10-Q 1 nr-60210q.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, 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 August 2, 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 June 30, 2002 Page 3 Condensed consolidated statements of operations for the three months and six months ended June 30, 2001 and 2002 Page 4 Condensed consolidated statements of cash flows for the six months ended June 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, June 30, 2001 2002 ---- ---- Assets ------ Current assets: Cash $ 25,203 $ 6,033 Accounts and notes receivable 621,679 777,786 Inventories 82,669 163,530 Prepaid expenses 215,588 285,286 Deferred tax asset - current portion 1,348,132 1,348,132 ------------ ------------ Total current assets 2,293,270 2,580,767 ------------ ------------ Property and equipment: Equipment 793,690 874,627 Leasehold improvements 84,229 84,229 ------------ ------------ 877,919 958,856 Less accumulated depreciation and amortization 309,936 338,541 ------------ ------------ Net property and equipment 567,982 620,315 ------------ ------------ Deferred tax asset 8,827,298 8,640,003 Other assets 1,503,616 1,470,057 ------------ ------------ Total assets $ 13,192,167 $ 13,311,142 ============ ============ Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable and accrued expenses $ 2,059,014 $ 1,741,611 Note payable to officer 65,840 65,840 Deferred franchise fees 251,850 253,807 ------------ ------------ Total current liabilities 2,376,704 2,061,258 ------------ ------------ Long-term obligations: Notes payable to Provident Bank net of warrant value of $140,318 at December 31, 2001 and $103,844 at June 30, 2002 7,859,682 7,896,156 Notes payable to various funds affiliated with Geometry Group net of warrant valuation of $90,868 at December 31, 2001 and $56,493 at June 30, 2002 2,281,133 2,315,508 ------------ ------------ Total long-term liabilities 10,140,815 10,211,664 ------------ ------------ Stockholders' equity: Common stock (25,000,000 shares authorized, 16,051,158 out- standing at December 31, 2001 and 16,051,158 as of June 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) (21,680,506) ------------ ------------ Total stockholders' equity 674,647 1,038,220 ------------ ------------ Total liabilities and stockholders' equity $ 13,192,167 $ 13,311,142 ============ ============
See accompanying notes 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, -------- -------- 2001 2002 2001 2002 ---- ---- ---- ---- Revenue: Royalties and fees $ 1,358,178 $ 1,529,041 $ 2,602,240 $ 2,848,010 Administrative fees and other 193,639 49,507 395,179 174,388 ----------- ----------- ----------- ----------- Total revenue 1,551,817 1,578,548 2,997,419 3,022,398 Operating expenses: Salaries and wages 270,857 337,729 532,167 599,483 Trade show expense 72,846 50,839 144,561 108,854 Travel expense 40,808 51,190 98,906 104,396 Other operating expenses 209,064 250,460 356,380 415,659 Depreciation 12,950 14,342 22,752 28,604 General and administrative 313,745 299,629 586,449 591,861 ----------- ----------- ----------- ----------- Operating income 631,548 574,359 1,256,204 1,173,541 Interest and other expense 307,166 319,641 614,046 622,673 ----------- ----------- ----------- ----------- Income before income tax 324,382 254,719 642,158 550,868 Income tax 109,237 86,604 218,334 187,295 ----------- ----------- ----------- ----------- Net income $ 215,145 $ 168,114 $ 423,824 $ 363,573 =========== =========== =========== =========== Earnings per share: Net income $ .02 $ .01 $ .03 $ .02 Weighted average number of common shares outstanding 14,197,229 16,051,158 13,937,331 16,051,158 Fully diluted earnings per share: Net income $ .01 $ .01 $ .03 $ .02 Weighted average number of common shares outstanding 16,610,055 17,015,481 16,350,158 17,015,481
See accompanying notes to condensed consolidated financial statements. 4 Noble Roman's, Inc. and Subsidiaries Consolidated Statement of Cash Flows (Unaudited)
Six Months Ended June 30, -------- 2001 2002 ---- ---- OPERATING ACTIVITIES Net income $ 423,824 $ 363,573 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 22,752 28,604 Non-cash interest 72,489 104,587 Deferred federal income taxes 218,334 187,295 Changes in operating assets and liabilities (increase) decrease in: Accounts receivable 150,582 (156,107) Inventory (11,594) (80,861) Prepaid expenses 39,981 (69,698) Other assets (178,916) (180) Increase (decrease) in: Accounts payable 220,359 263,047 Deferred franchise fee (127,875) 1,957 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 829,936 642,217 INVESTING ACTIVITIES Purchase of property and equipment (81,359) (80,937) Issuance of capital stock net of issuance cost 51,428 -- --------- --------- NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (29,931) (80,937) FINANCING ACTIVITIES Proceeds from long-term debt -- -- Principal payments on long-term debt and capital lease obligations -- -- Payment of obligations for discontinued operations (799,610) (580,451) --------- --------- NET CASH (USED) BY FINANCING ACTIVITIES (799,610) (580,451) --------- --------- INCREASE (DECREASE) IN CASH 395 (19,171) Cash at beginning of period 9,406 25,203 --------- --------- Cash at end of period $ 9,801 $ 6,032 ========= =========
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 six month periods ended June 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 and all of its full-service, traditional restaurants are now franchised 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 43 states plus 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 this past month and is being heavily promoted across the country. 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 six-month periods ended June 30, 2001 and for June 30, 2002, respectively. Three Months Ended Six Months Ended June 30, June 30, -------- -------- 2001 2002 2001 2002 ---- ---- ---- ---- Revenue: Royalties and fees 87.5% 96.9% 86.8% 94.2% Administrative fees and other 12.5 3.1 13.2 5.8 ------ Total revenue 100.0 100.0 100.0 100.0 Operating expenses: Salaries and wages 17.5 21.4 17.8 19.8 Trade show expenses 4.7 3.2 4.8 3.6 Travel expense 2.6 3.2 3.3 3.5 Other operating expenses 13.5 15.9 11.9 13.8 Depreciation .8 .9 .8 .9 General and administrative 20.2 19.0 19.6 19.6 ------ ------ ------ ------ Operating income 40.7 36.4 41.9 38.8 Interest 19.8 20.3 20.5 20.6 ------ ------ ------ ------ Net income before income tax 20.9% 16.1% 21.4% 18.2% 2002 Compared wth 2001 ---------------------- Total revenue from royalties and fees increased from $1.358 million to $1.529 million and from $2.602 million to $2.848 million, respectively, for the three-month and six-month periods ended June 30, 2002 compared to the same periods in 2001. That is a 12.6% and 9.5% growth, respectively, for the three-month and six-month periods ended June 30, 2002 as compared to the same periods in 2001. Total revenue increased from $1.552 million to $1.579 million and from $2.997 million to $3.022 million, respectively, for the three-month and six-month periods ended June 30, 2002 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. This increase was partially offset when you compare total revenue between the periods by the decrease in administrative fees and others as a result of the Company ceasing to provide accounting services for a fee to certain of its full-service franchisees. Salaries and wages increased from 17.5% and 17.8% of revenue for the three-month and six-month periods ended June 30, 2001 to 21.4% and 19.8%, respectively, of revenue for the same periods in 2002. This increase was a result of the Company hiring additional sales executives for the purpose of accelerating growth during the remainder of the year and into the future. 7 Trade show expense decreased from 4.7% and 4.8% of revenue for the three-month and six-month periods ended June 30, 2001 to 3.2% and 3.6%, respectively, of revenue for the same periods in 2002. This decrease is a result of the Company's decision not to attend certain of the less productive trade shows from the past and by spreading the trade show expense over a higher revenue base as a result of continued growth. Travel expenses increased from 2.6% and 3.3% of revenue for the three-month and six-month periods ended June 30, 2001 to 3.2% and 3.5%, 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. Other operating expenses increased from 13.5% and 11.9% of revenue for the three-month and six-month periods ended June 30, 2001 to 15.9% and 13.8%, 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 and the Company preparing for more accelerated growth, which is anticipated for the remainder of the year. General and administrative expense decreased from 20.2% of revenue for the three-month period ended June 30, 2001 to 19.0% for the same periods in 2002. For the six-month period ended June 30, 2001 general and administrative expenses were 19.6% of revenue, which remained the same 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 constant percentage for the six-month period was a result of the modest increase in actual cost, which was offset by a corresponding increase in revenue due to new unit growth. Operating income decreased from 40.7% and 41.9% of revenue for the three-month and six-month periods ended June 30, 2001 to 36.4% and 38.8%, respectively, of revenue for the same periods in 2002. This decrease was primarily the result of increased salaries and other operating structures, as explained in the two paragraphs above relating to those items, in preparation for anticipated accelerated growth later this year. Interest expense increased from 19.8% and 20.5% of revenue for the three-month and six-month periods ended June 30, 2001 to 20.3% and 20.6%, respectively, of revenue for the same periods in 2002. This increase is primarily a result of the increase in interest cost for the participating income notes, as the interest on those notes is calculated as a certain percentage of royalties and fees income. By the terms of the Participating Income Notes, after certain pay-out targets are achieved the percentage of the revenues for interest costs decreases by two-thirds. Based on current growth rates, that should occur in approximately October, 2002. 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 and all of its full-service, traditional restaurants are now franchised. The Company continues to provide franchise services to the full-service franchises in much the same fashion as it does with its non-traditional and co-branded franchises. 8 As a result of the Company's strategy since 1999, 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 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. 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. 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. Date: August 13, 2002 /s/ Paul Mobley --------------- -------------------------- Paul W. Mobley, Chairman of the Board 10