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 JUNE 30, 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 June 30, 1998 Page 3
Condensed consolidated statements of operations for the six
months ended June 30, 1997 and 1998 Page 4
Condensed consolidated statements of cash flows for the six
months ended June 30, 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, June 31,
1997 1998
-------------- --------------
Assets
------
Current assets:
Cash $ 68,136 $ 38,642
Accounts receivable 380,816 576,344
Inventories 802,097 782,803
Prepaid expenses 158,260 445,072
-------------- --------------
Total current assets 1,409,309 1,842,861
Property and equipment, less accumulated depreciation and
amortization of $3,379,356 and $3,745,583 6,825,777 6,802,042
Deferred tax asset 3,335,407 3,664,275
Costs in excess of assets acquired, net 6,204,698 6,074,708
Other assets 429,805 478,882
-------------- --------------
$ 18,204,996 $ 18,862,768
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 2,978,719 $ 4,053,892
Notes payable - current 21,743 612,195
Deferred franchise fees 638,00 131,800
Other current liabilities 1,855,118 1,427,258
-------------- --------------
Total current liabilities 4,919,380 6,225,145
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 20,256
Capital leases 8,201 1,203
-------------- --------------
Total long-term liabilities 13,611,064 13,601,459
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) (9,282,267)
-------------- --------------
Total stockholders' deficit (325,448) (963,836)
-------------- --------------
$ 18,204,996 $ 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)
Six Months Ended Three Months Ended
June 30, June 30,
------------------------ --------------------------
1997 1998 1997 1998
---- ---- ---- ----
Restaurant revenue $ 13,652,268 $ 11,288,357 $ 5,854,590 $ 5,778,786
Restaurant royalties 54,134 76,106 28,337 41,408
Express royalties and fees 102,757 861,217 64,805 538,573
Administrative fees and other 122,583 101,233 84,920 47,590
------------- ------------ ------------ ------------
Total revenue 13,931,742 12,326,913 6,032,652 6,406,357
Restaurant operating expenses:
Cost of revenue 2,796,879 2,207,478 1,239,639 1,128,174
Salaries and wages 5,008,628 4,148,162 2,082,514 2,103,386
Rent 1,340,338 1,103,495 551,544 552,807
Advertising 682,562 566,797 292,726 291,298
Other 3,123,328 2,742,981 1,232,444 1,402,032
Depreciation and amortization 580,890 496,303 256,016 250,502
Express operating expenses 82,412 498,681 61,048 281,462
General and administrative 1,453,687 1,260,941 711,838 644,305
Restructuring costs 5,159,836 0 5,159,836 0
------------- ------------ ------------ ------------
Operating loss (6,296,818) (697,925) (5,554,953) (247,609)
Interest and other expense 799,595 269,331 325,031 158,258
------------- ------------ ------------ ------------
Loss before income taxes (7,096,413) (967,256) (5,879,984) (405,867)
Income taxes benefit (2,412,800) (328,868) (1,999,214) (137,968)
------------- ------------ ------------ ------------
Net loss $ (4,683,613) $ (638,388) $(3,880,770) $ (267,899)
------------- ------------ ------------ ------------
Net loss per share $ (1.13) $ (.15) $ (.94) $ (.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)
Six Months Ended
June 30,
------------------------
1997 1998
---- ----
OPERATING ACTIVITIES
- --------------------
Net loss $(4,683,613) $ (638,388)
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 -
Deferred federal income taxes (2,404,836) (328,868)
Changes in operating assets and liabilities (increase) decrease in:
Accounts receivable (80,707) (195,528)
Inventory 40,762 19,294
Prepaid expenses (301,787) (286,812)
Other assets (81,225) (49,077)
Increase (decrease) in:
Accounts payable 27,772 1,075,173
Other current liabilities 12,924 (427,860)
Deferred franchise fee - 68,000
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (2,070,199) (267,849)
INVESTING ACTIVITIES
- --------------------
Purchase of fixed assets (452,136) (342,492)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (452,136) (342,494)
FINANCING ACTIVITIES
- --------------------
Proceeds from long-term debt and notes payable 2,787,272 592,367
Principal payments on long-term debt and capital lease obligations (283,713) (11,520)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,503,559 580,847
------------ ------------
DECREASE IN CASH (18,776) (29,494)
Cash at beginning of period 74,502 68,136
------------ ------------
Cash at end of period $ 55,726 $ 38,642
------------ ------------
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, 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.
Six Months Ended Three Months Ended
June 30, June 30,
----------------------- --------------------
1997 1998 1997 1998
---- ---- ---- ----
Revenue:
Restaurant revenue 98.0% 91.6% 97.0% 90.2%
Restaurant royalties .4 0.6 .5 .7
Express royalties and fees .7 7.0 1.1 8.4
Administrative fees and other .9 .8 1.4 .7
------- ------- ------- -------
100.0 100.0 100.0 100.0
Restaurant operating expenses (1):
Cost of revenue 20.5 19.6 21.2 19.5
Salaries and wages 36.7 36.8 35.6 36.4
Rent 9.8 9.8 9.4 9.6
Advertising 5.0 5.0 5.0 5.0
Other 22.9 24.3 21.1 24.3
Depreciation and amortization 4.2 4.0 4.2 3.9
Express operating expense .6 4.1 1.0 4.4
General and administrative 10.4 10.3 11.8 10.1
Restructuring costs 37.0 - 85.5 -
------- ------- ------- -------
Operating loss (45.2) (5.7) (92.1) (3.9)
Interest 5.7 2.2 5.4 2.4
------- ------- ------- -------
Loss before income taxes (50.9%) (7.9%) (97.5%) (6.3%)
(1) As a percentage of restaurant revenue
Total revenue increased $373.7 thousand, or 6.2% for the three-month period
ended June 30, 1998 compared to the same period in 1997. The primary reason for
the increase is the growth of 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 plus 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 and commissions $258,600) and $861,200
(royalties $299,000, initial franchise fees $164,600 and commissions $397,600)
for the three-month and six-month periods ended June 30, 1998 compared to only
$64,800 and $102,800 during the corresponding periods in 1997. Franchising of
Noble Roman's Pizza Express began in early 1997. At June 30, 1998, approximately
109 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 21.2% and
20.5% to 19.5% and 19.6% for the three-month and six-month periods ended June
30, 1998 and 1997, respectively. The decrease is primarily the result of
improved cost controls resulting from the Company's aggressive long-term
turnaround policy.
Salaries and wages increased as a percentage of restaurant revenue from 35.6%
and 36.7% to 36.4% and 36.8% for the three-month and six-month periods ended
June 30, 1998 and 1997, respectively. The increase is the result of increased
labor costs to improve customer service. This increased staffing level was
necessary to overcome perception created in 1996 and 1997.
General and administrative expenses as a percentage of total revenue decreased
from 11.8% and 10.4% to 10.1% and 10.3% for the three-month and six-month
periods ended June 30, 1998 and 1997, respectively. This decrease is primarily
attributable to the effective adherence to the restructuring plan and the
increase in revenue from the growth of the Express business.
Operating loss improved from a loss of $5.6 million and $6.3 million to a loss
of $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 $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 three-month and six-month periods ended June 30, 1998
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 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 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 (from 46 units open to 165 units open in the last 10
months) 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 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
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, 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; (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.
Page 10
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 11
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 12
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 13