United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
-----------------------
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 19971998
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: 0-11104
NOBLE ROMAN'S, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1281154
(State or other jurisdiction (I.R.S. Employer
of organization) Identification No.)
One Virginia Avenue, Suite 800
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
(317) 634-3377
(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 December 8, 1997,October 30, 1998, there were 4,131,324 shares of Common Stock, no par
value, outstanding.
Page 1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following condensed consolidated financial statements are included
herein:
Condensed consolidated balance sheets as of December 31, 19961997
and SeptemberJune 30, 19971998 Page 3
Condensed consolidated statements of operations for the nine and threesix
months ended SeptemberJune 30, 19961997 and 19971998 Page 4
Condensed consolidated statements of cash flows for the ninesix
months ended SeptemberJune 30, 19961997 and 19971998 Page 5
NotesNote to condensed consolidated financial statements Page 6
The interim condensed consolidated financial statements included herein reflect
all adjustments which are, in the opinion of management, necessary for a fair
statement of the results of operations for the interim periods presented and the
balance sheets for the dates indicated, which adjustments are of a normal
recurring nature.
This report containsBased on the Company's business plan, the number of Express units now open, the
backlog of units sold to be opened, the backlog of franchise prospects now in
ongoing discussions and negotiations, the Company's trends and the results thus
far in 1998, management determined that it is more likely than not that the
Company's deferred tax asset will be fully realized. Therefore, no valuation
allowance was established for its deferred tax asset. However, there can be no
assurance that the growth of the Express will continue in the future nor can
there be any assurance that the full-service restaurants can be operated
successfully in the future. If negative events should occur in the future in
either the Express or the full-service operations, the realization of all or
some portion of the Company's deferred tax asset could be jeopardized. The
Company will undertake to evaluate the need for a valuation allowance on a
quarterly basis in the future.
The statements contained in Management's Discussion and Analysis concerning the
Company's future revenues, profitability, financial resources, market demand and
product development are forward-looking statements which(as such term is defined in
the Private Securities Litigation Reform Act of 1995) relating to the Company
that are inherently
subjectbased on the beliefs of the management of the Company, as well as
assumptions and estimates made by and information currently available to risks and uncertainties. Noble Roman'sthe
Company's management. The Company's actual results couldin the future may differ
materially from those currently anticipatedprojected in the forward-looking statements due to risks
and uncertainties that exist in the Company's operations and business
environment including, but not limited to: the operations and results of
operations of the Company as well as its customers and suppliers, including as a
numberresult of competitive factors and pricing pressures, shifts in market demand,
general economic conditions and other factors including Noble Roman's abilitybut not limited to,
improve operatingchanges in demand, for the Company's products or franchises, the impact of
competitors' actions, and changes in prices or supplies of food ingredients.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions or estimates prove incorrect, actual results and trends at its
full service restaurants, competition in the markets for its full service
restaurants and Express franchises, increases in costs, availability of labor
and its ability to manage growth of its Express franchise business.may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
Page 2
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, September 30,
1996June 31,
1997 ------------ -------------1998
-------------- --------------
Assets
------
Current assets:
Cash $ 74,50268,136 $ 60,92538,642
Accounts receivable 947,924 552,576380,816 576,344
Inventories 947,644 821,760802,097 782,803
Prepaid expenses 363,074 339,475
------------- -------------158,260 445,072
-------------- --------------
Total current assets 2,333,144 1,774,7361,409,309 1,842,861
Property and equipment, less accumulated depreciation and
amortization of $4,372,980$3,379,356 and $3,189,601
9,475,794 6,819,609$3,745,583 6,825,777 6,802,042
Deferred tax asset - 2,560,4363,335,407 3,664,275
Costs in excess of assets acquired, net 6,464,678 6,269,6936,204,698 6,074,708
Other assets 1,177,069 999,941
------------- -------------429,805 478,882
-------------- --------------
$ 19,450,68518,204,996 $ 18,424,415
------------- -------------18,862,768
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 4,190,8962,978,719 $ 4,384,2774,053,892
Notes payable - current 14,251,373 16,816,14021,743 612,195
Deferred franchise fees - 65,000
Payroll and sales tax 141,945 1,307,000
------------- -------------638,00 131,800
Other current liabilities 1,855,118 1,427,258
-------------- --------------
Total current liabilities 18,584,214 22,572,4174,919,380 6,225,145
Long-term liabilities:
NotesSenior note payable - less current portion 41,540 32,1482,580,000 2,580,000
Subordinated note payable 11,000,000 11,000,000
Other long term debt 22,863 20,256
Capital leases 33,646 11,805
------------- -------------8,201 1,203
-------------- --------------
Total long-term liabilities 75,186 43,95313,611,064 13,601,459
Stockholders' equity
Common stock no par value, authorized 9,000,000(9,000,000 shares, issued 4,131,324 in 1997
and 4,131,324 5,518,431 5,518,431
Retained earnings (deficit) (4,727,146) (9,710,386)
------------- -------------1998) 8,318,431 8,318,431
Accumulated deficit (8,643,879) (9,282,267)
-------------- --------------
Total stockholders' equity (deficit) 791,285 (4,191,955)
------------- -------------deficit (325,448) (963,836)
-------------- --------------
$ 19,450,68518,204,996 $ 18,424,415
------------- -------------18,862,786
-------------- --------------
See accompanying note to condensed consolidated financial statements.
Page 3
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
NineSix Months Ended Three Months Ended
SeptemberJune 30, SeptemberJune 30,
--------------------- ----------------------
1996------------------------ --------------------------
1997 19961998 1997 1998
---- ---- ---- ----
Restaurant revenue $ 25,207,04913,652,268 $ 19,394,32311,288,357 $ 8,346,2395,854,590 $ 5,742,0555,778,786
Restaurant royalties 154,599 92,438 56,180 38,30454,134 76,106 28,337 41,408
Express royalties and fees - 242,888 - 140,131102,757 861,217 64,805 538,573
Administrative fees and other 173,148 126,516 30,647 3,933
------------122,583 101,233 84,920 47,590
------------- ------------ ------------ ------------
Total revenue 25,534,796 19,856,165 8,433,066 5,924,42313,931,742 12,326,913 6,032,652 6,406,357
Restaurant operating expenses:
Cost of revenue 4,805,084 4,088,086 1,496,318 1,291,2072,796,879 2,207,478 1,239,639 1,128,174
Salaries and wages 8,245,459 7,074,841 2,763,536 2,066,2135,008,628 4,148,162 2,082,514 2,103,386
Rent 2,248,265 1,891,956 758,388 551,6181,340,338 1,103,495 551,544 552,807
Advertising 1,556,715 969,679 416,961 287,117682,562 566,797 292,726 291,298
Other 6,171,920 4,301,150 2,096,904 1,177,8223,123,328 2,742,981 1,232,444 1,402,032
Depreciation and amortization 893,036 840,325 297,292 259,435580,890 496,303 256,016 250,502
Express operating expenses - 118,340 - 35,92882,412 498,681 61,048 281,462
General and administrative 1,807,121 2,083,166 614,153 629,479
Cost of attempted acquisition and equity
offering 768,389 - - -1,453,687 1,260,941 711,838 644,305
Restructuring costs - 5,159,836 - -
------------0 5,159,836 0
------------- ------------ ------------ ------------
Operating income (loss) (961,193) (6,671,214) (10,486) (374,396)loss (6,296,818) (697,925) (5,554,953) (247,609)
Interest and other expense 1,199,233 880,426 436,591 80,831799,595 269,331 325,031 158,258
------------- ------------ ------------ ------------
------------
Income (loss)Loss before income taxes (2,160,426) (7,551,640) (477,077) (455,227)(7,096,413) (967,256) (5,879,984) (405,867)
Income taxes (benefit) (756,149) (2,568,400) (156,477) (155,600)
------------benefit (2,412,800) (328,868) (1,999,214) (137,968)
------------- ------------ ------------ ------------
Net income (loss) before loss on
discontinued operations (1,404,277) (4,983,240) (290,600) (299,627)
Loss on discontinued operations 48,750 - - -
------------$ (4,683,613) $ (638,388) $(3,880,770) $ (267,899)
------------- ------------ ------------ ------------
Net income (loss) $ (1,453,027) $ (4,983,240) $ (290,600) $ (299,627)
------------ ------------ ------------ ------------
Net income (loss) per share before
discontinued operations $ (.34) $ (1.21) $ (.07) $ (.07)
------------ ------------ ------------ ------------
Net income (loss)loss per share $ (.35)(1.13) $ (1.21)(.15) $ (.07)(.94) $ (.07)
------------ ------------ ------------ ------------(.06)
Weighted average number of common
shares outstanding 4,131,324 4,131,324 4,131,324 4,131,324
See accompanying note to condensed consolidated financial statements.
Page 4
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
NineSix Months Ended
SeptemberJune 30,
-------------------------
1996------------------------
1997 1998
---- ----
OPERATING ACTIVITIES
- --------------------
Net income (loss)loss $(4,683,613) $ (1,453,027) $ (4,983,240)(638,388)
Adjustments to reconcile net incomeloss to net cash provided by
(used in) operating activities:
Depreciation and amortization 982,124 840,325647,127 496,217
Restructuring costs 4,753,384 - 4,753,384
Deferred federal income taxes - (2,560,436)(2,404,836) (328,868)
Changes in operating assets and liabilities (increase) decrease in:
Accounts receivable (38,311) (274,536)(80,707) (195,528)
Inventory (82,929) 54,17840,762 19,294
Prepaid expenses (348,634) (609,965)(301,787) (286,812)
Other assets (249,975) 96,818(81,225) (49,077)
Increase (decrease) in:
Accounts payable and other27,772 1,075,173
Other current liabilities 459,361 638,83012,924 (427,860)
Deferred franchise fee - 65,00068,000
------------ ------------
NET CASH PROVIDED BY (USED IN)USED IN OPERATING ACTIVITIES (731,391) (1,979,642)(2,070,199) (267,849)
INVESTING ACTIVITIES
- --------------------
Purchase of fixed assets (696,060) (567,469)(452,136) (342,492)
------------ ------------
NET CASH PROVIDED BY (USED IN)USED IN INVESTING ACTIVITIES (696,060) (567,469)(452,136) (342,494)
FINANCING ACTIVITIES
- --------------------
Proceeds from borrowing 1,585,081 2,814,767long-term debt and notes payable 2,787,272 592,367
Principal payments on long-term debt and capital lease obligations (259,644) (281,233)(283,713) (11,520)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,325,437 2,533,5342,503,559 580,847
------------ ------------
INCREASE (DECREASE)DECREASE IN CASH (102,014) (13,577)(18,776) (29,494)
Cash at beginning of period 229,462 74,502 68,136
------------ ------------
Cash at end of period $ 127,44855,726 $ 60,92538,642
------------ ------------
See accompanying note to condensed consolidated financial statements.
Page 5
Noble Roman's, Inc. and Subsidiaries
Note to Condensed Consolidated Financial Statements
(unaudited)(Unaudited)
1. SUBSEQUENT EVENTS
On November 19, 1997, Noble Roman's, Inc. ("Noble Roman's" orAugust 13, 1998 the "Company") entered into an amended and restated credit agreement with
The Provident Bank,Company obtained additional financing of $2,000,000
from its principalprimary lender. The new agreement provides
forThis financing is in the reductionform of previously outstanding debt from approximately
$16,900,000 to $11,000,000, cancellation of previously accrued
interest, no interest to be paid or accrued on such debt until
November 1, 1998, interest on such debt of 8% per annum payable
monthlya promissory note
due in arrears after November 1, 1998, maturity of the subject
note extended to December, 2001, principal payments on such debt
beginning December 1, 1998 in an amount equal to 50% of excess cash
flow as defined inbears interest at 2 1/2% over prime payable monthly.
As additional compensation, the agreement, and the cancellation ofBank received a previously
issued warrant to purchase 465,000750,000
shares of the Company's common
stock. In addition, the agreement provides for a new loan in the
amount of $2,580,000 due in December, 2000 with interest payable
monthly in arrearsstock at a rate of prime plus 2.5% per annum. These
arrangements were made in consideration for a new warrant to purchase
2,800,000 shares of the Company's common stock with an exercise price
of $.01 per share. Pursuant to entering into the amended and restated
credit facility, the Company issued warrants to purchase an aggregate
of 1,000,000 shares of common stock to certain executive officers,
with an exercise price of $.40 per share.
2. RESTRUCTURING COSTS
During the second quarter of 1997 the Company implemented a plan which
management believes will improve its stores' profitability by
restructuring its operations. This included closing 19 restaurants and
selling four others to a franchisee pursuant to a franchise agreement.
The Company currently owns 48 full-service restaurants, has 11 full
service franchised restaurants and 45 franchised Express locations.
The decision to close and sell certain restaurants was made because
some of the restaurants were operating at a loss, some were marginally
profitable and others were competing in market areas where the Company
operates newer restaurants and where the delivery area and some of the
dine-in market can be serviced by the newer facility. This action has
allowed the Company to consolidate management and supervision in the
remaining restaurants. The Company reported a loss of $5.2 million in
the second quarter of 1997 from this restructuring as a result of
writing off the carrying value of equipment, leasehold improvements,
other assets and accruing for estimated losses and ongoing expenses
relating to those closed restaurants.
Page 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Noble Roman's, Inc. and Subsidiaries
Results of Operations - Nine-monthSix-month and three-month periods ended SeptemberJune 30, 19961997
and 19971998
The following table sets forth the percentage relationship to total revenue of
the listed items included in Noble Roman's condensed consolidated statement of
operations. As noted, certainCertain items are shown as a percentage of restaurant revenue.
NineSix Months Ended Three Months Ended
SeptemberJune 30, SeptemberJune 30,
----------------------- --------------------
-------------------
1996 1997 19961998 1997 1998
---- ---- ---- ----
Revenue:
Restaurant revenue 98.7% 97.7% 99.0 96.9%98.0% 91.6% 97.0% 90.2%
Restaurant royalties .6.4 0.6 .5 .7 .6
Express royalties and fees - 1.2 - 2.4.7 7.0 1.1 8.4
Administrative fees and other .9 .8 1.4 .7
.6 .3 .1
----- ----- ----- ------------ ------- ------- -------
100.0 100.0 100.0 100.0
Restaurant operating expenses (1):
Cost of revenue 19.1 21.1 17.9 22.520.5 19.6 21.2 19.5
Salaries and wages 32.7 36.5 33.1 36.036.7 36.8 35.6 36.4
Rent 8.9 9.8 9.19.8 9.4 9.6
Advertising 6.25.0 5.0 5.0 5.0
Other 24.5 22.2 25.1 20.522.9 24.3 21.1 24.3
Depreciation and amortization 3.5 4.2 3.5 4.44.0 4.2 3.9
Express operating expense - .6 - .64.1 1.0 4.4
General and administrative 7.1 10.5 7.3 10.6
Loss from withdrawn acquisition and offering
and restaurants closed in 1987 3.0 - - -10.4 10.3 11.8 10.1
Restructuring costs 37.0 - 26.085.5 -
-
----- ----- ----- ------------ ------- ------- -------
Operating income (loss) (3.8) (33.6) (.1) (6.3)loss (45.2) (5.7) (92.1) (3.9)
Interest 4.7 4.4 5.2 1.4
----- ----- ----- -----
Income (loss)5.7 2.2 5.4 2.4
------- ------- ------- -------
Loss before income taxes (8.5%(50.9%) (38.0%(7.9%) (5.3%(97.5%) (7.7%(6.3%)
(1) As a percentage of restaurant revenue.
Duringrevenue
Total revenue increased $373.7 thousand, or 6.2% for the second quarter of 1997three-month period
ended June 30, 1998 compared to the Company implemented a plan which
management believes will improve its stores' profitability by restructuring
its operations. This included closing 19 restaurants and selling four others
to a franchisee pursuant to a franchise agreement.same period in 1997. The Company currently owns
48 full-service restaurants, has 11 full service franchised restaurants and 45
franchised Express locations. The decision to close and sell certain
restaurants was made because someprimary reason for
the increase is the growth of the restaurants were operating at a loss,
some were marginally profitable and others were competing in market areas
where the Company operates newer restaurants and where the delivery area and
someExpress business plus same store sales
increase of the dine-in market can be serviced by the newer facility. This action
also allowed the Company to consolidate management and supervision1.8% in the remainingfull-service restaurants. The Company reported a loss of $5.2 million from this
restructuring as a result of writing off the carrying value of equipment,
leasehold improvements, other assets and accruing for estimated losses and
ongoing expenses relating to those closed restaurants.
Page 7
Total revenue decreased $5.7$1.6
million, or 22.2%, and $2.5 million, or 29.7%11.5%, for the nine-month and three-month periodssix-month period ended SeptemberJune 30, 1997,
respectively,1998 compared to corresponding periodsthe
same period in 1996.1997. The principalprimary reason for thethis decrease was the closing of 19
restaurants and the sale of four others in the second quarter of 1997 andplus same
store sales decrease of 5.2% in the sale of four others to a franchisee. In addition,full-service restaurants. Same store sales
increase during the decreases
were partiallysecond quarter is the result of the Company's aggressive
turnaround strategy following a period of inconsistent service and product
during 1996 and 1997 which resulted in same store sales declines whichdeclines.
Page 7
After completing the restructuring of the Company's credit facilities with
Provident Bank and a restructuring of management, including the appointment of
Scott Mobley as President, Wade Shanower as Vice President of Operations and
Troy Branson as Vice President of Franchising, in November 1997, the Company
began an aggressive long-term turnaround strategy based on five primary
elements: (1) build morale, aggressively recruit management talent, and improve
all levels of management training; (2) re-focus the Company's culture of strict
cost controls toward an emphasis on improved customer service; (3) improve the
Company's product advantages creating even larger differentiations; (4) re-focus
attention on control systems; and (5) integrate all steps and increase marketing
and sales building efforts.
Express royalties and fees were 8.7%approximately $538,600 (royalties $177,300,
initial franchise fees $102,700 and 11.5%commissions $258,600) and $861,200
(royalties $299,000, initial franchise fees $164,600 and commissions $397,600)
for the nine-monththree-month and three-monthsix-month periods ended SeptemberJune 30, 1997,
respectively,1998 compared to only
$64,800 and $102,800 during the corresponding periods in 1996. The Company
continues to market its Express concept whereby franchisees operate a1997. Franchising of
Noble Roman's Pizza Express operationbegan in non-traditional restaurant locations
including convenience stores, other retail outlets, schools and recreational
facilities. The Company currently has 45 Pizzaearly 1997. At June 30, 1998, approximately
109 franchised Express units were open. Currently there are approximately 165
such franchised locations.
Royalties and fees fromunits open with approximately 70 more units sold to be opened
over the Express operations were $242,900 and $140,100 for
the nine-month and three-month periods ended September 30, 1997 compared to
none in 1996.next several months.
Cost of revenue as a percentage of restaurant revenue increaseddecreased from 19.1%21.2% and
17.9%20.5% to 21.1%19.5% and 22.5%19.6% for the nine-monththree-month and three-monthsix-month periods ended SeptemberJune
30, 19961998 and 1997, respectively. These increases wereThe decrease is primarily the result of
a change in method of recording many ofimproved cost controls resulting from the specials at net sales
price rather than gross sales plus discounts and higher discounts to the menu
price in an effort to rebuild customer count.Company's aggressive long-term
turnaround policy.
Salaries and wages increased as a percentage of restaurant revenue from 32.7%35.6%
and 33.1%36.7% to 36.5%36.4% and 36.0%36.8% for the nine-monththree-month and three-monthsix-month periods ended
SeptemberJune 30, 19961998 and 1997, respectively. These increases wereThe increase is the result of additionalincreased
labor costs to improve customer service. This increased staffing level was
necessary to accommodate increased customer count from a discount
promotion, same store sales declines, inefficienciesovercome perception created in scheduling as a result
of inexperienced store level management,1996 and a more competitive labor market
resulting in higher average wage rates.1997.
General and administrative expenses as a percentage of total revenue increaseddecreased
from 7.1%11.8% and 7.3%10.4% to 10.5%10.1% and 10.6%10.3% for the nine-monththree-month and three-monthsix-month
periods ended SeptemberJune 30, 19961998 and 1997, respectively. This increase wasdecrease is primarily
attributable to additional supervision cost in the first quarter andeffective adherence to the decline in total revenue in the second and third quarters. As a result
of the restructuring plan and the
Company has reduced its general and
administrative expenses.increase in revenue from the growth of the Express business.
Operating income (loss) decreasedloss improved from a loss of $961,200$5.6 million and a loss of
$10,500$6.3 million to a loss
of $6.7$247,600 and $697,900 during the three-month and six-month periods ended June
30, 1998 and 1997, respectively. The operating results for the three-month and
six-month periods ending June 30, 1997 included restructuring costs of $5.2
million and $374,400$5.2 million, respectively. Excluding the expenses resulting from
the Company's restructuring, the Company's operating income (loss) for the
three-month and six-month periods ended June 30, 1997 were a loss of $395,100
and $1.1 million, respectively. Excluding the effect of the restructuring costs
in 1997, the Company realized an improvement in operating income of $147,500 and
$439,100 during the nine-monththree-month and three-monthsix-month periods ended SeptemberJune 30, 19961998
compared to the same periods in 1997. The primary reason for the improved
operating loss is the operating profit of the Express business combined with
reduced costs of the Company's full-service restaurants and a decrease in
general and administrative resulting from adherence to the restructuring plan.
Interest decreased from $325,000 and $799,600 to $158,000 and $269,300 for the
three-month and six-month periods ended June 30, 1998 and 1997, respectively.
The primary reason for greater loss in 1997 was the restructuring costforgiveness of $5.2
million recorded in the second quarter.
Interestboth principal and other expense decreased from $1.2 million to $880,000 and
decreased from $437,000 to $81,000 for the nine-month and three-month periods
ended September 30, 1996 and 1997, respectively. Interest expense has not
been accrued for a portion of 1997 because the interest was forgiven as a part
of the financialdebt restructuring discussed below under "Liquidityon November 21, 1997 with the company's primary
lender. See Liquidity and Capital Resources."
Page 8
Net income (loss) decreasedloss improved from losses of $1.5$3.9 million and $290,600$4.7 million to $5.0
milliona loss of $267,900 and
$299,627$638,400 during the nine-monththree-month and three-monthsix-month periods ended SeptemberJune 30, 1998 and
1997, respectively. The increasereduction in the net loss was primarily the result of
the financial and operational restructuring costs recordedthat the Company completed in 1997
and the rapid growth (from 46 units open to 165 units open in the second quarterlast 10
months) of 1997.
Page 8
the Express business.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Historically, the Company's principal capital requirements arose from the costs
associated with the development and opening of new restaurants and refurbishment
of existing restaurants, however,restaurants. However, no new restaurants have been opened in 1997.1998.
The Company's primary sources of working capital are cash flow from operations
and borrowings under a credit facility.borrowings.
On March 25, 1996, the Company signed a Letter of Intent whereby it would have
acquired Papa Gino's Holdings Corp. (a 180 unit187-unit pizza restaurant chain in seven
northeasternNortheastern states) through a merger transaction whereby the stockholders of
Papa Gino's Holding Corp. would have received approximately 2.25 million shares
of a to-be-authorized class of non-voting common stock of the Company. Among
other things, this transaction was conditioned on a public equity offering,
implementation of a senior credit facility, a definitive agreement and
shareholder approval. Because of delays and uncertainties in
negotiating a definitive agreement, the Company and Papa Gino's mutually
agreed to terminate the Letter of Intent on June 10, 1996. The expenses incurred directly with regard to the proposed
acquisition and offering aggregated approximately $880,862.
In addition, deterioration in operating controls
duringFor a number of reasons this effortattempted acquisition failed, despite senior
management devoting substantially all of its attention on that attempt for a
period of almost 18 months. As the Company's focus was increasingly on the
acquisition transaction, the Company's primary market was, as a result of
senior management's focus on that activity
createdseveral demographic/consumption trends, targeted for expansion by a severe shortagelarge number
of working capital.
From March, 1995 through June, 1996mid-scale dining chains for expansion. At the same time, the unemployment
rates in the Company's labor markets were approaching record lows. The Company's
personnel were aggressively recruited by these outside chains. Simultaneously,
senior management, haddue to focus almost all of its time on arranging for financing and the unsuccessful
attempted acquisition of a 180 unit regional pizza restaurant chain operatingtransaction, were unable to
participate in seven northeastern states.daily operations.
As a result, the Company's current operations
severely deterioratedCompany experienced dramatic turnover and was unable to
stabilize its staffing levels through ordinary recruiting efforts. The resulting
in personnel turnover poorand short-staffing had a material adverse effect on operational results
generally, and specifically on service and
difficulties with operational standards and cost controls. Management has soughtAs a result,
sales and margins declined. Further, the management turnover, short labor supply
and negative press made it extremely difficult for the Company to improve operationsovercome its
staffing problem and these events led to further turnover. The full-service
restaurants are very labor intensive to operate.
The Company, as a result of the above referenced problems, suffered serious
losses and defaulted on its loan agreement with its primary lender. As a part of
its turn-around strategy, in May 1997, the ongoing addition of new
management and supervisory personnel, extensive training, the implementation
of better controls and the restructuring plan completed in the second quarter
of 1997 which included closing and selling a portionCompany closed 19 of its restaurants
and concentrating its efforts and management personnel onsold four others to consolidate the remaining restaurants.management, increased efforts
to recruit personnel and undertook an extensive training program. Because of the
very competitive labor market, the hiring and training process took more than a
year. In addition, the Company began franchising Noble Roman's Pizza
Express in December, 1996 and by year-end 1997 expects to have approximately
50 units in operation. Based upon market reaction to date, the Company
believes that its Pizza Express concept offers significant growth potential in
1998. The Company earns approximately $5,500 in fees and commissions for each
new unit opened and also receives weekly royalty payments equal to 7% of sales
generated by each unit open.
On November 19, 1997, the Company entered into an amended and restated credit
agreementnegotiated a debt restructuring with its
primary lender, The Provident Bank, its principal lender. The new agreement
provides forwhereby the reduction of previouslylender agreed to: reduce the
Company's outstanding debt from approximately
$16.9 million to $11 million, cancellation of previously accrued interest, no
interest to be paid or accrued on such debtby over $7 million; loan the Company an additional
$2.6 million; give the Company a grace period until November 1, 1998, interest
on such debt of 8% per annum payable monthly in arrears after November 1,
1998, maturity of the subject note extended to December, 2001, principal
payments on such debt beginning December 1, 1998 in an amount equalwithout
either having to 50% of
excess cash flow as defined inaccrue or pay interest on the agreement, and the cancellation of a
previously issued warrant to purchase 465,000 sharesold portion of the Company's common
stock. In addition,debt; extend
the agreement provides for a new loan interm of the amount of
$2.6 million due indebt until December 20002001 with no principal payments until
December 1998; make principal payments after December 1998 variable depending on
available cash flow; and fix the interest payable monthly in arrearsrate on the old debt at a rate of prime plus 2.5%8% per annum.year
commencing
Page 9
December 1998. These arrangements were made in considerationexchange for a new warrant to purchasebuy 2.8
million shares of commonNoble Roman's stock with an exerciseat a price of $.01 per share.
Pursuant to entering intoAfter completing a restructuring of the amendedCompany's credit facilities with
Provident Bank and restated credit facility,a restructuring of management in November 1997, including the
appointment of Scott Mobley as President, Wade Shanower as Vice President of
Operations and Troy Branson as Vice President of Franchising, the Company issued warrantsbegan
an aggressive long-term turnaround strategy based on five primary elements: (1)
build morale, aggressively recruit management talent, and improve all levels of
management training; (2) re-focus the Company's culture of strict cost controls
toward an emphasis on improved customer service; (3) improve the Company's
product advantages creating even larger differentiations; (4) re-focus attention
on control systems; and (5) integrate all steps and increase marketing and sales
building efforts.
On August 13, 1998, the Company obtained additional financing from its primary
lender in the amount of $2 million. This financing was in the form of a loan due
in December, 2001 and bears interest at 2 1/2% over prime payable monthly. As
additional compensation, the Bank received a warrant to purchase an aggregate of 1.0 million750 thousand
shares of commonthe Company's stock at $.01 per share.
Currently, the Company has approximately 165 franchised Express units in
operation with approximately 70 additional franchised units sold and scheduled
to certain executive
officersbe opened over the next several months. Discussions and negotiations are
ongoing with many other parties for additional franchise locations. The Company
developed the Express concept in early 1997 to take advantage of its
full-service products in the new, rapidly growing distribution channel of
non-traditional locations. The Company developed a process whereby its high
quality, superior tasting pizzeria products could be produced, distributed and
prepared very simply in non-traditional locations with an exercise priceend product virtually
indistinguishable from its full-service products.
The Company plans to aggressively grow by expanding its Express franchise
business. The business strategy for expansion of $.40 per share. Proceeds from the Express franchise business
includes the following principal elements:
- - Continue to add units with direct franchises in convenience stores, grocery
stores, universities, hotels, airports, hospitals and some stand alone units.
- - Continue the plan to get the expanded breakfast menu with enhanced
merchandising in existing Express units and to continue to include this program
in new loan
were primarilyunits as they open.
- - Introduce the cold Italian sub sandwich program, with related merchandising,
by December 1998 to existing units and include as a part of the program for working capitalnew
units.
- - Develop, by mid-1999, the necessary menu variety for the Express program to
attempt to replace existing eating facilities in office complexes, factories,
hospitals and existingdormitories.
- - Sell co-branding agreements to other restaurant upgrades.chains whereby the Express
would become a second brand in other established restaurant chains.
- - Sell Area Development Agreements to area developers. The Company plans to sell
for a development fee to area developers, territories for development whereby
the developer will receive a portion of the fees and provide ongoing service
responsibilities.
Page 910
Based uponAs a result of the amendments toadditional bank financing, the credit agreement, planned improvements in its
existingthe operations
of the Company's full-service restaurants and the planned growth in the new franchised
Express, business, management believes the Company will generatehave sufficient cash flow to meet
its obligations and to carry out its current business plan. Currently, the
Company anticipates that its capital requirements in 1998 will be approximately
$500,000 primarily for improvements to its existing full-service restaurants.restaurant
facilities. The Company also anticipates that most of itsCompany's growth during 1998 will be generatedprimarily come from
franchising of its newthe Express concept.concept where the capital requirements are
insignificant.
Page 1011
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation relating to
claims arising out of its normal business operations. The Company
believes that none of its current proceedings, individually or in the
aggregate, will have a material adverse effect onupon the Company.Company beyond
what has been provided for in its financial statement.
Legal proceedings against the Company which have not been reserved for
include REH Acquisition, Ltd. versus Noble Roman's, Inc. and The
Provident Bank., filed July 20, 1998 in the United States District
Court for the Southern District of New York. The complaint alleges that
the company breached agreements entered into with the Plaintiff to seek
to fund and restructure the company's bank debt. The Company believes
this case is without merit, denies any liability and will defend
vigorously.
U.S. Department of Labor has proposed penalty assessments for alleged
violations of child labor laws in 1995 and 1996. The Company asserts
the alleged violations, if any, were beyond the statue of limitations
and denies any liability. The Company is currently appealing to an
administrative law judge and will defend vigorously.
ITEM 2. CHANGES IN SECURITIES.
As of November 19, 1997, the Company entered into an amended and
restated credit facility with its bank. In connection with such
amendment: (i) the bank surrendered warrants to purchase 465,000
shares of Common Stock; (ii) the Company issued to the bank warrants
to purchase 2.8 million shares of Common Stock with an exercise price
of $.01 per share; and (iii) the Company issued to certain executive
officers warrants to purchase an aggregate of 1.0 million shares of
Common Stock with an exercise price of $.40 per share. The foregoing
warrants were issued in transactions not involving a public offering
in reliance upon the exemption provided pursuant to Section 4(2) under
the Securities Act of 1933, as amended.None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Exhibit A. Proforma Balance Sheet as of September 30, 1997.None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 10. Amended and Restated Credit Agreement
Exhibit 27. Financial Data Schedule
Page 1112
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.
NOBLE ROMAN'S, INC.
/s/ Paul W. Mobley
Date: December 12, 1997 -----------------------------
------------------- Paul W. Mobley,
President
(Principal Executive Officer)Chairman of the Board
/s/ Mitchell E. Katz
Date: December 12, 1997 -----------------------------
------------------- Mitchell E. Katz
(Chief Financial Officer)
Page 12
EXHIBIT A
NOBLE ROMAN'S, INC.
CONDENSED CONSOLIDATED PROFORMA BALANCE SHEET
(UNAUDITED)
The following condensed consolidated proforma balance sheet as of September
30, 1997 has been derived from the unaudited consolidated financial statements
of Noble Roman's, Inc. For the purpose of the proforma, this condensed
consolidated proforma balance sheet gives effect to the amended and restated
credit agreement with The Provident Bank, its principal lender, as of November
19, 1997 and the application of proceeds therefrom as if such transaction had
occurred as of September 30, 1997. The amended and restated agreement
provides for the reduction of previously outstanding debt from approximately
$16.9 million to $11 million, cancellation of previously accrued interest, no
interest to be paid or accrued on such debt until November 1, 1998, interest
on such debt of 8% per annum payable monthly in arrears after November 1,
1998, maturity of such debt extended to December, 2001, with principal
payments beginning December 1, 1998 in an amount equal to 50% of excess cash
flow as defined in the agreement, and the cancellation of a previously issued
warrant to purchase 465,000 shares of the Company's common stock. In
addition, the agreement provides for a new loan in the amount of $2.6 million
due in December, 2000 with interest payable monthly in arrears at a rate of
prime plus 2.5% per annum. These arrangements were made in consideration for
a new warrant to purchase 2.8 million shares of common stock with an exercise
price of $.01 per share. Proceeds from the new loan were primarily for
working capital and existing restaurant upgrades.
Page 13
EXHIBIT A
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(In Thousands)
Proforma Adjustments
Unaudited -------------------------------------- Proforma
9/30/97 Debit Credit 9/30/97
--------- ----- ------ --------
ASSETS
Current Assets:
Cash $ 60,925 2,580,000 (1) 2,262,000 (2) $ 378,925
Other Current Assets 1,713,811 125,300 (3) 1,588,511
----------- ------------
Total Current Assets 1,774,736 1,967,436
Property and equipment 6,819,609 6,819,609
Deferred tax assets 2,560,436 874,768 (4) 804,922 (5) 2,630,282
Costs in excess of assets acquired 6,269,693 6,269,693
Other assets 999,941 205,300 (3) 605,889 (6) 599,352
----------- ------------
TOTAL ASSETS $18,424,415 $18,286,372
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 4,384,277 875,000 (2) $ 3,509,277
Current portion of long-term debt 16,816,140 16,773,308 (7) 42,832
Deferred franchise fees 65,000 65,000
Payroll and sales tax 1,307,000 1,307,000 (2) 0
----------- ------------
Total Current Liabilities 22,572,417 3,617,109
Long-term Debt:
Long-term liabilities - other 43,953 43,953
Subordinated - note payable 0 5,773,308 (7) 16,773,308 (7) 11,000,000
Senior - note payable 0 2,580,000 (1) 2,580,000
----------- ------------
43,953 13,623,953
Common stock 5,518,431 2,800,000 (7) 8,318,431
Retained earnings (deficit) (9,710,386) 2,437,265 (4)(5)(6)(7) (7,273,121)
----------- ------------
Total Stockholders' Equity (deficit) (4,191,955) 1,045,310
----------- ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $18,424,415 $18,286,372
=========== ============
(1) New loan in the amount of $2,580,000.
(2) Use of proceeds from new loan to reduce accounts payable and payroll
and sales taxes payable.
(3) Recognition of certain financing costs as other assets.
(4) Reversal of valuation allowance for deferred tax assets.
(5) Recognition of tax liability arising from the transaction.
(6) Recording the expense of unamortized financing costs from prior loan
agreement.
(7) Reduction of previously outstanding net debt from $16,773,308 to
$11,000,000, issuance of stock warrants and recognition of the gain
on the forgiveness of debt.
Page 14