U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-21423
CHICAGO PIZZA & BREWERY, INC.
(Name of small business issuer as specified in its charter)
CALIFORNIA 33-0485615
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
26131 MARGUERITE PARKWAY, SUITE A, MISSION VIEJO, CA 92692
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (949) 367-8616
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
twelve 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.
-
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of equity, as of the latest practicable date: At July 27, 1998, 6,408,321
shares of the small business issuer's common stock were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
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CHICAGO PIZZA & BREWERY, INC. AND SUBSIDIARIES
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 1
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 1
Consolidated Statements of Operations -
Three Months Ended and Six Months Ended
June 30, 1998 and June 30, 1997 2
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998
and June 30, 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Results of Operations 6
Liquidity and Capital Resources 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of
Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES
<PAGE>
PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CHICAGO PIZZA & BREWERY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
------------ --------------
ASSETS
- ---------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . $ 1,610,731 $ 1,705,349
Restricted cash . . . . . . . . . . . . . . . . . . 100,000 200,000
Accounts receivable . . . . . . . . . . . . . . . . 191,206 161,649
Inventory . . . . . . . . . . . . . . . . . . . . . 350,965 361,299
Prepaids and other current assets . . . . . . . . . 467,495 646,700
------------ --------------
Total current assets. . . . . . . . . . . . . . . . 2,720,397 3,074,997
Property and equipment, net . . . . . . . . . . . . 8,921,950 8,673,831
Other assets. . . . . . . . . . . . . . . . . . . . 209,140 207,138
Restricted cash . . . . . . . . . . . . . . . . . . 369,123 369,123
Intangible assets, net. . . . . . . . . . . . . . . 5,517,625 5,516,662
------------ --------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . $17,738,235 $ 17,841,751
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . $ 1,105,819 $ 1,042,856
Accrued expenses. . . . . . . . . . . . . . . . . . 1,208,302 1,101,177
Notes payable to related parties. . . . . . . . . . 323,777 336,306
Current portion of long-term debt . . . . . . . . . 218,395 265,079
Current portion of obligations under capital lease. 127,590 97,844
------------ --------------
Total current liabilities . . . . . . . . . . . . . 2,983,883 2,843,262
Notes payable to related parties. . . . . . . . . . 1,881,924 2,058,681
Obligations under capital lease . . . . . . . . . . 245,223 199,265
Long-term debt. . . . . . . . . . . . . . . . . . . 458,019 585,751
Other liabilities . . . . . . . . . . . . . . . . . 128,583 135,067
------------ --------------
Total liabilities . . . . . . . . . . . . . . . . . 5,697,632 5,822,026
------------ --------------
Minority interest in partnership. . . . . . . . . . 233,376 211,357
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, none
issued or outstanding
Common stock, no par value, 60,000,000 shares
authorized, 6,408,321 issued and outstanding 15,039,646 15,039,646
Capital surplus . . . . . . . . . . . . . . . . . . 1,196,029 1,196,029
Accumulated deficit . . . . . . . . . . . . . . . . (4,428,448) (4,427,307)
------------ --------------
Total shareholders' equity. . . . . . . . . . . . . 11,807,227 11,808,368
------------ --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. . . . . $17,738,235 $ 17,841,751
============ ==============
<FN>
See accompanying notes.
</TABLE>
1
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CHICAGO PIZZA & BREWERY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . $7,825,198 $6,641,662 $14,713,454 $12,424,858
Cost of sales . . . . . . . . . . . . . . . 2,158,675 1,942,645 4,171,001 3,650,504
----------- ----------- ------------ ------------
Gross profit. . . . . . . . . . . . . . . . 5,666,523 4,699,017 10,542,453 8,774,354
----------- ----------- ------------ ------------
Cost and Expenses:
Labor and benefits. . . . . . . . . . . . . 2,791,966 2,275,406 5,292,686 4,230,189
Occupancy . . . . . . . . . . . . . . . . . 639,139 602,330 1,232,645 1,177,946
Operating expenses. . . . . . . . . . . . . 867,164 832,494 1,739,574 1,612,768
General and administrative. . . . . . . . . 613,535 687,602 1,206,744 1,351,168
Depreciation and amortization . . . . . . . 470,694 334,346 923,140 603,205
----------- ----------- ------------ ------------
Total cost and expenses . . . . . . . . . . 5,382,498 4,732,178 10,394,789 8,975,276
----------- ----------- ------------ ------------
Income (loss) from operations . . . . . . . 284,025 (33,161) 147,664 (200,922)
----------- ----------- ------------ ------------
Other Income (Expense):
Gain on involuntary conversion of assets. . 190,722 190,722
Interest expense, net . . . . . . . . . . . (73,162) (40,876) (107,826) (58,115)
Other income (expense), net . . . . . . . . (15,030) (1,107) (5,781) 9,112
----------- ----------- ------------ ------------
Total other income (expense). . . . . . . . (88,192) 148,739 (113,607) 141,719
----------- ----------- ------------ ------------
Income (loss) before minority interest and
income taxes . . . . . . . . . . . . 195,833 115,578 34,057 (59,203)
Minority interest in partnership. . . . . . (16,673) 2,558 (33,598) 6,176
----------- ----------- ------------ ------------
Income (loss) before income taxes . . . . . 179,160 118,136 459 (53,027)
Income tax expense. . . . . . . . . . . . . (800) (1,600) (800)
----------- ----------- ------------ ------------
Net income (loss) . . . . . . . . . . . . . $ 178,360 $ 118,136 $ (1,141) $ (53,827)
=========== =========== ============ ============
Basic and dilutive net income (loss) per
common share . . . . . . . . . . . . $ 0.03 $ 0.02 $ 0.00 $ (0.01)
=========== =========== ============ ============
Basic and dilutive weighted average number
of common shares outstanding . . . . 6,408,321 6,408,321 6,408,321 6,408,321
<FN>
See accompanying notes.
</TABLE>
2
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CHICAGO PIZZA & BREWERY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
---------------------------
1998 1997
----------- ------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . ($1,141) ($53,827)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . 923,140 603,205
Minority interest in partnership. . . . . . . . . . . . 33,598 (6,176)
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . (29,557) (36,486)
Inventory. . . . . . . . . . . . . . . . . . . . . 10,334 (36,761)
Prepaids and other current assets. . . . . . . . . 48,901 (135,115)
Other assets . . . . . . . . . . . . . . . . . . . (19,246) (77,295)
Accounts payable . . . . . . . . . . . . . . . . . 62,962 (53,396)
Accrued expenses . . . . . . . . . . . . . . . . . 107,125 33,589
Other liabilities. . . . . . . . . . . . . . . . . (6,484) (6,220)
----------- -----------
Net cash provided by operating activities. 1,129,632 231,518
----------- -----------
Cash flows provided by (used in) investing activities:
Purchase of equipment . . . . . . . . . . . . . . . . . (795,954) (1,637,235)
Proceeds from sale of restaurant equipment. . . . . . . 7,000
----------- -----------
Net cash used in investing activities. . . (788,954) (1,637,235)
----------- -----------
Cash flows used in financing activities:
Payments on related party debt. . . . . . . . . . . . . (189,286) (170,467)
Payments on long-term debt. . . . . . . . . . . . . . . (174,416) (160,486)
Capital lease payments. . . . . . . . . . . . . . . . . (60,014) (29,096)
Distribution to partners. . . . . . . . . . . . . . . . (11,580) (4,832)
----------- -----------
Net cash used in financing activities . . (435,296) (364,881)
----------- -----------
Net decrease in cash and cash equivalents (94,618) (1,770,598)
Cash and cash equivalents, beginning of period. . . . . 1,705,349 5,485,808
----------- -----------
Cash and cash equivalents, end of period. . . . . . . . $ 1,610,731 $ 3,715,210
============ ============
<FN>
See accompanying notes.
</TABLE>
3
<PAGE>
CHICAGO PIZZA & BREWERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying consolidated financial statements of Chicago Pizza &
Brewery, Inc. and its subsidiaries (the "Company") for the three months and
six months ended June 30, 1998 and 1997 have been prepared in accordance with
generally accepted accounting principles, and with the instructions to Form
10-QSB and Item 310 (b) of Regulation S-B. These financial statements have not
been audited by independent accountants, but include all adjustments
(consisting of normal recurring adjustments) which are, in Management's
opinion, necessary for a fair presentation of the financial condition, results
of operations and cash flows for such periods. However, these results are not
necessarily indicative of results for any other interim period or for the full
year.
Certain information and footnote disclosures normally included in
financial statements in accordance with generally accepted accounting
principles have been omitted pursuant to requirements of the Securities and
Exchange Commission (SEC). A description of the Company's accounting policies
and other financial information is included in the audited consolidated
financial statements as filed with the SEC on Form 10-KSB for the year ended
December 31, 1997. Management believes that the disclosures included in the
accompanying interim financial statements and footnotes are adequate to make
the information not misleading, but should be read in conjunction with the
consolidated financial statements and notes thereto included in the Form
10-KSB. The accompanying consolidated balance sheet as of December 31, 1997
has been derived from the audited financial statements.
2. ORGANIZATION:
The accompanying financial statements of the Company for the three months
and six months ended June 30, 1998 and 1997 are presented on a consolidated
basis and include the accounts of the Company, Chicago Pizza Northwest, Inc.
and BJ's Lahaina, L.P. All significant intercompany transactions and balances
have been eliminated.
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 Company funded the Debtor's Plan of Reorganization on
March 29, 1996, and thereby acquired all the stock in the reorganized entity
known as Chicago Pizza Northwest, Inc. On May 15, 1996, the Company agreed to
sell seven of the restaurants purchased from Pietro's Holdings. 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 Holdings was
sold to an independent operator. This restaurant, located in North Bend,
Oregon did not figure significantly in the Company's future plans and would
have required a commitment by the Company to a long-term lease extension.
On February 19, 1997, the Pietro's restaurant located in Aloha, Oregon
was heavily damaged by fire. The Company maintained insurance for such an
event and is evaluating rebuilding the restaurant and resuming operations at
this location. The Company received $260,691 during the second quarter of 1997
from its insurance carrier for this involuntary conversion of assets. A
business interruption insurance policy substantially offset the loss of
business during 1997.
On April 30,1998 the Company's lease for its delivery-only Pietro's
restaurant on Woodstock Road in Portland, Oregon expired. Due to its
delivery-only suitability, this location was not included in the Company's
plans for conversions to the BJ's format, and the Company did not pursue a
lease extension. A portion of the equipment at this location was sold to an
independent operator; the remaining restaurant equipment was removed and will
be used in future conversions to the BJ's restaurant format.
4
<PAGE>
3. LONG-LIVED ASSETS:
The Company periodically evaluates the carrying value of long-lived
assets (which primarily consist of goodwill and property and equipment)
including their related amortization periods. The Company determines whether
there has been impairment by comparing the anticipated undiscounted future
cash flows from operations with the carrying value of the specific assets.
4. PER SHARE INFORMATION:
SFAS 128, "Earnings Per Share," was adopted in the fourth quarter of 1997
and supersedes 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 on the face of the income statement. Basic net
income per share is computed by dividing the net income attributable to common
stockholders by the weighted average number of common shares outstanding
during the period. Dilutive net income per share is equal to basic net income
per share as both stock options and warrants are antidilutive for the periods
presented.
5. INCOME TAXES:
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 utilization of net operating loss and credit carryforwards
may be limited under the provisions of the Internal Revenue Code Section 382
and similar state provisions due to the initial 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 therefore has
not recognized a net deferred tax asset as of June 30, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's financial statements and notes thereto included elsewhere in
this Form 10-QSB. Except for the historical information contained herein, the
discussion in this Form 10-QSB contains certain forward looking statements
that involve risks and uncertainties, such as statements of the Company's
plans, objectives, expectations and intentions. The cautionary statements made
in this Form 10-QSB should be read as being applicable to all related
forward-looking statements wherever they appear in this Form 10-QSB. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, without
limitation, those factors discussed herein and in the 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
The Company developed a restaurant and microbrewery in Boulder, Colorado
in February 1997 and converted five of the Pietro's restaurants to the BJ's
restaurant and/or brewery concept during April through December 1997. Two
additional Pietro's restaurants were converted to the BJ's restaurant concept
5
<PAGE>
in the first quarter of 1998. Consequently, the results of operations for the
three-month and six-month periods ended June 30, 1998 are not necessarily
comparable to the results of operations for the same period in 1997.
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 pre-opening costs, including direct and incremental costs
associated with the opening of a new or converted 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.
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.
The Company utilizes a calendar year-end for financial reporting
purposes.
RESULTS OF OPERATIONS
Three-Month Period Ended June 30, 1998 Compared to Three-Month Period Ended
June 30, 1997.
Revenues. Total revenues for the three-month period ended June 30, 1998
increased to $7,825,000 from $6,642,000 for the three-month period ended June
30, 1997, an increase of $1,183,000 or 17.8%. The increase is primarily the
result of:
An increase in same store sales at the BJ's restaurants open both periods of
$621,000 or 16.6%. Management believes this increase was due to (i) an
increase in customer counts, (ii) an increase in check averages produced by a
price increase implemented in late May 1998 and (iii) the implementation of
more effective suggestive selling techniques at the restaurants.
An increase in same store sales at the former Pietro's restaurants converted
and operated as BJ's restaurants for the entire three-month period ended June
30, 1998 and operated as Pietro's for the comparable period in 1997 of
$848,000 or 105.1%.
The increase in revenues resulting from the above-mentioned factors was
partially offset by (i) the planned sales of the Pietro's restaurant in North
Bend, Oregon in June 1997 and the delivery-only location in Woodstock, Oregon
in April 1998, with the resultant sales decrease of $137,000 from the
comparable period in 1997, (ii) a decrease in sales at the restaurants
operated as Pietro's for the entire comparable periods of $15,000 or 1.0%,
(iii) the expected decrease from high opening sales levels at the initial BJ's
conversion in Oregon opened in April 1997 and (iv) the operational
consideration of reduced direct retail sales of BJ's brewed beer from the
Brea, California brewery to support the increased sales of in-house brewed
beer at store locations in California.
6
<PAGE>
Cost of Sales. Cost of food, beverages and paper (cost of sales) for the
restaurants increased to $2,159,000 for the three-month period ended June 30,
1998 from $1,943,000 for the comparable period in 1997, an increase of
$216,000 or 11.1%. However, as a percentage of revenues, cost of sales
decreased to 27.6% during the 1998 period from 29.3% in the 1997 period. The
decrease in cost of sales as a percentage of revenues was primarily due to
efficiencies achieved at the BJ's restaurants in Southern California,
Hawaii and Colorado as well as a menu price increase implemented in late May
1998. Cost of sales at those restaurants decreased to 25.6% of sales during
the three-month period ended June 30, 1998 from 28.8% of sales during the
comparable period in 1997. This decrease was partially offset by an increase
in cost of sales at the restaurants in the Northwest which were converted to
BJ's. Management believes the increase in cost of sales at these restaurants
is the result of expected operational inefficiencies experienced at these
newly-opened restaurants.
Labor. Labor costs for the restaurants increased to $2,792,000 in the
three-month period ended June 30, 1998 from $2,275,000 for the comparable
period in 1997, an increase of $517,000 or 22.7%. As a percentage of
revenues, labor costs increased to 35.7% in the 1998 period from 34.3% in the
1997 period. The factors which contributed to the increase in labor costs as
a percentage of revenue were:
The federal, California and Oregon minimum wages increased approximately 9.1%
to 15.0% between the second quarter 1997 and the second quarter 1998.
Planned increased staffing at the newly-converted BJ's restaurants in order to
provide our guests with the best possible dining experience while training new
staff. Management anticipates that staffing levels at these restaurants will
be reduced as they mature.
Occupancy. Occupancy costs increased to $639,000 during the three-month
period ended June 30, 1998 from $602,000 during the comparable period in 1997,
an increase of $37,000 or 6.1%. As a percentage of revenues, occupancy costs
decreased to 8.2% in the 1998 period from 9.1% in the 1997 period. 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 $867,000 during the
three-month period ended June 30, 1998 from $832,000 during the comparable
period in 1997, an increase of $35,000 or 4.2%. However, as a percentage of
revenues, operating expenses decreased to 11.1% in the 1998 period from 12.5%
in the 1997 period. The primary reasons for the decrease in operating
expenses as a percentage of revenues were (i) the increase in same store
sales, and (ii) an increased focus on operating the restaurants more
efficiently, including the implementation of improved expense monitoring
systems at the BJ's restaurants in Southern California. Operating expenses
include restaurant-level operating costs, the major components of which
include marketing, repairs and maintenance, supplies and utilities.
General and Administrative Expenses. General and administrative expenses
decreased to $614,000 during the three-month period ended June 30, 1998 from
$688,000 during the comparable period in 1997, a decrease of $74,000 or 10.8%.
The decrease in general and administrative expenses was primarily due to
additional legal and accounting fees incurred during 1997 associated with the
Company's first year of being a public company.
Depreciation and Amortization. Depreciation and amortization increased
to $471,000 during the three-month period ended June 30, 1998 from $334,000
during the comparable period in 1997, an increase of $137,000 or 41.0%. The
increase was primarily due to (i) the amortization of pre-opening costs
associated with the Boulder, Colorado restaurant and the converted Pietro's
restaurants and (ii) the depreciation associated with the renovation costs of
the Pietro's restaurants converted to the BJ's concept.
Interest Expense. Interest expense, net of interest income, increased to
$73,000 during the three-month period ended June 30, 1998 from $41,000 during
the comparable period in 1997, an increase of $32,000 or 78.0%. The increase
was primarily due to a reduction of interest income associated with the
utilization of cash for the planned renovation and conversion of the Pietro's
units.
7
<PAGE>
Six-Month Period Ended June 30, 1998 Compared to Six-Month Period Ended
June 30, 1997
Revenues. Total revenues for the six-month period ended June 30, 1998
increased to $14,713,000 from $12,425,000 for the six-month period ended June
30, 1997, an increase of $2,288,000 or 18.4%. The increase is primarily the
result of:
The opening of the Boulder, Colorado restaurant in February, 1997. Sales for
the complete six-month period of 1998 increased $335,000 over the shorter
period ended June 30, 1997.
An increase in same store sales at the BJ's restaurants open both periods of
$927,000 or 15.1%. Management believes this increase was due to (i) an
increase in customer counts, (ii) an increase in check averages produced by a
price increase implemented in late May 1998 and (iii) the implementation of
more effective suggestive selling techniques at the restaurants.
An increase in same store sales at the former Pietro's restaurants converted
and operated as BJ's restaurants for the entire six-month period ended June
30, 1998 and operated as Pietro's for the comparable period in 1997 of
$999,000 or 90.2%.
An increase in sales at two former Pietro's restaurants converted and reopened
as BJ's restaurants during the six-month period ended June 30, 1998 and
operated as Pietro's for the entire comparable period in 1997 of $422,000 or
86.5%.
The increase in revenues resulting from the above-mentioned factors was
partially offset by (i) a decrease in sales at the restaurants operated as
Pietro's for the entire comparable periods of $52,000 or 1.8%, (ii) the
planned sales of the Pietro's restaurant in North Bend, Oregon in June 1997
and the delivery-only location in Woodstock, Oregon in April 1998, with the
resultant sales decrease of $243,000 from the comparable period in 1997 and
(iii) the closure due to fire of the Pietro's restaurant in Aloha, Oregon in
February 1997, and which has not yet been rebuilt.
Cost of Sales. Cost of food, beverages and paper (cost of sales) for the
restaurants increased to $4,171,000 for the six-month period ended June 30,
1998 from $3,651,000 for the comparable period in 1997, an increase of
$520,000 or 14.2%. However, as a percentage of revenues, cost of sales
decreased to 28.3% during the 1998 period from 29.4% in the 1997 period. The
decrease in cost of sales as a percentage of revenues was primarily due to
efficiencies achieved at the BJ's restaurants in Southern California, Hawaii
and Colorado as well as a menu price increase implemented in late May 1998.
Cost of sales at those restaurants decreased to 26.4% of sales during the
six-month period ended June 30, 1998 from 28.6% of sales during the comparable
period in 1997. This decrease was partially offset by an increase in cost of
sales at the restaurants in the Northwest which were converted to BJ's.
Management believes the increase in cost of sales at these restaurants is the
result of expected operational inefficiencies experienced at these
newly-opened restaurants.
Labor. Labor costs for the restaurants increased to $5,293,000 in the
six-month period ended June 30, 1998 from $4,230,000 for the comparable period
in 1997, an increase of $1,063,000 or 25.1%. As a percentage of revenues,
labor costs increased to 36.0% in the 1998 period from 34.0% in the 1997
period. The factors which contributed to the increase in labor costs as a
percentage of revenue were:
The federal, California and Oregon minimum wages increased approximately 9.1%
to 15.0% during and at the end of the first quarter of 1998.
Planned increased staffing at the newly-converted Pietro's restaurants in
order to provide our guests with the best possible dining experience despite a
relatively inexperienced staff. Management anticipates that staffing levels
at these restaurants will be reduced as they mature.
8
<PAGE>
Occupancy. Occupancy costs increased to $1,233,000 during the six-month
period ended June 30, 1998 from $1,178,000 during the comparable period in
1997, an increase of $55,000 or 4.7%. As a percentage of revenues, occupancy
costs decreased to 8.4% in the 1998 period from 9.5% in the 1997 period. 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 $1,740,000 during
the six-month period ended June 30, 1998 from $1,613,000 during the comparable
period in 1997, an increase of $127,000 or 7.9%. However, as a percentage of
revenues, operating expenses decreased to 11.8% in the 1998 period
from 13.0% in the 1997 period. The primary reasons for the decrease in
operating expenses as a percentage of revenues were (i) the increase in same
store sales, and (ii) an increased focus on operating the restaurants more
efficiently, including the implementation of improved expense monitoring
systems at the BJ's restaurants in Southern California. Operating expenses
include restaurant-level operating costs, the major components of which
include marketing, repairs and maintenance, supplies and utilities.
General and Administrative Expenses. General and administrative expenses
decreased to $1,207,000 during the six-month period ended June 30, 1998 from
$1,351,000 during the comparable period in 1997, a decrease of $144,000 or
10.7%. The decrease in general and administrative expenses was primarily due
to additional legal and accounting fees incurred during 1997 associated with
the Company's first year of being a public company.
Depreciation and Amortization. Depreciation and amortization increased
to $923,000 during the six-month period ended June 30, 1998 from $603,000
during the comparable period in 1997, an increase of $320,000 or 53.1%. The
increase was primarily due to (i) the opening of the Boulder, Colorado
restaurant in February 1997, (ii) the amortization of pre-opening costs
associated with the Boulder, Colorado restaurant and the converted Pietro's
restaurants, and (iii) the depreciation associated with the renovation costs
of the Pietro's restaurants converted to the BJ's concept.
Interest Expense. Interest expense, net of interest income, increased to
$108,000 during the six-month period ended June 30, 1998 from $58,000 during
the comparable period in 1997, an increase of $50,000 or 86.2%. The increase
was primarily due to a reduction of interest income experienced as the
Company's invested cash was utilized in the renovation and conversion of the
Pietro's units.
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 pursuant to the Prospectus. 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, the Boulder, Colorado restaurant, and other sites, if possible,
as well as for the reduction of debt and increased working capital.
Since the completion of the Offering in October of 1996, the Company has
invested in restaurant development and reduced debt. Net cash provided by
operating activities for the six-month periods ended June 30, 1998 and June
30, 1997 were $1,130,000 and $232,000, respectively. Capital expenditures for
the six-month periods ended June 30, 1998 and June 30, 1997 were $796,000 and
$1,637,000, respectively. Total capital expenditures for the six-month periods
ending June 30, 1998 and 1997 were for the acquisition of restaurant and
brewery equipment and leasehold improvements to develop or convert the
acquired restaurants.
9
<PAGE>
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.
The Company currently intends to utilize cash and cash equivalents
primarily for the conversion and refurbishment of restaurants in the Northwest
and the acquisition of other sites, if possible, as well as for working
capital purposes. Management currently anticipates a total of $1,800,000 in
additional capital expenditure requirements for 1998, which includes
requirements for the Northwest Restaurant conversions
and other sites that Management is currently considering. Management believes
that cash and cash equivalents available at June 30, 1998 and future operating
cash flow will be sufficient for the Company to fund its operations and
continue to meet its business plan through the end of the fiscal year.
However, no assurance can be given that Management can successfully implement
such objectives. Further, there can be no assurance that future events,
including problems, delays, additional expenses and difficulties encountered
in expansion and conversion of restaurants, will not require additional
financing, or that such financing will be available if necessary.
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.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued two statements - SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which are effective for the Company in
the current fiscal year. In addition, in February 1998, the FASB issued SFAS
No. 132, "Employers Disclosure About Pensions and Other Retirement Benefits"
which will also be effective for the Company in the current fiscal year.
Presently, those standards have no impact on the Company's consolidated
financial statements.
Consistent with practices in the restaurant industry, the Company defers
its restaurant preopening costs and amortizes them over a twelve-month period
following the opening of the respective restaurant. In April 1998, The
American Institute of Certified Public Accounts ("AICPA") issued Statement of
Position ("SOP") 98-5 entitled "Reporting on the Costs of Start-Up
Activities". The SOP requires entities to expense as incurred all start-up and
preopening costs that are not otherwise capitalizable as long-lived assets.
The SOP is effective for fiscal years beginning after December 15, 1998, with
earlier adoption encouraged. Restatement of previously issued financial
statements is not permitted by the SOP, and entities are not required to
report the pro forma effects of the retroactive application of the new
accounting standard. The Company's adoption of the required new accounting
principle at January 1, 1999 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
that date. Net deferred preopening costs were approximately $261,000 at June
30, 1998.
Other recently issued standards of the FASB are not expected to affect
the Company, as conditions to which those standards apply are absent.
10
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 10, 1998, the Company held its Annual Meeting of Shareholders.
Shareholders voted upon the election of directors and upon the ratification of
PricewaterhouseCoopers, LLP, as the Company's independent public accountants
for the fiscal year ending December 31, 1998. Paul Motenko, Jeremiah Hennessy,
Alexander Puchner, Barry Grumman, Stanley Schneider, Steven Mayer and Ernest
Klinger, all of whom were directors prior to the Annual Meeting and were
nominated by management for re-election, were re-elected at the meeting. The
following votes were cast for each nominee:
NAME FOR WITHHELD
---- --- --------
Paul A. Motenko 4,455,826 18,680
Jeremiah J. Hennessy 4,455,826 18,680
Alexander Puchner 4,455,326 19,180
Barry J. Grumman 4,371,040 103,466
Stanley B. Schneider 4,371,040 103,466
Steven F. Mayer 4,370,540 103,966
Ernest T. Klinger 4,370,540 103,966
The following votes were cast for the ratification of
PricewaterhouseCoopers, LLP, as the Company's independent public accountants
for the fiscal year ending December 31, 1998: For: 4,459,706; Against: 4,400;
Abstain: 10,400.
Shareholders who wish to submit proposals to be included in the Company's
proxy materials for the 1999 annual meeting may do so in accordance with
Securities and Exchange Commission Rule 14a-8. For those shareholder proposals
which are not submitted in accordance with Rule 14a-8, the Company's
management proxies may exercise their discretionary voting authority, without
any discussion of the proposal in the Company's proxy materials, for any
proposal which is received by the Company after
April 25, 1999.
ITEM 5. OTHER INFORMATION
None
11
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHICAGO PIZZA & BREWERY, INC.
(Registrant)
July 30, 1998
By: /s/ PAUL A. MOTENKO
--------------------
Paul A. Motenko
Chief Executive Officer, Vice President,
Secretary and Chairman of the Board of
Directors
By: /s/JEREMIAH J. HENNESSY
------------------------
Jeremiah J. Hennessy
President, Chief Operating Officer,
Chief Financial Officer and Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Chicago
Pizza & Brewery, Inc. consolidated financial statements for the three months
ended June 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 1,611 1,611
<SECURITIES> 0 0
<RECEIVABLES> 191 191
<ALLOWANCES> 0 0
<INVENTORY> 351 351
<CURRENT-ASSETS> 2,720 2,720
<PP&E> 11,344 11,344
<DEPRECIATION> 2,422 2,422
<TOTAL-ASSETS> 17,738 17,738
<CURRENT-LIABILITIES> 2,984 2,984
<BONDS> 0 0
0 0
0 0
<COMMON> 15,040 15,040
<OTHER-SE> 1,196 1,195
<TOTAL-LIABILITY-AND-EQUITY> 17,738 17,738
<SALES> 7,825 14,713
<TOTAL-REVENUES> 7,825 14,713
<CGS> 2,159 4,171
<TOTAL-COSTS> 7,541 14,565
<OTHER-EXPENSES> 88 114
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<INTEREST-EXPENSE> 96 158
<INCOME-PRETAX> 179 0
<INCOME-TAX> 1 2
<INCOME-CONTINUING> 178 (1)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 178 (1)
<EPS-PRIMARY> 0.03 0.00
<EPS-DILUTED> 0.03 0.00
