United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended June 30, 2012March 31, 2013
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 organization) Identification No.)
One Virginia Avenue, Suite 300
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
(317) 634-3377
(Registrant's telephone number, including area code)
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 X[X] No --- ---[ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes X[X] No --- ---[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer --- ---[ ]
Non-Accelerated Filer [ ] Smaller Reporting Company X[X]
(do not check if --- --- smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No X
--- ---[X]
As of August 9, 2012,May 5, 2013, there were 19,516,589 shares of Common Stock, no par value,
outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
The following unaudited condensed consolidated financial statements are
included herein:
Condensed consolidated balance sheets as of December 31, 20112012
and June 30, 2012March 31, 2013 (unaudited) Page 3
Condensed consolidated statements of operations for the
sixthree months ended June 30, 2011March 31, 2012 and 20122013 (unaudited) Page 4
Condensed consolidated statements of changes in stockholders'
equity for the three and six months ended June 30, 2012March 31, 2013
(unaudited) Page 5
Condensed consolidated statements of cash flows for the
sixthree months ended June 30, 2011March 31, 2012 and 20122013 (unaudited) Page 6
Notes to condensed consolidated financial statements (unaudited) Page 7
2
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
December 31, June 30,
2011March 31,
2012 2013
------------ ------------
Assets
Current assets:
Cash $ 233,296144,354 $ 240,763164,223
Accounts and notesnote receivable - net 884,811 1,125,0521,080,362 1,232,759
Inventories 338,447 411,649460,839 485,092
Assets held for resale 252,552 252,552259,579 259,579
Prepaid expenses 278,718 401,951379,669 476,669
Deferred tax asset - current portion 1,400,000 1,400,000
------------ ------------
Total current assets 3,387,824 3,831,9673,724,803 4,018,322
------------ ------------
Property and equipment:
Equipment 1,147,109 1,155,9061,166,103 1,169,078
Leasehold improvements 12,283 12,283
------------ ------------
1,159,392 1,168,1891,178,386 1,181,361
Less accumulated depreciation and amortization 851,007 879,249905,376 918,254
------------ ------------
Net property and equipment 308,385 288,940273,010 263,107
Deferred tax asset (net of current portion) 9,613,399 9,184,0589,238,536 8,964,152
Other assets 3,914,523 4,283,492including long-term portion of receivables-net 3,924,404 3,998,443
------------ ------------
Total assets $ 17,224,13117,160,753 $ 17,588,45717,244,024
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term noteNote payable to bank $ 3,575,0001,250,000 $ 1,250,000
Accounts payable and accrued expenses 665,054 248,209510,710 484,861
------------ ------------
Total current liabilities 4,240,054 1,498,2091,760,710 1,734,861
------------ ------------
Long-term obligations:
Note payable to bank (net- net of current portion) -- 3,645,833
Note payable to officer 1,255,821 --portion 3,020,833 2,708,333
------------ ------------
Total long-term liabilities 1,255,821 3,645,8333,020,833 2,708,333
------------ ------------
Stockholders' equity:
Common stock - no par value (25,000,000 shares authorized, 19,469,31719,516,589
issued and outstanding as of December 31, 20112012 and 19,489,317 as of
June 30, 2012) 23,239,976 23,298,570March 31, 2013) 23,366,058 23,394,301
Preferred stock (5,000,000 shares authorized and 20,625 issued and
outstanding as of December 31, 20112012 and June 30, 2012)March 31, 2013) 800,250 800,250
Accumulated deficit (12,311,970) (11,654,405)(11,787,098) (11,393,721)
------------ ------------
Total stockholders' equity 11,728,256 12,444,41512,379,210 12,800,830
------------ ------------
Total liabilities and stockholders' equity $ 17,224,13117,160,753 $ 17,588,45717,244,024
============ ============
See accompanying notes to condensed consolidated financial statements.
3
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
Six Months Ended
June 30, June 30,
2011March 31,
--------------------------
2012 2011 20122013
----------- -----------
----------- -----------
Royalties and fees $ 1,731,8021,703,566 $ 1,767,414 $ 3,406,589 $ 3,470,9801,782,306
Administrative fees and other 11,018 5,496 19,395 12,7437,247 1,276
Restaurant revenue 137,670 120,680 256,522 247,529
----------- -----------126,849 107,156
----------- -----------
Total revenue 1,880,490 1,893,590 3,682,506 3,731,2521,837,662 1,890,738
Operating expenses:
Salaries and wages 247,497 253,524 485,140 496,983243,459 249,203
Trade show expense 93,247 123,127 183,247 244,124120,997 129,549
Travel expense 52,589 45,459 99,474 94,37448,915 44,315
Other operating expenses 176,290 172,008 355,230 350,209178,201 181,363
Restaurant expenses 129,903 113,029 248,467 232,272119,243 105,107
Depreciation and amortization 36,311 28,561 49,860 59,22530,664 28,346
General and administrative 403,430 392,670 811,818 788,387
----------- -----------395,717 406,984
----------- -----------
Total expenses 1,139,267 1,128,378 2,233,236 2,265,574
----------- -----------1,137,196 1,144,867
----------- -----------
Operating income 741,223 765,212 1,449,270 1,465,678700,466 745,871
Interest and other expense 97,207 198,692 195,859 294,621
----------- -----------95,929 53,157
----------- -----------
Income before income taxes 644,016 566,520 1,253,411 1,171,057604,537 692,714
Income tax expense 255,097 224,398 496,478 463,856
----------- -----------239,458 274,384
----------- -----------
Net income 388,919 342,122 756,933 707,201365,079 418,330
Cumulative preferred dividends 24,411 24,683 49,364 49,636
----------- -----------24,953 24,953
----------- -----------
Net income available to common
stockholders $ 364,508340,126 $ 317,439 $ 707,569 $ 657,565
=========== ===========393,377
=========== ===========
Earnings per share - basic:
Net income $ .02 $ .02
$ .04 $ .04
Net income available to common stockholders $ .02 $ .02 $ .04 $ .03
Weighted average number of common shares
outstanding 19,469,317 19,489,317 19,446,113 19,483,38319,477,449 19,516,589
Diluted earnings per share:
Net income $ .02 $ .02
$ .04 $ .04
Net income available to common
stockholders $ .02 $ .02 $ .04 $ .03
Weighted average number of common shares
outstanding 20,183,876 20,041,048 20,160,672 20,035,11420,005,889 20,244,804
See accompanying notes to condensed consolidated financial statements.
4
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in
Stockholders' Equity
(Unaudited)
Preferred Common Stock Accumulated
Stock Shares Amount Deficit Total
---------------------- ---------- ------------ ------------ -----------------------
Balance at December 31, 20112012 $ 800,250 19,469,31719,516,589 $ 23,239,976 $(12,311,970) $11,728,25623,366,058 $(11,787,098) $ 12,379,210
Net income for sixthree months ended
June 30, 2012 707,201 707,201March 31, 2013 418,330 418,330
Cumulative preferred
dividends (49,636) (49,636)
Exercise(24,953) (24,953)
Amortization of value of employee
stock options 20,000 7,200 7,200
Amortization of value of stock
options 51,394 51,394
----------28,243 28,243
------------ ---------- ------------ ------------ -----------------------
Balance at June 30, 2012March 31, 2013 $ 800,250 19,489,31719,516,589 $ 23,298,570 $(11,654,405) $12,444,415
========== ==========23,394,301 $(11,393,721) $ 12,800,830
============ ============ ======================= ============ ============
See accompanying notes to condensed consolidated financial statements.
5
Noble Roman's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
SixThree Months Ended June 30,
2011March 31,
2012 ----------- -----------2013
--------- ---------
OPERATING ACTIVITIES
Net income $ 756,933365,079 $ 707,201418,330
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 106,112 109,39640,846 41,121
Deferred income taxes 496,478 463,856239,458 274,384
Changes in operating assets and liabilities:
Increase(Increase) in:
Accounts and notes receivable (242,926) (240,242)(138,677) (152,395)
Inventories (1,216) (73,203)(19,029) (24,253)
Prepaid expenses (97,290) (123,233)(58,195) (97,000)
Other assets (454,990) (211,186)
Decrease(143,845) (74,039)
Increase (decrease) in:
Accounts payable and accrued expenses (28,551) (79,066)
----------- -----------(12,090) 35,686
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 534,550 553,523
----------- -----------273,547 421,834
--------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment (4,196) (8,797)
Investment in assets held for sale (3,393) --
----------- -----------(3,624) (2,975)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (7,589) (8,797)
----------- -----------(3,624) (2,975)
--------- ---------
FINANCING ACTIVITIES
Payment of obligations from discontinued operations (379,642) (337,777)(71,176) (61,537)
Payment of cumulative preferred dividends (49,364) (49,636)(24,953) (24,953)
Payment of principal on outstanding under prior bank loan (305,801) (3,575,000)
Payment of principal outstanding due officer -- (1,255,821)
Net proceeds from new bank loan -- 4,812,457
Payment of principal outstanding under new bank loan -- (104,167)debt (200,000) (312,500)
Payment of alternative minimum tax (34,515) -- (34,515)
Proceeds from the exercise of employee stock options 18,000 7,200 Principal payment received on notes receivable 29,947 --
Proceeds from officer loan 50,000 --
----------- -------------------- ---------
NET CASH USED IN FINANCING ACTIVITIES (636,860) (537,259)
----------- -----------(323,444) (398,990)
--------- ---------
Increase (decrease) in cash (109,899) 7,467(53,521) 19,869
Cash at beginning of period 337,044 233,296 ----------- -----------144,354
--------- ---------
Cash at end of period $ 227,145179,775 $ 240,763
=========== ===========164,223
========= =========
Supplemental schedule of non-cash investing and financing activities
None.
Cash paid for interest $ 173,45677,108 $ 155,18443,880
See accompanying notes to condensed consolidated financial statements.
6
Notes to Condensed Consolidated Financial Statements (Unaudited)
----------------------------------------------------------------
Note 1 - The accompanying unaudited interim condensed consolidated financial
statements, included herein, have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These condensed
consolidated statements have been prepared in accordance with the Company's
accounting policies described in theits Annual Report on Form 10-K for the year
ended December 31, 20112012 and should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in that report.
Unless the context indicates otherwise, references to the "Company" mean Noble
Roman's, Inc. and its subsidiaries.
In the opinion of the management of the Company, the information contained
herein reflects all adjustments necessary for a fair presentation of the results
of operations and cash flows for the interim periods presented and the financial
condition as of the dates indicated, which adjustments are of a normal recurring
nature. The results for the six-monththree-month period ended June 30, 2012March 31, 2013 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2012.2013.
Note 2 - On May 15, 2012, the Company entered into a Credit Agreement with BMO
Harris Bank, N.A. for a term loan in the amount of $5.0 million which is
repayable in 48 equal monthly principal installments of $104,000 plus interest
commencing on June 15, 2012 with a final payment due on May 15, 2016. Interest
on the unpaid principal balance is payable at a rate per annum of LIBOR plus 4%.
The proceeds from the term loan, net of certain fees and expenses associated
with obtaining the term loan, were used to repay existing indebtedness to Wells
Fargo Bank, N.A. and to an officer of the Company. The Company's obligations
under the term loan are secured by the grant of a security interest in
essentially all assets of the Company and a personal guaranty of an officer of
up to $1.2 million of the term loan and certain restrictions apply such as a
prohibition on the payment of dividends, as defined in the Credit Agreement.
Note 3 - Royalties and fees include $50,000$74,833 and $125,000$110,000 for the three-month
and
six-month periods ended June 30,March 31, 2012 and $75,000 and $127,000 for the
three-month and six-month periods ended June 30, 2011,2013, respectively, of initial franchise fees.
Royalties and fees included $13,000$9,345 and $23,000$13,327 for the three-month and six-month periods ended
June 30,March 31, 2012 and $8,000 and $18,000
for the three-month and six-month periods ended June 30, 2011,2013, respectively, of equipment commissions. Royalties and
fees, less initial franchise fees and equipment commissions were $1.7 million$1,619,388 and
$3.3 million$1,658,979 for the three-month and
six-month periods ended June 30,March 31, 2012 and $1.6 million and $3.3 million2013,
respectively. Most of the cost for the three-month and six-month periods ended June 30, 2011, respectively. The
breakdown of royalties and fees, less upfront fees,services required to be performed by the
Company are royalties and fees from
non-traditional franchises other than grocery stores were $1.2 million and $2.2
millionincurred prior to the franchise fee income being recorded, which is
based on a contractual liability for the three-month and six-month periods ended June 30, 2012, and $1.1
million and $2.2 million forfranchisee. For the three-month and six-month periods ended June
30, 2011, respectively; royalties and fees frommost part, the
grocery store take-n-bake
were $371,000 and $695,000 forCompany's royalty income is paid by the three-month and six-month periods ended June
30, 2012, and $265,000 and $548,000 forCompany initiating a draft on the
three-month and six-month periods
ended June 30, 2011, respectively; and royalties and fees from traditional
locations were $180,000 and $461,000 for the three-month and six-month periods
ended June 30, 2012, and $272,000 and $551,000 for the three-month and six-month
periods ended June 30, 2011, respectively.franchisee's account by electronic withdrawal. The Company has no material
amount of past due royalties.
There were 1,331 franchises/licenses1,847 outlets in operation on June 30, 2011December 31, 2012 and 1,710
franchises/licenses1,895 outlets in
operation on June 30, 2012.March 31, 2013. During the twelve-monththree-month period ended June 30, 2012March 31, 2013,
there was 394were 59 new outlets opened and 1511 outlets 7
closed. The breakdown of the 1,710 franchises at June 30, 2012 was 756
non-traditional franchises other than grocery stores, 912 grocery stores and 42
traditional franchises. In the ordinary course,
grocery stores from time to time add products, remove and subsequentlyfrequently re-offer
them. Therefore, it is unknown if
anyhow many grocery store licenses have left the
system.
7
Note 43 - The following table sets forth the calculation of basic and diluted
earnings per share for the three-month and six-month periodsperiod ended June 30,March 31, 2012:
Three Months Ended June 30, 2012
--------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------------
Net income $ 342,122 19,489,317365,079 19,477,449 $ .02
Less preferred stock dividends 24,683(24,953)
----------
Earnings per share - basic
Income available to common stockholders 317,439340,126 .02
Effect of dilutive securities
Options 185,065161,774
Convertible preferred stock 24,68324,953 366,666
---------- ----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 342,122 20,041,048365,079 20,005,889 $ .02
========== ========== =======
Six Months Ended June 30, 2012
------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $ 707,201 19,483,383 $ .04
Less preferred stock dividends 49,636
----------
Earnings per share - basic
Income available to common stockholders 657,565 .03
Effect of dilutive securities
Options 185,065
Convertible preferred stock 49,636 366,666
---------- ----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 707,201 20,035,114 $ .03
========== ========== =======
8
The following table sets forth the calculation of basic and diluted earnings per
share for the three-month and six-month periodsperiod ended June 30, 2011:March 31, 2013:
Three Months Ended June 30, 2011
--------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------------
Net income $ 388,919 19,469,317418,330 19,516,589 $ .02
Less preferred stock dividends (24,411)(24,953)
----------
Earnings per share - basic
Income available to common stockholders 364,508393,377 $ .02
Effect of dilutive securities
Options 347,893361,549
Convertible preferred stock 24,41124,953 366,666
---------- ----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 388,919 20,183,876418,330 20,244,804 $ .02
========== ========== =======
Six Months Ended June 30, 2011
------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $ 756,933 19,446,113 $ .04
Less preferred stock dividends (49,364)
----------
Earnings per share - basic
Income available to common stockholders 707,569 .04
Effect of dilutive securities
Options 347,893
Convertible preferred stock 49,364 366,666
---------- ----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 756,933 20,160,672 $ .04
========== ========== =======
Note 54 - The Company iswas a Defendant in a lawsuit styled Kari Heyser, Fred Eric
Heyser and Meck Enterprises, LLC, et al v. Noble Roman's, Inc. et al, filed in
Superior Court in Hamilton County, Indiana in June 2008.2008 (Cause No. 29D01 0806 PL
739). The Court issued an
Order dated December 23, 2010 granting summary judgment in favor of the Company
against all of the Plaintiffs. As a result, the Plaintiffs' allegations of fraud against the Company and certain of
its officers were determined to be without merit. Plaintiffs filed numerous motions and an appeal to the Indiana Court of
Appeals, in an attempt to reverse the December 23, 2010 summary judgment. All of
the motions were denied and the Indiana Court of Appeals dismissed the appeal
with prejudice. Plaintiffs' last attempt to vacate the summary judgment award
was their attempt to vacate the Order on the grounds of misconduct of third
parties. On December 1, 2011, the Judge denied their motion and specifically
found "that there was absolutely no evidence of misconduct" and the Court
admonished Plaintiffs and Plaintiffs' counsel for making such unfounded
allegations. The fraud charges against the Company and certain of its officers
are dismissed entirelymerit and Plaintiffs have no appealexhausted
their rights remaining.of appeal. The Company then filed a motion for sanctions against the Plaintiffs and their
attorney for the frivolous filings. On February 28, 2012, the Court granted the
Company's request for sanctions and ordered the Plaintiffs and their attorney to
pay the Company $8,326separate claim by April 23, 2012. The Plaintiffs filed a motion to
9
reconsider and the hearing was held on May 23, 2012. The Judge denied their
motion and ordered Plaintiffs and Plaintiffs' counsel to pay those sanctions
within 14 days, which made the payment due on June 7, 2012. Sanctions were not
paid and the Company filed a motion for contempt of court or to show cause. The
Judge gave the Plaintiffs until July 5, 2012 to respond to that motion. The
Plaintiffs filed a response but the Plaintiffs' counsel did not respond. The
Company does not believe that the Plaintiffs' response was responsive to the
contempt charge and, therefore, the Company filed a reply asking the Court to
rule on the contempt charge against Plaintiffs' counsel and to point out that
the Plaintiffs' response was not responsive to the Company's contempt motion and
moved the Court to impose additional sanctions. The Company's counterclaims
against the Plaintiffs for breach of contract remain pending as to amount of
damages, however the Company has been granted summary judgment as to liability.
The Complaint was originally against the Company and certain officers and
institutional lenders. The Plaintiffs are former franchiseesone of the Company's
traditional location venue. The Plaintiffs alleged that the Defendants
fraudulently induced them to purchase franchises for traditional locations
through misrepresentations and omissions of material facts regarding the
franchises. In addition to the above claims, one group of franchisee-Plaintiffs
in the same case had asserted a separate claim under the
Indiana Franchise Act as to whichwas settled. There are no longer any claims pending
against the Court's Order denied the Company's motion for summary judgment
as the Court determined that there is a genuine issue of material facts but did
not render any opinion on the merits of the claim.Company in this case.
The Company denies any
liability on the Indiana Franchise Act claim and will continue to vigorously
defend against this claim.
The Company filedasserted counterclaims for damages for breach of contract against
allthe Plaintiffs. The Company proceeded to trial against two of the Plaintiffs in the approximate amount of $3.6 million plus attorneys'
fees, interest and
other costs of collection, or a total of over $5 million. On
September 21, 2011, the Company filed motions for partial summary judgment asobtained damage awards against each. In addition to liability against the Plaintiffs on the Company's counterclaims. As a result,
the Company was granted partial summary judgment as to liability against the
Plaintiffs/Counterclaim-Defendants on the Company's counterclaims against the
Plaintiffs. In this partial summary judgment, the Court determined that the
Plaintiffs were liable to the Company for direct damages and consequential
damages including future royalties, for breach of their franchise agreements.
In addition,in the Court's summary judgment Order, the Court determined that as a
matter of law Noble Roman's wasis entitled to recover attorneys' fees associated
with obtaining preliminary injunctions, fees resulting from the prosecution of
Noble Roman's counterclaims, and fees for defending against fraudthe various claims
against the Company and certain of
its officers. TheCompany. A hearing was set for March 21, 2013 on the amount of
the award is8
attorneys' fees to be determined at trial. The Company
movedawarded, however the hearing date was extended and the
Court has not yet issued an Order setting a new hearing date. Sometime after the
hearing on attorney fees, the Court is expected to order mandatory mediation asissue an Order for a judgment
amount to be awarded to the Indiana Franchise Act
claim andCompany against the Company's counterclaim for damages. The Court ordered mediation,
which is set for September 14, 2012 with all Plaintiffs required to appear.two remaining Plaintiffs.
Note 6:5 - The Company evaluated subsequent events through the date the financial
statements were issued and filed with the SEC.S.E.C. There were no subsequent events
that required recognition or disclosure beyond what is disclosed in this report.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Information
-------------------
Noble Roman's, Inc., an Indiana corporation incorporated in 1972 with two
wholly-owned subsidiaries, Pizzaco, Inc. and N.R. Realty, Inc., sells and
services franchises and licenses for non-traditional foodservice operations
10
under the trade names "Noble Roman's Pizza", "Noble Roman's Take-N-Bake", and
"Tuscano's Italian Style Subs" and "Tuscano's Grab-N-Go Subs". The concepts' hallmarks include high quality
pizza and sub sandwiches, along with other related menu items, simple operating
systems, fast service times, labor-minimizing operations, attractive food costs
and overall affordability. Since 1997, the Company has focused its efforts and
resources primarily on franchising and licensing for non-traditional locations
and now has awarded franchise and/or license agreements in 49 states plus
Washington, D.C., Puerto Rico, the Bahamas, Italy, the Dominican Republic and
Canada. Although from 2005 to 2007 the Company sold some franchises for its
concepts in traditional restaurant locations, the Company is currently focusing
all of its sales efforts primarily on (1) selling franchises for non-traditional locations
primarily in convenience stores and entertainment facilities, (2) franchises for
stand-alone Noble Roman's Take-N-Bake Pizza retail outlets and (2)(3) license
agreements for grocery stores to sell the Noble Roman's Take-n-BakeTake-N-Bake Pizza. The Company has recently developed a
stand-alone take-n-bake pizza prototype and has entered into agreements with two
separate existing independent franchisees to open a total of four such units in
the upcoming months.
Pizzaco, Inc. is the owner and operator of the two Company locations used for
testing and demonstration purposes. The Company has no plans to operate any
other locations. References in this report to the "Company" are to Noble
Roman's, Inc. and its subsidiaries, unless the context requires otherwise.
Products & Systems
------------------
The Company's non-traditional franchises provide high-quality products, simple
operating systems, labor minimizing operations and attractive food costs.
Noble Roman's Pizza
The hallmark of Noble Roman's Pizza is "Superior quality that our customers can
taste." Every ingredient and process has been designed with a view to produce
superior results.
o Crust made with only specially milled flour with above average protein
and yeast.
o Fresh packed, uncondensed sauce made with secret spices, parmesan
cheese and vine-ripened tomatoes.
o 100% real cheese blended from mozzarella and Muenster, with no soy
additives or extenders.
o 100% real meat toppings, again with no additives or extenders - a
distinction compared to many pizza concepts.
o Vegetable and mushroom toppings that are sliced and delivered fresh,
never canned.
9
o An extended product line that includes breadsticks and cheesy stix
with dip, pasta, baked sandwiches, salads, wings and a line of
breakfast products.
o A fully-prepared pizza crust that captures the made-from-scratch
pizzeria flavor which gets delivered to the franchise location
shelf-stable so that dough handling is no longer an impediment to a
consistent product.
Noble Roman's Take-N-Bake
The Company developed a take-n-bake version of its pizza as an addition to its
menu offerings. The take-n-bake pizza is designed as an add-on component for new
and existing convenience stores, and as a stand-alone offering for grocery stores.stores
and as a stand-alone take-n-bake retail outlet. The Company offers the
take-n-bake program in grocery stores is being offered as a license agreement rather than a
franchise agreement. The stand-alone take-n-bake pizza format is offered under a
franchise agreement. In convenience stores, take-n-bake is an available menu
offering under the existing franchise agreement. The
Company has recently developed a stand-alone take-n-bake pizza prototype and has
entered into agreements with two separate existing independent franchisees to
open a total of four such units in the upcoming months. The Company uses the same high
quality pizza ingredients for its take-n-bake pizza as with its standard pizza,
with slight modifications to portioning for increased home baking performance.
11
Tuscano's Italian Style Subs
Tuscano's Italian Style Subs is a separate restaurant concept that focuses on sub sandwich
menu items. Tuscano's was designed to be comfortably familiar from a customer's
perspective but with many distinctive features that include an Italian-themed
menu. The franchise fee and ongoing royalty for a Tuscano's is identical to that
charged for a Noble Roman's Pizza franchise. For the most part, the Company
awards Tuscano's franchises for some of the same facilities as Noble Roman's
Pizza franchises, although Tuscano's franchises are also available for locations
that do not have a Noble Roman's Pizza franchise. Tuscano's Grab-N-Go Subs
Noble Roman's has developed a
grab-n-go service system for a selected portion of the Tuscano's menu. The
grab-n-go system is designed to add sales opportunities at existing
non-traditional Noble Roman's Pizza and/or Tuscano's Subs locations. Franchisees
that opened prior to the development of the grab-n-go service system may add it
as an option. The grab-n-go system has already been integrated into
the operations of several existing locations and is now available to all
franchisees. New, non-traditional franchisees have the opportunity to open with
both take-n-bake pizza and grab-n-go subs when they acquire a Noble Roman's
franchise or license.
Business Strategy
-----------------
The Company's business strategy includes in the following four elements:
1. Focus on revenue expansion through twothree primary growth vehicles:
Sales of Non-Traditional Franchises and Licenses. The Company believes that in
today's macroeconomic circumstances, it has an
opportunity for increasing unit growth and revenue within its non-traditional
venues, particularly with convenience stores, travel plazas and entertainment
facilities. The Company's franchises in non-traditional locations are
foodservice providers within a host business, and usually require a
substantially lesslower investment compared to a stand-alone traditional location.
Non-traditional franchises and licenses are most often sold into pre-existing
facilities as a service and/or revenue enhancer for the underlying business.
Although the Company's current focus is on non-traditional franchise or license
expansion and franchising stand-alone take-n-bake pizza retail outlets, the
Company will still seek to capitalize on other franchising opportunities as they
present themselves.
As a result of the Company's major focus being on non-traditional franchising,
franchising stand-alone take-n-bake retail outlets and licensing its requirementstake-n-bake
pizzas for grocery stores, Company overhead and operating costs are
10
significantly less than if it were focusing on franchising traditional
franchising.locations. In addition, the Company does not operate restaurants except for two
restaurants it uses for product testing, demonstration and training purposes.
This allows for a more complete focus on selling and servicing franchises and
licenses to pursue increased unit growth.
Licensing and Franchising the Company's Take-N-Bake Program. In Septemberlate 2009, the
Company introduced a take-n-bake pizza as an addition to its menu offering. The
take-n-bake pizza is designed as a stand-alone offering for grocery stores and
an add-on component for new and existing convenience store franchisees or
licensees and or stand-alone franchise locations. Since September 2009, when the Company started
offering take-n-bake pizza to grocery store chains in late 2009, through August 9, 2012,May 6,
2013, the Company has signed agreements for 1,206approximately 1,550 grocery store
locations to operate the take-n-bake pizza program and has opened the
take-n-bake pizza program in approximately 9451,150 of those locations. The Company
is currently in 12
discussions with numerousseveral grocery store operators for numerous
locations for additional take-n-bake locations. Beginning in August 2011, thelicense agreements. The Company introducedhas six new
"Signature Specialty Take-N-Bake Pizza" combinations toin its current standard
offerings. These pizzas feature unique, fun combinations of ingredients with
proven customer appeal in other Company venues, and include Hawaiian pizza, Four
Cheese pizza, BBQ Pork pizza, BBQ Chicken pizza, Hoppin' Jalapeno pizza and
Parmesan Tomato pizza. The Company's strategy with these new combinationsspecialty pizzas is to
secure more shelf space in existing locations, to add to the appeal of the program in
order to attract new locations, and to generally increase sales of the Company's
products.
To further accelerate the growth of take-n-bake pizzaIn January 2013, in an attempt to increase sales in existing grocery stores, the
Company has focused on signing agreements with variousadded two optional variations to the standard grocery store distributorstake-n-bake
program. The licensee may purchase a Noble Roman's branded display warmer and a
small commercial pizza oven for approximately $500 and offer a Noble Roman's
SuperSlice hot pizza program. The other variation is for grocery store deli
departments to marketinstall a menu board and offer the Company's Make-It-Your-Way
pizza program. With this variation, the customer can choose to purchase one of
the standard take-n-bake pizzas in the display cooler or can have the deli staff
make a pizza program towith the distributors'
current customer base. Astoppings of August 9,the customer's choice.
Franchising the Company's Take-N-Bake Program for Stand-Alone Locations. In
2012, the Company had signed 12 grocery
distributorsdeveloped a stand-alone take-n-bake pizza prototype and has
entered into agreements for 11 locations as of May 6, 2013. The first
stand-alone take-n-bake pizza location opened in October 2012, the second
location in December 2012, the third location opened in January 2013 and the
fourth and fifth locations opened in April 2013. Three additional locations are
scheduled to open in May 2013 and the remaining three locations are planned to
open in the next few months. The Company's stand-alone take-n-bake program
features the chain's popular traditional Hand-Tossed Style pizza, Deep-Dish
Sicilian pizza, SuperThin pizza, all with a choice of three different types of
sauce, and Noble Roman's famous breadsticks with spicy cheese sauce, all in a
convenient cook-at-home format. Additional menu items include such items as
fresh salads, cookie dough, cinnamon rounds, bake-able pasta and more. The
Company is currently in discussions with several other prospects for its
stand-alone program and continues to pursue others as well.is advertising for additional franchisees through
various web-based franchise referral systems. In addition, the Company will
demonstrate Noble Roman's stand-alone Take-N-Bake Pizza concept at the National
Restaurant Association Show in May 2013.
11
2. Leverage the results of extensive research and development advances.
The Company has invested a great deal in thesignificant time and effort to create what it considers
to be competitive advantages in its productproducts and systems for non-traditional and grocery
take-n-bake locations. The Company will continue to make these investments the
focal point in its marketing process. The Company believes that the quality of
its products, thetheir cost-effectiveness, of those
products, its relatively simple production and service
systems, and its diverse, modularized menu offerings all contribute to the
Company's strategic advantages
and growth potential. Every ingredient and process was designed with a
view to producing superior results. The menu items were developed to be
delivered in a ready-to-use form requiring only on-site assembly and baking
except for take-n-bake pizza, which is sold to bake at home, and the new carton-to-shelf
retailcertain other
menu items which require no assembly. The Company believes this process results
in products that are great tasting, quality consistent, easy to assemble,
and relatively low in food cost, and which require very low amounts of labor, and allowthus
allowing for a significant competitive advantage due to the speed at which itsthe
products can be prepared, baked and served to customers.
For example, in convenience stores and travel plazas, at competitive retail
prices, thegross margins on selling Noble Roman's products, after cost of product and
royalty, provides franchisees with a gross margin on the sales ofcan range from approximately 65% to 70%. The Company believes it
maintains a competitive advantage in product cost by using carefully selected,
independent third-party manufacturers and independent third-party distributors.
This allows the Company to contract for production of proprietary products and
services with highly efficient suppliers that have the potential of keeping
costs extremely low when compared to typical,many competing systems whereby the franchisor attempts to ownowns and
operateoperates production and distribution systems of their own much less efficiently.
3. Expand the Company's overall capacity to generate new franchises and
licenses.
The Company's Chairman and CEO has assumed the lead position at all of the
Company's trade shows across the country, which is the primary means for
demonstrating its product and system advantages to thousands of prospective
non-traditional and grocery operators. This focus by the Company's CEO has underscored the Company's
current, overriding orientation towards new revenue generation.
13
4. Aggressively communicate the Company's competitive advantages to its target
market of potential franchisees and licensees.
The Company utilizes four basic methods of reaching potential franchisees and
licensees and to communicate its product and system advantages. These methods
include: 1) calling from both acquired and in-house prospect lists; 2) frequent
direct mail campaigns to targeted prospects; 3) web-based lead capturing; and 4)
live demonstrations at trade and food shows. In particular, the Company has
found that conducting live demonstrations of its systems and products at
carefully selected trade and food shows across the country allows it to demonstrate
advantages that can otherwise be difficult for a potential prospect to
visualize. There is no substitute for actually tasting the difference in a
product's quality to demonstrate the advantages of the Company's product
quality.products. The
Company carefully selects the national and regional trade and food shows where
it either has an existing relationship or considerable previous experience to
expect that they offer opportunities for fruitfulsuccessful lead generation.
Business Operations
-------------------
Distribution
------------
Primarily all of the Company's products are manufactured pursuant to the
Company's recipes and formulas by third-party manufacturers pursuant tounder contracts
between the Company and theits various manufacturers. TheThese contracts require the
12
manufacturers to produce various ingredientsproducts with specific specifications and to sell them
to Company-approved distributors at a price negotiated between the Company and
the manufacturer.
At present, the Company has distribution agreements with 11 primary distributors
strategically located throughout the United States. The distribution agreements
require the primary distributors to maintain adequate inventories of all
ingredientsproducts necessary to meet the needs of the Company's franchisees and licensees
for weekly deliveries to the franchisee/licensee locations plus the grocery
store distributors in their respective territories. TheEach of the primary
distributors purchasepurchases the ingredientsproducts from the manufacturer, under payment terms
agreed upon by the manufacturer and the distributor, and distributedistributes the
ingredientsproducts to the franchisee/licensee at a price fixed by the distribution
agreement, which is
their landed cost plus a contracted mark-up for distribution.
Payment terms to the distributor are agreed upon between each
franchisee/licensee and the respective distributor. In addition, the Company has
agreements with 12several grocery store distributors located in various parts of
the country which are requiredagree to buy their products from one of the primary
distributors and to distribute take-n-bake products to their grocery store
customers.
Franchising
-----------
The Company sells franchises into various non-traditional and traditional
venues.
The initial franchise fee isfees are as follows:
------------------------------------------------------------------------------------------------
Non-Traditional, Traditional
Franchise except Hospitals Hospitals Stand-Alone
------------------------------------------------------------------------------------------------
Noble Roman's Pizza $ 6,000 $10,000 $15,000
------------------------------------------------------------------------------------------------
Tuscano's Subs $ 6,000 $10,000 $15,000
------------------------------------------------------------------------------------------------
Noble Roman's & Tuscano's $10,000 $18,000 $18,000
------------------------------------------------------------------------------------------------
Noble Roman's Stand-Alone Take-N-Bake $15,000
------------------------------------------------------------------------------------------------
14
-------------------------------------------------------------------------------
Non-Traditional, Traditional
Franchise except Hospitals Hospitals Stand-Alone
-------------------------------------------------------------------------------
Noble Roman's Pizza $ 6,000 $10,000 $15,000
-------------------------------------------------------------------------------
Tuscano's Subs $ 6,000 $10,000 $15,000
-------------------------------------------------------------------------------
Noble Roman's & Tuscano's $10,000 $18,000 $18,000
-------------------------------------------------------------------------------
The initial franchise fee for a Noble Roman's stand-alone take-n location
is $15,000.
The franchise fees are paid upon signing the franchise agreement and, when paid,
are deemed fully earned and non-refundable in consideration of the
administration and other expenses incurred by the Company in granting the
franchises and for the lost and/or deferred opportunities to grant such
franchises to any other party.
Licensing
---------
Noble Roman's Take-n-Bake Pizza licenses for grocery stores are goverenedgoverned by a
supply agreement. The supply agreement generally requires the licensee to: (1)
purchase proprietary ingredients from a Noble Roman's-approved distributor; (2)
assemble the products using only Noble Roman's approved ingredients and recipes;
package the products using shrink wrap; place the products in Noble Roman's
Pizza boxes; and (3) display products in a manner approved by Noble Roman's using Noble
Roman's point-of-sale marketing materials. Pursuant to the distribution
agreements, the distributors place an additional mark-up, as determined by the
Company, above their normal selling price on the key ingredients foras a fee to the
Company in lieu of a royalty. The distributors areagree to segregate this
additional mark-up upon invoicing the licensee, andto hold the amount in trust for
the Company and to remit such fees to the Company within ten days after the end
of each month.
13
Financial Summary
-----------------
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 may differ from those
estimates. The Company periodically evaluates the carrying values of its assets,
including property, equipment and related costs, accounts receivable and
deferred tax asset,assets, to assess whether any impairment indications are present
due to (among other factors) recurring operating losses, significant adverse
legal developments, competition, changes in demand for the Company's products or
changes in the business climate thatwhich affect the recovery of recorded value. If
any impairment of an individual asset is evident, a charge will be provided to
reduce the carrying value to its estimated fair value.
15
The following table sets forth the percentage relationship to total revenue of
the listed items included in Noble Roman's consolidated statements of operations
for the three-month and six-month periods ended June 30, 2011March 31, 2012 and 2013, respectively.
Three Months Ended
March 31,
--------
2012 respectively.
Three Months Ended Six Months Ended
June 30, June 30,
------- -------
2011 2012 2011 2012
---- ---- ---- ----
Royalties and fees 92.1 % 93.3 % 92.5 % 93.1 %
Administrative fees and other .6 .3 .5 .3
Restaurant revenue 7.3 6.4 7.0 6.6
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Salaries and wages 13.2 13.4 13.2 13.3
Trade show expense 5.0 6.5 5.0 6.5
Travel expense 2.8 2.4 2.7 2.5
Other operating expense 9.4 9.1 9.6 9.4
Restaurant expenses 6.9 6.0 6.7 6.2
Depreciation and amortization 1.8 1.5 1.4 1.6
General and administrative 21.5 20.7 22.0 21.1
----- ----- ----- -----
Total expenses 60.6 59.6 60.6 60.6
----- ----- ----- -----
Operating income 39.4 40.4 39.4 39.4
Interest and other expense 5.2 10.5 5.4 7.9
----- ----- ----- -----
Income before income taxes 34.2 29.9 34.0 31.5
Income tax expense 13.5 11.9 13.4 12.4
----- ----- ----- -----
Net income 20.7 % 18.0 % 20.6 % 19.12013
----- -----
Royalties and fees 92.7 % 94.3 %
Administrative fees and other .4 .1
Restaurant revenue 6.9 5.6
----- -----
Total revenue 100.0 % 100.0 %
Operating expenses:
Salaries and wages 13.2 % 13.2 %
Trade show expense 6.6 6.9
Travel expense 2.7 2.3
Other operating expense 9.7 9.6
Restaurant expenses 6.5 5.6
Depreciation and amortization 1.7 1.5
General and administrative 21.5 21.5
----- -----
Total expenses 61.9 60.6
----- -----
Operating income 38.1 39.4
Interest and other expense 5.2 2.8
----- -----
Income before income taxes 32.9 36.6
Income tax expense 13.0 14.5
----- -----
Net income 19.9 % 22.1 %
===== ===== ===== =====
Results of Operations
---------------------
Total revenue increased from $1.88$1.84 million to $1.89 million andfor the three-month
period ended March 31, 2013 compared to the corresponding period in 2012.
However, revenues in the first quarter 2012 included a $200,000 adjustment to
increase the estimated net realizable value of receivables in the Heyser case.
Without the adjustment revenue would have increased from $3.68$1.64 million to $3.73$1.89
million for the three-month and six-month periodsperiod ended June
30, 2012March 31, 2013 compared to the
corresponding periodsperiod in 2011. Franchisee2012, or 15.5%. One-time fees, franchisee fees and
equipment commissions ("upfront fees") decreased from $83,000 to $63,000 and
increased from $146,000$84,000 to $148,000 during$123,000 in the
first quarter 2013 compared to the first quarter 2012. Royalties and fees
increased from $1.62 million, or $1.42 million without the adjustment to the
Heyser case referenced above, to $1.66 million for the three-month and six-month periodsperiod ended
June 30, 2012March 31, 2013 compared to the corresponding periodsperiod in 2011. Royalties2012. The breakdown of
14
royalties and fees, less upfront fees, increased from $1.65 million to $1.70 million and from
$3.26 million to $3.32 million for the three-month and six-monththree month periods ended June 30,March
31, 2012 compared to the corresponding periods in 2011. The breakdown of
royalties and fees less upfront fees,2013, respectively, was: royalties and fees from non-traditional
franchises other than grocery stores were $1.15$1.01 million and $2.17 million for$1.16 million; fees
from the three-monthgrocery stores were $324,000 and six-month periods ended June 30, 2012 and $1.11 million and
$2.16 million for the three-month and six-month periods ended June 30, 2011,
respectively;$397,000; royalties and fees from
traditional locations were $280,000, or $80,000 without the grocery store take-n-bake were
$371,000adjustment related
to the Heyser case referenced above, and $695,000 for the three-month and six-month periods ended June 30,
2012 and $265,000 and $548,000 for the three-month and six-month periods ended
June 30, 2011, respectively;$77,000; and royalties and fees from
non-traditionalstand-alone take-n-bake locations were $180,000$0 and $461,000 for the three-month and six-month periods
ended June 30, 2012 and $272,000 and $551,000 for the three-month and six-month
periods ended June 30, 2011, respectively.$24,000. Included in royalties and
fees from traditional locations were $100,000 and $300,000 for$200,000 in the three-month and
six-month periodsperiod ended
June 30,March 31, 2012 and $200,000 and $400,000 for the
three-month and six-month periods ended June 30, 2011, respectively, for royalties and fees recognized as collectible from traditional
locations which are no longer operating.
Restaurant revenue decreased from $138,000$127,000 to $121,000 and from $257,000 to
$248,000$107,000 for the three-month
and six-month periodsperiod ended June 30, 2012March 31, 2013 compared to the corresponding periodsperiod in 2011. The decreases were the result of same
16
store sales decreases. The Company only operates two locations used primarily
for testing and demonstration purposes.
As a percentage of total revenue, salaries and wages increased from 13.2% to
13.4% and from 13.2% to 13.3% for the three-month and six-month periods ended
June 30, 2012 compared to the corresponding periods in 2011. Salaries and wages
increased from $247,000 to $254,000 and from $485,000 to $497,000 for the
three-month and six-month periods ended June 30, 2012 compared to the
corresponding periods in 2011.
Trade show expenses increased from 5.0% to 6.5% of total revenue for both the
three-month and six-month periods ended June 30, 2012, respectively, compared to
the corresponding periods in 2011. These increases were the result of scheduling
more trade shows for grocery stores. Trade show expenses were $123,000 and
$244,000 in the three-month and six-month periods ended June 30, 2012 compared
to $93,000 and $183,000 in the corresponding periods in 2011.
As a percentage of revenue, travel expenses decreased from 2.8% to 2.4% and from
2.7% to 2.5% for the three-month and six-month periods ended June 30, 2012,
respectively, compared to the corresponding periods in 2011. Travel expense
decreased from $53,000 to $45,000 and from $99,000 and $94,000 for the
three-month and six-month periods ended June 30, 2012 compared to the
corresponding periods in 2011. These decreases were the result of carefully
scheduling take-n-bake openings in grocery stores throughout the country to
minimize travel expenses.
As a percentage of total revenue, other operating expenses decreased from 9.4%
to 9.1% and from 9.6% to 9.4% for the three-month and six-month periods ended
June 30, 2012, respectively, compared to the corresponding periods in 2011.
Operating expenses decreased slightly for both periods in 2012 compared to the
corresponding periods in 2011. These decreases were the result of tightly
controlling operating costs.
As a percentage of total revenue, restaurant expenses decreased from 6.9% to
6.0% and from 6.7% to 6.2% for the three-month and six-month periods ended June
30, 2012, respectively, compared to the corresponding periods in 2011. These
percentage decreases were partially the result of a decrease in restaurant
revenue and partially the result of more tightly controlling restaurant
expenses.2012. The
Company only operates two restaurants which it uses for demonstration, training
and testing purposes.
As a percentageSalaries and wages remained approximately the same at 13.2% of total revenue general and administrative expenses decreased
from 21.5% to 20.7% and from 22.0% to 21.1% for
both the three-month and six-month
periods ended June 30, 2012, respectively, comparedMarch 31, 2013 and 2012. Actual salaries and
wages increased from $243,000 to the corresponding periods$249,000 but were offset by an increase in
2011. General and administrative expense decreasedtotal revenue.
Trade show expenses increased from $403,000 to $393,000
and from $812,000 to $788,000 for the three-month and six-month periods ended
June 30, 2012, respectively, compared to the corresponding periods in 2011. The
decrease in general and administrative expenses was the result of tightly
controlling those expenses.
As a percentage6.6% of total revenue to 6.9% of total
expenses decreased from 60.6% to 59.6%revenue for the three-month period ended June 30, 2012March 31, 2013 compared to the
corresponding period in 2011and remained2012. This increase was the same at 60.6%result of scheduling more
trade shows for grocery stores consistent with the six-month period ended June
30, 2012 and 2011. ExpensesCompany's strategy of
accelerating the growth in the number of grocery store locations for its
take-n-bake offering.
Travel expenses decreased from $1.14 million2.7% of total revenue to $1.13 million2.3% of total revenue
for the three-month periods and increased from $2.23 million to $2.27 million for
six-month periodsperiod ended June 30, 2012March 31, 2013 compared to the corresponding
periodsperiod in 2011. These increases were2012. Actual travel expense decreased from $49,000 to $44,000 for the
three-month period ended March 31, 2013 compared to the corresponding period in
2012. The primary reason for the decrease was by more efficient scheduling of
Franchise Managers by grouping openings in the same geographic area.
Other operating expenses decreased, as a percentage of total revenue, from 9.7%
to 9.6% for the three-month period ended March 31, 2013 compared to the
corresponding period in 2012. Actual operating expenses increased from $178,000
to $181,000. The reduction in operating expenses as a percentage of total
revenue was a result of the Company's continuing efforts to control costs and to
increase revenue.
Restaurant expenses decreased as a percentage of total revenue from 6.5% to 5.6%
for the three-month period ended March 31, 2013 compared to the corresponding
period in 2012. The Company only operates two restaurants which it is uses for
demonstration, training and testing purposes.
General and administrative expenses as a percentage of total revenue remained
approximately the same at 21.5% for both the three-month period ended March 31,
2013 and 2012. Actual general and administrative expense increased from $396,000
to $407,000 for the three-month period ended March 31, 2013 compared to the
corresponding period in 2012. The actual increase was primarily the result of
the increase in trade show
expense and a slight increase in salaries and wages offset by decreases inCompany's hiring an investor relations firm with all other expenses.
17
Asexpenses
remaining approximately the same.
Total expenses decreased as a percentage of total revenue from 61.9% to 60.6%
for the three-month period ended March 31, 2013 compared to the corresponding
period in 2012. Actual expenses remained approximately the same at $1.14 million
for both the three-month periods ended March 31, 2013 and 2012. This resulted
15
from the Company's commitment to continue to tightly control expenses while
increasing total revenue.
Operating income increased as a percentage of total revenue from 38.1% to 39.4%
for the three-month period ended March 31, 2013 compared to the corresponding
period in 2012. Actual operating income increased from 39.4%$700,000 to 40.4%$746,000 for
the three-month period and remained the same at 39.4% for the six-month
period ended June 30, 2012March 31, 2013 compared to the corresponding periodsperiod
in 2011.
Operating income increased2012. This increase was a result of the Company's strategy of seeking to
increase revenue while controlling expenses.
Interest expense decreased as a percentage of total revenue from $741,0005.2% to $765,000 and from $1.45 million to
$1.47 million2.8%
for the three-month and six-month periods ending June 30, 2012,
respectively,period ended March 31, 2013 compared to the corresponding
periodsperiod in 2011.
Interest expense2012. This decrease was primarily the result of a decrease in the
principal amount of notes payable outstanding and the Company's refinancing of
its debt in May 2012 resulting in lowering the effective interest rate on its
outstanding debt.
Net income increased from $97,000$365,000 to $199,000 and from $196,000 to
$295,000$418,000 for the three-month and six-month periodsperiod ended
June 30, 2012March 31, 2013 compared to the corresponding periodsperiod in 2011. The primary reason for2012. This increase was
primarily the increase in
interest expense was refinancingresult of the Company's bank debtcontinuing efforts to increase revenue
while controlling expenses and borrowing from
an officer of the Company with a new bank loan. The Company expensed $93,000 in
unamortized loan closing costs from the origination of the former bank loan at
the time the loan was repaid and recorded expense of $30,000continuing to terminate the
existing interest rate swap agreement related to the loan which was repaid. In
the future, interest expense should be approximately $61,000 per quarter or less
as the new loan continues to amortize. For details of the new loan agreement,
see Note 2 in the Notes to Condensed Consolidated Financial Statements herein.
Net income decreased from $389,000 to $342,000 and from $757,000 to $707,000 for
the three-month and six-month periods ended June 30, 2012 compared to the
corresponding periods in 2011. The increased interest expense, as explained
above, more than offset the increased operating income resulting in lower net
income.reduce its outstanding
debt.
Liquidity and Capital Resources
-------------------------------
The Company's current strategy is to grow its business by concentrating on
franchising/licensing new non-traditional locations, and licensing grocery stores to
sell take-n-bake pizza and other retail products.products, and franchising stand-alone
take-n-bake locations. This strategy is intended to not require any significant
increase in expenses. In addition, theThe Company
has previously announced that it has takenthe development of the
take-n-bake concept,program, which it has been doingdistributing through grocery stores, and
it has also created a stand-alone take-n-bake conceptprogram for an added revenue
growth opportunity. The Company has signed agreements for 11 such locations, the
first of which opened in October 2012, the second opened in December 2012, the
third opened in January 2013 and the fourth and fifth units opened in April
2013. Three additional avenuelocations are scheduled to increase revenue.open in May 2013 and the
remaining three locations will open in the next few months. The strategy will beis to
franchise
that conceptcontinue franchising the stand-alone take-n-bake retail outlets, which the
Company thinksbelieves can be done within its existing overhead structure.
Additionally, the Company does not operate any restaurants except for two
locations for testing and demonstration purposes. This strategy requires limited
overhead and operating expense and does not require significant capital
investment.
The Company's current ratio was 2.6-to-1 on June 30, 20122.3-to-1 as of March 31, 2013 compared to
0.8-to-1
on December0.9-to-1 as of March 31, 2011.2012. This significant improvement was achieved by
refinancing all of its debt into one 48-month amortizing term loan, and the continuedcombined
with net income from operating income.activities.
On May 15, 2012, the Company entered into a Credit Agreement with a bank for a
term loan in the amount of $5.0 million which is repayable in 48 equal monthly
principal installments of approximately $104,000 plus interest commencing on June 15, 2012 with a final
payment due on May 15, 2016. Interest on the unpaid principal balance is payable
at a rate per annum of LIBOR plus 4%. The proceeds from the term loan, net of
certain fees and expenses associated with obtaining the term loan, were used to
repay existing bank indebtedness and borrowingborrowings from an officer of the Company.
As a result of the financial arrangements described above and the Company's cash
flow projections, the Company believes it will have sufficient cash flow to meet
its obligations and to carry out its current business plan for the foreseeable
16
future. The Company's cash flow projections are based on the Company's strategy
of focusing entirely on growth in non-traditional venues, and the growth in the number of grocery
store locations licensed to sell the take-n-bake pizza.
18
pizza and the anticipated
growth from franchising the new stand-alone take-n-bake locations.
The Company does not anticipate that any of the recently issued Statement of
Financial Accounting Standards will have a material impact on its Statement of
Operations or its Balance Sheet.
Forward Looking Statements
--------------------------
The statements contained above in Management's Discussion and Analysis
concerning the Company's future revenues, profitability, financial resources,
market demand and product development are forward-looking statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995)
relating to the Company that are based on the beliefs of the management of the
Company, as well as assumptions and estimates made by and information currently
available to the Company's management. The Company's actual results in the
future may differ materially from those projected in the forward-looking
statements due to risks and uncertainties that exist in the Company's operations
and business environment, including, but not limited to competitive factors and
pricing pressures, non-renewal of franchise agreements, shifts in market demand,
the success of new franchise programs including the stand-alone take-n-bake
locations, general economic conditions, changes in demand for the Company's
products or franchises, the success or failure of individual franchisees and
changes in prices or supplies of food ingredients and labor the success of its recently
developed stand-alone take-n-bake concept, andas well as the
factors discussed under "Risk Factors" as contained in the Company's annual
report on Form 10-K. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions or estimates prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's exposure to interest rate risk relates primarily to its
variable-rate debt. As of June 30, 2012,March 31, 2013, the Company had outstanding variable
interest-bearing debt in the aggregate principal amount of $4.9$4.0 million. The
Company's current borrowings are at a variable rate tied to the London Interbank
Offered Rate ("LIBOR") plus 4% per annum adjusted on a monthly basis. Based on
its current debt structure, for each 1% increase in LIBOR the Company would
incur increased interest expense of approximately $42,800$33,000 over the succeeding
twelve-month period.
ITEM 4. Controls and Procedures
Based on his evaluation as of the end of the period covered by this report, Paul
W. Mobley, the Company's Chief Executive Officer and Chief Financial Officer,
has concluded that the Company's disclosure controls and procedures and internal
controls over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) are effective. There have
been no changes in internal controls over financial reporting during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company, from time to time, is or may become involved in various litigation
relating to claims arising out of its normal business operations.
The Company was a Defendant in a lawsuit styled Kari Heyser, Fred Eric Heyser
and Meck Enterprises, LLC, et al v. Noble Roman's, Inc. et al, filed in Superior
Court in Hamilton County, Indiana in June 2008.2008 (Cause No. 29D01 0806 PL 739).
The Court issued an Order dated
December 23, 2010 granting summary judgment in favor of the Company against all
of the Plaintiffs. As a result, the Plaintiffs' allegations of fraud against the Company and certain of its
officers were determined to be without merit.
Plaintiffs filed numerous motions and an appeal to the Indiana Court of Appeals,
in an attempt to reverse the December 23, 2010 summary judgment. All of the
19
motions were denied and the Indiana Court of Appeals dismissed the appeal with
prejudice. Plaintiffs' last attempt to vacate the summary judgment award was
their attempt to vacate the Order on the grounds of misconduct of third parties.
On December 1, 2011, the Judge denied their motion and specifically found "that
there was absolutely no evidence of misconduct" and the Court admonished
Plaintiffs and Plaintiffs' counsel for making such unfounded allegations. The
fraud charges against the Company and certain of its officers are dismissed
entirelymerit and Plaintiffs have no appealexhausted their
rights remaining.of appeal. The Company then filed
a motion for sanctions against the Plaintiffs and their attorney for the
frivolous filings. On February 28, 2012, the Court granted the Company's request
for sanctions and ordered the Plaintiffs and their attorney to pay the Company
$8,326separate claim by April 23, 2012. The Plaintiffs filed a motion to reconsider and the
hearing was held on May 23, 2012. The Judge denied their motion and ordered
Plaintiffs and Plaintiffs' counsel to pay those sanctions within 14 days, which
made the payment due on June 7, 2012. Sanctions were not paid and the Company
filed a motion for contempt of court or to show cause. The Judge gave the
Plaintiffs until July 5, 2012 to respond to that motion. The Plaintiffs filed a
response but the Plaintiffs' counsel did not respond. The Company does not
believe that the Plaintiffs' response was responsive to the contempt charge and,
therefore, the Company filed a reply asking the Court to rule on the contempt
charge against Plaintiffs' counsel and to point out that the Plaintiffs'
response was not responsive to the Company's contempt motion and moved the Court
to impose additional sanctions. The Company's counterclaims against the
Plaintiffs for breach of contract remain pending as to amount of damages,
however the Company has been granted summary judgment as to liability.
The Complaint was originally against the Company and certain officers and
institutional lenders. The Plaintiffs are former franchiseesone of the Company's
traditional location venue. The Plaintiffs alleged that the Defendants
fraudulently induced them to purchase franchises for traditional locations
through misrepresentations and omissions of material facts regarding the
franchises. In addition to the above claims, one group of franchisee-Plaintiffs
in the same case had asserted a separate claim under the Indiana
Franchise Act as to whichwas settled. There are no longer any claims pending against the
Court's Order denied the Company's motion for summary judgment
as the Court determined that there is a genuine issue of material facts but did
not render any opinion on the merits of the claim.Company in this case.
The Company denies any
liability on the Indiana Franchise Act claim and will continue to vigorously
defend against this claim.
The Company filedasserted counterclaims for damages for breach of contract against
allthe Plaintiffs. The Company proceeded to trial against two of the Plaintiffs in the approximate amount of $3.6 million plus attorneys'
fees, interest and
other costs of collection, or a total of over $5 million. On
September 21, 2011, the Company filed motions for partial summary judgment asobtained damage awards against each. In addition to liability against the Plaintiffs on the Company's counterclaims. As a result,
the Company was granted partial summary judgment as to liability against the
Plaintiffs/Counterclaim-Defendants on the Company's counterclaims against the
Plaintiffs. In this partial summary judgment, the Court determined that the
Plaintiffs were liable to the Company for direct damages and consequential
damages including future royalties, for breach of their franchise agreements.
In addition,in the Court's summary judgment Order, the Court determined that as a
matter of law Noble Roman's wasis entitled to recover attorneys' fees associated
with obtaining preliminary injunctions, fees resulting from the prosecution of
Noble Roman's counterclaims, and fees for defending against fraudthe various claims
against the Company and certain of
its officers. TheCompany. A hearing was set for March 21, 2013 on the amount of
the award isattorneys' fees to be determined at trial. The Company
movedawarded, however the hearing date was extended and the
Court has not yet issued an Order setting a new hearing date. Sometime after the
hearing on attorneys' fees, the Court is expected to order mandatory mediation asissue an Order for a
judgment amount to be awarded to the Indiana Franchise Act
claim andCompany against the Company's counterclaim for damages. The Court ordered mediation,
whichtwo remaining
Plaintiffs.
Other than as disclosed above, the Company is set for September 14, 2012 with all Plaintiffs required to appear.involved in no other material
litigation.
ITEM 6. Exhibits.
(a) Exhibits: See Exhibit Index appearing on page 22.
2020.
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SIGNATURES
Pursuant to the requirements 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 13, 2012May 9, 2013 By: /s/ Paul W. Mobley
----------------------------------
Paul W. Mobley, Chairman,
Chief Executive Officer,
Chief Financial Officer and
Principal Accounting Officer
(Authorized Officer and Principal
Financial Officer)
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Index to Exhibits
Exhibit
Number Description
------ -----------
3.1 Amended Articles of Incorporation of the Registrant, filed as an
exhibit to the Registrant's Amendment No. 1 to the Post Effective
Amendment No. 2 to Registration Statement on Form S-1 filed July 1,
1985 (SEC File No.2-84150), is incorporated herein by reference.
3.2 Amended and Restated By-Laws of the Registrant, as currently in
effect, filed as an exhibit to the Registrant's Form 8-K filed
December 23, 2009, is incorporated herein by reference.
3.3 Articles of Amendment of the Articles of Incorporation of the
Registrant effective February 18, 1992 filed as an exhibit to the
Registrant's Registration Statement on Form SB-2 (SEC File No.
33-66850), ordered effective on October 26, 1993, is incorporated
herein by reference.
3.4 Articles of Amendment of the Articles of Incorporation of the
Registrant effective May 11, 2000, filed as Annex A and Annex B to the
Registrant's Proxy Statement on Schedule 14A filed March 28, 2000, is
incorporated herein by reference.
3.5 Articles of Amendment of the Articles of Incorporation of the
Registrant effective April 16, 2001 filed as Exhibit 3.4 to
Registrant's Annual Reportannual report on Form 10-K for the year ended December
31, 2005, is incorporated herein by reference.
3.6 Articles of Amendment of the Articles of Incorporation of the
Registrant effective August 23, 2005, filed as Exhibit 3.1 to the
Registrant's current report on Form 8-K filed August 29, 2005, is
incorporated herein by reference.
4.1 Specimen Common Stock Certificates filed as an exhibit to the
Registrant's Registration Statement on Form S-18 filed October 22,
1982 and ordered effective on December 14, 1982 (SEC File No.
2-79963C), is incorporated herein by reference.
4.2 Form of Warrant Agreement filed as Exhibit 4.1 to the Registrant's
current report on Form 8-K filed August 29, 2005, is incorporated
herein by reference.
10.1 Employment Agreement with Paul W. Mobley dated January 2, 1999 filed
as Exhibit 10.1 to Registrant's Annual Reportannual report on Form 10-K for the
year ended December 31, 2005, is incorporated herein by reference.
10.2 Employment Agreement with A. Scott Mobley dated January 2, 1999 filed
as Exhibit 10.2 to Registrant's Annual Reportannual report on Form 10-K for the
year ended December 31, 2005, is incorporated herein by reference.
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10.3 1984 Stock Option Plan filed with the Registrant's Form S-8 filed
November 29, 1994 (SEC File No. 33-86804), is incorporated herein by
reference.
10.4 Noble Roman's, Inc. Form of Stock Option Agreement filed with the
Registrant's Form S-8 filed November 29, 1994 (SEC File No. 33-86804),
is incorporated herein by reference.
10.5 Settlement Agreement with SummitBridge dated August 1, 2005,
filed as Exhibit 99.2 to the Registrant's current report on Form
8-K filed August 5, 2005, is incorporated herein by reference.
10.6 Loan Agreement with Wells Fargo Bank, N.A. dated August 25, 2005
filed as Exhibit 10.1 to the Registrant's current report on Form
8-K filed August 29, 2005, is incorporated herein by reference.
10.7 First Amendment to Loan Agreement with Wells Fargo Bank, N.A.
dated February 4, 2008, filed as Exhibit 10.1 to the Registrant's
current report on Form 8-K filed February 8, 2008, is
incorporated herein by reference.
10.8 Registration Rights Agreement dated August 1, 2005 between the
Company and SummitBridge National Investments filed as an Exhibit
to the Registrant's Form S-1 filed on April 19, 2006, is
incorporated herein by reference.
10.9 Second Amendment to Loan Agreement with Wells Fargo Bank, N.A.
dated November 10, 2010 filed as Exhibit 10.7 to the Registrant's
current report on Form 10-Q filed on November 10, 2010, is
incorporated herein by reference.
10.10 Third Amendment to Loan Agreement with Wells Fargo Bank, N.A.
dated March 10, 2011, filed as Exhibit 10.10 to the Registrant's
current report on Form 10-K filed on March 13, 2012, is
incorporated herein by reference.
10.11 Promissory Note payable to Paul Mobley dated November 1, 2010
filed as Exhibit 10.8 to the Registrant's current report on Form
10-Q filed November 10, 2010, is incorporated herein by
reference.
10.12 Fourth Amendment to Loan Agreement with Wells Fargo Bank, N.A. dated
July 19, 2011, filed as Exhibit 10.12 to the Registrant's currentannual
report on Form 10-K filed on March 13, 2012, is incorporated herein
by reference.
10.1310.11 Fifth Amendment to Loan Agreement with Wells Fargo Bank, N.A. dated
October 28, 2011, filed as Exhibit 10.13 to the Registrant's currentannual
report on Form 10-K filed on March 13, 2012, is incorporated herein by
reference.
10.1410.12 Sixth Amendment to Loan Agreement with Wells Fargo Bank, N.A. dated
December 1, 2011, filed as Exhibit 10.14 to the Registrant's currentannual
report on Form 10-K filed on March 13, 2012, is incorporated herein by
reference.
23
10.1510.13 Seventh Amendment to Loan Agreement with Wells Fargo Bank, N.A. dated
January 30, 2012 filed as Exhibit 10.15 to the Registrant's currentannual
report on Form 10-K filed on March 13, 2012, is incorporated herein by
reference.
10.1610.14 Amended Promissory Note to Paul Mobley dated December 21, 2011, filed
as Exhibit 10.16 to the Registrant's currentannual report on Form 10-K filed
on March 13, 2012, is incorporated herein by reference.
10.1710.15 Credit Agreement with BMO Harris Bank, N.A., dated May 15,25, 2012,
filed herewith.
10.18as Exhibit 10.17 to the Registrant's quarterly report on Form
10-Q filed on August 13, 2012, is incorporated herein by reference.
10.16 Promissory Note to BMO Harris Bank, N.A. dated May 15, 2012, filed herewith.as
Exhibit 10.18 to the Registrant's quarter report on Form 10-Q filed on
August 13, 2012, is incorporated herein by reference.
21.1 Subsidiaries of the Registrant filed in the Registrant's Registration
Statement on Form SB-2 (SEC File No. 33-66850) ordered effective on
October 26, 1993, is incorporated herein by reference.
31.1 C.E.O. and C.F.O. Certification under Rule 13a-14(a)/15d-14(a)
32.1 C.E.O. and C.F.O. Certification under Section 1350
101 Interactive Financial Data
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