-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CedMKqIaEFcY06uh5QX/qqbWxEdhaKIS2r8bNKogAInOh0afkaeYpUy3BcI1ezIF gX6p2OA+X9b6I7F0Tp33RQ== 0000926274-98-000284.txt : 19981106 0000926274-98-000284.hdr.sgml : 19981106 ACCESSION NUMBER: 0000926274-98-000284 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19981105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOBLE ROMANS INC CENTRAL INDEX KEY: 0000709005 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 351281154 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11104 FILM NUMBER: 98738725 BUSINESS ADDRESS: STREET 1: ONE VIRGINIA AVE STREET 2: STE 800 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 BUSINESS PHONE: 3176343377 MAIL ADDRESS: STREET 1: ONE VIRGINIA AVENUE STREET 2: SUITE 800 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 10-Q 1 United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-Q ----------------------- (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES --- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO -------- ------- Commission file number: 0-11104 NOBLE ROMAN'S, INC. (Exact name of registrant as specified in its charter) Indiana 35-1281154 (State or other jurisdiction (I.R.S. Employer of organization) Identification No.) One Virginia Avenue, Suite 800 Indianapolis, Indiana 46204 (Address of principal executive offices) (Zip Code) (317) 634-3377 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of October 30, 1998, there were 4,131,324 shares of Common Stock, no par value, outstanding. Page 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following condensed consolidated financial statements are included herein: Condensed consolidated balance sheets as of December 31, 1997 and March 31, 1998 Page 3 Condensed consolidated statements of operations for the three months ended March 31, 1997 and 1998 Page 4 Condensed consolidated statements of cash flows for the three months ended March 31, 1997 and 1998 Page 5 Note to condensed consolidated financial statements Page 6 The interim condensed consolidated financial statements included herein reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results of operations for the interim periods presented and the balance sheets for the dates indicated, which adjustments are of a normal recurring nature. Based on the Company's business plan, the number of Express units now open, the backlog of units sold to be opened, the backlog of franchise prospects now in ongoing discussions and negotiations, the Company's trends and the results thus far in 1998, management determined that it is more likely than not that the Company's deferred tax asset will be fully realized. Therefore, no valuation allowance was established for its deferred tax asset. However, there can be no assurance that the growth of the Express will continue in the future nor can there be any assurance that the full-service restaurants can be operated successfully in the future. If negative events should occur in the future in either the Express or the full-service operations, the realization of all or some portion of the Company's deferred tax asset could be jeopardized. The Company will undertake to evaluate the need for a valuation allowance on a quarterly basis in the future. The statements contained in Management's Discussion and Analysis concerning the Company's future revenues, profitability, financial resources, market demand and product development are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) relating to the Company that are based on the beliefs of the management of the Company, as well as assumptions and estimates made by and information currently available to the Company's management. The Company's actual results in the future may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company's operations and business environment including, but not limited to: the operations and results of operations of the Company as well as its customers and suppliers, including as a result of competitive factors and pricing pressures, shifts in market demand, general economic conditions and other factors including but not limited to, changes in demand, for the Company's products or franchises, the impact of competitors' actions, and changes in prices or supplies of food ingredients. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. Page 2 Noble Roman's, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
(Unaudited) December 31, March 31, 1997 1998 -------------- -------------- Assets ------ Current assets: Cash $ 68,136 $ 35,521 Accounts receivable 380,816 381,436 Inventories 802,097 786,655 Prepaid expenses 158,260 317,996 -------------- -------------- Total current assets 1,409,309 1,521,608 Property and equipment, less accumulated depreciation and amortization of $3,379,356 and $3,560,076 6,825,777 6,835,128 Deferred tax asset 3,335,407 3,526,055 Costs in excess of assets acquired, net 6,204,698 6,139,703 Other assets 429,805 482,692 -------------- -------------- $ 18,204,996 $ 18,505,186 Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable and accrued expenses $ 2,978,719 $ 3,457,318 Notes payable - current 21,743 613,163 Deferred franchise fees 638,00 119,950 Other current liabilities 1,855,118 1,405,006 -------------- -------------- Total current liabilities 4,919,380 5,595,437 Long-term liabilities: Senior note payable 2,580,000 2,580,000 Subordinated note payable 11,000,000 11,000,000 Other long term debt 22,863 21,374 Capital leases 8,201 4,312 -------------- -------------- Total long-term liabilities 13,611,064 13,605,686 Stockholders' equity Common stock (9,000,000 shares, issued 4,131,324 in 1997 and 1998) 8,318,431 8,318,431 Accumulated deficit (8,643,879) (9,014,368) -------------- -------------- Total stockholders' deficit (325,448) (695,937) -------------- -------------- $ 18,204,996 $ 18,505,186 -------------- --------------
See accompanying note to condensed consolidated financial statements. Page 3 Noble Roman's, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, ------------------------ 1997 1998 ---- ---- Restaurant revenue $ 7,797,678 $ 5,509,571 Restaurant royalties 32,749 34,698 Express royalties and fees 17,141 322,644 Administrative fees and other 51,522 53,643 ------------ ------------ Total revenue 7,899,090 5,920,556 Restaurant operating expenses: Cost of revenue 1,557,240 1,079,304 Salaries and wages 2,926,114 2,044,776 Rent 788,794 550,688 Advertising 389,836 275,499 Other 1,890,884 1,340,949 Depreciation and amortization 324,874 245,801 Express operating expenses - 217,219 General and administrative 763,213 616,636 ------------ ------------ Operating loss (741,865) (450,316) Interest 474,564 111,073 ------------ ------------ Loss before income taxes (1,216,429) (561,389) Income taxes benefit (413,586) (190,900) ------------ ------------ Net loss $ (802,843) $ (370,489) ============ ============ Net loss per share $ (.19) $ (.09) ------------ ------------ Weighted average number of common shares outstanding 4,131,324 4,131,324
See accompanying note to condensed consolidated financial statements. Page 4 Noble Roman's, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, ------------------------ 1997 1998 ---- ---- OPERATING ACTIVITIES - -------------------- Net loss $ (802,843) $ (370,489) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 324,874 245,801 Deferred federal income taxes (405,622) (190,648) Changes in operating assets and liabilities (increase) decrease in: Accounts receivable (20,145) (620) Inventory (33,762) 15,442 Prepaid expenses (381,649) (159,736) Other assets (54,080) (52,973) Increase (decrease) in: Accounts payable and other current liabilities (175,229) 28,487 Deferred franchise fee - 56,150 ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (1,548,456) (428,586) INVESTING ACTIVITIES - -------------------- Purchase of fixed assets (219,490) (190,071) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (219,490) (190,071) FINANCING ACTIVITIES - -------------------- Proceeds from borrowing 2,034,288 592,365 Principal payments on long-term debt and capital lease obligations (258,293) (6,323) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 1,775,995 586,042 ------------ ------------ INCREASE (DECREASE) IN CASH 8,049 (32,615) Cash at beginning of period 74,502 68,136 ------------ ------------ Cash at end of period $ 82,551 $ 35,521 ------------ ------------
See accompanying note to condensed consolidated financial statements. Page 5 Noble Roman's, Inc. and Subsidiaries Note to Condensed Consolidated Financial Statements (unaudited) 1. SUBSEQUENT EVENT On August 13, 1998 the Company obtained additional financing of $2,000,000 from its primary lender. This financing is in the form of a promissory note due in December, 2001, bears interest at 2 1/2% over prime payable monthly. As additional compensation, the Bank received a warrant to purchase 750,000 shares of the Company's stock at $.01 per share. Page 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Noble Roman's, Inc. and Subsidiaries Results of Operations - Three-month periods ended March 31, 1997 and 1998 The following table sets forth the percentage relationship to total revenue of the listed items included in Noble Roman's condensed consolidated statement of operations. Certain items are shown as a percentage of restaurant revenue.
Three Months Ended March 31, -------------------- 1997 1998 ---- ---- Revenue: Restaurant revenue 98.7% 93.1% Restaurant royalties .4 .6 Express royalties and fees .2 5.4 Administrative fees and other .7 .9 ------- ------- 100.0 100.0 Restaurant operating expenses (1): Cost of revenue 20.0 19.6 Salaries and wages 37.5 37.1 Rent 10.1 10.0 Advertising 5.0 5.0 Other 24.2 24.3 Depreciation and amortization 4.1 4.2 Express operating expense - 3.7 General and administrative 9.7 10.4 ------- ------- Operating loss (9.4) (7.6) Interest 6.0 1.9 ------- ------- Loss before income taxes (15.4%) (9.5%)
(1) As a percentage of restaurant revenue. Total revenue decreased $2.0 million, or 25.0%, for the three month period ended March 31, 1998 compared to the corresponding period in 1997. The principal reason for the decrease was the closing of 19 restaurants and the sale of four others in the second quarter of 1997. In addition, the decreases were partially the result of same store sales declines of 8.5% for the three month period ended March 31, 1998 compared to the corresponding period in 1997. The same store sales declines reflect the negative impact of inconsistent service and product, in the Company's restaurants, during 1996 and 1997. As a result of the failed acquisition attempt in 1996 to acquire a 187 unit pizza chain in the northeast, the Company had massive restaurant level management turnover. This turnover of personnel resulted in poor service and inconsistent product to its customers. In November 1997, the Company began an aggressive turnaround strategy in its full-service restaurants which included reorganizing management and a five point plan designed to provide a long term fix. The steps in order were to: (1) build morale, aggressively raid others for management talent, and improve all Page 7 levels of management training; (2) alter the company's culture of strict cost controls to one of improved focus on customer service; (3) improve the company's product advantages creating even larger differentiations; (4) refocus attention on control systems; (5) integrate all steps and increase marketing and sales building efforts. The Company has corrected its service and product problem to a large degree and is in the process of restoring its customer base. Recent full-service store sales comparisons are positive compared to the same periods during the previous year. Express royalties and fees were approximately $322,644 (royalties $121,670, initial franchise fees $62,000 and commissions $138,974) for the three month period ended March 31, 1998 compared to only $17,141 during the corresponding period in 1997. Franchising of Noble Roman's Pizza Express began in early 1997. At March 31, 1998, approximately 70 franchised Express units were open. Currently there are approximately 165 such franchised units open with approximately 70 more units sold to be opened over the next several months. Cost of revenue as a percentage of restaurant revenue decreased from 20.0% to 19.6% for the three-month periods ended March 31, 1997 and 1998, respectively. The decrease was primarily the result of improved cost controls resulting from the Company's aggressive long-term turnaround strategy. Salaries and wages decreased as a percentage of restaurant revenue from 37.5% to 37.1% for the three-month periods ended March 31, 1997 and 1998. The decrease occurred even though the Company increased labor schedules to improve customer service. General and administrative expenses as a percentage of total revenue increased from 9.7% to 10.4% for the three-month periods ended March 31, 1997 and 1998. This increase was primarily attributable to the decline in total revenue. As a result of the restructuring plan, the Company has reduced its general and administrative expenses. Operating loss improved from a loss of $741,900 to $450,300 during the three-month periods ended March 31, 1997 and 1998. The primary reason for the improved operating loss is the operating profit generated by the Express business combined with improved cost controls at the Company's full-service restaurants and a decrease in general and administrative expenses resulting from adherence to the restructuring plan. Interest decreased from $474,600 to $111,000 for the three-month periods ended March 31, 1997 and 1998, respectively. The primary reason was the forgiveness of both principal and interest as a part of the debt restructuring on November 21, 1997 with the company's primary lender. See Liquidity and Capital Resources. Net loss improved from $802,800 to $370,500 during the three-month periods ended March 31, 1997 and 1998, respectively. The reduction in the net loss was primarily the result of the financial and operational restructuring that the Company completed in 1997 and the rapid growth of the Express business. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Historically, the Company's principal capital requirements arose from the costs associated with the development and opening of new restaurants and refurbishment of existing restaurants. However, no Page 8 new restaurants have been opened in 1998. The Company's primary sources of working capital are cash flow from operations and borrowings. On March 25, 1996, the Company signed a Letter of Intent whereby it would have acquired Papa Gino's Holdings Corp. (a 187-unit pizza restaurant chain in seven Northeastern states) through a merger transaction whereby the stockholders of Papa Gino's Holding Corp. would have received approximately 2.25 million shares of a to-be-authorized class of non-voting common stock of the Company. Among other things, this transaction was conditioned on a public equity offering, implementation of a senior credit facility, a definitive agreement and shareholder approval. The expenses incurred directly with regard to the proposed acquisition and offering aggregated approximately $880,862. For a number of reasons this attempted acquisition failed, despite senior management devoting substantially all of its attention on that attempt for a period of almost 18 months. As the Company's focus was increasingly on the acquisition transaction, the Company's primary market was, as a result of several demographic/consumption trends, targeted for expansion by a large number of mid-scale dining chains for expansion. At the same time, the unemployment rates in the Company's labor markets were approaching record lows. The Company's personnel were aggressively recruited by these outside chains. Simultaneously, senior management, due to the acquisition transaction, were unable to participate in daily operations. As a result, the Company experienced dramatic turnover and was unable to stabilize its staffing levels through ordinary recruiting efforts. The resulting turnover and short-staffing had a material adverse effect on operational results generally, and specifically on service standards and cost controls. As a result, sales and margins declined. Further, the management turnover, short labor supply and negative press made it extremely difficult for the Company to overcome its staffing problem and these events led to further turnover. The full-service restaurants are very labor intensive to operate. The Company, as a result of the above referenced problems, suffered serious losses and defaulted on its loan agreement with its primary lender. As a part of its turn-around strategy, in May 1997, the Company closed 19 of its restaurants and sold four others to consolidate the remaining management, increased efforts to recruit personnel and undertook an extensive training program. Because of the very competitive labor market, the hiring and training process took more than a year. In November 1997, the Company negotiated a debt restructuring with its primary lender, The Provident Bank, whereby the lender agreed to: reduce the Company's outstanding debt by over $7 million; loan the Company an additional $2.6 million; give the Company a grace period until December 1, 1998 without either having to accrue or pay interest on the old portion of the debt; extend the term of the debt until December 2001 with no principal payments until December 1998; make principal payments after December 1998 variable depending on available cash flow; and fix the interest rate on the old debt at 8% per year commencing December 1998. These arrangements were made in exchange for a warrant to buy 2.8 million shares of Noble Roman's stock at a price of $.01 per share. After completing a restructuring of the Company's credit facilities with Provident Bank and a restructuring of management in November 1997, including the appointment of Scott Mobley as President, Wade Shanower as Vice President of Operations and Troy Branson as Vice President of Franchising, the Company began an aggressive long-term turnaround strategy based on five primary elements: (1) build morale, aggressively recruit management talent, and improve all levels of management training; (2) re-focus the Company's culture of strict cost controls toward an emphasis on improved customer service; Page 9 (3) improve the Company's product advantages creating even larger differentiations; (4) re-focus attention on control systems; and (5) integrate all steps and increase marketing and sales building efforts. On August 13, 1998, the Company obtained additional financing from its primary lender in the amount of $2 million. This financing was in the form of a loan due in December, 2001 and bears interest at 2 1/2% over prime payable monthly. As additional compensation, the Bank received a warrant to purchase 750 thousand shares of the Company's stock at $.01 per share. Currently, the Company has approximately 165 franchised Express units in operation with approximately 70 additional franchised units sold and scheduled to be opened over the next several months. Discussions and negotiations are ongoing with many other parties for additional franchise locations. The Company developed the Express concept in early 1997 to take advantage of its full-service products in the new, rapidly growing distribution channel of non-traditional locations. The Company developed a process whereby its high quality, superior tasting pizzeria products could be produced, distributed and prepared very simply in non-traditional locations with an end product virtually indistinguishable from its full-service products. The Company plans to aggressively grow by expanding its Express franchise business. The business strategy for expansion of the Express franchise business includes the following principal elements: - - Continue to add units with direct franchises in convenience stores, grocery stores, universities, hotels, airports, hospitals and some stand alone units. - - Continue the plan to get the expanded breakfast menu with enhanced merchandising in existing Express units and to continue to include this program in new units as they open. - - Introduce the cold Italian sub sandwich program, with related merchandising, by December 1998 to existing units and include as a part of the program for new units. - - Develop, by mid-1999, the necessary menu variety for the Express program to attempt to replace existing eating facilities in office complexes, factories, hospitals and dormitories. - - Sell co-branding agreements to other restaurant chains whereby the Express would become a second brand in other established restaurant chains. - - Sell Area Development Agreements to area developers. The Company plans to sell for a development fee to area developers, territories for development whereby the developer will receive a portion of the fees and provide ongoing service responsibilities. As a result of the additional bank financing, the improvements in the operations of the Company's full-service restaurants and the growth in the new franchised Express, management believes the Company will have sufficient cash flow to meet its obligations and to carry out its current business plan. Currently, the Company anticipates that its capital requirements in 1998 will be approximately $500,000 primarily for improvements to its existing full-service restaurant facilities. The Company's growth during 1998 will primarily come from franchising the Express concept where the capital requirements are insignificant. Page 10 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. From time to time, the Company is involved in litigation relating to claims arising out of its normal business operations. The Company believes that none of its current proceedings, individually or in the aggregate, will have a material adverse effect upon the Company beyond what has been provided for in its financial statement. Legal proceedings against the Company which have not been reserved for include REH Acquisition, Ltd. versus Noble Roman's, Inc. and The Provident Bank., filed July 20, 1998 in the United States District Court for the Southern District of New York. The complaint alleges that the company breached agreements entered into with the Plaintiff to seek to fund and restructure the company's bank debt. The Company believes this case is without merit, denies any liability and will defend vigorously. U.S. Department of Labor has proposed penalty assessments for alleged violations of child labor laws in 1995 and 1996. The Company asserts the alleged violations, if any, were beyond the statue of limitations and denies any liability. The Company is currently appealing to an administrative law judge and will defend vigorously. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. Exhibit 27. Financial Data Schedule Page 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NOBLE ROMAN'S, INC. /s/ Paul W. Mobley Date: ----------------------------- ------------------- Paul W. Mobley, Chairman of the Board /s/ Mitchell E. Katz Date: ----------------------------- ------------------- Mitchell E. Katz (Chief Financial Officer) Page 12 EX-27 2
5 3-MOS DEC-31-1998 MAR-31-1998 35,521 0 381,436 0 786,655 1,521,608 10,395,204 (3,560,076) 18,505,186 5,595,437 13,605,686 0 0 8,318,431 (9,014,368) 18,505,186 5,509,571 5,920,556 1,079,304 4,211,912 1,079,656 0 111,073 (561,389) (190,900) (370,489) 0 0 0 (370,489) (.09) (.09)
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