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, 2012.
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, 2012, 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 $6.1 million.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 19,516,589 shares of
common stock as of March 1, 2013.
Documents Incorporated by Reference:
Portions of the definitive proxy statement for the registrant's 2013 Annual
Meeting of Shareholders are incorporated by reference in Part III.
2
NOBLE ROMAN'S, INC.
FORM 10-K
Year Ended December 31, 2012
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 14
3. Legal Proceedings 14
PART II
5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 15
6. Selected Financial Data 17
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
7A. Quantitative and Qualitative Disclosures About Market Risk 25
8. Financial Statements and Supplementary Data 26
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 41
9A. Controls and Procedures 41
9B. Other Information 42
PART III
10. Directors, Executive Officers and Corporate Governance 42
11. Executive Compensation 42
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 42
13. Certain Relationships and Related Transactions, and Director
Independence 42
14. Principal Accounting Fees and Services 43
PART IV
15. Exhibits, Financial Statements Schedules 43
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" and
"Tuscano's Italian Style 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, Dominican Republic and
Canada. Although from 2005 to 2007 the Company sold some franchises for its
concepts in traditional restaurant locations, the Company is currently focusing
all of its sales efforts on (1) franchises for non-traditional locations
primarily in convenience stores and entertainment facilities, (2) franchises for
stand-alone Noble Roman's Take-N-Bake Pizza retail outlets and (3) 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, 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.
4
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, as a stand-alone offering for grocery stores
and as a stand-alone take-n-bake retail outlet. The Company offers the
take-n-bake program in grocery stores as a license agreement rather than a
franchise agreement, however, the stand-alone take-n-bake pizza is offered under
a franchise agreement. In convenience stores, take-n-bake is an available menu
offering under the existing franchise agreement. The Company uses the same high
quality pizza ingredients for its take-n-bake pizza as with its standard pizza,
with slight modifications to portioning for increased home baking performance.
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. 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 available to all franchisees.
New, non-traditional franchisees have the opportunity to open with both
take-n-bake pizza and grab-n-go subs when they acquire a Noble Roman's franchise
or license.
Business Strategy
-----------------
The Company's business strategy includes the following four elements:
1. Focus on revenue expansion through three primary growth vehicles:
Sales of Non-Traditional Franchises and Licenses. The Company believes 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 lower investment compared to a stand-alone traditional location.
Non-traditional franchises and licenses are most often sold into pre-existing
facilities as a service and/or revenue enhancer for the underlying business.
Although the Company's current focus is on non-traditional franchise or license
expansion and franchising stand-alone take-n-bake pizza retail outlets, the
Company will still seek to capitalize on other franchising opportunities as they
present themselves.
As a result of the Company's major focus on non-traditional franchising,
franchising stand-alone take-n-bake retail outlets and licensing take-n-bake
pizzas for grocery stores, its requirements for overhead and operating costs 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.
5
Licensing and Franchising the Company's Take-N-Bake Program. In late 2009, the
Company introduced a take-n-bake pizza as an addition to its menu offering. The
take-n-bake pizza is designed as a stand-alone offering for grocery stores and
an add-on component for new and existing convenience store franchisees or
licensees and stand-alone franchise locations. Since the Company started
offering take-n-bake pizza to grocery store chains in late 2009, through March
1, 2013, the Company has signed agreements for approximately 1,500 grocery store
locations to operate the take-n-bake pizza program and has opened the
take-n-bake pizza program in approximately 1,075 of those locations. The Company
is currently in discussions with several grocery store operators for numerous
locations for additional take-n-bake license agreements. 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 appeal of the program in order to attract new locations, and to generally
increase sales of the Company's products.
In January 2013, in an attempt to increase sales in existing grocery stores, the
Company added two optional variations to the standard grocery store take-n-bake
program. The licensee may purchase a Noble Roman's branded display warmer and a
small commercial pizza oven for approximately $500 and offer a Noble Roman's
SuperSlice hot pizza program. The other variation is for grocery store deli
departments to install a menu board and offer the Company's Make-It-Your-Way
pizza program. With this variation, the customer can choose from purchasing one
of the standard take-n-bake pizzas in the display cooler or the customer can
have the deli staff make a pizza with the toppings of the customer's choice.
Franchising the Company's Take-N-Bake Program for Stand-Alone Locations. In
2012, the Company developed a stand-alone take-n-bake pizza prototype and has
entered into agreements for 11 locations as of March 1, 2013. The first
stand-alone take-n-bake pizza location opened in October 2012, the second
location in December 2012 and third location opened in January 2013. Three
additional locations are scheduled to open in March 2013 and the remaining five
locations will open in the next few months. The Company's stand-alone
take-n-bake program features the chain's popular traditional Hand-Tossed Style
pizza, Deep-Dish Sicilian pizza, SuperThin pizza and Noble Roman's famous
breadsticks with spicy cheese sauce, all in a convenient cook-at-home format.
Additional menu items include such items as fresh salads, cookie dough, cinnamon
rounds, bake-able pasta and more. The Company is currently in discussions with
several other prospects for its stand-alone program and is advertising for
additional franchisees through various web-based franchise referral systems. In
addition, the Company will demonstrate Noble Roman's stand-alone Take-N-Bake
Pizza concept at the National Restaurant Association Show in May 2013.
2. Leverage the results of extensive research and development advances.
The Company has invested significant time and effort to create what it considers
to be competitive advantages in its products and systems for non-traditional and
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, their cost-effectiveness, relatively simple production and service
systems, and its diverse, modularized menu offerings all contribute to the
Company's strategic attributes and growth potential. Every ingredient and
6
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 certain other menu items which require no assembly. The Company believes
this process results in products that are great tasting, quality consistent,
easy to assemble, relatively low in food cost, and require very low amounts of
labor, thus allowing for a significant competitive advantage due to the speed at
which the products can be prepared, baked and served to customers.
For example, in convenience stores and travel plazas, at competitive retail
prices, gross margins on Noble Roman's products, after cost of product and
royalty, can range from approximately 65% to 70%. The Company believes it
maintains a competitive advantage in product cost by using carefully selected,
independent third-party manufacturers and independent third-party distributors.
This allows the Company to contract for production of proprietary products and
services with highly efficient suppliers that have the potential of keeping
costs low compared to many competing systems whereby the franchisor owns and
operates production and distribution systems much less efficiently.
3. Expand the Company's overall capacity to generate new franchises and
licenses.
The Company's Chairman and CEO has assumed the lead position at all of the
Company's trade shows across the country, which is the primary means for
demonstrating its product and system advantages to thousands of prospective
non-traditional and grocery operators. This focus by the Company's CEO has
underscored the Company's current, overriding orientation towards new revenue
generation.
4. Aggressively communicate the Company's competitive advantages to its target
market of potential franchisees and licensees.
The Company utilizes four basic methods of reaching potential franchisees and
licensees and to communicate its product and system advantages. These methods
include: 1) calling from both acquired and in-house prospect lists; 2) frequent
direct mail campaigns to targeted prospects; 3) web-based lead capturing; and 4)
live demonstrations at trade and food shows. In particular, the Company has
found that conducting live demonstrations of its systems and products at
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 products. The
Company carefully selects the national and regional trade and food shows where
it either has an existing relationship or considerable previous experience to
expect that they offer opportunities for fruitful lead generation.
Business Operations
-------------------
Distribution
------------
Primarily all of the Company's products are manufactured pursuant to the
Company's recipes and formulas by third-party manufacturers under contracts
between the Company and its various manufacturers. These contracts require the
manufacturers to produce products with specific specifications and to sell them
to Company-approved distributors at a price negotiated between the Company and
the manufacturer.
7
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
products necessary to meet the needs of the Company's franchisees and licensees
for weekly deliveries to the franchisee/licensee locations plus the grocery
store distributors in their respective territories. Each of the primary
distributors purchases the products from the manufacturer, under payment terms
agreed upon by the manufacturer and the distributor, and distributes the
products to the franchisee/licensee at a price fixed by the distribution
agreement, which is landed cost plus a contracted mark-up for distribution.
Payment terms to the distributor are agreed upon between each
franchisee/licensee and the respective distributor. In addition, the Company has
agreements with several grocery store distributors located in various parts of
the country which agree to buy their products from one of the primary
distributors and to distribute take-n-bake products to their grocery store
customers.
Franchising
-----------
The Company sells franchises into various non-traditional and traditional
venues.
The initial franchise fees are as follows:
-----------------------------------------------------------------------------------------------
Non-Traditional, except Traditional
Franchise Hospitals Hospitals Stand-Alone
-----------------------------------------------------------------------------------------------
Noble Roman's Pizza $ 6,000 $10,000 $15,000
-----------------------------------------------------------------------------------------------
Tuscano's Subs $ 6,000 $10,000 $15,000
-----------------------------------------------------------------------------------------------
Noble Roman's & Tuscano's $10,000 $18,000 $18,000
-----------------------------------------------------------------------------------------------
Noble Roman's Stand-Alone Take-N-Bake -- -- $15,000
-----------------------------------------------------------------------------------------------
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 governed by a
supply agreement. The supply agreement generally requires the licensee to: (1)
purchase proprietary ingredients from a Noble Roman's-approved distributor; (2)
assemble the products using only Noble Roman's approved ingredients and recipes;
and (3) display products in a manner approved by Noble Roman's using Noble
Roman's point-of-sale marketing materials. Pursuant to the distribution
agreements, the distributors place an additional mark-up, as determined by the
Company, above their normal selling price on the key ingredients as a fee to the
Company in lieu of royalty. The distributors agree to segregate this additional
mark-up upon invoicing the licensee, to hold the amount in trust for the Company
and to remit such fees to the Company within ten days after the end of each
month.
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
8
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.
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 controlling costs of 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 typically 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, 2013, the Company employed approximately 21 persons full-time and
11 persons on a part-time, hourly basis, of which 19 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 11 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.
9
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 vendors
are also subject to federal and state environmental regulations. In 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.
Executive 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 for the Company since November 1997 and from 1992 to 1997, he was
10
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 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 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
11
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.
Dependence on growth strategy.
The Company's primary growth strategy includes selling new franchises or
licenses for non-traditional locations and stand-alone take-n-bake pizza retail
outlets. The opening and success of new locations will depend upon various
factors, which include: (1) the traffic generated by and viability of the
underlying activity or business in non-traditional locations; (2) the ability of
the franchisee and licensee to operate their locations; (3) their ability to
comply with applicable regulatory requirements; and (4) 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.
12
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.
Ongoing litigation.
As described in Item 3 of this report, the Company was a defendant in a lawsuit
filed by certain of its former traditional franchisees. The allegations against
the Company have been determined to be without merit and have been dismissed.
The Company is no longer a Defendant in this case.
The Company filed counterclaims for damages for breach of contract against the
Plaintiffs. The Company has received a summary judgment in favor of the Company
against the Plaintiffs on its counterclaims. The Company has since dismissed
claims against all but two of the Plaintiffs based on the Company's
determination that only two Plaintiffs had the ability to pay. In addition to
direct and consequential damages in the Court's summary judgment Order, the
Court determined that as a matter of law Noble Roman's is entitled to recover
attorney fees associated with obtaining preliminary injunctions, fees resulting
from the prosecution of Noble Roman's counterclaims, and fees for defending
against the various claims made against the Company. A hearing has been set for
March 21, 2013 on the amount of attorney fees to be awarded. Sometime after the
hearing on attorney fees, the Court is expected to issue an Order for a judgment
amount to be awarded to the Company against the two remaining Plaintiffs.
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."
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.
Inapplicability of corporate governance standards that apply to companies 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: (1) a majority of independent directors; (2) an audit committee of
independent directors; and (3) 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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 or may become involved in various litigation
relating to claims arising out of its normal business operations.
Kari Heyser, Fred Eric Heyser and Meck Enterprises, LLC, et al v. the Company
14
The Company was a Defendant in a lawsuit styled Kari Heyser, Fred Eric Heyser
and Meck Enterprises, LLC, et al v. Noble Roman's, Inc. et al, filed in Superior
Court in Hamilton County, Indiana in June 2008 (Cause No. 29D01 0806 PL 739).
The Plaintiffs' allegations of fraud against the Company and certain of its
officers were determined to be without merit and Plaintiffs have exhausted their
rights of appeal. The separate claim by one of the Plaintiffs under the Indiana
Franchise Act was settled. The Company is no longer a Defendant in this case.
The Company filed counterclaims for damages for breach of contract against the
Plaintiffs. The Company proceeded to trial against two of the Plaintiffs and
obtained damage awards against each. In addition to direct and consequential
damages in the Court's summary judgment Order, the Court determined that as a
matter of law Noble Roman's is entitled to recover attorney fees associated with
obtaining preliminary injunctions, fees resulting from the prosecution of Noble
Roman's counterclaims, and fees for defending against the various claims made
against the Company. A hearing has been set for March 21, 2013 on the amount of
attorney fees to be awarded. Sometime after the hearing on attorney fees, the
Court is expected to issue an Order for a judgment amount to be awarded to the
Company against the two remaining Plaintiffs.
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.
2011 2012
---- ----
Quarter Ended: High Low High Low
-------------- ----- ----- ----- -----
March 31 $1.08 $ .87 $ .80 $ .50
June 30 $1.12 $ .81 $ .65 $ .51
September 30 $1.01 $ .76 $ .79 $ .61
December 31 $ .92 $ .55 $ .82 $ .63
Holders of Record
-----------------
As of February 27, 2013, there were approximately 281 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.
15
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.
Sale of Unregistered Securities
-------------------------------
None.
Equity Compensation Plan Information
------------------------------------
The following table provides information as of December 31, 2012 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
Number of Securities to be Weighted-average exercise future issuance under equity
issued upon exercise of price of outstanding compensation plans
outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
Plan Category (a) (b) (c)
-----------------------------------------
Equity compensation plans approved by
stockholders -- $ -- --
Equity compensation plans not approved by
stockholders 3,226,500 $ .92 (1)
--------- ---
Total 3,226,500 $ .92 (1)
========= ===
(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, officers
and directors. Any employee, officer and director of the Company is eligible to
be awarded options under the plan. The employee stock option plan provides that
any options issued pursuant to the plan will generally 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
limit the number of shares that may be issued under the plan.
16
ITEM 6. SELECTED FINANCIAL DATA (In thousands except per share data)
Year Ended December 31,
-------------------------------------------------------
Statement of Operations Data: 2008 2009 2010 2011 2012
-------- -------- -------- -------- --------
Royalties and fees $ 7,562 $ 6,949 $ 6,726 $ 6,814 $ 6,824
Administrative fees and other 48 64 40 44 20
Restaurant revenue 1,432 537 505 518 456
-------- -------- -------- -------- --------
Total revenue 9,042 7,550 7,271 7,376 7,300
Operating expenses 3,184 2,247 2,150 2,202 2,348
Restaurant operating expenses 1,369 497 502 508 427
Depreciation and amortization 92 79 66 124 116
General and administrative 1,625 1,485 1,610 1,620 1,594
-------- -------- -------- -------- --------
Operating income 2,772 3,242 2,943 2,922 2,815
Interest and other 616 467 441 390 413
Adjust valuation allowance - Heyser Case -- -- -- -- 500
-------- -------- -------- -------- --------
Income before income taxes from continuing
operations 2,156 2,775 2,502 2,532 1,902
Income taxes 733 1,099 991 1,003 753
-------- -------- -------- -------- --------
Net income from continuing operations 1,423 1,676 1,511 1,529 1,149
Loss from discontinued operations (3,824) -- (1,201) (710) (525)
-------- -------- -------- -------- --------
Net income (loss) $ (2,401) $ 1,676 $ 310 $ 819 $ 624
Cumulative preferred dividends 66 66 91 99 99
-------- -------- -------- -------- --------
Net income (loss) available to common
stockholders $ (2,467) $ 1,610 $ 219 $ 720 $ 525
======== ======== ======== ======== ========
Weighted average number of common shares 19,213 19,412 19,415 19,458 19,498
Net income per share from continuing
operations $ .07 $ .09 $ .08 $ .08 $ .06
Net income (loss) per share (.13) .09 .02 .04 .03
Net income (loss) per share available to
common stockholders $ (.13) $ .08 $ .01 $ .04 $ .03
Balance Sheet Data:
Working capital (deficit) $ 551 $ 1,517 $ 927 $ (852) $ 1,964
Total assets 17,278 16,683 16,895 17,224 17,161
Long-term obligations, net of current portion 5,625 4,125 3,481 1,256 3,021
Stockholders' equity $ 8,962 $ 10,623 $ 10,885 $ 11,728 $ 12,379
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.
17
There were 1,583 franchised or licensed outlets in operation on December 31,
2011 and 1,847 on December 31, 2012. During that twelve-month period there were
291 new franchised or licensed outlets opened and 27 franchised outlets left the
system. Grocery stores are accustomed to adding products for a period of time,
removing them for a period of time and possibly re-offering them. Therefore, it
is unknown how many 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, 2011 and 2012 the Company
reported net accounts and notes receivable of $3.71 million and $3.99 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 $162,524
as of December 31, 2011 and $160,706 as of December 31, 2012, 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, 2011 and December 31, 2012, had a
deferred tax asset on its balance sheet totaling $11.013 million and $10.639
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 2018 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.
18
Condensed Consolidated Statement of Operations Data
Noble Roman's, Inc. and Subsidiaries
Years Ended December 31,
---------------------------------------------------------------
2010 2011 2012
---- ---- ----
Royalties and fees $6,725,769 92.5% $6,813,946 92.4% $6,823,811 93.5%
Administrative fees and other 40,312 .6 44,448 .6 19,872 .3
Restaurant revenue 505,022 6.9 517,679 7.0 456,449 6.2
---------- ----- ---------- ----- ---------- -----
Total revenue 7,271,103 100.0 7,376,073 100.0 7,300,132 100.0
Franchise-related operating
expenses:
Salaries and wages 970,652 13.3 970,966 13.2 979,447 13.4
Trade show expense 301,940 4.2 351,907 4.8 498,951 6.8
Travel expense 157,973 2.2 191,695 2.6 183,316 2.5
Other operating expense 719,316 9.9 687,519 9.3 685,836 9.4
Restaurant expenses 501,976 6.9 507,838 6.9 427,127 5.9
Depreciation 66,578 .9 124,009 1.6 116,287 1.6
General and administrative 1,610,123 22.1 1,619,778 22.0 1,593,646 21.8
---------- ----- ---------- ----- ---------- -----
Operating income 2,942,545 40.5 2,922,361 39.6 2,815,522 38.6
Interest and other expense 440,512 6.1 390,858 5.3 413,334 5.7
Adjust valuation allowance - Heyser Case
-- -- -- -- 500,000 6.8
---------- ----- ---------- ----- ---------- -----
Income before income taxes 2,502,033 34.4 2,531,504 34.3 1,902,188 26.1
Income taxes 991,056 13.6 1,002,730 13.7 753,457 10.3
---------- ----- ---------- ----- ---------- -----
Net income from continuing
operations $1,510,977 20.8% $1,528,774 20.6% $1,148,731 15.8%
========== ===== ========== ===== ========== =====
2012 Compared to 2011
---------------------
Total revenue decreased from $7.38 million in 2011 to $7.30 million in 2012.
One-time fees, franchisee fees and equipment commissions ("upfront fees")
increased from $255,000 in 2011 to $374,000 in 2012. Royalties and fees
decreased from $6.56 million in 2011 to $6.45 million in 2012. The breakdown of
royalties and fees, less upfront fees, were: royalties and fees from
non-traditional franchises other than grocery stores were $4.02 million in
2011 and $4.38 million in 2012; fees from the grocery store take-n-bake were
$1.17 million in 2011 and $1.37 million in 2012; and royalties and fees from
traditional locations were $1.37 million in 2011 and $707,000 in 2012. Included
in royalties and fees from traditional locations were $1.02 million in 2011 and
$400,000 in 2012 for royalties and fees recognized as collectible from
traditional locations which are no longer operating.
Total fees increased from $1.17 million in 2011 to $1.37 million in 2012, or an
increase of $201,000 from grocery store take-n-bake locations primarily as a
result of adding new locations. Royalties and fees from non-traditional
locations increased from $4.02 million in 2011 to $4.38 million in 2012, or an
increase of $352,000. The increases of revenue from grocery store take-n-bake
locations and non-traditional locations other than grocery stores were offset by
decreases in royalties and fees from traditional locations, which decreased from
$1.37 million in 2011 to $707,000 in 2012, or a decrease of $662,000. The
19
decrease in royalties and fees from traditional locations was primarily the
result of the change in royalties and fees recognized as collectible from
traditional locations which were no longer operating of $1.02 million in 2011
and $400,000 in 2012, or a decrease of $620,000.
Restaurant revenues decreased from $518,000 in 2011 to $456,000 in 2012. This
decrease was the result of same store sales decreasing. The Company only
operates two restaurants for testing and demonstration purposes.
Salaries and wages increased from 13.2% of revenue in 2011 to 13.4% of revenue
in 2012. This small increase was primarily the result of a decrease in total
revenue. Actual salaries and wages increased slightly from $971,000 in 2011 to
$979,000 in 2012.
Trade show expenses increased from 4.8% of revenue in 2011 to 6.8% of revenue in
2012. 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 $352,000 in 2011 to $499,000 in 2012.
Travel expenses decreased from 2.6% of revenue in 2011 to 2.5% of revenue in
2012. This decrease was primarily the result of being able to group grocery
store take-n-bake openings together in regions of the country making the travel
more efficient. Actual travel expenses decreased from $192,000 in 2011 to
$183,000 in 2012.
Other operating expenses increased from 9.3% of revenue in 2011 to 9.4% of
revenue in 2012. This increase was primarily the result of a decrease in total
revenue. Actual other operating expenses decreased from approximately $688,000
in 2011 to $686,000 in 2012.
Restaurant expenses decreased from 6.9% of revenue in 2011 to 5.9% of revenue in
2012. This decrease was primarily the result of tightly controlling restaurant
costs aided by a decrease in restaurant revenue. 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 22.0% of revenue in 2011 to
21.8% of revenue in 2012. Actual general and administrative expenses were
approximately $1.62 million in 2011 and $1.59 million in 2012. The decrease in
percentage was a result of reduced general and administrative expenses offset by
a decrease in total revenue. Actual general and administrative expenses
decreased slightly as a result of tightly controlling costs.
Total expenses were $4.45 million, or 60.4% of total revenue in 2011 and $4.48
million, or 61.4% of total revenue in 2012, with an approximate increase of
$30,000 in 2012. The increased expenses in 2012 were the result of increased
trade show expenses mostly offset by a decrease in other expenses.
Operating income decreased from $2.9 million in 2011 to $2.8 million in 2012.
The primary reason for the decrease was an increase in trade show expenses
partially offset by a slight increase in royalties and fees income and a
decrease in all other expenses.
Interest expense increased from 5.3% of revenue in 2011 to 5.7% of revenue in
2012. Actual interest expense was $391,000 in 2011 compared to $413,000 in 2012.
The increase in interest was primarily the result of the Company expensing
$93,000 in unamortized loan closing costs from the origination of the former
20
bank loan at the time the loan was repaid and recording an expense of $30,000 to
terminate the former interest rate swap agreement related to the loan which was
repaid. This was mostly offset with the decreased effective interest rate on the
new loan that replaced the former loan.
The Company recorded a $500,000 expense in 2012 by increasing the reserve
against receivables from former Plaintiffs in the Heyser Case.
Net income from continuing operations decreased slightly from $1.53 million in
2011 to $1.15 million in 2012. This decrease was primarily the result of
increased royalties and fees income from non-traditional locations other than
grocery stores and grocery store take-n-bake offset by a decrease in royalties
and fees from traditional locations primarily as a result of recognizing
$620,000 less in royalties and fees recognized as collectible from traditional
locations which are no longer operating. In addition, the Company recorded an
additional reserve against collections related to the receivables from the
Heyser Case.
Net income per share from continuing operations was $.08 per share in 2011 and
$.06 per share in 2012. The weighted average shares outstanding were
approximately 19.46 million in 2011 and 19.50 million in 2012. The decrease of
$.02 per share was attributable primarily to the Company recording a $500,000
expense by increasing the reserve against collections related to the Heyser
Case. The diluted net income per share from continuing operations was $.08 per
share in 2011 and $.06 per share in 2012.
Loss on discontinued operations was $710,000 in 2011 and $525,000 in 2012. 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 prosecute 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 after determining the estimate in 2008 was insufficient.
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 and, therefore, charged to
loss from discontinued operations. The Company had an additional loss of
$710,000 in 2011 and $525,000 in 2012 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.
The additional accruals were necessary, primarily because, since the Company was
granted summary judgment dismissing their fraud claims on December 23, 2010, the
Plaintiffs have continued to file numerous motions for reconsideration and
appeals, all of which created additional legal and other expenses.
2011 Compared with 2010
Total revenue increased from $7.27 million in 2010 to $7.38 million in 2011.
One-time fees, franchisee fees and equipment commissions ("upfront fees")
decreased from $377,000 in 2010 to $255,000 in 2011. Royalties and fees
increased from $6.35 million in 2010 to $6.56 million in 2011. The breakdown of
royalties and fees, less upfront fees, were: royalties and fees from
non-traditional franchises other than grocery stores were $4.43 million in 2010
and $4.02 million in 2011; fees from the grocery store take-n-bake were $463,000
in 2010 and $1.17 million in 2011; and royalties and fees from traditional
locations were $1.46 million in 2010 and $1.37 million in 2011. Included in
royalties and fees from traditional locations were $1.18 million in 2010 and
21
$1.02 million in 2011 for royalties and fees recognized as collectible from
traditional locations which are no longer operating.
Total fees increased from $463,000 in 2010 to $1.17 million 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 $4.43 million in 2010 to $4.02 million
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 $1.46 million in 2010 to $1.37 million in 2011. This decrease was
the result of a decrease from $1.18 million in 2010 to $1.02 million in 2011 in
royalties and fees recognized as collectible from traditional locations which
are no longer operating and the loss of eight traditional franchises.
Restaurant revenues increased from $505,000 in 2010 to $518,000 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 $302,000 in 2010 to $352,000 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 travel expenses incurred to
support 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 $158,000 in 2010 to $192,000 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 $719,000
in 2010 to $688,000 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 $1.61
million in 2010 and $1.62 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.
22
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 $441,000 in 2010 compared to
$391,000 in 2011 due to a decrease in average outstanding borrowings partially
offset by an increase in the applicable interest rate during the fourth quarter
of 2010.
Net income from continuing operations increased slightly from $1.51 million in
2010 to $1.53 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 19.41
million in 2010 and 19.46 million in 2011. The diluted net income per share from
continuing operations remained the same at $.08 per share in 2010 and 2011.
Loss on discontinued operations was $0 in 2009, $1.2 million in 2010 and
$710,000 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 after determining the
estimate in 2008 was insufficient. 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 $710,000 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.
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/licensing new non-traditional locations, licensing grocery stores to
sell take-n-bake pizza and other retail products, and franchising stand-alone
take-n-bake locations. This strategy is intended to not require any significant
increase in expenses. The Company previously announced the development of the
take-n-bake program, which it has been distributing through grocery stores, and
it has also created a stand-alone take-n-bake program for an added revenue
23
growth opportunity. The Company has signed agreements for 11 such locations, the
first of which opened in October 2012, the second opened in December 2012 and
the third opened in January 2013. Three additional locations are scheduled to
open in March 2013 and the remaining five locations will open in the next few
months. The strategy is to franchise the stand-alone take-n-bake products, which
the Company believes can be done within its existing overhead structure.
Additionally, the Company does not operate any restaurants except for two
locations for testing and demonstration purposes. This strategy requires limited
overhead and operating expense and does not require significant capital
investment.
The Company's current ratio was 2.1-to-1 as of December 31, 2012 compared to
0.8-to-1 as of December 31, 2011. This significant improvement was achieved by
refinancing all of its debt into one 48-month amortizing term loan and the
continued net income from operating activities.
On May 15, 2012, the Company entered into a Credit Agreement with a bank for a
term loan in the amount of $5.0 million which is repayable in 48 equal monthly
principal installments of approximately $104,000 plus interest with a final
payment due on May 15, 2016. Interest on the unpaid principal balance is payable
at a rate per annum of LIBOR plus 4%. The proceeds from the term loan, net of
certain fees and expenses associated with obtaining the term loan, were used to
repay existing bank indebtedness and borrowing from an officer of the Company.
As a result of the financial arrangements described above and the Company's cash
flow projections, the Company believes it will have sufficient cash flow to meet
its obligations and to carry out its current business plan for the foreseeable
future. The Company's cash flow projections are based on the Company's strategy
of focusing on growth in non-traditional venues, growth in the number of grocery
store locations licensed to sell the take-n-bake pizza and the anticipated
growth from franchising the new stand-alone take-n-bake locations.
The Company does not anticipate that any of the recently issued Statement of
Financial Accounting Standards will have a material impact on its Statement of
Operations or its Balance Sheet.
Contractual Obligations
-----------------------
The following table sets forth the contractual obligations of the Company as of
December 31, 2012:
Less than More than
Total 1 year 1-3 Years 3-5 Years 5 years
---------- ---------- ---------- ---------- ---------
Long-term debt $4,270,833 $1,250,000 $2,500,000 $ 520,833 $ --
Operating leases 591,383 230,632 347,501 13,250 --
---------- ---------- ---------- ---------- ---------
Total $4,862,216 $1,480,632 $2,847,501 $ 534,083 $ --
========== ========== ========== ========== =========
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
24
and business environment, including, but not limited to competitive factors and
pricing pressures, non-renewal of franchise agreements, shifts in market demand,
the success of new franchise programs, including stand-alone take-n-bake
locations, general economic conditions and other factors including, but not
limited to, 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. As of December 31, 2012, the Company had outstanding
variable interest-bearing debt in the aggregate principal amount of $4.3
million. The Company's current borrowings are at a variable rate tied to the
London Interbank Offered Rate ("LIBOR") plus 4% per annum adjusted on a monthly
basis. Based on its current debt structure, for each 1% increase in LIBOR the
Company would incur increased interest expense of approximately $36,400 over the
succeeding twelve-month period.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
Noble Roman's, Inc. and Subsidiaries
December 31,
----------------------------
2011 2012
------------ ------------
Assets
Current assets:
Cash $ 233,296 $ 144,354
Accounts and notes receivable - net 884,811 1,080,362
Inventories 338,447 460,839
Assets held for resale 252,552 259,579
Prepaid expenses 278,718 379,669
Deferred tax asset - current portion 1,400,000 1,400,000
------------ ------------
Total current assets 3,387,824 3,724,803
------------ ------------
Property and equipment:
Equipment 1,147,109 1,166,103
Leasehold improvements 12,283 12,283
------------ ------------
1,159,392 1,178,386
Less accumulated depreciation and amortization 851,007 905,376
------------ ------------
Net property and equipment 308,385 273,010
Deferred tax asset (net of current portion) 9,613,399 9,238,536
Other assets including long-term portion of notes receivable - net 3,914,523 3,924,404
------------ ------------
Total assets $ 17,224,131 $ 17,160,753
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term note payable to bank $ 3,575,000 $ 1,250,000
Accounts payable and accrued expenses 665,054 510,710
------------ ------------
Total current liabilities 4,240,054 1,760,710
------------ ------------
Long-term obligations:
Note payable to bank (net of current portion) -- 3,020,833
Note payable to officer 1,255,821 --
------------ ------------
Total long-term liabilities 1,255,821 3,020,833
------------ ------------
Stockholders' equity:
Common stock - no par value (25,000,000 shares authorized,
19,469,317 issued and outstanding as of December 31, 2011 and
19,516,589 as of December 31, 2012) 23,239,976 23,366,058
Preferred stock (5,000,000 shares authorized, 20,625 issued and
outstanding as of December 31, 2011 and December 31, 2012) 800,250 800,250
Accumulated deficit (12,311,970) (11,787,098)
------------ ------------
Total stockholders' equity 11,728,256 12,379,210
------------ ------------
Total liabilities and stockholders' equity $ 17,224,131 $ 17,160,753
============ ============
See accompanying notes to consolidated financial statements.
26
Consolidated Statements of Operations
Noble Roman's, Inc. and Subsidiaries
Year Ended December 31,
-------------------------------------------
2010 2011 2012
----------- ----------- -----------
Royalties and fees $ 6,725,769 $ 6,813,946 $ 6,823,811
Administrative fees and other 40,312 44,448 19,872
Restaurant revenue 505,022 517,679 456,449
----------- ----------- -----------
Total revenue 7,271,103 7,376,073 7,300,132
Operating expenses:
Salaries and wages 970,652 970,966 979,447
Trade show expense 301,940 351,907 498,951
Travel expense 157,973 191,695 183,316
Other operating expenses 719,316 687,519 685,836
Restaurant expenses 501,976 507,838 427,127
Depreciation and amortization 66,578 124,009 116,287
General and administrative 1,610,123 1,619,778 1,593,646
------------ ------------ ------------
Total expenses 4,328,558 4,453,712 4,484,610
------------ ------------ ------------
Operating income 2,942,545 2,922,361 2,815,522
Interest and other expense 440,512 390,858 413,334
Adjust valuation allowance - Heyser Case -- -- 500,000
------------ ------------ ------------
Income before income taxes from
continuing operations 2,502,033 2,531,503 1,902,188
Income tax expense 991,056 1,002,729 753,457
------------ ------------ ------------
Net income from continuing operations 1,510,977 1,528,774 1,148,731
Loss from discontinued operations net of tax benefit of $787,520
for 2010, $465,570 for 2011 and $344,079 for 2012 (1,200,664) (709,816) (524,588)
------------ ------------ ------------
Net income 310,313 818,958 624,143
Cumulative preferred dividends 90,682 99,000 99,271
------------ ------------ ------------
Net income available to common
stockholders $ 219,631 $ 719,958 $ 524,872
============ ============ ============
Earnings per share - basic:
Net income from continuing operations $ .08 $ .08 $ .06
Net loss from discontinued operations net of tax
benefit $ (.06) $ (.04) $ (.03)
Net income $ .02 $ .04 $ .03
Net income available to common
stockholders $ .01 $ .04 $ .03
Weighted average number of common shares
outstanding 19,414,367 19,457,810 19,497,638
Diluted earnings per share:
Net income from continuing operations $ .08 $ .08 $ .06
Net loss from discontinued operations net of tax benefit $ (.06) $ (.04) $ (.03)
Net income $ .02 $ .04 $ .03
Weighted average number of common shares
outstanding 20,094,961 20,112,278 20,077,910
See accompanying notes to consolidated financial statements.
27
Consolidated Statements of Changes in
Stockholders' Equity
Noble Roman's, Inc. and Subsidiaries
Common Stock
Preferred ----------------------------- Accumulated
Stock Shares Amount Deficit Total
------------ ------------ ------------ ------------ ------------
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
2012 net income 624,143 624,143
Cumulative preferred dividends (99,271) (99,271)
Amortization of value of
stock options 107,882 107,882
Exercise of employee stock options 47,272 18,200 18,200
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2012 $ 800,250 19,516,589 $ 23,366,058 $(11,787,098) $ 12,379,210
See accompanying notes to consolidated financial statements..
28
Consolidated Statements of Cash Flows
Noble Roman's, Inc. and Subsidiaries
Year ended December 31,
-------------------------------------------
2010 2011 2012
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 310,313 $ 818,958 $ 624,143
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 158,293 298,937 192,012
Non-cash expense from loss on discontinued operations 187,330 -- --
Deferred income taxes 991,056 1,002,729 753,457
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts and notes receivable 94,846 19,711 (195,553)
Inventories (77,907) (21,534) (122,392)
Prepaid expenses 6,075 (42,940) (100,950)
Other assets (561,952) (849,910) 147,902
Increase in:
Accounts payable and accrued expenses 219,654 10,736 205,946
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,327,708 1,236,687 1,504,565
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (5,738) (8,059) (18,994)
Assets held for resale (2,751) (6,274) (7,027)
----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (8,489) (14,333) (26,021)
----------- ----------- -----------
FINANCING ACTIVITIES
Payment of obligations from discontinued operations (933,809) (709,816) (704,369)
Payment of cumulative preferred dividends (90,682) (99,000) (99,271)
Payment of principal on outstanding under prior bank loan (1,125,000) (925,000) (3,575,000)
Payment of principal officer loan -- -- (1,255,821)
Payment of principal outstanding on new bank loan -- -- (729,167)
Payment of alternative minimum tax -- -- (34,515)
Payment received on long-term notes receivable 8,612 33,417 --
Payment of loan modification cost -- (43,703) --
Proceeds of loan from officer 825,500 400,000 --
Proceeds from new bank loan -- -- 4,812,457
Proceeds from the exercise of stock options -- 18,000 18,200
----------- ----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (1,315,379) (1,326,102) (1,567,486)
----------- ----------- -----------
Increase (decrease) in cash 3,840 (103,748) (88,942)
Cash at beginning of year 333,204 337,044 233,296
----------- ----------- -----------
Cash at end of year $ 337,044 $ 233,296 $ 144,354
=========== =========== ===========
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. In 2012, an option to purchase 20,000
shares at $.55 was exercised pursuant to the cashless exercise provision of the
option and the holder received 7,272 shares of common stock.
See accompanying notes to consolidated financial statements.
29
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," and "Noble Roman's Take-N-Pizza". 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.
30
As of December 31, 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 approximated its
fair value, and is not material to the Company's 2011 consolidated financial
statements. The former interest rate swap was paid off in 2012.
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
$156,991 with accumulated amortization at December 31, 2012 of $24,654.
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 the ASC "Exit or Disposal Cost
Obligations" topic.
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, 2012, the net operating loss carry-forward was approximately
$24.3 million which expires between the years 2018 and 2028. Management made the
determination that no valuation allowance was necessary after reviewing the
Company's business plans, relevant 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
Statements of Operations, which were none for the years ended December 31, 2010,
2011 and 2012. The Company's federal and various state income tax returns for
31
2009 through 2012 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 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
32
The following table sets forth the calculation of basic and diluted earnings per
share for the year ended December 31, 2012:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net income $ 624,143
Less preferred stock dividends (99,271)
----------
Earnings per share - basic
Income available to common
stockholders 524,872 19,497,638 $ .03
Effect of dilutive securities
Options -- 213,606
Convertible preferred stock 99,271 366,666
---------- ----------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 624,143 20,077,910 $ .03
Subsequent Events: The Company evaluated subsequent events through the date the
consolidated statements were issued and filed with Form 10-K. No subsequent
event required recognition or disclosure.
Note 2: Accounts and Notes Receivable
At December 31, 2011 and 2012, 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 net receivables reflected on the Consolidated Balance Sheets as of December
31, 2011 and 2012 will be collected.
Note 3: Notes Payable
On May 15, 2012, the Company entered into a Credit Agreement with BMO Harris
Bank, N.A. for a term loan in the original principal amount of $5.0 million
which is payable in 48 equal monthly principal installments of approximately
$104,000 plus interest commencing on June 15, 2012 with a final payment due on
May 15, 2016. Interest on the unpaid principal balance is payable at a rate per
annum of LIBOR plus 4%. The proceeds from this loan, net of certain fees and
expenses associated with obtaining this loan, were used to repay all existing
indebtedness to Wells Fargo Bank, N.A. and an officer of the Company, both of
which are described below. The Company's obligations under the term loan are
secured by the grant of a security interest in essentially all assets of the
Company and a personal guaranty of an officer of up to $1.2 million of the term
loan and certain restrictions apply such as a prohibition on the payment of
dividends, as defined in the Credit Agreement. Interest paid on this Note was
$117,899 in 2012.
On January 30, 2012, the Company entered into an Amendment to the Loan Agreement
with Wells Fargo Bank, N.A. (the "Amendment") that amended the existing loan
agreement between the Company and Wells Fargo, N.A. (the "Loan Agreement"). The
Amendment modified the monthly principal payments as follows: $50,000 on
February 1, 2012; $75,000 on March 1, 2012; $125,000 on April 1, 2012; $200,000
on the first of each month May through September 2012; and $2,250,000 on October
1, 2012.
33
The Loan Agreement, as amended, required monthly interest payments at the rate
of LIBOR plus 4.25% per annum through and including June 1, 2012, and LIBOR plus
7.25% per annum thereafter. Interest paid on this Note was $91,217 in 2012,
$253,813 in 2011 and $310,582 in 2010. The Company's obligations under the loan
were secured by the grant of a security interest in its personal property and
certain restrictions applied such as a prohibition on the payment of dividends,
all as defined in the Loan Agreement.
Paul W. Mobley, the Company's Chairman of the Board and Chief Executive Officer,
loaned the Company $1,255,821, during 2010 and 2011 which was evidenced by a
promissory note, to help fund principal payments due under its bank loan and
payments related to discontinued operations. The promissory note provided for
interest to be paid monthly on the unpaid principal balance of the note which
began December 1, 2010 and continued on the first day of each calendar month
thereafter until the note was paid in full, at the rate of 8% per annum.
Interest paid on this Note was $45,716 in 2012, $76,246 in 2011 and $5,956 in
2010.
Note 4: Royalties and Fees
Approximately $266,500, $194,000 and $294,000 are included in the 2010, 2011 and
2012, respectively, royalties and fees in the Consolidated Statements of
Operations for initial franchise fees. Also included in royalties and fees were
approximately $110,000, $61,000 and $81,000 in 2010, 2011 and 2012,
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 1,583 franchised or licensed outlets in operation on December 31,
2011 and 1,847 on December 31, 2012. During that 12-month period there were 291
new franchised or licensed outlets opened and 27 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 possibly reoffering them.
Therefore, it is unknown how many 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 two of the leases
to the landlords in the event of default by the assignees. The leases generally
34
required the Company or its assignees to pay all real estate taxes, insurance
and maintenance costs. At December 31, 2012, contingent obligations under
non-cancelable operating leases for 2013, 2014, 2015 and 2016, were
approximately $90,663, $91,563, $71,343 and $24,675, respectively.
The Company has future obligations of $591,383 under current operating leases as
follows: due in less than one year $230,632, due in one to three years $347,501
and due in three to five years $13,250.
Note 6: Income Taxes
The Company had a deferred tax asset, as a result of prior operating losses, of
$11.01 million at December 31, 2011 and $10.64 million at December 31, 2012,
which expires between the years 2018 and 2028. In 2010, 2011 and 2012, the
Company used deferred benefits to offset its tax expense of $991,000, $1.00
million and $753,000, respectively, and tax benefits from loss on discontinued
operations of $788,000 in 2010, $466,000 in 2011 and $344,000 in 2012. As a
result of the tax credits, the Company did not pay any income taxes in 2010,
2011 and 2012. 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
On December 31, 2011 and December 31, 2012, 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.
On February 14, 2012, an employee exercised an option for 20,000 shares of
common stock at a price of $.36 per share. On August 1, 2012, an employee
exercised an option for 20,000 shares of common stock through the cashless
exercise provision and received 7,272 shares of common stock. On August 2, 2012,
an employee exercised an option for 20,000 shares of common stock at a price of
$.55 per share.
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, 2012, the
Company had the following employee stock options outstanding:
# Common Shares
Represented Exercise Price
----------- --------------
46,000 $ .83
58,500 2.30
375,000 .36
431,000 .95
1,800,000 1.05
160,000 .90
356,000 .58
As of December 31, 2012, options for 1,079,500 shares were exercisable.
35
The Company adopted the modified prospective method, 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
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. The following assumptions
were used for grants in 2010, 2011 and 2012:
Expected volatility 20% to 30%
Expected dividend yield None
Expected term (in years) 5
Risk-free interest rate 3.56% to 1.65%
The following table sets forth the number of options outstanding as of December
31, 2009, 2010, 2011 and 2012 and the number of options granted, exercised or
forfeited during the years ended December 31, 2010, December 31, 2011 and
December 31, 2012:
----------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------
Stock options granted during the year ended 12/31/12 361,000
----------------------------------------------------------------------------------------
Stock options exercised during the year ended 12/31/12 (60,000)
----------------------------------------------------------------------------------------
Stock options forfeited during the year ended 12/31/12 (75,000)
----------------------------------------------------------------------------------------
Balance of employee stock options outstanding as of 12/31/12 3,226,500
----------------------------------------------------------------------------------------
The following table sets forth the number of non-vested options outstanding as
of December 31, 2009, 2010, 2011 and 2012, and the number of stock options
granted, vested and forfeited during the years ended December 31, 2010, December
31, 2011 and December 31, 2012.
----------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------
Stock options granted during the year ended 12/31/12 361,000
----------------------------------------------------------------------------------------
Stock options vested during the year ended 12/31/12 (600,000)
----------------------------------------------------------------------------------------
Stock options forfeited during the year ended 12/31/12 (75,000)
----------------------------------------------------------------------------------------
Balance of employee non-vested stock options outstanding as of 12/31/12 2,147,000
----------------------------------------------------------------------------------------
36
During 2012, employee stock options were granted for 361,000 shares, options for
60,000 shares were exercised and options for 75,000 shares were forfeited. At
December 31, 2012, the weighted average grant date fair value of non-vested
options was $.94 per share and the weighted average grant date fair value of
vested options was $.87 per share. The weighted average grant date fair value of
employee stock options granted during 2011 was $1.04 and during 2012 was $.58.
Total compensation cost recognized for share-based payment arrangements was
$42,157 with a tax benefit of $16,698 in 2010, $105,659 with a tax benefit of
$41,841 in 2011 and $107,882 with a tax benefit of $42,732 in 2012. As of
December 31, 2012, total compensation cost related to non-vested options was
$126,233, which will be recognized as compensation cost over the next six to 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 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 prosecute the Heyser lawsuit, as described in Note 10 herein. The ongoing
right to receive passive income in the form of royalties is not a part of the
discontinued segment. The Company reported an additional loss of $1.2 million in
2010 after determining the estimate in 2008 was insufficient. 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 $710,000 in 2011 and $525,000
in 2012 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. The additional accruals were
necessary, primarily because, since the Company was granted summary judgment
dismissing their fraud claims on December 23, 2010, the Plaintiffs have
continued to file numerous motions for reconsideration and appeals, all of which
created additional legal and other expenses.
Note 10: Contingencies
The Company, from time to time, is or may become involved in various litigation
relating to claims arising out of its normal business operations.
The Company was a Defendant in a lawsuit styled Kari Heyser, Fred Eric Heyser
and Meck Enterprises, LLC, et al v. Noble Roman's, Inc. et al, filed in Superior
Court in Hamilton County, Indiana in June 2008 (Cause No. 29D01 0806 PL 739).
The Plaintiffs' allegations of fraud against the Company and certain of its
officers were determined to be without merit and Plaintiffs have exhausted their
rights of appeal. The Company is no longer a Defendant in this case.
37
The Company filed counterclaims for damages for breach of contract against the
Plaintiffs. The Company proceeded to trial against two of the Plaintiffs and
obtained damage awards against each. In addition to direct and consequential
damages in the Court's summary judgment Order, the Court determined that as a
matter of law Noble Roman's is entitled to recover attorney fees associated with
obtaining preliminary injunctions, fees resulting from the prosecution of Noble
Roman's counterclaims, and fees for defending against the various claims made
against the Company. A hearing has been set for March 21, 2013 on the amount of
attorney fees to be awarded. Sometime after the hearing on attorney fees, the
Court is expected to issue an Order for a judgment amount to be awarded to the
Company against the two remaining Plaintiffs.
Other than as disclosed above, the Company is involved in no other material
litigation.
Note 11: Adjustment to Valuation Allowance - Heyser Case
The Company recorded a $500,000 expense in 2012 as a result of increasing the
reserve against collections related to the Heyser Case, as dicussed in Note 10.
The receivables related to the Heyser case are recorded in other assets
including long-term portion of notes receivable-net on the Consolidated Balance
Sheets.
Note 12: 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 $320,186,
$428,028 and $382,338 in 2010, 2011 and 2012, respectively.
Paul W. Mobley, the Company's Chairman of the Board and Chief Executive Officer,
loaned the Company $1,255,821 during 2010 and 2011, which was evidenced by a
promissory note, to help fund principal payments due under its bank loan and
payments related to discontinued operations. The promissory note provided for
interest to be paid monthly on the unpaid principal balance of the note which
began December 1, 2010 and continued on the first day of each calendar month
thereafter until the note was paid in full, at the rate of 8% per annum.
Interest paid on this Note was $45,716 in 2012, $76,246 in 2011, and $5,956 in
2010. This loan was repaid in full on May 15, 2012 as the result of the Company
refinancing its outstanding debt, as described in Note 3.
38
Note 13: Unaudited Quarterly Financial Information
Quarter Ended
--------------------------------------------------------
2012 December 31 September 30 June 30 March 31
---- ----------- ------------ ------- --------
(in thousands, except per share data)
Total revenue $ 1,724 $ 1,845 $ 1,894 $ 1,838
Operating income 624 726 765 700
Net income before income taxes from
continuing operations 66 665 567 605
Net income from continuing operations 40 402 342 365
Loss from discontinued operations 525 -- -- --
Net income (loss) (485) 402 342 365
Net income from continuing operations
per common share
-- .02 .02 .02
Basic
Diluted -- .02 .02 .02
Net income (loss) per common share
Basic (.02) .02 .02 .02
Diluted (.02) .02 .02 .02
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
.02 .02 .02 .02
Basic
Diluted .02 .02 .02 .02
Net income per common share
Basic .00 .00 .02 .02
Diluted .00 .00 .02 .02
39
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, 2012 and 2011, 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, 2012. 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, 2012 and 2011, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2012, in conformity with accounting principles generally accepted
in the United States of America.
Indianapolis, Indiana
March 14, 2013
40
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, 2012.
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 applicable 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
41
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 2013 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 2013 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 2013 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 2013 Proxy Statement and is incorporated herein by reference.
42
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning this item is included under the caption "Independent
Auditors' Fees" in the 2013 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, 2011 and 2012 26
Consolidated Statements of Operations - years ended December 31, 2010,
2011 and 2012. 27
Consolidated Statements of Changes in Stockholders' Equity - years
ended December 31, 2010, 2011 and 2012 28
Consolidated Statements of Cash Flows - years ended December 31, 2010,
2011 and 2012 29
Notes to Consolidated Financial Statements 30
Report of Independent Registered Accounting Firm. - Somerset CPAs, P.C. 40
Exhibits
Exhibit
Number Description
------ -----------
3.1 Amended Articles of Incorporation of the Registrant, filed as an exhibit
to the Registrant's Amendment No. 1 to the Post Effective Amendment No. 2
to Registration Statement on Form S-1 filed July 1, 1985 (SEC File
No.2-84150), is incorporated herein by reference.
3.2 Amended and Restated By-Laws of the Registrant, as currently in effect,
filed as an exhibit to the Registrant's Form 8-K filed December 23, 2009,
is incorporated herein by reference.
3.3 Articles of Amendment of the Articles of Incorporation of the Registrant
effective February 18, 1992 filed as an exhibit to the Registrant's
Registration Statement on Form SB-2 (SEC File No. 33-66850), ordered
effective on October 26, 1993, is incorporated herein by reference.
3.4 Articles of Amendment of the Articles of Incorporation of the Registrant
effective May 11, 2000, filed as Annex A and Annex B to the Registrant's
Proxy Statement on Schedule 14A filed March 28, 2000, is incorporated
herein by reference.
3.5 Articles of Amendment of the Articles of Incorporation of the Registrant
effective April 16, 2001 filed as Exhibit 3.4 to Registrant's annual
report on Form 10-K for the year ended December 31, 2005, is incorporated
herein by reference.
43
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 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.
10.6 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.
10.7 Second Amendment to Loan Agreement with Wells Fargo Bank, N.A. dated
November 10, 2010, filed as Exhibit 10.7 to the Registrant's quarterly
report on Form 10-Q filed November 10, 2010, is incorporated herein by
reference.
10.8 Third Amendment to the Loan Agreement with Wells Fargo Bank, N.A. dated
March 10, 2011, filed as Exhibit 10.10 to the Registrant's annual report
on Form 10-K filed on March 13, 2012, is incorporated herein by
reference.
10.9 Promissory Note payable to Paul Mobley dated November 1, 2010 filed as
Exhibit 10.8 to the Registrant's quarterly report on Form 10-Q filed on
November 10, 2010, is incorporated herein by reference.
10.10 Fourth Amendment to Loan Agreement with Wells Fargo Bank, N.A. dated July
19, 2011, filed as Exhibit 10.12 to the Registrant's annual report on
Form 10-K filed on March 13, 2012, is incorporated herein by reference.
10.11 Fifth Amendment to Loan Agreement with Wells Fargo Bank, N.A. dated
October 28, 2011, filed as Exhibit 10.13 to the Registrant's annual
report on Form 10-K filed March 13, 2012, is incorporated herein by
reference.
10.12 Sixth Amendment to Loan Agreement with Wells Fargo Bank, N.A. dated
December 1, 2011, filed as Exhibit 10.14 to the Registrant's annual
report on Form 10-K filed on March 13, 2012, is incorporated herein by
reference.
44
10.13 Seventh Amendment to Loan Agreement with Wells Fargo Bank, N.A. dated
January 30, 2012 filed as Exhibit 10.15 to the Registrant's annual report
on Form 10-K filed on March 13, 2012, is incorporated herein by
reference.
10.14 Amended Promissory Note to Paul Mobley dated December 21, 2011, filed as
Exhibit 10.16 to the Registrant's annual report on Form 10-K filed on
March 13, 2012, is incorporated herein by reference.
10.15 Credit Agreement with BMO Harris Bank, N.A., dated May 25, 2012, filed as
Exhibit 10.17 to the Registrant's quarterly report on Form 10-Q filed on
August 13, 2012, is incorporated herein by reference.
10.16 Promissory Note to BMO Harris Bank, N.A. dated May 15, 2012, filed as
Exhibit 10.18 to the Registrant's quarter report on Form 10-Q filed on
August 13, 2012, is incorporated herein by reference.
21.1 Subsidiaries of the Registrant filed in the Registrant's Registration
Statement on Form SB-2 (SEC File No. 33-66850) ordered effective on
October 26, 1993, is incorporated herein by reference.
31.1 C.E.O. and C.F.O. Certification under Rule 13a-14(a)/15d-14(a)
32.1 C.E.O. and C.F.O. Certification under Section 1350
101 Interactive Financial Data
45
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 15, 2013 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 15, 2013 /s/ Paul W. Mobley
---------------------------------
Paul W. Mobley
Chairman of the Board and Director
Date: March 15, 2013 /s/ A. Scott Mobley
---------------------------------
A. Scott Mobley
President and Director
Date: March 15, 2013 /s/ Douglas H. Coape-Arnold
---------------------------------
Douglas H. Coape-Arnold
Director
Date: March 15, 2013 /s/ Jeffrey R. Gaither
---------------------------------
Jeffrey R. Gaither
Director
46