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 26, 2000
[ ] 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 16, 2000:
Common Stock, $0.01 par value - 21,834,737
NPC INTERNATIONAL, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets --
September 26, 2000 and March 28, 2000 3
Consolidated Statements of Income --
For the Thirteen and Twenty-Six Weeks
Ended September 26, 2000 and
September 28, 1999 4
Consolidated Statements of Cash Flows --
For the Twenty-Six Weeks Ended
September 26, 2000 and
September 28, 1999 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results
of Operations 8
PART II. OTHER INFORMATION 16
PART I. FINANCIAL INFORMATION
ITEM I. Financial Statements
NPC International, Inc.
Consolidated Balance Sheets
(Unaudited, dollars in thousands)
ASSETS Sept. 26, 2000 March 28, 2000
Current assets:
Cash and cash equivalents $ 4,362 $ 3,842
Accounts receivable, net 1,079 946
Inventories of food and supplies 3,707 3,154
Deferred income tax asset 3,218 3,218
Prepaid insurance premiums 251 948
Prepaid rent payments 1,702 1,581
Prepaid expenses and other
current assets 965 682
Total current assets 15,284 14,371
Facilities and equipment, net 145,766 126,556
Franchise rights, less accumulated
amortization of $38,112 and $33,605,
respectively 251,696 239,607
Goodwill, less accumulated amortization
of $1,626 and $1,562, respectively 2,514 2,578
Investments, at cost 6,738 6,738
Other assets 6,800 5,705
TOTAL ASSETS $ 428,798 $ 395,555
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,390 $ 12,011
Payroll taxes 2,122 2,150
Sales taxes 2,308 2,457
Accrued interest 2,635 3,509
Accrued payroll 10,138 9,775
Income tax payable 2,662 3,730
Current portion of closure reserve 1,000 1,000
Insurance reserves 5,924 5,277
Other accrued liabilities 6,597 5,184
Total current liabilities 44,776 45,093
Long-term debt 194,500 166,900
Deferred income tax liability 7,102 7,102
Closure reserve 3,739 4,205
Other deferred items 5,564 4,736
Insurance reserves 9,000 9,000
Stockholders' equity:
Common stock, $.01 par value
100,000,000 shares authorized,
27,592,510 issued 276 276
Paid-in capital 22,238 21,975
Retained earnings 186,434 175,908
208,948 198,159
Less treasury stock at cost,
representing 5,761,273 and
5,158,730 shares, respectively (44,831) (39,640)
Total stockholders' equity 164,117 158,519
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 428,798 $ 395,555
The accompanying notes are an integral part of these Consolidated
Financial Statements.
NPC International, Inc.
Consolidated Statements of Income
(Unaudited, dollars in thousands, except share data)
Thirteen Twenty-Six
Weeks Ended Weeks Ended
Sept. 26, 2000 Sept. 26, 2000
Sept. 28, 1999 Sept. 28, 1999
Net sales $ 125,616 $ 113,494 $ 246,502 $ 221,170
Cost of sales 32,147 31,023 61,546 57,751
Direct labor 36,130 32,007 70,983 62,660
Other 36,934 32,401 71,695 62,555
Total operating expenses 105,211 95,431 204,224 182,966
Income from restaurant
operations 20,405 18,063 42,278 38,204
General and administrative
expenses 6,334 5,514 12,466 10,833
Depreciation, amortization
and pre-opening costs 2,945 2,650 5,878 5,162
Operating income before
facility actions 11,126 9,899 23,934 22,209
Net facility action charges 475 (580) 1,415 (310)
Operating income 10,651 10,479 22,519 22,519
Other income (expense):
Interest expense (3,704) (2,770) (6,939) (5,142)
Miscellaneous 274 381 612 983
Income before income taxes 7,221 8,090 16,192 18,360
Provision for income taxes 2,527 2,830 5,667 6,423
Income before cumulative
effect of change in
accounting principle 4,694 5,260 10,525 11,937
Cumulative effect of
change in accounting
principle, net of tax -- -- -- (114)
Net income $ 4,694 $ 5,260 $ 10,525 $ 11,823
Earnings per share - basic
before cumulative effect
of change in accounting
principle $ .21 $ .21 $ .47 $ .49
Cumulative effect of
change in accounting
principle -- -- -- (.01)
Earnings per share - basic $ .21 $ .21 $ .47 $ .48
Earnings per share
- diluted before
cumulative effect
of change in accounting
principle $ .21 $ .21 $ .47 $ .48
Cumulative effect of
change in accounting
principle -- -- -- (.01)
Earnings per share
- diluted $ .21 $ .21 $ .47 $ .47
Weighted average shares
outstanding - basic 21,973,675
24,511,409
22,165,640
24,526,070
Weighted average shares
outstanding - diluted 22,136,958
24,884,705
22,319,185
24,995,721
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. 26, 2000 Sept. 28, 1999
Operating Activities:
Net income $ 10,525 $ 11,823
Depreciation and amortization 14,665 12,851
Gain on disposition of assets (407) (605)
Net facility action charges 1,415 (310)
Change in assets and liabilities,
net of acquisitions:
Accounts receivable, net (133) 435
Inventories of food and supplies (315) (250)
Prepaid expenses and other
current assets 114 599
Accounts payable (621) (2,080)
Payroll taxes (28) (218)
Accrued interest (874) 274
Accrued payroll 363 (190)
Income tax payable (1,068) 1,163
Insurance reserves 647 294
Other accrued liabilities 1,452 1,092
Net cash flows provided by
operating activities 25,735 24,878
Investing Activities:
Capital expenditures (29,131) (20,695)
Changes in other assets and
liabilities, net (415) (1,210)
Change in closure reserves (1,058) (889)
Proceeds from sale of capital assets 1,939 1,769
Acquisitions, net of cash acquired (18,718) (36,905)
Net cash flows used in investing
activities (47,483) (57,930)
Financing Activities:
Purchase of treasury stock (4,962) (1,111)
Net change in revolving
credit agreements 35,096 40,700
Payment of long-term debt (8,000) (8,000)
Exercise of stock options 35 333
Net cash flows provided
by financing activities 22,169 31,922
Net Change in Cash and
Cash Equivalents 520 (1,130)
Cash and Cash Equivalents
at Beginning of Period 3,842 4,021
Cash and Cash Equivalents
at End of Period $ 4,362 $ 2,891
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").
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 28, 2000.
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 26, 2000 and March 28, 2000, the
results of operations for the thirteen and twenty-six weeks ended
September 26, 2000 and September 28, 1999, and cash flows for
twenty-six weeks ended September 26, 2000 and September 28, 1999.
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 July 22, 1999 the Company acquired 70 Pizza Hut units from
Pizza Hut, Inc. ("PHI") located in Alabama (16), Florida (14),
Georgia (20) and Kentucky (20) 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.
On June 8, 2000 the Company acquired 64 Pizza Hut units from PHI
located in Iowa (58), Illinois (4) and Georgia (2) for $18.7
million plus an amount for cash on hand, inventories and certain
prepaid items. These 38 restaurants and 26 delivery/carryout units
generated approximately $41 million in sales during the 52 weeks
ended March 2000. 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 - 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 unit's opening date. The adoption resulted
in a charge in the first quarter of fiscal 2000 of $175,000 or
$114,000 net of taxes to expense costs that had previously been
capitalized prior to March 30, 1999. This change also resulted in
the discontinuance of amortization of pre-opening costs in
subsequent periods.
Note 4 - 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 Twenty-Six
Weeks Ended Weeks Ended
Sept. 26, 2000 Sept. 26, 2000
Sept. 28, 1999 Sept. 28, 1999
Numerator:
Income before
cumulative effect
of change in accounting
principle $4,694,000
$5,260,000
$10,525,000
$11,937,000
Denominator:
Weighted average shares 21,973,675
24,511,409
22,165,640
24,526,070
Employee stock options 163,283
373,296
153,545
469,651
Denominator for diluted
earnings per share 22,136,958
24,884,705
22,319,185
24,995,721
Earnings per share
- basic $ .21 $ .21 $ .47 $ .49
Earnings per share
- diluted $ .21 $ .21 $ .47 $ .48
Note 5 - New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's
gains and losses to offset the related change in fair value on the
hedged item in the consolidated statement of income, and requires
that a company must formally document, designate and assess the
effectiveness of transactions that received hedge accounting.
In June 1999, the FASB amended SFAS 133 to extend the required
adoption date from fiscal years beginning after June 15, 1999 to
fiscal years beginning after June 15, 2000. The amendment was in
response to issues identified by FASB constituents regarding
implementation difficulties. A company may implement SFAS 133 as
of the beginning of any fiscal quarter after issuance, (that is,
fiscal quarters beginning June 16, 1998 and thereafter). SFAS 133
cannot be applied retroactively. When adopted, SFAS 133 must be
applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued,
acquired or substantively modified after December 31, 1998 (and,
at the company's election, before January 1, 1999).
In June 2000, the FASB issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities,"
which amended SFAS 133.
The Company plans to adopt these statements in fiscal 2001 and
does not anticipate that adoption of these statements will have a
significant impact on its consolidated financial position or its
future results of operations.
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 28, 2000.
Overview - The Company is the largest Pizza Hut franchisee in the
world and at September 26, 2000, operated 841 Pizza Hut units in
27 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 estimates that it
operates approximately 12% of the entire Pizza Hut system
excluding licensed units.
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 27, 2001 and March 28, 2000 both contain 52 weeks.
Facility Actions and Closure Reserves - In the fourth quarter of
fiscal 1998 the Company recorded a charge of $11.4 million for
facility actions at 95 locations. 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 are 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, 82 units
have been closed including one unit in the current quarter. Eight
remaining units are expected to be closed and five units will
remain in operation. During fiscal 2000 the Company was able to
extinguish certain lease liabilities for several closed units at
terms more favorable than anticipated when the estimated liability
was initially established. Additionally, five leases were
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 concluded that
four units originally identified for closure would 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 fiscal 2000 the Company updated its estimate of the
liability needed to complete the facility actions and determined
that it was appropriate to reverse $1.18 million of the $11.4
million impairment and loss provision recorded in March 1998.
Below is a summary of the net charges/disbursements that were
planned as part of the 1998 impairment and loss provision related
to the Company's planned activities:
Twenty-Six
Thirteen Weeks Weeks From
Ended Ended Plan
Sept. 26, 2000 Sept. 26, 2000 Inception
(Dollars in thousands)
Beginning balance $1,138 $1,761 $11,400
Planned charges /
disbursements, net (94) (717) (9,176)
(Income) expense impacts:
Favorable changes
to lease terms
and other estimates -- -- (1,010)
Modifications due
to economic changes -- -- (170)
Sub-total -- -- (1,180)
Balance at
September 26, 2000 $1,044 $1,044 $ 1,044
The balance at September 26, 2000 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 $7.1 million related to impairment and loss on
disposition of assets and intangibles. Management believes the
remaining balance is adequate to complete the planned activities.
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. During the twenty-six weeks ended September 26, 2000 the
Company made $717,000 in net planned disbursements, which included
$532,000 in costs associated with the early extinguishment of
certain lease liabilities upon terms favorable to the Company.
Fiscal 2000 Facility Action Provisions - During fiscal 2000 the
Company recorded a $1.7 million provision for facility actions at
39 locations consisting of $1.2 million for assets and intangibles
that were impaired as a result of the closure decision and $500
thousand of de-identification costs and contractual lease carry
costs. Of the 39 properties included in these charges, four units
closed without replacement. These four units generated
approximately $994 thousand in sales and $93 thousand in net loss
from restaurant operations during fiscal 2000.
Below is a summary of the net charges/disbursements that were
planned as part of the fiscal 2000 facility actions:
Thirteen Twenty-Six
Weeks Weeks From
Number Ended Ended Plan
of Units Sept. 26, Sept. 26, Incep-
2000 2000 tion
(Dollars in thousands)
Beginning Balance $ 340 $ 340 $ --
Provision 39 -- -- 1,710
Planned charges /
disbursements, net (100) (100) (1,470)
Balance at
September 26, 2000 $ 240 $ 240 $ 240
During the first quarter this year disbursements made were fully
offset by amounts received.
Fiscal 2001 Facility Action Provisions - During the current year-
to-date the Company has recorded additional closure provisions.
During the quarter ended June 27, 2000 the Company recorded a
$940,000 provision for facility actions at 17 locations consisting
of $542,000 for assets and intangibles that were impaired as a
result of the closure decision and $398,000 for estimated de-
identification costs and contractual lease carry costs. During the
current quarter, the Company recorded a $475,000 provision for
facility actions at 20 locations consisting of $280,000 for assets
and intangibles that were impaired as a result of the closure
provision and $195,000 for estimated de-identification costs and
contractual lease carry costs. Of the 37 properties included in
these charges, one unit closed without replacement. This unit
generated approximately $318 thousand in sales and $5 thousand in
net income from restaurant operations during fiscal 2000.
Below is a summary of the net charges/disbursements that were
planned as part of the fiscal 2001 facility actions:
Thirteen Twenty-Six
Weeks Weeks
Number Ended Ended
of Units Sept. 26, Sept. 26,
2000 2000
(Dollars in thousands)
Beginning Balance $ 334 $ --
First quarter facility
action charge 17 -- 940
Second quarter
facility action charge 20 475 475
37 809 1,415
Planned charges /
disbursements (237) (843)
Balance at
September 26, 2000 $ 572 $ 572
The Company expects to continue to accrue contractual closure
costs, and, if appropriate, impair asset values at the time the
decision is made to close or relocate. These closure decisions
under future phases of the Company's asset re-imaging initiative
are expected to be made as often as quarterly.
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 September 26, 2000 the
remaining closure reserve consists largely of future net lease
carry costs associated with 18 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 7 years with the longest obligation being 24
years. Below is a summary of net charges/disbursements related to
the Company's Skipper's reserve:
Twenty-Six
Thirteen Weeks Weeks
Ended Ended
Sept. 26, 2000 Sept. 26, 2000
(Dollars in thousands)
Beginning balance $ 3,074 $3,104
Planned charges /
disbursements (192) (222)
Balance at
September 26, 2000 $ 2,882 $2,882
Activity with respect to unit count during the quarter is set
forth in the table below:
2001 SECOND QUARTER UNIT ACTIVITY
Beginning Developed Closed Acquired Ending
Restaurant 653 14 (12) 0 655
Delivery 189 0 (3) 0 186
Total 842 14 (15) 0 841
2001 YEAR-TO-DATE UNIT ACTIVITY
Restaurant 615 30 (28) 38 655
Delivery 167 2 (9) 26 186
Total 782 32 (37) 64 841
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 26, 2000 and
September 28, 1999 (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 Twenty-Six
Weeks Ended Weeks Ended
Sept. 26, 2000 Sept. 26, 2000
Sept. 28, 1999 Sept. 28, 1999
Revenue
Restaurant Sales $ 97,304 $ 88,228 $191,900 $170,897
Delivery Sales 28,312 25,266 54,602 50,273
Total Revenue $125,616 $113,494 $246,502 $221,170
Restaurant Operating Expenses
as a Percentage of Revenue:
Total Expenses (1)
Cost of Sales 25.6% 27.3% 25.0% 26.1%
Direct Labor 28.8% 28.2% 28.8% 28.3%
Other 29.4% 28.6% 29.1% 28.3%
Total Operating
Expenses 83.8% 84.1% 82.9% 82.7%
Income from
Restaurant Operations 16.2% 15.9% 17.2% 17.3%
Restaurant Expenses (2)
Cost of Sales 25.7% 27.4% 25.1% 26.1%
Direct Labor 27.7% 27.1% 27.7% 27.2%
Other 30.8% 29.7% 30.5% 29.4%
Total Operating
Expense 84.2% 84.2% 83.3% 82.7%
Restaurant Based
Income 15.8% 15.8% 16.7% 17.3%
Delivery Expenses (3)
Cost of Sales 25.3% 27.2% 24.4% 25.9%
Direct Labor 32.4% 32.1% 32.5% 32.3%
Other 24.5% 24.5% 24.2% 24.5%
Total Operating
Expense 82.2% 83.8% 81.1% 82.7%
Delivery Based Income 17.8% 16.2% 18.9% 17.3%
(1) As a percent of total revenue
(2) As a percent of restaurant sales
(3) As a percent of delivery sales
Comparison of Operating Results for the Thirteen and Twenty-Six
Weeks Ended September 26, 2000 with the Thirteen and Twenty-Six
Weeks Ended September 28, 1999
Revenue for the quarter was $125.6 million, which was $12.1
million or 10.7% above the $113.5 million reported in the same
period last year. For the year-to-date, revenue was $246.5 million
for an increase of $25.3 million or 11.5% over the $221.1 million
reported last year. This growth was primarily due to $12.6 million
and $26.8 million of incremental sales during the quarter and year-
to-date, respectively, generated by the 70 units acquired on July
22, 1999 and the 64 units acquired on June 8, 2000. Also
contributing to sales growth was a 1.7% and 1.8% increase in
comparable store sales for the quarter and year-to-date,
respectively. Acquired unit sales, combined with comparable store
sales improvement, more than offset the impact of store closure
activity since the same periods of the prior year.
Comparable stores sales increased 1.7% for the quarter and 1.8%
for the year-to-date while rolling over comparable store sales
growth of 2.7% and 4% for the same periods last year. This growth
was driven by the continued success of the Company's asset re-
imaging program. Fifty-four stores that have been re-imaged in the
last 18 months accounted for 2.7% and 2.5% of the Company's
comparable store sales growth during the quarter and year-to-date,
respectively. The favorable impact of this program is primarily
reflected in the Company's dine-in restaurants which increased
comparable store sales 2.2% for the quarter and year-to-date,
while lapping comparable store sales growth of 2.1% and 3.4%,
respectively, last year. The Company's delivery units recorded a
decline in comparable stores sales of 0.3% for the quarter and
0.2% growth for the year-to-date, while rolling over comparable
store sales growth of 3.1% and 5.1% for the quarter and year-to-
date last year.
Cost of sales as a percent of revenue decreased 170 and 110 basis
points for the quarter and year-to-date compared to the same
periods of the prior year. This improvement was primarily
attributable to a decline in cheese costs of approximately 29% and
24% for the quarter and year-to-date and the favorable impact of a
new beverage contract. These favorable events were partially
offset by an increase of approximately 10% and 13% for the quarter
and year-to-date in meat ingredient costs over the prior year.
(See Effects of Inflation and Other Matters for additional
information on cheese and other ingredient costs.)
During the quarter and year-to-date, direct labor costs increased
60 and 50 basis points due to increasing wage rates that were not
fully offset by productivity gains and higher labor costs in the
64 stores acquired June 8, 2000. (See Effects of Inflation and
Other Matters for additional information on labor costs.)
Other operating expense increased 80 basis points for the quarter
and year-to-date compared to the same periods of the prior year.
The increase in these costs was due to increased depreciation
expense associated with the Company's re-imaging activity, an
increase in the royalty rate due to higher royalties in
acquisition markets and increases in certain other operating
costs. The effect of the higher royalty rate resulting from the
acquisitions is entirely reflected in the Company's restaurant
units.
General, Administrative and Other Items
General and administrative expense increased 10 basis points for
the quarter and 20 basis points for the year-to-date compared to
the same periods of the prior year largely due to the addition of
field infrastructure to support the calendar year 1999
acquisitions. On a nominal dollar basis, general and
administrative expenses increased $820 thousand or 14.9% and $1.6
million or 15.1% for the quarter and year-to-date, respectively,
compared to the same periods of the prior year. These increases
were primarily due to growth associated with acquisitions.
Depreciation, amortization and pre-opening costs increased $295
thousand or 11.1% and $716 thousand or 13.9% 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 pre-opening cost (due to re-imaging activity)
and franchise rights amortization associated with the July 1999
and June 2000 acquisitions. Pre-opening costs of $414 thousand and
$941 thousand were incurred during the quarter and year-to-date,
respectively, compared to $144 thousand and $296 thousand recorded
in the same periods of the prior year.
See Facility Actions and Closure Reserve section of this report
for discussions relating to the quarter facility action charges.
Interest expense increased $934 thousand or 33.7% for the quarter
and $1.8 million or 34.9% for the year-to-date due to increased
borrowings associated with the July 1999 and June 2000
acquisitions, stock repurchase activity and re-imaging investments.
Miscellaneous income was $274 thousand and $612 thousand for the
quarter and year-to-date, respectively, compared to $381 thousand
and $983 thousand reported last year. The decline in miscellaneous
income was due to higher gains on sale or disposition of assets
occurring during the prior year.
Income before the cumulative effect of a change in accounting
principle was $4.7 million and $10.5 million for the quarter and
year-to-date, respectively, compared to $5.3 million and $11.9
million in the prior year. As in the prior year, taxes are being
provided at an effective rate of 35%.
For the quarter, income before net facility action charges and the
cumulative effect of a change in accounting principle was
$5,003,000 or $.23 per diluted share compared to $4,883,000 or
$.20 per diluted share last year. For year-to-date, income before
net facility action charges and the cumulative effect of change in
accounting principle was $11,445,000 or $.51 per diluted share
compared to $11,736,000 or $.47 per diluted share in the prior
year.
Components of diluted earnings per share were as follows:
Thirteen Twenty-Six
Weeks Ended Weeks Ended
Sept. 26, 2000 Sept. 26, 2000
Sept. 28, 1999 Sept. 28, 1999
Income before cumulative
of effect change in
accounting principle
and facility action
charges,net of tax, $ .23 $ .20 $ .51 $ .47
Cumulative effect of
change in accounting
principle, net of tax -- -- -- (.01)
Facility action
charges, net of tax (.02) .01 (.04) .01
Earnings per share
- diluted $ .21 $ .21 $ .47 $ .47
Liquidity, Capital Resources and Cash Flows
The Company's primary source of cash is its operations. After-tax
cash flow for the twenty-six weeks ended September 26, 2000,
excluding the impact of facility action charges, increased 9% or
$2.2 million over the same period last year. Adjusted for various
changes in balance sheet accounts, cash flow provided by operating
activities was $25.7 million for the twenty-six weeks ended
September 26, 2000 compared to the $24.9 million reported in the
prior year.
Restaurant development, start-up technology investments and normal
recurring capital expenditures resulted in $29.1 million of total
capital expenditures for the twenty-six weeks ended September 26,
2000 compared to $20.7 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, management is evaluating the use of
a sale-leaseback facility to finance a significant portion of the
Company's investment in its asset re-imaging program.
In addition to cash provided by operations, the Company has a $180
million unsecured revolving line of credit through June 2003. This
line of credit agreement was amended, restated and extended during
the previous quarter. This agreement, previously a $200 million
line of credit expiring May 2001, includes an accordion feature,
which allows the Company to increase its borrowing capacity to
$200 million in the future if necessary. At September 26, 2000 the
Company had $38.7 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 $32.4 million was available for the payment
of dividends at September 26, 2000 under existing debt covenants.
The $18.7 million acquisition of 64 Pizza Hut units that closed
June 8, 2000 was funded through the Company's unsecured line of
credit. (See Note 2 for information regarding the 64-unit
acquisition.) Predominately cash sales and rapid inventory
turnover allow the Company to use all available cash to reduce
borrowings under its revolving 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 and is common in the restaurant
industry.
During the twenty-six weeks ended September 26, 2000 the Company
repurchased 574,850 shares for $4.9 million at an average price
per share of $8.56 and at September 26, 2000 177,500 shares
remained authorized for repurchase. Effective October 23, 2000 the
Company's Board of Directors increased the number of shares
authorized to repurchase by 500,000 shares for a total remaining
authorization of 677,500.
During the twenty-six weeks ended September 26, 2000 the Company
made all scheduled principal and interest payments.
Seasonality
The Company's Pizza Hut operations have not experienced
significant seasonality in its sales; however, sales are largely
driven through advertising and promotion and are adversely
impacted in economic times that generally negatively impact
consumer discretionary income such as back-to-school and 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
affect 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.
Currently, Congress is considering legislation which could
increase the minimum wage by as much as $1 per hour over a two-
year period. Final legislation has not been passed to date but
could be acted upon soon with an effective date as early as
January 2001. Such legislation, if passed, would increase the
Company's labor costs as a majority of the Company's food service
personnel are paid at rates related to minimum wage. However, due
to the uncertainty regarding this legislation, management cannot
reliably estimate the potential impact upon labor costs at this
time.
AmeriServe Food Distribution, Inc., the Company's major
distributor, has reached a definitive agreement to sell its U.S.
distribution business to McLane Company, Inc., a subsidiary of Wal-
Mart Stores, Inc. As part of the sale, the Company agreed to a two-
year contract extension and will incur a 5% increase in
distribution fees. The overall impact of the increased
distribution fees on cost of sales will be approximately 0.1%.
This sale is anticipated to be completed in October. No assurances
can be given that this transaction will be completed.
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 and year-to-date, respectively, cheese prices
were approximately 29% and 24% lower than the costs incurred
during the comparable periods of the prior year. Based upon
available forecasts, management expects cheese costs to be
approximately 15% below last year's levels during the Company's
third fiscal quarter and essentially flat compared to the prior
year during the Company's fourth fiscal quarter.
Increases in interest rates would directly affect the Company's
financial results. Approximately 40% of the Company's debt is
under fixed rate agreements including senior notes and fixed swap
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.
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 28, 2000.
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 11, 2000. At
the meeting, shareholders elected one director.
Results of the voting in connection with this election were as
follows:
Election of Director For Against
Martin C. Bicknell 20,031,318 433,602
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):
O. Gene Bicknell (2001) and Michael Braude (2001)
James K. Schwartz (2002), William A. Freeman (2002) and Michael W.
Gullion (2002)
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are 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 26, 2000:
There were no Forms 8-K filed during the quarter.
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 23, 2000 /s/ Troy D. Cook
Senior Vice President Finance Troy D. Cook
Chief Financial Officer
Principal Financial Officer
DATE: October 23, 2000 /s/ Susan G. Dechant
Chief Accounting Officer Susan G. Dechant
Corporate Controller
