**UNITEDSTATES**

**SECURITIESAND 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 SEPTEMBER 28,  2003** |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                       |
| **o**      |   | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                   |

 

**CommissionFile Number 000-29643**

 

**GRANITECITY FOOD & BREWERY LTD.**

(Exact Name of Small BusinessIssuer as 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. Louis Park, MN 55416****(952)  525-2070**                              |
| (Address of Principal Executive Offices and  Issuer’s  Telephone Number, including Area Code) |

 

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

 

Yes ý  No o.

 

As of October 28, 2003, the issuer had outstanding 4,027,298 shares ofcommon stock and 1,000,000 Class A Warrants. The number of outstanding shares of common stock includes the sharesissuable upon separation of the units, each consisting of one share of commonstock and one redeemable Class A Warrant, sold in the issuer’s initial publicoffering.

 

Transitional Small Business Disclosure Format:

Yes o  No ý.

 

 

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**TABLE OF CONTENTS**

 
| **PART I**            | **FINANCIAL INFORMATION**                                                                                                   |
|-----------------------|-----------------------------------------------------------------------------------------------------------------------------|
|                  |                                                                                                                        |
| ITEM 1                | Financial Statements                                                                                                        |
|                  |                                                                                                                        |
|                  | Condensed Balance Sheet as of September 28,  2003                                                                           |
|                  |                                                                                                                        |
|                  | Condensed Statements of Operations for the  thirteen and thirty-nine weeks ended September 29, 2002 and September 28,  2003 |
|                  |                                                                                                                        |
|                  | Condensed Statements of Cash Flows for the  thirty-nine weeks ended September 29, 2002 and September 28, 2003               |
|                  |                                                                                                                        |
|                  | Notes to Condensed Financial Statements                                                                                     |
|                  |                                                                                                                        |
| ITEM 2                | Management’s Discussion and Analysis or  Plan of Operation                                                             |
|                  |                                                                                                                        |
| ITEM 3                | Controls and Procedures                                                                                                     |
|                  |                                                                                                                        |
| **PART II**           | **OTHER INFORMATION**                                                                                                       |
|                  |                                                                                                                        |
| ITEM 1                | Legal  Proceedings                                                                                                          |
|                  |                                                                                                                        |
| ITEM 2                | Changes  in Securities                                                                                                      |
|                  |                                                                                                                        |
| 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**        |
|                  |
| **INDEX TO EXHIBITS** |

 

i

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**PART I  FINANCIAL INFORMATION**

** **

**ITEM1  Financial Statements**

 

**GRANITECITY FOOD & BREWERY LTD.**

 

# **CONDENSEDBALANCE SHEET**

**(Unaudited)**

** **
|                                                                                                                           |   | **September 28,  2003** |       |
|--------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|
| **ASSETS:**                                                                                                                    |   |                    |       |
| Current assets:                                                                                                                |   |                    |       |
| Cash                                                                                                                           |   | $                       | 2,625,559  |   |
| Inventory                                                                                                                      |   | 201,739                 |       |
| Prepaids and other                                                                                                             |   | 273,816                 |       |
| Total current assets                                                                                                           |   | 3,101,114               |       |
|                                                                                                                           |   |                    |       |
| Property and equipment, net                                                                                                    |   | 12,437,067              |       |
| Intangible assets and other                                                                                                    |   | 373,756                 |       |
| Total assets                                                                                                                   |   | $                       | 15,911,937 |   |
|                                                                                                                           |   |                    |       |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY:**                                                                                |   |                    |       |
| Current liabilities:                                                                                                           |   |                    |       |
| Accounts payable                                                                                                               |   | $                       | 874,472    |   |
| Accrued expenses                                                                                                               |   | 792,681                 |       |
| Long-term debt, current portion                                                                                                |   | 65,235                  |       |
| Capital lease obligations, current portion                                                                                     |   | 315,396                 |       |
| Total current liabilities                                                                                                      |   | 2,047,784               |       |
|                                                                                                                           |   |                    |       |
| Long-term debt, net of current portion                                                                                         |   | 1,814,480               |       |
| Capital lease obligations, net of current  portion                                                                             |   | 5,093,502               |       |
| Total liabilities                                                                                                              |   | 8,955,766               |       |
|                                                                                                                           |   |                    |       |
| Shareholders’ equity:                                                                                                     |   |                    |       |
| Common stock, $0.01 par value, 90,000,000 shares  authorized;  3,950,392 shares issued and outstanding                         |   | 39,504                  |       |
| Preferred stock, $0.01 par value,  10,000,000 authorized;  55,600 Series A Convertible Preferred shares issued and outstanding |   | 556                     |       |
| Additional paid-in capital                                                                                                     |   | 9,765,553               |       |
| Stock dividends distributable                                                                                                  |   | 704                     |       |
| Accumulated deficit                                                                                                            |   | (2,850,146              | )          |
| Total shareholders’ equity                                                                                                |   | 6,956,171               |       |
|                                                                                                                           |   |                    |       |
| Total liabilities and shareholders’ equity                                                                                |   | $                       | 15,911,937 |   |

 

See notes to condensed financial statements.

 

1

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**GRANITE CITY FOOD & BREWERY LTD.**

 

**CONDENSEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
|                                                    |   | **Thirteen Weeks Ended** |      | **Thirty-nine Weeks Ended** |   |
|---------------------------------------------------------|--------|--------------------------|-----------|-----------------------------|--------|
|                                                    |   | **September 29,  2002**  |      | **September 28,  2003**     |   | **September 29,  2002** |   | **September 28,  2003** |   |
|                                                    |   |                     |      |                        |   |   |   |   |   |
| Restaurant revenues                                     |   | $                        | 3,159,837 |                        | $      | 3,786,885 |   | $ | 9,436,453 |   | $ | 9,768,071 |   |
|                                                    |   |                     |      |                        |   |   |   |   |   |
| Cost of sales:                                          |   |                     |      |                        |   |   |   |   |   |
| Food, beverage and retail                               |   | 895,748                  |      | 1,094,291                   |   | 2,711,118 |   | 2,822,489 |   |
| Labor                                                   |   | 1,046,846                |      | 1,274,087                   |   | 3,198,404 |   | 3,320,948 |   |
| Direct and occupancy                                    |   | 661,931                  |      | 804,760                     |   | 1,954,940 |   | 2,121,687 |   |
| Total cost of sales                                     |   | 2,604,525                |      | 3,173,138                   |   | 7,864,462 |   | 8,265,124 |   |
|                                                    |   |                     |      |                        |   |   |   |   |   |
| Pre-opening                                             |   | —                   |      | 270,729                     |   | — |   | 270,729 |   |
| General and administrative                              |   | 254,380                  |      | 449,833                     |   | 673,778 |   | 1,156,256 |   |
| Depreciation and amortization                           |   | 192,053                  |      | 206,276                     |   | 574,373 |   | 596,471 |   |
|                                                    |   |                     |      |                        |   |   |   |   |   |
| Operating income (loss)                                 |   | 108,879                  |      | (313,091                    | )      | 323,840 |   | (520,509 | ) |
|                                                    |   |                     |      |                        |   |   |   |   |   |
| Interest:                                               |   |                     |      |                        |   |   |   |   |   |
| Income                                                  |   | 17                       |      | 15,266                      |   | 487 |   | 62,148 |   |
| Expense                                                 |   | (132,091                 | )         | (133,685                    | )      | (404,366 | ) | (378,860 | ) |
| Other income, net                                       |   | —                   |      | —                      |   | 32,355 |   | — |   |
| Net other expense                                       |   | (132,074                 | )         | (118,419                    | )      | (371,524 | ) | (316,712 | ) |
|                                                    |   |                     |      |                        |   |   |   |   |   |
| Net loss                                                |   | $                        | (23,195   | )                           | $      | (431,510 | ) | $ | (47,684 | ) | $ | (837,221 | ) |
|                                                    |   |                     |      |                        |   |   |   |   |   |
| Loss per common share, basic and diluted                |   | $                        | (0.01     | )                           | $      | (0.15 | ) | $ | (0.01 | ) | $ | (0.33 | ) |
|                                                    |   |                     |      |                        |   |   |   |   |   |
| Weighted average shares outstanding, basic  and diluted |   | 3,819,825                |      | 3,947,700                   |   | 3,812,108 |   | 3,888,038 |   |

 

See notes to condensed financial statements.

 

2

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**GRANITECITY FOOD & BREWERY LTD.**

 

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **
|                                                                                       |   | **Thirty-nine Weeks Ended** |    |
|--------------------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                                       |   | **September 29,  2002**     |    | **September 28,  2003** |   |
|                                                                                       |   |                        |    |   |   |
| Cash flows from operating activities:                                                      |   |                        |    |   |   |
| Net loss                                                                                   |   | $                           | (47,684 | ) | $ | (837,221 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |   |                        |    |   |   |
| Depreciation and amortization                                                              |   | 574,373                     |    | 596,471 |   |
| Stock option/warrant compensation                                                          |   | —                      |    | 9,762 |   |
| Decrease (increase) in:                                                                    |   |                        |    |   |   |
| Inventory                                                                                  |   | 23,328                      |    | (99,364 | ) |
| Prepaids and other                                                                         |   | (72,046                     | )       | (167,159 | ) |
| Increase (decrease) in:                                                                    |   |                        |    |   |   |
| Accounts payable                                                                           |   | 91,961                      |    | 187,107 |   |
| Accrued expenses                                                                           |   | (190,109                    | )       | (6,704 | ) |
| Net cash provided by (used in) operating  activities                                       |   | 379,823                     |    | (317,108 | ) |
|                                                                                       |   |                        |    |   |   |
| Cash flows from investing activities:                                                      |   |                        |    |   |   |
| Purchase of:                                                                               |   |                        |    |   |   |
| Property and equipment                                                                     |   | (448,556                    | )       | (1,950,915 | ) |
| Intangible assets and other                                                                |   | (3,809                      | )       | (38,578 | ) |
| Net cash used in investing activities                                                      |   | (452,365                    | )       | (1,989,493 | ) |
|                                                                                       |   |                        |    |   |   |
| Cash flows from financing activities:                                                      |   |                        |    |   |   |
| Payments on capital lease obligations                                                      |   | (179,896                    | )       | (208,952 | ) |
| Payments on long term-debt                                                                 |   | (21,458                     | )       | (22,907 | ) |
| Other non-current assets                                                                   |   | (208,141                    | )       | — |   |
| Payment of dividends                                                                       |   | —                      |    | (168,384 | ) |
| Proceeds from:                                                                             |   |                        |    |   |   |
| Long-term debt                                                                             |   | —                      |    | 428,572 |   |
| Related parties                                                                            |   | 200,000                     |    | — |   |
| Issuance of stock                                                                          |   | 20,087                      |    | 1,381,989 |   |
| Net cash provided by (used in) financing  activities                                       |   | (189,408                    | )       | 1,410,318 |   |
|                                                                                       |   |                        |    |   |   |
| Net decrease in cash                                                                       |   | (261,950                    | )       | (896,283 | ) |
| Cash, beginning                                                                            |   | 384,394                     |    | 3,521,842 |   |
| Cash, ending                                                                               |   | $                           | 122,444 |   | $ | 2,625,559 |   |

 

See notes to condensed financial statements.

 

3

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**GRANITECITY FOOD & BREWERY LTD.**

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

 

Thirteen and thirty-nine weeks ended September29, 2002 and September 28, 2003

 

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

 

Nature of business:

Granite City Food& Brewery Ltd. (the “Company”) was formed to develop and operate casualdining restaurants featuring on-premises breweries.  The Company is developing these restaurant-microbreweries, knownas Granite 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 hand-crafted beers.  TheCompany produces its beer using a process called Fermentus InterruptusTM, whichis intended to maintain high beer quality while enhancing overall profitabilityby reducing unit-level brewing costs. The first facility, located in St. Cloud, Minnesota, opened in July1999, a second facility opened in Sioux Falls, South Dakota, in December 2000,and a third facility, located in Fargo, North Dakota, opened in November2001.  Our fourth facility opened inSeptember 2003 in West Des Moines, Iowa. Construction for new restaurants is currently underway in Cedar Rapidsand Davenport, Iowa.

 

The Company’s currentexpansion strategy focuses on development of restaurants in markets wheremanagement believes the Company’s concept will have broad appeal and attractiverestaurant-level economics.

 

Interim financial statements:

The Company has prepared the condensed financial statements for thethirteen and thirty-nine weeks ended September 29, 2002 and September 28, 2003without audit by the Company’s independent auditors.  In the opinion of the Company’s management, all adjustmentsnecessary to present fairly the financial position of the Company at September28, 2003 and the results of operations and cash flows for the periods endedSeptember 29, 2002 and September 28, 2003 have been made. Those adjustmentsconsist only of normal and recurring adjustments.

 

Certain information and note disclosures normally included in theCompany’s annual financial statements have been condensed or omitted.  These condensed financial statements shouldbe read in conjunction with the financial statements and notes thereto includedin the Company’s Annual Report on Form 10-KSB for the fiscal year endedDecember 29, 2002, filed with the Securities and Exchange Commission on March28, 2003.

 

The results of operations for the thirteen and thirty-nine weeks endedSeptember 28, 2003 are not necessarily indicative of the results to be expectedfor the entire year.

 

4

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Earnings (loss) per share:

Basic earnings(loss) per common share is calculated by dividing net income (loss) lesspreferred stock dividends declared by the weighted average number of commonshares outstanding.  Diluted earnings(loss) per common share assumes that outstanding common shares were increasedby shares issuable upon exercise of stock options and warrants for which marketprice exceeds exercise price, less shares which could have been purchased bythe Company with the related proceeds. Calculations of the Company’s net loss per common share for the thirteenand thirty-nine weeks ended September 29, 2002 and September 28, 2003 are setforth in the following table:

 
|                                                    |   | **Thirteen  Weeks Ended** |    | **Thirty-nine  Weeks Ended** |   |
|---------------------------------------------------------|--------|---------------------------|---------|------------------------------|--------|
|                                                    |   | **September  29,  2002**  |    | **September 28,  2003**      |   | **September  29,  2002** |   | **September  28,  2003** |   |
|                                                    |   |                      |    |                         |   |   |   |   |   |
| Net loss                                                |   | $                         | (23,195 | )                            | $      | (431,510 | ) | $ | (47,684 | ) | $ | (837,221 | ) |
| Less dividends declared                                 |   | —                    |    | (168,854                     | )      | — |   | (433,935 | ) |
| Net loss available to common shareholders               |   | $                         | (23,195 | )                            | $      | (600,364 | ) | $ | (47,684 | ) | $ | (1,271,156 | ) |
|                                                    |   |                      |    |                         |   |   |   |   |   |
| Loss per common share, basic and diluted                |   | $                         | (0.01   | )                            | $      | (0.15 | ) | $ | (0.01 | ) | $ | (0.33 | ) |
|                                                    |   |                      |    |                         |   |   |   |   |   |
| Weighted average shares outstanding, basic and  diluted |   | 3,819,825                 |    | 3,947,700                    |   | 3,812,108 |   | 3,888,038 |   |

 

**2.****              Stockcompensation:**

 

The Company accounts for its stock-based compensation awards using theintrinsic value method prescribed by Accounting Principles Board (APB) OpinionNo. 25, *Accounting for Stock Issued toEmployees. *No compensationcost has been recognized for options issued to employees when the exerciseprice of the options granted is at least equal to the fair value of the commonstock on the date of grant.  Hadcompensation cost been determined consistent with Statement of FinancialAccounting Standard (SFAS) No. 123, *Accountingfor Stock-Based Compensation*, as amended by SFAS No. 148, *Accounting for Stock-Based Compensation-Transitionand Disclosure,* the Company’s net loss and net loss per common sharewould have been changed to the following pro forma amounts: 

 
|                                                                                                                                        |   | **Thirteen  Weeks Ended** |    | **Thirty-nine  Weeks Ended** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|---------|------------------------------|--------|
|                                                                                                                                        |   | **September  29,  2002**  |    | **September  28,  2003**     |   | **September  29,  2002** |   | **September  28,  2003** |   |
| Net income (loss):                                                                                                                          |   |                      |    |                         |   |   |   |   |   |
| As reported                                                                                                                                 |   | $                         | (23,195 | )                            | $      | (431,510 | ) | $ | (47,684 | ) | $ | (837,221 | ) |
|                                                                                                                                        |   |                      |    |                         |   |   |   |   |   |
| Less: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | $                         | (34,703 | )                            | $      | (58,272 | ) | $ | (100,680 | ) | $ | (273,285 | ) |
| Pro forma                                                                                                                                   |   | $                         | (57,898 | )                            | $      | (489,782 | ) | $ | (148,364 | ) | $ | (1,110,506 | ) |
|                                                                                                                                        |   |                      |    |                         |   |   |   |   |   |
| Net income (loss) per common share                                                                                                          |   |                      |    |                         |   |   |   |   |   |
| Basic and diluted as reported                                                                                                               |   | $                         | (0.01   | )                            | $      | (0.15 | ) | $ | (0.01 | ) | $ | (0.33 | ) |
| Basic and diluted pro forma                                                                                                                 |   | $                         | (0.02   | )                            | $      | (0.17 | ) | $ | (0.04 | ) | $ | (0.40 | ) |

 

5

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The fair value of each option grant for the pro forma disclosurerequired by SFAS No. 123, as amended by SFAS No. 148, is estimated on the grantdate using the Black-Scholes option-pricing model with the followingassumptions for the grants:

 
|                    |   | **2002** |   | **2003**   |   |
|-------------------------|--------|----------|--------|------------|--------|
| Dividend yield          |   | None     |   | None       |   |
| Expected volatility     |   | 101.4    | %      | 75.0       | %      |
| Expected life of option |   | 5 years  |   | 5-10 years |   |
| Risk-free interest rate |   | 3.9      | %      | 4.2        | %      |

 

**3.****              Changein capitalization:**

 

Issuance of preferred stock and warrants to purchase common stock:

During the fourth quarter of 2002, the Company conducted a privateplacement to accredited investors of Series A Convertible Preferred Stock andwarrants to purchase common stock.  TheCompany sold 55,600 shares of preferred stock for aggregate gross proceeds of$5,560,000.  The outstanding preferredstock is convertible into an aggregate of 3,518,964 shares of common stock at aconversion price of $1.58 per share. The preferred stock pays an 8% cumulative dividend in cash or in theCompany’s common stock.  The Company mayrequire conversion under certain circumstances.  The preferred stock was sold with five-year warrants to purchasean aggregate of 1,759,473 shares of common stock at an exercise price of $1.58per share.  In connection with suchplacement, the Company issued its agents warrants to purchase an aggregate of288,604 shares of common stock at an exercise price of $1.58 per share and paidits agents cash commissions aggregating $471,000.

 

Exercise of warrants and options:

As part of the sale of common stock in 1997 and 1998, the Company soldto its private placement agent, for $50, a stock purchase warrant for thepurchase of 111,950 shares of common stock at $1 per share.  As of December 29, 2002, 78,150 of such warrantsremained outstanding.  On February 19,2003, affiliates of the private placement agent exercised 76,450 warrants on acashless basis.  The remaining 1,700warrants expired February 20, 2003.

 

On June 10, 2003, 15,822 of the 1,759,473 warrants sold with the SeriesA Convertible Preferred Stock, were exercised on a cashless basis, resulting inan issuance of 5,854 shares of common stock..

 

On August 18, 2003, one of our directors exercised a stock option forthe purchase of 5,000 shares of common stock at an exercise price of $1.00 pershare.  These options were issuedpursuant to the 1997 Director Stock Option Plan.

 

Dividends:

On March 21, 2003, the Company authorized payment of dividends toholders of its preferred stock as of that date.  Such dividends aggregated $96,349 and were paid in cash on March31, 2003.

 

On June 23, 2003, the Company authorized payment of dividends toholders of its preferred stock as of that date.  Such dividends were paid on June 30, 2003 through the issuance ofan aggregate of 69,724 shares of common stock and $36 cash in lieu offractional shares.

 

On September 22, 2003, the Company authorized payment of dividends toholders of its preferred stock as of that date.  Such dividends were paid on September 30, 2003 through theissuance of an aggregate of 70,356 shares of common stock and $38 cash in lieuof fractional shares.

 

6

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**ITEM2       Management’****s Discussion and Analysis or Plan of Operation**

 

*Thisdiscussion and analysis contains various non-historical forward-lookingstatements within the meaning of Section 21E of the Exchange Act.  Although we believe that, in making any suchstatement, our expectations are based on reasonable assumptions, any suchstatement may be influenced by factors that could cause actual outcomes andresults to be materially different from those projected.  When used in the following discussion, thewords “anticipates,” “believes,” “expects,” “intends,” “plans,” “estimates” andsimilar expressions, as they relate to us or our management, are intended toidentify such forward-looking statements. You 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 29, 2002, filedwith the Securities and Exchange Commission on March 28, 2003, for additionalfactors known to us that may cause actual results to vary.*

 

**Overview**

 

We operate four casual dining restaurants featuringon-premises breweries under the name Granite City Food & Brewery.  Our activities through June 1999 wererelated 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 secondrestaurant, located in Sioux Falls, South Dakota, commenced operations inDecember 2000.  Our third restaurant,located in Fargo, North Dakota, opened in November 2001.  We developed these restaurants using the netproceeds from a private placement conducted in late 1997, our initial publicoffering in June 2000, financing in the form of long-term building andequipment leases, bank financing, and loans from a related party.

 

We opened our fourth restaurant, located in West DesMoines, Iowa, in September 2003.  Wedeveloped this restaurant using a portion of the proceeds we obtained throughthe private placement of convertible preferred stock and warrants to purchasecommon stock in the fourth quarter of 2002. Using the remaining proceeds from this financing, we plan to developadditional restaurants in Midwest markets. We have entered into a multi-site development agreement whereby we areprovided assistance in site selection, construction management and financingfor new Granite City Food & Brewery restaurants.  Under this agreement, we lease each new restaurant from ourdeveloper.  We expect to open our CedarRapids, Iowa location in November 2003 and have begun construction in theDavenport, Iowa market.

 

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 consumerpreferences, competitive factors and weather conditions.

 

Restaurant revenues are comprised almost entirely ofthe sales of food and beverages.  Thesale of retail items such as cigarettes and promotional items, make upapproximately 0.5% to 0.7% of total revenue. Product costs include the costs of food, beverages and retailitems.  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.

 

7

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**Resultsof Operations**

 

The following table compares operating resultsexpressed as a percentage of total revenue for the thirteen and thirty-nineweeks ended September 29, 2002 and September 28, 2003.

 
|                          |   | **Thirteen Weeks Ended** |   | **Thirty-nine Weeks Ended** |   |
|-------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                          |   | **September 29,  2002**  |   | **September 28,  2003**     |   | **September 29,  2002** |   | **September 28,  2003** |   |
|                          |   |                     |   |                        |   |   |   |   |   |
| Restaurant revenues           |   | 100.0                    | %      | 100.0                       | %      | 100.0 | % | 100.0 | % |
|                          |   |                     |   |                        |   |   |   |   |   |
| Cost of sales:                |   |                     |   |                        |   |   |   |   |   |
| Food, beverage and retail     |   | 28.3                     |   | 28.9                        |   | 28.7 |   | 28.9 |   |
| Labor                         |   | 33.1                     |   | 33.6                        |   | 33.9 |   | 34.0 |   |
| Direct and occupancy          |   | 20.9                     |   | 21.3                        |   | 20.7 |   | 21.7 |   |
| Total cost of sales           |   | 82.4                     |   | 83.8                        |   | 83.3 |   | 84.6 |   |
|                          |   |                     |   |                        |   |   |   |   |   |
| Pre-opening                   |   | —                   |   | 7.1                         |   | — |   | 2.8 |   |
| General and administrative    |   | 8.1                      |   | 11.9                        |   | 7.1 |   | 11.8 |   |
| Depreciation and amortization |   | 6.1                      |   | 5.4                         |   | 6.1 |   | 6.1 |   |
|                          |   |                     |   |                        |   |   |   |   |   |
| Operating income (loss)       |   | 3.4                      |   | (8.3                        | )      | 3.4 |   | (5.3 | ) |
|                          |   |                     |   |                        |   |   |   |   |   |
| Interest:                     |   |                     |   |                        |   |   |   |   |   |
| Income                        |   | —                   |   | 0.4                         |   | — |   | 0.6 |   |
| Expense                       |   | (4.2                     | )      | (3.5                        | )      | (4.3 | ) | (3.9 | ) |
| Other income, net             |   | —                   |   | —                      |   | 0.3 |   | — |   |
| Net other expense             |   | (4.2                     | )      | (3.1                        | )      | (3.9 | ) | (3.2 | ) |
|                          |   |                     |   |                        |   |   |   |   |   |
| Net loss                      |   | (0.7                     | )%     | (11.4                       | )%     | (0.5 | )% | (8.6 | )% |

 

Certain percentageamounts do not sum due to rounding.

 

**Critical Accounting Policies**

 

This discussion and analysisis based upon our financial statements, which were prepared in conformity withgenerally accepted accounting principles. These principles require management to make estimates and assumptionsthat affect the amounts reported in the 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 andequipment is depreciated over the estimated useful lives of the related assetsranging from three to 20 years.  Thecost of leasehold improvements is depreciated over the length of the relatedlease.  Depreciation is computed usingthe straight-line method for financial reporting purposes and acceleratedmethods for income tax purposes. Amortization of assets acquired under capital lease is included indepreciation expense.  Our accountingpolicies regarding property and equipment include certain management judgmentsregarding the estimated useful lives of such assets and the determination as towhat constitutes enhancing the value of or increasing the life of existingassets.  These judgments and estimatesmay produce materially different amounts of depreciation and amortizationexpense than would be reported if different assumptions were used.

 

8

----

 

We continually reassess ourassumptions and judgments and make adjustments when significant facts andcircumstances dictate.  Historically,actual results have not been materially different than the estimates we havemade.

 

**Results of Operations for theThirteen and Thirty-nine Weeks Ended September 29, 2002 and September 28, 2003**

 

**Revenue**

 

We generated $3,159,837 and $3,786,885 of revenuesduring the third quarter of 2002 and 2003, respectively, with average weeklysales increasing from $81,021 to $88,067 over the same comparable periods.  During the first three quarters of 2002 wehad revenues of $9,436,453 while we had revenues of $9,768,071 during thecomparable period of 2003.  Averageweekly sales for the comparable thirty-nine week periods increased slightlyfrom $80,653 in fiscal year 2002 to $80,728 in fiscal year 2003.  The overall 3.5% increase in revenues duringthe first three quarters of the current fiscal year was due primarily to theopening of our new restaurant in West Des Moines on September 2, 2003.

 

We anticipate that restaurant revenues will vary fromquarter to quarter.  We anticipateseasonal fluctuations in restaurant revenues due in part to increased outdoorseating and generally favorable weather conditions at all locations during thesummer months.  A restaurant typicallyexperiences a temporary period of high revenues immediately following itsopening due to increased demand fostered by the publicity surrounding theopening (the “honeymoon effect”).  Weexperienced this effect in the West Des Moines location in the third quarter of2003 and expect it to continue into the fourth quarter of 2003.  Therefore, we expect the timing of newrestaurant openings to cause fluctuations in restaurant revenues.  Additionally, consumer confidence in theeconomy and changes in consumer preferences may affect our future revenues.

** **

**Costof Sales**

* *

*Food,Beverage and Retail*

 

Our food, beverage and retail cost increased 0.6% as apercentage of revenues during the thirteen weeks ended September 28, 2003compared to the thirteen-week period ended September 29, 2002.  These costs increased 0.2% as a percentageof revenue during the first three quarters of 2003 compared to the first threequarters of 2002.  We expect that ourfood and beverage costs will vary going forward due to numerous variables,including seasonal changes in food costs and guest preferences.  We periodically create new menu offerings inboth our craftbrewed beers and our food based upon guest preferences.  Although such menu modifications maytemporarily result in increased food and beverage cost, we believe we are ableto offset such increases with our weekly specials which provide variety to ourguests at a great price value.  Ourvarieties of craftbrewed beer, which we can produce at lower cost than beers wepurchase for resale, also enable us to keep our food and beverage costs lowwhile fulfilling guest requests and building customer loyalty.  We expect that with the addition of futurelocations, increased purchasing power will reduce our food and beverage costsas a percentage of revenues.  Additionally,as we add new units, we believe our brewing process, Fermentus Interruptus,will allow us to keep our high quality product intact while reducing theproduction cost, thereby enhancing overall profitability.

* *

*Labor*

 

Our labor costs expressed as a percentage of revenuesincreased 0.5% during the third quarter of 2003 compared to the third quarterof 2002 and increased 0.1% for the thirty-nine weeks ended September 28, 2003compared to the same period of 2002. Throughout their honeymoon periods, we expect new restaurants to operateall shifts with more staff and to incur higher training expenses than what weexperience at our established restaurants. This was the case at our West Des Moines location in the third quarterof 2003 and we expect it to be the case in the fourth quarter of 2003 aswell.  Additionally, we had increasedlabor cost in the current fiscal year compared to that

 

9

----

 

in the previous fiscal year due to increased employeehealth insurance premiums and increased workers compensation insurance.

 

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, as will hiring and training expense atour new locations.  Our managementbelieves that retaining good employees through pay increases for moreexperienced staff ensures high quality guest service and reduces hiring andtraining costs.

* *

*Directand Occupancy*

 

Our direct and occupancy expenses increased 0.4% as apercentage of revenues during the thirteen weeks ended September 28, 2003compared to the thirteen weeks ended September 29, 2002.  During the first three quarters of 2003,direct and occupancy costs increased 1.0% as a percentage of revenues comparedto the first three quarters of 2002. Operating supplies, rent and occupancycosts, repairs and maintenance and advertising expense represent the majorityof our direct and occupancy expenses, a substantial portion of which is fixedor indirectly variable.  Increases indirect and operating expenses were primarily in the areas of utilities,property taxes and insurance.

 

**Pre-OpeningCosts**

 

Pre-opening costsexperienced during the thirteen and thirty-nine weeks ended September 28, 2003related to our West Des Moines and Cedar Rapids restaurants.  We incurred pre-opening costs of $207,916 inWest Des Moines and $62,813 in Cedar Rapids. We expect to incur additional pre-opening costs of approximately$150,000 to $155,000 for the Cedar Rapids location prior to its opening whichis scheduled for November 2003.  Weanticipate pre-opening costs of $200,000 to $230,000 for each new location.  Such costs are primarily incurred in themonth of, and two months prior to, the restaurant opening.

** **

**Generaland Administrative**

 

General and administrative expenses include salaries and benefitsassociated with our corporate staff that is responsible for overall restaurantquality, future expansion into new locations and financial controls andreporting.  Other general andadministrative expenses include professional fees, office administration andcentralized accounting system costs, and travel by our corporate management tothe restaurant locations.  General andadministrative expenses increased $195,453 from $254,380 during the thirdquarter of 2002 to $449,833 during the third quarter of 2003.  Such costs increased $482,478 during thefirst three quarters of 2003 compared to the first three quarters of 2002.  In order to retain core management andfurther build our infrastructure to facilitate growth, we incurred increasedpayroll and benefits related expenses in the first three quarters of 2003.  As we have increased our corporate staff, wehave incurred additional rent and office upkeep expenses.  Additionally, our travel related expenseshave increased with the development of new sites for expansion.  From the inception of our company throughthe end of fiscal year 2002, our executive officers did not receive any monetarycompensation from our company as we believe the options issued to theseofficers in 1999, 2001 and 2003 represented reasonable compensation for theirservices through March 30, 2003.  At ameeting held in February 2003, our board of directors established a $160,000annual salary for our President and Chief Executive Officer which becameeffective April 1, 2003.  His salaryincreased our general and administrative expenses for the second and thirdquarters of 2003.

 

We expect that general and administrative costs will continue tofluctuate as a percentage of restaurant revenues in the near term as we buildour infrastructure to adequately sustain operations across multiplelocations.  The anticipated additional restaurantrevenues associated with further expansion are expected to result in greatereconomies of scale for our corporate expenses in the long-term.

 

10

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**Depreciation and Amortization**

 

Depreciation and amortization expense increased$14,223 during the third quarter 2003 compared to the third quarter of2002.  Depreciation and amortizationexpense increased $22,098 during the first three quarters of 2003 compared tothe first three quarters of 2002.  As apercentage of revenues, depreciation and amortization expense remained steadyat 6.1% during the first three quarters of 2003 compared to that of 2002.

** **

**Other Income and Expense**

 

Interest expense net of interest income decreased $13,655 during thethirteen weeks ended September 28, 2003 compared to the similar period in2002.  Interest expense net of interestincome decreased $87,167 during the thirty-nine weeks ended September 28, 2003compared to the similar period in 2002. Over the first three quarters of 2003, interest expense decreased due tothe reduction of outstandingdebt while interest income increased due to interest earned on proceeds fromthe private placement of our securities during the fourth quarter of 2002.  Management expects interest expense willincrease as we enter into additional capital leases and loan agreements for ournew facilities and equipment financings. Other income and expense for the first three quarters of 2002 included aloss on assets which had not been fully depreciated, as well as the proceedsawarded by a NASD Arbitration Panel related to a claim we filed in November2000 against Equity Securities Investments, Inc., less related legal fees.

 

**Liquidity and Capital Resources**

 

We have required capital principally for thedevelopment, construction and opening of new restaurants.  To date, we have obtained gross proceedsaggregating approximately $11.0 million through the sales of oursecurities.  Additionally, we haveobtained financing through building and equipment leases, long-term debt froman independent financial institution, and loans from New Brighton Ventures,Inc., an entity owned in part by our President and Chief Executive Officer.

 

Using the proceeds from our sale of Series AConvertible Preferred Stock, we are expanding into markets where we believe ourconcept will have broad appeal and attractive restaurant-level economics.  To aid in our expansion, we entered into amulti-site development agreement in October 2002 with Dunham Capital ManagementL.L.C. (“Dunham”) for the development of restaurants.  Dunham is controlled by Donald A. Dunham, Jr., who is anaffiliate of Brew Buddies, L.L.C. (“Brew Buddies”), our largest beneficialowner of securities.  Under thisagreement, Dunham provides us assistance in site selection, constructionmanagement and restaurant financing.

 

As part of our expansion strategy, we have developed aprototype model for future restaurants. Our prototypical restaurant will be approximately 8,700 square feet andwill require an investment of approximately $3.5 million to $4.0 million forland, building and equipment.  Weanticipate these costs will vary from one market to another based on realestate values, zoning regulations, labor markets and other variables.  Under the above referenced developmentagreement, we will provide funding for the initial purchase of furniture,fixtures and equipment and our pre-opening expenses, which we anticipate willaggregate approximately $1.0 million to $1.5 million per location.  Additionally, we will lease each newrestaurant from our developer.

 

In January 2003, we entered into a 20-year net leaserelating to the restaurant under construction in Cedar Rapids and a 20-year netlease relating to the restaurant being developed in Davenport.  Each lease was entered into under the termsspecified in the development agreement with Dunham.  These restaurants will be constructed for us on areas rangingfrom approximately 1.7 to 2.8 acres on a build-to-suit basis.  The annual rent at each location will beequal to 10.5% of the sum of the construction cost and land cost.  The term of each lease will commence whenoperations begin at the specified location and each lease may be extended atour option for up to five additional five-year periods on the same terms and conditions,except the rent may increase based on a formula using the Consumer Price Indexduring any such extension.

 

11

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In August 2003, we entered into a $750,000 loanagreement with an independent financial institution, the proceeds of which financedour purchase of equipment for our West Des Moines location.  The loan matures in August 2010 and bearsinterest at the rate of 6.125% per annum. As of September 28, 2003, we had borrowed $428,572 under this loan.  The remaining balance of $321,428 wasborrowed on September 29, 2003.

 

In September 2003, we opened our restaurant in WestDes Moines.   We are leasing thisproperty from Dunham under a 20-year lease agreement.   Our annual lease payments are $294,000 with $173,460 classifiedas a capital lease and the remaining $120,540 classified as an operating lease.This lease may be extended at our option for up to five additional five-yearperiods.

 

 During thethirty-nine weeks ended September 28, 2003, the issuance of securities providedus $1,381,989 of net cash and proceeds from long-term debt provided us $428,572of net cash.  We used $317,108 of suchcash in operating activities, $1,989,493 to purchase equipment, primarily forour West Des Moines and Cedar Rapids locations, paid cash dividends of $168,384to holders of our preferred stock, and made payments on our debt and capitalleases aggregating $231,859.

 

During the thirty-nine weeks ended September 29, 2002,our operating activities provided $379,823 of net cash.  Using proceeds from promissory notes weissued to a related party aggregating $200,000 in February and May 2002,$20,087 in proceeds from issuing common stock pursuant to the exercise of stockoptions and warrants and the net cash provided by operations, we purchased$452,365 of assets, primarily for our Fargo location, made payments on our debtand capital lease obligations aggregating $201,354, and spent $208,141 onpre-paid expenses related to the sale of our Series A Convertible PreferredStock.

 

With the netproceeds raised through the sale of Series A Convertible Preferred Stock andequipment financing, management believes that we will have sufficient funds topursue our expansion strategy over the next 9 to 15 months.  We are also considering various alternativesto obtain capital to fund additional expansion, including debt and equityfinancing, partnerships with investors or combinations thereof.  The amount of financing required for newrestaurants depends upon the definitive locations, leasehold improvement costs,construction costs and the type of transactions pursuant to which we establishnew locations.  We cannot assure youthat the financing needed to pursue our expansion strategy will be available onterms acceptable or favorable to us, or at all.

 

**Commitmentsand Contingent Liabilities**

 

*Operatingand Capital Leases:*

 

We have three landand building lease agreements expiring in 2019, 2020 and 2023 with renewableoptions for additional periods.  Thebuilding portions of these leases are classified as capital leases becausetheir present value was greater than 90% of the estimated fair value at thebeginning of the lease.  The landportions of these leases are classified as operating leases because the fairvalue of the land was more than 25% of the leased property at the inception ofeach lease.  Under two of the threeleases, we are required to pay additional percentage rent based upon restaurantsales.  As of September 28, 2003, futureobligations relating to the land portion of these leases aggregated $5,777,936plus percentage rent.  The scheduledrent increases 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 Fargorestaurant.  As of September 28, 2003,future obligations under the terms of the lease aggregated $1,305,800 pluspercentage rent.  In April 2003, weentered into two separate 20-year net leases relating to future restaurants inCedar Rapids and Davenport.  The annualrent for each lease will be equal to 10.5% of the sum of the construction costand land cost.  The terms of theseleases will commence when operations begin at each location.

 

12

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*PersonalGuaranties:*

 

Certain of ourdirectors have personally guaranteed certain of our leases and loanagreements.  In connection with the $1.5million loan we obtained in July 2001 to finance our Fargo restaurant, weentered into an agreement concerning guaranty which provides, among otherthings, that such guarantors will be indemnified from any liabilities they mayincur by reason of their guaranties of our indebtedness. The agreement containsvarious covenants, one of which requires us to use our best efforts to obtain arelease of one 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 guaranties of our indebtedness.  The amount of such compensation has not yetbeen determined.

 

*EmploymentAgreement:*

 

We have enteredinto an employment agreement with our President and Chief Executive Officer.  In lieu of a salary, we issued stock optionsto him in 1999, 2001 and 2003 as compensation for his services through March30, 2003.  At a meeting held in February2003, our board of directors established a $160,000 annual salary for himeffective April 1, 2003.  Among otherprovisions, the employment agreement includes change in control provisions thatwould entitle him to receive severance pay equal to 18 months of salary ifthere is a change in control of our company and his employment terminates.  Based on his current salary, the maximumcontingent liability under this agreement would be $240,000.

 

*DevelopmentAgreement:*

 

We have enteredinto a development agreement with Dunham for the development of ourrestaurants.  Dunham is controlled byDonald A. Dunham, Jr., who is an affiliate of Brew Buddies, our largestbeneficial owner of securities.  Theagreement gives Dunham the right to develop, construct and lease up to 22restaurants for us prior to December 31, 2012. We are not bound to authorize the construction of restaurants duringthat time period, but generally cannot use another developer to develop or owna restaurant as long as the development agreement is in effect.  We can use another developer if Dunhamdeclines to build a particular restaurant, if the agreement is terminatedbecause of a default by Dunham, or if our company is sold or merged intoanother company.  In the case of amerger or sale of our company, the development agreement may be terminated atsuch time as Dunham has completed seven restaurants under the agreement.  The development agreement provides for acooperative process between Dunham and our company for the selection ofrestaurant sites and the development of restaurants on those sites, schedulingfor the development and construction of each restaurant once a location isapproved, and controls on the costs of development and construction usingbidding and guaranteed maximum cost concepts. The development agreement provides that restaurants will be leased to uson the basis of a triple net lease.  Therental rate of each lease will be calculated using a variable formula which isbased on approved and specified costs of development and construction and anindexed interest rate.  The term of eachlease is 20 years with five five-year options to renew.

 

*Summaryof Contractual Obligations:*

 

The followingtable summarizes our future obligations under contractual agreements as ofSeptember 28, 2003 and the time frame within which payments on such obligationsare due.  This table does not includeamounts related to loan guarantee fees, employment contracts, percentage rentor the lease agreement for our Cedar Rapids and Davenport locations as suchamounts have not yet been determined.

 

13

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|                        |   | **Payments due by period** |       |
|-----------------------------|--------|----------------------------|------------|
| **Contractual Obligations** |   | **Total**                  |       | **Less than 1  year** |   | **1-3 years** |   | **3-5 years** |   | **More than 5  years** |   |
| Long-term debt              |   | $                          | 1,879,715  |   | $ | 16,326 |   | $ | 137,646 |   | $ | 1,448,045 |   | $ | 277,697 |   |
| Capital lease obligations   |   | 10,270,326                 |       | 197,864 |   | 1,567,935 |   | 1,344,898 |   | 7,159,629 |   |
| Operating lease obligations |   | 7,093,040                  |       | 96,121 |   | 766,618 |   | 771,898 |   | 5,458,403 |   |
| Total Obligations           |   | $                          | 19,243,081 |   | $ | 310,311 |   | $ | 2,472,199 |   | $ | 3,564,841 |   | $ | 12,895,729 |   |

 

**Qualitativeand Quantitative Disclosures about Market Risk**

 

Our company isexposed to market risk from changes in interest rates on debt and changes incommodity prices.

 

*Changesin Interest Rate:*

 

We are exposed tomarket risk from changes in interest rates relating to a lease for equipmentunder an agreement expiring in 2008.  Asof June 15, 2004, we will be required to amortize approximately $264,100 of thethen remaining balance at an interest rate of prime plus 2% for 24 additionalmonths. At such time, our payments will increase if the prime rate is more than8.5%.  Each percentage point above suchrate would increase the total payments over the remaining life of the lease byapproximately $3,000.  On November 20,2004, we will be required to amortize approximately $416,600 of the thenremaining balance at an interest rate of prime plus 2% for 42 additionalmonths.  At such time, our payments willincrease if the prime rate is more than 10.3%. Each percentage point above such rate would increase the total paymentsover the remaining life of the lease by approximately $8,500.

 

In February 2007,we will have a balloon payment due of approximately $1,325,000 on the loan weobtained from an independent financial institution in July 2001.  Currently, this loan bears a fixed interestrate of 8.75%. If it becomes necessary to refinance such balloon balance, wemay not be able to secure financing at the same interest rate.  The effect of a higher interest rate woulddepend upon the negotiated financing terms.

 

*Changesin Commodity Prices:*

 

Many of the food productswe purchase 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 commodityprice risks.  Additionally, we have theability to increase menu prices, or vary the menu items offered, in response toa food product price increases.  If,however, competitive circumstances limit our menu price flexibility, marginscould be negatively impacted.

 

Our company doesnot enter into derivative contracts either to hedge existing risks or forspeculative purposes.

 

**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.

 

14

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**Inflation**

** **

The primary inflationary factors affecting ouroperations are food, supplies and labor costs. A large number of our restaurant personnel are paid at rates based onthe applicable minimum wage, and increases in the minimum wage directly affectour labor costs.  In the past, we havebeen able to minimize the effect of these increases through menu priceincreases and other strategies.  Todate, inflation has not had a material impact on our operating results.

 

**ITEM 3             Controls and Procedures**

 

We maintain a system of disclosure controls andprocedures that is designed to provide reasonable assurance that information,which is required to be disclosed, is accumulated and communicated tomanagement timely.  At the end of theperiod covered by this report, we carried out an evaluation under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Interim Chief Financial Officer, of the effectiveness ofthe design and operation of our disclosure controls and procedures pursuant toExchange Act Rule 13a-15.  Based uponthat evaluation, our Chief Executive Officer and Interim Chief FinancialOfficer concluded that our disclosure controls and procedures are effective intimely alerting them to material information relating to our company requiredto be disclosed in our periodic filings with the SEC.

 

During our most recentfiscal quarter, there has been no change in our internal control over financialreporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act)that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II OTHERINFORMATION**

 
| ITEM 1 |   | Legal  Proceedings               |
|--------|--------|----------------------------------|
|   |   |                             |
|   |   | Not applicable.                  |
|   |   |                             |
| ITEM 2 |   | Changes in  Securities           |
|   |   |                             |
|   |   | (a)                              |   | Not  applicable. |
|   |   |                             |   |   |
|   |   | (b)                              |   | Not  applicable. |
|   |   |                             |
|   |   | (c)                              | On  June 30, 2003, we issued 69,724 shares of common stock to the holders of our  Series A Convertible Preferred Stock.   We issued such common stock in lieu of $111,200 in cash dividends  otherwise payable to those investors on that date. |
|   |   |                             |   |
|   |   |                             | The  foregoing issuance was made in reliance upon the exemption provided in  Section 4(2) of the Securities Act.   Such securities are restricted as to sale or transfer, unless  registered under the Securities Act, and the certificates representing such  securities contain restrictive legends preventing sale, transfer or other  disposition, unless registered under the Securities Act.  In addition, the recipients of such  securities received, or had access to, material information concerning our  company, including, but not limited to, our reports on Form 10-KSB, Form 10-QSB  and Form 8-K, as filed with the SEC.   No underwriting discounts or commissions were paid in connection with  the issuance of such common stock. |
|   |   |                             |
|   |   | (d)                              |   | Not  applicable. |
|   |   |                             |
| ITEM 3 |   | Defaults upon  Senior Securities |
|   |   |                             |
|   |   | Not applicable.                  |

 

15

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| ITEM 4 |                                                                                                                                                                                   | Submission of  Matters to a Vote of Security Holders |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------|
|   |                                                                                                                                                                                   |                                                 |
|   | The 2003 annual meeting of shareholders was held  August 15, 2003.  Two proposals were  submitted for shareholder approval, both of which passed with voting results  as follows: |
|   |                                                                                                                                                                                   |                                                 |
|   |                                                                                                                                                                                   | (1)                                                  | To elect seven  directors for the ensuing year and until their successors shall be elected  and duly qualified. |
|   |                                                                                                                                                                                   |                                                 |
|   |                                                                                                                                                                                   |                                                 |   |   | **FOR** |   | **WITHHOLD  AUTHORITY** |   |   |
|   |                                                                                                                                                                                   |                                                 | William E. Burdick |   | 5,212,791 |   | 0 |   |   |
|   |                                                                                                                                                                                   |                                                 | Steven J. Wagenheim |   | 5,212,791 |   | 0 |   |   |
|   |                                                                                                                                                                                   |                                                 | Arthur E. Pew III |   | 5,212,791 |   | 0 |   |   |
|   |                                                                                                                                                                                   |                                                 | James G. Gilbertson |   | 5,212,791 |   | 0 |   |   |
|   |                                                                                                                                                                                   |                                                 | Bruce H. Senske |   | 5,212,791 |   | 0 |   |   |
|   |                                                                                                                                                                                   |                                                 | Eugene E. McGowan |   | 5,212,791 |   | 0 |   |   |
|   |                                                                                                                                                                                   |                                                 | Steve T. Kirby |   | 5,210,491 |   | 2,300 |   |   |
|   |                                                                                                                                                                                   |                                                 |   |   |   |   |   |   |   |
|   |                                                                                                                                                                                   | (2)                                                  | To ratify the appointment of Schechter, Dokken, Kanter, Andrews &  Selcer Ltd. as our independent auditors for the fiscal year ending December  28, 2003.  |
|   |                                                                                                                                                                                   |                                                 |   |   |   |   |   |   |   |   |   |   |
|   |                                                                                                                                                                                   |                                                 | FOR: |   | 5,211,791 |   |   | AGAINST: |   | 1,000 |   |   |
|   |                                                                                                                                                                                   |                                                 |   |   |   |   |   |   |   |   |   |   |
|   |                                                                                                                                                                                   |                                                 | ABSTAIN: |   | 0 |   |   | NON-VOTE: |   | 0 |   |   |
|   |                                                                                                                                                                                   |                                                 |   |   |   |   |   |   |   |   |   |   |
| ITEM 5 |                                                                                                                                                                                   | Other  Information                                   |
|   |                                                                                                                                                                                   |                                                 |
|   |                                                                                                                                                                                   | Not Applicable.                                      |
|   |                                                                                                                                                                                   |                                                 |
| ITEM 6 |                                                                                                                                                                                   | Exhibits and  Reports on Form 8-K                    |
|   |                                                                                                                                                                                   |                                                 |
|   |                                                                                                                                                                                   | (a)                                                  | Exhibits |
|   |                                                                                                                                                                                   |                                                 |   |
|   |                                                                                                                                                                                   |                                                 | See “Index to Exhibits.” |
|   |                                                                                                                                                                                   |                                                 |   |
|   |                                                                                                                                                                                   | (b)                                                  | Reports on Form 8-K |
|   |                                                                                                                                                                                   |                                                 |   |
|   |                                                                                                                                                                                   |                                                 | None. |
|        |                                                                                                                                                                                        |                                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

16

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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.

 

 
|   |              | GRANITE CITY FOOD & BREWERY LTD. |
|--------|-------------------|--------------------------------------|
|   |              |                                 |   |
|   |              |                                 |   |
| Date:  | November 12, 2003 |                                 | By: |   | /s/ Monica A. Underwood |   |
|   |              |                                 | Monica A. Underwood |
|   |              |                                 | Interim Chief Financial Officer and  Corporate Controller |
|        |                   |                                      |  |  |  |  |

 

17

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**INDEX TO EXHIBITS**

 
| **Exhibit Number** |   | **Description**                                                                                                                                                                                                               |
|--------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                          |
| 10.1               |   | Loan Agreement between Granite City Food & Brewery Ltd. and First  National Bank, dated August 28, 2003.                                                                                                                  |
|               |   |                                                                                                                                                                                                                          |
| 10.2               |   | Term Note for the  principal sum of $750,000 issued by Granite City Food & Brewery Ltd.,  Maker, to First National Bank, Payee, dated August 28, 2003.                                                                    |
|               |   |                                                                                                                                                                                                                          |
| 10.3               |   | Security Agreement between  Granite City Food & Brewery Ltd. and First National Bank, dated August  28, 2003.                                                                                                             |
|               |   |                                                                                                                                                                                                                          |
| 31.1               |   | Certification by  Steven J. Wagenheim, President and Chief Executive Officer of the Company,  pursuant to Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                    |
|               |   |                                                                                                                                                                                                                          |
| 31.2               |   | Certification by  Monica A. Underwood, Interim Chief Financial Officer and Corporate Controller  of the Company, pursuant to Exchange Act Rule 13a-14, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|               |   |                                                                                                                                                                                                                          |
| 32.1               |   | Certification by  Steven J. Wagenheim, President and Chief Executive Officer of the Company,  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                      |
|               |   |                                                                                                                                                                                                                          |
| 32.2               |   | Certification by Monica A. Underwood, Interim Chief Financial Officer  and Corporate Controller of the Company, pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     |

 

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