10-Q 1 nr-306q.txt United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2006 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 --- --- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One): Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X --- --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- As of May 3, 2006, there were 16,322,136 shares of Common Stock, no par value, outstanding. PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements The following unaudited condensed consolidated financial statements are included herein: Condensed consolidated balance sheets as of December 31, 2005 and March 31, 2006 (unaudited) Page 3 Condensed consolidated statements of operations for the three months ended March 31, 2005 and 2006 (unaudited) Page 4 Condensed consolidated statements of cash flows for the three months ended March 31, 2005 and 2006 (unaudited) Page 5 Notes to condensed consolidated financial statements (unaudited) Page 6 2 Noble Roman's, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited)
Assets December March 31, 2005 2006 ------------ ------------ Current assets: Cash - non-restricted $ 740,940 $ 671,863 Accounts and notes receivable (net of allowances of $122,262 as of December 31, 2005 and March 31, 2006) 1,299,942 1,164,821 Inventories 221,712 234,078 Assets held for resale 461,709 573,983 Prepaid expenses 301,661 352,184 Current portion of long-term notes receivable 173,498 176,991 Deferred tax asset - current portion 1,478,175 1,478,175 ------------ ------------ Total current assets 4,677,637 4,652,095 ------------ ------------ Property and equipment: Equipment 1,150,718 1,157,425 Leasehold improvements 105,503 105,503 ------------ ------------ 1,256,221 1,262,928 Less accumulated depreciation and amortization 565,102 586,745 ------------ ------------ Net property and equipment 691,119 676,183 ------------ ------------ Deferred tax asset (net of current portion) 7,782,360 7,845,144 Other assets including long-term portion of notes receivable 2,371,774 2,347,681 ------------ ------------ Total assets $ 15,522,890 $ 15,521,103 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $ 384,928 $ 394,711 Current portion of long-term notes payable 1,500,000 1,500,000 ------------ ------------ Total current liabilities 1,884,928 1,894,711 ------------ ------------ Long-term obligations: Note payable to bank (net of current portion) 7,125,000 6,750,000 ------------ ------------ Total long-term liabilities 7,125,000 6,750,000 ------------ ------------ Stockholders' equity: Common stock (25,000,000 shares authorized, 16,322,136 outstanding as of December 31, 2005 and March 31, 2006) 21,021,632 21,021,632 Preferred stock (5,000,000 shares authorized) 1,978,800 1,978,800 Accumulated deficit (16,487,470) (16,124,040) ------------ ------------ Total stockholders' equity 6,512,962 6,876,392 ------------ ------------ Total liabilities and stockholders' equity $ 15,522,890 $ 15,521,103 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 Noble Roman's, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, ---------------------------- 2005 2006 ----------- ----------- Royalties and fees $ 1,781,864 $ 1,867,437 Administrative fees and other 20,633 15,186 Restaurant revenue 248,441 412,933 ----------- ----------- Total revenue 2,050,937 2,295,556 Operating expenses: Salaries and wages 278,815 274,544 Trade show expense 108,006 106,730 Travel expense 63,412 95,605 Other operating expenses 189,600 196,910 Restaurant expenses 239,101 396,000 Depreciation and amortization 18,548 20,758 General and administrative 377,919 394,805 ----------- ----------- Operating income 775,536 810,204 Interest and other expense 202,246 197,226 ----------- ----------- Income before income taxes 573,289 612,978 Income tax expense 194,918 208,413 ----------- ----------- Net income $ 378,371 $ 404,565 Cumulative preferred dividends -- 41,135 ----------- ----------- Net income available to common stockholders $ 378,371 $ 363,430 =========== =========== Earnings per share - basic: Net income $ .02 $ .02 Net income available to common stockholders .02 .02 Weighted average number of common shares outstanding 17,136,884 16,322,136 Diluted earnings per share: Net income $ .02 $ .02 Net income available to common stockholders .02 .02 Weighted average number of common shares outstanding 17,699,086 17,295,536
See accompanying notes to condensed consolidated financial statements. 4 Noble Roman's, Inc. and Subsidiaries Consolidated Statement of Cash Flows (Unaudited)
Three Months Ended March 31, ---------------------------- 2005 2006 --------- --------- OPERATING ACTIVITIES Net income $ 378,371 $ 404,565 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,529 37,538 Deferred income taxes 194,918 208,413 Changes in operating assets and liabilities: (Increase) decrease in: Accounts and notes receivable (77,249) 120,685 Inventories 11,647 (12,367) Assets held for resale (209,460) (102,096) Prepaid expenses (24,821) (50,523) Other assets 801 596 Increase (decrease) in: Accounts payable 57,485 (174,610) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 358,221 432,201 --------- --------- INVESTING ACTIVITIES Purchase of property and equipment (43,287) (6,708) --------- --------- NET CASH USED BY INVESTING ACTIVITIES (43,287) (6,708) --------- --------- FINANCING ACTIVITIES Payment of obligations from discontinued operations (314,226) (120,521) Payment of cumulative preferred dividends -- (41,135) Payment of principal on outstanding debt -- (375,000) Payment received on long-term notes receivable 44,529 42,086 --------- --------- NET CASH USED BY FINANCING ACTIVITIES (269,698) (494,570) --------- --------- Increase (decrease) in cash 45,237 (69,077) Cash at beginning of period 260,025 740,940 --------- --------- Cash at end of period $ 305,262 $ 671,863 ========= ========= Supplemental schedule of non-cash investing and financing activities None. Cash paid for interest $ 82,975 $ 181,838
See accompanying notes to condensed consolidated financial statements. 5 Notes to Condensed Consolidated Financial Statements (Unaudited) ---------------------------------------------------------------- Note 1 - 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 financial condition as of the dates indicated, which adjustments are of a normal recurring nature. The results for the three-month period ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year ending December 31, 2006. Note 2 -Approximately $348,000 is included in the three-month period ended March 31, 2006, and approximately $189,000 for the three-month period ended March 31, 2005, for initial franchise fees. Because one of the Company's principal strategies is to grow its business by franchising in non-traditional locations and the number of such locations that are available for targeted growth, the Company believes that the initial franchise fee revenue for non-traditional locations will continue. Additionally, the Company has recently targeted additional growth by developing traditional dual-branded locations through the use of Area Developers. Because of this addition, the Company believes that franchise fee revenue will be greater in the future. Most of the cost for the services required to be performed by the Company are incurred prior to the franchise fee income being recorded. For the most part, the Company's ongoing royalty income is paid electronically by the Company initiating a draft on the franchisee's account by electronic withdrawal. As such, the Company has no material amount of past due royalties. 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 period ended March 31, 2005 and 2006 Introduction ------------ The Company sells and services franchises for non-traditional, co-branded and stand-alone foodservice operations under the trade names "Noble Roman's Pizza" and "Tuscano's Italian Style Subs." Both concepts' hallmarks include high quality products, simple operating systems, labor minimizing operations, attractive food costs and overall affordability. Noble Roman's Pizza ------------------- Superior quality that our customers can taste - that is the hallmark of Noble Roman's Pizza. Every ingredient and process has been designed with a view to produce superior results. Here are a few of the differences that we believe make our product unique: o Crust made with only specially milled flour with above average protein and yeast. o Fresh packed, uncondensed sauce made with secret spices, parmesan cheese and vine-ripened tomatoes. o 100% real cheese blended from mozzarella and muenster, with no soy additives or extenders. 6 o 100% real meat toppings, again with no additives or extenders - a real departure from many pizza concepts. o Vegetable and mushroom toppings that are sliced and delivered fresh, never canned. o An extended product line that includes breadsticks with dip, pasta, baked sandwiches, salads, wings and a line of breakfast products. o A recently introduced fully-prepared pizza crust that captures the made-from-scratch pizzeria flavor which gets delivered to the franchise location shelf-stable so that dough handling is no longer an impediment to a consistent product. The Company carefully developed all of its menu items to be delivered in a ready-to-use form requiring only on-site assembly and baking. These menu items are manufactured by third party vendors and distributed by unrelated distributors who deliver throughout all 48 contiguous states. This process results in products that are great tasting, quality consistent, easy to assemble, relatively low in food cost and require very low amounts of labor. Tuscano's Italian Style Subs ---------------------------- During 2004, the Company improved its cold sub sandwich menu items and expanded the offerings into a separate concept called 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. 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. With its Italian theme, Tuscano's offers a distinctive yet recognizable format. Like most other brand name sub concepts, customers select menu items at the start of the counter line then choose toppings and sauces according to their preference until they reach the check out point. Yet Tuscano's has many unique competitive features, including its Tuscan theme, the extra rich yeast content of its fresh baked bread, the thematic menu selections and serving options, high quality meats, and generous yet cost-effective quality sauces and spreads. Tuscano's was designed to be premium quality, simple to operate and cost-effective. Franchise Development --------------------- Noble Roman's has sold franchises in 44 states from coast-to-coast within the United States. In addition, it has sold franchises for military bases in Puerto Rico, Guam and Italy, and for entertainment facilities and convenience stores in Canada. The Company plans to continue its focus on 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 which it has been doing the past several years. In addition, the Company recently began offering the dual-branded concept of Noble Roman's/Tuscano's for stand-alone traditional locations. In order to seek more rapid growth, the Company has initiated a strategy to sell development territories to Area Developers for the growth of its traditional dual-branded concept. Area Developers will have the exclusive right to develop the dual-branded traditional concept in their 7 area. The Area Development Agents will generally pay a development fee of $.05 per capita in their development area and will receive 30% of the initial franchise fee and 2/7ths of the royalty from the locations developed pursuant to those agreements. The Company retains all training and supervision responsibilities and must approve all franchisees and all locations. In order to maintain the rights to develop the territory, each Development Agent has to meet the minimum development schedule stipulated in the Area Development Agreement. Currently, the Company is in discussions with several potential Area Developers. Financial Summary ----------------- The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates. The Company evaluates the carrying values of its assets, including property, equipment and related costs, accounts receivable and deferred tax asset, periodically to assess whether any impairment indications are present due to (among other factors) recurring operating losses, significant adverse legal developments, competition, changes in demands for the Company's products or changes in the business climate that affect the recovery of recorded value. If any impairment of an individual asset is evident, a charge will be provided to reduce the carrying value to its estimated fair value. The following table sets forth the percentage relationship to total revenue of the listed items included in Noble Roman's consolidated statements of operations for the three-month periods ended March 31, 2005 and 2006, respectively. Three Months Ended March 31, ----------------------------- 2005 2006 ---- ---- Royalties and fees 86.9% 81.4% Administrative fees and other 1.0 .6 Restaurant revenue 12.1 18.0 ----- ----- Total revenue 100.0 100.0 Operating expenses: Salaries and wages 13.6 12.0 Trade show expense 5.3 4.6 Travel expense 3.1 4.1 Other operating expense 9.2 8.6 Restaurant expenses 11.7 17.3 Depreciation .9 .9 General and administrative 18.4 17.2 ----- ----- Operating income 37.8 35.3 Interest expense 9.9 8.6 Income before income taxes 27.9 26.7 Income taxes 9.5 9.1 ----- ----- Net income 18.4% 17.6% ===== ===== Results of Operations --------------------- Total revenue increased from $2,050,937 to $2,295,556 for the three-month period ended March 31, 2006 compared to the corresponding period in 2005. This increase was the result of an increase in royalties and fees from the addition of new franchises and the increase in restaurant revenue as a result of operating more restaurants on a temporary basis. Royalties and fees increased from approximately $1,781,864 to $1,867,437 for the three-month period ended March 31, 2006 8 compared to the corresponding period in 2005. Included in royalties and fees were approximately $348,000 and $189,000 for initial franchise fees for the three-month periods ended March 31, 2006 and 2005, respectively. Because one of the Company's strategic directions is to grow its business by franchising non-traditional locations, and because the number of such locations that are available for targeted growth is large, the Company believes that the initial franchise fee revenue for non-traditional locations will continue. Additionally, the Company has recently targeted additional growth by developing traditional dual-branded locations through the use of Area Developers. Because of this addition, the Company believes that franchise fee revenue has the potential to be greater in the future. Restaurant revenues increased from $248,441 to $412,933 for the three-month period ended March 31, 2006 compared to the corresponding period in 2005. The Company was operating more restaurants on a temporary basis in the three-month period ended March 31, 2006 than in the first quarter of 2005. The Company only intends to operate one restaurant to be used for testing and demonstration purposes but from time to time temporarily operates others until a suitable franchisee is located. Since March 31, 2006, the Company has franchised two of the six restaurants it was operating on March 31, 2006. Salaries and wages decreased from 13.6% of revenue to 12.0% of revenue for the three-month period ended March 31, 2006 compared to the corresponding period in 2005. This decrease was primarily the result of actual salaries and wages remaining constant while the revenue increased. Trade show expenses decreased from 5.3% of revenue to 4.6% of revenue for the three-month period ended March 31, 2006 compared to the corresponding period in 2005. This decrease was primarily the result of actual trade show expense remaining constant while the revenue increased. The Company anticipates the actual dollar trade show expense to remain approximately the same for the balance of 2006 compared to the corresponding period in 2005. Travel expenses increased from 3.1% of revenue to 4.1% of revenue for the three-month period ended March 31, 2006 compared to the corresponding period in 2005. This increase was primarily the result of opening more locations farther away from the home office. Other operating expenses decreased from 9.2% of revenue to 8.6% of revenue for the three-month period ended March 31, 2006 compared to the corresponding period in 2005. This decrease was primarily the result of maintaining operating expenses at approximately the same dollar amount while the revenue increased. The Company anticipates that other operating expenses, as a percentage of revenue, will continue to decline as a result of anticipated additional growth in 2006 while maintaining operating expenses at approximately the same dollar amount. Restaurant expenses increased from 11.7% of revenue to 17.3% of revenue for the three month period ended March 31, 2006 compared to the corresponding period in 2005. This increase resulted primarily from the Company operating more restaurants on a temporary basis in 2006. The Company only intends to operate one restaurant to be used for testing and demonstration purposes but from time to time temporarily operates others until a suitable franchisee is located. Since March 31, 2006, the Company has franchised two of the six restaurants it was operating on March 31, 2006. General and administrative expenses decreased from 18.4% of revenue to 17.2% of revenue for the three month period ended March 31, 2006 compared to the corresponding period in 2005. This was 9 primarily the result of only a small growth in administrative expense which was more than offset by the growth in revenue. Operating income increased from $775,536 to $810,204 for the three-month period ended March 31, 2006 compared to the corresponding period in 2005. This was primarily the result of additional revenue. Interest expense decreased from 9.9% of revenue to 8.6% of revenue for the three-month period ended March 31, 2006 compared to the corresponding period in 2005. This was a result of a decrease in interest cost because of the reduction in the amount of debt outstanding and an increase in revenue partially offset by an increase in interest rate. Net income increased from $378,371 to $404,565 for the three-month period ended March 31, 2006 compared to the corresponding period in 2005. This increase was primarily the result of the growth in royalty and fee income, partially offset by the growth in travel expense. Liquidity and Capital Resources ------------------------------- The Company's strategy is to grow its business by continuing to franchise in non-traditional locations and by franchising in traditional locations primarily through the use of Area Development Agents. This strategy does not require significant additional capital. As a result of the Company's strategy, cash flow generated from operations, the Company's current rate of entering into new franchises and the anticipated growth, the Company believes it will have sufficient cash flow to meet its obligations and to carry out its current business plan. On August 25, 2005, the Company obtained a new six- year term loan in the original principal amount of $9,000,000 and with a principal balance on March 31, 2006 of $8,250,000. The note calls for monthly principal payments of $125,000 plus interest at the rate of LIBOR plus 4% per annum adjusted on a monthly basis. The Company's obligations under the loan are secured by the grant of a security interest in its personal property. The Company elected to purchase a swap contract fixing the rate on 50% of the principal balance for the first two years and then $3 million of the principal amount for the following two years at an annual interest rate of 8.83% per annum. The Company does not anticipate that any of the recently issued Statement of Financial Accounting Standards will have a material impact on the Company's Statement of Operations or its Balance Sheet. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The Company's current borrowings are at a monthly variable rate tied to LIBOR. However, the Company elected to purchase a swap contract fixing the rate on 50% of the principal balance for the first two years and then $3 million of the principal amount for the following two years at an annual interest rate of 8.83% per annum. The Company has concluded that there is no material market risk exposure and, therefore, no quantitative tabular disclosures are required. 10 ITEM 4. Controls and Procedures Based on his evaluation as of the end of the period covered by this report, Paul W. Mobley, the Company's Chief Executive Officer and Chief Financial Officer, has concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective. There have been no changes in internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. The Company, from time to time, is involved in various litigation relating to claims arising out of its normal business operations. The Company is not involved in any litigation currently, nor is any litigation currently threatened, which would have a material effect upon the Company. ITEM 6. Exhibits. (a) Exhibits: See Exhibit Index appearing on page 13. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NOBLE ROMAN'S, INC. Date: May 8, 2006 By: /s/ Paul W. Mobley ------------------------------------------- Paul W. Mobley, Chairman of the Board and Chief Financial Officer (Authorized Officer and Principal Financial Officer) 12 Index to Exhibits Exhibit ------- 3.1 Amended Articles of Incorporation of the Registrant, filed as an exhibit to the Registrant's Amendment No. 1 to the Post Effective Amendment No. 2 to Registration Statement on Form S-1 filed July 1, 1985 (SEC File No.2-84150), is incorporated herein by reference. 3.2 Amended and Restated By-Laws of the Registrant, as currently in effect, filed as an exhibit to the Registrant's Registration Statement on Form S-18 filed October 22, 1982 and ordered effective on December 14, 1982 (SEC File No. 2-79963C), is incorporated herein by reference. 3.3 Articles of Amendment of the Articles of Incorporation of the Registrant effective February 18, 1992 filed as an exhibit to the Registrant's Registration Statement on Form SB-2 (SEC File No. 33-66850), ordered effective on October 26, 1993, is incorporated herein by reference. 3.4 Articles of Amendment of the Articles of Incorporation of the Registrant effective May 11, 2000, filed as Annex A and Annex B to the Registrant's Proxy Statement on Schedule 14A filed March 28, 2000, is incorporated herein by reference. 3.5 Articles of Amendment of the Articles of Incorporation of the Registrant effective April 16, 2001 filed as Exhibit 3.4 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2005, is incorporated herein by reference. 3.6 Articles of Amendment of the Articles of Incorporation of the Registrant effective August 23, 2005, filed as Exhibit 3.1 to the Registrant's current report on Form 8-K filed August 29, 2005, is incorporated herein by reference. 4.1 Specimen Common Stock Certificates filed as an exhibit to the Registrant's Registration Statement on Form S-18 filed October 22, 1982 and ordered effective on December 14, 1982 (SEC File No. 2-79963C), is incorporated herein by reference. 4.2 Form of Warrant Agreement filed as Exhibit 4.1 to the Registrant's current report on Form 8-K filed August 29, 2005, is incorporated herein by reference. 10.1 Employment Agreement with Paul W. Mobley dated November 15, 1994 filed as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2005, is incorporated herein by reference. 10.2 Employment Agreement with A. Scott Mobley dated November 15, 1994 filed as Exhibit 10.2 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2005, is incorporated herein by reference. 10.3 1984 Stock Option Plan filed with the Registrant's Form S-8 filed November 29, 1994 (SEC File No. 33-86804), is incorporated herein by reference. 13 10.4 Noble Roman's, Inc. Form of Stock Option Agreement filed with the Registrant's Form S-8 filed November 29, 1994 (SEC File No. 33-86804), is incorporated herein by reference. 10.5 Settlement Agreement with SummitBridge dated August 1, 2005, filed as Exhibit 99.2 to the Registrant's current report on Form 8-K filed August 5, 2005, is incorporated herein by reference. 10.6 Loan Agreement with Wells Fargo Bank, N.A. dated August 25, 2005 filed as Exhibit 10.1 to the Registrant's current report on Form 8-K filed August 29, 2005, is incorporated herein by reference. 10.7 Registration Rights Agreement dated August 1, 2005 between the Company and SummitBridge National Investments filed as Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (SEC file No. 333-133382) filed April 19, 2006, is incorporated herein by reference. 21 Subsidiaries of the Registrant filed in the Registrant's Registration Statement on Form SB-2 (SEC File No. 33-66850) ordered effective on October 26, 1993, is incorporated herein by reference. 31.1 Certification of Chief Executive Officer and 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 and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 14