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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, 2002
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 X No
--- ---
As of November 4, 2002, there were 16,051,158 shares of Common Stock, no par
value, outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
The following condensed consolidated financial statements are included
herein:
Notes to condensed consolidated financial statements Page 2
Condensed consolidated balance sheets as of December 31, 2001
and September 30, 2002 Page 3
Condensed consolidated statements of operations for the three
months and nine months ended September 30, 2001 and 2002 Page 4
Condensed consolidated statements of cash flows for the
nine months ended September 30, 2001 and 2002 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.
Notes
- -----
Based on the Company's 2000 and 2001 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 2002, 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, the majority of
which expire between 2012 and 2016. Therefore, no valuation allowance was
established for its deferred tax asset. 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.
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 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.
2
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, September 30,
2001 2002
------------ ------------
Assets
Current assets:
Cash $ 25,203 $ 13,153
Accounts and notes receivable 621,679 794,402
Inventories 82,669 118,552
Prepaid expenses 215,588 296,668
Deferred tax asset - current portion 1,348,132 1,348,132
------------ ------------
Total current assets 2,293,270 2,570,907
------------ ------------
Property and equipment:
Equipment 793,690 896,317
Leasehold improvements 84,229 86,229
------------ ------------
877,919 982,545
Less accumulated depreciation and amortization 309,936 353,073
------------ ------------
Net property and equipment 567,982 629,473
------------ ------------
Deferred tax asset 8,827,298 8,542,756
Other assets 1,503,616 1,686,535
------------ ------------
Total assets $ 13,192,167 $ 13,429,671
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,059,014 $ 1,616,748
Note payable to officer 65,840 65,840
Deferred franchise fees 251,850 273,000
------------ ------------
Total current liabilities 2,376,704 1,955,588
------------ ------------
Long-term obligations:
Notes payable to Provident Bank net of warrant value of $140,318
at December 31, 2001 and $85,607 at September 30, 2002 7,859,682 7,914,393
Notes payable to various funds affiliated with Geometry Group
net of warrant valuation of $91,667 at December 31, 2001 and
$40,104 at September 30, 2002 2,281,133 2,332,696
------------ ------------
Total long-term liabilities 10,140,815 10,247,089
------------ ------------
Stockholders' equity:
Common stock (25,000,000 shares authorized, 16,051,158
outstanding at December 31, 2001 and at September 30, 2002) 17,789,452 17,789,452
Preferred stock (5,000,000 shares authorized) 4,929,274 4,929,274
Accumulated deficit (22,044,079) (21,491,731)
------------ ------------
Total stockholders' equity 674,647 1,226,994
------------ ------------
Total liabilities and stockholders' equity $ 13,192,167 $ 13,429,671
============ ============
See accompanying notes to condensed consolidated financial statements.
3
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Revenue:
Royalties and fees $ 1,283,640 $ 1,481,736 $ 3,755,816 $ 4,080,473
Administrative fees and other 97,350 49,290 492,529 223,678
Restaurant revenue 79,904 253,805 209,969 503,078
----------- ----------- ----------- -----------
Total revenue 1,460,895 1,784,831 4,458,314 4,807,228
Operating expenses:
Salaries and wages 259,601 282,170 747,700 798,430
Trade show expense 45,000 51,142 135,000 159,995
Travel expense 48,116 66,986 147,022 171,382
Other operating expenses 145,580 171,909 476,375 444,119
Restaurant expenses 74,953 255,697 199,167 482,369
Depreciation 11,335 14,532 34,087 43,136
General and administrative 300,309 321,534 886,758 913,395
----------- ----------- ----------- -----------
Operating income 576,001 620,862 1,832,205 1,794,402
Interest and other expense 314,712 334,840 928,758 957,513
----------- ----------- ----------- -----------
Income before income tax 261,289 286,021 903,447 836,889
Income tax 88,838 97,247 307,172 284,542
----------- ----------- ----------- -----------
Net income $ 172,451 $ 188,774 $ 596,275 $ 552,347
=========== =========== =========== ===========
Earnings per share:
Net income $ .01 $ .01 $ .04 $ .04
Weighted average number of common shares outstanding
15,438,506 16,051,158 14,443,221 16,051,158
Fully diluted earnings per share:
Net income $ .01 $ .01 $ .04 $ .03
Weighted average number of common shares outstanding
17,851,333 16,859,229 16,856,048 16,859,229
See accompanying notes to condensed consolidated financial statements.
4
Noble Roman's, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2001 2002
---- ----
OPERATING ACTIVITIES
Net income $ 596,275 $ 552,347
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 34,087 43,136
Non-cash interest 110,317 156,882
Deferred federal income taxes 307,172 284,542
Changes in operating assets and liabilities (increase) decrease in:
Accounts receivable (49,004) (172,723)
Inventory 8,799 (35,882)
Prepaid expenses 34,408 (81,081)
Other assets (315,811) (233,527)
Increase (decrease) in:
Accounts payable (557,369) 317,336
Deferred franchise fee (131,400) 21,150
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 37,474 852,179
INVESTING ACTIVITIES
Purchase of property and equipment (86,922) (104,627)
Issuance of capital stock net of issuance cost 51,428 --
--------- ---------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (35,494) (104,627)
FINANCING ACTIVITIES
Proceeds from long-term debt -- --
Principal payments on long-term debt and capital lease obligations -- --
Payment of obligations for discontinued operations -- (759,602)
--------- ---------
NET CASH (USED) BY FINANCING ACTIVITIES (759,602)
--------- ---------
INCREASE (DECREASE) IN CASH 1,980 (12,050)
Cash at beginning of period 9,406 25,203
--------- ---------
Cash at end of period $ 11,386 $ 13,153
========= =========
Supplemental schedule of non-cash investing and financing activities
None.
See accompanying notes to condensed consolidated financial statements.
5
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 nine-month periods ended September 30,
2001 and 2002
Introduction
- ------------
Over the last several years, given the potential size of the opportunities in
the non-traditional and co-branding segments of the industry, the Company made
the strategic decision to focus its business on franchising to non-traditional
and co-branding locations and away from operating full-service, traditional
restaurants. During 2000, the Company completed that transition.
The franchise program for non-traditional and co-brand locations was developed
and launched in 1997. Since inception in 1997, the Company has awarded over
1,000 franchises in 44 states plus Washington, D.C., Guam, Puerto Rico, Italy
and Canada. The program was designed based on the Company's reputation for
superior tasting pizza products. It is a complete foodservice program, although
primarily focused on pizza, and the concept can be tailored easily for the
different venues and for different locations within a venue. The systems are
designed to provide excellent taste and quality with simplicity and cost
effectiveness. Operations require minimal training and low staffing levels, has
a food cost structure that is very attractive and carries a low investment cost,
making the economics attractive to the franchisee. The Company believes that
franchising these type facilities offers opportunities for substantial growth
for the foreseeable future.
After over two years worth of development, another variation of the concept
called The Noble Roman's Cafe-To-Go, was launched in August 2002 and is being
heavily promoted across the country. To date more than 20 of these units have
been sold. This concept was developed to provide pizza-focused foodservice for
locations where they need and want to add foodservice but require something even
simpler than the standard concept. The Cafe-To-Go requires no additional labor
during operations, simply someone to keep the shelves stocked and to collect the
money from the sale of the products. The innovative, patent-pending "Pizza Bake
Ovens" produce fresh baked, fantastic tasting personal pizzas in minutes - there
is no other system like this on the market today that the Company is aware of.
The Company has undertaken an aggressive marketing plan nationwide, hired
additional sales personnel and believes there to be a very large market whereby
the Company can accelerate its growth with this concept now and in the
foreseeable future.
Based on the Company's 2000 and 2001 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, and
the Company's trends and the results of its operations thus far in 2002,
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. 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.
6
The following table sets forth the percentage relationship to total revenue of
the listed items included in Noble Roman's condensed consolidated statements of
operations for the three-month and nine-month periods ended September 30, 2001
and 2002, respectively.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Revenue:
Royalties and fees 87.8% 83.0% 84.3% 84.8%
Administrative fees and other 6.7 2.8 11.0 4.7
Restaurant revenue 5.5 14.2 4.7 10.5
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Operating expenses:
Salaries and wages 17.7 15.8 16.7 16.7
Trade show expenses 3.1 2.9 3.0 3.3
Travel expense 3.3 3.8 3.3 3.6
Other operating expenses 10.0 9.6 10.7 9.2
Restaurant expenses 5.1 14.3 4.5 10.0
Depreciation .8 .8 .8 .9
General and administrative 20.6 18.0 19.9 19.0
----- ----- ----- -----
Operating income 39.4 34.8 41.1 37.3
Interest 21.5 18.8 20.8 19.9
----- ----- ----- -----
Net income before income tax 17.9% 16.0% 20.3% 17.4%
2002 Compared wth 2001
- ----------------------
Total revenue increased from $1.461 million to $1.785 million and from $4.458
million to $4.807 million, respectively, for the three-month and nine-month
periods ended September 30, 2002 compared to the same periods in 2001. This
represents a 22.2% and a 7.8% increase for the three- month and nine-month
periods ended September 30, 2002, respectively, as compared to the same periods
in 2001.
Revenue from royalties and fees increased from $1.284 million to $1.482 million
and from $3.756 million to $4.080 million, respectively, for the three-month and
nine-month periods ended September 30, 2002 compared to the same periods in
2001. That is a 15.4% and 8.6% growth, respectively, for the three-month and
nine-month periods ended September 30, 2002 as compared to the same periods in
2001. The increase in the royalties and fees was primarily the result of the
growth in the number of franchise locations open.
Revenues from administrative fees and other decreased from $97 thousand to $49
thousand and from $493 thousand to $224 thousand for the three-month and
nine-month periods ended September 30, 2002, respectively, compared to the same
periods in 2001. This decrease was the result of the company ceasing to provide
accounting services for a fee to certain of its full-service franchisees.
7
Restaurant revenue increased from $80 thousand to $254 thousand and from $210
thousand to $503 thousand for the three-month and nine-month periods ended
September 30, 2002, respectively, compared to the same periods in 2001. This
increase was the result of the sales at the test store increasing by
approximately 20% and by the company operating, in 2002, two small military base
locations pending their sale to a franchisee. These two units will be franchised
as soon as a qualified franchisee can be identified.
Salaries and wages decreased from 17.7% and 16.7% of revenue for the three-month
and nine-month periods ended September 30, 2001 to 15.8% and 16.7%,
respectively, of revenue for the same periods in 2002. This decrease was
primarily the result of the growth in the number of franchise locations open
utilizing the same operational overhead structure partially offset by the hiring
of additional sales executives for the purpose of accelerating growth in the
future.
Trade show expenses decreased from 3.1% of revenue for the three-month period
ending September 30, 2001 to 2.9% for the same period in 2002. Trade show
expenses increased from 3.0% of revenue for the nine-month period ending
September 30, 2001 to 3.3% for the same period in 2002. The reason for the
decrease in the most recent three-month period was the moderate decline in
actual cost combined with the growth in revenue as a result of continued new
unit growth. The reason for the increase for the nine-month period is a result
of increasing the focusing on small demonstrations for potential franchisees as
opposed to conventional trade shows.
Travel expenses increased from 3.3% and 3.3% of revenue for the three-month and
nine-month periods ended September 30, 2001 to 3.8% and 3.6%, respectively, of
revenue for the same periods in 2002. This increase is a result of the growth in
units coming from throughout the United States rather than more focused on the
Midwest area where the Company is headquartered.
Other operating expenses decreased from 10.0% and 10.7% of revenue for the
three-month and nine-month periods ended September 30, 2001 to 9.6% and 9.2%,
respectively, of revenue for the same periods in 2002. This decrease is
primarily the result of the growth in the number of franchise locations open
without any significant cost increase for the latest three-month period and an
actual cost decrease for the nine-month period.
General and administrative expense decreased from 20.6% and 19.9% of revenue for
the three-month and nine-month periods ended September 30, 2001 to 18.0% and
19.0%, respectively, of revenue for the same periods in 2002. The reason for
this decrease was the continued growth in the number of franchise units open
utilizing the same administrative structure.
Operating income increased from $576 thousand to $621 thousand and decreased
from $1.832 million to $1.794 million for the three-month and nine-month periods
ended September 30, 2002 respectively, when compared to the same periods in
2001.
Interest expense increased from $315 thousand to $335 thousand and from $929
thousand to $958 thousand for the three-month and nine-month periods ended
September 30, 2002, respectively, when compared to the same periods in 2001.
This increase is the result of the additional interest on the participating
income notes. The interest on the participating income notes is based on revenue
and, therefore, increased because of the growth in revenue. By the terms of the
Participating Income Notes, after certain payout targets are received, the
percentage of the revenues for interest costs decreases by two-thirds. This
decrease in rate will occur approximately October 31, 2002.
8
Liquidity and Capital Resources
- -------------------------------
Over the last several years, given the potential size of the opportunities in
the non-traditional and co-branding market segments, the Company made the
strategic decision to refocus its business on franchising to non-traditional and
co-branding locations and away from operating full-service, traditional
restaurant locations. During 2000, the Company completed that transition.
As a result of the Company's current strategy, cash flow generated from
operations, the Company's current rate of growth by franchising plus anticipated
future growth, the Company believes it will have sufficient cash flow to meet
its obligations and to carry out its current business plan.
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 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.
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.
9
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K.
Exhibit 99.1 Certification of C.E.O.
Exhibit 99.2 Certification of C.F.O.
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: November 7, 2002 /s/ Paul Mobley
------------------------ -------------------------------------
Paul W. Mobley, Chairman of the Board
10