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