UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Quarter Ended December 23, 1997
[ ] 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 0-13007
NPC INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Kansas 48-0817298
(State of Incorporation) (IRS Employer Identification Number)
720 W. 20th Street, Pittsburg, KS 66762
(Address of principal executive offices)
Registrant's telephone number, including area code (316) 231-3390
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 [ ]
The number of shares outstanding of the registrant's class of common stock as of
January 20, 1998:
Common Stock, $0.01 par value - 24,734,459
NPC INTERNATIONAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets --
December 23, 1997 and March 25, 1997 3
Consolidated Statements of Income --
For the Thirteen and Thirty-Nine Weeks Ended
December 23, 1997 and December 24, 1996 4
Condensed Consolidated Statements of Cash Flows --
For the Thirty-Nine Weeks Ended
December 23, 1997 and December 24, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION 16
PART I - FINANCIAL INFORMATION
NPC International, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, dollars in thousands, except share data)
Dec. 23, 1997 March 25, 1997
ASSETS
Current assets:
Cash and cash equivalents $ 4,289 $ --
Accounts Receivable 1,936 1,535
Inventories of food and supplies 5,187 2,577
Income tax receivable 714 1,737
Other current assets 6,409 6,711
Total current assets 18,535 12,560
Facilities and equipment, net 144,369 126,461
Franchise rights, net 201,772 92,318
Goodwill 17,581 18,228
Other assets 9,522 10,340
TOTAL ASSETS $ 391,779 $ 259,907
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 20,460 $ 11,624
Payroll taxes 2,140 1,815
Accrued interest 2,346 1,997
Accrued payroll 8,482 4,412
Insurance reserves 6,437 3,724
Other current liabilities 11,697 5,584
Total current liabilities 51,562 29,156
Long-term debt 210,233 116,777
Other deferred items 19,823 18,181
Stockholders' Equity:
Common stock, $.01 par value
100,000,000 shares authorized,
27,592,510 issued 276 276
Paid-in capital 21,033 20,978
Retained earnings 108,352 94,827
129,661 116,081
Less treasury stock at cost, representing
2,859,238 and 2,957,307 shares,
respectively (19,500) (20,288)
Total stockholders' equity 110,161 95,793
TOTAL LIABILITIES AND EQUITY $ 391,779 $ 259,907
See notes to Condensed Consolidated Financial Statements
NPC International, Inc.
Consolidated Statements Of Income
(Unaudited, dollars in thousands, except share data)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
Dec. 23, 1997 Dec. 24, 1996 Dec. 23, 1997 Dec. 24, 1996
Net Sales $ 110,921 $ 72,065 $ 324,586 $ 209,893
Net franchise
revenue 2,005 2,158 6,151 6,326
Total revenue 112,926 74,223 330,737 216,219
Cost of sales 31,884 20,886 90,862 59,242
Direct labor 32,530 20,681 94,374 58,968
Other 30,869 19,281 88,465 55,324
Total operating
expenses 95,283 60,848 273,701 173,534
Income from restaurant
operations 17,643 13,375 57,036 42,685
General and
administrative
expenses 6,030 4,367 17,058 13,022
Depreciation and
amortization 2,927 1,716 8,352 4,436
Operating income 8,686 7,292 31,626 25,227
Other income (expense):
Interest expense (4,198) (1,356) (11,264) (3,797)
Other 215 88 445 120
Income before
income taxes 4,703 6,024 20,807 21,550
Provision for
income taxes 1,645 2,346 7,282 8,404
Net income $ 3,058 $ 3,678 $ 13,525 $ 13,146
Earning per
share - Basic $ .12 $ .15 $ .55 $ .53
Earnings per
share - Diluted $ .12 $ .15 $ .54 $ .53
Weighted average
shares outstanding
Basic 24,720,901 24,656,566 24,678,486 24,654,997
Weighted average
shares outstanding
Diluted 25,222,153 24,835,167 25,108,931 24,870,544
See notes to Condensed Consolidated Financial Statements
NPC International, Inc.
Condensed Consolidated Statements Of Cash Flows
(Unaudited, dollars in thousands)
Thirty-Nine Weeks Ended
Dec. 23, 1997 Dec. 24, 1996
Cash Flows Provided By Operating Activities:
Net income $ 13,525 $ 13,146
Depreciation and amortization 19,132 12,245
Amortization of start-up costs 2,006 1,271
Change in assets and liabilities,
net of acquisitions 17,924 6,267
Net cash flows provided by operating
activities 52,587 32,929
Cash Flows Used In Investing Activities:
Capital expenditures (21,842) (32,287)
Acquisition of business assets,
net of cash (121,849) (28,062)
Proceeds from sale of capital assets 2,233 7,600
Changes in other assets, net (679) 595
Net cash flows used in
investing activities (142,137) (52,154)
Cash Flows Provided By Financing Activities:
Net change in revolving credit agreements 54,684 29,470
Proceeds from issuance of long-term debt 49,756 --
Payment of long-term debt (11,444) (9,711)
Exercise of stock options 843 1,325
Purchase of treasury stock -- (904)
Net cash flows provided by
financing activities 93,839 20,180
Net Change In Cash And Cash Equivalents 4,289 955
Cash And Cash Equivalents At
Beginning Of Period -- 1,584
Cash And Cash Equivalents At
End Of Period $ 4,289 $ 2,539
See notes to Condensed Consolidated Financial Statements
NPC International, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1- Basis Of Presentation
The financial statements include the accounts of NPC International, Inc. and
its wholly owned subsidiaries (the Company). All significant intercompany
balances and transactions were eliminated.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X promulgated by the Securities and Exchange Commission. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for annual financial statement reporting
purposes. These statements should be read in conjunction with the financial
statements and notes contained in the Company's annual report on Form 10-K for
the fiscal year ended March 25, 1997.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of the Company as of December 23, 1997
and March 25, 1997, the results of operations for the thirteen and thirty-nine
weeks ended December 23, 1997 and December 24, 1996 and cash flows for the
thirty-nine weeks ended December 23, 1997 and December 24, 1996. Results for
the interim periods are not necessarily indicative of the results that may be
expected for the entire fiscal year.
Certain reclassifications have been made to the prior year statements to
conform with the current year presentation.
Note 2 - Cash Flows
There were net cash payments for income taxes of $6,284,000 and $1,740,000 in
the thirty-nine weeks ended December 23, 1997 and December 24, 1996,
respectively. Cash paid for interest for the thirty-nine weeks ended December
23, 1997 and December 24, 1996 was $11,073,000 and $4,814,000, respectively.
Note 3 - Acquisitions
On October 31, 1996, the Company acquired 31 units in North Carolina from R&W
Pizza Huts of North Carolina, Inc. for $27.5 million. Annual sales volume for
the year prior to acquisition was approximately $24 million.
On March 6, 1997, the Company closed on Phase I of a 126 unit acquisition from
Pizza Hut, Inc. (PHI). Phase I consisted of 60 units with a purchase price of
$27.3 million. On March 27, 1997, the Company closed on Phase II of the PHI
acquisition consisting of 62 units with a purchase price of $28.1 million.
Simultaneous with the Phase II closing, the Company assumed operational
responsibility for four units which have been reflected in the Company's
financial statements as if owned. These four units were acquired on September
2, 1997, for $1.1 million. For the year ended December 31, 1996, annual sales
volume for the 126 PHI units was approximately $73 million.
On April 15, 1997, the Company entered into a letter of intent with PHI to
acquire 52 units in North Dakota, South Dakota and Minnesota for $31 million.
This transaction closed June 5, 1997, except for one unit in Minnesota. The
acquisition of the remaining unit occurred July 10, 1997. For the year ended
December 31, 1996, annual sales volume for the 52 PHI units was approximately
$34 million.
On April 23, 1997, the Company entered into a letter of intent with Jamie B.
Coulter (Coulter) to purchase 100 units in 11 states which generated
approximately $60 million in sales during the year ended December 31, 1996 for
$57 million. This transaction closed May 15, 1997, except for 18 units in North
Carolina, which were being managed until acquired subject to resolution of
certain contingencies. The results of these managed units are reflected in the
financial statements as if owned. The Company acquired 10 of the North Carolina
units on July 16, 1997, four more on August 19, 1997 and on October 2, 1997 the
Company closed on the remaining four units.
The following unaudited pro forma results for the thirteen and thirty-nine weeks
ended December 23, 1997, and December 24, 1996, were developed assuming that all
of the acquired units previously described had been acquired at the beginning of
the respective periods. The unaudited pro forma data shown below is not
necessarily indicative of the consolidated results that would have occurred had
the acquisitions taken place at the beginning of the respective periods nor are
they necessarily indicative of results that may occur in the future.
Pro Forma Results (unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
(Dollars in thousands except per share data)
Dec. 23, 1997 Dec. 24, 1996 Dec. 23, 1997 Dec. 24, 1996
Total revenue $ 112,926 $ 117,329 $ 345,357 $ 355,728
Net income 3,058 3,311 14,116 13,105
Net income
per share - Basic .12 .13 .57 .53
Net income
per share - Diluted .12 .13 .56 .53
Note 4 - Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per share.
All earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted earnings
per share:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
Dec. 23, 1997 Dec. 24, 1996 Dec. 23, 1997 Dec. 24, 1996
Numerator:
Net Income $ 3,058,000 $ 3,678,000 $13,525,000 $13,146,000
Denominator:
Denominator for
basic earnings per
share - weighted
average shares 24,720,901 24,656,566 24,678,486 24,654,997
Effect of dilutive securities:
Employee
stock options 501,252 178,601 430,445 215,547
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed
conversions 25,222,153 24,835,167 25,108,931 24,870,544
Earnings per share
Basic $ .12 $ .15 $ .55 $ .53
Earnings per share
Dilutive $ .12 $ .15 $ .54 $ .53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction
with the Notes to Consolidated Financial Statement included in this Form 10-Q
and the audited financial statements and notes thereto together with
Management's Discussion and Analysis of Financial Condition and Results of
Operations incorporated by reference in the Company's Annual Report on Form 10-
K for the year ended March 25, 1997.
Overview - The Company is the largest Pizza Hut franchisee in the world. The
Company, through it's wholly owned subsidiary Romacorp, Inc., is also the
owner/franchisor of Tony Roma's, the casual theme restaurant "Famous for Ribs",
which was acquired in June 1993.
Products - Pizza Hut's main product is high quality, innovative and moderately
priced pizza. Additionally, the menu contains pasta, sandwiches, salad bar and
a luncheon buffet.
Tony Roma's is a casual theme restaurant that is "Famous for Ribs". The
restaurant's signature products are baby back ribs with a mild tangy sauce and
deep fried onion loaves. The menu also includes spare ribs with three
additional sauce varieties, chicken, seafood, soups, salads, appetizers, a
children's menu and dessert.
Both of the Company's concepts serve beer and/or other alcoholic beverages.
These products are not a significant portion of the sales mix at Pizza Hut, but
they comprise approximately 12% of sales for Tony Roma's.
Service - Pizza Hut provides a buffet with table service for beverages during
lunch and full table service for dinner, with delivery and carry-out available
throughout the day. Tony Roma's offers a fully staffed dining experience
throughout the day and evening.
Period of Operation - The Company operates on a 52 or 53 week fiscal year
ending the last Tuesday in March. The fiscal year ending March 31, 1998, will
contain 53 weeks and the fourth quarter will contain 14 weeks.
Development
Activity with respect to unit count during the quarter is set forth in the
table below:
SYSTEM UNIT ACTIVITY
1998 THIRD QUARTER
Beginning Developed(4) Acquired Closed(4)Sold Ending
Company Owned
Pizza Hut (1)
Restaurant 541 1 -- (2) -- 540
Delivery 147 -- -- (3) -- 144
Total
Pizza Hut 688 1 -- (5) -- 684
Tony Roma's(2) 44 1 -- -- -- 45
Total
Company
Owned 732 2 -- (5) -- 729
Franchised
Tony Roma's 144 1 -- -- -- 145
Total System 876 3 -- (5) -- 874
1998 YEAR-TO-DATE
Beginning Developed (3) Acquired Closed(3) Sold Ending
Company Owned
Pizza Hut (1)
Restaurant 360 7 181 (8) -- 540
Delivery 113 -- 41 (10) -- 144
Total
Pizza Hut 473 7 222 (18) -- 684
Tony Roma's(2)40 5 -- -- -- 45
Total
Company
Owned 513 12 222 (18) -- 729
Franchised
Tony Roma's 140 8 -- (3) -- 145
Total System 653 20 222 (21) -- 874
(1) Includes 2 restaurants being operated by NPC under management agreements.
(2) Excludes 2 units operated as joint ventures by the Company.
(3) Excludes 1 Tony Roma's replacement unit, and 3 Pizza Hut replacement units.
(4) Excludes 1 Pizza Hut replacement unit.
During the quarter the Company acquired four units previously being operated
under a management agreement. (See Note 3 of the Notes to Condensed
Consolidated Financial Statements) The acquisition of units formerly operated
under management agreements are not reflected in the tables of system unit
activity. These units have been reflected in the Company's financial
statements and in the tables above as if owned since March 27, 1997, and May
15, 1997, for the units acquired from PHI and Coulter, respectively.
During the thirty-nine weeks ended December 23, 1997, a total of 222 Pizza Hut
units or operations were acquired. The year-to-date total includes 118 units
purchased from PHI, 100 units purchased from franchisee Jamie B. Coulter, and
four units purchased from another franchisee. (See Note 3 of the Notes to
Condensed Consolidated Financial Statements for additional information on the
acquisitions.)
For the current year-to-date, seven Pizza Hut units were developed and four
replacement stores opened.
The Company closed 18 Pizza Hut units during the thirty-nine weeks ended
December 23, 1997, excluding three relocated units.
The Company has opened five new Tony Roma units, excluding one replacement
unit, during the thirty-nine weeks ended December 23, 1997. The Company
anticipates opening one additional company operated unit by fiscal year-end for
a total of six new company units, excluding the one replacement unit.
One Tony Roma international franchise unit opened during the quarter ended
December 23, 1997. For the current year-to-date four international units and
four domestic units have opened. Also during the current year-to-date, two
domestic and one international unit has been closed.
Results of Operations - Set forth at the beginning of the section discussing
the results of operations for each concept operated by the Company is a table
of revenue and operating expenses expressed as a percent of revenue, or sales
as indicated, for the thirteen and thirty-nine weeks ended December 23, 1997
and December 24, 1996. Cost of sales includes the cost of food and beverage
products sold. Direct labor represents the salary and related fringe benefit
costs associated with restaurant based personnel. Other operating expenses
include royalties (Pizza Hut only), rent, depreciation, advertising, utilities,
supplies and insurance among other costs directly associated with operating a
restaurant facility.
PIZZA HUT OPERATIONS
(Unaudited)
(dollars in thousands)
Thirteen Weeks EndedThirty-Nine Weeks Ended
Dec. 23, 1997 Dec. 24, 1996 Dec. 23, 1997 Dec. 24, 1996
Revenue:
Restaurant Sales $ 72,696 $ 42,818 $ 210,824 $ 124,141
Delivery Sales 17,857 12,086 52,648 36,782
Total Revenue $ 90,553 $ 54,904 $ 263,472 $ 160,923
Restaurant Operating Expenses
as a Percentage of Revenue:
Total Expenses: (1)
Cost of Sales 27.4% 27.4% 26.7% 26.5%
Direct Labor 28.9% 27.7% 28.5% 27.1%
Other 28.3% 27.2% 27.8% 26.9%
Total
Operating
Expenses 84.6% 82.3% 83.0% 80.5%
Restaurant
Based Income 15.4% 17.7% 17.0% 19.5%
Restaurant Expenses: (2)
Cost of Sales 27.4% 27.7% 26.8% 26.7%
Direct Labor 27.7% 26.5% 27.3% 25.8%
Other 29.0% 27.7% 28.3% 27.3%
Total
Operating
Expense 84.1% 81.9% 82.4% 79.8%
Restaurant
Based Income 15.9% 18.1% 17.6% 20.2%
Delivery Expenses: (3)
Cost of Sales 27.0% 26.3% 26.5% 25.7%
Direct Labor 34.0% 31.9% 33.3% 31.5%
Other 25.5% 25.4% 25.6% 25.6%
Total
Operating
Expenses 86.5% 83.6% 85.4% 82.8%
Restaurant
Based Income 13.5% 16.4% 14.6% 17.2%
(1) As a percent of total revenue
(2) As a percent of restaurant sales
(3) As a percent of delivery sales
Comparison of Pizza Hut Operating Results for the Thirteen and
Thirty-Nine Weeks Ended December 23, 1997 and December 24, 1996
Net revenue from Pizza Hut operations was $90.6 million during the quarter, for
an increase of 64.9% or $35.6 million over the same period of the prior year.
Year-to-date net revenue was $263.5 million, for an increase of 63.7% or $138.2
million over the same period of the prior year. The increase in quarterly and
year-to-date net revenue was due to revenue contributed from stores acquired
since the comparable periods of the prior year. (See Note 3 of the Notes to
Condensed Consolidated Financial Statements for additional information on the
acquisitions.) Comparable sales for the quarter, although negative, improved
from the negative 7.2% reported in the second quarter to negative 5.6%. On a
year-to-date basis comparable sales have declined 7.5%. During the quarter,
comparable sales declined by 9.3% during the Company's October period as the
Pizza Hut system reserved a majority of it's advertising spending to support
the October 26th launch of "The Edge". Since the introduction of "The Edge"
pizza comparable sales improved to negative 3.6% and negative 3.5% in the
Company's November and December periods. The majority of this improvement was
realized in the Company's delivery business where comparable sales improved
from negative 11.9% in October to negative 1.8% and negative 1.1% in November
and December, respectively. Comparable sales are calculated for stores
operated by the Company for greater than twelve months.
Earnings for the quarter were adversely impacted by lower margins on "The Edge"
pizza, increased commodity costs, implementation of the Company's delivery
dominance program, and launch costs associated with "The Edge". "The Edge" is
a lower margin product due to its introductory price point of $8.99 for a
medium and $11.99 for a large combined with a more abundant topping
specification. Introductory pricing on "The Edge" was discontinued in late
January. "The Edge" accounted for 15.7% of the Company's Pizza Hut sales since
its introduction. The Company expects to experience some continued margin
pressure in the fourth quarter of fiscal 1998 as comparable sales in the Pizza
Hut division have been mixed but remain modestly negative during the initial
weeks of January. Although Pizza Hut meat ingredient costs have declined as
expected, the cheese market has not experienced the previously anticipated
seasonal decline. Accordingly, cheese costs are expected to be higher in the
fourth quarter than the cost experienced in the third quarter. (See Effects of
Inflation and Other Matters for additional information on cheese costs.)
Cost of sales as a percent of revenue for the quarter was flat compared to the
same period of the prior year when the Company experienced unusually high
cheese costs. Cheese prices for the quarter declined 14.3% from the same
period of the prior year which partially offset the increased costs associated
with the more abundant topping specifications introduced May 1, 1997, when
Pizza Hut launched its "Totally New Pizza" campaign. Effective with the
introduction, all pizzas made by Pizza Hut feature larger, more abundant
toppings including meatier meats and fresh vegetables. Cost of sales as a
percent of revenue for the third quarter of this fiscal year was 100 basis
points higher than the second quarter as a result of the impact of reduced
margins from "The Edge" combined with increases in ingredient commodity costs
during the quarter. On a year-to-date basis, cost of sales increased from
26.5% in the prior year to 26.7% this year. This increase was attributable to
increased food costs associated with the new pizza. However, this increase was
largely offset by the decline in cheese prices from a year ago which were 15.7%
lower than the comparable period of the prior year. (See Effects of Inflation
and Other Matters for additional information on cheese costs.)
Direct labor for the quarter and year-to-date was 120 and 140 basis points
higher than the same periods of the prior year. The increase in direct labor
as a percentage of revenue was due to the minimum wage increases effective
October, 1996, and September, 1997, higher labor costs in the acquired stores
than typically experienced by the Company and de-leveraging of labor costs due
to lower unit volumes. Also, 55% of the units operated by the Company
currently provide delivery service compared to 43% a year ago. The increased
number of delivery service units combined with the Company's delivery dominance
program introduced during the quarter, intended to reduce delivery times and
increase customer awareness of the delivery service, has also increased direct
labor as a percent of labor. On a year-to-date basis, labor has also been
negatively impacted by training associated with the assimilation of the
acquired units in addition to the aforementioned factors. (See Effects of
Inflation and Other Matters for additional information on minimum wage
increases.)
Other operating expense for the quarter and year-to-date was 110 and 90 basis
points higher than the comparable periods of the prior year. The increase in
operating expense as a percent of sales for the quarter was largely due to
deleveraging of these costs inherent in the negative comparable sales periods
discussed above. The increase in the year-to-date was due to the July, 1996,
175 basis point increase in the franchise fee paid to the Company's franchisor
in addition to the negative comparable sales. Also attributing to the increase
in other operating expense was higher occupancy costs as the Company leases a
higher percent of its facilities than in the prior year. The increases for the
quarter and year-to-date were partially offset by a decline in non labor net
delivery expenses.
TONY ROMA'S OPERATIONS
(Unaudited)
(dollars in thousands)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
Dec. 23, 1997 Dec. 24, 1996(1) Dec. 23, 1997 Dec. 24, 1996(1)
Revenue
Restaurant Sales $20,368 $ 17,161 $ 61,114 $48,970
Franchise Revenue 2,005 2,158 6,151 6,326
Total Revenue $22,373 $ 19,319 $ 67,265 $55,296
Restaurant Operating Expenses
as a Percentage of Sales
Cost of Sales 35.1% 34.1% 33.4% 33.9%
Direct Labor 31.0% 32.0% 31.5% 31.3%
Other 25.8% 25.3% 25.0% 24.5%
Total Operating
Expenses 91.9% 91.4% 89.9% 89.7%
Restaurant
Based Income 8.1% 8.6% 10.1% 10.3%
Income from System
Operations (2) 16.4% 18.8% 18.3% 20.6%
(1) Contains reclassifications to conform with current year presentation.
(2) Net franchise revenue and restaurant based income as a percent of total
revenue
Comparison of Tony Roma's Operating Results for the Thirteen and Thirty-Nine
Weeks Ended December 23, 1997 and December 24, 1996
Restaurant sales were $20.4 million for the quarter for a 18.7 % or $3.2
million increase over the same period of the prior year. Year-to-date sales
aggregated $61.1 million for a 24.8 % or $12.1 million increase over the prior
year level of $49 million. These increases are largely attributable to sales
realized from units opened since the comparable periods of the prior year.
Comparable sales decreased 2.5% for the quarter and were essentially flat on a
year-to-date basis for stores open for more than 18 months. Tony Roma's
comparable sales were modestly positive in December after being negative in
October and November due in part to higher promotional activity in the prior
year during these periods. Additionally, Tony Roma's implemented a new menu
late in the quarter featuring new items, increased portion sizes,and price
increases on certain items. The effect of the price increase after considering
changes in sales mix and anticipated menu migration is uncertain but the
Company estimates the average guest ticket will increase up to 2%.
Net franchise revenue was $2 million during the quarter which was 7.1% below the
prior year level. This decrease was due to an incremental $310,000 in franchise
fees earned in the fourth quarter of the prior year which were largely
attributable to the sale of certain international franchise territorial rights.
On a year-to-date basis royalty income has increased by 6% over the prior year-
to-date, but net franchise revenue was 2.8% below the prior years level due
largely to the aforementioned sale of territory rights in the first and third
quarters of fiscal 1997.
Cost of sales, as a percent of sales, increased 100 basis points for the quarter
and decreased 50 basis points for the year-to-date from the comparable periods
of the prior year. Cost of sales as a percent of sales for the third quarter
increased over the second quarter of the current fiscal year by 270 basis
points. This increase was in line with recent expectations and due to the
effect of the fall rib purchase, which was made at prices approximately 40%
higher than the costs experienced during the first two quarters of the current
fiscal year. The improvement in year-to-date cost of sales as a percent of
sales was achieved despite an increase of approximately 18% in rib costs over
the prior year-to-date. This improvement was due a planned migration to higher
margin products, reduced waste and a menu price increase in October, 1996. The
increase in cost of sales as a percent of sales for the quarter was due to a
temporary increase of approximately 27% in rib costs over the comparable period
of the prior year which was largely isolated to the third quarter. (See Effects
of Inflation and Other Matters for additional information on rib costs.)
Direct labor, as a percentage of sales, declined 100 basis points from the
prior year for the quarter, and increased 20 basis points from the prior year-
to-date. The change for the quarter was largely due to the opening of five new
stores during the third quarter of the prior year compared to one new store
opening during the current quarter. On a year-to-date basis, the increase in
direct labor as a percentage of sales was due to the increase in minimum wage
effective October, 1996 and September, 1997. (See Effects of Inflation and
Other Matters for additional information on minimum wage increases.)
Other operating expense, as a percent of revenue, increased 50 basis points for
the quarter and year-to-date over the prior year. During the fourth quarter of
fiscal 1996 the Company recorded an impairment charge related to eight
restaurants to be closed. Seven of these restaurants were closed during fiscal
1997 and one closed in May, 1997. In accordance with the provisions of SFAS
No. 121 no depreciation was recorded for these units benefiting other operating
expense. Normalized for the impairment charge, quarterly results were 37 basis
points higher than the prior year which was largely due to negative comparative
sales during the quarter. Normalized results for the year-to-date were 12
basis points higher than the prior year due primarily to higher depreciation
costs related to new store development.
Consolidated Results
Comparison of Consolidated Operating Results for the Thirteen and Thirty-Nine
Weeks Ended December 23, 1997 and December 24, 1996
Total consolidated revenue for the quarter was $112.9 million, for an increase
of 52.1%, or $38.7 million over the same period of the prior year. On a year-
to-date basis consolidated revenue was $330.7 million, for an increase of 53%,
or $114.5 million over the comparable period of the prior year. This growth
was due largely to the revenue contributed from the acquired Pizza Hut units
and the increase in Tony Roma's company operated store count due to new store
openings. (See Note 3 of the Notes to Condensed Consolidated Financial
Statements for additional information on the acquisitions.)
Consolidated income from restaurant operations was $17.6 million or 15.6% of
revenue for the quarter compared to $13.4 million or 18% in the prior year for
an increase of $4.3 million or 31.9%. For the year-to-date, consolidated
income from restaurant operations was $57 million or 17.2% of revenue compared
to $42.7 million or 19.7% in the prior year for an increase of $14.4 million or
33.6%. Income from restaurant operations increased from the prior year due to
the income contributed from Pizza Hut units acquired and Tony Roma's units
opened since the comparable periods of the prior year. As a percent of
revenue, income from restaurant operations decreased from the prior year due to
the decrease in operating margin attributable to the factors previously
outlined in the concept specific discussion of operating results.
Increased leverage on general and administrative expenses continued to be
apparent as these costs increased only $1.7 million or 38.1% for the quarter
and $4.4 million or 31% for the year-to-date while consolidated revenue
increased 52.1% and 53% for the quarter and year-to-date, respectively. As a
percent of sales, these costs declined for the quarter and year-to-date by 60
and 80 basis points, respectively, from the comparable periods of the prior
year. This decrease occurred due to increased leverage on general and
administrative expense from the acquired stores. Depreciation and amortization
increased 30 and 40 basis points as a percent of sales for the quarter and year-
to-date, respectively, due to increased franchise rights amortization
associated with acquisitions completed since the same periods of the prior
year.
Increased borrowings associated with the acquisitions resulted in a $2.8
million increase for the quarter and a $7.5 million increase for the year-to-
date in interest charges compared to same periods of the prior fiscal year.
Net income for the quarter was $3,058,000 compared to $3,678,000 for the same
period of the prior year for a decline of 16.9%. On a year-to-date basis net
income increased 2.9% to $13,525,000 from $13,146,000 for the comparable period
of the prior year.
The effective income tax rate for the quarter was 35% compared to 39% for the
same period of the prior year. The decrease in the income tax rate is due to
the realization of tax benefits associated with the implementation of a
corporate reorganization and the realization of various tax credits.
Liquidity, Capital Resources and Cash Flows
The Company's primary source of cash is its operations. Adjusted for various
changes in balance sheet accounts, cash flow provided by operating activities
was $52.6 million for the thirty-nine weeks ended December 23, 1997, for an
increase of 60% over the $32.9 million reported during the comparable period of
the prior year. This improvement was due to increased earnings, before
depreciation charges, and the working capital leverage obtained from acquired
stores, which like the Company operate with a working capital deficit.
In addition to cash provided by operations, the Company has a $200 million
unsecured line of credit through March 3, 2000. At December 23, 1997, the
Company had $75 million in unused borrowing capacity under this agreement,
access to which is limited by the Company's debt covenants. The acquisitions
completed during the year-to-date were funded through the line of credit and
the issuance of $50 million of senior unsecured notes to institutional lenders.
Predominately cash sales and rapid inventory turnover allow the Company to use
all available cash to reduce borrowings under its line of credit. The low
requirement for the maintenance of current assets, combined with credit from
trade suppliers produces a working capital deficit, which is consistent with
past experience.
During the thirty-nine weeks ended December 23, 1997, the Company made all
scheduled principal and interest payments.
Restaurant development at Tony Roma's and Pizza Hut, in addition to normal
recurring capital expenditures and technology investments in the acquired
stores, resulted in $21.8 million of total capital expenditures for the year-to-
date compared to $32.3 million for the prior year-to-date. Investing
activities also include $121.8 million paid for acquisitions previously
discussed.
The Company anticipates cash flow from operations and additional borrowings will
be sufficient to fund continuing expansion and improvements and to service debt
obligations. The Company's ability to make additional acquisitions is subject
to certain financial covenants, the Company's ability to obtain additional debt
financing or, if necessary and warranted, the Company's ability to obtain
additional equity capital.
Seasonality
As a result of the diversification in restaurant concepts, the Company has
historically not experienced significant seasonal sales fluctuations on a
consolidated basis. However, each concept is impacted by individual sales
trends. Tony Roma's sales are traditionally higher from January to March due
to an increase in vacation and part time residence activity in the desert and
beach areas where a significant number of the Company's facilities are located.
Pizza Hut sales are largely driven through advertising and promotion and are
adversely impacted in economic times that generally negatively impact consumer
discretionary income such as back-to-school and holiday seasons.
Effects of Inflation
Inflationary factors such as increases in food and labor costs directly affect
the Company's operations. Because most of the Company's employees are paid on
an hourly basis, changes in rates related to federal and state minimum wage and
tip credit laws will effect the Company's labor costs. The Company cannot
always effect immediate price increases to offset higher costs and no assurance
can be given that the Company will be able to do so in the future.
Federal wage laws increased the minimum wage to $5.15 per hour on September 1,
1997. In addition to the federal minimum wage increase in October, 1996, and
September, 1997, the state of Oregon increased the state minimum wage rate to
$6.00 per hour on January, 1, 1998. The Company operates 24 Pizza Hut units in
the State of Oregon.
Cheese represents approximately 40% of the cost of a pizza. The price of this
commodity changes throughout the year due to changes in demand and supply
resulting from school lunch programs, weather and other factors. Baby back
ribs represent approximately 28% of the menu mix at Tony Roma's. Because ribs
are a by-product of pork processing, their price is influenced largely by the
demand for boneless pork. Significant changes in the prices of these
commodities has an impact on the Company's food cost as a percent of revenue.
The Company expects cheese costs to be approximately 5% to 10% higher than the
prior year during the fourth quarter as the cheese market has not realized
expected seasonal decline.
Baby-back rib prices were 27% and 18% higher than the prior year for the
quarter and the year-to-date, respectively. Based upon purchase contracts, in
the fourth quarter of fiscal 1998 the Company expects baby-back rib prices to
decline from the third quarter of fiscal 1998 by approximately 15% to 20%;
however, prices are expected to exceed the prior year's levels by around 10%.
Increases in interest rates would directly affect the Company's financial
results. At the end of the quarter, $90 million or 43% of the Company's
borrowings were under long-term fixed rate agreements. Under the Company's
revolving credit agreements alternative interest rate options are available
which can be used to limit the Company's exposure to fluctuating rates. The
Company actively utilizes these options as well as other hedging strategies
including interest rate swap products to reduce interest rate exposure.
Forward Looking Comments
The statements under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other statements which are not
historical facts contained herein are forward looking statements that involve
estimates, risks and uncertainties, including but not limited to: consumer
demand and market acceptance risk; the level of and the effectiveness of
marketing campaigns by the Company and Pizza Hut, Inc., and the overall success
of the Company's franchisor; the integration and assimilation of acquired
restaurants; training and retention of skilled management and other restaurant
personnel; the Company's ability to locate and secure acceptable restaurant
sites; the effect of economic conditions, including interest rate fluctuations,
the impact of competing restaurants and concepts, new product introductions,
product mix and pricing, the cost of commodities and other food products, labor
shortages and costs and other risks detailed in the Company's Securities and
Exchange Commission filings.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes in the legal proceedings reported in the
Company's Annual Report on Form 10-K for the year ended March 25, 1997.
Item 2. Changes in Securities
None
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 and Reports on Form 8-K
(a) Exhibits
The following Exhibits are filed as part of this Report:
Exhibit 10.28 - James K. Schwartz Promissory Note
Exhibit 11 - Statement Regarding Computation of Per Share Earnings -
Page 15
Exhibit 27 - Financial Data Schedule
(b) Reports on Forms 8-K (incorporated by reference)
No reports on Form 8-K were filed during the thirteen weeks ended
December 23, 1997.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NPC INTERNATIONAL, INC.
(Registrant)
DATE: February 2, 1998
Vice President Finance Troy D. Cook
Chief Financial Officer
Principal Financial Officer
DATE: February 2, 1998
Vice President, Restaurant Services Alan L. Salts
Chief Accounting Officer
Principal Accounting Officer
Exhibit 10.28
PROMISSORY NOTE
U.S. $100,000 January 7, 1998
FOR VALUE RECEIVED, I, James K. Schwartz, the undersigned, hereby promise
to pay the principal sum of One Hundred Thousand Dollars (U.S. $100,000) (the
"Principal") to NPC International, Inc. (the "Company") on or before January 7,
1999, together with interest thereon (the "Interest"), due and payable
quarterly, determined monthly to be an annual rate equal to the average cost of
the Company's swing-line borrowing rate, adjusted monthly, from the date of this
Promissory Note through the date upon which the Principal is repaid in full.
In the event of my resignation or other voluntary termination of my employment
with the Company prior to January 7, 1999 and upon demand by the Company, I
hereby agree to repay the Principal plus all accrued Interest within ninety (90)
days of my final employment date with the Company.
The payment obligation expressed herein is made with full and immediate
recourse, such that I or my estate shall be fully liable for the payment of the
Principal and the Interest in the event of my default.
____________________________
James K. Schwartz
Exhibit 11
NPC INTERNATIONAL, INC.
Statement Regarding Computation of Per Share Earnings
(Unaudited)
Thirteen Weeks EndedThirty-Nine Weeks Ended
Dec. 23, 1997 Dec. 24, 1996 Dec. 23, 1997 Dec. 24, 1996
BASIC
Shares
outstanding at
beginning of
period 24,702,122 24,694,711 24,635,203 24,522,432
Weighted average
of shares issued
(reacquired) during
period 18,779 (38,145) 43,283 132,565
Shares outstanding for computation
of per share
earnings 24,720,901 24,656,566 24,678,486 24,654,997
Net income $ 3,058,000 $ 3,678,000 $13,525,000 $13,146,000
Earnings
per share $ .12 $ .15 $ .55 $ .53
DILUTED
Shares outstanding
at beginning of
period 24,702,122 24,694,711 24,635,203 24,522,432
Weighted average of shares
issued (reacquired)
during period 18,779 (38,145) 43,283 132,565
Common stock
equivalents 501,252 178,601 430,445 215,547
Shares outstanding for computation
of per share
earnings 25,222,153 24,835,167 25,108,931 24,870,544
Net income $ 3,058,000 $ 3,678,000 $13,525,000 $13,146,000
Earnings
per share $ .12 $ .15 $ .54 $ .53
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