SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OR THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND 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
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of stock held by non-affiliates of the
registrant as of May 20, 1998:
Common Stock, $0.01 par value - $146,242,181
The number of shares outstanding of each of the registrant's
classes of common stock as of May 20, 1998:
Common Stock, $0.01 par value - 24,757,547
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year
ended March 31, 1998 are incorporated by reference in Part II,
Items 5 - 8.
Portions of the Proxy Statement for the Annual Stockholders'
Meeting to be held July 14, 1998, are incorporated by reference in
Part III, Items 10 - 13.
NPC INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I
ITEM PAGE
1. Business 3
2. Properties 13
3. Legal Proceedings 15
4. Submission of Matters to a Vote of Security Holders 15
4A. Executive Officers of the Registrant 15
PART II
5. Market for Registrant's Common Stock and
Related Stockholder Matters 17
6. Selected Financial Data 17
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
8. Financial Statements and Supplementary Data 17
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
PART III
10. Directors and Executive Officers of the Registrant 18
11. Executive Compensation 18
12. Security Ownership of Certain Beneficial Owners and
Management 18
13. Certain Relationships and Related Transactions 18
PART IV
13. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 19
NPC INTERNATIONAL, INC.
Pittsburg, Kansas
Annual Report to Securities and Exchange Commission
March 31, 1998
PART I
ITEM 1. BUSINESS
General
The Company. NPC International, Inc. (the "Company" or
"Registrant"), formerly National Pizza Company, is the successor
to certain Pizza Hut operations commenced in 1962 by O. Gene
Bicknell, the Chairman of the Board of the Company.
At March 31, 1998, the Company operated 536 Pizza Hut restaurants
and 144 delivery units in 24 states pursuant to franchise
agreements with Pizza Hut, Inc. ("PHI"), a wholly-owned subsidiary
of TRICON Global Restaurants, Inc. ("TRICON").
On March 27, 1997, the Company acquired 62 Pizza Huts from PHI.
Simultaneous with the closing, the Company assumed operational
responsibility for four units which have been reflected in the
Company's financial statements as if owned. These four units were
acquired on September 2, 1997.
On June 5, 1997, the Company acquired an additional 51 units from
PHI. One additional PHI unit was purchased on July 10, 1997.
On May 15, 1997, the Company acquired 82 units from Jamie B.
Coulter (Coulter). Simultaneously, the Company assumed operational
responsibility for 18 additional Coulter units in North Carolina,
which have been reflected in the Company's financial statements as
if owned. The Company acquired 10 of the North Carolina units on
July 16, 1997, four more on August 19, 1997 and on October 2, 1997
the Company closed on the remaining four units.
On April 27, 1998 the Company announced plans to consolidate and
relocate 53 Pizza Hut units to 45 new locations to redefine trade
areas, improve market presence, and to upgrade certain assets to a
more competitive format. Relocated units will be moved to
improved trade areas and fall into the following categories:
relocation of delivery units to more visible locations and
improved formats; relocation of older dine-in assets with rural
markets to new prototype units; and conversions of certain metro
markets to "Main-Path" restaurants.
On June 8, 1993, the Company completed the acquisition of
Romacorp, Inc. (formerly NRH Corporation). Romacorp, Inc. is the
operator and franchisor of Tony Roma's Famous For Ribs
restaurants. At March 31, 1998, Romacorp, Inc. operated 45
Company-owned and two joint-venture restaurants in eleven states
and through its subsidiaries, franchised 94 units in 19 states and
53 units in international locations.
The Company and Sentinel Capital Partners (Sentinel), a private
equity firm, have agreed to a recapitalization of Romacorp, Inc.
whereby Romacorp, Inc. will redeem the equity held by the Company
so that the Company's post recapitalization holdings will be 10%
of the equity of Romacorp, Inc. Sentinel will become the majority
investor in Romacorp, Inc. following the recapitalization.
Consummation of the transaction is subject to certain conditions
customary for a transaction of this nature. The closing will
occur no later than August 31, 1998.
The Company is a Kansas corporation incorporated in 1974 under the
name Southeast Pizza Huts, Inc. In 1984, the name of the Company
was changed to National Pizza Company and was subsequently renamed
NPC International, Inc. on July 12, 1994. Its principal office is
located at 720 W. 20th Street, Pittsburg, Kansas and its telephone
number is (316) 231-3390.
Pizza Hut Operations
Pizza Hut Restaurant System. The first Pizza Hut restaurant was
opened in 1958 in Wichita, Kansas by the original founders of the
Pizza Hut system. PHI, the franchisor of the Company, was formed
in 1959.
In 1977, PHI was acquired by PepsiCo, Inc., which continued
expanding the Pizza Hut system. In 1997, PepsiCo, Inc. completed
its spin-off of its restaurant group. PHI is now a wholly-owned
subsidiary of TRICON. The Pizza Hut system is the largest pizza
chain in the world, both in sales and number of units. As of
December 31, 1997 the Pizza Hut system had approximately 7,400
units and approximately 52% of the Pizza Hut units were operated
by PHI.
Pizza Hut restaurants generally offer full table service and a
menu featuring pizza, pasta, sandwiches, a salad bar, soft drinks
and, in most restaurants, beer. Most dough products are made fresh
at least twice per day, and only 100% natural cheese products are
used. All product ingredients are of a high quality and are
prepared in accordance with proprietary formulas established by
PHI. The restaurants offer pizza in three sizes with a variety of
toppings. Customers may also choose among thin crust, traditional
hand-tossed, stuffed-crust and thick crust pan pizza. With the
exception of the Personal Pan Pizza and food served at the
luncheon buffet, food products are prepared at the time of order.
Pizza sales account for approximately 86% of the Company's Pizza
Hut operations revenues. Sales of alcoholic beverages are less
than 1% of net sales.
New product introduction is vital to the continued success of any
restaurant system, and PHI maintains a research and development
department which develops new products and recipes, tests new
procedures and equipment, and approves suppliers for Pizza Hut
products. All new products are developed by PHI, and franchisees
are prohibited from offering any other products in their
restaurants unless approved by PHI.
Pizza Hut also delivers pizza products to their customers. Prior
to 1985, most delivery was done out of existing restaurants. In
1985, the system began to aggressively pursue home delivery
through delivery / carryout kitchens. Customer orders are
processed through a computerized customer service center (CSC), a
"single unit solution" (SUS, a facility similar to a CSC, but
smaller in scale), or directly to the kitchen.
A successful delivery operation yields lower profit margins as a
percentage of sales than the Company's Pizza Hut restaurants due
to higher labor costs, but the return on invested capital is
greater.
The Company's Pizza Hut Operations. The Company is the largest
Pizza Hut franchisee in the world. The franchise agreements, under
which the Company operates, grant exclusive right to operate Pizza
Hut restaurants in certain designated areas. States of operation
are indicated in the table below based on unit count by state.
Company-
owned
Pizza Huts at
State March 31, 1998
Alabama 82
Arizona 1
Arkansas 71
Colorado 7
Delaware 11
Georgia 1
Illinois 35
Indiana 16
Kansas 20
Kentucky 10
Louisiana 36
Minnesota 8
Mississippi 115
Missouri 29
North Carolina 47
North Dakota 18
Nevada 5
Oklahoma 32
Oregon 23
South Dakota 26
Tennessee 56
Texas 22
Utah 5
Washington 4
Company Total 680
The Company provides delivery service utilizing a CSC telephone
system in nine metropolitan markets: Springfield, Missouri;
Montgomery and Birmingham, Alabama; Shreveport, Louisiana; Jackson
and Long Beach, Mississippi; Little Rock, Arkansas; Tulsa,
Oklahoma and Memphis, Tennessee. Under the CSC system, all
customers within the trade area place telephone orders through a
single clearing number, and the pizza is dispatched from the
Company's delivery kitchen nearest the customer. Customers call
the restaurant delivery kitchens directly in other locations.
Relationships with Pizza Hut, Inc. The Company's franchise
agreements with PHI (the "Franchise Agreements") provide for,
among other things, standards of operation and physical condition
of the Company's restaurants, the provision of services, the
geographical territories in which the Company has exclusive rights
to open and operate Pizza Hut restaurants and delivery kitchens,
the term of the franchise and renewal options, the Company's
development rights and obligations and various provisions relating
to the transfer of interests in the Company's franchise rights.
PHI determines standards of operation for all Pizza Hut
restaurants, including standards of quality, cleanliness and
service. Further, the Franchise Agreements allow the franchisor
to set specifications for all furnishings, interior and exterior
decor, supplies, fixtures and equipment. See "Business - Supplies
and Equipment. " PHI also has the right to determine and change
the menu items offered by, and to inspect all restaurants of its
franchisees, including the Company. All such standards may be
revised from time to time. Upon the failure to comply with such
standards, PHI has various rights, including the right to
terminate the applicable Franchise Agreements, redefine the
franchise territory or terminate the Company's rights to establish
additional restaurants in that franchise territory. The Franchise
Agreements may also be terminated upon the occurrence of certain
events, such as the insolvency or bankruptcy of the Company or the
commission by the Company or any of its officers, directors or
principal stockholders (other than its public stockholders) of a
felony or other crime that, in the sole judgment of PHI is
reasonably likely to adversely affect the Pizza Hut system, its
trademark, the goodwill associated therewith or PHI's interest
therein. At no time during the Company's history has PHI sought
to terminate any of the Company's Franchise Agreements, redefine
its franchise territories or otherwise limit the Company's
franchise rights. The Company believes it is in compliance with
all material provisions of the Franchise Agreements.
Under the Franchise Agreements, extensive structural changes,
major remodeling and renovation and substantial modifications to
the Company's restaurants necessary to conform to the then current
Pizza Hut system image may be required by PHI, but not more often
than once every seven years. The Company has not been required to
make any such changes, renovations or modifications. PHI may also
request the Company to introduce new food products that could
require remodeling or equipment changes. PHI can require changes
of decor or products only after it has tested such changes in at
least 5% of Pizza Hut system restaurants.
PHI is required to provide certain continuing services to the
Company, including training programs, the furnishing of operations
manuals and assistance in evaluating and selecting locations for
restaurants.
In early 1990, PHI offered franchisees the opportunity to sign a
new twenty-year franchise agreement (the "1990 Franchise
Agreement"). The 1990 Franchise Agreement required franchise fees
of 4% of sales, as defined, for all restaurants and delivery
kitchens and increases in certain advertising contributions. The
1990 Franchise Agreement also sought to redefine certain rights
and obligations of the franchisee and franchisor. The 1990
Franchise Agreement did not alter the franchisee's territorial
rights and maintained, subject to some minor limitations, the
exclusivity of the Pizza Hut brand within the geographical limits
of the territory defined by each franchise agreement. On June 7,
1994, the Company conformed its existing Franchise Agreements to
the 1990 Franchise Agreement.
The 1990 Franchise Agreement grants to the Company the exclusive
right to develop and operate restaurants within designated
geographic areas through February 28, 2010. The Company has the
option to renew each Franchise Agreement prior to its expiration
for a single renewal term of 15 years by entering into the then-
current form of the PHI franchise agreement, including the then-
current fee schedules, provided the Company is not then in default
of its obligations under that Franchise Agreement, including the
development schedule, and has complied with the requirements
thereof throughout the term of the agreement.
The Franchise Agreements under which the Company operates require
the payment of monthly fees to PHI. Under the 1990 Franchise
Agreement (as it applies to the Company), the Company's royalty
payments for all units owned increased to 4% of gross sales in
July, 1996, from the Company's prior effective rate of
approximately 2.25%. This rate reflects the royalty rate which
was proposed by PHI to Pizza Hut franchisees as part of the 1990
Franchise Agreement and is lower than the rate under PHI's current
franchise agreement.
Franchise agreements covering units acquired from PHI will operate
under a new franchise agreement ("Location Franchise Agreement")
which, as amended, is similar to the 1990 Franchise Agreement and
expires 20 years after the date of the acquisition. The Company
has the option to renew each Franchise Agreement prior to its
expiration for a single renewal term of 15 years by entering into
the then-current form of the PHI franchise agreement, including
the then-current fee schedules, provided the Company is not then
in default of its obligations under that Franchise Agreement,
including the development schedule, and has complied with the
requirements thereof throughout the term of the agreement. Pizza
Huts acquired from other franchisees will continue to be subject
to the terms and conditions of the respective Franchise Agreement
covering the acquired unit.
For the fiscal years ended March 31, 1998, March 25, 1997, and
March 26, 1996 the Company incurred total franchise fees of
approximately $14,586,000, $7,535,000 and $4,983,000,
respectively. The Franchise Agreements require the Company to pay
initial franchise fees to PHI in amounts of up to $15,000 for each
new restaurant opened ($25,000 in territories granted under the
Location Franchise Agreement). The Company is required to
contribute or expend a certain percentage of its sales for local
and national advertising and promotion. See "Business -
Advertising and Promotion. "
Failure to develop a franchise territory as required would give
PHI the right to operate or franchise Pizza Hut restaurants in
that territory. Such failure would not affect the Company's
rights with respect to the Pizza Hut restaurants then in operation
or under development by the Company in any such territory. As of
March 31, 1998, the Company had no commitments for future
development under any franchise agreement.
The Franchise Agreements prohibit the transfer or assignment of
any interest in the franchise rights granted thereunder or in the
Company without the prior written consent of PHI, which consent
may not be unreasonably withheld if certain conditions are met.
All franchise agreements also give PHI a right of first refusal to
purchase any interest in the franchise rights or in the Company if
a proposed transfer by the Company or a controlling person would
result in a change of control of the Company. PHI also has a
right of first refusal with respect to any Pizza Hut franchise
right proposed to be acquired by the Company from any other Pizza
Hut franchisee. The right of first refusal, if exercised, would
allow PHI to purchase the interest proposed to be transferred upon
the same terms and conditions and for the same price as offered by
the proposed transferee.
The Company has the right to develop additional Pizza Hut
restaurants and delivery kitchens in its exclusive franchise
territories. However, since becoming a public company, expansion
by acquisition has been one of the Company's primary methods of
growth. Between 1990 and 1993, PHI exercised its right of first
refusal as described above on all proposed transactions between
the Company and other Pizza Hut franchisees; as a result the
Company acquired no units during this period. Between March, 1994
(when the Company announced its intention to sign a new Franchise
Agreement) and March, 1998, the Company acquired a total of 355
Pizza Hut units or the operations thereof, including 201 from PHI.
PHI nevertheless retains the right of first refusal on any
proposed acquisition in the future, and the Company cannot be
assured it will continue to receive such permission on proposed
future acquisitions, if any.
Pursuant to an amendment to the Franchise Agreements, filed as
Exhibit 10.29 to this Form 10-K, Mr. Bicknell is required to
maintain ownership of at least 20% of the Company's common stock.
Advertising and Promotion. The Company is required under its
Franchise Agreements to be a member of the International Pizza Hut
Franchise Holders Association, Inc. ("IPHFHA"), an independent
association of substantially all PHI franchisees. IPHFHA requires
its members to pay dues, which are spent primarily for national
advertising and promotion. Dues are 2% of restaurant net sales
and net delivery sales. Dues may be increased up to a maximum of
3% by the affirmative vote of 51% of the members. A joint
advertising committee, consisting of two representatives each from
PHI and IPHFHA, directs the national advertising campaign. PHI is
not a member of IPHFHA but has agreed to make contributions with
respect to those restaurants it owns on a per-restaurant basis to
the joint advertising committee at the same rate as its
franchisees (less IPHFHA overhead).
The Franchise Agreements also require the Company to participate
in cooperative advertising associations designated by PHI on the
basis of certain marketing areas defined by PHI. Each Pizza Hut
restaurant, including restaurants operated by PHI, contributes to
such cooperative advertising associations 2% of gross sales.
Certain of the Company's Franchise Agreements provide that the
amount of the required contribution may be increased at the sole
discretion of PHI. The cooperative advertising associations are
required to use their funds to purchase only broadcast media
advertising within their designated marketing areas. All
advertisements must be approved in writing by PHI, except with
respect to product or menu item prices.
Supplies and Equipment. The Franchise Agreements require the
Company to purchase all equipment, supplies and other products and
materials required in the operation of its restaurants and
delivery kitchens from suppliers who have been approved by PHI.
Ameriserve provides distribution services to PHI owned restaurants
under the parameters of a five year agreement with TRICON. These
services are provided to the Company and substantially all other
Pizza Hut franchisees under terms consistent with the TRICON
agreement as it relates to PHI. Purchasing is substantially
provided by the Supply Chain Management Group of TRICON to all
members of the Pizza Hut system.
Supervision and Control. Pizza Hut restaurants are open seven days
a week and serve both lunch and dinner. Each of the restaurants
has a manager, and in most units, an assistant manager who are
responsible for daily operations of the restaurant, including food
preparation, quality control, service, maintenance, personnel, and
record keeping. All of the restaurant managers have completed a
comprehensive management training program. Each area general
manager is responsible for approximately five to eleven
restaurants. Detailed operations manuals reflecting current
operations and control procedures are provided to each restaurant
and district manager as well as others in the organization.
Currently, the Company's Pizza Huts operate in ten regions ranging
from 50 to 90 stores per region. Each region is supervised by a
regional manager. Oversight of the ten regions is provided by
three divisional vice presidents who are supported by
administrative, marketing and human resource staff.
A point-of-sale cash register system is installed in all Company-
operated restaurants. This POS system provides effective
communication between the kitchen and the server, allowing
employees to serve customers in a quick and consistent manner
while still maintaining a high level of control. It feeds data to
the back office system that provides support for inventory,
payroll, accounts payable and cash management. The back office
system also provides management reporting and a communications
interface to the corporate systems.
Accounting is centralized in Pittsburg, Kansas. Additional
financial and management controls are maintained at the individual
restaurants, where inventory, labor and food data are recorded to
monitor food usage, food waste, labor costs, and other
controllable costs.
Competition. The restaurant business is highly competitive with
respect to price, service, location, food quality and
presentation, and is affected by changes in taste and eating
habits of the public, local and national economic conditions and
population and traffic patterns. The Company competes with a
variety of restaurants offering moderately priced food to the
public, including other pizza restaurants. The Company also
competes with locally-owned restaurants which offer similar pizza,
pasta and sandwich products. The Company believes other companies
can easily enter its market segment, which could result in the
market becoming saturated, thereby adversely affecting the
Company's revenues and profits. There is also active competition
for competent employees and for the type of commercial real estate
sites suitable for the Company's restaurants.
Employees. At March 31, 1998, the Company's Pizza Hut operations
had approximately 13,400 employees, including 193 headquarters and
staff personnel, three vice presidents, ten regional managers, 89
area general managers, 1,287 restaurant management employees and
approximately 11,818 restaurant employees (of whom approximately
71% are part-time). The Company experiences a high rate of
turnover of its part-time employees, which it believes to be
normal in the restaurant industry. The Company is not a party to
any collective bargaining agreements and believes its employee
relations to be satisfactory. The maintenance and expansion of
the Company's restaurant business is dependent on attracting and
training competent employees. The Company believes that the
restaurant manager plays a significant role in the success of its
business. Accordingly, the Company has established bonus plans
pursuant to which certain of its supervisory employees may earn
cash bonuses based upon both the sales and profits of their
restaurants.
Trade Names, Trademarks and Service Marks. The trade name "Pizza
Hut" and all other trademarks, service marks, symbols, slogans,
emblems, logos and designs used in the Pizza Hut system are owned
by PHI. All of the foregoing are of material importance to the
Company's business and are licensed to the Company under its
Franchise Agreements for use with respect to the operation and
promotion of the Company's restaurants.
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.
Tony Roma's Operations
Restaurant Format. Romacorp, Inc. operates, and through its
affiliates, franchises casual-theme restaurants under the name
Tony Roma's Famous For Ribs. The restaurants offer a full and
varied menu, including ribs, salads, steaks, seafood, chicken and
other menu items. The decor of the restaurants is casual, and
suitable for family dining. Recent renovations and new
restaurants feature improved lighting and light color decor
packages to attract a broader segment of customers. All entrees
are prepared to order. Romacorp, Inc., through its affiliates,
operates two Tony Roma's restaurants as joint ventures. Romacorp,
Inc. receives a fee for managing the joint venture restaurants and
remits to the partners an agreed-upon percentage of gross sales.
Menu and Food Preparation. All entrees served at Tony Roma's
restaurants are prepared to order. The menu includes ribs, steak,
chicken, seafood, sandwiches and salads. Tony Roma's signature
product is baby back ribs. Guest checks average approximately
$12.50 per person. Alcoholic beverages are served in all
restaurants, and account for approximately 12% of sales.
Supplies and Equipment. To assure consistent product quality and
to obtain optimum pricing, purchases of food and restaurant
equipment for the Tony Roma's restaurants are made through a
centralized purchasing function in its corporate office in Dallas,
Texas. The Company negotiates directly with meat processors for
its rib inventory, which is principally maintained in various
independent warehouses. Inventory is then shipped to restaurants
via commercial distributors. Produce and dairy products are
obtained locally. Food and equipment pricing information is also
generally available to the Tony Roma's franchisee community.
The Company is generally not dependent upon any one supplier for
availability of its products; its food and other products are
generally available from a number of acceptable sources. The
Company has a policy of maintaining alternate suppliers for most
of its baseline products. The Company does not manufacture any
products nor act as a middleman.
Franchising. Although the first Tony Roma's opened in 1972,
franchising wasn't a key element of Tony Roma's growth strategy
until 1984. At March 31, 1998, the Company had 49 franchisees
operating 147 units world wide. The largest franchise holder
operates a chain of 24 Tony Roma's restaurants. Although there
are some individual unit franchisees, the Company seeks to attract
franchisees who can develop several restaurants.
New domestic franchisees pay an initial franchise fee of $50,000
and a continuing royalty of 4% of gross sales. In addition,
franchisees are required to contribute 0.5% of gross sales to a
joint marketing account and may be required to participate in
local market advertising cooperatives. All potential franchisees
must meet certain operational and financial criteria.
In return for the domestic franchisee's initial fee and royalties,
the Company provides a variety of services, including: real estate
services, site selection criteria and review/advice on
construction cost and administration; pre-opening and opening
assistance, which include an on-site training team to assist in
recruitment, training, organization, inventory planning and
quality control; centralized and system-wide purchasing
opportunities; in-store management training programs, advertising
and marketing programs; and various administrative and training
programs developed by the Company.
International franchisees receive a modified version of the above
services. Currently, international franchises require a fee of
$30,000 per unit and royalty rate of 3% of gross sales. However,
costs associated with visits to international locations by Company
personnel are borne by the international franchisee.
International franchise holders also contribute 0.25% to a joint
marketing account.
Supervision and Control. Company operated restaurants are
typically run by one general manager, two to three assistant
managers and a kitchen manager. All of the Tony Roma's restaurant
managers have completed a comprehensive management training
program. Detailed operations manuals reflecting current
operations and control procedures are provided to each restaurant
and district manager as well as others in the organization.
A point-of-sale (POS) cash register system is installed in all
company-operated restaurants. This POS system provides effective
communication between the kitchen and the server, allowing
employees to serve the customers in a quick and consistent manner
while still maintaining a high level of control. It feeds data to
the back office system that provides support for inventory,
payroll, accounts payable and cash management. The back office
system also provides management reporting and a communications
interface to the corporate systems.
Accounting is centralized in Pittsburg, Kansas. Additional
financial and management controls are maintained at the individual
restaurants, where inventory, labor and food data are recorded to
monitor food usage, food waste, labor costs, and other
controllable costs.
Advertising. With customer research as an information base, the
marketing department directs sales program development,
advertising, public relations, field marketing activities, and
product packaging.
Competition. The restaurant industry is intensely competitive with
respect to price, value, service, location and food quality. Tony
Roma's has developed brand identity within the casual theme
segment and is the only national chain to focus on ribs. On a
local and regional basis, the Company competes with smaller
chains, which also specialize in ribs, and with larger concepts
which include ribs as a menu item.
Employees. At March 31, 1998, the Company owned Tony Roma's
operations had approximately 2,678 employees including 48
headquarters and staff personnel, 1 president, 2 regional
managers, 14 district managers, 221 restaurant management
employees and approximately 2,392 restaurant employees (of whom
approximately 58% are part-time). Romacorp, Inc. is not a party
to any collective bargaining agreements and believes its employee
relations to be satisfactory.
Trade Names, Trademarks and Service Marks. The trade name "Tony
Roma's" and all other trademarks, service marks, symbols, slogans,
emblems, logos, and designs used in the Tony Roma's restaurant
system are of material importance to its business. The domestic
trademark and franchise rights are owned by Roma Dining LP, an
affiliate of Romacorp, Inc., and international trademarks/
franchise rights are owned by Roma Systems, Inc., a wholly owned
subsidiary of Romacorp, Inc. A subsidiary, Roma Franchise
Corporation, through a license with Roma Dining LP, offers and
services franchises in the United States and Roma Systems, Inc.
offers services and franchises internationally. The use of these
marks is licensed to franchisees under franchise agreements for
use with respect to the operation and promotion of their Tony
Roma's restaurants.
Seasonality. Tony Roma's restaurant sales are normally higher from
January to March and traditionally lower during the summer months
than during the other months of the year.
The location of the Company-owned and franchised restaurants is as
follows:
State/Country Company-owned Joint Venture Franchised
Alabama 2 --- ---
Alaska --- --- 1
Arizona --- --- 4
Arkansas 1 -- --
California 5 1 32
Colorado --- --- 5
Florida 18 --- 3
Hawaii --- --- 4
Kentucky --- --- 2
Maine --- --- 1
Minnesota --- --- 2
Missouri 1 --- ---
Nebraska --- --- 1
Nevada 3 --- 4
New York --- --- 1
North Carolina 1 -- --
Ohio --- --- 3
Oklahoma 1 --- ---
Oregon --- --- 3
South Carolina 1 --- 2
Tennessee 1 --- ---
Texas 11 1 4
Utah --- --- 7
Washington --- --- 12
Wisconsin --- --- 3
United States Total 45 2 94
Aruba --- --- 1
Canada --- --- 10
Bahamas --- --- 1
Puerto Rico --- --- 1
China --- --- 1
Guam --- --- 2
Hong Kong --- --- 2
Indonesia --- --- 2
Japan --- --- 10
Korea --- --- 3
Mexico --- --- 5
Peru --- --- 2
Philippines --- --- 1
Saipan --- --- 1
Spain --- --- 7
Singapore --- --- 2
Taiwan --- --- 1
Thailand --- --- 1
International Total --- --- 53
World Total 45 2 147
Number of franchise holders 47
Government Regulation
All of the Company's operations are subject to various federal,
state and local laws that affect its business, including laws and
regulations relating to health, sanitation, alcoholic beverage
control and safety standards. To date, federal and state
environmental regulations have not had a material effect on the
Company's operations, but more stringent and varied requirements
of local governmental bodies with respect to zoning, building
codes, land use and environmental factors have in the past
increased, and can be expected in the future to increase, the cost
of, and the time required for opening new restaurants.
Difficulties or failures in obtaining required licenses or
approvals could delay or prohibit the opening of new restaurants.
In some instances, the Company may have to obtain zoning variances
and land use permits for its new restaurants. The Company
believes it is operating in compliance with all material laws and
regulations governing its operations.
The Company is also subject to the Fair Labor Standards Act, which
governs such matters as minimum wages, overtime and other working
conditions. A substantial majority of the Company's food service
personnel are paid at rates related to the minimum wage and other
employment laws and regulations, accordingly, increases in the
minimum wage result in higher labor costs.
Legislation mandating health coverage for all employees, if
passed, will increase benefit costs since most hourly restaurant
employees are not currently covered under Company plans. 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.
Cautionary Factors That May Affect Future Results, Financial
Condition or Business
In order to take advantage of the safe harbor provisions for
forward-looking statements adopted by the Private Securities
Litigation Reform Act of 1995, the Company is hereby identifying
important risks, uncertainties and other factors that could affect
the Company's actual results of operations, financial condition or
business and could cause the Company's actual results of
operations, financial condition or business to differ materially
from its historical results of operations, financial condition or
business or the results of operation, financial condition or
business contemplated by forward-looking statements made herein or
elsewhere orally or in writing, by, or on behalf of, the Company.
Except for the historical information contained herein, the
statements made in this Report on Form 10-K are forward-looking
statements that involve such risks, uncertainties and other
factors that could cause or contribute to such differences
including, but not limited to, those described below.
Consumer Demand and Market Acceptance. Food service businesses
are often affected by changes in consumer tastes, national,
regional and local economic conditions and demographic trends.
The performance of individual restaurants may be adversely
affected by factors such as traffic patterns, demographic
considerations and the type, number and location of competing
restaurants. Multi-unit food service chains such as the Company's
can also be materially and adversely affected by publicity
resulting from food quality, illness, injury and other health
concerns or operating issues stemming from one restaurant or a
limited number of restaurants, including restaurants operated by
the franchisor or another franchisee.
Effectiveness of Franchisor Advertising Programs and the Overall
Success of the Franchisor. The success of the Company is
substantially dependent upon the effectiveness of PHI's
advertising programs and development of new and successful
products, and the overall success of Pizza Hut.
Training and Retention of Skilled Management and Other Restaurant
Personnel. The Company's success depends substantially upon its
ability to recruit, train and retain skilled management and other
restaurant personnel. There can be no assurance that labor
shortages, economic conditions or other factors will not adversely
affect the ability of the Company to satisfy its requirements in
this area.
Ability to Locate and Secure Acceptable Restaurant Sites. The
success of restaurants is significantly influenced by location.
There can be no assurance that current locations will continue to
be attractive, or additional locations can be located and secured,
as demographic pattern change. It is possible that the current
locations or economic conditions where restaurants are located
could decline in the future, resulting in potentially reduced
sales in those locations. There is also no assurance that further
sites will produce the same results as past sites.
Competition. The Company's future performance will be subject to
a number of factors that affect the restaurant industry generally,
including competition. The restaurant business is highly
competitive and the competition can be expected to increase.
Price, restaurant location, food quality, quality and speed of
service and attractiveness of facilities are important aspects of
competition as are the effectiveness of marketing and advertising
programs. The competitive environment is also often affected by
factors beyond the Company's or a particular restaurant's control.
The Company's restaurants compete with a wide variety of
restaurants ranging from national and regional restaurant chains
(some of which have substantially greater financial resources than
the Company) to locally owned restaurants. There is also active
competition for advantageous commercial real estate sites suitable
for restaurants.
Unforeseeable Events and Conditions. Unforeseeable events and
conditions, many of which are outside the control of the Company,
can impact consumer patterns in the restaurant industry. These
events include weather patterns, severe storms and power outages,
natural disasters and other acts of God. Specific examples
include but are not limited to the Company's concentration of Tony
Roma's operations and franchisees in Florida and California, both
being areas that have historically suffered from severe weather
and natural disasters. There can be no assurance that the
Company's operations will not be adversely affected by such events
in the future.
Commodities Costs, Labor Shortages and Costs and other Risks.
Dependence on frequent deliveries of fresh produce and groceries
subjects food service businesses to the risk that shortages or
interruptions in supply, caused by adverse weather or other
conditions, could adversely affect the availability, quality and
cost of ingredients. Specifically, certain ingredients such as
cheese and babyback ribs constitute a large percentage of the
total cost of the Company's food products. Unforeseeable
increases in the cost of these specific ingredients could
significantly increase the Company's cost of sales and
correspondingly decrease the Company's operating income. In
addition, unfavorable trends or developments concerning factors
such as inflation, increased food, labor and employee benefit
costs (including increases in hourly wage and minimum unemployment
tax rates), regional weather conditions, interest rates and the
availability of experienced management and hourly employees may
also adversely affect the food service industry in general and the
Company's results of operations and financial condition in
particular.
ITEM 2. PROPERTIES
Pizza Hut Operations
Pizza Hut restaurants historically have been built according to
identification specifications established by PHI relating to
exterior style and interior decor. Variation from such
specifications is permitted only upon request and if required by
local regulations or to take advantage of specific opportunities
in a market area.
The distinctive Pizza Hut red roof is the identifying feature of
Pizza Hut restaurants throughout the world. Pizza Hut restaurants
are generally freestanding, one-story buildings, usually with wood
and brick exteriors, and are substantially uniform in design and
appearance. Property sites range from 15,000 to 40,000 square
feet and accommodates parking for 30 to 70 cars. Typically, Pizza
Hut restaurants contain from 1,800 to 3,500 square feet, including
a kitchen area, and have seating capacity for 70 to 125 persons.
The cost of land, building and equipment for a typical Pizza Hut
restaurant varies with location, size, construction costs and
other factors. The Company currently estimates that the average
cost to construct and equip a new restaurant in its existing
franchise territories is approximately $500,000 to $550,000, or
$600,000 to $850,000 including the cost of land acquisition.
The Company continually renovates and upgrades its existing
restaurants. Such improvements generally include new interior and
exterior decor, expansion of seating areas, and installation of
more modern equipment.
The Company anticipates that the capital investment necessary for
each delivery-only kitchen is approximately $90,000 in equipment
and $110,000 in leasehold improvements. The cost of a customer
service center is approximately $150,000 in equipment and
improvements.
The Pizza Hut restaurants and delivery units operated by the
Company at March 31, 1998, are owned or leased as follows:
Leased from unrelated third parties 502
Land and building owned by the Company 132
Building owned by the Company and land leased 46
680
The amount of rent paid to unrelated persons is determined on a
flat rate basis or as a percentage of sales or as a combination of
both. Some leases contain provisions requiring cost of living
adjustments.
Generally, the percentage rate is approximately 5% to 6% where
both land and buildings are leased. Approximately 377 leases have
initial terms which will expire within the next five years.
Nearly all of these leases contain provisions allowing for the
extension of the lease term.
The Company leases parking lot space for one Pizza Hut unit from
an officer of the Company. The rent is paid monthly as a flat
rate.
The Company owns its principal office in Pittsburg, Kansas,
containing approximately 46,000 square feet of commercial office
space. Currently, the Company leases from third parties office
space for its regional offices in Birmingham, AL, Vestavia, AL,
Little Rock, AR, Evansville, IN, Lenexa, KS, Shreveport, LA,
Brandon, MS, Springfield, MO, Winston-Salem, NC, Portland, OR,
Sioux Falls, SD, and Memphis, TN.
Tony Roma's Operations
Romacorp, Inc. selects all company-operated restaurant sites, and
has to right to approve all franchised restaurant locations.
Sites are selected using a screening model to analyze locations
with an emphasis on projected financial return, demographics (such
as population density, age and income distribution), analysis of
restaurant competition in the area, and an analysis of the site
characteristics, including accessibility, traffic counts, and
visibility.
The current cost of constructing and equipping a free-standing
Tony Roma's restaurant typically ranges from $750,000 to $950,000
for building, $150,000 to $250,000 for land improvements and
signage, and $250,000 to $300,000 for equipment. The cost of land
varies considerably depending on geographic and site location.
Land costs vary from $450,000 to $850,000. Units which are
constructed within existing structures or mall areas are typically
less. The Company has developed standardized restaurant designs
using a freestanding building to be situated on a 1-1/2 acre site.
The design is continually revised and refined.
The 45 Company-operated Tony Roma's restaurants at March 31, 1998,
are owned and leased as follows:
Leased from unrelated parties 20
Land and buildings owned 17
Building owned by the Company and land leased 8
45
Some of Tony Roma's leases contain percentage rent clauses
(typically 5% to 6% of gross sales) against which the minimum rent
is applied, and most are net leases under which Tony Roma's pays
taxes, maintenance, insurance, repairs and utility costs.
Properties Held For Sale or Liquidation
Effective March 25, 1996, the Company sold the stock of the wholly-
owned subsidiary Skipper's, Inc. (Skipper's), a quick service
seafood chain, to a Seattle investment group. In conjunction with
the sale of Skipper's, the Company retained nineteen fee simple
properties that had previously been operated by Skipper's and had
been closed prior to the sale. During fiscal 1997, the Company
sold five properties for $1,310,000 leaving fourteen fee simple
properties for sale at March 25, 1997. During fiscal 1998, the
Company sold three properties for $900,000 leaving eleven
properties for sale at March 31, 1998. At March 31, 1998, seven
of the eleven fee simple properties were occupied by tenants.
In addition to the properties held for sale, the Company had
obligations related to thirty-nine properties at the beginning of
the year, under operating leases, that had previously been
operated as Skipper's restaurants. During fiscal 1997, the
Company bought out of six of these leases and two leases expired.
During fiscal 1998, the Company bought out of four of these leases
and three leases expired. At March 31, 1998, the Company remains
obligated for twenty-four properties under operating leases,
twenty-two of which have been subleased. The Company continues to
market the properties to other potential subtenants, while also
pursuing alternative methods of extinguishing these commitments.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are engaged in ordinary and
routine litigation incidental to its business, but management does
not anticipate that any amounts which it may be required to pay by
reason thereof, net of insurance reimbursements, will have a
materially adverse effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders
during the fourth quarter of the fiscal year ended March 31, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are elected by the Board of
Directors and serve until their successors are duly elected and
qualified or until their earlier resignation or removal. The
executive officers of the Company and their current positions and
ages are as follows:
Name Position Age
O. Gene Bicknell Chairman of the Board,
Chief Executive Officer
and Director 65
James K. Schwartz President and Chief
Operating Officer 36
Marty D. Couk Senior Vice President
Pizza Hut Operations,
Eastern Division 43
D. Blayne Vaughn Vice President Pizza Hut
Operations, Western
Division 41
L. Bruce Sharp Vice President Pizza Hut
Operations, Southern
Division 40
Robert B. Page President, Romacorp, Inc.
(Tony Roma's Operations) 39
Troy D. Cook Vice President Finance,
Chief Financial Officer,
Treasurer and Assistant
Secretary 35
David G. Short Vice President Legal,
General Counsel, Secretary 57
O. Gene Bicknell founded the Company and has served as Chairman of
the Board since 1962. He also served as Chief Executive Officer
of the Company before July 1993 and after January 30, 1995.
James K. Schwartz joined the Company in December 1991 as Vice
President of Accounting and Administration. He was promoted to
Vice President Finance, Treasurer and Chief Financial Officer in
1993. In January 1995 he was promoted to President and Chief
Operating Officer.
Marty D. Couk joined the Company as a restaurant manager trainee
in April 1979. He served in various capacities at the Company,
including Field Specialist (1982), Area General Manager (1983) and
Regional Manager (1987). He was promoted to Vice President of
Pizza Hut Operations in December 1992 and Senior Vice President of
Pizza Hut Operations in September 1993. In May 1997, he became the
Senior Vice President of Pizza Hut operations for the Eastern
Division.
D. Blayne Vaughn joined the Company in November 1985 as an Area
General Manager. He was promoted to Regional Manager in 1990 and
then Regional Vice President in 1993. In May 1997 he was promoted
to Vice President of Pizza Hut operations for the Western
Division.
L. Bruce Sharp joined the Company in May 1987 as an Area General
Manager. He was promoted to Regional Manager in 1989 and Vice
President of Pizza Hut operations for the Southern Division in May
1997.
Robert B. Page became President of Romacorp, Inc. in 1994. He
joined the Company in 1988 in the Pizza Hut division, serving as a
Regional Manager and Senior Vice President of Pizza Hut Operations
until he moved to Tony Roma's in 1993 as its Chief Operating
Officer.
Troy D. Cook joined the Company in February 1995 as Vice President
Finance, Chief Financial Officer, Treasurer and Assistant
Secretary. Prior to that, he was Vice President and Chief
Operating Officer of Oread Laboratories from 1991 to 1995 and
Director of Accounting of American Italian Pasta Company from 1990
to 1991. Mr. Cook is a certified public accountant.
David G. Short joined the Company in June 1993 as part of the NRH
Corporation acquisition and was appointed to Vice President Legal
and General Counsel in July 1993. He was Vice President, Legal
and General Counsel for NRH Corporation from September 1990 and,
previous to that, Vice President-Legal, General Counsel and
Secretary of TGI Fridays, Inc.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by
reference from page 25 of the Company's 1998 Annual Report to
Stockholders, included herein as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by
reference from page 9 of the Company's 1998 Annual Report to
Stockholders, included herein as Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is incorporated herein by
reference from pages 10 through 13 of the Company's 1998 Annual
Report to Stockholders, included herein as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein
by reference from pages 14 through 23 of the Company's 1998 Annual
Report to Stockholders, included herein as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in, or disagreements with, the
Company's independent accountants on accounting or financial
disclosure matters.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item (except for the information
set forth in Item 4A of Part I hereof with respect to the
Registrant's executive officers) is incorporated herein by
reference from the Company's definitive Proxy Statement for its
Annual Meeting of Stockholders to be held July 14, 1998, to be
filed with the Commission pursuant to Regulation 14A within 120
days after the end of the Company's last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item concerning remuneration of
the Company's officers and Directors and information concerning
material transactions involving such officers and Directors is
incorporated herein by reference from the Company's definitive
Proxy Statement for its Annual Meeting of Stockholders, to be
filed with the Commission pursuant to Regulation 14A within 120
days after the end of the Company's last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item concerning the stock
ownership of management and five percent beneficial owners is
incorporated herein by reference from the Company's definitive
Proxy Statement for its Annual Meeting of Stockholders, to be
filed with the Commission pursuant to Regulation 14A within 120
days after the end of the Company's last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item concerning certain
relationships and related transactions is incorporated herein by
reference from the Company's definitive Proxy Statement for its
Annual Meeting of Stockholders, to be filed with the Commission
pursuant to Regulation 14A within 120 days after the end of the
Company's last fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report
1)Financial Statements
The following financial statements of the Registrant and report of
the Registrant's independent auditors, included in the
Registrant's Annual Report to Stockholders for the year ended
March 31, 1998, are incorporated by reference in Item 8 to this
report:
Report of Independent Auditors
Consolidated Balance Sheets as of March 31, 1998 and March 25,
1997.
Consolidated Statements of Income for the years ended March 31,
1998, March 25, 1997 and March 26, 1996.
Consolidated Statements of Stockholders' Equity for the years
ended March 31, 1998, March 25, 1997 and March 26, 1996.
Consolidated Statements of Cash Flows for the years ended March
31, 1998, March 25, 1997 and March 26, 1996.
Notes to Consolidated Financial Statements.
2) No schedules are filed as part of this Report because they are
not required or are not applicable, or the required information is
shown in the financial statements or notes thereto.
3) Exhibits (numbered in accordance with Item 601 of Regulation
S-K)
Page Number or
Exhibit Incorporation
Number Description by Reference from
2.1 Asset Sale Agreement by and Exhibits 2-A and 2-B to
among Pizza Hut, Inc. and Form 8-K filed April 14,
certain subsidiaries and NPC 1997
International, Inc. and certain EDGAR 748714-97-00008
subsidiaries dated March 3,1997
and amended March 27, 1997
2.2 Asset Purchase Agreement by and Exhibit 2-A to Form 8-K
between Jamie B.Coulter, et al., filed May 29, 1997
Sellers and NPC International, EDGAR 748714-97-000015
Inc.and certain subsidiaries
dated May 14, 1997.
2.3 Recapitalization Agreement among Exhibit 2-A to Form 8-K
Romacorp, Inc., NPC filed May 8, 1998
International, Inc., EDGAR NPC
Restaurant Holdings, 927025-98-000081
Inc. and Sentinel Capital
Partners, L.P.
3.1 Restated Articles of Exhibit 3(a) to Form S-1
Incorporation Registration Statement
effective August 14,
1984
File #2-91885
3.2 Certificate of Amendment to Amended by Form 8 filed
Restated Articles of May 30, 1991
Incorporation dated August 7,
1986, Certificate of Amendment
to Restated Articles of
Incorporation dated July 31,
1987 and Certificate of
Change of Location of Registered
Office dated October 20, 1987
3.3 Bylaws Exhibit 3(b) to Form S-1
Registration Statement
effective August 14,1984
File #2-91885
3.4 Certificate of Amendment to Exhibit B to Proxy
Restated Articles of Statement for Annual
Incorporation of National Pizza Meeting filed
Company effective July 12, 1994 June 13, 1994
EDGAR 748714-94-000007
4.1 Specimen Stock Certificate Exhibit 1 to to Form 8-A
For Common Stock filed July 31, 1995
EDGAR 748714-94-000016
10.01 Franchise Agreement between Exhibit 10.01 to
Pizza Hut, Inc. and NPC Form 10-Q
International, Inc. (sample filed August 1, 1994
document) effective EDGAR 748714-94-000016
March 30, 1994
10.02 Assignment of and Blanket Exhibit 10.02 to the
Amendment to Franchise Form 10-K filed June 6,
Agreements 1997
EDGAR 748714-97-000017
10.03 1995 Franchise Agreement Exhibit 10.03 to the
between Pizza Hut, Inc. Form 10-K filed June 6,
and NPC Management, Inc. 1997
EDGAR 748714-97-000017
10.04 Profit Sharing Plan of NPC Exhibit 10.25 to Form
International, Inc. dated 10-K for the year ended
July 1, 1992, as amended March 30, 1993
Exhibit 10.29 to Form
10-K for the year
ended March 29, 1994
EDGAR 748714-94-000009
Exhibit 10.33 to Form
10-Q filed August 1,
1994
EDGAR 748714-94-000016
10.05 Fourth Amendment to the Exhibit 10.05 to the
NPC International, Inc. Form 10-K filed June
Profit Sharing Plan dated, 6, 1997
October 20, 1995 EDGAR 748714-97-000017
10.06 Fifth Amendment to the NPC Exhibit 10.06 to the
International Form 10-K filed June 6,
Inc. Profit Sharing Plan 1997
effective July 12, 1994 EDGAR 748714-97-000017
10.07 Sixth Amendment to the NPC Exhibit 10.07 to the
International, Form 10-K filed
Inc. Profit Sharing Plan dated June 6, 1997
October 29, 1996 EDGAR 748714-97-000017
10.08 Seventh Amendment to the NPC Exhibit 10.08 to the
International, Inc. Profit Form 10-K filed June 6,
Sharing Plan effective 1997
January 1, 1997 EDGAR 748714-97-000017
10.09 NPC International, Inc. 1984 Exhibit 10(t) to Form
Amended and Restated Stock 10-K filed June 25, 1990
Option Plan
10.10 NPC International, Inc. 1994 Exhibit A to Proxy
Stock Option Plan Statement to Annual
dated May 3, 1994 Meeting of Stockholders
filed June 13, 1994
EDGAR 748714-94-000007
10.11 Senior Note Purchase Agreement Exhibit 10.26 to Form
made by and between Pacific 10-K for the year ended
Mutual Life Insurance Company, March 30, 1993
Pacific Corinthian Insurance
Company, Lutheran Brotherhood Exhibit 10.39 to Form
Life and NPC International, 10-K for the year ended
Inc., as amended March 28,1995
Exhibit 10.43 to Form
10-K for the year ended
March 28, 1995
Exhibit 10.44 to Form
10-K for the year ended
March 28,1995
10.12 Amendment to the Senior Note Exhibit 10.12 to the
Purchase Agreement made by and Form 10-K
between Pacific Mutual Life Filed June 6, 1997
Insurance Company, Pacific EDGAR 748714-97-000017
Corinthian Life Insurance Company,
Lutheran Brotherhood and NPC
International Inc., dated
May 29, 1996
10.13 Amendment to the Senior Note Exhibit 10.13 to the
Purchase Agreement made by and Form 10-K
between Pacific Mutual Life Filed June 6, 1997
Insurance Company,Pacific EDGAR 748714-97-000017
Corinthian Life Insurance
Company,Lutheran Brotherhood
and NPC International, Inc.
dated March 3, 1997
10.14 Amendment to the Senior Note Exhibit 10.14 to the
Purchase Agreement made by and Form 10-K
between Pacific Mutual Life Filed June 6, 1997
Insurance Company, Pacific EDGAR 748714-97-000017
Corinthian Life Insurance
Company,Lutheran Brotherhood
and NPC International, Inc.,
dated May 8, 1997
10.15 NPC Management, Inc. $50 million Exhibit 10.15 to the
7.94% Senior Guaranteed Notes Form 10-K
due May 1, 2006, Filed June 6, 1997
dated May 1, 1997 EDGAR 748714-97-000017
10.16 $160 million Revolving Credit Exhibit 10.16 to the
Agreement dated as of March 5, Form 10-K
1997 among NPC International, Filed June 6, 1997
Inc., various banks and Texas EDGAR 748714-97-000017
Commerce Bank National
Association as Agent and
NationsBank of Texas, N.A.
as Documentation Agent
10.17 Amended and Restated Revolving Exhibit 10.17 to the
Credit Agreement dated May 8, Form 10-K
1997, effective March 26, 1997, Filed June 6, 1997
among NPC Management, Inc., EDGAR 748714-97-000017
various banks and Texas
Commerce Bank National
Association as Agent and
NationsBank of Texas, N.A. as
Documentation Agent
10.18 $15 Million Revolving Credit Exhibit 10.18 to the
Agreement dated as of March 5, Form 10-K
1997 among NPC International, Filed June 6, 1997
Inc., various banks and EDGAR 748714-97-000017
Texas Commerce Bank National
Association as Agent
10.19 $15 Million Amended and Restated Exhibit 10.19 to the
Revolving Credit Agreement Form 10-K
dated as of May 8, 1997 Filed June 6, 1997
among NPC International, Inc., EDGAR 748714-97-000017
various banks and Texas Commerce
Bank National Association as
Agent
10.20 Amended and Restated Master Exhibit 10.20 to the
Shelf and Assumption Agreement Form 10-K
dated May 8, 1997, Filed June 6, 1997
effective March 26, 1997, EDGAR 748714-97-000017
between NPC Management, Inc.
and The Prudential
Insurance Company of America
10.21 Leases between the Company and Exhibit 10(e) to
Messrs. Bicknell and Elliott Form S-1
Registration Statement
effective August 14,
1984
File #2-91885
10.22 Employment Agreement between Exhibit 10.45
NPC International, Inc. and to Form 10-K for the
James K. Schwartz dated year ended March 28,
January 27, 1995 1995
10.23 Acquisition agreement by Exhibit 2.0 to Form 8-K
and among Seattle Crab Co., filed March 28, 1996
NPC International,
Inc. and Skipper's, Inc.
dated as of March 25, 1996
10.24 Lease Indemnification Exhibit 2.1 to Form 8-K
Agreement filed March 28, 1996
10.25 Liability Assumption Exhibit 2.2 to Form 8-K
Agreement filed March 28, 1996
10.26 Environmental Compliance Exhibit 2.3 to Form 8-K
Agreement filed March 28, 1996
10.27 Non-Competition Agreement Exhibit 2.5 to Form 8-K
filed March 28, 1996
10.28 James K. Schwartz Promissory Exhibit 10.28 to form
Note 10-Q filed February 4,
1998
EDGAR 748714-98-000003
10.29 Amendment to Assignment of Exhibit 10.29 to Form
and Blanket Amendment to 10-K for the year
Franchise Agreements ended March 31, 1998
13 1998 Annual Report to Exhibit 13
Stockholders(only those to Form 10-K for the
portions of such Annual year ended March 31,
Report to Stockholders 1998
which are specifically
incorporated by be reference
into this Form 10-K shall be
deemed to be filed
with the Commission)
21 List of Subsidiaries Exhibit 21 to this Form
10-K
23 Consent of Ernst & Young LLP Exhibit 23 to
Form 10-K for the year
ended March 31, 1998
(b) Reports on Form 8-K
No forms were filed on Form 8-K during the quarter ended March 31,
1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on the 3rd day of June, 1998 on its
behalf by the undersigned, thereunto duly authorized.
NPC INTERNATIONAL, INC.
By Troy D. Cook
Vice President, Chief Financial Officer,
Treasurer, Assistant Secretary
(Principal Financial Officer)
By Alan L. Salts
Vice President of Restaurant Services and
Chief Accounting Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on the
3rd day of June, 1998.
O. Gene Bicknell Chairman of the Board, Chief Executive
Officer and Director
(Principal Executive Officer)
James K. Schwartz President, Chief Operating Officer and
Director
Troy D. Cook Vice President Finance, Chief Financial
Officer, Treasurer and Assistant Secretary
(Principal Financial Officer)
David G. Short Secretary
Fran D. Jabara Director
Robert E. Cressler Director
Mary M. Polfer Director
William A. Freeman Director
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Fiscal Year Ended
(Dollars in thousands, March 25, March 26, March 28,
except share data) 1998 1997 1996
Numerator:
Net income $ 10,330 $ 17,811 $ 2,143
Denominator:
Denominator for basic
earnings per share
- weighted average
shares 24,694 24,646 24,513
Effect of dilutive securities:
employee stock options 415 228 78
Denominator for diluted gs
per earninshare -
adjusted weighted
average shares and
assumed conversions 25,109 24,874 24,591
Earnings per share - basic $ .42 $ .72 $ .09
Earnings per share - dilutive $ .41 $ .72 $ .09
Exhibit 21
NPC International, Inc.
List of Subsidiaries
NPC Management, Inc.
NPC Restaurant Holdings, Inc.
NPC Restaurants LP
Seattle Restaurant Equipment Company, Inc.
Roma Dining LP
Romacorp, Inc.
Roma Fort Worth, Inc.
Roma Franchise Corporation
Roma Holdings, Inc.
Roma Huntington Beach, Inc.
Roma Systems, Inc.
NPC International, Inc.
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of NPC International, Inc. of our report dated May 5,
1998 included in the 1998 Annual Report to Stockholders of NPC
International, Inc.
We also consent to the incorporation by reference in the
Registration Statements (Form S-8 No. 33-2233 and Form S-8 No. 33-
37354) pertaining to the NPC International, Inc. 1984 Non-
Qualified Stock Option Plan, As Amended, and the Registration
Statement (Form S-8 No. 33-56399) pertaining to the NPC
International, Inc. 1994 Non-Qualified Stock Option Plan of our
report dated May 5, 1998, with respect to the consolidated
financial statements, incorporated herein by reference in the
Annual Report (Form 10-K) of NPC International, Inc.
ERNST & YOUNG LLP
Kansas City, Missouri
June 3, 1998
Amendment to
Assignment of and Blanket Amendment to
Franchise Agreements
On the 26th day of February, 1997, Pizza Hut, Inc. ("PHI") and NPC
International, Inc. ("NPCI"), NPC Management, Inc. ("NPCM"), and
NPC Restaurants LP ("NPCL") entered into an Assignment of and
Blanket Amendment to Franchise Agreements ("1997 Blanket
Amendment"), a copy of which is attached hereto as Exhibit "A".
The parties to the 1997 Blanket Amendment wish to amend the 1997
Blanket Amendment in the following respect.
1) The parties have recognized in the 1997 Blanket Amendment
that O. Gene Bicknell ("Bicknell"), as owner of at least 51% of
the common stock of NPCI, is the only NPCI stockholder who falls
within the definition "Operator" under the relevant provisions of
all of the franchise agreements between PHI, as Franchisor and
NPCM, as Franchisee (the "Franchise Agreements"). The 1997
Blanket Amendments further provides that so long as Bicknell
continues to hold at least 51% of the outstanding stock of NPCI,
the definition of "Operator" under the relevant provisions of the
Franchise Agreements shall not include any NPCI shareholders other
than Bicknell and the prohibition on public ownership in such
Franchise Agreements shall not apply to NPCI, NPCM, or NPCL,
subject to the remaining provisions of the 1997 Blanket Amendment.
2) The parties hereby recognize that, upon the conditions
provided herein, the requirement that Bicknell continue to hold at
least 51% of the common stock of NPCI is no longer necessary.
Accordingly, the parties hereby agree that the provisions of the
1997 Blanket Amendment, specifically paragraph 4 and 5 thereof,
which refer to and require the continued ownership by Bicknell of
51% of each class of NPCI stock are hereby amended to require that
Bicknell shall be required to own at least 20% of each class of
NPCI stock. Otherwise, Bicknell shall be free of restriction
under the Franchise Agreement to transfer or dispose of NPCI
Common Stock.
3) Notwithstanding paragraph 2, however, if any person or entity
(or any group as defined by Rule 13D-5 under the Securities
Exchange Act of 1937) other than Bicknell (or members of
Bicknell's immediate family) acquires stock or voting rights in
NPCI sufficient to have the legal right to elect a majority of
NPCI's board of directors, or otherwise obtains control (as
defined by Rule 12B-2 under the Securities Exchange Act of 1937)
of NPCI ("Controlling Owner"), the following will occur"
a) The Controlling Owner will be deemed the "operator" under:
i) Article XXVII of the Franchise Agreements listed on
Exhibit A and B to the 1997 Blanket Amendment;
ii) Article XXVII of the Franchise Agreement listed on
Exhibit C to the 1997 Blanket Amendment; and
iii) Article XI of the Franchise Agreements listed on
Exhibit A, B and C to the 1997 Blanket Amendment; and
a) The provisions of Article XVII A, C and D of the Franchise
Agreements listed on Exhibits A, B and C to the 1997 Blanket
Amendment will apply to the Controlling Owner.
1) The parties further agree, that this Amendment shall apply to
any renewal of the Franchise Agreements and all future franchise
agreements between PHI and the parties and any renewals thereof.
2) Other than as herein amended, the 1997 Blanket Amendment is
hereby ratified and confirmed in its entirety.
NPC International, Inc.
"NPCI"
By:
O. Gene Bicknell,
Chief Executive Officer
NPC Management, Inc.
"NPCM"
By:
James K. Schwartz, President
NPC Restaurants LP
"NPCL"
By: NPC International, Inc.,
General Partner
By:
O. Gene Bicknell,
Chief Executive Officer
Pizza Hut, Inc.
"PHI"
By;
Michael A. Miles, Jr.,
SVP Franchise
1998 ANNUAL REPORT
BUILDING IT BETTER
Table of Contents
Letter to Stockholders 1
Better Products 2
Better Assets 4
Better Organization 6
Five Year Summary 9
Management's Discussion and Analysis 10
Consolidated Balance Sheets 14
Consolidated Statements of Income 15
Consolidated Statements of Stockholders' Equity 16
Consolidated Statements of Cash Flows 17
Notes to Consolidated Financial Statements 18
Report of Management 24
Report of Independent Auditors 24
Stockholder Data 25
FINANCIAL HIGHLIGHTS
(Dollars in Fiscal Year Ended
thousands, except March 31, March 25, March 26,
per share data) 1998 1997 1996
FOR THE YEAR:
Revenue $455,297 $ 295,285 $ 324,986
Operating income before
impairment and
loss provision 45,122 34,227 33,704
Asset impairment
and loss provision 14,100 -- 23,500
Operating income 31,022 34,227 10,204
Income before
income taxes 15,893 29,083 3,546
Net income 10,330 17,811 2,143
Earnings per share - diluted 0.41 0.72 0.09
PERFORMANCE MEASURES BEFORE
SPECIAL CHARGES AS A
PERCENT OF REVENUE:
EBITDA(1) 16.1% 17.7% 16.4%
Operating income 9.9% 11.6% 10.4%
Income before taxes 6.6% 9.8% 8.3%
Net income 4.3% 6.0% 5.0%
OTHER PERFORMANCE MEASURES:
RETURN ON AVERAGE
stockholders' equity 10.2% 20.6% 2.7%
Return on average
assets 3.2% 7.8% 1.0%
Fiscal Year Ended
(Dollars in March 31, March 25, March 26,
thousands) 1998 1997 1996
AT YEAR-END:
Total assets $381,237 $ 259,907 $ 197,829
Long-term debt 204,033 116,777 73,328
Stockholders' equity 107,036 95,793 77,320
Number of Company
owned units 725 513 405
Number of franchised units 147 140 142
(1) EBITDA-Earnings before interest taxes depreciation and
amortization
Revenue (in millions)
94 95 96 97 98
$337.0 $317.5 $325.0 $295.3 $455.3
Operating Income Before Impairment and Loss Provision (in
millions)
94 95 96 97 98
$25.2 $23.9 $33.7 $34.2 $45.1
EBITDA(1)(in millions)
94 95 96 97 98
$49.2 $44.9 $53.2 $52.4 $73.4
Earnings Per Share, Excluding Impairment and Loss Provision
(in dollars)
94 95 96 97 98
$.45 $.44 $.66 $.72 $.78
Number of Company Owned Sites
94 95 96 97 98
577 481 405 513 725
Building It Better
Informing Our Stockholders
With the anticipated recapitalization of Romacorp, Inc., we enter
fiscal 1999 with increased focus on our Pizza Hut operations and
great enthusiasm about the year ahead. We will use our increased
financial flexability to pursue the consolidation of the Pizza Hut
system while investing in the re-imaging of our restaurants. Pizza
Hut's heritage now spans 40 years and our dine-in asset has not
changed significantly since the late 1970's. As indicated on the
cover of this year's annual report, we have made "building it
better" one of our primary areas of focus for fiscal 1999. The
learning from this effort will provide the foundation for our
concept in the future. However, before we address our plans for
the future, we will address the activities and results of our last
fiscal year.
Fiscal 1998 was a transitional year for the Company and the Pizza
Hut brand. We nearly doubled the size of our Pizza Hut operations
through acquisition; improved the quality and abundance of the
toppings used in making the best pizza in America; formulated and
tested new asset formats to be used in the asset re-imaging plan;
and just after our fiscal year end, we agreed to a
recapitalization of our wholly-owned subsidiary, Romacorp, Inc.,
which owns and operates the Tony Roma's brand, significantly
increasing our future financial flexibility.
During the year, revenue increased 54% over fiscal 1997 to
$455,297,000 due largely to the acquisition of over 300 units late
in fiscal 1997 and early in fiscal 1998. Excluding special
charges, these acquisitions contributed to an increase in earnings
before interest and taxes of 32% over the prior year and a 40%
increase in earnings before interest, taxes, depreciation, and
amortization. However, this growth did not translate into a
comparable increase in after-tax earnings as these acquisitions
were financed with debt, significantly increasing the interest
charges incurred by the Company. Before special charges,
consolidated net income was $19,495,000 or $.78 per diluted share
for a 9.5% increase over last year's earnings of $17,811,000 or
$.72 per diluted share. In our fourth quarter, the board of
directors approved a plan to re-image certain of our Pizza Hut
assets. This plan calls for the closure of 31 units, the
relocation of 53 units to 45 new locations and the closure and
consolidation of 11 delivery units into existing restaurants. This
plan and other asset valuation adjustments resulted in a special,
one-time charge of $14,100,000 ($9,165,000 after tax or $.36 per
diluted share) in the fourth quarter of fiscal 1998. After giving
effect for the special charge, consolidated net income was
$10,330,000 or $.41 per diluted share.
Improving our sales performance and increasing market share is a
primary area of focus for fiscal 1999. Comparable store sales in
our Pizza Hut division declined 5.6% in fiscal 1998, but
consistently improved every quarter culminating with a comparable
sales index of negative .5% in the fourth quarter. While we depend
upon our franchisor for the majority of our marketing efforts, we
believe that we can have a meaningful impact upon comparable
sales. Accordingly, during fiscal 1998, we conducted a thorough
examination of our operations to determine what we could do to
continue to improve this trend. We concluded that our assets
require a more competitive format and that we need to revise our
print marketing strategy to increase traffic. We will begin to
aggressively address the asset issue with the implementation of
our asset re-imaging plan, and we have completely overhauled our
print marketing approach. In fiscal 1999 we will use a variety of
different print vehicles to better target our coupon strategy.
This will allow us to realize increased frequency and distribution
at a cost comparable to that incurred historically. These efforts,
combined with the marketing efforts of our franchisor, will
provide the platform necessary to increase our market share.
Why are we excited about fiscal 1999 and beyond? Because within
our existing markets we believe that we are positioned to
significantly improve our market share by "building it better,
"increasing the effectiveness of our print marketing strategy, and
continuing to leverage the significant product quality and
abundance improvements made by the system last year. Furthermore,
the anticipated de-leveraging of our balance sheet from the
expected recapitalization of Romacorp will position the Company to
continue to aggressively consolidate the Pizza Hut system, the
largest and most prominent pizza chain in the world.
We would like to extend our gratitude to our stockholders for
their continued confidence and support. We look forward to
rewarding this support with continued growth and profitability.
O. Gene Bicknell
Chairman & Chief Executive Officer
James K. Schwartz
President and Chief Operating Officer
Constructing Innovative Tastes
Better Products "Edge" the Competition
In fiscal 1998, a revolutionary year for Pizza Hut, we moved our
quality bar even higher with the introduction of our "totally new
pizzas" in the spring of 1997. These reformulated pizzas feature
"best in class" topping quality and abundance. The roll-out of
this product clearly displays our determination in making and
serving the best pizza in America. In addition to reformulating
our core pizza products, we also introduced two innovative,
quality products that are operationally simple and exemplify our
focus on quality while expanding our unmatched crust variety.
The EDGE pizza, introduced in October, was the perfect platform to
showcase our new toppings. The EDGE pizza features even more
abundant toppings than our core products. These toppings spread
all the way to the outer edge of the pizza, which has no lip on
the crust, and includes special seasoning and a sweeter sauce.
This product, well received by new and existing Pizza Hut
customers, achieved a peak mix of 17% of sales.
We followed this product introduction with The Sicilian pizza in
March of 1998. This deep-dish rectangular pizza includes basil,
oregano, and garlic baked into the crust for a zesty flavor
profile unmatched by any other pizza. Introduction of the Sicilian
pizza also succeeded, mixing at approximately 10% of pizza sales
for an extended period.
These two new products represent formidable additions to our
arsenal of quality products. We look forward to further product
innovations from our franchisor and continued product improvements
as we continue to establish Pizza Hut as the "Best Pizza in
America."
Pizza Hut simply stands for the Best Pizzas with America's
favorite deep dish pizza, Pan pizza, in addition to The EDGE
pizza, The Sicilian pizza, and our revolutionary Stuffed Crust
pizza. We think you'll agree that you can only find these great
products under one roof, our roof, Pizza Hut!
Upper Right (opp.): The deep-dish Sicilian pizza, introduced in
March of 1998, captured 10% of sales for an extended period of its
introduction with its flavorful toppings and zesty garlic and herb
crust.
Middle Left (opp.): Abundant, mouth-watering toppings spreading to
the outer limits of The EDGE pizza raised this pizza's peak mix to
17% of sales.
Middle Right (opp.): The Stuffed Crust Pizza, covered with
toppings that accentuate the abundance of cheese in every bite,
revolutionized the pizza industry with its cheese-filled crusts.
Bottom Middle (opp.): Thick, golden-brown crust piled with fresh
toppings, and our traditional sauce, makes Pizza Hut's traditional
Pan Pizza America's favorite deep-dish.
Better Assets
Reconstructing Our Assets
Asset Initiatives to Stimulate Growth
The asset re-imaging strategy that we will begin in fiscal 1999
will focus on three new proto-type assets, designed to service
three distinct elements of our business. Specifically, this
strategy will focus on improving our delivery presence and
convenience, making our rural dine-in assets more inviting and
convenient, and meeting the needs of our metro-market consumer
through extensive testing of a more contemporary concept.
Improved delivery presence - When we introduced delivery to the
Pizza Hut consumer in the mid 1980's we located our delivery
kitchens in low visibility, "stealth" locations to avoid
detracting from the presence of our dine-in business. Over the
last several years, the pizza delivery segment has become
saturated with competitors. Accordingly, in two test markets, we
will relocate existing delivery units to more visible locations.
We will also make the assets more carry-out friendly by improving
the store frontage to address the needs of the carry-out consumer.
This effort will improve our carry-out traffic while providing
increased awareness of Pizza Hut and our delivery service in these
markets. Pending the results of this test, we will expand this
conversion activity.
Revitalization of the rural restaurant presence - Pizza Hut has
dominated the dine-in pizza experience in rural markets since the
concept's nationwide roll-out in the 1960's and 1970's. Our asset
re-imaging strategy will allow us to continue this dominance into
the next century. Over the last two years, we have tested many
different assets as we have searched for the appropriate format.
Our most recent dine-in proto-type asset in Hattiesburg,
Mississippi has been very well received. It has produced 25%
greater unit volumes than our average restaurant facility with
more than 70% of this volume in dine-in traffic; compared to our
average restaurant facility which typically sees a 50/50 dine-
in/carry-out mix. We attribute these results to the more inviting,
lighter decor of the restaurant and the focus on the family. The
new Kids' Corner that we have incorporated into this restaurant,
complete with a tree that appears to be growing out of the floor,
exemplifies our commitment to providing an inviting family
atmosphere. In fiscal 1999, we will expand our test of this asset
along with another proto-type asset developed by our franchisor,
Pizza Hut, Inc. (PHI) in cooperation with the franchisee
community. Specifically, we will perform approximately 25
relocations and several extensive remodels.
Metro-market test-Pizza Hut, Inc. has developed a new Pizza Hut
concept to address the needs of the metro-market consumer. They
have extensively tested the asset and plan to expand the test to
other markets in 1999. These assets provide counter service,
limited dine-in seating, delivery, and an expanded menu. The
expanded menu includes, among other items, grilled sandwiches and
is designed to increase lunch-traffic and better meet the needs of
the `on the go' consumer. We will conduct a total market
conversion in Topeka, Kansas during fiscal 1999 and perform
selected tests of this concept in other markets.
We are very excited about this initiative and look forward to
reporting our progress to you.
Upper Left (opp.): New dine-in proto-type in Hattisburg, MS has
produced 25% greater unit volumes than the average restaurant
facility, with more than 70% of the volume in dine-in traffic.
Upper Right (opp.): With the addition of the new "Kid's Corner"
and renovation of the restaurants to a lighter decor, dine-in
facilities now promote an inviting family atmosphere.
Lower Left (opp.): Newly designed Pizza Hut Metro-market facility
targets higher unit volumes through multiple access modes and a
more contemporary design.
Lower Right (opp.): Metro-market facilities, based on successful
test-marketing, provide counter service, limited dine-in seating,
delivery, and an expanded menu to increase lunch traffic and cater
to consumers "on the go."
Better Organization
People: The Foundation of our Business
Making a Difference Every Day
At NPC, we recognize the vital importance of our employees to our
success as an organization. We strive to provide our employees
with the training, supervision, assets, and tools necessary to
succeed in today's competitive environment.
Our restaurant employees communicate with customers-the people we
serve-on a daily basis. Accordingly, we must present our employees
with the tools to be successful. Quality products and inviting,
productive facilities represent two essential elements for their
success in the marketplace.
During the past year, we have integrated the operations of over
300 stores acquired from both Pizza Hut, Inc. and the franchisee
community. While proud of the success produced by the NPC
operational approach, we continue to learn from the new members of
our team. An entrepreneurial attitude cornerstones our approach.
Therefore, to help maintain this heritage despite our growth, we
have organized our operations into three distinct divisions. This
approach gives people close to our customers access to decision-
makers on a regular basis in order to maintain and improve our
customer satisfaction and loyalty.
The effectiveness of this structure was demonstrated by the recent
execution of our Delivery Dominance Program. We identified
opportunities to improve our performance in our delivery business
early in our third fiscal quarter by tracking delivery times and
customer complaints. In response to these trends we developed and
implemented the Delivery Dominance initiative. This program was
created to reduce delivery times, increase delivery awareness, and
generally improve service levels. These objectives were to be
accomplished through increased delivery driver staffing levels,
execution of specific and measurable operational goals, expansion
of our customer feedback program, and increased utilization of car
toppers and door hung advertisements.
Our people again displayed their ability to react quickly and
effectively with the implementation of this program improving
comparable sales in our delivery units from negative 5% in our
third fiscal quarter to 3% growth during our fourth fiscal
quarter.
We believe that our asset re-imaging strategy, combined with
continued focus on product quality and innovation, will provide
our employees a competitive advantage in their efforts to increase
market share and stockholder value.
In addition to these efforts we will continue to strive to provide
our employees with leading-edge technology systems so they can
react in a timely manner to the changing landscape within their
markets.
The success of our asset re-imaging program and future product
innovations depends on our employees' ability to meet and exceed
our customers' needs. New products, facilities, and organization
are merely tools in our quest to grow the Pizza Hut brand. Our
employees truly make this goal a reality through commitment,
efforts, and smiles.
We extend our gratitude to our employees for their efforts during
the last fiscal year, and for the years to come.
Left to right (opp.):
James K. Schwartz, President and Chief Operating Officer
Troy D. Cook, Vice President and Chief Financial Officer
L. Bruce Sharp, Vice President, Southern Division
D. Blayne Vaughn, Vice President, Western Division
Linda K. Lierz, Vice President, Marketing
Marty D. Couk, Senior Vice President, Eastern Division
U.S. Operations as of March 31, 1998
Pictured on Page 8 of the Annual Report is the Company's Unit
Count Map. For information regarding the list of units by state,
also see Item #1 of the Company's 10-K
FIVE YEAR FINANCIAL SUMMARY
Fiscal Year Ended
(Dollars in March 31, March 25, March 26, March 28, March 29,
thousands, except 1998 1997 1996 1995 1994
per share data)
INCOME STATEMENT DATA:
Revenue $455,297 $295,285 $324,986 $317,467 $337,003
Cost of sales 125,365 80,618 93,977 92,332 98,692
Direct labor 129,133 81,086 87,293 89,964 97,103
Other operating
expenses 120,272 75,523 83,280 84,659 88,619
Income from
restaurant
operations 80,527 58,058 60,436 50,512 52,589
General and
administrative
expenses 23,930 17,710 21,084 21,066 19,970
Depreciation and
amortization 11,475 6,121 5,648 5,506 7,337
Operating income
before impairment
and loss
provision 45,122 34,227 33,704 23,940 25,282
Asset impairment
and loss
provision(1) 14,100 - 23,500 35,000 -
Operating income
(loss) 31,022 34,227 10,204 (11,060) 25,282
Interest expense (15,655) (5,455) (6,317) (6,252)
(6,720)
Other income
(expense) 526 311 (341) (140) (56)
Income (loss)
before income
taxes 15,893 29,083 3,546 (17,452) 18,506
Provision
(benefit)for
income taxes 5,563 11,272 1,403 (1,838) 7,211
Net income
(loss) 10,330 17,811 2,143 (15,614) 11,295
Earnings (loss)
per share:
Basic 0.42 0.72 0.09 (0.63) 0.45
Diluted 0.41 0.72 0.09 (0.63) 0.45
Cash dividend
per share(2) - - .421875 - -
Fiscal Year Ended
(Dollars in March 31, March 25, March 26, March 28, March 29,
thousands) 1998 1997 1996 1995 1994
YEAR END DATA:
Working capital
deficit $(30,837) $(15,405) $ (1,782) $(7,061) $(19,620)
Total assets 381,237 259,907 197,829 211,712 229,112
Long-term debt 204,033 116,777 73,328 82,850 86,734
Stockholders'
equity 107,036 95,793 77,320 80,287 8,987
Number of
Company-owned
units(3) 725 513 405 481 577
Number of
franchised
units(3) 147 140 142 157 155
Number of
employees 16,000 12,000 9,800 10,300 12,500
(1) The 1998 charge relates to the Pizza Hut re-imaging strategy.
The 1996 charge relates to the sale of Skipper's Inc., effective
March 1996, and the closure of certain Tony Roma's restaurants.
The 1995 charge relates to the closure of 77 Skipper's
restaurants.
(2) Declared August 8, 1995 related to Class A shares concurrent
with the approval of a stock recapitalization plan.
(3) Does not include two units operated as joint ventures by the
Company.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
The Company is the largest Pizza Hut franchisee in the world.
Based on unit count at year-end, the Company's Pizza Hut
operations account for approximately 19% of all Pizza Hut
franchised units and 9% of the entire Pizza Hut system. The
Company operated its Pizza Hut units in 24 states during fiscal
1998.
The Company, through its wholly owned subsidiary, Romacorp, Inc.,
is also the owner/franchisor of the Tony Roma's concept, which was
acquired in June 1993. The Tony Roma's system operates in 25
states and 17 foreign countries. Subsequent to year-end, the
Company entered into a recapitalization agreement with respect to
Romacorp, Inc. As part of the transaction, the Company will retain
a 10% ownership interest in Romacorp, Inc., and will recognize an
estimated pre-tax gain of $46 million ($29.5 million net of tax or
$1.17 per diluted share). The transaction is contingent upon
financing and customary conditions and approval, and is expected
to close in June 1998.
Products-Pizza Hut's main product is high quality, innovative and
moderately priced pizza. Additionally, the menu contains pasta,
sandwiches, salad bar and a luncheon buffet. Tony Roma's is a
casual theme restaurant that is "Famous For Ribs." The
restaurant's signature products are baby-back ribs with a mild
tangy sauce and deep fried onion loaves. The menu also includes
spare ribs with three sauce varieties, chicken, seafood, soups,
salads, appetizers, a children's menu and dessert.
Both Tony Roma's and Pizza Huts serve beer and/or other alcoholic
beverages. These products are not a significant portion of the
sales mix at Pizza Hut, and they comprise approximately 12% of
sales for Tony Roma's.
Service-Pizza Hut provides a buffet with table service for
beverages during lunch and full table service for dinner, with
delivery and carryout available throughout the day. Tony Roma's
offers a fully staffed dining experience throughout the day and
evening.
Period of Operation-The Company operates on a 52 or 53 week fiscal
year ending the last Tuesday in March. The fiscal year ended March
31, 1998 contained 53 weeks. The fiscal years ended March 25,
1997, and March 26, 1996, each comprised 52 weeks.
DEVELOPMENT
Activity with respect to unit count during the year is set forth
in the table below. Consistent with the strategy initiated last
year, the Company aggressively pursued the acquisition of Pizza
Hut units from Pizza Hut, Inc. (PHI) and other franchisees. During
the year, the Company acquired 118 units from PHI and 104 units
from franchisees.
Along with stores acquired during the year, nine Pizza Hut units
were opened, net of relocations. Twenty-four units were closed, as
the Company initiated an asset re-imaging plan in the fourth
quarter of the fiscal year calling for the consolidation and
relocation of 53 Pizza Hut units to 45 new locations, the closure
of 31 under-performing locations and consolidation of 11 delivery
unit operations into existing restaurant facilities. The plan will
primarily be executed during fiscal 1999.
Tony Roma's developed six new units during the year and closed and
relocated one unit that was part of the closure/relocation
strategy initiated in fiscal 1996.
RESULTS OF OPERATIONS
The "operations summaries" set forth an overview of revenue and
operating expenses as a percent of revenue for the last three
fiscal years (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 (Pizza Hut only), and
insurance among other costs directly associated with operating a
restaurant facility.
System Unit Activity
Beginning Developed(2) Acquired Closed(2) Ending
Company Owned
Pizza Hut
Restaurant 361 9 181 (12) 539
Delivery 112 41 (12) 141
Total Pizza Hut 473 9 222 (24) 680
Tony Roma's(1) 40 6 - (1) 45
Total Company
Owned 513 15 222 (25) 725
Franchised
Tony Roma's(1) 140 11 (4) 147
Total System 653 26 222 (29) 872
(1) Does not include two units operated as joint ventures by the
Company.
(2) Does not include five Pizza Hut restaurants, three Pizza Hut
delivery units and one Tony Roma's restaurant that were relocated.
Pizza Hut Operations Summary
Fiscal Year Ended March
1998 1997 1996
Revenue:
Restaurant Sales $286,631 $168,688 $168,353
Delivery Sales 73,776 49,293 52,654
Total Revenue $360,407 $217,981 $221,007
Restaurant Operating
Expenses as a
Percentage of Revenue:
Total Expenses:(1)
Cost of Sales 26.7% 26.5% 26.3%
Direct Labor 28.4% 27.3% 26.5%
Other 27.5% 27.0% 25.4%
Total Operating Expenses 82.6% 80.8% 78.2%
Restaurant Based Income 17.4% 19.2% 21.8%
Restaurant Expenses:(2)
Cost of Sales 26.8% 26.7% 26.6%
Direct Labor 27.2% 26.0% 25.1%
Other 28.1% 27.4% 25.6%
Total Operating Expenses 82.1% 80.1% 77.3%
Restaurant Based Income 17.9% 19.9% 22.7%
Delivery Expenses:(3)
Cost of Sales 26.4% 25.6% 25.5%
Direct Labor 33.1% 32.0% 30.9%
Other 25.4% 25.6% 24.7%
Total Operating Expenses 84.9% 83.2% 81.1%
Restaurant Based Income 15.1% 16.8% 18.9%
(1) As a percent of total revenue
(2) As a percent of restaurant sales
(3) As a percent of delivery sales
PIZZA HUT RESULTS OF OPERATIONS
Revenue-Revenue totaled $360 million during fiscal 1998, which was
$142 million or 65% higher than the prior year. The growth was
largely due to revenue contributed from the acquisition of 222
units during the year, and the acquisition of 91 units during
fiscal 1997 which more than offset a decline in comparable sales
of 5.6%. Comparable sales improved gradually throughout the fiscal
year cumulating with a negative .5% comparable sales index in the
Company's fourth fiscal quarter. This improvement was largely due
to new product news with the introduction of The Edge pizza in
October, and increased delivery service levels associated with the
implementation of the Company's Delivery Dominance program in its
third fiscal quarter. This program, which was designed to increase
delivery service levels and decrease delivery times, contributed
significantly to the improvement in delivery unit comparable sales
from negative 5% in the third fiscal quarter to 3% growth in the
fourth fiscal quarter. Revenue for fiscal 1997 was $3 million or
1.4% below fiscal 1996 results due to negative comparable sales,
which were only partially offset by revenue from 91 stores
acquired during the fiscal year. Fiscal 1997 comparable sales were
negative 8.3% due to the lapping of successful fiscal 1996 product
introductions "Stuffed Crust" and "TripleDecker" pizzas.
Cost and Expenses-Cost of sales as a percent of revenue increased
from 26.5% to 26.7% during fiscal 1998 primarily due to the
abundant topping specification on all products, effective May 1,
1997, when Pizza Hut launched its "Totally New Pizza" campaign.
Effective with the introduction, all pizzas made by Pizza Hut
feature larger, more abundant toppings including meatier meats and
fresh vegetables. Furthermore, the low introductory price point
used for promotion of The Edge, combined with a higher ingredient
cost contributed to higher costs as a percent of revenue. These
factors more than offset an 11% reduction in the average cost of
cheese for the year. In fiscal 1997 cheese costs averaged 8.6%
higher than 1996 levels and pushed cost of sales as a percent of
revenue to 26.5% from 26.3% in fiscal 1996. The impact of the
higher cost of cheese in fiscal 1997 was partially offset by the
higher than normal cheese content and promotional pricing related
to both the Stuffed Crust and TripleDecker products during fiscal
1996.
Direct labor as a percent of revenue increased to 28.4% during
fiscal 1998 from 27.3% in fiscal 1997. Factors impacting this
increase include de-leveraging from negative comparable sales
results; higher labor cost incurred in the acquired stores than
normally experienced by the Company; increases in minimum wage
effective October 1996 and September 1997; an increase in the
percentage of units providing delivery service from 44% to 55% of
total units; and the acquisition of units located in states with
minimum wage rates in excess of the federal minimum wage and no
available tip credit. Direct labor as a percent of revenue
increased to 27.3% during fiscal 1997 from 26.5% in fiscal 1996
due to the increased minimum wage and the de-leveraging of store
labor costs associated with fiscal 1997 comparable sales results.
Other operating costs increased to 27.5% of sales in fiscal 1998
from 27% in fiscal 1997 due to de-leveraging of these largely
fixed costs from negative comparable sales, and an increase in
occupancy cost as more units are leased. Additionally, a higher
franchise fee paid to PHI, which increased from 2.25% to 4% in
July 1996, was in effect for the full fiscal year. These increases
were partially offset by a reduction in net delivery expenses. In
fiscal 1997 other operating expenses increased to 27% of revenue
primarily due to the July 1996 increase in the Company's franchise
fee. Also contributing to the increase in these costs as a percent
of revenue was the effect of the lower per unit sales volumes on
these largely fixed costs.
Tony Roma's Operations Summary
Fiscal Year Ended March
1998 1997 1996
Revenue:
Restaurant Sales $86,408 $68,778 $51,499
Net Franchise Revenue 8,482 8,526 7,570
Total Revenue $94,890 $77,304 $59,069
Restaurant Operating
Expenses as a
Percentage of Sales:
Cost of Sales 33.6% 33.3% 34.1%
Direct Labor 30.9% 31.2% 30.6%
Other 24.3% 24.2% 25.9%
Total Operating Expenses 88.8% 88.7% 90.6%
Restaurant Based Income 11.2% 11.3% 9.4%
Income from System
Operations(1) 19.1% 21.0% 21.0%
(1) Net franchise revenue and restaurant based income as a percent
of total revenue.
TONY ROMA'S RESULTS OF OPERATIONS
Revenue-Restaurant sales increased 25.6% and 33.6% in fiscal 1998
and 1997, respectively, due to the development of six units in
1998, 12 units in 1997 and seven units in 1996. Additionally,
comparable sales growth for stores opened more than 18 months was
.9% in 1998 and 2.2% in 1997. Other factors impacting the change
in sales from year-to-year include a new menu introduced late in
the third quarter of fiscal 1998 featuring new items, increased
portion sizes and price increases on selected items, and an
overall 2% price increase in the third quarter of fiscal 1997. The
revenue growth in fiscal 1997 was net of the effect of closing six
units throughout the year and one unit during the last week of
fiscal 1996. This closure strategy was implemented in the fourth
quarter of fiscal 1996 and targeted low volume stores with poor
economic performance.
Royalty revenue in fiscal 1998 was 7% higher than 1997 amounts due
to improvement and growth of the franchise system and an
incremental week of revenue as 1998 contained 53 weeks compared to
52 weeks in the prior year. However, 1998 net franchise revenue
was slightly below 1997 results as 1997 reflected the sale of
certain international franchise rights which more than offset this
increase. The sale of these rights contributed significantly to a
12.6% increase in net franchise revenue from fiscal 1996 to 1997.
Additionally this increase was due to the opening of 14 franchised
locations in 1997 compared to 12 openings in 1996, and a lower
provision for bad debts as a result of reduced delinquency rates.
Costs and Expenses-Cost of sales as a percent of restaurant sales
increased to 33.6% in fiscal 1998 from 33.3% in fiscal 1997
largely due to an increase in the average price of baby-back ribs
of 23% for the year. This increase was partially offset by menu
enhancements implemented in fiscal 1998 and 1997 which caused
favorable sales mix changes and included price increases on select
items. The improvement in fiscal 1997 over fiscal 1996 occurred
despite an 8% increase in the average cost of baby-back ribs due
to menu enhancements and price increases in mid fiscal 1997 and
1996.
Direct labor fell to 30.9% of restaurant sales in fiscal 1998
despite the September 1997 increase in the minimum wage as the
number of new store openings decreased from 13 units in fiscal
1997 to seven units in fiscal 1998. Store openings are generally
accompanied by significant, planned labor inefficiencies due to
training and staffing levels to ensure a favorable dining
experience for first visit customers. In fiscal 1997, direct labor
increased to 31.2% of restaurant sales during the year from 30.6%
in fiscal 1996 primarily due to normal inefficiencies associated
with the opening of 13 restaurants during the year compared to
seven units developed in the prior year. The federal minimum wage
increase, effective in September 1997 and October 1996, also
impacted labor costs, but was offset by price increases and
operating efficiencies.
Other operating expenses in 1998 were relatively flat compared to
1997. This was due to the incremental week of revenue in fiscal
1998, offset by increased depreciation charges. The increase in
depreciation occurred because during the fourth quarter of fiscal
1996 the Company recorded an impairment charge related to eight
restaurants to be closed. Seven of these restaurants were closed
during fiscal 1997 and one closed in May, 1997. In accordance with
the provisions of SFAS No. 121 no depreciation was recorded for
these units in fiscal 1997 benefiting other operating expenses for
that year. Normalized for the impairment charge, fiscal 1997 other
operating expense as a percent of revenue, would have been 27
basis points higher than the amounts recorded. The improvement in
1997 compared to 1996 was largely due to the opening of higher
volume proto-type facilities and the closure of seven older, poor-
performing stores and the resulting depreciation benefit of these
closures.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated revenue was $455.3 million in fiscal 1998, an
increase of 54.2% over 1997 results. The increase was largely due
to growth through the consolidation of the Pizza Hut system, and
continued expansion of the Tony Roma's concept.
Consolidated revenue for fiscal 1997 was $295.3 million, a
decrease of $29.7 million or 9.1% from fiscal 1996. The decrease
was due to the sale of Skipper's Inc., which was partially offset
by expansion at Tony Roma's. Skipper's, Inc., a formerly wholly-
owned subsidiary was sold on May 14, 1996, effective March 25,
1996 and, therefore, no results of Skipper's operations are
reflected in the Company's financial statements for the year ended
March 25, 1997. For the fiscal year ended March 26, 1996,
Skipper's Inc. recorded revenue of $44.9 million, operating
expense of $45.1 million, and a loss from restaurant operations
exclusive of impairment and loss provision charges of $.2 million.
In fiscal 1996 a $20 million impairment charge was recorded in
conjunction with the disposition of Skipper's Inc.
Consolidated income from restaurant operations was $80.5 million
or 17.7% of revenue in fiscal 1998 compared to $58 million or
19.7% of revenue in fiscal 1997. The increase in nominal dollars
was due to growth in unit count, while the decrease as a percent
of revenue was due to lower unit margins of the acquired Pizza Hut
stores, de-leveraging of fixed costs resulting from negative
comparable sales in the Company's Pizza Hut Division, increases in
the minimum wage, and increased cost of sales in both concepts.
Fiscal 1997 results improved from $60.4 million or 18.6% of
revenue in fiscal 1996 primarily due to the elimination of
Skipper's losses.
Leverage from the Pizza Hut expansion resulted in a decrease in
general and administrative expenses as a percent of revenue from
6% in fiscal 1997 to 5.3% in fiscal 1998. In terms of nominal
dollars, general and administrative costs increased to $23.9
million in fiscal 1998 from $17.7 million a year ago, due to
increased staffing levels associated with the acquisition of Pizza
Hut units.
During fiscal 1997 general and administrative expenses were
reduced to $17.7 million or 6% of revenue compared to $21.1
million or 6.5% of revenue in fiscal 1996, due to the sale of
Skipper's which had a higher ratio of general and administrative
expenses to revenue than the consolidated operation.
Deprecation and amortization includes depreciation of field and
corporate equipment and facilities as well as the amortization of
goodwill, franchise rights and pre-opening costs. In both fiscal
1998 and 1997 these costs increased primarily due to increased
franchise rights amortization at Pizza Hut, combined with the
amortization of pre-opening costs related to the development at
Tony Roma's.
As the Pizza Hut expansion was financed with debt, interest costs
grew to $15.7 million in fiscal 1998 compared to $5.5 million in
fiscal 1997. Interest expense decreased in fiscal 1997 due to debt
reduction early in the year from the Skipper's sale proceeds and
favorable interest rates on the Company's revolving credit
facility.
NPC's income tax provision for the fiscal years 1998, 1997, and
1996 resulted in effective tax rates of 35.0%, 38.8%, and 39.6%,
respectively. The reduction in the fiscal 1998 tax rate resulted
from the realization of tax benefits associated with the
implementation of a corporate reorganization and the realization
of various tax credits.
Liquidity and Capital Resources
On March 31, 1998 the Company had a working capital deficit of
$30.8 million compared to a $15.4 million deficit at March 25,
1997. The increase in the deficit was due to the expansion of both
the Pizza Hut and Tony Roma's concepts. Like most restaurant
companies, the Company is able to operate with a working capital
deficit because substantially all of its sales are for cash, while
it generally receives credit from trade suppliers. Further,
receivables are not a significant asset in the restaurant business
and inventory turnover is rapid. Therefore, the Company uses all
available liquid assets to reduce borrowings under its revolving
line of credit.
At March 31, 1998 the Company had a $15 million and a $185 million
unsecured revolving credit facility, of which $113 million was
borrowed on the combined facilities. Availability under these
facilities is reduced by outstanding letters of credit of which
$6.3 million was issued at year-end.
The Company anticipates that cash from the recapitalization of
Romacorp, Inc. and increased borrowing capacity from the related
de-leveraging of the balance sheet, combined with cash flow from
operations will be sufficient to fund continuing expansion and
improvements, and to service debt obligations. The Company's
ability to make additional acquisitions is subject to certain
financial covenants or, if necessary and warranted, the Company's
ability to obtain additional equity capital.
CASH FLOWS
Net cash provided by operating activities was $65 million in
fiscal 1998 compared to $45 million in fiscal 1997. The 44%
increase was largely due to leverage gained from the growth in
unit count. Cash flows from operations increased $12 million in
fiscal 1997 from fiscal 1996, largely due to improved operating
results and the realization of deferred tax assets related to the
sale of Skipper's. Investing activities include normal maintenance
capital expenditures and in fiscal 1998 include the development of
17 Pizza Hut units including eight relocations and seven Tony
Roma's including one relocation compared to fiscal 1997 which
included the development of 23 Pizza Hut units and 13 Tony Roma's.
Acquisitions consist of 222 Pizza Hut units in fiscal 1998, and 91
Pizza Huts in fiscal 1997. Proceeds from the sale of fee simple
properties associated primarily with the Skipper's closure and
disposition strategy have resulted in cash received of $2.3
million in fiscal 1998 and $8.8 million in fiscal 1997.
Acquisitions during fiscal 1998 were funded through the Company's
revolving credit facility and the issuance of $50 million in
senior notes. Fiscal 1997 acquisitions were financed through the
revolving credit facility. Financing activities in fiscal 1996
include the borrowing of $20 million under the Company's previous
shelf facility and the payment of a $5.2 million one-time special
dividend related to the recapitalization of the Company's stock.
At March 31, 1998, 346,500 shares remain approved for repurchase
under the Company's stock repurchase program.
SEASONALITY
As a result of the diversification in restaurant concepts, the
Company has historically not experienced significant seasonal
sales fluctuations on a consolidated basis. However, each concept
is impacted by individual sales trends. Tony Roma's sales are
traditionally higher from January to March due to an increase in
vacation and part-time residence activity in the desert and beach
areas where a significant number of the Company's facilities are
located. 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 AND FUTURE OUTLOOK
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.
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. Baby-back ribs represent approximately 28% of
the menu mix at Tony Roma's. Because ribs are a by-product of pork
processing, their price is influenced largely by the demand for
boneless pork. Significant changes in the prices of these
commodities would have an impact on the Company's food cost as a
percent of revenue.
Cheese costs are expected by the Company to be at or below last
year's levels, provided favorable weather and supply and demand
conditions continue. Meat ingredient costs are expected to be
below last year's levels during the first three quarters of fiscal
1999. Based upon existing inventories, rib prices are expected to
be approximately 10% higher during the first and second quarters
of fiscal 1999 than during the same period of fiscal 1998.
Increases in interest rates would directly affect the Company's
financial results. 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,
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.
OTHER
Impact of Recently issued Accounting Pronouncements-See Note 1 to
Consolidated Financial Statements.
Year 2000 Compliance-The Company has developed a plan to modify
its information technology systems to be ready for year 2000, and
has begun implementation of this plan. Management believes the
cost for execution of the plan will not be significant.
Consolidated Balance Sheets
NPC International, Inc. and Subsidiaries
(Dollars in thousands, March 31, March 25,
except share data) 1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 4,548 $ -
Accounts receivable, net 2,375 1,535
Inventories of food and supplies 4,177 2,577
Income tax receivable - 1,737
Deferred income tax asset 3,245 3,546
Prepaid expenses and other current
assets 2,619 3,165
Total current assets 16,964 12,560
Facilities and equipment, net 138,779 126,461
Assets held for sale 3,157 4,248
Notes receivable, net 465 575
Franchise rights, less
accumulated amortization of
$17,867 and $11,366, respectively 198,917 92,318
Goodwill, less accumulated
amortization of $5,752 and $4,910,
respectively 17,364 18,228
Deferred income tax asset 344 -
Other assets 5,247 5,517
Total assets $381,237 $ 259,907
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,888 $ 11,624
Sales taxes 2,561 1,161
Payroll taxes 1,742 1,815
Accrued interest 4,130 1,997
Accrued payroll 8,669 4,412
Income tax payable 650 -
Current portion of closure reserve 1,360 400
Insurance reserves 5,613 3,724
Other accrued liabilities 6,188 4,023
Total current liabilities 47,801 29,156
Long-term debt 204,033 116,777
Deferred income tax liability - 5,619
Closure reserve 8,936 4,734
Other deferred items 4,431 181
Health and workers' compensation
reserves 9,000 7,647
STOCKHOLDERS' EQUITY
Common stock, $.01 par value
100,000,000 shares authorized,
27,592,510 issued 276 276
Paid-in capital 21,033 20,978
Retained earnings 105,157 94,827
126,466 116,081
Less treasury stock at cost,
representing 2,846,926 and
2,957,307 shares, respectively (19,430) (20,288)
Total stockholders' equity 107,036 95,793
Total liabilities and stockholders'
equity $381,237 $ 259,907
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF INCOME
NPC International, Inc. and Subsidiaries
For the Fiscal Year Ended
March 31, March 25, March 26,
(Dollars in thousands) 1998 1997 1996
Net sales $ 446,815 $ 286,759 $317,294
Net franchise revenue 8,482 8,526 7,692
Total revenue 455,297 295,285 324,986
Cost of sales 125,365 80,618 93,977
Direct labor 129,133 81,086 87,293
Other 120,272 75,523 83,280
Total operating expenses 374,770 237,227 264,550
Income from restaurant
operations 80,527 58,058 60,436
General and administrative
expenses 23,930 17,710 21,084
Depreciation and
amortization 11,475 6,121 5,648
Operating income before
asset impairment
and loss provision 45,122 34,227 33,704
Asset impairment and loss
provision 14,100 - 23,500
Operating income 31,022 34,227 10,204
Other income (expense):
Interest expense (15,655) (5,455) (6,317)
Miscellaneous 526 311 (341)
Income before income taxes 15,893 29,083 3,546
Provision for income taxes:
Current 11,225 994 7,500
Deferred (5,662) 10,278 (6,097)
5,563 11,272 1,403
Net income $ 10,330 $ 17,811 $ 2,143
Earnings per share-basic $ .42 $ .72 $ .09
Earnings per share-diluted $ .41 $ .72 $ .09
Weighted average shares
outstanding-basic 24,693,764 24,646,003 24,513,028
Weighted average shares
outstanding-diluted 25,108,988 24,873,624 24,590,531
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NPC International, Inc. and Subsidiaries
Total
(Dollars in Common Paid-in Retained Treasury
Stockholders'
thousands) Stock Capital Earnings Stock Equity
Balance,
March 28, 1995 $276 $22,020 $80,086 $(22,095) $80,287
Dividend - - (5,213) - (5,213)
Net income - - 2,143 - 2,143
Exercise of stock
options - (191) - 294 103
Balance,
March 26, 1996 276 21,829 77,016 (21,801) 77,320
Net income - - 17,811 - 17,811
Acquisition of treasury
stock - - - (904) (904)
Exercise of stock
options - (851) - 2,417 1,566
Balance,
March 25, 1997 276 20,978 94,827 (20,288) 95,793
Net income - - 10,330 - 10,330
Exercise of stock
options - 55 - 858 913
Balance,
March 31, 1998 $276 $21,033 $105,157 $(19,430) $107,036
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NPC International, Inc. and Subsidiaries
For the Fiscal Year Ended
March 31, March 25, March 26,
(Dollars in thousands) 1998 1997 1996
OPERATING ACTIVITIES
Net income $ 10,330 $ 17,811 $ 2,143
Non-cash items included
in net income:
Depreciation and
amortization 25,775 16,618 18,326
Amortization of start-up
costs 3,074 1,875 1,110
Deferred income taxes
and other (5,662) 10,278 (6,097)
Non-cash portion of asset
impairment and loss
provision 14,100 - 23,379
Change in assets and
liabilities, net of
acquisitions:
Accounts receivable, net (840) 969 (488)
Notes receivable, net 110 256 (312)
Inventories of food and
supplies (771) 1,153 (1,100)
Income tax receivable 2,387 (1,452) 2,245
Prepaid expenses and
other current assets (2,528) (3,289) (614)
Accounts payable 5,264 1,214 (1,327)
Payroll taxes (73) 168 294
Accrued interest 2,133 (162) 202
Accrued payroll 4,257 27 327
Health and workers'
compensation reserves 3,242 1,057 2,046
Other accrued liabilities 4,158 (1,420) (7,392)
Net cash flows provided
by operating activities 64,956 45,103 32,742
INVESTING ACTIVITIES
Capital expenditures (28,795) (41,466) (17,825)
Changes in other assets, net (614) (2,098) 289
Proceeds from sale of
capital assets 2,308 8,808 4,708
Acquisition of business
assets net of cash (121,232) (55,595) (15,150)
Net cash flows used in
investing activities (148,333) $(90,351) (27,978)
FINANCING ACTIVITIES
Purchase of treasury stock - (904) -
Dividends - - (5,213)
Net change in revolving
credit agreements 48,700 52,713 (16,480)
Proceeds from issuance
of long-term debt 49,756 - 20,000
Payment of long-term debt (11,444) (9,711) (11,561)
Exercise of stock options 913 1,566 103
Net cash flows provided by
(used in) financing
activities 87,925 43,664 (13,151)
Net change in cash and
cash equivalents 4,548 (1,584) (8,387)
Cash and cash equivalents
at beginning of year - 1,584 9,971
Cash and cash equivalents
at end of year $ 4,548 $ - $ 1,584
The accompanying notes are an integral part of these consolidated
financial statements.
Notes to Consolidated Financial Statements
Note 1: Summary of Significant
Accounting Policies
Consolidation-The financial statements include the accounts of NPC
International, Inc. and its wholly owned subsidiaries (the
Company). All significant intercompany transactions are
eliminated.
Fiscal Year-The Company operates on a 52 or 53 week fiscal year
ending the last Tuesday in March. The fiscal year ended March 31,
1998 contained 53 weeks. The fiscal years ended March 25, 1997 and
March 26, 1996 each contained 52 weeks.
Cash Equivalents-For purposes of the Consolidated Statements of
Cash Flows, the Company considers all highly liquid debt
instruments with an original maturity of three months or less to
be cash equivalents. At March 31, 1998 substantially all cash was
in the form of depository accounts.
Inventories-Inventories of food and supplies are valued at the
lower of cost (first-in, first-out method) or market.
Pre-opening Costs-The Company amortizes pre-opening costs, which
principally represent the cost of hiring and training new
personnel, over a period of one year commencing with the
restaurant's opening. Amortization of these costs is presented
below income from restaurant operations.
In April 1998, Statement of Position (SOP) 98-5 Accounting for
Costs of Start-up Activities was issued. The SOP requires 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 as described in APB No. 20, Accounting
Changes, during the first quarter of its fiscal year 2000. The
cumulative effect upon adoption will result in a one-time charge
to income in an amount equal to the net book value of the
Company's pre-opening costs. This change will also result in the
discontinuance of amortization of pre-opening cost expense in
subsequent periods. At March 31, 1998 the balance of pre-opening
costs was $727 thousand.
Facilities and Equipment-Facilities and equipment are recorded at
cost. Depreciation is charged on the straight-line basis for
buildings, furniture and equipment. Leasehold improvements are
amortized on the straight-line method-over the economic life of
the lease or the life of the improvements-whichever is shorter.
Effective in fiscal 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. The majority of the Company's long-lived assets held
for continuing use are evaluated for potential impairment on a
store-by-store basis. Assets held for sale are stated at estimated
fair value.
Franchise Rights-The Company's Pizza Hut franchise agreements
generally provide franchise rights for a period of 15 to 20 years
and are renewable at the option of the Company for an additional
15 years. Initial franchise fees are capitalized for accounting
purposes and are amortized over their estimated economic life
(original term plus option renewal period) on a straight-line
basis. Purchased franchise rights are recorded at estimated value
and amortized ratably over the remaining life of the franchise
agreement, including the renewal period, if any. Periodic
franchise fees, generally provided for in the agreements as a
percent of gross sales, as defined, are recorded as operating
expenses as incurred.
Net Franchise Revenue-The franchise agreements for Tony Roma's
restaurants provide for an initial fee and continuing royalty
payments based upon gross sales, in return for operational
support, product development, marketing programs and various
administrative services. Royalty revenue is recognized when earned
and initial fees are recognized when the franchisee's restaurant
is opened. Fees for granting exclusive development rights to
specific geographic areas are recognized when the right has been
granted and cash received is non-refundable and no significant
future obligation is required. Net franchise revenue is presented
net of direct expenses, which include labor, travel, and related
costs of Franchise Business Managers, who operate as liaisons
between the franchise community and the franchisor. Direct costs
also include bad debt expense, and opening costs consisting
primarily of training expenses. Franchisees also participate in
national and local marketing programs, which are managed by the
Company but are not included in the accompanying financial
statements. The reserve for uncollectible accounts relates solely
to net franchise revenue and consisted of $344 thousand at March
31, 1998 and $280 thousand at March 25, 1997.
Goodwill-Goodwill represents the excess of cost over the
identifiable net assets of companies acquired and is amortized on
the straight-line method over periods ranging from 25 to 40 years.
Income Taxes-The provision for income taxes includes federal and
state taxes currently payable and those deferred because of
temporary differences between the financial statements and tax
bases of assets and liabilities. Deferred taxes arise principally
from accelerated amortization of franchise rights for tax
purposes, the use of accelerated depreciation for tax purposes,
and the deferral of tax deductions for insurance costs and
impairment provisions that have been accrued for financial
statement purposes.
Use of Estimates-The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Advertising Costs-Advertising costs are expensed as incurred. The
Company incurred $23.8 million of such costs in fiscal 1998 and
$14.3 million and $17.2 million in fiscal 1997 and fiscal 1996,
respectively.
Stock Based Compensation-The Company measures compensation cost of
its employee stock options using the intrinsic value based method
of accounting. In accordance with SFAS No. 123 "Accounting for
Stock-Based Compensation," the Company has determined that net
income would not be reduced by more than $250 thousand in any year
presented if the fair value based method was used to measure
compensation expense. The Company considers this difference
immaterial and accordingly has not provided further disclosure
regarding the pro-forma effect of using the fair value based
method.
Related Party Transaction- The Company purchased real estate from
an officer of the company in the amount of $800 thousand in fiscal
1996. The value of the purchased real estate was determined by
Company personnel using recognized valuation techniques. This
related party transaction was approved by the Company's Board of
Directors.
Recently Issued Accounting Standards-In June 1997 the FASB issued
SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. This new standard requires companies to
disclose segment data based on how management makes decisions
about allocating resources to segments and how it measures segment
performance. SFAS 131 requires companies to disclose a measure of
segment profit or loss (operating income for example), segment
assets, and reconciliations to consolidated totals. It also
requires disclosures about a company's products and services, and
major customers, if any. The Company will adopt SFAS 131 in its
fiscal 1999 year-end financial statements. This statement is not
expected to have a significant impact on the Company's reporting.
Reclassifications-Certain amounts have been reclassified to
conform the prior year financial statements to the current year
presentation.
Note 2: Facilities and Equipment
Facilities and equipment consist of the following:
Estimated March 31, March 25,
(Dollars in thousands) Useful Life 1998 1997
Land $ 31,715 $ 27,978
Buildings 15-20 years 63,149 54,257
Leasehold improvements 5-20 years 40,593 37,997
Furniture and equipment 3-10 years 72,526 64,565
Construction in progress 3,785 9,009
211,768 193,806
Less accumulated depreciation
and amortization (72,989) (67,345)
Net facilities and equipment $ 138,779 $ 126,461
Note 3: Bank Debt and Senior Notes
The composition of the Company's long-term debt is as follows:
March 31, 1998 March 25, 1997
(Dollars in Principal Pmt Carrying Estimated Carrying Estimated
thousands) Begin End Value Fair Value Value Fair Value
Revolving credit $112,700 $112,700 $64,000 $64,000
9.09% senior notes 10/97 10/01 8,000 8,434 10,000 10,451
8.02% senior notes 4/98 4/02 10,000 10,360 10,000 10,072
7.94% senior notes 5/02 5/06 50,000 53,550 - -
7.58% senior notes 5/93 5/97 - - 5,000 4,990
6.96% senior notes 4/98 4/02 10,000 10,085 10,000 9,725
6.35% senior notes 4/96 4/00 12,000 11,940 16,000 15,500
Other 1,333 1,333 1,777 1,777
Total long-term debt $204,033 $208,402 $116,777 $116,515
The Company has a $15 million unsecured revolving credit facility
that provides the option to pay interest at the London Interbank
Offering Rate (LIBOR) or the "fed funds" rate plus a margin (7.0%
at March 31, 1998). Additionally, the Company has a $185 million
unsecured revolving credit facility, which provides the option to
pay interest at the prime rate or the LIBOR plus a margin (7.175%
at March 31, 1998). Availability under this agreement is reduced
by issued letters of credit, which can be as much as $12 million
of which $6.3 million has been issued at March 31, 1998. These
letters of credit expire July 1, 1998 but are expected to be
renewed as they relate to the Company's insurance program.
Commitment fees of .25% per annum are paid on the unused balance
of both facilities and are included in interest expense. These
agreements are in effect until March 3, 2000.
The Company has the ability and intent to refinance the principal
payments due under its senior notes through its revolving credit
agreement. Accordingly, such amounts are classified as long-term
debt.
The aggregate maturities of long-term debt, excluding the
revolving credit agreement, are as follows: fiscal 1999-$10.4
million, fiscal 2000-$10.4 million, fiscal 2001-$10.4 million,
fiscal 2002-$6 million, fiscal 2003-$14 million and $40 million in
years beyond.
The average amount outstanding on all bank borrowings and senior
notes for the year ended March 31, 1998, was $203.5 million and
the maximum borrowings were approximately $225 million. Interest
expense from bank borrowings and senior notes for fiscal years
1998, 1997 and 1996 was $15.8 million, $5.5 million and, $5.7
million, respectively. Weighted average interest rates during the
same periods were 7.52%, 7.02%, and 7.34%, respectively.
Cash paid for interest in fiscal years 1998, 1997 and 1996 was
$13.7 million, $6 million, and $6 million, respectively.
The Company is subject to a number of covenants under its various
credit agreements including limits on additional borrowing,
restrictions on dividend payments and requirements to maintain
various financial ratios and a minimum net worth. The Company was
in compliance with all such debt covenants, as amended, at March
31, 1998.
Generally accepted accounting principles require companies to
disclose the estimated fair value of financial instruments. The
Company's debt consists of non-trading long-term notes with fixed
rates maturing over the next nine years and long-term revolving
loans with variable rates. Management has computed the fair market
values of the fixed-rate notes based upon estimated incremental
borrowing rates of 6.6% in fiscal 1998 and 7.8% in fiscal 1997.
This rate is not substantially different from the rate spread from
similar government bonds with similar maturities to that of the
Company's debt portfolio. Management believes the fair market
value of the revolving credit agreement is equal to its carrying
value, due to its daily rate fluctuation.
Note 4: Profit Sharing Plan
The Company instituted the NPC International, Inc. Profit Sharing
Plan on July 1, 1992. To qualify, employees must generally have
two years of service, attain the age of 21 and be employed on the
last day of the plan year. The Company's contribution to the plan
is discretionary, based upon the earnings of each operating
division. The Company contributed $831 thousand, $611 thousand,
and $540 thousand, for calendar years 1997, 1996 and 1995,
respectively.
Note 5: Asset Impairment and Loss Provision
In March 1998 the Company committed to an asset re-imaging
strategy involving the consolidation and relocation of 53 Pizza
Hut units to 45 new locations, the consolidation of 11 units into
existing locations, and the closure of 31 underperforming units.
This initiative resulted in a pre-tax charge of $11.4 million.
Significant components of the charge included $5.7 million related
to the loss on disposition of assets, $5.0 million related to
obligations under long term lease arrangements, and $.7 million
related to de-identification and other miscellaneous costs. Assets
to be disposed of were recorded at fair value in accordance with
SFAS No. 121 and are reflected in assets held for sale.
Additionally, the Company recorded a charge of $1.6 million
related to the impairment of 10 locations where the Company will
continue to operate Pizza Hut units, and a charge of $1.1 million
to accelerate depreciation of back-of-house software and hardware
systems, which are being replaced with a newly developed windows-
based package. Of the total $14.1 million provision, $8.3 million
has been incurred prior to year-end. The 31 units to be closed
generated approximately $9.2 million of revenue and a loss from
restaurant operations approximately $187 thousand in fiscal 1998.
Effective March 25, 1996 the Company sold Skipper's Inc. and
recorded a pre-tax charge of $20 million related to the
transaction. The asset sale agreement was signed April 24, 1996
and closed May 14, 1996. Additionally, the Company recorded a pre-
tax provision of $3.5 million in fiscal 1996 related to the
disposition of six underperforming Tony Roma's units and the
relocation of two others.
In fiscal 1996, Skipper's generated $44.9 million of revenue and a
loss from restaurant operations, exclusive of the $20 million
impairment and loss provision, of $196 thousand. The six Tony
Roma's units to be disposed of generated sales of approximately
$7.6 million and losses from restaurant operations of
approximately $340 thousand in fiscal 1996.
Note 6: Recapitalization
On April 24, 1998, NPC International, Inc. and Sentinel Capital
Partners, L.P. executed a recapitalization agreement related to
Romacorp, Inc. and subsidiaries. Under terms of the agreement,
the Company will receive approximately $113 million in cash and $5
million in consideration that may be realized contingent upon
certain future events. The Company will retain a 10% ownership
interest in Romacorp, Inc. with an estimated value at closing of
approximately $3.5 million. The transaction is expected to close
in the first quarter of fiscal 1999 and is expected to result in a
pre-tax gain of approximately $46 million.
Note 7: Income Taxes
The provision (benefit) for income taxes consisted of the
following:
For the fiscal year ended
(Dollars in thousands) March 31, March 25, March 26,
1998 1997 1996
Current:
Federal $9,856 $604 $5,730
State 1,087 38 1,428
Foreign 282 352 342
11,225 994 7,500
Deferred:
Federal (4,972) 8,596 (3,956)
State (548) 1,243 (1,079)
Foreign (142) 439 (1,062)
(5,662) 10,278 (6,097)
Provision for income taxes $5,563 $11,272 $1,403
The differences between the provision for income taxes and the
amount computed by applying the statutory federal income tax rate
to earnings before income taxes are as follows:
For the fiscal year ended
(Dollars in thousands) March 31, March 25, March 26,
1998 1997 1996
Tax computed at statutory
rate $5,563 $10,179 $1,241
State taxes, net of federal
effect, and other,
including goodwill
amortization and tax
credits - 1,093 162
Provision for income taxes $5,563 $11,272 $1,403
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for federal
and state income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
For the fiscal year ended
(Dollars in thousands) March 31, March 25,
1998 1997
Deferred tax assets:
Insurance reserves $5,204 $4,041
Closure reserves 3,655 2,013
Other, net 1,554 1,710
Tax credit carryforwards - 1,145
Valuation allowance - (1,145)
Total deferred tax assets 10,413 7,764
Deferred tax liabilities:
Depreciation and amortization (6,630) (9,121)
Other, net (194) (716)
Total deferred tax liabilities (6,824) (9,837)
Net deferred tax asset (liability) 3,589 (2,073)
Current 3,245 3,546
Non-current $344 $(5,619)
Cash paid for income taxes in fiscal 1998 was $8,464. Amounts paid
in 1997 and 1996 were $2,430 and $4,868, respectively.
The Company reduced the valuation allowance applied against tax
credit carryforwards based on tax planning strategies which
included utilization of these credits.
Note 8: Commitments
The Company leases certain restaurant equipment and buildings
under operating leases. Rent expense for fiscal 1998, 1997, and
1996 was $19.3 million, $11 million, and $11.8 million,
respectively, including additional rentals of approximately $1.4
million in 1998, $1.3 million in 1997, and $1.5 million in 1996.
The additional rentals are based upon a percentage of sales in
excess of a base amount as specified in the lease. The majority of
the Company's leases contain renewal options for 5 to 10 years.
The remaining leases may be renewed upon negotiations. Minimum
lease payments for the next five years at March 31, 1998,
consisted of:
Fiscal Year (Dollars in thousands)
1999 $15,875
2000 13,817
2001 11,996
2002 10,113
2003 8,598
Thereafter 43,580
Total minimum
lease commitments $103,979
See note 3 related to letters of credit.
Note 9: Earnings per Share
In 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share.
Statement 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options. Diluted earnings per
share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods
have been presented, and where necessary, restated to conform to
the Statement 128 requirements.
The following table sets forth the computation of basic and
diluted earnings per share:
(Amounts in thousands March 31, March 25, March 26,
except per share data) 1998 1997 1996
Numerator:
Net income $10,330 $17,811 $ 2,143
Denominator:
Denominator for basic
earnings per share-
weighted average shares 24,694 24,646 $24,513
Effect of dilutive
securities:
employee stock options 415 228 78
Denominator for diluted
earnings per share-
adjusted weighted average
shares and assumed
conversions 25,109 24,874 24,591
Earnings per share-basic $ .42 $ .72 $ .09
Earnings per share-diluted $ .41 $ .72 $ .09
Note 10: Stock Options
A summary of the Company's stock option activity, and related
information is presented below:
March 31, 1998 March 25, 1997 March 26, 1996
Weighted Weighted Weighted
Average Average Average
(Options in Exercise Exercise Exercise
thousands) Options Price Options Price Options Price
Outstanding-
beginning
of year 1,763 $7.36 1,840 $7.07 1,593 $7.24
Granted 258 $9.76 229 $8.22 396 $6.41
Canceled (51) $6.56 (109) $6.06 (130) $7.24
Exercised (113) $6.49 (197) $6.40 (19) $5.49
Outstanding-end
of year 1,857 $7.77 1,763 $7.36 1,840 $7.07
Exercisable-
end of year 1,263 1,192 1,122
Weighted average
fair value of
options granted
during the year $3.77 $3.12 $2.40
Exercise prices for options outstanding as of March 31, 1998
ranged from $4.75 to $11.50. The weighted average remaining
contractual life of those options is 5.9 years.
At March 31, 1998 the Company has a 1994 Non-Qualified Stock
Option Plan pursuant to which an aggregate of 3,291,450 shares of
common stock are reserved for issuance to employees (including
officers) of the Company. The options have an exercise price equal
to the fair market value of the common stock on the date of grant,
and generally become exercisable over a four-year period in equal
annual amounts.
Under APB No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying
stock on the date of the grant, no compensation expense is
recognized.
Note 11: Acquisitions
The Company acquired 31 units from R&W Pizza Huts of North
Carolina, Inc., on October 31, 1996. The purchase price, funded
through the Company's revolving credit facility was $27.5 million,
which has been allocated between facilities and equipment and
franchise rights.
Additionally, the Company entered into an Asset Purchase Agreement
with Pizza Hut, Inc. (PHI) in fiscal 1997. The transaction closed
in two distinct phases. Phase I consisted of 60 units with a
purchase price of $27.3 million and closed on March 6, 1997. Phase
II consisted of 62 units and the operation of four others, with a
purchase price of $28.1 million and closed on March 27, 1997,
subsequent to the Company's fiscal 1997 year-end. Both phases of
this acquisition were funded through the Company's revolving
credit facility, and the purchase price was allocated between
facilities and equipment and franchise rights. The results of
operations of all acquired units are included in the Company's
financial statements from the closing date of each transaction
forward.
On May 15, 1997 the Company acquired 74 Pizza Hut units and the
operations of 8 others, from franchisee, Jamie B. Coulter, for $47
million. Beginning May 15, 1997 the Company also entered into a
management agreement related to 18 units. During fiscal 1998
these 18 units were acquired for $10 million.
Additionally, on June 5, 1997 the Company acquired 51 units from
PHI for $29.9 million. An additional unit was purchased on July
10, 1997 for $1.1 million. These transactions were funded through
the issuance of long-term debt and additional borrowings through
the revolving credit facility. See note 3 for further information
on the related funding.
The table presents unaudited pro forma results for fiscal 1998 and
fiscal 1997 assuming all units had been acquired as of the
beginning of the periods presented. For both years presented, the
unaudited, pro forma results reflect certain adjustments,
including interest expense, depreciation of facilities and
equipment, and amortization of franchise rights. The unaudited pro
forma results shown are not necessarily indicative of the
consolidated results that would have occurred had the acquisitions
taken place at the beginning of the respective periods, nor are
they necessarily indicative of results that may occur in the
future.
The following table indicates the pro forma results of these
transactions:
Pro Forma Results (unaudited)
(Dollars in thousands, March 31, March 25,
except per share data) 1998 1997
As reported:
Total revenues $455,297 $295,285
Net income 10,330 17,811
Net income per share-basic .42 .72
Net income per share-diluted .41 .72
Pro forma:
Total revenues 469,918 474,321
Pro forma net income 10,921 17,431
Pro forma net income per
share-basic .44 .71
Pro forma net income per
share-diluted .43 .70
Note 12: Quarterly Results (unaudited)
First Second Third Fourth Annual
(Dollars in thousands, Fiscal Fiscal Fiscal Fiscal Fiscal
except per share data) Quarter Quarter Quarter Quarter Total
Year Ended March 31, 1998
Revenue $103,117 $114,693 $112,926 $124,560 $455,297
Income from restaurant
operations 19,291 20,101 17,643 23,492 80,527
Asset impairment and
loss provision (1) - - - 14,100 14,100
Net income 5,723 4,742 3,058 (3,193) 10,330
Earnings per share-basic .23 .19 .12 (.13) .41
Year Ended March 25, 1997
Revenue $72,926 $69,070 $74,223 $79,066 $295,285
Income from restaurant
operations 16,265 13,044 13,375 15,374 58,058
Net income 5,522 3,946 3,678 4,665 17,811
Earnings per share-basic .22 .16 .15 .19 .72
Earnings per share-diluted .22 .16 .15 .19 .72
(1) The fourth quarter charge relates primarily to the Pizza Hut
re-imaging strategy.
Report of Management
The management of NPC International, Inc. has prepared the
consolidated financial statements and related financial
information included in this Annual Report. Management has the
primary responsibility for the integrity of the consolidated
financial statements and other financial information. The
consolidated financial statements have been prepared in accordance
with generally accepted accounting principles consistently applied
in all material respects and reflect estimates and judgments by
management where necessary. Financial information included
throughout this Annual Report is consistent with the consolidated
financial statements. Management of the Company has established a
system of internal accounting controls that provides reasonable
assurance that assets are properly safeguarded and accounted for
and that transactions are executed in accordance with management's
authorization.
The consolidated financial statements have been audited by our
independent auditors, Ernst & Young LLP, whose unqualified report
is presented herein. Their opinion is based upon procedures
performed in accordance with generally accepted auditing
standards, including tests of the accounting records, obtaining an
understanding of the system of internal accounting controls and
such other tests as deemed necessary in the circumstances to
provide them reasonable assurance that the consolidated financial
statements are fairly presented. The Audit Committee of the Board
of Directors, consisting solely of outside directors, meets with
the independent auditors at least twice per year to discuss the
scope and major findings of the audit. The independent auditors
have access to the Audit Committee at any time.
O. Gene Bicknell
Chairman of the Board and
Chief Executive Officer
James K. Schwartz
President and
Chief Operating Officer
Troy D. Cook
Vice President Finance and
Chief Financial Officer
Report of Independent Auditors
The Board of Directors and Stockholders
NPC International, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
NPC International, Inc. and Subsidiaries (the Company) as of March
31, 1998 and March 25, 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each
of the three fiscal years in the period ended March 31, 1998.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of NPC International, Inc. and Subsidiaries at March 31,
1998 and March 25, 1997 and the consolidated results of their
operations and their cash flows for each of the three fiscal years
in the period ended March 31, 1998 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, in the fiscal
year ended March 26, 1996 the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of."
Kansas City, Missouri
May 5, 1998
Stockholder Data
Registrar and Transfer Agent
American Stock Transfer & Trust Company, 40 Wall Street, New York,
New York 10005
Inquiries regarding stock transfers, lost certificates or address
changes should be directed to the Stock Transfer Department of
American Stock Transfer at the above address.
Stock Information-NPC International, Inc.'s common shares are
traded on the NASDAQ Stock Market under the symbol "NPCI."
For the calendar periods indicated, the table below sets forth the
range of high and low closing sale prices.
NPC International, Inc.'s policy is to retain earnings to fund
development and grow the business. The Company does not
contemplate payment of cash dividends in future periods.
As of May 20, 1998 the approximate number of stockholders was
4,205, including an estimated number of individual participants in
security position listings.
NPC International, Inc.'s 1998 Form 10-K Annual Report to the
Securities and Exchange Commission is available without charge to
stockholders and beneficial owners of stock upon written request
to the Chief Financial Officer, NPC International, Inc., 720 West
20th Street, Pittsburg, Kansas 66762.
Calendar Period
High Low
1996
First Quarter 9 6 7/8
Second Quarter 9 7/8 8 1/2
Third Quarter 10 1/2 8 1/4
Fourth Quarter 8 3/4 7 7/8
1997
First Quarter 10 7/8 8 1/4
Second Quarter 11 7/8 9 1/4
Third Quarter 12 1/2 11 1/4
Fourth Quarter 15 3/8 10 1/8
1998
First Quarter 14 3/8 9 5/8
Directors, Corporate Officers and Key Personnel
O. Gene Bicknell
Chairman of the Board
Chief Executive Officer, and Director
James K. Schwartz
President and Chief Operating Officer, and Director
Marty D. Couk
Senior Vice President, Pizza Hut Operations
D. Blayne Vaughn
Vice President, Pizza Hut Operations
L. Bruce Sharp
Vice President, Pizza Hut Operations
Robert B. Page
President, Romacorp, Inc.
Troy D. Cook
Vice President Finance, Chief Financial Officer, Treasurer and
Assistant Secretary
David G. Short
Vice President, Legal and Secretary
Linda K. Lierz
Vice President, Marketing
Frank S. Covvey
Vice President, Information and Communication Systems
Alan L. Salts
Vice President, Restaurant Services and Chief Accounting Officer
James K. Villamaria
Risk and Regulatory Counsel
Fran D. Jabara
Director, President of Jabara Ventures Group
Robert E. Cressler
Director, Partner in Diverse Direction, Inc.
Mary M. Polfer
Director, Financial Consultant, Merrill Lynch
William A. Freeman
Director, Chief Financial Officer
Semitool, Inc.
Auditors
Ernst & Young LLP
One Kansas City Place
1200 Main Street
Kansas City, Missouri 64105
NPC International, Inc.
720 West 20th Street
Pittsburg, Kansas 66762
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