-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AM27SiLHBQpifmXhQxsW7PaTXQLXTtkrJVQaRS8WwOmxRiTszeBKnhDTlOpxOo4M j6EW1C7htS5bLTS3b2mOsQ== 0000926274-99-000243.txt : 19990824 0000926274-99-000243.hdr.sgml : 19990824 ACCESSION NUMBER: 0000926274-99-000243 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990823 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOBLE ROMANS INC CENTRAL INDEX KEY: 0000709005 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 351281154 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-11104 FILM NUMBER: 99697873 BUSINESS ADDRESS: STREET 1: ONE VIRGINIA AVE STREET 2: STE 800 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 BUSINESS PHONE: 3176343377 MAIL ADDRESS: STREET 1: ONE VIRGINIA AVENUE STREET 2: SUITE 800 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 10-K405 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1998 [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the transition period from ____ to____. Commission file number 0-11104 NOBLE ROMAN'S, INC. (Exact name of registrant as specified in its charter) INDIANA 35-1281154 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) ONE VIRGINIA AVENUE, SUITE 800 INDIANAPOLIS, INDIANA 46204 (Address of principal executive offices) Registrant's telephone number: (317) 634-3377 Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. $6,578,968 as of August 3, 1999 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 5,565,390 shares of common stock as of August 3, 1999 Documents Incorporated by Reference: None NOBLE ROMAN'S, INC. FORM 10-K Year Ended December 31, 1998 Table of Contents Item # in Form 10-K Page PART I 1. Business 3 2. Properties 6 3. Legal Proceedings 7 4. Submission of Matters to a Vote of Security Holders 7 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters 8 6. Selected Financial Data 9 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 8. Financial Statements and Supplementary Data 17 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 30 PART III 10. Directors and Executive Officers of the Registrant 30 11. Executive Compensation 32 12. Security Ownership of Certain Beneficial Owners and Management 33 13. Certain Relationships and Related Transactions 34 PART IV 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 36 2 PART I ITEM 1. BUSINESS GENERAL INFORMATION - ------------------- Noble Roman's, Inc. (the "Company") sells franchises for non-traditional food service locations and operates casual dining restaurants that specialize in serving high quality pizza. The Company has awarded more than 360 franchises in 24 states for its Express concept since 1997 and has 51 full-service restaurants, four of which are franchises. Noble Roman's, "The Better Pizza People", offers a Pizza Express franchise to simplify food service operations for non-traditional locations such as universities, bowling centers, convenience stores, grocery stores, truck stops, travel centers and other venues where customer traffic already exists. In addition, The Company offers franchises to traditional restaurant concepts as a co-brand. A Noble Roman's franchise requires a modest investment by the franchisee, has minimal staffing requirements, enables the franchisee to operate low food cost and offers a menu of great tasting food products. The menu items are delivered to the franchisee weekly by third party vendors already prepared. The franchisee need only assemble then bake the products in a small conveyor oven prior to serving them fresh to the customer. The Company's full-service restaurants are located primarily in free-standing northern Italian style buildings. The Company attempts to differentiate its full-service restaurants from other pizza restaurants by offering a broad selection of superior tasting pizza products at a menu price comparable to "ordinary pizza". The Company seeks to reach a diverse customer base by offering a casual dining atmosphere in addition to a quick service menu at lunch, carry-out, drive-thru and delivery service all day. NOBLE ROMAN'S PIZZA EXPRESS - --------------------------- The Company developed and began to offer franchises of its Express concept in early 1997. The Express concept was designed to capitalize on its full-service products but with minimal labor requirements in the rapidly growing distribution channel of non-traditional locations. The Company has awarded more than 330 franchises for non-traditional locations since 1997. The Company plans to continue aggressively expanding its Express concept and currently has discussions and negotiations ongoing for many additional franchise locations. The Express concept is simple and inexpensive to operate, has a low investment cost for the franchisee (approximately $30,000 each), low cost of sales (approximately 23%-25% at recommended retail prices), simple product procedures, low staffing requirements and uses approximately 100 square feet of existing space. The system is fast and convenient for customers and features fresh-baked, great tasting individual and large pizzas, breadsticks with dip, buffalo wings, baked pasta and hot deli sandwiches plus a breakfast menu consisting of biscuit sandwiches, Pan One omelets, biscuits and gravy, and cinnamon rounds. The products are all delivered to the franchisee pre-prepared; the franchisee need only assemble then bake the products in a small conveyor oven prior to serving them fresh to the customer. Because the Express units are targeted for existing facilities it is possible to open a unit within two weeks or less from the time the franchise is sold. 3 FULL SERVICE RESTAURANTS - ------------------------ The Company's 47 owned and 4 franchised full-service restaurants are located primarily in Indiana. The Company's emphasis is on increasing same store sales in its full-service restaurants by improving customer service and consistency, and through successful product promotion. The Company's full-service restaurants specialize in high-quality pizza with the emphasis on taste, crust and topping variety with menu prices targeted to be comparable to "ordinary pizza". The menu features a choice of three crust styles: The Hand-Tossed Round, a round crust hand-tossed to order using traditional tossing techniques; the Monster(R), an extra-thick pan pizza made with 50% more topping and 50% more cheese; and the Deep-Dish Sicilian with a thick but light and airy crust baked with olive oil in an old-fashioned, rectangular pan to produce crispy, caramelized edges. Of total pizzas sold, Hand-Tossed Round represents approximately 65%, Deep-Dish Sicilian approximately 15%, Monster pizzas approximately 5% and individual pan pizzas approximately 15%. The Company offers a choice of 31 toppings. Another signature product for the Company is Breadsticks, hand-rolled and fresh-baked throughout the day. Breadsticks account for approximately 20% of food sales. In 1998, non-beverage sales accounted for approximately 88% of total restaurant revenue. Noble Roman's marketing strategy is niche oriented and attempts to leverage the Company's reputation for superior product quality. The marketing strategy stresses taste, quality, choice, value and casual dining all at a price comparable to "ordinary" pizza. The Company attempts to create value by offering superior products and service at competitive prices. To communicate this message to the public, the Company utilizes point-of-purchase material in addition to electronic and print media. Recognizing that families are an important element of the Company's target market, the Company directs part of its marketing efforts toward children. The Noble Roman's Pizza Monster (R), a big purple and blue hairy creature, makes appearances in commercials, restaurants, local community functions and parades. Nearly all restaurants have viewing windows with platforms where customers can view the entire kitchen activity, including pizza makers who toss the pizza dough by hand. The Company also markets special "Kid Parties" which allow groups of youngsters to tour the restaurant and try their hand at tossing pizzas. RECENT HISTORY - -------------- During 1995 and 1996, the Company attempted an acquisition of a 187-unit pizza restaurant chain operating in seven states in the Northeast as a part of a strategic decision to acquire and consolidate other regional chains. For a number of reasons the attempted acquisition failed, despite senior management devoting substantially all of its attention to that attempt for a period of almost 18 months. As the Company's focus was increasingly on the acquisition transaction, the Company's primary market was, as a result of several demographic/consumption trends, targeted for expansion by a large number of mid-scale dining chains for expansion. The unemployment rates in the Company's labor markets were approaching record lows and the Company's personnel were aggressively recruited by others. Senior management, due to the acquisition transaction, was unable to participate in daily operations during the period. Because of the Company's dramatic turnover and its inability to stabilize staffing levels through ordinary recruiting efforts, sales and margins declined. The Company suffered serious losses and defaulted on its loan agreement with its primary lender. Due to a lack of staffing and the Company's financial difficulties, 4 the Company closed 19 of its restaurants in May 1997 and initiated a turnaround strategy consisting of three primary elements: o Negotiated a series of debt restructurings with its primary lender, The Provident Bank, whereby the Bank loaned the Company additional funds, converted a portion of its debt to equity and extended maturity of remaining debt. The Company also obtained additional funding from various investors associated with The Geometry Group, New York, in the form of convertible participating income notes which may, at the option of the investors, be converted to equity April 15, 2003. o Restructured the Company's executive staff, including the appointment of Scott Mobley as President, Wade Shanower as Vice President of Operations, Troy Branson as Vice President of Franchising, Art Mancino as Vice President of Development and Dan Hutchison as Chief Financial Officer. o Began franchising Noble Roman's Pizza Express for non-traditional locations such as convenience stores, grocery stores, truck stops, travel centers, universities, bowling centers and to other traditional restaurants as a Co-Brand. The Express concept is designed to capitalize on the rapid growth of non-traditional locations for quick service restaurants and to be simple to operate, requiring a modest investment, with minimal staffing requirements while serving great tasting pizza and related products. The concept was designed to be convenient and quick for its customers. Based on experience to date, the Company believes that franchising its Express concept offers opportunities for rapid growth for the next several years. COMPETITION - ----------- The traditional-service restaurant industry is intensely competitive with respect to price and levels of product promotions, service, location and food quality. The Company's full-service units compete with local, regional and national pizza chains, casual dining and fast food restaurants. The Company also competes with all restaurants in its markets for management and hourly employees. A significant change in pricing or other business strategies by one or more of the Company's competitors, including an increase in the number of restaurants in the Company's territories, could have an adverse impact on the Company's results of operations. The Company competes in its full service restaurants primarily on the basis of product quality, service and restaurant atmosphere. Franchising of the Express, although competitive, is much less so than is the competition for its full-service restaurants. In its Express business the Company competes on the basis of product quality, investment cost, cost of sales, simplicity of the operation and labor requirements. SEASONALITY OF SALES - -------------------- Sales at Noble Roman's restaurants are seasonal in nature reflecting changes in weather, outdoor activities, and school calendars. Due to the location of the majority of Company operations, sales in winter months, particularly January through March, are very sensitive to sudden drops in temperature and the occurrence of precipitation. In general, sales are strongest in the third and fourth quarters of the calendar year and lower in the first and second quarters. 5 EMPLOYEES - --------- As of August 3, 1999, the Company employed approximately 1,270 persons. Of these, approximately 48 were engaged in various executive and administrative functions, and the remaining employees were engaged in restaurant operations, approximately 150 including 20 Express employees are full-time with the balance being part-time. No employees are covered under collective bargaining agreements, and the Company believes that relations with its employees are good. TRADEMARKS AND SERVICE MARKS - ---------------------------- The Company owns several trademarks and service marks. Many of these, including the NOBLE ROMAN'S (R), the MONSTER (R) and PAN ONE (R), are registered with the United States Patent and Trademark Office. The Company believes that its trademarks and service marks have significant value and are important to its marketing efforts. GOVERNMENT REGULATION - --------------------- The Company is subject to various federal, state and local laws affecting its business. The Company's restaurants are subject to regulation by various governmental agencies, including state and local licensing, zoning, land use, construction and environmental regulations and various health, sanitation, safety and fire standards. The Company is also subject to the Fair Labor Standards Act and various state laws governing minimum wages, overtime and working conditions. Franchising is subject to various Federal and State franchising laws. The Company's restaurants are subject to federal and state environmental regulations, but these have not had a material effect on their operations. More stringent and varied requirements of local governmental bodies with respect to zoning, land use or environmental factors could delay or prevent development of new restaurants in particular locations. The Company's restaurants have licenses from regulatory authorities allowing them to serve beer and wine. The Company's licenses to sell alcoholic beverages must be renewed annually and may be suspended or revoked at any time for cause, including violation by the Company or its employees of any law or regulation pertaining to alcoholic beverage control, such as those regulating the minimum age of patrons or employees, advertising and inventory control. The Company may be subject in certain states to "dram-shop" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. The Company has never been named as a defendant in a lawsuit involving "dram-shop" statutes. ITEM 2. PROPERTIES The following table shows the locations of the 47 Company-owned full-service restaurants. 6 Location Total -------- ----- Bloomington, Indiana........................................ 4 Columbus, Indiana........................................... 2 Evansville, Indiana......................................... 6 Indianapolis, Indiana (Metropolitan Area)................... 25 Jasper, Indiana............................................. 1 Lafayette, Indiana.......................................... 2 Marion, Indiana............................................. 1 Martinsville, Indiana....................................... 1 Muncie, Indiana............................................. 1 New Castle, Indiana......................................... 1 Noblesville, Indiana........................................ 1 Owensboro, Kentucky......................................... 1 Terre Haute, Indiana........................................ 1 These restaurants are all located on leased property. The restaurant leases expire on dates ranging from 1999 to 2015, with the majority of the leases providing for renewal options. All leases provide for specified periodic rental payments, and some call for additional rental based on sales volumes. Most of the leases require the Company to maintain insurance on the property and pay the cost of insurance and taxes. The Company leases two of its restaurant properties from related parties. The Company believes that both such leases are on terms no less favorable to the Company than from the unaffiliated persons. The Company's headquarters are located in 8,000 square feet of leased office space in Indianapolis, Indiana. The lease for this property expires in December 2002. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various litigation relating to claims arising out of its normal business operations and relating to restaurant facilities closed in 1997. The Company believes that none of its current proceedings, individually or in the aggregate, will have a material adverse effect upon the Company beyond the amount reserved in its financial statements. Legal proceedings against the Company include REH Acquisition, Ltd. ("REH") versus Noble Roman's, Inc. and The Provident Bank., filed July 20, 1998 in the United States District Court for the Southern District of New York. The complaint alleges that the Company breached agreements entered into with the Plaintiff to seek to fund and restructure the Company's bank debt. The Company has denied liability and will defend vigorously. The Company has filed a counter-claim against REH and Elliott and Robert Herskowitz, individually, for false and malicious misrepresentations seeking actual and punitive damages against each of them. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information - ------------------- The Company's common stock is included on Nasdaq "Electronic Bulletin Board" and trades under the symbol "NROM". The following table sets forth for the periods indicated, the high and low bid prices per share of common stock as reported by Nasdaq. The quotations reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not represent actual transactions. 1997 1998 1999 ---- ---- ---- Quarter Ended: High Low High Low High Low ---- --- ---- --- ---- --- March 31 $ 3 1/8 1 1/2 7/8 5/8 2 1/16 1 9/16 June 30 1 5/8 1/4 1 31/32 5/8 3 15/32 2 September 30 1 3/8 1 17/32 1 1/8 December 31 1 5/16 13/32 2 13/32 29/32 Holder of Record - ---------------- As of August 3, 1999, the Company believes there were approximately 379 holders of record of common stock. This excludes persons whose shares are held of record by a bank, brokerage house or clearing agency. Dividends - --------- The Company has never declared or paid dividends on its common stock. The Company intends to retain earnings to fund the development and growth of its business and does not expect to pay any dividends within the foreseeable future. The Company's current credit facilities prohibit the Company from paying dividends or shareholder distributions. Sale of Unregistered Securities - ------------------------------- On December 31, 1998, the Company sold 921,066 shares of its Common Stock to The Provident Bank in exchange for $1,842,132 of indebtedness of the Company to The Provident Bank pursuant to its Line of Credit. Also on December 31, 1998, the Company sold 500,000 shares of its Common Stock to Hamilton Medaris Corp., d/b/a A&L Pizza, a supplier to the Company, in exchange for $1,000,000 of accounts payable of the Company to Hamilton Medaris Corp. d/b/a A&L Pizza. Both sales were made in reliance upon the exemption from the registration requirements of the 1933 Act set forth in Section 4(2) of the 1933 Act. 8 ITEM 6. SELECTED FINANCIAL DATA (In thousands except number of restaurants)
Year Ended December 31, ----------------------------------------------------------- STATEMENT OF OPERATIONS DATA: 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Restaurant revenue $ 29,825 $ 33,325 $ 33,854 $ 25,369 $ 23,307 Express royalties and fees -- -- -- 524 2,161 Restaurant royalties 233 212 189 133 125 Other 403 358 196 79 189 -------- -------- -------- -------- -------- Total revenue 30,461 33,895 34,239 26,105 25,782 Restaurant operating expenses 25,171 29,149 31,090 24,094 22,781 Express operating expenses -- -- -- 220 839 Depreciation and amortization 1,092 1,334 1,488 1,076 1,059 General and administrative 1,785 1,951 2,834 2,816 3,002 Financing, acquisition and restructuring costs 65 112 1,554 6,529 571 -------- -------- -------- -------- -------- Operating income (loss) 2,348 1,350 (2,727) (8,632) (2,469) Interest 1,088 1,287 1,794 996 1,387 -------- -------- -------- -------- -------- Income (loss) before income taxes and cumulative effect of change in accounting principle and extraordinary item 1,260 64 (4,521) (9,627) (3,856) Income taxes (benefit) 489 39 (640) (4,148) (1,311) -------- -------- -------- -------- -------- Income (loss)before cumulative effect of change in accounting principle and extraordinary item $ 771 $ 24 $ (3,881) $ (5,479) $ (2,545) -------- -------- -------- -------- -------- Net income (loss) $ 771 $ (200) $ (3,881) $ (3,917) $ (2,150) -------- -------- -------- -------- -------- Weighted average number of common shares 3,993 4,131 4,131 4,131 4,131 Income (loss) per share before cumulative effect of change in accounting principle and extraordinary item $ .19 $ .01 $ (.94) $ (1.33) $ (.52) -------- -------- -------- -------- -------- Net income (loss) per share $ .19 $ (.05) $ (.94) $ (.95) $ (.52) -------- -------- -------- -------- -------- RESTAURANT DATA: Average sales per restaurant 635 647 630 560 596 Percentage change in comparable net sales from prior year 6% 2% -5% -9% -1% Company-owned restaurants open at 64 70 71 48 47 year-end Express franchises open at year-end -- -- -- 46 192 BALANCE SHEET DATA (AT YEAR END): Working capital (deficit) $ (40) $ (827) $(16,251) (3,510) (2,241) Total assets 18,205 20,004 19,451 18,205 19,143 Long-term obligations 11,193 11,891 12,561 13,611 14,187 Stockholders' equity (deficit) $ 4,155 $ 4,613 $ 791 $ (325) $ 1,076 PRO FORMA BALANCE SHEET DATA (1): Working capital (deficit) $ (320) Total assets 20,126 Long-term obligations 16,148 Stockholders' equity $ 1,370
(1) See Note 2 of Company's financial statements for pro forma balance sheet reflecting events subsequent to December 31, 1998. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION - ------------ During 1995 and 1996, the Company attempted a major acquisition of a 187-unit pizza restaurant chain operating in seven states in the Northeast as a part of a strategic decision to acquire and consolidate other regional chains. For a number of reasons this attempted acquisition failed, despite senior management devoting substantially all of its attention to that attempt for a period of almost 18 months. As the Company's focus was increasingly on the acquisition transaction, the Company's primary market was, as a result of several demographic/consumption trends, targeted for expansion by a large number of mid-scale dining chains for expansion. The unemployment rates in the Company's labor markets were approaching record lows and the Company's personnel were aggressively recruited by others. Senior management, due to the acquisition transaction, were unable to participate in daily operations during the period. Because of the Company's dramatic management turnover and its inability to stabilize staffing levels through ordinary recruiting efforts, sales and margins declined. The Company suffered serious losses and defaulted on its loan agreement with its primary lender. Due to a lack of staffing and the Company's financial difficulties, the Company closed 19 of its restaurants in May 1997 and launched a turnaround strategy consisting of three primary elements: o Negotiated a series of debt restructuring with its primary lender, The Provident Bank, whereby the Bank loaned the Company additional funds, converted a portion of its debt to equity and extended maturity of remaining debt. The Company also obtained additional funding from various investors associated with The Geometry Group, New York, in the form of convertible participating income notes which may, at the option of the investors, be converted to equity April 15, 2003. o Restructured the Company's executive staff including the appointment of Scott Mobley as President, Wade Shanower as Vice President of Operations, Troy Branson as Vice President of Franchising, Art Mancino as Vice President of Development and Dan Hutchison as Chief Financial Officer. o Began franchising Noble Roman's Pizza Express for non-traditional locations such as convenience stores, grocery stores, truck stops, travel centers, universities, bowling centers and to other traditional restaurants as a Co-Brand. The Express concept was designed to capitalize on the rapid growth of non-traditional locations for quick service restaurants and to be simple to operate, requiring a modest investment, with minimal staffing requirements while serving great tasting pizza and related products. The concept was designed to also be convenient and quick for its customers. Based on experience to date, the Company believes that franchising its Express concept can offer opportunities for rapid growth for the next several years. The Company plans to grow by aggressively expanding its Express franchise business. The Company's business strategy for expansion of its Express franchise business includes the following principle elements: 10 o Continue to add units by franchising to truck stops, travel centers, convenience stores, grocery stores, universities, hotels, airports, hospitals, bowling centers and some stand alone units. o Sell co-branding agreements to other restaurant chains whereby the Express will become a second brand in other established restaurant chain locations. Based on the Company's business plan, the number of Express units now open, the backlog of units sold to be opened, the backlog of franchise prospects now in ongoing discussions and negotiations, the Company's trends and the results thus far in 1999, management determined that it is more likely than not that the Company's deferred tax credits will be fully realized. Therefore, no valuation allowance was established for its deferred tax asset. However, there can be no assurance that the growth of the Express will continue in the future nor can there be any assurance that the full-service restaurants can be operated successfully in the future. If unanticipated events should occur in the future in either the Express or the full-service operations, the realization of all or some portion of the Company's deferred tax asset could be jeopardized. The Company will continue to evaluate the need for a valuation allowance on a quarterly basis in the future. The following table sets forth the percentage relationship to total revenue of the listed items included in the Company's consolidated statement of operations. Certain indicated items are shown as a percentage of restaurant revenue.
Years Ended December 31, --------------------------------------- 1996 1997 1998 ---- ---- ---- Revenue: Restaurant revenue 98.9% 97.2 90.4 Restaurant royalties .5 .5 .5 Express royalties and fees - 2.0 8.4 Administrative fees and other .6 .3 .7 ----- ----- ----- 100.0% 100.0% 100.0% Restaurant operating expenses (1): Cost of revenue 19.0 21.4 20.1 Salaries and wages 32.9 36.5 36.5 Rent 9.0 9.7 9.5 Advertising 7.0 5.2 7.2 Other 24.1 22.2 24.4 Express operating expense - .8 3.3 Depreciation and amortization 4.4 4.1 4.1 General and administrative 8.3 10.8 11.6 Financing and acquisition costs 2.6 - - Loss from withdrawn acquisition and offering and restaurants closed in 1987 2.0 - - Restructuring costs - 25.0 2.2 ----- ----- ----- Operating income (loss) (8.0) (33.1) (9.6) Interest 5.2 3.8 5.4 ----- ----- ----- Loss before income taxes (13.2)% (36.9)% (15.0)% ===== ===== =====
(1) Shown as a percentage of restaurant revenue. 1998 COMPARED WITH 1997 - ----------------------- Total revenue decreased $323 thousand, or 1.2%, for 1998 compared to 1997. The primary reason for this decrease was the closing of 19 restaurants and the sale of four others in the second quarter of 1997 partially offset by the $1.6 million increase in revenue from the Express business. In addition, even though same store sales increased in the third and fourth quarters of 1988 by 2.3% and 2.6%, respectively, 11 same store sales decreased for the year 1.6% in the full-service restaurants. The same store sales increase during the third and fourth quarters were the result of the Company's ability to stabilize management and aggressively advertise following a period of inconsistent service and product during 1996 and 1997. Express royalties and fees were approximately $2.2 million for 1998 compared to $524 thousand during 1997. This increase was the result of rapid growth in the number of franchisees. Franchising of Noble Roman's Pizza Express began in 1997. At December 31, 1998, approximately 192 franchised Express units were open compared to 46 at the end of 1997. Currently there are approximately 266 franchised Express units open with approximately 100 more units sold to be opened in the future. Cost of revenue as a percentage of restaurant revenue decreased from 21.4% in 1997 to 20.1% in 1998. This decrease was the result of improved cost controls resulting from the Company's ability to stabilize its store management partially offset by unusually high cheese prices during the third and fourth quarters of 1998. In February 1999 cheese prices returned to a more normal level and, if that condition continues, could result in an additional 3% of restaurant sales reduction in cost of revenue. Salaries and wages remained the same percentage of revenue in 1997 and 1998 at 36.5%. Less management turnover created efficiencies that offset wage rate increases. Other restaurant expenses were 22.2% for 1997 compared to 24.4% for 1998. This increase in expense as a percentage of restaurant revenue was primarily the result of higher discounts resulting from more aggressive advertising and the additional advertising cost. Express operating expenses increased from $220 thousand in 1997 to $839 thousand in 1998 reflecting the overall growth in the number of Express units from approximately 46 as of December 1997 to approximately 192 as of December 31, 1998. The Company has increased expenses more rapidly than were required for current operations because the Company has been aggressively increasing its Express staff and incurring significant trade show expenses in order to support aggressive growth of its Express business in the future. General and administrative expenses as a percentage of total revenue increased from 10.8% in 1997 to 11.6% in 1998. This increase was primarily attributable to lower restaurant sales as the result of fewer restaurants and planning for growth of the Express business partially offset by the effective adherence to the restructuring plan and the increase in revenue from the growth of the Express business. Restructuring costs of $571 thousand in 1998 represented additional accruals for possible future costs of restaurants closed in 1997, principally consisting of amounts necessary for settlements with landlords for lease terminations. The Company reduced its operating loss from $8.6 million in 1997 to $2.5 million during 1998. This improvement resulted from the Express franchising business achieving an operating profit of approximately $1.322 million in 1998 and the benefits realized by the Company in 1998 from its restructuring in 1997. Interest expense increased from $996 thousand in 1997 to $1.387 million in 1998. The primary reason for the increase was the additional debt outstanding as a result of the debt restructurings with the Company's primary lender, however, $599,572 of this interest was forgiven. Extraordinary gain of $1,562,513 in 1997 and $395,696 in 1998 were the result of the various debt restructures net of tax expense of $804,931 in 1997 and $203,876 in 1998. 12 The Company reduced its net loss from $3,917 thousand in 1997 to $2,150 thousand in 1998. This improvement was the result of the Express franchising business generating an operating profit of approximately $1.322 million in 1998 and the benefits realized by the Company in 1998 from its restructuring in 1997. 1997 COMPARED WITH 1996 - ----------------------- Total revenue decreased $8.1 million, or 23.8%, for 1997 compared to 1996. The principal reason for the decrease was the closing of 19 restaurants and the sale of four others in the second quarter of 1997. In addition, the decreases were partially the result of same store sales declines of 9.3% for 1997 compared to 1996. The same store sales declines were the result of inconsistent service and product because of management turnover in the Company's restaurants during 1996 and 1997. As a result of the failed acquisition attempt in 1996 to acquire a 187-unit pizza chain in the Northeast, the Company experienced substantial restaurant-level management turnover. The Company has now completed a major hiring and training program and believes it has corrected its service and product problem to a large degree and is in the process of restoring its customer base. Recent store sales comparisons are positive compared to the same periods the previous year. Express royalties and fees were $524 thousand in 1997 compared to none in 1996. Franchising of Noble Roman's Pizza Express began in early 1997. At December 31, 1997, 46 franchised Express units were open. Cost of revenue as a percentage of restaurant revenue increased from 19.0% in 1996 to 21.4% in 1997. This increase was primarily the result of a change in method of recording many of the specials at net sales price rather than gross and partially the result of inefficiencies primarily as a result of personnel turnover. In the Company's menu all items are individually priced. Some time in the past the Company began offering in-restaurant specials for a combination of items (such as individual sized pizza, order of breadsticks and a medium drink) for a price which was a discount to the total price of the individual items. Prior to the change, the sales were recorded at the individual item price and a charge to discount expense for the discounted amount. Since the specials became a standard part of the Company's offerings the Company began recording the sale at the combination price with no charge to discount expense, during much of 1997. This change had no effect on restaurant operating margins or net income. Salaries and wages increased as a percentage of restaurant revenue from 32.9% in 1996 to 36.5% in 1997. These increases were the result of same store sales declines, inefficiencies in scheduling as a result of inexperienced store level management, and a more significantly competitive labor market resulting in higher average wage rates. Other restaurant expenses were 22.2% in 1997 compared to 24.1% in 1996. This improvement was primarily the result of the changes in recording discounts as discussed above relating to cost of revenue. Express operating expenses were $220 thousand in 1997 compared to none in 1996. This expense represents all salaries, wages, advertising and other costs directly associated with franchising of the Express concept. General and administrative expenses as a percentage of total revenue increased from 8.3% in 1996 to 10.8% in 1997. This increase was primarily attributable to a decline in total revenue. As a result of the restructuring in May 1997, the Company reduced the level of general and administrative expenses. 13 Restructuring costs were $6.5 million in 1997. This cost represents the undepreciated cost of equipment and leasehold improvements for the restaurants closed and sold at a loss as a part of the restructure, losses on the closed restaurants, an accrual for estimated future expenses on closed properties including future rent, equipment moving expense, legal costs and a write down of various assets including accounts and notes receivable, prepaid assets and other assets. The Company has negotiated with its landlords to terminate most of the leases. Operating loss increased from a loss of $2.7 million in 1996 to a loss of $8.6 million in 1997. The primary reason for greater loss in 1997 was the restructuring cost of $6.5 million primarily recorded in the second quarter and discussed above. Interest and other expense decreased from $1.8 million in 1996 to $996 thousand in 1997. The primary reason was the conversion of both principal and interest to equity in connection with restructuring with the Company's primary lender. See "Liquidity and Capital Resources" and "Introduction". Income tax benefit increased from $640 thousand in 1996 to $4.1 million in 1997. The increased benefit resulted from the increased loss before income taxes in 1997 versus 1996, and the elimination of the valuation allowance for the deferred tax asset. Management determined that it is more likely than not that the Company's deferred tax asset will be fully realized; therefore, no valuation allowance is considered necessary. See "Introduction". Extraordinary gain as a result of the debt restructuring was $1.6 million in 1997, net of tax expense of $805 thousand. The extraordinary gain resulted from the financial restructuring discussed under "Liquidity and Capital Resources" and "Introduction". The net loss was $3.9 million in both 1996 and 1997. IMPACT OF INFLATION - ------------------- The primary inflation factors affecting the Company's operations are food and labor costs. To date, the Company has been able to offset the effects of inflation in food costs without significantly increasing prices through effective cost control methods, however, the competition for labor has resulted in higher salaries and wages as a percent of its revenues. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- During 1995 and 1996, the Company attempted a major acquisition of a 187-unit pizza restaurant chain operating in seven states in the Northeast as a part of a strategic decision to acquire and consolidate other regional chains. For a number of reasons this attempted acquisition failed, despite senior management devoting substantially all of its attention to that attempt for a period of almost 18 months. As the Company's focus was increasingly on the acquisition transaction, the Company's primary market was, as a result of several demographic/consumption trends, targeted for expansion by a large number of mid-scale dining chains for expansion. The unemployment rates in the Company's labor markets were approaching record lows and the Company's personnel were aggressively recruited by others. Senior management, due to the acquisition transaction, were unable to participate in daily operations during the period. Because of the Company's dramatic turnover and its inability to stabilize staffing levels through ordinary recruiting efforts, sales and margins declined. The Company suffered serious losses and defaulted on its loan agreement with its primary lender. Due to a lack of staffing and the Company's financial difficulties, 14 the Company closed 19 of its restaurants in May 1997 and launched a turnaround strategy consisting of three primary elements: o Negotiated a series of debt restructurings with its primary lender, The Provident Bank, whereby the Bank loaned the Company additional funds, converted a portion of its debt to equity and extended maturity of remaining debt. The Company also obtained additional funding from various investors associated with the Geometry Group, New York, in the form of convertible participating income notes which may, at the option of the investors, be converted to equity April 15, 2003. o Restructured the Company's executive staff including the appointment of Scott Mobley as President, Wade Shanower as Vice President of Operations, Troy Branson as Vice President of Franchising, Art Mancino as Vice President of Development and Dan Hutchison as Chief Financial Officer. o Began franchising Noble Roman's Pizza Express for non-traditional locations such as convenience stores, grocery stores, truck stops, travel centers, universities, bowling centers and to other traditional restaurants as a co-brand. On April 30, 1999, the Company obtained $2,235,600 in additional funding from various investors associated with The Geometry Group based in New York City, who purchaed participating income notes of the Company (the "Participating Notes") and warrants to purchase at any time prior to December 31, 2001 an aggregate of 275,000 shares of the Company's common stock at a price of $.01 per share. The Participating Notes mature on April 15, 2003 and are payable at that time, at the option of each investor, in cash, in shares of the Company's common stock based on a conversion price of $1.375 per share or in a combination thereof. Interest on the Participating Notes accrues at a rate per annum equal to each investor's pro rata share of the Company's revenues associated with the Company's Pizza Express. Such interest is payable in cash monthly, provided, however, that to the extent that the interest otherwise payable to an investor would exceed such investor's pro rata share of the sum of $33,534, all interest in excess of such amount shall be paid in the form of a PIK Note of the Company. Each PIK Note matures on April 15, 2003 and, similar to the Participating Notes, is payable at that time, at the option of each investor, in cash, in shares of the Company's common stock based on a conversion price of $1.375 per share or in a combination thereof. As a result of the Company's debt restructuring, the exchange of debt for equity, and the $2.2 million investment on April 30, 1999 by various funds associated with The Geometry Group, New York in the form of convertible participating income notes, the Company believes it will have sufficient cash flow to meet its obligations and to carry out its current business plan. Currently, the Company anticipates that its capital expenditures for 1999 will be approximately $500 thousand primarily for improvements to its existing full-service restaurants. The statements contained in Management's Discussion and Analysis concerning the Company's future revenues, profitability, financial resources, market demand and product development are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) relating to the Company that are based on the beliefs of the management of the Company, as well as assumptions and estimates made by and information currently available to the Company's management. The Company's actual results in the future may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company's operations and business environment including, 15 but not limited to: competitive factors and pricing pressures, shifts in market demand, general economic conditions and other factors, including (but not limited to) changes in demand for the Company's products or franchises, the impact of competitors' actions, and changes in prices or supplies of food ingredients and labor. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company is currently assessing its preparedness for year 2000 as it relates to its information systems. The Company has begun the process of working with outside advisors to update or replace various systems so all information system software will be year 2000 compliant by the third quarter 1999. Although there can be no assurance, management anticipates that issues related to year 2000 will have no material effect on the business, the results of operations or on the Company's financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. None. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS NOBLE ROMAN'S, INC. AND SUBSIDIARIES
December 31, ---------------------- ASSETS 1997 1998 ------ ---- ---- Current assets: Cash $ 68,136 $ 28,176 Accounts receivable 380,816 579,841 Inventories 802,097 844,783 Prepaid expenses 158,260 185,471 ------------ ------------ Total current assets 1,409,309 1,638,271 ------------ ------------ Property and equipment: Equipment 7,681,626 8,318,737 Leasehold improvements 2,169,702 2,214,931 Capitalized leases 353,805 168,750 ------------ ------------ 10,205,133 10,702,418 Less accumulated depreciation and amortization 3,379,356 4,044,780 ------------ ------------ Net property and equipment 6,825,777 6,657,638 Cost in excess of assets acquired, net 6,204,698 5,944,718 Deferred tax asset 3,335,407 4,442,726 Other assets 429,805 459,202 ------------ ------------ $ 18,204,996 $ 19,142,555 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,978,719 $ 1,911,089 Current portion of long-term debt 21,743 18,279 Note payable to officer -- 65,840 Deferred franchise fees 63,800 143,500 Other current liabilities 1,855,118 1,740,653 ------------ ------------ Total current liabilities 4,919,380 3,879,361 ------------ ------------ Long-term obligations: Senior note payable (net of warrant valuation of $653,241 in 1998) 2,580,000 13,919,125 Subordinated notes payable 11,000,000 -- Note payable to officer -- 250,000 Other long-term debt 22,863 18,339 Capital leases 8,201 -- ------------ ------------ Total long-term obligations 13,611,064 14,187,464 ------------ ------------ Stockholders' equity: Common stock (9,000,000 shares, issued 4,131,324 in 1997 and 5,552,390 shares in 1998) 8,318,431 11,869,174 Accumulated deficit (8,643,879) (10,793,444) ------------ ------------ Total stockholders' equity (deficit) (325,448) 1,075,370 ------------ ------------ $ 18,204,996 $ 19,142,555 ============ ============
See accompanying notes to consolidated financial statements. 17 CONSOLIDATED STATEMENTS OF OPERATIONS NOBLE ROMAN'S, INC. AND SUBSIDIARIES
Year ended December 31, -------------------------------------- 1996 1997 1998 ---- ---- ---- Restaurant revenue $ 33,854,485 $25,368,644 $23,306,780 Express royalties and fees -- 524,119 2,161,027 Restaurant royalties 188,843 132,741 125,093 Administrative fees and other 195,862 79,244 188,786 ------------ ------------ ------------ Total revenue 34,239,190 26,104,748 25,781,686 Restaurant operating expenses: Cost of revenue 6,421,293 5,428,908 4,685,955 Salaries and wages 11,121,349 9,251,298 8,514,806 Rent 3,039,690 2,455,115 2,223,367 Advertising 2,361,733 1,320,491 1,667,140 Other 8,145,681 5,639,373 5,689,619 Express operating expenses -- 219,955 838,655 Depreciation and amortization 1,488,110 1,076,325 1,059,088 General and administrative 2,833,910 2,816,266 3,001,957 Cost of attempted acquisition and equity offering 880,862 -- -- Loss associated with restaurants closed in 1987 673,157 -- -- Restructuring costs -- 6,528,726 570,544 ------------ ------------ ------------ Operating loss (2,726,595) (8,631,709) (2,469,445) Interest and other expense 1,794,632 995,590 1,387,011 ------------ ------------ ------------ Loss before income taxes and extraordinary item (4,521,227) (9,627,299) (3,856,456) Income tax benefit (639,790) (4,148,053) (1,311,194) ------------ ------------ ------------ Loss before extraordinary item (3,881,437) (5,479,246) (2,545,262) Extraordinary item net of tax expense of $804,931 in 1997 and $203,876 in 1998 -- 1,562,513 395,696 ------------ ------------ ------------ Net loss $ (3,881,437) $ (3,916,733) $ (2,149,565) ------------ ------------ ------------ Basic and diluted loss per share: Before extraordinary item $ (.94) $ (1.33) $ (.62) Extraordinary item -- .38 .10 ------------ ------------ ------------ Net loss $ (.94) $ (.95) $ (.52) ============ ============ ============ Weighted average number of common shares outstanding 4,131,324 4,131,324 4,131,324
See accompanying notes to consolidated financial statements. 18 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) NOBLE ROMAN'S, INC. AND SUBSIDIARIES
Common Stock Accumulated --------------------------- ----------- Shares Amount Deficit Total ------ ------ ------- ----- Balance at December 31, 1995 4,131,324 5,458,431 (845,709) 4,612,722 Issuance of warrants to purchase stock 60,000 60,000 1996 net loss (3,881,437) (3,881,437) Balance at December 31, 1996 4,131,324 $ 5,518,431 $ (4,727,146) $ 791,285 --------------- --------------- -------------- ------------- Issuance of warrants to purchase stock - 2,800,000 - 2,800,000 1997 net loss - - (3,916,733) (3,916,733) --------------- --------------- -------------- ------------- Balance at December 31, 1997 4,131,324 $ 8,318,431 $ (8,643,879) $ (325,448) --------------- --------------- -------------- ------------- Issuance of warrants to purchase stock - 708,600 - 708,600 Issuance of common stock in exchange for certain liabilities 1,421,066 2,842,144 - 2,842,144 1998 net loss - - (2,149,565) (2,149,565) --------------- --------------- -------------- ------------- Balance at December 31, 1998 5,552,390 $11,869,175 $ (10,793,444) $ 1,075,730 --------------- --------------- -------------- -------------
See accompanying notes to consolidated financial statements. 19 CONSOLIDATED STATEMENTS OF CASH FLOWS NOBLE ROMAN'S, INC. AND SUBSIDIARIES
Year ended December 31, ------------------------------------ OPERATING ACTIVITIES 1996 1997 1998 ---- ---- ---- Net loss $(3,881,437) $(3,916,733) $(2,149,565) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 1,621,005 1,081,217 1,113,447 Restructuring costs -- 5,404,504 -- Deferred federal income taxes (639,790) (4,140,338) (1,107,319) Extraordinary item -- (1,562,488) -- Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable 2,698 (189,715) (199,025) Inventories 32,890 48,794 (42,686) Prepaid expenses 149,875 (731,890) (27,211) Other assets 294,318 (85,537) (29,397) Increase (decrease) in: Accounts payable 1,525,555 (583,360) (67,630) Other current liabilities 68,270 290,000 182,629 Deferred franchise fees -- 63,800 79,700 ----------- ----------- ----------- NET CASH USED BY OPERATING ACTIVITIES (826,616) (4,320,746) (2,247,057) ----------- ----------- ----------- INVESTING ACTIVITIES Purchase of property and equipment (1,272,823) (765,174) (678,705) ----------- ----------- ----------- NET CASH USED BY INVESTING (1,272,823) (765,174) (678,705) ----------- ----------- ----------- ACTIVITIES FINANCING ACTIVITIES Principal payments on long-term obligations (278,842) (287,694) (22,404) Proceeds from notes payable to officer -- -- 315,840 Proceeds from long-term debt, net of debt issue costs 2,223,321 2,787,248 2,592,366 ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,944,479 5,079,554 2,885,802 ----------- ----------- ----------- DECREASE IN CASH (154,960) (6,366) (39,960) Cash at beginning of year 229,462 74,502 68,136 ----------- ----------- ----------- CASH AT END OF YEAR $ 74,502 $ 68,136 $ 28,176 =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES The restructuring of the Company's debt allowed it to not pay any interest for 10 months in 1998 on $11,000,000 of its notes to The Provident Bank. The computed amount for interest was $599,572 which will not be paid as the result of a subsequent restructuring. Also, in 1998, the Company converted accounts payable owed to a primary vendor in the amount of $1,000,012 to common stock. The Company converted $1,600,000 of previous notes payable plus $242,132 of accrued interest to common stock. See accompanying notes to consolidated financial statements. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOBLE ROMAN'S, INC. AND SUBSIDIARIES NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Organization: As of December 31, 1998, the Company operated and/or franchised approximately 243 locations. Of such locations, the Company owned 47 full-service restaurants and had four franchised full-service restaurants and approximately 192 Express units. Principles of Consolidation: The consolidated financial statements include the accounts of Noble Roman's, Inc. and its subsidiaries, Pizzaco, Inc., GNR, Inc., LPS, Inc., N.R. East, Inc. and Oak Grove Corporation ("Company"). Intercompany balances and transactions have been eliminated in consolidation. Acquisitions: All acquisitions have been accounted for using the purchase method of accounting. The accompanying financial statements include the operating results of all acquisitions subsequent to the purchase dates. Inventories: Inventories consist of food, beverage, restaurant supplies and marketing materials and are stated at the lower of cost (first-in, first-out) or market. Property and Equipment: Equipment and leasehold improvements are stated at cost including property under capital leases. Depreciation and amortization are computed on the straight-line method over the estimated useful lives. Leasehold improvements are amortized over the shorter of estimated useful life or the term of the lease. Advertising Costs: The Company records advertising costs consistent with Statement of Position 93-7 "Reporting on Advertising Costs." This statement requires the Company to expense advertising production costs the first time the production material is used. Fair Value of Financial Instruments: The carrying amount of long-term debt net of the estimated value of the warrant approximates its fair value because the interest rates are currently at market. Because of the very limited trading in the Company's common stock, the Company does not believe that traditional methods of valuing the warrant apply; therefore, the value of the warrant reflects the Company's estimate of its value. The carrying amount of all other financial instruments approximate fair value due to the short-term maturity of these items. Use of Estimates: The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The Company evaluates its property and equipment and related costs in excess of assets acquired periodically to assess whether any impairment indications are present, including recurring operating losses and significant adverse changes in legal factors or business climate that affect the recovery of recorded value. If any impairment of an individual asset is evident, a loss would be provided to reduce the carrying value to its estimated fair value. Intangible Assets: Costs in excess of assets acquired are amortized on the straight-line method over 30 years. Debt issue costs are amortized to interest expense ratably over the term of the applicable debt. Costs associated with the opening of new restaurants are amortized over a one-year period. 21 Royalties, Administrative and Franchise Fees: Royalties are recognized as income monthly and are based on a percentage of monthly sales of franchised restaurants. Administrative fees are recognized as income monthly as earned. Initial franchise fees are recognized as income when the franchised restaurant is opened. Income Taxes: The Company provides for current and deferred income tax liabilities and assets utilizing an asset and liability approach along with a valuation allowance as appropriate. The Company concluded that no valuation allowance was necessary at December 31, 1998 because it is more likely than not that the Company will earn sufficient income before the expiration of its net operating loss carry forwards to fully realize the value of its deferred tax asset. Management made this determination after reviewing the Company's business plans, all known facts to date, recent trends, current performance and analysis of the backlog of franchises sold but not yet open. Basic And Diluted Net Income Per Share: Net loss per share is based on the weighted average number of common shares outstanding during the respective year. When dilutive, stock options and warrants are included as share equivalents using the treasury stock method. SEGMENT REPORTING In 1998, the Company adopted FAS 131, Disclosures about Segments of an Enterprise and Related Information. FAS 131 supersedes FAS 14., Financial Reporting for Segments of a Business Enterprise, replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. FAS 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of FAS 131 did not affect results of operations or financial position but did affect the disclosure of segment information (see Note 12). NOTE 2: SUBSEQUENT EVENT On May 1, 1999, the Company obtained a $2.2 million investment by various investors associated with The Geometry Group, New York, for funding continued expansion of its Express business and for general corporate purposes. This investment was in the form of convertible participating income notes due April 15, 2003. At maturity the notes may be converted to stock at the holder's option. The following is an unaudited pro forma balance sheet to reflect the above transaction as if it had occurred on December 31, 1998: Noble Roman's, Inc. and Subsidiaries Pro Forma Balance Sheet (unaudited) December 31, 1998
Pro Forma Actual Debit Credit Balance Sheet 12/31/98 12/31/98 -------- ----- ------ -------------- Current assets $ 1,638,271 650,000 $ 2,288,271 Net property and equipment 6,657,638 6,657,638 Cost in excess of assets acquired, net 5,944,718 5,944,718 Deferred tax asset 4,442,726 4,442,726 Other assets 459,202 333,645 792,847 ----------- ------------ Total assets $19,142,555 $20,126,200 =========== ============ Current liabilities $ 3,879,361 1,271,455 $ 2,607,906 Total long-term obligations 14,187,464 275,000 2,235,600 16,148,064 275,000 Total stockholders' equity 1,075,730 19,500 1,370,230 ----------- ------ ----------- Total liabilities and stockholders' equity $19,142,555 $20,126,200 =========== ===========
22 NOTE 3: RESTRUCTURING EVENTS During 1995 and 1996, the Company attempted a major acquisition of a 187-unit pizza restaurant chain operating in seven states in the Northeast as a part of a strategic decision to acquire and consolidate other regional chains. For a number of reasons this attempted acquisition failed, despite senior management devoting substantially all of its attention to that attempt for a period of almost 18 months. As the Company's focus was increasingly on the acquisition transaction, the Company's primary market was, as a result of several demographic/consumption trends, targeted for expansion by a large number of mid-scale dining chains for expansion. The unemployment rates in the Company's labor markets were approaching record lows and the Company's personnel were aggressively recruited by others. Senior management, due to the acquisition transaction, were unable to participate in daily operations during the period. Because of the Company's dramatic turnover and its inability to stabilize staffing levels through ordinary recruiting efforts, sales and margins declined. The Company suffered serious losses and defaulted on its loan agreement with its primary lender. Due to a lack of staffing and the Company's financial difficulties, the Company closed 19 of its restaurants in May 1997 and initiated a turnaround strategy consisting of three primary elements: o Negotiated a series of debt restructurings with its primary lender, The Provident Bank, whereby the Bank loaned the Company additional money, converted a portion of its debt to equity and extended maturity of remaining debt. The Company also obtained additional funding from various investors associated with the Geometry Group, New York, in the form of convertible participating income notes which may, at the option of the investors, be converted to equity April 15, 2003. o Restructured the Company's executive staff including the appointment of Scott Mobley as President, Wade Shanower as Vice President of Operations, Troy Branson as Vice President of Franchising, Art Mancino as Vice President of Development and Dan Hutchison as Chief Financial Officer. o Began franchising Noble Roman's Pizza Express for non-traditional locations such as convenience stores, grocery stores, truck stops, travel centers, universities, bowling centers and to other traditional restaurants as a co-brand. Restructuring costs in 1997 were approximately $6.5 million primarily from closing the 19 restaurants and $571 thousand in 1998 to accrue for ongoing expenses until the restructure events are complete. The Express concept was designed to take advantage of the rapid growth of non-traditional locations for quick service restaurants and to be simple to operate, requiring a modest investment, with minimal staffing requirements, while serving great tasting pizza and related products. The concept was designed to also be convenient and quick for its customers. Based on experience to date, the Company believes that franchising its Express concept offers opportunities for rapid growth for the next several years. The Company plans to grow by aggressively expanding its Express franchise business. The Company's business strategy for expansion of its Express franchise business includes the following principal elements: o Continue to add units by franchising to truck stops, travel centers, convenience stores, grocery stores, universities, hotels, airports, hospitals, bowling centers and some stand alone units. 23 o Sell co-branding agreements to other restaurant chains whereby the Express would become a second brand in other established restaurant chains. NOTE 4: NOTES PAYABLE On November 19, 1997, the Company entered into an amended and restated credit agreement with The Provident Bank, its principal lender. The amended and restated agreement provided for the reduction of previously outstanding debt to $11,000,000, cancellation of previously accrued interest, no interest to be paid or accrued on such debt until November 1, 1998, interest on such debt of 8% per annum payable monthly in arrears after November 1, 1998, maturity of the subject note extended to December 2001, principal payments on such debt beginning December 1, 1998 in an amount equal to 50% of excess cash flow as defined in the agreement, and the cancellation of a previously issued warrant to purchase 465,000 shares of the Company's common stock. In addition, the agreement provided for a new loan in the amount of $2,580,000 due in December 2000 with interest payable monthly in arrears at a rate of prime plus 2.5% per annum. These arrangements were made in consideration for a new warrant to purchase 2,800,000 shares of the Company's common stock with an exercise price of $.01 per share. On August 13, 1998, the Company obtained additional financing of $2,000,000. This financing is in the form of a loan due in December 2001 and bears interest at 2 1/2% over the prime rate payable monthly. Simultaneous with making the loan, the Bank received a warrant to purchase an additional 750,000 shares of the Company's stock at an exercise price of $.01 per share. On December 31, 1998, The Provident Bank converted $1,600,000 of previous notes payable plus all accrued interest through December 31, 1998 to 921,066 shares of common stock in the Company. At the same time, The Provident Bank replaced the remaining notes with one note in the amount of $14,572,366 bearing interest of 8.75% per annum. The note was to mature November 30, 2001. Interest on said note was to be paid monthly commencing February 1, 1999. Principal payments on the note were to be quarterly in arrears in an amount equal to 50% of excess cash flow for the previous quarter as defined in the Amended Credit Agreement. In a subsequent transaction The Provident Bank canceled their existing note in the amount of $14,572,366 and replaced the canceled note with Tranche Y Term Loan in the amount of $8,000,000 and Tranche Z Term Loan in the amount of $6,572,366. Tranche Y Term Loan bears interest of 8.75% per annum payable monthly in arrears. Tranche Y Term Loan matures on April 15, 2003. Principal payments on the Tranche Y Term Loan are payable quarterly in arrears in an amount equal to 50% of excess cash flow from the previous quarter as defined in the Amended Credit Agreement. Tranche Z Term Loan bears interest of 8.75% per annum to be paid in PIK notes quarterly in arrears. Tranche Z Term Loan matures on April 15, 2003. There are to be no payments on Tranche Z Term Loan until such time as Tranche Y Term Loan is paid in full after which principal payments will be payable in amounts equal to 50% of the excess cash flow from the previous quarter as defined in the Amended Credit Agreement. Cash payments for interest on all of the Company's debt totaled $1,661,737, $1,036,403 and $1,106,346 in 1996, 1997 and 1998, respectively. 24 NOTE 5: LEASED ASSETS AND LEASE COMMITMENTS The Company leases restaurant facilities under noncancelable lease agreements which generally have initial terms ranging from five to 20 years with extended renewal terms. The leases generally require the Company to pay all real estate taxes, insurance and maintenance costs. The leases provide for a specified annual rental, and some leases call for additional rental based on sales volume over specified levels at that particular location. At December 31, 1998, obligations under noncancelable operating and capitalized leases for 1999, 2000, 2001, 2002, 2003 and after 2003 were $2.2 million, $2.0 million, $1.8 million, $1.8 million, $1.5 million and $9.8 million, respectively. Rent expense for operating leases was $3,039,690, $2,455,115 and $2,223,367 in 1996, 1997 and 1998, respectively. The Company currently leases two properties from related parties with rental payments in 1996, 1997 and 1998 of $112,981, $113,567 and $113,567, respectively. NOTE 6: INCOME TAXES The components of the provision (benefit) for income taxes are as follows: 1996 1997 1998 ---- ---- ---- Current benefit $ -- $ -- $ -- Deferred benefit (639,790) (4,148,053) (1,311,194) ----------- ----------- ----------- Income tax benefit $ (639,790) $(4,148,053) $(1,311,194) ----------- ----------- ----------- Income tax benefit differs from the amount computed by applying the federal income tax rate of 34% to income before taxes as a result of the following:
1996 1997 1998 ---- ---- ---- Computed "expected" tax benefit $(1,532,238) $(3,290,965) $(1,328,874) Amortization of costs in excess of assets acquired 17,680 17680.00 17,680 Valuation allowance 874,768 (874,768) - ------------ ----------- ------------ Income tax benefit $ (639,790) $(4,148,053) $(1,311,194) ============ =========== ============
The deferred tax asset at December 31 consists of the following:
1997 1998 ---- ---- Deferred tax assets: Tax credit carryforwards $ 193,680 $ 193,680 Net operating loss carryforwards 4,094,623 5,187,442 Franchise value for tax purposes of companies acquired 20,300 -- ---------- ---------- Total gross deferred tax assets 4,308,603 $5,381,120 ---------- ---------- Deferred tax liabilities: Property and equipment 876,521 903,042 Cost in excess of asset acquired 96,675 35,355 Total gross deferred tax liabilities 973,196 938,397 ---------- ---------- Net deferred tax asset 3,335,407 4,442,725 ========== ==========
25 NOTE 7: COMMON STOCK On December 31, 1998, the Company entered into two transactions resulting in the exchange of 1,421,066 shares of common stock for certain liabilities totaling $2,842,144. The Company issued 500,000 shares of common stock in exchange for $1.0 million of trade payables due to a certain vendor of the Company and issued 921,066 shares of common stock in exchange for $1.8 million due to The Provident Bank, the Company's principal lender. In conjunction with obtaining additional financing from The Provident Bank on August 13, 1998, the Company issued a warrant to purchase 750,000 shares of common stock at any time through November 30, 2001 at $.01 per share. This warrant was valued at $708,600 which is reflected as a discount to the related note payable. The discount is being amortized over the five year term of the note. In conjunction with certain financial advisory and investment banking services for possible acquisitions, the Company issued warrants to purchase 120,000 shares of common stock at any time through April 29, 2000 at $6.50 per share. No value has been recorded in the Company financial statements related to these warrants as the Company believes the effect would not be material. The Company has an incentive stock option plan for key employees and officers. The options are generally exercisable three years after the date of grant and expire ten years after the date of grant. The option prices are the fair market value of the stock at the date of grant. In 1998, options to acquire 35,000 shares were granted. In 1997 options to acquire 60,000 shares were granted. Options granted and remaining outstanding at December 31, 1998 are: 6,500 common shares at $4.25 per share, 4,500 common shares at $3.63 per share, 6,500 common shares at $3.25 per share, 18,500 common shares at $3.68 per share, 12,750 common shares at $6.44 per share, 46,500 common shares at $1.75 per share, 60,000 common shares at $1.00 per share and 35,000 common shares at $1.385 per share. As of December 31, 1998, options for 48,750 shares are exercisable. The Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", effective with the 1996 financial statements, but elected to continue to measure compensation cost using the intrinsic value method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost for stock options has been recognized. The value of the options granted in 1996, 1997 and 1998 were estimated to be $.88 per share, $.87 per share and $.76 per share, respectively. Because of the very limited trading in the Company's common stock, the Company does not believe that traditional methods of valuing the options apply, therefore, it has estimated the value of the options. The following represents the pro forma net loss and earnings per share determined as if the fair value based method had been applied in measuring compensation cost as described in SFAS 123 for the years ended December 31, 1996, December 31, 1997 and December 31, 1998: 1996 1997 1998 ---- ---- ---- Net loss $ 3,899,624 $ 3,936,253 $ 2,167,325 Loss per share $ .94 $ .87 $ .52 In 1997, the Company entered into an amended and restated credit facility with the Bank. In connection with such amendment: (i) the Bank surrendered warrants to purchase 465,000 shares of Common Stock; (ii) the Company issued to the Bank warrants to purchase 2.8 million shares of Common Stock with an exercise price of $.01 per share; (iii) the Company issued to certain executive officers warrants to purchase an aggregate of 1.0 million shares of Common stock with an exercise price of $.40 per share; 26 (iv) the Company issued to certain parties who had performed certain financial advisory and investment banking services related to the Company's restructuring in 1997 warrants to purchase an aggregate of 300,000 shares of Common Stock which have an exercise price as follows: 200,000 shares of Common Stock at $.40 per share, 50,000 shares of Common Stock at $1.00 per share and 50,000 shares of Common Stock at $1.50 per share. In 1998, the Company entered into an amended and restated credit facility with the Bank. In connection with such amendment the Company issued to the Bank a warrant to purchase 750,000 shares of common stock with an exercise price of $.01 per share. NOTE 8: OTHER EXPENSES Cost of attempted acquisition and equity offering of $880,862 in 1996 represents the direct cost associated with the attempt to acquire Papa Gino's Holding Corp. (a 187-unit pizza restaurant chain operating in seven northeastern states) and the planned equity offering to finance that acquisition. Loss associated with restaurants closed in 1987 recognized in 1996, was $673,157. This reflects the costs associated with a lease dispute in Dayton, Ohio for a restaurant property abandoned in 1987 in the amount of $133,637 and a charge-off of receivables for equipment and sub-rent built up over time from the former Dayton, Ohio franchisees in the amount of $539,520. The decision to charge off at this time was prompted by the Company's inability to purchase the operation as had originally been anticipated. NOTE 9: CONTINGENCIES The Company is involved in various litigation relating to claims arising out of its normal business operations and relating to restaurant facilities closed in 1997. Although litigation is inherently uncertain, the Company believes that none of its current proceedings, individually or in the aggregate, will have a material adverse effect upon the Company beyond the amount reserved in its financial statements. Legal proceedings against the Company include REH Acquisition, Ltd. ("REH") versus Noble Roman's, Inc. and The Provident Bank., filed July 20, 1998 in the United States District Court for the Southern District of New York. The complaint alleges that the Company breached agreements entered into with the Plaintiff to seek to fund and restructure the Company's bank debt. The Company denies liability and will defend vigorously. The Company has filed a counter-claim against REH and Elliott and Robert Herskowitz, individually, for false and malicious misrepresentations seeking actual and punitive damages against all of them. NOTE 10: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following is a summary of transactions to which the Company and certain officers and directors of the Company are a party or have a financial interest. The Board of Directors of the Company has adopted a policy that all transactions between the Company and its officers, directors, principal shareholders and other affiliates must be approved by a majority of the Company's disinterested directors, and be conducted on terms no less favorable to the Company than could be obtained from unaffiliated third parties. Paul W. Mobley leases a restaurant located in Indianapolis to GNR, Inc., a wholly-owned subsidiary of the Company, which lease has a remaining term of approximately five years and provides for rental payments of approximately $43,600 per year. 27 H-M Ltd., a corporation owned by Paul W. Mobley and Larry J. Hannah, in September 1995, leased a restaurant in Indianapolis, Indiana to the Company. This lease has a remaining term of 17 years and provides for rental payments of $72,000 per year. The Company believes that the terms of the above leases were substantially equivalent to market terms at the time such leases were entered into. Larry J. Hannah had a consulting agreement with the Company to provide financial consulting services. The agreement provided for payments of $5,000 per month through December 1998. Paul Mobley had a guarantee agreement with the Company that required the payment of $2,500 per month. Mr. Mobley unilaterally terminated this agreement in November 1997. Mr. Mobley also loaned moneys from time to time to the Company to help meet cash flow requirements and as of December 31, 1998 the balance of such loans to the Company aggregated $315,840. These amounts were converted to notes payable on May 1, 1999 in conjunction with the investment in the Company by investors affiliated with The Geometry Group. NOTE 11: YEAR 2000 ISSUES The Company is currently assessing its preparedness for year 2000 as it relates to its information systems. The Company has begun the process of working with outside advisors to update or replace various systems so all information system software and hardware will be year 2000 compliant by the third quarter 1999. Although there can be no assurance management anticipates that issues related to year 2000 will have no material effect on the business, the results of operations or on the Company's financial condition. NOTE 12: SEGMENT REPORTING In 1998, the company adopted FAS 131. Prior year information has been restated to present the Company's reportable segments. The Company is organized into two segments as follows: traditional full service restaurants which are Company owned and operated and Noble Roman's Pizza Express which franchises and provides ongoing services to independent franchises.
1996 1997 Restaurant Express Corporate Total Restaurant Express Corporate Total Revenue 33,854,485 384,705 34,239,190 25,368,644 524,119 211,985 26,104,748 Depreciation and amortization 1,137,946 350,164 1,488,110 761,224 315,101 1,076,325 Operating income (loss) 1,626,793 (4,353,388) (2,726,595) 512,235 304,164 (9,448,108) (8,631,709) Interest expense 75,723 1,718,909 1,794,632 96,378 899,212 995,590 Income tax expense (benefit) 578,855 (1,218,645) (639,790) 206,928 103,416 (4,458,397) (4,148,053) Segment Assets 10,122,273 9,328,412 19,450,685 6,808,625 0 11,396,371 18,204,996 Expenditures for property 927,368 345,455 1,272,823 746,449 18,725 765,174 1998 Restaurant Express Corporate Total Revenue 23,306,708 2,161,027 313,879 25,781,686 Depreciation and amortization 739,925 319,163 1,059,088 Operating income (loss) (214,032) 1,322,372 (3,577,785) (2,469,455) Interest expense 41,908 1,345,103 1,387,011 Income tax expense (benefit) (58,522) 449,606 (1,702,278) (1,311,194) Segment Assets 6,965,696 200,192 11,976,667 19,142,555 Expenditures for property 576,036 30,912 71,757 678,705
28 LETTERHEAD OF RUBIN, BROWN, GORNSTEIN & CO. LLP Independent Auditors' Report Board of Directors Noble Roman's, Inc. We have audited the accompanying consolidated balance sheets of Noble Roman's, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 1998 and 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of Noble Roman's, Inc. and subsidiaries as of December 31, 1996 were audited by other auditors whose report dated April 29, 1997, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Noble Roman's, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years ended December 31, 1998 and 1997, in conformity with generally accepted accounting principles. /s/ RUBIN, BROWN, GORNSTEIN & CO. LLP RUBIN, BROWN, GORNSTEIN & CO. LLP St. Louis, Missouri May 28, 1999 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of the Company are: Name Age Positions with the Company ---- --- -------------------------- Paul W. Mobley 58 Chairman of the Board and Director A. Scott Mobley 35 President, Secretary and Director Donald A. Morrison 56 Director Douglas H. Coape-Arnold 53 Director Troy Branson 35 Executive Vice President of Franchising Art Mancino 50 Executive Vice President of Development Wade Shanower 49 Vice President of Full-Service Operations The executive officers of the Company serve at the discretion of the Board of Directors and are elected at the annual meeting of the Board. Directors are elected annually by the stockholders. The following is a brief description of the previous business background of the executive officers and directors: PAUL W. MOBLEY has been Chairman of the Board since December 1991 and a Director since 1974. Mr. Mobley was President and Chief Executive Officer of the Company from 1981 to 1997. From 1975 to 1987, Mr. Mobley was a significant shareholder and president of a company which owned and operated 17 Arby's franchise restaurants. From 1974 to 1978, he also served as Vice President and Chief Operating Officer of the Company and from l978 to 1981 as Senior Vice President. He is the father of A. Scott Mobley. Mr. Mobley has a B.S. in Business Administration from Indiana University and is a CPA. A. SCOTT MOBLEY has been President since October 1997 and a Director since January 1992, and Secretary since February 1993. Mr. Mobley was Vice President from November 1988 to October 1997 and from August 1987 until November 1988 served as Director of Marketing for the Company. Prior to joining the Company Mr. Mobley was a strategic planning analyst with a division of Lithonia Lighting Company. Mr. Mobley has a B.S. in Business Administration from Georgetown University and an MBA from Indiana University. He is the son of Paul Mobley. 30 DONALD A. MORRISON, III has been a Director of the Company since December 1993. In January 1998, Mr. Morrison and an associate started their own independent brokerage firm offering general securities through Broker Transaction Services member NASD/SIPC, a subsidiary of Southwest Securities group. Prior to January 1998 Mr. Morrison was President and director of Traub & Company, Inc., an investment banking firm headquartered in Indianapolis, Indiana. Mr. Morrison was affiliated with Traub & Company since 1971. DOUGLAS H. COAPE-ARNOLD was appointed a Director of the Company in May 1999. Mr. Coape-Arnold has been Managing General Partner of Geovest Capital Partners, L.P. since January 1997, and Vice President of TradeCo Global Securities, Inc. since May 1994. Mr. Coape-Arnold's prior experience includes serving as Vice President of Morgan Stanley & Co., Inc. from 1982 to 1986, President & Chief Executive Officer of McLeod Young Weir Incorporated from 1986 to 1988, and Senior Vice President of GE Capital's Transportation & Industrial Funding Corp. from 1988 to 1991. Mr. Coape-Arnold is a Chartered Financial Analyst. TROY BRANSON, has been Executived Vice President of Franchising for the Company since November 1997 and since 1992, he was Director of Business Development. Prior to joining the Company, Mr. Branson was an owner of Branson-Yoder Marketing Group since 1987, after graduating from Indiana University where he received a B.S. in Business. ARTHUR L. MANCINO has been Executive Vice President of Development for the Company since January 1999. Prior to joining the Company Mr. Mancino had been employed by Blimpie International, Inc. since 1992. His last assignment with Blimpie International, Inc. was Vice President New Business. From 1990 to 1992 Mr. Mancino was Director of Franchising for EBC Office Centers. Mr. Mancino has a B.S. degree from Rutgers University. WADE SHANOWER has been Vice President of Full-Service Operations since November 1997 and since January 1996, he was Regional Director of Operations. Prior to joining the Company, Mr. Shanower was an owner of a Noble Roman's franchise restaurant plus two independent restaurants, which he sold in early 1995 before joining Noble Roman's. Prior to owning his own restaurants, Mr. Shanower was Vice President of Operations for American Diversified Foods, an Arby's franchisee owned in part by Paul Mobley. He has a B.S. degree from Indiana University. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE ------------------------------------------------------- Based solely on a review of the copies of reports of ownership and changes in ownership of the Company's common stock, furnished to the Company, or written representations that no such reports were required, the Company believes that during 1998 all filing requirements under Section 16(a) of the Securities Exchange Act of 1934 were complied with. 31 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the cash and non-cash compensation for each of the Company's last three years awarded to or earned by the Chief Executive Officer and other executive officers of the Company whose cash compensation in 1998 exceeded $100,000.
SUMMARY COMPENSATION TABLE Long Term Compensation Annual Compensation Securities Underlying Name and Principal Position Year Salary (l) Bonus Options # - --------------------------- ---- ----------- ------ --------------------- Paul Mobley 1998 $ 240,000 $ - - Chairman of the Board 1997 180,000 - 10,000 1996 180,000 - - A. Scott Mobley 1998 $ 150,000 $ - - President and Secretary 1997 96,923 - 10,000 1996 90,000 11,736 20,000
(1) The Company did not have any bonus, retirement, or other arrangements or plans respecting compensation, except for an Incentive Stock Option Plan for executive officers and other employees and a bonus plan initiated in 1994 for certain officers and administrative employees based on profitability. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information concerning the number of exercisable and unexercisable stock options held at December 31, 1998 by the executive officers named in the Summary Compensation Table. Number of Securities Values of Unexercised Underlying Unexercised In-The-Money Options at 12/31/98 Options at 12/31/98 (1) Exercisable/Unexercisable Exercisable/Unexercisable ------------------------- ------------------------- Paul W. Mobley 0 / 10,000 0 / $5,600 A. Scott Mobley 30,000 / 30,000 0 / $5,600 (1) Based on a per share price of $1.56, the last reported transaction price of the Company's common stock on December 31, 1998. 32 Employment Agreements - --------------------- Mr. Paul Mobley has an employment agreement with the Company which fixes his base compensation at $275,000 per year, provides for reimbursement of travel and other expenses incurred in connection with his employment, including the furnishing of an automobile, health and accident insurance similar to that provided other employees, and life insurance in an amount related to his base salary. The initial term of the agreement is five years and is renewable each year for a five-year period subject to approval by the Board. The agreement is terminable by the Company for just cause as defined in the agreement. Mr. A. Scott Mobley has an employment agreement with the Company which fixes his base compensation at $175,000 per year, provides for reimbursement of travel and other expenses incurred in connection with his employment, including the furnishing of an automobile, health and accident insurance similar to that provided other employees, and life insurance in an amount related to his base salary. The initial term of the agreement is five years and is renewable each year for a five-year period subject to approval by the Board. The agreement is terminable by the Company for just cause as defined in the agreement. Director Compensation - --------------------- The Company's outside directors receive standard directors' fees of $1,000 per year and $300 per meeting plus reimbursement of out-of-pocket expenses. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of May 21, 1999, there were 5,565,390 shares of the Company's common stock outstanding. The Company has agreed to use its best efforts to cause its authorized common stock to be increased to 13,000,000 shares by August 15, 1999. The following table sets forth the amount and percent of the Company's common stock beneficially owned on May 21, 1999 by (i) each director and named executive officer individually, (ii) each beneficial owner of more than five percent of the Company's outstanding common stock and, (iii) all executive officers and directors as a group:
Name and Address Amount and Nature Percent of Outstanding of Beneficial Owner of Beneficial Ownership (1) Common Stock (2) ------------------- --------------------------- ----------------------- Paul W. Mobley One Virginia Avenue, Suite 800 1,529,013 (3) 24.8% Indianapolis, IN 46204 A. Scott Mobley (1) One Virginia Avenue, Suite 800 583,326 (4) 9.6% Indianapolis, IN 46204 Provident Financial Group, Inc. One E. Fourth Street 3,121,066 (5) 39.4% Cincinnati, OH 45202 33 Donald A. Morrison, III 320 N. Meridian, #412 72,919 (6) * Indianapolis, IN 46204 Geovest Capital Partners, L.P. 110 E. 59th Street, 18th Floor 1,498,877 (7) 21.2% New York, N.Y. 10022 James Lewis 110 E. 59th Street, 18th Floor 933,737 (8) 14.3% New York, N.Y. 10022 Hamilton Medaris Corp. 500,000 8.9% All Executive Officers and Directors as a Group (7 Persons) 2,187,758 33.0%
*Less than 1% (1) All shares owned directly unless otherwise noted. (2) The percentage calculations are based upon 5,565,390 shares of the Company's common stock issued and outstanding as of May 21, 1999 and, for each officer or director, of the group, the number of shares subject to options or conversion rights exercisable prior to July 20, 1999. (3) This total includes a warrant to purchase 600 thousand shares of stock at an exercise price of $.40 per share issued November 19, 1997 in connection with the financial restructuring with The Provident Bank. (4) Includes 30,000 shares subject to options granted under an employee stock option plan which are currently exercisable at $4.25 per share for 6,500 common shares, $3.63 per share for 4,500 common shares, $3.25 per share for 6,500 common shares, $3.68 per share for 7,500 common shares and $6.44 per share for 5,000 common shares . Also includes a warrant to purchase 400,000 shares of stock at an exercise price of $.40 per share issued November 19, 1997 in connection with the financial restructuring with The Provident Bank. (5) This total includes warrants to purchase in the aggregate 2,200,000 shares of the Company's common stock at $.01 per share. The warrants were granted to the Bank as partial consideration for the Bank's obligations pursuant to Amended and Restated Credit Agreement. (6) This total includes 70,219 shares owned by Traub and Company, Inc ("Traub") in its investment account, of which Mr. Morrison is shareholder. Mr. Morrison disclaims beneficial ownership of such shares beyond his interest in Traub. (7) Includes warrants to purchase 771,605 shares of the Company's common stock at $.01 per share. obtained from The Provident Bank. (8) Includes warrants to purchase 555,556 shares of the Company's common stock at $.01 per share obtained from The Provident Bank. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following is a summary of transactions to which the Company and certain officers and directors of the Company were a party during 1998. The Board of Directors of the Company has adopted a policy that all transactions between the Company and its officers, directors, principal shareholders and other affiliates 34 require the approval of a majority of the Company's disinterested directors, and be conducted on terms no less favorable to the Company than could be obtained from unaffiliated third parties. Paul W. Mobley leases a restaurant located in Indianapolis to GNR, Inc., a wholly-owned subsidiary of the Company, which lease has a remaining term of approximately five years and provides for rental payments of approximately $43,600 per year. In September 1995, H-M Ltd., a corporation owned by Paul W. Mobley and Larry J. Hannah, leased a restaurant in Indianapolis, Indiana to the Company. This lease has a remaining term of 17 years and provides for rental payments of $72,000 per year. During 1998, approximately $72,000 in rental payments were made. The Company believes that the terms of the above leases were substantially equivalent to market terms at the time such leases were entered into. In the past, Mr. Mobley loaned moneys to the Company from time to time to help meet cash flow requirements and as of December 31, 1998, the aggregate amount of loans outstanding from Mr. Mobley to the Company was $315,840. These amounts were converted to notes payable on May 1, 1999 in conjunction with the investment in the Company by investors associated with The Geometry Group. 35 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following consolidated financial statements of Noble Roman's, Inc. and subsidiaries are included in Item 8: Page Consolidated Balance Sheets - December 31, 1997 and 1998 17 Consolidated Statements of Operations - years ended December 31, 1996, 1997 and 1998 18 Consolidated Statements of Changes in Stockholders' Equity - years ended December 31, 1996, 1997 and 1998 19 Consolidated Statements of Cash Flows - years ended December 31, 1996, 1997 and 1998 20 Notes to Consolidated Financial Statements 21 Report of Independent Auditors - Rubin, Brown, Gornstein & Co., LLP 29 (a) Exhibits Exhibit No. 3.1 Amended Articles of Incorporation of the Registrant (1) 3.2 Amended and Restated By-Laws of the Registrant 4.1 Specimen Common Stock Certificates (1) 10.3 Employment Agreement with Paul W. Mobley dated November 15, 1994 (3) 10.4 Credit Agreement with The Provident Bank dated December 1, 1995 (5) 10.5 Consulting Agreement with Larry J. Hannah dated April 1, 1993 (3) 10.6 1984 Stock Option Plan (6) 10.7 Form of Stock Option Agreement (6) 11.1 Statement Re: Computation Per Share Earnings 21.1 Subsidiaries of the Registrant (2) 36 24.1 Not Applicable (unless going to sign as power of attorney for directors) ------------------------ (1) Incorporated by reference from Registration Statement filed by the Registrant on Form S-18 on October 22, 1982 and ordered effective on December 14, 1982 (SEC No. 2-79963C), and, for the Amended Articles of Incorporation, from the Registrant's Amendment No. 1 to the Post Effective Amendment No. 2 to Registration Statement on Form S-1 on July 1, 1985. (SEC File No.2-84150). (2) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 (SEC File No. 33-66850) ordered effective on October 26, 1993. (3) Incorporated by reference from the Form 8-K filed by the registrant on February 17, 1993. (4) Incorporated by reference from the Form 8-K filed by the registrant on June 3, 1993. (5) Incorporated by reference from the Form 8-K filed by the registrant on December 5, 1995. (6) Incorporated by reference from the Form S-8 filed by the registrant on November 29, 1994 (SEC File No. 33-86804). (b) Reports on 8-K None. 37 SIGNATURES ---------- In accordance with of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NOBLE ROMAN'S, INC. Date: August 23, 1999 By: /s/ Paul W. Mobley --------------- ------------------------------------ Paul W. Mobley, Chairman of the Board In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: August 23, 1999 /s/ Paul W. Mobley ------------------------- ------------------------------------ Paul W. Mobley Chairman of the Board and Director Date: August 23, 1999 /s/ A. Scott Mobley ------------------------- ------------------------------------ A. Scott Mobley President and Director Date: August 23, 1999 /s/ Donald A. Morrison, III ------------------------- ------------------------------------ Donald A. Morrison, III Director Date: August 23, 1999 /s/ Douglas H. Coape-Arnold ------------------------- ------------------------------------ Douglas H. Coape-Arnold Director 38 EX-27 2
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 28,176 0 579,841 0 844,783 1,638,271 10,702,418 (4,044,780) 19,142,555 3,879,361 0 0 0 11,869,174 (10,793,444) 19,142,555 23,306,780 25,781,686 4,185,955 18,933,587 0 0 1,387,011 (3,856,456) (1,311,194) (2,545,222) 0 395,696 0 (2,149,565) (.52) (.52)
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