U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO ______ COMMISSION FILE NUMBER 0-21423 CHICAGO PIZZA & BREWERY, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 33-0485615 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 26131 MARGUERITE PARKWAY SUITE A MISSION VIEJO, CALIFORNIA 92692 (Address and zip code of Registrant's principal executive offices) (949) 367-8616 (Registrants telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO. -- As of May 1, 2000, there were 7,658,321 shares of Common Stock of the Registrant outstanding and 8,284,584 Redeemable Warrants of the Registrant outstanding.
CHICAGO PIZZA & BREWERY, INC. AND SUBSIDIARIES PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements 1 Consolidated Balance Sheets - March 31, 2000 (Unaudited) and December 31, 1999 1 Unaudited Consolidated Statements of Operations - Three Months Ended March 31, 2000 and March 31, 1999 2 Unaudited Consolidated Statements of Cash Flows - Three Months Ended March 31, 2000 and March 31, 1999 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 5 Item 3. Quantitative and Qualitative Disclosures about Market Risk 8 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings ` 8 Item 2. Changes in Securities 9 Item 3. Defaults Upon Senior Securities 9 Item 4. Submission of Matters to a Vote of Security Holders 9 Item 5. Other Information 9 Item 6. Exhibits and Reports on Form 8-K 9 SIGNATURES
3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL INFORMATION <TABLE> <CAPTION> CHICAGO PIZZA & BREWERY, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2000 DECEMBER 31, (UNAUDITED) 1999 ------------ ------------ ASSETS: <S> <C> <C> Current assets: - - Cash and cash equivalents $ 444,497 $ 188,811 Accounts receivable 142,079 141,968 Inventory 471,271 455,880 Prepaids and other current assets 342,230 271,854 -------------- ------------- Total current assets 1,400,077 1,058,513 Property and equipment, net 14,956,121 12,529,913 Other assets 371,546 353,595 Intangible assets, net 5,160,703 5,202,085 -------------- -------------- Total assets $ 21,888,447 $ 19,144,106 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY: Accounts payable $ 2,196,513 $ 1,114,757 Accrued expenses 1,895,724 1,710,984 Current portion of notes payable to related parties 357,321 350,341 Current portion of long-term debt 280,152 284,919 Current portion of obligations under capital lease 125,270 146,942 -------------- -------------- Total current liabilities 4,854,980 3,607,943 Notes payable to related parties 1,276,908 1,368,807 Long-term debt 2,006,864 687,331 Obligations under capital lease 8,342 22,574 Other liabilities 212,702 109,131 -------------- -------------- Total liabilities 8,359,796 5,795,786 -------------- -------------- Commitments and contingencies Minority interest in partnership 256,582 249,159 Shareholders' equity: Preferred stock, 5,000,000 shares authorized, none issued or outstanding Common stock, no par value, 60,000,000 shares authorized and 7,658,321 shares issued and outstanding as of March 31, 2000 and December 31, 1999 16,076,132 16,076,132 Capital surplus 975,280 975,280 Accumulated deficit (3,779,343) (3,952,251) -------------- -------------- Total shareholders' equity 13,272,069 13,099,161 -------------- -------------- Total liabilities and shareholders' equity $ 21,888,447 $ 19,144,106 ============== ============== The accompanying notes are an integral part of these consolidated financial statements. </TABLE> 1
<TABLE> <CAPTION> CHICAGO PIZZA & BREWERY, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, ------------------------------------ 2000 1999 ------------ ------------ <S> <C> <C> Revenues . . . . . . . . . . . . . . . . . . . . . $10,178,645 $ 8,092,403 Cost of sales. . . . . . . . . . . . . . . . . . . 2,801,755 2,224,396 Gross profit . . . . . . . . . . . . . . . 7,376,890 5,868,007 Costs and expenses: Labor and benefits . . . . . . . . . . . . . . . . 3,687,975 2,977,630 Occupancy. . . . . . . . . . . . . . . . . . . . . 833,937 709,223 Operating expenses . . . . . . . . . . . . . . . . 1,107,196 907,763 Preopening costs . . . . . . . . . . . . . . . . . 146,109 195,202 General and administrative . . . . . . . . . . . . 913,049 663,694 Depreciation and amortization. . . . . . . . . . . 425,881 354,205 ------------ ------------ Total cost and expenses. . . . . . . . . . . . . . 7,114,147 5,807,717 ------------ ------------ Income from operations . . . . . . . . . . 262,743 60,290 Other income (expense): Interest expense . . . . . . . . . . . . . . . . . (78,179) (67,258) Interest income. . . . . . . . . . . . . . . . . . 3,253 9,927 Other income (expense), net. . . . . . . . . . . . (1,162) 768 ------------ ------------ Total other income (expense) . . . . . . . (76,088) (56,563) ------------ ------------ Income before minority interest, income taxes and change in accounting . . . . . . . . . . . . 186,655 3,727 Minority interest in partnership . . . . . . . . . (7,423) (9,657) ------------ ------------ Income (loss) before income taxes and change in accounting. . . . . . . 179,232 (5,930) Income tax expense . . . . . . . . . . . . . . . (6,323) (1,615) ------------ ------------ Income (loss) before change in accounting. . . . . . . . . . . . 172,909 (7,545) Cumulative effect of change in accounting. . . . . (106,175) ------------ ------------ Net income (loss). . . . . . . . . . . . . $ 172,909 ($ 113,720) ============ ============ Net income (loss) per share: Basic and dilutive: Income (loss) before cumulative effect of change in accounting . . . . . . . . . . . . . $ 0.02 ($ 0.00) Cumulative effect of change in accounting. . . . . ($ 0.02) ------------ ------------ Net income (loss). . . . . . . . . . . . . $ 0.02 ($ 0.02) ============ ============ Weighted average number of shares outstanding: Basic. . . . . . . . . . . . . . . . . . . 7,658,321 6,824,988 ============ ============ Dilutive . . . . . . . . . . . . . . . . . 7,665,388 6,824,988 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. </TABLE> 2
<TABLE> <CAPTION> CHICAGO PIZZA & BREWERY, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, ------------------------------------ 2000 1999 ------------ ------------ <S> <C> <C> Cash flows provided by (used in) operating activities: Net income (loss). . . . . . . . . . . . . . . . . . . . . . . $ 172,909 ($ 113,720) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization. . . . . . . . . . . . . . . . . 425,881 354,205 Change in accounting principle . . . . . . . . . . . . . . . . 106,175 Minority interest in partnership . . . . . . . . . . . . . . . 7,423 9,657 Loss on sale of assets . . . . . . . . . . . . . . . . . . . . 1,000 Changes in assets and liabilities: Accounts receivable. . . . . . . . . . . . . . . . . . . . (111) 51,265 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . (15,391) (22,934) Prepaids and other current assets. . . . . . . . . . . . . (70,376) (125,825) Other assets . . . . . . . . . . . . . . . . . . . . . . . (19,340) (3,558) Accounts payable . . . . . . . . . . . . . . . . . . . . . 1,081,756 242,465 Accrued expenses . . . . . . . . . . . . . . . . . . . . . 184,740 139,387 Other liabilities. . . . . . . . . . . . . . . . . . . . . 103,571 (3,242) ------------ ------------ Net cash provided by operating activities . . . . . . . 1,872,062 633,875 ------------ ------------ Cash flows used in investing activities: Purchases of equipment . . . . . . . . . . . . . . . . . . . . (2,810,319) (1,220,770) ------------ ------------ Cash flows provided by (used in) financing activities: Proceeds from sale of common stock . . . . . . . . . . . . . . 1,000,000 Loan proceeds. . . . . . . . . . . . . . . . . . . . . . . . . 1,390,500 699,604 Payments on related party debt . . . . . . . . . . . . . . . . (84,919) (88,439) Payments on debt . . . . . . . . . . . . . . . . . . . . . . . (75,734) (69,786) Capital lease payments . . . . . . . . . . . . . . . . . . . . (35,904) (30,067) ------------ ------------ Net cash provided by financing activities . . . . . . . 1,193,943 1,511,312 ------------ ------------ Net increase in cash and cash equivalents . . . . . . . 255,686 924,417 Cash and cash equivalents, beginning of period . . . . . . . . 188,811 1,490,705 ------------ ------------ Cash and cash equivalents, end of period . . . . . . . . . . . $ 444,497 $ 2,415,122 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. </TABLE> 3
CHICAGO PIZZA & BREWERY, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Chicago Pizza & Brewery, Inc. and its subsidiaries (the "Company") for the three months ended March 31, 2000 and 1999 have been prepared in accordance with generally accepted accounting principles, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These financial statements have not been audited by independent accountants, but include all adjustments (consisting of normal recurring adjustments) which are, in Management's opinion, necessary for a fair presentation of the financial condition, results of operations and cash flows for such periods. However, these results are not necessarily indicative of results for any other interim period or for the full year. Certain information and footnote disclosures normally included in financial statements in accordance with generally accepted accounting principles have been omitted pursuant to requirements of the Securities and Exchange Commission (SEC). A description of the Company's accounting policies and other financial information is included in the audited consolidated financial statements as filed with the SEC on Form 10-K for the year ended December 31, 1999. Management believes that the disclosures included in the accompanying interim financial statements and footnotes are adequate to make the information not misleading, but should be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-K. The accompanying consolidated balance sheet as of December 31, 1999 has been derived from the audited financial statements. ORGANIZATION Chicago Pizza & Brewery, Inc. (the "Company" or "BJ's") owns and operates 27 restaurants located in Southern California, Oregon, Washington and Colorado and an interest in one restaurant in Lahaina, Maui. Each of these restaurants is operated as either a BJ's Pizza, Grill & Brewery, 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 current focus is on the development of the larger footprint BJ's restaurants in high profile locations with favorable demographics. The Company opened a BJ's Pizza & Grill in Valencia, California in March 2000. During the first quarter 2000, the Company acquired a restaurant location in West Covina, California and anticipates opening a BJ's Pizza, Grill & Brewery in early summer 2000. The Company also signed during the first quarter 2000 a sublease to develop a BJ's Pizza & Grill in Burbank, California and acquired selected assets, including the liquor license, of the previous restaurant at this location. The expected opening of this BJ's Pizza & Grill is early summer 2000. The Company entered into a new lease for an existing restaurant location in Huntington Beach, California and anticipates opening a BJ's Pizza & Grill in mid-summer 2000. The Company is currently in negotiations for additional sites in California, Arizona and Washington. RECENTLY ISSUED ACCOUNTING STANDARDS As had been the practice of many restaurant entities, the Company previously deferred its restaurant preopening costs and amortized them over the twelve-month period following the opening of each new restaurant. In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public 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 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. 4
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. DIVIDEND POLICY The Company has not paid any dividends since its inception and has currently not allocated any funds for the payment of dividends. Rather, it is the current policy of the Company to retain earnings, if any, for expansion of its operations, remodeling of existing restaurants and other general corporate purposes and to not pay any cash dividends in the foreseeable future. Should the Company decide to pay dividends in the future, such payments would be at the discretion of the Board of Directors. LONG-TERM CONSTRUCTION LOAN In February 2000, the Company entered into an agreement with a bank for a collateralized term loan for a maximum amount of $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 at the Company's preference, 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. A net-profit recapture is to be applied to the final year of the term loan if the Company's profits for the year ending December 31, 2000 exceed $2,000,000. Net profit in excess of this amount is to be applied to the debt outstanding at that time under this loan agreement. At March 31, 2000, the outstanding principal balance under this borrowing arrangement was $1,390,500. The weighted average interest rate from the date of initial drawdown through March 31, 2000 was 9.60 percent. The Company paid a one percent loan fee. In conjunction with the loan agreement, the Company granted a security interest to the bank in all of the Company's inventory, accounts, equipment and general intangibles, whether now owned or hereinafter acquired. Also included under this security agreement are all proceeds, including insurance proceeds, from the sale, destruction, loss or other disposition of the collateralized property. The security interest extends to all records and data relating to the secured property as well as the computer software required to maintain or process any such records and data. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Unaudited Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-Q. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-Q. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, without limitation, those factors discussed herein and in the Company's annual report as reported on Form 10-K dated December 31, 1999 including, without limitation: (i) the Company's ability to manage growth and conversions, (ii) construction delays, (iii) marketing and other limitations as a result of the Company's historic concentration in Southern California and current concentration in the Northwest, (iv) restaurant and brewery industry competition, (v) impact of certain brewery business considerations, including without limitation, dependence upon suppliers and related hazards, (vi) increase in food costs and wages, including without limitation the recent increase in minimum wage, (vii) consumer trends, (viii) potential uninsured losses and liabilities, (ix) trademark and servicemark risks, and (x) other general economic and regulatory conditions and requirements. 5
RESULTS OF OPERATIONS Three-Month Period Ended March 31, 2000 Compared to Three-Month Period Ended March 31, 1999. Revenues. Total revenues for the three months ended March 31, 2000 increased to $10,179,000 from $8,092,000 for the comparable period in 1999, an increase of $2,087,000 or 25.8%. 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 an increase in revenues of $1,976,000 during the first quarter of 2000. An increase in the BJ's restaurants same store sales for the comparable periods of $523,000, or 9.0%. 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 November 1999. The increase in revenues resulting from the above factors was partially offset by: The closing 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 of these locations in mid-year of 1999 reduced first quarter of 2000 revenues by $354,000 when compared with 1999, when they were open the entire three-month period. A decrease in the Pietro's restaurants same store sales for the comparable periods of $50,000, or 4.0%. Cost of Sales. Cost of food, beverages and paper (cost of sales) for the restaurants increased to $2,802,000 for the three months ended March 31, 2000 from $2,224,000 for the comparable period of 1999, an increase of $578,000 or 26.0%. This increase was in line with the 25.8% increase in revenues discussed above. As a percentage of sales, cost of sales was stable at 27.5% for both the 2000 and 1999 three-month periods. The Company's same-store cost of sales, as a percentage of sales, improved to 27.3% during the three months ended March 31, 2000 from 28.3% for the comparable period of 1999. The improvement in same store cost of sales was partially offset by the higher food costs associated with the opening of the new restaurants in Woodland Hills and La Mesa, California. As a percentage of their revenues, these new stores collectively incurred food costs of 29.0% for the first quarter of 2000. A higher cost of sales percentage in the early months of operations is in line with the Company's experience when opening new restaurants. Labor. Labor costs for the restaurants increased to $3,688,000 in the three months ended March 31, 2000 from $2,978,000 for the comparable period in 1999, an increase of $710,000 or 23.8%. As a percentage of revenues, labor costs decreased to 36.2% in the 2000 period from 36.8% in the 1999 period. The overall increase is attributable to the opening of the new California restaurants; labor costs at these three restaurants totaled $984,000. The decrease as a percentage of sales was primarily due to increased sales and more efficient staffing of the Arcadia, California restaurant, which was opened in January 1999. The Company intentionally overstaffs new restaurants during the startup phase of operations to allow for newly trained employees, an initial higher customer count and to ensure a good dining experience by its customers. Same-store labor costs increased $187,000, or 7.5%, to $2,680,000 for the quarter ended March 31, 2000 from $2,493,000 for the comparable period of 1999. As a percentage of revenues same-store labor costs for the three months of 1999 increased to 35.7% from 35.5% for the comparable period of 1999. Management feels the increase in same-store labor costs as a percentage of revenues is due primarily to a 4.0% decrease in sales at the northwest Pietro's restaurants. Occupancy. Occupancy costs increased to $834,000 during the three months ended March 31, 2000 from $709,000 during the comparable period in 1999, an increase of $125,000, or 17.6%. As a percentage of revenues, occupancy costs decreased to 8.2% in the 2000 period from 8.8% in the 1999 period. The primary reason for the percentage decrease in occupancy costs relative to revenues was the increase in comparable store sales. Additionally, the two Northwest stores closed during the second quarter of 1999 experienced a combined occupancy cost percentage of 14.2% for the three-month period ended March 31, 1999. 6
Operating Expenses. Operating expenses increased to $1,107,000 during the three months ended March 31, 2000 from $908,000 during the comparable period in 1999, an increase of $199,000 or 21.9%. As a percentage of revenues, operating expenses decreased to 10.9% in the 2000 period from 11.2% in the 1999 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 $913,000 during the three months ended March 31, 2000 from $664,000 during the comparable period in 1999, an increase of $249,000 or 37.5%. As a percentage of revenues general and administrative expenses increased to 9.0% from 8.2% of the comparable period of 1999. 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. 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 three month period ending March 31, 2000, the Company incurred costs of $146,000 due to preparations for the opening of its new restaurant in Valencia, California and the restaurants being developed in West Covina and Burbank, California. 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 increased to $426,000 during the three month period ended March 31, 2000 from $354,000 during the comparable period in 1999, an increase of $72,000 or 20.3%. This increase was primarily due to the addition of restaurant equipment, furniture and improvements and brewery equipment totaling $4,458,000 for the restaurants opened in Arcadia, Woodland Hills and La Mesa, California. Interest Expense. Interest expense increased to $78,000 during the quarter ended March 31, 2000 from $67,000 during the comparable period in 1999, an increase of $11,000 or 16.4%. This increase was primarily due to the additional debt incurred by the Company to finance equipment for the new restaurants in Arcadia, Woodland Hills and Valencia, California, as well as the restaurants being constructed in West Covina, Burbank and Huntington Beach, California. Interest expense related to these projects was $31,000 during the first quarter of 2000; this amount was partially offset by reduced interest expense on older debt due to normal principal amortization. LIQUIDITY AND CAPITAL RESOURCES The Company's operating activities, as detailed in the Consolidated Statement of Cash Flows, provided $1,872,000 net cash during the three months ended March 31, 2000, a $1,238,000, or 195.3%, increase over the $634,000 generated in the comparable period of the prior year. Since the completion of the Company's initial public offering in October of 1996, the Company has invested in restaurant development. Capital expenditures for the acquisition of restaurant and brewery equipment and leasehold improvements to develop new restaurants totaled $2,810,000 and $1,221,000 for the three months ended March 31, 2000 and 1999, respectively, an increase of $1,589,000, or 130.1%. These expenditures were required to develop the new restaurant in Valencia, California, as well the development of the three restaurants currently under construction and scheduled for various opening dates through mid-summer 2000. Debt reduction, including the principal portion of capitalized lease payments, for the quarter ended March 31, 2000 and 1999 totaled $197,000 and $188,000, respectively. 7
The Company intends to continue the development of additional restaurants. Management believes that the funds available under the existing credit facilities described previously 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risk from changes in commodity prices, since many of the food products purchased by the Company are affected by commodity pricing, and, therefore, are vulnerable to unpredictable price fluctuations. Over the recent past, the Company has experienced price volatility in such products as cheese and produce. The Company buys a significant portion of its product from a distributor, and has only minimal forward purchasing agreements with other suppliers. Material changes in commodity prices could negatively affect the Company's margins in the short-term. Longer-term changes in commodity pricing would affect most of the restaurant industry as well the Company. The Company most likely would be able to mitigate increased commodity prices by increasing menu prices, thereby passing them through to consumers, and by varying its menu product mix. However, competitive circumstances could limit menu pricing and/or mix strategies, and, in those circumstances, commodity price fluctuations would negatively impact the Company's margins. Management believes, however, that were such circumstances to occur, they would not materially impact the Company's results of operations. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Restaurants such as those operated by the Company are subject to 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. 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. 8
A settlement agreement has been offered by the landlord, which contemplates a one-time payment by the Company to the landlord of $40,000 and other minor considerations. If a settlement agreement is not completed, the case may proceed to trial. The Company has not made an accrual for any possible settlement amount and does not believe the lawsuit will have a material adverse effect on its consolidated financial position or consolidated results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Amended and Restated Articles of Incorporation of the Company, as amended incorporated by reference to the Company's Registration Statement on Form SB-2, effective October 8, 1996 (SEC File No. 333-5182-LA), referred to as the "Registration Statement". 3.2 Bylaws of the Company, as amended, incorporated by reference to Exhibit of Form 10-Q dated March 31, 2000. 4.1 Specimen Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 of the Registration Statement). 4.2 Warrant Agreement (incorporated by reference to Exhibit 4.2 of the Registration Statement). 4.3 Specimen Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.3 of the Registration Statement). 4.4 Form of Representative's Warrant (incorporated by reference to Exhibit 4.4. of the Registration Statement).
10.1 Assignment and Assumption Agreement of Real Estate Lease, dated March 30, 2000 between Chicago Pizza & Brewery, Inc., C & P Properties #1 and Performance Restaurant Group, Inc. for a BJ's Pizza & Grill restaurant in Burbank, California. 10.2 Loan Agreement, Security Agreement and Promissory Note between Chicago Pizza & Brewery, Inc. and Washington Mutual Bank dba WM Business Bank for a secured $4,000,000 credit facility for restaurant development. 9
27.1 Financial Data Schedule (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the quarter ended March 31, 2000. 10
SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHICAGO PIZZA & BREWERY, INC. (Registrant) May 11, 2000 By: /s/ PAUL A. MOTENKO -------------------- Paul A. Motenko Co-Chief Executive Officer, Vice President, Secretary and Co-Chairman of the Board of Directors By: /s/ JEREMIAH J. HENNESSY ------------------------- Jeremiah J. Hennessy Co-Chief Executive Officer and Co- Chairman of the Board of Directors By: /s/ ERNEST T. KLINGER ---------------------- Ernest T. Klinger President, Chief Financial Officer and Co-Chairman of the Board of Directors