Buying a good business at a great price

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Ticker: NROM Current PPS of $.73 $14.5M Market Cap Avg Volume (3 month): 31,053 Trades Over the Counter Headquartered in Indiana, USA 

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Began in 1972 as a small Indiana pizza operator In the 1980’s and 90’s phased out of the operating store business In the 1990’s and early 2000’s, the company morphed into a franchising and supply chain pizza business In 2008, the company was sued by many of their franchisees who accused Noble Roman’s of fraud as a result of the dramatic failure of most the of the franchises 

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Traditional Franchises
◦ 12% of Revenue expected for 2012

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Non-Traditional Locations
◦ 62% of Revenue

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Take-and-Bake
◦ 18% of Revenue ◦ Super Market / Distributors ◦ Stand alone franchises 

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In June 2008 the company was sued by former franchise owners for Fraud In December of 2010, a court issued a summary judgment in favor of Noble Roman’s and all appeals were rejected Noble Romans’ countered sued claiming the franchise owners had breached their contracts and owe substantial damages. This claim has been granted summary judgment but the final amounts are pending.
◦ The Court ordered mediation for September 14, 2012 ◦ $3.6M for damages and $1.4M for legal expenses

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Conservative DCF: that does not factor in legal payments, non traditional unit growth, or stand alone unit success: $1.13 PPS (46% upside) EPV of Current FCF (with no taxes): $1.07 PPS (46% upside) 

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Worst: $.72 (-6%)
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Base: $1.13 (46%)

0 grocery per year added Flat non-traditional stores Precipitous 35% decline in franchise stores No legal payout 100 grocery added per year Non-traditional stores growing at inflation (3%) Franchise stores declining at 20% per year $1M out of $5M in legal payout 400 grocery store per year Non-traditional stores growing at inflation (3%) Franchise stores staying flat $4M out of $5M in legal payout

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Best: $1.67 (116%) 

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Indiana Franchise Act

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Legal Payment decision less than expected

◦ Company has vigorously defended itself on this accusation. Furthermore, $5M in expected legal gains is not counted into the model and could more than offset any liability ◦ As stated above, not in model

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Cannot Sign new Grocery Stores

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Wastes money on stand alone Take-and-Bake concept
◦ Stated that they will use all FCF to pay down debt

◦ Has experienced great growth in this area, providing grocery stores a high margin product with a favored brand 

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Ways to win:
◦ ◦ ◦ ◦ ◦ Continued expansion in Take-and-Bake Legal payment award Any growth in non-traditional franchise Capital Structure Improvements Stand alone concept success

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Ways to lose:
◦ Indiana Franchise Act ◦ Management missteps ◦ Grocery store estimates too aggressive 

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Buying a good business at a great price Major catalysts in the expected $5M in legal payment Huge area of expansion in take-and-bake market Conservative Estimated upside: 46% with a target price of $1.13