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, 1999.
[ ] 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.
$9,798,901 as of July 25, 2000
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
12,605,399 shares of common stock as of July 25, 2000
Documents Incorporated by Reference: None
<PAGE>
NOBLE ROMAN'S, INC.
FORM 10-K
Year Ended December 31, 1999
Table of Contents
Item #
in Form 10-K Page
PART I
1. Business 3
2. Properties 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 6
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 7
6. Selected Financial Data 9
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
8. Financial Statements and Supplementary Data 16
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 31
PART III
10. Directors and Executive Officers of the Registrant 31
11. Executive Compensation 32
12. Security Ownership of Certain Beneficial Owners and Management 34
13. Certain Relationships and Related Transactions 36
PART IV
14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 37
<PAGE>
PART 1
ITEM 1. BUSINESS
General Information
-------------------
Noble Roman's, Inc. (the "Company") sells and services franchises for
non-traditional and co-branded foodservice operations under the trade name
"Noble Roman's Pizza". The concept's hallmarks include high quality pizza
products, simple operating systems, labor-minimizing operations, attractive food
costs and overall affordability. The Company has over 28 years experience
operating full-service pizza restaurants, giving it unique advantages in the
design and consultation of foodservice systems for franchisees. Since 1997, the
Company has awarded over 623 non-traditional and co-branded franchises in 36
states. Since the franchises are typically installed in pre-existing,
high-traffic commercial and recreational facilities, a typical franchise
requires an investment of approximately $25,000 to $30,000 per location.
Products & Systems
------------------
Prior to franchising non-traditional and co-branded locations, the company
invested approximately three years in time and manpower to engineer a selection
of high quality products and easy to implement systems that would appeal to
prospective franchisees. Using its 28 years of experience in operating pizza
restaurants and its highly regarded, scratch-made products served in its
traditional restaurants as a baseline for quality standards, the Company
carefully developed specially engineered dough products that are supplied by
third party vendors in a ready-to-use form requiring only on-site assembly and
baking. The result is products that are great tasting, quality consistent, easy
to assemble and relatively low in food cost.
The operating systems are also uniquely developed for simplicity of operation
and for minimizing hourly labor requirements and management intensiveness.
Operational layout, product pre-preparation, assembly and baking, and customer
fulfillment were all designed to function efficiently and cost-effectively with
minimal space requirements of approximately 100 square feet. Customers select
from a variety of grab-and-go products from an attractive counter-top kiosk, or
select a made-and-baked-to-order traditional large pizza with their favorite
toppings. All products are designed for quick assembly and baking through small,
stackable conveyor ovens.
A unique feature of the Noble Roman's program is the menu flexibility offered
franchisees. The core package includes such items as 14" large pizzas,
individual sized 7" pizzas and breadsticks with dip. From this core, franchisees
may also select from the following product extensions: baked pastas, Buffalo
wings, hot sandwiches and breakfast. Many potential franchisees are looking for
a complete foodservice package to fit their specific application or desire for
add-on sales opportunities. Noble Roman's product extensions allow the
franchisee "one-stop" franchise shopping to satisfy their complete needs through
one business relationship, one franchise fee and one set of equipment. Added
flexibility is provided with the Company's on-going co-branding relationship
with other traditional restaurant chains.
Typical Locations & Growth Plans
--------------------------------
Typical non-traditional locations include such venues as universities,
entertainment centers, convenience stores, travel plazas, military bases and
other types of locations with pre-existing customer traffic. Additionally, the
Company has national co-branding relationships with both TCBY(R) (over 3,000
<PAGE>
locations) and Subway(R) (over 14,500 locations worldwide). Co-branding allows
the owner of a TCBY(R) or Subway(R) franchise to add Noble Roman's products and
systems while utilizing their existing facility investment and overhead
structure. With much of the fixed overhead required already in place, the Noble
Roman's concept can be added with the potential of extremely attractive margins
on the additional sales it attracts to the location.
The Company has now awarded over 623 franchises since 1997 in 36 states, with
approximately 412 of these locations open and in operation for a total of 444
locations. In addition to the pipeline of sold but unopened locations, it is the
Company's plan to aggressively pursue the sale of additional locations across
the country and Canada. The Company is currently involved in on-going
discussions and negotiations involving many additional franchise locations.
Recent Strategic Events
-----------------------
Over the last several years, the Company made the strategic decision to refocus
its business on its non-traditional and co-branding opportunities and away from
operating full-service, traditional restaurant operations. Given the potential
size of the opportunities in the non-traditional and co-branding segments, and
the actual rapid pace of their growth within the Company during 1999, management
determined that all financial and human resources at the Company's disposal
would need to be focused on franchise services to maximize the potential for
stakeholders.
The Company realizes both the historic and continuing significance of its
full-service operations in its on-going franchise development. Accordingly, in
1999 the Company made the decision to consolidate the operations of its 29 most
productive full-service units in central and southern Indiana into four
operating districts, and to seek an independent franchise operator to purchase
and operate those units utilizing the existing supervisory and managerial
resources currently in place. In seeking a potential partner for this
transaction, the Company is selectively searching for an experienced operator
with the goal of reconditioning certain aspects of the existing facilities and
expanding the concept under a pre-agreed strategy and format. The Company will
continue to offer franchise services to the full-service franchises in much the
same fashion as it is currently doing with its non-traditional and co-branded
franchises. The Company is actively pursuing such arrangements and has already
franchised 15 of them and believes that an agreement can be reached for the
remainder.
Competition
-----------
The restaurant industry in general is very competitive with respect to
convenience, price, product quality and service. In addition, the Company's
non-traditional segment competes for franchise sales on the basis of product
engineering, investment cost, cost of sales, simplicity of operation and labor
requirements. A change in the business strategy or the receptivity of one or
more of the Company's competitors could have an adverse effect on the Company's
ability to sell additional franchises, maintain existing franchisees or sell its
products through its franchise system. In addition, the Company is dependent on
recruiting, hiring and maintaining the employment of professionals to sell, open
and maintain Noble Roman's Pizza franchises, and the market for such
professionals is very competitive. Many of the Company's competitors are very
large, internationally established companies.
Within the competitive environment of the non-traditional franchise segment of
the restaurant industry, management, however, has defined what it believes to be
certain competitive advantages for the Company. First, several of the Company's
competitors in the non-traditional segment are also large chains operating
<PAGE>
thousands of franchised, traditional restaurants. Because of the contractual
relationships with many of their franchisees, some competitors may be unable to
offer wide-scale site availability for potential non-traditional franchisees.
The Company is not faced with this restriction on any scale of major
significance since its full-service operations were highly concentrated
geographically and were largely company owned and operated.
Additionally, several of the Company's competitors in the non-traditional
segment were established with little or no organizational history in owning and
operating traditional food service locations. This lack of operating experience
may be a limitation in attracting and maintaining non-traditional franchisees
who, by the nature of the segment, often have little exposure to foodservice
operations themselves. The Company's background in traditional restaurant
operations has provided it organizational experience in structuring, planning,
marketing, and cost controlling which could be of material benefit to
franchisees.
Seasonality of Sales
--------------------
Direct sales of non-traditional franchises may be affected in minor ways by
certain seasonalities and holiday periods. Franchise sales to certain
non-traditional venues may be slower around major holidays such as Thanksgiving
and Christmas, and during the first couple of months of the year. Franchise
sales to other non-traditional venues show less or no seasonality. Additionally,
in middle and northern climates where adverse winter weather conditions may
hamper outdoor travel or activities, foodservice sales by franchisees may be
sensitive to sudden drops in temperature or precipitation which would in turn
affect Company royalties.
Employees
---------
As of May 19, 2000, the company employed approximately 32 persons in its
non-traditional and co-brand business segments, all of whom were engaged on a
full-time basis. No employees are covered under collective bargaining
agreements, and the Company believes that relations with its employees are good.
Trademarks and Service Marks
----------------------------
The Company owns and protects several trademarks and service marks. Many of
these, including NOBLE ROMAN'S (R), Noble Roman's Pizza(R), Noble Roman's Pizza
Express(R) and THE BETTER PIZZA PEOPLE (R) are registered with the United States
Patent and Trademark Office as well as with the corresponding agencies of
certain other foreign governments. The company believes that its trademarks and
service marks have significant value and are important to its sales and
marketing efforts.
Government Regulation
---------------------
The company and its franchisees are subject to various federal, state and local
laws affecting the operation of our respective businesses. Each Noble Roman's
location is subject to licensing and regulation by a number of governmental
authorities, which include health, safety, sanitation, building and other
agencies and ordinances in the state or municipality in which the facility is
located. The process of obtaining and maintaining required licenses or approvals
can delay or prevent the opening of a franchise location. Vendors, such as our
third party production and distribution services, are also licensed and subject
to regulation by state and local health and fire codes, and Department of
Transportation regulations. The Company, its franchisees and its vendors are
also subject to federal and state environmental regulations.
The Company is subject to Federal Trade Commission ("FTC") regulation and
various state agencies and
<PAGE>
laws regulating the offer and sale of franchises. Several states also regulate
aspects of the franchisor-franchisee relationship. The FTC requires us to
furnish to prospective franchisees a franchise offering circular containing
certain specified information. Some states also regulate the sale of franchises
and require registration of the franchise offering circular with state
authorities. Substantive state laws that regulate the franchisor-franchisee
relationship presently exist in a substantial number of states, and bills have
been introduced in Congress from time to time that would provide for federal
regulation of the franchisor-franchisee relationship in certain respects. The
state laws often limit, among other things, the duration and scope of
non-competition provisions and the ability of a franchisor to terminate or
refuse to renew a franchise. Some foreign countries also have disclosure
requirements and other laws regulating franchising and the franchisor-franchisee
relationship, and the Company would be subject to applicable laws in each
jurisdiction where franchised units may become established.
ITEM 2. PROPERTIES
The Company's headquarters are located in 8,000 square feet of leased office
space in Indianapolis, Indiana. The lease for this property expires in December
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 and 2000. The Company believes that none of its current proceedings,
individually or in the aggregate, will have a material adverse effect upon the
Company beyond the amount reserved in its financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On Tuesday, April 25, 2000, the Company held a special meeting of stockholders
for the purpose of voting on the following proposals which the shareholder
approved: to amend the Articles of Incorporation increasing the authorized
number of shares of capital stock to 30 million; to increase the number of
authorized shares of common stock to 25 million; and to create 5 million shares
of "blank check" preferred stock.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
------------------
The Company's common stock has been 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.
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
Quarter Ended: High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
March 31 $ 7/8 5/8 2 1/16 1 9/16 2 5/8 1 1/4
June 30 1 31/32 5/8 3 15/32 2 2 1/2 1 3/64
September 30 1 17/32 1 1/8 3 1/8 1 15/32
December 31 2 13/32 29/32 2 1 3/8
</TABLE>
Holder of Record
----------------
As of May 1, 2000, the Company believes there were approximately 359 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
-------------------------------
In the period February 2000 thru July 2000, the Company entered into a series of
transactions resulting in its obtaining approximately $10.5 million in
additional capital. The additional capital came from investors associated with
The Geometry Group in New York and certain local investors in Indianapolis
purchasing approximately $2.9 million of common stock in exchange for cash, The
Provident Bank exchanging $6.5 million senior secured debt and $740 thousand PIK
notes for $2.4 million of common stock and $4.9 million in no-yield preferred
stock which may later be converted to common stock at $3.00 per share at the
Bank's option and an officer converted $312 thousand of notes for common stock.
All of these transactions were at $1 per share.
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.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (In thousands except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
Proforma
Statement of Operations Data: 1995 1996 1997 1998 1999 1999
---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Restaurant revenue $ 33,325 $ 33,854 $ 25,369 $ 23,307 $ -- $ --
Express royalties -- -- 524 2,161 3,270 3,270
Restaurant royalties 212 189 133 125 81 700
Administrative fees and other 358 196 79 189 458 458
-------- -------- -------- -------- -------- --------
Total revenue 33,895 34,239 26,105 25,782 3,809 4,428
Restaurant operating expenses 29,149 31,090 24,094 22,781 -- --
Express operating expenses -- -- 220 839 1,611 1,611
Depreciation and amortization 1,334 1,488 1,076 1,059 65 65
General and administrative 1,951 2,834 2,816 3,002 849 849
Financing, acquisition and restructuring costs 112 1,554 6,529 571 -- --
-------- -------- -------- -------- -------- --------
Operating income (loss) 1,350 (2,727) (8,632) (2,469) 1,285 1,903
Interest 1,287 1,794 996 1,387 1,902 1,246
-------- -------- -------- -------- -------- --------
Income before income taxes and
extraordinary item 64 (4,521) (9,627) (3,856) (617) 657
Income taxes (benefit) 39 (640) (4,148) (1,311) (210) 223
-------- -------- -------- -------- -------- --------
Net income (loss) from continuing operations $ 24 $ (3,881) $ (5,479) $ (2,545) $ (407) $ 434
-------- -------- -------- -------- -------- --------
Income (loss) from discontinued operations and
extraordinary items (224) -- 1,563 396 (10,303) --
Net income (loss) $ (200) $ (3,881) $ (3,917) $ (2,150) $(10,714) $ 434
-------- -------- -------- -------- -------- --------
Weighted average number of common shares 4,008 4,131 4,131 4,131 6,015 11,601
Net income (loss) per share from continuing
operations $ .01 $ (.94) $ (1.33) $ (.62) $ (.07) $ .04
-------- -------- -------- -------- -------- --------
Income (loss) per share from discontinued
operations and extraordinary items (.06) -- .38 .10 (1.71) --
Net income (loss) per share $ (.05) $ (.94) $ (.95) $ (.52) $ (1.78) $ .04
-------- -------- -------- -------- -------- --------
Balance sheet data (at year end):
Working capital (deficit)
$ (827) $(16,251) $ (3,510) $ (2,241) $ (3,552) $ (689)
Total assets 20,004 19,451 18,205 19,143 14,049 15,815
Long-term obligations 11,891 12,561 13,611 14,187 16,937 9,871
Stockholders' equity (deficit) $ 4,613 $ 791 $ (325) $ 1,076 $ (9,235) $ 708
</TABLE>
(1) See Note 2 of Company's financial statements for pro forma balance sheet
reflecting events subsequent to December 31, 1999.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
------------
Over the last several years, the Company made the strategic decision to refocus
its business on its non-traditional and co-branding opportunities and away from
operating full-service, traditional restaurant operations. Given the potential
size of the opportunities in the non-traditional and co-branding segments, and
the actual rapid pace of their growth within the Company during 1999, management
determined that all financial and human resources at the Company's disposal
would need to be focused on franchise services to maximize the potential for
stakeholders.
The Company realizes both the historic and continuing significance of its
full-service operations in its on-going franchise development. Accordingly, in
1999 the Company made the decision to consolidate the operations of its 29 most
productive full-service units in central and southern Indiana into four
operating districts, and to seek an independent franchise operator to purchase
and operate those units utilizing the existing supervisory and managerial
resources currently in place. In seeking a potential partner for this
transaction, the Company is selectively searching for an experienced operator
with the goal of reconditioning certain aspects of the existing facilities and
expanding the concept under a pre-agreed strategy and format. The Company will
continue to offer franchise services to the full-service franchises in much the
same fashion as it is currently doing with its non-traditional and co-branded
franchises. The Company is actively pursuing such arrangements and has already
franchised 15 of them and believes that an agreement can be reached for the
remainder. There can be no assurance that a transaction will be completed or, if
so, under what terms or time frame. The Company has used its best estimates to
reserve for future operations until completed.
The franchising concept was designed to capitalize on the rapid growth of
non-traditional locations for quick service restaurants and to be simple to
operate, requiring a modest investment, with minimal staffing requirements while
serving great tasting pizza and related products. The concept was designed to
also be convenient and quick for its customers. Based on experience to date, the
Company believes that franchising its Express concept can offer opportunities
for rapid growth for the next several years.
Based on the Company's 1998 and 1999 proforma operating results, its business
plan, the number of franchise units now open, the backlog of units sold to be
opened, the backlog of franchise prospects now in ongoing discussions and
negotiations, the Company's trends and the results of its operations thus far in
2000, management has determined that it is more likely than not that the
Company's deferred tax credits will be fully utilized before the tax credits
expire. Therefore, no valuation allowance was established for its deferred tax
asset. However, there can be no assurance that the franchising growth will
continue in the future nor can there be any assurance that the full-service
restaurants will be franchised at the estimated value. If unanticipated events
should occur in the future, the realization of all or some portion of the
Company's deferred tax asset could be jeopardized. The Company will continue to
evaluate the need for a valuation allowance on a quarterly basis in the future.
The following table sets forth the proforma 1999 compared with proforma 1998
operating results included in the Company's consolidated statement of
operations.
<PAGE>
ProForma Consolidated Statement of Operations
Noble Roman's, Inc. and Subsidiaries
Years Ended December 31,
1998 1999
---- ----
Express royalties and fees $2,227,053 70.3% $3,269,888 73.9%
Administrative fees and other 566,948 18.5 457,824 10.3
Restaurant royalties 278,787 11.2 700,040 15.8
---------- ----- ---------- -----
Total revenue $3,072,788 100.0% $4,427,751 100.0%
Express operating expenses:
Salaries and wages $ 468,806 15.3 $ 776,053 17.5
Trade Show expense 105,031 3.4 214,046 4.8
Travel expense 111,798 3.6 256,215 5.8
Other operating expense 153,320 5.0 364,772 8.2
Depreciation and amortization 59,183 1.9 64,848 1.5
General and administrative $ 840,514 27.4% $ 848,538 19.2%
---------- ----- ---------- -----
Operating income $1,334,437 43.4% 1,903,279 43.0%
Interest expense 764,268 24.9 $1,246,433 28.2
---------- ----- ---------- -----
Income before income taxes 570,168 18.6 656,846 14.8
Income taxes 193,857 6.3 223,328 5.0
---------- ----- ---------- -----
Net income $ 376,311 12.3% $ 433,519 9.8%
1999 Compared with 1998
-----------------------
Total revenue increased from $3.1 million to $4.4 million, or 41.9%, for 1999
compared to 1998. This increase was primarily the result of the growth in the
number of the Express franchise locations open. Express royalties and fees were
approximately $3.3 million for 1999 compared to $2.2 million during 1998. 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, 1999,
approximately 310 franchised Express units were open compared to 192 at the end
of 1998. Currently there are approximately 444 franchised Express units open
with approximately 210 more units sold and to be opened in the future.
Salaries and wages increased from 15.3% of revenue in 1998 to 17.5% of revenue
in 1999. The primary reason for this increase was the building of the Company's
infrastructure in franchising for anticipated rapid growth in the future.
Trade show expense increased from 3.4% of revenue in 1998 to 4.8% of revenue in
1999. The primary reason for this increase was the increase in the number of
trade shows that the Company participated in during 1999. This increase also
reflects the Company's decision to participate in national trade shows
commencing in 1999 as opposed to only local midwestern shows in 1998. As a
result, the Company now has franchises sold in 35 states.
Travel expense increased from 3.6% of revenue in 1998 to 5.8% of revenue in
1999. This increase was the result of the Company expanding its franchise area
from local midwestern states to 35 states nationwide.
Other operating expenses increased from 5.0% of revenue in 1998 to 8.2% of
revenue in 1999. This increase was primarily the result of the increased cost
related to the increased staff as discussed in salaries and wages and the
building of the infrastructure in the franchising for the anticipated future
growth nationwide.
General and administrative expense decreased from 27.4% of revenue in 1998 to
19.2% of revenue in 1999. This decrease was the result of the fact that the
administrative structure for future franchise growth was put in place in 1998
and, therefore, remained approximately constant in dollar amounts for 1999,
however, the percentage decreased because total revenue increased.
<PAGE>
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, 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.
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.
<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.
Impact of Inflation
-------------------
The primary inflation factors affecting the Company's operations are food and
labor costs to the Franchisee. To date, the Company has been able to offset the
effects of inflation in food costs without significantly increasing prices
through effective cost control methods, however, the competition for labor has
resulted in higher salaries and wages for the Franchisees.
Liquidity and Capital Resources
-------------------------------
Over the last several years, the Company made the strategic decision to refocus
its business on its non-traditional and co-branding opportunities and away from
operating full-service, traditional restaurant operations. Given the potential
size of the opportunities in the non-traditional and co-branding segments, and
the actual rapid pace of their growth within the Company, during 1999 management
determined that all financial and human resources at the Company's disposal
would need to be focused on franchise services to maximize the potential for
stakeholders.
Within this, however, the Company realizes both the historic and continuing
significance of its full-service operations in its on-going franchise
development. Accordingly, in 1999 the Company made the decision to consolidate
the operations of its 29 most productive full-service units in central and
southern Indiana into four operating districts, and to seek an independent
franchise operator to purchase and operate those units utilizing the existing
supervisory and managerial resources currently in place. In seeking a potential
partner for this transaction, the Company is selectively searching for an
experienced operator with the goal of reconditioning certain aspects of the
existing facilities and expanding the concept under a pre-agreed strategy and
format. The Company will continue to offer franchise services to the
full-service franchises in much the same fashion as it is currently doing with
its non-traditional and co-branded franchises. The Company is actively pursuing
such arrangements and has already franchised 15 of them and believes that an
agreement can be reached for the remainder. There can be no assurance that a
transaction will be completed, or if so, under what terms or time frame. The
Company has used its best estimates to reserve for future operations until
completed.
Pursuant to the Company's strategic decision to refocus its business on its
non-traditional and co-branding franchising opportunities, the Company closed 16
of its full-service restaurants and began franchising efforts for the remaining
31 full-service restaurants. Accordingly, all assets associated with its
full-service operations were reduced to the estimated sales price of the 31
restaurants being franchised. The reduction in the carrying value of those
assets, all activities in 1999 associated with the full-service restaurants and
a reserve for future costs associated with those restaurants in the amount of
$1,599,032 were charged to loss on discontinued operations.
In the period February 2000 thru July 2000, the Company entered into a series of
transactions resulting in its obtaining approximately $10.5 million in
additional capital. The additional capital came from investors associated with
The Geometry Group in New York and certain local investors in Indianapolis
purchasing approximately $2.9 million of common stock in exchange for cash, The
Provident Bank exchanging $6.5 million senior secured debt and $740 thousand PIK
notes for $2.4 million of common stock and $4.9 million in no-yield preferred
stock which may later be converted to common stock at $3.00 per share at the
Bank's option and an officer exchanged $312 thousand of notes for common stock.
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
purchased participating income notes of the Company (the "Participating Notes")
and warrants to purchase at any time prior to December 31,
<PAGE>
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 $1.00 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 $1.00 per share or in a combination thereof.
As a result of the additional capital raised by the Company, as discussed above,
its decision to focus on growth by franchising and its decision to franchise its
existing full-service restaurants, the Company believes it will have sufficient
cash flow to meet its obligations and to carry out its current business plan.
The statements contained in Management's Discussion and Analysis concerning the
Company's future revenues, profitability, financial resources, market demand and
product development are forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995) relating to the Company
that are based on the beliefs of the management of the Company, as well as
assumptions and estimates made by and information currently available to the
Company's management. The Company's actual results in the future may differ
materially from those projected in the forward-looking statements due to risks
and uncertainties that exist in the Company's operations and business
environment including, but not limited to: competitive factors and pricing
pressures, shifts in market demand, general economic conditions and other
factors, including (but not limited to) changes in demand for the Company's
products or franchises, the impact of competitors' actions, and changes in
prices or supplies of food ingredients and labor. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions or
estimates prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
None.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
Noble Roman's, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Proforma
December 31,
------------ Proforma Balance Sheet
Assets 1998 1999 Adjustments as of 12/31/99
------ ---- ---- ----------- --------------
<S> <C> <C> <C> <C>
Current assets:
Cash $ 28,176 $ 29,913 $1,091,000 (2) $ 1,426,248
107,000 (3)
198,335 (4)
Accounts receivable 579,841 718,623 718,623
Inventories 844,783 437,120 437,120
Prepaid expenses 185,471 109,006 355,832 (4) 464,838
Assets held for sale - 1,500,000 1,500,000
------------ ------------ ------------
Total current assets 1,638,271 2,794,662 4,546,829
------------ ------------ ------------
Property and equipment:
Equipment 8,318,737 813,305 813,305
Leasehold improvements 2,214,931 84,229 84,229
Capitalized leases 168,750 - -
------------ ------------ ------------
10,702,418 897,534 897,534
Less accumulated depreciation and amortization 4,044,780 327,039 327,039
------------ ------------ ------------
Net property and equipment 6,657,638 570,496 570,496
------------ ------------ ------------
Costs in excess of assets acquired, net 5,944,718 - -
Deferred tax asset 4,442,726 9,961,723 (36,380) (3) 9,925,343
Other assets 459,202 721,982 50,000 (4) 771,982
------------ ------------ ----------- ------------
$ 19,142,555 $ 14,048,862 $ 15,814,650
------------ ------------ ------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,911,089 $ 3,163,200 $ (922,500)(4) $ 2,240,700
Current portion of long-term debt 18,279 17,661 17,661
Note payable to officer 65,840 65,840 65,840
Deferred franchise fees 143,500 227,125 227,125
Other current liabilities 1,740,653 2,872,515 (58,333)(4) 2,684,182
------------ ------------ (130,000)(4) ------------
Total current liabilities 3,879,361 6,346,341 5,235,507
------------ ------------ ----------- ------------
Long-term obligations:
Notes payable to Provident Bank net of warrant value of
$653,241and $520,377) 13,919,125 14,051,989 (6,338,197)(1) 7,713,793
Notes payable to various fund affiliated with Geometry
Group net of warrant valuation of $228,567 in 1999 2,006,433 137,200 (4) 2,143,633
PIK notes payable to Provident Bank - 583,070 (583,070)(2) --
Note payable to officer 250,000 250,000 (250,000)(2) --
PIK notes payable to officer 32,242 (32,242)(2) --
Other long-term debt 18,339 13,432 13,432
------------ ------------ ----------- ------------
Total long-term obligations 14,187,464 16,937,166 9,870,858
------------ ------------ ----------- ------------
Stockholders' equity:
Common stock (25,000,000 shares authorized, 5,552,390
outstanding in 1998 and 7,019,711 in 1999) 11,869,175 12,272,637 1,643,092 (1) 17,449,841
1,956,312 (2)
1,577,800 (4)
Preferred stock (5,000,000 shares authorized) 4,929,274 (1) 4,929,274
Accumulated deficit (10,793,445) (21,507,281) (234,169)(1) (21,670,830)
70,620 (3)
------------ ------------ ----------- ------------
Total stockholders' equity (deficit) 1,075,730 (9,234,645) 708,285
------------ ------------ ----------- ------------
Total liabilities and stockholder's equity $ 19,142,555 $ 14,048,862 $ 15,814,650
------------ ------------ ----------- ------------
</TABLE>
(1) Conversion of $6,572,366 of senior secured debt less warrant valuation of
$234,169 to $4,929,274 no yield preferred stock and $1,643,092 common stock
at $1.00 per share.
(2) Private placement of $1,175,000 of common stock to local investors less
commissions of eight percent (8%) on $1,050,000, the conversion of PIK
notes to Provident Bank, PIK notes officer and a note payable to an officer
to common stock for $583,070, $32,242 and $250,000 respectively.
(3) Liquidation value of closed stores.
(4) Record additional capital of $1,715,000 less 8% commissions payable in a
participating note and the payment of interest to Provident Bank through
May 1, 2000, the payment of certain accounts payable, and accrued expenses
and the estimated legal and other closing costs associated with this
transaction.
See accompanying note to condensed consolidated financial statements.
<PAGE>
Consolidated Statements of Operations
Noble Roman's, Inc. and Subsidiaries
<TABLE>
<CAPTION>
1997 1998 1999 Adjustment Proforma
---- ---- ----
Year ended December 31,
-----------------------
Proforma 1999
<S> <C> <C> <C> <C> <C>
Restaurant revenue $ 25,368,644 $23,306,780 $ -- $ -- $ --
Express royalties and fees 524,119 2,161,027 3,269,888 3,269,888
Restaurant royalties 132,741 125,093 81,313 618,727(2) 700,040
Administrative fees and other 79,244 188,786 457,824 457,824
------------ ------------ ------------ ------------
Total revenue 26,104,748 25,781,686 3,809,024 4,427,751
Restaurant operating expenses:
Cost of revenue 5,428,908 4,685,955 -- --
Salaries and wages 9,251,298 8,514,806 -- --
Rent 2,455,115 2,223,367 -- --
Advertising 1,320,491 1,667,140 -- --
Other 5,639,373 5,689,619 -- --
Express operating expenses 219,955 838,655 1,611,086 1,611,086
Depreciation and amortization 1,076,325 1,059,088 64,848 64,848
General and administrative 2,816,266 3,001,957 848,538 848,538
Restructuring costs 6,528,726 570,544 -- --
------------ ------------ ------------ ------------
Operating income (loss) (8,631,709) (2,469,445) 1,284,552 1,903,279
Interest and other expense 995,590 1,387,011 1,901,948 (655,515)(1) 1,246,433
Income (loss) before income taxes (9,627,299) (3,856,456) (617,396) 656,846
Income tax (benefit) (4,148,053) (1,311,194) (209,915) 433,242 (3) 233,328
------------ ------------ ------------ ------------
Net income (loss) from continuing operations (5,479,246) (2,545,262) (407,481) -- 433,519
Discontinued operations (note 8):
Loss from discontinued operations (less
applicable income tax benefit of 632,849) -- -- (1,228,471) -- --
Loss on disposal of assets from discontinued
operations including a provision of
$1,599,032 for operating losses during phase
out period (less applicable income tax benefit
of $4,676,468) -- -- (9,077,885) -- --
------------ ------------ ------------ ------------
Net income (loss) before extraordinary gain (5,479,246) (2,545,262) (10,713,838) 433,519
Extraordinary item net of tax expense of $804,931
in 1997 and $203,876 in 1998
1,562,513 395,696 -- --
------------ ------------ ------------ ------------
Net income (loss) $ (3,916,733) $ (2,149,565) $(10,713,838) $ 433,519
------------ ------------ ------------ ------------
Earnings per share:
Net income (loss) from continuing operations $ (1.33) $ (.62) $ (.07) $ .04
Net income (loss) before extraordinary item (1.33) (.61) (1.78) .04
Net income (loss) (.95) (.52) (1.78) .04
------------ ------------ ------------ ------------
Weighted average number of common shares
outstanding 4,131,324 4,131,324 6,014,864 11,600,552
Earnings per share assuming full dilution:
Net income $ .03
Weighted number of common shares outstanding
assuming full dilution 16,332,718
</TABLE>
(1) Reduction in interest as a result of conversion of senior secured note
payable to Provident Bank of $6,572,366 less warrant valuation of $234,169
to $4,929,274 no yield preferred stock which is convertible to common stock
at $3.00 per share and $1,643,092 common stock at $1.00 per share.
(2) Royalties which would have been earned at 4% for 31 restaurants franchised
or to be franchised.
(3) Tax effect of above entries.
See accompanying note to condensed consolidated financial statements.
<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, 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
------------ ------------ ------------ ------------
Issuance of warrants to purchase stock 275,000 275,000
Issuance of common stock in exchange
for certain liabilities 90,419 90,419
Conversion of warrants to stock 1,467,321 38,044 38,044
1999 net loss (10,713,837) (10,713,837)
------------ ------------ ------------ ------------
7,019,711 $ 12,272,638 $(21,507,282) $ (9,234,645)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Cash Flows
Noble Roman's, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31,
OPERATING ACTIVITIES 1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net loss $(3,916,733) $(2,149,565) $(10,713,837)
Adjustments to reconcile net (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,081,217 1,113,447 970,401
Restructuring costs 5,404,504 -- --
Non-cash interest 615,312
Deferred federal income taxes (4,140,338) (1,107,319) (5,518,998)
Loss from discontinued segment (1,562,488) -- 9,814,285
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (189,715) (199,025) (138,782)
Inventories 48,794 (42,686) 407,663
Prepaid expenses (730,890) (27,211) 76,465
Other assets (85,537) (29,397) (5,113)
Increase (decrease) in:
Accounts payable (583,360) (67,630) 1,252,111
Other current liabilities 290,000 182,629 1,131,245
Deferred franchise fees 63,800 79,700 83,625
----------- ----------- -----------
NET CASH USED BY OPERATING
ACTIVITIES (4,320,746) (2,247,057) (2,025,623)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (765,174) (678,705) (617,511)
Sale of property and equipment 260,325
NET CASH USED BY INVESTING ACTIVITIES (765,174) (678,705) (357,186)
----------- ----------- -----------
FINANCING ACTIVITIES
Principal payments on long-term debt and capital lease
obligations (287,694) (22,404) (4,908)
Proceeds from notes payable to officer -- 315,840 --
Proceeds from long-term debt, net of debt issue costs 2,787,248 2,592,366 1,966,703
Issuance of capital stock 432,334
Legal fees associated with conversion of debt to equity (9,582)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 5,079,554 2,885,802 2,384,547
----------- ----------- -----------
INCREASE (DECREASE) IN CASH (6,366) (39,960) 1,737
Cash at beginning of year 74,502 68,136 28,176
----------- ----------- -----------
CASH AT END OF YEAR $ 68,136 $ 28,176 $ 29,913
=========== =========== ===========
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
As a result of the Company's debt restructurings with Provident Bank, the
Company was not required to pay interest on the $11,000,000 note payable to
Provident Bank for the period November 1, 1997 through October 31, 1998. The
computed interest cost for the twelve month period ended December 31, 1998 was
$599,572.
The Company's loan agreement provided that interest on certain of its notes
payable is to be paid by the issuance of PIK notes. The amount of such non-cash
interest for the twelve month period ended December 31, 1999 was $615,312.
See accompanying notes to consolidated financial statements.
<PAGE>
Notes to Consolidated Financial Statements
Noble Roman's, Inc. and Subsidiaries
Note l: Summary of Significant Accounting Policies
General Organization: The Company sells and services franchises for
non-traditional and co-branded foodservice operations under the trade name
"Noble Roman's Pizza".
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.
<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, 1999 because it is more likely than not
that the Company will earn sufficient income before the expiration of its net
operating loss carry forwards to fully realize the value of its deferred tax
asset. The net operating less carryforward is approximately $31.1 million of
which approximately $30.3 million expires between the years 2012 and 2015.
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
In the period February 2000 thru July 2000, the Company entered into a series
of transactions resulting in its obtaining approximately $10.5 million in
additional capital. The additional capital came from investors associated with
The Geometry Group in New York and certain local investors in Indianapolis
purchasing approximately $2.9 million of common stock in exchange for cash, The
Provident Bank exchanging $6.5 million senior secured debt and $740 thousand PIK
notes for $2.4 million of common stock and $4.9 million in no-yield preferred
stock which may later be converted to common stock at $3.00 per share at the
Bank's option and an officer converted $312 thousand in notes for common stock.
These transactions were all at $1.00 per share.
Note 3: Recent Strategic Events
Over the last several years, the Company made the strategic decision to refocus
its business on its non-traditional and co-branding opportunities and away from
operating full-service, traditional restaurant operations. Given the potential
size of the opportunities in the non-traditional and co-branding segments, and
the actual rapid pace of their growth within the Company, management determined
that all financial and human resources at the Company's disposal would need to
be focused on franchise services to maximize the potential for stakeholders.
The Company realizes both the historic and continuing significance of its
full-service operations in its on-going franchise development. Accordingly, in
1999 the Company made the decision to consolidate the operations of its 29 most
productive full-service units in central and southern Indiana into four
operating districts, and to seek an independent franchise operator to purchase
and operate those units utilizing the existing supervisory and managerial
resources currently in place. In seeking a potential partner for this
transaction, the Company is selectively searching for an experienced operator
with the goal of reconditioning certain aspects of the existing facilities and
expanding the concept under a pre-agreed strategy and format. The Company will
continue to offer franchise services to the full-service franchises in much the
same fashion as it is currently doing with its non-traditional and co-branded
franchises. The Company is actively pursuing such arrangements and has already
franchised 15 of them and believes that an agreement can be reached for the
remainder. There
<PAGE>
can be no assurance that a transaction will be completed, or if so, under what
terms or time frame. The Company has used its best estimates to reserve for
future operations until completed.
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 $14,572,366.47 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.
On April 30, 1999, 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.
In a subsequent transaction The Provident Bank exchanging $6.5 million senior
secured debt and $740 thousand PIK notes for $2.4 million in common stock and
$4.9 million in no-yield preferred stock which may be later converted to common
stock at $3.00 per share at the Bank's option and an officer converted $312
thousand of notes for common stock. All of these transactions were at $1 per
share.
<PAGE>
Cash payments for interest on all of the Company's debt totaled $1,036,403,
$1,106,346 and $580,269 in 1997, 1998 and 1999, respectively.
Note 5: Leased Assets and Lease Commitments
The Company formerly leased its restaurant facilities under noncancelable lease
agreements which generally had initial terms ranging from five to 20 years with
extended renewal terms. The leases generally required the Company to pay all
real estate taxes, insurance and maintenance costs. The leases provided for a
specified annual rental, and some leases called for additional rental based on
sales volume over specified levels at that particular location. At December 31,
1999, obligations under noncancelable operating and capitalized leases for 2000,
2001, 2002, 2003, 2004 and after 2004 were $1.0 million, $1.0 million, $986
thousand, $776 thousand, $634 thousand and $5.9 million, respectively. As a
charge to discontinued operations, the Company has provided for estimated future
cost associated with these leases until they are sold or terminated.
Rent expense for operating leases were $2,455,115, $2,223,367 and $1,298,567 in
1997, 1998 and 1999, respectively.
The Company currently leases two properties from related parties with rental
payments in 1997, 1998 and 1999 of $113,567, $113,567 and $113,567,
respectively.
Note 6: Income Taxes
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current benefit $ -- $ -- $ -- $ --
Deferred benefit (639,790) (4,148,053) (1,311,194) (209,915)
----------- ----------- ----------- -----------
Income tax benefit $ (639,790) $(4,148,053) $(1,311,194) $ (209,915)
----------- ----------- ----------- -----------
</TABLE>
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 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computed "expected" tax benefit $(1,532,238) $(3,290,965) $(1,328,874) $ (209,915)
Amortization of costs in excess of assets
acquired 17,680 17,680 17,680
Valuation allowance 874,768 (874,768) -- --
----------- ----------- ----------- -----------
Income tax benefit $ (639,790) $(4,148,053) $(1,311,194) $ (209,915)
=========== =========== =========== ===========
</TABLE>
The deferred tax asset at December 31 consists of the following:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Tax credit carryforwards $ 193,680 $ 193,680 $ 172,768
Net operating loss carryforward 4,094,623 5,187,442 9,788,955
Franchise value for tax purposes of companies acquired 20,300 -- --
---------- ---------- ----------
Total gross deferred tax assets 4,308,603 $5,381,120 $9,961,723
---------- ---------- ----------
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 $9,961,723
========== ========== ==========
</TABLE>
<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.
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 1999, options to acquire 47,500
shares were granted. In 1998, options to acquire 24,000 shares were granted. In
1997 options to acquire 60,000 shares were granted. Options granted and
remaining outstanding at December 31, 1999 are: 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, 43,500 common shares at $1.75
per share, 60,000 common shares at $1.00 per share, 24,000 common shares at
$1.385 per share, 10,000 common shares at $2.06 per share, 25,000 common shares
at $2.75 per share, 2,500 common shares at $1.63 per share, 10,000 common shares
at $1.40 per share and 147,250 common shares at $1.46 per share. As of December
31, 1999, options for 85,750 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 1997, 1998 and 1999 were estimated to be $.87
per share, $.76 per share and $.75 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, 1997, December 31, 1998 and December 31, 1999:
1997 1998 1999
---- ---- ----
Net loss $ 3,936,253 $ 2,167,325 $ 10,749,463
Loss per share $ .87 $ .52 $ 1.79
<PAGE>
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; (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.
In the period February 2000 thru July 2000, the Company entered into a series of
transactions resulting in its obtaining approximately $10.5 million in
additional capital. The additional capital came from investors associated with
the Geometry Group, Inc. in New York and certain local investors in Indianapolis
purchasing approximately $2.9 million of common stock in exchange for cash, The
Provident Bank exchanged $6.5 million senior secured debt and $740 thousand PIK
notes for $2.4 million of common stock and $4.9 million in no-yield preferred
stock which may later be converted to common stock at $3.00 per share at the
Bank's option and an officer converted $312 thousand in notes for common stock.
Note 8: Loss from Discontinued Operations
Pursuant to the Company's strategic decision to refocus its business on its
non-traditional and co-branding franchising opportunities, the Company closed 16
of its full-service restaurants and began franchising efforts for the remaining
31 full-service restaurants. Accordingly, all assets associated with its
full-service operations were reduced to the estimated sales price of the 31
restaurants being franchised. The reduction in the carrying value of those
assets, all activities in 1999 associated with the full-service restaurants and
a reserve for future costs associated with those restaurants in the amount of
$1,599,032 was charged to a loss on discontinued operations.
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.
<PAGE>
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.
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.
Mr. Mobley 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.
TradeCo Global Securities, Inc., where James Lewis is the majority shareholder,
was paid $40,000 in 1999 for financial advisory services.
Note 11. 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 are franchises
and provides ongoing services to independent franchisees.
<TABLE>
<CAPTION>
Income tax
Depreciation Operating Interest expense Segment Expenditures
Revenue and amortization income (loss) Expense (benefit) assets for property
------- ---------------- ------------- ------- --------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
Restaurant $25,368,644 $ 761,224 $ 512,235 $ 96,378 $ 206,928 $ 6,808,625 $ 746,449
Express 524,119 -- 304,164 -- 103,416 -- --
Corporate 211,985 315,101 (9,448,108) 899,212 (4,458,397) 11,396,371 18,725
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $26,104,748 $ 1,076,325 $(8,631,709) $ 995,590 $(4,148,053) $18,204,996 $ 765,174
1998
Restaurant $23,306,780 $ 739,925 $ (214,032) $ 41,908 $ (58,522) $ 6,965,696 $ 576,036
Express 2,161,027 -- 1,322,372 -- 449,606 200,192 30,912
Corporate 313,879 319,163 (3,577,785) 1,345,103 (1,702,278) 11,976,667 71,757
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $25,781,686 $ 1,059,088 $(2,469,445) $ 1,387,011 $(1,311,194) $19,142,555 $ 678,705
1999
Restaurant $ -- $ -- $ -- $ -- $ -- $ 2,674,880 $ 554,829
Express 3,269,888 5,945 1,268,857 -- 431,411 725,627 26,379
Corporate 539,137 58,903 15,696 1,901,348 (641,326) 11,398,355 36,303
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 3,809,021 $ 64,848 $ 1,284,552 $ 1,901,348 $ (209,915) $14,048,862 $ 617,511
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<PAGE>
The executive officers and directors of the Company are:
Name Age Positions with the Company
---- --- --------------------------
Paul W. Mobley 59 Chairman of the Board and Director
A. Scott Mobley 36 President and Secretary
Douglas H. Coape-Arnold 54 Director
Donald A. Morrison, III 57 Director
Troy Branson 36 Executive Vice President of Franchising
Wade Shanower 50 Vice President of Express Operations
Dan P. Hutchison 40 Chief Financial Officer
The executive officers of the Company serve at the discretion of the Board
of Directors and are elected at the annual meeting of the Board. Directors are
elected annually by the stockholders. The following is a brief description of
the previous business background of the executive officers and directors:
Paul W. Mobley has been Chairman of the Board since December 1991 and a
Director since 1974. Mr. Mobley was President and Chief Executive Officer of the
Company from 1981 to 1997. From 1975 to 1987, Mr. Mobley was a significant
shareholder and president of a company which owned and operated 17 Arby's
franchise restaurants. From 1974 to 1978, he also served as Vice President and
Chief Operating Officer of the Company and from l978 to 1981 as Senior Vice
President. He is the father of A. Scott Mobley. Mr. Mobley has a B.S. in
Business Administration from Indiana University and is a CPA.
A. Scott Mobley has been President since October 1997 and a Director since
January 1992, and Secretary since February 1993. Mr. Mobley was Vice President
from November 1988 to October 1997 and from August 1987 until November 1988
served as Director of Marketing for the Company. Prior to joining the Company
Mr. Mobley was a strategic planning analyst with a division of Lithonia Lighting
Company. Mr. Mobley has a B.S. in Business Administration from Georgetown
University and an MBA from Indiana University. He is the son of Paul Mobley.
Douglas H. Coape-Arnold was appointed a Director of the Company in May
1999. Mr. Coape-Arnold has been Managing General Partner of Geovest Capital
Partners, L.P. since January 1997, and Managing Director of TradeCo Global
Securities, Inc. since May 1994. Mr. Coape-Arnold's prior experience includes
serving as Vice President of Morgan Stanley & Co., Inc. from 1982 to 1986,
President & Chief Executive Officer of McLeod Young Weir Incorporated from 1986
to 1988, and Senior Vice President of GE Capital's Transportation & Industrial
Funding Corp. from 1988 to 1991. Mr. Coape-Arnold is a Chartered Financial
Analyst.
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.
Troy Branson, has been Executive Vice President of Franchising for the
Company since November 1997 and since 1992, he was Director of Business
Development. Prior to joining the Company, Mr. Branson was an owner of
Branson-Yoder Marketing Group since 1987, after graduating from Indiana
University where he received a B.S. in Business.
Wade Shanower has been Vice President of Express Operations since August
1999, 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.
<PAGE>
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.
Dan P. Hutchison has been Chief Financial Officer since April 1999. Prior
to joining the Company, Mr. Hutchison was Director of Operations from May 1998
to February 1999, V.P. of Finance and Administration from January 1997 to May
1998, and Controller from April 1993 to January 1997 with the American Trucker
magazine, a division of Southam, Inc. Prior to his employment with Southam,
Inc., Mr. Hutchison was Assistant Controller for ATEC Associates, Inc. Mr.
Hutchison has a B.S. degree from Indiana University and is a CPA.
Section l6(a) Beneficial Ownership Reporting Compliance
Based solely on a review of the copies of reports of ownership and changes
in ownership of the Company's common stock, furnished to the Company, or written
representations that no such reports were required, the Company believes that
during 1999 all filing requirements under Section 16(a) of the Securities
Exchange Act of 1934 were complied with.
ITEM l1. 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
1999 exceeded $100,000.
<PAGE>
SUMMARY COMPENSATION TABLE
--------------------------
Long Term
Compensation
Annual Compensation Securities Underlying
Name and Principal Position Year Salary (l) Bonus Options #
--------------------------- ---- ---------- ----- ---------------------
Paul Mobley 1999 $240,000 $ --
Chairman of the Board 1998 240,000 -- 10,000
1997 180,000 -- --
A. Scott Mobley 1999 $150,000 $ --
President and Secretary 1998 150,000 -- --
1997 96,923 -- 10,000
(1) The Company did not have any bonus, retirement, or other arrangements
or plans respecting compensation, except for an Incentive Stock Option Plan for
executive officers and other employees 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 12/31/99 Options at 12/31/99 (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 $1.40, the last reported transaction
price of the Company's common stock on December 31, 1999.
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.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of July 25, 2000, there were 12,605,399 shares of the Company's common
stock outstanding. The stockholders of the Company have agreed to cause its
authorized common stock to be increased to 25,000,000 shares on April 25, 2000.
The following table sets forth the amount and percent of the Company's common
stock beneficially owned on July 25, 2000 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 2,541,018 (3) 18.3%
One Virginia Avenue, Suite 800
Indianapolis, IN 46204
A. Scott Mobley (1) 913,326 (4) 7.0%
One Virginia Avenue, Suite 800
Indianapolis, IN 46204
Provident Financial Group, Inc. 5,332,839 (5) 36.4%
One E. Fourth Street
Cincinnati, OH 45202
Donald A. Morrison, III 72,919 (6) .6%
320 N. Meridian, #412
Indianapolis, IN 46204
Geovest Capital Partners, L.P. 1,871,625 (8) 13.7%
110 E. 59th Street, 18th Floor
New York, N.Y. 10022
James Lewis 4,564,136 (9) 30.7%
110 E. 59th Street, 18th Floor
New York, N.Y. 10022
All Executive Officers and
Directors as a Group (7 Persons) 5,501,888 35.8%
</TABLE>
*Less than 1%
(1) All shares owned directly unless otherwise noted.
(2) The percentage calculations are based upon 12,605,399 shares of our common
stock issued and outstanding as of July 25, 2000 and, for each officer or
director of the group, the number of shares subject to options or
conversion rights exercisable currently or within 60 days of July 25, 2000.
(3) This total includes a warrant to purchase 600,000 shares of stock at an
exercise price of $.40 per share issued November 19, 1997 in connection
with the financial restructuring with The Provident Bank and a warrant to
purchase 700,000 shares of our common stock at an exercise price of $2.00
per share, in the event of (i) a change of control in Noble Roman's, (ii)
the sale of substantially all of Noble Roman's assets, or (iii) the merger
or consolidation of Noble Roman's with another entity.
(4) Includes 53,500 shares subject to options granted under an employee stock
option plan which are currently exercisable at $3.63 per share for 4,500
common shares, $3.25 per
<PAGE>
share for 6,500 common shares, $3.68 per share for 7,500 common shares,
$6.44 per share for 5,000 common shares , $1.75 per share for 20,000 common
shares and $1.00 per share for 10,000 common shares. Also includes a
warrant to purchase 400,000 shares of our common stock at an exercise price
of $.40 per share issued November 19, 1997 in connection with the financial
restructuring with The Provident Bank and a warrant to purchase 300,000
shares of our common stock at an exercise price of $2.00 per share, in the
event of (i) a change of control in Noble Roman's, (ii) the sale of
substantially all of Noble Roman's assets, or (iii) the merger or
consolidation of Noble Roman's with another entity.
(5) This total includes warrants to purchase in the aggregate 385,000 shares of
our common stock at $.01 per share. The warrants were granted to Provident
Financial Group as partial consideration for its obligations pursuant to an
Amended and Restated Credit Agreement. The total also includes 1,643,091
shares of our common stock which Provident's 4,929,275 shares of our
preferred stock may be converted into.
(6) This total includes 70,219 shares owned by Traub and Company, Inc. in its
investment account, of which Mr. Morrison is shareholder. Mr. Morrison
disclaims beneficial ownership of such shares beyond his interest in Traub
and Company.
(7) Includes warrants to purchase 1,771,605 shares beneficially owned by
Geovest Capital Partners, L.P. in its investment account, of which Mr.
Coape-Arnold is managing partner. Mr. Coape-Arnold disclaims beneficial
ownership of such shares beyond his interest in Geovest Capital Partners.
(8) Includes warrants to purchase 20,000 shares of our common stock at $.01 per
share obtained from The Provident Bank and 1,000,000 shares of our common
stock convertible from participating income notes.
(9) This total includes 138,580 shares of our common stock owned by James Lewis
Family Trust, 200,000 shares of our common stock owned by James W. Lewis
MPP, 520,000 shares of our common stock convertible from participating
income notes, 50,000 shares of our common stock convertible from
participating income notes owned by James Lewis Family Investment, L.P.,
100,000 shares of our common stock convertible from participating income
notes owned by James W. Lewis IRA, 100,000 shares of our common stock
convertible from participating income notes owned by James W. Lewis, MPP
and a warrant to purchase 1,500,000 shares of our common stock at $.01 per
share obtained from The Provident Bank.
<PAGE>
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
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.
TradeCo Global Securities, Inc., where James Lewis is the majority shareholder,
was paid $40,000 in 1999 for financial advisory services.
<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, 1998 and 1999 16
Consolidated Statements of Operations - years ended December 31,
1997, 1998 and 1999 18
Consolidated Statements of Changes in Stockholders' Equity - years
ended December 31, 1997, 1998 and 1999 20
Consolidated Statements of Cash Flows - years ended December 31,
1997, 1998 and 1999 21
Notes to Consolidated Financial Statements 23
Report of Independent Auditors - Larry E. Nunn & Associates, LLC 30
(a) Exhibits
Exhibit No.
-----------
3.1 Amended Articles of Incorporation of the Registrant (1)
3.2 Amended and Restated By-Laws of the Registrant
4.1 Specimen Common Stock Certificates (1)
10.3 Employment Agreement with Paul W. Mobley dated November
15, 1994 (3)
10.4 Credit Agreement with The Provident Bank dated December
1, 1995 (5)
10.6 1984 Stock Option Plan
10.7 Form of Stock Option Agreement (6)
11.1 Statement Re: Computation Per Share Earnings
21.1 Subsidiaries of the Registrant (2)
24.1 Not Applicable (unless going to sign as power of
attorney for directors)
(1) Incorporated by reference from Registration Statement filed
by the Registrant on Form S-18 on October 22, 1982 and ordered
effective on December 14, 1982 (SEC No. 2-79963C), and, for the
Amended Articles of Incorporation, from the Registrant's
Amendment No. 1 to the Post Effective Amendment No. 2 to
Registration Statement on Form S-1 on July 1, 1985. (SEC File
No.2-84150).
(2) Incorporated by reference to the Registrant's Registration
Statement on Form SB-2 (SEC File No. 33-66850) ordered effective
on October 26, 1993.
(3) Incorporated by reference from the Form 8-K filed by the
registrant on February 17, 1993.
<PAGE>
(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.
<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: 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: /s/ Paul W. Mobley
----------------- -------------------------------------
Paul W. Mobley
Chairman of the Board and Director
Date: /s/ A. Scott Mobley
----------------- -------------------------------------
A. Scott Mobley
President and Director
Date: /s/ Donald A. Morrison, III
----------------- -------------------------------------
Donald A. Morrison, III
Director
Date: /s/ Douglas H. Coape-Arnold
----------------- -------------------------------------
Douglas H. Coape-Arnold
Director
