August 11, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Room 1004
Judiciary Plaza
Washington, D.C. 20549
RE: Romacorp, Inc. 10-Q for First Quarter Ended June 27, 1999
Gentlemen:
We are transmitting electronically the Form 10-Q for Romacorp, Inc. for
the first quarter ended June 27, 1999.
Sincerely,
Susan R. Holland
Vice President, Finance &
Chief Financial Officer
/ktc
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 June 27, 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 AUGUST 6, 1999:
COMMON STOCK 100 SHARES, $.01 PAR VALUE
ROMACORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 27, March 28,
1999 1999
------- -------
(Dollars in thousands)
(Unaudited)
Current Assets:
Cash and cash equivalents............ $519 $ --
Accounts receivable, net............. 1,168 1,637
Inventories of food and supplies................. 2,884 3,051
Deferred income tax asset....................... 661 217
Prepaid expenses............... 863 1,059
Preopening expenses............. - 777
Other current assets...................... 23 14
------ ------
Total current assets............... 6,118 6,755
Facilities and equipment, net........ 56,031 57,046
Notes receivable, net.................. 715 719
Goodwill, net of accumulated amortization of
$5,367 and $5,184, respectively................... 13,609 13,792
Deferred income tax asset............ 1,581 1,642
Other assets...................................... 787 792
Debt issuance costs, net of accumulated amortization
of $418 and $337, respectively................ 3,208 3,289
------ ------
Total assets........................ $82,049 $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
June 27, March 28,
1999 1999
-------- --------
(Dollars in thousands)
(Unaudited)
Current Liabilities:
Accounts payable........................ $2,300 $2,651
Accrued interest........................ 4,507 2,291
Current portion of closure reserve........... 100 100
Checks written in excess of cash.............. -- 296
Other accrued liabilities.................... 5,408 5,565
Income taxes payable........................ 177 --
------ ------
Total current liabilities........... 12,492 10,903
Senior notes........................... 75,000 75,000
Long-term debt................................. 1,340 5,290
Closure reserve................................... 312 309
Deferred gain on sale of asset............... 580 -
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....................... (75,351) (75,351)
Other..................................... 7 215
------- -------
Total............................... (75,344) (75,136)
------- -------
Total stockholder's equity (deficit).. (8,875) (8,667)
------- -------
Total liabilities and stockholder's
equity (deficit)......................... $ 82,049 $84,035
======= =======
The accompanying notes are an integral part of these consolidated financial
statements
ROMACORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Weeks Ended
----------------------
June 27, 1999 June 28, 1998
------------ -------------
(Dollars in thousands)
Net restaurant sales..................... $26,516 $ 22,513
Net franchise revenue................ 2,188 2,115
------- -------
Total revenues.................... 28,704 24,628
Cost of sales.................. 8,412 7,833
Direct labor......................... 8,174 6,800
Other..................................... 6,184 5,282
General and administrative expenses.......... 3,059 2,018
------- -------
Total operating expenses............... 25,829 21,933
------- -------
Operating income.............................. 2,875 2,695
Other income (expense):
Interest expense...................... (2,433) (663)
Miscellaneous...................... 28 193
------- -------
Income before income taxes........... 470 2,225
Provision for income taxes........ 165 779
------- -------
Net income before cumulative effect of a
change in accounting principle........... 305 1,446
Cumulative effect of a change in accounting
principle .... (513) -
------- -------
Net income (loss)........................ $ (208) $ 1,446
======= =======
The accompanying notes are an integral part of these consolidated financial
statements
ROMACORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirteen Weeks Ended
---------------------
June 27, 1999 June 28, 1998
------------- -------------
(Dollars in thousands)
Operating Activities:
Net income (loss)...................... $(208) $1,446
Non-cash items included in net income (loss):
Depreciation and amortization............. 1,488 1,410
Amortization of pre-opening costs........ - 267
Amortization of debt issuance costs..... 81 -
Deferred income taxes................ (119) -
Deferred gain on sale of assets........... (3) -
Cumulative effect of a change in accounting
principle..... 513 -
Change in assets and liabilities:
Accounts receivable, net.................... 469 (35)
Inventories of food and supplies.......... 167 (618)
Preopening costs........................... - (103)
Other current assets................. 187 (108)
Accounts payable..................... (351) 22
Accured interest.......................... 2,216 -
Other accrued liabilities................ (154) (450)
Other............................ 181 7
------- -------
Net cash flows provided by operating
activities.............. 4,467 1,838
------- -------
Investing Activities:
Capital expenditures, net................. (3,603) (1,912)
Changes in other assets, net............... (4) 42
------- -------
Net cash flows used by investing
activities (3,607) (1,870)
------- -------
Financing Activities:
Net borrowings under line-of-credit agreement(3,950) -
Proceeds from sale of assets........... 3,905 -
Net change in payable to affiliate..... - (497)
Change in checks written in excess of cash... (296) 529
------ ------
Net cash flows provided (used) by
financing activities.... (341) 32
------- -------
Net Change in Cash and Cash Equivalents.. 519 0
Cash and Cash Equivalents At Beginning of Period - -
------- -------
Cash and Cash Equivalents At End of Period. $ 519 $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 June 27, 1999 and
June 28, 1998 and the consolidated financial position as of June 27, 1999.
Results for the period ended June 27, 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 - Long-Term Debt
Long-term debt 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 June 27, 1999, five sale
leasebacks had been completed for $9.5 million.
Note 4 - 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 5 - 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 was 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
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 June 27, 1999, the Company
had a working capital deficit of $6.4 million compared to a $4.1 million
deficit at March 28, 1999. The increase in the deficit is primarily due to
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 June 27, 1999,
$1,340,000 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 June 27, 1999, $9.5 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Results of Operations
Net restaurant sales. Net restaurant sales for the quarter ended June
27, 1999 increased $4.0 million, or 17.8%, to $26.5 million from $22.5 million
for the quarter ended June 28, 1998. This increase was due primarily to an
increase in the net number of restaurants and an increase of 1.9% in same-
store sales growth. There were 52 stores open as of June 27, 1999 versus 45
stores open as of June 28, 1998. During November 1998, weighted average menu
prices were increased 6%.
Net franchise revenues. Net franchise revenues increased for the quarter
3.5% to $2.2 million due to an increase in the number of franchise restaurants
partly offset by a $100,000 credit recorded to bad debt expense in the
previous year to reduce the allowance for doubtful accounts.
Cost of sales. Cost of sales as a percentage of net restaurant sales
decreased to 31.7% from 34.8% for the quarter primarily due to a decrease in
the average price of baby-back ribs, increased menu prices and fewer
promotional discounts.
Direct labor. Direct labor as a percentage of net restaurant sales for
the quarter increased from 30.2% to 30.8% due to an increase in workers'
compensation and group insurance expense.
Other. Other operating expenses as a percentage of sales remained
basically stable at 23.3% of net restaurant sales versus 23.5% a year ago.
General and administrative expenses. General and administrative expenses
increased to $3.1 million for the quarter from $2.0 million a year ago,
primarily due to increases in salaries related to corporate staff additions
as necessary under new ownership, management fees, travel and professional
fees. In addition with the adoption of SOP 98-5, the quarter included pre-
opening expense of $508,000 as compared to pre-opening amortization in the
previous year of $266,000.
Interest expense. Interest expense increased $1.8 million for the
quarter primarily due to interest related to the notes.
Miscellaneous. Miscellaneous income for the previous year includes a
$169,000 settlement for business interruption insurance related to a
restaurant destroyed by fire.
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 was 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 (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.
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 June 27,
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: August 11, 1999 By: /s/Susan R. Holland
-------------------------
Vice President, Finance
& Chief Financial Officer
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