United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 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
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of November 8, 2005, 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, 2004
and September 30, 2005 (unaudited) Page 3
Condensed consolidated statements of operations for the three
months and nine months ended September 30, 2004 and 2005
(unaudited) Page 4
Condensed consolidated statements of cash flows for the
nine months ended September 30, 2004 and 2005 (unaudited) Page 5
Notes to condensed consolidated financial statements (unaudited) Page 6
2
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, September 30,
Assets 2004 2005
------ ------------ ------------
Current Assets:
Cash - non-restricted $ 260,025 $ 983,335
Cash - restricted 196,754 55,476
Accounts and notes receivable (net of allowance of
$82,262 as of December 31, 2004 and $122,262 as of
September 30, 2005) 1,011,758 1,299,397
Inventories 207,857 191,059
Assets held for resale -- 272,184
Prepaid expenses 505,646 470,093
Current portion of long-term notes receivable 183,478 170,073
Deferred tax asset - current portion 994,148 994,148
------------ ------------
Total current assets 3,359,665 4,435,766
------------ ------------
Property and equipment:
Equipment 1,042,790 1,138,904
Leasehold improvements 94,017 104,388
------------ ------------
1,136,807 1,243,292
Less accumulated depreciation and amortization 484,068 541,651
------------ ------------
Net property and equipment 652,739 701,641
------------ ------------
Deferred tax asset (net of current portion) 9,135,834 7,898,415
Other assets 2,100,436 2,393,659
------------ ------------
Total assets $ 15,248,675 $ 15,429,481
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,252,852 $ 348,964
Current portion of long-term note payable 1,500,000
------------ ------------
Total current liabilities 1,252,852 1,848,964
Long-term obligations:
Note payable to bank net of current portion 7,700,000 7,500,000
Subordinated debentures 2,040,000 --
------------ ------------
Total long-term liabilities 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 16,322,136 outstanding as of September 30, 2005) 18,648,512 21,021,632
Preferred stock (5,000,000 shares authorized) 4,929,274 1,978,800
Accumulated deficit (19,321,963) (16,919,915)
------------ ------------
Total stockholders' equity 4,255,823 6,080,517
------------ ------------
Total liabilities and stockholders' equity $ 15,248,675 $ 15,429,481
============ ============
See accompanying notes to condensed consolidated financial statements.
3
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2004 2005 2004 2005
---- ---- ---- ----
Revenue:
Royalties and fees $ 1,750,150 $ 1,841,408 $ 5,239,185 $ 5,475,220
Administrative fees and other 15,654 15,991 90,726 52,340
Restaurant revenue 250,014 247,349 751,932 789,913
------------ ------------ ------------ ------------
Total revenue 2,015,818 2,104,748 6,081,842 6,317,472
Operating expenses:
Salaries and wages 290,541 282,852 854,048 833,406
Trade show expense 86,685 119,816 294,666 348,356
Travel expense 70,804 83,333 191,252 226,136
Other operating expenses 177,524 183,424 532,105 554,327
Restaurant expenses 240,271 241,021 725,741 767,581
Depreciation and amortization 15,306 25,301 48,211 63,197
General and administrative expenses 347,878 372,762 1,034,510 1,121,280
------------ ------------ ------------ ------------
Operating income 786,808 796,239 2,401,309 2,403,187
Interest and other expense 240,782 207,298 736,586 613,930
Other income -- 2,800,830 -- 2,800,830
------------ ------------ ------------ ------------
Net income before income taxes
from continuing operations 546,026 3,389,771 1,664,723 4,590,088
Income tax 185,649 1,152,522 560,226 1,560,630
------------ ------------ ------------ ------------
Net income from continuing
operations $ 360,377 $ 2,237,249 $ 1,104,497 $ 3,029,458
Loss on discontinued operations net of
tax benefit of $167,276 for three
months ended and $323,211 for the
nine months ended September 30, 2005 -- (324,711) -- (627,410)
------------ ------------ ------------ ------------
Net income $ 360,377 $ 1,912,537 $ 1,104,497 $ 2,402,048
============ ============ ============ ============
Earnings per share:
Net income from continuing operations $ .02 $ .13 $ .07 $ .18
Net income $ .02 $ .11 $ .07 $ .14
Weighted average number of common
shares outstanding 16,277,827 16,809,214 16,277,827 17,026,460
Diluted earnings per share:
Net income $ .02 $ .11 $ .06 $ .14
Weighted average number of common
shares outstanding 17,015,481 17,411,377 17,044,648 17,628,623
See accompanying notes to condensed consolidated financial statements.
4
Noble Roman's, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------
2004 2005
---- ----
OPERATING ACTIVITIES
Net income from continuing operations $ 1,104,497 $ 3,029,458
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 114,281 128,190
Interest accrued not paid -- 354,533
Deferred federal income taxes 560,226 1,560,630
Changes in operating assets and liabilities (increase) decrease in:
Accounts receivable (159,434) (287,639)
Inventory (61,916) 16,798
Assets held for resale -- (272,184)
Prepaid expenses (45,302) (4,447)
Other assets (282,870) 21,740
Decrease in:
Accounts payable (97,510) (287,401)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,131,972 4,259,678
------------ ------------
INVESTING ACTIVITIES
Purchase of property and equipment (114,352) (106,485)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (114,352) (106,485)
------------ ------------
FINANCING ACTIVITIES
Payments received on long term notes receivable 109,830 193,945
Payment of obligations from discontinued operations (768,473) (1,159,850)
Net proceeds from long-term debt -- 8,599,852
Principal payments on long-term debt (165,840) --
Purchase of all of SummitBridge's interest in the Company except
2.4 million shares of common stock -- (11,143,909)
Issuance cost of the new preferred stock -- (61,200)
------------ ------------
NET CASH USED BY FINANCING ACTIVITIES (824,483) (3,571,161)
------------ ------------
INCREASE IN CASH 193,136 582,032
Cash at beginning of period 237,445 456,779
------------ ------------
Cash at end of period $ 430,581 $ 1,038,811
============ ============
Supplemental schedule of non-cash investing and financing activities
The holders of the $2,040,000 aggregate principal amount of subordinated
debentures exchanged their subordinated debentures for preferred stock with an
aggregate liquidation value of $2,040,000.
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 quarter
and nine months ended September 30, 2005 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2005.
Note 2 - On August 25, 2005, the Company consummated a Settlement Agreement with
SummitBridge National Investments, LLC and related entities. As of a result of
the Settlement Agreement, Noble Roman's acquired 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 consisted of a senior
secured promissory note in the principal amount of $7,700,000, interest accrued
on the note of $927,756, 3,214,748 shares of Noble Roman's common stock,
$4,929,275 stated amount of Noble Roman's no-yield preferred stock which was
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.
Simultaneous with the closing on the Settlement Agreement, Noble Roman's
obtained a new six-year term loan in the principal amount of $9,000,000. The
new note calls for monthly principal payments of $125,000 plus interest at the
rate of LIBOR plus 4% per annum variable on a monthly basis. 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.
In accordance with 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.
As a result of the settlement, the legal action initiated by Noble Roman's
against SummitBridge National Investments, LLC in March 2004 was resolved and
the parties executed mutual releases. The legal action that was settled was a
Complaint filed by the Company 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.
Note 3 - Simultaneous with the closing under the Settlement Agreement and the
new term loan, the previous holders of the Company's subordinated debentures, in
the principal amount of $2,040,000, which bore interest at the rate of 8% per
annum which was payable quarterly and which were to
6
mature December 31, 2006, accepted an offer from the Company to convert their
subordinated debentures to convertible preferred stock with an aggregate
liquidation value of $2,040,000 . The convertible preferred stock provides for
cumulative dividends of 8% per annum on the liquidation value of the convertible
preferred stock. 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 $257,300 and $644,500 are included in the three-month and
nine-month periods ended September 30, 2005, and approximately $218,000 and
$613,500 for the three-month and nine-month periods ended September 30, 2004,
for initial franchise fees. Because the Company's strategic direction is to grow
its business by franchising primarily, in the past, 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.
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 September 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
--------------------------------------------------------------------------
1,000,000 $ .40 12/31/2007
--------------------------------------------------------------------------
1,000,000 $ .93 12/31/2007
--------------------------------------------------------------------------
404,000 $ 1.25 1/15/2008
--------------------------------------------------------------------------
1,000,000 $ .93 1/7/2010
--------------------------------------------------------------------------
50,000 $ .95 9/26/2010
--------------------------------------------------------------------------
600,000 $ .93 1/24/2011
--------------------------------------------------------------------------
Note 8 - The Company does not believe that the recently issued Statement of
Financial Accounting Standards will have any material impact on the Company's
Statement of Operations or its Balance Sheet.
7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Noble Roman's, Inc. and Subsidiaries
Results of Operations - Three-month and nine-month periods ended September 30,
2004 and 2005
Introduction
- ------------
On August 25, 2005, the Company consummated a Settlement Agreement with
SummitBridge National Investments, LLC and related entities. As of a result of
the Settlement Agreement, Noble Roman's acquired 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 consisted of a senior
secured promissory note in the principal amount of $7,700,000, interest accrued
on the note of $927,756, 3,214,748 shares of Noble Roman's common stock,
$4,929,275 stated amount of Noble Roman's no-yield preferred stock which was
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.
Simultaneous with the closing on the Settlement Agreement, Noble Roman's
obtained a new six-year term loan in the principal amount of $9,000,000. The
new note calls for monthly principal payments of $125,000 plus interest at the
rate of LIBOR plus 4% per annum variable on a monthly basis. 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 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.
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.
8
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 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 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, high
quality whole-muscle meats, 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.
Franchise Development
- ---------------------
Noble Roman's has sold franchises in 44 states from coast-to-coast within the
United States. In addition, it has sold franchise agreements for military bases
in Puerto Rico, Guam and Italy, and for entertainment facilities and convenience
stores in Canada.
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.
For more rapid growth, the Company plans to sell development territories, by
television areas of dominant influence, 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 area, subject to
Company approval on each franchisee and each location. The Area Development
Agents will generally pay a development fee of $.05 per population in their
9
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. 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 negotiations on eight Area Development
Agreements and is in discussions with several other 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 condensed consolidated statements of
operations for the three-month and nine-month periods ended September 30, 2004
and 2005, respectively.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2004 2005 2004 2005
---- ---- ---- ----
Revenue:
Royalties and fees 86.8% 87.5% 86.1% 86.7%
Administrative fees and other .8 .8 1.5 .8
Restaurant revenue 12.4 11.8 12.4 12.5
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Operating expenses:
Salaries and wages 14.4 13.4 14.0 13.2
Trade show expenses 4.3 5.7 4.8 5.5
Travel expense 3.5 4.0 3.1 3.6
Other operating expenses 8.8 8.7 8.7 8.8
Restaurant expenses 11.9 11.5 11.9 12.2
Depreciation and amortization .8 1.2 .8 1.0
General and administrative 17.3 17.7 17.0 17.7
----- ----- ----- -----
Operating income 39.0 37.8 39.5 38.0
Interest and other expense 11.9 9.8 12.1 9.7
Other income - 133.1 - 44.3
----- ----- ----- -----
Net income before income tax 27.1 161.1 27.4 72.7
Income tax 9.2 54.8 9.2 24.7
----- ----- ----- -----
Net income 17.9% 106.3% 18.2% 48.0%
===== ===== ===== =====
10
Results of Operations
- ---------------------
Total revenue from royalties and fees increased from $1.750 million to $1.841
million and from $5.239 million to $5.475 million, respectively, for the
three-month and nine-month periods ended September 30, 2005 compared to the
corresponding periods in 2004. Total revenue increased from $2.016 million to
$2.105 million and from $6.082 million to $6.318 million, respectively, for the
three-month and nine-month periods ended September 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 14.4% of revenue to 13.4% of revenue and from
14.0% of revenue to 13.2% of revenue for the three-month and nine-month periods
ended September 30, 2005 compared to the corresponding periods in 2004. 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 4.3% of revenue to 5.7% of revenue and from
4.8% of revenue to 5.5% of revenue for the three-month and nine-month periods
ended September 30, 2005 compared to the corresponding periods in 2004. The
increase was the result of increased participation in national trade shows
designed to create additional growth for the future and to further diversify
that growth. The actual expense is not expected to grow more in the future and
if revenues continue to grow as expected, the percentage of revenue represented
by trade show expense is expected to decline.
Travel expenses increased from 3.5% of revenue to 4.0% of revenue and from 3.1%
of revenue to 3.6% of revenue for the three-month and nine-month periods ended
September 30, 2005 compared to the corresponding periods in 2004. 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 decreased from 8.8% of revenue to 8.7% of revenue and
increased from 8.7% of revenue to 8.8% of revenue, respectively, for the
three-month and nine-month periods ended September 30, 2005 compared to the
corresponding periods in 2004.
Restaurant expenses decreased from 11.9% of revenue to 11.5% of revenue and
increased from 11.9% of revenue to 12.2% of revenue, respectively, for the
three-month period and nine-month periods ended September 30, 2005 compared to
the same periods in 2004. The decrease in the three-month period was the result
of operating fewer restaurants on a temporary basis. The increase in the
nine-month period was the result of operating more restaurants on a temporary
basis. Other than the one demonstration unit, the Company does not plan on
operating restaurants, except on a temporary basis until a suitable franchisee
is located.
General and administrative expense increased from 17.3% of revenue to 17.7% of
revenue and from 17.0% of revenue to 17.7% of revenue for the three-month and
nine-month periods ended September 30, 2005, respectively, compared to the same
periods in 2004. This slight increase was the result of adding additional
overhead in preparation for additional growth.
Operating income decreased from 39.0% of revenue to 37.8% of revenue and from
39.5% of revenue to 38.0% of revenue for the three-month and nine-month periods
ended September 30, 2005, respectively, compared to the corresponding periods in
2004. The decrease in operating
11
income as a percentage of revenue was a result of the increase in operating
income being less than the increase in total revenue. This was primarily the
result of the increase in trade show expense and travel expense as a percentage
of total revenue partially offset by the decrease in salaries and wages as a
percentage of total revenue.
Interest expense decreased from 11.9% of total revenue and 12.1% of total
revenue to 9.8% of total revenue and 9.7% of total revenue for the three-month
and nine-month periods ended September 30, 2005, respectively, compared to the
corresponding periods in 2004. This decrease was the result of the revenue
increases from additional growth while the interest cost decreased from
reduction of outstanding debt.
Other income was $2,800,830 for both the three-month period and nine-month
period ended September 30, 2005 compared to none for the corresponding periods
in 2004. This income was the result of the gain associated with the August 25,
2005 settlement with SummitBridge National Investments, LLC, as described under
"Introduction to Management's Discussion and Analysis of Financial Condition and
Results of Operations" above.
Net income from continuing operations increased from $360,377 and $1,104,497 to
$2,237,249 and $3,029,458 for the three-month and nine-month periods ended
September 30, 2005, respectively, compared to the corresponding periods in 2004.
This increase was the result of a slight increase in operating income, a
decrease in interest expense and primarily from the other income, as described
above, offset by income tax expense on the other income.
The Company incurred a loss on discontinued operations in the amount of $324,711
and $627,410 net of a tax benefit of $167,276 and $323,211 during the
three-month period and nine-month period ended September 30, 2005, respectively.
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. The Company is not aware of any remaining issues
related to the discontinued operations that will result in any significant
additional expense in the future.
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 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.
Cash flow provided by operating activities continued to show improvement in the
nine-month period ended September 30, 2005, compared to the corresponding period
in 2004, even after reducing the cash flow provided by operating activities by
the gain associated with the settlement with SummitBridge National Investments,
LLC, as discussed under "Introduction to Management's Discussion and Analysis of
Financial Condition and Results of Operations" above.
On August 25, 2005, the Company finalized a Settlement Agreement with
SummitBridge National Investments, LLC and related entities. As of a result of
the Settlement Agreement, Noble Roman's acquired 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 consisted of a senior
12
secured promissory note in the principal amount of $7,700,000, interest accrued
on the note of $927,756, 3,214,748 shares of Noble Roman's common stock,
$4,929,275 stated amount of Noble Roman's no-yield preferred stock which was
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.
Simultaneous with the closing on the Settlement Agreement, Noble Roman's
obtained a new six-year term loan in the principal amount of $9,000,000. The
new note calls for monthly principal payments of $125,000 plus interest at the
rate of LIBOR plus 4% per annum variable on a monthly basis. 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 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 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.
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'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.
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
13
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.
On August 25, 2005, the Company consummated a Settlement Agreement with
SummitBridge National Investments, LLC and related entities. As of a result of
the Settlement Agreement, Noble Roman's acquired 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 consisted of a senior
secured promissory note in the principal amount of $7,700,000, interest accrued
on the note of $927,756, 3,214,748 shares of Noble Roman's common stock,
$4,929,275 stated amount of Noble Roman's no-yield preferred stock which was
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 accordance with 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.
As a result of the settlement, the legal action initiated by Noble Roman's
against SummitBridge National Investments, LLC in March 2004 was resolved and
the parties executed mutual releases. The legal action that was settled was a
Complaint filed by the Company 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. In accordance with 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.
14
As a result of the settlement, the legal action initiated by Noble Roman's
against SummitBridge National Investments, LLC in March 2004 was resolved and
the parties executed mutual releases. The legal action that was settled was a
Complaint filed by the Company 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.
The Company is not involved in any litigation currently, nor is any litigation
currently threatened, which would have any material effect upon the Company.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) ISSUER PURCHASES OF EQUITY SECURITIES
- -------------------------------------------------------------------------------------------------------------
(d) Maximum Number (or
(b) (c) Total Number of Approximate Dollar Value) of
(a) Total Number Average Price Shares Purchased as Part Shares that May Yet Be
of Shares Paid per of Publicly Announced Purchased Under the Plans or
Period Purchased Share Plans or Programs(1) Programs
- -------------------------------------------------------------------------------------------------------------
Month #1 (July 1 -
July 31) 0 0 0 0
- -------------------------------------------------------------------------------------------------------------
Month #2 (August 1 -
August 31) (1) (1) 0 0
- -------------------------------------------------------------------------------------------------------------
Month #3 (September 1
- - September 30) 0 0 0 0
- -------------------------------------------------------------------------------------------------------------
Total (1) (1) 0 0
- -------------------------------------------------------------------------------------------------------------
(1) As reported under Part II, Item 1 to this Form 10-Q, the Company consummated
a Settlement Agreement with SummitBridge National Investments, LLC and related
entities on August 25, 2005. As a result of this Settlement Agreement, Noble
Roman's acquired a warrant to purchase 385,000 shares of Noble Roman's common
stock with an exercise price of $.01 per share plus $4,929,275 stated amount of
Noble Roman's no-yield preferred stock which was convertible into 1,643,092
shares of common stock and 814,748 shares of Noble Roman's common stock, all
valued at $1.04 per share.
ITEM 6. Exhibits.
(a) Exhibits: See Exhibit Index appearing on page 15.
15
Index to Exhibits
Exhibit
- -------
3.1 Amendment to Articles of Incorporation Authorizing Series B
Convertible Preferred Stock, filed as Exhibit 3.1 to the
Company's Form 8-K filed August 29, 2005 and incorporated
herein by reference.
4.1 Form of Warrant to Purchase Common Stock, filed as Exhibit 4.1
to the Company's Form 8-K filed August 29, 2005 and
incorporated herein by reference.
10.1 Loan Agreement by and Among the Company, Pizzaco, Inc., N.R. Realty,
Inc. and Wells Fargo Bank, N.A., filed as Exhibit 10.1 to the
Company's Form 8-K filed August 29, 2005 and incorporated herein by
reference.
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
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOBLE ROMAN'S, INC.
Date: November 14, 2005 By: /s/ Paul W. Mobley
-----------------------------------------
Paul W. Mobley, Chairman of the Board and
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
17