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 Cafe-To-Go" and "Noble Roman's Express". 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 1,050 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 $20,000 to $45,000 per location.
The Company launched another variation of the concept in August 2002 called "Noble Roman's Cafe-To-Go". This concept was developed to provide pizza-focused foodservice for locations which need to add foodservice but require something even simpler and with less space than the Company's standard concept. This concept features many of the great tasting products offered under the standard concept, but is designed to be self-service: the products arrive on location already fully prepared, and the customer bakes their food selection in a self-service unit. The concept requires no additional labor and only requires 12 square feet of floor space. The innovative, patent-pending "Pizza Bake Ovens" produce fresh baked, great tasting individual size pizzas in approximately 3 1/2 minutes. To date, the Company has sold 31 Cafe-To-Go units.
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. 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 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.
Noble Roman's Cafe-To-Go - ------------------------
The Cafe-To-Go is a very unique self-service kiosk which contains a refrigerated display unit, two commercial grade microwaves, two patent-pending self service, traditional cooking conveyor belt pizza ovens, and a back lit integrated sign. The customer selects their favorite pizza from the display, drops it in a slot on one of the pizza ovens and retrieves if from a slot on the other end when the baking is finished.
In addition, customers may select from two flavors of personal stuffed pizzas, three types of pasta and two flavors of wings. These items are baked in microwaves for approximately two minutes by selecting the preset baking program from the microwave panel. Since the menu items come in fully prepared and customers serve themselves, the Cafe-To-Go units require no labor to operate them. Since the kiosk is 6' wide, 2'2" deep and 7'6" high, it only occupies about 12 square feet of floor space.
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 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 1,050 franchises since 1997 in 44 states plus Washington, D.C., Puerto Rico, Guam, Italy and Canada, plus it has sold approximately 31 Cafe-To-Go units. 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 and through the sale of Cafe-To-Go units. To accomplish this goal the Company participates in selective trade shows whereby it rents trade show space sponsored by various industry
organizations. The Company can display both variations of its concept in the same trade show space and demonstrate it with the same staff. 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 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 and its Cafe-To-Go kiosk. Two such growth opportunities currently being designed are Noble Roman's Pizza Express 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 opportunities 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.
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.
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, 2003, the Company employed approximately 28 persons full-time and 31 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 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.
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 2003.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
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.
2001 2002 2003 ---- ---- ---- Quarter Ended: High Low High Low High Low
March 31 $ 1.81 $ .97 $ 1.06 $ .75 $ .95 $ .65 June 30 2.10 1.06 1.08 .92 September 30 1.90 1.30 1.06 .55 December 31 1.40 .70 1.03 .60 *Includes transactions through February 21, 2003.
Holder of Record - ----------------
As of February 24, 2003, the Company believes there were approximately 377 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 2002, the Company issued 115,000 shares of authorized common stock in payment of certain obligations related to its discontinued operations.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (In thousands except per share data)
ITEM 7.
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
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.
The Company launched another variation of the concept in August 2002 called "Noble Roman's Cafe-To-Go". This concept was developed to provide pizza-focused foodservice for locations which need to add foodservice but require something even simpler and less space than the Company's standard concept. This concept features many of the great tasting products as are offered under the standard concept and is designed to be self-service where the food arrives already fully prepared and the customer bakes the food in a self-service unit. The concept requires no additional labor and only requires 12 square feet of floor space. The innovative, patent-pending "Pizza Bake Ovens" produce fresh baked, great tasting personal pizzas in approximately 3 1/2 minutes. The Company has undertaken an aggressive marketing plan nationwide and believes there is a very large market whereby the Company can accelerate its growth with this additional variation. To date, the Company has sold 31 Cafe-To-Go units.
Based on the Company's 2000, 2001 and 2002 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 2003, management has determined that it is more likely than not that the Company's deferred tax credits will be fully utilized before the tax credits expire. Therefore, no valuation allowance was established for its deferred tax asset. However, there can be no assurance that the franchising growth will continue in the future. If unanticipated events should occur in the future, the realization of all or some portion of the Company's deferred tax asset could be jeopardized. The Company will continue to evaluate the need for a valuation allowance on a quarterly basis in the future.
The following table sets forth the 2000, 2001 and 2002 operating results included in the Company's consolidated statement of 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.
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.
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.
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 cost 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.
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 refocus its business on franchising to non-traditional and co-branding locations and away from operating full-service, traditional restaurant locations. During 2000, the Company completed that transition.
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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See accompanying note to condensed consolidated financial statements.
See accompanying note to condensed consolidated financial statements.
See accompanying notes to consolidated financial statements.
Supplemental Schedule of Noncash Investing and Financing Activities
None
See accompanying notes to consolidated financial statements.
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" and "Noble Roman's Pizza Express".
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.
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, 2002 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
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, completed a transition from operating restaurants to franchising and servicing non-traditional franchise locations in 2000.
Note 3: Notes Payable
The Company has a note payable to The Provident Bank in the amount of $8,000,000. The loan bears interest of 8.75% per annum payable monthly in arrears and matures on December 31, 2004.
The Company also have Participating Income Notes payable to various investors affiliated with Geometry Group, Inc. in the total amount of $2,372,800. The loans bear interest at the rate of 7.5% of defined income up to an aggregate amount of $1,117,800. After that aggregate amount was exceeded the loans bear interest at the rate of 2.5% of the defined income. As of December 31, 2002, the aggregate amount of $1,117,800 had been exceeded and, therefore, currently the loans bear interest at the rate of 2.5% of defined income. These loans mature on April 15, 2003 and on Decmeber 31, 2004 and may either be converted to capital stock at the rate of $1.00 per share, or must be paid in cash at the option of the holders.
Note 4: 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 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 on a portion of the leases 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, 2002, contingent obligations under non-cancelable operating leases for 2003, 2004, 2005, 2006, 2007, and after 2007 were $403 thousand, $360 thousand, $231 thousand, $216 thousand, $216 thousand, and $1.3 million, respectively.
Note 5: Income Taxes:
The Company had a deferred tax asset, as a result of prior operating losses, of $10,175,430 at December 31, 2001 and $9,921,093 at December 31, 2002. In 2000, 2001 and 2002, the Company used deferred benefits to offset its tax expense of $358,793, $310,704 and $415,682, respectively.
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 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.
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 2002, options to acquire 150,000 shares were granted. Options granted and remaining outstanding at December 31, 2002 are: 15,000 common shares at $3.68 per share, 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 and 75,000 at $.55 per share. As of December 31, 2002, options for 107,000 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-services 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 charge in the amount of $1,671,409 after tax benefit of $861,029 was recognized in 2001. As a result of the resolution of most outstanding issues in the last half of 2002, an additional charge in the amount of $313,198 after tax benefit of $161,365 was recognized in 2002 resulting in a reserve at December 31, 2002 for future cost in the amount of $262,508 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 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 $30,000 in 2000 for financial advisory services, in 2001, $120,000 was accrued for financial advisory services but has not yet been paid and in 2002, $120,000 was accrued for financial advisory services but has not yet been paid. In addition, TradeCo Global Securities, Inc. was paid $22,851 in interest on Participating Income Notes in 2000, $0 was paid in 2001 and $48,091 was paid in 2002.
James Lewis, James Lewis Family Trust, James W. Lewis, MPP, and James Lewis Family Investments, LP, were paid $65,037 in interest on Participating Income Notes in 2000, $0 was paid in 2001 and $15,987 was paid in 2002.
The Provident Bank was paid $620,331 for interest on its loans to the Company in 2000, $709,722 was paid in 2001 and $709,722 was paid in 2002.
[LETTERHEAD OF LARRY E. NUNN & ASSOCIATES, LLC]
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, 2002 and 2001, and the related consolidated statements of operations, cash flows and changes in stockholders' equity(deficit) for the years ended December 31, 2002, 2001 and 2000. 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, 2002 and 2001, and the results of their operations, and their cash flows for the years ended December 31, 2002, 2001 and 2000 in conformity with accounting principles generally accepted in United States.
/s/ LARRY E. NUNN & ASSOCIATES, LLC
Columbus, Indiana March 17, 2003
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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 62 Chairman of the Board and Director A. Scott Mobley 39 President, Secretary and Director Douglas H. Coape-Arnold 57 Director Troy Branson 39 Executive Vice President of Franchising George Apostolopoulos 57 Executive Vice President of Development Mitchell Grunat 50 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 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
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 2002 all filing requirements under Section 16(a) of the Securities Exchange Act of 1934 were complied with.
ITEM 11.
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.
(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, 2002 by the executive officers named in the Summary Compensation Table.
Number of Securities Values of Unexercised Underlying Unexercised In-The-Money Options at 12/31/02 Options at 12/31/02 (1) Exercisable/Unexercisable Exercisable/Unexercisable ------------------------- -------------------------
Paul W. Mobley 10,000 / 20,000 0 / 20,000 A. Scott Mobley 42,500 / 40,000 0 / 20,000 Troy Branson 22,500 / 50,000 0 / 15,000 ----------
(1) Based on a per share price of $.80, the last reported transaction price of the Company's common stock on December 31, 2002.
Employment Agreements - ---------------------
Mr. Paul Mobley has an employment agreement with the Company which fixes his base compensation at $300,000 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.
Mr. A. Scott Mobley has an employment agreement with the Company which fixes his base compensation at $195,000 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of February 24, 2003, 2003, there were 16,166,158 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 February 24, 2003 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:
*Less than 1%
(1) All shares owned directly unless otherwise noted.
(2) The percentage calculations are based upon 16,166,158 shares of our common stock issued and outstanding as of February 24, 2003 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 February 24, 2003.
(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 42,500 shares subject to options granted under an employee stock option plan which are currently exercisable at $3.68 per share for 7,500 common shares, $6.44 per share for 5,000 common shares , $1.75 per share for 20,000 common shares, and $1.00 per share for 10,000 common shares. Also includes a warrant to purchase 400,000 shares of our common stock at an exercise price of $.40 per share issued November 19, 1997 in connection with the financial restructuring with The Provident Bank and a warrant to purchase 300,000 shares of our common stock at an exercise price of $2.00 per
share, in the event of (i) a change of control in Noble Roman's, (ii) the sale of substantially all of Noble Roman's assets, or (iii) the merger or consolidation of Noble Roman's with another entity.
(5) This total includes warrants to purchase in the aggregate 385,000 shares of our common stock at $.01 per share. The warrants were granted to Provident Financial Group as partial consideration for its obligations pursuant to an Amended and Restated Credit Agreement. The total also includes 1,643,091 shares of our common stock which Provident's 4,929,275 shares of our preferred stock may be converted into.
(6) Includes 829,090 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 181,372 shares of our common stock owned by James Lewis Family Trust, 200,000 shares of our common stock owned by James W. Lewis MPP, 587,682 shares of our common stock convertible from participating income notes, 92,301 shares of our common stock convertible from participating income notes owned by James Lewis Family Investment, L.P., 116,920 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.
ITEM 13.
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 $30,000 in 2000 for financial advisory services, in 2001, $120,000 was accrued for financial advisory services but has not yet been paid and in 2002, 120,000 was accrued for financial advisory services but has not yet been paid. In addition, TradeCo Global Securities, Inc. was paid $22,851 in interest on Participating Income Notes in 2000, $0 was paid in 2001 and $48,091 was paid in 2002.
James Lewis, James Lewis Family Trust, James W. Lewis, MPP, and James Lewis Family Investments, LP, were paid $65,037 in interest on Participating Income Notes in 2000, $0 was paid in 2001 and $15,987 was paid in 2002.
The Provident Bank was paid $620,331 for interest on its loans to the Company in 2000, $709,722 was paid in 2001 and $709,722 was paid in 2002.
PART IV
ITEM 14.
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, 2001 and 2002 14
Consolidated Statements of Operations - years ended December 31, 2000, 2001 and 2002 15
Consolidated Statements of Changes in Stockholders' Equity - years ended December 31, 2000, 2001 and 2002 16
Consolidated Statements of Cash Flows - years ended December 31, 2000, 2001 and 2002 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.
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 25, 2003 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 25, 2003 /s/ Paul W. Mobley ------------------------- ------------------------------------- Paul W. Mobley Chairman of the Board and Director
Date: March 25, 2003 /s/ A. Scott Mobley ------------------------- ------------------------------------- A. Scott Mobley President and Director
Date: March 25, 2003 /s/ Douglas H. Coape-Arnold ------------------------- ------------------------------------- Douglas H. Coape-Arnold Director