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 30, 200327, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______ to_______from_____ to_____
Commission File No. 0-3189
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 incorporation or organization) (I.R.S. Employer Identification No.)
1400 Old Country Road, Westbury, New York 11590
- -------------------------------------------------------------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] 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 6, 2003the last day of the Registrant's most
recently completed second fiscal quarter - September 26, 2004 was approximately
$19,479,901.$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 6, 2003,20, 2005,
there were 5,366,3645,564,217 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
ITEM 1. BUSINESS
AS USED HEREIN, UNLESS WE OTHERWISE SPECIFY, THE TERMS "WE,As used herein, unless we otherwise specify, the terms "we," "US,"us," "OUR" AND "NATHAN'S" MEAN NATHAN'S FAMOUS, INC. AND ITS SUBSIDIARIES, INCLUDING
MIAMI SUBS CORPORATION, OWNER OF THE MIAMI SUBS BRAND, AND"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.Roasters Corp., OWNER OF THE KENNY ROGERS BRAND.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 continuing to open new franchised restaurants, expanding our
Nathan's Branded Product Program and our 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 co-branding rights to use the Arthur
Treachers' brand within the United States. During 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 30, 2003,27, 2005, our system, consisting of Nathan's Famous, Kenny Rogers
Roasters and Miami Subs restaurants, included 343355 franchised units, including six6
units operating pursuant to management agreements, 126 company-owned units
concentrated in the New York metropolitan area and Florida
and approximately 2,200more than 5,900 branded
product points of sale under our Branded Product Program, located in 4146 states,
the District of Columbia and 1213 foreign countries.
We plan to 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, , open new franchised outlets in
traditional or captive market environments, expand the Nathan's retail licensing
programs and continue to introduce co-branding opportunitiesco-brand within the existingour 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.
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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 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 8789 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 designs 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
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.
2
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, gyros on pita bread, cheesesteaks and
chicken wings.
Miami Subs restaurants feature a distinctive decor unique to the Miami
Subs concept. The exterior of free-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
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competitors. At March 30, 2003, 8927, 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 that maintain drive-thru service.
Currently, 8771 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 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.
3
The Kenny Rogers Roasters restaurant system consists primarily of
approximately 95 restaurants operating internationally and 90 co-branded
representations within our Nathan's and Miami Subs restaurant systems
domestically.
Franchise Operations
At March 30, 2003,27, 2005, our franchise system, including our Nathan's, Miami
Subs and Kenny Rogers restaurant concepts, consisted of 343355 units operating in
2223 states and 1211 foreign countries.
Today, our franchise system counts among its 149127 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 30, 2003,27, 2005, HMS Host Marriott operated 3435 franchised outlets, including
1512 units at airports, 1518 units within highway travel plazas and 4five units
within malls. Additionally, HMS Host Marriott operates 1736 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,
having to do with franchise fees or advertising requirements. 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.
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 4
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 30, 2003,27, 2005, ("fiscal 2003"2005") franchisees have opened 1326 new Nathan's
franchised units in the United States and have terminated three 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. Additionally, 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 ten 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% of gross sales in traditional
restaurants or 5.0% of gross sales in non-traditional restaurants for the term
of the franchise agreement. Additional charges, based on a percentage of
restaurant sales are contributedrequired 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.
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 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, in 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
5
franchisees to use specified kitchen equipment to maximize consistency 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 evaluates 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 30, 2003,27, 2005, franchisees have opened two new Miami Subs franchised units and
we terminated twono 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, 2004.2006. 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 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
6
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-payment of
royalties, sale of unauthorized products, bankruptcy or conviction of a felony.
During the fiscal year ended March 30, 2003, two27, 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 30, 2003,27, 2005, we operated 8six company-owned Nathan's units,
including one seasonal location, in New York. Company-owned units currently
range in size from approximately 440 square feet to 10,000 square feet and 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 contemporary 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 leased space in certain Home Depot
Improvement Centers to operate Nathan's restaurants. The term of each Home Depot
agreement was five years from the date on which the restaurant opens, with one
five year renewal option. In August 2002, the companyNathan's received written notice from
Home Depot U.S.A., INC. ("Home Depot") that Home Depot terminated eight license agreementsLicense Agreements with the company pursantNathan's
pursuant to which the companyNathan's operated Nathan's Resturantsrestaurants in certain Home Depot
improvement centers.Improvement Centers. In accordance with the termination notices, Nathan's ceased
its operations in those locations before FeburaryFebruary 20, 2003.
Company-owned units currently range in size from approximately 440
square feet to 10,000 square feet and are principally free-standing buildings.
All restaurants, except our seasonal boardwalk location, have seating to
accommodate between 60 and 350 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.
Company-owned Miami Subs Restaurant Operations
As ofDuring the fiscal year ended March 30, 2003,27, 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 currently rangeranged in size from approximately
2,500 square feet to 4,000 square feet with seating capacity for approximately
90 guests. On
March 31, 2003, oneAt present, we do not intend to open any new company-operated restaurant was sold to a franchisee and we
are presently seeking to franchise the remaining restaurants. On June 13, 2003,
we entered into an agreement whereby we expect to sell one company-owned
restaurant and enter into to management agreement for another company-owned
restaurant with a franchisee.
Commencing January 2000, we introduced a re-engineered 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 30, 2003, we ceased operating the Kenny Rogers Roasters
restaurants in Rockville Centre and Commack, New York. These units were
traditional free-standing buildings, each with a drive thru.
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-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 Development
As of March 30, 2003,27, 2005, our franchisees operated 91106 units in 1211 foreign
countries having significant representationsoperations within Malaysia and the Philippines. The
vast majority of foreign operations consist of approximately 95 Kenny Rogers
Roasters units, although our Nathan's restaurant concept also has 11 foreign
franchise operations. During the current fiscal year, our international
franchising program opened oneseven Nathan's restaurant in ChinaJapan, three Nathan's in Kuwait and
nineone Kenny Rogers Roasters restaurants as follows: fiverestaurant in Malaysia, three in China and one
in Hong Kong.the Bahamas.
During fiscal 2003,2004, we executed a Master Franchise Agreement and a
Distribution and Manufacturing Agreement for the Nathan's and Miami Subs rights
to Japanin Kuwait and are currently in various stages of negotiations 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, which 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 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 at March 30, 200327, 2005 and their geographical
distribution:
Franchise
LocationDomestic Locations Company or License(1) Total
- -------------------------- ------- ------------- -----
Alabama - 4 4
Arizona - 2 2
California - 4 42 2
Connecticut - 6 67 7
Delaware - 1 1
Florida 4 99 103- 91 91
Georgia - 3 3
Idaho4 4
Kentucky - 1 1
Indiana2 2
Maine - 1 1
Maryland - 1 12 2
Massachusetts - 3 3
Michigan - 1 1
Minnesota - 2 21 1
Missouri - 4 43 3
Nevada - 4 4
New Jersey - 42 4241 41
New York 8 57 656 60 66
North Carolina - 11 119 9
Ohio - 4 4
Pennsylvania - 3 35 5
South Carolina - 2 2
8
1 1
Tennessee - 1 1
Texas - 2 21 1
Virginia - 1 13 3
-- --- ---
Domestic Subtotal 12 252 2646 249 255
-- ------- ---
8
International Locations
- -----------------------
BruneiBahamas - 1 1
Canada - 2 2
China - 4 48 8
Cypress - 1 1
Egypt - 4 4
Indonesia - 1 1
Israel - 1 13 3
Hong Kong - 1 12 2
Japan - 7 7
Kuwait - 3 3
Malaysia - 35 3531 31
Philippines - 35 3544 44
Singapore - 4 4
United Arab Emirates - 2 2
-- --- ---
International Subtotal - 91 91106 106
-- --- ---
Grand Total 12 3436 355 -- --- ---361
== === ===
(1) Includes sixAmounts include 6 units operated by third parties pursuant to management
agreements and does not include our Branded Product Program.
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 2003,2005, the Branded Product Program was comprised of approximately 2,200over 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 as 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 products are also offered in the cafeteria at the
House of Representatives and the Kennedy Space Center. Nathan's hot dog was
named an official hot dog of the New
York Yankees for the 2001-2003 baseball seasons. We have recently executed a new
agreement naming Nathan's as the official non-kosher hot dog of the New York Yankees for the 2004-20062001-2006
baseball seasons. Of particular significance is our recent expansion intoIn April 2005, Nathan's was also named an official hot dog of
the convenience
store arena, whereNew York Mets for the 2005 - 2007 baseball seasons.
Additionally, Nathan's hot dogs are currently being offered at a variety
of restaurant 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 encounter new
business opportunities. In
addition to over 1,100 convenience stores
9
(including gas stations),business opportunities. Nathan's is offered in retail environments,
universities, entertainment centers, casinos, airport and travel plazas and on
Amtrak Trains throughout the nation.
Expansion Program
We expect to continue opening new franchised units individually and on
a co-branded basis, expanding product distribution through various means such as
branded products and retail licensing arrangements, developing master
franchising programs in foreign countries and continuing to introduce each
restaurant concepts' signature products through co-branding efforts within our
existing restaurant system.
We anticipate that we will open franchised units individually and
develop new co-branded outlets. We may selectively consider opening new
company-owned units on an opportunistic basis within the New York metropolitan
area or in Southern Florida. Existing company-owned units are 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 expect that our international development efforts will take on added
dimensions as a result of the 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 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.
We will also seek 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 intoto 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 individually and
on a co-branded basis, expanding product distribution through various means such
as branded products and retail licensing arrangements, developing master
franchising programs in foreign countries and continuing to introduce our
restaurant concepts' signature products through co-branding efforts within our
restaurant system.
We anticipate that we will open franchised units individually and develop
new co-branded outlets. We may selectively consider opening new company-owned
Nathan's units on an opportunistic basis. Existing company-owned units are
located in the New York metropolitan area, where we have extensive experience in
operating restaurants. We may consider new opportunities in both traditional and
captive market settings.
We believe that our international development efforts will continue 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, 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.
During fiscal 2004, we test marketed the sale of Nathan's hot 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
also developed additional products exclusively for sale by QVC such as cheese
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 further develop this distribution channel
throughout fiscal 2006.
Co-branding
We believe that there is a an 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 UFOCUniform 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" continued to operate pursuant to their
original 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, we began 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. DuringSince
fiscal 2002, and fiscal 2003, we have continued to co-brand within ourthe Nathan's restaurant system
by adding the
10
Kenny Rogers and Arthur Treacher's brands into Nathan's restaurants. During fiscal 2004,restaurants, and we
intend to continue these co-branding efforts.
10
efforts with new and existing franchisees
in the future.
Currently, the Arthur Treacher's brand is being sold within 125114 Nathan's,
Kenny Rogers Roasters and Miami Subs restaurants, the Nathan's brand is included
on the menu of 8165 Miami Subs and Kenny Rogers restaurants, while the Kenny
Rogers Roasters brand is being sold within 6990 Miami Subs and Nathan's
restaurants.
We believe that our diverse brand offerings compliment each other, which
has enabled us to market franchises of co-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 SFG,Specialty Food Group, Inc.(successor "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, club stores and groceries, thereby providing foods for
off-premises consumption. The SFG 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 $2,091,000$2,451,000 in fiscal 20032005 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 SFG
provided the majority of our fiscal 20032005 retail license revenues.
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 2003, 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 2003 have not been significant.
We concluded an agreement for the sale of Nathan's in-home grills to be
marketed via televised infomercials in late fiscal 2003. Revenues derived under
this agreement were insignificant during the fiscal year. We believe that this
agreement will provide Nathan's additional revenues in fiscal 2004. Also, we may
market selected Nathan's products on QVC and over the Internet.
Additionally, we have reached an agreement with ConAgra to test the
production and retail distribution of Nathan's frozen french fries. We expect
that the product will be first available at Shop Rite supermarkets in the New
York area during the summer of 2003. Future availability shall be determined
based upon the outcome of this test.
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
20032005 and 2002,2004, we earned $274,000$336,000 and $249,000,$288,000, respectively, under these
agreements.
During fiscal 2004, we entered into an agreement with ConAgra to test the
production and retail 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 SFG, Inc. in accordance with
Nathans' recipes, quality standards and proprietary spice formulations. John
Morrell & Company, our licensee prior to 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. Most
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 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 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. 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 2003,2005, 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, SFG 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 SFG increases brand recognition and thereby indirectly
benefits Nathan's restaurants in the areas in which SFG conducts its campaigns.
From time to time, we also participate with SFG 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 are
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 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.
Miami Subs' 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.
Miami Subs' radio advertisements are broadcast
principally in markets where there are sufficient restaurants to benefit from
such advertisements.12
The physical facility of each Miami Subs restaurant represents a key
component of Miami Subs' 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, 20042006 have been waived.
12
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 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.
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.
13
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 30, 2003,27, 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.
EMPLOYEES
At March 30, 2003,27, 2005, we had 484238 employees, of whom 5653 were corporate
management and administrative employees, 5430 were restaurant managers and 374155
were hourly full-time and part-time food-service employees. Food-service
employees at four locations are currently represented by Local 1199 SEIU, New
York's Health & Human Service1102 RWSDU UFCW
AFL-CIO, CLC , Retail, Wholesale and Department Store Union, an affiliate of the AFL - CIO, under various agreementsagreement
which expiredexpires in April 2003.The terms of the expired
contracts remain in force while we are currently negotiating new contracts with
the union.June 2006. We consider our employee relations to be good and
have not suffered any strike or work stoppage for more than 3133 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.
TRADEMARKS
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.
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 53numerous 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 application
with the U.S. Patent and Trademark 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.
14
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.
COMPETITION
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 hot
dogs and licensed packaged foods within
supermarkets, compete primarily on the basis of reputation, flavor, quality and
price. In 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
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 two
restaurant properties consisting of a 15
2,650 sq. ft. Nathan's restaurant, at 86th
Street in Brooklyn, New York located on a 25,000 sq. ft. lot, and a 2,600 sq.
ft. Miami Subs restaurant in Miami, FL located on a 25,000 sq. ft. lot. At March
30, 2003,27, 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 2005 440
Kings Plaza Shopping Center (A) Brooklyn, NY July 2010 4,200
Long Beach Road Oceanside, NY May 2011 7,300
Central Park Avenue Yonkers, NY April 2010 10,000
Hempstead Turnpike Levittown,Broad Hollow Road Farmingdale, NY September 2004 4,100
Broad Hollow Road Farmingdale, NY April 2008 2,200
Miami Subs Restaurants
17th Street (B) Ft. Lauderdale, FL August 2003 3,000
Lauderhill Lauderhill, FL May 2007 4,000
South Miami Miami, FL August 2006 3,500
Lejune and 11(C) Miami, FL September 2007 2,500
A - Restaurant was sold to a franchisee on May 1, 2003.
B - Exercised five year option on June 19, 2003.
C - Restaurant was sold to a franchisee on March 31, 2003.
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 providedprovide for renewal options ranging between five10 and 2520 years upon
expiration of the primecurrent lease.
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 30, 2003,27, 2005, we were the sublessor to 3329 properties pursuant to
these arrangements, 13arrangements; 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 $2,340,000$1,278,000 in fiscal 2003.2005.
16
ITEM 3. 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 SupremeCircuit Court of New York, Westchester County. According to the amended complaint, the
plaintiffs, a minor and her mother, sought 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. The court
16
approved the original settlement and on September 9, 2002, the plaintiffs were
paid $659,000 of which $650,000 had been accrued as of March 31, 2002.
Nathan's Famous was served on January 10, 2003 with a summons in
connection with an action commenced by Mitchell Putterman and Michael Pellegrino
in the Supreme Court of New York, Suffolk County seeking damages of $1,000,000
for claims of breach of contract and fraud in connection with a letter of intent
with the Company's subsidiary, NF Roasters of Commack, Inc. Although the letter
of intent contains specific disclaimer language stating that it did not convey
any rights or obligations and contemplated the execution of a management
agreement, which was never executed, plaintiffs purport nonetheless to have
certain claims in connection therewith. The Company has served a notice of
appearance and demand for a complaint. On March 31, 2003, this action was
dismissed without prejudice by stipulation.
Elizabeth B. Jackson and Joseph Jackson commenced an action, in the
circut court of the fifteenth JudicalFifteenth
Judicial Circuit, Palm Beach County, Florida in September 2001 against Miami
Subs and EKFD corporation,Corporation, a Miami Subs franchaisee ("the franchaisee"franchisee (the "franchisee") claiming
neglegencenegligence in connection with a slip and fall which allegdly occuredallegedly occurred on the
premises of the franchise agreement,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,insured. Miami Subs has denied
any liability to plantiffsplaintiffs 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 subsSubs and has assumed the defense of this action for Miami Subs.
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.,
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 settlement 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 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
ITEM 5. MARKET 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 30, 200327, 2005
First quarter $ 4.316.16 $ 3.355.50
Second quarter 4.00 3.076.30 5.61
Third quarter 3.82 3.048.35 5.86
Fourth quarter 3.70 3.508.39 7.01
Fiscal year ended March 31, 200228, 2004
First quarter $ 3.503.93 $ 2.873.38
Second quarter 3.55 3.104.87 3.48
Third quarter 3.60 3.075.36 4.22
Fourth quarter 3.62 3.215.99 5.00
At June 6, 200320, 2005 the closing price per share for our common stock, as reported
by Nasdaq was $3.63.$9.48.
DIVIDEND POLICY
We have not declared or paid a cash dividend on our common stock since our
initial public 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 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.
SHAREHOLDERS
As of June 6, 2003,20, 2005, we had 822836 shareholders of record, excluding
shareholders whose shares were held by brokerage firms, depositories and other
institutional firms in "street name" for their customers.
1819
ISSUER 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,
under 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 30, 2003:27, 2005:
20
- ------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BEWEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS AND PRICE OF OUTSTANDING OPTIONS AND (EXCLUDING SECURITIES
WARRANTS OPTIONS AND WARRANTS REFLECTED IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------- ----------------------- --------------------------
EQUITY COMPENSATION
PLANS APPROVED BY SECURITY
HOLDERS 1,272,999 $4.5711 413,500
- ------------------------------------------------------------------------------------------------------------------1,031,046 $ 4.0886 203,500
EQUITY COMPENSATION
PLANS NOT APPROVED BY
SECURITY 800,000 $3.5529HOLDERS 632,500 $ 3.3271 -0-
HOLDERS
- --------------------------------------------------------------------------------------------------------------------------- -------- -------
TOTAL 2,072,999 $4.1782 413,500
- ------------------------------------------------------------------------------------------------------------------1,663,546 $ 3.7991 203,500
--------- -------- -------
Warrants
In November 1993, 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 $9.71 per share, representing 105% of the market price of our common
stock on the date of grant, which exercise 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 expires in November 2003.
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
19
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 6, 2003,20, 2005, there were options outstanding to purchase an aggregate
500,000482,500 shares of common stock with a weighted average exercise price of $3.3597,$3.351,
each of which has a term of ten years from its grant date are issued
and outstanding. No options have lapsed sincedate. Since the inception
of the 1998 Plan.Plan, 17,500 options have been exercised and no options have lapsed.
21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FISCAL YEARS ENDED
MARCH 27, MARCH 28, MARCH 30, MARCH 31, MARCH 25,
MARCH 26, MARCH 28,2005 2004 (2) 2003 (2) 2002 (1)(1, 2) 2001 2000 (2)
1999
------------------------------------------------------------------------- -------- --------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Operations Data:
Revenues:
Sales $ 24,92023,296 $ 27,49219,848 $ 29,85223,809 $ 25,60126,400 $ 19,75628,796
Franchise fees and royalties 6,774 6,286 5,977 7,944 8,814 5,906 3,230
License royalties, investment and other income 4,042 3,628 3,033 4,106 3,561
2,343 1,953
------------------------------------------------------------------------- -------- --------- --------- --------
Total revenues 33,930 39,542 42,227 33,850 24,939
-----------------------------------------------------------------34,112 29,762 32,819 38,450 41,171
-------- -------- --------- --------- --------
Costs and Expenses:
Cost of sales 16,750 18,336 19,217 16,460 12,25217,266 14,198 16,012 17,644 18,536
Restaurant operating expenses 5,621 6,559 7,621 7,231 4,8623,063 3,441 5,292 6,221 7,315
Depreciation and amortization 1,314 1,395 1,535 1,142 851918 898 1,270 1,354 1,499
Amortization of intangible assets 263 261 278 888 839 716 384
General and administrative expenses 8,341 7,519 8,600 9,292 8,978
8,222 4,722
Interest expense 49 75 132 256 310 198 1
Impairment of long-lived assets - 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 35,719 37,093 39,240 35,701 23,025
-----------------------------------------------------------------
(Loss) income29,884 26,670 34,608 36,022 38,217
-------- -------- --------- --------- --------
Income (loss) from continuing operations before
income taxes (1,789) 2,449 2,987 (1,851) 1,914
(Benefit) provision (benefit) for income taxes ( 283) 1,057 1,402 (382) (576)
-----------------------------------------------------------------
(Loss)4,228 3,092 (1,789) 2,428 2,954
Provision (benefit) for income taxes 1,482 1,140 (283) 1,049 1,389
-------- -------- --------- --------- --------
Income (loss) from continuing operations 2,746 1,952 (1,506) 1,392 1,585 (1,469) 2,490
-----------------------------------------------------------------
20
1,379 1,565
-------- -------- --------- --------- --------
Discontinued operations
(Loss) income from discontinued operations before
income taxes (15) (98) (206) (238) 35 331 396(217) 68
(Benefit) provision for income taxes (6) (40) (82) (95) 14 132 158
-----------------------------------------------------------------(87) 27
-------- -------- --------- --------- --------
(Loss) income from discontinued operations (9) (58) (124) (143) 21 199 238
-----------------------------------------------------------------
(Loss) income(130) 41
-------- -------- --------- --------- --------
Income (loss) before cumulative effect of accounting
change 2,737 1,894 (1,630) 1,249 1,606 (1,270) 2,728
Cumulative effect of change in accounting principle,
net of tax benefit of $854$ 854 in 2003 - - (12,338) -- -- -- --
------------------------------------------------------------------ -
-------- -------- --------- --------- --------
Net income (loss) income$ 2,737 $ 1,894 ($ 13,968) $ 1,249 $ 1,606
($ 1,270) $ 2,728
========================================================================= ======== ========= ========= ========
Basic income (loss) income per share:
(Loss) incomeIncome (loss) from continuing operations $ 0.52 $ 0.37 ($ 0.25) $ 0.20 $ 0.23 ($ 0.25) $ 0.53
(Loss) income0.22
Income (loss) from discontinued operations - (0.01) (0.03) (0.02) 0.00 0.03 0.05.01
Cumulative effect of change in accounting principle - - (2.06) -- -- -- --
------------------------------------------------------------------ -
-------- -------- --------- --------- --------
Net income (loss) income$ 0.52 $ 0.36 ($ 2.34) $ 0.18 $ 0.23
($ 0.22) $ 0.58
========================================================================= ======== ========= ========= ========
22
Diluted income (loss) income per share:
(Loss) incomeIncome (loss) from continuing operations $ 0.45 $ 0.34 ($ 0.25) $ 0.20 $ 0.23 ($ 0.25) $ 0.52
(Loss) income0.22
Income (loss) from discontinued operations - (0.01) (0.03) (0.02) 0.00 0.03 0.05.01
Cumulative effect of change in accounting principle - - (2.06) -- -- -- --
------------------------------------------------------------------ -
-------- -------- --------- --------- --------
Net income (loss) income$ 0.45 $ 0.33 ($ 2.34) $ 0.18 $ 0.23
($ 0.22) $ 0.57
========================================================================= ======== ========= ========= ========
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
Diluted (3) 6,080 5,678 5,976 7,083 7,098 5,881 4,753
Balance Sheet Data at End of Fiscal Year:
Working capital (deficit)$ 14,009 $ 9,185 $ 5,935 $ 9,565 $ 5,210
($ 322) $ 3,708
Total assets 31,269 27,584 25,886 48,745 51,826 48,583 31,250
Long term debt, net of current maturities 692 866 1,053 1,220 1,789
3,131 0
Stockholders' equity $ 21,356 $ 17,352 $ 16,383 $ 36,145 $ 35,031
$ 33,347 $ 26,348
========================================================================= ======== ========= ========= ========
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
Franchised (4) 161,740 185,389 208,889 152,627 64,178
-----------------------------------------------------------------
Total $ 183,695 $ 212,873 $ 239,835 $ 180,105 $ 86,159
=================================================================
21
======== ======== ========= ========= ========
Number of Units Open at End of Fiscal Year:
Company-owned 6 7 12 22 25
32 25======== ======== ========= ========= ========
Franchised 355 338 343 364 386
415 163
---------- --------- --------- --------- ---------
Total 355 386 411 447 188
========================================================================= ======== ========= ========= ========
Notes 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) On April 1, 1999 Nathan's acquiredResults have been adjusted to reflect the intellectual propertyclosure of Roasters Corp.one restaurant during
the fiscal year ended March 27, 2005 and Roasters Franchise Corp. On September 30, 1999,
Nathan's completed the acquisitionreclassification of Miami Subs Corp. by acquiring the
remaining 70%results of
the outstanding common stock Nathan's did not already
own.that restaurant's operations to discontinued operations.
(3) Common stock equivalents have been excluded from the computation for the
yearsyear ended March 30, 2003 and March 26, 2000 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
aswithin continuing operations and discontinued operations.
23
ITEM 7. MANAGEMENT'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 ourits existing restaurant
system. Currently, the Arthur Treacher's brand is being sold within 125114
Nathan's, Kenny Rogers Roasters and Miami Subs restaurants, the Nathan's brand
is included on the menu of 8165 Miami Subs and Kenny Rogers restaurants, while the
Kenny Rogers Roasters brand is being sold within 6990 Miami Subs and Nathan's
restaurants.
In connection with our acquisition of Miami Subs, we determined that up
to 18 underperforming restaurants would be closed pursuant to our divestiture
plan. To date, we have terminated leases on 16 of those properties, sold one ofAt March 31, 2002, Nathan's owned 22 company-operated restaurants. During
the 22
properties to a non-franchisee and are continuing to market the remaining
property for sale. We also terminated 10 additional leases for properties
outside of the divestiture plan and may terminate additional leases in the
future that were not part of our divestiture plan.
Atfiscal 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 343Nathan's Famous, Kenny Rogers
Roasters and Miami Subs restaurants, included 355 franchised or
licensed units, 12including 6
units operating pursuant to management agreements, 6 company-owned units,
including one seasonal location, within the New York metropolitan area and over 2,200 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 4146 states, the District of Columbia and 1213 foreign countries. At
March 30, 2003,27, 2005, our company-owned restaurant system included eightsix Nathan's units and four Miami
Subs units,
as compared to 16seven Nathan's units, four Miami Subs units and two
Kenny Rogers Roasters units at March 31, 2002.28, 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 No. 142, "Goodwill and Other
Intangible Assets," ("SFAS No. 142")
24
requires that goodwill and intangible assets with indefinite lives will no
longer be amortized but will be reviewedtested annually (or more frequently if impairment indicators arise)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 expensescharges may be
required.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," ("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 No. 144 has 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 $1,367,000
relating to seven restaurants during$25,000.
During the fifty-two weeks ended March 30, 2003.2003, we identified seven restaurants
that had been impaired and recorded impairment charges of approximately
$1,367,000.
Impairment of Notes Receivable
Statement of Financial Accounting Standards 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: a) indications that the borrower is experiencing business
problems, such as operating losses, marginal working capital, inadequate cash
flow or business interruptions; b) whether the loan is secured by collateral
that is not readily marketable; and/or 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 debtor'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 $208,000 relating to two notes and $1,425,000 relating to nine
notes during the fifty-two weeks ended March 28, 2004 and March 30, 2003.2003,
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 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.
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 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
23
are 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("SAB") No. 101,104, "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. In conjunction with our
external risk manager,The self-insurance accrual
at March 27, 2005 and March 28, 2004 was $324,000 and $346,000, respectively.
During the fifty-two weeks ended March 27, 2005, we reversed approximately
$71,000 of previously recorded insurance accruals to reflect 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 relating to prior yearsin conjunction with our external risk manager
and have reversed $196,000 of previously recorded self insurance accruals during the fiscal year ended March 30, 2003 for those
claims on which the Company'sour exposure hashad been settled.
RESULTS OF OPERATIONS
FISCAL YEAR ENDEDEND MARCH 30, 200327, 2005 COMPARED TO FISCAL YEAR ENDED MARCH 31, 200228, 2004
Revenues from Continuing Operations
Total sales from continuing operations decreasedincreased by 9.4%$3,448,000 or $2,572,00017.4% to $24,920,000$23,296,000 for the
fifty-two weeks ended March 30, 200327, 2005 ("fiscal 20032005 period") as compared to
$27,492,000$19,848,000 for the fifty-threefifty-two weeks ended March 31,
200228, 2004 ("fiscal 20022004 period").
Sales from the Branded Product Program increased by 33.8%41.7% to $6,509,000$10,838,000 for the
fiscal 20032005 period as compared to sales of $4,864,000$7,651,000 in the fiscal 20022004 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 18.6%by $741,000 or $4,217,0006.2% to $18,411,000$11,122,000 from
$22,628,000$11,863,000 primarily due to the operation of five fewer company-ownedCompany-owned stores as
compared to the prior fiscal year, and an overall 5.3%which was partly offset by a 4.7% sales
decreaseincrease at our comparable restaurants (consisting of eightsix Nathan's, and four Miami Subs restaurants)including
one seasonal location). The reduction in company-ownedCompany-owned stores is the result of
our franchising three restaurants and sellingentering into two restaurants, one of which was tomanagement agreements
during the State of Florida pursuant to an
order of condemnation.fiscal 2004 period. The financial impact associated with these five
restaurants lowered restaurant sales by $3,294,000$1,237,000 and improved restaurant
operating profits before depreciation by $138,000 versus the fiscal 2004 period.
During the fiscal 2005 period we realized sales of $1,336,000 as compared to
$334,000 in the fiscal 2004 period in connection with our QVC marketing program
which was introduced in September 2003. The majority of the sales generated by
QVC during the fiscal 2005 period were in connection with the "Today's Special
Value" program held on May 20, 2004 featuring Nathan's hot dogs.
Franchise fees and royalties increased by $488,000 or 7.8% to $6,774,000
in the fiscal 2005 period compared to $6,286,000 in the fiscal 2004 period.
Franchise royalties increased by $396,000 or 6.9% to $6,103,000 in the fiscal
2005 period as compared to $5,707,000 in the fiscal 2004 period. This increase
is due primarily to improved contract compliance and higher domestic franchise
sales. Domestic sales increased by 2.2% to $164,925,000 in the fiscal 2005
period as compared to $161,332,000 in the fiscal 2004 period. Comparable
domestic franchise sales (consisting of 175 restaurants) increased by $7,931,000
or 6.3% to $133,141,000 in the fiscal 2005 period as compared to $125,210,000 in
the fiscal 2004 period. At March 27, 2005, there were 355 domestic and
international franchised or licensed restaurants operating as compared to 338
domestic and international franchised or licensed restaurants at March 28, 2004.
During the fifty-two weeks ended March 27, 2005, royalty income from 25 domestic
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 was $355,000 in the fiscal 2005 period as compared to
$376,000 in the fiscal 2004 period. During the fiscal 2005 period, 28 new
domestic franchised units opened as compared to opening 20 new franchised units
and franchising four Company-owned restaurants during the fiscal 2004 period.
Fourteen of the new units that opened during the fiscal 2005 period were
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 domestic 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 2005 period as compared to $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 2005 period as compared to
$2,970,000 in the fiscal 2004 period. This increase is primarily attributable to
higher royalties earned from the sale of Nathan's frankfurters within
supermarkets and club 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 $472,000 in the fiscal 2005 period versus
$459,000 in the fiscal 2004 period. During
27
the fiscal 2005 period, income 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
$149,000 were realized, primarily in connection with the sale of two
Company-owned restaurants to franchisees.
Interest income was $238,000 in the fiscal 2005 period versus $199,000 in
the fiscal 2004 period due primarily to earning higher interest income from our
marketable investment securities and lower interest income on notes receivable
which were determined to be impaired during the fiscal year 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 from $14,198,000 in the fiscal 2004 period. Higher costs of approximately
$2,868,000 were incurred primarily in connection with the growth of our Branded
Product Program. Increased costs were also incurred in connection with our QVC
marketing program and higher commodity costs of both programs during the fiscal
2005 period. During the fiscal 2005 period, restaurant cost of sales were lower
than the fiscal 2004 period by approximately $706,000. Restaurant cost of sales
were lower by approximately $919,000 as a result of operating five fewer
Company-owned restaurants during the fiscal 2005 period. The cost of restaurant
sales at our comparable units as a percentage of restaurant sales was 60.3% in
the fiscal 2005 period as compared to 61.1% in the fiscal 2004 period. This
decrease was the result of lower labor and related costs which were partly
offset by higher food costs. The cost of beef products has continued to increase
since the beginning of fiscal 2004. The cost of hot dogs was approximately 7.1%
higher during the 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 where possible to offset some of the margin pressure during the
second half of fiscal 2004. 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 quarter
of fiscal 2006.
Restaurant operating expenses decreased by $378,000 to $3,063,000 in the
fiscal 2005 period from $3,441,000 in the fiscal 2004 period. Restaurant
operating expenses were lower by $458,000 as a result of operating five fewer
restaurants which were partly offset by higher marketing and insurance costs.
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.
Depreciation and amortization was $918,000 in the 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 $822,000 to $8,341,000 in
the fiscal 2005 period as compared to $7,519,000 in the fiscal 2004 period. The
increase in general and administrative expenses was due primarily to higher
personnel, severance and incentive compensation expenses of approximately
$588,000 and higher corporate insurance expense of approximately $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 $49,000 during the fiscal 2005 period as compared to
$75,000 during the fiscal 2004 period. The reduction in interest expense relates
primarily to the repayment of outstanding loans between the two periods.
28
No notes receivable were determined to be impaired during the fiscal 2005
period. Impairment charge on notes receivable of $208,000 during the fiscal 2004
period represents the write-down of two notes receivable, due to the failure of
the franchisees to make required payments to us.
Provision for Income Taxes
In the fiscal 2005 period, the income tax provision was $1,482,000 or
35.1% of income from continuing operations before income taxes as compared to
$1,140,000 or 36.9% of income from continuing operations before income taxes in
the fiscal 2004 period. 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 one
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 fiscal 2005 and 2004 periods, respectively. Losses before income taxes from
this restaurant were $15,000 and $98,000 during the 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 from continuing operations decreased by 16.6% or $3,961,000 to
$19,848,000 for the fifty-two weeks ended March 28, 2004 ("fiscal 2004") as
compared to $23,809,000 for the fifty-two weeks ended March 30, 2003 ("fiscal
2003"). Company-owned restaurant sales decreased 32.0% or $5,595,000 to
$11,863,000 from $17,458,000 primarily due to the operation of seven fewer
company-owned restaurants as compared to the prior fiscal year. The reduction in
company-owned restaurants is the result of our franchising or entering into
management agreements for six restaurants and selling one restaurant. The
financial impact associated with these seven restaurants lowered restaurant
sales by $5,323,000 and improved restaurant operating profits by $52,000$43,000 versus
fiscal 2003. Sales decreased 2.0% at our comparable company-owned restaurants
(consisting of six Nathan's restaurants, including one seasonal restaurant).
Sales from the Branded Product Program increased by 20.5% to $7,651,000 in
fiscal 2004 as compared to sales of $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 2002 period. During theyear. Additionally, during fiscal 2002 period, approximately $341,0002004,
Nathan's realized sales of $334,000 in restaurant sales were generated during
the additional week of operations.connection with a test marketing program
with QVC.
Franchise fees and royalties decreasedincreased by 24.8%$309,000 or $1,967,0005.2% to $6,286,000
in fiscal 2004 compared to $5,977,000 in the fiscal 2003 period compared to $7,944,000 in the fiscal 2002
period.2003. Franchise royalties
decreasedincreased by $1,409,000$483,000 or 20.8%9.0% to $5,835,000 in fiscal 2004 as compared to
$5,352,000 in fiscal 2003. This increase is due primarily to the royalties
earned from the new units that were opened or franchised during fiscal 2004 and
the full year earnings from units opened during fiscal 2003, periodall of which have
been recognized as compared to $6,761,000 in the fiscal 2002 period. The
majority of this decline is due to the decreaseincome. Additionally, we realized an improvement in the
amount of franchise
sales,unrealizable royalties which were not previously recognized as
revenues, primarily withinin the South Florida marketplace for the Miami Subs brand,
causing an increase in the amount of royalties deemed unrealizable during the
fiscal 2003 period as compared to the fiscal 2002 period. Royalty income was
not recorded from 59 domestic franchised locations during the fiscal 2003
period as compared to 48 domestic franchised locations during the fiscal 2002
period as a result of determining that collectibility of the royalties was not
reasonably assured.2003. Domestic franchise restaurant sales decreasedwere virtually
unchanged, decreasing by 12.8%0.3% to $161,332,000 in fiscal 2004 as compared to
$161,740,000 in the fiscal 2003 period as compared to $185,389,000 in the
fiscal 2002 period.2003. At March 30, 2003, 34328, 2004, 338 franchised or licensed
restaurants were operating as compared to 364343 franchised or licensed restaurants
at March 31, 2002.30, 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
number of unsuccessful units that have closed. Franchise fee income derived from
new openings and our co-branding activities and forfeitures was $625,000$428,000 in the fiscal 2003 period2004 as
compared to $1,183,000$418,000 in fiscal 2003. During fiscal 2004, 40 franchised units
including the fiscal 2002 period. This decrease was attributable to
lower franchise fees earnedfranchising of $247,000,three company-owned restaurants and the reduction in co-branding fees
earnedconversion
of $210,000 and lower forfeitures of $101,000 between the two periods.
Revenues from new unit openingsthree company-owned restaurants into management agreements were lower during the fiscal 2003 periodopened as
compared to the24 franchise openings during fiscal 2002 period although 24 new franchised restaurants were
opened, including our first Nathan's unit in China and nine Kenny Rogers
Roasters units in Foreign Countries, as compared to 18 new franchised
restaurants during the fiscal 2002 period. Franchise fees attributable to new
Kenny Rogers Roasters restaurants is recognized upon payment by the franchisee,
which payments have not been received.2003. During the fiscal 2002 period, the
one-time co-branding initiative was substantially concluded. During the fiscal 2003,
period, weNathan's also earned $207,000 in connection with the termination of two Master
Development Agreements in accordance with their terms due to non-compliancebreaches by the franchisees as compared to $308,000 during the fiscal
2002 period in connection with forfeited area development fees.
24franchisees.
29
License royalties were $2,585,000$2,970,000 in the fiscal 2003 period2004 as compared to $2,038,000$2,585,000
in the fiscal 2002 period. This2003. The majority of this increase is attributable to higher
royalties earnedrevenues from
sales made by SFG, Inc., Nathans' licenseenew license agreements for the sale of Nathan's frankfurters within supermarkets and club stores, the manufacture of
certain proprietary spices and seasonings, the sale of condiments sold underproducts, primarily the Nathan's
brand"Griddle" which was marketed via "infomercial" throughout the year and royaltiesby
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 under a new license agreementon notes receivable which have
been impaired during the fiscal years ended March 28, 2004 and March 30, 2003.
Investment and other income increased by $303,000 to $459,000 in fiscal
2004 versus $156,000 in fiscal 2003. During fiscal 2004, Nathan's recognized net
gains of $206,000 primarily in connection with the Branded Product Program.
Interest income decreasedsale of two company-owned
restaurants to franchisees and additional miscellaneous revenue of $31,000 which
was partially offset by $208,000 to $292,000 in thean increased subleasing loss of $69,000. In fiscal 2003,
period versus $500,000 in the fiscal 2002 period due to lower interest income on
its investments in marketable securities and its notes receivable.
Investment and other income decreased by $1,412,000 to $156,000 in the
fiscal 2003 period versus $1,568,000 in the fiscal 2002 period. During the
fiscal 2003 period, Nathans' investment loss was approximately $206,000 greater
than in the fiscal 2002 period due primarily to differences in performance of
the financial markets during the time that Nathan's maintained its investments
in "trading securities", which "trading securities" were substantially
liquidated in October 2002, as compared to being held for the entire fiscal 2002
period. Nathan's loss from sub-leasing was approximately $28,000 more than in
the fiscal 2002 period. In the fiscal 2003 period,
Nathan's realized a gain of $135,000 in connection with the early termination of
a Branded Product Program sales agreement. During the fiscal 2003, period, Nathan's earnedNathans'
investment loss of approximately $126,000 less miscellaneous income than$244,000 was primarily attributable to our
investment in thelimited partnership, which was liquidated during fiscal 2002 period principally in
connection with its ice cream sales. During the fiscal 2002 period, Nathan's
recognized net gains of $1,226,000 which included $850,000 from the successful
appeal of a condemnation award from the State of Florida and gains primarily in
connection with the sale of two company-owned restaurants and one non-restaurant
property.2003.
Costs and Expenses from Continuing Operations
Cost of sales from continuing operations decreased by $1,586,000$1,814,000 to
$16,750,000$14,198,000 in the fiscal 2003 period2004 from $18,336,000$16,012,000 in the fiscal 2002
period.2003. During the fiscal 2003 period,2004,
restaurant cost of sales were lower than the fiscal 2002 period2003 by approximately
$2,661,000.$3,602,000. Cost of sales were lower by approximately $2,237,000$3,520,000 as a result of
operating fewer company-owned restaurants.restaurants during fiscal 2004. The cost of
restaurant sales at our comparable units as a percentage of restaurant sales was
62.6%61.1% in the fiscal 2003 period2004 as compared to 61.5%60.2% in the fiscal 2002 period2003 due primarily to higher
labor and related costs. Higher
product and other direct costs of approximately $1,075,000$1,461,000 were incurred
primarily in connection with the growth of our Branded Product Program which was partially
offset by lowerand
higher commodity costs during the fiscal 2003 period. During the fiscal
2003 period, commodity prices2004. Commodity costs of our primary meatbeef products
were higher during fiscal 2004 than fiscal 2003. This increase was caused by
reductions in line with
historical normsthe 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
U.S. beef had increased through December 23, 2003 when the first case of bovine
spongiform encephalopathy, otherwise known as comparedBSE in the United States was
reported. Although the export of beef by the United States was significantly
reduced as a result of this finding, Nathan's had not realized a reduction in
the cost of beef during the fourth quarter of fiscal 2004. In response to being at their highest levelsthese
higher costs, Nathan's had increased menu prices in recent years
through mostits company-operated
restaurants by approximately 2.0% and increased prices within its Branded
Product Program to offset some of the twenty-six weeks ended September 23, 2001.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 from continuing operations decreased by $938,000$1,851,000 to $5,621,000$3,441,000 in
the fiscal 2003 period2004 from $6,559,000$5,292,000 in the fiscal 2002 period.2003. Restaurant operating costs were
lower in the fiscal 2003 period2004 by approximately $1,105,000,$1,847,000, as compared to the fiscal 2002 period2003 as
a result of operating seven fewer restaurants.
Depreciation and amortization decreased by $347,000 to $923,000 in fiscal
2004 from $1,270,000 in fiscal 2003. Depreciation expense was lower by
approximately $255,000 as a result of operating fewer restaurants. The reduction in restaurant operating expenses from
operating fewercompany-owned restaurants
was partially offset by higher occupancy and current
insurance costs netthe effect of lower marketing and utility coststhe impairment charges on long-lived assets recorded during
the fiscal 2003
period.
Depreciation and amortization from continuing operations decreased by
$81,000 to $1,314,000 in the fiscal 2003 period from $1,395,000 in the fiscal
2002 period due to our additional capital spending.2003.
Amortization of intangibles decreased by $610,000was $261,000 in fiscal 2004 as compared to
$278,000 in the
fiscal 2003 period from $888,000 in the fiscal 2002 period. Amortization of
intangibles decreased as a result of the adoption of SFAS No. 142 " Goodwill and
Other Intangible Assets" in the first quarter of fiscal 2003. Pursuant to SFAS
No. 142, we have discontinued the amortization of Goodwill, Trademarks, Trade
Names and Recipes.
General and administrative expenses decreased by $692,000$1,081,000 to $7,519,000
in fiscal 2004 as compared to $8,600,000 in the fiscal 2003 period as compared to $9,292,000 in the fiscal 2002 period.2003. The decrease in general
and administrative expenses was due primarily to lower litigationpersonnel and incentive
compensation expense of approximately $450,000,$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 $185,000,$99,000, lower compensation and related expensesun-leased property
expense of approximately $106,000$86,000 and lower travel expensesthe expense reversal from the settlement of
$106,000 which were partly offset by
higher insurance costsa disputed claim of 25
approximately $172,000.$50,000.
Interest expense was $132,000$75,000 during the fiscal 2003 period2004 as compared to $256,000$132,000
during the fiscal 2002 period.2003. The reduction in interest expense relates primarily to the
repayment of outstanding bank debtloans 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 the fiscal 2003 period
represents the write-down relating to seven under-performing stores,
three of which are expected to continue operating.
Impairment charge on notes receivable of $1,425,000 during the fiscal
2003 period relates to the write-down of nine notes receivable.restaurants.
Other expense of $45,000 in thefiscal 2004 represents lease reserves relating
to two vacant properties. Other expense of $232,000 in fiscal 2003 period represents
lease reserves relating to four vacant properties.
Other income of $210,000 in the fiscal 2002
period represents the reversal of a previously recorded litigation provision for
an award that was settled, upon appeal, in our favor.Provision (Benefit) provision for Income Taxes from Continuing Operations
In the fiscal 2003 period,2004, the income tax benefitprovision on income from continuing
operations was $283,000$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 fiscal 2003. The
effective income tax rate was positively impacted in fiscal 2004 as compared to a provision for income taxesresult of
$1,057,000 or 43.2%a tax refund received of income from continuing operations before income taxes in the$62,000 as a result of filing an amended fiscal 2002
period.tax return. The effective income tax rate was lower in the fiscal 2003 period
due in part to the adoption of SFAS No. 142 which requires that goodwill no
longer be amortized. Such goodwill amortization was not tax deductible by
Nathan's which increased the effective tax rate in prior years.
Discontinued Operations
During the fiscal 2003 period,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
removed from Continuing Operations and are presented as Discontinued Operations
for all prior periods presented. Fiscal 2003 included the results of operations
of eight Company-ownedcompany-owned restaurants, all of which were abandoned by March 30,
2003, including seven which were abandoned in connection with the early lease
terminations of restaurants located in Home Depot early lease terminations.Improvement Centers. Revenues
generated by these eight restaurants were $3,543,000$917,000 during thefiscal 2004 and $4,496,000
during fiscal 2003, period as compared to $4,857,000 during the fiscal 2002 period. Lossesrespectively. Loss before income taxes from these
restaurants werewas $99,000 during fiscal 2004 and $206,000 during the fiscal 2003,
period as compared to $238,000 during the fiscal 2002 period.respectively. The fiscal 2003 loss before tax 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 2003 period.2003.
Cumulative Effecteffect of Changechange in Accounting Principleaccounting principle
In the first quarter fiscal 2003, period, Nathan'swe adopted SFAS No. 142, "Goodwill"Accounting for
Goodwill and Other Intangibles." In connection with the implementation of this
new standard, 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 tax.
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED TO FISCAL YEAR ENDED MARCH 25, 2001
Revenues from Continuing Operations
Total sales from continuing operations decreased by 7.9% or $2,360,000OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to $27,492,000 for the fifty-three weeks ended March 31, 2002 ("fiscal 2002
period") as compared to $29,852,000 for the fifty-two weeks ended March 25, 2001
("fiscal 2001 period"). Sales from the Branded Product Program increased by
26.2% or $1,011,000 to $4,864,000 for the fiscal 2002 period as compared to
sales of $3,853,000 in the fiscal 2001 period. Company-owned restaurant sales
decreased 13.0% or $3,371,000 to $22,628,000 from $25,999,000 primarily due to
operating nine fewer company-owned stores as compared to the prior fiscal period
and lower sales at the new restaurant that began operating during the fiscal
2001 period. These reductions were partially offset by sales during the fiscal
2002 period from a restaurant that was closed for renovation during the fiscal
2001 period and increased sales at the Coney Island restaurant during the summer
season. Fiscal 2002 was
26
a 53 week reporting period while fiscal 2001 was a 52 week reporting period.
Approximately $362,000 in restaurant sales were generated during the additional
week of operations. The unit reduction was the result of our franchising 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. The financial impact associated
with these nine restaurants lowered restaurant sales by $3,749,000 and improved
restaurant operating profits by $30,000 versus the fiscal 2001 period, excluding
any one time gains or royalties to be received from restaurants sold to
franchisees. Comparable restaurant sales (consisting of nine Nathan's and four
Miami Subs restaurants that have been operating for 18 months or longer as of
the beginning of the fiscal year) during the comparable 52 week period increased
by 3.3% versus the fiscal 2001 period.
Franchise fees and royalties decreased by 9.9% or $870,000 to
$7,944,000 in the fiscal 2002 period compared to $8,814,000 in the fiscal 2001
period. Franchise royalties decreased by $1,299,000 or 16.1% to $6,761,000 in
the fiscal 2002 period as compared to $8,060,000 in the fiscal 2001 period.
Domestic franchise restaurant sales decreased by 11.2% to $185,389,000 in the
fiscal 2002 period as compared to $208,889,000 in the fiscal 2001 period. The
majority of this decline was due to fewer franchised restaurants operating
during the fiscal 2002 period as compared to the fiscal 2001 period. During the
initial months subsequent to September 11, 2001, we 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 was an increase in the amount of royalties deemed to
be unrealizable. At March 31, 2002, 364 franchised or licensed restaurants were
operating as compared to 386 franchised or licensed restaurants at March 25,
2001. Franchise fee income derived from new openings and co-branding was
$875,000 in the fiscal 2002 period as compared to $754,000 in the fiscal 2001
period. This increase was primarily attributable to the fees earned from the
co-branding initiative within the existing restaurant system. During the fiscal
2002 period, 18 new franchised or licensed units opened and 47 units were
co-branded. During the fiscal 2002 period we realized $308,000 in connection
with forfeited development fees.
License royalties were $2,038,000 in the fiscal 2002 period as compared
to $1,958,000 in the fiscal 2001 period. This increase was comprised of higher
royalties earned from sales by SFG, Inc., Nathans' licensee for the sale of
Nathan's frankfurters within supermarkets and club stores.
Interest income was $500,000 in the fiscal 2002 period versus $537,000
in the fiscal 2001 period which was due primarily to earning lower interest
rates on our investments due the changes in the marketplace.
Investment income was $1,568,000 in the fiscal 2002 period versus
$1,066,000 in the fiscal 2001 period. During the fiscal 2002 period, Nathan's
recognized net gains of $1,226,000 in connection with the sale of two
company-owned restaurants and a third non-restaurant property. During the fiscal
2002 period, Nathans' investment loss was approximately $384,000 less than in
the fiscal 2001 period due primarily to differences in performance of the
financial markets between the two periods. In the fiscal 2001 period, Nathan's
recognized income of approximately $479,000 in connection with the introduction
of a consolidated food distribution agreement and earned a $500,000 transfer fee
in connection with a change in ownership of Nathan's licensee, SFG, Inc.
Costs and Expenses from Continuing Operations
Cost of sales from continuing operations decreased by $881,000 to
$18,336,000 in the fiscal 2002 period from $19,217,000 in the fiscal 2001
period. During the fiscal 2002 period, restaurant cost of sales were lower than
the fiscal 2001 period by approximately $1,980,000. Restaurant cost of sales
were reduced by approximately $2,423,000 as a result of operating fewer
company-owned restaurants. Additionally, lower cost of sales at one of the Kenny
Rogers Roasters restaurants opened last year partly offset the higher costs at
our comparable restaurants. Notwithstanding the lower costs and expenses of the
Kenny Rogers Roasters restaurant, this restaurant continued to underperform.
Consequently, we decided to sell the Kenny Rogers Roasters restaurant in
Rockville Centre, New York in fiscal 2003. The cost of restaurant sales at our
comparable units as a percentage of restaurant sales was 62.1% in the fiscal
2002 period as compared to 60.9% in the fiscal 2001 period due primarily to
higher labor and related costs. Higher costs of approximately $1,100,000 were
incurred in connection with the growth of our Branded Product Program and higher
product costs incurred for much of the fiscal 2002 period. During the first
twenty-six weeks 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.
27
Restaurant operating expenses from continuing operations decreased by
$1,062,000 to $6,559,000 in the fiscal 2002 period from $7,621,000 in the fiscal
2001 period. Restaurant operating costs were lower in the fiscal 2002 period by
approximately $1,357,000, as compared to the fiscal 2001 period as a result of
operating fewer restaurants. Restaurant operating expenses of the Kenny Rogers
Roasters restaurant opened last year were $40,000 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 $330,000 at the comparable restaurants which were
primarily driven by higher marketing and insurance costs.
Depreciation and amortization from continuing operations decreased by
$140,000 to $1,395,000 in the fiscal 2002 period from $1,535,000 in the fiscal
2001 period. Lower depreciation expense of operating fewer company-owned
restaurants during the fiscal 2002 period versus the fiscal 2001 period was
partially offset by additional depreciation expense attributable to fiscal
2001'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 increased as a result of fiscal 2001's final purchase price
allocation of the Miami Subs acquisition.
General and administrative expenses increased by $314,000 to $9,292,000
in the fiscal 2002 period as compared to $8,978,000 in the fiscal 2001 period.
The increase in general and administrative expenses was due primarily to higher
legal and professional expenses of approximately $544,000, including a
litigation expense of $450,000, and higher bad debts of approximately $76,000
which were partly offset by lower personnel and incentive compensation expense
of approximately $389,000.
Interest expense was $256,000 during the fiscal 2002 period as compared
to $310,000 during the fiscal 2001 period. The reduction in interest expense
relates primarily to the repayment of outstanding debt between the two periods.
Impairment charges on long-lived assets from continuing operations of
$392,000 during the fiscal 2002 period and $127,000 during the fiscal 2001
period reflect write-downs relating to one under-performing store in the fiscal
2002 period and one under-performing store in the fiscal 2001 period.
Impairment charges on notes receivable of $185,000 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 2002 period represents the
reversal of a previously recorded litigation provision for an award that was
settled, upon appeal, in our favor. Other expense of $462,000 during the fiscal
2001 period relates primarily to lease termination expenses of units that were
not part of the final divestiture plan of $463,000.
Provision for Income Taxes from Continuing Operations
In the fiscal 2002 period, the provision for income taxes from
continuing operations was $1,057,000 or 43.2% as compared to $1,402,000 or
46.9% of income from continuing operations before income taxes in the fiscal
2002 period.
Discontinued Operations
Discontinued operations is comprised of eight Company-owned
restaurants, all of which were abandoned during fiscal 2003, including seven
which were abandoned in connection with the Home Depot early lease terminations.
Revenues generated by these eight restaurants were $4,857,000 during the fiscal
2002 period as compared to $4,947,000 during the fiscal 2001 period. Loss before
income taxes from these restaurants was $238,000 during the fiscal 2002 period
as compared to income before income taxes of $35,000 during the fiscal 2001
period.off-balance sheet arrangements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 30, 200327, 2005 aggregated $1,415,000,$2,935,000,
decreasing by $419,000$514,000 during the fiscal 2003
28
2005 period. At March 30, 2003,27, 2005,
marketable securities and investment in limited
partnership decreasedincreased by $4,196,000$4,164,000 from March 31, 200228, 2004 to $4,623,000$11,641,000
and net working capital decreasedincreased to $5,935,000$14,009,000 from $9,565,000$9,185,000 at March 31, 2002.
During fiscal 2003,28,
2004.
Nathan's liquidated its investment in limited partnership
and invested the proceeds with its other marketable securities.
Cash provided byearned cash from operations of $2,296,000$3,308,000 in the fiscal 20032005
period isdue primarily attributable to net lossincome of $13,968,000,$2,737,000 and non-cash chargesexpenses of
$17,482,000, including the cumulative effect of accounting change of
$12,338,000, depreciation and amortization of $1,907,000, impairment charges on
long-lived assets$1,406,000 which was partly reduced by increased accounts receivable and notes
receivable of
$2,792,000, amortization31
$1,370,000 resulting primarily from higher Branded Product Program sales and
increased royalties.
We invested cash of intangible
assets$4,799,000 of $278,000, provisionwhich $4,553,000 resulted from the net
purchase of available for doubtful accounts of $82,000 and amortization
of bond premium of $85,000. Changessale securities. Nathan's also invested $588,000 in
the other assets and liabilities
consisted of decreases in marketable securities and investment in limited
partnership of $981,000, prepaid expenses and other current assets of $627,000,
inventories of $203,000, accounts payable and accrued expenses of $1,647,000,
other liabilities of $577,000 and deferred franchise fees of $205,000.
Cash provided by investing activities of $3,696,000 incapital expenditures during the fiscal 2003
period is comprised primarily2005 period. We also received repayments
on notes receivable of $331,000 and proceeds from the sale of available-for-sale
securities of $6,088,000, proceeds from the sale of a restaurant and other fixed assets
of $781,000 and repayments on notes receivable of $273,000 which were
partly offset by the purchases of available-for-sale securities of $2,884,000
and expenditures relating to capital improvements of selected company-owned
restaurants and other fixed asset additions of $562,000.
Cash used in$11,000.
We received cash from our financing activities of $6,411,000$977,000 which is
comprised of proceeds received from the exercise of warrants issued in
connection with the fiscal 2003
period represents repurchasesMiami Subs acquisition and employee stock options of
1,599,547$1,387,000. We repurchased 39,799 shares of common stock at a total
cost of $5,858,000for an aggregate
$237,000 pursuant to our stock buyback program and repayments of notes payable and obligations under capital
leasesalso repaid bank debt in the
amount of $553,000, including the repayment of a mortgage in the
amount of $373,000 on December 31, 2002.approximately $173,000.
On September 14, 2001, Nathan's was authorized to purchase up to one
million shares of its common stock. Pursuant to ourits stock repurchase program, weit
repurchased one million shares of common stock in open market transactions and a
private transaction at a total cost of $3,670,000 through the quarter ended
September 29, 2002. On October 7, 2002, Nathan's was authorized to purchase up
to one million additional shares of its common stock. Through March 30, 2003,27, 2005,
Nathan's purchased 641,238891,100 shares of common stock at a cost of approximately
$2,323,000. Subsequent to$3,488,000 which includes the repurchase of 39,799 shares during the fifty-two
weeks ended March 30, 2003,27, 2005 at a cost of $237,000. As of March 27, 2005, Nathan's
has purchased an additional
57,600a total of 1,891,100 shares of common stock at a cost of
approximately $211,000. To date,$7,158,000. Nathan's has purchased a total of 1,698,838 shares of common stock at a cost of
approximately $6,204,000. We expectexpects 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 support the growth of the Branded Product Program in the future
and that we expect to fund those investments from our operating cash flow. We do not expect tomay incur
significantadditional capital expenditures to develop new company-owned restaurants through March 29, 2004.
Inin connection with our acquisitionthe replacement of Miami Subs, we determined that up
to 18 underperforming restaurants would be closed pursuant to our divestiture
plan. To date, we have terminated leases on 16 of those properties, sold one of
the remaining properties to a
non-franchisee and are continuing to market the
remaining property for sale. The sale of theCompany-owned restaurant was consummated on
October 4, 2002. Since acquiring Miami Subs, we have accrued approximately
$1,461,000 and made payments of approximately $1,273,000 forwhose lease obligations
and termination costs, as part of the acquisition, for units having total future
minimum lease obligations of $7,680,000 that had remaining lease terms of one
year up to approximately 17 years. 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.expired in September 2004.
There are currently 3329 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
all costs associated with these properties including: rent, property taxes and
insurance. Additionally, we guaranteed financing on behalf of certain
franchisees with two third-party lenders. Our maximum obligation for loans
funded by the lenders as of March 30, 200327, 2005 was approximately $1,004,000.$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.
The following schedules represent Nathan's cash contractual obligations
and the expiration of other contractual commitments by maturity (in thousands):
29
Payments Due by Period
----------------------------------------------
Less than
Cash Contractual Obligations Total 1 Year 1 - 3 Years 4-5 Years After 5 Years
- ---------------------------- ----------------------------------------- ------- --------- ----------- --------- -------------
Long-Term Debt $ 1,167819 $ 167 $ 333 $ 333319 $ 334-
Capital Lease Obligations 59 6 1447 7 17 2221 2
Employment Agreements 1,071 733 338 -- --1,509 572 500 437 -
Operating Leases 25,657 4,204 8,041 6,885 6,52714,887 3,587 6,174 3,373 1,753
------- ------- ------- ------- ---------------- ----------- --------- ---------
Gross Cash Contractual Obligations 27,954 5,110 8,726 7,235 6,88317,262 4,333 7,024 4,150 1,755
Less: Sublease Income 12,606 1,969 3,744 3,072 3,8219,115 2,001 3,508 2,043 1,563
------- ------- ------- ------- ---------------- ----------- --------- ---------
Net Cash Contractual Obligations $15,348 $ 3,1418,147 $ 4,9822,332 $ 4,1633,516 $ 3,0622,107 $ 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 $ 1,004325 $ 363123 $ 408202 $ 233 --- -
--------- ------- ------- ------- ------- ------------------ ---------- -------------
Total Commercial Commitments $ 1,004325 $ 363123 $ 408202 $ 233 --- -
========= ======= ======= ======= ======= ================== ========== =============
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 never borrowed any funds
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. However, due toNotwithstanding the changing compositioncontinued growth of our Branded Product
Program and the reduced number of our restaurants, we believe that future
revenues and profits will continue to be highest during our first two fiscal
quarters with the fourth fiscal quarter representing the slowest period.
IMPACT OF INFLATION
During the past several years, our commodity costs have remained
relatively stable. As such, weInflationary Impact
We believe that general inflation has not materially impacted earnings
during the past three years. Nevertheless, during that period of time. However, duringtime, 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 half ofquarter fiscal 2006, the fiscal 2002 period, commodity pricesprice of our primary meatbeef products were at
their highest levels in recent years. These costs were in line withhas 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. In addition, during fiscal 2004 and fiscal 2005 we have
realized the fiscal 2003 period. We also experienced increasedimpact of higher oil prices in the form of higher distribution
costs for
utilities and insurance during the fiscalutilities. Further, in 2002 and 2003 periods. Last year, various Federal and New York State
legislators proposed changes to the minimum wage requirements, however, none of
the proposals were enacted. WeAlthough we only operate six Company-owned
restaurants, we believe that significant 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 PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143").
SFAS No. 143 addresses financialItem 7A. Qualitative 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
30
after June 15, 2002. Nathan's has evaluated the effect of adoption on its
financial position and results of operations, and it is not expected to have a
material impact on the financial position and results of operations of the
Company.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No.
145 eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current criteria for extraordinary classification. Additionally, any gain or
loss on extinguishment of debt that was classified as an extraordinary item in
prior periods presented that does not meet the criteria in APB Opinion No. 30
for classification as an extraordinary item shall be reclassified. In addition,
SFAS No. 145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. SFAS
No. 145 also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the changes related
to lease accounting will be effective for transactions occurring after May 15,
2002. SFAS No. 145 has not had, and is not expected to have a material impact on
the financial position and results of operations of the Company.
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit
or Disposal Activities," which addresses accounting for restructuring and
similar costs. SFAS No. 146 supersedes previous accounting guidance, principally
Emerging Issues Task Force ("EITF") Issue No. 94-3. SFAS No. 146 requires that
the liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF No. 94-3, a liability for
an exit cost was recognized at the date of a company's commitment to an exit
plan. SFAS No. 146 also establishes that the liability should initially be
measured and recorded at fair value. SFAS No. 146 is effective for disposal
activities initiated after December 31, 2002. The adoption of SFAS No. 146 did
not have a material impact on the financial position and results of operations
of the Company.
In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure" which addresses financial accounting
and reporting for recording expenses for the fair value of stock options. SFAS
No. 148 provides alternative methods of transition for a voluntary change to
fair value based method of accounting for stock-based employee compensation.
Additionally, SFAS No. 148 requires more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. The provisions of this Statement are effective for fiscal years
ending after December 15, 2002, with early application permitted in certain
circumstances. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. The adoption of SFAS No. 148 had no impact on the financial
position and results of operations of the Company.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," which amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 except for the provisions that were cleared by the
FASB in prior pronouncements. The Company is currently evaluating the effect of
the adoption of SFAS No. 149 on its financial position and results of
operations.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS No. 150"), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. This Statement shall be effective for financial instruments entered
into or modified after May 31, 2003, and otherwise shall be effective for the
year ended December 31, 2003. The Company is currently evaluating the effect of
the adoption of SFAS No. 150 on its financial position and results of
operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No.
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires
that upon issuance of a guarantee, a guarantor must recognize a liability for
the fair value of an obligation assumed under a
31
guarantee. FIN No. 45 also requires additional disclosures by a guarantor in its
interim and annual financial statements about the obligations associated with
guarantees issued. The recognition provisions of FIN No. 45 are effective for
any guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements for periods ending after
December 15, 2002. The adoption of FIN No. 45 did not have a material impact on
the Company's financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46
("Fin No. 46") "Consolidation of Variable Interest Entities." In general, a
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in activities on behalf of another
company. Until now, a company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN No. 46 changes that by requiring a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. FIN No. 46's
consolidation requirements apply immediately to variable interest entities
created or acquired after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply to all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company has adopted FIN No. 46
effective January 31, 2003. The Company does not anticipate that the adoption
of FIN No. 46 will have a material impact on the Company's consolidated
financial condition or results of operations taken as a whole.
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: 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-looking statements with the words "believe," "intend," "plan," "expect,"
"anticipate," "estimate," "will," "should" and similar expressions.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative 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 30, 2003,27, 2005, Nathans' cash and cash equivalents aggregated $1,415,000.$2,935,000.
Earnings on these cash and cash equivalents would increase or decrease by
approximately $3,500$7,300 per annum for each .25%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 30, 2003,27, 2005, the market
value of
33
Nathans' marketable investment securities aggregated $4,623,000.$11,641,000. Interest
income on these marketable investment securities would increase or decrease by
approximately $11,600$29,100 per annum for each .25%0.25% change in interest rates. The
following chart presents the hypothetical changes in the fair value of the
marketable investmentsinvestment securities held at March 30, 200327, 2005 that are sensitive to
interest rate fluctuations (in thousands):
32
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
-------------------------- Fair ------------------------------------------------------------
(150BPS) (100BPS) (50BPS) Value +50BPS +100BPS +150BPS
----------------------------------------------------------------------------------- -------- -------- ------- ------- ------- -------
Municipal notes and bonds $ 4,84312,284 $ 4,777 $4,712 $4,650 $4,589 $4,53012,064 $ 4,47311,850 $11,641 $11,437 $11,237 $11,042
======== ======== ======== ======= ======= ====== ====== ====== ============= =======
INVESTMENT IN LIMITED PARTNERSHIP
We had invested in a highly liquid investment limited partnership that
invested principally in equity securities. These investments were subject to the
performance of the equity markets. During fiscal 2003, Nathan's liquidated its
investment in limited partnership. Accordingly, Nathan's investment in limited
partnership has no further exposure to the equity markets.
BORROWINGS
The interest rate on our borrowings areis 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 30, 2003,27, 2005, total outstanding debt, including capital leases, aggregated
$1,226,000$866,000 of which $1,167,000$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 .25%0.25%. Nathan's also maintains a $7,500,000 credit
line which
bears interest at the prime rate (4.25% at March 30, 2003)5.75% as of May 17, 2005). The Company has never borrowed
any funds under this line.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 March 2005,
the Bush administration was expected to re-open the Canadian border and resume
importing Canadian beef, which has not occurred. As a result, supply continues
to be tight and prices remain unrelentingly high. Nathan's cost of its hot dogs
was approximately 7.1% higher during the fifty-two weeks ended March 27, 2005
than the fifty-two weeks ended March 28, 2004, which is in addition to an
approximately 14.6% increase over the fifty-two weeks ended March 30, 2003.
Nathan's has already been forced to increase menu prices in its company-operated
restaurants and had 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 30, 200327, 2005 would have increased or decreased cost of sales by approximately
$1,133,000.$1,265,000.
On December 23, 2003, the United States Department of Agriculture ("USDA")
announced that the first case of bovine spongiform encephalopathy, otherwise
known as BSE, or mad-cow disease was discovered in the United States in a single
cow in the State of Washington. Nathan's has obtained written assurances from
its beef processors that Nathan's products have not come from the meat
processing plants associated with the production of products having to do with
this incident. Nathan's demand for its products continues to be strong 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 foreign currencies. As a result, we have not purchased future contracts,
options or other instruments to hedge against changes in values of foreign
currencies and we do not believe fluctuations in the value of foreign currencies
would have a material impact 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 future effects of the first case of 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-looking statements with the words "believe," "intend," "plan," "expect,"
"anticipate," "estimate," "will," "should" and similar expressions.
ADOPTION 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 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 issued 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.
ITEM 8. 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 15, 2002,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 dismissed Arthur Andersen LLP,file or submit under
35
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified by the SEC's rules and 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 report of Arthur Andersen LLP for the year ended March 25, 2001
and does 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 year ended March 25, 2001
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
33
their satisfaction, would have caused it to make a reference to the subject
matterobjectives of the
disagreement in connection with its report.
We did notcontrol 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 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 fiscal year ended
March 25, 2001 and through March 24, 2002, 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.
34reasonable assurance level.
ITEM 9B. OTHER INFORMATION
None
36
PART III
ITEM 10. 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.
ITEM 11. 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.
ITEM 12. 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.
ITEM 13. 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.
ITEM 14. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our Chief
Executive Officer ("CEO"), Chief Operating Officer ("COO")and Chief Financial
Officer ("CFO") the Company's disclosure controls and procedures were evaluated
as of a date 90 days prior to the filing of this report. Based on that
evaluation, the Company's CEO, COO and CFO concluded that the company's
disclosure controls and procedures were effective.
(b) Our CEO, COO and CFO are involved in ongoing evaluations of our
internal controls. There have been no significant changes in our internal
controls or in other factors that could significantly affect our internal
controls subsequent to our last evaluation.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
We were billed by Grant Thornton LLP the aggregate amount of approximately
$146,000$168,000 in respect of fiscal 20032005 and $128,500$149,000 in respect to fiscal 20022004 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
$20,000$0 in respect of fiscal 20032005 and $0$19,000 in respect to fiscal 20022004 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 20032005 and 2002.
35
2004.
ALL OTHER FEES
Grant Thornton LLP did not render any other services, other than as set
forth above, for fiscal 20032005 and 2002.2004. Consequently, aggregate fees billed for
all other services rendered by Grant Thornton LLP for fiscal 20032005 and 20022004 were
$0.
PRE-APPROVAL POLICIES
Our audit committee has not adopted any policies pursuant to which it
has pre-approvedpre-approval policies. Instead,
the Audit Committee will specifically pre-approve the provision by Grant
Thornton LLP of anyall audit orand non-audit services.
Our audit committee approved all of the services provided by Grant
Thornton LLP and described in the preceding paragraphs.
3637
PART IV
ITEM 16.15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) CONSOLIDATED 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 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) EXHIBITS
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 1933 or under the
Securities Exchange Act of 1934 and are herein incorporated by reference.
Exhibit
No. Exhibit
- ------- -------
3.1 Certificate of Incorporation.(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 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,Exhibit
No. Exhibit
- ------- -------
3.1 Certificate of Incorporation. (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 by reference to Exhibit 3.2 to Registration
Statement on Form S-1 No. 33-56976.)
3.3 By-Laws, as amended.
4.1 Specimen Stock Certificate. (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 Specimen Rights Certificate (Incorporated by reference to Exhibit 2
to Form 8-A/A dated December 10, 1999.)
4.1 Specimen Stock Certificate.(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
4 to the Current Report on Form 8-K dated July 14, 1995.)
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.)
3710.7 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 by reference to
Exhibit 10.19 to the Annual Report filed on Form 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 Form 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 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 Form 10-Q for the
fiscal quarter ended December 29, 1996.)
10.14 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 Form 10-Q for the fiscal quarter ended
December 29, 1996.)
10.15 1998 Stock Option Plan. (Incorporated by reference to Exhibit 10.26
to the Annual Report filed on Form 10-K for the fiscal year ended
March 29, 1998.)
10.16 North Fork Bank Promissory Note.(Incorporated by reference to
Exhibit 10.21 to the Annual Report filed on Form 10-K for the fiscal
year ended March 28, 1999.)
10.17 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 Form 10-K for the fiscal year
ended March 26, 2000.)
10.18 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/A
dated December 10, 1999.)
10.19 Amendment No. 1 to Rights Agreement dated as of June 15, 2005
between Nathan's Famous, Inc. and American Stock Transfer and Trust
Company. (Incorporated by reference to Exhibit 10.1 to the Current
Report filed on Form 8-K dated June 15, 2005.)
10.20 Employment Agreement dated as of January 1, 2005 with Howard M.
Lorber.(Incorporated by reference to
39
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 by reference
to Exhibit 10.19 to the Annual Report filed on Form 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 Form 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 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 Form 10-Q for the
fiscal quarter ended December 29, 1996.)
10.14 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 Form 10-Q for the fiscal quarter ended
December 29, 1996.)
10.15 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.)
10.16 1998 Stock Option Plan. (Incorporated by reference to Exhibit 10.26
to the Annual Report filed on Form 10-K for the fiscal year ended
March 29, 1998.)
10.17 North Fork Bank Promissory Note.(Incorporated by reference to
Exhibit 10.21 to the Annual Report filed on Form 10-K for the fiscal
year ended March 28, 1999.)
10.18 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 Form 10-K for the fiscal year
ended March 26, 2000.)
10.19 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/A
dated December 10, 1999.)
10.20 Employment Agreement dated as of January 1, 2000 with Howard M.
Lorber.(Incorporated by reference to Exhibit 10.24 to the Annual
Report filed on Form 10-K for the fiscal year ended March 26, 2000.)
10.21 Marketing Agreement with beverage supplier. (Incorporated by
reference to Exhibit 10.25 to the Quarterly Report filed on Form
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.
21 List of Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP dated June 26, 2003.
99.1 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.
99.2Exhibit 10.01 to the Quarterly Report filed on Form 10-Q for the
fiscal quarter ended December 26, 2004.)
10.21 Marketing Agreement with beverage supplier. (Incorporated by
reference to Exhibit 10.25 to the Quarterly Report filed on Form
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 Consent of Grant Thornton LLP dated 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.
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 Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
None
3840
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 20th23rd day of June,
2003.2005.
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 20th23rd day of June, 2003.2005.
/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
39
CERTIFICATION
I, Howard M. Lorber, Chief Executive Officer, of Nathan's Famous, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Nathan's
Famous, Inc;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 20, 2003 /s/ Howard M. Lorber
--------------------
Howard M. Lorber
Chief Executive Officer
40
CERTIFICATION
I, Wayne Norbitz, President and Chief Operating Officer, of Nathan's
Famous, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Nathan's
Famous, Inc;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 20, 2003 /s/ Wayne Norbitz
-----------------
Wayne Norbitz
President and Chief Operating OfficerCHARLES RAICH
- -----------------------
Charles Raich Director
41
CERTIFICATION
I, Ronald G. DeVos, Chief Financial Officer, of Nathan's Famous, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Nathan's
Famous, Inc;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 20, 2003 /s/ Ronald G. DeVos
-------------------
Ronald G. DeVos
Chief Financial Officer
42
Nathan's Famous, Inc. and Subsidiaries
TABLE OF CONTENTS
Page
--------------
Report of Independent CertifiedRegistered Public Accountants: Grant Thornton LLPAccounting Firm F-2
Report of Independent Public Accountants: Arthur Andersen LLP F-3
Consolidated Balance Sheets F-4F-3
Consolidated Statements of Operations F-5F-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-51
Report of Independent Public Accountants on Schedule F-52F-50
Schedule II - Valuation and Qualifying Accounts F-53
Consent of Independent Certified Public AccountantsF-51
F-1
REPORT OF INDEPENDENT CERTIFIEDREGISTERED PUBLIC ACCOUNTANTSACCOUNTING FIRM
Board of Directors and Shareholders
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of Nathan's Famous,
Inc. (a Delaware Corporation) and subsidiaries (the "Company") as of March 30,
200327,
2005 and March 31, 2002,28, 2004, and the related consolidated statements of operations,
stockholders' equity and cash flows for the fifty-two weeks ended March 27,
2005, March 28, 2004 and March 30, 2003
and the fifty-three weeks ended March 31, 2002.2003. 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.
The financial
statements of the Company for the fifty-two weeks ended March 25, 2001
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those financial statements in their report
dated June 14, 2001.
We conducted our audits in accordance with auditingthe standards generally accepted
inof the United States of America.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 30, 200327, 2005 and March 31, 2002,28, 2004,
and the consolidated results of their operations and their consolidated cash
flows for the fifty-two weeks ended March 27, 2005, March 28, 2004 and March 30,
2003 and the fifty-three weeks ended March 31, 2002 in conformity with accounting principles generally accepted in the United
States of America.
We have also audited Schedule IIOur audit was conducted for the fifty-two weeks ended March 30, 2003
and the fifty-three weeks ended March 31, 2002. In our opinion, this schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information therein.
As described in Notes B and F to the consolidated financial statements, the
Company adopted Statementspurpose of Financial Accounting Standards Nos. 142, "Goodwill
and Other Intangible Assets," ("SFAS No. 142") and 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144") on April 1, 2002.
As described above, the financial statements of the Company for the fifty-two
weeks ended March 25, 2001 were audited by other auditors who have ceased
operations. As described in Notes B and F, these financial statements have been
revised to include the transitional disclosures required by SFAS No. 142 and the
reclassification and disclosures of discontinued operations required SFAS No.
144. Our audit procedures with respect to the disclosures in Note B with respect
to 2001 included agreeing the previously reported net income to the previously
issued financial statements and the adjustments to reported net income
representing amortization expense (including related tax effects) recognized in
that period related to goodwill and intangible assets that are no longer
amortized, as a result of initially applying SFAS No. 142, to the Company's
underlying records obtained from management. We also tested the mathematical
accuracy of the reconciliation of adjusted net income to reported net income and
the related earnings-per-share amounts. Our audit procedures with respect to the
reclassification of the financial statement and the disclosures in Note F with
respect to 2001 included agreeing the amounts reclassified to discontinued
operations to the Company's underlying records obtained from management and
testing the mathematical accuracy of the revision in income from continuing
operations and discontinued operations and the related earnings-per-share
amounts. In our opinion, the reclassification and disclosures for the fifty-two
weeks ended March 25, 2001 contained in the financial statement Notes B and F
are appropriate and have been appropriately applied. However, we were not
engaged to audit, review or apply any procedures to the 2001 financial
statements of the Company other than with respect to such reclassification and
disclosures and, accordingly, we do not expressforming an opinion or any other form of
assurance on the 2001basic
financial statements taken as a whole. /s/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 23, 200327, 2005 (except for Note K - 3, as to
which the date is June 15, 2005)
F-2
THE BELOW REPORT OF ARTHUR ANDERSEN LLP ("ANDERSEN") IS A COPY OF THE PREVIOUSLY
ISSUED REPORT OF ANDERSEN AND THE REPORT HAS NOT BEEN REISSUED BY ANDERSEN.
NOTE THAT THIS PREVIOUSLY ISSUED ANDERSEN REPORT CONTAINS REFERENCES TO CERTAIN
FISCAL YEARS AND PERIODS, WHICH ARE NOT REQUIRED TO BE PRESENTED IN THE
ACCOMPANYING FINANCIAL STATEMENTS AS OF AND FOR THE THREE FISCAL YEARS ENDED
MARCH 30, 2003. AS DISCUSSED IN NOTES B AND F, THE COMPANY HAS REVISED ITS
FINANCIAL STATEMENTS FOR THE FIFTY-TWO WEEKS ENDED MARCH 25, 2001 TO INCLUDE THE
TRANSITIONAL DISCLOSURES REQUIRED BY STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS" AND THE RECLASSIFICATION OF
DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE REQUIRED BY STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 144, "ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS". THE ANDERSEN REPORT DOES NOT EXTEND TO THESE
CHANGES. THE REVISIONS TO THE 2001 FINANCIAL STATEMENTS RELATED TO THESE
TRANSITIONAL DISCLOSURES AND RECLASSIFICATIONS WERE REPORTED ON BY GRANT
THORNTON LLP, AS STATED IN THEIR REPORT APPEARING HEREIN.
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 of March 25, 2001 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.
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 auditing standards generally accepted
in the 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. 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 audits provide 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 25, 2001 and March 26, 2000, and the results of their
operations and their cash flows for each of the three fiscal years ended March
25, 2001 in conformity with accounting principles generally accepted in the
United States.
/s/Arthur Andersen LLP
Melville, New York
June 14, 2001
F-3
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
MARCH 30, 200327, 2005 March 31, 200228, 2004
-------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,4152,935 $ 1,8343,449
Marketable securities and investment in limited partnership 4,623 8,81911,641 7,477
Notes and accounts receivable, net 2,607 2,8083,591 2,352
Inventories 389 592688 743
Assets available for sale 799 1,512688 507
Prepaid expenses and other current assets 642 1,269907 463
Deferred income taxes 2,079 1,747
--------- ---------1,168 1,326
---------- ----------
Total current assets 12,554 18,58121,618 16,317
Notes receivable, net 740 2,277136 313
Property and equipment, net 6,263 8,9254,583 5,094
Goodwill 95 11,08395
Intangible assets, net 3,319 6,0402,800 3,063
Deferred income taxes 2,647 1,5391,792 2,452
Other assets, net 268 300
--------- ---------245 250
---------- ----------
$ 25,88631,269 $ 48,745
========= =========27,584
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of notes payable and capital lease obligations $ 173174 $ 559173
Accounts payable 1,377 1,6192,009 1,950
Accrued expenses and other current liabilities 4,942 6,5065,088 4,836
Deferred franchise fees 127 332
--------- --------338 173
---------- ----------
Total current liabilities 6,619 9,016
Notes7,609 7,132
Note payable and capital lease obligations, less current maturities 1,053 1,220692 866
Other liabilities 1,831 2,364
--------- ---------1,612 2,234
---------- ----------
Total liabilities 9,503 12,600
--------- ---------9,913 10,232
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 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 5,423,9645,549,217 and 7,023,5115,213,901
shares outstanding at March 30, 200327, 2005 and March 31, 2002,28, 2004, respectively 7174 71
Additional paid-in capital 42,665 40,746
40,746Deferred compensation (281) -
Accumulated deficit (18,505) (4,537)(13,874) (16,611)
Accumulated other comprehensive (loss) income 64 -
--------- ---------
22,376 36,280(70) 67
---------- ----------
28,514 24,273
Treasury stock, at cost, 1,641,2381,891,100 and 41,6911,851,301 shares at March 30, 200327, 2005
and March 31, 2002,28, 2004, respectively (5,993) (135)
--------- ---------(7,158) (6,921)
---------- ----------
Total stockholders' equity 16,383 36,145
--------- ---------21,356 17,352
---------- ----------
$ 25,88631,269 $ 48,745
========= =========27,584
========== ==========
The accompanying notes are an integral part of these statements.
F-4F-3
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
FIFTY-TWO Fifty-threeFifty-two Fifty-two
WEEKS ENDED weeks ended weeks ended
MARCH 27, 2005 March 28, 2004 March 30, 2003 March 31, 2002 March 25, 2001
-------------- -------------- --------------
REVENUES
Sales $ 24,92023,296 $ 27,49219,848 $ 29,85223,809
Franchise fees and royalties 6,774 6,286 5,977 7,944 8,814
License royalties 3,332 2,970 2,585 2,038 1,958
Interest income 238 199 292 500 537
Investment and other income 472 459 156
1,568 1,066
---------- --------------------- ----------
Total revenues 33,930 39,542 42,227$ 34,112 29,762 32,819
---------- --------------------- ----------
COSTS AND EXPENSES
Cost of sales 16,750 18,336 19,21717,266 14,198 16,012
Restaurant operating expenses 5,621 6,559 7,6213,063 3,441 5,292
Depreciation and amortization 1,314 1,395 1,535918 923 1,270
Amortization of intangible assets 263 261 278 888 839
General and administrative expenses 8,341 7,519 8,600 9,292 8,978
Interest expense 49 75 132 256 310
Impairment charge on long-lived assets - - 1,367 392 127
Impairment charge on notes receivable - 208 1,425
185 151
Other (income) expense, (income), net (16) 45 232
(210) 462
---------- --------------------- ----------
Total costs and expenses 35,719 37,093 39,24029,884 26,670 34,608
---------- ----------- ---------- (Loss) income----------
Income (loss) from continuing operations before provision
(benefit) provision for income taxes 4,228 3,092 (1,789)
2,449 2,987
(Benefit) provisionProvision (benefit) for income taxes 1,482 1,140 (283)
1,057 1,402
---------- ----------- ---------- (Loss) income----------
Income (loss) from continuing operations 2,746 1,952 (1,506)
1,392 1,585
(Loss) incomeLoss from discontinued operations, net of income tax (benefit)
provisionbenefit
of $(82)($6), $(95)($40) and $14($82) in 2005, 2004 and 2003, 2002 and 2001,
respectively (9) (58) (124)
(143) 21
---------- ----------- ---------- (Loss) income----------
Income (loss) from operations before cumulative effect of
a change in accounting changeprinciple 2,737 1,894 (1,630) 1,249 1,606
Cumulative effect of change in accounting principle, net of tax
benefit of $854 (12,338)($854) in 2003 - - (12,338)
---------- --------------------- ----------
Net income (loss) income$ 2,737 $ 1,894 $ (13,968)
$ 1,249 $ 1,606
========== ===================== ==========
PER SHARE INFORMATION
Basic income (loss) income per share:
(Loss) incomeIncome (loss) from continuing operations $ (.25).52 $ .20.37 $ .23(.25)
Loss from discontinued operations - (.01) (.03) (.02) .00
Cumulative effect of change in accounting principle (2.06) - - (2.06)
---------- --------------------- ----------
Net income (loss) income$ .52 $ .36 $ (2.34)
$ .18 $ .23
========== ===================== ==========
Diluted income (loss) income per share:
(Loss) incomeIncome (loss) from continuing operations $ (.25).45 $ .20.34 $ .23(.25)
Loss from discontinued operations - (.01) (.03) (.02) .00
Cumulative effect of change in accounting principle (2.06) - - (2.06)
---------- --------------------- ----------
Net income (loss) income$ .45 $ .33 $ (2.34)
$ .18 $ .23
========== ===================== ==========
Weighted average shares used in computing net income
(loss) per share
Basic 5,307,000 5,306,000 5,976,000
7,048,000 7,059,000
========== ===================== ==========
Diluted 6,080,000 5,678,000 5,976,000
7,083,000 7,098,000
========== ===================== ==========
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 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-two weeks ended March 27, 2005, March 28, 2004 and March 30, 2003 fifty-three weeks ended March 31, 2002
and fifty-two weeks ended March 25, 2001
(in thousands, except share amounts)
Accumulated
Additional otherOther
Common Common paid-inPaid-in Deferred Accumulated comprehensive
shares stock capital deficit incomeComprehensive
Shares Stock Capital Compensation Deficit Income
--------- ------ ----- ------- ------- ---------------- ------------ ----------- -------------
Balance, March 26, 2000 7,040,196
BALANCE, MARCH 28, 2004 7,065,202 $ 7071 $ 40,66940,746 $ (7,392) - Stock compensation 25,000$ (16,611) $ 67
SHARES ISSUED IN CONNECTION WITH THE
EXERCISE OF WARRANTS 142,855 1 77 - -
Warrants exercised 6856 - - -
-
Net incomeSHARES ISSUED IN CONNECTION WITH EXERCISE
OF EMPLOYEE STOCK OPTIONS 182,260 1 529 - - -
1,606INCOME TAX BENEFIT ON STOCK OPTION EXERCISES - Comprehensive income- 172 - - -
ISSUANCE OF RESTRICTED STOCK AWARD 50,000 1 362 (363) - -
--------- ------ ---------- -------- ------
Balance, March 25, 2001 7,065,202 71 40,746 (5,786) -
Repurchase of treasury stockAMORTIZATION OF DEFERRED COMPENSATION
RELATING TO RESTRICTED STOCK - - - 82 - -
Net income - - - 1,249 -
Comprehensive income - - - - -
--------- ------ ---------- -------- ------
Balance, March 31, 2002 7,065,202 71 40,746 (4,537) -
REPURCHASE OF TREASURY STOCK - - - - - -
UNREALIZED GAIN(LOSSES) ON MARKETABLE
SECURITIES, NET OF DEFERRED INCOME TAXESTAX
(BENEFIT) OF $46($95) - - - - $ 64- (137)
NET LOSSINCOME - - - (13,968)- 2,737 -
COMPREHENSIVE LOSSINCOME - - - - - -
--------- ------ ---------- -------- ------------------ ----------- -------------
BALANCE, MARCH 30, 2003 7,065,20227, 2005 7,440,317 $ 7174 $ 40,746 $(18,505)42,665 $ 64(281) $ (13,874) $ (70)
========= ====== ========== ======== ================== =========== =============
Treasury Stock, at Cost Total
Treasury stock, at cost stockholders'----------------------- Stockholders' Comprehensive
Shares Amount equity income (loss)
------ ------ ------ -----------Equity Income (Loss)
--------- -------- ------------- -------------
Balance, March 26, 2000BALANCE, MARCH 28, 2004 1,851,301 $ (6,921) $ 17,352
SHARES ISSUED IN CONNECTION WITH THE
EXERCISE OF WARRANTS - - $ 33,347
Stock compensation857
SHARES ISSUED IN CONNECTION WITH EXERCISE
OF EMPLOYEE STOCK OPTIONS - - 78
Warrants exercised530
INCOME TAX BENEFIT ON STOCK OPTION EXERCISES - - 172
ISSUANCE OF RESTRICTED STOCK AWARD - - -
Net incomeAMORTIZATION OF DEFERRED COMPENSATION
RELATING TO RESTRICTED STOCK - - 1,606 $ 1,606
-----------
Comprehensive income - - - $ 1,606
--------- ------- ---------- ===========
Balance, March 25, 2001 - - 35,031
Repurchase of treasury stock 41,691 $ (135) (135)
Net income - - 1,249 $ 1,249
-----------
Comprehensive income - - - $ 1,249
--------- ------- ---------- ===========
Balance, March 31, 2002 41,691 (135) 36,14582
REPURCHASE OF TREASURY STOCK 1,599,547 (5,858) (5,858)39,799 (237) (237)
UNREALIZED GAIN(LOSSES) ON MARKETABLE
SECURITIES, NET OF DEFERRED INCOME TAXESTAX
(BENEFIT) OF $46($95) - - 64(137) $ 64(137)
NET LOSSINCOME - - (13,968) (13,968)
-----------2,737 2,737
-------------
COMPREHENSIVE LOSSINCOME - - - $ (13,904)2,600
--------- ------- ---------- ===========-------- ------------- =============
BALANCE, MARCH 30, 2003 1,641,238 $(5,993)27, 2005 1,891,100 $ 16,383(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-TWO Fifty-threeFifty-two Fifty-two
WEEKS ENDED weeks ended weeks ended
MARCH 27, 2005 March 28, 2004 March 30, 2003 March 31, 2002 March 25, 2001
-------------- -------------- --------------
Cash flows from operating activities:
Net income (loss) income$ 2,737 $ 1,894 $ (13,968) $ 1,249 $ 1,606
Adjustments to reconcile net income (loss) income to net cash
Providedprovided by (used in) operating activities
Cumulative effect of change in accounting principle,
net of tax benefit 12,338 - - 12,338
Depreciation and amortization 918 971 1,907 1,661 1,791
Amortization of intangible assets 263 261 278 888 839
Amortization of bond premium 155 127 85
Amortization of deferred compensation 82 - -
Gain on disposal of fixed assets (84) (206) (39) (1,226) -
Stock compensation expense - - 78
Gain on sale of available for sale securities (10) - -(12) (10)
Impairment of long-lived assets - 25 1,367 685 127
Impairment of notes receivable - 208 1,425 185 151
Provision for (recovery of) doubtful accounts 13 (17) 82
267 191Income tax benefit on stock option exercises 172 - -
Deferred income taxes 915 945 (585) 509 313
Changes in operating assets and liabilities:
Marketable securities and investment in limited partnership - - 981 (4,171) (1,651)
Notes and accounts receivable (1,406) 294 2
(26) (1,350)
Inventories 55 (354) 203 (69) 20
Prepaid expenses and other current assets (444) 179 627 (295) (339)
Other assets 5 18 32 104 159
Accounts payable, accrued expenses and other current
liabilities 311 467 (1,647) (2,538) 961
Deferred franchise fees 165 46 (205) (324) (76)
Other liabilities (549) 430 (577) 20 1,329
---------- -------- ------------------
Net cash provided by (used in) operating activities 3,308 5,276 2,296 (3,081) 4,149
---------- -------- ------------------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 1,357 2,497 6,088 - -
Purchase of available for sale securities (5,910) (5,461) (2,884) - -
Lease terminations and other costs in connection with acquisition - - (1,036)
Purchases of property and equipment (588) (449) (562) (2,082) (1,458)
Payments received on notes receivable 331 797 273 812 506
Proceeds from sales of property and equipment 11 489 781 3,348 45
---------- -------- ------------------
Net cash (used in) provided by (used in) investing activities (4,799) (2,127) 3,696 2,078 (1,943)
---------- -------- ------------------
Cash flows from financing activities:
Principal repayments of borrowingnotes payable and capitalized lease
obligations (173) (187) (553) (1,353) (278)
Repurchase of treasury stock (237) (928) (5,858)
(135)Proceeds from the exercise of stock options and warrants 1,387 - -
---------- -------- ------------------
Net cash used inprovided by (used in) financing activities 977 (1,115) (6,411) (1,488) (278)
---------- -------- ------------------
Net change in cash and cash equivalents (514) 2,034 (419) (2,491) 1,928
Cash and cash equivalents, beginning of year 3,449 1,415 1,834 4,325 2,397
---------- -------- ------------------
Cash and cash equivalents, end of year $ 1,4152,935 $ 1,8343,449 $ 4,3251,415
========== ======== ==================
Cash paid during the year for:
Interest $ 13849 $ 26474 $ 317138
========== ======== ==================
Income taxes $ 57522 $ 149253 $ 1,50857
========== ======== ==================
Noncash financing activities:
LoanLoans to franchiseefranchisees in connection with sale of restaurantrestaurants $ - $ 600 $ 44
$ 416 $ 130
========== ======== ==================
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 30, 2003,27, 2005, March 31, 200228,2004 and March 25, 200130, 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 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 previously owned by
the Company.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 30, 2003,27, 2005, the Company's restaurant system, consisting of Nathan's
Famous, Kenny Rogers Roasters and Miami Subs restaurants, included 126
company-owned units concentrated in the New York City metropolitan area, and Florida, 343355 franchised
or licensed units, including 6 units operating pursuant to management
agreements and approximately 2,200over 5,900 branded product points of sale under the Nathan's
Branded
Product Program, located in 4146 states, the District of Columbia, and 1213
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.
F-8
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 2001
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
and cash flows for the fiscal yearyears ended March 27, 2005, March 28,
2004 and March 30, 2003 are all on the basis of a 52-week reporting
period. The results of operations and cash
flows for the fiscal year ended March 31, 2002 are on the basis of a
53-week reporting period. The results of operations and cash flows for
the fiscal year ended March 25, 2001 are 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, lease termination reserves and the
deferred tax valuation allowance.assets.
F-9
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE B (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 30, 200327, 2005 and March 31, 2002, respectively, and
is included in cash and cash equivalents.28, 2004.
5. Impairment of Notes Receivable
Nathan's follows the guidance in Statement of Financial Accounting
Standards ("SFAS") No. 114 ("SFAS No. 114") "Accounting by Creditors
for Impairment of a Loan," 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: (a)
indications that the borrower is experiencing business problems such as
operating losses, marginal working capital, inadequate cash flow or
business interruptions, (b) loans secured by collateral that is not
readily marketable, or (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 debtor'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.
Following are summaries of impaired notes receivable and the allowance
for impaired notes receivable:
MARCH 30,27, March 31,
2003 200228,
2005 2004
--------- -----------------
Total recorded investment in impaired notes receivable $ 2,598 $1,0001,836 $ 2,248
Allowance for impaired notes receivable (2,065) (640)
------- ------(1,701) (2,051)
--------- ---------
Recorded investment in impaired notes receivable, net $ 533135 $ 360
======= ======197
========= =========
F-10
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE B (CONTINUED)
MARCH 30,27, March 31,
2003 200228,
2005 2004
--------- -----------------
Allowance for impaired notes receivable at beginning of
the fiscal year $ 6402,051 $ 6132,065
Impairment charges on notes receivable 1,425 185
Direct writedowns of impaired- 208
Impaired notes receivable - (240)
Other increases in allowance for impaired notes receivable - 82
---------- --------written off (350) (222)
--------- ---------
Allowance for impaired notes receivable at end of the fiscal periodyear $ 2,0651,701 $ 640
========== ========2,051
========= =========
Based on the present value of the estimated cash flows of identified
impaired notes receivable, the Company records interest income on its
impaired notes receivable on a cash basis. The following represents the
interest income recognized and average recorded investment of impaired
notes receivable.
MARCH 27, March 28, March 30,
March 31, March 25,2005 2004 2003
2002 2001
--------- ------------------- ---------
Interest income recorded on impaired notes receivable $ 9613 $ 4719 $ 11296
Average recorded investment in impaired notes receivable $ 1,6241,942 $ 9362,341 $ 1,7021,624
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 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 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
30, 200327, 2005 and March 31, 2002,28, 2004, all marketable securities held by the
Company have been classified as either available-for-sale or trading 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. Unrealized gains and losses on available for sale
securities are included as a component of accumulated other
comprehensive income in the accompanying consolidated balance sheet.
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. During the fiscal year ended
March 30, 2003, the Company liquidated its investment in limited
partnership.
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 sales of restaurants
under the 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 30, 200327, 2005 and March 31, 2002,28, 2004, the Company had depositsdeferred
gains, included in other liabilities, on the sales of restaurants,
which are accounted for under the installment method of $161$196 and $214, respectively, included$269,
respectively. Installment gains recognized in accrued expenses inearnings for the accompanying consolidated balance sheets.fiscal
years ended March 27, 2005, March 28, 2004 and 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 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 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.Subs. These
intangible assets were being amortized over periods from 10 to 40 years
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 requiredrequires 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 defineddefinite
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)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE B (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 of the goodwill, related to
the acquisitions, 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 arewere as follows:
Goodwill Trademarks Recipes Total
-------- ---------- ------- -------------
Balance as of April 1, 2002 $ 11,083 $ 2,242 $ 30 $13,355$ 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 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE B (CONTINUED)
The table below presents amortized and unamortized intangible assets as
of March 30, 200327, 2005 and March 31, 2002:28, 2004:
MARCH 27, 2005 March 30, 2003 March 31, 2002
-------------- --------------28, 2004
------------------------------------ ----------------------------------
GROSS NET Gross Net
Gross NetCARRYING ACCUMULATED CARRYING Carrying Accumulated Carrying
Carrying Accumulated CarryingAMOUNT AMORTIZATION AMOUNT Amount Amortization Amount
Amount Amortization Amount
-------------- ------------ ------ --------------- -------- ------------ --------------
Amortized intangible assets:
Royalty streams $4,259 $(1,008) $ 3,251 $ 4,259 $ (747)(1,531) $ 3,5122,728 $ 4,259 $ (1,269) $ 2,990
Favorable leases 285 (285) - 285 (31) 254(285) -
Other 16 (16) - 62 (60) 2
------ -------6 (2) 4 6 (1) 5
-------- ------- ------- -------
$4,560 $(1,309) 3,251------------ --------- -------- ------------
$ 4,6064,550 $ (838) 3,768
====== ======= ======= =======(1,818) $ 2,732 $ 4,550 $ (1,555) $ 2,995
======== ============ ======== ============
Unamortized intangible assets:
Trademarks and tradenames and recipes 68 2,425 (153) 2,27268
--------- --------
------- ------- -------
$ 3,3192,800 $ 7,031 $ (991) $ 6,0403,063
========= ======== ======= ======= =======
Goodwill $ 95 $17,043 $(5,960) $11,083$ 95
========= ======== ======= ======= =======
The following table provides a reconciliation of the reported net
(loss) income and net (loss) income per share for the fiscal years
ended March 30, 2003, March 31, 2002 and March 25, 2001, adjusted as
though SFAS No. 142 had been effective for all periods:
2003 2002 2001
-------- ------ ------
Reported net (loss) income before cumulative
effect of change in accounting principle $ (1,630) $ 1,249 $ 1,606
Add back discontinued amortization expense - 555 555
--------- ------- -------
Adjusted net (loss) income before cumulative
effect of change in accounting principle $ (1,630) $ 1,804 $ 2,161
Cumulative effect of change in accounting principle (12,338) - -
--------- ------- -------
Adjusted net (loss) income $(13,968) $ 1,804 $ 2,161
========= ======= =======
Reported basic net (loss) income per common share before
cumulative effect of change in accounting principle $ (.25) $ .18 $ .23
Effect of discontinued amortization expense - .08 .08
--------- ------- ------
Adjusted basic net (loss) income per common share before
cumulative effect of change in accounting principle (.25) .26 .31
Cumulative effect of change in accounting principle (2.06) - -
--------- ------- ------
Adjusted basic net (loss) income per common share $ (2.34) $ .26 $ .31
========= ======= =======
Reported diluted net (loss) income per common share before
cumulative effect of change in accounting principle $ (.25) $ .18 $ .23
Effect of discontinued amortization expense - .07 .07
--------- ------- -------
Adjusted diluted net (loss) income per common share before
cumulative effect of change in accounting principle $ (.25) $ .25 $ .30
Cumulative effect of change in accounting principle (2.06) - -
--------- ------- -------
Adjusted diluted net (loss) income per common share $ (2.34) $ .25 $ .30
========= ======= =======
F-15
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
As of March 30, 2003,27, 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 wereare deemed necessary.
Total amortization expense for intangible assets was $278, $888$263, $261 and
$839$278 for the fiscal years ended March 30, 2003,27, 2005, March 31, 200228, 2004 and
March 25, 2001.30, 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 locationslocation had
incurred negative cash flows from operations for fiscal 2003 and arewas
projected to incur negative cash flows in fiscal 2004 isand 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 that seven two and one units that have beenwere impaired, and recorded impairment
charges of $1,367, (inclusive of $239 related to favorable leases)leases
discussed in Note B-10), $685
and $127 in the statementsstatement of operations for the fiscal
yearsyear ended March 30, 2003, March 31, 2002 and March 25, 2001, respectively.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
were recorded with respect to such intangible assets for the fiscal
years ended March 27, 2005 and March 28, 2004. (See Note 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.) No impairment charges were
recorded with respect to such intangible assets for the fiscal years
ended March 31, 2002 and March 25, 2001.
F-16
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
12. Self-Insurance
The Company is self-insured for portions of its general liability
coverage. As part of Nathan's risk management strategy, its insurance
programs include deductibles for each incident and in the aggregate for
a policy year. As such, Nathan's accrues estimates of its ultimate
self-insurance costs throughout the policy 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 30, 200327, 2005 and
March 31, 200228, 2004 were $596$324 and $1,346,$346, respectively and are included in
"Accrued"accrued expenses and other current liabilities" in the accompanying
consolidated balance sheets. During the fiscal year ended March 27,
2005, approximately $71 of previously recorded insurance accruals were
reversed, reflecting the revised 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 satisfaction of a claim against the Company totaling
$659 (see Note L) and the reversal of approximately $196 of previously recorded self
insurance accruals in connection with the conclusion of claims relating
to prior policy years.
F-16
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)
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 as the current interest rates
on such instruments approximates current market interest rates on
similar instruments.
14. Stock-Based Compensation
At March 30, 2003,27, 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 employee stock optionsindependent 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)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE B (CONTINUED)
The following table illustrates the effect on net income (loss) and earningsnet
income (loss) per share had the Company applied the fair value
recognition provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation.
Fiscal year ended
MARCH 27, March 28, March 30,
March 31, March 25,2005 2004 2003 2002 2001
--------- --------- ---------
Net income (loss) income,, as reported $(13,968) $ 1,2492,737 $ 1,6061,894 $ (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 Awardsawards (171) (170) (165)
(410) (358)
-------- ------- --------------- ---------
Pro forma net income (loss) $ 2,615 $ 1,724 $ (14,133)
======== ======== =========
Net income $(14,133) $ 839 $ 1,248
======== ======= =======
(Loss) earnings(loss) per share
Basic - as reported $ .52 $ .36 $ (2.34)
$ .18 $ .23
======== ======= =============== =========
Diluted - as reported $ .45 $ .33 $ (2.34)
$ .18 $ .23
======== ======= =============== =========
Basic - pro forma $ .49 $ .32 $ (2.36)
$ .12 $ .18
======== ======= =============== =========
Diluted - pro forma $ .43 $ .30 $ (2.36)
$ .12 $ .18
======== ======= =============== =========
Pro forma compensation 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 Black-Scholes option valuation model was developed for use in
estimating the fair value of traded 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 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE B (CONTINUED)
The weighted-average option fair values and the assumptions used to
estimate these values for stock options granted are as follows:
2005 2004 2003
2002
------ --------------- --------- ---------
Weighted-average option fair values $2.19 $1.30$ 2.87 $ 1.60 $ 2.19
Expected life (years) 7.0 7.0 10.0 6.6
Interest rate 4.50% 3.85% 5.30%
4.06%
Volatility 29.9% 30.6% 32.8% 32.3%
Dividend yield 0% 0% 0%
There were no options or warrants granted during fiscal 2001.
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 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 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. At March
30, 200327, 2005 and March 31, 2002, $12728, 2004, $316 and $332,$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 included in the
accompanying consolidated balance sheets. For the fiscal years ended March
27, 2005, March 28, 2004, March 30, 2003, March 31, 2002 and March 25, 2001, the Company earned franchise
fees from new unit openings, transfers and co-branding of $417, $693$605, $556 and
$525,$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 summary of franchise openings and closings for the
fiscal years ended March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 2001:30, 2003:
2005 2004 2003 2002 2001
---- ---- ----
Franchised restaurants operating at the beginning of the period 338 343 364 386 415
New franchised restaurants opened during the period 39 40 24 18 21
Franchised restaurants closed during the period (22) (45) (40) (50)(45)
--- --- ---
Franchised restaurants operating at the end of the period 355 338 343 364 386
=== === ===
F-20
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE B (CONTINUED)
The Company 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.
Revenue from sub-leasing properties to franchisees 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 accompanying consolidated statements of operations.
The Company 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.
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.
An accrual for19. Revenue Recognition - License Royalties
The Company earns revenue from royalties on the costlicensing of the
product touse of its name on certain products produced and sold by outside
vendors. The use of the Company name and symbols must be approved by
the Company prior to each specific application to ensure proper quality
and project a consistent image. Revenue from license royalties is
recorded simultaneously with the revenue.
19.recognized when it is earned and deemed collectible.
20. Interest Income
Interest income is accruedrecorded when it is earned and deemed realizable by
the Company.
20.21. Investment and other income (loss)
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.66No. 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
contract.
Investments classified as trading securities are recorded at fair value
and the unrealized gains or losses are recognized as a component to the
Company's "Investment and other income (loss)" on the consolidated
statement of operations. During the fiscal year ended March 30, 2003,
the Company liquidated its investment in trading securities.
F-21
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE B (CONTINUED)
Investment and other income (loss) consists of the following:
2005 2004 2003
2002 2001
------ ------------- ------- ------
Gain on disposal of fixed assets $ 39 $1,22684 $ -206 $ 39
Realized gains (losses) on marketable securities (242) 7 (2)
Unrealized losses of trading securities - (43) (420)12 (242)
Loss on subleasing of rental properties (124) (312) (243) (215) (194)
Gain from the early termination of sales agreement 135 - - 135
Other income 512 553 467
593 1,682
----- ------ ----------- -----
$ 472 $ 459 $ 156
$1,568 $1,066
===== ====== =========== =====
21.22. 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 30, 2003,27, 2005 one retail licensee and one franchisee
each represented 19% and 11% respectively of accounts receivable. At
March 28, 2004, no franchisee, retail licensee or Branded Product
Program customer represented 10% or greater of franchise royaltiesaccounts receivable.
At(See Note D). No franchisee, retail licensee or Branded Product
customer accounted for 10% or more of revenues during the fiscal years
ended March 31, 2002, one franchisee27, 2005, March 28, 2004 and March 30, 2003.
The Company's primary supplier of hot dogs represented 13%66%, 62% and 41%
of franchise royalties receivable (Note D).
22.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%. These advertising
funds are separate entities, which are not a component of the
consolidated group. Revenues and expenses of these advertising funds
are excluded from the Company's statement of operations. Contributions
to the advertising funds from Company-owned stores are included in
restaurant operating expenses in the accompanying consolidated
statements of operations. Net Company-owned
store advertising expense was $608, $940$242, $241 and $1,602,$608, for the fiscal years
ended March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 2001, respectively.
F-22
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts) March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
23.respectively.
24. Classification of Operating Expenses
Cost of sales consists of the following:
- The cost of products sold both inby the Company-operated restaurants,
andthrough the Branded Product Program.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 of the Branded Product Program, 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.
24.25. 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. A valuation allowance has been established to reduce deferred
tax assets attributable to net operating losses and credits of Miami
Subs.
25.26. Reclassifications
Certain prior yearyears' balances have been reclassified to conform with
current year presentation.
F-23
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
26.27. Recently Issued Accounting Standards
In June 2001,November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, "Accounting151, "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 Asset Retirement Obligations" ("inventories with International Accounting
Standards. SFAS No.
143"). SFAS No. 143 addresses financialNo.151 requires idle facility expenses, freight,
handling costs, and reporting obligations
associated withwasted material (spoilage) costs to be recognized
as current-period charges. It also requires that allocation of fixed
production overheads to the retirementcosts 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/orconversion be based on the normal
operationcapacity of a
long-lived asset, except for certain obligations of lessees.the production facilities. SFAS No.
143 isNo.151 will be effective
for financial statements issued forinventory costs incurred during fiscal years beginning after June
15, 2002. The Company has evaluated2005. We are evaluating the effectimpact 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. 143 on its financial position and results of
operations, and it is not expected123R to have a material impact on the financial position and results of operationsbeginning of the Company.
In April 2002,first annual period after June
15, 2005. We plan to adopt the FASB issued Statementprovisions of Financial Accounting
Standards No. 145 ("SFAS No. 145"), "Rescission123R in the first
quarter of FASB Statements No.
4, 44, and 64, Amendmentfiscal year 2007. The Company is currently evaluating the
impact of FASB Statement No. 13, and Technical
Corrections."adoption of the various provisions of SFAS No. 145 eliminates the current requirement that
gains and losses on debt extinguishment must be classified as
extraordinary items in the income statement. Instead, such gains and
losses will be classified as extraordinary items only if they are
deemed to be unusual and infrequent, in accordance with the current
criteria for extraordinary classification. Additionally, any gain or
loss on extinguishment of debt that was classified as an extraordinary
item in prior periods presented that does not meet the criteria in APB
Opinion No. 30 for classification as an extraordinary item shall be
reclassified. In addition, SFAS No. 145 eliminates an inconsistency in
lease accounting by requiring that modifications of capital leases that
result in reclassification as operating leases be accounted for
consistent with sale-leaseback accounting rules. SFAS No. 145 also
contains other nonsubstantive corrections to authoritative accounting
literature. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the
changes related to lease accounting will be effective for transactions
occurring after May 15, 2002. SFAS No. 145 has not had, and is not
expected to have, a material impact on the financial position and
results of operations of the Company.123R.
F-24
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 2001
NOTE B (CONTINUED)
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force ("EITF")
Issue No. 94-3. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit
cost was recognized at the date of a company's commitment to an exit
plan. SFAS No. 146 also establishes that the liability should initially
be measured and recorded at fair value. SFAS No. 146 is effective for
disposal activities initiated after December 31, 2002. The adoption of
SFAS No. 146 did not have a material impact on the financial position
and results of operations of the Company.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure" which addresses financial
accounting and reporting for recording expenses for the fair value of
stock options. SFAS No. 148 provides alternative methods of transition
for a voluntary change to fair value-based method of accounting for
stock-based employee compensation. Additionally, SFAS No. 148 requires
more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. The provisions of this
Statement are effective for fiscal years ending after December 15,
2002, with early application permitted in certain circumstances. As
discussed in Note B-14, the Company continues to account for
stock-based compensation using the intrinsic value method in accordance
with APB No. 25 and has adopted the disclosure provisions of SFAS No.
148. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning
after December 15, 2002. The adoption of SFAS No. 148 had no impact on
the financial position and results of operations of the Company.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133. SFAS No. 149
is effective for contracts entered into or modified after June 30, 2003
except for the provisions that were cleared by the FASB in prior
pronouncements. The Company is currently evaluating the effect of the
adoption of SFAS No. 149 on its financial position and results of
operations.
F-25
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts) March 30, 2003
March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS No. 150"), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and
measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. In
accordance with the standard, financial instruments that embody
obligations for the issuer are required to be classified as
liabilities. This Statement shall be effective for financial
instruments entered into or modified after May 31, 2003, and otherwise
shall be effective for the year ended December 31, 2003. The Company is
currently evaluating the effect of the adoption of SFAS No. 150 on its
financial position and results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No.
45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."
FIN No. 45 requires that upon issuance of a guarantee, a guarantor must
recognize a liability for the fair value of an obligation assumed under
a guarantee. FIN No. 45 also requires additional disclosures by a
guarantor in its interim and annual financial statements about the
obligations associated with guarantees issued. The recognition
provisions of FIN No. 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are
effective for financial statements for periods ending after December
15, 2002. The adoption of FIN No. 45 did not have a material impact on
the Company's financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No.
46") "Consolidation of Variable Interest Entities." In general, a
variable interest entity is a corporation, partnership, trust, or any
other legal structure used for business purposes that either (a) does
not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the
entity to support its activities. A variable interest entity often
holds financial assets, including loans or receivables, real estate or
other property. A variable interest entity may be essentially passive
or it may engage in activities on behalf of another company. Until now,
a company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting
interests. FIN No. 46 changes that by requiring a variable interest
entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's
activities or
F-26
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
entitled to receive a majority of the entity's residual returns or
both. FIN No. 46's consolidation requirements apply immediately to
variable interest entities created or acquired after January 31, 2003.
The consolidation requirements apply to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of
the disclosure requirements apply to all financial statements issued
after January 31, 2003, regardless of when the variable interest entity
was established. The Company has adopted FIN No. 46 effective January
31, 2003. The Company does not anticipate that the adoption of FIN No.
46 will have a material impact on the Company's consolidated financial
condition or results of operations taken as a whole.
NOTE C - INCOME (LOSS) INCOME PER SHARE
Basic income (loss) earnings per common share is calculated by dividing income
(loss)
income 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.
The following chart provides a reconciliation of information used in
calculating the per share amounts for the fiscal years ended March 30, 2003,27,
2005, March 31, 200228, 2004 and March 25, 2001,30, 2003, respectively:
(Loss) income (Loss) incomeIncome (loss) Income (loss) per share
from continuing operations Shares From continuing operations
--------------------------- ------------------------------------------------------------------- --------------------------
2005 2004 2003 2002 20012005 2004 2003 2002 20012005 2004 2003 2002 2001
--------
------ ------ ------- --------- ------------------- --------- ------ ------ ----------- -----
Basic EPS
Basic calculation $2,746 $1,952 $(1,506) $1,392 $1,5855,307,000 5,306,000 5,976,000 7,048,000 7,059,000$.52 $.37 $(.25) $.20 $.23
Effect of dilutive
employee stock
options and warrants - - - 773,000 372,000 - 35,000 39,000(.07) (.03) - - -
-------
------ ------ ------- --------- ---------- --------- --------- ----- ---- ---- -----
Diluted EPS
Diluted calculation $2,746 $1,952 $(1,506) $1,392 $1,5856,080,000 5,678,000 5,976,000 7,083,000 7,098,000$.45 $.34 $(.25) $.20 $.23
=======
====== ====== ======= ========= ========== ========= ========= ===== ==== ==== =====
Options and warrants to purchase 19,500 and 811,918 shares of common stock
purchase rightsfor 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 12,369,2801,374,981 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.
Options, warrants and common
stock purchase rights to purchase 11,226,016 and 11,019,142 shares of common
stock for the years ended March 31, 2002 and March 25, 2001, 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.
F-27F-25
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE D - NOTES AND ACCOUNTS RECEIVABLE, NET
Notes and accounts receivable, net, consistsconsist of the following:
MARCH 30,27, March 31,
2003 200228,
2005 2004
--------- ---------
Notes receivable, net of impairment charges $ 998523 $ 2,662573
Franchise and license royalties 1,465 1,3761,803 1,404
Branded product sales 737 7851,128 687
Other 565 906
------- -------
3,765 5,729450 329
------ ------
3,904 2,993
Less: allowance for doubtful accounts 418 644177 328
Less: notes receivable due after one year 740 2,277
------- -------136 313
------ ------
Notes and accounts receivable, net $ 2,607 $ 2,808
======= =======$3,591 $2,352
====== ======
Notes receivable at March 30, 200327, 2005 and March 31, 200228, 2004 principally resulted
from sales of restaurant businesses to Miami 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).
Accounts receivable are due within 30 days and are stated at amounts due
from franchisees, retail licensees and licensors,Branded Product Program customers,
net of an 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 factors, including the
length of time trade accounts receivable are past due, the Company's previous
loss history, the customer's current and expected future ability to pay
its obligation to the Company, and the condition of the general economy
and the industry as a whole. The Company writes off accounts receivable
when they becomeare deemed to be uncollectible.
F-28F-26
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE D (CONTINUED)
Changes in the Company's allowance for doubtful accounts isare as follows:
2005 2004 2003 2002 2001
------ ------ ------
Beginning balance $ 644328 $ 880418 $ 809644
Bad debt (recoveries) expense 13 (17) 82
267 191
Other 17 - 27 27-
Accounts written off (181) (73) (308) (530) (147)
----- ----- -----
Ending balance $ 418177 $ 644328 $ 880418
===== ===== =====
NOTE E - MARKETABLE SECURITIES AND INVESTMENT IN LIMITED PARTNERSHIP
The cost, gross unrealized gains, gross unrealized losses and fair market
value for marketable securities by major security type at March 30, 200327, 2005
and March 31, 200228, 2004 are as follows:
Gross Gross Fair
unrealized unrealized market
Cost gains losses value
------ ----- ------ -------------- ---------- ---------- -------
2003:2005:
Available-for-sale securities:
Bonds $4,513 $ 18111,778 $ (71) $4,623
====== ===== ===== ======
2002:
Trading24 $ (161) $11,641
======== ======= ======= =======
2004:
Available-for-Sale securities:
Bonds $7,821 $ -7,382 $ (20) $7,801
Investment in limited partnership 1,020 - (2) 1,018
------ ----- ----- ------
$8,841107 $ -(12) $ (22) $8,819
====== ===== ===== ======7,477
======== ======= ======= =======
F-29F-27
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE E (CONTINUED)
As of March 27, 2005, the 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:
2005 2004 2003 2002 2001
------ ------ -----------
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 (2) - - Trading securities:
Proceeds $ 767 $2,933 $2,564
Gross realized gains - 8 -
Gross realized losses (252) (1) (2)
Effective April 1, 2002, the Company transferred the Company's bond
portfolio formerly classified as trading securities to available securities
for sale
securities due to a change in the Company's investment strategies. As
required by FASB StatementSFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities", the transfer of these securities between categories of
investments has been accounted for at fair value and the unrealized
holding loss previously recorded through April 1, 2002 of $20 from the
trading category has not been reversed. The net unrealized gain(losses) gains
for the fiscal yearyears ended March 27, 2005, March 28, 2004 and March 30,
2003, totalingrespectively, of $(137), $3 and $64, net of deferred income taxes,
has been included as a component of comprehensive income. Investments classified as trading
securities are recorded at fair value and the unrealized gains or losses are
recognized as a component of investment and other income in the consolidated
statement of operations.
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-30F-28
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE F - PROPERTY AND EQUIPMENT, NET
Property and equipment consistconsists of the following:
MARCH 30,27, March 31,
2003 200228,
2005 2004
--------- ---------
Construction-in-progressLand $ 311,094 $ 842
Land 1,665 1,6651,281
Building and improvements 2,255 2,2451,917 1,854
Machinery, equipment, furniture and fixtures 5,297 6,6026,021 5,980
Leasehold improvements 4,042 7,201
-------- --------
13,290 18,5554,371 4,123
Construction-in-progress 9 103
------- -------
13,412 13,341
Less: accumulated depreciation and amortization 7,027 9,630
-------- --------8,829 8,247
------- -------
$ 6,2634,583 $ 8,925
======== ========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 $1,907, $1,661$918,
$971 and $1,791$1,907 for the fiscal years ended March 30, 2003,27, 2005, March 31, 200228, 2004
and March 25,
2001,30, 2003, respectively.
1. Sales of Restaurants
On April 1, 2002, theThe Company adoptedfollows the provisions of Financial
Accounting Standards Board issued Statement of Financial Accounting
StandardsSFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"No.144"). This statement supersedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets,
related 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 retained the fundamental provisions of SFAS No. 121 for
recognition and measurement of impairment, but amends the accounting and reporting standards for segments of a business
to be disposed of. In accordance with SFAS No. 144 has broadened the definition of
discontinued operations to
includeincludes components of an entity whose cash
flows are clearly identifiable as compared to a segment of a business.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-31F-29
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 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 a total consideration of $591,000.$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 $75,000.$75. In October 2002, a
non-operating restaurant, which had been classified as held for sale was
sold to a non-franchisee for $466,000$466 and an operating restaurant was sold to
a franchisee in exchange for a $50,000$50 note. As these restaurants were either
classified as held-for-sale prior to the adoption of SFAS No. 144 or the
Company has a continuing stream of cash flows in the case of the franchised
restaurant, the results of operations for thethese 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 30, 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 a continuing stream of
cash flows withfrom 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.
During the fiscal year ended March 31, 2002, the Company sold two
company-owned restaurants and a non-restaurant property for total
proceeds of $3,348. The Company recognized a gain of $1,226 in
connection with these sales.
In May 2001, the Company completed the sale of a restaurant property
for approximately $1,500 pursuant to an order of condemnation by the
State of Florida. The fair value of the assets (which approximated the
carrying value) was included in the current portion of assets available
for sale at March 25, 2001. 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, 2001 as current in the 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 as a component of "investment and other
income" in the accompanying consolidated statement of operations.
F-32F-30
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 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 statementstatements 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 yearsyear ended March 30, 2003, March 31, 2002
and March 25, 2001:2003:
2003
2002 2001
------- ------- -------
Revenues $ 3,096 $ 4,099 $ 3,990
======= =======
=======
(Loss) income before income taxes (A) $ (166) $ 316 $ 262
======= =======
=======
(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-33F-31
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE F (CONTINUED)
3. Discontinued Operations
As described in Notes F-1 and F-2 above, the Company has classified
the results of eightoperations of certain restaurants as discontinued
operations in accordance with SFAS No. 144. The following is a
summary of the results of operations for these eight restaurants for the
fiscal years ended March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 2001:30,
2003:
2005 2004 2003 2002 2001
------- ------- -------
Revenues $ 3,543415 $ 4,857917 $ 4,9474,496
======= ======= =======
(Loss) incomeLoss before income taxes (A) $ (206)(15) $ (238)(98) $ 35(206)
======= ======= =======
(A) - (Loss) incomeLoss 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.
At March 30, 2003,4. Assets Held for Sale
Included in accordance with SFAS No. 144, the Company has
classified the net fixed assets of four restaurants as held for sale in
the accompanying consolidated balance sheet.
NOTE G - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expensesas of March 27, 2005 and other current liabilities consist of the following:
MARCH 30, March 31,
2003 2002
------ ------
Payroll and other benefits $1,324 $1,455
Professional and legal costs 349 407
Self-insured retention 596 1,346
Rent, occupancy and lease reserve termination costs 739 831
Taxes payable 556 595
Other 1,378 1,872
------ ------
$4,942 $6,506
====== ======
F-34March 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 G - ACCRUED EXPENSES, OTHER CURRENT LIABILITIES AND OTHER LIABILITIES
Accrued expenses and other current liabilities consist of the following:
MARCH 27, March 28,
2005 2004
---------- ---------
Payroll and other benefits $ 1,618 $ 1,369
Professional and legal costs 328 259
Self-insurance costs 324 346
Rent, occupancy and lease reserve termination costs 413 757
Taxes payable 684 544
Unexpended advertising funds 498 440
Deferred marketing funds 365 410
Other 858 711
------- -------
$ 5,088 $ 4,836
======= =======
F-33
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, 200130, 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,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. To date theThe
Company has closed or sold 17all 18 units. The Company continues to market the remaining property for
sale. As of March 30, 2003,27, 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 H - NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
A summary of notes payable and capitalized lease obligations is as
follows:
MARCH 30,27, March 31,
2003 200228,
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 February 2006
and February 2009 and maturing in 2010 $ 1,167819 $ 1,333
Note payable to bank at 8.75% and maturing in 2003 - 381986
Capital lease obligations and other 59 65
------- -------
1,226 1,77947 53
------ ------
866 1,039
Less current portion (174) (173)
(559)
------- ------------- ------
Long-term portion $ 1,053692 $ 1,220
======= =======866
====== ======
The above notes are secured by the related property and equipment.
F-35
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)equipment, which
have been fully depreciated as of March 30, 2003, March 31, 2002 and March 25, 2001
NOTE H (CONTINUED)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 $297$225 as of March 30, 2003.27, 2005. (See Note L-2)
At March 30, 2003,27, 2005, the aggregate annual maturities of notes payable and
capitalized lease obligations are as follows:
20042006 $ 173
2005 173
2006 174
2007 175
2008 175
2009 176
2010 164
Thereafter 356
-------2
-----
$ 1,226
=======866
=====
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,
2003,2005, and bears interest at the prime rate (4.25%(5.75% at March 30, 2003)27, 2005).
There were no borrowings outstanding under this line of credit as of March
30, 2003.
NOTE I - OTHER EXPENSE (INCOME), NET
Included in other expense (income), in the accompanying consolidated
statements of operations is (i) $232 in lease reserves in connection with
four vacant properties for the fiscal year ended27, 2005 and March 30, 2003 (ii) the
reversal of a previous litigation accrual of ($210) for the fiscal year
ended March 31, 2002 and (iii) $463 in lease termination costs for the
fiscal year ended March 25, 2001.
F-3628, 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
March 31, 2002 and March 25, 2001
NOTE I (CONTINUED)
During- OTHER EXPENSE (INCOME), NET
Included in other expense (income), in the quarter ended June 24, 2001, the Company reversed an accrualaccompanying consolidated
statements of $210 related to its successful appeal of a previous award in an action
entitled: Miami Subs Corporation or MIAMI S V. MURRAY FAMILY TRUST/KENNETH
DASH PARTNERSHIP. In this case the court found that Miami Subs breached a
fiduciary duty it owed to defendants and awarded the Murray Family Trust
$200. Both Miami Subs and defendants appealed the court's decision, and in
November 1996, the appeal was argued before the Supreme Court of New
Hampshire. In December 1997, the Supreme Court ruled in favor of Miami Subs,
vacated the damage award, reversed the award of attorney fees and remanded
to a trial court for a determination of damagesoperations for the alleged breachfiscal year ended March 27, 2005, is (i)
$(16) for the recovery of fiduciary duty tolease termination expense, (ii) $45 of lease
termination expense in connection with two properties for the Murray Family Trust. In May 1998,fiscal year
ended March 28, 2004, and (iii) $232 in lease reserves in connection with
four vacant properties for the trial court
awarded the Murray Family Trust compensatory damages in the amount of $200,
which Miami Subs accrued for on its books. Miami Subs appealed the damage
award, and in December 1999, the Supreme Court of New Hampshire heard the
second appeal. On February 1, 2001, the Supreme Court of New Hampshire ruled
in favor of Miami Subs and vacated the damage award. The plaintiff had the
right to further appeal the reversal for a period of 90 days, until May 2,
2001. No further action was taken by the plaintiff and upon passage of the
90-day period the litigation award was reversed into income.fiscal year ended March 30, 2003.
NOTE J - INCOME TAXES
Income tax provision (benefit) consists of the following for the fiscal
years ended March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 2001:30, 2003:
2005 2004 2003
2002 2001
------- ------- ------------- ------ -----
Federal
Current $ 577 $ 120 $ -
$ 985 $ 865
Deferred 611 804 (281)
(93) 246
------- ------- ------------- ------ -----
1,188 924 (281)
892 1,111
------- ------- ------------- ------ -----
State and local
Current 257 74 46
181 224
Deferred 37 142 (48)
(16) 67
------- ------- ------------- ------ -----
294 216 (2)
165 291
------- ------- -------
$ (283) $ 1,057 $ 1,402
======= ======= =======------ ------ -----
$1,482 $1,140 $(283)
====== ====== =====
F-37
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE J (CONTINUED)
Total income tax provision (benefit) provision for the fiscal years ended March 30,
2003,27,
2005, March 31, 200228, 2004 and March 25, 200130, 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:
2005 2004 2003
2002 2001
------- --------------- -------- -------
Computed "expected" tax (benefit) expense $ (609)1,438 $ 8331,052 $ 1,016(609)
Nondeductible amortization 37 37 99 169 222
Impairment on nondeductible favorable lease intangible assets 87 - - 87
State and local income taxes, net of Federal income tax benefit 160 181 140 106 199
Tax-exempt investment earnings (66) (46) (48)
(68) (30)Tax refunds received (81) (62) -
Nondeductible meals and entertainment and other (6) (22) 48 17 (5)
------- ------- -------
$ (283)1,482 $ 1,0571,140 $ 1,402(283)
======= ======= =======
F-36
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 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 30,27, March 31,
2003 2002
------- -------28,
2005 2004
-------- ---------
Deferred tax assets
Accrued expenses $ 672619 $ 1,164668
Allowance for doubtful accounts 167 29172 131
Impairment of notes receivable 855 256705 908
Deferred revenue 806 978582 816
Depreciation expense and impairment of long-lived assets 1,152 1,101850 988
Expenses not deductible until paid 238 130 138
Amortization of intangibles 407 105213 308
Net operating loss and other carryforwards 1,540 676312 751
Unrealized loss on marketable securities 47 -
Excess of straight line over actual rent 106 -
Other 101 595 65
------- -------
Total gross deferred tax assets 5,938 4,760$ 3,641 $ 4,773
------- -------
Deferred tax liabilities
AmortizationDifference in tax bases of intangibles 80 422installment gains not
yet recognized 198 196
Deductible prepaid expense 170 -
Unrealized gain on marketable securities and income on
investment in limited partnership- 46
207
Other 335 3201 2
------- -------
Total gross deferred tax liabilities 461 949369 244
------- -------
Net deferred tax asset 5,477 3,8113,272 4,529
Less valuation allowance (312) (751) (525)
------- -------
2,960 3,778
Less current portion (1,168) (1,326)
------- -------
Long-Term portion $ 4,7261,792 $ 3,2862,452
======= =======
F-38F-37
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE 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 $4,726$2,960 and $3,286$3,778 at March 30, 200327, 2005 and March 31, 2002,28,
2004, respectively, is realizable is based on anticipated future taxable
income.
At March 30, 2003, as result of settling the Miami Subs IRS audits for the
years 1991 through 1996,27, 2005, the Company had a net operating loss carryforward
("NOL")an 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 $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 Sections 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 L-3).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 K - 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-39F-38
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 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 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
2001 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, 2002.2002 and December 31, 2004, respectively. The
1998 Plan, the 2001 Plan the 2002 Plan and the Directors'2002 Plan expire on April 5, 2008, June
13, 2011 and June 17, 2012,
and December 31, 2004, 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.
F-40During 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 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE K (CONTINUED)
2. Warrants
In November 1993, 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 $9.71 per share, representing 105%
of the market price of the Company's common stock on the date of grant,
which exercise 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 expiresexpired, 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. The
shares vested at a rate of 25% per annum commencing July 17, 1998 and
the warrant expires in July 2007.
In November 1996, the Company granted to a nonemployee consultant a
warrant to purchase 50,000 shares of its common stock at an exercise
price of $3.94 per share, which represented the market price of the
Company's common stock on the date of grant. Upon the date of grant,
one-third of the shares vested immediately, one-third vested on the
first anniversary thereof, and the remaining one-third vested on the
second anniversary thereof. The warrant expired, unexercised, on
November 24, 2001.
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 27, 2005, March 28, 2004 and March 30, 2003 and changes
during the fiscal years then ended is presented in the tables below:
2005 2004 2003
---------------------- --------------------- -----------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares price Shares price
--------- --------- --------- --------- --------- ---------
Options outstanding - beginning
of year 1,778,686 $ 3.92 1,754,249 $ 4.01 1,821,146 $ 4.29
Granted 95,000 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 - -
--------- --------- --------- --------- --------- ---------
Options outstanding - end of year 1,494,796 3.81 1,778,686 3.92 1,754,249 4.01
========= ========= =========
Options exercisable - end of year 1,322,629 1,572,268 1,502,124
========= ========= =========
Weighted-average fair value of
options granted $ 2.87 $ 1.60 $ 2.19
========= ======== =========
Warrants outstanding - beginning
of year 168,750 $ 4.73 318,750 $ 4.62 318,750 $ 4.62
Expired - (150,000) 4.50 -
--------- --------- ---------
Warrants outstanding - end of year 168,750 4.73 168,750 4.73 318,750 4.62
--------- --------- ---------
Warrants exercisable - end of year 168,750 168,750 318,750
Weighted-average fair value of ========= ========= =========
warrants granted $ - $ - $ -
========= ======== =========
At March 27, 2005, 203,500 common shares were reserved for future
restricted stock or stock option grants.
F-41
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 2001
NOTE K (CONTINUED)
A summary of the status of the Company's stock option plans and
warrants, excluding warrants issued to former shareholders of Miami
Subs, at March 30, 2003 March 31, 2002 and March 25, 2001 and changes
during the fiscal years then ended is presented in the tables and
narrative below:
2003 2002 2001
---------------------- ------------------------ ----------------------
WEIGHTED- Weighted- Weighted-
AVERAGE average average
EXERCISE exercise exercise
SHARES PRICE Shares price Shares price
--------- --------- --------- ----------- --------- ---------
Options outstanding - beginning
of year 1,821,146 $ 4.29 1,514,209 $ 3.86 1,614,924 $ 4.79
Granted 40,000 3.96 307,000 3.20 - -
Expired (106,897) 7.32 (63) 6.20 (100,715) 10.60
--------- --------- ---------
Options outstanding - end of year 1,754,249 4.01 1,821,146 4.29 1,514,209 3.86
========= ========= =========
Options exercisable - end of year 1,502,124 1,367,479 1,220,876
========= ========= =========
Weighted-average fair value of
options granted $ 2.19 $ 1.30 $ -
========= =========== =========
Warrants outstanding - beginning
of year 318,750 $ 4.62 368,750 $ 4.53 401,200 $ 5.66
Expired - - (50,000) 3.94 (32,450) 18.61
--------- --------- ---------
Warrants outstanding - end of year 318,750 4.62 318,750 4.62 368,750 4.53
--------- --------- ---------
Warrants exercisable - end of year 318,750 318,750 368,750
========= ========= =========
Weighted-average fair value of
warrants granted $ - $ - $ -
========= =========== =========
At March 30, 2003, 413,500 common shares were reserved for future stock
option grants.
F-42
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE 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 30, 2003:27, 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 3/30/0327/05 contractual life price at 3/30/0327/05 price
- ----------------- ----------- ---------------- --------- ---------------- -------- ----------- -----------------
$ 3.19 to $ 4.00 1,499,558 5.81,434,418 4.0 $ 3.36 1,247,4331,373,918 $ 3.373.35
4.01 to 6.60 507,691 1.7 5.18 507,691 5.18
6.616.00 136,250 8.1 5.27 24,583 4.52
6.01 to 22.25 65,75016.55 92,878 1.4 14.99 65,750 14.998.38 92,878 8.38
--------- --- --------------- --------- -----------------
$ 3.19 to$ 22.25 2,072,999 4.7to $ 4.18 1,820,87416.55 1,663,546 4.2 $ 4.303.80 1,491,379 $ 3.68
========= === ======== ========= =================
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.
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. F-43On 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 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 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 10,130,7419,307,363
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 30, 2003,
641,23827, 2005, 891,100 additional shares
have been repurchased at a cost of approximately $2,323.$3,488.
5. Employment Agreements
The Company and its Chairman and Chief Executive OfficerWe entered into a new employment agreement with Howard M. Lorber, our
Chairman and Chief Executive Officer, effective as of January 1, 2000.2005. The new
employment
agreement expires December 31, 2004.2009. Pursuant to the agreement, the officerMr. Lorber
receives a base salary of $1.00$250 and an annual bonus equal to 5%5 percent of
the Company'sour consolidated pretaxpre-tax earnings over $5,000 for each fiscal year, with a minimum bonus of $250.year. The new employment
agreement further provides for a three-year consulting periodagreement after the
termination of employment during which the officerMr. Lorber will receive a
consulting paymentspayment of $225 per year. Mr. Lorber is also entitled to a
severance payment in an annual amount equal to two thirds ofcertain circumstances upon termination, as defined in
the average of the annual bonuses awarded to him during the three fiscal
years preceding the fiscal year of termination of his employment.agreement. The employment F-44agreement 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 restricted common stock
F-43
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE K (CONTINUED)
agreement also provides forwhich vest ratably over the continuation5-year term of certain benefits
following death or disability. In connection with the agreement,employment agreement. A
charge of $363 based on the
Company issued to the officer 25,000 shares of common stock with a fair market value atof the date of grant of approximately $78.Company's common
stock has been recorded to deferred compensation and is being amortized to
earnings ratably over the 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, 2002,2005, based on the
original terms, and no nonrenewal notice has been given as of May 23, 2003.25,
2005. The agreement provides for annual compensation of $275$289 plus certain
other 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 23, 2003.25, 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-45F-44
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 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 annual compensation
upon a change in control, as defined.
The Company and one executive of Miami Subs entered into an employment
agreement effective as of July 1, 2001 for a period commencing on the
date of the agreement and ending in July 2003 and for compensation of
$125 per year. In March 2003, the Company notified the executive that
it did not intend to renew the employment agreement with the employee.
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 the employee'shis annual compensation upon a change
in control, as defined.
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," 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 27, 2005,
March 28, 2004 and March 30, 2003 March 31, 2002 and March 25, 2001 were $25, $36$22, $21 and $25, 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-46F-45
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE L - 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) rental payments if sales
volumes at the related restaurants exceed specified limits. As of
March 30, 2003,27, 2005, the Company has noncancelable operating lease
commitments, net of certain sublease rental income, as follows:
Lease Sublease Net lease
commitments income commitments
----------- -------- -----------
20042006 $ 4,2043,587 $ 1,9692,001 $ 2,235
2005 4,110 1,928 2,182
2006 3,931 1,816 2,1151,586
2007 3,753 1,682 2,0713,377 1,905 1,472
2008 3,132 1,390 1,7422,797 1,603 1,194
2009 1,846 1,099 747
2010 1,527 944 583
Thereafter 6,527 3,821 2,7061,753 1,563 190
--------- -------------- -------
$ 25,65714,887 $ 12,606 $13,0519,115 $ 5,772
========= ======== =======
Aggregate rental expense, net of sublease income, under all current
leases amounted to $2,340, $2,734$1,278, $1,584 and $3,549$2,340 for the fiscal years
ended March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 2001,30, 2003,
respectively.
The Company also owns or leases sites, which it leases orin turn subleases to
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 $2,179$2,885 and expire on various dates through
20102015 exclusive of renewal options.
F-47F-46
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 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 $88, $129$52, $67 and $123$88 for the fiscal
years ended March 27, 2005, March 28, 2004 and March 30, 2003,
March 31, 2002 and March 25, 2001, respectively.
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 30, 2003,27,
2005, was approximately $707.$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
30,
2003,27, 2005, was approximately $297.
2.$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 the effective date for FIN 45 "Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others."
3. Contingencies
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.
Miami 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 Nathan's Famous Operating Corp. were named as
twoSubsidiaries
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)
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 three defendants ina 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 in July 2001,an action, in the Supreme Court of the State of
New York, Westchester County. AccordingKings 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 amended
complaint, the plaintiffs,expectation that it will be covered by its
employment practices liability insurance policy.
An employee of a minor and her mother, soughtMiami Subs franchised restaurant commenced an action for
unspecified damages in the amountUnited States District Court, Southern District
of $17 millionFlorida in September 2004 against Nathan's FamousMiami Subs Corporation, Miami Subs
USA, Inc., and Nathan's Famous
Operatingthree Miami Subs franchisees, FMI Subs Corporation, NEESA
Subs Corp. and one of Nathan's Famous' former employeesMuhammad Amin, (the franchisees), claiming that she was not
paid overtime when she worked in excess of 40 hours per week, in violation
of the Nathan's entities failedFair Labor Standards Act. The action also seeks damages for any
other employees of the defendants who would be similarly entitled to
properly supervise minor
employees, failedovertime. Pursuant to monitor its supervisory personnel, and were
negligentthe terms of the Miami Subs Franchise Agreement, the
franchisees are obligated to operate their Miami Subs franchises in
hiring, retaining and promotingcompliance with the individual defendant,
who allegedly molested, harassed and raped the minor plaintiff, who was
also an employee.law, including all labor laws. On May 29, 2002, as a result of a mediation,27, 2005 this
action was settled subjectwithout payment to court approval. The court approved the
original settlement and on September 9, 2002, the plaintiffs were paid
$659 of which $650 had been accrued as of March 31, 2002.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 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 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 Famousdenied. Although the parties agreed to a settlement in March 2004
for approximately $10, such agreement was served on January 10, 2003not 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
summonsshift change and then by terminating her employment in connectionJuly 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 an action commenced by Mitchell Putterman and Michael
Pellegrinothe
EEOC's conciliation efforts in the Supreme Court of New York, Suffolk County seeking
damages of $1,000 for claims of breach of contracthope that this matter can be settled on
reasonable terms. If it cannot, and fraud in
connection with a letter of intent with the Company's subsidiary, NF
Roasters of Commack, Inc. Althoughemployee or the letter of intent contains
specific disclaimer language stating that it did not convey any rights
or obligations and contemplatedEEOC commences
legal proceedings, Nathan's will defend the execution of a management
agreement, which was never executed, plaintiffs purport nonetheless to
have certain claims in connection therewith. The Company had served a
notice of appearance and demand for a complaint. On March 31, 2003,
this action was dismissed without prejudice by stipulation.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 $5,900 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 30, 2003, the remaining net operating loss
carryforward is $1,289 and the remaining general business credit is
$120. These losses and credits are subject to limitations imposed under
the Internal Revenue Code pursuant to sections 382 and 383 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. 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.
F-49
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE M - RELATED PARTY TRANSACTIONS
AsAn accounting firm of March 30, 2003, Miami Subs leased two restaurant properties from
Kavala, Inc., a private company owned by Gus Boulis, a former shareholderwhich Charles Raich, who joined Nathan's Board of
Miami Subs. Future minimum rental commitments due to Kavala at March 30,
2003 under these existing leases was approximately $1,074. Rent expense
under these two leases amounted to $198, $182Directors on June 15, 2004, serves as Managing Partner, received ordinary
tax preparation and $181other consulting fees of $127, $99 and $81 for the
fiscal years ended March 27, 2005, March 28, 2004 and March 30, 2003,
respectively.
A firm on which Mr. Howard M. Lorber serves as chairman of the board of
directors, and the firm's affiliates received ordinary and customary
insurance commissions aggregating approximately $49, $26 and $41 for the
fiscal years ended March 31, 200227, 2005, March 28, 2004 and March 25, 2001,30, 2003,
respectively.
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 of Nathan's since October 1999. Mr.
Perlyn served as a member of the Board of Directors of Arthur Treacher's,
Inc. until 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. and Mr. Perlyn had been granted options to
acquire approximately 175,000 shares of Arthur Treacher's, Inc. common
stock. These options were converted into options of the entity that sold
Arthur Treacher's, Inc.
NOTE N - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 2003,2004, 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 intangible assets. In connection therewith, impairment
charges on certain notes receivable of $883$108 and impairment charges on fixed
assets of $896$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 2002, 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, impairment charges on certain notes receivable of $185
and impairment charges on fixed assets of $685 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.
F-50F-49
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003,27, 2005, March 31, 200228, 2004 and March 25, 200130, 2003
NOTE O - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- ------------------ ----------- ------------ ------------
FISCAL YEAR 20032005
TOTAL REVENUES (a) $ 9,6669,261 $ 9,5659,903 $ 7,5367,300 $ 7,1637,648
GROSS PROFIT (a), (b) 2,397 2,665 1,674 1,4341,812 2,243 1,033 942
NET (LOSS) INCOME (11,992) 110 (106) (1,980)(a) $ 950 $ 1,090 $ 476 $ 221
=========== =========== =========== ======================= ============
PER SHARE INFORMATION
NET (LOSS) INCOME PER SHARE
BASIC (c) $ (1.89).18 $ .02.21 $ (.02).09 $ (.36).04
=========== =========== =========== ======================= ============
DILUTED (c) $ (1.89).16 $ .02.18 $ (.02).08 $ (.36).04
=========== =========== =========== ======================= ============
SHARES USED IN COMPUTATION OF NET (LOSS) INCOME
PER SHARE
BASIC (c) 6,354,000 6,105,000 5,878,000 5,568,0005,214,000 5,203,000 5,352,000 5,459,000
=========== =========== ============ ============
DILUTED (C) 5,913,000 5,924,000 6,173,000 6,312,000
=========== =========== DILUTED (c) 6,354,000 6,229,000 5,878,000 5,568,000
=========== =========== =========== ======================= ============
Fiscal Year 20022004
Total revenues (a) $ 10,5588,744 $ 10,5918,484 $ 9,1846,290 $ 9,2096,244
Gross profit (a), (b) 2,514 2,820 1,960 1,8621,903 1,878 939 930
Net income (loss) 962 654 263 (630)$ 744 $ 856 $ 237 $ 57
=========== =========== =========== ======================= ============
Per share information
Net income (loss) per share
Basic (c) $ .14 $ .09.16 $ .04 $ (.09).01
=========== =========== =========== ======================= ============
Diluted (c) $ .14 $ .09.15 $ .04 $ (.09).01
=========== =========== =========== ======================= ============
Shares used in computation of net income
(loss)
per share
Basic (c) 7,065,000 7,065,000 7,038,000 7,024,0005,370,000 5,313,000 5,286,000 5,255,000
=========== =========== ============ ============
Diluted (c) 5,478,000 5,593,000 5,742,000 5,901,000
=========== =========== Diluted (c) 7,084,000 7,080,000 7,062,000 7,024,000
=========== =========== =========== ======================= ============
(a) Quarterly results have beenTotal revenues and gross profit were adjusted from amounts previously
reported on Form 10Q's to reflect the resultsa reclassification of operations of restaurants that are classified asone
restaurant to discontinued operations atin the fiscal year ended March 30,
2003 as discontinued operations for all periods presented27,
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-51F-50
THE BELOW REPORT OF ARTHUR ANDERSEN LLP ("ANDERSEN") IS A COPY OF THE PREVIOUSLY
ISSUED REPORT OF ANDERSEN AND THE REPORT HAS NOT BEEN REISSUED BY ANDERSEN.
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 of America, 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
F-52
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 COL. C COL. D(1) (2)
---------- Additions COL. E
- ------------------------------------------- ---------- ---------------------------- ----------- -------------
(1) (2)
AdditionsCOL. A Balance at charged to Additions COL. D -------------
- ------------------------------------- beginning costs and charged to ---------- Balance at
Description of period expenses other accounts Deductions end of period
- ------------------------------------------- ---------------------------------------------- ---------- ---------- -------------- --------------------- -------------
FIFTY-THREEFIFTY-TWO WEEKS ENDED MARCH 30, 200327, 2005
ALLOWANCE FOR DOUBTFUL ACCOUNTS -
NOTES AND
ACCOUNTS RECEIVABLE $644$ 328 $ 13 $ 17(b) $ 181(a) $ 177
====== ======= ======= ======== ==========
LEASE RESERVE AND TERMINATION COSTS $ 532 $ - $ - $ 334(c) $ 198
====== ======= ======= ======== ==========
Fifty-two weeks ended March 28, 2004
Allowance for doubtful accounts -
accounts receivable $ 418 $ - $ - $ 90(a) $ 328
====== ======= ======= ======== ==========
Lease reserve and termination costs $ 529 $ 80 $ - $ 77(c) $ 532
====== ======= ======= ======== ==========
Fifty-two weeks ended March 30, 2003
Allowance for doubtful accounts -
accounts receivable $ 644 $ 82 $ - $ 308(a) $418
==== ====$ 418
====== ======= ======= ======== ====
LEASE RESERVE AND TERMINATION COSTS $336 $209 $ - $ 16(d) $529
==== ==== ======= ======== ====
Fifty-three weeks ended March 31, 2002
Allowance for doubtful accounts - notes and
accounts receivable $880 $267 $ 27(b) $ 530(a) $644
==== ==== ======= ======== ==============
Lease reserve and termination costs $678 $ 30336 $ 209 $ - $ 372(d) $336
==== ====16(c) $ 529
====== ======= ========== ====
Fifty-two weeks ended March 25, 2001
Allowance for doubtful accounts - notes and
accounts receivable $809 $191 $ 27 (b) $ 147(a) $880
==== ==== ======= ======== ====
Lease reserve and termination costs $974 $463 $ 801 (c) $ 1,560(d) $678
==== ==== ======= ======== ==============
(a) Uncollectible amounts written off
(b) Provision charged to advertising fund
(c) Lease termination charge to purchase accounting
(d) Payment of lease termination and other costs
F-53F-51