UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 200227, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-3189
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NATHAN'S FAMOUS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-3166443
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1400 Old Country Road, Westbury, New York 11590
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:code (516) 338-8500
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Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - par value $.01
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ].] No [X]
The aggregate market value of the voting stockand non-voting common equity held
by non-affiliates of the registrant as of June 7, 2002the last day of the Registrant's most
recently completed second fiscal quarter - September 26, 2004 was approximately
$24,399,888.$32,148,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of June 7, 2002,20, 2005,
there were 6,272,5115,564,217 shares of Common Stock, par value $.01 per share
outstanding.
Documents incorporated by reference: Part III (Items 10, 11, 12 and 13) -
Registrant's definitive proxy statement to be filed pursuant to Regulation 14-A
of the Securities Exchange Act of 1934.
PART I
ItemITEM 1. Business
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As used herein, unless we otherwise specify, the terms "we," "us," "our"
and "Nathan's" mean Nathan's Famous, Inc. and its subsidiaries, including Miami
Subs Corporation, owner of the Miami Subs brand, and NF Roasters Corp., owner of
the Kenny Rogers brand.
We have historically operated and franchised fast food units featuring
Nathan's famous brand all beef frankfurters, crinkle-cut french fried potatoes,
and a variety of other menu offerings. Our Nathan's brand company-owned and
franchised units operate under the name "Nathan's Famous," the name first used
at our original Coney Island restaurant opened in 1916. SinceDuring fiscal 1998, we
supplemented our Nathan's franchise program withintroduced our Branded Product Program which enables foodservice retailers to
sell some of Nathan's proprietary products outside of the realm of a traditional
franchise relationship. During fiscal 2000, we acquired the intellectual
property rights, including trademarks, recipes and franchise agreements of
Roasters Corp. and Roasters Franchise Corp. and also completed a merger with
Miami Subs Corporation whereby we acquired the remaining 70% of Miami Subs
common stock we did not already own.
Over the past five years, we have focused on developing our restaurant
franchise system by openingcontinuing to open new franchised restaurants, operating our existing company-owned
restaurants, expanding our supermarket licensing program of the Nathan's brand,
implementing our
Nathan's Branded Product Program and beganour Nathan's branded retail licensing
programs, operating our existing company-owned restaurants and developing an
international master franchising program. In an effort to expand our restaurant
system and expand our brand portfolio, during fiscal 2000 we completed our
merger with Miami Subs Corp. and our acquisition of the intellectual property of
the Kenny Rogers Roasters franchise system. In addition, through our acquisition
of Miami Subs, we also secured certain exclusive co- brandingco-branding rights to use the Arthur
Treachers' brand within the United States. WeDuring fiscal 2002 we offered the
Nathan's, Kenny Rogers Roasters and Arthur Treachers' signature products to the
Miami Subs franchise community. Since then, we have continued to capitalize on
the co-branding opportunities within our existingthe Nathan's restaurant system, as well as
seek to develop new multi-brand marketing and development plans.
At March 31, 2002,27, 2005, our system, consisting of Nathan's Famous, Kenny Rogers
Roasters and Miami Subs restaurants, included 364355 franchised units, including three6
units operating pursuant to management agreements, 226 company-owned units
concentrated in the New York metropolitan area (including New Jersey) and Florida and approximately 1,500more than 5,900 branded
product points of sale under our Branded Product Program, located in 3946 states,
the District of Columbia and 1413 foreign countries.
We plan to further introduce our co-branding opportunities within the
existing restaurant system, seek to expandcontinue expanding the scope and market penetration of
our Branded Product Program, further develop the restaurant operations of
existing franchised and company-owned outlets, for all restaurant concepts, and
open new franchised outlets of all of our restaurant concepts in
traditional or captive market environments.environments, expand the Nathan's retail licensing
programs and continue to co-brand within our restaurant system. We may
selectively consider opening new company-owned restaurants. We also plan to
further develop an international presence through the use of master franchising
agreements based upon individual or combined use of all threeour restaurant concepts.
Nathan's plans to continue co-branding within its existing restaurant system and
in new units that open.
We were incorporated in Delaware on July 10, 1992 under the name "Nathan's
Famous Holding Corporation" to act as the parent of a Delaware corporation
then-known as Nathan's Famous, Inc. On December 15, 1992, we changed our name to
Nathan's Famous, Inc. and our Delaware subsidiary changed its name to Nathan's
Famous Operating Corporation. The Delaware subsidiary was organized in October
1989 in connection with its reincorporation in Delaware from that of a New York
corporation named "Nathan's Famous, Inc." The New York Nathan's was incorporated
on July 10, 1925 as a successor to the sole proprietorship that opened the first
Nathan's restaurant in Coney Island in 1916. On July 23, 1987, Equicor Group,
Ltd. was merged with and into the New York Nathan's in a "going private"
transaction. The New York Nathan's, the Delaware subsidiary and Equicor may all
be deemed to be our predecessors.
1
Acquisitions
Pursuant to the Joint Plan of Reorganization of the Official Committee of
Franchisees of Roasters Corp. and Roasters Franchise Corp. as confirmed by the
U. S. Bankruptcy Court for the Middle District of North Carolina, Durham
Division, we acquired through our wholly owned subsidiary, NF Roasters Corp.,
the intellectual property rights, including trademarks, recipes and franchise
agreements of Roasters Corp. and Roasters Franchise Corp. for $1,250,000 in cash
plus related expenses, which was paid out of working capital on April 1, 1999.
On November 25, 1998, we purchased 2,030,250 shares of Miami Subs
Corporation (after giving effect to a 4 for 1 reverse stock split), or
approximately 30% of its then outstanding common stock for $4,200,000. On
September 30, 1999, we completed our merger with Miami Subs and acquired the
remaining outstanding shares of Miami Subs in exchange for 2,317,980 shares of
our common stock and warrants to acquire 579,040 additional shares of our common
stock at a price of $6.00 per share.
Restaurant OperationsRESTAURANT OPERATIONS
Nathan's Concept and Menus
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Our Nathan's concept offers a wide range of facility designs and sizes,
suitable to a vast variety of locations and features a core menu, consisting of
the
"Nathan's Famous" all-beef frankfurters, crinkle-cut french fries and beverages.
Nathans' menu is designed to be tailored to take advantage of site-specific
market opportunities by adding complementary food items to the core menu. The
Nathan's concept is suitable to stand alone or be co-branded with other
nationally recognized brands.
Nathans' hot dogs are all-beef and are free from all fillers and starches.
Hot dogs are flavored with the original secret blend of spices created by Ida
Handwerker in 1916, which historically have distinguished Nathans' hot dogs. HotOur
hot dogs are prepared and served in accordance with procedures which have not
varied significantly in more than 8689 years. Our signature crinkle-cut french
fried potatoes are featured at each Nathan's restaurant. Nathans' french fried
potatoes are cooked to order in 100% cholesterol-free corn oil. We believe that the
majority of sales in our company-owned units consist of Nathan's famous hot
dogs, crinkle-cut french fried potatoes and beverages.
Individual Nathan's restaurants supplement their core menu of hot dogs,
french fries and beverages with a variety of other quality menu choices:choices
including: chargrilled hamburgers, chargrilled chicken sandwiches, Philly
Cheesesteaks, selected seafood and other chicken items, a breakfast menu and
assorted desserts and snacks. While the number of supplemental menus carried
varies with the size of the unit, the specific supplemental menus chosen are
tailored to local food preferences and market conditions. Each of these
supplemental menu options consists of a number of individual items; for example,
the hamburger menu may include chargrilled bacon cheeseburgers, superburgers and
super cheeseburgers. We maintain the same quality standard with each of Nathan's
supplemental menus as we do with Nathans' core hot dog and french fried potato
menu. Thus, for example, hamburgers and sandwiches are prepared to order and not
pre-wrapped or kept warm under lights. Nathan's also has a "Kids Meal" program
in which various menu alternatives are combined with toys to appeal to the
children's market. Soft drinks, iced tea, coffee and fresh squeezed lemonade are
also offered.
Nathans' restaurant unitsdesigns are available in a range of sizes from 300 to
4,000 sq. ft. We have also developed Nathan's carts, kiosks, and modular units.
Our smaller units may not have customer seating areas, although they may often
share seating areas with other fast food outlets in food court settings. Other
units generally provide seating for 45 to 125 customers. Carts, kiosks and
2
modular units generally carry only the core menu. This menu is supplemented by a
number of other menu selections in our other restaurant types.
We believe Nathan's carts, kiosks, modular units and food court designs
are particularly well-suited for placement in non-traditional sites, such as
airports, travel plazas, stadiums, schools, convenience stores, entertainment
facilities, military facilities, business and industry food service, within
larger retail operations and other captive markets. Many of these smaller units
have been designed specifically to support our expanding Branded Product
Program. All of these units feature the Nathan's logo and utilize a contemporary
design.
Miami Subs Concept and Menu
Our Miami Subs concept features a wide variety of moderately priced lunch,
dinner and snack foods, including hot and cold submarine sandwiches, various
ethnic foods such as gyros and pita sandwiches, flame grilled hamburgers and
chicken breast sandwiches, cheesesteaks, chicken wings, fresh salads, ice cream
and other desserts. Soft drinks, iced tea, coffee, beer and wine are also
offered.
Freshness and quality of breads, produce and other ingredients are
emphasized in Miami Subs restaurants. The Miami Subs menu may include low-fat
selections such as salads, grilled chicken breasts, and non-fat frozen yogurt
which we believe are perceived as nutritious and appealing to health conscious
consumers. We believe Miami Subs has become known for certain "signature" foods,
such as grilled chicken on pita bread, cheesesteaks and gyros on pita bread.bread, cheesesteaks and
chicken wings.
Miami Subs restaurants feature a distinctive decor unique to the Miami
Subs concept. The exterior of free- standingfree-standing restaurants feature an unusual roof
design and neon pastel highlights for easy recognition. Interiors have a
tropical motif in a neon pink and blue color scheme with murals of fish,
mermaids, flamingos and tropical foliage. Exteriors and interiors are brightly
lit to create an inviting, attractive ambience to distinguish our restaurants
from those of our
2
competitors. At March 31, 2002, 11227, 2005, 67 of the Miami Subs restaurants were located in
freestanding buildings, ranging between 2,000 and 5,000 square feet. Certain
other Miami Subs restaurants are scaled down to accommodate non-traditional
captive market environments.
Miami Subs restaurants are typically open seven days a week, generally
opening at 10:30 am, with many of the restaurants having extended late-night
hours. Indoor service is provided at a walk-up counter where the customer places
an order and is given an order number and a drink cup. The customer then
proceeds to a self service soda bar while the food is prepared to order.
Drive-thru service is provided at substantially all free-standing Miami Subs
restaurants. We estimate that drive-thru sales account for approximately 45%52% of
sales in free-standing restaurants.restaurants that maintain drive-thru service.
Currently, 10271 Miami Subs restaurants have introducedoffer our co-branded menu consisting
of various selections of Nathan's, Kenny Rogers Roasters or Arthur Treachers'
signature products. Weproducts and we have created a new image for Miami Subs based upon
this co-branding strategy called "Miami Subs Plus" which has been heavily marketed in Southern
Florida beginning in July 2001.Plus."
Kenny Rogers Roasters Concept and Menu
The Kenny Rogers Roasters concept was first introduced in 1991 with the
idea of serving home-style family foods based on a menu centered around
wood-fire rotisserie chicken. Kenny Rogers Roasters' unique proprietary marinade
and spice formula, combined with wood-fire roasting in a specifically designed
rotisserie, became the basis of a breakthrough taste in rotisserie chicken. The
menu, design and service style were created to position the concept midway
between quick-serve and casual dining. This format, coupled with a customer
friendly environment developed for dine-in or take-home consumers, is the
precursor of the Kenny Rogers Roasters system.
The distinctive flavoring of our Kenny Rogers Roasters chicken is the
result of a two step process. First, our chickens are marinated using a
specially flavored proprietary marinade. Then a second unique blend of spice is
applied to the chicken prior to cooking, often in thean open flame wood-fire
rotisserie in full view of customers at the restaurant. Other entrees offered in
Kenny
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Rogers Roasters restaurants may include Honey Bourbon BBQ ribs and
rotisserie turkey. Complimenting Kenny Rogers Roasters main courses are a wide
variety of freshly prepared side dishes, corn muffins, soups, salads and
sandwiches. The menu offers a healthful alternative to traditional quick-serve
menu offerings that caters to families and individuals.
TheA traditional Kenny Rogers Roasters restaurants arerestaurant is a free standing buildingsbuilding
or large in-line unit offering dine-in and drive thru delivery options ranging
in size between 3,000 and 4,000 sq. ft. with seating capacity for approximately
125 guests. Other prototype restaurant designs that are beinghave been considered include
food court units and scaled down in-line and free standing restaurant types.
We have recently
begun to co-brandThe Kenny Rogers Roasters withrestaurant system consists primarily of
approximately 95 restaurants operating internationally and 90 co-branded
representations within our Nathan's by introducing Nathan's
famous all-beef frankfurters, crinkle-cut french fries and hamburger menus to
supplement Roasters' core menu offerings.Miami Subs restaurant systems
domestically.
Franchise Operations
At March 31, 2002,27, 2005, our franchise system, including our Nathan's, Miami
Subs and Kenny Rogers restaurant concepts, consisted of 364355 units operating in
2223 states and 1411 foreign countries.
Today, our franchise system counts among its 172127 franchisees and licensees
such well known companies as HMS Host Marriott Services USA, Inc., ARAMARK Leisure Services, Inc., CA1
Services, Inc., Centerplate (formerly known as Service America Corp.), Culinart,
Loews Cineplex and Sodexho
USA.National Amusements. We continue to seek to market our
franchising program to larger, experienced and successful operators with the
financial and business capability to develop multiple franchise units.
3
As of March 31, 2002,27, 2005, HMS Host Marriott operated 3435 franchised outlets, including
1712 units at airports, 1418 units within highway travel plazas and threefive units
within malls. Additionally, HMS Host operates 36 locations featuring Nathan's
products pursuant to our Branded Product Program.
Nathan's Franchise Program
Franchisees are required to execute a standard franchise agreement prior
to opening each Nathan's Famous unit. Our current standard Nathan's franchise
agreement provides for, among other things, a one-time $30,000 franchise fee
payable upon execution of the agreement, a monthly royalty payment based on 5.0%
of restaurant sales and the expenditure of 2.0% of restaurant sales on
advertising. We also offer a modified franchise agreement tailored to meet the
needs of franchisees who desire to operate a Nathan's of a smaller size offering
a reduced menu. The modified franchise agreement provides for the initial
franchise fee of $15,000 which is payable upon execution of the agreement,
monthly royalties of 5.0% and the expenditure of 2.0% of restaurant sales on
advertising. We may offer alternatives to the standard franchise agreement,
particularly having to do with franchise fees or advertising requirements. Marriott and National
Restaurant Management, Inc., are among those franchisees who are not subject to
the requirement to spend a percentage of sales on advertising. The initial term
of the typical franchise agreement is 20 years, with a 15-year renewal option by
the franchisee, subject to conditions contained in the franchise agreement.
Franchisees are approved on the basis of their business background,
evidence of restaurant management experience, net worth and capital available
for investment in relation to the proposed scope of the development agreement.
We provide numerous support services to our Nathan's franchisees. We
assist in and approve all site selections. Thereafter, we provide architectural
plans suitable for restaurants of varying sizes and configurations for use in
food-court, in-line and free-standing locations. We also assist in establishing
building design specifications, reviewing construction compliance, equipping the
restaurant and providing appropriate menus to coordinate with the restaurant
design and location selected by the franchisee. We typically do not sell food,
equipment or supplies to our Nathan's franchisees.
4
We offer various management training courses for management personnel of
company-owned and franchised Nathan's restaurants. At least one restaurant
manager from each restaurant must successfully complete our mandated management
training program. We also offer additional operations and general management
training courses for all restaurant managers and other managers with supervisory
responsibilities. We provide standard manuals to each franchisee covering
training and operations, products and equipment and local marketing programs. We
also provide ongoing advice and assistance to franchisees. We host periodic
"Focus on Food" meetings with our franchisees to discuss upcoming marketing
events, menu development and other topics, each of which is created to provide
systemwide benefits.
Franchised restaurants are required to be operated in accordance with
uniform operating standards and specifications relating to the selection,
quality and preparation of menu items, signage, decor, equipment, uniforms,
suppliers, maintenance and cleanliness of premises and customer service. All
standards and specifications are developed by us and applied on a system-wide
basis. We continuously monitor franchisee operations and inspect restaurants.
Franchisees are required to furnish us with detailed monthly sales or operating
reports which assist us in monitoring the franchisee's compliance with its
franchise or license agreement. We make both announced and unannounced
inspections of restaurants to ensure that our practices and procedures are being
followed. We have the right to terminate a franchise if a franchisee does not
operate and maintain a restaurant in accordance with the requirements of its
franchise or license agreement. We also have the right to terminate a franchise
for non-compliance with certain other terms and conditions of the franchise or
license agreement such as non-payment of royalties, sale of unauthorized
products, bankruptcy or conviction of a felony. During the fiscal year ended
March 31, 2002,27, 2005, ("fiscal 2002"2005") franchisees have opened 1626 new Nathan's
franchised units in the United States and we did not terminate anythree Nathan's franchise agreements
were terminated for non-compliance.
4
Franchisees who desire to open multiple units in a specific territory
within the United States may enter into a standard area development agreement
under which we receive an advance fee based upon the number of proposed units
which the franchisee is authorized to open. This advance is credited against the
franchise fee payable to us as provided in the standard franchise agreement. We
may also grant exclusive territorial rights in foreign countries for the
development of Nathan's units based upon compliance with a predetermined
development schedule. We wouldAdditionally, we may further grant exclusive manufacturing
and distribution rights in foreign countries. In all situations we expect to
require an exclusivity fee to be conveyed for such exclusive rights.
Miami Subs Franchise Program
Franchisees are required to execute a standard franchise agreement
relating to the operation of each Miami Subs restaurant. Currently, the term of
the franchise agreement is between fiveten and 20 years, and the initial franchise
fee is $30,000 for traditional restaurants and $15,000 for certain
non-traditional restaurants. The standard franchise agreement provides for the
payment of a monthly royalty fee of 4.5% onof gross restaurant sales in traditional
restaurants or 5.0% of gross sales in non-traditional restaurants for the term
of the franchise agreement, and additionalagreement. Additional charges, based on a percentage of
restaurant sales are required by operators of traditional restaurants, typically
totaling 2.25%, to support various system-wide and local advertising funds.
In addition to individual franchise agreements, we have from time to time
entered into development agreements with certain franchisees. The development
agreement establishes a minimum number of restaurants that the franchisee is
required to open in an agreed upon exclusive area during the term of the
agreement. In addition to receiving a franchise fee for each restaurant opened,
we also receive a non-refundable fee based upon the number of restaurants
committed to be opened under the agreement.
Operations personnel train and assist Miami Subs franchisees in opening
new restaurants and monitor the operations of existing restaurants as part of
the support provided under the franchise program. New franchisees are required
to complete a six-week training program. Upon the opening of a new franchised
restaurant, we typically send representatives to the restaurant to assist the
franchisee during the opening period. These company representatives work in the
restaurant to monitor compliance with Miami Subs' standards and provide
additional on-site training of the franchisee's restaurant personnel.
5
We also provide development and construction support services to our Miami
Subs franchisees. We review and approve plans and specifications for the
restaurants before improvements begin. Our personnel typically visit the
facility during construction to meet with the franchisee's site contractor and to verify that construction standards are met.
The six-week training program consists of formal classroom training and
in-restaurant training featuring various aspects of day-to-day operations
leading to certification in all functioning positions. Topics covered include
human resources, accounting and purchasing, andin addition to labor and food
handling laws. Standard operating manuals are provided to each franchisee.
To maintain uniform standards of appearance, service and food and beverage
quality for our Miami Subs restaurants, we have adopted policies and implemented
a monitoring program. Franchisees are expected to adhere to specifications and
standards in connection with the selection and purchase of products used in the
operation of the Miami Subs restaurant. Detailed specifications are provided for
the products used, and franchisees must request approval for any deviations. We
do not generally sell equipment, supplies or products to our Miami Subs
franchisees. The franchise agreement requires franchisees to operate their
restaurants in accordance with Miami Subs' requirements. We require our
franchisees to use specified kitchen equipment to maximize consistency and speed
of food
preparation. Ongoing advice and assistance is provided to franchisees in
connection with the operation and management of each restaurant. Our area
consultants are responsible for oversight of franchisees and periodically visit
each restaurant. During such visits, the area consultant completes a report
which contains evaluations onevaluates speed of
preparation for menu items, quality of delivered product, cleanliness of
5
restaurant facilities as well as evaluations of managers and other personnel.
The area consultants also make announced and unannounced follow-up visits to
ensure adherence to operational specifications.
During the past year, Miami Subs continued its meetings with small groups
of franchisees in its primary market of south Florida throughout the year. The
purpose of these meetings is principally to improve communications in areas of
marketing, promotions, new products, training and personnel motivation,
operations and other areas affecting the operation and performance of the
franchised restaurants.
Franchisees are required to furnish us with detailed monthly sales or
operating reports which assist us in monitoring the franchisee's compliance with
its franchise agreement. We have the right to terminate a franchise if a
franchisee does not operate and maintain a restaurant in accordance with the
requirements of its franchise agreement. We also have the right to terminate a
franchise for non-compliance with certain other terms and conditions of the
franchise agreement such as non-payment of royalties, sale of unauthorized
products, bankruptcy or conviction of a felony. During the fiscal year ended
March 31, 2002,27, 2005, franchisees have opened 4two new Miami Subs franchised units and
we
did not terminate anyno Miami Subs franchise agreements were terminated for non-compliance.
Kenny Rogers Roasters Franchise Program
Kenny Rogers Roasters domestic franchisees from the previous franchise
system were required to execute amended and restated franchise agreements in
order to preserve their franchised units. The amended and restated franchise
agreement affirmed the franchisees responsibilities and offered reduced
royalties to 3% of sales and waived advertising fund payments through March 31,
2001. These reduced rates have been extended until March 31, 2003.2006. Future Kenny
Rogers Roasters franchisees will have to execute our current standard franchise
agreement which provides for, among other things, a one-time $30,000 franchise
fee payable upon execution of the agreement, a monthly royalty payment based on
4.5% of restaurant sales and the expenditure of 2.5% of restaurant sales on
advertising. In some specific situations, we may offer alternatives to the
standard franchise agreement. The initial term of the typical franchise
agreement is 20 years, with up to a 20-year renewal option by the franchisee,
subject to conditions contained in the franchise agreement.
Franchisees will be approved on the basis of their business background,
evidence of restaurant management experience, net worth and capital available
for investment in relation to the proposed scope of the development agreement.
We expect to provide numerous restaurant opening support services to
future Kenny Rogers Roasters franchisees. We expect to assist in and approve all
Kenny Rogers Roasters site selections. Thereafter, we expect to provide
architectural prototype plans suitable for Kenny Rogers Roasters restaurants of
varying sizes and configurations, for use in food-court, in-line and
free-standing locations. We will also assist in establishing building design
specifications, reviewing construction compliance, equipping the restaurant and
providing appropriate 6
menus to coordinate with the prototype restaurant design
and location selected by the Kenny Rogers Roasters franchisee. We do not
typically sell food, equipment or supplies to our Kenny Rogers Roasters
franchisees.
We plan to offer various management training courses for management
personnel of future Kenny Rogers Roasters restaurants. At least one restaurant
manager from each new restaurant or co-branded restaurant will have to
successfully complete Kenny Rogers Roasters' mandated management training
program. We also plan to offer additional operations and general management
training courses to all Kenny Rogers Roasters restaurant managers and other
managers with supervisory responsibilities. We provide standard manuals to each
franchisee covering training and operations, products and equipment and local
marketing programs. We also provide ongoing advice and assistance to
franchisees.
Franchised restaurants are required to be operated in accordance with
uniform operating standards and specifications relating to the selection,
quality and preparation of menu items, signage, decor, equipment, uniforms,
suppliers, maintenance and cleanliness of premises and customer service. We
develop all standards and specifications, which are applied on a system-wide
basis. We continuouslybasis and monitor franchisee operations. Franchisees are required to furnish us
with
6
detailed monthly sales or operating reports which assist us in monitoring the
franchisee's compliance with its franchise agreement. We have the right to
terminate a franchise if a franchisee does not operate and maintain a restaurant
in accordance with the requirements of its franchise or license agreement. We
also have the right to terminate a franchise for non-compliance with certain
other terms and conditions of the franchise agreement such as non-
paymentnon-payment of
royalties, sale of unauthorized products, bankruptcy or conviction of a felony.
During the fiscal year ended March 31, 2002, three27, 2005, no Kenny Rogers Roasters franchise
agreements were terminated for non-compliance.
Franchisees who desire to open multiple units in a specific territory
within the United States may generally enter into a standard area development
agreement under which we would receive an advance fee based upon the number of
proposed units which the franchisee is authorized to open. This advance would be
credited against the franchise fee payable to us, as provided in its standard
franchise agreement. In some circumstances, we may grant exclusive territorial
rights in foreign countries for the development of Roasters units based upon
compliance with a predetermined development scheduleschedule. During fiscal 2004, we
renegotiated our agreement with Roasters Asia Pacific, our Master Developer in
the Far East. Under this agreement, we will receive an annual fee instead of
ongoing royalties and restaurant opening fees. The annual fee is scheduled to
increase on each anniversary of the agreement.
Company-owned Nathan's Restaurant Operations
As of March 31, 2002,27, 2005, we operated 16six company-owned Nathan's units,
including one kiosk and one seasonal location, in New YorkYork. Company-owned units currently
range in size from approximately 440 square feet to 10,000 square feet and New Jersey.are
principally free-standing buildings. All restaurants, except our seasonal
boardwalk location in Coney Island, NY, have seating to accommodate between 60
and 350 customers. The restaurants are designed to appeal to all ages and are
open seven days a week. We have established high standards for food quality,
cleanliness and service at our restaurants and regularly monitor the operations
of our restaurants to ensure adherence to these standards. Restaurant service
areas, seating, signage and general decor are contemporary.
Three of these restaurants are older and significantly larger units which
do not conform to currentcontemporary designs. These units carry a broader selection of
menu items than current designs. The items offered at our restaurants, other
than the core menu, tend to have lower margins than the core menu. The older
units require significantly higher levels of initial investment than current
franchise designs and tend to operate at a lower sales/investment ratio.
Consequently, we do not intend to replicate these older units in future
company-owned units.
We entered into a food service lease agreement with Home Depot U.S.A.,
Inc. ("Home Depot") under which we leaseleased space in certain Home Depot
Improvement Centers to operate Nathan's restaurants. The term of each Home Depot
agreement iswas five years from the date on which the restaurant opens, with one
five year renewal option. We
currently operate seven units withinIn August 2002, Nathan's received written notice from
Home Depot that Home Depot terminated eight License Agreements with Nathan's
pursuant to which Nathan's operated Nathan's restaurants in certain Home Depot
Improvement Centers, including
one kiosk.
Company-owned units currently rangeCenters. In accordance with the termination notices, Nathan's ceased
its operations in size from approximately 440 square
feet to 10,000 square feet and are located principally in retail shopping
environments or are free-standing buildings. All restaurants, except our
seasonal boardwalk location, have seating to accommodate between 30 and 325
customers. The restaurants are designed to appeal to all ages and generally are
open seven days a week. We have established high standards for food quality,
cleanliness and service at our restaurants and regularly monitor the operations
of our restaurants to ensure adherence to these standards. Restaurant service
areas, seating, signage and general decor are contemporary.
7
those locations before February 20, 2003.
Company-owned Miami Subs Restaurant Operations
As ofDuring the fiscal year ended March 31, 2002,27, 2005, we operateddid not operate any
company-owned Miami Subs restaurants. During fiscal 2004, our four
Miami Subscompany-operated restaurants located in Southern Florida. All of ourFlorida were franchised or
transferred pursuant to Management Agreements. These four company-owned Miami
Subs restaurants arewere free-standing restaurants offering drive-thru operations
as well as dine-in seating. TheThese restaurants generally areranged in size from approximately
3,1002,500 square feet to 4,000 square feet with seating capacity for approximately
90 guests. We are presently evaluating our
company-owned restaurants and might seekAt present, we do not intend to franchise some of these restaurants.
Commencing January 2000, we introduced a re-engineeredopen any new company-operated Miami
Subs menu
within our company-owned restaurants.
Throughout fiscal years 2001 and 2002, our
menu development activities emphasized our co-branding strategy of including
certain Nathan's, Kenny Rogers Roasters and Arthur Treachers' signature products
within the Miami Subs restaurant system.7
Company-owned Kenny Rogers Roasters Restaurant Operations
At March 31, 2002, we operated two Kenny Rogers Roasters restaurants in
Rockville Centre and Commack New York. These units are traditional free-standing
buildings, each with a drive thru. In addition to the standard Kenny Rogers
Roasters menu, both restaurants feature Nathan's all-beef frankfurters,
crinkle-cut french fries, chargrilled hamburgers and other select Nathan's menu
items, including a newly formulated kids' menu. Arthur Treachers' products are
also featured in the Rockville Centre restaurant. As of March 31, 2002, we
decided to sell of our company-operated Kenny Rogers Roasters restaurant in
Rockville Centre, New York and are actively engaged in negotiations with a
prospective purchaser.
In April 2002, we opened a new limited-menu Kenny Rogers food court type
outlet, as part of a major remodeling of a large Company-ownedcompany-owned Nathan's facility
in Oceanside, New York. The Kenny Rogers Roasters operations was closed in June
2005.
At March 27, 2005, we did not operate any Company-owned stand alone Kenny
Rogers Roasters restaurants. At present, we do not intend to open any new
company-operated Kenny Rogers Roasters restaurants.
International FranchisingDevelopment
As of March 31, 2002,27, 2005, our franchisees operated 90106 units in 1411 foreign
countries having significant representationsoperations within Malaysia the Philippines,
and the Middle-East.Philippines. The
vast majority of foreign operations consist of approximately 95 Kenny Rogers
Roasters units, although our Nathan's and Miami Subs restaurant conceptsconcept also havehas 11 foreign
franchise operations. During the current fiscal year, our international
franchising program opened 11seven Nathan's in Japan, three Nathan's in Kuwait and
one Kenny Rogers Roasters as follows: fourrestaurant in the PhilippinesBahamas.
During fiscal 2004, we executed a Master Franchise Agreement and seven in Malaysia.
To date, we also executed Letters of Intent to enter into Master
Development Agreementsa
Distribution and Manufacturing Agreement for the Nathan's and Miami Subs rights
to China, Japan, India and Turkeyin Kuwait and are currently in various stages of discussionsnegotiations for development in
other foreign countries. We may continue to grant exclusive territorial rights
for franchising and for the manufacturing and distribution rights in foreign
countries, based upon compliance with a pre-determined development schedule andwhich would require that an exclusivity fee be conveyed for these
rights. We plan to develop the restaurant franchising system internationally
through the use of master franchising agreements based upon individual or
combined use of all three restaurant concepts.
8
concepts and for the distribution of
Nathan's products. During the fiscal year ended March 27, 2005, approximately
3.3% of total revenues were derived from Nathan's international operations.
Location Summary
The following table shows the number of our company-owned and franchised or
licensed units in operation or under development at March 31, 200227, 2005 and their geographical
distribution:
Franchise
LocationDomestic Locations Company or License(1) Total
- -------------------------- ------- ------------------------- -----
AlabamaArizona - 2 2
California - 2 2
Connecticut - 7 7
Delaware - 1 1
Florida - 91 91
Georgia - 4 4
ArizonaKentucky - 3 3
California - 5 5
Colorado - 1 1
Connecticut - 4 4
Florida 4 112 116
Georgia - 3 3
Idaho - 1 1
Indiana2 2
Maine - 1 1
Maryland - 1 12 2
Massachusetts - 3 3
Michigan - 1 1
Michigan - 2 2
Minnesota - 2 21 1
Missouri - 4 43 3
Nevada - 4 4
New Jersey 2 44 46- 41 41
New York 16 54 706 60 66
North Carolina - 15 159 9
Ohio - 4 4
Pennsylvania - 6 65 5
South Carolina - 2 21 1
Tennessee - 1 1
Texas - 4 41 1
Virginia - 3 3
-- --- ---
Domestic Subtotal 22 274 2966 249 255
-- --- ---
8
International Locations
Bahamas - 2 2
Brunei-----------------------
Bahamas - 1 1
CanadaChina - 3 38 8
Cypress - 1 1
Dominican RepublicEgypt - 3 3
Hong Kong - 2 2
EgyptJapan - 4 4
Indonesia7 7
Kuwait - 1 1
Israel - 1 13 3
Malaysia - 30 3031 31
Philippines - 35 35
Puerto Rico - 2 2
Saudi Arabia - 2 244 44
Singapore - 4 4
United Arab Emirates - 2 2
-- --- ---
International Subtotal - 90 90106 106
-- --- ---
Grand Total 22 364 386
-- --- ---
(1) Includes 3 units operating6 355 361
== === ===
(1) Amounts include 6 units operated by third parties pursuant to management
agreements and does not include our Branded Product Program.
9
Branded Product Program
The "Branded Product Program" was launched during fiscal 1998. The program
was expressly created to provide a new vehicle for the sale of Nathan's hot dogs
and other proprietary items. Through the program, Nathan's provides qualified
foodservice operators in a variety of venues the opportunity to capitalize on
marketing Nathan's superior signature products and valued brand equity.and selling Nathan's signature products. In
conjunction with the program, the operators are granted a limited use of the
Nathan's trademark, as well as Nathan's point of purchase materials. We sell
products either directly to the end users, or to various foodservice
distributors who provide the product to retailers.
As of March 2002,2005, the branded product programBranded Product Program was comprised of approximately 1,500over 5,900
points of sale. The program is unique in its flexibility and broad appeal. Hot
dogs are offered in a variety of sizes and even come packaged with buns for
vending machine use. The Canteen Corporation, America's largest vending company,
uses Nathan's packaged hot dogs throughoutas part of its system. During fiscal 2005,
Nathan's hot dogs continued to be promoted as part of the pretzel dogs sold at
over 570 Auntie Ann's. Nathan's hot dogs were introduced in over 320 Circle K
convenience stores and approximately 100 Subway restaurants operating within
Wal-Mart stores.
During the past two years, the number of locations offering the Nathan's
branded productproducts have been significantly expanded. Today, Nathan's hot dogs are
being offered byin major hotel and casino operations such as Park Place
Entertainment (Caesar's, Paris, Bally's, Flamingo, etc.), as well as by all of
the Trump Casino operations in Atlantic City, New Jersey. National movie
theaters, such as National AmusementAmusements, Loews Theaters and Muvico, nowalso offer
Nathan's at their concession stands. A wide variety of colleges and universities
serve Nathan's hot dogs. Our product isproducts are also offered in the cafeteria at the
House of Representatives and the Kennedy Space Center. Nathan's hot dog iswas
named the official non-kosher hot dog of the New York Yankees for the 2001-20032001-2006
baseball seasons. Of particular significance is our recent expansion intoIn April 2005, Nathan's was also named an official hot dog of
the fast food
arena, whereNew York Mets for the 2005 - 2007 baseball seasons.
Additionally, Nathan's hot dogs are currently being offered at a variety
of restaurantsrestaurant chains such as Johnny Rockets, Flamers, Subway and A&W Hot Dogs &
More. Of particular significance is our expansion into over 1,500 retail
locations, approximately 1,800 convenience stores with companies such as
Exxon/Mobil, and approximately 1,000 locations that are operated by various
contract feeders. As we expand the program, we continue to openencounter new
opportunities with high volume
potential. In addition to over 75 airport locations,9
business opportunities. Nathan's is now offered in retail environments,
universities, entertainment centers, casinos, airport and travel plazas and on
Amtrak Trains throughout the nation, as well as a number of highway travel
plazas.nation.
Expansion Program
We expect to continue the growth of our Branded Product Program through
the addition of new points of sale primarily for Nathan's hot dogs. We believe
that as consumers look to assure confidence in the quality of the food that they
purchase, there is great potential to increase our sales by converting existing
sales of non-branded products to Nathan's branded products throughout the
foodservice industry. In addition, certain Miami Subs, Kenny Rogers Roasters and
additional Nathan's products may be included as part of our Branded Product
Program.
We also expect to continue opening new franchised units for each restaurant
concept individually and
on a co- brandedco-branded basis, expanding product distribution through alternativevarious means such
as branded products or supermarketand retail licensing arrangements, developing master
franchising programs in foreign countries and continue introducing eachcontinuing to introduce our
restaurant concepts' signature products through co-branding efforts within our
existing restaurant system.
During fiscal 2003,We anticipate that we will open franchised units individually and develop
new co-branded outlets. We may selectively openconsider opening new company-owned
Nathan's units concentrated within the New York metropolitan area or in Southern Florida using
our co-branded format.on an opportunistic basis. Existing company-owned units are principally
located in the New York metropolitan area, and Southern Florida market where we have extensive experience in
operating restaurants. We may consider new opportunities in both traditional and
captive market settings.
We anticipatebelieve that we will open
franchised units of all three restaurant concepts individually and develop new
co-branded outlets. We have engaged an imaging and equipment design firm to
assist us with the development of certain prototype restaurants.
We expect that during fiscal 2003 our international development efforts will take on added dimensionscontinue to
garner a variety of interest as a result of the unique co-branding and product
distribution opportunities that we now offer. We believe that in addition to
restaurant franchising, of our three
restaurant concepts, there is the opportunity to further increase revenues by
offering master development agreements to qualified persons or entities allowing
for the operation of franchised restaurants, subfranchising restaurants to
others, licensing the manufacture of our signature products, selling our
signature products through supermarkets or other retail venues and allowing for
the further development of our Branded Product Program. Qualified persons or
entities must have satisfactory foodservice experience managing multiple units,
the appropriate infrastructure and the necessary financial resources to support
the business development.
10
We will also seek to continueDuring fiscal 2004, we test marketed the growthsale of our Branded Product Program in
fiscal 2003 through the addition of new points of sale for Nathan's hot dogs.dogs on the
QVC television network. On May 20, 2004, Nathan's was featured as a "Today's
Special Value", based upon the results of this test. During the balance of
fiscal 2005, our products were also promoted on 18 additional QVC showings. We
believe thatalso developed additional products exclusively for sale by QVC such as consumers lookcheese
dogs and hot dogs on a stick. On May 12, 2005 we were once again featured as a
"Today's Special Value"and intend to assure confidence in the quality of the food
that they purchase, there is great potential to increase our sales by converting
existing sales of non-branded products into branded productsfurther develop this distribution channel
throughout the
foodservice industry. In addition, certain Miami Subs, Kenny Rogers Roasters and
Nathan's products may be included as part of our Branded Product Program.fiscal 2006.
Co-branding
We believe that there is a substantialan opportunity for co-branding amongour restaurant
concepts. In addition to the three restaurant concepts that we own, we also
maintain certain co-branding rights for the use of the brand "Arthur Treacher's
Fish & Chips" within the United States. Franchisees wishing to co-brand with our
other brands receive a current Uniform Franchise Offering Circular ("UFOC") and
execute a participation agreement as a rider to their franchise agreement.
During the fiscal year ended March 31, 2002,2001, we began to implementimplementing our co-branding strategy within our
existing restaurant system. The "Host Restaurants" continuecontinued to operate pursuant to their
currentoriginal franchise agreements. ExistingParticipating franchisees executed an addendum to
their agreement which defined the terms of our co-branding relationship. In
January 2001, we began to implement our co-branding strategy by offering the
Miami Subs franchise community the ability to add Nathan's, Kenny Rogers
Roasters and Arthur Treachers' signature products to their menus. As part of
ourthis co-branding strategy for the Miami Subs franchise system, an entirely new
marketing approach was developed to include the name "Miami Subs Plus". In January 2001,Since
fiscal 2002, we beganhave continued to implement our
co-branding strategy by offering to the Miami Subs franchise community the
ability to add Nathan's, Kenny Rogers Roasters and Arthur Treachers' signature
products to their menus. During fiscal 2003, we intend to focus on co-brandingco-brand within the Nathan's restaurant system
by adding the
10
Kenny Rogers brand , and includingArthur Treacher's brands into Nathan's restaurants, and we
intend to continue these co-branding efforts with new and existing franchisees
in the future.
Currently, the Arthur Treacher's brand at additional Nathan's restaurants.
To date, the Arthur Treacher's brand has been introducedis being sold within 133114 Nathan's,
Kenny Rogers Roasters and Miami Subs restaurants, the Nathan's brand has been added tois included
on the menu of 8865 Miami Subs and Kenny Rogers restaurants, while the Kenny
Rogers Roasters brand has been introduced into 79is being sold within 90 Miami Subs and Nathan's
restaurants.
We have introduced the Miami Subs brand in three
company-owned Nathan's and one Kenny Rogers franchised restaurants.
We believe that our diverse brand offerings compliment each other, and will enablewhich
has enabled us to market franchises of co- brandedco-branded units and continue co-branding
within existing franchised units. The Nathan's and Miami Subs products are
typically stronger during lunch while the Kenny Rogers Roasters and Arthur
Treachers' products are generally stronger during dinner.
We expectcontinue to market co-branded units, generally, promoting Nathan's as
the "Host Restaurant", within the United States and internationally. We believe
that a multi- branded restaurant concept offering strong lunch and dinner day
parts will beis very appealing to both consumers and potential franchisees. Such
restaurants shouldare designed to allow the operator to increase sales and leverage
the cost of real estate and other fixed costs which mayto provide superior investment
returns as compared to many restaurants that are single branded.
Licensing Program
We license Specialty Food Group, Inc. "SFG, Inc." (successor to SMG, Inc.)
to produce packaged hot dogs and other meat products according to Nathans'
proprietary recipes and spice formulations, and to use "Nathan's Famous" and
related trademarks to sell these products on an exclusive basis in the United
States to supermarkets, groceriesclub stores and other outlets,groceries, thereby providing foods for
off-premises consumption. The SMGSFG agreement expires in 2014 and provides for
royalties ranging between 3% to 5% of sales. The percentage varies based on
sales volume, with escalating minimum royalties. Earned royalties of
approximately $1,724,000$2,451,000 in fiscal 20022005 exceeded the contractual minimum
established under the agreement. We believe that the overall exposure of the
brand and opportunity for consumers to enjoy the "Nathan's Famous" hot dog in
their homes helps promote "Nathan's Famous" restaurant patronage. Supermarket
sales of our hot dogs are concentrated in the New York metropolitan area, New
England, Florida, California, the Mid-Atlantic states and certain other select
markets. Over the past year, SFG, Inc. has developed a variety of new products
which include four different flavored Link Beef Sausages, two different flavored
Dinner Sausages and Cheese Franks. Nathan's has surpassed the Hebrew National
brand as the number one selling premium all beef hot dog in the United States
for the fifty-two weeks ended April 16, 2005. For the same period of time,
Nathan's was the third highest selling all beef hot dog in the United States
surpassed only by the Ball Park and Oscar Mayer brands. Royalties from SMGSFG
provided the majority of our fiscal 20022005 retail license revenues.
11
In November 1997, we executed a license agreement with J.J. Mathews & Co,
Inc. to market a variety of Nathan's packaged menu items for sale within
supermarkets and groceries. The agreement called for us to receive royalties
based upon sales, subject to minimum annual royalties, as specified in the
agreement. During fiscal 2001 the license agreement was terminated.
During fiscal 2002, certain products were also distributed under licensing
agreements with Gold Pure Food Product's Co., Inc. and Herman Pickle Packers,
Inc. Both companies licensed the "Nathan's Famous" name for the manufacture and
sale of various condiments including mustard, salsa, sauerkraut and pickles.
These products have been distributed on a limited basis. Fees and royalties
earned during fiscal 2002 have not been significant.
We also license the manufacture of the proprietary spices and marinade which
are used to produce Nathans' hot dogs and Kenny Rogers chicken. During fiscal
20022005 and 2001,2004, we earned $249,000$336,000 and $284,000,$288,000, respectively, under these
agreements.
ProvisionsDuring fiscal 2004, we entered into an agreement with ConAgra to test the
production and Suppliesretail distribution of Nathan's frozen french fries. The product
was solely available at Shop Rite supermarkets in the New York City area during
fiscal 2004. Based on the success of this test, we introduced Nathan's frozen
french fries in approximately 1,200 Publix and Winn-Dixie supermarkets in
Florida during the summer of 2004. Currently, Nathan's french fries are sold in
all of the major supermarkets in the New York City metropolitan area.
During fiscal 2005, certain products were also distributed under licensing
agreements with Hermann Pickle Packers, Inc., Gold Pure Food Product's Co., Inc.
and Premio Foods, Inc. These companies licensed the "Nathan's Famous" name for
the manufacture and sale of various condiments including mustard, salsa,
sauerkraut, pickles and certain meat products which are not covered by the SFG
license agreement. These products have been distributed on a limited basis. Fees
and royalties earned during fiscal 2005 were approximately $175,000.
11
In fiscal 2004, we first licensed the sale of a Nathan's stove-top griddle
which was marketed via televised infomercial and direct retail. During fiscal
2005, we continued to sell the stove-top griddle at retail only and have been
focusing on developing new products, along with establishing a new relationship
for the direct marketing of these products. Revenue derived under this agreement
was $325,000 during fiscal 2004 and $38,000 during fiscal 2005. We intend to
continue these efforts to develop and market additional Nathan's non-food items
during fiscal 2006.
PROVISIONS AND SUPPLIES
Our proprietary hot dogs are produced by SMG,SFG, Inc. in accordance with
Nathans' recipes, quality standards and proprietary spice formulations. John
Morrell & Company, our licensee prior to SMG,SFG, has retained the right to produce
Nathans' proprietary spice formulations. Kenny Rogers Roasters proprietary
marinade and spice formulations are produced by McCormick and Co., Inc. AllMost
other company provisions are purchased and obtained from multiple sources to
prevent disruption in supply and to obtain competitive prices. We approve all
products and product specifications. We negotiate directly with our suppliers on
behalf of the entire system for all primary food ingredients and beverage
products sold in the restaurants to ensure adequate supply of high quality items
at competitive prices.
We utilize a unified source for the distribution needs of all of our
restaurant concepts pursuant to a national food distribution contract with Marriott Distribution Services.US
Foodservice, Inc. This agreement enables our restaurant operators to order and
receive deliveries for the majority of their food and paper products directly
through this distributor. We believe that this arrangement is more efficient and
cost effective than having multiple distributors.
Marketing, Promotion and AdvertisingMARKETING, PROMOTION AND ADVERTISING
We maintain advertising funds for local, regional and national advertising
under the Nathan's Famous Systems, Inc. Franchise Agreement. Nathans'
franchisees are generally required to spend on local marketing activities or
contribute to the advertising funds up to 2.5% of restaurant sales for
advertising and promotion. Marriott and National Restaurant Management, Inc. are
among the current franchisees who are not subject to this requirement. Franchisee contributions to the advertising fund for
national marketing support are generally based upon the type of restaurant and
its location. The difference, if any, between 2.5% and the contribution to the
advertising fund must be expended on local programs approved by us as to form,
content and method of dissemination.
Throughout fiscal 2002,2005, Nathans' primary marketing emphasis continued to
be focused on local store marketing campaigns featuring a value oriented
strategy supplemented with promotional "Limited Time Offers." We anticipate that
near-term marketing efforts for Nathan's will continue to emphasize local store
marketing activities.
In addition, SMGSFG promotes and advertises the "Nathan's Famous" packaged
retail brand, particularly in the New York metropolitan area, California, the
greater Boston area, Phoenix, Arizona and throughout Florida. We believe that
the advertising by SMGSFG increases brand recognition and thereby indirectly
benefits Nathan's restaurants in the areas in which SMGSFG conducts its campaigns.
From time to time, we also participate with SMGSFG in joint promotional activities.
We maintain a separate Production Advertising Fund for the creation and
development of advertising, marketing, public relations, research and related
programs for the Miami Subs system, as well as for other activities that we may
deemare
deemed appropriate. Franchisee and any company-operated restaurants contribute
.5%..50% of each restaurants'restaurant's gross sales to this fund. In addition, we maintain
certain Regional Advertising Funds in which franchised and company-operated
restaurants in the region contribute 1.75% of each restaurants'restaurant's gross sales. If
a restaurant
12
is not located in an area where a regional advertising fund has
been established, the franchisee or company-operated restaurant is required to
spend at least 1.75% of the restaurants'restaurant's gross sales for local advertising.
Our Miami SubsSubs' advertising programs principally use radio and print, and carry the
theme that Miami Subs offers a variety of menu selections at competitive, fast
food prices.
Our Miami Subs radio advertisements are broadcast
principally in markets where there are sufficient restaurants to benefit from
such advertisements. In the summer 2001, we used a television, radio and
newsprint campaign to introduce the new co-branded Miami Subs Plus concept in
Southern Florida.12
The physical facility of each Miami Subs restaurant represents a key
component of our Miami SubsSubs' marketing strategy. The restaurants have well-lit
exteriors featuring a distinctive roof design, an abundance of pastel neon
lights and a lively interior featuring a tropical motif which we believe creates
strong appeal during the day and night.
We maintain separate advertising funds on behalf of the Kenny Rogers
Roasters franchise system for regional and national advertising under the NF
Roasters Corp. Franchise Agreement. Franchisees who signed up to participate in
the new system arewere required to contribute to the advertising funds .50% of
restaurant sales for advertising and promotion for the year April 1, 1999
through March 31, 2000 and .75% of restaurant sales for advertising and
promotion thereafter. However, contributions to the marketing fund for the years
April 1, 2000 through March 31, 20032006 have been waived. New franchisees will be
expected to spend on local marketing activities or contribute to the advertising
funds up to 2.5% of restaurant sales for advertising and promotion.
During the year, the Kenny Rogers Roasters' primary marketing focus has
been toward utilizing promotional "Limited Time Offers". We anticipate that
near-term marketing efforts for Kenny Rogers Roasters will continue to emphasize
local store marketing activities.
Government RegulationGOVERNMENT REGULATION
We are subject to Federal Trade Commission ("FTC") regulation and several
state laws which regulate the offer and sale of franchises. We are also subject
to a number of state laws which regulate substantive aspects of the
franchisor-franchisee relationship.
The FTC's "Trade Regulation Rule Concerning Disclosure Requirements and
Prohibitions Concerning Franchising and Business Opportunity Ventures" requires
us to disclose certain information to prospective franchisees. Fifteen states,
including New York, also require similar disclosure. While the FTC rule does not
require registration or filing of the disclosure document, fourteen states
require franchisors to register the disclosure document (or obtain exemptions
from that requirement) before offering or selling a franchise. The laws of
seventeen other states require some form of registration under "business
opportunity" laws, which sometimes apply to franchisors such as the franchisor
of the Nathan's Famous, Miami Subs, and Kenny Rogers Roasters systems.
Laws that regulate one or another aspect of the franchisor-franchisee
relationship presently exist in twenty-one states and the District of Columbia.
These laws regulate the franchise relationship by, for example, requiring the
franchisor to deal with its franchisees in good faith, prohibiting interference
with the right of free association among franchisees, limiting the imposition of
standards of performance on a franchisee, and regulating discrimination among
franchisees in charges, royalties or fees. These laws have not precluded us from
seeking franchisees in any given area. Although these laws may also restrict a
franchisor in the termination of a franchise agreement by, for example,
requiring "good cause" to exist as a basis for the termination, advance notice
to the franchisee of the termination, an opportunity to cure a default and
repurchase of inventory or other compensation, these provisions have not had a
significant effect on our operations.
We are not aware of any pending franchise legislation in the U.S. that we
believe is likely to significantly affect our operations. We believe that our
operations comply substantially with the FTC rule and state franchise laws.
13
Each company-owned and franchised restaurant is subject to regulation by
federal agencies and to licensing and regulation by state and local health,
sanitation, safety, fire and other departments. Difficulties or failures in
obtaining the required licenses or approvals could delay or prevent the opening
of a new restaurant.
We are also subject to the Federal Fair Labor Standards Act, which governs
minimum wages, overtime, working conditions and other matters. We are also
subject to other federal and state environmental regulations, which have not had
a material effect on our operations. More stringent and varied requirements of
local governmental bodies with respect to zoning, land use and environmental
factors could delay or prevent development of new restaurants in
13
particular locations. In addition, the federalFederal Americans with Disabilities Act
("ADA") applies with respect to the design, construction and renovation of all
restaurants in the United States. Compliance with the ADA's requirements could
delay or prevent the development of, or renovations to, restaurants in certain
locations, as well as add to the cost of such development or renovation.
Each of the companies which manufactures, supplies or sells our products
is subject to regulation by federal agencies and to licensing and regulation by
state and local health, sanitation, safety and other departments. Difficulties
or failures by these companies in obtaining the required licenses or approvals
could adversely effect our revenues which are generated from these companies.
Alcoholic beverage control regulations require each restaurant that sells
such products to apply to a state authority and, in certain locations, county
and municipal authorities, for a license or permit to sell alcoholic beverages
on the premises. Typically, licenses must be renewed annually and may be revoked
or suspended for cause at any time. Alcoholic beverage control regulations
relate to numerous aspects of the daily operations of the restaurants, including
minimum age of customers and employees, hours of operation, advertising,
wholesale purchasing, inventory control and handling, storage and dispensing of
alcoholic beverages. At March 31, 2002,27, 2005, we offered for sale beer or wine in sixtwo
of our existing company-operated restaurants. Each of these restaurants have
current alcoholic beverage licenses permitting the sale of these beverages. We
have never had an alcoholic beverage license revoked.
We may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which wrongfully served alcoholic beverages to
such person. We carry liquor liability coverage as part of our existing
comprehensive general liability insurance and have never been named as a
defendant in a lawsuit involving "dram-shop" statutes.
We believe that we operate in substantial compliance with applicable laws
and regulations governing our operations.
EmployeesEMPLOYEES
At March 31, 2002,27, 2005, we had 557238 employees, of whom 6553 were corporate
management and administrative employees, 7530 were restaurant managers and 417155
were hourly full-time and part-time food-service employees. Food-service
employees at fivefour locations are currently represented by Local 1115-NY, a division of
District 1115, AFL - CIO1102 RWSDU UFCW
AFL-CIO, CLC , Retail, Wholesale and Department Store Union, under various agreementsagreement
which will expireexpires in April 2003.June 2006. We consider our employee relations to be good and
have not suffered any strike or work stoppage for more than 3033 years.
We provide a training program for managers and assistant managers of our
new company-owned and franchised restaurants. Hourly food workers are trained,
on site, by managers and crew trainers following company practices and
procedures outlined in our operating manuals.
TrademarksTRADEMARKS
We hold trademark and service mark registrations for NATHAN'S FAMOUS,
NATHAN'S and Design, NATHAN'S FAMOUS SINCE 1916 and SINCE 1916 NATHAN'S FAMOUS
within the United States, with some of these marks holding corresponding foreign
trademark and service mark registrations in more than 20 jurisdictions. We also
hold various related marks for restaurant services and some food items.
14
We have registered the marks "MIAMI SUBS AND DESIGN" and "MIAMI SUBS GRILL
AND DESIGN" with the United States Patent and Trademark Office. In addition, the
marks have been registered in approximately 50numerous foreign countries.
14
We have also filed the MIAMI SUBS PLUS trademark on February 15, 2001 and
an Amendment to Alleged Use on May 21, 2001. The MIAMI SUBS PLUS is a pending application
with the U.S. Patent and Trademark Office. It generally takes
approximately 18 months for the approval of an application.Office became effective on September 10,
2002.
We hold trademark and service mark registrations for "KENNY ROGERS
ROASTERS", "KENNY ROGERS ROASTERS WOOD FIRE ROASTED CHICKEN & DESIGN", " DOWN
RIGHT KICKIN BBQ CHICKEN", "EVERYONE ELSE IS JUST PLAIN CHICKEN", "THERE'S
GOODNESS HERE", "YOU'RE GONNA LOVE THIS FOOD", "YOUR HEART IS IN THE RIGHT
PLACE", "KENNY ROGERS TAKE IT HOME & DESIGN" and "KENNY ROGERS ROASTERS EXPRESS
& DESIGN" within the United States. Some of these marks are covered by
corresponding foreign trademark and service mark registrations in more than 80
jurisdictions. The "Kenny Rogers Roasters" marks are subject to the terms of an
April 5, 1993 license from Mr. Kenny Rogers; that license agreement was assigned
to us on April 1, 1999, when we purchased certain assets relating to the "Kenny
Rogers Roasters" franchise system.
We believe that our trademarks and service marks provide significant value
to us and are an important factor in the marketing of our products and services.
We believe that we do not infringe on the trademarks or other intellectual
property rights of any third parties.
CompetitionCOMPETITION
The fast food restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional or
national economic conditions, changes in consumer tastes, consumer concerns
about the nutritional quality of quick-service food and increases in the number
of, and particular locations of, competing restaurants. Factors such as
inflation, increases in food, labor and energy costs, the availability and cost
of suitable sites, fluctuating interest and insurance rates, state and local
regulations and licensing requirements and the availability of an adequate
number of hourly paid employees can also adversely affect the fast food
restaurant industry.
Our restaurants competerestaurant system competes with numerous restaurants and drive-in
units operating on both a national and local basis, including major national
chains with greater financial and other resources than ours. Changes in pricing
or other marketing strategies by these competitors can have an adverse impact on
our sales, earnings and growth. We also compete with local restaurants and
diners on the basis of menu diversity, food quality, price, size, site location
and name recognition. There is also active competition for management personnel
as well as suitable commercial sites for restaurants.
We believe that our emphasis on our signature products and the reputation
of these products for taste and quality set us apart from our major competitors.
As fast food companies have experienced flattening growth rates and declining
average sales per restaurant, some of them have adopted "value pricing" and or
deep discount strategies. These strategies could have the effect of drawing
customers away from companies which do not engage in discount pricing and could
also negatively impact the operating margins of competitors which attempt to
match their competitors' price reductions. We have introduced our own form of
"value pricing," selling combinations of different menu items for a total price
lower than the usual sale price of the individual items and other forms of price
sensitive promotions. We have expanded our value pricing strategy by offering
multi-sized alternatives to our value priced combo meals. Extensive price
discounting in the fast food industry could have an adverse effect on us.our
financial results.
We also compete for the sale of franchises with many franchisors of restaurants and other business
concepts for the sale of franchises to qualified and financially capable
franchiseesfranchisees.
Our Branded Product Program competes directly with a variety of nationally
recognized hot dog companies. Our products primarily compete based upon price,
quality and value to the foodservice operator and consumer. We believe that the
reputation of the Nathan's brand for superior quality along with numerous companiesthe unique
operational support provided to the foodservice operator provides Nathan's with
a competitive advantage.
15
Our retail licensing program for the sale and distribution of our
licensed hot dogs and other packaged foods within
supermarkets, compete primarily on the basis of reputation, flavor, quality and
price. 15
ItemIn most cases, we compete against nationally recognized brands that have
significantly greater resources then those at our disposal.
AVAILABLE INFORMATION
We file reports with the SEC, including an annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and a proxy
statement on Schedule 14A. The public may read and copy any materials filed by
us with the SEC at the SEC's public reference room at 450 Fifth Street, NW,
Washington D.C., 20549. The public may obtain information about the operation of
the SEC's public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC
also maintains a website at http://www.sec.gov that contains reports, proxy and
information statements and other information about issuers such as us that file
electronically with the SEC.
In addition, we make available free of charge on our website at
http://www.nathansfamous.com our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, proxy statement on Schedule 14A and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) under the Exchange Act as soon as reasonably practical after we
electronically file such material with, or furnish it to, the SEC.
ITEM 2. Properties
- ------ ----------PROPERTIES
Our principal executive offices consist of approximately 9,700 sq. ft. of
leased space in a modern, high-rise office building in Westbury, New York which
expires in November 2009. We also own Miami Subs' regional office consisting of
approximately 8,500 sq. ft. in Fort Lauderdale, Florida. We currently own threetwo
restaurant properties consisting of a 2,650 sq. ft. Nathan's restaurant, at 86th
Street in Brooklyn, New York located on a 25,000 sq. ft. lot, a 2,400 sq. ft.
Miami Subs restaurant in Largo, FL located on a 47,000 sq. ft. lot and a 2,600 sq.
Ft.ft. Miami Subs restaurant in Miami, FL located on a 25,000 sq. ft. lot. At March
31, 2002,27, 2005, other company-owned restaurants which were operating or
developed were located in
leased space with terms expiring as shown in the following table:
Current Lease Approximate
Nathan's Restaurants Location Expiration Date Square Footage
--------- ---------------------- --------------- --------------- --------------
Nathan's Restaurants
--------------------
Coney Island Brooklyn, NY December 2007 10,000
Coney Island Boardwalk Brooklyn, NY October 20022005 440
Kings Plaza Shopping Center Brooklyn, NY July 2010 4,200
Long Beach Road Oceanside, NY May 2011 7,300
Central Park Avenue Yonkers, NY April 2010 10,000
Jericho Turnpike Commack, NY March 2003 3,200
Hempstead Turnpike Levittown, NY September 2004 4,100
Broad Hollow Road Farmingdale, NY April 20032008 2,200
Jericho Home Depot Jericho, NY September 2004 1,500
Copiague Home Depot Copiague, NY April 2005 1,200
Flushing Home Depot Flushing, NY June 2005 1,500
Elmont Home Depot Elmont, NY October 2005 1,500
Union Home Depot Union, NJ January 2008 960
Staten Island Home Depot Staten Island, NY July 2007 1,680
Brooklyn Home Depot Brooklyn, NY March 2008 950
Kenny Rogers Roasters
---------------------
Commack Roasters Commack, NY October 2013 3,100
Rockville Centre Roasters Rockville Centre, NY April 2018 4,000
Miami Subs Restaurants
----------------------
17th Street Ft. Lauderdale, FL August 2003 3,000
Lauderhill Lauderhill, FL May 2007 4,000
South Miami Miami, FL August 2006 3,500
Lejune and 11th Miami, FL September 2002 2,500
Leases for Nathan's restaurants typically provide for a base rent plus
real estate taxes, insurance and other expenses and, in some cases, provide for
an additional percentage rent based on the restaurants' revenues. ManyThree of the
Nathan's leases also provide for renewal options ranging between five10 and 2520 years upon
expiration of the primecurrent lease.
We assumed the leases for the two properties operated as Kenny Rogers
Roasters from the previous restaurant operator. These leases have remaining
terms of 11 and 12 years and also provide for a base rent plus real estate
taxes, insurance and other expenses. We are currently seeking to sell the
Rockville Centre restaurant and terminate the lease.
16
Properties leased by Miami Subs restaurants generally provide for an
initial lease term of up to 20 years and renewal terms of five to 20 years. The
leases generally provide for fixed rents plus adjustments based on changes in
the consumer price index or percentage rentals on gross sales. Restaurants and
other facilities are leased or sub-leased to franchisees or others on terms
which are generally similar to the terms in our lease with the third-party
landlord, except that in certain cases the rent has been increased. We remain
liable for all lease costs when properties are sub-leased to franchisees or
others.
At March 31, 2002,27, 2005, we were the sublessor to 3429 properties pursuant to
these arrangements, 11arrangements; five of the restaurants leased/sub-leased to franchisees or
others are located outside of Florida.Florida or the metropolitan New York area.
Aggregate rental expense, net of sublease income, under all current leases
amounted to $2,734,000$1,278,000 in fiscal 2002.
Item2005.
16
ITEM 3. Legal Proceedings
- ------ -----------------LEGAL PROCEEDINGS
We and our subsidiaries are from time to time involved in ordinary and
routine litigation. We are also involved in the following litigation:
Nathan's Famous, Inc. and Nathan's Famous Operating Corp. were named as two
of three defendants in anAn action has been commenced, in July 2001, in the Supreme Court of
New York, Westchester County. According to the amended complaint, the
plaintiffs, a minor and her mother, are seeking damages in the amount of $17
million against Nathan's Famous and Nathan's Famous Operating Corp. and one of
Nathan's Famous' former employees claiming that the Nathan's entities failed to
properly supervise minor employees, failed to monitor its supervisory personnel,
and were negligent in hiring, retaining and promoting the individual defendant,
who allegedly molested, harassed and raped the minor plaintiff, who was also an
employee. On May 29, 2002, as a result of a mediation, this action was settled,
subject to court approval. In the event the court approves the settlement, the
plaintiffs will be paid $650,000.
Elizabeth B. Jackson and Joseph Jackson commenced an action, in the Circuit Court of the Fifteenth
Judicial Circuit, Palm Beach County, Florida in September 2001 against Miami
Subs and EKFD Corporation, a Miami Subs franchisee ("the
franchisee"(the "franchisee") claiming
negligence in connection with a slip and fall which allegedly occurred on the
premises of the franchisee for unspecified damages. Pursuant to the terms of the
Miami Subs Franchise Agreement, the franchisee is obligated to indemnify Miami
Subs and hold themit harmless against claims asserted and procuredprocure an insurance
policy which namednames Miami Subs as an additional insured. Miami Subs has denied
any liability to Plaintiffsplaintiffs and has made demand
upon the franchisee's insurer to indemnify and defend against the claims
asserted. The insurer has agreed to indemnify
and defend Miami Subs and has assumed the defense of this action for Miami Subs.
Item 4. SubmissionAn employee of Mattersa Miami Subs franchised restaurant commenced an action for
unspecified damages in the United States District Court, Southern District of
Florida in January 2004 against Miami Subs Corporation, Miami Subs USA, Inc.,
and two Miami Subs franchisees, Nadia M. Investments, Inc. and DYV SYS
International, Inc.(the "franchisees"), claiming that he was not paid overtime
when he worked in excess of 40 hours per week, in violation of the Fair Labor
Standards Act. The action also seeks damages for any other employees of the
defendants who would be similarly entitled to overtime. Pursuant to the terms of
the Miami Subs Franchise Agreement, the franchisees are obligated to operate
their Miami Subs franchises in compliance with the law, including all labor
laws. On July 27, 2004, this action was settled without payment to the
plaintiffs by Miami Subs Corporation.
Ismael Rodriguez commenced an action, in the Supreme Court of the State of
New York, Kings County, in May 2004 against Nathan's Famous, Inc. seeking
damages of $1,000,000 for claims of age discrimination in connection with the
termination of Mr. Rodriguez's employment. Mr. Rodriguez was terminated from his
position in connection with his repeated violation of company policies and
failure to follow company-mandated procedures. Initial discoveries and
depositions have commenced. Nathan's has denied any liability and intends to
continue to defend this action vigorously. Nathan's has submitted this claim to
its insurance carrier and expects that it will not incur any material liability
that is not covered by its employment practices liability insurance policy.
An employee of a Miami Subs franchised restaurant commenced an action for
unspecified damages in the United States District Court, Southern District of
Florida in September 2004 against Miami Subs Corporation, Miami Subs USA, Inc.,
and three Miami Subs franchisees, FMI Subs Corporation, NEESA Subs Corp. and
Muhammad Amin, (the "franchisees"), claiming that she was not paid overtime when
she worked in excess of 40 hours per week, in violation of the Fair Labor
Standards Act. The action also seeks damages for any other employees of the
defendants who would be similarly entitled to overtime. Pursuant to the terms of
the Miami Subs Franchise Agreement, the franchisees are obligated to operate
their Miami Subs franchises in compliance with the law, including all labor
laws. On May 27, 2005, this action was settled without payment to the plaintiffs
by Miami Subs Corporation.
In July 2001, a female manager at one of our company-owned restaurants
filed a charge with the Equal Employment Opportunity Commission ("EEOC")
claiming sex discrimination in violation of Title VII of the Civil Rights Act of
1964 and a violation of the Equal Pay Act. The employee claimed that she was
being paid less than male employees for comparable work, which Nathan's denied.
Although the parties agreed to a Votesettlement in March 2004 for approximately
$10,000, such agreement was not finalized and in June and August 2004, the
employee filed further charges with the EEOC claiming that Nathan's had
retaliated against her, first by refusing her request for a shift change and
then by terminating her employment in July 2004. Following a determination by
the EEOC in May 2005 that there was no reasonable cause to believe that the
employee was terminated in retaliation for filing a charge of Security Holders
- ------ ---------------------------------------------------discrimination,
but that there was reasonable cause to believe that she was paid less than
similarly situated males in violation of the Equal Pay Act and Title VII and
that she was denied a request for a change in shift in retaliation for filing
the discrimination charge, the EEOC advised that it would engage in conciliation
and settlement efforts to try to resolve the employee's charges. Nathan's
intends to cooperate with the EEOC's conciliation efforts in the hope that this
matter can be settled on reasonable terms. If it cannot, and the employee or the
EEOC commences legal proceedings, Nathan's will defend the matter vigorously.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
1718
PART II
ItemITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters
- ------ --------------------------------------------------------------------
Common Stock PricesMARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
COMMON STOCK PRICES
Our common stock began trading on the over-the-counter market on February
26, 1993 and is quoted on the Nasdaq National Market System ("Nasdaq") under the
symbol "NATH." The following table sets forth the high and low closing sharesales
prices per share for the periods indicated:
High Low
- --------------------------------------------------------------------------------------- ------
Fiscal year ended March 31, 200227, 2005
First quarter $ 3.506.16 $ 2.875.50
Second quarter 3.55 3.106.30 5.61
Third quarter 3.60 3.078.35 5.86
Fourth quarter 3.62 3.218.39 7.01
Fiscal year ended March 25, 200128, 2004
First quarter $ 4.003.93 $ 2.753.38
Second quarter 3.94 2.884.87 3.48
Third quarter 3.81 2.565.36 4.22
Fourth quarter 3.88 2.885.99 5.00
At June 7, 200220, 2005 the closing price per share for our common stock, as reported
by Nasdaq was $3.8820.
Dividend Policy$9.48.
DIVIDEND POLICY
We have not declared or paid a cash dividend on our common stock since our
initial public offering.offering and do not anticipate that we will pay any dividends in
the foreseeable future. It is our Board of Directors' policy to retain all
available funds to finance the development and growth of our business.business and to
purchase stock pursuant to our stock buyback program. The payment of any cash
dividends in the future will be dependent upon our earnings and financial
requirements.
ShareholdersSHAREHOLDERS
As of June 7, 2002,20, 2005, we had 830836 shareholders of record, excluding
shareholders whose shares were held by brokerage firms, depositories and other
institutional firms in "street name" for their customers.
1819
Equity CompensationISSUER PURCHASES OF EQUITY SECURITIES
(d) MAXIMUM
(c) TOTAL NUMBER OF NUMBER OF SHARES
SHARES PURCHASED THAT MAY YET BE
(a) TOTAL NUMBER OF (b) AVERAGE PRICE AS PART OF PUBLICLY PURCHASED UNDER
PERIOD SHARES PURCHASED PAID PER SHARE ANNOUNCED PLANS THE PLAN
- --------------- ------------------- ----------------- ------------------- ----------------
DEC. 28 2004 -
JAN. 23 2005 -0- $ -0- 1,891,100 108,900
JAN. 24, 2005 -
FEB. 20, 2005 -0- $ -0- 1,891,100 108,900
FEB. 21, 2005 -
MAR. 27, 2005 55,380 $7.90 1,891,100 108,900
------ ----- --------- -------
TOTAL 55,380 $7.90 1,891,100 108,900
------ ----- --------- -------
On September 14, 2001, Nathan's was authorized to purchase up to one million
shares of its common stock. Pursuant to our stock repurchase program, we
repurchased one million shares of common stock in open market transactions and a
private transaction by September 29, 2002. On October 7, 2002, Nathan's was
authorized to purchase up to one million additional shares of its common stock.
To date, we have repurchased 891,100 shares of common stock in open market
transactions. Nathan's is authorized to repurchase up to an additional 108,900
shares of common stock. There is no set time limit on the purchases.
On March 11, 2005, our Chairman and Chief Executive Officer exercised a stock
option to purchase 100,000 shares of common stock at an exercise price of $4.375
per share (the "Option"). Pursuant to the terms of the 1992 Stock Option Plan,
Informationunder which the Option was granted, the Option exercise price was paid by
delivery of 55,380 "mature shares" previously owned by him. The repurchase of
these shares was not under the publicly announced stock repurchase plan.
EQUITY COMPENSATION PLAN INFORMATION
The following chart summarizes the options and warrants outstanding and
available to be issued at March 31, 2002:27, 2005:
20
- ------------------------------ ---------------------------- ---------------------------- ----------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options and options and warrants future issuance under
warrants equity compensation plans
(excluding securities
reflected in columnNUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS AND OUTSTANDING OPTIONS AND (EXCLUDING SECURITIES
WARRANTS WARRANTS REFLECTED IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
- ------------------------------ ---------------------------- ---------------------------- ------------------------------------------------------ -------------------------- ----------------------- --------------------------
Equity compensation plans
approved by security holders 1,339,896 $4.8083 153,666
- ------------------------------ ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
not approved by security
holders 800,000 $3.5529EQUITY COMPENSATION
PLANS APPROVED BY SECURITY
HOLDERS 1,031,046 $ 4.0886 203,500
EQUITY COMPENSATION
PLANS NOT APPROVED BY
SECURITY HOLDERS 632,500 $ 3.3271 -0-
- ------------------------------ ---------------------------- ---------------------------- ----------------------------
Total 2,139,896 $4.3390 153,666
- ------------------------------ ---------------------------- ---------------------------- ------------------------------------- -------- -------
TOTAL 1,663,546 $ 3.7991 203,500
--------- -------- -------
ItemWarrants
On July 17, 1997, we granted to our Chairman and Chief Executive
Officer a warrant to purchase 150,000 shares of our common stock at an exercise
price of $3.50 per share, representing the market price of our common stock on
the date of grant. The shares vested at a rate of 25% per annum commencing July
17, 1998 and the warrant expires in July 2007.
1998 Stock Option Plan
In April 1998, our Board of Directors adopted the Nathan's Famous, Inc.
1998 Stock Option Plan, under which any of our directors, officers, employees or
consultants, or those of a subsidiary or an affiliate, may be granted options to
purchase an aggregate 500,000 shares of common stock. The 1998 Plan is to be
administered by the Board of Directors of Nathan's; provided, however, that the
Board may, in the exercise of its discretion, designate from among its members a
compensation committee or a stock option committee consisting of no fewer than
two "non-employee directors", as defined in the Securities Exchange Act of 1934.
The Compensation Committee currently administers the 1998 Plan. Subject to the
terms of the 1998 Plan, the Compensation Committee may determine and designate
those directors, officers, employees and consultants who are to be granted stock
options under the 1998 Plan and the number of shares to be subject to options
and the term of the options to be granted, which term may not exceed ten years.
The Board of Directors or the committee shall also, subject to the express
provisions of the 1998 Plan, have authority to interpret the 1998 Plan and to
prescribe, amend and rescind the rules and regulations relating to the 1998
Plan. Only non-qualified stock options may be granted under the terms of the
1998 Plan. The exercise price for the options granted under the 1998 Plan will
be not less than the fair market value on the date of grant. The option price,
as well as the number of shares subject to the option, shall be appropriately
adjusted by the committee in the event of stock splits, stock dividends,
recapitalizations, and other specified events involving a change in Nathan's
capital.
On June 20, 2005, there were options outstanding to purchase an aggregate
482,500 shares of common stock with a weighted average exercise price of $3.351,
each of which has a term of ten years from its grant date. Since the inception
of the 1998 Plan, 17,500 options have been exercised and no options have lapsed.
21
ITEM 6. Selected Consolidated Financial Data
- ------- -------------------------------------SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal years ended
MarchFISCAL YEARS ENDED
MARCH 27, MARCH 28, MARCH 30, MARCH 31, MarchMARCH 25,
March 26, March 28, March 292005 2004 (2) 2003 (2) 2002 (1, 2) 2001 2000 1999 1998
-------------------------------------------------------------------
(In thousands, except per share amounts)
Statement of Operations Data:(2)
-------- -------- --------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Operations Data:
Revenues:
Sales $32,349 $34,799 $29,642 $23,964 $22,971$ 23,296 $ 19,848 $ 23,809 $ 26,400 $ 28,796
Franchise fees and royalties 6,774 6,286 5,977 7,944 8,814 5,906 3,230 3,062
License royalties, investment and other income 4,042 3,628 3,033 4,106 3,561
2,343 1,953 2,393
--------------------------------------------------------------------------- -------- --------- --------- --------
Total revenues 44,399 47,174 37,891 29,147 28,426
-------------------------------------------------------------------34,112 29,762 32,819 38,450 41,171
-------- -------- --------- --------- --------
Costs and Expenses:
Cost of sales 21,643 22,530 18,977 14,932 14,01717,266 14,198 16,012 17,644 18,536
Restaurant operating expenses 7,788 8,964 8,208 5,780 6,4113,063 3,441 5,292 6,221 7,315
Depreciation and amortization 1,661 1,791 1,358 1,065 1,035918 898 1,270 1,354 1,499
Amortization of intangible assets 263 261 278 888 839 716 384 384
General and administrative expenses 8,341 7,519 8,600 9,292 8,978
8,222 4,722 4,755
19
Interest expense 49 75 132 256 310 198 1 6
Impairment of long-lived assets 685- 25 1,367 392 127 465 302 ---
Impairment of notes receivable - 208 1,425 185 151
840 --- ---
Other expense (income) expense, net (16) 45 232 (210) 462
427 (349) ---
--------------------------------------------------------------------------- -------- --------- --------- --------
Total costs and expenses 42,188 44,152 39,411 26,837 26,608
-------------------------------------------------------------------29,884 26,670 34,608 36,022 38,217
-------- -------- --------- --------- --------
Income (loss) from continuing operations before
provision (benefit) for income taxes 2,211 3,022 (1,520) 2,310 1,8184,228 3,092 (1,789) 2,428 2,954
Provision (benefit) for income taxes 962 1,416 (250) (418) 290
-------------------------------------------------------------------1,482 1,140 (283) 1,049 1,389
-------- -------- --------- --------- --------
Income (loss) from continuing operations 2,746 1,952 (1,506) 1,379 1,565
-------- -------- --------- --------- --------
Discontinued operations
(Loss) income from discontinued operations before
income taxes (15) (98) (206) (217) 68
(Benefit) provision for income taxes (6) (40) (82) (87) 27
-------- -------- --------- --------- --------
(Loss) income from discontinued operations (9) (58) (124) (130) 41
-------- -------- --------- --------- --------
Income (loss) before cumulative effect of accounting
change 2,737 1,894 (1,630) 1,249 1,606
Cumulative effect of change in accounting principle,
net of tax benefit of $ 854 in 2003 - - (12,338) - -
-------- -------- --------- --------- --------
Net income (loss) $ 2,737 $ 1,894 ($ 13,968) $ 1,249 $ 1,606
======== ======== ========= ========= ========
Basic income (loss) per share:
Income (loss) from continuing operations $ 0.52 $ 0.37 ($1,270) $2,728 $1,528
===================================================================
Per Share Data: 0.25) $ 0.20 $ 0.22
Income (loss) from discontinued operations - (0.01) (0.03) (0.02) .01
Cumulative effect of change in accounting principle - - (2.06) - -
-------- -------- --------- --------- --------
Net income (loss) Basic $0.18 $0.23$ 0.52 $ 0.36 ($0.22) $0.58 $0.32 2.34) $ 0.18 $ 0.23
======== ======== ========= ========= ========
22
Diluted $0.18 $0.23income (loss) per share:
Income (loss) from continuing operations $ 0.45 $ 0.34 ($0.22) $0.57 $0.32 0.25) $ 0.20 $ 0.22
Income (loss) from discontinued operations - (0.01) (0.03) (0.02) .01
Cumulative effect of change in accounting principle - - (2.06) - -
-------- -------- --------- --------- --------
Net income (loss) $ 0.45 $ 0.33 ($ 2.34) $ 0.18 $ 0.23
======== ======== ========= ========= ========
Dividends ---- ---- ---- ---- ----- - - - -
Weighted average shares used in computing
net income (loss) per share
Basic 5,307 5,306 5,976 7,048 7,059
5,881 4,722 4,722
Diluted (1)(3) 6,080 5,678 5,976 7,083 7,098 5,881 4,753 4,749
Balance Sheet Data at End of Fiscal Year:
Working capital (deficit)$ 14,009 $ 9,185 $ 5,935 $ 9,565 $5,210 ($ 322) $ 3,708 $ 6,1055,210
Total assets 31,269 27,584 25,886 48,745 51,826 48,583 31,250 29,539
Long term debt, net of current maturities 692 866 1,053 1,220 1,789
3,131 0 9
Stockholders' equity $36,145 $35,031 $33,347 $26,348 $23,586
===================================================================$ 21,356 $ 17,352 $ 16,383 $ 36,145 $ 35,031
======== ======== ========= ========= ========
Selected Restaurant Operating Data:
SystemwideCompany-owned Restaurant Sales:
Company-ownedSales (4) $ 11,538 $ 12,780 $ 21,955 $ 27,484 $30,946 $27,478 $21,981 $22,332
Franchised 185,389 208,889 152,627 64,178 58,802
-------------------------------------------------------------------
Total $212,873 $239,835 $180,105 $86,159 $81,134
===================================================================$ 30,946
======== ======== ========= ========= ========
Number of Units Open at End of Fiscal Year:
Company-owned 6 7 12 22 25
32 25 27======== ======== ========= ========= ========
Franchised 355 338 343 364 386
415 163 156
-------------------------------------------------------------------
Total 386 411 447 188 183
===================================================================
Notes to Selected Financial Data
(1) Common stock equivalents have been excluded from the computation for the
year ended March 26, 2000 as the impact of their inclusion would have been
anti-dilutive.
======== ======== ========= ========= ========
20Notes to Selected Financial Data
(1) Our fiscal year ends on the last Sunday in March which results in a 52 or
53 week year. Fiscal 2002 was a 53 week year.
(2) Results have been adjusted to reflect the closure of one restaurant during
the fiscal year ended March 27, 2005 and reclassification of results of
that restaurant's operations to discontinued operations.
(3) Common stock equivalents have been excluded from the computation for the
year ended March 30, 2003 as, due to the net loss, the impact of their
inclusion would have been anti-dilutive.
(4) Company-owned restaurant sales represent sales from restaurants presented
within continuing operations and discontinued operations.
23
ItemITEM 7. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
-------------
IntroductionMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
As used in this Report, the terms "we", "us", "our", "the Company" and
"Nathan's" mean Nathan's Famous, Inc. and its subsidiaries (unless the context
indicates a different meaning).
During the fiscal year ended March 26, 2000, we completed two acquisitions
that provided us with two highly recognized brands. On April 1, 1999, we became
the franchisor of the Kenny Rogers Roasters restaurant system by acquiring the
intellectual property rights, including trademarks, recipes and franchise
agreements of Roasters Corp. and Roasters Franchise Corp. On September 30, 1999,
we acquired the remaining 70% of the outstanding common stock of Miami Subs
Corporation we did not already own. Our revenues are generated primarily from
operating company-owned restaurants and franchising the Nathan's, Miami Subs and
Kenny Rogers restaurant concepts, selling products under Nathan's Branded
Product Program and licensing agreements for the sale of Nathan's products
within supermarkets and selling products under Nathan's Branded Product
Program.supermarkets. The Branded Product Program enables foodservice operators
to offer Nathans' hot dogs and other proprietary items for sale within their
facilities. In conjunction with this program, foodservice operators are granted
a limited use of the Nathans' trademark with respect to the sale of hot dogs and
certain other proprietary food items and paper goods.
In addition to plans for expansion through franchising and our Branded
Product Program, Nathan's is continuingcontinues to capitalize on the co-branding
opportunitiesco-brand within its existing restaurant
system. To date,Currently, the Arthur Treacher's brand has been introducedis being sold within 133114
Nathan's, Kenny Rogers Roasters and Miami Subs restaurants, the Nathan's brand
has been added tois included on the menu of 8865 Miami Subs and Kenny Rogers restaurants, while the
Kenny Rogers Roasters brand has been introduced into 79is being sold within 90 Miami Subs and Nathan's
restaurants.
We have begun
testing the Miami Subs brand in three company-owned Nathan's restaurants and one
Kenny Rogers franchised restaurant.
In connection with our acquisition of Miami Subs, we determined that up to
18 underperforming restaurants would be closed pursuant to our divestiture plan.
Through March 31, 2002, we have terminated leases on 15 of those properties. We
continue to market two of those properties for sale and terminated the lease for
the last unit upon the lease expiration in May 2002. We also terminated 10
additional leases for properties outside of the divestiture plan.
In the wake of the events of September 11, 2001, we have experienced lower
sales at company-owned restaurants and lower royalties from franchised
restaurants that operate in markets which are significant tourist destinations
such as Las Vegas and South Florida. During the initial months subsequent to
September 11, we realized declines at our franchised restaurants operating at
airports throughout the United States as a result of the overall decline in
airline traffic.
At March 31, 2002, Nathan's owned 22 company-operated restaurants. During
the fiscal year ended March 30, 2003, Nathan's abandoned eight company-operated
restaurants pursuant to early lease terminations which are presented as
discontinued operations pursuant to SFAS No. 144 in the accompanying financial
statements. Nathan's franchised two company-operated restaurants during the
fiscal year ended March 30, 2003. During the fiscal year ended March 28, 2004,
Nathan's franchised three company-operated restaurants and entered into two
management agreements with franchisees to operate two company-operated
restaurants. During the fiscal year ended March 27, 2005, Nathan's closed one
company-operated restaurant due to its lease expiration. The remaining six
restaurants are presented as continuing operations in the accompanying financial
statements.
At March 27, 2005, our combined system, consistedconsisting of 364Nathan's Famous, Kenny Rogers
Roasters and Miami Subs restaurants, included 355 franchised or
licensed units, 22including 6
units operating pursuant to management agreements, 6 company-owned units,
including one seasonal location, within the New York metropolitan area and approximately 1,500 Nathan's Branded
Productmore
than 5,900 branded product points of sale that feature Nathan's world famous all-beef hot dogs,under our Branded Product Program,
located in 3946 states, the District of Columbia and 1413 foreign countries. At
March 31, 2002,27, 2005, our company-owned restaurant system included 16six Nathan's units,
four Miami Subs units and two Kenny Rogers Roasters units,
as compared to 17seven Nathan's units, six Miami Subs units and two Kenny Rogers Roasters units at March 25, 2001.
Critical Accounting Policies and Estimates28, 2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements and the notes to our consolidated
financial statements contain information that is pertinent to management's
discussion and analysis. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities. We
believe the following critical accounting policies involve additional management
judgement due to the sensitivity of the methods, assumptions and estimates
necessary in determining the related asset and liability amounts.
Impairment of Goodwill and Other Intangible Assets
Statement of Financial Accounting Standards or No. 142, "Goodwill and Other
Intangible Assets," ("SFAS No. 121,142")
24
requires that goodwill and intangible assets with indefinite lives will no
longer be amortized but will be tested annually (or more frequently if events or
changes in circumstances indicate the carrying value may not be recoverable) for
impairment. The most significant assumptions which are used in this test are
estimates of future cash flows. We typically use the same assumptions for this
test as we use in the development of our business plans. If these assumptions
differ significantly from actual results, additional impairment charges may be
required in the future. In the first quarter of fiscal 2003, Nathan's adopted
SFAS No. 142. In connection with the implementation of this new standard in
fiscal 2003, Goodwill, Trademarks, Trade Names and Recipes were deemed to be
impaired and their carrying value was written down by $13,192,000, or
$12,338,000, net of an income tax benefit of $854,000. No goodwill or other
intangible assets were determined to be impaired during the fifty-two week
periods ended March 27, 2005 or March 28, 2004.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets, and for Long-Lived Assets to be Disposed
Of," ("SFAS No. 144") requires
management judgements regarding the future operating and disposition plans for
underperforming assets, and estimates of expected realizable values for assets
to be sold. The application of SFAS 121No. 144 has
21
affected the amounts and timing
of charges to operating results in recent years. We evaluate possible impairment
of each restaurant individually, and record an impairment charge whenever we
determine that impairment factors exist. We consider a history of restaurant
operating losses to be the primary indicator of potential impairment of a
restaurant's carrying value. We haveDuring the fifty-two week period ended March 27,
2005, no impairment charges on long-lived assets were recorded. During the
fifty-two week period ended March 28, 2004, we identified certain restaurantsone restaurant that
havehad been impaired and recorded impairment charges of approximately $685,000 (relating to two restaurants), $127,000 (relating to one
restaurant)$25,000.
During the fifty-two weeks ended March 30, 2003, we identified seven restaurants
that had been impaired and $465,000 (relating to three restaurants) in the consolidated
statementsrecorded impairment charges of operations for fiscal years 2002, 2001 and 2000, respectively.approximately
$1,367,000.
Impairment of Notes Receivable
Statement of Financial Accounting Standards or SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended, requires management judgements
regarding the future collectibility of notes receivable and the underlying fair
market value of collateral. We consider the following factors when evaluating a
note for impairment: 1)a) indications that the borrower is experiencing business
problems, such as operating losses, marginal working capital, inadequate cash
flow or business interruptions; 2)b) whether the loan is secured by collateral
that is not readily marketable; and/or 3)c) whether the collateral is susceptible
to deterioration in realizable value. When determining possible impairment, we
also assess our future intention to extend certain leases beyond the minimum
lease term and the note holder'sdebtor's ability to meet its obligation over that extendedthe projected
term. During the fifty-two week period ended March 27, 2005, no impairment
charges on notes receivable were recorded. We havepreviously identified certain
notes receivable that havehad been impaired and recorded impairment charges of
approximately $185,000 (relating$208,000 relating to two loans),
$151,000 (relatingnotes and $1,425,000 relating to one loan)nine
notes during the fifty-two weeks ended March 28, 2004 and $840,000 (relatingMarch 30, 2003,
respectively.
Revenue Recognition
Sales by Company-owned restaurants, which are typically paid in cash by
the customer, are recognized upon the performance of services.
In connection with its franchising operations, the Company receives initial
franchise fees, development fees, royalties, contributions to six loans)marketing funds,
and in certain cases, revenue from sub-leasing restaurant properties to
franchisees.
Franchise and area development fees, which are typically received prior to
completion of the revenue recognition process, are recorded as deferred revenue.
Initial franchise fees, which are non-refundable, are recognized as income when
substantially all services to be performed by Nathan's and conditions relating
to the sale of the franchise have been performed or satisfied, which generally
occurs when the franchised restaurant commences operations. The following
services are typically provided by the Company prior to the opening of a
franchised restaurant:
25
o Approval of all site selections to be developed.
o Provision of architectural plans suitable for restaurants to be
developed.
o Assistance in establishing building design specifications, reviewing
construction compliance and equipping the restaurant.
o Provision of appropriate menus to coordinate with the restaurant
design and location to be developed.
o Provide management training for the new franchisee and selected
staff.
o Assistance with the initial operations of restaurants being
developed.
Development fees are non-refundable and the related agreements require the
franchisee to open a specified number of restaurants in the development area
within a specified time period or the agreements may be canceled by the Company.
Revenue from development agreements is deferred and recognized as restaurants in
the development area commence operations on a pro rata basis to the minimum
number of restaurants required to be open, or at the time the development
agreement is effectively canceled.
Nathan's recognizes franchise royalties when they are earned and deemed
collectible. Franchise fees and royalties that are not deemed to be collectible
are not recognized as revenue until paid by the franchisee, or until
collectibility is deemed to be reasonably assured. The number of non-performing
units are determined by analyzing the number of months that royalties have been
paid during a period. When royalties have been paid for less then the majority
of the time frame reported, such location is deemed non-performing. Accordingly,
the number of non-performing units may differ between the quarterly results and
year to date results. Revenue from sub-leasing properties is recognized as
income as the revenue is earned and becomes receivable and deemed collectible.
Sub-lease rental income is presented net of associated lease costs in the
consolidated statements of operations for fiscal years 2002, 2001operations.
Nathan's recognizes revenue from the Branded Product Program when it is
determined that the products have been delivered via third party common carrier
to Nathans' customers.
Nathan's recognizes revenue from royalties on the licensing of the use of
its name on certain products produced and 2000,
respectively.sold by outside vendors. The use of
Nathans' name and symbols must be approved by Nathan's prior to each specific
application to ensure proper quality and project a consistent image. Revenue
from license royalties is recognized when it is earned and deemed collectible.
In the normal course of business, we extend credit to franchisees for the
payment of ongoing royalties and to trade customers of our Branded Product
Program. Notes and accounts receivable, net, as shown on our consolidated
balance sheets wereare net of allowances for doubtful accounts. An allowance for
doubtful accounts is determined through analysis of the aging of accounts
receivable at the date of the financial statements, assessment of collectibility
based upon historical trends and an evaluation of the impact of current and
projected economic conditions. In the event that the collectibility of a
receivable at the date of the transaction is doubtful, the associated revenue is
not recorded until the facts and circumstances change in accordance with Staff
Accounting Bulletin SAB No
101,("SAB") No. 104, "Revenue Recognition".Recognition."
Self-insurance Liabilities
We are self-insured for portions of our general liability coverage. As
part of our risk management strategy, our insurance programs include deductibles
for each incident and in the aggregate for aeach policy year. As such, we accrue
estimates of our ultimate self insurance costs throughout the policy year. These
estimates have been developed based upon our historical trends, however, the
final cost of many of these claims may not be known for five years or longer.
Accordingly, our annual self insurance costs may be subject to adjustment from
previous estimates as facts and circumstances change. Statement of Financial Accounting Standards, or SFAS No. 142, GoodwillThe self-insurance accrual
at March 27, 2005 and Other Intangible Assets, requires that goodwillMarch 28, 2004 was $324,000 and intangible assets with
indefinite lives will no longer be amortized but will be reviewed annually (or
more frequently if impairment indicators arise) for impairment, requiring
significant management judgement. Separable intangible assets that are not
deemed to have indefinite lives will continue to be amortized over their useful
lives (but with no maximum life). The amortization provisions of SFAS 142 apply
to goodwill and intangible assets acquired after June 30, 2001. There are also
transition provisions that apply to business combinations completed before July
1, 2001, that were accounted for by$346,000, respectively.
During the purchase method. With respect to its
goodwill and intangible assets acquired prior to July 1, 2001, Nathan's is
required to adopt SFAS 142 effective in its next fiscal year, commencing April
1, 2002. Nathan's will no longer amortize existing goodwill and certain
intangibles having indefinite lives, thus reducing amortization expense by
approximately $600,000 per year. We expect to complete our impairment analysis
during the first quarter fiscal 2003 and expect to recognize an impairment
charge of approximately $12 to $13 million upon adoption of SFAS No. 142.
Results of Operations
Fiscal Year Ended March 31, 2002 Compared to Fiscal Year Ended March 25, 2001
Revenues
- --------
Total sales decreased by 7.0% or $2,450,000 to $32,349,000 for the
fifty-threefifty-two weeks ended March 31, 2002 ("fiscal 2002 period") as compared27, 2005, we reversed approximately
$71,000 of previously recorded insurance accruals to $34,799,000reflect the revised
estimated cost of claims. Also, during the fifty-two weeks ended March 28, 2004,
we reversed approximately $268,000 of previously recorded insurance accruals for
items that have been concluded without further payment. Finally, during the
26
fifty-two weeks ended March 30, 2003, we completed an evaluation of the
outstanding claims and reserves in conjunction with our external risk manager
and reversed $196,000 of previously recorded self insurance accruals for those
claims on which our exposure had been settled.
RESULTS OF OPERATIONS
FISCAL YEAR END MARCH 27, 2005 COMPARED TO FISCAL YEAR ENDED MARCH 28, 2004
Revenues from Continuing Operations
Total sales increased by $3,448,000 or 17.4% to $23,296,000 for the
fifty-two weeks ended March 25, 200127, 2005 ("fiscal 20012005 period") as compared to
$19,848,000 for the fifty-two weeks ended March 28, 2004 ("fiscal 2004 period").
Sales from the Branded Product Program increased by 26.2% or $1,011,00041.7% to $4,864,000$10,838,000 for the
fiscal 20022005 period as compared to sales of $3,853,000$7,651,000 in the 22
fiscal 20012004 period.
This increase was attributable to a volume increase of approximately 44.7% and
price increases which were partly offset by higher sales allowances.
Company-owned restaurant sales decreased 11.2%by $741,000 or $3,461,0006.2% to $27,485,000$11,122,000 from
$30,946,000$11,863,000 primarily due to operating ninethe operation of five fewer company-ownedCompany-owned stores as
compared to the prior fiscal period and lower sales at
the two new restaurants that began operating during the fiscal 2001 period.
These reductions were partiallyyear, which was partly offset by a 4.7% sales
during the fiscal 2002 period
from a restaurant that was closed for renovation during the fiscal 2001 period
and increased salesincrease at the Coney Island restaurant during the summer season.
Fiscal 2002 was a 53 week reporting period while fiscal 2001 was a 52 week
reporting period. Approximately $390,000our comparable restaurants (consisting of six Nathan's, including
one seasonal location). The reduction in restaurant sales were generated
during the additional week of operations. The unit reductionCompany-owned stores is the result of
our franchising three restaurants and entering into two company-owned restaurants, transferring one company-owned
restaurant to a franchisee pursuant to a management agreement, closing four
unprofitable company-owned units (including three Miami Subs restaurants
pursuant to our divesture plan), selling one unit pursuant to an order of
condemnation and closing one unit due to its lease expiration.agreements
during the fiscal 2004 period. The financial impact associated with these ninefive
restaurants lowered restaurant sales by $3,749,000$1,237,000 and improved restaurant
operating profits before depreciation by $30,000$138,000 versus the fiscal 20012004 period.
During the fiscal 2005 period excluding any one time gains or royaltieswe realized sales of $1,336,000 as compared to
be received
from restaurants sold to franchisees. Comparable restaurant sales (consisting of
15 Nathan's and four Miami Subs restaurants that have been operating for 18
months or longer as$334,000 in the fiscal 2004 period in connection with our QVC marketing program
which was introduced in September 2003. The majority of the beginning ofsales generated by
QVC during the fiscal year) during2005 period were in connection with the comparable
52 week period increased by 2.5% versus the fiscal 2001 period."Today's Special
Value" program held on May 20, 2004 featuring Nathan's hot dogs.
Franchise fees and royalties decreasedincreased by 9.9%$488,000 or $870,0007.8% to $7,944,000$6,774,000
in the fiscal 20022005 period compared to $8,814,000$6,286,000 in the fiscal 20012004 period.
Franchise royalties decreasedincreased by $1,299,000$396,000 or 16.1%6.9% to $6,761,000$6,103,000 in the fiscal
20022005 period as compared to $8,060,000$5,707,000 in the fiscal 20012004 period. This increase
is due primarily to improved contract compliance and higher domestic franchise
sales. Domestic franchise restaurant sales decreasedincreased by 11.2%2.2% to $185,389,000$164,925,000 in the fiscal 20022005
period as compared to $208,889,000$161,332,000 in the fiscal 20012004 period. The majorityComparable
domestic franchise sales (consisting of this decline is due175 restaurants) increased by $7,931,000
or 6.3% to fewer franchised restaurants operating during$133,141,000 in the fiscal 20022005 period as compared to $125,210,000 in
the fiscal 20012004 period. During the initial months
subsequent to September 11, 2001, we have experienced lower royalties from
franchised restaurants that operate in markets which are significant tourist
destinations, such as Las Vegas and South Florida, and from franchised
restaurants operating at airports throughout the United States. Further
contributing to the decline is an increase in the amount of royalties deemed to
be unrealizable. At March 31, 2002, 36427, 2005, there were 355 domestic and
international franchised or licensed restaurants were
operating as compared to 386338
domestic and international franchised or licensed restaurants at March 28, 2004.
During the fifty-two weeks ended March 27, 2005, royalty income from 25 2001. Franchisedomestic
franchised locations have been deemed unrealizable as compared to 35 domestic
franchised locations during the fifty-two weeks ended March 28, 2004. Domestic
franchise fee income derived from new openings and co-branding was $875,000$355,000 in the fiscal 20022005 period as compared to
$754,000$376,000 in the fiscal 20012004 period. This increase was primarily attributable to the fees earned from the
co-branding initiative within the existing restaurant system. During the fiscal 20022005 period, 1828 new
domestic franchised units opened as compared to opening 20 new franchised or licensed units
opened and 47 units have been
co- branded. Duringfranchising four Company-owned restaurants during the fiscal 20022004 period.
Fourteen of the new units that opened during the fiscal 2005 period we realized $308,000were
non-traditional stores whereby lower franchise fees are earned as compared to
nine non-traditional units during the fiscal 2004 period. Nathan's also
recognized $66,000 in connection with three forfeited development fees.
License royalties were $2,038,000domestic franchise fees
during the fiscal 2005 period and $23,000 in connection with one forfeited
domestic franchise fee during the fiscal 2004 period. International franchise
fee income was $250,000 in the fiscal 20022005 period as compared to $1,958,000$180,000 during
the fiscal 2004 period. During the fiscal 2005 period, 11 new international
units were opened.
License royalties were $3,332,000 in the fiscal 20012005 period as compared to
$2,970,000 in the fiscal 2004 period. This increase is comprised ofprimarily attributable to
higher royalties earned from sales by SMG, Inc., Nathans' licensee for the sale of Nathan's frankfurters within
supermarkets and club stores.stores and from our license agreements for Nathan's french
fries and condiments, which more than offset lower royalties earned from the
sale of the Nathan's "griddle" that was marketed via infomercial and retailers
during the Christmas 2003 season.
Investment and other income was $2,068,000$472,000 in the fiscal 20022005 period versus
$1,603,000$459,000 in the fiscal 20012004 period. During
27
the fiscal 20022005 period, Nathan's
recognizedincome from subleasing activities and other income was
approximately $135,000 higher than the fiscal 2004 period primarily due to the
termination of unprofitable leases, which was partially offset by lower
investment income and amortized deferred income. Gains associated with the sale
of fixed assets were approximately $122,000 lower during the fiscal 2005 period
than during the fiscal 2004 period. In the fiscal 2004 period net gains of
1,226,000$149,000 were realized, primarily in connection with the sale of two
company-ownedCompany-owned restaurants and a third non-restaurant property. During the fiscal
2002 period, Nathans' investment and interestto franchisees.
Interest income was approximately $342,000
higher than$238,000 in the fiscal 20012005 period versus $199,000 in
the fiscal 2004 period due primarily to differences in
performance of the financial markets between the two periods. Inearning higher interest income from our
marketable investment securities and lower interest income on notes receivable
which were determined to be impaired during the fiscal 2001year ended March 28,
2004.
Costs and Expenses from Continuing Operations
Cost of sales increased by $3,068,000 to $17,266,000 in the fiscal 2005
period Nathan's recognized incomefrom $14,198,000 in the fiscal 2004 period. Higher costs of approximately
$479,000$2,868,000 were incurred primarily in connection with the introductiongrowth of a consolidated food distribution agreement and earned a
$500,000 transfer feeour Branded
Product Program. Increased costs were also incurred in connection with a change in ownershipour QVC
marketing program and higher commodity costs of Nathan's
licensee, SMG Inc.
Costs and Expenses
- ------------------
Cost of sales decreased by $887,000 to $21,643,000 inboth programs during the fiscal
2002
period from $22,530,000 in the fiscal 20012005 period. During the fiscal 20022005 period, restaurant cost of sales were lower
than the fiscal 20012004 period by approximately $1,986,000.$706,000. Restaurant cost of sales
were reducedlower by approximately $2,423,000$919,000 as a result of operating five fewer
company-owned restaurants.
Additionally, lower cost of sales atCompany-owned restaurants during the two Kenny Rogers Roasters restaurants
opened last year offset the higher costs at our comparable restaurants.
Notwithstanding the lower costs and expenses of the two Kenny Rogers Roasters
restaurants, these restaurants continued to underperform. Consequently, we have
decided to sell the Kenny Rogers Roasters restaurant in Rockville Centre, New
York.fiscal 2005 period. The cost of restaurant
sales at our comparable units as a percentage of restaurant sales was 62.5%60.3% in
the fiscal 20022005 period as compared to 61.3%61.1% in the fiscal 2001 period due primarily to higher2004 period. This
decrease was the result of lower labor and related costs which were partly
offset by higher food costs. Higher costsThe cost of beef products has continued to increase
since the beginning of fiscal 2004. The cost of hot dogs was approximately $1,100,000 were incurred in connection with7.1%
higher during the growth of our
23
fiscal 2005 period than the fiscal 2004 period. In response to
last year's cost increases, Nathan's increased selling prices within its Branded
Product Program and higher product costs incurred for muchwhere possible to offset some of the margin pressure during the
second half of fiscal 2002 period. During2004. Nathan's had previously increased menu prices in its
company-operated restaurants due to these rising costs. Nathan's plans to
further increase its selling prices in response to the unusually high cost of
our beef products and the impact of higher gasoline prices in the first twenty-six weeksquarter
of fiscal 2002, commodity prices
of our primary meat products were at their highest levels in recent years
causing the majority of the cost increase. In response, we raised retail prices
on a selective basis in an attempt to partially offset these increases.
Beginning in the third quarter fiscal 2002 these costs were lowered to their
historical levels. However, should costs escalate again for an extended period,
we may determine to further examine our pricing structure to attempt to reduce
the impact on our margins.2006.
Restaurant operating expenses decreased by $1,176,000$378,000 to $7,788,000$3,063,000 in the
fiscal 20022005 period from $8,964,000$3,441,000 in the fiscal 20012004 period. Restaurant
operating costsexpenses were lower in the fiscal 2002 period by approximately
$1,357,000, as compared to the fiscal 2001 period$458,000 as a result of operating five fewer
restaurants. Restaurant operating expenses of the two restaurants opened last
year were $92,000 lower during the fiscal 2002 period due in part to the higher
costs attributable to last years' openings. These reductions in restaurant
operating expenses were partially offset by an increase of approximately
$268,000 at the comparable
restaurants which were primarily drivenpartly offset by higher marketing and insurance costs.
Depreciation and amortization decreased by $130,000 to $1,661,000 in the
fiscal 2002 period from $1,791,000 in the fiscal 2001 period. Lower depreciation
expense of operating fewer company-owned restaurantsInsurance costs during the fiscal 20022004 period versus the fiscal 2001 period was partially offset by additional
depreciation expense attributable to last year's capital spending.
Amortization of intangibles increased by $49,000 to $888,000 in the fiscal
2002 period from $839,000 in the fiscal 2001 period. Amortization of intangibles
increasedwere lower as a result of last years' final purchase price allocationthe
reversal of previously recorded insurance accruals for items that were concluded
without further payment by Nathan's.
Depreciation and amortization was $918,000 in the Miami Subs acquisition.fiscal 2005 period as
compared to $923,000 in the fiscal 2004 period.
Amortization of intangible assets was $263,000 in the fiscal 2005 period
and $261,000 in the fiscal 2004 period.
General and administrative expenses increased by $314,000$822,000 to $9,292,000$8,341,000 in
the fiscal 20022005 period as compared to $8,978,000$7,519,000 in the fiscal 20012004 period. The
increase in general and administrative expenses was due primarily to higher
legalpersonnel, severance and professionalincentive compensation expenses of approximately
$544,000, including a
litigation expense of $450,000,$588,000 and higher bad debts of approximately $76,000
which were partly offset by lower personnel and incentive compensationcorporate insurance expense of approximately $389,000.$65,000.
Insurance costs during the fiscal 2004 period were lower as a result of the
reversal of previously recorded insurance accruals for items that were concluded
without further payment by Nathan's. During the fiscal 2004 period, Nathan's
recorded an expense reversal of approximately $50,000 from the settlement of a
disputed claim for less then the anticipated amount.
Interest expense was $256,000$49,000 during the fiscal 20022005 period as compared to
$310,000$75,000 during the fiscal 20012004 period. The reduction in interest expense relates
primarily to the repayment of outstanding debtloans between the two periods.
Impairment charges on fixed assets of $685,00028
No notes receivable were determined to be impaired during the fiscal 2002
period and $127,000 during the fiscal 2001 period reflect write-downs relating
to two under-performing stores in the fiscal 2002 period and one under-
performing store in the fiscal 20012005
period. Impairment chargescharge on notes receivable of $185,000$208,000 during the fiscal 2002
period and $151,000 during the fiscal 2001 period relate to write-downs of two
and one notes receivable, respectively.
Other income of $210,000 in the fiscal 20022004
period represents the reversalwrite-down of a previously recorded litigation provision for an award that was settled,
upon appeal, in our favor. Other expense of $462,000 duringtwo notes receivable, due to the fiscal 2001
period relates primarily to lease termination expenses of units that were not
partfailure of
the final divestiture plan of $463,000.franchisees to make required payments to us.
Provision for Income Tax Expense
- ------------------Taxes
In the fiscal 20022005 period, the income tax provision was $962,000$1,482,000 or
43.5%35.1% of income from continuing operations before income taxes as compared to
$1,416,000$1,140,000 or 46.9%36.9% of income from continuing operations before income taxes in
the fiscal 20012004 period. Fiscal Year Ended March 25, 2001 Compared to Fiscal Year Ended March 26, 2000
Effective October 1, 1999,During the third quarter fiscal 2005, Nathan's received
a refund of prior years' state income taxes, which, net of applicable federal
income tax, was approximately $81,000, lowering the effective tax rate by 1.9%
for the fiscal 2005 period.
Discontinued operations
The fiscal 2005 period and fiscal 2004 period include the results of Miami Subs Corporation have been
included inone
restaurant that was closed pursuant to its lease expiration on September 12,
2004. Revenues generated by this restaurant were $415,000 and $917,000 during
the consolidated results of Nathan's Famous, Inc. Our results of
operations forfiscal 2005 and 2004 periods, respectively. Losses before income taxes from
this restaurant were $15,000 and $98,000 during the 52 weeks ended March 26, 2000 included the operations of
24
Miami Subs for approximately 26 weeks as compared to including 52 weeks of such
operations for the period ended March 25, 2001. The results of Miami Subs'
operations for the twenty-six week period ended September 24, 2000 have been
separately stated to quantify that impact on the fifty-two weeks of operations
for the non-comparable period.fiscal 2005 and 2004
periods, respectively.
FISCAL YEAR END MARCH 28, 2004 COMPARED TO FISCAL YEAR ENDED MARCH 30, 2003
Revenues - --------from Continuing Operations
Total sales increasedfrom continuing operations decreased by 17.4%16.6% or $5,157,000$3,961,000 to
$34,799,000$19,848,000 for the fifty-two weeks ended March 25, 200128, 2004 ("fiscal 2001 period"2004") as
compared to $29,642,000$23,809,000 for the fifty-two weeks ended March 26, 200030, 2003 ("fiscal
2000 period"2003"). Of the total increase,Company-owned restaurant sales increased by $5,968,000 during the twenty-six week
period ended September 24, 2000 as a result of the Miami Subs acquisition made
last year, offset by a sales decline of $811,000decreased 32.0% or $5,595,000 to
$11,863,000 from $17,458,000 primarily due to the operation of 18seven fewer
company-owned storesrestaurants as compared to the prior fiscal period which
was partly offset by sales from newly openedyear. The reduction in
company-owned restaurants and increased sales of
our Branded Products. This unit reduction is the result of our franchising eight
company-ownedor entering into
management agreements for six restaurants transferringand selling one company-owned restaurant to a
franchisee pursuant to a management agreement, closing seven unprofitable
company-owned units (including three Miami Subs restaurants pursuant to our
divesture plan) and closing two units due to lease expirations.restaurant. The
financial impact associated with these 18seven restaurants lowered restaurant
sales by $4,299,000$5,323,000 and improved restaurant operating profits by $135,000$43,000 versus
the
fiscal 2000 period. Additionally, one unit was temporarily closed during part of
the fiscal 2001 period for renovation. This unit re- opened in October 2000.
Comparable restaurant sales of the company-owned Nathan's brand (neither Miami
Subs nor Roasters2003. Sales decreased 2.0% at our comparable company-owned restaurants
were deemed to be comparable units
based upon their period(consisting of operation under our ownership) also declined by 1.5%
versus the fiscal 2000 period, due principally to weakness experienced at the
Coney Island restaurant primarily attributable to the unfavorable weather
conditions experienced earlier in the fiscal year. During the fiscal 2001
period, sales from two new company-ownedsix Nathan's restaurants, were $2,343,000.including one seasonal restaurant).
Sales from the Branded Product Program increased by 78.1%20.5% to $3,853,000 for the$7,651,000 in
fiscal 2001
period2004 as compared to sales of $2,163,000$6,351,000 in fiscal 2003. This increase was
due to higher sales volume and the impact of the price increases implemented
during the second half of the fiscal 2000 period.year. Additionally, during fiscal 2004,
Nathan's realized sales of $334,000 in connection with a test marketing program
with QVC.
Franchise fees and royalties increased by 49.2%$309,000 or $2,908,0005.2% to $8,814,000$6,286,000
in the fiscal 2001 period2004 compared to $5,906,000$5,977,000 in the fiscal 2000 period.
Increases in franchise fees and2003. Franchise royalties during the twenty-six week period
ended September 24, 2000 resulting from the Miami Subs acquisition made last
year was $2,397,000. Franchise sales of Nathan's three restaurant concepts
increased by 36.9%$483,000 or 9.0% to $208,889,000$5,835,000 in the fiscal 2001 period2004 as compared to
$152,627,000$5,352,000 in the fiscal 2000 period2003. This increase is due primarily to the inclusionroyalties
earned from the new units that were opened or franchised during fiscal 2004 and
the full year earnings from units opened during fiscal 2003, all of which have
been recognized as income. Additionally, we realized an improvement in the
amount of unrealizable royalties which were not previously recognized as
revenues, primarily in the South Florida marketplace for the Miami Subs franchise system sales for the entire fiscal 2001 period compared to
twenty-six weeks for the fiscal 2000 period. Franchise royalties were $8,060,000
in the fiscal 2001 periodbrand,
as compared to $5,167,000fiscal 2003. Domestic franchise restaurant sales were virtually
unchanged, decreasing by 0.3% to $161,332,000 in fiscal 2004 as compared to
$161,740,000 in fiscal 2003. At March 28, 2004, 338 franchised or licensed
restaurants were operating as compared to 343 franchised or licensed restaurants
at March 30, 2003. At March 28, 2004, royalties from 35 domestic franchised
locations have been deemed unrealizable as compared to 59 domestic franchised
locations at March 30, 2003. The majority of this decline is attributable to the
fiscal 2000 period.number of unsuccessful units that have closed. Franchise fee income derived from
new unit openings and our co-branding initiative were $754,000activities was $428,000 in the fiscal 2001 period2004 as
compared to $739,000$418,000 in the fiscal 2000 period. This increase was primarily attributable to the number
of2003. During fiscal 2004, 40 franchised units
opened betweenincluding the two periods, franchise fees earned from
the co-branded restaurant conversionsfranchising of three company-owned restaurants and the difference between expiredconversion
of three company-owned restaurants into management agreements were opened as
compared to 24 franchise fees recognized into income.openings during fiscal 2003. During fiscal 2003,
Nathan's also earned $207,000 in connection with the fiscal 2001 period, seventeen
new franchised or licensed units opened.termination of two Master
Development Agreements due to breaches by the franchisees.
29
License royalties were $1,958,000$2,970,000 in the fiscal 2001 period2004 as compared to $1,906,000$2,585,000
in the fiscal 2000 period. Royalties earned2003. The majority of this increase is attributable to revenues from
new license agreements for the sale of Nathan's frankfurters within supermarketsproducts, primarily the Nathan's
"Griddle" which was marketed via "infomercial" throughout the year and club stores were approximately $1,614,000by
retailers during the Christmas 2003 season.
Interest income was $199,000 in fiscal 2004 versus $292,000 in fiscal 2003
due primarily to lower interest income earned on notes receivable which have
been impaired during the fiscal 2001 period as compared to $1,432,000 during the fiscal 2000
period. Royalties from the sale of proprietary spicesyears ended March 28, 2004 and marinade were
approximately $228,000 in the fiscal 2001 period as compared to $184,000 in the
fiscal 2000 period. During the fiscal 2001 period, we terminated an agreement
with a licensee which lowered our revenue for the fiscal 2001 period by
approximately $125,000 as compared to the fiscal 2000 period.
Equity in losses of unconsolidated affiliate of $163,000 in the fiscal 2000
period represented Nathans' proportionate share of Miami Subs' net loss for the
period March 1, 1999 through September 30, 1999, which has been reported on a
one month lag since the acquisition of the 30% equity interest. Included in
Miami Subs' net loss for the period were merger costs of $325,000.2003.
Investment and other income increased by $1,003,000$303,000 to $1,603,000$459,000 in the
fiscal
2001 period2004 versus $600,000$156,000 in the fiscal 2000 period. Increases in other
income during the twenty-six week period ended September 24, 2000 as a result of
the Miami Subs acquisition made last year was $392,000.2003. During the fiscal 2001
period2004, Nathan's recognized incomenet
gains of approximately $694,000$206,000 primarily in connection with the introductionsale of a consolidated food distribution system for its three
restaurant conceptstwo company-owned
restaurants to franchisees and the ongoing recognitionadditional miscellaneous revenue of deferred marketing support.
The increase is also attributable to a transfer fee of $500,000 that was earned
25
in connection with a change in ownership of Nathan's licensee, SMG, Inc.
Investment income was approximately $756,000 less than the fiscal 2000 period
due primarily to the difference in performance of the financial markets between
the two periods$31,000 which
was partially offset by higher interest incomean increased subleasing loss of $69,000. In fiscal 2003,
Nathan's realized a gain of $135,000 in connection with the early termination of
a Branded Product Program sales agreement. During fiscal 2003, Nathans'
investment loss of approximately $195,000.$244,000 was primarily attributable to our
investment in limited partnership, which was liquidated during fiscal 2003.
Costs and Expenses - ------------------from Continuing Operations
Cost of sales increasedfrom continuing operations decreased by $3,553,000$1,814,000 to
$22,530,000$14,198,000 in the fiscal 2001
period2004 from $18,977,000$16,012,000 in the fiscal 2000 period. Of the total increase,2003. During fiscal 2004,
restaurant cost of sales increasedwere lower than fiscal 2003 by $3,837,000 during the twenty-six week period ended
September 24, 2000approximately
$3,602,000. Cost of sales were lower by approximately $3,520,000 as a result of the Miami Subs acquisition made last year.
Cost of sales attributable to two new company-owned restaurants along with
higher labor costs in the Nathan's brand partially offset lower costs of
operating fewer company-owned restaurants totaling $2,969,000 as compared to theduring fiscal 2000 period.2004. The cost of
restaurant sales at Nathans'our comparable units
was 60.2% as a percentage of restaurant sales was
61.1% in the fiscal 2001 period2004 as compared to 60.0% as a percentage of restaurant sales60.2% in the fiscal 2000 period2003 due primarily to higher
labor and related costs. Higher costs (neither Miami Subs nor Roasters
company-owned restaurants were deemed to be comparable units based upon their
period of operation under our ownership). Higher cost of sales totaling
approximately $1,152,000$1,461,000 were incurred
primarily in connection with the growth of theour Branded Product Program.
Restaurant operating expenses increasedProgram and
higher commodity costs during fiscal 2004. Commodity costs of our beef products
were higher during fiscal 2004 than fiscal 2003. This increase was caused by
$756,000 to $8,964,000reductions in the fiscal 2001 period from $8,208,000supply of beef primarily due to: 1) the prohibition since May
2003 on importing of Canadian beef livestock into the U.S. 2) the decrease in
imports of Australian beef due to local drought conditions and 3) the export of
U.S. beef had increased through December 23, 2003 when the first case of bovine
spongiform encephalopathy, otherwise known as BSE in the fiscal 2000 period. Restaurant
operating expenses increasedUnited States was
reported. Although the export of beef by $1,687,000 during the twenty-six week period
ended September 24, 2000United States was significantly
reduced as a result of this finding, Nathan's had not realized a reduction in
the Miami Subs acquisition made last
year. Lowercost of beef during the fourth quarter of fiscal 2004. In response to these
higher costs, Nathan's had increased menu prices in its company-operated
restaurants by approximately 2.0% and increased prices within its Branded
Product Program to offset some of $1,622,000the margin pressure. Additionally, Nathan's
also incurred cost of sales of $327,000 in fiscal 2004 in connection with the
QVC test marketing program.
Restaurant operating expenses decreased by $1,851,000 to $3,441,000 in
fiscal 2004 from $5,292,000 in fiscal 2003. Restaurant operating costs were
attributable to the closed company-owned
restaurantslower in fiscal 2004 by approximately $1,847,000, as compared to the endfiscal 2003 as
a result of fiscal 2000 which were partially offset by
higher costs of approximately $735,000 from operating two new Roasters
restaurants and higher utility costs at company-owned comparableseven fewer restaurants.
Depreciation and amortization increaseddecreased by $433,000$347,000 to $1,791,000$923,000 in the
fiscal
2001 period2004 from $1,358,000$1,270,000 in the fiscal 2000 period.2003. Depreciation expense increasedwas lower by
$403,000 during the twenty-six week period ended September
24, 2000approximately $255,000 as a result of the Miami Subs acquisition made last year. Depreciation
expense attributable two new company-owned restaurants and the remaining capital
spending for the fiscal 2001 period was partially offset by the lower
depreciation expense of operating fewer company-owned restaurants
versusand the effect of the impairment charges on long-lived assets recorded during
fiscal 2000 period.2003.
Amortization of intangibles increasedwas $261,000 in fiscal 2004 as compared to
$278,000 in fiscal 2003.
General and administrative expenses decreased by $123,000$1,081,000 to $839,000$7,519,000
in fiscal 2004 as compared to $8,600,000 in fiscal 2003. The decrease in general
and administrative expenses was due primarily to lower personnel and incentive
compensation expense of approximately $411,000 resulting from the implementation
of an expense reduction plan (primarily in connection with the reduction in the
number of company-operated restaurants), lower professional fees of $247,000,
lower bad debts expense of approximately $99,000, lower un-leased property
expense of approximately $86,000 and the expense reversal from the settlement of
a disputed claim of approximately $50,000.
Interest expense was $75,000 during fiscal 2001 period2004 as compared to $132,000
during fiscal 2003. The reduction in interest expense relates primarily to the
repayment of outstanding loans between the two periods.
30
Impairment charge on notes receivable of $208,000 during fiscal 2004
represents the write-down of two notes receivable, due to the failure of the
franchisees to make required payments to us and $1,425,000 during fiscal 2003
represents the write-down relating to nine notes receivable.
Impairment charge on long-lived assets of $1,367,000 during fiscal 2003
represents the write-down relating to seven under-performing restaurants.
Other expense of $45,000 in fiscal 2004 represents lease reserves relating
to two vacant properties. Other expense of $232,000 in fiscal 2003 represents
lease reserves relating to four vacant properties.
Provision (Benefit) for Income Taxes from $716,000Continuing Operations
In fiscal 2004, the income tax provision on income from continuing
operations was $1,140,000 or 36.9% of income from continuing operations as
compared to the income tax (benefit) from continuing operations of ($283,000) or
15.8% of loss from continuing operations before income taxes in the fiscal 2000 period primarily2003. The
effective income tax rate was positively impacted in fiscal 2004 as a result of
the
Miami Subs acquisition made last year which is attributable to intangible assets
acquired and the amortizationa tax refund received of the excess purchase price.
General and administrative expenses increased by $756,000 to $8,978,000 in
the fiscal 2001 period as compared to $8,222,000 in the fiscal 2000 period.
General and administrative expenses increased by approximately $1,562,000 during
the twenty-six week period ended September 24, 2000$62,000 as a result of the Miami
Subs acquisition made last year. General and administrative expenses, excluding
the impact of Miami Subs, decreased by $806,000 primarily due tofiling an amended fiscal 2002
tax return. The effective income tax rate was lower bad debt
expense of approximately $739,000 and certain rebates of approximately $178,000,
which were partially offset by higher spending in connection with personnel
costs and incentive compensation of approximately $245,000.
Interest expense was $310,000 during the fiscal 20012003 period
as compared to
$198,000 during the fiscal 2000 period. Interest expense increased principally
due in part to the different periodsadoption of timeSFAS No. 142 which requires that Miami Subs has been ownedgoodwill no
longer be amortized. Such goodwill amortization was not tax deductible by
Nathan's which expense hasincreased the effective tax rate in prior years.
Discontinued operations
No restaurants were accounted for as discontinued operations during fiscal
2004. However, during fiscal 2005, we closed one restaurant as a result of its
lease expiration. Pursuant to SFAS No.144, results for this restaurant have been
reducedremoved from Continuing Operations and are presented as Discontinued Operations
for all prior periods presented. Fiscal 2003 included the results of operations
of eight company-owned restaurants, all of which were abandoned by the repayment of some of the Miami Subs'
assumed debt since the date of the acquisition.
Impairment charges on notes receivable of $151,000 during the fiscal 2001
period and $840,000 during the fiscal 2000 period relate to write-downs of one
and six notes receivable, respectively.
Impairment charges on fixed assets of $127,000 during the fiscal 2001
period and $465,000 during the fiscal 2000 period reflect write-downs relating
to one under-performing store in the fiscal 2001 period and three under-
performing stores in the fiscal 2000 period.
26
Other expense of $462,000 during the fiscal 2001 period relates primarily
to lease termination expenses of units thatMarch 30,
2003, including seven which were not part of the final
divestiture plan of $463,000. During the fiscal 2000 period, other expense of
$427,000 included approximately $191,000 in lease expense resulting from the
default of subleases and $236,000abandoned in connection with the satisfactionearly lease
terminations of certain
financial guarantees.
Income Tax Expense
- ------------------
In therestaurants located in Home Depot Improvement Centers. Revenues
generated by these restaurants were $917,000 during fiscal 2001 period, the income tax provision was $1,416,000 or 46.9%
of income2004 and $4,496,000
during fiscal 2003, respectively. Loss before income taxes as compared to an income tax benefit of ($250,000)
or(16.4%) offrom these
restaurants was $99,000 during fiscal 2004 and $206,000 during fiscal 2003,
respectively. The fiscal 2003 loss before income taxestax included $428,000 of additional
depreciation expense due to a change in the estimated useful lives of the
restaurants operating within Home Depot Improvement Centers for which Nathan's
received early lease termination notifications during the second quarter of
fiscal 2000 period. These rates are
higher than the statutory federal tax rate due to the2003.
Cumulative effect of statechange in accounting principle
In the first quarter fiscal 2003, we adopted SFAS No. 142, "Accounting for
Goodwill and local
taxesOther Intangibles." In connection with the implementation of this
new standard, Goodwill, Trademarks, Trade Names and certain nondeductible expenses. Nathan's has agreedRecipes were deemed to accept an offerbe
impaired and their carrying value was written down by the Internal Revenue Service$13,192,000, or
$12,338,000, net of tax.
OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to conclude the Miami Subs tax audit for the
years 1991 through 1996. As part of that agreement, Nathan's expects that
certain amortization of intangible assets previously deducted by Miami Subs will
be reversed and will not be deductible in the future.
Liquidity and Capital Resourcesany off-balance sheet arrangements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 31, 200227, 2005 aggregated $1,834,000,$2,935,000,
decreasing by $2,491,000$514,000 during the fiscal 20022005 period. At March 31, 2002,27, 2005,
marketable securities and investment in limited partnership increased by $4,171,000$4,164,000 from March 25, 200128, 2004 to $8,819,000$11,641,000
and net working capital increased to $9,565,000$14,009,000 from $5,210,000$9,185,000 at March 25, 2001.
Cash used in28,
2004.
Nathan's earned cash from operations of $3,081,000$3,308,000 in the fiscal 20022005
period isdue primarily attributable to net income of $1,249,000,$2,737,000 and non-cash charges of
$4,195,000, including depreciation and amortization of $2,549,000, impairment
charges of $870,000, deferred taxes of $509,000 and provision for doubtful
accounts of $267,000, in addition to a decrease in other assets of $104,000,
which were more than offset by decreases in accounts payable and accrued expenses of
$2,538,000, an increase$1,406,000 which was partly reduced by increased accounts receivable and notes
receivable of
31
$1,370,000 resulting primarily from higher Branded Product Program sales and
increased royalties.
We invested cash of $4,799,000 of which $4,553,000 resulted from the net
purchase of available for sale securities. Nathan's also invested $588,000 in
marketable securitiescapital expenditures during the fiscal 2005 period. We also received repayments
on notes receivable of $331,000 and investment in
limited partnership of $4,171,000, an increase in prepaid expenses and other
current assets of $295,000, an increase in inventories of $69,000 and a decrease
in deferred franchise fees of $324,000.
Cash provided by investing activities of $2,078,000 is comprised primarily
of proceeds from the sale of two company-owned restaurants and one
non-restaurant property totaling $3,348,000. On May 1, 2001, pursuant to an
order of condemnation, we sold a company-owned restaurant to the State of
Florida for $1,475,000, net of estimated expenses of $25,000, and repaid the
outstanding mortgage of approximately $793,000 plus accrued interest. We
successfully appealed the value of the property that was condemned by the State
of Florida and were awarded an additional $850,000 in November 2001. On June 22,
2001, we also sold our restaurant in the Paramus Park Mall to a franchisee for
$400,000 in cash and concurrently entered into a sub-lease for the property. On
January 17, 2002, we also sold a non-restaurant location for $575,000.
Additionally, $2,082,000 was expended relating to capital improvements of the
company-owned restaurants and other fixed asset additions and was partially
offset by repayments on notes receivableassets
of $812,000.
Cash used in$11,000.
We received cash from our financing activities of $1,488,000 represents repayments$977,000 which is
comprised of notes payableproceeds received from the exercise of warrants issued in
connection with the Miami Subs acquisition and obligations under capital leasesemployee stock options of
$1,387,000. We repurchased 39,799 shares of common stock for an aggregate
$237,000 pursuant to our stock buyback program and also repaid bank debt in the
amount of $1,353,000.
The majority of the repayments arose from the repayment of an outstanding
mortgage of approximately $793,000 plus accrued interest in connection with the
condemnation of a company-owned restaurant by the State of Florida, as described
above.$173,000.
On September 14, 2001, Nathan's was authorized to purchase up to 1one
million shares of its common stock. Pursuant to ourits stock repurchase program, weit
repurchased 41,691one million shares of common stock in open market transactions at a total
cost of $135,000 as of March 31, 2002. On April 10, 2002, we repurchased 751,000
shares of common stock inand a
private transaction at a total cost of $2,741,500.
In connection with our acquisition of Miami Subs, we determined that$3,670,000 through the quarter ended
September 29, 2002. On October 7, 2002, Nathan's was authorized to purchase up
to 18 underperforming restaurants would be closed pursuant to our divestiture plan.one million additional shares of its common stock. Through March 31, 2002, we have terminated leases on 1527, 2005,
Nathan's purchased 891,100 shares of those properties. Wecommon stock at a cost of approximately
$3,488,000 which includes the repurchase of 39,799 shares during the fifty-two
weeks ended March 27,
are continuing to market two2005 at a cost of the remaining properties for sale and terminated
the lease for the last unit upon the lease expiration in May 2002.$237,000. As of March 31, 2002, we have accrued approximately $1,461,000 and made payments27, 2005, Nathan's
has purchased a total of 1,891,100 shares of common stock at a cost of
approximately $1,273,000 for lease obligations$7,158,000. Nathan's expects to make additional purchases of stock
from time to time, depending on market conditions, in open market or in
privately negotiated transactions, at prices deemed appropriate by management.
There is no set time limit on the purchases. Nathan's expects to fund these
stock repurchases from its operating cash flow.
We expect that we will make additional investments in certain existing
restaurants and termination costs, as partsupport the growth of the acquisition,Branded Product Program in the future
and to fund those investments from our operating cash flow. We may incur
additional capital expenditures in connection with the replacement of a
Company-owned restaurant whose lease expired in September 2004.
There are currently 29 properties that we either own or lease from third
parties which we lease or sublease to franchisees, operating managers and
non-franchisees. Additionally, there is currently one leased vacant property
which was previously sublet to a franchisee. We remain contingently liable for
unitsall costs associated with total future minimum lease obligationsthese properties including: rent, property taxes and
insurance. Additionally, we guaranteed financing on behalf of $7,680,000certain
franchisees with remaining lease termstwo third-party lenders. Our maximum obligation for loans
funded by the lenders as of one year up toMarch 27, 2005 was approximately 17 years.$325,000.
We may incur future cash payments, consisting primarily of future lease
payments, including costs and expenses associated with terminating additional
leases, that were not part of our divestiture plan.
We expect that we will make additional investments in certain existing
restaurants inThe following schedules represent Nathan's cash contractual obligations
and the future and that we will fund those investments from our
operating cash flow. We do not expect to incur significant capital expenditures
to develop new company-owned restaurants during our fiscal year ending March 30,
2003.
There are currently 34 properties that we either own or lease from third
parties which we lease or sublease to franchisees and non-franchisees. We remain
contingently liable for all costs associated with these properties.
Additionally, we guaranteed financing on behalfexpiration of certain franchisees with two
third party lenders. Our maximum obligation for loans fundedother contractual commitments by the lenders as
of March 31, 2002 was approximately $1.7 million.maturity (in thousands):
Payments Due by Period
------------------------
Less than
Cash Contractual Obligations Total 1 Year 1 - 3 Years 4-5 Years After 5 Years
- ------------------------------------ ------- --------- ----------- --------- -------------
Long-Term Debt $ 819 $ 167 $ 333 $ 319 $ -
Capital Lease Obligations 47 7 17 21 2
Employment Agreements 1,509 572 500 437 -
Operating Leases 14,887 3,587 6,174 3,373 1,753
------- --------- ----------- --------- ---------
Gross Cash Contractual Obligations 17,262 4,333 7,024 4,150 1,755
Less: Sublease Income 9,115 2,001 3,508 2,043 1,563
------- --------- ----------- --------- ---------
Net Cash Contractual Obligations $ 8,147 $ 2,332 $ 3,516 $ 2,107 $ 192
======= ========= =========== ========= =========
32
Amount of Commitment Expiration Per Period
------------------------------------------
Total
Amounts Less than
Other Contractual Commitments Committed 1 Year 1 - 3 Years 4-5 Years After 5 Years
- ----------------------------- --------- ------- ----------- ---------- -------------
Loan Guarantees $ 325 $ 123 $ 202 $ - -
--------- ------- ----------- ---------- -------------
Total Commercial Commitments $ 325 $ 123 $ 202 $ - -
========= ======= =========== ========== =============
Management believes that available cash, marketable investment securities,
and internally generated funds should provide sufficient capital to finance our
operations for at least the next twelve months. We currently maintain a
$7,500,000 uncommitted bank line of credit and have notnever borrowed any funds
to date under this linethe company's lines of credit.
SEASONALITYSeasonality
Our business is affected by seasonal fluctuations, the effects of weather
and economic conditions. Historically, restaurant sales from Company-owned
restaurants, franchised restaurants from which royalties are earned and the
Company's earnings have been highest during our first two fiscal quarters with
the fourth fiscal quarter representing the slowest period. This seasonality is
primarily attributable to weather conditions in our marketplace for our
company-owned and franchised Nathan's stores,restaurants, which is principally the New
York metropolitan area. As a result of the changing composition of the Miami
Subs' restaurant system, sales, have
historically been strongest duringand the period March through August, which
approximates our first and second quarters, as a result of a heavyresulting royalties derived, are less
seasonally dependant despite the ongoing concentration of restaurants being
located in Florida. As a result,Notwithstanding the continued growth of our Branded Product
Program and the reduced number of our restaurants, we believe that future
revenues may become slightly more seasonal.
IMPACT OF INFLATION
Duringand profits will continue to be highest during our first two fiscal
quarters with the past several years, our commodity costs have remained relatively
stable. As such, wefourth fiscal quarter representing the slowest period.
Inflationary Impact
We believe that general inflation has not materially impacted earnings
during the past three years. Nevertheless, during that period of time. Last year we experiencedtime, our
commodity costs for beef have increased significantly while other costs have
increased slightly. Beginning with fiscal 2004, throughout fiscal 2005 and into
the first quarter fiscal 2006, the price of our meatbeef products and utilities resulting fromhas risen
dramatically over historical norms, particularly as compared to fiscal 2003. As
previously discussed, Nathan's has increased prices in response to the increased
commodity costs. We also
experienced increasedIn addition, during fiscal 2004 and fiscal 2005 we have
realized the impact of higher oil prices in the form of higher distribution
costs for insurance attributable to the hardening of the
insurance markets. This year,and utilities. Further, in 2002 various Federal and New York State
legislators have proposed changes to the existing minimum wage requirements. The New York
State Assembly has voted to increaserequirements, however, none of
the minimum wage to $6.75 an hour beginning
January 1, 2003 with automatic annual increases, commencing January 2004, based
upon increases in the state's average weekly pay. Before being enacted, this
proposal must be approved by the New York State Senate and signed by the
Governor. In addition, U.S. Senator Edward Kennedy has proposed increasing the
Federal minimum wage to $6.65 an hour which would be fully phased in by January
1, 2004. If this proposal is passed this year, the first increase of $0.60 an
hour would take effect 60 days later, followed by a $0.50 cent an hour increase
on January 1, 2003 and another $0.50 an hour increase on January 1, 2004. U.S.
Senate Majority Leader Tom Daschle has indicated that he wants to schedule a
vote on this matter in the summer of 2002. Weproposals were enacted. Although we only operate six Company-owned
restaurants, we believe that thesesignificant increases in the minimum wage could
have a significant financial impact on our financial results. Prolongedresults and the results of
our franchisees. Continued increases in labor, food and other operating
expenses could adversely affect our operations and those of the restaurant
industry and we might have to further reconsider our pricing strategy as a means
to offset reduced operating margins.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTSItem 7A. Qualitative and Quantitative Disclosures About Market Risk
CASH AND CASH EQUIVALENTS
We have historically invested our cash and cash equivalents in short term,
fixed rate, highly rated and highly liquid instruments which are reinvested when
they mature throughout the year. Although our existing investments are not
considered at risk with respect to changes in interest rates or markets for
these instruments, our rate of return on short-term investments could be
affected at the time of reinvestment as a result of intervening events. As of
March 27, 2005, Nathans' cash and cash equivalents aggregated $2,935,000.
Earnings on these cash and cash equivalents would increase or decrease by
approximately $7,300 per annum for each 0.25% change in interest rates.
MARKETABLE INVESTMENT SECURITIES
We have invested our marketable investment securities in intermediate
term, fixed rate, highly rated and highly liquid instruments. These investments
are subject to fluctuations in interest rates. As of March 27, 2005, the market
value of
33
Nathans' marketable investment securities aggregated $11,641,000. Interest
income on these marketable investment securities would increase or decrease by
approximately $29,100 per annum for each 0.25% change in interest rates. The
following chart presents the hypothetical changes in the fair value of the
marketable investment securities held at March 27, 2005 that are sensitive to
interest rate fluctuations (in thousands):
Valuation of securities Valuation of securities
Given an interest rate Given an interest rate
Decrease of X Basis points Fair Increase of X Basis points
-------------------------- ----------------------------------
(150BPS) (100BPS) (50BPS) Value +50BPS +100BPS +150BPS
-------- -------- -------- ------- ------- ------- -------
Municipal notes and bonds $ 12,284 $ 12,064 $ 11,850 $11,641 $11,437 $11,237 $11,042
======== ======== ======== ======= ======= ======= =======
BORROWINGS
The interest rate on our borrowings is generally determined based upon the
prime rate and may be subject to market fluctuation as the prime rate changes as
determined within each specific agreement. We do not anticipate entering into
interest rate swaps or other financial instruments to hedge our borrowings. At
March 27, 2005, total outstanding debt, including capital leases, aggregated
$866,000 of which $819,000 is at risk due to changes in interest rates. The
current interest rate is 4.50% per annum and will adjust in January 2006 and
January 2009 to prime plus 0.25%. Nathan's also maintains a $7,500,000 credit
line at the prime rate 5.75% as of May 17, 2005). The Company has never borrowed
any funds under its credit lines. Accordingly, the Company does not believe that
fluctuations in interest rates would have a material impact on its financial
results.
COMMODITY COSTS
The cost of commodities are subject to market fluctuation. We have not
attempted to hedge against fluctuations in the prices of the commodities we
purchase using future, forward, option or other instruments. As a result, our
future commodities purchases are subject to changes in the prices of such
commodities. Generally, we attempt to pass through permanent increases in our
commodity prices to our customers, thereby reducing the impact of long-term
increases on our financial results. During the fifty-two week periods ended
March 27, 2005 and March 28, 2004, the price of our beef products has risen
dramatically over historical norms, particularly as compared to the fiscal year
ended March 2003. The increases have been caused by reductions in the supply of
beef primarily due to: 1) the prohibition since May 2003 on importing of
Canadian beef livestock into the U.S., 2) the decrease in imports of Australian
beef due to local drought conditions and 3) the export of United States beef had
increased through December 23, 2003 when the first case of bovine spongiform
encephalopathy, otherwise known as BSE in the United States was reported.
Nathan's has not experienced a softening in the price of beef since December 23,
2003. Although the export of beef by the United States was significantly reduced
as a result of this finding, beef costs have continued to rise. In July 2001,March 2005,
the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("SFAS No.141")Bush administration was expected to re-open the Canadian border and No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS No.141
requires all business combinations initiated after June 30, 2001resume
importing Canadian beef, which has not occurred. As a result, supply continues
to be accounted
for usingtight and prices remain unrelentingly high. Nathan's cost of its hot dogs
was approximately 7.1% higher during the purchase method. Under SFAS No.142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemedfifty-two weeks ended March 27, 2005
than the fifty-two weeks ended March 28, 2004, which is in addition to have indefinite lives will continuean
approximately 14.6% increase over the fifty-two weeks ended March 30, 2003.
Nathan's has already been forced to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. There are also transition provisions that apply to business
combinations completed before July 1, 2001, that were accounted for by the
purchase method. With respect to its goodwill and intangible assets acquired
prior to July 1, 2001, Nathan's is required to adopt SFAS 142 effectiveincrease menu prices in its next fiscal year, commencing April 1, 2002. Nathan's will no longer amortize
existing goodwillcompany-operated
restaurants and certain intangibles having indefinite lives, thus reducing
amortization expensehad increased prices within its Branded Product Program to
offset some of the margin pressure. A short term increase or decrease of 10% in
the cost of our food and paper products for the entire fifty-two weeks ended
March 27, 2005 would have increased or decreased cost of sales by approximately
$600,000 per year. We expect to complete
our impairment analysis during$1,265,000.
On December 23, 2003, the United States Department of Agriculture ("USDA")
announced that the first quarter fiscal 2003 and expect to
28
recognize an impairment chargecase of approximately $12 to $13 million upon adoptionbovine spongiform encephalopathy, otherwise
known as BSE, or mad-cow disease was discovered in the United States in a single
cow in the State of SFAS No. 142.
In June 2001,Washington. Nathan's has obtained written assurances from
its beef processors that Nathan's products have not come from the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations"("SFAS No.143"). SFAS No.143 addresses financial and reporting
obligationsmeat
processing plants associated with the retirementproduction of tangible long-lived assets and the
associated asset retirement costs. It appliesproducts having to legal obligations associateddo with
the retirement of long-lived assets that result from acquisition,
construction, development and/or the normal operation of a long-lived asset,
exceptthis incident. Nathan's demand for certain obligations of lessees. SFAS No.143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Nathan's is currently evaluating the effect of adoption on its financial
position and results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No.144"). SFAS No.144 supersedes FAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and Accounting Principles Board Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". SFAS No.144 retains the fundamental provisions of SFAS 121 for
recognition and measurement of impairment, but amends the accounting and
reporting standards for segments of a businessproducts continues to be disposed of. The provisionsstrong and
Nathan's has not experienced any material sales impact in connection with this
incident.
34
FOREIGN CURRENCIES
Foreign franchisees generally conduct business with us and make payments
in United States dollars, reducing the risks inherent with changes in the values
of this statement are requiredforeign currencies. As a result, we have not purchased future contracts,
options or other instruments to be adopted no later than fiscal years
beginning after December 31, 2001, with early adoption encouraged. Nathan's is
currently evaluatinghedge against changes in values of foreign
currencies and we do not believe fluctuations in the value of foreign currencies
would have a material impact of the adoption of SFAS 144, which Nathan's does
not expect to be material.on our financial results.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report are forward-looking
statements. Forward-looking statements represent our current judgment regarding
future events. Although we would not make forward-looking statements unless we
believe we have a reasonable basis for doing so, we cannot guarantee their
accuracy and actual results may differ materially from those we anticipated due
to a number of uncertainties, many of which we are not aware. These risks and
uncertainties, many of which are not within our control, include, but are not
limited to: the ongoingfuture effects of the eventsfirst case of September 11, 2001;bovine spongiform
encephalopathy, BSE, identified in the United States on December 23, 2003;
economic, weather, legislative and business conditions; the collectibility of
receivables; the availability of suitable restaurant sites on reasonable rental
terms; changes in consumer tastes; the ability to continue to attract
franchisees; the ability to purchase our primary food and paper products at
reasonable prices; no material increases in the minimum wage; and our ability to
attract competent restaurant and managerial personnel. We generally identify
forward- lookingforward-looking statements with the words "believe","believe," "intend," "plan," "expect,"
"anticipate," "estimate," "will," "should" and similar expressions.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
We have historically invested our cash and cash equivalents in short term,
fixed rate, highly rated and highly liquid instrumentsADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS Statement No. 151, "Inventory Costs--an amendment of ARB No. 43" ("SFAS
No.151"), which are reinvested when
they mature throughoutis the year. Although our existing investments are not
considered at risk with respect to changes in interest rates or markets for
these instruments, our rate of return on short- term investments could be
affected at the time or reinvestment as a result of intervening events.
We have invested our marketable investment securities in intermediate term,its efforts to converge U.S. accounting
standards for inventories with International Accounting Standards. SFAS No. 151
requires idle facility expenses, freight, handling costs, and wasted material
(spoilage) costs to be recognized as current-period charges. It also requires
that allocation of fixed rate, highly rated and highly liquid instruments and a highly liquid
investment limited partnership that invests principally in equities. These
investments are subjectproduction overheads to fluctuations in interest rates and the performancecosts of conversion be
based on the normal capacity of the equity markets.
The interest rateproduction facilities. SFAS No. 151 will be
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. We are evaluating the impact of this standard on our borrowings areconsolidated
financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment"
("SFAS No. 123R"), which revises SFAS No. 123, "Accounting for Stock-Based
Compensation," and generally determined based upon
prime raterequires, among other things, that all employee
stock-based compensation be measured using a fair value method and maythat the
resulting compensation cost be subject to market fluctuation as the prime rate changes as
determined within each specific agreement. We do not anticipate entering into
interest rate swaps or other financial instruments to hedge our borrowings.
The cost of commodities are subject to market fluctuation. We have not
attempted to hedge against fluctuationsrecognized in the pricesfinancial statements. SFAS 123R
also provides guidance on how to determine the grant-date fair value for awards
of equity instruments, as well as alternative methods of adopting its
requirements. On April 14, 2005, the SEC delayed the effective date of required
adoption of SFAS No. 123R to the beginning of the commodities we
purchase using future, forward, option or other instruments. As a result, our
future commodities purchases are subjectfirst annual period after June
15, 2005. We plan to changesadopt the provisions of SFAS No. 123R in the pricesfirst quarter
of such
commodities.
29
Foreign franchisees generally conduct business with us and make payments
in, United States dollars, reducingfiscal year 2007. The Company is currently evaluating the risks inherent with changes inimpact of adoption
of the valuesvarious provisions of foreign currencies. As a result, we have not purchased future
contracts, options or other instruments to hedge against changes in values of
foreign currencies.
ItemSFAS No. 123R.
ITEM 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data is submitted
as a separate section of this report beginning on Page F-1.
ItemITEM 9. ChangesCHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer,
Chief Operating Officer and Chief Financial Officer, conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures, as required by Exchange Act Rule 13a-15. Based on that evaluation,
the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer
have concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in the reports that we file or submit under
35
the Exchange Act is recorded, processed, summarized and Disagreements with Accountants on Accountingreported within the time
periods specified by the SEC's rules and - ------ -----------------------------------------------------------------------
Financial Disclosure
--------------------
On March 15, 2002, we dismissed Arthur Andersen LLP,forms.
There were no significant changes in our independent
auditors forinternal controls over
financial reporting that occurred during the fiscal yearquarter ended March 25, 200127, 2005
that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
We believe that a control system, no matter how well designed and
effective March 25, 2002,
replaced them with Grant Thornton LLP, our auditors foroperated, cannot provide absolute assurance that the fiscal year ended
March 31, 2002. The decision to change accountants was ratified by our Audit
Committee on March 19, 2002.
The reports of Arthur Andersen LLP for the years ended March 25, 2001 and
March 26, 2000 do not contain an adverse opinion or a disclaimer of opinion, or
a qualification or modification as to uncertainty, audit scope or accounting
principles.
In connection with the audit for our fiscal years ended March 25, 2001 and
March 26, 2000 and for the period from March 26, 2001 through the date of change
in auditors, there were no disagreements with Arthur Andersen LLP on any matters
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to their
satisfaction, would have caused it to make a reference to the subject matterobjectives of the
disagreement in connection with its report.
Wecontrol system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have not had any discussions nor received any written reports or oral
advice from Grant Thornton LLP duringbeen detected. Our disclosure controls and procedures are
designed to provide reasonable assurance of achieving their objectives and
our Chief Executive Officer, Chief Operating Officer and Chief Financial
Officer have concluded that such controls and procedures are effective at
the two most recent fiscal years and any
subsequent interim period with respect to either the application of accounting
principles to a specified transaction, either completed or proposed, or as to
the type of audit opinion that might be rendered on our financial statements.
30reasonable assurance level.
ITEM 9B. OTHER INFORMATION
None
36
PART III
ItemITEM 10. Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this Item is incorporated herein
by reference to our proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year covered by this Report.
ItemITEM 11. Executive Compensation
- ------- ----------------------EXECUTIVE COMPENSATION
The information required in response to this Item is incorporated herein
by reference to our proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year covered by this Report.
ItemITEM 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this Item is incorporated herein
by reference to our proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year covered by this Report.
ItemITEM 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item is incorporated herein
by reference to our proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year covered by this Report.
31ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
We were billed by Grant Thornton LLP the aggregate amount of approximately
$168,000 in respect of fiscal 2005 and $149,000 in respect to fiscal 2004 for
fees for professional services rendered for the audit of our annual financial
statements and review of our financial statements included in our forms 10-Q.
AUDIT-RELATED FEES
We were billed by Grant Thornton LLP the aggregate amount of approximately
$0 in respect of fiscal 2005 and $19,000 in respect to fiscal 2004 for fees for
assurance and reasonably related services related to the performance of the
audit.
TAX FEES
Grant Thornton LLP did not render any tax compliance, tax advice or tax
planning services for fiscal 2005 and 2004.
ALL OTHER FEES
Grant Thornton LLP did not render any other services, other than as set
forth above, for fiscal 2005 and 2004. Consequently, aggregate fees billed for
all other services rendered by Grant Thornton LLP for fiscal 2005 and 2004 were
$0.
PRE-APPROVAL POLICIES
Our audit committee has not adopted any pre-approval policies. Instead,
the Audit Committee will specifically pre-approve the provision by Grant
Thornton LLP of all audit and non-audit services.
Our audit committee approved all of the services provided by Grant
Thornton LLP and described in the preceding paragraphs.
37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------- ---------------------------------------------------------------ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Consolidated Financial StatementsCONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying index to
consolidated financial statements and schedule on Page F-1 are filed as part of
this report.
(2) Financial Statement ScheduleFINANCIAL STATEMENT SCHEDULE
The consolidated financial statement schedule listed in the accompanying
index to consolidated financial statements and schedule on Page F-1 is filed as
part of this report.
(3) ExhibitsEXHIBITS
Certain of the following exhibits (as indicated in the footnotes to the
list), were previously filed as exhibits to other reports or registration
statements filed by the Registrant under the Securities Act of 19931933 or under the
Securities Exchange Act of 1934 and are herein incorporated by reference.
Exhibit
No. Exhibit
- ------- -------
3.1 Certificate of Incorporation.(Incorporated (Incorporated by reference to Exhibit
3.1 to Registration Statement on Form S-1 No. 33-56976.)
3.2 Amendment to the Certificate of Incorporation, filed December 15,
1992.(Incorporated (Incorporated by reference to Exhibit 3.2 to Registration
Statement on Form S-1 No. 33-56976.)
3.3 By-Laws, as amended.
(Incorporated by reference to Exhibit 3.3 to the
Annual Report on Form 10-K for the fiscal year ended March 28, 1999.)
4.1 Specimen Stock Certificate.(Incorporated (Incorporated by reference to Exhibit
4.1 to Registration Statement on Form S-1 No. 33-56976.)
4.2 Form of Warrant issued to Ladenburg, Thalmann & Co., Inc.
(Incorporated by reference to Exhibit 4.2 to Registration Statement
on Form S-1 No. 33-56976.)
4.3 Form of Warrant issued to Howard M. Lorber. ( Incorporated by reference to
Exhibit 4.3 to the Annual Report filed on form 10-K for the fiscal year
ended March 27, 1994.)
4.4 Amendment to Warrant issued to Howard M. Lorber (Incorporated by reference
to Exhibit 4.4 to the Annual Report filed on form 10-K for the fiscal year
ended March 31, 1996.)
4.5 Specimen Rights Certificate (Incorporated by reference to Exhibit 42
to the
Current Report on form 8-KForm 8-A/A dated July 14, 1995.December 10, 1999.)
10.1 Employment Agreement with Wayne Norbitz, dated December 28, 1992.
(Incorporated by reference to Exhibit 10.1 to Registration Statement
on Form S-1 No. 33-56976.)
10.2 Leases for premises at Coney Island, New York, as follows:
(Incorporated by reference Exhibit 10.3 to Registration Statement on
Form S-1 No. 33-56976.)
a) Lease, dated November 22, 1967, between Nathan's Realty Associates
and the Company.
b) Lease, dated November 22, 1967, between Ida's Realty Associates
and the Company.
c) Lease, dated November 17, 1967, between Ida's Realty Associates
and the Company.
10.3 Leases for the premises at Yonkers, New York, as follows:
(Incorporated by reference to Exhibit 10.4 to Registration Statement
on Form S-1 No. 33-56976.)
a) Lease Modification of Land and Building Lease between the Yonkers
Corp. and the Company, dated November 19, 1980;
38
b) Lease Modification of Land and Building Lease between 787 Central
Park Avenue, Inc., and the Company dated May 1, 1980.
10.4 Lease with NWCM Corp. for premises at Oceanside, New York, dated
March 14, 1975. (Incorporated by reference to Exhibit 10.5 to
Registration Statement on Form S-1 No. 33-56976.)
10.5 1992 Stock Option Plan, as amended. (Incorporated by reference to
Exhibit 10.8 to Registration Statement on Form S-8 No. 33-93396.)
10.6 Area Development Agreement with Marriott Corporation, dated February
19, 1993. (Incorporated by reference to Exhibit 10.9(a) to the
Annual Report on Form 10-K for the fiscal year ended March 28,
1993.)
32
10.7 Area Development Agreement with Premiere Foods, dated September 11,
1990. (Incorporated by reference to Exhibit 10.10 to Registration
Statement on Form S-1 No. 33-56976.)
10.8 Form of Standard Franchise Agreement. (Incorporated by reference to
Exhibit 10.12 to Registration Statement on Form S-1 No. 33-56976.)
10.9 401K Plan and Trust. (Incorporated by reference to Exhibit 10.5 to
Registration Statement on Form S-1 No. 33-56976.)
10.10 Amendment dated November 8, 1993, to the Employment Agreement, dated
December 28, 1992, with Wayne Norbitz. ( Incorporated(Incorporated by reference to
Exhibit 10.19 to the Annual Report filed on formForm 10-K for the fiscal
year ended March 27, 1994.)
10.11 License Agreement dated as of February 28, 1994, among Nathan's
Famous Systems, Inc. and SMG, Inc., including amendments and waivers
thereto. ( Incorporated by reference to Exhibit 10.21 to the Annual
Report filed on formForm 10-K for the fiscal year ended March 27, 1994.)
10.12 Outside Director Stock Option Plan. (Incorporated by reference to
Exhibit 10.22 to Registration Statement on Form S-8 No. 33-89442.)
10.13 Home Depot Food Service Lease Agreement. (Incorporated by reference to
Exhibit 10.24 to the Annual Report filed on form 10-K for the fiscal year
ended March 26, 1995.)
10.14 Modification Agreement to the Employment Agreement with Wayne
Norbitz, dated December 28, 1992. (Incorporated by reference to
Exhibit 10.1 to the Quarterly Report filed on formForm 10-Q for the
fiscal quarter ended December 29, 1996.)
10.1510.14 Amendment to License Agreement dated as of February 28, 1994, among
Nathan's Famous Systems, Inc. and SMG, Inc. including waivers and
amendments thereto. (Incorporated by reference to Exhibit 10.2 to
the Quarterly Report filed on formForm 10-Q for the fiscal quarter ended
December 29, 1996.)
10.16 Warrant Agreement dated November 24, 1996 between the Company and Jerry
Krevans. (Incorporated by reference to Exhibit 10.24 to the Annual Report
filed on form 10-K for the fiscal year ended March 30, 1997.)
10.17 Second Amended and Restated Rights Agreement dated as of April 6, 1998
between Nathan's Famous, Inc. and American Stock Transfer and Trust Company
(Incorporated by reference to Exhibit 2 to Form 8-A/A dated April 6, 1998.)
10.1810.15 1998 Stock Option Plan. (Incorporated by reference to Exhibit 10.26
to the Annual Report filed on formForm 10-K for the fiscal year ended
March 29, 1998.)
10.1910.16 North Fork Bank Promissory Note.(Incorporated by reference to
Exhibit 10.21 to the Annual Report filed on formForm 10-K for the fiscal
year ended March 28, 1999.)
10.2010.17 Amended and Restated Employment Agreement with Donald L. Perlyn
effective September 30, 1999. (Incorporated by reference to Exhibit
10.20 to the Annual Report filed on formForm 10-K for the fiscal year
ended March 26, 2000.)
10.2110.18 Third Amended and Restated Rights Agreement dated as of December 10,
1999 between Nathan's Famous, Inc. and American Stock Transfer and
Trust Company (Incorporated by reference to Exhibit 2 to Form 8- A/8-A/A
dated December 10, 1999.)
10.22 Master Distributor10.19 Amendment No. 1 to Rights Agreement with U.S. Foodservice, Inc..(Incorporateddated as of June 15, 2005
between Nathan's Famous, Inc. and American Stock Transfer and Trust
Company. (Incorporated by reference to Exhibit 10.2310.1 to the AnnualCurrent
Report filed on form 10-K for the
fiscal year ended March 26, 2000.Form 8-K dated June 15, 2005.)
10.2310.20 Employment Agreement dated as of January 1, 20002005 with Howard M.
Lorber.(Incorporated by reference to
39
Exhibit 10.2410.01 to the AnnualQuarterly Report filed on form 10-KForm 10-Q for the
fiscal yearquarter ended MarchDecember 26, 2000.2004.)
10.2410.21 Marketing Agreement with beverage supplier. (Incorporated by
reference to Exhibit 10.25 to the Quarterly Report filed on formForm
10-Q for the fiscal quarter ended June 25, 2000.)
10.22 2001 Stock Option Plan. (Incorporated by reference to Exhibit 4 to
Registration Statement on Form S-8 No. 333-82760.)
10.23 2002 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1
to Registration Statement on Form S-8 No. 333-101355.)
10.24 Master Distributor Agreement with U.S. Foodservice, Inc. dated
February 5, 2003. (Incorporated by reference to Exhibit 10.24 to the
Annual Report filed on Form 10-K for the fiscal year ended March 30,
2003.)
10.25 Material Definitive Agreement with Thor Realty, LLC dated February
25, 2005. (Incorporated by reference to Exhibit 10.01 to the Current
Report filed on Form 8-K on February 28, 2005.)
10.26 Restricted Stock Agreement with Howard M. Lorber.
14. Code of Ethics (Incorporated by reference to Exhibit 14 to the
Annual Report filed on Form 10-K for the fiscal year ended March 28,
2004.)
21 List of Subsidiaries of the Registrant.
23.123 Consent of Grant Thornton LLP dated June 24,May 27, 2005.
31.1 Certification by Howard M. Lorber, Chief Executive Officer, pursuant
to Rule 13a - 14(a).
31.2 Certification by Wayne Norbitz, Chief Operating Officer, pursuant to
Rule 13a - 14(a).
31.3 Certification by Ronald G. DeVos, Chief Financial Officer, pursuant
to Rule 13a - 14(a).
32.1 Certification by Howard M. Lorber, Chief Executive Officer of
Nathan's Famous, Inc., pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On March 15, 2002 - Item 4 -32.2 Certification by Ronald G. DeVos, Chief Financial Officer of
Nathan's Famous, Inc., pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Company reported that it dismissed Arthur
Andersen LLP the Companies independent public accountants for the fiscal year
ended March 25, 2001.
On March 26, 2002 - Item 4 - the Company reported that it hired Grant
Thornton LLP as the Companies independent public accountants for the year ending
March 31,Sarbanes-Oxley Act of 2002.
3340
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized on the 24th23rd day of June,
2002.2005.
Nathan's Famous, Inc.
/s/ WAYNE NORBITZ
- ----------------------------
Wayne Norbitz, President and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated on the 24th23rd day of June, 2002.2005.
/s/ HOWARD M. LORBER
- ------------------------------------------------
Howard M. Lorber Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
/s/ WAYNE NORBITZ
- ------------------------------------------------
Wayne Norbitz President, Chief Operating Officer and Director
/s/ RONALD G. DEVOS
- ------------------------------------------------
Ronald G. DeVos Vice President - Finance and Chief Financial
Officer (Principal Financial and Accounting
Officer)
/s/ DONALD L. PERLYN
- ------------------------------------------------
Donald L. Perlyn Executive Vice President and Director
/s/ ERIC GATOFF
- -----------------------
Eric Gatoff Vice President - Corporate Counsel and Director
/s/ ROBERT J. EIDE
- ------------------------------------------------
Robert J. Eide Director
/s/ BARRY LEISTNER
- ------------------------------------------------
Barry Leistner Director
/s/ BRIAN GENSON
- ------------------------------------------------
Brian Genson Director
/s/ ATTILIO F. PETROCELLI
- ------------------------------------------------
Attilio F. Petrocelli Director
/s/ CHARLES RAICH
- -----------------------
Charles Raich Director
41
Nathan's Famous, Inc. and Subsidiaries
TABLE OF CONTENTS
Page
----
Report of Independent Certified Public Accountants: Grant Thornton LLP F-2
Report of Independent Public Accountants: Arthur Andersen LLP F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-41
Report of Independent Public Accountants on Schedule:
Arthur Andersen LLP F-42
Schedule II - Valuation and Qualifying Accounts F-43
Consent of Independent Certified Public Accountants F-44
Page
----------
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders' Equity F-5 - F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-50
Schedule II - Valuation and Qualifying Accounts F-51
F-1
REPORT OF INDEPENDENT CERTIFIEDREGISTERED PUBLIC ACCOUNTANTSACCOUNTING FIRM
Board of Directors and Shareholders
Nathan's Famous, Inc. and SubsidiariesNATHAN'S FAMOUS, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheetsheets of Nathan's Famous,
Inc. (a Delaware Corporation) and subsidiaries (the "Company") as of March 31,
2002,27,
2005 and March 28, 2004, and the related consolidated statements of operations,
stockholders' equity and cash flows for the fifty-three weeks then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nathan's Famous, Inc. and
subsidiaries as of March 31, 2002, and the results of their operations and their
cash flows for the fifty-three weeks then ended in conformity with accounting
principles generally accepted in the United States of America.
We have also audited the financial statement schedule listed in the Index at
Item 14(a)(2) as of and for the fifty-threefifty-two weeks ended March 31, 2002. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/GRANT THORNTON LLP
Melville, New York
May 24, 2002 (except for Note N-2, as to
which the date is May 29, 2002)
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Nathan's Famous, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Nathan's Famous,
Inc., (a Delaware Corporation) and subsidiaries as of27,
2005, March 25, 200128, 2004 and March 26, 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three fiscal years ended March 25, 2001.30, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditingthe standards generally accepted
inof the United States.Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit
also includesstatements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Nathan's Famous, Inc. and subsidiaries as of March 25, 200127, 2005 and March 26, 2000,28, 2004,
and the consolidated results of their operations and their consolidated cash
flows for each of the three fiscal yearsfifty-two weeks ended March 25, 200127, 2005, March 28, 2004 and March 30,
2003 in conformity with accounting principles generally accepted in the United
States.
/s/Arthur AndersenStates of America.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II, Valuation and Qualifying
Accounts, is presented for the purposes of additional analysis and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
GRANT THORNTON LLP
Melville, New York
May 27, 2005 (except for Note K - 3, as to
which the date is June 14, 2001
This Report of Independent Certified Public Accountants is a copy of a
previously issued Arthur Andersen LLP ("Andersen") report and has not been
reissued by Andersen. The inclusion of this previously issued Andersen report is
pursuant to the "Temporary Final Rule and Final Rule: Requirements for Arthur
Andersen LLP Auditing Clients," issued by the U.S. Securities and Exchange
Commission in March 2002. Note that this previously issued Andersen report
includes references to certain fiscal years, which are not required to be
presented in the accompanying consolidated financial statements as of and for
the fiscal years ended March 31, 2002.
F-315, 2005)
F-2
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETSMARCH 27, 2005 March 31, 2002 March 25, 200128, 2004
-------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,8342,935 $ 4,3253,449
Marketable securities and investment in limited partnership 8,819 4,64811,641 7,477
Notes and accounts receivable, net 2,808 4,1783,591 2,352
Inventories 592 523688 743
Assets available for sale 1,512 1,510688 507
Prepaid expenses and other current assets 1,269 974907 463
Deferred income taxes 1,747 1,714
-------- --------1,168 1,326
---------- ----------
Total current assets 18,581 17,87221,618 16,317
Notes receivable, net 2,277 1,729136 313
Property and equipment, net 8,925 11,279
Assets available for sale - 4504,583 5,094
Goodwill 95 95
Intangible assets, net 17,123 18,0112,800 3,063
Deferred income taxes 1,539 2,0811,792 2,452
Other assets, net 300 404
-------- --------
$48,745 $51,826
======== ========245 250
---------- ----------
$ 31,269 $ 27,584
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of notes payable and capital lease obligations $ 559174 $ 1,343173
Accounts payable 1,619 1,9782,009 1,950
Accrued expenses and other current liabilities 6,506 8,6855,088 4,836
Deferred franchise fees 332 656
-------- --------338 173
---------- ----------
Total current liabilities 9,016 12,662
Notes7,609 7,132
Note payable and capital lease obligations, less current maturities 1,220 1,789692 866
Other liabilities 2,364 2,344
-------- --------1,612 2,234
---------- ----------
Total liabilities 12,600 16,795
-------- --------9,913 10,232
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note N)L)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 30,000,000 shares authorized; 7,065,2027,440,317 and
7,065,202 shares issued; and 7,023,5115,549,217 and 7,065,2025,213,901
shares outstanding at March 31, 200227, 2005 and March 25, 2001,28, 2004, respectively 7174 71
Additional paid-in capital 42,665 40,746
40,746Deferred compensation (281) -
Accumulated deficit (4,537) (5,786)
-------- --------
36,280 35,031(13,874) (16,611)
Accumulated other comprehensive (loss) income (70) 67
---------- ----------
28,514 24,273
Treasury stock, 41,691at cost, 1,891,100 and 1,851,301 shares at cost (135) -
-------- --------March 27, 2005
and March 28, 2004, respectively (7,158) (6,921)
---------- ----------
Total stockholders' equity 36,145 35,031
-------- --------21,356 17,352
---------- ----------
$ 48,74531,269 $ 51,826
======== ========
The accompanying notes are an integral part of these statements.
27,584
========== ==========
F-4The accompanying notes are an integral part of these statements.
F-3
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Fifty-threeFIFTY-TWO Fifty-two Fifty-two
WEEKS ENDED weeks ended Fifty-two weeks ended
MARCH 27, 2005 March 31, 200228, 2004 March 25, 2001 March 26, 200030, 2003
-------------- -------------- --------------
REVENUES
Sales $32,349 $34,799 $29,642$ 23,296 $ 19,848 $ 23,809
Franchise fees and royalties 7,944 8,814 5,9066,774 6,286 5,977
License royalties 2,038 1,958 1,906
Equity in losses of unconsolidated affiliate - - (163)3,332 2,970 2,585
Interest income 238 199 292
Investment and other income 2,068 1,603 600
------- ------- -------472 459 156
---------- ---------- ----------
Total revenues 44,399 47,174 37,891
------- ------- -------$ 34,112 29,762 32,819
---------- ---------- ----------
COSTS AND EXPENSES
Cost of sales 21,643 22,530 18,97717,266 14,198 16,012
Restaurant operating expenses 7,788 8,964 8,2083,063 3,441 5,292
Depreciation and amortization 1,661 1,791 1,358918 923 1,270
Amortization of intangible assets 888 839 716263 261 278
General and administrative expenses 9,292 8,978 8,2228,341 7,519 8,600
Interest expense 256 310 19849 75 132
Impairment charge on long-lived assets 685 127 465- - 1,367
Impairment charge on notes receivable 185 151 840- 208 1,425
Other (income) expense, net (210) 462 427
------- ------- -------(16) 45 232
---------- ---------- ----------
Total costs and expenses 42,188 44,152 39,411
------- ------- -------29,884 26,670 34,608
---------- ---------- ----------
Income (loss) from continuing operations before provision
(benefit) for income taxes 2,211 3,022 (1,520)4,228 3,092 (1,789)
Provision (benefit) for income taxes 962 1,416 (250)
------- ------- -------1,482 1,140 (283)
---------- ---------- ----------
Income (loss) from continuing operations 2,746 1,952 (1,506)
Loss from discontinued operations, net of income tax benefit
of ($6), ($40) and ($82) in 2005, 2004 and 2003, respectively (9) (58) (124)
---------- ---------- ----------
Income (loss) from operations before cumulative effect of
a change in accounting principle 2,737 1,894 (1,630)
Cumulative effect of change in accounting principle, net of tax
benefit of ($854) in 2003 - - (12,338)
---------- ---------- ----------
Net income (loss) $ 1,2492,737 $ 1,606 $(1,270)
======= ======= =======1,894 $ (13,968)
========== ========== ==========
PER SHARE INFORMATION
Basic income (loss) per share:
Income (loss) from continuing operations $ .52 $ .37 $ (.25)
Loss from discontinued operations - (.01) (.03)
Cumulative effect of change in accounting principle - - (2.06)
---------- ---------- ----------
Net income (loss) $ .52 $ .36 $ (2.34)
========== ========== ==========
Diluted income (loss) per share
Basic $.18 $.23 $(.22)
==== ==== =====
Diluted $.18 $.23 $(.22)
==== ==== =====share:
Income (loss) from continuing operations $ .45 $ .34 $ (.25)
Loss from discontinued operations - (.01) (.03)
Cumulative effect of change in accounting principle - - (2.06)
---------- ---------- ----------
Net income (loss) $ .45 $ .33 $ (2.34)
========== ========== ==========
Weighted average shares used in computing net income
(loss) per share
Basic 7,048,000 7,059,000 5,881,000
========= ========= =========5,307,000 5,306,000 5,976,000
========== ========== ==========
Diluted 7,083,000 7,098,000 5,881,000
========= ========= =========
6,080,000 5,678,000 5,976,000
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-4
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Fifty-two weeks ended March 27, 2005, March 28, 2004 and March 30, 2003
(in thousands, except share amounts)
Accumulated
Additional Other
Common Common Paid-in Deferred Accumulated Comprehensive
Shares Stock Capital Compensation Deficit Income
--------- ------ ---------- ------------ ----------- -------------
Balance, March 31, 2002 7,065,202 $ 71 $ 40,746 - $ (4,537) $ -
Repurchase of these statements.
treasury stock - - - - - -
Unrealized gains on marketable
securities, net of deferred income
taxes of $50 - - - - - 70
Reclassification adjustment for net gains
realized in net loss, net of deferred
income taxes of $4 - - - - - (6)
Net loss - - - - (13,968) -
Comprehensive loss - - - - - -
--------- ------ ---------- ------------ ----------- -------------
Balance, March 30, 2003 7,065,202 71 40,746 - (18,505) 64
Repurchase of treasury stock - - - - - -
Unrealized gains on marketable
securities, net of deferred income
taxes of $7 - - - - - 10
Reclassification adjustment for net gains
realized in net income, net of
deferred income taxes of $5 - - - - - (7)
Net income - - - - 1,894 -
Comprehensive income - - - - - -
--------- ------ ---------- ------------ ----------- -------------
Balance, March 28, 2004 7,065,202 $ 71 $ 40,746 - $ (16,611) $ 67
Treasury Stock, at Cost Total
----------------------- Stockholders' Comprehensive
Shares Amount Equity Income (Loss)
--------- -------- ------------- -------------
Balance, March 31, 2002 41,691 $ (135) $ 36,145 $ -
Repurchase of treasury stock 1,599,547 (5,858) (5,858)
Unrealized gains on marketable
securities, net of deferred income
taxes of $50 - - 70 70
Reclassification adjustment for net gains
realized in net loss, net of deferred
income taxes of $4 - - (6) (6)
Net loss - - (13,968) (13,968)
-------------
Comprehensive loss - - - $ (13,904)
--------- -------- ------------- =============
Balance, March 30, 2003 1,641,238 (5,993) 16,383
Repurchase of treasury stock 210,063 (928) (928)
Unrealized gains on marketable
securities, net of deferred income
taxes of $7 - - 10 10
Reclassification adjustment for net gains
realized in net income, net of
deferred income taxes of $5 - - (7) (7)
Net income - - 1,894 1,894
-------------
Comprehensive income - - - $ 1,897
--------- -------- ------------- =============
Balance, March 28, 2004 1,851,301 $ (6,921) $ 17,352
The accompanying notes are an integral part of this statement.
F-5
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Fifty-threeFifty-two weeks ended March 31, 2002 and fifty-two weeks
ended27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003
(in thousands, except share amounts)
Accumulated
Additional TotalOther
Common Common paid-inPaid-in Deferred Accumulated Treasury stock, at cost stockholders'
shares stock capital deficitComprehensive
Shares Amount equityStock Capital Compensation Deficit Income
--------- ------ ---------- ------------ ----------- ------------ -------------- -------- ------- -------------
Balance, March 29, 1999 4,722,216 $47 $32,423 $(6,122)BALANCE, MARCH 28, 2004 7,065,202 $ 71 $ 40,746 $ - $ - $26,348
Common stock issued in connection
with merger 2,317,980 23 7,367(16,611) $ 67
SHARES ISSUED IN CONNECTION WITH THE
EXERCISE OF WARRANTS 142,855 1 856 - - -
7,390
Warrants issued in connection
with merger - - 330SHARES ISSUED IN CONNECTION WITH EXERCISE
OF EMPLOYEE STOCK OPTIONS 182,260 1 529 - - -
330
Options assumed in connection
with mergerINCOME TAX BENEFIT ON STOCK OPTION EXERCISES - - 549172 - - -
549
Net lossISSUANCE OF RESTRICTED STOCK AWARD 50,000 1 362 (363) - -
AMORTIZATION OF DEFERRED COMPENSATION
RELATING TO RESTRICTED STOCK - - - (1,270)82 - -
(1,270)
--------- --- ------- ------- ----- ----- ------
Balance, March 26, 2000 7,040,196 70 40,669 (7,392) - - 33,347
Stock compensation 25,000 1 77 - - - 78
Warrants exercised 6REPURCHASE OF TREASURY STOCK - - - - - -
Net income - - - 1,606 - - 1,606
--------- --- ------- ------- ----- ----- ------
Balance, March 25, 2001 7,065,202 71 40,746 (5,786) - - 35,031
Repurchase of treasury stockUNREALIZED (LOSSES) ON MARKETABLE
SECURITIES, NET OF DEFERRED INCOME TAX
(BENEFIT) OF ($95) - - - - 41,691 (135) (135)
Net income- (137)
NET INCOME - - - 1,249- 2,737 -
COMPREHENSIVE INCOME - - 1,249- - - -
--------- --- ------- ------- ----- ------ ------
Balance, March 31, 2002 7,065,202 $71 $40,746 $(4,537) 41,691 $(135) $36,145---------- ------------ ----------- -------------
BALANCE, MARCH 27, 2005 7,440,317 $ 74 $ 42,665 $ (281) $ (13,874) $ (70)
========= === ======= ======= ====== ====== =======
========== ============ =========== =============
Treasury Stock, at Cost Total
----------------------- Stockholders' Comprehensive
Shares Amount Equity Income (Loss)
--------- -------- ------------- -------------
BALANCE, MARCH 28, 2004 1,851,301 $ (6,921) $ 17,352
SHARES ISSUED IN CONNECTION WITH THE
EXERCISE OF WARRANTS - - 857
SHARES ISSUED IN CONNECTION WITH EXERCISE
OF EMPLOYEE STOCK OPTIONS - - 530
INCOME TAX BENEFIT ON STOCK OPTION EXERCISES - - 172
ISSUANCE OF RESTRICTED STOCK AWARD - - -
AMORTIZATION OF DEFERRED COMPENSATION
RELATING TO RESTRICTED STOCK - - 82
REPURCHASE OF TREASURY STOCK 39,799 (237) (237)
UNREALIZED (LOSSES) ON MARKETABLE
SECURITIES, NET OF DEFERRED INCOME TAX
(BENEFIT) OF ($95) - - (137) $ (137)
NET INCOME - - 2,737 2,737
-------------
COMPREHENSIVE INCOME - - - $ 2,600
--------- -------- ------------- =============
BALANCE, MARCH 27, 2005 1,891,100 $ (7,158) $ 21,356
========= ======== =============
The accompanying notes are an integral part of this statement.
F-6
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fifty-threeFIFTY-TWO Fifty-two Fifty-two
WEEKS ENDED weeks ended Fifty-two weeks ended
MARCH 27, 2005 March 31, 200228, 2004 March 25, 2001 March 26, 200030, 2003
-------------- -------------- --------------
Cash flows from operating activitiesactivities:
Net income (loss) $ 1,2492,737 $ 1,606 $(1,270)1,894 $ (13,968)
Adjustments to reconcile net income (loss) to net cash
(used in)
provided by operating activities
Cumulative effect of change in accounting principle,
net of tax benefit - - 12,338
Depreciation and amortization 1,661 1,791 1,358918 971 1,907
Amortization of intangible assets 888 839 716
(Gain) loss263 261 278
Amortization of bond premium 155 127 85
Amortization of deferred compensation 82 - -
Gain on disposal of fixed assets (1,226)(84) (206) (39)
Gain on sale of available for sale securities - 123
Stock compensation expense - 78 -(12) (10)
Impairment of long-lived assets 685 127 465- 25 1,367
Impairment of notes receivable 185 151 840- 208 1,425
Provision for (recovery of) doubtful accounts 267 191 895
Equity in losses of unconsolidated affiliate13 (17) 82
Income tax benefit on stock option exercises 172 - - 163
Deferred income taxes 509 313 (958)915 945 (585)
Changes in operating assets and liabilities, net of effects from
acquisition of Miami Subsliabilities:
Marketable securities and investment in limited partnership (4,171) (1,651) 270- - 981
Notes and accounts receivable (26) (1,350) (504)(1,406) 294 2
Inventories (69) 20 355 (354) 203
Prepaid expenses and other current assets (295) (339) (187)(444) 179 627
Other assets 104 159 1825 18 32
Accounts payable, accrued expenses and other current
liabilities (2,538) 961 (158)311 467 (1,647)
Deferred franchise fees (324) (76) 721165 46 (205)
Other liabilities 20 1,329 (682)
------- ------- -------(549) 430 (577)
---------- -------- ----------
Net cash (used in) provided by operating activities (3,081) 4,149 1,977
------- ------- -------3,308 5,276 2,296
---------- -------- ----------
Cash flows from investing activities
Cash acquired in connection with merger, netactivities:
Proceeds from sale of transaction costs - - 3,429
Lease terminations and other costs in connection with acquisition - (1,036) -available for sale securities 1,357 2,497 6,088
Purchase of available for sale securities (5,910) (5,461) (2,884)
Purchases of property and equipment (2,082) (1,458) (1,975)
Purchase of intellectual property - - (1,590)(588) (449) (562)
Payments received on notes receivable 812 506 320331 797 273
Proceeds from sales of property and equipment 3,348 4511 489 781
---------- -------- ----------
Net cash (used in) provided by investing activities (4,799) (2,127) 3,696
---------- -------- ----------
Cash flows from financing activities:
Principal repayments of notes payable and capitalized lease
obligations (173) (187) (553)
Repurchase of treasury stock (237) (928) (5,858)
Proceeds from the exercise of stock options and warrants 1,387 - ------- ------- --------
---------- -------- ----------
Net cash provided by (used in) investing activities 2,078 (1,943) 184
------- ------- -------
Cash flows from financing activities Principal repayments of borrowing (1,353) (278) (1,929)
Repurchase of treasury stock (135) - -
------- ------- -------
Net cash used in financing activities (1,488) (278) (1,929)
------- ------- -------977 (1,115) (6,411)
---------- -------- ----------
Net change in cash and cash equivalents $(2,491) $ 1,928 $ 232(514) 2,034 (419)
Cash and cash equivalents, beginning of year 4,325 2,397 2,165
------- ------- -------3,449 1,415 1,834
---------- -------- ----------
Cash and cash equivalents, end of year $ 1,8342,935 $ 4,3253,449 $ 2,397
======= ======= =======1,415
========== ======== ==========
Cash paid during the year forfor:
Interest $ 26449 $ 31774 $ 207
======= ======= =======138
========== ======== ==========
Income taxes $ 149522 $ 1,508253 $ 831
======= ======= =======57
========== ======== ==========
Noncash financing activities:
LoanLoans to franchiseefranchisees in connection with sale of restaurant $ 416 $ 130 $ -
======= ======= =======
Common stock, warrants and options issued in connection with
acquisitionrestaurants $ - $ -600 $ 8,269
======= ======= =======
44
========== ======== ==========
The accompanying notes are an integral part of these statements.
F-7
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128,2004 and March 26, 200030, 2003
NOTE A - DESCRIPTION AND ORGANIZATION OF BUSINESS
1. Description of Business
Nathan's Famous, Inc. and subsidiaries (collectively the "Company" or
"Nathan's") has historically operated in one business segment,or franchised a chain of retail fast
food restaurants featuring the Nathan's famous brand of all beef
frankfurters, fresh crinkle-cut french fried potatoes and a variety of
other menu offerings. Since fiscal 1998, the CompanyNathan's has supplemented
Nathan's franchise program with the Nathan'salso established a Branded Product
Program, which enables foodservice retailers to sell some of Nathan's
proprietary products outside of the realm of a traditional franchise
relationship. During fiscal
2000, theThe Company, acquired the intellectual property rights, including
trademarks, recipes and franchise agreements of Roasters Corp. and Roasters
Franchise Corp. ("Roasters"),through wholly-owned subsidiaries, is also the
franchisor of Kenny Rogers Roasters. In
addition, Nathan's completed a merger withRoasters ("Roasters") and Miami Subs Corporation ("Miami
Subs") whereby it acquired the remaining 70% of Miami Subs common stock not
already owned.Subs. Miami
Subs features a wide variety of lunch, dinner and snack foods, including
hot and cold sandwiches and various ethnic foods. Roasters features
home-style family foods based on a menu centered around wood-fire
rotisserie chicken. The Company considers its subsidiaries to be in the
food service industry, and has pursued co-branding and co-hosting
initiatives; accordingly, management has evaluated the Company as a single
reporting unit.
At March 31, 2002,27, 2005, the Company's restaurant system, consisting of Nathan's
Famous, Kenny Rogers Roasters and Miami Subs restaurants, included 226
company-owned units concentrated in the New York City metropolitan area, (including New Jersey and Florida), 364355 franchised
or licensed units, including 36 units operating pursuant to management
agreements and approximately 1,500over 5,900 branded product points of sale under the Nathan's
Branded
Product Program, located in 3946 states, the District of Columbia, and 1413
foreign countries.
2. Organization of Business
In July 1987, all of the outstanding shares, options and warrants of
Nathan's Famous, Inc. (the "Predecessor Company"), a then publicly held New
York corporation, were acquired through a cash transaction, accounted for
by the purchase method of accounting (the "Acquisition"). In connection
with the Acquisition, a privately-held New York corporation (the "Acquiring
Corporation") was merged into the Predecessor Company. The purchase price
exceeded the fair value of the acquired assets of the Predecessor Company
by $15,374, and such amount is recorded net of accumulated amortization in
the accompanying consolidated balance sheets.
F-8
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 2000
NOTE A (continued)
In November 1989, the surviving corporation was merged with Nathan's Newco,
Inc., a Delaware corporation which, upon the effectiveness of the merger,
changed its name to Nathan's Famous, Inc. ("NFI").
In August 1992, Nathan's Famous Holding Corp. ("NFH"), a new Delaware
corporation was formed. Pursuant to a merger agreement, NFI became a wholly
owned subsidiary of NFH. On December 15, 1992, NFI and NFH amended their
charter to change their respective names to Nathan's Famous Operating Corp.
("NFOC") and Nathan's Famous, Inc.30, 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies have been applied in the
preparation of the consolidated financial statements:
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all of its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
2. Fiscal Year
The Company's fiscal year ends on the last Sunday in March, which
results in a 52- or 53-week reporting period. The results of operations
for the
fiscal year ended March 31, 2002 is on the basis of a 53-week reporting
period. The results of operationsand cash flows for the fiscal years ended March 25, 200127, 2005, March 28,
2004 and March 26, 200030, 2003 are all on the basis of a 52-week reporting
period.periods.
3. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates
made by management in preparing the consolidated financial statements
include revenue recognition, the allowance for doubtful accounts, the
allowance for impaired notes receivable, the self-insurance reserve and
impairment charges on goodwill and long-lived assets.
F-9
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003
NOTE B (continued)(CONTINUED)
4. Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
CashIncluded in cash and cash equivalents is cash restricted for untendered
shares associated with the Acquisition amounted
toacquisition of Nathan's in 1987 of $83 at
March 31, 200227, 2005 and March 25, 2001, respectively, and is included
in cash and cash equivalents. At March 31, 2002 and March 25, 2001, cash
and cash equivalents included unexpended Miami Subs' advertising funds of
$0 and $2,104, respectively.28, 2004.
5. Impairment of Notes Receivable
In accordance withNathan's follows the guidance in Statement of Financial Accounting
Standards ("SFAS") No. 114 ("SFAS No. 114") "Accounting by Creditors
for Impairment of a Loan," Nathan's applies the provisions thereof to value notes receivable.as amended. Pursuant to SFAS No. 114, a loan
is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. When
evaluating a note for impairment, the factors considered include: 1)(a)
indications that the borrower is experiencing business problems such as
operating losses, marginal working capital, inadequate cash flow or
business interruptions, 2)(b) loans secured by collateral that is not
readily marketable, or 3)(c) that are susceptible to deterioration in
realizable value. When determining impairment, management's assessment
includes its intention to extend certain leases beyond the minimum
lease term and the note holder'sdebtor's ability to meet its obligation over that
extended term. In certain cases where Nathan's has determined that a
loan has been impaired, it generally does not expect to extend or renew
the underlying leases. Based on the Company's analysis, it has
determined that there are notes that have incurred such an impairment (Note E).impairment.
Following is a summaryare summaries of impaired notes receivable and the allowance
for impaired notes receivable:
MARCH 27, March 31, March 25,
2002 200128,
2005 2004
--------- ---------
Total recorded investment in impaired notes receivable $1,000 $1,105$ 1,836 $ 2,248
Allowance for impaired notes receivable (640) (613)
------ ------(1,701) (2,051)
--------- ---------
Recorded investment in impaired notes receivable, net $ 360135 $ 492
====== ======197
========= =========
F-10
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003
NOTE B (continued)(CONTINUED)
MARCH 27, March 28,
2005 2004
--------- ---------
Allowance for impaired notes receivable at beginning of
the fiscal year $ 2,051 $ 2,065
Impairment charges on notes receivable - 208
Impaired notes written off (350) (222)
--------- ---------
Allowance for impaired notes receivable at end of the fiscal year $ 1,701 $ 2,051
========= =========
Based on the present value of the estimated cash flows of identified
impaired note receivables,notes receivable, the Company has recognized approximately $47 and
$63 ofrecords interest income on theseits
impaired notes forreceivable on a cash basis. The following represents the
fiscal years ended March 31,
2002interest income recognized and March 25, 2001, respectively.average recorded investment of impaired
notes receivable.
MARCH 27, March 28, March 30,
2005 2004 2003
--------- --------- ---------
Interest income recorded on impaired notes receivable $ 13 $ 19 $ 96
Average recorded investment in impaired notes receivable $ 1,942 $ 2,341 $ 1,624
6. Inventories
Inventories, which are stated at the lower of cost or market value,
consist primarily of restaurant food items, supplies, marketing items
and equipment in connection with the Branded Product Program. Cost is
determined using the first-in, first-out method.
F-11
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE B (CONTINUED)
7. Marketable Securities and Investment in Limited Partnership
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company determines the appropriate
classification of securities at the time of purchase and reassesses the
appropriateness of the classification at each reporting date. At March
31,
2002,27, 2005 and March 28, 2004, all marketable securities and investment in limited partnership held by the
Company have been classified as tradingavailable-for-sale and, as a result,
are stated at fair value.value, with unrealized gains and losses on available
- for-sale securities included as a component of accumulated other
comprehensive income (loss) in the accompanying consolidated balance
sheet. Realized gains and losses on the sale of securities, as
determined on a specific identification basis, as well as unrealized
holding gains and losses on trading securities are included in the
accompanying consolidated statements of operations. Investment income in
the trading limited partnership is based upon Nathan's proportionate share
of the change in the underlying net assets of the partnership. The
partnership invests primarily in publicly traded common stocks with a
concentration in securities traded on exchanges in the United States of
America.
8. Sales of Restaurants
The Company observes the provisions of SFAS No. 66, "Accounting for
Sales of Real Estate," ("SFAS No. 66") which establishes accounting
standards for recognizing profit or loss on sales of real estate. SFAS
No. 66 provides for profit recognition by the full accrual method,
provided (a) the profit is determinable, that is, the collectibility of
the sales price is reasonably assured or the amount that will not be
collectible can be estimated, and (b) the earnings process is virtually
complete, that is, the seller is not obliged to perform significant
activities after the sale to earn the profit. Unless both conditions
exist, recognition of all or part of the profit shall be postponed and
other methods of profit recognition shall be followed. In accordance
with SFAS No. 66, the Company recognizes profit on F-11
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE B (continued)
sales of restaurants
under boththe full accrual method, the installment method and the deposit
method, depending on the specific terms of each sale. The Company
continues
to recordrecords depreciation expense on the property subject to the sales
contracts that are accounted for under the deposit method and records
any principal payments received as a deposit until such time that the
transaction meets the sales criteria of SFAS No. 66.
As of March 31, 200227, 2005 and March 25, 2001,28, 2004, the Company had deposits of $214
and $332deferred
gains, included in accrued expensesother liabilities, on the sales of restaurants,
which are accounted for under the installment method of $196 and $269,
respectively. Installment gains recognized in the accompanying consolidated
balance sheets.
Duringearnings for the fiscal
yearyears ended March 31, 2002, the Company sold two
company-owned restaurants27, 2005, March 28, 2004 and a nonrestaurant property for total proceeds
of $3,348. The Company recognized a gain of $1,226 in connection with these
sales.March 30, 2003 were $73,
$205 and $13 respectively.
F-12
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE B (CONTINUED)
9. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are calculated
primarily on the straight-line basis over the estimated useful lives of
the assets. Leasehold improvements are amortized over the shorter of
the estimated useful life or the lease term of the related asset. The
estimated useful lives are as follows:
Building and improvements 5 - 25 years
Machinery, equipment, furniture and fixtures 5 - 15 years
Leasehold improvements 5 - 20 years
10. Goodwill and Intangible Assets
Intangible assets consist of (i) the goodwill resulting from the
Acquisition;acquisition of Nathan's in 1987; (ii) trademarks, and trade names and
franchise rights and recipes in connection with Roasters and (iii) goodwilltrademarks,
trade names and certain identifiable
intangibles resulting from thefranchise rights in connection with Miami Subs acquisition (Note C).Subs. These
intangible assets arewere being amortized over periods from 10 to 40 years.
F-12years
through March 31, 2002.
On April 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), which supercedes APB Opinion No.
17, "Intangible Assets" and certain provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No. 142 requires that
goodwill and other intangibles be reported separately; eliminates the
requirement to amortize goodwill and indefinite-lived intangible
assets; addresses the amortization of intangible assets with a definite
life; and addresses impairment testing and recognition of goodwill and
intangible assets. SFAS No. 142 changes the method of accounting for
the recoverability of goodwill for the Company, such that it is
evaluated at the brand level based upon the estimated fair value of the
brand. Fair value can be determined based on discounted cash flows, on
comparable sales or valuations of other restaurant brands. The
impairment review involves a two-step process as follows:
Step 1: Compare the fair value for each reporting unit to its
carrying value, including goodwill. For each reporting unit where
the carrying value, including goodwill, exceeds the reporting
unit's fair value, move on to step 2. If a reporting unit's fair
value exceeds the carrying value, no further work is performed and
no impairment charge is necessary.
F-13
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003
NOTE B (continued)(CONTINUED)
Step 2: Allocate the fair value of the reporting unit to its
identifiable tangible and intangible assets, excluding goodwill
and liabilities. This will derive an implied fair value for the
reporting unit's goodwill. Then, compare the implied fair value of
the reporting unit's goodwill with the carrying amount of
reporting unit's goodwill. If the carrying amount of the reporting
unit's goodwill is greater than the implied fair value of its
goodwill, an impairment loss must be recognized for the excess.
The transitional impairment charge, if any, is recorded as a
cumulative effect of accounting change for goodwill.
The Company completed its initial SFAS No. 142 transitional impairment
test of goodwill and other intangible assets in April 2002, including
an assessment of a valuation of the Nathan's, Miami Subs and Roasters
reporting units by an independent valuation consultant, and has
recorded an impairment charge requiring the Company to write-off
substantially all goodwill, trademarks and recipes as a cumulative
effect of accounting change in the first quarter of fiscal 2003. The
fair value was determined through the combination of a present value
analysis as well as prices of comparative businesses. The changes in
the net carrying amount of goodwill, trademarks and recipes recorded in
the first quarter of fiscal 2003 were as follows:
Goodwill Trademarks Recipes Total
-------- ---------- ------- --------
Balance as of April 1, 2002 $ 11,083 $ 2,242 $ 30 $ 13,355
Cumulative effect of accounting change for
goodwill and other intangible assets (10,988) (2,174) (30) (13,192)
-------- ---------- ------- --------
Balance as of March 30, 2003 $ 95 $ 68 $ - $ 163
======== ========== ======= ========
F-14
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE B (CONTINUED)
The table below presents amortized and unamortized intangible assets as
of March 27, 2005 and March 28, 2004:
MARCH 27, 2005 March 28, 2004
------------------------------------ ----------------------------------
GROSS NET Gross Net
CARRYING ACCUMULATED CARRYING Carrying Accumulated Carrying
AMOUNT AMORTIZATION AMOUNT Amount Amortization Amount
-------- ------------ --------- -------- ------------ --------
Amortized intangible assets:
Royalty streams $ 4,259 $ (1,531) $ 2,728 $ 4,259 $ (1,269) $ 2,990
Favorable leases 285 (285) - 285 (285) -
Other 6 (2) 4 6 (1) 5
-------- ------------ --------- -------- ------------
$ 4,550 $ (1,818) $ 2,732 $ 4,550 $ (1,555) $ 2,995
======== ============ ======== ============
Unamortized intangible assets:
Trademarks and tradenames 68 68
--------- --------
$ 2,800 $ 3,063
========= ========
Goodwill $ 95 $ 95
========= ========
As of March 27, 2005 and March 28, 2004, the Company has reevaluated
the impact of SFAS No. 142 on its goodwill and intangible assets, and
determined no additional impairment charges are deemed necessary.
Total amortization expense for intangible assets was $263, $261 and
$278 for the fiscal years ended March 27, 2005, March 28, 2004 and
March 30, 2003. The Company estimates future annual amortization
expense of approximately $261 per year for each of the next five years.
In the fourth quarter of fiscal 2003, the Company recorded an
impairment charge of $239 related to its favorable leases. This
impairment charge, which was based upon the fact that such location had
incurred negative cash flows from operations for fiscal 2003 and was
projected to incur negative cash flows in fiscal 2004 and beyond, was
recorded as a component of impairment charge on long-lived assets. (See
Note B-11.)
11. Long-lived Assets
Long-lived assets and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate the carrying value
may not be recoverable. Impairment is measured by comparing the
carrying value of the long-lived assets to the estimated undiscounted
future cash flows expected to result from use of the assets and their
ultimate disposition. In instances where impairment is determined to
exist, the Company writes down the asset to its fair value based on the
present value of estimated future cash flows.
F-15
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE B (CONTINUED)
Impairment losses are recorded on long-lived assets on a
restaurant-by-restaurant basis whenever impairment factors are
determined to be present. The Company considers a history of restaurant
operating losses to be its primary indicator of potential impairment
for individual restaurant locations. No units were deemed impaired
during the fiscal year ended March 27, 2005. The Company haspreviously
identified two, one and threethat seven units that have beenwere impaired, and recorded impairment
charges of $685, $127 and
$465$1,367, (inclusive of $239 related to favorable leases
discussed in Note B-10), in the statementsstatement of operations for the fiscal
yearsyear ended March 31,
2002, March 25, 2001 and March 26, 2000, respectively.30, 2003.
The Company periodically reviews intangible assets for impairment,
whenever events or changes in circumstances indicate that the carrying
amounts of those assets may not be recoverable. No impairment charges
have beenwere recorded with respect to such intangible assets for the fiscal
years ended March 31, 2002, March 25, 200127, 2005 and March 26, 2000.28, 2004. (See Note B-22.B - 10 for a
description of impairment charges recorded on goodwill and other
intangible assets during the fiscal year ended March 30, 2003 as a
result of the adoption of SFAS No. 142.)
12. Investment in Unconsolidated AffiliateSelf-Insurance
The Company accountedis self-insured for portions of its initial investmentgeneral liability
coverage. As part of Nathan's risk management strategy, its insurance
programs include deductibles for each incident and in Miami Subs under the equity methodaggregate for
a policy year. As such, Nathan's accrues estimates of accounting untilits ultimate
self-insurance costs throughout the completionpolicy year. These estimates have
been developed based upon Nathan's historical trends, however, the
final cost of many of these claims may not be known for five years or
longer. Accordingly, Nathan's annual self-insurance costs may be
subject to adjustment from previous estimates as facts and
circumstances change. The self-insurance accruals at March 27, 2005 and
March 28, 2004 were $324 and $346, respectively and are included in
"accrued expenses and other current liabilities" in the merger.
Accordingly,accompanying
consolidated balance sheets. During the carrying valuefiscal year ended March 27,
2005, approximately $71 of previously recorded insurance accruals were
reversed, reflecting the investment, priorrevised estimated cost of claims. During the
fiscal year ended March 28, 2004, approximately $268 of previously
recorded insurance accruals for items that have been concluded without
further payment were reversed. During the fiscal year ended March 30,
2003, the self insurance accrual was reduced by approximately $829, due
principally to the acquisition, was equalsatisfaction of a claim against the Company totaling
$659 and the reversal of approximately $196 of previously recorded self
insurance accruals in connection with the conclusion of claims relating
to the Company's initial cash investment in Miami
Subs, plus itsprior policy years.
F-16
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share of the loss of Miami Subs through Septemberand per share amounts)
March 27, 2005, March 28, 2004 and March 30, 1999.2003
NOTE B (CONTINUED)
13. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, marketable
securities,
and investment in limited partnership, accounts receivable and accounts payable approximate fair
value due to the short-term maturities of the instruments. The carrying
amounts of note payable and capital lease obligations and notes
receivable approximate their fair values.
F-13values as the current interest rates
on such instruments approximates current market interest rates on
similar instruments.
14. Stock-Based Compensation
At March 27, 2005, the Company has five stock-based employee
compensation plans, which are described more fully in Note K. The
Company accounts for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations
("APB No. 25") and has adopted the disclosure provisions of SFAS No.
148 "Accounting for Stock-Based Compensation-Transition and
Disclosure." Under APB No. 25, when the exercise price of stock options
granted to employees or the Company's independent directors equals the
market price of the underlying stock on the date of grant, no
compensation expense is recognized. Accordingly, no compensation
expense has been recognized in the consolidated financial statements in
connection with employee or independent director stock option grants.
Compensation expense for restricted stock awards is measured at the
fair value on the date of grant based upon the number of shares granted
and the quoted market price of the Company's stock. Such value is
recognized as expense over the vesting period of the award.
F-17
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003
NOTE B (continued)
14. Stock-Based Compensation(CONTINUED)
The following table illustrates the effect on net income (loss) and net
income (loss) per share had the Company complies withapplied the disclosure-onlyfair value
recognition provisions of SFASStatement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation.Compensation," This statement establishes
financial accounting and reporting standards forto stock-based
employee compensation.
Fiscal year ended
MARCH 27, March 28, March 30,
2005 2004 2003
--------- --------- ---------
Net income (loss), as reported $ 2,737 $ 1,894 $ (13,968)
Add: Stock-based compensation included in net
income (loss) 49 - -
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards (171) (170) (165)
-------- -------- ---------
Pro forma net income (loss) $ 2,615 $ 1,724 $ (14,133)
======== ======== =========
Net income (loss) per share
Basic - as reported $ .52 $ .36 $ (2.34)
======== ======== =========
Diluted - as reported $ .45 $ .33 $ (2.34)
======== ======== =========
Basic - pro forma $ .49 $ .32 $ (2.36)
======== ======== =========
Diluted - pro forma $ .43 $ .30 $ (2.36)
======== ======== =========
Pro forma compensation plans.expense may not be indicative of pro forma
expense in future years. For purposes of estimating the fair value of
each option on the date of grant, the Company utilized the
Black-Scholes option-pricing model.
The provisionsBlack-Scholes option valuation model was developed for use in
estimating the fair value of SFAS No. 123 encourage entitiestraded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-18
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE B (CONTINUED)
The weighted-average option fair values and the assumptions used to
adopt a fair value-based method of accountingestimate these values for stock compensation plans;
however, these provisions also permit the Company to continue to measure
compensation costs under pre-existing accounting pronouncements. Pursuant
to SFAS No. 123, the Company has elected to continue the accounting set
forth in Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and to provide the necessary pro forma
disclosures.options granted are as follows:
2005 2004 2003
--------- --------- ---------
Weighted-average option fair values $ 2.87 $ 1.60 $ 2.19
Expected life (years) 7.0 7.0 10.0
Interest rate 4.50% 3.85% 5.30%
Volatility 29.9% 30.6% 32.8%
Dividend yield 0% 0% 0%
15. Start-up Costs
Preopening and similar costs are expensed as incurred.
16. Revenue Recognition - Company-owned Restaurants
Sales by Company-owned restaurants, which are typically paid in cash by
the customer, are recognized on a cash basis, upon the performance of services.
17. Revenue Recognition - Franchising Operations
In connection with its franchising operations, the Company receives
initial franchise fees, development fees, royalties, contributions to
marketing funds, and in certain cases, revenue from sub-leasing
restaurant properties to franchisees.
Franchise and area development fees, which are typically received prior
to completion of the revenue recognition process, are recorded as
deferred revenue. Initial franchise fees, which are non-refundable, are
recognized as income when substantially all services to be performed by
Nathan's and conditions relating to the sale of the franchise have been
performed or satisfied, which generally occurs when the franchised
restaurant commences operations. The following services are typically
provided by the Company prior to the opening of a franchised
restaurant:
F-19
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE B (CONTINUED)
- Approval of all site selections to be developed.
- Provision of architectural plans suitable for restaurants to
be developed.
- Assistance in establishing building design specifications,
reviewing construction compliance and equipping the
restaurant.
- Provision of appropriate menus to coordinate with the
restaurant design and location to be developed.
- Provide management training for the new franchisee and
selected staff.
- Assistance with the initial operations of restaurants being
developed.
Development fees are nonrefundable and the related agreements require the
franchisee to open a specified number of restaurants in the development
area within a specified time period or the agreements may be canceled by
the Company. Revenue from development agreements is deferred and
recognized as restaurants in the development area commence operations on a
pro rata basis to the minimum number of restaurants required to be open,
or at the time the development agreement is effectively canceled. Royalties, whichAt March
27, 2005 and March 28, 2004, $316 and $453, respectively, of deferred
development fee revenue is included in the accompanying consolidated
balance sheets. In addition, at March 27, 2005 and March 28, 2004, $338
and $173, respectively, of deferred franchise fees are based uponincluded in the
accompanying consolidated balance sheets. For the fiscal years ended March
27, 2005, March 28, 2004, March 30, 2003, the Company earned franchise
fees from new unit openings, transfers and co-branding of $605, $556 and
$418, respectively. During the fiscal year ended March 30, 2003, the
Company recognized $207 in connection with the forfeiture of two Master
Development Agreements.
The following is a percentagesummary of franchise openings and closings for the
franchisee's gross sales, are recognized as incomefiscal years ended March 27, 2005, March 28, 2004 and March 30, 2003:
2005 2004 2003
---- ---- ----
Franchised restaurants operating at the beginning of the period 338 343 364
New franchised restaurants opened during the period 39 40 24
Franchised restaurants closed during the period (22) (45) (45)
--- --- ---
Franchised restaurants operating at the end of the period 355 338 343
=== === ===
F-20
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE B (CONTINUED)
The Company recognizes franchise royalties when the feesthey are earned and
become receivabledeemed collectible. Franchise fees and royalties that are not deemed collectible.to
be collectible are not recognized as revenue until paid by the
franchisee or until collectibility is deemed to be reasonably assured.
Revenue from sub-leasing properties to franchisees is recognized as
income as the
F-14
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE B (continued) revenue is earned and becomes receivable and deemed
collectible. Sub-lease rental income is presented net of associated
lease costs in the accompanying consolidated financial statements. Franchisestatements of operations.
18. Revenue Recognition - Branded Products Operations
The Company recognizes revenue from the Branded Product Program when it
is determined that the products have been delivered via third party
common carrier to Nathans' customers.
19. Revenue Recognition - License Royalties
The Company earns revenue from royalties on the licensing of the
use of its name on certain products produced and area
development fees receivedsold by outside
vendors. The use of the Company name and symbols must be approved by
the Company prior to completioneach specific application to ensure proper quality
and project a consistent image. Revenue from license royalties is
recognized when it is earned and deemed collectible.
20. Interest Income
Interest income is recorded when it is earned and deemed realizable by
the Company.
21. Investment and other income
The Company recognizes gains on the sale of fixed assets under the full
accrual method, installment method or deposit method in accordance with
provisions of SFAS No. 66 (See Note B-8).
Deferred revenue associated with supplier contracts is generally
amortized into income on a straight-line basis over the life of the
revenue recognition
process are recorded as deferred revenue.
Atcontract.
F-21
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 31, 200227, 2005, March 28, 2004 and March 25, 2001, $33230, 2003
NOTE B (CONTINUED)
Investment and $656, respectively,other income consists of deferred franchise fees are included in the accompanying consolidated
balance sheets.
18.following:
2005 2004 2003
------- ------- ------
Gain on disposal of fixed assets $ 84 $ 206 $ 39
Realized gains (losses) on marketable securities - 12 (242)
Loss on subleasing of rental properties (124) (312) (243)
Gain from the early termination of sales agreement - - 135
Other income 512 553 467
----- ----- -----
$ 472 $ 459 $ 156
===== ===== =====
22. Business Concentrations of Credit Riskand Geographical Information
The Company's accounts receivable consist principally of receivables
from franchisees for royalties and advertising contributions, and from
sales under the Branded Product Program.Program, and for royalties from retail
licensees. At March 31, 2002,27, 2005 one retail licensee and one franchisee
each represented 13%19% and 11% respectively of franchise royalties receivable and ataccounts receivable. At
March 25, 2001,
one28, 2004, no franchisee, retail licensee or Branded Product
Program customer represented 10% or greater of franchise royalties receivable (Note E)accounts receivable.
(See Note D). 19.No franchisee, retail licensee or Branded Product
customer accounted for 10% or more of revenues during the fiscal years
ended March 27, 2005, March 28, 2004 and March 30, 2003.
The Company's primary supplier of hot dogs represented 66%, 62% and 41%
of product purchases for the fiscal years ended March 27, 2005, March
28, 2004 and March 30, 2003, respectively. The Company's distributor of
product to its Company-owned restaurants represented 24%, 34% and 18%
of product purchases for the fiscal years ended March 27, 2005, March
28, 2004 and March 30, 2003, respectively. A prior distributor
represented 35% of product purchases for the fiscal year ended March
30, 2003.
The Company's revenues were derived from the following geographic areas:
2005 2004 2003
------- ------- -------
Domestic (United States) $32,994 $29,037 $32,485
Non-domestic 1,118 725 334
------- ------- -------
$34,112 $29,762 $32,819
======= ======= =======
F-22
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE B (CONTINUED)
23. Advertising
The Company administers various advertising funds on behalf of its
subsidiaries and franchisees to coordinate the marketing efforts of the
Company. Under these arrangements, the Company collects and disburses
fees paid by franchisees and Company-owned stores for national and
regional advertising, promotional and public relations programs.
Contributions to the advertising funds are based on specified
percentages of net sales, generally ranging up to 3%. Advertising contributions from Company-owned stores are included in
restaurant operating expenses in the accompanying consolidated statements
of operations. Net Company-owned
store advertising expense was $940, $1,602$242, $241 and $888,$608, for the fiscal years
ended March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 2000,30, 2003, respectively.
20.24. Classification of Operating Expenses
Cost of sales consists of the following:
- The cost of products sold by the Company-operated restaurants,
through the Branded Product Program and other distribution
channels.
- The cost of labor and associated costs of in-store restaurant
management and crew.
- The cost of paper products used in Company-operated
restaurants.
- Other direct costs such as fulfillment, commissions, freight
and samples.
Restaurant operating expenses consist of the following:
- Occupancy costs of Company-operated restaurants.
- Utility costs of Company-operated restaurants.
- Repair and maintenance expenses of the Company-operated
restaurant facilities.
- Marketing and advertising expenses done locally and
contributions to advertising funds for Company-operated
restaurants.
- Insurance costs directly related to Company-operated
restaurants.
25. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the year in
F-23
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE B (CONTINUED)
which those temporary differences are expected to be recovered or
settled. 21.A valuation allowance has been established to reduce deferred
tax assets attributable to net operating losses and credits of Miami
Subs.
26. Reclassifications
Certain prior yearyears' balances have been reclassified to conform with
current year presentation.
F-1527. Recently Issued Accounting Standards
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs--an amendment of ARB No.43"
("SFAS No.151"), which is the result of its efforts to converge U.S.
accounting standards for inventories with International Accounting
Standards. SFAS No.151 requires idle facility expenses, freight,
handling costs, and wasted material (spoilage) costs to be recognized
as current-period charges. It also requires that allocation of fixed
production overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No.151 will be effective
for inventory costs incurred during fiscal years beginning after June
15, 2005. We are evaluating the impact of this standard on our
consolidated financial statements.
In December 2004, the FASB issues SFAS No. 123R, "Share-Based Payment"
("SFAS No. 123R"), which revises SFAS No. 123, Accounting for Stock
Based Compensation, and generally requires, among other things, that
all employee stock-based compensation be measured using a fair value
method and that the resulting compensation cost be recognized in the
financial statements. SFAS 123R also provides guidance on how to
determine the grant-date fair value for awards of equity instruments,
as well as alternative methods of adopting its requirements. On April
14, 2005, the SEC delayed the effective date of required adoption of
SFAS No. 123R to the beginning of the first annual period after June
15, 2005. We plan to adopt the provisions of SFAS No. 123R in the first
quarter of fiscal year 2007. The Company is currently evaluating the
impact of adoption of the various provisions of SFAS No. 123R.
F-24
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 2000
NOTE B (continued)
22. Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives (but
with no maximum life). The amortization provisions of SFAS No. 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect
to goodwill and intangible assets acquired prior to July 1, 2001, Nathan's
is required to adopt SFAS No. 142 effective in its next fiscal year,
commencing April 1, 2002.
The Company will no longer amortize existing goodwill and certain
intangible assets having indefinite lives, thereby reducing amortization
expense by approximately $600 per year. The Company expects to complete its
impairment analysis during the first quarter of fiscal 2003 and expects to
recognize an impairment charge of approximately $12.0 to $13.0 million upon
the adoption of SFAS No. 142.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No.
143 addresses financial and reporting obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. Nathan's
is currently evaluating the effect of adoption on its financial position
and results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS No. 144"). SFAS No. 144 supersedes SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This statement retains the fundamental provisions of SFAS
No.
F-16
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE B (continued)
121 for recognition and measurement of impairment, but amends the
accounting and reporting standards for segments of a business to be
disposed of. The provisions of SFAS No. 144 are required to be adopted no
later than fiscal years beginning after December 31, 2001, with early
adoption encouraged. The Company is currently evaluating the impact of the
adoption of SFAS No. 144, which the Company expects will not be material.
NOTE C - ACQUISITIONS
On February 19, 1999, the U. S. Bankruptcy Court for the Middle District of
North Carolina, Durham Division, confirmed the Joint Plan of Reorganization
of the Official Committee of Franchisees of Roasters Corp. and Roasters
Franchise Corp., operators of Kenny Rogers Roasters Restaurants. Under the
Joint Plan of Reorganization, on April 1, 1999, Nathan's acquired the
intellectual property rights, including trademarks, recipes and franchise
agreements, of Roasters Corp. and Roasters Franchise Corp. for $1,250 in
cash plus related expenses of approximately $340. NF Roasters Corp., a
wholly-owned subsidiary, was created for the purpose of acquiring these
assets. The acquired assets are recorded as intangibles in the accompanying
consolidated balance sheet and are being amortized on a straight-line basis
over periods of 10 to 20 years. No company-owned restaurants were acquired
in this transaction. Results of operations are included in these
consolidated financial statements as of April 1, 1999.
On November 25, 1998, the Company acquired 8,121,000 (2,030,250 after
giving effect to a 4-for-1 reverse stock split) shares, or approximately
30% of the then outstanding common stock, of Miami Subs Corporation for
$4,200, excluding transaction costs. On January 15, 1999, the Company and
Miami Subs entered into a definitive merger agreement pursuant to which
Nathan's would acquire the remaining outstanding shares of Miami Subs in
exchange for shares of and warrants to purchase Nathan's common stock.
On September 30, 1999, Nathan's completed the acquisition of Miami Subs and
acquired the remaining outstanding common stock of Miami Subs in exchange
for 2,317,980 shares of Nathan's common stock, 579,040 warrants to purchase
Nathan's common stock, and the assumption of existing employee options and
warrants to purchase 542,284 shares of Miami Subs' common stock in
connection with the merger. The total purchase price was approximately
$13,000, including acquisition costs. The acquisition was accounted for as
a purchase under APB Opinion No. 16, "Accounting for Business Combinations"
("APB No. 16"). In accordance with APB No. 16, the Company allocated the
purchase price of Miami Subs based on the fair value of the assets acquired
and liabilities assumed. Goodwill of $1,668 resulted from the acquisition
of Miami Subs and is being amortized over a period of 20 years.
F-17
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE C (continued)
In connection with the acquisition of Miami Subs, Nathan's planned to
permanently close 18 under-performing company-owned restaurants. Nathan's
expected to abandon or sell the related assets at amounts below the
historical carrying amounts recorded by Miami Subs. In accordance with APB
No. 16, the write-down of these assets was reflected as part of the
purchase price allocation. To date the Company has closed or sold 15 units.
The Company continues to market two of these properties for sale and will
cease operations of the remaining unit upon lease expiration. The estimated
disposal value is included in assets held for sale in the accompanying
consolidated balance sheet for the remaining units to be sold. As of March
31, 2002, as part of the acquisition, the Company has recorded
approximately $1,461 ($877 after tax) for lease reserves and termination
costs.
The allocation of purchase price is as follows:
Current assets $ 5,481
Property and equipment 7,060
Assets held for sale 653
Intangibles 5,441
Goodwill 1,668
Notes receivable - long-term 3,860
Other assets 2,212
Liabilities assumed (13,364)
--------
$ 13,011
========
The consolidated results of operations for Miami Subs are included in the
consolidated financial statements as of the date of acquisition. Summarized
below are the unaudited pro forma results of operations for the fifty-two
weeks ended March 26, 2000 of Nathan's as though the Miami Subs acquisition
had occurred as of the beginning of the periods presented. Adjustments have
been made for amortization of goodwill based upon salary expense based on
employment agreements, reversal of Miami Subs merger costs, elimination of
Nathan's 30% equity earnings in Miami Subs, issuance of common stock, and
reduction of interest income on marketable securities used to purchase the
initial 30% of Miami Subs' common stock.
F-18
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE C (continued)
Fifty-two weeks ended
March 26, 2000
---------------------
Total revenues $ 50,455
========
Net loss $ (1,466)
========
Net loss per share
Basic $ (.21)
========
Diluted $ (.21)
========
Weighted average shares used in computing
net loss per share
Basic 7,040,000
=========
Diluted 7,040,000
=========
These pro forma results of operations have been prepared for comparative
purposes only and are not necessarily indicative of actual results of
operations that would have occurred had the acquisition been made at the
beginning of the period presented or of the results which may occur in the
future.
NOTE D - NET INCOME (LOSS) PER SHARE
Basic earningsincome (loss) per common share is calculated by dividing net income
(loss) by the weighted-average number of common shares outstanding and
excludes any dilutive effects of stock options or warrants. Diluted earningsincome
(loss) per common share gives effect to all potentially dilutive common
shares that were outstanding during the period. Dilutive common shares
used in the computation of diluted earningsincome (loss) per common share result
from the assumed exercise of stock options and warrants, using the
treasury stock method.
F-19
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE D (continued)
The following chart provides a reconciliation of information used in
calculating the per share amounts for the fiscal years ended March 31,
2002,27,
2005, March 25, 200128, 2004 and March 26, 2000,30, 2003, respectively:
Net incomeIncome (loss) Shares Net incomeIncome (loss) per share
from continuing operations Shares From continuing operations
--------------------------- --------------------------------- --------------------------
------------------------------ ---------------------------
2002 2001 2000 (1) 2002 2001 2000 (1) 2002 2001 2000 (1)
---- ---- ---- ---- ---- ---- ---- ---- ----2005 2004 2003 2005 2004 2003 2005 2004 2003
------ ------ ------- --------- ---------- --------- ------ ----- -----
Basic EPS
Basic calculation $1,249 $1,606 $(1,270) 7,048,000 7,059,000 5,881,000 $.18 $.23 $(.22)$2,746 $1,952 $(1,506) 5,307,000 5,306,000 5,976,000 $.52 $.37 $(.25)
Effect of dilutive
employee stock
options and warrants - - - 35,000 39,000773,000 372,000 - (.07) (.03) -
- -
------------- ------ ------- --------- ------------------- --------- ---- ---- -----
Diluted EPS
Diluted calculation $1,249 $1,606 $(1,270) 7,083,000 7,098,000 5,881,000 $.18 $.23 $(.22)
=======$2,746 $1,952 $(1,506) 6,080,000 5,678,000 5,976,000 $.45 $.34 $(.25)
====== ====== ======= ========= ========== ========= ============= ==== ==== =====
(1) Common stock equivalents have been excluded from the computation for net
income (loss) per share for the fiscal year end March 26, 2000 as their
inclusion would be anti-dilutive.
Options and warrants to purchase 19,500 and 811,918 shares of common stock
for the years ended March 27, 2005 and March 28, 2004, respectively, were
not included in the computation of diluted earnings per share because the
exercise prices exceeded the average market price of common shares during
the respective periods. Options and warrants to purchase 1,374,981 shares
of the Company's common stock for the year ended March 30, 2003 were
excluded from the calculation of diluted loss per share as the impact of
their inclusion would have been anti-dilutive.
F-25
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE ED - NOTES AND ACCOUNTS RECEIVABLE, NET
Notes and accounts receivable, net, consistsconsist of the following:
MARCH 27, March 31, March 25,
2002 200128,
2005 2004
--------- ---------
Notes receivable, net of impairment charges $2,662 $2,874$ 523 $ 573
Franchise and license royalties 1,376 2,4991,803 1,404
Branded product sales 785 7301,128 687
Other 906 684450 329
------ ------
5,729 6,7873,904 2,993
Less: allowance for doubtful accounts 644 880
Notes177 328
Less: notes receivable due after one year 2,277 1,729136 313
------ ------
Notes and accounts receivable, net $2,808 $4,178$3,591 $2,352
====== ======
F-20
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE E (continued)
Notes receivable at March 31, 200227, 2005 and March 25, 200128, 2004 principally resulted
from sales of restaurant businesses to Miami Subs'Sub's and Nathan's
franchisees and are generally guaranteed by the purchaser and
collateralized by the restaurant businesses and assets sold. The notes are
generally due in monthly installments of principal and interest with a
balloon payment at the end of the term, with interest rates ranging
principally between 5% and 10% (See Note B-5).
NOTE F - MARKETABLE SECURITIES AND INVESTMENT IN
LIMITED PARTNERSHIP
Marketable securitiesAccounts receivable are due within 30 days and are stated at March 31, 2002amounts due
from franchisees, retail licensees and March 25, 2001 consistedBranded Product Program customers,
net of trading securities with aggregate fair valuesan allowance for doubtful accounts. Accounts outstanding longer
than the contractual payment terms are considered past due. The Company
determines its allowance by considering a number of $8,819 and $4,648,
respectively. Fair valuesfactors, including the
length of corporate and municipal bondstime accounts receivable are based upon
quoted market prices. Investment income in trading limited partnerships is
based onpast due, the Company's proportionate shareprevious
loss history, the customer's current and expected future ability to pay
its obligation to the Company, and the condition of the change ingeneral economy
and the underlying
net assets of the partnership.industry as a whole. The gross unrealized holding gains and fair values of trading securities by
major security type for the fiscal years ended March 31, 2002, March 25,
2001 and March 26, 2000 were as follows:
2002 2001 2000
----------------------------- ----------------------------- ------------------------
Gross Gross Gross
unrealized Fair unrealized Fair unrealized Fair
holding value of holding value of holding value of
gain (loss) investments gain (loss) investments gain (loss) investments
----------- ----------- ----------- ----------- ----------- -----------
Municipal bonds $(20) $7,801 $ 16 $3,628 $ 3 $1,540
Investment in trading
limited partnerships * (2) 1,018 (438) 1,020 420 1,457
---- ------ ----- ------ ---- ------
$(22) $8,819 $(422) $4,648 $423 $2,997
==== ====== ===== ====== ==== ======
* Subject to the terms of the partnership, the Company has the right to
liquidate its investment in the trading limited partnerships without
penalty.
F-21Company writes off accounts receivable
when they are deemed to be uncollectible.
F-26
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003
NOTE G - PROPERTY AND EQUIPMENT, NET
Property and equipment consist ofD (CONTINUED)
Changes in the following:Company's allowance for doubtful accounts are as follows:
March 31, March 25,
2002 2001
---------- -----------2005 2004 2003
------ ------ ------
Construction-in-progress
Beginning balance $ 842328 $ 141
Land 1,665 1,983
Building and improvements 2,245 3,083
Machinery, equipment, furniture and fixtures 6,602 7,202
Leasehold improvements 7,201 7,949
-------- -------
18,555 20,358
Less: accumulated depreciation and amortization 9,630 9,079
-------- -------418 $ 8,925644
Bad debt (recoveries) expense 13 (17) 82
Other 17 - -
Accounts written off (181) (73) (308)
----- ----- -----
Ending balance $ 11,279177 $ 328 $ 418
===== ===== =====
Depreciation expense on propertyNOTE E - MARKETABLE SECURITIES
The cost, gross unrealized gains, gross unrealized losses and equipment was $1,661, $1,791 and
$1,358fair market
value for the fiscal years endedmarketable securities by major security type at March 31, 2002, March 25, 200127, 2005
and March 26, 2000, respectively.
In May 2001, the Company completed the sale of a restaurant property for
approximately $1.5 million pursuant to an order of condemnation by the
State of Florida. The fair value of the assets (which approximated the
carrying value) is included in the current portion of assets available for
sale at March 25, 2001 in the accompanying consolidated balance sheet.
Concurrent with the sale, the Company satisfied the related note payable of
approximately $793 plus accrued interest, and accordingly, had classified
the remaining balance at March 25, 200128, 2004 are as current in the accompanying
consolidated balance sheet. The Company appealed the value of this property
and on November 19, 2001, an Order was entered by the Circuit Court of the
11th Judicial Circuit of Florida in and for Miami-Dade County pursuant to
which the State of Florida Department of Transportation was ordered to pay
to the Company, an aggregate value of $2,350, plus legal fees in the amount
of $253 in connection with the condemnation by the State of Florida of the
restaurant. The additional proceeds received by the Company of
approximately $850 is recorded in "investment and other income" in the
accompanying consolidated statement of operations.
F-22follows:
Gross Gross Fair
unrealized unrealized market
Cost gains losses value
-------- ---------- ---------- -------
2005:
Available-for-sale securities:
Bonds $ 11,778 $ 24 $ (161) $11,641
======== ======= ======= =======
2004:
Available-for-Sale securities:
Bonds $ 7,382 $ 107 $ (12) $ 7,477
======== ======= ======= =======
F-27
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003
NOTE H - INTANGIBLE ASSETS, NET
Intangible assets consistE (CONTINUED)
As of March 27, 2005, the following:bonds mature at various dates between May 2005
and April 2014. Proceeds from the sale of available-for-sale and trading
securities and the resulting gross realized gains and losses included in
the determination of net income are as follows:
March 31, March 25,
2002 2001
--------- --------2005 2004 2003
------ ------ -----
Goodwill $17,043 $17,043
Trademark, trade name, franchise rights and recipes 7,031 7,031
------- -------
24,074 24,074
Less accumulated amortization 6,951 6,063
------- -------
Intangible assets, net $17,123 $18,011
======= =======
Available-for-sale securities:
Proceeds $1,357 $2,497 $6,088
Gross realized gains - 17 12
Gross realized losses - (5) (2)
Trading securities:
Proceeds - - $ 767
Gross realized gains - - -
Gross realized losses - - (252)
Amortization expense relatedEffective April 1, 2002, the Company transferred the Company's bond
portfolio formerly classified as trading securities to available for sale
securities due to a change in the Company's investment strategies. As
required by SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities", the transfer of these intangible assets was $888, $839securities between categories of
investments has been accounted for at fair value and $716the unrealized
holding loss previously recorded through April 1, 2002 of $20 from the
trading category has not been reversed. The net unrealized (losses) gains
for the fiscal years ended March 27, 2005, March 28, 2004 and March 30,
2003, respectively, of $(137), $3 and $64, net of deferred income taxes,
has been included as a component of comprehensive income.
During the fiscal year ended March 30, 2003, the Company liquidated its
investment in limited partnership and received proceeds of $767 and
recorded a loss of $252 which is included as a component of investment and
other income in the accompanying consolidated statement of operations for
the fiscal year ended March 30, 2003.
F-28
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE F - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
MARCH 27, March 28,
2005 2004
--------- ---------
Land $ 1,094 $ 1,281
Building and improvements 1,917 1,854
Machinery, equipment, furniture and fixtures 6,021 5,980
Leasehold improvements 4,371 4,123
Construction-in-progress 9 103
------- -------
13,412 13,341
Less: accumulated depreciation and amortization 8,829 8,247
------- -------
$ 4,583 $ 5,094
======= =======
Assets under capital lease amounted to $48 at March 27, 2005 and March 28,
2004. These assets were fully amortized prior to the fiscal year ended
March 28, 2004. Depreciation expense on property and equipment was $918,
$971 and $1,907 for the fiscal years ended March 27, 2005, March 28, 2004
and March 30, 2003, respectively.
1. Sales of Restaurants
The Company follows the provisions of SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS No.144"),
related to the accounting and reporting for segments of a business
to be disposed of. In accordance with SFAS No. 144 the definition of
discontinued operations includes components of an entity whose cash
flows are clearly identifiable. SFAS No. 144 requires the Company to
classify as discontinued operations any restaurant that it sells,
abandons or otherwise disposes of where the Company will have no
further involvement in, or cash flows, from such restaurant's
operations.
F-29
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE F (CONTINUED)
During the fiscal year ended March 27, 2005, the Company ceased the
operations of one Company-owned restaurant pursuant to the termination of
the lease and notification by the landlord not to renew. The results of
operations for this restaurant have been included in discontinued
operations for fiscal years ended March 27, 2005, March 28, 2004 and March
30, 2003, as the company has no continuing involvement in the operation of
this restaurant or cash flows from this restaurant.
During the fiscal year ended March 28, 2004, the Company sold three
Company-owned restaurants for total consideration of $1,083 and entered
into two management agreements with franchisees to operate two
Company-owned restaurants. As the Company expects to have a continuing
stream of cash flows for all of these restaurants, the results of
operations for these Company-operated restaurants are included as a
component of continuing operations in the accompanying consolidated
statements of operations.
During the fiscal year ended March 30, 2003, the Company sold three
Company-owned restaurants for total consideration of $591. In August 2002,
an operating restaurant, which had been classified as held for sale at
March 31, 2002, was sold to a non-franchisee for $75. In October 2002, a
non-operating restaurant, which had been classified as held for sale was
sold to a non-franchisee for $466 and an operating restaurant was sold to
a franchisee in exchange for a $50 note. As these restaurants were either
classified as held-for-sale prior to the adoption of SFAS No. 144 or the
Company has continuing cash flows in the case of the franchised
restaurant, the results of operations for these Company-operated
restaurants that were sold are included as a component of continuing
operations in the accompanying consolidated statements of operations for
the fiscal year ended March 25, 200130, 2003. In December 2002, the Company
abandoned the operations of one Company-owned restaurant pursuant to a
lease termination agreement with the landlord. The results of operations
for this restaurant have been classified as discontinued operations for
fiscal year ended March 30, 2003 as the Company does not have any
continuing involvement in the operations of this restaurant or continuing
cash flows from this restaurant.
As discussed in Note F-2 below, during fiscal 2003, the Company also
abandoned the operations of seven company-operated restaurants located
within certain Home Depot Home Improvement Centers. Pursuant to SFAS No.
144, the results of operations for all seven of these restaurants have
been presented as discontinued operations in the accompanying consolidated
statement of operations for the period ended March 30, 2003, as the
Company has no continuing involvement in the operations of these
restaurants or cash flows relating to any of these restaurants.
F-30
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 26, 2000,30, 2003
NOTE F (CONTINUED)
2. Food Service License Termination Within Home Depot Stores
In August 2002, the Company received written notice from Home Depot
U.S.A., Inc. ("Home Depot") that Home Depot terminated seven License
Agreements with the Company pursuant to which the Company operated
Nathan's restaurants in certain Home Depot Home Improvement Centers.
In accordance with the termination notices, the Company ceased its
operations in all seven Home Depot locations during the fiscal year
ended March 30, 2003.
Pursuant to SFAS No. 144, the results of operations for all seven of
these restaurants have been presented as discontinued operations in
the accompanying consolidated statements of operations as the
Company has no continuing involvement in the operations of these
restaurants or cash flows relating to any of these restaurants. The
Company revised the estimated useful lives of these assets to
reflect the shortened useful lives and recorded additional
depreciation expense of approximately $428 during the fiscal year
ended March 30, 2003. Pursuant to the termination provisions of
certain of the lease agreements with Home Depot, the Company
received payments of $184.
Following is a summary of the results of operations for these seven
restaurants for the fiscal year ended March 30, 2003:
2003
-------
Revenues $ 3,096
=======
(Loss) income before income taxes (A) $ (166)
=======
(A) - (Loss) income before income taxes for the fiscal year ended March
30, 2003 includes additional depreciation expense of $428, as a
result of revising the estimated useful lives of these restaurants.
F-31
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE F (CONTINUED)
3. Discontinued Operations
As described in Notes F-1 and F-2 above, the Company has classified
the results of operations of certain restaurants as discontinued
operations in accordance with SFAS No. 144. The following is a
summary of the results of operations for these restaurants for the
fiscal years ended March 27, 2005, March 28, 2004 and March 30,
2003:
2005 2004 2003
------- ------- -------
Revenues $ 415 $ 917 $ 4,496
======= ======= =======
Loss before income taxes (A) $ (15) $ (98) $ (206)
======= ======= =======
(A) - Loss before income taxes for the fiscal year ended March 30,
2003 includes additional depreciation expense of $428, as a
result of revising the estimated useful lives of these
restaurants.
4. Assets Held for Sale
Included in assets held for sale as of March 27, 2005 and March 28,
2004 are certain land, building and improvements associated with two
and one properties, respectively.
F-32
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE IG - ACCRUED EXPENSES, OTHER CURRENT LIABILITIES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
MARCH 27, March 31, March 25,
2002 2001
------- -------28,
2005 2004
---------- ---------
Payroll and other benefits $1,455 $1,365$ 1,618 $ 1,369
Professional and legal costs 407 898
Self-insured retention 1,346 825328 259
Self-insurance costs 324 346
Rent, occupancy and subleaselease reserve termination costs 831 1,236413 757
Taxes payable 595 512684 544
Unexpended advertising funds - 2,104498 440
Deferred marketing funds 365 410
Other 1,872 1,745
------ ------
$6,506 $8,685
====== ======858 711
------- -------
$ 5,088 $ 4,836
======= =======
F-23F-33
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26,30, 2003
NOTE G (CONTINUED)
Other liabilities consists of the following:
MARCH 27, March 28,
2005 2004
--------- ---------
Deferred income - supplier contracts $ 771 $ 1,137
Deferred development fees 316 453
Deferred gain on sales of fixed assets 160 269
Deferred rental liability 265 264
Tenant's security deposits on subleased property 100 111
------- -------
$ 1,612 $ 2,234
======= =======
Lease Reserve Termination Costs
In connection with the Company's acquisition of Miami Subs in fiscal 2000,
Nathan's planned to permanently close 18 under-performing company-owned
restaurants; Nathan's expected to abandon or sell the related assets at
amounts below the historical carrying amounts recorded by Miami Subs. In
accordance with APB No. 16 "Business Combinations", the write-down of
these assets was reflected as part of the purchase price allocation. The
Company has closed or sold all 18 units. As of March 27, 2005, the Company
has recorded charges to operations of approximately $1,461 ($877 after
tax) for lease reserves and termination costs in connection with these
properties.
Changes in the Company's reserve for lease reserve and termination costs
are as follows:
2005 2004 2003
------ ------ ------
Beginning balance $ 532 $ 529 $ 336
Additions - 80 209
Payments (334) (77) (16)
----- ----- -----
Ending balance $ 198 $ 532 $ 529
===== ===== =====
F-34
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE JH - NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
A summary of notes payable and capitalized lease obligations is as
follows:
MARCH 27, March 31, March 25,
2002 200128,
2005 2004
--------- ---------
Note payable to bank at 8.5% through January 2003, 4.5% from February 2003
through January 2006 and adjusting to prime plus 0.25% in 2003,February 2006
and February 2009 and maturity in 2010 $1,333 $ 1,505
Note payable to bank at 8.0% through January 2002 - 806
Note payable to bank at 1.5% over prime and maturing in 2001 - 354
Note payable to bank at 8.75% and maturing in 2003 381 3972010 $ 819 $ 986
Capital lease obligations and other 65 7047 53
------ -------
1,779 3,132------
866 1,039
Less current portion (559) (1,343)(174) (173)
------ -------------
Long-term portion $1,220 $ 1,789692 $ 866
====== =============
The above notes are secured by the related property and equipment.equipment, which
have been fully depreciated as of March 27, 2005.
In August 2001, Miami Subs entered into an agreement with a franchisee and
a bank, which called for the assumption of a note payable by the
franchisee and the repayment of an existing note receivable from the
franchisee. The Company guarantees the franchisee's note payable with the
bank. The Company's maximum obligation should the franchisee default on
the required payments to the bank for loansthe loan funded by the lender was
approximately $225 as of March 31, 2002, was approximately $333.27, 2005. (See Note L-2)
At March 31, 2002,27, 2005, the aggregate annual maturities of notes payable and
capitalized lease obligations are as follows:
20032006 $ 559
2004 173
2005 173
2006 174
2007 174175
2008 175
2009 176
2010 164
Thereafter 526
------
$1,779
======2
-----
$ 866
=====
F-24
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE J (continued)
The Company maintains a $7,500 line of credit with its primary banking
institution. Borrowings under the line of credit are intended to be used
to meet the normal short-term working capital needs of the Company. The
line of credit is not a commitment and, therefore, credit availability is
subject to ongoing approval. The line of credit expires on October 1,
2002,2005, and bears interest at the prime rate (4.75%(5.75% at March 31, 2002)27, 2005).
There were no borrowings outstanding under this line of credit as of March
31, 2002.27, 2005 and March 28, 2004.
F-35
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE KI - OTHER EXPENSE (INCOME) EXPENSE,, NET
Included in other expense (income) expense,, in the accompanying consolidated
statements of operations is (i) the reversal of a previous litigation
accrual of ($210) for the fiscal year ended March 31, 2002 (ii) $463 in27, 2005, is (i)
$(16) for the recovery of lease termination costsexpense, (ii) $45 of lease
termination expense in connection with two properties for the fiscal year
ended March 25, 2001,28, 2004, and (iii) $236$232 in lease reserves in connection with
the satisfaction of certain financial guarantees
and $191 in lease expense resulting from the default of subleasesfour vacant properties for the fiscal year ended March 26, 2000.30, 2003.
NOTE LJ - INCOME TAXES
Income tax provision (benefit) consists of the following for the fiscal
years ended March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 2000:30, 2003:
2002 2001 2000
---- ---- ----2005 2004 2003
------ ------ -----
Federal
Current $911 $ 868577 $ 461120 $ -
Deferred (93) 246 (719)
----611 804 (281)
------ ------ -----
818 1,114 (258)
----1,188 924 (281)
------ ------ -----
State and local
Current 160 235 247257 74 46
Deferred (16) 67 (239)
----37 142 (48)
------ ------ -----
144 302 8
----294 216 (2)
------ ------ -----
$962 $1,416 $(250)
====$1,482 $1,140 $(283)
====== ====== =====
F-25
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE L (continued)
Total income tax provision (benefit) for the fiscal years ended March 31,
2002,27,
2005, March 25, 200128, 2004 and March 26, 2000 differed30, 2003 differs from the amounts computed
by applying the United States Federal income tax rate of 34% to income
before income taxes as a result of the following:
2002 2001 2000
---- ------ -----2005 2004 2003
-------- -------- -------
Computed "expected" tax (benefit) expense $752 $1,027 $(516)$ 1,438 $ 1,052 $ (609)
Nondeductible amortization 169 222 21237 37 99
Impairment on nondeductible favorable lease intangible assets - - 87
State and local income taxes, net of Federal income tax benefit 106 199 8160 181 140
Tax-exempt investment earnings (68) (30) (30)(66) (46) (48)
Tax refunds received (81) (62) -
Nondeductible meals and entertainment and other 3 (2) 76
---- ------ -----
$962 $1,416 $(250)
==== ====== =====(6) (22) 48
------- ------- -------
$ 1,482 $ 1,140 $ (283)
======= ======= =======
F-26F-36
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003
NOTE L (continued)J (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
MARCH 27, March 31, March 25,
2002 2001
-------28,
2005 2004
-------- ---------
Deferred tax assets
Accrued expenses $1,164 $ 602619 $ 668
Allowance for doubtful accounts 291 35272 131
Impairment of notes receivable 256 245705 908
Deferred revenue 978 1,243582 816
Depreciation expense and impairment of long-lived assets 1,101 2,134850 988
Expenses not deductible until paid 130 372138
Amortization of intangibles 105 70213 308
Net operating loss and other carryforwards 676 2,326312 751
Unrealized loss on marketable securities 47 -
Excess of straight line over actual rent 106 -
Other 59 106
------5 65
------- -------
Total gross deferred tax assets 4,760 7,450
------$ 3,641 $ 4,773
------- -------
Deferred tax liabilities
AmortizationDifference in tax bases of intangibles 422installment gains not
yet recognized 198 196
Deductible prepaid expense 170 -
Unrealized gain on marketable securities and income on
investment in limited partnership 207 209- 46
Other 320 720
------1 2
------- -------
Total gross deferred tax liabilities 949 929
------369 244
------- -------
Net deferred tax asset 3,811 6,5213,272 4,529
Less valuation allowance (525) (2,726)
------(312) (751)
------- $3,286-------
2,960 3,778
Less current portion (1,168) (1,326)
------- -------
Long-Term portion $ 3,795
======1,792 $ 2,452
======= =======
The determination that the net deferred tax asset of $3,286 and $3,795 at
March 31, 2002 and March 25, 2001, respectively, is realizable is based on
anticipated future taxable income.
F-27F-37
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003
NOTE L (continued)J (CONTINUED)
The Company utilized net operating loss carryforwards ("NOLs") of
approximately $244 during fiscal 2005. The determination that the net
deferred tax asset of $2,960 and $3,778 at March 27, 2005 and March 28,
2004, respectively, is realizable is based on anticipated future taxable
income.
At March 31, 2002, as result of settling the Miami Subs IRS audits for the
years 1991 through 1996,27, 2005, the Company had a net operating loss carryforwardan NOL of approximately $1,289$244 remaining
(after certain IRS agreed-upon adjustments and other reductions due to
expiring losses) which ismay be available to offset futurethe Company's March 27,
2005 taxable income through 2005 and general business credit carryforwards remaining of
approximately $87$120 which may be used to offset liabilities through 2008.
These losses and credits are subject to limitations imposed under the
Internal Revenue Code pursuant to SectionSections 382 and 383 regarding changes
in ownership. As a result of these limitations, the Company has recorded a
valuation allowance for the Miami Subs loss carryforwards and credits
related to the acquisition. (See Note N-3).acquisition of Miami Subs. The valuation allowance also
includes various state NOL's related to the post-acquisition losses of
Miami Subs not utilized on a consolidated basis and carried forward on a
state basis.
NOTE MK - STOCKHOLDER'S EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
1. Stock Option Plans
On December 15, 1992, the Company adopted the 1992 Stock Option Plan
(the "1992 Plan"), which provides for the issuance of incentive
stock options ("ISO's") to officers and key employees and
nonqualified stock options to directors, officers and key employees.
Up to 525,000 shares of common stock have been reserved for issuance
under the 1992 Plan. The terms of the options are generally ten
years, except for ISO's granted to any employee, whom prior to the
granting of the option, owns stock representing more than 10% of the
voting rights, for which the option term will be five years. The
exercise price for nonqualified stock options outstanding under the
1992 Plan can be no less than the fair market value, as defined, of
the Company's common stock at the date of grant. For ISO's, the
exercise price can generally be no less than the fair market value
of the Company's common stock at the date of grant, with the
exception of any employee who prior to the granting of the option,
owns stock representing more than 10% of the voting rights, for
which the exercise price can be no less than 110% of fair market
value of the Company's common stock at the date of grant.
F-38
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE K (CONTINUED)
On May 24, 1994, the Company adopted the Outside Director Stock Option
Plan (the "Directors' Plan"), which provides for the issuance of
nonqualified stock options to nonemployee directors, as defined, of the
Company. Under the Directors' Plan, 200,000 shares of common stock have
been authorized and issued pursuant to the Directors' Plan.issued. Options awarded to each nonemployee
F-28
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE M (continued) director
are fully vested, subject to forfeiture under certain conditions and shall
be exercisable upon vesting.
In April 1998, the Company adopted the Nathan's Famous, Inc. 1998 Stock
Option Plan (the "1998 Plan"), which provides for the issuance of
nonqualified stock options to directors, officers and key employees. Up to
500,000 shares of common stock have been reserved for issuance under the
1998 Plan.
In June 2001, the Company adopted the Nathan's Famous, Inc. 2001 Stock
Option Plan (the "2001 Plan"), which provides for the issuance of
nonqualified stock options to directors, officers and key employees. Up to
350,000 shares of common stock have been reserved for issuance under the
19982001 Plan.
In June 2002, the Company adopted the Nathan's Famous, Inc. 2002 Stock
Incentive Plan (the "2002 Plan"), which provides for the issuance of
nonqualified stock options or restricted stock awards to directors,
officers and key employees. Up to 300,000 shares of common stock have been
reserved for issuance under the 2002 Plan.
The 1992 Plan and Directors' Plan expired with respect to the granting of
new options on December 2, 2002 and December 31, 2004, respectively. The
1998 Plan, the 2001 Plan and the Directors'2002 Plan expire on December 2, 2002, April 5, 2008, June
13, 2011 and December 31, 2004,June 17, 2012, respectively, unless terminated earlier by the
Board of Directors under conditions specified in the Plan.
The Company issued 478,584 stock options to employees of Miami Subs Corporation to
replace 957,168 of previously issued Miami Subs options pursuant to the
merger agreementacquisition by Nathan's and issued 47,006 new options. All options were
fully vested upon consummation of the merger. Exercise prices range from a
low of $3.1875 to a high of $22.2517$18.6120 per share and expire at various times
through September 30, 2009.
During the fiscal year ended March 27, 2005, 237,640 stock options were
exercised which aggregated proceeds of $530 to the Company.
F-39
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE K (CONTINUED)
2. Warrants
In November 1996,1993, the Company granted to a nonemployee consultantits Chairman and Chief
Executive Officer a warrant to purchase 50,000150,000 shares of itsthe Company's
common stock at an exercise price of $3.94$9.71 per share, representing 105%
of the market price of the Company's common stock on the date of grant,
which representedexercise price was reduced on January 26, 1996 to $4.50 per
share. The shares vested at a rate of 25% per annum commencing November
1994 and the warrant expired, unexercised in November 2003.
On July 17, 1997, the Company granted to its Chairman and Chief
Executive Officer a warrant to purchase 150,000 shares of the Company's
common stock at an exercise price of $3.50 per share, representing the
market price of the Company's common stock on the date of grant. Upon the date of grant, one-third of theThe
shares vested immediately, one-third vested on the first anniversary thereof,at a rate of 25% per annum commencing July 17, 1998 and
the remaining one-third vested on the second anniversary thereof. The
warrant expired, unexercised, on November 24, 2001.
F-29
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE M (continued)expires in July 2007.
In connection with the merger with Miami Subs, the Company issued
579,040 warrants to purchase common stock to the former shareholders of
Miami Subs. These warrants expireexpired on September 30, 2004 and havehad an
exercise price of $6.00 per share. During fiscal 2005, 142,855 of these
warrants were exercised which aggregated proceeds of $857 to the
Company, and 436,179 warrants expired unexercised. The Company also
issued 63,700 warrants to purchase common stock to the former warrant
holders of Miami Subs. Exercise prices range
betweenSubs, of which 18,750 remain outstanding as of March
27, 2005. The exercise price of these outstanding warrants is $16.55
per share and $49.63expire in March 2006.
F-40
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share expiring throughamounts)
March 2006.27, 2005, March 28, 2004 and March 30, 2003
NOTE K (CONTINUED)
A summary of the status of the Company's stock option plans and warrants,
excluding the 579,040 warrants issued to former shareholders of Miami
Subs, at March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003 and changes
during the fiscal years then ended is presented in the tables and narrative below:
2002 2001 20002005 2004 2003
---------------------- ---------------------- ------------------------------------------- -----------------------
WEIGHTED- Weighted- Weighted-
Weighted-
average average average
exercise exercise exercise
Shares priceAVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares price Shares price
--------- -------- --------- ------- ------ ----------------- --------- --------- ---------
Options outstanding - beginning
of year 1,514,209 $3.86 1,614,9241,778,686 $ 4.79 707,667 $5.083.92 1,754,249 $ 4.01 1,821,146 $ 4.29
Granted 307,000 3.2095,000 5.62 65,000 4.03 40,000 3.96
Expired (141,250) 7.22 (40,563) 11.67 (106,897) 7.32
Exercised (237,640) 4.08 - -
512,006 3.34
Replacement options - Miami Subs - - - - 478,584 6.04
Canceled (63) 6.20 (100,715) 10.60 (83,333) 5.50
--------- --------- ---------------- --------- --------- ---------
Options outstanding - end of year 1,821,146 4.29 1,514,209 3.86 1,614,924 4.791,494,796 3.81 1,778,686 3.92 1,754,249 4.01
========= ========= =========
Options exercisable - end of year 1,367,479 1,220,876 1,086,4241,322,629 1,572,268 1,502,124
========= ========= =========
Weighted-average fair value of
options granted $ 2.87 $ 1.60 $ 2.19
========= ======== ========= =========
granted $1.30 $ - $2.10
===== ========= =====
Warrants outstanding - beginning
of year 368,750 $4.53 401,200168,750 $ 5.66 350,000 $3.88
Replacement warrants4.73 318,750 $ 4.62 318,750 $ 4.62
Expired - Miami Subs(150,000) 4.50 - - - - 63,700 24.09
Expired (50,000) 3.94 (32,450) 18.61 (12,500) 49.63
--------- --------- ----------------
Warrants outstanding - end of year 168,750 4.73 168,750 4.73 318,750 4.62
368,750 4.53 401,200 5.66
--------- --------- ----------------
Warrants exercisable - end of year 168,750 168,750 318,750 368,750 401,200
Weighted-average fair value of warrants ========= ========= ================
warrants granted $ - $ - $ -
====== ======= =============== ======== =========
At March 31, 2002, 153,66627, 2005, 203,500 common shares were reserved for future
restricted stock or stock option grants.
F-30F-41
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003
NOTE M (continued)K (CONTINUED)
The following table summarizes information about stock options and
warrants (excluding warrants issued to the Miami Subs shareholders as part of the
merger consideration) at March 31, 2002:27, 2005:
Options and
Options and warrants outstanding warrants exercisable
----------------------------------------------------- --------------------------------------------------------------------------------------- --------------------------
Weighted- Weighted- Weighted-
Number average average Number average
Range of outstanding remaining exercise exercisable exercise
exercise prices at 3/31/0227/05 contractual life price at 3/31/0227/05 price
---------------- ----------------- ----------- ------------------------------------------------- --------- ----------- -----------------
$ 3.19 to $ 4.00 1,459,558 6.71,434,418 4.0 $ 3.36 1,373,918 $ 3.35
1,005,891 $ 3.39
4.01 to 7.00 580,588 2.5 5.41 580,588 5.41
7.016.00 136,250 8.1 5.27 24,583 4.52
6.01 to 22.25 99,750 1.8 12.61 99,750 12.6116.55 92,878 1.4 8.38 92,878 8.38
--------- --- --------------- --------- ----------------
$ 3.19 to $ 22.25 2,139,896 5.316.55 1,663,546 4.2 $ 4.34 1,686,2293.80 1,491,379 $ 4.633.68
========= === =============== ========= ================
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
2002 2000
---- ----
Expected life (years) 6.6 6.3
Interest rate 4.06% 6.22%
Volatility 32.3% 59.3%
Dividend yield 0% 0%
There were no options or warrants granted during fiscal 2001.
F-31
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE M (continued)
The Company has adopted the pro forma disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has been recognized in the accompanying financial
statements for the stock option plans. Had compensation cost for the
Company's stock option plans been determined under SFAS No. 123, the
Company's net income (loss) and income (loss) per share would approximate
the pro forma amounts below:
2002 2001 2000
------ ------ ------
Net income (loss): As reported $1,249 $1,606 $(1,270)
Pro forma 839 1,248 (1,907)
Net income (loss) per share: Basic
-----
As reported $.18 $.23 $(.22)
Pro forma .12 .18 (.32)
Diluted
-------
As reported $.18 $.23 $(.22)
Pro forma .12 .18 (.32)
Because the SFAS No. 123 method of accounting is not applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
3. Common Stock Purchase Rights
On June 20, 1995, the Board of Directors declared a dividend distribution
of one common stock purchase right (the "Rights") for each outstanding
share of Common Stock of the Company. The distribution was paid on June
20, 1995 to the shareholders of record on June 20, 1995. The terms of the
Rights were amended on April 6, 1998 and December 8, 1999. Each Right, as
amended, entitles the registered holder thereof to purchase from the
Company one share of the Common Stock at a price of $4.00 per share (the
"Purchase Price"), subject to adjustment for anti-dilution. New Common
Stock certificates issued after June 20, 1995 upon transfer or new
issuance of the Common Stock will contain a notation incorporating the
Rights Agreement by reference.
F-32
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE M (continued)
The Rights are not exercisable until the Distribution Date. The
Distribution Date is the earlier to occur of (i) ten days following a
public announcement that a person or group of affiliated or associated
persons (an "Acquiring Person") acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of
the Common Stock, as amended, or (ii) ten business days (or such later
date as may be determined by action of the Board of Directors prior to
such time as any person becomes an Acquiring Person) following the
commencement, or announcement of an intention to make a tender offer or
exchange offer by a person (other than the Company, any wholly-owned
subsidiary of the Company or certain employee benefit plans) which, if
consummated, would result in such person becoming an Acquiring Person. The
Rights willwere set to expire on June 19, 2005, unless earlier redeemed by the
Company. On June 15, 2005, The Board of Directors approved an extension of
the Rights through June 19, 2010 under essentially the same terms and
conditions.
F-42
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE K (CONTINUED)
At any time prior to the time at which a person or group or affiliated or
associated persons has acquired beneficial ownership of 15% or more of the
outstanding shares of the Common Stock of the Company, the Board of
Directors of the Company may redeem the Rights in whole, but not in part,
at a price of $.001 per Right. In addition, the Rights Agreement, as
amended, permits the Board of Directors, following the acquisition by a
person or group of beneficial ownership of 15% or more of the Common Stock
(but before an acquisition of 50% or more of Common Stock), to exchange
the Rights (other than Rights owned by such 15% person or group), in whole
or in part, for Common Stock, at an exchange ratio of one share of Common
Stock per Right.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the
right to vote or to receive dividends. The Company has reserved 9,358,7649,307,363
shares of Common Stock for issuance upon exercise of the Rights.
4. Stock Repurchase Plan
On September 14, 2001, the Board of Directors of the Company authorized
the repurchase of up to 1,000,000 shares of the Company's common stock. As
part of the stock repurchase plan, on April 10, 2002, the Company
repurchased 751,000 shares of the Company's common stock for aggregate
consideration of $2,741 in a private transaction with a stockholder. The
Company completed its initial Stock Repurchase Plan at a cost of
approximately $3,670 during the fiscal year ended March 30, 2003. On
October 7, 2002, the Board of Directors of the Company authorized the
repurchase of up to 1,000,000 additional shares of the Company's common
stock. Purchases of stock will be made from time to time, depending on
market conditions, in open market or in privately negotiated transactions,
at prices deemed appropriate by management. There is no set time limit on
the purchases. The Company expects to fund these stock repurchases from
its operating cash flow. Through March 31, 2002, 41,69127, 2005, 891,100 additional shares
have been repurchased at a cost of approximately $135.
On April 10, 2002,$3,488.
5. Employment Agreements
We entered into a new employment agreement with Howard M. Lorber, our
Chairman and Chief Executive Officer, effective as of January 1, 2005. The
agreement expires December 31, 2009. Pursuant to the Company repurchased 751,000agreement, Mr. Lorber
receives a base salary of $250 and an annual bonus equal to 5 percent of
our consolidated pre-tax earnings over $5,000 for each fiscal year. The
agreement further provides for a consulting agreement after the
termination of employment during which Mr. Lorber will receive a
consulting payment of $225 per year. Mr. Lorber is also entitled to a
severance payment in certain circumstances upon termination, as defined in
the agreement. The employment agreement also provides Mr. Lorber the right
to participate in employment benefits offered to other Nathan's
executives. In connection with the agreement, we issued to Mr. Lorber
50,000 shares of the Company'srestricted common stock
for aggregate consideration of $2,741 in a private transaction
with a stockholder.
F-33F-43
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003
NOTE M (continued)
5. Employment Agreements
The Company and its Chairman and Chief Executive Officer entered into a newK (CONTINUED)
which vest ratably over the 5-year term of the employment agreement effective asagreement. A
charge of January 1, 2000. The new employment
agreement expires December 31, 2004. Pursuant to$363 based on the agreement, the officer
receives a base salary of $1.00 and an annual bonus equal to 5%fair market value of the Company's consolidated pretax earnings for each fiscal year, with a minimum
bonus of $250. The new employment agreement further provides for a
three-year consulting period after termination of employment during which
the officer will receive consulting payments in an annual amount equal to
two thirds of the average of the annual bonuses awarded to him during the
three fiscal years preceding the fiscal year of termination of his
employment. The employment agreement also provides for the continuation of
certain benefits following death or disability. In connection with the
agreement, the Company issued to the officer 25,000 shares of common
stock with a fair market value athas been recorded to deferred compensation and is being amortized to
earnings ratably over the date of grant of approximately $78.vesting period.
In the event that the officer'sMr. Lorber's officer employment is terminated without
cause, he is entitled to receive his salary and incentive payment, if any,bonus for the remainder of
the contract term. The employment agreement further provides that in the
event there is a change in control, of the Company, as defined therein,in the officeragreement, Mr.
Lorber has the option, exercisable within one year after such
an event, to
terminate his employment agreement. Upon such termination, he has the
right to receive a lump sum cash payment equal to the greater of (i)(A) his
salary and annual bonuses for the remainder of the employment term
(including a pro ratedprorated bonus for any partial fiscal year), which bonus
shall be equal to the average of the annual bonuses awarded to him during
the three fiscal years preceding the fiscal year of termination; or (ii)(B)
2.99 times his salary and annual bonus for the fiscal year immediately
preceding the fiscal year of termination, as well as a lump sum cash
payment equal to the difference between the exercise price of any
exercisable options having an exercise price of less than the then current
market price of the Company'sour common stock and such then current market price. In
addition, the Companywe will provide the officerMr. Lorber with a tax gross-up payment to cover
any excise tax due. In the event of termination due to Mr. Lorber's death
or disability, he is entitled to receive an amount equal to his salary and
annual bonuses for a three-year period, which bonus shall be equal to the
average of the annual bonuses awarded to him during the three fiscal years
preceding the fiscal year of termination.
The Company and its President and Chief Operating Officer entered into an
employment agreement on December 28, 1992 for a period commencing on
January 1, 1993 and ending on December 31, 1996. The employment agreement
has been extended annually through December 31, 2001,2005, based on the
original terms, and no nonrenewal notice has been given as of May 24, 2002.25,
2005. The agreement provides for annual compensation of $275$289 plus certain
other
F-34
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE M (continued) benefits. In November 1993, the Company amended this agreement to
include a provision under which the officer has the right to terminate the
agreement and receive payment equal to approximately three times annual
compensation upon a change in control, as defined.
The Company and the President of Miami Subs, pursuant to the merger
agreement, entered into an employment agreement on September 30, 1999 for
a period commencing on September 30, 1999 and ending on September 30,
2002. The agreement provides for annual compensation of $200$210 plus certain
other benefits and automatically renews annually unless 180 days prior
written notice is given to the employee. No nonrenewal notice has been
given as of May 25, 2005. The agreement includes a provision under which
the officer has the right to terminate the agreement and receive payment
equal to approximately three times his annual compensation upon a change
in control, as defined. In the event a nonrenewal notice is delivered, the
Company must pay the officer an amount equal to the employee's base salary
as then in effect.
F-44
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE K (CONTINUED)
The Company and one executive of Miami Subs entered into a change of
control agreement effective November 1, 2001 for annual compensation of
$130$136 per year. The agreement additionally includes a provision under which
the executive has the right to terminate the agreement and receive payment
equal to approximately three times his annual compensation upon a change
in control, as defined.
The Company and one executive of Miami Subs entered into an employee
agreement effective as of July 1, 2001 for a period commencing on the date
of the agreement and ending on July 1, 2003 and for compensation of $125
per year. The Company and another executive of Miami Subs entered into an
employment agreement effective August 1, 2001 for a period commencing on
the date of the agreement and ending on September 30, 2003 and for
compensation at $90 per year. Each agreement also provides for certain
other benefits. Each agreement additionally includes a provision under
which the executive has the right to terminate the agreement and receive
payment equal to approximately three times the employee's annual
compensation upon a change in control, as defined.
F-35
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE M (continued)
Each employment agreement terminates upon death or voluntary termination
by the respective employee or may be terminated by the Company upon
30-days' prior written notice by the Company in the event of disability or
"cause","cause," as defined in each agreement.
6. 401(k) Plan
The Company has a defined contribution retirement plan under Section
401(k) of the Internal Revenue Code covering all nonunion employees over
age 21 who have been employed by the Company for at least one year.
Employees may contribute to the plan, on a tax-deferred basis, up to 15%
of their total annual salary. Company contributions are discretionary. Beginning with the
plan year ending February 28, 1994, theThe
Company elected to matchmatches contributions at a rate of $.25 per dollar contributed by
the employee on up to a maximum of 3% of the employee's total annual
salary. Employer contributions for the fiscal years ended March 31, 2002,27, 2005,
March 25, 200128, 2004 and March 26, 200030, 2003 were $36,$22, $21 and $25, and $21, respectively.
7. Other Benefits
The Company provides, on a contributory basis, medical benefits to active
employees. The Company does not provide medical benefits to retirees.
F-45
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE NL - COMMITMENTS AND CONTINGENCIES
1. Commitments
The Company's operations are principally conducted in leased
premises. The leases generally have initial terms ranging from 5 to
20 years and usually provide for renewal options ranging from 5 to
20 years. Most of the leases contain escalation clauses and common
area maintenance charges (including taxes and insurance). Certain of
the leases require additional (contingent) F-36
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE N (continued)
rental payments if sales
volumes at the related restaurants exceed specified limits. As of
March 31, 2002,27, 2005, the Company has noncancelable operating lease
commitments, net of certain sublease rental income, as follows:
Lease Sublease Net lease
commitments income Commitmentscommitments
----------- -------- -----------
20032006 $ 4,7843,587 $ 2,4342,001 $ 2,350
2004 4,313 2,080 2,233
2005 4,209 2,005 2,204
2006 3,988 1,904 2,0841,586
2007 3,763 1,762 2,0013,377 1,905 1,472
2008 2,797 1,603 1,194
2009 1,846 1,099 747
2010 1,527 944 583
Thereafter 13,194 7,416 5,7781,753 1,563 190
--------- -------- -------- --------
$34,251 $17,601 $16,650-------
$ 14,887 $ 9,115 $ 5,772
========= ======== ======== ===============
Aggregate rental expense, net of sublease income, under all current
leases amounted to $2,734, $3,549$1,278, $1,584 and $2,848$2,340 for the fiscal years
ended March 31,
2002,27, 2005, March 25, 200128, 2004 and March 26, 2000,30, 2003,
respectively.
The Company also owns or leases sites, which it leases orin turn subleases to
franchisees.franchisees which expire on various dates through 2016 exclusive of
renewal options. The Company remains liable for all lease costs when
properties are subleased to franchisees.
The Company also subleases non-Miami Subs locations to third parties. Such
sub-leases provide for minimum annual rental payments by the Company
aggregating approximately $2.4 million$2,885 and expire on various dates through
20102015 exclusive of renewal options.
F-46
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE L (CONTINUED)
Contingent rental payments on building leases are typically made
based on the percentage of gross sales on the individual restaurants
that exceed predetermined levels. The percentage of gross sales to
be paid and related gross sales level vary by unit. Contingent
rental expense was approximately $129, $123, $123$52, $67 and $88 for the fiscal
years ended March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 2000,30, 2003,
respectively.
F-37
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE N (continued)2. Guarantees
The Company guarantees certain equipment financing for franchisees
with a third-party lender. The Company's maximum obligation, should
the franchisees default on the required monthly payment to the
third-party lender, for loans funded by the lender, as of March 31, 2002,27,
2005, was approximately $1.4 million.$100. The equipment financing expires at
various dates through fiscal 2008.
The Company also guarantees a franchisee's note payable with a bank.
The note payable matures in fiscal 2007. The Company's maximum
obligation, should the franchisee default on the required monthly
payments to the bank, for loansthe loan funded by the lender, as of March
27, 2005, was approximately $225.
The guarantees referred to above were entered into by the Company
prior to December 31, 2002 and have not been modified since that
date, which was approximately $333.
2.the effective date for FIN 45 "Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others."
3. Contingencies
Nathan's Famous, Inc. and Nathan's Famous Operating Corp. were named as two
of three defendants in an action commenced in July 2001, in the Supreme
Court of New York, Westchester County. According to the amended complaint,
the plaintiffs, a minor and her mother, are seeking damages in the amount
of $17 million against Nathan's Famous and Nathan's Famous Operating Corp.
and one of Nathan's Famous' former employees claiming that the Nathan's
entities failed to properly supervise minor employees, failed to monitor
its supervisory personnel, and were negligent in hiring, retaining and
promoting the individual defendant, who allegedly molested, harassed and
raped the minor plaintiff, who was also an employee. On May 29, 2002, as a
result of a mediation, this action was settled, subject to final Court
approval. In the event the Court approves the settlement, the plaintiffs
will be paid $650, which has been accrued for as a component of "Accrued
expenses and other current liabilities" in the accompanying balance sheets.
An action has been commenced, in the Circuit Court of the Fifteenth
Judicial Circuit, Palm Beach County, Florida in September 2001
against Miami Subs and EKFD Corporation, a Miami Subs franchisee
("the franchisee") claiming negligence in connection with a slip and
fall which allegedly occurred on the premises of the franchisee for
unspecified damages. Pursuant to the terms of the Miami Subs
Franchise Agreement, the franchisee is obligated to indemnify Miami
Subs and hold themit harmless against claims asserted and procuredprocure an
insurance policy which namednames Miami Subs as an additional insured.
Miami Subs has denied any liability to plaintiffs and has made
demand upon the franchisee's insurer to indemnify and defend against
the claims asserted. The insurer has agreed to indemnify and defend
Miami Subs and has assumed the defense of this action for Miami
Subs.
F-38Miami Subs has received a claim from a landlord for a franchised
location that Miami Subs owes the landlord $150 in connection with
the construction of the leased premises. Miami Subs has been the
primary tenant at the location since 1993, when the lease was
assigned to Miami
F-47
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003
NOTE N (continued)L (CONTINUED)
Subs by the initial tenant under the lease, the party to whom the
construction loan was made. To date, the landlord has not commenced legal
action. Miami Subs intends to continue to dispute its liability for the
construction loan and to vigorously defend any legal action.
An employee of a Miami Subs franchised restaurant, commenced an action for
unspecified damages in the United States District Court, Southern District
of Florida in January 2004 against Miami Subs Corporation, Miami Subs USA,
Inc. , Nadia M. Investments, Inc. and DYV SYS International, Inc., both
Miami Subs franchisees ("the franchisees"), claiming that he was not paid
overtime when he worked in excess of 40 hours per week, in violation of
the Fair Labor Standards Act. The action also seeks damages for any other
employees of the defendants who would be similarly entitled to overtime.
Pursuant to the terms of the Miami Subs Franchise Agreement, the
franchisees are obligated to operate their Miami Subs franchises in
compliance with the law, including all labor laws. On July 27, 2004, this
action was settled without payment to the plaintiffs by Miami Subs
Corporation.
Ismael Rodriguez commenced an action, in the Supreme Court of the State of
New York, Kings County, in May 2004 against Nathan's Famous, Inc. seeking
damages of $1,000 for claims of age discrimination in connection with the
termination of Mr. Rodriguez's employment. Mr. Rodriguez was terminated
from his position in connection with his repeated violation of company
policies and failure to follow company-mandated procedures. Nathan's
Famous, Inc. intends to deny any liability and defend this action
vigorously. Nathan's Famous, Inc. has submitted this claim to its
insurance carrier with the expectation that it will be covered by its
employment practices liability insurance policy.
An employee of a Miami Subs franchised restaurant commenced an action for
unspecified damages in the United States District Court, Southern District
of Florida in September 2004 against Miami Subs Corporation, Miami Subs
USA, Inc., and three Miami Subs franchisees, FMI Subs Corporation, NEESA
Subs Corp. and Muhammad Amin, (the franchisees), claiming that she was not
paid overtime when she worked in excess of 40 hours per week, in violation
of the Fair Labor Standards Act. The action also seeks damages for any
other employees of the defendants who would be similarly entitled to
overtime. Pursuant to the terms of the Miami Subs Franchise Agreement, the
franchisees are obligated to operate their Miami Subs franchises in
compliance with the law, including all labor laws. On May 27, 2005 this
action was settled without payment to the plaintiffs by Miami Subs
Corporation.
F-48
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 27, 2005, March 28, 2004 and March 30, 2003
NOTE L (CONTINUED)
In July 2001, a female manager at one of our company-owned restaurants
filed a charge with the Equal Employment Opportunity Commission ("EEOC")
claiming sex discrimination in violation of Title VII of the Civil Rights
Act of 1964 and a violation of the Equal Pay Act. The employee claimed that
she was being paid less than male employees for comparable work, which
Nathan's denied. Although the parties agreed to a settlement in March 2004
for approximately $10, such agreement was not finalized and in June and
August 2004, the employee filed further charges with the EEOC claiming that
Nathan's had retaliated against her, first by refusing her request for a
shift change and then by terminating her employment in July 2004. Following
a determination by the EEOC in May 2005 that there was no reasonable cause
to believe that the employee was terminated in retaliation for filing a
charge of discrimination, but that there was reasonable cause to believe
that she was paid less than similarly situated males in violation of the
Equal Pay Act and Title VII and that she was denied a request for a change
in shift in retaliation for filing the discrimination charge, the EEOC
advised that it would engage in conciliation and settlement efforts to try
to resolve the employee's charges. Nathan's intends to cooperate with the
EEOC's conciliation efforts in the hope that this matter can be settled on
reasonable terms. If it cannot, and the employee or the EEOC commences
legal proceedings, Nathan's will defend the matter vigorously.
The Company is involved in various other litigation in the normal course
of business, none of which, in the opinion of management, will have a
significant adverse impact on its financial position or results of
operations.
3. Miami Subs Tax Audit
As a result of the Miami Subs acquisition, the Company obtained a net
operating loss carryforward of approximately $5.9 million and a general
business credit carryforward of approximately $274. The Miami Subs Federal
income tax returns for all fiscal years 1991 through 1996, inclusive, have
been examined by the Internal Revenue Service. In January 2002, the Miami
Subs tax audit was settled with the IRS Appeals Office. The settlement
resulted in a reduction of the net operating loss carryforward to $4,004
and an adjustment to the general business credit to $300. Each of these
carryforwards were subject to reductions due to various expiration dates.
In addition to these adjustments, the Company made tax and interest
payments totaling $344 in full settlement of the audit. As of March 31,
2002, the remaining net operating loss carryforward is $1,289 and the
remaining general business credit is $87. These losses and credits are
subject to limitations imposed under the Internal Revenue Code pursuant to
section 382 regarding changes in ownership. As a result of these
limitations, the Company has recorded a valuation allowance for the
remaining Miami Subs loss carryforwards and credits related to the
acquisition.
NOTE OM - RELATED PARTY TRANSACTIONS
AsAn accounting firm of March 31, 2002, Miami Subs leased two restaurant properties from
Kavala, Inc., a private company owned by Gus Boulis, a former shareholder
of Miami Subs. Future minimum rental commitments due to Kavala at March 31,
2002 under these existing leases was approximately $1.2 million.
Mr. Donald L. Perlyn has been an officer of Miami Subs since 1990, a
Director since 1997 and President and Chief Operating Officer since July
1998. Mr. Perlyn has been a director ofwhich Charles Raich, who joined Nathan's since October 1999. Mr.
Perlyn served as a member of the Board of
Directors on June 15, 2004, serves as Managing Partner, received ordinary
tax preparation and other consulting fees of Arthur Treacher's
Inc. until$127, $99 and $81 for the
fiscal years ended March 2002 when Arthur Treacher's, Inc. was sold in a private
transaction. Miami Subs has been granted certain exclusive co-branding
rights by Arthur Treacher's, Inc.27, 2005, March 28, 2004 and March 30, 2003,
respectively.
A firm on which Mr. Perlyn had been granted options
to acquire approximately 175,000 shares of Arthur Treachers' common stock.
These options were converted into optionsHoward M. Lorber serves as chairman of the entity that sold Arthur
Treacher's, Inc.
F-39
Nathan's Famous, Inc.board of
directors, and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except sharethe firm's affiliates received ordinary and per share amounts)customary
insurance commissions aggregating approximately $49, $26 and $41 for the
fiscal years ended March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003,
respectively.
NOTE PN - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 2002,2004, the Company's management
continued to monitor and evaluate the collectibility and potential
impairment of its assets, in particular, notes receivable, certain fixed
assets and certain fixedintangible assets. In connection therewith, impairment
charges on certain notes receivable of $185$108 and impairment charges on fixed
assets of $685$25 were recorded in the fourth quarter. It is management's
opinion that these adjustments are properly recorded in the fourth quarter
based upon the facts and circumstances that became available in that
period.
During the fourth quarter of fiscal 2000, the Company's management
continued to monitor and evaluate the collectibility and potential
impairment of its assets, in particular, notes receivable and certain fixed
assets. In connection therewith, additional allowances for doubtful
accounts of $399, impairment charges on certain notes receivable of $273
and impairment charges on fixed assets of $465 were recorded in the fourth
quarter. Additionally, Nathan's recorded a $191 lease rental reserve
resulting from the default of subleases for space which is not expected to
be utilized by Nathan's and $236 in connection with the satisfaction of
certain financial guarantees. It is management's opinion that these
adjustments are properly recorded in the fourth quarter based upon the
facts and circumstances that became available in that period.
F-40F-49
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(CONTINUED)
(in thousands, except share and per share amounts)
March 31, 2002,27, 2005, March 25, 200128, 2004 and March 26, 200030, 2003
NOTE QO - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------Quarter Quarter Quarter Quarter
----------- ----------- ------------ ------------
FISCAL YEAR 2005
TOTAL REVENUES (a) $ 9,261 $ 9,903 $ 7,300 $ 7,648
GROSS PROFIT (a)(b) 1,812 2,243 1,033 942
NET INCOME (a) $ 950 $ 1,090 $ 476 $ 221
=========== =========== ============ ============
PER SHARE INFORMATION
NET INCOME PER SHARE
BASIC (c) $ .18 $ .21 $ .09 $ .04
=========== =========== ============ ============
DILUTED (c) $ .16 $ .18 $ .08 $ .04
=========== =========== ============ ============
SHARES USED IN COMPUTATION OF NET INCOME
PER SHARE
BASIC (c) 5,214,000 5,203,000 5,352,000 5,459,000
=========== =========== ============ ============
DILUTED (C) 5,913,000 5,924,000 6,173,000 6,312,000
=========== =========== ============ ============
Fiscal Year 2002
----------------
Revenues $11,876 $11,785 $10,380 $10,3582004
Total revenues (a) $ 8,744 $ 8,484 $ 6,290 $ 6,244
Gross profit (a) 2,988 3,200 2,317 2,201(b) 1,903 1,878 939 930
Net income (loss) 962 654 263 (630)
======= ======= ======= =======$ 744 $ 856 $ 237 $ 57
=========== =========== ============ ============
Per share information
Net income (loss) per share
Basic (b) $.14 $.09 $.04 $(.09)
==== ==== ==== =====(c) $ .14 $ .16 $ .04 $ .01
=========== =========== ============ ============
Diluted (b) $.14 $.09 $.04 $(.09)
==== ==== ==== ======(c) $ .14 $ .15 $ .04 $ .01
=========== =========== ============ ============
Shares used in computation of net income
(loss)
per share
Basic (b) 7,065,000 7,065,000 7,038,000 7,024,000
========= ========= ========= =========(c) 5,370,000 5,313,000 5,286,000 5,255,000
=========== =========== ============ ============
Diluted (b) 7,084,000 7,080,000 7,062,000 7,107,000
========= ========= ========= =========
Fiscal Year 2001
----------------
Revenues $12,899 $12,666 $11,418 $10,191
Gross profit (a) 3,423 3,457 2,821 2,568
Net income (loss) 745 933 145 (217)
======= ======= ======= =======
Per share information
Net income (loss) per share
Basic (b) $.11 $.13 $.02 $(.03)
==== ==== ==== =====
Diluted (b) $.11 $.13 $.02 $(.03)
==== ==== ==== =====
Shares used in computation of net income (loss)
per share
Basic (b) 7,040,000 7,065,000 7,065,000 7,065,000
========= ========= ========= =========
Diluted (b) 7,044,000 7,155,000 7,065,000 7,130,000
========= ========= ========= =========
(a) Gross profit represents the difference between sales and the cost sales.
(b) The sum of the quarters does not equal the full year per share amounts
included in the accompanying consolidated statements of operations due to
the effect of the weighted average number of shares outstanding during the
fiscal years as compared to the quarters.
(c) 5,478,000 5,593,000 5,742,000 5,901,000
=========== =========== ============ ============
F-41(a) Total revenues and gross profit were adjusted from amounts previously
reported on Form 10Q's to reflect a reclassification of operations of one
restaurant to discontinued operations in the fiscal year ended March 27,
2005.
(b) Gross profit represents the difference between sales and cost of sales.
(c) The sum of the quarters does not equal the full year per share amounts
included in the accompanying consolidated statements of operations due to
the effect of the weighted average number of shares outstanding during the
fiscal years as compared to the quarters.
F-50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To
Nathan's Famous, Inc. and Subsidiaries:
We have audited, in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements of Nathan's
Famous, Inc. and subsidiaries, included in this Form 10-K and have issued
our report thereon dated June 14, 2001. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The accompanying schedule is the responsibility of the Company's
management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
/s/Arthur Andersen LLP
Melville, New York
June 14, 2001
This Report of Independent Certified Public Accountants on Schedule is a copy of
a previously issued Arthur Andersen LLP ("Andersen") report and has not been
reissued by Andersen. The inclusion of this previously issued Andersen report is
pursuant to the "Temporary Final Rule and Final Rule: Requirements for Arthur
Andersen LLP Auditing Clients," issued by the U.S. Securities and Exchange
Commission in March 2002. Note that this previously issued Andersen report
refers to the Schedule as of and for the fifty-two weeks ended March 25, 2001
and March 26, 2000.
F-42
Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Fifty-two weeks ended March 27, 2005, March 28, 2004 and March 30, 2003
(in thousands)
COL. AC
----------------------------
COL. B (1) (2)
---------- Additions COL. CE
COL. A Balance at charged to Additions COL. D COL. E-------------
- ------------------------------------------------------ --------- ------------------------ ---------- ------------
(1) (2)
Additions
Balance charged Additions
at to charged to Balance at------------------------------------- beginning costs and charged to ---------- Balance at
Description of period expenses other accounts Deductions end of period
Description of period expenses accounts
- ------------------------------------------------------ --------- -------------------------------------------------------------- ---------- ---------------------- -------------- ---------- -------------
Fifty-threeFIFTY-TWO WEEKS ENDED MARCH 27, 2005
ALLOWANCE FOR DOUBTFUL ACCOUNTS -
ACCOUNTS RECEIVABLE $ 328 $ 13 $ 17(b) $ 181(a) $ 177
====== ======= ======= ======== ==========
LEASE RESERVE AND TERMINATION COSTS $ 532 $ - $ - $ 334(c) $ 198
====== ======= ======= ======== ==========
Fifty-two weeks ended March 31, 2002
--------------------------------------28, 2004
Allowance for doubtful accounts -
notes and
accounts receivable $ 880418 $ 267- $ 27(c)- $ 530(a)90(a) $ 644328
====== ====== ===== ====== ============= ======= ======== ==========
Lease reserve and termination costs $ 678529 $ 3080 $ - $ 372(f)77(c) $ 336532
====== ====== ===== ====== ============= ======= ======== ==========
Fifty-two weeks ended March 25, 2001
------------------------------------30, 2003
Allowance for doubtful accounts -
notes and
accounts receivable $ 809644 $ 19182 $ 27 (c)- $ 147 (a)308(a) $ 880418
====== ====== ===== ====== ======
Lease reserve and termination costs $974 $ 463 $ 801 (d) $1,560 (f) $ 678
====== ====== ===== ====== ======
Fifty-two weeks ended March 26, 2000
------------------------------------
Allowance for doubtful accounts - notes and 404 (e)
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accounts receivable $ 467 $ 895 $ 32 (c) $ 989 (a) $ 809
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274 (e)
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Lease reserve and termination costs $ 336 $ 209 $ - $ 19116(c) $ 660 (d) $ 151 $ 974529
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(a) Uncollectible amounts written off
(b) Uncollectible advertising fund receivables
(c) Provision charged to advertising fund
(d) Lease termination charge to purchase accounting
(e) Assumed as part of the Miami Subs acquisition
(f) Payment of lease termination and other costs
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F-43(a) Uncollectible amounts written off
(b) Provision charged to advertising fund
(c) Payment of lease termination and other costs
F-51