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 1, 2007
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 7, 2007, 19,383,845 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.
California Pizza Kitchen, Inc. and Subsidiaries
TABLE OF CONTENTS
2
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,
2007 | | | December 31,
2006 | |
| | | (unaudited) | | | | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 8,933 | | | $ | 8,187 | |
Other receivables | | | 7,208 | | | | 7,876 | |
Inventories | | | 4,433 | | | | 4,745 | |
Current deferred tax asset, net | | | 11,862 | | | | 11,721 | |
Prepaid income tax | | | 1,779 | | | | — | |
Other prepaid expenses and other current assets | | | 5,708 | | | | 5,388 | |
| | | | | | | | |
Total current assets | | | 39,923 | | | | 37,917 | |
Property and equipment, net | | | 258,728 | | | | 255,382 | |
Noncurrent deferred tax asset, net | | | 6,003 | | | | 5,867 | |
Goodwill and other intangibles | | | 5,789 | | | | 5,825 | |
Other assets | | | 5,968 | | | | 5,522 | |
| | | | | | | | |
Total assets | | $ | 316,411 | | | $ | 310,513 | |
| | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 8,594 | | | $ | 15,044 | |
Accrued compensation and benefits | | | 18,822 | | | | 15,042 | |
Accrued rent | | | 14,659 | | | | 14,532 | |
Deferred rent credits | | | 4,584 | | | | 4,494 | |
Other accrued liabilities | | | 12,292 | | | | 13,275 | |
Accrued income tax | | | 5,568 | | | | 3,614 | |
| | | | | | | | |
Total current liabilities | | | 64,519 | | | | 66,001 | |
| | | | | | | | |
Other liabilities | | | 7,718 | | | | 8,683 | |
Deferred rent credits, net of current portion | | | 27,952 | | | | 27,486 | |
Stockholders’ equity: | | | | | | | | |
Common stock - $0.01 par value, 80,000,000 | | | | | | | | |
shares authorized, 19,382,791 and 19,296,635 shares issued and outstanding at April 1, 2007 and December 31, 2006, respectively | | | 194 | | | | 193 | |
Additional paid-in capital | | | 225,397 | | | | 221,163 | |
Accumulated deficit (1) | | | (9,369 | ) | | | (13,013 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 216,222 | | | | 208,343 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 316,411 | | | $ | 310,513 | |
| | | | | | | | |
| (1) | The Company recorded an adjustment to beginning retained earnings of $47,000 related to FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” |
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 1,
2007 | | April 2,
2006 |
Revenues: | | | | | | |
Restaurant sales | | $ | 147,844 | | $ | 128,518 |
Royalties from Kraft licensing agreement | | | 712 | | | 535 |
Domestic franchise revenues | | | 523 | | | 506 |
International franchise revenues | | | 287 | | | 139 |
| | | | | | |
Total revenues | | | 149,366 | | | 129,698 |
| | |
Costs and expenses: | | | | | | |
Food, beverage and paper supplies | | | 36,376 | | | 32,168 |
Labor | | | 56,199 | | | 47,627 |
Direct operating and occupancy | | | 28,695 | | | 25,294 |
| | | | | | |
Cost of sales | | | 121,270 | | | 105,089 |
| | |
General and administrative | | | 12,790 | | | 10,355 |
Depreciation and amortization | | | 8,541 | | | 6,971 |
Pre-opening costs | | | 1,350 | | | 633 |
| | | | | | |
Operating income | | | 5,415 | | | 6,650 |
| | |
Other income: | | | | | | |
Interest income | | | 86 | | | 224 |
| | | | | | |
Total other income | | | 86 | | | 224 |
| | | | | | |
Income before income tax provision | | | 5,501 | | | 6,874 |
Income tax provision | | | 1,904 | | | 2,268 |
| | | | | | |
Net income | | $ | 3,597 | | $ | 4,606 |
| | | | | | |
Net income per common share: | | | | | | |
Basic | | $ | 0.19 | | $ | 0.23 |
| | | | | | |
Diluted | | $ | 0.18 | | $ | 0.23 |
| | | | | | |
Weighted average shares used in calculating net income per common share: | | | | | | |
Basic | | | 19,372 | | | 19,680 |
| | | | | | |
Diluted | | | 20,003 | | | 20,290 |
| | | | | | |
See accompanying notes
4
California Pizza Kitchen, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
| | | | | | | | |
| | | Three Months Ended | |
| | | April 1,
2007 | | | April 2,
2006 | |
Operating activities: | | | | | | | | |
Net income | | $ | 3,597 | | | $ | 4,606 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 8,541 | | | | 6,971 | |
Non-cash compensation expense | | | 2,167 | | | | 1,436 | |
Tax benefit from employee stock option exercises and employee stock purchase plan disqualifying dispositions credited to equity | | | (169 | ) | | | — | |
Change in deferred rent credits | | | 1,688 | | | | 1,833 | |
Change in net deferred tax assets | | | (25 | ) | | | (565 | ) |
Changes in operating assets and liabilities: | | | | | | | | |
Other receivables | | | 668 | | | | 273 | |
Inventories | | | 312 | | | | 159 | |
Amortization of deferred rent credits | | | (1,132 | ) | | | (1,214 | ) |
Prepaid expenses and other assets | | | (2,545 | ) | | | (837 | ) |
Accounts payable | | | (3,503 | ) | | | (959 | ) |
Accrued liabilities | | | 5,203 | | | | (3,002 | ) |
Other liabilities | | | (965 | ) | | | (135 | ) |
| | | | | | | | |
Net cash provided by operating activities | | | 13,837 | | | | 8,566 | |
Investing activities: | | | | | | | | |
Capital expenditures* | | | (15,165 | ) | | | (8,808 | ) |
Change in investments in marketable securities | | | — | | | | (1 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (15,165 | ) | | | (8,809 | ) |
Financing activities: | | | | | | | | |
Net proceeds from issuance of common stock | | | 1,905 | | | | 1,211 | |
Stock repurchase | | | — | | | | (1,947 | ) |
Tax benefit from employee stock option exercises and employee stock purchase plan disqualifying dispositions credited to equity | | | 169 | | | | — | |
| | | | | | | | |
Net cash provided by (used in) financing activities | | | 2,074 | | | | (736 | ) |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 746 | | | | (979 | ) |
Cash and cash equivalents at beginning of period | | | 8,187 | | | | 11,272 | |
| | | | | | | | |
Cash and cash equivalents at end of period | | $ | 8,933 | | | $ | 10,293 | |
| | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | |
Cash paid during the period for income taxes | | $ | 1,828 | | | $ | 735 | |
| | | | | | | | |
Supplemental disclosure of investing activities: | | | | | | | | |
*Property, plant and equipment purchased and included in accounts payable and other accrued liabilities | | $ | 4,437 | | | $ | 2,399 | |
| | | | | | | | |
See accompanying notes
5
California Pizza Kitchen, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 1, 2007
(unaudited)
1. Basis of Presentation
California Pizza Kitchen, Inc. (the “Company”) owns, operates, licenses or franchises 210 restaurants as of April 1, 2007 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 1, 2007 are not necessarily indicative of the results that may be expected for the year ending December 30, 2007.
The consolidated balance sheet at December 31, 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.
Certain prior year amounts have been reclassified to conform to the current year presentation.
2. Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We have not yet determined the impact the adoption of SFAS No. 159 will have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Statement defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This Statement becomes effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We have not yet determined the impact the adoption of SFAS No. 157 will have on our consolidated financial statements.
In September 2006, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 expresses the SEC staff’s views regarding the process of quantifying financial statement misstatements. The interpretations in SAB 108 address diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet. SAB 108 is effective for interim periods of the first fiscal year ending after November 15, 2006. The adoption of SAB 108 did not have a material impact on the Company’s consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes recognition and measurement criteria in addition to classification, interim period accounting and significantly expanded disclosure provisions for uncertain tax positions that are expected to be taken in a company’s tax return. The Company adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements. See Note 6 to the consolidated financial statements for further discussion of the Company’s adoption of FIN 48.
3. Common Stock
On January 15, 2007 employees purchased 20,362 shares of common stock from the Company under the Company’s employee stock purchase plan. The net proceeds to the Company were $464,000. Additionally, employees exercised options
6
to purchase 65,794 shares of common stock during the first three months ended April 1, 2007, which resulted in net proceeds to the Company of $1,441,000.
On January 11, 2006, 70,000 shares of restricted stock were granted to each of Richard L. Rosenfield and Larry S. Flax, our co-founders, co-Chairmen of the Board of Directors and co-Chief Executive Officers. Of the total grant, 22,500 restricted shares vested for each of them in the first three months ended April 1, 2007.
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 August 16, 2004, the Board of Directors authorized a stock repurchase program (“August 2004 Program”) to acquire the Company’s common stock from time to time in the open market and through privately negotiated transactions. Under the August 2004 Program, up to $20.0 million of the Company’s common stock could be reacquired from time to time over a 24-month period. On June 14, 2006, the Board of Directors authorized an additional stock repurchase program (“June 2006 Program”) to acquire the Company’s common stock from time to time in the open market and through privately negotiated transactions. Under the June 2006 Program, up to $30.0 million of the Company’s common stock could be reacquired from time to time over a 24-month period. Under the August 2004 Program 65,000 shares were repurchased during the first three months of 2006 for an aggregate purchase price of $1.9 million. The average purchase price per share for the first three months of 2006 was $29.96. The Company did not repurchase any of its equity securities during the first quarter of 2007. The August 2004 Program expired in the third quarter of 2006. Approximately $16.8 million remains available under the June 2006 Program.
4. Long-term Debt and Credit Facilities
In June 2006, the Company entered into a First Amendment to its Amended and Restated Credit Agreement (the “Amendment”) with Bank of America, N.A. to amend the Amended and Restated Credit Agreement dated June 30, 2004 (the “Original Credit Agreement”). The Amendment increased the revolving line of credit from $20.0 million to $75.0 million. 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, 2009. Other than the commitment amount, there were no other material changes to the terms of the Original Credit Agreement. No amounts were outstanding as of April 1, 2007. Availability under the line of credit is reduced by outstanding letters of credit, which totaled $5.6 million as of April 1, 2007. The credit facility also includes financial and non-financial covenants, with which the Company was in compliance as of April 1, 2007.
5. 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 a rate of 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 No. 123(R), “Share-Based Payment” (“SFAS 123R”), effective January 2, 2006, using the modified prospective transition method. As a result, the Company 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 option awards to employees. The resulting compensation expense is recognized over the requisite service period, which is generally the option vesting term of four years.
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 1, 2007 on income before income tax provision and net income was $2.3 million and $1.5 million, respectively, or $0.11 and $0.07 on diluted earnings per share, respectively. 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 $1.0 million, respectively, or $0.07 and $0.05 on diluted earnings per share, respectively
Reported stock-based compensation was classified as follows (in thousands):
7
| | | | | | | | |
| | | Three Months Ended April 1, 2007 | | | Three Months Ended April 2, 2006 | |
Labor | | $ | 219 | | | $ | 230 | |
General and administrative | | | 2,071 | | | | 1,206 | |
| | | | | | | | |
Total stock-based compensation | | | 2,290 | | | | 1,436 | |
Tax benefit | | | (792 | ) | | | (474 | ) |
| | | | | | | | |
Total stock-based compensation, net of tax | | $ | 1,498 | | | $ | 962 | |
| | | | | | | | |
The weighted average fair value at the grant date using the Black-Scholes valuation model for options issued in the first quarter of 2007 and 2006 was $10.09 and $10.55 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 2007 and 2006, respectively: (a) no dividend yield on our common stock; (b) expected stock price volatility of 28.29% and 35.62%; (c) a risk-free interest rate of 4.71% and 4.64%; and (d) an expected option term of 4.0 years for both periods.
The expected term of the options represents the estimated period of time until exercise and is based on the Company’s historical experience of similar option grants, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. For fiscal 2007, 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) | | Aggregate Intrinsic Value |
Outstanding at December 31, 2006 | | 3,824,895 | | | $ | 23.33 | | | | | |
Awards granted | | 37,500 | | | | 33.61 | | | | | |
Awards exercised | | (110,794 | ) | | | 13.01 | | | | | |
Awards cancelled | | (67,702 | ) | | | 26.98 | | | | | |
| | | | | | | | | | | |
Outstanding at April 1, 2007 | | 3,683,899 | | | | 23.70 | | 7.72 | | $ | 33,874,734 |
| | | | | | | | | | | |
Vested and exercisable at April 1, 2007 | | 1,844,538 | | | | | | | | | |
| | | | | | | | | | | |
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 1, 2007. This amount changes based on the fair market value of our stock. Total intrinsic value of options exercised for the quarter ended April 1, 2007 was $2.3 million.
A summary of the status of the Company’s nonvested share awards as of April 1, 2007, and changes during the three months ended April 1, 2007, is as follows:
8
| | | | | | |
| | | Nonvested Shares |
| | | Shares | | | Weighted Average Grant Date Fair Value |
Nonvested at December 31, 2006 | | 2,131,795 | | | $ | 10.40 |
Awards granted | | 37,500 | | | | 10.09 |
Awards vested | | (276,508 | ) | | | 12.33 |
Awards cancelled | | (53,426 | ) | | | 9.31 |
| | | | | | |
Nonvested at April 1, 2007 | | 1,839,361 | | | | 10.14 |
| | | | | | |
As of April 1, 2007, total unrecognized stock-based compensation expense related to nonvested share awards was approximately $16.9 million, which is expected to be recognized over a weighted average period of approximately 2.6 years. As of April 1, 2007, there were 1.0 million shares of common stock available for issuance pursuant to future stock awards.
6. Income Taxes
In June 2006, the FASB issued FIN 48, an interpretation of FASB Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFAS No. 109”), which the Company adopted beginning January 1, 2007. At the date of adoption and as of April 1, 2007, the Company had $723,000 in unrecognized tax benefits, $444,000 of which would impact the Company’s effective tax rate if recognized. The adjustment was recorded to beginning retained earnings. The Company estimates that unrecognized tax benefits of $327,000 will decrease in the next twelve months due to the expiration of statute of limitations and completion of audits in progress.
The Company has elected to recognize interest and penalties related to uncertain tax positions in income tax expense. As of April 1, 2007, the Company has accrued $119,000 of interest and $101,000 of penalties related to uncertain tax positions.
The tax years 2001 to 2006 remain open to examination by major taxing jurisdictions.
7. 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 1, 2007 and April 2, 2006, respectively, is as follows (in thousands):
| | | | | | |
| | | Three Months Ended |
| | | April 1, 2007 | | April 2, 2006 |
Numerator for basic and diluted net income per common share | | $ | 3,597 | | $ | 4,606 |
| | | | | | |
Denominator: | | | | | | |
Denominator for basic net income per common share weighted average shares | | | 19,372 | | | 19,680 |
Employee stock options | | | 631 | | | 610 |
| | | | | | |
Denominator for diluted net income per common share weighted average shares | | | 20,003 | | | 20,290 |
| | | | | | |
9
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 2006 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. As of May 7, 2007 we own, operate, license or franchise 212 restaurants under the names California Pizza Kitchen, California Pizza Kitchen ASAP (“CPK/ASAP”) and LA Food Show in 28 states, the District of Columbia and six foreign countries. We have 31 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 22 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 1, 2007): 1) 168 company-owned full service California Pizza Kitchen restaurants; 2) 11 company-owned California Pizza Kitchen ASAP restaurants and 3) one company-owned LA Food Show restaurant.
We intend to open 16-18 full service restaurants during 2007, two of which were opened in the first three months of 2007. We have signed lease agreements for all of our new full service restaurants planned for fiscal 2007. The majority of these new restaurants require, on average, a gross cash investment of approximately $2.8 million for inline restaurants and $3.2 million for freestanding restaurants. Tenant improvement allowances, most of which are generally associated with inline restaurants, average approximately $400,000 and are recorded as reductions to future rent over the initial lease term. In addition, pre-opening costs are expected to average $330,000 per new full service restaurant.
In addition to opening new full service restaurants, we opened two CPK/ASAPs during the first three months of 2007 to compete in the fast casual segment. As of May 7, 2007, we have 11 company-owned CPK/ASAPs. We are currently re-engineering the concept and have slowed down development for 2007. Key areas of re-engineering include menu, marketing, speed of service and capital investment.
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 new 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 or delays in those 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
10
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, 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 1, 2007 and April 2, 2006 each consisted of 13 weeks. In calculating company-owned comparable restaurant sales, we include a restaurant in the comparable base once it has been open for 18 months. As of April 1, 2007, we had 151 company-owned restaurants that met this criterion.
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.
Results of Operations
Our operating results for the three months ended April 1, 2007 and April 2, 2006 are expressed as a percentage of revenues below, except for cost of sales which is expressed as a percentage of restaurant sales:
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| | | | | | |
| | | Three Months Ended | |
| | | April 1,
2007 | | | April 2,
2006 | |
Revenues: | | | | | | |
Restaurant sales | | 99.0 | % | | 99.1 | % |
Royalties from Kraft licensing agreement | | 0.5 | % | | 0.4 | % |
Domestic franchise revenues | | 0.3 | % | | 0.4 | % |
International franchise revenues | | 0.2 | % | | 0.1 | % |
| | | | | | |
Total revenues | | 100.0 | % | | 100.0 | % |
| | |
Costs and expenses: | | | | | | |
Food, beverage and paper supplies | | 24.6 | % | | 25.0 | % |
Labor (1) | | 38.0 | % | | 37.1 | % |
Direct operating and occupancy | | 19.4 | % | | 19.7 | % |
| | | | | | |
Cost of sales | | 82.0 | % | | 81.8 | % |
| | |
General and administrative (2) | | 8.6 | % | | 8.0 | % |
Depreciation and amortization | | 5.7 | % | | 5.4 | % |
Pre-opening costs | | 0.9 | % | | 0.5 | % |
| | | | | | |
Operating income | | 3.6 | % | | 5.1 | % |
| | |
Other income: | | | | | | |
Interest income | | 0.1 | % | | 0.2 | % |
| | | | | | |
Total other income | | 0.1 | % | | 0.2 | % |
| | | | | | |
Income before income tax provision | | 3.7 | % | | 5.3 | % |
Income tax provision | | 1.3 | % | | 1.7 | % |
| | | | | | |
Net income | | 2.4 | % | | 3.6 | % |
| | | | | | |
| (1) | Labor percentage includes approximately 10 basis points of stock-based compensation in the three months ended April 1, 2007 compared to 20 basis points in the three months ended April 1, 2006. |
| (2) | General and administrative percentage includes approximately 140 basis points of stock-based compensation in the three months ended April 1, 2007 compared to 90 basis points in the three months ended April 1, 2006. |
The following table details the number of restaurants at the end of the first quarter of 2007:
| | | | | | | | | | |
First Quarter 2007 | | Total Units at December 31, 2006 | | Opened | | Acquired | | Closed | | Total Units at April 1, 2007 |
Company-owned full service domestic | | 166 | | 2 | | — | | — | | 168 |
Company-owned ASAP domestic | | 9 | | 2 | | — | | — | | 11 |
Company-owned LA Food Show | | 1 | | — | | — | | — | | 1 |
Franchised domestic | | 16 | | — | | — | | — | | 16 |
Franchised international | | 13 | | 1 | | — | | — | | 14 |
| | | | | | | | | | |
Total | | 205 | | 5 | | — | | — | | 210 |
| | | | | | | | | | |
Three months ended April 1, 2007 compared to the three months ended April 2, 2006
Total Revenues. Total revenues increased by $19.7 million, or 15.2%, to $149.4 million in the first quarter of 2007 from $129.7 million in the first quarter of 2006 due to a $19.3 million increase in restaurant sales and a $0.4 million increase in franchise and other revenues. The increase in restaurant sales was due to a 4.1% increase in weekly sales average for full
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service restaurants, $4.1 million in sales derived from CPK/ASAP restaurants and $1.1 million in sales derived from LA Food Show. The 18-month comparable base restaurant increase was 4.7%, driven by a 1.2% increase in guest counts, a 0.3% increase in mix and a 3.2% increase in pricing. The increase in franchise and other revenues was primarily due to increased royalties from Kraft’s distribution of our frozen pizza and the opening of three international franchises since the first quarter of 2006.
Food, beverage and paper supplies. Food, beverage and paper supplies increased by $4.2 million, or 13.0%, to $36.4 million in the first quarter of 2007 from $32.2 million in the first quarter of 2006. Food, beverage and paper supplies as a percentage of restaurant sales was 24.6% in the first quarter of 2007 compared to 25.0% in the first quarter of 2006. The decrease in food, beverage and paper supplies as a percentage of restaurant sales was primarily due to lower dairy, grocery and seafood prices partially offset by higher produce and alcohol costs.
Labor. Labor increased by $8.6 million, or 18.1%, to $56.2 million in the first quarter of 2007 from $47.6 million in the first quarter of 2006. As a percentage of restaurant sales, labor increased to 38.0% in the first quarter of 2007 from 37.1% in the first quarter of 2006. The increase in labor as a percentage of restaurant sales was primarily due to increased hourly labor associated with minimum wage increases in 14 states in 2007.
Direct operating and occupancy. Direct operating and occupancy costs increased by $3.4 million, or 13.4%, to $28.7 million in the first quarter of 2007 from $25.3 million in the first quarter of 2006. Direct operating and occupancy costs as a percentage of restaurant sales decreased to 19.4% in the first quarter of 2007 from 19.7% in the first quarter of 2006. The decrease in direct operating and occupancy expenses as a percentage of restaurant sales was primarily due to better fixed cost leverages on sales increases.
General and administrative. General and administrative costs increased by $2.4 million, or 23.1%, to $12.8 million in the first quarter of 2007 from $10.4 million in the first quarter of 2006. General and administrative costs as a percentage of total revenue increased to 8.6% in the first quarter of 2007 from 8.0% in the first quarter of 2006. The dollar increase in general and administrative expenses was primarily a result of additional personnel to support restaurant operations and $0.6 million in incremental stock-based compensation expense associated with accelerated restricted stock vesting.
Depreciation and amortization. Depreciation and amortization increased by $1.5 million, or 21.4%, to $8.5 million in the first quarter of 2007 from $7.0 million in the first quarter of 2006. The increase in the first quarter of 2007 was primarily due to the addition of 16 full service restaurants and six CPK/ASAPs since the end of the first quarter of 2006.
Pre-opening costs. Pre-opening costs increased by $0.8 million to $1.4 million in the first quarter of 2007 from $0.6 million in the first quarter of 2006. We opened two full service restaurants and two CPK/ASAPs in the first quarter of 2007 compared to two full service restaurants opening in the first quarter of 2006. Pre-opening costs also increased by $282,000 due to the impact of Staff Position No. FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period.”
Interest income. Interest income decreased by $138,000 to $86,000 in the first quarter of 2007 from interest income of $224,000 for the first quarter of 2006. The decrease was a result of lower cash and marketable securities balances in the first quarter of 2007 from the first quarter of 2006.
Income tax provision. The effective income tax rate was 34.6% for the first quarter of 2007, compared to 33.0% for the first quarter of 2006. The increase in the effective tax rate over the prior year was primarily due to limitations on deductibility of stock-based compensation.
Net income. Net income decreased by $1.0 million to $3.6 million in the first quarter of 2007 from $4.6 million in the first quarter of 2006. Net income as a percentage of revenues decreased to 2.4% in the first quarter of 2007 from 3.6% in the prior year.
Liquidity and capital resources
We fund our capital requirements through cash flow from operations. For the first three months of 2007, net cash flows provided by operating activities were $13.8 million compared to $8.6 million for the first three months of 2006. Net cash flows provided by operating activities for the first three months of 2007 were higher than the first three months of 2006 primarily due to an increase in depreciation, non-cash compensation expense, deferred tax assets and a net increase in operating assets and liabilities.
Net cash flows used in investing activities for the first three months of 2007 increased to $15.2 million from $8.8 million for the first three months of 2006 due to increased capital expenditures related to new restaurants and capitalized maintenance.
We opened two new prototype full service restaurants and two CPK/ASAPs in the first three months of 2007. The new full service restaurant prototype is larger than our pre-2004 prototype and requires, on average, a higher net investment than our pre-2004 restaurants due to its increased size. However, we expect, and have seen, corresponding sales to be higher and to
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ultimately generate a higher restaurant cash flow. Pre-opening costs for each of these new full service restaurants are approximately $330,000; however, any unexpected delays in construction, labor shortages or other factors could result in higher than anticipated pre-opening costs. A CPK/ASAP is approximately half the size of a full service restaurant. We currently have 11 CPK/ASAP restaurants and are re-engineering the concept based on market research with a focus on menu, marketing, speed of service and capital investment. We expect the results of re-engineering efforts to be complete by the first quarter of fiscal 2008.
Net proceeds from issuance of common stock were $1.9 million for the first three months of 2007 compared to $1.2 million for the first three months of 2006 and consisted of purchases under our employee stock purchase plan of $0.5 million and $0.4 million, respectively, and common stock option exercises of $1.4 million and $0.8 million, respectively. On August 16, 2004, the Board of Directors authorized a stock repurchase program (“August 2004 Program”) to acquire the Company’s common stock from time to time in the open market and through privately negotiated transactions. Under the August 2004 Program, up to $20.0 million of the Company’s common stock could be reacquired from time to time over a 24-month period. On June 14, 2006, the Board of Directors authorized an additional stock repurchase program (“June 2006 Program”) to acquire the Company’s common stock from time to time in the open market and through privately negotiated transactions. Under the June 2006 Program, up to $30.0 million of the Company’s common stock could be reacquired from time to time over a 24-month period. Under the August 2004 Program 65,000 shares were repurchased during the first three months of 2006 for an aggregate purchase price of $1.9 million. The average purchase price per share for the first three months of 2006 was $29.96. The Company did not repurchase any of its equity securities during the first quarter of 2007. The August 2004 Program expired in the third quarter of 2006. Approximately $16.8 million remains available under the June 2006 Program.
In June 2006, we entered into a First Amendment to Amended and Restated Credit Agreement (the “Amendment”) with Bank of America, N.A. to amend the Amended and Restated Credit Agreement dated June 30, 2004 (the “Original Credit Agreement”). The Amendment increased the revolving line of credit from $20.0 million to $75.0 million. 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, 2009. Other than the commitment amount, there were no other material changes to the terms of the Original Credit Agreement. No amounts were outstanding as of April 1, 2007. Availability under the line of credit is reduced by outstanding letters of credit, which totaled $5.6 million as of April 1, 2007. The credit facility also includes financial and non-financial covenants, with which the Company was in compliance as of April 1, 2007.
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 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 1, 2007, 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 1, 2007 (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) | | $ | 290.5 | | $ | 25.2 | | $ | 71.1 | | $ | 65.3 | | $ | 128.9 |
FIN 48 Liability | | | 0.7 | | | 0.4 | | | 0.3 | | | — | | | — |
| | | | | | | | | | | | | | | |
| | $ | 291.2 | | $ | 25.6 | | $ | 71.4 | | $ | 65.3 | | $ | 128.9 |
| | | | | | | | | | | | | | | |
| (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
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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 market prices related to our investments in marketable securities. As of April 1, 2007, we did not hold any marketable securities. Changes in interest rates affect the investment income we could earn on our investments and, therefore, impact our cash flows and results of operations.
In June 2006 we entered into the Amendment. 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, 2009. Other than the commitment amount, there were no other material changes to the terms of the Original Credit Agreement. No amounts were outstanding as of April 1, 2007. Availability under the line of credit is reduced by outstanding letters of credit, which totaled $5.6 million as of April 1, 2007. 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-CEOs and CFO, 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 1, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 1A. RISK FACTORS
A description of the risk factors associated with the Company is contained in Item 1A, “Risk Factors,” of our 2006 Annual Report on Form 10-K filed with the SEC on March 14, 2007 and incorporated herein by reference. There were no material changes in the first quarter of 2007 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.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 16, 2004, the Board of Directors authorized a stock repurchase program (“August 2004 Program”) to acquire the Company’s common stock from time to time in the open market and through privately negotiated transactions. Under the August 2004 Program, up to $20.0 million of the Company’s common stock could be reacquired from time to time over a 24-month period. On June 14, 2006, the Board of Directors authorized an additional stock repurchase program (“June 2006 Program”) to acquire the Company’s common stock from time to time in the open market and through privately negotiated transactions. Under the June 2006 Program, up to $30.0 million of the Company’s common stock could be reacquired from time to time over a 24-month period. Under the August 2004 program 65,000 shares were repurchased during the first three months of 2006 for an aggregate purchase price of $1.9 million. The average purchase price per share for the first three months of 2006 was $29.96. The Company did not repurchase any of its equity securities during the first quarter of 2007. The August 2004 Program expired in the third quarter of 2006. Approximately $16.8 million remains available under the June 2006 Program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The Exhibit Index on page 18 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 11, 2007
| | |
| 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) |
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INDEX TO EXHIBITS
| | |
| 3.1(A) | | Certificate of Incorporation |
| |
| 3.2(A) | | Bylaws |
| |
| 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 |
| (A) | Incorporated by reference to the registrant’s current report on Form 8-K filed December 22, 2004 |
18
