UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the thirteen weeks ended September 28, 2003
OR
For the transition period from to
Commission file number 0-21423
CHICAGO PIZZA & BREWERY, INC.
(Exact name of registrant as specified in its charter)
16162 Beach Boulevard
Suite 100
Huntington Beach, California 92647
(Address and zip code of principal executive offices)
(714) 848-3747
(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 ¨.
Indicate by check mark if the filer is an accelerated filer (as defined in Rule 12B-2 of the Act). YES x NO ¨.
As of October 20, 2003, there were 19,461,953 shares of Common Stock of the Registrant outstanding.
PART I.
Item 1.
Consolidated Financial Statements
Consolidated Balance Sheets – September 28, 2003 (Unaudited) and December 29, 2002
Unaudited Consolidated Statements of Income – Thirteen Weeks Ended and Nine Months Ended September 28, 2003 and September 29, 2002
Unaudited Consolidated Statements of Shareholders’ Equity – Nine Months Ended September 28, 2003
Unaudited Consolidated Statements of Cash Flows – Nine Months Ended September 28, 2003 and September 29, 2002
Notes to Unaudited Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings
Changes in Securities and Use of Proceeds
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Item 5.
Other Information
Item 6.
Exhibits and Reports on Form 8-K
Certifications
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
Assets
Current assets:
Cash and cash equivalents
Investments
Accounts and other receivables
Inventories
Prepaid expenses and other current assets
Deferred taxes
Total current assets
Property and equipment, net
Deferred income taxes
Goodwill
Other assets, net
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses
Current portion of notes payable to related parties
Current portion of long-term debt
Total current liabilities
Notes payable to related parties
Long-term debt
Reserve for store closures
Other liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Preferred stock, 5,000 shares authorized, none issued or outstanding
Common stock, no par value, 60,000 shares authorized and 19,460 and 19,305 shares issued and outstanding as of September 28, 2003 and December 29, 2002, respectively
Capital surplus
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to unaudited consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
September 28,
2003
September 29,
2002
Revenues
Costs and expenses:
Cost of sales
Labor and benefits
Occupancy
Operating expenses
General and administrative
Depreciation and amortization
Restaurant opening expense
Total costs and expenses
Income from operations
Other income (expense):
Interest income
Interest expense
Other income, net
Total other income
Income before income taxes
Income tax expense
Net income
Net income per share:
Basic
Diluted
Weighted average number of shares outstanding:
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UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Capital
Surplus
Retained
Earnings
Balance, December 29, 2002
Exercise of stock options, net
Tax benefit from stock option exercises
Balance, September 28, 2003
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Tax benefit from stock options exercised
Changes in operating assets and liabilities:
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Purchases of investments
Proceeds from investments
Proceeds from sale of restaurant equipment, net of expenses
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock in connection with warrants exercised
Payments on long-term debt
Proceeds from exercise of stock options
Payments on notes payable to related party
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Chicago Pizza & Brewery, Inc. and its wholly owned subsidiaries. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
The accompanying consolidated financial statements have not been audited by independent auditors. The financial statements include all adjustments (consisting of normal recurring accruals), which are, in management’s opinion, necessary for a fair presentation of the financial position, 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 consolidated financial statements in accordance with accounting principles generally accepted in the United States 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 29, 2002. 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 29, 2002 has been derived from the audited financial statements.
Effective July 1, 2002, the Company changed its fiscal year end from December 31 to the Sunday closest to December 31 in each year. In connection with this change in fiscal year, the Company also realigned its fiscal quarters whereby the first, second and third quarters will each consist of 13 weeks. The fourth quarter will typically consist of 13 weeks, except approximately every fifth year it will consist of 14 weeks. The fourth quarter of 2004 will consist of 14 weeks.
INVESTMENTS
All investments are classified as held-to maturity and are reported at amortized cost and realized gains and losses are reflected in earnings.
Investments consist of the following (in thousands):
U.S. and government agency securities
U.S. corporate notes and bonds
Total Investments
NET INCOME PER SHARE
Net income per share is computed in accordance with Financial Accounting Standards Board (FASB) No. 128, Earnings Per Share. Basic net income per share is computed based on the weighted average of common shares outstanding during the period. Diluted net income per share is computed based on the weighted average number of common shares and common stock equivalents outstanding during the period, which includes options outstanding under the Company’s stock option plan.
RELATED PARTY
As of September 28, 2003, Jacmar Companies and their affiliates (collectively referred to herein as “Jacmar”) owned approximately 42.2% of the Company’s outstanding common stock. Jacmar, through its specialty wholesale food distributorship, is the Company’s largest supplier of food, beverage and paper products. Jacmar sells products to the Company at prices comparable to those offered by unrelated third parties. Jacmar supplied the Company with approximately $11.0 million and $8.2 million of food, beverage and paper products for the nine months ended September 28, 2003 and September 29, 2002, respectively, and had accounts payable related to these products of approximately $1.2 million and
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$1.1 million at September 28, 2003 and September 29, 2002, respectively. Additionally, the Company paid Jacmar approximately $5,000 for the nine months ended September 28, 2003 for various consulting services.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (Interpretation 45). Interpretation 45 will significantly change current practice in the accounting for, and disclosure of, guarantees. Guarantees meeting the characteristics described in Interpretation 45 are required to be initially recorded at fair value, which is different from the current practice of recording a liability only when a loss is probable and reasonably estimable, as those terms are defined in FASB Statement No. 5, Accounting for Contingencies. Interpretation 45 also requires a guarantor to make significant new disclosures for virtually all guarantees even when the likelihood of the guarantor’s having to make payments under the guarantee is remote. Interpretation 45’s disclosure requirements are effective for financial statements with annual periods ending after December 15, 2002. Interpretation 45’s initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 29, 2002. The guarantor’s previous accounting for guarantees issued prior to the date of Interpretation 45’s initial application will not be revised or restated to reflect the Interpretation’s provisions. The adoption of Interpretation 45 did not impact the Company’s consolidated financial position, results of operations or cash flows for the nine months ended September 28, 2003.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 provides a model for accounting and reporting for costs associated with exit or disposal activities, whereby such costs are initially recognized and measured at fair value in the period in which they are incurred. Under SFAS 146, in many cases, costs will be recognized as liabilities in periods following a commitment to a plan, not at the date of commitment. SFAS 146 is effective for exit or disposal activities initiated after December 29, 2002. The adoption of SFAS 146 did not impact the Company’s consolidated financial position, results of operations or cash flows for the nine months ended September 28, 2003.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements (Interpretation 46). Interpretation 46 significantly changes previous consolidation guidance pertaining to special purpose entities (“SPEs”). Interpretation 46 clarifies the application of ARB No. 51 to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. These entities are defined as variable interest entities or VIEs. Most SPEs will be evaluated for consolidation under the Interpretation as VIEs. All enterprises with variable interests in VIEs created after January 31, 2003 are required to apply the provisions of the Interpretation immediately. The Interpretation also requires certain disclosures in all financial statements initially issued after January 31, 2003, regardless of the date on which the VIE was created if it is reasonably possible that an enterprise will consolidate or disclose information about a VIE when the Interpretation becomes effective.
Interpretation 46 may be applicable to the Company due to the Company’s relationship with its only licensee BJ’s Lahaina, Maui. For the nine months ended September 28, 2003, license fee income from BJ’s Lahaina was $28,000. The Company owned approximately 46% of BJ’s Lahaina up to April 2001 when the Company’s interest was purchased by a minority shareholder. For the four months ended April 2001 and for the fiscal year 2000, the Company’s share of income or (loss) related to BJ’s Lahaina was $8,000 and ($42,000), respectively.
Under the proposed application of Interpretation 46, the Company may be required to consolidate the operations of BJ’s Lahaina even though it is operating under a license agreement and the Company does not have an ownership interest. Management is in the process of evaluating the impact, if any; that Interpretation 46 will have on the Company’s consolidated financial position, results of operations and cash flows.
RESTAURANT CLOSURES
On December 31, 2002, the Company sold its Pietro’s restaurant on Lombard Street in Portland, Oregon. This sale yielded no gain after recording a reserve of $23,000 for the Company’s guarantee of the lease liability, which extends through a portion of 2005. Additionally, on June 15, 2003, the Company closed its BJ’s restaurant on Stark Street in Portland, Oregon. The net book value of the restaurant’s assets was included in the reserve for store closures; therefore no loss was recorded in 2003 as a result of the closing.
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STOCK OPTION PLAN
The Company has adopted the disclosure-only provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123), as amended by FASB Statement No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (SFAS 148), and will continue to use the intrinsic value based method of accounting prescribed by Accounting Principles Board Statement No. 25, Accounting for Stock Issued to Employees (APB No. 25). Under APB No. 25, no compensation cost has been recognized for options granted with an option price equal to the grant date market value of the Company’s common stock. Had compensation cost for the Company’s options granted been determined based on the fair value of the option at the grant date for the 1996 Stock Option Plan consistent with the provisions of SFAS 123, the Company’s net income and net income per share would have been decreased to the pro forma amounts indicated below for the periods indicated below (in thousands, except for per share data):
Net income, as reported
Employee compensation expense
Net income, pro forma
Net income per share, as reported:
Net income per share, pro forma:
The fair value of each option grant issued is estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: (a) no dividend yield on the Company’s stock, (b) expected volatility of the Company’s stock ranging from 21.3% to 70.4%, (c) a risk-free interest rate ranging from 2.29% to 4.87% and (d) expected option life of five years.
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 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.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
The following discussion and analysis should be read in conjunction with our 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 our 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. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, without limitation, those factors discussed herein and in our annual report as reported on Form 10-K as of December 29, 2002 and for the year then ended including, without limitation: (i) our ability to manage growth and conversions, (ii) construction delays, (iii) marketing and other limitations as a result of our historic concentration in Southern California, (iv) restaurant and brewery industry competition, (v) impact of certain brewery business considerations, including without limitation, dependence upon suppliers and related hazards, (vi) consumer trends, (vii) potential uninsured losses and liabilities, (viii) fluctuating commodity costs including food and energy, (ix) trademark and servicemark risks, (x) government regulations (xi) licensing costs, and (xii) other general economic and regulatory conditions and requirements.
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GENERAL
We own and operate 31 restaurants located in California, Oregon, Colorado, Arizona and Texas and receive fees from one licensed restaurant in Lahaina, Maui. Each of our restaurants are operated either as a BJ’s Restaurant & Brewery, a BJ’s Pizza & Grill, a BJ’s Restaurant & Brewhouse or a Pietro’s Pizza restaurant. Our menu features our award-winning, signature deep-dish pizza, our own handcrafted beers as well as a wide selection of appetizers, entrees, pastas, sandwiches, specialty salads and desserts. We have nine BJ’s Restaurant & Brewery restaurants that feature in-house brewing facilities where our handcrafted beers are produced. Our three Pietro’s Pizza restaurants serve primarily Pietro’s thin-crust pizza in a very casual, counter-service environment.
In calculating our comparable restaurant sales, we include a restaurant in the comparable base once it has been opened for eighteen periods.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our unaudited Consolidated Statements of Income expressed as percentages of total revenues. The results of operations for the nine months ended September 28, 2003 are not necessarily indicative of the results to be expected for the full fiscal year.
For The Thirteen
Weeks Ended
For The Nine
Months Ended
Total cost and expenses
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Thirteen Weeks Ended September 28, 2003 Compared to Thirteen Weeks Ended September 29, 2002.
Revenues. Total revenues for the thirteen weeks ended September 28, 2003 increased to $26.7 million from $19.0 million during the comparable thirteen week period of 2002, an increase of $7.7 million or 40.5%. The increase is primarily the result of:
Location
Concept
Opening Date
Westlake, California
Oxnard, California
Lewisville, Texas
Cupertino, California
Clear Lake, Texas
Addison, Texas
Cerritos, California
Cost of Sales. Cost of food, beverages and paper (cost of sales) for our restaurants increased to $7.1 million during the thirteen weeks ended September 28, 2003 from $4.7 million during the comparable thirteen week period of 2002, an increase of $2.4 million or 51.1%. As a percentage of sales, cost of sales increased to 26.6% for the current thirteen week period from 24.8% for the comparable prior-year thirteen week period. This increase is a result of the following: (i) conducting business in new markets where we have a higher cost of sales mix and higher per unit purchase costs and (ii) an increase in selected commodity costs primarily cheese and beef. We continue to work with our vendors to control food costs; however, there can be no assurance that future supplies and costs for commodities used in our restaurants will not fluctuate due to weather and other market conditions.
Labor and Benefits. Labor and benefit costs for our restaurants increased to $9.4 million during the thirteen weeks ended September 28, 2003 from $6.9 million during the comparable thirteen week period of 2002, an increase of $2.5 million or 36.2%. As a percentage of sales, labor and benefit costs decreased to 35.1% for the current thirteen week period from 36.2% for the comparable prior-year thirteen week period. This decrease is primarily a result of management directed productivity improvements at the restaurant level and the presence of more restaurants in tip credit states.
Occupancy. Occupancy costs increased to $2.0 million during the thirteen weeks ended September 28, 2003 from $1.4 million during the comparable thirteen week period of 2002, an increase of $600,000 or 42.9%. The increase reflects the four additional restaurants we opened in August, September, November and December 2002 and the three additional restaurants we opened in January, May and July 2003, partially offset by the closure of our Pietro’s Portland, Oregon restaurant (Lombard Street) in December 2002 and our BJ’s Portland, Oregon restaurant (Stark Street) in June 2003. As a percentage of revenues, occupancy costs were relatively stable, increasing to 7.6% for the current thirteen week period from 7.5% for the comparable prior-year thirteen week period.
Operating Expenses. Operating expenses increased to $3.2 million during the thirteen weeks ended September 28, 2003 from $2.3 million during the comparable thirteen week period of 2002, an increase of $900,000 or 39.1%. As a percentage of sales, operating expenses decreased to 11.8% for the current thirteen week period from 12.1% for the comparable prior-year thirteen week period. The slight decrease is primarily due to computer supplies purchased in the prior year comparable thirteen week period in connection with our system conversions in July 2002. Operating expenses include restaurant-level operating costs, the major components of which include marketing, repairs and maintenance, insurance, supplies, credit cards fees and utilities.
General and Administrative Expenses. General and administrative expenses increased to $2.2 million during the thirteen weeks ended September 28, 2003 from $2.0 million during the comparable thirteen week period of 2002, an increase of $200,000 or 10.0%. As a percentage of revenues, general and administrative expenses decreased to 8.2% for the current thirteen week period from 10.5% for the comparable prior-year thirteen week period. This decrease is
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primarily due to a 40.5% increase in sales versus an increase of 10.0% in general and administrative costs as the 2002 expenditures for infrastructure were spread across higher sales volumes.
Depreciation and Amortization.Depreciation and amortization increased to $993,000 during the thirteen weeks ended September 28, 2003 from $657,000 during the comparable thirteen week period of 2002, an increase of $336,000 or 51.1%. The increase was primarily due to our acquisition of restaurant equipment, furniture, leasehold improvements and brewery equipment totaling $8.5 million and $12.0 million for the three restaurants opened in 2003 and the four restaurants opened in the last half of 2002, respectively, coupled with four restaurants opened over the last year that had ground leases resulting in higher leasehold improvement costs.
Restaurant Opening Expense. Restaurant opening expenses decreased to $526,000 during the thirteen weeks ended September 28, 2003 from $700,000 during the comparable thirteen week period of 2002, a decrease of $174,000. This decrease is primarily due to one restaurant opening in the current thirteen week period in comparison to two restaurant openings in the comparable thirteen week period of 2002, offset by $295,000 of costs related to our San Jose, California restaurant that opened in October 2003. Our opening costs will fluctuate from quarter to quarter, depending upon, but not limited to, the number of restaurant openings, the size and concept of the restaurants being opened and the complexity of the staff hiring and training process. During the fourth quarter of the year, we expect to incur additional expenditures related to our San Jose, California and Willowbrook, Texas restaurants which are scheduled to open in October 2003 and January 2004, respectively.
Interest Income (Expense), Net. Interest income (expense), net decreased to $84,000 during the thirteen weeks ended September 28, 2003 from $154,000 during the comparable thirteen week period of 2002, a decrease of $70,000. During 2002, approximately 7.3 million redeemable warrants and approximately 188,000 stock options were exercised, providing approximately $36.3 million in cash proceeds to the Company, net of approximately $229,000 of related costs. The overall decrease in interest income, net is primarily due to (i) less cash to invest after the opening of seven new stores and (ii) decreased interest rates.
Other Income, Net. Net other income decreased to $95,000 during the thirteen weeks ended September 28, 2003 from $122,000 in the comparable thirteen week period of 2002, a decrease of $27,000. The decrease was primarily due to decreased license fee income from our interest in BJ’s Lahaina, Maui, Hawaii restaurant.
Nine months Ended September 28, 2003 Compared to Nine months Ended September 29, 2002.
Revenues. Total revenues for the nine months ended September 28, 2003 increased to $76.0 million from $54.7 million during the comparable nine months of 2002, an increase of $21.3 million or 38.9%. The increase is primarily the result of:
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Cost of Sales. Cost of food, beverages and paper (cost of sales) for our restaurants increased to $20.1 million during the nine months ended September 28, 2003 from $13.8 million during the comparable nine months of 2002, an increase of $6.3 million or 45.7%. As a percentage of sales, cost of sales increased to 26.5% for the current nine months from 25.3% for the comparable prior-year nine months. This increase is a result of the following: (i) conducting business in new markets where we have a higher cost of sales mix and higher per unit purchase costs and (ii) an increase in selected commodity costs primarily cheese and beef. We continue to work with our vendors to control food costs; however, there can be no assurance that future supplies and costs for commodities used in our restaurants will not fluctuate due to weather and other market conditions.
Labor and Benefits. Labor and benefit costs for our restaurants increased to $27.0 million during the nine months ended September 28, 2003 from $19.9 million during the comparable nine months of 2002, an increase of $7.1 million or 35.7%. As a percentage of sales, labor and benefit costs decreased to 35.6% for the current nine months from 36.3% for the comparable prior-year nine months. This decrease is primarily a result of management directed productivity improvements at the restaurant level and the presence of more restaurants in tip credit states.
Occupancy. Occupancy costs increased to $5.7 million during the nine months ended September 28, 2003 from $4.2 million during the comparable nine months of 2002, an increase of $1.5 million or 35.7%. The increase reflects the four additional restaurants we opened in August, September, November and December 2002 and the three additional restaurants we opened in January, May and July 2003, partially offset by the closure of our Pietro’s Eugene, Oregon restaurant in February 2002, our Pietro’s Portland, Oregon restaurant (Lombard Street) in December 2002 and our BJ’s Portland, Oregon restaurant (Stark Street) in June 2003. As a percentage of revenues, occupancy costs decreased to 7.5% for the current nine months from 7.8% for the comparable prior-year nine months. This decrease is primarily due to the fact that four out of the seven restaurants opened over the last year had ground leases with monthly lease payments below our historical rent levels.
Operating Expenses. Operating expenses increased to $8.7 million during the nine months ended September 28, 2003 from $6.1 million during the comparable nine months of 2002, an increase of $2.6 million or 42.6%. As a percentage of sales, operating expenses increased to 11.5% for the current nine months from 11.1% for the comparable prior-year nine months. The increase is primarily due to the following: (i) increased utility costs, (ii) increased repair and maintenance costs related to stores open for a number of years, (iii) increased supply costs related to the implementation of a management driven labor productivity program, and (iv) increased marketing costs related to new markets and the continuing promotion of existing markets. Operating expenses include restaurant-level operating costs, the major components of which include marketing, repairs and maintenance, insurance, supplies, credit cards, and utilities.
General and Administrative Expenses. General and administrative expenses increased to $6.6 million during the nine months ended September 28, 2003 from $5.3 million during the comparable nine months of 2002, an increase of $1.3 million or 24.5%. As a percentage of revenues, general and administrative expenses decreased to 8.6% for the current nine months from 9.8% for the comparable prior-year nine months. This decrease is primarily due to a 38.9% increase in sales versus an increase of 24.5 % in general and administrative costs as the 2002 expenditures for infrastructure were spread across higher sales volumes.
Depreciation and Amortization. Depreciation and amortization increased to $2.9 million during the nine months ended September 28, 2003 from $1.8 million during the comparable nine months of 2002, an increase of $1.1 million or 61.1%. The increase was primarily due to our acquisition of restaurant equipment, furniture, leasehold improvements and brewery equipment totaling $8.5 million and $12.0 million for the three restaurants opened in 2003 and the four restaurants opened in the last half of 2002, respectively, coupled with four restaurants opened over the last year that had ground leases resulting in higher leasehold improvement costs.
Restaurant Opening Expense. Restaurant opening expenses increased to $1.2 million during the nine months ended September 28, 2003 from $821,000 during the comparable nine months of 2002, an increase of $379,000. This increase is due to three restaurant openings in the current nine months in comparison to two restaurant openings in the comparable nine months of 2002. Additionally, our current nine months included costs of $307,000 related to our San Jose, California restaurant that opened October 2003, but are offset by $112,000 of costs incurred in 2002 related to our Clear Lake, Texas restaurant that opened in January 2003. Our opening costs will fluctuate from period to period, depending upon, but not limited to, the number of restaurant openings, the size and concept of the restaurants being opened and the complexity of the staff hiring and training process. During the fourth quarter of the year, we expect to incur additional expenditures related to our San Jose, California and Willowbrook, Texas restaurants which are scheduled to open in October 2003 and January 2004, respectively.
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Interest Income (Expense), Net. Interest income (expense), net increased to $277,000 during the nine months ended September 28, 2003 from $159,000 during the comparable nine months of 2002, an increase of $118,000. During 2002, approximately 7.3 million redeemable warrants and approximately 188,000 stock options were exercised, providing approximately $36.3 million in cash proceeds to the Company, net of approximately $229,000 of related costs. The overall increase in interest income, net is primarily due to a decrease in interest expense related to the payoff of our term loan in April 2002 with an outstanding balance of $3.1 million offset by the decrease in interest income primarily due to (i) less cash to invest after the opening of our seven new stores over the past year and (ii) decreased interest rates.
Other Income, Net. Net other income increased to $377,000 during the nine months ended September 28, 2003 from $268,000 in the comparable nine months of 2002, an increase of $109,000. The increase was primarily due to increased gaming income at our Pietro’s Pizza locations.
LIQUIDITY AND CAPITAL RESOURCES
Our overall operating activities, as detailed in the unaudited Consolidated Statements of Cash Flows, provided $5.7 million of net cash during the nine months ended September 28, 2003, a $900,000 or 18.8% increase from the $4.8 million generated during the comparable nine months of 2002. The increase in cash from operating activities for the nine months ended September 28, 2003 in comparison to the nine months ended September 29, 2002 was due primarily to an increase in net income and depreciation.
Total capital expenditures for the acquisition of our restaurant and brewery equipment and leasehold improvements to construct new restaurants were $11.1 million for the nine months ended September 28, 2003. These expenditures were primarily related to the development of our Clear Lake, Texas, Addison, Texas, Cerritos, California and San Jose, California restaurants.
We have signed leases for, and plan to open, restaurants in Willowbrook, Texas and Summerlin, Nevada in the first half of 2004, and Rancho Cucamonga, California and San Bernardino, California in the second half of 2004.
IMPACT OF INFLATION
The impact of inflation on food, labor, energy and occupancy costs can significantly affect our operations. Many of our employees are paid hourly rates related to Federal and State minimum wage laws. Minimum wages have been increased numerous times and remain subject to future increases.
SEASONALITY AND ADVERSE WEATHER
Our results of operations have historically been impacted by seasonality, which directly impacts tourism at our coastal locations. The summer months (June through August) have traditionally been higher volume periods than other periods of the year.
CRITICAL ACCOUNTING POLICIES
We believe the following areas comprise our critical accounting policies: 1) accounting for property and equipment, 2) accounting for deferred taxes, and 3) related party accounting.
Property and equipment accounting requires estimates of the useful lives for the assets for depreciation purposes and selection of depreciation methods. We believe the useful lives reflect the actual economic life of the underlying assets. We have elected to use the straight-line method of depreciation for financial statement purposes. Renewals and betterments that materially extend the useful life of an asset are capitalized while maintenance and repair costs are charged to operations as incurred. Judgment is often required in the decision to distinguish between an asset which qualifies for capitalization versus an expenditure which is for maintenance and repairs.
We review property and equipment (which includes leasehold improvements) and intangible assets with finite lives for impairment when events or circumstances indicate these assets might be impaired. We test impairment using historical cash flows and other relevant facts and circumstances as the primary basis for our estimates of future cash flows. The analysis is performed at the restaurant level for indicators of impairment. This process requires the use of estimates and
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assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets.
Deferred tax accounting requires that we evaluate net deferred tax assets to determine if these assets will more likely than not be realized in the foreseeable future. This test requires projection of our taxable income into future years to determine if there will be income sufficient to realize the tax assets (future tax deductions and FICA tax credit carryforwards). The preparation of the projections requires considerable judgment and is subject to change to reflect future events and changes in the tax laws. Our net deferred tax liability at September 28, 2003 totaled $204,000.
Related party accounting requires the proper identification of related parties and extensive disclosure of the transactions and balances with such related parties. Related parties include Jacmar and ASSI, Inc. Jacmar is our largest supplier of food, beverage and paper products and, through its affiliates, Jacmar owns 42.2% of our outstanding common stock. ASSI, Inc. is a former shareholder that now holds an option to purchase 200,000 shares of our common stock at $4.00 per share. Disclosure of transactions and balances with Jacmar and ASSI, Inc. is included in Item 1 under Notes to Unaudited Consolidated Financial Statements.
Our market risk exposures are related to cash and cash equivalents and investments. We invest our excess cash in highly liquid short-term investments with maturities of less than twelve months as of the date of purchase. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flows and results of operations. During 2003, the average interest rate earned on cash and cash equivalents and investments was approximately 1.5%.
Our management, including our principal executive officers and principal financial officer, conducted an evaluation of our disclosure controls and procedures; as such term is defined under Rule 13(a)-14(c) promulgated under the Securities Exchange Act of 1934, as amended, within 90 days of the filing date of this report. Based on their evaluation, our principal executive officers and principal financial officer concluded that our disclosure controls and procedures are effective.
There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph above.
PART II. OTHER INFORMATION
On April 30, 2002, we received a copy of a complaint filed on behalf of ASSI Inc., a Nevada Corporation (“ASSI”) in the Superior Court of Orange County, California (the “California Case”). The defendants initially named in that complaint were BJ Chicago, LLC, The Jacmar Companies, James A. Dal Pozzo, and William H. Tilley (collectively, “Jacmar”). We are not a party to the California Case. Jacmar, however, constitutes our largest shareholder group and several of its principals. On June 10, 2002, ASSI amended its complaint in the California Case, by which it dropped its claim for alleged violations of section 10(b) of the federal Securities Exchange Act, but added two of our officers and directors, Paul A. Motenko and Jeremiah J. Hennessy, as defendants. In response to Messrs. Motenko and Hennessy’s demurrers to ASSI’s first amended complaint, ASSI dropped additional claims. ASSI then filed a second amended complaint. That complaint alleged claims against Jacmar and Messrs. Motenko and Hennessy for (1) securities fraud (purportedly under unspecified state, rather than federal, law), (2) common law fraud, (3) intentional interference with economic relations, and (4) unjust enrichment. Messrs. Motenko and Hennessy and Jacmar filed demurrers to the second amended complaint as well. At a hearing on November 8, 2002, the Court sustained Messrs. Motenko and Hennessy’s and Jacmar’s demurrers to each of the claims alleged in the second amended complaint. ASSI was granted leave to attempt to cure the defects in its second amended complaint.
On or about December 3, 2002, ASSI filed its third amended complaint in the California Case, again alleging claims against Jacmar and Messrs. Motenko and Hennessy for common law fraud, securities fraud (under California statutes), intentional interference with economic relations, and unjust enrichment. Messrs. Motenko and Hennessy and Jacmar
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filed demurrers to each of the claims in ASSI’s third amended complaint, and Messrs. Motenko and Hennessy filed a motion to strike certain of the claims. At a hearing conducted on those matters on April 23, 2003, the Court sustained the demurrers as to ASSI’s claims for common law fraud and intentional interference with economic relations (with leave to amend) and as to ASSI’s claim for unjust enrichment (without leave to amend). In addition, the Court authorized Messrs. Motenko and Hennessy to renew their motion to strike in the event that ASSI attempted to further amend its pleading.
On or about May 5, 2003, ASSI filed its fourth amended complaint in the California Case, again alleging claims against Jacmar and Messrs. Motenko and Hennessy for common law fraud, securities fraud (under California statutes), and intentional interference with economic relations. Messrs. Motenko and Hennessy and Jacmar once again filed demurrers to ASSI’s fourth amended complaint. At a hearing conducted on those matters on July 1, 2003, the Court sustained the demurrers as to ASSI’s claim for common law fraud (without leave to amend). On July 18, 2003, Messrs. Motenko and Hennessy filed their answer to ASSI’s fourth amended complaint, and asserted a cross-claim against ASSI for breach of the “Mutual General Release” (the “Release”).
On or about August 15, 2003, Messrs. Motenko and Hennessy filed a motion for summary judgment, or in the alternative, summary adjudication based the argument that the Release provides Messrs. Motenko and Hennessy a complete defense to ASSI’s claims in the California Case. In addition, Jacmar filed a motion for summary judgment on the grounds that no evidence supported ASSI’s claims. Messrs. Motenko and Hennessy joined in Jacmar’s motion. The Court is expected to rule on the motions for summary judgment in early November 2003.
The trial in the California case is presently scheduled for December 1, 2003, in the event that any part of ASSI’s claims survives the summary judgment motions. In addition, Messrs. Motenko and Hennessy have filed a motion asking the Court to sever the Release issues from other issues in the case and to try the Release issues first. That motion is scheduled to be heard at the same time as the summary judgment motions.
On or about May 1, 2002, we also received a copy of a demand for arbitration made by ASSI with the American Arbitration Association against BJ Chicago, LLC (the “Arbitration”), which appears to make similar allegations to those alleged in the pending California Case, but does not name either us or Messrs. Motenko and Hennessy as parties. As such, we currently are taking no action with regard to the Arbitration. Moreover, it does not appear that ASSI is going to pursue the Arbitration.
Messrs. Motenko and Hennessy believe that the claims against them are wholly without merit. They intend to vigorously defend against all of the allegations and to raise all available defenses, including, but not limited to, asserting a complete defense under the Release. We executed the Release in December 2000 with Louis Habash, the president of ASSI, which serves to release all claims relating to the stock purchase transaction (voluntarily terminated by ASSI) between ASSI and us that ASSI and Mr. Habash may have against us, our officers and directors, and any of our affiliates, which includes Messrs. Motenko and Hennessy. In addition, all of the parties to the Release have waived their assertion of unknown claims against one another.
On March 10, 2003, one of our former employees, on behalf of himself and other employees and our former employees similarly situated and working in California, filed a class action complaint in the Superior Court of California for the County of Orange against us. The complaint alleges that we violated provisions of the California Labor Code covering meal and rest breaks for employees, along with associated acts of unfair competition, and seeks payment of wages for all meal and rest breaks allegedly denied to our California employees for the period from October 1, 2000 to the present. Management intends to vigorously defend against all allegations in the complaint. Due to the recent filing of this action, this matter is in the early discovery phase and management is not currently able to estimate the range of possible liability, if any.
There can be no assurance as to the outcome of the California Case, the recently filed class action case or any other litigation that may be filed against us or our officers or directors. Our management strongly believes, however, that the ultimate disposition of the California Case will not have a material adverse effect on our results of operations or financial condition.
None.
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None
The Company filed a Report on Form 8-K dated as of October 16, 2003 announcing third quarter 2003 revenues and comparable restaurant sales and the execution of a lease in San Bernardino, California.
The Company filed a Report on Form 8-K dated as of November 4, 2003 announcing its financial results for the quarter ended September 28, 2003.
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.
(Registrant)
/s/ PAUL A. MOTENKO
Paul A. Motenko
Chairman of the Board of Directors, Co-Chief
Executive Officer, Vice President and
Secretary
/s/ JEREMIAH J. HENNESSY
Jeremiah J. Hennessy
Director, Co-Chief Executive Officer and
President
/s/ C. DOUGLAS MITCHELL
C. Douglas Mitchell
Chief Financial Officer
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