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, 2008.
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 if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes No X
--- ---
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes No X
--- ---
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 (ss.229,405 of this chapter) 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
---
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer or a small reporting company.
See the definitions of "large accelerated filer", "accelerated filer" and "small
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer --- Accelerated Filer ---
Non-Accelerated Filer Smaller Reporting Company X
(do not check if a smaller --- ---
reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
The aggregate market value of the common stock held by non-affiliates of
the registrant as of June 30, 2008, the last business day of the registrant's
most recently completed second fiscal quarter, based on the closing price of the
registrant's common shares on such date was $8.2 million.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 19,412,499 shares of
common stock as of March 1, 2009.
Documents Incorporated by Reference: None.
NOBLE ROMAN'S, INC.
FORM 10-K
Year Ended December 31, 2008
Table of Contents
Item #
in Form 10-K Page
PART I
1. Business 4
1A. Risk Factors 8
1B. Unresolved Staff Comments 11
2. Properties 12
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 13
PART II
5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 13
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
7A. Quantitative and Qualitative Disclosures About Market Risk 20
8. Financial Statements and Supplementary Data 21
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 35
9A. Controls and Procedures 35
9B. Other Information 36
PART III
10. Directors, Executive Officers and Corporate Governance 36
11. Executive Compensation 38
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 44
13. Certain Relationships and Related Transactions, and
Director Independence 47
14. Principal Accounting Fees and Services 47
PART IV
15. Exhibits, Financial Statements Schedules 48
3
PART 1
ITEM 1. BUSINESS
General Information
-------------------
Noble Roman's, Inc., an Indiana corporation incorporated in 1972 (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 Bistro" and "Tuscano's Italian Style Subs." The concepts' hallmarks
include high quality pizza and sub sandwiches, along with other related menu
items, simple operating systems, fast service times, labor-minimizing
operations, attractive food costs and overall affordability. Since 1997, the
Company has focused its efforts and resources primarily on franchising for
non-traditional and co-branded locations and now has awarded franchises in 45
states plus Washington, D.C., Puerto Rico, Guam, Italy and Canada. In 2005 the
Company began selling franchises for its concepts in traditional locations. In
August 2006 the Company began selling development territories to Area Developers
in an attempt to accelerate growth in the dual-branded traditional concept.
However, with the current economic environment and difficulties in obtaining
third party financing, the Company believes its non-traditional franchises
currently offer more favorable growth potential, therefore, the Company is
focusing all of its sales efforts on selling franchises for non-traditional
locations. Prior to 1997, the Company had approximately 25 years' experience
operating pizza restaurants in traditional locations, giving it expertise in the
design and support of foodservice systems for franchisees. Royalties and
franchise fees from the Company's franchise operations were $8,084,175,
$10,411,326 and $7,561,440 for 2006, 2007 and 2008, respectively. Royalties and
fees from franchise operations accounted for 85.2%, 90.0% and 83.6% of total
revenue for 2006, 2007 and 2008, respectively. Other financial information about
the Company's business, including revenue, profit and loss and total assets, is
detailed in Item 8 - Financial Statements and Supplementary Data.
Products & Systems
------------------
The Company sells and services franchises for non-traditional and stand-alone
foodservice operations under the trade names "Noble Roman's Pizza", "Tuscano's
Italian Style Subs" and "Noble Roman's Bistro". The Company believes the
attributes of these concepts include high quality products, simple operating
systems, labor minimizing operations, attractive food costs and overall
affordability.
Noble Roman's Pizza
-------------------
Superior quality that our customers can taste - that is the hallmark of Noble
Roman's Pizza. Every ingredient and process has been designed with a view to
produce superior results. We believe the following make our product unique:
o Crust made with only specially milled flour with above average protein and
yeast.
o Fresh packed, uncondensed sauce made with secret spices, parmesan cheese
and vine-ripened tomatoes.
o 100% real cheese blended from mozzarella and muenster, with no soy
additives or extenders.
o 100% real meat toppings, again with no additives or extenders - a real
departure from many pizza concepts.
o Vegetable and mushroom toppings that are sliced and delivered fresh, never
canned.
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o An extended product line that includes breadsticks with dip, pasta, baked
sandwiches, salads, wings and a line of breakfast products.
o A fully-prepared pizza crust that captures the made-from-scratch pizzeria
flavor which gets delivered to the franchise location shelf-stable so that
dough handling is no longer an impediment to a consistent product.
The Company carefully developed all of its menu items to be delivered in a
ready-to-use form requiring only on-site assembly and baking. These menu items
are manufactured by third party vendors and distributed by unrelated
distributors who deliver throughout most of the continental United States. We
believe this process results in products that are great tasting, quality
consistent, easy to assemble and relatively low in food cost and require
relatively low amounts of labor.
Tuscano's Italian Style Subs
----------------------------
Tuscano's Italian Style Subs is a separate restaurant concept that focuses on
sub sandwich menu items. Tuscano's was designed to be comfortably familiar from
a customer's perspective but with many distinctive features that include an
Italian themed menu. The franchise fee and ongoing royalty for a Tuscano's is
identical to that charged for a Noble Roman's Pizza franchise. For the most
part, the Company awards Tuscano's franchises for the same facilities as Noble
Roman's Pizza franchises, although Tuscano's franchises are also available for
locations that do not have a Noble Roman's Pizza franchise.
With its Italian theme, Tuscano's offers a distinctive yet recognizable format.
Like most other brand name sub concepts, customers select menu items at the
start of the counter line then choose toppings and sauces according to their
preference until they reach the check out point. Tuscano's, however, has many
unique competitive features, including its Tuscan theme, the extra rich yeast
content of its fresh baked bread, thematic menu selections and serving options,
high quality meats, and generous yet cost-effective quality sauces and spreads.
Tuscano's was designed to be premium quality, simple to operate and
cost-effective.
Noble Roman's Bistro
--------------------
Noble Roman's Bistro, introduced in October 2008, is an additional service
system specifically designed for non-traditional venues such as convenience
stores, entertainment facilities, universities, hospitals, bowling centers and
other high traffic facilities. The Bistro incorporates all of the ingredient
qualities described above for Noble Roman's Pizza, and retains simplicity by
using largely ready-to-use ingredients that require only final assembly and
baking on site. It features the SuperSlice pizza, one-fourth of a large pizza,
along with hot entrees such as chicken parmesan, baked pastas, hot sub
sandwiches, breadsticks and calzones plus fresh salads and snacks. The Bistro is
also available with an optional breakfast expansion menu featuring a wide
variety of standard breakfast favorites. Customers move along the food display
counter and are served to order as they go.
5
Business Strategy
The Company's business strategy can be summarized as follows:
Intensify Focus on Sales of Non-Traditional Franchises. With a very weak retail
economy, and with the severe dislocations in the lending markets, the Company
believes that it has a unique opportunity for increasing unit growth and revenue
within its non-traditional venues such as hospitals, military bases,
universities, convenience stores, attractions, entertainment facilities,
casinos, airports, travel plazas, office complexes and hotels. The Company's
franchises in non-traditional locations are foodservice providers within a host
business, and usually require a minimal investment compared to a stand-alone
franchise. Non-traditional franchises are often sold into pre-existing
facilities as a service and/or revenue enhancer for the underlying business.
Through focusing on non-traditional franchise expansion, the Company will still
seek to capitalize on other franchising opportunities as they present
themselves.
With the intensified focus on non-traditional franchising, the Company's
requirements for overhead and operating cost will be substantially less. In
addition, the Company has discontinued operating restaurants, by selling all but
two of the restaurants to be operated as franchises, which will also
substantially reduce the Company's requirements for overhead and operating cost
for the foreseeable future. The Company does intend to continue operating the
two locations that it uses for testing and demonstration purposes. This change
will allow for a more complete focus on selling and servicing franchises to
capitalize on the attractive opportunity the Company believes it has for
increased unit growth in non-traditional franchises. After making these changes,
the Company believes it has created the opportunity to achieve its business plan
for 2009 and the anticipated results that were announced in the Company's Form
10-Q for the quarterly period ended September 30, 2008.
Enhance Product Offerings. To augment the Company's sales opportunities within
non-traditional venues, it introduced the Noble Roman's Bistro service system in
October 2008. As an addition to the current service systems offered in its Noble
Roman's Pizza and Tuscano's Italian Style Subs concepts, the Bistro is designed
to appeal to additional types of businesses and operational objectives with its
fresh food display and serve-to-order serving system. Though sometimes presented
or packaged differently, the substantial majority of the menu selections are
comprised of ingredients already utilized in Noble Roman's Pizza and Tuscano's
Italian Style Subs, thereby leveraging the Company's simple systems,
distribution and purchasing power.
Maintain Superior Product Quality. The Company believes that the quality of its
products will contribute to the growth of both its non-traditional and
traditional locations. Every ingredient and process was designed with a view to
producing superior results. Most of our menu items were developed to be
delivered in a ready-to-use form requiring only on-site assembly and baking. The
Company believes this process results in products that are great tasting,
quality consistent, easy to assemble and relatively low in food cost and
requiring very low amounts of labor, which allows for a significant competitive
advantage due to the speed at which its products can be prepared, baked and
served to customers.
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 and quality,
investment cost, cost of sales, distribution, simplicity of operation and labor
requirements. Actions by one or more of the Company's
6
competitors could have an adverse effect on the Company's ability to sell
additional franchises, maintain and renew 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 geographic 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 franchise unit operations which may be of material benefit to
franchisees.
Seasonality of Sales
--------------------
Direct sales of non-traditional franchises may be affected 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 quarter 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 affect Company
royalties.
Employees
---------
As of March 1, 2009, the Company employed approximately 27 persons full-time and
16 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), THE BETTER PIZZA
PEOPLE (R) and Tuscano's Italian Style Subs(R) are registered with the U.S.
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 franchise
location is subject to licensing and regulation by a number of governmental
authorities, which include health, safety, sanitation, building and other
agencies
7
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 U. S. 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 regulation by the Federal Trade Commission ("FTC") and
various state agencies pursuant to federal and state 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 disclosure document containing certain specified
information. Some states also regulate the sale of franchises and require
registration of a franchise disclosure document 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 additional
federal regulation of the franchisor-franchisee relationship in certain
respects. 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 it seeks to market additional franchised units.
Available Information
---------------------
We make available, free of charge through our Internet website
(http://www.nobleromans.com), our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K and amendments to these reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended, as soon as reasonably practicable after we
electronically file these reports with, or furnish them to, the Securities and
Exchange Commission. The information on our website is not incorporated into
this annual report.
ITEM 1A. RISK FACTORS
All phases of the Company's operations are subject to a number of uncertainties,
risks and other influences, many of which are outside of its control and any one
of which, or a combination of which, could materially affect its results of
operations. Important factors that could cause actual results to differ
materially from the Company's expectations are discussed below. Prospective
investors should carefully consider these factors before investing in our
securities as well as the information set forth under "Forward-Looking
Statements" in Item 7 of this report. These risks and uncertainties include:
8
Competition from larger companies.
The Company competes for franchise sales with large national companies and
numerous regional and local companies. Many of its competitors have greater
financial and other resources than the Company. The restaurant industry in
general is intensely competitive with respect to convenience, price, product
quality and service. In addition, the Company competes for franchise sales on
the basis of several factors, including product engineering and quality,
investment cost, cost of sales, distribution, simplicity of operation and labor
requirements. Activities of the Company's competitors could have an adverse
effect on the Company's ability to sell additional franchises or maintain and
renew existing franchises or operating results of the Company's franchise
system. As a result of these factors, the Company may have difficulty competing
effectively from time to time or in certain markets.
Dependence on growth strategy.
The Company's primary growth strategy consists of selling new franchises for
non-traditional locations. The opening and success of new non-traditional
locations will depend upon various factors, including the traffic generated by
and viability of the underlying activity or business, the ability of the
franchisee to operate the franchised location, their ability to comply with
applicable regulatory requirements and the effect of competition and general
economic and business conditions including food and labor costs. Many of the
foregoing factors are not within the Company's control. There can be no
assurance that the Company will be able to achieve its plans with respect to the
opening or operation of new non-traditional locations.
Dependence on success of franchisees.
A significant portion of the Company's earnings comes from royalties generated
by its franchises. Franchisees are independent operators, and their employees
are not the Company's employees. The Company provides training and support to
franchisees, but the quality of franchise store operations may be diminished by
any number of factors beyond the Company's control. Consequently, franchisees
may not successfully operate stores in a manner consistent with the Company's
standards and requirements, or may not hire and train qualified managers and
other store personnel. If they do not, the Company's image and reputation may
suffer, and its revenues and stock price could decline. While the Company
attempts to ensure that its franchisees maintain the quality of its brand and
branded products, franchisees may take actions that adversely affect the value
of the Company's intellectual property or reputation.
Dependence on consumer preferences and perceptions.
The restaurant industry is often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns and the type, number and location of competing restaurants. The Company
can be substantially adversely affected by publicity resulting from food
quality, illness, injury, or other health concerns or operating issues stemming
from one restaurant or a limited number of restaurants.
Interruptions in supply or delivery of fresh food products.
Dependence on frequent deliveries of fresh product from unrelated third-party
manufacturers through unrelated third-party distributors also subjects the
Company to the risk that shortages or interruptions in
9
supply caused by inclement weather or other conditions could adversely affect
the availability, quality and cost of ingredients. In addition, factors such as
inflation, market conditions for cheese, wheat, meats, paper and labor may also
adversely affect the franchisees and, as a result, adversely affect the
Company's ability to add new franchised restaurants.
Dependence on key executives.
The Company's business has been and will continue to be dependent upon the
efforts and abilities of certain members of its management, particularly Paul
Mobley, our Chairman, Chief Executive Officer and Chief Financial Officer, and
A. Scott Mobley, our President and Chief Operating Officer. The loss of either
of their services could have a material adverse effect on the Company.
The Company is subject to ongoing litigation.
As described in Item 3 of this report, the Company is a defendant in a lawsuit
filed by certain of its former traditional franchisees. The plaintiffs in this
lawsuit allege that they purchased traditional franchises from the Company as a
result of certain fraudulent representations by the defendants in the case and
the omission of certain material facts regarding the franchises. If the Company
is subject to adverse findings in this litigation, it could be required to pay
damages or have other remedies imposed, which could have a material adverse
effect on the Company. The resolution of this matter could also be
time-consuming, expensive and distract the Company's management from the conduct
of the Company's business. The Company believes that it has strong and
meritorious legal and factual defenses to these claims and will vigorously
defend its interest in the case.
The Company is subject to Indiana law with regard to purchases of our stock.
Certain provisions of Indiana law applicable to the Company could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could also limit the price that certain investors might be
willing to pay in the future for shares of its common stock. These provisions
include prohibitions against certain business combinations with persons that
become "interested shareholders" (persons owning or controlling shares with
voting power equal to 10% or more) unless the board of directors approves either
the business combination or the acquisition of stock before the person becomes
an "interested shareholder."
The Company and its franchisees are subject to various federal, state and local
laws with regard to the operation of the businesses.
The Company is subject to regulation by the FTC and various state agencies
pursuant to federal and state laws regulating the offer and sale of franchises.
Several states also regulate aspects of the franchisor-franchisee relationship.
The FTC requires the Company to furnish to prospective franchisees a disclosure
document containing certain specified information. Some states also regulate the
sale of franchises and require registration of a franchise disclosure document
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
10
franchising and the franchisor-franchisee relationship, and the Company would be
subject to applicable laws in each jurisdiction where it seeks to market
additional franchise units.
Each franchise 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 the Company's third party production and distribution services, are also
licensed and subject to regulation by state and local health and fire codes, and
U. S. Department of Transportation regulations. The Company, its franchisees and
its vendors are also subject to federal and state environmental regulations.
The Company's stock is quoted on the OTC Bulletin Board and, accordingly, we are
not subject to the same corporate governance standards that would apply if our
shares were listed on a national exchange, which limits the liquidity and price
of our securities more than if our securities were quoted or listed on a
national exchange.
Our stock is quoted on the OTC Bulletin Board, an NASD-sponsored and operated
inter-dealer automated quotation system for equity securities not included on
the Nasdaq Stock Market. We are not subject to the same corporate governance
requirements that apply to exchange-listed companies. These requirements include
having: a majority of independent directors; an audit committee of independent
directors; and shareholder approval of certain equity compensation plans. As a
result, quotation of our stock on the OTC Bulletin Board limits the liquidity
and price of our stock more than if our stock was quoted or listed on a national
exchange. There is no assurance that the Company's stock will continue to be
authorized for quotation by the OTC Bulletin Board or any other market in the
future.
Compliance with external assurance requirements of the Sarbanes-Oxley Act of
2002 will require substantial financial and management resources.
The Company will be required to comply with the external assurance requirements
of Section 404 of the Sarbanes-Oxley Act of 2002 beginning with our Annual
Report on Form 10-K for the year ending December 31, 2009. Section 404 requires
us to evaluate and report on our system of internal controls over financial
reporting, however, the Company is not currently required to have its auditor
report on management's evaluation of our system of internal controls or certify
its compliance with the rules related to its system of internal controls. If we
fail to maintain the adequacy of our internal controls, we could be subject to
various sanctions. Any inability to provide reliable financial reports could
harm our business. Any failure to implement required new or improved controls,
or difficulties encountered in the implementation of adequate controls over our
financial processes and reporting in the future, could harm our operating
results or cause us to fail to meet our reporting obligations. Inferior internal
controls could also cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading price of our
stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
11
ITEM 2. PROPERTIES
The Company's headquarters are located in 7,600 square feet of leased office
space in Indianapolis, Indiana. The lease for this property expires in August
2015.
The Company also leases space for the Company-owned dual-branded restaurant in
Indianapolis, Indiana which is used as a demonstration and test restaurant. The
lease for this property expires December 31, 2010. The Company has the option to
extend the term of this lease for two additional five-year periods.
The Company leases space for operating an additional dual-branded restaurant in
Indianapolis, Indiana. The lease for this property expires December 5, 2010. The
Company has the option to extend the term of this lease for two additional
five-year periods. This lease also provides for the Company to assign the lease
to a franchisee when it is franchised.
ITEM 3. LEGAL PROCEEDINGS
The Company, from time to time, is involved in various litigation relating to
claims arising out of its normal business operations.
The Company is a Defendant in a lawsuit styled Kari Heyser, Fred Eric Heyser and
Meck Enterprises, LLC, et al v. Noble Roman's, Inc. et al, filed in Superior
Court in Hamilton County, Indiana on June 19, 2008 (Cause No. 29D01 0806 PL
739). The Plaintiffs in the case are all former franchisees of the Company. In
addition to the Company, the Defendants include certain of the Company's
officers and lenders to certain of the Plaintiffs. The Plaintiffs allege that
they purchased traditional franchises as a result of certain fraudulent
representations by the Defendants and the omission of certain material facts
regarding the franchises and seek compensatory and punitive damages. No
substantive discovery has yet been completed. The Company believes that it has
strong and meritorious legal and factual defenses to these claims and will
vigorously defend its interests in this case.
The Company filed a Counter-Claim for Damages against all of the Plaintiffs and
Preliminary Injunction and Permanent Injunction against a majority of the
Plaintiffs. In addition, the Company filed a Motion For Preliminary Injunction
against a majority of the Plaintiffs, all of which are former franchisees and
the Preliminary Injunction was granted on October 7, 2008. The Plaintiffs were
ordered to comply within seven days for the majority of actions required by the
injunction and within 14 days for the remainder. None of the Plaintiffs fully
complied with the Court's Order and the Company believes several of them only
minimally complied. Defendants filed a motion to require full compliance, to
show cause why they should not be held in contempt and for attorney's fees as
sanctions. The Plaintiffs responded to that motion by filing affidavits by each
of the Plaintiffs. After reviewing those affidavits, Defendants filed a Motion
To Strike Plaintiff's Fraudulent Affidavits claiming that they neither contained
a valid declaration or affirmation nor appeared before a valid notary who
administered the oath, although Plaintiffs attorney signed the affidavits as if
they had appeared before him, which Defendants claim is a criminal offense.
Plaintiffs filed Response to Noble Roman's Motion To Strike Plaintiffs
Affidavits by attempting to withdraw the original affidavits and substituting
certified affirmations. Defendants have filed a Reply In Support of Motion To
Strike Fraudulent Affidavits claiming that Plaintiffs tacitly admitted that the
original affidavits were fraudulent by not denying any of the claims in the
Motion To Strike but, instead, attempted to file new affidavits. Defendants have
subsequently filed a Motion To Revoke David M.
12
Duree's Temporary Admission Pro Hac Vice for committing a criminal offense and
filing fraudulent affidavits with the court. The Plaintiffs have filed a motion
for sanctions against certain Defendants and their counsel.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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.
2007 2008
---- ----
Quarter Ended: High Low High Low
-------------- ---- ----- ---- -----
March 31 $ 4.50 $ 3.60 $ 1.35 $ 1.21
June 30 $ 7.40 $ 4.05 $ 1.30 $ 1.15
September 30 $ 7.80 $ 5.05 $ .79 $ .67
December 31 $ 6.20 $ 1.40 $ .38 $ .35
Holders of Record
-----------------
As of February 28, 2009, there were approximately 323 holders of record of the
Company's 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 on its common stock within the
foreseeable future.
Sale of Unregistered Securities
-------------------------------
None.
13
Equity Compensation Plan Benefit Information
--------------------------------------------
Information about the Company's equity compensation plan is detailed in Item 12
ITEM 6. SELECTED FINANCIAL DATA (In thousands except per share data)
Year Ended December 31,
------------------------------------------------------
Statement of Operations Data: 2004 2005 2006 2007 2008
-------- -------- -------- -------- --------
Royalties and fees $ 6,789 $ 7,270 $ 8,084 $ 10,411 $ 7,562
Administrative fees and other 125 72 63 68 48
Restaurant revenue 998 1,089 1,340 1,088 1,432
-------- -------- -------- -------- --------
Total revenue 7,912 8,431 9,487 11,567 9,042
Operating expenses 2,522 2,627 2,921 4,371 3,184
Restaurant operating expenses 962 1,059 1,284 1,011 1,369
Depreciation and amortization 50 70 84 97 92
General and administrative 1,403 1,491 1,550 1,680 1,625
-------- -------- -------- -------- --------
Operating income 2,975 3,184 3,648 4,408 2,772
Interest and other 946 817 776 651 616
Other income -- 2,801 -- -- --
-------- -------- -------- -------- --------
Income before income taxes from continuing operations 2,029 5,168 2,872 3,757 2,156
Income taxes 690 1,757 976 1,268 733
-------- -------- -------- -------- --------
Net income from continuing operations 1,339 3,411 1,896 2,489 1,423
Loss from discontinued operations (404) (560) -- -- 3,824
-------- -------- -------- -------- --------
Net income (loss) $ 935 $ 2,851 $ 1,896 $ 2,489 $ (2,401)
Cumulative preferred dividends -- 16 163 127 66
-------- -------- -------- -------- --------
Net income available to common
stockholders $ 935 $ 2,835 $ 1,733 $ 2,361 $ (2,467)
======== ======== ======== ======== ========
Weighted average number of common shares 16,280 16,849 16,406 17,676 19,213
Net income from continuing operations $ .06 $ .17 $ .12 $ .14 $ .07
Net income (loss) per share $ .06 $ .17 $ .12 $ .14 $ (.13)
Net income (loss) available to common $ .06 $ .17 $ .11 $ .13 $ (.13)
stockholders
Balance Sheet Data (at year end):
Working capital $ 2,107 $ 2,793 $ 3,423 $ 3,806 $ 551
Total assets 15,249 15,523 16,138 17,469 17,278
Long-term obligations, net of current portion 9,740 7,125 5,625 4,125 5,625
Stockholders' equity $ 4,256 $ 6,513 $ 8,617 $ 11,312 $ 8,962
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
------------
The Company sells and services franchises for non-traditional, co-branded and
stand-alone foodservice operations under the trade names "Noble Roman's Pizza",
"Tuscano's Italian Style Subs" and "Noble Roman's Bistro". The hallmarks include
high quality products, simple operating systems, labor-minimizing operations,
attractive food costs and overall affordability.
14
There were 823 franchised outlets in operation on December 31, 2007 and 829 on
December 31, 2008. During that twelve-month period there were 74 new franchised
outlets opened and 68 franchised outlets left the system, 18 of which reached
the end of their franchise agreement term and 50 of which ceased operation for
other reasons.
Financial Summary
-----------------
The preparation of the consolidated financial statements in conformity with
United States 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 may
differ from those estimates. The Company evaluates the carrying values of its
assets, including property, equipment and related costs, accounts receivable and
deferred tax asset, periodically to assess whether any impairment indications
are present due to (among other factors) recurring operating losses, significant
adverse legal developments, competition, changes in demand for the Company's
products or changes in the business climate that affect the recovery of recorded
value. If any impairment of an individual asset is evident, a charge will be
provided to reduce the carrying value to its estimated fair value.
Condensed Consolidated Statement of Operations Data
Noble Roman's, Inc. and Subsidiaries
Years Ended December 31,
--------------------------------------------------------------------
2006 2007 2008
---- ---- ----
Royalties and fees $ 8,084,175 85.2% 10,411,326 90.0% 7,561,440 83.7%
Administrative fees and other 63,072 .7 67,467 .6 48,084 .5
Restaurant revenue 1,339,555 14.1 1,088,022 9.4 1,432,435 15.8
----------- ------ ----------- ------ ----------- ------
Total revenue 9,486,802 100.0 11,566,815 100.0 9,041,959 100.0
Franchise-related operating expenses:
Salaries and wages 1,278,319 13.5 1,642,529 14.2 1,366,861 15.1
Trade show expense 447,303 4.7 554,574 4.8 488,012 5.4
Travel expense 380,763 4.0 527,455 4.6 386,018 4.3
Sales commissions 72,343 .8 621,928 5.4 62,960 .7
Other operating expense 742,104 7.8 1,024,399 8.9 880,464 9.7
Restaurant expenses 1,283,702 13.5 1,011,146 8.7 1,369,139 15.2
Depreciation 84,353 .9 96,682 .8 91,736 1.0
General and administrative 1,550,030 16.3 1,680,284 14.5 1,624,022 18.0
----------- ------ ----------- ------ ----------- ------
Operating income 3,647,887 38.5 4,407,818 38.1 2,772,747 30.6
Interest and other expense 776,028 8.2 650,802 5.6 616,333 6.8
----------- ------ ----------- ------ ----------- ------
Income before income taxes 2,871,859 30.3 3,757,016 32.5 2,156,414 23.8
Income taxes 976,432 10.3 1,268,489 11.0 733,180 8.1
----------- ------ ----------- ------ ----------- ------
Net income from continuing
operations $ 1,895,427 20.0% $ 2,488,527 21.5% 1,423,234 15.7%
=========== ====== =========== ====== =========== ======
15
2008 Compared with 2007
-----------------------
Total revenue decreased from $11.6 million in 2007 to $9.0 million in 2008. This
decrease was primarily due to a decrease in royalties and fees as a result of
selling fewer franchises, less equipment commissions and less Area Development
Agreements. Royalties and fees decreased from approximately $10.4 million in
2007 to approximately $7.6 million in 2008. Included in royalties and fees were
approximately $1,221,500 in 2007 and $353,500 in 2008 for initial franchise
fees. In addition, royalties and fees included approximately $1,537,700 in 2007
and $104,825 in 2008, for the sale of Area Development Agreements. Also included
in royalties and fees were approximately $891,300 in 2007 and approximately
$397,200 in 2008, for equipment commissions. Royalty and fee income, less
initial franchise fees, area development fees and equipment commissions, were
$6.8 million in 2007 and $6.7 million in 2008.
Restaurant revenues increased from $1.1 million in 2007 to $1.4 million in 2008.
The Company only intends to operate two restaurants to be used for testing and
demonstration purposes but from time to time did temporarily operate others
until a suitable franchisee was located. Although, as of December 31, 2008, the
Company was operating only the two restaurants, it operated more restaurants on
a temporary basis during 2008 than 2007.
Salaries and wages increased from 14.2% of revenue in 2007 to 15.1% of revenue
in 2008. This increase was primarily the result of the decrease in revenue.
Actual salaries and wages decreased from $1.64 million in 2007 to $1.37 million
in 2008 and is anticipated to be further reduced in 2009.
Trade show expenses increased from 4.8% of revenue in 2007 to 5.4% of revenue in
2008. The increase was primarily the result of the decrease in revenue. Actual
trade show expenses decreased from $555 thousand in 2007 to $488 thousand in
2008. This expense is anticipated to be lower in 2009.
Travel expenses decreased from 4.6% of revenue in 2007 to 4.3% of revenue in
2008. This decrease was primarily the result of having fewer supervisors and
trainers because of opening fewer new restaurants which was offset by the
decrease in revenue. The trend toward lower travel expenses is anticipated to
continue in 2009.
Sales commission expense decreased from 5.4% of revenue in 2007 to .7% of
revenue in 2008. This decrease was primarily the result of selling fewer Area
Development Agreements and fewer Franchise Agreements in 2008 compared to 2007.
Other operating expenses increased from 8.9% of revenue in 2007 to 9.7% of
revenue in 2008. This increase was primarily the result of the decrease in
revenue. Actual other operating expenses decreased from approximately $1.024
million in 2007 to $880 thousand in 2008. This decrease was primarily due to the
reduction of expenses related to staff reductions.
Restaurant expenses increased from 8.7% of revenue in 2007 to 15.2% of revenue
in 2008. This increase was primarily the result of the Company operating more
restaurants on a temporary basis in 2008 and the decrease in royalty and fee
revenue. The Company only intends to operate two restaurants to be used for
testing and demonstration purposes but did temporarily operate others until a
franchisee was located. The Company currently does not have any plans to operate
any other restaurants. Although, as of December 31, 2008, the Company only
operated the two restaurants, it operated more restaurants on a temporary basis
during 2008 than 2007.
16
General and administrative expenses increased from 14.5% of revenue in 2007 to
18.0% of revenue in 2008. This increase was a result of the decrease in revenue.
Actual general and administrative expenses were $1.680 million in 2007 and
$1.624 million in 2008 and are anticipated to be further reduced in 2009.
Operating income decreased from $4.4 million in 2007 to $2.8 million in 2008.
This was primarily the result of the decrease in royalty and fee revenue as a
result of selling fewer franchises, less equipment commissions and less Area
Development Agreements partially offset by a decrease in operating expenses.
Interest expense increased from 5.6% of revenue in 2007 to 6.8% of revenue in
2008. This was a result of the decrease in revenue. Actual interest expense was
approximately $651 thousand in 2007 compared to $616 thousand in 2008. The
actual loan balance was higher in 2008 than 2007 but was more than offset by a
lower interest rate.
Net income from continuing operations decreased from $2.5 million in 2007 to
$1.4 million in 2008. This decrease was primarily the result of the decrease in
revenue partially offset by a decrease in operating expenses.
Net income per share from continuing operations decreased from $.14 per share on
17.7 million weighted average shares outstanding in 2007 to $.07 per share on 19
million weighted average shares outstanding in 2008. The diluted net income per
share from continuing operations decreased from $.13 per share on 19.0 million
weighted average shares outstanding in 2007 to $.07 per share on 20 million
weighted average shares outstanding in 2008.
Loss on discontinued operations was $3.8 million in 2008. The Company reported
no discontinued operations in 2007. The loss on discontinued operations was
primarily the result of operating traditional restaurants which had been
acquired from struggling franchisees and later sold to new franchisees. Noble
Roman's made the decision in late 2008 to discontinue that business and charged
off or dramatically lowered the carrying value of all receivables related to the
traditional restaurants and accrued future estimated expenses related thereto.
The Company does not expect to report any loss on discontinued operations in
2009.
2007 Compared with 2006
-----------------------
Total revenue increased from $9.5 million in 2006 to $11.6 million in 2007. This
increase was primarily the result of an increase in royalties and fees from the
addition of new franchises. Royalties and fees increased from approximately $8.1
million in 2006 to approximately $10.4 million in 2007. Included in royalties
and fees were approximately $963,000 in 2006 and $1,221,500 in 2007 for initial
franchise fees. In addition, royalties and fees included approximately $707,000
in 2006 and $1,537,700 in 2007, for the sale of Area Development Agreements.
Also included in royalties and fees were approximately $891,300 in 2007 and
approximately $533,900 in 2006, for equipment commissions. Royalty and fee
income, less initial franchise fees, area development fees and equipment
commissions, were $6.8 million in 2007 and $5.9 million in 2006.
Restaurant revenues decreased from $1.3 million in 2006 to $1.1 million in 2007.
The Company only intends to operate two restaurants to be used for testing and
demonstration purposes but from time to time temporarily operates others until a
suitable franchisee is located. As of December 31, 2007, the Company operated
six restaurants on a temporary basis.
17
Salaries and wages remained increased from 13.5% of revenue in 2006 to 14.2% of
revenue in 2007. This increase was primarily the result of adding additional
supervisors to cover a larger base of units.
Trade show expenses increased from 4.7% of revenue in 2006 to 4.8% of revenue in
2007. The increase in the level of expense from participating in more franchise
shows, was mostly offset by the increased revenue.
Travel expenses increased from 4.0% of revenue in 2006 to 4.6% in 2007. This
increase was primarily the result of having more supervisors to support the
franchisees.
Sales commission expense increased from 0.8% of revenue in 2006 to 5.4% of
revenue in 2007. This increase was primarily the result of selling more Area
Development Agreements in 2007 and more franchises sold by Area Developers.
Other operating expenses increased from 7.8% of revenue in 2006 to 8.9% of
revenue in 2007. This increase was primarily the result of additional
advertising and an increase in group insurance, payroll taxes and auto expense
resulting from the increase in the number of supervisors who support the
franchisees.
Restaurant expenses decreased from 13.5% of revenue in 2006 to 8.7% of revenue
in 2007. This decrease resulted primarily from the Company operating fewer
restaurants on a temporary basis in 2007 and the increase in royalty and fee
revenue.
General and administrative expenses decreased from 16.3% of revenue in 2006 to
14.5% of revenue in 2007. This decrease was a result of administrative expense
increasing at a slower rate compared to the growth in revenue.
Operating income increased from $3.6 million in 2006 to $4.4 million in 2007.
This was primarily the result of additional revenue from growth in the number of
franchise locations while the Company controlled operating expenses.
Interest expense decreased from 8.2% of revenue in 2006 to 5.6% of revenue in
2007. This was a result of a decrease in interest expense due to a reduction in
the average amount of debt outstanding and, additionally, the result of an
increase in revenue.
Net income from continuing operations increased from $1.9 million in 2006 to
$2.5 million in 2007. This increase was primarily the result of additional
revenue from growth in the number of franchise locations while maintaining
control of the operating expenses.
Net income per share from continuing operations increased from $.12 per share on
16.4 million weighted average shares outstanding in 2006 to $.14 per share on
17.7 million weighted average shares outstanding in 2007. The diluted net income
per share from continuing operations increased from $.10 on 19.7 million
weighted average shares outstanding in 2006 to $.13 per share on 19.0 million
weighted average shares outstanding in 2007.
18
Impact of Inflation
-------------------
The primary inflation factors affecting the Company's operations are food and
labor costs to the franchisee. The Company was affected in 2008 by the dramatic
increase in commodity prices, primarily cheese and meats, which negatively
affected its franchisees' food costs. The commodity prices returned to a more
normal level during the latter part of 2008 and the beginning of 2009. The
competition for labor has resulted in higher salaries and wages for the
franchisees, however, that effect is largely minimized by the relatively low
labor requirements of the Company's franchise concepts.
Liquidity and Capital Resources
-------------------------------
The Company's current strategy is to grow its business by concentrating largely
on franchising new non-traditional locations. The Company recently increased its
focus on selling additional franchises for non-traditional locations and created
the Noble Roman's Bistro service system as an attempt to broaden the appeal to
additional types of locations and operations, and to accelerate the
non-traditional growth. In addition, the Company has discontinued operating any
restaurants except for the two locations the Company operates for testing and
demonstration purposes. This change has allowed the Company to significantly
reduce operating expenses and overhead. This strategy does not require
significant capital investments.
The Company's current ratio decreased during 2008 as a result of the loss
incurred on the discontinued operations. The deferred tax asset increased, by
the tax benefit, as a result of the loss on discontinued operations. Also,
accounts receivable decreased as a result of the Company's decision to
discontinue the business of operating traditional restaurants which had been
acquired from struggling franchisees and charging off, or dramatically lowering
the carrying value, of all receivables related to the traditional restaurants.
In addition, the accrued expenses increased in 2008 as a result of the Company
accruing estimates of future expenses related to the discontinued operations.
The Company does not expect to report any loss on discontinued operations in
2009.
In order to intensify focus on non-traditional franchising and withdraw from
temporarily operating restaurants, the Company sold the excess restaurants to be
operated as a franchise which will substantially reduce the Company's
requirement for overhead and operating cost. After making these changes, subject
to worsening economic conditions, the Company has created the opportunity to
achieve management's business plan for 2009 and the anticipated results that
were announced in the Company's Form 10-Q for the quarterly period ended
September 30, 2008. The Company does not plan any significant capital
expenditures in 2009.
As a result of the Company's strategy and cash flow generated from operations in
the future, the Company believes it will have sufficient cash flow to meet its
obligations and to carry out its current business plan.
On February 4, 2008, the Company and certain of its subsidiaries, entered into a
First Amendment to Loan Agreement (the "Amendment") with Wells Fargo Bank, N.A.
that amended the existing Loan Agreement dated August 25, 2005, between the
Company and Wells Fargo (the "Loan Agreement"). Under the Amendment, Wells Fargo
loaned the Company an additional $3.0 million. The Amendment also reduced the
interest rate applicable to amounts borrowed under the Loan Agreement from LIBOR
plus 4% per annum to LIBOR plus 3.75% per annum and extended the maturity date
for borrowings under the loan from August 31, 2011 to August 31, 2013.
19
On February 6, 2008, the Company elected to trade its previous swap contract for
a new swap contract fixing the rate on 50% of the principal balance under the
Loan Agreement, as amended by the Amendment (approximately $3.375 million as of
March 1, 2009), at an annual interest rate of 8.2%.
The Company does not anticipate that any of the recently issued Statement of
Financial Accounting Standards will have a material impact on its Statement of
Operations or its Balance Sheet.
Contractual Obligations
-----------------------
The following table sets forth the contractual obligations of the Company as of
December 31, 2008:
Less than More than
Total 1 year 1-3 Years 3-5 Years 5 years
----- --------- --------- --------- ---------
Long-term debt $7,125,000 $1,500,000 $3,000,000 $2,625,000 $ --
Operating leases 959,830 176,255 374,041 252,022 157,512
---------- ---------- ---------- ---------- ----------
Total $8,084,830 $1,676,255 $3,374,041 $2,877,022 $ 157,512
========== ========== ========== ========== ==========
Forward-Looking Statements
--------------------------
The statements contained above in Management's Discussion and Analysis
concerning the Company's future revenues, profitability, financial resources,
market demand and product development are forward-looking statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995)
relating to the Company that are based on the beliefs of the management of the
Company, as well as assumptions and estimates made by and information currently
available to the Company's management. The Company's actual results in the
future may differ materially from those projected in the forward-looking
statements due to risks and uncertainties that exist in the Company's operations
and business environment, including, but not limited to, competitive factors and
pricing pressures, the current litigation with certain former traditional
franchisees, 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 success or failure of individual franchisees, the
impact of competitors' actions and changes in prices or supplies of food
ingredients and labor as well as the factors discussed above under "Risk
Factors." 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
The Company's exposure to interest rate risk relates primarily to its
variable-rate debt. As of December 31, 2008, the Company had outstanding
interest-bearing debt in the aggregate principal amount of $7.125 million. The
Company's current borrowings are at a monthly variable rate tied to the London
Interbank Offered Rate ("LIBOR") plus 3.75% per annum adjusted on a monthly
basis. To mitigate interest rate risk, the Company traded its previous swap
contract for a new swap contract fixing the rate on 50% of the principal balance
outstanding at 8.2%. Based upon the principal balance outstanding as of March 1,
2009 of $6.75 million for each 1.0% increase in LIBOR, the Company would incur
increased interest expense of approximately $30,300 over the succeeding
twelve-month period.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
Noble Roman's, Inc. and Subsidiaries
December 31,
----------------------------
2007 2008
------------ ------------
Assets
Current assets:
Cash $ 832,207 $ 450,968
Accounts and notes receivable - net 1,770,994 1,046,545
Inventories 310,362 223,024
Assets held for resale 643,915 242,690
Prepaid expenses 175,022 222,095
Current portion of long-term notes receivable 133,736 5,810
Deferred tax asset - current portion 1,971,875 1,050,500
------------ ------------
Total current assets 5,838,111 3,241,632
------------ ------------
Property and equipment:
Equipment 1,289,795 1,206,979
Leasehold improvements 107,729 96,512
------------ ------------
1,397,524 1,303,491
Less accumulated depreciation and amortization 755,987 821,422
------------ ------------
Net property and equipment 641,537 482,069
Deferred tax asset (net of current portion) 9,106,008 11,802,637
Other assets including long-term portion of notes receivable - net 1,883,644 1,752,102
------------ ------------
Total assets $ 17,469,300 $ 17,278,440
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term note payable $ 1,500,000 $ 1,500,000
Accounts payable 254,813 290,895
Accrued expenses 277,451 900,221
------------ ------------
Total current liabilities 2,032,264 2,691,116
------------ ------------
Long-term obligations:
Note payable to bank (net of current portion) 4,125,000 5,625,000
------------ ------------
Total long-term liabilities 4,125,000 5,625,000
------------ ------------
Stockholders' equity:
Common stock - no par value (25,000,000 shares authorized, 19,187,499 issued
and outstanding as of December 31, 2007 and 19,412,499 issued and
outstanding as of December 31, 2008) 22,905,617 23,023,250
Preferred stock (5,000,000 shares authorized, 20,625 issued and outstanding as
of December 31, 2007 and December 31, 2008) 800,250 800,250
Accumulated deficit (12,393,830) (14,861,176)
------------ ------------
Total stockholders' equity 11,312,036 8,962,324
------------ ------------
Total liabilities and stockholders' equity $ 17,469,300 $ 17,278,440
============ ============
See accompanying notes to consolidated financial statements.
21
Consolidated Statements of Operations
Noble Roman's, Inc. and Subsidiaries
Year Ended December 31,
------------------------------------------
2006 2007 2008
------------ ------------ ------------
Royalties and fees $ 8,084,175 $ 10,411,326 $ 7,561,440
Administrative fees and other 63,072 67,467 48,084
Restaurant revenue 1,339,555 1,088,022 1,432,435
------------ ------------ ------------
Total revenue 9,486,802 11,566,815 9,041,959
Operating expenses:
Salaries and wages 1,278,319 1,642,529 1,366,861
Trade show expense 447,303 554,574 488,012
Travel expense 380,763 527,455 386,018
Sales commissions 72,343 621,928 62,960
Other operating expenses 742,104 1,024,399 880,464
Restaurant expenses 1,283,702 1,011,146 1,369,139
Depreciation and amortization 84,353 96,682 91,736
General and administrative 1,550,030 1,680,284 1,624,022
------------ ------------ ------------
Operating income 3,647,887 4,407,818 2,772,747
Interest and other expense 776,028 650,802 616,333
------------ ------------ ------------
Income before income taxes from
continuing operations 2,871,859 3,757,016 2,156,414
Income tax expense 976,432 1,268,489 733,180
------------ ------------ ------------
Net income from continuing operations 1,895,427 2,488,527 1,423,234
Loss from discontinued operations net of tax benefit
of $2,508,433 for 2008 -- -- 3,824,397
------------ ------------ ------------
Net income (loss) 1,895,427 2,488,527 (2,401,163)
Cumulative preferred dividends 163,200 127,116 66,181
------------ ------------ ------------
Net income (loss) available to common
stockholders $ 1,732,227 $ 2,361,411 $ (2,467,344)
============ ============ ============
Earnings per share - basic:
Net income from continuing operations $ .12 $ .14 $ .07
Net income (loss) $ .12 $ .14 $ (.13)
Net income (loss) available to common
stockholders $ .11 $ .13 $ (.13)
Weighted average number of common shares
outstanding 16,405,995 17,675,834 19,213,522
Diluted earnings per share:
Net income from continuing operations $ .10 $ .13 $ .07
Net income (loss) $ .10 $ .13 $ (.12)
Weighted average number of common shares
outstanding 19,702,988 18,973,291 20,147,150
See accompanying notes to consolidated financial statements.
22
Consolidated Statements of Changes in
Stockholders' Equity
Noble Roman's, Inc. and Subsidiaries
Preferred Common Stock Accumulated
Stock Shares Amount Deficit Total
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 1,978,800 16,322,136 21,021,632 (16,487,470) 6,512,962
2006 net income 1,895,427 1,895,427
Cumulative preferred
dividends (163,200) (163,200)
Exercise of employee stock options 46,250 67,807 67,807
Amortization of value of employee
stock options 11,077 11,077
Exercise of warrants from
previous debt holders 234,275 292,844 292,844
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2006 $ 1,978,800 16,602,661 $ 21,393,360 $(14,755,243) $ 8,616,917
2007 net income 2,488,527 2,488,527
Cumulative preferred
dividends (127,116) (127,116)
Exercise of employee stock options 130,750 143,358 143,358
Amortization of value of employee
stock options 26,631 26,631
Conversion of preferred stock to
common stock (1,178,550) 539,994 1,178,550 --
Exercise of warrants from
previous debt holders 130,975 163,719 163,719
Cashless exercise of warrants 1,783,119 --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2007 $ 800,250 19,187,499 $ 22,905,618 $(12,393,832) $ 11,312,036
2008 net loss (2,401,163) (2,401,163)
Cumulative preferred
dividends (66,181) (66,181)
Exercise of employee stock options 15,000 12,450 12,450
Amortization of value of employee
stock options 52,682 52,682
Exercise of warrants from
previous debt holders 10,000 12,500 12,500
Issuance of common stock 200,000 40,000 40,000
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2008 $ 800,250 19,412,499 23,023,250 $(14,861,176) $ 8,962,324
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
23
Consolidated Statements of Cash Flows
Noble Roman's, Inc. and Subsidiaries
Year ended December 31,
-----------------------------------------
2006 2007 2008
----------- ----------- -----------
OPERATING ACTIVITIES
Net income (loss) $ 1,895,427 $ 2,488,527 $(2,401,163)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 162,543 191,432 183,225
Non-cash expense from loss on discontinued operations -- -- 2,220,023
Deferred income taxes 976,433 1,268,489 733,180
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts and notes receivable (536,577) (1,074,561) (40,591)
Inventories 6,155 (94,805) 6,337
Prepaid expenses (234,506) (266,358) (49,363)
Other assets (93,200) (255,521) 88,673
Increase (decrease) in:
Accounts payable (173,275) 136,519 (158,020)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 2,003,532 2,393,722 582,301
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (33,362) (107,941) (16,778)
Assets held for resale 15,532 (312,539) (2,040)
----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (17,830) (420,480) (18,818)
----------- ----------- -----------
FINANCING ACTIVITIES
Payment of obligations from discontinued operations (676,469) (929,484) (2,501,682)
Payment of cumulative preferred dividends (163,200) (127,116) (66,181)
Payment of principal on outstanding debt (1,500,000) (1,500,000) (1,500,000)
Payment received on long-term notes receivable 173,498 187,898 133,736
Proceeds from issuance of long-term debt, net of debt
issue costs -- -- 2,964,455
Proceeds from the exercise of stock options and warrants 360,651 307,076 24,950
----------- ----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (1,805,520) (2,061,627) (944,722)
----------- ----------- -----------
Increase (decrease) in cash 179,650 (88,383) (381,239)
Cash at beginning of year 740,940 920,590 832,207
----------- ----------- -----------
Cash at end of year $ 920,590 $ 832,207 $ 450,968
=========== =========== ===========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The holders of 1,215,000 in liquidation value of preferred stock exchanged their
preferred stock for 539,994 shares of common stock in 2007. The holders of
warrants to purchase 2,000,000 shares of stock exercised the cashless exercise
provisions of the warrants in 2007 and were issued 1,783,119 shares of common
stock.
See accompanying notes to consolidated financial statements.
24
Notes to Consolidated Financial Statements
Noble Roman's, Inc. and Subsidiaries
Note l: Summary of Significant Accounting Policies
Organization: The Company sells and services franchises for non-traditional and
co-branded foodservice operations under the trade names "Noble Roman's Pizza",
"Tuscano's Italian Style Subs" and "Noble Roman's Bistro".
Principles of Consolidation: The consolidated financial statements include the
accounts of Noble Roman's, Inc. and its wholly owned subsidiaries, Pizzaco, Inc.
and N.R. Realty, Inc. (collectively, the "Company"). Inter-company balances and
transactions have been eliminated in consolidation.
Inventories: Inventories consist of food, beverage, restaurant supplies,
restaurant equipment 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.
Depreciation and amortization are computed on the straight-line method over the
estimated useful lives ranging from five years to 12 years. Leasehold
improvements are amortized over the shorter of estimated useful life or the term
of the lease.
Cash and Cash Equivalents: Includes actual cash balance plus cash invested
overnight pursuant to agreement with bank. Neither the cash or cash equivalents
are pledged nor are there any withdrawal restrictions.
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 Company's current borrowings are at a
monthly variable rate tied to LIBOR. On February 6, 2008, the Company elected to
trade its previous swap contract for a new swap contract fixing the rate on 50%
of the principal balance under the Loan Agreement, as amended by the Amendment
(approximately $3.375 million as of March 1, 2009), at an annual interest rate
of 8.2%.
Use of Estimates: The preparation of the consolidated financial statements in
conformity with United States 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 records a valuation allowance in
a sufficient amount to adjust the total notes and accounts receivables value, in
its best judgment, to reflect the amount that the Company estimates will be
collected from its total receivables. As any accounts are determined to be
uncollectible, they are charged off against the valuation allowance. The Company
evaluates its assets held for resale, property and equipment and related costs
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.
25
Intangible Assets: Debt issue costs are amortized to interest expense ratably
over the term of the applicable debt. The debt issue cost being amortized is
$438,236 with accumulated amortization at December 31, 2006 of $89,487, December
31, 2007 of $156,603 and December 31, 2008 of $207,243.
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 services for the
franchised restaurant are substantially completed. Area development fees, since
they are fully earned and non-refundable when received, are recognized as income
when received.
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 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 the recorded deferred tax asset. As of
December 31, 2008, the net operating loss carry-forward was approximately $30
million which expires between the years 2012 and 2023. Management made the
determination that no valuation allowance was necessary 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 (Loss) 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.
The following table sets forth the calculation of basic and diluted earnings per
share for the year ended December 31, 2006:
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net income $ 1,895,427
Less preferred stock dividends (163,200)
-----------
Earnings per share - basic
Income available to common
stockholders 1,732,227 16,405,995 $ .11
Effect of dilutive securities
Warrants -- 2,251,653
Options -- 138,673
Convertible preferred stock 163,200 906,667
----------- ----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 1,895,427 19,702,988 $ .10
26
The following table sets forth the calculation of basic and diluted earnings per
share for the year ended December 31, 2007:
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net income $ 2,488,527
Less preferred stock dividends (127,116)
-----------
Earnings per share - basic
Income available to common
stockholders 2,361,411 17,675,834 $ .13
Effect of dilutive securities
Warrants -- 858,333
Options -- 72,458
Convertible preferred stock 127,116 366,666
----------- ----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 2,488,527 18,973,291 $ .13
The following table sets forth the calculation of basic and diluted loss per
share for the year ended December 31, 2008:
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net loss $(2,401,163)
Less preferred stock dividends (66,181)
-----------
Loss per share - basic
Loss available to common
stockholders (2,467,344) 19,213,522 $ (.13)
Effect of dilutive securities
Warrants -- 230,660
Options -- 336,302
Convertible preferred stock 66,181 366,666
----------- ----------
Diluted loss per share
Loss available to common stockholders
and assumed conversions $(2,401,163) 20,147,150 $ (.12)
Note 2: Accounts and Notes Receivable
In 2008, as a result of the shift in focus to selling non-traditional
franchises, discontinuing operating restaurants until a franchisee could be
located and a current economic environment, the Company charged off or
substantially lowered the carrying value of its receivables. As a result of this
reduction, the Company anticipates that substantially all of its receivables, as
of December 31, 2008, will be collected and at December 31, 2007 the notes and
accounts receivable were shown net of a $656,712 allowance.
27
Note 3: Notes Payable
In conjunction with a Settlement Agreement with SummitBridge National
Investments, LLC and related entities, Noble Roman's obtained a new six-year
term loan, on August 25, 2005, in the principal amount of $9,000,000 requiring
principal payments of $125,000 per month plus interest at the rate of LIBOR plus
4% per annum adjusted on a monthly basis. On February 4, 2008, the Company
entered into a First Amendment to Loan Agreement (the "Amendment") with Wells
Fargo that amended the existing Loan Agreement dated August 25, 2005 between the
Company and Wells Fargo (the "Loan Agreement"). The Amendment provided for Wells
Fargo to loan an additional $3.0 million to the Company. The Amendment also
reduced the interest rate applicable to amounts borrowed under the Loan
Agreement to LIBOR plus 3.75% per annum and extended the maturity date for
borrowings under the loan from August 31, 2011 to August 31, 2013. On February
6, 2008, the Company elected to trade its previous swap contract for a new swap
contract fixing the rate on 50% of the principal balance under the Loan
Agreement, as amended by the Amendment at an annual interest rate of 8.2%. The
unpaid balance on the Amended Note as of December 31, 2008 was $7,125,000.
Interest paid on this Note was $569,523 in 2008, $598,211 in 2007 and $721,930
in 2006. The Note's principal amortization is as follows: $1.5 million in 2009,
$1.5 million 2010, $1.5 million in 2011, $1.5 million in 2012 and $1.125 million
in 2013. The Company's obligations under the loan are secured by the grant of a
security interest in its personal property and certain restrictions apply such
as a prohibition on the payment of dividends, all as defined in the loan
agreement. The cumulative (gain) loss difference between interest from the swap
contract compared to interest expense on the term loan was ($8,393), ($14,537)
and $62,698 for the years ended December 31, 2006, 2007 and 2008, respectively.
Note 4: Royalties and Fees
Approximately $963,000, $1,221,500 and $353,500 are included in the 2006, 2007
and 2008, respectively, royalties and fees in Consolidated Statement of
Operations for initial franchise fees. In addition, the Consolidated Statement
of Operations reflects approximately $707,000, $1,537,700 and $104,825 in 2006,
2007 and 2008, respectively, of royalties and fees for the sale of Area
Development Agreements. Also included in royalties and fees were approximately
$533,856, $891,300 and $397,200 in 2006, 2007 and 2008, respectively, for
equipment commissions. Most of the cost for the services required to be
performed by the Company are incurred prior to the franchise fee income being
recorded which is based on contractual liability for the franchisee. For the
most part, the Company's ongoing royalty income is paid electronically by the
Company initiating a draft on the franchisee's account by electronic withdrawal.
As such, the Company has no material amount of past due royalties.
In conjunction with the development of Noble Roman's Pizza and Tuscano's Italian
Style Subs, the Company has devised its own recipes for many of the ingredients
that go into the making of its products ("Proprietary Products"). The Company
contracts with various manufacturers to manufacture its Proprietary Products in
accordance with the Company's recipes and formulas and to sell those products to
authorized distributors at a contract price which includes an allowance for use
of the Company's recipes. The manufacturing contracts also require the
manufacturers to remit those allowances to the Company on a periodic basis,
usually monthly. The Company recognizes those allowances in revenue as earned
based on sales reports from the distributors.
28
There were 823 franchised outlets in operation on December 31, 2007 and 829 on
December 31, 2008. During that twelve-month period there were 74 new franchised
outlets opened and 68 franchised outlets left the system, 18 of which reached
the end of their franchise agreement term and 50 of which ceased operation for
other reasons.
Note 5: 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. All of these leases have been terminated or 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, 2008, contingent
obligations under non-cancelable operating leases for 2009, 2010, 2011, 2012,
2013 and after 2013 were approximately $113,663, $87,963, $88,863, $89,763,
$90,663 and $187,580, respectively.
The Company has future obligations under current operating leases of $959,830 as
follows: due in less than one year $176,255, due in one to three years $374,041,
due in three to five years $252,022 and due in more than five years $157,512.
Note 6: Income Taxes
The Company had a deferred tax asset, as a result of prior operating losses, of
$11,077,883 at December 31, 2007 and $12,853,137 at December 31, 2008, most of
which expires between the years 2012 and 2028. In 2006, 2007 and 2008, the
Company used deferred benefits to offset its tax expense of $976,432, $1,268,489
and $733,180, respectively, and tax benefits from loss on discontinued
operations of $2,508,434 in 2008. The Company reduced its valuation allowance in
2007 by $2,074,253 and in 2008 by $120,975 and reflected that reduction in the
discontinued operations. As a result of the tax credits, the Company did not pay
any income taxes in 2006, 2007 and 2008. There are no material differences
between reported income tax expense or benefit and the income tax expense or
benefit that would result from applying the Federal and state statutory tax
rates.
Note 7: Common Stock
During 2006, certain warrant holders exercised their warrants to purchase
234,275 shares of common stock and various employees exercised stock options for
45,250 shares of common stock.
During 2007, certain warrant holders exercised their warrants to purchase
130,975 shares of common stock and various employees exercised stock options for
130,750 shares of common stock. In addition, certain warrant holders with
warrants for the purchase of 2,000,000 shares exercised, pursuant to the
cashless exercise provision of the warrants, those warrants and received
1,783,119 shares of common stock.
During 2008, certain warrant holders exercised their warrants to purchase 10,000
shares of common stock and an employee exercised its option to purchase 15,000
shares of common stock.
29
At December 31, 2008 the Company had outstanding warrants to purchase common
stock as follows:
# Common Shares Represented Exercise Price Warrant Expiration Date
100,000 $ .75 6/2/2009
1,000,000 $ .93 6/30/2011
50,000 $ .95 9/26/2010
600,000 $ .93 1/24/2011
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. At December 31, 2008, the Company had
the following employee stock options outstanding:
# Common Shares
Represented Exercise Price
750 $1.46
20,000 $1.45
40,000 $ .55
46,000 $ .83
20,000 $1.10
58,500 $2.30
465,000 $ .36
As of December 31, 2008, options for 106,750 shares were exercisable.
The Company had issued and outstanding, on December 31, 2006, Series B Preferred
Stock with a liquidation value of $2,040,000 which was convertible, after
December 31, 2006, at the option of the holder to common stock at a conversion
price of $2.25 per share. During 2007, the holders representing $1,215,000 in
liquidation value of the Series B Preferred Stock converted to 539,994 shares of
common stock. On December 31, 2007 and December 31, 2008, the Company had issued
and outstanding Series B Preferred Stock with a liquidation value of $825,000,
which provides for cumulative dividends of 8% per annum on the liquidation
value. The Company, at its option, may redeem the Series B Preferred Stock after
December 31, 2008 at the liquidation value.
The Company adopted SFAS No. 123R using the modified prospective method of
adoption, which does not require restatement of prior periods. Under the
modified prospective method, the Company is required to record compensation
expense for all awards granted after the date of adoption and for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption, net of an estimate of expected forfeitures. Under SFAS No. 123R,
compensation expense is based on the estimated fair values of stock options
determined on the date of grant and is recognized over the related vesting
period, net of an estimate of expected forfeitures.
The Company estimates the fair value of its option awards on the date of grant
using the Black-Scholes option pricing model. The risk-free interest rate is
based on external data while all other assumptions are determined based on the
Company's historical experience with stock options. No options were granted in
2007. The following assumptions were used for grants in 2008:
30
Expected volatility 30%
Expected dividend yield None
Expected term (in years) 5
Risk-free interest rate 3.56%
The following table sets forth the number of options outstanding as of December
31, 2006, 2007 and 2008 and the number of options granted, exercised or
forfeited during the year ended December 31, 2007 and the year ended December
31, 2008:
--------------------------------------------------------------------------------
Balance of employee stock options outstanding as of 12/31/2006 351,500
--------------------------------------------------------------------------------
Stock options granted during the year ended 12/31/07 0
--------------------------------------------------------------------------------
Stock options exercised during the year ended 12/31/07 (130,750)
--------------------------------------------------------------------------------
Stock options forfeited during the year ended 12/31/07 (20,500)
--------------------------------------------------------------------------------
Balance of employee stock options outstanding as of 12/31/07 200,250
--------------------------------------------------------------------------------
Stock options granted during the year ended 12/31/08 485,000
--------------------------------------------------------------------------------
Stock options exercised during the year ended 12/31/08 (15,000)
--------------------------------------------------------------------------------
Stock options forfeited during the year ended 12/31/08 (20,000)
--------------------------------------------------------------------------------
Balance of employee stock options outstanding as of 12/31/08 650,250
---------------------------------------------------------------------===========
Note 8: Statement of Financial Accounting Standards
The Company does not believe that the recently issued Statement of Financial
Accounting Standards will have any material impact on the Company's Statement of
Operations or its Balance Sheet.
Note 9: Loss from Discontinued Operations
Loss on discontinued operations was $3.8 million in 2008 and none in 2007 and
2006. Losses from discontinued operations of $2.0 million in 2007 and $1.5
million in 2006 were offset by decreasing the valuation allowance for its
deferred tax credit. The Company has elected to focus all of its efforts on
non-traditional franchises. The loss on discontinued operations was primarily
the result of operating traditional restaurants which had been acquired from
struggling franchisees and later sold to new franchisees. The Company has made
the decision to discontinue that business and charged off or dramatically
lowered the carrying value of all receivables related to the traditional
restaurants and accrued future estimated expenses related thereto. The Company
does not expect to generate revenue or incur expenses from the sale of similar
products or services to customers of the disposed components. The disposed
components were accounted for as discontinued operations since the direct cash
flows of the components have been eliminated from the ongoing operations of the
Company and the Company will not have any continuing financial involvement in
the disposed components.
Note 10: Contingencies
The Company, from time to time, is involved in various litigation relating to
claims arising out of its normal business operations.
The Company is a Defendant in a lawsuit styled Kari Heyser, Fred Eric Heyser and
Meck Enterprises, LLC, et al v. Noble Roman's, Inc. et al, filed in Superior
Court in Hamilton County, Indiana on June 19, 2008 (Cause No. 29D01 0806 PL
739). The Plaintiffs in the case are all former franchisees of the Company. In
addition to the Company, the Defendants include certain of the Company's
officers and lenders to certain of the Plaintiffs. The Plaintiffs allege that
they purchased traditional franchises as a result of certain fraudulent
representations by the Defendants and the omission of certain material facts
regarding the franchises and seek compensatory and punitive damages. No
substantive discovery has yet been completed. The Company believes that it has
strong and meritorious legal and factual defenses to these claims and will
vigorously defend its interests in this case.
31
The Company filed a Counter-Claim for Damages against all of the Plaintiffs and
Preliminary Injunction and Permanent Injunction against a majority of the
Plaintiffs. In addition, the Company filed a Motion For Preliminary Injunction
against a majority of the Plaintiffs, all of which are former franchisees and
the Preliminary Injunction was granted on October 7, 2008. The Plaintiffs were
ordered to comply within seven days for the majority of actions required by the
injunction and within 14 days for the remainder. None of the Plaintiffs fully
complied with the Court's Order and the Company believes several of them only
minimally complied. Defendants filed a motion to require full compliance, to
show cause why they should not be held in contempt and for attorney's fees as
sanctions. The Plaintiffs responded to that motion by filing affidavits by each
of the Plaintiffs. After reviewing those affidavits, Defendants filed a Motion
To Strike Plaintiff's Fraudulent Affidavits claiming that they neither contained
a valid declaration or affirmation nor appeared before a valid notary who
administered the oath, although Plaintiffs attorney signed the affidavits as if
they had appeared before him, which Defendants claim is a criminal offense.
Plaintiffs filed Response to Noble Roman's Motion To Strike Plaintiffs
Affidavits by attempting to withdraw the original affidavits and substituting
certified affirmations. Defendants have filed a Reply In Support of Motion To
Strike Fraudulent Affidavits claiming that Plaintiffs tacitly admitted that the
original affidavits were fraudulent by not denying any of the claims in the
Motion To Strike but, instead, attempted to file new affidavits. Defendants have
subsequently filed a Motion To Revoke David M. Duree's Temporary Admission Pro
Hac Vice for committing a criminal offense and filing fraudulent affidavits with
the court. The Plaintiffs have filed a motion for sanctions against certain
Defendants and their counsel.
Note 11: 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.
Douglas Coape-Arnold was paid $79,200 in consulting fees in 2006, $79,200 in
consulting fees in 2007 and $79,200 in consulting fees in 2008.
For information with respect to executive compensation, see Item 11 of this
report.
32
Note 12: Unaudited Quarterly Financial Information
Quarter Ended
--------------------------------------------------
2008 December 31 September 30 June 30 March 31
---- ----------- ------------ ------- --------
(in thousands, except per share data)
Total revenue $ 2,058 $2,212 $2,422 $2,350
Operating income 758 612 761 641
Income from continuing operations
before income taxes 609 461 599 487
Net income from continuing operations 402 305 395 321
Loss from discontinued operations 3,824 -- -- --
Net income (loss) (3,422) 305 395 321
Net income from continuing operations
per common share
Basic .02 .02 .02 .02
Diluted .02 .02 .02 .02
Net income (loss) per common share
Basic (.18) .02 .02 .02
Diluted (.17) .02 .02 .02
Quarter Ended
--------------------------------------------------
2007 December 31 September 30 June 30 March 31
---- ----------- ------------ ------- --------
(in thousands, except per share data)
Total revenue $ 2,673 $2,959 $3,080 $2,855
Operating income 738 1,198 1,233 1,239
Income before income taxes 591 1,035 1,066 1,065
Net income 389 693 704 703
Net income per common share
Basic .02 .04 .04 .04
Diluted .02 .03 .04 .04
33
[LETTERHEAD OF SOMERSET CPAs]
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
NOBLE ROMAN'S, INC. AND SUBSIDIARIES
Indianapolis, Indiana
We have audited the accompanying consolidated balance sheets of NOBLE ROMAN'S,
INC. AND SUBSIDIARIES, as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2008. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NOBLE ROMAN'S, INC.
AND SUBSIDIARIES, as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Somerset CPAs, P.C.
Indianapolis, Indiana
March 19, 2009
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our
management, including Paul W. Mobley, the Company's Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31, 2008.
Internal Control Over Financial Reporting is a process designed by, or under the
supervision of, the company's principal executive and principal financial
officers, or persons performing similar functions, and effected by the Company's
board of directors, management, and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with United States
generally accepted accounting principles ("GAAP") and includes those policies
and procedures that:
(1) Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
(2) Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
GAAP, and that receipts and expenditures of the Company are being made only
in accordance with authorizations of management and directors of the
Company; and
(3) Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's assets
that could have a material effect on the financial statements.
Because of such limitations, there is a risk that material misstatements may not
be prevented or detected on a timely basis by internal control over financial
reporting. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
The Public Company Accounting Oversight Board's Auditing Standard No. 5 defines
a material weakness as a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company's annual or interim
financial statements will not be prevented or detected on a timely basis. A
deficiency in internal control over reporting exists when the design or
operation of a control does not allow management or employees, in the normal
course of performing their assigned functions, to prevent or detect
misstatements on a timely basis.
Based on his evaluation as of the end of the period covered by this report, Paul
W. Mobley, the Company's Chief Executive Officer and Chief Financial Officer,
has concluded that the Company's
35
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) are effective.
There have been no changes in internal controls over financial reporting during
the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND
CORPORATE GOVERNANCE
The executive officers and directors of the Company are:
Name Age Positions with the Company
---- --- --------------------------
Paul W. Mobley 68 Chairman of the Board, Chief Executive
Officer, Chief Financial Officer
A. Scott Mobley 45 President, Secretary and Director
Douglas H. Coape-Arnold 63 Director
Troy Branson 45 Executive Vice President of Franchising
Mitchell Grunat 56 Vice President of Franchise Services
Michael B. Novak 51 Vice President of Product Development,
Purchasing and Distribution
James D. Bales 39 Vice President of Operations
The executive officers of the Company serve at the discretion of the Board of
Directors and are elected at the annual meeting of the Board. Directors serve
one-year terms or until their successors are elected and qualified. 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, Chief Executive Officer and Chief
Financial Officer since December 1991 and a Director since 1974. Mr. Mobley was
President 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
36
father of A. Scott Mobley. Mr. Mobley has a B.S. in Business Administration from
Indiana University and is a CPA. Mr. Mobley is also a Director of Monroe
Bancorp.
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 W. 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 is a Chartered Financial
Analyst.
Troy Branson, has been Executive Vice President of Franchising for the Company
since November 1997 and from 1992 to 1997, he was Director of Business
Development. Prior to joining the Company, Mr. Branson was an owner of
Branson-Yoder Marketing Group from 1987 to 1992, after graduating from Indiana
University where he received a B.S. in Business.
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 from 2001 to 2002. Mr. Grunat has B.A. degree in
English and Philosophy from Muskingum College.
Michael B. Novak has been Vice President of Product Development, Purchasing and
Distribution since March 2006. Prior to joining the Company, Mr. Novak was
employed by Delco Foods, a regional food distributor from 2001 to 2006. Prior to
Mr. Novak being employed by Delco Foods, he was employed by the Company from
1984 to 2001 as a restaurant General Manager, Area Director of Operations and
Director of Product Development and Distribution.
James D. Bales has been Vice President of Operations since March 2008. Prior to
becoming Vice President of Operations, Mr. Bales held various positions with the
Company beginning in March 2004. Prior to joining the Company, Mr. Bales had 15
years management experience in operations and marketing where he held various
positions with TCBY starting in 1989 as a General Manager of 17 TCBY stores
owned by a franchisee of TCBY. Mr. Bales joined the parent company of TCBY in
1996 and held various positions before leaving that Company at the end of 2003.
The last position was with Mrs. Fields Famous Brands, the parent company of
TCBY, as Vice President of Operations, Eastern U.S. Region, Western U.S. Region
and National Accounts. Mr. Bales attended Northern Kentucky University for
Graphic Design and Inver Hills Community College for Business Management.
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, the Company
believes that during 2007 and 2008 all filing requirements under Section 16(a)
of the Securities Exchange Act of 1934 were complied with.
37
Corporate Governance
--------------------
Because no separate Audit Committee has been established, the Board of
Directors, as a whole, acts as the Audit Committee. Mr. Coape-Arnold is
qualified as an "Audit Committee Financial Expert."
The Company has adopted a code of ethics for its senior executive and financial
officers. The code of ethics can be obtained without charge by contacting the
Company's executive office at the address set forth on the cover page of this
report.
There have been no material changes to the procedures by which security holders
may recommend nominees to the Company's board of directors during the fiscal
year ended December 31, 2008.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Objectives of the Company's Compensation Program:
The Company's compensation policies, goals and objectives are designed to
provide competitive levels of compensation to the executive officers and to
reward certain officers, who can more directly affect the net income of the
Company, with incentives to increase net income. It is also believed that total
executive compensation generally should be higher for individuals with greater
responsibility and greater ability to influence the Company's achievements.
The Company has long-term employment contracts with the Chairman/CEO and with
the President of the Company, which guide the compensation level for those
individuals. These contracts were established a number of years ago in
connection with negotiations for financing transactions and with certain
significant shareholders at the time. They were established in such a way that
the compensation level increases over time.
The Company's President receives an incentive compensation to reward him for the
increase in net income over the previous year. The Company's Executive Vice
President-Franchising receives incentive compensation that rewards him based on
the net income from franchising activities of the Company.
The Company uses employee stock options to align certain employees with the
interest of its shareholders. In addition, the employee stock options add
additional incentive for longevity.
Oversight of Compensation Program:
The compensation program is supervised by the Board of Directors. The
compensation of the Chairman/CEO and the President of the Company has been set
by long-term contracts with those individuals. The compensation of other
executive officers of the Company is determined by the Chairman/CEO and
President and approved by the Company's Board of Directors. Other than the
Chairman/CEO and President, no other executive officer participates in the
compensation process.
38
Elements of Compensation and How Those Elements Are Designed:
Base Salary - The base salary is the essential element of the Company's
executive compensation. It is established to match the individual's
responsibilities and their ability to influence the Company's achievements and
to be competitive. The Company establishes an executive's initial base salary
based upon a general knowledge of the base salaries paid to officers in similar
positions at companies that we believe compete with us for executive talent.
There is no set group of companies that has consistently been considered by us
in setting initial base salaries nor are there any formal guidelines as to the
relationship that the initial base salary of a newly hired executive should have
to the base salaries of similar executives in any other company or group of
companies.
Incentive Compensation - The Company does not have a formal non-equity incentive
compensation program. However, the Company enters into individual incentive
compensation arrangements with key employees from time to time. These
arrangements are intended to incentivize these employees and can be based on a
variety of different performance factors. We currently have these types of
arrangements with our President and with our Executive Vice
President-Franchising. These arrangements are designed to give the President and
Executive Vice President-Franchising additional incentive to increase the net
income of the Company and to reward them for that increase.
Employee Stock Options - The Company maintains an employee stock option plan for
our employees and officers that is designed to motivate the executive officers
to increase shareholder value and to allow executive officers to benefit from
increased shareholder value. Any employees or officers of the company are
eligible to be awarded options under the plan. The employee stock option plan
provides that any options issued pursuant to the plan will have an exercise
price equal to the fair market value of the stock on the date of grant and a
three-year vesting period and will expire ten years after the date of grant. The
vesting period for exercising is intended to provide additional incentive for
longevity with the Company. Awards under the plan are periodically made at the
recommendation of the Chairman/CEO and President and approved by the Board of
Directors. The employee stock option plan does not have a limit on the number of
shares that may be issued under the plan.
How the Company Determines the Amount of Each Element of Compensation:
The base salary of the Chairman/CEO and President of the Company is determined
by long-term contracts which provide for a 6% annual increase. The base salary
of other executive officers is determined by the Chairman/CEO and President
based on recent performance of each of the other executive officers. For fiscal
2008 our Chairman/CEO received a pay increase of $14,000, to $439,000 from his
base salary of $425,000 for fiscal 2007. The Chairman/CEO elected not to take
the full amount of base salary increase that was provided for in his employment
contract in either of the last three years and he has voluntarily reduced his
salary for 2009 to $400,000, which is $92,000 below the contract amount. Our
President received a pay increase in 2008 of $17,290, to $306,132 from his base
salary of $288,842 for fiscal 2007. The President/COO voluntarily chose not to
take the increase in 2009 as the contract calls for. Mr. Branson's base salary
was $100,000 in both 2007 and 2008. Mr. Grunat's base salary was $156,000 in
2007 and $159,846 in 2008. Mr. Bales' base salary was $85,208 in 2007 and
$108,096 in 2008.
Employee stock options are granted to executive officers based on recent
performance of those executive officers and the Company's desire to motivate
those executive officers to increase shareholder value, as recommended by the
Chairman/CEO and President, and approved by the Board of Directors. The amount
39
of gain realized from prior compensation awards is not considered in setting
current compensation awards. In fiscal 2008, employee stock options were granted
to eight employees in the total amount of 465,000 shares and none were granted
in 2007.
The Company currently has a non-equity incentive arrangement with our President
under which he may earn additional compensation if the Company's net income
increases for a given fiscal year as compared to the immediately prior fiscal
year. For the purposes of this calculation we exclude any one-time gains or
gains or losses from discontinued operations. For fiscal 2008 our net income
decreased from fiscal 2007, therefore, the President did not earn any additional
compensation during fiscal 2008.
The Company also currently has a non-equity incentive arrangement with our
Executive Vice President of Franchising under which he may earn additional
compensation. His compensation is based on 2.5% of all royalty and fee revenue
associated with franchising less the direct expenses of those activities
excluding any administrative cost. The net revenue for this activity under this
calculation in 2008 was $3,493,276, therefore, our Executive Vice President of
Franchising earned $87,332 of additional compensation for fiscal 2008.
How Each Element of the Company's Decisions Regarding Compensation Fit Into the
Company's Overall Compensation Objectives:
The Company is relatively small and, accordingly, has determined that it has not
yet been necessary to establish a formal policy for allocating compensation
between long-term and current, or to establish a policy for allocating total
compensation between cash and non-cash. The only long-term compensation plan
that the Company has is the employee stock option plan.
Company Policies and Decisions Regarding the Adjustment or Recovery of the
Awards or Payments If the Relevant Company Performance Measures Upon Which They
are Based are Re-Stated or Otherwise Adjusted in a Manner that Would Reduce the
Size of an Award or Payment:
The Company has no policy providing for any recovery of awards or payments based
on performance.
Summary Compensation Table for 2008
-----------------------------------
The following table sets forth the cash and non-cash compensation awarded
to or earned by the Chief Executive Officer and Chief Financial Officer and the
three other highest paid executive officers of the Company, the only executive
officers whose total compensation exceeded $100,000 for 2008.
Non-Equity
Incentive Option Total
Name and Principal Position Year Salary Compensation Awards1 Compensation
Paul Mobley 2008 $439,000 $ -- $ -- $439,000
Chairman of the Board 2007 $425,000 $ -- $ -- $425,000
2006 $404,000 $ -- $ -- $404,000
A. Scott Mobley 2008 $306,132 $ -- $ 18,245 $324,377
President and Secretary 2007 $288,842 $ 95,875 $ 11,610 $396,327
2006 $269,330 $ 33,323 $ 11,610 $314,263
40
Non-Equity
Incentive Option Total
Name and Principal Position Year Salary Compensation Awards1 Compensation
Troy Branson 2008 $100,000 $ 87,332 $ 6,178 $193,510
Executive Vice President of Franchising 2007 $100,000 $132,965 $ 4,644 $237,609
2006 $100,000 $107,606 $ 4,644 $212,250
Mitchell Grunat 2008 $159,846 $ -- $ 5,057 $164,903
Vice President of Franchise Services 2007 $156,000 $ -- $ 4,644 $160,644
2006 $156,000 $ -- $ 4,644 $160,644
Jim Bales 2008 $108,096 $ -- $ 2,241 $110,337
Vice President of Operations 2007 $ 85,208 $ -- $ -- $ 85,208
(1) These amounts represent the dollar amounts recognized for financial
statement reporting purposes in 2006, 2007 and 2008 with respect to the option
awards included in the Company's consolidated financial statements for 2006,
2007 and 2008 per SFAS 123(R).
The Summary Compensation Table includes the grant date fair value for fiscal
2006, 2007 and 2008 for stock options granted to the named executive officers
under the Company's employee stock option plan. The Company determines the grant
date fair value of stock options based on the principles described in Statement
of Financial Accounting Standards No. 123 (revised 2004) "Share-Based Payment"
("SFAS 123(R)"). See Note 7 to the Company's Consolidated Financial Statements
for a discussion of the Company's determination of the grant date fair value of
stock options.
The Company expects all stock options outstanding at December 31, 2008, to vest.
Grants of Plan-Based Awards for 2008
------------------------------------
All Other
Option
Awards:
Number Exercise or
Estimated Future Payouts under of Base Price Grant Date
Non-Equity Incentive Plan Awards Securities of Option Fair Value
Grant Underlying Awards of Option
Name Date Threshold Target Maximum Options (#) ($/Sh) Awards ($)
Paul W. Mobley -- -- -- -- -- --
A. Scott Mobley 3/24/08 -- -- -- 175,000 $ .36 $ 39,375
Troy Branson 3/24/08 -- $87,332 (1) -- 50,000 $ .36 11,250
Mitch Grunat 3/24/08 -- -- -- 30,000 $ .36 6,750
Doug Coape-Arnold 3/24/08 -- -- -- 90,000 $ .36 20,250
Jim Bales 3/24/08 -- -- -- 40,000 $ .36 9,000
(1) Represents non-equity incentive compensation paid to Mr. Branson based on
royalty and fee income generated from franchise activities less expenses
directly relating to the franchise activity not including administrative
expense.
41
(2) The Company had no threshold or maximum amounts for the non-equity incentive
compensation for Mr. Branson.
The number of options granted to the President was determined by the
Chairman/CEO and approved by the Board of Directors. The number of options
granted to the other executive officers was determined by the Chairman/CEO and
President and approved by the Board of Directors. In considering whether or not
to issue options, many factors were taken into account such as individual
performance of the grantee, recent performance of the Company, the progress of
the Company relative to the Company's plans and the overall performance of the
Company's stock.
In determining the number of option grants, such factors as number of new
franchises awarded, overall profitability of the Company and achievement of the
Company's plans were all considered. There were no definitive benchmarks for the
award of options.
Employment Agreements
---------------------
Mr. Paul Mobley has an employment agreement with the Company which fixes his
base compensation at $492,484 per year for 2009 although Mr. Mobley has
voluntarily reduced his base compensation to $400,000 for 2009, 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 automatically renews 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 $325,208 per year for 2009 although Mr. Mobley has
voluntarily reduced his base compensation to $306,800 for 2009, provides for
reimbursement of travel and other expenses incurred in connection with his
employment, including the furnishing of an automobile, health and accident
insurance similar to that provided other employees, and life insurance in an
amount related to his base salary. The initial term of the agreement is five
years and automatically renews each year for a five-year period unless the Board
takes specific action to not renew. The agreement is terminable by the Company
for just cause as defined in the agreement.
Outstanding Equity Awards at Fiscal Year-End
--------------------------------------------
The following table sets forth information concerning the number of outstanding
equity awards of the executive officers named in the Summary Compensation Table
as of December 31, 2008.
--------------------------------------------------------------------------------------------------------------
Option Awards
--------------------------------------------------------------------------------------------------------------
Number of Securities Number of Securities
Underlying Unexercised Underlying Unexercised Option Exercise Option Expiration
Options (#) Exercisable Options (#) Unexercisable Price ($) Date
Name
--------------------------------------------------------------------------------------------------------------
Paul W. Mobley 20,000 $ .55 8/7/12
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
A. Scott Mobley 20,000 $ 1.45 12/1/10
--------------------------------------------------------------------------------------------------------------
20,000 $ .55 8/7/12
--------------------------------------------------------------------------------------------------------------
20,000 $ .83 12/22/14
--------------------------------------------------------------------------------------------------------------
25,000 $ 2.30 8/28/16
--------------------------------------------------------------------------------------------------------------
175,000 $ .36 3/24/18
--------------------------------------------------------------------------------------------------------------
42
--------------------------------------------------------------------------------------------------------------
Troy Branson 10,000 $ 2.30 8/28/16
--------------------------------------------------------------------------------------------------------------
50,000 $ .36 3/24/18
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Mitchell Grunat 10,000 $ .83 12/22/14
--------------------------------------------------------------------------------------------------------------
10,000 $ 2.30 8/28/16
--------------------------------------------------------------------------------------------------------------
30,000 $ .36 3/24/18
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Jim Bales 40,000 $ .36 3/24/18
--------------------------------------------------------------------------------------------------------------
All options listed above vested or will vest three years after the date of the
grant, and expire ten years after the grant date.
Option Exercises and Stock Vested
---------------------------------
---------------------------------------------------------------------
Option Awards
---------------------------------------------------------------------
Number of Shares Value Realized on
Name Acquired on Exercise (#) Exercise ($)
---------------------------------------------------------------------
Troy Branson 15,000 9,300
---------------------------------------------------------------------
Director Compensation
---------------------
------------------------------------------------------------------------
Fees Earned
or Paid Option All Other
in Cash Awards Compensation Total
Name ($) ($) ($) ($)
------------------------------------------------------------------------
Douglas H. Coape-Arnold -- $9,675 $79,200 $88,875
------------------------------------------------------------------------
The Company has engaged Mr. Coape-Arnold as a consultant and does not separately
compensate him for his service as a director. Mr. Coape-Arnold was paid $79,200
in consulting fees in 2006, $79,200 in consulting fees in 2007, and $79,200 in
consulting fees in 2008.
The Company does not pay any separate compensation for Directors that are also
employees of the Company.
Compensation Committee Interlocks and Insider Participation
Because no separate Compensation Committee has been established, the Board of
Directors, as a whole, acts as the Compensation Committee. Paul W. Mobley, A.
Scott Mobley and Douglas H. Coape-Arnold participate in executive compensation
decisions.
43
Compensation Committee Report
The Board of Directors has reviewed and discussed the Compensation Discussion
and Analysis with management. Based on the review and discussions, the Board of
Directors approved the inclusion of the Compensation Discussion and Analysis in
the Company's annual report on Form 10-K for the fiscal year ended December 31,
2008.
The Board of Directors of Noble Roman's, Inc.
Paul W. Mobley
A. Scott Mobley
Douglas H. Coape-Arnold
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As of March 1, 2009 there were 19,412,499 shares of the Company's common
stock outstanding and 25,000,000 shares are authorized. The following table sets
forth the amount and percent of the Company's common stock beneficially owned on
March 1, 2009 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 known to the Company 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 3,156,035 (3) 15.5%
A. Scott Mobley
One Virginia Avenue, Suite 800
Indianapolis, IN 46204 1,116,103 (4) 5.6%
Geovest Capital Partners, L.P.
750 Lexington Avenue, 25th Floor
New York, N.Y. 10022 685,000 (5) 3.5%
James W. Lewis
335 Madison Ave., Suite 1702
New York, N.Y. 10017 1,909,580 (6) 9.8%
Douglas H. Coape-Arnold
750 Lexington Avenue, 25th Floor
New York, N.Y. 10022 250,000 (7) 1.3%
44
Name and Address Amount and Nature Percent of Outstanding
of Beneficial Owner of Beneficial Ownership (1) Voting Common Stock (2)
------------------- --------------------------- -----------------------
Troy Branson
One Virginia Avenue, #800
Indianapolis, IN 46204 80,100 -
Mitchell Grunat
One Virginia Avenue, #800
Indianapolis, IN 46204 10,000 (8) -
Zyville E. Lewis
456 N. Maple Street
Greenwich, CT 06830 1,145,396 5.9%
Special Situations Fund III QP, L.P.
527 Madison Avenue, Suite 2600
New York, NY 10023 1,341,850 (9) 6.1%
Robert P. Stiller
33 Coffee Lane
Waterbury, VT 05676 3,830,000 (10) 19.7%
Timothy Riley
34 Hedge Brook Lane
Stamford, CT 06903 1,060,900 (11) 5.5%
All Executive Officers and
Directors as a Group (5 Persons) 4,612,238 21.9%
----------
(1) All shares owned directly with sole investment and voting power, unless
otherwise noted.
(2) The percentage calculations are based upon 19,197,499 shares of the
Company's common stock, eligible to vote, issued and outstanding as of
March 1, 2009 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 March 1, 2009.
(3) The total includes a warrant to purchase 600,000 shares of common stock at
an exercise price of $.93 per share which expires June 30, 2011, a warrant
to purchase 300,000 shares of common stock at an exercise price of $.93
which expires January 24, 2011 and 20,000 shares of common stock subject to
options granted under an employee stock option plan which are currently
exercisable at $.55 per share.
(4) The total includes 60,000 shares of common stock subject to options granted
under an employee stock option plan which are currently exercisable at
$1.45 per share for 20,000 shares, $.55 per share for 20,000 shares and
$.83 per share for 20,000 shares. Also includes a warrant to purchase
300,000 shares of common stock at an exercise price of $.93 per share which
expires June 30, 2011, and a warrant to purchase 200,000 shares of common
stock at an exercise price of $.93 per share which expires January 24,
2011.
(5) Based on a Form 4 filed June 20, 2007, by Geovest Capital Partners, LP.
Douglas H. Coape-Arnold is Managing Partner of Geovest Capital Partners,
LP, however, Mr. Coape-Arnold disclaims beneficial ownership of such shares
beyond his interest in Geovest Capital Partners.
45
(6) This total includes 138,580 shares of common stock owned by James Lewis
Family Investments LP, 220,000 shares of common stock owned by James W.
Lewis MPPP and 200,000 shares owned by Geometry Asset Management, Inc.
(7) This total includes a warrant to purchase 100,000 shares of common stock at
an exercise price of $.93 per share which expires June 30, 2011 and a
warrant to purchase 100,000 shares of common stock at an exercise price of
$.93 per share which expires January 24, 2011.
(8) This total includes 10,000 shares of common stock subject to options
granted under an employee stock option plan which are currently exercisable
at $.83 per share for 10,000 shares.
(9) Based on a Schedule 13G filed February 13, 2008, by Austin W. Marxe and
David M. Greenhouse as Investment Managers of Special Situations Fund III
QP, L.P.
(10) Based on a Schedule 13G filed February 17, 2009, by Robert P. Stiller.
(11) Based on a Schedule 13G filed August 8, 2008, by Timothy Riley.
Equity Compensation Plan Benefit Information
--------------------------------------------
The following table provides information as of December 31, 2008 with
respect to the shares of our common stock that may be issued under our existing
equity compensation plans.
Number of securities
remaining available for
future issuance under
Number of Securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Plan Category (a) (b) (c)
--------------------- ----------------------- -------------------- ------------------------
Equity compensation plans approved
by stockholders -- $ -- --
Equity compensation plans not
approved by stockholders 650,250 $ .64 (1)
Total 650,250 $ .64 --
(1) The Company may grant additional options under the employee stock option
plan. There is no maximum number of shares available for issuance under the
employee stock option plan.
The Company maintains an employee stock option plan for our employees and
officers. Any employees or officers of the Company are eligible to be awarded
options under the plan. The employee stock option plan provides that any options
issued pursuant to the plan will have a three-year vesting period and will
expire ten years after the date of grant. Awards under the plan are periodically
made at the recommendation of the Chairman/CEO and President and approved by the
Board of Directors. The employee stock option plan does not have a limit on the
number of shares that may be issued under the plan.
46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The Company has reviewed all 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. The Board of Directors has
determined that there were no transactions since January 1, 2007 that are
required to be disclosed under this item. In making this determination the Board
of Directors examined consulting fees and interest on Participating Income Notes
paid to directors and determined that these items were not required to be
disclosed due to the amount of the payments.
The Company's Board of Directors is currently comprised of Paul W. Mobley, our
Chairman and Chief Executive Officer, A. Scott Mobley, our President, and
Douglas H. Coape-Arnold. For the purpose of determining director independence
for this Annual Report on Form 10-K, the Company has adopted the New York Stock
Exchange definition of independence. The Board of Directors has determined that
Mr. Coape-Arnold is an independent director under that definition.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees for professional audit services rendered by
Somerset CPAs for the audit of our annual financial statements and review of our
quarterly financial statements, and fees billed for other services rendered by
Somerset CPAs during the year 2007 and 2008.
Fiscal Year Ended Fiscal Year Ended
December 31, 2008 December 31, 2007
----------------- -----------------
Audit Fees and Review Fees (1) $78,000 $71,000
----------
(1) Audit Fees consist of fees rendered for professional services rendered by
Somerset CPAs for the audit of our financial statements included in our
Forms 10-K for the years ended December 31, 2007 and 2008 and the review of
the unaudited financial statements included in our quarterly reports during
2007 and 2008.
The engagement of Somerset CPAs, P.C., Certified Public Accountants, for
conducting the audit of the Company's financial statements for the years ended
December 31, 2008, 2007 and 2006, and for the review of its financial statements
included in its Form 10-Q's during the year 2007 and 2008, was pre-approved by
the Company's Board of Directors. Somerset CPAs, P.C. has not been engaged by
the Company to perform any services other than audits of the Company's financial
statements and reviews of its Form 10-Qs. The Board of Directors does not have a
pre-approval policy with respect to work performed by the Company's independent
auditor.
47
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Noble
Roman's, Inc. and subsidiaries are included in Item 8: Page
----
Consolidated Balance Sheets - December 31, 2007 and 2008 21
Consolidated Statements of Operations - years ended December 31,
2006, 2007 and 2008 22
Consolidated Statements of Changes in Stockholders' Equity - years
ended December 31, 2006, 2007 and 2008 23
Consolidated Statements of Cash Flows - years ended December 31,
2006, 2007 and 2008 24
Notes to Consolidated Financial Statements 25
Report of Independent Registered Accounting Firm. - Somerset CPAs, P.C. 36
Exhibits
Exhibit
Number Description
3.1 Amended Articles of Incorporation of the Registrant, filed as an exhibit to
the Registrant's Amendment No. 1 to the Post Effective Amendment No. 2 to
Registration Statement on Form S-1 filed July 1, 1985 (SEC File
No.2-84150), is incorporated herein by reference.
3.2 Amended and Restated By-Laws of the Registrant, as currently in effect,
filed as an exhibit to the Registrant's Registration Statement on Form S-18
filed October 22, 1982 and ordered effective on December 14, 1982 (SEC File
No. 2-79963C), is incorporated herein by reference.
3.3 Articles of Amendment of the Articles of Incorporation of the Registrant
effective February 18, 1992 filed as an exhibit to the Registrant's
Registration Statement on Form SB-2 (SEC File No. 33-66850), ordered
effective on October 26, 1993, is incorporated herein by reference.
3.4 Articles of Amendment of the Articles of Incorporation of the Registrant
effective May 11, 2000, filed as Annex A and Annex B to the Registrant's
Proxy Statement on Schedule 14A filed March 28, 2000, is incorporated
herein by reference.
3.5 Articles of Amendment of the Articles of Incorporation of the Registrant
effective April 16, 2001 filed as Exhibit 3.4 to Registrant's Annual Report
on Form 10-K for the year ended December 31, 2005, is incorporated herein
by reference.
3.6 Articles of Amendment of the Articles of Incorporation of the Registrant
effective August 23, 2005, filed as Exhibit 3.1 to the Registrant's current
report on Form 8-K filed August 29, 2005, is incorporated herein by
reference.
48
4.1 Specimen Common Stock Certificates filed as an exhibit to the Registrant's
Registration Statement on Form S-18 filed October 22, 1982 and ordered
effective on December 14, 1982 (SEC File No. 2-79963C), is incorporated
herein by reference.
4.2 Form of Warrant Agreement filed as Exhibit 4.1 to the Registrant's current
report on Form 8-K filed August 29, 2005, is incorporated herein by
reference.
10.1 Employment Agreement with Paul W. Mobley dated November 15, 1994 filed as
Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 2005, is incorporated herein by reference.
10.2 Employment Agreement with A. Scott Mobley dated November 15, 1994 filed as
Exhibit 10.2 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 2005, is incorporated herein by reference.
10.3 1984 Stock Option Plan filed with the Registrant's Form S-8 filed November
29, 1994 (SEC File No. 33-86804), is incorporated herein by reference.
10.4 Noble Roman's, Inc. Form of Stock Option Agreement filed with the
Registrant's Form S-8 filed November 29, 1994 (SEC File No. 33-86804), is
incorporated herein by reference.
10.5 Settlement Agreement with SummitBridge dated August 1, 2005, filed as
Exhibit 99.2 to the Registrant's current report on Form 8-K filed August 5,
2005, is incorporated herein by reference.
10.6 Loan Agreement with Wells Fargo Bank, N.A. dated August 25, 2005 filed as
Exhibit 10.1 to the Registrant's current report on Form 8-K filed August
29, 2005, is incorporated herein by reference.
10.7 First Amendment to Loan Agreement with Wells Fargo Bank, N.A. dated
February 4, 2008, filed as Exhibit 10.1 to the Registrant's current report
on Form 8-K filed February 8, 2008, is incorporated herein by reference.
10.8 Registration Rights Agreement dated August 1, 2005 between the Company and
SummitBridge National Investments filed as an Exhibit to the Registrant's
Form S-1 filed on April 19, 2006, is incorporated herein by reference.
21.1 Subsidiaries of the Registrant filed in the Registrant's Registration
Statement on Form SB-2 (SEC File No. 33-66850) ordered effective on October
26, 1993, is incorporated herein by reference.
31.1 C.E.O. and C.F.O. Certification under Rule 13a-14(a)/15d-14(a)
32.1 C.E.O. and C.F.O. Certification under Section 1350
49
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 19, 2009 By: /s/ Paul W. Mobley
-------------- ---------------------------------------
Paul W. Mobley, Chief Executive Officer and
Chief Financial Officer
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 19, 2009 /s/ Paul W. Mobley
-------------- ---------------------------------------
Paul W. Mobley
Chairman of the Board and Director
Date: March 19, 2009 /s/ A. Scott Mobley
-------------- ---------------------------------------
A. Scott Mobley
President and Director
Date: March 19, 2009 /s/ Douglas H. Coape-Arnold
-------------- ---------------------------------------
Douglas H. Coape-Arnold
Director
50