United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 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:
Notes to condensed consolidated financial statements Page 2
Condensed consolidated balance sheets as of
December 31, 1997 and September 30, 1998 Page 4
Condensed consolidated statements of operations for the nine
and three months ended September 30, 1997 and 1998 Page 5
Condensed consolidated statements of cash flows for the nine
months ended September 30, 1997 and 1998 Page 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 EVENTS
On December 28, 1998 the Company entered into two transactions resulting in the
exchange of 1.3 million shares of common stock for certain liabilities totaling
$2.6 million. The Company issue 500,000 shares of common stock in exchange for
$1.0 million of trade payables due to a certain vendor of the Company and issued
800,000 shares of common stock in exchange for $1.6 million due to The Provident
Bank, the Company's principal lender.
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.
2
The following is an unaudited pro forma balance sheet to the May 1, 1999
transaction as if it had occurred on December 31, 1998:
Noble Roman's, Inc. and Subsidiaries
Pro Forma Balance Sheet (Unaudited)
December 31, 1998
Pro Forma
Actual Balance Sheet
12/31/98 Debit Credit 12/31/98
-------- ----- ------ -------------
Current assets $ 1,638,271 650,000 $ 2,288,271
Net property and equipment 6,657,638 6,657,638
Cost in excess of assets acquired, net 5,944,718 5,944,718
Deferred tax asset 4,442,726 4,442,726
Other assets 459,202 333,645 792,847
----------- -----------
Total assets $19,142,555 $20,126,200
=========== ===========
Current liabilities $ 3,879,361 1,271,455 $ 2,607,906
Total long-term obligations 14,187,464 275,000 2,235,600 16,148,064
275,000
Total stockholders' equity 1,075,730 19,500 1,370,230
----------- --------- -----------
Total liabilities and stockholders' equity $19,142,555 $20,126,200
=========== ===========
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, September 30,
1997 1998
------------- ------------
Assets
------
Current assets:
Cash $ 68,136 $ 39,908
Accounts receivable 380,816 673,167
Inventories 802,097 835,913
Prepaid expenses 158,260 835,383
------------- ------------
Total current assets 1,409,309 2,384,371
Property and equipment, less accumulated depreciation and
amortization of $3,379,356 and $3,940,814 6,825,777 6,783,396
Deferred tax asset 3,335,407 3,880,207
Costs in excess of assets acquired, net 6,204,698 6,009,713
Other assets 429,805 475,669
------------- ------------
$ 18,204,996 $ 19,533,356
------------- ------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 2,978,719 $ 3,345,212
Notes payable - current 21,743 611,207
Deferred franchise fees 63,800 146,300
Other current liabilities 1,855,118 1,197,048
------------- ------------
Total current liabilities 4,919,380 5,299,767
Long-term liabilities:
Senior note payable 2,580,000 2,580,000
Subordinated note payable (net of warrant valuation of
$690,885 in 1998)_ 11,000,000 12,309,115
Other long term debt 22,863 18,757
Capital leases 8,201 --
------------- ------------
Total long-term liabilities 13,611,064 14,907,872
Stockholders' equity
Common stock (9,000,000 shares, issued 4,131,324 in 1997
and 1998) 8,318,431 9,027,031
Accumulated deficit (8,643,879) (9,701,314)
------------- ------------
Total stockholders' deficit (325,448) (674,283)
------------- ------------
$ 18,204,996 $ 19,533,356
------------- ------------
See accompanying note to condensed consolidated financial statements.
4
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------- -----------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
Restaurant revenue $ 19,394,323 $ 17,175,756 $ 5,742,055 $ 5,887,399
Restaurant royalties 92,438 102,015 38,304 25,909
Express royalties and fees 242,888 1,453,758 140,131 592,541
Administrative fees and other 126,513 135,876 3,933 34,643
------------ ------------ ------------ ------------
Total revenue 19,856,165 18,867,405 5,924,423 6,540,492
Restaurant operating expenses:
Cost of revenue 4,088,086 3,384,917 1,291,207 1,177,439
Salaries and wages 7,074,841 6,285,320 2,066,213 2,137,158
Rent 1,891,956 1,660,109 551,618 556,614
Advertising 969,679 858,777 287,117 291,980
Other 4,301,150 4,273,729 1,177,822 1,530,748
Depreciation and amortization 840,325 756,529 259,435 260,226
Express operating expenses 118,340 561,422 35,928 234,741
General and administrative 2,083,166 2,230,680 629,479 752,739
Restructuring costs 5,159,836 -- -- --
------------ ------------ ------------ ------------
Operating loss (6,671,214) (1,099,078) (374,396) (401,153)
Interest and other expense 880,426 1,042,772 80,831 413,683
------------ ------------ ------------ ------------
Loss before income tax and extraordinary item (7,551,640) (2,141,850) (455,227) (814,836)
Income tax benefit (2,568,400) (728,269) (155,600) (277,084)
------------ ------------ ------------ ------------
Loss before extraordinary item (4,983,240) (1,413,581) (299,627) (537,752)
Extraordinary item, net of tax expense of
$183,469 and $61,156 -- 356,146 -- 118,705
------------ ------------ ------------ ------------
Net loss $ (4,983,240) $ (1,057,435) $ (299,627) $ (419,047)
============ ============ ============ ============
Net loss per share $ (1.21) $ (.26) $ (.07) $ (.10)
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.
5
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
----------------------------
1997 1998
----------- -----------
OPERATING ACTIVITIES
- --------------------
Net loss $(4,983,240) $(1,057,435)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 840,325 774,244
Restructuring costs 4,753,384 --
Deferred federal income taxes (2,560,436) (544,800)
Changes in operating assets and liabilities (increase) decrease in:
Accounts receivable (274,536) (292,351)
Inventory 54,178 (33,816)
Prepaid expenses (609,965) (677,123)
Other assets 96,818 (45,864)
Increase (decrease) in:
Accounts payable and other current liabilities 638,830 (291,577)
Deferred franchise fee 65,000 82,500
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,979,642) (2,086,222)
INVESTING ACTIVITIES
- --------------------
Purchase of fixed assets (567,469) (519,162)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (567,469) (519,162)
FINANCING ACTIVITIES
- --------------------
Proceeds from long-term debt and notes payable 2,814,767 2,592,366
Principal payments on long-term debt and capital lease obligations (281,233) (15,210)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,533,534 2,577,156
----------- -----------
DECREASE IN CASH (13,577) (28,228)
Cash at beginning of period 74,502 68,136
----------- -----------
Cash at end of period $ 60,925 $ 39,908
----------- -----------
Supplemental schedule of non-cash investing and financing activities
As a result of the Company's debt restructuring with The Provident Bank, the
Company was not required to pay interest on $11,000,000 note payable to The
Provident Bank for the period November 1, 1997 through October 31, 1998. The
computed interest cost for such note for the nine-month period ended September
30, 1998 is $539,615.
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 - Nine-month and three-month periods ended September 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.
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ----------------------
1997 1998 1997 1998
---- ---- ---- ----
Revenue:
Restaurant revenue 97.7% 91.0% 96.9% 90.0%
Restaurant royalties .5 0.6 .6 .4
Express royalties and fees 1.2 7.7 2.4 9.1
Administrative fees and other .6 .7 .1 .5
------ ------ ------ ------
100.0 100.0 100.0 100.0
Restaurant operating expenses (1):
Cost of revenue 21.1 19.7 22.5 20.0
Salaries and wages 36.5 36.6 36.0 36.3
Rent 9.8 9.7 9.6 9.5
Advertising 5.0 5.0 5.0 5.0
Other 22.2 24.9 20.5 26.0
Depreciation and amortization 4.2 4.0 4.4 4.0
Express operating expense .6 3.0 .6 3.4
General and administrative 10.5 11.8 10.6 11.5
Restructuring costs 26.0 - - -
------ ------ ------ ------
Operating loss (33.6) (5.8) (6.3) (6.1)
Interest 4.4 5.5 1.4 6.3
------ ------ ------ ------
Loss before income tax and extraordinary item (38.0%) (11.4%) (7.7%) ( 12.5%)
(1) As a percentage of restaurant revenue
Total revenue increased $616.1 thousand, or 10.4% for the three-month period
ended September 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 2.5% in the full-service restaurants. Total revenue decreased $988.8
thousand, or 5.0%, for the nine-month period ended September 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 2.7% in the full-service restaurants. The same
store sales increase during the third 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. The
Express business has grown to represent 9.1% of the Company's total revenues
during the third quarter of 1998 compared to 2.4% during the same period in
1997.
7
Express royalties and fees were approximately $592,500 and $1,453,800 for the
three-month and nine-month periods ended September 30, 1998 compared to $140,100
and $242,900 during the corresponding periods in 1997. Franchising of Noble
Roman's Pizza Express began in early 1997.
Cost of revenue as a percentage of restaurant revenue decreased from 22.5% and
21.1% to 20.0% and 19.7% for the three-month and nine-month periods ended
September 30, 1998 and 1997, respectively. The decrease is the result of
improved cost controls resulting from the Company's aggressive long-term
turnaround policy coupled with a change in the method of recording many of the
specials at net sales price rather than gross, offset by significantly higher
cheese prices during the third quarter of 1998 compared to last year. In the
Company's menu, all items are individually priced. Some time in the past the
Company began offering in-restaurant specials for a combination of items (such
as individual sized pizza, order of breadsticks and medium drink) for a price
which was a discount to the total price of the individual items. During 1997,
the Company changed its method of reporting these specials and recorded the sale
at the combination price with no charge to discount expense. During 1998, the
Company reverted back to its historical method of recording the sales at the
individual item price and a charge to discount expense for the discounted
amount. While causing cost of revenues to decrease and other restaurant expenses
to increase in 1998, the change had no effect on sales, restaurant operating
margins or net income.
Salaries and wages increased slightly as a percentage of restaurant revenue from
36.0% and 36.5% to 36.3% and 36.6% for the three-month and nine-month periods
ended September 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.
Other restaurant expenses were 20.5% and 22.2% compared to 26.0% and 24.9% for
the three-month and nine-month periods ended September 30, 1998. This increase
in expense as a percentage of restaurant revenue was primarily the result of the
changes in recording discounts as discussed above relating to cost of revenue.
General and administrative expenses as a percentage of total revenue increased
from 10.6% and 10.5% to 11.5% and 11.8% for the three-month and nine-month
periods ended September 30, 1998 and 1997, respectively. This increase is
primarily attributable to the growth of the Express business.
Operating loss increased from $374.4 thousand to a loss of $401.2 thousand
during the three-month period ended September 30, 1998 compared to the same
period in 1997. Increases in revenues from the growth of the Express business
plus the same store sales increase were offset by increased restaurant operating
expenses. Operating loss improved from a loss of $6.7 million to a loss of $1.1
million during the nine-month periods ended September 30, 1998 and 1997. The
operating results for the nine-month period ending September 30, 1997 included
restructuring costs of $5.2 million. Excluding the expenses resulting from the
Company's restructuring, the Company's operating loss for the nine-month period
ended September 30, 1998 was $1.5 million. Excluding the effect of the
restructuring costs in 1997, the Company realized an improvement in operating
income of $412.3 thousand during the nine-month period ended September 30, 1998
compared to the same period in 1997. The primary reason for the improved results
is growth of the Express business.
8
Interest increased from $80.8 thousand to $413.7 thousand for the three-month
period ended September 30, 1998. The primary reason for the increase was that
certain interest was not recorded in the three months ended September 30, 1997
due to the subsequent forgiveness of both principal and interest as part of the
debt restructuring on November 21, 1997 with the Company's primary lender. Due
to the effect of that restructuring, interest expense increased from $880.4
thousand to $1.0 million for the nine-month periods ended September 30, 1998 and
1997.
Net loss increased from $299.6 thousand to $537.8 thousand during the
three-month period ended September 30, 1998 and 1997. Net loss improved from
$5.0 to a loss of $1.4 million during the nine-month periods ended September 30,
1998 and 1997. Excluding restructuring costs incurred in 1997, net loss improved
from a loss of $1.6 million to a loss of $1.4 million. 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
- -------------------------------
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:
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.
9
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
purchaed 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 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: 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 and labor. 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.
The Company is currently assessing its preparedness for year 2000 as it relates
to its information systems. The Company has begun the process of working with
outside advisors to update or replace various systems so all information system
software will be year 2000 compliant by 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.
10
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 statements.
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
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: August 23, 1999 -----------------------------
---------------- Paul W. Mobley, President
(Principal Executive Officer)
12