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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
THE SECURITIES EXCHANGE ACT OF 1934
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______
Commission file number 0-21423
CHICAGO PIZZA & BREWERY, INC.
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 33-0485615
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
26131 Marguerite Parkway
Suite A
Mission Viejo, California 92692
(714) 367-8616
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock and
Redeemable Warrants
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 disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
-----
State issuer's revenues for its most recent fiscal year: $26,191,472.
The aggregate market value of the common stock of the Registrant ("Common
Stock") held by non-affiliates as of December 31, 1997 based on the market
price at February 27, 1998 was $11,615,082. As of March 4, 1998, there were
6,408,321 shares of Common Stock of the Registrant outstanding and 12,084,584
Redeemable Warrants of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the following documents are incorporated by reference
into Part III of this Form 10-KSB: The Registrant's Proxy Statement for the
Annual Meeting of Shareholders.
Transitional Small Business Disclosure Format (check one): YES NO X .
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INDEX
PART I
ITEM 1. DESCRIPTION OF BUSINESS........................................... 1
ITEM 2. PROPERTIES........................................................ 7
ITEM 3. LEGAL PROCEEDINGS................................................. 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS...................................... 8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 10
ITEM 7. FINANCIAL STATEMENTS.............................................. 16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................. 16
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS...... 16
ITEM 10. EXECUTIVE COMPENSATION............................................ 16
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 16
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.................................. 17
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CHICAGO PIZZA & BREWERY, INC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS AND STRATEGY
Chicago Pizza & Brewery, Inc. (the "Company" or "BJ's") owns and operates 27
restaurants located in Southern California, Oregon, Washington and Colorado
and an interest in one restaurant in Lahaina, Maui, each of which is
currently operated as either a BJ's Pizza, Grill & Brewery, BJ's Pizza &
Grill, BJ's Pizza & Grill - OTC or a Pietro's Pizza. The Company's Oregon and
Washington restaurants (the "Northwest Restaurants"), which were acquired in
early 1996 from Pietro's Corporation, a Washington Corporation ("Pietro's"),
are currently being converted into BJ's restaurants. Also, during 1996, the
Company completed a refurbishment program at its California restaurants as
well as an expansion of its menu around its core pizza products, and
introduced handcrafted, micro-brewed beers with the opening of its first
micro-brewery in Brea, California. During 1997 the Company opened a BJ's
Pizza, Grill & Brewery in Boulder, Colorado and converted five of the
Pietro's restaurants in Oregon to BJ's restaurants, two of which contain
micro-breweries. The Company recently converted two additional Pietro's
restaurants which opened as BJ's restaurants in February and March 1998. The
Company plans to continue to refurbish and convert the Northwest Restaurants
and add its award-winning pizza products, some or all of the expanded BJ's
menu and its award-winning handcrafted, micro-brewed beer to the menu
offerings at the Northwest Restaurants. If this plan can be successfully
executed, all 28 of the Company's restaurants will fit into one of the three
following BJ's concepts:
- BJ'S PIZZA, GRILL & BREWERY is designed to provide a
dining experience in an operating micro-brewery environment
where a variety of proprietary, hand-crafted beers are
produced on-site. The menu features the core pizza products
surrounded by a selection of appetizers, entrees, pastas,
sandwiches, specialty salads and desserts. Currently, the
Company operates one of its California restaurants, two of
its Oregon restaurants and its Boulder, Colorado restaurant
as the BJ'S PIZZA, GRILL & BREWERY concept.
- BJ'S PIZZA & GRILL is designed to provide a casual dining
experience with table service featuring a menu of pizza,
pasta, sandwiches, salads and desserts. Currently, the
Company operates seven of its California restaurants, three
of its Oregon restaurants and the Lahaina, Maui restaurant
as, and plans to convert several more of its Northwest
Restaurants into, the BJ'S PIZZA & GRILL concept.
- BJ'S PIZZA & GRILL - OTC is designed to provide an
informal dining experience with counter-service and a menu
featuring pizza and a limited selection of pastas,
sandwiches and salads. Currently, the Company does not plan
to operate any of the California restaurants as, operates
two of the Northwest Restaurants as, and plans to convert
an additional six to eight of the Northwest Restaurants
into, the BJ'S PIZZA & GRILL - OTC concept.
Management believes that having three concepts, which can be utilized in
alternative locations, facilities and markets, provides the Company a broader
scope of potential acquisitions and development sites.
According to certain newspaper polls, BJ's pizza is considered among the best
in Orange County, California. It has won numerous awards over the past years
from publications such as the Orange County edition of the Los Angeles Times,
Orange Coast Magazine, Daily Pilot and The Metropolitan, and BJ's pizza was
featured in 1994 on the TV show "Live in LA" as one of the five best pizzas
in the Los Angeles area. Finally, BJ's pizza was voted number one by the
readers of the Orange County Register, a leading Orange County,
California-based newspaper and by the readers of the Maui News.
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The Company has completed a campaign to broaden its customer base by: i)
surrounding its core pizza product with a more expansive menu including
appetizers, grilled sandwiches, specialty salads and pastas, ii) adding
hand-crafted, micro-brewed beers through on-site micro-breweries in certain
locations and the sale of internally-produced beer through other Company
restaurants and iii) differentiating the BJ's identity and expanding
merchandising opportunities through a comprehensive new logo and identity
program, new uniforms, a new interior design concept and redesigned signage.
The Company has also sought to expand through acquisitions and conversions,
such as the acquisition of the Northwest Restaurants and the Brea, California
restaurant. The Company is currently actively looking at an additional site
in Valencia, California, the hometown of a Six Flags Magic Mountain amusement
park, as well as other sites. However, no assurance can be given that the
Company's objectives can be achieved or that sufficient capital will be
available to finance the Company's business plan.
The Company was formed in 1991 as a California corporation to assume the
management of five "BJ's Chicago Pizzeria" restaurants and to develop
additional BJ's restaurants. Between 1992 and 1995, the Company developed
five additional restaurants, purchased three of those original five
restaurants that it managed and discontinued one of those that it had
developed. As a result of these transactions, at the end of 1995 the Company
owned restaurants in California located in La Jolla Village, Laguna Beach,
Belmont Shore, Seal Beach, Huntington Beach, and Balboa in Newport Beach, as
well as a 53.68% interest in a restaurant in Lahaina, Maui.
During late 1995 and early 1996, the Company converted the restaurants in
Balboa in Newport Beach, La Jolla Village, Laguna Beach, Belmont Shore, Seal
Beach and Huntington Beach, California to the BJ'S PIZZA & GRILL concept and
opened a new BJ'S PIZZA & GRILL restaurant in Westwood Village in Los
Angeles, California. Management believes that customer frequency and sales
volumes at the converted restaurants were significantly enhanced in 1996 as
compared to 1995, primarily due to the conversion to this expanded concept.
The seven restaurants open the entire years of 1995 and 1996 experienced an
increase in sales of $856,000 or 13.3% in 1996 over 1995. The La Jolla
Village restaurant, which had the most significant physical upgrade,
experienced sales increases of 44.7%. The same seven restaurants, which were
open the entire years of 1996 and 1997 experienced an increase in sales of
$633,000 or 8.7% in 1997 over 1996.
The first BJ'S PIZZA, GRILL & BREWERY opened in Brea, California in April
1996. This 10,000-square-foot restaurant features elaborate brick walls and
archways, high molded tin ceilings, warm lighting and industrial railings.
The on-premises brewing equipment includes a 30-barrel, copper-clad kettle,
60-barrel, stainless steel fermentation tanks, kegging equipment, and a
40,000-pound-capacity corrugated metal grain silo located at the front
entrance to the restaurant. The brewery capacity is sufficient to supply beer
for all of the Company's existing Southern California restaurants. In
addition, the Brea brewery has capacity to and currently produces beer for
several other breweries and restaurants.
The Company opened a BJ'S PIZZA, GRILL & BREWERY in Boulder, Colorado in
February 1997. This restaurant includes a ten-barrel brewing system which
primarily produces beer for the Boulder site. The Company also converted to
the BJ's Pizza, Grill & Brewery format the Pietro's restaurants in the
Jantzen Beach and Lloyd Center areas of Portland, Oregon in August and
October 1997, respectively. The Jantzen Beach brewery has a fifteen-barrel
brewing system and serves as the production facility for distribution of BJ's
beers to the Northwest Restaurants. The Lloyd Center brewery is a
three-barrel brewing system which produces specialty cask ales. In the one
and one-half years the Company has been producing its own beers, it has
received five significant awards. In 1996, the Company won a silver medal in
the strong ale category at the Great American Beer Festival in Denver,
Colorado for its Jeremiah Red Ale. In 1997, the Company won a gold medal at
the California State Fair for its PM Porter and a silver medal for its
Harvest Hefeweizen. Most recently, the Company won a silver medal for its
Jeremiah Red and a bronze medal for its Wassail at the World Beer
Competition. Management believes that in addition to the benefit of providing
a high-quality product to its restaurant guests, the relatively low
production cost of brewing its own beer and high premium pricing associated
with micro-brewed beer can significantly improve margins.
The March 1996 multi-unit acquisition of the Northwest Restaurants (the
"Pietro's Acquisition") was a key step in
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the strategy to quickly develop a market presence for the deep-dish, Chicago
style pizza and micro-brewery concept. Management believes that a significant
benefit from the Pietro's Acquisition is having 18 restaurants in the
Northwest market, which provides the Company with an immediate and
significant presence in that market area, without the more cumbersome and
time-consuming licensing and permitting issues which would be involved in the
development of individual restaurants. The Company's strategy is to continue
to operate the remaining unconverted restaurants under the "Pietro's" name
while awaiting conversion to either BJ'S PIZZA, GRILL & BREWERY, BJ'S PIZZA &
GRILL or BJ'S PIZZA & GRILL - OTC concepts. Management believes that it has
and will continue to significantly capitalize on the Pietro's Acquisition
based upon the following factors:
1. ESTABLISHED CUSTOMER BASE. Each of the restaurants purchased
already has a customer base which, based upon the results of the
conversions to date, can be expanded with the renovation and
introduction of the BJ's menu and concept.
2. REDUCTION OR ELIMINATION OF DISCOUNTING. Pietro's relies heavily
on discounting to maintain its share of the pizza market.
Discounts during 1997 were 17.5% of total sales of all Pietro's
restaurants. BJ's does very little discounting, relying instead
on the quality of its product and service to compete in the
marketplace. As Pietro's restaurants are converted to BJ's
restaurants, Management intends to reduce the use of
discounting, which Management believes will have a positive
effect on gross profit margins as the remaining Pietro's
restaurants are converted to one of the BJ's formats. The
percentage of discounting experienced at the Pietro's
restaurants converted to BJ's during 1997 was reduced to 5.1%.
3. POSITIVE IMPACT UPON MARKETING COSTS AS A RESULT OF REDUCED
DISCOUNTING. Due to its widespread use of discount coupons,
Pietro's marketing costs, consisting mainly of printing and
distribution, have been extremely high. Marketing costs averaged
approximately 6.1% of sales. BJ's marketing costs average under
2% of sales. Management believes that the anticipated reduction
in discounting upon conversion of the units to BJ's restaurants
will also significantly reduce marketing costs.
4. CAPITALIZATION UPON INCREASED PURCHASING VOLUMES. Management
believes that it has achieved significant cost reductions from
capitalizing on the increased purchasing volumes resulting from
the operation of the 18 additional restaurants.
5. ELIMINATION OF DUPLICATE OVERHEAD. Management has eliminated
duplicate overhead in accounting, finance, purchasing and
executive management, which has reduced overhead in total and
as a percentage of sales.
6. ECONOMIC BENEFITS OF INTERNALLY PRODUCED BEER. The installation
of micro-breweries in several of the converted Pietro's
restaurants should provide the economic benefits of internally
produced beer, not only to those restaurants but to other
converted restaurants as well. Management intends to distribute
the beer produced at BJ's micro-breweries, subject to local
regulations, to as many of the other converted restaurants as
possible.
7. INCREASED SALES THROUGH RENOVATION AND CONVERSION. Management
believes that through renovation and conversion of the acquired
restaurants to BJ's restaurants, the sales volumes could
increase to be more consistent with the volumes of the other
BJ's restaurants. The units converted during 1997 have
experienced from the date of conversion through the end of that
year an average 104% increase in sales over the comparable
periods of 1996.
The Company's current objectives are to complete the conversion of those
restaurants acquired from Pietro's to one of the three BJ's concepts over
approximately the next six months. The Company originally designated
approximately $4.5 million of the net proceeds of its initial public offering
which closed October 15, 1996 (the "Offering") for use in refurbishment and
redesign of these restaurants. However, Management believes that it will
achieve its desired objectives with a less costly refurbishment program than
originally anticipated, primarily due to the utilization of smaller and less
costly brewery systems, as well as a greater emphasis on the BJ'S PIZZA &
GRILL - OTC
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concept, as opposed to the more costly BJ'S PIZZA & GRILL concept. As a
result, Management is looking to develop additional BJ'S PIZZA, GRILL &
BREWERY restaurants at other potential sites with any funds remaining from
the original allocation for the development of the Northwest Restaurants. For
instance, Management has executed a letter of intent on an additional site in
Valencia, California, the hometown of a Six Flags Magic Mountain amusement
park. Management may also consider other new sights in the future. However,
no assurance can be given that the Company's objectives can be achieved or
that sufficient capital will be available to finance the Company's business
plan.
While Management will be required to close certain restaurants or sections of
such restaurants while undergoing conversion, Management believes that it can
somewhat lessen the impact of such closings by coordinating with neighboring
locations, where possible, to continue delivery operations. However, there
can be no assurance that future events, including problems, delays,
additional expenses and difficulties encountered in expansion and conversion
of restaurants, will not adversely impact the Company's ability to meet its
operational objectives or require additional financing, or that such
financing will be available if necessary.
MENU
The BJ's menu has been developed on a foundation of excellence. BJ's core
product, its deep-dish, Chicago-style pizza, has been highly acclaimed since
it was originally developed in 1978. This unique version of Chicago-style
pizza is unusually light, with a crispy, flavorful crust. Management believes
BJ's lighter crust helps give it a broader appeal than some other versions of
deep-dish pizza. The pizza is topped with high-quality meats, fresh
vegetables and whole-milk mozzarella cheese. BJ's pizza consistently has been
awarded "best pizza" honors by restaurant critics and public opinion polls in
Orange County, California. In addition, BJ's recently won the award for "best
pizza on Maui" in a poll conducted by the Maui News.
Management's objective in developing BJ's expanded menu was to ensure that
all items on the menu maintained and enhanced BJ's reputation for quality.
Many of BJ's food portions have been increased in conjunction with the new
menu, creating a real value orientation. Because of the relatively low food
cost associated with pizza, BJ's highest volume item, Management believes it
will still be able to maintain favorable gross profit margins while providing
a value to the consumer. When the new menu items were first developed in late
1995 and early 1996, they were introduced at promotional prices. Management
believes this artificially low pricing contributed to the higher food cost
percentage incurred during that time period. Prices on most of the new items
were increased effective May 1996. While the menu is still very
value-oriented, the new pricing is more consistent with Management's gross
profit margin objectives.
BJ's restaurants provide a constantly evolving selection of domestic,
imported and micro-brewed beers. In addition, subject to local regulations
and the capacity of the restaurants, BJ's restaurants feature a selection of
beers, including the award-winning Jeremiah Red Ale, PM Porter, Harvest
Hefeweizen and Wassail, brewed at one or more of BJ's micro-breweries.
Management believes that this provides two major benefits:
1. The quality and freshness of the BJ's brewed beers are under the
constant supervision of the Company's Vice President of Brewing
Operations. This has a positive impact on both the actual
quality and the perceived quality of the beer.
2. Management believes that the production costs of the internally
brewed beer are significantly less than purchased beer. The
relatively low production costs and premium pricing often
associated with micro-brewed beers is having a significant,
positive impact on gross profit margins.
MARKETING
To date, the majority of marketing has been accomplished through
community-based promotions and customer referrals. Management's philosophy
has been to "spend its marketing dollars on the plate," or use funds that
would typically be allocated to marketing to provide a better product and
value to its existing guests. Management believes this will result in
increased frequency of visits and greater customer referrals. BJ's
expenditures on advertising and marketing are typically 1.0% to 2.0% of sales.
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BJ's is very much involved in the local community and charitable causes,
providing food and resources for many worthwhile events. Management feels
very strongly about its commitment to helping others, and this philosophy has
benefited the Company in its relations with its surrounding communities.
The Company distributes very few coupons and does not try to compete with
other pizza chains that rely on heavy discounting. This philosophy has
enabled BJ's to maintain its quality image and its gross profit margins
through a period of "price wars" which have plagued the pizza industry.
Pietro's had traditionally marketed itself through the widespread use of
discount coupons. The resulting reductions in margins forced Pietro's
management to reduce the quality of its product in order to maintain a
reasonable food cost. Management believes that these pizza "price wars"
ultimately resulted in reduced value perceptions among Pietro's clientele,
and Pietro's lacked the financial resources to strategically overcome this
obstacle. As the Northwest Restaurants have been converted, and the BJ's
quality food and service have been introduced, discounting has been reduced
and expenditures on marketing have fallen to a range more typical for a BJ's
operation.
OPERATIONS
The Company's policy is to staff the restaurants with enthusiastic people
who can be an integral part of BJ's fun, casual atmosphere. Prior experience
in the industry is only one of the qualities Management looks for in its
employees. Enthusiasm, motivation and the ability to interact well with the
Company's clientele are the most important qualities for BJ's management and
staff.
Both management and staff undergo thorough formal training prior to assuming
their positions at the restaurants. Management has designated certain
managers, servers and cooks as "trainers," who are responsible for properly
training and monitoring all new employees. In addition, the Company's
Director of Food and Beverage and regional managers supervise the training
functions in their particular areas.
The Company purchases its food product from several key suppliers. The
majority of food and operating supplies for the California restaurants is
purchased from Jacmar Sales, with which the Company has had a long-term,
valuable relationship. A majority of food and operating supplies for the
Northwest Restaurants is purchased from McDonald Wholesale Company. Product
specifications are very strict because the Company insists on using fresh,
high-quality ingredients.
COMPETITION
The restaurant industry is highly competitive. A great number of restaurants
and other food and beverage service operations compete both directly and
indirectly with the Company in many areas, including food quality and
service, the price-value relationship, beer quality and selection, and
atmosphere, among other factors. Many competitors who use concepts similar to
that of the Company are well-established, and often have substantially
greater resources.
Because the restaurant industry can be significantly affected by changes in
consumer tastes, national, regional or local economic conditions, demographic
trends, traffic patterns, weather and the type and number of competing
restaurants, any changes in these factors could adversely affect the Company.
In addition, factors such as inflation and increased food, liquor, labor and
other employee compensation costs could also adversely affect the Company.
The Company believes, however, that its ability to offer high-quality food at
moderate prices with superior service in a distinctive dining environment
will be the key to overcoming these obstacles.
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GOVERNMENT REGULATIONS
The Company is subject to various federal, state and local laws, rules and
regulations that affect its business. Each of the Company's restaurants is
subject to licensing and regulation by a number of governmental authorities,
which may include alcoholic beverage control, building, land use, health,
safety and fire agencies in the state or municipality in which the restaurant
is located. Difficulties obtaining the required licenses or approvals could
delay or prevent the development of a new restaurant in a particular area or
could adversely affect the operation of an existing restaurant. Similar
difficulties, such as the inability to obtain a liquor, restaurant license or
a given restaurant's products and services could also limit restaurant
development and/or profitability. Management believes, however, that the
Company is in compliance in all material respects with all relevant laws,
rules, and regulations. Furthermore, the Company has never experienced
abnormal difficulties or delays in obtaining the licenses or approvals
required to open a new restaurant or continue the operation of its existing
restaurants. Additionally, Management is not aware of any environmental
regulations that have had or that it believes will have a materially adverse
effect upon the operations of the Company.
Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a federal and state authority and, in certain
locations, municipal authorities for a license and permit to sell alcoholic
beverages on the premises. Typically, licenses must be renewed annually and
may be revoked or suspended for cause by such authority at any time.
Alcoholic beverage control regulations relate to numerous aspects of the
daily operations of the Company's restaurants, including minimum age of
patrons and employees, hours of operation, advertising, wholesale purchasing,
inventory control and handling, and storage and dispensing of alcoholic
beverages. The Company has not encountered any material problems relating to
alcoholic beverage licenses or permits to date and does not expect to
encounter any material problems going forward. The failure to receive or
retain, or a delay in obtaining, a liquor license in a particular location
could adversely affect the Company's ability to obtain such a license
elsewhere.
The Company is subject to "dram-shop" statutes in California and other states
in which it operates. Those statutes generally provide a person who has been
injured by an intoxicated person the right to recover damages from an
establishment that has wrongfully served alcoholic beverages to such person.
The Company carries liquor liability coverage as part of its existing
comprehensive general liability insurance which it believes is consistent
with coverage carried by other entities in the restaurant industry and will
help protect the Company from possible claims. Even though the Company
carries liquor liability insurance, a judgment against the Company under a
dram-shop statute in excess of the Company's liability coverage could have a
materially adverse effect on the Company. To date, the Company has never been
the subject of a "dram-shop" claim.
Various federal and state labor laws, rules and regulations govern the
Company's relationship with its employees, including such matters as minimum
wage requirements, overtime and working conditions. Significant additional
governmental mandates such as an increased minimum wage, an increase in paid
leaves of absence, extensions in health benefits or increased tax reporting
and payment requirements for employees who receive gratuities, could
negatively impact the Company's restaurants.
EMPLOYEES
As of March 1, 1998, the Company employed 615 employees at its eight
California Restaurants, one Hawaii restaurant, and one Boulder, Colorado
restaurant. Additionally, 798 are employed at the acquired restaurants in
Washington and Oregon. The Company also employs 22 administrative and field
supervisory personnel at its corporate offices. Historically, the Company has
experienced relatively little turnover of restaurant management employees.
The Company believes that it maintains favorable relations with its
employees, and currently no unions or collective bargaining arrangements
exist.
INSURANCE
The Company maintains worker's compensation insurance and general liability
insurance coverage which it believes will be adequate to protect the Company,
its business, assets and operations. There is no assurance that any
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insurance coverage maintained by the Company will be adequate, that it can
continue to obtain and maintain such insurance at all or that the premium
costs will not rise to an extent that they adversely affect the Company or
the Company's ability to economically obtain or maintain such insurance.
TRADEMARKS AND COPYRIGHTS
The Company has not secured any rights in connection with its trademarks,
servicemarks or any other proprietary rights related to the use of the BJ'S
PIZZA, GRILL & BREWERY, BJ'S PIZZA & GRILL and BJ'S PIZZA & GRILL - OTC
names. There are other restaurants using the BJ's name throughout the United
States, thus, no assurance can be given that the Company will be able to
secure any such rights in the future or that the use of the BJ's name may not
be subject to claims by third parties.
ITEM 2. PROPERTIES
The Company's corporate headquarters in California are located in a 2,219
square-foot leased facility in Mission Viejo, California. The initial term of
the lease expires on December 31, 1998 and currently provides for
approximately $29,000 in annual rent, which is subject to certain adjustments
and annual increases. As of March 22, 1997, Chicago Pizza Northwest, Inc.,
the Company's subsidiary in Washington has headquarters in a 2,711
square-foot leased facility in Lynnwood, Washington. This lease expires on
March 13, 2002 and currently provides for approximately $50,000 in annual
rent, which is subject to certain adjustments and annual increases,
including, without limitation, annual Consumer Price Index escalations.
The Company currently leases the following restaurants:
<TABLE>
<CAPTION>
YEAR OPENED/
ACQUIRED SQUARE FEET
------------ -----------
<S> <C> <C>
CALIFORNIA
Balboa in Newport Beach ............................. 1995 2,600
La Jolla Village..................................... 1995 3,000
Laguna Beach......................................... 1995 2,150
Belmont Shore........................................ 1995 2,910
Seal Beach........................................... 1994 2,369
Huntington Beach..................................... 1994 3,430
Westwood Village, Los Angeles........................ 1996 2,450
Brea................................................. 1996 10,000
COLORADO
Boulder ............................................. 1997 5,500
HAWAII
Lahaina, Maui........................................ 1994 3,430
OREGON
Hood River........................................... 1996 7,000
Gresham ............................................. 1996 5,016
Eugene I ......................................... 1996 7,500
Milwaukie............................................ 1996 8,064
Salem I ............................................. 1996 6,875
Jantzen Beach ....................................... 1996 7,932
The Dalles........................................... 1996 6,560
Eugene II............................................ 1996 4,443
Eugene IV............................................ 1996 4,345
Salem II............................................. 1996 5,000
Portland (Stark)..................................... 1996 6,405
Portland (Lloyd Center) ............................. 1996 4,341
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Portland (Burnside) ................................. 1996 3,483
Portland (Lombard.................................... 1996 5,700
Aloha ............................................... 1996 3,658
McMinnville ......................................... 1996 2,900
Woodstock ........................................... 1996 1,200
WASHINGTON
Longview............................................. 1996 5,300
</TABLE>
All of the Company's restaurants are on leased premises and are subject to
varying lease-specific arrangements. For example, some of the leases require
a flat rent, subject to regional cost-of-living increases, while others
additionally include a percentage of gross sales. In addition, certain of
these leases expire in the near future, and there is no automatic renewal or
option to renew. No assurance can be given that leases can be renewed, or, if
renewed, that rents will not increase substantially, both of which would
adversely affect the Company. Other leases are subject to renewal at fair
market value, which could involve substantial increases. Total restaurant
lease expense in 1997 was approximately $1,865,000 and, as indicated above,
is subject to various increases.
With respect to future restaurant sites, the Company believes the locations
of its restaurants are important to its long-term success and will devote
significant time and resources to analyzing prospective sites. The Company's
strategy is to open its restaurants in high-profile locations with strong
customer traffic during day, evening and weekend hours. The Company has
developed specific criteria for evaluating prospective sites, including
demographic information, visibility and traffic patterns.
ITEM 3. LEGAL PROCEEDINGS
Restaurants such as those operated by the Company are subject to a continuous
stream of litigation in the ordinary course of business, most of which the
Company expects to be covered by its general liability insurance. Punitive
damages awards, however, are not covered by the Company's general liability
insurance. To date, the Company has not paid punitive damages with respect to
any claims, but there can be no assurance that punitive damages will not be
awarded with respect to any future claims or any other actions. Although the
Company is not currently a party to any legal proceedings that would have a
material adverse effect upon the Company's business or financial position, it
is possible that in the future the Company could become a party to such
proceedings.
The Company closed its La Jolla Prospect restaurant in 1995 and the lease was
assigned, subject to a continuing guarantee by the Company, to a third party
restaurant operator. That operator defaulted on the terms of the lease and
the owner of the property filed an action against the Company. In October
1997, the Company agreed to a settlement and mutual release of this lease in
the amount of $150,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter
of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
On October 8, 1996, the Company's Common Stock and Redeemable Warrants became
listed on the Nasdaq Small Cap Market ("Nasdaq") (Symbols: CHGO and CHGOW) in
connection with the Offering. On March 4, 1998, the closing prices of the
Common Stock and Redeemable Warrants were $1.81 per share and $0.16 per
Redeemable Warrant, respectively. The table below shows the high and low
sales prices as reported by Nasdaq. The sales prices represent inter-dealer
quotations without adjustments for retail mark-ups, mark-downs or commissions.
8
<PAGE>
<TABLE>
<CAPTION>
CALENDAR YEAR ENDED
DECEMBER 31,
COMMON STOCK REDEEMABLE WARRANTS
-------------------------- --------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1996
- ----
Fourth Quarter (From
October 8, 1996) $6.50 $5.00 $1.75 $0.98
1997
- ----
First Quarter $5.38 $1.28 $1.19 $0.09
Second Quarter $1.75 $1.00 $0.41 $0.19
Third Quarter $2.44 $1.38 $0.31 $0.16
Fourth Quarter $2.13 $1.34 $0.22 $0.09
</TABLE>
As of March 4, 1998, the Company had 126 shareholders of record and 78
holders of Redeemable Warrants of record.
USE OF PROCEEDS
On October 9, 1996, the Company received proceeds of $6,803,743 net of
offering expenses, through the sale of the Company's common stock and
redeemable warrants. The U.S. Securities & Exchange Commission file number of
the registration statement for this initial public offering was 3-35182. The
effective date of the registration statement was October 8, 1996.
Of the offering proceeds, approximately $2,505,013 has been expended through
December 31, 1997 for construction of new and conversion of existing
restaurants, $1,372,948 for the purchase of restaurant and brewery equipment,
$72,910 for the repayment of debt to officers and shareholders, $747,592 for
the repayment of debt to others, $480,244 for costs associated with the
opening of new or converted restaurants (preopening costs), and $66,326 for
working capital. The Company anticipates that the remaining $1,558,710 of
offering proceeds will be used to complete the conversion of the remaining
Pietro's restaurants, with completion expected in the third quarter of 1998.
Pending the use of offering proceeds, these funds have been invested in an
institutional working capital fund with a major financial institution.
DIVIDEND POLICY
The Company has not paid any dividends since its inception and has currently
not allocated any funds for the payment of dividends. Rather, it is the
current policy of the Company to retain earnings, if any, for expansion of
its operations, remodeling of existing restaurants and other general
corporate purposes and to not pay any cash dividends in the foreseeable
future. Should the Company decide to pay dividends in the future, such
payments would be at the discretion of the Board of Directors.
During 1997, the Company did not sell any equity securities that were not
registered under the Securities Act of 1933, as amended (the "Securities
Act").
9
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction with
the Consolidated Financial Statements and related notes thereto as well as
with the discussion below.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------- --------------------------------
1997 1996 1997 1996
---------------- ------------- -------------- -------------
(in thousands) (%) (%)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $26,191 $19,865 100.0% 100.0%
Cost of sales 7,732 6,183 29.5 31.1
---------------- ------------- ------------- -------------
Gross profit 18,459 13,682 70.5 68.9
---------------- ------------- ------------- -------------
Costs and Expenses:
Labor and benefits 9,086 6,932 34.7 34.9
Occupancy 2,363 1,877 9.0 9.4
Operating expenses 3,385 2,998 12.9 15.1
General and administrative 2,637 2,258 10.1 11.4
Depreciation and amortization 1,389 1,037 5.3 5.2
---------------- ------------- ------------- -------------
Total costs and expenses 18,859 15,102 72.0 76.0
---------------- ------------- ------------- -------------
Loss from operations (400) (1,420) (1.5) (7.1)
---------------- ------------- ------------- -------------
Other Income (Expense):
Gain on involuntary conversion of assets 202 0.8
Interest expense, net (125) (507) (0.5) (2.6)
Other income (expense), net 19 (380) 0.1 (1.9)
---------------- ------------- ------------- -------------
Total other income (expense) 97 (887) 0.4 (4.5)
---------------- ------------- ------------- -------------
Loss before minority interest and taxes (303) (2,307) (1.2) (11.6)
Minority interest in partnership (11) 27 (0.0) 0.1
---------------- ------------- ------------- -------------
Loss before taxes (314) (2,280) (1.2) (11.5)
Income tax expense (1) (9) (0.0) (0.0)
---------------- ------------- ------------- -------------
Net loss ($315) ($2,289) (1.2%) (11.5%)
================ ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Balance Sheet Data (end of period):
Working capital $232 $3,329
Intangible assets, net 5,517 5,676
Total assets 17,842 18,914
Total long-term debt (including current portion) 3,543 3,964
Minority interest 211 215
Shareholders' equity 11,808 12,123
</TABLE>
10
<PAGE>
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Financial Statements and notes thereto included elsewhere in this
Form 10-KSB. Except for the historical information contained herein, the
discussion in this Form 10-KSB 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-KSB should be read as being applicable to all related
forward-looking statements wherever they appear in this Form 10-KSB. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, without
limitation, those factors discussed herein and in the Company's prospectus
dated October 8, 1996 (the "Prospectus"), including, without limitation: (i)
the Company's ability to manage growth and conversions, (ii) construction
delays, (iii) marketing and other limitations as a result of the Company's
historic concentration in Southern California and current concentration in
the Northwest, (iv) restaurant and brewery industry competition, (v) impact
of certain brewery business considerations, including without limitation,
dependence upon suppliers and related hazards, (vi) increase in food costs
and wages, including without limitation the recent increase in minimum wage,
(vii) consumer trends, (viii) potential uninsured losses and liabilities,
(ix) trademark and servicemark risks, and (x) other general economic and
regulatory conditions and requirements.
GENERAL
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 of 1996 and 1 of the restaurants in the second quarter 1997. The
Company opened a restaurant and brewery in Boulder, Colorado in February 1997
and converted five of the Pietro's restaurants to the BJ's restaurant and/or
brewery concept in April, July, August, October and December 1997.
Consequently, the results of operations for 1997 are not in some respects
comparable to the results of operations for the same period in 1996.
The Company's revenues are derived primarily from food and beverage sales at
its restaurants. The Company's expenses consist primarily of food and
beverage costs, labor costs (consisting of wages and benefits), operating
expenses (consisting of marketing costs, repairs and maintenance, supplies,
utilities and other operating expenses), occupancy costs, general and
administrative expenses and depreciation and amortization expenses.
Certain preopening costs, including direct and incremental costs associated
with the opening of a new restaurant, are amortized over a period of one year
from the opening date of such restaurant. These costs include primarily those
incurred to train a new restaurant management team, food, beverage and supply
costs incurred to test all equipment and systems, and any rent or operating
expenses incurred prior to opening. Construction costs, including leasehold
capital improvements, are amortized over the remaining useful life of the
related asset, or, for leasehold improvements, over the initial term, if less.
During 1995 and early 1996 the Company incurred a number of non-recurring
charges in connection with the development and implementation of 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 Vice President of brewing operations, beer
menu development costs and brewery design.
Management believes the Company can be profitable through increased sales
relating to its extended menu developed in 1996 and the continuing 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 made possible with the acquisition
of the Northwest Restaurants.
11
<PAGE>
RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
REVENUES. Total revenues for the year ended December 31, 1997 increased to
$26,191,000 from $19,865,000 for the year ended December 31, 1996, an
increase of $6,326,000 or 31.8%.
Those factors contributing to the increase in revenues were:
Revenues from the Northwest Restaurants were not included in the
results of operations for the period from January 1, 1996 through the
date of their acquisition, March 29, 1996. A full year's revenues
from the Northwest Restaurants were included in the results of
operations for 1997. Revenues for the excluded comparable period of
1997 (January 1 through March 29) from the Northwest Restaurants were
$2,580,000.
The opening of a BJ's Pizza, Grill & Brewery in Boulder, Colorado in
February 1997. Revenues at the Boulder, Colorado restaurant during
1997 totaled $1,829,000.
The opening of the Westwood Village (Los Angeles), California and
Brea, California restaurants in March and April 1996, respectively.
Same store sales at the units operated as BJ's restaurants during the
entire comparable periods increased to $7,904,000 in 1997 from
$7,271,000 in 1996, an increase of $633,000 or 8.7%. Management
believes this increase is primarily due to increased awareness and
continued acceptance of the expanded BJ's concept and menu.
Revenues at the BJ's Pizza, Grill & Brewery in Brea, California, for
the portion of the year operated during both comparable periods
(April 1 through December 31), increased to $2,882,000 during 1997
from $2,449,000 during 1996, an increase of $433,000 or 17.7%.
Revenues at the BJ's Pizza & Grill in Westwood Village (Los Angeles),
California, for the portion of the year operated during both
comparable periods (March 16 through December 31), increased to
$878,000 during 1997 from $806,000 during 1996, an increase of
$72,000 or 8.9%.
The Northwest Restaurants which were converted to BJ's restaurants
during 1997 experienced increases in revenues from the prior year
when they were operated as Pietro's restaurants, as follows:
<TABLE>
<CAPTION>
PERIOD FROM
CONVERSION TO INCREASE IN PERCENTAGE
LOCATION END OF YEAR REVENUES INCREASE
-------------- -------------------- ---------------- ------------------
<S> <C> <C> <C>
Eugene IV 4/25 - 12/31 $ 562,000 130 %
Stark St. 7/1 - 12/31 156,000 38
Jantzen Beach 8/25 - 12/31 426,000 213
Lloyd Center 10/15 - 12/31 53,000 48
---------------- -----------------
Totals $1,197,000 104 %
================ =================
</TABLE>
Factors which partially offset the revenue increases noted above were:
The sale of seven of the Northwest Restaurants in May and June 1996,
which accounted for $1,533,000 in revenue during 1996.
12
<PAGE>
The temporary closure of the Pietro's restaurant in Aloha, Oregon in
February 1997 due to a fire at that location.
The sale of the Pietro's restaurant in North Bend, Oregon in June
1997.
Revenues for the units operated as Pietro's restaurants during the
entire comparable periods decreased to $7,132,000 in 1997 from
$7,514,000 in 1996, a decrease of $382,000 or 5.1%. Management
believes this decrease is primarily due to continuing dilution of the
Pietro's brand while the restaurants await conversion, as well as a
reduction in marketing expenditures.
COST OF SALES. Cost of food, beverages and paper (cost of sales) for the
restaurants increased to $7,732,000 for 1997 from $6,183,000 for 1996, an
increase of $1,549,000 or 25.1%. However, as a percentage of revenues, cost
of sales decreased to 29.5% in 1997 from 31.1% in 1996. The decrease in cost
of sales as a percentage of revenues was primarily due to (i) additional
non-recurring costs incurred during the first half of 1996 associated with
the testing and initial implementation phase of the menu expansion, (ii)
special promotional pricing of certain of the new menu items through May
1996, (iii) more efficient purchasing and enhanced control systems, and (iv)
a reduction in discounting at the Pietro's restaurants. These factors were
partially offset by the generally higher cost of sales relative to revenues
at the Pietro's restaurants, which were owned by the Company for the entire
year of 1997 but only for nine months of 1996. Another offsetting factor was
the increased cost of sales associated with the Northwest Restaurants
converted to BJ's during 1997. It typically takes several months for
newly-opened restaurants to achieve desired efficiencies relative to food
cost.
LABOR. Labor costs for the restaurants increased to $9,086,000 in 1997 from
$6,932,000 in 1996, an increase of $2,154,000 or 31.1%. However, as a
percentage of revenues, labor costs decreased to 34.7% in 1997 from 34.9% in
1996. The factors which contributed to the decrease in labor costs as a
percentage of revenue were:
The planned extra staffing in 1996 associated with the opening of the
Westwood Village (Los Angeles) and Brea, California restaurants and
the implementation of the major menu and concept expansion.
The generally lower labor costs as a percentage of revenues at the
Pietro's restaurants, which were owned by the Company for the entire
year of 1997 but only for nine months of 1996. The Pietro's labor
costs are generally lower because, unlike the BJ's restaurants, they
are not full service.
Because the management portion of labor costs are mostly fixed costs,
increases in comparable store sales resulted in lower total labor
costs relative to revenues.
The above-mentioned factors were partially offset by the following:
Increases in the Federal, California and Oregon minimum wage.
Anticipated higher labor costs relating to the re-opening of the
converted restaurants in the Northwest during 1997.
OCCUPANCY. Occupancy costs increased to $2,363,000 in 1997 from $1,877,000 in
1996, an increase of $486,000 or 25.9%. As a percentage of revenues,
occupancy costs decreased to 9.0% in 1997 from 9.4% in 1996. The primary
reason for the decrease in occupancy costs relative to revenues was the
increase in comparable store sales.
OPERATING EXPENSES. Operating expenses increased to $3,385,000 in 1997 from
$2,998,000 in 1996, an increase of $387,000 or 12.9%. However, as a
percentage of revenues, operating expenses decreased to 12.9% in 1997 from
15.1% in 1996. The primary reasons for the decrease in operating expenses as
a percentage of revenues were (i) the increase in same store sales, and (ii)
an increased focus on operating the restaurants more efficiently as well as
the implementation of improved expense monitoring systems. Operating expenses
include restaurant-level operating costs, the major components of which
include marketing, repairs and maintenance, supplies and utilities.
13
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $2,637,000 in 1997 from $2,258,000 in 1996, an increase of
$379,000 or 16.8%. The increase in general and administrative expenses was
due to (i) the acquisition of the Northwest Restaurants in March 1996, (ii)
increased expenses associated with being a publicly held company since
October 1996, (iii) the hiring of additional personnel relating to the
physical and operational conversion of the Pietro's restaurants to the BJ's
concept and (iv) the costs, totaling $150,000, relating to a settlement with
a prior landlord on a continuing guarantee of a lease in LaJolla, California.
As a percentage of revenues, general and administrative expenses decreased to
10.1% in 1997 from 11.4% in 1996, due to increased revenues. Management
anticipates that as future revenues increase due to the conversions of the
remaining Pietro's restaurants, general and administrative expenses will
continue to decrease as a percentage of revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$1,389,000 in 1997 from $1,037,000 in 1996, an increase of $352,000 or 33.9%.
The increase was primarily due to (i) the acquisition of the Northwest
Restaurants in March 1996, (ii) the opening of the Westwood Village (Los
Angeles) and Brea, California restaurants in March and April 1996,
respectively, (iii) the opening of the Boulder, Colorado restaurant in
February 1997 and (iv) the amortization of pre-opening costs associated with
the Boulder, Colorado restaurant and the converted Pietro's restaurants.
INTEREST EXPENSE. Interest expense, net of interest income, decreased to
$125,000 in 1997 from $507,000 in 1996, a decrease of $382,000 or 75.3%. The
decrease was primarily due to (i) the conversion in October 1996 of
$3,000,000 in convertible debt, issued in February 1996, into common stock
and warrants and the resulting elimination of interest expense and finance
costs associated with the convertible debt, and (ii) the increase in interest
income from investment of the proceeds of the Company's initial public
offering in October 1996.
LIQUIDITY AND CAPITAL RESOURCES
On October 15, 1996 the Company completed its initial public offering (the
"Offering") of 1,800,000 shares of Common Stock and 1,800,000 Redeemable
Warrants. On November 26, 1996, the representative of the underwriters of the
Offering exercised the over-allotment option pursuant to the Prospectus to
purchase 270,000 additional Redeemable Warrants (the "Over-Allotment
Option"). The Offering, including the Over-Allotment Option, resulted in
approximately $6,804,000 in net proceeds. The funds have been and will be
used for the continued development of the Northwest Restaurants and other
sites, if possible, as well as for the reduction of debt and working capital
purposes.
Since the completion of the Offering in October 1996, the Company has
invested in restaurant development and reduced debt. Net cash used by
operating activities for the year ended December 31, 1997 and the year ended
December 31, 1996 was $147,000 and $114,000, respectively. Capital
expenditures for 1997 totaled $3,303,000 and primarily included the
construction, improvement and equipment costs of three BJ's Pizza, Grill and
Brewery restaurants, one located in Boulder, Colorado and two in Portland,
Oregon (Jantzen Beach and Lloyd Center), two BJ's Pizza & Grill restaurants,
one located in Eugene, Oregon and one in Portland, Oregon (Stark, St.) and
the opening of one BJ's Pizza & Grill -OTC located in Portland Oregon
(Burnside). Capital expenditures for 1996 totaled $4,853,000 and primarily
included the acquisition of the 26 Northwest Restaurants, net of proceeds
from the sale of seven of those restaurants, the BJ's Pizza, Grill and
Brewery located in Brea, California including purchase of leasehold
interests, equipment and improvements and the improvements and equipment
associated with the BJ's Pizza & Grill located in Westwood (Los Angeles),
California.
During 1995 and early 1996 the Company incurred a number of non-recurring
charges in connection with the development and implementation of 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 Vice President of brewing operations, beer
menu development costs and brewery design.
Management believes the Company can be profitable through increased sales
relating to its extended menu
14
<PAGE>
developed in 1996 and the continuing 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 made possible with the acquisition of the Northwest
Restaurants.
The Company currently intends to utilize cash and cash equivalents at year
end primarily for the conversion and refurbishment of restaurants in the
Northwest and the acquisition of additional sites, if possible, as well as
for working capital purposes. Management currently anticipates a total of
$2,000,000 in additional capital expenditure requirements for 1998, which
includes requirements for the Northwest Restaurant conversions and other
sites, if possible. Management believes that cash and cash equivalents at
year end and future operating cash flow will be sufficient for the Company to
fund its operations and continue to meet its business plan over the next
fiscal year.
IMPACT OF INFLATION
Impact of inflation on food, labor and occupancy costs can significantly
affect the Company's operations. Many of the Company's employees are paid
hourly rates related to the federal minimum wage, which has been increased
numerous times and remains subject to future increases.
SEASONALITY AND ADVERSE WEATHER
The Company's results of operations have historically been impacted by
seasonality, which directly impacts tourism at the Company's coastal
locations. The summer months (June through August) have traditionally been
higher volume periods than other periods of the year.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computerized information systems to
identify the systems and applications that could be affected by the Year 2000
issue. The Company currently believes that its principal computerized systems
and applications are Year 2000 compliant in all material respects, and that
the costs solely related to addressing any Year 2000 noncompliance issues
will not have a material effect on the Company's financial condition or
results of operations.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standard ("SFAS") No. 130 "Reporting Comprehensive
Income" which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. Comprehensive
income includes net income and other comprehensive income components which
under generally accepted accounting principles ("GAAP") bypass the income
statement and are reported in the balance sheet as a separate component of
equity. For the two years ended December 31, 1997, the Company had no other
comprehensive income components as defined in SFAS No. 130. SFAS No. 130 does
not apply to an enterprise that has no items of other comprehensive income in
any of the periods presented.
In June 1997, the FASB issued SFAS No. 131 "Disclosure About Segments of an
Enterprise and Restated Information," which changes current practice and
establishes a new framework, referred to as the "management" approach, on
which to have segment reporting. The management approach requires that
management identify the "operating segments" based on the way that management
disaggregates the entity for internal operating decisions. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997, and is not
required for interim statements in the first year of adoption. Management
believes that the adoption of this new standard will not have any material
impact on the Company's financial position or results of operations.
As is currently the practice of many restaurant entities, the Company defers
its restaurant preopening costs and amortizes them over the twelve-month
period following the opening of each respective restaurant. In April 1997,
the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued a draft Statement of Position (SOP)
entitled "Reporting on the Costs of Start-Up Activities." The proposed SOP
would require entities to expense as incurred all start-up and preopening
costs that are not otherwise capitalizable as
15
<PAGE>
long-lived assets. In March 1998, the FASB adopted the SOP for final
issuance, subject to certain changes. The Company believes the final SOP will
be issued during the second quarter of fiscal 1998 and will be effective for
fiscal years beginning after December 15, 1998. Restatement of previously
issued financial statements is not permitted by the draft SOP, and entities
are not permitted to report the pro forma effects of the retroactive
application of the new accounting standard.
The Company's adoption of the new accounting standard proposed by the SOP
will involve the recognition of the cumulative effect of the change in
accounting principle required by the SOP as a one-time charge against
earnings, net of any related income tax effect, retroactive to the beginning
of the fiscal year of adoption. Total deferred preopening costs were $333,000
at December 31, 1997.
Other recently issued standards of the FASB are not expected to affect the
Company as conditions to which those standards apply are absent.
ITEM 7. FINANCIAL STATEMENTS
See the Index to Financial Statements attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item is incorporated herein by reference to
the information contained in the Proxy Statement relating to the Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the year ended December
31, 1997.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the information contained in the Proxy Statement relating to the Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the year ended December
31, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
the information contained in the Proxy Statement relating to the Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the year ended December
31, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the information contained in the Proxy Statement relating to the Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the year ended December
31, 1997.
16
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Debtor's Plan of Reorganization incorporated by reference to
Exhibit 2.1 of the Registration Statement on Form SB-2, as filed on
June 28, 1996 (Registration No. 333-5182-LA), and declared
effective by the Securities and Exchange Commission on October 8,
1996 (referred to herein as the "Registration Statement").
2.2 Asset Purchase Agreement by and between the Company and Roman
Systems, Inc. incorporated by reference to Exhibit 2.2 of the
Registration Statement.
2.3 Secured Promissory Note by and between the Company and Roman
Systems, Inc. filed as Exhibit 2.3 of the Registration Statement.
3.1 Amended and Restated Articles of Incorporation of the Company,
as amended, incorporated by reference to Exhibit 3.1 of
the Registration Statement.
3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 of
the Registration Statement.
4.1 Specimen Common Stock Certificate of the Company, incorporated by
reference to Exhibit 4.1 of the Registration Statement.
4.2 Warrant Agreement, incorporated by reference to Exhibit 4.2 of
the Registration Statement.
4.3 Specimen Common Stock Purchase Warrant, incorporated by reference
to Exhibit 4.3 of the Registration Statement.
4.4 Form of Representative's Warrant, incorporated by reference to
Exhibit of the Registration Statement.
10.1 Form of Employment Agreement of Jeremiah J. Hennessy, incorporated
by reference to Exhibit 10.1 of the Registration Statement.
10.2 Form of Employment Agreement of Paul Motenko, incorporated by
reference to Exhibit 10.2 of the Registration Statement.
10.3 Form of Indemnification Agreement with Officers and Directors,
incorporated by reference to Exhibit 10.6 of the Registration
Statement.
10.4 Chicago Pizza & Brewery, Inc. Stock Option Plan, incorporated by
reference to Exhibit 10.7 of the Registration Statement.
10.5 Lease Agreement - Corporate Headquarters, Mission Viejo,
incorporated by reference to Exhibit 10.9 of the Registration
Statement.
10.6 Lease Agreement - Corporate Headquarters, Chicago Pizza Northwest,
incorporated by reference to Exhibit 10.10 of the Registration
Statement.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.7 Consulting Agreement between the Company and ASSI, Inc. --
Pietro's, incorporated by reference to Exhibit 10.11 of the
Registration Statement.
10.8 Consulting Agreement between the Company and ASSI, Inc. -- Nevada,
incorporated by reference to Exhibit 10.12 of the Registration
Statement.
10.9 Note Purchase Agreement by and between the Company and ASSI, Inc.,
incorporated by reference to Exhibit 10.13 of the Registration
Statement.
10.10 Note Purchase Agreement by and between the Company and Norton
Herrick, incorporated by reference to Exhibit 10.14 of the
Registration Statement.
10.11 Asset Purchase Agreement by and between the Company and Abby's,
Inc., incorporated by reference to Exhibit 10.15 of the
Registration Statement.
10.12 BJ's Lahaina, L.P. Partnership Agreement, incorporated by
reference to Exhibit 10.16 of the Registration Statement.
10.13 Pepsi Supplier Agreement, incorporated by reference to Exhibit
10.17 of the Registration Statement.
10.14 Underwriting Agreement between the Company and The Boston Group,
L.P., as Representative of the Several Underwriters named therein,
incorporated by reference to Exhibit 1.1 of the Registration
Statement.
21 List of Subsidiaries, incorporated by reference to Exhibit 21.1 of
the Registration Statement.
27.1 Financial Data Schedule.
</TABLE>
(b) The Company filed no Reports on Form 8-K during the last quarter of
1997.
18
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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.
By: /s/PAUL A. MOTENKO
Paul A. Motenko, Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------- -------- ----
<S> <C> <C>
By: /s/PAUL A. MOTENKO Director, Chief Executive Officer, March 30, 1998
- -------------------- Chairman of the Board and Vice-
Paul A. Motenko President and Secretary
By: /s/JEREMIAH J. HENNESSY President, Chief Operating March 30, 1998
- -------------------- Officer, Chief Financial Officer,
Jeremiah J. Hennessy Principal Accounting Officer and
Director
By: /s/ALEXANDER M. PUCHNER Vice President of Brewing Operations March 30, 1998
- -------------------- and Director
Alexander M. Puchner
By: /s/BARRY J. GRUMMAN Director March 30, 1998
- --------------------
Barry J. Grumman
</TABLE>
19
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report Of Independent Accountants 21
Consolidated Balance Sheets As Of December 31, 1997 and 1996 22
Consolidated Statements Of Operations For The Years Ended
December 31, 1997 and 1996 23
Consolidated Statements Of Shareholders' Equity For The Years Ended
December 31, 1997 and 1996 24
Consolidated Statements Of Cash Flows For The Years Ended
December 31, 1997 and 1996 25
Notes To Consolidated Financial Statements 26
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
----------
To the Shareholders
Chicago Pizza & Brewery, Inc.
We have audited the accompanying consolidated balance sheets of Chicago Pizza
& Brewery, Inc. (the "Company"), as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years ended December 31, 1997 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Chicago Pizza & Brewery, Inc. as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 10, 1998
21
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 1,705,349 $ 5,485,808
Restricted cash 200,000 200,000
Accounts receivable 161,649 157,422
Inventory 361,299 256,668
Prepaids and other current assets 646,700 343,176
----------------- -----------------
Total current assets 3,074,997 6,443,074
Property and equipment, net 8,673,831 6,234,061
Other assets 207,138 191,118
Restricted cash 369,123 369,123
Intangible assets, net 5,516,662 5,676,349
----------------- -----------------
Total assets $17,841,751 $18,913,725
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable 1,042,856 1,264,798
Accrued expenses 1,101,177 1,199,092
Notes payable to related parties 336,306 328,681
Current portion of long-term debt 265,079 255,636
Current portion of obligations under capital lease 97,844 66,266
----------------- -----------------
Total current liabilities 2,843,262 3,114,473
Notes payable to related parties 2,058,681 2,386,547
Obligations under capital lease 199,265 110,322
Long-term debt 585,751 816,187
Other liabilities 135,067 147,771
----------------- -----------------
Total liabilities 5,822,026 6,575,300
----------------- -----------------
Minority interest in partnership 211,357 215,128
Commitments (Note 8)
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, none issued
or outstanding
Common stock, no par value, 60,000,000 shares authorized as of
December 31, 1997 and 1996, 6,408,321 shares issued and
outstanding as of December 31, 1997 and 1996 15,039,646 15,039,646
Capital surplus 1,196,029 1,196,029
Accumulated deficit (4,427,307) (4,112,378)
----------------- -----------------
Total shareholders' equity 11,808,368 12,123,297
----------------- -----------------
Total liabilities and shareholders' equity $17,841,751 $18,913,725
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
22
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Revenues $ 26,191,472 $ 19,865,390
Cost of sales 7,732,193 6,182,528
----------------- -----------------
Gross profit 18,459,279 13,682,862
----------------- -----------------
Costs and Expenses:
Labor and benefits 9,085,853 6,932,481
Occupancy 2,363,002 1,877,321
Operating expenses 3,384,616 2,998,333
General and administrative 2,636,904 2,257,701
Depreciation and amortization 1,388,551 1,037,320
----------------- -----------------
Total cost and expenses 18,858,926 15,103,156
----------------- -----------------
Loss from operations (399,647) (1,420,294)
----------------- -----------------
Other Income (Expense):
Gain on involuntary conversion of assets 202,082 -
Interest expense, net (124,950) (506,959)
Other income (expense), net 19,438 (380,010)
----------------- -----------------
Total other income (expense) 96,570 (886,969)
----------------- -----------------
Loss before minority interest and income taxes (303,077) (2,307,263)
Minority interest in partnership (11,052) 27,223
----------------- -----------------
Loss before income taxes (314,129) (2,280,040)
Income tax expense (800) (8,570)
----------------- -----------------
Net loss ($314,929) ($2,288,610)
================= =================
Basic net loss per common share ($0.05) ($0.52)
================= =================
Basic weighted average number of common shares outstanding 6,408,321 4,391,709
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
23
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL ACCUMULATED
SHARES AMOUNT SURPLUS DEFICIT TOTAL
---------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 3,788,878 $5,568,467 $278,750 ($1,823,768) $4,023,449
Initial public offering of common stock, net 1,800,000 6,348,964 6,348,964
Initial public offering of warrants, net 454,779 454,779
Conversion of note payable 750,000 2,775,000 412,500 3,187,500
Warrants issued for consulting services 50,000 50,000
Common stock issued for consulting services 69,443 347,215 347,215
Net loss (2,288,610) (2,288,610)
---------------- --------------- --------------- ---------------- --------------
Balance, December 31, 1996 6,408,321 $15,039,646 1,196,029 (4,112,378) 12,123,297
Net loss (314,929) (314,929)
---------------- --------------- --------------- ---------------- --------------
Balance, December 31, 1997 6,408,321 $15,039,646 $1,196,029 ($4,427,307) $11,808,368
================ =============== =============== ================ ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
24
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss ($314,929) ($2,288,610)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,388,551 1,037,320
Gain on involuntary conversion of assets (202,082)
Gain on sale of restaurant (16,678)
Amortization of debt financing costs 390,000
Minority interest in partnership 11,052 (27,223)
Noncash interest and consulting expense 559,715
Changes in assets and liabilities:
Accounts receivable (4,227) (59,054)
Inventory (104,631) (45,799)
Prepaids and other current assets (555,451) (150,879)
Other assets (16,020) 91,437
Accounts payable (221,943) 590,421
Accrued expenses (97,915) (165,766)
Other liabilities (12,704) (45,396)
---------------- ---------------
Net cash used in operating activities (146,977) (113,834)
---------------- ---------------
Cash flows provided by (used in) investing activities:
Acquisition of Chicago Pizza Northwest, net of cash acquired (2,479,343)
Acquisition of Brea, CA micro-brewery leasehold interest (930,400)
Purchases of equipment (3,303,414) (2,363,220)
Purchase of trademark and liquor license (30,000)
Proceeds from involuntary conversion of asset 260,691
Proceeds from sale of restaurants, net of expenses 40,900 950,000
---------------- ---------------
Net cash used in investing activities (3,001,823) (4,852,963)
---------------- ---------------
Cash flows provided by (used in) financing activities:
Borrowing on short-term debt 3,327,912
Borrowing on long-term debt 750,771
Payments on related party debt (320,241) (1,375,007)
Payments on debt (220,993) (512,865)
Capital lease payments (75,603) (41,527)
Proceeds from stock issuance, net of costs 6,456,964
Proceeds from warrants, net of costs 454,779
Distributions to partners (14,822) (10,191)
Debt financing costs (390,000)
---------------- ---------------
Net cash (used in) provided by financing activities (631,659) 8,660,836
---------------- ---------------
Net (decrease) increase in cash and cash equivalents (3,780,459) 3,694,039
Cash and cash equivalents, beginning of period 5,485,808 1,791,769
---------------- ---------------
Cash and cash equivalents, end of period $1,705,349 $5,485,808
================ ===============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
25
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company And Summary Of Significant Accounting Policies:
ORGANIZATION
Chicago Pizza & Brewery, Inc. (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.
Effective January 1, 1995, pursuant to the Asset Purchase Agreement
between the Company and Roman Systems, the Company purchased the three
existing BJ's Chicago Pizzeria restaurants operated and managed under
the Management Agreement and terminated the Management Agreement.
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. The operating results for the acquired
restaurants have been included in the Company's consolidated financial
operations since the date of acquisition.
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. On June 1,
1997, an additional restaurant acquired from Pietro's Corp. was sold to
an independent operator. The operating results for the eight restaurants
sold were included in the Company's consolidated operating results for
the period they were owned by the Company.
The following summarized, unaudited pro forma results of operations for
the year ended December 31, 1996 assumes the acquisition of Pietro's
Corporation occurred as of the beginning of 1996:
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31, 1996
---------------------------
<S> <C>
Revenue $23,644,919
Net loss ($2,454,537)
Loss per share ($0.56)
</TABLE>
BASIS OF PRESENTATION
The accompanying financial statements of the Company as of and for the
years ended December 31, 1997 and 1996 are presented on a consolidated
basis, and include the accounts of the Company and BJ's Lahaina, L.P.
The Company operates in the restaurant industry exclusively in the
United States. All significant intercompany transactions and balances
have been eliminated.
26
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. The Company And Summary Of Significant Accounting Policies, Continued:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with an
original maturity of three months or less when purchased. Cash and cash
equivalents are stated at cost, which approximates market value.
RESTRICTED CASH
In 1996, as part of the acquisition of the Brea restaurant location, the
Company assumed an existing bank loan with the condition that a $200,000
certificate of deposit be restricted as collateral. Additionally, as
part of the Pietro's Acquisition, the Company acquired U.S. Treasury
Notes, which are restricted as part of a bonding arrangement relating to
Washington State Workers' Compensation insurance. The fair market value
of the U.S. Treasury Notes at December 31, 1997 and 1996 was approximately
$369,000.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market
and is comprised primarily of food and beverages for the restaurant
operations.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Renewals and betterments
that materially extend the life of an asset are capitalized while
maintenance and repair costs are charged to operations as incurred. When
property and equipment are sold or otherwise disposed of, the asset
account and related accumulated depreciation and amortization accounts
are relieved, and any gain or loss is included in operations.
Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the related assets or, for leasehold
improvements, over the term of the lease, if less. The following are the
estimated useful lives:
Furniture and fixtures 7 years
Equipment 7-10 years
Leasehold improvements 7-25 years
LEASES
Leases that meet certain criteria are capitalized and included with
property and equipment. The resulting assets and liabilities are
recorded at the lesser of cost or amounts equal to the present value of
the future minimum lease payment at the beginning of the lease term.
Such assets are amortized evenly over the related life of the lease or
the useful lives of the assets, whichever is less. Interest expense
relating to these liabilities is recorded to effect constant rates over
the terms of the leases. Leases that do not meet the criteria for
capitalization are classified as operating leases and rental payments
are charged to expense as incurred.
PREPAIDS AND OTHER CURRENT ASSETS
The Company capitalizes restaurant preopening costs which include the
direct and incremental costs associated with the opening of a new
restaurant. These are primarily costs incurred to develop new restaurant
management teams, and the food, beverage and supply costs incurred to
perform testing of all equipment, concept, systems and recipes. The
capitalized costs are amortized on a straight-line basis over a period
of one year beginning on the restaurant's opening date. Unamortized
preopening costs totaled $333,382 and $204,634 as of December 31, 1997
and 1996, respectively.
27
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. The Company And Summary Of Significant Accounting Policies, Continued:
INTANGIBLE ASSETS
Goodwill from the acquisition of the net assets of Roman Systems, the
acquisition of the limited partnership interests of BJ's Belmont Shore,
L.P. and BJ's La Jolla, L.P., and the acquisition of Pietro's represent
the excess of cost over fair value of net assets acquired. Goodwill is
amortized over 40 years using the straight-line method beginning on the
date of acquisition. Also included in intangible assets are trademarks,
which are amortized over 10 years and the covenant not to compete, which
is amortized over 8.5 years.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for
the years ended December 31, 1997 and 1996 was $761,780 and $741,194,
respectively.
INCOME TAXES
Deferred income taxes are recognized based on the tax consequences in
future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based
on enacted tax laws and statutory tax rates applicable to the periods in
which differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. The provision for income
taxes represents the tax payable for the period and the change during
the period in deferred tax assets and liabilities.
MINORITY INTEREST
For the consolidated financial statements as of December 31, 1997 and
1996, minority interest represents the limited partners' interests
totaling 46.32% for BJ's Lahaina, L.P.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions for the reporting period and as of the financial statement
date. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107.
"Disclosure About Fair Value of Financial Instruments", requires
disclosure of fair value information about most financial instruments
both on and off the balance sheet, if it is practicable to estimate.
SFAS No. 107 excludes certain financial instruments, such as certain
insurance contracts, and all non-financial instruments from its
disclosure requirements. A financial instrument is defined as
contractual obligation that ultimately ends with the delivery of cash or
an ownership interest in an entity. Disclosures regarding the fair value
of financial instruments have been derived using external market
sources, estimates using present value or other valuation techniques.
Cash, accounts payable, accrued liabilities and short term debt are
reflected in the financial statements at fair value because of the
short-term maturity of these instruments. The fair value of long-term
debt closely approximates its carrying value.
PER SHARE INFORMATION
SFAS 128, "Earnings Per Share", was adopted in the fourth quarter of
1997 and supersedes the Company's previous standards for computing net
income per share under Accounting Principles Board ("APB") Opinion
No. 15. The new standard requires dual presentation of basic net income
per common share and net income per common share assuming dilution
28
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. The Company And Summary Of Significant Accounting Policies, Continued:
on the face of the income statement. Basic net income per share is
computed by dividing the net income attributable to common stockholders
by the weighted average number of common shares outstanding during the
period. The financial statements present basic net income per share.
Dilutive net income per share is not presented as both stock options and
warrants are antidilutive for the periods presented.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" during 1996. SFAS No. 121 requires an entity to review long-lived
assets and certain identifiable intangible assets whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Impairment losses are recognized when the
carrying amount of the asset exceeds the estimated fair value of the
asset. There was no impact on the Company as a result of implementing
SFAS No. 121.
The Company periodically evaluates the carrying value of goodwill
including the related amortization periods. The Company determines
whether there has been impairment by comparing the anticipated
undiscounted future cash flows from operations of the acquired
restaurants with the carrying value of the goodwill.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 defines a "fair
value method" of accounting for an employee stock option. The fair value
of the stock option is determined using factors such as the exercise
price, the expected life of the option, the current price of the
underlying stock and its volatility, expected dividends on the stock,
and the risk-free interest rate for the expected term of the option.
Under the fair value method, compensation cost is measured at the grant
date based on the fair value of the award and is recognized over the
service period. Pro forma disclosures for entities that elect to
continue to measure compensation cost under the "intrinsic method"
provided by APB Opinion No. 25 must include the effects of all awards
granted in fiscal years that begin after December 15, 1994.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130 "Reporting Comprehensive Income" which establishes
standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. Comprehensive income includes net
income and other comprehensive income components which under generally
accepted accounting principles ("GAAP") bypass the income statement and
are Reported in the balance sheet as a separate component of equity. For
the two years ended December 31, 1997, the Company had no other
comprehensive income components as defined in SFAS No. 130. SFAS No. 130
does not apply to an enterprise that has no items of other comprehensive
income in any of the periods presented.
In June 1997, the FASB issued SFAS No. 131 "Disclosure About Segments of
an Enterprise and Restated Information," which changes current practice
and establishes a new framework, referred to as the "management"
approach, on which to have segment reporting. The management approach
requires that management identify the "operating segments" based on the
way that management disaggregates the entity for internal operating
decisions. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997, and is not required for interim statements in the
first year of adoption. Management believes that the adoption of this
new standard will not have any material impact on the Company's
financial position or results of operations.
29
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. The Company And Summary Of Significant Accounting Policies, Continued:
As is currently the practice of many restaurant entities, the Company
defers its restaurant preopening costs and amortizes them over the
twelve-month period following the opening of each respective restaurant.
In April 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued a draft
Statement of Position (SOP) entitled "Reporting on the Costs of Start-Up
Activities." The proposed SOP would require entities to expense as
incurred all start-up and preopening costs that are not otherwise
capitalizable as long-lived assets. In March 1998, the FASB adopted the
SOP for final issuance, subject to certain changes. The Company believes
the final SOP will be issued during the second quarter of 1998 and will be
effective for fiscal years beginning after December 15,1998. Restatement
of previously issued financial statements is not permitted by the draft
SOP, and entities are not permitted to report the pro forma effects of
the retroactive application of the new accounting standard.
The Company's adoption of the new accounting standard proposed by the
SOP will involve the recognition of the cumulative effect of the change
in accounting principle required by the SOP as a one-time charge against
earnings, net of any related income tax effect, retroactive to the
beginning of the fiscal year of adoption. Total deferred preopening
costs were $333,000 at December 31, 1997.
Other recently issued standards of the FASB are not expected to affect
the Company as conditions to which those standards apply are absent.
BUSINESS OPERATIONS
The Company has incurred net losses during its organization and
acquisition of restaurants. While many of these costs were created by
the ramping-up of the organization and restaurant concept development,
including a more expansive menu, food testing, and micro-brewery
concepts, management believes that such costs will be reduced in the
future. Management believes the Company can be profitable through
increased sales relating to its extended menu developed in 1996 and the
continuing 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
made possible with the acquisition of the Northwest Restaurants.
While there can be no assurance that Management's plans, if executed,
will return the Company to profitability, Management believes their
plans provide the Company with a strong base to accomplish their goals.
2. Concentration Of Credit Risk:
Financial instruments which potentially subject the Company to a
concentration of credit risk, as defined by SFAS No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance Sheet Risk and
Concentrations of Credit Risk," principally consist of cash, cash
equivalents and accounts receivable. The Company maintains its cash
accounts at various banking institutions. At times, cash balances may be
in excess of the FDIC insurance limit. Cash equivalents represent money
market funds and certificates of deposits.
30
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. Property and Equipment:
Property and equipment consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1997 1996
---------------- --------------
<S> <C> <C>
Furniture and fixtures $543,594 $236,901
Equipment 3,889,964 2,466,648
Leasehold improvements 6,039,018 3,507,971
---------------- --------------
$10,472,576 $6,211,520
Less, accumulated depreciation and amortization (1,869,788) (918,610)
Construction in progress 71,043 941,151
---------------- --------------
$8,673,831 $6,234,061
================ ==============
</TABLE>
4. Intangible Assets:
Intangible assets consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Goodwill $5,798,251 $5,798,251
Trademarks 48,000 48,000
Covenant not to compete 50,000 50,000
Lease right for Lahaina lease 25,000 25,000
Liquor licenses 65,000 65,000
----------------- -----------------
$5,986,251 $5,986,251
Less, accumulated amortization 469,589 309,902
----------------- -----------------
$5,516,662 $5,676,349
================= =================
</TABLE>
5. Accrued Expenses:
Accrued expenses consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996
---------------- -----------------
<S> <C> <C>
Accrued professional fees $93,500 $306,089
Accrued rent 265,122 282,572
Payroll related liabilities 547,568 403,725
Accrued interest 18,409 40,235
Other 182,578 166,471
---------------- -----------------
$1,107,177 $1,199,092
================ =================
</TABLE>
31
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. Debt:
RELATED PARTY DEBT
Related party debt consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996
---------------- ------------------
<S> <C> <C>
Note payable to shareholder, with interest rate of 6%,
due on demand $ 20,296
Note payable to Roman Systems, with interest rate of 7%, due in
monthly installments of $38,195, maturing April 1, 2004,
collateralized by the BJ's Laguna, BJ's La Jolla and BJ's Balboa
restaurants $2,335,487 2,597,578
Note payable to Roman Systems, with interest rate of 2.25% plus the
bank's reference rate (8.50% at December 31, 1997 and 8.25% at
December 31, 1996), due in monthly installments of $3,500,
maturing June 1, 1999
59,500 97,354
------------------ ------------------
Total related party debt 2,394,987 2,715,228
Less, current portion 336,306 328,681
------------------ ------------------
$2,058,681 $2,386,547
================== ==================
</TABLE>
Future maturities of related party debt for each of the five years
subsequent to December 31, 1997 and thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $336,306
1999 339,726
2000 350,147
2001 378,068
2002 405,989
Thereafter 584,751
================
$2,394,987
================
</TABLE>
32
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. Debt, Continued:
OTHER LONG-TERM DEBT
Other long-term debt consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996
-------------- ----------------
<S> <C> <C>
Note payable with interest rate of 2% plus the bank's reference rate
(8.50% at December 31, 1997 and 8.25% at December 31, 1996), due in
monthly installments of $12,513, maturing March 1, 2001,
collateralized by $200,000 certificate of deposit maturing March 1,
1998 $481,002 $631,157
Notes payable for Pietro's outstanding tax claims as part of the
Debtor's Plan of Reorganization, due in quarterly installments of
$32,670 from July 1, 1996 through April 1, 1997 and $20,071 from July
1, 1997 through June 30, 2001 and varying payments totaling an
aggregate of $34,122 from October 1, 2001 until April 1, 2002.
Interest accrues at 8.25% 315,115 440,666
Note payable with interest rate of 10.80%, payable in monthly
installments of $8,100, including interest, maturing
September 1998 54,713
-------------- ----------------
850,830 1,071,823
Less, current portion 265,079 255,636
-------------- ----------------
$585,751 $816,187
============== ================
</TABLE>
Future maturities of other long-term debt for each of the five years
subsequent to December 31, 1997 and thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $265,079
1999 230,438
2000 230,438
2001 108,152
2002 16,723
Thereafter -
----------------
$850,830
================
</TABLE>
Total interest expense for the years ended December 31, 1997 and 1996
was approximately $341,000 and $567,000, respectively.
CONVERTIBLE NOTES
In February 1996, the Company issued $3,000,000 in Convertible Notes
with an interest rate of 10%. At the completion of the Company's initial
public offering, the principal and accrued interest thereon
automatically converted into 750,000 shares of common stock and
4,500,000 warrants. The Company incurred $390,000 in financing costs
related to these notes, which is included in other expense on the
accompanying consolidated statement of operations.
33
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. Capital Leases:
The Company leases computer and other equipment under capital lease
arrangements. The equipment related to the capital leases has an
original cost of $434,618 and $239,439 at December 31, 1997 and 1996,
respectively. Accumulated amortization related to these leases is
$123,019 and $59,236 as of December 31, 1997 and 1996, respectively. The
obligations under capital leases have a weighted average interest rate
of 18.5% and mature at various dates through 2001. Annual future minimum
lease payments for years subsequent to December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 129,040
1999 123,101
2000 106,382
2001 6,309
---------------
Total minimum payments 364,832
Less, amount representing interest 67,723
---------------
Obligations under capital leases 297,109
Less, current portion 97,844
---------------
Long-term portion $ 199,265
===============
</TABLE>
8. Commitments:
The Company leases its restaurant and office facilities under
noncancelable operating leases with terms ranging from approximately 7
to 25 years with renewal options ranging from 5 to 15 years. Rent
expense for the years ended December 31, 1997 and 1996, was $2,023,738
and $1,536,669, respectively.
The Company has certain operating leases which contain fixed escalation
clauses. Rent expense for these leases has been calculated on a
straight-line basis over the term of the leases. A deferred credit in
the amount of $248,348 has been established and included in accrued
expenses at December 31, 1997 for the difference between the amount
charged to expense and the amount paid. The deferred credit will be
amortized over the life of the leases.
A number of the leases also provide for contingent rentals based on a
percentage of sales above a specified minimum. Total contingent rentals
for the years ended December 31, 1997 and 1996 were $58,192 and $48,233,
respectively.
The following are the future minimum rental payments under noncancelable
operating leases for each of the five years subsequent to December 31,
1997 and in total thereafter:
<TABLE>
<CAPTION>
<S> <C>
1998 $1,765,562
1999 1,570,544
2000 1,356,469
2001 1,206,044
2002 883,737
Thereafter 4,169,739
-----------------
$10,952,095
=================
</TABLE>
34
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. Commitments, Continued:
With respect to the lease for the Richland, Washington restaurant, which
was closed and sold by the Company, the Company remains liable in the
event of default by the current lessee. 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.
LEGAL PROCEEDINGS
The Company is currently not a party to any pending legal proceedings
which it believes will have a material adverse effect on its
consolidated financial position or consolidated results of operations.
The Company closed its La Jolla Prospect restaurant in 1995 and the
lease was assigned, subject to a continuing guarantee by the Company, to
a third party restaurant operator. That operator defaulted on the terms
of the lease and the owner of the property filed an action against the
Company. In October 1997 the Company agreed to a settlement and mutual
release of this lease in the amount of $150,000.
EMPLOYMENT AGREEMENTS
Effective March 26, 1996, the Company entered into employment agreements
with Paul Motenko and Jeremiah J. Hennessy. The agreements provide for a
minimum annual salary of $135,000 subject to escalation annually in
accordance with the Consumer Price Index and certain benefits through
2004. The agreements may be terminated by either party. The agreements
also contain provisions for additional cash compensation based on
earnings or income of the Company. The agreements contain provisions
which grant the employees the right to receive salary and benefits, as
individually defined, if such employee is terminated by the Company
without cause.
CONSULTING AGREEMENT
In February 1996 the Company entered into a consulting agreement
("Consulting Agreement") with ASSI, Inc. pursuant to which ASSI, Inc.
agrees to advise the Company with site selection and marketing and
development strategy for penetrating the Las Vegas, Nevada market. In
consideration for such services, the Company shall pay ASSI, Inc. an
annual fee equal to 10% of the Net Profits, as defined, of the acquired
Las Vegas, Nevada restaurants. As additional consideration for
consulting services, the Company issued to ASSI, Inc. an aggregate of
100,000 warrants to purchase shares of common stock of the Company at an
exercise price of $3.85 per share. The Consulting Agreement expires on
December 31, 2000. The warrants were automatically converted into
warrants included in the initial public offering.
The Company also entered into a consulting agreement ("Pietro's
Consulting Agreement") with ASSI, Inc. regarding the Pietro's Corp.
acquisition. Under this agreement, ASSI, Inc. agrees to advise the
Company in connection with the reconstruction, expansion, marketing and
strategic development of the restaurants acquired from Pietro's Corp. In
consideration for such services, the Company shall pay to ASSI, Inc. an
annual fee equal to 5% of Net Profits, as defined, of the 26 restaurants
acquired, 18 of which the Company has retained. As additional
consideration for the consulting services, the Company issued to ASSI,
Inc. an additional aggregate of 100,000 warrants to purchase shares of
common stock of the Company at an exercise price of $3.85 per share. The
Pietro's Consulting Agreement expires on December 31, 2000. The warrants
were automatically converted to warrants included in the initial public
offering.
35
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. Shareholders' Equity:
INITIAL PUBLIC OFFERING
In October 1996, the Company completed an initial public offering (the
"IPO") of 1,800,000 shares of common stock at $5.00 per share, and
2,070,000 warrants at $0.25 per share which generated $9,517,500 in
gross proceeds less underwriting commissions and other related expenses
of $2,713,757.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares in one or more
series of preferred stock and to determine the rights, preferences,
privileges and restrictions to be granted to, or imposed upon, any such
series, including the voting rights, redemption provisions (including
sinking fund provisions), dividend rights, dividend rates, liquidation
rates, liquidation preferences, conversion rights and the description
and number of shares constituting any wholly unissued series of
preferred stock. No shares of preferred stock were outstanding at
December 31, 1997 or 1996. The Company currently has no plans to issue
shares of preferred stock.
COMMON STOCK
Shareholders of the Company's outstanding common stock are entitled to
receive dividends if and when declared by the Board of Directors.
Shareholders are entitled to one vote for each share of common stock
held of record. Pursuant to the requirements of California law,
shareholders are entitled to cumulate votes in connection with the
election of directors.
CAPITAL SURPLUS
In May 1995, the Company issued warrants to purchase up to 300,000
shares of common stock at a price of $5.00 per share to each of Barry
Grumman, a director of the Company, and Lexington Ventures, Inc. Each
of Mr. Grumman and Lexington Ventures, Inc. were issued their respective
warrants at a price of $0.07 per warrant or a total price to each of
$21,000. Mr. Grumman's liability for payment of the warrants was
extinguished in exchange for past services to the Company as a Director
which had not been compensated.
Proceeds from the valuation or sale of warrants issued in conjunction
with the private placement offerings totaled $236,750. The warrants were
automatically converted into warrants included in the Company's initial
public offering.
36
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. Income Taxes:
The provision for income tax consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Current:
Federal - -
State $800 $8,570
------------- -------------
800 8,570
Deferred:
Federal - -
State - -
------------- -------------
Provision for income taxes $800 $8,570
============= =============
</TABLE>
The temporary differences which give rise to deferred tax provision
(benefit) consist of the following for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
------------- ---------------
<S> <C> <C>
Property and equipment ($83,530) ($72,177)
Goodwill 40,835 22,692
Accrued liabilities 5,052 125,624
Investment in partnerships (5,965) 685
Net operating losses (59,042) (789,391)
Income tax credits (103,657) (81,062)
Other (233) (18,020)
Change in valuation allowance 206,540 811,649
------------- ----------------
$ - $ -
============= ===============
</TABLE>
The provision (benefit) for income taxes differs from the amount that
would result from applying the federal statutory rate as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996
------------- --------------
<S> <C> <C>
Statutory regular federal income tax benefit (34.0%) (34.0%)
State income taxes, net of federal benefit 0.3% 0.0%
Change in valuation allowance 54.2% 36.2%
Change in credits (32.9%) (3.6%)
Employer tax credit disallowance 10.8% 1.1%
Other, net 2.1% 0.7%
------------- ---------------
0.5% 0.4%
============= ===============
</TABLE>
37
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. Income Taxes, Continued:
The components of the deferred income tax asset (liability) consist of
the following for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------- ---------------------
<S> <C> <C>
Property and equipment $ 192,414 $ 101,043
Goodwill (173,023) (129,203)
Accrued liabilities 31,939 37,928
Investment in partnerships 26,110 19,719
Net operating losses 1,630,144 1,575,274
Income tax credits 184,720 81,062
Other 18,628 18,569
-------------------- ----------------------
1,910,932 1,704,392
Valuation allowance (1,910,932) (1,704,392)
-------------------- ----------------------
Net deferred income taxes $ - $ -
==================== ======================
</TABLE>
As of December 31, 1997, the Company had net operating loss
carryforwards for federal and state purposes of approximately $4,225,000
and $2,194,000, respectively. The net operating loss carryforwards begin
expiring in 2008 for federal purposes and 1997 for state purposes.
The Company has a federal credit for FICA taxes paid on employees' tip
income of approximately $185,000. The credit will begin to expire in
2011.
The utilization of net operating loss ("NOL") and credit carryforwards
may be limited under the provisions of Internal Revenue Code Section 382
and similar state provisions due to the Inital Public Offering in 1996.
The Company has not previously generated taxable income, and there is no
opportunity to carryback losses to prior periods. The Company has
therefore not recognized a deferred tax asset as of December 31, 1997
and 1996.
11. Supplemental Cash Flow Information :
Supplemental cash flow items consisted of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------------
<S> <C> <C>
Cash paid for:
Interest $381,109 $606,482
Taxes $800 $8,570
</TABLE>
Supplemental information on noncash investing and financing activities
consisted of the following for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------------
<S> <C> <C>
Equipment purchases under a capital lease $196,125 $181,221
Common stock or warrants issued for consulting
services - $397,215
Purchase of CPNI (assumed liabilities) - $1,411,595
Conversion of notes payable into common stock
and warrants - $3,000,000
Prepaid IPO costs - $108,000
Interest expense on convertible debt - $187,500
</TABLE>
38
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. 1996 Stock Option Plan:
The Company adopted the 1996 Stock Option Plan as of August 7, 1996
under which options may be granted to purchase up to 600,000 shares of
common stock. The 1996 Stock Option Plan provides for the options issued
to be either incentive stock options or non-statutory stock options as
defined under Section 422A of the Internal Revenue Code. The exercise
price of the shares under the option shall be equal to or exceed 100% of
the fair market value of the shares at the date of option grant. The
1996 Stock Option Plan expires on June 30, 2005 unless terminated
earlier. The options generally vest over a three-year period.
The following is a summary of changes in options outstanding pursuant to
the plan for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------------------- -------------------------------------
PRICE PER PRICE PER
SHARES SHARE SHARES SHARE
-------------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
Outstanding options at beginning of year 487,500 $5.00-$5.03 - -
Granted 25,000 $1.00 487,500 $5.00-$5.03
Exercised - - - -
Terminated (159,591) $5.00-$5.03 - -
-------------- ----------------- --------------- ------------------
Outstanding options at end of year 352,909 $1.00-$5.00 487,500 $5.00-$5.03
============== ================= =============== ==================
Options exercisable at end of year 258,382 $1.00-$5.00 268,898 $5.00-$5.03
============== ================= =============== ==================
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation" and will continue to
use the intrinsic value based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
since options were granted with an option price equal to the grant date
market value of the Company's common stock, no compensation cost has
been recognized for the stock option plan. Had compensation cost for the
Company's stock option plan been determined based on the fair value of
the option at the grant date for awards in 1997 and 1996 consistent with
the provisions of SFAS No. 123, the Company's net loss and basic loss
per share would have been increased to the pro forma amounts indicated
below as of December 31,
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------------
<S> <C> <C>
Basic net loss, as reported ($314,929) ($2,288,610)
Basic net loss, pro forma ($542,062) ($2,530,442)
Basic loss per share, as reported ($0.05) ($0.52)
Basic loss per share, pro forma ($0.08) ($0.58)
</TABLE>
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 of 49%, (c) a
risk-free interest rate ranging from 5.78% to 6.74% and (d) expected
option lives of one to five years.
39
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. Acquisitions And Transfers:
PIETRO'S CORP.
On March 29, 1996, the Company acquired 26 restaurants located in Oregon
and Washington by providing the funding for the Debtor's Plan and
thereby acquired all the stock in the reorganized entity known as
Chicago Pizza Northwest, Inc. The Debtor's Plan was confirmed by an
order of the Bankruptcy Court on March 18, 1996 and the Company funded
the Plan on March 29, 1996. The Company paid $2,350,000 to fund the
Debtor's Plan plus acquisition costs of $353,073. Additionally, the
Company assumed a $506,006 liability for taxes plus interest which will
be paid over six years.
BREA, CALIFORNIA
On March 27, 1996, the Company completed the acquisition of a restaurant
and brew-pub site in Brea, California. The purchase price totaled
$930,400 including acquisition costs. The restaurant opened as BJ's
Pizza, Grill & Brewery on April 1, 1996.
WESTWOOD, CALIFORNIA
In 1995, the Company entered into a lease for its Westwood restaurant
location. The site was renovated and opened on March 15, 1996.
BOULDER, COLORADO
In 1995, the Company entered into a lease for its Boulder, Colorado
restaurant and brewery location. The site was renovated and opened on
February 14, 1997.
SALE OF RESTAURANTS
On May 15, 1996, the Company agreed to sell seven newly acquired Chicago
Pizza Northwest, Inc. restaurants to Abby's, Inc. Two of the restaurants
were sold on May 31, 1996, two more were sold on June 24, 1996, and
three more were sold on June 26, 1996. On June 1, 1997, an additional
restaurant acquired from Pietro's Corp. was sold to an independent
operator. The remaining 18 restaurants have been or will be converted
into "BJ's Pizza & Grill - OTC," "BJ's Pizza & Grill" or "BJ's Pizza,
Grill & Brewery" restaurants.
GAIN ON INVOLUNTARY CONVERSION OF ASSETS
On February 19, 1997, the Pietro's restaurant in Aloha, Oregon was
heavily damaged by fire. The Company has received a preliminary
settlement from the insurance carrier for the loss of personal property.
This settlement, due to the coverage provided by the Company's
replacement cost policy, resulted in the recognition of a gain on
involuntary conversion of asset in the amount of $202,082 during 1997.
The Company is presently in the early stages of refurbishing the
restaurant and plans to resume operations at this location.
40
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. Quarterly Financial Data (Unaudited):
Summarized unaudited quarterly financial data for the Company is as
follows:
<TABLE>
<CAPTION>
MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30, 1997 DECEMBER 31, 1997
---------------- ------------------ ------------------- --------------------
<S> <C> <C> <C> <C>
Total revenues $5,783,196 $6,641,662 $7,208,665 $6,557,949
Income (loss) from operations ($167,761) ($33,161) $51,754 ($250,479)
Net income (loss) ($171,964) $118,136 $22,555 ($283,656)
Basic net income (loss) per share ($0.03) $0.02 $0.00 ($0.04)
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996
----------------- ----------------- ------------------- --------------------
Total revenues $1,768,255 $6,539,799 $6,009,515 $5,547,821
Loss from operations ($288,958) ($398,944) ($61,370) ($671,022)
Net loss ($366,969) ($707,775) ($308,293) ($905,573)
Basic net loss per share - - - ($0.15)
</TABLE>
41
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHICAGO
PIZZA AND BREWERY, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,705
<SECURITIES> 0
<RECEIVABLES> 162
<ALLOWANCES> 0
<INVENTORY> 361
<CURRENT-ASSETS> 3,075
<PP&E> 10,544
<DEPRECIATION> (1,870)
<TOTAL-ASSETS> 17,842
<CURRENT-LIABILITIES> 2,843
<BONDS> 0
0
0
<COMMON> 15,040
<OTHER-SE> 1,196
<TOTAL-LIABILITY-AND-EQUITY> 17,842
<SALES> 26,191
<TOTAL-REVENUES> 26,191
<CGS> 7,732
<TOTAL-COSTS> 18,859
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125
<INCOME-PRETAX> (314)
<INCOME-TAX> 1
<INCOME-CONTINUING> (315)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (315)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
