Wednesday, May 03, 2006
Noble Roman's (NROM) 10-K
10-K: (brief look)
16.3 million shares on March 1, 2006. 4 million options and warrants. Assume 23 million totally diluted shares.
They're selling "development territories" to area developers for 5 cents per capita in exchange for 30% of the franchise fee and 2/7ths of the royalty from locations in the territory.
Royalties and fees, and restaurant revenues have grown consistently while admin fees and other have declined (they weren't much to start with). Total revenues increased consistently from 2001 ($5.7 million) to 2005 ($8.4 million). In 2005 this was due to new franchises and not favorable comps (from what I can tell). About 10% of revenue is initial franchise fees ($483K in 2003, $796K in 2004, $700K in 2005).
In the 2003->2004 comparison, they mention commissions on equipment sales which decreased by $250K. This is an item that I don't like. It's possible to overcharge for equipment while growing new restaurants, inflating revenues. This possible portion of revenues isn't totally clear to me and I'm not digging carefully through the details to look for it right now.
Net income has grown consistently. However, 2005 had a large "other income" event from the settlement (see below). Net income would have been around $1.1 million (rather than $2.8 million). They seem to consistently have significant losses from discontinued operations: $560K in 2005.
The loss from discontinued operations was primarily the result of settling lease disputes on lease agreements related to restaurants closed in 1999 and 2000 and for legal fees related to the discontinued operations. The Company believes that any additional expenses resulting from the discontinued operations, in the future, will not be material.Margins have been fairly steady over the years. Operating margin of around 37%, but then there's the constantly recurring loss from discontinued operations. Operating leverage seems to be fairly good.
A legal settlement forced them to buy-back 2.4 million shares plus a bunch of debt and pfd convertable stock and warrants. Total cost was $8.3 million. Along with the settlement NROM got a $9 million loan at LIBOR+4 adjustable monthly (bad) secured by NROM property. They did an interest rate swap.
The assets are mostly deferred tax assets, AR (about 10% allowance), and cash, with some half-depreciated equipment. Current ratio is good, but worse than it looks. A little more than half equity.
Over the last 3 years, cash flow from ops has pretty much matched what I consder to be earnings. Free cash flow is pretty good, I'd say averaging around $1.3 million per year. HOWEVER, financing has chewed it all up via payment of obligations from discontinued operations. This would need close scrutiny before I'd ever consider this as an investment. They've also done some debt shuffling.
The Chairman owns 21% of the stock. Officers and directors own 29%.
Considering the 10% of revenues is initial franchise fees and assuming the costs of discontinued operations will end (important "if"), then I'd say they'd have about $1 million in free cash flow per year and they'd be worth around 65 cents.
NOTE: Feel free to tell me when I totally miss some huge important point or screw up somehow, which can and will happen. I promise.