February 8, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Room 1004
Judiciary Plaza
Washington, D.C. 20549
RE: Romacorp, Inc. 10-Q for Third Quarter Ended December 27, 1998
Gentlemen:
We are transmitting electronically the Form 10-Q for Romacorp, Inc. for the
third quarter ended December 27, 1998.
Sincerely,
Susan R. Holland
Vice President, Finance &
Chief Financial Officer
/ktc
<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 December 27, 1998
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 (I.R.S. Employer
of incorporation Identification No.)
or organization)
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 DECEMBER 27, 1998:
COMMON STOCK 400
<PAGE>
ROMACORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 27, March 29,
1998 1998
----------- ---------
(Dollars in thousands)
(Unaudited)
Current Assets:
Cash and cash equivalents $ 371 $ --
Accounts receivable, net 1,305 1,351
Inventories of food and supplies 2,612 1,509
Deferred income tax asset 407 583
Prepaid expenses 582 583
Preopening expenses 441 466
Other current assets 21 22
----- -----
Total current assets 5,739 4,514
Facilities and equipment, net 58,751 52,600
Notes receivable, net 729 757
Goodwill, net of accumulated amortization of
$5,000 and $4,450, respectively 13,976 14,526
Deferred income tax asset 1,899 1,423
Other assets 826 927
Debt issuance costs 3,258 --
----- -----
Total assets $85,178 $74,747
======= =======
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
ROMACORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDER'S EQUITY
December 27, March 29,
1998 1998
----------- ---------
(Dollars in thousands)
(Unaudited)
Current liabilities:
Accounts payable $1,681 $1,094
Accrued interest 4,546 28
Current portion of closure reserve 100 100
Checks written in excess of cash -- 113
Other accrued liabilities 4,970 4,560
Current portion of long-term debt -- 444
------ ------
Total current liabilities 11,297 6,339
Senior notes 75,000 --
Long-term debt 6,843 889
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, 400
shares issued and outstanding -- --
Paid-in capital 66,512 17,444
Retained earnings (deficit):
Dividend to Holdings (75,351) --
Other (632) 13,848
------- ------
Total (75,983) 13,848
------- ------
Total stockholder's equity (deficit) (9,471) 31,292
------- ------
Total liabilities and stockholder's equity $85,178 $74,747
======= =======
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
ROMACORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
12/27/98 12/21/97 12/27/98 12/21/97
(Dollars in thousands)
Net restaurant sales $22,047 $20,368 $66,978 $61,114
Net franchise revenues 2,222 2,006 6,475 6,151
------- ------- ------- -------
Total revenues 24,269 22,374 73,453 67,265
Cost of sales 7,348 7,135 23,104 20,379
Direct labor 6,935 6,316 20,773 19,270
Other 5,349 5,260 16,160 15,305
General and administrative
expenses 2,368 2,235 6,725 6,869
------ ------ ------ ------
Total operating expenses 22,000 20,946 66,762 61,823
Operating income 2,269 1,428 6,691 5,442
Other income (expense):
Interest expense (2,557) (669) (5,658) (1,709)
Miscellaneous 22 (13) 239 (12)
----- ----- ------ ------
Income (loss) before income
taxes (266) 746 1,272 3,721
Income tax provision (benefit) (82) 309 458 1,351
----- ----- ----- ------
Net income (loss) $(184) $437 $814 $2,370
===== ===== ===== ======
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
ROMACORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-Nine Weeks Ended
-----------------------
12/27/98 12/21/97
(Dollars in thousands)
Operating Activities:
Net income $814 $2,370
Non-cash items included in net income:
Depreciation and amortization 4,279 3,865
Amortization of pre-opening costs 667 1,563
Amortization of debt issuance costs 209 --
Deferred income taxes (427) (717)
Change in assets and liabilities:
Accounts receivable, net 46 625
Inventories of food and supplies (1,103) (1,368)
Preopening costs (642) (1,019)
Other current assets 2 196
Accounts payable 587 (217)
Accured interest 4,518 (7)
Other accrued liabilities 273 749
Other 28 37
------ -----
Net cash flows provided by operating
activities 9,251 6,077
Investing Activities:
Capital expenditures, net (10,049) (8,881)
Changes in other assets, net 73 (57)
------ -----
Net cash flows used by investing activiti (9,976) (8,938)
------ -----
Financing Activities:
Senior Notes 75,000 --
Dividend to Holdings (75,351) --
Net borrowings under line-of-credit agreement 6,843 --
Debt issuance costs (3,467) --
Payments of debt (1,333) (444)
Net change in payable to affiliate (483) 4,064
Change in checks written in excess of cash (113) (407)
------ -----
Net cash flows provided by financing
activities 1,096 3,213
------ -----
Net Change in Cash and Cash Equivalents 371 352
Cash and Cash Equivalents At Beginning of Period -- --
------ -----
Cash and Cash Equivalents At End of Period $371 $352
====== ======
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
ROMACORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Consolidation and Presentation
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 December 27, 1998 and December 21, 1997 and the
consolidated financial position as of December 27, 1998. Results for the period
ended December 27, 1998 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 S-4 Registration Statement 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
On April 24, 1998, NPC International, Inc. and subsidiaries (NPC) and
Sentinel Capital Partners, L.P. and certain of its affiliates (Sentinel)
executed a recapitalization agreement effective June 28, 1998 related
to Holdings. Prior to the recapitalization, Holdings was a wholly-owned
subsidiary of NPC. Holdings redeemed stock held by NPC so that NPC
held 20% of the equity of Holdings following the transaction. Sentinel
became the majority equity owner of Holdings following the transaction.
In conjunction with this transaction, $75,000,000 of 12% Senior Notes
were issued by the Company. Interest on the notes will accrue
from the date of issuance and will be 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. The Company paid Holdings a dividend of
$75.3
million, 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.
Note 3 - Long-Term Debt and Payable to Affiliate
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 (NPC) was contributed to capital.
Note 4 - Credit Facilities
Effective July 1, 1998, the Company entered into an agreement with a bank for
a Revolving Credit Facility which will provide borrowings up to $15 million, 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 six-month 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 of .375 % is payable monthly on all unused
commitments. On July 1, 1998, the Company borrowed $5 million. At December 27,
1998, the Company had borrowed $6.8 million under this facility.
In addition to the Revolving Credit Facility, the Company has two commitments
from a financial group. One is a commitment to purchase 11 restaurants not to
exceed $1.75 million each or $19.5 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 second
commitment, a
Leasehold Mortgage Loan Commitment, provides for the funding of the construction
of 11 restaurants on leased land at a rate not to exceed 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.
<PAGE>
ROMACORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Note 5 - Stock Option Plan
The Company has a stock option plan (the "Stock Plan"), which provides for
the grant to certain key employees and/or directors of the Company of stock
options that are non-qualified options for federal income tax purposes. The
Stock Plan will be administered by the Board of Directors or a committee
thereof.
Note 6 - 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.
<PAGE>
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, two separate commitments from a financial group to
purchase and leaseback 11 restaurant properties and to fund the construction of
11 restaurants on leased land, 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 portion of the commitment. As of December 27, 1998, $6,843,000 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 Leasehold Mortgage
Loan Commitment provides for the funding of the construction of 11 restaurants
on leased land not to exceed $1 million per property or $11,000,000 in aggregate
at a rate not to exceed 450 basis points over the then existing rate of fifteen
year United States Treasuries, an amortization period of 15 years and payments
to be made monthly. Both commitments expire June 30, 2000. On December 29,
1998, the Company sold two restaurants and entered into lease agreements under
the sale/leaseback commitment.
During fiscal 1999 the Company estimates total capital expenditures,
including ongoing capitalized maintenance to be approximately $15 million. The
Company plans to open a total of six restaurants and ten restaurants during
fiscal 1999 and fiscal 2000, respectively.
<PAGE>
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 $1,825,000 at March 29, 1998 to $5,558,000 at
December 27, 1998, primarily due to increased accrued interest expense, partly
offset by an increase in rib inventory in storage.
Results of Operations
Net restaurant sales. Net restaurant sales for the quarter ended December 27,
1998 increased $1.7 million, or 8.2%, to $22.0 million from $20.4 million for
the
quarter ended December 21, 1997. This increase was due primarily to an increase
in the net number of restaurants and an increase of 2.7% in same-store sales
growth. Year-to-date sales increased to $67.0 million, an increase of $5.9
million or 9.6% over the comparable 1997 period, due to a net increase in the
number of stores and an increase in same-store store sales of 1.8%. There were
47 stores open as of December 27, 1998 versus 45 stores open as of December 21,
1997. A new menu was introduced in the latter part of the third quarter of
fiscal 1998 which repositioned baby-back ribs as the premier rib offering,
introduced new menu items, increased portion sizes and increased prices on
selected items. This strategy resulted in an approximate 2% weighted average
price increase to offset the increased product cost associated with the new and
higher quality items as well as increased baby-back rib costs. In addition,
during November 1998, weighted average menu prices were increased 6% along with
the renaming of rib portions from "dinner and lunch" to "full slab and half
slab."
Net franchise revenues. Net franchise revenues increased for the quarter and
year-to-date 10.8% to $2.2 million and 5.3% to $6.5 million, respectively, due
to an increase in franchise fees net of pre-opening cost, royalty income from
new restaurants, partly offset by the devaluation of Asian currency for
existing restaurants. In addition, year-to-date bad debt expense decreased.
The net number of franchise stores increased from 144 as of December 21, 1997
to 152 as of December 27, 1998.
Cost of sales. Cost of sales as a percentage of net restaurant sales
decreased to 33.3% from 35.0% for the quarter primarily due to a decrease in the
average price of baby-back ribs of approximately 17% and to the increased menu
prices. For the year-to-date, cost of sales as a percentage of net restaurant
sales increased from 33.3% to 34.5% primarily due to an increase in the average
price per pound of baby-back ribs of approximately 4%.
Direct labor. Direct labor as a percentage of net restaurant sales for the
quarter increased from 31.0% to 31.5% due to a reduction in the prior year
in estimated vacation expenses. Year-to-date direct labor as a percentage of
sales decreased to 31.0% from 31.5% due largely to leverage obtained from
increases in comparable sales volumes. Also affecting the positive change was
the opening of one new store during the quarter versus four new store openings
a year ago and the opening of three new stores during the year-to-date versus
six new store openings a year ago. Unusually high labor costs are incurred with
store openings due to increased training and staffing levels to ensure the
customer's initial experience is favorable. In addition, workers compensation
insurance declined for the year-to-date period.
Other. Other operating expenses decreased as a percentage of sales from 25.8%
to 24.3% for the quarter and from 25.0% to 24.1% for the year-to-date period
primarily due to a decrease in the percentage of the number of leased
restaurants versus owned restaurants.
General and administrative expenses. General and administrative expenses
increased $133,000 to $2.4 million for the quarter and $144,000 to $6.7 million
for the year-to-date period, primarily due to increases in salaries related to
corporate staff additions as necessary under new ownership, management fees,
travel and professional fees, partly offset by lower amortization of pre-opening
costs, which occurs over the twelve months following a restaurant opening.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Interest expense. Interest expense increased $1.9 million and $3.9 million
for the quarter and year-to-date, respectively, primarily due to interest
related to the notes.
Miscellaneous. Miscellaneous income for the year-to-date period includes a
$169,000 settlement for business interruption insurance related to a restaurant
destroyed by fire.
Year 2000 Issue
The Company is in the process of evaluating and modifying its computer systems
and applications for Year 2000 compliance. Management believes that all
significant systems will be Year 2000 compliance prior to the end of the 1999
calendar year.
As the Company has entered into a Transition Services Agreement, providing for
accounting services, payroll services and use of NPC's proprietary POS System,
part of the evaluation is a review of NPC's systems and programs. Management
has reviewed NPC's plans for Year 2000 compliance and NPC plans to complete all
modifications and testing by March 31, 1999, including the POS System. NPC will
incur the costs for the Year 2000 compliance efforts related to the Transition
Services Agreement.
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 plans to provide all franchises with
information related to the risks associated with the Year 2000 issue by
March 31, 1999.
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.
<PAGE>
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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, net of
related taxes. This change will also result in the discontinuation of
amortization of pre-opening costs in subsequent periods. At December 27, 1998,
the balance of pre-opening costs was $441,000.
<PAGE>
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 December 27,
1998.
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: February 8, 1999 By: /s/Susan R. Holland
------------------------
Vice President, Finance &
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-28-1999
<PERIOD-START> OCT-28-1998
<PERIOD-END> DEC-27-1998
<CASH> 371
<SECURITIES> 0
<RECEIVABLES> 1,305
<ALLOWANCES> 0
<INVENTORY> 2,612
<CURRENT-ASSETS> 5,739
<PP&E> 58,751
<DEPRECIATION> 0
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<CURRENT-LIABILITIES> 11,297
<BONDS> 75,000
0
0
<COMMON> 0
<OTHER-SE> (9,471)
<TOTAL-LIABILITY-AND-EQUITY> 85,178
<SALES> 22,047
<TOTAL-REVENUES> 24,269
<CGS> 14,283
<TOTAL-COSTS> 22,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,557)
<INCOME-PRETAX> (266)
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