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 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 January 19, 2000:
Common Stock, $0.01 par value - 22,431,280
NPC INTERNATIONAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets --
December 28, 1999 and March 30, 1999 3
Consolidated Statements of Income --
For the Thirteen and Thirty-Nine
Weeks Ended December 28, 1999 and
December 29, 1998 4
Consolidated Statements of Cash Flows --
For the Thirty-Nine Weeks Ended
December 28, 1999 and December 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 Dec. 28, 1999 March 30, 1999
Current assets:
Cash and cash equivalents $ 4,112 $ 4,021
Accounts receivable, net 1,124 1,817
Inventories of food and supplies 3,323 2,972
Deferred income tax asset 3,064 3,064
Prepaid insurance premiums 1,470 963
Prepaid rent payments 1,575 1,486
Prepaid expenses and other
current assets 915 1,429
Total current assets 15,583 15,752
Facilities and equipment, net 118,323 95,228
Franchise rights, less accumulated
Amortization of $31,413 and $25,122,
respectively 241,488 217,995
Goodwill, less accumulated amortization
of $1,530 and $1,432, respectively 2,611 2,708
Investments, at cost 6,738 6,750
Other assets 5,703 5,650
TOTAL ASSETS $390,446 $344,083
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,795 $ 12,506
Payroll taxes 1,631 2,046
Sales taxes 2,315 2,174
Accrued interest 2,070 3,088
Accrued payroll 7,065 9,042
Income tax payable 4,094 1,889
Current portion of closure reserve 1,500 2,260
Insurance reserves 4,762 4,934
Other accrued liabilities 7,073 5,742
Total current liabilities 41,305 43,681
Long-term debt 172,600 123,500
Deferred income tax liability 4,386 4,386
Closure reserve 4,733 5,691
Other deferred items 4,969 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 22,079 21,927
Retained earnings 169,660 153,103
192,015 175,306
Less treasury stock at cost,
representing 5,022,605 and
3,063,074 shares,
respectively (38,562) (22,318)
Total stockholders' equity 153,453 152,988
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $390,446 $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 Thirty-Nine
Weeks Ended Weeks Ended
Dec. 28, 1999
Dec. 29, 1998
Dec. 28, 1999
Dec. 29, 1998
Net sales $ 114,544 $ 89,429 $ 335,714 $ 293,224
Net franchise revenue -- -- -- 2,114
Total revenue 114,544 89,429 335,714 295,338
Cost of sales 30,123 25,464 87,874 80,372
Direct labor 32,601 24,593 95,261 81,745
Other 32,707 25,048 95,262 81,237
Total operating expenses 95,431 75,105 278,397 243,354
Income from restaurant
operations 19,113 14,324 57,317 51,984
General and administrative
expenses 5,613 4,639 16,446 15,649
Depreciation, amortization
And pre-opening costs 2,767 2,073 7,929 6,658
Operating income before
facility actions 10,733 7,612 32,942 29,677
Net facility action charges 500 -- 190 --
Operating Income 10,233 7,612 32,752 29,677
Other income (expense):
Interest expense (2,955) (2,030) (8,097) (7,829)
Miscellaneous 8 401 991 1,120
Gain on recapitalization
of Romacorp -- -- -- 39,400
Income before income taxes 7,286 5,983 25,646 62,368
Provision for income taxes 2,552 2,094 8,975 20,643
Income before cumulative
effect of change in
accounting principle 4,734 3,889 16,671 41,725
Cumulative effect of
change in accounting
principle -- -- (114) --
Net income $ 4,734 $ 3,889 $ 16,557 $ 41,725
Earnings per share -
basic before cumulative
effect of change in
accounting principle $ .20 $ .16 $ .68 $ 1.69
Cumulative effect of
change in accounting
principle -- -- -- --
Earnings per share -
basic $ .20 $ .16 $ .68 $ 1.69
Earnings per share -
diluted before
cumulative effect of
change in accounting
principle $ .19 $ .16 $ .67 $ 1.67
Cumulative effect of
change in accounting
principle -- -- -- --
Earnings per share -
diluted $ .19 $ .16 $ .67 $ 1.67
Weighted average shares
outstanding - basic 24,180,398
24,491,208
24,410,846
24,669,028
Weighted average shares
outstanding - diluted 24,434,094
24,785,438
24,808,512
25,024,102
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. 28, 1999 Dec. 29,1998
Operating Activities:
Net income $16,557 $41,725
Non-cash items included in net
income:
Depreciation and amortization 19,778 17,499
Net facility action charges 190 --
Non-cash gain on recapitalization
of Romacorp -- (38,758)
Change in assets and liabilities,
net of acquisitions and
recapitalization:
Accounts receivable, net 693 (275)
Inventories of food and supplies (32) (886)
Prepaid expenses and other
current assets (678) (1,982)
Accounts payable (1,711) (722)
Payroll taxes (415) (1)
Accrued interest (1,018) (2,790)
Accrued payroll (1,977) (2,315)
Income tax payable 2,205 5,752
Insurance reserves 828 350
Other accrued liabilities 1,397 1,421
Net cash flows provided by
operating activities 35,817 19,018
Investing Activities:
Net proceeds from recapitalization
of Romacorp -- 101,237
Acquisitions, net of cash (37,275) --
Capital expenditures (29,685) (13,732)
Changes in other assets, net (3,421) (2,891)
Proceeds from sale of capital assets 1,647 3,043
Net cash flows (used in) provided
by investing activities (68,734) 87,657
Financing Activities:
Net change in revolving credit
agreements 59,100 (93,600)
Purchase of treasury stock (16,629) (3,837)
Payment of long-term debt (10,000) (10,000)
Exercise of stock options 537 558
Net cash flows provided by
(used in) financing activities 33,008 (106,879)
Net Change in Cash and
Cash Equivalents 91 (204)
Cash and Cash Equivalents at
Beginning of Period 4,021 4,548
Cash and Cash Equivalents at
End of Period $ 4,112 $ 4,344
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 December 28, 1999 and March 30, 1999, the
results of operations for the thirteen and thirty-nine weeks ended
December 28, 1999 and December 29, 1998, and cash flows for thirty-
nine weeks ended December 28, 1999 and December 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 received $101 million for a majority
portion of its investment in Romacorp, resulting in a net gain of
$39.4 million. The Company's remaining minority interest of 19.9%
is carried at cost of $6.7 million. 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 fiscal year-to-date ended December
29, 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 during 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 Thirty-Nine
Weeks Ended Weeks Ended
Dec. 28, 1999
Dec. 29, 1998
Dec. 28, 1999
Dec. 29, 1998
Numerator:
Income before
cumulative effect
of change in
accounting principle $4,734,000
$3,889,000
$16,671,000
$41,725,000
Denominator:
Weighted average
shares 24,180,398
24,491,208
24,410,846
24,669,028
Employee stock
Options 253,696
294,230
397,666
355,074
Denominator for
diluted earnings
per share 24,434,094
24,785,438
24,808,512
25,024,102
Earnings per share -
basic $ .20 $ .16 $ .68 $ 1.69
Earnings per share -
diluted $ .19 $ .16 $ .67 $ 1.67
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 December 28, 1999, operated 785 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 11% of the entire domestic 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.
Facility Actions and Closure Reserves - In the fourth quarter of
fiscal 1998 the Company initiated an asset re-imaging strategy.
This plan called 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, 76 units
have been closed including seven units in the current quarter and
23 units for the year-to-date. Fifteen remaining units are
expected to close and four units will remain in operation. During
the fiscal year, 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, during the
Company's quarter ended September 28, 1999, the Company updated
its estimate of the liability needed to complete the re-imaging
strategy and determined that it was 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.
Thirty-Nine
Thirteen Weeks Weeks From
Ended Ended Plan
Dec. 28, 1999 Dec. 28, 1999 Inception
(Dollars in thousands)
Beginning balance $ 3,100 $ 4,500 $11,400
Planned charges /
disbursements (420) (1,040) (7,940)
(Income) expense impacts:
Favorable changes to
lease terms and other
estimates -- (610) (610)
Modifications due to
economic changes -- (170) (170)
Sub-total -- (780) (780)
Balance at
December 28, 1999 $ 2,680 $ 2,680 $ 2,680
The balance at December 28, 1999 is included in "closure reserves"
on the Company's balance sheet and consists of 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 $5.8 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.
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 has recorded quarterly
provisions during the current year-to-date. During the quarter
ended June 29, 1999 the Company recorded a $270 thousand provision
for facility actions at three locations consisting of $245
thousand for assets that were impaired as a result of the closure
decision and $25 thousand of de-identification costs. During the
quarter ended September 29, 1999, the Company recorded a $200
thousand provision for facility actions at three locations
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. All units associated with the first
and second quarter provisions have closed. During the current
quarter, the Company recorded a charge of $500 thousand related to
facility actions at nineteen properties consisting of $382
thousand for assets that were impaired as a result of the closure
decision and $118 thousand of de-identification costs and
contractual lease carry costs. Of the nineteen properties, three
units will close without replacement. These three units generated
approximately $620 thousand in sales and $11 thousand in net loss
from restaurant operations during the current fiscal year-to-date.
Below is a summary of the charges/disbursements that were planned
as part of the current fiscal year re-imaging provisions.
Thirteen Thirty-Nine
Weeks Weeks
Number Ended Ended
of Units Dec. 28, 1999 Dec. 28, 1999
(Dollars in thousands)
Beginning Balance $ 256 $ --
First quarter facility
action charge 3 -- 270
Second quarter facility
action charge 3 -- 200
Third quarter facility
action charge 19 500 500
25 756 970
Planned charges /
disbursements (348) (562)
Balance at
December 28, 1999 $ 408 $ 408
Through December 28, 1999 the Company has recorded $970 thousand
as a provision for fiscal 2000 facility actions. Offsetting these
charges was the $780 thousand reversal of previous charges
resulting in net charge from facility actions of $190 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. These closure decisions under
future phases of the Company's asset re-imaging initiative are
expected to be made as often as quarterly. 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.
Skipper's Reserves - Effective March 25, 1996 the Company sold
Skipper's Inc. but retained certain assets and liabilities
primarily related to the closure of 77 properties in February
1995. The retained assets were recorded at fair value in
accordance with SFAS No. 121 and the remaining assets are
reflected in assets held for sale. At December 28, 1999, the
remaining closure reserve consists largely of future net lease
carry costs associated with 20 leased properties with remaining
lease obligations and estimated future carry costs associated with
two remaining fee simple properties. The average term of these
leased properties is 8 1/2 years with the longest obligation being
25 years. Below is a summary of disbursements related to the
Company's Skipper's reserve:
Thirty-Nine
Thirteen Weeks Weeks
Ended Ended
Dec. 28, 1999 Dec. 28, 1999
(Dollars in thousands)
Beginning balance $ 3,217 $ 3,428
Planned charges /
disbursements (68) (279)
Balance at
December 28, 1999 $ 3,149 $ 3,149
Activity with respect to unit count during the quarter is set
forth in the table below:
FISCAL 2000 THIRD QUARTER UNIT ACTIVITY
Developed/
Beginning Reopened Closed Acquired Ending
Restaurant 621 11 (16) -- 616
Delivery 176 1 (8) -- 169
Total 797 12 (24) -- 785
FISCAL 2000 YEAR TO-DATE UNIT ACTIVITY
Developed/
Beginning Reopened Closed Acquired Ending
Restaurant 573 25 (34) 52 616
Delivery 162 9 (20) 18 169
Total 735 34 (54) 70 785
Results of Operations - The "operations summaries" set forth an
overview of revenue and operating expenses as a percent of revenue
for the thirteen and thirty-nine weeks ended December 28, 1999 and
December 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 Thirty-Nine
Weeks Ended Weeks Ended
Dec. 28, 1999
Dec. 29, 1998
Dec. 28, 1999
Dec. 29, 1998
Revenue
Restaurant Sales $ 88,882 $71,461 $259,779 $215,943
Delivery Sales 25,662 17,968 75,935 54,768
Total Revenue $114,544 $89,429 $335,714 $270,711
Restaurant Operating
Expenses as a
Percentage of Revenue:
Total Expenses(1)
Cost of Sales 26.3% 28.5% 26.2% 26.8%
Direct Labor 28.5% 27.5% 28.4% 27.7%
Other 28.5% 28.0% 28.3% 28.0%
Total Operating
Expenses 83.3% 84.0% 82.9% 82.5%
Income from
Restaurant Operations 16.7% 16.0% 17.1% 17.5%
Restaurant Expenses (2)
Cost of Sales 26.4% 28.6% 26.3% 26.9%
Direct Labor 27.6% 26.4% 27.3% 26.5%
Other 29.8% 29.0% 29.5% 28.9%
Total Operating Expense 83.8% 84.0% 83.1% 82.3%
Restaurant Based Income 16.2% 16.0% 16.9% 17.7%
Delivery Expenses (3)
Cost of Sales 25.8% 27.9% 25.9% 26.3%
Direct Labor 31.6% 31.8% 32.0% 32.2%
Other 24.3% 24.1% 24.5% 24.8%
Total Operating Expense 81.7% 83.8% 82.4% 83.3%
Delivery Based Income 18.3% 16.2% 17.6% 16.7%
(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 28, 1999 with the Thirteen and
Thirty-Nine Weeks Ended December 29, 1998
Revenue from the Company's Pizza Hut operations was $114.5 million
during the quarter, which was $25.1 million or 28.1% above the
$89.4 million reported in the same period last year. For the year-
to-date, revenue was $335.7 million for an increase of $65 million
or 24% over the $270.7 million reported last year. The increase in
revenue for the quarter and year-to-date was largely due to the
revenue contributed by the 169 units acquired in calendar 1999.
These units recorded revenue of $25.2 million during the quarter
and $63.9 million for the year-to-date. Comparable store sales
increased 3.4% for the quarter driven by the success of the
Stuffed Crust Pizza promotion and the favorable effects of the
Company's asset re-imaging plan. Comparable store sales increased
3.8% for the year-to-date, which was largely driven by the
continued success of the Big New Yorker Pizza that was introduced
in January 1999 and the favorable effects of the Company's asset
re-imaging plan. Acquired unit sales combined with the comparable
store sales improvement more than offset the impact of store
closure activity for the quarter and year-to-date. Sales growth in
re-imaged stores has contributed 1.5% to comparable store sales
growth for the quarter and 1.2% for the year-to-date.
The Company's delivery units generated comparable store sales
growth of 4.4% for the quarter and 4.9% for the year-to-date while
the Company's restaurant units generated comparable store sales
growth of 3.2% for the quarter and 3.3% for the year-to-date. The
Company's restaurant units are the primary beneficiaries of the
Company's asset re-imaging plan; accordingly, the sales growth in
these units includes the previously mentioned positive impact of
this program. Comparable store sales improvement for the quarter
was attributable to the success of Stuffed Crust Pizza promotion
and the favorable effects of the Company's asset re-imaging plan.
Pizza Hut began promoting Stuffed Crust Pizza on November 1, 1999.
The product mixed at approximately 15% of the Company's net pizza
sales during the national promotion period which ran through
December 19, 1999 in most of the Company's markets. For the
quarter, this product mixed at approximately 11% which is
consistent with the mix experienced during the same quarter of the
prior year. During the Stuffed Crust Pizza promotional period, the
Big New Yorker Pizza declined, as expected, to approximately 5% of
the Company's net pizza sales. Comparable store sales improvement
for the year-to-date was primarily due to the success of the Big
New Yorker Pizza, which represented approximately 11% of the
Company's net pizza sales during the year-to-date.
Cost of sales as a percent of revenue decreased 220 basis points
for the quarter compared to the same quarter of the prior year.
This improvement was primarily attributable to a decline in cheese
costs of approximately 22% over the prior year's unusually high
levels and reduced distribution costs (related to a distribution
contract entered into in January 1999) which was partially offset
by an increase of 16% in meat ingredient cost over the prior year.
For the year-to-date, cost of sales as a percent of revenue
decreased 60 basis points compared to the same period of the prior
year. The reduced distribution costs for the year-to-date and a
year-to-date decline in cheese costs of approximately 5.4% have
more than offset higher food costs associated with the Big New
Yorker Pizza, increased paper costs associated with the Star Wars
promotion earlier in the year and certain increases in other
ingredients. (See Effects of Inflation and Other Matters for
additional information on cheese and other ingredient costs.)
Direct labor as a percent of revenue increased 100 basis points
for the quarter and 70 basis points for the year-to-date compared
to the same periods of the prior year. During the quarter, lower
labor productivity attributable to lower than anticipated unit
volumes (November 1999), re-imaged store openings and continued
wage inflation (primarily in metro markets) caused labor to
increase over the prior year. For the year-to-date, direct labor
was negatively impacted by inefficiencies and training costs
associated with the 99-unit and 70-unit acquisitions as well as
increased staffing levels and training related to the Star Wars
promotion to meet anticipated demand. (See Effects of Inflation
and Other Matters for additional information on labor costs.)
Other operating expense as a percent of revenue increased 50 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 50 basis points for the
quarter and approximately 40 basis points for the 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.
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 30 and 40 basis points for the quarter and year-to-date,
respectively, compared to the same periods of the prior year due
to the increased leverage associated with higher aggregate sales
volume and positive comparable store sales growth. On a nominal
dollar basis, for the year-to-date, the required field
infrastructure additions to support the calendar 1999 acquisitions
more than offset the decline in these costs associated with the
recapitalization of Romacorp.
Depreciation, amortization and pre-opening costs increased $694
thousand or 33.5% and $1,271 thousand or 19.1% 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 an increase in
franchise rights amortization associated with the 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 $184 thousand and $479 thousand were
incurred during the quarter and year-to-date, respectively,
compared to $61 thousand and $162 thousand recorded in the same
periods of the prior year.
See the Facility Actions and Closure Reserve section of this
report for discussions relating to the quarter and year-to-date
facility action charges.
Interest charges for the quarter were $925 thousand or 45.6%
higher than the same period of the prior year primarily due to an
increase in borrowings to fund the calendar 1999 acquisitions.
Interest charges for the year-to-date were $268 thousand or 3.4%
higher than the same period of the prior year. For the year-to-
date, despite increased borrowings associated with acquisitions,
average outstanding borrowings were not significantly higher than
the prior year as the proceeds from the Romacorp recapitalization
reduced debt at the end of the last year's first quarter.
Miscellaneous income was $8 thousand and $991 thousand for the
quarter and year-to-date, respectively, compared to $401 thousand
and $1.1 million reported in the same periods of the prior year.
Income recorded in the prior year periods and the current year-to-
date consist mainly of gains on sale or disposition of assets.
Net income for the quarter was $4.7 million compared to $3.9
million recorded in the same period of the prior year. For the
year-to-date, net income was $16.6 million compared to $41.7
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.
For the quarter, net income before net facility action charges was
$5,059,000 or $.21 per diluted share compared to $3,889,000 or
$.16 per diluted share last year. Year-to-date net income before
net facility action charges and the cumulative effect of a change
in accounting principle was $16,795,000 or $.68 per diluted share
compared to $14,933,000 or $.60 per diluted share last year
(excluding the after tax gain of $26.8 million from the
recapitalization of Romacorp).
Components of diluted earnings per share were as follows:
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
Dec. 28, 1999
Dec. 29, 1998
Dec. 28, 1999
Dec. 29, 1998
Net income before
Cumulative effect of
change in accounting
principle, facility
action charges,
net of tax, and gain
on recapitalization
of Romacorp, net
of tax $ .21 $ .16 $ .68 $ .60
Gain on
Recapitalization
of Romacorp,
net of tax -- -- -- 1.07
Change in accounting
principle -- -- -- --
Facility action charges,
net of tax (.02) -- (.01) --
Earnings per share -
diluted $ .19 $ .16 $ .67 $ 1.67
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 $35.8 million for the thirty-nine
weeks ended December 28, 1999 compared to the $19 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 which were included through the first quarter of fiscal
1999.
Restaurant development, start-up technology investments in
acquired stores and normal recurring capital expenditures resulted
in $29.7 million of total capital expenditures for the thirty-nine
weeks ended December 28, 1999 compared to $13.7 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 December 28,
1999 the Company had $90.5 million in unused borrowing capacity
under this agreement. The Company's debt facilities contain
restrictions on additional borrowing and dividend payments as well
as requirements to maintain various financial ratios and a minimum
net worth. Retained earnings of $36.5 million was available for
the payment of dividends at December 28, 1999 under existing 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 December 13, 1999 the Board of Directors increased the number
of shares authorized for re-purchase by 1.5 million shares. During
the thirteen weeks ended December 28, 1999 the Company purchased
1,914,800 shares and at December 28, 1999 460,400 shares remained
authorized for re-purchase.
During the thirty-nine weeks ended December 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 and will increase
the rate to $6.15 per hour effective October 1, 2000. 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 increased 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 22% lower than
the unusually high costs incurred during the comparable period of
the prior year when cheese prices increased over 30%. Based upon
available forecasts, management expects cheese costs for the
fourth quarter of fiscal 2000 to be approximately 15% to 20% lower
than costs experienced during the prior year.
Increases in interest rates would directly affect the Company's
financial results. At December 28, 1999 approximately 41% 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 evaluated and modified 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. The Company completed all identified hardware
replacements to insure Year 2000 readiness of these systems.
Throughout 1999 the Company tested both the existing and newly
developed or installed systems and evaluated any potential issues.
This plan addressed 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. The Company also reviewed non-information technology
equipment and determined minimal upgrades or replacements were
necessary. To date, the Company has not experienced any Year 2000
problems with computer systems or non-information technology
equipment.
Additionally, the Company evaluated third-party vendors for Year
2000 readiness. The Company completed an inventory of its large
suppliers and banks and mailed letters requesting information on
their Year 2000 status. Responses received to date have not
identified any suppliers or banks considered high risk. To date,
the Company has not experienced any third-party issues related to
Year 2000 readiness.
Costs incurred to date associated with Year 2000 readiness have
not been material to the Company's financial position or results
of operations.
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 calendar 2000. The Company made diligent, reasonable
efforts to assess Year 2000 readiness and developed contingency
plans for business critical systems prior to the end of calendar
1999. However, no contingency plans were 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 2000 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 has
minimized the Company's level of uncertainty about Year 2000
problems and, in particular, about the Year 2000 readiness of its
material external agents. The Company does not anticipate any
interruptions of normal operations in the future related to Year
2000.
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; federal or
state minimum wage increases; 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, the availability of raw product and
ingredients and distribution of 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
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 26, 2000
Troy D. Cook
Senior Vice President Finance
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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<FISCAL-YEAR-END> MAR-28-2000
<PERIOD-END> DEC-28-1999
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