10-Q 1 0001.txt 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, 2000 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 June 30, 2000, there were 10,952,803 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, 1999 and March 31, 2000 Page 3 Condensed consolidated statements of operations for the three months ended March 31, 1999 and 2000 Page 4 Condensed consolidated statements of cash flows for the three months ended March 31, 1999 and 2000 Page 5 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. Recent Events ------------- In June and July 2000 investors purchased 650,000 shares of common stock at $1.00 per share, Provident Bank converted $583,070 of PIK notes and an officer converted $44,218 in PIK notes and $250,000 note payable to common stock at $1.00 per share. Based on the Company's 1998 and 1999 proforma operating results, its business plan, the number of franchise 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 of its operations thus far in 2000, management has determined that it is more likely than not that the Company's deferred tax credits will be fully utilized before the tax credits expire. Therefore, no valuation allowance was established for its deferred tax asset. However, there can be no assurance the franchising growth will continue in the future nor can there be any assurance that the full-service restaurants will be franchised at the estimated value. If unanticipated events should occur in the future, the realization of all or some portion of the Company's deferred tax asset could be jeopardized. The Company will continue 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: 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. Noble Roman's, Inc. and Subsidiaries Condensed Consolidated Balance Sheets

(Unaudited) (Unaudited) Proforma December 31, March 31, Proforma Balance Sheet Assets 1999 2000 Adjustment as of 3/31/2000 ------ ------------- ------------- ------------- --------------- Current assets: Cash $ 29,913 $ 20,273 $ 598,000(1) $ 618,273 Accounts receivable 718,623 779,251 779,251 Inventories 437,120 380,612 380,612 Prepaid expenses 109,006 388,232 388,232 Assets held for sale 2,250,000 2,250,000 2,250,000 ------------ ------------ ------------ Total current assets 3,544,662 3,818,368 4,416,368 Property and equipment, less accumulated depreciation of $327,039 and $333,361 570,496 565,430 565,430 Deferred tax asset 9,621,723 9,515,385 9,515,385 Other assets 721,982 679,867 679,867 ------------ ------------ ------------ Total assets $ 14,458,862 $ 14,579,050 $ 15,177,050 ============ ============ ============ Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 3,163,200 $ 2,229,483 2,229,483 Current portion of long-term debt 17,661 16,444 16,444 Note payable officer 65,840 65,840 65,840 Deferred franchise fees 227,125 276,625 276,625 Other current liabilities 2,622,515 1,288,433 1,288,433 ------------ ------------ ------------ Total current liabilities 6,096,341 3,876,825 3,876,825 Long-term obligations: Notes payable to Provident Bank net of warrant value of $520,377 and $267,974 14,051,989 7,732,026 7,732,026 Notes payable to various funds affiliated with Geometry Group net of warrant valuation of $741,179 in 2000 2,006,433 2,160,821 2,160,821 PIK notes payable to Provident Bank 583,070 583,070 (583,070)(1) -- Notes payable to officer 250,000 250,000 (250,000)(1) -- PIK notes payable to officer 32,242 44,218 (44,218)(1) -- Other long-term debt 13,432 13,271 13,271 ------------ ------------ ------------ Total long-term liabilities 16,937,166 10,783,406 9,906,118 Stockholders' equity Common stock (25,000,000 shares authorized, 5,552,390 outstanding in 1999 and 10,902,803 in 2000) 12,272,637 15,752,359 1,475,288(1) 17,227,648 Preferred Stock (5,000,000 shares authorized, 4,929,274 outstanding in 2000) 4,929,274 4,929,274 Accumulated deficit (20,847,281) (20,762,815) (20,762,815) ------------ ------------ ------------ Total stockholder's equity (deficit) (8,574,645) (81,182) 1,394,107 ------------ ------------ ------------ Total liabilities and stockholder's equity $ 14,458,862 $ 14,579,050 $ 15,177,050 ============ ============ ============

(1) Investment by investors of $650,000 in common stock at $1.00 per share less commission of $52,000 and the conversion of PIK notes Provident Bank, PIK notes officer and note payable officer of $583,070, $44,218 and $250,000 respectively, to common stock at $1.00 per share. See accompanying note to condensed consolidated financial statements. Noble Roman's, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)

Three Months Ended March 31, 1999 2000 ---- ---- Express royalties and fees $ 655,783 $ 941,744 Administrative fees and other 85,692 272,115 Restaurant royalties 21,962 22,589 ------------ ------------ Total revenue 763,437 1,236,448 Express operating expenses: Salaries and wages 176,115 238,890 Trade show expense 53,499 60,000 Travel expense 44,561 68,413 Other operating expenses 82,305 99,136 Depreciation 10,114 9,802 General and administrative 181,317 325,006 ------------ ------------ Operating income 215,526 435,201 Interest and other expense 369,296 307,221 ------------ ------------ Income (loss) before income taxes (153,770) 127,980 Income taxes (benefit) (52,282) 43,513 ------------ ------------ Net income (loss) before extraordinary item (101,488) 84,467 Loss on discontinued operations net of tax benefit of $175,732 (341,127) -- ------------ ------------ Net income (loss) $ (442,615) $ 84,467 ------------ ------------ Earnings per share: Net income (loss) before extraordinary item (.02) .01 Net income (loss) (.08) .01 Weighted number of common shares outstanding 5,552,390 9,238,621 Earnings per share assuming full dilution: Net income before extraordinary item .01 Net income .01 Weighted number of common shares outstanding assuming full dilution 13,553,945

See accompanying notes to condensed consolidated financial statements Noble Roman's, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)

Three Months Ended March 31, OPERATING ACTIVITIES 1999 2000 -------------------- ---- ---- Net income (loss) $ (442,615) $ 84,467 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 293,564 9,802 Non-cash interest 143,771 64,269 Deferred federal income taxes (228,014) 29,838 Changes in operating assets and liabilities (increase) decrease in: Accounts receivable (17,358) (60,628) Inventory 12,607 56,508 Prepaid expenses 125,172 (279,226) Other assets (8,449) -- Increase (decrease) in: Accounts payable (55,514) (933,717) Other current liabilities -- (1,234,436) Deferred franchise fee 27,500 49,500 ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (149,337) (2,213,624) INVESTING ACTIVITIES Purchase of property and equipment (90,042) (4,016) Issuance of capital stock net of issuance cost -- 2,208,000 Legal fees associated with conversion of debt to equity (9,582) -- ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (99,624) 2,203,984 FINANCING ACTIVITIES Proceeds from long-term debt 250,000 -- Principal payments on long-term debt and capital lease obligations (1,365) -- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 248,635 -- ----------- ----------- INCREASE (DECREASE) IN CASH (326) (9,640) Cash at beginning of period 28,176 29,913 ----------- ----------- Cash at end of period $ 27,850 $ 20,273 ----------- -----------

Supplemental Schedule of non-cash investing and financing activities The Company converted $6,572,366 of long-term debt to 4,929,274 shares of no-yield preferred stock which are convertible to common stock at $3.00 per share and 1,643,092 shares of common stock at $1.00 per share. See accompanying note to condensed consolidated financial statements. 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, 1999 and 2000 Introduction ------------ Over the last several years, the Company made the strategic decision to refocus its business on its non-traditional and co-branding opportunities and away from operating full-service, traditional restaurant operations. Given the potential size of the opportunities in the non-traditional and co-branding segments, and the actual rapid pace of their growth within the Company during 1999, management determined that all financial and human resources at the Company's disposal would need to be focused on franchise services to maximize the potential for stakeholders. The Company realizes both the historic and continuing significance of its full-service operations in its on-going franchise development. Accordingly, in 1999 the Company made the decision to consolidate the operations of its 29 most productive full-service units in central and southern Indiana into four operating districts, and to seek an independent franchise operator to purchase and operate those units utilizing the existing supervisory and managerial resources currently in place. The Company will continue to offer franchise services to the full-service franchises in much the same fashion as it is currently doing with its non-traditional and co-branded franchises. 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.

Three Months Ended March 31, 1999 2000 ---- ---- Express royalties and fees 85.9 % 76.2 % Administrative fees and other 11.2 22.0 Restaurant royalties 2.9 1.8 Total revenue 100.0 % 100.0 % Express operating expenses: Salaries and wages 23.1 % 19.3 % Trade show expenses 7.0 4.9 Travel expense 5.8 5.5 Other operating expenses 10.8 8.0 Depreciation 1.3 .8 General and administrative 23.8 26.3 ----- ----- Operating income 28.2 % 35.2 % Interest 48.4 24.8 ----- ----- Ner income (loss) before income tax and extraordinary item (20.1)% 10.4 %

2000 Compared with 1999 ----------------------- Total revenue increased from $763 thousand to $1.24 million, or 62.0%, for the three-month period ended March 31, 1999 compared to the same period in 2000. This increase was primarily the result of the growth in the number of the Express franchise locations open. Express royalties and fees were approximately $656 thousand for the three-month period ended March 31, 1999 compared to $942 thousand for the three-month period ended March 31, 2000. This increase was the result of rapid growth in the number of franchisees. Franchising of Noble Roman's Pizza Express began in 1997. At March 31, 2000, approximately 341 franchised Express units were open compared to 200 at March 31, 1999. Currently there are approximately 410 franchised Express units open with approximately 205 more units sold and to be opened in the future. Salaries and wages decreased from 23.1% of revenue for the three-month period ended March 31, 1999 to 19.3% of revenue for the three-month period ended March 31, 2000. This decrease was the result of the growth in number of franchised units within the infrastructure established earlier in anticipation of that growth. Trade show expense decreased from 7.0% of revenue for the three-month period ended March 31, 1999 to 4.9% of revenue for the three-month period ended March 31, 2000. This decrease was the result of the increased revenue as a result of unit growth. Travel expenses decreased from 5.8% of revenue for the three-month period ended March 31, 1999 to 5.5% of revenue for the three-month period ended March 31, 2000. This decrease was the result of the increased revenue as a result of unit growth partially offset by increased travel cost related to units opening further away from the home office. Other operating expenses decreased from 10.8% of revenue for the three-month period ended March 31, 1999 to 8.0% of revenue for the three-month period ended March 31, 2000. This decrease was the result of the increased revenue as a result of the growth in number of franchised units within the infrastructure established earlier in anticipation of that growth. Depreciation decreased from 1.3% of revenue for the three-month period ended March 31, 1999 to .8% of revenue for the three-month period ended March 31, 2000. This decrease was the result of the increased revenue as a result of the growth in number of franchised units with minimal capital requirements. General and administrative expenses increased from 23.8% of revenue for the three-month period ended March 31, 1999 to 26.3% of revenue for the three-month period ended March 31, 2000. This increase was the result of creating additional administrative infrastructure in order to be prepared for expected accelerated growth in the future. Interest expense decreased from $369 thousand for the three-month period ended March 31, 1999 to $307 thousand for the three-month period ended March 31, 2000. This decrease was the result of the conversion of $6.5 million in debt to equity on February 9, 2000 partially offset by increased borrowings of $2.2 million on April 30, 1999. Net income (loss) before extraordinary item improved from a net loss of $101 thousand for the three-month period ended March 31, 1999 to a net income of $84 thousand for the three-month period ended March 31, 2000. This improvement was the result of the increased revenue as a result of the growth in the number of franchised units within the infrastructure established earlier in anticipation of that growth. Liquidity and Capital Resources ------------------------------- Over the last several years, the Company made the strategic decision to refocus its business on its non-traditional and co-branding opportunities and away from operating full-service, traditional restaurant operations. Given the potential size of the opportunities in the non-traditional and co-branding segments, and the actual rapid pace of their growth within the Company, during 1999 management determined that all financial and human resources at the Company's disposal would need to be focused on franchise services to maximize the potential for stakeholders. Within this, however, the Company realizes both the historic and continuing significance of its full-service operations in its on-going franchise development. Accordingly, in 1999 the Company made the decision to consolidate the operations of its 29 most productive full-service units in central and southern Indiana into four operating districts, and to seek an independent franchise operator to purchase and operate those units utilizing the existing supervisory and managerial resources currently in place. The Company will continue to offer franchise services to the full-service franchises in much the same fashion as it is currently doing with its non-traditional and co-branded franchises. In the period February 2000 through July 2000, the Company entered into a series of transactions resulting in its obtaining approximately $10.7 million in additional capital. The additional capital came from investors associated with The Geometry Group in New York and certain local investors in Indianapolis purchasing approximately $3.4 million of common stock in exchange for cash, The Provident Bank exchanging $6.5 million senior secured debt and $.6 million PIK notes for $2.2 million of common stock and $4.9 million in no-yield preferred stock which may later be converted to common stock at $3.00 per share at the Bank's option and an officer converted $294 thousand of notes for common stock. 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 $1.00 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 $1.00 per share or in a combination thereof. As a result of the additional capital raised by the Company, as discussed above, its decision to focus on growth by franchising and its decision to franchise its existing full-service restaurants, the Company believes it will have sufficient cash flow to meet its obligations and to carry out its current business plan. 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 and 2000. 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. 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 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. Date: /s/ Paul W. Mobley -------------- ----------------------------------------- Paul W. Mobley, Chairman of the Board Date: /s/ Dan P. Hutchison -------------- ----------------------------------------- Dan P. Hutchison, Chief Financial Officer