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
--- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 19981999
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 No X
No
----- -------- ---
As of October 30, 1998,August 15, 1999, there were 4,131,3245,565,390 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:
Note to condensed consolidated financial
statements Page 2
Condensed consolidated balance sheets as of
December 31, 19971998 and June 30, 19981999 Page 34
Condensed consolidated statements of operations for
the six and three months ended June 30, 19971998 and 19981999 Page 45
Condensed consolidated statements of cash flows for
the six months ended June 30, 19971998 and 1998 Page 5
Note to condensed consolidated financial statements1999 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.
SEGMENT REPORTING
In 1998, the Company adopted FAS 131. Prior year information has been restated
to present the Company's reportable segments. The Company is organized into two
segments as follows: traditional full-service restaurants which are
Company-owned and operated, and Noble Roman's Pizza Express which are
franchised.
Depreciation Operating Income Tax
and income expense Segment Expenditures
Revenue Amortization (loss) Interest (benefit) Assets for property
Six months ended
June 30, 1998
Restaurant $11,288,357 328,594 190,850 27,235 64,889 6,859,241 342,492
Express 861,217 - 579,536 - 197,042 184,374 -
Corporate 177,339 167,709 (1,468,311) 601,839 (713,111) 11,819,153 -
----------- -------- ---------- ------- -------- ---------- --------
Total $12,326,913 496,303 (697,925) 629,074 (451,180) 18,862,768 342,492
Six months ended
June 30, 1999
Restaurant $11,065,451 369,698 36,469 35,992 12,399 6,736,795 216,064
Express 1,418,373 - 655,442 - 222,850 226,125 10,065
Corporate 178,695 150,218 (1,284,592) 788,999 (717,258) 13,181,741 5,012
----------- -------- ---------- ------- -------- ---------- --------
Total $12,662,520 519,916 (592,682) 824,991 (482,009) 20,144,661 231,141
2
Based 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 (as such term is defined in
the Private Securities Litigation Reform Act of 1995) relating to the Company
that are based on the beliefs of the management of the Company, as well as
assumptions and estimates made by and information currently available to the
Company's management. The Company's actual results in the future may differ
materially from those projected 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
result of competitive factors and pricing pressures, shifts in market demand,
general economic conditions and other factors including but not limited to,
changes 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 may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
Page 23
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, June 31,
199730,
1998 -------------- --------------
Assets
------1999
------------ ------------
Assets
------
Current assets:
Cash $ 68,13628,176 $ 38,642578,069
Accounts receivable 380,816 576,344579,841 550,039
Inventories 802,097 782,803844,783 863,137
Prepaid expenses 158,260 445,072
-------------- --------------185,471 141,398
------------ ------------
Total current assets 1,409,309 1,842,8611,638,271 2,132,643
Property and equipment, less accumulated depreciation and
amortization of $3,379,356$4,029,228 and $3,745,583 6,825,777 6,802,042$4,433,818 6,657,638 6,495,773
Deferred tax asset 3,335,407 3,664,2754,442,725 4,924,482
Costs in excess of assets acquired, net 6,204,698 6,074,7085,944,718 5,814,728
Other assets 429,805 478,882
-------------- --------------459,202 777,035
------------ ------------
$ 18,204,99619,142,554 $ 18,862,76820,144,661
------------ ------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 2,978,7191,911,089 $ 4,053,8921,631,973
Notes payable - current 21,743 612,19518,279 18,279
Note payable to officer - current 65,840 65,840
Deferred franchise fees 638,00 131,800143,500 175,000
Other current liabilities 1,855,118 1,427,258
-------------- --------------1,740,653 1,319,603
------------ ------------
Total current liabilities 4,919,380 6,225,1453,879,361 3,210,695
Long-term liabilities:
Senior noteNotes payable 2,580,000 2,580,000
Subordinated noteto Provident Bank net of warrant valuation of
$653,241 and $586,809, respectively 13,919,125 13,985,558
Notes payable 11,000,000 11,000,000to various funds affiliated with Geometry
Group net of warrant valuation of $262,942 in 1999 -- 1,972,058
PIK notes payable -- 289,139
Note payable to officer 250,000 250,000
Other long term debt 22,863 20,256
Capital leases 8,201 1,203
-------------- --------------liabilities 18,339 15,561
------------ ------------
Total long-term liabilities 13,611,064 13,601,45914,187,464 16,512,316
Stockholders' equity
Common stock (9,000,000 shares, issued 4,131,3245,552,390 in 19971998
and 1998) 8,318,431 8,318,4315,565,390 in 1999) 11,869,175 12,154,093
Accumulated deficit (8,643,879) (9,282,267)
-------------- --------------(10,793,445) (11,732,443)
------------ ------------
Total stockholders' deficit (325,448) (963,836)
-------------- --------------equity 1,075,730 421,650
------------ ------------
$ 18,204,99619,142,554 $ 18,862,786
-------------- --------------20,144,661
------------ ------------
See accompanying note to condensed consolidated financial statements.
Page 34
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
------------------------ --------------------------
1997--------------------- --------------------
1998 19971999 1998 1999
---- ---- ---- ----
Restaurant revenue $ 13,652,268 $ 11,288,357 $ 5,854,59011,065,451 $ 5,778,786 $ 5,545,930
Restaurant royalties 54,134 76,106 28,33742,807 41,408 20,845
Express royalties and fees 102,757 861,217 64,8051,418,373 538,573 762,590
Administrative fees and other 122,583 101,233 84,920135,888 47,590 -------------50,196
------------ ------------ ------------ ------------
Total revenue 13,931,742 12,326,913 6,032,65212,662,520 6,406,357 6,379,562
Restaurant operating expenses:
Cost of revenue 2,796,879 2,207,478 1,239,6392,177,371 1,128,174 1,082,051
Salaries and wages 5,008,628 4,148,162 2,082,5144,202,387 2,103,386 2,122,158
Rent 1,340,338 1,103,495 551,5441,124,754 552,807 565,624
Advertising 682,562 566,797 292,726540,878 291,298 264,295
Other 3,123,328 2,742,981 1,232,4442,613,894 1,402,032 1,322,908
Depreciation and amortization 580,890 496,303 256,016519,916 250,502 259,568
Express operating expenses 82,412 498,681 61,048 281,462281,681 762,932 172,962 406,452
General and administrative 1,453,687 1,260,941 711,838 644,305
Restructuring costs 5,159,836 0 5,159,836 0
-------------1,477,941 1,313,070 752,805 647,854
------------ ------------ ------------ ------------
Operating loss (6,296,818) (697,925) (5,554,953)(592,682) (247,609) (291,349)
Interest and other expense 799,595 269,331 325,031 158,258
-------------629,074 824,991 338,130 455,695
------------ ------------ ------------ ------------
Loss before income taxes (7,096,413) (967,256) (5,879,984) (405,867)tax and
extraordinary item (1,326,999) (1,417,673) (585,739) (747,044)
Income taxestax benefit (2,412,800) (328,868) (1,999,214) (137,968)
-------------(451,180) (482,009) (199,180) (253,995)
------------ ------------ ------------ ------------
Loss before extraordinary item (875,819) (935,664) (386,559) (493,049)
Extraordinary item, net of tax expense
of $122,312 and $61,156 237,431 -- 118,715 --
------------ ------------ ------------ ------------
Net loss $ (4,683,613)(638,389) $ (638,388) $(3,880,770)(935,664) $ (267,899)
-------------(267,844) $ (493,049)
------------ ------------ ------------ ------------
Net loss per share $ (1.13) $ (.15) $ (.94)(.17) $ (.06) $ (.09)
Weighted average number of common
shares outstanding 4,131,324 5,556,390 4,131,324 4,131,324 4,131,3245,561,057
See accompanying note to condensed consolidated financial statements.
Page 45
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
------------------------
1997--------------------
1998 1999
---- ----
OPERATING ACTIVITIES
- --------------------
Net loss $(4,683,613) $ (638,388) $ (935,664)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 647,127 496,217 Restructuring costs 4,753,384 -609,036
Non-cash interest -- 289,139
Deferred federal income taxes (2,404,836) (328,868) (482,009)
Changes in operating assets and liabilities (increase) decrease in:
Accounts receivable (80,707) (195,528) 29,802
Inventory 40,762 19,294 (18,354)
Prepaid expenses (301,787) (286,812) 44,073
Other assets (81,225) (49,077) (60,166)
Increase (decrease) in:
Accounts payable 27,772 1,075,173 (279,116)
Other current liabilities 12,924 (427,860) (421,050)
Deferred franchise fee - 68,000 ------------ ------------31,500
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (2,070,199) (267,849) (1,192,809)
INVESTING ACTIVITIES
- --------------------
Purchase of fixed assets (452,136) (342,492) ------------ ------------(231,141)
Issuance of common stock -- 19,500
Legal fees associated with exchange of debt for equity -- (9,582)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (452,136) (342,494) (221,223)
FINANCING ACTIVITIES
- --------------------
Proceeds from long-term debt, and notes payable 2,787,272net of debt issue costs 592,367 1,966,703
Principal payments on long-term debt and capital lease obligations (283,713) (11,520) ------------ ------------(2,778)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,503,559 580,847 ------------ ------------
DECREASE1,963,925
----------- -----------
INCREASE (DECREASE) IN CASH (18,776) (29,494) 549,893
Cash at beginning of period 74,502 68,136 ------------ ------------28,176
----------- -----------
Cash at end of period $ 55,72638,642 $ 38,642
------------ ------------578,069
----------- -----------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
As a result of the Company's debt restructurings with Provident Bank, the
Company was not required to pay interest on $11,000,000 note payable to
Provident Bank for the period November 1, 1997 through October 31, 1998. The
computed interest cost for the six-month period ended June 30, 1998 was
$359,743.
The Company's loan agreement provides that interest on $6,572,366 of its notes
payable is to be paid by the issuance of PIK notes. The amount of such non-cash
interest for the six month period ended June 30, 1999 was $289,139.
See accompanying note to condensed consolidated financial statements.
Page 5
Noble Roman's, Inc. and Subsidiaries
Note to Condensed Consolidated Financial Statements
(Unaudited)
1. SUBSEQUENT EVENTS
On August 13, 1998 the Company obtained additional financing of $2,000,000
from its primary lender. This financing is in the form of a promissory note
due in December, 2001, bears interest at 2 1/2% over prime payable monthly.
As additional compensation, the Bank received a warrant to purchase 750,000
shares of the Company's stock at $.01 per share.
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 - Six-month and three-month periods ended June 30, 19971998
and 19981999
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. Certain items are shown as a percentage of restaurant revenue.
Six Months Ended Three Months Ended
June 30, June 30,
----------------------- --------------------
1997---------------- ------------------
1998 19971999 1998 1999
---- ---- ---- ----
Revenue:
Restaurant revenue 98.0% 91.6% 97.0%87.4% 90.2% 86.9%
Restaurant royalties .4 0.6 .5 .70.3 0.6 0.3
Express royalties and fees .7 7.0 1.111.2 8.4 12.0
Administrative fees and other .9 .8 1.41.1 .7 ------- ------- ------- -------0.8
------ ------ ------ ------
100.0 100.0 100.0 100.0
Restaurant operating expenses (1):
Cost of revenue 20.5 19.6 21.219.7 19.5 19.5
Salaries and wages 36.7 36.8 35.638.0 36.4 38.3
Rent 9.8 9.8 9.410.2 9.6 10.2
Advertising 5.0 4.9 5.0 5.0 5.04.8
Other 22.9 24.3 21.123.6 24.3 23.9
Depreciation and amortization 4.2 4.0 4.24.1 3.9 4.1
Express operating expense .6 4.1 1.0 4.42.3 6.0 2.7 6.4
General and administrative 12.0 10.4 10.3 11.8 10.110.2
Restructuring costs 37.0 - 85.5 - ------- ------- ------- -------- -
------ ------ ------ ------
Operating loss (45.2) (5.7) (92.1)(4.7) (3.9) (4.6)
Interest 5.7 2.2 5.4 2.4
------- ------- ------- -------5.1 6.5 5.3 7.1
------ ------ ------ ------
Loss before income taxes (50.9%(10.8) (11.2) (9.1) (11.7)
Income tax benefit 3.7 3.8 3.1 4.0
------ ------ ------ ------
Loss before extraordinary item (7.1%) (7.9%(7.4%) (97.5%(6.0%) (6.3%(7.7%)
(1) As a percentage of restaurant revenue
Total revenue increased $373.7approximately $336 thousand or 6.2%and decreased approximatley
$27 thousand for the three-monthsix-month period and three month period ended June 30, 19981999
compared to the same periodperiods in 1997.1998. The primary reason for the increase iswas
the growth ofin revenue from the Express business plus same store sales
increase of 1.8% in the full-service restaurants. Total revenue decreased $1.6
million, or 11.5%, for the six-month period ended June 30, 1998 compared to the
same period in 1997. The primary reason for this decrease was the closing of 19
restaurants and the sale of four others in the second quarter of 1997 plusoffset slightly by a 1% same
store sales decrease of 5.2% in the full-service restaurants. Same store sales
increase during the second 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.
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 approximately $538,600 (royalties $177,300,
initial franchise fees $102,700$1,418,373 and commissions $258,600) and $861,200
(royalties $299,000, initial franchise fees $164,600 and commissions $397,600)$762,590 for the
three-monthsix month and six-monththree month periods ended June 30, 19981999 compared to only
$64,800$861,217 and
$102,800 during$538,573 for the correspondingsix month and three month periods in 1997.ended June 30, 1998.
Franchising of Noble Roman's Pizza Express began in early 1997. At June 30,
1998,1999, approximately 109235 franchised Express units were open. Currently there are
7
approximately 165266 such franchised units open withand approximately 70 more100 units sold to
be opened over the next several months. In addition, there are current
negotiations for a significant number of new units to be opened in 1999.
Cost of revenue as a percentage of restaurant revenue decreased from 21.2%remained approximately the
same at 19.7% and 20.5% to 19.5% and 19.6% for the three-monthsix month and six-monththree month periods ended June 30,
19981999 compared to 19.6% and 1997, respectively. The decrease is primarily19.5% for the result of
improvedsix month and three month periods ended
June 30, 1998. Ingredient cost controls resulting fromfor the Company's aggressive long-term
turnaround policy.products have remained about
the same, however, recently the price of cheese has been escalating.
Salaries and wages increased as a percentage of restaurant revenue from 35.6%were 38.0% and 36.7% to 36.4% and 36.8%38.3%
for the three-monthsix and six-monththree month periods ended June 30, 19981999 compared to 36.7% and
1997, respectively.36.4% for the six month and three month periods ended June 30, 1998. The
increase iswas the result of wage rate increases due to increased labor costscompetition for
restaurant employees.
Other restaurant expenses as a percentage of restaurant revenue were 23.6% and
23.9% for the six month and three month periods ended June 30, 1999 compared to
improve customer service.24.3% and 24.3% for the six month and three month periods ended June 30, 1998.
The decrease was primarily the result of an improvement in discount cost due to
management's decision to modify its coupon policy.
Express operating expenses were $762,932 and $406,452 for the six month and
three month periods ended June 30, 1999 compared to $281,681 and $172,962 for
the six month and three month periods ended June 30, 1998. This increased staffing levelincrease was necessarya
result of the growth in number of franchised Express units and the Company's
decisionnal staff to overcome perception createdbe prepared for an accelerated rate of growth in 1996 and 1997.the number
of new franchised units to be opened during the remainder of 1999.
General and administrative expenses as a percentage of total revenue decreased
from 11.8%was 10.4%
and 10.4% to 10.1% and 10.3%10.2% for the three-monthsix month and six-monththree month periods ended June 30, 19981999 compared
to 12.0% and 1997, respectively.11.8% for the six month and three month periods ended June 30,
1998. This decrease is primarily attributable to the effective adherence to the restructuring plan and the
increasegrowth in revenue from the
growthExpress business and reduced training cost as a result of greater management
stability in the Express business.
Operating loss improved from a loss of $5.6 millionfull-service restaurants.
Interest expenses were $824,991 and $6.3 million to a loss
of $247,600$455,695 for the six month and $697,900 during the three-month and six-monththree month
periods ended June 30, 19981999 compared to $629,074 and 1997, respectively. The operating results$338,130 for the three-monthsix month
and six-month periods ending June 30, 1997 included restructuring costs of $5.2
million and $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-monththree month periods ended June 30, 19971998. The reason for the increase was a
result of increased borrowings.
Net losses before extraordinary item were a loss of $395,100$935,664 and $1.1 million, respectively. Excluding$493,049 for the effect of the restructuring costs
in 1997, the Company realized an improvement in operating income of $147,500six
month and $439,100 during the three-month and six-monththree month periods ended June 30, 19981999 compared to the same periods in 1997. The primary reason$875,819 and
$386,559 for the improved
operating loss is the operating profit of the Express business combined with
reduced costs of the Company's full-service restaurantssix month 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-monththree month periods ended June 30, 1998 and 1997, respectively.1998. The
primary reason was the forgiveness of both principal and interest as a part
of the debt restructuring on November 21, 1997 with the company's primary
lender. See Liquidity and Capital Resources.
Page 8
Net loss improved from $3.9 million and $4.7 million to a loss of $267,900 and
$638,400 during the three-month and six-month periods ended June 30, 1998 and
1997, respectively. The reductionslight increase in the net loss before extraordinary item was primarily the result of the
financialincreased interest cost, increased salaries and operational restructuring that the Company completed in 1997
and the rapid growth (from 46 units open to 165 units openwages in the last 10
months)full-service
restaurants mostly offset by the increased operating profit from the growth of
the Express business.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Historically, the Company's principal capital requirements arose from the costs
associated with the developmentDuring 1995 and opening of new restaurants and refurbishment
of existing restaurants. However, no new restaurants have been opened in 1998.
The Company's primary sources of working capital are cash flow from operations
and borrowings.
On March 25, 1996, the Company signedattempted a Lettermajor acquisition of Intent whereby it would have
acquired Papa Gino's Holdings Corp. (aa 187-unit
pizza restaurant chain operating in seven Northeastern states) throughstates in the Northeast as a merger transaction whereby the stockholders of
Papa Gino's Holding Corp. would have received approximately 2.25 million sharespart of a
to-be-authorized class of non-voting common stock of the Company. Amongstrategic decision to acquire and consolidate other things, this transaction was conditioned on a public equity offering,
implementation of a senior credit facility, a definitive agreement and
shareholder approval. The expenses incurred directly with regard to the proposed
acquisition and offering aggregated approximately $880,862.regional chains. For a
number of reasons this attempted acquisition failed, despite senior management
devoting substantially all of its attention onto 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 several
demographic/consumption trends, targeted for expansion by a large number of
8
mid-scale dining chains for expansion. At the same time, theThe unemployment rates in the Company's
labor markets were approaching record lows. Thelows and the Company's personnel were
aggressively recruited by these outside chains. Simultaneously,
seniorothers. Senior management, due to the acquisition
transaction, were unable to participate in daily operations.
As a result,operations during the Company experiencedperiod.
Because of the Company's dramatic turnover and was unableits inability to stabilize its
staffing levels through ordinary recruiting efforts. The resulting
turnover and short-staffing had a material adverse effect on operational results
generally, and specifically on service standards and cost controls. As a result,efforts, sales and margins declined.
Further, the management turnover, short labor supply
and negative press made it extremely difficult for the Company to overcome 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. AsDue to a partlack of its turn-around strategy, in May 1997,staffing and the Company's financial
difficulties, the Company closed 19 of its restaurants in May 1997 and sold four others to consolidate the remaining management, increased efforts
to recruit personnel and undertook an extensive training program. Becauselaunched
a turnaround strategy consisting of the
very competitive labor market, the hiring and training process took more thanthree primary elements:
o Negotiated a year. In November 1997, the Company negotiated aseries of debt restructuringrestructurings with its primary lender, The
Provident Bank, whereby the lender agreed to: reduceBank loaned the Company additional funds,
converted a portion of its debt to equity and extended maturity of
remaining debt. The Company also obtained additional funding from
various investors associated with the Geometry Group, New York, in the
form of convertible participating income notes which may, at the option
of the investors, be converted to equity April 15, 2003.
o Restructured the Company's outstanding debt by over $7 million; loan the Company an additional
$2.6 million; give the Company a grace period until December 1, 1998 without
either having to accrue or pay interest on the old portion of the debt; extend
the term of the debt until December 2001 with no principal payments until
December 1998; make principal payments after December 1998 variable depending on
available cash flow; and fix the interest rate on the old debt at 8% per year
commencing
Page 9
December 1998. These arrangements were made in exchange for a warrant to buy 2.8
million shares of Noble Roman's stock at a price of $.01 per share.
After completing a restructuring of the Company's credit facilities with
Provident Bank and a restructuring of management in November 1997,executive staff 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 began
an aggressive long-term turnaround strategy based on five primary elements: (1)
build morale, aggressively recruit management talent,Art Mancino as Vice
President of Development 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;Dan Hutchison as Chief Financial Officer.
o Began franchising Noble Roman's Pizza Express for non-traditional
locations such as convenience stores, grocery stores, truck stops, travel
centers, universities, bowling centers and (5) integrate all steps and increase marketing and sales
building efforts.to other traditional
restaurants as a Co-Brand.
On August 13, 1998,April 30, 1999, the Company obtained $2,235,600 in additional financingfunding from
its primary
lendervarious investors associated with The Geometry Group based in New York City, who
purchased participating income notes of the Company (the "Participating Notes")
and warrants to purchase at any time prior to December 31, 2001 an aggregate of
275,000 shares of the Company's common stock at a price of $.01 per share. The
Participating Notes mature on April 15, 2003 and are payable at that time, at
the option of each investor, in cash, in shares of the Company's common stock
based on a conversion price of $1.375 per share or in a combination thereof.
Interest on the Participating Notes accrues at a rate per annum equal to each
investor's pro rata share of the Company's revenues associated with the
Company's Pizza Express. Such interest is payable in cash monthly, provided,
however, that to the extent that the interest otherwise payable to an investor
would exceed such investor's pro rata share of the sum of $33,534, all interest
in excess of such amount of $2 million. This financing wasshall be paid in the form of a loan duePIK Note of the Company.
Each PIK Note matures on April 15, 2003 and, similar to the Participating Notes,
is payable at that time, at the option of each investor, in December, 2001 and bears interest at 2 1/2% over prime payable monthly. As
additional compensation, the Bank received a warrant to purchase 750 thousandcash, in shares of
the Company's common stock at $.01based on a conversion price of $1.375 per share.
Currently, the Company has approximately 165 franchised Express unitsshare or in
operation with approximately 70 additional franchised units sold and scheduled
to be 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 end 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 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 units 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 new
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 dormitories.
- - Sell co-branding agreements to other restaurant 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 10
combination thereof.
As a result of the additional bank financing,Company's debt restructuring, the improvementsexchange of debt for
equity, and the $2.2 million investment on April 30, 1999 by various funds
associated with The Geometry Group, New York in the operationsform of the Company's full-service restaurants and the growth in the new franchised
Express, management believesconvertible
participating income notes, the Company believes it will have sufficient cash
flow to meet its obligations and to carry out its current business plan.
Currently, the Company anticipates that its capital requirements in 1998expenditures for 1999 will
be approximately $500,000$500 thousand primarily for improvements to its existing
full-service restaurant
facilities.restaurants.
9
The Company is currently assessing its preparedness for year 2000 as it relates
to its information systems. Teen working with outside advisors to update or
replace various systems so all information system software will be year 2000
compliant by the end of the third quarter 1999. Although there can be no
assurance, management anticipates that issues related to year 2000 will have no
material effect on the business, the results of operations or on the Company's
growth during 1998 will primarily come from
franchising the Express concept where the capital requirements are
insignificant.
Page 11
financial condition.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, theThe Company is involved in various litigation relating to the claims arising
out of its normal business operations.operations and relating to restaurant facilities
closed in 1997. The Company believes that none of its current proceedings,
individually or in the aggregate, will have a material adverse effect upon
the Company beyond what has been provided forthe amount reserved in its financial statement.
Legal proceedings against the Company which have not been reserved for
include REH Acquisition, Ltd. ("REH")
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 companyCompany breached agreements entered into with the
Plaintiff to seek to fund and restructure the company'sCompany's bank debt. The
Company believes
this case is without merit, denies anyhas denied 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 statuehas
filed a counter-claim against REH and Elliott and Robert Herskowitz,
individually, for false and malicious misrepresentations seeking actual and
punitive damages against each of limitations
and denies any liability. The Company is currently appealing to an
administrative law judge and will defend vigorously.them.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 27. Financial Data Schedule
Page 1210
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: -----------------------------
-------------------August 23, 1999 -------------------------------------
--------------- Paul W. Mobley, Chairman of the Board
/s/ Mitchell E. KatzDan P. Hutchison
Date: -----------------------------
------------------- Mitchell E. Katz
(ChiefAugust 23, 1999 -------------------------------------
--------------- Dan P. Hutchison
Chief Financial Officer)
Page 13Officer
11