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, 2005
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 5, 2005, there were 17,136,884 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, 2004
and June 30, 2005 Page 3
Condensed consolidated statements of operations for the
three months and six months ended June 30, 2004 and 2005 Page 4
Condensed consolidated statements of cash flows for the
six months ended June 30, 2004 and 2005 Page 5
Notes to condensed consolidated financial statements Page 6
2
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, June 30,
------------ --------
Assets 2004 2005
------ ---- ----
Current Assets:
Cash - non-restricted $ 260,025 $ 424,716
Cash - restricted 196,754 55,476
Accounts and notes receivable (net of allowances of
$82,262) 1,011,758 1,193,587
Inventories 207,857 195,159
Assets held for resale -- 256,465
Prepaid expenses 505,646 526,421
Current portion of long-term notes receivable 183,478 190,820
Deferred tax asset - current portion 994,148 994,148
------------ ------------
Total current assets 3,359,665 3,836,793
------------ ------------
Property and equipment:
Equipment 1,042,790 1,105,727
Leasehold improvements 94,017 104,018
------------ ------------
1,136,807 1,209,744
Less accumulated depreciation and amortization 484,068 521,964
------------ ------------
Net property and equipment 652,739 687,780
------------ ------------
Deferred tax asset (net of current portion) 9,135,834 8,883,662
Other assets 2,100,436 2,097,703
------------ ------------
Total assets $ 15,248,675 $ 15,505,938
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,252,852 $ 1,020,604
------------ ------------
Total current liabilities 1,252,852 1,020,604
Long-term obligations:
Note payable to bank net of current portion 7,700,000 7,700,000
Subordinated debentures 2,040,000 2,040,000
------------ ------------
Total long-term liabilities 9,740,000 9,740,000
------------ ------------
Stockholders' equity:
Common stock (25,000,000 shares authorized,
17,136,884 outstanding as of December 31, 2004
and June 30, 2005) 18,648,512 18,648,512
Preferred stock (5,000,000 shares authorized) 4,929,274 4,929,274
Accumulated deficit (19,321,963) (18,832,452)
------------ ------------
Total stockholders' equity 4,255,823 4,745,334
------------ ------------
Total liabilities and stockholders' equity $ 15,248,675 $ 15,505,938
============ ============
See accompanying notes to condensed consolidated financial statements.
3
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2005 2004 2005
---- ---- ---- ----
Revenue:
Royalties and fees $ 1,792,474 $ 1,851,948 $ 3,489,035 $ 3,633,811
Administrative fees and other 22,131 15,716 75,072 36,349
Restaurant revenue 308,092 294,123 501,917 542,563
------------ ------------ ------------ ------------
Total revenue 2,122,697 2,161,786 4,066,024 4,212,724
Operating expenses:
Salaries and wages 288,411 271,739 563,507 550,554
Trade show expense 83,394 120,534 207,981 228,540
Travel expense 55,781 79,390 120,449 142,803
Other operating expenses 175,486 181,303 354,580 370,903
Restaurant expenses 299,275 287,460 485,470 526,560
Depreciation and amortization 16,672 19,349 32,905 37,896
General and administrative 331,291 370,599 686,632 748,518
------------ ------------ ------------ ------------
Operating income 872,386 831,413 1,614,501 1,606,948
Interest and other expense 250,437 204,385 495,803 406,632
------------ ------------ ------------ ------------
Net income before income taxes
from continuing operations 621,950 627,028 1,118,698 1,200,317
Income tax 205,683 213,189 374,577 408,108
------------ ------------ ------------ ------------
Net income from continuing
operations $ 416,267 $ 413,838 $ 744,121 $ 792,209
Loss on discontinued operations net of
tax benefit of $155,935 -- (302,698) -- (302,698)
------------ ------------ ------------ ------------
Net income $ 416,267 $ 111,140 $ 744,121 $ 489,511
============ ============ ============ ============
Earnings per share:
Net income from continuing operations $ .03 $ .02 $ .05 $ .05
Net income $ .03 $ .01 $ .05 $ .03
Weighted average number of common
shares outstanding 16,277,827 17,136,884 16,277,827 17,136,884
Diluted earnings per share:
Net income $ .02 $ .01 $ .04 $ .03
Weighted average number of common
shares outstanding 17,156,501 17,660,322 17,156,501 17,660,322
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,
--------
2004 2005
---- ----
OPERATING ACTIVITIES
- --------------------
Net income from continuing operations $ 744,121 $ 792,209
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 78,365 53,858
Deferred federal income taxes 374,577 408,108
Changes in operating assets and liabilities (increase) decrease in:
Accounts receivable (252,419) (202,204)
Inventory (6,397) (8,315)
Assets held for resale -- (215,079)
Prepaid expenses 2,410 (20,774)
Other assets 517 (3,818)
Decrease in:
Accounts payable (283,195) (46,488)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 657,979 757,496
--------- ---------
INVESTING ACTIVITIES
- --------------------
Purchase of property and equipment (74,228) (72,937)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (74,228) (72,937)
--------- ---------
FINANCING ACTIVITIES
- --------------------
Payment of obligations from discontinued operations (519,750) (609,808)
Payment of principal on outstanding debt (100,000) --
Payment received on long-term notes receivable 72,487 89,939
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (547,263) (519,868)
--------- ---------
INCREASE IN CASH 36,488 164,691
Cash at beginning of period 237,445 260,025
--------- ---------
Cash at end of period $ 273,933 $ 424,716
========= =========
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
- --------------------------------------------------------------
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 quarter
ended and six months ended June 30, 2005 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2005.
Note 2 - On August 2, 2005, the Company entered into a Settlement Agreement with
SummitBridge National Investments, LLC and related entities. Upon closing of the
Settlement Agreement, Noble Roman's will acquire all of SummitBridge's debt and
equity interests in Noble Roman's, except for 2,400,000 shares of common stock,
for a purchase price of $8,300,000. These interests consist of a senior secured
promissory note in the principal amount of $7,700,000, interest accrued on the
note since February 2004, 3,214,748 shares of Noble Roman's common stock,
$4,929,275 stated amount of Noble Roman's no-yield preferred stock convertible
into 1,643,092 shares of common stock, and a warrant to purchase 385,000 shares
of Noble Roman's common stock with an exercise price of $.01 per share.
In order to show the effect of the significant subsequent transaction on its
financial statements, the Company has included a proforma balance sheet on page
7 and a proforma statement of operations on page 8. The proforma entries are
recorded to adjust the balance sheet as of June 30, 2005 and the statements of
operations for the three-month and six-month periods ended June 30, 2005 to
reflect (i) the borrowing of $9,000,000, (ii) the conversion of existing
subordinated debentures to preferred stock, (iii) to record the Settlement
Agreement, and (iv) to adjust interest expense to reflect expense on the new
debt instead of the old debt as if these transactions had occurred on June 30,
2005 in the case of the balance sheet and at the beginning of the periods
presented in the case of the statements of operations.
Proforma net income available to common shareholders is $1,957,610 and
$2,354,682 for the three-month and six-month periods ended June 30, 2005
compared to actual net income of $416,267 and $744,121 for the three-month and
six-month periods ended June 30, 2004. This increase was primarily the result of
the gain reflected for the settlement with SummitBridge National Investments,
LLC. The gain, as a result of the settlement, is $2,793,194 less tax expense of
$949,686, or a net of $1,843,508.
6
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, Proforma Proforma
2004 June 30, 2005 Adjustment June 30, 2005
---- ------------- ---------- -------------
Current Assets:
Cash - non-restricted $260,025 424,716 (1)(2)(3) 268,800 693,516
Cash - restricted 196,754 55,476 55,476
Accounts and notes receivable (net of allowances of
$82,262) 1,011,758 1,193,587 1,193,587
Inventories 207,857 195,159 195,159
Assets held for resale - 256,465 256,465
Prepaid expenses 505,646 526,421 526,421
Current portion of long-term notes receivable 183,478 190,820 190,820
Deferred tax asset - current portion 994,148 994,148 994,148
------------ ------------ ------------
Total current assets 3,359,665 3,836,793 4,105,593
------------ ------------ ------------
Property and equipment:
Equipment 1,042,790 1,105,727 1,105,727
Leasehold improvements 94,017 104,018 104,018
------------ ------------ ------------
1,136,807 1,209,744 1,209,744
Less accumulated depreciation and amortization 484,068 521,964 521,964
------------ ------------ ------------
Net property and equipment 652,739 687,780 687,780
------------ ------------ ------------
Deferred tax asset (net of current portion) 9,135,834 8,883,662 (2)(3) (949,686) 7,933,976
Other assets 2,100,436 2,097,703 (1)(2) 326,598 2,424,301
------------ ------------ ------------
Total assets $15,248,675 $15,505,938 $15,151,650
============ ============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $1,252,852 $1,020,604 (3) (978,756) $ 41,849
Short-term notes payable - - (1) 1,500,000 1,500,000
------------ ------------ ------------
-
Total current liabilities 1,252,852 1,020,604 1,541,849
------------ ------------ ------------
Long-term obligations:
Note payable to bank net of current portion 7,700,000 7,700,000 (1)(3) (200,000) 7,500,000
Subordinated debentures 2,040,000 2,040,000 (2) (2,040,000) -
------------ ------------ ------------
Total long-term liabilities 9,740,000 9,740,000 7,500,000
------------ ------------ ------------
Stockholders' equity:
Common stock (25,000,000 shares authorized,
17,136,884 outstanding as of December 31, 2004
and June 30, 2005) 18,648,512 18,648,512 (3) 2,471,434 21,119,946
Preferred stock (5,000,000 shares authorized) 4,929,274 4,929,274 (2)(3) (2,950,474) 1,978,800
Accumulated deficit (19,321,963) (18,832,452) (2)(3) 1,843,508 (16,988,945)
------------ ------------ ------------
Total stockholders' equity 4,255,823 4,745,334 6,109,801
------------ ------------ ------------
Total liabilities and
stockholders' equity $15,248,675 $15,505,938 $15,151,650
============ -=========== ============
See accompanying notes to condensed consolidated financial statements.
(1) To record new borrowing of $9,000,000 and the associated cost.
(2) To record the conversion of the existing subordinated debentures to
preferred stock and the associated cost.
(3) To record the Settlement Agreement between SummitBridge National
Investments, LLC and Noble Roman's, Inc.
These proforma entries are recorded to adjust the statements of operations for
the three-month and six-month periods ended June 30, 2005 and the balance sheet
of June 30, 2005 to reflect (i) the borrowing of $9,000,000, (ii) the conversion
of existing subordinated debentures to preferred stock, (iii) to record the
Settlement Agreement between SummitBridge National Investments, LLC and Noble
Roman's, Inc., and (iv) to adjust interest expense to reflect expense on the new
debt instead of the old debt as if these transactions had occurred on June 30,
2005 for the balance sheet and at the beginning of the periods presented for the
statements of operations.
7
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------ -------------------------------------------------
Actual Actual Proforma Proforma Actual Actual Proforma Proforma
2004 2005 Adjustment 2005 2004 2005 Adjustment 2005
---- ---- ---------- ---- ---- ---- ---------- ----
Revenue:
Royalties and fees $1,792,474 $1,851,948 $1,851,948 $3,489,035 $3,633,811 $3,633,811
Administrative fees and
other 22,131 15,716 15,716 75,072 36,349 36,349
Restaurant revenue 308,092 294,123 294,123 501,917 542,563 542,563
---------- ---------- ---------- ---------- ---------- ----------
Total revenue 2,122,697 2,161,786 2,161,786 4,066,024 4,212,724 4,212,724
Operating expenses:
Salaries and wages 288,411 271,739 271,739 563,507 550,554 550,554
Trade show expense 83,394 120,534 120,534 207,981 228,540 228,540
Travel expense 55,781 79,390 79,390 120,449 142,803 142,803
Other operating expenses 175,486 181,303 181,303 354,580 370,903 370,903
Restaurant expenses 299,275 287,460 287,460 485,470 526,560 526,560
Depreciation and amortization 16,672 19,349 19,349 32,905 37,896 37,896
General and administrative 331,291 370,599 370,599 686,632 748,518 748,518
---------- ---------- ---------- ---------- ---------- ----------
Operating income 872,386 831,413 831,413 1,614,501 1,606,948 1,606,948
Interest and other expense 250,437 204,385(3)(4) (43,204) 161,181 495,803 406,632(3)(4) (103,040) 303,591
Other income -- --(1)(2) 2,793,194 2,793,194 -- --(1)(2) 2,793,194 2,793,194
---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes from continuing
operations 621,950 627,028 3,463,425 1,118,698 1,200,317 4,096,550
Income tax 205,683 213,189(1)(2) 949,686 1,162,875 374,577 408,108(1)(2) 949,686 1,357,794
---------- ---------- ---------- ---------- ---------- ----------
Net income from
continuing operations $ 416,267 $ 413,838 $2,300,550 $ 744,121 $ 792,209 $2,738,757
Loss on discontinued
operations net of tax
benefit of $155,935 -- (302,698) (302,698) -- (302,698 (302,698)
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 416,267 $ 111,140 $1,997,851 $ 744,121 $ 489,511 $2,436,059
Cumulative preferred dividends -- --(5) 40,241 40,241 -- --(5) 81,377 81,377
Net income available to
common stockholders 416,267 111,140 1,957,610 $ 744,121 $ 489,511 $2,354,682
========== ========== ========== ========== ========== ==========
Earnings per share:
Net income from
continuing operations $ .03 $ .02 $ .14 $ .05 $ .05 $ .17
Net income available to
common stockholders $ .03 $ .01 $ .12 $ .05 $ .03 $ .14
Weighted average number of
common shares outstanding 16,277,827 17,136,884 16,322,136 16,277,827 17,136,884 16,322,136
Diluted earnings per share:
Net income $ .02 $ .01 $ .12 $ .04 $ .03 $ .14
Weighted average number of
common shares outstanding 17,156,501 17,660,322 16,855,574 17,156,501 17,660,322 16,855,574
See accompanying notes to condensed consolidated financial statements.
(1) To record the conversion of the existing subordinated debentures to
preferred stock and the associated cost.
(2) To record the Settlement Agreement between SummitBridge National
Investments, LLC and Noble Roman's, Inc.
(3) Reverse interest charges for debt repaid from transaction.
(4) Record interest on new debt.
(5) Record cumulative preferred dividends.
These proforma entries are recorded to adjust the statements of operations for
the three-month and six-month periods ended June 30, 2005 and the balance sheet
of June 30, 2005 to reflect (i) the borrowing of $9,000,000, (ii) the conversion
of existing subordinated debentures to preferred stock, (iii) to record the
Settlement Agreement between SummitBridge National Investments, LLC and Noble
Roman's, Inc., and (iv) to adjust interest expense to reflect expense on the new
debt instead of the old debt as if these transactions had occurred on June 30,
2005 for the balance sheet and at the beginning of the periods presented for the
statements of operations.
8
(Note 2 continued)
The closing under the Settlement Agreement is contingent upon, among other
things, Noble Roman's obtaining new financing on terms satisfactory to it. Noble
Roman's has entered into a non-binding letter of understanding with a lender
that proposes to make Noble Roman's a loan of the funds to complete the
transactions under the Settlement Agreement.
In the Settlement Agreement, Noble Roman's agreed to use commercially reasonable
efforts to assist SummitBridge in finding one or more buyers for its retained
stock over a six- to nine-month period after closing. SummitBridge will continue
to have no voting rights with respect to its retained shares as a result of the
Indiana Control Share Acquisition Act. However, following the six- to nine-month
period after closing, SummitBridge will have the right to require Noble Roman's
and its executive officers to use commercially reasonable efforts to cause Noble
Roman's shareholders to vote to restore SummitBridge's voting rights on any
shares that SummitBridge then owns. Also after the six- to nine-month period, if
SummitBridge then owns more than 5% of Noble Roman's outstanding shares,
SummitBridge will have certain registration rights.
Upon closing under the Settlement Agreement, the legal action initiated by Noble
Roman's against SummitBridge National Investments, LLC in March 2004 will be
resolved and the parties will execute mutual releases.
Until closing on the Settlement Agreement, 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 Company's former 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 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
seeking payment of the unpaid principal and interest of the note and against
certain of its subsidiaries and a 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
9
loan and related instruments it purchased from the bank. SummitBridge's motion
was briefed and argued and the Court denied SummitBridge's motion.
Note 3 - The Company's subordinated debentures in the principal amount of
$2,040,000 bear interest at the rate of 8% per annum, payable quarterly, and
mature December 31, 2006. In conjunction with the financing discussed in Note 2,
the holders of the $2,040,000 principal amount of currently outstanding
subordinated debentures issued by Noble Roman's have agreed, at the time of the
closing under the Settlement Agreement, to convert their debentures into shares
of Noble Roman's convertible preferred stock that bears cumulative dividends at
8% per annum and has a liquidation preference equal to the principal amount of
the debt converted. The preferred stock is convertible after December 31, 2006
into Noble Roman's common stock at a conversion price of $2.25 per share. At any
time after December 31, 2008, the Company shall have the right, but not the
obligation, to redeem all preferred shares for a purchase price equal to the
liquidation value.
Note 4 - The Company records a valuation allowance in a sufficient amount to
adjust the total receivables value, in its best judgment, to reflect the amount
that the Company estimates will be collected from its total receivables. As any
accounts are determined to be uncollectible, they are charged off against the
valuation allowance.
Note 5 - Approximately $217,700 and $387,200 are included in the three-month and
six-month periods ended June 30, 2005, and approximately $254,000 and $395,500
for the three-month and six-month periods ended June 30, 2004, for initial
franchise fees. Because the Company's strategic direction is to grow its
business by franchising primarily 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 will continue. 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.
Note 6 - In conjunction with the development of Noble Roman's Pizza and
Tuscano's Italian Style Subs, the Company has devised its own recipes for many
of the ingredients that go into the making of its products ("Proprietary
Products"). The Company contracts with various manufacturers to manufacture its
Proprietary Products in accordance with the Company's recipes and formulas and
to sell those products to authorized distributors at a contract price which
includes an allowance for use of the Company's recipes. The manufacturing
contracts also require the manufacturers to remit those allowances to the
Company on a periodic basis, usually monthly. The Company recognizes those
allowances in revenue as earned based on sales reports from the distributors.
Note 7 - At December 31, 2004 and June 30, 2005, the Company had outstanding
warrants to purchase common stock as follows:
-----------------------------------------------------------------------
# Common Shares Represented Exercise Price Warrant Expiration Date
-----------------------------------------------------------------------
50,000 $ 1.50 6/30/2006
-----------------------------------------------------------------------
404,000 $ 1.25 1/15/2007
-----------------------------------------------------------------------
1,000,000 $ .40 12/31/2007
-----------------------------------------------------------------------
1,000,000 $ .93 12/31/2007
-----------------------------------------------------------------------
1,000,000 $ .93 1/7/2010
-----------------------------------------------------------------------
600,000 $ .93 1/24/2011
-----------------------------------------------------------------------
10
Note 8 - None of the recently issued Statement of Financial Accounting Standards
will have any material impact on the Company's Statement of Operations or its
Balance Sheet.
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, 2004
and 2005
Introduction
- ------------
On August 2, 2005, the Company entered into a Settlement Agreement with
SummitBridge National Investments, LLC and related entities. Upon closing of the
Settlement Agreement, Noble Roman's will acquire all of SummitBridge's debt and
equity interests in Noble Roman's, except for 2,400,000 shares of common stock,
for a purchase price of $8,300,000. These interests consist of a senior secured
promissory note in the principal amount of $7,700,000, interest accrued on the
note since February 2004, 3,214,748 shares of Noble Roman's common stock,
$4,929,275 stated amount of Noble Roman's no-yield preferred stock convertible
into 1,643,092 shares of common stock, and a warrant to purchase 385,000 shares
of Noble Roman's common stock with an exercise price of $.01 per share.
In order to show the effect of the significant subsequent transaction on its
financial statements, the Company has included a proforma balance sheet on page
7 and a proforma statement of operations on page 8. The proforma entries are
recorded to adjust the balance sheet as of June 30, 2005 and the statements of
operations for the three-month and six-month periods ended June 30, 2005 to
reflect (i) the borrowing of $9,000,000, (ii) the conversion of existing
subordinated debentures to preferred stock, (iii) to record the Settlement
Agreement, and (iv) to adjust interest expense to reflect expense on the new
debt instead of the old debt as if these transactions had occurred on June 30,
2005 in the case of the balance sheet and at the beginning of the periods
presented in the case of the statements of operations.
The Company sells and services franchises for non-traditional, co-branded and
stand-alone foodservice operations under the trade name "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 developed in such a way as
to produce superior results. Here are a few of the differences that the Company
believes makes its products 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.
11
o 100% real cheese blended from mozzarella and muenster, with no soy
additives or extenders.
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.
With its Italian theme, Tuscano's offers a distinctive format. Tuscano's was
designed to be comfortably familiar with the customer. For example, 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 cash 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, and the generous
yet cost effective quality sauces and spreads. Tuscano's was designed to be
premium quality, simple to operate and cost effective.
For the most part, the Company expects to award Tuscano's franchises for the
same facilities as Noble Roman's Pizza franchises, although both franchises are
available for locations that do not have the other.
The Company continues 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. Recently, the Company has also been offering the dual-branded concept of
Noble Roman's/Tuscano's for stand-alone traditional locations. Noble Roman's has
sold franchises in 44 states from coast-to-coast within the United States. In
addition, it has sold
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franchise agreements for military bases in Puerto Rico, Guam and Italy, and for
entertainment facilities and convenience stores in Canada.
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 condensed consolidated statements of
operations for the three-month and six-month periods ended June 30, 2004 and
2005, respectively.
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2004 2005 2004 2005
---- ---- ---- ----
Revenue:
Royalties and fees 84.5% 85.7% 85.9% 86.3%
Administrative fees and other 1.0 .7 1.8 .9
Restaurant revenue 14.5 13.6 12.3 12.8
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Salaries and wages 13.6 12.6 13.9 13.1
Trade show expenses 3.9 5.6 5.1 5.4
Travel expense 2.6 3.7 3.0 3.4
Other operating expenses 8.3 8.4 8.7 8.8
Restaurant expenses 14.1 13.3 11.9 12.5
Depreciation and amortization .8 .9 .8 .9
General and administrative 15.6 17.1 16.9 17.8
----- ----- ----- -----
Operating income 41.1 38.5 39.7 38.1
Interest and other expense 11.8 9.5 12.2 9.7
----- ----- ----- -----
Net income before income tax 29.3 29.0 27.5 28.5
Income tax 9.7 9.9 9.2 9.7
----- ----- ----- -----
Net income 19.6% 19.1% 18.3% 18.8%
===== ===== ===== =====
Results of Operations
- ---------------------
Total revenue from royalties and fees increased from $1.792 million to $1.852
million and from $3.489 million to $3.634 million, respectively, for the
three-month and six-month periods ended June 30, 2005 compared to the
corresponding periods in 2004. Total revenue increased from $2.123 million to
$2.162 million and from $4.066 million to $4.213 million, respectively, for the
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three-month and six-month periods ended June 30, 2005 compared to the
corresponding periods in 2004. The increase in the royalties and fees was
primarily the result of the growth in the number of franchise locations open and
higher unit sales from some of the most recent openings. The increase in total
revenue was primarily the result of the increase in royalty and fee income.
Salaries and wages decreased from 13.6% of revenue for the three-month periods
ended June 30, 2004 to 12.6% for the three-month period ended June 30, 2005.
Salaries and wages decreased from 13.9% of revenue for the six-month period
ended June 30, 2004 to 13.1% of revenue for the corresponding period in 2005.
The primary reason for the decrease was the growth in revenue with approximately
the same salaries by utilizing the same staff to support additional growth.
Trade show expense increased from 3.9% of revenue for the three-month period
ended June 30, 2004 to 5.6% of revenue for the corresponding period in 2005.
Trade show expense increased for the six-month period ended June 30, 2005 to
5.4% of revenue from 5.1% of revenue for the corresponding period in 2004. The
increase was the result of increased participation in more national trade shows
designed to create additional growth for the future and to further diversify
that growth. This expense is not expected to grow more in the future.
Travel expenses increased from 2.6% and 3.0% of revenue for the three-month and
six-month periods ended June 30, 2004 to 3.7% and 3.4%, respectively, of revenue
for the corresponding periods in 2005. This increase was primarily the result of
the increase in the number of franchise locations, especially locations farther
away from the home office.
Other operating expenses increased from 8.3% to 8.4% and from 8.7% to 8.8% of
revenue, respectively, for the three-month and six-month periods ended June 30,
2005 compared to the corresponding periods in 2004. These increases were
primarily the result of additional advertising expense for additional field
staff for anticipated future needs.
Restaurant expenses decreased from 14.1% to 13.3% of revenue for the three-month
period ended June 30, 2005 compared to the same period in 2004. Restaurant
expenses increased from 11.9% to 12.5% for the six-month period ended June 30,
2005 compared to the corresponding period in 2004. The decrease in the
three-month period was the result of operating fewer restaurants on a temporary
basis. The increase in the six-month period was the result of operating more
restaurants on a temporary basis during the first quarter of 2005 compared to
the corresponding period in 2004. Except for one demonstration restaurant, which
the Company intends to operate, the Company only operates restaurants on a
temporary basis until a suitable franchisee is located.
General and administrative expense increased from 15.6% and 16.9% to 17.1% and
17.8% of revenue for the three-month and six-month period ended June 30, 2005,
respectively, compared to the same periods in 2004. The increase was the result
of adding more overhead in anticipation of additional growth later in the year.
The general and administrative expense, as a percentage of revenue, is expected
to decrease as more units are opened later this year.
Operating income decreased from 41.1% and 39.7% of revenue for the three-month
and six-month periods ended June 30, 2004 to 38.5% and 38.1%, respectively, of
revenue for the corresponding periods in 2005. The decrease in operating income
as a percentage of revenue was a result of increasing capacity to support
planned future growth. The Company anticipates that the operating
14
income as a percent of revenue will improve later in the year as revenue
continues to grow from the growth in the number of units.
Interest expense decreased from 11.8% and 12.2% of revenue for the three-month
and six-month periods ended June 30, 2004 to 9.5% and 9.7%, respectively, of
revenue for the corresponding periods in 2005. This decrease was the result of
the revenue increases from additional growth while the interest cost decreased
from reduction of outstanding debt.
Net income from continuing operations decreased from $416,267 to $413,838 for
the three-month period ended June 30, 2005 compared to the second quarter in
2004. Net income from continuing operations increased from $744,121 to $792,209
for the six-month period ended June 30, 2005 compared to the corresponding
period in 2004. Net income from continuing operations primarily decreased
because of increased operating expenses, incurred for future growth, were
slightly more than the savings in interest cost as a result of less debt
outstanding in the three-month period ended June 30, 2005 compared to 2004. In
the six-month period ended June 30, 2005 compared to 2004, net income increased
primarily as a result of decreased interest cost resulting from decreased debt
outstanding.
During the three-month period and six-month period ended June 30, 2005, the
Company incurred a loss on discontinued operations in the amount of $302,698 net
of a tax benefit of $155,935. This loss was primarily the result of settling a
dispute on a lease agreement related to a restaurant which was closed in
February 2000 and legal fees related to the discontinued operations.
Liquidity and Capital Resources
- -------------------------------
The Company's strategy is to grow its business by franchising primarily in
non-traditional locations. 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 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.
Cash flow provided by operating activities continued to show improvement in the
six-month period ended June 30, 2005 of $757,496 compared to the corresponding
period in 2004 of $657,979. The current ratio as of June 30, 2005 was 3.8 to 1,
which was an improvement from December 31, 2004 of 2.7 to 1.
Noble Roman's has entered into a non-binding letter of understanding with a
lender that proposes to make Noble Roman's a loan of the funds to complete the
previously discussed Settlement Agreement. The loan will bear interest at a
variable rate of LIBOR plus 4% and it is to be amortized on a straight-line
basis over a period of 72 consecutive months immediately following closing. In
conjunction with the new financing, all of the holders of the $2,040,000
principal amount of currently outstanding subordinated debentures issued by
Noble Roman's have agreed to convert their debentures into shares of Noble
Roman's convertible preferred stock that bears cumulative dividends at 8% per
annum and has a liquidation preference equal to the principal amount of the debt
converted. The preferred stock is convertible at the option of the holder after
December 31, 2006 into Noble Roman's common stock at a conversion price of $2.25
per share. At
15
any time after December 31, 2008, the Company shall have the right, but not the
obligation, to redeem all preferred shares for a purchase price equal to the
liquidation value.
As discussed in the introduction to Management's Discussion and Analysis of
Financial Condition and Results of Operations, on August 2, 2005, the Company
entered into a Settlement Agreement with SummitBridge National Investments, LLC.
In order to show the effect of the significant subsequent transaction on its
financial statements, the Company has included a proforma balance sheet on page
7 and a proforma statement of operations on page 8. On a proforma basis, as of
June 30, 2005, total debt to net worth was .68 to 1 and the current ratio was
2.7 to 1.
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
satisfaction of conditions under the proposed Settlement Agreement relating to
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.
None of the recently issued Statement of Financial Accounting Standards will
have any material impact on the Company's Statement of Operations or its Balance
Sheet.
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. The Company's borrowings are at
fixed interest rates of 8.0% and 8.75% per annum.
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
16
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.
Recently the Company entered into a Settlement Agreement with SummitBridge
National Investments, LLC and related entities. Upon closing of the Settlement
Agreement, Noble Roman's will acquire all of SummitBridge's debt and equity
interests in Noble Roman's, except for 2,400,000 shares of common stock, for a
purchase price of $8,300,000. These interests consist of a senior secured
promissory note in the principal amount of $7,700,000, interest accrued on the
note since February 2004, 3,214,748 shares of Noble Roman's common stock,
$4,929,275 stated amount of Noble Roman's no-yield preferred stock convertible
into 1,643,092 shares of common stock, and a warrant to purchase 385,000 shares
of Noble Roman's common stock with an exercise price of $.01 per share.
The closing under the Settlement Agreement is contingent upon, among other
things, Noble Roman's obtaining new financing on terms satisfactory to it. Noble
Roman's has entered into a non-binding letter of understanding with a lender
that proposes to make Noble Roman's a loan of the funds to complete the
transactions under the Settlement Agreement.
In the Settlement Agreement, Noble Roman's agreed to use commercially reasonable
efforts to assist SummitBridge in finding one or more buyers for their retained
stock over a six- to nine-month period after closing. SummitBridge will continue
to have no voting rights with respect to its retained shares as a result of the
Indiana Control Share Acquisition Act. However, following the six- to nine-month
period after closing, SummitBridge will have the right to require Noble Roman's
and its executive officers to use commercially reasonable efforts to cause Noble
Roman's shareholders to vote to restore SummitBridge's voting rights on any
shares that SummitBridge then owns. Also after the six- to nine-month period, if
SummitBridge then owns more than 5% of Noble Roman's outstanding shares,
SummitBridge will have certain registration rights.
Upon closing under the Settlement Agreement, the legal action initiated by Noble
Roman's against SummitBridge National Investments, LLC in March 2004 will be
resolved and the parties will execute mutual releases.
Until closing on the Settlement Agreement, 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
17
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. SummitBridge has disputed the Company's position.
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
seeking payment of the unpaid principal and interest of the note and against
certain of its subsidiaries and a 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 denied SummitBridge's motion.
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 16.
18
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
19
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 09, 2005 By /s/ Paul W. Mobley
-----------------------------------------
Paul W. Mobley, Chairman of the Board and
Chief Financial Officer
20