U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K THE SECURITIES EXCHANGE ACT OF 1934 /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 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 (949) 367-8616 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED -------------------------- ----------------------------------------- Common Stock, No Par Value NASDAQ 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 -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-X is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X -- The aggregate market value of the common stock of the Registrant ("Common Stock") held by non-affiliates as of December 31, 1999 based on the market price at March 15, 2000 was $9,474,911. As of March 15, 2000, there were 7,658,321 shares of Common Stock of the Registrant outstanding and 7,964,584 Redeemable Warrants of the Registrant outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the following documents are incorporated by reference into Part III of this Form 10-K: The Registrant's Proxy Statement for the Annual Meeting of Shareholders.
INDEX PART I <TABLE> <CAPTION> <S> <C> <C> ITEM 1. DESCRIPTION OF BUSINESS.................................................................................1 ITEM 2. PROPERTIES..............................................................................................2 ITEM 3. LEGAL PROCEEDINGS.......................................................................................5 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS...................................6 ITEM 6. SELECTED FINANCIAL DATA.................................................................................8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................9 ITEM 8. FINANCIAL STATEMENTS....................................................................................14 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................................14 ITEM 11. EXECUTIVE COMPENSATION..................................................................................14 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................14 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................................14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.........................................15 </TABLE>
CHICAGO PIZZA & BREWERY, INC. PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL Chicago Pizza & Brewery, Inc. (the "Company" or "BJ's") owns and operates 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, a BJ's Pizza & Grill, a 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 hand-crafted beers are produced. The eight Pietro's Pizza restaurants serve primarily Pietro's thin-crust pizza in a very casual, counter-service environment. The Company was incorporated in California on October 1, 1991 originally to assume the operation of the then existing five BJ's restaurants. In January 1995, the Company purchased the BJ's restaurants and concept from its founders. Since that time, the Company has completed the (i) expansion of the BJ's menu to include high-quality sandwiches, pastas, entrees, specialty salads and desserts; (ii) enhancement of the BJ's concept through a comprehensive new logo and identity program, new uniforms, a new interior design concept and redesigned signage; (iii) addition of BJ's restaurants and microbreweries to the concept to produce BJ's own hand-crafted beers; (iv) purchase of the Pietro's Pizza chain in the Northwest in March 1996, converting seven of the Pietro's restaurants to BJ's. The enhancement of the BJ's concept and the menu expansion have contributed to same store sales increases at the BJ's restaurants open the entire comparable periods of 6.5%, 15.7% and 8.7% for the years 1999, 1998 and 1997 respectively. The opening of the Company's first microbrewery in Brea, California in August 1996 marked the beginning of the Company's production of award-winning hand-crafted specialty beers which are distributed to all of the Company's restaurants. The breweries have added an exciting dimension to the BJ's concept which further distinguishes BJ's from many other restaurant operations. The acquisition of the Pietro's restaurants and the conversion of several of those restaurants to BJ's has given the Company a significant presence in the Oregon market. Due to the relative success of the Company's larger restaurants, management has determined that the Company's resources will be best utilized in the development of additional larger restaurants in prime locations. Consequently, there are currently no plans to convert additional Pietro's units to BJ's. The Company's current focus is on the development of the larger footprint BJ's restaurants in high profile locations with favorable demographics. The Company opened BJ's Pizza & Grills in Arcadia, California in January 1999 and in La Mesa, California in November 1999, and a BJ's Pizza Grill & Brewery in Woodland Hills, California in April 1999. The Company anticipates opening BJ's Pizza & Grills in Valencia, California, Burbank, California and Huntington Beach, California in early spring 2000, early summer 2000 and mid summer, respectively, and a BJ's Pizza, Grill & Brewery in late spring 2000. The Company is currently in negotiations for additional sites in California, Arizona and Washington. The Company's fundamental business strategy is to grow through the additional development and expansion of the BJ's brand. The BJ's brand represents exceptional food and specialty beers accompanied by great value, in a fun, casual environment. In addition to developing new BJ's restaurant and brewery operations, the Company plans to pursue acquisition opportunities which may involve conversion to the BJ's concept or the operation of additional complementary concepts. There can be no assurance that future events, including problems, delays, additional expenses and difficulties encountered in expansion and conversion of restaurants, will not adversely impact the Company's ability to meet its operational objectives or require additional financing, or that such financing will be available if necessary. 1
RESTAURANT CONCEPT AND MENU The Company believes it is positioned for competitive advantage by offering customers moderate prices, and excellent food from a menu that features award-winning pizza, bountiful salads, soups, pastas, sandwiches, entrees and desserts. The popularity of BJ's restaurants, management believes, is due to the broadness of their appeal, with menu items ranging from pizza to steaks and ribs. The BJ's menu has been developed on a foundation of excellence. BJ's core product, its deep-dish, Chicago-style pizza, has been highly acclaimed since it was originally developed in 1978. This unique version of Chicago-style pizza is unusually light, with a crispy, flavorful crust. Management believes BJ's lighter crust helps give it a broader appeal than some other versions of deep-dish pizza. The pizza is topped with high-quality meats, fresh vegetables and whole-milk mozzarella cheese. BJ's pizza consistently has been awarded "best pizza" honors by restaurant critics and public opinion polls in Orange County, California. In addition, BJ's recently won the award for "best pizza on Maui" in a poll conducted by the Maui News. Management's objective in developing BJ's expanded menu was to ensure that all items on the menu maintained and enhanced BJ's reputation for quality. BJ's offers large portions of high quality food, creating a real value orientation. Because of the relatively low food cost associated with pizza, BJ's highest volume item, the restaurants are able to maintain favorable gross profit margins while providing a value to the customer. BJ's restaurants provide a variety of beers for every taste, offering a constantly evolving selection of domestic, imported and micro-brewed beers. BJ's own hand-crafted beers are the focus of the beer selection and feature five standard beers along with a rotating selection of seasonal specialties. While the BJ's beers are produced at the Company's central brewery locations, they are distributed to, and offered at all of the BJ's and Pietro's restaurants. Management believes that internally produced beer provides a variety of benefits, including: 1. The quality and freshness of the BJ's brewed beers, which is under the constant supervision of the Company's Vice President of Brewing Operations, is superior to beer purchased from external sources. 2. The production costs of internally brewed beer can be significantly less than purchased beer. The relatively low production costs and premium pricing often associated with micro-brewed beers has a positive impact on gross profit margins. The cost savings are maximized when the brewery is operating at or near capacity. This is the basis for the Company's "central brewery" structure. RESTAURANT LOCATIONS AND EXPANSION PLANS The following table sets forth data regarding the Company's existing and future restaurant locations: <TABLE> <CAPTION> Year Opened/ Acquired Square Feet -------- ----------- <S> <C> <C> CALIFORNIA Balboa Island .......................................................1995 2,600 La Jolla Village.....................................................1995 3,000 Laguna Beach.........................................................1995 2,150 Belmont Shore........................................................1995 2,910 Seal Beach...........................................................1994 2,369 Huntington Beach.....................................................1994 3,430 Westwood Village, Los Angeles........................................1996 2,450 Brea (Microbrewery)..................................................1996 10,000 Arcadia..............................................................1999 7,371 Woodland Hills (Microbrewery)........................................1999 13,000 La Mesa..............................................................1999 7,200 Valencia* ...........................................................1999 7,000 West Covina* (Microbrewery)..........................................2000 12,000 Huntington Beach II**................................................2000 8,031 Burbank**............................................................2000 11,000 COLORADO Boulder (Microbrewery)...............................................1997 5,500 HAWAII Lahaina, Maui........................................................1994 3,430 2
OREGON Hood River (Pietro's)................................................1996 7,000 Gresham .............................................................1996 5,016 Milwaukie (Pietro's).................................................1996 8,064 Salem I (Pietro's)...................................................1996 6,875 Jantzen Beach (Microbrewery).........................................1996 7,932 Eugene II (Pietro's).................................................1996 4,443 Eugene IV............................................................1996 4,345 Salem II (Pietro's)..................................................1996 5,000 Portland (Stark).....................................................1996 6,405 Portland (Lloyd Center) (Microbrewery)...............................1996 4,341 Portland (Burnside) .................................................1996 3,483 Portland (Lombard) (Pietro's)........................................1996 5,700 McMinnville (Pietro's)...............................................1996 2,900 WASHINGTON Longview (Pietro's)..................................................1996 5,300 </TABLE> * Expected to open in spring 2000. ** Expected to open in summer 2000. In addition to the above locations, the Company is evaluating potential locations in California, Arizona and Washington. The Company's ability to open additional restaurants will depend upon a number of factors, including, but not limited to , the availability of qualified management, restaurant staff and other personnel, the cost and availability of suitable locations, regulatory limitations regarding common ownership of breweries and restaurants in certain states, cost effective and timely construction of restaurants (which can be delayed by a variety of controllable and non-controllable factors), securing of required governmental permits and approvals and the Company's ability to generate funds from existing operations or external financing. There can be no assurance that the Company will be able to open its planned restaurants in a timely or cost effective manner, if at all. MARKETING To date, the majority of marketing has been accomplished through community-based promotions and customer referrals. Management's philosophy relating to the BJ's restaurants has been to "spend its marketing dollars on the plate," or use funds that would typically be allocated to marketing to provide a better product and value to its existing guests. Management believes this will result in increased frequency of visits and greater customer referrals. BJ's expenditures on advertising and marketing are typically 1.0% to 2.0% of sales. BJ's is very much involved in the local community and charitable causes, providing food and resources for many worthwhile events. Management feels very strongly about its commitment to helping others, and this philosophy has benefited the Company in its relations with its surrounding communities. BJ's commitment to supporting worthwhile causes is exemplified by its "Cookies for Kids" program, which provides a donation to the Cystic Fibrosis Foundation for each Pizookie sold. The Pizookie, BJ's extremely popular dessert, is a cookie, freshly baked in a mini pizza pan, and topped with vanilla bean ice cream. Pietro's marketing strategy relies much more on the distribution of discount coupons. Expenditures for marketing relating to the Pietro's restaurants are typically 5.0% of sales (excluding discounts). OPERATIONS The Company's policy is to staff the restaurants with enthusiastic people, who can be an integral part of BJ's fun, casual atmosphere. Prior experience in the industry is only one of the qualities management looks for in its employees. Enthusiasm, motivation and the ability to interact well with the Company's clientele are the most important qualities for BJ's management and staff. Both management and staff undergo thorough formal training prior to assuming their positions at the restaurants. Management has designated certain managers, servers and cooks as "trainers," who are responsible for properly training and monitoring all new employees. In addition, the Company's Director of Food and Beverage and regional managers supervise the training functions in their particular areas. The Company purchases its food product from several wholesale distributors. The majority of food and operating supplies for the California restaurants is currently purchased from Jacmar Sales, with which the Company has had a long-term relationship. The Company has recently started purchasing a majority of food and operating supplies for the Northwest Restaurants from Alliant Food Services, a vendor which has supplied the Company's Boulder, Colorado store for several years. Product specifications are very strict because the Company insists on using fresh, high-quality ingredients. 3
COMPETITION The restaurant industry is highly competitive. A great number of restaurants and other food and beverage service operations compete both directly and indirectly with the Company in many areas, including food quality and service, the price-value relationship, beer quality and selection, and atmosphere, among other factors. Many competitors who use concepts similar to that of the Company are well-established, and often have substantially greater resources. Because the restaurant industry can be significantly affected by changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns, weather and the type and number of competing restaurants, any changes in these factors could adversely affect the Company. In addition, factors such as inflation and increased food, liquor, labor and other employee compensation costs could also adversely affect the Company. The Company believes, however, that its ability to offer high-quality food at moderate prices with superior service in a distinctive dining environment will be the key to overcoming these obstacles. GOVERNMENT REGULATIONS The Company is subject to various federal, state and local laws, rules and regulations that affect its business. Each of the Company's restaurants is subject to licensing and regulation by a number of governmental authorities, which may include alcoholic beverage control, building, land use, health, safety and fire agencies in the state or municipality in which the restaurant is located. Difficulties obtaining the required licenses or approvals could delay or prevent the development of a new restaurant in a particular area or could adversely affect the operation of an existing restaurant. Similar difficulties, such as the inability to obtain a liquor, restaurant license or a given restaurant's products and services could also limit restaurant development and/or profitability. Management believes, however, that the Company is in compliance in all material respects with all relevant laws, rules, and regulations. Furthermore, the Company has never experienced abnormal difficulties or delays in obtaining the licenses or approvals required to open a new restaurant or continue the operation of its existing restaurants. Additionally, management is not aware of any environmental regulations that have had or that it believes will have a materially adverse effect upon the operations of the Company. Alcoholic beverage control regulations require each of the Company's restaurants to apply to a federal and state authority and, in certain locations, municipal authorities for a license and permit to sell alcoholic beverages on the premises. Typically, licenses must be renewed annually and may be revoked or suspended for cause by such authority at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the Company's restaurants, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, and storage and dispensing of alcoholic beverages. The Company has not encountered any material problems relating to alcoholic beverage licenses or permits to date and does not expect to encounter any material problems going forward. The failure to receive or retain, or a delay in obtaining, a liquor license in a particular location could adversely affect the Company's ability to obtain such a license elsewhere. The Company is subject to "dram-shop" statutes in California and other states in which it operates. Those statutes generally provide a person who has been injured by an intoxicated person the right to recover damages from an establishment that has wrongfully served alcoholic beverages to such person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance which it believes is consistent with coverage carried by other entities in the restaurant industry and will help protect the Company from possible claims. Even though the Company carries liquor liability insurance, a judgment against the Company under a dram-shop statute in excess of the Company's liability coverage could have a materially adverse effect on the Company. To date, the Company has never been the subject of a "dram-shop" claim. Various federal and state labor laws, rules and regulations govern the Company's relationship with its employees, including such matters as minimum wage requirements, overtime and working conditions. Significant additional governmental mandates such as an increased minimum wage, an increase in paid leaves of absence, extensions in health benefits or increased tax reporting and payment requirements for employees who receive gratuities, could negatively impact the Company's restaurants. 4
EMPLOYEES As of March 1, 2000, the Company employed 1,180 employees at its eleven California Restaurants, one Hawaii restaurant, and one Boulder, Colorado restaurant. Additionally, 445 are employed at the restaurants in Washington and Oregon. The Company also employs 30 administrative and field supervisory personnel at its corporate offices. Historically, the Company has experienced relatively little turnover of restaurant management employees. The Company believes that it maintains favorable relations with its employees, and currently no unions or collective bargaining arrangements exist. INSURANCE The Company maintains worker's compensation insurance and general liability insurance coverage which it believes will be adequate to protect the Company, its business, assets and operations. There is no assurance that any insurance coverage maintained by the Company will be adequate, that it can continue to obtain and maintain such insurance at all or that the premium costs will not rise to an extent that they adversely affect the Company or the Company's ability to economically obtain or maintain such insurance. TRADEMARKS AND COPYRIGHTS The Company has not secured any rights in connection with its trademarks, servicemarks or any other proprietary rights related to the use of the BJ'S PIZZA, GRILL & BREWERY, the BJ'S PIZZA & GRILL and the BJ'S PIZZA & GRILL OTC names. There are other restaurants using the BJ's name throughout the United States, thus, no assurance can be given that the Company will be able to secure any such rights in the future or that the use of the BJ's name may not be subject to claims by third parties. ITEM 2. PROPERTIES All of the Company's restaurants are on leased premises and are subject to varying lease-specific arrangements. For example, some of the leases require a flat rent, subject to regional cost-of-living increases, while others additionally include a percentage of gross sales. In addition, certain of these leases expire in the near future, and there is no automatic renewal or option to renew. No assurance can be given that leases can be renewed, or, if renewed, that rents will not increase substantially, both of which would adversely affect the Company. Other leases are subject to renewal at fair market value, which could involve substantial increases. Total restaurant lease expense in 1999 was approximately $2,404,000. With respect to future restaurant sites, the Company believes the locations of its restaurants are important to its long-term success and will devote significant time and resources to analyzing prospective sites. The Company's strategy is to open its restaurants in high-profile locations with strong customer traffic during day, evening and weekend hours. The Company has developed specific criteria for evaluating prospective sites, including demographic information, visibility and traffic patterns. The Company's corporate headquarters in California are located in a 2,219 square-foot leased facility in Mission Viejo, California. The lease expires on December 31, 2001 and currently provides for approximately $42,600 in annual rent, which is subject to certain adjustments and annual increases. Chicago Pizza Northwest, Inc., the Company's subsidiary in Washington, has offices in a 2,711 square-foot leased facility in Lynnwood, Washington. The Northwest office also maintains the Company's business processes and data services, and provides all management and financial reporting for the Company. This lease expires on March 13, 2002 and currently provides for approximately $51,000 in annual rent, which is subject to certain adjustments and annual increases, including, without limitation, annual Consumer Price Index escalations. ITEM 3. LEGAL PROCEEDINGS Restaurants such as those operated by the Company are subject to a continuous stream of 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. 5
The Company is a defendant in a lawsuit brought by the owner and landlord of property in Aloha, Oregon where the Company formerly operated a Pietro's restaurant. This restaurant was heavily damaged by fire in February 1997, and the Company received insurance proceeds for its assets that were lost in the fire. The property owner contends that it was the Company's obligation to rebuild a restaurant at this location with the insurance proceeds. The Company has continued to pay rent since the fire, but is of the opinion that the insurance payments were made to compensate the Company for the loss of its personal property, and the obligation to repair the fire damage rests with the landlord. The Company has filed a counterclaim for breach of its lease, and to recover damages it has suffered due to the landlord's failure to rebuild. A settlement agreement is being considered by both the Company and the landlord, which contemplates a sublease of the property by the Company to a third party and no payment of damages by either the Company or the landlord. If the sublease is not completed, the case may proceed to trial. The Company does not believe the lawsuit will have a material adverse effect on its consolidated financial position or consolidated results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders in the fourth quarter of 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS On October 8, 1996, the Company's Common Stock and Redeemable Warrants became listed on the NASDAQ Small Cap Market ("NASDAQ") (Symbols: CHGO and CHGOW) in connection with the Initial Public Offering. On March 15, 2000, the closing prices of the Common Stock and Redeemable Warrants were $1.50 per share and $0.13 per Redeemable Warrant, respectively. The table below shows the high and low sales prices as reported by NASDAQ. The sales prices represent inter-dealer quotations without adjustments for retail mark-ups, mark-downs or commissions. <TABLE> <CAPTION> CALENDAR YEAR ENDED DECEMBER 31, COMMON STOCK REDEEMABLE WARRANTS HIGH LOW HIGH LOW <S> <C> <C> <C> <C> 1998 - ---- First Quarter $2.09 $1.34 $0.22 $0.12 Second Quarter $2.47 $1.53 $0.22 $0.09 Third Quarter $2.06 $1.28 $0.12 $0.03 Fourth Quarter $1.81 $1.25 $0.09 $0.02 1999 - ---- First Quarter $1.81 $1.25 $0.13 $0.02 Second Quarter $2.00 $1.22 $0.13 $0.06 Third Quarter $2.06 $1.56 $0.13 $0.06 Fourth Quarter $1.88 $1.25 $0.09 $0.06 </TABLE> As of March 7, 2000, the Company had 137 shareholders of record and 121 holders of Redeemable Warrants of record. 6
PRIVATE PLACEMENT In March 1999, the Company sold, through a private placement, 1,250,000 shares of its common stock to ASSI, Inc. 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. 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. The Company has no plans to 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. 7
ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and related notes thereto as well as with the discussion below. <TABLE> <CAPTION> Year Ended December 31, ------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- ------- (in thousands, except per share data) <S> <C> <C> <C> <C> <C> Statement of Operations Data: Revenues $37,393 $30,051 $26,191 $19,865 $6,586 Cost of sales 10,491 8,458 7,732 6,182 1,848 -------- -------- -------- -------- ------- Gross profit 26,902 21,593 18,459 13,683 4,738 -------- -------- -------- -------- ------- Costs and Expenses: Labor and benefits 13,542 10,831 9,086 6,933 2,647 Occupancy 2,998 2,563 2,363 1,877 654 Operating expenses 4,161 3,520 3,385 2,998 1,250 Costs to open/close restaurants 665 General and administrative 3,218 2,583 2,636 2,258 879 Depreciation and amortization 1,517 1,737 1,389 1,037 359 -------- -------- -------- -------- ------- Total costs and expenses 26,101 21,234 18,859 15,103 5,789 -------- -------- -------- -------- ------- Income (loss) from operations 801 359 (400) (1,420) (1,051) Other Income (expense): -------- -------- -------- -------- ------- Gain on involuntary conversion of assets 202 Interest expense, net (251) (212) (125) (507) (472) Other income (expense), net 16 (5) 20 (380) (104) -------- -------- -------- -------- ------- Total other income (expense) (235) (217) 97 (887) (576) -------- -------- -------- -------- ------- Income (loss) before minority interest, taxes and change in accounting 566 142 (303) (2,307) (1,627) Minority interest in partnership (44) (56) (11) 27 27 -------- -------- -------- -------- ------- Income before taxes and change in accounting 522 86 (314) (2,280) (1,600) Income tax expense (26) (1) (1) (9) (6) -------- -------- -------- -------- ------- Net income(loss) before change in accounting 496 85 (315) (2,289) (1,606) Cumulative effect of change in accounting 106 -------- -------- -------- -------- ------- Net income (loss) $390 $85 ($315) ($2,289) ($1,606) ======== ======== ======== ======== ======= Net income (loss) per share: Basic and diluted $0.05 $0.01 ($0.05) ($0.52) ($0.55) ======== ======== ======== ======== ======= Weighted average shares outstanding: Basic 7,401 6,408 6,408 4,392 2,936 ======== ======== ======== ======== ======= Diluted 7,411 6,420 6,408 4,392 2,936 ======== ======== ======== ======== ======= Balance Sheet Data (end of period): Working capital (deficit) ($2,549) ($796) $232 $3,329 $22 Intangible assets, net 5,202 5,367 5,452 5,676 5,558 Total assets 19,144 17,595 17,842 18,914 9,943 Total long-term debt (including current portion) 2,861 2,927 3,543 3,964 4,127 Minority interest 249 235 211 215 253 Shareholders' equity 13,099 11,893 11,808 12,123 4,023 </TABLE> 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION FORWARD LOOKING STATEMENTS The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K. Except for the historical information contained herein, the discussion in this Form 10-K 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-K should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-K. 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 including: (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, and (x) other general economic and regulatory conditions and requirements. GENERAL Chicago Pizza & Brewery, Inc. (the "Company" or "BJ's") owns and operates 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, a BJ's Pizza & Grill, a 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 hand-crafted beers are produced. The eight Pietro's Pizza restaurants serve primarily Pietro's thin-crust pizza in a very casual, counter-service environment. The Company's revenues are derived primarily from food and beverage sales at its restaurants. The Company's expenses consist primarily of food and beverage costs, labor costs (consisting of wages and benefits), operating expenses (consisting of marketing costs, repairs and maintenance, supplies, utilities and other operating expenses), occupancy costs, general and administrative expenses and depreciation and amortization expenses. RESULTS OF OPERATIONS FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998 REVENUES. Total revenues for the year ended December 31, 1999 increased to $37,393,000 from $30,052,000 for the comparable period in 1998, an increase of $7,341,000 or 24.4%. The increase is primarily the result of: The opening of restaurants in Arcadia and La Mesa, California in January 1999 and November 1999, respectively, and a restaurant & brewery in Woodland Hills, California in April 1999. These new locations provided $6,862,000 in revenues during the periods of 1999 in which they were operating. An increase in the BJ's restaurants same store sales for comparable periods, of $1,524,000 or 6.5%. Management believes this increase was due to (i) an increase in customer counts in the California and Colorado restaurants, and (ii) an increase in check averages produced by a price increase implemented in January 1999. The increase in revenues resulting from the above factors was partially offset by the closing during the year of two restaurants in Oregon, a BJ's in The Dalles in May 1999 and a Pietro's in Eugene in June 1999. The closures in mid-year of these locations reduced revenues by $927,000 when compared with 1998, during which they were open the entire year. 9
COST OF SALES. Cost of food, beverages and paper (cost of sales) for the restaurants increased to $10,490,000 for the year ended December 31, 1999 from $8,459,000 for the comparable period of 1998, an increase of $2,031,000 or 24.0%. This increase was in line with the 24.4% increase in revenues discussed above. As a percentage of sales, cost of sales was stable at 28.1% for both 1999 and 1998. The Company's same-store cost of sales, as a percentage of sales, improved to 28.0% during the year ended December 31, 1999 from 28.9% for the comparable period of 1998. A continued emphasis during 1999 on efficiencies as well as menu price increases for the California stores in January 1999 and for the Northwest stores in January 1999 was necessary for the Company to keep pace with continued high prices for cheese and other selected food items during 1999. The improvement in same store cost of sales was partially offset by the higher food costs associated with the opening of the new California restaurants. As a percentage of their revenues, these stores collectively incurred food costs of 30.2% for the periods of 1999 during which they were operational. A higher cost of sales percentage in the early months of operations is in line with the Company's experience when opening new restaurants. Also partially offsetting the improvement in same-store cost of sales were the food costs at the two restaurants closed during 1999. For the periods of 1999 during which they were open, these restaurants, as a percentage of their sales, incurred food costs of 29.5%. LABOR. Labor costs for the restaurants increased to $13,542,000 in the year ended December 31, 1999 from $10,830,000 for the comparable period in 1998, an increase of $2,712,000 or 25.0%. As a percentage of revenues, labor costs increased to 36.2% in the1999 period from 36.0% in the 1998 period. The overall increase, as well as the percentage increase, is attributable to the opening of the new California restaurants. Labor costs at these three restaurants totaled $2,769,000, or 40.4%, of their collective sales. The Company intentionally overstaffs new restaurants during the startup phase of operations to ensure a good dining experience by its customers. As a result of gradually reducing staffing towards the level of a mature restaurant, the new stores showed a reduction in labor costs by December 1999, as a percentage of sales. Same-store labor costs increased $372,000, or 3.8%, to $10,232,000 for the year ended December 31, 1999 from $9,860,000 for the comparable period of 1998. As a percentage of revenues, however, same-store labor costs for the twelve months of 1999 declined to 34.3% from 34.9% for the comparable period of 1998. Management feels the improvement in same-store labor costs is the result of planned labor controls. OCCUPANCY. Occupancy costs increased to $2,998,000 during the year ended December 31, 1999 from $2,563,000 during the comparable period in 1998, an increase of $435,000, or 17.0%. As a percentage of revenues, occupancy costs decreased to 8.0% in the 1999 period from 8.5% in the 1998 period. The primary reason for the decrease in occupancy costs relative to revenues was the increase in comparable store sales. Additionally, the two Northwest stores closed during 1999 experienced a combined occupancy cost percentage of 12.4% for the twelve-month period ended December 31, 1998. OPERATING EXPENSES. Operating expenses increased to $4,160,000 during the year ended December 31, 1999 from $3,520,000 during the comparable period in 1998, an increase of $640,000 or 18.2%. However, as a percentage of revenues, operating expenses decreased to 11.1% in the 1999 period from 11.7% in the 1998 period. Operating expenses include restaurant-level operating costs, the major components of which include marketing, repairs and maintenance, supplies and utilities. Management believes the primary reasons for the decrease in operating expenses as a percentage of revenues were (i) the increase in same store sales, and (ii) a focus on more efficient restaurant operations. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $3,218,000 during the year ended December 31, 1999 from $2,583,000 during the comparable period in 1998, an increase of $635,000 or 24.6%. As a percentage of revenues, however, general and administrative expenses remained unchanged at 8.6% in 1999, the percentage experienced in the comparable period of 1998. The increase in general and administrative expenses was primarily due to acquiring resources to plan and implement the Company's growth strategy, incurring costs in locating and evaluating sites for future restaurants and developing staff and systems to manage anticipated future expansion. 10
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. During the twelve month period ended December 31, 1999, the Company incurred costs of $517,000 due to preparations for the opening of its new restaurants in Arcadia, Woodland Hills and La Mesa, California that, under previous accounting standards, would have been capitalized and amortized over a 12-month period. These costs will fluctuate from year to year, 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. DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased to $1,517,000 during the year ended December 31, 1999 from $1,737,000 during the comparable period in 1998, a decrease of $220,000 or 12.7%. The decrease was primarily due to the implementation of SOP 98-5, noted in the previous section. During the twelve months ended December 31, 1998, the Company's amortization and depreciation costs included $384,000 amortization of previously capitalized preopening costs. The Company expensed the remaining capitalized preopening costs of $106,000 as a cumulative effect of change in accounting principle in the first quarter of 1999. Excluding the amortization of preopening costs, amortization and depreciation for 1998 was $1,353,000. On a comparable cost basis, depreciation and amortization for the year of 1999 increased $164,000, or 12.1%. This increase was primarily due to the addition of restaurant equipment and furniture, improvements and brewery equipment utilized in the development of the three new California restaurants. INTEREST EXPENSE. Interest expense, net of interest income, increased to $250,000 during the year ended December 31, 1999 from $211,000 during the comparable period in 1998, an increase of $39,000 or 18.5%. This increase was primarily due to the additional debt incurred by the Company to finance equipment for the new restaurants in Arcadia, California and Woodland Hills, California. Interest expense related to this financing was $67,000 during 1999; this amount was partially offset by reduced interest expense on older debt due to normal principal amortization. FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997 REVENUES. Total revenues for the year ended December 31, 1998 increased to $30,052,000 from $26,191,000 for the comparable period in 1997, an increase of $3,861,000 or 14.7%. The increase is primarily the result of: The opening of the Boulder, Colorado restaurant in February 1997. An increase in same store sales at the BJ's restaurants, which were open in both periods, of $1,986,000 or 15.7%. 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 former Pietro's restaurants converted and operated as BJ's restaurants for a part or all of the year ended December 31, 1998 and operated as Pietro's for a part or all of the comparable period in 1997 of $2,012,000 or 39.3%. The increase in revenues resulting from the above-mentioned factors was partially offset by (i) a decrease in sales at the restaurants operated as Pietro's for the entire comparable periods of $395,000 or 6.4%; (ii) the sale of the Pietro's restaurant in North Bend, Oregon in June 1997 and (iii) a fire which caused the closing of a Pietro's restaurant in February 1997. COST OF SALES. Cost of food, beverages and paper for the restaurants increased to $8,459,000 for the year ended December 31, 1998 from $7,732,000 for the comparable period in 1997, an increase of $727,000 or 9.4%. 11
However, as a percentage of revenues, cost of sales decreased to 28.1% during the 1998 period from 29.5% in the 1997 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 and Colorado as well as a menu price increase implemented in late May 1998. Cost of sales at those restaurants decreased to 26.4% of sales during the year ended December 31, 1998 from 28.0% of sales during the comparable period in 1997. This decrease was also due to a decrease in cost of sales at the Northwest BJ's and Pietro's restaurants to 30.4% in 1998 from 31.4% in 1997. The decrease in cost of sales was achieved despite the substantial increase in cheese prices, which occurred during the last half of 1998. LABOR. Labor costs for the restaurants increased to $10,831,000 in the year ended December 31, 1998 from $9,086,000 for the comparable period in 1997, an increase of $1,745,000 or 19.2%. As a percentage of revenues, labor costs increased to 36.0% in the 1998 period from 34.7% in the1997 period. Management believes the increase in labor costs as a percentage of revenue were primarily due to substantial increases in the Federal, California and Oregon minimum wages between 1997 and 1998. OCCUPANCY. Occupancy costs increased to $2,563,000 during the year ended December 31, 1998 from $2,363,000 during the comparable period in 1997, an increase of $200,000 or 8.5%. As a percentage of revenues, occupancy costs decreased to 8.5% in the 1998 period from 9.0% in the1997 period. The primary reason for the decrease in occupancy costs relative to revenues was the increase in comparable store sales. OPERATING EXPENSES. Operating expenses increased to $3,520,000 during the year ended December 31, 1998 from $3,385,000 during the comparable period in 1997, an increase of $135,000 or 4.0%. However, as a percentage of revenues, operating expenses decreased to 11.7% in the 1998 period from 12.9% in the 1997 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 more efficient restaurant operations as well as the implementation of improved expense monitoring systems at the BJ's restaurants in Southern California. Operating expenses include restaurant-level operating costs, the major components of which include marketing, repairs and maintenance, supplies and utilities. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased to $2,583,000 during the year ended December 31, 1998 from $2,636,000 during the comparable period in 1997, a decrease of $53,000 or 2.0%. The decrease in general and administrative expenses was primarily due to additional legal and accounting fees incurred during 1997 associated with the Company's first year of being a public company. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to $1,737,000 during the year ended December 31, 1998 from $1,389,000 during the comparable period in 1997, an increase of $348,000 or 25.1%. The increase was primarily due to (i) the opening of the Boulder, Colorado restaurant in February 1997, and (ii) the depreciation associated with the renovation costs of the Pietro's converted to BJ's. INTEREST EXPENSE. Interest expense, net of interest income, increased to $211,000 during the year ended December 31, 1998 from $125,000 during the comparable period in 1997, an increase of $86,000 or 69.0%. 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. During 1998, the Company also arranged a number of equipment leases to finance the acquisition of point-of-sale systems for its Northwest restaurants. The implicit interest in these lease agreements, capitalized for balance sheet disclosure in accordance with the requirements of FASB 13, also contributed to the increase of interest expense. LIQUIDITY AND CAPITAL RESOURCES The Company's operating activities, as detailed in the Consolidated Statement of Cash Flows, provided $2,274,000 net cash during the year ended December 31,1999, a $204,000, or 9.9%, increase over the $2,070,000 generated in the prior year ended December 31, 1998. Since the completion of the Company's initial public offering in October of 1996, the Company has invested in restaurant development and reduced its debt. Capital expenditures for the acquisition of restaurant and brewery equipment and leasehold improvements to develop or convert restaurants totaled $4,470,000 and $2,039,000 for the years ended December 31, 1999 and 1998, respectively. Debt reduction, including the principal portion of capitalized lease payments, for the years ended December 31, 1999 and 1998 totaled $770,000 and $728,000, respectively. 12
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 notes have 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 December 31, 1999 $637,000 was outstanding under this financing agreement. The unused portion of the commitment is no longer available to the Company. On March 1, 1999, the Company completed a private placement 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 Consolidated Financial Statements. The Company used $4,470,000 to acquire equipment and facilities during the year ended December 31, 1999, compared to the $2,039,000 used for this purpose during the prior year ended December 31, 1998, an increase of $2,431,000, or 119.2%. These expenditures were required to develop the three new California restaurants, as well as to partially fund the development of the four restaurants currently planned for 2000. As a result of the above expenditures on capital equipment and construction, cash and cash equivalents during the year ended December 31, 1999 decreased to $189,000, a decrease of $1,302,000 from the $1,491,000 balance at December 31, 1998. The Company intends to continue the development of additional restaurants. In February 2000, the Company entered into an agreement with a bank for a collateralized term loan for $4,000,000. There is an initial twelve month draw down period and a subsequent thirty-six month term out period. Interest accrued on outstanding borrowings shall be Wall Street Journal Prime plus 2.0% or LIBOR plus 3.5%, and Wall Street Journal Prime plus 3.0%, floating or fixed during the term out period. Payment shall be interest only during the draw down period and an even amortization during the term out period, with a final maturity on February 15, 2004. The Company paid a one percent loan fee. This loan agreement contains, among other things, certain financial covenants and restrictions. Management believes that the funds available under the existing credit facilities 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 used internal and external resources to upgrade and test its systems. Costs incurred in addressing the Y2K issue were incurred primarily for the purchase of new LAN computer equipment and software upgrades warranted by the developer as Y2K compliant. Most of these upgrades and replacements would have occurred in the normal course of information systems maintenance, and were not material to the Company's financial results. The Company did not experience any significant malfunctions or errors in its operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, the Company does not expect any 13
significant impact or costs to its ongoing business as a result of the Y2K issue. However, it is possible that the full impact of the date change has not been fully recognized. The Company currently is not aware of any significant Y2K or similar problems that have arisen for its customers and suppliers. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS 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 accelerates the Company's recognition of costs associated with the opening of new restaurants but will benefit the post-opening results of new restaurants. Initial application is required as of the beginning of the fiscal year in which SOP 89-5 is first adopted. The Company had no deferred preopening costs at December 31, 1999 and $106,175 at January 1, 1999. Other recently issued standards of the FASB are not expected to affect the Company, as conditions to which those standards apply are absent from the Company's operations. ITEM 8. FINANCIAL STATEMENTS See the Index to Financial Statements attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference to the information contained in the Proxy Statement relating to the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1999. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the information contained in the Proxy Statement relating to the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the information contained in the Proxy Statement relating to the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the information contained in the Proxy Statement relating to the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 1999. 14
PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) (1) CONSOLIDATED FINANCIAL STATEMENTS The following documents are contained in Part II, Item 8 of this Annual Report on Form 10-K: Consolidated Balance Sheets at December 31, 1999 and 1998. Consolidated Statements of Operations for each of the three years in the period ended December 31, 1999. Consolidated Statement of Shareholders' Equity for each of the three years in the period ended December 31, 1999. Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999. Notes to the Consolidated Financial Statements. Report of Independent Accounts. (2) FINANCIAL STATEMENT SCHEDULES All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (3) EXHIBITS <TABLE> <CAPTION> Exhibit Number Description ------- ----------- <S> <C> 2.1 Asset Purchase Agreement by and between the Company and Roman Systems, Inc. incorporated by reference to Exhibit 2.2 of the Registration Statement. 2.2 Secured Promissory Note by and between the Company and Roman Systems, Inc. filed as Exhibit 2.3 of the Registration Statement. 3.1 Amended and Restated Articles of Incorporation of the Company, as amended, incorporated by reference to Exhibit1 of the Registration Statement. 3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 of the Registration Statement. 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 of the Registration Statement. 10.1 Form of Employment Agreement of Jeremiah J. Hennessy, incorporated by reference to Exhibit 10.1 of the Registration Statement. 15
Exhibit Number Description ------- ----------- <S> <C> 10.2 Form of Employment Agreement of Paul Motenko, incorporated by reference to Exhibit 10.2 of the Registration Statement. 10.3 Form of Indemnification Agreement with Officers and Directors, incorporated by reference to Exhibit 10.6 of the Registration Statement. 10.4 Chicago Pizza & Brewery, Inc. Stock Option Plan, incorporated by reference to Exhibit 10.7 of the Registration Statement. 10.5 Lease Agreement - Corporate Headquarters, Mission Viejo, incorporated by reference to Exhibit 10.9 of the Registration Statement. 10.6 Lease Agreement - Corporate Headquarters, Chicago Pizza Northwest, incorporated by reference to Exhibit 10.10 of the Registration Statement. 10.7 Consulting Agreement between the Company and ASSI, Inc. -- Pietro's, incorporated by reference to Exhibit 10.11 of the Registration Statement. 10.8 Consulting Agreement between the Company and ASSI, Inc. -- Nevada, incorporated by reference to Exhibit 10.12 of the Registration Statement. 10.9 BJ's Lahaina, L.P. Partnership Agreement, incorporated by reference to Exhibit 10.16 of the Registration Statement. 10.10 Pepsi Supplier Agreement, incorporated by reference to Exhibit 10.17 of the Registration Statement. 10.11 Underwriting Agreement between the Company and The Boston Group, L.P., as Representative of the Several Underwriters named therein, incorporated by reference to Exhibit 1.1 of the Registration Statement. 10.12 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. 10.13 Real Estate Lease, dated November 1, 1999, between Chicago Pizza & Brewery, Inc. and Huntington Executive Park, a California Limited Partnership, for a BJ's Pizza & Grill restaurant. 10.14 Real Estate, dated February 16, 2000, between Chicago Pizza & Brewery, Inc. and Eastland Shopping Center LLC for a BJ's Pizza, Grill & Brewery restaurant. 10.15 Employment Agreement dated June 21, 1999 between the Company and Ernest T. Klinger, employed as President and Co-Chairman of the Board of Directors incorporated by reference to Exhibit 10.1 of the Form 10-Q filed August 16, 1999. 21 List of Subsidiaries, incorporated by reference to Exhibit 21.1 of the Registration Statement. 27.1 Financial Data Schedule. (b) The Company filed no Reports on Form 8-K during the fiscal year ended December 31, 1999. </TABLE> 16
SIGNATURES In accordance with Section 13 or 15(d) 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. By: /s/ PAUL A. MOTENKO Paul A. Motenko, Co-Chief Executive Officer and Secretary Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> SIGNATURE CAPACITY DATE - --------- -------- ---- <S> <C> <C> By: /s/PAUL A. MOTENKO Director, Co-Chief Executive Officer, March 28, 2000 - ---------------------- Co-Chairman of the Board and Vice- Paul A. Motenko President and Secretary By: /s/JEREMIAH J. HENNESSY Co-Chief Executive Officer and March 28, 2000 - --------------------------- Co-Chairman of the Board of Directors Jeremiah J. Hennessy By: /s/ERNEST T. KLINGER President, Chief Financial Officer and March 28, 2000 - ------------------------ Co-Chairman of the Board of Directors Ernest T. Klinger By: /s/BARRY J. GRUMMAN Director March 28, 2000 - ----------------------- Barry J. Grumman By: /s/STANLEY B. SCHNEIDER Director March 28, 2000 - --------------------------- Stanley B. Schneider By: /s/ALLYN R. BURROUGHS Director March 28, 2000 - ------------------------- Allyn R. Burroughs </TABLE> 17
CHICAGO PIZZA & BREWERY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS <TABLE> <CAPTION> Page ---- <S> <C> Report Of Independent Accountants 19 Consolidated Balance Sheets At December 31, 1999 and 1998 20 Consolidated Statements Of Operations For Each Of The Three Years In The Period Ended December 31, 1999 21 Consolidated Statements Of Shareholders' Equity For Each Of The Three Years In The Period Ended December 31, 1999 22 Consolidated Statements Of Cash Flows For Each Of The Three Years In The Period Ended December 31, 1999 23 Notes To Consolidated Financial Statements 24 </TABLE> 18
REPORT OF INDEPENDENT ACCOUNTANTS ---------- To the Shareholders Chicago Pizza & Brewery, Inc. In our opinion, the accompanying consolidated balance sheets and the related statements of operations, of shareholders' equity, and of cash flows present fairly, in all material respects, the financial position of Chicago Pizza & Brewery, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 of the consolidated financial statements, the Company changed its method of accounting for preopening costs in 1999. PricewaterhouseCoopers LLP Los Angeles, California March 12, 2000 19
CHICAGO PIZZA & BREWERY, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, <TABLE> <CAPTION> 1999 1998 ----------- ----------- <S> <C> <C> ASSETS: Current assets: Cash and cash equivalents $188,811 $1,490,705 Accounts receivable 141,968 175,712 Inventory 455,880 345,874 Prepaids and other current assets 271,854 295,176 ----------- ----------- Total current assets 1,058,513 2,307,467 Property and equipment, net 12,529,913 9,567,604 Other assets 353,595 352,916 Intangible assets, net 5,202,085 5,366,722 ----------- ----------- Total assets $19,144,106 $17,594,709 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $1,114,757 $1,130,691 Accrued expenses 1,710,984 1,286,539 Current portion of notes payable to related parties 350,341 339,727 Current portion of long-term debt 284,919 210,367 Current portion of obligations under capital lease 146,942 135,809 ----------- ----------- Total current liabilities 3,607,943 3,103,133 Notes payable to related parties 1,368,807 1,718,954 Long-term debt 687,331 355,313 Obligations under capital lease 22,574 167,219 Other liabilities 109,131 122,099 ----------- ----------- Total liabilities 5,795,786 5,466,718 ----------- ----------- Commitments and contingencies (Note 8) Minority interest in partnership 249,159 235,040 Shareholders' equity: Preferred stock, 5,000,000 shares authorized, none issued or outstanding Common stock, no par value, 60,000,000 shares authorized as of December 31, 1999 and 1998, 7,658,321 and 6,408,321 shares issued and outstanding as of December 31, 1999 and 1998, respectively 16,076,132 15,039,646 Capital surplus 975,280 1,196,029 Accumulated deficit (3,952,251) (4,342,724) ----------- ----------- Total shareholders' equity 13,099,161 11,892,951 ----------- ----------- Total liabilities and shareholders' equity $19,144,106 $17,594,709 =========== =========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 20
CHICAGO PIZZA & BREWERY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, <TABLE> <CAPTION> 1999 1998 1997 ----------- ----------- ----------- <S> <C> <C> <C> Revenues $37,392,793 $30,051,503 $26,191,472 Cost of sales 10,490,329 8,458,829 7,732,193 ----------- ----------- ----------- Gross profit 26,902,464 21,592,674 18,459,279 ----------- ----------- ----------- Costs and expenses: Labor and benefits 13,542,002 10,830,181 9,085,853 Occupancy 2,998,346 2,562,825 2,363,002 Operating expenses 4,160,479 3,520,221 3,384,616 General and administrative 3,217,921 2,583,384 2,636,904 Depreciation and amortization 1,517,428 1,737,430 1,388,551 Restaurant opening expenses 516,953 Restaurant closing expense 148,464 ----------- ----------- ----------- Total cost and expenses 26,101,593 21,234,041 18,858,926 ----------- ----------- ----------- Income (loss) from operations 800,871 358,633 (399,647) ----------- ----------- ----------- Other income (expense): Gain on involuntary conversion of assets 202,082 Interest income 64,839 95,153 216,333 Interest expense (315,086) (306,259) (341,283) Other income (expense), net 15,852 (5,090) 19,438 ----------- ----------- ----------- Total other income (expense) (234,395) (216,196) 96,570 ----------- ----------- ----------- Income (loss) before minority interest, income taxes and change in accounting 566,476 142,437 (303,077) Income applicable to minority interest in partnership (44,227) (56,254) (11,052) ----------- ----------- ----------- Income (loss) before income taxes and change in accounting 522,249 86,183 (314,129) Income tax expense (25,601) (1,600) (800) ----------- ----------- ----------- Income (loss) before change in accounting 496,648 84,583 (314,929) Cumulative effect of change in accounting 106,175 ----------- ----------- ----------- Net income (loss) $390,473 $84,583 ($314,929) =========== =========== =========== Net income (loss) per share: Basic and diluted: Net income (loss) before cumulative effect of change in $0.07 $0.01 ($0.05) accounting Cumulative effect of change in accounting (0.02) ----------- ----------- ----------- Net income (loss) $0.05 $0.01 ($0.05) =========== =========== =========== Basic weighted average number of common shares outstanding 7,401,472 6,408,321 6,408,321 =========== =========== =========== Diluted weighted average number of common shares outstanding 7,410,722 6,419,851 6,408,321 =========== =========== =========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 21
CHICAGO PIZZA & BREWERY, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY <TABLE> <CAPTION> Capital Accumulated Shares Amount Surplus Deficit Total ----------- ------------- ------------ ------------- ------------- <S> <C> <C> <C> <C> <C> Balance, December 31, 1996 6,408,321 $15,039,646 $1,196,029 ($4,112,378) $12,123,297 Net loss (314,929) (314,929) ----------- ------------- ------------ ------------- ------------- Balance, December 31, 1997 6,408,321 15,039,646 1,196,029 (4,427,307) 11,808,368 Net income 84,583 84,583 ----------- ------------- ------------ ------------- ------------- Balance, December 31, 1998 6,408,321 15,039,646 1,196,029 (4,342,724) 11,892,951 Private placement of common stock, net 1,250,000 876,486 876,486 Reallocation of value of 3,200,000 warrants cancelled under terms of private placement 160,000 (160,000) - Purchase of redeemable warrants (60,749) (60,749) Net income 390,473 390,473 ----------- ------------- ------------ ------------- ------------- Balance, December 31, 1999 7,658,321 $16,076,132 $975,280 ($3,952,251) $13,099,161 =========== ============= ============ ============= ============= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 22
CHICAGO PIZZA & BREWERY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, <TABLE> <CAPTION> 1999 1998 1997 ------------- ------------ ------------ <S> <C> <C> <C> Cash flows from operating activities: Net income (loss) $390,473 $84,583 ($314,929) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,517,428 1,737,430 1,388,551 Change in accounting principle 106,175 Gain on involuntary conversion of assets (202,082) (Gain) loss on sale of restaurant 116,318 (16,678) Minority interest in partnership 44,227 56,254 11,052 Changes in assets and liabilities: Accounts receivable 33,744 (14,063) (4,227) Inventory (110,006) 15,425 (104,631) Prepaids and other current assets (210,453) (32,852) (555,451) Other assets (9,397) (36,584) (16,020) Accounts payable (15,935) 87,836 (221,943) Accrued expenses 424,445 185,362 (97,915) Other liabilities (12,968) (12,968) (12,704) ------------- ------------ ------------ Net cash provided by (used in) operating activities 2,274,051 2,070,423 (146,977) ------------- ------------ ------------ Cash flows from investing activities: Purchases of equipment (4,470,283) (2,038,596) (3,303,414) Purchase of liquor licenses (53,545) Proceeds from involuntary conversion of asset 260,691 Proceeds from sale of restaurants, net of expenses 55,270 7,000 40,900 ------------- ------------ ------------ Net cash used in investing activities (4,415,013) (2,085,141) (3,001,823) ------------- ------------ ------------ Cash flows from financing activities: Proceeds from sale of common stock 1,000,000 Equipment loan proceeds 699,604 Release of cash pledged as collateral 560,830 Repurchase of redeemable warrants (60,749) Payments on related party debt (339,533) (336,306) (320,241) Payments on debt (293,034) (285,150) (220,993) Principal payments on capital lease obligations (137,112) (106,877) (75,603) Distributions to minority interest partners (30,108) (32,423) (14,822) ------------- ------------ ------------ Net cash provided by (used in) financing activities 839,068 (199,926) (631,659) ------------- ------------ ------------ Net decrease in cash and cash equivalents (1,301,894) (214,644) (3,780,459) Cash and cash equivalents, beginning of period 1,490,705 1,705,349 5,485,808 ------------- ------------ ------------ Cash and cash equivalents, end of period $188,811 $1,490,705 $1,705,349 ============= ============ ============ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 23
CHICAGO PIZZA & BREWERY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company And Summary Of Significant Accounting Policies: OPERATIONS Chicago Pizza & Brewery, Inc. (the "Company" or "BJ's") was incorporated in California on October 1, 1991. The Company owns and operates 26 restaurants located in Southern California, Oregon, Washington and Colorado and a controlling interest in one restaurant in Lahaina, Maui. Each of the restaurants is currently operated as either a BJ's Pizza, Grill & Brewery, a BJ's Pizza & Grill, a BJ's Pizza & Grill OTC or, located exclusively in the Northwest, a Pietro's Pizza. During 1999, the Company opened three restaurants in southern California, BJ's Pizza & Grills in Arcadia, California and La Mesa, California in January and November, respectively, and a BJ's Pizza, Grill & Brewery in Woodland Hills, California in April. BASIS OF PRESENTATION The accompanying financial statements of the Company as of the years ended December 31, 1999, 1998 and 1997 are presented on a consolidated basis, and include the accounts of the Company, its wholly owned subsidiary, Chicago Pizza Northwest, Inc. and BJ's Lahaina, L.P. The Company operates in the restaurant industry exclusively in the United States. All significant intercompany transactions and balances have been eliminated. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased. Cash and cash equivalents are stated at cost, which approximates market value. INVENTORY Inventory is stated at the lower of cost (first-in, first-out) or market and is comprised primarily of food and beverages for the restaurant operations. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Renewals and betterments that materially extend the life of an asset are capitalized while maintenance and repair costs are charged to operations as incurred. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation and amortization accounts are relieved, and any gain or loss is included in operations. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the related assets or, for leasehold improvements, over the term of the lease, if less. The following are the estimated useful lives: <TABLE> <S> <C> Furniture and fixtures 7 years Equipment 5-10 years Leasehold improvements 7-25 years </TABLE> The Company periodically evaluates the carrying value of its property and equipment, including related useful lives. Impairment losses to long lived assets are recognized when the carrying value of an asset exceeds the estimated fair value of the asset. Management believes there is no impairment of the net book value of its property and equipment at December 31, 1999. 24
1. The Company And Summary Of Significant Accounting Policies (continued): LEASES Leases that meet certain criteria are capitalized and included with property and equipment. The resulting assets and liabilities are recorded at the lesser of cost or amounts equal to the present value of the future minimum lease payment at the beginning of the lease term. Such assets are amortized evenly over the related life of the lease or the useful lives of the assets, whichever is less. Interest expense relating to these liabilities is recorded to effect constant rates over the terms of the leases. Leases that do not meet the criteria for capitalization are classified as operating leases and rental payments are charged to expense as incurred. PREPAIDS AND OTHER CURRENT ASSETS 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 Accountants 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 accelerates 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. INTANGIBLE ASSETS Goodwill from the acquisition of the net assets of Roman Systems, the acquisition of the limited partnership interests of BJ's Belmont Shore, L.P. and BJ's La Jolla, L.P., and the acquisition of Pietro's represent the excess of cost over fair value of net assets acquired. Goodwill is amortized over 40 years using the straight-line method beginning on the date of acquisition. Also included in intangible assets are trademarks, which are amortized over 10 years and the covenant not to compete, which is amortized over 8.5 years. The Company periodically evaluates the carrying value of goodwill including the related amortization periods. The Company determines whether there has been impairment by comparing the anticipated undiscounted future cash flows from operations of the acquired restaurants with the carrying value of the goodwill. Management does not believe there is any impairment of goodwill valuation at December 31, 1999. REVENUE RECOGNITION Revenue from restaurant sales is recognized when food and beverage is sold. ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 1999, 1998 and 1997 were $657,808, $558,291 and $761,780, respectively. INCOME TAXES Deferred income taxes are recognized based on the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. 25
1. The Company And Summary Of Significant Accounting Policies (continued): MINORITY INTEREST For the consolidated financial statements as of December 31, 1999 and 1998, minority interest represents the limited partners' interests totaling 46.32% for BJ's Lahaina, L.P. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions for the reporting period and as of the financial statement date. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards ("SFAS") Opinion No. 107, "Disclosure About Fair Value of Financial Instruments", requires disclosure of fair value information about most financial instruments both on and off the balance sheet, if it is practicable to estimate. Disclosures regarding the fair value of financial instruments have been derived using external market sources, estimates using present value or other valuation techniques. Cash, accounts payable, accrued liabilities and short-term debt are reflected in the financial statements at fair value because of the short-term maturity of these instruments. The fair value of long-term debt closely approximates its carrying value. NET INCOME PER SHARE 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 reflects the potential dilution that could occur if stock options issued by the Company to sell common stock at set prices were exercised. The financial statements present basic and dilutive net income per share. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercises of outstanding stock options using the treasury stock method. STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation plan using the intrinsic value method prescribed in APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS No. 123, "Accounting for Stock-based Compensation", encourages, but does not require companies to record stock-based compensation plans at fair value. The Company has elected to continue accounting for stock-based compensation in accordance with APB No. 25, but will comply with the required disclosures under SFAS No. 123. BUSINESS OPERATIONS The Company incurred net losses during its organization and acquisition of restaurants. While many of these costs were created by the ramping-up of the organization and restaurant concept development, including a more expansive menu, food testing, and micro-brewing concepts, management believes that the controlling of these costs has been a factor in achieving its recent profitability. Management believes the Company can continue to improve its profitability through increased sales relating to its extended menu and the continuing development of additional restaurant sites. While there can be no assurance that management's plans, if executed, will continue to improve the Company's profitability, management believes their plans provide the Company with a strong base to accomplish their goals. 26
2. Concentration Of Credit Risk: Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of cash, cash equivalents and accounts receivable. The Company maintains its cash accounts at various banking institutions. At times, cash and cash equivalent balances may be in excess of the FDIC 2. Concentration of Credit Risk (continued): insurance limit. Cash equivalents represent money market funds and certificates of deposits. 3. Property and Equipment: Property and equipment consisted of the following as of: <TABLE> <CAPTION> DECEMBER 31, ---------------------------------- 1999 1998 ----------- ------------ <S> <C> <C> Furniture and fixtures $1,181,972 $715,098 Equipment 5,534,479 4,101,864 Leasehold improvements 9,545,323 6,545,352 ----------- ------------ 16,261,774 11,362,314 Less, accumulated depreciation and amortization (4,204,880) (2,990,505) ----------- ------------ 12,056,894 8,371,809 Construction in progress 473,019 1,195,795 ----------- ------------ $12,529,913 $9,567,604 =========== ============ </TABLE> 4. Intangible Assets: Intangible assets consisted of the following as of: <TABLE> <CAPTION> DECEMBER 31, ------------------------------------ 1999 1998 ---------- ---------- <S> <C> <C> Goodwill $5,867,358 $5,867,357 Trademarks 59,000 58,563 Covenant not to compete 50,000 50,000 Lease right for Lahaina lease 25,000 25,000 ---------- ---------- 6,001,358 6,000,920 Less, accumulated amortization 799,273 634,198 ---------- ---------- $5,202,085 $5,366,722 ========== ========== </TABLE> 5. Accrued Expenses: Accrued expenses consisted of the following as of: <TABLE> <CAPTION> DECEMBER 31, --------------------------------------- 1999 1998 ----------- ---------- <S> <C> <C> Accrued professional fees $87,681 $89,251 Accrued rent 232,515 244,163 Payroll related liabilities 1,007,506 729,298 Accrued interest 6,294 - Other 376,988 223,827 ----------- ---------- $1,710,984 $1,286,539 =========== ========== </TABLE> 27
6. Debt: RELATED PARTY DEBT Related party debt consisted of the following as of: <TABLE> <CAPTION> DECEMBER 31, -------------------------------------- 1999 1998 ------------- ------------ <S> <C> <C> Note payable to Roman Systems, with fixed interest rate of 7%, due in monthly installments of $38,195, maturing April 1, 2004, collateralized by the BJ's Laguna, BJ's La Jolla and BJ's Balboa restaurants $1,719,148 $2,041,181 Note payable to Roman Systems, with interest rate of 2.25%plus the bank's reference rate (7.75% at December 31, 1998 and 8.50% at December 31, 1997), due in monthly installments of $3,500, Maturing June 1, 1999 - 17,500 ------------- ------------ Total related party debt 1,719,148 2,058,681 Less, current portion 350,341 339,727 ------------- ------------ $1,368,807 $1,718,954 ============= ============ </TABLE> Future maturities of related party debt for each of the five years subsequent to December 31, 1999 and thereafter are as follows: <TABLE> <S> <C> 2000 $350,341 2001 378,068 2002 405,989 2003 433,909 2004 150,841 Thereafter - ----------- $1,719,148 =========== </TABLE> Total interest expense on related party debt for the years ended December 31, 1999, 1998 and 1997 was approximately $136,000, $164,000and $194,000, respectively. 28
6. Debt (continued): OTHER LONG-TERM DEBT Other long-term debt consisted of the following as of : <TABLE> <CAPTION> DECEMBER 31, ------------------------------------ 1999 1998 ---------- ----------- <S> <C> <C> Notes payable to a financial institution with an implicit Interest rates of 11.63% to 13.68% due in monthly Installments of $12,176, maturing February 15, 2006, Collateralized by improvements and restaurant equipment And furniture at the BJ's Arcadia and BJ's Woodland Hills restaurants. $637,007 Note payable to a financial institution with interest rate of 2%plus the bank's reference rate (8.50% at December 31, 1999 and 7.75% at December 31, 1998), due in monthly installments of $12,513, maturing March 1, 2001 180,695 $330,849 Notes payable to taxing authorities for Pietro's outstanding tax claims as part of the Debtor's Plan of Reorganization, due in quarterly installments of $32,670 from July 1, 1996 through April 1, 1997 and $20,071 from July 1, 1997 through June 30, 2001 and varying payments totaling an aggregate of $34,122 from October 1, 2001 until April 1, 2002. Interest accrues at 8.25% 154,548 234,831 ---------- ----------- 972,250 565,680 Less, current portion 284,919 210,367 ---------- ----------- $687,331 $355,313 ========== =========== </TABLE> Future maturities of other long-term debt for years subsequent to December 31, 1999 are as follows: <TABLE> <S> <C> 2000 $284,919 2001 192,035 2002 111,108 2003 106,203 2004 119,506 Thereafter 158,478 ------------ $972,249 ============ </TABLE> Total interest expense on other long-term debt for the years ended December 31, 1999, 1998 and 1997 was approximately $120,000, $76,000and $125,000, respectively. On January 15, 1999 the Company completed a financing agreement with a lender to provide equipment financing totaling $1,000,000 for the equipment and furnishings required by the two additional California locations. A commitment fee was paid by the Company in January 1999, and initial funding, as provided by the proposal, took place in March 1999. The maturities of the several notes are approximately seven years from the date of loan funding. 29
7. Capital Leases: The Company leases point-of-sale and other equipment under capital lease arrangements. The equipment financed by the capital leases has an original cost of $469,187 and $488,732 at December 31, 1999 and 1998, respectively. Accumulated amortization related to these leases is $165,735 and $209,546 as of December 31, 1999 and 1998, respectively. The obligations under capital leases have a weighted average interest rate of 18.46% and mature at various dates through 2002. Annual future minimum lease payments for years subsequent to December 31, 1999 are as follows: <TABLE> <S> <C> 2000 166,091 2001 23,170 2002 354 -------- Total minimum payments 189,615 Less, amount representing interest 20,099 -------- Obligations under capital leases 169,516 Less, current portion 146,942 -------- Long-term portion $22,574 ======== </TABLE> Imputed interest expense on capital leases for the years ended December 31, 1999, 1998 and 1997 was approximately $59,000, $66,000and $22,000, respectively. 8. Commitments and contingencies: LEASES The Company leases its restaurant and office facilities under noncancelable operating leases with remaining terms ranging from approximately 1 month to 16 years with renewal options ranging from 5 to 15 years. Rent expense for the years ended December 31, 1999, 1998 and 1997 was $2,490,252, $2,184,223 and $2,023,738, respectively. The Company has certain operating leases which contain fixed escalation clauses. Rent expense for these leases has been calculated on a straight-line basis over the term of the leases. A deferred credit in the amount of $217,445 and $228,914 has been established and included in accrued expenses at December 31, 1999 and December 31, 1998, respectively, for the difference between the amount charged to expense and the amount paid. The deferred credit will be amortized over the life of the leases. A number of the leases also provide for contingent rentals based on a percentage of sales above a specified minimum. Total contingent rentals, included in rent expense, above, for the years ended December 31, 1999, 1998 and 1997 were $289,054, $189,572 and $71,702, respectively. The following are the future minimum rental payments under noncancelable operating leases for each of the five years subsequent to December 31, 1999 and in total thereafter: <TABLE> <C> <C> 2000 $2,725,557 2001 2,803,863 2002 2,449,531 2003 2,102,152 2004 1,656,918 Thereafter 7,669,108 ----------- $19,407,129 =========== </TABLE> 30
8. Commitments and contingencies (continued): With respect to the lease for the Richland, Washington restaurant, which was closed and sold by the Company, the Company remains liable in the event of default by the current lessee. The Company may also be liable for additional expenses, such as insurance, real estate taxes, utilities and maintenance and repairs. Management currently has no reason to believe that such expenses, if incurred, will be significant. LEGAL PROCEEDINGS The Company is a defendant in a lawsuit brought by the owner and landlord of property in Aloha, Oregon where the Company formerly operated a Pietro's restaurant. This restaurant was heavily damaged by fire in February 1997, and the Company received insurance proceeds for its assets that were lost in the fire. The property owner contends that it was the Company's obligation to rebuild a restaurant at this location with the insurance proceeds. The Company has continued to pay rent since the fire, but is of the opinion that the insurance payments were made to compensate the Company for the loss of its personal property, and the obligation to repair the fire damage rests with the landlord. The Company has filed a counterclaim for breach of its lease, and to recover damages it has suffered due to the landlord's failure to rebuild. A settlement agreement is being considered by both the Company and the landlord, which contemplates a sublease of the property by the Company to a third party and no payment of damages by either the Company or the landlord. If the sublease is not completed, the case may proceed to trial. The Company does not believe the lawsuit will have a material adverse effect on its consolidated financial position, consolidated results of operations, or cashflows. EMPLOYMENT AGREEMENTS Effective March 26, 1996, the Company entered into employment agreements with Paul Motenko and Jeremiah J. Hennessy, currently Co-chief Executive Officers. The agreements provide for a minimum annual salary of $135,000, subject to escalation annually in accordance with the Consumer Price Index, and certain benefits through 2004. The agreements may be terminated by either party. The agreements also contain provisions for additional cash compensation based on earnings or income of the Company. The agreements contain provisions which grant the employees the right to receive salary and benefits, as individually defined, if such employee is terminated by the Company without cause. Effective June 21, 1999 the Company entered into an employment agreement with Ernest T. Klinger, President. The agreement provides for a minimum salary of $145,000, subject to escalation annually in accordance to the Consumer Price Index, and certain other benefits through March 2004. The agreement may be terminated by either party. The agreement also contains provisions for additional cash compensation based on earnings or income of the Company. The agreement contains provisions which grant the employee the right to receive salary and benefits, as defined, if the employee is terminated by the Company without cause. 9. Shareholders' Equity: PREFERRED STOCK The Company is authorized to issue 5,000,000 shares in one or more series of preferred stock and to determine the rights, preferences, privileges and restrictions to be granted to, or imposed upon, any such series, including the voting rights, redemption provisions (including sinking fund provisions), dividend rights, dividend rates, liquidation rates, liquidation preferences, conversion rights and the description and number of shares constituting any wholly unissued series of preferred stock. No shares of preferred stock were outstanding at December 31, 1999 or 1998. The Company currently has no plans to issue shares of preferred stock. : 31
9. Shareholders' Equity (continued): COMMON STOCK Shareholders of the Company's outstanding common stock are entitled to receive dividends if and when declared by the Board of Directors. Shareholders are entitled to one vote for each share of common stock held of record. Pursuant to the requirements of California law, shareholders are entitled to cumulate votes in connection with the election of directors. In March 1999, the Company sold, through a private placement, 1,250,000 shares of its common stock to ASSI, Inc. 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. CAPITAL SURPLUS In May 1995, the Company issued warrants to purchase up to 300,000 shares of common stock at a price of $5.00 per share to each of Barry Grumman, a director of the Company, and Lexington Ventures, Inc. Mr. Grumman and Lexington Ventures, Inc. were issued their respective warrants at a price of $0.07 per warrant or a total price to each of $21,000. Mr. Grumman's liability for payment of the warrants was extinguished in exchange for past services to the Company as a Director which had not been compensated. Proceeds from the valuation or sale of warrants issued in conjunction with the private placement offerings totaled $236,750. The warrants were automatically converted into warrants included in the Company's initial public offering (IPO). The Company issued Redeemable Warrants with the Company's IPO on October 15, 1996. At December 31, 1999, the Company had 7,964,584 Redeemable Warrants outstanding. Each redeemable warrant entitles the holder thereof to purchase, at any time during the 54-month period commencing one year after the date of the Company's IPO, one share of Common Stock at a price of 110% of the initial public offering price per share ($5.50), subject to adjustment in accordance with the anti-dilution and other provisions referred to below. In conjunction with the private placement discussed in the preceding section, 3.2 million of the Company's redeemable warrants held by ASSI, Inc. were cancelled. The Redeemable Warrants are subject to redemption by the Company at any time, at a price of $.25 per Redeemable Warrant if the average closing bid price of the Common Stock equals or exceeds 140% of the IPO price per share ($7.00) for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of notice of redemption. Redemption of the Redeemable Warrants can be made only after 30 days notice, during which period the holders of the Redeemable Warrants may exercise the Redeemable Warrants. 32
10. Income Taxes: The provision for income tax consists of the following for the years ended December 31: <TABLE> <CAPTION> 1999 1998 1997 ---------- --------- --------- <S> <C> <C> <C> Current: Federal $23,101 State 2,500 $1,600 $800 ---------- --------- --------- $25,601 1,600 800 Deferred: Federal State ---------- --------- --------- Provision for income taxes $25,601 $1,600 $800 ========== ========= ========= </TABLE> The temporary differences which give rise to deferred tax provision (benefit) consist of the following for the years ended December 31: <TABLE> <CAPTION> 1999 1998 1997 ------------ ----------- ------------ <S> <C> <C> <C> Property and equipment $151,850 $20,457 ($83,530) Goodwill $108,812 116,762 40,835 Accrued liabilities ($12,117) (6,123) 5,052 Investment in partnerships ($12,045) (44,896) (5,965) Net operating losses $176,161 32,854 (59,042) Income tax credits ($231,391) (99,655) (103,657) Other ($70,698) 58,197 (233) Change in valuation allowance ($110,572) (77,596) 206,540 ------------ ----------- ------------ $0 $0 $0 ============ =========== ============ </TABLE> The provision (benefit) for income taxes differs from the amount that would result from applying the federal statutory rate as follows for the years ended December 31: <TABLE> <CAPTION> 1999 1998 1997 ------------ ----------- ------------ <S> <C> <C> <C> Statutory regular federal income tax benefit 34.0% 34.0% (34.0)% Non-deductible expenses 6.5% State income taxes, net of federal benefit 0.4% 1.2% 0.3% Change in valuation allowance (0.4)% 65.6% 54.2% Change in credits (55.0)% (150.8)% (32.9)% Employer tax credit disallowance 17.6% 46.9% 10.8% Other, net 0.2% 5.0% 1.8% ------------ ----------- ------------ 3.5% 1.9% 0.2% ============ =========== ============ </TABLE> 33
10. Income Taxes (continued): The components of the deferred income tax asset and (liability) consist of the following at December 31: <TABLE> <CAPTION> 1999 1998 1997 ------------- -------------- ------------- <S> <C> <C> <C> Property and equipment $20,107 $171,957 $192,414 Goodwill (398,597) (289,785) (173,023) Accrued liabilities 50,179 38,062 31,939 Investment in partnerships 83,050 71,005 26,110 Net operating losses 1,421,129 1,597,290 1,630,144 Income tax credits 528,111 284,375 184,720 Other 18,785 (39,568) 18,628 ------------- -------------- ------------- 1,722,764 1,833,336 1,910,932 Valuation allowance (1,722,764) (1,833,336) (1,910,932) ------------- -------------- ------------- Net deferred income taxes $- $- $- ============= ============== ============= </TABLE> As of December 31, 1999, the Company had net operating loss carryforwards for federal and state purposes of approximately $3,880,000 and $1,140,000, respectively. At December 31, 1998, the respective tax carryforwards were approximately $4,225,000 and $2,194,000. The net operating loss carryforwards begin expiring in 2008 for federal purposes and 1997 for state purposes. The Company has a federal credit for FICA taxes paid on employees' tip income of approximately $520,000. The credit will begin to expire in 2011. The utilization of net operating loss ("NOL") and credit carryforwards may be limited under the provisions of Internal Revenue Code Section 382 and similar state provisions due to the Initial Public Offering in 1996. The Company has not previously generated taxable income, and there is no opportunity to carryback losses to prior periods. The Company has therefore not recognized a deferred tax asset as of December 31, 1999 and 1998. 11. Supplemental Cash Flow Information : Supplemental cash flow items consisted of the following for the years ended December 31: <TABLE> <CAPTION> 1999 1998 1997 ------------- ------------- -------------- <S> <C> <C> <C> Cash paid for: Interest $308,792 $306,523 $381,109 Taxes $25,601 $1,600 $800 </TABLE> Supplemental information on noncash investing and financing activities consisted of the following for the years ended December 31: <TABLE> <CAPTION> 1999 1998 --------------- -------------- <S> <C> <C> Equipment purchases under a capital lease $3,600 $112,796 </TABLE> 12. 1996 Stock Option Plan: The Company adopted the 1996 Stock Option Plan as of August 7, 1996 under which options may be granted to purchase up to 600,000 shares of common stock, and was amended on September 28, 1999, increasing the total number of shares under the plan to 1,200,000. The 1996 Stock Option Plan provides for the options issued to be either incentive stock options or non-statutory stock options as defined under Section 422A of the Internal Revenue Code. The exercise price of the shares under the option shall be equal to or exceed 100% of the fair market value of the shares at the date of option grant. The 1996 Stock 34
12. 1996 Stock Option Plan (continued): Option Plan expires on June 30, 2005 unless terminated earlier. The options generally vest over a three-year period. The following is a summary of changes in options outstanding pursuant to the plan for the years ended December 31, 1999, 1998 and 1997: <TABLE> <CAPTION> Weighted Average Shares Exercise Price ---------------- ------------------ <S> <C> <C> Outstanding options at December 31, 1996 487,500 $5.00 Granted 25,000 $1.00 Exercised - - Terminated (159,591) $5.00 ---------------- ------------------ Outstanding options at December 31, 1997 352,909 $4.14 Granted 176,500 $1.88 Exercised - - Terminated (79,409) $4.94 ---------------- ------------------ Outstanding options at December 31, 1998 450,000 $3.11 Granted 528,000 $1.26 Exercised - - Terminated (51,500) $3.53 ================ ================== Outstanding options at December 31, 1999 926,500 $2.38 Options exercisable at end of year 570,833 $2.70 ================ ================== </TABLE> The per share weighted average fair value for options granted in 1999, 1998 and 1997 was $1.26, $0.93 and $0.51, respectively. Information relating to significant option groups outstanding at December 31, 1999 are as follows: <TABLE> <CAPTION> Life of Exercise Price Outstanding Outstanding Options Shares Shares(Yr.) Exercisable --------------- -------------- ------------- ------------- <S> <C> <C> <C> $5.00 125,000 6.77 125,000 $3.00 92,000 6.77 92,000 $1.88 611,500 8.99 328,833 $1.81 53,000 9.56 $1.69 20,000 9.74 $1.00 25,000 7.31 25,000 -------------- ------------- ------------- Total 926,500 8.40 570,833 ============== ============= ============= </TABLE> The Company has adopted the disclosure-only provisions of SFAS Statement No. 123, "Accounting for Stock-Based Compensation" and will continue to use the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, since options were granted with an option price equal to the grant date market value of the Company's common stock, no compensation cost has been recognized for the stock option plan. Had compensation 35
cost for the Company's stock option plan been determined based on the fair value of the option at the 36
12. 1996 Stock Option Plan (continued): grant date for awards in 1999 and 1998 consistent with the provisions of SFAS No. 123, the Company's net income and basic income per share would have been decreased to the pro forma amounts indicated below as of December 31, <TABLE> <CAPTION> 1999 1998 1997 ------------ ------------ ------------ <S> <C> <C> <C> Net income, as reported $390,473 $84,583 ($314,929) Net loss, pro forma ($155,878) ($155,515) ($542,062) Basic and diluted income (lose) per share, as reported $0.05 $0.01 ($0.05) Basic and dilutive loss per share, pro forma $0.00 ($0.02) ($0.08) </TABLE> The fair value of each option grant issued is estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: (a) no dividend yield on the Company's stock, (b) expected volatility of the Company's stock ranging from 49.0% to 78.9%, (c) a risk-free interest rate ranging from 4.88% to 6.74% and (d) expected option life of five years. 13. Acquisitions And Transfers: LA MESA, CALIFORNIA In August 1999, the Company entered into a sublease for its La Mesa, California restaurant location. The site was renovated and opened on November 8, 1999. SALE OF RESTAURANTS In May 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 $112,300 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 In June 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. 37
14. Selected Quarterly Financial Data (Unaudited): Summarized unaudited quarterly financial data for the Company is as follows: <TABLE> <CAPTION> March 31, June 30, September 30, December 31, 1999 1999 1999 1999 ------------ ------------ -------------- -------------- <S> <C> <C> <C> <C> Total revenues $8,092,403 $9,947,282 $10,039,105 $9,314,003 Gross profit $5,868,007 $7,157,045 $7,177,145 $6,700,267 Income (loss) from operations $60,290 $420,865 $444,215 ($124,499) Net income (loss) before effect of accounting change ($7,545) $343,909 $330,876 ($170,592) Effect of accounting change ($106,175) Net income (loss) ($113,720) $343,909 $330,876 ($170,592) Basic and diluted net income (loss) per share before accounting change $0.00 $0.04 $0.04 ($0.01) Basic and diluted net income (loss) per share ($0.02) $0.04 $0.04 ($0.01) March 31, June 30, September 30, December 31, 1998 1998 1998 1998 ------------ ------------ -------------- -------------- Total revenues $6,888,256 $7,825,198 $8,157,975 $7,180,073 Gross profit $4,875,930 $5,666,523 5,926,040 $5,124,181 Income (loss) from operations ($136,361) $284,025 $355,680 ($144,711) Net income (loss) ($179,501) $178,360 $285,151 ($199,427) Basic and dilutive net income (loss) per share ($0.03) $0.03 $0.04 ($0.03) </TABLE> 15. Subsequent event: In February 2000, the Company entered into an agreement with a bank for a collateralized term loan for $4,000,000. There is an initial twelve-month draw down period and a subsequent thirty-six month term-out period. Interest accrued on outstanding borrowings shall be Wall Street Journal Prime plus 2.0% or LIBOR plus 3.5%, and Wall Street Journal Prime plus 3.0%, floating or fixed during the term out period. Payment shall be interest only during the draw down period and an even amortization during the term out period, with a final maturity on February 15, 2004. The Company paid a one percent loan fee. This loan agreement contains, among other things, certain financial covenants and restrictions. 38