10-Q 1 nob10q.txt United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange --- Act of 1934 For the quarterly period ended June 30, 2001 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 August 10, 2001, there were 15,382,479 shares of Common Stock, no par value, outstanding. PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements The following condensed consolidated financial statements are included herein: Note to condensed consolidated financial statements Page 2 Condensed consolidated balance sheets as of December 31, 2000 and June 30, 2001 Page 3 Condensed consolidated statements of operations for the three months and six months ended June 30, 2000 and 2001 Page 4 Condensed consolidated statements of cash flows for the three months and six months ended June 30, 2000 and 2001 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 1999, 2000 and the first six months of 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, 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. The Company will continue to evaluate the need for a valuation allowance on a quarterly basis in the future. The statements contained in Management's Discussion and Analysis concerning the Company's future revenues, profitability, financial resources, market demand and product development are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) relating to the Company that are based on the beliefs of the management of the Company, as well as assumptions and estimates made by and information currently available to the Company's management. The Company's actual results in the future may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company's operations and business environment including, but not limited to: competitive factors and pricing pressures, shifts in market demand, general economic conditions and other factors, including (but not limited to) changes in demand for the Company's products or franchises, the impact of competitors' actions, and changes in prices or supplies of food ingredients and labor. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. 2 Noble Roman's, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
(Audited) (Unaudited) December 31, June 30, Assets 2000 2001 ------ ------------ ------------ Current assets: Cash $ 9,406 $ 9,801 Accounts and notes receivable 1,146,492 995,910 Inventories 74,587 86,181 Prepaid expenses 203,460 163,479 Deferred tax assets - current portion 1,122,551 1,122,551 ------------ ------------ Total current assets 2,556,496 2,377,921 Property and equipment: Equipment 822,046 903,405 Leasehold improvements 84,229 84,229 ------------ ------------ 906,275 987,634 Less accumulated depreciation and amortization 377,865 402,155 ------------ ------------ Net property and equipment 528,410 585,479 Deferred tax asset 8,502,555 8,284,221 Other assets 1,407,307 1,586,223 ------------ ------------ Total assets $ 12,994,768 $ 12,833,844 ============ ============ Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable and accrued expenses $ 1,013,342 $ 434,091 Note payable officer 65,840 65,840 Deferred franchise fees 228,500 100,625 ------------ ------------ Total current liabilities 1,307,682 600,556 Long-term obligations: Notes payable to Provident Bank net of warrant value of $213,266 at December 31, 2000 and $176,792 at June 30, 2001 7,786,734 7,823,208 Notes payable to various funds affiliated with Geometry Group net of warrant valuation of $159,618 at December 31, 2000 and $125,243 at June 30, 2001 2,212,383 2,246,758 ------------ ------------ Total long-term liabilities 9,999,117 10,069,966 Stockholders' equity Common stock (25,000,000 shares authorized, 13,593,701 outstanding at December 31, 2000 and 15,382,479 as of June 30, 2001) 17,734,495 17,785,923 Preferred Stock (5,000,000 shares authorized) 4,929,274 4,929,274 Accumulated deficit (20,975,800) (20,551,875) ------------ ------------ Total stockholder's equity 1,687,969 2,163,322 ------------ ------------ Total liabilities and stockholder's equity $ 12,994,768 $ 12,833,844 ============ ============
See accompanying note to condensed consolidated financial statements. 3 Noble Roman's, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 2000 2001 2000 2001 ----------- ----------- ----------- ----------- Royalties and fees $ 1,213,191 $ 1,358,178 $ 2,177,523 $ 2,602,240 Administrative fees and other 149,062 193,639 421,177 395,179 ----------- ----------- ----------- ----------- Total revenue 1,362,253 1,551,817 2,598,701 2,997,419 Operating expenses: Salaries and wages 245,090 270,857 483,981 532,167 Trade show expense 60,000 72,846 120,000 144,561 Travel expense 77,549 40,808 145,962 98,906 Other operating expenses 122,866 209,064 222,002 356,380 Depreciation and amortization 9,812 12,950 19,614 22,752 General and administrative 311,368 313,745 636,374 586,449 ----------- ----------- ----------- ----------- Operating income 535,568 631,548 970,769 1,256,204 Interest and other expense 320,775 307,166 627,996 614,046 ----------- ----------- ----------- ----------- Income before income taxes 214,793 324,382 342,773 642,158 Income tax 73,030 109,237 116,543 218,334 ----------- ----------- ----------- ----------- Net income $ 141,763 $ 215,145 $ 226,230 $ 423,824 =========== =========== =========== =========== Earnings per share: Net income .01 .02 .02 .03 Weighted average number of common shares 10,919,287 14,197,229 10,078,954 13,937,331 outstanding Fully diluted earnings per share: Net income .01 .01 .02 .03 Weighted number of common shares outstanding 15,077,170 16,610,055 14,236,837 16,350,158
See accompanying notes to condensed consolidated financial statements. 4 Noble Roman's, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June, --------------------------- OPERATING ACTIVITIES 2000 2001 ------------------- ----------- ----------- Net income $ 226,230 $ 423,824 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 19,614 22,752 Non-cash interest 92,196 72,489 Deferred federal income taxes 179,367 218,334 Changes in operating assets and liabilities (increase) decrease in: Accounts receivable (299,811) 150,582 Inventory 146,605 (11,594) Prepaid expenses (204,807) 39,981 Other assets 37,829 (178,916) Increase (decrease) in: Accounts payable (986,968) (579,251) Other current liabilities (1,551,955) -- Deferred franchise fee 108,500 (127,875) ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,233,200) 30,326 INVESTING ACTIVITIES Purchase of property and equipment (27,407) (81,359) Issuance of capital stock net of issuance cost 2,254,000 51,428 ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,226,593 (29,931) FINANCING ACTIVITIES Proceeds from long-term debt -- -- Principal payments on long-term debt and capital lease obligations (1,546) -- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES (1,546) -- ----------- ----------- INCREASE (DECREASE) IN CASH (8,153) 395 Cash at beginning of period 29,913 9,406 ----------- ----------- Cash at end of period $ 21,760 $ 9,801 =========== ===========
Supplemental Schedule of non-cash investing and financing activities None. See accompanying note 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 six-month periods ended June 30, 2000 and 2001 Introduction The Company's strategic business plan is focused on rapid growth by franchising of non-traditional locations and the development of co-brand franchises with other traditional restaurant chains nationwide. Given the huge growth opportunities in franchising non-traditional locations and in co-branding opportunities and the actual rapid pace of that growth over the last three years, management is focusing all of its financial and human resources on franchise services to maximize the potential for the company and its stakeholders. Accordingly, the Company is not now operating Company-owned locations and currently has no plans to do so in the future. The franchising concept is designed to capitalize on the rapid growth of non-traditional locations for quick service restaurants and is simple to operate, requires a modest investment, with minimal staffing requirements while serving great tasting pizza and related products. The concept is also convenient and quick for its customers. Based on experience to date, the Company believes that franchising offers opportunities for rapid growth for the foreseeable future. The Company is currently expanding in such venues as: hotels, airports, various types of family entertainment facilities, casinos, universities, military bases, office complexes, manufacturing plants, convenience stores, travel plazas and as co-brands with other traditional restaurants. 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 six-month periods ended June 30, 2000 and June 30, 2001, respectively. Three Months Ended Six Months Ended June 30, June 30, ------------------------------------- 2000 2001 2000 2001 ------- ------- ------- ------- Royalties and fees 89.1% 87.5% 83.8% 86.8% Administrative fees and other 10.9 12.5 16.2 13.2 ------- ------- ------- ------- Total revenue 100.0% 100.0% 100.0% 100.0% Operating expenses: Salaries and wages 18.0 % 17.5% 18.6% 17.8% Trade show expenses 4.4 4.7 4.6 4.8 6 Travel expense 5.7 2.6 5.6 3.3 Other operating expenses 9.0 13.5 8.5 11.9 Depreciation .7 .8 .8 .8 General and administrative 22.9 20.2 24.5 19.6 ------- ------- ------- ------- Operating income 39.3% 40.7% 37.4% 41.9% Interest 23.5 19.8 24.2 20.5 ------- ------- ------- ------- Net income before income tax 15.8% 20.9% 13.2% 21.4% 2001 Compared with 2000 Total revenue increased from $1,362,253 to $1,551,817 and from $2,598,701 to $2,997,419, respectively, or 14% and 15% increase, respectively, for the three- month and six-month periods ended June 30, 2001 compared to the same periods in 2000. This increase was primarily the result of the growth in the number of franchise locations open. Royalties and fees were approximately $1,358,178 and $2,602,240 for the three month and six month periods ended June 30, 2001 compared to $1,213,181 and $2,177,523, respectively, during the same period in 2000. This increase was the result of growth in the number of franchises. Salaries and wages decreased from 18.0% and 18.6% of revenue for the three-month and six-month periods ended June 30, 2000 compared to 17.5% and 17.8%, respectively, of revenue for the same period in 2001. The primary reason for this decrease was the increased number of franchise units based on the Company's infrastructure which was previously established for the anticipated rapid growth. Trade show expense increased from 4.4% and 4.6% of revenue for the three-month and six-month periods ended June 30, 2000 compared to 4.7% and 4.8%, respectively, of revenue for the same periods in 2001. The primary reason for this increase was that the number of trade shows increased to reach additional venues in anticipation of further accelerating future growth. Travel expenses decreased from 5.7% and 5.6% for the three-month and six-month periods ended June 30, 2000 to 2.6% and 3.3%, respectively, for the same periods in 2001. This decrease was the result of the growth in number of franchises allowing for scheduling efficiencies which permits multiple assignments to be accomplished with one trip. Other operating expenses increased from 9.0% and 8.5% of revenue for the three-month and six-month periods ended June 30, 2000 to 13.5% and 11.9%, respectively, of revenue for the same periods in 2001. This increase resulted from the Company's commitment to increasing its capacity for additional growth in the future which was partially offset by the increased revenue from the growth in the number of franchised units. 7 General and administrative expense decreased from 22.9% and 24.5% for the three-month and six-month periods ended June 30, 2000 to 20.2% and 19.6%, respectively, of the same periods in 2001. This decrease was the result of the growth in the number of franchise units with the same administrative structure put in place earlier in anticipation of the growth. Operating income grew from 39.3% and 37.4%, or $535,568 and $970,769, for the three-month and six-month periods ended June 30, 2000 to 40.7% and 41.9%, or $631,548 and $1,256,204, for the same periods in 2001. This increase of $95,980 and $285,435, or 18.0% and 29.0%, respectively, was the result of the continued growth in the number of franchise units while maintaining approximately the same operating structure. Interest expense decreased from 23.5% and 24.2% for the three-month and six-month periods ended June 30, 2000 to 19.8% and 20.5% for the same periods in 2001. This was the result of the growth in the number of franchised units with no additional borrowing. Net income before income taxes grew from 15.8% and 13.2%, or $214,793 and $342,773, for the three-month and six-month periods ended June 30, 2000 to 20.9% and 21.4%, respectively, or $324,382 and $642,158, respectively, for the same periods in 2001. This 51.0% and 87.0% increase was the result of the growth in franchising with approximately the same infrastructure. Liquidity and Capital Resources The Company's strategic business plan is focused on rapid growth by franchising of non-traditional locations and the development of co-brand franchises with other traditional restaurant chains nationwide. Given the huge growth opportunities in franchising non-traditional locations and in co-branding opportunities and the actual rapid pace of that growth over the last three years, management is focusing all of its financial and human resources on franchise services to maximize the potential for the company and its stakeholders. Accordingly, the Company is not now operating Company-owned locations and currently has no plans to do so in the future. During 2000, the Company entered into a series of transactions resulting in its obtaining approximately $10.4 million in additional capital. The additional capital came from investors associated with The Geometry Group in New York and certain other investors purchasing approximately $3.2 million of common stock in exchange for cash, The Provident Bank exchanging $6.5 million senior secured debt and $740 thousand PIK notes for $2.4 million of common stock and $4.9 million in no-yield preferred stock which may later be converted to common stock at $3.00 per share at the Bank's option and an officer converted $312 thousand of notes for common stock. Most of these transactions were at $1.00 per share. On April 30, 1999, the Company obtained $2.2 million in additional funding from various investors associated with The Geometry Group based in New York City, who purchased participating income notes of the Company (the "Participating Notes") and warrants to purchase at any time prior to December 31, 2001 an aggregate of 275 thousand shares of the Company's common stock at a price of $.01 per share. The Participating Notes mature on April 15, 2003 and are payable at that time, at the option of each investor, in cash, in shares of the Company's common stock based on a conversion price of $1.00 per share or in a combination thereof. Interest on the Participating Notes accrues at a rate per annum equal to each investor's pro rata share of the Company's revenues associated with the Company's 8 Pizza Express. Such interest is payable in cash monthly, provided, however, that to the extent that the interest otherwise payable to an investor would exceed such investor's pro rata share of the sum of $33,534, all interest in excess of such amount shall be paid in the form of a PIK Note of the Company. Each PIK Note matures on April 15, 2003 and, similar to the Participating Notes, is payable at that time, at the option of each investor, in cash, in shares of the Company's common stock based on a conversion price of $1.00 per share or in a combination thereof. As a result of the capital raised by the Company, cash flow generated from operations, its focus on growth by franchising and the current rate of growth 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 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 in the Company's operations and business environment including, but not limited to: competitive factors and pricing pressures, shifts in market demand, general economic conditions and other factors, including (but not limited to) changes in demand for the Company's products or franchises, the impact of competitors' actions, and changes in prices or supplies of food ingredients and labor. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. The Company is involved in various litigation relating to claims arising out of its normal business operations and relating to restaurant facilities closed in 1997 and 2000. The Company believes that none of its current proceedings, individually or in the aggregate, will have a material adverse effect upon the Company beyond the amount reserved in its financial statements. ITEM 2. Changes in Securities. None. ITEM 3. Defaults Upon Senior Securities. None. ITEM 4. Submission of Matters to a Vote of Security Holders. None. ITEM 5. Other Information. None. ITEM 6. Exhibits and Reports on Form 8-K. None. 9 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: August 14, 2001 Paul W. Mobley, Chairman of the Board --------------- 10