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, 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 of organization) (I.R.S. Employer
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 13, 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 March 31, 1999 Page 4
Condensed consolidated statements of operations for the
three months ended March 31, 1998 and 1999 Page 5
Condensed consolidated statements of cash flows for the
three months ended March 31, 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.
SUBSEQUENT EVENT
On May 1, 1999, the Company obtained a $2.2 million investment by various
investors associated with The Geometry Group, New York, for funding continued
expansion of its Express business and for general corporate purposes. This
investment was in the form of convertible participating income notes due April
15, 2003. At maturity the notes may be converted to stock at the holder's
option.
The following is a pro forma balance sheet (unaudited) to reflect the above
transaction as if it had occurred on March 31, 1999:
Noble Roman's, Inc. and Subsidiaries
Pro Forma Balance Sheet (Unaudited)
March 31, 1999
Pro Forma
Actual Debit Credit Balance Sheet
3/31/99 3/31/99
------- ----- ------ -------------
Current assets $ 1,517,524 650,000 $ 2,167,524
Net property and equipment 6,567,880 6,567,880
Cost in excess of assets acquired, net 5,879,723 5,879,723
Deferred tax asset 4,665,452 4,665,452
Other assets 467,651 333,645 801,296
----------- -----------
Total assets $19,098,230 $20,081,875
=========== ===========
Current liabilities $ 3,851,345 1,271,455 $ 2,579,890
Total long-term obligations 14,613,087 275,000 2,235,600 16,573,687
275,000
Total stockholders' equity 633,798 19,500 928,298
----------- ----------- -----------
Total liabilities and stockholders'
equity $19,098,230 $20,081,875
=========== ===========
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 1999, 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, March 31,
1998 1999
------------ -----------
Assets
------
Current assets:
Cash $ 28,176 $ 27,850
Accounts receivable 579,841 597,199
Inventories 844,783 832,176
Prepaid expenses 185,471 60,299
------------ ------------
Total current assets 1,638,271 1,517,524
Property and equipment, less accumulated depreciation and
amortization of $4,044,780 and $4,224,488 6,657,638 6,552,328
Deferred tax asset 4,442,725 4,670,740
Costs in excess of assets acquired, net 5,944,718 5,879,723
Other assets 459,202 467,651
------------ ------------
$ 19,142,554 $ 19,087,966
------------ ------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,911,089 $ 2,211,585
Notes payable 18,279 18,279
Note payable officer 65,840 65,840
Deferred franchise fees 143,500 171,000
Other current liabilities 1,740,653 1,384,641
------------ ------------
Total current liabilities 3,879,361 3,851,345
Long-term liabilities:
Senior note payable/net of warrant valuation of $653,241 and
620,025, respectively 13,919,125 14,202,341
PIK notes payable 143,771
Note payable to officer 250,000 250,000
Other long term debt 18,339 16,975
------------ ------------
Total long-term liabilities 19,187,464 14,613,087
Stockholders' equity
Common stock (9,000,000 shares, issued 5,552,390 in 1998
and 5,552,390 in 1999 11,869,175 11,859,593
Accumulated deficit (10,793,445) (11,236,059)
------------ ------------
Total stockholders' equity 1,075,730 623,534
------------ ------------
$ 19,142,554 $ 19,087,966
------------ ------------
See accompanying note to condensed consolidated financial statements.
4
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
------------------
1998 1999
---- ----
Restaurant revenue $ 5,509,571 $ 5,519,521
Restaurant royalties 34,698 21,962
Express royalties and fees 322,644 655,783
Administrative fees and other 53,643 85,692
----------- -----------
Total revenue 5,920,556 6,282,958
Restaurant operating expenses:
Cost of revenue 1,079,304 1,095,320
Salaries and wages 2,044,776 2,080,229
Rent 550,688 559,130
Advertising 275,499 276,583
Other 1,340,949 1,290,986
Depreciation and amortization 245,801 260,348
Express operating expenses 108,719 356,480
General and administrative 725,136 665,216
----------- -----------
Operating loss (450,316) (301,333)
Interest 290,945 369,296
----------- -----------
Loss before income tax and
extraordinary item (741,261) (670,629)
Income taxes benefit (252,000) (228,014)
----------- -----------
Loss before extraordinary item (489,261) (442,615)
Extraordinary item net of tax
expense of $61,156 118,716 -
----------- -----------
Net loss $ 370,545 $ (442,615)
=========== ===========
Net loss per share $ (.09) $ (.08)
----------- -----------
Weighted average number of common
shares outstanding 4,131,324 5,552,390
See accompanying note to condensed consolidated financial statements.
5
Noble Roman's, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
------------------
OPERATING ACTIVITIES 1998 1999
- -------------------- ---- ----
Net loss $ (370,545) $ (442,615)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 263,450 293,564
Non-cash interest - 143,771
Deferred federal income taxes (190,844) (228,014)
Changes in operating assets and liabilities (increase) decrease in:
Accounts receivable (620) (17,358)
Inventory 15,442 12,607
Prepaid expenses (159,736) 125,172
Other assets (52,973) (8,449)
Increase (decrease) in:
Accounts payable and other current liabilities 28,487 (55,514)
Deferred franchise fee 56,150 27,500
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES (411,189) (149,337)
INVESTING ACTIVITIES
- --------------------
Purchase of fixed assets (207,468) (90,042)
Legal fees associated with conversion of debt to equity - (9,582)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (207,468) (99,624)
FINANCING ACTIVITIES
- --------------------
Proceeds from borrowing 592,365 250,000
Principal payments on long-term debt and capital lease obligations (6,323) (1,365)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 586,042 248,635
------------ -----------
INCREASE (DECREASE) IN CASH (32,615) (326)
Cash at beginning of period 68,136 28,176
------------ -----------
Cash at end of period $ 35,521 $ 27,850
------------ -----------
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 three-month period ended March 31, 1998 was
$179,872.
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 three month period ended March 31, 1999 was $143,771.
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 - Three-month periods ended March 31, 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.
Three Months Ended
March 31,
------------------
1998 1999
---- ----
Revenue:
Restaurant revenue 93.1% 87.9%
Restaurant royalties .6 .3
Express royalties and fees 5.4 10.4
Administrative fees and other .9 1.4
------- -------
100.0 100.0
Restaurant operating expenses (1):
Cost of revenue 19.6 19.8
Salaries and wages 37.1 37.7
Rent 10.0 10.1
Advertising 5.0 5.0
Other 24.3 23.4
Depreciation and amortization 4.2 4.1
Express operating expense 1.8 5.7
General and administrative 12.2 10.6
------- -------
Operating loss (7.6) (4.8)
Interest 4.9 5.9
------- -------
Loss before income taxes and
extraordinary item (12.5)% (10.7)%
(1) As a percentage of restaurant revenue.
Total revenues were $5.9 million and $6.3 million for the three-month periods
ended March 31, 1998 and 1999, respectively, or an increase of 6.1%. The reason
for the increase was the growth in revenue from the Express business and same
store sales increase of approximately 1% in the full-service restaurants for the
three-month period ended March 31, 1999 compared to the same period in 1998.
Express royalties and fees were approximately $322,644 and $655,783 for the
three-month periods ended March 31, 1998 and 1999, respectively. Franchising of
Noble Roman's Pizza Express began in early 1997. At March 31, 1999,
approximately 223 franchised Express units were open compared to approximately
67 units open at March 31, 1998. Currently there are approximately 266
franchised units open with approximately 100 units sold to be opened over the
next several months. The Company's plans are for significant growth in the
number of franchised Express units.
7
Cost of revenue as a percentage of restaurant revenue were 19.6% and 19.8% for
the three-month periods ended March 31, 1998 and 1999, respectively. The
increase was the result of unusually high cheese prices during the third and
fourth quarter of 1998 and continuing through January 1999. In February 1999
cheese prices returned to a more normal historic level.
Salaries and wages as a percentage of restaurant revenue were 37.1% and 37.7%
for the three-month periods ended March 31, 1998 and 1999, respectively. 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 24.3% and
23.4% for the three-month periods ended March 31, 1998 and 1999, respectively.
This decrease was primarily the result of an improvement in discount costs due
to management's decision to modify its coupon policy.
General and administrative expenses as a percentage of total revenue were 12.2%
to 10.6% for the three-month periods ended March 31, 1998 and 1999,
respectively. This improvement was the result of management's control of general
and administrive costs and from the increase in revenue from the growth of the
Express business.
Operating losses were $450,316 and $301,333 for the three-month periods ended
March 31, 1998 and 1999, respectively. The reasons for the improved operating
results were the increase in operating profit from the Express business and the
reduction of general and administrative expenses.
Interest expenses were $290,945 and $369,296 for the three-month periods ended
March 31, 1998 and 1999, respectively. The reason for the increase was due to
the increased borrowings, however, $179,872 of this interest was forgiven as a
part of the Company's debt restructurings. The interest forgiven was recorded as
extraordinary gain net of tax expense in the amount of $118,716 in 1999.
Net losses were $370,545 and $442,615 for the three-month periods ended March
31, 1998 and 1999, respectively. The decline in results was a result of the
increased operating profit from the Express business, the reduction of general
and administrative expenses and offset by the increase in interest cost.
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
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:
8
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.
The Company is currently assessing its preparedness for year 2000 as it relates
to its information systems. The Company has been 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.
9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in various litigation relating to 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