BEHIND THE NEWS: Noble Roman's pays up to sever ties with vulture

September 12, 2005

The pizza-andsub business is tough enough without also having to worry about your largest creditor stabbing you in the back.

I n d i a n a p o l i s - based franchiser Noble Roman's Inc. has rid itself of that looming threat by paying $8.3 million to buy out nearly all the interests of a vulture investment firm that may have been scheming to control the company.

The deal settles a lawsuit Noble Roman's filed in March 2004 seeking to invoke Indiana's 19-year-old antitakeover laws to keep affiliates of the vulture firm, New York-based Fortress Investment Group, at bay.

Fortress blindsided Noble Roman's two years ago when it paid nearly $7 million to Cincinnati-based Provident Bank for its $7.7 million Noble Roman's loan, as well as for common stock and other company securities representing a nearly 25-percent ownership stake.

Noble Roman's had had a long, cozy relationship with Provident, which cut the company slack over and over in the 1990s as it suffered steep losses. Provident sold the Noble Roman's interests to clean up its books in advance of last year's $2.1 billion sale to Cleveland-based National City Corp.

Fortress was a different animal. An affiliate says on its Web site that it aims "to generate superior risk-adjusted returns by opportunistically acquiring and originating a diversified portfolio of undervalued, orphaned and distressed investments."

Tough tactics go with the territory. Two years ago, a Fortress affiliate bought a lender's interest in a $2.2 million loan to IW Industries Inc., a family-owned faucet maker in Melville, N.Y. Within months, it sought an injunction to freeze the company's assets, forcing it to restructure in bankruptcy court.

Noble Roman's Chairman Paul Mobley said he was confident his company would prevail in the lawsuit but decided to settle because terms were favorable.

"The lawsuit was never a worry for us," he said. "The bad part was the enormous amount of time it took, primarily on my part. That was time and energy we could have used more productively growing the business."

His son, President Scott Mobley, noted the company will record a pretax gain of $2.8 million from the deal, because the amount it paid is less than GREG ANDREWS gandrews@ibj.com

the value listed on financial statements.

The deal reduces the amount of debt on Noble Roman's balance sheet, company officials say, even though it borrowed $9 million from San Francisco-based Wells Fargo & Co. to fund the settlement.

Fortress appears to have fared respectably, too. In Marion Superior Court records, it said it paid $6.98 million for the Noble Roman's interests. About $1 million of the $8.3 million payment represents interest it had not been collecting during the dispute, leaving its gain at about $300,000.

But that doesn't take into account 2.4 million shares of Noble Roman's stock Fortress affiliates continue to hold. The shares represent about a 10-percent stake in the company, though under the settlement they lack voting power.

Noble Roman's thinly traded shares fetch about 95 cents apiece, which would value the holding at more than $2.2 million. Under the settlement, Noble Roman's agreed to do its best to find buyers for the shares within six to nine months.

The company has plenty of incentive to do so. According to the settlement, if buyers don't emerge, Fortress may be able to gain voting rights for the shares.

Jack Nelson, an Oakland, Calif., attorney representing Fortress, said: "My client is satisfied with the settlement. They think it is an appropriate resolution. We remain a shareholder of the company and certainly still think it is a good investment."

Improving business

Despite the uncertainty surrounding the company the past year, Noble Roman's has continued to pump out steadily improving financial results.

Excluding special charges, Noble Roman's posted a profit of $792,209 on revenue of $4.2 million in the first six months of 2005. That compares with a profit of $744,121 on revenue of $4.07 million in the same period a year earlier.

The company franchises Noble Roman's pizza outlets and Tuscano's Italian Style Subs outlets in convenience stores, airports and other nontraditional locations. A decade ago, it operated more than 70 stand-alone Noble Roman's restaurants but shuttered them and switched to the franchising game after losing more than $20 million in a four-year span.

Since 1997, Noble Roman's has awarded franchises in 44 states, as well as in Washington, D.C.; Puerto Rico; Guam; Italy; and Canada.
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