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 March 31, 2003
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
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 May 4, 2003, there were 16,166,158 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,
2002 and March 31, 2003 Page 3
Condensed consolidated statements of operations for the
three months ended March 31, 2002 and 2003 Page 4
Condensed consolidated statements of cash flows for the
three months ended March 31, 2002 and 2003 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, 2001, 2002 and first quarter of 2003 operating
results, 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.
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
(Audited) (Unaudited)
December 31, March 31,
2002 2003
------------ ------------
Assets
Current assets:
Cash $ 13,180 $ 25,081
Accounts and notes receivable 1,107,551 1,007,745
Inventories 140,762 140,976
Prepaid expenses 345,818 367,967
Current portion of long-term notes receivable 58,618 94,735
Deferred tax asset - current portion 1,550,000 1,875,000
------------ ------------
Total current assets 3,215,929 3,511,503
------------ ------------
Property and equipment:
Equipment 923,034 926,605
Leasehold improvements 86,229 86,229
------------ ------------
1,009,262 1,012,834
Less accumulated depreciation and amortization 373,301 389,533
------------ ------------
Net property and equipment 635,962 623,301
------------ ------------
Deferred tax asset 8,371,093 7,906,223
Other assets 1,377,761 1,650,169
------------ ------------
Total assets $ 13,600,744 $ 13,691,196
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,920,915 $ 1,801,044
Note payable to officer 65,840 65,840
Current portion of long-term notes payable 1,050,000 1,510,073
Deferred franchise fees 163,115 66,500
------------ ------------
Total current liabilities 3,199,870 3,443,457
------------ ------------
Long-term obligations:
Notes payable to Provident Bank net of warrant value of $67,370
at December 31, 2002 and $49,133 at March 31, 2003 7,632,630 7,950,867
Notes payable to various funds affiliated with Geometry Group
net of warrant valuation of $22,917 at December 31, 2002 and
$5,729 at March 31, 2003 - net of current portion 1,599,883 856,998
------------ ------------
Total long-term liabilities 9,232,514 8,807,865
------------ ------------
Stockholders' equity:
Common stock (25,000,000 shares authorized, 16,166,158
outstanding at December 31, 2002 and March 31, 2003) 17,789,452 17,789,452
Preferred stock (5,000,000 shares authorized) 4,929,274 4,929,274
Accumulated deficit (21,550,365) (21,278,852)
------------ ------------
Total stockholders' equity 1,168,361 1,439,874
------------ ------------
Total liabilities and stockholders' equity $ 13,600,745 $ 13,691,196
============ ============
See accompanying note to condensed consolidated financial statements.
3
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
-------------------------
2002 2003
---- ----
Revenue:
Royalties and fees $ 1,248,409 $ 1,530,683
Administrative fees and other 124,880 39,335
Restaurant revenue 70,559 200,762
----------- -----------
Total revenue 1,443,848 1,770,780
Operating expenses:
Salaries and wages 235,200 262,082
Trade show expense 58,015 78,607
Travel expense 53,206 46,951
Other operating expenses 124,878 185,019
Restaurant expenses 66,875 198,164
Depreciation 14,262 16,232
General and administrative 292,232 311,714
----------- -----------
Operating income 599,180 672,011
Interest and other expense 303,032 260,628
----------- -----------
Income before income tax 296,148 411,383
Income tax 100,690 139,870
----------- -----------
Net income $ 195,458 $ 271,513
=========== ===========
Earnings per share:
Net income $ .01 $ .02
=========== ===========
Weighted average number of common shares outstanding 16,051,158 16,166,158
Fully diluted earnings per share:
Net income $ .01 $ .02
=========== ===========
Weighted average number of common shares outstanding 17,032,308 17,069,783
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,
----------------------
OPERATING ACTIVITIES 2002 2003
- -------------------- ---- ----
Net income $ 195,458 $ 271,513
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 66,556 68,526
Deferred federal income taxes 100,690 139,870
Changes in operating assets and liabilities (increase) decrease in:
Accounts receivable (57,053) 99,806
Inventory (54,008) (213)
Prepaid expenses (53,580) (22,149)
Other assets -- (325,393)
Increase (decrease) in:
Accounts payable 157,570 24,005
Deferred franchise fee (4,500) (96,615)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 351,133 159,349
--------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment (63,148) (3,572)
--------- ---------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (63,148) (3,572)
--------- ---------
FINANCING ACTIVITIES
Payment of obligations for discontinued operations (311,693) (143,876)
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (311,693) (143,876)
--------- ---------
INCREASE (DECREASE) IN CASH (23,708) 11,901
Cash at beginning of period 25,203 13,180
--------- ---------
Cash at end of period $ 1,495 $ 25,081
========= =========
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 periods ended March 31, 2002 and 2003
Introduction
- ------------
The Company's strategic direction is to focus its business on pizza-focused
non-traditional and co-branded opportunities. Given the potential size of the
opportunities in franchising these segments, and the actual rapid pace of their
growth within the Company, the Company completed a transition from operating
restaurants to franchising and servicing non-traditional franchise locations in
2000 in order to focus all of its efforts on franchise services.
The franchising concept was designed to capitalize on the rapid growth of
non-traditional locations and co-branded quick service restaurants. The
Company's franchise system was designed to be simple to operate, requiring a
modest investment, with minimal staffing requirements while serving great
tasting pizza and related products. The concept was also designed to be
convenient and quick for its customers. Based on experience to date, the Company
believes that franchising in these segments offers many opportunities for growth
for the foreseeable future.
The Company launched two other variations of the concept in late 2002 called
"Noble Roman's Cafe-To-Go" and "Noble Roman's Pizza Express". These concepts
were developed to provide pizza-focused foodservice for locations which need to
add foodservice but require something even simpler and with less space
requirements than the Company's standard concept. These concepts feature many of
the great tasting products offered under the standard concept but where the food
arrives already fully prepared and assembled, ready to bake. The concepts
require no additional labor and only requires approximately 12 square feet of
floor space. The innovative, patent-pending "Pizza Bake Ovens" produce fresh
baked, great tasting personal pizzas in approximately 3 1/2 -5 minutes. The
Company has undertaken an aggressive marketing plan nationwide and believes
there is a very large market whereby the Company can accelerate its growth with
these additional variations.
Based on the Company's 2000, 2001 and 2002 operating results, its business plan,
the number of franchise units now open, the backlog of units sold to be opened
in the future, the backlog of franchise prospects now in ongoing discussions and
negotiations, the Company's trends and the results of its operations thus far in
2003, 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.
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 periods ended March 31, 2002 and for March 31,
2003, respectively.
Consolidated Statement of Operations
Noble Roman's, Inc. and Subsidiaries
Three Months Ended
March 31,
------------------
2002 2003
---- ----
Revenue:
Royalties and fees 86.5% 86.5%
Administrative fees and other 8.6 2.2
Restaurant revenue 4.9 11.3
----- -----
Total revenue 100.0 100.0
Operating expenses:
Salaries and wages 16.3 14.8
Trade show expenses 4.0 4.4
Travel expense 3.7 2.7
Other operating expenses 8.6 10.4
Restaurant expenses 4.6 11.2
Depreciation and amortization 1.0 0.9
General and administrative 20.2 17.6
----- -----
Operating income 41.5 38.0
Interest 21.0 14.7
----- -----
Net income before income tax 20.5 23.3
Income tax 7.0 7.9
----- -----
Net income 13.5% 15.4%
===== =====
2003 Compared wth 2002
- ----------------------
Total revenue increased from approximately $1.4 million for the three-month
period ended March 31, 2002 to $1.8 million for the three-month period ended
March 31, 2003. This was an increase of approximately 22.6%. The reason for this
increase was the increase in royalties and fees as a result of the continued
growth in the number of franchise locations partially offset by decrease in
administrative fees and other and the increase in restaurant revenue as a result
of operating three locations on military bases until they are sold as franchise
locations. The Company only plans to operate these three locations temporarily
until a qualified franchisee can be located.
Salaries and wages decreased from 16.3% of revenue for the three-month period
ended March 31, 2002 to 14.8% of revenue for the three-month period ended March
31, 2003. This decrease was the result of the revenue increase from the
continued growth in the number of locations while utilizing approximately the
same operational staff.
Trade show expense increased from 4.0% of revenue for the three-month period
ended March 31, 2002 to 4.4% of revenue for the three-month period ended March
31, 2003. This increase was a
7
result of scheduling more trade shows to attract additional franchisees from
additional venues to further diversify the Company's market.
Travel expense decreased from 3.7% of revenue for the three-month period ended
March 31, 2002 to 2.7% of revenue for the three-month period ended March 31,
2003. This decrease was the result of the growth in revenue from continued
growth in locations while utilizing approximately the same employees.
Other operating expenses increased from 8.6% of revenue for the three-month
period ended March 31, 2002 to 10.4% of revenue for the three-month period ended
March 31, 2003. This increase was primarily the result of a significant increase
in the rate for group insurance, additional sales commissions, additional
payroll tax expense, and additional general insurance costs all of which was
partially offset by the increase in revenue from the growth in the number of
franchise locations.
Restaurant expenses increased from 4.6% of revenue for the three-month period
ended March 31, 2002 to 11.2% of revenue for the three-month period ended March
31, 2003. This increase was the result of operating three locations on military
bases until they are sold as franchise locations.
General and administrative expense decreased from 20.2% of revenue for the
three-month period ended March 31, 2002 to 17.6% of revenue for the three-month
period ended March 31, 2003. This decrease was the result of the increased
revenue as a result of the continued growth in the number of franchise locations
while utilizing approximately the same administrative structure.
Interest and other expense decreased from 21.0 % of revenue for the three-month
period ended March 31, 2002 to 14.7% of revenue for the three-month period ended
March 31, 2003. This decrease was the result of the revenue increases as a
result of the continued growth in the number of franchise locations and the rate
of interest on the participating income notes decreasing from 7.5% of defined
revenue to 2.5% of defined revenue.
Net income increased from approximately $195 thousand for the three-month period
ended March 31, 2002 to approximately $272 thousand for the three-month period
ended March 31, 2003. This was a 38.9% increase compared to the same period one
year ago. The primary reason for this increase was the continued growth while
maintaining approximately the same infrastructure.
Liquidity and Capital Resources
- -------------------------------
Given the potential size of the opportunities in franchising non-traditional and
co-brand locations, the Company focuses its business on franchising to
non-traditional and co-brand locations. Since the Company's plans are to
continue to grow by franchising, no significant capital investment is required
for that growth.
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 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
8
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
Exhibit 99.2
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: May 6, 2003 /s/ Paul W. Mobley
----------- -------------------------------------
Paul W. Mobley, Chairman of the Board
10
I, Paul W. Mobley, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Noble Roman's, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 45 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Paul W. Mobley
May 6, 2003 -----------------------
Paul W. Mobley
Chief Executive Officer
Subscribed and sworn to before me this 6th day of May, 2003.
/s/ Linda L. Minett
- ----------------------------------
Linda L. Minett, Notary Public
My commission expires: 11/27/08
12
I, Paul W. Mobley, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Noble Roman's, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 45 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Paul W. Mobley
May 6, 2003 -----------------------
Paul W. Mobley
Chief Financial Officer
Subscribed and sworn to before me this 6th day of May, 2003.
/s/ Linda L. Minett
- ----------------------------------
Linda L. Minett, Notary Public
My commission expires: 11/27/08
13