**UNITED STATES**

**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 27, 2004** |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                |
| **o**  | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                             |

 

**Commission File Number 000-29643**

 
| **GRANITE CITY FOOD & BREWERY LTD.**                           |
|--------------------------------------------------------------------|
| (Exact Name of Small Business Issuer 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 whetherthe issuer:  (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

 

Yes ý  No o.

 

As of July 16,2004, the issuer had outstanding 4,311,284 shares of common stock and 1,000,000Class A Warrants.  The number ofoutstanding shares of common stock includes the shares issuable upon separationof the units, each consisting of one share of common stock and one redeemableClass A Warrant, sold in the issuer’s initial public offering.

 

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 June 27, 2004                                                                      |   |
|                  |                      |                                                                                                             |   |
|                  |                      | Condensed Statements of Operations for the  thirteen and twenty-six weeks ended June 29, 2003 and June  27, 2004 |   |
|                  |                      |                                                                                                             |   |
|                  |                      | Condensed Statements of Cash Flows for the  twenty-six weeks ended June 29, 2003 and June 27, 2004               |   |
|                  |                      |                                                                                                             |   |
|                  |                      | 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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**PARTI     FINANCIAL INFORMATION**

 

**ITEM1  Financial Statements**

 

**GRANITECITY FOOD & BREWERY LTD.**

 

# **CONDENSED BALANCE SHEET**

**(Unaudited)**

 
| ** **                                                                                                                     | ** ** | **June 27,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
|                                                                                                                           |       |               |       |
| Current assets:                                                                                                                |       |               |       |
| Cash                                                                                                                           |       | $                  | 704,439    |   |
| Inventory                                                                                                                      |       | 277,297            |       |
| Prepaids and other                                                                                                             |       | 268,368            |       |
| Total current assets                                                                                                           |       | 1,250,104          |       |
|                                                                                                                           |       |               |       |
| Property and equipment, net                                                                                                    |       | 22,137,100         |       |
| Intangible assets and other                                                                                                    |       | 401,262            |       |
| Total assets                                                                                                                   |       | $                  | 23,788,466 |   |
|                                                                                                                           |       |               |       |
| Current liabilities:                                                                                                           |       |               |       |
| Accounts payable                                                                                                               |       | $                  | 861,517    |   |
| Accrued expenses                                                                                                               |       | 1,840,715          |       |
| Line of credit                                                                                                                 |       | 95,348             |       |
| Long-term debt, current portion                                                                                                |       | 226,874            |       |
| Capital lease obligations, current portion                                                                                     |       | 504,612            |       |
| Total current liabilities                                                                                                      |       | 3,529,066          |       |
|                                                                                                                           |       |               |       |
| Long-term debt, net of current portion                                                                                         |       | 2,611,477          |       |
| Capital lease obligations, net of current  portion                                                                             |       | 12,012,146         |       |
| Total liabilities                                                                                                              |       | 18,152,689         |       |
|                                                                                                                           |       |               |       |
| Shareholders’ equity:                                                                                                     |       |               |       |
| Common stock, $0.01 par value, 90,000,000  shares authorized; 4,311,284 shares issued and outstanding                          |       | 43,113             |       |
| Preferred stock, $0.01 par value,  10,000,000 authorized; 54,355 Series A Convertible Preferred shares issued  and outstanding |       | 544                |       |
| Additional paid-in capital                                                                                                     |       | 10,586,352         |       |
| Accumulated deficit                                                                                                            |       | (4,994,232         | )          |
| Total shareholders’ equity                                                                                                |       | 5,635,777          |       |
|                                                                                                                           |       |               |       |
| Total liabilities and shareholders’ equity                                                                                |       | $                  | 23,788,466 |   |

 

See notes tocondensed financial statements.

 

1

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**GRANITECITY FOOD & BREWERY LTD.**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
| ** **                                              | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|---------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                              | ** ** | **June 29,  2003**       | ** ** | **June 27,  2004**         | ** ** | **June 29,  2003** | ** ** | **June 27,  2004** | ** ** |
|                                                    |       |                     |       |                       |       |   |   |   |   |
| Restaurant revenues                                     |       | $                        | 3,111,026  |                       | $          | 7,625,932 |   | $ | 5,981,186 |   | $ | 13,918,803 |   |
|                                                    |       |                     |       |                       |       |   |   |   |   |
| Cost of sales:                                          |       |                     |       |                       |       |   |   |   |   |
| Food, beverage and retail                               |       | 909,316                  |       | 2,333,702                  |       | 1,728,198 |   | 4,209,817 |   |
| Labor                                                   |       | 1,061,028                |       | 2,526,463                  |       | 2,046,861 |   | 4,569,684 |   |
| Direct and occupancy                                    |       | 653,660                  |       | 1,382,331                  |       | 1,316,927 |   | 2,647,193 |   |
| Total cost of sales                                     |       | 2,624,004                |       | 6,242,496                  |       | 5,091,986 |   | 11,426,694 |   |
|                                                    |       |                     |       |                       |       |   |   |   |   |
| Pre-opening                                             |       | —                   |       | 483,349                    |       | — |   | 748,323 |   |
| General and administrative                              |       | 412,806                  |       | 605,478                    |       | 706,423 |   | 1,194,062 |   |
| Depreciation and amortization                           |       | 197,159                  |       | 384,970                    |       | 390,195 |   | 715,010 |   |
|                                                    |       |                     |       |                       |       |   |   |   |   |
| Operating loss                                          |       | (122,943                 | )          | (90,361                    | )          | (207,418 | ) | (165,286 | ) |
|                                                    |       |                     |       |                       |       |   |   |   |   |
| Interest:                                               |       |                     |       |                       |       |   |   |   |   |
| Income                                                  |       | 23,581                   |       | 221                        |       | 46,882 |   | 4,192 |   |
| Expense                                                 |       | (121,727                 | )          | (279,125                   | )          | (245,175 | ) | (511,298 | ) |
| Net other expense                                       |       | (98,146                  | )          | (278,904                   | )          | (198,293 | ) | (507,106 | ) |
|                                                    |       |                     |       |                       |       |   |   |   |   |
| Net loss                                                |       | (221,089                 | )          | (369,265                   | )          | (405,711 | ) | (672,392 | ) |
| Less preferred stock dividends declared                 |       | (168,732                 | )          | (108,710                   | )          | (265,081 | ) | (455,816 | ) |
| Net loss available to common shareholders               |       | $                        | (389,821   | )                          | $          | (477,975 | ) | $ | (670,792 | ) | $ | (1,128,208 | ) |
|                                                    |       |                     |       |                       |       |   |   |   |   |
| Loss per common share, basic and diluted                |       | $                        | (0.10      | )                          | $          | (0.11 | ) | $ | (0.17 | ) | $ | (0.27 | ) |
|                                                    |       |                     |       |                       |       |   |   |   |   |
| Weighted average shares outstanding, basic  and diluted |       | 3,871,101                |       | 4,271,439                  |       | 3,858,208 |   | 4,202,186 |   |

 

Seenotes to condensed financial statements.

 

2

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**GRANITECITY FOOD & BREWERY LTD.**

 

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **
| ** **                                                                                 | ** ** | **Twenty-six Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                 | ** ** | **June 29,  2003**         | ** ** | **June 27,  2004** | ** ** |
|                                                                                       |       |                       |       |   |   |
| Cash flows from operating activities:                                                      |       |                       |       |   |   |
| Net loss                                                                                   |       | $                          | (405,711   | ) | $ | (672,392 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                       |       |   |   |
| Depreciation and amortization                                                              |       | 390,195                    |       | 715,010 |   |
| Stock option/warrant compensation                                                          |       | —                     |       | 12,780 |   |
| Decrease (increase) in:                                                                    |       |                       |       |   |   |
| Inventory                                                                                  |       | (72                        | )          | (100,121 | ) |
| Prepaids and other                                                                         |       | (64,675                    | )          | (122,511 | ) |
| Increase (decrease) in:                                                                    |       |                       |       |   |   |
| Accounts payable                                                                           |       | (12,833                    | )          | 391,473 |   |
| Accrued expenses                                                                           |       | (226,753                   | )          | 438,764 |   |
| Net cash provided by (used in) operating  activities                                       |       | (319,849                   | )          | 663,003 |   |
|                                                                                       |       |                       |       |   |   |
| Cash flows from investing activities:                                                      |       |                       |       |   |   |
| Purchase of:                                                                               |       |                       |       |   |   |
| Property and equipment                                                                     |       | (908,056                   | )          | (1,979,625 | ) |
| Intangible assets and other                                                                |       | (12,327                    | )          | (29,561 | ) |
| Net cash used in investing activities                                                      |       | (920,383                   | )          | (2,009,186 | ) |
|                                                                                       |       |                       |       |   |   |
| Cash flows from financing activities:                                                      |       |                       |       |   |   |
| Payments on capital lease obligations                                                      |       | (129,057                   | )          | (223,642 | ) |
| Payments on long term-debt                                                                 |       | (15,331                    | )          | (90,985 | ) |
| Proceeds from (payments on) line of credit                                                 |       | —                     |       | 95,348 |   |
| Payment of dividends                                                                       |       | (168,348                   | )          | (36 | ) |
| Proceeds from long-term debt                                                               |       | —                     |       | 750,000 |   |
| Proceeds from issuance of stock                                                            |       | 1,448,987                  |       | 79,977 |   |
| Net cash provided by financing activities                                                  |       | 1,136,251                  |       | 610,662 |   |
|                                                                                       |       |                       |       |   |   |
| Net decrease in cash                                                                       |       | (103,981                   | )          | (735,521 | ) |
| Cash, beginning                                                                            |       | 3,521,842                  |       | 1,439,960 |   |
| Cash, ending                                                                               |       | $                          | 3,417,861  |   | $ | 704,439 |   |
|                                                                                       |       |                       |       |   |   |
| Supplemental disclosure of non-cash  investing activities:                                 |       |                       |       |   |   |
| Buildings acquired under capital lease  agreements                                         |       | $                          | —     |   | $ | 5,675,128 |   |

 

See notes tocondensed financial statements.

 

3

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**GRANITECITY FOOD & BREWERY LTD.**

 

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

 

Thirteen andtwenty-six weeks ended June 29, 2003 and June 27, 2004

 

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

 

Nature of business:

Granite City Food & Brewery Ltd. (“theCompany”) was formed to develop and operate casual dining restaurants featuringon-premise breweries.  The Company isdeveloping these restaurant-microbreweries, known as Granite City Food &Brewery®, in selected markets throughout the United States.  The theme is casual dining with a widevariety of menu items that are prepared fresh daily, combined with freshlybrewed hand-crafted beers made on-premise. The Company produces its beer using a process called FermentusInterruptusTM, which is intended to maintain high beer quality while enhancingoverall profitability by reducing unit-level brewing costs.  The first facility, located in St. Cloud,Minnesota, opened in July 1999. Subsequently, the Company opened restaurants in Sioux Falls, SouthDakota; Fargo, North Dakota; West Des Moines, Cedar Rapids and Davenport, Iowa,Lincoln, Nebraska and Minneapolis, Minnesota.

 

The Company’s current expansion strategy focuses on development ofrestaurants in markets where management believes the Company’s concept willhave broad appeal and attractive restaurant-level economics.

 

Interim financial statements:

The Company has prepared the condensedfinancial statements for the thirteen and twenty-six weeks ended June 29, 2003and June 27, 2004 without audit by the Company’s independent auditors.  In the opinion of the Company’s management,all adjustments necessary to present fairly the financial position of theCompany at June 27, 2004 and the results of operations and cash flows for theperiods ended June 29, 2003 and June 27, 2004 have been made. Those adjustmentsconsist only of normal and recurring adjustments.

 

Certain information and note disclosuresnormally included in the Company’s annual financial statements have beencondensed or omitted.  These condensedfinancial statements should be read in conjunction with the financialstatements and notes thereto included in the Company’s Annual Report on Form10-KSB for the fiscal year ended December 28, 2003, filed with the Securitiesand Exchange Commission on March 29, 2004.

 

The results of operations for the thirteenand twenty-six weeks ended June 27, 2004 are not necessarily indicative of theresults to be expected for the entire year.

 

4

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Earnings (loss) per share:

Basic earnings (loss) percommon share is calculated by dividing net income (loss) less preferred stockdividends declared by the weighted average number of common sharesoutstanding.  Diluted earnings (loss) percommon share assumes that outstanding common shares were increased by sharesissuable upon exercise of stock options and warrants for which market priceexceeds exercise price, less shares which could have been purchased by theCompany with the related proceeds. Calculations of the Company’s net loss per common share for the thirteenand twenty-six weeks ended June 29, 2003 and June 27, 2004 are set forth in thefollowing table:

 
| ** **                                              | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|---------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                              | ** ** | **June 29,  2003**       | ** ** | **June 27,  2004**         | ** ** | **June 29,  2003** | ** ** | **June 27,  2004** | ** ** |
|                                                    |       |                     |       |                       |       |   |   |   |   |
| Net loss                                                |       | $                        | (221,089   | )                          | $          | (369,265 | ) | $ | (405,711 | ) | $ | (672,392 | ) |
| Less dividends declared                                 |       | (168,732                 | )          | (108,710                   | )          | (265,081 | ) | (455,816 | ) |
| Net loss available to common shareholders               |       | $                        | (389,821   | )                          | $          | (477,975 | ) | $ | (670,792 | ) | $ | (1,128,208 | ) |
|                                                    |       |                     |       |                       |       |   |   |   |   |
| Loss per common share, basic and diluted                |       | $                        | (0.10      | )                          | $          | (0.11 | ) | $ | (0.17 | ) | $ | (0.27 | ) |
|                                                    |       |                     |       |                       |       |   |   |   |   |
| Weighted average shares outstanding, basic  and diluted |       | 3,871,101                |       | 4,271,439                  |       | 3,858,208 |   | 4,202,186 |   |

 

**2.     Stockcompensation:**

 

The Company accounts for its stock-basedcompensation awards using the intrinsic value method prescribed by AccountingPrinciples Board (APB) Opinion No. 25, *Accountingfor Stock Issued to Employees. *Nocompensation cost has been recognized for options issued to employees when theexercise price of the options granted is at least equal to the fair value ofthe common stock on the date of grant. Had compensation cost been determined consistent with Statement ofFinancial Accounting 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** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                  | ** ** | **June 29,  2003**       | ** ** | **June 27,  2004**         | ** ** | **June 29,  2003** | ** ** | **June 27,  2004** | ** ** |
| Net income (loss):                                                                                                                          |       |                     |       |                       |       |   |   |   |   |
| As reported                                                                                                                                 |       | $                        | (221,089   | )                          | $          | (369,265 | ) | $ | (405,711 | ) | $ | (672,392 | ) |
| Less: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | $                        | (73,470    | )                          | $          | (168,831 | ) | $ | (215,013 | ) | $ | (322,523 | ) |
| Pro forma                                                                                                                                   |       | $                        | (294,559   | )                          | $          | (538,096 | ) | $ | (620,724 | ) | $ | (994,915 | ) |
|                                                                                                                                        |       |                     |       |                       |       |   |   |   |   |
| Net income (loss) per common share                                                                                                          |       |                     |       |                       |       |   |   |   |   |
| Basic and diluted as reported                                                                                                               |       | $                        | (0.10      | )                          | $          | (0.11 | ) | $ | (0.17 | ) | $ | (0.27 | ) |
| Basic and diluted pro forma                                                                                                                 |       | $                        | (0.12      | )                          | $          | (0.15 | ) | $ | (0.23 | ) | $ | (0.35 | ) |

 

5

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The fair value of each option grant for thepro forma disclosure required by SFAS No. 123, as amended by SFAS No. 148, isestimated on the grant date using the Black-Scholes option-pricing model withthe following assumptions for the grants:

** **
| ** **              | ** ** | **2003**   | ** ** | **2004**   | ** ** |
|-------------------------|------------|------------|------------|------------|------------|
| Dividend yield          |       | None       |       | None       |       |
| Expected volatility     |       | 78.6%      |       | 71.4%      |       |
| Expected life of option |       | 5-10 years |       | 5-10 years |       |
| Risk-free interest rate |       | 3.4%       |       | 4.8%       |       |

 

**3.     Changein capitalization:**

 

Exercise of warrants and options:

 

Duringthe first quarter of 2004, the Company issued an aggregate of 40,822 shares ofcommon stock to accredited investors, upon the conversion of 645 shares ofSeries A Convertible Preferred Stock originally issued on October 1, 2002.  The convertible preferred stock was convertedat $1.58 per share.

 

Duringthe first quarter of 2004, the Company issued 31,645 shares of common stock toaccredited investors upon the exercise for cash of warrants originally issuedon October 1, 2002, in connection with a private placement of Series AConvertible Preferred Stock and warrants. Each warrant was exercised at $1.58 per share.

 

As part of the Company’s initial publicoffering, the Company sold to the underwriter, for $100, stock purchasewarrants for the purchase of an aggregate of 100,000 units exercisable at $4.95per unit after June 6, 2001. Each unit consists of one share of common stockand one warrant to purchase one share of common stock at an exercise price of$5.00 per share, subject to adjustment. The agreement that set forth the terms and conditions of these warrantscontains certain anti-dilution provisions. Pursuant to these provisions, the number of shares purchasable uponexercise of these warrants and the related purchase price both requiredadjustment upon the issuance of common stock in lieu of cash dividends to theholders of the Company’s Series A Convertible Preferred Stock.  These warrants also provide for a cashlessexercise provision and expire on June 6, 2005. During the first quarter of 2004, the Company issued 6,514 units uponthe cashless exercise of 19,368 of such warrants.  As a result of these exercises and theanti-dilution adjustments, as of June 27, 2004, the number of units purchasableunder this agreement was 87,670 and the exercise price was $4.61.

 

OnJune 8, 2004, the Company issued 15,822 shares of common stock to an accreditedinvestor upon the exercise for cash of warrants originally issued on October 1,2002, in connection with a private placement of Series A Convertible PreferredStock and warrants.  Each warrant wasexercised at $1.58 per share.

 

OnJune 10, 2004, the Company issued an aggregate of 31,645 shares of common stockto an accredited investor, upon the conversion of 500 shares of Series AConvertible Preferred Stock originally issued on October 1, 2002.  The convertible preferred stock was convertedat $1.58 per share.

 

6

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As part of the Company’s initial public offering, the Company sold1,000,000 units, each unit consisting of one share of common stock and oneredeemable Class A warrant.  Each Class Awarrant entitles the holder to purchase one share of common stock at anexercise price of $5.00 per share.  Theagreement that set forth the terms and conditions of the Class A Warrantscontains certain anti-dilution provisions. Pursuant to these provisions, the number of shares purchasable uponexercise of these warrants and the related purchase price both requiredadjustment upon the issuance of common stock in lieu of cash dividends to theholders of the Company’s Series A Convertible Preferred Stock. As a result ofthese adjustments and the issuance, pursuant to Registration File No.333-93459, of 1,072 shares of common stock upon the exercise of such warrantsin May 2004 at an exercise price of $4.66, the number of shares purchasableunder this agreement at June 27, 2004 was 1,071,889 and the exercise price was$4.66 per share.  The warrants expire onJune 6, 2005.

 

Dividends:

On December 10, 2003, the Company authorized payment of dividends toholders of its preferred stock as of December 23, 2003.  Such dividends were paid on December 31, 2003through the issuance of an aggregate of 70,230 shares of common stock valued at$1.58 per share.  The closing price ofthe stock on December 23, 2003 was $3.97 per share.  Additionally, $37 cash in lieu of fractionalshares was distributed.

 

On March 11, 2004, the Company authorizedpayment of dividends to holders of its preferred stock as of March 23,2004.  Such dividends were paid on March31, 2004 through the issuance of an aggregate of 69,414 shares of common stockvalued at $1.58 per share.  The closingprice of the stock on March 23, 2004 was $5.00 per share.  Additionally, $36 cash in lieu of fractionalshares was distributed.

 

On June 15, 2004, the Company authorized cashpayment of dividends to holders of its preferred stock as of June 23,2004.  Such dividends aggregated $108,710and were included in accrued expenses on the Company’s balance sheet at June27, 2004.  Such dividends were paid onJune 30, 2004.

 

**4.     Lineof Credit:**

 

In April 2004, the Company entered into a revolving line of creditagreement with maximum availability of $750,000 with an independent financialinstitution.  The Company pays 6.75%annual interest on amounts it borrows. This line of credit expires September 1, 2004.  The line of credit is secured bysubstantially all the personal property of the Company and is guaranteed by oneof the Company’s directors.  As of June27, 2004, the Company had $95,348 outstanding on this line.

 

7

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**ITEM2       Management’s Discussion andAnalysis or Plan of Operation**

 

*This discussion and analysis contains variousnon-historical forward-looking statements within the meaning of Section 21E ofthe Exchange Act.  Although we believethat, in making any such statement, our expectations are based on reasonableassumptions, any such statement may be influenced by factors that could causeactual outcomes and results 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 28, 2003, filedwith the Securities and Exchange Commission on March 29, 2004, for additionalfactors known to us that may cause actual results to vary.*

 

**Overview**

 

We operate eight casual dining restaurants featuringon-premises breweries under the name Granite City Food & Brewery®.  Our activities through June 1999 were relatedto the development of our restaurant-microbrewery concept and the developmentand financing of our first restaurant which commenced operations in St. Cloud,Minnesota, in June 1999.  Over the nexttwo-and one-half years, we opened a restaurant in Sioux Falls, South Dakota anda restaurant in Fargo, North Dakota.  Wedeveloped these restaurants using the net proceeds from a private placement ofcommon stock completed in late 1997, an initial public offering in June 2000,financing in the form of long-term building and equipment leases, bankfinancing, and loans from a related party.

 

After opening two additional restaurants during thelater part of 2003 located in West Des Moines and Cedar Rapids, Iowa, we openedthree restaurants in 2004.  Theserestaurants opened in Davenport, Iowa, Lincoln, Nebraska and Minneapolis,Minnesota.  We developed theserestaurants using the proceeds we obtained through the private placement ofconvertible preferred stock and warrants to purchase common stock in the fourthquarter of 2002, as well as equipment loans and a line of credit.  These five units were designed using theprototype we developed in early 2003, and based on the performance of theseunits, management plans to continue to use this prototype for futureexpansion.  We have entered into amulti-site development agreement with a commercial developer that provides usassistance in site selection, construction management and financing for newrestaurants.  Under this agreement, welease each new restaurant from our developer. We continue to explore additional methods of financing in order tofurther pursue our expansion plans.

 

We have developed a brewing process called FermentusInterruptus.  We believe that FermentusInterruptus improves the economics of our microbrewing process as it eliminatesthe initial stages of brewing and storage at multiple locations, therebyreducing equipment and development costs at new restaurant locations.  Having a common starting point for ourinitial brewing process creates consistency of taste for our product from unitto unit.  We believe that FermentusInterruptus gives us the ability to improve unit level economics whilemaintaining the consistency of our beers.  This commissary brewing process will allow us to service up to 25locations from one wort production site. We are evaluating strategies for capitalizing on Fermentus Interruptus,including licensing of our brewing technology.

 

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.

 

Our restaurant revenues are comprised almost entirelyof the sales of food and beverages.  Thesale of retail items, such as cigarettes and promotional items, typicallyrepresent approximately 0.3% to 0.7% of total revenue.  Product costs include the costs of food,beverages and retail items.  Labor costsinclude direct hourly and management wages, taxes and benefits for restaurantemployees.  Direct and

 

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occupancy costs includerestaurant supplies, marketing costs, rent, utilities, real estate taxes,repairs and maintenance and other related costs.  Pre-opening costs consist of direct costsrelated to hiring and training the initial restaurant workforce and certainother direct costs associated with opening new restaurants.  General and administrative expenses arecomprised of expenses associated with all corporate and administrativefunctions that support existing operations, management and staff salaries,employee benefits, travel, information systems and training and marketresearch.  Depreciation and amortizationinclude depreciation on capital expenditures. Other income and expense includes primarily the cost of interest expenseon debt and capital leases and interest income on invested assets.

 

**Results of Operations**

 

The following tablecompares operating results expressed as a percentage of total revenue for thethirteen and twenty-six weeks ended June 29, 2003 and June 27, 2004.

 
| ** **                    | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|-------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **June 29,  2003**       | ** ** | **June 27,  2004**         | ** ** | **June 29,  2003** | ** ** | **June 27,  2004** | ** ** |
|                          |       |                     |       |                       |       |   |   |   |   |
| Restaurant revenues           |       | 100.0                    | %          | 100.0                      | %          | 100.0 | % | 100.0 | % |
|                          |       |                     |       |                       |       |   |   |   |   |
| Cost of sales:                |       |                     |       |                       |       |   |   |   |   |
| Food, beverage and retail     |       | 29.2                     |       | 30.6                       |       | 28.9 |   | 30.2 |   |
| Labor                         |       | 34.1                     |       | 33.1                       |       | 34.2 |   | 32.8 |   |
| Direct and occupancy          |       | 21.0                     |       | 18.1                       |       | 22.0 |   | 19.0 |   |
| Total cost of sales           |       | 84.3                     |       | 81.9                       |       | 85.1 |   | 82.1 |   |
|                          |       |                     |       |                       |       |   |   |   |   |
| Pre-opening                   |       | —                   |       | 6.3                        |       | — |   | 5.4 |   |
| General and administrative    |       | 13.3                     |       | 7.9                        |       | 11.8 |   | 8.6 |   |
| Depreciation and amortization |       | 6.3                      |       | 5.0                        |       | 6.5 |   | 5.1 |   |
|                          |       |                     |       |                       |       |   |   |   |   |
| Operating loss                |       | (4.0                     | )          | (1.2                       | )          | (3.5 | ) | (1.2 | ) |
|                          |       |                     |       |                       |       |   |   |   |   |
| Interest:                     |       |                     |       |                       |       |   |   |   |   |
| Income                        |       | 0.8                      |       | 0.0                        |       | 0.8 |   | 0.0 |   |
| Expense                       |       | (3.9                     | )          | (3.7                       | )          | (4.1 | ) | (3.7 | ) |
| Net other expense             |       | (3.2                     | )          | (3.7                       | )          | (3.3 | ) | (3.6 | ) |
|                          |       |                     |       |                       |       |   |   |   |   |
| Net loss                      |       | (7.1                     | )%         | (4.8                       | )%         | (6.8 | )% | (4.8 | )% |

 

Certain percentage amounts donot sum due to rounding.

 

**CriticalAccounting Policies**

 

This discussion and analysisis based upon our consolidated financial statements, which were prepared inconformity with generally accepted accounting principles.  These principles require management to makeestimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and accompanying notes. We believe our estimates and assumptions are reasonable; however, actualresults and the timing of the recognition of such amounts could differ fromthose estimates.  We have identified thefollowing critical accounting policies and estimates utilized by management inthe preparation of our financial statements:

 

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*Property and equipment*

 

The cost of property andequipment is depreciated over the estimated useful lives of the related assetsranging from three to 20 years.  The costof leasehold improvements is depreciated over the length of the relatedlease.  Depreciation is computed on thestraight-line method for financial reporting purposes and accelerated methodsfor income tax purposes.  Amortization ofassets acquired 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.

 

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.

 

**Resultsof Operations for the Thirteen and Twenty-six Weeks Ended June 29, 2003 andJune 27, 2004**

 

**Revenue**

 

We generated $3,111,026 and $7,625,932 of revenuesduring the second quarter of 2003 and 2004, respectively.  During the first half of 2003 we had revenuesof $5,981,186 while during the first half of 2004 we had revenues of$13,918,803, with year-to-date average restaurant sales increasing from $76,682to $86,452 per week.  The overall 132.7%increase in revenues during the first half of the current fiscal year was dueprimarily to the opening of five additional restaurants since the first half of2003.

 

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 Cedar Rapids, Davenport, Lincoln and Minneapolis inthe first half of 2004, and we expect the honeymoons to continue into the thirdquarter of 2004 at Lincoln and Minneapolis. Therefore, we expect the timing of new restaurant openings to causefluctuations in restaurant revenues. Additionally, consumer confidence in the economy and changes in consumerpreferences may affect our future revenues.

 

**Cost of Sales**

 

*Food, Beverage and Retail*

 

Our food, beverage and retail cost increased by 1.4%as a percentage of revenues during both the second quarter and first half of2004 compared to the second quarter and first half of 2003, respectively.  The increases we experienced were dueprimarily to new staff members becoming familiar with our concept as we openedrestaurants in late 2003 and early 2004, as well as product price increase insome areas.

 

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 believe we are able to offset such increases withour weekly specials which provide variety to our guests at a great pricevalue.  Our varieties of craftbrewedbeer, which we can produce at lower cost than beers we purchase for resale,also enable us to keep our food and beverage costs low while fulfilling guestrequests and building customer loyalty. As we have opened additional units, we have experienced increasedpurchasing power and believe we will continue to do so with additionalexpansion, thereby reducing our food and beverage

 

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costs as a percentage ofrevenues.  Additionally, as we add newunits, we believe our brewing process, Fermentus Interruptus, will allow us tokeep our high quality product intact while reducing the production cost,thereby enhancing overall profitability.

 

*Labor*

 

Our labor costs expressed as a percentage of revenuesdecreased 1.0% during the second quarter of 2004 compared to the second quarterof 2003.  These costs decreased 1.4% as apercentage of revenues in the first half of 2004 compared to the first half of2003.  Although we have experiencedincreases in employee benefit costs such as health and workers compensationinsurance, our increased revenue base in the first half of 2004, due to thehoneymoon effect, enabled us to obtain an overall decrease in labor as apercentage of revenue.

 

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 for more experienced staff ensures highquality guest service and reduces hiring and training costs.

 

*Direct and Occupancy*

 

Our direct andoccupancy expenses decreased 2.9% as a percentage of revenues during the firstquarter of 2004 compared to the first quarter of 2003.  During the first half of 2004, these expensesdecreased 3.0% compared to the first half of 2003.  Operating supplies, rent and occupancy costs,repairs and maintenance and advertising expense represent the majority of ourdirect and occupancy expenses, a substantial portion of which is fixed orindirectly variable.  Decreases in directand operating expenses were primarily in the areas of employee meal costs,advertising, and repair and maintenance. Although we experienced increases in credit card discounts, hiring andtraining expenses and various supplies, our higher unit volumes reduced thefixed and indirectly variable costs as a percentage of revenues.

 

**Pre-Opening Costs**

 

Pre-opening costsexperienced during the first half of 2004 related to our Davenport, Lincoln andMinneapolis restaurants.  During thattime, we incurred pre-opening costs of $197,769 in Davenport, $312,976 inLincoln and $237,578 in Minneapolis.  TheLincoln pre-opening expenses were unusually high due to the distance betweenLincoln and the restaurants at which the new managers trained, causing us toincur significantly more travel, lodging and meal expenses.  Additionally, we encountered some unexpectedpersonnel turnover and related costs during the training process there.  We expect total pre-opening expenses at eachfuture location will be between $215,000 and $250,000.  Such costs are primarily incurred in themonth of, and two months prior to, the restaurant opening.

 

**General and Administrative**

 

General and administrative expenses includesalaries and benefits associated with our corporate staff that is responsiblefor overall restaurant quality, future expansion into new locations andfinancial controls and reporting.  Othergeneral and administrative expenses include advertising, professional fees, officeadministration, centralized accounting system costs, and travel by ourcorporate management to the restaurant locations.  General and administrative expenses increased$192,672 during the second quarter of 2004 compared to the second quarter of2003.  Such expenses increased $487,639during the first half of 2004 compared to the first half of 2003.  Due to higher unit volumes, general andadministrative expenses decreased 5.3% and 3.2% as a percent of revenue, duringthe second quarter and first half of 2004, respectively, compared to the sameperiods in 2003.  In order to retain andrecruit core management and further build our infrastructure to facilitategrowth, we incurred increased expenses related to payroll and benefits as wellas additional rent and office upkeep expenses in the first half of 2004compared to

 

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that of 2003.  During the first quarter of 2003, ourpresident and chief executive officer did not receive any monetary compensationfrom our company as we believe the options issued to him represented reasonablecompensation for his service through March 30, 2003.  Additionally, our travel related expenseshave increased with the opening of new restaurants and the development of newsites for expansion, our advertising costs increased with a billboard campaignin the first two months of 2004, and our investor relations cost have increasedwith heightened investor activity.

 

We expect that general and administrativecosts will continue to fluctuate as a percentage of restaurant revenues in thenear term as we build our infrastructure to adequately sustain operationsacross multiple locations.  Theanticipated additional restaurant revenues associated with further expansionare expected to result in greater economies of scale for our corporate expensesin the long-term.

 

**Depreciation and Amortization**

 

Depreciation and amortization expense increased$187,811 during the second quarter of 2004 and $324,815 during the first halfof 2004 compared to the same periods in 2003 due principally to the additionaldepreciation related to the newly opened restaurants.  As a percentage of revenues, during the firsthalf of 2004, depreciation expense decreased by 1.4% compared to the first halfof 2003, indicating that revenues generated from our new locations more thanoffset the related increase in depreciation expense.

 

**Other Income and Expense**

** **

Interestexpense net of interest income increased $180,758 during the second quarter of2004 compared to the second quarter of 2003. Interest expense net of interest income increased $308,813 during thefirst half of 2004 compared to the first half of 2003.  The increases were due to the increase ofdebt and capital leases and the reduction of invested cash as we opened newunits.  Management expects interest expense willincrease with future expansion.

 

**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 our securities inour initial public offering and two private placements.  Additionally, we have obtained financingthrough building and equipment leases, long and short-term debt from anindependent financial institution, loans from New Brighton Ventures, Inc., anentity owned in part by our President and Chief Executive Officer, and theexercise of various options and warrants for cash.

 

During the twenty-six weeks ended June 27, 2004,operating activities provided us $663,003 of cash, issuance of common stockpursuant to the exercise of warrants provided us $79,977 in cash and proceedsfrom long-term debt and our line of credit provided us $845,348 net cash.  We used $2,009,186 of cash to purchaseequipment and other assets primarily for our Davenport, Lincoln and Minneapolislocations, and made payments on our debt and capital lease obligationsaggregating $314,627.

 

During thetwenty-six weeks ended June 29, 2003, the issuance of securities provided us$1,448,987 of net cash.  We used $319,849in operating activities, $920,383 to purchase equipment, primarily for our WestDes Moines location, paid dividends of $168,348 to holders of our preferredstock and made payments on our debt and capital leases aggregating $144,388.

 

In January 2004,we opened our restaurant in Davenport.  We are leasing this property from our developer under a 20-year leaseagreement.   Our annual lease paymentsare $341,250 with $194,250 classified as a capital lease and the remaining$147,000 classified as an operating lease. This lease may be extended at ouroption for up to five additional five-year periods.

 

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In January 2004, we entered into a $750,000loan agreement with an independent financial institution.  The proceeds of this loan financed thepurchase of equipment for the Davenport location.  The loan is secured by substantially all of the personal property ofour company and is guaranteed by one of our directors.  The interest rate on the loan is 6.125% perannum and the loan matures in January 2011.

 

In April 2004, we entered into a revolving line of credit agreementwith maximum availability of $750,000 with an independent financialinstitution.  We pay 6.75% annualinterest on amounts we borrow.  This lineof credit expires September 1, 2004.  Theline of credit is secured by substantially all the personal property of ourcompany and is guaranteed by one of our directors.  As of June 27, 2004, we had $95,348outstanding on this line.

 

In May 2004, we openedour restaurant in Lincoln.   We areleasing this property from our developer under a 20-year lease agreement forthe building and a 15-year lease agreement for the land.   Our annual capital lease payments on thebuilding lease are $168,000 and our annual operating lease payments for theland average $140,000 per year over the initial term of the lease. These leasesmay be extended at our option for up to five additional five-year periods.

 

In June 2004, we openedour restaurant in Minneapolis.  We areleasing this property from an independent third party under a 20-year leaseagreement.  Our annual lease payments are$367,500 with $235,200 classified as a capital lease and the remaining $132,300classified as an operating lease. This lease may be extended at our option forup to five additional five-year periods.

 

With cashgenerated from operations and proceeds from the revolving line of credit,management believes that we will have sufficient funds to pursue our businessstrategy over the next 12 months.  Wecontinue to explore new restaurant sites and are considering variousalternatives to obtain capital to fund additional expansion, including debt andequity financing, partnerships with investors or combinations thereof.  The amount of financing required for newrestaurants depends upon the definitive locations, leasehold improvement costsand construction costs.  We cannot assureyou that the financing needed to pursue our expansion strategy will beavailable on terms acceptable or favorable to us, or at all.

 

**Commitmentsand Contingent Liabilities**

 

*Operatingand Capital Leases:*

 

As of June 27,2004, we had seven land and building lease agreements.  One of these leases expires in 2019, one in2020, two in 2023, and the remaining three expire in 2024, all 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 three of the leases,we are required to pay additional percentage rent based upon restaurantsales.  As of June 27, 2004, futureobligations relating to the land portion of these seven leases aggregated$15,650,650 plus percentage rent.  Thescheduled rent increases for the land during the life of each lease arerecognized on a straight-line basis. Future obligations relating to the building portion of these sevenleases aggregated $24,053,499 at June 27, 2004.

 

In 2001, weentered into a 20-year operating lease for land upon which we built our Fargorestaurant.  As of June 27, 2004, futureobligations under the terms of this lease aggregated $1,251,800 plus percentagerent.

 

As of June 27,2004, we have additional capital lease obligations outstanding of $833,491 forequipment leases expiring in 2008, and operating leases obligations outstandingaggregating $60,820 for leases expiring in 2005 for office space and variousequipment items.

 

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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, at ameeting held in March 2004, our board of directors agreed to compensate ourPresident and Chief Executive Officer for his personal guaranties of equipmentloans entered into in August 2003 and January 2004.  The amount of such compensation shall becalculated based on 3% of the weighted average daily balances of such loans atthe end of each monthly accounting period. As of June 27, 2004, we had accrued $16,133 of such fees.

 

*EmploymentAgreement:*

 

We have enteredinto an employment agreement with our President and Chief ExecutiveOfficer.  In lieu of a salary, we issuedstock options to him in 1999, 2001 and 2003 as compensation for his servicesthrough March 30, 2003.  Effective April1, 2003, we began paying an annual salary to such officer.  At a meeting held in March 2004, our board ofdirectors approved an increase in his annual salary to $175,000 effective July1, 2004.  Among other provisions, theemployment agreement includes change in control provisions that would entitlehim to receive severance pay equal to 18 months of salary if there is a changein control of our company and his employment terminates.  Based on his current salary, the maximumcontingent liability under this agreement would be $262,500.

 

*DevelopmentAgreement:*

 

We have entered into adevelopment agreement with Dunham Capital Management L.L.C. (“Dunham”) for thedevelopment of our restaurants.  Dunhamis controlled by Donald A. Dunham, Jr., who is an affiliate of Brew Buddies,L.L.C., the largest beneficial owner of our securities.  The agreement gives Dunham the right todevelop, construct and lease up to 22 restaurants for us prior to December 31,2012.  We are not bound to authorize theconstruction of restaurants during that time period, but generally cannot useanother developer to develop or own a restaurant as long as the developmentagreement is in effect.  We can useanother developer if Dunham declines to build a particular restaurant, if theagreement is terminated because of a default by Dunham, or if our company issold or merged into another company.  Inthe case of a merger or sale of our company, the development agreement may beterminated at such time as Dunham has completed seven restaurants under theagreement.  The development agreementprovides for a cooperative process between Dunham and our company for theselection of restaurant sites and the development of restaurants on thosesites, scheduling for the development and construction of each restaurant oncea location is approved, and controls on the costs of development andconstruction using bidding and guaranteed maximum cost concepts.  The development agreement provides thatrestaurants will be leased to us on the basis of a triple net lease.  The rental rate of each lease will becalculated using a variable formula which is based on approved and specifiedcosts of development and construction and an indexed interest rate.  The term of each lease is 20 years with fivefive-year options to renew.  As of June27, 2004, five restaurants have been constructed for us under this developmentagreement.

 

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*Summaryof Contractual Obligations:*

 

The following tablesummarizes our future obligations under contractual agreements as of June 27,2004 and the time frame within which payments on such obligations are due.  This table does not include amounts relatedto percentage rent as such amounts have not yet been determined.  Whether or not we would incur any additionalexpense on our employment agreement with Mr. Wagenheim depends upon theexistence of a change in control of the company.  Therefore, no percentage rent or employmentagreement expense have been included in the following table.

 

| ** **                   | ** ** | **Payments due by period** | ** ** |
|------------------------------|------------|----------------------------|------------|
| **Contractual  Obligations** | ** ** | **Total**                  | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** |
| Line of credit               |       | $                          | 95,348     |   | $ | 95,348 |   | $ | — |   | $ | — |   | $ | — |   |
| Long-term debt               |       | 2,838,353                  |       | 107,361 |   | 467,917 |   | 1,774,487 |   | 488,588 |   |
| Capital lease obligations    |       | 24,886,990                 |       | 780,928 |   | 3,033,063 |   | 2,740,500 |   | 18,332,499 |   |
| Operating lease obligations  |       | 16,963,270                 |       | 484,015 |   | 1,885,872 |   | 1,858,968 |   | 12,734,415 |   |
| Loan guarantee               |       | 144,083                    |       | 20,421 |   | 67,289 |   | 42,284 |   | 14,089 |   |
| Total obligations            |       | $                          | 44,928,044 |   | $ | 1,488,073 |   | $ | 5,454,141 |   | $ | 6,416,239 |   | $ | 31,569,591 |   |

 

**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 to marketrisk from changes in interest rates relating to a lease for equipment under anagreement expiring in 2008.  On November20, 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 willhave a balloon payment due of approximately $1,325,000 on the loan we obtainedfrom 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, margins couldbe negatively impacted.

 

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Our company does notenter into derivative contracts either to hedge existing risks or forspeculative purposes.

 

**Seasonality**

 

We expect that oursales and earnings will fluctuate based on seasonal patterns.  We anticipate that our highest sales andearnings will occur in the second and third quarters due to the milder climateand availability of outdoor seating during those quarters in our existing andproposed markets.

 

**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.  To date,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.

 

Duringour most recent fiscal quarter, there has been no change in our internalcontrol over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f)under the Exchange Act) that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

**PARTII      OTHER INFORMATION**

 
| ITEM 1 |   | Legal  Proceedings                                                                                                                                                                                                                                                                                             |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                           |
|   |   | Not applicable.                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                           |
| ITEM 2 |   | Changes in  Securities                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                           |
|   |   | (a)         Not  applicable.                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                           |
|   |   | (b)         Not  applicable.                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                           |
|   |   | (c)         On  March 31, 2004, we issued 69,414 shares of common stock to the holders of our  Series A Convertible Preferred Stock.   We issued such common stock in lieu of $109,710 in cash dividends  otherwise payable to those investors on that date. |

 

On June 8, 2004, we issued 15,822 shares of commonstock to an accredited investor upon the exercise for cash of warrantsoriginally issued on October 1, 2002, in connection with a private placement ofSeries A Convertible Preferred Stock and warrants.  Each warrant was exercised at $1.58 pershare.

 

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On June 10, 2004, we issued an aggregate of 31,645shares of common stock to an accredited investor, upon the conversion of 500shares of our Series A Convertible Preferred Stock originally issued on October1, 2002.  The convertible preferred stockwas converted at $1.58 per share.

 

The foregoing issuances were made in reliance uponthe exemption provided in Section 4(2) of the Securities Act.  Such securities are restricted as to sale ortransfer, unless registered under the Securities Act, and the certificatesrepresenting such securities contain restrictive legends preventing sale, transferor other disposition, unless registered under the Securities Act.  In addition, the recipients of suchsecurities received, or had access to, material information concerning ourcompany, including, but not limited to, our reports on Form 10-KSB, Form 10-QSBand Form 8-K, as filed with the SEC.  Nounderwriting discounts or commissions were paid in connection with theissuances of such common stock.

 

(d)                                 Not applicable.

 

(e)                                  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                                                       |
|   |   |                                                                                                                    |
|   |   |               See  “Index to Exhibits.” |
|   |   |                                                                                                                    |
|   |   | (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.

 

 
|                      |   | GRANITE CITY FOOD &  BREWERY LTD. |
|---------------------------|--------|---------------------------------------|
|                      |   |                                  |
|                      |   |                                  |
| Date:  July 23, 2004 | By:    | /s/ Monica A. Underwood               |   |
|                      |   | Monica A. Underwood                   |
|                      |   | Interim Chief Financial  Officer and  |
|                      |   | Corporate Controller                  |

 

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**INDEX TO EXHIBITS**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                               |
|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                                                                                                                                          |
| 10.1               |       | Business Loan  Agreement between Granite City Food & Brewery Ltd. and First National  Bank, dated April 14, 2004 (incorporated by reference to our Quarterly Report  on Form 10-QSB, filed on May 3, 2004 (File No. 0-29643)).                                                            |
|               |       |                                                                                                                                                                                                                                                                                          |
| 10.2               |       | Promissory Note  for the principal sum of $750,000 issued by Granite City Food & Brewery  Ltd., Borrower, to First National Bank, Lender, dated April 14, 2004 (incorporated by reference to our  Quarterly Report on Form 10-QSB, filed on May 3, 2004 (File No. 0-29643)).              |
|               |       |                                                                                                                                                                                                                                                                                          |
| 10.3               |       | Commercial  Guarantee Agreement between Granite City Food & Brewery Ltd., Borrower,  First National Bank, Lender, and Steven J. Wagenheim, Guarantor, dated April  14, 2004 (incorporated by reference to our Quarterly Report on Form 10-QSB,  filed on May 3, 2004 (File No. 0-29643)). |
|               |       |                                                                                                                                                                                                                                                                                          |
| 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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