[Noble Roman's, Inc. Letterhead]
August 31, 2007
VIA OVERNIGHT COURIER AND EDGAR
Ms. Linda Cvrkel
Branch Chief
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Noble Roman's, Inc.
Form 10-K for Fiscal Year Ended December 31, 2006
File No. 0-11104
Dear Ms. Cvrkel:
We are in receipt of the Staff's comment letter, dated August 2, 2007,
pursuant to which the Staff commented on the Form 10-K for Fiscal Year Ended
December 31, 2006 (the "Form 10-K") of Noble Roman's, Inc., an Indiana
corporation (the "Company"). We have set forth below each Staff comment in the
comment letter followed by our response to each comment.
We also expressly note that, by responding to the Staff's comment or
revising or agreeing to revise any disclosure in response to the Staff's
comment, the Company is not hereby admitting or acknowledging any deficiency in
its prior disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- -------------------------------------------------------------------
1. We note the disclosure on page 19 indicating that the Company has concluded
there is no material market risk exposure based on the Company's election to
purchase a swap contract on 50% of the principal balance of its borrowings for
the first two years and $3.0 million for the following two years to fix the
annual interest rate at 8.83%. As only 50% of the principal balance of
$7,125,000 has been converted to a fixed rate through the swap contract, we do
not concur with your conclusion. As such, please revise to provide a discussion
of your exposure to changes in interest rates in one of the suggested formats
outlined in Item 305(a)(1) of Regulation S-K.
Ms. Linda Cvrkel
August 31, 2007
Page 2
Response: For the year ended December 31, 2006, we believe that the
market risk sensitivity analysis is unnecessary due to the immateriality of the
potential fluctuations in interest expense. However, we propose in future
filings, to add disclosure similar to the following that we have prepared to
read as if it were included in the Form 10-K:
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, 2006, the Company had
outstanding interest-bearing debt in the aggregate principal amount of
$7.1 million. The Company's current borrowings are at a monthly
variable rate tied to the London Interbank Offered Rate ("LIBOR") plus
4% per annum adjusted on a monthly basis. To mitigate interest rate
risk, the Company purchased a swap contract fixing the rate on 50% of
the principal balance for the two-year period ending in August 2007,
decreasing to $3.0 million of the principal amount for the following
two years at an annual interest rate of 8.83% per annum. Based upon the
principal balance outstanding at December 31, 2006, for each 1.0%
increase in LIBOR, the Company would incur increased interest expense
of approximately $32,000 over the succeeding twelve-month period.
Earnings per Share
- ------------------
2. Please revise the notes to your audited and interim financial statements to
include all of the disclosures required by paragraph 40(a), (b) and (c) of SFAS
No. 128.
Response: We reviewed the disclosures required by paragraphs 40(a), (b)
and (c) of SFAS No. 128, and concluded that the only items not included in our
disclosures were line items for "Net income available to common stockholders" in
the basic earnings per share data in our Consolidated Statements of Operations.
As set forth below, the amounts did not vary materially from the reported
earnings per share amounts. Accordingly, we propose in future filings, to add
disclosure similar to the following that we have prepared to read as if it were
included in the Form 10-K:
Consolidated Statements of Operations
Noble Roman's, Inc. and Subsidiaries
Year Ended December 31,
----------------------------------------
2004 2005 2006
---- ---- ----
Earnings per share - basic:
Net income from continuing operations $ .08 $ .20 $ .12
Net income .06 .17 .12
Ms. Linda Cvrkel
August 31, 2007
Page 3
Net income available to common stockholders .06 .17 .11
Weighted average number of common shares
outstanding 16,280,171 16,848,932 16,405,995
Diluted earnings per share:
Net income from continuing operations $ .08 $ .20 $ .10
Net income .06 .16 .10
Weighted average number of common shares
outstanding 16,888,236 17,406,367 18,796,322
All contingent securities are included in the diluted weighted average
number of common shares outstanding.
Note 2-Notes Payable, page 25
- -----------------------------
3. Supplementally advise us and expand your disclosure to describe in further
detail your accounting for the various transactions associated with the
Summitbridge National Investments Settlement Agreement. As part of your response
and your revised disclosure, please address each of the following matters:
o Please explain in detail how you calculated or determined the
$2,800,830 gain recognized on this transaction during 2005.
Your response should clearly explain how the shares of Noble
Roman common and no-yield preferred shares, and the warrants
to acquire 385,000 shares at an exercise price of $.01 per
share, that were reacquired as part of this transaction, were
valued or considered in determining the gain recognized. Also,
explain how the $3 conversion price used to convert the
preferred shares reacquired into common shares as described in
Note 6 was determined and indicate whether this conversion
price represented a beneficial conversion feature.
Response: The accounting for the various transactions associated with
the Settlement Agreement with SummitBridge National Investments, LLC
("SummitBridge") in August 2005, which previously has been disclosed in the
Company's filings, is as follows:
In October 2003, SummitBridge acquired the following from Provident
Bank: (1) a warrant to purchase 385,000 shares of the Company's common stock
with an exercise price of $.01 per share; (2) a promissory note made by the
Company in the original amount of $8,000,000; (3) the Company's preferred stock
with a stated value of $4,929,274, which was convertible at any time into the
Company's common stock at $3.00 per share; and (4) 3,214,748 shares of the
Company's common stock. This transaction violated the Indiana Control Share
Acquisition Act and the Indiana Business Combination Law. In 2004, the Company
filed a lawsuit against SummitBridge asserting various claims under these
statutes.
Ms. Linda Cvrkel
August 31, 2007
Page 4
After the Company filed suit, it ceased paying interest on the note.
However, the Company continued to accrue interest on the note from that time
through the date of the Settlement Agreement. At the date of settlement, the
Company had accrued unpaid interest in the amount of $927,756, and the unpaid
principal balance of the note payable to Provident Bank which it had transferred
to SummitBridge was $7,700,000.
The $3.00 per share conversion price at which the preferred shares
could be converted into common shares was determined in an arms' length
negotiation and was not a beneficial conversion feature. These negotiations
occurred in January and February 2000 during a major restructuring of the
Company's debt obligations, which restructuring was a major step to avoid
liquidation. Consequently, at that time the stock had very little or no market
value.
On the Nasdaq OTC electronic bulletin board, the Company's common stock
traded 12,670 shares on August 25, 2005 with the closing bid price of $1.04 and
the ask price of $1.05. The last trade on that date was at $1.04. Since the
preferred stock was convertible into common stock at any time and there was a
viable public reported market for the underlying common stock (while none
existed for the privately placed preferred stock), the preferred stock was
valued for financial reporting purposes as if it were converted into 1,643,092
shares of common. Those shares, plus the common stock owned by SummitBridge at
the time of settlement totalled 4,857,840 shares. By the terms of the Settlement
Agreement, the Company acquired all but 2,400,000 shares. Accordingly, in the
settlement the Company acquired 2,457,840 shares of common stock valued at $1.04
per share, or $2,556,154.
The warrant to purchase 385,000 shares of common stock at an exercise
price of $.01 per share originally was issued to Provident Bank in August 1998
during a restructuring of the Company's debt obligations, that was a major step
to avoid bankruptcy and, perhaps, liquidation. That warrant was assigned no
value at the time of issuance as the Company's senior debt obligations far
exceeded its financing resources and foreseeable cash flows and it was doubtful
that the Company would continue in operation. The terms of the warrant allowed
it to be exercised anytime from and after the original issue date until December
31, 2001. Accordingly, this warrant had expired even before Provident Bank
transferred it to SummitBridge in October 2003. Since the warrant had expired
and no longer was exercisable, the Company assigned no value to that instrument
in the August 25, 2005 settlement with SummitBridge.
The Company paid $8,300,000 in cash to SummitBridge as part of the
settlement. The Company also incurred $83,079.37 in various costs associated
with the settlement transaction.
Ms. Linda Cvrkel
August 31, 2007
Page 5
Therefore, the entry to record the transaction was as follows:
Debit notes payable $7,700,000.00
Debit accrued interest 927,755.51
Debit capital stock (the value of the shares acquired) 2,556,153.60
Credit cash for expenses paid (83,079.37)
Credit cash for amount paid to SummitBridge (8,300,000.00)
--------------
Gain on the transaction $2,800,829.74
o Explain the relevant technical accounting literature that was
applied in accounting for this transaction. Your response and
your revised disclosure should clearly explain whether this
"settlement agreement" was a troubled debt restructuring that
was accounted for pursuant to SFAS No. 15.
Response: The Company does not believe that SFAS No.15 applies to the
SummitBridge Settlement Agreement. The debt repurchased by the Company as part
of the Settlement Agreement was not, at the time, troubled debt that was
restructured by the Company. As discussed above, SummitBridge purchased the note
along with certain Noble Roman's common and preferred stock in October 2003 from
Provident Bank in a transaction that violated various Indiana anti-takeover
statutes. After SummitBridge purchased the debt and stock, the Company continued
to make regular principal and interest payments monthly, as agreed, until it
evaluated its rights under applicable law. After this evaluation and discussions
with SummitBridge, the Company determined that SummitBridge, in fact, had
violated various Indiana statutes in making the purchase and filed a lawsuit to
enforce the statutes. After filing the lawsuit, the Company discontinued making
payments of principal and interest on the note to SummitBridge. After numerous
attempts to negotiate a settlement, the parties finally arrived at a mutually
acceptable settlement which involved the Company purchasing a substantial
portion of SummitBridge's position in Noble Roman's at a price negotiated at
arms' length between the Company and SummitBridge, which was an adverse party.
o Please indicate whether Summit was a principal shareholder of
the Company at the time of the settlement transaction and
explain your basis for your conclusion. Please note that if
Summit was a principal shareholder, it appears that the gain
on this transaction should not be reflected in operations but
should be accounted for as a capital transaction in accordance
with footnote 1 to paragraph 20 of APB 26.
Response: Paragraph 20 of APB 26 states that the difference between the
reacquisition price and the net carrying amount of extinguished debt should be
recognized currently in income for the period of extinguishment as losses or
gains and identified as a separate item. Footnote 1 to that paragraph states
that if there are other stated or unstated rights or privileges, the portion of
the consideration exchanged for those stated or unstated rights or privileges
should be given separate accounting recognition. The Company does not believe
that there were any other stated
Ms. Linda Cvrkel
August 31, 2007
Page 6
or unstated rights or privileges that were a part of this transaction that were
not accounted for in its calculation of the gain on the transaction described
above. Footnote 1 to Paragraph 20 of APB 26 also states that extinguishment
transactions between related entities may be in essence capital transactions. As
discussed above, the Company and SummitBridge were not related entities at the
time of this transaction. In particular, SummitBridge had no voting rights with
respect to its stock under the Indiana Control Share Acquisition Law and, as a
result of the Indiana Business Combination Law, SummitBridge was prohibited from
entering into certain transactions with the Company. Accordingly, we do not
believe that SummitBridge qualified as a principal shareholder of the Company or
that gain on this transaction should be accounted for as a capital transaction.
o Explain why the previous holders of the Company's subordinated
debentures agreed to convert their $2,040,000 of 8%
subordinated debentures into converted preferred stock with an
aggregate liquidation value of $2,040,000 and indicate whether
a gain or loss was recognized in connection with the
conversion. Also, please explain how the conversion price for
the preferred stock of $2.25 per share was determined and
indicate whether this preferred stock provided for a
beneficial conversion feature.
Response: In September 2003 we privately placed $2,040,000 principal
amount of subordinated notes to 28 different individuals. These individuals were
represented by three individuals from David A. Noyes & Co., a registered
broker-dealer. These representatives negotiated the terms of the subordinated
notes with the Company in an arms' length process.
In August 2005, the Company negotiated a bank loan to fund the
settlement payment to SummitBridge discussed above. The lender, Wells Fargo
Bank, required as a condition of its financing, that the subordinated notes be
converted into some form of equity. The Company met with the representatives
from David A. Noyes & Co., representing the individual subordinated note
holders, and in an arms' length transaction negotiated the terms of the
convertible preferred stock to replace the subordinated notes. After that
negotiation, an offer of exchange of the preferred stock for the subordinated
notes was sent to each individual investor, along with a term sheet showing the
comparison of the terms of the preferred stock and the subordinated notes. All
of the holders of the subordinated notes agreed to the exchange. This
transaction was a dollar-for-dollar exchange of the principal amount of the
notes for a like amount of the stated value (i.e., liquidation preference) of
the preferred stock and, therefore, no gain or loss was recognized in connection
with the exchange.
The $2.25 per share price at which the convertible preferred was
convertible into common stock was determined as a part of the arms' length
negotiations between the Company and representatives from David A. Noyes & Co.
On the date of the exchange, the closing price of the common stock was $1.04 per
share, as reported by the Nasdaq OTC electronic bulletin board. The exchange did
not result in a beneficial conversion feature. The convertible feature provided
that each individual investor could convert his or her preferred stock into
common
Ms. Linda Cvrkel
August 31, 2007
Page 7
stock at the $2.25 per share conversion rate at any time, at their option, after
December 31, 2006. Holders of the preferred stock had no right to cause the
Company to redeem such shares, however, the Company had the right, at its
option, to redeem any outstanding preferred stock, at any time after December
31, 2008 for its liquidation value.
Prior to August 25, 2005 (the date of issue), the Company's stock had
been trading in a very close range. For two years prior to this transaction, the
Company's stock traded the majority of the time around $1.00 per share, but at
times traded as low as approximately $.60 per share and as high as approximately
$1.40 per share. Using the Black-Scholes method to calculate the value of a
$2.25 conversion right with a 50% volatility, a risk-free rate of 3.7% (U.S.
Treasury rate at the time) and a three-year term (a term which extends slightly
past the Company's redemption time), the value would be $.84 which is well below
the market value at the time of $1.04. Accordingly, the $2.25 conversion right
was not a beneficial conversion feature.
Note 3. Royalties and Fees
- --------------------------
4. We note the disclosure in Note 3 indicating that royalties and fees for 2006
include approximately $707,000 for the sale of area development agreements. We
also note that revenues form area development agreements were recognized during
the quarter ended March 31, 2007. Please tell us and clarify in your accounting
policy disclosures, how your revenue recognition for fees associated with area
development agreements complies with the guidance outlined in paragraphs 8 and 9
of SFAS No. 45. Also, please revise the notes to your financial statements
include all of the disclosures required by paragraph 23 of SFAS No.45.
Response: The Company's Area Development Agreements are not an Area
Franchise Sale and have no similarities to the Area Franchise Agreements that
are addressed in paragraphs 8 and 9 of SFAS No.45. The Area Development
Agreements that the Company enters into do nothing more than grant the Area
Developer the right to sell franchises in a defined territory. They do not grant
the Area Developer the right to any franchise location without purchasing a
franchise agreement for the location. When an Area Developer purchases a
franchise agreement or sells a franchise agreement to a third party, the Company
receives the full franchise fee and performs the services for that franchise
fee, in the same way as any other franchise agreement. The Area Development
Agreements do not obligate the Company to perform any services whatsoever. The
Company is only obligated to perform services after a franchise agreement is
sold and then only for that particular location. In addition, the Area
Development Agreements specifically state that "the development fee shall be
fully earned by the Company when received and is not refundable."
The Company's strategy is to use Area Development Agreements, in
effect, as a method of hiring and incentivizing a commission sales person for a
particular area structured such that
Ms. Linda Cvrkel
August 31, 2007
Page 8
the sales person purchases the opportunity to generate future franchise fees up
front and then receives a commission for selling franchises plus a share of the
royalties from those franchises sold, as long as the Area Developer maintains a
defined and negotiated development schedule. The Company is not obligated to
perform any services on or after the signing of an Area Development Agreement
until a franchise agreement is purchased by either the Area Developer or a
third-party franchisee. Therefore, since the development fee is non-refundable
and since all material services to be performed by the Company have been
performed for the development fee earned at the time of signing the Area
Development Agreement, the fee is properly recognized as income at that time.
The Company proposes to revise Note 1, in future filings, to include the
following:
Royalties, Administrative, Franchise and Area Development Fees:
Royalties are recognized as income monthly and are based on a
percentage of monthly sales of franchised restaurants. Administrative
fees are recognized as income monthly as earned. Initial franchise fees
are recognized as income when the majority of services for the
franchised restaurant are completed. Area Development fees, since they
are fully earned and non-refundable when received, are recognized as
income when received.
There were 972 franchised outlets in operation on December 31, 2005 and
1,011 on December 31, 2006. During 2006, there were 72 new franchised outlets
opened and 33 franchised outlets left the system, 12 of which reached the end of
their franchise agreement term and 21 of which ceased operations for other
reasons. The overall change was not considered material, but the Company
proposes to disclose those numbers in future filings.
Note 6. Common Stock
- --------------------
5. We note that your audited financial statements do not include all of the
disclosures required by SFAS No. 123R with respect to stock options granted
during the period presented in your financial statements. Please revise the
notes to your financial statements to include all of the disclosures required by
paragraphs 64, 65, and 84 of SFAS No. 123R, as applicable. See also paragraph
A240 in Appendix A of SFAS No. 123R for required disclosures.
Response: Substantially all of the information required by paragraphs
64, 65 and 84 of SFAS No. 123R and paragraph A240 in Appendix A of SFAS No. 123R
was included in the Company's prior filings. In addition to the information set
forth in Note 6 to our financial statements in the Form 10-K, the following
table sets forth the location of these prior disclosures:
- -----------------------------------------------------------------------------------------------------------------
Information Filing Location
- -----------------------------------------------------------------------------------------------------------------
1. Options exercised during the Form 10-K for the year ended Face of the Consolidated
year ended 12/31/2006 12/31/2006 Statements of Changes in
Stockholders' Equity
- -----------------------------------------------------------------------------------------------------------------
Ms. Linda Cvrkel
August 31, 2007
Page 9
- -----------------------------------------------------------------------------------------------------------------
2. Adoption of SFAS No. 123R; Use Form 10-K/A filed April 30, 2007 Item 11 in the discussion
of modified prospective method following the Summary
of adoption Compensation Table and in Note 6
to the Financial Statements
- -----------------------------------------------------------------------------------------------------------------
3. Black-Scholes valuation of Form 10-K/A filed 4/30/2007 Item 11 in the discussion
option grants during the year following the Summary
ended 12/31/06, including Compensation Table
specific assumptions
- -----------------------------------------------------------------------------------------------------------------
4. Outstanding options at 12/31/2006 Form 10-K/A filed 4/30/2007 Item 12 under the caption
"Equity Compensation Plan
Benefit Information" and also in
Note 6 to Financial Statements
- -----------------------------------------------------------------------------------------------------------------
5. Options exercised during the Form 10-K for the year ended Face of the Consolidated
year ended 12/31/2005 12/31/2005 Statements of Changes in
Stockholders' Equity
- -----------------------------------------------------------------------------------------------------------------
6. Options granted during the year Form 10-K for the year ended Item 11 under the caption
ended 12/31/2005 12/31/2005 "Option Grants in Last Year"
- -----------------------------------------------------------------------------------------------------------------
7. Outstanding options at 12/31/2005 Form 10-K for the year ended Note 6 to our financial
12/31/2005 statements
- -----------------------------------------------------------------------------------------------------------------
8. Outstanding options at 12/31/2004 Form 10-K for the year ended Note 5 to our financial
12/31/2004 statements
- -----------------------------------------------------------------------------------------------------------------
In light of the foregoing, the only required information that we have not
previously disclosed is that 75,000 options and 5,000 options were forfeited in
the years ended December 31, 2005 and 2006, respectively. Accordingly, we
propose in future filings to add disclosure to the notes to our financial
statements similar to the following that we have prepared to read as if it were
included in the Form 10-K at the end of Note 6:
The Company adopted SFAS No. 123R using the modified prospective method
of adoption, which does not require restatement of prior periods. Under
the modified prospective method, the Company is required to record
compensation expense for all awards granted after the date of adoption
and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption, net of an estimate of expected
forfeitures. Under SFAS No. 123R, 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.
Ms. Linda Cvrkel
August 31, 2007
Page 10
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 fiscal year
2006:
Expected volatility 50%
Expected dividend yield None
Expected term (in years) 5
Risk-free interest rate 4.66%
The following table sets forth the number of stock options outstanding
as of December 31, 2004, 2005 and 2006 and the number of stock options
granted, exercised or forfeited during the fiscal years ended December
31, 2005 and 2006:
Balance of employee stock options outstanding as of 12/31/2004 378,750
Stock options granted during the year ended 12/31/2005 0
Stock options exercised during the year ended 12/31/2005 0
Stock options forfeited during the year ended 12/31/2005 (75,000)
------------
Balance of employee stock options outstanding as of 12/31/2005 303,750
Stock options granted during the year ended 12/31/2006 99,000
Stock options exercised during the year ended 12/31/2006 (46,250)
Stock options forfeited during the year ended 12/31/2006 (5,000)
------------
Balance of employee stock options outstanding as of 12/31/2006 351,500
============
* * *
Pursuant to the Staff's request, we acknowledge that:
o we are responsible for the adequacy and accuracy of
the disclosure in our filings and this response
letter;
o Staff comments or changes to disclosure in response
to Staff comments do not foreclose the Commission
from taking any action with respect to our filings;
and
o we 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.
Ms. Linda Cvrkel
August 31, 2007
Page 11
* * *
We believe that the foregoing should address the Staff's comments. We
thank you in advance for the Staff's customary courtesies. If the Staff has any
questions about, or disagrees with the adequacy of, our response as set forth
above we would be pleased to discuss these matters further.
Very truly yours,
NOBLE ROMAN'S, INC.
By: /s/ Paul W. Mobley
---------------------------------
Paul W. Mobley
Chairman, Chief Executive Officer
and Chief Financial Officer
cc: Effie Simpson
Thomas A. Litz, Esq.