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 SEPTEMBER 30, 1997
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, 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, 1996 and September 30, 1997 Page 3
Condensed consolidated statements of operations for
the nine and three months ended September 30,
1996 and 1997 Page 4
Condensed consolidated statements of cash flows for
the nine months ended September 30, 1996 and 1997
Page 5
Notes 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 for the interim periods
presented, which adjustments are of a normal recurring nature.
This report contains forward-looking statements which are inherently
subject to risks and uncertainties. Noble Roman's actual results could differ
materially from those currently anticipated due to a number of factors,
including Noble Roman's ability to improve operating 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.
Page 2
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, September 30,
1996 1997
------------ -------------
Assets
------
Current assets:
Cash $ 74,502 $ 60,925
Accounts receivable 947,924 552,576
Inventories 947,644 821,760
Prepaid expenses 363,074 339,475
------------- -------------
Total current assets 2,333,144 1,774,736
Property and equipment, less accumulated depreciation and
amortization of $4,372,980 and $3,189,601
9,475,794 6,819,609
Deferred tax asset - 2,560,436
Costs in excess of assets acquired, net 6,464,678 6,269,693
Other assets 1,177,069 999,941
------------- -------------
$ 19,450,685 $ 18,424,415
------------- -------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 4,190,896 $ 4,384,277
Notes payable - current 14,251,373 16,816,140
Deferred franchise fees - 65,000
Payroll and sales tax 141,945 1,307,000
------------- -------------
Total current liabilities 18,584,214 22,572,417
Long-term liabilities:
Notes payable - less current portion 41,540 32,148
Capital leases 33,646 11,805
------------- -------------
Total long-term liabilities 75,186 43,953
Stockholders' equity
Common stock, no par value, authorized 9,000,000 shares,
issued 4,131,324 and 4,131,324 5,518,431 5,518,431
Retained earnings (deficit) (4,727,146) (9,710,386)
------------- -------------
Total stockholders' equity (deficit) 791,285 (4,191,955)
------------- -------------
$ 19,450,685 $ 18,424,415
------------- -------------
See accompanying note to condensed consolidated financial statements.
Page 3
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------- ----------------------
1996 1997 1996 1997
---- ---- ---- ----
Restaurant revenue $ 25,207,049 $ 19,394,323 $ 8,346,239 $ 5,742,055
Restaurant royalties 154,599 92,438 56,180 38,304
Express royalties and fees - 242,888 - 140,131
Administrative fees and other 173,148 126,516 30,647 3,933
------------ ------------ ------------ ------------
Total revenue 25,534,796 19,856,165 8,433,066 5,924,423
Restaurant operating expenses:
Cost of revenue 4,805,084 4,088,086 1,496,318 1,291,207
Salaries and wages 8,245,459 7,074,841 2,763,536 2,066,213
Rent 2,248,265 1,891,956 758,388 551,618
Advertising 1,556,715 969,679 416,961 287,117
Other 6,171,920 4,301,150 2,096,904 1,177,822
Depreciation and amortization 893,036 840,325 297,292 259,435
Express operating expenses - 118,340 - 35,928
General and administrative 1,807,121 2,083,166 614,153 629,479
Cost of attempted acquisition and equity
offering 768,389 - - -
Restructuring costs - 5,159,836 - -
------------ ------------ ------------ ------------
Operating income (loss) (961,193) (6,671,214) (10,486) (374,396)
Interest and other expense 1,199,233 880,426 436,591 80,831
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,160,426) (7,551,640) (477,077) (455,227)
Income taxes (benefit) (756,149) (2,568,400) (156,477) (155,600)
------------ ------------ ------------ ------------
Net income (loss) before loss on
discontinued operations (1,404,277) (4,983,240) (290,600) (299,627)
Loss on discontinued operations 48,750 - - -
------------ ------------ ------------ ------------
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) per share $ (.35) $ (1.21) $ (.07) $ (.07)
------------ ------------ ------------ ------------
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
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------------------
1996 1997
---- ----
OPERATING ACTIVITIES
--------------------
Net income (loss) $ (1,453,027) $ (4,983,240)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 982,124 840,325
Restructuring costs - 4,753,384
Deferred federal income taxes - (2,560,436)
Changes in operating assets and liabilities (increase) decrease in:
Accounts receivable (38,311) (274,536)
Inventory (82,929) 54,178
Prepaid expenses (348,634) (609,965)
Other assets (249,975) 96,818
Increase (decrease) in:
Accounts payable and other current liabilities 459,361 638,830
Deferred franchise fee - 65,000
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (731,391) (1,979,642)
INVESTING ACTIVITIES
--------------------
Purchase of fixed assets (696,060) (567,469)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (696,060) (567,469)
FINANCING ACTIVITIES
--------------------
Proceeds from borrowing 1,585,081 2,814,767
Principal payments on long-term debt and capital lease obligations (259,644) (281,233)
------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,325,437 2,533,534
------------ ------------
INCREASE (DECREASE) IN CASH (102,014) (13,577)
Cash at beginning of period 229,462 74,502
------------ ------------
Cash at end of period $ 127,448 $ 60,925
------------ ------------
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 November 19, 1997, Noble Roman's, Inc. ("Noble Roman's" or the
"Company") entered into an amended and restated credit agreement with
The Provident Bank, its principal lender. The new agreement provides
for the reduction 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
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 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 $2,580,000 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
2,800,000 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-month and three-month periods ended September 30,
1996 and 1997
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, certain items are shown as a percentage of restaurant
revenue.
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------- -------------------
1996 1997 1996 1997
---- ---- ---- ----
Revenue:
Restaurant revenue 98.7% 97.7% 99.0 96.9%
Restaurant royalties .6 .5 .7 .6
Express royalties and fees - 1.2 - 2.4
Administrative fees and other .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 22.5
Salaries and wages 32.7 36.5 33.1 36.0
Rent 8.9 9.8 9.1 9.6
Advertising 6.2 5.0 5.0 5.0
Other 24.5 22.2 25.1 20.5
Depreciation and amortization 3.5 4.2 3.5 4.4
Express operating expense - .6 - .6
General and administrative 7.1 10.5 7.3 10.6
Loss from withdrawn acquisition and offering
and restaurants closed in 1987 3.0 - - -
Restructuring costs - 26.0 - -
----- ----- ----- -----
Operating income (loss) (3.8) (33.6) (.1) (6.3)
Interest 4.7 4.4 5.2 1.4
----- ----- ----- -----
Income (loss) before income taxes (8.5%) (38.0%) (5.3%) (7.7%)
(1) As a percentage of restaurant revenue.
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
also allowed the Company to consolidate management and supervision in the
remaining 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 million, or 22.2%, and $2.5 million, or 29.7%,
for the nine-month and three-month periods ended September 30, 1997,
respectively, compared to corresponding periods in 1996. The principal reason
for the decrease was the closing of 19 restaurants in the second quarter of
1997 and the sale of four others to a franchisee. In addition, the decreases
were partially the result of same store sales declines which were 8.7% and
11.5% for the nine-month and three-month periods ended September 30, 1997,
respectively, compared to the corresponding periods in 1996. The Company
continues to market its Express concept whereby franchisees operate a Noble
Roman's Pizza Express operation in non-traditional restaurant locations
including convenience stores, other retail outlets, schools and recreational
facilities. The Company currently has 45 Pizza Express franchised locations.
Royalties and fees from 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.
Cost of revenue as a percentage of restaurant revenue increased from 19.1% and
17.9% to 21.1% and 22.5% for the nine-month and three-month periods ended
September 30, 1996 and 1997, respectively. These increases were primarily the
result of a change in method of recording many of 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.
Salaries and wages increased as a percentage of restaurant revenue from 32.7%
and 33.1% to 36.5% and 36.0% for the nine-month and three-month periods ended
September 30, 1996 and 1997, respectively. These increases were the result of
additional staffing to accommodate increased customer count from a discount
promotion, same store sales declines, inefficiencies in scheduling as a result
of inexperienced store level management, and a more competitive labor market
resulting in higher average wage rates.
General and administrative expenses as a percentage of total revenue increased
from 7.1% and 7.3% to 10.5% and 10.6% for the nine-month and three-month
periods ended September 30, 1996 and 1997, respectively. This increase was
primarily attributable to additional supervision cost in the first quarter and
to the decline in total revenue in the second and third quarters. As a result
of the restructuring plan, the Company has reduced its general and
administrative expenses.
Operating income (loss) decreased from a loss of $961,200 and a loss of
$10,500 to a loss of $6.7 million and $374,400 during the nine-month and
three-month periods ended September 30, 1996 and 1997, respectively. The
primary reason for greater loss in 1997 was the restructuring cost of $5.2
million recorded in the second quarter.
Interest 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 financial restructuring discussed below under "Liquidity and Capital
Resources."
Net income (loss) decreased from losses of $1.5 million and $290,600 to $5.0
million and $299,627 during the nine-month and three-month periods ended
September 30, 1997, respectively. The increase in the net loss was primarily
the result of the restructuring costs recorded in the second quarter of 1997.
Page 8
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, no new restaurants have been
opened in 1997. The Company's primary sources of working capital are cash
flow from operations and borrowings under a credit facility.
On March 25, 1996, the Company signed a Letter of Intent whereby it would have
acquired Papa Gino's Holdings Corp. (a 180 unit pizza restaurant chain in
seven northeastern 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 with regard to the proposed acquisition and offering aggregated
approximately $880,862. In addition, deterioration in operating controls
during this effort as a result of senior management's focus on that activity
created a severe shortage of working capital.
From March, 1995 through June, 1996 the Company's senior management had to
focus almost all of its time on arranging for financing and the unsuccessful
attempted acquisition of a 180 unit regional pizza restaurant chain operating
in seven northeastern states. As a result, the Company's current operations
severely deteriorated resulting in personnel turnover, poor service and
difficulties with operational standards and controls.
Management has sought to improve operations with 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 portion of its restaurants and
concentrating its efforts and management personnel on the remaining
restaurants. 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
agreement with The Provident Bank, its principal lender. The new 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 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 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. Pursuant to entering into the
amended and restated credit facility, the Company issued warrants to purchase
an aggregate of 1.0 million shares of common stock to certain executive
officers with an exercise price of $.40 per share. Proceeds from the new loan
were primarily for working capital and existing restaurant upgrades.
Page 9
Based upon the amendments to the credit agreement, planned improvements in its
existing full-service restaurants and the planned growth in the new franchised
Express business, management believes the Company will generate 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 for improvements to its existing full-service
restaurants. The Company also anticipates that most of its growth during 1998
will be generated from franchising of its new Express concept.
Page 10
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 on the Company.
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.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 10. Amended and Restated Credit Agreement
Exhibit 27. Financial Data Schedule
Page 11
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)
/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