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
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
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
laws regulating the offer and sale of franchises. Several states also regulate aspects of the franchisor-franchisee relationship. The FTC requires us to furnish to prospective franchisees a franchise offering circular containing certain specified information. Some states also regulate the sale of franchises and require registration of the franchise offering circular with state authorities. Substantive state laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the franchisor-franchisee relationship in certain respects. The state laws often limit, among other things, the duration and scope of non-competition provisions and the ability of a franchisor to terminate or refuse to renew a franchise. Some foreign countries also have disclosure requirements and other laws regulating franchising and the franchisor-franchisee relationship, and the Company would be subject to applicable laws in each jurisdiction where franchised units may become established.
ITEM 2.
ITEM 2. PROPERTIES
The Company's headquarters are located in 8,000 square feet of leased office space in Indianapolis, Indiana. The lease for this property expires in December 2002.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation relating to claims arising out of its normal business operations and relating to restaurant facilities closed in 1997 and 2000. The Company believes that none of its current proceedings, individually or in the aggregate, will have a material adverse effect upon the Company beyond the amount reserved in its financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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.
PART II
ITEM 5.
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.
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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (In thousands except per share data)
(1) See Note 2 of Company's financial statements for pro forma balance sheet reflecting events subsequent to December 31, 1999.
ITEM 7.
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.
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.
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.
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,
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheets Noble Roman's, Inc. and Subsidiaries
(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.
Consolidated Statements of Operations Noble Roman's, Inc. and Subsidiaries
(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.
Consolidated Statements of Changes in Stockholders' Equity (Deficit) Noble Roman's, Inc. and Subsidiaries
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows Noble Roman's, Inc. and Subsidiaries
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.
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.
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
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.
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:
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:
The deferred tax asset at December 31 consists of the following:
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
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.
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.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are:
Name Age Positions with the Company ---- --- -------------------------- Paul W. Mobley 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.
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.
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.
ITEM 12.
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:
*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
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.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of transactions to which the Company and certain officers and directors of the Company 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.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following consolidated financial statements of Noble Roman's, Inc. and subsidiaries are included in Item 8: Page ----
Consolidated Balance Sheets - December 31, 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.
(4) Incorporated by reference from the Form 8-K filed by the registrant on June 3, 1993.
(5) Incorporated by reference from the Form 8-K filed by the registrant on December 5, 1995.
(6) Incorporated by reference from the Form S-8 filed by the registrant on November 29, 1994 (SEC File No. 33-86804).
(b) Reports on 8-K
None.
SIGNATURES ----------
In accordance with of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NOBLE ROMAN'S, INC.
Date: 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