10-K 1 nr-05k.txt 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, 2005. 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 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. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X --- --- --- 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 voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2005, 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 $8,054,060. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 16,322,136 shares of common stock as of March 1, 2006. Documents Incorporated by Reference: None NOBLE ROMAN'S, INC. FORM 10-K Year Ended December 31, 2005 Table of Contents Item # in Form 10-K Page PART I 1. Business 4 1A. Risk Factors 7 1B. Unresolved Staff Comments 10 2. Properties 10 3. Legal Proceedings 10 4. Submission of Matters to a Vote of Security Holders 10 PART II 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 10 6. Selected Financial Data 12 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 7A. Quantitative and Qualitative Disclosures About Market Risk 18 8. Financial Statements and Supplementary Data 19 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 30 9A. Controls and Procedures 30 9B. Other Information 30 PART III 10. Directors and Executive Officers of the Registrant 30 11. Executive Compensation 32 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 33 13. Certain Relationships and Related Transactions 36 PART IV 14. Principal Accounting Fees and Services 36 15. Exhibits, Financial Statements Schedules 37 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" 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, labor-minimizing operations, attractive food costs and overall affordability. In 2005 the Company began selling franchises for its dual-branded concept in traditional locations. The Company plans to sell development territories to Area Developers in an attempt to accelerate growth in the dual-branded traditional concept. Prior to focusing its efforts on franchising for non-traditional and co-branded foodservice operations, the Company had approximately 25 years' experience operating full-service pizza restaurants, giving it unique advantages in the design and consultation of foodservice systems for franchisees. Since 1997, the Company has focused its efforts and resources primarily on franchising for non-traditional and co-branded locations and now has awarded franchises in 44 states plus Washington, D.C., Puerto Rico, Guam, Italy and Canada. The initial investment, including franchise fee, for a Noble Roman's franchise ranges from approximately $26,700 to $197,500, for a Tuscano's franchise from approximately $30,600 to $167,900, and for both franchises in the same facility from approximately $56,000 to $261,700, depending on the type of facility. Royalties and fees from franchise operations accounted for 86.1%, 85.8% and 86.2% of total revenue for 2003, 2004 and 2005, 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 ------------------ 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. Here are a few of the differences that we believe 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. o An extended product line that includes breadsticks with dip, pasta, baked sandwiches, salads, wings and a line of breakfast products. o A recently introduced 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. 4 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 all 48 contiguous states. This process results in products that are great tasting, quality consistent, easy to assemble, relatively low in food cost and require very low amounts of labor. Tuscano's Italian Style Subs ---------------------------- During 2004, the Company improved its cold sub sandwich menu items and expanded the offerings into a separate concept called Tuscano's Italian Style Subs. 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 expects to award 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. Yet Tuscano's has many unique competitive features, including its Tuscan theme, the extra rich yeast content of its fresh baked bread, the 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. Franchise Development --------------------- Noble Roman's has sold franchises in 44 states from coast-to-coast within the United States. In addition, it has sold franchises for military bases in Puerto Rico, Guam and Italy, and for entertainment facilities and convenience stores in Canada. The Company plans to continue its focus on awarding franchise agreements for both Noble Roman's Pizza and Tuscano's Italian Style Subs in non-traditional venues such as hospitals, military bases, universities, convenience stores, attractions, entertainment facilities, casinos, airports, travel plazas, office complexes and hotels which it has been doing the past several years. In addition, the Company recently began offering the dual-branded concept of Noble Roman's/Tuscano's for stand-alone traditional locations. In order to seek more rapid growth, the Company has initiated a strategy to sell development territories, by television areas of dominant influence, to Area Developers for the growth of its traditional dual-branded concept. Area Developers will have the exclusive right to develop the dual-branded traditional concept in their area. The Area Development Agents will generally pay a development fee of $.05 per capita in their development area and will receive 30% of the initial franchise fee and 2/7ths of the royalty from the locations developed pursuant to those agreements. The Company retains all training and supervision responsibilities and must approve all franchisees and all locations. In order to maintain the rights to develop the territory, each Development Agent has to meet the minimum development schedule stipulated in the Area Development Agreement. Currently, the Company is in discussions with several potential Area Developers. 5 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. A change in the business strategy of one or more of the Company's 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. Within the competitive environment of the traditional franchise segment of the restaurant industry, management has defined what it believes to be certain competitive advantages for the Company. One of these advantages is that due to the Company's recently developed fully-prepared crust, pizzas can be prepared and baked in less than five minutes, which the Company believes is a significant advantage especially in the delivery segment of the business. 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 in minor ways by certain seasonalities and holiday periods. Franchise sales to certain non-traditional venues may be slower around major holidays such as Thanksgiving and Christmas, and during the first 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. 6 Employees --------- As of February 28, 2006, the Company employed approximately 29 persons full-time and 47 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 United States Patent and Trademark Office as well as with the corresponding agencies of certain other foreign governments. The Company believes that its trademarks and service marks have significant value and are important to its sales and marketing efforts. Government Regulation --------------------- The Company and its franchisees are subject to various federal, state and local laws affecting the operation of our respective businesses. Each 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 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 offering circular with state authorities. Substantive state laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states, and bills have been introduced in Congress from time to time that would provide for 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. 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 the Company's control and any one of which, or a combination of which, could materially affect the Company's 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 the Company's securities. These risks and uncertainties include, without limitation: 7 Competition from larger companies. The Company competes for franchise sales with large national companies and numerous regional and local companies. Many of the Company's 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 product engineering and quality, investment cost, cost of sales, distribution, simplicity of operation and labor requirements. A change in the business strategy of one or more of the Company's 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. As a result of these factors, we may have difficulty competing effectively from time to time or in certain markets. Dependence on growth strategy. A significant component of the Company's growth strategy is selling new franchises and assisting franchisees in opening new restaurants. The opening and success of new restaurants will depend upon various factors, including the franchisee's ability to find suitable sites, the ability to negotiate leases for the new restaurants on acceptable terms, the ability to comply with applicable regulatory requirements, the ability to meet construction schedules, the ability of the franchisees to manage their anticipated expansion and to hire and train personnel, the ability of the franchisees to obtain acceptable financing and the effect of competition and general economic and business conditions including, but not limited to, food and labor costs. Many of the foregoing factors are not within the control of the Company. There can be no assurance that the Company will be able to achieve its plans with respect to the opening of new franchise units. 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. 8 Interruptions in supply or delivery of fresh food products. Dependence on frequent deliveries of fresh product also subjects the Company to the risks that shortages or interruptions in the 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, food, paper and labor may also adversely affect the franchisees and, as a result, adversely affect the Company's ability to add new restaurants. Dependence on a few individuals. 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, the Company's Chairman, Chief Executive Officer and Chief Financial Officer, and A. Scott Mobley, the Company's President and Chief Operating Officer. The loss of either of their services could have a material adverse effect on the Company. Company subject to Indiana law with regard to purchase of the Company's stock. Certain provisions of Indiana law applicable to the Company could have the affect 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 in the Company. 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 Company's Board of Directors approves either the business combination or the acquisition of stock before the person becomes an "interested shareholder." Company and its franchisees 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 offering circular with state authorities. Substantive state laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the franchisor-franchisee relationship in certain respects. The state laws often limit, among other things, the duration and scope of non-competition provisions and the ability of a franchisor to terminate or refuse to renew a franchise. Some foreign countries also have disclosure requirements and other laws regulating franchising and the franchisor-franchisee relationship, and the Company would be subject to applicable laws in each jurisdiction where 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 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. 9 ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES The Company's headquarters are located in 8,000 square feet of leased office space in Indianapolis, Indiana. The lease for this property expires in December 2008. 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 a dual-branded restaurant in Indianapolis, Indiana which it intends to sell when an appropriate franchisee can be identified. 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 not involved in any litigation currently, nor is any litigation currently threatened, which would have any material effect upon the Company. 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." 10 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. 2004 2005 Quarter Ended: High Low High Low ---- ----- ---- --- March 31 $1.55 $1.01 $.95 $.70 June 30 1.50 1.15 $.85 $.63 September 30 1.35 1.00 $1.15 $.71 December 31 1.15 .73 $1.01 $.77 Holders of Record ----------------- As of March 1, 2006, there were approximately 351 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 within the foreseeable future. Sale of Unregistered Securities ------------------------------- None. Equity Compensation Plan Benefit Information -------------------------------------------- The following table provides information as of December 31, 2005 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 Number of Securities to be Weighted-average exercise future issuance under issued upon exercise of price of outstanding equity compensation plans outstanding options, options, warrants (excluding securities warrants and rights and rights reflected in column (a)) Plan Category (a) (b) (c) Equity compensation plans approved by stockholders -- $ -- -- Equity compensation plans not approved by stockholders 303,750 $ 1.05 -- ---------------- ---------------- Total 303,750 $ 1.05 -- ---------------- ----------------
11 ITEM 6. SELECTED FINANCIAL DATA (In thousands except per share data)
Year Ended December 31, -------------------------------------------------------- Statement of Operations Data: 2001 2002 2003 2004 2005 -------- -------- -------- -------- -------- Royalties and fees $ 5,162 $ 5,644 $ 6,701 $ 6,789 $ 7,270 Administrative fees and other 306 294 199 125 72 Restaurant revenue 279 711 882 998 1,089 -------- -------- -------- -------- -------- Total revenue 5,747 6,649 7,782 7,912 8,431 Operating expenses 2,051 2,152 2,328 2,522 2,627 Restaurant operating expenses 266 702 867 962 1,059 Depreciation and amortization 54 63 68 50 70 General and administrative 1,207 1,255 1,259 1,403 1,491 -------- -------- -------- -------- -------- Operating income 2,169 2,477 3,260 2,975 3,184 Interest and other 1,255 1,254 1,047 946 817 Other income -- -- -- -- 2,801 -------- -------- -------- -------- -------- Income before income taxes from continuing operations 914 1,223 2,213 2,029 5,168 Income taxes 311 416 752 690 1,757 -------- -------- -------- -------- -------- Net income from continuing operations 603 807 1,461 1,339 3,411 Loss from discontinued operations (1,671) (313) (167) (404) (560) -------- -------- -------- -------- -------- Net income (loss) $ (1,068) $ 494 $ 1,294 $ 935 $ 2,851 Cumulative preferred dividends -- -- -- -- 16 -------- -------- -------- -------- -------- Net income (loss) available to common stockholders $ (1,068) $ 494 $ 1,294 $ 935 $ 2,835 ======== ======== ======== ======== ======== Weighted average number of common shares 14,794 16,058 16,169 16,280 16,849 Net income per share from continuing operations $ .04 $ .05 $ .09 $ .08 $ .20 Loss per share from discontinued operations (.11) (.02) (.01) (.02) (.03) -------- -------- -------- -------- -------- Net income (loss) per share $ (.07) $ .03 $ .08 $ .06 $ .17 ======== ======== ======== ======== ======== Balance Sheet Data (at year end): Working capital (deficit) $ (83) $ 16 $ 2,220 $ 2,107 $ 2,793 Total assets 13,192 13,601 14,284 15,249 15,523 Long-term obligations, net of current portion 10,141 9,232 10,099 9,740 7,125 Stockholders' equity $ 675 $ 1,168 $ 2,462 $ 4,256 $ 6,513
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 name "Noble Roman's Pizza" and "Tuscano's Italian Style Subs." Both concepts' hallmarks include high quality products, simple operating systems, labor minimizing operations, attractive food costs and overall affordability. On August 25, 2005, the Company consummated a Settlement Agreement with SummitBridge National Investments, LLC and related entities. As of a result of the Settlement Agreement, Noble Roman's acquired all of SummitBridge's debt and equity interests in Noble Roman's, except for 2,400,000 shares of common stock, 12 for a purchase price of $8,300,000. These interests consisted of a senior secured promissory note in the principal amount of $7,700,000, interest accrued on the note of $927,756, 3,214,748 shares of Noble Roman's common stock, $4,929,274 stated amount of Noble Roman's no-yield preferred stock which was convertible into 1,643,092 shares of common stock, and a warrant to purchase 385,000 shares of Noble Roman's common stock with an exercise price of $.01 per share. Simultaneous with the closing on the Settlement Agreement, Noble Roman's obtained a new six- year term loan in the principal amount of $9,000,000. The new note calls for monthly principal payments of $125,000 plus interest at the rate of LIBOR plus 4% per annum adjusted on a monthly basis. The Company's obligations under the loan are secured by the grant of a security interest in its personal property. The Company elected to purchase a swap contract fixing the rate on 50% of the principal balance for the first two years and then $3 million of the principal amount for the following two years at an annual interest rate of 8.83% per annum. Financial Summary ----------------- The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results 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 demands 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. Contractual Obligations -----------------------
Total Less than 1 year 1-3 Years 3-5 Years More than 5 years Long-term debt $8,625,000 $1,500,000 $3,000,000 $3,000,000 $1,125,000 Operating leases 725,567 200,806 373,377 151,384 -- ---------- ---------- ---------- ---------- ---------- Total $9,350,567 $1,700,806 $3,373,377 $3,151,384 $1,125,000 ========== ========== ========== ========== ==========
The following table sets forth the 2003, 2004 and 2005 operating results included in the Company's consolidated statement of operations. 13 Condensed Consolidated Statement of Operations Noble Roman's, Inc. and Subsidiaries
Years Ended December 31, ------------------------------------------------------------------------------------------ 2003 2004 2005 ---- ---- ---- Royalties and fees $ 6,700,457 86.1% $ 6,788,590 85.8% $ 7,269,868 86.2% Administrative fees and other 199,231 2.6 124,893 1.6 72,177 .9 Restaurant revenue 882,305 11.3 998,037 12.6 1,088,783 12.9 ------- ---- ------- ---- --------- ---- Total revenue 7,781,992 100.0 7,911,520 100.0 8,430,828 100.0 Express operating expenses: Salaries and wages 1,083,168 13.9 1,169,701 14.8 1,139,502 13.5 Trade show expense 327,615 4.2 405,580 5.1 474,555 5.6 Travel expense 219,365 2.8 282,302 3.6 333,617 4.0 Other operating expense 698,120 9.0 664,001 8.4 678,231 8.0 Restaurant expenses 867,227 11.1 961,552 12.2 1,059,396 12.6 Depreciation 67,938 .9 50,493 .6 69,964 .8 General and administrative 1,259,035 16.2 1,403,338 17.7 1,491,243 17.7 --------- ---- --------- ---- --------- ---- Operating income 3,259,524 41.9 2,974,553 37.6 3,184,320 37.8 Interest expense 1,046,581 13.4 946,234 12.0 817,357 9.7 Other income - - - - 2,800,830 33.2 --------- ---- --------- ---- --------- ---- Income before income taxes 2,212,944 28.4 2,028,319 25.6 5,167,793 61.3 Income taxes 752,401 9.7 689,628 8.7 1,757,049 20.8 --------- ---- --------- ---- --------- ---- Net income from continuing operations $1,460,543 18.8% $ 1,338,691 16.9% $ 3,410,744 40.5% ========== =========== ===========
2005 Compared with 2004 ----------------------- Total revenue increased from $7.9 million in 2004 to $8.4 million in 2005. 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 $6.8 million in 2004 to approximately $7.3 million in 2005. Included in royalties and fees were approximately $795,500 for 2004 and $699,500 for 2005 for initial franchise fees. Because one of the Company's strategic directions is to grow its business by franchising non-traditional locations, and because the number of such locations that are available for targeted growth is large, the Company believes that the initial franchise fee revenue for non-traditional locations will continue. Additionally, the Company has recently targeted additional growth by developing traditional dual-branded locations through the use of Area Developers. Because of this addition, the Company believes that franchise fee revenue has the potential to be greater in the future. Restaurant revenues increased from $998,037 in 2004 to $1.089 million in 2005. The Company only intends to operate one restaurant to be used for testing and demonstration purposes but from time to time temporarily operates others until a suitable franchisee is located. Salaries and wages decreased from 14.8% of revenue in 2004 to 13.5% of revenue in 2005. This decrease was primarily the result of actual salaries and wages remaining constant while the revenue increased primarily as a result of an increase in franchise locations. Trade show expenses increased from 5.1% of revenue in 2004 to 5.6% of revenue in 2005. This increase was primarily the result of adding additional national trade shows in different venues. The Company anticipates this actual dollar expense to 14 remain approximately the same in 2006 and, with anticipated growth in revenue, the percentage expense is anticipated to decrease in 2006. Travel expenses increased from 3.6% of revenue in 2004 to 4.0% of revenue in 2005. This increase was primarily the result of opening more locations farther away from the home office. Even though the Company expects opening more locations farther away from the home office will continue, the Company anticipates that the expected additional growth in revenue for 2006 will offset the expected increase in travel so that the travel expense, as a percentage of revenue, would stabilize or slightly decrease over time. Other operating expenses decreased from 8.4% of revenue in 2004 to 8.0% of revenue in 2005. This decrease was primarily the result of maintaining operating expenses at approximately the same dollar amount while the revenue increased primarily from the growth in franchise locations. The Company anticipates that other operating expenses, as a percentage of revenue, will continue to decline as a result of anticipated additional growth in 2006 while maintaining operating expenses at approximately the same dollar amount. Restaurant expenses increased from 12.2% of revenue in 2004 to 12.6% of revenue in 2005. This increase resulted primarily from the Company operating more restaurants on a temporary basis in 2005. The Company only intends to operate one restaurant to be used for testing and demonstration purposes but from time to time temporarily operates others until a suitable franchisee is located. General and administrative expenses remained a constant 17.7% of revenue in 2004 and 2005. This was primarily the result of growth in administrative expense being offset by growth in revenue. The increase in administrative expenses was due in part to expenses associated with the now-settled SummitBridge litigation. The Company expects to be able to maintain the current level of cost as a percent of revenue and possibly lower it slightly over time with the expenses from the SummitBridge litigation now over. Operating income increased from $3.0 million in 2004 to $3.2 million in 2005. This was primarily the result of additional revenue from growth in the number of franchise locations while maintaining control of the operating expenses. Interest expense decreased from 12.0% of revenue in 2004 to 9.7% of revenue in 2005. This was a result of a decrease in interest cost because of the reduction in the amount of debt outstanding and, additionally, the result of an increase in revenue. Other income was $2.8 million in 2005 resulting from the Company consummating a settlement agreement with SummitBridge National Investments, LLC and related entities, as described above under "-Introduction." Net income from continuing operations increased from $1.34 million in 2004 to $3.41 million in 2005. This increase was primarily the result of the other income described in the previous paragraph and, additionally, the increase in income from continuing operations from $1.34 million in 2004 to $1.56 million in 2005 as a result of the increase in operating income. The Company recognized a net loss from discontinued operations in 2005 of $560,153 after a tax benefit of $387,603 and $403,753 after a tax benefit of $243,175 in 2004. The loss from discontinued operations was primarily the result of settling lease disputes on lease agreements related to restaurants closed in 15 1999 and 2000 and for legal fees related to the discontinued operations. The Company believes that any additional expenses resulting from the discontinued operations, in the future, will not be material. 2004 Compared with 2003 ----------------------- Total revenue increased from $7.8 million in 2003 to $7.9 million in 2004. Continuing fees such as royalties and product allowances were approximately the same in 2004 as 2003, while new franchise fees increased approximately $400,000 and commissions on equipment sales decreased by approximately $250,000. Restaurant revenues increased from approximately $882,000 in 2003 to $998,000 in 2004. This increase was the result of operating more units on a temporary basis in 2004 than were operated in 2003. From time to time the Company operates units until a qualified franchisee can be located. The Company does not plan to operate any units on a permanent basis except for one location which is used as a test kitchen and demonstration facility. Salaries and wages increased from 13.9% of revenue in 2003 to 14.8% of revenue in 2004. This increase was primarily the result of preparing the Company for additional growth beyond what was realized in 2004. Trade show expenses increased from 4.2% of revenue in 2003 to 5.1% of revenue in 2004. This increase was the result of participating in more national trade shows to attract franchisees from additional venues to further diversify the Company's target market. Travel expenses increased from 2.8% of revenue in 2003 to 3.6% of revenue in 2004. This increase was the result of more locations opening farther away from the home office. Other operating expenses decreased from 9.0% of revenue in 2003 to 8.4% of revenue in 2004. This decrease was primarily the result of tightly controlling operating expenses. Restaurant expenses increased from 11.1% of revenue in 2003 to 12.2% of revenue in 2004. This increase was the result of operating more units on a temporary basis in 2004 than were operated in 2003. General and administrative expenses increased from 16.2% of revenue in 2003 to 17.7% of revenue in 2004. This increase was primarily the result of the cost of the litigation with SummitBridge. Operating income decreased from $3.3 million in 2003 to $3.0 million in 2004. This decrease was the result of various increases in expenses described above while achieving less growth in revenue than was expected. Net income from continuing operations decreased from $1.46 million in 2003 to $1.34 million in 2004. This decrease was primarily the result of the various increases in expenses, as described above, while less than expected growth in revenue was achieved. The Company recognized a net loss from discontinued operations in 2004 of $403,753 after a tax benefit of $243,175. Additionally, the Company recorded previously unrecorded deferred tax assets from discontinued operations in the amount of $527,095 in 2004. 16 Impact of Inflation ------------------- The primary inflation factors affecting the Company's operations are food and labor costs to the franchisee. To date, the Company has been able to offset the effects of inflation in food costs without significantly increasing prices through effective cost control methods and greater purchasing power as a result of additional growth. The competition for labor has resulted in higher salaries and wages for the franchisees, however, that effect is largely minimized by the relatively low labor requirements of the Company's franchise concepts. Liquidity and Capital Resources ------------------------------- The Company's strategy is to grow its business by continuing to franchise in non-traditional locations and by franchising in traditional locations primarily through the use of Area Development Agents. This strategy does not require significant additional capital. As a result of the Company's strategy, cash flow generated from operations, the Company's current rate of entering into new franchises and the anticipated growth, the Company believes it will have sufficient cash flow to meet its obligations and to carry out its current business plan. On August 25, 2005, the Company finalized a Settlement Agreement with SummitBridge National Investments, LLC and related entities. As of a result of the Settlement Agreement, Noble Roman's acquired all of SummitBridge's debt and equity interests in Noble Roman's, except for 2,400,000 shares of common stock, for a purchase price of $8,300,000. These interests consisted of a senior secured promissory note in the principal amount of $7,700,000, interest accrued on the note of $927,756, 3,214,748 shares of Noble Roman's common stock, $4,929,274 stated amount of Noble Roman's no-yield preferred stock which was convertible into 1,643,092 shares of common stock, and a warrant to purchase 385,000 shares of Noble Roman's common stock with an exercise price of $.01 per share. Simultaneous with the closing on the Settlement Agreement, Noble Roman's obtained a new six- year term loan in the principal amount of $9,000,000. The new note calls for monthly principal payments of $125,000 plus interest at the rate of LIBOR plus 4% per annum adjusted on a monthly basis. The Company's obligations under the loan are secured by the grant of a security interest in its personal property. The Company elected to purchase a swap contract fixing the rate on 50% of the principal balance for the first two years and then $3 million of the principal amount for the following two years at an annual interest rate of 8.83% per annum. The Company does not anticipate that any of the recently issued Statement of Financial Accounting Standards will have a material impact on the Company's Statement of Operations or its Balance Sheet. 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 including, but not limited to, competitive factors and pricing pressures, shifts in market demand, general 17 economic conditions, changes in demand for the Company's products or franchises, the impact of competitors' actions and changes in prices or supplies of food ingredients and labor 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 current borrowings are at a monthly variable rate tied to LIBOR. However, the Company elected to purchase a swap contract fixing the rate on 50% of the principal balance for the first two years and then $3 million of the principal amount for the following two years at an annual interest rate of 8.83% per annum. The Company has concluded that there is no material market risk exposure and, therefore, no quantitative tabular disclosures are required. 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheets Noble Roman's, Inc. and Subsidiaries
December 31, ------------ Assets 2004 2005 ---- ---- Current assets: Cash - non-restricted $ 260,025 $ 740,940 Cash - restricted 196,754 -- Accounts and notes receivable (net of allowances of $82,262 in 2004 and $122,262 in 2005) 1,011,758 1,299,942 Inventories 207,856 221,712 Assets held for resale -- 461,709 Prepaid expenses 505,646 301,661 Current portion of long-term notes receivable 183,478 173,498 Deferred tax asset - current portion 994,148 1,478,175 ------------ ------------ Total current assets 3,359,665 4,677,637 ------------ ------------ Property and equipment: Equipment 1,042,790 1,150,718 Leasehold improvements 94,017 105,503 ------------ ------------ 1,136,807 1,256,221 Less accumulated depreciation and amortization 484,068 565,102 ------------ ------------ Net property and equipment 652,739 691,119 ------------ ------------ Deferred tax asset (net of current portion) 9,135,834 7,782,360 Other assets including long-term portion of notes receivable 2,100,437 2,371,774 ------------ ------------ Total assets $ 15,248,675 $ 15,522,890 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $ 1,252,852 $ 384,928 Current portion of long-term notes payable -- 1,500,000 ------------ ------------ Total current liabilities 1,252,852 1,884,928 ------------ ------------ Long-term obligations: Note payable to bank (net of current portion) 7,700,000 7,125,000 Subordinated debentures 2,040,000 -- ------------ ------------ Total long-term liabilities 9,740,000 7,125,000 ------------ ------------ Stockholders' equity: Common stock (25,000,000 shares authorized, 17,136,884 outstanding at December 31, 2004 and 16,322,136 outstanding as of December 31, 2005) 18,648,512 21,021,632 Preferred stock (5,000,000 shares authorized) 4,929,274 1,978,800 Accumulated deficit (19,321,963) (16,487,470) ------------ ------------ Total stockholders' equity 4,255,823 6,512,962 ------------ ------------ Total liabilities and stockholders' equity $ 15,248,675 $ 15,522,890 ============ ============
See accompanying notes to consolidated financial statements. 19 Consolidated Statements of Operations Noble Roman's, Inc. and Subsidiaries
Year Ended December 31, -------------------------------------------- 2003 2004 2005 ------------ ------------ ------------ Royalties and fees $ 6,700,457 $ 6,788,590 $ 7,269,868 Administrative fees and other 199,230 124,893 72,177 Restaurant revenue 882,305 998,037 1,088,783 ------------ ------------ ------------ Total revenue 7,781,992 7,911,520 8,430,828 Operating expenses: Salaries and wages 1,083,168 1,169,701 1,139,502 Trade show expense 327,615 405,580 474,555 Travel expense 219,365 282,302 333,617 Other operating expenses 698,120 664,001 678,231 Restaurant expenses 867,228 961,552 1,059,396 Depreciation and amortization 67,938 50,493 69,964 General and administrative 1,259,034 1,403,338 1,491,243 ------------ ------------ ------------ Operating income 3,259,524 2,974,553 3,184,320 Interest and other expense 1,046,581 946,234 817,357 Other income -- -- 2,800,830 ------------ ------------ ------------ Income before income taxes from continuing operations 2,212,944 2,028,319 5,167,793 Income tax expense 752,401 689,628 1,757,051 ------------ ------------ ------------ Net income from continuing operations 1,460,543 1,338,691 3,410,742 Loss from discontinued operations net of tax benefit of $86,071, $243,175 and $387,603, respectively (167,079) (403,753) (560,153) ------------ ------------ ------------ Net income 1,293,464 934,938 2,850,589 Cumulative preferred dividends -- -- 16,096 ------------ ------------ ------------ Net income available to common stockholders $ 1,293,464 $ 934,938 $ 2,834,493 ============ ============ ============ Earnings per share - basic: Net income from continuing operations $ 09 $ .08 $ .20 Net income .08 .06 .17 Weighted average number of common shares outstanding 16,168,911 16,280,171 16,848,932 Diluted earnings per share: Net income from continuing operations $ .09 $ .08 $ .20 Net income .08 .06 .16 Weighted average number of common shares outstanding 16,799,214 16,888,236 17,406,367
See accompanying notes to consolidated financial statements. 20 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, 2002 $ 4,929,274 16,166,158 $ 17,789,452 $(21,550,365) $ 1,168,361 Non-cash exercise of warrants 111,666 2003 net income 1,293,464 1,293,464 ----------- ---------- ------------ ------------ ----------- Balance at December 31, 2003 4,929,274 16,277,824 17,789,452 (20,256,901) 2,461,825 Conversion of participating income notes to common stock 859,060 859,060 859,060 2004 net income 934,938 934,938 ----------- ---------- ------------ ------------ ----------- Balance at December 31, 2004 4,929,274 17,136,884 18,648,512 (19,321,963) 4,255,823 2005 net income 2,850,589 2,850,589 Cumulative preferred dividends (16,096) (16,096) Conversion of long-term subordinated debentures to preferred stock less issuance cost 1,978,800 1,978,800 Conversion of preferred stock to common stock (4,929,274) 1,643,092 4,929,274 -- Purchase of SummitBridge shares (2,457,840) (2,556,154) (2,556,154) ----------- ---------- ------------ ------------ ----------- -- -- Balance at December 31, 2005 $ 1,978,800 16,322,136 $21,021,632 $(16,487,470) $6,512,962 =========== ========== =========== ============= ==========
See accompanying notes to consolidated financial statements. 21 Consolidated Statements of Cash Flows Noble Roman's, Inc. and Subsidiaries
Year ended December 31, ----------------------------------------- OPERATING ACTIVITIES 2003 2004 2005 ----------- ----------- ----------- Net income $ 1,293,464 $ 934,938 $ 2,850,589 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 235,013 137,172 134,403 Interest accrued not paid -- -- 354,533 Non-cash gain from purchase of SummitBridge's interest -- -- (2,800,830) Deferred income taxes 666,330 446,453 1,449,303 Loss from discontinued segment 253,150 646,927 560,153 Changes in operating assets and liabilities: (Increase) decrease in: Accounts and notes receivable (561,940) (379,616) (308,559) Inventories (21,964) 57,835 (34,868) Assets held for resale -- -- (449,564) Prepaid expenses (118,333) (65,745) 163,985 Other assets (30,905) (42,861) 21,397 Increase (decrease) in: Accounts payable (738,645) 277,962 (253,187) ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 976,170 2,013,065 1,687,355 ----------- ----------- ----------- INVESTING ACTIVITIES Purchase of property and equipment (65,946) (125,851) (98,402) ----------- ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (65,946) (125,851) (98,402) ----------- ----------- ----------- FINANCING ACTIVITIES Payment of obligations from discontinued operations (953,881) (1,771,718) (1,190,795) Payment of cumulative preferred dividends -- -- (16,096) Asset sold for note receivable -- (75,000) -- Payment of principal on outstanding debt (1,713,740) (165,840) (375,000) Payment received on long-term notes receivable 46,744 147,923 235,201 Purchase of all of SummitBridge's interest in the company except 2.4 million shares of common stock -- -- (8,300,000) Issuance cost of the new preferred stock -- -- (61,200) Proceeds from issuance of long-term debt, net of debt issue costs 1,934,919 -- 8,599,852 ----------- ----------- ----------- NET CASH USED BY FINANCING ACTIVITIES (685,958) (1,864,635) (1,108,038) ----------- ----------- ----------- Increase in cash 224,266 22,579 480,915 Cash at beginning of year 13,180 237,446 260,025 ----------- ----------- ----------- Cash at end of year $ 237,446 $ 260,025 $ 740,940 =========== =========== ===========
Supplemental Schedule of Non-Cash Investing and Financing Activities: The holders of $2,040,000 aggregate principal amount of subordinated debentures exchanged their subordinated debentures for preferred stock with an aggregate liquidation value of $2,040,000. See accompanying notes to consolidated financial statements. 22 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" and "Tuscano's Italian Style Subs." Principles of Consolidation: The consolidated financial statements include the accounts of Noble Roman's, Inc. and its subsidiaries, Pizzaco, Inc., N.R. Realty, Inc., GNR, Inc., LPS, Inc., N.R. East, Inc. and Oak Grove Corporation (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 including property under capital leases. Depreciation and amortization are computed on the straight-line method over the estimated useful lives. Leasehold improvements are amortized over the shorter of estimated useful life or the term of the lease. Advertising Costs: The Company records advertising costs consistent with Statement of Position 93-7 "Reporting on Advertising Costs." This statement requires the Company to expense advertising production costs the first time the production material is used. Fair Value of Financial Instruments: The Company's current borrowings are at a monthly variable rate tied to LIBOR. However, the Company elected to purchase a swap contract fixing the rate on 50% of the principal balance for the first two years and then $3 million of the principal amount for the following two years at an annual interest rate of 8.83% per annum. Use of Estimates: The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The Company records a valuation allowance in a sufficient amount to adjust the total 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 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. Intangible Assets: Debt issue costs are amortized to interest expense ratably over the term of the applicable debt. Royalties, Administrative and Franchise Fees: Royalties are recognized as income monthly and are based on a percentage of monthly sales of franchised restaurants. Administrative fees are recognized as income monthly as earned. 23 Initial franchise fees are recognized as income when the franchised restaurant is opened. Income Taxes: The Company provides for current and deferred income tax liabilities and assets utilizing an asset and liability approach along with a valuation allowance as appropriate. The Company concluded that its valuation allowance was adequate at December 31, 2004 and 2005 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. The net operating loss carry-forward is approximately $25.7 million which expires between the years 2011 and 2016. Management made the determination that the valuation allowance was adequate after reviewing the Company's business plans, all known facts to date, recent trends, current performance and analysis of the backlog of franchises sold but not yet open. Basic and Diluted Net Income Per Share: Net income per share is based on the weighted average number of common shares outstanding during the respective year. When dilutive, stock options and warrants are included as share equivalents using the treasury stock method. Note 2: Notes Payable On August 25, 2005, the Company consummated a Settlement Agreement with SummitBridge National Investments, LLC and related entities. As of a result of the Settlement Agreement, Noble Roman's acquired all of SummitBridge's debt and equity interests in Noble Roman's, except for 2,400,000 shares of common stock, for a purchase price of $8,300,000. These interests consisted of a senior secured promissory note in the principal amount of $7,700,000, interest accrued on the note of $927,756, 3,214,748 shares of Noble Roman's common stock, $4,929,274 stated amount of Noble Roman's no-yield preferred stock which was convertible into 1,643,092 shares of common stock, and a warrant to purchase 385,000 shares of Noble Roman's common stock with an exercise price of $.01 per share. Simultaneous with the closing on the Settlement Agreement, Noble Roman's obtained a new six- year term loan in the principal amount of $9,000,000. The new note calls for monthly principal payments of $125,000 plus interest at the rate of LIBOR plus 4% per annum adjusted on a monthly basis. The Company's obligations under the loan are secured by the grant of a security interest in its personal property. The Company elected to purchase a swap contract fixing the rate on 50% of the principal balance for the first two years and then $3 million of the principal amount for the following two years at an annual interest rate of 8.83% per annum. Simultaneous with the closing under the Settlement Agreement and the new term loan, the previous holders of the Company's subordinated debentures, in the principal amount of $2,040,000, which bore interest at the rate of 8% per annum which was payable quarterly and which were to mature December 31, 2006, accepted an offer from the Company to convert their subordinated debentures to convertible preferred stock with an aggregate liquidation value of $2,040,000 . The convertible preferred stock provides for cumulative dividends of 8% per annum on the liquidation value of the convertible preferred stock. The preferred stock is convertible after December 31, 2006 into Noble Roman's common stock at a conversion price of $2.25 per share. At any time after December 31, 2008, the Company shall have the right, but not the obligation, to redeem all preferred shares for a purchase price equal to the liquidation value. 24 Note 3: Royalties and Fees Approximately $483,500, $795,500 and $699,500 are included in the 2003, 2004 and 2005 royalties and fees in Consolidated Statement of Operations for initial franchise fees. Because a primary strategy of the Company has been to grow its business by franchising primarily in non-traditional locations and the number of such locations that are available for targeted growth, the Company believes that the initial franchise fee revenue for non-traditional locations will continue. Additionally, the Company has recently targeted additional growth by developing traditional dual-branded locations through the use of Area Developers. 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. Note 4: Contingent Liabilities for Leased Facilities The Company formerly leased its restaurant facilities under non-cancelable lease agreements which generally had initial terms ranging from five to 20 years with extended renewal terms. These leases have all been assigned to 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, 2005, contingent obligations under non-cancelable operating leases for 2006, 2007, 2008, 2009, 2010 and after 2010 were approximately $171,528, $171,528, $171,528, $107,688, $107,688 and $460,318, respectively. Note 5: Income Taxes: The Company had a deferred tax asset, as a result of prior operating losses, of $10,129,982 at December 31, 2004 and $8,760,535 at December 31, 2005, most of which expires between the years 2012 and 2016. In 2003, 2004 and 2005, the Company used deferred benefits to offset its tax expense of $752,401, $689,628 and $1,757,051, respectively, and tax benefits from loss on discontinued operations of $86,071, $243,175 and $387,603 for 2003, 2004 and 2005, respectively. After review, based on time period of the tax carryforward and current operating results, the Company reduced its valuation allowance by $500,000 to $1,655,000 against the deferred tax asset as of December 2005. The valuation allowance reduction is reflected in the discontinued operations. 25 Note 6: Common Stock During 2003, a warrant holder exercised its warrants to purchase 150,000 shares at $.40 per share on a cashless basis and received 111,666 shares of common stock. During 2004, the holders of participating income notes exercised their option to convert those notes to 859,060 shares of common stock. During 2005, the Company purchased all of the common stock owned by SummitBridge National Investments, LLC except for 2,400,000 shares after the conversion of its preferred stock with a stated value of $4,929,274 to common stock at the conversion price of $3.00 per share. At December 31, 2005, the Company had outstanding warrants to purchase common stock as follows: # Common Shares Represented Exercise Price Warrant Expiration Date 50,000 $ 1.50 6/30/2006 1,000,000 $ .40 12/31/2007 1,000,000 $ .93 12/31/2007 404,000 $ 1.25 1/15/2008 1,000,000 $ .93 1/7/2010 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. Options granted and remaining outstanding at December 31, 2005 are: 33,000 common shares at $1.75 per share, 40,000 common shares at $1.00 per share, 8,000 common shares at $1.385 per share, 24,250 common shares at $1.46 per share, 47,500 common shares at $1.45 per share, 75,000 common shares at $.55 per share, 10,000 common shares at $.89 and 66,000 common shares at $.83. As of December 31, 2005, options for 237,750 shares are exercisable. The Series B Preferred Stock with a liquidation value of $2,040,000 is convertible, after December 31, 2006, at the option of the holder to common stock at a conversion price of $2.25 per share. The Company, at its option, may redeem the preferred stock after December 31, 2008 at the liquidation value. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R (revised 2004), "Share-Based Payments" (SFAS 123R). SFAS 123R requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in the financial statements based on the estimated fair value of the awards. The Company adopted SFAS 123R effective for periods beginning January 1, 2006. For periods prior to 2005, the Company accounted for stock-based compensation using the intrinsic method prescribed in APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations (APB 25). Accordingly, no compensation cost for stock options has been recognized and none were issued in 2005. 26 Note 7: 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 8: Loss from Discontinued Operations Pursuant to the Company's strategic decision in 1999 to refocus its business on its non-traditional and co-branding franchising opportunities, the Company closed or franchised all of its formerly owned full-service restaurants. A loss on these discontinued operations was recognized in a gross amount of $1,047,726 in 2003, an expense of $403,753 after a tax benefit of $243,175 in 2004, and an expense of $560,153 after a tax benefit of $387,603 in 2005. The loss from discontinued operations is primarily the result of settling lease disputes on lease agreements related to restaurants closed in 1999 and 2000 and for legal fees related to the discontinued operations. Note 9: 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 not involved in any litigation currently, nor is any litigation currently threatened, which would have any material effect upon the Company. Note 10: 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 $55,000 in consulting fees and $2,480 in interest on Participating Income Notes in 2003, $60,000 in consulting fees and $4,680 of interest on Participating Income Notes in 2004, and $72,000 in consulting fees and $2,800 of interest on Participating Income Notes in 2005. Geovest Capital Partners, LP, whose managing partner is Douglas Coape-Arnold, was paid $139,547 in interest in participating income notes in 2003, $150,728 in 2004 and $77,379 in 2005. On August 25, 2005, the Company consummated a Settlement Agreement with SummitBridge. As of a result of the Settlement Agreement, Noble Roman's acquired all of SummitBridge's debt and equity interests in Noble Roman's, except for 2,400,000 shares of common stock, for a purchase price of $8,300,000. These interests consisted of a senior secured promissory note in the principal amount of $7,700,000, interest accrued on the note of $927,756, 3,214,748 shares of Noble Roman's common stock, $4,929,274 stated amount of Noble Roman's no-yield preferred stock which was convertible into 1,643,092 shares of common stock, and a warrant to purchase 385,000 shares of Noble Roman's common stock with an exercise price of $.01 per share. 27 Note 11: Unaudited Quarterly Financial Information
Quarter Ended ------------- 2005 December 31 September 30 June 30 March 31 ---- ----------- ------------ ------- -------- (in thousands, except per share data) Total revenue $ 2,114 $ 2,105 $ 2,161 $ 2,051 Operating income 781 796 831 776 Income before income taxes from continuing operations 578 3,390 627 573 Net income from continuing operations 382 2,237 414 378 Net income $ 450 $ 1,912 $ 111 $ 378 Net income per common share from continuing operations Basic $ .03 $ .13 $ .02 $ .02 Diluted .03 .13 .02 .02 Net income per share Basic .02 .11 .01 .02 Diluted .01 .11 .01 .02 Quarter Ended ------------- 2004 December 31 September 30 June 30 March 31 ---- ----------- ------------ ------- -------- (in thousands, except per share data) Total revenue $ 1,830 $ 2,016 $ 2,123 $ 1,943 Operating income 574 787 872 742 Income before income taxes from continuing operations 363 546 622 497 Net income from continuing operations 235 360 416 328 Net income (loss) $ (169) $ 360 $ 416 $ 328 Net income per common share from continuing operations Basic $ .02 $ .02 $ .03 $ .02 Diluted .02 .02 .02 .02 Net income (loss) per share Basic (.01) .02 .03 .02 Diluted (.01) .02 .02 .02
28 To the Board of Directors and Stockholders of Noble Roman's, Inc. INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated balance sheets of Noble Roman's, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, cash flows and changes in stockholders' equity(deficit) for the years ended December 31, 2005, 2004 and 2003. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Noble Roman's, Inc. and subsidiaries at December 31, 2005 and 2004, and the results of their operations, and their cash flows for the years ended December 31, 2005, 2004 and 2003 in conformity with accounting principles generally accepted in United States. /s/ Larry E. Nunn & Associates, LLC Columbus, Indiana March 22, 2006 29 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES 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 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. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of the Company are: Name Age Positions with the Company ---- --- -------------------------- Paul W. Mobley 65 Chairman of the Board, Chief Executive Officer, Chief Financial Officer and Director A. Scott Mobley 42 President, Secretary and Director Douglas H. Coape-Arnold 60 Director Troy Branson 42 Executive Vice President of Franchising Mitchell Grunat 53 Vice President of Franchise Services Michael B. Novak 48 Vice President of Product Development, Purchasing and Distribution 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 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. 30 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's prior experience includes serving as Vice President of Morgan Stanley & Co., Inc. from 1982 to 1986, President & Chief Executive Officer of McLeod Young Weir Incorporated from 1986 to 1988, and Senior Vice President of GE Capital's Transportation & Industrial Funding Corp. from 1988 to 1991. Mr. Coape-Arnold is a Chartered Financial Analyst. Troy Branson, has been Executive Vice President of Franchising for the Company since November 1997 and 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, Business Development Officer for Midwest Bankers from 2000 to 2001, and Chief Operating Officer for Tavel Optical Group from 1987 to 2000. 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 recently 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. Section l6(a) Beneficial Ownership Reporting Compliance ------------------------------------------------------- Based solely on a review of the copies of reports of ownership and changes in ownership of the Company's common stock, furnished to the Company, or written representations that no such reports were required, the Company believes that during 2005 all filing requirements under Section 16(a) of the Securities Exchange Act of 1934 were complied with. * * * 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 by contacting the Company's executive office at the address set forth on the cover page of this report. 31 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the cash and non-cash compensation for each of the Company's last three years awarded to or earned by the Chief Executive Officer and three other highest paid executive officers of the Company, the only executive officers whose salary and bonus exceeded $100,000 for 2005. SUMMARY COMPENSATION TABLE --------------------------
Long-Term Compensation Annual Compensation Securities Underlying Name and Principal Position Year Salary (l) Bonus Options # --------------------------- ---- ---------- ----- --------------------- Paul Mobley 2005 $390,000 $ -- -- Chairman of the Board 2004 $360,000 -- -- 2003 $318,000 -- A. Scott Mobley 2005 $247,808 $ 2,895 -- President and Secretary 2004 $241,708 $ -- 20,000 2003 $209,135 $ -- - Troy Branson 2005 $100,000 $88,138 -- Executive Vice President of Franchising 2004 $103,846 $82,075 15,000 2003 $100,000 $83,722 -- Mitchell Grunat 2005 $155,815 $ -- -- Vice President of Franchise Services 2004 $155,769 -- 10,000 2003 $141,692 -- 10,000 ------------------
(1) The Company did not have any bonus, retirement, or other arrangements or plans respecting compensation, except for an Incentive Stock Option Plan for executive officers and other employees. Option Grants In Last Year The Company did not grant any stock options during the year ended December 31, 2005, to any employee, officer or director. Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values --------------------------------------------- The following table sets forth information concerning the number of exercisable and unexercisable stock options held at December 31, 2005 by the executive officers named in the Summary Compensation Table. 32 Number of Securities Values of Unexercised Underlying Unexercised In-The-Money Options at 12/31/05 Options at 12/31/05 (1) Exercisable/Unexercisable Exercisable/Unexercisable ------------------------- ------------------------- Paul W. Mobley 30,000 / 0 $ 9,300 / $ 0 A. Scott Mobley 70,000 / 20,000 9,300 / 3,600 Troy Branson 65,000 / 15,000 6,900 / 2,700 Mitchell Grunat 20,000 / 10,000 5,800 / 1,800 (1) Based on a per share price of $1.01, the last reported transaction price of the Company's common stock on December 31, 2005. Employment Agreements --------------------- Mr. Paul Mobley has an employment agreement with the Company which fixes his base compensation at $ 390,000 per year for 2005, 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 $ 248,241 per year for 2005, 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. The Company does not pay any separate compensation for Directors that are also employees of the Company. During 2005, the Company paid its non-employee Director a fee of $ 72,000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 1, 2006, there were 16,322,136 shares of the Company's common stock outstanding and and 25,000,000 shares are authorized. The following table sets forth the amount and percent of the Company's voting common stock beneficially owned on March 1, 2006 by (i) each director and named executive officer individually, (ii) each beneficial owner of more than five percent of the Company's outstanding common stock and (iii) all executive officers and directors as a group: 13
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 3,471,018 (3) 21.3% A. Scott Mobley (1) One Virginia Avenue, Suite 800 Indianapolis, IN 46204 1,417,326 (4) 9.3 Geovest Capital Partners, L.P. 750 Lexington Avenue, 4th Floor New York, N.Y. 10022 1,667,741 (5) 11.9 James W. Lewis 335 Madison Ave., Suite 1702 New York, N.Y. 10017 1,709,580 (6) 12.2 Douglas H. Coape-Arnold 250,000 (7) 1.8 Troy Branson 65,100 (8) -- Mitchell Grant 20,000 (9) -- Zyville E. Lewis 456 N. Maple Street Greenwich, CT 06830 1,145,396 8.2 All Executive Officers and Directors as a Group (5 Persons) 5,223,444 29.3 ------------------
(1) All shares owned directly with sole investment and voting power, unless otherwise noted. (2) The percentage calculations are based upon 14,052,386 shares of the Company's common stock, eligible to vote, issued and outstanding as of March 1, 2006 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, 2006. (3) The total includes a warrant to purchase 600,000 shares of stock at an exercise price of $.40 per share which expires December 31, 2007, a warrant to purchase 700,000 shares of common stock at an exercise price of $.93 per share which expires December 31, 2007, a warrant to purchase 600,000 shares at an exercise price of $.93 per share which expires January 7, 2010, a warrant to purchase 300,000 shares at an exercise price of $.93 which expires January 24, 2011, 10,000 shares subject to options granted under an employee stock option plan which are currently exercisable at $1.00 per share and 20,000 shares subject to options granted under an employee stock option plan which are currently exercisable at $.55 per share. (4) The total includes 70,000 shares subject to options granted under an employee stock option plan which are currently exercisable at $1.75 per share for 20,000 common shares, $1.00 per share for 10,000 common shares, 34 $1.45 per share for 20,000 common shares and $.55 per share for 20,000 common shares. Also includes a warrant to purchase 400,000 shares of common stock at an exercise price of $.40 per share which expires December 31, 2007 and a warrant to purchase 300,000 shares of common stock at an exercise price of $.93 per share which expires December 31, 2007, a warrant to purchase 300,000 shares of common stock at an exercise price of $.93 per share which expires January 7, 2010, 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) Mr. 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. (6) This total includes 138,580 shares of common stock owned by James Lewis Family Investments LP and 220,000 shares of our common stock owned by James W. Lewis MPPP. (7) This total includes a warrant to purchase 100,000 shares of common stock at an exercise price of $.93 per share which expires January 7, 2010 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 65,000 shares subject to options granted under an employee stock option plan which are currently exercisable at $.55 per share for 15,000 common shares, $1.45 per share for 20,000 common shares, $1.46 per share for 15,000 common shares, $1.38 per share for 5,000 common shares and $1.75 per share for 10,000 common shares. (9) This total includes 20,000 shares subject to options granted under an employee stock option plan which are currently exercisable at $.89 per share for 10,000 common shares and $.55 per share for 10,000 common shares. SummitBridge National Investments LLC, Drawbridge Special Opportunities Fund LP, Drawbridge Special Opportunities Advisors LLC, Fortress Investment Group LLC, Highbridge/Zwirn Special Opportunities Fund, L.P., Highbridge/Zwirn Capital Management LLC, D.B. Zwirn & Co., LLC, and Daniel B. Zwirn (collectively "SummitBridge") filed an Amendment No. 3 to Schedule 13D with the Securities and Exchange Commission on February 15, 2006 in which it reported shared dispositive power over 2,269,750 shares of common stock of the Company. However, SummitBridge currently has no voting rights as to such shares due to the applicability of the Indiana Control Share Acquisition Law. On August 25, 2005, the Company consummated a Settlement Agreement with SummitBridge. Pursuant to the Settlement Agreement, the Company agreed to use commercially reasonable efforts to assist SummitBridge in finding one or more buyers for its stock over a six- to nine-month period. That period has now expired, therefore, SummitBridge has the right to require the Company and its executive officers to use commercially reasonable efforts to cause the Company's shareholders to vote to restore SummitBridge's voting rights on their remaining shares. In addition, since the period has expired, SummitBridge has certain registration rights with respect to the resale of the shares it holds. 35 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following is a summary of transactions to which the Company and certain officers and directors of the Company are a party or have a financial interest. The Board of Directors of the Company has adopted a policy that all transactions between the Company and its officers, directors, principal shareholders and other affiliates must be approved by a majority of the Company's disinterested directors, and be conducted on terms no less favorable to the Company than could be obtained from unaffiliated third parties. Douglas Coape-Arnold, director, was paid $72,000 in consulting fees and $2,800 of interest on Participating Income Notes in 2005. Geovest Capital Partners, LP, whose managing partner is Douglas Coape-Arnold, was paid $77,379 of interest on Participating Income Notes in 2005. On August 25, 2005, the Company consummated a Settlement Agreement with SummitBridge. As of a result of the Settlement Agreement, Noble Roman's acquired all of SummitBridge's debt and equity interests in Noble Roman's, except for 2,400,000 shares of common stock, for a purchase price of $8,300,000. These interests consisted of a senior secured promissory note in the principal amount of $7,700,000, interest accrued on the note of $927,756, 3,214,748 shares of Noble Roman's common stock, $4,929,274 stated amount of Noble Roman's no-yield preferred stock which was convertible into 1,643,092 shares of common stock, and a warrant to purchase 385,000 shares of Noble Roman's common stock with an exercise price of $.01 per share. Additional information regarding the Settlement Agreement is set forth in Item 12 above and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The following table presents fees for professional audit services rendered by Larry E. Nunn & Associates, LLC for the audit of our annual financial statements, and fees billed for other services rendered by Larry E. Nunn & Associates, LLC during the fiscal years shown. Fiscal Year Ended Fiscal Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Audit Fees (1) .... $ 28,304 $ 21,097 --------------------- (1) Audit Fees consist of fees rendered for professional services rendered for the audit of our financial statements included in our Forms 10-K for the years ended December 31, 2005 and 2004, review of the unaudited financial statements included in our quarterly reports during such years, and services that are normally provided by Larry E. Nunn & Associates, LLC in connection with statutory and regulatory filings or engagement. The engagement of Larry E. Nunn and Associates, LLC for conducting the audit of its financial statements and the review of its Form 10-Q's during the years ended December 31, 2005 and 2004, was pre-approved by the Company's Board of Directors. Larry E. Nunn and Associates, LLC 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 independent auditor. 36 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, 2004 and 2005 19 Consolidated Statements of Operations - years ended December 31, 2003, 2004 and 2005 20 Consolidated Statements of Changes in Stockholders' Equity - years ended December 31, 2003, 2004 and 2005 21 Consolidated Statements of Cash Flows - years ended December 31, 2003, 2004 and 2005 22 Notes to Consolidated Financial Statements 23 Report of Independent Registered Accounting Firm - Larry E. Nunn & Associates, LLC 29 Exhibits Exhibit No. 3.1 Amended Articles of Incorporation of the Registrant (1) 3.2 Amended and Restated By-Laws of the Registrant (1) 3.3 Articles of Amendment of the Articles of Incorporation of the Registrant (2) 3.4 Articles of Amendment of the Articles of Incorporation of the Registrant dated April 16, 2001 4.1 Specimen Common Stock Certificates (1) 4.2 Form of Warrant Agreement 10.1 Employment Agreement with Paul W. Mobley dated January 2, 1999 10.2 Employment Agreement with A. Scott Mobley dated January 2, 1999 10.3 1984 Stock Option Plan (3) 10.4 Form of Stock Option Agreement (3) 10.5 Settlement Agreement with SummitBridge dated August 1, 2005 (4) 10.6 Loan Agreement with Wells Fargo Bank, N.A. dated August 25, 2005 (2) 21.1 Subsidiaries of the Registrant (5) 31.1 CEO and CFO Certification under Rule 13a-14(a)/15d-14(a) 32.1 CEO and CFO Certification under Section 1350 -------------------- (1) Incorporated by reference from Registration Statement filed by the Registrant on Form S-18 on October 22, 1982 and ordered effective on December 14, 1982 (SEC No. 2-79963C), and, for the Amended Articles of Incorporation, from the Registrant's Amendment No. 1 to the Post Effective Amendment No. 2 to Registration Statement on Form S-1 on July 1, 1985 (SEC File No.2-84150). (2) Incorporated by reference from Registrant's current report on Form 8-K filed August 29, 2005. (3) Incorporated by reference from the Form S-8 filed by the registrant on November 29, 1994 (SEC File No. 33-86804). (4) Incorporated by reference from Registrant's current report on Form 8-K filed August 5, 2005. (5) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 (SEC File No. 33-66850) ordered effective on October 26, 1993. 37 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 29, 2006 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 29, 2006 /s/ Paul W. Mobley ---------------------------------- Paul W. Mobley Chairman of the Board and Director Date: March 29, 2006 /s/ A. Scott Mobley ---------------------------------- A. Scott Mobley President and Director Date: March 29, 2006 /s/ Douglas H. Coape-Arnold ---------------------------------- Douglas H. Coape-Arnold Director 38