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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 28, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 333-62615
______________________________
ROMACORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4010466
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9304 Forest Lane, Suite 200
Dallas, Texas 75243
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code:
(214) 343-7800
______________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
______________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
X No ____
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. [ ]
As of March 28, 1999, 100 shares of Common Stock, $.01 par value,
were outstanding and held by Roma Restaurant Holdings, Inc.
==========================================================================
PART I
ITEM 1. BUSINESS
Romacorp, Inc. (the Company) is the operator and franchisor of the
largest national, casual dining chain specializing in ribs with 211
restaurants located in 27 states in the United States and in 20 foreign
countries and territories. Founded in Miami in 1972, the Company's
restaurants are primarily located in Florida, Texas and California. Both
the Tony Roma's name and its "Famous for Ribs" and "Tony Roma's A Place
for Ribs" slogans are well-recognized throughout the United States. The
restaurants offer a full and varied menu, including ribs, chicken,
steaks, seafood, salads and other menu items in a casual atmosphere that
is suitable for the entire family. Since the inception of Tony Roma's,
its baby-back ribs have won numerous consumer and industry awards in over
25 markets. In addition to its award-winning ribs, the menu features its
signature deep fried onion ring loaf. As of March 28, 1999, the Company
operated 50 Company-owned and two joint-venture restaurants in 12 states
and through its subsidiaries, franchised 97 restaurants in 20 states and
62 restaurants in international locations.
The Tony Roma's concept is designed to serve a demographically and
geographically diverse customer base, with high quality food at moderate
prices. Entrees typically range in price from $4.99 to $12.99 for lunch
and $4.99 to $16.99 for dinner. Dessert selections range in price from
$1.99 to $3.99. Tony Roma's restaurants are generally located in
free-standing buildings with approximately 200 seats and separate bar
areas. The restaurants have a fun, comfortable atmosphere with
distinctive and varied decor and provide consumers with high quality,
friendly service. The Tony Roma's concept is appropriate for a wide
variety of casual dining occasions including family dinners and
business lunches.
To assure consistent product quality and to obtain optimum pricing,
purchases of food and restaurant equipment for the Tony Roma's
restaurants are made through a centralized purchasing function in its
corporate office in Dallas, Texas. The Company negotiates directly with
meat processors for its rib inventory, which is principally maintained
in various independent warehouses. Inventory is then shipped to
restaurants via commercial distributors. Produce and dairy products are
obtained locally. Food and equipment pricing information is also
generally available to the Tony Roma's franchisee community.
The Company is generally not dependent upon any one supplier for
availability of its products; its food and other products are generally
available from a number of acceptable sources. The Company has a policy
of maintaining alternate suppliers for most of its baseline products.
The Company does not manufacture any products nor act as a middleman.
The Company utilizes local advertising for individual restaurants
and broadcast advertising where market penetration is efficient as well
as public relations activities aimed at individual restaurants and entire
markets. The Company's advertising campaigns emphasize freshness,
quality food, good service and value. During fiscal 1999, the Company's
expenditures for advertising were 2.8% of Company-owned restaurant
revenues.
The Company (then Romacorp) was acquired in June 1993 by NPC
International, Inc. (NPC). On April 24, 1998, Holdings, NPC and Sentinel
Capital Partners, L.P. executed a recapitalization agreement ("The
Recapitalization") effective June 28, 1998 related to the Company.
Romacorp, Inc. was renamed Roma Restaurant Holdings, Inc. (Holdings) and
the assets, liabilities and operations of Holdings were contributed to
its newly-created, wholly-owned subsidiary, Romacorp, Inc. Prior to the
Recapitalization, Romacorp was a wholly-owned subsidiary of NPC. In the
Recapitalization, Holdings redeemed stock held by NPC and NPC forgave and
contributed to the capital of the Company a payable to NPC in the amount
of $33,731,000. After the Recapitalization, NPC held 20% and Sentinel
through certain affiliates (Sentinel) held 80% of the equity of Holdings.
In conjunction with this transaction, $75,000,000 of 12% Senior Notes
were issued by the Company. The Company paid Holdings a dividend of
$75,300,000 consisting primarily of the proceeds from the 12% Senior
Notes, which was used by Holdings, along with Sentinel's equity
contribution, to effect the Recapitalization. This transaction was
accounted for as a leveraged recapitalization with the assets and
liabilities of Romacorp, Inc. retaining their historical value.
Franchised Restaurants
Although the first Tony Roma's opened in 1972, franchising wasn't a
key element of Tony Roma's growth strategy until 1984. At March 28,
1999, the Company had 48 franchisees operating 159 units world wide. The
largest franchise holder operates a chain of 21 Tony Roma's restaurants.
Although there are some individual unit franchisees, the Company seeks
to attract franchisees who can develop several restaurants.
New domestic franchisees pay an initial franchise fee of $50,000 and
a continuing royalty of 4% of gross sales. In addition, franchisees are
required to contribute 0.5% of gross sales to a joint marketing account
and may be required to participate in local market advertising
cooperatives. All potential franchisees must meet certain operational
and financial criteria.
In return for the domestic franchisee's initial fee and royalties,
the Company provides a variety of services, including: real estate
services, site selection criteria and review/advice on construction cost
and administration; pre-opening and opening assistance, which include an
on-site training team to assist in recruitment, training, organization,
inventory planning and quality control; centralized and system-wide
purchasing opportunities; in-store management training programs,
advertising and marketing programs; and various administrative and
training programs developed by the Company.
International franchisees receive a modified version of the above
services. Currently, international franchises require a fee of $30,000
per unit and royalty rate of 3% of gross sales. However, costs
associated with visits to international locations by Company personnel
are borne by the international franchisee. International franchise
holders also contribute 0.25% to a joint marketing account.
Competition
The restaurant industry is highly competitive with respect to price,
value, service, location and food quality. Tony Roma's has developed
brand identity within the casual theme segment and is the only national
chain to focus on ribs. On a local and regional basis, the Company
competes with smaller chains, which also specialize in ribs, and with
larger concepts that include ribs as a menu item.
Employees
As of March 28, 1999, the Company employed approximately 3,000
persons (including full-time and part-time personnel), of whom
approximately 2,930 were restaurant employees and 70 were restaurant
supervision and corporate employees. Company restaurants employ an
average of approximately 60 full-time or part-time employees. None of
the Company's employees are covered by collective bargaining agreements,
and the Company has never experienced a major work stoppage, strike, or
labor dispute. The Company considers its employee relations to be good.
Trade Names, Trademarks and Service Marks
The trade name "Tony Roma's" and all other trademarks, service
marks, symbols, slogans, emblems, logos, and designs used in the Tony
Roma's restaurant system are of material importance to its business. The
domestic trademark and franchise rights are owned by Roma Dining LP, an
affiliate of Romacorp, Inc., and international trademarks/franchise
rights are owned by Roma Systems, Inc., a wholly owned subsidiary of
Romacorp, Inc. A subsidiary, Roma Franchise Corporation, through a
license with Roma Dining LP, offers and services franchises in the United
States and Roma Systems, Inc. offers services and franchises
internationally. The use of these trademarks/franchise rights are
licensed to franchisees under franchise agreements for use with respect
to the operation and promotion of their Tony Roma's restaurants.
Seasonality
Tony Roma's restaurant sales are traditionally higher from January
to March due to an increase in vacation and part-time residence activity
in warm weather climates and resort locations where a significant number
of the Company's restaurants are located.
The location of the
Company-owned and franchised restaurants as of
March 28, 1999 is as follows:
State Company-Owned Joint Venture Franchised
Alabama............... 3 0 0
Alaska................ 0 0 1
Arizona................ 0 0 6
Arkansas............... 1 0 0
California............. 4 1 32
Colorado............... 0 0 5
Florida.............. 20 0 2
Hawaii................. 0 0 4
Indiana................ 0 0 1
Kentucky............... 0 0 2
Louisiana.............. 1 0 0
Maine................. 0 0 1
Minnesota.............. 0 0 2
Missouri............... 1 0 0
Nebraska............... 0 0 1
Nevada................. 3 0 3
New York............... 0 0 1
North Carolina......... 1 0 0
Ohio................... 0 0 3
Oklahoma.............. 2 0 0
Oregon.............. 0 0 3
South Carolina......... 1 0 2
Tennessee.............. 1 0 0
Texas.................. 12 1 5
Utah................... 0 0 7
Washington............ 0 0 13
Wisconsin.............. 0 0 3
------- ---- ----
Total U.S..... 50 2 97
Foreign Country/Territory Franchised
Aruba.......................... 1
Bahamas............................................ 1
Canada................................................12
China................................................. 1
El Salvador........................................ 1
Germany............................................. 1
Guam............................................... 2
Hong Kong........................................... 3
Indonesia......................................... 2
Japan................................................ 7
Korea.............................................. 3
Mexico................................................ 9
Peru.................................................. 2
Phillippines......................................... 1
Puerto Rico......................................... 2
Saipan.............................................. 1
Singapore............................................ 2
Spain................................................ 9
Taiwan............................................... 1
Thailand............................................ 1
-----
Total International...................... 62
=====
Government Regulation
All of the Company's operations are subject to various federal,
state and local laws that affect its business, including laws and
regulations relating to health, sanitation, alcoholic beverage control
and safety standards. To date, federal and state environmental
regulations have not had a material effect on the Company's operations,
but more stringent and varied requirements of local governmental bodies
with respect to zoning, building codes, land use and environmental
factors have in the past increased, and can be expected in the future to
increase, the cost of, and the time required for, opening new
restaurants. Difficulties or failures in obtaining required licenses or
approvals could delay or prohibit the opening of new restaurants. In some
instances, the Company may have to obtain zoning variances and land use
permits for its new restaurants. The Company believes it is operating in
compliance with all material laws and regulations governing its
operations.
The Company is also subject to the Fair Labor Standards Act, which
governs such matters as minimum wages, overtime and other working
conditions. A substantial majority of the Company's food service
personnel are paid at rates related to the minimum wage and other
employment laws and regulations; accordingly, increases in the minimum
wage result in higher labor costs.
In recent years many states have enacted laws regulating franchise
operations. Much of this legislation requires detailed disclosure in the
offer and sale of franchises and the registration of the franchisor with
state administrative agencies. The Company is also subject to Federal
Trade Commission regulations relating to disclosure requirements in the
sale of franchises. Additionally, certain states have enacted, and
others may enact, legislation governing the termination and non-renewal
of franchises and other aspects of the franchise relationship that are
intended to protect franchisees. The foregoing matters may result in
some modifications in the Company's franchising activities and some
delays or failures in enforcing certain of its rights and remedies under
license and lease agreements. The laws applicable to franchise operations
and relationships are developing rapidly, and the Company is unable to
predict the effect on its intended operations of additional requirements
or restrictions that may be enacted or promulgated or of court decisions
that may be adverse to franchisors.
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 Annual Report on Form 10-K are forward-looking
statements that involve such risks, uncertainties and other factors that
could cause or contribute to such differences including, but not limited
to, those described below.
Consumer Demand and Market Acceptance. Food service businesses are
often affected by changes in consumer tastes, national, regional and
local economic conditions and demographic trends. The performance of
individual restaurants may be adversely affected by factors such as
traffic patterns, demographic considerations and the type, number and
location of competing restaurants. Multi-unit food service chains such
as the Company's can also be materially and adversely affected by
publicity resulting from food quality, illness, injury and other health
concerns or operating issues stemming from one restaurant or a limited
number of restaurants, including restaurants operated by the franchisor
or another franchisee.
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.
Unforeseeable Events and Conditions. Unforeseeable events and
conditions, many of which are outside the control of the Company, can
impact consumer patterns in the restaurant industry. These events
include weather patterns, severe storms and power outages, natural
disasters and other acts of God. Specific examples include but are not
limited to the Company's concentration of Tony Roma's operations and
franchisees in Florida and California, both being areas that have
historically suffered from severe weather and natural disasters. There
can be no assurance that the Company's operations will not be adversely
affected by such events in the future.
Commodities Costs, Labor Shortages and Costs and Other Risks.
Dependence on frequent deliveries of fresh produce and groceries subjects
food service businesses to the risk that shortages or interruptions in
supply, caused by adverse weather or other conditions, could adversely
affect the availability, quality and costs of ingredients. Specifically,
certain ingredients such as babyback ribs and chicken constitute a large
percentage of the total cost of the Company's food products.
Unforeseeable increases in the cost of these specific ingredients could
significantly increase the Company's cost of sales and correspondingly
decrease the Company's operating income. In addition, unfavorable trends
or developments concerning factors such as inflation, increased food,
labor and employee benefit costs (including increases in hourly wage and
minimum unemployment tax rates), regional weather conditions, interest
rates and the availability of experienced management and hourly employees
may also adversely affect the food service industry in general and the
Company's results of operations and financial condition in particular.
ITEM 2. PROPERTIES
Romacorp, Inc. selects all company-operated restaurant sites, and
has the right to approve all franchised restaurant locations. Sites are
selected using a screening model to analyze locations with an emphasis
on projected financial return, demographics (such as population density,
age and income distribution), analysis of restaurant competition in the
area, and an analysis of the site characteristics, including
accessibility, traffic counts, and visibility.
The current costs of constructing, equipping, and opening a new
freestanding restaurant range from $1,670,000 to $2,700,000, including
approximately $280,000 to $950,000 for land, approximately $985,000 to
$1,220,000 for sitework, construction, and landscaping, and approximately
$400,000 to $530,000 for furniture, and opening costs. The cost of
developing new Company restaurants will vary, primarily because of
varying costs of land, sitework, signage, preopening, and labor.
Units that are constructed within existing structures or mall areas
are typically less costly. The Company has developed standardized
restaurant designs using a freestanding building to be situated on
a 1-1/2 acre site. The design is continually revised and refined.
The 50 Company-owned Tony Roma's restaurants at March 28, 1999 are
owned and leased as follows:
Leased from unrelated parties 22
Land and building owned 19
Building owned by the Company and land leased 9
----
50
====
Some of the Company's leases contain percentage rent clauses
(typically 5% to 6% of gross sales) against which the minimum rent is
applied, and most are net leases under which the Company pays taxes,
maintenance, insurance, repairs and utility costs.
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 that the Company may be required to pay by reason
thereof, net of insurance reimbursements, will have a materially adverse
effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holder,
Roma Restaurant Holdings, Inc., during the fourth quarter of the fiscal
year ended March 28, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER
MATTERS.
There is no established public trading market for the Company's
common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the historical consolidated financial statements and the notes
related thereto of the Company included elsewhere in this report.
Fiscal Year Ended
3/28 3/29 3/23 3/24 3/28
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Income Statement Data:
Revenues
Net restaurant sales $93,213 $86,408 $68,778 $51,499 $42,137
Net franchise revenues 8,723 8,482 8,526 7,570 7,291
------ ------ ------ ------ ------
Total revenues $101,936 $94,890 $77,304 $59,069 $49,428
====== ====== ====== ====== ======
Deprec and amortization $6,670 $7,197 $5,425 $3,993 $3,829
Operating income (1) 10,467 8,883 7,001 2,029 3,259
Net interest expense 8,147 2,412 1,550 876 335
Income taxes..... 925 2,315 2,017 545 1,203
Net income......... $ 1,661 $4,165 $3,476 $351 $1,691
Other Financial Data:
Cash flows from:
Operating activities.... $9,844 $9,874 $9,416 $5,355 $5,228
Investing activities (14,969) (10,686) (24,758) (16,491) (6,178)
Financing activities... 5,125 812 15,342 10,909 (483)
EBITDA (2) (4)........ $17,403 $16,089 $12,468 $5,765 $7,058
EBITDA Margin (2)(3)(4) 17.1% 17.0% 16.1% 9.8% 14.3%
Balance Sheet Data:
Facilities and
equipment, net...... $57,046 $52,600 $46,516 $25,755 $15,659
Total assets....... 84,035 74,747 68,724 50,104 36,196
Total borrowings and
payables to
affiliate (5).... 80,290 35,717 34,611 19,574 7,086
Shareholder's equity
(deficit) (6) (8,667) 31,292 27,127 23,651 23,301
-------------
(1) For fiscal 1996, operating income includes an impairment and
loss provision for underperforming assets of $3.5 million.
Without this provision, operating income would have been $5.5
million.
(2) As used herein, "EBITDA" represents net income plus: (i) net
interest; (ii) income taxes; and (iii) depreciation and
amortization including amortization of start-up costs. The
Company has included information concerning EBITDA in this Form
10-K because it believes that such information is used by
certain investors as one measure of an issuer's historical
ability to service debt. EBITDA is not a measure determined in
accordance with Generally Accepted Accounting Principles and
should not be considered as an alternative to, or more
meaningful than, earnings from operations or other traditional
indications of an issuer's operating performance. EBITDA as
presented may not be comparable to EBITDA or other similarly
titled measures defined and presented by other companies.
(3) EBITDA margin represents EBITDA divided by total revenues.
(4) For fiscal 1996, earnings include the impairment and loss
provisions for underperforming assets of $3.5 million. Without
this provision, EBITDA would have been $9.3 million and EBITDA
margin would have been 15.7%.
(5) Includes current portion of long-term borrowings.
(6) See "Item I Business" for a description of the Recapitalization
which was effective June 28, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Comments
The statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other statements that
are not historical facts contained herein are forward looking statements
that involve estimates, risks and uncertainties, including but not
limited to: consumer demand and market acceptance risk; the level of and
the effectiveness of marketing campaigns by the Company; training and
retention of skilled management and other restaurant personnel; the
Company's ability to locate and secure acceptable restaurant sites; the
effect of economic conditions, including interest rate fluctuations, the
impact of competing restaurants and concepts, new product introductions,
product mix and pricing, the cost of commodities and other food products,
labor shortages and costs and other risks detailed herein.
Results of Operations
The following table sets forth the Company's historical consolidated
revenues for fiscal 1999, 1998 and 1997:
Fiscal Year
1999 1998 1997
----- ----- -----
Revenues (Dollars in millions)
Net restaurant sales. $93.2 $86.4 $68.8
Net franchise revenues 8.7 8.5 8.5
----- ----- -----
Total revenues....... $101.9 $94.9 $77.3
===== ===== =====
The following table sets forth certain consolidated historical
financial data for the Company expressed as a percentage of net
restaurant sales for fiscal 1999, 1998 and 1997:
Fiscal Year
1999 1998 1997
----- ----- -----
Net restaurant sales 100.0% 100.0% 100.0%
Cost of sales............ 33.7% 33.6% 33.3%
Direct labor.................. 30.9% 30.9% 31.2%
Other (1).................. 23.4% 24.3% 24.2%
----- ----- -----
88.0% 88.8% 88.7%
====== ====== ======
Income from Company-owned
restaurant operations...... 12.0% 11.2% 11.3%
----- ----- -----
________________
(1 ) Other operating expenses include rent, depreciation and
amortization, advertising, utilities, supplies, and insurance
among other costs directly associated with operation of restaurant
facilities.
Fiscal 1999 Compared to Fiscal 1998
Net restaurant sales. Net restaurant sales for fiscal 1999 increased
$6.8 million, or 7.9%, to $93.2 million from $86.4 million in fiscal
1998. This increase was due primarily to the addition of six restaurants
and an increase in comparable sales growth of 1.8% for restaurants open
for more than 18 months, partly offset by one less week of sales in
fiscal 1999 versus fiscal 1998. In addition, menu prices were increased
in November by a weighted average of 6%.
Net franchise revenues. Net franchise revenues for fiscal 1999
increased $241,000 to $8.7 million due to a decrease in bad debt expense
and an increase in net franchise fees. These increases were partly
offset by a decrease in royalty income, resulting from one less week of
operations in fiscal 1999 versus fiscal 1998. Comparable store sales
were down 4.4%, primarily a result of the devaluation of Asian currency.
Cost of sales. Cost of sales as a percentage of net restaurant sales
remained basically unchanged at 33.7% versus 33.6% a year ago with
average rib costs per pound over the year being relatively flat compared
to the prior year.
Direct labor. Direct labor as a percentage of net restaurant sales
remained unchanged at 30.9%.
Other. Other operating expenses for fiscal 1999 decreased to 23.4%
from 24.3% primarily due to a decrease in rent and advertising expenses,
partly offset by an increase in depreciation expense resulting from the
addition of new restaurants. Rent expense declined as a percentage of
sales due to an increase in the number of owned restaurants versus leased
restaurants.
General and administrative expenses. General and administrative
expenses increased $151,000 to $9.4 million primarily due to increased
corporate staff as necessary under new ownership, increased professional
fees and the addition of the management fee related to the
Recapitalization. These increases were offset by a decrease in
preopening costs resulting from fewer openings in fiscal 1999 than in
1998. Preopening costs are amortized over twelve months following a
restaurant opening.
Interest expense. Interest expense increased $5.7 million due to
interest from the $75 million senior notes issued June 1998 in the
Recapitalization.
Miscellaneous. Miscellaneous income for fiscal 1999 includes
$169,000 for business interruption insurance proceeds related to a
restaurant destroyed by fire in the prior year.
Tax provision. The Company's tax provision for fiscal 1999 resulted
in an effective tax rate of 35.8%, which is consistent with the prior
year rate of 35.7%. See Note 7 of the Notes to Consolidated Financial
Statements for a further discussion of the effective tax rate.
Fiscal 1998 Compared to Fiscal 1997
Net restaurant sales. Net restaurant sales for fiscal 1998 increased
$17.6 million, or 25.6%, to $86.4 million from $68.8 million in fiscal
1997. This increase was due largely to the addition of five restaurants
in fiscal 1998, 13 restaurants in fiscal 1997, and 0.9% comparable sales
growth for restaurants open for more than 18 months. In addition, a new
menu was introduced resulting in an approximate 2% weighted average price
increase.
Net franchise revenues. Net franchise revenues for fiscal 1998
decreased slightly primarily due to lower revenues from sales of
international franchise rights in fiscal 1998 than in fiscal 1997. This
decrease was partially offset by an increase in royalty revenue of 7% due
to growth of the franchise system.
Cost of sales. Cost of sales as a percentage of net restaurant sales
increased to 33.6% for fiscal 1998 from 33.3% for fiscal 1997 due to an
increase in the average price of baby-back ribs of 17% for the year. This
increase was partially offset by menu enhancements implemented in fiscal
1998 and fiscal 1997 which caused favorable sales mix changes and
included price increases on select items.
Direct labor. Direct labor as a percentage of net restaurant sales
decreased to 30.9% for fiscal 1998 from 31.2% for fiscal 1997. This
decrease was primarily due to fewer new restaurant openings, with six
restaurants opened in fiscal 1998 compared to 14 restaurants in fiscal
1997. The higher labor costs in fiscal 1997 were due to training and
increased staffing levels, which typically accompany restaurant openings
to ensure a favorable dining experience for first visit customers. This
decrease was partially offset by the increase in the federal minimum wage
in September 1997.
Other. Other operating expenses for fiscal 1998 were relatively flat
as a percentage of restaurant sales compared to fiscal 1997.
General and administrative expenses. General and administrative
expenses were relatively flat at approximately $9.3 million in both
fiscal 1998 and 1997. General and administrative expenses as a percentage
of total revenues decreased to 9.8% in fiscal 1998 from 12% in fiscal
1997, reflecting the leverage from year-over-year revenue growth. General
and administrative expenses include the amortization of goodwill and pre-
opening costs. These costs increased over fiscal 1997 due to the
amortization of pre-opening costs, which occurs over the twelve months
following a restaurant opening.
Interest expense. Interest expense grew consistently during fiscal
1998 as restaurant growth and development was financed through the
Company's borrowings from NPC.
Tax provision. The Company's tax provision for fiscal 1998 resulted
in an effective tax rate of 35.7% compared to 36.7% for fiscal 1997. See
Note 7 of the Notes to Consolidated Financial Statements for a discussion
of the differences which cause the effective tax rate to vary from the
statutory federal income tax rate of 35%.
Liquidity and Capital Resources
The Company's principal sources of liquidity on both a long-term and
short-term basis are cash flow generated from operations, two separate
commitments from a financial group to purchase and leaseback up to 11
restaurant properties and to fund the construction of up to 11
restaurants on leased land, and a Revolving Credit Facility. On March
28, 1999, the Company had a working capital deficit of $4.1 million
compared to a $1.8 million deficit at March 29, 1998. The increase in
the deficit is primarily due to the accrued interest related to the $75
million in senior notes. 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
suppliers. Further, receivables are not a significant asset in the
restaurant business and inventory turnover is rapid.
Concurrently with the consummation of the recapitalization and the
issuance of $75 million in notes, the Company entered into a Revolving
Credit Facility. This facility provides for borrowings in an aggregate
principal amount of up to $15 million, is a five-year facility and bears
interest at a rate per annum equal (at the Company's option) to: (i) a
floating rate per annum equal to the Prime Rate (as defined in the New
Revolving Credit Facility); or (ii) a floating rate per annum equal to
2.25% in excess of the LIBOR Rate (as defined in the New Revolving Credit
Facility). Obligations of the Company under the New Revolving Credit
Facility not paid when due shall bear interest at a default rate equal
to 2% in excess of the non-default interest rate. A commitment fee based
on an annual rate of .375% is payable monthly on any unused portion of the
commitment. As of March 28, 1999, $5,290,000 was outstanding under the
facility.
During September 1998, the Company obtained two commitments from a
financial group. One is a commitment to purchase, at the Company's
option, 11 restaurants not to exceed $1.75 million each or $19 million
in the aggregate and to subsequently enter into a leaseback agreement
with the Company as lessee. The lease agreement provides for an initial
minimum annual rent of 10% of the purchase price, which will increase 6%
on the third anniversary of the lease and an additional 6% every three
years thereafter. Payments are to be made monthly. The lease term will
be for 15 years with two five-year renewal options of five years each.
The minimum annual rent for the renewal option periods will be set at
fair market value. As of March 28, 1999, $5.5 million in those sale-
leaseback transactions had been completed. The second commitment, a
Leasehold Mortgage Loan Commitment, provides for the funding of the
construction of 11 restaurants on leased land at a rate of 450 basis
points over the then existing rate of 15-year United States Treasury
Notes with an amortization period of 15 years and payments to be made
monthly. Both commitments expire June 30, 2000.
Capital Expenditures
The Company's capital expenditures in fiscal 1999, 1998 and 1997
were approximately $15.1 million, $10.6 million and $23.8 million,
respectively. Such expenditures were used primarily to fund the
maintenance, renovation and new development of Company-owned restaurants.
The Company plans to open ten restaurants and complete one major remodel
during fiscal 2000 and estimates capital expenditures to be approximately
$21.7 million. The Company plans to fund approximately $16.5 million of
expenditures with sales leaseback transactions resulting in net capital
expenditures of $5.2 million, which will be funded by internally
generated cash flow and the existing credit facility.
Seasonality
Tony Roma's restaurant sales are traditionally higher from January
to March due to an increase in vacation and part-time residence activity
in warm weather climates and resort locations where a significant number
of the Company's restaurants are located.
Rib Pricing
Baby-back ribs represent approximately 25% of the Company's cost of
sales. Because ribs are a by-product of pork processing, their price is
influenced largely by the demand for boneless pork. Historically, the
cost of baby-back ribs has been volatile. Significant changes in the
prices of ribs could significantly increase the Company's cost of sales
and adversely effect the business, results of operations and financial
condition of the Company.
Effects of Inflation
Inflationary factors such as increases in food and labor costs
directly affect the Company's operations. Because many of the Company's
restaurant 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.
Year 2000 Issue
The Company is in the process of evaluating and modifying its
computer systems and applications for Year 2000 compliance.
In conjunction with the Recapitalization, the Company entered into
a Transition Financial and Accounting Services Agreement (the
"Transition Services Agreement") with its former parent, NPC
International, Inc. (NPC) providing for accounting services, payroll
services and use of NPC's proprietary POS System. Management has reviewed
NPC's plans for Year 2000 compliance and NPC has completed substantially
all modifications and testing, including the POS System and will continue
testing systems throughout 1999. Terms of the Transition Services
Agreement provide for indemnification of NPC with respect to services
performed, in the absence of gross negligence. The Company, although not
incurring incremental costs to evaluate the NPC software, is responsible
for any necessary hardware upgrades, which are expected to be minimal.
In addition to a review of NPC's systems, the Company is in the
process of evaluating third party vendors for Year 2000 readiness. This
includes verbal as well as written inquiries to substantially all of the
Company's vendors. These responses will be assessed and prioritized in
order of significance to the business. To the extent that responses are
not satisfactory, contingency plans will be developed. Furthermore, the
Company has provided all franchises with information related to the risks
associated with the Year 2000.
Additionally, the Company is in the process of reviewing
non-information technology equipment and anticipates completion of this
effort by June 30, 1999. It is believed that any necessary upgrades or
replacements will be minimal and will be funded out of existing cash
flows from operations.
Since the majority of the systems work is being performed by NPC,
the Company will incur minimal costs related to the Year 2000 issue. Any
work performed to remedy any Year 2000 issues will be performed by
existing Company staff and any effect on the financial condition and
results of operations due to the diversion of resources will be
insignificant.
The Company does not believe the costs related to the Year 2000
compliance project will be material to its financial position or results
of operations. However, the cost of the project and the date on which the
Company plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors.
Unanticipated failures by critical vendors as well as the failure by the
Company to execute its own remediation efforts could have a material
adverse effect on the cost of the project and its completion date. As a
result, there can be no assurance that these forward-looking estimates
will be achieved and the actual cost and vendor compliance could differ
materially from those plans, resulting in material financial risk.
Recently Issued Accounting Pronouncements
In April 1998, Statement of Position ("SOP") 98-5 Accounting for
Costs of Start-up Activities was issued. The SOP requires the Company to
expense pre-opening costs as incurred and to report the initial adoption
as a cumulative effect of a change in accounting principles as described
in APB No. 20, Accounting Changes, during the first quarter of its fiscal
year 2000. The cumulative effect upon adoption will result in a one-time
charge to income in an amount equal to the net book value of the
Company's pre-opening costs. This change will also result in the
discontinuation of amortization of pre-opening cost expense in subsequent
periods. At March 28, 1999, the balance of pre-opening costs was $777,000
which will be written-off during the first quarter of fiscal year 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
on debt and changes in commodity prices, particularly baby-back rib
prices.
The Company's exposure to interest rate risk relates to the variable
rate revolving credit loan that is benchmarked to United States and
European short-term interest rates. The Company does not use derivative
financial instruments to manage overall borrowing costs or reduce
exposure to adverse fluctuations in interest rates. The impact on the
Company's results of operations of a one-point interest rate change on
the outstanding balance of the variable rate debt as of March 28, 1999
would be immaterial.
Baby-back ribs represent approximately 25% of the Company's cost of
sales. Because ribs are a by-product of pork processing, their price is
influenced largely by the demand for boneless pork. Historically, the
cost of baby-back ribs has been volatile. Significant changes in the
prices of ribs could significantly increase the Company's cost of sales
and adversely effect the business, results of operations and financial
condition of the Company. The Company actively manages its rib costs
through supply commitments in advance of a specific need; however, the
arrangements are terminable at will at the option of either party without
prior notice. Therefore, there can be no assurance that any of the supply
commitments will not be terminated in the future. As a result, the
Company is subject to the risk of substantial and sudden price increases,
shortages or interruptions in supply of such items, which could have a
material adverse effect on the business, financial condition and results
of operations.
The Company purchases certain other commodities used in food
preparation. These commodities are generally purchased based upon market
prices established with vendors. These purchase arrangements may contain
contractual features that limit the price paid by establishing certain
price floors or caps. The Company does not use financial instruments to
hedge commodity prices because these purchase arrangements help control
the ultimate cost paid and any commodity price aberrations are generally
short term in nature.
This market risk discussion contains forward-looking statements.
Actual results may differ materially from this discussion based upon
general market conditions and changes in domestic and global financial
markets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included under Item 14 of this Annual
Report.
ITEM 9.
The Company had no disagreements on accounting or financial matters
with its independent accountants to report under this Item 9.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of March 28,
1999 were:
Name Age Position
Robert B. Page . . .40 Chief Executive Officer, Director
Susan R. Holland . .42 Vice President, Finance - Chief
Financial Officer
David G. Short . . .60 Vice President, Legal, Secretary and
General Counsel
David S. Lobel . . .46 Chairman of the Board of Directors
Eric D. Bommer . . .30 Director
Philip Friedman. . .53 Director
John F. McCormack. .40 Director
Michael J. Myers . .58 Director
James K. Schwartz. .37 Director (resigned on May 12, 1999)
Robert B. Page has been President since June 1994. He serves as
Chief Executive Officer of the Company and as a director of the Company
and Holdings. Mr. Page joined the Company in October 1993 as Senior
Vice President of Operations and Chief Operations Officer until he became
President. From August 1988 to October 1993, Mr. Page was Senior Vice
President of Operations for the Pizza Division of NPC International, Inc.
Susan R. Holland was with El Chico Restaurants, Inc. from 1985 until
joining the Company in August 1998. Ms. Holland served as Acting Chief
Financial Officer from May 1998 and as Vice President, Treasurer,
Controller and Corporate Secretary since October 1996. Ms. Holland
joined El Chico Restaurants, Inc. as Controller and served as Treasurer
since August 1990. Ms. Holland is a Certified Public Accountant.
David G. Short has been Vice President-Legal, General Counsel and
Secretary since September 1990. From 1986 to 1990, Mr. Short was Vice
President, Legal and General Counsel of TGI Friday's, Inc. Mr. Short
also served as Vice President of NPC International, Inc. and certain of
its affiliates until the Recapitalization.
David S. Lobel serves as a director of the Company and Holdings. Mr.
Lobel founded Sentinel in 1995 and presently serves as Managing Partner.
From 1981 to 1995, Mr. Lobel was employed by First Century Partners, a
venture capital affiliate of Salomon Smith Barney, and served as a
general partner of funds managed by First Century from 1983 to 1995. Mr.
Lobel serves on the boards of various private companies.
Eric D. Bommer serves as a director of the Company and Holdings. Mr.
Bommer joined Sentinel in March 1997 and serves as Vice President. Prior
to joining Sentinel, he was an associate at Gefinor Acquisition Partners,
L.P., a private equity investment partnership, from June 1995 to March
1997. From 1993 to 1995, he worked in the Investment Banking Division
of CS First Boston. From 1992 to 1993, Mr. Bommer worked at LaSalle
Partners. Mr. Bommer serves on the boards of various private companies.
Philip Friedman serves as a director of the Company and Holdings.
Mr. Friedman is President of McAlister's Corporation, operator and
franchisor of the McAlister's Deli restaurant chain. From June 1996 to
January 1998, Mr. Friedman was President of Panda Management Company,
Inc., a developer and operator of 300 quick-service chinese restaurants.
In addition, from June 1986 to the present, Mr. Friedman has been
president of P. Friedman and Associates, Inc., a restaurant consulting
firm. Mr. Friedman serves as Chairman of the Board of Rosti Restaurants
and is a director of Panda Management Company, Inc., Paramark, Inc.,
Roadhouse Grill, Inc. and Eateries, Inc.
John F. McCormack serves as a director of the Company and Holdings.
Mr. McCormack co-founded Sentinel in 1995 and presently serves as a
Partner. From 1990 to 1995 Mr. McCormack served as Vice President at
First Century Partners, a venture capital affiliate of Salomon Smith
Barney. From 1983 to 1990, Mr. McCormack was employed by Coopers &
Lybrand, most recently as a Manager. Mr. McCormack serves on the boards
of various private companies.
Michael J. Myers serves as a director of the Company and Holdings.
Mr. Myers is the President of First Century Partners, a venture capital
affiliate of Salomon Smith Barney, and has been a Senior Advisory Partner
to Sentinel since 1995. Mr. Myers co-founded First Century Partners in
1972 and has served as its President since 1976. Mr. Myers is a director
of Office Depot and various private companies.
James K. Schwartz served as a director of the Company and Holdings.
He has served as President and Chief Operating Officer of NPC
International, Inc. since February 1995 and as a director since July
1996. From January 1993 to February 1995 Mr. Schwartz served as Vice
President and Chief Financial Officer of NPC International, Inc. From
1984 to 1991, he was associated with Ernst & Young LLP. On May 12, 1999,
Mr. Schwartz resigned from the Board of Directors of the Company and
Holdings.
ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS
The following summarizes, for each of the three fiscal years ended
March 28, 1999, March 29, 1998, and March 23, 1997, the compensation
awarded to, earned by, or paid to the Chief Executive Officer (the "CEO")
of the Company as of March 28, 1999, and the other executive officer
(other than the CEO) who served as an executive officer of the Company
or its subsidiaries as of March 28, 1999, whose annual compensation
exceeded $100,000 for the fiscal year ended March 28, 1999.
Summary Compensation Table
Annual Compensation
-------------------------------
Other
Fiscal Annual
Year Salary Bonus Compensation(1)
----- ------ ----- -------------
Name and Principal Position
---------------------------
Robert B. Page 1999 $194,231 $38,472 $4,668
Chief Executive Officer 1998 160,000 23,207 9,760
1997 140,000 62,500 9,414
David G. Short 1999 138,998 0 5,052
Vice President, Legal, 1998 132,500 0 9,147
Secretary and General 1997 125,000 0 9,128
Counsel
_______________
(1) Includes profit sharing contributions, car allowance and
insurance.
There were no options granted during the year ended March 28, 1999
or outstanding as of March 28, 1999. Accordingly, disclosure tables are
not presented.
Employment Agreements
In connection with the Recapitalization, the Company entered into an
employment agreement with Mr. Page. Such agreement provides for: (i) a
three year employment term with a maximum base of $200,000 per annum and
a bonus, based upon EBITDA objectives, up to 50% of base compensation;
(ii) severance benefits and noncompetition, nonsolicitation and
confidentiality agreements in certain situations; and (iii) the grant of
certain stock options in Holdings; and other terms and conditions of Mr.
Page's employment.
Compensation of Directors
The Company reimburses directors for out-of-pocket expenses incurred
by them in connection with services provided in such capacity. Mr. Myers
receives a quarterly payment of $7,500. Mr. Friedman receives a quarterly
payment of $3,500 and a payment of $1,000 per Board of Directors Meeting.
In addition, on May 12, 1999, Mr. Friedman was awarded a stock option
grant to purchase .88 shares at $12,500 per share, which vests 25% a year
over four years.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee is or has been an officer or
employee of the Company or any of its subsidiaries or had any
relationship requiring disclosures pursuant to Item 404 of Regulation S-K.
In fiscal 1999, no executive officer of the Company served as a
director of another entity, one of whose executive officers served on the
Compensation Committee or on the Company's Board of Directors.
The Company reimbursed Sentinel for all out-of-pocket expenses
incurred in connection with the Recapitalization. In addition, pursuant
to a management agreement, Sentinel receives a management fee equal to
$300,000 per annum for the first two years of the term of the management
agreement and $500,000 per annum thereafter, and will be reimbursed for
certain out-of-pocket expenses.
Report of the Compensation and Benefits Committee
The Compensation Committee of the Board of Directors, comprised of
the undersigned non-employee directors of the Company, has the
responsibility for determining compensation plans for all executive
officers. Any recommendations are submitted to the full Board of
Directors for approval.
The Committee has adopted a policy that the Company's executive
compensation plan should have three principal components:
- Competitive base salaries. In order to attract and retain high-
quality management the Company should offer appropriate salaries
commensurate with skills and experience. The Committee considers
recommendations by the Chief Executive Officer in determining
other executive base salaries, as well as information on industry
practice.
- A short term bonus plan. To encourage and reward near-term
improvements in the Company's performance, the Committee
determined to offer an annual bonus plan based on EBITDA
objectives. "EBITDA" represents net income plus: (i) net
interest; (ii) income taxes; and (iii) depreciation and
amortization including amortization of start-up costs. The
Committee believes EBITDA is an important measure in determining
the value of a privately-held company. Provision also has been
made for discretionary bonuses in certain situations.
- A long-term incentive plan. The Committee determined to
establish a long-term incentive plan to accomplish the following
objectives:
- reward sustained performance;
- balance short-term and long-term focus;
- attract and retain qualified management;
- build executive equity ownership;
- align executive and ownership interest; and
- minimize adverse financial statement impact of awards.
To these ends, the Committee determined that stock option awards are
effective in accomplishing the desired objectives.
The Committee is responsible for reviewing and recommending base
salary changes for executive officers. Effective with the completion of
the Recapitalization, Mr. Page was appointed Chief Executive Officer, and
a compensation package was determined based upon industry averages, the
size of the Company and Mr. Page's industry experience. In addition, the
existing Vice President, Legal, Secretary and General Counsel and the
newly hired Chief Financial Officer's compensation was determined by
considering market data for each officer's position, level of
responsibility, experience and, past performance, as applicable.
The executive short-term bonus plan for fiscal 1999 was based upon
an EBITDA target which when met would pay a pre-determined bonus to each
executive officer.
The Committee also recommends awards under the Company's non-qualified
stock option plan. On May 12, 1999, stock option grants
totaling 40.7 shares were made to the Chief Executive Officer, the two
named executive officers and certain other key employees. These grants
reflect an exercise price of $12,500 per share, which was determined to
be the fair market value at the date of grant as required by the Stock
Option Plan.
Federal income tax legislation has limited the deductibility of
certain compensation paid to the Chief Executive Officer and covered
employees to the extent the compensation exceeds $1,000,000.
Performance-based compensation and certain other compensation, as
defined, is not subject to the deduction limitation of this section
162(m) regulation. It is not currently anticipated that any covered
employee would earn annual compensation in excess of the $1,000,000
definition under existing or proposed compensation plans. The Company
continually reviews its compensation plans to minimize or avoid potential
adverse effects of this legislation. The Committee will consider
recommending such steps as may be required to qualify annual and long-
term incentive compensation for deductibility if that appears appropriate
at some time in the future.
Members of the Compensation and
Benefits Committee
David S. Lobel, Chairman
Michael J. Myers
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
100% of the outstanding stock of the Company is owned by Roma
Restaurant Holdings, Inc. which, as of March 28, 1999, was owned 22.2%
by Sentinel Capital Partners, 44.0% by Sentinel Capital Partners II, 20%
by NPC International, Inc. and the remaining 13.8% by unrelated third
parties. The address of Sentinel Capital Partners is 777 Third Avenue,
32nd Floor, New York, New York 10017 and the address of NPC
International, Inc. is 14400 College Blvd., Lenexa, Kansas 66762.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transition Services Agreement
The Company entered into the Transition Service Agreement whereby
NPC will continue to provide administrative services to the Company for
an initial fee of $16,000 per week for a period of up to one year.
Services provided will include accounting services, payroll services and
use of NPC's proprietary restaurant technology system software (the "POS
System"). As part of the Transition Services Agreement, the Company was
granted a perpetual license to use the POS System. Effective March 29,
1999, the Company amended the contract whereby services will continue
through July 2001 with a weekly base service fee of $14,300 during fiscal
2000, $15,000 during fiscal 2001, and $15,750 during fiscal 2002. In
addition to the base fee, an incremental weekly fee shall be paid for
each restaurant opened on or after March 29, 1999 in the amount of $160
for fiscal 2000, $170 for fiscal 2001 and $180 for fiscal 2002.
Payment of Certain Fees and Expenses
The Company reimburses Sentinel for all out-of-pocket expenses
incurred in connection with the Recapitalization. In addition, pursuant
to a management agreement, Sentinel receives a management fee equal to
$300,000 per annum for the first two years of the term of the management
agreement and $500,000 per annum thereafter, and will be reimbursed for
certain out-of-pocket expenses.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
The following documents are filed as part of this report:
(1) Financial Statements:
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements at page F-1.
(2) Financial Statement Schedules:
All schedules have been omitted as the required information is
inapplicable or the information is presented in the financial
statements or related notes.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at
page 22 are filed as part of this Report.
(4) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
March 28, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the undersigned Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Dallas, the State of Texas, on
June 24, 1999.
By: /s/ Robert B. Page
-------------------
Name: Robert B. Page
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Each person
whose signature to this report appears below hereby appoints Robert B.
Page and Susan R. Holland and each of them, any one of whom may act
without the joinder of the other, as his or her attorney-in-fact to sign
on his behalf, individually and in each capacity stated below, and to
file all amendments to this report, which amendment or amendments may
make such changes in and additions to the report as any such attorney-
in-fact may deem necessary or appropriate.
Signature Title Date
/s/ Robert B. Page Chief Executive Officer June 24, 1999
------------------- and Director (principal
Robert B. Page executive officer)
/s/ Susan R. Holland Vice President, Finance June 24, 1999
-------------------- and Chief Financial Officer,
Susan R. Holland (principal financial officer
and accounting officer)
/s/ David S. Lobel Chairman of the Board June 24, 1999
-------------------- of Directors
David S. Lobel
/s/ Eric D. Bommer Director June 24, 1999
---------------------
Eric D. Bommer
/s/ Philip Friedman Director June 24, 1999
-----------------------
Philip Friedman
/s/ John J. McCormack Director June 24, 1999
----------------------
John J. McCormack
/s/ Michael J. Myers Director June 24, 1999
--------------------
Michael J. Myers
EXHIBITS INDEX
Exhibit
Number Description
2.1 Recapitalization Agreement dated April 24, 1998 by and
among the Company, NPC International, Inc., NPC Restaurant
Holdings, Inc. and Sentinel Capital Partners, L.P.
2.2 Assignment Agreement dated July 1, 1998 by and among
Sentinel, Sentinel Capital Partners II, L.P. ("Sentinel
II"), Omega Partners, L.P. ("Omega"), Provident Financial
Group, Inc. ("Provident"), Travelers Casualty and Surety
Company ("Travelers I"), The Travelers Insurance Company
("Travelers II"), The Travelers Life and Annuity Company
("Travelers III") and the Phoenix Insurance Company
("Phoenix", and together with Sentinel II, Omega,
Provident, Travelers I, Travelers II, and Travelers III,
the "Assignees") . . . . . . . . . . . . . . . . . .
3.1 Certificate of Incorporation of the Company . . . . . .
3.2 By-laws of the Company. . . . . . . . . . . . . . . . .
10.1 Indenture dated as of July 1, 1998 between the Company,
the Guarantors named therein and United States Trust
Company of New York. . . . . . . . . . . . . . . . .
10.2 Purchase Agreement dated as of June 26, 1998 among the
Company, Salomon Brothers Inc. and Schroder & Co. Inc. .
10.3 Registration Rights Agreement dated as of July 1, 1998
among the Company, the Guarantors named therein, Salomon
Brothers, Inc. and Schroder & Co. Inc.
10.4 Stockholders Agreement dated as of July 1, 1998 by and
among the Company, the Assignees and Holdings . .
10.5 Registration Rights Agreement dated July 1, 1998 by and
among the Company, NPC Restaurant Holdings, Inc., Sentinel
Capital Partners L.P., Sentinel Capital Partners II, L.P.,
Omega Partners, L.P., Provident Financial Group, Inc.,
Travelers Casualty and Surety Company, Travelers Insurance
Company, The Travelers Life and Casualty and The Phoenix
Insurance Company . . . .. . . . .
10.6 Transitional Financial and Accounting Services Agreement
dated as of July 1, 1998 by and among NPC Management, Inc.
and the Company . . . . . . . . . . . . . . . . . . . .
10.7 Management Services Agreement dated as of July 1, 1998 by
and among the Company and Sentinel . . . . . . . . .
10.8 Credit Agreement dated as of July 1, 1998 by and among the
Company, Roma Systems, Inc., Roma Franchise Corporation,
Roma Holdings, Inc., Roma Dining LP, The Provident Bank
and various lenders described therein. . . . . . . .
10.9 Management Agreement dated as of July 1, 1998 by and among
the Company and Robert B. Page
10.9a Amended and Restated Accounting and Management Information
Services Agreement dated January 20, 1999 . .
*10.10 Amended Management Agreement dated as of May 12, 1999 by
and among the Company and Robert B. Page . . . . . .
*10.11 Letter of employment and agreement dated as of July 13,
1998 by and among the Company and Susan R. Holland
10.12 Letter of commitment dated September 4, 1998 to the
Company from CAPTEC Financial Group, Inc.. . . . . .
21.1 Subsidiaries of the Issuer. . . . . . . . . . . . . . .
27.1 Financial Data Schedule . . . . . . . . . . . . . . . .
_____________
Filed as an exhibit to the Company's Form S-4, and incorporated
herein by reference.
* Management contract for compensation plan or arrangement.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Audited Consolidated Financial Statements:
Report of Independent Auditors F-2
Consolidated Balance Sheets -Assets
As of March 28, 1999 and March 29, 1998 F-3
Consolidated Balance Sheets - Liabilities and
Stockholder's Equity (Deficit)
As of March 28, 1999 and March 29, 1998 F-4
Consolidated Statements of Income
For the fiscal years ended March 28, 1999,
March 29, 1998 and March 23, 1997 F-5
Consolidated Statements of Changes in Stockholder's
Equity (Deficit)
For the fiscal years ended March 28, 1999,
March 29, 1998 and March 23, 1997 F-6
Consolidated Statements of Cash Flows
For the fiscal years ended March 28, 1999,
March 29, 1998 and March 23, 1997 F-7
Notes to Consolidated Financial Statements F-8
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Romacorp, Inc. and Subsidiaries
We have audited the accompanying balance sheets of Romacorp, Inc.
and Subsidiaries (the Company) as of March 28, 1999, and March 29, 1998
and the related statements of income, changes in stockholder's equity
(deficit), and cash flows for each of the three fiscal years in the
period ended March 28, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Romacorp,
Inc. and Subsidiaries at March 28, 1999, and March 29, 1998 and the
results of their operations and their cash flows for each of the three
fiscal years in the period ended March 28, 1999, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Kansas City, Missouri
April 28, 1999
ROMACORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 28, March 29,
1999 1998
-------- --------
(Dollars in thousands)
Current Assets:
Cash and cash equivalents..... $ - $ -
Accounts receivable, net............. 1,637 1,351
Inventories of food and supplies......... 3,051 1,509
Deferred income tax asset........... 217 583
Prepaid expenses......... 1,059 583
Preopening costs................. 777 466
Other current assets......... 14 22
----- ------
Total current assets........ 6,755 4,514
Facilities and equipment, net... 57,046 52,600
Notes receivable, net.............. 719 757
Goodwill, net of accumulated amortization
of $5,184 and $4,450, respectively.... 13,792 14,526
Deferred income tax asset......... 1,642 1,423
Other assets............. 792 927
Debt issuance costs, net of accumulated
amortization of $337............... 3,289 -
------ ------
Total assets........ $84,035 $74,747
====== ======
The accompanying notes are an integral part of these consolidated
financial statements
ROMACORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
March 28, March 29,
1999 1998
--------- --------
(Dollars in thousands)
Current Liabilities:
Accounts payable............. $2,651 $1,094
Accrued interest............... 2,291 28
Current portion of closure reserve 100 100
Checks written in excess of cash 296 113
Other accrued liabilities........ 5,565 4,560
Current portion of long-term debt - 444
------ ------
Total current liabilities 10,903 6,339
Senior notes................ 75,000 -
Long-term debt.................. 5,290 889
Closure reserve............... 309 443
Payable to affiliate - 34,384
Long-term insurance reserves....... 1,200 1,400
Stockholder's Equity (Deficit):
Common stock, 2,000 shares authorized,
100 shares issued and outstanding - -
Paid-in capital.......... 66,469 17,444
Retained earnings (deficit):
Dividend to Holdings...... (75,351) -
Other..................... 215 13,848
------- -------
Total............... (75,136) 13,848
------- -------
Total stockholder's equity (deficit) (8,667) 31,292
Total liabilities and stockholder's
equity (deficit)............ $84,035 $74,747
======= =======
The accompanying notes are an integral part of these consolidated
financial statements
ROMACORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Fiscal Year Ended
March 28, March 29, March 23,
1997 1998 1997
----- ------- -------
(Dollars in thousands)
Net restaurant sales........ $93,213 $86,408 $68,778
Net franchise revenues........ 8,723 8,482 8,526
------ ------ ------
Total revenues......... 101,936 94,890 77,304
====== ====== ======
Cost of sales................. 31,399 29,011 22,921
Direct labor............... 28,836 26,694 21,461
Other...................... 21,819 21,038 16,645
General and administrative expenses 9,415 9,264 9,276
------ ------ ------
Total operating expenses.... 91,469 86,007 70,303
------ ------ ------
Operating income............. 10,467 8,883 7,001
Other income (expense):
Interest expense......... (8,147) (2,412) (1,550)
Miscellaneous.............. 266 9 42
------ ------ ------
Income before income taxes.. 2,586 6,480 5,493
Provision (benefit) for income taxes:
Current......... 778 3,138 731
Deferred............ 147 (823) 1,286
------ ------ ------
925 2,315 2,017
------ ------ ------
Net income............. $1,661 $4,165 $3,476
====== ====== ======
The accompanying notes are an integral part of these consolidated
financial statements
ROMACORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
Balances at March 24, 1996 100 $- $17,444 $6,207 $23,651
Net earnings 3,476 3,476
------ ----- ------ ------ ------
Balances at March 23, 1997 100 - 17,444 9,683 27,127
Net earnings 4,165 4,165
------ ------ ------ ------ ------
Balances at March 28, 1998 100 - 17,444 13,848 31,292
Net earnings from March 29,
1998 to June 28, 1998 1,446 1,446
Payable to affiliate
contributed to capital - - 33,731 - 33,731
------ ------ ------ ------ ------
Balance at June 28, 1998 100 - 51,175 15,294 66,469
Contribution of Holdings net
assets to Romacorp, Inc.
(Note 1) - - 66,469 - 66,469
Dividend to Holdings - - - (75,351)(75,351)
Net earnings from June 29,
1998 to March 28, 1999 - - - 215 215
------ ------ ------ ------ ------
Balances at March 28, 1999 100 $- $66,469 $(75,136)$(8,667)
====== ====== ====== ====== =======
The accompanying notes are an integral part of these consolidated
financial statements
ROMACORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Year Ended
March 28, March 29, March 23,
1999 1998 1997
------ ------ ------
(Dollars in thousands)
Operating Activities:
Net income.................... $1,661 $4,165 $3,476
Non-cash items included in net income:
Depreciation and amortization..... 5,750 5,260 3,808
Amortization of pre-opening costs. 920 1,937 1,617
Amortization of debt issuance costs 337 - -
Deferred income taxes......... 147 (823) 1,286
Change in assets and liabilities:
Accounts receivable, net....... (286) 122 (559)
Notes receivable, net......... - 57 27
Inventories of food and supplies.. (1,542) (848) 1,435
Preopening costs................ (1,231) (1,169) (2,095)
Other current assets............ (468) (71) (140)
Accounts payable............... 1,557 239 139
Accrued interest............... 2,263 (18) (18)
Other accrued liabilities...... 868 1,023 440
Other....................... (132) - -
------ ------ ------
Net cash flows provided by
operating activities. 9,844 9,874 9,416
------ ------ ------
Investing Activities:
Capital expenditures ........... (15,067) (10,610) (23,835)
Changes in other assets, net....... 98 (76) (923)
------- ------- -------
Net cash flows used by investing
activities.. (14,969) (10,686) (24,758)
------- ------- -------
Financing Activities:
Senior Notes.................... 75,000 - -
Dividend to Holdings........... (75,351) - -
Net borrowings under line-of-credit
agreement.... 5,290 - -
Debt issuance costs........ (3,626) - -
Payments of debt................. (1,333) (444) (711)
Proceeds from sale of assets...... 5,445 - -
Chng in checks written excess of cash 183 (294) 305
Net change in payable to affiliate (483) 1,550 15,748
------- ------- -------
Net cash flows provided by
financing activities..... 5,125 812 15,342
Net Change in Cash and Cash Equivalents - - -
Cash and Cash Equivalents At Beginning
of Year - - -
------ ------ ------
Cash and Cash Equivalents At End
of Year $- $- $-
======= ======= =======
Supplemental cash flow information:
Cash paid for interest $4,919 $278 $178
======= ======= =======
Cash paid for income taxes $10 $- $-
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements
ROMACORP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization, Operation and Basis of Presentation
The consolidated financial statements reflect the financial information
of Romacorp, Inc. and Subsidiaries through June 28, 1998, the effective
date of the Recapitalization (See Note 2). On that date, the former
Romacorp, Inc. was renamed Roma Restaurant Holdings, Inc. (Holdings) and
the assets, liabilities and operations of Holdings were contributed to
its newly-created, wholly-owned subsidiary, Romacorp Operating
Corporation, whose name was then changed to Romacorp, Inc. Subsequent to
June 28, 1998, the consolidated financial statements reflect the
financial information of the newly-created Romacorp, Inc. and
subsidiaries (the Company) and include the Company's operation of its
owned restaurants and franchise revenue from franchisees' use of
trademarks and other proprietary information in the operation of Tony
Roma's restaurants. The Company maintains its corporate office in Dallas,
Texas, and through its subsidiaries provides menu development, training,
marketing and other administrative services related to the operation of
the Roma Concept. All intercompany transactions between Romacorp, Inc.
and its Subsidiaries have been eliminated.
(2) Recapitalization
The Company (then Romacorp) was acquired in June 1993 by NPC
International, Inc. (NPC). On April 24, 1998, Holdings, NPC and Sentinel
Capital Partners, L.P. executed a recapitalization agreement ("The
Recapitalization") effective June 28, 1998 related to the Company.
Romacorp, Inc. was renamed Roma Restaurant Holdings, Inc. (Holdings) and
the assets, liabilities and operations of Holdings were contributed to
its newly-created, wholly-owned subsidiary, Romacorp, Inc. Prior to the
Recapitalization, Romacorp was a wholly-owned subsidiary of NPC. In the
Recapitalization, Holdings redeemed stock held by NPC and NPC forgave and
contributed to the capital of the Company a payable to NPC in the amount
of $33,731,000. After the Recapitalization, NPC held 20% and Sentinel
through certain affiliates (Sentinel) held 80% of the equity of Holdings.
In conjunction with this transaction, $75,000,000 of 12% Senior Notes
were issued by the Company. The Company paid Holdings a dividend of
$75,300,000 consisting primarily of the proceeds from the 12% Senior
Notes, which was used by Holdings, along with Sentinel's equity
contribution, to effect the Recapitalization. This transaction was
accounted for as a leveraged recapitalization with the assets and
liabilities of Romacorp, Inc. retaining their historical value.
(3) Summary of Significant Accounting Policies
Fiscal Year The Company operates on a 52 or 53 week fiscal year
ending on the last Sunday before the last Tuesday in March. The fiscal
years ended March 28, 1999, and March 23, 1997 each contained 52 weeks.
The fiscal year ended March 29, 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. For
each period presented, substantially all cash was in the form of
depository accounts.
Inventories Inventories of food and supplies are valued at the lower
of cost (first-in, first-out method) or market.
Pre-opening Costs The Company amortizes pre-opening costs, which
principally represent the cost of hiring and training new personnel, over
a period of one year commencing with the restaurant's opening.
Facilities and Equipment - Facilities and equipment are recorded at
cost. Depreciation is charged on the straight-line basis for buildings,
furniture and equipment. Leasehold improvements are amortized on the
straight-line method over the life of the lease or the life of the
improvements whichever is shorter. Interest is capitalized with the
construction of new restaurants as part of the asset to which it relates.
Interest capitalized during 1999, 1998 and 1997 was $116,000, $332,000
and $339,000, respectively.
Long-lived Assets - The majority of the Company's long-lived assets
held for continuing use are evaluated for potential impairment on a
store-by-store basis. Assets held for sale are stated at estimated fair
value.
Goodwill - Goodwill represents the excess of cost over the identifiable
net assets acquired and is amortized on the straight-line method over
periods ranging from 25 to 40 years.
Franchise Revenue - The franchise agreements for Tony Roma's
restaurants provide for an initial fee and continuing royalty payments
based upon gross sales, in return for operational support, product
development, marketing programs and various administrative services.
Royalty revenue is recognized on the accrual basis, although initial fees
are not recognized until the franchisee's restaurant is opened. Fees for
granting exclusive development rights to specific geographic areas are
recognized when the right has been granted and cash received is non-
refundable. Net franchise revenue is presented net of direct expenses,
which include labor, travel and related costs of Franchise Business
Managers, who operate as liaisons between the franchise community and the
franchisor. Direct costs also include bad debt expense, and opening costs
consisting primarily of training expenses. Franchisees also participate
in national and local marketing programs, which are managed by the
Company. The related funding for these programs is separate and not
included in the accompanying financial statements.
Fair Value of Financial Instruments - As of March 28, 1999 and March
29, 1998, the fair value of the Company's financial instruments,
including cash equivalents, approximates their carrying value.
Income Taxes - The Company's results prior to June 28, 1998, are
included in the consolidated federal income tax return of NPC
International, Inc. As a result of the Recapitalization (see Note 2), the
Company began filing its own federal income tax return subsequent to June
28, 1998. The provisions for income taxes, reflected in the accompanying
statements, were calculated for the Company on a separate return basis.
The provisions for income taxes include taxes that are deferred because
of temporary differences between the financial statements and tax bases
of assets and liabilities. Deferred taxes arise principally from the use
of different depreciation methods and lives for tax purposes, and the
deferral of tax deductions for the insurance and closure reserves accrued
for financial statement purposes.
Insurance Reserves -The Company is self-insured for certain risks
and is covered by insurance policies for other risks. The Company
maintains reserves for their policy deductibles and other program
expenses using case basis evaluations and other analyses. The reserves
include estimates of future trends in claim severity and frequency, and
other factors, which could vary as claims, are ultimately settled.
Reserve estimates are continually reviewed and adjustments are reflected
in current operations. Changes in deductible amounts could impact both
the establishment of future reserves and/or the rate of premiums
incurred.
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 approximately $2,700,000, $2,700,000, and $2,130,000 of
such costs in fiscal 1999, fiscal 1998 and fiscal 1997, respectively.
Recently Issued Accounting Standards - In April 1998, Statement of
Position (SOP) 98-5 Accounting for Costs of Start-up Activities was
issued. The SOP requires the Company to expense pre-opening costs as
incurred and to report the initial adoption as a cumulative effect of a
change in accounting principle as described in APB No. 20, Accounting
Changes, during the first quarter of its fiscal year 2000. The cumulative
effect upon adoption will result in a one-time charge to income in an
amount equal to the net book value of the Company's pre-opening costs.
This change will also result in the discontinued amortization of
pre-opening cost expense in subsequent periods. At March 28, 1999, the
balance of pre-opening costs was $777,000.
(4) Accounts Receivable
Accounts receivable consists of the following:
March 28, March 29,
1999 1998
(Dollars in thousands)
Franchise receivables....... $1,303 $1,324
Other receivables........... 408 299
------- -------
1,711 1,623
Allowances for doubtful accounts... (74) (272)
------- -------
Net receivables............ $1,637 $1,351
======= =======
Franchise receivables represent royalties due based on a percent of
sales at the franchisees' Tony Roma's restaurants, and for other services
provided, and fees assessed in accordance with the franchise agreement.
Other receivables include amounts due for the sale of raw materials,
principally ribs, which the Company has sold from its supply to
franchisees. Other receivables also includes "banquet" sales to
significant individual customers and other miscellaneous items.
The Company generally does not require collateral on the accounts,
but has the right to terminate the franchise agreement in the event the
royalties becomes uncollectible.
(5) Facilities and Equipment
Facilities and equipment consists of the following:
Estimated March 28, March 29,
Useful Life 1999 1998
---------- --------- ---------
(Dollars in thousands)
Land.................... $14,371 $12,057
Buildings................ 15-30 years 26,374 26,790
Leasehold improvements..... 5-20 years 12,050 11,785
Furniture and equipment.... 3-10 years 17,112 14,898
Construction in progress.... 4,756 1,472
-------- --------
74,663 67,002
-------- --------
Less accumulated depreciation and
amortization..... (17,617) (14,402)
-------- --------
Net facilities and equipment $57,046 $52,600
======== ========
(6) Accrued Liabilities
Accrued liabilities consists of the following:
March 28, March 29,
1999 1998
-------- --------
(Dollars in thousands)
Compensation and related taxes $2,098 $1,438
Insurance claims and administration... 812 1,161
Taxes other than income and payroll.... 961 1,052
Gift certificates............. 595 313
Other......................... 1,099 596
-------- --------
Total accrued liabilities........ $5,565 $4,560
======== ========
(7) Income Taxes
The provision (benefit) for income taxes consisted of the following:
For the Fiscal Year Ended
March 28, March 29, March 23,
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Current:
Federal.............. $533 $2,755 $330
State...................... 25 99 49
Foreign................ 220 284 352
------- ------- -------
778 3,138 731
------- ------- -------
Deferred:
Federal................... 147 (723) 581
State...................... - (26) 86
Foreign............... - (74) 619
------- ------- -------
147 (823) 1,286
------- ------- -------
Provision for income taxes.. $ 925 $2,315 $2,017
======= ======= =======
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 28, March 29, March 23,
1999 1998 1997
------- ------- -------
(Dollars in thousands)
Tax computed at statutory rate $902 $2,268 $1,923
Goodwill amortization......... 244 249 242
Tax credits................ (264) (372) (309)
State taxes, net of federal
effect, and other. 43 170 161
------- ------- -------
Provision for income taxes $ 925 $2,315 $2,017
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for federal and state
income tax purposes. Significant components of the Company's deferred tax
assets and liabilities are as follows:
March 28, March 29,
1999 1998
-------- --------
Deferred tax assets: (Dollars in thousands)
Insurance reserves........... $551 $926
Closure reserves.............. 139 192
Accrued vacation............... 199 245
Depreciation................. 700 507
Allowance for doubtful accounts.... 25 97
Other, net.................... 509 204
------ ------
Total deferred tax assets.... 2,123 2,171
------- ------
Deferred tax liabilities:
Pre-opening expenses....... 264 165
Net deferred tax assets......... 1,859 2,006
Current.................... 217 583
------- -------
Non-current............. $1,642 $1,423
======= =======
A valuation allowance against deferred tax assets is required if,
based on the weight of available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized. The
Company believes, based on the expected timing of the reversal of the
future taxable temporary differences that no valuation allowance is
necessary.
(8) Senior Notes
Senior notes are comprised of $75.0 million in notes issued in
conjunction with the Recapitalization on June 28, 1998. Interest on the
notes accrue from the date of issuance and are payable in arrears on
January 1 and July 1 of each year commencing January 1, 1999, at the rate
of 12% per annum. The notes will mature on July 1, 2006. As of March 28,
1999, the fair value of the notes as estimated to be in the range of
approximately $72 million to $73.5 million based on the quoted market
rates for the debt.
(9) Long-term Debt and Payable to Affiliate
Long-term debt as of March 28, 1999 consists of a note payable to
a bank under a $15 million revolving credit facility which is secured by
substantially all of the assets of the Company, and bears interest at the
Company's option of prime rate or up to LIBOR plus 2.25%. Both rates are
subject to maintaining certain financial covenants, and interest is
payable upon maturity of the LIBOR or monthly for prime rate advances.
In addition, a commitment fee based on an annual rate of .375% is payable
monthly on all unused commitments.
In addition to the credit facility, the Company obtained two
commitments from a financial group. One is a commitment to purchase, at
the Company's option, 11 restaurants not to exceed $1.75 million each or
$19.3 million in aggregate and subsequently enter into a lease agreement
with the Company as lessee. The lease agreement provides for a minimum
annual rent of 10% of the purchase price which will increase 6% on the
third anniversary of the lease and 6% every three years thereafter.
Payments are to be made monthly. The lease term will be for 15 years
with two five year renewal options of five years each. The minimum
annual rent for the renewal option periods will be set at fair market
value. The second commitment, a Leasehold Mortgage Loan Commitment
provides for the funding of the construction of 11 restaurants on leased
land, not to exceed $1.0 million each or $11.0 million in aggregate, at
a rate of 450 basis points over the then existing rate of fifteen year
United States Treasuries with an amortization period of 15 years and
payments to be made monthly. Both commitments expire June 30, 2000. As
of March 28, 1999, three sale leasebacks had been completed for $5.5
million.
Long-term debt as of March 29, 1998, consisted of a note payable
to a former franchisee. As part of the Recapitalization transaction,
this note was paid in full. In addition, in conjunction with the
Recapitalization, $33,887,000 in payable to affiliate was contributed to
capital.
(10) Commitments
The Company leases certain restaurant equipment and buildings
under operating leases. Rent expense for the fiscal years 1999, 1998,
and 1997 was $3,879,000, $3,879,000, and $3,412,000 respectively,
including additional rentals of approximately $724,000 in 1999, $712,000
during 1998, and $687,000 during 1997 which are based upon a percentage
of sales in excess of a base amount as specified in the lease. The
majority of the Company's leases contain renewal option(s) for 5 to 10
years. Renewal of the remaining leases is dependent on mutually
acceptable negotiations.
At March 28, 1999, minimum rental commitments under operating
leases that have initial or remaining non-cancelable lease terms in
excess of one year are as follows:
Fiscal Year (Dollars in thousands)
2000............. $3,116
2001..................... 2,942
2002.......................... 2,760
2003............................. 2,645
2004............................... 2,394
Thereafter 15,831
--------
$29,688
========
(11) Stock Option Plan
Holdings has a stock option plan (the "Stock Plan"), which reserved
for grant 44.4 shares to certain key employees and/or directors of the
Company. The stock options granted under the stock plan are non-
qualified options for federal income tax purposes. As of March 28, 1999,
no options have been granted.
(12) Summarized Financial Information
Summarized financial information for Romacorp Inc., excluding the
assets, liabilities, and operations of its wholly-owned subsidiaries, is
as follows (in thousands):
For the Fiscal Year Ended
March 28, March 29, March 23,
1999 1998 1997
-------- -------- --------
Total revenues.... $93,213 $86,408 $68,778
Total operating expenses.. 92,120 86,496 67,829
Operating income (loss).. 1,093 (88) 949
Loss before income taxes. 7,987 3,147 1,040
Net loss......... 5,210 2,093 771
March 28, March 29, March 23,
1999 1998 1997
-------- -------- --------
Current assets........... $ 6,388 $ 3,275 $ 3,348
Noncurrent assets...... 88,421 74,957 64,654
Current liabilities...... 2,183 1,641 5,812
Noncurrent liabilities... 101,293 45,299 51,448
(13) Related Party Transactions
The Company entered into a Transitional Financial and Accounting
Services Agreement (the "Transition Services Agreement") whereby NPC will
continue to provide administrative services to the Company for an initial
fee of $16,000 per week for a period of up to one year. Services provided
will include accounting services, payroll services and use of NPC's
proprietary restaurant technology system software (the "POS System").
As part of the Transition Services Agreement, the Company was granted a
perpetual license to use the POS System. Effective March 29, 1999, the
Company amended the contract whereby services will continue through July
2001 with a weekly base service fee of $14,300 during fiscal 2000,
$15,000 during fiscal 2001, and $15,750 during fiscal 2002. In addition
to the base fee, an incremental weekly fee shall be paid for each
restaurant opened on or after March 29, 1999 in the amount of $160 for
fiscal 2000, $170 for fiscal 2001 and $180 for fiscal 2002.
The Company reimbursed Sentinel for all out-of-pocket expenses incurred
in connection with the Recapitalization. In addition, pursuant to a
management agreement, Sentinel receives a management fee equal to
$300,000 per annum for the first two years of the term of the management
agreement and $500,000 per annum thereafter, and will be reimbursed for
certain out-of-pocket expenses.