U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ______
COMMISSION FILE NUMBER 0-21423
CHICAGO PIZZA & BREWERY, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0485615
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
26131 MARGUERITE PARKWAY
SUITE A
MISSION VIEJO, CALIFORNIA 92692
(Address and zip code of Registrant's principal executive offices)
(949) 367-8616
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO.
---
As of April 30, 1999, there were 7,658,321 shares of Common Stock of the
Registrant outstanding and 8,884,584 Redeemable Warrants of the Registrant
outstanding.
CHICAGO PIZZA & BREWERY, INC. AND SUBSIDIARIES
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 1
Consolidated Balance Sheets -
March 31, 1999 (Unaudited) and December 31, 1998 1
Unaudited Consolidated Statements of Operations -
Three Months Ended March 31, 1999 and
Three Months Ended March 31, 1998 2
Unaudited Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and
Three Months Ended March 31, 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Item 3. Quantitative and Qualitative Disclosures about Market Risk 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of
Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K
11
SIGNATURES
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL INFORMATION
CHICAGO PIZZA & BREWERY, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1999 1998
(UNAUDITED)
------------ --------------
ASSETS:
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 2,415,122 $ 1,490,705
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . 124,447 175,712
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 368,808 345,874
Prepaids and other current assets . . . . . . . . . . . . . . . 162,226 295,176
------------ --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . 3,070,603 2,307,467
Property and equipment, net . . . . . . . . . . . . . . . . . . 10,507,157 9,567,604
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . 354,266 352,916
Intangible assets, net. . . . . . . . . . . . . . . . . . . . . 5,325,028 5,366,722
------------ --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . $19,257,054 $ 17,594,709
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . $ 1,373,157 $ 1,130,691
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . 1,425,926 1,286,539
Current portion of notes payable to related parties . . . . . . 329,227 339,727
Current portion of long-term debt . . . . . . . . . . . . . . . 356,483 210,367
Current portion of obligations under capital lease. . . . . . . 133,970 135,809
------------ --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 3,618,763 3,103,133
Notes payable to related parties. . . . . . . . . . . . . . . . 1,641,015 1,718,954
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . 839,015 355,313
Obligations under capital lease . . . . . . . . . . . . . . . . 138,991 167,219
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . 118,857 122,099
------------ --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 6,356,641 5,466,718
------------ --------------
Minority interest in partnership. . . . . . . . . . . . . . . . 244,696 235,040
------------ --------------
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, none issued
or outstanding
Common stock, no par value, 60,000,000 shares authorized;
7,658,321 and 6,408,321,shares issued and outstanding as of
March 31, 1999 and December 31, 1998, respectively . . . . . 16,076,132 15,039,646
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . 1,036,029 1,196,029
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (4,456,444) (4,342,724)
------------ --------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . 12,655,717 11,892,951
------------ --------------
Total liabilities and shareholders' equity. . . . . . . . . . . $19,257,054 $ 17,594,709
============ ==============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
CHICAGO PIZZA & BREWERY, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE
MONTHS ENDED MARCH 31,
------------------------
1999 1998
----------- -----------
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . $8,092,403 $6,888,256
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 2,224,396 2,012,326
Gross profit. . . . . . . . . . . . . . . . . . . . . 5,868,007 4,875,930
Costs and expenses:
Labor and benefits. . . . . . . . . . . . . . . . . . . . . . 2,977,630 2,500,720
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . 709,223 593,506
Operating expenses. . . . . . . . . . . . . . . . . . . . . . 907,763 872,411
Preopening costs. . . . . . . . . . . . . . . . . . . . . . . 195,202
General and administrative. . . . . . . . . . . . . . . . . . 663,694 593,209
Depreciation and amortization . . . . . . . . . . . . . . . . 354,205 452,445
----------- -----------
Total cost and expenses . . . . . . . . . . . . . . . . . . . 5,807,717 5,012,291
----------- -----------
Income (loss) from operations . . . . . . . . . . . . 60,290 (136,361)
Other income (expense):
Interest expense, net . . . . . . . . . . . . . . . . . . . . (57,331) (34,664)
Other income, net . . . . . . . . . . . . . . . . . . . . . . 768 9,249
----------- -----------
Total other income (expense). . . . . . . . . . . . . (56,563) (25,415)
----------- -----------
Income (loss) before minority interest, income taxes
and change in accounting. . . . . . . . . . . 3,727 (161,776)
Minority interest in partnership. . . . . . . . . . . . . . . (9,657) (16,925)
----------- -----------
Loss before income taxes and change
in accounting . . . . . . . . . . . . . . . . (5,930) (178,701)
Income tax expense. . . . . . . . . . . . . . . . . . . . . . (1,615) (800)
----------- -----------
Loss before change in accounting. . . . . . . . . . . (7,545) (179,501)
Cumulative effect of change in accounting . . . . . . . . . . (106,175)
----------- ----------
Net loss. . . . . . . . . . . . . . . . . . . . . . . ($113,720) ($179,501)
=========== ==========
Net loss per share:
Basic and dilutive:
Loss before cumulative effect of change in accounting . . . . ($0.00) ($0.03)
Cumulative effect of change in accounting . . . . . . . . . . ($0.02)
----------- ----------
Net loss. . . . . . . . . . . . . . . . . . . . . . . ($0.02) ($0.03)
=========== ==========
Weighted average number of shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . 6,824,988 6,408,321
=========== ===========
Dilutive. . . . . . . . . . . . . . . . . . . . . . . 6,824,988 6,408,321
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
CHICAGO PIZZA & BREWERY, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE
MONTHS ENDED MARCH 31,
-------------------------
1999 1998
------------ -----------
Cash flows provided by (used in) operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . ($113,720) ($179,501)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 354,205 452,445
Change in accounting principle. . . . . . . . . . . . . . . 106,175
Minority interest in partnership. . . . . . . . . . . . . . 9,657 16,925
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . 51,265 (13,053)
Inventory . . . . . . . . . . . . . . . . . . . . . . . (22,934) 20,228
Prepaids and other current assets . . . . . . . . . . . (125,825) 15,196
Other assets. . . . . . . . . . . . . . . . . . . . . . (3,558) 7,579
Accounts payable. . . . . . . . . . . . . . . . . . . . 242,465 108,517
Accrued expenses. . . . . . . . . . . . . . . . . . . . 139,387 38,351
Other liabilities . . . . . . . . . . . . . . . . . . . (3,242) (3,242)
------------ -----------
Net cash provided by operating activities. . . . . . 633,875 463,445
------------ -----------
Cash flows used in investing activities:
Purchases of equipment. . . . . . . . . . . . . . . . . . . (1,220,770) (629,835)
------------ -----------
Cash flows provided by (used in) financing activities:
Proceeds from sale of common stock. . . . . . . . . . . . . 1,000,000
Equipment loan proceeds . . . . . . . . . . . . . . . . . . 699,604
Payments on related party debt. . . . . . . . . . . . . . . (88,439) (81,459)
Payments on debt. . . . . . . . . . . . . . . . . . . . . . (69,786) (73,079)
Capital lease payments. . . . . . . . . . . . . . . . . . . (30,067) (33,825)
------------ -----------
Net cash provided by (used in) financing activities. 1,511,312 (188,363)
------------ -----------
Net increase (decrease) in cash and cash equivalents 924,417 (354,753)
Cash and cash equivalents, beginning of period. . . . . . . 1,490,705 1,705,349
------------ -----------
Cash and cash equivalents, end of period. . . . . . . . . . $ 2,415,122 $1,350,596
============ ===========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
CHICAGO PIZZA & BREWERY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Chicago
Pizza & Brewery, Inc. and its subsidiaries (the "Company") for the three
months ended March 31, 1999 and 1998 have been prepared in accordance with
generally accepted accounting principles, and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. These financial statements have not
been audited by independent accountants, but include all adjustments
(consisting of normal recurring adjustments) which are, in Management's
opinion, necessary for a fair presentation of the financial condition, results
of operations and cash flows for such periods. However, these results are not
necessarily indicative of results for any other interim period or for the full
year.
Certain information and footnote disclosures normally included in
financial statements in accordance with generally accepted accounting
principles have been omitted pursuant to requirements of the Securities and
Exchange Commission (SEC). A description of the Company's accounting policies
and other financial information is included in the audited consolidated
financial statements as filed with the SEC on Form 10-KSB for the year ended
December 31, 1998. Management believes that the disclosures included in the
accompanying interim financial statements and footnotes are adequate to make
the information not misleading, but should be read in conjunction with the
consolidated financial statements and notes thereto included in the Form
10-KSB. The accompanying consolidated balance sheet as of December 31, 1998
has been derived from the audited financial statements.
ORGANIZATION
Chicago Pizza & Brewery, Inc. (the "Company" or "BJ's") owns and
operates, as of March 31, 1999, 27 restaurants located in Southern California,
Oregon, Washington and Colorado and an interest in one restaurant in Lahaina,
Maui. Each of these restaurants is operated as either a BJ's Pizza, Grill &
Brewery, BJ's Pizza & Grill, BJ's Pizza & Grill - OTC or a Pietro's Pizza
restaurant. The menu at the BJ's restaurants feature BJ's award-winning,
signature deep-dish pizza, BJ's own hand-crafted beers as well as a great
selection of appetizers, entrees, pastas, sandwiches, specialty salads and
desserts. The four BJ's Pizza, Grill & Brewery restaurants feature in-house
brewing facilities where BJ's hand-crafted beers are produced. The two BJ's
Pizza & Grill - OTC restaurants have a limited menu and service level. The
ten Pietro's Pizza restaurants serve primarily Pietro's thin-crust pizza in a
very casual, counter-service environment.
During the first quarter of 1999, the Company opened its latest BJ's
Pizza & Grill restaurant in Arcadia, California. In April 1999, the Company
opened its fifth BJ's Pizza, Grill & Brewery in Woodland Hills, California.
PER SHARE INFORMATION
SFAS 128, "Earnings Per Share", was adopted in the fourth quarter of 1997
and supersedes the Company's previous standards for computing net income per
share under Accounting Principals Board (APB) No. 15. The new standard
requires dual presentation of basic net income per common share and net income
per common share assuming dilution on the face of the income statement. Basic
net income per share is computed by dividing the net income attributable to
common stockholders by the weighted average number of common shares
outstanding during the period. Dilutive net income per share is equal to basic
net income per share as both stock options and warrants are antidilutive for
the periods presented.
RECENTLY ISSUED ACCOUNTING STANDARDS
As had been the practice of many restaurant entities, the Company
previously deferred its restaurant preopening costs and amortized them over
the twelve-month period following the opening of each new restaurant. In April
1998, the Accounting Standards Executive Committee of the American Institute
of Certified Public Accounts issued Statement of Position 98-5 (SOP 98-5),
Accounting for the Costs of Start-Up Activities. SOP 98-5 requires all costs
of start-up activities that are not otherwise capitalizable as long-lived
assets to be expensed as incurred. The Company adopted SOP 98-5 during the
first quarter of 1999. This new accounting standard will accelerate the
Company's recognition of costs associated with the opening of new restaurants
but will benefit the post-opening results of new restaurants. The Company's
total deferred preopening costs were $106,175 at January 1, 1999. As provided
by SOP 98-5, the Company wrote off the balance of deferred preopening costs
during the first quarter of 1999.
Other recently issued standards of the FASB are not expected to affect
the Company, as conditions to which those standards apply are absent.
DIVIDEND POLICY
The Company has not paid any dividends since its inception and has
currently not allocated any funds for the payment of dividends. Rather, it is
the current policy of the Company to retain earnings, if any, for expansion of
its operations, remodeling of existing restaurants and other general corporate
purposes and to not pay any cash dividends in the foreseeable future. Should
the Company decide to pay dividends in the future, such payments would be at
the discretion of the Board of Directors.
LONG-TERM EQUIPMENT LOAN
In January 1999, the Company completed an agreement with a lender to
provide equipment financing up to $1,000,000 for equipment and furnishings
required in the Arcadia, Woodland Hills and other restaurant developments. The
note has a term of eighty-four months, and the interest rate is fixed at the
time of funding; to date funds provided for equipment financing under this
facility have been at effective interest rates ranging from 11.63% to 13.68%.
Amounts borrowed are secured by the financed equipment and additional
equipment and property owned by the Company up to the amount of the loan
balance. At March 31, 1999, The outstanding principal balance under the
borrowing agreement was $687,428.
PRIVATE PLACEMENT
In March 1999, the Company sold, through a private placement, 1,250,000
shares of its common stock to ASSI, Inc. (the "ASSI Transaction") in exchange
for a cash payment of $1,000,000, the termination of two consulting
agreements, cancellation of 3.2 million of the Company's redeemable warrants
held by ASSI, Inc. and the agreement by ASSI, Inc. and its sole stockholder to
finance future Company development projects subject to pre-commitment
approval. The Company also has the right of first refusal to repurchase the
shares of its common stock, in the event the shareholder decides to sell such
shares.
A lawsuit was filed by La Pizza Loca, Inc. and its controlling
stockholder to rescind the ASSI Transaction. The Company was successful in
defending against an injunction to stop the ASSI transaction, and La Pizza
Loca, Inc. dropped its lawsuit to rescind the private placement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Unaudited Consolidated Financial Statements and notes thereto
included elsewhere in this Form 10-Q. Except for the historical information
contained herein, the discussion in this Form 10-Q contains certain forward
looking statements that involve risks and uncertainties, such as statements of
the Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Form 10-Q should be read as being applicable to all
related forward-looking statements wherever they appear in this Form 10-Q.
The Company's actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include,
without limitation, those factors discussed herein and in the Company's
prospectus dated October 8, 1996 (the "Prospectus") including, without
limitation: (i) the Company's ability to manage growth and conversions, (ii)
construction delays, (iii) marketing and other limitations as a result of the
Company's historic concentration in Southern California and current
concentration in the Northwest, (iv) restaurant and brewery industry
competition, (v) impact of certain brewery business considerations, including
without limitation, dependence upon suppliers and related hazards, (vi)
increase in food costs and wages, including without limitation the recent
increase in minimum wage, (vii) consumer trends, (viii) potential uninsured
losses and liabilities, (ix) trademark and servicemark risks, (x) year 2000
risk issues, and (xi) other general economic and regulatory conditions and
requirements.
RESULTS OF OPERATIONS
Three-Month Period Ended March 31, 1999 Compared to Three-Month Period Ended
March 31, 1998.
Revenues. Total revenues for the three month period ended March 31, 1999
increased to $8,092,000 from $6,888,000 for the comparable period in 1998, an
increase of $1,204,000 or 17.5%. The increase is primarily the result of:
The opening of the Arcadia, California restaurant on January 21, 1999. The
Arcadia restaurant generated revenues of $694,000 during the period from
opening through March 31, 1999.
An increase in same store sales at the BJ's restaurants open both periods of
$465,000 or 9.1%. Management believes this increase was due to (i) an
increase in customer counts, and (ii) an increase in check averages produced
by a price increase implemented in late May 1998 and the implementation of
more effective suggestive selling techniques at the restaurants.
An increase in same store sales at the Pietro's restaurants converted and
operated as BJ's restaurants for all of the three month period ended March 31,
1999 and operated as Pietro's for a part or all of the comparable period in
1998 of $83,000 or 27.4%.
An increase in revenues at the restaurants operated as Pietro's for both
periods of $49,000 or 3.6%.
The above-described increases in revenues were partially offset by the
closing of one of the Pietro's restaurants in April 1998.
Cost of Sales. Cost of food, beverages and paper (cost of sales) for the
restaurants increased to $2,224,000 for the three month period ended March 31,
1999 from $2,012,000 for the comparable period in 1998, an increase of
$212,000 or 10.5%. However, as a percentage of revenues, cost of sales
decreased to 27.5% during the 1999 period from 29.2% in the 1998 period. The
decrease in cost of sales as a percentage of revenues was primarily due to
efficiencies achieved at the BJ's restaurants in Southern California, Hawaii,
Colorado and Oregon as well as a menu price increase implemented in late May
1998.
Labor. Labor costs for the restaurants increased to $2,978,000 in the
three month period ended March 31, 1999 from $2,501,000 for the comparable
period in 1998, an increase of $477,000 or 19.1%. As a percentage of
revenues, labor costs increased to 36.8% in the 1999 period from 36.3% in the
1998 period. Management believes the increase in labor costs as a percentage
of revenue were primarily due to increases in the federal, California and
Oregon minimum wages between the comparable periods of 1999 and 1998. Also
contributing to the increase was the planned initial overstaffing of the
Arcadia, California restaurant which opened in January 1999.
Occupancy. Occupancy costs increased to $709,000 during the three month
period ended March 31, 1999 from $594,000 during the comparable period in
1998, an increase of $115,000 or 19.4%. As a percentage of revenues,
occupancy costs increased to 8.8% in the 1999 period from 8.6% in the 1998
period. The primary reason for the increase in occupancy costs relative to
revenues was annual lease escalations offset partially by increases in
comparable store sales.
Operating Expenses. Operating expenses increased to $908,000 during the
three month period ended March 31, 1999 from $872,000 during the comparable
period in 1998, an increase of $36,000 or 4.1%. However, as a percentage of
revenues, operating expenses decreased to 11.2% in the 1999 period from 12.7%
in the 1998 period. The primary reasons for the decrease in operating
expenses as a percentage of revenues were (i) the increase in same store
sales, and (ii) an increased focus on operating the restaurants more
efficiently as well as the implementation of improved expense monitoring
systems at the BJ's restaurants in Southern California and Oregon. Operating
expenses include restaurant-level operating costs, the major components of
which include marketing, repairs and maintenance, supplies and utilities.
Preopening Costs. During the first quarter of 1999, the company adopted
Statement of Position 98-5 (SOP 98-5), Accounting for the Costs of Start-Up
Activities, which requires all costs of start-up activities that are not
otherwise capitalizable as long-lived assets to be expensed as incurred. The
Company previously deferred its restaurant preopening costs and amortized them
over the twelve-month period following the opening of each new restaurant.
This new accounting standard accelerates the Company's recognition of costs
associated with the opening of new restaurants. The Company wrote off $106,175
as a cumulative effect of change in accounting principle in the first quarter
of 1999.
During the three month period ended March 31, 1999 the Company incurred
costs of $195,202 related to the openings of its new restaurants in Arcadia,
California and Woodland Hills, California that, under previous accounting
standards, would have been capitalized and amortized over a 12-month period.
These costs will fluctuate from quarter to quarter, possibly significantly,
depending upon, but not limited to, the number of restaurants under
development, the size and concept of the restaurants being developed and the
complexity of the staff hiring and training process.
General and Administrative Expenses. General and administrative expenses
increased to $664,000 during the three month period ended March 31, 1999 from
$593,000 during the comparable period in 1998, an increase of $71,000 or
12.0%. As a percentage of revenues, general and administrative expenses
decreased to 8.2% in 1999 from 8.6% during the comparable period of 1998. The
increase in general and administrative expenses in total was primarily due to
increases in overhead in anticipation of future expansion. The decrease in
general and administrative expenses as a percentage of revenues reflects a
higher rate of increase in revenues than in overhead expenses.
Depreciation and Amortization. Depreciation and amortization decreased
to $354,000 during the three month period ended March 31, 1999 from $452,000
during the comparable period in 1998, a decrease of $98,000 or 21.7%. The
decrease was primarily due to the change in accounting principle from the
deferred and amortization of preopening costs to the expensing of those costs
as incurred. This factor was partially offset by the increase in depreciation
relating to the opening of the Arcadia, California restaurant in January 1999.
Interest Expense. Interest expense, net of interest income, increased to
$57,000 during the three month period ended March 31, 1999 from $35,000 during
the comparable period in 1998, an increase of $22,000 or 62.9%. The increase
was primarily due to a reduction of interest income experienced as the
Company's invested cash was utilized in the renovation and conversion of the
Pietro's units and the development of the Arcadia, California and Woodland
Hills, California units.
LIQUIDITY AND CAPITAL RESOURCES
On January 15, 1999, the Company completed a financing agreement with a
lender to provide equipment financing up to $1,000,000 for equipment and
furnishings required in the Arcadia, Woodland Hills and other restaurant
developments. The note has a term of eighty-four months, and the interest rate
is fixed at the time of funding; to date funds provided for equipment
financing under this facility have been at effective interest rates ranging
from 11.63% to 13.68%. Amounts borrowed are secured by the financed equipment
and additional equipment and property owned by the Company up to the amount of
the loan balance. At March 31, 1999, The outstanding principal balance under
the financing agreement was $687,428, and approximately $300,000 of financing
under this agreement is still available to the Company for equipment at
additional restaurant locations.
On March 1, 1999, the Company completed the sale of Company Common Stock
to ASSI, Inc. The Company issued 1,250,000 common shares to the shareholder in
exchange for a cash payment of $1,000,000, the cancellation of 3,200,000 of
the Company's Redeemable Warrants and other considerations.
The Company's operating activities, as detailed in the Consolidated
Statement of Cash Flows, provided $634,000 net cash during the three-month
period ending March 31, 1999, a $170,000, or 36.6%, increase over the $464,000
generated in the comparable period of 1998. The Company used $1,221,000 to
acquire equipment and facilities during the three-month period ending March
31, 1999, compared to the $630,000 used for this purpose during the comparable
period of 1999, an increase of $581,000, or 92.2%. These expenditures were
required to develop the two new California restaurants. An additional $188,000
was used during the first quarter of 1999 for the repayment of debt and
capital lease payments, the same as the amount used for that purpose in the
comparable quarter of 1998.
Cash and cash equivalents increased during the first quarter of 1999
increased to $2,415,000, an increase of $924,000 from the amount at December
31, 1998, the Company's 1998 fiscal year end. This increase, after the
acquisition and financing of equipment and facilities, was primarily due to
the sale of the Company's Common Stock to an existing shareholder, as
discussed in Item 2, "Changes in Securities". The Company currently intends to
utilize cash and cash equivalents primarily for the development of additional
restaurants, as well as for working capital purposes. Management believes that
cash and cash equivalents available at March 31, 1999 and future operating
cash flow will be sufficient for the Company to fund its operations and
continue to meet its business plan over the next year. However, no assurance
can be given that management can successfully implement such objectives.
Further, there can be no assurance that future events, including problems,
delays, additional expenses and difficulties encountered in expansion and
conversion of restaurants, will not require additional financing, or that such
financing will be available if necessary.
IMPACT OF INFLATION
Impact of inflation on food, labor and occupancy costs can significantly
affect the Company's operations. Many of the Company's employees are paid
hourly rates related to the federal minimum wage, which has been increased
numerous times and remains subject to future increases.
SEASONALITY AND ADVERSE WEATHER
The Company's results of operations have historically been impacted by
seasonality, which directly impacts tourism at the Company's coastal
locations. The summer months (June through August) have traditionally been
higher volume periods than other periods of the year.
YEAR 2000 COMPLIANCE
The Company has completed a review of its computerized information
systems to identify the systems and applications that could be affected by
Year 2000 issues. The Company primarily utilizes software and hardware offered
by major developers, and periodically purchases upgrades directly from those
developers or authorized resellers. The Company's policy since the beginning
of 1998 is to seek and purchase upgrades that include from the developer a
Year 2000 compliance warranty. To date, the Company has spent approximately
$29,000 in upgrading its essential software and hardware.
As part of their support program, the vendor/developer of the Company's
point of sale system recently provided an upgrade to assist the Company in
making its POS system Year 2000 compliant. We are in the process of installing
this upgrade in our restaurants and assessing the system's ability to handle
Year 2000 transactions. Management feels that its main data processing systems
are either now or very close to being Year 2000 compliant, and that any
additional expenditures will not be significant.
The Company's non-IT systems consist primarily of our telephone switching
equipment and restaurant operating equipment. We have upgraded our telephone
switching equipment where necessary. Our initial assessment of our restaurant
operating equipment has indicated that modification or replacement will not be
necessary as a result of the Year 2000 issue. Therefore we are not currently
remediating this operating equipment. However, the existence of non-compliant
embedded technology in this type of equipment is, by nature, more difficult to
identify and repair than in computer hardware and software.
The Company also plans to contact its major product vendors and request
statements as to their preparedness for the potential impact of Year 2000
issues. Their responses will be evaluated, and, based on the information
provided, decisions will be made as to their ability to continue to meet the
Company's need for product into Year 2000. Alternative sources for product
will be identified in cases where the Company feels there are major questions
as to the vendor's ability to conduct its normal business due to potential
Year 2000 implications.
Despite our Year 2000 remediation, testing efforts and contingency
planning, there may be disruptions and unexpected business problems caused by
IT systems, non-IT systems or third party vendors during the early months of
the year 2000. The Company is making diligent efforts to assess the Year 2000
readiness of our significant business partners and will develop contingency
plans for critical areas where we believe our exposure to Year 2000 risk is
the greatest. However, despite our best efforts, we may encounter
unanticipated third party failures or a failure to have successfully concluded
our systems remediation efforts. Any of these unforeseen events could have a
material adverse impact on the Company's results of operations, financial
condition or cash flows. Additionally, any prolonged inability of a
significant number of our restaurants to operate could have a material adverse
effect. The amount of any potential losses related to these occurrences
cannot be reasonably estimated at this time.
The most likely worst case scenario for the Company is that a significant
number of our restaurants will be unable to operate for a few days due to
public infrastructure failures and/or food supply problems. Some restaurants
may have longer-term problems lasting a few weeks. The failure of restaurants
to operate would result in reduced revenues and cash flows for the Company
during the period of disruption. Loss of restaurant revenues would be
partially mitigated by reduced costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from changes in commodity prices,
since many of the food products purchased by the Company are affected by
commodity pricing, and, therefore, are vulnerable to unpredictable price
fluctuations. Over the recent past, the Company has experienced price
volatility in such products as cheese and produce. The Company buys a
significant portion of its product from a distributor, and has only minimal
forward purchasing agreements with other suppliers. Extreme changes in
commodity prices could negatively affect the Company's margins in the
short-term.
Longer term changes in commodity pricing would affect most of the
restaurant industry as well as Chicago Pizza & Brewery. The Company most
likely would be able to mitigate increased commodity prices by increasing menu
prices, thereby passing them through to consumers, and by varying its menu
product mix. However, competitive circumstances could limit menu pricing
and/or mix strategies, and, in those circumstances, commodity price
fluctuations would negatively impact the Company's margins. Management
believes, however, that were such circumstances to occur, they would not
materially impact the Company's results of operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Restaurants such as those operated by the Company are subject to
litigation in the ordinary course of business, most of which the Company
expects to be covered by its general liability insurance. Punitive damages
awards, however, are not covered by the Company's general liability insurance.
To date, the Company has not paid punitive damages with respect to any claims,
but there can be no assurance that punitive damages will not be awarded with
respect to any future claims or any other actions.
On February 23, 1999, a lawsuit was filed in the Superior Court of the
State of California, County of Orange (Case No. 805978) by La Pizza Loca, Inc.
and its controlling stockholder (collectively, "LPL") to prevent the Company
from completing the sale of 1,250,000 shares of its Common Stock to ASSI, Inc.
The Company was successful in defending against LPL's attempt to obtain an
injunction. However, LPL continued to maintain a claim against the Company,
its directors and ASSI, Inc. for breach of fiduciary duty and other claims
relating to the Company's transactions with ASSI, Inc. In April 1999, LPL
dropped its remaining claims against the Company, its directors and ASSI, Inc.
without prejudice.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In March 1999, the Company sold, through a private placement pursuant to
the exemption afforded by Section 4(2) of the Securities Act of 1933, as
amended, 1,250,000 shares of its Common Stock to ASSI, Inc. (the "ASSI
Transaction") in exchange for a cash payment of $1,000,000, the termination of
two consulting agreements between Chicago Pizza and Brewery and ASSI, a
release of any claims that ASSI and its affiliates may have had against the
Company or its affiliates relating to the consulting agreements and prior
investments by ASSI and its affiliates in the Company. In addition, ASSI, Inc.
agreed to the cancellation of 3.2 million of the Company's Redeemable
Warrants. The shares sold by the Company to ASSI are subject to restrictions
on resale including a right of first refusal in favor of the Company or its
designees. As an additional part of the consideration for the Common Stock,
ASSI and Louis Habash, the controlling shareholder of ASSI, agreed to finance
or guarantee financing of potential future development projects of the
Company, subject to project pre-commitment approval, and agreed to cooperate
in connection with any gaming or licensing applications or proceedings
involving the Company. In connection with its investment, ASSI received
certain demand and piggyback registration rights as well as a commitment from
the company to use its best efforts to have two of the Company's directors be
persons designated by ASSI and to cause each of such designees to be included
in the slate of director nominees for election at each annual meeting of
shareholders over the next three years. ASSI also received a commitment from
Paul Motenko and Jeremiah Hennessy, the Company's principal executive
officers, to vote their shares of Common Stock in favor of ASSI's board
nominees in certain circumstances. Such rights terminate at such time as ASSI
and its affiliates no longer own at least five percent of the Company's
outstanding Common Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of the
Company, as amended incorporated by reference to the
Company's Registration Statement on Form SB-2, effective
October 8, 1996 (SEC File No. 333-5182-LA) (referred to
herein as the "Registration Statement").
3.2 Bylaws of the Company, as amended.
4.1 Specimen Common Stock Certificate of the Company
(incorporated by reference to Exhibit 4.1 of the
Registration Statement).
4.2 Warrant Agreement (incorporated by reference to
Exhibit 4.2 of the Registration Statement).
4.3 Specimen Common Stock Purchase Warrant (incorporated by
reference to Exhibit 4.3 of the Registration Statement).
4.4 Form of Representative's Warrant (incorporated by
reference to Exhibit 4.4. of the Registration Statement).
10.1 Stock Purchase Agreement by and between the Company,
ASSI, Inc.and Louis Habash (incorporated by reference to
Exhibit 10.15 of the Company's Form 10-KSB for the fiscal
year ended December 31, 1998).
10.2 Financing Agreements, dated January 15, 1999, between the
Company and Lexington Capital Corporation.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during the quarter ended March 31, 1999.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHICAGO PIZZA & BREWERY, INC.
(Registrant)
May 13, 1999 By: /s/ PAUL A. MOTENKO
--------------------
Paul A. Motenko
Chief Executive Officer, Vice
President, Secretary and Chairman
of the Board of Directors
By: /s/ JEREMIAH J. HENNESSY
-----------------------------
Jeremiah J. Hennessy
President, Chief Operating Officer,
Chief Financial Officer and Director