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, 2011.
--- 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 300
Indianapolis, Indiana 46204
(Address of principal executive offices)
Registrant's telephone number, including area code: (317) 634-3377
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes No X
--- ---
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes No X
--- ---
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 No
--- ---
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Website, 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 No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229,405 of this chapter) 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
---
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. (Check one):
Large Accelerated Filer [ ] Accelerated Filer [ ]
Non-Accelerated Filer [ ] Smaller Reporting Company [X]
(do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
The aggregate market value of the common stock held by non-affiliates of
the registrant as of June 30, 2011, the last business day of the registrant's
most recently completed second fiscal quarter, based on the closing price of the
registrant's common shares on such date was $7.2 million.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 19,489,317 shares of
common stock as of March 1, 2012.
Documents Incorporated by Reference:
Portions of the definitive proxy statement for the registrant's 2012 Annual
Meeting of Shareholders are incorporated by reference in Part III.
NOBLE ROMAN'S, INC.
FORM 10-K
Year Ended December 31, 2011
Table of Contents
Item # in
Form 10-K Page
PART I
1. Business 4
1A. Risk Factors 11
1B. Unresolved Staff Comments 14
2. Properties 15
3. Legal Proceedings 15
PART II
5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 16
6. Selected Financial Data 18
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
7A. Quantitative and Qualitative Disclosures About Market Risk 26
8. Financial Statements and Supplementary Data 27
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 43
9A. Controls and Procedures 43
9B. Other Information 44
PART III
10. Directors, Executive Officers and Corporate Governance 44
11. Executive Compensation 44
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 44
13. Certain Relationships and Related Transactions, and Director
Independence 44
14. Principal Accounting Fees and Services 45
PART IV
15. Exhibits, Financial Statements Schedules 45
3
PART 1
ITEM 1. BUSINESS
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
under the trade names "Noble Roman's Pizza", "Noble Roman's Take-N-Bake",
"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 and Canada. Although from 2005 to2007 the Company sold
some franchises for its concepts in traditional restaurant locations, the
Company is currently focusing all of its sales efforts on (i) selling franchises
for non-traditional locations primarily in convenience stores and entertainment
facilities and (ii) license agreements for grocery stores to sell the Noble
Roman's Take-n-Bake Pizza. 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.
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. The take-n-bake program in grocery stores is being offered as a license
agreement rather than a franchise agreement. In convenience stores, take-n-bake
is an available menu offering under the existing franchise agreement. The
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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.
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 can be summarized in the following 4 points:
1. Focus on revenue expansion through two 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 less 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, 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
and licensing, its requirements for overhead and operating cost are
significantly less than if it were focusing on traditional franchising. 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.
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Licensing the Company's Take-N-Bake Program. In September 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. Since September 2009, when the Company started offering take-n-bake
pizza to grocery store chains, through March 8, 2012, the Company has signed
agreements with 1,016 grocery store locations to operate the take-n-bake pizza
program and has opened take-n-bake pizza in approximately 833 of those
locations. The Company is currently in discussions with numerous grocery store
operators for additional take-n-bake locations. Beginning in August 2011, the
Company introduced six new "Signature Specialty Take-N-Bake Pizza" combinations
to 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
combinations 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.
At the start of 2011, seeking to supplement the take-n-bake pizza offering and
expand merchandising space, the Company introduced several carton-to-shelf
retail items that require no assembly at the grocery store and help expand the
merchandising visibility of the Noble Roman's brand. These items include Noble
Roman's Pasta Sauce, Noble Roman's Deep-Dish Lasagna with Italian Sausage, Noble
Roman's Spicy Cheese Sauce and Noble Roman's Cheesy Stix.
To further accelerate the growth of take-n-bake pizza in grocery stores, the
Company has focused on signing agreements with various grocery store
distributors to market the take-n-bake pizza program to the distributors'
current customer base. As of March 8, 2012, the Company had signed 11 grocery
distributors to the program, and continues to pursue others as well.
2. Leverage the results of extensive research and development advances.
The Company has invested a great deal in the time and effort to create what it
considers to be competitive advantages in its product 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, the cost effectiveness of those
products, its relatively simple production and service systems as well as its
diverse, modularized menu offerings 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 retail 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 requiring very low amounts of
labor, allowing for a significant competitive advantage due to the speed at
which its products can be prepared, baked and served to customers.
For example, in convenience stores and travel plazas, at competitive retail
prices, the margins on selling Noble Roman's products, after cost of product and
royalty, provides the franchisees with a gross margin on the sales of
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 proprietary products and services with highly efficient
suppliers that have the potential of keeping costs extremely low when compared
6
to typical, competing systems whereby the franchisor attempts to own and operate
production and distribution systems of their own much less efficiently.
3. Expand the Company's overall capacity to generate new franchises and
licenses.
To increase the capacity of the Company to generate, follow-up on and close new
franchise and licensing leads, the Company has made two strategic decisions.
First, 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. Additionally, in January 2012, the Company recruited a new, proven
sales executive to further help generate, follow-up on and close leads for new
franchises, with a particular focus on its non-traditional convenience store and
travel plaza venues. The Company was able to accomplish this without increasing
corporate overhead by eliminating other positions and spreading those
responsibilities across other, existing personnel.
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 utilizes these methods to communicate its product and system
advantages. These methods include calling from both acquired and in-house
prospect lists, frequent direct mail campaigns to targeted prospects, web-based
lead capturing, and 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. The Company carefully selects those national and regional trade
and food shows where it either has an existing relationship or considerable
previous experience to know that fruitful lead generation has a high
probability.
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 to
contracts between the Company and the various manufacturers. The contracts
require the manufacturers to produce various ingredients and 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
ingredients 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. The primary distributors purchase
the ingredients from the manufacturer, under payment terms agreed upon by the
manufacturer and the distributor, and distribute the ingredients 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
distributor. In addition, the Company has 11 grocery store distributors located
7
in various parts of the country which are required to buy their products from
one of the primary distributors 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 is 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
--------------------------------------------------------------------------------
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 controlled by a
supply agreement. The supply agreement generally requires the licensee to
purchase proprietary ingredients from a Noble Roman's approved distributor, to
assemble the products using only Noble Roman's approved ingredients and recipes,
to package the products using shrink wrap, to place the products in Noble
Roman's Pizza boxes and to 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 for a fee to the Company in lieu of royalty. The distributors are to
segregate this additional mark-up upon invoicing the licensee and hold such
mark-up in trust for the Company and remit such fees to the Company within ten
days after the end of each month.
Competition
-----------
The restaurant industry in general is very competitive with respect to
convenience, price, product quality and service. In addition, the Company
competes for franchise and license sales on the basis of product engineering and
quality, investment cost, cost of sales, distribution, simplicity of operation
and labor requirements. Actions by one or more of the Company's competitors
could have an adverse effect on the Company's ability to sell additional
franchises or licenses, maintain and renew existing franchises or licenses, or
sell its products. Many of the Company's competitors are very large,
internationally established companies.
Within the competitive environment of the non-traditional franchise and license
segment of the restaurant industry, management has defined what it believes to
be certain competitive advantages for the Company. First, some of the Company's
competitors in the non-traditional segment are also large chains operating
thousands of franchised, traditional restaurants. Because of the contractual
relationships with many of their franchisees, some competitors may be unable to
offer wide-scale site availability for potential non-traditional franchisees.
8
The Company is not faced with any significant geographic restrictions in this
regard.
Most of the Company's competitors in the non-traditional segment were
established with little or no organizational history in owning and operating
traditional foodservice locations. This lack of operating experience may be a
limitation for them in attracting and maintaining non-traditional franchisees or
licensees who, by the nature of the segment, often have little exposure to
foodservice operations themselves. The Company's background in traditional
restaurant operations has provided it experience in structuring, planning,
marketing, and cost controlling franchise or license unit operations which may
be of material benefit to franchisees or licensees.
Seasonality of Sales
--------------------
Direct sales of non-traditional franchises or licenses may be affected by
seasonalities and holiday periods. Sales to certain non-traditional venues may
be slower around major holidays such as Thanksgiving and Christmas, and during
the first quarter of the year. The Company's sales of take-n-bake pizza in
grocery stores are slower during the summer months, especially when the weather
is hot. Sales to other non-traditional venues show less or no seasonality.
Additionally, in middle and northern climates where adverse winter weather
conditions may hamper outdoor travel or activities, foodservice sales by
franchisees or licensees may be sensitive to sudden drops in temperature or
precipitation which would in turn affect Company royalties.
Employees
---------
As of March 1, 2012, the Company employed approximately 22 persons full-time and
16 persons on a part-time, hourly basis, of which 20 of the full-time employees
are employed in sales and service of the franchise/license units and two of the
full-time employees and the 16 employed on a part-time basis manage and work at
the two Company locations. No employees are covered under collective bargaining
agreements, and the Company believes that relations with its employees are good.
Trademarks and Service Marks
----------------------------
The Company owns and protects several trademarks and service marks. Many of
these, including NOBLE ROMAN'S (R), Noble Roman's Pizza(R), THE BETTER PIZZA
PEOPLE (R) and Tuscano's Italian Style Subs(R), are registered with the U.S.
Patent and Trademark Office as well as with the corresponding agencies of
certain other foreign governments. The Company believes that its trademarks and
service marks have significant value and are important to its sales and
marketing efforts.
Government Regulation
---------------------
The Company and its franchisees and licensees are subject to various federal,
state and local laws affecting the operation of our respective businesses. Each
location is subject to licensing and regulation by a number of governmental
authorities, which include health, safety, sanitation, building and other
agencies and ordinances in the state or municipality in which the facility is
located. The process of obtaining and maintaining required licenses or approvals
can delay or prevent the opening of a location. Vendors, such as our third-party
production and distribution services, are also licensed and subject to
regulation by state and local health and fire codes, and U. S. Department of
Transportation regulations. The Company, its franchisees, licensees and its
vendors are also subject to federal and state environmental regulations. In
9
certain circumstances, the Company is, or soon may be, subject to various local,
state and/or federal laws requiring disclosure of nutritional and/or ingredient
information concerning the Company's products, its packaging, menu boards and/or
other literature.
The Company is subject to regulation by the Federal Trade Commission ("FTC") and
various state agencies pursuant to federal and state laws regulating the offer
and sale of franchises. Several states also regulate aspects of the
franchisor-franchisee relationship. The FTC requires us to furnish to
prospective franchisees a disclosure document containing certain specified
information. Several states also regulate the sale of franchises and require
registration of a franchise disclosure document with state authorities.
Substantive state laws that regulate the franchisor-franchisee relationship
presently exist in a substantial number of states and bills have been introduced
in Congress from time to time that would provide for additional federal
regulation of the franchisor-franchisee relationship in certain respects. State
laws often limit, among other things, the duration and scope of non-competition
provisions and the ability of a franchisor to terminate or refuse to renew a
franchise. Some foreign countries also have disclosure requirements and other
laws regulating franchising and the franchisor-franchisee relationship, and the
Company would be subject to applicable laws in each jurisdiction where it seeks
to market additional franchised units.
Officers of the Company
-----------------------
Chief Executive Officer and Chairman of the Board - Paul W. Mobley* has been
Chairman of the Board, Chief Executive Officer and Chief Financial Officer since
December 1991 and a Director since 1974. Mr. Mobley was President 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.
Chief Operating Officer, President, Secretary and a Director - A. Scott Mobley*
has been President since 1997, 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 W. Mobley.
Executive Vice President of Franchising - Troy Branson* has been Executive Vice
President of Franchising for the Company since November 1997 and from 1992 to
1997, he was Director of Business Development. Before joining the Company, Mr.
Branson was an owner of Branson-Yoder Marketing Group from 1987 to 1992, after
graduating from Indiana University where he received a B.S. in Business.
Vice President of Franchise Services - Mitch Grunat has been Vice President of
Franchise Services for the Company since August 2002. Before joining the
Company, Mr. Grunat was Chief Operating Officer of Lanter Eye Care from 2001 to
2002, Business Development Officer for Midwest Bankers from 2001 to 2002 and
Chief Operating Officer for Tavel Optical Group from 1987 to 2000. Mr. Grunat
has a B.A. degree in English and Philosophy from Muskingum College.
Vice President of National Franchise Sales - Juel Tillery has been Vice
President of National Franchise Sales since January 2012. Before joining the
Company, Mr. Tillery was the founder of MaggieMoo's Ice Cream as well as the
10
Director of Business Development for Hot Stuff Pizza. Prior to that he had many
years experience with both Pizza Inn and McDonald's. Mr. Tillery has an MBA from
St. Mary's College of the Plains.
Vice President of Operations - James D. Bales has been Vice President of
Operations since March 2008. Before becoming Vice President of Operations, Mr.
Bales held various positions with the Company beginning in March 2004. Before
joining the Company, Mr. Bales had 15 years of management experience in
operations and marketing where he held various positions with TCBY starting in
1989. Mr. Bales attended Northern Kentucky University for Graphic Design, Inver
Hills Community College for Business Management and obtained his B.S. in
Business from the University of Phoenix.
*Each of Messieurs Paul W. Mobley, A. Scott Mobley and Troy Branson are
"executive officers" of the Company for purposes of the Securities Exchange Act
of 1934, as amended.
Available Information
---------------------
We make available, free of charge through our Internet website
(http://www.nobleromans.com), our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K and amendments to these reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended, as soon as reasonably practicable after we
electronically file these reports with, or furnish them to, the Securities and
Exchange Commission. The information on our website is not incorporated into
this annual report.
ITEM 1A. RISK FACTORS
All phases of the Company's operations are subject to a number of uncertainties,
risks and other influences, many of which are outside of its control and any one
of which, or a combination of which, could materially affect its results of
operations. Important factors that could cause actual results to differ
materially from the Company's expectations are discussed below. Prospective
investors should carefully consider these factors before investing in our
securities as well as the information set forth under "Forward-Looking
Statements" in Item 7 of this report. These risks and uncertainties include:
Competition from larger companies.
The Company competes for franchise and license sales with large national
companies and numerous regional and local companies. Many of its competitors
have greater financial and other resources than the Company. The restaurant
industry in general is intensely competitive with respect to convenience, price,
product quality and service. In addition, the Company competes for franchise and
license sales on the basis of several factors, including product engineering and
quality, investment cost, cost of sales, distribution, simplicity of operation
and labor requirements. Activities of the Company's competitors could have an
adverse effect on the Company's ability to sell additional franchises or
licenses or maintain and renew existing franchises and licenses or operating
results of the Company's system. Unlike the other non-traditional agreements,
the take-n-bake license agreements with grocery stores are not for any specified
period of time and, therefore, grocery stores could discontinue offering the
take-n-bake pizza or other retail items at any time. As a result of these
factors, the Company may have difficulty competing effectively from time to time
or in certain markets.
11
Dependence on growth strategy.
The Company's primary growth strategy includes selling new franchises or
licenses for non-traditional locations. The opening and success of new
non-traditional locations will depend upon various factors, including the
traffic generated by and viability of the underlying activity or business, the
ability of the franchisee and licensee to operate their locations, their ability
to comply with applicable regulatory requirements and the effect of competition
and general economic and business conditions including food and labor costs.
Many of the foregoing factors are not within the Company's control. There can be
no assurance that the Company will be able to achieve its plans with respect to
the opening or operation of new non-traditional or take-n-bake locations.
Dependence on success of franchisees and licensees.
Most of the Company's earnings comes from royalties and other fees generated by
its franchisees and licensees which are independent operators, and their
employees are not the Company's employees. The Company provides training and
support to franchisees and licensees but the quality of the store operations may
be diminished by any number of factors beyond the Company's control.
Consequently, franchisees and licensees may not successfully operate locations
in a manner consistent with the Company's standards and requirements, or may not
hire and train qualified managers and other store personnel. If they do not, the
Company's image and reputation may suffer, and its revenues and stock price
could decline. While the Company attempts to ensure that its franchisees and
licensees maintain the quality of its brand and branded products, franchisees
and licensees may take actions that adversely affect the value of the Company's
intellectual property or reputation.
Dependence on consumer preferences and perceptions.
The restaurant industry and the retail food industry is often affected by
changes in consumer tastes, national, regional and local economic conditions,
demographic trends, traffic patterns and the type, number and location of
competing restaurants. The Company can be substantially adversely affected by
publicity resulting from food quality, illness, injury, or other health concerns
or operating issues stemming from one restaurant or a limited number of
restaurants.
Interruptions in supply or delivery of food products.
Dependence on frequent deliveries of product from unrelated third-party
manufacturers through unrelated third-party distributors also subjects the
Company to the risk that shortages or interruptions in supply caused by
contractual interruptions, market conditions, inclement weather or other
conditions could adversely affect the availability, quality and cost of
ingredients. In addition, factors such as inflation, market conditions for
cheese, wheat, meats, paper and labor may also adversely affect the franchisees
and licensees and, as a result, can adversely affect the Company's ability to
add new franchised or licensed locations.
Dependence on key executives.
The Company's business has been and will continue to be dependent upon the
efforts and abilities of its executive staff generally, and particularly Paul
Mobley, our Chairman, Chief Executive Officer and Chief Financial Officer, and
A. Scott Mobley, our President and Chief Operating Officer. The loss of either
of their services could have a material adverse effect on the Company.
12
The Company is subject to ongoing litigation.
As described in Item 3 of this report, the Company is a defendant in a lawsuit
filed by certain of its former traditional franchisees. The Company has been
awarded summary judgment dismissing substantially all the claims against the
Company and the Plaintiffs' time for appeal has expired. This matter has been
time-consuming, expensive and distracting to the Company's management. The
Company will continue to pursue its counterclaims against the Plaintiffs and has
been awarded partial summary judgment as to liability. 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, the Court determined that, as
a matter of law, Noble Roman's was 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 fraud
claims against the Company and certain of its officers. The amount of the award
is to be determined at trial.
Refinancing of bank loan.
The Company has engaged Concord Financial Advisors, LLC to assist it in
refinancing the Company's bank loan which matures in October 2012. Several banks
have expressed interest in providing the refinancing and the Company expects to
refinance the outstanding balance of its bank loan before maturity. There can be
no assurance, however, that it will be able to refinance its bank loan on
favorable terms or at all.
The Company is subject to Indiana law with regard to purchases of our stock.
Certain provisions of Indiana law applicable to the Company could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could also limit the price that certain investors might be
willing to pay in the future for shares of its common stock. These provisions
include prohibitions against certain business combinations with persons or
groups of persons that become "interested shareholders" (persons or groups of
persons who are beneficial owners of shares with voting power equal to 10% or
more) unless the board of directors approves either the business combination or
the acquisition of stock before the person becomes an "interested shareholder."
The Company and its franchisees are subject to various federal, state and local
laws with regard to the operation of the businesses.
The Company is subject to regulation by the FTC and various state agencies
pursuant to federal and state laws regulating the offer and sale of franchises.
Several states also regulate aspects of the franchisor-franchisee relationship.
The FTC requires the Company to furnish to prospective franchisees a disclosure
document containing certain specified information. Several states also regulate
the sale of franchises and require registration of a franchise disclosure
document with state authorities. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist in a substantial number of
states, and bills have been introduced in Congress from time to time that would
provide for federal regulation of the franchisor-franchisee relationship in
certain respects. The state laws often limit, among other things, the duration
and scope of non-competition provisions and the ability of a franchisor to
terminate or refuse to renew a franchise. Some foreign countries also have
disclosure requirements and other laws regulating franchising and the
13
franchisor-franchisee relationship, and the Company would be subject to
applicable laws in each jurisdiction where it seeks to market additional
franchise units.
Each franchise location is subject to licensing and regulation by a number of
governmental authorities, which include health, safety, sanitation, building and
other agencies and ordinances in the state or municipality in which the facility
is located. The process of obtaining and maintaining required licenses or
approvals can delay or prevent the opening of a franchise location. Vendors,
such as the Company's third party production and distribution services, are also
licensed and subject to regulation by state and local health and fire codes, and
U. S. Department of Transportation regulations. The Company, its franchisees and
its vendors are also subject to federal and state environmental regulations.
The Company's stock is quoted on the OTC Bulletin Board and, accordingly, we are
not subject to the same corporate governance standards that would apply if our
shares were listed on a national exchange, which limits the liquidity and price
of our securities more than if our securities were quoted or listed on a
national exchange.
Our stock is quoted on the OTC Bulletin Board, a Nasdaq-sponsored and operated
inter-dealer automated quotation system for equity securities not included on
the Nasdaq Stock Market. We are not subject to the same corporate governance
requirements that apply to exchange-listed companies. These requirements include
having: a majority of independent directors; an audit committee of independent
directors; and shareholder approval of certain equity compensation plans. As a
result, quotation of our stock on the OTC Bulletin Board limits the liquidity
and price of our stock more than if our stock was quoted or listed on a national
exchange. There is no assurance that the Company's stock will continue to be
authorized for quotation by the OTC Bulletin Board or any other market in the
future.
Compliance with external assurance requirements of the Sarbanes-Oxley Act of
2002 will require substantial financial and management resources.
The Company is not now required to comply with the external assurance
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, but could become
subject to them in the future. Section 404 requires the Company to evaluate and
report on the system of internal controls over financial reporting, however, the
Company is not currently required to have its independent registered public
accountants report on management's evaluation of our system of internal controls
or certify its compliance with the rules related to its system of internal
controls. If we fail to maintain the adequacy of our internal controls, we could
be subject to various sanctions. Any inability to provide reliable financial
reports could harm our business. Any failure to implement required new or
improved controls, or difficulties encountered in the implementation of adequate
controls over our financial processes and reporting in the future, could
adversesly affect our operating results or cause us to fail to meet our
reporting obligations. Inferior internal controls could also cause investors to
lose confidence in our reported financial information, which could have a
negative effect on the trading price of our stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
14
ITEM 2. PROPERTIES
The Company's headquarters are located in 7,600 square feet of leased office
space in Indianapolis, Indiana. The lease for this property expires in March
2015.
The Company also leases space for a Company-owned dual-branded restaurant in
Indianapolis, Indiana which is used as a demonstration and test restaurant. The
lease for this property expires December 31, 2015. The Company has the option to
extend the term of this lease for one additional five-year period.
The Company leases space for operating an additional dual-branded restaurant in
Indianapolis, Indiana. The lease for this property expires April 4, 2016. The
Company has the option to extend the term of this lease for one additional
five-year period. This lease also provides for the Company to assign the lease
to a franchisee if and when it is franchised.
ITEM 3. LEGAL PROCEEDINGS
The Company, from time to time, is involved in various litigation relating to
claims arising out of its normal business operations.
The Company is 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 (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 failed 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 entirely and Plaintiffs have no appeal rights remaining.
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 our
request for sanctions and ordered the Plaintiffs and their attorney to pay the
Company $8,276 by April 23, 2012. The Company's counterclaims against the
Plaintiffs for breach of contract remain pending as to amount of damages,
however, the Company was granted summary judgment as to liability.
The Complaint was originally against the Company and certain officers and
institutional lenders. The Plaintiffs are former franchisees 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 which the Court's Order denied the Company's motion for summary judgment
as the Court determined that there is a genuine issue of material fact but did
not render any opinion on the merits of the claim. The Company denies any
liability on the Indiana Franchise Act claim and will continue to vigorously
defend against this claim.
15
The Company filed counterclaims for damages for breach of contract against all
of the Plaintiffs in the approximate amount of $3.6 million plus attorneys'
fees, interest and other cost of collection, or a total of over $5 million. On
September 21, 2011, the Company filed motions for partial summary judgment as 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, the Court determined that, as a matter of law, Noble Roman's was
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 fraud claims against the Company and certain of
its officers. The amount of the award is to be determined at trial.
Other than as disclosed above, the Company is involved in no other material
litigation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
------------------
The Company's common stock is included on the Nasdaq "OTC 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.
2010 2011
---- ----
Quarter Ended: High Low High Low
-------------- ---- ----- ---- -----
March 31 $ .95 $ .66 $1.08 $ .87
June 30 $1.15 $ .78 $1.12 $ .81
September 30 $1.10 $ .85 $1.01 $ .76
December 31 $1.09 $ .90 $ .92 $ .55
Holders of Record
-----------------
As of March 1, 2012, there were approximately 282 holders of record of the
Company's common stock and 20 holders of preferred 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's current loan agreement, as described in Note 3 of the notes to the
Company's consolidated financial statements, prohibits the payment of dividends.
16
Sale of Unregistered Securities
-------------------------------
None.
Equity Compensation Plan Information
------------------------------------
The following table provides information as of December 31, 2011 with respect to
the shares of our common stock that may be issued under our existing equity
compensation plan.
Number of securities
remaining available for
future issuance under
Number of Securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Plan Category (a) (b) (c)
---------------------------------- ------------------------ ------------------- ------------------------
Equity compensation plans approved
by stockholders - $ - -
Equity compensation plans not
approved by stockholders 3,000,500 $ .95 (1)
Total 3,000,500 $ .95 -
(1) The Company may grant additional options under the employee stock option
plan. There is no maximum number of shares available for issuance under
the employee stock option plan.
The Company maintains an employee stock option plan for its employees and
officers. Any employees or officers of the Company are eligible to be awarded
options under the plan. The employee stock option plan provides that any options
issued pursuant to the plan will have a three-year vesting period and will
expire ten years after the date of grant. Awards under the plan are periodically
made at the recommendation of the Chairman/CEO and President and approved by the
Board of Directors. The employee stock option plan does not have a limit on the
number of shares that may be issued under the plan.
17
ITEM 6. SELECTED FINANCIAL DATA (In thousands except per share data)
Year Ended December 31,
------------------------------------------------------
Statement of Operations Data: 2007 2008 2009 2010 2011
-------- -------- -------- -------- --------
Royalties and fees $ 10,411 $ 7,562 $ 6,949 $ 6,726 $ 6,814
Administrative fees and other 68 48 64 40 44
Restaurant revenue 1,088 1,432 537 505 518
-------- -------- -------- -------- --------
Total revenue 11,567 9,042 7,550 7,271 7,376
Operating expenses 4,371 3,184 2,247 2,150 2,202
Restaurant operating expenses 1,011 1,369 497 502 508
Depreciation and amortization 97 92 79 66 124
General and administrative 1,680 1,625 1,485 1,610 1,620
-------- -------- -------- -------- --------
Operating income 4,408 2,772 3,242 2,943 2,922
Interest and other 651 616 467 441 390
-------- -------- -------- -------- --------
Income before income taxes from continuing
operations 3,757 2,156 2,775 2,502 2,532
Income taxes 1,268 733 1,099 991 1,003
-------- -------- -------- -------- --------
Net income from continuing operations 2,489 1,423 1,676 1,511 1,529
Loss from discontinued operations -- (3,824) -- (1,201) (710)
-------- -------- -------- -------- --------
Net income (loss) $ 2,489 $ (2,401) $ 1,676 $ 310 $ 819
Cumulative preferred dividends 127 66 66 91 99
-------- -------- -------- -------- --------
Net income (loss) available to common
stockholders $ 2,361 $ (2,467) $ 1,610 $ 219 $ 720
======== ======== ======== ======== ========
Weighted average number of common shares 17,676 19,213 19,412 19,415 19,458
Net income from continuing operations $ .14 $ .07 $ .09 $ .08 $ .08
Net income (loss) per share .14 (.13) .09 .02 .04
Net income (loss) available to common $ .13 $ (.13) $ .08 $ .01 $ .04
stockholders
Balance Sheet Data:
Working capital (deficit) $ 3,806 $ 551 $ 1,517 $ 927 $ (852)*
Total assets 17,469 17,278 16,683 16,895 17,224
Long-term obligations, net of current portion 4,125 5,625 4,125 3,481 1,256
Stockholders' equity $ 11,312 $ 8,962 $ 10,623 $ 10,885 $ 11,728
* The Company's bank loan is classified as a current liability due to it's
stated maturity on October 1, 2012.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
------------
The Company sells and services franchises and licenses for non-traditional
foodservice operations under the trade names "Noble Roman's Pizza," "Tuscano's
Italian Style Subs," "Noble Roman's Take-N-Bake Pizza" and "Tuscano's Grab-N-Go
Subs." We believe the attributes of our franchise include high quality products,
simple operating systems, labor-minimizing operations, attractive food costs and
overall affordability.
There were 1,112 franchised or licensed outlets in operation on December 31,
2010 and 1,583 on December 31, 2011. During that twelve-month period there were
485 new franchised or licensed outlets opened and 14 franchised outlets left the
system. Grocery stores are accustomed to adding products for a period of time,
18
removing them for a period of time and re-offering them. Therefore, it is
unknown if any grocery store licenses have left the system.
As discussed in Note 1 of the notes to the Company's consolidated financial
statements, the Company uses significant estimates in evaluating such items as
notes and accounts receivable to reflect the actual amount expected to be
collected for total receivables. At December 31, 2010 and 2011 the Company
reported net accounts and notes receivable of $2.672 million and $3.713 million,
respectively, which were net of allowances to reflect the amount the Company
expects to realize for the receivables. The Company has reviewed each of its
accounts and notes receivable and only included receivables in the amount
expected to be collected. The Company has provided an accrual for estimated
future expense related to its discontinued operations in the amount of $128,246
as of December 31, 2010 and $162,524 as of December 31, 2011, which was
primarily to provide for future legal expenses for the litigation described in
"Legal Proceedings" of this report which involves the discontinued operations of
the Company. The Company, at December 31, 2010 and December 31, 2011, had a
deferred tax asset on its balance sheet totaling $11.551 million and $11.013
million, respectively. After reviewing expected results from the Company's
current business plan, the Company believes it is more likely than not that the
deferred tax assets will be utilized prior to their expiration, most of which
expire between 2012 and 2028.
Financial Summary
-----------------
The preparation of the consolidated financial statements in conformity with
United States 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 evaluates the carrying values of its
assets, including property, equipment and related costs, accounts receivable and
deferred tax asset, periodically 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 that affect the recovery of recorded
values. If any impairment of an individual asset is evident, a charge will be
provided to reduce the carrying value to its estimated fair value.
19
Condensed Consolidated Statement of Operations Data
Noble Roman's, Inc. and Subsidiaries
Years Ended December 31,
--------------------------------------------------------------
2009 2010 2011
---- ---- ----
Royalties and fees $6,949,192 92.1% $6,725,769 92.5% $6,813,946 92.4%
Administrative fees and other 63,503 .8 40,312 .6 44,448 .6
Restaurant revenue 536,885 7.1 505,022 6.9 517,679 7.0
---------- ----- ---------- ----- ---------- -----
Total revenue 7,549,580 100.0 7,271,103 100.0 7,376,073 100.0
Franchise-related operating
expenses:
Salaries and wages 1,057,675 14.0 970,652 13.3 970,966 13.2
Trade show expense 309,827 4.1 301,940 4.2 351,907 4.8
Travel expense 134,350 1.8 157,973 2.2 191,695 2.6
Other operating expense 745,376 9.8 719,316 9.9 687,519 9.3
Restaurant expenses 496,614 6.6 501,976 6.9 507,838 6.9
Depreciation 78,777 1.0 66,578 .9 124,009 1.6
General and administrative 1,485,356 19.7 1,610,123 22.1 1,619,778 22.0
---------- ----- ---------- ----- ---------- -----
Operating income 3,241,605 43.0 2,942,545 40.5 2,922,361 39.6
Interest and other expense 466,944 6.2 440,512 6.1 390,858 5.3
---------- ----- ---------- ----- ---------- -----
Income before income taxes 2,774,661 36.8 2,502,033 34.4 2,531,504 34.3
Income taxes 1,099,044 14.6 991,056 13.6 1,002,730 13.7
---------- ----- ---------- ----- ---------- -----
Net income from continuing
operations $1,675,617 22.2% $1,510,977 20.8% $1,528,774 20.6%
========== ===== ========== ===== ========== =====
2011 Compared with 2010
-----------------------
Total revenue increased from $7,271,103 in 2010 to $7,376,073 in 2011. One-time
fees, franchisee fees and equipment commissions ("upfront fees") decreased from
$376,613 in 2010 to $255,236 in 2011. Royalties and fees increased from
$6,349,156 in 2010 to $6,558,710 in 2011. The breakdown of royalties and fees,
less upfront fees, were; royalties and fees from non-traditional franchises
other than grocery stores were $4,425,822 in 2010 and $4,023,177 in 2011; fees
from the grocery store take-n-bake were $462,625 in 2010 and $1,166,650 in 2011;
and royalties and fees from traditional locations were $1,460,709 in 2010 and
$1,368,883 in 2011. Included in royalties and fees from traditional locations
were $1,180,000 in 2010 and $1,020,000 in 2011 for royalties and fees recognized
as collectible from traditional locations which are no longer operating.
Total fees increased from $462,625 in 2010 to $1,166,650 in 2011 from grocery
store take-n-bake locations primarily as a result of adding new locations. The
increase of revenue from grocery store take-n-bake locations was offset by
decreases in royalties and fees from non-traditional locations other than
grocery stores and traditional locations. Royalties and fees from
non-traditional locations decreased from $4,425,822 in 2010 to $4,023,177 in
2011. This decrease was primarily the result of loss in revenue from bowling
centers and attractions offset by an increase of 19 in the number of
non-traditional locations. Royalties and fees from traditional locations
decreased from $1,460,709 in 2010 to $1,368,883 in 2011. This decrease was the
result of a decrease from $1,180,000 in 2010 to $1,020,000 in 2011 in royalties
and fees recognized as collectible from traditional locations which are no
longer operating and the loss of eight traditional franchises.
20
Restaurant revenues increased from $505 thousand in 2010 to $518 thousand in
2011. This increase was the result of same store sales increasing. The Company
only operates two restaurants for testing and demonstration purposes.
Salaries and wages decreased from 13.3% of revenue in 2010 to 13.2% of revenue
in 2011. This small decrease was primarily the result of increased revenue.
Actual salaries and wages were approximately the same in 2010 and 2011.
Trade show expenses increased from 4.2% of revenue in 2010 to 4.8% of revenue in
2011. This increase was the result of more trade show activity, primarily
grocery store shows, as a result of adding more grocery store distributors.
Actual trade show expenses increased from $302 thousand in 2010 to $352 thousand
in 2011.
Travel expenses increased from 2.2% of revenue in 2010 to 2.6% of revenue in
2011. This increase was primarily the result of the number of grocery store
take-n-bake licenses opening throughout the country in locations farther away
from the headquarters partially offset by increased revenue. Actual travel
expenses increased from $158 thousand in 2010 to $192 thousand in 2011.
Other operating expenses decreased from 9.9% of revenue in 2010 to 9.3% in 2011.
This decrease was primarily the result of tightly controlling operating
expenses. Actual other operating expenses decreased from approximately $719
thousand in 2010 to $688 thousand in 2011.
Restaurant expenses remained the same at 6.9% of revenue in 2010 and 2011. The
Company only operates two restaurants for testing and demonstration purposes and
does not intend to operate any more restaurants.
General and administrative expenses decreased from 22.1% of revenue in 2010 to
22.0% of revenue in 2011. Actual general and administrative expenses were $1.610
million in 2010 and $1.620 million in 2011. The decrease in percentage was a
result of increase in revenue. Actual operating expenses only showed a slight
increase as a result of tightly controlling costs.
Operating income remained approximately the same at $2.9 million in 2010 and
2011. The small increase in total revenue was offset by small increases in trade
show expense and travel expense.
Interest expense decreased from 6.1% of revenue in 2010 to 5.3% of revenue in
2011. This decrease was a result of a decrease in interest expense and by an
increase in revenue. Actual interest expense was $441 thousand in 2010 compared
to $391 thousand in 2011 due to a decrease in average outstanding borrowings
partially offset by an increase in interest rate during the fourth quarter of
2010.
Net income from continuing operations increased slightly from $1.511 million in
2010 to $1.529 million in 2011. This increase was primarily the result of the
increase in total revenue.
Net income per share from continuing operations remained the same at $.08 per
share in both 2010 and 2011. The weighted average shares outstanding was 19.414
million in 2010 and 19.458 million in 2011. The diluted net income per share
from continuing operations remained the same at $.08 per share in 2010 and 2011.
21
Loss on discontinued operations was $0 in 2009, $1.2 million in 2010 and $710
thousand in 2011. The Company made the decision in late 2008 to discontinue the
business of operating traditional restaurants, which had been acquired from
struggling franchisees and later sold to new franchisees, and charged off or
dramatically lowered the carrying value of all receivables related to the
traditional restaurants and accrued future estimated expenses related to the
estimated cost to defend the Heyser lawsuit, as described in Note 10 of the
notes to the accompanying consolidated financial statements. The Company
reported an additional loss of $1.2 million in 2010 as the accrual for legal
cost estimate in 2008 was insufficient and additional accrual was required.
Additionally, in reviewing the accounts receivable, various receivables
originating in 2007 and 2008 relating to the operations that were discontinued
in 2008 were determined to be doubtful of collection, therefore charged to loss
on discontinued operations. The Company had an additional loss of $710 thousand
in 2011 relating to the operations that were discontinued in 2008 for an
additional accrual of legal and other costs related to the Heyser lawsuit and
the charge-off of some additional receivables originating in 2007 and 2008
relating to the operations that were discontinued. An additional accrual was
necessary, primarily because, since the Company was granted summary judgment
dismissing their fraud claims on December 23, 2010, the Plaintiffs filed
numerous motions for reconsideration and an appeal, all of which created
additional legal and other expenses.
2010 Compared with 2009
-----------------------
Total revenue decreased from $7,549,580 in 2009 to $7,271,103 in 2010. One-time
fees, franchisee fees and equipment commissions ("upfront fees") increased from
$241,959 in 2009 to $376,613 in 2010. Royalties and fees decreased from
$6,707,233 in 2009 to $6,349,156 in 2010. The breakdown of royalties and fees,
less upfront fees, are royalties and fees from non-traditional franchises other
than grocery stores were $6,094,405 in 2009 and $4,425,822 in 2010; fees from
the grocery store take-n-bake were $34,553 in 2009 and $462,625 in 2010; and
royalties and fees from traditional locations were $578,275 in 2009 and
$1,460,709 in 2010. Included in royalties and fees from traditional locations
were $150,000 in 2009 and $1,180,000 in 2010 for royalties and fees recognized
as collectible from traditional locations which are no longer operating.
Restaurant revenues decreased from $537 thousand in 2009 to $505 thousand in
2010. This decrease was the result of same store sales decreasing. The company
only operates two restaurants for testing and demonstration purposes.
Salaries and wages decreased from 14.0% of revenue in 2009 to 13.3% of revenue
in 2010. This decrease was primarily the result of the Company reducing
operating expenses in light of slower growth in the number of franchised units.
Actual salaries and wages decreased from $1.06 million in 2009 to $971 thousand
in 2010.
Trade show expenses increased from 4.1% of revenue in 2009 to 4.2% of revenue in
2010. This increasee was primarily the result of a decrease in revenue as
explained above. Actual trade show expenses decreased from $310 thousand in 2009
to $302 thousand in 2010.
Travel expenses increased from 1.8% of revenue in 2009 to 2.2% of revenue in
2010. This increase was primarily the result of the number of grocery store
take-n-bake licenses opening throughout the country in locations farther away
from the headquarters combined with the decrease in total revenue. Actual travel
expenses increased from $134 thousand in 2009 to $158 thousand in 2010.
22
Other operating expenses increased from 9.8% of revenue in 2009 to 9.9% in 2010.
This increase was primarily the result of a decrease in revenue as explained
above. Actual other operating expenses decreased from approximately $742
thousand in 2009 to $719 thousand in 2010. This decrease was primarily the
result of the Company's focus on decreasing expenses.
Restaurant expenses increased from 6.6% of revenue in 2009 to 6.9% of revenue in
2010. This increase was the result of the decrease in total revenue as explained
above. The Company only operates two restaurants for testing and demonstration
purposes and does not intend to operate any more restaurants.
General and administrative expenses increased from 19.7% of revenue in 2009 to
22.1% of revenue in 2010. This increase was partially a result of the decrease
in revenue as explained above. Actual general and administrative expenses were
$1.485 million in 2009 and $1.610 million in 2010. The increase in general and
administrative expenses was the result of a $51 thousand increase in legal
expenses, $27 thousand in additional directors' fees as a result of adding two
new directors and $52 thousand in rent expense as a result of having no rent in
the beginning of 2009 because our old lease expired and the new lease did not
become effective until major remodeling was completed. All other general and
administrative expenses decreased in total by $5 thousand.
Operating income decreased from $3.2 million in 2009 to $2.9 million in 2010.
This was primarily the result of a decrease in revenue as explained above.
Interest expense decreased from 6.2% of revenue in 2009 to 6.1% of revenue in
2010. This was a result of a decrease in interest expense partially offset by
the decrease in revenue as noted above. Actual interest expense was $467
thousand in 2009 compared to $441 thousand in 2010 due to a decrease in average
outstanding borrowings partially offset by an increase in interest rate during
the fourth quarter of 2010.
Net income from continuing operations decreased from $1.7 million in 2009 to
$1.5 million in 2010. This decrease was primarily the result of the decrease in
total revenue partially offset by reduced expenses.
Net income per share from continuing operations decreased from $.09 per share on
19.4 million weighted average shares outstanding in 2009 to $.08 per share on
19.4 million weighted average shares outstanding in 2010. The diluted net income
per share from continuing operations remained the same at $.08 per share on 20.0
million weighted average shares outstanding in 2009 and $.08 per share on 20.1
million weighted average shares outstanding in 2010.
Loss on discontinued operations was $3.8 million in 2008, $0 in 2009 and $1.2
million in 2010. The loss on discontinued operations in 2008 was primarily the
result of operating traditional restaurants which had been acquired from
struggling franchisees and later sold to new franchisees. Noble Roman's made the
decision in late 2008 to discontinue that business and charged off or
dramatically lowered the carrying value of all receivables related to the
traditional restaurants and accrued future estimated expenses related to the
estimated cost to defend the Heyser lawsuit, as described in Note 10 of the
notes to the accompanying consolidated financial statements. The Company
reported an additional loss of $1.2 million in 2010 as the accrual for legal
cost estimate in 2008 was insufficient and additional accrual was required.
Additionally, in reviewing the accounts receivable, various receivables
originating in 2007 and 2008 relating to the operations that were discontinued
in 2008 were determined to be doubtful of collection, therefore charged to loss
on discontinued operations.
23
Impact of Inflation
-------------------
The primary inflation factors affecting the Company's operations are food and
labor costs to the franchisee. The commodity prices, primarily cheese and meats,
were at normal levels, near the ten-year average, in 2009; however, commodity
prices increased dramatically in the last half of 2010 and into 2011 until near
the end of 2011. During the first portion of 2012 commodity prices stabilized
and cheese prices, which make up the single largest cost of a pizza, have
returned to near the ten-year average. Labor cost has remained relatively
constant in the past two years and, in addition, any labor cost increase in the
future for our franchisees will be mitigated by the relatively low labor
requirements of the Company's franchise concepts.
Liquidity and Capital Resources
-------------------------------
The Company's current strategy is to grow its business by concentrating on
franchising non-traditional locations and licensing grocery stores to sell
take-n-bake pizza and other retail products. 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 .8-to-1 as of December 31, 2011 compared to
1.2-to-1 at December 31, 2010. The Company's bank loan was classified as a
current liability as of December 31, 2011, due to its stated maturity in October
of 2012.
At various times, Paul W. Mobley, the Company's Chairman of the Board and Chief
Executive Officer, loaned the Company $855,821 in 2010 and $400,000 in 2011 for
a total of $1,255,821 to help fund $1,125,000 in principal payments in 2010 and
$925,000 in 2011 due under its bank loan and to help fund $933,809 in payments
related to discontinued operations in 2010 and $709,816 in payments related to
discontinued operations in 2011. The payments related to the discontinued
operations were largely for legal fees related to the Heyser lawsuit, which is
described in Note 10 of the notes to the accompanying consolidated financial
statements. The advances are evidenced by a promissory note in the amount of
$1,255,821, which provides for interest to be paid monthly on the unpaid
principal balance of the note which began December 1, 2010, and has continued on
the first day of each calendar month thereafter and will continue until the note
is paid in full, at the rate of 8% per annum, and the Company is current on the
required interest payments. In addition, the note requires principal payments
commencing on January 1, 2013 and on the first day of each calendar month
thereafter in the amount of $100,000 per month through November 1, 2013 and
$155,821 on December 1, 2013. The Third Amendment to the Loan Agreement with
Wells Fargo states that no principal payment on the officer note can commence
until the Wells Fargo loan is paid in full.
On November 9, 2010, the Company entered into a Second Amendment to Loan
Agreement (the "Second Amendment") with Wells Fargo that amended the existing
Loan Agreement between the Company and Wells Fargo. Pursuant to the Amendment,
Wells Fargo agreed to defer principal payments on the outstanding notes payable
to the bank for the months of October through December 2010. On March 10, 2011,
the Company executed a Third Amendment to the Loan Agreement with Wells Fargo
Bank (the "Third Amendment") reducing principal payments to $25,000 per month
for March and April 2011. In addition, the interest rate under the note payable
was changed from LIBOR plus 3.75% per annum to LIBOR plus 4.25% per annum. On
July 19, 2011, the Company executed a Fourth Amendment to the Loan Agreement
with Wells Fargo Bank (the "Fourth Amendment") adjusting the principal payments
24
and shortening the maturity to October 1, 2012. In addition, the Fourth
Amendment keeps the interest rate at LIBOR plus 4.25% per annum through and
including June 1, 2012 and LIBOR plus 7.25% per annum thereafter. In addition,
the principal payments were further amended by an additional amendment, on
January 30, 2012, to the Loan Agreement with Wells Fargo Bank as follows:
February 1, 2012 $ 50,000
March 1, 2012 $ 75,000
April 1, 2012 $ 125,000
May 1, 2012 $ 200,000
June 1, 2012 $ 200,000
July 1, 2012 $ 200,000
August 1, 2012 $ 200,000
September 1, 2012 $ 200,000
October 1, 2012 $ 2,250,000
The Company has engaged Concord Financial Advisors, LLC to assist it in
refinancing the Company's bank loan which matures in October 2012. Several banks
have expressed interest in providing the refinancing and the Company expects to
refinance the outstanding balance of its bank loan before maturity. There can be
no assurance, however, that it will be able to refinance its bank loan on
favorable terms or at all.
In February 2008, the Company elected to trade its previous interest rate swap
contract for a new swap contract fixing the rate on 50% of the principal balance
under the Company's loan agreement, as amended (approximately $1.125 million as
of March 1, 2012), at an annual interest rate of 8.2%.
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.
Contractual Obligations
-----------------------
The following table sets forth the contractual obligations of the Company as of
December 31, 2011:
Less than More than
Total 1 year 1-3 Years 3-5 Years 5 years
---------- ---------- ---------- ---------- ---------
Long-term debt $4,830,821 $3,575,000 $1,255,821 $ -- $ --
Operating leases 820,561 229,178 461,830 129,553
---------- ---------- ---------- ---------- ---------
Total $5,651,382 $3,804,178 $1,717,651 $ 129,553 $ --
========== ========== ========== ========== =========
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,
general economic conditions and other factors including, but not limited to, the
25
Company's ability to refiance its bank loan at or before maturity, 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 as well as the factors discussed under "Risk Factors" as contained in this
annual report. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions or estimates prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to interest rate risk relates primarily to its
variable-rate debt under its bank loan. As of December 31, 2011, the Company had
outstanding interest-bearing debt to the bank in the aggregate principal amount
of $3.575 million. The Company's current borrowings are at a variable rate tied
to the London Interbank Offered Rate ("LIBOR") plus 4.25% per annum adjusted on
a monthly basis through and including June 1, 2012 and thereafter LIBOR plus
7.25%. To mitigate interest rate risk, the Company traded its previous swap
contract for a new swap contract fixing the rate on 50% of the principal balance
outstanding at 8.2%. Based upon the principal balance outstanding as of March 1,
2012 of $3.375 million for each 1.0% increase in LIBOR, the Company would incur
increased interest expense of approximately $8,256 over the succeeding
twelve-month period.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
Noble Roman's, Inc. and Subsidiaries
December 31,
----------------------------
Assets 2010 2011
------------ ------------
Current assets:
Cash $ 337,044 $ 233,296
Accounts and notes receivable - net 920,304 884,811
Inventories 316,913 338,447
Assets held for resale 246,278 252,552
Prepaid expenses 235,778 278,718
Deferred tax asset - current portion 1,400,000 1,400,000
------------ ------------
Total current assets 3,456,317 3,387,824
------------ ------------
Property and equipment:
Equipment 1,139,050 1,147,109
Leasehold improvements 12,283 12,283
------------ ------------
1,151,333 1,159,392
Less accumulated depreciation and amortization 784,282 851,007
------------ ------------
Net property and equipment 367,051 308,385
Deferred tax asset (net of current portion) 10,150,558 9,613,399
Other assets including long-term portion of notes receivable - net 2,920,853 3,914,523
------------ ------------
Total assets $ 16,894,779 $ 17,224,131
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term note payable to bank $ 1,875,000 $ 3,575,000
Accounts payable and accrued expenses 654,319 665,054
------------ ------------
Total current liabilities 2,529,319 $ 4,240,054
------------ ------------
Long-term obligations:
Note payable to bank (net of current portion) 2,625,000 --
Note payable to officer 855,821 1,255,821
------------ ------------
Total long-term liabilities 3,480,821 1,255,821
------------ ------------
Stockholders' equity:
Common stock - no par value (25,000,000 shares authorized, 19,419,317 issued
and outstanding as of December 31, 2010 and 19,469,317 as of
December 31, 2011) 23,116,317 23,239,976
Preferred stock (5,000,000 shares authorized, 20,625 issued and
outstanding as of December 31, 2010 and December 31, 2011) 800,250 800,250
Accumulated deficit (13,031,928) (12,311,970)
------------ ------------
Total stockholders' equity 10,884,639 11,728,256
------------ ------------
Total liabilities and stockholders' equity $ 16,894,779 $ 17,224,131
============ ============
See accompanying notes to consolidated financial statements.
27
Consolidated Statements of Operations
Noble Roman's, Inc. and Subsidiaries
Year Ended December 31,
-------------------------------------------
2009 2010 2011
------------ ------------ ------------
Royalties and fees $ 6,949,192 $ 6,725,769 $ 6,813,946
Administrative fees and other 63,503 40,312 44,448
Restaurant revenue 536,885 505,022 517,679
------------ ------------ ------------
Total revenue 7,549,580 7,271,103 7,376,073
Operating expenses:
Salaries and wages 1,057,675 970,652 970,966
Trade show expense 309,827 301,940 351,907
Travel expense 134,350 157,973 191,695
Other operating expenses 745,376 719,316 687,519
Restaurant expenses 496,614 501,976 507,838
Depreciation and amortization 78,777 66,578 124,009
General and administrative 1,485,356 1,610,123 1,619,778
------------ ------------ ------------
Operating income 3,241,605 2,942,545 2,922,361
Interest and other expense 466,944 440,512 390,858
------------ ------------ ------------
Income before income taxes from
continuing operations 2,774,661 2,502,033 2,531,503
Income tax expense 1,099,044 991,056 1,002,729
------------ ------------ ------------
Net income from continuing operations 1,675,617 1,510,977 1,528,774
Loss from discontinued operations net of tax benefit
of $787,520 for 2010 and $465,570 for 2011 -- (1,200,664) (709,816)
------------ ------------ ------------
Net income 1,675,617 310,313 818,958
Cumulative preferred dividends 66,000 90,682 99,000
------------ ------------ ------------
Net income available to common
stockholders $ 1,609,617 $ 219,631 $ 719,958
============ ============ ============
Earnings per share - basic:
Net income from continuing operations $ .09 $ .08 $ .08
Net loss from discontinued operations net of tax
benefit $ -- $ (.06) $ (.04)
Net income $ .09 $ .02 $ .04
Net income available to common
stockholders $ .08 $ .01 $ .04
Weighted average number of common shares
outstanding 19,412,499 19,414,367 19,457,810
Diluted earnings per share:
Net income from continuing operations $ .08 $ .08 $ .08
Net loss from discontinued operations net of tax benefit $ -- $ (.06) $ (.04)
Net income $ .08 $ .02 $ .04
Weighted average number of common shares
outstanding 19,950,027 20,094,961 20,112,278
See accompanying notes to consolidated financial statements.
28
Consolidated Statements of Changes in
Stockholders' Equity
Noble Roman's, Inc. and Subsidiaries
Preferred Common Stock Accumulated
Stock Shares Amount Deficit Total
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2008 $ 800,250 19,412,499 $ 23,023,250 $(14,861,176) $ 8,962,324
2009 net income 1,675,617 1,675,617
Cumulative preferred dividends (66,000) (66,000)
Amortization of value of
stock options 50,910 50,910
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2009 $ 800,250 19,412,499 $ 23,074,160 $(13,251,559) $ 10,622,851
2010 net income 310,313 310,313
Cumulative preferred dividends (90,682) (90,682)
Amortization of value of
stock options 42,157 42,157
Cashless exercise of warrants 6,818
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2010 $ 800,250 19,419,317 $ 23,116,317 $(13,031,928) $ 10,884,639
2011 net income 818,958 818,958
Cumulative preferred dividends (99,000) (99,000)
Amortization of value of
stock options 105,659 105,659
Exercise of employee stock options 50,000 18,000 18,000
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2011 $ 800,250 19,469,317 $ 23,239,976 $(12,311,970) $ 11,728,256
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
29
Consolidated Statements of Cash Flows
Noble Roman's, Inc. and Subsidiaries
Year ended December 31,
-----------------------------------------
OPERATING ACTIVITIES 2009 2010 2011
----------- ----------- -----------
Net income $ 1,675,617 $ 310,313 $ 818,958
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 179,185 158,293 298,937
Non-cash expense from loss on discontinued operations -- 187,330 --
Deferred income taxes 1,099,044 991,056 1,002,729
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts and notes receivable (315,597) 94,846 19,711
Inventories (4,713) (77,907) (21,534)
Prepaid expenses (19,757) 6,075 (42,940)
Other assets (419,332) (561,952) (849,910)
Increase (decrease) in:
Accounts payable and accrued expenses (81,451) 219,654 10,736
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 2,112,996 1,327,708 1,236,687
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (45,211) (5,738) (8,059)
Assets held for resale (837) (2,751) (6,274)
----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (46,048) (8,489) (14,333)
----------- ----------- -----------
FINANCING ACTIVITIES
Payment of obligations from discontinued operations (652,522) (933,809) (709,816)
Payment of cumulative preferred dividends (66,000) (90,682) (99,000)
Payment of principal on outstanding debt (1,500,000) (1,125,000) (925,000)
Payment received on long-term notes receivable 33,810 8,612 33,417
Payment of loan modification cost -- -- (43,703)
Proceeds of loan from officer -- 825,500 400,000
Proceeds from the exercise of stock options -- -- 18,000
----------- ----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (2,184,712) (1,315,379) (1,326,102)
----------- ----------- -----------
Increase (decrease) in cash (117,764) 3,840 (103,748)
Cash at beginning of year 450,968 333,204 337,044
----------- ----------- -----------
Cash at end of year $ 333,204 $ 337,044 $ 233,296
=========== =========== ===========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
In 2010, a warrant to purchase 50,000 shares at $.95 per share was exercised
pursuant to the cashless exercise provision of the warrant and the holders
received 6,818 shares of common stock.
See accompanying notes to consolidated financial statements.
30
Notes to Consolidated Financial Statements
Noble Roman's, Inc. and Subsidiaries
Note l: Summary of Significant Accounting Policies
Organization: The Company sells and services franchises and/or licenses for
non-traditional foodservice operations under the trade names "Noble Roman's
Pizza," "Tuscano's Italian Style Subs," "Noble Roman's Take-N-Pizza" and
"Tuscano's Grab-N-Go Subs." Unless the context otherwise indicates, reference to
the "Company" are to Noble Roman's, Inc. and its wholly-owned subsidiaries.
Principles of Consolidation: The consolidated financial statements include the
accounts of Noble Roman's, Inc. and its wholly-owned subsidiaries, Pizzaco, Inc.
and N.R. Realty, Inc. Inter-company balances and transactions have been
eliminated in consolidation.
Inventories: Inventories consist of food, beverage, restaurant supplies,
restaurant equipment 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.
Depreciation and amortization are computed on the straight-line method over the
estimated useful lives ranging from five years to 12 years. Leasehold
improvements are amortized over the shorter of estimated useful life or the term
of the lease.
Cash and Cash Equivalents: Includes actual cash balance plus cash invested
overnight pursuant to an agreement with a bank. Neither the cash or cash
equivalents are pledged nor are there any withdrawal restrictions.
Assets Held for Resale: The Company records the cost of franchised locations
held by the Company on a temporary basis until they are sold to a franchisee at
the Company's cost adjusted for impaired value, if any, to the estimated net
realizable value. The Company estimates net realizable value using comparative
replacement costs for other similar franchise locations that are being built at
the time the estimate is made.
Advertising Costs: The Company records advertising costs consistent with
Financial Accounting Standards Board's ("FASB") Accounting Standards
Codification ("ASC") Other Expense topic and Advertising Costs subtopic. This
statement requires the Company to expense advertising production costs the first
time the production material is used.
Fair Value Measurements and Disclosures: The Fair Value Measurements and
Disclosures topic of the FASB's ASC requires companies to determine fair value
based on the price that would be received to sell the asset or paid to transfer
the liability to a market participant. The Fair Value Measurements and
Disclosures topic emphasizes that fair value is a market-based measurement, not
an entity-specific measurement.
The guidance requires that assets and liabilities carried at fair value be
classified and disclosed in one of the following categories:
o Level 1: Quoted market prices in active markets for identical assets
or liabilities.
o Level 2: Observable market-based inputs or unobservable inputs that
are corroborated by market data.
o Level 3: Unobservable inputs that are not corroborated by market data.
31
As of December 31, 2010 and 2011, the Company held an interest rate swap, a
financial liability that is required to be measured at fair value on a recurring
basis utilizing Level 2 inputs. The carrying value for this liability
approximates its fair value, and is not material to the Company's 2010 or 2011
consolidated financial statements.
Fair Value of Financial Instruments: The Company's current bank borrowings are
at a monthly variable rate tied to LIBOR. On February 6, 2008, the Company
elected to trade its previous swap contract for a new swap contract fixing the
rate on 50% of the principal balance under the Loan Agreement, as amended by the
Amendment (approximately $1.125 million as of March 1, 2012), at an annual
interest rate of 8.2%.
The Company's swap is a derivative instrument that is designated as cash flow
hedge because the swap provides a hedge against the effects of rising interest
rates on present and/or forecasted future borrowings. The effective portion of
the gain or loss on the swap is reported as a component of other comprehensive
income and reclassified into earnings in the same period or periods during which
the swap affects earnings. Gains or losses on the swap representing either hedge
ineffectiveness or hedge components excluded from the assessment of
effectiveness are recognized in current earnings. Amounts payable or receivable
under the swap is accounted for as adjustments to interest expense. The
financial liability was not material to the Company's 2010 or 2011 consolidated
financial statements. There were no derivatives that were not designated as
hedging instruments under the provisions of the ASC topic, "Derivatives and
Hedging."
Use of Estimates: The preparation of the consolidated financial statements in
conformity with United States 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 records a valuation allowance in
a sufficient amount to adjust the total notes and accounts receivables value, in
its best judgment, to reflect the amount that the Company estimates will be
collected from its total receivables. As any accounts are determined to be
uncollectible, they are charged off against the valuation allowance. The Company
evaluates its assets held for resale, property and equipment and related costs
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: Debt issue costs are amortized to interest expense ratably
over the term of the applicable debt. The debt issue cost being amortized is
$481,939 with accumulated amortization at December 31, 2010 of $306,241 and
December 31, 2011 of $364,510.
Royalties, Administrative and Franchise Fees: Royalties are recognized as income
monthly and are based on a percentage of monthly sales of franchised or licensed
restaurants. Fees from the retail products in grocery stores are recognized
monthly based on the distributors' sale of those retail products to the grocery
stores. Administrative fees are recognized as income monthly as earned. Initial
franchise fees are recognized as income when the services for the franchised
restaurant are substantially completed.
Exit or Disposal Activities Related to Discontinued Operations: The Company
records exit or disposal activity for discontinued operations when management
commits to an exit or disposal plan and includes those charges under results of
discontinued operations, as required by ASC "Exit or Disposal Cost Obligations"
topic.
32
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 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 the recorded deferred tax asset. As of
December 31, 2011, the net operating loss carry-forward was approximately $26
million which expires between the years 2012 and 2028. Management made the
determination that no valuation allowance was necessary 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.
U.S. generally accepted accounting principles require the Company to examine its
tax positions for uncertain positions. Management is not aware of any tax
positions that are more likely than not to change in the next 12 months, or that
would not sustain an examination by applicable taxing authorities. The Company's
policy is to recognize penalties and interest as incurred in its Consolidated
Statement of Operations, which were none for the years ended December 31, 2009,
2010 and 2011. The Company's federal and various state income tax returns for
2008 through 2011 are subject to examination by the applicable tax authorities,
generally for three years after the later of the original or extended due date.
Basic and Diluted Net Income Per Share: Net income 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.
The following table sets forth the calculation of basic and diluted loss per
share for the year ended December 31, 2009:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $ 1,675,617
Less preferred stock dividends (66,000)
Earnings per share - basic
Income available to common
stockholders 1,609,617 19,412,499 $ .08
Effect of dilutive securities
Warrants -- --
Options -- 170,862
Convertible preferred stock 66,000 366,666
----------- -----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 1,675,617 19,950,027 $ .08
33
The following table sets forth the calculation of basic and diluted earnings per
share for the year ended December 31, 2010:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $ 310,313
Less preferred stock dividends (90,682)
Earnings per share - basic
Income available to common
stockholders 219,631 19,414,367 $ .01
Effect of dilutive securities
Options -- 313,928
Convertible preferred stock 90,682 366,666
----------- -----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 310,313 20,094,961 $ .02
The following table sets forth the calculation of basic and diluted earnings per
share for the year ended December 31, 2011:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $ 818,958
Less preferred stock dividends (99,000)
Earnings per share - basic
Income available to common
stockholders 719,958 19,457,810 $ .04
Effect of dilutive securities
Options -- 287,802
Convertible preferred stock 99,000 366,666
----------- -----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 818,958 20,112,278 $ .04
Subsequent Events: The Company evaluated subsequent events through the date the
consolidated statements were issued and filed with Form 10-K. There were no
subsequent events that required recognition or disclosure except for the January
30, 2012 loan amendment discussed in Note 3.
Note 2: Accounts and Notes Receivable
At December 31, 2010 and 2011, the carrying value of the Company's accounts
receivable has been reduced to anticipated realizable value. As a result of this
reduction of carrying value, the Company anticipates that substantially all of
its receivables reflected on the Consolidated Balance Sheets as of December 31,
2010 and 2011 will be collected.
34
Note 3: Notes Payable
On February 4, 2008, the Company entered into a First Amendment to Loan
Agreement (the "Amendment") with Wells Fargo Bank N.A., that amended the
existing Loan Agreement between the Company and Wells Fargo (the "Loan
Agreement"). The Amendment provided for Wells Fargo to loan an additional $3.0
million to the Company. The Amendment also reduced the interest rate applicable
to amounts borrowed under the Loan Agreement to LIBOR plus 3.75% per annum and
extended the maturity date for borrowings under the loan from August 31, 2011 to
August 31, 2013. On February 6, 2008, the Company elected to trade its previous
swap contract for a new swap contract fixing the rate on 50% of the principal
balance under the Loan Agreement, as amended by the Amendment at an annual
interest rate of 8.2%. On November 9, 2010, the Company entered into a Second
Amendment to Loan Agreement (the "Second Amendment") with Wells Fargo that
amended the existing Loan Agreement between the Company and Wells Fargo.
Pursuant to the Second Amendment, Wells Fargo agreed to defer principal payments
on the outstanding notes payable to the bank for the months of October through
December 2010. On March 10, 2011, the Company executed a Third Amendment to the
Loan Agreement with Wells Fargo Bank (the "Third Amendment") reducing principal
payments to $25,000 per month for March and April 2011. In addition, the
interest rate under the note payable was changed from LIBOR plus 3.75% per annum
to LIBOR plus 4.25% per annum. On July 19, 2011, the Company executed a Fourth
Amendment to the Loan Agreement with Wells Fargo Bank (the "Fourth Amendment")
adjusting the principal payments and shortening the maturity to October 1, 2012.
In addition, the Fourth Amendment keeps the interest rate at LIBOR plus 4.25%
per annum through and including June 1, 2012 and LIBOR plus 7.25% per annum
thereafter. In addition, the principal payments were further amended by an
additional amendment, on January 30, 2012, to the Loan Agreement with Wells
Fargo Bank as follows:
February 1, 2012 $ 50,000
March 1, 2012 $ 75,000
April 1, 2012 $ 125,000
May 1, 2012 $ 200,000
June 1, 2012 $ 200,000
July 1, 2012 $ 200,000
August 1, 2012 $ 200,000
September 1, 2012 $ 200,000
October 1, 2012 $ 2,250,000
Interest paid on this Note was $253,813 in 2011, $310,582 in 2010 and $408,735
in 2009. The Company's obligations under the loan are secured by the grant of a
security interest in its personal property and certain restrictions apply such
as a prohibition on the payment of dividends, all as defined in the Loan
Agreement. The difference between interest from the swap contract compared to
interest expense on the term loan was a loss of $128,559, $104,719 and $70,372
for the years ended December 31, 2009, 2010 and 2011, respectively.
At various times, Paul W. Mobley, the Company's Chairman of the Board and Chief
Executive Officer, loaned the Company $855,821 in 2010 and $400,000 in 2011 for
a total of $1,255,821 to help fund $1,125,000 in principal payments in 2010 and
$925,000 in 2011 due under its bank loan and to help fund $933,809 in payments
related to discontinued operations in 2010 and $709,816 in payments related to
discontinued operations in 2011. The payments related to the discontinued
operations were largely for legal fees related to the Heyser lawsuit, which is
described in Note 10 of the notes to the accompanying consolidated financial
35
statements. The advances are evidenced by promissory note in the amount of
$1,255,821, which provides for interest to be paid monthly on the unpaid
principal balance of the note which began December 1, 2010, and has continued on
the first day of each calendar month thereafter and will continue until the note
is paid in full, at the rate of 8% per annum and the Company is current on the
required interest payments. In addition, the note requires principal payments
commencing on January 1, 2013 and on the first day of each calendar month
thereafter in the amount of $100,000 per month through November 1, 2013 and
$155,821 on December 1, 2013. The Third Amendment to the Loan Agreement with
Wells Fargo states that no principal payment on the officer note can commence
until the Wells Fargo loan is paid in full.
Note 4: Royalties and Fees
Approximately $203,450, $266,500 and $193,818 are included in the 2009, 2010 and
2011, respectively, royalties and fees in the Consolidated Statements of
Operations for initial franchise fees. Also included in royalties and fees were
approximately $38,509, $110,113 and $61,418 in 2009, 2010 and 2011,
respectively, for equipment commissions. Most of the cost for the services
required to be performed by the Company are incurred prior to the franchise fee
income being recorded which is based on contractual liability for the
franchisee. For the most part, the Company's ongoing royalty income is paid
electronically by the Company initiating a draft on the franchisee's account by
electronic withdrawal. As such, the Company has no material amount of past due
royalties.
In conjunction with the development of Noble Roman's Pizza and Tuscano's Italian
Style Subs, the Company has devised its own recipes for many of the ingredients
that go into the making of its products ("Proprietary Products"). The Company
contracts with various manufacturers to manufacture its Proprietary Products in
accordance with the Company's recipes and formulas and to sell those products to
authorized distributors at a contract price which includes an allowance for use
of the Company's recipes. The manufacturing contracts also require the
manufacturers to remit those allowances to the Company on a periodic basis,
usually monthly. The Company recognizes those allowances in revenue as earned
based on sales reports from the distributors.
There were 1,112 franchised or licensed outlets in operation on December 31,
2010 and 1,583 on December 31, 2011. During that 12-month period there were 485
new franchised or licensed outlets opened and 14 franchised or licensed outlets
left the system. Grocery stores are accustomed to adding products for a period
of time, removing them for a period of time and reoffering them. Therefore, it
is unknown if any grocery store licenses have left the system.
Note 5: Contingent Liabilities for Leased Facilities
The Company leased its former restaurant facilities under non-cancelable lease
agreements which generally had initial terms ranging from five to 20 years with
extended renewal terms. These leases have been terminated or assigned to
franchisees who operate them pursuant to a Noble Roman's, Inc. Franchise
Agreement. The assignment passes all liability for future lease payments to the
assignees, however, the Company remains contingently liable on a portion of the
leases to the landlords in the event of default by the assignees. The leases
generally required the Company or its assignees to pay all real estate taxes,
insurance and maintenance costs. At December 31, 2011, contingent obligations
under non-cancelable operating leases for 2012, 2013, 2014, 2015, 2016 and after
2016 were approximately $89,763, $90,663, $91,563, $71,343, $24,675 and $0,
respectively.
36
The Company has future obligations under current operating leases of $820,561 as
follows: due in less than one year $229,178, due in one to three years $461,830,
due in three to five years $129,553 and due in more than five years $0.
Note 6: Income Taxes
The Company had a deferred tax asset, as a result of prior operating losses, of
$11,550,558 at December 31, 2010 and $11,013,399 at December 31, 2011, which
expires between the years 2012 and 2028. In 2009, 2010 and 2011, the Company
used deferred benefits to offset its tax expense of $1,099,044, $991,056 and
$1,002,729, respectively, and tax benefits from loss on discontinued operations
of $787,520 in 2010 and $465,570 in 2011. As a result of the tax credits, the
Company did not pay any income taxes in 2009, 2010 and 2011. There are no
material differences between reported income tax expense or benefit and the
income tax expense or benefit that would result from applying the Federal and
state statutory tax rates.
Note 7: Common Stock
During 2010, certain unrelated warrant holders with warrants for the purchase of
50,000 shares exercised, pursuant to the cashless exercise provision of the
warrants, and received 6,818 shares of common stock.
On December 31, 2010 and December 31, 2011, the Company had issued and
outstanding Series B Preferred Stock with a liquidation value of $825,000,
which, at the option of the holder may be converted to common stock at a
conversion price of $2.25 per share. The preferred stock provides for cumulative
dividends at the rate of 12% per annum on the liquidation value. The Company, at
its option, may redeem the Series B Preferred Stock at the liquidation value.
The Company has an incentive stock option plan for key employees, officers and
directors. 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. At December 31, 2011, the
Company had the following employee stock options outstanding:
# Common Shares
Represented Exercise Price
----------- --------------
40,000 $ .55
46,000 .83
58,500 2.30
395,000 .36
481,000 .95
1,800,000 1.05
180,000 .90
As of December 31, 2011, options for 539,500 shares were exercisable.
The Company adopted the modified prospective method of adoption, which does not
require restatement of prior periods. Under the modified prospective method, the
Company is required to record compensation expense for all awards granted after
the date of adoption and for the unvested portion of previously granted awards
that remain outstanding at the date of adoption, net of an estimate of expected
37
forfeitures. Compensation expense is based on the estimated fair values of stock
options determined on the date of grant and is recognized over the related
vesting period, net of an estimate of expected forfeitures.
The Company estimates the fair value of its option awards on the date of grant
using the Black-Scholes option pricing model. The risk-free interest rate is
based on external data while all other assumptions are determined based on the
Company's historical experience with stock options. No options were granted in
2009. The following assumptions were used for grants in 2010 and 2011:
Expected volatility 30%
Expected dividend yield None
Expected term (in years) 5
Risk-free interest rate 3.01%
The following table sets forth the number of options outstanding as of December
31, 2008, 2009, 2010 and 2011 and the number of options granted, exercised or
forfeited during the years ended December 31, 2009, December 31, 2010 and
December 31, 2011:
--------------------------------------------------------------------------------------------------------------------
Balance of employee stock options outstanding as of 12/31/08 650,250
--------------------------------------------------------------------------------------------------------------------
Stock options granted during the year ended 12/31/09 0
--------------------------------------------------------------------------------------------------------------------
Stock options exercised during the year ended 12/31/09 0
--------------------------------------------------------------------------------------------------------------------
Stock options forfeited during the year ended 12/31/09 (20,000)
--------------------------------------------------------------------------------------------------------------------
Balance of employee stock options outstanding as of 12/31/09 630,250
--------------------------------------------------------------------------------------------------------------------
Stock options granted during the year ended 12/31/10 491,000
--------------------------------------------------------------------------------------------------------------------
Stock options exercised during the year ended 12/31/10 0
--------------------------------------------------------------------------------------------------------------------
Stock options forfeited during the year ended 12/31/10 (20,750)
--------------------------------------------------------------------------------------------------------------------
Balance of employee stock options outstanding as of 12/31/10 1,100,500
--------------------------------------------------------------------------------------------------------------------
Stock options granted during the year ended 12/31/11 2,000,000
--------------------------------------------------------------------------------------------------------------------
Stock options exercised during the year ended 12/31/11 (50,000)
--------------------------------------------------------------------------------------------------------------------
Stock options forfeited during the year ended 12/31/11 (50,000)
--------------------------------------------------------------------------------------------------------------------
Balance of employee stock options outstanding as of 12/31/11 3,000,500
--------------------------------------------------------------------------------------------------------------------
The following table sets forth the number of non-vested options outstanding as
of December 31, 2008, 2009, 2010 and 2011, and the number of stock options
granted, vested and forfeited during the years ended December 31, 2009, December
31, 2010 and December 31, 2011.
--------------------------------------------------------------------------------------------------------------------
Balance of employee non-vested stock options outstanding as of 12/31/08 543,500
--------------------------------------------------------------------------------------------------------------------
Stock options granted during the year ended 12/31/09 0
--------------------------------------------------------------------------------------------------------------------
Stock options vested during the year ended 12/31/09 (78,500)
--------------------------------------------------------------------------------------------------------------------
Stock options forfeited during the year ended 12/31/09 (20,000)
--------------------------------------------------------------------------------------------------------------------
Balance of employee non-vested stock options outstanding as of 12/31/09 445,000
--------------------------------------------------------------------------------------------------------------------
Stock options granted during the year ended 12/31/10 491,000
--------------------------------------------------------------------------------------------------------------------
Stock options vested during the year ended 12/31/10 0
--------------------------------------------------------------------------------------------------------------------
Stock options forfeited during the year ended 12/31/10 0
--------------------------------------------------------------------------------------------------------------------
Balance of employee non-vested stock options outstanding as of 12/31/10 936,000
--------------------------------------------------------------------------------------------------------------------
Stock options granted during the year ended 12/31/11 2,000,000
--------------------------------------------------------------------------------------------------------------------
Stock options vested during the year ended 12/31/11 (445,000)
--------------------------------------------------------------------------------------------------------------------
Stock options forfeited during the year ended 12/31/11 (30,000)
--------------------------------------------------------------------------------------------------------------------
Balance of employee non-vested stock options outstanding as of 12/31/11 2,461,000
--------------------------------------------------------------------------------------------------------------------
38
During 2011, employee stock options were granted for 2,000,000 shares, 50,000
were exercised and 50,000 shares were forfeited. At December 31, 2011, the
weighted average grant date fair value of non-vested options was $1.02 per share
and the weighted average grant date fair value of vested options was $.62 per
share. The weighted average grant date fair value of employee stock options
granted during 2010 was $.95 and during 2011 was $1.04. Total compensation cost
recognized for share-based payment arrangements was $50,910 with a tax benefit
of $20,165 in 2009, $42,157 with a tax benefit of $16,698 in 2010 and $105,659
with a tax benefit of $41,841 in 2011. As of December 31, 2011, total
compensation cost related to non-vested options was $203,430, which will be
recognized as compensation cost over the next 30 months. No cash was used to
settle equity instruments under share-based payment arrangements.
Note 8: Statements of Financial Accounting Standards
The Company does not believe that the recently issued Statements of Financial
Accounting Standards will have any material impact on the Company's Consolidated
Statements of Operations or its Consolidated Balance Sheets.
Note 9: Loss from Discontinued Operations
The Company had a loss on discontinued operations of $3.8 million in 2008. The
Company has elected to focus its efforts on non-traditional franchises. The loss
on discontinued operations was primarily the result of operating traditional
restaurants which had been acquired from struggling franchisees and later sold
to new franchisees. The Company, in December 2008, made the decision to
discontinue that business and charged off or dramatically lowered the carrying
value of all assets related to the traditional restaurants and accrued estimated
future expenses including an estimate for legal espenses related to the Heyser
lawsuit as explained in Note 10 related thereto. The ongoing right to receive
passive income in the form of royalties is not a part of the discontinued
segment. The Company had no loss from discontinued operations in 2009. In 2010
and 2011, the Company reported a loss from discontinued operations of $1,200,664
and $709,816, respectively. In 2008, the Company accrued for estimated costs to
defend the Heyser lawsuit described in Note 10, however, that estimate was
insufficient and an additional accrual was required in both 2010 and 2011. An
additional accrual was necessary, primarily because, since the Company was
granted summary judgment dismissing their fraud claims on December 23, 2010, the
Plaintiffs filed numerous motions for consideration and an appeal, all of which
created additional legal and other expenses. Additionally, in reviewing accounts
receivable, various receivables which originated in 2007 and 2008 relating to
the operations that were discontinued were determined to be doubtful of
collection, therefore, charged to loss on discontinued operations in both 2010
and 2011.
Note 10: Contingencies
The Company, from time to time, is involved in various litigation relating to
claims arising out of its normal business operations.
The Company is 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, Indianain June 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 failed and the Indiana Court of Appeals
39
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 entirely and Plaintiffs have no appeal rights remaining.
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 our
request for sanctions and ordered the Plaintiffs and their attorney to pay the
Company $8,376 by April 23, 2012. The Company's counterclaims against the
Plaintiffs for breach of contract remain pending as to amount of damages,
however the Company was granted summary judgment as to liability.
The Complaint was originally against the Company and certain officers and
institutional lenders. The Plaintiffs are former franchisees 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 which the Court's Order denied the Company's motion for summary judgment
as the Court determined that there is a genuine issue of material fact but did
not render any opinion on the merits of the claim. The Company denies any
liability on the Indiana Franchise Act claim and will continue to vigorously
defend against this claim.
The Company filed counterclaims for damages for breach of contract against all
of the Plaintiffs in the approximate amount of $3.6 million plus attorneys'
fees, interest and other cost of collection, or a total of over $5 million. On
September 21, 2011, the Company filed motions for partial summary judgment as 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, the Court determined that, as a matter of law, Noble Roman's was
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 fraud claims against the Company and certain of
its officers. The amount of the award is to be determined at trial.
Other than as disclosed above, the Company is involved in no other material
litigation.
Note 11: 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.
Jeffrey R. Gaither, a Director, is Managing Partner of Bose McKinney & Evans,
LLP, a law firm that performs legal services for the Company. The Company paid
Bose McKinney for services rendered in the approximate amount of $357,895,
$320,186 and $428,028 in 2009, 2010 and 2011, respectively.
40
At various times, Paul W. Mobley, the Company's Chairman of the Board and Chief
Executive Officer, loaned the Company $855,821 in 2010 and $400,000 in 2011 for
a total of $1,255,821 to help fund $1,125,000 in principal payments in 2010 and
$925,000 in 2011 due under its bank loan and to help fund $933,809 in payments
related to discontinued operations in 2010 and $709,816 in payments related to
discontinued operations in 2011. The payments related to the discontinued
operations were largely for legal fees related to the Heyser lawsuit, which is
described in Note 10 of the notes to the accompanying consolidated financial
statements. The advances are evidenced by promissory note in the amount of
$1,255,821, which provides for interest to be paid monthly on the unpaid
principal balance of the note which began December 1, 2010, and has continued on
the first day of each calendar month thereafter and will continue until the note
is paid in full, at the rate of 8% per annum and the Company is current on the
required interest payments. In addition, the note requires principal payments
commencing on November 1, 2012 and on the first day of each calendar month
thereafter in the amount of $100,000 per month through September 1, 2013 and
$125,500 on October 1, 2013. The Third Amendment to the Loan Agreement with
Wells Fargo states that no principal payment on the officer note can commence
until the Wells Fargo loan is paid in full.
Note 12: Unaudited Quarterly Financial Information
Quarter Ended
-------------
2011 December 31 September 30 June 30 March 31
---- ----------- ------------ ------- --------
(in thousands, except per share data)
Total revenue $ 1,928 $ 1,766 $ 1,880 $ 1,802
Operating income 832 641 741 708
Net income before income taxes from
continuing operations 736 542 644 609
Net income from continuing operations 444 328 389 368
Loss from discontinued operations (394) (316) -- --
Net income 50 12 389 368
Net income from continuing operations
per common share
Basic .02 .02 .02 .02
Diluted .02 .02 .02 .02
Net income per common share
Basic .00 .00 .02 .02
Diluted .00 .00 .02 .02
Quarter Ended
-------------
2010 December 31 September 30 June 30 March 31
---- ----------- ------------ ------- --------
(in thousands, except per share data)
Total revenue $ 1,831 $ 1,853 $ 1,832 $ 1,755
Operating income 728 788 735 692
Net income before income taxes from
continuing operations 626 673 621 582
Net income from continuing operations 378 407 374 352
Loss from discontinued operations (266) (935) -- --
Net income (loss) 112 (528) 374 352
Net income from continuing operations
per common share
Basic $ .02 $ .02 $ .02 $ .02
Diluted .02 .02 .02 .02
Net income (loss) per common share
Basic .01 (.03) .02 .02
Diluted .01 (.03) .02 .02
41
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
NOBLE ROMAN'S, INC. AND SUBSIDIARIES
Indianapolis, Indiana
We have audited the accompanying consolidated balance sheets of NOBLE ROMAN'S,
INC. AND SUBSIDIARIES, as of December 31, 2011 and 2010, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2011. 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.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, 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, 2011 and 2010, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2011, in conformity with accounting principles generally accepted
in the United States of America.
Indianapolis, Indiana
March 13, 2012
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our
management, including Paul W. Mobley, the Company's Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31, 2011.
Internal Control Over Financial Reporting is a process designed by, or under the
supervision of, the Company's principal executive and principal financial
officers, or persons performing similar functions, and effected by the Company's
Board of Directors, management, and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with United States
generally accepted accounting principles ("GAAP") and includes those policies
and procedures that:
(1) Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
(2) Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
GAAP, and that receipts and expenditures of the Company are being made only
in accordance with authorizations of management and directors of the
Company; and
(3) Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's assets
that could have a material effect on the financial statements.
Because of such limitations, there is a risk that material misstatements may not
be prevented or detected on a timely basis by internal control over financial
reporting. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
The Public Company Accounting Oversight Board's Auditing Standard No. 5 defines
a material weakness as a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company's annual or interim
financial statements will not be prevented or detected on a timely basis. A
deficiency in internal control over reporting exists when the design or
operation of a control does not allow management or employees, in the normal
course of performing their assigned functions, to prevent or detect
misstatements on a timely basis.
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 (as defined
43
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) are effective. It was also concluded that the Company's internal
controls over financial reporting 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.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this annual report.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND
CORPORATE GOVERNANCE
Information concerning this item is included under captions "Election of
Directors", "Section 16(a) Beneficial Ownership Reporting Compliance," and
"Corporate Governance" in our Proxy Statement for our 2012 Annual Meeting of
Shareholders (the "Proxy Statement") and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning this item is included under the caption "Executive
Compensation", "Director Compensation", "Compensation Committee Interlocks and
Insider Participation" and "Compensation Committee Report" in the 2012 Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning this item is included in Item 5 of this report under the
caption "Equity Compensation Plan Information" and under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the 2012 Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Information concerning this item is included under the caption "Corporate
Governance" in the 2012 Proxy Statement and is incorporated herein by reference.
44
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning this item is included under the caption
"Independent Auditors' Fees" in the 2012 Proxy Statement and is incorporated
herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Noble
Roman's, Inc. and Subsidiaries are included in Item 8: Page
----
Consolidated Balance Sheets - December 31, 2010 and 2011 27
Consolidated Statements of Operations - years ended December 31,
2009, 2010 and 2011. 28
Consolidated Statements of Changes in Stockholders' Equity - years
ended December 31, 2009, 2010 and 2011 29
Consolidated Statements of Cash Flows - years ended December 31,
2009, 2010 and 2011 30
Notes to Consolidated Financial Statements 31
Report of Independent Registered Accounting Firm. -
Somerset CPAs, P.C. 42
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.
45
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 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 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 Report on
Form 10-K for the year ended December 31, 2005, is
incorporated herein by reference.
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 incoporated herein by reference.
10.10 Third Amendment to Loan Agreement with Wells Fargo Bank,
N.A. dated March 10, 2011, filed herewith.
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.
46
10.12 Fourth Amendment to Loan Agreement with Wells Fargo Bank,
N.A. dated July 19, 2011, filed herewith.
10.13 Fifth Amendment to Loan Agreement with Wells Fargo Bank,
N.A. dated October 28, 2011 filed herewith.
10.14 Sixth Amendment to Loan Agreement with Wells Fargo Bank,
N.A. dated December 1, 2011, filed herewith.
10.15 Seventh Amendment to Loan Agreement with Wells Fargo Bank,
N.A. dated January 30, 2012, filed herewith.
10.16 Amended Promissory Note to Paul Mobley dated December 21,
2011, filed herewith.
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
47
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: March 13, 2012 By: /s/ Paul W. Mobley
-------------------------------
Paul W. Mobley, Chairman,
Chief Executive Officer,
Chief Financial Officer and
Principal Accounting Officer
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: March 13, 2012 /s/ Paul W. Mobley
----------------------------------
Paul W. Mobley
Chairman of the Board and Director
Date: March 13, 2012 /s/ A. Scott Mobley
----------------------------------
A. Scott Mobley
President and Director
Date: March 13, 2012 /s/ Douglas H. Coape-Arnold
----------------------------------
Douglas H. Coape-Arnold
Director
Date: March 13, 2012 /s/ Jeffrey R. Gaither
----------------------------------
Jeffrey R. Gaither
Director
Date: March 13, 2012 /s/
----------------------------------
James F. Basili
Director
48