10-Q 1 nr-904q.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 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