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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 March 31, 2004
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 126-2 of the Exchange Act).
Yes No X
--- ---
As of May 10, 2004 there were 16,277,827 shares of common stock outstanding.
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, 2003 and March 31, 2004 Page 3
Condensed consolidated statements of operations
for the three months ended March 31, 2003
and 2004 Page 4
Condensed consolidated statements of cash flows
for the three months ended March 31, 2003
and 2004 Page 5
Notes to condensed consolidated financial statements Page 6
2
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Audited) (Unaudited)
December 31, March 31,
2003 2004
------------ ------------
Assets
------
Current assets:
Cash $ 237,445 $ 157,400
Accounts and notes receivable (net of allowances) 711,385 790,706
Inventories 157,192 165,025
Prepaid expenses 439,901 478,455
Current portion of long-term notes receivable 147,923 150,902
Deferred tax asset - current portion 2,250,000 2,250,000
------------ ------------
Total current assets 3,943,847 3,992,488
------------ ------------
Property and equipment:
Equipment 988,980 1,073,881
Leasehold improvements 86,229 86,229
------------ ------------
1,075,209 1,160,110
Less accumulated depreciation and amortization 441,239 457,473
------------ ------------
Net property and equipment 633,970 702,638
------------ ------------
Deferred tax asset (net of current portion) 7,799,340 7,630,445
Other assets 1,907,133 1,955,756
------------ ------------
Total assets $ 14,284,289 $ 14,281,327
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,057,564 $ 826,749
Note payable to officer 65,840 65,840
Current portion of long-term notes payable 600,000 --
------------ ------------
Total current liabilities 1,723,404 892,589
------------ ------------
Long-term obligations:
Notes payable net of current portion 7,200,000 7,700,000
Subordinated debentures 2,040,000 2,040,000
Participating income notes 859,060 859,060
------------ ------------
Total long-term liabilities 10,099,060 10,599,060
------------ ------------
Stockholders' equity:
Common stock (25,000,000 shares authorized, 16,277,827 outstanding
as of December 31, 2003 and March 31, 2004) 17,789,452 17,789,452
Preferred stock (5,000,000 shares authorized) 4,929,274 4,929,274
Accumulated deficit (20,256,901) (19,929,048)
------------ ------------
Total stockholders' equity 2,461,825 2,789,678
------------ ------------
Total liabilities and stockholders' equity $ 14,284,289 $ 14,281,327
============ ============
See accompanying notes to condensed consolidated financial statements.
3
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
-------------------------
2003 2004
----------- -----------
Revenue:
Royalties and fees $ 1,530,683 $ 1,696,561
Administrative fees and other 39,335 52,941
Restaurant revenue 200,762 193,826
----------- -----------
Total revenue 1,770,780 1,943,328
Operating expenses:
Salaries and wages 262,082 275,096
Trade show expense 78,607 124,587
Travel expense 46,951 64,667
Other operating expenses 185,019 179,095
Restaurant expenses 198,164 186,195
Depreciation and amortization 16,232 16,233
General and administrative 311,714 355,341
----------- -----------
Operating income 672,011 742,115
Interest and other expense 260,628 245,366
----------- -----------
Income before income tax 411,383 496,749
Income tax 139,870 168,895
----------- -----------
Net income $ 271,513 $ 327,854
=========== ===========
Basic earnings per share:
Net income $ .02 $ .02
=========== ===========
Basic weighted average number of common shares outstanding 16,166,158 16,277,824
Diluted earnings per share:
Net income $ .02 $ .02
=========== ===========
Diluted weighted average number of common shares outstanding 17,069,783 17,309,176
See accompanying notes to condensed consolidated financial statements.
4
Noble Roman's, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
March 31,
----------------------
OPERATING ACTIVITIES 2003 2004
- -------------------- --------- ---------
Net income $ 271,513 $ 327,854
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 68,526 41,054
Deferred federal income taxes 139,870 168,895
Changes in operating assets and liabilities (increase) decrease in:
Accounts receivable 99,806 (79,321)
Inventories (213) (7,833)
Prepaid expenses (22,149) (38,554)
Other assets (325,393) 102
Accounts payable (72,610) (75,048)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 159,349 337,150
--------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment (3,572) (17,052)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (3,572) (17,052)
--------- ---------
FINANCING ACTIVITIES
Payments received on long-term notes receivable -- 35,883
Payment of obligations from discontinued operations (143,876) (336,026)
Payment of principal on outstanding debt -- (100,000)
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (143,876) (400,143)
--------- ---------
INCREASE (DECREASE) IN CASH 11,901 (80,045)
Cash at beginning of period 13,180 237,445
--------- ---------
Cash at end of period $ 25,081 $ 157,400
========= =========
Supplemental schedule of non-cash investing and financing activities
None.
See accompanying notes to condensed consolidated financial statements.
5
Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
The interim condensed consolidated financial statements, included herein, are
unaudited, but 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. The results for the quarter ended
March 31, 2004 are not necessarily indicative of the results to be expected for
the full year ending December 31, 2004.
The Company has an outstanding note payable originally made in favor of a bank
with an unpaid balance of $7,700,000. By the terms of the note it bears interest
of 8.75% per annum payable monthly in arrears. Summitbridge National
Investments, LLC reported that it had purchased this note in October 2003, as
well as convertible preferred stock of the Company with an aggregate liquidation
preference of $4,929,275 (convertible to 1,643,092 shares of common stock of the
Company), 3,214,748 shares of common stock and a warrant to purchase 385,000
shares of common stock at an exercise price of $.01 per share. The preferred
stock, common stock and warrant were issued to the bank lender in conjunction
with various financing transactions. Under the Indiana Control Share Acquisition
Law, Summitbridge currently has no voting rights with respect to the shares it
acquired. The Company also has advised Summitbridge of the Company's position
that the Indiana Business Combination Law prohibits Summitbridge from engaging
in certain transactions with the Company until the fifth anniversary of the
acquisition, including receipt of payment in respect of the debt obligation and
receipt of common stock issuable upon conversion of the convertible preferred
stock. The Company also believes that the warrants have expired and no longer
are exercisable.
The Company has filed a Complaint For Declaratory Judgment, Money Damages and
Jury Trial in the Marion Superior Court Civil Division against Summitbridge. To
date, Summitbridge has not formally responded to the Complaint, however,
Summitbridge informally has advised the Company that it disagrees with the
Company's position as to the applicability of the Indiana Business Combination
Law. The Company intends to vigorously prosecute its claims against
Summitbridge.
Based on the Company's 2001, 2002, 2003 and first quarter of 2004 operating
results, its business plan, the number of franchise units now open, the backlog
of units sold to be opened in the future 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, 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.
6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Noble Roman's, Inc. and Subsidiaries
Results of Operations - Three-month periods ended March 31, 2003 and 2004
Introduction
- ------------
The Company's strategic direction is to grow its business by franchising
primarily in non-traditional locations.
The Company recently took its cold sub sandwich menu items, improved them and
expanded the offerings into a separate concept named Tuscano's Italian Style
Subs. Tuscano's was designed to be comfortably familiar from a customer's
perspective, but with many distinctive features that include an Italian-themed
menu. The franchise fee and ongoing royalty for a Tuscano's is identical to that
charged for a Noble Roman's Pizza franchise. To date, franchisees have opened
two Tuscano's locations in Virginia, and the Company has awarded four additional
Tuscano's franchise agreements for Illinois, Georgia, Virginia and Mississippi
with ongoing discussions for several more agreements in the coming weeks.
Additionally, the Company plans on adding Tuscano's to its corporate test unit
during May 2004. For the most part, the Company expects to award Tuscano's
franchises for the same facilities as Noble Roman's Pizza franchises, although
Tuscano's franchises are also available for locations that do not have a Noble
Roman's Pizza.
The Company continues its focus of awarding franchise agreements for both Noble
Roman's Pizza and Tuscano's Italian Style Subs in non-traditional venues such as
hospitals, military bases, universities, convenience stores, attractions,
entertainment facilities, casinos, airports, travel plazas, office complexes and
hotels. Noble Roman's has sold franchises in 44 states from coast-to-coast
within the United States. In addition, it has sold franchise agreements for
military bases in Puerto Rico, Guam and Italy, and for entertainment facilities
and convenience stores in Canada.
Both franchising concepts were designed to capitalize on the rapid growth of
non-traditional locations for quick service restaurants and to be simple to
operate, requiring a modest investment, with minimal staffing requirements while
serving great tasting menu items. The concepts were designed to also be
convenient and quick for its customers. Based on the Company's experience, we
believe that franchising for non-traditional locations offers many opportunities
for growth for the foreseeable future.
Based on the Company's 2001, 2002 and 2003 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 2004,
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. 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.
7
The Company will continue to evaluate the need for a valuation allowance on a
quarterly basis in the future.
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 periods ended March 31, 2003 and for March 31,
2004, respectively.
Consolidated Statement of Operations
Noble Roman's, Inc. and Subsidiaries
Three Months Ended
March 31,
-----------------
2003 2004
------ ------
Revenue:
Royalties and fees 86.5% 87.3%
Administrative fees and other 2.2 2.7
Restaurant revenue 11.3 10.0
----- -----
Total revenue 100.0 100.0
Operating expenses:
Salaries and wages 14.8 14.2
Trade show expenses 4.4 6.4
Travel expense 2.7 3.3
Other operating expenses 10.4 9.2
Restaurant expenses 11.2 9.6
Depreciation and amortization .9 .8
General and administrative 17.6 18.3
----- -----
Operating income 38.0 38.2
Interest 14.7 12.6
----- -----
Income before income tax 23.2 25.6
Income tax 7.9 8.7
----- -----
Net income 15.4% 16.9%
===== =====
2004 Compared wth 2003
- ----------------------
Total revenue increased from approximately $1.77 million for the three-month
period ended March 31, 2003 to $1.94 million for the three-month period ended
March 31, 2004. This was an increase of approximately 9.7%. The primary reason
for this increase was the increase in royalties and fees as a result of the
continued growth in the number of franchise locations.
Salaries and wages decreased from 14.8% of revenue for the three-month period
ended March 31, 2003 to 14.2% of revenue for the three-month period ended March
31, 2004. This decrease was primarily the result of the growth in the number of
franchised locations while utilizing approximately the same operational
structure. This trend should continue as the Company continues to sell more
franchises.
8
Trade show expense increased from 4.4% of revenue for the three-month period
ended March 31, 2003 to 6.4% of revenue for the three-month period ended March
31, 2004. This increase was primarily the result of scheduling more national
trade shows to attract franchisees from additional venues to further diversify
the Company's target market.
Travel expense increased from 2.7% of revenue for the three-month period ended
March 31, 2003 to 3.3% of revenue for the three-month period ended March 31,
2004. This increase was primarily the result of more national growth further
from the Company headquarters which requires greater travel. This trend should
reverse as more franchises open in those markets allowing for better utilization
of personnel.
Other operating expenses decreased from 10.4% of revenue for the three-month
period ended March 31, 2003 to 9.2% of revenue for the three-month period ended
March 31, 2004. This decrease was the result of the continued growth of revenue
by the increased number of locations while utilizing essentially the same
operating structure.
Restaurant expenses decreased from 11.2% of revenue for the three-month period
ended March 31, 2003 to 9.6% of revenue for the three-month period ended March
31, 2004. This decrease was primarily the result of the increase in revenue from
growth in franchising while maintaining the same operating restaurants.
General and administrative expense increased from 17.6% of revenue for the
three-month period ended March 31, 2003 to 18.3% of revenue for the three-month
period ended March 31, 2004. This increase was primarily the result of preparing
for additional expansion. The Company maintained essentially the same general
and administrative expense for the past three years. The Company expects that
the general and administrative expense will trend downward as a percent of
revenue as a result of additional growth in the future.
Interest and other expense decreased from 14.7 % of revenue for the three-month
period ended March 31, 2003 to 12.6% of revenue for the three-month period ended
March 31, 2004. This decrease was primarily the result of repaying the majority
of the Participating Income Notes in late 2003 by issuing new Subordinated
Debentures at more attractive interest rates, and as a result of the growth in
revenue without additional borrowing. This trend should continue as the Company
continues to grow its revenue by additional franchising.
Net income increased from approximately $272 thousand for the three-month period
ended March 31, 2003 to approximately $328 thousand for the three-month period
ended March 31, 2004. This was approximately a 20.75% increase. The increase was
a result of the continued growth in revenues from franchising by utilizing
approximately the same operating and administrative structure. This trend should
continue as the Company continues to grow by additional franchising.
Liquidity and Capital Resources
- -------------------------------
The Company's strategic direction is to grow its business by franchising
primarily in non-traditional locations. This strategy does not require
significant growth in capital.
9
As a result of the Company's strategy, cash flow generated from operations, the
Company's current rate of growth by franchising plus the anticipated growth, the
Company believes it will have sufficient cash flow to meet its obligations and
to carry out its current business plan.
The Company has an outstanding note payable originally made in favor of a bank
with an unpaid balance of $7,700,000. By the terms of the note it bears interest
of 8.75% per annum payable monthly in arrears. Summitbridge National
Investments, LLC reported that it had purchased this note in October 2003, as
well as convertible preferred stock of the Company with an aggregate liquidation
preference of $4,929,275 (convertible to 1,643,092 shares of common stock of the
Company), 3,214,748 shares of common stock and a warrant to purchase 385,000
shares of common stock at an exercise price of $.01 per share. The preferred
stock, common stock and warrant were issued to the bank lender in conjunction
with various financing transactions. Under the Indiana Control Share Acquisition
Law, Summitbridge currently has no voting rights with respect to the shares it
acquired. The Company also has advised Summitbridge of the Company's position
that the Indiana Business Combination Law prohibits Summitbridge from engaging
in certain transactions with the Company until the fifth anniversary of the
acquisition, including receipt of payment in respect of the debt obligation and
receipt of common stock issuable upon conversion of the convertible preferred
stock. The Company also believes that the warrants have expired and no longer
are exercisable.
The Company has filed a Complaint For Declaratory Judgment, Money Damages and
Jury Trial in the Marion Superior Court Civil Division against Summitbridge. To
date, Summitbridge has not formally responded to the Complaint, however,
Summitbridge informally has advised the Company that it disagrees with the
Company's position as to the applicability of the Indiana Business Combination
Law. The Company intends to vigorously prosecute its claims against
Summitbridge.
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, changes in
prices or supplies of food ingredients and labor and disputes regarding the
Company's obligations under certain financing agreements. 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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company presently does not use any derivative financial instruments to hedge
its exposure to adverse fluctuations in interest rates, foreign exchange rates,
fluctuations in commodity prices or other market risks, nor does the Company
invest in speculative financial instruments. Borrowings with the bank bear
interest at 8.75%.
10
Due to the nature of the Company's borrowings, it has concluded that there is no
material market risk exposure and, therefore, no quantitative tabular
disclosures are required.
ITEM 4. Controls and Procedures
Based on his evaluation as of the end of the period covered by this report, Paul
W. Mobley, the Company's Chief Executive Officer and Chief Financial Officer,
has concluded that the Company's disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) are effective. There have been no changes in internal controls over
financial reporting during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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. As described under "MD&A
- Liquidity and Capital Resources", the Company is involved in
litigation involving a dispute regarding its obligations under certain
financing agreements. 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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: See Exhibit Index appearing on page 12.
11
Index to Exhibits
Exhibit
- -------
31.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
12
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: May 12, 2004 /s/ Paul W. Mobley
-------------------------------------
Paul W. Mobley, Chairman of the Board
13