<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-21423
CHICAGO PIZZA & BREWERY, INC.
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(Exact name of small business issuer
as specified in its charter)
California 33-0485615
- ------------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
26131 Marguerite Parkway, Suite A, Mission Viejo, CA 92692
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(Address of principal executive offices)
(714) 367-8616
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
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 No X
---- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
equity as of the latest practicable date: As of November 22, 1996, 6,408,321
shares of the small business issuers' Common Stock were outstanding.
Transitional Small Business Disclosure Format (Check One):
Yes No X
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<PAGE>
CHICAGO PIZZA & BREWERY, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1995
and September 30, 1996............................. 1
Consolidated Statements Of Operations for the
nine months ended September 30, 1995 and
September 30, 1996; three months ended September 30,
1995 and September 30, 1996........................ 2
Consolidated Statements Of Cash Flows for the
nine months ended September 30, 1995 and
September 30, 1996 ................................ 3
Notes To Consolidated Financial Statements ........ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations ............................. 7
Liquidity and Capital Resources ................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................. 17
Item 2. Changes in Securities .............................. 17
Item 3. Defaults Upon Senior Securities .................... 17
Item 4. Submission Of Matters To A Vote of
Security Holders ................................... 17
Item 5. Other Information .................................. 17
Item 6. Exhibits and Reports on Form 8-K ................... 17
SIGNATURES
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ITEM I. CONSOLIDATED FINANCIAL STATEMENTS
CHICAGO PIZZA & BREWERY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
ASSETS:
December 31, September 30, September 30,
1995 1996 1996
-------------- ------------- -------------
(Pro Forma)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,791,769 $ 179,262 $ 7,539,872
Restricted cash 200,000
Accounts receivable 11,100 89,089 89,089
Inventory 62,525 228,394 228,394
Deferred initial public offering expenses 108,000 1,153,205 0
Preopening expenses 68,405 253,201 253,201
Prepaids and other current assets 109,027 394,562 199,562
------------ ----------- ------------
Total current assets 2,350,826 2,297,713 8,310,118
Property and equipment, net 1,870,531 5,337,274 5,337,274
Other assets 163,608 456,312 456,312
Restricted cash 562,116 562,116
Intangible assets, net 5,558,244 5,734,684 5,734,684
------------ ----------- ------------
Total assets $ 9,943,209 $14,388,099 $ 20,400,504
------------ ----------- ------------
------------ ----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 446,597 $ 1,427,436 $ 1,112,333
Accrued expenses 900,326 1,987,451 1,354,827
Notes payable to related parties 967,474 3,937,475 937,475
Notes payable, current 268,235 268,235
Current portion of obligations
under capital lease 14,655 52,525 52,525
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Total current liabilities 2,329,052 7,673,122 3,725,395
Notes payable to related parties 3,122,761 2,606,324 2,606,324
Obligations under capital lease 22,239 108,004 108,004
Notes payable 873,796 873,796
Minority interest in partnerships 252,541 253,333 253,333
Other liabilities 193,167 183,108 183,108
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Total liabilities 5,919,760 11,697,687 7,749,960
Commitments
Shareholders' equity:
Preferred stock, 5,000,000 shares
authorized, none issued or outstanding
Common stock, no par value, 20,000,000
and 60,000,000 shares authorized as of
December 31, 1995 and September 30,
1996, respectively, 3,788,878 shares
issued and outstanding as of December 31,
1995 and 4,608,321 shares issued and
outstanding as of September 30, 1996 5,568,467 5,568,467 15,319,777
Capital surplus 278,750 328,750 732,572
Accumulated deficit (1,823,768) (3,206,805) (3,401,805)
------------ ----------- ------------
Total shareholders' equity 4,023,449 2,690,412 12,650,544
------------ ----------- ------------
Total liability and shareholders' equity $ 9,943,209 $14,388,099 $ 20,400,504
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
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CHICAGO PIZZA & BREWERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
------------------------------
<TABLE>
<CAPTION>
For the nine-months For the three-months
ended September 30, ended September 30,
--------------------------- ---------------------------
1995 1996 1995 1996
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 5,160,279 $ 14,317,569 $ 1,952,913 $ 6,009,515
Cost of sales 1,444,346 4,471,998 550,137 1,857,808
------------ ------------- ------------ ------------
Gross profit 3,715,933 9,845,571 1,402,776 4,151,707
Costs and expenses:
Labor and benefits 2,060,519 5,053,538 791,461 1,965,408
Occupancy 497,112 1,226,936 183,463 531,220
Operating expenses 1,055,359 2,306,756 405,046 978,121
Preopening expense 118,886 59,770
General and administrative 536,810 1,284,442 206,057 451,516
Depreciation and amortization 277,139 604,285 95,623 227,042
------------ ------------- ------------ ------------
Total cost and expenses 4,426,939 10,594,843 1,681,650 4,213,077
------------ ------------- ------------ ------------
Loss from operations (711,006) (749,272) (278,874) (61,370)
Other income (expense):
Interest expense, net (426,999) (631,744) (45,832) (246,085)
Other (104,000) 7,342 (104,000)
------------ ------------- ------------ ------------
Total other expense (530,999) (624,402) (149,832) (246,085)
Loss before minority
interest and taxes (1,242,005) (1,373,674) (428,706) (307,455)
Minority interest in partnership 17,405 (793) 651
------------ ------------- ------------ ------------
Loss before taxes (1,224,600) (1,374,467) (428,706) (306,804)
Income tax expense (4,000) (8,570) (1,600) (1,489)
------------ ------------- ------------ ------------
Net loss $ (1,228,600) $ (1,383,037) $ (430,306) $ (308,293)
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Net loss per common share $ (0.42) $ (0.37) $ (0.12) $ (0.08)
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Weighted average of common shares
outstanding 2,935,818 3,788,878 3,517,837 3,788,878
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
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<TABLE>
<CAPTION>
For the nine-months
ended September 30,
------------------------------------
1995 1996
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<S> <C> <C>
Cash flows used in operating activities:
Net loss $ (1,228,600) $ (1,383,037)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 277,139 604,285
Minority interest in partnership (17,405) 793
Noncash interest expense on private placement
offering notes 166,847
Noncash payment of Director fees 21,000
Noncash interest and consulting expense on
private placement offerings' warrants 8,000 50,000
Changes in assets and liabilities:
Accounts receivable 10,850 9,279
Inventory 4,995 15,080
Prepaids and other current assets (77,502) (1,319,901)
Other assets 80,860 (66,400)
Accounts payable (105,538) 753,059
Accrued expenses (47,041) 417,199
Other liabilities 94,518 169,330
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Net cash used in operating activities (811,877) (750,313)
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Cash flows used in investing activities:
Acquisition of Roman Systems and limited
partnership interests (4,421,142)
Acquisition of Chicago Pizza Northwest (2,591,208)
Acquisition of Brea, California micro-brewery
leasehold interest (930,400)
Purchases of equipment (209,604) (1,343,281)
Net proceeds from sale of restaurants 950,000
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Net cash used in investing activities (4,630,746) (3,914,889)
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Cash flows provided by financing activities:
Borrowings on related party debt 4,988,113 3,100,000
Borrowings on short-term debt 227,912
Borrowings on long-term debt 750,771
Payments on related party debt (1,693,203) (646,436)
Payments on debt (342,658)
Capital lease payments (10,814) (36,894)
Proceeds from stock issuance 5,136,629
Proceeds from warrants 249,750
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Net cash provided by financing activities 8,670,475 3,052,695
------------ -----------
Net increase (decrease) in cash and cash
equivalents 3,227,852 (1,612,507)
Cash and cash equivalents, beginning of period 49,889 1,791,769
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Cash and cash equivalents, end of period $ 3,277,741 $ 179,262
------------ -----------
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</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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CHICAGO PIZZA & BREWERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying consolidated financial statements of Chicago Pizza
& Brewery, Inc. and its subsidiaries (the "Company") for the nine months and
three months ended September 30, 1995 and 1996 have been prepared in
accordance with generally accepted accounting principles, and with the
instructions to Form 10-QSB and Item 310(b) of Regulation S-B. 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. The December 31, 1995 balance
sheet is derived from audited financial statements included in the Company's
prospectus dated October 8, 1996 (the "Prospectus"). The consolidated
financial statements herein and related notes thereto should be read in
conjunction with the Company's audited consolidated financial statements for
the year ended December 31, 1995 included in the Prospectus.
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. 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 combined
and consolidated financial statements and notes thereto included in the
Prospectus.
2. RECLASSIFICATION:
Certain prior year items have been reclassified to conform to the current
year presentation.
3. ORGANIZATION:
The accompanying financial statements of the Company as of December
31, 1995 and for the nine months ended September 30, 1995 and 1996 are presented
on a consolidated basis, and include the accounts of the Company, Chicago Pizza
Northwest, Inc. and BJ's Lahaina, L.P. during the periods owned. All
significant intercompany transactions and balances have been eliminated.
4
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CHICAGO PIZZA & BREWERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. ORGANIZATION (CONTINUED):
The Company was formed in 1991 by Mr. Jeremiah Hennessy and Mr. Paul
Motenko (the "Owners") to operate and manage five existing "BJ's Chicago
Pizzeria" restaurants in Southern California owned by Roman Systems, Inc.
("Roman Systems") under a Management Agreement (the "Management Agreement") with
Roman Systems. Pursuant to the Management Agreement, the Company had the right
and obligation to open, operate and manage BJ's Chicago Pizzeria restaurants.
In 1992, the Owners formed CPA-BG, Inc. ("CPA-BG") and opened two restaurants
with CPA-BG as the general partner of BJ's Belmont Shore, L.P. and BJ's La
Jolla, L.P. in 1992 and 1993, respectively. In 1994, the Company opened two
BJ's Chicago Pizzeria restaurants in Huntington Beach and Seal Beach.
Additionally, in 1994, the Company opened a restaurant in Lahaina, Hawaii as a
limited partner of BJ's Lahaina, L.P. The general partners of BJ's Lahaina,
L.P. were CPA010, Inc. ("CPA010"), which was formed by the Owners, and
Blue Max, Inc. ("Blue Max").
Effective January 1, 1995, pursuant to the Asset Purchase Agreement between
the Company and Roman Systems (the "Asset Purchase Agreement"), the Company
purchased the three existing BJ's Chicago Pizzeria restaurants operated and
managed under the Management Agreement and terminated the Management Agreement.
As part of the Asset Purchase Agreement, the Company assumed responsibility for
closing two of Roman Systems' existing BJ's Chicago Pizzeria restaurants in
Santa Ana and San Juan Capistrano, California and assumed the net liabilities
related thereto. These restaurants were closed in 1995.
Effective January 1, 1995, the Company purchased the limited partnership
interests of BJ's Belmont Shore, L.P. and BJ's La Jolla, L.P. The general
partnership interests of CPA-BG were transferred to the Company for no
consideration prior to the acquisition of the limited partnership interests.
The general partnership interests in BJ's Lahaina, L.P. were also transferred to
the Company for no consideration. Additionally, the Company closed a BJ's
Chicago Pizzeria restaurant in 1995. As of December 31, 1995, the Company owned
seven BJ's Chicago Pizzeria restaurants, all in coastal locations in Southern
California and Hawaii.
On March 29, 1996, the Company acquired 26 restaurants located in Oregon
and Washington by providing the funding for the Debtor's (Pietro's Corp.) Plan
of Reorganization, Dated February 29, 1996, as modified (the "Debtor's Plan")
and thereby acquired all the stock in the reorganized entity known as Chicago
Pizza Northwest, Inc. ("CPNI"). The Debtor's Plan was confirmed by an order of
the
5
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CHICAGO PIZZA & BREWERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. ORGANIZATION (CONTINUED):
Bankruptcy Court on March 18, 1996 and the Company funded the Debtor's Plan
on March 29, 1996. The September 30, 1996 unaudited financial statements
include the results of the 26 restaurants from the date that they were
acquired. The results for seven of the restaurants, which were sold during
the second quarter of 1996, were only included through the date of their
sale, as described below.
On May 15, 1996 the Company agreed to sell seven of the restaurants
purchased from Pietro's Corp. Two of the restaurants were sold on May 31, 1996,
two additional restaurants were sold on June 24, 1996 and three additional
restaurants were sold on June 26, 1996. The operating results for the seven
restaurants sold were included in the Company's consolidated operating results
for the period they were owned by the Company. No gain or loss was recognized
on the sale of the restaurants.
4. PRO FORMA DATA
On October 15, 1996 (the "Closing"), the Company completed an initial
public offering (the "Initial Public Offering") of 1,800,000 shares of Common
Stock at $5.00 per share and 1,800,000 redeemable warrants at $0.25 per
redeemable warrant which generated approximately $7,005,000 in proceeds net
of underwriting comissions and related expenses. (See footnote 5). On the
Closing, pursuant to their terms, certain convertible notes totalling
$3,000,000 in principle amount (the "Convertible Notes"), and the accrued
interest thereon converted to 750,000 shares of Common Stock and 4,700,000
warrants of the Company. In addition, in connection with the Convertible
Notes, the Company paid 13%, or $390,000, for related financing costs which
were recorded as an asset and amortized over 12 months during the term of the
Convertible Notes. As of September 30, 1996 the unamortized balance totaled
$195,000. The pro forma information has been prepared so as to give effect
to the Closing of the Initial Public Offering and classify the aforementioned
$3,000,000 principal amount of Convertible Notes and $150,000 of accrued
interest thereon as Common Stock outstanding (750,000 additional shares
outstanding) and capital surplus. As a result the $195,000 remaining
unamortized amount of financing costs has been expensed, thereby increasing
the pro forma accumulated deficit.
5. SUBSEQUENT EVENTS
On October 2, 1996, the Company granted 462,500 incentive stock options at
an issue price of $5.00 to employees and Directors under its 1996 Stock Option
Plan.
On October 15, 1996, the Company completed an initial public offering of
1,800,000 shares of Common Stock at $5.00 per share and 1,800,000 redeemable
warrants at $0.25 per redeemable warrant which generated approximately
$7,005,000 in proceeds, net of underwriting commissions and related expenses.
Consequently, the $3,000,000 in Convertible Notes converted to 750,000 shares of
Common Stock and 4,700,000 redeemable warrants of the Company. (See footnote 4).
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and notes thereto included
elsewhere in this Form 10-QSB. Except for the historical information
contained herein, the discussion in this Form 10-QSB 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-QSB should be read as being
applicable to all related forward-looking statements wherever they appear in
this Form 10-QSB. 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 Comany's prospectus dated October 8, 1996 (the "Prospectus"),
including, without limitation: (i) the Company's ability to manage growth and
conversions, (ii) construction delays, (iii) marketing and other limitations
as a result of the Company's historic concentration in Southern California,
(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,
(vii) consumer trends, (viii) potential uninsured losses and liabilities,
(ix) trademark and servicemark risks, and (x) other general economic and
regulatory conditions and requirements. For further information, please see
the Company's Prospectus.
In March and April, 1996, the Company developed two new restaurants in
Westwood Village (Los Angeles) and Brea, California, respectively. In
addition, on March 29, 1996 the Company acquired 26 restaurants located in
Washington and Oregon by providing the funding for a plan of reorganization
filed with the U.S. Bankruptcy Court by Pietro's Corporation, a Washington
state corporation. The Company sold 7 of the 26 restaurants in the second
quarter, 1996. Consequently, the results of operations for 1996 are not
necessarily comparable to the results of operations for the same period in
1995.
THREE-MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE-MONTHS ENDED
SEPTEMBER 30, 1995
REVENUES. Total revenues for the three-months ended September 30, 1996
increased to $6,010,000, from $1,953,000 for the comparable period in 1995,
an increase of $4,057,000 or 207.7%. The 19 northwest restaurants, acquired
on March 29, 1996 remaining after the sale of 7 restaurants completed in the
second quarter (the "Remaining Northwest Restaurants"), accounted for
$2,864,000 of the increase in revenues. Excluding the Remaining Northwest
Restaurants, total revenues for the three-months ended September 30, 1996
increased to $3,146,000 from $1,953,000 for the comparable period in 1995.
The increase resulted from (i)new restaurants opened in 1996 in Westwood
Village (Los Angeles), and Brea, California which contributed $1,045,000,
and (ii)increased comparable restaurant sales. Revenues for the seven stores
open the entire comparable period increased to $2,070,000 from $1,953,000 or
6.0%. Management believes that the increase in revenues in these stores was
primarily due to increased customer counts related to the introduction of a
new BJ's menu and concept.
COST OF SALES. Cost of food, beverages and paper (cost of sales) for the
restaurants increased to $1,858,000 for the three months ended September 30,
1996 from $550,000 for the comparable period in 1995, an increase of
$1,308,000 or 237.8%. As a percentage of revenues, cost of sales increased
to 30.9% for the period from 28.2% for the comparable period in 1995. The
Remaining Northwest Restaurants accounted for $929,000 of the increase in
cost of sales. Excluding the Remaining Northwest Restaurants, cost of sales
for the three-months ended September 30, 1996 increased to $929,000 from
$550,000 for the comparable period in 1995, an increase of 68.9%. Excluding
the Remaining Northwest Restaurants, as a percentage of revenues, cost of
sales increased to 29.5% for the three-months ended September 30, 1996
from 28.2% for the comparable period in 1995. Management believes this
increase is primarily due to the relatively high cost of mozzarella cheese
experienced during the three months ended September 30, 1996. Mozzarella
cheese represented 10.1% of the Company's total food purchases during that
period. The average cost of mozzarella cheese for the three months ended
September 30, 1996 was approximately 24.2% higher
7
<PAGE>
than the comparable period in 1995. During the month of October 1996,
mozzarella prices decreased 21.2%. Management believes that the decrease, if
sustained, will have a favorable impact on cost of sales in the future.
LABOR. Labor costs for the restaurants increased to $1,965,000 for the
three-months ended September 30, 1996 from $791,000 for the comparable period
in 1995, an increase of $1,174,000 or 148.4%. The Remaining Northwest
Restaurants accounted for $928,000 of the increase in labor costs. Excluding
the Remaining Northwest Restaurants, labor costs for the three-months ended
September 30, 1996 increased to $1,037,000 from $791,000 for the comparable
period in 1995, an increase of 31.1%. Excluding the Remaining Northwest
Restaurants, as a percentage of revenues, labor costs decreased to 33.0% for
the three-month period ended September 30, 1996 from 40.5% for the comparable
period in 1995. Management believes that the decrease was due primarily to
increased revenue and more efficient staffing in the restaurants. The recent
increase in the Federal, California and Oregon minimum wage will increase
restaurant labor costs in the future. Management believes that the impact
in the California restaurants of the increase in the Federal and California
minimum wage on labor will be mitigated by an October 1, 1996 menu price
increase.
OCCUPANCY. Occupancy costs increased to $531,000 for the three-months
ended September 30, 1996 from $183,000 for the comparable period in 1995, an
increase of $348,000 or 190.2%. The Remaining Northwest Restaurants
accounted for $283,000 of the increase in occupancy costs. Excluding the
Remaining Northwest Restaurants, occupancy costs for the three-months ended
September 30, 1996 increased to $248,000 from $183,000 for the comparable
period in 1995, an increase of 35.5%. The $65,000 increase was due primarily
to the opening of the Westwood (Los Angeles) and Brea, California restaurants
in 1996. Excluding the Remaining Northwest Restaurants, as a percentage of
revenues, occupancy costs decreased to 7.9% for the three-months ended
September 30, 1996 from 9.4% for the comparable period in 1995. Management
believes that the decrease in occupancy costs as a percent of revenue was due
to (i) fairly stable occupancy costs in an environment of increasing
comparable store revenue, and (ii) lower occupancy costs relative to the
revenues generated by the newly-opened Westwood Village (Los Angeles) and
Brea, California restaurants.
OPERATING EXPENSES. Operating expenses increased to $978,000 for the
three-months ended September 30, 1996 from $405,000 for the comparable period
in 1995, an increase of $573,000 or 141.5%. The Remaining Northwest
Restaurants accounted for $454,000 of the increase in operating expenses.
Excluding the Remaining Northwest Restaurants, operating expenses for the
three-months ended September 30, 1996 increased to $524,000 from $405,000 for
the comparable period in 1995. New restaurant openings in Westwood (Los
Angeles) and Brea contributed $119,000 to the increase. Excluding the
Remaining Northwest Restaurants, as a percentage of revenue, operating
expenses decreased to 16.7% for the three-month period ended September 30,
1996 from 20.7% for the comparable period in 1995. Management believes that
since a significant portion of operating expenses are fixed costs, the
increase in comparable store revenue was the primary reason for the decrease
in operating expenses as a percentage of sales.
8
<PAGE>
Operating expenses include restaurant-level operating costs, the major
components of which include marketing, repairs and maintenance, supplies and
utilities.
PREOPENING EXPENSES. Preopening expenses totaled $60,000 for the
three-months ended September 30, 1996 due to the opening of Westwood (Los
Angeles) and Brea, California restaurants in March and April of 1996,
respectively. There were no preopening expenses in 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $452,000 for the three-months ended September 30, 1996 from
$206,000 for the comparable period in 1995, a $246,000 or 119.4% increase.
The Remaining Northwest Restaurants accounted for $237,000 of the increase in
general and administrative expenses. Excluding the Remaining Northwest
Restaurants, general and administrative expenses for the three-months ended
September 30, 1996 increased to $215,000 from $206,000 for the comparable
period in 1995. Excluding the Remaining Northwest Restaurants, as a
percentage of revenue, general and administrative expenses decreased to 6.8%
for the three-months ended September 30, 1996 from 10.5% for the
comparable period in 1995. Management believes that the decrease in general
and administrative expenses as a percentage of revenue was primarily due to
the development of the restaurants in Westwood Village (Los Angeles) and
Brea, California without a corresponding increase in corporate overhead.
Management further believes that the elimination of duplicated general and
administrative expenses between Southern California and the Northwest,
initiated in the second quarter of 1996, will enable the Company to further
reduce general and administrative expenses as a percentage of revenue in the
future.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
to $227,000 for the three-months ended September 30, 1996 from $96,000 for
the comparable period in 1995, an increase of $131,000 or 136.5%. The
Remaining Northwest Restaurants accounted for $81,000 of depreciation and
amortization. Excluding the Remaining Northwest Restaurants, depreciation and
amortization for the three-months ended September 30, 1996 increased to
$146,000 from $96,000 for the comparable period in 1995. The increase was
primarily due to the depreciation related to the remodeling of the La Jolla
Village restaurant in November, 1995 and the opening of the Westwood (Los
Angeles) and Brea California restaurants in March and April, 1996,
respectively.
INTEREST EXPENSE, NET. Interest expense, net of interest income
increased to $246,000 for the three-months ended September 30, 1996 from
$46,000 for the comparable period in 1995, an increase of $200,000. The
increase primarily resulted from $3,000,000 in convertible debt (the
"Convertible Debt"), borrowed in 1996 in order to finance the acquisition of
the Northwest Restaurants (as hereinafter defined), which accrued interest
at 10% per annum. The costs associated with obtaining this debt financing
were amortized to interest expense over twelve months beginning April 1996.
During the three-months ended September 30, 1996 $98,000 of these costs were
amortized to interest expense along with $75,000 accrued interest on the
Convertible Debt.
On October 15, 1996, simultaneous with the closing of the Company's initial
public offering, the entire principal and interest of the Convertible Debt
converted into Company common stock and warrants. Consequently, the
remaining $195,000 unamortized costs related to the Convertible Debt were
written off. As a result, the Convertible Debt will no longer impact the
Company's results from operations.
9
<PAGE>
NINE-MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE-MONTHS ENDED
SEPTEMBER 30, 1995
REVENUES. Total revenues for the nine-months ended September 30, 1996
increased to $14,318,000, from $5,160,000 for the comparable period in 1995,
an increase of $9,158,000 or 177.5%. The 26 northwest restaurants, acquired
on March 29, 1996 including, for the period owned by the Company, the 7
restaurants sold during the second quarter (the "Northwest Restaurants")
accounted for $6,421,000 of revenues from the date of acquisition through
September 30, 1996. Excluding the Northwest Restaurants, total revenues for
the nine-months ended September 30, 1996 increased to $7,897,000 from
$5,160,000, an increase of $2,737,000 for the comparable period in 1995.
Approximately $2,175,000 of the increase was due to the opening of the
Westwood Village (Los Angeles) and Brea, California restaurants in March and
April 1996 respectively, partially offset by the closure of the La Jolla
Prospect restaurant in 1995. Revenues for the seven stores open the entire
comparable period increased to $5,691,000 from $4,988,000 or 14.1%.
Management primarily attributes the increase in revenues in those stores to
the following factors, in order of their significance: (i) increased customer
counts due to the introduction of a new BJ's menu and concept, (ii) the
winter storms experienced during the first quarter of 1995 which resulted in
reduced customer counts during that period and a related decrease in revenues
and (iii) increased customer counts due to the refurbishment of the La Jolla
Village restaurant in November 1995.
COST OF SALES. Cost of food, beverages and paper (cost of sales) for the
restaurants increased to $4,472,000 for the nine months ended September 30,
1996 from $1,444,000 for the comparable period in 1995, an increase of
$3,028,000 or 209.7%. As a percentage of revenues, cost of sales increased
to 31.2% for the period from 28.0% for the comparable period in 1995. The
Northwest Restaurants accounted for $2,079,000 of cost of sales from the date
of acquisition through September 30, 1996. Excluding the Northwest
Restaurants, cost of sales for the nine-months ended September 30, 1996
increased to $2,393,000 from $1,444,000 for the comparable period in 1995, an
increase of 65.7%. Excluding the Northwest Restaurants, as a percentage of
revenues, cost of sales increased to 30.3% for the nine-months ended
September 30, 1996 from 28.0% for the comparable period in 1995. Management
believes that cost of sales as a percentage of sales increased primarily due
to the following temporary factors: (i) additional non-recurring costs
incurred, as anticipated, during the testing and initial implementation phase
of the menu expansion, (ii) special promotional pricing of certain of the new
menu items through May 1996, and (iii) an average 18.5% increase in the cost
of mozzarella cheese as compared to the prior year. The cost of mozzerella
cheese, which represents approximately 10.0% of the company's total food
purchases, was reduced in October 1996 by 21.2%. While management believes
that the most significant factors causing the increase in food cost
percentage were temporary in nature, the increased food cost percentage may
continue as a result of higher relative costs of certain of the new menu
items, which will have an ongoing impact on cost of sales.
10
<PAGE>
LABOR. Labor costs for the restaurants increased to $5,054,000 for the
nine-months ended September 30, 1996 from $2,061,000 for the comparable
period in 1995, an increase of $2,993,000 or 145.2%. The Northwest
Restaurants, acquired on March 29, 1996, accounted for $2,127,000 of labor
costs from the date of acquisition through September 30, 1996. Excluding the
Northwest Restaurants, labor costs for the nine-months ended September 30,
1996 increased to $2,927,000 from $2,061,000 for the comparable period in
1995, an increase of 42.0%. Excluding the Northwest Restaurants, as a
percentage of revenues, labor costs decreased to 37.1% for the nine-months
ended September 30, 1996 from 39.9% for the comparable period in 1995. This
decrease resulted despite the implementation of the new menu and expanded
concepts which required re-training of all restaurant employees. In
addition, the Company temporarily increased the number of staff members per
shift in both the kitchen and dining room in order to maintain a high level
of service during the transition period. As of June 1996, labor was reduced
to levels which Management believes are more representative of ongoing
staffing requirements. Management believes that this factor, along with
increased revenue for the nine-month period ended September 30, 1996,
contributed to the decrease in labor cost as a percent of sales. The recent
increase in the Federal, California and Oregon minimum wage will increase
restaurant labor costs in the future. Management believes that the
impact in the California restaurants of the increase in the Federal and
California minimum wage on labor costs will be mitigated by an October 1,
1996 menu price increase.
OCCUPANCY. Occupancy costs increased to $1,227,000 for the nine-months
ended September 30, 1996 from $497,000 for the comparable period in 1995, an
increase of $730,000 or 146.9%. The Northwest Restaurants accounted for
$633,000 of occupancy costs from the date of acquisition through September
30, 1996. Excluding the Northwest Restaurants, occupancy costs for the
nine-months ended September 30, 1996 increased to $594,000 from $497,000 for
the comparable period in 1995, an increase of 19.5%. Management believes
that the increase was due primarily to the opening of the Westwood (Los
Angeles) and Brea, California restaurants in March and April 1996,
respectively, offset partially by the closure of the La Jolla - Prospect
restaurant in June 1995. Excluding the Northwest Restaurants, as a
percentage of revenues, occupancy costs decreased to 7.5% for the nine-months
ended September 30, 1996 from 9.6% for the comparable period in 1995.
Management believes that the decrease in occupancy costs as a percent of
revenue was due to (i) fairly stable occupancy costs in an environment of
increasing comparable store revenue, and (ii) lower occupancy costs relative
to the respective revenues generated by the newly-opened Westwood (Los
Angeles) and Brea, California restaurants.
OPERATING EXPENSES. Operating expenses increased to $2,307,000 for the
nine-months ended September 30, 1996 from $1,055,000 for the comparable
period in 1995, an increase of $1,252,000 or 118.7%. The Northwest
Restaurants, acquired on March 29, 1996, accounted for $1,029,000 of
operating expenses from the date of acquisition through September 30, 1996.
Excluding the Northwest Restaurants, operating expenses for the nine-months
ended September 30, 1996 increased to $1,278,000 from $1,055,000 for the
comparable period in 1995. Management believes that the
11
<PAGE>
$223,000 or 21.1% increase resulted primarily from the opening of the
Westwood (Los Angeles) and Brea, California restaurants in March and April
1996, respectively. Excluding the Northwest Restaurants, as a percentage of
revenue, operating expenses decreased to 16.2% for the nine-months ended
September 30, 1996 from 20.5% for the comparable period in 1995. Management
believes that since a significant portion of operating expenses are fixed
costs, the increase in comparable store revenue was the primary reason for
the decrease in operating expenses as a percentage of sales. Operating
expenses include restaurant-level operating costs, the major components of
which include marketing, repairs and maintenance, supplies and utilities.
PREOPENING EXPENSES. Preopening expenses totaled $119,000 for the
nine-months ended September 30, 1996 due to the opening of Westwood Village
(Los Angeles) and Brea, California restaurants in March and April of 1996,
respectively. There were no preopening expenses in 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $1,284,000 for the nine-months ended September 30, 1996 from
$537,000 for the comparable period in 1995, a $747,000 or 139.1% increase.
The Northwest Restaurants, accounted for $602,000 of general and
administrative expenses from the date of acquisition through September 30,
1996. Excluding the Northwest Restaurants, general and administrative
expenses for the nine-months ended September 30, 1996 increased to $682,000
from $537,000 for the comparable period in 1995. Excluding the Northwest
Restaurants, as a percentage of revenue, general and administrative expenses
decreased to 8.6% for the nine-months ended September 30, 1995 from 10.4% for
the comparable period in 1995. The increase in revenue from the opening of
the Westwood (Los Angeles) and Brea, California restaurants as well as the
increase in comparable store sales more than offset the increased general and
administrative expenses in preparation for the initial public offering and
anticipated growth.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
to $604,000 for the nine-months ended September 30, 1996 from $277,000 for
the comparable period in 1995, an increase of $327,000 or 118.1%. The
Northwest Restaurants accounted for $205,000 of depreciation and amortization
from the date of acquisition through September 30, 1996. Excluding the
Northwest Restaurants, depreciation and amortization for the nine-months
ended September 30, 1996 increased to $399,000 from $277,000 for the
comparable period in 1995. Management believes that the increase was
primarily due to the depreciation related to the remodeling of the La Jolla
Village restaurant in November 1995 and the addition of the Westwood (Los
Angeles) and Brea, California restaurants in March and April 1996,
respectively.
INTEREST EXPENSE. Interest expense increased to $632,000 for the
nine-months ended September 30, 1996 from $427,000 for the comparable period
in 1995, an increase of $205,000 or 48.0%. The increase was primarily due to
a reduction in debt in May 1995 with a subsequent increase in Convertible
Debt in March 1996. During 1995 the Company issued 222,462 shares of
12
<PAGE>
stock as additional interest valued at $.75 per share in conjunction with a
January 1995 debt private placement. For accounting purposes the value of these
shares was treated as interest expense. The debt was repaid during the second
and third quarters of 1995 with a portion of the proceeds from the May 1995
private placement resulting in reduced interest expense. Additionally, interest
income from invested private placement proceeds partially offset the remaining
expense.
During 1996 the Company borrowed $3,000,000 in Convertible Debt, accruing
interest at 10% per annum, in order to finance the purchase of the Northwest
restaurants. The costs associated with obtaining this debt financing were
amortized to interest expense over twelve months beginning April 1996.
During the nine-months ended September 30, 1996, $195,000 of these costs were
amortized to interest expense. On October 15, 1996, simultaneous with the
closing of the Company's initial public offering, the entire principal and
interest of the Convertible Debt converted into Company common stock and
warrants. Consequently, the remaining $195,000 unamortized costs related to
the Convertible Debt were written off. As a result, the Convertible Debt
will no longer impact the Company's results from operations.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On October 15, 1996 the initial public offering of the 1,800,000 shares of
common stock of the Company (the "Common Stock") and 1,800,000 redeemable
warrants (the "Warrants") pursuant to the October 8, 1996 Prospectus closed,
resulting in approximately $7,005,000 in proceeds net of underwriting
commissions and related expenses.
The Company historically has operated without working capital, but it
does not have significant inventory or trade receivables and customarily
receives several weeks of credit in purchasing food and supplies. The
Company's working capital deficit is primarily due to its operating losses,
interest expense, acquisition costs and restaurant development costs.
Seasonality has magnified the improvement of the quarter ended September 30,
1996 over prior quarters of 1996. Net cash used in operating activities for
the nine months ended September 30, 1995 and the nine months ended September
30, 1996, were $812,000 and $750,000, respectively.
To date the Company has primarily financed its operations, acquisitions,
development and expansion from private placements completed in January, March
and September 1995, and convertible notes issued in March 1996. These funds
have been used primarily for acquiring and/or developing the Roman Systems
restaurants, the Brea restaurant, the Northwest Restaurants, menu and
restaurant development costs, restaurant refurbishment, and working capital.
Capital expenditures for the nine months ended September 30, 1995 and the
nine months ended September 30, 1996 were $4,631,000 and $3,915,000,
respectively.
In connection with the development of the Huntington Beach restaurant in
1994, the Company issued a demand note payable to a related party in the
amount of $350,000 with interest accruing at a rate of 6%. This demand note
is collateralized by the Huntington Beach restaurant and equipment. By the
end of the third quarter, $250,000 of this demand note was repaid.
The remaining $100,000 of this demand note was repaid in October 1996.
In connection with the 1995 Roman Systems acquisition, the Company, in
addition to a $550,000 cash down payment and assumption of certain liabilities,
issued a note in favor of the sellers in the amount of $3,700,000, which note
accrues interest at a rate of 7% per annum and matures on April 1, 2004. This
note is payable in monthly principal and interest installments of $38,195.
Under this note the Company is also required to
14
<PAGE>
make additional payments of $25,000 per month toward the total outstanding
principal until an aggregate of $875,000 in additional principal payments
under the note have been made. This note is collateralized by the restaurants
in Balboa in Newport Beach, La Jolla Village and Laguna Beach, California.
In October 1996 the remaining balance of the $875,000 note was repaid.
In connection with the 1996 Brea acquisition, the Company issued a note in
favor of the seller in the amount of $228,000 and assumed a bank note payable in
the amount of $751,000, collateralized by a $200,000 certificate of deposit
maturing March 1, 1998. During April 1996 the $228,000 note was repaid. The
$751,000 is payable in monthly principal installments of $12,513 plus interest
accrued at the bank's reference rate plus 2% and matures March 1, 2001.
In connection with the Pietro's Acquisition, the Company funded the
Debtor's Plan of Reorganization in the amount of $2,350,000 and assumed notes
payable to federal and state taxing authorities in the aggregate amount of
$506,000. The Company is required to pay these notes in the following principal
installments: (i) $32,670 per quarter from July 1, 1996 until April 1, 1997,
(ii) $20,071 per quarter from July 1, 1997 until June 30, 2001, and (iii)
varying payments totaling $34,122 from October 1, 2001 until April 1, 2002. In
addition, the Company is required to make interest payments at the rate of
8.25%.
Also in connection with the Pietro's Acquisition, the Company sold an
aggregate of $3,000,000 in Convertible Notes. Simultaneous with the closing of
the Company's initial public offering in October 1996, the entire principal and
interest of the Convertible Debt converted into Common Stock and warrants.
Consequently, the remaining $195,000 unamortized costs related to the
Convertible Debt were written off. As a result, the Convertible Debt will no
longer impact the Company's results from operation.
With respect to the leases for the La Jolla-Prospect, California and the
Richland, Washington restaurants, which restaurants were closed and sold by the
Company, respectively, the Company remains liable in the event of default by the
current lessees. Contingent liability for the full remaining term of the leases
was estimated at $716,000 and $466,000 for the La Jolla-Prospect and Richland
locations, respectively. The Company may also be liable for additional
expenses, such as, insurance, real estate taxes, utilities and maintenance and
repairs. Management currently has no reason to believe that such expenses, if
incurred, will be significant.
With respect to the La Jolla-Prospect property, the tenant has been
current on rent payments for a year and Management currently has no reason to
believe that the tenant will not continue to pay rent as due in the future.
With respect to the Richland, Washington site, Abby's Inc. ("Abby's"), an
affiliate of A-II, L.L.C., an Arizona LLC, which is the purchaser (the
"Purchaser") of the site has agreed to guarantee payment under the lease. In
addition, both Abby's and the Purchaser have agreed to indemnify the Company
with respect to such related liabilities.
15
<PAGE>
Finally, in the event of a default, the landlord of the Richland site has agreed
to exhaust all remedies against the Purchaser and Abby's prior to pursuing any
remedies against the Company. Management currently has no reason to believe
that the Purchaser and/or Abby's is not capable of performing under the lease.
During 1995 and early 1996 the Company developed and implemented its
extended menu, restaurant concept change and brewery concept for the BJ'S PIZZA,
GRILL & BREWERY and BJ'S PIZZA & GRILL restaurants. Expenditures for the new
menu items included food development costs, menu development costs, menu design
and printing, management and staff training and new kitchen equipment to
facilitate new menu items. Expenditures for the BJ'S PIZZA, GRILL & BREWERY and
BJ'S PIZZA & GRILL restaurant concepts included new interior design, logo
design, signage design and uniform design. Expenditures for the brewery concept
included the hiring of a director of brewing operations, beer menu development
costs and brewery design. Management believes they completed the menu
development and restaurant concept development phase of its business plan in the
second quarter and that the costs associated with many of these changes are
non-recurring. Additionally, the Company reduced overhead expenses during the
second and third quarters of 1996 by eliminating duplicated positions in the
administrative offices resulting in an estimated annualized savings of $600,000.
Management believes the Company can be profitable through increased sales
relating to its extended menu and to the conversion and refurbishment of the
Northwest Restaurants. Management also believes that profitability may be
enhanced by reduced costs associated with Company produced beer and vendor
volume purchasing associated with the recent Northwest Restaurant acquisition,
the Company's recent restaurant openings in Westwood Village (Los Angeles) and
Brea, California and the future opening of the restaurant in Boulder, Colorado.
Finally, management expects a further reduction in costs as a result of the
reduction of overhead through consolidation of general and administrative
expenses.
The Company currently intends to utilize remaining capital primarily for
the conversion and refurbishment of restaurants in the Northwest, development of
the restaurant in Boulder, Colorado and for working capital purposes.
Management currently anticipates a total of $5,500,000 in additional capital
expenditure requirements, including approximately $4,500,000 for the Northwest
Restaurant conversions and approximately $1,000,000 for the Boulder, Colorado
restaurant development. Management anticipates opening the restaurant in
Boulder Colorado, which is currently under construction and converting two of
the restaurants in the Northwest which are currently being developed, in the
first quarter, 1997. The Company intends to continue to develop and convert the
Northwest restaurants through 1997 and complete the conversion in the second
quarter of 1998. Management believes the proceeds from the Comany's initial
public offering will be sufficient for the Company to meet its business plan
over the next 18 months. 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.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
3.1 Incorporated by reference to the Amended and Restated
Articles of Incorporation of the Company, as amended,
filed as Exhibit 3.1 to Registration Statement No. 333-
5182-LA on Form SB-2 filed on June 28, 1996.
3.2 Incorporated by reference to the Bylaws of the Company
filed as Exhibit 3.2 to Registration Statement
No. 333-5182-LA on Form SB-2 filed on June 28, 1996.
27.1 Financial Data Schedule
17
<PAGE>
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.
Date: November 22, 1996 By:/s/ Paul A. Motenko
------------------------
Paul A. Motenko
Chief Executive Officer,
Secretary and Chairman of
the Board of Directors
By:/s/ Laura Parisi
-------------------------
Laura Parisi
Chief Financial Officer
and Assistant Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Consolidated Statement of Operations found on
pages 1 and 2 of the Company's Form 10-QSB for the year-to-date and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 179,262
<SECURITIES> 0
<RECEIVABLES> 89,089
<ALLOWANCES> 0
<INVENTORY> 228,394
<CURRENT-ASSETS> 2,297,713
<PP&E> 6,019,220
<DEPRECIATION> 681,946
<TOTAL-ASSETS> 14,388,099
<CURRENT-LIABILITIES> 7,673,122
<BONDS> 0
0
0
<COMMON> 5,568,467
<OTHER-SE> (2,878,055)
<TOTAL-LIABILITY-AND-EQUITY> 14,388,099
<SALES> 14,317,569
<TOTAL-REVENUES> 14,317,569
<CGS> 4,471,998
<TOTAL-COSTS> 4,471,998
<OTHER-EXPENSES> 10,594,843
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 631,744
<INCOME-PRETAX> (624,402)
<INCOME-TAX> 8,570
<INCOME-CONTINUING> (1,383,037)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,383,037)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
