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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, 2003.
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.
$10,486,045 as of March 1, 2004
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
13,063,076 shares of voting common stock as of February 28, 2004
3,214,748 shares of non-voting common stock as of February 28, 2004
Documents Incorporated by Reference: None
NOBLE ROMAN'S, INC.
FORM 10-K
Year Ended December 31, 2003
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 8
8. Financial Statements and Supplementary Data 14
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 23
PART III
10. Directors and Executive Officers of the Registrant 23
11. Executive Compensation 24
12. Security Ownership of Certain Beneficial Owners and Management 25
13. Certain Relationships and Related Transactions 27
PART IV
14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 29
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 names
"Noble Roman's Pizza", "Noble Roman's Express" and "Noble Roman's Pizza & Subs".
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 more
than 1,250 non-traditional and co-branded franchises in 44 states plus
Washington, D.C., 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 $25,000 to $130,000 per location.
Products & Systems
- ------------------
Noble Roman's Pizza
- -------------------
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, in
a ready-to-use form requiring only on-site assembly and baking. After many years
in development and after testing the product in selective locations during 2003,
the Company just introduced a new updated dough formula which makes the concept
even simpler. 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 countertop 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, freshly
assembled cold sub
3
sandwiches and a breakfast menu of various biscuit sandwiches, biscuits and
gravy and a cinnamon round. 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.
Typical Locations & Growth Plans
- --------------------------------
Typical non-traditional locations include hospitals, 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 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 over 1,250 franchises since 1997 in 44 states plus
Washington, D.C., Puerto Rico, Guam, Italy and Canada. 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 ongoing 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 with either a "Noble Roman's
Pizza" or a "Noble Roman's Pizza & Subs". To accomplish this goal the Company
participates in selective trade shows whereby it rents trade show space
sponsored by various industry organizations. At these trade shows, the Company
displays the concept and prepares, cooks and serves its various menu items for
sampling and demonstration. In addition, the Company takes its 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 hospitals, 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 such as the
recently developed "Noble Roman's Pizza & Subs". 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. All of
these opportunities can be serviced through the Company's existing
infrastructures, and share many aspects in common with the simplicity of
implementation and oversight.
The Company's strategic direction is to focus its business on its
non-traditional and co-branding opportunities. 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, the Company completed a
transition from operating restaurants to franchising and servicing
non-traditional franchise locations in 2000 so that it might focus all of its
efforts on franchise sales and services.
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, distribution, 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 restrictions.
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 may 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 February 18, 2004, the Company employed approximately 28 persons full-time
and 37 persons on a part-time, hourly 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((TM)) and THE BETTER PIZZA PEOPLE (R) are registered with the United
States Patent and Trademark Office as well as with the
5
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 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
2008.
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.
2002 2003 2004
---- ---- ----
Quarter Ended: High Low High Low High Low
---- --- ---- --- ---- ---
March 31 $ 1.06 $ .75 $ .95 $ .65 $ 1.50 $ 1.10*
June 30 1.08 .92 .95 .65
September 30 1.06 .55 1.11 .85
December 31 1.03 .60 1.60 1.10
*Includes transactions through March 5, 2004.
Holder of Record
- ----------------
As of February 28, 2004, the Company believes there were approximately 374
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.
Sale of Unregistered Securities
- -------------------------------
During 2003, the Company sold $2,040,000 of Subordinated Debentures along with
warrants which allows the holders to purchase 404,000 shares of common stock at
any time on or before January 15, 2007 at $1.25 per share. The proceeds were
used to retire certain Senior Secured Participating Income Notes in the
principal amount of $1,513,740 plus accrued interest. The Senior Secured
Participating Income Notes would have otherwise been convertible to 1,513,740
shares of common stock.
7
ITEM 6. SELECTED FINANCIAL DATA (In thousands except per share data)
Year Ended December 31,
----------------------------------------------------
Statement of Operations Data: 1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
Royalties and fees $ 3,351 $ 4,760 $ 5,162 $ 5,644 $ 6,701
Administrative fees and other 458 798 306 294 199
Restaurant revenue -- -- 279 711 882
-------- -------- -------- -------- --------
Total revenue 3,809 5,559 5,747 6,649 7,782
Operating expenses 1,611 1,903 2,051 2,152 2,328
Restaurant operating expenses -- -- 266 702 867
Depreciation and amortization 65 58 54 63 68
General and administrative 849 1,265 1,207 1,255 1,259
-------- -------- -------- -------- --------
Operating income 1,285 2,332 2,169 2,477 3,260
Interest and other 1,902 1,276 1,255 1,254 1,047
-------- -------- -------- -------- --------
Income (loss) before income taxes from
continuing operations (617) 1,055 914 1,223 2,213
Income taxes (benefit) (210) 359 311 416 752
-------- -------- -------- -------- --------
Net income (loss) from continuing operations $ (407) $ 696 $ 603 $ 807 $ 1,461
(Loss) from discontinued operations and
extraordinary items (10,303) (165) (1,671) (313) (167)
-------- -------- -------- -------- --------
Net income (loss) $(10,714) $ 531 $ (1,068) $ 494 $ 1,294
Weighted average number of common shares 6,015 11,371 14,794 16,058 16,169
Net income (loss) per share from continuing
operations $ (.07) $ .06 $ .04 $ .05 $ .09
(Loss) per share from discontinued
operations and extraordinary items (1.71) (.01) (.11) (.02) (.01)
-------- -------- -------- -------- --------
Net income (loss) per share $ (1.78) $ .05 $ (.07) $ .03 $ .08
-------- -------- -------- -------- --------
Balance sheet data (at year end):
Working capital (deficit) $ (3,552) $ 1,249 $ (83) $ 16 $ 2,220
Total assets 14,049 12,995 13,192 13,601 14,284
Long-term obligations 16,937 9,999 10,141 9,232 10,099
Stockholders' equity (deficit) $ (9,235) $ 1,688 $ 675 $ 1,168 $ 2,462
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
- ------------
The Company's strategic direction is to focus its business on its
non-traditional and co-branding opportunities. 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, in order to focus all of its
efforts on franchise services, the Company completed a transition from operating
restaurants to franchising and servicing non-traditional franchise locations in
2000.
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, subs and related products. The concept was
8
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 2001, 2002 and 2003 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 2004,
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, 2002 and 2003 operating results
included in the Company's consolidated statement of operations.
Condensed Consolidated Statement of Operations
Noble Roman's, Inc. and Subsidiaries
Years Ended December 31,
-----------------------------------------------------------
2001 2002 2003
---- ---- ----
Royalties and fees $5,161,648 89.8% $5,644,548 84.9% $6,700,457 86.1%
Administrative fees and other 305,928 5.3 293,668 4.4 199,231 2.6
Restaurant revenue 279,369 4.9 710,600 10.7 882,305 11.3
---------- ------ ---------- ----- ---------- -----
Total revenue 5,746,945 100.0 6,648,816 100.0 7,781,992 100.0
Express operating expenses:
Salaries and wages 1,010,217 17.6 1,090,251 16.4 1,083,168 13.9
Trade show expense 197,824 3.4 180,866 2.7 327,615 4.2
Travel expense 181,140 3.2 242,470 3.6 219,365 2.8
Other operating expense 661,755 11.5 638,360 9.6 698,120 9.0
Restaurant expenses 266,176 4.6 701,555 10.6 867,227 11.1
Depreciation and amortization 53,978 .9 63,364 1.0 67,938 .9
General and administrative 1,207,043 21.0 1,254,551 18.9 1,259,035 16.2
---------- ------ ---------- ----- ---------- -----
Operating income 2,168,812 37.7 2,477,399 37.3 3,259,524 41.9
Interest expense 1,254,976 21.8 1,254,803 18.9 1,046,581 13.4
---------- ------ ---------- ----- ---------- -----
Income before income taxes 913,836 15.9 1,222,595 18.4 2,212,944 28.4
Income taxes 310,704 5.4 415,682 6.3 752,401 9.7
---------- ------ ---------- ----- ---------- -----
Net income from continuing
operations $ 603,132 10.5% $ 806,913 12.1% $1,460,543 18.8%
2003 Compared with 2002
- -----------------------
Total revenue increased from $6.6 million in 2002 to $7.8 million in 2003, or a
17.0% increase. This increase was primarily a result of increase in royalties
and fees as a result of growth in the number of franchisees. This increase is
partially offset by a decrease in administrative fees and other and the increase
was aided by the increase in restaurant revenue as a result of operating three
locations on military bases until they are sold as franchise locations. The
Company only plans to operate these locations temporarily until a qualified
franchisee can be located.
9
Royalties and fees increased from $5.6 million in 2002 to $6.7 million in 2003,
or a 18.7% increase. This increase was primarily the result of the growth in the
number of franchise locations open and the higher per unit sales from some of
the more recent openings. Management believes the royalties and fees will
continue to grow significantly in 2004 from additional new franchises and from
higher volume locations.
Restaurant revenues increased from $711 thousand in 2002 to $882 thousand in
2003. This increase was the result of the additions of three military bases in
Rhode Island and Virginia as Company operations during 2002. In 2003, all of
these units were open for the entire year. The Company only plans to operate
these three locations temporarily until a qualified franchisee can be located.
However, the Company may, from time to time, have other such locations while a
franchisee is being located.
Salaries and wages decreased from 16.4% of revenue in 2002 to 13.9% of revenue
in 2003. This decrease was primarily the result of the growth in the number of
franchise locations open while utilizing approximately the same operational
staff. This trend should continue as the Company continues to sell more
franchises faster than additional personnel is required.
Trade show expenses increased from 2.7% of revenue in 2002 to 4.2% of revenue in
2003. This increase was the result of participating in more national trade shows
to attract franchisees from additional venues to further diversify the Company's
target market. Since the Company does not intend to increase trade show
appearances in 2004, this percentage should decrease as the growth in number of
units continues.
Travel expenses decreased from 3.6% of revenue in 2002 to 2.8% of revenue in
2003. This decrease is a result of the growth in revenue from continued growth
in locations while utilizing approximately the same employees and by locating
operational staff in various parts of the country to minimize travel costs. This
trend should continue but at a decreasing rate as larger units require more time
in the initial training at new locations.
Other operating expenses decreased from 9.6% of revenue in 2002 to 9.0% of
revenue in 2003. This decrease was the result of the continued growth in
locations that was partially offset by increases in group insurance costs,
additional sales commissions from the sale of new units and the increase in
payroll taxes as a result of the increase in commissions.
Restaurant expenses increased from 10.6% of revenue in 2002 to 11.1% of revenue
in 2003. This increase was the result of the additions of three military bases
in Rhode Island and Virginia as Company operations during 2002. In 2003, all of
these units were open for the entire year. The Company only plans to operate
these three locations temporarily until a qualified franchisee can be located.
General and administrative expenses decreased from 18.9% of revenue in 2002 to
16.2% of revenue in 2003. This decrease was the result of the growth in revenue
with the same general administrative structure over the last four years. The
dollar amount of general and administrative expense only grew by 0.4% for the
year ended 2003 compared to the same period in 2002, while revenue grew 17.0%
during the same time period. The trend for lower General and Administrative
expenses as a percentage of revenue should continue as the growth in the number
of open units continues to grow with the basic administrative structure already
in place to accommodate more growth.
Operating income increased from $2.5 million in 2002 to $3.3 million in 2003, or
a 31.6% increase. This increase was the result of continued growth in revenues
from franchising by utilizing the operational structure previously put in place
for that growth.
10
Net income from continuing operations increased from $807 thousand in 2002 to
$1.46 million in 2003, or a 81.0% increase. This increase was the result of
continued growth in revenues from franchising by utilizing approximately the
same operating and administrative structure. Management does not believe that
the operating and administrative structure will change significantly from the
continued growth in the foreseeable future except for periodically adding an
additional franchise consultant or other support staff.
The Company recognized a net loss from discontinued operations in 2003 of $167
thousand after tax benefit of $86 thousand. This net loss consisted of a loss of
approximately $1,048 thousand partially offset by a gain of approximately $795
thousand from previously unrecorded deferred tax asset from discontinued
operations.
2002 Compared with 2001
- -----------------------
Total revenue increased from $5.7 million to $6.6 million, or a 15.7 % increase.
Approximately one-half of this growth was due to growth in the number of
franchise locations open and from the new Cafe-To-Go concept. The remainder of
the growth in revenues was the result of opening three military base in Rhode
Island and Virginia as Company operations. The Company only plans to operate
these three locations temporarily until a qualified franchisee can be located.
Royalties and fees increased from $5.2 million in 2001 to $5.6 million in 2002,
or a 9.4 % increase. This increase was the result of the growth in the number of
franchise locations and Cafe-To-Go units open.
Revenues from administrative fees and other decreased from $306 thousand in 2001
to $294 thousand in 2002. This decrease was the result of the Company
discontinuing to offer accounting services for fees in early 2001.
Restaurant revenues increased from $279 thousand in 2001 to $711 thousand in
2002. This increase was the result of adding three military base in Rhode Island
and Virginia as Company operations during 2002. The Company only plans to
operate these three locations temporarily until a qualified franchisee can be
located.
Salaries and wages decreased from 17.6%, of revenue, in 2001 to 16.4%, of
revenue, in 2002. This decrease was primarily the result of the growth in the
number of franchise locations open utilizing the same operational staff
partially offset by the hiring of additional sales staff in order to accelerate
growth in the future.
Trade show expenses decreased from 3.4%, of revenue, in 2001 to 2.7%, of
revenue, in 2002. This decrease was the result of the growth in revenue while
participating in approximately the same number of trade shows.
Travel expenses increased from 3.2 %, of revenue, in 2001 to 3.6%, of revenue,
in 2002. This increase was the result of growth further away from the home
office in 44 states plus Washington, D.C., Guam, Puerto Rico, Italy and Canada
Other operating expenses decreased from 11.5%, of revenue, in 2001 to 9.6%, of
revenue, in 2002. This decrease was the result of the increase revenue with the
same operating structure.
11
Restaurant expenses increased from 4.6%, of revenue, in 2001 to 10.6%, of
revenue, in 2002. This increase was the result of adding three military base in
Rhode Island and Virginia as Company operations during 2002. The Company only
plans to operate these three locations temporarily until a qualified franchisee
can be located.
General and administrative expenses decreased from 21.0%, of revenue, in 2001 to
18.9%, of revenue, in 2002. This decrease was the result of the growth in
revenue with the same general administrative structure over the last three
years.
Operating income increased from $2.2 million in 2001 to $2.5 million in 2002, or
a 14.2% increase. This increase was the result of continued growth in revenues
from franchising by utilizing the operational structure previously put in place
for that growth.
Net income before extraordinary items increased from $603 thousand in 2001 to
$807 thousand in 2002, or a 33.8% increase. This increase was the result of
continued growth of revenues from franchising by utilizing the operational
structure previously put in place for that growth.
The Company recognized a loss from discontinued operations in 2002 of $313
thousand, including a reserve of $263 thousand, for future cost of those
discontinued operations. The Company believes the reserve is adequate to cover
those future costs.
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, given the potential size of the opportunities in
the non-traditional and co-branding market segments, the Company made the
strategic decision to continue to grow its business by franchising to
non-traditional and co-branding locations and away from operating full-service,
traditional restaurant locations.
As a result of the Company's current strategy, cash flow generated from
operations, the Company's current rate of growth by franchising plus anticipated
future 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 including, but not limited to: competitive factors
12
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
December 31,
------------
Assets 2002 2003
---- ----
Current assets:
Cash $ 13,180 $ 237,445
Accounts and notes receivable (net of allowances) 1,107,551 711,385
Inventories 140,762 157,192
Prepaid expenses 345,818 439,901
Current portion of long-term notes receivable 58,618 147,923
Deferred tax asset - current portion 1,550,000 2,250,000
------------ ------------
Total current assets 3,215,929 3,943,847
------------ ------------
Property and equipment:
Equipment 923,034 988,980
Leasehold improvements 86,229 86,229
------------ ------------
1,009,262 1,075,209
Less accumulated depreciation and amortization 373,301 441,239
------------ ------------
Net property and equipment 635,962 633,970
------------ ------------
Deferred tax asset (net of current portion) 8,371,093 7,799,340
Other assets 1,377,761 1,907,133
------------ ------------
Total assets $ 13,600,744 $ 14,284,289
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,920,915 $ 996,564
Note payable to officer 65,840 65,840
Current portion of long term notes payable 1,050,000 600,000
Deferred franchise fees 163,115 61,000
------------ ------------
Total current liabilities 3,199,870 1,723,404
------------ ------------
Long-term obligations:
Note payable to bank-net of warrant value of $67,370 at December 31,
2002 and $0 at December 31, 2003 and net of current portion 7,632,630 7,200,000
Subordinated debentures -- 2,040,000
Participating income notes -net of warrant valuation of $22,917 at
December 31, 2002 and $0 at December 31, 2003 1,599,883 859,060
------------ ------------
Total long-term obligations 9,232,513 10,099,060
------------ ------------
Stockholders' equity:
Voting common stock (25,000,000 shares authorized, 16,166,158 outstanding at
December 31, 2002 and 16,277,827 less non-voting shares of
3,214,748, or 13,063,076, as of December 31, 2003) 17,789,452 13,890,061
Non-voting common stock outstanding as of December 31, 2003 of
3,214,748 shares -- 3,899,391
Preferred stock (5,000,000 shares authorized) 4,929,274 4,929,274
Accumulated deficit (21,550,365) (20,256,901)
------------ ------------
Total stockholders' equity 1,168,361 2,461,825
------------ ------------
Total liabilities and stockholders' equity $ 13,600,744 $ 14,284,289
============ ============
See accompanying note to consolidated financial statements
14
Consolidated Statements of Operations
Noble Roman's, Inc. and Subsidiaries
Year ended December 31,
------------------------
2001 2002 2003
---- ---- ----
Royalties and fees $ 5,161,648 $ 5,644,548 $ 6,700,457
Administrative fees and other 305,928 293,668 199,231
Restaurant revenue 279,369 710,600 882,305
------------ ------------ ------------
Total revenue 5,746,945 6,648,816 7,781,992
Operating expenses:
Salaries and wages 1,010,217 1,090,251 1,083,168
Trade show expense 197,824 180,866 327,615
Travel expense 181,140 242,470 219,365
Other operating expenses 661,755 638,360 698,120
Restaurant expenses 266,176 701,555 867,228
Depreciation and amortization 53,978 63,364 67,938
General and administrative expense 1,207,043 1,254,551 1,259,035
------------ ------------ ------------
Operating income 2,168,812 2,477,398 3,259,524
Interest and other expense 1,254,976 1,254,803 1,046,581
------------ ------------ ------------
Income before income taxes from
continuing operations 913,836 1,222,595 2,212,944
Income tax expense 310,704 415,682 752,401
------------ ------------ ------------
Net income from continuing operations 603,132 806,913 1,460,543
Loss from discontinued operations net of tax benefit
of $861,029, $161,345 and $86,071, respectively (1,671,409) (313,198) (167,079)
------------ ------------ ------------
Net income (loss) $ (1,068,277) $ 493,714 $ 1,293,464
------------ ------------ ------------
Earnings per share:
Net income from continuing operations $ .04 $ .05 $ 09
Net income (loss) (.07) .03 .08
Weighted average number of common shares
outstanding 14,793,939 16,058,199 16,168,911
Fully diluted earnings per share
Net income from continuing operations $ .04 $ .05 $ .09
Net income (loss) (.06) .03 .08
Weighted average number of common shares
outstanding 16,654,100 16,882,342 16,799,214
See accompanying note to consolidated financial statements.
15
Consolidated Statements of Changes in
Stockholders' Equity (Deficit)
Noble Roman's, Inc. and Subsidiaries
Non-Voting
Voting Common Stock Common Stock
Preferred ------------------------ ------------------------ Accumulated
Stock Shares Amount Shares Amount Deficit Total
----------- ---------- ----------- ---------- ----------- ------------- -----------
Balance at December 31, 2000 $ 4,929,274 13,593,701 $17,734,495 0 $ 0 $(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 0 0 (22,044,079) 674,647
Issuance of common stock in
exchange for certain liabilities 115,000
2002 net income 493,714 493,714
----------- ---------- ----------- --------- --------- ------------ -----------
Balance at December 31, 2002 4,929,274 16,166,158 17,789,452 0 0 (21,550,365) 1,168,361
Certain shares of common stock
became non-voting in accordance
with Indiana Controlled Share
Acquisition Statute (3,214,748) (3,899,391) 3,214,748 3,899,391
Record the non-cash exercise
of warrants 111,666
2003 net income 1,293,464 1,293,464
----------- ---------- ----------- --------- --------- ------------ -----------
Balance at December 31, 2003 $ 4,929,274 13,063,076 $13,890,061 3,214,748 3,899,391 $(20,256,901) $ 2,461,825
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 2001 2002 2003
---- ---- ----
Net income (loss) $(1,068,277) $ 493,714 $ 1,293,464
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 263,454 272,539 235,014
Deferred federal income taxes (550,325) 254,337 (128,247)
Loss from discontinued segment 2,532,438 474,543 253,150
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts and notes receivable 524,813 (485,873) 396,166
Inventories (8,082) (58,093) (16,430)
Prepaid expenses (12,128) (130,230) (94,084)
Other assets (96,309) (240) (590,385)
Increase (decrease) in:
Accounts payable 517,969 337,249 (799,910)
Deferred franchise fees 23,350 (88,735) (102,115)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 2,126,903 1,069,212 446,623
INVESTING ACTIVITIES
Purchase of property and equipment (92,551) (131,344) (65,946)
----------- ----------- -----------
NET CASH (USED) BY INVESTING ACTIVITIES (92,551) (131,344) (65,946)
FINANCING ACTIVITIES
Payment of obligations from discontinued operations (2,085,106) (949,891) (377,591)
Payment of principal on outstanding debt -- -- (1,713,740)
Proceeds from long-term debt, net of debt issue costs 11,594 -- 1,934,919
Issuance of capital stock 54,957 -- --
NET CASH (USED) BY FINANCING ACTIVITIES (2,018,555) (949,891) (156,412)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 15,797 (12,023) 224,265
Cash at beginning of year 9,406 25,203 13,180
----------- ----------- -----------
CASH AT END OF YEAR $ 25,203 $ 13,180 $ 237,445
=========== =========== ===========
Supplemental Schedule of Non-Cash 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 names
"Noble Roman's Pizza", "Noble Roman's Cafe-To-Go", "Noble Roman's Pizza Express"
and "Noble Roman's Pizza & Subs".
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"). Inter-Company
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 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.
18
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.
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, 2003 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 $30 million which
expires between the years 2011 and 2016. Management made the determination for
no valuation allowance 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: Notes Payable
The Company issued a note payable to a bank in the original principal amount of
$7,800,000. The loan bears interest of 8.75% per annum payable monthly in
arrears. Summitbridge National Investments, LLC reported that its affiliates
(collectively, "Summitbridge") had purchased this note, as well as convertible
preferred stock of the Company with an aggregate liquidation preference of
$4,929,275 (convertible to 1,643,092 shares of common stock of the Company),
3,214,748 shares of common stock and a warrant to purchase 385,000 shares of
common stock at an exercise price of $.01 per share on October 17, 2003. Under
the Indiana Control Share Acquisition Law, Summitbridge currently has no voting
rights with respect to the shares it acquired. The Company also has advised
Summitbridge of the Company's position that the Indiana Business Combination Law
prohibits Summitbridge from engaging in certain transactions with the Company
until the fifth anniversary of the acquisition, including receipt of payment in
respect of the debt obligation and receipt of common stock issuable upon
conversion of the convertible preferred stock. The Company also believes that
the warrants have expired and no longer are exercisable.
The Company also issued Participating Income Notes payable to Geovest Capital
Partners, L.P. and Douglas Coape-Arnold in the amount of $859,060. The loans
bear interest at the rate of 859,060 / 2,372,800 x 2.5% of certain defined gross
income. These notes may be converted to common stock at the rate of $1.00 per
share at the option of the holders.
Note 3: Contingent Liabilities for Leased Facilities
The Company formerly leased its restaurant facilities under non-cancelable lease
agreements which generally had initial terms ranging from five to 20 years with
extended renewal terms. These leases have all been assigned to franchisees who
operate them pursuant to a Noble Roman's, Inc. Franchise Agreement. The
assignment passes all liability for future lease payments to the assignees,
however, the Company remains contingently liable on a portion of the leases to
the landlords in the event of default by the assignees. The leases generally
required the Company or its assignees 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, 2003, contingent obligations
under non-cancelable operating leases for 2004, 2005, 2006,
19
2007 and 2008, and after 2008 were $487 thousand, $348 thousand, $332 thousand,
$323 thousand, $323 thousand and $1,096 thousand, respectively.
Note 4: Income Taxes:
The Company had a deferred tax asset, as a result of prior operating losses, of
$9,921,093 at December 31, 2002 and $10,049,340 at December 31, 2003. In 2001,
2002 and 2003, the Company used deferred benefits to offset its tax expense of
$310,704, $415,682 and $752,401, respectively, and tax benefits from loss on
discontinued operations of $861,029, $161,345 and $86,071 for 2001, 2002 and
2003, respectively. Additionally, the Company recorded an increase in its
deferred tax asset of $794,576 in 2003 for previously unrecorded deferred tax
asset from discontinued operations.
Note 5: Common Stock
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 stock. In addition, certain
warrant holders exercised their warrants to purchase 2,035,679 shares of common
stock at $.01 per share.
During 2002, the Company issued 115,000 shares of common stock in payment of
certain obligations related to its discontinued operations.
During 2003, a certain warrant holder exercised its warrants to purchase 150,000
shares at $.40 per share on a cashless basis and received 111,666 shares of
common stock. Summitbridge National Investments, LLC reported that its
affiliates (collectively, "Summitbridge") had purchased convertible preferred
stock of the Company with an aggregate liquidation preference of $4,929,275
(convertible into 1,643,092 shares of common stock of the Company), 3,214,748
shares of common stock and a warrant to purchase 385,000 shares of common stock
at an exercise price of $.01 per share, on October 17, 2003. Under the Indiana
Control Share Acquisition Law, Summitbridge currently has no voting rights with
respect to the shares it acquired. The Company also has advised Summitbridge of
the Company's position that the Indiana Business Combination Law prohibits
Summitbridge from engaging in certain transactions with the Company until the
fifth anniversary of the acquisition, including receipt of payment in respect of
the debt obligation and receipt of common stock issuable upon conversion of the
convertible preferred stock. The Company also believes that the warrants have
expired and no longer are exercisable.
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. Options granted and remaining
outstanding at December 31, 2003 are: 11,000 common shares at $6.44 per share,
33,000 common shares at $1.75 per share, 40,000 common shares at $1.00 per
share, 8,000 common shares at $1.385 per share, 25,250 common shares at $1.46
per share, 47,500 at $1.45 per share, 75,000 at $1.03 per share, 75,000 at $.55
per share and 10,000 at $.89. As of December 31, 2003, options for 164,750
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.
20
Note 6: 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. A loss on these discontinued
operations of $1,671,409 after tax benefit of $861,029 was recognized in 2001,
and $313,198 after tax benefit of $161,365 was recognized in 2002. In 2003, many
of the remaining issues connected to the discontinued operations were resolved
resulting in a gross charge to discontinued operations of $1,047,726.
Additionally, the Company, in 2003, increased its deferred tax asset by $794,576
to record the previously unrecorded deferred tax asset from its discontinued
operations. This resulted in recognizing a net loss on discontinued operations
in 2003 of $167,079 after tax benefit of $86,071.
Note 7: 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.
Note 8: 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.
James Lewis, James Lewis Family Trust, James W. Lewis, MPPP, and James Lewis
Family Investments, LP, were paid $15,987 in 2002 and $284,877 in 2003 for
interest on Participating Income Notes.
TradeCo Global Securities, Inc., where James Lewis is the majority shareholder,
was paid $48,091 in 2002 and $17,227 in 2003 for interest on Participating
Income Notes.
Douglas Coape-Arnold was paid $55,000 in consulting fees and $2,480 for interest
on Participating Income Notes in 2003.
The Provident Bank was paid interest of $709,722 in 2001, $709,722 in 2002 and
$712,056 in 2003. In addition, affiliates of Summitbridge National Investments,
LLC (collectively, "Summitbridge"), the acquirer of assets previously owned by
Provident Bank were paid interest of $116,911 in 2003. Under the Indiana Control
Share Acquisition Law, Summitbridge currently has no voting rights with respect
to the shares it acquired. The Company also has advised Summitbridge of the
Company's position that the Indiana Business Combination Law prohibits
Summitbridge from engaging in certain transactions with the Company until the
fifth anniversary of the acquisition, including receipt of payment in respect of
the debt obligation and receipt of common stock issuable upon conversion of the
convertible preferred stock. In view of the foregoing, the Company does not
consider Summitbridge to be an affiliate of the Company.
21
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, 2003 and 2002, and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity(deficit) for the years ended December 31, 2003, 2002 and 2001. 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 auditing standards generally accepted
in the United States. 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, 2003 and 2002, and the results of their operations,
and their cash flows for the years ended December 31, 2003, 2002 and 2001 in
conformity with accounting principles generally accepted in United States.
/s/ LARRY E. NUNN & ASSOCIATES, LLC
Columbus, Indiana
March 6, 2004
22
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 63 Chairman of the Board and Director
A. Scott Mobley 40 President, Secretary and Director
Douglas H. Coape-Arnold 58 Director
Troy Branson 40 Executive Vice President of Franchising
George Apostolopoulos 58 Executive Vice President of Development
Mitchell Grunat 51 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 was Managing Director of TradeCo Global
Securities, Inc. from May 1994 to December 2002. 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 President of GE Capital's
Transportation & Industrial Funding Corp. from 1988 to 1991. Mr. Coape-Arnold is
a Chartered Financial Analyst.
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
23
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.
George Apostolopoulos, has been Executive Vice President of Development for
the Company since April 2002. Prior to joining the Company, Mr. Apostolopoulos
was National Manager Hotels and Resorts for Tricon Global Restaurants, Inc.
since 1986. Mr. Apostolopoulos has an Associate Degree in Restaurant and
Hospitality Management from San Diego City College.
Mitchell Grunat, has been Vice President of Franchise Services for the
Company since August 2002. Prior to joining the Company, Mr. Grunat was Chief
Operating Officer of Lanter Eye Care since 2001, Business Development Officer
for Midwest Bankers since 2000 and Chief Operating Officer for Tavel Optical
Group since 1987. Mr. Grunat has B.A. degree in English and Philosophy from
Muskingum College.
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 2003 all filing requirements under Section 16(a) of the Securities
Exchange Act of 1934 were complied with.
ITEM 11. 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 two other highest paid executive officers of the Company.
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long-Term Compensation
------------------- Securities Underlying
Name and Principal Position Year Salary (l) Bonus Options #
- --------------------------- ---- ---------- ----- ---------
Paul Mobley 2003 $318,000 $ - -
Chairman of the Board 2002 $300,000 $ - 20,000
2001 $272,083 $ - -
A. Scott Mobley 2003 $209,135 $ - -
President and Secretary 2002 $193,923 $ - 20,000
2001 $173,750 $ - -
Troy Branson 2003 $100,000 $83,722 -
Executive Vice President 2002 $100,000 $45,723 15,000
of Franchising 2001 $100,000 $31,162 -
(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.
24
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, 2003 by the executive
officers named in the Summary Compensation Table.
Number of Securities Values of Unexercised
Underlying Unexercised In-The-Money
Options at 12/31/03 Options at 12/31/03 (1)
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
Paul W. Mobley 10,000 / 20,000 $4,000 / $17,000
A. Scott Mobley 55,000 / 20,000 4,000 / 17,000
Troy Branson 53,500 / 15,000 75 / 12,750
----------
(1) Based on a per share price of $1.40, the last reported transaction
price of the Company's common stock on December 31, 2003.
Employment Agreements
- ---------------------
Mr. Paul Mobley has an employment agreement with the Company which fixes his
base compensation at $347,181 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 unless the Board takes specific action to not
renew. 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 $220,933 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 unless the Board takes specific action to not renew.
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 February 28, 2004, there were 13,063,076 shares of the Company's
voting common stock outstanding and 3,214,748 shares of the Company's non-voting
common stock outstanding, and 25,000,000 shares are authorized. The following
table sets forth the amount and percent of the Company's voting common stock
beneficially owned on February 28, 2004 by (i) each director and named executive
25
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) Voting Common Stock (2)
------------------- --------------------------- -----------------------
Paul W. Mobley
One Virginia Avenue, Suite 800
Indianapolis, IN 46204 3,151,018 (3) 21.0%
A. Scott Mobley (1)
One Virginia Avenue, Suite 800
Indianapolis, IN 46204 1,202,326 (4) 8.5%
Geovest Capital Partners, L.P.
110 E. 59th Street, 33rd Floor
New York, N.Y. 10022 1,537,731 (5) 11.1%
James W. Lewis
335 Madison Ave., Suite 1702
New York, N.Y. 10017 1,959,580 (6) 15.0%
Douglas H. Coape-Arnold
110 E. 59th Street, 33rd Floor
New York, N.Y. 10022 150,000 (7) 1.1%
Zyville E. Lewis
456 N. Maple
Greenwich, CT 06830 180,000 8.8%
All Executive Officers and
Directors as a Group (3 Persons) 4,483,344 27.7%
(1) All shares owned directly unless otherwise noted.
(2) The percentage calculations are based upon 13,063,076 shares of the
Company's voting common stock issued and outstanding as of February
28, 2004 and, for each officer or director of the group, the number of
shares subject to options, warrants or conversion rights exercisable
currently or within 60 days of February 28, 2004.
(3) The total includes a warrant to purchase 600,000 shares of stock at an
exercise price of $.40 per share issued November 19,1997, a warrant to
purchase 700,000 shares of 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, a
warrant to purchase 600,000 shares at an exercise price of $1.40 per
share issued January 7, 2004, and 10,000 shares subject to options
granted under an employee stock option plan which are currently
exercisable at $1.00 per share.
(4) This total includes 55,000 shares subject to options granted under an
employee stock option plan which are currently exercisable at $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 common shares. Also includes a warrant to purchase 400,000
shares of common stock at an exercise price of $.40 per share issued
November 19, 1997 and a warrant to purchase 300,000 shares of common
stock at an
26
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 a warrant to purchase 300,000 shares of
common stock at an exercise price of $1.40 per share issued January 7,
2004.
(5) Includes 829,060 shares of 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.
(6) This total includes 138,580 shares of common stock owned by James
Lewis Family Investments, LP and 220,000 shares of our common stock
owned by James W. Lewis MPPP.
(7) This total includes 30,000 shares of common stock convertible from
participating income notes and a warrant to purchase 100,000 shares of
common stock at an exercise price of $1.40 per share issued January 7,
2004.
Affiliates of Summitbridge National Investments, LLC (collectively
"Summitbridge") jointly filed a Schedule 13D reporting shared depositive power
over 5,242,840 shares of common stock of the Company. However, Summitbridge
acknowledged that they currently have no voting rights as to such shares due to
the applicability of the Indiana Control Share Acquisition Law. This total
includes preferred stock with an aggregate liquidation preference of $4,929,275
(convertible into 1,643,092 shares of common stock of the Company), 3,214,748
shares of common stock and a warrant to purchase 385,000 shares of common stock
at an exercise price of $.01 per share. The Company's position is that the
warrant to purchase the 385,000 shares expired by its terms April 15, 2003. The
Company also has advised Summitbridge of the Company's position that the Indiana
Business Combination Law prohibits Summitbridge from engaging in certain
transactions with the Company until the fifth anniversary of the acquisition,
including receipt of payment in respect of the debt obligation and receipt of
common stock issuable upon conversion of the convertible preferred stock.
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 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.
TradeCo Global Securities, Inc., where James Lewis is the majority shareholder,
was paid $48,091 in 2002 and $17,227 in 2003 for interest on Participating
Income Notes.
James Lewis, James Lewis Family Trust, James W. Lewis, MPPP, and James Lewis
Family Investments, LP, were paid $15,987 in 2002 and $284,877 in 2003 for
interest on Participating Income Notes.
27
Douglas Coape-Arnold was paid $55,000 in consulting fees and $2,480 for interest
on Participating Income Notes in 2003.
The Provident Bank was paid interest of $709,722 in 2001, $709,722 in 2002 and
$712,056 in 2003. In addition, affiliates of Summitbridge National Investments,
LLC (collectively, "Summitbridge"), the acquirer of assets previously owned by
Provident Bank were paid interest of $116,911 in 2003. Under the Indiana Control
Share Acquisition Law, Summitbridge currently has no voting rights with respect
to the shares it acquired. The Company has also advised Summitbridge of the
Company's position that the Indiana Business Combination Law prohibits
Summitbridge from engaging in certain transactions with the Company until the
fifth anniversary of the acquisition, including receipt of payment in respect of
the debt obligation and receipt of common stock issuable upon conversion of the
convertible preferred stock. In view of the foregoing, the Company does not
consider Summitbridge to be an affiliate of the Company.
28
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, 2002 and 2003 14
Consolidated Statements of Operations - years ended
December 31, 2001, 2002 and 2003 15
Consolidated Statements of Changes in Stockholders'
Equity - years ended December 31, 2001, 2002 and 2003 16
Consolidated Statements of Cash Flows - years ended
December 31, 2001, 2002 and 2003 17
Notes to Consolidated Financial Statements 18
Report of Independent Auditors - Larry E. Nunn &
Associates, LLC 22
(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.
29
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 , 2004 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 24, 2004 By: /s/ Paul W. Mobley
-------------- -------------------------------------
Paul W. Mobley
Chairman of the Board and Director
Date: March 24, 2004 By: /s/ A. Scott Mobley
-------------- -------------------------------------
A. Scott Mobley
President and Director
Date: March 24, 2004 By: /s/ Douglas H. Coape-Arnold
-------------- -------------------------------------
Douglas H. Coape-Arnold
Director
30
I, Paul W. Mobley, certify that:
(1) I have reviewed this annual report on Form 10-K of Noble Roman's,
Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
March 24, 2004 /s/ Paul W. Mobley
-------------------------------
Paul W. Mobley
Chief Executive Officer
Subscribed and sworn to before me this 24th day of March, 2004.
/s/ Linda L. Minett
-------------------------------
Notary Public
My commission expires: 11/27/08
I, Paul W. Mobley, certify that:
(1) I have reviewed this annual report on Form 10-K of Noble Roman's,
Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
March 24, 2004 /s/ Paul W. Mobley
-------------------------------
Paul W. Mobley
Chief Financial Officer
Subscribed and sworn to before me this 24th day of March, 2004.
/s/ Linda L. Minett
-------------------------------
Notary Public
My commission expires: 11/27/08