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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, 2004
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 November 10, 2004, there were 16,277,827 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:
Condensed consolidated balance sheets as of December 31, 2003
and September 30, 2004 Page 3
Condensed consolidated statements of operations for the three
months and nine months ended September 30, 2003 and 2004 Page 4
Condensed consolidated statements of cash flows for the
nine months ended September 30, 2003 and 2004 Page 5
Notes to condensed consolidated financial statements Page 6
2
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited
December 31, September 30,
2003 2003
------------ ------------
Assets
------
Current assets:
Cash $ 237,445 $ 430,581
Accounts and notes receivable (net of allowances) 711,385 870,819
Inventories 157,192 144,108
Equipment held for resale -- 75,000
Prepaid expenses 439,901 485,203
Current portion of long-term notes receivable 147,923 157,039
Deferred tax asset - current portion 1,350,000 1,350,000
------------ ------------
Total current assets 3,043,847 3,512,750
------------ ------------
Property and equipment:
Equipment 988,980 1,161,902
Leasehold improvements 86,229 95,510
------------ ------------
1,075,209 1,257,412
Less accumulated depreciation and amortization 441,239 489,451
------------ ------------
Net property and equipment 633,970 767,961
------------ ------------
Deferred tax asset (net of current portion) 8,699,340 8,139,114
Other assets 1,907,133 2,214,758
------------ ------------
Total assets $ 14,284,289 $ 14,634,582
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,057,564 $ 469,200
Note payable to officer 65,840 0
------------ ------------
Total current liabilities 1,123,404 469,200
Long-term obligations:
Notes payable to bank 7,800,000 7,700,000
Subordinated debentures 2,040,000 2,040,000
Participating income notes 859,060 859,060
------------ ------------
Total long-term liabilities 10,699,060 10,599,060
------------ ------------
Stockholders' equity:
Common stock (25,000,000 shares authorized, 16,277,827 outstanding
at December 31, 2003 and September 30, 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) (19,152,404)
------------ ------------
Total stockholders' equity 2,461,825 3,566,322
------------ ------------
Total liabilities and stockholders' equity $ 14,284,289 $ 14,634,582
============ ============
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,
------------- -------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
Revenue:
Royalties and fees $ 1,695,459 $ 1,750,150 $ 4,890,068 $ 5,239,185
Administrative fees and other 50,192 15,654 137,036 90,726
Restaurant revenue 238,367 250,014 664,889 751,932
----------- ----------- ----------- -----------
Total revenue 1,984,018 2,015,818 5,691,993 6,081,842
Operating expenses:
Salaries and wages 286,034 290,541 812,111 854,048
Trade show expense 84,020 86,685 241,920 294,666
Travel expense 61,887 70,804 148,754 191,252
Other operating expenses 179,828 177,524 530,455 532,105
Restaurant expenses 234,105 240,271 652,803 725,741
Depreciation and amortization 16,232 15,306 48,696 48,211
General and administrative 326,281 347,878 944,216 1,034,510
----------- ----------- ----------- -----------
Operating income 795,631 786,808 2,313,037 2,401,309
Interest and other expense 254,844 240,782 768,368 736,586
----------- ----------- ----------- -----------
Income before income tax 540,787 546,026 1,544,669 1,664,723
Income tax 183,867 185,649 525,187 560,226
----------- ----------- ----------- -----------
Net income $ 356,919 360,377 $ 1,019,481 $ 1,104,497
=========== =========== =========== ===========
Earnings per share:
Net income $ .02 $ .02 $ .06 $ .07
Weighted average number of common shares outstanding 16,166,158 16,277,827 16,166,158 16,277,827
Fully diluted earnings per share:
Net income $ .02 $ .02 $ .06 $ .06
Weighted average number of common shares outstanding 17,015,481 17,044,648 17,157,632 17,044,648
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,
2003 2004
----------- -----------
OPERATING ACTIVITIES
Net income $ 1,019,481 $ 1,104,497
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 178,262 114,281
Deferred federal income taxes 525,187 560,226
Changes in operating assets and liabilities (increase) decrease in:
Accounts receivable (125,744) (159,434)
Inventory 11,484 (61,916)
Prepaid expenses (205,906) (45,302)
Other assets (522,724) (282,870)
Increase (decrease) in:
Accounts payable and accrued expenses (681,104) (97,510)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 198,936 1,131,972
INVESTING ACTIVITIES
Purchase of property and equipment (59,952) (114,352)
----------- -----------
NET CASH (USED) IN INVESTING ACTIVITIES (59,952) (114,352)
----------- -----------
FINANCING ACTIVITIES
Payment received on long-term notes receivable -- 109,830
Net proceeds from issuance of subordinated debentures 1,934,919 --
Payment of obligations for discontinued operations (363,553) (768,473)
Payment of principal on outstanding debt (1,563,740) (165,840)
----------- -----------
NET CASH PROVIDED BY (USED BY) FINANCING
ACTIVITIES 7,626 (824,483)
----------- -----------
INCREASE IN CASH 146,610 193,136
Cash at beginning of period 13,180 237,445
----------- -----------
Cash at end of period $ 159,790 $ 430,581
=========== ===========
Supplemental schedule of non-cash investing and financing activities
None.
See accompanying notes to condensed consolidated financial statements.
5
Notes to Unaudited 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
September 30, 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 principal balance of $7,700,000. By the terms of the note it was
to bear 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 into 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
seeking (among other relief) confirmation of the Company's position under the
Indiana Business Combination Law and as to the Company's obligations under the
loan. Summitbridge filed an Answer, as well as a Counterclaim against the
Company and certain of its subsidiaries and principal shareholder to enforce
certain purported guarantees.
Summitbridge also filed a motion for Judgment on the Pleadings as to a portion
of the Complaint filed by the Company. That motion sought for the Court to rule
that the Indiana Business Combination Law does not prevent Summitbridge from
enforcing its purported rights under the loan and related instruments it
purchased from the bank. Summitbridge's motion was briefed and argued and the
Court has denied Summitbridge's motion. The Company intends to continue to
vigorously prosecute its claims against Summitbridge and to defend against
Summitbridge's counterclaims.
Based on the Company's 2001, 2002, 2003 operating results and results thus far
in 2004, 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 and nine-month periods ended September 30,
2003 and 2004
Introduction
- ------------
The Company's strategic direction is to grow its business by franchising
primarily in non-traditional locations.
Earlier this year, the Company improved its cold sub sandwich menu items, 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 15
Tuscano's locations. The Company has awarded 17 additional Tuscano's franchise
agreements to be opened soon. Additionally, the Company has added 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 franchise.
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 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 and nine-month periods ended September 30, 2003
and for September 30, 2004, respectively.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2004 2003 2004
---- ---- ---- ----
Revenue:
Royalties and fees 85.5% 86.8% 85.9% 86.1%
Administrative fees and other 2.5 .8 2.4 1.5
Restaurant revenue 12.0 12.4 11.7 12.4
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Operating expenses:
Salaries and wages 14.4 14.4 14.3 14.0
Trade show expenses 4.2 4.3 4.3 4.8
Travel expense 3.1 3.5 2.6 3.1
Other operating expenses 9.1 8.8 9.3 8.7
Restaurant expenses 11.8 11.9 11.5 11.9
Depreciation and amortization .8 .8 .9 .8
General and administrative 16.4 17.3 16.6 17.0
----- ----- ----- -----
Operating income 40.1 39.0 40.6 39.5
Interest and other expense 12.8 11.9 13.5 12.1
----- ----- ----- -----
Net income before income tax 27.3% 27.1 27.1% 27.4
Income tax 9.3 9.2 9.2 9.2
----- ----- ----- -----
Net income 18.0% 17.9% 17.9% 18.2%
Results of Operations
- ---------------------
Total revenue from royalties and fees increased from $1.70 million to $1.75
million and from $4.89 million to $5.24 million, respectively, for the
three-month and nine-month periods ended September 30, 2004 compared to the
corresponding periods in 2003. That is a 3.2% and 7.1% growth, respectively, for
the three-month and nine-month periods ended September 30, 2004 as compared to
the corresponding periods in 2003. Total revenue increased from $1.98 million to
$2.02 million and from $5.69 million to $6.08 million, or an increase of 1.6%
and 6.8%, respectively, for the three-month and nine-month periods ended
September 30, 2004 compared to the corresponding periods in 2003. The increase
in the royalties and fees was primarily the result of the growth in the number
of franchise locations open and the higher unit sales from some of the most
recent openings. The increase in total revenue was the result of the increase in
royalties and fees partially offset by decrease in administrative fees and other
and the increase in restaurant revenue as a result of
8
operating locations on a temporary basis until they are sold as franchise
locations. The Company has no intention of operating any of these locations
except for the one test location on a permanent basis. They are only to be
operated temporarily until a qualified franchisee is located.
Salaries and wages represented 14.4% of revenue for the three-month periods
ended September 30, 2003 and September 30, 2004. Salaries and wages decreased
from 14.3% of revenue for the nine-month period ended September 30, 2003 to
14.0% of revenue for the corresponding period in 2004. The primary reason for
the decrease in the nine-month period compared to last year was the growth in
revenue with only a very minor increase in salaries by utilizing the existing
staff to support that growth.
Trade show expense increased from 4.2% and 4.3% of revenue for the three-month
and nine-month periods ended September 30, 2003 to 4.3% and 4.8%, respectively,
of revenue for the corresponding periods in 2004. This increase was the result
of increased participation in national trade shows to broaden the company's base
in different venues to create additional and more diversified growth for the
future.
Travel expenses increased from 3.1% and 2.6% of revenue for the three-month and
nine-month periods ended September 30, 2003 to 3.5% and 3.1%, respectively, of
revenue for the corresponding periods in 2004. This increase was primarily the
result of the increase in the number of franchise locations further away from
the home office.
Other operating expenses decreased from 9.1% and 9.3% of revenue for the
three-month and nine-month periods ended September 30, 2003 to 8.8% and 8.7%,
respectively, of revenue for the corresponding periods in 2004. These decreases
were primarily the result of the growth in revenue from additional locations
with an actual decrease in total operating expenses for the three-month period
ended September 30, 2004 and only a minor increase in the nine-month period.
Restaurant expenses increase from 11.8% and 11.5% of revenue for the three-month
and nine-month periods ended September 30, 2003 to 11.9% and 11.9%,
respectively, of revenue for the corresponding periods in 2004. These increases
were the result of more temporary operations until they are sold as franchise
locations. The Company only plans to operate these locations until a franchisee
is located.
General and administrative expense increased from 16.4% and 16.6% of revenue for
the three-month and nine month periods ended September 30, 2003 to 17.3% and
17.0%, respectively, of revenue for the corresponding periods in 2004. These
increases are the result of the growth in revenue not yet offsetting the growth
in general and administrative expenses that were increased in the beginning of
2004 to support planned growth.
Operating income decreased from 40.1% and 40.6% of revenue for the three-month
and nine-month periods ended September 30, 2003 to 39.0% and 39.5%,
respectively, of revenue for the corresponding periods in 2004. The decrease in
operating income as a percentage of revenue was a result of increasing the
capacity for future growth. It is anticipated that the operating income as a
percent of revenue will improve as revenue continues to grow from the growth in
the number of units.
9
Interest expense decreased from 12.8% and 13.5% of revenue for the three-month
and nine-month periods ended September 30, 2003 to 11.9% and 12.1%,
respectively, of revenue for the corresponding periods in 2004. This decrease
was the result of the revenue increases from additional growth while the
interest cost actually declined slightly.
Net income increased from approximately $357 thousand to $360 thousand and from
$1.02 million to $1.10 million, respectively, for the three-month and nine-month
periods ended September 30, 2004 compared to corresponding periods in 2003.
These amounts reflected a 1.0% and 8.3% growth, respectively, for the
three-month and nine-month periods ended September 30, 3004 as compared to the
corresponding periods in 2003. The primary reason for this increase was the
continued growth in the number of franchised units. This was partially offset by
increased operating costs in preparation for planned growth in the future.
Management believes that the operating structure in place will not change
significantly from continue growth in the near future and, therefore, as
additional new units open the net income should continue to increase.
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.
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 principal balance of $7,700,000. By the terms of the note it was
to bear 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 into 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 filed a Complaint For Declaratory Judgment, Money Damages and Jury
Trial in the Marion Superior Court Civil Division against Summitbridge seeking
(among other relief) confirmation of the Company's position under the Indiana
Business Combination Law and as to the Company's obligations under the loan.
Summitbridge filed an Answer, as well as a Counterclaim against the Company and
certain of its subsidiaries and principal shareholder to enforce certain
purported guarantees.
10
Summitbridge also filed a motion for Judgment on the Pleadings as to a portion
of the Complaint filed by the Company. That motion sought for the Court to rule
that the Indiana Business Combination Law does not prevent Summitbridge from
enforcing its purported rights under the loan and related instruments it
purchased from the bank. Summitbridge's motion was briefed and argued and the
Court has ruled by denying Summitbridge's motion. The Company intends to
continue to vigorously prosecute its claims against Summitbridge and to defend
against Summitbrige's counterclaims.
The statements contained above 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%.
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.
11
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 above in
Part I under "ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources",
the Company is involved in litigation involving a dispute regarding its
obligations under certain financing agreements. Although there can be
no assurance, the Company believes that the outcome of current legal
proceedings, individually or in the aggregate, will not have a material
adverse effect upon the Company.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: See Exhibit Index appearing on page 13.
12
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
13
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 ___, 2004 -------------------------------------
Paul W. Mobley, Chairman of the Board
14