20
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 June
29, 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 July 19, 1999:
Common Stock, $0.01 par value - 24,550,851
NPC INTERNATIONAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets --
June 29, 1999 and March 30, 1999 3
Consolidated Statements of Income --
For the Thirteen Weeks Ended
June 29, 1999 and June 30, 1998 4
Consolidated Statements of Cash Flows --
For the Thirteen Weeks Ended
June 29, 1999 and June 30, 1998 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
ITEM I. Financial Statements
NPC International, Inc.
Consolidated Balance Sheets
(Unaudited, dollars in thousands)
ASSETS June 29, 1999 March 30, 1999
Current assets:
Cash and cash equivalents $ 5,125 $ 4,021
Accounts receivable, net 1,390 1,817
Inventories of food and supplies 3,174 2,972
Deferred income tax asset 3,064 3,064
Prepaid insurance premiums 537 963
Prepaid rent payments 1,474 1,486
Prepaid expenses and other
current assets 1,398 1,429
Total current assets 16,162 15,752
Facilities and equipment, net 100,249 95,228
Franchise rights, less accumulated
amortization of $27,101 and $25,122,
respectively 216,041 217,995
Goodwill, less accumulated amortization
oOf $1,465 and $1,432, respectively 2,676 2,708
Investments, at cost 6,737 6,750
Other assets 5,747 5,650
TOTAL ASSETS $347,612 $344,083
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,397 $ 12,506
Payroll taxes 1,620 2,046
Sales taxes 2,236 2,174
Accrued interest 1,454 3,088
Accrued payroll 7,028 9,042
Income tax payable 5,260 1,889
Current portion of closure reserve 2,260 2,260
Insurance reserves 4,994 4,934
Other accrued liabilities 6,081 5,742
Total current liabilities 47,330 43,681
Long-term debt 117,500 123,500
Deferred income tax liability 4,386 4,386
Closure reserve 5,493 5,691
Other deferred items 5,116 5,837
Insurance reserves 8,000 8,000
Stockholders' Equity:
Common stock, $.01 par value
100,000,000 shares authorized,
27,592,510 issued 276 276
Paid-in capital 21,991 21,927
Retained earnings 159,666 153,103
181,933 175,306
Less treasury stock at cost,
representing 3,041,659 and
3,063,074 shares, respectively (22,146) (22,318)
Total stockholders' equity 159,787 152,988
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $347,612 $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 Ended
June 29, 1999 June 30, 1998
Net Sales $107,676 $113,388
Net franchise revenue -- 2,114
Total revenue 107,676 115,502
Cost of sales 26,728 30,646
Direct labor 30,653 32,185
Other 30,200 30,484
Total operating expenses 87,581 93,315
Income from restaurant operations 20,095 22,187
General and administrative expenses 5,319 6,262
Depreciation and amortization 2,337 2,531
Operating income before facility actions 12,439 13,394
Facility actions 270 --
Operating income 12,169 13,394
Other income (expense):
Interest expense (2,403) (3,882)
Miscellaneous 504 266
Gain on recapitalization of
Romacorp, Inc. -- 39,400
Income before income taxes 10,270 49,178
Provision for income taxes 3,593 16,028
Net income before cumulative
effect of change in accounting
principle 6,677 33,150
Cumulative effect of accounting
change, net of tax (114) --
Net income $ 6,563 $ 33,150
Earnings per share - basic
(before cumulative effect of change
in accounting principle) $ .27 $ 1.34
Cumulative effect of change
in accounting principle (.01) --
Earnings per share - basic $ .26 $ 1.34
Earnings per share - diluted
(before cumulative effect of change
in accounting principle) $ .27 $ 1.31
Cumulative effect of change
in accounting principle (.01) --
Earnings per share - diluted $ .26 $ 1.31
Weighted average shares
outstanding - basic 24,540,731 24,758,341
Weighted average shares
outstanding - diluted 25,106,736 25,238,181
The accompanying notes are an integral part of these Consolidated
Financial Statements.
NPC International, Inc.
Consolidated Statements of Cash Flows
(Unaudited, dollars in thousands)
Thirteen Weeks Ended
June 29, 1999 June 30,1998
Operating Activities:
Net income $ 6,563 $ 33,150
Non-cash items included in net income:
Depreciation and amortization 6,268 6,839
Provision for facility actions 270 --
Non-cash gain on recapitalization
of Romacorp -- (38,758)
Change in assets and liabilities,
net of acquisitions
and recapitalization:
Accounts receivable, net 427 (106)
Inventories of food and supplies (202) (397)
Prepaid expenses and other
current assets 292 (32)
Accounts payable 3,891 (812)
Payroll taxes (426) (15)
Accrued interest (1,634) (1,796)
Accrued payroll (2,014) (1,792)
Income tax payable 3,371 15,742
Insurance reserves 60 147
Other accrued liabilities (282) 1,037
Net cash flows provided by
operating activities 16,584 13,207
Investing Activities:
Capital expenditures (9,688) (5,767)
Changes in other assets, net (924) (1,341)
Proceeds from sale of capital assets 896 316
Net cash flows used in investing
activities (9,716) (6,792)
Financing Activities:
Net change in revolving credit
agreements 2,000 1,500
Payment of long-term debt (8,000) (8,000)
Exercise of stock options 236 218
Net cash flows used in financing
activities (5,764) (6,282)
Net Change in Cash and Cash Equivalents 1,104 133
Cash and Cash Equivalents at
Beginning of Period 4,021 4,548
Cash and Cash Equivalents at
End of Period $ 5,125 $ 4,681
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 for 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 June 29, 1999 and March 30, 1999, the results of
operations for the thirteen weeks ended June 29, 1999 and June 30,
1998, and cash flows for thirteen weeks ended June 29, 1999 and
June 30, 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. These 60 restaurants and 39 delivery 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.
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. 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 will be 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 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 has
resulted in a charge in the first quarter 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 Ended
June 29, 1999 June 30, 1998
Numerator:
Net Income before cumulative
effect of change in
accounting principle $ 6,677,000 $ 33,150,000
Denominator:
Weighted average shares 24,540,731 24,758,341
Employee stock options 566,006 479,840
Denominator for diluted
earnings per share 25,106,736 25,238,181
Earnings per share - Basic $ .27 $ 1.34
Earnings per share - Diluted $ .27 $ 1.31
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 June 29, 1999, operated 737 Pizza Hut units in 26
states. On July 22, 1999 the Company purchased 70 additional
Pizza Hut units from PHI. (See Note 2 for information regarding
the 70 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. Including the 70-
unit acquisition, the Company 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, 59 units
have been closed including 9 units in the current quarter. The
remaining units are expected to be closed within the current
fiscal year. The Company remains committed to the re-imaging
strategy and expects to complete the plan on or about the original
targeted completion date.
The 1998 impairment and loss provision included $11.4 million
related to the Company's re-imaging plan. Below is a summary of
the utilization of amounts provided.
Current Quarter From Plan Inception
(Dollars in millions)
Beginning of period $ 4.5 $ 11.4
Utilization (.3) (7.2)
Balance at June 29, 1999 $ 4.2 $ 4.2
The balance at June 29, 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 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 our estimates. Through June 29, 1999
the amounts utilized apply only to actions provided for in the
plan and to-date, no adjustments have been made to management's
initial estimated provision.
In addition to the units that are expected to be closed during the
year as part of the initial re-imaging plan, the Company has
identified three units that will be re-imaged at their present
location. The Company has recorded a provision of $270,000 which
primarily reflects net book value of assets that will not be
recovered through the operation of these units. These units will
continue to reflect depreciation expense until the re-imaging
project commences at the applicable location.
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.
Activity with respect to unit count during the quarter is set
forth in the table below:
2000 FIRST QUARTER UNIT ACTIVITY
Beginning Developed Closed Acquired Ending
Company Owned
Pizza Hut
Restaurant 573 10 (9) -- 574
Delivery 162 6 (5) -- 163
Total Company Owned 735 16 (14) -- 737
Results of Operations - The "operations summaries" set forth an
overview of revenue and operating expenses as a percent of revenue
for the thirteen weeks ended June 29, 1999 and June 30, 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 Ended
June 29, 1999 June 30, 1998
Revenue:
Restaurant Sales $ 82,669 $ 72,240
Delivery Sales 25,007 18,635
Total Revenue $107,676 $ 90,875
Restaurant Operating Expenses
as a Percentage of Revenue:
Total Expenses: (1)
Cost of Sales 24.8% 25.1%
Direct Labor 28.5% 27.9%
Other 28.0% 27.7%
Total Operating Expenses 81.3% 80.8%
Restaurant Based Income 18.7% 19.2%
Restaurant Expenses: (2)
Cost of Sales 24.9% 25.2%
Direct Labor 27.3% 26.8%
Other 29.1% 28.4%
Total Operating Expenses 81.3% 80.4%
Restaurant Based Income 18.7% 19.6%
Delivery Expenses: (3)
Cost of Sales 24.6% 24.7%
Direct Labor 32.4% 32.5%
Other 24.6% 25.0%
Total Operating Expenses 81.6% 82.2%
Restaurant Based Income 18.4% 17.8%
(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 Weeks
Ended June 29, 1999 with the Thirteen Weeks Ended June 30, 1998
Revenue from the Company's Pizza Hut operations was $107.7 million
during the quarter, which was $16.8 million or 18.5% above the
$90.9 million reported in the same period last year. The increase
in revenue was due to an improvement in comparable sales of 5.4%
and a revenue contribution of $15.2 million from 99 units acquired
in February 1999. Acquired unit sales, along with comparative
sales improvement, more than offset the impact of store closure
activity since the same period of the prior year. During the
quarter the Company's delivery units generated comparable sales
growth of 7.1% while the Company's restaurant units generated
comparable sales growth of 4.7%. Average unit volumes for all
asset types increased 6.9% due to sales growth and the favorable
effects of the asset re-imaging program. Comparable sales
improvement was primarily due to the continued success of the Big
New Yorker Pizza, which mixed at over 13% of the Company's net
pizza sales during the quarter.
Cost of sales as a percent of revenue decreased 30 basis points
compared to same period last year. Reduced distribution costs
related to a new distribution contract entered into late in fiscal
1999 more than offset the higher food costs associated with the
Big New Yorker Pizza, increased cheese costs of approximately 1.6%
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 increased 60 basis points compared to the same
quarter last year. The increase was primarily due to Star Wars
training costs incurred and increased staffing levels to meet
anticipated demand. Also impacting labor cost was the dilutive
effect of acquisition stores which have historically incurred a
higher labor percentage than other Company-owned stores. (See
Effects of Inflation and Other Matters for additional information
on labor costs.)
Other operating expense increased 30 basis points compared to last
year. The increase was largely due to an increase in the effective
royalty rate of approximately 30 basis points (due to the 6.5%
royalty rate on the 99-unit acquisition) and was partially offset
by increased leverage associated with positive comparable sales
volumes. The effect of this royalty rate structure, after
considering the impact of the recent 70-unit acquisition, is
expected to increase total other operating expenses by 45 to 55
basis points over fiscal 1999 levels. This increase will primarily
be reflected in the Company's restaurants (Red Roof), while the
Company's delivery units will not be significantly impacted.
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.
Consolidated Results
Comparison of Consolidated Operating Results for the Thirteen
Weeks Ended June 29, 1999 with the Thirteen Weeks Ended June 30,
1998
During the quarter consolidated revenue was $107.7 million, which
was 6.8% or $7.8 million below the $115.5 million reported during
the same period last year. The decline in revenue was due to the
loss of revenue from the recapitalization of Romacorp and was
largely offset by increased sales in the Company's Pizza Hut units
discussed previously. During the same quarter of the prior year,
revenue from Romacorp of $24.6 million was recorded.
Consolidated income from restaurant operations was $20.1 million
or 18.7% of revenue for the quarter compared to $22.2 million or
19.2% last year. Income from restaurant operations as a percent
of revenue declined from the prior year due to increases in
operating costs in the Company's Pizza Hut division discussed
previously in the concept specific sections. The decline in
income from restaurant operations in nominal dollars for the
quarter was largely attributable to the loss of earnings from
Romacorp.
General and administrative expenses were $5.3 million during the
quarter compared to $6.3 million during the same period last year
for a decrease of $1 million or 15.1%. As a percent of revenue
these costs were 4.9% during the current quarter compared to 5.4%
during the same quarter of the prior year. The nominal dollar
decrease and the decrease in these costs as a percent of revenue
was due to the recapitalization of Romacorp, which historically
had a higher percentage of such costs as a percentage of revenue.
Also contributing to the decline in these costs as a percentage of
revenue was increased leverage associated with positive comparable
sales volumes in the Company's Pizza Hut units and the sales
contributed from the 99-unit February acquisition.
Depreciation and amortization remained flat in nominal dollars and
as a percentage of revenue. In nominal dollars, the reduction in
these expenses as a result of the recapitalization of Romacorp was
offset by increased amortization of franchise rights related to
the Company's February 1999 acquisition.
Interest expense decreased to $2.4 million during the quarter from
$3.9 million in the same quarter last year due to debt reduction
early in fiscal 1999 from the proceeds of the Romacorp
recapitalization.
Miscellaneous income was $504,000 for the quarter compared to
$266,000 reported last year. The increase in miscellaneous income
was due to the gain on sale or disposition of assets.
Net income before the cumulative effect of a change in accounting
principle for the quarter was $6.7 million compared to $33.2
million recorded in the same period of the prior year. Net income
for the prior year 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 $16.6 million for the thirteen weeks
ended June 29, 1999 compared to the $13.2 million reported in the
prior year. This increase is largely due to the timing differences
in the Company's working capital accounts.
Restaurant development and normal recurring capital expenditures
resulted in $9.7 million of total capital expenditures for the
thirteen weeks ended June 29, 1999 compared to $5.8 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 June 29,
1999 the Company had $148 million in unused borrowing capacity
under this agreement, access to which is limited by the Company's
debt covenants. The $33.6 million acquisition of 70 Pizza Hut
units which closed July 22, 1999 was funded through the Company's
unsecured line of credit. (See Note 2 for information regarding
the 70 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 one million shares. At
June 29, 1999 967,700 shares remained authorized for re-purchase.
During the thirteen weeks ended June 29, 1999 the Company made all
scheduled principal and interest payments.
Seasonality
As a result of its historical diversification in restaurant
concepts the Company has historically not experienced significant
seasonal sales fluctuations on a consolidated basis. However,
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 22, 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 1.6% higher
than the costs incurred during the comparable period of the prior
year. Based upon available forecasts, management expects cheese
costs to equal or exceed last year's unusually high levels during
the Company's second and third fiscal quarters, effectively
eliminating the previously anticipated year-over-year margin
benefit of lower cheese prices from the prior year during these
quarters. Due to the current volatility in this market future
cheese price fluctuations are difficult to predict.
Increases in interest rates would directly affect the Company's
financial results. At June 29, 1999 approximately 61% 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, 58% have been received. The Company has sent
letters requesting status information from lending and cash
management banks. Of approximately 750 inquires sent, 92% 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,
including but not limited to: 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
fluctuations, 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.
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
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)
The following reports on Form 8-K were filed during the
quarter ended June 29, 1999:
June 8, 1999 Announcement of intent to acquire 70 Pizza Hut
units from Pizza Hut, Inc.
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: July 27, 1999
Senior Vice President Finance Troy D. Cook
Chief Financial Officer
Principal Financial Officer
DATE: July 27, 1999
Vice President Restaurant Services Alan L. Salts
Chief Accounting Officer
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