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 25, 2000
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.
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(Exact name of registrant as specified in its charter)
Delaware 13-4010466
----------------------------- ---------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9304 Forest Lane, Suite 200, Dallas, Texas 75243
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(Address of principal executive offices)
(214) 343-7800
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(Registrant's telephone number, including area code)
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
As of August 1, 2000, 100 shares of Common Stock, $.01 par value,
were outstanding and held by Roma Restaurant Holdings, Inc.
ROMACORP, INC.
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
June 25, 2000 and March 26, 20001... . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations
For the Thirteen Weeks Ended
June 25, 2000 and June 27, 1999. . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Cash Flows
For the Thirteen Weeks Ended
June 25, 2000 and June 27, 1999. . . . . . . . . . . . . . . . 4
Notes to Condensed Consolidated Financial Statements . . . . . 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . 7
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 11
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ROMACORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
ASSETS
(UNAUDITED)
June 25, March 26,
2000 2000
--------- ---------
Current Assets:
Cash and cash equivalents. . . . . . . . . . $1,618 $ 39
Accounts receivable, net . . . . . . . . . . 1,528 2,062
Inventories of food and supplies . . . . . . 1,052 1,083
Deferred income tax asset. . . . . . . . . . 781 755
Prepaid expenses . . . . . . . . . . . . . . 1,375 1,138
Other current assets . . . . . . . . . . . . 31 26
----- -----
Total current assets. . . . . . . . . . 6,385 5,103
Facilities and equipment, net . . . . . . . . . 61,291 60,704
Goodwill, net of accumulated amortization of
$6,101 and $5,918, respectively . . . . . . . . 12,875 13,059
Deferred income tax asset . . . . . . . . . . . 2,243 2,141
Other assets. . . . . . . . . . . . . . . . . . 268 245
Debt issuance costs, net of accumulated amortization
of $624 and $452, respectively . . . . . . . . 1,986 2,459
------- -------
Total assets. . . . . . . . . . . . . . . . $85,048 $83,711
======= =======
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ROMACORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in Thousands)
LIABILITIES AND STOCKHOLDER'S EQUITY
(UNAUDITED)
June 25, March 26,
2000 2000
------- --------
Current Liabilities:
Accounts payable. . . . . . . . . . . . $3,537 $4,291
Accrued interest. . . . . . . . . . . . . . 3,560 2,134
Current portion of store closure reserve. . 100 100
Other accrued liabilities . . . . . . . . 9,346 7,425
Accrued income taxes. . . . . . . . . . . . 435 381
------ ------
Total current liabilities. . . . . . 16,978 14,331
Senior notes. . . . . . . . . . . . . . . . 57,000 69,000
Long-term debt. . . . . . . . . . . . . . . 18,399 8,242
Store closure reserve . . . . . . . . . . . 363 391
Deferred gain on sale of assets . . . . . . 673 685
------ ------
Total liabilities. . . . . . . . . 93,413 92,649
------ ------
Stockholder's Equity (Deficit):
Common stock, $.01 par value; 2,000 shares
authorized; 100 shares issued and outstanding - -
Paid-in capital . . . . . . . . . . . . . . . 66,469 66,469
Retained earnings (deficit):
Dividend to Holdings. . . . . . . . . . (75,368) (75,368)
Other . . . . . . . . . . . . . . . . . . 534 (39)
------ ------
Total . . . . . . . . . . . . . . . . (74,834) (75,407)
------ ------
Total stockholder's equity (deficit). (8,365) (8,938)
------ ------
Total liabilities and stockholder's
equity (deficit). . . . . . . . . . . . $85,048 $83,711
====== ======
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ROMACORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(UNAUDITED)
Thirteen Weeks Ended
-----------------------------
June 25, 2000 June 27, 1999
------------- -------------
Net restaurant sales. . . . . . . . $31,796 $26,516
Net franchise revenue . . . . . . . 2,417 2,188
------ ------
Total revenues . . . . . . . . 34,213 28,704
Cost of sales . . . . . . . . . . . 11,677 8,412
Direct labor. . . . . . . . . . . . 10,163 8,174
Other . . . . . . . . . . . . . . . 7,612 6,225
General and administrative expenses . . . 3,471 3,018
------ ------
Total operating expenses . . . . . . 32,923 25,829
Operating income. . . . . . . . . . . 1,290 2,875
Other income (expense):
Interest expense . . . . . . . . . . . (2,271) (2,433)
Miscellaneous income (expense) . . . . (4) 28
------ ------
Income (loss) before income taxes, cumulative
effect of a change in accounting principle
and extraordinary item. . . . . . . . . . (985) 470
Provision (benefit) for income taxes. . . . (344) 165
------ ------
Income (loss) before cumulative effect of
a change in accounting principle and
extraordinary item . . . . . . . . . . . (641) 305
Cumulative effect of a change in accounting
principle, net of tax . . . . . . . . . . - (513)
Extraordinary gain on early retirement of debt,
net of tax. . . . . . . . . . . . . . . . 1,214 -
------ ------
Net income (loss) . . . . . . . . . . . . . $573 $(208)
====== =====
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
ROMACORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(UNAUDITED)
Thirteen Weeks Ended
----------------------------
June 25, 2000 June 27,1999
------------- ------------
Operating Activities:
Net income (loss) . . . . . . . . . . . . . . $573 $(208)
Non-cash items included in net income (loss):
Depreciation and amortization. . . . . . . 1,726 1,488
Amortization of debt issuance costs. . 91 81
Deferred income taxes. . . . . . . . . . . (128) (119)
Cumulative effect of a change in accounting
principle . . . . . . . . . . . . . . . . - 513
Deferred gain on sale of assets. . . . . . (12) (3)
Gain on repurchase of Senior Notes . . . . (1,214) -
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . 534 469
Inventories of food and supplies . . . . . 31 167
Notes receivable . . . . . . . . . . . . . - 4
Other current assets . . . . . . . . . . . (242) 187
Accounts payable . . . . . . . . . . . . . (754) (311)
Accrued interest . . . . . . . . . . . . . 1,426 2,216
Other accrued liabilities. . . . . . . . . 1,685 (154)
Income taxes payable . . . . . . . . . . . (600) -
Other. . . . . . . . . . . . . . . . . . . (9) 137
----- -----
Net cash flows provided (used) by
operating activities . . . . . . . . . . 3,107 4,467
----- -----
Investing Activities:
Capital expenditures, net . . . . . . . . . . (2,120) (3,603)
Proceeds from sale of assets. . . . . . . . . - 3,905
Changes in other assets, net. . . . . . . . . (23) (4)
----- -----
Net cash flows provided (used) by
investing activities . . . . . . . . . . . (2,143) 298
----- -----
Financing Activities:
Repayments of Senior Notes. . . . . . . . . . (9,600) -
Net borrowings under line-of-credit agreement 10,365 (3,950)
Debt issuance costs . . . . . . . . . . . . . (150) -
Change in checks written in excess of cash. . - (296)
----- -----
Net cash flows provided (used) by financing
activities. . . . . . . . . . . . . . . . . 615 (4,246)
----- -----
Net Change in Cash and Cash Equivalents . . . 1,579 519
Cash and Cash Equivalents At Beginning of Period 39 -
----- -----
Cash and Cash Equivalents At End of Period. . $1,618 $519
===== =====
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
ROMACORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Consolidation and Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The operating results for the
quarter ended June 25, 2000 are not necessarily an indication of the
results that may be expected for the fiscal year ending March 25,
2001. Except as disclosed herein, there has been no material change
in the information disclosed in the notes to the consolidated
financial statements included in the Company's Form 10-K for the
fiscal year ended March 26, 2000. Therefore, it is suggested that the
accompanying financial statements be read in conjunction with the
Company's March 26, 2000 consolidated financial statements.
The condensed consolidated financial statements of Romacorp, Inc.
and subsidiaries (the "Company") 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 Tony Roma's concept. All intercompany transactions
between Romacorp, Inc. and its subsidiaries have been eliminated.
Certain items have been reclassified in the accompanying condensed
consolidated financial statements for prior periods in order to be
comparable with the classification adopted for the current period.
Such reclassifications had no effect on previously reported net
income.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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, a recapitalization
agreement (the " Recapitalization") effective June 28, 1998 was
executed pursuant to which 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, Inc. ("Romacorp"). In the
Recapitalization that was executed by Holdings, NPC and Sentinel
Capital Partners, L.P. ("Sentinel"), 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, held 80% of the equity of Holdings. In conjunction with
this transaction, $75.0 million of 12% Senior Notes due July 1, 2006
(the "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 the Company retaining their
historical value.
The summarized financial information for Romacorp, Inc., excluding
the assets, liabilities, and operations of its wholly owned subsidiaries,
is as follows (dollars in thousands):
Thirteen Weeks Ended
(Unaudited)
-------------------------------
June 25, 2000 June 27, 1999
------------- -------------
Total revenues. . . . . . . . . . $30,891 $26,516
Total operating expenses. . . . . . 32,210 25,941
Operating income (loss) . . . . . . . (1,319) 575
Loss before income taxes. . . . . . . (1,967) (2,211)
Net loss. . . . . . . . . . . . . (1,279) (1,438)
June 25, 2000 March 26, 2000
------------- --------------
Current assets. . . . . . . . . . $(20,639) $(20,172)
Noncurrent assets . . . . . . . . 76,369 75,522
Current liabilities . . . . . . . 8,300 5,930
Noncurrent liabilities. . . . . . 76,435 78,318
Note 3 - Senior Notes
In conjunction with the Recapitalization on June 28, 1998, the
Company issued the Senior Notes. Interest on the notes accrues from
the date of issuance and is payable in arrears on January 1 and July 1
of each year commencing January 1, 1999. As of June 25, 2000 and March
26, 2000, the amounts outstanding were $57.0 million and $69.0
million, respectively. The Senior Notes are secured by substantially
all of the assets of the Company. However, the debt outstanding under
the Revolving Credit Facility (the "Revolving Credit Facility") has a
first priority lien on these same assets.
During February 2000, the Company repurchased $6.0 million face
value of its Senior Notes on the open market at an average price of
$803.75 per $1,000 principal amount. To accomplish this repurchase,
the Company obtained a waiver of certain restrictions associated with
its Revolving Credit Facility. During April 2000, the Company
increased its borrowing capacity under the Revolving Credit Facility
and repurchased an additional $12.0 million face value of its Senior
Notes at an average price of $800 per $1,000 principal amount. The
repurchases of the Senior Notes in February 2000 and April 2000
resulted in extraordinary gains, net of the write-off of associated
debt issuance costs and the effect of income taxes, of $592,000 and
$1.2 million, respectively. See Note 4 for a discussion of the
Revolving Credit Facility.
Note 4 - Long-term Debt
Long-term debt consists of a note payable to a bank under a
Revolving Credit Facility which is secured by substantially all of the
assets of the Company. Prior to April 2000, the Revolving Credit Facility
bore interest at the Company's option of prime rate or up to LIBOR plus
2.25% and the maximum credit available under the facility was $15.0
million.
In April 2000, the Company executed the First Amendment to Credit
Agreement (the "Amended Credit Agreement") which modified the terms of
the Revolving Credit Facility. The Amended Credit Agreement provides
for borrowings in an aggregate principal amount of up to $25.0 million
until April 2001; $24.0 million until April 2002; $22.5 million until
April 2003; and $20.5 million until June 2003 at which time the
maximum borrowing is reduced to $5.5 million. The Amended Credit
Agreement expires in April 2005. The terms of the Amended Credit
Agreement provide for interest rates ranging from the prime rate to
prime plus 1.0% or the six-month LIBOR plus 2.25% to LIBOR plus 3.25%.
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. Subsequent to executing the
Amended Credit Agreement, the Company utilized $9.6 million to repurchase
Senior Notes with a face value of $12.0 million.
Note 5 - Commitments
In September 1998, the Company obtained a commitment from a
financial group to purchase, at the Company's option, eleven
restaurants at a price not to exceed $1.75 million each or $19.3
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. The lease term will be for
15 years with two five-year renewal options. The minimum annual rent
for the renewal option periods will be set at fair market value. This
commitment originally was to expire on June 30, 2000 but has been
extended for a time sufficient to complete transactions related to
three additional properties in the fiscal year ending March 25, 2001.
During the fiscal years ended March 26, 2000 and March 28, 1999,
the Company completed $5.9 million and $5.5 million of sale-leaseback
transactions, respectively. The transactions during the fiscal year
ended March 26, 2000 resulted in a deferred gain of $717,000. This
deferred gain is being recognized over the 15-year initial term of the
new leases.
Note 6 - Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. In June 1999, the FASB
issued Statement of Financial Accounting Standards No. 137 ("SFAS No.
137"), "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," which
defers the effective date of SFAS No. 133 until the Company's first
quarter financial statements in fiscal 2002. The Company is currently
not involved in derivative instruments or hedging activities, and
therefore, will measure the impact of this statement as it becomes
necessary.
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction
Romacorp, Inc. ("Romacorp" and the "Company") is the operator and
franchisor of the largest national, casual dining chain specializing
in ribs with 227 restaurants located in 28 states in the United States
and in 20 foreign countries and territories. As of June 25, 2000, the
Company operated 59 Company-owned and one joint-venture restaurant in
13 states and, through its subsidiaries, franchised 97 restaurants in
20 states and 70 restaurants in international locations. Results of
the joint venture restaurant are not included in the Company's
financial statements.
Management Changes
In June 2000, the Company announced the departure of Robert B. Page
as President and Chief Executive Officer. Other management changes
that occurred during June 2000 included the departures of Jeff
Waldrop, Vice President of Operations; Scott Knode, Vice President of
Real Estate and Development; and Ron Long, Vice President of
Purchasing. In addition, David Groll joined the Company as Vice
President, Food and Beverage in June 2000 and Terry Hamblen joined the
Company as Vice President, Purchasing in July 2000. The Company is
actively recruiting to fill the President and Vice President of
Operations positions at the date of this filing. During the interim
period, Richard A. Peabody, Vice President, Finance and Chief
Financial Officer has been named President (Acting).
Results of Operations
The Company receives revenues from restaurant sales, franchise fees
and royalties. Net franchise revenues include franchise fees and
royalty income and is presented net of direct expenses associated with
the franchising of the Tony Roma's concept. Cost of sales relates to
food, beverage and paper costs. Direct labor costs include salaries,
benefits, bonuses and related taxes for restaurant personnel. Other
operating expenses include rent, depreciation, advertising, utilities,
supplies, property taxes and insurance among other costs directly
associated with operating a restaurant facility.
The table below sets forth the percentage relationship to total
revenues, unless otherwise indicated, of certain items included in the
Company's condensed consolidated statements of operations for the
periods indicated:
Thirteen Weeks Ended
------------------------------
June 25, 2000 June 27, 1999
------------- -------------
(Unaudited)
REVENUES:
Net restaurant sales. . . . . . . . . 92.9% 92.4%
Net franchise revenue . . . . . . . . 7.1% 7.6%
----- -----
100.0% 100.0%
===== =====
COST AND EXPENSES:
Cost of sales (1) . . . . . . . . . . 36.7% 31.7%
Direct labor (1). . . . . . . . . . . 32.0% 30.8%
Other (1) . . . . . . . . . . . . . . 23.9% 23.5%
General and administrative expenses. . . 10.1% 10.5%
Operating income. . . . . . . . . . . 3.8% 10.0%
(1) As a percentage of net restaurant sales.
Comparison of Operating Results for the Thirteen Weeks Ended June 25,
2000 with the Thirteen Weeks Ended June 27, 1999
Net restaurant sales. Net restaurant sales for the quarter ended
June 25, 2000 were $31.8 million, representing an increase of $5.3
million, or 19.9% above the $26.5 million reported during the same
period of the prior year. This increase is due primarily to an
increase in the number of Company-owned restaurants and a 4.1% sales
increase at comparable stores. There were 59 Company-owned restaurants
at June 25, 2000 compared to 52 restaurants at June 27, 1999.
Net franchise revenues. Net franchise revenues increased $229,000
to $2.4 million for the quarter, due primarily to increases in royalty
income and franchise fees. Comparable sales at franchisee operated
restaurants increased 4.2% for the quarter. The revenue increase was
partially offset by an increase in franchise support services. During
the quarter ended June 25, 2000, franchisees opened three restaurants
and closed four restaurants.
Cost of sales. Cost of sales as a percentage of net restaurant
sales increased to 36.7% from 31.7% for the same quarter of the prior
year. This increase is due primarily to a significant increase in the
Company's average cost of baby-back ribs during the quarter as well as
increased beverage and paper costs. During the quarter, the Company's
usage of baby-back ribs exceeded its contracted commitments from its
suppliers resulting in product purchases on the open market during a
period of low availability.
Direct labor. Direct labor as a percentage of net restaurant sales
increased to 32.0% from 30.8% for the same quarter of the prior year
due primarily to higher average hourly rates and increased management
staffing levels.
Other. Other operating expenses for the quarter increased $1.4
million to $7.6 million or 23.5% of net restaurant sales from $6.2
million or 23.3% of net restaurant sales for the same quarter of the
prior year. This increase is due primarily to the effect of
restaurants that have opened or closed during the current or prior
fiscal year.
General and administrative expenses. General and administrative
expenses for the quarter were $3.5 million, representing an increase
of $453,000 above the $3.0 million reported during the same quarter of
the prior year. This increase is due primarily to expenses that were
accrued related to management changes that were announced during the
quarter and incremental field supervision costs related to the unit
growth that occurred during the prior year partially offset by lower
pre-opening expenses during the current year.
Interest expense. Interest expense for the quarter was $2.3
million, representing a decrease of $162,000 below the $2.4 million
that was reported during the same quarter of the prior year. The
decrease is due to the elimination of $3.6 million of debt as the
Company has utilized the Revolving Credit Facility to repurchase
Senior Notes with a face value of $18.0 million, thereby converting an
additional $14.4 million of Senior Note indebtedness to the Revolving
Credit Facility which bears a lower interest rate. Further interest
expense reductions occurred due to the write-off of loan costs related
to the repurchased Senior Notes, amortization of which is treated as
interest expense.
Tax provision. An income tax benefit for the quarter has been
provided for based on an effective tax rate of approximately 35% of
the income (loss) before income taxes, cumulative effect of a change
in accounting principle and extraordinary item.
Cumulative effect of a change in accounting principle. Effective
March 29, 1999, the Company adopted Statement of Position 98-5,
"Accounting for Costs of Start-up Activities" ("SOP 98-5"), which
requires the Company to expense pre-opening costs as incurred rather
than the previous policy of amortizing those costs over a 12-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 of the
fiscal year ended March 26, 2000 as a change in accounting principle.
Extraordinary gain on early retirement of debt. During the first
quarter of fiscal 2001, the Company repurchased Senior Notes with a
face value of $12.0 million at a discount resulting in an after-tax
gain of $1.2 million.
Liquidity and Capital Resources
The Company has a working capital deficit of $10.6 million at June
25, 2000, which is common in the restaurant industry, as restaurant
companies do not typically require a significant investment in
accounts receivable or inventory. The working capital deficit
increased from $9.2 million at March 26, 2000 due to increases in
accrued interest and accrued liabilities.
Concurrently with the consummation of the Recapitalization and the
issuance of $75.0 million in Senior Notes, the Company entered into
the Revolving Credit Facility. This five-year Revolving Credit
Facility initially provided for borrowings in an aggregate principal
amount of up to $15.0 million with interest, at the Company's option,
of prime rate or up to six-month LIBOR plus 2.25%. A commitment fee of
.375% is payable monthly on any unused commitments. During the fourth
quarter of fiscal 2000, the Company utilized $4.8 million of the
Revolving Credit Facility to repurchase $6.0 million of the Senior
Notes.
In April 2000, the Company entered into the Amended Credit
Agreement which modified the terms of the Revolving Credit Facility.
The Amended Credit Agreement provides for borrowings in an aggregate
principal amount of up to $25.0 million until April 2001; $24.0
million until April 2002; $22.5 million until April 2003; and $20.5
million until June 2003 at which time the maximum borrowing is reduced
to $5.5 million. The terms of the Amended Credit Agreement provide for
interest rates ranging from the prime rate to prime plus 1.0% or the
six-month LIBOR plus 2.25% to LIBOR plus 3.25%. The Company expects to
pay the maximum interest rate during the first year of the Amended
Credit Agreement. Subsequent to executing the Amended Credit
Agreement, the Company utilized $9.6 million to repurchase Senior
Notes with a face value of $12.0 million. As of June 25, 2000, $18.4
million was outstanding under the Revolving Credit Facility.
In September 1998, the Company obtained a commitment from a
financial group to purchase, at the Company's option, eleven
restaurants at a price not to exceed $1.75 million each or $19.0
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. The lease term will be for
15 years with two five-year renewal options. The minimum annual rent
for the renewal option periods will be set at fair market value. This
commitment originally was to expire on June 30, 2000 but has been
extended for a time sufficient to complete transactions related to
three additional properties. During fiscal 1999, $5.4 million of
sale-leaseback transactions were completed. During fiscal 2000, an
additional $5.9 million of sale-leaseback transactions were completed
resulting in total deferred gain under the arrangement of $717,000.
This deferred gain is reflected on the Consolidated Balance Sheets and
will be recognized over the 15-year initial term of the new leases.
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, the
Revolving Credit Facility, as amended, and the commitment from a
financial group to purchase and leaseback eleven restaurant
properties.
Cash flow provided by operating activities for the quarter ended
June 25, 2000 was $3.1 million compared to $4.5 million during the
same period of the prior year. Capital expenditures were $2.1 million
for the quarter ended June 25, 2000 and were funded primarily through
cash flow from operations. Approximately $1.7 million of these capital
expenditures were for the construction of new or relocated stores.
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 in filings with the
Securities and Exchange Commission.
ITEM 3. Quantitative and Qualitative Disclosures 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 Facility which 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 26, 2000
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
price 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 of the Company.
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.
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
The following report on Form 8-K was filed during the quarter
covered by this report:
The Company filed a report on Form 8-K with the Securities and
Exchange Commission dated June 8, 2000, reporting under Item 5 that
its President and Chief Executive Officer, Robert B. Page, was no
longer with the Company and the appointment of Richard A. Peabody
as President (Acting) on an interim basis.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ROMACORP, INC.
Date: August 8, 2000 By: /s/Richard A. Peabody
---------------------------------
President (Acting) & Chief Financial
Officer
(Principal Financial and Accounting
Officer)
