September 21, 2009
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 the Fiscal Year Ended December 31, 2008
File No. 0-11104
Dear Ms. Cvrkel:
We are in receipt of the Staff's comment letter, dated September 3, 2009,
pursuant to which the Staff commented on the Form 10-K for the year ended
December 31, 2008 (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.
Management's Discussion and Analysis of Financial Condition and Results of
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Operations, page 14
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1. Please revise future filings to include your critical accounting estimates.
Among other accounting policies with critical estimates that may be required for
disclosure, it appears the following items were subject to significant
estimates, assumptions and sensitivity to change: (1) the recoverability of
accounts and notes receivable considering the significant charge off in the
fourth quarter of fiscal 2008 (see discontinued operations); (2) the significant
amount of accrued future estimated expenses relating to the discontinued
business; and (3) the material amount of deferred tax assets and the related
recoverability of this asset. Refer to SEC Release 34-48960 and FR72
Response: As requested by your comment, we propose in future filings to add the
following disclosure under "Introduction" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations": As discussed in
1
Note 1 to the Company's 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, 2008, the Company reported net accounts and notes receivable of $1.046
million, which was net of an allowance to reflect the amount the Company expects
to realize for the receivable at December 31, 2008. The Company has reviewed
each of its accounts and notes receivable and only included current receivables
and has excluded all receivables related to franchising traditional dual-branded
restaurants for which new franchising activity has been curtailed. The Company
has provided an accrual for estimated future expense related to its discontinued
operations in the amount of $.722 million 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. This is the
Company's best estimate of those future costs after reviewing the status of the
litigation, the estimated work to conclusion and is net of the estimated portion
to be paid by the insurance carrier. The Company, at December 31, 2008, had a
deferred tax asset on its balance sheet totaling $12.853 million and, 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 the expiration of those deferred assets, most of which expire
between 2012 and 2028.
Financial Statements
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Consolidated Statements of Operations, page 22
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2. Please revise to present basic and diluted earnings per share for
discontinued operations in all relevant periods. Refer to paragraph 37 of SFAS
128.
Response: As requested by your comment, we propose in future filings to add the
following information:
Earnings per share - basic: 2006 2007 2008
---- ---- ----
Net income from continuing operations $ .12 $ .14 $ .07
Net loss from discontinued operations net
of tax benefit $ -- $ -- $ .20
Net income (loss) $ .12 $ .14 $ (.13)
Net income (loss) available to common
stockholders $ .11 $ .13 $ (.13)
Weighted average number of common shares
outstanding 16,405,995 17,675,834 19,213,522
Diluted earnings per share:
Net income from continuing operations $ .10 $ .13 $ .07
Net loss from discontinued operations net
of tax benefit $ -- $ -- $ .19
Net income (loss) $ .10 $ .13 $ (.12)
Weighted average number of common shares
outstanding 19,702,988 18,973,291 20,147,150
2
Consolidated Statements of Cash Flows, page 24
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3. Please tell us the nature of the line item "Noncash expense from loss on
discontinued operations" and tell us where this charge was classified in the
consolidated statement of operations. If it is part of the amount classified
within the Loss from discontinued operations, please also tell us and reconcile
why the amount differs from the $3.8 million amount in the consolidated
statement of operations.
Response: The non-cash expense, which is a part of the loss on discontinued
operations, represents a write-off of accounts and notes receivable associated
with the discontinued operations. The receivables and other miscellaneous items
being charged off affected cash in prior periods.
Loss from discontinued operations net of tax benefit $3,824,397
Tax benefit 2,508,433
Expenses for items paid for in 2008 (4,112,807)
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Non-cash expenses from loss on discontinued operations $2,220,023
Notes to Consolidated Financial Statements, page 25
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Note 1: Summary of Significant Accounting Policies, page 25
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4. Reference is made to your consolidated balance sheet where you classify
"assets held for resale". In light of the significant changes in these assets
each period, please tell us and provide an accounting policy that describes the
nature of the assets held for resale and how such assets are recognized and
measured in the financial statements for each material component category. In
this regard, please also address the accounting literature relied upon in this
manner.
Response: The assets held for resale include the cost of franchised locations
held by the Company on a temporary basis until the franchise is sold and
recorded at the Company's cost adjusted as necessary for any impaired value to
the estimated net realizable value to the Company. While those assets are held
by the Company, the revenues generated from those franchised locations are
included in restaurant revenue and all expenses are included in the operating
expense titled "restaurant expenses".
5. It appears that the material change in accrued expenses as of the end of
fiscal 2008 may relate to the accrued future estimated expenses attributable to
the decision to discontinue the business as disclosed in note 11. Please tell us
and expand your accounting policies to describe the various nature of the
expenses accrued with respect to the discontinuance of this business including
3
the methodology in determining the estimates and the accounting guidance
followed that appropriately provides for the accrual of these future expenses.
Response: The accrual for estimated future expenses attributable to the decision
to discontinue the business includes an estimate of legal fees ($620,000) for
implementing the decision to discontinue the business segment, lease payments
($20,590) on the one lease involved to the end of the lease term, a settlement
of a prior claim ($41,068) paid in January 2009, and other estimated expenses
($40,000) for implementing the decision to discontinue the business segment.
Note 3: Notes Payable, page 28
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6. We note that the February 2008 Amendment to the Loan Agreement provided for
additional amounts of principal, a change in interest rate and extension on the
maturity date of the loan. Please tell us how you have considered the guidance
in EITF Issue 96-19, including if these loan modifications were considered
substantive whereby you met any of the conditions in treating this as an
exchange of debt instruments with substantially different terms. In your
response, please specifically address in complete and clear detail your
accounting treatment on this amended loan agreement transaction. Although we may
have further comments after a review of your response, please also expand your
notes to discuss your accounting treatment and the basis for the treatment with
respect to this amended loan agreement, thereto.
Response: The amendment to the loan agreement in February 2008 was not
considered substantive as discussed in EITF 96-19. In August 2005, the Company
borrowed $9 million for the purpose of implementing a settlement with
SummitBridge National Investments, LLC. That term loan required principal
payments of $125,000 per month plus monthly interest payments equal to LIBOR +
4%. The loan agreement also required the Company to maintain certain financial
ratios during the term of the loan. At the time of the modification in February
2008, that loan had a remaining principal balance $5.375 million. At that time,
the Company added $3 million to the same term loan for the purpose of providing
funds to repurchase some of the Company's common stock if the Board of Directors
should decide that was in the best interest of the shareholders and for general
corporate purposes. The terms of the loan were to maintain the same $125,000 per
month principal payments and the interest rate was modified to LIBOR + 3.75% to
reflect the reduced leverage ratio of the Company at the time as opposed to the
leverage ratio at the time of the original term loan. The extension of the
maturity date from August 31, 2011 to August 31, 2013 was to reflect the number
of months necessary to maintain the same $125,000 per month principal payments
and the financial ratios for maintaining the same as before. The accounting for
the transaction was a debit to cash and a credit to note payable for the
additional $3 million.
7. We note that the company employs the use of interest rate swaps with regard
to outstanding debt. Please tell us, and revise future filings to disclose, how
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you account for these swaps, specifically if the swaps are designated as
derivative instruments in accordance with SFAS 133. To the extent the swaps are
derivative instruments, please revise future filings to include all disclosures
required by paragraphs 44 and 45 of SFAS 133.
Response: Reported interest expense was adjusted to reflect the gain or loss
difference by the swap contract, which difference was considered immaterial. The
pre-tax (gain) or loss between interest from the swap contract compared to
stated interest for the loan documents was ($8,393), ($14,537) and $62,698 for
the years ended December 31, 2006, 2007 and 2008, respectively. The after-tax
(gain) or loss would have only been ($5,539), ($9,594) and $41,381 for the years
ended December 31, 2006, 2007 and 2008, respectively. The Company will revise
its reporting in future filings if the gain or loss between interest and the
swap contract compared to stated interest of loan documents becomes material.
8. In a related matter, to the extent applicable, please revise future filings
to provide all disclosures required by SFAS 157, paragraph 32, with regards to
the interest rate swap and any other instruments measured at fair value as
required.
Response: The Company will revise future filings to provide the disclosure
required by SFAS 157, paragraph 32, with regard to the interest rate swap.
Note 5: Contingent Liabilities for Leased Facilities, page 29
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9. We note that the company remains contingently liable for operating leases on
franchised restaurants. Given disclosures in your document that you have taken
over restaurants by struggling franchisees, it appears as though amounts payable
under such guarantees are probable. Please tell us how you have considered the
guidance of FIN 45 and what amounts you have accrued in your financial
statements related to these leases. If you have not accrued amounts related to
these leases, please tell us why you believe you are not required to do so.
Based on your response, please also expand the disclosures in the notes to
address this matter accordingly.
Response: The Company currently is contingently liable only for two restaurant
leases for operating restaurants operated by franchisees. Both restaurants have
been operating for several years and are operated by a very successful
franchisee with high sales volume restaurants and it is very unlikely that the
Company would ever have to pay either of those lease payments.
Note 7: Common Stock, page 29
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10. We refer to your response to our prior comments 5 and 4 from our letters
dated August 2, 2007 and September 7, 2007, respectively. We continue to note
5
that your financial statements still do not include all the required disclosures
by paragraph A240 of SFAS 123R. Please note that some disclosures are required
for each year an income statement is provided and some are required only for the
current year presented. Please review the disclosures requirements and example
disclosures in SFAS 123R and provide us with your proposed revised disclosures
for future filings.
Response: The Company will add the non-vested balances in future filings, as
follows:
Non-vested stock options 12/31/05 71,000 shares
Stock options vested in 2006 (10,000) shares
Non-vested options forfeited in 2006 (12,500) shares
Options issued in 2006 111,500 shares
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Non-vested stock options 12/31/06 160,000 shares
Stock options vested in 2007 (61,000) shares
Non-vested options forfeited in 2007 (20,500) shares
Options issued in 2007 0 shares
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Non-vested stock options 12/31/07 78,500 shares
Stock options vested in 2008 0 shares
Non-vested stock options forfeited in 2008 0 shares
Options issued in 2008 465,000 shares
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Non-vested stock options 12/31/08 543,500 shares
The employee stock options are generally exercisable three years after the date
of grant and expire 10 years after the date of grant. If the optionee shall
cease to be employed by the Company for any reason other than death or
disability, the options, subject to earlier expiration, shall terminate and
expire three months after the date of such termination. If the optionee shall
cease to be employed by the Company due to death or disability, the options
shall be exercisable for a period of 12 months after the date of disability or
for six months after the date of death by the optionee's personal
representative.
Note 9: Loss from Discontinued Operations, page 31
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11. We note that the company classified as discontinued operations the sale of
company operated restaurants (acquired from struggling franchisees). Please tell
us how the sale of such restaurants meets the requirements of discontinued
operations presentation under paragraph 42 of SFAS 144. Given that franchise
fees will still be received from the purchasers of these restaurants, it is
unclear why you believe the cash flows have been eliminated from ongoing
operations. Please refer to paragraph A27 of SFAS 144 and advise. We may have
further comment upon receipt of your response.
Response: For the past few years, prior to approximately mid-November 2008,
Noble Roman's business consisted of several components as follows:
Non-Traditional Franchise Sales and Service Business - The Company started this
business in 1997 and has grown from zero franchises at that time to
approximately 800 franchises today, which has been the substantial majority of
6
the Company's business since 1997 and continues as such today. In fact, it is
the only active segment today.
Selling Area Development Agreements - This component was started in 2006 and is
closely related to franchising traditional locations. In fact, the area
development agreements specifically excepted non-traditional locations from
those agreements. Area developers were specifically prohibited from selling
non-traditional locations in their area. Each of the area development agreements
contained a specific schedule of franchises they were required to sell within
specified time periods or the agreements automatically terminated. None of the
area developers met the time schedules in their agreements and, as such, all of
the agreements have automatically terminated. This component did not prove
successful for Noble Roman's/Tuscano's as the area development program was
created to sell franchises to individuals who basically wanted to own their job.
As it turned out, those type of individuals could not deal and successfully
operate with the complications created by having a dual-branded concept with
each concept appealing to a different day segment. Noble Roman's dual-branded
concept, including Tuscano's, where Tuscano's business came primarily 10:00 a.m.
to 2:00 p.m. Monday through Friday and Noble Roman's Pizza business coming
primarily 4:30 p.m. to 10:00 p.m. seven days a week with the weekends being
greater than the weekdays. Inexperienced first-time business owners had
difficulty successfully operating, therefore, the Company discontinued the
component of its business related to the sales of area development agreements.
In fact, the Company has not sold an area development agreement, nor offered for
sale area development agreements, since June 1, 2008 and has only sold one in
all of 2008. The operations and cash flows of this segment of its business has
been totally eliminated from ongoing operations and does not have any continuing
involvement in the operations from this segment of its business.
Traditional Franchise Sales and Service Segment - This segment was started in
2005 and was selling franchises for dual branded Noble Roman's/Tuscano's in
traditional locations. This is unrelated to selling franchises for
non-traditional locations. In fact, franchise agreements for non-traditional
locations did not grant any territorial restrictions on the sale of traditional
locations and the franchise agreements for traditional locations did not grant
any territorial protection against the sale of non-traditional locations. The
Company tested this method years ago and there was no interference from a
non-traditional location being located across the street from a traditional
location. When the Company opened a non-traditional location across the street
from a traditional location the sales in the traditional location did not suffer
at all from the opening of the non-traditional location and the non-traditional
location was successful in attracting sales to its market despite the fact that
a traditional location was across the street. Therefore, there has been no
significant shifting of revenue from the non-tradition to the traditional or
vice versa. The non-traditional segment draws its business from the traffic that
exists in the facility in which the non-traditional location is located. The
traditional segment draws its business from the general public that come there
for the sole purpose of buying one of the products that the traditional segment
offers. The Company no longer offers for sale franchises for traditional
locations nor promotes that activity in any way. The operations and cash flows
7
of this segment have been eliminated from ongoing operations and will not have
any significant continuing involvement in the operations of this segment. The
Company will continue to get some minor ongoing royalty but that is dwindling
rapidly as the units are being closed. As of today, there are only approximately
15 of such units remaining open.
Purchasing Rehabilitating and Finding New Franchisees For Troubled Units: The
Company started this service approximately five years ago but made the decision
in November 2008 to discontinue this service. This intention was announced in a
press release on November 10, 2008. This intention was carried out by selling
nine of the remaining such locations and closing one during the fourth quarter
of 2008. One of the nine sold already has closed and the Company expects an
additional seven of the nine to close within the next few months. The operator
of the seven units that we expect to close did not invest any capital, has not
paid any of the rents since December and we believe they are going to close
within the next few months. All the operations and cash flow from these
operations have been eliminated from the ongoing operations and the Company will
have no significant continuing involvement in these operations except for a
small amount of passive royalty income for a short time until they close.
The assessment period may extend beyond one year after the component is actually
disposed of in a situation in which events or circumstances beyond the entity's
control, extend the period required to eliminate the direct cash flows of the
disposed component or eliminate significant continuing involvement in the
ongoing operations of the disposed component provided that the entity (a) takes
the action necessary to respond to those situations and (b) expects to eliminate
the direct cash flows and the significant continuing involvement.
With regard to the three components of our business that we made the decision to
discontinue, namely selling area development agreements, traditional franchise
sales and service segment and purchase and rehabilitating and finding new
franchisees for troubled units, the operations and cash flow of those components
of our business have been eliminated from ongoing operations and we do not have
any continuing involvement in the operations from those components. Paragraph 42
of Statement 144 states: "The results of operations of a component of an entity
that either has been disposed of or is classified as held for sale shall be
reported in discontinued operations in accordance with Paragraph 43 if both of
the following conditions are met: (a) the operations and cash flows of
components have been (or will be) eliminated from the ongoing operations of the
entity as a result of disposal transactions and (b) the entity will not have any
significant continuing involvement in the operations of the component after the
disposal transaction." The different charges related to the disposal of the
above referenced segments of our business clearly falls within paragraph 42 of
Statement 144.
With regard to the area development agreement component, it is clear there are
no ongoing cash flow implications of any kind and there is no ongoing financial
involvement on our part.
8
With regard to traditional franchise sales and service segment, they are mostly
gone, are anticipated to practically all be gone by the end of this year and our
only involvement is some ongoing but diminishing royalty and EITF abstract issue
03-13, item 7 clearly states that continuing cash flows that was not
disqualifying include, but not limited to, (a) interest income, (b) contingent
consideration and business combination, (c) dividends, (d) passive royalty
interest in the disposed component's operations. Our sole obligations in respect
of this segment are as a franchisor and are set out in Section V of the
Franchise Agreement:
1) Franchisor site selection guidelines and site selection assistance
2) Assistance in the layout and design as the franchisor may deem necessary
3) Site evaluation and assistance as franchisor may deem necessary
4) Loan of one set of confidential manuals
5) Upon opening the franchise, franchisor is to receive initial on-the-job
training program as franchisor reasonably deems necessary
6) The services of one representative for reasonable assistance and guidance
in connection with the opening and initial operation
7) During the operation of the business such additional assistance that the
franchisor deems necessary in its sole discretion
As can be seen from the above list, the Company has no material continuing
obligations with those remaining franchises. The royalty agreement is not
significant to the overall operation of the disposed component, as can be seen
from the paragraph above regarding the Company's franchise agreement, the
Company is not involved in the ongoing activity of the disposed component, the
Company's obligations are limited to its ability to receive the royalty payment
and there is nothing in the franchise agreement that enables the Company to
exert significant influence over the disposed component.
The Company has no cash flow from the disposed components for either revenue or
expense.
There are no cash flow results from migration, as explained above, and the
Company's non-traditional segment neither benefits from the closing of a
traditional location nor is jeopardized by the opening of a traditional
location.
There is no cash flow to the Company, incoming or outgoing, from the
continuation of any of the activities of the disposed components. In addition,
it is anticipated there will not be any significant continuation of those
activities after 2009.
9
As described in the Company's franchise agreement, the Company has no ability to
influence the financial decisions of the disposed components that are continuing
and has no obligations under the franchise agreements to provide them any
ongoing services.
The Company's reporting of the discontinued operations also is consistent with
the assessment period requirements. Disposal of the components has already been
completed and the Company has no future involvement except passive royalty
interest in the disposed component's operations, which will also be gone, for
all practical purposes, in less than a year.
12. We note that losses from discontinued operations in 2006 and 2007 were fully
offset by decreases in your valuation allowance. Please tell us the nature of
the adjustments that offset these losses.
Response: The loss from discontinued operations in 2006 and 2007 were offset by
decreasing the valuation allowance for the deferred tax asset. The valuation
allowance for the deferred tax asset was eliminated as the Company concluded
that it was more likely than not that the deferred tax asset would be utilized
before the credits expired, most of which expire between the years of 2012 and
2028. The deferred tax asset was created as a result of previous losses on
discontinued operations.
Note 10: Contingencies, page 31
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13. Please revise future filings to disclose the amount of damages claimed by
the plaintiffs in these actions.
Response: In future filings the Company will attempt to disclose the amount of
damages claimed by the plaintiffs, although that is difficult to quantify as it
is not clear in the series of amended complaints.
Item 9A. Controls and Procedures, page 35
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14. We note that your disclosure only covers the assessment of internal controls
of financial reporting. Please revise future filings to include a discussion of
both the assessment of disclosure controls and procedures and internal controls
of financial reporting. Your revised disclosure should include a conclusion of
the effectiveness of each type of controls. Refer to Items 307 and 308 of
Regulation S-K.
Response: The Company will revise future filings to include a discussion of both
the assessment of disclosure controls and procedures and internal controls of
financial reporting.
10
Quarterly Reports on Forms 10-Q for the quarters ended March 31, 2009 and
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June 30, 2009
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Exhibits 31
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15. We note that you filed your Principal Executive Officer and Principal
Financial Officer certification under Item 601(b)(31) of Regulation S-K. Please
revise this certification in all future filings to include the introductory
language of paragraph 4 and the language of paragraph 4(b) of Item 601(b)(31) of
Regulation S-K.
Response: The Company will revise future filings to include the introductory
language of paragraph 4 and the language of paragraph 4(b) of Item 601(b)(31) of
Regulation S-K.
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 for 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 Federal Securities
Laws of the United States.
We believe 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 very pleased to discuss these matters further.
Sincerely,
Noble Roman's, Inc.
By: /s/ Paul W. Mobley
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Paul W. Mobley, Chairman, Chief Executive
Officer and Chief Financial Officer
cc: Heather Clark