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 28, 1999
[ ] 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 25, 1999:
Common Stock, $0.01 par value - 24,469,413
NPC INTERNATIONAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets --
September 28, 1999
and March 30, 1999 3
Consolidated Statements of Income --
For the Thirteen and Twenty-Six
Weeks Ended September 28, 1999
and September 29, 1998 4
Consolidated Statements of Cash Flows --
For the Twenty-Six Weeks Ended
September 28, 1999 and
September 29, 1998 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and
Results of Operations 7
PART II. OTHER INFORMATION 17
PART I. FINANCIAL INFORMATION
ITEM I. Financial Statements
NPC International, Inc.
Consolidated Balance Sheets
(Unaudited, dollars in thousands)
ASSETS Sept. 28, 1999 March 30, 1999
Current assets:
Cash and cash equivalents $ 2,891 $ 4,021
Accounts receivable, net 1,382 1,817
Inventories of food and supplies 3,541 2,972
Deferred income tax asset 3,064 3,064
Prepaid insurance premiums 202 963
Prepaid rent payments 1,644 1,486
Prepaid expenses and other
current assets 1,066 1,429
Total current assets 13,790 15,752
Facilities and equipment, net 113,538 95,228
Franchise rights, less accumulated
amortization of $29,221 and
$25,122, respectively 243,619 217,995
Goodwill, less accumulated
amortization of $1,497 and
$1,432, respectively 2,643 2,708
Investments, at cost 6,738 6,750
Other assets 5,659 5,650
TOTAL ASSETS $385,987 $344,083
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,426 $ 12,506
Payroll taxes 1,828 2,046
Sales taxes 2,171 2,174
Accrued interest 3,362 3,088
Accrued payroll 8,852 9,042
Income tax payable 3,052 1,889
Current portion of closure reserve 1,500 2,260
Insurance reserves 4,228 4,934
Other accrued liabilities 6,802 5,742
Total current liabilities 42,221 43,681
Long-term debt 156,200 123,500
Deferred income tax liability 4,386 4,386
Closure reserve 5,068 5,691
Other deferred items 5,079 5,837
Insurance reserves 9,000 8,000
Stockholders' equity:
Common stock, $.01 par value
100,000,000 shares authorized,
27,592,510 issued 276 276
Paid-in capital 22,007 21,927
Retained earnings 164,926 153,103
187,209 175,306
Less treasury stock at cost,
representing 3,123,931 and
3,063,074 shares, respectively (23,176) (22,318)
Total stockholders' equity 164,033 152,988
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $385,987 $344,083
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 Twenty-Six Weeks
Ended Ended
Sept. 28, 1999
Sept. 29, 1998
Sept. 28, 1999
Sept. 29, 1998
Net sales $113,494 $ 90,407 $221,170 $203,795
Net franchise revenue -- -- -- 2,114
Total revenue 113,494 90,407 221,170 205,909
Cost of sales 31,023 24,262 57,751 54,908
Direct labor 32,007 24,967 62,660 57,152
Other 32,401 25,705 62,555 56,189
Total operating expenses 95,431 74,934 182,966 168,249
Income from restaurant
operations 18,063 15,473 38,204 37,660
General and administrative
expenses 5,514 4,748 10,833 11,010
Depreciation, amortization
and pre-opening costs 2,650 2,054 5,162 4,585
Operating income before
facility actions 9,899 8,671 22,209 22,065
Net (gain) from facility
actions (580) -- (310) --
Operating Income 10,479 8,671 22,519 22,065
Other income (expense):
Interest expense (2,770) (1,917) (5,142) (5,799)
Miscellaneous 381 453 983 719
Gain on recapitalization
of Romacorp -- -- -- 39,400
Income before income taxes 8,090 7,207 18,360 56,385
Provision for income taxes 2,830 2,521 6,423 18,549
Income before cumulative
effect of change in
accounting principle 5,260 4,686 11,937 37,836
Cumulative effect of change
in accounting principle -- -- (114) --
Net income $ 5,260 $ 4,686 $ 11,823 $ 37,836
Earnings per share -
basic before cumulative
effect of change in
accounting principle $ .21 $ .19 $ .49 $ 1.53
Cumulative effect of
change in accounting
principle -- -- (.01) --
Earnings per share -
basic $ .21 $ .19 $ .48 $ 1.53
Earnings per share -
diluted before cumulative
effect of change in
accounting principle $ .21 $ .19 $ .48 $ 1.51
Cumulative effect of
change in accounting
principle -- -- (.01) --
Earnings per share -
diluted $ .21 $ .19 $ .47 $ 1.51
Weighted average shares
outstanding - basic 24,511,409
24,744,246
24,526,070
24,751,294
Weighted average shares
outstanding - diluted 24,884,705
25,035,400
24,995,721
25,136,791
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. 28, 1999 Sept. 29, 1998
Operating Activities:
Net income $ 11,823 $ 37,836
Non-cash items included in net income:
Depreciation and amortization 12,851 12,129
Net (gain)/loss from facility actions (310) --
Non-cash gain on recapitalization
of Romacorp -- (38,758)
Change in assets and liabilities,
net of acquisitions and
recapitalization:
Accounts receivable, net 435 (360)
Inventories of food and supplies (250) (491)
Prepaid expenses and other
current assets 599 (1,583)
Accounts payable (2,080) (1,980)
Payroll taxes (218) 55
Accrued interest 274 (1,216)
Accrued payroll (190) (1,123)
Income tax payable 1,163 18,248
Insurance reserves 294 486
Other accrued liabilities 1,092 182
Net cash flows provided by
operating activities 25,483 23,425
Investing Activities:
Net proceeds from recapitalization
of Romacorp -- 99,921
Acquisitions, net of cash (37,275) --
Capital expenditures (20,511) (10,477)
Changes in other assets, net (1,945) (1,451)
Proceeds from sale of capital assets 1,196 1,424
Net cash flows (used in) provided
by investing activities (58,535) 89,417
Financing Activities:
Net change in revolving credit
agreements 40,700 (104,500)
Purchase of treasury stock (1,111) (1,127)
Payment of long-term debt (8,000) (8,000)
Exercise of stock options 333 170
Net cash flows provided by (used in)
financing activities 31,922 (113,457)
Net Change in Cash and Cash Equivalents (1,130) (615)
Cash and Cash Equivalents at
Beginning of Period 4,021 4,548
Cash and Cash Equivalents at
End of Period $ 2,891 $3,933
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"). Romacorp, Inc. ("Romacorp"), a wholly owned
subsidiary of the Company until June 30, 1998 was recapitalized
(See Note 3 - Recapitalization). These financial statements
include Romacorp's results of operations through the quarter ended
June 30, 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 30, 1999.
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 28, 1999 and March 30, 1999, the
results of operations for the thirteen and twenty-six weeks ended
September 28, 1999 and September 29, 1998, and cash flows for
twenty-six weeks ended September 28, 1999 and September 29, 1998.
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 February 4, 1999 the Company acquired 99 units from Pizza Hut,
Inc ("PHI") in and around Pensacola, Florida; Panama City,
Florida; Mobile, Alabama; Augusta, Georgia; and Savannah, Georgia
for $31 million plus an amount for cash on hand, inventories and
certain prepaid items. These 60 restaurants and 39
delivery/carryout units generated approximately $58 million in
sales during the 52 weeks ended November 1998. The purchase price
of this acquisition was funded through the Company's revolving
credit facility and was allocated between facilities and equipment
and franchise rights. Subsequent to completing the 99-unit
acquisition the Company exercised its option to purchase eight of
the certain fee simple properties formerly leased from PHI. These
properties were acquired in August 1999 for $2.6 million.
On July 22, 1999 the Company acquired 70 Pizza Hut units from PHI
in and around Tallahassee, Florida; Albany, Georgia; Huntsville,
Alabama; and Lexington, Kentucky for $33.6 million plus an amount
for cash on hand, inventories and certain prepaid items. These 52
restaurants and 18 delivery/carryout units generated approximately
$48 million in sales during the 52 weeks ended May 1999. The
purchase price of this acquisition was funded through the
Company's revolving credit facility and was allocated between
facilities and equipment and franchise rights.
Note 3 - Recapitalization
On June 30, 1998 the Company completed the recapitalization of
Romacorp resulting in a net pre-tax gain of $39.4 million. The
Company's remaining minority interest is carried at cost. 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 Statements of Income for the quarter ended
June 30, 1998.
Note 4 - Change in Accounting Principle
The Company has adopted Statement of Position 98-5 "Accounting for
Costs of Start-up Activities," which required the Company to
expense pre-opening costs as incurred and to report the initial
adoption as a cumulative effect of a change in accounting
principle. Previously, the Company capitalized costs associated
with the opening of its restaurants and amortized those costs over
twelve months from the units' opening date. The adoption resulted
in a charge in the quarter ended June 29, 1999 of $175,000 or
$114,000 net of taxes to expense costs that had previously been
capitalized prior to March 30, 1999.
Note 5 - Earnings per Share
The following table sets forth the computation of basic and
diluted earnings per share before the cumulative effect of a
change in accounting principle:
Thirteen Weeks Twenty-Six Weeks
Ended Ended
Sept. 28, 1999
Sept. 29, 1998
Sept. 28, 1999
Sept. 29, 1998
Numerator:
Income before
cumulative effect
of change in
accounting principle $5,260,000 $4,686,000
$11,937,000 $37,836,000
Denominator:
Weighted average
shares 24,511,409 24,744,246
24,526,070 24,751,294
Employee stock options 373,296 291,154
469,651 385,497
Denominator for diluted
Earnings per share 24,884,705 25,035,400
24,995,721 25,136,791
Earnings per share -
basic $ .21 $ .19
$ .49 $ 1.53
Earnings per share -
diluted $ .21 $ .19
$ .48 $ 1.51
ITEM 2. 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
Statements 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 30, 1999.
Overview - The Company is the largest Pizza Hut franchisee in the
world and at September 28, 1999, operated 797 Pizza Hut units in
26 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. The Company currently
estimates that it operates approximately 12% of the entire Pizza
Hut system excluding licensed units.
The Company, through its wholly owned subsidiary, Romacorp, was
also the owner/franchisor of the Tony Roma's concept, from its
acquisition in June 1993 through June 30, 1998 when Romacorp was
recapitalized. (See Note 3 for information regarding the
recapitalization.)
Products & Service - 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. 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 years
ending March 29, 2000 and March 30, 1999 both contain 52 weeks.
Development and Facility Actions - In the fourth quarter of fiscal
1998 the Company initiated an asset re-imaging strategy. This plan
calls for the closure of 31 units, the consolidation of 11 units
into existing locations and the consolidation and relocation of 53
Pizza Hut units to 45 new locations to redefine trade areas,
improve market presence and to upgrade certain assets to more
competitive formats. Relocated units will be moved to improved
trade areas and fall into the following categories: relocation of
delivery units to more visible locations and formats; relocation
of older dine-in assets in rural markets to new prototype units;
and conversion of certain metro markets to main-path restaurants.
Of the 95 units to be closed as part of this strategy, 69 units
have been closed including seven units in the current quarter and
16 units for the year-to-date. Twenty-two remaining units are
expected to close within the current fiscal year, and four units
will remain in operation. Recently, the Company has been able to
extinguish certain lease liabilities for several closed units at
terms more favorable than anticipated when the estimated liability
was initially established. Additionally, four leases have been
restructured making it feasible to scrape (demolish) the existing
building and rebuild a new facility at the current location,
thereby making it unnecessary to abandon the site and incur the
related closing costs. Furthermore, the Company has concluded
that four units originally identified for closure will remain in
operation at their current locations due to improvement in store
performance and outlook resulting primarily from surrounding
positive economic changes. As a result of these specific events,
the Company has updated its estimate of the liability needed to
complete the re-imaging strategy and determined that it is
appropriate to reverse $780 thousand of the $11.4 million
impairment and loss provision recorded in March 1998.
Below is a summary of the charges/disbursements that were planned
as part of the 1998 impairment and loss provision related to the
Company's re-imaging plan.
Twenty-Six
Thirteen Weeks Weeks From
Ended Ended Plan
Sept. 28, 1999 Sept. 28,1999 Inception
(Dollars in thousands)
Beginning of period $ 4,200 $ 4,500 $11,400
Planned charges/
disbursements (320) (620) (7,520)
(Income) expense impacts:
Favorable changes to
lease terms and other
estimates (610) (610) (610)
Modifications due to
economic changes (170) (170) (170)
Sub-total (780) (780) (780)
Balance at
September 28, 1999 $ 3,100 $ 3,100 $ 3,100
The balance at September 28, 1999 is included in "closure
reserves" on the Company's balance sheet and consists of long-term
estimates of obligations to be paid subsequent to the closure of
the unit and cost to de-identify the assets upon closure as
required by the Company's franchise agreement. The amount utilized
from plan inception includes $5.7 million related to impairment
and loss on disposition of assets. Management believes the
remaining balance is adequate to complete the 1998 re-imaging
plan. However, the estimate includes assumptions regarding the
Company's ability to sub-lease properties and/or buy out of lease
obligations; accordingly, actual results could differ from amounts
estimated. Through September 28, 1999 the amounts utilized apply
only to actions provided for in the plan.
In addition to units expected to be closed during the year as part
of the 1998 re-imaging plan, the Company closed and relocated
three units during the current quarter, and recorded a provision
of $200 thousand consisting of $86 thousand for assets that were
impaired as a result of the closure decision, and $114 thousand of
de-identification costs and contractual lease carry costs, net of
estimated sub-rental income. The Company also recorded a $270
thousand provision in the quarter ended June 29, 1999 for facility
actions at three locations. Through September 28, 1999 the Company
has recorded $470 thousand as a provision for fiscal 2000 facility
actions. Offsetting these charges was the $780 thousand reversal
of previous charges resulting in a gain from facility actions of
$580 thousand for the quarter and $310 thousand for the year-to-
date.
The Company expects to continue to accrue contracted closure
costs, and, if appropriate, impair asset values at the time the
decision to close a store is made. However, closure decisions
under future phases of the Company's asset re-imaging initiative
are expected to be made as often as quarterly, which is more
frequent than the Company's past practice. For the balance of the
2000 fiscal year, charges for facility actions are expected to be
similar to the quarterly charges taken to date but could vary
depending upon the number of units impacted by the Company's
future strategic decisions.
Activity with respect to unit count during the quarter is set
forth in the table below:
FISCAL 2000 SECOND QUARTER UNIT ACTIVITY
Beginning Developed Closed Acquired Ending
Restaurant 573 5 (9) 52 621
Delivery 164 1 (7) 18 176
Total 737 6 (16) 70 797
FISCAL 2000 YEAR TO-DATE UNIT ACTIVITY
Beginning Developed Closed Acquired Ending
Restaurant 573 14 (18) 52 621
Delivery 162 8 (12) 18 176
Total 735 22 (30) 70 797
Results of Operations - The "operations summaries" set forth an
overview of revenue and operating expenses as a percent of revenue
for the thirteen and twenty-six weeks ended September 28, 1999 and
September 29, 1998 (dollars in thousands) for each concept
operated by the Company. 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 rent, depreciation,
advertising, utilities, supplies, franchise fees, and insurance
among other costs directly associated with operating a restaurant
facility.
PIZZA HUT OPERATIONS
(Unaudited)
Thirteen Weeks Twenty-Six Weeks
Ended Ended
Sept. 28, 1999
Sept. 29, 1998
Sept. 28, 1999
Sept. 29, 1998
Revenue
Restaurant Sales $ 88,228 $ 72,436 $ 170,897 $144,676
Delivery Sales 25,266 17,971 50,273 36,606
Total Revenue $113,494 $ 90,407 $ 221,170 $181,282
Restaurant Operating
Expenses as a
Percentage of Revenue:
Total Expenses (1)
Cost of Sales 27.3% 26.9% 26.1% 26.0%
Direct Labor 28.2% 27.6% 28.3% 27.8%
Other 28.6% 28.4% 28.3% 28.0%
Total Operating
Expenses 84.1% 82.9% 82.7% 81.8%
Income from
Restaurant Operations 15.9% 17.1% 17.3% 18.2%
Restaurant Expenses (2)
Cost of Sales 27.4% 27.0% 26.1% 26.1%
Direct Labor 27.1% 26.5% 27.2% 26.6%
Other 29.7% 29.2% 29.4% 28.8%
Total Operating
Expense 84.2% 82.7% 82.7% 81.5%
Restaurant Based Income 15.8% 17.3% 17.3% 18.5%
Delivery Expenses (3)
Cost of Sales 27.2% 26.4% 25.9% 25.5%
Direct Labor 32.1% 32.1% 32.3% 32.3%
Other 24.5% 25.3% 24.5% 25.2%
Total Operating
Expense 83.8% 83.8% 82.7% 83.0%
Delivery Based Income 16.2% 16.2% 17.3% 17.0%
(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 28, 1999 with the Thirteen and
Twenty-Six Weeks Ended September 29, 1998
Revenue from the Company's Pizza Hut operations was $113.5 million
during the quarter, which was $23.1 million or 25.6% above the
$90.4 million reported in the same period last year. For the year-
to-date, revenue was $221.2 million for an increase of $39.9
million or 22% over the $181.3 million reported last year. The
increase in revenue for the quarter and year-to-date was largely
due to the revenue generated by the 169 units acquired in calendar
1999. These units recorded revenue of $23.6 million during the
quarter and $38.7 million for the year-to-date. Comparable store
sales improvement of 2.7% for the quarter and 4% for the year-to-
date also contributed to the year over year increase in sales.
The Company's delivery units generated comparable store sales
growth of 3.1% for the quarter and 5.1% for the year-to-date while
the Company's restaurant units generated comparable store sales
growth of 2.1% for the quarter and 3.4% for the year-to-date.
Average unit volumes for all asset types increased 4.7% for the
quarter and 5.4% for the year-to-date due to comparable store
sales growth and the favorable impact of the asset re-imaging
plan. Comparable sales improvement for the quarter and year-to-
date was primarily due to the continued success of the Big New
Yorker Pizza, which represented over 13% of the Company's net
pizza sales during the quarter and year-to-date.
Cost of sales as a percent of revenue increased 40 basis points
for the quarter compared to the same quarter of the prior year,
primarily due to an increase in cheese costs of approximately 8%
over prior years' unusually high levels and higher food cost
associated with the Big New Yorker Pizza. The increase for the
quarter was partially offset by reduced distribution costs related
to a distribution contract entered into in January 1999. For the
year-to-date, cost of sales as a percent of revenue was
essentially flat. The reduced distribution costs for the year-to-
date has effectively offset a year-to-date increase in cheese
costs of approximately 5%, higher food costs associated with the
Big New Yorker Pizza and increased paper costs associated with the
Star Wars promotion. (See Effects of Inflation and Other Matters
for additional information on cheese and other ingredient costs.)
Direct labor as a percent of revenue increased 60 and 50 basis
points for the quarter and year-to-date, respectively, compared to
the same periods of the prior year. The increase for the quarter
was partially attributable to the dilutive effect of the 169
acquisition stores, which have historically incurred a higher
labor percentage than other Company-owned stores and training
costs incurred in the 70 units acquired in July 1999. For the
year-to-date labor costs were impacted by increased staffing
levels and training costs related to the Star Wars promotion to
meet anticipated demand as well as the aforementioned dilutive
effect of acquisition stores. (See Effects of Inflation and Other
Matters for additional information on labor costs.)
Other operating expense as a percent of revenue increased 20 and
30 basis points for the quarter and year-to-date, respectively,
compared to the same periods last year. The increase for the
quarter and year-to-date was largely due to an increase in the
effective royalty rate of approximately 40 basis points for the
quarter and year-to-date (due to the 6.5% royalty rate on the 99-
unit and 70-unit acquisitions). The effect of this royalty rate
structure is expected to increase total other operating expenses
by 45 to 55 basis points over fiscal 1999 levels during the
balance of the year and will primarily be reflected in the
Company's restaurant units, while the Company's delivery units
will not be impacted. These increases were partially offset by
increased leverage associated with positive comparable sales
volumes and reductions in other controllable expenses.
Tony Roma's Results of Operation
As a result of the recapitalization of Romacorp effective June 30,
1998 Romacorp's results of operations are only included in fiscal
1999 results through the date of recapitalization. During the
thirteen weeks ended June 30, 1998 restaurant sales were $22.5
million, and income from restaurant operations, which included net
franchise revenue, was $4.7 million.
TONY ROMA'S OPERATIONS
(Unaudited)
(dollars in thousands)
Thirteen Weeks Ended
June 30, 1998
Revenue:
Restaurant Sales $ 22,513
Franchise Revenue 2,114
Total Revenue $ 24,627
Restaurant Operating Expenses
as a Percentage of Sales:
Cost of Sales 34.8%
Direct Labor 30.2%
Other 23.5%
Total Operating Expenses 88.5%
Restaurant Based Income 11.5%
Income from System Operations (1) 19.1%
(1) Net franchise revenue and restaurant based income as a percent
of total revenue.
General, Administrative and Other Items
General and administrative expenses, as a percent of revenue,
declined 40 basis points for the quarter and year-to-date compared
to the same periods of the prior year due to the increased
leverage associated with higher aggregate sales volume and
positive comparable sales growth. For the year-to-date, the
decline in these costs in nominal dollars (due to the
recapitalization of Romacorp) was largely offset by the required
field infrastructure additions to support the calendar 1999
acquisitions.
Depreciation, amortization and pre-opening costs increased $596
thousand or 29% and $577 thousand or 12.6% for the quarter and
year-to-date, respectively, compared to the same periods of the
prior year. The increase for the quarter and year-to-date was due
to an increase in smallwares amortization, an increase in pre-
opening cost (due to re-imaging plan activity) and franchise
rights amortization associated with acquisitions. The increase for
the year-to-date was partially offset by a reduction in
amortization expense as a result of the recapitalization of
Romacorp. Pre-opening costs in the Company's Pizza Hut operations
of $144 thousand and $296 thousand were incurred during the
quarter and year-to-date, respectively, compared to $49 thousand
and $101 thousand recorded in the same periods of the prior year.
Interest charges for the quarter were $853 thousand or 44.5%
higher than the same period of the prior year due to an increase
in borrowings to fund the calendar 1999 acquisitions. For the year-
to-date, average outstanding borrowings decreased from the prior
year as the proceeds from the Romacorp recapitalization reduced
debt at the end of the last years first quarter. The lower
average borrowings in the current year have resulted in a decrease
in interest charges of approximately $657 thousand or 11.3%.
Miscellaneous income was $381 thousand and $983 thousand for the
quarter and year-to-date, respectively, compared to $453 thousand
and $719 thousand reported in the same periods of the prior year.
The increase for the year-to-date was due to the gain on sale or
disposition of assets primarily due to involuntary conversions.
Net income for the quarter was $5.3 million compared to $4.7
million recorded in the same period of the prior year. For the
year-to-date, net income was $11.9 million compared to $37.8
million reported last year. Net income for the prior year-to-date
included a gain from the recapitalization of Romacorp of $39.4
million on a pre-tax basis or $26.8 million, net of taxes. Taxes
for the year are being provided at an effective rate of 35%
compared to last year's effective rate of 33%. The prior year
effective tax rate would have been 35%, but was reduced due to the
weighted-average effect of a lower tax rate associated with the
Romacorp recapitalization gain.
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 $25.5 million for the twenty-six weeks
ended September 28, 1999 compared to the $23.4 million reported in
the prior year. During the current year-to-date, cash from
operations was positively impacted by the 169 stores acquired in
calendar 1999. These stores, like the Company, operate with a
working capital deficit. Offsetting this positive impact to cash
flows was the exclusion of cash provided by operations from
Romacorp.
Restaurant development, start-up technology investments in
acquired stores and normal recurring capital expenditures resulted
in $20.5 million of total capital expenditures for the twenty-six
weeks ended September 28, 1999 compared to $10.5 million of total
capital expenditures for the same period of the prior year. The
increase was largely due to new store development associated with
the Company's asset re-imaging program.
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 May 2001. At September
28, 1999 the Company had $109 million in unused borrowing capacity
under this agreement. Access to the unused capacity is subject to
certain limitations of the Company's debt covenants. 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 one million shares.
During the thirteen weeks ended September 28, 1999 the Company
purchased 92,500 shares and at September 28, 1999 875,200 shares
remained authorized for re-purchase.
During the twenty-six weeks ended September 28, 1999 the Company
made all scheduled principal and interest payments.
Seasonality
Pizza Hut sales are largely driven through advertising and
promotion and are adversely impacted in economic times that
generally require high cash flow from consumers 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.
The state of Oregon increased the state minimum wage rate from
$6.00 per hour to $6.50 per hour effective January 1, 1999. The
state of Delaware increased the state minimum wage rate from $5.15
per hour to $5.65 per hour effective May 1, 1999. The state of
Washington increased the state minimum wage rate from $5.15 per
hour to $5.65 per hour effective January 1, 1999 and will increase
the rate to $6.50 per hour effective January 1, 2000. The Company
currently operates 23, 10 and 5 Pizza Hut units in Oregon,
Delaware and Washington, respectively. The impact of these
increases 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 approximately 8% higher than
the unusually high costs incurred during the comparable period of
the prior year when cheese prices increased 30%. Based upon the
recent significant decline in the cheese block market and
available forecasts, management expects the Company to benefit
from an estimated decline in cheese prices during the third
quarter cost of sales by 100 to 200 basis points compared to the
prior year.
Increases in interest rates would directly affect the Company's
financial results. At September 28, 1999 approximately 46% 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.
Year 2000 Compliance
The Company is in the process of evaluating and modifying its
computer systems and applications for Year 2000 issues. The final
phase of a four-phase readiness 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 calendar 1999 the Company
is in the process of testing and rolling out vendor software
upgrades. To date, the Company has completed all identified
hardware upgrades. As a result of these replacements and
upgrades, these systems will be Year 2000 ready. 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 and
will evaluate any potential issues. 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. The Company completed an
inventory of its large suppliers and has mailed letters requesting
information on their Year 2000 status. Of approximately 220
inquiries made, 59% have been received, which includes responses
from vendors the Company considers critical to its operations.
The Company has sent letters requesting status information from
lending and cash management banks. Of approximately 750 inquires
sent, 97% have been received. Responses received to date have not
identified any suppliers or banks considered to be high risk. The
Company is continuing the process of collecting the responses from
the suppliers and banks and will continue to follow up throughout
calendar 1999.
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 readiness
will be material to its financial position or results of
operation. 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 numerous 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. Given the Company's best efforts and execution of
remediation, replacement and testing, it is still possible that
there will be disruptions and unexpected business problems during
the early months of fiscal 2000. The Company will make diligent,
reasonable efforts to assess Year 2000 readiness and will
ultimately develop contingency plans for business critical systems
prior to the end of calendar 1999. However, no contingency plans
are being developed for the availability of key public services
and utilities. The Company is heavily dependant on the continued
normal operations of not only key suppliers of cheese and other
raw materials and major food and supplies distributor, but also on
other entities such as lending, depository and disbursement banks
and third party administrators of benefit plans. Despite the
Company's diligent preparation, unanticipated third-party
failures, general public infrastructure failures, or failure to
successfully conclude remediation efforts as planned could have a
material adverse impact on the results of operations, financial
condition or cash flows in 1999 and beyond. Lack of publicly
available hard currency or credit card processing capability
supporting the retail sales stream could also have a material
adverse impact on the results of operations, financial condition
or cash flows. The Company's 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
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 risks and uncertainties.
Forward looking statements can often be identified by the use of
forward looking terminology, such as "believes," "expects," "may,"
"will," "should," "could," "intends," "plans," "estimates," or
"anticipates," variations of these words or similar expressions.
Among the factors that could cause actual results to be materially
different from those described in the forward looking statements
are the following: consumer demand and market acceptance risk;
the effectiveness of franchisor advertising programs, 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 fluctua-
tions, the impact of competing restaurants and concepts, 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. Forward looking statements are not guarantees
of future performance or results.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
The Company does not believe it has any material exposure
associated with market risk sensitive instruments.
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 30, 1999.
ITEM 2. Changes in Securities
None
ITEM 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on July 13, 1999. At
the meeting, shareholders elected three directors.
Results of the voting in connection with this election were as
follows:
Election of Directors For Withheld
James K. Schwartz 23,172,127 11,715
William A. Freeman 23,172,127 11,715
Michael W. Gullion 23,172,127 11,715
The following directors were not required to stand for reelection
at the meeting (the year in which each director's term expires is
indicated in parenthesis):
Fran D. Jabara (2000), Robert E. Cressler (2000), O. Gene Bicknell
(2001), and Michael Braude (2001).
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
quarter ended September 28, 1999:
July 28, 1999 Changes in Registrant's Certifying Accountant
July 29, 1999 Acquisition or Disposition of Assets
8K/A - August 16, 1998 Changes in Registrant's Certifying
Accountant
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 26, 1999
Senior Vice President Finance Troy D. Cook
Chief Financial Officer
Principal Financial Officer
DATE: October 26, 1999
Vice President Alan L. Salts
Restaurant Services
Chief Accounting Officer
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