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 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 January 18, 1999:
Common Stock, $0.01 par value - 24,473,889
NPC INTERNATIONAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets --
December 29, 1998 and March 31, 1998 3
Consolidated Statements of Income --
For the Thirteen and Thirty-Nine
Weeks Ended December 29, 1998
and December 23, 1997 4
Consolidated Statements of Cash Flows --
For the Thirty-Nine Weeks Ended
December 29, 1998 and December 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 15
PART I. FINANCIAL INFORMATION
NPC International, Inc.
Consolidated Balance Sheets
(Unaudited, dollars in thousands)
ASSETS Dec. 29, 1998
March 31, 1998
Current assets:
Cash and cash equivalents $ 4,344 $4,548
Accounts receivable, net 1,439 2,375
Inventories of food and supplies 2,936 4,177
Deferred income tax asset 2,662 3,245
Prepaid expenses and other
current assets 4,663 3,874
Total current assets 16,044 18,219
Facilities and equipment, net 86,885 138,779
Notes receivable, net 63 465
Franchise rights, net 193,547 198,917
Goodwill, net 2,741 17,364
Investment in Roma Restaurant
Holdings, Inc. 6,750 --
Deferred income tax asset -- 344
Other assets 4,924 8,404
TOTAL ASSETS $310,954 $382,492
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,306 $18,143
Sales taxes 1,729 2,561
Payroll taxes 1,408 1,742
Accrued interest 1,312 4,130
Accrued payroll 5,557 8,669
Income tax payable 6,402 650
Current portion of closure reserve 1,260 1,360
Health and casualty reserves 5,513 5,613
Other accrued liabilities 6,275 6,188
Total current liabilities 45,762 49,056
Long-term debt 99,100 204,033
Deferred income tax liability 1,079 --
Closure reserve 7,167 8,936
Insurance reserves 7,000 9,000
Other deferred items 5,364 4,431
Stockholders' Equity:
Common stock, $.01 par value
100,000,000 shares authorized,
27,592,510 issued 276 276
Paid-in capital 21,113 21,033
Retained earnings 146,882 105,157
168,271 126,466
Less treasury stock at cost,
representing 3,121,621 and
2,846,926 shares, respectively (22,789) (19,430)
Total stockholders' equity 145,482 107,036
TOTAL LIABILITIES AND EQUITY $310,954 $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 Weeks Ended
Dec. 29, 1998
Dec. 23, 1997
Thirty-Nine Weeks Ended
Dec. 29, 1998
Dec. 23, 1997
Net Sales $ 89,429 $110,921 $293,224 $324,586
Net franchise revenue -- 2,005 2,114 6,151
Total revenue 89,429 112,926 295,338 330,737
Cost of sales 25,464 31,884 80,372 90,862
Direct labor 24,593 32,530 81,745 94,374
Other 25,048 30,869 81,237 88,465
Total operating expenses 75,105 95,283 243,354 273,701
Income from restaurant
operations 14,324 17,643 51,984 57,036
General and administrative
expenses 4,639 6,030 15,649 17,058
Depreciation and
amortization 2,073 2,927 6,658 8,352
Operating income 7,612 8,686 29,677 31,626
Other income (expense):
Interest expense (2,030) (4,198) (7,829) (11,264)
Other 401 215 1,120 445
Income before income
taxes and gain on
recapitalization of
subsidiary 5,983 4,703 22,968 20,807
Gain on recapitalization
of Romacorp, Inc. -- -- 39,400 --
Income before income taxes 5,983 4,703 62,368 20,807
Provision for income taxes 2,094 1,645 20,643 7,282
Net income $3,889 $3,058 $ 41,725 $13,525
Earning per share - Basic $ .16 $ .12 $ 1.69 $ .55
Earning per share - Diluted $ .16 $ .12 $ 1.67 $ .54
Weighted average shares
Outstanding - Basic 24,491,208
24,720,901
24,669,028
24,678,486
Weighted average shares
outstanding - Diluted 24,785,438
25,222,153
25,024,102
25,108,932
The accompanying notes are an integral part of these Consolidated
Financial Statements.
NPC International, Inc.
Consolidated Statements of Cash Flows
(Unaudited, dollars in thousands)
Thirty-Nine Weeks Ended
Dec. 29, 1998 Dec. 23, 1997
Operating Activities:
Net income $41,725 $ 13,525
Non-cash items included in net income:
Depreciation and amortization 16,981 18,982
Amortization of start-up costs 518 2,156
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 (275) (401)
Notes receivable, net 340 85
Inventories of food and supplies (886) (1,781)
Prepaid expenses and other
current assets (2,322) (2,320)
Accounts payable (722) 8,836
Payroll taxes (1) 325
Accrued interest (2,790) 349
Income tax payable 5,752 1,023
Accrued payroll (2,315) 4,070
Health and workers' compensation
reserves 350 2,889
Other accrued liabilities 1,421 5,156
Net cash flows provided by
operating activities 19,018 52,587
Investing Activities:
Proceeds from recapitalization of
Romacorp, Inc., net 101,237 --
Capital expenditures (13,732) (21,842)
Acquisition of business assets,
net of cash -- (121,849)
Proceeds from sale of capital assets 3,043 2,233
Changes in other assets, net (2,891) (679)
Net cash flows provided by
(used in) investing activities 87,657 (142,137)
Financing Activities:
Purchase of treasury stock (3,837) --
Net change in revolving
credit agreements (93,600) 54,684
Proceeds from issuance of
long-term debt -- 49,756
Payment of long-term debt (10,000) (11,444)
Exercise of stock options 558 843
Net cash flows (used in)
provided by financing activities (106,879) 93,839
Net Change in Cash and Cash
Equivalents (204) 4,289
Cash and Cash Equivalents at
Beginning of Period 4,548 --
Cash and Cash Equivalents at
End of Period $ 4,344 $ 4,289
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 December 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 December 29, 1998, and March 31, 1998, the
results of operations for the thirteen and thirty-nine weeks ended
December 29, 1998 and December 23, 1997, and cash flows for the
thirty-nine weeks ended December 29, 1998 and December 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 thirty-nine
weeks ended December 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)
(Dollars in thousands except Thirty-nine weeks ended
per share data) December 23, 1997
Total revenue $ 345,357
Net income 14,116
Net income per share - Basic .57
Net income per share - Diluted .56
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 thirty-
nine weeks ended December 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 - Subsequent Events.
On January 7, 1999 the Company entered into a letter of intent
with PHI to purchase 99 Pizza Hut units in four states for $31
million. These units generated nearly $58 million in sales during
the 52 weeks ended November 1998. The Company will pay an ongoing
royalty rate of 6.5% of sales on the acquired units in accordance
with Pizza Hut's current refranchising contract. As each asset is
upgraded to meet current re-build standards, as established by
PHI, the Company will commence paying a 4% royalty rate over a new
20-year period. The Company expects all assets will meet upgrade
standards within eight years. Consummation of the transaction
is subject to negotiation of definitive asset acquisition
agreement, board approval of both companies, and approval from
regulatory agencies.
On January 13, 1999 the Company announced that it entered into a
six-year exclusive food and supplies distribution agreement with
AmeriServe Food Distribution, Inc. The initial term of the
agreement will expire December 31, 2000 and provides two automatic
renewal options for two years each at market rates. The terms of
the contract will provide incentives for using more efficient
distribution practices and will result in a reduction in the
distribution costs incurred by the Company. AmeriServe acquired
PepsiCo Food Systems (PFS) in July 1997 and has been providing
distribution services to the Company through its PFS relationship
since the acquisition.
Note 5 - Earnings per Share
The following table sets forth the computation of basic and
diluted earnings per share:
Thirteen Weeks Ended
Dec. 29, 1998 Dec. 23, 1997
Thirty-Nine Weeks Ended
Dec. 29, 1998
Dec. 23, 1997
Numerator:
Net Income $ 3,889,000 $3,058,000 $41,725,000 $13,525,000
Denominator:
Denominator for
basic earnings
per share -
weighted average
shares 24,491,208 24,720,901 24,669,028 24,678,486
Effect of
dilutive
securities:
Employee stock
options 294,230 501,252 355,074 430,446
Denominator
For diluted
earnings per
share - adjusted
weighted average
share and assumed
conversions 24,785,438 25,222,153 25,024,102 25,108,932
Earning per
share - Basic $ .16 $ .12 $ 1.69 $ .55
Earning per
share - Diluted $ .16 $ .12 $ 1.67 $ .54
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 December 29, 1998, operated 642 Pizza Hut units in 24
states. On January 7, 1999 the Company announced its intent to
purchase 99 additional Pizza Hut units from PHI. (See Note 4 for
information regarding the 99 unit acquisition.) 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.
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 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 Devel- Temp Owner-
ning sions oped4 Closed3 Closed4 ship2 Ending
Company
Owned
Pizza Hut
Restaurant 524 (1) 2 (1) (5) -- 519
Delivery 125 1 -- -- (3) -- 123
Total
Company
Owned 649 -- 2 (1) (8) -- 642
1999 YEAR-TO-DATE
Change
in
Begin- Conver Devel- Temp Owner
ning sions oped4 Closed3 Closed4 ship2 Ending
Pizza Hut
Restaurant 536 (2) 5 (1) (19) -- 519
Delivery 144 2 -- -- (23) -- 123
Total
Pizza Hut 680 -- 5 (1) (42) -- 642
Tony Roma's1 45 -- -- -- -- (45) --
Total
Company
Owned 725 -- 5 (1) (42) (45) 642
Franchised
Tony Roma's 147 -- 2 -- (2) (147) --
Total System 872 -- 7 (1) (44) (192) 642
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.
3Unit temporarily closed for remodel.
4Excludes one Pizza Hut replacement unit.
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 38 Pizza Hut units, converted one
unit from a restaurant unit to a delivery unit during the thirty-
nine weeks ended December 29, 1998. Additionally, five Pizza Hut
units were developed, four Pizza Hut units closed, and one
restaurant unit was converted to a delivery unit during the thirty-
nine weeks ended December 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 thirty-nine weeks ended December 29, 1998 and December 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 Weeks Ended
Dec. 29, 1998 Dec. 23, 1997
Thirty-Nine Weeks Ended
Dec. 29, 1998 Dec. 23, 1997
Revenue
Restaurant
Sales $ 71,461 $72,696 $215,943 $210,824
Delivery Sales 17,968 17,857 54,768 52,648
Total Revenue $ 89,429 $90,553 $270,711 $263,472
Restaurant
Operating
Expenses
as a Percentage
of Revenue:
Total Expenses (1)
Cost of Sales 28.5% 27.4% 26.8% 26.7%
Direct Labor 27.5% 28.9% 27.7% 28.5%
Other 28.0% 28.3% 28.0% 27.8%
Total Operating
Expenses 84.0% 84.6% 82.5% 83.0%
Restaurant Based
Income 16.0% 15.4% 17.5% 17.0%
Restaurant
Expenses (2)
Cost of Sales 28.6% 27.4% 26.9% 26.8%
Direct Labor 26.4% 27.7% 26.5% 27.3%
Other 29.0% 29.0% 28.9% 28.3%
Total Operating
Expense 84.0% 84.1% 82.3% 82.4%
Restaurant Based
Income 16.0% 15.9% 17.7% 17.6%
Delivery
Expenses (3)
Cost of Sales 27.9% 27.0% 26.3% 26.5%
Direct Labor 31.8% 34.0% 32.2% 33.3%
Other 24.1% 25.5% 24.8% 25.6%
Total
Operating
Expense 83.8% 86.5% 83.3% 85.4%
Restaurant
Based
Income 16.2% 13.5% 16.7% 14.6%
(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 29, 1998 with the Thirteen and
Thirty-Nine Weeks Ended December 23, 1997
Revenue from the Company's Pizza Hut operations was $89.4 million
during the quarter, which was $1.1 million or 1.2% below the $90.6
million reported in the same period of the prior year. The
decline was due to a planned reduction in unit count of 42 units
from the prior year and was partially offset by a 4.2% increase in
comparable sales for the quarter. Despite the reduction in unit
count associated with the asset re-imaging strategy, year-to-date
revenue was $270.7 million for a $7.2 million or 2.7% increase
over the $263.5 million reported in the same period of the prior
year. The year-to-date increase was largely due to the timing of
the prior year acquisitions and year-to-date comparable sales
growth of 2.3%. Comparable sales growth in the Company's delivery
business improved 7.3% and 7.0% for the quarter and year-to-date,
respectively. Comparable sales growth in the Company's restaurant
(Red Roof) business improved 3.4% for the quarter and 1.2% the
year-to-date. Average unit volumes increased by 5.2% and 3.5%
during the quarter and year-to-date, respectively, over the same
periods of the prior year due to comparable sales growth and 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 110 basis points
compared to the same quarter of the prior year primarily due to an
increase in cheese costs for the quarter of approximately 32%.
Also contributing to the increase in cost of sales as a percent of
revenue was the negative impact on margins associated with the
increased Stuffed Crust pizza product mix. The food cost of this
product is significantly higher than other pizza products due to
the high cheese content. Pizza Hut began promoting the Stuffed
Crust pizza in early November 1998. The product mixed at
approximately 14.8% of total pizza sales during the promotion
period which ran through the end of December 1998. For the
quarter, this product mixed at approximately 11% of total pizza
sales compared to a 3% mix during the same quarter of the prior
year. For the year-to-date, cost of sales as a percent of revenue
was flat despite an increase in cheese costs of approximately
19%. This was achieved due to more normalized ingredient costs
(except cheese) and improved operational control in acquired
stores. The Company benefited in the quarter and year-to-date
from the aforementioned reduced ingredient costs compared to the
same periods of the prior year due to better optimization of
ingredient formulations and supply contract negotiations. (See
Effects of Inflation and Other Matters for additional information
on cheese and other ingredient costs.)
Direct labor declined 140 basis points for the quarter and 80
basis points for the year-to-date compared to the same periods of
the prior year. The improvement for the quarter and year-to-date
results from leverage associated with positive comparable sales
volumes, labor efficiencies primarily achieved in acquisition
markets, and reduction in worker's compensation expense.
Other operating expense declined 30 basis points compared to the
same quarter of the prior year. This improvement resulted from
increased leverage from higher unit volumes on fixed costs. For
the year-to-date, other operating expense increased 20 basis
points compared to the same period 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 the
aforementioned 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 Weeks Ended
Dec. 29, 1998 Dec. 23, 1997
Thirty-Nine Weeks Ended
Dec. 29, 1998
Dec. 23, 1997
Restaurant
Expenses (2)
Cost of Sales 28.6% 27.4% 26.9% 26.8%
Direct Labor 26.4% 27.7% 26.5% 27.3%
Revenue
Restaurant
Sales $ n/a $ 20,368 $ 22,513 $61,114
Franchise
Revenue n/a 2,005 2,114 6,151
Total Revenue $ n/a $ 22,373 $ 24,627 $67,265
Restaurant
Operating
Expenses
as a Per-
centage
of Sales
Cost of Sales n/a 35.1% 34.8% 33.3%
Direct Labor n/a 31.0% 30.2% 31.5%
Other n/a 25.8% 23.5% 25.1%
Total
Operating
Expenses n/a 91.9% 88.5% 89.9%
Restaurant
Based
Income n/a 8.1% 11.5% 10.1%
Income
from
System
Operations (1) n/a 16.4% 19.1% 18.3%
(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
Thirty-Nine Weeks Ended December 29, 1998 with the Thirteen and
Thirty-Nine Weeks Ended
December 23, 1997
Total consolidated revenue for the quarter was $89.4 million,
which was 20.8% or $23.5 million below the same period of the
prior year. On a year-to-date basis, consolidated revenue was
$295.3 million, which was 10.7% or $35.4 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 and year-to-date.
Consolidated income from restaurant operations was $14.3 million
or 16% of revenue for the quarter compared to $17.6 million or
15.6% last year. For the year-to-date, consolidated income from
restaurant operations was $52 million or 17.6% of revenue compared
to $57 million or 17.2% of revenue last year. Income from
restaurant operations as a percent of revenue increased over the
prior year for the quarter and year-to-date due to improved margin
performance in the Company's Pizza Hut units. These improvements
were partially offset by increased cheese costs of approximately
32% for the quarter and 19% for the year-to-date compared to the
same periods of the prior year. 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, were
basically flat for the quarter and year-to-date compared to the
same periods of the prior year. Depreciation and amortization
decreased $854 thousand or 29.2% and $1.7 million or 20.3% 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 $2.2
million for the quarter. For the year-to-date, interest expense
declined by $3.4 million due to the debt reduction from the
proceeds of the Romacorp recapitalization, which was partially
offset by the impact of lower debt levels in the first quarter of
last year compared to the same period this year.
Other income was $401 thousand and $1.1 million for the quarter
and year-to-date, respectively, compared to $215 thousand and $445
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 and business
interruption claims.
Net income for the quarter was $3.9 million compared to $3.1
million recorded in the same period of the prior year. On a year-
to-date basis, net income was $41.7 million compared to $13.5
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 $19 million for the thirty-nine weeks
ended December 29, 1998, a decrease of 63.80% compared to the
$52.6 million reported in the thirty-nine weeks ended December 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 and third
quarters of fiscal 1999.
Restaurant development and normal recurring capital expenditures
resulted in $13.7 million of total capital expenditures ($1.9
million of which were Tony Roma expenditures) for the thirty-nine
weeks ended December 29, 1998 compared to $21.8 million of total
capital expenditures ($8.9 million of which were Tony Roma
expenditures) for the same period of the prior year. The decrease
was largely due to Romacorp's capital expenditures no longer being
reflected in the Company's financial statements subsequent to the
recapitalization.
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
December 29, 1998 the Company had $175 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. The pending 99 Pizza Hut unit acquisition will be funded
through the Company's unsecured line of credit. (See Note 4 for
information regarding the 99 unit acquisition.) 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 $2.7 million for the
purchase of treasury stock. For the year-to-date, the Company has
expended $3.8 million for purchase of treasury stock. At the end
of the quarter, 967,700 shares remain authorized for re-purchase.
During the thirty-nine weeks ended December 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 32% higher than the costs
incurred during the comparable period of the prior year. Based
upon recent declines in the Chicago Mercantile Exchange cheese
block market and available forecasts, management expects cheese
costs to be significantly below third quarter levels during the
fourth fiscal quarter. However, management believes cheese costs
in the fourth fiscal quarter could exceed the prior year's levels
by as much as 15% to 20%.
Increases in interest rates would directly affect the Company's
financial results. At December 29, 1998, approximately 81% 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. The
final phase of a four-phase compliance program was completed as
scheduled in December 1998. This plan included all development and
testing of internally developed systems and certification of
vendor provided equipment and systems. During the first part of
calendar year 1999, the Company will be installing new equipment
or upgrades to vendor systems that were previously scheduled for
replacement. As a result of these replacements and upgrades,
these systems will be Year 2000 compliant. The Company does not
believe that the costs of equipment or upgrades will be material.
Throughout 1999 the Company will continue the testing of both the
existing and newly developed or installed systems. This plan
addresses all of the Company's significant computer systems
including the Point-of-Sale (POS), 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
None
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)
None
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: January 25, 1999
Vice President Finance Troy D. Cook
Chief Financial Officer
Principal Financial Officer
DATE: January 25, 1999
Vice President, Alan L. Salts
Restaurant Services
Chief Accounting Officer
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