ITEM 1.BUSINESS
GENERAL
The Company. NPC International, Inc. and Subsidiaries (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 28, 2000 the Company operated 615 Pizza Hut restaurants and 167 delivery units in 26 states pursuant to franchise agreements with Pizza Hut, Inc. ("PHI"), a wholly-owned subsidiary of Tricon Global Restaurants, Inc. ("TRICON").
On February 4, 1999 the Company acquired 99 units from PHI and on July 22, 1999 the Company acquired an additional 70 units from PHI. Acquisition of Pizza Hut restaurants has been the primary factor in the Company's growth over the last four years with the Company acquiring 482 Pizza Hut restaurants over the last four fiscal years. On May 3, 2000 the Company signed a letter of intent with PHI to acquire 64 Pizza Hut restaurants located primarily in Iowa. This transaction is expected to be completed in June 2000.
On June 8, 1993 the Company completed the acquisition of Romacorp, Inc. ("Romacorp") (formerly NRH Corporation). Romacorp is the operator and franchisor of Tony Roma's Famous For Ribsr restaurants. Effective June 30, 1998 the Company completed the recapitalization of Romacorp. Romacorp redeemed stock held by the Company so that the Company held a minority interest in Romacorp. Following the transaction, Romacorp changed its name to Roma Restaurant Holdings, Inc. ("RRH").
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 1999 the Pizza Hut system had approximately 6,800 domestic units (excluding licensed units) and approximately 35% 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. Additionally Pizza Hut serves the Big New Yorker Pizza, a 16" traditional crust 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 85% 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 computer system similar to that operated in a CSC, but smaller in scale), or directly to the kitchen.
A successful delivery operation typically has a higher return on invested capital than the Company's restaurants as the required capital investment is considerably lower.
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 following table based on unit count by state.
Company-owned Pizza Huts at State March 28, 2000 Alabama 106 Arizona 1 Arkansas 63 Colorado 7 Delaware 9 Florida 40 Georgia 51 Illinois 32 Indiana 13 Kansas 18 Kentucky 28 Louisiana 35 Minnesota 8 Mississippi 110 Missouri 28 North Carolina 46 North Dakota 18 Nevada 4 Oklahoma 25 Oregon 23 South Carolina 10 South Dakota 26 Tennessee 50 Texas 22 Utah 5 Washington 4 Company Total 782
The Company provides delivery service utilizing a CSC operation in ten metropolitan markets: Springfield, Missouri; Montgomery and Birmingham, Alabama; Shreveport, Louisiana; Jackson and Long Beach, Mississippi; Little Rock, Arkansas; Tulsa, Oklahoma; Portland, Oregon 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 in other markets call the restaurant delivery kitchens directly.
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 terms 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 ser- vice. Further, the Franchise Agreements allow the franchisor to 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 20-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 operate under the new franchise agreement ("Location Franchise Agreement") which has a 20-year term from 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 agreement and fee schedules, provided the Company is not then in default of its obligations under that franchise agreement, including the development schedule, if any, and has complied with the requirements thereof throughout the term of the agreement. The franchise agreement, as amended, is similar to the 1990 agreement for all acquisitions completed prior to fiscal 1999.
The Location Franchise Agreement, as amended, for the 99 units acquired in fiscal 1999 and the 70 units acquired in fiscal 2000, requires fees of 6.5% of gross sales, as defined. The Agreement has a 500 yard radius protection for each restaurant operated under the agreement and does not contain exclusive territorial rights as are available in the Company's other Franchise Agreements.
The Company has the option to renew each of the above Franchise Agreements prior to their expiration for single renewal terms of not less than 15 years by entering into the then-current agreements and fee schedules, provided the Company is not then in default of its obligations under those franchise agreements, including the development schedules, if any, and has complied with the requirements thereof throughout the terms of the agreements.
The Company can obtain a new 20-year franchise agreement ("1998 Location Franchise Agreement") with a fee requirement of 4.0% of gross sales, as defined, upon completing a qualified rebuild or remodel of a dine-in restaurant. This agreement provides a one mile radius protection for personal pan pizzas and a larger variable radius protection for dinner size pizzas based upon the surrounding population. This agreement can be renewed for a term of not less than 15 years without any renewal fee and continuing fees of 4.0% of gross sales, as defined, if the Company is not in default under the agreement and the Company has made an approved investment, as defined, in the location. Excluding the reduced fee requirement, a different radius protection and renewal provisions, the 1998 Location Franchise Agreement, as amended, is similar to the Location Franchise agreement governing the aforementioned 99-unit and 70-unit acquisitions.
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(s).
For the fiscal years ended March 28, 2000, March 30, 1999 and March 31, 1998 the Company incurred total franchise fees of approximately $20,420,000, $15,476,000 and $14,586,000, respectively. The Franchise Agreements require the Company to pay initial franchise fees to PHI in amounts of up to $25,000 for each new restaurant opened. 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 28, 2000 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, 2000 the Company acquired a total of 524 Pizza Hut units including 370 from PHI. Effective in 1995, PHI changed its strategy to embrace refranchising and TRICON has stated its goal of selling down to approximately 20% to 25% of the Pizza Hut system. 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 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. Purchasing is substantially provided by the Unified Foodservice Purchasing Cooperative to all members who consist of Taco Bell, KFC and Pizza Hut franchisees and the restaurants operated by TRICON. Prior to the PepsiCo, Inc. spin-off of its restaurant division, substantially all distribution services were provided by PepsiCo Food Systems, Inc., which was a wholly-owned subsidiary of PepsiCo, Inc.
Distribution. The Company entered into a two-year exclusive food and supplies distribution agreement with AmeriServe Food Distribution, Inc. ("AmeriServe") effective November 1, 1998. The initial term of the agreement will expire December 31, 2000 and provides two automatic renewal options for two years, each at market rates, not to exceed current rates. The terms of the contract provide incentives for using more efficient distribution practices and results in a reduction in the distribution costs incurred by the Company. AmeriServe acquired PepsiCo Food Systems ("PFS") in July 1997 and has been providing substantially all of the distribution services to the Company through its PFS relationship since the acquisition.
On January 31, 2000 AmeriServe filed for protection under Chapter 11 of the U.S. Bankruptcy Code. AmeriServe has advised its customers that it intends to prepare and file with the Bankruptcy Court a plan of reorganization in the future. TRICON and another major AmeriServe customer agreed to provide a $150 million interim "debtor in possession" revolving credit facility to AmeriServe. There can be no assurance that this $150 million debt facility will be sufficient to meet AmeriServe's cash requirements. TRICON, the purchasing cooperative for TRICON as well as key representatives of the TRICON Franchise Community are working together to proactively address the bankruptcy situation and develop appropriate contingency plans.
The Company believes that an alternate distributor or distributors can be obtained to meet the needs of the Company if AmeriServe is no longer able to adequately service its restaurants or if otherwise permitted by the Bankruptcy Court. There can be no assurance, however, that the cost of an alternate distributor or distributors would be at the same rates in which the Company currently pays AmeriServe and there can be no assurance that the process of obtaining an alternate distributor or distributors will not cause disruption of business. As mentioned previously, the Company has a multi-year contract with AmeriServe which is subject to the Bankruptcy Court procedures during the reorganization process.
As in most bankruptcies involving a primary supplier or distributor, the AmeriServe bankruptcy poses certain risks and uncertainties to the Company. Significant adverse developments in any of these risks or uncertainties could have a material adverse impact on the Company's results of operations, cash flows or financial position.
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 four to twelve 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 11 regions ranging from 40 to 90 stores per region. Each region is supervised by a regional manager. Oversight of the 11 regions is provided by three divisional vice presidents who are supported by administrative, marketing, construction and human resource staff..
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 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 28, 2000 the Company's Pizza Hut operations had approximately 15,200 employees, including 218 headquarters and staff personnel, three divisional operational vice presidents, 11 regional managers, 101 area general managers, 1,410 restaurant management employees and approximately 13,500 restaurant employees (of whom approximately 72% 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.
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 material compliance with all 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 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 negative 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 patterns 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.
Distribution. The Company's restaurants are dependent on frequent replenishment of the food ingredients and paper supplies. Significant interruptions in distribution services or the lack of distribution services could have a material adverse impact on the Company's results of operations, cash flows or financial position. (See "Pizza Hut Operations - Distribution" in this Item 1 relating to status of AmeriServe bankruptcy filing.)
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. 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 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.
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, with wood, brick or stucco exteriors and are substantially uniform in design and appearance. A new unit type, main path, which has no red roof and has a stucco exterior is targeted for metro markets and has a quick service platform. Property sites range from 25,000 to 45,000 square feet and accommodate parking for 30 to 70 cars. Typically, Pizza Hut restaurants contain from 1,800 to 3,600 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 vary 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 $650,000 to $800,000, or $800,000 to $1,300,000 including the cost of land acquisition.
The Company continually renovates and upgrades its existing restaurants. Such improvements generally include new interior and exterior decor and installation of more modern equipment.
The Company anticipates that the capital investment necessary for each delivery-only kitchen is approximately $100,000 in equipment and $150,000 in leasehold improvements. The cost of a CSC is approximately $150,000 in equipment and improvements.
The Pizza Hut restaurants and delivery units operated by the Company at March 28, 2000 are owned or leased as follows:
Leased from unrelated third parties 584 Land and building owned by the Company 145 Building owned by the Company and land leased 53
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. Generally the percentage rate is approximately 5% to 6% where both land and buildings are leased. Approximately 447 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. Some leases contain provisions requiring cost of living adjustments.
The Company leases parking lot space for one Pizza Hut unit from an officer of the Company. The rent is paid monthly at 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.
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 19 fee simple properties that had previously been operated by Skipper's and had been closed prior to the sale. Through March 28, 2000 the Company sold 17 fee simple properties leaving two properties for sale or lease. At March 28, 2000 both fee simple properties were unoccupied.
In addition to the properties held for sale the Company retained obligations related to 39 properties under operating leases that had previously been operated as Skipper's restaurants. Through March 28, 2000 the Company had bought out of 12 leases and seven leases had expired. At March 28, 2000 the Company remained obligated for 20 properties under operating leases, all of which have been subleased. These 20 leases have an average life of eight years with the longest lease extending approximately 25 years. The Company continues to pursue alternative methods of extinguishing these commitments under favorable economic terms.
In conjunction with the Company's asset re-imaging strategy (Pizza Huts) the Company has closed six fee simple properties. Through March 28, 2000 the Company had sold three fee simple properties leaving three properties for sale or lease at March 28, 2000. At March 28, 2000 these fee simple properties were unoccupied.
In addition to the properties held for sale the Company had obligations under operating leases for 22 properties at the beginning of fiscal 2000 and during the year the Company closed 41 additional leased properties. During fiscal 2000 the Company bought out of 17 leases and 29 leases expired. At March 28, 2000 the Company was still obligated for 17 properties under operating leases, five of which had been subleased. The Company continues to market the properties to other potential subtenants while also pursuing alternative methods of extinguishing these commitments under favorable economic terms.
ITEM 3.
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.
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 28, 2000.
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 67
James K. Schwartz President, Chief Operating Officer and Director 38
Troy D. Cook Senior Vice President, Chief Financial Officer, Treasurer and Secretary 37
D. Blayne Vaughn Vice President Pizza Hut Operations, Western Division 43
L. Bruce Sharp Vice President Pizza Hut Operations, Southern Division 42
Robert R. Greene Vice President Pizza Hut Operations, Eastern Division 40
Frank S. Covvey Vice President Information Systems 49
Linda K. Lierz Vice President Marketing 31
Lavonne K. Walbert Vice President Human Resources 36
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. Mr. Schwartz is a board member of the IPHFHA and the Unified Foodservice Purchasing Cooperative.
Troy D. Cook joined the Company in February 1995 as Vice President Finance, Chief Financial Officer, Treasurer and Assistant Secretary. During fiscal 1999 he was named Secretary and in March 1999 he was promoted to Senior Vice President. Prior to that he was Vice President, Finance and Chief Operating Officer of Oread Laboratories from 1991 to 1995. Mr. Cook is a certified public accountant.
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 R. Greene joined the Company in December 1987 as a restaurant manager and in 1989 was promoted to Area General Manager. He was promoted to Regional Manager in 1993 and Vice President of Pizza Hut operations for the Eastern Division in December 1999.
Frank S. Covvey joined the Company in July 1993 as Vice President Information Systems. Prior to that he was Director of Technology for The Ultimate Corp. from 1989 to 1993.
Linda K. Lierz joined the Company in January 1998 as Vice President Marketing. Prior to joining the Company she was National Marketing Manager for Captain D's Seafood restaurants.
Lavonne K. Walbert joined the Company in February 1999 as Vice President Human Resources. Prior to joining the Company she was Director of Human Resources for Western Auto Supply Company.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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:
CALENDAR PERIOD High Low
First Quarter 14 3/8 9 5/8 Second Quarter 14 3/16 12 Third Quarter 12 8 7/8 Fourth Quarter 12 5/8 10
First Quarter 17 3/8 10 1/2 Second Quarter 18 3/16 14 11/16 Third Quarter 16 7/8 10 5/8 Fourth Quarter 12 5/8 7 21/32
First Quarter 9 9/32 7 3/8
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 18, 2000 there were approximately 523 stockholders of record.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY
Fiscal Year Ended (Dollars in March March March March March thousands, 28, 30, 31, 25, 26, except per 2000 1999 1998 1 1997 1996 share data)
INCOME STATEMENT DATA: Revenue $ 455,624 $ 401,159 $ 455,297 $ 295,285 $ 324,986 Cost of sales 117,637 107,821 125,365 80,618 93,977 Direct labor 129,124 111,468 129,133 81,086 87,293 Other operating expenses 129,451 110,339 120,272 75,523 83,280 Income from restaurant operations 79,412 71,531 80,527 58,058 60,436 General and administrative expenses 22,487 20,983 23,930 17,710 21,084 Depreciation, amortization and pre-opening expenses 10,749 8,922 11,475 6,121 5,648 Operating income before impairment and loss provision, recapitalization and net facility action charges 46,176 41,626 45,122 34,227 33,704 Net facility action charges and impairment and loss provision 2 530 -- 14,100 -- 23,500
Operating income 45,646 41,626 31,022 34,227 10,204
Interest expense (11,282) (10,177) (15,655) (5,455) (6,317) Miscellaneous income (expense) 895 1,089 526 311 (341) Income before recapitalization gain 35,259 32,538 15,893 29,083 3,546
Recapitalization Gain 3 -- 39,400 -- -- -- Income before income taxes 35,259 71,938 15,893 29,083 3,546 Provision for income taxes 12,340 23,992 5,563 11,272 1,403 Income before cumulative effect of change in accounting principle 22,919 47,946 10,330 17,811 2,143 Cumulative effect of change in accounting principle, net of tax (114) -- -- -- -- Net income $ 22,805 $ 47,946 $ 10,330 $ 17,811 $ 2,143 Earnings per share before cumulative effect of change in accounting principle: Basic $.96 $1.95 $.42 $.72 $.09 Diluted $.95 $1.92 $.41 $.72 $.09 Cash dividend per share 4 $-- $-- $-- $-- $.421875
Fiscal Year Ended (Dollars in March March March March March thousands, 28, 30, 31, 25, 26, except per 2000 1999 1998 1 1997 1996 share data)
YEAR END DATA: Working capital deficit $(30,722) $(27,929) $(30,837) $(15,405) $ (1,782) Total assets 395,555 344,083 382,492 259,907 197,829 Long-term debt 166,900 123,500 204,033 116,777 73,328 Stockholders' equity 158,519 152,988 107,036 95,793 77,320 Number of Company-owned units 5 782 735 725 513 405 Number of franchised units 5 -- -- 147 140 142 Number of employees 15,200 14,400 16,000 12,000 9,800
1 Fiscal 1998 contained 53 weeks of operation. 2 The 2000 charge relates to facility action charges. 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. 3 Effective June 30, 1998 the Company completed the Recapitalization of its previously wholly-owned subsidiary, Romacorp. (See Note 6 to Consolidated Financial Statements.) 4 Declared August 8, 1995 related to Class A shares concurrent with the approval of a stock recapitalization plan. 5 Does not include two Tony Roma units operated as joint ventures by the Company through June 30, 1998.
ITEM 7.
ITEM 7. 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 18% of the domestic Pizza Hut franchised units and 12% of the entire Pizza Hut system. The Company operated its Pizza Hut units in 26 states during fiscal 2000.
The Company, through its wholly-owned subsidiary, Romacorp was also the owner/franchisor of the Tony Roma's concept, from its acquisition in June 1993 through June 30, 1998 when Romacorp was recapitalized. (See Note 6 to Consolidated Financial Statements.)
Products & Service - Pizza Hut's main product is high quality, innovative and moderately priced pizza. Additionally, the menu contains pasta, sandwiches, salad bar and a luncheon buffet. Pizza Hut provides a buffet with table service for beverages during lunch and full table service for dinner, with delivery and carryout available throughout the day.
Period of Operation - The Company operates on a 52 or 53 week fiscal year ending the last Tuesday in March. The fiscal years ended March 28, 2000 and March 30, 1999 each contained 52 weeks. The fiscal year ended March 31, 1998 contained 53 weeks.
DEVELOPMENT AND RE-IMAGING
Activity with respect to unit count during the year is set forth in the table below:
FISCAL 2000 ACTIVITY
Beginning Developed Acquired Closed 1 Ending
Company-Owned
Pizza Hut Restaurant 573 30 52 (40) 615 Delivery 162 11 18 (24) 167
Total Pizza Hut 735 41 70 (64) 782
1 Includes units which were relocated, consolidated, converted or scraped and rebuilt and five units closed without replacement.
See Note 5 to Consolidated Financial Statements for information related to facility actions and re-imaging activity and Note 11 to Consolidated Financial Statements for information related to acquisition activity.
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 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.
PIZZA HUT OPERATIONS SUMMARY (Dollars in thousands)
Fiscal Year Ended March 2000 1999 1998
Revenue: Restaurant Sales $354,318 $297,639 $286,631 Delivery Sales 101,306 78,893 73,776 Total Revenue $455,624 $376,532 $360,407
Restaurant Operating Expenses as a Percentage of Revenue: Total Expenses: 1 Cost of Sales 25.8% 26.6% 26.7% Direct Labor 28.3% 27.8% 28.4% Other 28.4% 27.9% 27.5% Total Operating Expenses 82.5% 82.3% 82.6% Restaurant Based Income 17.5% 17.7% 17.4%
Restaurant Expenses: 2 Cost of Sales 25.9% 26.7% 26.8% Direct Labor 27.3% 26.7% 27.2% Other 29.6% 28.8% 28.1% Total Operating Expenses 82.8% 82.2% 82.1% Restaurant Based Income 17.2% 17.8% 17.9%
Delivery Expenses: 3 Cost of Sales 25.4% 26.0% 26.4% Direct Labor 32.1% 32.1% 33.1% Other 24.2% 24.5% 25.4% Total Operating Expenses 81.7% 82.6% 84.9% Restaurant Based Income 18.3% 17.4% 15.1%
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 for fiscal 2000 totaled $455.6 million and was $79.1 million or 21% higher than fiscal 1999 revenue of $376.5 million. This growth was largely due to revenue contributed by the 99 units acquired in February 1999 and the 70 units acquired in July 1999. Comparable store sales increased 2.9%, which was largely driven by the continued success of the Big New Yorker Pizza and the favorable effects of the Company's asset re- imaging plan. Acquired unit sales combined with the comparable store sales improvement more than offset the impact of store closure activity for the fiscal year. Sales growth in re-imaged stores contributed 1.5% to comparable store sales growth for the fiscal year.
During fiscal 2000 the Company's delivery units generated comparable store sales growth of 2.7% while the Company's restaurant units also generated comparable sales growth of 2.9%. The Company's restaurant units are the primary beneficiaries of the Company's asset re-imaging plan; accordingly, the sales growth in these units includes the previously mentioned positive impact of this program.
Revenue was $376.5 million for the 52 weeks ended March 30, 1999 for an increase of $16.1 million or 4.5% over the $360.4 million reported during the 53 weeks ended March 31, 1998. The growth was primarily due to an increase in comparable sales of 4.4% and a late fiscal year acquisition of 99 units from PHI, which offset the impact of store closure activity throughout the year. Comparable store sales posted steady improvement in all asset types throughout fiscal 1999 culminating with 10.5% comparable store sales growth in the Company's fourth fiscal quarter. The comparable store sales growth achieved during the fourth fiscal quarter was primarily due to the introduction of the Big New Yorker Pizza which fueled growth across all asset types after its launch on January 28, 1999.
The fiscal 1999 comparable store sales trend was a continuation of improved comparable sales that began with the implementation of the Company's Delivery Dominance Program in the third quarter of fiscal 1998. Focus on this program continued in fiscal 1999 and increased marketing efforts as well as improved couponing strategies resulted in continued comparable store sales growth. For fiscal 1999 delivery units generated comparable store sales growth of 9.2% and peaked at 15.6% during the Company's fourth fiscal quarter. The Company's restaurant units also contributed to the improved comparable store sales trend with 3.2% comparable sales growth.
Costs and Expenses - Cost of sales as a percent of revenue decreased from 26.6% during fiscal 1999 to 25.8% during fiscal 2000. The decline in cheese costs of approximately 12% and reduced distribution costs (related to the new distribution contract) more than offset higher food cost associated with the Big New Yorker Pizza, increased paper costs associated with the Star Wars promotion and increases in other certain ingredients.
Cost of sales as a percent of revenue was 26.6% in fiscal 1999 compared to 26.7% in fiscal 1998 despite an increase in the average cost of cheese for the year of approximately 15%. This was achieved due to more normalized ingredient costs (except cheese), the benefit of supply contract negotiations, improved operational control in the stores acquired during fiscal 1998 and reduced distribution costs related to a new distribution contract entered into late in the fiscal year. (See "Pizza Hut Operations - Distribution" in Item 1 for additional information related to the Company's distribution contract.)
Direct labor as a percent of revenue increased to 28.3% during fiscal 2000 from 27.8% during fiscal 1999. Factors impacting this increase include the negative impact of continued wage inflation, higher labor cost in re-imaged new store openings and inefficiencies and training costs associated with the calendar 1999 acquisitions.
Direct labor as a percent of revenue improved from 28.4% during fiscal 1998 to 27.8% during fiscal 1999. This decline results from leverage associated with positive comparable sales volumes, labor efficiencies primarily achieved in stores acquired during fiscal 1998 and a reduction in workers' compensation expense. This improvement was achieved despite fourth fiscal quarter training costs incurred due to launch of the Big New Yorker Pizza and higher labor costs in the 99 units acquired February 4, 1999 due to training, transitional issues and historically higher labor costs.
Other operating costs as a percent of revenue increased from 27.9% in fiscal 1999 to 28.4% in fiscal 2000. This increase is largely due to an increase in the effective royalty rate of approximately 40 basis points (due to the 6.5% royalty rate on the 99-unit and 70-unit acquisitions) and increased depreciation associated with the re-imaging activity. The effect of this higher royalty rate structure was entirely reflected in the Company's restaurant units; the Company's delivery units were not impacted.
Other operating costs increased to 27.9% of revenue in fiscal 1999 from 27.5% in fiscal 1998. This increase is largely attributable to increased store manager bonuses due to improvements in controllable profit and increased couponing costs which were partially offset by the aforementioned leverage on fixed costs and a reduction in net delivery expenses.
TONY ROMA'S OPERATIONS SUMMARY (Dollars in thousands)
Thirteen Weeks Fiscal Year Ended Ended June 30, 1998 2 March 29, 1998 Revenue: Restaurant Sales $22,513 $86,408 Net Franchise Revenue 2,114 8,482 Total Revenue $24,627 $94,890 Restaurant Operating Expenses as a Percentage of Sales: Cost of Sales 34.8% 33.6% Direct Labor 30.2% 30.9% Other 23.5% 24.3% Total Operating Expenses 88.5% 88.8% Restaurant Based Income 11.5% 11.2% Income from System Operations 1 19.1% 19.1%
1 Net franchise revenue and restaurant based income as a percent of total revenue 2 Due to the recapitalization of Romacorp, effective June 30, 1998 information reflects activity through that date. (See Note 6 to Consolidated Financial Statements.)
TONY ROMA'S RESULTS OF OPERATIONS
As a result of the recapitalization of Romacorp effective June 30, 1998 Romacorp's results of operations are only included in fiscal 1999 results through the date of recapitalization. During the thirteen weeks ended June 30, 1998 restaurant sales were $22.5 million and income from restaurant operations, which included net franchise revenue, was $4.7 million.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated revenue in fiscal 2000 was $455.6 million for an increase of $54.5 million or 13.6% over the $401.2 million reported in fiscal 1999. This increase was largely due to calendar 1999 (169 units) acquisitions and was partially offset by the loss of revenue from Romacorp, which was recapitalized at the end of the Company's first quarter of fiscal 1999. Specifically, during fiscal 1999 revenue from Romacorp of $24.6 million was recorded during the 13 weeks prior to its recapitalization.
During the 52 weeks ended March 30, 1999 consolidated revenue was $401.2 million, which was 11.9% or $54.1 million below the $455.3 million reported during the 53 weeks ended March 31, 1998. The decline in revenue resulted primarily due to the recapitalization of Romacorp. During fiscal 1999 revenue from Romacorp of $24.6 million was recorded compared to revenue of $94.9 million recorded in fiscal 1998. Also contributing to the decrease in revenue was the closure of Pizza Hut units related to the Company's re-imaging strategy and the impact of an extra week of operations during fiscal 1998. The decline in consolidated revenue was partially offset by an increase in annual comparable store sales at Pizza Hut of approximately 4.4% and the acquisition of 99 units.
Consolidated income from restaurant operations was $79.4 million or 17.4% of revenue in fiscal 2000 compared to $71.5 million or 17.8% of revenue in fiscal 1999. The increase in nominal dollars was due to growth in unit count and was partially offset by the loss of earnings from Romacorp. The decline in consolidated income from restaurant operations as a percent of revenue was due to lower margin structure and higher royalty fees in the calendar 1999 acquisition units as well as the negative impact of wage inflation and higher labor costs of re-imaged new store openings.
Consolidated income from restaurant operations was $71.5 million or 17.8% of revenue for fiscal 1999 compared to $80.5 million or 17.7% in fiscal 1998. Income from restaurant operations as a percent of revenue increased over the prior year due to improved margin performance in the Company's Pizza Hut operations. The decrease in consolidated income from restaurant operations in nominal dollars was largely attributable to the loss of earnings from Romacorp and the extra week of operations in fiscal 1998 results.
Leverage from the Pizza Hut expansion resulted in a decrease in general and administrative expenses as a percent of revenue from 5.2% in fiscal 1999 to 4.9% in fiscal 2000. In terms of nominal dollars, general and administrative costs increased to $22.5 million in fiscal 2000 from $21 million in fiscal 1999, largely due to increased staffing levels associated with the calendar 1999 acquisitions.
General and administrative expenses were $21 million during fiscal 1999 compared to $23.9 million in fiscal 1998 for a decrease of $2.9 million or 12.3%. As a percent of revenue these costs were 5.2% during fiscal 1999 compared to 5.3% in fiscal 1998. The nominal dollar decrease and the decrease in these costs as a percent of revenue were due to the recapitalization of Romacorp, which historically had a higher percentage of such costs as a percentage of revenue.
Depreciation, amortization and pre-opening costs include depreciation of field and corporate equipment and facilities as well as the amortization of goodwill, franchise rights and pre- opening costs which effective fiscal 2000 are expensed as incurred as required by Statement of Position 98-5. These costs increased during fiscal 2000 due to increased franchise rights amortization associated with the calendar 1999 acquisitions, smallwares amortization and increased pre-opening costs (due to re-imaging activity). Pre-opening costs increased to $723 thousand from $183 thousand last year due to increased re-imaging activity and the change in accounting principle.
Depreciation, amortization and pre-opening costs declined in nominal dollars and as a percent of revenue during fiscal 1999 due to the reduction in amortization expense as a result of the recapitalization of Romacorp. Romacorp historically had a higher percentage of depreciation and amortization than the Company's Pizza Hut division resulting from amortization of goodwill and more significant amortization of pre-opening expenses.
As the calendar 1999 acquisitions were financed with debt, interest costs grew to $11.3 million in fiscal 2000 compared to $10.2 million in fiscal 1999.
Interest expense decreased to $10.2 million in fiscal 1999 from $15.7 million in fiscal 1998 due to debt reduction early in the year from the proceeds of the Romacorp recapitalization.
Miscellaneous income was $895 thousand during fiscal 2000 compared to $1.1 million reported in fiscal 1999 and $526 thousand reported in fiscal 1998. The increase for fiscal 1999 was due to an increase in the gain on sale or disposition of assets and business interruption proceeds.
In fiscal 2000 net income before cumulative effect of change in accounting principle was $22.9 million compared to $47.9 million reported during fiscal 1999. Net income in fiscal 1999 included a gain from the recapitalization of Romacorp of $39.4 million (pre-tax) or $26.8 million, net of tax. (See Note 6 to Consolidated Financial Statements.) Normalized for Romacorp's pro forma income contribution, net income was approximately $3.1 million or 15.5% higher in fiscal 2000 compared to fiscal 1999 due largely to income generated by acquired units. However, due largely to share repurchases, earnings per diluted share increased 19% on this basis.
Net income for fiscal 1999 was $47.9 million compared to $10.3 million reported during fiscal 1998. Fiscal 1999 net income included the aforementioned gain from the recapitalization of Romacorp. Additionally, the increase in net income over fiscal 1998 results was due to a $14.1 million pre-tax, or $9.2 million net of tax, asset impairment and loss charge recorded in the fourth quarter of fiscal 1998. Normalized for these items, net income was approximately 8.5% higher in fiscal 1999 compared to fiscal 1998 results which was primarily due to improved margins in the Company's Pizza Hut units.
Components of diluted earnings per share were as follows:
Fifty-Two Fifty-Two Fifty-Three Weeks Weeks Weeks Ended Ended Ended March March March 28, 30, 31, 2000 1999 1998
Net income before cumulative effect of change in accounting principle, facility action charges, and gain on recapitalization of Romacorp, net of tax $ .96 $ .85 $ .78
Gain on recapitalization of Romacorp, net of tax -- 1.07 --
Cumulative effect of change in accounting principle, net of tax (.01) -- --
Facility action charges, net of tax (.01) -- (.37)
Earnings per share - diluted $ .94 $1.92 $ .41
The Company's income tax provision for the fiscal years 2000, 1999 and 1998 resulted in effective tax rates of 35%, 33.4% and 35%, respectively. The reduction of the rate in fiscal 1999 resulted from a lower tax rate associated with the Romacorp recapitalization gain. (See Note 6 to Consolidated Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES
On March 28, 2000 the Company had a working capital deficit of $30.7 million compared to a $27.9 million deficit at March 30, 1999. The increase in the deficit was primarily due to the fiscal 2000 70-unit Pizza Hut acquisition. 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 28, 2000 the Company had a $15 million and a $185 million unsecured revolving credit facility of which $96.9 million was outstanding on the combined facilities. Availability under these facilities is reduced by outstanding letters of credit of which $6.5 million was issued at year-end.
The Company anticipates cash flow from operations and capacity under its existing line of credit will be sufficient to fund continuing expansion, acquisitions and improvements and to service debt obligations. The Company anticipates the utilization of sale-leaseback facilities in fiscal 2001 and beyond to partially fund the capital requirements associated with the Company's asset re-imaging program. 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. (See Note 3 to Consolidated Financial Statements.)
CASH FLOWS
Net cash provided by operating activities was $57 million in fiscal 2000 compared to $32.3 million in fiscal 1999, an increase of $24.7 million. Cash flow from operations was positively impacted by acquired stores, which like the Company, operate with a working capital deficit.
Net cash provided by operating activities was $32.3 million in fiscal 1999 compared to $65 million in fiscal 1998. Cash from operations in fiscal 1999 was positively impacted by acquired stores. Offsetting this positive impact to cash flows was the exclusion of cash provided by operations from Romacorp for the second through fourth quarters of fiscal 1999.
Investing activities include normal maintenance capital expenditures and include the development of restaurant units including relocations and conversions. Acquisitions consist of 70 Pizza Hut units in fiscal 2000, 99 Pizza Hut units in fiscal 1999 and 222 Pizza Hut units in fiscal 1998. Proceeds from the sale of fee simple properties associated primarily with the Skipper's and Pizza Hut's closure and disposition strategies have resulted in cash received of $1 million in fiscal 2000, $3.7 million in fiscal 1999 and $2.3 million in fiscal 1998.
The fiscal 2000 acquisition and fiscal 1999 acquisition were funded through the Company's unsecured revolving credit facility. Acquisitions completed during fiscal 1998 were funded through the revolving credit facility and the issuance of $50 million in senior unsecured notes.
During fiscal 2000 the Company increased the number of shares authorized by the Board of Directors for repurchase by two million shares. During the year the Company expended $18.3 million for the purchase of 2,215,300 shares of treasury stock. There were 752,400 shares that remained authorized for repurchase at March 28, 2000.
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. Currently, Congress is considering legislation which could increase the minimum wage by as much as $1 per hour over a two to three year period. Such legislation, if passed, would increase the Company's labor costs as a majority of the Company's food service personnel are paid at rates related to minimum wage. However, due to the uncertainty regarding this legislation, management cannot reliably estimate the potential impact upon labor costs at this time.
As discussed in "Pizza Hut Operations - Distribution" in Item 1, the Company's major distributor, AmeriServe, has filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Although the Company believes that an alternate distributor or distributors could be obtained to meet the needs of its restaurants (should it be necessary), it cannot be certain that the costs would be at the same rates in which the Company currently pays AmeriServe nor can it be certain that a disruption of services will not occur during the process of obtaining an alternate distributor or distributors. At this time, management cannot reliably estimate the impact upon cost of sales, if any, related to this situation.
Cheese represents approximately 40% of the cost of a pizza. The price of this commodity changes throughout the year due to changes in demand and supply resulting from school lunch programs, weather and other factors. Significant change in the price of cheese would have an impact on the Company's food cost as a percent of revenue.
Based upon available forecasts, management expects cheese costs for fiscal 2001 to be below last year's levels by approximately 10% with the primary benefit realized in the second and third quarters of fiscal 2001. Meat ingredient costs are expected to exceed fiscal 2000 levels by approximately 5% to 10%.
The Company is required to pay a franchise fee of 6.5% on the sales of certain of the 99 units acquired on February 4, 1999 and certain of the 70 units acquired on July 22, 1999 in accordance with the terms of the amended franchise agreement. This rate is 2.5% higher than the Company's current rate of 4%. The effect of this fee arrangement increased other operating costs by approximately 40 basis points during fiscal 2000. Future acquisitions will pay franchise fees at the higher rate and, as a result, such acquisitions will cause further increases in this category. These increases will be mitigated by future reductions in franchise fees achieved through re-imaging.
Increases in interest rates would directly affect the Company's financial results. Approximately 42% of the Company's debt are senior notes with fixed interest rates. Under the Company's revolving credit agreements alternative interest rate options are available which can be used to limit the Company's exposure to fluctuating rates.
FORWARD LOOKING COMMENTS
The statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other statements which are not historical facts contained herein are forward looking statements that involve risks and uncertainties. Forward looking statements can often be identified by the use of forward looking terminology, such as "believes," "expects," "may," "will," "should," "could," "intends," "plans," "estimates," or "anticipates," variations of these words or similar expressions. Among the factors that could cause actual results to be materially different from those described in the forward looking statements are the following: consumer demand and market acceptance risk; the effectiveness of franchisor advertising programs and the overall success of the Company's franchisor; the integration and assimilation of acquired restaurants; training and retention of skilled management and other restaurant personnel; federal or state minimum wage increases; the Company's ability to locate and secure acceptable restaurant sites; the effect of economic conditions, including interest rate fluctuations, the impact of competing restaurants and concepts, the cost of commodities and other food products, the availability of raw product and ingredients and distribution of products, labor shortages and costs and other risks detailed in the Company's Securities and Exchange Commission filings. Forward-looking statements are not guarantees of future performance or results.
OTHER
Recently Issued Accounting Pronouncements - The Financial Accounting Standards Board ("FASB") has issued SFAS No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities." This statement, as amended by SFAS No. 137, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The statement is required to be adopted by the Company in 2001. The Company does not anticipate that adoption of this statement will have a significant impact on its consolidated financial position or its future results of operations.
Impact of Year 2000 - In previous filings the Company disclosed the nature and progress of its plans to become Year 2000 ready. The Company completed its readiness program in December 1998 and performed testing throughout 1999. As a result of these efforts the Company experienced no significant disruptions in its operating or financial activities associated with computer systems or non-information technology equipment and believes those systems successfully responded to the Year 2000 date change. The Company is not aware of any material problems resulting from Year 2000 issues with its internal systems or the products and services of third parties such as suppliers and banks. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe it has any material exposure associated with market risk sensitive instruments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Management 21 Independent Auditors' Reports 22 Consolidated Balance Sheets - Assets, Liabilities and Stockholders' Equity as of March 28, 2000 and March 30, 1999 23 Consolidated Statements of Income for the fiscal years ended March 28, 2000, March 30, 1999 and March 31, 1998 24 Consolidated Statement of Stockholders' Equity for the fiscal years ended March 28, 2000, March 30, 1999 and March 31, 1998 25 Consolidated Statements of Cash Flows for the fiscal years ended March 28, 2000, March 30,1999 and March 31, 1998 26 Notes to Consolidated Financial Statements 27 - 35
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 accountants, KPMG 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 accountants at least twice per year to discuss the scope and major findings of the audit. The independent accountants 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 Senior Vice President 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 28, 2000 and March 30, 1999 and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These consolidated 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 auditing standards generally accepted in the United States of America. 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 2000 and 1999 consolidated financial statements referred to above present fairly, in all material respects, the financial position of NPC International, Inc. and Subsidiaries as of March 28, 2000 and March 30, 1999 and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles.
KPMG LLP Kansas City, Missouri April 28, 2000
Report of Independent Auditors
The Board of Directors and Stockholders NPC International, Inc. and Subsidiaries
We have audited the consolidated balance sheet of NPC International, Inc. and Subsidiaries (the "Company") as of March 31, 1998 (not presented herein) and the related consolidated statement of income, stockholders' equity and cash flows for the fiscal year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides 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 the consolidated results of their operations and their cash flows for the fiscal year then ended in conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP Kansas City, Missouri May 5, 1998
NPC International, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands)
ASSETS March 28, March 30, 2000 1999 Current assets: Cash and cash equivalents $ 3,842 $ 4,021 Accounts receivable, net 946 1,817 Inventories of food and supplies 3,154 2,972 Deferred income tax asset 3,218 3,064 Prepaid insurance premiums 948 963 Prepaid rent payments 1,581 1,486 Prepaid expenses and other current assets 682 1,429 Total current assets 14,371 15,752
Facilities and equipment, net 126,556 95,228 Franchise rights, less accumulated amortization of $33,605 and $25,122, respectively 239,607 217,995 Goodwill, less accumulated amortization of $1,562 and $1,432, respectively 2,578 2,708 Investments, at cost 6,738 6,750 Other assets 5,705 5,650
Total assets $ 395,555 $ 344,083
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Accounts payable $ 12,011 $ 12,506 Payroll taxes 2,150 2,046 Sales taxes 2,457 2,174 Accrued interest 3,509 3,088 Accrued payroll 9,775 9,042 Income tax payable 3,730 1,889 Current portion of closure reserve 1,000 2,260 Insurance reserves 5,277 4,934 Other accrued liabilities 5,184 5,742 Total current liabilities 45,093 43,681
Long-term debt 166,900 123,500 Deferred income tax liability 7,102 4,386 Closure reserve 4,205 5,691 Other deferred items 4,736 5,837 Insurance reserves 9,000 8,000
Stockholders' equity, net 27,592,510 shares outstanding, $.01 par value 158,519 152,988
Total liabilities and stockholders' equity $ 395,555 $ 344,083
The accompanying notes are an integral part of these consolidated financial statements.
NPC International, Inc. and Subsidiaries Consolidated Statements of Income (Dollars in thousands, except share data)
For the Fiscal Year Ended March March March 28, 30, 31, 2000 1999 1998
Net sales $ 455,624 $ 399,045 $ 446,815 Net franchise revenue -- 2,114 8,482 Total revenue 455,624 401,159 455,297
Cost of sales 117,637 107,821 125,365 Direct labor 129,124 111,468 129,133 Other 129,451 110,339 120,272 Total operating expenses 376,212 329,628 374,770
Income from restaurant operations 79,412 71,531 80,527
General and administrative expenses 22,487 20,983 23,930 Depreciation, amortization and pre-opening costs 10,749 8,922 11,475
Operating income before facility action charges 46,176 41,626 45,122
Net facility action charges and impairment and loss provision 530 -- 14,100 Operating income 45,646 41,626 31,022
Other income (expense): Interest expense (11,282) (10,177) (15,655) Miscellaneous 895 1,089 526 Gain on recapitalization of Romacorp -- 39,400 -- Income before income taxes 35,259 71,938 15,893
Provision for income taxes 12,340 23,992 5,563
Income before cumulative effect of change in accounting principle 22,919 47,946 10,330 Cumulative effect of change in accounting principle, net of tax (114) -- --
Net income $ 22,805 $ 47,946 $ 10,330
Earnings per share - basic before cumulative effect of change in accounting principle $ .96 $1.95 $ .42 Cumulative effect of change in a accounting principle (.01) -- -- Earnings per share - basic $ .95 $1.95 $ .42
Earnings per share - diluted before cumulative effect of change in accounting principle $ .95 $1.92 $ .41 Cumulative effect of change in accounting principle (.01) -- -- Earnings per share - diluted $ .94 $1.92 $ .41
Weighted average shares outstanding - basic 23,919,642 24,621,914 24,693,764 Weighted average shares outstanding - diluted 24,243,629 24,992,304 25,108,988
The accompanying notes are an integral part of these consolidated financial statements.
NPC International, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (Dollars in thousands)
Total Paid- Stock- Common in Retained Treasury holders' Stock Capital Earnings Stock Equity
Balance, March 25, 1997 $ 276 $20,978 $ 94,827 $(20,288) $95,793 Net income -- -- 10,330 -- 10,330 Exercise of stock options - 106,756 shares -- 55 -- 858 913
Balance, March 31, 1998 276 21,033 105,157 (19,430) 107,036 Net income -- -- 47,946 -- 47,946 Purchase of treasury stock - 378,800 shares -- -- -- (3,837) (3,837) Exercise of stock options - 166,277 shares -- 894 -- 949 1,843
Balance, March 30, 1999 276 21,927 153,103 (22,318) 152,988 Net income -- -- 22,805 -- 22,805 Purchase of treasury stock - 2,215,300 shares -- -- -- (18,284) (18,284) Exercise of stock options - 119,644 shares -- 48 -- 962 1,010
Balance, March 28, 2000 $ 276 $21,975 $ 175,908 $(39,640) $158,519
Common stock, $.01 par value, of 100 million shares is authorized, with 27,592,510 shares issued and outstanding.
Treasury stock is stated at cost and represents 5,158,730 and 3,063,074 shares at March 28, 2000 and March 30, 1999, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
NPC International, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands) For the Fiscal Year Ended March March March 28, 30, 31, 2000 1999 1998 Operating Activities
Net income $ 22,805 $ 47,946 $ 10,330
Non-cash items included in net income: Depreciation and amortization 26,870 23,503 28,849 Deferred income taxes 2,562 2,905 (5,662) Net facility action charges 530 -- 14,100 Non-cash gain on recapitalization of Romacorp -- (38,758) -- Change in assets and liabilities, net of acquisitions and recapitalization: Accounts receivable, net 871 (653) (840) Inventories of food and supplies 137 (548) (771) Prepaid expenses and other current assets (180) (1,335) (2,418) Accounts payable (495) (4,522) 5,264 Payroll taxes 104 637 (73) Accrued interest 421 (1,014) 2,133 Accrued payroll 733 1,170 4,257 Income tax payable 1,841 1,239 2,387 Insurance reserves 1,343 771 3,242 Other accrued liabilities (583) 945 4,158
Net cash flows provided by operating activities 56,959 32,286 64,956
Investing Activities
Net proceeds from recapitalization of Romacorp -- 101,237 -- Capital expenditures (42,716) (22,644) (28,795) Changes in other assets, net (4,920) (2,875) (614) Proceeds from sale of assets 1,647 3,663 2,308 Acquisitions, net of cash acquired (37,275) (31,000) (121,232)
Net cash flows (used in) provided by investing activities (83,264) 48,381 (148,333)
Financing Activities
Purchase of treasury stock (18,284) (3,837) -- Net change in revolving credit agreements 53,400 (69,200) 48,700 Net proceeds from issuance of long-term debt -- -- 49,756 Payment of long-term debt (10,000) (10,000) (11,444) Exercise of stock options 1,010 1,843 913 Net cash flows provided by (used in) financing activities 26,126 (81,194) 87,925
Net change in cash and cash equivalents (179) (527) 4,548
Cash and cash equivalents at beginning of year 4,021 4,548 --
Cash and cash equivalents at end of year $ 3,842 $ 4,021 $ 4,548
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE: 1 Summary of Significant Accounting Policies
Basis of Presentation and Consolidation - The financial statements include the accounts of NPC International, Inc. and its wholly-owned subsidiaries (the "Company"). Romacorp, a wholly- owned subsidiary of the Company until June 30, 1998 was recapitalized. (See Note 6 to Consolidated Financial Statements.) These financial statements include Romacorp's results of operations for the fiscal year ended March 1998 and the quarter ended June 30, 1998.
Fiscal Year - The Company operates on a 52 or 53 week fiscal year ending the last Tuesday in March. The fiscal years ended March 28, 2000 and March 30, 1999 each contained 52 weeks. The fiscal year ended March 31, 1998 contained 53 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 28, 2000 substantially all cash was in the form of depository accounts.
Inventories - Inventories of food and supplies are carried at the lower of cost (first-in, first-out method) or market.
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. Franchise rights are capitalized for accounting purposes and are amortized over their estimated economic life (original term plus option renewal period) on a straight-line basis. 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 certain services. Net franchise revenue is presented net of direct expenses.
Goodwill - Goodwill is amortized over periods ranging from 30 to 40 years.
Impairment of Long-Lived Assets - The Company reviews long- lived assets related to each restaurant annually for impairment or whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable. The Company evaluates restaurants using a "two-year history of cash flow losses" as the primary indicator of potential impairment. Based on the best information available the Company writes down an impaired restaurant to its estimated fair market value, which becomes its new cost basis. Estimated fair market value is determined by discounting estimated future cash flows including the estimated net realizable value of the property, if any. Additionally, when a decision is made to close a store beyond the quarter in which the closure decision is made, it is reviewed for impairment and depreciable lives are adjusted. The impairment evaluation is based on the estimated cash flows from continuing use until the expected disposal date plus the expected terminal value. Management judgement is necessary to estimate future cash flows. Accordingly, actual results could vary from management estimates.
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 $26.6 million of such costs in fiscal 2000 and $23.7 million and $23.8 million in fiscal 1999 and fiscal 1998, respectively.
Change in Accounting Principle - In May 1998 Statement of Position ("SOP") 98-5 "Accounting for 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. Previously, the Company capitalized costs associated with the opening of its restaurants and amortized those costs over 12 months from the unit's opening date. The Company adopted this statement during the quarter ended June 29, 1999 which resulted in a charge of $175 thousand or $114 thousand net of taxes to expense costs that had previously been capitalized prior to March 30, 1999. This change also resulted in the discontinuance of amortization of pre-opening cost expense in subsequent periods.
Related Party Transactions - During fiscal 1999 an officer of the Company purchased real estate from the Company in the amount of $511 thousand. Additionally, the Company utilized a corporate aircraft from a related party and incurred expense of approximately $100 thousand during fiscal 2000 and fiscal 1999. Management believes amounts paid were at least as favorable as could be obtained from unrelated parties.
Effective July 1, 1998 the Company entered into a services agreement with an unconsolidated entity, RRH. (See Note 6 to Consolidated Financial Statements.) In accordance with this agreement, as amended, the Company will provide accounting, management reporting and information services to RRH through July 29, 2001. Fees earned under this agreement were $777 thousand during fiscal 2000 and $564 thousand during fiscal 1999. These fees are recorded as an offset to general and administrative expenses.
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 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 basis over the economic life of the lease or the life of the improvements, whichever is shorter. Facilities and equipment consist of the following:
Estimated March 28, March 30, (Dollars in thousands) Useful Life 2000 1999
Land $ 27,143 $ 17,973 Buildings 15-20 years 47,207 37,849 Leasehold improvements 5-20 years 47,863 37,344 Furniture and equipment 3-10 years 72,050 63,128 Construction in progress 9,324 3,437 203,587 159,731
Less accumulated depreciation (77,031) (64,503)
Net facilities and equipment $ 126,556 $ 95,228
NOTE 3: Bank Debt and Senior Notes
The Company's debt consists of revolving credit facilities and senior notes. At March 28, 2000 debt totaled $166.9 million which consisted of $96.9 million of revolving credit and $70 million of senior notes. At March 30, 1999 total debt was $123.5 million, including $43.5 million of revolving credit and $80 million of senior notes.
The Company's unsecured revolving credit facilities total $200 million until May 2001 and provide the option to pay interest at "LIBOR" or the "fed funds" rate plus a margin (6.961% and 7.063%, respectively, at March 28, 2000). Availability under these facilities is reduced by letters of credit, of which $6.5 million were issued at March 28, 2000. Commitment fees of .25% per annum are paid on the unused balance of the facilities and are included in interest expense.
The Company's senior notes are unsecured and bear interest at various rates from 6.35% to 9.09%. The senior notes have scheduled maturities through May 2006 with aggregate maturities as follows: fiscal 2001 - $10 million, fiscal 2002 - $6 million, fiscal 2003 - $14 million, fiscal 2004 - $10 million, fiscal 2005 - - $10 million and $20 million in years beyond. 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 debt facilities contain restrictions on additional borrowing and dividend payments as well as requirements to maintain various financial ratios and a minimum net worth. Retained earnings of $38.5 million was available for the payment of dividends at March 28, 2000 under existing debt covenants. The average amount outstanding on the revolving credit and senior note facilities for the year ended March 28, 2000 was $151.4 million and the maximum borrowings were $177.7 million. Weighted average interest rates during fiscal years 2000, 1999 and 1998 were 7.41%, 7.40% and 7.52%, respectively. Based on current market interest rates, management believes that the carrying amounts of its debt facilities approximate fair value.
Cash paid for interest in fiscal years 2000, 1999 and 1998 was $10.9 million, $11 million and $13.7 million, respectively.
NOTE 4: Employee Benefit Plans
The Company's defined contribution plans include a Profit Sharing Plan, a 401(k) Plan and a Deferred Compensation Plan. In accordance with the provisions of the plans, the Company provides a matching contribution to the 401(k) and the Deferred Compensation Plan. Contributions made by the Company for these plans were $486 thousand, $1 million and $831 thousand for fiscal years 2000, 1999 and 1998, respectively.
In addition, the Company entered into deferred compensation contracts with certain key executives during fiscal 1999. Funding of this plan is not required. The Company recorded expense related to these contracts of $361 thousand for fiscal 2000 and $90 thousand for fiscal 1999.
NOTE 5: Facility Actions and Closure Reserves
In the fourth quarter of fiscal 1998 the Company initiated an asset re-imaging strategy. This plan called for the closure of 31 units, the consolidation of 11 units into existing locations and the consolidation and relocation of 53 Pizza Hut units to 45 new locations to redefine trade areas, improve market presence and to upgrade certain assets to more competitive formats. Relocated units are moved to improved trade areas and fall into the following categories: relocation of delivery units to more visible locations and formats; relocation of older dine-in assets in rural markets to new prototype units; and conversion of certain metro markets to main-path restaurants.
Of the 95 units to be closed as part of this strategy, 78 units have been closed including 23 units during fiscal 2000. Thirteen remaining units are expected to close in fiscal 2001 and four units will remain in operation. During fiscal 2000 the Company has been able to extinguish certain lease liabilities for several closed units at terms more favorable than anticipated when the estimated liability was initially established. Additionally, five leases have been restructured making it feasible to scrape (demolish) the existing building and rebuild a new facility at the current location, thereby making it unnecessary to abandon the site and incur the related closing costs. Furthermore, the Company has concluded that four units originally identified for closure will remain in operation at their current locations due to improvement in store performance and outlook resulting primarily from surrounding positive economic changes. As a result of these specific events, during fiscal 2000 the Company updated its estimate of the liability needed to complete the re-imaging strategy and determined that it was appropriate to reverse $1.18 million of the $11.4 million impairment and loss provision recorded in March 1998.
Below is a summary of the charges/disbursements that were planned as part of the 1998 impairment and loss provision related to the Company's re-imaging plan:
Fiscal Year Ended From (Dollars in thousands) March Plan 28, 2000 Inception
Beginning Balance $ 4,500 $ 11,400 Planned charges / disbursements (1,559) (8,459) (Income) expense impacts: Favorable changes to lease terms and other estimates (1,010) (1,010) Modifications due to economic changes (170) (170) Sub-total (1,180) (1,180)
Balance at March 28, 2000 $ 1,761 $ 1,761
The balance at March 28, 2000 is included in "closure reserves" on the Company's balance sheet and consists of estimates of obligations to be paid subsequent to the closure of the unit and cost to de-identify the assets upon closure as required by the Company's franchise agreement. The amount utilized from plan inception includes $6.6 million related to impairment and loss on disposition of assets. Management believes the remaining balance is adequate to complete the 1998 re-imaging plan. However, the estimate includes assumptions regarding the Company's ability to sub-lease properties and/or buy out of lease obligations; accordingly, actual results could differ from amounts estimated. Amounts utilized apply only to actions provided for in the plan.
In addition to units closed as part of the 1998 re-imaging plan the Company has recorded additional closure provisions during fiscal 2000. During fiscal 2000 the Company recorded a $1.7 million provision for facility actions at 39 locations consisting of $1.2 million for assets that were impaired as a result of the closure decision and $500 thousand of de-identification costs and contractual lease carry costs. Of the 39 properties included in these charges, four units will close without replacement. These four units generated approximately $994 thousand in sales and $93 thousand in net loss from restaurant operations during fiscal 2000.
Below is a summary of the charges/disbursements that were planned as part of the fiscal 2000 re-imaging provisions:
Number (Dollars in thousands) of Units Fiscal 2000
Beginning Balance $ --
Provision 39 1,710
Planned charges / disbursements (1,370)
Balance at March 28, 2000 $ 340
During fiscal 2000 the Company recorded $1.7 million as a provision for fiscal 2000 facility actions. Offsetting these charges was the $1.18 million reversal of the fiscal 1998 charge resulting in net charge from facility actions of $530 thousand for fiscal 2000.
The Company expects to continue to accrue contractual closure costs, and, if appropriate, impair asset values at the time the decision is made to close or relocate. These closure decisions under future phases of the Company's asset re-imaging initiative are expected to be made as often as quarterly.
Skipper's Reserves - Effective March 25, 1996 the Company sold Skipper's Inc. but retained certain assets and liabilities primarily related to the closure of 77 properties in February 1995. The retained assets were recorded at fair value in accordance with SFAS No. 121 and the remaining assets are reflected in assets held for sale. At March 28, 2000 the remaining closure reserve consists largely of future net lease carry costs associated with 20 leased properties with remaining lease obligations and estimated future carry costs associated with two remaining fee simple properties. The average term of these leased properties is 8 years with the longest obligation being 25 years. Below is a summary of disbursements related to the Company's Skipper's reserve:
(Dollars in thousands) Fiscal 2000
Beginning Balance $ 3,428 Planned charges / disbursements (324)
Balance at March 28, 2000 $ 3,104
NOTE 6: Recapitalization
On June 30, 1998 the Company received $101 million for a majority portion of its investment in Romacorp resulting in a net gain of $39.4 million. The Company's remaining minority interest of 19.9% is carried at cost of $6.7 million. Romacorp was a wholly- owned subsidiary of the Company throughout the Company's first fiscal quarter ended June 30, 1998; its results of operations through that date have been consolidated and reflected in the Consolidated Statements of Income for the fiscal year ended March 30, 1999.
NOTE 7: Income Taxes
The provision (benefit) for income taxes consisted of the following:
For the fiscal year ended March March March 28, 30, 31, (Dollars in thousands) 2000 1999 1998
Current: Federal $ 9,368 $ 20,405 $ 9,856 State/Foreign 349 576 1,369 9,717 20,981 11,225
Deferred: Federal 2,530 2,934 (4,972) State/Foreign 93 77 (690) 2,623 3,011 (5,662)
Provision for income taxes $12,340 $ 23,992 $ 5,563
The cumulative effect of the change in accounting principle of $175 thousand before income taxes resulted in a $61 thousand deferred tax benefit in fiscal 2000.
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 March March March 28, 30, 31, (Dollars in thousands) 2000 1999 1998
Tax computed at statutory rate $12,340 $25,178 $ 5,563 State taxes, net of federal effect ,and other, including goodwill amortization, the impact of the Romacorp recapitaliza- tion and tax credits -- (1,186) --
Provision for income taxes $12,340 $23,992 $ 5,563
Significant components of the Company's deferred tax assets and liabilities are as follows:
March 28, March 30, (Dollars in thousands) 2000 1999
Deferred tax assets:
Insurance reserves $ 5,095 $4,478 Closure reserves 2,111 2,970 Other, net 1,336 1,159 Total deferred tax assets 8,542 8,607
Deferred tax liabilities:
Depreciation and amortization (11,409) (8,817) Other, net (1,017) (1,112) Total deferred tax liabilities (12,426) (9,929)
Net deferred tax liability (3,884) (1,322)
Current 3,218 3,064 Non-current (7,102) (4,386)
Cash paid for income taxes in fiscal 2000, 1999 and 1998 was $8.1 million, $19 million and $8.5 million, respectively.
NOTE 8: Commitments
The Company leases certain restaurant equipment and buildings under operating leases. Rent expense for fiscal 2000, 1999 and 1998 was $19 million, $16.8 million and $19.3 million, respectively, including contingent rents of approximately $1.1 million, $1.1 million and $1.4 million, respectively. The majority of the Company's leases contain renewal options for 1 to 5 years. The remaining leases may be renewed upon negotiations. Minimum lease payments for the next five years, including non-operating assets, at March 28, 2000 consisted of:
Fiscal Year (Dollars in thousands)
2001 $ 17,013 2002 14,465 2003 12,233 2004 10,280 2005 8,675 Thereafter 28,991
Total minimum lease commitments $ 91,657
Total minimum lease payments have not been reduced by minimum sublease rentals of $4.7 million under operating leases due in the future under non-cancelable subleases.
NOTE 9: Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
Fiscal Year Ended (Amounts in thousands, March 28, March 30, March 31, except per share data) 2000 1999 1998
Numerator: Income before cumulative change in accounting principle $ 22,919 $ 47,946 $ 10,330
Denominator: Weighted average shares 23,920 24,622 24,694 Employee stock options 324 370 415
Denominator for diluted earnings per share 24,244 24,992 25,109
Earnings per share - basic $ .96 $1.95 $.42
Earnings per share - diluted $ .95 $1.92 $.41
NOTE 10: Stock Options
A summary of the Company's stock option activity and related information is presented below:
March 28, March 30, March 31, 2000 1999 1998 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise (Options Options Price Options Price Options Price in thousands)
Outstanding- beginning of year 1,566 $8.21 1,857 $ 7.77 1,763 $7.36 Granted 403 $9.59 203 $11.17 258 $9.76 Canceled (150) $9.99 (176) $ 8.81 (51) $6.56 Exercised (120) $6.62 (318) $ 7.20 (113) $6.49
Outstanding- end of year 1,699 $8.49 1,566 $ 8.21 1,857 $7.77
Exercisable-end of year 1,151 $7.91 1,157 $ 7.65 1,263 $7.51
Weighted average fair value per share of options granted during the year $3.69 $ 3.93 $3.77
Exercise prices for options outstanding as of March 28, 2000 ranged from $5.00 to $14.75 and the weighted average remaining contractual life is 5 years.
The Company has a 1994 Non-Qualified Stock Option Plan under which 3,291,450 shares of common stock are reserved for issuance to employees and officers at an exercise price equal to the fair market value of the common stock on the date of grant and vest over a four-year period in equal annual amounts and expire 10 years from the date of grant.
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.
The following table summarizes information about stock options as of March 28, 2000:
(Shares) Outstanding Stock Exercisable Stock in thousands) Options Options Weighted Average Weighted Weighted Number Remaining Average Number Average of Contractual Exercise of Exercise Shares Life Price Shares Price
Range of Exercise Prices
$ 5.00 to $ 7.375 659 4.8 years $ 6.33 567 $ 6.16 $ 7.656 to $11.25 959 4.9 years $ 9.60 566 $ 9.53 $11.50 to $14.75 81 8.4 years $ 12.92 17 $12.37
The Company measures pro forma compensation expense of its employee stock options using the intrinsic value based method of accounting. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 "Accounting for Stock-Based Compensation". The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2000, 1999 and 1998; risk-free interest rate of 6.28%, 4.87% and 5.96%, respectively; volatility factor of the expected market price of the Company's common stock of 30.6%, 29.8% and 28.9%, respectively, and an average expected life of the option of 5 years.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
(Dollars in thousands, except per share data)
2000 1999 1998 As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma
Income before cumulative effect of change in accounting principle $22,919 $22,639 $47,946 $47,656 $10,330 $10,070
Earnings per share - basic $.96 $.95 $1.95 $1.94 $.42 $.41
Earnings per share - diluted $.95 $.93 $1.92 $1.91 $.41 $.40
NOTE 11: Acquisitions
Between March 27, 1997 and July 22, 1999 the Company acquired 391 Pizza Hut units, including 287 from PHI and 104 from other franchisees. These acquisitions were funded through the Company's revolving credit facility or the issuance of senior notes. The purchase prices of these acquisitions were allocated between facilities and equipment and franchise rights. The following table summarizes these acquisitions:
(Dollars in millions) Purchase # Units Purchased Acquired From Date Price Fiscal Fiscal Fiscal 2000 1999 1998
PHI 3/27/97 $28.1 -- -- 66 6/5/97 $31.0 -- -- 52 2/4/99 $31.0 1 -- 99 -- 7/22/99 $33.6 70 -- --
Other Franchisees: 4/16/97 $ 2.5 -- -- 4 5/15/97 $57.0 -- -- 100
Total Units Acquired 70 99 222
1 Does not include land purchased from seller in August 1999 for $2.6 million.
In May 2000 the Company signed a letter of intent with PHI to acquire 64 units in a transaction scheduled to close in June 2000. This transaction will be funded through additional borrowings through the Company's revolving credit facility.
The following table indicates the pro forma results of the 99-unit acquisition which was completed on February 4, 1999. Pro forma results are not presented for the 70-unit acquisition in July 1999, due to the size of the acquisition. Pro Forma Results (unaudited)
(Dollars in thousands, March 30, March 31, except per share data) 1999 1998
As reported: Total revenues $401,159 $455,297 Net income 47,946 10,330 Net income per share-basic 1.95 .42 Net income per share-diluted 1.92 .41
Pro forma: Total revenues $449,098 $510,854 Pro forma net income 48,502 11,098 Pro forma net income per share-basic 1.97 .45 Pro forma net income per share-diluted 1.94 .44
The table presents unaudited pro forma results for fiscal 1999 and 1998 assuming all units had been acquired as of the beginning of the periods presented and reflects certain adjustments.
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 or results that may occur in the future.
NOTE 12: Quarterly Results (unaudited)
(Dollars in thousands, First Second Third Fourth Annual except per Fiscal Fiscal Fiscal Fiscal Fiscal share data) Quarter Quarter Quarter Quarter Total
Year Ended March 28, 2000 Revenue $107,676 $113,494 $114,544 $119,910 $455,624 Income from restaurant operations 20,141 18,063 19,113 22,095 79,412 Net facility action charges 270 (580) 500 340 530 Cumulative effect of change in accounting principle 114 -- -- -- 114 Net income 6,563 5,260 4,734 6,248 22,805 Earnings per share - basic .26 .21 .20 .28 .95 Earnings per share - diluted .26 .21 .19 .28 .94
Year Ended March 30, 1999 Revenue $115,502 $ 90,407 $ 89,429 $105,821 $401,159 Income from restaurant operations 22,187 15,473 14,324 19,547 71,531 Gain on recapitalization 39,400 -- -- -- 39,400 Net income 33,150 4,686 3,889 6,221 47,946 Earnings per share - basic 1.34 .19 .16 .25 1.95 Earnings per share - diluted 1.31 .19 .16 .25 1.92
ITEM 9.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective August 16, 1999 as discussed in the Company's filing on From 8-K/A dated August 16, 1999 the Audit Committee recommended and the Board of Directors approved the selection of KPMG LLP as independent public accountants of the Company for the fiscal year ended March 28, 2000. KPMG LLP audited the financial statements of the Company for fiscal years ended March 30, 1999 and March 28, 2000. A representative of KPMG LLP will be present at the Annual Meeting with the opportunity to make a statement if he desires to do so and will be available to respond to appropriate questions.
KPMG LLP's reports on the Company's financial statements for the fiscal years ended March 28, 2000 and March 30, 1999 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal years ended March 28, 2000 and March 30, 1999 there were no disagreements with KPMG LLP on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of KPMG LLP, would have caused it to make a reference to the subject matter of the disagreement in connection with their audit report.
During the fiscal years ended March 28, 2000 and March 30, 1999 there were no reportable events (as defined in Securities and Exchange Commission Regulations S-K Item 304(a)(1)(v)).
Effective July 27, 1998 as discussed in the Company's filing on Form 8-K dated July 30, 1998, the Company's Audit Committee recommended and the Board of Directors approved a change in independent accountants from Ernst & Young LLP to PricewaterhouseCoopers LLP.
PricewaterhouseCoopers LLP's report on the Company's financial statements for the fiscal year ended March 30, 1999 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal year ended March 30, 1999 there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make a reference to the subject matter of the disagreements in connection with its audit report.
During the fiscal year ended March 30, 1999 there were no reportable events (as defined in Securities and Exchange Commission Regulations S-K Item 304(a)(1)(v)).
Ernst & Young LLP's report on the Company's financial statements for the fiscal year ended March 31, 1998 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal year ended March 31, 1998 and during subsequent interim periods though June 30, 1998 there were no disagreements with Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Ernst & Young LLP, would have caused it to make a reference to the subject matter of the disagreements in connection with its audit reports.
During the fiscal year ended March 31, 1998 and during subsequent interim periods through June 30, 1998 there were no reportable events (as defined in Securities and Exchange Commission Regulations S-K Item 304(a)(1)(v)).
PART III
ITEM 10.
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 11, 2000 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.
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.
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.
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.
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
Report of Independent Accountants
Consolidated Balance Sheets as of March 28, 2000 and March 30, 1999
Consolidated Statements of Income for the years ended March 28, 2000, March 30, 1999 and March 31, 1998
Consolidated Statements of Stockholders' Equity for the years ended March 28, 2000, March 30, 1999 and March 31,
Consolidated Statements of Cash Flows for the years ended March 28, 2000, March 30, 1999 and March 31, 1998
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 Recapitalization Agreement Exhibit 2-A to among Romacorp, Inc., Form 8-K NPC International, Inc., filed May 8, 1998 NPC Restaurant Holdings, EDGAR 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-K Restated Articles of filed 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 Statement for Annual of Incorporation of National Meeting filed June 13, Pizza Company 1994 Effective July 12, 1994 EDGAR 748714-94-000007
4.1 Specimen Stock Certificate Exhibit 1 to Form 8-A for Common Stock filed July 31, 1995 EDGAR 748714-94-000016
10.01 Franchise Agreement between Exhibit 10.01 to Form Pizza Hut, Inc. and 10-Q filed NPC International, Inc. August 1, 1994 (sample document) effective EDGAR 748714-94-000 March 30, 1994 016
10.02 Assignment of and Blanket Exhibit 10.02 to Form Amendment to Franchise 10-K filed Agreements June 6, 1997 EDGAR 748714-97-000017
10.03 1995 Franchise Agreement Exhibit 10.03 to Form between Pizza Hut, Inc. 10-K filed and NPC Management, Inc. June 6, 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 July 1, 1992, as amended ended 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 Form NPC International, 10-K Inc. Profit Sharing Plan filed June 6, 1997 dated July 1, 1992 EDGAR 748714-97-000017
10.06 Fifth Amendment to the Exhibit 10.06 to Form NPC International, Inc. 10-K Profit Sharing Plan filed June 6, 1997 effective July 12, 1994 EDGAR 748714-97-000017
10.07 Sixth Amendment to the Exhibit 10.07 to Form NPC International, Inc. 10-K filed Profit Sharing Plan dated June 6, 1997 January 1, 1997 EDGAR 748714-97-000017
10.08 Seventh Amendment to the Exhibit 10.08 to Form NPC International, Inc. 10-K Profit Sharing Plan filed June 6, 1997 effective 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 Option Plan June 25, 1990
10.10 NPC International, Inc. 1994 Exhibit A to Proxy Stock Option Statement to Annual Plan 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 Mutual Life Insurance Company, ended March 30, 1993 Pacific Corinthian Life Insurance Company, Lutheran Brotherhood Exhibit 10.39 to Form and NPC International, Inc., 10-K for the year as amended ended 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 Form Purchase Agreement 10-K filed June 6, made by and between Pacific 1997 Mutual Life Insurance EDGAR 748714-97-000017 Company, Pacific 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 Form Purchase Agreement 10-K filed June 6, made by and between Pacific 1997 Mutual Life Insurance EDGAR 748714-97-000017 Company, Pacific 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 Form Purchase Agreement 10-K made by and between Pacific filed June 6, 1997 Mutual Life Insurance EDGAR 748714-97-000017 Company, Pacific Corinthian Life Insurance Company, Lutheran Brotherhood and NPC International, Inc. dated May 8, 1997
10.15 NPC Management, Inc. Exhibit 10.15 to Form $50 million 7.94% Senior 10-K Guaranteed Notes due May 1, filed June 6, 1997 2006, dated May 1, 1997 EDGAR 748714-97-000017
10.16 $160 million Revolving Credit Exhibit 10.16 to Form Agreement dated 10-K as of March 5, 1997 among filed June 6, 1997 NPC International, EDGAR 748714-97-000017 Inc., various banks and Texas 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 Form Credit Agreement 10-K dated May 8, 1997, effective filed June 6, 1997 March 26, 1997, among EDGAR 748714-97-000017 NPC Management, Inc., 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 Form Agreement dated as of March 5, 10-K filed 1997 among NPC International, June 6,1997 Inc., various banks and Texas EDGAR 748714-97-000017 Commerce Bank National Association as Agent
10.19 $15 Million Amended and Exhibit 10.19 to Form Restated Revolving 10-K Credit Agreement dated as filed June 6, 1997 of May 8, 1997 among EDGAR 748714-97-000017 NPC International, Inc., various banks and Texas Commerce Bank National Association as Agent
10.20 Amended and Restated Exhibit 10.20 to Form Master Shelf and 10-K Assumption Agreement dated filed June 6, 1997 May 8, 1997, effective EDGAR 748714-97-000017 March 26, 1997, 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
10.23 Acquisition agreement by and Exhibit 2.0 to Form 8-K 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 Agreement Exhibit 2.2 to Form 8-K 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 Amendment to Assignment of Exhibit 10.29 to Form and Blanket 10-K for the year Amendment to Franchise Agreements ended March 31, 1998
10.29 Amendment to the Adoption Exhibit 10.29 to Form Agreement of the 10-K for the year ended Existing Retirement March 30, 1999 Plan to Activate the 401(k) Plan effective January 1, 1999
10.30 NPC International, Inc. Exhibit 10.30 to Form Non-Qualified 10-K for the year Executive Deferred ended March 30, 1999 Compensation Plan Effective December 1, 1998
10.31 NPC International, Inc. Exhibit 10.31 to Form Deferred Compensation and 10-K for the year Retirement Plan ended March 30, 1999 Established January 1, 1999
10.32 Pizza Hut National Purchasing Exhibit 10.32 to Form Coop, Inc. Membership 10-K for the year Subscription and ended March 30, 1999 Commitment Agreement
11 Statement Regarding Computation Exhibit 11 to Form 10-K of Per Share Earnings for the year ended March 28, 2000
16 Letter Regarding Change Exhibit 16 to Form 8-K/A in Certifying Accountants filed August 18, 1999
16 Letter Regarding Change Exhibit 16 to Form 8-K in Certifying Accountants filed July 30, 1998
21 List of Subsidiaries Exhibit 21 to Form 10-K for the year ended March 28, 2000
23 Consent of Independent Auditors Exhibit 23 to Form 10-K for the year ended March 28, 2000
27 Financial Data Schedule Exhibit 27 to Form 10-K for the year ended March 28, 2000
(b) Reports on Form 8-K:
The following forms were filed on Form 8-K during the quarter ended March 28, 2000:
Announcement addressing AmeriServe Bankruptcy filed January 31, 2000.
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 26th day of May, 2000 on its behalf by the undersigned, thereunto duly authorized.
NPC INTERNATIONAL, INC.
By Troy D. Cook Senior Vice President, Chief Financial Officer, Treasurer, Secretary (Principal Financial 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 26th day of May, 2000.
Chairman of the Board, O. Gene Bicknell Chief Executive Officer and Director (Principal Executive Officer)
President, Chief Operating James K. Schwartz Officer and Director
Senior Vice President, Chief Troy D. Cook Financial Officer, Treasurer and Secretary (Principal Financial Officer)
Director Fran D. Jabara
Director Robert E. Cressler
Director Michael Braude
Director William A. Freeman
Director Michael W. Gullion
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Fiscal Year Ended (Dollars in thousands, March 28, March 30, March 31, except share data) 2000 1999 1998
Numerator: Income before cumulative Change in accounting principle $ 22,919 $ 47,946 $ 10,330
Denominator: Denominator for basic earnings per share - weighted average shares 23,920 24,622 24,694 Effect of dilutive securities: employee stock options 324 370 415
Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 24,244 24,992 25,109
Earnings per share - basic $.96 $1.95 $.42 Earnings per share - dilutive $.95 $1.92 $.41
Exhibit 21
NPC International, Inc. List of Subsidiaries
NPC Management, Inc. NPC Restaurant Holdings, Inc. NPC Restaurants LP National Catering Company Seattle Restaurant Equipment Company, Inc.
Exhibit 23
NPC International, Inc. Consent of Independent Accountants
We 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 April 28, 2000, with respect to the consolidated financial statements included in the Annual Report (Form 10-K) of NPC International, Inc.
KPMG LLP
Kansas City, Missouri May 26, 2000
NPC International, Inc. Consent of Independent Auditors
We 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 statement included in the Annual Report (Form 10-K) of NPC International, Inc. for the year ended March 28, 2000.
ERNST & YOUNG LLP
Kansas City, Missouri May 26, 2000
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.
Corporate Officers, Directors and Key Personnel
O. Gene Bicknell Chairman of the Board, Chief Executive Officer and Director
James K. Schwartz President, Chief Operating Officer and Director
Troy D. Cook Senior Vice President, Chief Financial Officer, Treasurer and Secretary
D. Blayne Vaughn Vice President, Pizza Hut Operations Western Division
L. Bruce Sharp Vice President, Pizza Hut Operations Southern Division
Robert R. Greene Vice President, Pizza Hut Operations Eastern Division
LaVonne K. Walbert Vice President Human Resources
Linda K. Lierz Vice President Marketing
Frank S. Covvey Vice President Information Systems
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.
William A. Freeman, Director Senior Vice President and Chief Financial Officer of Semitool, Inc.
Michael Braude, Director President and Chief Executive Officer of the Kansas City Board of Trade
Michael W. Gullion, Director Chairman of the Board of Directors and Chief Executive Officer of Gold Banc Corporation, Inc.
Independent Accountants KPMG LLP 1000 Walnut, Ste. 1600 Kansas City, MO 64106