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 October 1, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File No 000-31149
CALIFORNIA PIZZA KITCHEN, INC.
(Exact name of registrant as specified in its charter)
California 95-4040623
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6053 West Century Boulevard, 11th Floor, Los Angeles, California 90045-6442
(Address of Principal Executive Offices)
(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 ___
---
There were 17,888,091 shares of outstanding Common Stock of the Registrant as of
November 13, 2000.
Total number of pages: 16.
1
California Pizza Kitchen, Inc and Subsidiaries
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at January 2, 2000 and October 1, 2000 3
Consolidated Statements of Income for the three months ended
October 3,1999 and October 1, 2000 and nine months ended October 3,
1999 and October 1, 2000 4
Consolidated Statements of Cash Flows for the nine
months ended October 3, 1999 and October 1, 2000 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3 Quantitative and Qualitative Disclosures About Market Risk 13
PART II OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 2 Changes in Securities and Use of Proceeds 14
Item 3 Defaults Upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 15
Financial Data Schedule 16
2
PART 1--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
California Pizza Kitchen, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except for share data)
January 2, October 1,
2000 2000
-------------------------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 5,686 $ 12,666
Trade accounts receivable 1,509 3,980
Inventories 1,239 1,385
Prepaid expenses and other current assets 2,395 489
-------------------------------------
Total current assets 10,829 18,520
Property and equipment, net 78,048 84,764
Deferred taxes 4,754 4,754
Other assets 1,119 1,902
-------------------------------------
Total assets $ 94,750 $ 109,940
=====================================
Liabilities and shareholders' equity (deficiency)
Current liabilities:
Accounts payable $ 3,661 $ 1,739
Accrued compensation and benefits 7,658 6,635
Accrued rent 4,655 4,667
Other accrued liabilities 3,993 6,827
Current maturities of long-term debt 1,537 37
-------------------------------------
Total current liabilities 21,504 19,905
Long-term debt, less current maturities 38,548 19
Other liabilities 606 742
Commitments
Redeemable stock:
Series A 12 1/2% Cumulative Compounding Preferred Stock -10,151,771 and 0
shares issued and outstanding at January 2, 2000 and October 1, 2000,
respectively; liquidation preference of $24,625 at January 2, 2000 24,625 -
Series B 13 1/2% Cumulative Compounding Preferred Stock - 10,151,771 and 0
shares issued and outstanding at January 2, 2000 and October 1, 2000,
respectively; liquidation preference of $19,296 at January 2, 2000 19,296 -
Shareholders' equity (deficiency)
Common Stock - $0.01 par value, 80,000,000 shares authorized, 10,896,570 and
17,888,091 shares issued and outstanding at January 2, 2000 and October 1,
2000, respectively 109 179
Additional paid-in capital 104,340 198,295
Accumulated deficit (114,278) (109,200)
-------------------------------------
Total shareholders' equity (deficiency) (9,829) 89,274
-------------------------------------
Total liabilities and shareholders' equity (deficiency) $ 94,750 $ 109,940
=====================================
See accompanying notes
3
California Pizza Kitchen, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands except for per share data)
(unaudited)
Three Months Ended Nine Months Ended
-------------------------------------------------------
October 3, October 1, October 3, October 1,
1999 2000 1999 2000
-------------------------------------------------------
Revenues:
Restaurant sales $46,338 $54,328 $131,391 $154,013
Franchise and other revenues 536 641 1,544 1,861
-------------------------------------------------------
Total revenues 46,874 54,969 132,935 155,874
Restaurant Costs and expenses:
Cost of sales 11,839 13,402 33,054 38,149
Labor 16,711 19,301 47,403 55,109
Direct operating and occupancy 9,120 10,588 26,233 30,388
-------------------------------------------------------
Total restaurant operating costs 37,670 43,291 106,690 123,646
General and administrative 3,321 3,817 9,780 11,038
Depreciation and amortization 2,155 2,418 6,188 7,040
Pre-opening 164 396 720 910
Loss on impairment of property and equipment and
restaurant closures - - - 1,839
Non-recurring compensation - - - 1,949
-------------------------------------------------------
Operating income 3,564 5,047 9,557 9,452
Other income (expenses):
Interest income (expense) (842) (139) (2,655) (1,640)
-------------------------------------------------------
Total other income (expense), net (842) (139) (2,655) (1,640)
-------------------------------------------------------
Income before income tax provision 2,722 4,908 6,902 7,812
Income tax provision (952) (1,718) (2,415) (2,734)
-------------------------------------------------------
Net income $ 1,770 $ 3,190 $ 4,487 $ 5,078
=======================================================
Redeemable preferred stock accretion (1,296) (582) (3,851) (3,512)
-------------------------------------------------------
Net income attributable to common shareholders 474 2,608 636 1,566
=======================================================
Net income per common share:
Basic $0.04 $0.17 $0.06 $0.13
=======================================================
Diluted $0.04 $0.17 $0.06 $0.12
=======================================================
Shares used in calculating net income per common share:
Basic 10,787 15,129 10,767 12,307
=======================================================
Diluted 11,041 15,473 11,018 12,578
=======================================================
See accompanying notes
4
California Pizza Kitchen, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
October 3, October 1,
1999 2000
-----------------------------------------
Operating activities
Net income $ 4,487 $ 5,078
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 6,039 7,040
Amortization of bank fees 149 -
Equity in net losses of limited partnerships (150) -
Loss on impairment of property and equipment - 1,839
Non-recurring compensation - 1,949
Changes in operating assets and liabilities:
Trade accounts receivable (8) (2,622)
Inventories (86) (128)
Prepaid expenses and other assets (740) 1,238
Accounts payable (3,344) (1,940)
Accrued liabilities 687 2,113
Other liabilities 530 (100)
-----------------------------------------
Net cash provided by operating activities 7,564 14,467
Investing activities
Capital expenditures (13,970) (15,789)
-----------------------------------------
Net cash used in investing activities (13,970) (15,789)
Financing activities
Payments on long-term debt (4,694) (40,027)
Net proceeds from issuance of common stock 149 71,876
Redemption of preferred stock - (23,719)
-----------------------------------------
Net cash provided by (used in) financing activities (4,545) 8,130
-----------------------------------------
Net increase (decrease) in cash and cash equivalents (10,951) 6,808
Cash and cash equivalents at beginning of period 14,553 5,686
Cash from consolidation of investment in limited partnership - 172
-----------------------------------------
Cash and cash equivalents at end of period $ 3,602 $ 12,666
=========================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 2,673 $ 1,879
=========================================
Income taxes $ 457 $ 2,583
=========================================
see accompanying notes
5
California Pizza Kitchen, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 1, 2000
(Unaudited)
1. Basis of Presentation
California Pizza Kitchen, Inc. (referred to herein as the "Company" or in
the first person notations "we," "us" and "our") owns, operates, licenses or
franchises 110 restaurants under the names California Pizza Kitchen and
California Pizza Kitchen ASAP.
The accompanying financial statements have been prepared by the Company in
accordance with generally accepted accounting principles and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated
financial statements presented herein have not been audited by independent
public accountants, but include all material adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of the Company's financial condition, results of operations and
cash flows for the periods. However, these results are not necessarily
indicative of results for any other interim periods or for the full fiscal year.
The consolidated balance sheet data presented herein for January 2, 2000 was
derived from our audited consolidated financial statements for the fiscal year
then ended, but does not include all disclosures required by generally accepted
accounting principles. The preparation of financial statements in accordance
with generally accepted accounting principles requires us to make certain
estimates and assumptions for the reporting periods covered by the financial
statements. These estimates and assumptions affect the reported amounts of
assets, liabilities, revenues and expenses. Actual amounts could differ from
these estimates.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to requirements of the Securities and Exchange
Commission. We believe the disclosures included in the accompanying interim
financial statements and footnotes are adequate to make the information not
misleading, but should be read in conjunction with the consolidated financial
statements and notes thereto included in our Registration Statement on Form S-1.
In January 2000, the Company acquired a majority interest in its remaining
limited partnership restaurant. As such, beginning January 3, 2000, the Company
consolidated the financial statements of the limited partnership with its own
financial statements. Prior to fiscal 2000, the Company accounted for its
ownership in the limited partnership under the equity method of accounting. All
significant intercompany balances and transactions have been eliminated.
2. Initial Public Offering
The Company completed its initial public offering on August 7, 2000. The
offering resulted in the issuance of 5,300,000 shares of common stock at $15.00
per share, resulting in net proceeds to the Company of approximately $71.9
million. Upon consummation of the offering, all shares of Series A 12 1/2%
cumulative compounding preferred stock and Series B 13 1/2% cumulative
compounding preferred stock were automatically converted into a right to receive
$23.7 million and 1,580,938 shares of common stock. Additionally, upon
completion of the Company's public offering, options to purchase 110,696 shares
of common stock were exercised.
3. Long-term Debt and Credit Facilities
Under the terms of the Company's credit agreement with Bank of America,
N.A., the term loan was repaid upon consummation of the initial public offering.
Additionally, the Company repaid all outstanding amounts under its revolving
line of credit upon consummation of the initial public offering. As of October
1, 2000, the Company had no borrowings against the revolving line of credit.
6
4. Loss on Impairment of Property and Equipment and Store Closures
The Company reviews the carrying value of its assets in accordance with
SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of," on a restaurant by restaurant basis. In April 2000,
the Company determined that one of its restaurant locations, with a net book
value of $1,839, was impaired. As a result, the Company recorded a $1,839
write-down of the book value of the restaurant in accordance with SFAS No. 121.
5. Non-Recurring Compensation Charge
In June 2000, the Company recorded a one-time compensation charge of $1,949
related to the exercise of performance based stock options. The exercise of
these options triggered variable plan accounting resulting in the one-time
charge in accordance with Accounting Principles Board No. 25.
6. Earnings Per Share (in thousands)
Three Months Three Months Nine Months Nine Months
Ended October 3, Ended October 1, Ended October 3, Ended October 1,
1999 2000 1999 2000
-----------------------------------------------------------------------------
Numerator for basic and diluted net income per share $ 474 $ 2,608 $ 636 $ 1,566
attributable to common shareholders ======= ======= ======= =======
Denominator
Denominator for basic net income per share - weighted
average shares 10,787 15,129 10,767 12,307
Employee stock options 254 344 251 271
------- ------- ------- -------
Denominator for diluted net income per share - weighted
average shares 11,041 15,473 11,018 12,578
======= ======= ======= =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINACIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
California Pizza Kitchen is a leading casual dining restaurant chain in the
premium pizza segment. We own and operate 79 restaurants under the name
"California Pizza Kitchen" or "California Pizza Kitchen ASAP" in 17 states and
the District of Columbia. We also franchise our concept and currently have 31
additional restaurants which operate under franchise or license agreements. We
opened our first restaurant in 1985 in Beverly Hills, California. During our 15
years of operating history, we have developed a recognized consumer brand and
demonstrated the appeal of our concept in a wide variety of geographic areas.
Our restaurants, which feature an exhibition-style kitchen centered around an
open-flame oven, provide a distinctive, casual dining experience, which is
family friendly and has a broad consumer appeal.
We have opened eight restaurants in fiscal 2000, of which five have been
our full service restaurants and three, our fast-casual ASAP restaurants. We
intend to open three additional full service restaurants this year. All of the
remaining restaurants planned for 2000 are currently under construction. We plan
to open a minimum of fourteen full service restaurants in 2001, and have either
signed lease agreements or letters of intent for all fourteen of these
restaurants.
Our revenues are comprised of restaurant sales, franchise royalties and
other income. Our restaurant sales are comprised almost entirely of food and
beverage sales. Cost of sales is composed of food, beverage and paper supply
expenses. The components of costs of sales are variable and increase with sales
volume. Labor costs include direct hourly and management wages, bonuses, taxes
and benefits for restaurant employees. Direct operating and occupancy costs
include restaurant supplies, marketing costs, fixed rent, percentage rent,
common area maintenance charges, utilities, real estate taxes, repairs and
maintenance and other related costs.
7
General and administrative costs include all corporate and administrative
functions that support existing operations and provide infrastructure to
facilitate our future growth. Components of this category include management,
supervisory and staff salaries and related employee benefits, travel,
information systems, training, corporate rent and professional and consulting
fees. Depreciation and amortization principally includes depreciation on capital
expenditures for restaurants.
Pre-opening costs, which are expensed as incurred, consist of the costs of
hiring and training the initial work force, travel, the cost of food used in
training, marketing costs, the cost of the initial stocking of operating
supplies and other direct costs related to the opening of a new restaurant.
Our fiscal year consists of 52 or 53 weeks and ends on the Sunday closest
to December 31 in each year. The three months ended October 3, 1999 and October
1, 2000 consist of thirteen weeks. The nine months ended October 3, 1999 and
October 1, 2000 consist of thirty-nine weeks. In calculating company-owned
comparable restaurant sales, we include a restaurant in the comparable base once
it has been open for 12 months.
Result of Operations
Our operating results for the three months and nine months ended October 3,
1999 and October 1, 2000 are expressed as a percentage of revenues below, except
for restaurant operating costs and expenses, which are expressed as a percentage
of restaurant sales:
Three Months Ended Nine Months Ended
-------------------------------------------------------
October 3, October 1, October 3, October 1,
1999 2000 1999 2000
-------------------------------------------------------
Revenues:
Restaurant sales 98.9% 98.8% 98.8% 98.8%
Franchise and other revenues 1.1 1.2 1.2 1.2
-------------------------------------------------------
Total revenues 100.0 100.0 100.0 100.0
Restaurant costs and expenses:
Cost of sales 25.5 24.7 25.2 24.8
Labor 36.1 35.5 36.1 35.8
Direct operating and occupancy 19.7 19.5 20.0 19.7
-------------------------------------------------------
Total restaurant operating costs 81.3 79.7 81.2 80.3
General and administrative 7.1 6.9 7.4 7.1
Depreciation and amortization 4.6 4.4 4.7 4.5
Pre-opening 0.3 0.7 0.5 0.6
Loss on impairment of property and equipment and
restaurant closures - - - 1.2
Non-recurring compensation - - - 1.3
-------------------------------------------------------
Operating income 7.6 9.2 7.2 6.1
Other income (expenses):
Interest income (expense) (1.8) (0.3) (2.0) (1.0)
-------------------------------------------------------
Total other income (expense), net (1.8) (0.3) (2.0) (1.0)
-------------------------------------------------------
Income before income tax provision 5.8 8.9 5.2 5.1
Income tax provision (2.0) (3.1) (1.8) (1.8)
-------------------------------------------------------
Net income 3.8% 5.8% 3.4% 3.3%
=======================================================
Three months ended October 1, 2000 compared to the three months ended October 3,
1999
Total Revenues. Total revenues increased by $8.1 million, or 17.3%, to $55.0
million in the third quarter of 2000 from $46.9 million for the third quarter of
1999 due to an $8.0 million increase in restaurant sales and a $105,000 increase
in franchise and other revenue. The increase in restaurant sales was due to
$291,000 in sales from a full three months of operations for the one restaurant
that opened in the third quarter of 1999, $636,000 in sales from the
consolidation of our limited partnership restaurant,
8
$3.3 million in sales derived from the six restaurants opened in the first nine
months of 2000, and $4.1 million from comparable restaurant sales increases of
9.0%. This increase in restaurant sales was offset by the loss of revenue from
the one restaurant which was closed in the fourth quarter of 1999. The increase
in comparable restaurant sales was driven by increases in customer counts of
approximately 6.7% and increases in the average check of approximately 2.3%
compared to the third quarter of 1999. The increase in average check was due to
approximately 1.7% in price increases with the remainder due to modest shifts in
our menu mix. Franchise and other revenue growth was due primarily to a full
three months of operations for the six new franchise restaurants that opened in
the second half of 1999 and the six franchise restaurants that opened in the
first nine months of 2000.
Cost of sales. Cost of sales increased by $1.6 million, or 13.2%, to $13.4
million for the third quarter of 2000 from $11.8 million for the third quarter
of 1999. Cost of sales as a percentage of restaurant sales decreased to 24.7%
for the third quarter of 2000 from 25.5% in the prior period. This reduction was
primarily a result of increased operational efficiency, the shift in the timing
of the roll-out of our new menu from the third quarter last year to the second
quarter of this year and the price increase taken in the second quarter of 2000.
We do not expect significant movements in cost of sales for the fourth quarter,
except for the possibility of some pressure on dairy costs and the slight
inefficiency related to the five new store openings in the fourth quarter.
Labor. Labor increased by $2.6 million, or 15.5%, to $19.3 million for the third
quarter of 2000 from $16.7 million for the third quarter of 1999. Labor as a
percentage of restaurant sales decreased to 35.5% for the third quarter of 2000
from 36.1% for the prior period. The decrease in labor as a percentage of
restaurant sales was primarily due to lower hourly labor as a percentage of
sales resulting from higher weekly store sales. Hourly labor as a percentage of
sales decreased to 21.2% for the third quarter of 2000 from 22.2% of sales for
the prior period. However, as a result of tightening labor markets and
inefficiency related to the five new store openings in the fourth quarter, we
expect upward pressure on labor as a percentage of sales in the fourth quarter.
Direct operating and occupancy. Direct operating and occupancy increased by $1.5
million, or 16.1%, to $10.6 million for the third quarter of 2000 from $9.1
million for the third quarter of 1999. Direct operating and occupancy as a
percentage of restaurant sales decreased to 19.5% for the third quarter 2000
from 19.7% from the prior period. The reduction was due primarily to higher net
sales spread over relatively fixed restaurant level operating and occupancy
expenses.
General and administrative. General and administrative increased by $496,000, or
14.9%, to $3.8 million for the third quarter of 2000 from $3.3 million for the
third quarter of 1999. General and administrative as a percentage of total
revenues decreased to 6.9% for the third quarter of 2000 from 7.1% for the prior
period. The increase in general and administrative expenses was primarily a
result of higher travel and moving expenses related to manager relocations for
our new restaurants and higher personnel costs related to new management
positions. The decrease in general and administrative expenses as a percentage
of revenues was primarily a result of the Company's increasing revenue base and
its ability to leverage its general and administrative personnel.
Depreciation and amortization. Depreciation and amortization increased by
$263,000, or 12.2%, to $2.4 million for the third quarter of 2000 from $2.2
million for the third quarter of 1999. The increase was primarily due to the six
new restaurants opened during the first nine months of fiscal 2000 and a full
quarter of depreciation on the one restaurant opened after July 4, 1999.
Pre-opening. Pre-opening increased by $232,000, to $396,000 for the third
quarter of 2000 from $164,000 for the third quarter of 1999. The increase was
due to the three restaurants that opened during the third quarter of 2000 as
compared to the one restaurant that opened during the same period in 1999. In
addition, we incurred pre-opening expenses during the third quarter of 2000 for
restaurants scheduled to open in the fourth quarter of 2000.
Interest expense. Interest expense decreased by $703,000 to $139,000 for the
third quarter of 2000 from $842,000 for the third quarter of 1999. The decrease
was a result of the repayment of our term note and the pay-down of the revolving
line of credit on August 7, 2000 from the proceeds of our offering.
Income tax provision. The income tax provision for the third quarter of 2000 and
1999 was based on annual effective tax rates applied to the income before income
tax provision. The 35.0% tax rate applied to the third quarter of 2000 comprises
the federal and state statutory rates based on the annual estimated effective
tax rate for 2000. The 35.0% tax rate applied to the third quarter of 1999
comprises the federal and state statutory rates based on the annual estimated
effective tax rate for 1999.
Nine months ended October 1, 2000 compared to the nine months ended October 3,
1999
Total Revenues. Total revenues increased by $22.9 million, or 17.3%, to $155.9
million for the first nine months of 2000 from $132.9 million for the first nine
months of 1999 due to a $22.6 million increase in restaurant sales and a
$317,000 increase in
9
franchise and other revenue. The increase in restaurant sales was due to $6.7
million in sales from a full year of operations for the five restaurants that
opened in 1999, $1.9 million in sales from the consolidation of our limited
partnership restaurant, $5.3 million in sales derived from the six restaurants
opened in the first nine months of 2000, and $10.0 million from comparable
restaurant sales increases of 7.8%. This increase in restaurant sales was offset
by the loss of revenue from the two restaurants which were closed in 1999. The
increase in comparable restaurant sales was driven by increases in customer
counts of approximately 4.6% and increases in the average check of approximately
3.2% compared to the first nine months of 1999. Approximately one-half of the
increase in average check is due to price increases taken in 1999 and 2000, with
the remainder due to modest shifts in our menu mix. Franchise and other revenue
growth was due primarily to a full nine months of operations for the seven new
franchise restaurants that opened in 1999 and the six franchise restaurants that
opened in the first nine months of 2000.
Cost of sales. Cost of sales increased by $5.1 million, or 15.4%, to $38.1
million for the first nine months of 2000 from $33.0 million for the first nine
months of 1999. Cost of sales as a percentage of restaurant sales decreased to
24.8 % for the first nine months of 2000 from 25.2% in the prior period. This
reduction was primarily a result of increased operational efficiency and the
price increase taken in the second quarter of 2000.
Labor. Labor increased by $7.7 million, or 16.3%, to $55.1 million for the first
nine months of 2000 from $47.4 million for the first nine months of 1999. Labor
as a percentage of restaurant sales decreased to 35.8% for the first nine months
of 2000 from 36.1% for the prior period. The decrease in labor as a percentage
of restaurant sales was primarily due to lower hourly labor as a percentage of
sales resulting from higher weekly store sales for the first nine months of 2000
compared to the same period last year. Hourly labor as a percentage of sales
decreased to 21.4% for the first nine months of 2000 from 21.7% of sales for the
prior period.
Direct operating and occupancy. Direct operating and occupancy increased by $4.2
million, or 15.8%, to $30.4 million for the first nine months of 2000 from $26.2
million for the first nine months of 1999. Direct operating and occupancy as a
percentage of restaurant sales decreased to 19.7% for the first nine months of
2000 from 20.0% from the prior period. The reduction was due primarily to higher
net sales spread over relatively fixed restaurant level operating and occupancy
expenses.
General and administrative. General and administrative increased by $1.3
million, or 12.9%, to $11.0 million for the first nine months of 2000 from $9.8
million for the first nine months of 1999. General and administrative as a
percentage of total revenue decreased to 7.1% for the first nine months of 2000
from 7.4% for the prior period. The increase in general and administrative
expenses was primarily a result of higher travel and moving expenses related to
manager relocations for our new restaurants and higher personnel costs related
to new management positions. The decrease in general and administrative
expenses as a percentage of revenues was primarily a result of the Company's
increasing revenue base and its ability to leverage its general and
administrative personnel.
Depreciation and amortization. Depreciation and amortization increased by
$852,000, or 13.8%, to $7.0 million for the first nine months of 2000 from $6.2
million for the first nine months of 1999. The increase was primarily due to the
six new restaurants opened during the first nine months of fiscal 2000 and a
full nine months of depreciation on the restaurants opened in 1999
Pre-opening. Pre-opening increased by $190,000 to $910,000 for the first nine
months of 2000 from $720,000 for the first nine months of 1999. The increase was
due to the six restaurants that opened in the first nine months of 2000 compared
to the five restaurants that opened in the first nine months of 1999, as well as
pre-opening expenses incurred in connection with the restaurants that we plan to
open in the fourth quarter of 2000.
Loss on impairment of property and equipment and restaurant closures. Loss on
impairment of property and equipment and restaurant closures was $1.8 million in
the first nine months of 2000 related to the write-down of one restaurant in
accordance with Financial Accounting Standards No. 121. In 1999, we did not
write down any of our restaurants.
Non-recurring compensation charge. Non-recurring compensation charge of $1.9
million represents the performance-based stock options granted to Frederick R.
Hipp, our Chief Executive Officer and President. Upon closing of the initial
public offering, these options were exercised triggering a variable plan
accounting charge in accordance with Accounting Principles Board No. 25.
Interest expense. Interest expense decreased by $1.1 million to $1.6 million
for the first nine months of 2000 from $2.7 million for the first nine months of
1999. The decrease was primarily a result of a lower debt balance due to
payments made under our credit facility, a lower interest rate due to our new
credit facility that was put in place in October 1999, and the repayment of our
term note and the pay-down of the revolving line of credit on August 7, 2000
with the proceeds from our initial public offering.
10
Income tax provision. The income tax provision for the first nine months of 2000
and 1999 was based on annual effective tax rates applied to the income before
income tax provision. The 35.0% tax rate applied to the first nine months of
2000 comprises the federal and state statutory rates based on the annual
estimated effective tax rate for 2000. The 35.0% tax rate applied to the first
nine months of 1999 comprises the federal and state statutory rates based on the
annual estimated effective tax rate for 1999.
Liquidity and capital resources
In recent years we have funded our capital requirements through cash flow
from operations. In 1997, in order to fund the merger and leveraged
recapitalization, Bruckmann, Rosser, Sherrill & Co., L.P. and its co-investors
made a $25.0 million capital contribution to us and we entered into a $57.0
million credit facility, of which $49.0 million was drawn. For the first nine
months of 2000, net cash flow provided by operating activities was $14.5 million
compared to $7.6 million for the first nine months of 1999. Net cash flow
provided by operating activities exceeded the net income for both periods due to
the effects of depreciation and amortization for both 2000 and 1999 and loss on
impairment of property and equipment and non-recurring compensation for 2000.
We use cash to fund the development and construction of new restaurants and
the remodel our existing restaurants. Net cash used in investing activities for
the first nine months of 2000 and 1999 was $15.8 million and $14.0 million,
respectively. We opened six new restaurants in the first nine months of 2000
compared to five opened in the first nine months of 1999. We expect to open
five additional restaurants in the fourth quarter of 2000 and a minimum of 14
full service restaurants in 2001. We expect that our planned future restaurants
will require, on average, a total cash investment per restaurant, after landlord
contributions, of approximately $1.3 million for our full service restaurants
and $650,000 for our ASAP restaurants. Additionally, we anticipate pre-opening
costs on average to be approximately $150,000 for our full service restaurants
and $75,000 for our ASAP restaurants, however, any unexpected delays in
construction, labor shortages or other factors could result in higher than
anticipated pre-opening costs.
Net cash provided by financing operations was $8.1 million for the first
nine months of 2000 compared to net cash used in financing activities of $4.5
million for the first nine months of 1999. Financing activities in fiscal 2000
consisted primarily of $71.9 million from the sale of securities net of
underwriting fees and expenses offset by debt payments of $40.0 million and cash
payments of $23.7 million to our preferred shareholders upon conversion of their
preferred stock into common stock. Financing activities in fiscal 1999
consisted primarily of debt payments made under our term loan and revolving line
of credit. At October 1, 2000 we had a $25.0 million revolving line of credit,
of which nothing is currently outstanding. The line of credit expires on
October 31, 2004 and bears interest at the rate of LIBOR as of the date of
borrowing plus 1.25% to 1.75% dependent upon our meeting certain financial
ratios.
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 expenditures requirements through
2001. Changes in our operating plans, acceleration of our expansion plans, lower
than anticipated sales, increased expenses or other events may cause us to seek
additional financing sooner than anticipated. Additional financing may not be
available on acceptable terms, or at all. Failure to obtain additional financing
as needed could have a material adverse effect on our business and results of
operations.
Risk Factors
This document contains forward-looking statements concerning the Company,
which involve risks and uncertainties. Such forward-looking statements may be
deemed to include those regarding anticipated restaurant openings, anticipated
costs and sizes of future restaurants and the adequacy of anticipated sources of
cash to fund the Company's future capital requirements. The Company's actual
results may differ materially from those discussed in this document. Factors
that might cause actual events or results to differ materially from those
indicated by such forward-looking statements may include matters noted below in
this Form 10-Q, such as development and construction risks, potential labor
shortages, fluctuations in operating results, and changes in food costs. Words
such as "believes," "anticipates," "expects," "intends," "plans" and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements.
Our growth strategy requires us to open new restaurants at an accelerated pace.
We may not be able to achieve this planned expansion
11
We are pursuing an accelerated, but disciplined growth strategy which to be
successful depends on our ability, and the ability of our franchisees and
licensees, to open new restaurants and to operate these new restaurants on a
successful basis. The success of our planned expansion will be dependent upon
numerous factors, many of which are beyond our control, including the hiring,
training and retention of qualified operating personnel, especially managers,
identification and availability of suitable restaurant sites, competition for
restaurant sites, negotiation of favorable lease terms, timely development of
new restaurants, including the availability of construction materials and labor,
management of construction and development costs of new restaurants, securing
required governmental approvals and permits, competition in our markets; and
general economic conditions. If any of these risks actually occur, our
business, financial condition, operating results or cash flows could be
materially adversely affected.
Our success depends on our ability to locate a sufficient number of suitable new
restaurant sites.
One of our biggest challenges in meeting our growth objectives will be to
secure an adequate supply of suitable new restaurant sites. We have experienced
delays in opening some of our restaurants and may experience delays in the
future. There can be no assurance that we will be able to find sufficient
suitable locations for our planned expansion in any future period. Delays or
failures in opening new restaurants could materially adversely affect our
business, financial condition, operating results or cash flows.
We could face labor shortages which could slow our growth.
Our success depends in part upon our ability to attract, motivate and
retain a sufficient number of qualified employees, including restaurant
managers, kitchen staff and servers, necessary to keep pace with our expansion
schedule. Qualified individuals of the requisite caliber and number needed to
fill these positions are in short supply in some areas. Although we have not
experienced any significant problems in recruiting or retaining employees, any
future inability to recruit and retain sufficient individuals may delay the
planned openings of new restaurants. Any such delays or any material increases
in employee turnover rates in existing restaurants could have a material adverse
effect on our business, financial condition, operating results or cash flows.
Additionally, competition for qualified employees could require us to pay higher
wages to attract sufficient employees, which could result in higher labor costs.
Our expansion into new markets may present increased risks due to our
unfamiliarity with the area.
We anticipate that our new restaurants will typically take several months
to reach budgeted operating levels due to problems commonly associated with new
restaurants, including lack of market awareness, inability to hire sufficient
staff and other factors. Although we have attempted to mitigate these factors by
expanding primarily in markets in which we already have a significant presence
and by careful attention to training and staffing needs, there can be no
assurance that we will be successful in operating our new restaurants on a
profitable basis.
Our expansion may strain our infrastructure which could slow our restaurant
development.
We also face the risk that our existing systems and procedures, restaurant
management systems, financial controls, and information systems will be
inadequate to support our planned expansion. We cannot predict whether we will
be able to respond on a timely basis to all of the changing demands that our
planned expansion will impose on management and these systems and controls. If
we fail to continue to improve our information systems and financial controls or
to manage other factors necessary for us to achieve our expansion objectives,
our business, financial condition, operating results or cash flows could be
materially adversely affected.
Our restaurant expansion strategy focuses primarily on further penetrating
existing markets. This strategy can cause sales in some of our existing
restaurants to decline.
In accordance with our expansion strategy, we intend to open new
restaurants primarily in our existing markets. Since we typically draw customers
from a relatively small radius around each of our restaurants, the sales
performance and customer counts for restaurants near the area in which a new
restaurant opens may decline due to cannibalization.
Our planned expansion into retail distribution channels through the introduction
of our premium frozen pizzas could dilute the value of our brand.
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We have entered into a strategic alliance with Kraft Pizza Company to
distribute a line of premium frozen pizzas through supermarkets and other retail
outlets. Although sales of these frozen products in the geographic markets in
which they are currently available have been encouraging, we run the risk that
the availability of a frozen product could dilute the value of our brand to the
extent that consumers perceive our frozen products to be unappealing or of a
lower quality. In addition, use of these frozen products in alternative
distribution channels in which it is not readily apparent to consumers that they
are purchasing a formerly frozen product could also harm the value of our brand.
Our operations are susceptible to changes in food and supply costs which could
adversely affect our margins.
Our profitability depends, in part, on our ability to anticipate and react
to changes in food and supply costs. Our centralized purchasing staff negotiates
prices for all of our ingredients and supplies through either contracts (terms
of one month up to one year) or commodity pricing formulas. Our master
distributor delivers goods at a set, flat fee per case twice a week to all of
our restaurants. Our contract with our master distributor, Meadowbrook Meat
Company, Inc., expires in December 2000. Although we believe we will be able to
negotiate a similarly-priced contract with either our current master distributor
or another distributor, any increase in distribution prices could cause our food
and supply costs to increase. Furthermore, various factors beyond our control,
including adverse weather conditions and governmental regulations, could also
cause our food and supply costs to increase. We cannot predict whether we will
be able to anticipate and react to changing food and supply costs by adjusting
our purchasing practices. A failure to do so could adversely affect our
operating results and cash flows.
Changes in consumer preferences or discretionary consumer spending could
negatively impact our results.
Our restaurants feature pizzas, pastas, salads and appetizers in an
upscale, family-friendly, casual environment. Our continued success depends, in
part, upon the popularity of these foods and this style of informal dining.
Shifts in consumer preferences away from this cuisine or dining style could
materially adversely affect our future profitability. Also, our success depends
to a significant extent on numerous factors affecting discretionary consumer
spending, including economic conditions, disposable consumer income and consumer
confidence. Adverse changes in these factors could reduce customer traffic or
impose practical limits on pricing, either of which could materially adversely
affect our business, financial condition, operating results or cash flows. Like
other restaurant chains, we can also be materially adversely affected by
negative publicity concerning food quality, illness, injury, publication of
government or industry findings concerning food products served by us, or other
health concerns or operating issues stemming from one restaurant or a limited
number of restaurants.
Forty-two percent of our restaurants are located in California. As a result, we
are highly sensitive to negative occurrences in that state.
We and our franchisees currently operate a total of 46 restaurants in
California, of which 36 are concentrated in the greater Los Angeles and San
Diego metropolitan areas. As a result, we are particularly susceptible to
adverse trends and economic conditions in California. In addition, given our
geographic concentration, negative publicity regarding any of our restaurants in
California could have a material adverse effect on our business and operations,
as could other regional occurrences such as local strikes, earthquakes or other
natural disasters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk exposures are related to our cash, cash equivalents and
investments. We invest our excess cash in highly liquid short-term investments
with maturities of less than one year. These investments are not held for
trading or other speculative purposes. Changes in interest rates affect the
investment income we earn on our investments and, therefore, impact our cash
flows and results of operations.
In addition, we have a $25.0 million line of credit agreement with Bank of
America, N.A. Interest on the line is calculated on either a bank reference
rate plus 0.75% or on an adjusted LIBOR plus 1.25 to 1.75% per annum. Currently,
there is no outstanding balance under this agreement. Should we draw on this
line in the future, changes in interest rates would affect the interest expense
on these loans and, therefore, impact our cash flows and results of operations.
Many of the food products purchased by us are affected by changes in
weather, production, availability, seasonality and other factors outside our
control. In an effort to control some of this risk, we have entered into some
fixed price purchase commitments with terms of less than a year. In addition, we
believe that almost all of our food and supplies are available from several
sources, which helps to control food commodity risks.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are one of the defendants to a lawsuit filed on March 11, 1998 in the
152nd Judicial District Court of Harris County, Texas, brought by The Chair
King, Inc., as the named plaintiff in a class action suit under the Telephone
Consumer Protection Act of 1991. This lawsuit alleges that we sent 8,200 faxes
in violation of the federal act that requires the recipient's consent prior to
sending an unsolicited fax. The federal act provides for minimum damages of $500
per fax received by a plaintiff with the possibility for an additional $1,000
per fax if the plaintiff can prove that the defendant knowingly violated the
law. Although not currently so certified, if the plaintiff is able to achieve
class certification, we could potentially be liable for significant amounts,
including the amounts claimed by plaintiff of $4.1 million in regular damages,
and $8.2 million in additional damages. We currently believe we will prevail on
this claim because the plaintiffs have been unable thus far to produce evidence
that any faxes were actually sent by us or on our behalf, or that the agent that
we employed to send the faxes did so without obtaining the necessary consents.
We filed for and successfully obtained summary judgment in this matter on March
7, 2000. The plaintiffs subsequently filed for appeal to the Texas appeals
courts. On August 31, 2000, the presiding judge ordered the lawsuit to
mediation, which is expected to occur in December 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) We registered and sold 5,300,000 shares of our common stock, par value
$0.01, to the public at an aggregate offering price of $79,500,000 or
$15.00 a share pursuant to registration statement No. 333-37778, which was
declared effective on August 1, 2000 (the "Offering"). The Offering has
terminated. The lead underwriters of the Offering were Banc of America
Securities LLC, Deutsche Bank Securities Inc., and FleetBoston Robertson
Stephens Inc.
Through October 1, 2000, we incurred the following expenses in connection
with the Offering:
Underwriting discounts and commissions......................................................... $5,565,000
Other expenses (accounting, legal, printing, etc.)............................................. 2,059,000
----------
Total expenses.................................................................. $7,624,000
==========
The net offering proceeds to us through October 1, 2000 after deducting the
total expenses above were $71,876,000.
Our use of proceeds through October 1, 2000 conformed to the
intended use of proceeds described in the prospectus related to the
Offering. Our intended use of proceeds as stated in the prospectus was for
the repayment of outstanding bank debt, redemption of preferred stock and
general corporate purposes. Through October 1, 2000, we used $40.0 million
from the proceeds to repay the entire outstanding bank debt and $23.7
million from the proceeds to redeem all of our outstanding preferred stock.
We intend to use the remainder of the proceeds for the development of
additional restaurants, working capital requirements and general corporate
purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
ITEM 5. OTHER MATTERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports on form 8-K
No reports on Form 8-K were filed by the Registrant during
the three months ended October 1, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto dully authorized.
Dated: November 13, 2000 CALIFORNIA PIZZA KITCHEN, INC.
H.G. CARRINGTON JR.
-------------------------------------
H.G. Carrington Jr
Executive Vice President and Chief
Financial Officer
GREGORY S. LEVIN.
-------------------------------------
Gregory S. Levin
Vice President, Controller and Chief
Accounting Officer
15