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 MARCH 31, 1998
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 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, 1997
and March 31, 1998 Page 3
Condensed consolidated statements of operations for the three
months ended March 31, 1997 and 1998 Page 4
Condensed consolidated statements of cash flows for the three
months ended March 31, 1997 and 1998 Page 5
Note 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.
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 2
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, March 31,
1997 1998
-------------- --------------
Assets
------
Current assets:
Cash $ 68,136 $ 35,521
Accounts receivable 380,816 381,436
Inventories 802,097 786,655
Prepaid expenses 158,260 317,996
-------------- --------------
Total current assets 1,409,309 1,521,608
Property and equipment, less accumulated depreciation and
amortization of $3,379,356 and $3,560,076 6,825,777 6,835,128
Deferred tax asset 3,335,407 3,526,055
Costs in excess of assets acquired, net 6,204,698 6,139,703
Other assets 429,805 482,692
-------------- --------------
$ 18,204,996 $ 18,505,186
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 2,978,719 $ 3,457,318
Notes payable - current 21,743 613,163
Deferred franchise fees 638,00 119,950
Other current liabilities 1,855,118 1,405,006
-------------- --------------
Total current liabilities 4,919,380 5,595,437
Long-term liabilities:
Senior note payable 2,580,000 2,580,000
Subordinated note payable 11,000,000 11,000,000
Other long term debt 22,863 21,374
Capital leases 8,201 4,312
-------------- --------------
Total long-term liabilities 13,611,064 13,605,686
Stockholders' equity
Common stock (9,000,000 shares, issued 4,131,324 in 1997
and 1998) 8,318,431 8,318,431
Accumulated deficit (8,643,879) (9,014,368)
-------------- --------------
Total stockholders' deficit (325,448) (695,937)
-------------- --------------
$ 18,204,996 $ 18,505,186
-------------- --------------
See accompanying note to condensed consolidated financial statements.
Page 3
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
------------------------
1997 1998
---- ----
Restaurant revenue $ 7,797,678 $ 5,509,571
Restaurant royalties 32,749 34,698
Express royalties and fees 17,141 322,644
Administrative fees and other 51,522 53,643
------------ ------------
Total revenue 7,899,090 5,920,556
Restaurant operating expenses:
Cost of revenue 1,557,240 1,079,304
Salaries and wages 2,926,114 2,044,776
Rent 788,794 550,688
Advertising 389,836 275,499
Other 1,890,884 1,340,949
Depreciation and amortization 324,874 245,801
Express operating expenses - 217,219
General and administrative 763,213 616,636
------------ ------------
Operating loss (741,865) (450,316)
Interest 474,564 111,073
------------ ------------
Loss before income taxes (1,216,429) (561,389)
Income taxes benefit (413,586) (190,900)
------------ ------------
Net loss $ (802,843) $ (370,489)
============ ============
Net loss per share $ (.19) $ (.09)
------------ ------------
Weighted average number of common
shares outstanding 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)
Three Months Ended
March 31,
------------------------
1997 1998
---- ----
OPERATING ACTIVITIES
- --------------------
Net loss $ (802,843) $ (370,489)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 324,874 245,801
Deferred federal income taxes (405,622) (190,648)
Changes in operating assets and liabilities (increase) decrease in:
Accounts receivable (20,145) (620)
Inventory (33,762) 15,442
Prepaid expenses (381,649) (159,736)
Other assets (54,080) (52,973)
Increase (decrease) in:
Accounts payable and other current liabilities (175,229) 28,487
Deferred franchise fee - 56,150
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,548,456) (428,586)
INVESTING ACTIVITIES
- --------------------
Purchase of fixed assets (219,490) (190,071)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (219,490) (190,071)
FINANCING ACTIVITIES
- --------------------
Proceeds from borrowing 2,034,288 592,365
Principal payments on long-term debt and capital lease obligations (258,293) (6,323)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES
1,775,995 586,042
------------ ------------
INCREASE (DECREASE) IN CASH 8,049 (32,615)
Cash at beginning of period 74,502 68,136
------------ ------------
Cash at end of period $ 82,551 $ 35,521
------------ ------------
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 EVENT
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 - Three-month periods ended March 31, 1997 and 1998
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.
Three Months Ended
March 31,
--------------------
1997 1998
---- ----
Revenue:
Restaurant revenue 98.7% 93.1%
Restaurant royalties .4 .6
Express royalties and fees .2 5.4
Administrative fees and other .7 .9
------- -------
100.0 100.0
Restaurant operating expenses (1):
Cost of revenue 20.0 19.6
Salaries and wages 37.5 37.1
Rent 10.1 10.0
Advertising 5.0 5.0
Other 24.2 24.3
Depreciation and amortization 4.1 4.2
Express operating expense - 3.7
General and administrative 9.7 10.4
------- -------
Operating loss (9.4) (7.6)
Interest 6.0 1.9
------- -------
Loss before income taxes (15.4%) (9.5%)
(1) As a percentage of restaurant revenue.
Total revenue decreased $2.0 million, or 25.0%, for the three month period ended
March 31, 1998 compared to the corresponding period in 1997. The principal
reason for the decrease was the closing of 19 restaurants and the sale of four
others in the second quarter of 1997. In addition, the decreases were partially
the result of same store sales declines of 8.5% for the three month period ended
March 31, 1998 compared to the corresponding period in 1997. The same store
sales declines reflect the negative impact of inconsistent service and product,
in the Company's restaurants, during 1996 and 1997. As a result of the failed
acquisition attempt in 1996 to acquire a 187 unit pizza chain in the northeast,
the Company had massive restaurant level management turnover. This turnover of
personnel resulted in poor service and inconsistent product to its customers.
In November 1997, the Company began an aggressive turnaround strategy in its
full-service restaurants which included reorganizing management and a five point
plan designed to provide a long term fix. The steps in order were to: (1) build
morale, aggressively raid others for management talent, and improve all
Page 7
levels of management training; (2) alter the company's culture of strict cost
controls to one of improved focus on customer service; (3) improve the company's
product advantages creating even larger differentiations; (4) refocus attention
on control systems; (5) integrate all steps and increase marketing and sales
building efforts. The Company has corrected its service and product problem to a
large degree and is in the process of restoring its customer base. Recent
full-service store sales comparisons are positive compared to the same periods
during the previous year.
Express royalties and fees were approximately $322,644 (royalties $121,670,
initial franchise fees $62,000 and commissions $138,974) for the three month
period ended March 31, 1998 compared to only $17,141 during the corresponding
period in 1997. Franchising of Noble Roman's Pizza Express began in early 1997.
At March 31, 1998, approximately 70 franchised Express units were open.
Currently there are approximately 165 such franchised units open with
approximately 70 more units sold to be opened over the next several months.
Cost of revenue as a percentage of restaurant revenue decreased from 20.0% to
19.6% for the three-month periods ended March 31, 1997 and 1998, respectively.
The decrease was primarily the result of improved cost controls resulting from
the Company's aggressive long-term turnaround strategy.
Salaries and wages decreased as a percentage of restaurant revenue from 37.5% to
37.1% for the three-month periods ended March 31, 1997 and 1998. The decrease
occurred even though the Company increased labor schedules to improve customer
service.
General and administrative expenses as a percentage of total revenue increased
from 9.7% to 10.4% for the three-month periods ended March 31, 1997 and 1998.
This increase was primarily attributable to the decline in total revenue. As a
result of the restructuring plan, the Company has reduced its general and
administrative expenses.
Operating loss improved from a loss of $741,900 to $450,300 during the
three-month periods ended March 31, 1997 and 1998. The primary reason for the
improved operating loss is the operating profit generated by the Express
business combined with improved cost controls at the Company's full-service
restaurants and a decrease in general and administrative expenses resulting from
adherence to the restructuring plan.
Interest decreased from $474,600 to $111,000 for the three-month periods ended
March 31, 1997 and 1998, respectively. 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.
Net loss improved from $802,800 to $370,500 during the three-month periods ended
March 31, 1997 and 1998, respectively. The reduction in the net loss was
primarily the result of the financial and operational restructuring that the
Company completed in 1997 and the rapid growth of 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, no
Page 8
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 signed a Letter of Intent whereby it would have
acquired Papa Gino's Holdings Corp. (a 187-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. The expenses incurred directly with regard to the proposed
acquisition and offering aggregated approximately $880,862.
For a number of reasons this attempted 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
several demographic/consumption trends, targeted for expansion by a large number
of mid-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, due to the acquisition transaction, were unable to
participate in daily operations.
As a result, the Company experienced dramatic turnover and was unable 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,
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. As a part of
its turn-around strategy, in May 1997, the Company closed 19 of its restaurants
and sold four others to consolidate the remaining 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 November 1997, the Company negotiated a debt restructuring with its
primary lender, The Provident Bank, whereby the lender agreed to: reduce 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 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, 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, 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;
Page 9
(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 750 thousand
shares of the 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 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.
As a result of the additional bank financing, the improvements in the operations
of the Company's full-service restaurants and the growth in the new franchised
Express, management believes the Company 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 1998 will be approximately
$500,000 primarily for improvements to its existing full-service restaurant
facilities. The Company's growth during 1998 will primarily come from
franchising the Express concept where the capital requirements are
insignificant.
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 upon the 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.
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 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: -----------------------------
------------------- Paul W. Mobley,
Chairman of the Board
/s/ Mitchell E. Katz
Date: -----------------------------
------------------- Mitchell E. Katz
(Chief Financial Officer)
Page 12