SEC Company Response from CALIFORNIA PIZZA KITCHEN INC (CIK 0000789356) — Jul 14, 2005
CALIFORNIA PIZZA KITCHEN INC (CIK 0000789356)
Date: July 14, 2005 · CIK: 0000789356 · Accession: 0001193125-05-142121
AI Filing Summary & Sentiment
File numbers found in text: 000-31149
Referenced dates: June 30, 2005
Letter
Securities and Exchange Commission Attention: David R. Humphrey Form 10-K for the year ended January 2, 2005 Filed April 4, 2005 File No. 000-31149
Re: California Pizza Kitchen, Inc. (the “Company”)
Dear Mr. Humphrey:
Thank you for your letter dated June 30, 2005 on behalf of the Securities and Exchange Commission. We are submitting the Company’s responses to your comments with respect to the document referred to above. We have referenced our responses to correspond with the numbers assigned to the comments in your letter. As we discussed, all of the changes noted below will be reflected in future filings by the Company and we will not be amending our Form 10-K for the year ended January 2, 2005.
Item 1. Business
Unit Level Economics, Page 7
1. We note your presentation of restaurant level operating margin percentages within your discussion of unit level economics. Please revise this discussion, as appropriate after you consider the following comment regarding the presentation of non-GAAP financial measures.
In response to the SEC’s comment, we will amend our discussion of unit level economics in future filings to reflect the same data contained in our revised presentation in Management’s Discussion and Analysis as described in the response below.
Management’s Discussion and Analysis
Results of Operations, Page 23
2. In light of the issuance of FR-65, and the related guidance made available by the Division of Corporate Finance on June 13, 2003, we believe you should discontinue your presentations of operating margins and restaurant operating margin percentages. In this regard, our principle objection is to the exclusion of general and administrative expenses. Since the volume and timing of newly opened restaurants can have a material impact on your results of operations, the general and administrative costs that support existing operations and provide infrastructure to facilitate growth should be included in any measure of profitability of performance.
Thank you for your helpful comment. We will amend our presentation in future filings to be in line with the attached Appendix 1 which contains reformatted first quarter information and is presented for your consideration as a sample for illustrative purposes.
We would, however, like to additionally respond to this comment by explaining the genesis of this presentation and the rationale for providing this supplementary information in our desire for increased transparency.
In July 2003, the Board of Directors appointed the Company’s co-founders as co-Chief Executive Officers (co-CEOs). This management change resulted in the co-CEOs conducting a thorough “due diligence review” of senior level management, product initiatives, the Company’s real estate pipeline and store level profitability metrics. During this review, the investment community began to inappropriately draw conclusions regarding the notion that perhaps California Pizza Kitchen, as a concept, was “broken.” The investment community questioned management’s ability to achieve the goals set out by the Board of Directors. In December 2003, the due diligence review was complete. Management identified the key factors that led to a “deleveraging” of net income, all of which related almost entirely to the real estate pipeline and, specifically, the 40 restaurants built during fiscal 2002 and 2003. To best communicate this to the investment community, management determined the most effective method of highlighting the disparity between the new stores built in 2002-2003, and our core group of restaurants built prior to 2002, was to breakout the results by what we call “classes.” Each class reflects the year in which a restaurant opened. This increased disclosure was met with great enthusiasm and appreciation and we have been consistently applauded by the investment community for this increased transparency from the very first earnings release outlining class data in January 2004, to recent conversations with the investment community.
In response to your objection of not considering general and administrative expenses when discussing restaurant costs, we are respectful of your comments. However, we feel strongly that while allocating general and administrative expenses could be done based on a percent of sales, it would not be as meaningful to investors. In Appendix 1, we are renaming this supplemental data cost of sales and then showing cost of sales as a percentage of sales which we believe would achieve the same transparency goal that the investment community finds so helpful, i.e., a focus on key restaurant level performance indicators to evaluate progress of the new management team. We believe this disclosure complies with FR-65 as it does not rely on non-GAAP measures.
Additionally, the total of the cost of sales for each class will reconcile to the total cost of sales line item on our Consolidated Statement of Income. We also believe this presentation conforms with SFAS No. 131 – Disclosures about Segments of an Enterprise and Related Information, as this information is “evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.”
Consolidated Financial Statements
Consolidated Statements of Income, Page 40
3. Please consider the propriety of presenting “total restaurant operating costs” in light of the fact that your general and administrative costs support your restaurant operations. Also, pre-opening expenses and store closure costs as well as the legal settlement reserve recorded in your most recent fiscal year, are all related to your restaurant operations.
In line with the comments above and Appendix 1, we will rename the “total restaurant operating costs” line item as “cost of sales” in future filings. Please see Appendix 2 for a sample of our revised presentation format for our Consolidated Statement of Income. The elements of cost of sales include food, beverage and paper supplies (previously referred to as cost of sales), labor and direct operating and occupancy costs. We believe this better reflects the elements under store level control and is in line with GAAP. Appendix 2 also reflects general and administrative, depreciation, pre-opening expenses and other expenses that total to “total costs and expenses.”
In conclusion, we understand that:
•
the Company is responsible for the adequacy and accuracy of the disclosure in our filings with the Securities and Exchange Commission; and,
•
the staff’s comments or changes to disclosure in response to the staff’s comments do not foreclose the Commission from taking any action with respect to the filing; and,
•
the Company may not assert staff’s comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
We appreciate your courtesy and cooperation and should you have any questions, please contact me by telephone at (310) 342-4620.
Sincerely,
/s/ Susan M. Collyns
Show Raw Text
CORRESP
1
filename1.htm
SEC Response Letter
July 13, 2005
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Attention: David R. Humphrey
Accounting Branch Chief
Re: California Pizza Kitchen, Inc. (the “Company”)
Form 10-K for the year ended January 2, 2005
Filed April 4, 2005
File No. 000-31149
Dear Mr. Humphrey:
Thank you for your letter dated June 30, 2005 on behalf of the Securities and Exchange
Commission. We are submitting the Company’s responses to your comments with respect to the document referred to above. We have referenced our responses to correspond with the numbers assigned to the comments in your letter. As we discussed, all
of the changes noted below will be reflected in future filings by the Company and we will not be amending our Form 10-K for the year ended January 2, 2005.
Item 1. Business
Unit Level Economics, Page 7
1.
We note your presentation of restaurant level operating margin percentages within your discussion of unit level economics. Please revise this discussion, as appropriate after you
consider the following comment regarding the presentation of non-GAAP financial measures.
In response to the SEC’s comment, we will amend our discussion of unit level economics in future filings to reflect the same data contained in our revised presentation in Management’s Discussion and Analysis
as described in the response below.
Management’s
Discussion and Analysis
Results of Operations, Page 23
2.
In light of the issuance of FR-65, and the related guidance made available by the Division of Corporate Finance on June 13, 2003, we believe you should discontinue your
presentations of operating margins and restaurant operating margin percentages. In this regard, our principle objection is to the exclusion of general and administrative expenses. Since the volume and timing of newly opened restaurants can have a
material impact on your results of operations, the general and administrative costs that support existing operations and provide infrastructure to facilitate growth should be included in any measure of profitability of performance.
Thank you for your helpful comment. We will amend our presentation in future filings to be in line with the attached
Appendix 1 which contains reformatted first quarter information and is presented for your consideration as a sample for illustrative purposes.
We would, however, like to additionally respond to this comment by explaining the genesis of this presentation and the rationale for providing this supplementary
information in our desire for increased transparency.
In July 2003, the Board
of Directors appointed the Company’s co-founders as co-Chief Executive Officers (co-CEOs). This management change resulted in the co-CEOs conducting a thorough “due diligence review” of senior level management, product initiatives,
the Company’s real estate pipeline and store level profitability metrics. During this review, the investment community began to inappropriately draw conclusions regarding the notion that perhaps California Pizza Kitchen, as a concept, was
“broken.” The investment community questioned management’s ability to achieve the goals set out by the Board of Directors. In December 2003, the due diligence review was complete. Management identified the key factors that led to a
“deleveraging” of net income, all of which related almost entirely to the real estate pipeline and, specifically, the 40 restaurants built during fiscal 2002 and 2003. To best communicate this to the investment community, management
determined the most effective method of highlighting the disparity between the new stores built in 2002-2003, and our core group of restaurants built prior to 2002, was to breakout the results by what we call “classes.” Each class reflects
the year in which a restaurant opened. This increased disclosure was met with great enthusiasm and appreciation and we have been consistently applauded by the investment community for this increased transparency from the very first earnings release
outlining class data in January 2004, to recent conversations with the investment community.
In response to your objection of not considering general and administrative expenses when discussing restaurant costs, we are respectful of your comments. However, we feel strongly that while allocating general and
administrative expenses could be done based on a percent of sales, it would not be as meaningful to investors. In Appendix 1, we are renaming this supplemental data cost of sales and then showing cost of sales as a percentage of sales which we
believe would achieve the same transparency goal that the investment community finds so helpful, i.e., a focus on key restaurant level performance indicators to evaluate progress of the new management team. We believe this disclosure complies with
FR-65 as it does not rely on non-GAAP measures.
Additionally, the total of the
cost of sales for each class will reconcile to the total cost of sales line item on our Consolidated Statement of Income. We also believe this presentation conforms with SFAS No. 131 – Disclosures about Segments of an Enterprise and Related
Information, as this information is “evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.”
2
Consolidated Financial Statements
Consolidated Statements of Income, Page 40
3.
Please consider the propriety of presenting “total restaurant operating costs” in light of the fact that your general and administrative costs support your restaurant
operations. Also, pre-opening expenses and store closure costs as well as the legal settlement reserve recorded in your most recent fiscal year, are all related to your restaurant operations.
In line with the comments above and Appendix 1, we will rename the “total restaurant
operating costs” line item as “cost of sales” in future filings. Please see Appendix 2 for a sample of our revised presentation format for our Consolidated Statement of Income. The elements of cost of sales include food, beverage and
paper supplies (previously referred to as cost of sales), labor and direct operating and occupancy costs. We believe this better reflects the elements under store level control and is in line with GAAP. Appendix 2 also reflects general and
administrative, depreciation, pre-opening expenses and other expenses that total to “total costs and expenses.”
In conclusion, we understand that:
•
the Company is responsible for the adequacy and accuracy of the disclosure in our filings with the Securities and Exchange Commission; and,
•
the staff’s comments or changes to disclosure in response to the staff’s comments do not foreclose the Commission from taking any action with respect to the filing; and,
•
the Company may not assert staff’s comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
We appreciate your courtesy and cooperation and should you have
any questions, please contact me by telephone at (310) 342-4620.
Sincerely,
/s/ Susan M. Collyns
Chief Financial Officer
California Pizza Kitchen, Inc.
3
APPENDIX 1
California Pizza Kitchen, Inc.
Supplemental
Information
# of Stores
Weekly Sales
Average
(,000)
Restaurant Sales
(,000)
Cost of Sales (1)
Cost of Sales
as a Percentage
of Sales
Pre-2002
Q1, 2005
94
65,872
79,789
64,071
80.3
%
Q1, 2004 (restated)
94
60,413
73,825
58,839
79.7
%
Year over year change
9.0
%
8.1
%
8.9
%
60
bps
Class of 2002
Q1, 2005
18
51,582
12,070
10,139
84.0
%
Q1, 2004 (restated)
18
46,584
10,901
9,386
86.1
%
Year over year change
10.7
%
10.7
%
8.0
%
(210
)bps
Class of 2003
Q1, 2005
20
40,909
10,636
9,487
89.2
%
Q1, 2004 (restated)
22
38,851
11,111
10,233
92.1
%
Year over year change
5.3
%
-4.3
%
-7.3
%
(290
)bps
Class of 2004
Q1, 2005
4
52,408
2,725
2,472
90.7
%
Q1, 2004 (restated)
1
50,574
657
548
83.4
%
Year over year change
3.6
%
314.8
%
351.1
%
730
bps
Class of 2005
Q1, 2005
5
88,865
2,768
2,569
92.8
%
ASAPS
Q1, 2005
4
27,479
1,429
1,325
92.7
%
Q1, 2004 (restated)
4
24,213
1,259
1,188
94.4
%
Year over year change
13.5
%
13.5
%
11.5
%
(170
)bps
Total restaurants
Q1, 2005
145
59,452
109,418
90,048
82.3
%
Q1, 2004 (restated)
139
54,097
97,753
80,157
82.0
%
Year over year change
9.9
%
11.9
%
12.3
%
30
bps
(1)
Cost of sales includes food, beverage & paper supplies, labor, and direct operating and occupany costs
4
APPENDIX 2
Selected Unaudited Consolidated Financial and Operating Data
(Dollars in thousands, except for per share and operating data)
Three Months Ended
April 3,
2005
March 28,
2004
(restated)
Revenues:
Restaurant sales
$
109,418
$
97,753
Franchise and other revenues
900
877
Total revenues
110,318
98,630
Costs and expenses:
Food, beverage and paper supplies
26,957
23,986
Labor
41,115
36,462
Direct operating and occupancy
21,976
19,755
Cost of sales
90,048
80,203
General and administrative
7,509
6,724
Depreciation and amortization
5,552
5,464
Pre-opening costs
1,101
64
Loss on impairment of property and equipment
26
—
Total costs and expenses
104,236
92,455
Operating income
6,082
6,175
Other income (expense):
Interest income
195
—
Equity in net loss of unconsolidated joint venture
(21
)
59
Total other income
174
59
Income before income tax provision
6,256
6,234
Income tax provision
1,985
4,216
Net income
$
4,271
$
2,018
Net income per common share:
Basic
$
0.22
$
0.11
Diluted
$
0.22
$
0.11
Weighted average shares used in calculating net income per common share:
Basic
19,280
18,993
Diluted
19,596
19,081
5