May 13, 2005
Ms. Linda Cvrkel, Branch Chief
Division of Corporate Finance
Securities and Exchange Commission
Mail Stop 03-05
Washington, D.C. 20549
RE: Noble Roman's, Inc.
Form 10-K For Year Ended 12/31/04
Commission File #000-11104
Dear Ms. Cvrkel:
We received your comments dated May 2, 2005 regarding the above referenced file.
Our response to those comments below corresponds to the numbered comments in
your letter of May 2, 2005.
1) Noble Roman's, Inc. ("Noble Roman's" or the "Company")hereby acknowledges
(i) that it is responsible for the adequacy and accuracy of the disclosure
in its filings, (ii) that staff comments or changes to disclosure in
response to staff comments do not foreclose the Commission from taking any
action with respect to the filing and (iii) the Company may not assert
staff comments as a defense in any proceeding initiated by the Commission
or any person under the federal securities laws of the United States.
2) The following language will be included with financial statements included
in future filings.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
may differ from those estimates. The Company 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 demands for the Company's products or changes in the business
climate that affect the recovery of recorded value. If any impairment of an
individual asset is evident, a charge will be provided to reduce the
carrying value to its estimated fair value.
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3) Interest income was included in total revenue for the years 2002, 2003 and
2004 in the amount of $69,528, $68,948 and $60,449, respectively. The
amount of interest was not considered material to the financial statements
as to require separate classification in order to make the statements not
misleading.
In future years, if the interest income becomes material to the operating
income, the Company will include the interest in non-operating income
presented below the operating income line on the statement of operations.
4) The 115,000 common shares issued in December 2002 were for partial
settlement, in addition to cash paid, for the termination of a lease for
one of the former locations of the discontinued operations. The shares so
issued contained the following restrictive legend: "The common shares
represented by this certificate have not been registered under the
Securities Act of 1933, as amended, or any state's securities laws. These
shares may not be transferred in any manner without registration or an
available exemption from registration."
The Company's common stock was quoted on the OTC/BB at $.65 per share at
the time of the transaction. This stock only traded nine days during
December 2002 for a total of 59,700 shares during the entire month. In
order to assess the fair market value of the shares at the date of
issuance, because of the minimal trading, there should be some discount, at
least 20%, which would take the value to $.52 per share and an additional
discount of at least 33% to reflect securities law restrictions on the
unregistered stock. Accordingly, the Company estimates that the value of
the shares was approximately $.35 per share.
Had the value been attributed to those shares of stock, the entry would
have been:
Debit loss on discontinued operations $26,565
Debit deferred tax asset 13,685
Credit common stock $40,250
To record the issuance of 115,000
shares of common stock as partial payment of a lease
termination for one of the locations in the discontinued
operations by charging the loss to discontinued operations net
of tax effect.
Had that entry been made, the effect on the statement of operations:
2002, As 2002, With
Reported Above Entry
Net income from continuing operations $ 806,913 $ 806,913
Loss from discontinued operations net of tax (313,918) (340,483)
--------- ---------
Net income $ 493,714 $ 466,430
Net income per share $ .03 $ .03
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Had the entry been made, the effect on equity section of the balance sheet:
2002, As 2002, With
Reported Above Entry
Common stock $17,789,452 $17,829,702
Preferred stock 4,929,274 4,929,274
Accumulated deficit (21,550,365) (21,576,930)
----------- -----------
Total stockholders' equity $ 1,168,361 $ 1,182,046
The effect on the financial statements, as demonstrated, is immaterial both
to the statement of operations and the balance sheet. In addition, the
Company believes the above calculation overstates the true value of
restricted stock in December 2002. It is the Company's belief that
restricted stock in 2002 had only minimal, if any, market value.
5) The Company will include the following note to its financial statements in
future filings, "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
purchase reports from the distributors."
6) In future filings the Company will include the amount of any allowance for
uncollectible accounts and include in the notes to financial statements the
Company's policy for recording the allowances, determining past due or
delinquent status and writing off uncollectible accounts.
7) The original $1.375 conversion price of the notes and the amended
conversion price of $1.00 per share were determined by arms length
negotiations between the investors in the notes and the Company. A detailed
discussion of the historical background that led to the negotiation and
execution of the convertible note financing is set forth immediately below.
During 1995 and 1996, the Company attempted a major acquisition of a
187-unit pizza restaurant chain operating in seven states in the Northeast
as a part of a strategic decision to acquire and consolidate other regional
chains. For a number of reasons this attempted acquisition failed, despite
senior management devoting substantially all of its attention to that
attempt for a period of almost 18 months. As the Company's focus was
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increasingly on the acquisition transaction, the Company's primary market
was, as a result of several demographic/consumption trends, targeted for
expansion by a large number of mid-scale dining chains. The unemployment
rates in the Company's labor markets were approaching record lows and the
Company's personnel were aggressively recruited by others. Senior
management, due to the acquisition transaction, was unable to participate
in daily operations during the period.
Because of the Company's dramatic employee turnover and its inability to
stabilize staffing levels through ordinary recruiting efforts, sales and
margins declined. The Company suffered serious losses and defaulted on its
loan agreement with its primary lender. Due to a lack of staffing and the
Company's financial difficulties, the Company closed 19 of its restaurants
in May 1997 and initiated a turnaround strategy consisting of three primary
elements:
o Negotiating a series of debt restructurings, as described below,
with its primary lender, The Provident Bank, whereby the bank
loaned the Company additional money, converted a portion of its
debt to equity and extended maturity of remaining debt. The
Company also obtained additional funding from various investors
associated with the Geometry Group, New York, in the form of
convertible participating income notes which may, at the option
of the investors, be converted to equity April 15, 2003.
o Restructuring the Company's executive staff, including the
appointment of Scott Mobley as President, Wade Shanower as Vice
President of Operations, Troy Branson as Vice President of
Franchising and Art Mancino as Vice President of Development.
o Initiating franchising Noble Roman's Pizza Express for
non-traditional locations such as convenience stores, grocery
stores, truck stops, travel centers, universities, bowling
centers and to other traditional restaurants as a co-brand.
On November 19, 1997, the Company entered into an amended and restated
credit agreement with The Provident Bank. The amended and restated
agreement provided for the reduction of previous outstanding debt of
$11,000,000, cancellation of previously accrued interest, no interest to be
paid or accrued on such debt until November 1, 1998, interest on such debt
of 8% per annum payable monthly in arrears after November 1, 1998, maturity
of the subject note extended to December 2001, principal payments on such
debt beginning December 1, 1998 in an amount equal to 50% of excess cash
flow as defined in the agreement, and the cancellation of a previously
issued warrant to purchase 465,000 shares of the Company's common stock. In
addition, the agreement provided for a new loan in the amount of $2,580,000
due in December 2000 with interest payable monthly in arrears at a rate of
prime plus 2.5% per annum. These arrangements were made in consideration
for a new warrant to purchase 2,800,000 shares of the Company's common
stock with an exercise price of $.01 per share.
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On August 13, 1998, the Company obtained additional financing of
$2,000,000. This financing was in the form of a loan due in December 2001
and was to bear interest at 2 1/2 % per annum over the prime rate payable
monthly. Simultaneous with making the loan, the bank received a warrant to
purchase an additional 750,000 shares of the Company's stock at an exercise
price of $.01 per share. The warrant was valued at $708,600, reflected as a
discount to the note and amortized to interest expense over the term of the
note.
On December 31, 1998, converted $1,600,000 principal amount of previous
notes payable plus all accrued interest through December 31, 1998 into
921,066 shares of common stock in the Company. At the same time, replaced
the remaining notes with one note in the amount of $14,572,366.47 bearing
interest of 8.75% per annum. The note was to mature November 30, 2001.
Interest on said note was to be paid monthly commencing February 1, 1999.
Principal payments on the note were to be made quarterly in arrears in an
amount equal to 50% of excess cash flow for the previous quarter as defined
in the amended credit agreement.
On May 1, 1999, canceled its existing note in the amount of $14,572,366 and
replaced the canceled note with Tranche Y Term Loan in the principal amount
of $8,000,000 and Tranche Z Term Loan in the principal amount of
$6,572,366. Tranche Y Term Loan was to bear interest of 8.75% per annum
payable monthly in arrears. Tranche Y Term Loan was to mature on April 15,
2003. Principal payments on the Tranche Y Term Loan were payable quarterly
in arrears in an amount equal to 50% of excess cash flow from the previous
quarter as defined in the amended credit agreement. Tranche Z Term Loan was
to bear interest of 8.75% per annum to be paid in PIK notes quarterly in
arrears. Tranch Z Term Loan was to mature on April 15, 2003. There were to
be no payments on the Tranche Z Term Loan until such time as Tranche Y Term
Loan was paid in full, after which principal payments would be payable in
amounts equal to 50% of the excess cash flow from the previous quarter as
defined in the amended credit agreement. Simultaneous with this
transaction, the Company and the bank entered into a Security Purchase
Agreement with Geometry Group whereby Geometry Group, through various
investors, loaned the Company $2,235,600 evidenced by Participating Income
Notes which were to bear interest at the rate of 7.5% of certain revenues
of the Company as defined in the Securities Purchase Agreement and were to
mature on April 15, 2003. At maturity the Participating Income Note, at the
option of the holder, was (i) to be paid in cash, (ii) to be paid by
issuance of common stock at a conversion rate of $1.375, or (iii) a
combination of cash and common stock.
In December 1999, given the potential size of the opportunities in the
non-traditional and co-branding segments, management determined that all
financial and human resources at the Company's disposal would need to be
focused on franchise services to maximize the potential outside of
operating full-service traditional restaurants. As a result of that
strategic decision, the Company closed another 16 of its full-service
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restaurants and began efforts to franchise the remaining 31 full-service
restaurants. Accordingly, all assets associated with the full-service
operations were reduced to the estimated sales price of the 31 restaurants
that the Company was expecting to sell. The reduction of the carrying value
of all of those activities in 1999 associated with the full-service
restaurants and a reserve for future costs associated with those
restaurants in the amount of $1,599,032 was charged to a loss on
discontinued operations totaling $13,754,353 before income tax benefit.
During 2000, the Company entered into a series of transactions resulting in
its obtaining approximately $10.4 million in additional capital. The
additional capital came from investors associated with The Geometry Group
in New York and certain other investors purchasing approximately $3.2
million of common stock for cash, the bank exchanging $6.5 million senior
secured debt and $740,000 PIK notes for $2.4 million of common stock and
$4.9 million in no-yield preferred stock which may later be converted to
common stock at $3.00 per share at the bank's option and an officer
converted $312,000 of notes into common stock. These transactions were at
$1.00 per share. At the time of these transactions, to obtain this
additional financing, the conversion rate of the previous issued
participating income notes held by Geometry Group was reduced by
negotiation to $1.00 from $1.375 per share. All of these sales were made in
reliance upon the exemption from the registration requirements of the 1933
Act set forth in Section 4(2) of the 1993 Act.
Because of the uncertainties and ongoing financial problems that the
Company was experiencing and the other recently negotiated transactions at
the same price per share, the Company's view is that at the time the
conversion rate on the participating income notes was negotiated and at the
time it was amended, there was no difference between the conversion price
and the fair value of the common stock. Therefore, there was not a
beneficial conversion feature, pursuant to EITF 98-5, since the difference
between the conversion price and the fair value of the common stock into
which the debt it convertible was zero.
8) The Company will include the detail contained in its response to comment 15
in future filings in notes to its financial statements.
9) In future filings the Company will disclose the nature and amount of the
charges to loss on discontinued operations.
10) In general, SFAS 109 requires income tax expense or benefit for the year to
be allocated according to the pre-tax income or loss of the various
segments. In prior years the entire tax benefit was not recorded as a
result of the loss from discontinued operations because it was unclear that
the entire benefit could be realized before credit expired. Since the tax
benefit being recorded related to the previously unrecorded tax benefit, as
a result of loss from discontinued operations, it would be misleading to
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now record that benefit to ongoing operations.
Please call upon us if you have any questions or if we otherwise can be of
assistance. Thank you very much.
Sincerely,
/s/ Paul W. Mobley
Paul W. Mobley
Chief Executive Officer of Noble Roman's, Inc.
and Chief Financial Officer of Noble Roman's, Inc.
cc: Claire Lamoureux
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