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, 1998
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ____ to____.
Commission file number 0-11104
NOBLE ROMAN'S, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1281154
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ONE VIRGINIA AVENUE, SUITE 800
INDIANAPOLIS, INDIANA 46204
(Address of principal executive offices)
Registrant's telephone number: (317) 634-3377
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
$6,578,968 as of August 3, 1999
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
5,565,390 shares of common stock as of August 3, 1999
Documents Incorporated by Reference: None
<PAGE>
NOBLE ROMAN'S, INC.
FORM 10-K
Year Ended December 31, 1998
Table of Contents
Item #
in Form 10-K Page
PART I
1. Business 3
2. Properties 6
3. Legal Proceedings 7
4. Submission of Matters to a Vote of Security Holders 7
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
6. Selected Financial Data 9
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
8. Financial Statements and Supplementary Data 17
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 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 33
13. Certain Relationships and Related Transactions 34
PART IV
14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 36
2
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PART I
ITEM 1. BUSINESS
GENERAL INFORMATION
- -------------------
Noble Roman's, Inc. (the "Company") sells franchises for non-traditional food
service locations and operates casual dining restaurants that specialize in
serving high quality pizza. The Company has awarded more than 360 franchises in
24 states for its Express concept since 1997 and has 51 full-service
restaurants, four of which are franchises.
Noble Roman's, "The Better Pizza People", offers a Pizza Express franchise to
simplify food service operations for non-traditional locations such as
universities, bowling centers, convenience stores, grocery stores, truck stops,
travel centers and other venues where customer traffic already exists. In
addition, The Company offers franchises to traditional restaurant concepts as a
co-brand.
A Noble Roman's franchise requires a modest investment by the franchisee, has
minimal staffing requirements, enables the franchisee to operate low food cost
and offers a menu of great tasting food products. The menu items are delivered
to the franchisee weekly by third party vendors already prepared. The franchisee
need only assemble then bake the products in a small conveyor oven prior to
serving them fresh to the customer.
The Company's full-service restaurants are located primarily in free-standing
northern Italian style buildings. The Company attempts to differentiate its
full-service restaurants from other pizza restaurants by offering a broad
selection of superior tasting pizza products at a menu price comparable to
"ordinary pizza". The Company seeks to reach a diverse customer base by offering
a casual dining atmosphere in addition to a quick service menu at lunch,
carry-out, drive-thru and delivery service all day.
NOBLE ROMAN'S PIZZA EXPRESS
- ---------------------------
The Company developed and began to offer franchises of its Express concept in
early 1997. The Express concept was designed to capitalize on its full-service
products but with minimal labor requirements in the rapidly growing distribution
channel of non-traditional locations. The Company has awarded more than 330
franchises for non-traditional locations since 1997. The Company plans to
continue aggressively expanding its Express concept and currently has
discussions and negotiations ongoing for many additional franchise locations.
The Express concept is simple and inexpensive to operate, has a low investment
cost for the franchisee (approximately $30,000 each), low cost of sales
(approximately 23%-25% at recommended retail prices), simple product procedures,
low staffing requirements and uses approximately 100 square feet of existing
space. The system is fast and convenient for customers and features fresh-baked,
great tasting individual and large pizzas, breadsticks with dip, buffalo wings,
baked pasta and hot deli sandwiches plus a breakfast menu consisting of biscuit
sandwiches, Pan One omelets, biscuits and gravy, and cinnamon rounds. The
products are all delivered to the franchisee pre-prepared; the franchisee need
only assemble then bake the products in a small conveyor oven prior to serving
them fresh to the customer. Because the Express units are targeted for existing
facilities it is possible to open a unit within two weeks or less from the time
the franchise is sold.
3
<PAGE>
FULL SERVICE RESTAURANTS
- ------------------------
The Company's 47 owned and 4 franchised full-service restaurants are located
primarily in Indiana. The Company's emphasis is on increasing same store sales
in its full-service restaurants by improving customer service and consistency,
and through successful product promotion.
The Company's full-service restaurants specialize in high-quality pizza with the
emphasis on taste, crust and topping variety with menu prices targeted to be
comparable to "ordinary pizza". The menu features a choice of three crust
styles: The Hand-Tossed Round, a round crust hand-tossed to order using
traditional tossing techniques; the Monster(R), an extra-thick pan pizza made
with 50% more topping and 50% more cheese; and the Deep-Dish Sicilian with a
thick but light and airy crust baked with olive oil in an old-fashioned,
rectangular pan to produce crispy, caramelized edges. Of total pizzas sold,
Hand-Tossed Round represents approximately 65%, Deep-Dish Sicilian approximately
15%, Monster pizzas approximately 5% and individual pan pizzas approximately
15%. The Company offers a choice of 31 toppings. Another signature product for
the Company is Breadsticks, hand-rolled and fresh-baked throughout the day.
Breadsticks account for approximately 20% of food sales. In 1998, non-beverage
sales accounted for approximately 88% of total restaurant revenue.
Noble Roman's marketing strategy is niche oriented and attempts to leverage the
Company's reputation for superior product quality. The marketing strategy
stresses taste, quality, choice, value and casual dining all at a price
comparable to "ordinary" pizza. The Company attempts to create value by offering
superior products and service at competitive prices. To communicate this message
to the public, the Company utilizes point-of-purchase material in addition to
electronic and print media.
Recognizing that families are an important element of the Company's target
market, the Company directs part of its marketing efforts toward children. The
Noble Roman's Pizza Monster (R), a big purple and blue hairy creature, makes
appearances in commercials, restaurants, local community functions and parades.
Nearly all restaurants have viewing windows with platforms where customers can
view the entire kitchen activity, including pizza makers who toss the pizza
dough by hand. The Company also markets special "Kid Parties" which allow groups
of youngsters to tour the restaurant and try their hand at tossing pizzas.
RECENT HISTORY
- --------------
During 1995 and 1996, the Company attempted an acquisition of a 187-unit pizza
restaurant chain operating in seven states in the Northeast as a part of a
strategic decision to acquire and consolidate other regional chains. For a
number of reasons the attempted acquisition failed, despite senior management
devoting substantially all of its attention to that attempt for a period of
almost 18 months. As the Company's focus was increasingly on the acquisition
transaction, the Company's primary market was, as a result of several
demographic/consumption trends, targeted for expansion by a large number of
mid-scale dining chains for expansion. The unemployment rates in the Company's
labor markets were approaching record lows and the Company's personnel were
aggressively recruited by others. Senior management, due to the acquisition
transaction, was unable to participate in daily operations during the period.
Because of the Company's dramatic turnover and its inability to stabilize
staffing levels through ordinary recruiting efforts, sales and margins declined.
The Company suffered serious losses and defaulted on its loan agreement with its
primary lender. Due to a lack of staffing and the Company's financial
difficulties,
4
<PAGE>
the Company closed 19 of its restaurants in May 1997 and initiated a turnaround
strategy consisting of three primary elements:
o Negotiated a series of debt restructurings with its primary
lender, The Provident Bank, whereby the Bank loaned the
Company additional funds, converted a portion of its debt to
equity and extended maturity of remaining debt. The Company
also obtained additional funding from various investors
associated with The Geometry Group, New York, in the form of
convertible participating income notes which may, at the
option of the investors, be converted to equity April 15,
2003.
o Restructured the Company's executive staff, including the
appointment of Scott Mobley as President, Wade Shanower as
Vice President of Operations, Troy Branson as Vice President
of Franchising, Art Mancino as Vice President of Development
and Dan Hutchison as Chief Financial Officer.
o Began franchising Noble Roman's Pizza Express for
non-traditional locations such as convenience stores, grocery
stores, truck stops, travel centers, universities, bowling
centers and to other traditional restaurants as a Co-Brand.
The Express concept is designed to capitalize on the rapid growth of
non-traditional locations for quick service restaurants and to be simple to
operate, requiring a modest investment, with minimal staffing requirements while
serving great tasting pizza and related products. The concept was designed to be
convenient and quick for its customers. Based on experience to date, the Company
believes that franchising its Express concept offers opportunities for rapid
growth for the next several years.
COMPETITION
- -----------
The traditional-service restaurant industry is intensely competitive with
respect to price and levels of product promotions, service, location and food
quality. The Company's full-service units compete with local, regional and
national pizza chains, casual dining and fast food restaurants. The Company also
competes with all restaurants in its markets for management and hourly
employees. A significant change in pricing or other business strategies by one
or more of the Company's competitors, including an increase in the number of
restaurants in the Company's territories, could have an adverse impact on the
Company's results of operations. The Company competes in its full service
restaurants primarily on the basis of product quality, service and restaurant
atmosphere. Franchising of the Express, although competitive, is much less so
than is the competition for its full-service restaurants. In its Express
business the Company competes on the basis of product quality, investment cost,
cost of sales, simplicity of the operation and labor requirements.
SEASONALITY OF SALES
- --------------------
Sales at Noble Roman's restaurants are seasonal in nature reflecting changes in
weather, outdoor activities, and school calendars. Due to the location of the
majority of Company operations, sales in winter months, particularly January
through March, are very sensitive to sudden drops in temperature and the
occurrence of precipitation. In general, sales are strongest in the third and
fourth quarters of the calendar year and lower in the first and second quarters.
5
<PAGE>
EMPLOYEES
- ---------
As of August 3, 1999, the Company employed approximately 1,270 persons. Of
these, approximately 48 were engaged in various executive and administrative
functions, and the remaining employees were engaged in restaurant operations,
approximately 150 including 20 Express employees are full-time with the balance
being part-time. 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 several trademarks and service marks. Many of these, including
the NOBLE ROMAN'S (R), the MONSTER (R) and PAN ONE (R), are registered with the
United States Patent and Trademark Office. The Company believes that its
trademarks and service marks have significant value and are important to its
marketing efforts.
GOVERNMENT REGULATION
- ---------------------
The Company is subject to various federal, state and local laws affecting its
business. The Company's restaurants are subject to regulation by various
governmental agencies, including state and local licensing, zoning, land use,
construction and environmental regulations and various health, sanitation,
safety and fire standards. The Company is also subject to the Fair Labor
Standards Act and various state laws governing minimum wages, overtime and
working conditions. Franchising is subject to various Federal and State
franchising laws.
The Company's restaurants are subject to federal and state environmental
regulations, but these have not had a material effect on their operations. More
stringent and varied requirements of local governmental bodies with respect to
zoning, land use or environmental factors could delay or prevent development of
new restaurants in particular locations.
The Company's restaurants have licenses from regulatory authorities allowing
them to serve beer and wine. The Company's licenses to sell alcoholic beverages
must be renewed annually and may be suspended or revoked at any time for cause,
including violation by the Company or its employees of any law or regulation
pertaining to alcoholic beverage control, such as those regulating the minimum
age of patrons or employees, advertising and inventory control.
The Company may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. The Company has never been named as a defendant in a lawsuit
involving "dram-shop" statutes.
ITEM 2. PROPERTIES
The following table shows the locations of the 47 Company-owned full-service
restaurants.
6
<PAGE>
Location Total
-------- -----
Bloomington, Indiana........................................ 4
Columbus, Indiana........................................... 2
Evansville, Indiana......................................... 6
Indianapolis, Indiana (Metropolitan Area)................... 25
Jasper, Indiana............................................. 1
Lafayette, Indiana.......................................... 2
Marion, Indiana............................................. 1
Martinsville, Indiana....................................... 1
Muncie, Indiana............................................. 1
New Castle, Indiana......................................... 1
Noblesville, Indiana........................................ 1
Owensboro, Kentucky......................................... 1
Terre Haute, Indiana........................................ 1
These restaurants are all located on leased property. The restaurant leases
expire on dates ranging from 1999 to 2015, with the majority of the leases
providing for renewal options. All leases provide for specified periodic rental
payments, and some call for additional rental based on sales volumes. Most of
the leases require the Company to maintain insurance on the property and pay the
cost of insurance and taxes. The Company leases two of its restaurant properties
from related parties. The Company believes that both such leases are on terms no
less favorable to the Company than from the unaffiliated persons.
The Company's headquarters are located in 8,000 square feet of leased office
space in Indianapolis, Indiana. The lease for this property expires in December
2002.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation relating to claims arising out of
its normal business operations and relating to restaurant facilities closed in
1997. The Company believes that none of its current proceedings, individually or
in the aggregate, will have a material adverse effect upon the Company beyond
the amount reserved in its financial statements.
Legal proceedings against the Company include REH Acquisition, Ltd. ("REH")
versus Noble Roman's, Inc. and The Provident Bank., filed July 20, 1998 in the
United States District Court for the Southern District of New York. The
complaint alleges that the Company breached agreements entered into with the
Plaintiff to seek to fund and restructure the Company's bank debt. The Company
has denied liability and will defend vigorously. The Company has filed a
counter-claim against REH and Elliott and Robert Herskowitz, individually, for
false and malicious misrepresentations seeking actual and punitive damages
against each of them.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
- -------------------
The Company's common stock is included on Nasdaq "Electronic Bulletin Board" and
trades under the symbol "NROM".
The following table sets forth for the periods indicated, the high and low bid
prices per share of common stock as reported by Nasdaq. The quotations reflect
inter-dealer prices without retail mark-up, mark-down or commissions and may not
represent actual transactions.
1997 1998 1999
---- ---- ----
Quarter Ended: High Low High Low High Low
---- --- ---- --- ---- ---
March 31 $ 3 1/8 1 1/2 7/8 5/8 2 1/16 1 9/16
June 30 1 5/8 1/4 1 31/32 5/8 3 15/32 2
September 30 1 3/8 1 17/32 1
1/8
December 31 1 5/16 13/32 2 13/32 29/32
Holder of Record
- ----------------
As of August 3, 1999, the Company believes there were approximately 379 holders
of record of common stock. This excludes persons whose shares are held of record
by a bank, brokerage house or clearing agency.
Dividends
- ---------
The Company has never declared or paid dividends on its common stock. The
Company intends to retain earnings to fund the development and growth of its
business and does not expect to pay any dividends within the foreseeable future.
The Company's current credit facilities prohibit the Company from paying
dividends or shareholder distributions.
Sale of Unregistered Securities
- -------------------------------
On December 31, 1998, the Company sold 921,066 shares of its Common Stock to The
Provident Bank in exchange for $1,842,132 of indebtedness of the Company to The
Provident Bank pursuant to its Line of Credit. Also on December 31, 1998, the
Company sold 500,000 shares of its Common Stock to Hamilton Medaris Corp., d/b/a
A&L Pizza, a supplier to the Company, in exchange for $1,000,000 of accounts
payable of the Company to Hamilton Medaris Corp. d/b/a A&L Pizza. Both sales
were made in reliance upon the exemption from the registration requirements of
the 1933 Act set forth in Section 4(2) of the 1933 Act.
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (In thousands except number of restaurants)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Restaurant revenue $ 29,825 $ 33,325 $ 33,854 $ 25,369 $ 23,307
Express royalties and fees -- -- -- 524 2,161
Restaurant royalties 233 212 189 133 125
Other 403 358 196 79 189
-------- -------- -------- -------- --------
Total revenue 30,461 33,895 34,239 26,105 25,782
Restaurant operating expenses 25,171 29,149 31,090 24,094 22,781
Express operating expenses -- -- -- 220 839
Depreciation and amortization 1,092 1,334 1,488 1,076 1,059
General and administrative 1,785 1,951 2,834 2,816 3,002
Financing, acquisition and restructuring costs 65 112 1,554 6,529 571
-------- -------- -------- -------- --------
Operating income (loss) 2,348 1,350 (2,727) (8,632) (2,469)
Interest 1,088 1,287 1,794 996 1,387
-------- -------- -------- -------- --------
Income (loss) before income taxes and
cumulative effect of change in accounting
principle and extraordinary item 1,260 64 (4,521) (9,627) (3,856)
Income taxes (benefit) 489 39 (640) (4,148) (1,311)
-------- -------- -------- -------- --------
Income (loss)before cumulative effect of
change in accounting principle and
extraordinary item $ 771 $ 24 $ (3,881) $ (5,479) $ (2,545)
-------- -------- -------- -------- --------
Net income (loss) $ 771 $ (200) $ (3,881) $ (3,917) $ (2,150)
-------- -------- -------- -------- --------
Weighted average number of common shares 3,993 4,131 4,131 4,131 4,131
Income (loss) per share before cumulative
effect
of change in accounting principle and
extraordinary item $ .19 $ .01 $ (.94) $ (1.33) $ (.52)
-------- -------- -------- -------- --------
Net income (loss) per share $ .19 $ (.05) $ (.94) $ (.95) $ (.52)
-------- -------- -------- -------- --------
RESTAURANT DATA:
Average sales per restaurant 635 647 630 560 596
Percentage change in comparable net
sales from prior year 6% 2% -5% -9% -1%
Company-owned restaurants open at 64 70 71 48 47
year-end
Express franchises open at year-end -- -- -- 46 192
BALANCE SHEET DATA (AT YEAR END):
Working capital (deficit) $ (40) $ (827) $(16,251) (3,510) (2,241)
Total assets 18,205 20,004 19,451 18,205 19,143
Long-term obligations 11,193 11,891 12,561 13,611 14,187
Stockholders' equity (deficit) $ 4,155 $ 4,613 $ 791 $ (325) $ 1,076
PRO FORMA BALANCE SHEET DATA (1):
Working capital (deficit) $ (320)
Total assets 20,126
Long-term obligations 16,148
Stockholders' equity $ 1,370
</TABLE>
(1) See Note 2 of Company's financial statements for pro forma balance sheet
reflecting events subsequent to December 31, 1998.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
- ------------
During 1995 and 1996, the Company attempted a major acquisition of a 187-unit
pizza restaurant chain operating in seven states in the Northeast as a part of a
strategic decision to acquire and consolidate other regional chains. For a
number of reasons this attempted acquisition failed, despite senior management
devoting substantially all of its attention to that attempt for a period of
almost 18 months. As the Company's focus was increasingly on the acquisition
transaction, the Company's primary market was, as a result of several
demographic/consumption trends, targeted for expansion by a large number of
mid-scale dining chains for expansion. The unemployment rates in the Company's
labor markets were approaching record lows and the Company's personnel were
aggressively recruited by others. Senior management, due to the acquisition
transaction, were unable to participate in daily operations during the period.
Because of the Company's dramatic management turnover and its inability to
stabilize staffing levels through ordinary recruiting efforts, sales and margins
declined. The Company suffered serious losses and defaulted on its loan
agreement with its primary lender. Due to a lack of staffing and the Company's
financial difficulties, the Company closed 19 of its restaurants in May 1997 and
launched a turnaround strategy consisting of three primary elements:
o Negotiated a series of debt restructuring with its primary
lender, The Provident Bank, whereby the Bank loaned the
Company additional funds, converted a portion of its debt to
equity and extended maturity of remaining debt. The Company
also obtained additional funding from various investors
associated with The Geometry Group, New York, in the form of
convertible participating income notes which may, at the
option of the investors, be converted to equity April 15,
2003.
o Restructured the Company's executive staff including the
appointment of Scott Mobley as President, Wade Shanower as
Vice President of Operations, Troy Branson as Vice President
of Franchising, Art Mancino as Vice President of Development
and Dan Hutchison as Chief Financial Officer.
o Began franchising Noble Roman's Pizza Express for
non-traditional locations such as convenience stores, grocery
stores, truck stops, travel centers, universities, bowling
centers and to other traditional restaurants as a Co-Brand.
The Express concept was designed to capitalize on the rapid growth of
non-traditional locations for quick service restaurants and to be simple to
operate, requiring a modest investment, with minimal staffing requirements while
serving great tasting pizza and related products. The concept was designed to
also be convenient and quick for its customers. Based on experience to date, the
Company believes that franchising its Express concept can offer opportunities
for rapid growth for the next several years.
The Company plans to grow by aggressively expanding its Express franchise
business. The Company's business strategy for expansion of its Express franchise
business includes the following principle elements:
10
<PAGE>
o Continue to add units by franchising to truck stops, travel
centers, convenience stores, grocery stores, universities,
hotels, airports, hospitals, bowling centers and some stand
alone units.
o Sell co-branding agreements to other restaurant chains whereby
the Express will become a second brand in other established
restaurant chain locations.
Based on the Company's business plan, the number of Express units now open, the
backlog of units sold to be opened, the backlog of franchise prospects now in
ongoing discussions and negotiations, the Company's trends and the results thus
far in 1999, management determined that it is more likely than not that the
Company's deferred tax credits will be fully realized. Therefore, no valuation
allowance was established for its deferred tax asset. However, there can be no
assurance that the growth of the Express will continue in the future nor can
there be any assurance that the full-service restaurants can be operated
successfully in the future. If unanticipated events should occur in the future
in either the Express or the full-service operations, the realization of all or
some portion of the Company's deferred tax asset could be jeopardized. The
Company will continue to evaluate the need for a valuation allowance on a
quarterly basis in the future.
The following table sets forth the percentage relationship to total revenue of
the listed items included in the Company's consolidated statement of operations.
Certain indicated items are shown as a percentage of restaurant revenue.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenue:
Restaurant revenue 98.9% 97.2 90.4
Restaurant royalties .5 .5 .5
Express royalties and fees - 2.0 8.4
Administrative fees and other .6 .3 .7
----- ----- -----
100.0% 100.0% 100.0%
Restaurant operating expenses (1):
Cost of revenue 19.0 21.4 20.1
Salaries and wages 32.9 36.5 36.5
Rent 9.0 9.7 9.5
Advertising 7.0 5.2 7.2
Other 24.1 22.2 24.4
Express operating expense - .8 3.3
Depreciation and amortization 4.4 4.1 4.1
General and administrative 8.3 10.8 11.6
Financing and acquisition costs 2.6 - -
Loss from withdrawn acquisition and offering
and restaurants closed in 1987 2.0 - -
Restructuring costs - 25.0 2.2
----- ----- -----
Operating income (loss) (8.0) (33.1) (9.6)
Interest 5.2 3.8 5.4
----- ----- -----
Loss before income taxes (13.2)% (36.9)% (15.0)%
===== ===== =====
</TABLE>
(1) Shown as a percentage of restaurant revenue.
1998 COMPARED WITH 1997
- -----------------------
Total revenue decreased $323 thousand, or 1.2%, for 1998 compared to 1997. The
primary reason for this decrease was the closing of 19 restaurants and the sale
of four others in the second quarter of 1997 partially offset by the $1.6
million increase in revenue from the Express business. In addition, even though
same store sales increased in the third and fourth quarters of 1988 by 2.3% and
2.6%, respectively,
11
<PAGE>
same store sales decreased for the year 1.6% in the full-service restaurants.
The same store sales increase during the third and fourth quarters were the
result of the Company's ability to stabilize management and aggressively
advertise following a period of inconsistent service and product during 1996 and
1997.
Express royalties and fees were approximately $2.2 million for 1998 compared to
$524 thousand during 1997. This increase was the result of rapid growth in the
number of franchisees. Franchising of Noble Roman's Pizza Express began in 1997.
At December 31, 1998, approximately 192 franchised Express units were open
compared to 46 at the end of 1997. Currently there are approximately 266
franchised Express units open with approximately 100 more units sold to be
opened in the future.
Cost of revenue as a percentage of restaurant revenue decreased from 21.4% in
1997 to 20.1% in 1998. This decrease was the result of improved cost controls
resulting from the Company's ability to stabilize its store management partially
offset by unusually high cheese prices during the third and fourth quarters of
1998. In February 1999 cheese prices returned to a more normal level and, if
that condition continues, could result in an additional 3% of restaurant sales
reduction in cost of revenue.
Salaries and wages remained the same percentage of revenue in 1997 and 1998 at
36.5%. Less management turnover created efficiencies that offset wage rate
increases.
Other restaurant expenses were 22.2% for 1997 compared to 24.4% for 1998. This
increase in expense as a percentage of restaurant revenue was primarily the
result of higher discounts resulting from more aggressive advertising and the
additional advertising cost.
Express operating expenses increased from $220 thousand in 1997 to $839 thousand
in 1998 reflecting the overall growth in the number of Express units from
approximately 46 as of December 1997 to approximately 192 as of December 31,
1998. The Company has increased expenses more rapidly than were required for
current operations because the Company has been aggressively increasing its
Express staff and incurring significant trade show expenses in order to support
aggressive growth of its Express business in the future.
General and administrative expenses as a percentage of total revenue increased
from 10.8% in 1997 to 11.6% in 1998. This increase was primarily attributable to
lower restaurant sales as the result of fewer restaurants and planning for
growth of the Express business partially offset by the effective adherence to
the restructuring plan and the increase in revenue from the growth of the
Express business.
Restructuring costs of $571 thousand in 1998 represented additional accruals for
possible future costs of restaurants closed in 1997, principally consisting of
amounts necessary for settlements with landlords for lease terminations.
The Company reduced its operating loss from $8.6 million in 1997 to $2.5 million
during 1998. This improvement resulted from the Express franchising business
achieving an operating profit of approximately $1.322 million in 1998 and the
benefits realized by the Company in 1998 from its restructuring in 1997.
Interest expense increased from $996 thousand in 1997 to $1.387 million in 1998.
The primary reason for the increase was the additional debt outstanding as a
result of the debt restructurings with the Company's primary lender, however,
$599,572 of this interest was forgiven. Extraordinary gain of $1,562,513 in 1997
and $395,696 in 1998 were the result of the various debt restructures net of tax
expense of $804,931 in 1997 and $203,876 in 1998.
12
<PAGE>
The Company reduced its net loss from $3,917 thousand in 1997 to $2,150 thousand
in 1998. This improvement was the result of the Express franchising business
generating an operating profit of approximately $1.322 million in 1998 and the
benefits realized by the Company in 1998 from its restructuring in 1997.
1997 COMPARED WITH 1996
- -----------------------
Total revenue decreased $8.1 million, or 23.8%, for 1997 compared to 1996. The
principal reason for the decrease was the closing of 19 restaurants and the sale
of four others in the second quarter of 1997. In addition, the decreases were
partially the result of same store sales declines of 9.3% for 1997 compared to
1996. The same store sales declines were the result of inconsistent service and
product because of management turnover in the Company's restaurants during 1996
and 1997. As a result of the failed acquisition attempt in 1996 to acquire a
187-unit pizza chain in the Northeast, the Company experienced substantial
restaurant-level management turnover. The Company has now completed a major
hiring and training program and believes it has corrected its service and
product problem to a large degree and is in the process of restoring its
customer base. Recent store sales comparisons are positive compared to the same
periods the previous year.
Express royalties and fees were $524 thousand in 1997 compared to none in 1996.
Franchising of Noble Roman's Pizza Express began in early 1997. At December 31,
1997, 46 franchised Express units were open.
Cost of revenue as a percentage of restaurant revenue increased from 19.0% in
1996 to 21.4% in 1997. This increase was primarily the result of a change in
method of recording many of the specials at net sales price rather than gross
and partially the result of inefficiencies primarily as a result of personnel
turnover. In the Company's menu all items are individually priced. Some time in
the past the Company began offering in-restaurant specials for a combination of
items (such as individual sized pizza, order of breadsticks and a medium drink)
for a price which was a discount to the total price of the individual items.
Prior to the change, the sales were recorded at the individual item price and a
charge to discount expense for the discounted amount. Since the specials became
a standard part of the Company's offerings the Company began recording the sale
at the combination price with no charge to discount expense, during much of
1997. This change had no effect on restaurant operating margins or net income.
Salaries and wages increased as a percentage of restaurant revenue from 32.9% in
1996 to 36.5% in 1997. These increases were the result of same store sales
declines, inefficiencies in scheduling as a result of inexperienced store level
management, and a more significantly competitive labor market resulting in
higher average wage rates.
Other restaurant expenses were 22.2% in 1997 compared to 24.1% in 1996. This
improvement was primarily the result of the changes in recording discounts as
discussed above relating to cost of revenue.
Express operating expenses were $220 thousand in 1997 compared to none in 1996.
This expense represents all salaries, wages, advertising and other costs
directly associated with franchising of the Express concept.
General and administrative expenses as a percentage of total revenue increased
from 8.3% in 1996 to 10.8% in 1997. This increase was primarily attributable to
a decline in total revenue. As a result of the restructuring in May 1997, the
Company reduced the level of general and administrative expenses.
13
<PAGE>
Restructuring costs were $6.5 million in 1997. This cost represents the
undepreciated cost of equipment and leasehold improvements for the restaurants
closed and sold at a loss as a part of the restructure, losses on the closed
restaurants, an accrual for estimated future expenses on closed properties
including future rent, equipment moving expense, legal costs and a write down of
various assets including accounts and notes receivable, prepaid assets and other
assets. The Company has negotiated with its landlords to terminate most of the
leases.
Operating loss increased from a loss of $2.7 million in 1996 to a loss of $8.6
million in 1997. The primary reason for greater loss in 1997 was the
restructuring cost of $6.5 million primarily recorded in the second quarter and
discussed above.
Interest and other expense decreased from $1.8 million in 1996 to $996 thousand
in 1997. The primary reason was the conversion of both principal and interest to
equity in connection with restructuring with the Company's primary lender. See
"Liquidity and Capital Resources" and "Introduction".
Income tax benefit increased from $640 thousand in 1996 to $4.1 million in 1997.
The increased benefit resulted from the increased loss before income taxes in
1997 versus 1996, and the elimination of the valuation allowance for the
deferred tax asset. Management determined that it is more likely than not that
the Company's deferred tax asset will be fully realized; therefore, no valuation
allowance is considered necessary. See "Introduction".
Extraordinary gain as a result of the debt restructuring was $1.6 million in
1997, net of tax expense of $805 thousand. The extraordinary gain resulted from
the financial restructuring discussed under "Liquidity and Capital Resources"
and "Introduction".
The net loss was $3.9 million in both 1996 and 1997.
IMPACT OF INFLATION
- -------------------
The primary inflation factors affecting the Company's operations are food and
labor costs. 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, however, the competition for labor has resulted
in higher salaries and wages as a percent of its revenues.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During 1995 and 1996, the Company attempted a major acquisition of a 187-unit
pizza restaurant chain operating in seven states in the Northeast as a part of a
strategic decision to acquire and consolidate other regional chains. For a
number of reasons this attempted acquisition failed, despite senior management
devoting substantially all of its attention to that attempt for a period of
almost 18 months. As the Company's focus was increasingly on the acquisition
transaction, the Company's primary market was, as a result of several
demographic/consumption trends, targeted for expansion by a large number of
mid-scale dining chains for expansion. The unemployment rates in the Company's
labor markets were approaching record lows and the Company's personnel were
aggressively recruited by others. Senior management, due to the acquisition
transaction, were unable to participate in daily operations during the period.
Because of the Company's dramatic turnover and its inability to stabilize
staffing levels through ordinary recruiting efforts, sales and margins declined.
The Company suffered serious losses and defaulted on its loan agreement with its
primary lender. Due to a lack of staffing and the Company's financial
difficulties,
14
<PAGE>
the Company closed 19 of its restaurants in May 1997 and launched a turnaround
strategy consisting of three primary elements:
o Negotiated a series of debt restructurings with its primary
lender, The Provident Bank, whereby the Bank loaned the
Company additional funds, converted a portion of its debt to
equity and extended maturity of remaining debt. The Company
also obtained additional funding from various investors
associated with the Geometry Group, New York, in the form of
convertible participating income notes which may, at the
option of the investors, be converted to equity April 15,
2003.
o Restructured the Company's executive staff including the
appointment of Scott Mobley as President, Wade Shanower as
Vice President of Operations, Troy Branson as Vice President
of Franchising, Art Mancino as Vice President of Development
and Dan Hutchison as Chief Financial Officer.
o Began franchising Noble Roman's Pizza Express for
non-traditional locations such as convenience stores, grocery
stores, truck stops, travel centers, universities, bowling
centers and to other traditional restaurants as a co-brand.
On April 30, 1999, the Company obtained $2,235,600 in additional funding from
various investors associated with The Geometry Group based in New York City, who
purchaed participating income notes of the Company (the "Participating Notes")
and warrants to purchase at any time prior to December 31, 2001 an aggregate of
275,000 shares of the Company's common stock at a price of $.01 per share. The
Participating Notes mature on April 15, 2003 and are payable at that time, at
the option of each investor, in cash, in shares of the Company's common stock
based on a conversion price of $1.375 per share or in a combination thereof.
Interest on the Participating Notes accrues at a rate per annum equal to each
investor's pro rata share of the Company's revenues associated with the
Company's Pizza Express. Such interest is payable in cash monthly, provided,
however, that to the extent that the interest otherwise payable to an investor
would exceed such investor's pro rata share of the sum of $33,534, all interest
in excess of such amount shall be paid in the form of a PIK Note of the Company.
Each PIK Note matures on April 15, 2003 and, similar to the Participating Notes,
is payable at that time, at the option of each investor, in cash, in shares of
the Company's common stock based on a conversion price of $1.375 per share or in
a combination thereof.
As a result of the Company's debt restructuring, the exchange of debt for
equity, and the $2.2 million investment on April 30, 1999 by various funds
associated with The Geometry Group, New York in the form of convertible
participating income notes, the Company believes it will have sufficient cash
flow to meet its obligations and to carry out its current business plan.
Currently, the Company anticipates that its capital expenditures for 1999 will
be approximately $500 thousand primarily for improvements to its existing
full-service restaurants.
The statements contained in Management's Discussion and Analysis concerning the
Company's future revenues, profitability, financial resources, market demand and
product development are forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995) relating to the Company
that are based on the beliefs of the management of the Company, as well as
assumptions and estimates made by and information currently available to the
Company's management. The Company's actual results in the future may differ
materially from those projected in the forward-looking statements due to risks
and uncertainties that exist in the Company's operations and business
environment including,
15
<PAGE>
but not limited to: competitive factors and pricing pressures, shifts in market
demand, general economic conditions and other factors, including (but not
limited to) changes in demand for the Company's products or franchises, the
impact of competitors' actions, and changes in prices or supplies of food
ingredients and labor. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions or estimates prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.
The Company is currently assessing its preparedness for year 2000 as it relates
to its information systems. The Company has begun the process of working with
outside advisors to update or replace various systems so all information system
software will be year 2000 compliant by the third quarter 1999. Although there
can be no assurance, management anticipates that issues related to year 2000
will have no material effect on the business, the results of operations or on
the Company's financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
NOBLE ROMAN'S, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31,
----------------------
ASSETS 1997 1998
------ ---- ----
<S> <C> <C>
Current assets:
Cash $ 68,136 $ 28,176
Accounts receivable 380,816 579,841
Inventories 802,097 844,783
Prepaid expenses 158,260 185,471
------------ ------------
Total current assets 1,409,309 1,638,271
------------ ------------
Property and equipment:
Equipment 7,681,626 8,318,737
Leasehold improvements 2,169,702 2,214,931
Capitalized leases 353,805 168,750
------------ ------------
10,205,133 10,702,418
Less accumulated depreciation and amortization 3,379,356 4,044,780
------------ ------------
Net property and equipment 6,825,777 6,657,638
Cost in excess of assets acquired, net 6,204,698 5,944,718
Deferred tax asset 3,335,407 4,442,726
Other assets 429,805 459,202
------------ ------------
$ 18,204,996 $ 19,142,555
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,978,719 $ 1,911,089
Current portion of long-term debt 21,743 18,279
Note payable to officer -- 65,840
Deferred franchise fees 63,800 143,500
Other current liabilities 1,855,118 1,740,653
------------ ------------
Total current liabilities 4,919,380 3,879,361
------------ ------------
Long-term obligations:
Senior note payable (net of warrant valuation of $653,241
in 1998) 2,580,000 13,919,125
Subordinated notes payable 11,000,000 --
Note payable to officer -- 250,000
Other long-term debt 22,863 18,339
Capital leases 8,201 --
------------ ------------
Total long-term obligations 13,611,064 14,187,464
------------ ------------
Stockholders' equity:
Common stock (9,000,000 shares, issued 4,131,324 in 1997 and
5,552,390 shares in 1998) 8,318,431 11,869,174
Accumulated deficit (8,643,879) (10,793,444)
------------ ------------
Total stockholders' equity (deficit) (325,448) 1,075,370
------------ ------------
$ 18,204,996 $ 19,142,555
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
NOBLE ROMAN'S, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Restaurant revenue $ 33,854,485 $25,368,644 $23,306,780
Express royalties and fees -- 524,119 2,161,027
Restaurant royalties 188,843 132,741 125,093
Administrative fees and other 195,862 79,244 188,786
------------ ------------ ------------
Total revenue 34,239,190 26,104,748 25,781,686
Restaurant operating expenses:
Cost of revenue 6,421,293 5,428,908 4,685,955
Salaries and wages 11,121,349 9,251,298 8,514,806
Rent 3,039,690 2,455,115 2,223,367
Advertising 2,361,733 1,320,491 1,667,140
Other 8,145,681 5,639,373 5,689,619
Express operating expenses -- 219,955 838,655
Depreciation and amortization 1,488,110 1,076,325 1,059,088
General and administrative 2,833,910 2,816,266 3,001,957
Cost of attempted acquisition and equity offering 880,862 -- --
Loss associated with restaurants closed in 1987 673,157 -- --
Restructuring costs -- 6,528,726 570,544
------------ ------------ ------------
Operating loss (2,726,595) (8,631,709) (2,469,445)
Interest and other expense 1,794,632 995,590 1,387,011
------------ ------------ ------------
Loss before income taxes and
extraordinary item (4,521,227) (9,627,299) (3,856,456)
Income tax benefit (639,790) (4,148,053) (1,311,194)
------------ ------------ ------------
Loss before extraordinary item (3,881,437) (5,479,246) (2,545,262)
Extraordinary item net of tax expense of $804,931 in 1997
and $203,876 in 1998 -- 1,562,513 395,696
------------ ------------ ------------
Net loss $ (3,881,437) $ (3,916,733) $ (2,149,565)
------------ ------------ ------------
Basic and diluted loss per share:
Before extraordinary item $ (.94) $ (1.33) $ (.62)
Extraordinary item -- .38 .10
------------ ------------ ------------
Net loss $ (.94) $ (.95) $ (.52)
============ ============ ============
Weighted average number of common shares outstanding 4,131,324 4,131,324 4,131,324
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
NOBLE ROMAN'S, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Common Stock Accumulated
--------------------------- -----------
Shares Amount Deficit Total
------ ------ ------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1995 4,131,324 5,458,431 (845,709) 4,612,722
Issuance of warrants to purchase stock 60,000 60,000
1996 net loss (3,881,437) (3,881,437)
Balance at December 31, 1996 4,131,324 $ 5,518,431 $ (4,727,146) $ 791,285
--------------- --------------- -------------- -------------
Issuance of warrants to purchase stock - 2,800,000 - 2,800,000
1997 net loss - - (3,916,733) (3,916,733)
--------------- --------------- -------------- -------------
Balance at December 31, 1997 4,131,324 $ 8,318,431 $ (8,643,879) $ (325,448)
--------------- --------------- -------------- -------------
Issuance of warrants to purchase stock - 708,600 - 708,600
Issuance of common stock in exchange
for certain liabilities 1,421,066 2,842,144 - 2,842,144
1998 net loss - - (2,149,565) (2,149,565)
--------------- --------------- -------------- -------------
Balance at December 31, 1998 5,552,390 $11,869,175 $ (10,793,444) $ 1,075,730
--------------- --------------- -------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOBLE ROMAN'S, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
OPERATING ACTIVITIES 1996 1997 1998
---- ---- ----
<C> <C> <C> <C>
Net loss $(3,881,437) $(3,916,733) $(2,149,565)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization 1,621,005 1,081,217 1,113,447
Restructuring costs -- 5,404,504 --
Deferred federal income taxes (639,790) (4,140,338) (1,107,319)
Extraordinary item -- (1,562,488) --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 2,698 (189,715) (199,025)
Inventories 32,890 48,794 (42,686)
Prepaid expenses 149,875 (731,890) (27,211)
Other assets 294,318 (85,537) (29,397)
Increase (decrease) in:
Accounts payable 1,525,555 (583,360) (67,630)
Other current liabilities 68,270 290,000 182,629
Deferred franchise fees -- 63,800 79,700
----------- ----------- -----------
NET CASH USED BY OPERATING
ACTIVITIES (826,616) (4,320,746) (2,247,057)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (1,272,823) (765,174) (678,705)
----------- ----------- -----------
NET CASH USED BY INVESTING (1,272,823) (765,174) (678,705)
----------- ----------- -----------
ACTIVITIES
FINANCING ACTIVITIES
Principal payments on long-term obligations (278,842) (287,694) (22,404)
Proceeds from notes payable to officer -- -- 315,840
Proceeds from long-term debt, net of debt issue costs 2,223,321 2,787,248 2,592,366
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,944,479 5,079,554 2,885,802
----------- ----------- -----------
DECREASE IN CASH (154,960) (6,366) (39,960)
Cash at beginning of year 229,462 74,502 68,136
----------- ----------- -----------
CASH AT END OF YEAR $ 74,502 $ 68,136 $ 28,176
=========== =========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
The restructuring of the Company's debt allowed it to not pay any interest for
10 months in 1998 on $11,000,000 of its notes to The Provident Bank. The
computed amount for interest was $599,572 which will not be paid as the result
of a subsequent restructuring.
Also, in 1998, the Company converted accounts payable owed to a primary vendor
in the amount of $1,000,012 to common stock. The Company converted $1,600,000 of
previous notes payable plus $242,132 of accrued interest to common stock.
See accompanying notes to consolidated financial statements.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOBLE ROMAN'S, INC. AND SUBSIDIARIES
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Organization: As of December 31, 1998, the Company operated and/or
franchised approximately 243 locations. Of such locations, the Company owned 47
full-service restaurants and had four franchised full-service restaurants and
approximately 192 Express units.
Principles of Consolidation: The consolidated financial statements include the
accounts of Noble Roman's, Inc. and its subsidiaries, Pizzaco, Inc., GNR, Inc.,
LPS, Inc., N.R. East, Inc. and Oak Grove Corporation ("Company"). Intercompany
balances and transactions have been eliminated in consolidation.
Acquisitions: All acquisitions have been accounted for using the purchase
method of accounting. The accompanying financial statements include the
operating results of all acquisitions subsequent to the purchase dates.
Inventories: Inventories consist of food, beverage, restaurant supplies and
marketing materials and are stated at the lower of cost (first-in, first-out) or
market.
Property and Equipment: Equipment and leasehold improvements are stated at cost
including property under capital leases. Depreciation and amortization are
computed on the straight-line method over the estimated useful lives. Leasehold
improvements are amortized over the shorter of estimated useful life or the term
of the lease.
Advertising Costs: The Company records advertising costs consistent with
Statement of Position 93-7 "Reporting on Advertising Costs." This statement
requires the Company to expense advertising production costs the first time the
production material is used.
Fair Value of Financial Instruments: The carrying amount of long-term debt net
of the estimated value of the warrant approximates its fair value because the
interest rates are currently at market. Because of the very limited trading in
the Company's common stock, the Company does not believe that traditional
methods of valuing the warrant apply; therefore, the value of the warrant
reflects the Company's estimate of its value. The carrying amount of all other
financial instruments approximate fair value due to the short-term maturity of
these items.
Use of Estimates: The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates. The Company evaluates its property and equipment
and related costs in excess of assets acquired periodically to assess whether
any impairment indications are present, including recurring operating losses and
significant adverse changes in legal factors or business climate that affect the
recovery of recorded value. If any impairment of an individual asset is evident,
a loss would be provided to reduce the carrying value to its estimated fair
value.
Intangible Assets: Costs in excess of assets acquired are amortized on the
straight-line method over 30 years. Debt issue costs are amortized to interest
expense ratably over the term of the applicable debt. Costs associated with the
opening of new restaurants are amortized over a one-year period.
21
<PAGE>
Royalties, Administrative and Franchise Fees: Royalties are recognized as income
monthly and are based on a percentage of monthly sales of franchised
restaurants. Administrative fees are recognized as income monthly as earned.
Initial franchise fees are recognized as income when the franchised restaurant
is opened.
Income Taxes: The Company provides for current and deferred income tax
liabilities and assets utilizing an asset and liability approach along with a
valuation allowance as appropriate. The Company concluded that no valuation
allowance was necessary at December 31, 1998 because it is more likely than not
that the Company will earn sufficient income before the expiration of its net
operating loss carry forwards to fully realize the value of its deferred tax
asset. Management made this determination after reviewing the Company's business
plans, all known facts to date, recent trends, current performance and analysis
of the backlog of franchises sold but not yet open.
Basic And Diluted Net Income Per Share: Net loss per share is based on the
weighted average number of common shares outstanding during the respective year.
When dilutive, stock options and warrants are included as share equivalents
using the treasury stock method.
SEGMENT REPORTING
In 1998, the Company adopted FAS 131, Disclosures about Segments of an
Enterprise and Related Information. FAS 131 supersedes FAS 14., Financial
Reporting for Segments of a Business Enterprise, replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. FAS 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of FAS 131 did not
affect results of operations or financial position but did affect the disclosure
of segment information (see Note 12).
NOTE 2: SUBSEQUENT EVENT
On May 1, 1999, the Company obtained a $2.2 million investment by various
investors associated with The Geometry Group, New York, for funding continued
expansion of its Express business and for general corporate purposes. This
investment was in the form of convertible participating income notes due April
15, 2003. At maturity the notes may be converted to stock at the holder's
option.
The following is an unaudited pro forma balance sheet to reflect the above
transaction as if it had occurred on December 31, 1998:
Noble Roman's, Inc. and Subsidiaries
Pro Forma Balance Sheet (unaudited)
December 31, 1998
<TABLE>
<CAPTION>
Pro Forma
Actual Debit Credit Balance Sheet
12/31/98 12/31/98
-------- ----- ------ --------------
<S> <C> <C> <C> <C>
Current assets $ 1,638,271 650,000 $ 2,288,271
Net property and equipment 6,657,638 6,657,638
Cost in excess of assets acquired, net 5,944,718 5,944,718
Deferred tax asset 4,442,726 4,442,726
Other assets 459,202 333,645 792,847
----------- ------------
Total assets $19,142,555 $20,126,200
=========== ============
Current liabilities $ 3,879,361 1,271,455 $ 2,607,906
Total long-term obligations 14,187,464 275,000 2,235,600 16,148,064
275,000
Total stockholders' equity 1,075,730 19,500 1,370,230
----------- ------ -----------
Total liabilities and stockholders' equity $19,142,555 $20,126,200
=========== ===========
</TABLE>
22
<PAGE>
NOTE 3: RESTRUCTURING EVENTS
During 1995 and 1996, the Company attempted a major acquisition of a 187-unit
pizza restaurant chain operating in seven states in the Northeast as a part of a
strategic decision to acquire and consolidate other regional chains. For a
number of reasons this attempted acquisition failed, despite senior management
devoting substantially all of its attention to that attempt for a period of
almost 18 months. As the Company's focus was increasingly on the acquisition
transaction, the Company's primary market was, as a result of several
demographic/consumption trends, targeted for expansion by a large number of
mid-scale dining chains for expansion. The unemployment rates in the Company's
labor markets were approaching record lows and the Company's personnel were
aggressively recruited by others. Senior management, due to the acquisition
transaction, were unable to participate in daily operations during the period.
Because of the Company's dramatic turnover and its inability to stabilize
staffing levels through ordinary recruiting efforts, sales and margins declined.
The Company suffered serious losses and defaulted on its loan agreement with its
primary lender. Due to a lack of staffing and the Company's financial
difficulties, the Company closed 19 of its restaurants in May 1997 and initiated
a turnaround strategy consisting of three primary elements:
o Negotiated a series of debt restructurings with its primary
lender, The Provident Bank, whereby the Bank loaned the
Company additional money, converted a portion of its debt to
equity and extended maturity of remaining debt. The Company
also obtained additional funding from various investors
associated with the Geometry Group, New York, in the form of
convertible participating income notes
which may, at the option of the investors, be converted to
equity April 15, 2003.
o Restructured the Company's executive staff including the
appointment of Scott Mobley as President, Wade Shanower as
Vice President of Operations, Troy Branson as Vice President
of Franchising, Art Mancino as Vice President of Development
and Dan Hutchison as Chief Financial Officer.
o Began franchising Noble Roman's Pizza Express for
non-traditional locations such as convenience stores, grocery
stores, truck stops, travel centers, universities, bowling
centers and to other traditional restaurants as a co-brand.
Restructuring costs in 1997 were approximately $6.5 million primarily from
closing the 19 restaurants and $571 thousand in 1998 to accrue for ongoing
expenses until the restructure events are complete.
The Express concept was designed to take advantage of the rapid growth of
non-traditional locations for quick service restaurants and to be simple to
operate, requiring a modest investment, with minimal staffing requirements,
while serving great tasting pizza and related products. The concept was designed
to also be convenient and quick for its customers. Based on experience to date,
the Company believes that franchising its Express concept offers opportunities
for rapid growth for the next several years.
The Company plans to grow by aggressively expanding its Express franchise
business. The Company's business strategy for expansion of its Express franchise
business includes the following principal elements:
o Continue to add units by franchising to truck stops, travel
centers, convenience stores, grocery stores, universities,
hotels, airports, hospitals, bowling centers and some stand
alone units.
23
<PAGE>
o Sell co-branding agreements to other restaurant chains whereby
the Express would become a second brand in other established
restaurant chains.
NOTE 4: NOTES PAYABLE
On November 19, 1997, the Company entered into an amended and restated credit
agreement with The Provident Bank, its principal lender. The amended and
restated agreement provided for the reduction of previously outstanding debt to
$11,000,000, cancellation of previously accrued interest, no interest to be paid
or accrued on such debt until November 1, 1998, interest on such debt of 8% per
annum payable monthly in arrears after November 1, 1998, maturity of the subject
note extended to December 2001, principal payments on such debt beginning
December 1, 1998 in an amount equal to 50% of excess cash flow as defined in the
agreement, and the cancellation of a previously issued warrant to purchase
465,000 shares of the Company's common stock. In addition, the agreement
provided for a new loan in the amount of $2,580,000 due in December 2000 with
interest payable monthly in arrears at a rate of prime plus 2.5% per annum.
These arrangements were made in consideration for a new warrant to purchase
2,800,000 shares of the Company's common stock with an exercise price of $.01
per share.
On August 13, 1998, the Company obtained additional financing of $2,000,000.
This financing is in the form of a loan due in December 2001 and bears interest
at 2 1/2% over the prime rate payable monthly. Simultaneous with making the
loan, the Bank received a warrant to purchase an additional 750,000 shares of
the Company's stock at an exercise price of $.01 per share.
On December 31, 1998, The Provident Bank converted $1,600,000 of previous notes
payable plus all accrued interest through December 31, 1998 to 921,066 shares of
common stock in the Company. At the same time, The Provident Bank replaced the
remaining notes with one note in the amount of $14,572,366 bearing interest of
8.75% per annum. The note was to mature November 30, 2001. Interest on said note
was to be paid monthly commencing February 1, 1999. Principal payments on the
note were to be quarterly in arrears in an amount equal to 50% of excess cash
flow for the previous quarter as defined in the Amended Credit Agreement.
In a subsequent transaction The Provident Bank canceled their existing note in
the amount of $14,572,366 and replaced the canceled note with Tranche Y Term
Loan in the amount of $8,000,000 and Tranche Z Term Loan in the amount of
$6,572,366. Tranche Y Term Loan bears interest of 8.75% per annum payable
monthly in arrears. Tranche Y Term Loan matures on April 15, 2003. Principal
payments on the Tranche Y Term Loan are payable quarterly in arrears in an
amount equal to 50% of excess cash flow from the previous quarter as defined in
the Amended Credit Agreement. Tranche Z Term Loan bears interest of 8.75% per
annum to be paid in PIK notes quarterly in arrears. Tranche Z Term Loan matures
on April 15, 2003. There are to be no payments on Tranche Z Term Loan until such
time as Tranche Y Term Loan is paid in full after which principal payments will
be payable in amounts equal to 50% of the excess cash flow from the previous
quarter as defined in the Amended Credit Agreement.
Cash payments for interest on all of the Company's debt totaled $1,661,737,
$1,036,403 and $1,106,346 in 1996, 1997 and 1998, respectively.
24
<PAGE>
NOTE 5: LEASED ASSETS AND LEASE COMMITMENTS
The Company leases restaurant facilities under noncancelable lease agreements
which generally have initial terms ranging from five to 20 years with extended
renewal terms. The leases generally require the Company to pay all real estate
taxes, insurance and maintenance costs. The leases provide for a specified
annual rental, and some leases call for additional rental based on sales volume
over specified levels at that particular location. At December 31, 1998,
obligations under noncancelable operating and capitalized leases for 1999, 2000,
2001, 2002, 2003 and after 2003 were $2.2 million, $2.0 million, $1.8 million,
$1.8 million, $1.5 million and $9.8 million, respectively.
Rent expense for operating leases was $3,039,690, $2,455,115 and $2,223,367 in
1996, 1997 and 1998, respectively.
The Company currently leases two properties from related parties with rental
payments in 1996, 1997 and 1998 of $112,981, $113,567 and $113,567,
respectively.
NOTE 6: INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
1996 1997 1998
---- ---- ----
Current benefit $ -- $ -- $ --
Deferred benefit (639,790) (4,148,053) (1,311,194)
----------- ----------- -----------
Income tax benefit $ (639,790) $(4,148,053) $(1,311,194)
----------- ----------- -----------
Income tax benefit differs from the amount computed by applying the federal
income tax rate of 34% to income before taxes as a result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax benefit $(1,532,238) $(3,290,965) $(1,328,874)
Amortization of costs in excess of assets acquired 17,680 17680.00 17,680
Valuation allowance 874,768 (874,768) -
------------ ----------- ------------
Income tax benefit $ (639,790) $(4,148,053) $(1,311,194)
============ =========== ============
</TABLE>
The deferred tax asset at December 31 consists of the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards $ 193,680 $ 193,680
Net operating loss carryforwards 4,094,623 5,187,442
Franchise value for tax purposes of companies acquired 20,300 --
---------- ----------
Total gross deferred tax assets 4,308,603 $5,381,120
---------- ----------
Deferred tax liabilities:
Property and equipment 876,521 903,042
Cost in excess of asset acquired 96,675 35,355
Total gross deferred tax liabilities 973,196 938,397
---------- ----------
Net deferred tax asset 3,335,407 4,442,725
========== ==========
</TABLE>
25
<PAGE>
NOTE 7: COMMON STOCK
On December 31, 1998, the Company entered into two transactions resulting in the
exchange of 1,421,066 shares of common stock for certain liabilities totaling
$2,842,144. The Company issued 500,000 shares of common stock in exchange for
$1.0 million of trade payables due to a certain vendor of the Company and issued
921,066 shares of common stock in exchange for $1.8 million due to The Provident
Bank, the Company's principal lender.
In conjunction with obtaining additional financing from The Provident Bank on
August 13, 1998, the Company issued a warrant to purchase 750,000 shares of
common stock at any time through November 30, 2001 at $.01 per share. This
warrant was valued at $708,600 which is reflected as a discount to the related
note payable. The discount is being amortized over the five year term of the
note.
In conjunction with certain financial advisory and investment banking services
for possible acquisitions, the Company issued warrants to purchase 120,000
shares of common stock at any time through April 29, 2000 at $6.50 per share. No
value has been recorded in the Company financial statements related to these
warrants as the Company believes the effect would not be material.
The Company has an incentive stock option plan for key employees and officers.
The options are generally exercisable three years after the date of grant and
expire ten years after the date of grant. The option prices are the fair market
value of the stock at the date of grant. In 1998, options to acquire 35,000
shares were granted. In 1997 options to acquire 60,000 shares were granted.
Options granted and remaining outstanding at December 31, 1998 are: 6,500 common
shares at $4.25 per share, 4,500 common shares at $3.63 per share, 6,500 common
shares at $3.25 per share, 18,500 common shares at $3.68 per share, 12,750
common shares at $6.44 per share, 46,500 common shares at $1.75 per share,
60,000 common shares at $1.00 per share and 35,000 common shares at $1.385 per
share. As of December 31, 1998, options for 48,750 shares are exercisable.
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", effective with the 1996 financial statements, but elected to
continue to measure compensation cost using the intrinsic value method in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation cost for stock options has been recognized. The
value of the options granted in 1996, 1997 and 1998 were estimated to be $.88
per share, $.87 per share and $.76 per share, respectively. Because of the very
limited trading in the Company's common stock, the Company does not believe that
traditional methods of valuing the options apply, therefore, it has estimated
the value of the options. The following represents the pro forma net loss and
earnings per share determined as if the fair value based method had been applied
in measuring compensation cost as described in SFAS 123 for the years ended
December 31, 1996, December 31, 1997 and December 31, 1998:
1996 1997 1998
---- ---- ----
Net loss $ 3,899,624 $ 3,936,253 $ 2,167,325
Loss per share $ .94 $ .87 $ .52
In 1997, the Company entered into an amended and restated credit facility with
the Bank. In connection with such amendment: (i) the Bank surrendered warrants
to purchase 465,000 shares of Common Stock; (ii) the Company issued to the Bank
warrants to purchase 2.8 million shares of Common Stock with an exercise price
of $.01 per share; (iii) the Company issued to certain executive officers
warrants to purchase an aggregate of 1.0 million shares of Common stock with an
exercise price of $.40 per share;
26
<PAGE>
(iv) the Company issued to certain parties who had performed certain financial
advisory and investment banking services related to the Company's restructuring
in 1997 warrants to purchase an aggregate of 300,000 shares of Common Stock
which have an exercise price as follows: 200,000 shares of Common Stock at $.40
per share, 50,000 shares of Common Stock at $1.00 per share and 50,000 shares of
Common Stock at $1.50 per share.
In 1998, the Company entered into an amended and restated credit facility with
the Bank. In connection with such amendment the Company issued to the Bank a
warrant to purchase 750,000 shares of common stock with an exercise price of
$.01 per share.
NOTE 8: OTHER EXPENSES
Cost of attempted acquisition and equity offering of $880,862 in 1996 represents
the direct cost associated with the attempt to acquire Papa Gino's Holding Corp.
(a 187-unit pizza restaurant chain operating in seven northeastern states) and
the planned equity offering to finance that acquisition.
Loss associated with restaurants closed in 1987 recognized in 1996, was
$673,157. This reflects the costs associated with a lease dispute in Dayton,
Ohio for a restaurant property abandoned in 1987 in the amount of $133,637 and a
charge-off of receivables for equipment and sub-rent built up over time from the
former Dayton, Ohio franchisees in the amount of $539,520. The decision to
charge off at this time was prompted by the Company's inability to purchase the
operation as had originally been anticipated.
NOTE 9: CONTINGENCIES
The Company is involved in various litigation relating to claims arising out of
its normal business operations and relating to restaurant facilities closed in
1997. Although litigation is inherently uncertain, the Company believes that
none of its current proceedings, individually or in the aggregate, will have a
material adverse effect upon the Company beyond the amount reserved in its
financial statements.
Legal proceedings against the Company include REH Acquisition, Ltd. ("REH")
versus Noble Roman's, Inc. and The Provident Bank., filed July 20, 1998 in the
United States District Court for the Southern District of New York. The
complaint alleges that the Company breached agreements entered into with the
Plaintiff to seek to fund and restructure the Company's bank debt. The Company
denies liability and will defend vigorously. The Company has filed a
counter-claim against REH and Elliott and Robert Herskowitz, individually, for
false and malicious misrepresentations seeking actual and punitive damages
against all of them.
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.
Paul W. Mobley leases a restaurant located in Indianapolis to GNR, Inc., a
wholly-owned subsidiary of the Company, which lease has a remaining term of
approximately five years and provides for rental payments of approximately
$43,600 per year.
27
<PAGE>
H-M Ltd., a corporation owned by Paul W. Mobley and Larry J. Hannah, in
September 1995, leased a restaurant in Indianapolis, Indiana to the Company.
This lease has a remaining term of 17 years and provides for rental payments of
$72,000 per year.
The Company believes that the terms of the above leases were substantially
equivalent to market terms at the time such leases were entered into.
Larry J. Hannah had a consulting agreement with the Company to provide financial
consulting services. The agreement provided for payments of $5,000 per month
through December 1998. Paul Mobley had a guarantee agreement with the Company
that required the payment of $2,500 per month. Mr. Mobley unilaterally
terminated this agreement in November 1997. Mr. Mobley also loaned moneys from
time to time to the Company to help meet cash flow requirements and as of
December 31, 1998 the balance of such loans to the Company aggregated $315,840.
These amounts were converted to notes payable on May 1, 1999 in conjunction with
the investment in the Company by investors affiliated with The Geometry Group.
NOTE 11: YEAR 2000 ISSUES
The Company is currently assessing its preparedness for year 2000 as it relates
to its information systems. The Company has begun the process of working with
outside advisors to update or replace various systems so all information system
software and hardware will be year 2000 compliant by the third quarter 1999.
Although there can be no assurance management anticipates that issues related to
year 2000 will have no material effect on the business, the results of
operations or on the Company's financial condition.
NOTE 12: SEGMENT REPORTING
In 1998, the company adopted FAS 131. Prior year information has been restated
to present the Company's reportable segments. The Company is organized into two
segments as follows: traditional full service restaurants which are Company
owned and operated and Noble Roman's Pizza Express which franchises and provides
ongoing services to independent franchises.
<TABLE>
<CAPTION>
1996 1997
Restaurant Express Corporate Total Restaurant Express Corporate Total
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue 33,854,485 384,705 34,239,190 25,368,644 524,119 211,985 26,104,748
Depreciation and amortization 1,137,946 350,164 1,488,110 761,224 315,101 1,076,325
Operating income (loss) 1,626,793 (4,353,388) (2,726,595) 512,235 304,164 (9,448,108) (8,631,709)
Interest expense 75,723 1,718,909 1,794,632 96,378 899,212 995,590
Income tax expense (benefit) 578,855 (1,218,645) (639,790) 206,928 103,416 (4,458,397) (4,148,053)
Segment Assets 10,122,273 9,328,412 19,450,685 6,808,625 0 11,396,371 18,204,996
Expenditures for property 927,368 345,455 1,272,823 746,449 18,725 765,174
1998
Restaurant Express Corporate Total
Revenue 23,306,708 2,161,027 313,879 25,781,686
Depreciation and amortization 739,925 319,163 1,059,088
Operating income (loss) (214,032) 1,322,372 (3,577,785) (2,469,455)
Interest expense 41,908 1,345,103 1,387,011
Income tax expense (benefit) (58,522) 449,606 (1,702,278) (1,311,194)
Segment Assets 6,965,696 200,192 11,976,667 19,142,555
Expenditures for property 576,036 30,912 71,757 678,705
</TABLE>
28
<PAGE>
LETTERHEAD OF RUBIN, BROWN, GORNSTEIN & CO. LLP
Independent Auditors' Report
Board of Directors
Noble Roman's, Inc.
We have audited the accompanying consolidated balance sheets of Noble Roman's,
Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 1998 and 1997. 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. The consolidated financial statements of Noble
Roman's, Inc. and subsidiaries as of December 31, 1996 were audited by other
auditors whose report dated April 29, 1997, expressed an unqualified opinion on
those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Noble Roman's, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years ended December 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
/s/ RUBIN, BROWN, GORNSTEIN & CO. LLP
RUBIN, BROWN, GORNSTEIN & CO. LLP
St. Louis, Missouri
May 28, 1999
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are:
Name Age Positions with the Company
---- --- --------------------------
Paul W. Mobley 58 Chairman of the Board and Director
A. Scott Mobley 35 President, Secretary and Director
Donald A. Morrison 56 Director
Douglas H. Coape-Arnold 53 Director
Troy Branson 35 Executive Vice President of Franchising
Art Mancino 50 Executive Vice President of Development
Wade Shanower 49 Vice President of Full-Service Operations
The executive officers of the Company serve at the discretion of the
Board of Directors and are elected at the annual meeting of the Board. Directors
are elected annually by the stockholders. The following is a brief description
of the previous business background of the executive officers and directors:
PAUL W. MOBLEY has been Chairman of the Board since December 1991 and a
Director since 1974. Mr. Mobley was President and Chief Executive Officer of the
Company from 1981 to 1997. From 1975 to 1987, Mr. Mobley was a significant
shareholder and president of a company which owned and operated 17 Arby's
franchise restaurants. From 1974 to 1978, he also served as Vice President and
Chief Operating Officer of the Company and from l978 to 1981 as Senior Vice
President. He is the father of A. Scott Mobley. Mr. Mobley has a B.S. in
Business Administration from Indiana University and is a CPA.
A. SCOTT MOBLEY has been President since October 1997 and a Director
since January 1992, and Secretary since February 1993. Mr. Mobley was Vice
President from November 1988 to October 1997 and from August 1987 until November
1988 served as Director of Marketing for the Company. Prior to joining the
Company Mr. Mobley was a strategic planning analyst with a division of Lithonia
Lighting Company. Mr. Mobley has a B.S. in Business Administration from
Georgetown University and an MBA from Indiana University. He is the son of Paul
Mobley.
30
<PAGE>
DONALD A. MORRISON, III has been a Director of the Company since
December 1993. In January 1998, Mr. Morrison and an associate started their own
independent brokerage firm offering general securities through Broker
Transaction Services member NASD/SIPC, a subsidiary of Southwest Securities
group. Prior to January 1998 Mr. Morrison was President and director of Traub &
Company, Inc., an investment banking firm headquartered in Indianapolis,
Indiana. Mr. Morrison was affiliated with Traub & Company since 1971.
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 Vice President of TradeCo Global
Securities, Inc. since May 1994. Mr. Coape-Arnold's prior experience includes
serving as Vice President of Morgan Stanley & Co., Inc. from 1982 to 1986,
President & Chief Executive Officer of McLeod Young Weir Incorporated from 1986
to 1988, and Senior Vice President of GE Capital's Transportation & Industrial
Funding Corp. from 1988 to 1991. Mr. Coape-Arnold is a Chartered Financial
Analyst.
TROY BRANSON, has been Executived Vice President of Franchising for the
Company since November 1997 and since 1992, he was Director of Business
Development. Prior to joining the Company, Mr. Branson was an owner of
Branson-Yoder Marketing Group since 1987, after graduating from Indiana
University where he received a B.S. in Business.
ARTHUR L. MANCINO has been Executive Vice President of Development for
the Company since January 1999. Prior to joining the Company Mr. Mancino had
been employed by Blimpie International, Inc. since 1992. His last assignment
with Blimpie International, Inc. was Vice President New Business. From 1990 to
1992 Mr. Mancino was Director of Franchising for EBC Office Centers. Mr.
Mancino has a B.S. degree from Rutgers University.
WADE SHANOWER has been Vice President of Full-Service Operations since
November 1997 and since January 1996, he was Regional Director of Operations.
Prior to joining the Company, Mr. Shanower was an owner of a Noble Roman's
franchise restaurant plus two independent restaurants, which he sold in early
1995 before joining Noble Roman's. Prior to owning his own restaurants, Mr.
Shanower was Vice President of Operations for American Diversified Foods, an
Arby's franchisee owned in part by Paul Mobley. He has a B.S. degree from
Indiana University.
SECTION 16(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 1998 all filing requirements under Section 16(a) of the Securities
Exchange Act of 1934 were complied with.
31
<PAGE>
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 other executive officers of the Company whose cash
compensation in 1998 exceeded $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Securities Underlying
Name and Principal Position Year Salary (l) Bonus Options #
- --------------------------- ---- ----------- ------ ---------------------
<S> <C> <C> <C> <C>
Paul Mobley 1998 $ 240,000 $ - -
Chairman of the Board 1997 180,000 - 10,000
1996 180,000 - -
A. Scott Mobley 1998 $ 150,000 $ - -
President and Secretary 1997 96,923 - 10,000
1996 90,000 11,736 20,000
</TABLE>
(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 and a bonus plan initiated in 1994 for
certain officers and administrative employees based on profitability.
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, 1998 by the executive
officers named in the Summary Compensation Table.
Number of Securities Values of Unexercised
Underlying Unexercised In-The-Money
Options at 12/31/98 Options at 12/31/98 (1)
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
Paul W. Mobley 0 / 10,000 0 / $5,600
A. Scott Mobley 30,000 / 30,000 0 / $5,600
(1) Based on a per share price of $1.56, the last reported transaction price of
the Company's common stock on December 31, 1998.
32
<PAGE>
Employment Agreements
- ---------------------
Mr. Paul Mobley has an employment agreement with the Company which fixes his
base compensation at $275,000 per year, provides for reimbursement of travel and
other expenses incurred in connection with his employment, including the
furnishing of an automobile, health and accident insurance similar to that
provided other employees, and life insurance in an amount related to his base
salary. The initial term of the agreement is five years and is renewable each
year for a five-year period subject to approval by the Board. The agreement is
terminable by the Company for just cause as defined in the agreement.
Mr. A. Scott Mobley has an employment agreement with the Company which fixes his
base compensation at $175,000 per year, provides for reimbursement of travel and
other expenses incurred in connection with his employment, including the
furnishing of an automobile, health and accident insurance similar to that
provided other employees, and life insurance in an amount related to his base
salary. The initial term of the agreement is five years and is renewable each
year for a five-year period subject to approval by the Board. The agreement is
terminable by the Company for just cause as defined in the agreement.
Director Compensation
- ---------------------
The Company's outside directors receive standard directors' fees of $1,000 per
year and $300 per meeting plus reimbursement of out-of-pocket expenses.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of May 21, 1999, there were 5,565,390 shares of the Company's common
stock outstanding. The Company has agreed to use its best efforts to cause its
authorized common stock to be increased to 13,000,000 shares by August 15, 1999.
The following table sets forth the amount and percent of the Company's common
stock beneficially owned on May 21, 1999 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:
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent of Outstanding
of Beneficial Owner of Beneficial Ownership (1) Common Stock (2)
------------------- --------------------------- -----------------------
<S> <C> <C>
Paul W. Mobley
One Virginia Avenue, Suite 800 1,529,013 (3) 24.8%
Indianapolis, IN 46204
A. Scott Mobley (1)
One Virginia Avenue, Suite 800 583,326 (4) 9.6%
Indianapolis, IN 46204
Provident Financial Group, Inc.
One E. Fourth Street 3,121,066 (5) 39.4%
Cincinnati, OH 45202
33
<PAGE>
Donald A. Morrison, III
320 N. Meridian, #412 72,919 (6) *
Indianapolis, IN 46204
Geovest Capital Partners, L.P.
110 E. 59th Street, 18th Floor 1,498,877 (7) 21.2%
New York, N.Y. 10022
James Lewis
110 E. 59th Street, 18th Floor 933,737 (8) 14.3%
New York, N.Y. 10022
Hamilton Medaris Corp. 500,000 8.9%
All Executive Officers and
Directors as a Group (7 Persons) 2,187,758 33.0%
</TABLE>
*Less than 1%
(1) All shares owned directly unless otherwise noted.
(2) The percentage calculations are based upon 5,565,390 shares of
the Company's common stock issued and outstanding as of May
21, 1999 and, for each officer or director, of the group, the
number of shares subject to options or conversion rights
exercisable prior to July 20, 1999.
(3) This total includes a warrant to purchase 600 thousand shares
of stock at an exercise price of $.40 per share issued
November 19, 1997 in connection with the financial
restructuring with The Provident Bank.
(4) Includes 30,000 shares subject to options granted under an
employee stock option plan which are currently exercisable at
$4.25 per share for 6,500 common shares, $3.63 per share for
4,500 common shares, $3.25 per share for 6,500 common shares,
$3.68 per share for 7,500 common shares and $6.44 per share
for 5,000 common shares . Also includes a warrant to purchase
400,000 shares of stock at an exercise price of $.40 per share
issued November 19, 1997 in connection with the financial
restructuring with The Provident Bank.
(5) This total includes warrants to purchase in the aggregate
2,200,000 shares of the Company's common stock at $.01 per
share. The warrants were granted to the Bank as partial
consideration for the Bank's obligations pursuant to Amended
and Restated Credit Agreement.
(6) This total includes 70,219 shares owned by Traub and Company,
Inc ("Traub") in its investment account, of which Mr. Morrison
is shareholder. Mr. Morrison disclaims beneficial ownership of
such shares beyond his interest in Traub.
(7) Includes warrants to purchase 771,605 shares of the Company's
common stock at $.01 per share. obtained from The Provident
Bank.
(8) Includes warrants to purchase 555,556 shares of the Company's
common stock at $.01 per share obtained from The Provident
Bank.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of transactions to which the Company and certain
officers and directors of the Company were a party during 1998. 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
34
<PAGE>
require the approval of a majority of the Company's disinterested directors, and
be conducted on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.
Paul W. Mobley leases a restaurant located in Indianapolis to GNR, Inc., a
wholly-owned subsidiary of the Company, which lease has a remaining term of
approximately five years and provides for rental payments of approximately
$43,600 per year.
In September 1995, H-M Ltd., a corporation owned by Paul W. Mobley and Larry J.
Hannah, leased a restaurant in Indianapolis, Indiana to the Company. This lease
has a remaining term of 17 years and provides for rental payments of $72,000 per
year. During 1998, approximately $72,000 in rental payments were made.
The Company believes that the terms of the above leases were substantially
equivalent to market terms at the time such leases were entered into.
In the past, Mr. Mobley loaned moneys to the Company from time to time to help
meet cash flow requirements and as of December 31, 1998, the aggregate amount of
loans outstanding from Mr. Mobley to the Company was $315,840. These amounts
were converted to notes payable on May 1, 1999 in conjunction with the
investment in the Company by investors associated with The Geometry Group.
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
The following consolidated financial statements of Noble
Roman's, Inc. and subsidiaries are included in Item 8: Page
Consolidated Balance Sheets - December 31, 1997 and 1998 17
Consolidated Statements of Operations - years ended December 31,
1996, 1997 and 1998 18
Consolidated Statements of Changes in Stockholders' Equity -
years ended December 31, 1996, 1997 and 1998 19
Consolidated Statements of Cash Flows - years ended December 31,
1996, 1997 and 1998 20
Notes to Consolidated Financial Statements 21
Report of Independent Auditors - Rubin, Brown, Gornstein & Co., LLP 29
(a) Exhibits
Exhibit No.
3.1 Amended Articles of Incorporation of the Registrant (1)
3.2 Amended and Restated By-Laws of the Registrant
4.1 Specimen Common Stock Certificates (1)
10.3 Employment Agreement with Paul W. Mobley dated November 15,
1994 (3)
10.4 Credit Agreement with The Provident Bank dated December 1,
1995 (5)
10.5 Consulting Agreement with Larry J. Hannah dated April 1,
1993 (3)
10.6 1984 Stock Option Plan (6)
10.7 Form of Stock Option Agreement (6)
11.1 Statement Re: Computation Per Share Earnings
21.1 Subsidiaries of the Registrant (2)
36
<PAGE>
24.1 Not Applicable (unless going to sign as power of
attorney for directors)
------------------------
(1) Incorporated by reference from Registration Statement
filed by the Registrant on Form S-18 on October 22, 1982 and
ordered effective on December 14, 1982 (SEC No. 2-79963C),
and, for the Amended Articles of Incorporation, from the
Registrant's Amendment No. 1 to the Post Effective Amendment
No. 2 to Registration Statement on Form S-1 on July 1, 1985.
(SEC File No.2-84150).
(2) Incorporated by reference to the Registrant's Registration
Statement on Form SB-2 (SEC File No. 33-66850) ordered
effective on October 26, 1993.
(3) Incorporated by reference from the Form 8-K filed by the
registrant on February 17, 1993.
(4) Incorporated by reference from the Form 8-K filed by the
registrant on June 3, 1993.
(5) Incorporated by reference from the Form 8-K filed by the
registrant on December 5, 1995.
(6) Incorporated by reference from the Form S-8 filed by the
registrant on November 29, 1994 (SEC File No. 33-86804).
(b) Reports on 8-K
None.
37
<PAGE>
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: August 23, 1999 By: /s/ Paul W. Mobley
--------------- ------------------------------------
Paul W. Mobley, Chairman of the Board
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Date: August 23, 1999 /s/ Paul W. Mobley
------------------------- ------------------------------------
Paul W. Mobley
Chairman of the Board and Director
Date: August 23, 1999 /s/ A. Scott Mobley
------------------------- ------------------------------------
A. Scott Mobley
President and Director
Date: August 23, 1999 /s/ Donald A. Morrison, III
------------------------- ------------------------------------
Donald A. Morrison, III
Director
Date: August 23, 1999 /s/ Douglas H. Coape-Arnold
------------------------- ------------------------------------
Douglas H. Coape-Arnold
Director
38
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