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, 2001.
[ ] 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.
$6,441,714 as of March 15, 2002
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
16,051,158 shares of common stock as of March 15, 2002
Documents Incorporated by Reference: None
NOBLE ROMAN'S, INC.
FORM 10-K
Year Ended December 31, 2001
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 24
PART III
10. Directors and Executive Officers of the Registrant 24
11. Executive Compensation 25
12. Security Ownership of Certain Beneficial Owners and Management 27
13. Certain Relationships and Related Transactions 29
PART IV
14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 30
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 30 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 950 non-traditional and co-branded franchises
in 42 states plus Puerto Rico, Guam, Italy and Canada. Since the franchises are
typically installed in pre-existing, high-traffic commercial, military,
educational and recreational facilities, a typical franchise requires an
investment of approximately $20,000 to $45,000 per location.
Products & Systems
- ------------------
Prior to franchising non-traditional and co-branded locations in 1997, the
company invested considerable time and manpower to engineer a selection of high
quality products and easy to implement systems that would appeal to prospective
franchisees. Using its 30 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, relatively low in food cost and require
very low amounts of labor.
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 the customers either select from a variety of instantly available
grab-and-go products in an attractive counter-top kiosk display, or made and
baked-to-order traditional large pizzas with their favorite toppings. Pizzas and
all other menu items have been designed for quick assembly and baking through
small, stackable conveyor ovens. All menu items can be ready to serve in
approximately seven minutes or less.
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 any of the following product extensions: three types of baked
pastas, two flavors of Buffalo wings, three types of hot sandwiches and a
breakfast menu. 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"
foodservice solutions to satisfy their complete needs with 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 and its continuous product development.
3
Typical Locations & Growth Plans
- --------------------------------
Typical non-traditional locations include military bases, universities,
recreational facilities, hotels, office buildings, convenience stores, travel
plazas and other types of locations with pre-existing customer traffic.
Additionally, the Company has national co-branding relationships with other
restaurant chains for both traditional 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 950 franchises since 1997 in 42 states
plus Puerto Rico, Guam, Italy and Canada, with approximately 775 of those
locations opened. In addition to the pipeline of sold but unopened locations, it
is the Company's plan to aggressively pursue the sale of additional franchises.
The Company is currently involved in on-going discussions and negotiations
involving many additional franchise locations.
Company Strategy
- ----------------
The Company's focus will remain on aggressively growing its business through
franchising non-traditional and co-brand locations. To accomplish that goal the
Company participates in selective trade shows whereby it rents trade show booths
sponsored by various industry organizations. In those booths the Company
displays the concept, as well as preparing, cooking and serving its various menu
items for sampling. In addition, the Company takes it's show equipment to
various prospects where it sets up a unit in the prospect's office or in a
nearby hotel conference room where the Company demonstrates its concept and
products in private showings for the individual prospect. For the next several
years the Company plans to concentrate its growth targets to military bases,
universities, recreational facilities, hotels, office buildings, convenience
stores, travel plazas and as a co-brand to traditional restaurant facilities.
Additionally, the Company intends to develop additional growth vehicles to
compliment its existing system for non-traditional locations. Two such growth
opportunities currently being designed are self-serve kiosks and traditional
carry-out/delivery units. Both of these growth opportunities are being developed
with state-of-the-art product development, systems and technology intended to
make them uniquely attractive in the marketplace. Both of these concepts can be
serviced through the Company's existing infrastructures, and share many aspects
in common with the Company's non-traditional and co-branding development for
simplicity of implementation and oversight.
Over the last several years, the Company made the strategic decision to focus
its business on its non-traditional and co-branding opportunities and away from
operating 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, management determined during 1999
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 franchising all of its restaurants. The
Company continues to provide franchise services to the franchisees operating the
existing traditional locations in much the same fashion as the services to its
non-traditional and co-branded franchises.
4
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 for them 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 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 15, 2002, 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) 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.
5
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 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.
2000 2001 2002
---- ---- ----
Quarter Ended: High Low High Low High Low
---- --- ---- --- ---- ---
March 31 2 5/8 1 1/4 1 13/16 31/32 1 1/50* 3/4*
June 30 2 1/2 1 3/64 2 1/10 1 1/16
September 30 2 13/64 27/32 1 9/10 1 3/10
December 31 1 3/4 1 3/8 1 2/5 7/10
*Includes transactions through March 6, 2002.
Holder of Record
- ----------------
As of March 6, 2002, the Company believes there were approximately 383 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 2001, the Company issued 371,778 shares of authorized common stock in
payment of certain obligations related to its discontinued operations and
purchased certain restaurant equipment for 50,000 shares of its authorized
common stock.
7
ITEM 6. SELECTED FINANCIAL DATA (In thousands except per share data)
Year Ended December 31,
--------------------------------------------------------
Statement of Operations Data: 1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
Restaurant revenue $ 25,369 $ 23,307 $ -- $ -- $ --
Royalties and fees 657 2,286 3,351 4,760 5,162
Administrative fees and other 79 189 458 798 585
-------- -------- -------- -------- --------
Total revenue 26,105 25,782 3,809 5,559 5,747
Restaurant operating expenses 24,094 26,513 -- -- --
Express operating expenses 220 839 1,611 1,903 2,317
Depreciation and amortization 1,076 59 65 58 54
General and administrative 2,816 841 849 1,265 1,207
Financing, acquisition and restructuring costs 6,529 -- -- -- --
-------- -------- -------- -------- --------
Operating income (loss) (8,632) (2,469) 1,285 2,332 2,169
Interest 996 1,387 1,902 1,276 1,255
-------- -------- -------- -------- --------
Income before income taxes and
extraordinary item (9,627) (3,856) (617) 1,055 914
Income taxes (benefit) (4,148) (1,311) (210) 359 311
-------- -------- -------- -------- --------
Net income (loss) from continuing $ (5,479) $ (2,545) $ (407) $ 696 $ 603
operations
Income (loss) from discontinued operations and
extraordinary items 1,563 396 (10,303) (165) (1,671)
-------- -------- -------- -------- --------
Net income (loss) $ (3,917) $ (2,150) $(10,714) $ 531 $ (1,068)
Weighted average number of common shares 4,131 4,131 6,015 11,371 14,794
Net income (loss) per share from continuing
operations $ (1.33) $ (.62) $ (.07) $ .06 $ .04
Income (loss) per share from discontinued
operations and extraordinary items .38 .10 (1.71) (.01) (.11)
-------- -------- -------- -------- --------
Net income (loss) per share $ (.95) $ (.52) $ (1.78) $ .05 $ (.07)
-------- -------- -------- -------- --------
Balance sheet data (at year end):
Working capital (deficit) $ (3,510) $ (2,241) $ (3,552) $ 1,249 $ (83)
Total assets 18,205 19,143 14,049 12,995 13,192
Long-term obligations 13,611 14,187 16,937 9,999 10,141
Stockholders' equity (deficit) $ (325) $ 1,076 $ (9,235) $ 1,688 $ 675
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 focus
its business on franchising non-traditional and co-branding locations. 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 franchising
all of its full-service, traditional restaurants. The Company continues to
provide franchise services to the full-service franchises in much the same
fashion as the service to 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 many opportunities for growth for the
foreseeable future.
Based on the Company's 2000 and 2001 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 2002, 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 2001 operating results, 2000 operating
results and the 1999 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,
------------------------
1999 2000 2001
---- ---- ----
Royalties and fees $ 3,351,201 88.0% $ 4,760,429 85.6% $ 5,161,648 89.8%
Administrative fees and other 457,824 12.0 798,538 14.4 585,297 10.2
----------- ----- ----------- ----- ----------- -----
Total revenue 3,809,024 100.0 5,558,967 100.0 5,746,945 100.0
Express operating expenses:
Salaries and wages 792,155 20.8 971,682 17.5 1,112,495 19.4
Trade show expense 214,046 5.6 210,000 3.8 197,824 3.4
Travel expense 162,930 4.3 240,300 4.3 181,140 3.2
Other operating expense 441,955 11.6 481,338 8.7 825,623 14.4
Depreciation and amortization 64,848 1.7 58,411 1.1 53,978 .9
General and administrative 848,538 22.3 $ 1,265,697 22.8 1,207,043 21.0
----------- ----- ----------- ----- ----------- -----
Operating income 1,284,552 33.7 2,331,539 41.9 2,168,812 37.7
Interest expense 1,901,948 49.9 1,276,266 23.0 1,254,976 21.8
----------- ----- ----------- ----- ----------- -----
Income (loss) before
income taxes (617,396) (16.2) 1,055,273 19.0 913,836 15.9
Income taxes (benefit) (209,915) (5.5) 358,793 6.5 310,704 5.4
----------- ----- ----------- ----- ----------- -----
Net income (loss) from
continuing operations $ (407,481) (10.7)% $ 696,481 12.5% $ 603,132 10.5%
2001 Compared with 2000
- -----------------------
Total revenue increased from $5.6 million to $5.7 million, or 3.4%, for 2001
compared to 2000. This increase was primarily the result of the growth in the
number of franchise locations open. Royalties and fees were approximately $4.9
million for 2001 compared to $5.2 million during 2000. This increase was the
result of growth in the number of franchises and food sales from test facility
of approximately $279 thousand.
Salaries and wages increased from 17.5% of revenue in 2000 to 19.4% of revenue
in 2001. The primary reason for this increase was the addition of an Executive
Vice President of Development to create additional growth opportunities for
future periods and wages for the test facility of approximately $102 thousand.
Trade show expense decreased from 3.8% of revenue in 2000 to 3.4% of revenue in
2001. 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 decreased from 4.3% of total revenues in 2000 to 3.2% of revenue
in 2001. Both the dollar amount of travel expense and the percentage of revenue
spent on travel decreased as a result of locating franchise consultants in
various parts of the country in order to reduce travel.
Other operating expenses increased from 8.7% of revenue in 2000 to 14.4% of
revenue in 2001. This increase was primarily the result of the increased
presentation expenses to develop new growth opportunities for the future,
additional mailer cost for growth opportunities, additional group medical costs
and test facility operating cost of approximately $177 thousand. In addition,
new unit growth, primarily in the hotel industry, planned for the last quarter
of 2001 was delayed following the events of September 11, 2001.
General and administrative expense decreased from 22.8% of revenue in 2000 to
21.0% of revenue in 2001. This decrease was the result of the administrative
structure for the Company remaining the same while the revenue grew as a result
of new locations.
Net income before extraordinary items decreased from $696 thousand in 2000 to
$603 thousand in 2001. This decrease was primarily the result of the increased
cost to create additional growth opportunities for the future mostly offset by
additional revenue from growth in the number of locations in 2001. Most of the
planned growth for the last quarter of 2001 was in the hotel industry which got
canceled or delayed after the events of September 11, 2001.
The Company recognized a loss from discontinued operations in 2001 of $1.7
million to cover approximately $1 million in settlements of outstanding claims
from its discontinued operations plus provided an additional $700 thousand
reserve for future costs of those discontinued operations. The Company believes
this reserve is adequate to cover all future costs associated with those
discontinued operations.
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 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 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.
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.
11
General and administrative expense increased from 22.3% of revenue in 1999 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.
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
- -------------------------------
The Company's strategic business plan is focused on growth by franchising of
non-traditional locations and the development of co-brand franchises with other
traditional restaurant chains nationwide. Given the huge growth opportunities in
franchising non-traditional locations and in co-branding opportunities and the
actual rapid pace of that growth over the last three years, management is
focusing all of its financial and human resources on franchise services to
maximize the potential for the company and its stakeholders. Accordingly, the
Company is not now operating Company-owned locations except for one test
location and currently has no plans to do so in the future.
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.
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.
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.
12
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
December 31,
Assets ------------
------
2000 2001
------------ ------------
Current assets:
Cash $ 9,406 $ 25,203
Accounts and notes receivable 1,146,492 621,679
Inventories 74,587 82,669
Prepaid expenses 203,460 215,588
Deferred tax asset - current portion 1,122,551 1,348,132
------------ ------------
Total current assets 2,556,496 2,293,270
------------ ------------
Property and equipment:
Equipment 822,046 793,690
Leasehold improvements 84,229 84,229
------------ ------------
906,275 877,919
Less accumulated depreciation and amortization 377,865 309,936
------------ ------------
Net property and equipment 528,410 567,982
------------ ------------
Deferred tax asset 8,502,555 8,827,298
Other assets 1,407,307 1,503,616
------------ ------------
Total assets $ 12,994,768 $ 13,192,167
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 803,188 $ 1,321,157
Note payable to officer 65,840 65,840
Deferred franchise fees 228,500 251,850
Reserve for loss on discontinued operations 210,154 737,857
------------ ------------
Total current liabilities 1,307,682 2,376,704
------------ ------------
Long-term obligations:
Notes payable to Provident Bank net of warrant value of
$213,266 and $140,318 in 2000 and 2001, respectively) 7,786,734 7,859,682
Notes payable to various funds affiliated with Geometry Group
net of warrant valuation of $159,618 in 2000 and $90,868in 2001 2,212,383 2,281,133
------------ ------------
Total long-term obligations 9,999,117 10,140,815
------------ ------------
Stockholders' equity:
Common stock (25,000,000 shares authorized, 13,593,701outstanding
in 2000 and 16,051,158 in 2001) 17,734,495 17,789,452
Preferred stock (5,000,000 shares authorized) 4,929,274 4,929,274
Accumulated deficit (20,975,800) (20,044,079)
------------ ------------
Total stockholders' equity 1,687,969 674,647
------------ ------------
Total liabilities and stockholder's equity $ 12,994,768 $ 13,192,167
============ ============
See accompanying note to condensed consolidated financial statements.
14
Consolidated Statements of Operations
Noble Roman's, Inc. and Subsidiaries
Year ended December 31,
-----------------------
1999 2000 2001
------------ ------------ ------------
Royalties and fees $ 3,351,201 $ 4,760,429 $ 5,161,648
Administrative fees and other 457,824 798,538 585,297
------------ ------------ ------------
Total revenue 3,809,024 5,558,967 5,746,945
Operating expenses:
Salaries and wages 792,155 971,682 1,112,495
Trade show expense 214,046 210,000 197,824
Travel expense 162,930 240,300 181,140
Other operating expenses 441,955 481,338 825,653
Depreciation and amortization 64,848 58,411 53,978
General and administrative 848,538 1,265,697 1,207,043
------------ ------------ ------------
Operating income 1,284,552 2,331,539 2,168,812
Interest and other expense 1,901,948 1,276,266 1,254,976
------------ ------------ ------------
Income (loss) before income taxes (617,396) 1,055,273 913,836
Income tax (benefit) (209,915) 358,793 310,704
------------ ------------ ------------
Net income (loss) before extraordinary item (407,481) 696,481 603,132
Extraordinary item net of tax benefit of $5,309,317,
$85,000 and $861,029 in 1999, 2000 and 2001,
respectively (10,306,357) (165,000) (1,671,409)
------------ ------------ ------------
Net income (loss) $(10,713,838) $ 531,481 $ (1,068,277)
------------ ------------ ------------
Earnings per share:
Net income (loss) before extraordinary item $ (.07) $ .06 $ .04
Net income (loss) (1.78) .05 (.07)
============ ============ ============
Weighted average number of common shares
outstanding 6,014,864 11,370,717 14,793,939
Fully diluted earnings per share
Net income before extraordinary item $ .05 $ .04
Net income (loss) .04 (.06)
============ ============
Weighted average number of common shares
outstanding 14,788,603 16,654,100
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, 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
Conversion of warrants to stock -- 2,035,679 19,457 -- 19,457
Issuance of common stock in
exchange for certain liabilities
and purchase of assets -- 421,778 35,500 -- 35,500
2001 net loss -- -- -- (1,068,279) (1,068,279)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 $ 4,929,274 16,051,158 $ 17,789,452 $(22,044,079) $ 674,647
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 1999 2000 2001
------------ ------------ ------------
Net loss $(10,713,837) $ 531,438 $ (1,068,277)
Adjustments to reconcile net (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 970,401 248,069 263,454
Non-cash interest 615,312 -- --
Deferred federal income taxes (5,518,998) 443,793 (550,325)
Loss from discontinued segment 9,814,285 250,000 2,532,438
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts and notes receivable (138,782) (137,869) 524,813
Inventories 407,663 342,533 (8,082)
Prepaid expenses 76,465 (94,454) (12,128)
Other assets (5,113) -- (96,309)
Increase (decrease) in:
Accounts payable 1,252,111 (2,678,107) 517,969
Other current liabilities 1,131,245 (2,344,266) 527,703
Deferred franchise fees 83,625 1,375 23,350
------------ ------------ ------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (2,025,623) (3,437,488) 2,126,903
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of property and equipment (617,511) 8,741 (92,551)
Sale of fixed assets 260,325 -- --
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (357,186) 8,741 (92,551)
------------ ------------ ------------
FINANCING ACTIVITIES
Principal payments on long-term debt and capital lease
obligations (4,908) -- --
Payment of obligations for discontinued operations -- -- (2,085,106)
Proceeds from long-term debt, net of debt issue costs 1,966,703 137,000 11,594
Issuance of capital stock 432,334 3,271,240 54,957
Legal fees associated with conversion of debt to equity (9,582) -- --
------------ ------------ ------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 2,384,547 3,408,240 (2,018,555)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 1,737 (20,507) 15,797
Cash at beginning of year 28,176 29,913 9,406
------------ ------------ ------------
CASH AT END OF YEAR $ 29,913 $ 9,406 $ 25,203
============ ============ ============
Supplemental Schedule of Noncash Investing and Financing Activities
None
See accompanying notes to consolidated financial statements.
17
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.
18
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, 2001 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 $29.9 million of
which approximately $29.1 million expires between the years 2012 and 2016.
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 income (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.
Note 2: Recent Strategic Events
Over the last several years, the Company made the strategic decision to focus
its business on franchising non-traditional and co-branding locations. 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 franchising
all of its full-service, traditional restaurants. The Company continues to
provide franchise services to the full-service franchises in much the same
fashion as the service to 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 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.
19
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,
2001, contingent obligations under noncancelable operating leases for 2002,
2003, 2004, 2005, 2006 and after 2006 were $688 thousand, $560 thousand, $503
thousand, $356 thousand, $341 thousand and $2.5 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 and
used deferred benefits of $310,704 to offset its tax expense on income in 2001.
The deferred tax asset at December 31 consists of the following:
1999 2000 2001
----------- ----------- -----------
Deferred tax assets:
Tax credit carryforwards $ 172,768 $ -- $ --
Net operating loss carryforward 9,788,955 9,625,106 10,175,430
----------- ----------- -----------
Total gross deferred tax assets $ 9,961,723 $ 9,625,106 $10,175,430
----------- ----------- -----------
Deferred tax liabilities:
Property and equipment -- -- --
Cost in excess of asset acquired -- -- --
----------- ----------- -----------
Total gross deferred tax liabilities -- -- --
----------- ----------- -----------
Net deferred tax asset $ 9,961,723 $ 9,625,106 $10,175,430
=========== =========== ===========
Note 6: Common Stock
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.
During 2001, the Company issued 371,778 shares of common stock in payment of
certain obligations related to its discontinued operations and purchased certain
restaurant assets for 50,000 shares of common
20
stock. In addition, certain warrant holders exercised their warrants to purchase
2,035,679 shares of common stock at $.01 per share.
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. Options granted and remaining outstanding at December 31,
2001 are: 6,500 common shares at $3.25 per share, 15,000 common shares at $3.68
per share, 11,000 common shares at $6.44 per share, 36,000 common shares at
$1.75 per share, 50,000 common shares at $1.00 per share, 13,000 common shares
at $1.385 per share, 35,250 common shares at $1.46 per share and 47,500 at $1.45
per share. As of December 31, 2001, options for 131,500 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.
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. An additional
change in the amount of $1,671,409 after tax benefit of $861,029 was recognized
in 2001 resulting in a reserve for future cost in the amount of $737,857 for
discontinued operations. The Company believes that this reserve is adequate to
cover all future costs associated with the discontinued operations.
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 and 2000. 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
21
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, $30,000 in 2000 for financial advisory services and in
2001, $120,000 was accrued for financial advisory services but has not yet been
paid. In addition, TradeCo Global Securities, Inc. was paid $11,037 in interest
on Participating Income Notes in 1999, $22,851 in 2000 and $10,156 was accrued
in 2001.
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, $65,037 in 2000 and $124,909 was accrued in 2001.
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 for interest on its
loans to the Company. In 2001, The Provident Bank was paid $700,000 for interest
on its loans to the Company.
22
[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, 2001 and 2000, and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity (deficit) for the years ended December 31, 2001, 2000 and 1999. 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, 2001 and 2000, and the results of their operations,
and their cash flows for the years ended December 31, 2001, 2000 and 1999 in
conformity with generally accepted accounting principles.
/s/ LARRY E. NUNN $ ASSOCIATES, LLC
Columbus, Indiana
March 21, 2002
23
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 61 Chairman of the Board and Director
A. Scott Mobley 38 President, Secretary and Director
Douglas H. Coape-Arnold 56 Director
Donald A. Morrison, III 59 Director
Troy Branson 38 Executive Vice President of Franchising
Wade Shanower 52 Vice President of Franchise Services
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
24
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.
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 Franchise Services 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 2001 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
2001 exceeded $100,000.
25
SUMMARY COMPENSATION TABLE
--------------------------
Long Term
Annual Compensation Compensation
------------------- Securities Underlying
Name and Principal Position Year Salary (l) Bonus Options #
- --------------------------- ---- ---------- ----- ---------------------
Paul Mobley 2001 $ 272,083 $ - -
Chairman of the Board 2000 $ 240,000 - -
1999 240,000 - -
A. Scott Mobley
President and Secretary 2001 $ 173,750 $ -
2000 $ 150,000 - 20,000
1999 150,000 - -
Troy Branson 2001 $ 100,000 $ 31,162 -
Executive Vice President of Franchising 2000 93,754 37,794 35,000
1999 75,577 29,751 -
(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.
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, 2001 by the executive
officers named in the Summary Compensation Table.
Number of Securities Values of Unexercised
Underlying Unexercised In-The-Money
Options at 12/31/01 Options at 12/31/01 (1)
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
Paul W. Mobley 10,000 / 0 0 / 0
A. Scott Mobley 49,000 / 20,000 0 / 0
Troy Branson 22,500 / 35,000 0 / 0
- ----------
(1) Based on a per share price of $.86, the last reported transaction price of
the Company's common stock on December 31, 2001.
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 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.
26
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 15, 2002, there were 16,051,158 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 15, 2002 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
Indianapolis, IN 46204 2,551,018 (3) 14.7%
A. Scott Mobley (1)
One Virginia Avenue, Suite 800
Indianapolis, IN 46204 928,826 (4) 5.5%
Provident Financial Group, Inc.
One E. Fourth Street
Cincinnati, OH 45202 5,332,839 (5) 29.5%
Donald A. Morrison, III
320 N. Meridian, #412
Indianapolis, IN 46204 62,810 *
Geovest Capital Partners, L.P.
110 E. 59th Street, 18th Floor
New York, N.Y. 10022 1,871,625 (6) 11.0%
James W. Lewis
110 E. 59th Street, 18th Floor
New York, N.Y. 10022 4,564,136 (7) 27.2%
Douglas H. Coape-Artnold
110 E. 59th Street, 18th Floor
New York, N.Y. 10022 20,000 *
All Executive Officers and
Directors as a Group (4 Persons) 3,562,654 19.7%
*Less than 1%
27
(1) All shares owned directly unless otherwise noted.
(2) The percentage calculations are based upon 16,051,158 shares of our
common stock issued and outstanding as of March 15, 2002 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 15, 2002.
(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 69,000 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, $1.00 per share for 10,000 common shares and $1.45 per
share for 20,000 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) Includes 1,000,000 shares of our common stock convertible from
participating income notes 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.
(7) 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 and 100,000 shares of our common stock convertible from
participating income notes owned by James W. Lewis, MPP.
28
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 2001 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, $30,000 in 2000 for financial advisory services and in
2001, $120,000 was accrued for financial advisory services but has not yet been
paid. In addition, TradeCo Global Securities, Inc. was paid $11,037 in interest
on Participating Income Notes in 1999, $22,851 in 2000 and $10,156 was accrued
in 2001.
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, $65,037 in 2000 and $124,909 was accrued in 2001.
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 for interest on its
loans to the Company. In 2001, The Provident Bank was paid $700,000 for interest
on its loans to the Company.
29
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, 2000 and 2001 14
Consolidated Statements of Operations - years ended December
31, 1999, 2000 and 2001 15
Consolidated Statements of Changes in Stockholders' Equity -
years ended December 31, 1999, 2000 and 2001 16
Consolidated Statements of Cash Flows - years ended December
31, 1999, 2000 and 2001 17
Notes to Consolidated Financial Statements 18
Report of Independent Auditors - Larry E. Nunn & Associates, LLC 23
(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.
30
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: March 30, 2001 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: March 30, 2001 By: /s/ Paul W. Mobley
-------------- -------------------------------------
Paul W. Mobley
Chairman of the Board and Director
Date: March 30, 2001 /s/ A. Scott Mobley
-------------- -------------------------------------
A. Scott Mobley
President and Director
Date: March 30, 2001 /s/ Donald A. Morrison
-------------- -------------------------------------
Donald A. Morrison, III
Director
Date: March 30, 2001 /s/ Douglas H. Coape-Arnold
-------------- -------------------------------------
Douglas H. Coape-Arnold
Director
31