UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2001 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 000-31149
California Pizza Kitchen, Inc.
(Exact name of registrant as specified in its charter)
6053 West Century Boulevard, 11th Floor
Los Angeles, California 90045-6442
(Address of principal executive offices including zip code)
(310) 342-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ],
There were 18,285,783 shares of outstanding Common Stock of the Registrant as of May 11, 2001.
California Pizza Kitchen, Inc and Subsidiaries
TABLE OF CONTENTS
| PART I. Financial Information | Page No. |
| Item 1. Financial Statements (unaudited): | |
| Consolidated Balance Sheets at December 31, 2000 and April 1, 2001 | |
| Consolidated Statements of Operations for the three months ended April 2, 2000 and April 1, 2001. | |
| Consolidated Statements of Cash Flows for the three months ended April 2, 2000 and April 1, 2001. | |
| Notes to Consolidated Financial Statements | |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
| PART II. Other Information | |
| Item 4. Submission of Matters to a Vote of Security Holders | |
| Item 6. Exhibits and Reports on Form 8-K | |
| Signatures |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
California Pizza Kitchen, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except for share data)
April 1, December 31,
2001 2000
------------- -------------
Assets (unaudited)
Current assets:
Cash and cash equivalents................................. $ 16,661 $ 12,649
Trade accounts receivable................................. 1,063 1,122
Inventories............................................... 1,452 1,609
Prepaid expenses and other current assets................. 2,488 2,003
------------- -------------
Total current assets........................................ 21,664 17,383
Property and equipment, net................................. 93,317 91,144
Deferred taxes.............................................. 5,953 5,953
Other assets................................................ 2,151 2,497
------------- -------------
Total assets................................................ $ 123,085 $ 116,977
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable.......................................... $ 2,218 $ 3,473
Accrued compensation and benefits......................... 6,500 9,273
Accrued rent.............................................. 4,874 4,763
Other accrued liabilities................................. 6,755 5,581
Current maturities of long-term debt...................... 37 47
------------- -------------
Total current liabilities................................... 20,384 23,137
Other liabilities........................................... 1,050 1,522
Commitments
Shareholders' equity:
Common Stock--$0.01 par value, 80,000,000 shares
authorized, 18,277,001 and 17,889,091 shares issued
and outstanding at April 1, 2001 and December 31,
2000, respectively...................................... 183 179
Additional paid-in capital................................ 204,073 198,052
Accumulated deficit....................................... (102,605) (105,913)
------------- -------------
Total shareholders' equity.................................. 101,651 92,318
------------- -------------
Total liabilities and shareholders' equity.................. $ 123,085 $ 116,977
============= =============
See accompanying notes
California Pizza Kitchen, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except for per share data)
(unaudited)
Three Months Ended
--------------------
April 1, April 2,
2001 2000
--------- ----------
Revenues:
Restaurant sales.............................................. $ 56,376 $ 47,711
Franchise and other revenues.................................. 651 555
--------- ---------
Total revenues........................................ 57,027 48,266
--------- ---------
Restaurant costs and expenses:
Cost of sales................................................. 13,797 11,799
Labor......................................................... 20,299 17,086
Direct operating and occupancy................................ 11,257 9,582
--------- ---------
Total restaurant operating costs....................... 45,353 38,467
General and administrative.................................... 3,669 3,550
Depreciation and amortization................................. 2,740 2,289
Pre-opening................................................... 392 136
Loss on impairment of property and equipment and
restaurant closures......................................... -- 1,839
--------- ---------
Operating income................................................ 4,873 1,985
Other income (expenses):
Interest income (expense)..................................... 216 (761)
--------- ---------
Total other income (expense), net...................... 216 (761)
--------- ---------
Income before income tax provision.............................. 5,089 1,224
Income tax provision............................................ (1,781) (428)
--------- ---------
Net income...................................................... 3,308 796
Redeemable preferred stock accretion............................ -- (1,458)
--------- ---------
Net income (loss) attributable to common shareholders........... $ 3,308 $ (662)
========= =========
Net income (loss) per common share:
Basic......................................................... $ 0.18 $ (0.06)
========= =========
Diluted....................................................... $ 0.18 $ (0.06)
========= =========
Shares used in calculating net income (loss) per common share:
Basic......................................................... 18,137 10,897
========= =========
Diluted....................................................... 18,572 11,216
========= =========
See accompanying notes
California Pizza Kitchen, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
----------------------
April 1, April 2,
2001 2000
---------- ----------
Operating activities
Net income...................................................... $ 3,308 $ 796
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .............................. 2,740 2,289
Loss on impairment of property and equipment
and restaurant closures................................... -- 1,839
Changes in operating assets and liabilities:
Trade accounts receivable................................. 59 (637)
Inventories............................................... 157 73
Prepaid expenses and other assets......................... (141) 1,156
Accounts payable.......................................... (1,255) (2,064)
Accrued liabilities....................................... (680) (1,180)
Other liabilities......................................... (364) (52)
---------- ----------
Net cash provided by operating activities....................... 3,824 2,220
---------- ----------
Investing activities
Capital expenditures........................................ (4,938) (4,337)
---------- ----------
Net cash used in investing activities........................... (4,938) (4,337)
---------- ----------
Financing activities
Payments on long-term debt.................................. (9) (9)
Net proceeds from issuance of common stock.................. 5,135 --
---------- ----------
Net cash provided by (used in) financing activities............. 5,126 (9)
---------- ----------
Net increase (decrease) in cash and cash equivalents............ 4,012 (2,126)
Cash and cash equivalents at beginning of period................ 12,649 5,686
Cash from consolidation of investment in limited partnership.... -- 172
---------- ----------
Cash and cash equivalents at end of period...................... $ 16,661 $ 3,732
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest..................................................... $ 3 $ 38
========== ==========
Income taxes................................................. $ 1,333 $ 355
========== ==========
See accompanying notes
California Pizza Kitchen, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 1, 2001
(unaudited)
1. Basis of Presentation
California Pizza Kitchen, Inc. (referred to herein as the "Company" or in the first person notations "we," "us" and "our") owns, operates, licenses or franchises 116 restaurants under the names California Pizza Kitchen and California Pizza Kitchen ASAP.
The accompanying consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated financial statements presented herein have not been audited by independent public accountants, but include all material adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the Company's consolidated financial condition, results of operations and cash flows for the periods. However, these results are not necessarily indicative of results for any other interim periods or for the full fiscal year. The consolidated balance sheet data presented herein for December 31, 2000 was derived from our audited consolidated financial statements for the fiscal year then ended, but does not include all disclosures required by accounting principles generally accepted in the United States. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make certain estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Actual amounts could differ from these estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to requirements of the Securities and Exchange Commission. We believe the disclosures included in the accompanying interim consolidated financial statements and footnotes are adequate to make the information not misleading, but should be read in conjunction with the consolidated financial statements and notes thereto included in our filings with the Securities and Exchange Commission.
In January 2000, the Company acquired a majority interest in its remaining limited partnership restaurant. As such, beginning January 3, 2000, the Company consolidated the financial statements of the limited partnership with its own financial statements. Prior to fiscal 2000, the Company accounted for its ownership in the limited partnership under the equity method of accounting. All significant intercompany balances and transactions have been eliminated.
2. Sales of Securities
The Company completed a follow-on offering for 4,400,000 shares of common stock, of which 200,000 shares were sold by the Company and 4,200,000 shares were sold by selling shareholders. The shares were sold at a price of $25.94 per share, resulting in net proceeds to the Company of approximately $4.5 million.
On January 15, 2001, employees purchased 69,873 shares of common stock from the Company under the Company's employee stock purchase plan. The net proceeds to the Company were $891,000.
The Company completed its initial public offering on August 7, 2000. The offering resulted in the issuance of 5,300,000 shares of common stock at $15.00 per share, resulting in net proceeds to the Company of approximately $71.9 million. Upon consummation of the offering, all shares of Series A 12 1/2% cumulative compounding preferred stock and Series B 13 1/2% cumulative compounding preferred stock were automatically converted into a right to receive $23.7 million in cash and 1,580,938 shares of common stock. Additionally, upon completion of the Company's public offering, options to purchase 110,696 shares of common stock were exercised.
3. Long-term Debt and Credit Facilities
Upon completion of the Company's initial public offering in August 2000, the Company repaid all borrowings outstanding under its 1999 credit agreement. On December 15, 2000, the Company replaced its 1999 credit agreement with a $20.0 million revolving line of credit with Bank of America, N.A., of which zero is outstanding as of April 1, 2001. The credit line bears interest at either the bank base rate minus 0.75% or LIBOR plus 1.0% and expires on June 30, 2004. The terms of the credit facility include financial covenants which the Company was in compliance with as of April 1, 2001.
4. Loss on Impairment of Property and Equipment and Store Closures
The Company reviews the carrying value of its assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," on a restaurant by restaurant basis. In April 2000, the Company determined that one of its restaurant locations, with a net book value of $1,839,000, was impaired. As a result, the Company recorded a $1,839,000 write- down of the book value of the restaurant in accordance with SFAS No. 121. There was no write-down of assets in the first quarter of 2001.
5. Earnings Per Share (in thousands)
Three Months Ended
---------- ---------
April 1, April 2,
2001 2000
--------- ---------
Numerator for basic and diluted net income (loss) per share
attributable to common shareholders........................ $ 3,308 $ (662)
Denominator: ========= =========
Denominator for basic net income (loss) per share -
weighted average shares................................... 18,137 10,897
Employee stock options..................................... 435 319
--------- ---------
Denominator for diluted net income (loss) per share -
weighted average shares................................... 18,572 11,216
========= =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
California Pizza Kitchen is a leading casual dining restaurant chain in the premium pizza segment. We own and operate 85 restaurants under the name "California Pizza Kitchen" or "California Pizza Kitchen ASAP" in 17 states and the District of Columbia. We also franchise our concept and currently have 31 additional restaurants which operate under franchise or license agreements. We opened our first restaurant in 1985 in Beverly Hills, California. During our more than 15 years of operating history, we have developed a recognized consumer brand and demonstrated the appeal of our concept in a wide variety of geographic areas. Our restaurants, which feature an exhibition-style kitchen centered around an open-flame oven, provide a distinctive, casual dining experience, which is family friendly and has a broad consumer appeal.
So far we have opened three full service restaurants in fiscal 2001. We plan to open a minimum of eleven additional full service restaurants in 2001, and have either begun construction or signed lease agreements for all of these additional restaurants.
Our revenues are comprised of restaurant sales, franchise royalties and other income. Our restaurant sales are comprised almost entirely of food and beverage sales. Cost of sales is composed of food, beverage and paper supply expenses. The components of cost of sales are variable and increase with sales volume. Labor costs include direct hourly and management wages, bonuses, taxes and benefits for restaurant employees. Direct operating and occupancy costs include restaurant supplies, marketing costs, fixed rent, percentage rent, common area maintenance charges, utilities, real estate taxes, repairs and maintenance and other related costs.
General and administrative costs include all corporate and administrative functions that support existing operations and provide infrastructure to facilitate our future growth. Components of this category include management, supervisory and staff salaries and related employee benefits, travel, information systems, training, corporate rent and professional and consulting fees. Depreciation and amortization principally includes depreciation on capital expenditures for restaurants.
Pre-opening costs, which are expensed as incurred, consist of the costs of hiring and training the initial work force, travel, the cost of food used in training, marketing costs, the cost of the initial stocking of operating supplies and other direct costs related to the opening of a new restaurant.
Our fiscal year consists of 52 or 53 weeks and ends on the Sunday closest to December 31 in each year. The three months ended April 2, 2000 and April 1, 2001 consist of thirteen weeks. In calculating company-owned comparable restaurant sales, we include a restaurant in the comparable base once it has been open for 12 months.
Results of Operations
Our operating results for the three months ended April 2, 2000 and April 1, 2001 are expressed as a percentage of revenues below, except for restaurant operating costs and expenses, which are expressed as a percentage of restaurant sales:
Three Months Ended
--------------------
April 1, April 2,
2001 2000
--------- ---------
Revenues:
Restaurant sales.............................................. 98.9 % 98.9 %
Franchise and other revenues.................................. 1.1 1.1
--------- ---------
Total revenues........................................ 100.0 100.0
--------- ---------
Restaurant costs and expenses:
Cost of sales................................................. 24.5 24.7
Labor......................................................... 36.0 35.8
Direct operating and occupancy................................ 20.0 20.1
--------- ---------
Total restaurant operating costs....................... 80.4 80.6
General and administrative.................................... 6.4 7.4
Depreciation and amortization................................. 4.8 4.7
Pre-opening................................................... 0.7 0.3
Loss on impairment of property and equipment and
restaurant closures......................................... 0.0 3.8
--------- ---------
Operating income................................................ 8.5 4.1
Other income (expenses):
Interest income (expense)..................................... 0.4 (1.6)
--------- ---------
Total other income (expense), net...................... 0.4 (1.6)
--------- ---------
Income before income tax provision.............................. 8.9 2.5
Income tax provision............................................ (3.1) (0.9)
--------- ---------
Net income...................................................... 5.8 % 1.6 %
========= =========
Three months ended April 1, 2001 compared to the three months ended April 2, 2000
Total Revenues. Total revenues increased by $8.8 million, or 18.2%, to $57.0 million in the first quarter of 2001 from $48.3 million for the first quarter of 2000 due to an $8.7 million increase in restaurant sales and a $96,000 increase in franchise and other revenue. The increase in restaurant sales was due to $5.4 million in sales derived from the eleven restaurants opened subsequent to the first quarter of 2000, $3.0 million from comparable restaurant sales increases of 6.3% and $285,000 from one new store opened in the first quarter of 2001. The increase in comparable restaurant sales was driven by increases in customer counts of approximately 2.0% and increases in the average check of approximately 4.3% compared to the first quarter of 2000. The increase in average check was due to approximately 3.7% in price increases with the remainder due to modest shifts in our menu mix. Franchise and other revenue growth was due primarily to a full three months of operations for the four new franchise restaurants that opened subsequent to the first quarter of 2000.
Cost of sales. Cost of sales increased by $2.0 million, or 16.9%, to $13.8 million for the third quarter of 2000 from $11.8 million for the first quarter of 2000. Cost of sales as a percentage of restaurant sales decreased to 24.5% for the first quarter of 2001 from 24.7% in the comparable quarter for the prior year. This reduction was primarily a result of increased operational efficiency, lower dairy and grocery prices and price increases taken in May and November of 2000. We do not expect significant movements in cost of sales for the second quarter, except for the possibility of some slight upward pressure due to the operating inefficiencies associated with new store openings and the roll-out of our new menu towards the later part of the second quarter.
Labor. Labor increased by $3.2 million, or 18.8%, to $20.3 million for the first quarter of 2001 from $17.1 million for the first quarter of 2000. Labor as a percentage of restaurant sales increased to 36.0% for the first quarter of 2001 from 35.8% for the prior period. The increase in labor as a percentage of restaurant sales was primarily due to higher management labor as a percentage of sales resulting from the hiring of additional managers in anticipation of new store openings. Despite minimum wage increases, hourly labor as a percentage of sales remained flat at 21.3% for both quarters. However, due to the increase in new store openings and increased workers' compensation and health care benefit expenses, we expect upward pressure on our labor costs for the second quarter and remainder of the year.
Direct operating and occupancy. Direct operating and occupancy increased by $1.7 million, or 17.5%, to $11.3 million for the first quarter of 2001 from $9.6 million for the first quarter of 2000. Direct operating and occupancy as a percentage of restaurant sales decreased to 20.0% for the first quarter 2001 from 20.1% for the prior period. The reduction was due primarily to higher net sales spread over relatively fixed restaurant level operating and occupancy expenses, despite a 0.40% increase in the cost of natural gas as a percent of sales during the quarter. We expect natural gas prices to come down during the summer months as demand for heating diminishes; however, natural gas prices are expected to remain higher than the previous year. As such, we expect the increases in natural gas prices and the recently approved electricity rate increases in California to exert upward pressure on our direct operating costs for the second quarter and remainder of the year.
General and administrative. General and administrative increased by $119,000, or 3.4%, to $3.7 million for the first quarter of 2001 from $3.6 million for the first quarter of 2000. General and administrative as a percentage of total revenues decreased to 6.4% for the first quarter of 2001 from 7.4% for the prior period. The increase in general and administrative expenses was primarily a result of higher travel and moving expenses related to manager relocations for our new restaurants and higher personnel costs related to new management positions. The decrease in general and administrative expenses as a percentage of revenues was primarily a result of the Company's increasing revenue base and its ability to leverage its general and administrative personnel, coupled with the elimination of our co-founders' salaries effective October 1, 2000.
Depreciation and amortization. Depreciation and amortization increased by $451,000, or 19.7%, to $2.7 million for the first quarter of 2001 from $2.3 million for the first quarter of 2000. The increase was primarily due to the eleven new restaurants opened subsequent to the first quarter of 2000.
Pre-opening. Pre-opening increased by $256,000, to $392,000 for the first quarter of 2001 from $136,000 for the first quarter of 2000. The increase was due to the one new store that opened in the first quarter of 2001 and the pre-opening costs associated with two restaurants that opened in April 2001 compared to zero openings in the first quarter of 2000 and three restaurants that opened in April 2000. We expect to incur a substantial increase in pre-opening during the second quarter of 2001 related to five second quarter restaurant openings and a portion of the pre-opening related to two restaurant openings expected to occur early in the third quarter.
Interest income (expense). Interest income, net of interest expense, increased by $977,000 to $216,000 for the first quarter of 2001 from interest expense of $761,000 for the first quarter of 2000. The increase was a result of the repayment of our term note and the pay-down of the revolving line of credit on August 7, 2000 from the proceeds of our initial public offering.
Income tax provision. The income tax provision for the first quarter of 2001 and 2000 was based on annual effective tax rates applied to the income before income tax provision. The 35.0% tax rate applied to the first quarter of 2001 comprises the federal and state statutory rates based on the annual estimated effective tax rate for 2001. The 35.0% tax rate applied to the first quarter of 2000 comprises the federal and state statutory rates based on the annual estimated effective tax rate for 2000.
Liquidity and capital resources
In recent years we have funded our capital requirements through cash flow from operations. For the first three months of 2001, net cash flow provided by operating activities was $3.8 million compared to $2.2 million for the first three months of 2000. Net cash flow provided by operating activities exceeded the net income for both periods due to the effects of depreciation and amortization for both 2001 and 2000 and the loss on impairment of property and equipment and restaurant closures for 2000.
We use cash to fund the development and construction of new restaurants and to remodel our existing restaurants. Net cash used in investing activities for the first three months of 2001 and 2000 was $4.9 million and $4.3 million, respectively. We opened one new restaurant in the first three months of 2001 and two restaurants in April 2001. In 2000, we opened zero restaurants in the first quarter and three restaurants in April 2000. We anticipate opening an additional 11 restaurants in 2001. We expect that our planned future restaurants will require, on average, a total cash investment per restaurant, after landlord contributions, of approximately $1.3 to $1.4 million. Additionally, we anticipate pre-opening costs on average to be approximately $175,000. However, any unexpected delays in construction, labor shortages or other factors could result in higher than anticipated pre-opening costs.
Net cash provided by financing operations was $5.1 million for the first three months of 2001 compared to net cash used in financing activities of $9,000 for the first three months of 2000. Financing activities in the first three months of 2001 consisted primarily of an aggregate of $5.1 million from the sale of securities, net of underwriting fees and expenses, and option exercises. Financing activities in the first three months of 2000 consisted primarily of debt payments made under our prior credit facility. At April 1, 2001 we had a $20.0 million revolving line of credit, of which nothing is currently outstanding. The line of credit expires on June 30, 2004 and bears interest at either LIBOR plus 1.0% or the bank base rate minus 0.75%.
Our capital requirements, including costs related to opening additional restaurants, have been and will continue to be significant. Our future cash requirements and the adequacy of available funds will depend on many factors, including the pace of expansion, real estate markets, site locations and the nature of the arrangements negotiated with landlords. We believe that our current cash balances, together with anticipated cash flows from operations and funds anticipated to be available from our credit facility, will be sufficient to satisfy our working capital and capital expenditure requirements through 2001. Changes in our operating plans, acceleration of our expansion plans, lower than anticipated sales, increased expenses or other events may cause us to seek additional financing sooner than anticipated. Additional financing may not be available on acceptable terms, or at all. Failure to obtain additional financing as needed could have a material adverse effect on our business and results of operations.
Risk Factors
This document contains forward-looking statements concerning the Company, which involve risks and uncertainties. Such forward- looking statements may be deemed to include those regarding anticipated restaurant openings, anticipated costs and sizes of future restaurants and the adequacy of anticipated sources of cash to fund the Company's future capital requirements. The Company's actual results may differ materially from those discussed in this document. Factors that might cause actual events or results to differ materially from those indicated by such forward-looking statements may include matters noted below in this Form 10-Q, such as development and construction risks, potential labor shortages, fluctuations in operating results, and changes in food costs. Words such as "believes," "anticipates," "expects," "intends," "plans" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.
Our growth strategy requires us to open new restaurants at an accelerated pace. We may not be able to achieve this planned expansion.We are pursuing an accelerated, but disciplined growth strategy which to be successful depends on our ability, and the ability of our franchisees and licensees, to open new restaurants and to operate these new restaurants on a profitable basis. The success of our planned expansion will be dependent upon numerous factors, many of which are beyond our control, including the hiring, training and retention of qualified operating personnel, especially managers, identification and availability of suitable restaurant sites, competition for restaurant sites, negotiation of favorable lease terms, timely development of new restaurants, including the availability of construction materials and labor, management of construction and development costs of new restaurants, securing required governmental approvals and permits, competition in our markets, and general economic conditions. If we are unable to manage these risks effectively, our business, financial condition, operating results or cash flows could be materially adversely affected.
Our success depends on our ability to locate a sufficient number of suitable new restaurant sites.One of our biggest challenges in meeting our growth objectives will be to secure an adequate supply of suitable new restaurant sites. We have experienced delays in opening some of our restaurants and may experience delays in the future. There can be no assurance that we will be able to find sufficient suitable locations for our planned expansion in any future period. Delays or failures in opening new restaurants could materially adversely affect our business, financial condition, operating results or cash flows.
We could face labor shortages which could slow our growth.Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including restaurant managers, kitchen staff and servers, necessary to keep pace with our expansion schedule. Qualified individuals of the requisite caliber and number needed to fill these positions are in short supply in some areas. Although we have not experienced any significant problems in recruiting or retaining employees, any future inability to recruit and retain sufficient individuals may delay the planned openings of new restaurants. Any such delays or any material increases in employee turnover rates in existing restaurants could have a material adverse effect on our business, financial condition, operating results or cash flows. Additionally, competition for qualified employees could require us to pay higher wages to attract sufficient employees, which could result in higher labor costs.
Our expansion into new markets may present increased risks due to our unfamiliarity with the area.We anticipate that our new restaurants will typically take several months to reach budgeted operating levels due to problems commonly associated with new restaurants, including lack of market awareness, inability to hire sufficient staff and other factors. Although we have attempted to mitigate these factors by expanding primarily in markets in which we already have a significant presence and by paying careful attention to training and staffing needs, there can be no assurance that we will be successful in operating our new restaurants on a profitable basis.
Our expansion may strain our infrastructure which could slow our restaurant development.We also face the risk that our existing systems and procedures, restaurant management systems, financial controls, and information systems will be inadequate to support our planned expansion. We cannot predict whether we will be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on management and these systems and controls. If we fail to continue to improve our information systems and financial controls or to manage other factors necessary for us to achieve our expansion objectives, our business, financial condition, operating results or cash flows could be materially adversely affected.
Our restaurant expansion strategy focuses primarily on further penetrating existing markets. This strategy can cause sales in some of our existing restaurants to decline.In accordance with our expansion strategy, we intend to open new restaurants primarily in our existing markets. Since we typically draw customers from a relatively small radius around each of our restaurants, the sales performance and customer counts for restaurants near the area in which a new restaurant opens may decline due to cannibalization of the existing restaurant's customer base.
Our planned expansion into retail distribution channels through the introduction of our premium frozen pizzas could dilute the value of our brand.We have entered into a strategic alliance with Kraft Pizza Company to distribute a line of premium frozen pizzas through supermarkets and other retail outlets. Although sales of these frozen products in the geographic markets in which they are currently available have been encouraging, we run the risk that the availability of a frozen product could dilute the value of our brand to the extent that consumers perceive our frozen products to be unappealing or of a lower quality.
Our operations are susceptible to changes in food and supply costs which could adversely affect our margins.Our profitability depends, in part, on our ability to anticipate and react to changes in food and supply costs. Our centralized purchasing staff negotiates prices for all of our ingredients and supplies through either contracts (terms of one month up to one year) or commodity pricing formulas. Our master distributor delivers goods at a set, flat fee per case twice a week to all of our restaurants. Our contract with our master distributor, Meadowbrook Meat Company, Inc., expires in June 2001. We are currently in negotiations to extend the term of this contract and we believe we will be able to obtain a similarly-priced contract. However, any increase in distribution prices could cause our food and supply costs to increase. Furthermore, various factors beyond our control, including adverse weather conditions and governmental regulations, could also cause our food and supply costs to increase. We cannot predict whether we will be able to anticipate and react to changing food and supply costs by adjusting our purchasing practices. A failure to do so could adversely affect our operating results and cash flows.
Changes in consumer preferences or discretionary consumer spending could negatively impact our results.Our restaurants feature pizzas, pastas, salads and appetizers in an upscale, family-friendly, casual environment. Our continued success depends, in part, upon the popularity of these foods and this style of informal dining. Shifts in consumer preferences away from this cuisine or dining style could materially adversely affect our future profitability. Also, our success depends to a significant extent on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. Adverse changes in these factors could reduce customer traffic or impose practical limits on pricing, either of which could materially adversely affect our business, financial condition, operating results or cash flows. Like other restaurant chains, we can also be materially adversely affected by negative publicity concerning food quality, illness, injury, publication of government or industry findings concerning food products served by us, or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants.
Forty-two percent of our restaurants are located in California. As a result, we are highly sensitive to negative occurrences in that state.We and our franchisees currently operate a total of 49 restaurants in California, of which 37 are concentrated in the greater Los Angeles and San Diego metropolitan areas. As a result, we are particularly susceptible to adverse trends and economic conditions in California, including adverse consequences stemming from its higher energy prices for gas and electricity, as well as the possibility of rolling blackouts due to expected shortages of electricity during the summer of 2001. In addition, given our geographic concentration, negative publicity regarding any of our restaurants in California could have a material adverse effect on our business and operations, as could other regional occurrences such as local strikes, earthquakes or other natural disasters.
The restaurant industry is affected by litigation and publicity concerning food quality, health and other issues which can cause customers to avoid our restaurants and result in liabilities.
We are sometimes the subject of complaints or litigation from customers or employees alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from these allegations may materially adversely affect us and our restaurants, regardless of whether the allegations are valid or whether California Pizza Kitchen is liable. In fact, we are subject to the same risks of adverse publicity resulting from these sorts of allegations even if the claim actually involves one of our franchisees or licensees. Further, employee claims against us based on, among other things, discrimination, harassment or wrongful termination may divert our financial and management resources that would otherwise be used to benefit the future performance of our operations. We have been subject to these employee claims before, and a significant increase in the number of these claims or any increase in the number of successful claims could materially adversely affect our business, financial condition, operating results or cash flows. We also are subject to some states' "dram shop" statutes. These statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk exposures are related to our cash and cash equivalents. We invest our excess cash in highly liquid short-term investments with maturities of less than three months as of the date of purchase. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flows and results of operations.
In addition, we have a $20.0 million line of credit agreement with Bank of America, N.A. Interest on the line is calculated on either a bank base rate minus 0.75% or on LIBOR plus 1.0% per annum. Currently, there is no outstanding balance under this agreement. Should we draw on this line in the future, changes in interest rates would affect the interest expense on these loans and, therefore, impact our cash flows and results of operations.
Many of the food products purchased by us are affected by changes in weather, production, availability, seasonality and other factors outside our control. In an effort to control some of this risk, we have entered into some fixed price purchase commitments with terms of no more than a year. In addition, we believe that almost all of our food and supplies are available from several sources, which helps to control food commodity risks.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 1, 2001, we held our Annual Meeting of Shareholders. The matters submitted for vote and the related election results were as follows:
Votes For | Votes Withheld | |
Bruce C. Bruckman |
| 109,336 |
Larry S. Flax | 15,016,701 | 2,097,481 |
Brian P. Friedman | 17,004,846 | 109,336 |
Frederick R. Hipp | 15,016,993 | 2,097,189 |
Charles G. Phillips | 17,004,846 | 109,336 |
Richard L. Rosenfield | 15,016,701 | 2,097,481 |
Harold O. Rosser | 16,936,546 | 177,636 |
Fortunato N. Valenti | 14,436,257 | 2,677,925 |
Votes For | Votes Against | Abstained | Broker Non-votes |
|
|
|
|
Votes For | Votes Against | Abstained |
|
|
|
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) | Exhibits | ||
10.24 | Third and Fourth Amendments to California Pizza Kitchen, Inc. 1998 Stock-Based Incentive Compensation Plan dated as of July 28, 2000 and May 1, 2001 | ||
b) | Reports on Form 8-K | ||
No reports on Form 8-K were filed by the Registrant during the three months ended April 1, 2001 | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: May 11, 2001
| California Pizza Kitchen, Inc. | ||
| By: | /s/ H.G. CARRINGTON JR. | |
| H.G. Carrington Jr | ||
| Executive Vice President and Chief Financial Officer | ||
| By: | /s/ GREGORY S. LEVIN | |
| Gregory S. Levin | ||
| Vice President and Controller and Chief Accounting Officer | ||