Noble Roman's Announces Results for Fourth Quarter and Full Year 2012

Noble Roman 's, Inc. (OTC/BB: NROM), the Indianapolis based franchisor and licensor of Noble Roman 's Pizza and Tuscano's Italian Style Subs, today announced financial results for the fourth quarter and full-year ended December 31, 2012.

Net income from continuing operations was $1.1 million, or $0.06 per share, for 2012 compared to $1.5 million, or $0.08 per share, for 2011. This comparison is made somewhat confusing due to the items flowing through the Consolidated Statements of Operations related to the reserve for collections for the company's claims against the former Heyser case Plaintiffs, as discussed under Update on Litigation below. In 2011 there was $1.0 million income recognized by reducing the reserve for collectability against the former Plaintiffs in the Heyser case, and in 2012 there was only $400,000 in revenue recognized by reducing the reserve for collectability in the same case. In addition, on December 31, 2012, an expense was recorded for $500,000 to increase the reserve for collectability regarding the same case. For comparison purposes, removing all of the adjustments for the reserve for collectability against the former Heyser case Plaintiffs and showing the tax effect of those adjustments, the net income from continuing operations was $1.2 million, or $0.06 per share, in 2012, and $813,000, or $0.04, per share, in 2011.

"As reported previously, the Heyser case has been a major distraction but, fortunately, the claims against the company have all been dismissed and the former Plaintiffs have exhausted all of their appeal rights," commented Paul Mobley , Chairman and CEO of Noble Roman 's, Inc.  "The Court has ruled in the company's favor on its counterclaims against the former Plaintiffs/Counter-Defendants as to liability.  Opposing counsel has continued to elongate the Court proceedings to no avail other than to cause the company continued time and expense.  Each reporting period, since the suit began in 2008, the company has been required to make assessments as to the ultimate costs of this process and the capability of the company being able to collect on any judgments against them.  This has required the company to make periodic reserve adjustments and those adjustments flow through the Consolidated Statements of Operations. We are hopeful this matter will soon be resolved and behind us." 

Fourth Quarter 2012 Financial and Operational Highlights

• Ongoing royalties and fees from non-traditional franchises increased 31.7%, or $282,357 compared to fourth quarter of 2011.
• Ongoing royalties and fees from take-n-bake increased 9.8%, or $28,832, compared to fourth quarter 2011.
• Upfront fees and commissions were approximately the same as in the fourth quarter 2011.
• Ongoing royalties and fees from traditional franchises decreased $463,659 because in the fourth quarter 2011 $420,000 in traditional royalties and fees were recognized by reducing the valuation allowance for collectability of receivables from traditional locations which are no longer operating, with no such valuation reduction in the fourth quarter of 2012.
• Operating margins were 36.1% of total revenue compared to 43.1% in the fourth quarter 2011. Without the recognition of the $420,000 in traditional royalties recognized by reducing the valuation allowance of receivables from traditional locations no longer operating, the 2011 operating margin would have been 27.3%.
• Total operating expenses were $1.1 million, essentially unchanged from the fourth quarter 2011.  Trade show expenses increased by $34,922 as the company invested in future growth. In aggregate, all other operating expenses declined by $30,648 compared to the fourth quarter last year.
• Net income from continuing operations was $39,958 compared to $444,236 in the fourth quarter of 2011.  The net income from continuing operations was less this quarter than a year ago because of the $420,000 in traditional royalties recognized by reducing the valuation allowance of receivables of traditional locations no longer operating and an expense was recorded of $500,000 to increase the reserve for collectability related to the Heyser Case.  The after tax effect of those two adjustments regarding the Heyser case and the traditional locations no longer operating was $555,588. For comparison purposes, removing all of the adjustments for the reserve for collectability against the former Heyser case Plaintiffs, the net income after tax from continuing operations was $341,907, or $0.02 per share, compared to $190,866, or $0.01 per share, in the fourth quarter 2011.
• Loss from discontinued operations was $524,588 net of tax benefit of $344,079 compared to a loss of  $393,794 after a tax benefit of $258,290 in fourth quarter 2011. The loss from discontinued operations primarily relates to legal and other costs related to the Heyser case plus the write-off of a few receivables originating in 2007 and 2008 relating to operations that were discontinued.

"Our financials related to continuing operations improved during the fourth quarter," added Mr. Mobley. "However, these positive metrics are somewhat masked by the $420,000 income recorded as a reduction in the valuation allowance in the 2011 period with no such adjustment reflected in the fourth quarter 2012 and, in addition, a $500,000 expense was recorded in the fourth quarter 2012 to increase the reserve against collections related to this ongoing litigation with no such adjustment in 2011. Excluding these changes, for comparison purposes, the company would have reported a 19.2% increase in revenue and a 51.5% increase in operating income. Operationally, we continued to expand our take-n-bake offering in the fourth quarter, appearing at trade shows and driving interest in both the grocery-based model and our stand-alone franchises. This progress directly led to expansions of both models during the early part of 2013, with further growth expected as we move through the year."

Fiscal Year Ended December 31, 2012 Financial and Operational Highlights

• Ongoing royalties and fees from non-traditional franchises increased 8.8%, or $352,177, compared to 2011.
• Ongoing royalties and fees from take-n-bake increased 17.2%, or $200,818, compared to 2011.
• Upfront fees and commissions increased 46.7%, or $119,213, compared to 2011.
• Royalties and fees from traditional franchises were $1.37 million in 2011, inclusive of the $1 million reserve adjustment impact, and $707,000 in 2012, inclusive of the $400,000 reserve adjustment impact, as described above. Excluding this reserve adjustment impact, royalties and fees from traditional franchises were approximately the same in both years.
• Total royalties and fees were $6.8 million in 2012 inclusive of the $400,000 reserve adjustment impact described above compared to $6.8 million in 2011 inclusive of the $1 million reserve adjustment impact described above. The current year benefitted from the increase in royalties and fees from non-traditional locations, increase in royalties and fees from take-n-bake and increase in upfront fees and commissions. These increases more than offset the decline in royalties and fees from traditional locations as a result of the  decrease in additional valuation allowance described above related to the traditional locations that are no longer operating. 
• Operating margins were 38.6% of total revenue compared to 39.6% of total revenue in 2011. Excluding the changes in valuation allowance as described above, for comparative purposes, the operating margins would have been 35.0% compared to 29.9% in 2011.
• Total operating expenses were $4.5 million for both 2012 and 2011. The trade show expenses increased by $147,044 as the company invested in future growth.  In aggregate, all other operating expenses decreased by $116,145.
• Net income from continuing operations was $1.1 million, or $0.06 per share, compared to $1.5 million, or $0.08 per share, in 2011.  This comparison includes the recording of $620,000 less in 2012 compared to 2011 in royalties and fees from traditional locations no longer operating, and the recording of $500,000 expense in 2012 and none in 2011 to increase the valuation allowance for collections related to the Heyser case.
• Loss from discontinued operations was $524,588 net of tax benefit of $344,079 compared to a loss of  $709,816 net of tax benefit of $465,570 in 2011.  The loss from discontinued operations primarily relates to legal and other costs related to the Heyser case plus the write-off of a few receivables originating in 2007 and 2008 relating to operations that were discontinued.
• Net income for the year was $624,143, or $.03 per share, compared to $818,958, or $.04 per share, in 2011. This comparison includes the recording of $620,000 less in 2012 compared to 2011 in royalties and fees from traditional locations no longer operating, the recording of $500,000 expense in 2012 and none in 2011 to increase the valuation allowance for collections related to the Heyser case and the expense of the Heyser litigation.

The company has entered into agreements with seven different franchise groups for 11 stand-alone take-n-bake locations. The company uses the same high-quality pizza ingredients for its take-n-bake pizzas as with its standard pizza, with slight modifications to portioning for increased home baking performance. The company's stand-alone take-n-bake pizza program features the chain's popular traditional Hand-Tossed Style pizza, Deep-Dish Sicilian pizza and SuperThin pizza with a choice of three different sauces and numerous topping options 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.

"Existing and potential franchisees are embracing this fastest growing segment of the pizza industry with our high quality, great tasting pizza offerings adapted for the take-n-bake pizza market and recognize the economics of opening a smaller, more affordable and more efficient to operate facility," Mr. Mobley continued. 

In 2012, the company signed franchise/license agreements for 39 new non-traditional locations other than grocery stores including 12 locations with Huck's, a 110-unit convenience store chain located in five states. Management is in discussions with several other significant convenience store chains and has signed 12 more such agreements from January 1, 2013 through March 12, 2013.  Since the company introduced take-n-bake pizza in grocery store chains in late 2009 through March 12, 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 these locations. 

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 manufacturers and the distributors, 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 distributors 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.

"We enter 2013 with three platforms for continued growth, well positioned in the fastest growing segments of the pizza industry and supported by a well respected national brand," concluded Mr. Mobley. "We expect relatively rapid growth from our two take-n-bake models, expanding our presence in grocery stores around the country while adding stand-alone locations as well. The impacts of the 2008 lawsuit should continue to dissipate and, as a result, our statement of operations will be less clouded by items flowing through the statement of operations related to that lawsuit."

Balance Sheet Summary

Total current assets totaled approximately $3.7 million and current liabilities totaled approximately $1.8 million as of December 31, 2012 compared to total assets of approximately $3.4 million and current liabilities of $4.2 million as of December 31, 2011.  This significant improvement came from the refinancing of all the company's debt on May 15, 2012 and the continued earnings.  Total stockholders' equity as of December 31, 2012 was approximately $12.4 million compared to $11.7 million as of December 31, 2011.

The credit agreement entered into in May, 2012 has had the effect of reducing the interest rate the company pays on its debt to approximately 4.25% from approximately 8%, which is reflected in the decrease to the interest expense this quarter and positively affected net income compared to last year.  This positive effect will continue in future periods as well.

Update on Litigation: 

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.  

The company will be filing its Annual Report on Form 10-K today, March 15, 2013, and full financial tables are available in that document. 


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