** **

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

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**FORM 10-QSB**

 

 
| **ý** |   | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE  30, 2002** |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                 |
| **o**      |   | **TRANSITION REPORT UNDER SECTION 13 OR 15(d)  OF THE EXCHANGE ACT**                                                                 |

 

 

**Commission File Number 000-29643**

 

 

**FOUNDERS FOOD & FIRKINS LTD.**

(Exact Name of Registrantas Specified in Its Charter)

 
| **Minnesota**                                                    |   | **41-1883639**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction  of Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |

 

**5831 Cedar Lake Road****St. LouisPark, MN 55416(952) 525-2070**

(Address ofPrincipal Executive Offices and Registrant’sTelephone Number, including Area Code)

 

Check whether the issuer:  (1) filed all reports required to be filed by Section 13 or 15(d)of the Exchange Act during the past 12 months (or such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes   ý   No   o.

 

As of July 24, 2002, the issuer had outstanding3,815,100 shares of common stock and 1,000,000 Class A Warrants.  The number of outstanding shares of commonstock includes the shares issuable upon separation of the units, eachconsisting of one share of common stock and one redeemable Class A Warrant,sold in the issuer’s initial public offering.

 

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**TABLE OF CONTENTS**

 
| **PART I**     |   | **FINANCIAL INFORMATION**                                                                                       |   |   |
|----------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|--------|
|           |   |                                                                                                            |   |   |
| ITEM 1         |   | Financial Statements                                                                                            |   |   |
|           |   |                                                                                                            |   |   |
|           |   | Condensed Balance Sheet as of  June 30, 2002                                                                    |   |   |
|           |   |                                                                                                            |   |   |
|           |   | Condensed Statements  of Operations for the thirteen and twenty-six weeks ended July 1, 2001 and  June 30, 2002 |   |   |
|           |   |                                                                                                            |   |   |
|           |   | Condensed Statements  of Cash Flows for the twenty-six weeks ended July 1, 2001 and June 30, 2002               |   |   |
|           |   |                                                                                                            |   |   |
|           |   | Notes to  Condensed Financial Statements                                                                        |   |   |
|           |   |                                                                                                            |   |   |
| ITEM  2        |   | Management’s  Discussion and Analysis or Plan of Operation                                                 |   |   |
|           |   |                                                                                                            |   |   |
| **PART  II**   |   | **OTHER  INFORMATION**                                                                                          |   |   |
|           |   |                                                                                                            |   |   |
| ITEM  1        |   | Legal Proceedings                                                                                               |   |   |
|           |   |                                                                                                            |   |   |
| ITEM 2         |   | Changes  in Securities and Use of Proceeds                                                                      |   |   |
|           |   |                                                                                                            |   |   |
| ITEM 3         |   | Defaults upon  Senior Securities                                                                                |   |   |
|           |   |                                                                                                            |   |   |
| ITEM  4        |   | Submission  of Matters to a Vote of Security Holders                                                            |   |   |
|           |   |                                                                                                            |   |   |
| ITEM  5        |   | Other Information                                                                                               |   |   |
|           |   |                                                                                                            |   |   |
| ITEM 6         |   | Exhibits and  Reports on Form 8-K                                                                               |   |   |
|           |   |                                                                                                            |   |   |
| **SIGNATURES** |   |                                                                                                            |
|                |        |                                                                                                                 |        |        |  |  |

 

i

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**PART I**

ITEM 1   FinancialStatements

 

**FOUNDERS FOOD & FIRKINS LTD.**

 

**CONDENSED BALANCE SHEET**

**(Unaudited)**
| ** **                                                                                             | ** ** | **June 30,  2002** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| **ASSETS:**                                                                                            |       |               |       |
| Current assets:                                                                                        |       |               |       |
| Cash                                                                                                   |       | $                  | 161,518    |   |
| Inventory                                                                                              |       | 103,890            |       |
| Prepaids and  other                                                                                    |       | 286,305            |       |
| Total current  assets                                                                                  |       | 551,713            |       |
|                                                                                                   |       |               |       |
| Property and  equipment, net                                                                           |       | 9,358,033          |       |
| Liquor license  and other                                                                              |       | 337,160            |       |
| Total assets                                                                                           |       | $                  | 10,246,906 |   |
|                                                                                                   |       |               |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY:**                                                        |       |               |       |
| Current  liabilities:                                                                                  |       |               |       |
| Accounts payable                                                                                       |       | $                  | 497,817    |   |
| Accrued expenses                                                                                       |       | 641,275            |       |
| Due to related  parties                                                                                |       | 300,000            |       |
| Long-term debt,  current portion                                                                       |       | 27,175             |       |
| Capital lease  obligations, current portion                                                            |       | 249,454            |       |
| Total current  liabilities                                                                             |       | 1,715,721          |       |
|                                                                                                   |       |               |       |
| Long-term debt,  net of current portion                                                                |       | 1,458,322          |       |
| Capital lease  obligations, net of current portion                                                     |       | 3,831,859          |       |
| Total  liabilities                                                                                     |       | 7,005,902          |       |
|                                                                                                   |       |               |       |
| Shareholders’  equity:                                                                            |       |               |       |
| Common stock,  $0.01 par value, 90,000,000 shares authorized; 3,815,100 shares issued and  outstanding |       | 38,151             |       |
| Additional  paid-in capital                                                                            |       | 4,426,368          |       |
| Accumulated  deficit                                                                                   |       | (1,223,515         | )          |
| Total  shareholders’ equity                                                                       |       | 3,241,004          |       |
|                                                                                                   |       |               |       |
| Total liabilities  and shareholders’ equity                                                       |       | $                  | 10,246,906 |   |

 

See notes tocondensed financial statements.

 

1

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**FOUNDERS FOOD & FIRKINS LTD.**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
|                                                    |       | **Thirteen  Weeks Ended** |       | **Twenty-six  Weeks Ended** |       |
|---------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **July 1,  2001**         | ** ** | **June 30,  2002**          | ** ** | **July 1,  2001** | ** ** | **June 30,  2002** | ** ** |
| Restaurant  revenues                                    |       | $                         | 2,079,576  |                        | $          | 3,162,279 |   | $ | 4,132,915 |   | $ | 6,276,619 |   |
|                                                    |       |                      |       |                        |       |   |   |   |   |
| Restaurant  costs:                                      |       |                      |       |                        |       |   |   |   |   |
| Food and  beverage                                      |       | 608,407                   |       | 908,625                     |       | 1,236,749 |   | 1,815,378 |   |
| Labor                                                   |       | 678,722                   |       | 1,076,435                   |       | 1,359,260 |   | 2,151,562 |   |
| Direct and  occupancy                                   |       | 405,522                   |       | 629,289                     |       | 857,632 |   | 1,293,004 |   |
| Total restaurant  costs                                 |       | 1,692,651                 |       | 2,614,349                   |       | 3,453,641 |   | 5,259,944 |   |
|                                                    |       |                      |       |                        |       |   |   |   |   |
| Income from  restaurant operations                      |       | 386,925                   |       | 547,930                     |       | 679,274 |   | 1,016,675 |   |
|                                                    |       |                      |       |                        |       |   |   |   |   |
| General and  administrative                             |       | 173,709                   |       | 203,977                     |       | 330,835 |   | 419,398 |   |
| Depreciation and  amortization                          |       | 117,268                   |       | 191,535                     |       | 232,678 |   | 382,320 |   |
|                                                    |       |                      |       |                        |       |   |   |   |   |
| Operating income                                        |       | 95,948                    |       | 152,418                     |       | 115,761 |   | 214,957 |   |
| Interest:                                               |       |                      |       |                        |       |   |   |   |   |
| Income                                                  |       | 9,766                     |       | 312                         |       | 25,373 |   | 470 |   |
| Expense                                                 |       | (85,559                   | )          | (132,722                    | )          | (169,628 | ) | (272,275 | ) |
| Other income,  net                                      |       | —                    |       | (14,833                     | )          | — |   | 32,354 |   |
| Net other  expense                                      |       | (75,793                   | )          | (147,243                    | )          | (144,255 | ) | (239,451 | ) |
|                                                    |       |                      |       |                        |       |   |   |   |   |
| Net income  (loss)                                      |       | $                         | 20,155     |                        | $          | 5,175 |   | $ | (28,494 | ) | $ | (24,494 | ) |
|                                                    |       |                      |       |                        |       |   |   |   |   |
| Earnings (loss)  per common share                       |       | $                         | 0.01       |                        | $          | 0.00 |   | $ | (0.01 | ) | $ | (0.01 | ) |
|                                                    |       |                      |       |                        |       |   |   |   |   |
| Earnings (loss)  per common share, assuming dilution    |       | $                         | 0.01       |                        | $          | 0.00 |   | $ | (0.01 | ) | $ | (0.01 | ) |
|                                                    |       |                      |       |                        |       |   |   |   |   |
| Weighted average  shares outstanding                    |       | 3,807,350                 |       | 3,809,116                   |       | 3,807,350 |   | 3,808,255 |   |
|                                                    |       |                      |       |                        |       |   |   |   |   |
| Weighted average  shares outstanding, assuming dilution |       | 3,905,793                 |       | 3,882,238                   |       | 3,807,350 |   | 3,808,255 |   |

 

See notes to condensedfinancial statements.

 

2

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**FOUNDERS FOOD & FIRKINS LTD.**

 

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **
|                                                                            |       | **Twenty-six  Weeks Ended** |       |
|---------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                      | ** ** | **July 1,  2001**           | ** ** | **June 30,  2002** | ** ** |
| Cash flows from  operating activities:                                          |       |                        |       |   |   |
| Net loss                                                                        |       | $                           | (28,494    | ) | $ | (24,494 | ) |
| Adjustments to  reconcile net loss to net cash provided byoperating activities: |       |                        |       |   |   |
| Depreciation and  amortization                                                  |       | 232,678                     |       | 382,320 |   |
| Decrease  (increase) in:                                                        |       |                        |       |   |   |
| Inventory                                                                       |       | 13,071                      |       | 12,088 |   |
| Prepaids and  other                                                             |       | (54,732                     | )          | (170,448 | ) |
| Increase  (decrease) in:                                                        |       |                        |       |   |   |
| Accounts payable                                                                |       | (83,252                     | )          | 32,996 |   |
| Accrued expenses                                                                |       | 18,396                      |       | (85,858 | ) |
| Net cash  provided by operating activities                                      |       | 97,667                      |       | 146,604 |   |
|                                                                            |       |                        |       |   |   |
| Cash flows from  investing activities:                                          |       |                        |       |   |   |
| Purchase of:                                                                    |       |                        |       |   |   |
| Property and  equipment                                                         |       | (865,775                    | )          | (444,265 | ) |
| Liquor license  and intangibles                                                 |       | (11,896                     | )          | (1,827 | ) |
| Short-term  investments/redemption of short-term investments                    |       | 674,945                     |       | — |   |
| Net cash used in  investing activities                                          |       | (202,726                    | )          | (446,092 | ) |
|                                                                            |       |                        |       |   |   |
| Cash flows from  financing activities:                                          |       |                        |       |   |   |
| Payment to  related parties                                                     |       | (6,000                      | )          | — |   |
| Payments on  capital lease obligations                                          |       | (77,812                     | )          | (118,972 | ) |
| Payments on long  term debt                                                     |       | —                      |       | (14,503 | ) |
| Proceeds from:                                                                  |       |                        |       |   |   |
| Related parties                                                                 |       | —                      |       | 200,000 |   |
| Capital lease                                                                   |       | 750,000                     |       | — |   |
| Issuance of  common stock                                                       |       | —                      |       | 10,087 |   |
| Net cash  provided by financing activities                                      |       | 666,188                     |       | 76,612 |   |
|                                                                            |       |                        |       |   |   |
| Net increase  (decrease) in cash                                                |       | 561,129                     |       | (222,876 | ) |
| Cash, beginning                                                                 |       | 963,541                     |       | 384,394 |   |
| Cash, ending                                                                    |       | $                           | 1,524,670  |   | $ | 161,518 |   |

 

See notes tocondensed financial statements.

 

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**FOUNDERS FOOD & FIRKINS LTD.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**(Unaudited)**

 

Thirteen andtwenty-six weeks ended July 1, 2001 and June 30, 2002

 

**1.     Natureof business and basis of presentation:**

 

Nature ofbusiness:

Founders Food &Firkins Ltd. (the Company) was formed to develop and operate casual diningrestaurants featuring on-premise breweries. The Company is developing these restaurant-microbreweries, known asGranite City Food & Brewery®, in selected markets throughout the UnitedStates.  The theme is casual dining witha wide variety of menu items that are prepared fresh daily, combined withfreshly brewed handcrafted beers.  TheCompany produces its beer using a patent-pending process that is intended tomaintain high beer quality while enhancing overall profitability by reducingunit-level brewing costs.  The firstrestaurant, located in St. Cloud, Minnesota, opened in July 1999.  The second restaurant, located in SiouxFalls, South Dakota, opened in December 2000 and a third restaurant located inFargo, North Dakota, opened in November 2001.

 

Subject toobtaining adequate financing, the Company’s current expansion strategy focuseson development of restaurants in markets where management believes theCompany’s concept will have broad appeal and attractive restaurant-leveleconomics.  The Company also intends toexplore off-premise sales of its handcrafted beers through the supervised useof contract brewers.

 

Interim financialstatements:

The Company hasprepared the condensed financial statements for the thirteen and twenty-sixweeks ended July 1, 2001 and June 30, 2002 without audit by the Company’sindependent auditors.  In the opinion ofthe Company’s management, all adjustments necessary to present fairly thefinancial position of the Company at June 30, 2002 and the results ofoperations and cash flows for the periods ended July 1, 2001 and June 30, 2002have been made. Those adjustments consist only of normal and recurringadjustments.

 

Certaininformation and note disclosures normally included in the Company’s annualfinancial statements have been condensed or omitted.  These condensed financial statements should be read inconjunction with the financial statements and notes thereto included in theCompany’s Annual Report on Form 10-KSB for the fiscal year ended December 30,2001, filed on February 20, 2002 with the Securities and Exchange Commission.

 

The results ofoperations for the thirteen and twenty-six weeks ended June 30, 2002 are notnecessarily indicative of the results to be expected in a full year.

 

Reclassifications:

Certainreclassifications have been made to the 2001 financial statements in order forthem to conform to the presentation of the 2002 financial statements.  These reclassifications have no effect onthe accumulated deficit or the net income (loss) previously reported.

 

4

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**ITEM 2       Management’s Discussion and Analysis or Plan of Operation**

 

*This discussion and analysiscontains various non-historical forward-looking statements within the meaningof Section 21E of the Exchange Act. Although we believe that, in making any such statement, our expectationsare based on reasonable assumptions, any such statement may be influenced byfactors that could cause actual outcomes and results to be materially differentfrom those projected.  When used in thefollowing discussion, the words “anticipates,” “believes,” “expects,”“intends,” “plans,” “estimates” and similar expressions, as they relate to usor our management, are intended to identify such forward-lookingstatements.  Potential purchasers of oursecurities are cautioned not to place undue reliance on such forward-lookingstatements, which are qualified in their entirety by the cautions and risksdescribed herein.  Please refer to ourAnnual Report on Form 10-KSB for the fiscal year ended December 30, 2001, filedon February 20, 2002 with the Securities and Exchange Commission, foradditional factors known to us that may cause actual results to vary.*

 

**Overview**

 

We operate three casual dining restaurants featuringon-premise breweries under the name Granite City Food & Brewery®.  Our activities in 1998 and through June 1999were related to the development of our restaurant-microbrewery concept and thedevelopment and financing of our first restaurant.  Our initial restaurant commenced operations in St. Cloud,Minnesota, in June 1999.  Our second restaurant,located in Sioux Falls, South Dakota, commenced operations in December2000.  Our third restaurant, located inFargo, North Dakota, opened in November 2001.

We developed our first restaurant using the netproceeds from a private placement conducted in late 1997, together withfinancing in the form of long-term building and equipment leases.  We developed our second restaurant using aportion of the net proceeds from our initial public offering in June 2000,together with financing in the form of long-term building and equipmentleases.  We developed our thirdrestaurant using the remaining net proceeds from our initial public offering,together with bank financing, a long-term equipment lease and loans from arelated party.

In 2001, we developed apatent-pending brewing process called Fermentus InterruptusTM.  We believe this process will aid in thequality, consistency and efficiency of serving handcrafted brews in multiplelocations.  Fermentus Interruptus isintended to improve the economics of our brewing process by eliminating theinitial stages of brewing and storage at multiple locations, thereby reducingequipment and development costs at new restaurant locations.  This process will also allow us to serviceup to 15 locations from one wort production site, which we believe will improveour quality, consistency and our brew profitability.  We are evaluating strategies for capitalizing on FermentusInterruptus, including licensing of our brewing technology.

We are****currentlyexploring methods of additional financing in order to develop additionalrestaurants in selected markets throughout the United States.  Our revenue growth depends upon theavailability of financing to develop additional restaurants.  We will not be able to achieve such growthusing internally generated funds alone. At present, we have no commitments from any party to provide us with thefinancing required to achieve additional expansion.

We believe that our operating results will fluctuatesignificantly because of several factors, including the timing of newrestaurant openings and related expenses, profitability of new restaurants,increases or decreases in comparable restaurant sales, general economicconditions, consumer confidence in the economy, changes in consumer preferences,competitive factors and weather conditions.

The second quarterand first half of fiscal year 2001, included 26 and 52 restaurant weeks,respectively, while the second quarter and first half of fiscal year 2002included 39 and 78 restaurant weeks, respectively.

 

5

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Our restaurant sales arecomprised almost entirely of the sales of food and beverages.  Product costs include the costs of food andbeverages.  Labor costs include directhourly and management wages, taxes and benefits for restaurant employees.  Direct and occupancy costs includerestaurant supplies, marketing costs, rent, utilities, real estate taxes,repairs and maintenance and other related costs.  General and administrative expenses are comprised of expensesassociated with all corporate and administrative functions that supportexisting operations, management and staff salaries, employee benefits, travel,information systems and training and market research.  Depreciation and amortization include depreciation on capitalexpenditures.  Other income and expenseincludes primarily the cost of interest expense on debt and capital leases andinterest income on invested assets.

**Results of Operations**

                The following table compares operating results expressedas a percentage of total revenue for the thirteen and twenty-six weeks endedJuly 1, 2001 and June 30, 2002.

 
|                               |       | **Thirteen  Weeks Ended** |       | **Twenty-six  Weeks Ended** |       |
|------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **July 1,********2001**   | ** ** | **June 30,********2002**    | ** ** | **July 1,  2001** | ** ** | **June 30,  2002** | ** ** |
| Restaurant  revenues               |       | 100.0                     | %          | 100.0                       | %          | 100.0 | % | 100.0 | % |
|                               |       |                      |       |                        |       |   |   |   |   |
| Restaurant  costs:                 |       |                      |       |                        |       |   |   |   |   |
| Food and  beverage                 |       | 29.3                      | %          | 28.7                        | %          | 29.9 | % | 28.9 | % |
| Labor                              |       | 32.6                      | %          | 34.0                        | %          | 32.9 | % | 34.3 | % |
| Direct and  occupancy              |       | 19.5                      | %          | 19.9                        | %          | 20.8 | % | 20.6 | % |
| Total restaurant  costs            |       | 81.4                      | %          | 82.7                        | %          | 83.6 | % | 83.8 | % |
|                               |       |                      |       |                        |       |   |   |   |   |
| Income from  restaurant operations |       | 18.6                      | %          | 17.3                        | %          | 16.4 | % | 16.2 | % |
|                               |       |                      |       |                        |       |   |   |   |   |
| General and  administrative        |       | 8.4                       | %          | 6.5                         | %          | 8.0 | % | 6.7 | % |
| Depreciation and  amortization     |       | 5.6                       | %          | 6.1                         | %          | 5.6 | % | 6.1 | % |
|                               |       |                      |       |                        |       |   |   |   |   |
| Operating income                   |       | 4.6                       | %          | 4.8                         | %          | 2.8 | % | 3.4 | % |
| Interest:                          |       |                      |       |                        |       |   |   |   |   |
| Income                             |       | 0.5                       | %          | 0.0                         | %          | 0.6 | % | 0.0 | % |
| Expense                            |       | (4.1                      | )%         | (4.2                        | )%         | (4.1 | )% | (4.3 | )% |
| Other income,  net                 |       | 0.0                       | %          | (0.5                        | )%         | 0.0 | % | 0.5 | % |
| Net other  expense                 |       | (3.6                      | )%         | (4.7                        | )%         | (3.5 | )% | (3.8 | )% |
|                               |       |                      |       |                        |       |   |   |   |   |
| Net income  (loss)                 |       | 1.0                       | %          | 0.2                         | %          | (0.7 | )% | (0.4 | )% |

 

6

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**Critical Accounting Policies**

 

Management’s Discussion and Analysis or Plan of Operation is based uponour consolidated financial statements, which were prepared in conformity with generallyaccepted accounting principles.  Theseprinciples require management to make estimates and assumptions that affect theamounts reported in the consolidated financial statements and accompanyingnotes.  We believe our estimates andassumptions are reasonable; however, actual results and the timing of therecognition of such amounts could differ from those estimates.  We have identified the following criticalaccounting policies and estimates utilized by management in the preparation ofour financial statements:

 

*Property and equipment*:

 

The cost of property and equipment is depreciated over the estimateduseful lives of the related assets ranging from three to 20 years.  The cost of leasehold improvements isdepreciated over the length of the related lease.  Depreciation is computed on the straight-line method forfinancial reporting purposes and accelerated methods for income taxpurposes.  Amortization of assetsacquired under capital lease is included in depreciation expense.  Our accounting policies regarding propertyand equipment include certain management judgments regarding the estimateduseful lives of such assets and the determination as to what constitutesenhancing the value of or increasing the life of existing assets.  These judgments and estimates may producematerially different amounts of depreciation and amortization expense thanwould be reported if different assumptions were used.

 

*Other estimates*:

 

We are required to make judgments and/or estimates in the determinationof several of the accruals that are reflected in our consolidated financialstatements.  These accruals include, butare not limited to performance-based compensation, contingency rental expensebased upon restaurant sales, payroll expense related to employee vacations, aswell as utilities and other services provided to us for which we have notreceived billing at the time our financial statements are prepared.

 

We continually reassess our assumptions and judgments and makeadjustments when significant facts and circumstances dictate.  Historically, actual results have not beenmaterially different than the estimates we have made.

 

**Results of Operations for the Thirteen and Twenty-six WeeksEnded July 1, 2001 and June 30, 2002**

 

**Revenue**

 

We operated three restaurants during the secondquarter and first half of 2002 and two restaurants in the second quarter andfirst half of 2001.  We generated$2,079,576 and $3,162,279 of revenues during the second quarter of 2001and2002, respectively, and $4,132,915 and $6,276,619 of revenues during the firsthalf of 2001 and 2002, respectively. The 52% increase in revenues for the first half of 2002 over 2001 wasattributed principally to the addition of our third operating unit.

We anticipate thatrestaurant revenues will vary from quarter to quarter.  We anticipate seasonal fluctuations inrestaurant revenues due in part to increased outdoor seating and generallyfavorable weather conditions at all locations during the summer months.  In addition, restaurants typicallyexperience a temporary period of high revenues immediately following theiropening due to increased demand fostered by the publicity surrounding theopening (the “honeymoon effect”).

 

7

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**Restaurant Costs**

*Food and Beverage*

Our food and beverage cost decreased 0.6% as apercentage of revenues during the thirteen weeks ended June 30, 2002 comparedto the thirteen-week period ended July 1, 2001.  During the first half of 2002, food and beverage costs decreased1.0% as a percentage of revenues compared to the first half of 2001.  These decreases were due primarily to anincrease in purchasing power with the opening of our Fargo location.  We expect that with the addition of futurelocations, increased purchasing power will have an even greater effect on thereduction of our food and beverage costs.

We expect that our food and beverage costs will varygoing forward due to numerous variables, including seasonal changes in foodcosts and guest preferences.  Weperiodically create new menu offerings in both our craftbrewed beers and ourfood based upon guest preferences. Although such menu modifications may temporarily result in increasedfood and beverage cost, we are able to offset such increases with our weeklyspecials which provide variety to our guests at a high price value.  Our varieties of craftbrewed beer, which wecan produce at lower cost than beers we purchase for resale, also enable us tokeep our food and beverage costs low while fulfilling guest requests andbuilding customer loyalty.

*Labor*

Our labor costs expressed as a percentage of revenuesincreased 1.4% during the thirteen and twenty-six weeks ended June 30, 2002compared to the same periods ended July 1, 2001.  Training expense at the Fargo location continues to be higherthan we anticipate it will be in future quarters.  As the Fargo staff becomes more experienced and the number ofstaff members per shift is reduced, we expect labor costs at that location willdecrease.  We have also experiencedincreases in employee benefit costs, primarily health insurance, which hasincreased our labor costs, as have increases in wages paid to retain goodemployees and ensure high quality guest service.

We expect that labor costs will vary as we add newlocations.  Minimum wage laws, locallabor laws and practices, as well as unemployment rates vary from state tostate and will affect our labor costs. In addition, we believe that retention of good employees ensures highquality guest service and reduces hiring and training costs.  Hiring and training cost savings associatedwith increased staff experience are offset slightly by pay increases as ourstaff gains more experience.

*Direct and Occupancy*

                Our direct and occupancy expenses increased 0.4% as apercentage of revenues during the thirteen weeks ended June 30, 2002 comparedto the similar period in 2001.  Duringthe twenty-six weeks ended June 30, 2002, our direct and occupancy expensesdecreased 0.2% as a percentage of revenues compared to the twenty-six weeksended July 1, 2001.  The majorcomponents of direct and occupancy expenses are operating supplies, rent,repairs and maintenance, advertising expense and other occupancy costs.  A substantial portion of these expenses isfixed or indirectly variable.  As such,our decrease in direct and occupancy expense during the first half of 2002 canbe attributed to higher unit volumes, which reduced fixed and indirectlyvariable costs as a percentage of revenues.

**General and Administrative**

General andadministrative expenses include salaries and benefits associated with ourcorporate staff that is responsible for overall restaurant quality, futureexpansion into new locations and financial controls and reporting.  Other general and administrative expensesinclude professional fees, office administration and centralized accountingsystem costs, and travel by our corporate management to the restaurantlocations.  General and administrativeexpenses increased $30,268 and $88,563 during the second quarter and first halfof 

 

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2002, respectively,compared to the similar periods of 2001. In order to retain core management members and to continue to build ourinfrastructure in order to facilitate our continued growth, we have incurredincreased payroll and benefits related expenses.  With the addition of an operating location, travel andcommunication costs between operating locations and the corporate officeincreased significantly in the first half of 2002 compared to the first half of2001.  From the inception of our companythrough June 30, 2002, our executive officers did not receive any monetarycompensation from our company as we believe the options issued to theseofficers in 1999 and 2001 represent reasonable compensation for their servicesthrough June 30, 2002.  Compensationpayable to them thereafter will be determined by our board and will increaseour general and administrative expenses. Despite the foregoing increases in general and administrative expenses,the increase in restaurant revenue associated with the opening of our thirdlocation caused our general and administrative expenses to decrease as apercentage of revenue.  For the thirteenweeks ended June 30, 2002 these expenses decreased 1.9% from the comparableperiod in 2001.  During the twenty-sixweeks ended June 30, 2002, such expenses decreased 1.3% compared to thetwenty-six weeks ended July 1, 2001.

We expect thatgeneral and administrative costs will continue to fluctuate as a percentage ofrestaurant revenues in the near term as we hire certain additional corporatestaff members to adequately sustain operations across multiple locations.  The anticipated additional restaurantrevenues associated with further expansion are expected to result in greatereconomies of scale for our corporate expenses in the long-term.

**Depreciationand Amortization**

Depreciation and amortization expense increased by$74,267 from the second quarter of 2001 to the second quarter of 2002.  The increase for the related twenty-six weekperiod was $149,642.  These increaseswere primarily the result of depreciation recognized on capital expendituresfor our Fargo restaurant.  As apercentage of revenues, depreciation and amortization expense increased 0.5%between the first half of 2001 and the first half of 2002.

**Other Income and Expense**

                Interest expensenet of interest income increased $56,617 during the thirteen weeks ended June30, 2002 compared to the similar period in 2001.  Net interest expense increased $127,550 during the twenty-sixweeks ended June 30, 2002 compared to the twenty-six weeks ended July 1,2001.  Such increases were dueprincipally to increased debt incurred in the construction of our Fargolocation.  Other income and expense forthe first half of 2002 includes a loss on assets we replaced which had not beenfully depreciated, as well as the proceeds awarded by a NASD Arbitration Panelrelated to a claim we filed in November 2000 against Equity SecuritiesInvestments, Inc., less related legal fees.

 

**Liquidity and Capital Resources**

To date, we have required capital principally for thedevelopment, construction and opening of new restaurants.  Prior to commencement of restaurantoperations in June 1999, our capital requirements were principally fundedthrough private sales of equity.  In1997 and 1998, we sold, through private placements, an aggregate of 1,969,500shares of common stock for gross proceeds of $1,319,500.    In June 2000, we sold, through our initialpublic offering, an aggregate of 1,000,000 units for gross proceeds of$4,125,000.  We have also obtainedadditional financing through building and equipment leases, long-term debt froman independent financial institution and loans from New Brighton Ventures,Inc., an entity owned and controlled by certain members of our executivemanagement, as evidenced by promissory notes.

Our operatingactivities provided $146,604 of net cash during the twenty-six weeks ended June30, 2002.  Using proceeds frompromissory notes we issued to New Brighton Ventures, Inc. aggregating $200,000in February and May 2002, $10,087 in proceeds from issuing common stockpursuant to the exercise of a stock option and warrants and the net cashprovided by operations, we purchased $446,092 of assets primarily for our Fargolocation and made payments on our debt and capital lease obligationsaggregating $133,475.

 

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In 2000, we invested excess cash from our initialpublic offering proceeds in short-term investments with staggered maturitydates to correspond with anticipated pre-opening costs. During the first halfof 2001, we redeemed $674,945 of short-term investments.

During the twenty-six weeks ended July 1, 2001, ouroperating activities provided $97,667 of net cash.  Using net cash provided by operations, net proceeds from theredemption of short-term investments and $750,000 in proceeds from an equipmentlease, we purchased equipment totaling $877,671 and made payments on other debtaggregating $83,812.

In February and May 2002, we issued promissory notesaggregating $200,000 to New Brighton Ventures, Inc.  We used the proceeds of these notes to pay capital expendituresrelated to the development of the Fargo location.  The principal of these loans is due and payable 30 days followingdemand for payment.  Until such demandis made, we are required to pay monthly installments of accrued interest only.

We are pursuing theexpansion of our Granite City Food & Brewery® concept into markets where webelieve it will have broad appeal and attractive restaurant-leveleconomics.  In order to facilitate suchexpansion, we will require additional financing.  The amount of financing required for new stores depends upon thedefinitive locations, leasehold improvement costs, construction costs and thetype of transactions pursuant to which we establish new locations.  We are considering various ways to obtainneeded capital through debt financing, equity financing, partnerships withinvestors or some combination thereof, including the private placement ofconvertible preferred stock and warrants we announced March 6, 2002.  We cannot assure you that financing neededto pursue our expansion strategy will be available on terms acceptable orfavorable to us, or at all.  At present,we have no commitments from any party to provide us with the financing requiredto achieve additional expansion.

 

**Commitments and ContingentLiabilities**

 

*Operating and Capital Leases:*

 

We have two land andbuilding lease agreements expiring in 2019 and 2020 with renewable options foradditional periods.  The buildingportions of these leases are classified as capital leases because their presentvalue is greater than 90% of the estimated fair value.  The land portions of these leases areclassified as operating leases because the fair value of the land was more than25% of the leased property at the inception of each lease.  Under these leases, we are required to payadditional percentage rent based upon restaurant sales.  As of June 30, 2002, future obligationsrelating to the land portion of these leases aggregate $3,673,917 pluspercentage rent.  The scheduled rentincreases for the land during the life of each lease are recognized on astraight-line basis.   In 2001, weentered into a 20-year operating lease for land upon which we built our thirdrestaurant.  As of June 30, 2002, futureobligations under the terms of the lease aggregated $1,389,800 plus percentagerent.

 

*Personal Guaranties:*

 

Certain of our officersand directors have personally guaranteed the lease on two of our restaurantsand the $1.5 million loan we obtained to finance our third restaurant.  In connection with the loan, we entered intoan agreement concerning guaranty which provides, among other things, that suchguarantors will be indemnified from any liabilities they may incur by reason oftheir guaranties of our indebtedness. The agreement contains various covenants,one of which assures that we will use our best efforts to obtain a release ofone individual’s guarantee obligation by January 1, 2006.  If we have not accomplished this, we areobligated to pay him a monthly guarantee fee in the amount of $1,000 until suchrelease is obtained.  Additionally, ourboard of directors agreed to compensate each of the guarantors for theirexisting and possible future guarantees of our indebtedness.  Although the amount has not yet beendetermined, our board agreed that such compensation would be paid upon theinitial payment of rent on our fourth restaurant lease.

 

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*Employment Agreements:*

 

We have entered intoemployment agreements with two officers, both of whom are directors of ourcompany.  The agreements stated that theindividuals would receive no monetary compensation during fiscal year 2000, andthat salaries would be established in 2001. In lieu of salaries, we believe the stock options issued to the twoofficers represent reasonable compensation for their services through June 30,2002.  Among other provisions, theagreements included change in control provisions that would entitle each of theofficers to receive severance pay equal to 18 months of salary if there is achange in control of our company and their employment terminates.  The maximum contingent liability under theseagreements is not determinable as no monetary compensation has beenestablished.

 

*Summary of Contractual Obligations:*

 

                Thefollowing table summarizes our future obligations under contractual agreementsas of June 30, 2002 and the time frame within which payments on suchobligations are due.  This table doesnot include amounts related to percentage rent, loan guarantee fees andemployment contracts, as such amounts have not yet been determined.

 
|                         |       |      |       | **Payments  Due By**          |       |
|------------------------------|------------|-----------|------------|-------------------------------|------------|
| ** **                   | ** ** | **Total** | ** ** | **End of  Fiscal  Year 2002** | ** ** | **End of  Fiscal  Year 2005** | ** ** | **End of  Fiscal  Year 2007** | ** ** | **After  Fiscal  Year 2007** | ** ** |
| New Brighton  Ventures, Inc. |       | $         | 300,000    |                          | $          | 300,000 |   | $ | — |   | $ | — |   | $ | — |   |
| First National  Bank         |       | 1,485,497 |       | 11,832                        |       | 101,505 |   | 1,372,160 |   | — |   |
| Capital Leases               |       | 7,633,580 |       | 286,114                       |       | 1,874,463 |   | 1,026,700 |   | 4,446,303 |   |
| Operating Leases             |       | 5,084,063 |       | 113,267                       |       | 805,513 |   | 540,661 |   | 3,624,622 |   |
| Total  Obligations           |       | $         | 14,503,140 |                          | $          | 711,213 |   | $ | 2,781,481 |   | $ | 2,939,521 |   | $ | 8,070,925 |   |

** **

**Qualitative and QuantitativeDisclosures about Market Risk**

 

Our company is exposed tomarket risk from changes in interest rates on debt and changes in commodityprices.

 

*Changes in Interest Rate:*

 

                Weare exposed to market risk from changes in interest rates relating to a leasefor equipment under an agreement expiring in 2008.  As of June 15, 2004, we will be required to amortizeapproximately $264,100 of the then remaining balance at an interest rate ofprime plus 2% for 24 additional months. At such time, our payments willincrease if the prime rate is more than 8.5%. Each percentage point above such rate would increase the total paymentsover the remaining life of the lease by approximately $3,000.  On November 20, 2004 we will be required toamortize approximately $416,600 of the then remaining balance at an interestrate of prime plus 2% for 42 additional months.  At such time, our payments will increase if the prime rate ismore than 10.3%.  Each percentage pointabove such rate would increase the total payments over the remaining life ofthe lease by approximately $8,500.

 

                InFebruary 2007, we will have a balloon payment due of approximately $1,325,000on the loan we obtained from an independent financial institution in July2001.  Currently, this loan bears afixed interest rate of 8.75%. If it became necessary to refinance such balloonbalance, we may not be able to secure financing at the same interest rate.  The effect of a higher interest rate dependsupon the negotiated financing terms.

 

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*Changes in Commodity Prices:*

 

                Many of the food products wepurchase are affected by commodity pricing and are, therefore, subject tounpredictable price volatility.   Thesecommodities are generally purchased based upon market prices established withvendors.  Extreme fluctuations incommodity prices and/or long-term changes could have an adverse affect onus.  Substantially all of our food andsupplies are available from several sources, which helps to control foodcommodity risks.  Additionally, we havethe ability to increase menu prices, or vary the menu items offered, inresponse to a food product price increases. If, however, competitive circumstances limit our menu price flexibility,margins could be negatively impacted.

 

                Our company does not enter intoderivative contracts either to hedge existing risks or for speculativepurposes.

 

**Seasonality**

We expect that our sales and earnings will fluctuatebased on seasonal patterns.  Weanticipate that our highest sales and earnings will occur in the second andthird quarters due to the milder climate and availability of outdoor seatingduring those quarters in our existing and proposed markets.

**Inflation**

                Theprimary inflationary factors affecting our operations are food, supplies andlabor costs.  A large number of ourrestaurant personnel are paid at rates based on the applicable minimum wage,and increases in the minimum wage directly affect our labor costs.  In the past, we have been able to minimizethe effect of these increases through menu price increases and otherstrategies.  To date, inflation has nothad a material impact on our operating results.

 

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| **PART  II** | **OTHER INFORMATION**                                |
|--------------|------------------------------------------------------|
|         |                                                 |
| ITEM 1       | Legal Proceedings                                    |
|         |                                                 |
|         | Not applicable.                                      |
|         |                                                 |
| ITEM 2       | Changes in Securities  and Use of Proceeds           |
|         |                                                 |
|         | Not applicable.                                      |
|         |                                                 |
| ITEM 3       | Defaults upon Senior  Securities                     |
|         |                                                 |
|         | Not applicable.                                      |
|         |                                                 |
| ITEM 4       | Submission of Matters  to a Vote of Security Holders |
|         |                                                 |
|         | Not applicable.                                      |
|         |                                                 |
| ITEM 5       | Other  Information                                   |
|         |                                                 |
|         | Not Applicable.                                      |
|         |                                                 |
| ITEM 6       | Exhibits and Reports on  Form 8-K                    |
|         |                                                 |
|         | (a)                                                  | Exhibits |
|         |                                                 |   |
|         |                                                 | None. |
|         |                                                 |   |
|         | (b)                                                  | Reports on Form 8-K |
|         |                                                 |   |
|         |                                                 | None. |

 

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**SIGNATURES**

 

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|                       | FOUNDERS FOOD & FIRKINS LTD. |
|----------------------------|----------------------------------|
|                       |                             |   |
|                       |                             |   |
| Date:  July  26, 2002 | By                               | /s/ Mitchel I. Wachman |
|                       |                             | Mitchel I. Wachman |
|                       |                             | Chief Financial Officer |

 

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