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 June 30, 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 Identification No.) of organization) 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 July 25, 2000, there were 12,605,399 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 June 30, 2000 Page 4 Condensed consolidated statements of operations for the three months and six months ended June 30, 1999 and 2000 Page 5 Condensed consolidated statements of cash flows for the three months and six months ended June 30, 1999 and 2000 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. Recent Events In the period February 2000 through July 2000, the Company entered into a series of transactions resulting in its obtaining approximately $10.5 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 $2.9 million of common stock in exchange for cash, The Provident Bank exchanging $6.5 million senior secured debt and $740 thousand PIK notes for $2.4 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 $312 thousand of notes for common stock. All of these transactions were at $1.00 per share. Based on the Company's 1998 and 1999 proforma operating results, the Company's trends and the results of its operations thus far in 2000, its business plan, the number of franchise units now open, the backlog of units sold to be opened and the backlog of franchise prospects now in ongoing discussions and negotiations, 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 that the franchising growth will continue in the future nor can there be any assurance that the remainder of 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 2 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. 3 Noble Roman's, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited)

(Unaudited) Proforma December 31, June 30, Proforma Balance Sheet Assets 1999 2000 Adjustment as of 6/30/00 ------ --------------- -------------- ---------- ------------- Current assets: Cash $ 29,913 $ 21,760 $ 552,000 (1) $ 573,760 Accounts receivable 718,623 1,018,434 1,018,434 Inventories 437,120 290,515 290,515 Prepaid expenses 109,006 313,813 313,813 Assets held for sale 1,500,000 1,500,000 1,500,000 ------------- ------------- ----------- Total current assets 2,794,662 3,144,522 3,696,522 Property and equipment, less accumulated depreciation of $327,039 and $317,749 570,496 581,019 581,019 Deferred tax asset 9,961,723 9,782,356 9,782,356 Other assets 721,982 684,153 684,153 ------------- ------------- ----------- Total assets $ 14,048,862 $ 14,192,050 $14,744,050 ============= ============= =========== Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 3,163,200 $ 2,176,232 $ 2,176,232 Current portion of long-term debt 17,661 16,444 16,444 Note payable officer 65,840 65,840 65,840 Deferred franchise fees 227,125 335,625 335,625 Other current liabilities 2,872,515 1,321,777 1,321,777 ------------- ------------- ----------- Total current liabilities 6,346,341 3,915,918 3,915,918 Long-term obligations: Notes payable to Provident Bank net of warrant value of $520,377 and $249,740 14,051,989 7,750,261 7,750,261 Notes payable to various funds affiliated with Geometry Group net of warrant valuation of $569,992 in 2000 2,006,433 2,178,008 2,178,008 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 56,325 (56,325) (1) - Other long-term debt 13,432 11,886 11,886 ------------- ------------- ------------- Total long-term liabilities 16,937,166 10,829,550 9,940,155 Stockholders' equity Common stock (25,000,000 shares authorized, 5,552,390 outstanding in 1999 and 10,952,803 in 2000) 12,272,637 15,798,360 1,441,395 (1) 17,239,755 Preferred Stock (5,000,000 shares authorized, 4,929,274 outstanding in 2000) 4,929,274 4,929,274 Accumulated deficit (21,507,281) (21,281,051) (21,281,051) ------------- ------------- ----------- Total stockholder's equity (deficit) (9,234,645) (553,418) 887,977 ------------- ------------- ----------- Total liabilities and stockholder's equity $ 14,048,862 $ 14,192,050 $14,744,050 ============= ============= ===========

(1) Investment by investors affiliated with Geometry Group, New York and certain local investors of $600,000 in common stock at $1.00 per share and the conversion of PIK notes Provident Bank, note payable officer and PIK notes officer of $583,070, $250,000 and $56,325, respectively, to common stock at $1.00 per share. See accompanying note to condensed consolidated financial statements. 4 Noble Roman's, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)

Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 1999 2000 1999 2000 ---- ---- ---- ---- Express royalties and fees $ 762,590 $ 1,194,849 $ 1,418,373 $ 2,136,592 Administrative fees and other 50,196 149,062 135,888 421,177 Restaurant royalties - full service 20,845 18,342 42,807 40,931 ----------- ----------- ----------- ----------- Total revenue 833,631 1,362,253 1,597,068 2,598,701 Express operating expenses: Salaries and wages 194,374 245,090 370,489 483,981 Trade show expense 54,842 60,000 108,341 120,000 Travel expense 53,823 77,549 98,384 145,962 Other operating expenses 91,268 122,866 173,573 222,002 Depreciation 10,114 9,812 20,228 19,614 General and administrative expenses 182,947 311,368 364,264 636,374 ----------- ----------- ----------- ----------- Operating income 246,263 535,568 461,789 970,769 Interest 455,695 320,775 824,991 627,996 ----------- ----------- ----------- ----------- Income (loss) before income taxes (209,432) 214,793 (363,202) 342,773 Income taxes (benefit) (71,207) 73,030 (123,489) 116,543 ----------- ----------- ----------- ----------- Net income (loss) before extraordinary item (138,225) 141,763 (239,713) 226,230 Loss on discontinued operations net of tax benefit of $182,788 and $358,520 (354,824) -- (695,951) -- ----------- ----------- ----------- ----------- Net income (loss) $ (493,049) $ 141,763 $ (935,664) $ 226,230 ----------- ----------- ----------- ----------- Earnings per share: Net income (loss) before extraordinary item (.02) .01 (.04) .02 Net income (loss) (.06) .01 (.17) .02 Weighted number of common shares outstanding 5,561,057 10,919,287 5,556,390 10,078,954 Earnings per share assuming full dilution: Net income before extraordinary item .01 .02 Net income .01 .02 Weighted number of common shares outstanding assuming full dilution 15,077,170 14,236,837

See accompanying notes to condensed consolidated financial statements. 5 Noble Roman's, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended June 30, OPERATING ACTIVITIES 1999 2000 -------------------- ---- ---- Net income (loss) $ (935,664) $ 226,230 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 609,036 19,614 Non-cash interest 289,139 92,196 Deferred federal income taxes (482,009) 179,367 Changes in operating assets and liabilities (increase) decrease in: Accounts receivable 29,802 (299,811) Inventory (18,354) 146,605 Prepaid expenses 44,073 (204,807) Other assets (60,166) 37,829 Increase (decrease) in: Accounts payable (279,116) (986,968) Other current liabilities (421,050) (1,551,955) Deferred franchise fee 31,500 108,500 ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (1,192,809) (2,233,200) INVESTING ACTIVITIES Purchase of property and equipment (231,141) (27,407) Issuance of capital stock net of issuance cost 19,500 2,254,000 Legal fees associated with conversion of debt to equity (9,582) -- ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (221,223) 2,226,593 FINANCING ACTIVITIES Proceeds from long-term debt 1,966,703 -- Principal payments on long-term debt and capital lease obligations (2,778) (1,546) ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 248,635 (1,546) ----------- ----------- INCREASE (DECREASE) IN CASH 549,893 (8,153) Cash at beginning of period 28,176 29,913 ----------- ----------- Cash at end of period $ 578,069 $ 21,760 ----------- -----------

Supplemental Schedule of non-cash investing and financing activities The Company's loan agreements provide that interest on certain of its notes payable is to be paid by the issuance of PIK notes. The amount of such non-cash interest for the six-month period ended June 30, 1999 and June 30, 2000 was $289,139 and $92,196. 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. 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 and six-month periods ended June 30, 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 franchising opportunities and away from operating full-service, traditional restaurants. Given the potential size of the opportunities in the non-traditional and co-branding segments, and the actual rapid pace of the franchising growth within the Company, during 1999 management determined that all financial and human resources at the Company's disposal should 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 Company-owned most productive full-service restaurants in central and southern Indiana into four operating districts, and to seek independent franchise operators to purchase and operate those units utilizing the existing supervisory and managerial resources currently in place. In seeking potential partners for this transaction, the Company is selectively searching for experienced operators with the goal of reconditioning certain aspects of the existing facilities and expanding the concept under a pre-agreed strategy and format. 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 Company is actively pursuing such arrangements and has already franchised 15 of them and believes that agreements will be reached for the remainder. 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 Six Months Ended June 30, June 30, ---------------- ---------------- 1999 2000 1999 2000 ---- ---- ---- ---- Express royalties and fees 91.5 % 87.7 % 88.8 % 82.2 % Administrative fees and other 6.0 10.9 8.5 16.2 Restaurant royalties 2.5 1.3 2.7 1.6 ------- ------- ------- ------- Total revenue 100.0 % 100.0 % 100.0 % 100.0 % Express operating expenses: Salaries and wages 23.3 % 18.0 % 23.2 % 18.6 % Trade show expenses 6.6 4.4 6.8 4.6 Travel expense 6.5 5.7 6.2 5.6 Other operating expenses 10.9 9.0 10.9 8.5 Depreciation 1.2 .7 1.3 .8 General and administrative 21.9 22.9 22.8 24.5 ------- ------- ------- ------- Operating income 29.5 % 39.3 % 28.9 % 37.4 % Interest 54.7 23.5 51.7 24.2 ------- ------- ------- ------- Net income (loss) before income tax and extraordinary item (25.1)% 15.8 % (22.7)% 13.2%

7 2000 Compared with 1999 Total revenue increased from $834 thousand to $1.36 million and from $1.6 million to $2.6 million, respectively, or 62.5% increase, for the three-month and six-month periods ended June 30, 2000 compared to the same period in 1999. This increase was primarily the result of the growth in the number of the Express franchise locations open. Express royalties and fees were approximately $1.19 million and $2.14 million, respectively, for the three-month and six-month periods ended June 30, 2000 compared to $763 thousand and $1.42 million for the same periods in 1999. This increase was the result of rapid growth in the number of franchises. Franchising of Noble Roman's Pizza Express began in 1997. At June 30, 2000 approximately 397 franchised Express units were open compared to 235 at June 30, 1999. Since 1997 the Company has awarded over 630 franchises in 36 states, with approximately 420 of those locations open and in operation for a total of approximately 452 locations. In addition to the 210 sold and not yet open locations, it is the Company's plan to aggressively pursue the sale of additional locations across the country and Canada. The Company is currently involved in ongoing discussions and negotiations involving many additional franchise locations. Salaries and wages decreased from 23.3% and 23.2% of revenue for the three-month and six-month periods ended June 30, 1999 to 18.0% and 18.6% of revenue for the three-month and six-month periods ended June 30, 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 6.6% and 6.8% of revenue for the three-month and six-month periods ended June 30, 1999 to 4.4% and 4.6%, respectively, of revenue for the three-month and six-month periods ended June 30, 2000. This decrease was the result of the increased revenue as a result of unit growth partially offset by more national trade shows. Travel expenses decreased from 6.5% and 6.2% of revenue for the three-month and six-month periods ended June 30, 1999 to 5.7% and 5.6%, respectively, of revenue for the three-month and six-month periods ended June 30, 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, now in 36 states. Other operating expenses decreased from 10.9% and 10.9% of revenue for the three-month and six-month periods ended June 30, 1999 to 9.0% and 8.5%, respectively, of revenue for the three-month and six-month periods period ended June 30, 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 1.2% and 1.3% of revenue for the three-month and six-month periods ended June 30, 1999 to .7% and .8%, respectively, of revenue for the three-month and six-month periods ended June 30, 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 21.9% and 22.8% of revenue for the three-month and six-month periods ended June 30, 1999 to 22.9% and 24.5%, respectively, of revenue for the three-month and six-month periods ended June 30, 2000. This increase was the result of creating 8 additional administrative infrastructure in order to be prepared for expected accelerated growth in the future. Interest expense decreased from $456 thousand and $825 thousand for the three-month and six-month periods ended June 30, 1999 to $321 thousand and $628 thousand, respectively, for the three-month and six-month periods ended June 30, 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 $138 thousand and $240 thousand for the three-month and six-month periods ended June 30, 1999 to a net income of $142 and $226 thousand for the three-month and six-month periods ended June 30, 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 franchising opportunities and away from operating full-service, traditional restaurants. 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 should 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 Company-owned most productive full-service restaurants in central and southern Indiana into four operating districts, and to seek independent franchise operators 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 Company has franchised 15 of the 29 restaurants and believes that agreements will be reached for the remainder. In the period February 2000 through July 2000, the Company entered into a series of transactions resulting in its obtaining approximately $10.5 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 $2.9 million of common stock in exchange for cash, The Provident Bank exchanging $6.5 million senior secured debt and $740 thousand PIK notes for $2.4 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 $312 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 9 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 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. Date: /s/ Paul W. Mobley -------------------- ------------------------------------------- Paul W. Mobley, Chairman of the Board Date: /s/ Dan P. Hutchison -------------------- ------------------------------------------- Dan P. Hutchison, Chief Financial Officer 11