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 SEPTEMBER 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO ______ COMMISSION FILE NUMBER 0-21423 CHICAGO PIZZA & BREWERY, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 33-0485615 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 26131 MARGUERITE PARKWAY SUITE A MISSION VIEJO, CALIFORNIA 92692 (Address and zip code of Registrant's principal executive offices) (949) 367-8616 (Registrants telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO. --- As of October 25, 1999, 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 - September 30, 1999 (Unaudited) and December 31, 1998 1 Unaudited Consolidated Statements of Operations - Three Months Ended and Nine Months Ended September 30, 1999 and September 30, 1998 2 Unaudited Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1999 and September 30, 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 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings 11 Item 2. Changes in Securities 11 Item 3. Defaults Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES
PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL INFORMATION <TABLE> <CAPTION> CHICAGO PIZZA & BREWERY, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31, 1999 1998 (UNAUDITED) --------------- -------------- ASSETS: <S> <C> <C> Current assets: Cash and cash equivalents $ 1,882,686 $ 1,490,705 Accounts receivable 114,302 175,712 Inventory 389,907 345,874 Prepaid and other current assets 192,419 295,176 --------------- -------------- Total current assets 2,579,314 2,307,467 Property and equipment, net 11,318,983 9,567,604 Other assets 347,521 352,916 Intangible assets, net 5,243,467 5,366,722 --------------- -------------- Total assets $ 19,489,285 $ 17,594,709 =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 1,208,157 $ 1,130,691 Accrued expenses 1,541,002 1,286,539 Current portion of notes payable to related parties 336,187 339,727 Current portion of long-term debt 356,483 210,367 Current portion of obligations under capital leases 139,854 135,809 --------------- -------------- Total current liabilities 3,581,683 3,103,133 Notes payable to related parties 1,465,942 1,718,954 Long-term debt 690,681 355,313 Obligations under capital leases 66,618 167,219 Other liabilities 112,373 122,099 --------------- -------------- Total liabilities 5,917,297 5,466,718 --------------- -------------- Minority interest in partnership 270,344 235,040 --------------- -------------- 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 September 30, 1999 and December 31, 1998, respectively. 16,076,132 15,039,646 Capital surplus 1,007,171 1,196,029 Accumulated deficit (3,781,659) (4,342,724) --------------- -------------- Total shareholders' equity 13,301,644 11,892,951 --------------- -------------- Total liabilities and shareholders' equity $ 19,489,285 $ 17,594,709 =============== ============== <FN> The accompanying notes are an integral part of these consolidated financial statements. </TABLE>
<TABLE> <CAPTION> CHICAGO PIZZA & BREWERY, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- -------------------------- 1999 1998 1999 1998 ------------ ----------- ------------ ------------ <S> <C> <C> <C> <C> Revenues $10,039,105 $8,157,975 $28,078,790 $22,871,430 Cost of sales 2,861,960 2,231,935 7,876,593 6,402,936 ------------ ----------- ------------ ------------ Gross profit 7,177,145 5,926,040 20,202,197 16,468,494 Costs and expenses: Labor and benefits 3,543,146 2,882,977 10,050,707 8,175,663 Occupancy 775,823 666,088 2,236,200 1,898,733 Operating expenses 1,106,134 936,988 3,032,259 2,676,561 Preopening costs 43,439 - 365,352 - Restaurant closure expenses - - 169,071 - General and administrative 872,249 661,084 2,288,017 1,867,828 Depreciation and amortization 392,139 423,223 1,135,894 1,346,363 ------------ ----------- ------------ ------------ Total cost and expenses 6,732,930 5,570,360 19,277,500 15,965,148 ------------ ----------- ------------ ------------ Income from operations 444,215 355,680 924,697 503,346 Other income (expense): Interest expense, net (64,615) (50,064) (187,805) (157,890) Other income (expense), net 285 1,464 9,991 (4,317) ------------ ----------- ------------ ------------ Total other expense (64,330) (48,600) (177,814) (162,207) ------------ ----------- ------------ ------------ Income before minority interest, income taxes and change in accounting 379,885 307,080 746,883 341,139 Minority interest in partnership (33,773) (21,929) (53,832) (55,527) ------------ ----------- ------------ ------------ Income (loss) before income taxes and change change in accounting 346,112 285,151 693,051 285,612 Income tax expense (15,236) - (25,811) (1,600) ------------ ----------- ------------ ------------ Income (loss) before change in accounting 330,876 285,151 667,240 284,012 Cumulative effect of change in accounting - - (106,175) - ------------ ----------- ------------ ------------ Net income $ 330,876 $ 285,151 $ 561,065 $ 284,012 ============ =========== ============ ============ Net income per share: Basic and dilutive: Income before cumulative effect of change in accounting $0.04 $0.04 $0.09 $0.04 Cumulative effect of change in accounting - - ($0.01) - ------------ ----------- ------------ ------------ Net income $0.04 $0.04 $0.08 $0.04 ============ =========== ============ ============ Weighted average number of shares outstanding: Basic 7,658,321 6,408,321 7,328,651 6,408,321 ============ =========== ============ ============ Dilutive 7,669,453 6,450,384 7,338,419 6,450,384 ============ =========== ============ ============ <FN> The accompanying notes are an integral part of these consolidated financial statements. </TABLE>
<TABLE> <CAPTION> CHICAGO PIZZA & BREWERY, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1999 1998 ------------ ----------- <S> <C> <C> Cash flows provided by (used in) operating activities: Net income $ 561,065 $ 284,012 Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation and amortization 1,135,894 1,346,363 Change in accounting principle 106,175 - Minority interest in partnership 53,832 55,527 Loss on disposal of assets 136,925 - Changes in assets and liabilities: Accounts receivable 61,410 (10,041) Inventory (44,033) (14,468) Prepaid and other current assets (156,018) 90,347 Other assets (1,553) (435,970) Accounts payable 77,466 (164,850) Accrued expenses 254,463 92,927 Other liabilities (9,726) (9,732) ------------ ----------- Net cash provided by operating activities 2,175,900 1,234,115 ------------ ----------- Cash flows used in investing activities: Purchases of equipment (2,913,776) (938,352) Proceeds from sale of restaurant equipment 48,867 7,000 ----------- ----------- Net cash used in investing activities (2,864,909) (931,352) ------------ ----------- Cash flows provided by (used in) financing activities: Proceeds from sale of common stock 1,000,000 - Repurchase of redeemable warrants (28,858) - Equipment loan proceeds 699,604 - Payments on related party debt (256,552) (249,612) Payments on debt (218,120) (227,541) Capital lease payments (96,556) (90,599) Distribution to minority interest partners (18,528) (25,476) ------------ ----------- Net cash provided by (used in) financing activities 1,080,990 (593,228) ------------ ----------- Net increase (decrease) in cash and cash equivalents 391,981 (290,465) Cash and cash equivalents, beginning of period 1,490,705 1,705,349 ------------ ----------- Cash and cash equivalents, end of period $ 1,882,686 $1,414,884 ============ =========== <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 and nine months ended September 30, 1999 and 1998 have been prepared in accordance with generally accepted accounting principles, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These financial statements have not been audited by independent accountants, but include all adjustments (consisting of normal recurring adjustments) which are, in Management's opinion, necessary for a fair presentation of the financial condition, results of operations and cash flows for such periods. However, these results are not necessarily indicative of results for any other interim period or for the full year. Certain information and footnote disclosures normally included in financial statements in accordance with generally accepted accounting principles have been omitted pursuant to requirements of the Securities and Exchange Commission (SEC). A description of the Company's accounting policies and other financial information is included in the audited consolidated financial statements as filed with the SEC on Form 10-KSB for the year ended December 31, 1998. Management believes that the disclosures included in the accompanying interim financial statements and footnotes are adequate to make the information not misleading, but should be read in conjunction with the consolidated financial statements and notes thereto included in the Form 10-KSB. The accompanying consolidated balance sheet as of December 31, 1998 has been derived from the audited financial statements. ORGANIZATION Chicago Pizza & Brewery, Inc. (the "Company" or "BJ's") owns and operates, as of September 30, 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 six BJ's Pizza, Grill & Brewery restaurants feature in-house brewing facilities where BJ's handcrafted beers are produced. The one BJ's Pizza & Grill - OTC restaurant has a limited menu and service level. The eight Pietro's Pizza restaurants serve primarily Pietro's thin-crust pizza in a very casual, counter-service environment. During the 3rd quarter of 1999, the Company signed a sublease to operate a BJ's restaurant in La Mesa, California and acquired selected assets, including the liquor license, of the previous restaurant at this location. The rebuilt restaurant was opened as a BJ's Pizza & Grill on November 8,1999. The Company has also signed a lease for a BJ's Pizza & Grill in Valencia, California; the anticipated opening of this new facility is early 2000. The Company is in escrow to acquire a restaurant location in West Covina, California. The closing of escrow and acquisition of this location is contingent on the satisfaction of certain contingencies. Pending the resolution of these contingencies, the Company anticipates opening a BJ's Pizza, Grill & Brewery at this location late in the second quarter of 2000. PER SHARE INFORMATION SFAS 128, "Earnings Per Share", was adopted in the fourth quarter of 1997. 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. 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 new accounting standard will accelerate the Company's recognition of costs associated with the opening of new restaurants but will benefit the post-opening results of new restaurants. The Company's total deferred preopening costs were $106,175 at January 1, 1999. As provided by SOP 98-5, the Company wrote off the balance of deferred preopening costs during the first quarter of 1999. Other recently issued standards of the FASB are not expected to affect the Company, as conditions to which those standards apply are absent. DIVIDEND POLICY The Company has not paid any dividends since its inception and has currently not allocated any funds for the payment of dividends. Rather, it is the current policy of the Company to retain earnings, if any, for expansion of its operations, remodeling of existing restaurants and other general corporate purposes and to not pay any cash dividends in the foreseeable future. Should the Company decide to pay dividends in the future, such payments would be at the discretion of the Board of Directors. LONG-TERM EQUIPMENT LOAN In January 1999, the Company completed an agreement with a lender to provide equipment financing up to $1,000,000 for equipment and furnishings required in the Arcadia, Woodland Hills and other restaurant developments. The note has a term of eighty-four months, and the interest rate is fixed at the time of funding; to date funds provided for equipment financing under this facility have been at effective interest rates ranging from 11.63% to 13.68%. Amounts borrowed are collateralized by the financed equipment and additional equipment and property owned by the Company up to the amount of the loan balance. At September 30, 1999, the outstanding principal balance under the borrowing agreement was $654,312. PRIVATE PLACEMENT In March 1999, the Company sold, through a private placement, 1,250,000 shares of its common stock to ASSI, Inc. (the "ASSI Transaction") in exchange for a cash payment of $1,000,000, the termination of two consulting agreements, cancellation of 3,200,000 of the Company's redeemable warrants held by ASSI, Inc. and the agreement by ASSI, Inc. and its sole stockholder to finance future Company development projects subject to pre-commitment approval. The Company also has the right of first refusal to repurchase the shares of its common stock; in the event the shareholder decides to sell such shares. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Unaudited Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-Q. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-Q. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, without limitation, those factors discussed herein and in the Company's annual report as reported on Form 10-KSB dated December 31, 1998 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 September 30, 1999 Compared to Three-Month Period Ended September 30, 1998. Revenues. Total revenues for the three-month period ended September 30, 1999 increased to $10,039,000 from $8,158,000 for the comparable period in 1998, an increase of $1,881,000 or 23.1%. The increase is primarily the result of: The opening of the Arcadia, California and Woodland Hills, California restaurants on January 21, 1999 and April 10, 1999, respectively. These new restaurants generated revenues of $1,949,000 during the third quarter of 1999. An increase in same store sales at the BJ's restaurants that were open both periods of $397,000 or 6.1%. Management believes this increase was due to an increase in customer counts and more effective suggestive selling techniques at the restaurants. The overall increase in revenues for the third quarter of 1999 when compared to the same quarter of the prior year was achieved despite the closing of the BJ's restaurant in The Dalles, Oregon in May 1999 and a Pietro's restaurant in Eugene, Oregon in June 1999. Sales at the nine remaining Pietro's restaurants in Oregon and Washington were essentially flat, when comparing third quarter 1999 with third quarter 1998. Cost of Sales. Cost of food, beverages and paper (cost of sales) for the restaurants increased to $2,862,000 for the three month period ended September 30, 1999 from $2,232,000 for the comparable period in 1998, an increase of $630,000 or 28.2%. As a percentage of revenues, cost of sales increased to 28.5% during the 1999 period from 27.4% in the 1998 period. The increase in cost of sales as a percentage of revenues was primarily due to the opening of the Arcadia, California and Woodland Hills, California restaurants. Cost of sales for these new restaurants was 30.8 % as a percentage of their revenues. This higher than normal cost of sales was anticipated based on previous experience when opening new restaurants. Labor. Labor costs for the restaurants increased to $3,543,000 in the three-month period ended September 30, 1999 from $2,883,000 for the comparable period in 1998, an increase of $660,000 or 22.9%. As a percentage of revenues, labor costs were unchanged at 35.3% for both the 1999 and 1998 three-month periods. This control of labor costs was achieved despite the planned initial overstaffing of the Arcadia, California restaurant opened in January 1999 and the Woodland, Hills, California restaurant opened in April 1999. As a percentage of revenues, the combined labor costs for these new stores were 39.9% for the third quarter. Occupancy. Occupancy costs increased to $776,000 during the three-month period ended September 30, 1999 from $666,000 during the comparable period in 1998, an increase of $110,000 or 16.5%. Occupancy costs for the new Arcadia, California and Woodland Hills, California restaurants totaled $126,000. This amount was partially offset by the closures of the BJ's restaurant in The Dalles, Oregon and one of the Pietro's restaurants in Eugene, Oregon during the second quarter of 1999. The balance of the increase was due to annual lease escalations and higher revenues at restaurants with lease provisions requiring rental payments based on a percentage of sales. As a percentage of revenues, occupancy costs for all stores decreased to 7.7% in the 1999 period from 8.2% in the 1998 period. Operating Expenses. Operating expenses increased to $1,106,000 during the three-month period ended September 30, 1999 from $937,000 during the comparable period in 1998, an increase of $169,000 or 18.0%. However, as a percentage of revenues, operating expenses decreased slightly to 11.0% in the 1999 period from 11.5% in the 1998 period. The primary reasons for the decrease in operating expenses as a percentage of revenues were (i) the increase in same store sales, (ii) an increased focus on operating the restaurants more efficiently and, (iii) the implementation of improved expense monitoring systems at the BJ's restaurants in Southern California and Oregon. Operating expenses include restaurant-level operating costs, the major components of which include marketing, repairs and maintenance, supplies and utilities. Preopening Costs. During the first quarter of 1999, the company adopted Statement of Position 98-5 (SOP 98-5), Accounting for the Costs of Start-Up Activities, which requires all costs of start-up activities that are not otherwise capitalizable as long-lived assets to be expensed as incurred. The Company previously deferred its restaurant preopening costs and amortized them over the twelve-month period following the opening of each new restaurant. This new accounting standard accelerates the Company's recognition of costs associated with the opening of new restaurants. the Company wrote off $106,000 as a cumulative effect of change in accounting principle in the first quarter of 1999. During the three-month period ended September 30, 1999, the Company incurred costs of $43,000, primarily due to preparations for the opening of its new restaurant in La Mesa, 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 $872,000 during the three-month period ended September 30, 1999 from $661,000 during the comparable period in 1998, an increase of $211,000 or 31.9%. As a percentage of revenues, general and administrative expenses increased to 8.7% in 1999 from 8.1% during the comparable period of 1998. The increase in general and administrative expenses was primarily due to increases in overhead in anticipation of future expansion and costs incurred in locating and evaluating sites for future restaurants. Depreciation and Amortization. Depreciation and amortization decreased to $392,000 during the three-month period ended September 30, 1999 from $423,000 during the comparable period in 1998, a decrease of $31,000 or 7.3%. The decrease was primarily due to the change in accounting principle from the deferral and amortization of preopening costs to the expensing of those costs as incurred. Preopening costs amortized during the three-month period ending September 30, 1998 totaled $92,000. This amount was partially offset by additional depreciation relating to the opening of the Arcadia, California restaurant in January 1999 and the Woodland Hills, California restaurant in April 1999. Interest Expense. Interest expense, net of interest income, increased to $65,000 during the three-month period ended September 30, 1999 from $50,000 during the comparable period in 1998, an increase of $15,000 or 30.0%. 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 $20,000 during the third quarter; this amount was partially offset by the normal amortization of older debt. Income Tax Expense. The Company historically experienced net losses through 1997. For 1998 the Company had net income of $85,000. At the end of 1998, the Company had federal and California net operating loss carryovers of approximately $4,770,000 and $1,636,000, respectively. While the net operating loss carryovers should be adequate to offset any regular taxable income for 1999, the provision for estimated alternative minimum tax expense made during the second quarter was evaluated and increased to $15,600 at the end of the third quarter 1999. Nine-Month Period Ended September 30, 1999 Compared to Nine-Month Period Ended September 30, 1998. Revenues. Total revenues for the nine-month period ended September 30, 1999 increased to $28,079,000 from $22,871,000 for the comparable period in 1998, an increase of $5,208,000 or 22.8%. The increase is primarily the result of: The opening of the Arcadia, California and Woodland Hills, California restaurants on January 21, 1999 and April 10, 1999, respectively. These new restaurants generated revenues of $4,661,000 during the first nine months of 1999. An increase in same store sales at the BJ's restaurants that were open both periods of $1,240,000 or 7.0%. Management believes this increase was due to (i) an increase in customer counts, (ii) an increase in check averages produced by a price increase implemented in late May 1998 and (iii) the implementation of more effective suggestive selling techniques at the restaurants. The overall increase in revenues was achieved despite the closing of the BJ's restaurant in The Dalles, Oregon in May 1999 and two Pietro's restaurants in Oregon, one in Eugene in June 1999 and a delivery only location in Woodstock in April 1998. Sales at the nine remaining Pietro's restaurants in Oregon and Washington increased slightly during the nine-month period ended September 30, 1999, when compared with the same period of the prior year. Cost of Sales. Cost of food, beverages and paper (cost of sales) for the restaurants increased to $7,877,000 for the nine month period ended September 30, 1999 from $6,403,000 for the comparable period in 1998, an increase of $1,474,000 or 23.0%. Of the increase, $1,421,000 was attributable to the new stores at Arcadia, California and Woodland Hills, California. As a percentage of revenues, overall cost of sales at 28.1% during the 1999 period was only slightly higher than the 28.0% of the 1998 period. Labor. Labor costs for the restaurants increased to $10,051,000 in the nine-month period ended September 30, 1999 from $8,176,000 for the comparable period in 1998, an increase of $1,875,000 or 22.9%. Contributing to the increase was the planned initial overstaffing of the Arcadia, California and Woodland Hills, California restaurants which opened in January 1999 and April 1999, respectively. Labor costs at these two restaurants totaled $1,885,000 from their respective dates of opening to September 30, 1999. Despite the initial staffing levels at the new stores, overall labor costs, as a percentage of revenues, remained stable, increasing slightly to 35.8% in the 1999 period from 35.7% in the 1998 period. Occupancy. Occupancy costs increased to $2,236,000 during the nine-month period ended September 30, 1999 from $1,899,000 during the comparable period in 1998, an increase of $337,000 or 17.7%. The new stores in Arcadia, California and Woodland Hills, California accounted for $274,000 of the increase in occupancy costs. As a percentage of revenues, occupancy costs decreased to 8.0% in the 1999 period from 8.3% in the 1998 period. The primary reasons for the decrease in occupancy costs relative to revenues was annual lease escalations offset by increases in comparable store sales, and higher revenues at restaurants with lease provisions requiring rental payments based on a percentage of sales. Operating Expenses. Operating expenses increased to $3,032,000 during the nine-month period ended September 30, 1999 from $2,677,000 during the comparable period in 1998, an increase of $355,000 or 13.3%. However, as a percentage of revenues, operating expenses decreased to 10.8% in the 1999 period from 11.7% 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, (ii) an increased focus on operating the restaurants more efficiently and, (iii) the implementation of improved expense monitoring systems at the BJ's restaurants in Southern California and Oregon. Preopening Costs. During the first quarter of 1999, the company adopted Statement of Position 98-5 (SOP 98-5), Accounting for the Costs of Start-Up Activities, which requires all costs of start-up activities that are not otherwise capitalizable as long-lived assets to be expensed as incurred. The Company previously deferred its restaurant preopening costs and amortized them over the twelve-month period following the opening of each new restaurant. This new accounting standard accelerates the Company's recognition of costs associated with the opening of new restaurants. The Company wrote off $106,000 as a cumulative effect of change in accounting principle in the first quarter of 1999. During the nine-month period ended September 30, 1999, the Company incurred costs of $365,000 related to the openings of its new restaurants in Arcadia, California, Woodland Hills, California 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 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. Restaurant Closure Expenses. On May 31, 1999, the lease on the BJ's Pizza & Grill - OTC in The Dalles, Oregon terminated. The Company and the landlord could not reach an agreement on the terms of a lease extension. A portion of the restaurant equipment was sold to the landlord, and additional equipment was removed for use at other BJ's locations. The Company incurred a non-cash charge of $132,900 for a loss on the sale of assets to the landlord at this location and an additional $28,700 for the settlement of claims made by the landlord. On June 30, 1999, a Pietro's restaurant located in Eugene, Oregon was closed. The Company and the landlord could not reach an agreement on the terms of a new lease. The Company incurred a non-cash charge of $4,000 on the closure of this restaurant, and incurred other charges related to closing of $3,400. General and Administrative Expenses. General and administrative expenses increased to $2,288,000 during the nine-month period ended September 30, 1999 from $1,868,000 during the comparable period in 1998, an increase of $420,000 or 22.5%. As a percentage of revenues, general and administrative expenses were slightly lower at 8.1% in 1999 compared with 8.2% during the same nine-month period of 1998. The increase in general and administrative expenses in total was primarily due to increases in overhead in anticipation of future expansion and costs associated with the evaluation of potential sites for restaurant development. Depreciation and Amortization. Depreciation and amortization decreased to $1,136,000 during the nine-month period ended September 30, 1999 from $1,346,000 during the comparable period in 1998, a decrease of $210,000 or 15.6%. The decrease was primarily due to the change in accounting principle from the deferral and amortization of preopening costs to the expensing of those costs as incurred. Preopening costs amortized during the first three quarters of 1998 totaled $365,000. This factor was offset by the depreciation expense incurred by the new restaurants in Arcadia, California and Woodland Hills, California, which totaled $115,000 through September 30, 1999. Interest Expense. Interest expense, net of interest income, increased to $188,000 during the nine-month period ended September 30, 1999 from $158,000 during the comparable period in 1998, an increase of $30,000 or 19.0%. The increase was primarily due to new equipment financing obtained for the development of the Arcadia, California and Woodland Hills, California restaurants, which has incurred $41,000 of interest expense since its inception. This additional expense was partially offset by the scheduled amortization of previously existing term loans. Income Tax Expense. At the end of 1998, the Company had federal and California net operating loss carryovers of approximately $4,770,000 and $1,636,000, respectively. While the net operating loss carryovers should be adequate to offset any regular taxable income for 1999, the provision for estimated alternative minimum tax expense made during the second quarter was evaluated and increased to $15,600 at the end of the third quarter 1999. 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 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 September 30, 1999, $654,000 was outstanding under this financing agreement, and $300,000 remains available to the Company for future equipment financing. On March 1, 1999, the Company completed the sale of Company Common Stock to ASSI, Inc. The Company issued 1,250,000 common shares to the shareholder in exchange for a cash payment of $1,000,000, the cancellation of 3,200,000 of the Company's Redeemable Warrants and other consideration. See Notes to Unaudited Consolidated Financial Statements. The Company's operating activities, as detailed in the Unaudited Consolidated Statement of Cash Flows, provided $2,176,000 net cash during the nine-month period ending September 30, 1999, a $942,000, or 76.3%, increase over the $1,234,000 generated in the comparable period of 1998. The Company used $2,914,000 to acquire equipment and facilities during the nine-month period ending September 30, 1999, compared to the $938,000 used for this purpose during the comparable period of 1998, an increase of $1,976,000, or 210.7%. These expenditures were required to develop the two new California restaurants, as well as the La Mesa, California restaurant recently opened. An additional $571,000 was used during the first three quarters of 1999 for the repayment of debt and capital lease payments, compared to $568,000 used for that purpose in the comparable periods of 1998. Cash and cash equivalents during the first nine months of 1999 increased to $1,883,000, an increase of $392,000 from the amount at December 31, 1998, the Company's 1998 fiscal year end. This increase, after the acquisition and financing of equipment and facilities, was primarily due to the sale of the Company's Common Stock to an existing shareholder, as mentioned above and discussed later in this filing. The Company currently intends to utilize cash and cash equivalents primarily for the development of additional restaurants, as well as for working capital purposes. Management believes that cash and cash equivalents available at September 30, 1999, the balance available under the existing equipment financing facility and future operating cash flow will be sufficient for the Company to fund its operations and continue to meet its business plan over the next year. However, no assurance can be given that management can successfully implement such objectives. Further, there can be no assurance that future events, including problems, delays, additional expenses and difficulties encountered in expansion and conversion of restaurants, will not require additional financing, or that such financing will be available if necessary. IMPACT OF INFLATION Impact of inflation on food, labor and occupancy costs can significantly affect the Company's operations. Many of the Company's employees are paid hourly rates related to the federal minimum wage, which has been increased numerous times and remains subject to future increases. SEASONALITY AND ADVERSE WEATHER The Company's results of operations have historically been impacted by seasonality, which directly impacts tourism at the Company's coastal locations. The summer months (June through August) have traditionally been higher volume periods than other periods of the year. YEAR 2000 COMPLIANCE The Company has completed a review of its computerized information systems to identify the systems and applications that could be affected by Year 2000 issues. The Company primarily utilizes software and hardware offered by major developers, and periodically purchases upgrades directly from those developers or authorized resellers. The Company's policy since the beginning of 1998 is to seek and purchase upgrades that include from the developer a Year 2000 compliance warranty. To date, the Company has spent approximately $30,000 in upgrading its essential software and hardware. As part of their support program, the vendor/developer of the Company's point of sale system recently provided an upgrade to assist the Company in making its POS system Year 2000 compliant. This upgrade has recently been installed in our restaurants, and management is assessing the system's ability to handle Year 2000 transactions. Management feels that its main data processing systems are either now or very close to being Year 2000 compliant, and that any additional expenditures will not be significant. The Company's non-IT systems consist primarily of our telephone switching equipment and restaurant operating equipment. We have upgraded our telephone switching equipment where necessary. Our initial assessment of our restaurant operating equipment has indicated that modification or replacement will not be necessary as a result of the Year 2000 issue. Therefore we are not currently remediating this operating equipment. However, the existence of non-compliant embedded technology in this type of equipment is, by nature, more difficult to identify and repair than in computer hardware and software. The Company also plans to contact its major product vendors and request statements as to their preparedness for the potential impact of Year 2000 issues. Their responses will be evaluated, and, based on the information provided, decisions will be made as to their ability to continue to meet the Company's need for product into Year 2000. Alternative sources for product will be identified in cases where the Company feels there are major questions as to the vendor's ability to conduct its normal business due to potential Year 2000 implications. The Company has determined that the readiness of its customers is not within its control even though the ability of its customers to purchase its products may be affected by third parties (financial institutions). The Company is not investigating this issue, and the impact is highly uncertain. Despite our Year 2000 remediation, testing efforts and contingency planning, there may be disruptions and unexpected business problems caused by IT systems, non-IT systems or third party vendors during the early months of the year 2000. The Company is making diligent efforts to assess the Year 2000 readiness of our significant business partners and will develop contingency plans for critical areas where we believe our exposure to Year 2000 risk is the greatest. However, despite our best efforts, we may encounter unanticipated third party failures or a failure to have successfully concluded our systems remediation efforts. Any of these unforeseen events could have a material adverse impact on the Company's results of operations, financial condition or cash flows. Additionally, any prolonged inability of a significant number of our restaurants to operate could have a material adverse effect. The amount of any potential losses related to these occurrences cannot be reasonably estimated at this time. The worst case scenario for the Company is that a significant number of our restaurants will be unable to operate for a few days due to public infrastructure failures and/or food supply problems. Some restaurants may have longer-term problems lasting a few weeks. The failure of restaurants to operate would result in reduced revenues and cash flows for the Company during the period of disruption. Loss of restaurant revenues would be partially mitigated by reduced costs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risk from changes in commodity prices, since many of the food products purchased by the Company are affected by commodity pricing, and, therefore, are vulnerable to unpredictable price fluctuations. Over the recent past, the Company has experienced price volatility in such products as cheese and produce. The Company buys a significant portion of its product from a distributor, and has only minimal forward purchasing agreements with other suppliers. 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 litigation in the ordinary course of business, most of which the Company expects to be covered by its general liability insurance. Punitive damages awards, however, are not covered by the Company's general liability insurance. To date, the Company has not paid punitive damages with respect to any claims, but there can be no assurance that punitive damages will not be awarded with respect to any future claims or any other actions. The Company is currently not a party to any pending legal proceedings which it believes will have a material adverse effect on its consolidated financial position or consolidated results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 28, 1999, the Company held its Annual Meeting of Shareholders. Shareholders voted upon the election of directors and upon the ratification of PricewaterhouseCoopers, LLP, as the Company's independent public accountants for the fiscal year ending December 31, 1998. Paul Motenko, Jeremiah Hennessy, Ernest Klinger, Alexander Puchner, Barry Grumman, Stanley Schneider, Allyn Burroughs and Mark James, all of whom were directors prior to the Annual Meeting and were nominated by management for re-election, were re-elected at the meeting. The following votes were cast for each nominee: NAME FOR WITHHELD -------------------- --------- -------- Paul A. Motenko 6,508,553 147,400 Jeremiah J. Hennessy 6,508,553 147,400 Ernest T. Klinger 6,508,553 147,400 Alexander Puchner 6,508,553 147,400 Barry J. Grumman 6,507,053 148,900 Stanley Schneider 6,508,553 147,400 Allyn R. Burroughs 6,508,553 147,400 Mark James 6,507,053 148,900 The following votes were cast for the amendment of the 1996 Stock Option Plan increasing the shares available to 1,200,000 and increasing the share limit per person per year to 500,000 shares: For: 6,342,631; Against: 234,561; Abstain: 4,700; Broker Non-votes: 74,061. The following votes were cast for the ratification of PricewaterhouseCoopers, LLP, as the Company's independent public accountants for the fiscal year ending December 31, 1999: For: 6,604,853; Against: 45,300; Abstain: 5,800. Shareholders who wish to submit proposals to be included in the Company's proxy materials for the 2000 annual meeting may do so in accordance with Securities and Exchange Commission Rule 14a-8. For those shareholder proposals which are not submitted in accordance with Rule 14a-8, the Company's management proxies may exercise their discretionary voting authority, without any discussion of the proposal in the Company's proxy materials, for any proposal which is received by the Company after March 1, 2000. 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, incorporated by reference to Exhibit 3.2 of Form 10-Q dated March 31, 1999. 4.1 Specimen Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 of the Registration Statement). 4.2 Warrant Agreement (incorporated by reference to Exhibit 4.2 of the Registration Statement). 4.3 Specimen Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.3 of the Registration Statement). 4.4 Form of Representative's Warrant (incorporated by reference to Exhibit 4.4. of the Registration Statement). 10.1 Assignment and Second Amendment of Real Estate Lease, dated August 15, 1999 between Chicago Pizza & Brewery, Inc., Grossmont Shopping Center and Pizza Nova - La Mesa for a BJ's Pizza, Grill and Brewery restaurant. 27.1 Financial Data Schedule (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the quarter ended September 30, 1999.
SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHICAGO PIZZA & BREWERY, INC. (Registrant) November 12, 1999 By: /s/ PAUL A. MOTENKO -------------------- Paul A. Motenko Co-Chief Executive Officer, Vice President, Secretary and Co-Chairman of the Board of Directors By: /s/ JEREMIAH J. HENNESSY ------------------------- Jeremiah J. Hennessy Co-Chief Executive Officer and Co-Chairman of the Board of Directors By: /s/ ERNEST T. KLINGER -------------------------- Ernest T. Klinger President, Chief Financial Officer and Co-Chairman of the Board of Directors