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
September 29, 1998
[ ] 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 October 12, 1998:
Common Stock, $0.01 par value - 24,437,414
NPC INTERNATIONAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets --
September 29, 1998 and March 31, 1998 3
Consolidated Statements of Income --
For the Thirteen and Twenty-Six
Weeks Ended September 29, 1998
and September 23, 1997 4
Consolidated Statements of Cash Flows --
For the Twenty-Six Weeks Ended
September 29, 1998 and September
23, 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II. OTHER INFORMATION 14
PART I. FINANCIAL INFORMATION
NPC International, Inc.
Consolidated Balance Sheets
(Unaudited, dollars in thousands)
ASSETS September March
29, 1998 31, 1998
Current assets:
Cash and cash equivalents $ 3,933 $4,548
Accounts receivable, net 1,524 2,375
Inventories of food and supplies 2,541 4,177
Deferred income tax asset 2,662 3,245
Prepaid expenses and other current
assets 4,059 3,874
Total current assets 14,719 18,219
Facilities and equipment, net 86,935 138,779
Assets held for sale 3,123 3,157
Notes receivable, net 359 465
Franchise rights, net 195,351 198,917
Goodwill, net 2,773 17,364
Investment in Roma Restaurant
Holdings, Inc. 6,750 --
Deferred income tax asset -- 344
Other assets 4,354 5,247
TOTAL ASSETS $314,364 $382,492
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,048 $18,143
Sales taxes 1,464 2,561
Payroll taxes 1,347 1,742
Accrued interest 2,886 4,130
Accrued payroll 6,749 8,669
Income tax payable 18,898 650
Current portion of closure reserve 1,260 1,360
Health and casualty reserves 4,649 5,613
Other accrued liabilities 5,934 6,188
Total current liabilities 58,235 49,056
Long-term debt 90,200 204,033
Deferred income tax liability 1,079 --
Closure reserve 7,653 8,936
Insurance reserves 8,000 9,000
Other deferred items 5,282 4,431
Stockholders' Equity:
Common stock, $.01 par value
100,000,000 shares authorized,
27,592,510 issued 276 276
Paid-in capital 21,054 21,033
Retained earnings 142,993 105,157
164,323 126,466
Less treasury stock at cost,
representing 2,889,096 shares (20,408) (19,430)
Total stockholders' equity 143,915 107,036
TOTAL LIABILITIES AND EQUITY $314,364 $382,492
The accompanying notes are an integral part of these Consolidated
Financial Statements.
NPC International, Inc.
Consolidated Statements of Income
(Unaudited, dollars in thousands, except share data)
Thirteen Twenty-Six
Weeks Ended Weeks Ended
Sept. 29, Sept. 23, Sept. 29, Sept. 23,
1998 1997 1998 1997
Net Sales $ 90,407 $112,598 $203,795 $ 213,665
Net franchise revenue -- 2,095 2,114 4,145
Total revenue 90,407 114,693 205,909 217,810
Cost of sales 24,262 30,854 54,908 58,978
Direct labor 24,967 32,420 57,152 61,844
Other 25,705 31,318 56,189 57,596
Total operating expenses 74,934 94,592 168,249 178,418
Income from restaurant
operations 15,473 20,101 37,660 39,392
General and administrative
expenses 4,748 5,743 11,010 11,027
Depreciation and
amortization 2,054 3,058 4,585 5,424
Operating income 8,671 11,300 22,065 22,941
Other income (expense):
Interest expense (1,917) (4,036) (5,799) (7,066)
Other 453 32 719 229
Income before income
taxes and gain
on recapitalization of
subsidiary 7,207 7,296 16,985 16,104
Gain on recapitalization
of Romacorp, Inc. -- -- 39,400 --
Income before income taxes 7,207 7,296 56,385 16,104
Provision for income taxes 2,521 2,554 18,549 5,637
Net income $ 4,686 $ 4,742 $ 37,836 $ 10,467
Earning per
share - Basic $ .19 $ .19 $ 1.53 $ .42
Earning per
share - Diluted $ .19 $ .19 $ 1.51 $ .42
Weighted average shares
outstanding - Basic 24,744,246 24,671,271 24,751,294 24,657,278
Weighted average shares
outstanding - Diluted 25,035,400 25,093,215 25,136,791 25,052,321
The accompanying notes are an integral part of these Consolidated
Financial Statements
NPC International, Inc.
Consolidated Statements of Cash Flows
(Unaudited, dollars in thousands)
Twenty-Six
Weeks Ended
Sept. 29, Sept. 23,
1998 1997
Operating Activities:
Net income $37,836 $ 10,467
Non-cash items included in net income:
Depreciation and amortization 11,702 12,226
Amortization of start-up costs 427 1,411
Deferred income taxes -- (307)
Gain on recapitalization
of Romacorp, Inc., net of cash (38,758) --
Change in assets and liabilities,
net of acquisitions and divestitures:
Accounts receivable, net (360) (583)
Notes receivable, net 44 38
Inventories of food and supplies (491) (859)
Prepaid expenses and other current
assets (1,627) (2,391)
Accounts payable (1,980) 8,108
Payroll taxes 55 524
Accrued interest (1,216) 2,091
Income tax payable 18,248 1,106
Accrued payroll (1,123) 1,771
Health and workers' compensation
reserves 486 2,112
Other accrued liabilities 182 3,076
Net cash flows provided by
operating activities 23,425 38,790
Investing Activities:
Proceeds from recapitalization
of Romacorp, Inc., net 99,921 --
Capital expenditures (10,477) (15,872)
Acquisition of business assets,
net of cash -- (119,947)
Proceeds from sale of capital assets 1,424 65
Changes in other assets, net (1,451) 1,358
Net cash flows provided by (used in)
investing activities 89,417 (134,396)
Financing Activities:
Purchase of treasury stock (1,127) --
Net change in revolving
credit agreements (104,500) 58,127
Proceeds from issuance of
long-term debt -- 49,756
Payment of long-term debt (8,000) (9,444)
Exercise of stock options 170 552
Net cash flows (used in)
provided by financing activities (113,457) 98,991
Net Change in Cash and Cash
Equivalents (615) 3,385
Cash and Cash Equivalents at
Beginning of Period 4,548 --
Cash and Cash Equivalents at End
of Period $ 3,933 $ 3,385
The accompanying notes are an integral part of these Consolidated
Financial Statements.
NPC International, Inc.
Notes to 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. (See Note 3 - Recapitalization of Romacorp, Inc.
for information regarding the accounting method used to record
this formerly wholly-owned subsidiary's activity for the year-to-
date ended September 29, 1998.)
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 31, 1998.
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all normal recurring
adjustments necessary to present fairly the financial position of
the Company as of September 29, 1998, and March 31, 1998, the
results of operations for the thirteen and twenty-six weeks ended
September 29, 1998 and September 23, 1997, and cash flows for the
twenty-six weeks ended September 29, 1998 and September 23, 1997.
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 - Acquisitions
On March 6, 1997, the Company acquired 60 Pizza Hut units from
Pizza Hut, Inc. (PHI).
On March 27, 1997, the Company acquired 62 Pizza Hut units from
PHI. Simultaneous with the 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.
On June 5, 1997, the Company acquired an additional 51 units from
PHI. One additional PHI unit was purchased on July 10, 1997.
On May 15, 1997, the Company acquired 82 units from Jamie B.
Coulter (Coulter). Simultaneously, the Company assumed
operational responsibility for 18 additional Coulter units, which
have been reflected in the Company's financial statements as if
owned. The Company acquired ten of the 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 twenty-six weeks
ended September 23, 1997, were developed assuming that all of the
acquired units previously described had been acquired at the
beginning of the period. 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 period nor is it necessarily indicative of
results that may occur in the future.
Pro Forma Results (unaudited) Twenty-six weeks ended
(Dollars in thousands except September 23, 1997
per share data)
Total revenue $ 232,431
Net income 11,058
Net income per share - Basic .45
Net income per share - Diluted .44
Note 3 - Recapitalization of Romacorp, Inc.
Effective June 28, 1998, the Company completed the
recapitalization of its previously wholly owned subsidiary,
Romacorp, Inc. (Romacorp). Romacorp redeemed stock held by the
Company so that the Company held 20% of the equity of Romacorp
following the transaction. Sentinel Capital Partners became the
majority equity owner of Romacorp following the transaction.
Romacorp was a wholly owned subsidiary of the Company throughout
the Company's first fiscal quarter ended June 30, 1998, its
results of operations through that date have been consolidated and
reflected in the Consolidated Statement of Income for the twenty-
six weeks ended September 29, 1998. Following the transaction,
Romacorp changed its name to Roma Restaurant Holdings, Inc. The
Company's remaining investment in Roma Restaurant Holdings, Inc.
is presented on its balance sheet and is accounted for using the
cost method of accounting.
Note 4 - Earnings per Share
The following table sets forth the computation of basic and
diluted earnings per share:
Thirteen Weeks Twenty-Six Weeks
Ended Ended
Sept 29, Sept. 23, Sept. 29, Sept. 23,
1998 1997 1998 1997
Numerator:
Net Income $ 4,686,000 $ 4,742,000 $37,836,000 $ 10,467,000
Denominator:
Denominator for
basic earnings
per share -
weighted average
shares 24,744,246 24,671,271 24,751,294 24,657,278
Effective of
dilutive securities:
Employee stock
options 291,154 421,944 385,497 395,043
Denominator for
diluted earnings
per share -
adjusted weighted
average share
and assumed
conversions 25,035,400 25,093,215 25,136,791 25,052,321
Earning per
share - Basic $ .19 $ .19 $ 1.53 $ .42
Earning per
share - Diluted $ .19 $ .19 $ 1.51 $ .42
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 31, 1998.
Overview - The Company is the largest Pizza Hut franchisee in the
world and at September 29, 1998, operated 649 Pizza Hut units in
24 states. The Company and its franchisor, PHI, have agreed that
the Company may acquire additional Pizza Hut units and, as a
result, operate up to a total of 1,300 units, subject to
availability and certain conditions. During the preceding 24
months, the Company has acquired over 300 units from PHI, and
other franchisees. The Company, estimates that it operates
approximately 9% of the entire Pizza Hut system. As a result of a
recapitalization of its Romacorp subsidiary, effective June 28,
1998, the Company has reduced its equity holdings in this entity
to 20%, and therefore, no longer controls its operations.
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. Certain of
the Company's Pizza Hut units serve beer. This product is not a
significant portion of the Pizza Hut sales mix.
Service - Pizza Hut provides a buffet with table service for
beverages during lunch and full table service for dinner, with
delivery and carryout available throughout the day.
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 30, 1999 will contain 52 weeks. The fiscal year ended
March 31, 1998 contained 53 weeks.
Development - Activity with respect to unit count during the
quarter is set forth in the table below:
SYSTEM UNIT ACTIVITY
1999 SECOND QUARTER
Change
in
Begin- Conver- Develop- Acquir- Clos- Owner End-
ning sions ed ed ed ship2 ing
Company Owned
Pizza Hut
Restaurant 524 -- 2 -- (2) -- 524
Delivery 134 -- -- -- (9) -- 125
Total
Company
Owned 658 -- 2 -- (11) -- 649
1999 YEAR-TO-DATE
Change
in
Begin- Conver- Develop- Acquir- Clos- Owner End-
ning sions ed ed ed ship2 ing
Company Owned
Pizza Hut
Restaurant 536 (1) 4 -- (15) -- 524
Delivery 144 1 -- -- (20) -- 125
Total
Pizza Hut 680 -- 4 -- (35) -- 649
Tony Roma's1 45 -- -- -- -- (45) --
Total
Company
Owned 725 -- 4 -- (35) (45) 649
Franchised
Tony Roma's 147 -- 2 -- (2) (147) --
Total System 872 -- 6 -- (37) (192) 649
1Excludes 2 units operated as joint ventures by the Company.
2Effective June 28, 1998, NPC International, Inc. owns 20% equity
interest in Roma Restaurant Holdings, Inc. and, therefore, no
longer controls the operations of Roma Restaurant Holdings, Inc.
and subsidiaries. (See Note 3 - Recapitalization of Romacorp,
Inc. for further information.)
On April 27, 1998 the Company announced plans to consolidate and
relocate 53 Pizza Hut units to 45 new locations to redefine trade
areas, improve market presence, and to upgrade certain assets to a
more competitive format. Relocated units will be moved to
improved trade areas and fall into the following categories:
relocation of delivery units to more visible locations and
improved formats; relocation of older dine-in assets in rural
markets to new prototype units; and conversions of certain metro
markets to "Main-Path" restaurants. In conjunction with this
strategy, the Company closed 33 Pizza Hut units during the twenty-
six weeks ended September 29, 1998. Additionally, four Pizza Hut
units were developed and two Pizza Hut units closed during the
twenty-six weeks ended September 29, 1998.
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 twenty-six weeks ended September 29, 1998 and September 23,
1997. 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)
Thirteen Twenty-Six
Weeks Ended Weeks Ended
Sept. 29, Sept. 23, Sept. 29, Sept. 23,
1998 1997 1998 1997
Revenue
Restaurant Sales $ 72,436 $ 73,928 $ 144,676 $ 138,128
Delivery Sales 17,971 18,149 36,606 34,791
Total Revenue $ 90,407 $ 92,077 $ 181,282 $ 172,919
Restaurant Operating
Expenses as a
Percentage of Revenue:
Total Expenses (1)
Cost of Sales 26.9% 26.3% 26.0% 26.4%
Direct Labor 27.6% 28.1% 27.8% 28.3%
Other 28.4% 28.4% 28.0% 27.5%
Total Operating
Expenses 82.9% 82.8% 81.8% 82.2%
Restaurant Based
Income 17.1% 17.2% 18.2% 17.8%
Restaurant Expenses (2)
Cost of Sales 27.0% 26.3% 26.1% 26.5%
Direct Labor 26.5% 26.9% 26.6% 27.1%
Other 29.2% 28.9% 28.8% 28.0%
Total Operating
Expense 82.7% 82.1% 81.5% 81.6%
Restaurant Based
Income 17.3% 17.9% 18.5% 18.4%
Delivery Expenses (3)
Cost of Sales 26.4% 26.3% 25.5% 26.3%
Direct Labor 32.1% 32.7% 32.3% 32.9%
Other 25.3% 26.4% 25.2% 25.6%
Total Operating
Expense 83.8% 85.4% 83.0% 84.8%
Restaurant Based
Income 16.2% 14.6% 17.0% 15.2%
(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
Twenty-Six Weeks Ended September 29, 1998 with the Thirteen and
Twenty-Six Weeks Ended September 23, 1997
Revenue from the Company's Pizza Hut operations was $90.4 million
during the quarter, which was $1.7 million or 1.8% below the $92.1
million reported in the same period of the prior year. The
decrease was largely due to the impact of closing 25 units without
replacement and consolidating 8 other low volume units as planned.
The effect of the unit count activity was partially offset by a 3%
increase in comparable sales for the quarter. Year-to-date revenue
was $181.3 million for an $8.4 million or 4.8% increase over the
prior year. This increase was largely due to the acquisition of
222 units at various points during the first fiscal quarter of
last year and comparable sales growth of 1.2% on a year-to-date
basis. The increase in units operated during the first quarter of
fiscal 1999 combined with a 1.2% increase in comparable sales for
the year-to-date more than offset the impact of the above-
mentioned decline in unit count. Comparable sales growth in the
Company's delivery business improved 7.8% and 6.5% for the quarter
and year-to-date, respectively. Comparable sales growth in the
Company's restaurant (Red Roof) business improved 1.9% for the
quarter and was essentially flat for the year-to-date. Average
unit volumes increased by 3.7% and 2.7% during the quarter and
year-to-date, respectively, over the same periods of the prior
year due to the favorable impact of the asset re-imaging plan.
(See Development section for further information regarding the
Company's asset re-imaging strategy.)
Cost of sales as a percent of revenue increased 60 basis points
compared to the same quarter of the prior year primarily due to an
increase in cheese costs for the quarter of approximately 29%.
(See Effects of Inflation and Other Matters for additional
information on cheese costs.) For the year-to-date, cost of sales
as a percent of revenue declined 40 basis points. The improvement
for the year-to-date was achieved due to more normalized
ingredient costs (largely meat) and reduced waste in acquired
stores and was partially offset by a 12.5% increase in cheese
costs. The Company benefited in the quarter and year-to-date from
reduced ingredient costs compared to the same periods of the prior
year due to better optimization of ingredient formulations and
supply contract negotiations.
Direct labor declined 50 basis points for the quarter and year-to-
date compared to the same periods of the prior year despite the
increase in minimum wage effective September, 1997 which has
contributed to a 6% increase in the average hourly wage incurred
relative to last year. This improvement results from leverage
associated with positive comparable sales volumes and labor
efficiencies primarily achieved in acquisition markets. (See
Effects of Inflation and Other Matters for additional information
on minimum wage increases.)
Other operating expense was flat for the quarter and increased 50
basis points for the year-to-date compared to the same periods of
the prior year. The increase for the year-to-date was largely
attributable to increased local marketing and increased store
manager bonuses due to improvements in controllable profit and was
partially offset by increased leverage on fixed costs.
Tony Roma's Operating Results
As reported in the Company's 10-Q for fiscal quarter ended June
30, 1998, Romacorp, a formerly wholly owned subsidiary, was
recapitalized effective June 28, 1998. (See Note 3 -
Recapitalization of Romacorp, Inc.) The results through the date
of recapitalization have been reflected in these statements.
Subsequent to the transaction, the Company has reflected its
investment on a cost basis. The following table presents the Tony
Roma's operating results as they have been reflected in the
Company's consolidated financial statements.
TONY ROMA'S OPERATIONS
(Unaudited)
(dollars in thousands)
Thirteen Twenty-Six
Weeks Ended Weeks Ended
Sept. 29, Sept. 23, Sept. 29, Sept. 23,
1998 1997 1998 1997
Revenue
Restaurant Sales $ n/a $20,521 $22,513 $40,746
Franchise Revenue n/a 2,095 2,114 4,145
Total Revenue $ n/a $22,616 $24,627 $44,891
Restaurant Operating
Expenses as a
Percentage of
Sales
Cost of Sales n/a 32.4% 34.8% 32.5%
Direct Labor n/a 32.1% 30.2% 31.8%
Other n/a 25.1% 23.5% 24.6%
Total Operating
Expenses n/a 89.6% 88.5% 88.9%
Restaurant Based
Income n/a 10.4% 11.5% 11.1%
Income from System
Operations (1) n/a 18.7% 19.1% 19.3%
(1) Net franchise revenue and restaurant based income as a
percent of total revenue.
Consolidated Results
Comparison of Consolidated Operating Results for the Thirteen and
Twenty-Six Weeks Ended September 29, 1998 with the Thirteen and
Twenty-Six Weeks Ended September 23, 1997
Total consolidated revenue for the quarter was $90.4 million,
which was 21.2% or $24.3 million below the same period of the
prior year. On a year-to-date basis, consolidated revenue was
$205.9 million, which was 5.5% or $11.9 million below the same
period of the prior year. The decline in revenue for the quarter
and year-to-date was primarily due to the loss of revenue from the
recapitalization of Romacorp (see Note 3). The closure of stores
related to the Pizza Hut re-imaging strategy also contributed to
the decline for the quarter.
Consolidated income from restaurant operations was $15.5 million
or 17.1% of revenue for the quarter compared to $20.1 million or
17.5% last year. For the quarter, income from restaurant
operations as a percent of revenue declined due to the
recapitalization of Romacorp. As a result of net franchise revenue
generated, Romacorp historically had a higher percentage of income
from restaurant operations than the Company's Pizza Hut
operations. Also contributing to the decline in income from
restaurant operations as a percent of revenue for the quarter was
the margin impact of an increase in cheese costs of approximately
29% compared to the same period of the prior year. For the year-
to-date, consolidated income from restaurant operations was $37.7
million or 18.3% of revenue compared to $39.4 million or 18.1% of
revenue last year. Income from restaurant operations as a percent
of revenue increased over the prior year due to improved margin
performance in the Company's Pizza Hut units. The decline in
income from restaurant operations in nominal dollars for the
quarter and year-to-date was primarily due to the recapitalization
of Romacorp.
General and administrative expenses, as a percent of revenue,
increased 30 and 20 basis points for the quarter and year-to-date,
respectively, over the same period of the prior year as the
infrastructure required to support the acquired Pizza Hut stores
was not fully developed in the same periods of the prior year.
Depreciation and amortization decreased $1 million or 32.8% and
$839 thousand or 15.5% for the quarter and year-to-date,
respectively, compared to the same periods of the prior year. The
decline was due largely to the reduction in amortization expense
as a result of the recapitalization of Romacorp. Romacorp
historically had a higher percentage of depreciation and
amortization than the Company's Pizza Hut division resulting from
amortization of goodwill and more significant amortization of pre-
opening expenses.
A decline in outstanding borrowings since the same period of the
prior year, largely attributable to the Romacorp recapitalization,
resulted in a decrease in interest charges of approximately $2.1
million for the quarter. For the year-to-date, interest expense
declined by $1.3 million due to the debt reduction from the
proceeds of the Romacorp recapitalization, which was partially
offset by lower interest charges in the first quarter of last year
compared to the same period this year.
Other income was $453 thousand and $719 thousand for the quarter
and year-to-date, respectively, compared to $32 thousand and $229
thousand reported in the same periods of the prior year. For the
quarter and year-to-date, the increase in other income was due to
the gain on sale or disposition of assets.
Net income for the quarter was $4.7 million, which was essentially
flat when compared to the same period of the prior year. On a year-
to-date basis, net income was $37.8 million compared to $10.5
million recorded in the same period of the prior year. Net income
for the year-to-date included $39.4 million in pre-tax income
related to the gain on the recapitalization of Romacorp and $12.6
million of income tax expense related to that gain. Consistent
with last year, income taxes have been provided for at 35% for
income not related to the recapitalization gain. (See Note 3 -
Recapitalization of Romacorp, Inc. for further information.)
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 $23.4 million for the twenty-six weeks
ended September 29, 1998, a decrease of 40% compared to the $38.8
million reported in the twenty-six weeks ended September 23, 1997.
Cash flow from operations last year was positively impacted by the
acquired stores which, like the Company, operate with a working
capital deficit. Also contributing to the decline in cash flows
from operating activities was the exclusion of cash flow provided
by operations from Romacorp for the second quarter of fiscal 1999.
Restaurant development and normal recurring capital expenditures,
resulted in $10.5 million of total capital expenditures ($1.9
million of which were Tony Roma expenditures) for the twenty-six
weeks ended September 29, 1998 compared to $15.9 million of total
capital expenditures ($7.6 million of which were Tony Roma
expenditures) for the same period of the prior year. The decrease
was largely due to the Romacorp transaction.
The Company anticipates cash flow from operations, and capacity
under its existing line of credit will be sufficient to fund
continuing expansion, acquisitions and improvements and to service
debt obligations.
In addition to cash provided by operations, the Company has a $200
million unsecured line of credit through March 3, 2000. At
September 29, 1998 the Company had $186 million in unused
borrowing capacity under this agreement, access to which is
limited by the Company's debt covenants. The acquisitions
completed during fiscal 1998 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.
On July 27, 1998, the Company increased the number of shares
authorized by the Board for re-purchase by 1 million shares.
During the quarter, the Company expended $1.1 million for the
purchase of treasury stock. At the end of the quarter, 1,240,700
shares remain authorized for re-purchase.
During the twenty-six weeks ended September 29, 1998, the Company
made all scheduled principal and interest payments.
Seasonality
As a result of previous diversification in restaurant concepts,
the Company has historically not experienced significant seasonal
sales fluctuations on a consolidated basis. However, both Tony
Roma's and Pizza Hut are impacted by individual sales trends.
Tony Roma's sales were 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 were 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 post
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 in
September 1997. In addition to the federal minimum wage increase
in September 1997, the state of Oregon increased the state minimum
wage rate to $6.00 per hour on January 1, 1998. On January 1,
1999, the state of Oregon will increase the state minimum wage
rate to $6.50 per hour. The Company currently operates 22 Pizza
Hut units in the State of Oregon; accordingly, the impact on
consolidated labor costs is not expected to be significant.
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. Significant changes in the price of cheese have
an impact on the Company's food cost as a percent of revenue.
During the quarter, cheese prices were 29% higher than the costs
incurred during the comparable period of the prior year.
Management expects cheese costs to exceed last year's levels
during the third fiscal quarter by 25% to 30% based upon available
forecasts. Based on these forecasts, management believes a
favorable market change is possible late in the third fiscal
quarter or early in the fourth fiscal quarter. This increase,
combined with anticipated changes in sales mix, could increase
cost of sales by as much as 1% of sales compared to the same
fiscal quarter of last year.
Increases in interest rates would directly affect the Company's
financial results. At September 29, 1998, approximately 91% 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.
Year 2000 Compliance
The Company is in the process of evaluating and modifying its
computer systems and applications for Year 2000 Compliance. Phase
three of a four-phase compliance plan was completed as scheduled
in August 1998, and phase four is expected to be completed by the
end of the 1998 calendar year. This allows the entire calendar
year of 1999 for the resolution of any issues that develop during
phase four of the compliance plan. During 1999, contingency plans
will also be developed, if necessary, for any significant risks
detected in phase four of the current plan. This plan addresses
all of the Company's significant computer systems including the
Point-of-Sale (POS) system, its proprietary "back-office" system,
and its financial reporting system, which includes sub-modules for
various applications such as payroll and accounts payable.
Additionally, the Company is in the process of evaluating third-
party vendors for Year 2000 readiness. This includes verbal and/or
written inquiries to the Company's major vendors including its
various depository institutions.
The Company is also in the process of reviewing non-information
technology equipment. Based on information gathered to date, the
Company believes that any necessary upgrades or replacements will
be minimal, and, if necessary, will be funded out of existing cash
flows from operations.
The Company does not believe costs related to Year 2000 Compliance
will be material to its financial position or results of operation
and, to date, such costs have not been separately accounted for.
However, the costs of the project and the date on which the
Company plans to complete the Year 2000 modifications are based on
management's best estimates. These estimates were derived based on
various assumptions of future events including the continued
availability of resources, third-party modification plans, and
other factors. Failures by significant vendors and/or failure by
the Company to satisfactorily complete it own plans could
adversely impact the project's cost and its completion date.
Consequently, there is no assurance that the forward looking
estimates will be realized and actual costs and vendor compliance
could be significantly different than anticipated, which could
result in material financial risk.
The failure to correct a material Year 2000 problem could result
in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and
adversely affect the Company's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent
in the Year 2000 problem, resulting in part from the uncertainty
of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to provide assurance at this time that the
consequences of Year 2000 failures will not have a material impact
on the Company's results of operations, liquidity or financial
condition. The Year 2000 Project is expected to significantly
reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and
readiness of its material External Agents. The Company believes
that, with the implementation of new business systems and
completion of the Project as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
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 PHI, 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 31, 1998.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on July 14, 1998
(b) Proxies were solicited by the Company pursuant to
Regulation 14 under the Securities Exchange Act of 1934.
There was no solicitation in opposition of the nominees as
listed in the proxy statement, and all such nominees were
elected pursuant to the vote of the stockholders.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibit is filed as part of this Report:
Exhibit 27 - Financial Data Schedule
(b) Reports on Forms 8-K (incorporated by reference)
The following reports on Form 8-K were filed during the
thirteen weeks ended September 29, 1998:
July 16, 1998 Acquisition or Disposition of Assets pertaining
to the recapitalization of Romacorp, Inc.
July 30, 1998 Change in Accountants
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: October 28, 1998
Vice President Finance Troy D. Cook
Chief Financial Officer
Principal Financial
Officer
DATE: October 28, 1998
Vice President,
Restaurant Services Alan L. Salts
Chief Accounting Officer
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