MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our financial
statements and their notes appearing elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly
from the results discussed in any forward-looking statements. Forward-looking statements in this prospectus are those of a non-historical nature which in some cases are indicated by our
use of such terms as "believe," "estimate" and "expect." Factors that may cause such a difference in actual results include, but are not limited to, those discussed under Risk
Factors.
Overview
We own and operate a casual dining restaurant featuring an on-premise brewery. Our initial restaurant commenced operations in St. Cloud, Minnesota,
in June 1999. We expect to develop these restaurant breweries in selected markets throughout the United States and have targeted Sioux Falls, South Dakota, and Fargo, North Dakota, as locations
for the development of our next two restaurant-microbreweries in 2000. The theme of Granite City Food & Brewery restaurants is casual dining with a broad selection of menu items that are
prepared fresh daily, combined with freshly brewed handcrafted beers made on premise. We developed our first restaurant using the net proceeds from a private placement conducted in late 1997, together
with financing in the form of long-term building and equipment leases.
Results of Operations
Our activities in 1998 and through June 1999, related to development of our restaurant-microbrewery concept and the development and financing of our
first restaurant. Because we only recently commenced restaurant operations, a comparative discussion of operations between 1999 and 1998 would not be meaningful. The table below sets forth results of
our operations for the year ended December 26, 1999, with substantially all revenue falling in the six-month period ended December 26, 1999.
|
|
Year Ended
December 26, 1999
|
|
|
|
Amount
|
|
Percent
|
|
|
Restaurant revenues
|
|
$
|
1,984,525
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
Restaurant costs:
|
|
|
|
|
|
|
|
Food and beverage
|
|
|
580,528
|
|
29.3
|
|
|
Labor, direct and occupancy
|
|
|
1,144,303
|
|
57.7
|
|
|
Depreciation
|
|
|
113,727
|
|
5.7
|
|
|
|
|
|
|
|
|
|
Total restaurant costs
|
|
|
1,838,558
|
|
92.7
|
|
|
|
|
|
|
|
|
|
Income from restaurant operations
|
|
|
145,967
|
|
7.3
|
|
|
Pre-opening costs
|
|
|
196,703
|
|
9.9
|
|
|
General and administrative
|
|
|
140,069
|
|
7.0
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(190,805
|
)
|
(9.6
|
)
|
|
Net interest expense
|
|
|
(97,690
|
)
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
Loss before taxes
|
|
|
(288,495
|
)
|
(14.5
|
)
|
|
Income tax expense
|
|
|
(27,811
|
)
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(316,306
|
)
|
(15.9
|
)%
|
|
|
|
|
|
|
|
We
have no earlier period with which to compare the results for our first quarter of operations. However, we believe that our operating results will fluctuate significantly because of
several factors, including the timing of new restaurant openings and related expenses, profitability of new restaurants, increases or decreases in comparable restaurant sales, general economic
conditions, consumer
confidence in the economy, changes in consumer preferences, competitive factors and weather conditions.
We
anticipate that restaurant revenues will vary from quarter to quarter. Restaurants typically experience a temporary period of high revenues immediately following their opening due
to increased demand fostered by the publicity surrounding the opening. We believe that our restaurant costs will also fluctuate from quarter to quarter. Our cost of food and beverage will vary due to
our purchasing power, which we anticipate will improve with the opening of new restaurants, and due to customer preferences for craftbrewed beer, which we can produce at lower cost than other beers
which we would be required to purchase for resale. We anticipate that the labor, direct and occupancy costs associated with a newly-opened restaurant for the first quarter of operations will be
greater than what we expect to experience after that time.
We expect the timing of new restaurant openings to have a significant impact on restaurant revenues and costs. We believe we will incur the most significant portion of preopening
costs associated with a given restaurant within the quarter immediately preceding, and the month of, the opening of such restaurant. We expect to incur $175,000 of pre-opening costs for
each restaurant we propose to develop during 2000. This amount is less than the pre-opening costs we incurred at our St. Cloud location because we will not be required to duplicate certain
pre-opening expenses at future locations, such as menu and concept development. Pre-opening costs of $196,703 offset the store-level profitability of our initial restaurant,
contributing to a net loss of $316,306 for the year ended December 26, 1999. We expect to incur net losses for the foreseeable future due to the pre-opening costs of the restaurants
we propose to develop during 2000.
Liquidity and Capital Resources
Prior to commencement of restaurant operations in June 1999, our capital requirements were principally funded through private sales of equity. In 1997
and 1998, we sold an aggregate of 1,969,500 shares of common stock for gross proceeds of $1,319,500 (a weighted average price of $0.67 per share). Additional capital has been provided through capital
lease obligations for the building and equipment.
In 2000, we expect to develop two restaurants for which we will require build-to-suit leases. We estimate that the total cost of developing these additional
restaurants will be approximately $4,110,000. If we are unable to finance these expenditures, our development of these restaurants will be delayed. Our capital expenditures for restaurant development
in 2000 will include developer fees, leasehold improvements, licensing, inventory and equipment and preopening expenses. We plan to finance approximately $3,300,000 of these expenditures from the net
proceeds of this offering, and to fund the remainder, approximately $810,000, with financing in the form of long-term building and equipment leases. If we fail to develop additional
restaurants, our St. Cloud location would continue to be our only source of revenue.
We
have entered into a letter of intent for the development of a restaurant site in Sioux Falls, South Dakota. We expect to enter into agreements relating to the development and lease
of this restaurant when we or our developer secure all necessary permits and licenses. We are currently in the process of identifying and securing a site in Fargo, North Dakota. In both Sioux Falls
and Fargo, we plan to enter into build-to-suit lease arrangements and develop the properties similar to the way we developed our Granite City Food & Brewery restaurant
in St. Cloud, Minnesota.
Seasonality
We expect that our sales and earnings will fluctuate based on seasonal patterns. We anticipate that our highest sales and earnings will occur in the second and
third quarters due to the milder climate during those quarters in our existing and proposed markets.
Inflation
Inflation in food, labor, real estate and construction costs can significantly affect our operations. A large number of our restaurant personnel are paid at
rates based on the applicable minimum wage, and increases in the minimum wage directly affect our labor costs. To date, inflation has not had a material impact on our operating results.
Year 2000 Readiness Disclosure
We have reviewed both our information technology and our non-information technology systems to determine whether they are year 2000 compliant. We
believe our systems are year 2000 compliant. To date, we have not experienced any difficulties associated with the year 2000 problem. We have received written assurances of year 2000 compliance from a
majority of the third parties with whom we have relationships, including our national food distributor, and payroll and credit card service providers. Unless public suppliers of water, electricity or
natural gas are disrupted for a substantial period of time, we believe that our operations will not be significantly disrupted even if third parties with whom we have relationships are not year 2000
compliant. If public suppliers of water, electricity or natural gas are disrupted for a substantial period of time, our business, financial condition, operating results and cash flows may be
materially adversely affected.
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