<PAGE>
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, 1998
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
(949) 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: $30,051,503.
The aggregate market value of the common stock of the Registrant ("Common
Stock") held by non-affiliates as of December 31, 1998 based on the market price
at March 26, 1999 was $6,458,278. As of March 26, 1999, there were 7,658,321
shares of Common Stock of the Registrant outstanding and 8,884,584 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 .
--- ---
<PAGE>
INDEX
<TABLE>
<S> <C> <C>
PART I
ITEM 1. DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . 6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . 7
ITEM 7. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . .11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . .11
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS . . . .12
ITEM 10. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . .12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . .12
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . .12
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . .12
</TABLE>
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Chicago Pizza & Brewery, Inc. (the "Company" or "BJ's") owned and operated,
as of December 31, 1998, 26 restaurants located in Southern California,
Oregon, Washington and Colorado and an interest in one restaurant in Lahaina,
Maui. Each of these restaurants is operated as either a BJ's Pizza, Grill &
Brewery, a BJ's Pizza & Grill, a BJ's Pizza & Grill - OTC or a Pietro's Pizza
restaurant. The menu at the BJ's restaurants feature BJ's award-winning,
signature deep-dish pizza, BJ's own hand-crafted beers as well as a great
selection of appetizers, entrees, pastas, sandwiches, specialty salads and
desserts. The four BJ's Pizza, Grill & Brewery restaurants feature in-house
brewing facilities where BJ's hand-crafted beers are produced. The two BJ's
Pizza & Grill - OTC restaurants have a limited menu and service level. The
ten Pietro's Pizza restaurants serve primarily Pietro's thin-crust pizza in a
very casual, counter-service environment.
The Company was incorporated in California on October 1, 1991 originally to
assume the operation of the then existing five BJ's restaurants. In January
1995, the Company purchased the BJ's restaurants and concept from its founders.
Since that time, the Company has completed the (i) expansion of the BJ's menu to
include high-quality sandwiches, pastas, entrees, specialty salads and desserts;
(ii) enhancement of the BJ's concept through a comprehensive new logo and
identity program, new uniforms, a new interior design concept and redesigned
signage; (iii) addition of microbreweries to the concept to produce BJ's own
hand-crafted beers; (iv) purchase of the Pietro's Pizza chain in the Northwest
in March 1996, converting seven of the seventeen Pietro's restaurants to BJ's,
and the (v) development of a BJ's Pizza & Grill in Westwood Village (Los
Angeles), California, and BJ's Pizza, Grill & Breweries in Brea, California and
Boulder, Colorado.
The enhancement of the BJ's concept and the menu expansion have contributed to
same store sales increases at the BJ's restaurants open the entire comparable
periods of 13.3%, 8.7% and 15.7% for the years 1996, 1997 and 1998 respectively.
The opening of the Company's first microbrewery in Brea, California in August
1996 marked the beginning of the Company's production of award-winning
hand-crafted specialty beers which are distributed to all of the Company's
restaurants. The breweries have added an exciting dimension to the BJ's
concept which further distinguishes BJ's from many other restaurant
operations.
The acquisition of the Pietro's restaurants and conversion of seven of those
restaurants to BJ's has given the Company a significant presence in the Oregon
market. Due to the relative success of the Company's larger restaurants,
management has determined that the Company's resources will be best utilized in
the development of additional larger restaurants in prime locations.
Consequently, there are currently no plans to convert additional Pietro's units
to BJ's.
The Company's current focus is on the development of the larger footprint BJ's
restaurants in high profile locations with favorable demographics. The Company
opened a BJ's Pizza & Grill in Arcadia, California in January 1999 and
anticipates the opening of a BJ's Pizza, Grill & Brewery in Woodland Hills,
California in April 1999.
The Company's fundamental business strategy is to grow through the additional
development and expansion of the BJ's brand. The BJ's brand represents
exceptional food and specialty beers accompanied by great value, in a fun,
casual environment.
In addition to developing new BJ's restaurant and brewery operations, the
Company plans to pursue acquisition opportunities which may involve conversion
to the BJ's concept or the operation of additional complementary concepts.
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.
RECENT DEVELOPMENT
In March 1999, the Company sold, through a private placement, 1,250,000
shares of its Common Stock to ASSI, Inc. (the "ASSI Transaction") in exchange
for a cash payment of $1,000,000, the termination of two consulting
agreements between Chicago Pizza and ASSI, a release of any claims that ASSI
and its affiliates may have had against the Company or its affiliates
relating to the consulting agreements and prior investments by ASSI and its
affiliates in the Company. In addition, ASSI, Inc. agreed to the cancellation
of 3.2 million of the Company's redeemable warrants. The shares sold by the
Company to ASSI are subject to restrictions on resale including a right of
first refusal in favor of the Company or its designees. As an additional
part of the consideration for the common stock, ASSI and Louis Habash, the
controlling shareholder of ASSI, agreed to finance or guarantee financing of
potential future development projects of the company, subject to project
pre-commitment approval, and agreed to cooperate in connection with any
gaming or licensing applications or proceedings involving the Company. In
connection with its investment, ASSI received certain demand and piggyback
registration rights as well as a commitment from the company to use its best
efforts to have two of the company's directors be persons designated by ASSI
and to cause each of such designees to be included in the slate of director
nominees for election at each annual meeting of shareholders over the next
three years. ASSI also received a commitment from Paul Motenko and Jeremiah
Hennessy, the company's principal executive officers, to vote their shares of
common stock in favor of ASSI's board nominees in certain circumstances. Such
rights terminate at such time as ASSI and its affiliates no longer own at
least 5 percent of the company's outstanding common stock.
On February 23, 1999, a lawsuit was filed in the Superior Court of the State
of California, County of Orange (Case No. 805978) by La Pizza Loca, Inc. and
its controlling stockholder (collectively, "LPL") to prevent the Company from
completing the ASSI Transaction. The Company was successful in defending
against LPL's attempt to obtain an injunction. However, LPL continues to
pursue an action against the Company, its directors and ASSI for alleged
breaches of fiduciary duty, rescission and certain other claims. The Company
believes that the lawsuit is without merit and intends to vigorously defend
itself in connection with such lawsuit. The Company maintains Directors &
Officers liability insurance and is seeking coverage of the costs of the LPL
lawsuit under such policy. However, because the costs of defense cannot be
determined at this time, in the event that such insurance coverage is denied
or inadequate, and the Company incurs significant costs in defending the LPL
lawsuit, the Company's financial performance could be adversely affected.
1
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RESTAURANT CONCEPT AND MENU
The Company believes it is positioned for competitive advantage by offering
customers moderate prices, and excellent food from a menu that features
award-winning pizza, bountiful salads, soups, pastas, sandwiches, entrees and
desserts. The popularity of BJ's restaurants, management believes, is due,
to the broadness of their appeal, with menu items ranging from pizza to
steaks and ribs.
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. BJ's
offers large portions of high quality food, creating a real value orientation.
Because of the relatively low food cost associated with pizza, BJ's highest
volume item, the restaurants are able to maintain favorable gross profit margins
while providing a value to the customer.
BJ's restaurants provide a variety of beers for every taste, offering a
constantly evolving selection of domestic, imported and micro-brewed beers. BJ's
own hand-crafted beers are the focus of the beer selection and feature five
standard beers along with a rotating selection of seasonal specialties. While
the BJ's beers are produced at the Company's central brewery locations, they are
distributed to, and offered at all of the BJ's and Pietro's restaurants.
Management believes that internally produced beer provides a variety of
benefits, including:
1. The quality and freshness of the BJ's brewed beers, being under the
constant supervision of the Company's Vice President of Brewing
Operations, is superior to beer purchased from external sources.
2. The production costs of internally brewed beer can be significantly
less than purchased beer. The relatively low production costs and
premium pricing often associated with micro-brewed beers has a
positive impact on gross profit margins. The cost savings are
maximized when the brewery is operating at or near capacity. This is
the basis for the Company's "central brewery" structure.
RESTAURANT LOCATIONS AND EXPANSION PLANS
The following table sets forth data regarding the Company's existing and future
restaurant locations:
<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
Arcadia. . . . . . . . . . . . . . . . . . 1999 7,371
Woodland Hills*. . . . . . . . . . . . . . 1999 13,000
COLORADO
Boulder. . . . . . . . . . . . . . . . . . 1997 5,500
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
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
Portland (Burnside). . . . . . . . . . . 1996 3,483
Portland (Lombard. . . . . . . . . . . . 1996 5,700
McMinnville. . . . . . . . . . . . . . . 1996 2,900
WASHINGTON
Longview . . . . . . . . . . . . . . . . 1996 5,300
</TABLE>
* Expected to open in April 1999.
In addition to the above locations, the Company is evaluating potential
locations in California, Colorado, Washington and Arizona. The Company's
ability to open additional restaurants will depend upon a number of factors,
including, but not limited to, the availability of qualified management,
restaurant staff and other personnel, the cost and availability of suitable
locations, regulatory limitations regarding common ownership of breweries and
restaurants in certain states, cost effective and timely construction of
restaurants (which can be delayed by a variety of controllable and
non-controllable factors), securing of required governmental permits and
approvals and the Company's ability to generate funds from existing
operations or external financing. There can be no assurance that the Company
will be able to open its planned restaurants in a timely or cost effective
manner, if at all.
MARKETING
To date, the majority of marketing has been accomplished through community-based
promotions and customer referrals. Management's philosophy relating to the BJ's
restaurants 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.
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. BJ's
commitment to supporting worthwhile causes is exemplified by its "Cookies for
Kids" program, which provides a donation to the Cystic Fibrosis Foundation for
each Pizookie sold. The Pizookie, BJ's extremely popular dessert, is a cookie,
freshly baked in a mini pizza pan, and topped with vanilla bean ice cream.
Pietro's marketing strategy relies much more on the distribution of discount
coupons. Expenditures for marketing relating to the Pietro's restaurants are
typically 5.0% of sales (excluding discounts).
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.
3
<PAGE>
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.
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.
4
<PAGE>
EMPLOYEES
As of March 1, 1999, the Company employed 760 employees at its nine California
Restaurants, one Hawaii restaurant, and one Boulder, Colorado restaurant.
Additionally, 624 are employed at the restaurants in Washington and Oregon. The
Company also employs 25 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 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, the BJ'S PIZZA & GRILL and the 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
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 1998 was
approximately $2,180,000 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.
The Company's corporate headquarters in California are located in a 2,219
square-foot leased facility in Mission Viejo, California. The lease expires on
December 31, 2001 and currently provides for approximately $42,600 in annual
rent, which is subject to certain adjustments and annual increases. Chicago
Pizza Northwest, Inc., the Company's subsidiary in Washington, has offices in a
2,711 square-foot leased facility in Lynnwood, Washington. The Northwest office
also maintains the Company's business processes and data services, and provides
all management and financial reporting for the Company. This lease expires on
March 13, 2002 and currently provides for approximately $51,000 in annual rent,
which is subject to certain adjustments and annual increases, including, without
limitation, annual Consumer Price Index escalations.
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.
5
<PAGE>
On February 23, 1999, a lawsuit was filed in the Superior Court of the State
of California, County of Orange (Case No. 805978) by La Pizza Loca, Inc. and
its controlling stockholder (collectively, "LPL") to prevent the Company from
completing the sale of 1,250,000 shares of its Common Stock to ASSI, Inc. The
Company was successful in defending against LPL's attempt to obtain an
injunction. However, LPL continues to pursue an action against the Company,
its directors and ASSI for alleged breaches of fiduciary duty, rescission and
certain other claims. The Company believes that the lawsuit is without merit
and intends to vigorously defend itself in connection with such lawsuit. The
Company maintains Directors & Officers liability insurance and is seeking
coverage of the costs of the LPL lawsuit under such policy. However, because
the costs of defense cannot be determined at this time, in the event that
such insurance coverage is denied or inadequate, and the Company incurs
significant costs in defending the LPL lawsuit, the Company's financial
performance could be adversely affected.
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
1998.
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 5, 1999, the closing prices of the
Common Stock and Redeemable Warrants were $1.56 per share and $0.09 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.
<TABLE>
<CAPTION>
Calendar Year ended
December 31, Common Stock Redeemable Warrants
---------------------- -------------------
High Low High Low
------ ------- ------- -------
<S> <C> <C> <C> <C>
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
1998
First Quarter $2.09 $1.34 $0.22 $0.12
Second Quarter $2.47 $1.53 $0.22 $0.09
Third Quarter $2.03 $1.28 $0.12 $0.03
Fourth Quarter $1.81 $1.25 $0.09 $0.02
</TABLE>
As of March 4, 1999, the Company had 137 shareholders of record and 121 holders
of Redeemable Warrants of record.
PRIVATE PLACEMENT
In March 1999, the Company sold, through a private placement, 1,250,000
shares of its Common Stock to ASSI, Inc. (the "ASSI Transaction") in exchange
for a cash payment of $1,000,000, the termination of two consulting
agreements between Chicago Pizza and ASSI, a release of any claims that ASSI
and its affiliates may have had against the Company or its affiliates
relating to the consulting agreements and prior investments by ASSI and its
affiliates in the Company. In addition, ASSI, Inc. agreed to the cancellation
of 3.2 million of the Company's redeemable warrants. The shares sold by the
Company to ASSI are subject to restrictions on resale including a right of
first refusal in favor of the Company or its designees. As an additional
part of the consideration for the common stock, ASSI and Louis Habash, the
controlling shareholder of ASSI, agreed to finance or guarantee financing of
potential future development projects of the company, subject to project
pre-commitment approval, and agreed to cooperate in connection with any
gaming or licensing applications or proceedings involving the Company. In
connection with its investment, ASSI received certain demand and piggyback
registration rights as well as a commitment from the company to use its best
efforts to have two of the company's directors be persons designated by ASSI
and to cause each of such designees to be included in the slate of director
nominees for election at each annual meeting of shareholders over the next
three years. ASSI also received a commitment from Paul Motenko and Jeremiah
Hennessy, the company's principal executive officers, to vote their shares of
common stock in favor of ASSI's board nominees in certain circumstances. Such
rights terminate at such time as ASSI and its affiliates no longer own at
least 5 percent of the company's outstanding common stock.
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
6
<PAGE>
would be at the discretion of the Board of Directors.
During 1998, the Company did not sell any equity securities that were not
registered under the Securities Act of 1933, as amended (the "Securities Act").
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,
------------------ ------------------
1998 1997 1998 1997
-------- -------- ------- -------
(in thousands) (%) (%)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $30,051 $26,191 100.0% 100.0%
Cost of sales 8,458 7,732 28.1 29.5
-------- -------- ------- -------
Gross profit 21,593 18,459 71.9 70.5
-------- -------- ------- -------
Costs and Expenses:
Labor and benefits 10,831 9,086 36.0 34.7
Occupancy 2,563 2,363 8.5 9.0
Operating expenses 3,520 3,385 11.7 12.9
General and administrative 2,583 2,636 8.7 10.1
Depreciation and amortization 1,737 1,389 5.8 5.3
-------- -------- ------- -------
Total costs and expenses 21,234 18,859 70.7 72.0
-------- -------- ------- -------
Income (loss) from operations 359 (400) 1.2 (1.5)
-------- -------- ------- -------
Other Income (expense):
Gain on involuntary conversion of assets 202 0.8
Interest expense, net (212) (125) (0.7) (0.6)
Other income (expense), net (5) 20 (0.0) 0.1
-------- -------- ------- -------
Total other income (expense) (217) 97 (0.7) 0.3
-------- -------- ------- -------
Income (loss) before minority
interest and taxes 142 (303) 0.5 (1.2)
Minority interest in partnership (56) (11) (0.2) (0.0)
-------- -------- ------- -------
Income (loss) before taxes 86 (314) 0.3 (1.2)
Income tax expense (1) (1) (0.0) (0.0)
-------- -------- ------- -------
Net income (loss) $85 ($315) (0.3%) (1.2%)
-------- -------- ------- -------
-------- -------- ------- -------
Balance Sheet Data (end of period):
Working capital (deficit) ($796) $232
Intangible assets, net 5,367 5,452
Total assets 17,595 17,842
Total long-term debt (including current portion) 2,927 3,543
Minority interest 235 211
Shareholders' equity 11,893 11,808
</TABLE>
7
<PAGE>
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto included
elsewhere in this Form 10-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, (x) year 2000 risk issues, and (xi) other general economic and
regulatory conditions and requirements.
GENERAL
Chicago Pizza & Brewery, Inc. owned and operated, as of December 31, 1998, 26
restaurants located in Southern California, Oregon, Washington and Colorado and
an interest in one restaurant in Lahaina, Maui. Each of these restaurants is
operated as either a BJ's Pizza, Grill & Brewery, a BJ's Pizza & Grill, a BJ's
Pizza & Grill - OTC or a Pietro's Pizza restaurant. The menu at the BJ's
restaurants feature BJ's award-winning, signature deep-dish pizza, BJ's own
hand-crafted beers as well as a great selection of appetizers, entrees, pastas,
sandwiches, specialty salads and desserts. The four BJ's Pizza, Grill & Brewery
restaurants feature in-house brewing facilities where BJ's hand-crafted beers
are produced. The two BJ's Pizza & Grill - OTC restaurants have a limited menu
and service level. The ten Pietro's Pizza restaurants serve primarily Pietro's
thin-crust pizza in a very casual, counter-service environment.
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.
RESULTS OF OPERATIONS
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
REVENUES. Total revenues for the year ended December 31, 1998 increased to
$30,052,000 from $26,191,000 for the comparable period in 1997, an increase of
$3,861,000 or 14.7%. The increase is primarily the result of:
The opening of the Boulder, Colorado restaurant in February, 1997.
An increase in same store sales at the BJ's restaurants, which were open in
both periods, of $1,986,000 or 15.7%. Management believes this increase
was due to (i) an increase in customer counts, and (ii) an increase in
check averages produced by a price increase implemented in late May 1998
and 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 a part or all of the year
ended December 31, 1998 and operated as Pietro's for a part or all of the
comparable period in 1997 of $2,012,000 or 39.3%.
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 $395,000 or 6.4%; (ii) the sale of
the Pietro's restaurant in North Bend, Oregon in June 1997 and (iii) a fire
which caused the closing of a Pietro's restaurant in February 1997.
8
<PAGE>
COST OF SALES. Cost of food, beverages and paper (cost of sales) for the
restaurants increased to $8,459,000 for the year ended December 31, 1998 from
$7,732,000 for the comparable period in 1997, an increase of $727,000 or 9.4%.
However, as a percentage of revenues, cost of sales decreased to 28.1% during
the 1998 period from 29.5% 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 year ended December 31, 1998 from 28.0%
of sales during the comparable period in 1997. This decrease was also due to a
decrease in cost of sales at the Northwest BJ's and Pietro's restaurants to
30.4% in 1998 from 31.4% in 1997. The decrease in cost of sales was achieved
despite the substantial increase in cheese prices which occurred during the last
half of 1998.
LABOR. Labor costs for the restaurants increased to $10,831,000 in the year
ended December 31, 1998 from $9,086,000 for the comparable period in 1997, an
increase of $1,745,000 or 19.2%. As a percentage of revenues, labor costs
increased to 36.0% in the 1998 period from 34.7% in the 1997 period.
Management believes the increase in labor costs as a percentage of revenue
were primarily due to substantial increases in the federal, California and
Oregon minimum wages between 1997 and 1998.
OCCUPANCY. Occupancy costs increased to $2,563,000 during the year ended
December 31, 1998 from $2,363,000 during the comparable period in 1997, an
increase of $200,000 or 8.5%. As a percentage of revenues, occupancy costs
decreased to 8.5% in the 1998 period from 9.0% in the1997 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 $3,520,000 during the year
ended December 31, 1998 from $3,385,000 during the comparable period in 1997, an
increase of $135,000 or 4.0%. However, as a percentage of revenues, operating
expenses decreased to 11.7% in the 1998 period from 12.9% 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 as well as 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 $2,583,000 during the year ended December 31, 1998 from $2,636,000
during the comparable period in 1997, a decrease of $53,000 or 2.0%. 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
$1,737,000 during the year ended December 31, 1998 from $1,389,000 during the
comparable period in 1997, an increase of $348,000 or 25.1%. The increase was
primarily due to (i) the opening of the Boulder, Colorado restaurant in February
1997, and (ii) the depreciation associated with the renovation costs of the
Pietro's converted to BJ's.
INTEREST EXPENSE. Interest expense, net of interest income, increased to
$211,000 during the year ended December 31, 1998 from $125,000 during the
comparable period in 1997, an increase of $86,000 or 69.0%. 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
Since the completion of the Company's initial public offering in October of
1996, the Company has invested in restaurant development and reduced its debt.
Net cash provided by (used in) operating activities for the years ended December
31, 1998 and 1997 were $2,070,000 and ($147,000), respectively. Total capital
expenditures of $2,039,000 and $3,303,000 for the years ended December 31, 1998
and 1997, respectively, were for the acquisition of restaurant and brewery
equipment and leasehold improvements to develop or convert restaurants. Debt
reduction, including the principal portion of capitalized lease payments, for
the years ended December 31, 1998 and 1997 totaled $728,000 and $617,000,
respectively.
9
<PAGE>
The Company currently intends to utilize cash and cash equivalents primarily
for the development of additional restaurants, as well as for working capital
purposes.
On January 15, 1999, the Company completed a financing agreement with a lender
to provide equipment financing up to $1,000,000 for the equipment and
furnishings required in the Arcadia and Woodland Hills locations. Also, in
February 1999, the Company entered into a stock purchase agreement with an
existing shareholder for the sale of Company common stock. The Company issued
1,250,000 common shares to the shareholder in exchange for a cash payment of
$1,000,000 and other considerations. (See Private Placement and Legal
Proceedings).
Management believes that cash and cash equivalents available at December 31,
1998 and future operating cash flow will be sufficient for the Company to fund
its operations and continue to meet its business plan over the next year.
However, no assurance can be given that management can successfully implement
such objectives. Further, there can be no assurance that future events,
including problems, delays, additional expenses and difficulties encountered in
expansion and conversion of restaurants, will not require additional financing,
or that such financing will be available if necessary.
On February 23, 1999, a lawsuit was filed in the Superior Court of the State
of California, County of Orange (Case No. 805978) by La Pizza Loca, Inc. and
its controlling stockholder (collectively, "LPL") to prevent the Company from
completing the sale of 1,250,000 shares of its Common Stock to ASSI, Inc. The
Company was successful in defending against LPL's attempt to obtain an
injunction. However, LPL continues to pursue an action against the Company,
its directors and ASSI for alleged breaches of fiduciary duty, rescission and
certain other claims. The Company believes that the lawsuit is without merit
and intends to vigorously defend itself in connection with such lawsuit. The
Company maintains Directors & Officers liability insurance and is seeking
coverage of the costs of the LPL lawsuit under such policy. However, because
the costs of defense cannot be determined at this time, in the event that
such insurance coverage is denied or inadequate, and the Company incurs
significant costs in defending the LPL lawsuit, the Company's financial
performance could be adversely affected.
IMPACT OF INFLATION
Impact of inflation on food, labor and occupancy costs can significantly affect
the Company's operations. Many of the Company's employees are paid hourly rates
related to the federal minimum wage, which has been increased numerous times and
remains subject to future increases.
SEASONALITY AND ADVERSE WEATHER
The Company's results of operations have historically been impacted by
seasonality, which directly impacts tourism at the Company's coastal locations.
The summer months (June through August) have traditionally been higher volume
periods than other periods of the year.
YEAR 2000 COMPLIANCE
The Company has completed a review of its computerized information systems to
identify the systems and applications that could be affected by Year 2000
issues. The Company primarily utilizes software and hardware offered by major
developers, and periodically purchases upgrades directly from those developers
or authorized resellers. The Company's policy since the beginning of the current
year is to seek and purchase upgrades that include from the developer a Year
2000 compliance warranty. During 1998 the Company purchased Year 2000 upgrades
for most of its computerized information systems; total costs during 1998 of
acquiring these upgrades was approximately $9,000. Management feels that its
main data processing systems are now Year 2000 compliant. This policy of
replacement in the normal course of information system maintenance will
continue; it is anticipated that an additional $15,000 will be spent to make all
of the Company's systems and hardware Year 2000 compliant. If the third parties
upon which the Company relies are unable to address this issue in a timely
manner, it could result in a material financial risk to the Company.
The point of sale system used to facilitate the collection of operational data
in the Company's restaurants is not yet warranted to be Year 2000 compliant. The
Company is working with the developer of this system and plans to support the
developer's efforts with all resources necessary to resolve any significant year
2000 issues in a timely manner. If the developer is unable to provide Year 2000
assurances within a reasonable period of time, management intends to temporarily
put manual procedures in place to collect and transmit this customer and order
data, as was done in the past. The cost of this contingency plan would be in the
form of additional labor expense, and would not be expected to have a material
impact on the Company's financial position.
10
<PAGE>
The Company's non-IT systems consist primarily of our telephone switching
equipment and restaurant operating equipment. We have upgraded our telephone
switching equipment where necessary. Our initial assessment of our restaurant
operating equipment has indicated that modification or replacement will not be
necessary as a result of the Year 2000 issue. Therefore we are not currently
remediating this operating equipment. However, the existence of non-compliant
embedded technology in this type of equipment is, by nature, more difficult to
identify and repair than in computer hardware and software.
The Company also plans to contact its major product vendors and request
statements as to their preparedness for the potential impact of Year 2000
issues. Their responses will be evaluated, and, based on the information
provided, decisions will be made as to their ability to continue to meet the
Company's need for product into Year 2000. Alternative sources for product will
be identified in cases where the Company feels there are major questions as to
the vendor's ability to conduct its normal business due to potential Year 2000
implications.
Despite our Year 2000 remediation, testing efforts and contingency planning,
there may be disruptions and unexpected business problems caused by IT systems,
non-IT systems or third party vendors during the early months of the year 2000.
The Company is making diligent efforts to assess the Year 2000 readiness of our
significant business partners and will develop contingency plans for critical
areas where we believe our exposure to Year 2000 risk is the greatest. However,
despite our best efforts, we may encounter unanticipated third party failures or
a failure to have successfully concluded our systems remediation efforts. Any
of these unforeseen events could have a material adverse impact on the Company's
results of operations, financial condition or cash flows. Additionally, any
prolonged inability of a significant number of our restaurants to operate could
have a material adverse effect. The amount of any potential losses related to
these occurrences cannot be reasonably estimated at this time.
The most likely worst case scenario for the Company is that a significant number
of our restaurants will be unable to operate for a few days due to public
infrastructure failures and/or food supply problems. Some restaurants may have
longer-term problems lasting a few weeks. The failure of restaurants to operate
would result in reduced revenues and cash flows for the Company during the
period of disruption. Loss of restaurant revenues would be partially mitigated
by reduced costs.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
As has been 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 new restaurant. In April 1998, the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accounts issued Statement of Position 98-5 (SOP 98-5), Accounting for the
Costs of Start-Up Activities. SOP 98-5 requires all costs of start-up activities
that are not otherwise capitalizable as long-lived assets to be expensed as
incurred, and is effective for financial statements for fiscal years beginning
after December 15, 1998. Adoption of the new accounting standard will require
the Company to write off all capitalized preopening costs as a cumulative effect
of a change in accounting principal as a one-time charge against earnings.
Initial application is required as of the beginning of the fiscal year in which
SOP 89-5 is first adopted. The Company's total deferred preopening costs were
$135,261 at December 31, 1998.
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.
11
<PAGE>
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, 1998.
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,
1998.
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, 1998.
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, 1998.
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 Exhibit1 of the Registration
Statement.
3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 of
the Registration Statement.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Exhibit
NUMBER DESCRIPTION
------- -----------
<S> <C>
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.
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.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Exhibit
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.15 Stock Purchase Agreement by and between Chicago Pizza & Brewery,
Inc., Louis Habash and ASSI, Inc.
21 List of Subsidiaries, incorporated by reference to Exhibit 21.1 of
the Registration Statement.
27.1 Financial Data Schedule.
(b) The Company filed no Reports on Form 8-K during the last quarter of
1998.
</TABLE>
14
<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 26, 1999
- -------------------- Chairman of the Board and Vice-
Paul A. Motenko President and Secretary
By: /s/JEREMIAH J. HENNESSY President, Chief Operating March 26, 1999
- -------------------- Officer, Chief Financial Officer,
Jeremiah J. Hennessy Principal Accounting Officer and
Director
By: /s/ALEXANDER M. PUCHNER Vice President of Brewing March 26, 1999
- --------------------- Operations and Director
Alexander M. Puchner
By: /s/BARRY J. GRUMMAN Director March 26, 1999
- --------------------
Barry J. Grumman
</TABLE>
15
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report Of Independent Accountants 17
Consolidated Balance Sheets As Of December 31, 1998 and 1997 18
Consolidated Statements Of Operations For The Years Ended
December 31, 1998 and 1997 19
Consolidated Statements Of Shareholders' Equity For The Years Ended
December 31, 1998 and 1997 20
Consolidated Statements Of Cash Flows For The Years Ended
December 31, 1998 and 1997 21
Notes To Consolidated Financial Statements 22
</TABLE>
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
__________
To the Shareholders
Chicago Pizza & Brewery, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
statements of operations, of shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of Chicago Pizza &
Brewery, Inc. at December 31, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers, LLP
Los Angeles, California
March 12, 1999
17
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 1,490,705 $1,705,349
Restricted cash - 200,000
Accounts receivable 175,712 161,649
Inventory 345,874 361,299
Prepaids and other current assets 295,176 646,700
----------- ----------
Total current assets 2,307,467 3,074,997
Property and equipment, net 9,567,604 8,673,831
Other assets 352,916 272,138
Restricted cash - 369,123
Intangible assets, net 5,366,722 5,451,662
----------- ----------
Total assets $17,594,709 $17,841,751
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $1,130,691 $1,036,856
Accrued expenses 1,286,539 1,107,177
Current portion of notes payable to related parties 339,727 336,306
Current portion of long-term debt 210,367 265,079
Current portion of obligations under capital lease 135,809 97,844
----------- ----------
Total current liabilities 3,103,133 2,843,262
Notes payable to related parties 1,718,954 2,058,681
Long-term debt 355,313 585,751
Obligations under capital lease 167,219 199,265
Other liabilities 122,099 135,067
----------- ----------
Total liabilities 5,466,718 5,822,026
----------- ----------
Minority interest in partnership 235,040 211,357
Commitments and contingencies (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, 1998 and 1997, 6,408,321 shares issued and
outstanding as of December 31, 1998 and 1997 15,039,646 15,039,646
Capital surplus 1,196,029 1,196,029
Accumulated deficit (4,342,724) (4,427,307)
----------- ----------
Total shareholders' equity 11,892,951 11,808,368
----------- ----------
Total liabilities and shareholders' equity $17,594,709 $17,841,751
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
18
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Revenues $ 30,051,503 $ 26,191,472
Cost of sales 8,458,829 7,732,193
------------ -------------
Gross profit 21,592,674 18,459,279
------------ -------------
Costs and expenses:
Labor and benefits 10,830,181 9,085,853
Occupancy 2,562,825 2,363,002
Operating expenses 3,520,221 3,384,616
General and administrative 2,583,384 2,636,904
Depreciation and amortization 1,737,430 1,388,551
------------ -------------
Total cost and expenses 21,234,041 18,858,926
------------ -------------
Income (loss) from operations 358,633 (399,647)
------------ -------------
Other income (expense):
Gain on involuntary conversion of assets -- 202,082
Interest expense, net (211,106) (124,950)
Other income (expense), net (5,090) 19,438
------------ -------------
Total other income (expense) (216,196) 96,570
------------ -------------
Income (loss) before minority interest and income taxes 142,437 (303,077)
Minority interest in partnership (56,254) (11,052)
------------ -------------
Income (loss) before income taxes 86,183 (314,129)
Income tax expense (1,600) (800)
------------ -------------
Net income (loss) $84,583 ($314,929)
------------ -------------
------------ -------------
Basic and dilutive net income (loss) per common share $0.01 ($0.05)
------------ -------------
------------ -------------
Basic weighted average number of common shares outstanding 6,408,321 6,408,321
------------ -------------
------------ -------------
Dilutive weighted average number of common shares outstanding 6,419,851 6,408,321
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
19
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital Accumulated
Shares Amount Surplus Deficit Total
--------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
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
Net income 84,583 84,583
--------- ----------- ---------- ------------ -----------
Balance, December 31, 1998 6,408,321 $15,039,646 $1,196,029 ($4,342,724) $11,892,951
--------- ----------- ---------- ------------ -----------
--------- ----------- ---------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
20
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $84,583 ($314,929)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,737,430 1,388,551
Gain on involuntary conversion of assets (202,082)
Gain on sale of restaurant (16,678)
Minority interest in partnership 56,254 11,052
Changes in assets and liabilities:
Accounts receivable (14,063) (4,227)
Inventory 15,425 (104,631)
Prepaids and other current assets (32,852) (555,451)
Other assets (36,584) (16,020)
Accounts payable 87,836 (221,943)
Accrued expenses 185,362 (97,915)
Other liabilities (12,968) (12,704)
------------ ------------
Net cash provided by (used in) operating activities 2,070,423 (146,977)
------------ ------------
Cash flows provided by (used in) investing activities:
Purchases of equipment (2,038,596) (3,303,414)
Purchase of liquor licenses (53,545)
Proceeds from involuntary conversion of asset 260,691
Proceeds from sale of restaurants, net of expenses 7,000 40,900
------------ ------------
Net cash used in investing activities (2,085,141) (3,001,823)
------------ ------------
Cash flows provided by (used in) financing activities:
Release of cash pledged as collateral 560,830
Payments on related party debt (336,306) (320,241)
Payments on debt (285,150) (220,993)
Capital lease payments (106,877) (75,603)
Distributions to partners (32,423) (14,822)
------------ ------------
Net cash used in financing activities (199,926) (631,659)
------------ ------------
Net decrease in cash and cash equivalents (214,644) (3,780,459)
Cash and cash equivalents, beginning of period 1,705,349 5,485,808
------------ ------------
Cash and cash equivalents, end of period $1,490,705 $1,705,349
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
21
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company And Summary Of Significant Accounting Policies:
OPERATIONS
Chicago Pizza & Brewery, Inc. (the "Company" or "BJ's") was incorporated in
California on October 1, 1991. The Company owns and operates 26 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, a BJ's Pizza & Grill, a
BJ's Pizza & Grill - OTC or a Pietro's Pizza, located exclusively in the
Northwest. 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 include micro-breweries. Two
additional Pietro's restaurants were converted and opened as BJ's
restaurants in February and March 1998. In January 1999, the Company opened
its latest BJ's Pizza & Grill restaurant in Arcadia, California.
BASIS OF PRESENTATION
The accompanying financial statements of the Company as of and for the
years ended December 31, 1998 and 1997 are presented on a consolidated
basis, and include the accounts of the Company, its wholly owned
subsidiary, Chicago Pizza Northwest, Inc. 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.
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. Under the terms of the
assumed bank loan, $100,000 of the collateral was released to the Company
during 1998. The remaining $100,000 certificate of deposit was released to
the Company in March 1999.
As part of the Pietro's Acquisition, the Company acquired U.S. Treasury
Notes, which were controlled by the State of Washington under an escrow
agreement relating to a previous Washington State Workers' Compensation
insurance program. In December 1998, the State of Washington accepted a
surety bond arranged by the Company and released its interest in the
escrowed Treasury Notes.
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
22
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. The Company And Summary Of Significant Accounting Policies, Continued:
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 5-10 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, concepts, 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 $135,261 and $333,382 as of December 31,
1998 and 1997, respectively.
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.
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.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 1998 and 1997 was $558,291 and $761,780,
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.
23
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. The Company And Summary Of Significant Accounting Policies, Continued:
MINORITY INTEREST
For the consolidated financial statements as of December 31, 1998 and 1997,
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") Opinion 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. 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 Principals Board (APB) 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 reflects the potential dilution that could occur if stock options
issued by the Company to sell common stock at set prices were exercised.
The financial statements present basic and dilutive net income per share.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plan using the
intrinsic value method prescribed in APB Opinion No. 25, "Accounting for
Stock Issued to Employees". SFAS No. 123, "Accounting for Stock-based
Compensation", encourages, but does not require companies to record
stock-based compensation plans at fair value. The Company has elected
to continue accounting for stock-based compensation in accordance with
APB No. 25, but will comply with the required disclosures under SFAS
No. 123.
RECENTLY ISSUED ACCOUNTING STANDARDS
As has been 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 new restaurant. In April
1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accounts issued Statement of Position 98-5
(SOP 98-5), "Accounting for the Costs of Start-Up Activities". SOP 98-5
requires all costs of start-up activities that are not otherwise
capitalizable as long-lived assets to be expensed as incurred, and is
effective for financial statements for fiscal years beginning after
December 15, 1998. Adoption of the new accounting standard will require
the Company to write off all capitalized preopening costs as a cumulative
effect of a change in accounting principle as a one-time charge against
24
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. The Company And Summary Of Significant Accounting Policies, Continued:
earnings. Initial application is required as of the beginning of the fiscal
year in which SOP 98-5 is first adopted. The Company's total deferred
preopening costs were $135,261 at December 31, 1998.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements
to conform with the 1998 presentation.
BUSINESS OPERATIONS
The Company has historically 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-brewing 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
development of additional restaurant sites.
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 and cash
equivalent balances may be in excess of the FDIC insurance limit. Cash
equivalents represent money market funds and certificates of deposits.
3. Property and Equipment:
Property and equipment consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Furniture and fixtures $ 715,098 $ 543,594
Equipment 4,101,864 3,889,964
Leasehold improvements 6,545,352 6,039,018
----------- -----------
11,362,314 10,472,576
Less, accumulated depreciation and amortization (2,990,505) (1,869,788)
----------- -----------
8,371,809 8,602,788
Construction in progress 1,195,795 71,043
----------- -----------
$9,567,604 $8,673,831
----------- -----------
----------- -----------
</TABLE>
25
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. Intangible Assets:
Intangible assets consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Goodwill $5,867,357 $5,798,251
Trademarks 58,563 48,000
Covenant not to compete 50,000 50,000
Lease right for Lahaina lease 25,000 25,000
---------- ----------
6,000,920 5,921,251
Less, accumulated amortization 634,198 469,589
---------- ----------
$5,366,722 $5,451,662
---------- ----------
---------- ----------
</TABLE>
5. Accrued Expenses:
Accrued expenses consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Accrued professional fees $89,251 $93,500
Accrued rent 244,163 265,122
Payroll related liabilities 729,298 547,568
Accrued interest - 18,409
Other 223,827 182,578
---------- ----------
$1,286,539 $1,107,177
---------- ----------
---------- ----------
</TABLE>
6. Debt:
RELATED PARTY DEBT
Related party debt consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
------------- -----------
<S> <C> <C>
Note payable to Roman Systems (affiliate),
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 $2,041,181 $2,335,487
Note payable to Roman Systems (affiliate),
with interest rate of 2.25% plus the bank's
reference rate (7.75% at December 31, 1998
and 8.50% at December 31, 1997), due in
monthly installments of $3,500, maturing
June 1, 1999 17,500 59,500
------------- -----------
Total related party debt 2,058,681 2,394,987
Less, current portion 339,727 336,306
------------- -----------
$1,718,954 $2,058,681
------------- -----------
------------- -----------
</TABLE>
26
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. Debt, Continued:
Future maturities of related party debt for each of the five years
subsequent to December 31, 1998 and thereafter are as follows:
<TABLE>
<CAPTION>
<C> <C>
1999 $ 339,727
2000 350,147
2001 378,068
2002 405,989
2003 433,909
Thereafter 150,841
----------
$2,058,681
----------
----------
</TABLE>
OTHER LONG-TERM DEBT
Other long-term debt consisted of the following as of :
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
--------- --------
<S> <C> <C>
Note payable with interest rate of 2% plus the
bank's reference rate (7.75% at December 31,
1998 and 8.50% at December 31, 1997), due in
monthly installments of $12,513, maturing
March 1, 2001. $330,849 $481,002
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% 234,831 315,115
Note payable with interest rate of 10.80%,
payable in monthly installments of $8,100,
including interest, maturing September 1998 - 54,713
--------- ---------
565,680 850,830
Less, current portion 210,367 265,079
--------- ---------
$355,313 $585,751
--------- ---------
--------- ---------
</TABLE>
Future maturities of other long-term debt for years subsequent to December
31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $210,367
2000 230,437
2001 108,152
2002 16,724
--------
$565,680
--------
--------
</TABLE>
27
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. Debt, Continued:
Total interest expense for the years ended December 31, 1998 and 1997 was
approximately $239,000 and $341,000, respectively.
On January 15, 1999 the Company completed a financing agreement with a
lender to provide equipment financing totaling $1,000,000 for the equipment
and furnishings required by the two additional California locations. A
commitment fee was paid by the Company in January 1999, and initial
funding, as provided by the proposal, took place in March 1999. The term of
the loan is approximately seven years, based on the completion of loan
funding.
7. Capital Leases:
The Company leases computer and other equipment under capital lease
arrangements. The equipment financed by the capital leases has an original
cost of $488,732 and $434,618 at December 31, 1998 and 1997, respectively.
Accumulated amortization related to these leases is $209,546 and $123,019 as of
December 31, 1998 and 1997, respectively. The obligations under capital leases
have a weighted average interest rate of 19.0% and mature at various dates
through 2001. Annual future minimum lease payments for years subsequent to
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $181,287
2000 165,072
2001 22,118
--------
Total minimum payments 368,477
Less, amount representing interest 65,449
--------
Obligations under capital leases 303,028
Less, current portion 135,809
--------
Long-term portion $167,219
--------
--------
</TABLE>
8. Commitments and contingencies:
LEASES
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, 1998 and 1997, was $2,184,223 and $2,023,738,
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 $228,914 and $248,348 has been established and included in
accrued expenses at December 31, 1998 and December 31, 1997, respectively,
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,
included in rent expense, above, for the years ended December 31, 1998 and
1997 were $189,572 and $71,702, respectively.
28
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. Commitments and contingencies, Continued:
The following are the future minimum rental payments under noncancelable
operating leases for each of the five years subsequent to December 31, 1998
and in total thereafter:
<TABLE>
<S> <C>
1999 $ 2,196,865
2000 1,960,343
2001 1,812,372
2002 1,435,551
2003 1,063,704
Thereafter 4,246,750
-----------
$12,715,585
-----------
-----------
</TABLE>
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. (See Note 15
Subsequent Event)
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, Chief Executive Officer, and Jeremiah J. Hennessy,
President and Chief Operating Officer. 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.
9. Shareholders' Equity:
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, 1998 or 1997.
The Company currently has no plans to issue shares of preferred stock.
29
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. Shareholders' Equity, Continued:
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. 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 (IPO).
The Company issued Redeemable Warrants with the Company's IPO on October
15, 1996. At December 31, 1998, the Company had 12,084,584 Redeemable
Warrants outstanding. Each redeemable warrant entitles the holder thereof
to purchase, at any time during the 54-month period commencing one year
after the date of the Company's IPO, one share of Common Stock at a price
of 110% of the initial public offering price per share ($5.50), subject to
adjustment in accordance with the anti-dilution and other provisions
referred to below.
The Redeemable Warrants are subject to redemption by the Company at any
time, at a price of $.25 per Redeemable Warrant if the average closing bid
price of the Common Stock equals or exceeds 140% of the IPO price per share
for any 20 trading days within a period of 30 consecutive trading days
ending on the fifth trading day prior to the date of notice of redemption.
Redemption of the Redeemable Warrants can be made only after 30 days
notice, during which period the holders of the Redeemable Warrants may
exercise the Redeemable Warrants.
10. Income Taxes:
The provision for income tax consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current:
Federal -- --
State $1,600 $800
--------- ---------
1,600 800
Deferred:
Federal -- --
State -- --
--------- ---------
Provision for income taxes $1,600 $800
--------- ---------
--------- ---------
</TABLE>
30
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. Income Taxes, Continued:
The temporary differences which give rise to deferred tax provision
(benefit) consist of the following for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Property and equipment $ 20,457 ($83,530)
Goodwill 116,762 40,835
Accrued liabilities (6,123) 5,052
Investment in partnerships (44,896) (5,965)
Net operating losses 32,854 (59,042)
Income tax credits (99,655) (103,657)
Other 58,197 (233)
Change in valuation allowance (77,596) 206,540
---------- ----------
$ -- $ --
---------- ----------
---------- ----------
</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>
1998 1997
-------- --------
<S> <C> <C>
Statutory regular federal income tax 34.0% (34.0%)
benefit
State income taxes, net of federal 1.2% 0.3%
benefit
Change in valuation allowance 65.6% 54.2%
Change in credits (150.8%) (32.9%)
Employer tax credit disallowance 46.9% 10.8%
Other, net 5.0% 1.8%
-------- --------
1.9% 0.2%
-------- --------
-------- --------
</TABLE>
The components of the deferred income tax asset and (liability) consist of
the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Property and equipment $ 171,957 $ 192,414
Goodwill (289,785) (173,023)
Accrued liabilities 38,062 31,939
Investment in partnerships 71,005 26,110
Net operating losses 1,597,290 1,630,144
Income tax credits 284,375 184,720
Other (39,568) 18,628
----------- -----------
1,833,336 1,910,932
Valuation allowance (1,833,336) (1,910,932)
----------- -----------
Net deferred income taxes $ -- $ --
----------- -----------
----------- -----------
</TABLE>
As of December 31, 1998, the Company had net operating loss carryforwards
for federal and state purposes of approximately $4,186,000 and $1,950,000,
respectively. The net operating loss carryforwards begin expiring in 2008
for federal purposes and 1999 for state purposes.
The Company has a federal credit for FICA taxes paid on employees' tip
income of approximately $280,000. The credit will begin to expire in 2011.
31
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. Income Taxes, Continued:
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 Initial Public Offering in 1996.
The Company has established a valuation allowance against its deferred
tax assets due to the uncertainty surrounding the realization of such
assets. Management periodically evaluates the recoverability of the
deferred tax assets. At such time as it is determined that it is more
likely than not that deferred tax assets are realizable, the valuation
allowance will be reduced.
11. Supplemental Cash Flow Information :
Supplemental cash flow items consisted of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<C> <S> <S>
Cash paid for:
Interest $306,523 $381,109
Taxes $1,600 $800
</TABLE>
Supplemental information on noncash investing and financing activities
consisted of the following for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Equipment purchases under a capital lease $112,796 $196,125
</TABLE>
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>
1998 1997
-------------------------- --------------------------
Weighted Average Weighted Average
Exercise Price Exercise Price
Shares per Share Shares per Share
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Outstanding options at beginning of year 352,909 $4.14 487,500 $5.00
Granted 176,500 $1.88 25,000 $1.00
Exercised - - - -
Terminated (79,409) $4.94 (159,591) $5.00
--------- --------- ---------- ----------
Outstanding options at end of year 450,000 $3.11 52,909 $4.72
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Options exercisable at end of year 312,028 $3.40 282,603 $4.65
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
32
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. 1996 Stock Option Plan, Continued:
The per share weighted average fair value for options granted in 1998
and 1997 was $0.93 and $0.51 respectively. On January 27, 1998 a board
resolution was passed changing the exercise price from $5.00 to $3.00
for outstanding options held by current employees (as of January 27,
1998) excluding Corporate Officers and Directors. Information relating
to significant option groups outstanding at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Life of
Exercise Outstanding Outstanding Options
Price Shares Shares(Yr.) Exercisable
-------- ----------- ----------- -----------
<S> <C> <C> <C>
$5.00 150,000 7.77 130,685
$3.00 98,500 7.77 80,343
$1.88 176,500 9.28 76,000
$1.00 25,000 8.31 25,000
-------- ----------- ----------- -----------
Total 450,000 8.40 312,028
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS Statement
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 1998 and 1997 consistent with the
provisions of SFAS No. 123, the Company's net income (loss) and basic
income (loss) per share would have been decreased and increased,
respectively, to the pro forma amounts indicated below as of December 31,
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net income (loss), as reported $84,583 ($314,929)
Net loss, pro forma ($155,515) ($542,062)
Basic and dilutive income (loss) per
share, as reported $0.01 ($0.05)
Basic and dilutive loss per share,
pro forma ($0.02) ($0.08)
</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 ranging from 49.0% to
61.4%, (c) a risk-free interest rate ranging from 4.88% to 6.74% and (d)
expected option life of five years.
13. Acquisitions And Transfers:
ARCADIA, CALIFORNIA
In September 1998, the Company entered into a sublease for its Arcadia,
California restaurant location. The site was renovated and opened on
January 21, 1999.
33
<PAGE>
CHICAGO PIZZA & BREWERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. Acquisitions And Transfers, Continued:
WOODLAND HILLS, CALIFORNIA
In August 1998, the Company entered into a lease for its Woodland Hills,
California restaurant and brewery location. The site is being renovated,
and management anticipates a Spring 1999 opening.
SALE OF RESTAURANTS
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.
GAIN ON INVOLUNTARY CONVERSION OF ASSETS
In February 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.
14. Quarterly Financial Data (Unaudited):
Summarized unaudited quarterly financial data for the Company is as
follows:
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998
-------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Total revenues $6,888,256 $7,825,198 $8,157,975 $7,180,073
Income (loss) from operations ($136,361) $284,025 $355,680 ($144,711)
Net income (loss) ($179,501) $178,360 $285,151 ($199,427)
Basic and dilutive net income
(loss) per share ($0.03) $0.03 $0.04 ($0.03)
</TABLE>
<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)
</TABLE>
15. Subsequent Event:
In March 1999, the Company sold, through a private placement, 1,250,000
shares of its Common Stock to ASSI, Inc. (the "ASSI Transaction") in
exchange for a cash payment of $1,000,000, the termination of two
consulting agreements between Chicago Pizza and ASSI, a release of any
claims that ASSI and its affiliates may have had against the Company or
its affiliates relating to the consulting agreements and prior
investments by ASSI and its affiliates in the Company. In addition,
ASSI, Inc. agreed to the cancellation of 3.2 million of the Company's
redeemable warrants. The shares sold by the Company to ASSI are subject
to restrictions on resale including a right of first refusal in favor
of the Company or its designees. As an additional part of the
consideration for the common stock, ASSI and Louis Habash, the
controlling shareholder of ASSI, agreed to finance or guarantee
financing of potential future development projects of the company,
subject to project pre-commitment approval, and agreed to cooperate in
connection with any gaming or licensing applications or proceedings
involving the Company. In connection with its investment, ASSI received
certain demand and piggyback registration rights as well as a
commitment from the company to use its best efforts to have two of the
company's directors be persons designated by ASSI and to cause each of
such designees to be included in the slate of director nominees for
election at each annual meeting of shareholders over the next three
years. ASSI also received a commitment from Paul Motenko and Jeremiah
Hennessy, the company's principal executive officers, to vote their
shares of common stock in favor of ASSI's board nominees in certain
circumstances. Such rights terminate at such time as ASSI and its
affiliates no longer own at least 5 percent of the company's
outstanding common stock.
On February 23, 1999, a lawsuit was filed in the Superior Court of the
State of California, County of Orange (Case No. 805978) by La Pizza
Loca, Inc. and its controlling stockholder (collectively, "LPL") to
prevent the Company from completing the ASSI Transaction. The Company
was successful in defending against LPL's attempt to obtain an
injunction. However, LPL continues to pursue an action against the
Company, its directors and ASSI for alleged breaches of fiduciary duty,
rescission and certain other claims. The Company believes that the
lawsuit is without merit and intends to vigorously defend itself in
connection with such lawsuit. The Company maintains Directors &
Officers liability insurance and is seeking coverage of the costs of
the LPL lawsuit under such policy. However, because the costs of
defense cannot be determined at this time, in the event that such
insurance coverage is denied or inadequate, and the Company incurs
significant costs in defending the LPL lawsuit, the Company's financial
performance could be adversely affected.
34
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of February
18, 1999, by and between CHICAGO PIZZA & BREWERY, INC., a California
corporation (the "Company"), LOUIS HABASH ("Habash") and ASSI, INC., a Nevada
corporation ("ASSI"), with reference to the following facts:
RECITALS
A. In order to provide additional working capital and to facilitate
its continued growth, the Company desires to raise additional equity through
the sale of shares of its Common Stock, no par value ("Common Stock").
B. ASSI, a corporation owned and controlled by Habash, desires to make
an equity investment in the Company on the terms and conditions set forth in
this Agreement.
C. ASSI and the Company have previously entered into (i) that certain
Consulting Agreement, dated February 20, 1996, relating to the Company's
Pacific Northwest operations, and (ii) that certain Consulting Agreement,
dated February 20, 1996, relating to the Company's Las Vegas, Nevada
operations (collectively, the "Consulting Agreements"), and (iii) that
certain Note Purchase Agreement, dated February 20, 1996, relating to
$2,000,000 in financing provided to the Company by ASSI (the "Note
Agreement").
D. ASSI is the record and beneficial owner of Warrants to purchase an
aggregate of 3,200,000 shares of Common Stock (the "ASSI Warrants"),
3,000,000 of which were issued upon conversion of the Convertible Note issued
pursuant to the terms of the Note Agreement, and 200,000 of which were issued
pursuant to the terms of the Consulting Agreements.
E. ASSI desires to purchase from the Company and the Company desires
to issue and sell to ASSI an aggregate of 1,250,000 shares of Common Stock
pursuant to the terms and conditions set forth in this Agreement.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other good and valuable consideration, the receipt
and adequacy of which is hereby acknowledged, the parties hereto agree as
follows:
I. DEFINITIONS. In addition to the definitions contained
elsewhere herein, the following terms, as used herein, shall have the
following meanings:
<PAGE>
A. "California Securities Law" shall mean the California
Corporate Securities Law of 1968, as amended, and any successor statutes.
A. "Securities Act" shall mean the Securities Act of 1933,
as amended, and any successor statutes.
I. PURCHASE AND SALE OF SHARES.
A. PURCHASE AND SALE OF SHARES. Upon the terms and subject
to the conditions set forth herein, the Company hereby agrees to issue to
ASSI, and ASSI hereby agrees to acquire from the Company an aggregate of One
Million Two Hundred Fifty Thousand (1,250,000) shares of Common Stock of the
Company (the "Shares"), for the following consideration:
(a) A cash payment of One Million Dollars ($1,000,000) (the
"Cash Payment") which shall be paid on or prior to March 1, 1999 by wire
transfer to an account or accounts designated by the Company;
(b) Cancellation of the Warrants in accordance with Section 2.3
of this Agreement;
(c) Termination of the Consulting Agreements and any remaining
rights or obligations of the Company and ASSI pursuant to the Note
Agreement in accordance with Section 2.4 of this Agreement;
(d) A general release by Habash, ASSI and their respective
affiliates of any claims against the Company in accordance with Section 3
of this Agreement; and
(e) The additional covenants of Habash and ASSI contained in
Section 8 of this Agreement.
ASSI shall have no voting or other rights as owner of the Shares unless and
until the Cash Payment has been made. Notwithstanding anything to the
contrary contained herein, failure of ASSI to make the Cash Payment on or
prior to March 1, 1999 shall not affect the applicability and effectiveness
of Sections 2.3, 2.4, 3, 8.4, 8.5 and 8.6 of this Agreement.
A. DELIVERY OF CERTIFICATES. Simultaneously with the
Company's receipt of the Cash Payment (the "Payment Date"), the Company
shall issue and deliver to ASSI or its designees a certificate or
certificates representing the Shares (the "Certificates"). The Certificates
shall bear a restrictive legend in accordance with the provisions of the
Securities Act and any applicable Blue Sky laws
2
<PAGE>
and shall also bear a legend reflecting that the Shares are subject to the
voting and transfer restrictions contained in Section 8.1 of this Agreement.
A. CANCELLATION OF WARRANTS. Simultaneously with the
execution of this Agreement (i) each of the Warrants shall be automatically
canceled and of no further force and effect, (ii) ASSI shall promptly deliver
to the Company all warrant certificates representing the Warrants which
certificates shall be endorsed (with signature Medallion guaranteed by a
national bank or member of the New York Stock Exchange) for transfer to the
Company; provided, however, that in the event such warrant certificates have
been lost or destroyed, ASSI shall deliver an indemnity of lost certificate
to the Company in a form reasonably satisfactory to the Company (with
signature Medallion guaranteed by a national bank or member of the New York
Stock Exchange) pursuant to which ASSI will certify, among other things, that
the certificates have been lost or destroyed and that ASSI will indemnify the
Company from and against any losses, claims or damages resulting from or
relating to the loss or destruction of the certificates in question, (iii)
ASSI shall execute and deliver such other documents, assignments or
certifications as the Company may reasonably require in order to effect the
cancellation of the Warrants contemplated hereby, (iv) the Company shall be
authorized to notify the Warrant Agent for the Redeemable Warrants and the
Company's Transfer Agent and Registrar of the cancellation of the Warrants.
A. CANCELLATION OF CONSULTING AGREEMENTS AND NOTE AGREEMENT.
Simultaneously with the execution of this Agreement (i) each of the
Consulting Agreements shall be automatically canceled, terminated and of no
further force and effect, (ii) any remaining obligations of the Company or
rights of ASSI pursuant to the Note Agreement shall be automatically
canceled, terminated and of no further force and effect, and (iii) ASSI shall
execute and deliver such other documents or certifications as the Company may
reasonably require in order to effect the cancellation of the Consulting
Agreements and Note Agreement contemplated hereby.
I. RELEASE OF CLAIMS.
A. RELEASE BY ASSI AND HABASH. Each of ASSI and Habash, on
behalf of themselves and each of their affiliates, successors and assigns
(collectively, the "ASSI Releasing Parties"), hereby forever releases and
discharges the Company and each of its representatives, employees, attorneys,
advisors, successors and assigns and all persons acting in concert with any
such person and the Company and its present and former directors, officers,
representatives, employees, attorneys, advisors, parents, subsidiaries,
affiliated companies, predecessors, successors and assigns and all persons
acting in concert with any such person (the "Company Released Parties") from
all manner of claims, actions, causes of action or suits, at law or in
equity, which any of the ASSI Releasing Parties now has or hereafter can,
shall or may have by reason of any matter, cause or thing whatsoever from the
beginning of time to the date of this Agreement, arising out of, in
connection with, or in any way related to the Consulting Agreements or Note
Agreement or the transactions contemplated
3
<PAGE>
thereby, the acquisition or ownership of shares of Common Stock, warrants or
any other securities of the Company by any ASSI Releasing Party, excepting
only any action, cause of action or suit arising by virtue of an undertaking,
covenant, promise or representation contained in this Agreement, including
those arising in connection with the acquisition of Shares contemplated by
this Agreement (the "ASSI Released Claims").
A. RELEASE BY COMPANY. The Company, on behalf of itself and
each of its affiliates, successors and assigns (collectively, the "Company
Releasing Parties"), hereby forever releases and discharges ASSI and each of
its representatives, employees, attorneys, advisors, successors and assigns
and all persons acting in concert with any such person and its present and
former directors, officers, representatives, employees, attorneys, advisors,
parents, subsidiaries, affiliated companies, predecessors, successors and
assigns and all persons acting in concert with any such person (the "ASSI
Released Parties") from all manner of claims, actions, causes of action or
suits, at law or in equity, which any of the Company Releasing Parties now
has or hereafter can, shall or may have by reason of any matter, cause or
thing whatsoever from the beginning of time to the date of this Agreement,
arising out of, in connection with, or in any way related to the Consulting
Agreements or Note Agreement or the transactions contemplated thereby,
excepting only any action, cause of action or suit arising by virtue of an
undertaking, covenant, promise or representation contained in this Agreement
(the "Company Released Claims").
A. RELEASE OF UNKNOWN CLAIMS PURSUANT TO SECTION 1542. Each
of the ASSI Releasing Parties and the Company Releasing Parties hereby waives
the benefits of California Civil Code Section 1542 which provides as follows:
Section 1542. CERTAIN CLAIMS NOT AFFECTED BY GENERAL RELEASE. A general
release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release, which
if known by him must have materially affected his settlement with the
debtor.
A. NO ASSIGNMENT OR TRANSFER OF CLAIMS BY ASSI RELEASING
PARTIES. Each of the ASSI Releasing Parties represents and warrants that he,
she or it has not heretofore assigned or transferred, or purported to assign
or transfer, to any person, firm, partnership, corporation or other entity
whomsoever any ASSI Released Claim. Each of Habash and ASSI agrees to
indemnify and hold harmless each Company Released Party against any claim,
debt, liability, demand, obligation, cost, expense, including, but not
limited to, attorneys' fees, action or cause of action based on, arising out
of or in connection with any such transfer or assignment or purported
transfer or assignment.
A. NO ASSIGNMENT OR TRANSFER OF CLAIMS BY COMPANY RELEASING
PARTIES. Each of the Company Releasing Parties represents and warrants that
he, she or it has not heretofore assigned or transferred, or purported to
assign or
4
<PAGE>
transfer, to any person, firm, partnership, corporation or other entity
whomsoever any Company Released Claim. The Company hereby agrees to
indemnify and hold harmless each ASSI Released Party against any claim, debt,
liability, demand, obligation, cost, expense, including, but not limited to,
attorneys' fees, action or cause of action based on, arising out of or in
connection with any such transfer or assignment or purported transfer or
assignment.
A. FURTHER ASSURANCES. Each of the Company, Habash and ASSI
hereby agrees to execute and deliver any documents or instruments of any kind
requested by another party to carry out any of the releases or
acknowledgments contemplated hereunder.
I. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to ASSI as follows:
A. ORGANIZATION OF THE COMPANY. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of California. The Company has all requisite corporate
power and authority to conduct its business as it is presently being
conducted.
A. AUTHORIZATION. The Company has all necessary corporate
power and authority and has taken all corporate action necessary to enter
into this Agreement, to consummate the transactions contemplated hereby and
to perform its obligations hereunder. This Agreement has been duly executed
and delivered by the Company and is a legal, valid and binding obligation of
the Company enforceable against the Company in accordance with its terms. No
authorization, approval, consent, order, registration, license or permit of
any court or governmental agency or body (other than under the Securities
Act, the Regulations promulgated thereunder and applicable state securities
or Blue Sky laws) is required for the valid authorization, issuance, sale and
delivery of the Shares to ASSI and the consummation by the Company of the
transactions contemplated by the Agreement.
A. NO CONFLICTS. The execution, delivery and performance of
this Agreement, the consummation by the Company of the transactions herein
and therein contemplated and the compliance by the Company with the terms of
this Agreement do not, and will not, with or without the giving of notice or
the lapse of time, or both, (i) result in any violation of the Articles of
Incorporation or By-Laws of the Company; (ii) result in a breach of or
conflict with any of the terms or provisions of, or constitute a default
under, or result in the modification or termination of, or result in the
creation or imposition of any lien, security interest, charge or encumbrance
upon any of the properties or assets of the Company pursuant to, any
indenture, mortgage, note, contract, commitment or other agreement or
instrument to which the Company is a party or by which the Company or any of
its properties or
5
<PAGE>
assets are or may be bound or affected, except to the extent that such
violation, breach, conflict, default or termination is not material to the
Company taken as a whole; or (iii) have any material adverse effect on any
permit, certification, registration, approval, consent, license or franchise
necessary for the Company to own or lease and operate any of its properties
and to conduct its business or the ability of the Company to make use thereof.
A. AUTHORIZATION OF SHARES. The issuance and sale of the
Shares have been duly authorized, and when the Shares have been issued and
duly delivered against payment therefor as contemplated by this Agreement the
Shares will be validly issued, fully paid and nonassessable, and ASSI will
not be subject to personal liability solely by reason of being a purchaser.
The Shares will not be subject to preemptive rights of any security holder of
the Company.
A. SEC DOCUMENTS. Since October 8, 1996, the Company has
filed all reports, schedules, forms, statements and other documents required
to be filed by it with the Securities and Exchange Commission (the "SEC" or
"Commission") pursuant to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (all of the foregoing
filed prior to the date hereof being hereinafter referred to as the "SEC
Documents"), except where the failure to file would not have a material
adverse effect on the Company, its operations, or the Company's listing on
the Nasdaq SmallCap Market. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the Exchange Act
and the regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with
the SEC, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
B. INDEMNIFICATION. The Company agrees to indemnify and
hold harmless ASSI, Habash and their respective affiliates and
representatives from and against all damages, losses, costs and expenses
(including reasonable attorney's fees) that they may incur by reason of the
failure of the Company to fulfill any of the terms or conditions of this
Agreement or by reason of any breach of the representations and warranties
made by the Company in this Agreement.
A. CAPITALIZATION. Immediately prior to the closing of the
sale of Shares contemplated by this Agreement and assuming no exercise of any
of the Company's outstanding Redeemable Warrants, the authorized capital
stock of the Company will consist of 60,000,000 shares of Common Stock, of
which 6,408,321 will be issued and outstanding, and 5,000,000 shares of
Preferred Stock, none of which are issued and outstanding. Immediately prior
to the closing of the transactions contemplated by this Agreement and
assuming no exercise of any of the Company's Redeemable Warrants that are
outstanding on the date of this Agreement, there will be outstanding
Redeemable Warrants of the Company to purchase 8,884,584 shares of the
6
<PAGE>
Company's Common Stock (excluding the ASSI Warrants canceled in accordance
with the terms of this Agreement).
A. NO MATERIAL ADVERSE CHANGE. Since the date of the last
periodic report filed by the Company pursuant to the requirements of the
Exchange Act and except as disclosed in such report or specifically
contemplated thereby, the Company has not experienced any adverse change in
its financial condition, business prospects, results of operations, or assets
that an investor in similar circumstances to ASSI would consider material in
making an investment decision.
I. REPRESENTATIONS AND WARRANTIES OF ASSI AND HABASH. ASSI and
Habash hereby jointly and severally represent and warrant to the Company as
follows:
A. ORGANIZATION OF ASSI. ASSI is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Nevada. ASSI has all requisite corporate power and authority to conduct
its business as it is presently being conducted.
A. AUTHORIZATION. ASSI has all necessary corporate power
and authority and has taken all corporate action necessary to enter into this
Agreement, to consummate the transactions contemplated hereby and to perform
its obligations hereunder. Habash has all requisite power and authority and
has taken all actions necessary to enter into this Agreement, to consummate
the transactions contemplated hereby and to perform his obligations
hereunder. This Agreement has been duly executed and delivered by each of
ASSI and Habash and is a legal, valid and binding obligation of ASSI and
Habash enforceable against each of them in accordance with its terms.
A. KNOWLEDGE AND EXPERIENCE. Each of ASSI and Habash has a
preexisting business relationship with the Company and has sufficient
knowledge and experience in business and financial matters to evaluate the
risks of ASSI's purchase of the Shares and to make an informed decision.
Each of ASSI and Habash is aware that the Shares are speculative securities
and involve a high degree of risk.
A. FINANCIAL RESOURCES. ASSI has the financial resources
for providing for its current needs and to bear the economic risks associated
with its investment. ASSI's overall commitment to investments which are not
readily marketable is not disproportionate to ASSI's net worth and the
purchase of the Shares by ASSI will not cause such overall commitment to
become excessive. ASSI is an "accredited investor" as such term is defined
in the Regulation D promulgated under the Securities Act. Each equity owner
of ASSI has a net worth, or joint net worth with his spouse, in excess of
$1,000,000, or each equity owner of ASSI had individual income in excess of
$200,000 during each of 1997 and 1998 and such person has a reasonable
expectation of reaching the same income level in 1999, or such equity
7
<PAGE>
owner's joint income with his or her spouse was in excess of $300,000 during
each of 1997 and 1998 and such person has a reasonable expectation of
reaching the same income level during 1999.
A. INVESTMENT INTENT. ASSI is acquiring the Shares for
investment purposes only, for its own account, not as a nominee or agent, and
not with a view to, or for resale in connection with, any distribution
thereof. Except as contemplated by this Agreement, ASSI has no contract,
undertaking, agreement or arrangement with any person to sell, transfer or
otherwise distribute to such person or to have any person sell, transfer or
otherwise distribute for ASSI the Shares or any interest therein. ASSI
presently is not engaged, nor does ASSI plan to engage within the presently
foreseeable future, in any discussion with any person relative to such sale,
transfer or other distribution of the Shares or any interest therein.
A. COMPLIANCE WITH SECURITIES LAWS. ASSI understands that
the issuance and sale of the Shares have not been, and will not be,
registered under the Securities Act or qualified pursuant to the California
Securities Law by reason of specific exemptions therefrom which depend upon,
among other things, the bona fide nature of the investment intent and the
accuracy of ASSI's representations as expressed herein. ASSI understands
that the exemptions only exempt the issuance of the Shares to ASSI and not
necessarily any sale or other disposition of the Shares or any interest
therein by ASSI.
A. LEGEND CONDITION. ASSI understands that its right to
assign, transfer, pledge, sell, hypothecate, exchange or otherwise dispose of
the Shares shall be restricted by legend conditions, when appropriate, in
accordance with the provisions of the Securities Act and any applicable Blue
Sky laws and shall contain a legend that reflects that the Shares are subject
to and bound by the provisions of Section 8.1 of this Agreement.
A. NO BROKERS. Neither ASSI nor Habash is a party to any
contract, agreement, arrangement or understanding with any person or firm
which will result in the obligation of ASSI, Habash or the Company to pay any
finder's fee, brokerage commission or similar payment in connection with the
transactions contemplated hereby.
A. OWNERSHIP OF ASSI WARRANTS. ASSI is the record and
beneficial owner of all of the ASSI Warrants, free and clear of all claims,
liens and encumbrances. No person other than ASSI has any interest in or
right to acquire all or any portion of the ASSI Warrants or the shares of
Common Stock issuable upon exercise of the ASSI Warrants.
A. INDEMNIFICATION. ASSI and Habash jointly and severally
agree to indemnify and hold harmless the Company and its officers, directors,
affiliates and representatives from and against all damages, losses, costs
and expenses (including
8
<PAGE>
reasonable attorney's fees) that they may incur by reason of the failure of
ASSI or Habash to fulfill any of the terms or conditions of this Agreement or
by reason of any breach of the representations and warranties made by ASSI or
Habash in this Agreement.
I. RIGHT TO DESIGNATE BOARD NOMINEES.
6.1 RIGHT TO DESIGNATE BOARD NOMINEES. For a period commencing on
the Payment Date and ending on the earlier of (i) the date that is three
years from the date of this Agreement or (ii) at such time as Habash and his
affiliates (including ASSI) no longer beneficially own at least five percent
(5%) of the Company's outstanding Common Stock (the "Designation Period") the
Company shall, if requested by ASSI:
(a) use its best efforts to cause two of the Company's directors
to be persons designated by ASSI (the "Board Designees"), and
(b) cause each of the Board Designees, if any, to be included on
the slate of director-nominees of the board of directors for election at
each annual meeting of shareholders during the Designation Period.
In addition, the Company covenants and agrees that during the Designation
Period, it shall not increase the number of authorized directors of the
Company to more than nine (9) without the prior written consent of ASSI.
6.2 AGREEMENT TO VOTE SHARES OF PAUL MOTENKO AND JEREMIAH
HENNESSEY. Paul Motenko and Jeremiah Hennessey hereby agree to vote during
the Designation Period all shares of Common Stock of the Company held of
record and beneficially by each of them in favor of the individuals
designated by ASSI to serve on the Board of Directors of the Company in
accordance with the terms of this Section 6; provided, however, that nothing
herein shall prohibit Paul Motenko and Jeremiah Hennessey from voting their
respective shares in favor of themselves as nominees for director in any such
election to the extent that they deem such votes to be reasonably necessary
to effect their election to the Board of Directors. Notwithstanding the
foregoing, each of ASSI and Habash acknowledges and agrees that the Company
has not made and ASSI and Habash are not relying on any representations
regarding the validity or enforceability of this Section 6.
I. REGISTRATION RIGHTS. ASSI will have the following
registration rights with respect to the Shares:
A. DEMAND REGISTRATION. At any time commencing three months
from the Payment Date and expiring at such time as the Shares are saleable
pursuant to Rule 144(k) of the Securities Act (the "Termination Date"), ASSI
shall
9
<PAGE>
have the right (which right is in addition to the registration rights under
Section 7.2 hereof), exercisable by written notice to the Company, to have
the Company prepare, file and use its best efforts to have declared effective
by the Commission, on one occasion, a registration statement and such other
documents, including a prospectus, as may be necessary in the opinion of both
counsel for the Company and counsel for the holder of the Shares, if any, in
order to comply with the provisions of the Securities Act and applicable blue
sky laws, so as to permit a public offering and sale by the holders of the
Shares held of record by such holders at the time of exercise of such
registration rights, for a period of time expiring when all the Shares are
saleable pursuant to Rule 144(k).
A. PIGGY-BACK REGISTRATION. If at any time following the
Payment Date the Company proposes to register any of its securities under the
Securities Act (other than in connection with a merger, acquisition, exchange
offer, redemption or pursuant to Form S-8 or successor form) it will give
written notice (the "Filing Notice") by registered mail, at least twenty (20)
days prior to the filing of each such registration statement to ASSI of its
intention to do so. Upon the written request of ASSI given within ten (10)
days after receipt of the Filing Notice to include any Shares in such
proposed registration statement, the Company shall afford the holder of the
Shares the opportunity to have such Shares registered under such
registration. The "piggy-back" registration rights described in this Section
7.2 shall terminate on the Termination Date.
Notwithstanding anything to the contrary contained in the
provisions of this Section 7.2, the Company shall have the right at any time
after it shall have given written notice pursuant to this Section 7.2
(irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
A. LIMITATION ON REGISTRATION RIGHTS. Notwithstanding
anything to the contrary contained in this Agreement, (i) the Company shall
not be obligated to effect a registration pursuant to Section 7.1 of this
Agreement during the period starting with the date ninety (90) days prior to
the Company's estimated date of filing of, and ending on a date ninety (90)
days following the effective date of, a registration statement pertaining to
an underwritten public offering of the Company's securities, provided that
the Company is actively employing in good faith all reasonable efforts to
cause such registration statement to become effective and that the Company's
estimate of the date of filing such registration statement is made in good
faith; and (ii) if the Company shall furnish ASSI a certificate signed by the
President of the Company stating that in the good faith judgment of the Board
of Directors it would be seriously detrimental to the Company or its
shareholders for a registration statement to be filed in the near future,
then the Company's obligations to use its best efforts to file a registration
statement on demand by ASSI shall be deferred for a period not to exceed
10
<PAGE>
ninety (90) days; provided, however, that the Company shall not obtain such a
deferral more than once in any twelve (12) month period.
A. INDEMNIFICATION.
a. The Company shall indemnify and hold harmless ASSI,
Habash and each of their respective officers, directors, affiliates,
successors and assigns from and against any and all losses, claims, damages
and liabilities caused by any untrue statement of a material fact contained
in any registration statement filed by the Company under the Securities Act
by reason of this Agreement, any post-effective amendment to such
registration statements, or any prospectus included therein, or caused by any
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any such untrue
statement or omission based upon information furnished or required to be
furnished in writing to the Company by ASSI or Habash (or the authorized
representatives or agents of ASSI or Habash) expressly for use therein, which
indemnification shall include each person, if any, who controls ASSI within
the meaning of the Securities Act and each officer, director, employee and
agent of ASSI and Habash; provided, however, that the indemnification in this
Section 7.4 with respect to any prospectus shall not inure to the benefit of
the ASSI or Habash (or to the benefit of any person controlling the ASSI) on
account of any such loss, claim, damage or liability arising from the sale of
Shares, if a copy of a subsequent prospectus correcting the untrue statement
or omission in such earlier prospectus was provided to ASSI or Habash by the
Company prior to the subject sale and the subsequent prospectus was not
delivered or sent by ASSI or Habash to the purchaser of such securities prior
to such sale; and provided further, that the Company shall not be obligated
to so indemnify ASSI, Habash or any other person referred to above unless
ASSI, Habash or such other person, as the case may be, shall at the same time
indemnify the Company, its directors, each officer signing the Registration
Statement and each person, if any, who controls the Company within the
meaning of the Securities Act, from and against any and all losses, claims,
damages and liabilities caused by any untrue statement of a material fact
contained in any registration statement or any prospectus required to be
filed or furnished by reason of this Agreement or caused by any omission to
state therein a material fact required to be stated theein or necessary to
make the statements therein not misleading, insofar as such losses, claims,
damages or liabilities are caused by any untrue statement or omission based
upon information furnished in writing to the Company by ASSI or Habash
expressly for use therein.
b. If for any reason the indemnification provided for in the
preceding subparagraph is held by a court of competent jurisdiction to be
unavailable to an indemnified party with respect to any loss, claim, damage,
liability or expense referred to therein, then the indemnifying party, in
lieu of indemnifying such indemnified party thereunder, shall contribute to
the amount paid or payable by the indemnified party as a result of such loss,
claim, damage or liability in such proportion
11
<PAGE>
as is appropriate to reflect not only the relative benefits received by the
indemnified party and the indemnifying party, but also the relative fault of
the indemnified party and the indemnifying party, as well as any other
relevant equitable considerations.
A. EXPENSES OF REGISTRATION; PROSPECTUS DELIVERY.
a. All expenses, filing fees and other costs incurred by the
Company in connection with any registration of securities pursuant to this
Section 7 (exclusive of underwriting discounts and selling commissions
applicable to any sale of registered securities) shall be borne by the
Company.
b. In the case of each registration effected by the Company
pursuant to this Section 7, the Company will (i) furnish to the holders of
the registered securities such numbers of copies of a prospectus, including a
preliminary prospectus, in conformity with the requirements of the Securities
Act, and such other documents as such holders may reasonably request in order
to facilitate the disposition of the registered securities owned by them, and
(ii) notify each holder of registered securities covered by such registration
statement at any time when a prospectus relating thereto is required to be
delivered under the Securities Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing.
I. ADDITIONAL AGREEMENTS OF ASSI AND HABASH.
A. RIGHT OF FIRST REFUSAL.
12
<PAGE>
(a) NOTICE OF OFFER. Except for Excluded Transfers (as
defined below), in the event ASSI has a bona fide intention to sell or
transfer all or any of the Shares in the open market or otherwise, ASSI
shall give notice to the Company (the "Offer Notice"). The Offer
Notice shall specify: (i) the number of Shares proposed to be
transferred (the "Offered Shares"), (ii) the identity of the proposed
transferee, or if no transferee has been identified, the method by
which the Shares will be sold, and (iii) the terms and conditions upon
which ASSI intends to make the transfer.
(b) RIGHT OF FIRST REFUSAL. The Company or its designees
(which may include officers, directors or other affiliates of the
Company) shall have the right to purchase all or, in the event the
Offer Notice relates to a sale of the Offered Shares in the public
market, any portion of the Offered Shares, at a price per Share equal
to the price set forth in the Offer Notice (on the terms set forth
therein), or, if no such price is specified or the Offered Shares are
proposed to be sold in the public market, the closing bid price per
share of Common Stock as reported on the Nasdaq Stock Market or any
other exchange or electronic quotation system on which the Company's
Common Stock is listed for the day immediately preceding the closing
date of the Company's purchase of the Offered Shares. The Company's
right to purchase the Offered Shares must be exercised by the Company
within five (5) business days of its receipt of the Offer Notice by
delivery of written notice of exercise to ASSI. Notwithstanding
anything to the contrary contained in this Agreement, the Company may,
in its sole discretion, elect to exercise the right of first refusal on
behalf of parties other than the Company and transfer and assign such
purchase right to such parties subsequent to the exercise thereof. The
members of the Board of Directors designated pursuant to Section 6
shall not participate in any vote of the Board of Directors that may be
required in connection with the Company's decision as to whether to
exercise the right to purchase the Offered Shares or to assign the
purchase right to any party.
(c) CLOSING FOR RIGHT OF FIRST REFUSAL PURCHASE. If the
Company exercises the right to purchase the Offered Shares on behalf of
itself or any other party, the closing of such purchase shall take
place on or before the seventh business day following the date that the
Company gave notice of the exercise of the right to purchase such
Shares. The Company shall give written notice to ASSI of the number of
Offered Shares to be purchased, the closing date, the identities of the
purchasers of the Offered Shares, the allocation of the Offered Shares
among the Company and any additional purchasers, and the location of
the closing for the purchase at least three business days prior to such
closing date.
13
<PAGE>
(d) TRANSFER OF OFFERED SHARES TO THIRD PARTY.
Notwithstanding any other provision in this Agreement, if and only if
the Company either (i) does not exercise its right to purchase all of
the Offered Shares within the five (5) business day period described in
paragraph (b) above, or (ii) after exercising such rights, fails to
consummate such purchases through no fault of ASSI, then ASSI may carry
out the proposed sale or transfer of any Offered Shares not purchased
by the Company or its designees in accordance with the terms set forth
in the Offer Notice, provided that such transfer is consummated on or
before the thirtieth (30th) day following the date of the Offer Notice.
No transfer or sale of any of the Offered Shares or any interest
therein shall be made after the end of the thirty day period referred
to above, nor shall any material change in the price or terms of the
transfer from those set forth in the Offer Notice be permitted, unless
ASSI gives a new Offer Notice to the Company and complies with all of
the provisions of this Section 8.1.
(e) EXCLUDED TRANSFERS. The provisions of Sections 8.1(a)
through 8.1(d), inclusive, shall not apply to any transfer or sale,
whether or not for consideration, by ASSI to any entity owned and
controlled entirely by ASSI or Habash (an "Excluded Transfer"). The
transferee of an Excluded Transfer shall be fully subject to the terms
of this Agreement.
(f) TERMINATION OF RIGHT. The right of first refusal
granted pursuant to this Section 8.1 shall terminate upon expiration of
the Designation Period.
14
<PAGE>
A. FINANCING COMMITMENT. Subject to project pre-commitment
approval by Habash which may be given in Habash's sole discretion, Habash
will agree to finance or guarantee financing (directly or through one of his
affiliates) future development projects of the Company. Such financing will
be made at commercially reasonable rates and may be secured by assets of the
Company or its subsidiaries.
A. [INTENTIONALLY OMITTED]
A. COOPERATION IN LICENSING. Each of Habash and ASSI
covenant and agree to cooperate fully with the Company in connection with the
preparation of, application for, and proceedings relating to any license that
the Company deems necessary or appropriate. Such cooperation shall include,
without limitation, (i) prompt, complete and accurate completion and prompt
execution of any liquor or gambling permit applications or amendments or
modifications thereto required to be completed by the Company, its Board of
Directors, shareholders or affiliates as a result of the transactions
contemplated by this Agreement or otherwise, (ii) providing complete
cooperation and disclosure to the extent such cooperation and disclosure is
required or deemed necessary or advisable by the Company or any licensing
authority in connection with any licensing proceedings or applications, (iii)
cooperation with the Company in connection with obtaining any regulatory
approvals required in connection with the present or future operation of the
Company's business (including in connection with applications or other
proceedings with the Bureau of Alcohol, Tobacco and Firearms or any state or
federal gambling or liquor licensing authority). In this regard, it is
expressly understood by Habash and ASSI that the Company may apply for liquor
and gambling licenses in all jurisdictions in which the Company's restaurants
are or may in the future be located.
A. COOPERATION WITH SEC FILINGS AND PRESS RELEASES. Each of
Habash and ASSI covenant and agree to promptly provide the Company with all
information regarding either of them and their respective affiliates and
business affairs as the Company may deem reasonably necessary in order to
meet its obligations as a reporting company under the Exchange Act. In this
regard, it is expressly contemplated that the Company will issue a press
release regarding the transactions contemplated by this Agreement that will
include information regarding the experience of ASSI and its affiliates in
the hospitality, restaurant and real estate development industries.
A. ACTIONS OF CONTROLLED PERSONS. Each of Habash and ASSI
will cause each person over whom he or it may have control or share control
to observe the foregoing provisions of Section 8 of this Agreement as if they
were bound thereby.
I. MISCELLANEOUS.
15
<PAGE>
A. ASSIGNMENT AND BINDING EFFECT. Neither this Agreement
nor any of the rights or obligations hereunder may be assigned by any party
without the prior written consent of the other parties. Subject to the
foregoing, this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors, transferees, assigns,
representatives, executors, heirs, administrators and agents and no other
person shall have any right, benefit or obligation hereunder.
A. ARBITRATION. Any claims or disputes arising out of or
relating to this Agreement shall be settled by binding arbitration conducted
in Los Angeles County or Orange County, California in accordance with the
Commercial Arbitration Rules of the American Arbitration Association then in
effect, and judgment upon the award entered by the arbitrator(s) may be
entered in any court having jurisdiction thereof. There shall be no
pre-arbitration discovery. Neither party's right to file a lawsuit seeking
an injunction or such party's right to injunctive relief is subject to
arbitration or to the provisions of this Section 9.2. Each of the Company,
Habash and ASSI hereby irrevocably submits to the jurisdiction of the
arbitrator in Los Angeles or Orange County, California and waives any defense
in an arbitration based upon any claim that such party is not subject
personally to the jurisdiction of such arbitrator, that such arbitration is
brought in an inconvenient forum or that such venue is improper. The
arbitral award shall be in writing and shall be final and binding on each of
the parties thereto. The award may include an award of costs, including
reasonable attorneys' fees and disbursements. Judgment upon the award may be
entered by any court having jurisdiction thereof or having jurisdiction over
the parties or their assets.
A. NOTICES. Unless applicable law requires a different
method of giving notice, any and all notices, demands or other communications
required or desired to be given hereunder by any party shall be in writing.
Assuming that the contents of a notice meet the requirements of the specific
Section of this Agreement which mandates the giving of that notice, a notice
shall be validly given or made to another party if served either personally
or if postage prepaid, or if transmitted by telegraph, telecopy or other
electronic written transmission device or if sent by overnight courier
service, and if addressed to the applicable party as set forth below. If
such notice, demand or other communication is served personally, service
shall be conclusively deemed made at the time of such personal service. If
such notice, demand or other communication is given by mail, service shall be
conclusively deemed given upon the earlier of receipt or ninety-six (96)
hours after the deposit thereof in the United States mail, postage prepaid.
If such notice, demand or other communication is given by overnight courier,
or electronic transmission, service shall be conclusively made at the time of
confirmation of delivery. The addresses for ASSI, Habash and the Company are
as follows:
16
<PAGE>
If to ASSI or Habash:
5075 Spyglass Hill Drive
Las Vegas, Nevada 89122
Attention: Mr. Louis Habash
Telecopier No.: (702) 457-8923
With a copy to:
William L. Twomey, Esq.
Hewitt & McGuire
19900 MacArthur Boulevard, Suite 1050
Irvine, California 92715
Telecopier No.: (949) 798-0511
If to the Company:
Chicago Pizza & Brewery, Inc.
26131 Marguerite Parkway, Suite A
Mission Viejo, California 92692
Telecopier No.: (949) 367-8623
Attention: Paul Motenko
With a copy to:
Robert M. Steinberg, Esq.
Jeffer, Mangels, Butler & Marmaro
2121 Avenue of the Stars, Tenth Floor
Los Angeles, California 90067
Telecopier No.: (310) 203-0567
Any party hereto may change his or its address for the purpose of receiving
notices, demands and other communications as herein provided, by a written
notice given in the aforesaid manner to the other parties hereto.
A. CHOICE OF LAW; VENUE. This Agreement shall be construed,
interpreted and the rights of the parties determined in accordance with the
laws of the State of California.
A. ENTIRE AGREEMENT. This Agreement, together with all
exhibits and schedules hereto, constitutes the entire agreement among the
parties pertaining to the subject matter hereof and supersedes all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties.
17
<PAGE>
A. AMENDMENTS AND WAIVERS. No supplement, modification or
amendment of this Agreement, or of any covenant, condition or limitation
herein contained, shall be valid unless made in writing and executed by the
parties hereto. No waiver of any covenant, condition, or limitation herein
contained shall be valid unless made in writing and executed by the party
making the waiver. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar), nor shall such waiver constitute a continuing
waiver unless otherwise expressly provided.
A. MULTIPLE COUNTERPARTS. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
A. EXPENSES. Each party hereto shall pay his or its own
legal, accounting, out-of-pocket and other expenses incident to this
Agreement and to any action taken by such party in preparation for carrying
this Agreement into effect.
A. SEVERABILITY. In the event that any one or more of the
provisions contained in this Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, then to the maximum extent permitted by law,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement or any other such instrument.
A. FURTHER ACTIONS. Each party will cooperate in good faith
with the others and will take all appropriate action and execute any
documents, instruments or conveyances of any kind which may be reasonably
necessary or advisable to carry out any of the transactions contemplated
hereunder.
IN WITNESS WHEREOF, the Company and ASSI have caused this Agreement to
be duly executed on their respective behalf by officers thereunto duly
authorized, and Habash has executed this Agreement, all as of the day and
year first above written.
"Company" CHICAGO PIZZA & BREWERY, INC., a California
corporation
By:
Paul Motenko, Chief Executive Officer
18
<PAGE>
"ASSI" ASSI, INC., a Nevada corporation
By: ___________________________________________
Louis Habash, President
"Habash"
_______________________________________________
LOUIS HABASH
AGREED TO AND ACCEPTED
(solely with respect to Section 6.2 above) BY:
________________________________________
PAUL MOTENKO
________________________________________
JEREMIAH HENNESSEY
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHICAGO
PIZZA & BREWERY FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,491
<SECURITIES> 0
<RECEIVABLES> 176
<ALLOWANCES> 0
<INVENTORY> 346
<CURRENT-ASSETS> 2,307
<PP&E> 12,558
<DEPRECIATION> 2,990
<TOTAL-ASSETS> 17,595
<CURRENT-LIABILITIES> 3,103
<BONDS> 2,241
0
0
<COMMON> 15,040
<OTHER-SE> (3,147)
<TOTAL-LIABILITY-AND-EQUITY> 17,595
<SALES> 30,052
<TOTAL-REVENUES> 30,052
<CGS> 8,459
<TOTAL-COSTS> 29,693
<OTHER-EXPENSES> 311
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 306
<INCOME-PRETAX> 86
<INCOME-TAX> 2
<INCOME-CONTINUING> 85
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>