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, 1997MARCH 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 December 8, 1997,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, 19961997
          and September 30, 1997March 31, 1998                                              Page 3

     Condensed consolidated statements of operations for the nine and three
          months ended September 30,
               1996March 31, 1997 and 19971998                            Page 4

     Condensed consolidated statements of cash flows for the ninethree
         months ended September 30, 1996March 31, 1997 and 19971998                             Page 5

     NotesNote 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.

This report containsBased 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 which(as such term is defined in
the Private Securities Litigation Reform Act of 1995) relating to the Company
that are inherently
subjectbased on the beliefs of the management of the Company, as well as
assumptions and estimates made by and information currently available to risks and uncertainties.  Noble Roman'sthe
Company's management. The Company's actual results couldin the future may differ
materially from those currently anticipatedprojected 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
numberresult of competitive factors and pricing pressures, shifts in market demand,
general economic conditions and other factors including Noble Roman's abilitybut not limited to,
improve operatingchanges 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 and trends at its
full service restaurants, competition in the markets for its full service
restaurants and Express franchises, increases in costs, availability of labor
and its ability to manage growth of its Express franchise business.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, September 30, 1996March 31, 1997 ------------ -------------1998 -------------- -------------- Assets ------ Current assets: Cash $ 74,50268,136 $ 60,92535,521 Accounts receivable 947,924 552,576380,816 381,436 Inventories 947,644 821,760802,097 786,655 Prepaid expenses 363,074 339,475 ------------- -------------158,260 317,996 -------------- -------------- Total current assets 2,333,144 1,774,7361,409,309 1,521,608 Property and equipment, less accumulated depreciation and amortization of $4,372,980$3,379,356 and $3,189,601 9,475,794 6,819,609$3,560,076 6,825,777 6,835,128 Deferred tax asset - 2,560,4363,335,407 3,526,055 Costs in excess of assets acquired, net 6,464,678 6,269,6936,204,698 6,139,703 Other assets 1,177,069 999,941 ------------- -------------429,805 482,692 -------------- -------------- $ 19,450,68518,204,996 $ 18,424,415 ------------- -------------18,505,186 Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable and accrued expenses $ 4,190,8962,978,719 $ 4,384,2773,457,318 Notes payable - current 14,251,373 16,816,14021,743 613,163 Deferred franchise fees - 65,000 Payroll and sales tax 141,945 1,307,000 ------------- -------------638,00 119,950 Other current liabilities 1,855,118 1,405,006 -------------- -------------- Total current liabilities 18,584,214 22,572,4174,919,380 5,595,437 Long-term liabilities: NotesSenior note payable - less current portion 41,540 32,1482,580,000 2,580,000 Subordinated note payable 11,000,000 11,000,000 Other long term debt 22,863 21,374 Capital leases 33,646 11,805 ------------- -------------8,201 4,312 -------------- -------------- Total long-term liabilities 75,186 43,95313,611,064 13,605,686 Stockholders' equity Common stock no par value, authorized 9,000,000(9,000,000 shares, issued 4,131,324 in 1997 and 4,131,324 5,518,431 5,518,431 Retained earnings (deficit) (4,727,146) (9,710,386) ------------- -------------1998) 8,318,431 8,318,431 Accumulated deficit (8,643,879) (9,014,368) -------------- -------------- Total stockholders' equity (deficit) 791,285 (4,191,955) ------------- -------------deficit (325,448) (695,937) -------------- -------------- $ 19,450,68518,204,996 $ 18,424,415 ------------- -------------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)
Nine Months Ended Three Months Ended September 30, September 30, --------------------- ---------------------- 1996March 31, ------------------------ 1997 1996 1997 ---- ----1998 ---- ---- Restaurant revenue $ 25,207,0497,797,678 $ 19,394,323 $ 8,346,239 $ 5,742,0555,509,571 Restaurant royalties 154,599 92,438 56,180 38,30432,749 34,698 Express royalties and fees - 242,888 - 140,13117,141 322,644 Administrative fees and other 173,148 126,516 30,647 3,933 ------------ ------------51,522 53,643 ------------ ------------ Total revenue 25,534,796 19,856,165 8,433,066 5,924,4237,899,090 5,920,556 Restaurant operating expenses: Cost of revenue 4,805,084 4,088,086 1,496,318 1,291,2071,557,240 1,079,304 Salaries and wages 8,245,459 7,074,841 2,763,536 2,066,2132,926,114 2,044,776 Rent 2,248,265 1,891,956 758,388 551,618788,794 550,688 Advertising 1,556,715 969,679 416,961 287,117389,836 275,499 Other 6,171,920 4,301,150 2,096,904 1,177,8221,890,884 1,340,949 Depreciation and amortization 893,036 840,325 297,292 259,435324,874 245,801 Express operating expenses - 118,340 - 35,928217,219 General and administrative 1,807,121 2,083,166 614,153 629,479 Cost of attempted acquisition and equity offering 768,389 - - - Restructuring costs - 5,159,836 - - ------------ ------------763,213 616,636 ------------ ------------ Operating income (loss) (961,193) (6,671,214) (10,486) (374,396)loss (741,865) (450,316) Interest and other expense 1,199,233 880,426 436,591 80,831474,564 111,073 ------------ ------------ ------------ ------------ Income (loss)Loss before income taxes (2,160,426) (7,551,640) (477,077) (455,227)(1,216,429) (561,389) Income taxes (benefit) (756,149) (2,568,400) (156,477) (155,600) ------------ ------------benefit (413,586) (190,900) ------------ ------------ Net income (loss) before loss on discontinued operations (1,404,277) (4,983,240) (290,600) (299,627) Loss on discontinued operations 48,750 - - - ------------ ------------ ------------ ------------$ (802,843) $ (370,489) ============ ============ Net income (loss) $ (1,453,027) $ (4,983,240) $ (290,600) $ (299,627) ------------ ------------ ------------ ------------ Net income (loss) per share before discontinued operations $ (.34) $ (1.21) $ (.07) $ (.07) ------------ ------------ ------------ ------------ Net income (loss)loss per share $ (.35)(.19) $ (1.21) $ (.07) $ (.07) ------------ ------------(.09) ------------ ------------ 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. Page 4 Noble Roman's, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
NineThree Months Ended September 30, ------------------------- 1996March 31, ------------------------ 1997 1998 ---- ---- OPERATING ACTIVITIES - -------------------- Net income (loss)loss $ (1,453,027)(802,843) $ (4,983,240)(370,489) Adjustments to reconcile net incomeloss to net cash provided by (used in) operating activities: Depreciation and amortization 982,124 840,325 Restructuring costs - 4,753,384324,874 245,801 Deferred federal income taxes - (2,560,436)(405,622) (190,648) Changes in operating assets and liabilities (increase) decrease in: Accounts receivable (38,311) (274,536)(20,145) (620) Inventory (82,929) 54,178(33,762) 15,442 Prepaid expenses (348,634) (609,965)(381,649) (159,736) Other assets (249,975) 96,818(54,080) (52,973) Increase (decrease) in: Accounts payable and other current liabilities 459,361 638,830(175,229) 28,487 Deferred franchise fee - 65,00056,150 ------------ ------------ NET CASH PROVIDED BY (USED IN)USED IN OPERATING ACTIVITIES (731,391) (1,979,642)(1,548,456) (428,586) INVESTING ACTIVITIES - -------------------- Purchase of fixed assets (696,060) (567,469)(219,490) (190,071) ------------ ------------ NET CASH PROVIDED BY (USED IN)USED IN INVESTING ACTIVITIES (696,060) (567,469)(219,490) (190,071) FINANCING ACTIVITIES - -------------------- Proceeds from borrowing 1,585,081 2,814,7672,034,288 592,365 Principal payments on long-term debt and capital lease obligations (259,644) (281,233)(258,293) (6,323) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 1,325,437 2,533,5341,775,995 586,042 ------------ ------------ INCREASE (DECREASE) IN CASH (102,014) (13,577)8,049 (32,615) Cash at beginning of period 229,462 74,502 68,136 ------------ ------------ Cash at end of period $ 127,44882,551 $ 60,92535,521 ------------ ------------
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 EVENTSEVENT On November 19, 1997, Noble Roman's, Inc. ("Noble Roman's" orAugust 13, 1998 the "Company") entered into an amended and restated credit agreement with The Provident Bank,Company obtained additional financing of $2,000,000 from its principalprimary lender. The new agreement provides forThis financing is in the reductionform of previously outstanding debt from approximately $16,900,000 to $11,000,000, cancellation of previously accrued interest, no interest to be paid or accrued on such debt until November 1, 1998, interest on such debt of 8% per annum payable monthlya promissory note due in arrears after November 1, 1998, maturity of the subject note extended to December, 2001, principal payments on such debt beginning December 1, 1998 in an amount equal to 50% of excess cash flow as defined inbears interest at 2 1/2% over prime payable monthly. As additional compensation, the agreement, and the cancellation ofBank received a previously issued warrant to purchase 465,000750,000 shares of the Company's common stock. In addition, the agreement provides for a new loan in the amount of $2,580,000 due in December, 2000 with interest payable monthly in arrearsstock at a rate of prime plus 2.5% per annum. These arrangements were made in consideration for a new warrant to purchase 2,800,000 shares of the Company's common stock with an exercise price of $.01 per share. Pursuant to entering into the amended and restated credit facility, the Company issued warrants to purchase an aggregate of 1,000,000 shares of common stock to certain executive officers, with an exercise price of $.40 per share. 2. RESTRUCTURING COSTS During the second quarter of 1997 the Company implemented a plan which management believes will improve its stores' profitability by restructuring its operations. This included closing 19 restaurants and selling four others to a franchisee pursuant to a franchise agreement. The Company currently owns 48 full-service restaurants, has 11 full service franchised restaurants and 45 franchised Express locations. The decision to close and sell certain restaurants was made because some of the restaurants were operating at a loss, some were marginally profitable and others were competing in market areas where the Company operates newer restaurants and where the delivery area and some of the dine-in market can be serviced by the newer facility. This action has allowed the Company to consolidate management and supervision in the remaining restaurants. The Company reported a loss of $5.2 million in the second quarter of 1997 from this restructuring as a result of writing off the carrying value of equipment, leasehold improvements, other assets and accruing for estimated losses and ongoing expenses relating to those closed restaurants. 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 - Nine-month and three-monthThree-month periods ended September 30, 1996March 31, 1997 and 19971998 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. As noted, certainCertain items are shown as a percentage of restaurant revenue.
Nine Months Ended Three Months Ended September 30, September 30,March 31, -------------------- ------------------- 1996 1997 1996 19971998 ---- ---- ---- ---- Revenue: Restaurant revenue 98.7% 97.7% 99.0 96.9%93.1% Restaurant royalties .6 .5 .7.4 .6 Express royalties and fees - 1.2 - 2.4.2 5.4 Administrative fees and other .7 .6 .3 .1 ----- ----- ----- ----- 100.0 100.0.9 ------- ------- 100.0 100.0 Restaurant operating expenses (1): Cost of revenue 19.1 21.1 17.9 22.520.0 19.6 Salaries and wages 32.7 36.5 33.1 36.037.5 37.1 Rent 8.9 9.8 9.1 9.610.1 10.0 Advertising 6.2 5.0 5.0 5.0 Other 24.5 22.2 25.1 20.524.2 24.3 Depreciation and amortization 3.54.1 4.2 3.5 4.4 Express operating expense - .6 - .63.7 General and administrative 7.1 10.5 7.3 10.69.7 10.4 ------- ------- Operating loss (9.4) (7.6) Interest 6.0 1.9 ------- ------- Loss from withdrawn acquisition and offering and restaurants closed in 1987 3.0 - - - Restructuring costs - 26.0 - - ----- ----- ----- ----- Operating income (loss) (3.8) (33.6) (.1) (6.3) Interest 4.7 4.4 5.2 1.4 ----- ----- ----- ----- Income (loss) before income taxes (8.5%(15.4%) (38.0%) (5.3%) (7.7%(9.5%)
(1) As a percentage of restaurant revenue. During the second quarter of 1997 the Company implemented a plan which management believes will improve its stores' profitability by restructuring its operations. This included closing 19 restaurants and selling four others to a franchisee pursuant to a franchise agreement. The Company currently owns 48 full-service restaurants, has 11 full service franchised restaurants and 45 franchised Express locations. The decision to close and sell certain restaurants was made because some of the restaurants were operating at a loss, some were marginally profitable and others were competing in market areas where the Company operates newer restaurants and where the delivery area and some of the dine-in market can be serviced by the newer facility. This action also allowed the Company to consolidate management and supervision in the remaining restaurants. The Company reported a loss of $5.2 million from this restructuring as a result of writing off the carrying value of equipment, leasehold improvements, other assets and accruing for estimated losses and ongoing expenses relating to those closed restaurants. Page 7 Total revenue decreased $5.7$2.0 million, or 22.2%, and $2.5 million, or 29.7%25.0%, for the nine-month and three-month periodsthree month period ended September 30, 1997, respectively,March 31, 1998 compared to the corresponding periodsperiod in 1996.1997. The principal reason for the decrease was the closing of 19 restaurants in the second quarter of 1997 and the sale of four others to a franchisee.in the second quarter of 1997. In addition, the decreases were partially the result of same store sales declines which were 8.7% and 11.5%of 8.5% for the nine-month and three-month periodsthree month period ended September 30, 1997, respectively,March 31, 1998 compared to the corresponding periodsperiod in 1996.1997. 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 continueshas corrected its service and product problem to marketa 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 concept whereby franchisees operate aroyalties 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 operationbegan in non-traditional restaurant locations including convenience stores, other retail outlets, schools and recreational facilities. The Company currently has 45 Pizzaearly 1997. At March 31, 1998, approximately 70 franchised Express units were open. Currently there are approximately 165 such franchised locations. Royalties and fees fromunits open with approximately 70 more units sold to be opened over the Express operations were $242,900 and $140,100 for the nine-month and three-month periods ended September 30, 1997 compared to none in 1996.next several months. Cost of revenue as a percentage of restaurant revenue increaseddecreased from 19.1% and 17.9%20.0% to 21.1% and 22.5%19.6% for the nine-month and three-month periods ended September 30, 1996March 31, 1997 and 1997,1998, respectively. These increases wereThe decrease was primarily the result of a change in method of recording many ofimproved cost controls resulting from the specials at net sales price rather than gross sales plus discounts and higher discounts to the menu price in an effort to rebuild customer count.Company's aggressive long-term turnaround strategy. Salaries and wages increaseddecreased as a percentage of restaurant revenue from 32.7% and 33.1%37.5% to 36.5% and 36.0%37.1% for the nine-month and three-month periods ended September 30, 1996March 31, 1997 and 1997, respectively. These increases were1998. The decrease occurred even though the result of additional staffingCompany increased labor schedules to accommodate increasedimprove customer count from a discount promotion, same store sales declines, inefficiencies in scheduling as a result of inexperienced store level management, and a more competitive labor market resulting in higher average wage rates.service. General and administrative expenses as a percentage of total revenue increased from 7.1% and 7.3%9.7% to 10.5% and 10.6%10.4% for the nine-month and three-month periods ended September 30, 1996March 31, 1997 and 1997, respectively.1998. This increase was primarily attributable to additional supervision cost in the first quarter and to the decline in total revenue in the second and third quarters.revenue. As a result of the restructuring plan, the Company has reduced its general and administrative expenses. Operating income (loss) decreasedloss improved from a loss of $961,200 and a loss of $10,500$741,900 to a loss of $6.7 million and $374,400$450,300 during the nine-month and three-month periods ended September 30, 1996March 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 for greater loss in 1997 was the restructuring costforgiveness of $5.2 million recorded in the second quarter. Interestboth principal and other expense decreased from $1.2 million to $880,000 and decreased from $437,000 to $81,000 for the nine-month and three-month periods ended September 30, 1996 and 1997, respectively. Interest expense has not been accrued for a portion of 1997 because the interest was forgiven as a part of the financialdebt restructuring discussed below under "Liquidityon November 21, 1997 with the company's primary lender. See Liquidity and Capital Resources." Net income (loss) decreasedloss improved from losses of $1.5 million and $290,600$802,800 to $5.0 million and $299,627$370,500 during the nine-month and three-month periods ended September 30,March 31, 1997 and 1998, respectively. The increasereduction in the net loss was primarily the result of the financial and operational restructuring costs recordedthat the Company completed in 1997 and the second quarterrapid growth of 1997. Page 8 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,restaurants. However, no Page 8 new restaurants have been opened in 1997.1998. The Company's primary sources of working capital are cash flow from operations and borrowings under a credit facility.borrowings. On March 25, 1996, the Company signed a Letter of Intent whereby it would have acquired Papa Gino's Holdings Corp. (a 180 unit187-unit pizza restaurant chain in seven northeasternNortheastern 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. Because of delays and uncertainties in negotiating a definitive agreement, the Company and Papa Gino's mutually agreed to terminate the Letter of Intent on June 10, 1996. The expenses incurred directly with regard to the proposed acquisition and offering aggregated approximately $880,862. In addition, deterioration in operating controls duringFor a number of reasons this effortattempted 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 senior management's focus on that activity createdseveral demographic/consumption trends, targeted for expansion by a severe shortagelarge number of working capital. From March, 1995 through June, 1996mid-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, haddue to focus almost all of its time on arranging for financing and the unsuccessful attempted acquisition of a 180 unit regional pizza restaurant chain operatingtransaction, were unable to participate in seven northeastern states.daily operations. As a result, the Company's current operations severely deterioratedCompany experienced dramatic turnover and was unable to stabilize its staffing levels through ordinary recruiting efforts. The resulting in personnel turnover poorand short-staffing had a material adverse effect on operational results generally, and specifically on service and difficulties with operational standards and cost controls. Management has soughtAs a result, sales and margins declined. Further, the management turnover, short labor supply and negative press made it extremely difficult for the Company to improve operationsovercome 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 ongoing addition of new management and supervisory personnel, extensive training, the implementation of better controls and the restructuring plan completed in the second quarter of 1997 which included closing and selling a portionCompany closed 19 of its restaurants and concentrating its efforts and management personnel onsold four others to consolidate the remaining restaurants.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 addition, the Company began franchising Noble Roman's Pizza Express in December, 1996 and by year-end 1997 expects to have approximately 50 units in operation. Based upon market reaction to date, the Company believes that its Pizza Express concept offers significant growth potential in 1998. The Company earns approximately $5,500 in fees and commissions for each new unit opened and also receives weekly royalty payments equal to 7% of sales generated by each unit open. On November 19, 1997, the Company entered into an amended and restated credit agreementnegotiated a debt restructuring with its primary lender, The Provident Bank, its principal lender. The new agreement provides forwhereby the reduction of previouslylender agreed to: reduce the Company's outstanding debt from approximately $16.9 million to $11 million, cancellation of previously accrued interest, no interest to be paid or accrued on such debtby over $7 million; loan the Company an additional $2.6 million; give the Company a grace period until November 1, 1998, interest on such debt of 8% per annum payable monthly in arrears after November 1, 1998, maturity of the subject note extended to December, 2001, principal payments on such debt beginning December 1, 1998 in an amount equalwithout either having to 50% of excess cash flow as defined inaccrue or pay interest on the agreement, and the cancellation of a previously issued warrant to purchase 465,000 sharesold portion of the Company's common stock. In addition,debt; extend the agreement provides for a new loan interm of the amount of $2.6 million due indebt until December 20002001 with no principal payments until December 1998; make principal payments after December 1998 variable depending on available cash flow; and fix the interest payable monthly in arrearsrate on the old debt at a rate of prime plus 2.5%8% per annum.year commencing December 1998. These arrangements were made in considerationexchange for a new warrant to purchasebuy 2.8 million shares of commonNoble Roman's stock with an exerciseat a price of $.01 per share. Pursuant to entering intoAfter completing a restructuring of the amendedCompany's credit facilities with Provident Bank and restated credit facility,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 issued warrants to purchasebegan an aggregateaggressive long-term turnaround strategy based on five primary elements: (1) build morale, aggressively recruit management talent, and improve all levels of 1.0 million sharesmanagement training; (2) re-focus the Company's culture of common stock to certain executive officers withstrict cost controls toward an exercise price of $.40 per share. Proceeds from the new loan were primarily for working capital and existing restaurant upgrades.emphasis on improved customer service; Page 9 Based upon(3) improve the amendmentsCompany'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 credit agreement, plannedCompany'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 its existingthe operations of the Company's full-service restaurants and the planned growth in the new franchised Express, business, management believes the Company will generatehave 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 restaurants.restaurant facilities. The Company also anticipates that most of itsCompany's growth during 1998 will be generatedprimarily come from franchising of its newthe Express concept.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 onupon the Company.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. As of November 19, 1997, the Company entered into an amended and restated credit facility with its bank. In connection with such amendment: (i) the bank surrendered warrants to purchase 465,000 shares of Common Stock; (ii) the Company issued to the bank warrants to purchase 2.8 million shares of Common Stock with an exercise price of $.01 per share; and (iii) the Company issued to certain executive officers warrants to purchase an aggregate of 1.0 million shares of Common Stock with an exercise price of $.40 per share. The foregoing warrants were issued in transactions not involving a public offering in reliance upon the exemption provided pursuant to Section 4(2) under the Securities Act of 1933, as amended.None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. Exhibit A. Proforma Balance Sheet as of September 30, 1997.None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. Exhibit 10. Amended and Restated Credit Agreement 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: December 12, 1997 ----------------------------- ------------------- Paul W. Mobley, President (Principal Executive Officer)Chairman of the Board /s/ Mitchell E. Katz Date: December 12, 1997 ----------------------------- ------------------- Mitchell E. Katz (Chief Financial Officer) Page 12 EXHIBIT A NOBLE ROMAN'S, INC. CONDENSED CONSOLIDATED PROFORMA BALANCE SHEET (UNAUDITED) The following condensed consolidated proforma balance sheet as of September 30, 1997 has been derived from the unaudited consolidated financial statements of Noble Roman's, Inc. For the purpose of the proforma, this condensed consolidated proforma balance sheet gives effect to the amended and restated credit agreement with The Provident Bank, its principal lender, as of November 19, 1997 and the application of proceeds therefrom as if such transaction had occurred as of September 30, 1997. The amended and restated agreement provides for the reduction of previously outstanding debt from approximately $16.9 million to $11 million, cancellation of previously accrued interest, no interest to be paid or accrued on such debt until November 1, 1998, interest on such debt of 8% per annum payable monthly in arrears after November 1, 1998, maturity of such debt extended to December, 2001, with principal payments beginning December 1, 1998 in an amount equal to 50% of excess cash flow as defined in the agreement, and the cancellation of a previously issued warrant to purchase 465,000 shares of the Company's common stock. In addition, the agreement provides for a new loan in the amount of $2.6 million due in December, 2000 with interest payable monthly in arrears at a rate of prime plus 2.5% per annum. These arrangements were made in consideration for a new warrant to purchase 2.8 million shares of common stock with an exercise price of $.01 per share. Proceeds from the new loan were primarily for working capital and existing restaurant upgrades. Page 13 EXHIBIT A PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1997 (In Thousands)
Proforma Adjustments Unaudited -------------------------------------- Proforma 9/30/97 Debit Credit 9/30/97 --------- ----- ------ -------- ASSETS Current Assets: Cash $ 60,925 2,580,000 (1) 2,262,000 (2) $ 378,925 Other Current Assets 1,713,811 125,300 (3) 1,588,511 ----------- ------------ Total Current Assets 1,774,736 1,967,436 Property and equipment 6,819,609 6,819,609 Deferred tax assets 2,560,436 874,768 (4) 804,922 (5) 2,630,282 Costs in excess of assets acquired 6,269,693 6,269,693 Other assets 999,941 205,300 (3) 605,889 (6) 599,352 ----------- ------------ TOTAL ASSETS $18,424,415 $18,286,372 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 4,384,277 875,000 (2) $ 3,509,277 Current portion of long-term debt 16,816,140 16,773,308 (7) 42,832 Deferred franchise fees 65,000 65,000 Payroll and sales tax 1,307,000 1,307,000 (2) 0 ----------- ------------ Total Current Liabilities 22,572,417 3,617,109 Long-term Debt: Long-term liabilities - other 43,953 43,953 Subordinated - note payable 0 5,773,308 (7) 16,773,308 (7) 11,000,000 Senior - note payable 0 2,580,000 (1) 2,580,000 ----------- ------------ 43,953 13,623,953 Common stock 5,518,431 2,800,000 (7) 8,318,431 Retained earnings (deficit) (9,710,386) 2,437,265 (4)(5)(6)(7) (7,273,121) ----------- ------------ Total Stockholders' Equity (deficit) (4,191,955) 1,045,310 ----------- ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $18,424,415 $18,286,372 =========== ============
(1) New loan in the amount of $2,580,000. (2) Use of proceeds from new loan to reduce accounts payable and payroll and sales taxes payable. (3) Recognition of certain financing costs as other assets. (4) Reversal of valuation allowance for deferred tax assets. (5) Recognition of tax liability arising from the transaction. (6) Recording the expense of unamortized financing costs from prior loan agreement. (7) Reduction of previously outstanding net debt from $16,773,308 to $11,000,000, issuance of stock warrants and recognition of the gain on the forgiveness of debt. Page 14