United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(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, 1999
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
--- ---
As of August 15, 1999, there were 5,565,390 shares of Common Stock, no par
value, outstanding.
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, 1998 and June 30, 1999 Page 4
Condensed consolidated statements of operations for
the six and three months ended June 30, 1998 and 1999 Page 5
Condensed consolidated statements of cash flows for
the six months ended June 30, 1998 and 1999 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.
3
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, June 30,
1998 1999
------------ ------------
Assets
------
Current assets:
Cash $ 28,176 $ 578,069
Accounts receivable 579,841 550,039
Inventories 844,783 863,137
Prepaid expenses 185,471 141,398
------------ ------------
Total current assets 1,638,271 2,132,643
Property and equipment, less accumulated depreciation and
amortization of $4,029,228 and $4,433,818 6,657,638 6,495,773
Deferred tax asset 4,442,725 4,924,482
Costs in excess of assets acquired, net 5,944,718 5,814,728
Other assets 459,202 777,035
------------ ------------
$ 19,142,554 $ 20,144,661
------------ ------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,911,089 $ 1,631,973
Notes payable - current 18,279 18,279
Note payable to officer - current 65,840 65,840
Deferred franchise fees 143,500 175,000
Other current liabilities 1,740,653 1,319,603
------------ ------------
Total current liabilities 3,879,361 3,210,695
Long-term liabilities:
Notes payable to Provident Bank net of warrant valuation of
$653,241 and $586,809, respectively 13,919,125 13,985,558
Notes payable to 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 liabilities 18,339 15,561
------------ ------------
Total long-term liabilities 14,187,464 16,512,316
Stockholders' equity
Common stock (9,000,000 shares, issued 5,552,390 in 1998
and 5,565,390 in 1999) 11,869,175 12,154,093
Accumulated deficit (10,793,445) (11,732,443)
------------ ------------
Total stockholders' equity 1,075,730 421,650
------------ ------------
$ 19,142,554 $ 20,144,661
------------ ------------
See accompanying note to condensed consolidated financial statements.
4
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
--------------------- --------------------
1998 1999 1998 1999
---- ---- ---- ----
Restaurant revenue $ 11,288,357 $ 11,065,451 $ 5,778,786 $ 5,545,930
Restaurant royalties 76,106 42,807 41,408 20,845
Express royalties and fees 861,217 1,418,373 538,573 762,590
Administrative fees and other 101,233 135,888 47,590 50,196
------------ ------------ ------------ ------------
Total revenue 12,326,913 12,662,520 6,406,357 6,379,562
Restaurant operating expenses:
Cost of revenue 2,207,478 2,177,371 1,128,174 1,082,051
Salaries and wages 4,148,162 4,202,387 2,103,386 2,122,158
Rent 1,103,495 1,124,754 552,807 565,624
Advertising 566,797 540,878 291,298 264,295
Other 2,742,981 2,613,894 1,402,032 1,322,908
Depreciation and amortization 496,303 519,916 250,502 259,568
Express operating expenses 281,681 762,932 172,962 406,452
General and administrative 1,477,941 1,313,070 752,805 647,854
------------ ------------ ------------ ------------
Operating loss (697,925) (592,682) (247,609) (291,349)
Interest and other expense 629,074 824,991 338,130 455,695
------------ ------------ ------------ ------------
Loss before income tax and
extraordinary item (1,326,999) (1,417,673) (585,739) (747,044)
Income tax benefit (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 $ (638,389) $ (935,664) $ (267,844) $ (493,049)
------------ ------------ ------------ ------------
Net loss per share $ (.15) $ (.17) $ (.06) $ (.09)
Weighted average number of common
shares outstanding 4,131,324 5,556,390 4,131,324 5,561,057
See accompanying note to condensed consolidated financial statements.
5
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------------------
1998 1999
---- ----
OPERATING ACTIVITIES
- --------------------
Net loss $ (638,388) $ (935,664)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 496,217 609,036
Non-cash interest -- 289,139
Deferred federal income taxes (328,868) (482,009)
Changes in operating assets and liabilities (increase) decrease in:
Accounts receivable (195,528) 29,802
Inventory 19,294 (18,354)
Prepaid expenses (286,812) 44,073
Other assets (49,077) (60,166)
Increase (decrease) in:
Accounts payable 1,075,173 (279,116)
Other current liabilities (427,860) (421,050)
Deferred franchise fee 68,000 31,500
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (267,849) (1,192,809)
INVESTING ACTIVITIES
- --------------------
Purchase of fixed assets (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 (342,494) (221,223)
FINANCING ACTIVITIES
- --------------------
Proceeds from long-term debt, net of debt issue costs 592,367 1,966,703
Principal payments on long-term debt and capital lease obligations (11,520) (2,778)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 580,847 1,963,925
----------- -----------
INCREASE (DECREASE) IN CASH (29,494) 549,893
Cash at beginning of period 68,136 28,176
----------- -----------
Cash at end of period $ 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.
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, 1998
and 1999
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,
---------------- ------------------
1998 1999 1998 1999
---- ---- ---- ----
Revenue:
Restaurant revenue 91.6% 87.4% 90.2% 86.9%
Restaurant royalties 0.6 0.3 0.6 0.3
Express royalties and fees 7.0 11.2 8.4 12.0
Administrative fees and other .8 1.1 .7 0.8
------ ------ ------ ------
100.0 100.0 100.0 100.0
Restaurant operating expenses (1):
Cost of revenue 19.6 19.7 19.5 19.5
Salaries and wages 36.7 38.0 36.4 38.3
Rent 9.8 10.2 9.6 10.2
Advertising 5.0 4.9 5.0 4.8
Other 24.3 23.6 24.3 23.9
Depreciation and amortization 4.0 4.1 3.9 4.1
Express operating expense 2.3 6.0 2.7 6.4
General and administrative 12.0 10.4 11.8 10.2
Restructuring costs - - - -
------ ------ ------ ------
Operating loss (5.7) (4.7) (3.9) (4.6)
Interest 5.1 6.5 5.3 7.1
------ ------ ------ ------
Loss before income taxes (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%) (7.4%) (6.0%) (7.7%)
(1) As a percentage of restaurant revenue
Total revenue increased approximately $336 thousand and decreased approximatley
$27 thousand for the six-month period and three month period ended June 30, 1999
compared to the same periods in 1998. The primary reason for the increase was
the growth in revenue from the Express business offset slightly by a 1% same
store sales decrease in the full-service restaurants.
Express royalties and fees were approximately $1,418,373 and $762,590 for the
six month and three month periods ended June 30, 1999 compared to $861,217 and
$538,573 for the six month and three month periods ended June 30, 1998.
Franchising of Noble Roman's Pizza Express began in early 1997. At June 30,
1999, approximately 235 franchised Express units were open. Currently there are
7
approximately 266 such franchised units open and approximately 100 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 remained approximately the
same at 19.7% and 19.5% for the six month and three month periods ended June 30,
1999 compared to 19.6% and 19.5% for the six month and three month periods ended
June 30, 1998. Ingredient cost for the Company's products have remained about
the same, however, recently the price of cheese has been escalating.
Salaries and wages as a percentage of restaurant revenue were 38.0% and 38.3%
for the six and three month periods ended June 30, 1999 compared to 36.7% and
36.4% for the six month and three month periods ended June 30, 1998. The
increase was the result of wage rate increases due to increased competition 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
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 increase was a
result of the growth in number of franchised Express units and the Company's
decisionnal staff to be prepared for an accelerated rate of growth in the number
of new franchised units to be opened during the remainder of 1999.
General and administrative expenses as a percentage of total revenue was 10.4%
and 10.2% for the six month and three month periods ended June 30, 1999 compared
to 12.0% and 11.8% for the six month and three month periods ended June 30,
1998. This decrease is primarily attributable to the growth in revenue from the
Express business and reduced training cost as a result of greater management
stability in the full-service restaurants.
Interest expenses were $824,991 and $455,695 for the six month and three month
periods ended June 30, 1999 compared to $629,074 and $338,130 for the six month
and three month periods ended June 30, 1998. The reason for the increase was a
result of increased borrowings.
Net losses before extraordinary item were $935,664 and $493,049 for the six
month and three month periods ended June 30, 1999 compared to $875,819 and
$386,559 for the six month and three month periods ended June 30, 1998. The
slight increase in net loss before extraordinary item was the result of the
increased interest cost, increased salaries and wages in the full-service
restaurants mostly offset by the increased operating profit from the growth of
the Express business.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During 1995 and 1996, the Company attempted a major acquisition of a 187-unit
pizza restaurant chain operating in seven states in the Northeast as a part of a
strategic decision to acquire and consolidate other regional chains. For a
number of reasons this attempted acquisition failed, despite senior management
devoting substantially all of its attention to 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. The unemployment rates in the Company's
labor markets were approaching record lows and the Company's personnel were
aggressively recruited by others. Senior management, due to the acquisition
transaction, were unable to participate in daily operations during the period.
Because of the Company's dramatic turnover and its inability to stabilize
staffing levels through ordinary recruiting efforts, sales and margins declined.
The Company suffered serious losses and defaulted on its loan agreement with its
primary lender. Due to a lack of staffing and the Company's financial
difficulties, the Company closed 19 of its restaurants in May 1997 and launched
a turnaround strategy consisting of three primary elements:
o Negotiated a series of debt restructurings with its primary lender, The
Provident Bank, whereby the Bank 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 executive staff including the appointment of
Scott Mobley as President, Wade Shanower as Vice President of Operations,
Troy Branson as Vice President of Franchising, Art Mancino as Vice
President of Development and 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 to other traditional
restaurants as a Co-Brand.
On April 30, 1999, the Company obtained $2,235,600 in additional funding from
various 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 shall be paid in the form of a PIK 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 cash, in shares of
the Company's common stock based on a conversion price of $1.375 per share or in
a combination thereof.
As a result of the Company's debt restructuring, the exchange 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 form of convertible
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 expenditures for 1999 will
be approximately $500 thousand primarily for improvements to its existing
full-service 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
financial condition.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in various litigation relating to the claims arising
out of its normal business 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 the amount reserved in its financial statement.
Legal proceedings against the Company 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 Company breached agreements entered into with the
Plaintiff to seek to fund and restructure the Company's bank debt. The
Company has denied liability and will defend vigorously. The Company has
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 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
10
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/ Dan P. Hutchison
Date: August 23, 1999 -------------------------------------
--------------- Dan P. Hutchison
Chief Financial Officer
11