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GCFB > SEC Filings for GCFB > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for GRANITE CITY FOOD & BREWERY LTD.

Form 10-Q for GRANITE CITY FOOD & BREWERY LTD.


14-Nov-2013

Quarterly Report


ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations

This discussion and analysis contains various non-historical forward-looking statements within the meaning of Section 21E of the Exchange Act. Although we believe that, in making any such statement, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used in the following discussion, the words "anticipates," "believes," "expects," "intends," "plans," "estimates" and similar expressions, as they relate to us or our management, are intended to identify such forward-looking statements. You are cautioned not to attribute undue certainty to such forward-looking statements, which are qualified in their entirety by the cautions and risks described herein. Please refer to the Cautionary Statement filed as Exhibit 99 to our Quarterly Report on 10-Q filed with the Securities and Exchange Commission on May 17, 2013 for additional factors known to us that may cause actual results to vary.

Overview

We operate Modern American casual dining restaurants under the names Granite City Food & Brewery® and Cadillac Ranch All American Bar & Grill®. As of November 11, 2013, we operated 30 Granite City restaurants and six Cadillac Ranch restaurants. The Granite City restaurant theme is upscale casual dining with a wide variety of menu items that are prepared fresh daily, including Granite City's award-winning signature line of hand-crafted beers finished on-site. The extensive menu features moderately priced favorites served in generous portions. Granite City's attractive price point, high service standards, and great food and beer combine for a memorable dining experience. Cadillac Ranch restaurants feature freshly prepared, authentic, All-American cuisine in a fun, dynamic environment. Patrons enjoy a warm, Rock N' Roll inspired atmosphere, with plenty of room for friends, music and dancing. The Cadillac Ranch menu is diverse with offerings ranging from homemade meatloaf to pasta dishes, all freshly prepared using quality ingredients.

Additionally, we operate a centralized beer production facility which facilitates the initial stages of our brewing process. The product produced at our beer production facility is then transported to the fermentation vessels at each of our Granite City restaurants where the brewing process is completed. We believe that this brewing process improves the economics of microbrewing as it eliminates the initial stages of brewing and storage at multiple locations. We were granted patents by the United States Patent Office for our brewing process and for an apparatus for distributed production of beer.


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Our industry can be significantly affected by changes in economic conditions, discretionary spending patterns, consumer tastes, and cost fluctuations. In recent years, consumers have been under increased economic pressures and as a result, many have changed their discretionary spending patterns. While we believe trends in consumer spending within the casual dining sector will continue to fluctuate, we are continuing to see many consumers dining out less frequently than in the past and/or decreasing the amount they spend on meals while dining out. These changes have affected the guest counts of the overall casual dining industry, including our concepts. To help offset the negative impact of these trends, we continue to seek to renegotiate the pricing of various aspects of our business. We also implemented marketing initiatives designed to increase brand awareness and help drive guest traffic, including focusing on local marketing and social media initiatives, as well as growing our "Mug Club" loyalty program database.

We believe that our operating results will fluctuate significantly because of several factors, including the operating results of our restaurants, changes in food and labor costs, increases or decreases in comparable restaurant sales, general economic conditions, consumer confidence in the economy, changes in consumer preferences, nutritional concerns and discretionary spending patterns, competitive factors, the skill and the experience of our restaurant-level management teams, the maturity of each restaurant, adverse weather conditions in our markets, and the timing of future restaurant openings and related expenses.

We utilize a 52/53-week fiscal year ending the last Tuesday in December for financial reporting purposes. Fiscal year 2013 will consist of 53 weeks while fiscal year 2012 consisted of 52 weeks. The third quarters of 2013 and 2012 included 452 and 429 operating weeks, respectively, which is the sum of the actual number of weeks each restaurant operated. The first three quarters of 2013 and 2012 included 1,364 and 1,246 operating weeks, respectively. Because we have opened new restaurants at various times throughout the years, we provide this statistical measure to enhance the comparison of revenue from period to period as changes occur in the number of units we are operating.

Our restaurant revenue is comprised almost entirely of the sales of food and beverages. We also obtain a small percentage of revenue from cover charges, banquet or private dining room rentals and the sale of retail items. Such sales make up approximately one percent of total revenue. Product costs include the costs of food, beverages and retail items. Labor costs include direct hourly and management wages, taxes and benefits for restaurant employees. Direct and occupancy costs include restaurant supplies, marketing costs, rent, utilities, real estate taxes, repairs and maintenance and other related costs. Pre-opening costs consist of direct costs related to hiring and training the initial restaurant workforce, the salaries and related costs of our new restaurant opening team, cash and non-cash rent costs incurred during the construction period and certain other direct costs associated with opening new restaurants. General and administrative expenses are comprised of expenses associated with all corporate and administrative functions that support existing operations, which include management and staff salaries, employee benefits, travel, information systems, training, market research, professional fees, supplies and corporate rent. Acquisition costs are expenses related to due diligence performed as part of the acquisition of assets. Depreciation and amortization includes depreciation on capital expenditures at the restaurant and corporate levels and amortization of intangibles that do not have indefinite lives. Interest expense represents the cost of interest expense on debt and capital leases and the change in fair value of our interest rate swap, net of interest income on invested assets.

Results of operations as a percentage of sales

The following table sets forth results of our operations expressed as a percentage of sales for the third quarter and first three quarters of fiscal years 2013 and 2012, respectively:


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                                    Thirteen Weeks Ended        40 Weeks Ended    39 Weeks Ended
                                 October 1,    September 25,      October 1,      September 25,
                                    2013           2012              2013              2012

Restaurant revenue                    100.0 %          100.0 %           100.0 %           100.0

Cost of sales:
Food, beverage and retail              27.7             27.0              27.4              27.0
Labor                                  32.6             33.1              32.5              33.0
Direct restaurant operating            15.8             15.3              15.6              14.8
Occupancy                               8.8              8.3               8.2               8.2
Total cost of sales                    84.9             83.6              83.7              83.0
General and administrative              7.8              7.4               7.5               8.0
Depreciation and amortization           6.5              6.2               6.0               6.1
Pre-opening                             1.3              0.5               1.0               1.0
Acquisition costs                       0.4              0.6               0.2               0.8
Loss on disposal of assets              0.5              0.5               0.5               0.4
Exit or disposal activities             0.0              0.1               0.0               0.1
Operating (loss) income                (1.4 )            1.1               1.1               0.7
Interest:
Income                                    -                -                 -                 -
Expense                                (3.9 )           (4.0 )            (3.7 )            (4.1 )
Net interest expense                   (3.9 )           (4.0 )            (3.7 )            (4.1 )

Net loss                               (5.4 )           (2.9 )%           (2.6 )%           (3.5 )

Certain percentage amounts do not sum due to rounding.

Critical Accounting Policies

Our critical accounting policies are those that require significant judgment. There have been no material changes to the critical accounting policies previously reported in our Annual Report on Form 10-K for the fiscal year ended December 25, 2012, filed with the Securities and Exchange Commission on March 20, 2013.

Results of operations for the thirteen weeks and forty weeks ended October 1, 2013 and the thirteen and thirty-nine weeks ended September 25, 2012

Revenue

We generated $31,356,336 and $31,135,288 of revenue during the third quarters of 2013 and 2012, respectively, an increase of 0.7%. Such increase was primarily the result of 23 additional restaurant operating weeks in the third quarter of 2013 attributable to our Cadillac Ranch restaurant in Pittsburgh, Pennsylvania and our Granite City restaurants in Troy, Michigan, Franklin, Tennessee and Indianapolis, Indiana. Comparable restaurant revenue, which includes restaurants which we have operated for over 18 months, decreased 3.8% from the third quarter of 2012 to the third quarter of 2013 due primarily to decreased guest counts.

We generated $100,273,122 and $90,072,910 of revenue during the first three quarters of 2013 and 2012, respectively, an increase of 11.3%. Such increase was the result of the additional fiscal week in the first quarter of 2013 as well as having three additional locations in operation in the first three quarters of 2013 compared to that of 2012. Comparable restaurant revenue, which includes restaurants which we have operated for


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over 18 months, increased 0.4% from the first three quarters of 2012 to the first three quarters of 2013 due to a menu price increase and increased guest counts.

We expect that restaurant revenue will vary from quarter to quarter. Continued seasonal fluctuations in restaurant revenue are due in part to increased outdoor seating and weather conditions. Due to the honeymoon effect that periodically occurs with the opening of a restaurant, we expect the timing of any future restaurant openings to cause fluctuations in restaurant revenue. Additionally, other factors outside of our control, such as timing of holidays, consumer confidence in the economy and changes in consumer preferences may affect our future revenue.

Restaurant costs

Food and beverage

Our food and beverage costs, as a percentage of revenue, increased 0.7% to 27.7% in the third quarter of 2013 from 27.0% in the third quarter of 2012. Such costs increased 0.4% as a percentage of revenue to 27.4% in the first three quarters of 2013 from 27.0% in the first three quarters of 2012. While we experienced some cost decreases in bottled beer, liquor and some proteins, such decreases were offset by increases in tap beer, soft drinks, wine, steak, cheese and retail products. While pricing negotiations with our suppliers have reduced our exposure to commodity price increases, we do expect that our food and beverage costs will continue to vary going forward due to numerous variables, including seasonal changes in food and beverage costs for certain products for which we do not have contracted pricing, fluctuations within commodity-priced goods and guest preferences. We periodically create new menu offerings and introduce new craft brewed beers based upon guest preferences. During the second quarter of 2013, the Granite City concept rolled out a new menu which we believe caused a temporary increase in our food costs. We have, however, been able to offset a portion of such increase with our feature items which provide variety and value to our guests. Our varieties of craft brewed beer, which we produce at a lower cost than beers we purchase for resale, also enable us to keep our food and beverage costs low while fulfilling guest requests and building customer loyalty. Based on industry information, we anticipate commodity prices to increase two to three percent through 2013. However, we continue to seek to offset such increases with pricing, new menu offerings and specials.

Labor

Labor expense consists of restaurant management salaries, hourly staff payroll costs, other payroll-related items including management bonuses, and non-cash stock-based compensation expense. Our experience to date has been that staff labor costs associated with a newly opened restaurant, for approximately its first four to six months of operation, are greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenue.

Our labor costs, as a percentage of revenue, decreased 0.5% to 32.6% in the third quarter of 2013 from 33.1% in the third quarter of 2012. Such costs decreased 0.5% as a percentage of revenue to 32.5% in the first three quarters of 2013 from 33.0% in the first three quarters of 2012. Although we experienced increases in some kitchen labor and labor relating to the security and janitorial services we brought in-house at a number of our locations, nearly all other labor costs decreased from the first three quarters of 2012 to the three quarters of 2013. Non-cash stock-based compensation decreased $45,547 to $61,929 in the first three quarters of 2013 from $107,476 in the first three quarters of 2012.

We expect that benefit costs will increase as new health insurance regulations are implemented. Additionally, we expect labor costs will vary as minimum wage laws, local labor laws and practices, and unemployment rates vary from state to state, as will hiring and training expenses. We believe that retaining good employees and more experienced staff ensures high quality guest service and may reduce hiring and training costs.


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Direct restaurant operating

Operating supplies, repairs and maintenance, utilities, promotions and restaurant-level administrative expense represent the majority of our direct restaurant operating expense, a portion of which is fixed or indirectly variable. Our direct restaurant operating expense, as a percentage of revenue, increased 0.5% to 15.8% in the third quarter of 2013 from 15.3% in the third quarter of 2012. Such costs increased 0.8% as a percentage of revenue to 15.6% in the first three quarters of 2013 from 14.8% in the first three quarters of 2012. Cost increases in training, maintenance and repair, marketing, and subscriptions were offset in part by decreases in paper products and linen and laundry services. Additionally, because we brought janitorial services in-house at many of our locations, we experienced decreases in outside janitorial service costs.

We continue to seek ways to reduce our direct operating costs going forward including additional pricing negotiations with suppliers and the elimination of waste.

Occupancy

Our occupancy costs, which include both fixed and variable portions of rent, common area maintenance charges, property insurance and property taxes, increased 0.5% as a percentage of revenue to 8.8% in the third quarter of 2013 from 8.3% in the third quarter of 2012. Such costs remained steady at 8.2% as a percentage of revenue in the first three quarters of 2013 and 2012. While fixed rent decreased as a percentage of revenue due to the higher revenue base and the additional fiscal week in the first quarter of 2013 compared to the first quarter of 2012, occupancy expense increased $374,445 in the first three quarters of 2013 due to the additional restaurants in operation. The majority of our leases include a provision for additional rent based upon restaurant sales. As such, with our increased revenue base, our percentage rent has increased as well.

Pre-opening

Pre-opening costs, which are expensed as incurred, consist of expenses related to hiring and training the initial restaurant workforce, wages and expenses of a new restaurant opening team during periods of expansion, non-cash rental costs incurred during the construction period and certain other direct costs associated with opening new restaurants. The majority of pre-opening costs, excluding construction-period rent, are incurred in the month of, and two months prior to, restaurant opening.

Our pre-opening costs in the first three quarters of 2013 were related primarily to the Granite City restaurant we opened in Franklin, Tennessee in February 2013 and the Granite City restaurant we opened in Indianapolis, Indiana in July 2013, while such expenses in the first three quarters of 2012 were related primarily to the Granite City restaurant we opened in Troy, Michigan in May 2012. Of the pre-opening cost incurred in the first three quarters of 2013, we recorded $115,968 of non-cash construction-period rent related to our Indianapolis restaurant.

General and administrative

General and administrative expense includes all salaries and benefits, including non-cash stock-based compensation, associated with our corporate staff that is responsible for overall restaurant quality, financial controls and reporting, restaurant management recruiting, management training, and excess capacity costs related to our beer production facility. Other general and administrative expense includes advertising, professional fees, investor relations, office administration, centralized accounting system costs and travel by our corporate management.

General and administrative expense increased $135,950 to $2,451,488 in the third quarter of 2013 from $2,315,538 in the third quarter of 2012. As a percentage of revenue, general and administrative expense increased 0.4% to 7.8% in the third quarter of 2013 from 7.4% in the third quarter of 2012. Such costs increased $348,911 to $7,555,994 in the first three quarters of 2013 from $7,207,083 in the first three quarters of 2012. As a percentage of revenue, general and administrative costs decreased 0.5% to 7.5% in the first three quarters of 2013 from 8.0% in the first three quarters of 2012 due to the higher revenue provided by new locations and the


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additional fiscal week in 2013. Compensation expense was higher in the first three quarters of 2013 due to the additional fiscal week in the first quarter and legal and investor relations fees were higher due to our appeal of NASDAQ's determination to delist our common stock. Additionally, we incurred approximately $158,000 of consulting expense related to a restaurant site we discontinued pursuing. These costs were offset in part by a reduction of travel and management training expenses. While we expect similar general and administrative expenses in future months, we believe that the benefit of restaurant, menu and food upgrades and future restaurant unit growth will help to reduce general and administrative expenses as a percentage of revenue.

As we seek new ways to build revenue, we will continue to closely monitor our general and administrative costs and attempt to reduce these expenses as a percentage of revenue while preserving an infrastructure that remains suitable for our current operations. With our growth plans, we will need to recruit additional personnel to provide continued oversight of operations. To the extent our turnover increases above our expectations, additional costs could be incurred in recruiting and training expenses.

Depreciation and amortization

Depreciation and amortization expense increased $121,657 to $2,042,082 in the third quarter of 2013 from $1,920,425 in the third quarter of 2012. As a percentage of revenue, depreciation expense increased 0.3% to 6.5% in the third quarter of 2013 from 6.2% in the third quarter of 2012. Such costs increased $501,168 to $5,994,887 in the first three quarters of 2013 from $5,493,719 in the first three quarters of 2012. As a percentage of revenue, depreciation and amortization expense decreased 0.1% to 6.0% in the first three quarters of 2013 from 6.1% in the first three quarters of 2012, indicating that revenue generated from our new locations more than offset the related increase in depreciation expense. We anticipate depreciation expense will increase as we complete enhancements at selected restaurants including increased seating in the bars, enclosure of patios for year-round service, and the addition of private dining rooms to accommodate private parties and reduce wait times during peak periods.

Interest

Net interest expense consists of interest expense on capital leases and long-term debt, net of interest earned from cash on hand. Net interest expense decreased $5,035 to $1,227,480 in the third quarter of 2013 from $1,232,515 in the third quarter of 2012. Net interest expense increased $13,623 to $3,735,046 in the first three quarters of 2013 from $3,721,423 in the first three quarters of 2012. In the first three quarters of 2013 and 2012, $125,533 and $98,500 of interest expense was capitalized as part of the construction of our new restaurants. In the second quarter of 2013, we entered into an interest swap agreement per the terms of our credit agreement with Fifth Third Bank (the "Bank"). The decrease in fair value of the swap agreement was $18,132 and $136,693 during the first quarter and first three quarters of 2013, respectively, and is recorded as interest expense in the condensed consolidated statements of operations.

Liquidity and capital resources

As of October 1, 2013, we had $978,328 of cash and a working capital deficit of $8,258,342 compared to $2,566,034 of cash and a working capital deficit of 8,905,723 at December 25, 2012.

During the forty weeks ended October 1, 2013, we obtained $1,758,271 of net cash from operating activities. Our net cash used for investing activities of $7,545,418 was made up of purchases of property and equipment totaling $10,250,272 and other assets consisting primarily of security deposits aggregating $125,146, offset in part by $2,830,000 of cash proceeds from the sale leaseback of our Franklin, Tennessee and Indianapolis, Indiana restaurants in the form of tenant improvement allowances. We obtained $4,199,441 in financing activities which included $6,368,338 from our line of credit, offset in part by payments on our debt and capital leases of $1,545,767, cash payment of dividends on our preferred stock of $405,005, debt issuance costs of $218,624 related to our amended and restated credit agreement with the Bank and $499 of net proceeds from the issuance of common stock.

During the thirty-nine weeks ended September 25, 2012, we obtained $1,771,370 of net cash in operating activities and $13,192,685 of net cash through financing activities. The funds from financing activities were


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made up of $9,807,171 in proceeds from a credit facility with the Bank, $6,549,358 of net cash from the issuance of common stock and $4,000,000 in proceeds from the sale leaseback of our Troy, Michigan property, offset in part by payments we made on our debt and capital lease obligations aggregating $6,660,394, cash used for debt issuance costs in the amount of $199,695, and $303,755 of cash in payment of dividends on our preferred stock. We used $14,679,093 of cash to purchase property and equipment, including $5,764,277 to purchase the assets of four Cadillac Ranch restaurants, including intellectual property, and approximately $3,700,000 for construction and equipment for our Troy, Michigan restaurant.

Credit Facility

On May 31, 2013, we entered into an amended and restated credit agreement with the Bank. The agreement amended and restated the credit agreement between the Company and the Bank dated May 10, 2011, as amended, and now provides for a term loan in the amount of $16.0 million that refinances all existing indebtedness with the Bank; an acquisition line of up to $10.0 million ("ALOC"); a $100,000 line of credit to issue standby letters of credit; and a delayed draw term loan ("DDTL") in the amount of $4.0 million to acquire the improvements and assume the related ground leases for six of our existing restaurant properties from entities related to or managed by Dunham Capital Management L.L.C. Our pre-existing term and line of credit loans were converted into a portion of the new term loan. The Bank's commitment to issue the standby letters of credit is subject to reduction or modification as provided in the credit agreement. These credit facilities mature on May 31, 2018.

Pursuant to the terms of a guaranty, pledge and security agreement, our obligations under the credit agreement are secured by liens on our subsidiaries, personal property, fixtures and real estate owned or to be acquired. Payment and performance of our obligations to the Bank are jointly and severally guaranteed by our subsidiaries.

The loans bear interest at our option at a fluctuating per annum rate equal to
(i) a base rate plus a margin which is tied to our senior leverage ratio or
(ii) LIBOR plus a margin which is tied to our senior leverage ratio. With respect to the term loan only, we may also pay interest at a fixed rate of 6.75% per annum. Interest is payable on either a monthly basis (with respect to base rate or fixed rate loans) or at the end of each 30, 60 or 90 day LIBOR period (with respect to LIBOR loans) and at maturity. We pay an unused line fee in the amount of 0.50% of the unused line on both the ALOC and the DDTL equal to the difference between the total commitment for each of the ALOC and the DDTL and the amount outstanding under each of the ALOC and DDTL. We are obligated to make principal payments on the term loan in quarterly installments which commenced September 30, 2013 each in the amount of $200,000 through June 30, 2014; $300,000 through June 30, 2015; and $400,000 in every quarter thereafter with a final payment of principal and interest on May 31, 2018. The DDTL is payable in quarterly installments commencing December 31, 2013 in amounts equal to a percentage of outstanding principal of 1.25% through September 30, 2014; increasing to 1.875% on and after December 31, 2014; and increasing to 2.50% on and after December 31, 2015, with a final payment of interest and principal due on May 31, 2018.

We may voluntarily prepay the loans in whole or part subject to notice and other requirements of the credit agreement and are obligated to make prepayments from time to time:

† if we make certain dispositions or suffer events of loss resulting in cash proceeds, subject to the right to reinvest such proceeds (to be applied first to term loans until paid in full and then to the line of credit loan until paid in full);

. . .

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