November 9, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Room 1004
Judiciary Plaza
Washington, D.C. 20549
RE: Romacorp, Inc. 10-Q for Second Quarter Ended September 26, 1999
Gentlemen:
We are transmitting electronically the Form 10-Q for Romacorp, Inc. for the
second quarter ended September 26, 1999.
Sincerely,
Susan R. Holland
Vice President, Finance &
Chief Financial Officer
/ktc
cc: Peter Cola
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 26, 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 incorporation (I.R.S. Employer
or organization) Identification No.)
9304 Forest Lane, Suite 200, Dallas, Texas 75243
------------------------------------------------
(Address of principal executive offices)
(214) 343-7800
----------------------------------------------------
(Registrant's telephone number, including area code)
-------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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
COMMON SHARES OUTSTANDING AT NOVEMBER 1, 1999:
COMMON STOCK 100 SHARES, $.01 PAR VALUE
ROMACORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 26, March 28,
1999 1999
--------- ---------
(Dollars in thousands)
(Unaudited)
Current Assets:
Cash and cash equivalents................... $ - $ -
Accounts receivable, net..................... 1,201 1,637
Inventories of food and supplies.............. 2,686 3,051
Deferred income tax asset..................... 497 217
Prepaid expenses........................... 1,021 1,059
Preopening expenses.......................... - 777
Other current assets....................... 25 14
----- -----
Total current assets................... 5,430 6,755
Facilities and equipment, net................ 58,948 57,046
Notes receivable, net.......................... 711 719
Goodwill, net of accumulated amortization
of $5,551 and $5,184, respectively.............. 13,425 13,792
Deferred income tax asset.................... 1,895 1,642
Other assets.............................. 761 792
Debt issuance costs, net of accumulated
amortization of $643 and $337, respectively..... 3,095 3,289
------- -------
Total assets............................ $84,265 $84,035
======= =======
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
September 26, March 28,
1999 1999
----------- ---------
(Dollars in thousands)
(Unaudited)
Current Liabilities:
Accounts payable......................... $ 2,277 $ 2,651
Accrued interest........................... 2,287 2,291
Current portion of closure reserve......... 100 100
Checks written in excess of cash........... 56 296
Other accrued liabilities................ 5,584 5,565
------- -------
Total current liabilities............ 10,304 10,903
Senior notes........................... 75,000 75,000
Long-term debt........................... 5,868 5,290
Closure reserve................ 295 309
Deferred gain on sale of asset................ 571 -
Long-term insurance reserves................... 1,200 1,200
Stockholder's Equity (Deficit):
Common stock, 2,000 shares authorized, 100 shares
issued and outstanding................. - -
Paid-in capital........................ 66,469 66,469
Retained earnings (deficit):
Dividend to Holdings.................. (75,368) (75,351)
Other............................... (74) 215
------- -------
Total....................... (75,442) (75,136)
------- -------
Total stockholder's equity (deficit). (8,973) (8,667)
------- -------
Total liabilities and stockholder's
equity (deficit).................... $84,265 $84,035
======= =======
The accompanying notes are an integral part of these consolidated
financial statements
ROMACORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
13 Weeks Ended 26 Weeks Ended
9/26/99 9/27/98 9/26/99 9/27/98
------- ------- -------- -------
Net restaurant sales..... $26,651 $22,418 $53,167 $44,931
Net franchise revenue..... 2,145 2,139 4,333 4,253
------- ------- ------ ------
Total revenues..... 28,796 24,557 57,500 49,184
Cost of sales......... 8,631 7,923 17,043 15,756
Direct labor.............. 8,301 7,038 16,475 13,838
Other............. 6,585 5,532 12,769 10,811
General and administrative
expenses.... 2,962 2,336 6,021 4,357
----- ------ ------ ------
Total operating expenses.. 26,479 22,829 52,308 44,762
Operating income......... 2,317 1,728 5,192 4,422
Other income (expense):
Interest expense....... (2,479) (2,438) (4,912) (3,101)
Miscellaneous......... 37 23 65 217
----- ----- ------ -----
Income (loss) before
income taxes........... (125) (687) 345 1,538
Provision (benefit) for
income taxes........ (44) (239) 121 540
------ ------ ------ ------
Income (loss) before cumulative
effect of a change in accounting
principle......... (81) (448) 224 998
Cumulative effect of a change in
accounting principle......... - - (513) -
------ ------ ------ ------
Net income (loss).......... $ (81) $ (448) $ (289) $ 998
====== ====== ====== ======
The accompanying notes are an integral part of these consolidated
financial statements
ROMACORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-Six Weeks Ended
9/26/1999 9/27/1998
--------- ---------
(Dollars in thousands)
Operating Activities:
Net income (loss).................... $ (289) $ 998
Non-cash items included in net income (loss):
Depreciation and amortization...... 3,082 2,837
Amortization of pre-opening costs...... - 468
Amortization of debt issuance costs..... 225 110
Deferred income taxes............ (269) (286)
Cumulative effect of a change in
accounting principle................. 513 -
Deferred gain on sale of assets....... (12) -
Change in assets and liabilities:
Accounts receivable, net............ 436 (39)
Inventories of food and supplies....... 365 (1,045)
Preopening costs.............. - (405)
Other current assets............... 27 (416)
Accounts payable.................... (374) (177)
Payroll taxes....................... - (18)
Accrued interest................... (4) 2,230
Other accrued liabilities.......... 5 452
Other............................. 8 (20)
------ ------
Net cash flows provided by operating
activities............ 3,713 4,689
------ ------
Investing Activities:
Capital expenditures, net.............. (7,918) (4,346)
Changes in other assets, net............ 10 55
------ ------
Net cash flows used by investing activities.. (7,908) (4,291)
------ ------
Financing Activities:
Senior Notes.................... - 75,000
Dividend to Holdings............. (17) (75,337)
Net borrowings under line-of-credit agreement 578 5,226
Proceeds from sale of assets......... 3,905 -
Debt issuance costs................. (31) (3,445)
Payments of debt..................... - (1,333)
Net change in payable to affiliate... - (483)
Change in checks written in excess of cash (240) (26)
------ ------
Net cash flows provided (used) by
financing activities............ 4,195 (398)
------ ------
Net Change in Cash and Cash Equivalents... 0 0
Cash and Cash Equivalents At Beginning of Period - -
------ ------
Cash and Cash Equivalents At End of Period.. $ 0 $ 0
====== ======
The accompanying notes are an integral part of these consolidated
financial statements
ROMACORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Consolidation and 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.
The consolidated financial statements include the accounts of its wholly
owned subsidiaries. The consolidated financial statements and information
included herein are unaudited; however, they reflect all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary to fairly present the consolidated results of
operations and cash flows for the interim periods ended September 26, 1999
and September 27, 1998 and the consolidated financial position as of
September 26, 1999. Results for the period ended September 26, 1999 are
not necessarily indicative of the results that may be expected for the
entire fiscal year. The notes to the audited consolidated financial
statements contained in the Form 10-K should be read in conjunction with
these unaudited consolidated condensed financial statements.
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.
Note 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 $75,351,000
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.
ROMACORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Income Taxes
Prior to the Recapitalization the Company's results were included in the
consolidated federal income tax return of NPC International, Inc.
Following the Recapitalization, the Company will file its federal income
tax return on a stand alone basis.
Note 4 - Recently Issued Accounting Pronouncements
Effective March 29, 1999, the Company adopted Statement of Position 98-5
("SOP 98-5") Accounting for Costs of Start-up Activities which requires the
Company to expense pre-opening costs as incurred rather than the previous
policy of amortizing those costs over a twelve month period and to report
the initial adoption as a cumulative effect of a change in accounting
principle. Accordingly, $513,000 in pre-opening costs net of taxes were
recorded during the first quarter as a change in accounting principle.
ITEM 2. 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 which 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 in filings with the Securities and
Exchange Commission.
Liquidity and Capital Resources
Historically, the Company's principal sources of funds have been
operations and borrowings under a credit facility with NPC. The Company's
principal uses of funds have been capital expenditures and payments on a
note payable related to the acquisition of a franchisee's restaurants.
The Company believes cash flow generated from operations and working
capital are principal indicators of its liquidity condition. The Company's
principal sources of liquidity on both a long-term and short-term basis are
cash flow generated from operations, a commitment from a financial group
to purchase and leaseback 11 restaurant properties and a Revolving Credit
Facility.
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 the Company's option of prime rate or up to six-month LIBOR
plus 2.25%. Obligations of the Company not paid when due bear interest at
a default rate equal to 2% in excess of the non-default interest rate. A
commitment fee of .375% is payable monthly on any unused commitments. As
of September 26, 1999, $5,868,000 was outstanding under the facility.
The commitment from the financial group to purchase and leaseback 11
restaurants includes a provision to purchase from the Company 11
restaurants not to exceed $1.75 million each or $19.25 million in aggregate
and subsequently enter into a lease agreement with the Company as lessee.
The lease agreement provides for minimum annual rent of 10% of the purchase
price and 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 commitment expires June 30, 2000. As of September
26, 1999, five sale leasebacks had been completed for $9.5 million.
During fiscal 2000 the Company estimated total capital expenditures
including on going capitalized maintenance to be approximately $20 million.
The Company plans to open six to seven restaurants and fund all restaurants
through the financing program described above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company is currently operating with a working capital deficit, which
is common in the restaurant industry, since restaurant companies do not
typically require a significant investment in accounts receivable or
inventory. Working capital deficit increased from $4,148,000 at March 28,
1999 to $4,874,000 at September 26, 1999, primarily due to usage of ribs
in storage and lower accounts receivable.
Results of Operations
Net restaurant sales. Net restaurant sales for the quarter ended
September 26, 1999 increased $4.2 million, or 18.9% to $26.7 million from
$22.4 million. This increase was primarily due to an increase in the
number of restaurants. Comparable store sales were flat for the quarter.
Year-to-date sales increased $8.2 million to $53.2 million or 18.3% due to
a net increase in the number of stores and an increase in comparable store
sales of 0.9%. There were 54 stores open as of September 26, 1999 versus
46 stores open as of September 27, 1998. During November 1998, weighted
average menu prices were increased 6%.
Net franchise revenues. Net franchise revenues increased for the
quarter and year to date 0.3% to $2.1 million and 1.9% to $4.3 million,
respectively, due to an increase in royalty income, partly offset by a
decrease in franchise fees and an increase in receivable reserves. The net
number of franchise stores increased from 152 as of September 27, 1998 to
162 as of September 26, 1999.
Cost of sales. Cost of sales as a percentage of net restaurant sales
decreased to 32.4% from 35.3% and to 32.1% from 35.1% for the quarter and
year to date, respectively, primarily due to a decrease in the average
price of baby-back ribs of 9% for both the quarter and year to date.
Direct labor. Direct labor as a percentage of net restaurant sales
decreased slightly for the quarter from 31.4% to 31.1% and increased for
the year to date from 30.8% to 31.0%, respectively.
Other. Other operating expenses as a percentage of net restaurant sales
decreased slightly for the quarter and year to date from 12.0% to 11.7% and
from 11.5% to 11.2%, respectively.
General and administrative expenses. General and administrative
expenses increased for the quarter and year to date from $2.3 million to
$3.0 million and from $4.4 million to $6.0 million, respectively. These
increases were primarily due to increased corporate staff and related
travel and an increase in the number of field supervisors and managers in
training.
Interest expense. Interest expense for the quarter remained basically
stable and increased for the year to date $1.8 million due to the $75.0
million in notes issued in conjunction with the Recapitalization.
Miscellaneous. Miscellaneous income for the prior year's year-to-date
period includes $169,000 for business interruption insurance for a
restaurant destroyed by fire.
Tax Provision. Income taxes for the quarter and year to date were
consistent with the prior year at approximately 35% of pretax income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 completed the process of reviewing non-
information technology equipment and 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not own, nor does it have an interest in any market
risk sensitive investments.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
26, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROMACORP, INC.
Date: November 9, 1999 By: /s/Susan R. Holland
---------------------------
Vice President, Finance &
Chief Financial Officer
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<FISCAL-YEAR-END> MAR-26-2000
<PERIOD-START> JUN-28-1999
<PERIOD-END> SEP-26-1999
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<SECURITIES> 0
<RECEIVABLES> 1,201
<ALLOWANCES> 0
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