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 JUNE 30, 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 July 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 -
June 30, 1999 (Unaudited) and December 31, 1998 1
Unaudited Consolidated Statements of Operations -
Three Months Ended and Six Months Ended
June 30, 1999 and June 30, 1998 2
Unaudited Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and
June 30, 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of
Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL INFORMATION
CHICAGO PIZZA & BREWERY, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED)
- -------------------------------------------------------------------- ------------ --------------
ASSETS:
Current assets:
Cash and cash equivalents $ 2,119,570 $ 1,490,705
Accounts receivable 192,883 175,712
Inventory 393,130 345,874
Prepaid and other current assets 178,934 295,176
------------ --------------
Total current assets 2,884,517 2,307,467
Property and equipment, net 11,003,796 9,567,604
Other assets 356,128 352,916
Intangible assets, net 5,284,846 5,366,722
------------ --------------
Total assets $19,529,287 $ 17,594,709
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 1,289,511 $ 1,130,691
Accrued expenses 1,623,699 1,286,539
Current portion of notes payable to related parties 336,187 339,727
Current portion of long-term debt 356,483 210,367
Current portion of obligations under capital leases 143,618 135,809
------------ --------------
Total current liabilities 3,749,498 3,103,133
Notes payable to related parties 1,547,371 1,718,954
Long-term debt 765,093 355,313
Obligations under capital leases 96,986 167,219
Other liabilities 115,614 122,099
------------ --------------
Total liabilities 6,274,562 5,466,718
------------ --------------
Minority interest in partnership 255,099 235,040
------------ --------------
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
June 30, 1999 and December 31, 1998, respectively. 16,076,132 15,039,646
Capital surplus 1,036,029 1,196,029
Accumulated deficit (4,112,535) (4,342,724)
------------ --------------
Total shareholders' equity 12,999,626 11,892,951
------------ --------------
Total liabilities and shareholders' equity $19,529,287 $ 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 FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ --------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
Revenues $9,947,282 $7,825,198 $18,039,685 $14,713,454
Cost of sales 2,790,237 2,158,675 5,014,633 4,171,001
Gross profit 7,157,045 5,666,523 13,025,052 10,542,453
Costs and expenses:
Labor and benefits 3,529,931 2,791,966 6,507,561 5,292,686
Occupancy 751,154 639,139 1,460,377 1,232,645
Operating expenses 1,016,763 867,164 1,924,526 1,739,574
Preopening costs 126,711 321,913
General and administrative 752,074 613,535 1,415,768 1,206,744
Depreciation and amortization 389,550 470,694 743,755 923,140
------------ ------------
Total cost and expenses 6,566,183 5,382,498 12,373,900 10,394,789
----------- ----------- ------------ ------------
Income from operations 590,862 284,025 651,152 147,664
Other income (expense):
Interest expense, net (65,859) (73,162) (123,190) (107,826)
Other expense, net (161,731) (15,030) (160,964) (5,781)
------------ ------------
Total other expense (227,590) (88,192) (284,154) (113,607)
----------- ----------- ------------ ------------
Income before minority interest, income
taxes and change in accounting 363,272 195,833 366,998 34,057
Minority interest in partnership (10,403) (16,673) (20,059) (33,598)
----------- ----------- ------------ ------------
Income (loss) before income taxes and
change in accounting 352,869 179,160 346,939 459
Income tax expense (8,960) (800) (10,575) (1,600)
----------- ----------- ------------ ------------
Income (loss) before change in accounting 343,909 178,360 336,364 (1,141)
Cumulative effect of change in accounting (106,175)
----------- ----------- ------------ ------------
Net income (loss) $ 343,909 $ 178,360 $ 230,189 ($1,141)
=========== =========== ============ ============
Net income per share:
Basic and dilutive:
Income before cumulative effect of change in
accounting $0.05
Cumulative effect of change in accounting ($0.02)
----------- ----------- ------------ ------------
Net income $0.04 $0.03 $0.03 $0.00
=========== =========== ============ ============
Weighted average number of shares outstanding:
Basic 7,658,321 6,408,321 7,161,083 6,408,321
=========== =========== ============ ===========
Dilutive 7,667,598 6,408,321 7,170,058 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 SIX MONTHS
ENDED JUNE 30,
-------------------------
1999 1998
------------ -----------
Cash flows provided by (used in) operating activities:
Net income (loss) $ 230,189 ($1,141)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 743,755 923,140
Change in accounting principle 106,175
Minority interest in partnership 20,059 33,598
Loss on disposal of assets 136,925
Changes in assets and liabilities:
Accounts receivable (17,171) (29,557)
Inventory (47,258) 10,334
Prepaid and other current assets (142,533) 48,901
Other assets (8,389) (19,246)
Accounts payable 158,819 62,962
Accrued expenses 337,160 107,125
Other liabilities (6,484) (6,484)
------------ -----------
Net cash provided by operating activities 1,511,247 1,129,632
------------ -----------
Cash flows used in investing activities:
Purchases of equipment (2,249,598) (795,954)
Proceeds from sale of restaurant equipment 48,867 7,000
------------ -----------
Net cash used in investing activities (2,200,731) (788,954)
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 (175,123) (189,286)
Payments on debt (143,708) (174,416)
Capital lease payments (62,424) (60,014)
Distribution to minority interest partners (11,580)
------------ ------------
Net cash provided by (used in) financing activities 1,318,349 (435,296)
------------ -----------
Net increase (decrease) in cash and cash equivalents 628,865 (94,618)
Cash and cash equivalents, beginning of period 1,490,705 1,705,349
------------ -----------
Cash and cash equivalents, end of period $ 2,119,570 $1,610,731
============ ===========
<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
and six months ended June 30, 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 June 30, 1999, 26 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 five BJ's
Pizza, Grill & Brewery restaurants feature in-house brewing facilities where
BJ's handcrafted beers are produced. The one BJ's Pizza & Grill - OTC restaurant
has a limited menu and service level. The eight Pietro's Pizza restaurants
serve primarily Pietro's thin-crust pizza in a very casual, counter-service
environment.
During the second quarter of 1999, the Company opened its fifth BJ's Pizza,
Grill & Brewery in Woodland Hills, California. The Company also recently signed
a lease for a BJ's Pizza & Grill in Valencia, California; the anticipated
opening of this new facility is early 2000. The Company also is in escrow to
acquire a restaurant location in La Mesa, California. The closing of escrow and
acquisition of this location is contingent on the transfer of the existing
liquor license. Pending approval of the liquor license transfer, the Company
anticipates opening a BJ's Pizza & Grill at this location in late 1999.
On May 31, 1999, the lease on the BJ's Pizza & Grill - OTC in The Dalles,
Oregon terminated. The Company and the landlord could not reach an agreement on
the terms of a lease extension. A portion of the restaurant equipment was sold
to the landlord, and additional equipment was removed for use at other BJ's
locations. The Company incurred a non-cash charge of $132,900 for a loss on the
sale of assets to the landlord, primarily leasehold improvements, at this
location and an additional $28,700 for the settlement of claims made by the
landlord. While this restaurant showed fairly strong initial sales after its
conversion from a Pietro's to a BJ's Pizza & Grill in February 1998, management
felt the very low population density in the area was not sufficient to sustain
revenues necessary to make it a successful restaurant. Sales at The Dalles for
the five months through May 31, 1999 were $292,000, compared to $357,000 for the
comparable five-month period of the prior year.
On June 30, 1999, a Pietro's restaurant located in Eugene, Oregon was
closed. The Company and the landlord could not reach an agreement on the terms
of a new lease. This restaurant did not figure significantly in the Company's
future plans, and the Company chose to close it rather than meet the landlord's
request for an extensive remodel. The Company incurred a non-cash charge of
$4,000 on the closure of this restaurant. Sales at this restaurant for the
six-month period ended June 30, 1999 were $378,000, compared to $391,000 for the
similar period of the prior year.
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 collateralized by the financed equipment and additional
equipment and property owned by the Company up to the amount of the loan
balance. At June 30, 1999, the outstanding principal balance under the borrowing
agreement was $671,000.
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 3,200,000 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.
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 annual report as
reported on Form 10-KSB dated December 31, 1999 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 June 30, 1999 Compared to Three-Month Period Ended June
30, 1998.
Revenues. Total revenues for the three-month period ended June 30, 1999
increased to $9,947,000 from $7,825,000 for the comparable period in 1998, an
increase of $2,122,000 or 27.1%. The increase is primarily the result of:
The opening of the Arcadia, California and Woodland Hills restaurants on January
21, 1999 and April 10, 1999, respectively. These new restaurants generated
revenues of $2,018,000 during the second quarter of 1999.
An increase in same store sales at the BJ's restaurants that were open both
periods of $478,000 or 8.3%. Management believes this increase was due to (i)
an increase in customer counts, (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.
The above-mentioned increases in revenues at the BJ's restaurants were
partially offset by a $201,000 decrease in sales at the BJ's restaurant in
Gresham, Oregon for the second quarter of 1999, compared to the same period of
the prior year. A former Pietro's restaurant, it experienced a high level of
sales during the second quarter of 1998 after its conversion to the BJ's format.
During the second quarter of 1999 it also was necessary to close this restaurant
for two weeks to repair damage caused by a minor fire. Sales at the remaining
nine Pietro's restaurants in Oregon and Washington were essentially flat, when
comparing second quarter 1999 with second quarter 1998.
Cost of Sales. Cost of food, beverages and paper (cost of sales) for the
restaurants increased to $2,790,000 for the three month period ended June 30,
1999 from $2,159,000 for the comparable period in 1998, an increase of $631,000
or 29.2%. However, as a percentage of revenues, cost of sales increased
slightly to 28.0% during the 1999 period from 27.6% in the 1998 period. The
increase in cost of sales as a percentage of revenues was primarily due to the
opening of the Arcadia, California and Woodland Hills, California restaurants.
Cost of sales for these new restaurants was 29.7 % as a percentage of their
revenues. A higher than normal cost of sales was anticipated based on previous
experience when opening new restaurants.
Labor. Labor costs for the restaurants increased to $3,530,000 in the
three-month period ended June 30, 1999 from $2,792,000 for the comparable period
in 1998, an increase of $738,000 or 26.4%. As a percentage of revenues, labor
costs decreased slightly to 35.5% in the 1999 period from 35.7% in the 1998
period. This control of labor costs was achieved despite the planned initial
overstaffing of the Arcadia, California restaurant opened in January 1999 and
the Woodland, Hills, California restaurant opened in April 1999. For the portion
of the second quarter that these new restaurants were operating, as a percentage
of revenues, their combined labor costs were 39.4%.
Occupancy. Occupancy costs increased to $751,000 during the three-month
period ended June 30, 1999 from $639,000 during the comparable period in 1998,
an increase of $112,000 or 17.5%. The new stores in Arcadia, California and
Woodland Hills, California accounted for $88,000 of the increase in occupancy
costs. The balance was due to annual lease escalations and higher revenues at
restaurants with lease provisions requiring rental payments based on a
percentage of sales. As a percentage of revenues, occupancy costs for all stores
decreased to 7.6% in the 1999 period from 8.2% in the 1998 period.
Operating Expenses. Operating expenses increased to $1,017,000 during the
three-month period ended June 30, 1999 from $867,000 during the comparable
period in 1998, an increase of $150,000 or 17.3%. However, as a percentage of
revenues, operating expenses decreased to 10.2% in the 1999 period from 11.1% 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, (ii) an
increased focus on operating the restaurants more efficiently and, (iii) 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 $106,000
as a cumulative effect of change in accounting principle in the first quarter of
1999.
During the three-month period ended June 30, 1999 the Company incurred
costs of $127,000 related to the openings of its new restaurant in 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 $752,000 during the three-month period ended June 30, 1999 from
$614,000 during the comparable period in 1998, an increase of $138,000 or 22.5%.
As a percentage of revenues, general and administrative expenses decreased
slightly to 7.6% in 1999 from 7.8% 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 the
increase in revenues for the period.
Depreciation and Amortization. Depreciation and amortization decreased to
$390,000 during the three-month period ended June 30, 1999 from $471,000 during
the comparable period in 1998, a decrease of $81,000 or 17.2%. The decrease was
primarily due to the change in accounting principle from the deferral and
amortization of preopening costs to the expensing of those costs as incurred.
Preopening costs amortized during the three-month period ending June 30, 1998
totaled $117,000. This factor was partially offset by the increase in
depreciation relating to the opening of the Arcadia, California restaurant in
January 1999 and the Woodland Hills, California restaurant in April 1999.
Interest Expense. Interest expense, net of interest income, decreased to
$66,000 during the three month period ended June 30, 1999 from $73,000 during
the comparable period in 1998, a decrease of $7,000 or 9.6%. The decrease was
primarily due to the maturity in May 1999 of a loan assumed when the Company was
formed, the conclusion of several capitalized equipment leases and the normal
amortization of the major acquisition loan held by an affiliate. The Company's
stronger cash position subsequent to the private placement in March 1999
contributed to higher interest income and a reduction of net interest for the
quarter ended June 30, 1999, compared to the comparable quarter of 1998.
Income Tax Expense. The Company historically experienced net losses
through 1997; for 1998 the Company had net income of $85,000. At the end of
1998, the Company had federal and California net operating loss carryovers of
approximately $4,770,000 and $1,636,000, respectively. While the net operating
loss carryovers should be adequate to offset any regular taxable income for
1999, a provision was made during the second quarter of 1999 for estimated
alternative minimum tax expense. The provision for minimum federal and state
taxes made at June 30, 1999 will be evaluated quarterly.
Six-Month Period Ended June 30, 1999 Compared to Six-Month Period Ended June 30,
1998.
Revenues. Total revenues for the six-month period ended June 30, 1999
increased to $18,040,000 from $14,713,000 for the comparable period in 1998, an
increase of $3,327,000 or 22.6%. The increase is primarily the result of:
The opening of the Arcadia, California and Woodland Hills restaurants on January
21, 1999 and April 10, 1999, respectively. These new restaurants generated
revenues of $2,712,000 during the first six months of 1999.
An increase in same store sales at the BJ's restaurants that were open both
periods of $902,000 or 8.3%. Management believes this increase was due to (i)
an increase in customer counts, (ii) an increase in check averages produced by a
price increase implemented in late May 1998 and (iii) the implementation of more
effective suggestive selling techniques at the restaurants.
The above-mentioned increases in revenues at the BJ's restaurants were
partially offset by a $232,000 decrease in sales at the at the BJ's restaurants
in Gresham, Oregon and The Dalles Oregon for the first six months of 1999,
compared to the same period of the prior year. A former Pietro's restaurant,
Gresham experienced a high level of sales during the second quarter of 1998
after its conversion to the BJ's format. During the second quarter of 1999 this
restaurant also was closed for two weeks to repair damage caused by a minor
fire. The Dalles, Oregon restaurant was closed at the end of May 1999.
Cost of Sales. Cost of food, beverages and paper (cost of sales) for the
restaurants increased to $5,015,000 for the six month period ended June 30, 1999
from $4,171,000 for the comparable period in 1998, an increase of $844,000 or
20.2%. Of the increase, however, $821,000 was attributable to the new stores at
Arcadia, California and Woodland Hills, California. As a percentage of revenues,
overall cost of sales decreased slightly to 27.8% during the 1999 period from
28.3% in the 1998 period. Management believes that this decrease as a percentage
of revenues indicates that efficiencies in food cost achieved at the existing
BJ's restaurants in Southern California, Hawaii, Colorado and Oregon during the
first quarter of 1999 were maintained through the second quarter of 1999.
Labor. Labor costs for the restaurants increased to $6,508,000 in the
six-month period ended June 30, 1999 from $5,293,000 for the comparable period
in 1998, an increase of $1,215,000 or 23.0%. Contributing to the increase was
the planned initial overstaffing of the Arcadia, California and Woodland Hills,
California restaurants which opened in January 1999 and April 1999,
respectively. Labor costs at these two restaurants totaled $1,107,000 from their
respective dates of opening to June 30, 1999. Despite the initial staffing
levels at the new stores, overall labor costs as a percentage of revenues
remained stable, increasing slightly to 36.1% in the 1999 period from 36.0% in
the 1998 period.
Occupancy. Occupancy costs increased to $1,460,000 during the six-month
period ended June 30, 1999 from $1,233,000 during the comparable period in 1998,
an increase of $227,000 or 18.4%. The new stores in Arcadia, California and
Woodland Hills, California accounted for $148,000 of the increase in occupancy
costs. As a percentage of revenues, occupancy costs decreased to 8.1% in the
1999 period from 8.4% in the 1998 period. The primary reasons for the decrease
in occupancy costs relative to revenues was annual lease escalations offset by
increases in comparable store sales, and higher revenues at restaurants with
lease provisions requiring rental payments based on a percentage of sales.
Operating Expenses. Operating expenses increased to $1,925,000 during the
six-month period ended June 30, 1999 from $1,740,000 during the comparable
period in 1998, an increase of $185,000 or 10.6%. However, as a percentage of
revenues, operating expenses decreased to 10.7% in the 1999 period from 11.8% 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, (ii) an
increased focus on operating the restaurants more efficiently and, (iii) the
implementation of improved expense monitoring systems at the BJ's restaurants in
Southern California and Oregon.
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 $106,000
as a cumulative effect of change in accounting principle in the first quarter of
1999.
During the six-month period ended June 30, 1999 the Company incurred costs
of $322,000 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 $1,416,000 during the six-month period ended June 30, 1999 from
$1,207,000 during the comparable period in 1998, an increase of $209,000 or
17.3%. As a percentage of revenues, general and administrative expenses
decreased to 7.8% in 1999 from 8.2% 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 the
increase in revenues for the period.
Depreciation and Amortization. Depreciation and amortization decreased to
$744,000 during the six-month period ended June 30, 1999 from $923,000 during
the comparable period in 1998, a decrease of $179,000 or 19.4%. The decrease was
primarily due to the change in accounting principle from the deferral and
amortization of preopening costs to the expensing of those costs as incurred.
Preopening costs amortized during the six-month period ending June 30, 1998
totaled $230,000. This factor was partially offset by the increase in
depreciation relating to the opening of the Arcadia, California restaurant in
January 1999 and the Woodland Hills, California restaurant in April 1999.
Interest Expense. Interest expense, net of interest income, increased to
$123,000 during the six-month period ended June 30, 1999 from $108,000 during
the comparable period in 1998, an increase of $15,000 or 13.9%. The increase
was primarily due to new equipment financing obtained for the development of the
Arcadia, California and Woodland Hills, California restaurants.
Income Tax Expense. At the end of 1998, the Company had federal and
California net operating loss carryovers of approximately $4,770,000 and
$1,636,000, respectively. While the net operating loss carryovers should be
adequate to offset any regular taxable income for 1999, a provision was made
during the second quarter of 1999 for estimated alternative minimum tax expense.
The provision for minimum federal and state taxes made at June 30, 1999 will be
evaluated quarterly.
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%. At June 30, 1999, $671,000 was outstanding under this financing
agreement, and $300,000 remains available to the Company for future equipment
financing.
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 consideration. See Notes to Unaudited
Consolidated Financial Statements.
The Company's operating activities, as detailed in the Unaudited
Consolidated Statement of Cash Flows, provided $1,511,000 net cash during the
six-month period ending June 30, 1999, a $381,000, or 33.7%, increase over the
$1,130,000 generated in the comparable period of 1998. The Company used
$2,250,000 to acquire equipment and facilities during the six-month period
ending June 30, 1999, compared to the $796,000 used for this purpose during the
comparable period of 1998, an increase of $1,454,000, or 182.7%. These
expenditures were required to develop the two new California restaurants. An
additional $381,000 was used during the first two quarters of 1999 for the
repayment of debt and capital lease payments, compared to $424,000 used for that
purpose in the comparable periods of 1998.
Cash and cash equivalents during the first six months of 1999 increased to
$2,120,000, an increase of $629,000 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 mentioned above and
discussed later in this filing. 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 June 30, 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 $30,000 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. This upgrade has recently been
installed in our restaurants, and management is 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.
The Company has determined that the readiness of its customers is not
within its control even though the ability of its customers to purchase its
products may be affected by third parties (financial institutions). The Company
is not investigating this issue, and the impact is highly uncertain.
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 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 the Company. 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. The Company is currently not a party to any
pending legal proceedings which it believes will have a material adverse effect
on its consolidated financial position or consolidated results of operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Company's Board of Directors at their meeting held on July 20, 1999
appointed two new directors effective on that date. Allyn R. Burroughs, Chief
Executive Officer and Chairman of the Board of Directors of American Convenience
Corporation, and Mark James, a partner with the Las Vegas, Nevada law firm of
Driggs, Walch, Santoro, Kearney, Johnston and Thompson and a Nevada state
senator, were both elected to the Company's Board of Directors.
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, incorporated by reference to
Exhibit 3.2 of Form 10-Q dated March 31, 1999.
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 Employment Agreement dated June 21, 1999 between the Company and
Ernest T. Klinger, employed as President and Co-Chairman of the
Board of Directors.
10.2 Real Estate Lease, dated June 7, 1999 between Chicago Pizza &
Brewery, Inc. and Newhall Land and Farming Company for a BJ's
Pizza & Grill restaurant.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
June 30, 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)
August 12, 1999 By: /s/ PAUL A. MOTENKO
--------------------
Paul A. Motenko
Co-Chief Executive Officer, Vice
President, Secretary and Co-Chairman
of the Board of Directors
By: /s/ JEREMIAH J. HENNESSY
-------------------------
Jeremiah J. Hennessy
Co-Chief Executive Officer and
Co-Chairman of the Board of Directors
By: /s/ ERNEST T. KLINGER
----------------------
Ernest T. Klinger
President, Chief Financial Officer
and Co-Chairman of the Board of
Directors