U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2000.
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ____ to____.
Commission file number 0-11104
NOBLE ROMAN'S, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1281154
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Virginia Avenue, Suite 800
Indianapolis, Indiana 46204
(Address of principal executive offices)
Registrant's telephone number: (317) 634-3377
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
$7,689,810 as of March 20, 2001
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
13,593,701 shares of common stock as of March 20, 2001
Documents Incorporated by Reference: None
NOBLE ROMAN'S, INC.
FORM 10-K
Year Ended December 31, 2000
Table of Contents
Item #
in Form 10-K Page
PART I
1. Business 3
2. Properties 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 6
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 7
6. Selected Financial Data 8
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
8. Financial Statements and Supplementary Data 14
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 25
PART III
10. Directors and Executive Officers of the Registrant 25
11. Executive Compensation 26
12. Security Ownership of Certain Beneficial Owners and Management 28
13. Certain Relationships and Related Transactions 30
PART IV
14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 31
2
PART 1
ITEM 1. BUSINESS
General Information
- -------------------
Noble Roman's, Inc. (the "Company") sells and services franchises for
non-traditional and co-branded foodservice operations under the trade name
"Noble Roman's Pizza". The concept's hallmarks include high quality pizza
products, simple operating systems, labor-minimizing operations, attractive food
costs and overall affordability. The Company has over 29 years experience
operating full-service pizza restaurants, giving it unique advantages in the
design and consultation of foodservice systems for franchisees. Since 1997, the
Company has awarded approximately 750 non-traditional and co-branded franchises
in 41 states. Since the franchises are typically installed in pre-existing,
high-traffic commercial and recreational facilities, a typical franchise
requires an investment of approximately $25,000 to $30,000 per location.
Products & Systems
- ------------------
Prior to franchising non-traditional and co-branded locations, the company
invested approximately three years in time and manpower to engineer a selection
of high quality products and easy to implement systems that would appeal to
prospective franchisees. Using its 29 years of experience in operating pizza
restaurants and its highly regarded, scratch-made products served in its
traditional restaurants as a baseline for quality standards, the Company
carefully developed specially engineered dough products that are manufactured by
third party vendors and distributed throughout all 48 contiguous states by an
unrelated distributor, Multifoods Distribution Group, Inc., in a ready-to-use
form requiring only on-site assembly and baking. The results are products that
are great tasting, quality consistent, easy to assemble and relatively low in
food cost.
The operating systems are also uniquely developed for simplicity of operation
and for minimizing hourly labor requirements and management intensiveness.
Operational layout, product pre-preparation, assembly and baking, and customer
fulfillment were all designed to function efficiently and cost-effectively with
minimal space requirements. Service systems are customizable by franchise venue,
but generally customers select from a variety of grab-and-go products from an
attractive counter-top kiosk, or select a made-and-baked-to-order traditional
large pizza with their favorite toppings. All products are designed for quick
assembly and baking through small, stackable conveyor ovens.
A unique feature of the Noble Roman's program is the menu flexibility offered
franchisees. The core package includes such items as 14" large pizzas,
individual sized 7" pizzas and breadsticks with dip. From this core, franchisees
may also select from the following product extensions: baked pastas, Buffalo
wings, hot sandwiches and breakfast items. Many potential franchisees are
looking for a complete foodservice package to fit their specific application or
desire for add-on sales opportunities. Noble Roman's product extensions allow
the franchisee "one-stop" franchise shopping to satisfy their complete needs
through one business relationship, one franchise fee and one set of equipment.
Added flexibility is provided with the Company's ongoing co-branding
relationship with other traditional restaurant chains.
Typical Locations & Growth Plans
- --------------------------------
Typical non-traditional locations include such venues as universities,
recreational facilities, hotels, convenience stores, travel plazas, military
bases and other types of locations with pre-existing customer
3
traffic. Additionally, the Company has national co-branding relationships with
other restaurant chains for both tranditional and non-traditional locations.
Co-branding allows the owner of other traditional restaurant franchise locations
to add Noble Roman's products and systems to their menu offerings while
utilizing their existing facility investment and overhead structure. With much
of the fixed overhead required already in place, the Noble Roman's concept can
be added with the potential of extremely attractive margins on the additional
sales it attracts to the location.
The Company has now awarded approximately 750 franchises since 1997 in 41
states, with approximately 575 of those locations open. In addition to the
pipeline of sold but unopened locations, it is the Company's plan to
aggressively pursue the sale of additional locations. The Company is currently
involved in on-going discussions and negotiations involving many additional
franchise locations. The Company plans to aggressively pursue franchising growth
in non-traditional locations and co-branding opportunities in the future.
Recent Strategic Events
- -----------------------
Over the last several years, the Company made the strategic decision to refocus
its business on its non-traditional and co-branding opportunities and away from
operating full-service, traditional restaurant operations. Given the potential
size of the opportunities in the non-traditional and co-branding segments, and
the actual rapid pace of their growth within the Company, during 1999 management
determined that all financial and human resources at the Company's disposal
would need to be focused on franchise services to maximize the potential for
stakeholders. During 2000, the Company completed that transition and all of its
restaurants, except one non-traditional unit, used for training, product
development and demonstration purposes, are now franchised. The Company will
continue to offer franchise services to the full-service franchises which were
formerly company operated in much the same fashion as it has been doing with its
non-traditional and co-branded franchises.
Competition
- -----------
The restaurant industry in general is very competitive with respect to
convenience, price, product quality and service. In addition, the Company
competes for franchise sales on the basis of product engineering, investment
cost, cost of sales, simplicity of operation and labor requirements. A change in
the business strategy or the receptivity of one or more of the Company's
competitors could have an adverse effect on the Company's ability to sell
additional franchises, maintain existing franchises or sell its products
through its franchise system. Many of the Company's competitors are very large,
internationally established companies.
Within the competitive environment of the non-traditional franchise segment of
the restaurant industry, management has defined what it believes to be certain
competitive advantages for the Company. First, several of the Company's
competitors in the non-traditional segment are also large chains operating
thousands of franchised, traditional restaurants. Because of the contractual
relationships with many of their franchisees, some competitors may be unable to
offer wide-scale site availability for potential non-traditional franchisees.
The Company is not faced with any significant restriction since its full-service
operations were highly concentrated geographically.
Several of the Company's competitors in the non-traditional segment were
established with little or no organizational history in owning and operating
traditional foodservice locations. This lack of operating experience may be a
limitation in attracting and maintaining non-traditional franchisees who, by the
nature of the segment, often have little exposure to foodservice operations
themselves. The Company's
4
background in traditional restaurant operations has provided it experience in
structuring, planning, marketing, and cost controlling which could be of
material benefit to franchisees.
Seasonality of Sales
- --------------------
Direct sales of non-traditional franchises may be affected in minor ways by
certain seasonalities and holiday periods. Franchise sales to certain
non-traditional venues may be slower around major holidays such as Thanksgiving
and Christmas, and during the first couple of months of the year. Franchise
sales to other non-traditional venues show less or no seasonality. Additionally,
in middle and northern climates where adverse winter weather conditions may
hamper outdoor travel or activities, foodservice sales by franchisees may be
sensitive to sudden drops in temperature or precipitation which would in turn
effect Company royalties.
Employees
- ---------
As of March 26, 2001, the company employed approximately 25 persons, all of whom
were engaged on a full-time basis. No employees are covered under collective
bargaining agreements, and the Company believes that relations with its
employees are good.
Trademarks and Service Marks
- ----------------------------
The Company owns and protects several trademarks and service marks. Many of
these, including NOBLE ROMAN'S (R), Noble Roman's Pizza(R), Noble Roman's Pizza
Express(R) and THE BETTER PIZZA PEOPLE (R) are registered with the United States
Patent and Trademark Office as well as with the corresponding agencies of
certain other foreign governments. The company believes that its trademarks and
service marks have significant value and are important to its sales and
marketing efforts.
Government Regulation
- ---------------------
The company and its franchisees are subject to various federal, state and local
laws affecting the operation of our respective businesses. Each Noble Roman's
location is subject to licensing and regulation by a number of governmental
authorities, which include health, safety, sanitation, building and other
agencies and ordinances in the state or municipality in which the facility is
located. The process of obtaining and maintaining required licenses or approvals
can delay or prevent the opening of a franchise location. Vendors, such as our
third party production and distribution services, are also licensed and subject
to regulation by state and local health and fire codes, and Department of
Transportation regulations. The Company, its franchisees and its vendors are
also subject to federal and state environmental regulations.
The Company is subject to Federal Trade Commission ("FTC") regulation and
various state agencies and laws regulating the offer and sale of franchises.
Several states also regulate aspects of the franchisor-franchisee relationship.
The FTC requires us to furnish to prospective franchisees a franchise offering
circular containing certain specified information. Some states also regulate the
sale of franchises and require registration of the franchise offering circular
with state authorities. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist in a substantial number of
states, and bills have been introduced in Congress from time to time that would
provide for federal regulation of the franchisor-franchisee relationship in
certain respects. The state laws often limit, among other things, the duration
and scope of non-competition provisions and the ability of a franchisor to
terminate or refuse to renew a franchise. Some foreign countries also have
disclosure requirements and other laws regulating
5
franchising and the franchisor-franchisee relationship, and the Company would be
subject to applicable laws in each jurisdiction where franchised units may
become established.
ITEM 2. PROPERTIES
The Company's headquarters are located in 8,000 square feet of leased office
space in Indianapolis, Indiana. The lease for this property expires in December
2002.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation relating to claims arising out of
its normal business operations and relating to restaurant facilities closed in
1997 and 2000. The Company believes that none of its current proceedings,
individually or in the aggregate, will have a material adverse effect upon the
Company beyond the amount reserved in its financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
- ------------------
The Company's common stock is included on Nasdaq "Electronic Bulletin Board" and
trades under the symbol "NROM".
The following table sets forth for the periods indicated, the high and low bid
prices per share of common stock as reported by Nasdaq. The quotations reflect
inter-dealer prices without retail mark-up, mark-down or commissions and may not
represent actual transactions.
1999 2000 2001
---- ---- ----
Quarter Ended: High Low High Low High Low
---- --- ---- --- ---- ---
March 31 2 1/16 1 9/16 2 5/8 1 1/4 1 13/16* 31/32*
June 30 3 15/32 2 2 1/2 1 3/64
September 30 3 1/8 1 15/32 2 13/64 27/32
December 31 2 1 3/8 1 3/4 1 3/8
*Includes transactions through March 20, 2001.
Holder of Record
- ----------------
As of March 20, 2001, the Company believes there were approximately 360 holders
of record of common stock. This excludes persons whose shares are held of record
by a bank, brokerage house or clearing agency.
Dividends
- ---------
The Company has never declared or paid dividends on its common stock. The
Company intends to retain earnings to fund the development and growth of its
business and does not expect to pay any dividends within the foreseeable future.
The Company's current credit facilities prohibit the Company from paying
dividends or shareholder distributions.
Sale of Unregistered Securities
- -------------------------------
During 2000, the Company entered into a series of transactions resulting in its
obtaining approximately $10.4 million in additional capital. The additional
capital came from investors associated with The Geometry Group in New York and
certain other investors purchasing approximately $3.2 million of common stock in
exchange for cash, The Provident Bank exchanging $6.5 million senior secured
debt and $740 thousand PIK notes for $2.4 million of common stock and $4.9
million in no-yield preferred stock which may later be converted to common stock
at $3.00 per share at the Bank's option and an officer converted $312 thousand
of notes for common stock. Most of these transactions were at $1.00 per share.
All of these sales were made in reliance upon the exemption from the
registration requirements of the 1933 Act set forth in Section 4(2) of the 1933
Act.
7
ITEM 6. SELECTED FINANCIAL DATA (In thousands except per share data)
Year Ended December 31,
----------------------------------------------------
Statement of Operations Data: 1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Restaurant revenue $ 33,854 $ 25,369 $ 23,307 $ -- $ --
Royalties and fees 189 657 2,286 3,351 4,760
Administrative fees and other 196 79 189 458 798
-------- -------- -------- -------- --------
Total revenue 34,239 26,105 25,782 3,809 5,559
Restaurant operating expenses 31,090 24,094 26,513 -- --
Express operating expenses -- 220 839 1,611 1,903
Depreciation and amortization 1,488 1,076 59 65 58
General and administrative 2,834 2,816 841 849 1,265
Financing, acquisition and restructuring costs 1,554 6,529 -- -- --
-------- -------- -------- -------- --------
Operating income (loss) (2,727) (8,632) (2,469) 1,285 2,332
Interest 1,794 996 1,387 1,902 1,276
-------- -------- -------- -------- --------
Income before income taxes and
extraordinary item (4,521) (9,627) (3,856) (617) 1055
Income taxes (benefit) (640) (4,148) (1,311) (210) 359
-------- -------- -------- -------- --------
Net income (loss) from continuing
operations $ (3,881) $ (5,479) $ (2,545) $ (407) $ 696
Income (loss) from discontinued operations and
extraordinary items -- 1,563 396 (10,303) (165)
-------- -------- -------- -------- --------
Net income (loss) $ (3,881) $ (3,917) $ (2,150) $(10,714) $ 531
Weighted average number of common shares 4,131 4,131 4,131 6,015 11,371
Net income (loss) per share from continuing
operations $ (.94) $ (1.33) $ (.62) $ (.07) $ .06
Income (loss) per share from discontinued
operations and extraordinary items -- .38 .10 (1.71) (.01)
-------- -------- -------- -------- --------
Net income (loss) per share $ (.94) $ (.95) $ (.52) $ (1.78) $ .05
-------- -------- -------- -------- --------
Balance sheet data (at year end):
Working capital (deficit) $(16,251) $ (3,510) $ (2,241) $ (3,552) $ 1,249
Total assets 19,451 18,205 19,143 14,049 12,995
Long-term obligations 12,561 13,611 14,187 16,937 9,999
Stockholders' equity (deficit) $ 791 $ (325) $ 1,076 $ (9,235) $ 1,688
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
- ------------
Over the last several years, the Company made the strategic decision to refocus
its business on its non-traditional and co-branding opportunities and away from
operating full-service, traditional restaurant operations. Given the potential
size of the opportunities in the non-traditional and co-branding segments, and
the actual rapid pace of their growth within the Company, during 1999 management
determined that all financial and human resources at the Company's disposal
would need to be focused on franchise services to maximize the potential for
stakeholders. During 2000, the Company completed that transition and all of its
full-service, traditional restaurants are now franchised. The Company will
continue to offer franchise services to the full-service franchises which were
formerly company operated in much the same fashion as it has been doing with its
non-traditional and co-branded franchises.
The franchising concept was designed to capitalize on the rapid growth of
non-traditional locations for quick service restaurants and to be simple to
operate, requiring a modest investment, with minimal staffing requirements while
serving great tasting pizza and related products. The concept was designed to
also be convenient and quick for its customers. Based on experience to date, the
Company believes that franchising offers opportunities for rapid growth for the
foreseeable future.
Based on the Company's 2000 operating results, its business plan, the number of
franchise units now open, the backlog of units sold to be opened, the backlog of
franchise prospects now in ongoing discussions and negotiations, the Company's
trends and the results of its operations thus far in 2001, management has
determined that it is more likely than not that the Company's deferred tax
credits will be fully utilized before the tax credits expire. Therefore, no
valuation allowance was established for its deferred tax asset. However, there
can be no assurance that the franchising growth will continue in the future. If
unanticipated events should occur in the future, the realization of all or some
portion of the Company's deferred tax asset could be jeopardized. The Company
will continue to evaluate the need for a valuation allowance on a quarterly
basis in the future.
The following table sets forth the 2000 operating results, 1999 operating
results and the 1998 operating results from ongoing operations included in the
Company's consolidated statement of operations.
9
ProForma Consolidated Statement of Operations
Noble Roman's, Inc. and Subsidiaries
Years Ended December 31,
------------------------
1998 1999 2000
---- ---- ----
Royalties and fees $ 2,349,813 94.9% $ 3,351,201 88.0% $ 4,760,429 85.6%
Administrative fees and other 125,093 5.1 457,824 12.0 798,538 14.4
----------- ----- ----------- ----- ----------- -----
Total revenue 2,474,906 100.0 3,809,024 100.0 5,558,967 100.0
Express operating expenses:
Salaries and wages 465,391 18.8 792,155 20.8 971,682 17.5
Trade show expense 131,079 5.3 214,046 5.6 210,000 3.8
Travel expense 70,065 2.8 162,930 4.3 240,300 4.3
Other operating expense 172,120 7.0 441,955 11.6 481,338 8.7
Depreciation and amortization 59,183 2.4 64,848 1.7 58,411 1.1
General and administrative 840,514 34.0 848,538 22.3 $ 1,265,697 22.8
----------- ----- ----------- ----- ----------- -----
Operating income 736,554 70.2 1,284,552 33.7 2,331,539 41.9
Interest expense 1,387,011 56.0 1,901,948 49.9 1,276,266 23.0
----------- ----- ----------- ----- ----------- -----
Income (loss) before
income taxes (650,457) 14.2 (617,396) (16.2) 1,055,273 19.0
Income taxes (benefit) (221,155) 4.8 (209,915) (5.5) 358,793 6.5
----------- ----- ----------- ----- ----------- -----
Net income (loss) $ (429,302) 9.4%$ (407,481) (10.7)%$ 696,481 12.5%
2000 Compared with 1999
- -----------------------
Total revenue increased from $3.8 million to $5.6 million, or 45.9%, for 2000
compared to 1999. This increase was primarily the result of the growth in the
number of franchise locations open. Royalties and fees were approximately $4.8
million for 2000 compared to $3.4 million during 1999. This increase was the
result of rapid growth in the number of franchises.
Salaries and wages decreased from 20.8% of revenue in 1999 compared to 17.5% of
revenue in 2000. The primary reason for this decrease was the number of
franchise units open in 2000 based on the Company's infrastructure which was
established in 1999 for the anticipated rapid growth in 2000.
Trade show expense decreased from 5.6% of revenue in 1999 compared to 3.8% of
revenue in 2000. The primary reason for this decrease was that the number of
trade shows remained constant while the revenue grew as a result of the
additional franchised units open.
10
Travel expense was 4.3% of total revenues in both 1999 and 2000. The dollar
amount of travel expense increased in relation to the growth in revenue as a
result of the Company expanding its franchise area from local midwestern states
to 42 states nationwide.
Other operating expenses decreased from 11.6% of revenue in 1999 to 8.7% of
revenue in 2000. This decrease was primarily the result of the growth in revenue
as a result of the increased number of franchised units from the Company's
infrastructure put in place in 1999 for the anticipated rapid growth in 2000.
General and administrative expense increased from 22.3% of revenue in 1999
compared to 22.8% of revenue in 2000. This increase was the result of the
administrative structure for the Company being expanded to accommodate expected
accelerated growth in the future.
Net income before extraordinary items increased from a loss of ($407 thousand)
in 1999 to a net income of $696 thousand in 2000. This increase was primarily
the result of a continuation of the rapid growth in the number of franchised
units open based on the Company's infrastructure put in place in prior years in
anticipation of the growth in franchising.
1999 Compared with 1998
- -----------------------
Total revenue increased from $2.5 million to $3.8 million, or 54.0%, for 1999
compared to 1998. This increase was primarily the result of the growth in the
number of franchise locations open. Royalties and fees were approximately $3.4
million for 1999 compared to $2.3 million during 1998. This increase was the
result of rapid growth in the number of franchises.
Salaries and wages increased from 18.8% of revenue in 1998 to 20.8% of revenue
in 1999. The primary reason for this increase was the building of the Company's
infrastructure in 1998 for anticipated growth in 1999.
Trade show expense increased from 5.3% of revenue in 1998 to 5.6% of revenue in
1999. The primary reason for this increase was the increase in the number of
trade shows that the Company participated in during 1999. This increase also
reflects the Company's decision to participate in national trade shows
commencing in 1999 as opposed to only local midwestern shows in 1998. The
Company now has franchises in 42 states nationwide.
Travel expense increased from 2.8% of revenue in 1998 to 4.3% of revenue in
1999. This increase was the result of the Company expanding its franchise area
from local midwestern states to 42 states nationwide.
Other operating expenses increased from 7.0% of revenue in 1998 to 11.6% of
revenue in 1999. This increase was primarily the result of the Company's
building its infrastructure in anticipation of future rapid growth and as a
result of expanding its strade area from the midwestern states to nationwide.
General and administrative expense decreased from 34.0% of revenue in 1998 to
22.3% of revenue in 1999. This decrease was the result of the Company's ability
to leverage its administrative structure in place in 1998 for further expansion
in 1999.
11
Impact of Inflation
- -------------------
The primary inflation factors affecting the Company's operations are food and
labor costs to the franchisee. To date, the Company has been able to offset the
effects of inflation in food costs without significantly increasing prices
through effective cost control methods and greater purchasing power as a result
of additional growth. The competition for labor has resulted in higher salaries
and wages for the franchisees, however, that effect is largely minimized by the
low labor requirements of the franchise concept.
Liquidity and Capital Resources
- -------------------------------
Over the last several years, the Company made the strategic decision to refocus
its business on its non-traditional and co-branding opportunities and away from
operating full-service, traditional restaurant operations. Given the potential
size of the opportunities in the non-traditional and co-branding segments, and
the actual rapid pace of their growth within the Company, during 1999 management
determined that all financial and human resources at the Company's disposal
would need to be focused on franchise services to maximize the potential for
stakeholders. During 2000, the Company completed that transition and all of its
full-service, traditional restaurants are now franchised. The Company will
continue to offer franchise services to the full-service franchises which were
formerly company operated in much the same fashion as it has been doing with its
non-traditional and co-branded franchises.
During 2000, the Company entered into a series of transactions resulting in its
obtaining approximately $10.4 million in additional capital. The additional
capital came from investors associated with The Geometry Group in New York and
certain other investors purchasing approximately $3.2 million of common stock in
exchange for cash, The Provident Bank exchanging $6.5 million senior secured
debt and $740 thousand PIK notes for $2.4 million of common stock and $4.9
million in no-yield preferred stock which may later be converted to common stock
at $3.00 per share at the Bank's option and an officer converted $312 thousand
of notes for common stock. Most of these transactions were at $1.00 per share.
On April 30, 1999, the Company obtained $2.2 million in additional funding from
various investors associated with The Geometry Group based in New York City, who
purchased participating income notes of the Company (the "Participating Notes")
and warrants to purchase at any time prior to December 31, 2001 an aggregate of
275 thousand shares of the Company's common stock at a price of $.01 per share.
The Participating Notes mature on April 15, 2003 and are payable at that time,
at the option of each investor, in cash, in shares of the Company's common stock
based on a conversion price of $1.00 per share or in a combination thereof.
Interest on the Participating Notes accrues at a rate per annum equal to each
investor's pro rata share of the Company's revenues associated with the
Company's Pizza Express. Such interest is payable in cash monthly, provided,
however, that to the extent that the interest otherwise payable to an investor
would exceed such investor's pro rata share of the sum of $33,534, all interest
in excess of such amount shall be paid in the form of a PIK Note of the Company.
Each PIK Note matures on April 15, 2003 and, similar to the Participating Notes,
is payable at that time, at the option of each investor, in cash, in shares of
the Company's common stock based on a conversion price of $1.00 per share or in
a combination thereof.
As a result of the capital raised by the Company, cash flow generated from
operations, its focus on growth by franchising and the current rate of growth
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.
12
The statements contained in Management's Discussion and Analysis concerning the
Company's future revenues, profitability, financial resources, market demand and
product development are forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995) relating to the Company
that are based on the beliefs of the management of the Company, as well as
assumptions and estimates made by and information currently available to the
Company's management. The Company's actual results in the future may differ
materially from those projected in the forward-looking statements due to risks
and uncertainties that exist in the Company's operations and business
environment 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
None.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
Noble Roman's, Inc. and Subsidiaries
Assets December 31,
------ ------------
1999 2000
------------ ------------
Current assets:
Cash $ 29,913 $ 9,406
Accounts receivable 718,623 856,492
Note receivable -- 290,000
Inventories 437,120 74,587
Prepaid expenses 109,006 203,460
Deferred tax assets - current portion -- 1,122,551
Assets held for sale 1,500,000 --
------------ ------------
Total current assets 2,794,662 2,556,496
------------ ------------
Property and equipment:
Equipment 813,305 822,046
Leasehold improvements 84,229 84,229
Capitalized leases -- --
------------ ------------
897,534 906,275
Less accumulated depreciation and amortization 327,039 377,865
------------ ------------
Net property and equipment 570,496 528,410
------------ ------------
Costs in excess of assets acquired, net -- --
Deferred tax asset 9,961,723 8,502,555
Other assets 721,982 1,407,307
------------ ------------
$ 14,048,862 $ 12,994,768
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 3,163,200 $ 485,093
Current portion of long-term debt 17,661 --
Note payable to officer 65,840 65,840
Deferred franchise fees 227,125 228,500
Other current liabilities 2,872,515 528,249
------------ ------------
Total current liabilities 6,346,341 1,307,682
------------ ------------
Long-term obligations:
Notes payable to Provident Bank net of warrant value of
$520,377and $213,266 in 1999 and 2000, respectively) 14,051,989 7,786,734
Notes payable to various fund affiliated with Geometry Group
net of warrant valuation of $228,567 in 1999 and $159,618 in 2000 2,006,433 2,212,383
PIK notes payable to Provident Bank 583,070 --
Note payable to officer 250,000 --
PIK notes payable to officer 32,242 --
Other long-term debt 13,432 --
------------ ------------
Total long-term obligations 16,937,166 9,999,117
------------ ------------
Stockholders' equity:
Common stock (25,000,000 shares authorized, 7,019,711outstanding
in 1999 and 13,593,701 in 2000) 12,272,637 17,734,495
Preferred stock (5,000,000 shares authorized) -- 4,929,274
Accumulated deficit (21,507,281) (20,975,800)
------------ ------------
Total stockholders' equity (deficit) (9,234,645) 1,687,969
------------ ------------
Total liabilities and stockholder's equity $ 14,048,862 $ 12,994,768
============ ============
See accompanying note to condensed consolidated financial statements
14
Consolidated Statements of Operations
Noble Roman's, Inc. and Subsidiaries
Year ended December 31,
-----------------------
1998 1999 2000
------------ ------------ ------------
Royalties and fees $ 2,286,210 $ 3,351,201 $ 4,760,429
Administrative fees and other 188,786 457,824 798,538
------------ ------------ ------------
Total revenue from ongoing operations 2,474,906 3,809,024 5,558,967
Operating expenses:
Salaries and wages 465,391 792,155 971,682
Trade show expense 131,079 214,046 210,000
Travel expense 70,065 162,930 240,300
Other operating expenses 172,120 441,955 481,338
Depreciation and amortization 59,183 64,848 58,411
General and administrative 840,514 848,538 1,265,697
------------ ------------ ------------
Operating income from ongoing operations 736,554 1,284,552 2,331,539
Discontinued restaurant operations:
Revenue 23,306,780 -- --
Operating expenses 26,512,779 -- --
------------ ------------ ------------
Operating income (loss) (2,469,445) 1,284,552 2,331,539
Interest and other expense 1,387,011 1,901,948 1,276,266
------------ ------------ ------------
Income (loss) before income taxes (3,856,456) (617,396) 1,055,273
Income tax (benefit) (1,311,194) (209,915) 358,793
------------ ------------ ------------
Net income (loss) before extraordinary item (2,545,262) (407,481) 696,481
Extraordinary item net of tax expense of $203,876
in 1998, tax benefit of $5,309,317 in 1999 and tax
benefit of $85,000 in 2000 395,696 (10,306,357) (165,000)
------------ ------------ ------------
Net income (loss) $ (2,149,566) $(10,713,838) $ 531,481
------------ ------------ ------------
Earnings per share:
Net income (loss) before extraordinary item $ (.61) $ (.07) $ .06
Net income (loss) (.52) (1.78) .05
============ ============ ============
Weighted average number of common shares
outstanding 4,131,324 6,014,864 11,370,717
Fully diluted earnings per share
Net income (loss) before extraordinary item $ .05
Net income (loss) .04
============
Weighted average number of common shares
outstanding 14,788,603
See accompanying note to condensed consolidated financial statements.
15
Consolidated Statements of Changes in
Stockholders' Equity (Deficit)
Noble Roman's, Inc. and Subsidiaries
Common Stock
Preferred --------------------------- Accumulated
Stock Shares Amount Deficit Total
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 $ -- 4,131,324 $ 8,318,431 $ (8,643,879) $ (325,448)
------------ ------------ ------------ ------------ ------------
Issuance of warrants to purchase
stock -- -- 708,600 -- 708,600
Issuance of common stock in
exchange or certain liabilities -- 1,421,066 2,842,144 -- 2,842,144
1998 net loss -- -- -- (2,149,565) (2,149,565)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 -- 5,552,390 11,869,175 (10,793,444) 1,075,730
------------ ------------ ------------ ------------ ------------
Issuance of warrants to purchase
stock -- 275,000 275,000
Issuance of common stock in
exchange for certain liabilities -- 90,419 90,419
Conversion of warrants to stock -- 1,467,321 38,044 38,044
1999 net loss -- (10,713,837) (10,713,837)
------------ ------------ ------------ ------------
Balance at December 31, 1999 -- 7,019,711 12,272,638 (21,507,282) (9,234,645)
Issuance of preferred stock in
exchange for certain liabilities 4,929,274 4,929,274
Issuance of common stock in
exchange for certain liabilities
and cash 6,573,989 5,461,857 5,461,857
2000 net income 531,481 531,481
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 $ 4,929,274 13,593,701 $ 17,734,495 $(20,975,800) $ 1,687,969
See accompanying notes to consolidated financial statements.
16
Consolidated Statements of Cash Flows
Noble Roman's, Inc. and Subsidiaries
Year ended December 31,
-----------------------
OPERATING ACTIVITIES 1998 1999 2000
------------ ------------ ------------
Net loss $ (2,149,565) $(10,713,837) $ 531,438
Adjustments to reconcile net (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,113,447 970,401 248,069
Restructuring costs -- -- --
Non-cash interest -- 615,312 --
Deferred federal income taxes (1,107,319) (5,518,998) 443,793
Loss from discontinued segment -- 9,814,285 250,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (199,025) (138,782) (137,869)
Inventories (42,686) 407,663 342,533
Prepaid expenses (27,211) 76,465 (94,454)
Other assets (29,397) (5,113) --
Increase (decrease) in:
Accounts payable (67,630) 1,252,111 (2,678,107)
Other current liabilities 182,629 1,131,245 (2,344,266)
Deferred franchise fees 79,700 83,625 1,375
------------ ------------ ------------
NET CASH USED BY OPERATING
ACTIVITIES (2,247,057) (2,025,623) (3,437,488)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of property and equipment (678,705) (617,511) 8,741
Sale of property and equipment 260,325 --
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (678,705) (357,186) 8,741
------------ ------------ ------------
FINANCING ACTIVITIES
Principal payments on long-term debt and capital lease
obligations (22,404) (4,908) --
Proceeds from notes payable to officer 315,840 -- --
Proceeds from long-term debt, net of debt issue costs 2,592,366 1,966,703 137,000
Issuance of capital stock -- 432,334 3,271,240
Legal fees associated with conversion of debt to equity -- (9,582) --
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 2,885,802 2,384,547 3,408,240
------------ ------------ ------------
INCREASE (DECREASE) IN CASH (39,960) 1,737 (20,507)
Cash at beginning of year 68,136 28,176 29,913
------------ ------------ ------------
CASH AT END OF YEAR $ 28,176 $ 29,913 $ 9,406
============ ============ ============
17
Supplemental Schedule of Noncash Investing and Financing Activities
During 2000, The Provident Bank exchanged $6.5 million senior secured debt and
$740 thousand PIK notes for $2.4 million of common stock and $4.9 million in
no-yield preferred stock, and an officer converted $312 thousand of notes for
common stock.
See accompanying notes to consolidated financial statements.
18
Notes to Consolidated Financial Statements
Noble Roman's, Inc. and Subsidiaries
Note l: Summary of Significant Accounting Policies
General Organization: The Company sells and services franchises for
non-traditional and co-branded foodservice operations under the trade name
"Noble Roman's Pizza".
Principles of Consolidation: The consolidated financial statements include the
accounts of Noble Roman's, Inc. and its subsidiaries, Pizzaco, Inc., GNR, Inc.,
LPS, Inc., N.R. East, Inc. and Oak Grove Corporation ("Company"). Intercompany
balances and transactions have been eliminated in consolidation.
Inventories: Inventories consist of food, beverage, restaurant supplies and
marketing materials and are stated at the lower of cost (first-in, first-out) or
market.
Property and Equipment: Equipment and leasehold improvements are stated at cost
including property under capital leases. Depreciation and amortization are
computed on the straight-line method over the estimated useful lives. Leasehold
improvements are amortized over the shorter of estimated useful life or the term
of the lease.
Advertising Costs: The Company records advertising costs consistent with
Statement of Position 93-7 "Reporting on Advertising Costs." This statement
requires the Company to expense advertising production costs the first time the
production material is used.
Fair Value of Financial Instruments: The carrying amount of long-term debt net
of the estimated value of the warrant approximates its fair value because the
interest rates are currently at market. Because of the very limited trading in
the Company's common stock, the Company does not believe that traditional
methods of valuing the warrant apply; therefore, the value of the warrant
reflects the Company's estimate of its value. The carrying amount of all other
financial instruments approximate fair value due to the short-term maturity of
these items.
Use of Estimates: 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 could
differ from those estimates. The Company evaluates its property and equipment
and related costs in excess of assets acquired periodically to assess whether
any impairment indications are present, including recurring operating losses and
significant adverse changes in legal factors or business climate that affect the
recovery of recorded value. If any impairment of an individual asset is evident,
a loss would be provided to reduce the carrying value to its estimated fair
value.
Intangible Assets: Debt issue costs are amortized to interest expense ratably
over the term of the applicable debt.
Royalties, Administrative and Franchise Fees: Royalties are recognized as income
monthly and are based on a percentage of monthly sales of franchised
restaurants. Administrative fees are recognized as income monthly as earned.
Initial franchise fees are recognized as income when the franchised restaurant
is opened.
19
Income Taxes: The Company provides for current and deferred income tax
liabilities and assets utilizing an asset and liability approach along with a
valuation allowance as appropriate. The Company concluded that no valuation
allowance was necessary at December 31, 1999 because it is more likely than not
that the Company will earn sufficient income before the expiration of its net
operating loss carry forwards to fully realize the value of its deferred tax
asset. The net operating loss carry-forward is approximately $31.1 million of
which approximately $30.3 million expires between the years 2012 and 2015.
Management made this determination after reviewing the Company's business plans,
all known facts to date, recent trends, current performance and analysis of the
backlog of franchises sold but not yet open.
Basic And Diluted Net Income Per Share: Net loss per share is based on the
weighted average number of common shares outstanding during the respective year.
When dilutive, stock options and warrants are included as share equivalents
using the treasury stock method.
Segment Reporting: In 1998, the Company adopted FAS 131, Disclosures about
Segments of an Enterprise and Related Information. FAS 131 supersedes FAS 14,
Financial Reporting for Segments of a Business Enterprise, replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. FAS 131 also requires disclosures about products
and services, geographic areas and major customers. The adoption of FAS 131 did
not affect results of operations or financial position but did affect the
disclosure of segment information (see Note 12).
Note 2: Recent Strategic Events
Over the last several years, the Company made the strategic decision to refocus
its business on its non-traditional and co-branding opportunities and away from
operating full-service, traditional restaurant operations. Given the potential
size of the opportunities in the non-traditional and co-branding segments, and
the actual rapid pace of their growth within the Company during 1999, management
determined that all financial and human resources at the Company's disposal
would need to be focused on franchise services to maximize the potential for
stakeholders. During 2000, the Company completed that transition and all of its
full-service, traditional restaurants are now franchised. The Company will
continue to offer franchise services to the full-service franchises which were
formerly company operated in much the same fashion as it has been doing with its
non-traditional and co-branded franchises.
Note 3: Notes Payable
On January 1, 1999, the Company had a note payable to The Provident Bank in the
amount of $14,572,366. On April 30, 1999, the Provident Bank canceled their
existing note in the amount of $14,572,366 and replaced the canceled with
Tranche Y term loan in the amount of $8,000,000 and Tranche Z term loan in the
amount of $6,572,366. Tranche Y term loan bears interest of 8.75% per annum
payable monthly in arrears and matures on April 15, 2003. Tranche Z term loan
bore interest of at 8.75% per annum to have been paid in PIK notes quarterly in
arrears and was to mature on April 15, 2003. There were to have been no payments
on Tranche Z term loan until such time that Tranche Y term loan was paid in
full. Simultaneous with this transaction, the Company and The Provident Bank
entered into a Security Purchase Agreement with TradeCo Global Securities, Inc.
whereby TradeCo Global Securities, Inc., through various investors, loaned the
Company $2,235,600 evidenced by a Participating Income Note which bears interest
at the rate of 7.5% of certain revenues of the Company as defined in the
Securities Purchase Agreement and matures on April 15, 2003. At maturity the
Participating Income Note is convertible to common stock at a conversion rate of
$1.00 per share. The Participating Income Note ranks
20
pari passu with The Provident Bank notes with regard to the collateral interest
on all assets of the Company.
In a subsequent transaction, The Provident Bank exchanged $6.5 million senior
secured debt and $740 thousand PIK notes for $2.4 million in common stock and
$4.9 million in no-yield preferred stock which may later be converted to common
stock at $3.00 per share at its option and an officer converted $312 thousand in
notes for common stock. All of these transactions were at $1.00 per share.
Note 4: Contingent Liabilities for Leased Facilities
The Company formerly leased its restaurant facilities under noncancelable lease
agreements which generally had initial terms ranging from five to 20 years with
extended renewal terms. These leases have all been assigned to a Franchisee who
operates them pursuant to a Noble Roman's, Inc. Franchise Agreement. The
assignment passes all liability for future lease payments to the assignee,
however, the Company remains contingently liable to the landlords in the event
of default by the assignee. The leases generally required the Company to pay all
real estate taxes, insurance and maintenance costs. The leases provided for a
specified annual rental, and some leases called for additional rental based on
sales volume over specified levels at that particular location. At December 31,
2000, contingent obligations under noncancelable operating leases for 2001,
2002, 2003, 2004, 2005 and after 2005 were $1.2 million, $1.1 million, $990
thousand, $889 thousand, $631 thousand and $4.8 million, respectively.
Note 5: Income Taxes
The Company created an additional deferred benefit in 1998 of $1,311,194 and a
deferred benefit in 1999 $209,915 as a result of its operating loss and used
deferred benefits of $358,793 to offset its tax expense on income in 2000.
The deferred tax asset at December 31 consists of the following:
1998 1999 2000
---------- ---------- ----------
Deferred tax assets:
Tax credit carryforwards $ 193,680 $ 172,768 $ --
Net operating loss carryforward 5,187,442 9,788,955 9,625,106
Franchise value for tax purposes of
companies acquired -- -- --
---------- ---------- ----------
Total gross deferred tax assets $5,381,120 $9,961,723 $9,625,106
---------- ---------- ----------
Deferred tax liabilities:
Property and equipment 903,042 -- --
Cost in excess of asset acquired 35,355 -- --
---------- ---------- ----------
Total gross deferred tax liabilities 938,397 -- --
---------- ---------- ----------
Net deferred tax asset $4,442,725 $9,961,723 $9,625,106
========== ========== ----------
Note 6: Common Stock
On December 31, 1998, the Company entered into two transactions resulting in the
exchange of 1,421,066 shares of common stock for certain liabilities totaling
$2,842,144. The Company issued 500,000 shares of common stock in exchange for
$1.0 million of trade payables due to a certain vendor of the Company and issued
921,066 shares of common stock in exchange for $1.8 million due to The Provident
Bank, the Company's principal lender.
21
In conjunction with obtaining additional financing from The Provident Bank on
August 13, 1998, the Company issued a warrant to purchase 750,000 shares of
common stock at any time through November 30, 2001 at $.01 per share. This
warrant was valued at $708,600 which is reflected as a discount to the related
note payable. The discount is being amortized over the five year term of the
note.
In 1998, the Company entered into an amended and restated credit facility with
the Bank. In connection with such amendment the Company issued to the Bank a
warrant to purchase 750,000 shares of common stock with an exercise price of
$.01 per share.
During 2000, the Company entered into a series of transactions resulting in its
obtaining approximately $10.4 million in additional capital. The additional
capital came from investors associated with The Geometry Group in New York and
certain other investors purchasing approximately $3.2 million of common stock in
exchange for cash, The Provident Bank exchanging $6.5 million senior secured
debt and $740 thousand PIK notes for $2.4 million of common stock and $4.9
million in no-yield preferred stock which may later be converted to common stock
at $3.00 per share at the Bank's option and an officer converted $312 thousand
of notes for common stock. Most of these transactions were at $1.00 per share.
All of these sales were made in reliance upon the exemption from the
registration requirements of the 1933 Act set forth in Section 4(2) of the 1933
Act.
The Company has an incentive stock option plan for key employees and officers.
The options are generally exercisable three years after the date of grant and
expire ten years after the date of grant. The option prices are the fair market
value of the stock at the date of grant. In 2000, options to acquire 144,750
shares were granted. In 1998, options to acquire 15,000 shares were granted.
Options granted and remaining outstanding at December 31, 2000 are: 6,500 common
shares at $3.25 per share, 18,500 common shares at $3.68 per share, 12,750
common shares at $6.44 per share, 40,500 common shares at $1.75 per share,
60,000 common shares at $1.00 per share, 15,000 common shares at $1.385 per
share, 7,250 common shares at $1.46 per share and 97,500 at $1.45 per share. As
of December 31, 2000, options for 138,250 shares are exercisable.
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", effective with the 1996 financial statements, but elected to
continue to measure compensation cost using the intrinsic value method in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation cost for stock options has been recognized. The
value of the options granted in 1998 and 2000 were estimated to be $.76 per
share and $.75 per share, respectively. Because of the very limited trading in
the Company's common stock, the Company does not believe that traditional
methods of valuing the options apply, therefore, it has estimated the value of
the options. The following represents the pro forma net loss and earnings per
share determined as if the fair value based method had been applied in measuring
compensation cost as described in SFAS 123 for the years ended December 31, 1998
and December 31, 2000:
1998 2000
---- ----
Net income (loss) $ (2,167,325) $ 459,831
Net income (loss) per share $ (.52) $ .04
22
Note 7: Loss from Discontinued Operations
Pursuant to the Company's strategic decision in 1999 to refocus its business on
its non-traditional and co-branding franchising opportunities, the Company
closed 16 of its full-service restaurants and began franchising efforts for the
remaining 31 full-service restaurants. Accordingly, in 1999 all assets
associated with its full-service operations were reduced to the estimated sales
price of the 31 restaurants being franchised. The reduction in the carrying
value of those assets, all activities in 1999 associated with the full-service
restaurants and a reserve for future costs associated with those restaurants in
the amount of $1,599,032 was charged to a loss on discontinued operations. In
2000, all of the full-service restaurants were franchised and all operating
results of those restaurants during the interim were charged to the reserve
established in 1999. An additional charge for future costs in the amount of
$250,000 was charged to a loss on discontinued operations in 2000.
Note 8: Contingencies
The Company is involved in various litigation relating to claims arising out of
its normal business operations and relating to restaurant facilities closed in
1997. Although litigation is inherently uncertain, the Company believes that
none of its current proceedings, individually or in the aggregate, will have a
material adverse effect upon the Company beyond the amount reserved in its
financial statements.
Note 9: Certain Relationships and Related Transactions
The following is a summary of transactions to which the Company and certain
officers and directors of the Company are a party or have a financial interest.
The Board of Directors of the Company has adopted a policy that all transactions
between the Company and its officers, directors, principal shareholders and
other affiliates must be approved by a majority of the Company's disinterested
directors, and be conducted on terms no less favorable to the Company than could
be obtained from unaffiliated third parties.
Mr. Mobley loaned monies from time to time to the Company to help meet cash flow
requirements and as of December 31, 1998 the balance of such loans to the
Company aggregated $315,840. These amounts were converted to notes payable on
May 1, 1999 in conjunction with the investment in the Company by investors
affiliated with The Geometry Group. In 2000, in conjunction with the investment
in the Company by investors affiliated with The Geometry Group and the
conversion by The Provident Bank of certain of its loans to the Company to
common stock, Mr. Mobley converted $250,000 plus his PIK notes to common stock.
TradeCo Global Securities, Inc., where James Lewis is the majority shareholder,
was paid $40,000 in 1999 and $30,000 in 2000 for financial advisory services. In
addition, TradeCo Global Securities, Inc. was paid $11,037 in interest on
Participating Income Notes in 1999 and $22,851 in 2000.
James Lewis, James Lewis Family Trust, James W. Lewis, MPP, and James Lewis
Family Investments, LP, were paid $51,299 in interest on Participating Income
Notes in 1999 and $65,037 in 2000.
The Provident Bank, on December 31, 1998, converted $1,600,000 of previous notes
payable plus accrued interest to 921,066 shares of common stock. In February
2000, The Provident Bank converted $6.5 million senior secured debt and $740
thousand PIK notes for $2.4 million in common stock and $4.9 million in no-yield
preferred stock which may later be converted to common stock at $3.00 per share.
In 2000, The Provident Bank was paid $620,331 in 2000 for interest on its loans
to the Company.
23
[LETTERHEAD OF LARRY E. NUNN $ ASSOCIATES]
To the Board of Directors and
Stockholders of Noble Roman's, Inc.
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated balance sheets of Noble Roman's,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity(deficit) for the years ended December 31, 2000, 1999 and 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Noble Roman's, Inc. and
subsidiaries at December 31, 2000 and 1999, and the results of their operations,
and their cash flows for the years ended December 31, 2000, 1999 and 1998 in
conformity with generally accepted accounting principles.
Columbus, Indiana
March 26, 2001
24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are:
Name Age Positions with the Company
---- --- --------------------------
Paul W. Mobley 60 Chairman of the Board and Director
A. Scott Mobley 37 President and Secretary
Douglas H. Coape-Arnold 55 Director
Donald A. Morrison, III 58 Director
Bernard J. Brozek 44 Executive Vice President of Development
Troy Branson 37 Executive Vice President of Franchising
Wade Shanower 51 Vice President of Operations
The executive officers of the Company serve at the discretion of the Board
of Directors and are elected at the annual meeting of the Board. Directors are
elected annually by the stockholders. The following is a brief description of
the previous business background of the executive officers and directors:
Paul W. Mobley has been Chairman of the Board since December 1991 and a
Director since 1974. Mr. Mobley was President and Chief Executive Officer of the
Company from 1981 to 1997. From 1975 to 1987, Mr. Mobley was a significant
shareholder and president of a company which owned and operated 17 Arby's
franchise restaurants. From 1974 to 1978, he also served as Vice President and
Chief Operating Officer of the Company and from l978 to 1981 as Senior Vice
President. He is the father of A. Scott Mobley. Mr. Mobley has a B.S. in
Business Administration from Indiana University and is a CPA.
A. Scott Mobley has been President since October 1997 and a Director since
January 1992, and Secretary since February 1993. Mr. Mobley was Vice President
from November 1988 to October 1997 and from August 1987 until November 1988
served as Director of Marketing for the Company. Prior to joining the Company
Mr. Mobley was a strategic planning analyst with a division of Lithonia Lighting
Company. Mr. Mobley has a B.S. in Business Administration from Georgetown
University and an MBA from Indiana University. He is the son of Paul Mobley.
Douglas H. Coape-Arnold was appointed a Director of the Company in May
1999. Mr. Coape-Arnold has been Managing General Partner of Geovest Capital
Partners, L.P. since January 1997, and Managing Director of TradeCo Global
Securities, Inc. since May 1994. Mr. Coape-Arnold's prior experience includes
serving as Vice President of Morgan Stanley & Co., Inc. from 1982 to 1986,
President & Chief Executive Officer of McLeod Young Weir Incorporated from 1986
to 1988, and Senior Vice
25
President of GE Capital's Transportation & Industrial Funding Corp. from 1988 to
1991. Mr. Coape-Arnold is a Chartered Financial Analyst.
Donald A. Morrison, III has been a Director of the Company since December
1993. In January 1998, Mr. Morrison and an associate started their own
independent brokerage firm offering general securities through Broker
Transaction Services member NASD/SIPC, a subsidiary of Southwest Securities
group. Prior to January 1998 Mr. Morrison was President and director of Traub &
Company, Inc., an investment banking firm headquartered in Indianapolis,
Indiana. Mr. Morrison was affiliated with Traub & Company since 1971.
Bernard J. Brozek has been Executive Vice President of Development since
November 2000. Prior to joining the Company, Mr. Brozek was Chief Operating
Officer for Laundromax, a chain of laundry superstores, from October 1999 to
November 2000. Prior to Laundromax, Mr. Brozek was Director and General Manager
of Pizza Hutt Express for Tricon Global Restaurants where he had been employed
for sixteen years. As Director and General Manager of Pizza Hut Express, Mr.
Brozek was responsible for franchising and operations for their non-traditional
locations.
Troy Branson, has been Executive Vice President of Franchising for the
Company since November 1997 and since 1992, he was Director of Business
Development. Prior to joining the Company, Mr. Branson was an owner of
Branson-Yoder Marketing Group since 1987, after graduating from Indiana
University where he received a B.S. in Business.
Wade Shanower has been Vice President of Express Operations since August
1999, Vice President of Full-Service Operations since November 1997 and since
January 1996 he was Regional Director of Operations. Prior to joining the
Company, Mr. Shanower was an owner of a Noble Roman's franchise restaurant plus
two independent restaurants, which he sold in early 1995 before joining Noble
Roman's. Prior to owning his own restaurants, Mr. Shanower was Vice President of
Operations for American Diversified Foods, an Arby's franchisee owned in part by
Paul Mobley. He has a B.S. degree from Indiana University.
Section l6(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
Based solely on a review of the copies of reports of ownership and changes
in ownership of the Company's common stock, furnished to the Company, or written
representations that no such reports were required, the Company believes that
during 1999 all filing requirements under Section 16(a) of the Securities
Exchange Act of 1934 were complied with.
ITEM l1. EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation for each
of the Company's last three years awarded to or earned by the Chief Executive
Officer and other executive officers of the Company whose cash compensation in
2000 exceeded $100,000.
26
SUMMARY COMPENSATION TABLE
--------------------------
Long Term
Annual Compensation Compensation
------------------- Securities Underlying
Name and Principal Position Year Salary (l) Bonus Options #
- --------------------------- ---- ---------- ------ -------------------
Paul Mobley 2000 $ 240,000 $ - -
Chairman of the Board 1999 240,000 - -
1998 240,000 - -
A. Scott Mobley
President and Secretary 2000 $ 150,000 $ - 20,000
1999 150,000 - -
1998 150,000 - -
Troy Branson 2000 $ 93,754 $ 37,794 35,000
Executive Vice President of Franchising 1999 75,577 29,751 -
1998 74,250 17,495 5,000
(1) The Company did not have any bonus, retirement, or other arrangements or
plans respecting compensation, except for an Incentive Stock Option Plan for
executive officers and other employees and a bonus plan initiated in 1994 for
certain officers and administrative employees based on profitability.
Aggregate Option Exercises in Last
Fiscal Year and Fiscal Year-End Option Values
---------------------------------------------
The following table sets forth information concerning the number of exercisable
and unexercisable stock options held at December 31, 2000 by the executive
officers named in the Summary Compensation Table.
Number of Securities Values of Unexercised
Underlying Unexercised In-The-Money
Options at 12/31/00 Options at 12/31/00 (1)
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
Paul W. Mobley 10,000 / 0 $ 7,500 / 0
A. Scott Mobley 49,000 / 20,000 7,500 / $ 6,000
Troy Branson 17,500 / 40,000 0 / $ 12,175
- --------------
(1) Based on a per share price of $1.75, the last reported transaction price of
the Company's common stock on December 29, 2000.
Employment Agreements
- ---------------------
Mr. Paul Mobley has an employment agreement with the Company which fixes his
base compensation at $275,000 per year, provides for reimbursement of travel and
other expenses incurred in connection with his employment, including the
furnishing of an automobile, health and accident insurance similar to that
provided other employees, and life insurance in an amount related to his base
salary. The initial term of
27
the agreement is seven years and is renewable each year for a seven-year period
subject to approval by the Board. The agreement is terminable by the Company for
just cause as defined in the agreement.
Mr. A. Scott Mobley has an employment agreement with the Company which fixes his
base compensation at $175,000 per year, provides for reimbursement of travel and
other expenses incurred in connection with his employment, including the
furnishing of an automobile, health and accident insurance similar to that
provided other employees, and life insurance in an amount related to his base
salary. The initial term of the agreement is five years and is renewable each
year for a five-year period subject to approval by the Board. The agreement is
terminable by the Company for just cause as defined in the agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of March 20, 2001, there were 13,709,701 shares of the Company's common
stock outstanding and 25,000,000 shares are authorized. The following table sets
forth the amount and percent of the Company's common stock beneficially owned on
March 20, 2001 by (i) each director and named executive officer individually,
(ii) each beneficial owner of more than five percent of the Company's
outstanding common stock and, (iii) all executive officers and directors as a
group:
Name and Address Amount and Nature Percent of Outstanding
of Beneficial Owner of Beneficial Ownership (1) Common Stock (2)
------------------- --------------------------- ----------------------
Paul W. Mobley
One Virginia Avenue, Suite 800 2,551,018 (3) 18.4%
Indianapolis, IN 46204
A. Scott Mobley (1)
One Virginia Avenue, Suite 800 908,826 (4) 6.3
Indianapolis, IN 46204
Provident Financial Group, Inc.
One E. Fourth Street 5,332,839 (5) 33.9
Cincinnati, OH 45202
Donald A. Morrison, III
320 N. Meridian, #412 72,919 (6) *
Indianapolis, IN 46204
Geovest Capital Partners, L.P.
110 E. 59th Street, 18th Floor 1,871,625 (8) 12.7
New York, N.Y. 10022
James Lewis
110 E. 59th Street, 18th Floor 4,564,136 (9) 34.4
New York, N.Y. 10022
All Executive Officers and
Directors as a Group (7 Persons) 5,187,388 30.7
*Less than 1%
28
(1) All shares owned directly unless otherwise noted.
(2) The percentage calculations are based upon 13,709,701 shares of our common
stock issued and outstanding as of March 20, 2001 and, for each officer or
director of the group, the number of shares subject to options or
conversion rights exercisable currently or within 60 days of March 20,
2001.
(3) This total includes a warrant to purchase 600,000 shares of stock at an
exercise price of $.40 per share issued November 19, 1997 in connection
with the financial restructuring with The Provident Bank, a warrant to
purchase 700,000 shares of our common stock at an exercise price of $2.00
per share, in the event of (i) a change of control in Noble Roman's, (ii)
the sale of substantially all of Noble Roman's assets, or (iii) the merger
or consolidation of Noble Roman's with another entity and 10,000 shares
subject to options granted under an employee stock option plan which are
currently exercisable at $1.00 per share.
(4) Includes 9,000 shares subject to options granted under an employee stock
option plan which are currently exercisable at $3.25 per share for 6,500
common shares, $3.68 per share for 7,500 common shares, $6.44 per share for
5,000 common shares , $1.75 per share for 20,000 common shares and $1.00
per share for 10,000 common shares. Also includes a warrant to purchase
400,000 shares of our common stock at an exercise price of $.40 per share
issued November 19, 1997 in connection with the financial restructuring
with The Provident Bank and a warrant to purchase 300,000 shares of our
common stock at an exercise price of $2.00 per share, in the event of (i) a
change of control in Noble Roman's, (ii) the sale of substantially all of
Noble Roman's assets, or (iii) the merger or consolidation of Noble Roman's
with another entity.
(5) This total includes warrants to purchase in the aggregate 385,000 shares of
our common stock at $.01 per share. The warrants were granted to Provident
Financial Group as partial consideration for its obligations pursuant to an
Amended and Restated Credit Agreement. The total also includes 1,643,091
shares of our common stock which Provident's 4,929,275 shares of our
preferred stock may be converted into.
(6) This total includes 70,219 shares owned by Traub and Company, Inc. in its
investment account, of which Mr. Morrison is shareholder. Mr. Morrison
disclaims beneficial ownership of such shares beyond his interest in Traub
and Company.
(7) Includes warrants to purchase 1,771,605 shares beneficially owned by
Geovest Capital Partners, L.P. in its investment account, of which Mr.
Coape-Arnold is managing partner. Mr. Coape-Arnold disclaims beneficial
ownership of such shares beyond his interest in Geovest Capital Partners.
(8) Includes warrants to purchase 20,000 shares of our common stock at $.01 per
share obtained from The Provident Bank and 1,000,000 shares of our common
stock convertible from participating income notes.
(9) This total includes 138,580 shares of our common stock owned by James Lewis
Family Trust, 200,000 shares of our common stock owned by James W. Lewis
MPP, 520,000 shares of our common stock convertible from participating
income notes, 50,000 shares of our common stock convertible from
participating income notes owned by James Lewis Family Investment, L.P.,
100,000 shares of our common stock convertible from participating income
notes owned by James W. Lewis IRA, 100,000 shares of our common stock
convertible from participating income notes owned by James W. Lewis, MPP
and a warrant to purchase 1,500,000 shares of our common stock at $.01 per
share obtained from The Provident Bank.
29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of transactions to which the Company and certain
officers and directors of the Company were a party during 2000. The Board of
Directors of the Company has adopted a policy that all transactions between the
Company and its officers, directors, principal shareholders and other affiliates
require the approval of a majority of the Company's disinterested directors, and
be conducted on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.
Mr. Mobley loaned monies from time to time to the Company to help meet cash flow
requirements and as of December 31, 1998 the balance of such loans to the
Company aggregated $315,840. These amounts were converted to notes payable on
May 1, 1999 in conjunction with the investment in the Company by investors
affiliated with The Geometry Group. In 2000, in conjunction with the investment
in the Company by investors affiliated with The Geometry Group and the
conversion by The Provident Bank of certain of its loans to the Company to
common stock, Mr. Mobley converted $250,000 plus his PIK notes to common stock.
TradeCo Global Securities, Inc., where James Lewis is the majority shareholder,
was paid $40,000 in 1999 and $30,000 in 2000 for financial advisory services. In
addition, TradeCo Global Securities, Inc. was paid $11,037 in interest on
Participating Income Notes in 1999 and $22,851 in 2000.
James Lewis, James Lewis Family Trust, James W. Lewis, MPP, and James Lewis
Family Investments, LP, were paid $51,299 in interest on Participating Income
Notes in 1999 and $65,037 in 2000.
The Provident Bank, on December 31, 1998, converted $1,600,000 of previous notes
payable plus accrued interest to 921,066 shares of common stock. In February
2000, The Provident Bank converted $6.5 million senior secured debt and $740
thousand PIK notes for $2.4 million in common stock and $4.9 million in no-yield
preferred stock which may later be converted to common stock at $3.00 per share.
In 2000, The Provident Bank was paid $620,331 in 2000 for interest on its loans
to the Company.
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
The following consolidated financial statements of Noble
Roman's, Inc. and subsidiaries are included in Item 8: Page
----
Consolidated Balance Sheets - December 31, 1999 and 2000 14
Consolidated Statements of Operations - years ended December 31,
1998, 1999 and 2000 15
Consolidated Statements of Changes in Stockholders' Equity -
years ended December 31, 1998, 1999 and 2000 16
Consolidated Statements of Cash Flows - years ended December
31, 1998, 1999 and 2000 17
Notes to Consolidated Financial Statements 19
Report of Independent Auditors - Larry E. Nunn & Associates, LLC 24
(a) Exhibits
Exhibit No.
-----------
3.1 Amended Articles of Incorporation of the Registrant (1)
3.2 Amended and Restated By-Laws of the Registrant
4.1 Specimen Common Stock Certificates (1)
10.3 Employment Agreement with Paul W. Mobley dated
November 15, 1994 (3)
10.4 Credit Agreement with The Provident Bank dated
December 1, 1995 (5)
10.6 1984 Stock Option Plan
10.7 Form of Stock Option Agreement (6)
11.1 Statement Re: Computation Per Share Earnings
21.1 Subsidiaries of the Registrant (2)
24.1 Not Applicable (unless going to sign as power of
attorney for directors)
--------------
(1) Incorporated by reference from Registration Statement filed
by the Registrant on Form S-18 on October 22, 1982 and
ordered effective on December 14, 1982 (SEC No. 2-79963C),
and, for the Amended Articles of Incorporation, from the
Registrant's Amendment No. 1 to the Post Effective Amendment
No. 2 to Registration Statement on Form S-1 on July 1, 1985.
(SEC File No.2-84150).
(2) Incorporated by reference to the Registrant's Registration
Statement on Form SB-2 (SEC File No. 33-66850) ordered
effective on October 26, 1993.
(3) Incorporated by reference from the Form 8-K filed by the
registrant on February 17, 1993.
(4) Incorporated by reference from the Form 8-K filed by the
registrant on June 3, 1993.
(5) Incorporated by reference from the Form 8-K filed by the
registrant on December 5, 1995.
(6) Incorporated by reference from the Form S-8 filed by the
registrant on November 29, 1994 (SEC File No. 33-86804).
(b) Reports on 8-K
None.
31
SIGNATURES
----------
In accordance with of Section 13 or 15(d) 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: By: /s/ Paul W. Mobley
---------------------- -------------------------------------
Paul W. Mobley, Chairman of the Board
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Date: /s/ Paul W. Mobley
---------------------- -------------------------------------
Paul W. Mobley
Chairman of the Board and Director
Date: /s/ A. Scott Mobley
---------------------- -------------------------------------
A. Scott Mobley
President and Director
Date: /s/ Donald A. Morrison, III
---------------------- -------------------------------------
Donald A. Morrison, III
Director
Date: /s/ Douglas H. Coape-Arnold
---------------------- -------------------------------------
Douglas H. Coape-Arnold
Director
32