UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED April 2, 2006
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)
| | |
| Delaware | | 95-4040623 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
6053 West Century Boulevard, 11th Floor
Los Angeles, California 90045-6438
(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 such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ No x
As of May 5, 2006, 19,806,165 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.
California Pizza Kitchen, Inc. and Subsidiaries
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
California Pizza Kitchen, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except for share data)
| | | | | | | | |
| | | April 2, 2006 | | | January 1,
2006 | |
| | | (unaudited) | | | | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 10,293 | | | $ | 11,272 | |
Investments in marketable securities | | | 11,413 | | | | 11,408 | |
Other receivables | | | 3,836 | | | | 4,109 | |
Inventories | | | 3,617 | | | | 3,776 | |
Current deferred tax asset, net | | | 8,444 | | | | 8,437 | |
Prepaid income tax | | | 2,095 | | | | 1,428 | |
Other prepaid expenses and other current assets | | | 5,530 | | | | 5,492 | |
| | | | | | | | |
Total current assets | | | 45,228 | | | | 45,922 | |
Property and equipment, net | | | 214,391 | | | | 213,408 | |
Noncurrent deferred tax asset, net | | | 5,071 | | | | 4,513 | |
Goodwill and other intangibles | | | 5,932 | | | | 5,967 | |
Other assets | | | 4,576 | | | | 4,444 | |
| | | | | | | | |
Total assets | | $ | 275,198 | | | $ | 274,254 | |
| | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 5,206 | | | $ | 7,054 | |
Accrued compensation and benefits | | | 8,120 | | | | 13,068 | |
Accrued rent | | | 13,338 | | | | 13,253 | |
Deferred rent credits | | | 4,015 | | | | 4,056 | |
Other accrued liabilities | | | 8,355 | | | | 9,294 | |
Accrued income tax | | | 2,800 | | | | — | |
| | | | | | | | |
Total current liabilities | | | 41,834 | | | | 46,725 | |
| | | | | | | | |
Other liabilities | | | 5,248 | | | | 5,383 | |
Deferred rent credits, net of current portion | | | 25,470 | | | | 24,810 | |
Stockholders’ equity: | | | | | | | | |
Common Stock - $0.01 par value, 80,000,000 shares authorized, 19,804,861 and 19,665,689 shares issued and outstanding at April 2, 2006 and January 1, 2006, respectively | | | 198 | | | | 197 | |
Additional paid-in capital | | | 231,858 | | | | 231,159 | |
Accumulated deficit | | | (29,407 | ) | | | (34,013 | ) |
Accumulated comprehensive loss | | | (3 | ) | | | (7 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 202,646 | | | | 197,336 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 275,198 | | | $ | 274,254 | |
| | | | | | | | |
See accompanying notes
3
California Pizza Kitchen, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
(in thousands, except per share data)
| | | | | | | |
| | | Three Months Ended | |
| | | April 2,
2006 | | April 3,
2005 | |
Revenues: | | | | | | | |
Restaurant sales | | $ | 128,518 | | $ | 109,418 | |
Franchise and other revenues | | | 1,180 | | | 900 | |
| | | | | | | |
Total revenues | | | 129,698 | | | 110,318 | |
Costs and expenses: | | | | | | | |
Food, beverage and paper supplies | | | 32,168 | | | 26,957 | |
Labor (1) | | | 47,627 | | | 41,115 | |
Direct operating and occupancy | | | 25,294 | | | 21,976 | |
| | | | | | | |
Cost of sales | | | 105,089 | | | 90,048 | |
General and administrative (2) | | | 10,355 | | | 7,509 | |
Depreciation and amortization | | | 6,971 | | | 5,578 | |
Pre-opening costs | | | 633 | | | 1,101 | |
| | | | | | | |
Operating income | | | 6,650 | | | 6,082 | |
Other income (expense): | | | | | | | |
Interest income | | | 224 | | | 195 | |
Equity in net loss of unconsolidated joint venture | | | — | | | (21 | ) |
| | | | | | | |
Total other income | | | 224 | | | 174 | |
| | | | | | | |
Income before income tax provision | | | 6,874 | | | 6,256 | |
Income tax provision | | | 2,268 | | | 1,985 | |
| | | | | | | |
Net income | | $ | 4,606 | | $ | 4,271 | |
| | | | | | | |
Net income per common share: | | | | | | | |
Basic | | $ | 0.23 | | $ | 0.22 | |
| | | | | | | |
Diluted | | $ | 0.23 | | $ | 0.22 | |
| | | | | | | |
Weighted average shares used in calculating net income per common share: | | | | | | | |
Basic | | | 19,680 | | | 19,280 | |
| | | | | | | |
Diluted | | | 20,290 | | | 19,596 | |
| | | | | | | |
| (1) | Labor expense for the quarter ended April 2, 2006 includes approximately $230,000 of stock-based compensation compared to none in the quarter ended April 3, 2005. |
| (2) | General and administrative expense for the quarter ended April 2, 2006 includes approximately $1.2 million of stock-based compensation compared to none in the quarter ended April 3, 2005. |
See accompanying notes
4
California Pizza Kitchen, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
| | | | | | | | |
| | | Three Months Ended | |
| | | April 2,
2006 | | | April 3,
2005 | |
Operating activities: | | | | | | | | |
Net income | | $ | 4,606 | | | $ | 4,271 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 6,971 | | | | 5,578 | |
Non-cash compensation expense | | | 1,436 | | | | — | |
Equity in loss of unconsolidated joint venture | | | — | | | | 21 | |
Change in deferred rent credits | | | 619 | | | | (870 | ) |
Change in net deferred tax assets | | | (565 | ) | | | — | |
Changes in operating assets and liabilities: | | | | | | | | |
Other receivables | | | 273 | | | | 1,921 | |
Inventories | | | 159 | | | | (100 | ) |
Prepaid expenses and other assets | | | (802 | ) | | | (857 | ) |
Accounts payable | | | (1,848 | ) | | | 4,095 | |
Accrued liabilities | | | (3,002 | ) | | | 2,142 | |
Other liabilities | | | (135 | ) | | | (617 | ) |
| | | | | | | | |
Net cash provided by operating activities | | | 7,712 | | | | 15,584 | |
Investing activities: | | | | | | | | |
Capital expenditures | | | (7,954 | ) | | | (20,518 | ) |
Change in marketable securities | | | (1 | ) | | | — | |
| | | | | | | | |
Net cash used in investing activities | | | (7,955 | ) | | | (20,518 | ) |
Financing activities: | | | | | | | | |
Net proceeds from issuance of common stock | | | 1,211 | | | | 1,283 | |
Stock repurchase | | | (1,947 | ) | | | — | |
| | | | | | | | |
Net cash (used in) provided by financing activities | | | (736 | ) | | | 1,283 | |
| | | | | | | | |
Net decrease in cash and cash equivalents | | | (979 | ) | | | (3,651 | ) |
Cash and cash equivalents at beginning of period | | | 11,272 | | | | 17,719 | |
| | | | | | | | |
Cash and cash equivalents at end of period | | $ | 10,293 | | | $ | 14,068 | |
| | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | |
Cash paid during the period for income taxes | | $ | 735 | | | $ | 1,494 | |
| | | | | | | | |
See accompanying notes
5
California Pizza Kitchen, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2006
(unaudited)
1. Basis of Presentation
California Pizza Kitchen, Inc. (referred to herein as the “Company”) owns, operates, licenses or franchises 190 restaurants as of April 2, 2006 under the names California Pizza Kitchen, California Pizza Kitchen ASAP and LA Food Show.
The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended April 2, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.
The consolidated balance sheet at January 1, 2006 has been derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes required by U.S. GAAP for complete financial statements.
The preparation of financial statements in accordance with U.S. GAAP requires the Company 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.
Stock-based Compensation
Prior to fiscal 2006, the Company accounted for stock-based compensation expense under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations and adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under APB 25, no stock-based compensation expense was reflected in net income for grants of stock options prior to fiscal 2006 because the Company grants stock options with an exercise price equal to the market value of the stock on the date of grant.
Effective January 2, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS 123R”), which requires the measurement and recognition of compensation cost at fair value for all share-based payments, including stock options and restricted stock awards. The Company adopted SFAS 123R using the modified prospective transition method and, as a result, did not retroactively adjust results from prior periods. Under this transition method, stock-based
6
compensation is recognized for: 1) expense related to the remaining nonvested portion of all stock awards granted prior to January 2, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and 2) expense related to all stock awards granted on or subsequent to January 2, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The Company applies the Black-Scholes valuation model in determining the fair value of share-based payments, which is then amortized on a straight-line basis over the requisite service period. See Note 4 of the Notes to Consolidated Financial Statements in this Form 10-Q for further discussion of stock-based compensation.
Pre-opening Costs
Pre-opening costs, which are expensed as incurred, consist primarily 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 restaurant. Also included in pre-opening expense is the accrual for straight-line rent recorded from the date of possession through construction completion. In accordance with FASB Staff Position No. 13-1, “Accounting for Rental Costs Incurred During a Construction Period,” (“FSP 13-1”) as of January 2, 2006, the Company ceased capitalizing rent during the construction period. The financial impact of FSP 13-1 is expected to be approximately $700,000 to $800,000, net of taxes, in additional pre-opening rent expense during fiscal 2006 which may vary based on lease terms, restaurant openings and length of construction period.
2. Common Stock
On January 15, 2006, employees purchased 25,292 shares of common stock from the Company under the Company’s employee stock purchase plan. The net proceeds to the Company were $428,000. Additionally, employees exercised options to purchase 38,880 shares of common stock during the first three months ended April 2, 2006, which resulted in net proceeds to the Company of $783,000.
On January 15, 2005, employees purchased 25,451 shares of common stock from the Company under the Company’s employee stock purchase plan. The net proceeds to the Company were $411,000. Additionally, employees exercised options to purchase 47,258 shares of common stock during the first three months ended April 3, 2005, which resulted in net proceeds to the Company of $872,000.
On August 16, 2004, the Board of Directors authorized a stock repurchase program to acquire the Company’s common stock from time to time in the open market and through privately negotiated transactions. Under the program, up to $20.0 million of the Company’s common stock could be reacquired from time to time over a 24-month period. 65,000 shares were repurchased during the first quarter of 2006 for an aggregate purchase price of $1.9 million. The average purchase price per share for the first quarter was $29.96. Since the program was authorized, a total of 343,547 shares have been repurchased for a total of $9.0 million at an average purchase price of $26.08.
7
3. Long-term Debt and Credit Facilities
The Company has a $20.0 million revolving line of credit with Bank of America, N.A. The line of credit bears interest at either the bank base rate minus 0.75% or LIBOR plus 0.80% and expires on June 30, 2007. No amounts were outstanding as of April 2, 2006. Availability under the line of credit is reduced by outstanding letters of credit, which totaled $5.0 million as of April 2, 2006. The credit facility also includes financial and non-financial covenants, with which the Company was in compliance as of April 2, 2006.
4. Stock-Based Compensation
The Company maintains incentive compensation plans under which restricted stock awards, stock options, stock units and stock appreciation rights may be granted to employees, directors and independent contractors. To date, we have granted both stock options and restricted stock awards. Stock options under the plans provide for either nonqualified stock options or incentive stock options. Stock options are granted at the market price on the date of grant and generally vest at 25% per year. The stock options generally expire 10 years from the date of grant. The Company issues new shares of common stock upon exercise of stock options.
The Company adopted SFAS 123R, effective January 2, 2006, using the modified prospective transition method, and as a result, did not retroactively adjust results from prior periods. Under this transition method, stock-based compensation was recognized for: 1) expense related to the remaining nonvested portion of all stock awards granted prior to January 2, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and 2) expense related to all stock awards granted on or subsequent to January 2, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The Company applies the Black-Scholes valuation model in determining the fair value of share-based payments to employees. The resulting compensation expense is recognized over the requisite service period, which is generally the option vesting term of four years. Prior to fiscal 2006, stock-based compensation was included as a pro forma disclosure in the Notes to the Consolidated Financial Statements as permitted by SFAS 123.
Compensation expense is recognized only for those awards expected to vest, with forfeitures estimated based on our historical experience and future expectations. Prior to the adoption of SFAS 123R, the effect of forfeitures on the pro forma expense amounts was recognized as the forfeitures occurred.
As a result of adopting SFAS 123R, the impact to the Consolidated Statement of Income for the quarter ended April 2, 2006 on income before income tax provision and net income was $1.4 million and $962,000, respectively, and $0.07 and $0.05 on diluted earnings per share, respectively.
8
Reported stock-based compensation was classified as follows (in thousands):
| | | | |
| | | Three Months
Ended April 2, 2006 | |
Labor | | $ | 230 | |
General and administrative | | | 1,206 | |
| | | | |
Total stock-based compensation | | | 1,436 | |
Tax effect | | | (474 | ) |
| | | | |
Total stock-based compensation, net of tax | | $ | 962 | |
| | | | |
The pro forma table below applies the fair value recognition provisions of SFAS 123 and reflects net income and basic and diluted net income per share for the first quarter of fiscal 2005:
| | | |
| | | Three Months
Ended
April 3, 2005 |
Net income as reported | | $ | 4,271 |
Deduct: | | | |
Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects | | | 3,514 |
| | | |
Pro forma net income | | $ | 757 |
| | | |
Net income per share: | | | |
Basic, as reported | | $ | 0.22 |
Basic, pro forma | | $ | 0.04 |
Diluted, as reported | | $ | 0.22 |
Diluted, pro forma | | $ | 0.04 |
Weighted average shares used in computation: | | | |
Basic | | | 19,280 |
Diluted | | | 19,596 |
Pro forma disclosure for the quarter ended April 2, 2006 is not presented because the amounts are recognized in the consolidated financial statements.
The weighted average fair value at the grant date using the Black-Scholes valuation model for options issued in the first quarter of 2006 and 2005 was $11.87 and $8.51 per option, respectively. The fair value of options at the date of grant was estimated using the following weighted average assumptions for the first quarter of 2006 and 2005, respectively: (a) no dividend yield on our common stock, (b) expected stock price volatility of 29.56% and 32.44%, (c) a risk-free interest rate of 3.82% and 3.87%, and (d) an expected option term of four and five years.
9
The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar options, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. For fiscal 2006, expected stock price volatility is based on the historical volatility of our stock. The risk-free interest rate is based on the U.S. Treasury bill rate in effect at the time of grant with an equivalent expected term or life. The Company has not paid dividends in the past and does not currently plan to pay any dividends in the future.
Information regarding activity for stock awards under our plans is as follows:
| | | | | | | | | | | |
| | | Shares | | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Term
(in years) | | Average
Intrinsic
Value |
Outstanding at January 1, 2006 | | 3,396,673 | | | $ | 22.45 | | | | | |
Awards granted | | 822,408 | | | | 25.18 | | | | | |
Awards exercised | | (38,880 | ) | | | 20.14 | | | | | |
Awards cancelled | | (39,665 | ) | | | 28.93 | | | | | |
| | | | | | | | | | | |
Outstanding at April 2, 2006 | | 4,140,536 | | | $ | 22.95 | | 8.38 | | $ | 39,331,937 |
| | | | | | | | | | | |
Vested and exercisable at April 2, 2006 | | 1,668,154 | | | | | | | | | |
| | | | | | | | | | | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on April 2, 2006. This amount changes based on the fair market value of our stock. Total intrinsic value of options exercised for the quarter ended April 2, 2006 was $410,000.
A summary of the status of the Company’s nonvested shares as of April 2, 2006, and changes during the three months ended April 2, 2006, is as follows:
| | | | | | |
| | | Nonvested Shares |
| | | Shares | | | Weighted
Average
Grant Date
Fair Value |
Nonvested at January 1, 2006 | | 1,894,730 | | | $ | 7.89 |
Awards granted | | 822,408 | | | $ | 15.36 |
Awards vested | | (205,091 | ) | | $ | 7.50 |
Awards cancelled | | (39,665 | ) | | $ | 10.33 |
| | | | | | |
Nonvested at April 2, 2006 | | 2,472,382 | | | $ | 10.37 |
| | | | | | |
As of April 2, 2006, total unrecognized stock-based compensation expense related to nonvested shares was approximately $24.1 million, which is expected to be recognized over a weighted
10
average period of approximately 3.3 years. As of April 2, 2006 there were 1.0 million shares of common stock available for issuance pursuant to future stock awards.
5. Net Income Per Common Share
Reconciliation of the components included in the computation of basic and diluted net income per common share in accordance with SFAS No. 128, “Earnings Per Share,” for the three months ended April 2, 2006 and April 3, 2005 is as follows (in thousands):
| | | | | | |
| | | Three Months Ended |
| | | April 2,
2006 | | April 3,
2005 |
Numerator for basic and diluted net income per common share | | $ | 4,606 | | $ | 4,271 |
| | | | | | |
Denominator: | | | | | | |
Denominator for basic net income per common share weighted average shares | | | 19,680 | | | 19,280 |
Employee stock options | | | 610 | | | 316 |
| | | | | | |
Denominator for diluted net income per common share weighted average shares | | | 20,290 | | | 19,596 |
| | | | | | |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
This report contains forward-looking statements that involve risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as “expects,” “anticipates,” “intends,” “plans,” and similar expressions. Our actual results could differ materially from those discussed in these statements. Factors that could contribute to these differences include those discussed under “Risk Factors” of our 2005 Annual Report on Form 10-K and elsewhere in this report. The cautionary statements made in this report should be read as being applicable to all forward-looking statements wherever they appear in this report.
Overview
California Pizza Kitchen, Inc. (referred to hereafter as “we” and “our”) is a leading casual dining restaurant chain in the premium pizza segment. As of May 5, 2006 we own, operate, license or franchise 192 restaurants under the names California Pizza Kitchen, California Pizza Kitchen ASAP and LA Food Show in 28 states, the District of Columbia and five foreign countries. We have 32 restaurants which operate under franchise agreements and use the California Pizza Kitchen and California Pizza Kitchen ASAP brand names and trademarks. We opened our first restaurant in 1985 in Beverly Hills, California and during our 21 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.
We manage our operations by restaurant and have aggregated our operations into one reportable segment. For analytical purposes we have broken this segment into three concepts (as of April 2, 2006): 1) our 153 full service California Pizza Kitchen restaurants; 2) five California Pizza Kitchen ASAP restaurants and 3) one LA Food Show restaurant.
11
We intend to open 16 to 18 new full service restaurants during 2006, two of which were opened in the first three months of 2006. All new development in 2006, with the exception of one restaurant opened in a new market in Omaha, Nebraska, are in existing markets. We have signed lease agreements for all of our new full service restaurants planned for fiscal 2006 and intend to continue to develop new full service restaurants that range in size from 5,700 to 6,000 square feet. The majority of these new restaurants require, on average, a gross cash investment of approximately $2.9 million. Tenant improvement allowances, which average approximately $500,000, are recorded as reductions to future rent. In addition, pre-opening costs are expected to be $300,000 per new full service restaurant.
It is common in the restaurant industry for new restaurant locations to initially open with sales volumes well in excess of their sustainable run-rate levels. This initial “honeymoon” effect usually results from promotional and other consumer awareness activities that generate abnormally high customer traffic for our restaurants. During the several months following the opening of a new restaurant, customer traffic generally settles into its normal pattern, resulting in sales volumes that gradually adjust downward to their expected sustained run-rate level. Additionally, our new restaurants usually require a 90 to 120 day period after opening to reach their targeted restaurant-level operating margin due to cost of sales and labor inefficiencies commonly associated with new restaurants. As a result, a significant number of restaurant openings in any single fiscal quarter, accompanied with their associated pre-opening costs, could have a significant impact on our consolidated results of operations for that period. Therefore, our results of operations for any single fiscal quarter are not necessarily indicative of the results to be expected for any other fiscal quarter or for a full fiscal year.
Cost of sales is comprised of food, beverage and paper supplies, labor, and direct operating and occupancy expenses. The components of food, beverage and paper supplies are variable and increase with sales volume. Labor costs include direct hourly and management wages, stock-based compensation, bonuses and 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 restaurant costs. Direct operating and occupancy costs generally increase with sales volume but decline as a percentage of restaurant sales.
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, stock-based compensation, travel and relocation costs, 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, currently consist of rent from the date construction begins through the restaurant opening date, 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 restaurant.
Our fiscal year consists of 52 or 53 weeks and ends on the Sunday closest to December 31 in each year. The three month periods ended April 2, 2006 and April 3, 2005 each consisted of 13
12
weeks. In calculating company-owned comparable restaurant sales, we include a restaurant in the comparable base once it has been open for 18 months.
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our unaudited Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. When we prepare these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to investments, self-insurance, leasing activities, deferred tax assets, intangible assets, long-lived assets and stock-based compensation. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Stock-Based Compensation
Prior to fiscal 2006, the Company accounted for stock-based compensation expense under the recognition and measurement principles of APB 25, and related interpretations and adopted the disclosure-only provisions of Statement of Financial Accounting Standards SFAS 123. Under APB 25, no stock-based compensation expense was reflected in net income for grants of stock options prior to fiscal 2006 because the Company grants stock options with an exercise price equal to the market value of the stock on the date of grant.
Effective January 2, 2006, the Company adopted SFAS 123R, which requires the measurement and recognition of compensation cost at fair value for all share-based payments, including stock options and restricted stock awards. The Company adopted SFAS 123R using the modified prospective transition method and, as a result, did not retroactively adjust results from prior periods. As of April 2, 2006, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $24.1 million, which is expected to be recognized over a weighted average period of approximately 3.3 years. Accordingly, we have modified the “Stock-Based Compensation” section of our critical accounting policies from the previous disclosure included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended January 1, 2006 as follows:
We account for stock-based compensation in accordance with the provisions of SFAS 123R. We use the Black-Scholes option-pricing model, which requires the input of various assumptions. These assumptions include estimating the length of time employees will retain their stock options before exercising them (“expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not
13
complete their vesting requirements (“forfeitures”). Changes in these assumptions can materially affect the estimated fair value of stock-based compensation and consequently, the related amount recognized on the consolidated statements of operations. See Note 4 of the Notes to Consolidated Financial Statements in this Form 10-Q for further discussion of stock-based compensation.
There have been no material changes to the other critical accounting policies previously reported in our Annual Report on Form 10-K for the fiscal year ended January 1, 2006.
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Results of Operations
Our operating results for the three months ended April 2, 2006 and April 3, 2005 are expressed as a percentage of revenues below, except for cost of sales which is expressed as a percentage of restaurant sales:
| | | | | | |
| | | Three Months Ended | |
| | | April 2,
2006 | | | April 3,
2005 | |
Revenues: | | | | | | |
Restaurant sales | | 99.1 | % | | 99.2 | % |
Franchise and other revenues | | 0.9 | % | | 0.8 | % |
| | | | | | |
Total revenues | | 100.0 | % | | 100.0 | % |
Costs and expenses: | | | | | | |
Food, beverage and paper supplies | | 25.0 | % | | 24.6 | % |
Labor (1) | | 37.1 | % | | 37.6 | % |
Direct operating and occupancy | | 19.7 | % | | 20.1 | % |
| | | | | | |
Cost of sales | | 81.8 | % | | 82.3 | % |
General and administrative (2) | | 8.0 | % | | 6.8 | % |
Depreciation and amortization | | 5.4 | % | | 5.1 | % |
Pre-opening costs | | 0.5 | % | | 1.0 | % |
| | | | | | |
Operating income | | 5.1 | % | | 5.5 | % |
Other income (expense): | | | | | | |
Interest income | | 0.2 | % | | 0.2 | % |
Equity in net loss of unconsolidated joint venture | | 0.0 | % | | 0.0 | % |
| | | | | | |
Total other income | | 0.2 | % | | 0.2 | % |
| | | | | | |
Income before income tax provision | | 5.3 | % | | 5.7 | % |
Income tax provision | | 1.7 | % | | 1.8 | % |
| | | | | | |
Net income | | 3.6 | % | | 3.9 | % |
| | | | | | |
| (1) | Labor percentage includes approximately 20 basis points of stock-based compensation for the quarter ended April 2, 2006 compared to none in the quarter ended April 3, 2005. |
| (2) | General and administrative percentage includes approximately 90 basis points of stock-based compensation for the quarter ended April 2, 2006 compared to none in the quarter ended April 3, 2005. |
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In an effort to better clarify unit level economics, we now present supplemental operating data for each of our concepts. Accordingly, supplemental information (as of April 2, 2006) has been grouped into 1) our 153 full service California Pizza Kitchen restaurants; 2) five California Pizza Kitchen ASAP restaurants and 3) one LA Food Show restaurant:
| | | | | | | | | | | | | | |
First Quarter 2006 | | # of Stores | | Weekly Sales
Average | | | (,000)
Restaurant
Sales | | | (,000)
Cost of
Sales (1) | | | Cost of Sales
as a Percentage
of Sales | |
Full Service Restaurants | | | | | | | | | | | | | | |
Q1, 2006 | | 153 | | 63,293 | | | 125,492 | | | 102,325 | | | 81.5 | % |
Q1, 2005 | | 141 | | 60,382 | | | 107,989 | | | 88,742 | | | 82.2 | % |
Year over year change | | | | 4.8 | % | | 16.2 | % | | 15.3 | % | | 70 | bps |
ASAP Restaurants | | | | | | | | | | | | | | |
Q1, 2006 | | 5 | | 31,309 | | | 2,035 | | | 1,849 | | | 90.9 | % |
Q1, 2005 | | 4 | | 27,479 | | | 1,429 | | | 1,306 | | | 91.4 | % |
Year over year change | | | | 13.9 | % | | 42.4 | % | | 41.6 | % | | 50 | bps |
LA Food Show | | | | | | | | | | | | | | |
Q1, 2006 | | 1 | | 76,240 | | | 991 | | | 915 | | | 92.3 | % |
Total restaurants | | | | | | | | | | | | | | |
Q1, 2006 | | 159 | | 62,366 | | | 128,518 | | | 105,089 | (2) | | 81.8 | % |
Q1, 2005 | | 145 | | 59,452 | | | 109,418 | | | 90,048 | | | 82.3 | % |
Year over year change | | | | 4.9 | % | | 17.5 | % | | 16.7 | % | | 50 | bps |
| (1) | Cost of sales includes food, beverage and paper supplies, labor, and direct operating and occupancy costs. |
| (2) | Cost of sales includes approximately $230,000, or 20 basis points, of stock-based compensation in the first quarter of 2006 compared to none in the first quarter of 2005. |
Three months ended April 2, 2006 compared to the three months ended April 3, 2005
Total Revenues. Total revenues increased by $19.4 million, or 17.6%, to $129.7 million in the first quarter of 2006 from $110.3 million in the first quarter of 2005 due to a $19.1 million increase in restaurant sales and a $280,000 increase in franchise and other revenues. The increase in restaurant sales was due to a 4.8% increase in weekly sales averages for our full service restaurants, $2.0 million in sales derived from our ASAP restaurants and $1.0 million in sales derived from LA Food Show. The 18-month comparable base restaurant increase was 6.4%, which was driven by a 2.3% increase in customer counts, a 3.6% increase in pricing and menu mix changes of 0.5%. The increase in franchise and other revenues was primarily due to increased royalties from Kraft’s distribution of our frozen pizza.
Food, beverage and paper supplies. Food, beverage and paper supplies increased by $5.2 million, or 19.3%, to $32.2 million in the first quarter of 2006 from $27.0 million in the first quarter of 2005. Food, beverage and paper supplies as a percentage of restaurant sales increased to 25.0% in the first quarter of 2006 from 24.6% in the first quarter of 2005. The increase was primarily due to higher commodity prices for produce and grocery items which were partially offset by decreases in dairy costs. Additionally, alcoholic beverage costs increased in the first quarter of 2006 compared to the first quarter of 2005.
Labor. Labor increased by $6.5 million, or 15.8%, to $47.6 million in the first quarter of 2006 from $41.1 million in the first quarter of 2005. As a percentage of restaurant sales, labor decreased to 37.1% in the first quarter of 2006 from 37.6% in the first quarter of 2005. The decrease in labor as a percentage of restaurant sales was primarily due to lower hourly labor training costs in the first quarter of 2006 than in the first quarter of 2005 associated with the point-of-sale system rollout, sales leverage of management labor, two new full service restaurant openings in the first quarter of 2006 compared to five new full service restaurants in the first quarter of 2005 and no restaurant remodels in the first quarter of 2006 compared to two in the
16
first quarter of 2005. Labor in the first quarter of 2006 also included $230,000 of stock-based compensation expense in accordance with SFAS 123R.
Direct operating and occupancy. Direct operating and occupancy increased by $3.3 million, or 15.0%, to $25.3 million in the first quarter of 2006 from $22.0 million in the first quarter of 2005. Direct operating and occupancy as a percentage of restaurant sales decreased to 19.7% in the first quarter of 2006 from 20.1% in the first quarter of 2005. The decrease in direct operating and occupancy expenses as a percentage of restaurant sales was primarily due to sales leverage of fixed expenses partially offset by increased utility charges.
General and administrative. General and administrative costs increased by $2.9 million, or 38.7%, to $10.4 million in the first quarter of 2006 from $7.5 million in the first quarter of 2005. General and administrative costs as a percentage of total revenue increased to 8.0% in the first quarter of 2006 from 6.8% in the first quarter of 2005. The dollar increase in general and administrative expenses was primarily a result of additional personnel to support restaurant operations and $1.2 million in stock-based compensation expense in accordance with SFAS 123R.
Depreciation and amortization. Depreciation and amortization increased by $1.4 million, or 25.0%, to $7.0 million in the first quarter of 2006 from $5.6 million in the first quarter of 2005. The increase in the first quarter of 2006 was primarily due to the addition of 12 full service restaurants, two ASAPs and LA Food Show since the first quarter of 2005 and depreciation associated with the new point-of-sale system acquisition.
Pre-opening costs. Pre-opening costs decreased by $0.5 million to $0.6 million in the first quarter of 2006 from $1.1 million in the first quarter of 2005. The decrease was due to two full service restaurants opening in the first quarter of 2006 compared to five full service restaurants opening in the first quarter of 2005.
Interest income. Interest income increased by $29,000 to $224,000 in the first quarter of 2006 from interest income of $195,000 for the first quarter of 2005. The increase was a result of higher interest rates offset by lower cash balances in the first quarter of 2006.
Income tax provision. The effective income tax rate was 33.0% for the first quarter of 2006 compared to 31.7% for the first quarter of 2005. The tax rate of 33.0% for the first quarter of 2006 resulted primarily from higher state taxes relative to the prior year.
Net income. Net income increased by $0.3 million, or 7.0%, to $4.6 million in the first quarter of 2006 from $4.3 million in the first quarter of 2005. Net income as a percentage of revenues decreased to 3.6% in the first quarter of 2006 from 3.9% in the prior year. The decrease as a percentage of revenues was primarily due to the $1.4 million total stock-based compensation charge incurred in the first quarter of 2006.
Liquidity and capital resources
We have funded our capital requirements through cash flow from operations and proceeds from the initial public offering of our common stock on August 2, 2000. For the first three months of
17
2006, net cash flows provided by operating activities were $7.7 million compared to $15.6 million for the first three months of 2005. Net cash flows provided by operating activities for the first three months of 2006 were lower than the first three months of 2005 primarily due to the decrease in operating assets and liabilities offset by an increase in non-cash compensation expense and deferred rent credits. The net change in operating assets and liabilities was caused by decreases in other receivables, accounts payable and accrued liabilities.
Net cash used in investing activities for the first three months of 2006 was $8.0 million compared to $20.5 million for the first three months of 2005. Investing activities primarily consisted of capital expenditures relating to new restaurants and capitalized maintenance.
We opened two new prototype full service restaurants in the first three months of 2006. The new restaurant prototype is larger than our pre-2004 prototype. These new restaurants require, on average, a higher net investment than our pre-2004 restaurants due to their increased size. However, we expect, and have seen, corresponding sales to be higher and to ultimately generate a higher restaurant cash flow. Pre-opening costs for each of these new restaurants are approximately $300,000; however, any unexpected delays in construction, labor shortages or other factors could result in higher than anticipated pre-opening costs.
Net proceeds from issuance of common stock was $1.2 million for the first three months of 2006 compared to $1.3 million for the first three months of 2005 and consisted of purchases under our employee stock purchase plan of $428,000 and $411,000, respectively, and common stock option exercises of $783,000 and $872,000, respectively. In August 2004, the Board of Directors authorized a stock repurchase program to acquire the Company’s common stock from time to time in open market purchases and through privately negotiated transactions. We repurchased 65,000 shares during the first three months of 2006 for an aggregate purchase price of $1.9 million at an average purchase price of $29.96. Since the program was authorized, a total of 343,547 shares have been repurchased for a total of $9.0 million at an average purchase price of $26.08.
We have a $20.0 million revolving line of credit with Bank of America, N.A. The line of credit bears interest at either the bank base rate minus 0.75% or LIBOR plus 0.80% and expires on June 30, 2007. No amounts were outstanding as of April 2, 2006. Availability under the line of credit is reduced by outstanding letters of credit, which totaled $5.0 million as of April 2, 2006. The credit facility also includes financial and non-financial covenants, with which we were in compliance as of April 2, 2006.
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 on a short-term and long-term basis. Changes in our operating plans, acceleration of our expansion plans, lower than anticipated sales, increased expenses, non-compliance with our credit facility, financial and non-financial covenant requirements or other
18
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.
As of April 2, 2006 we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties. Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts.
Contractual Obligations
The following table summarizes our contractual obligations as of April 2, 2006 (in millions):
| | | | | | | | | | | | | | | |
| | | | | Payments Due by Period |
| | | Total | | Less than 1
Year | | 1-3 Years | | 3-5 Years | | More than 5
Years |
Operating Lease Obligations (1) | | $ | 257.3 | | $ | 21.1 | | $ | 62.5 | | $ | 57.0 | | $ | 116.7 |
| | | | | | | | | | | | | | | |
| (1) | Represents aggregate minimum lease payments. Most of the leases also require contingent rent in addition to the minimum rent based on a percentage of sales and require expenses incidental to the use of the property. |
Inflation
The primary inflationary factors affecting our operations are food and labor costs. A large number of our restaurant personnel are paid at rates based on the applicable minimum wage, and increases in the minimum wage directly affect our labor costs. Many of our leases require us to pay for taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. We believe inflation has not had a material impact on our results of operations in recent years.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our market risk exposures are related to our cash and cash equivalents and marketable securities. Cash and cash equivalents are invested in highly liquid short-term investments with maturities of less than three months as of the date of purchase. We are exposed to market risk from changes in
19
market prices related to our investments in marketable securities. As of April 2, 2006 we held $11.4 million in marketable securities. Changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flows and results of operations.
We have a $20.0 million revolving line of credit with Bank of America, N.A. The line of credit bears interest at either the bank base rate minus 0.75% or LIBOR plus 0.80% and expires on June 30, 2007. No amounts were outstanding as of April 2, 2006. Availability under the line of credit is reduced by outstanding letters of credit, which totaled $5.0 million as of April 2, 2006. The credit facility also includes financial and non-financial covenants, with which we were in compliance as of April 2, 2006. Should we draw on this line of credit in the future, changes in interest rates would affect the interest expense on these loans and, therefore, impact our prospective 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 one 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.
| ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures – We conducted an evaluation, under the supervision and with the participation of our management, including our co-Chief Executive Officers (“co-CEOs”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operations of our disclosure controls and procedures, as defined in Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934 (“Exchange Act”). Based upon that evaluation, our Company’s co-CEOs and CFO concluded that our disclosure controls and procedures are effective, as of the end of the period covered by this report, in ensuring that material information relating to California Pizza Kitchen, Inc., including its consolidated subsidiaries, required to be disclosed in reports we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to our management, including our co-Chief Executive Officers and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Change in Internal Control Over Financial Reporting – There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended April 2, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
We are subject to certain private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. Such claims typically involve claims from guests, employees and others related to operational issues common to the food service industry. A number of such claims may exist at any given time. We could be affected by adverse publicity resulting from such allegations, regardless of whether such allegations are valid or whether we are determined to be liable. From time to time, we are also involved in lawsuits with respect to infringements of, or challenges to, our registered trademarks. We believe that the final disposition of such lawsuits and claims will not have a material adverse effect on our financial position, results of operations or liquidity.
A description of the risk factors associated with the Company is contained in Item 1A, “Risk Factors,” of our 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 17, 2006 and incorporated herein by reference. There were no material changes in the first quarter of 2006 for the risk factors described in the 10-K. The cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the SEC.
21
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table provides information with respect to Company purchases made of California Pizza Kitchen, Inc. common stock during the first quarter of 2006:
| | | | | | | | | | |
Period | | (a) Total Number
of Shares
Purchased | | (b) Average Price
Paid Per Share | | (c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or Programs (1) | | (d) Maximum Number
(or Approximate Dollar Value) of Shares that
May Yet Be Purchased
Under the Plans or Programs |
01/02/06-02/05/06 | | — | | | — | | — | | $ | 12,987,433 |
02/06/06-03/05/06 | | 65,000 | | $ | 29.96 | | 65,000 | | $ | 11,040,033 |
03/06/06-04/02/06 | | — | | $ | — | | — | | $ | 11,040,033 |
| | | | | | | | | | |
Total | | 65,000 | | $ | 29.96 | | 65,000 | | $ | 11,040,033 |
| | | | | | | | | | |
| (1) | The Board of Directors authorized a stock repurchase program to acquire Company stock from time to time in the open market and through privately negotiated transactions in August 2004. Under the plan, up to $20.0 million of Company stock could be reacquired over a 24-month period. |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
None.
The Exhibit Index on page 24 of this Quarterly Report on Form 10-Q lists the exhibits that are filed or furnished, as applicable, as part of this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of 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.
Dated: May 12, 2006
| | |
| | CALIFORNIA PIZZA KITCHEN, INC. |
| |
| By: | | /s/ LARRY S. FLAX |
| | Larry S. Flax |
| | Co-Chairman of the Board, Co-Chief Executive Officer, Co-President and Director (Principal Executive Officer) |
| |
| By: | | /s/ RICHARD L. ROSENFIELD |
| | Richard L. Rosenfield |
| | Co-Chairman of the Board, Co-Chief Executive Officer, Co-President and Director (Principal Executive Officer) |
| |
| By: | | /s/ SUSAN M. COLLYNS |
| | Susan M. Collyns |
| | Chief Financial Officer, Chief Accounting Officer and Senior Vice President of Finance (Principal Financial and Accounting Officer) |
23
INDEX TO EXHIBITS
| | |
| |
| 31.1 | | Certification of Principal Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| 31.2 | | Certification of Principal Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| 31.3 | | Certification of Principal Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| 32.1 | | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| 32.2 | | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| 32.3 | | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
24
