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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 25, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-3189
NATHAN'S FAMOUS, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3166443
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1400 Old Country Road, Westbury, New York 11590
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 338-8500
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on which Registered
-------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - par value $.01
-----------------------------
(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 [ ].
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 6, 2001 was approximately $23,315,166.
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, 2001,
there were 7,065,202 shares of Common Stock, par value $.01 per share
outstanding.
Documents incorporated by reference: Part III - Registrant's definitive
proxy statement to be filed pursuant to Regulation 14-A of the Securities
Exchange Act of 1934.
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PART I
ITEM 1. BUSINESS
As used herein, unless we otherwise specify, the terms "we," "us," and
"our" mean Nathan's Famous, Inc. and its subsidiaries, including Miami Subs
Corporation, owner of the Miami Subs brand, and NF Roasters Corp., owner of the
Kenny Rogers brand.
We have historically operated and franchised fast food units featuring
Nathan's famous brand all beef frankfurters, fresh crinkle-cut french fried
potatoes, and a variety of other menu offerings. Our Nathan's brand
company-owned and franchised units operated under the name "Nathan's Famous,"
the name first used at our original Coney Island restaurant opened in 1916.
Since fiscal 1998, we supplemented our Nathan's franchise program with 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
system by operating company-owned restaurants and opening franchised
restaurants, developing complimentary lines of business, such as expanding our
supermarket licensing program of our Nathan's brand, implementing our Nathan's
Branded Product Program, and developing an international master franchising
program. In an effort to expand our restaurant system and expand our brand
portfolio, during fiscal 2000 we completed our merger with Miami Subs Corp. and
our acquisition of the intellectual property of the Kenny Rogers Roasters
franchise system. In addition, through our acquisition of Miami Subs, we also
secured certain exclusive co-branding rights to use the Arthur Treachers brand
within the United States. We have begun to capitalize on the co-branding
opportunities within our existing restaurant system, as well as seek to develop
new multi-brand marketing and development plans.
At March 25, 2001, our system, consisting of Nathan's Famous, Kenny
Rogers Roasters and Miami Subs restaurants, included 25 company-owned units
concentrated in the New York metropolitan area (including New Jersey) and
Florida, 386 franchised units, including four units operating pursuant to
management agreements, and over 1,200 branded product points of sale under our
Branded Product Program, located in 42 states, the District of Columbia, and 17
foreign countries.
We plan to further introduce our co-branding opportunities within the
existing restaurant system, seek to expand the scope and market penetration of
our Branded Product Program, further develop the restaurant operations of
existing company-owned and franchised outlets for all restaurant concepts, and
open new franchised outlets of all of our restaurant concepts in traditional or
captive market environments. We also may selectively consider opening new
company-owned restaurants. We also plan to develop an international presence
through the use of master franchising agreements based upon individual or
combined use of all three restaurant concepts.
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 the 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
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, fresh 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. Hot dogs are prepared and served in accordance with procedures which have
not varied significantly in more than 85 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:
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, cheeseburgers, superburgers and "BLT"
burgers. 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.
Nathans' restaurant units are available in a range of sizes as follows:
Type A--300 to 1,200 sq. ft., Type B--approximately 2,200 sq. ft. and Type
C--approximately 4,000 sq. ft. We have also developed Nathan's carts, kiosks,
and modular merchandising units, all designated as Type D. Type A units may not
have customer seating areas, although they may often share seating areas with
other fast food outlets in food court settings. Type B and Type C units
generally provide seating for 45 to 50 and 75 to 125 customers, respectively.
Type D units generally carry only the core menu. This menu is supplemented by a
number of other menu selections in Type A & B units and even greater menu
selection in Type C units.
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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 utilize a uniform, contemporary design.
Miami Subs Concept and Menu
Our Miami Subs concept features a wide variety of moderately priced
lunch, dinner and snack foods, including hot and cold submarine sandwiches,
various ethnic foods such as gyros and pita sandwiches, flame grilled hamburgers
and chicken breast sandwiches, 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
strongly emphasized in Miami Subs, as they are in all of our restaurants. The
Miami Subs menu may include low-fat selections such as salads, grilled chicken
breasts, vegetarian items 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, cheese steak subs and gyros on pita bread.
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 the restaurants
from our competitors. At March 25, 2001, 120 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 35% -
45% of Miami Subs sales.
To date, 105 Miami Subs restaurants have introduced our co-branded menu
consisting of Nathan's, Kenny Rogers Roasters or Arthur Treachers signature
products. We are creating a new image for Miami Subs based upon this co-branding
strategy called "Miami Subs Plus" which is expected to be heavily marketed in
Southern Florida in July 2001.
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 in the 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,
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soups, salads and sandwiches. The menu offers a healthful alternative to
traditional quick-serve menu offerings that caters to families and individuals.
The majority of existing Kenny Rogers Roasters restaurants are
traditional free standing buildings 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 being
considered include kiosks, food court units, double drive-thru units and scaled
down in-line and free standing restaurant types.
We have recently begun to co-brand Kenny Rogers Roasters with Nathan's
by introducing Nathan's famous all-beef frankfurters, crinkle-cut french fries
and hamburger menus to supplement Roasters' core menu offerings. We believe that
adding Nathan's products will compliment the Kenny Rogers menu by adding strong
lunchtime offerings to the existing predominant dinner offerings and expect that
the added variety will please and attract more families with children.
Franchise Operations
At March 25, 2001, our franchise system, including our Nathan's, Miami
Subs and Kenny Rogers restaurant concepts, consisted of 386 units operating in
25 states and 16 foreign countries.
Today, our franchise system counts among its 175 franchisees and
licensees such well known companies as Host Marriott Services USA, Inc., ARAMARK
Leisure Services, Inc., CA1 Services, Inc., Service America Corp., Ogden
Services Corp. and Sodexho USA. 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.
As of March 25, 2001, Host Marriott operated 34 franchised outlets,
including 18 units at airports, 13 units within highway travel plazas and three
units within malls.
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 4.5% of restaurant sales and the expenditure of 2.5% 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 4.5% and the expenditure of 2.5% of restaurant
sales on advertising. We may offer alternatives to the standard franchise
agreement, particularly having to do with advertising requirements. Marriott and
National Restaurant Management, Inc., are among those franchisees who are not
subject to the requirement to spend a percentage of sales on advertising. The
initial term of the typical franchise agreement is 20 years, with a 15-year
renewal option by the franchisee, subject to conditions contained in the
franchise agreement.
Franchisees are approved on the basis of their business background,
evidence of restaurant management experience, net worth and capital available
for investment in relation to the proposed scope of the development agreement.
We provide numerous support services to our Nathan's franchisees. We
assist in and approve all site selections. Thereafter, we provide architectural
plans suitable for restaurants of varying sizes and configurations for use in
food-court, in-line and free-standing locations. We also assist in establishing
building design specifications, reviewing construction compliance, equipping the
restaurant and providing appropriate menus to coordinate with the restaurant
design and location selected by the franchisee. We typically do not sell food,
equipment or supplies to our Nathan's franchisees.
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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.
Franchised restaurants are required to be operated in accordance with
uniform operating standards and specifications relating to the selection,
quality and preparation of menu items, signage, decor, equipment, uniforms,
suppliers, maintenance and cleanliness of premises and customer service. All
standards and specifications are developed by us and applied on a system-wide
basis. We continuously monitor franchisee operations and inspect restaurants.
Franchisees are required to furnish us with detailed monthly sales or operating
reports which assist us in monitoring the franchisee's compliance with its
franchise or license agreement. We make both announced and unannounced
inspections of restaurants to ensure that our practices and procedures are being
followed. We have the right to terminate a franchise if a franchisee does not
operate and maintain a restaurant in accordance with the requirements of its
franchise or license agreement. We also have the right to terminate a franchise
for non-compliance with certain other terms and conditions of the franchise or
license agreement such as non-payment of royalties, sale of unauthorized
products, bankruptcy or conviction of a felony. During the fiscal year ended
March 25, 2001, ("fiscal 2001") franchisees have opened 16 new Nathan's
franchised units, including 3 units in Egypt and 1 unit in Israel. We initiated
termination of 3 Nathan's franchise agreements for non-compliance during fiscal
2001.
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. In
some circumstances, we may grant exclusive territorial rights in foreign
countries for the development of Nathan's units based upon compliance with a
predetermined development schedule. We would 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 five 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% on gross restaurant sales for the term
of the franchise agreement, and additional charges based on a percentage of
restaurant sales, 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.
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We also provide development and construction support services to our
Miami Subs franchisees. We review and approve plans and specifications for the
restaurants before improvements begin. Our personnel typically visit the
facility during construction to meet with the franchisee's site contractor and
to verify that construction standards are met.
The six-week training program consists of formal classroom training and
in-restaurant training featuring various aspects of day-to-day operations
leading to certification in all functioning positions. Topics covered include
human resources, accounting, purchasing and labor and food handling laws.
Standard operating manuals are provided to each franchisee.
To maintain uniformly high standards of appearance, service and food
and beverage quality for our Miami Subs restaurants, we have adopted policies
and implemented a monitoring program. Franchisees are expected to adhere to
specifications and standards in connection with the selection and purchase of
products used in the operation of the Miami Subs restaurant. Detailed
specifications are provided for the products used, and franchisees must request
approval for any deviations. We do not generally sell equipment, supplies or
products to our Miami Subs franchisees. The franchise agreement requires
franchisees to operate their restaurants in accordance with Miami Subs'
requirements. We require our franchisees to use specified kitchen equipment to
maximize consistency and speed of food preparation. Ongoing advice and
assistance is provided to franchisees in connection with the operation and
management of each restaurant. Our area consultants are responsible for
oversight of franchisees and periodically visit each restaurant. During such
visits, the area consultant completes a report which contains evaluations on
speed of preparation for menu items, quality of delivered product, cleanliness
of restaurant facilities as well as evaluations of managers and other personnel.
The area consultants also make unannounced follow-up visits to ensure adherence
to operational specifications.
We also use information about the restaurants which is received from
customers on a Miami Subs' standardized "comment card" and maintain a toll-free
telephone number to receive customer comments.
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 25, 2001, franchisees have opened 2 new Miami Subs franchised units.
During the fiscal year ended March 25, 2001, we initiated termination of 6 Miami
Subs franchise agreements for such non-compliance.
Kenny Rogers Roasters Franchise Program
Kenny Rogers Roasters 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 royalty and
advertising fund payments through March 31, 2001. These reduced rates have been
extended until March 31, 2002. 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
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provide architectural prototype plans suitable for Kenny Rogers Roasters
restaurants of varying sizes and configurations, for use in food-court, in-line,
double drive-thru 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 continuously monitor franchisee operations. 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 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 25, 2001, no Kenny
Rogers Roasters franchise agreements were terminated for such 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 schedule
Company-owned Nathan's Restaurant Operations
As of March 25, 2001, we operated 17 company-owned Nathan's units,
including one kiosk, in New York and New Jersey. Three of these restaurants are
older and significantly larger units which do not conform to current 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 required 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. under which we lease space in certain Home Depot Improvement Centers to
operate Nathan's restaurants. The term of each Home Depot agreement is five
years from the date on which the restaurant opens, with two five year renewal
options. We currently operate seven units within Home Depot Improvement Centers,
including one kiosk.
Company-owned units currently range in size from approximately 440
square feet to 10,000 square feet and are located principally in retail shopping
environments or are free-standing buildings. Some restaurant designs do not
include seating and others include seating for 100 to 300 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.
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Company-owned Miami Subs Restaurant Operations
As of March 25, 2001, we operated six Miami Subs restaurants located in
Southern Florida. All of our company-owned Miami Subs restaurants are
free-standing restaurants offering drive thru operations as well as dine in
seating. The restaurants generally are approximately 3,100 square feet with
seating capacity for approximately 90 guests.
We use kitchen equipment in our Miami Subs restaurants which is
designed to be versatile, improve product consistency, and facilitate menu
modifications. Meats and other products, which are purchased in pre-weighed
individual servings, can be consistently cooked-to-order automatically.
Commencing January 2000, we introduced a re-engineered Miami Subs menu
within our company-owned Miami Subs restaurants. During fiscal 2001, we
furthered our menu development activities by proceeding with our co-branding
strategy of including certain Nathan's, Kenny Rogers Roasters and Arthur
Treachers signature products in selected company-owned Miami Subs restaurants.
During the year ended March 25, 2001, we closed three of the Miami Subs
company-operated restaurants that were identified for closure as part of our
acquisition strategy.
Company-owned Kenny Rogers Roasters Restaurant Operations
At March 25, 2001, we operated two Kenny Rogers Roasters restaurants in
Rockville Centre and Commack New York. These units are traditional free-standing
buildings, each with a drive thru, and boast a new interior design and decor
package featuring simulated weather-washed woodwork accentuated with earthtones.
Custom wall murals have been painted that are complimented with hanging
memorabilia. In addition to the standard Kenny Rogers Roasters menu, both
restaurants feature Nathan's all-beef frankfurters, crinkle-cut french fries,
chargrilled hamburgers and other select Nathan's menu items, including a newly
formulated kids' menu. Arthur Treachers' products are also featured in the
Rockville Centre restaurant.
International Franchising
As of March 25, 2001, our franchisees operated 93 units in 16 foreign
countries having significant representations within Malaysia, the Philippines,
and the Middle-East. The vast majority of foreign operations consist of Kenny
Rogers Roasters units, although our Nathan's and Miami Subs restaurant concepts
also have foreign franchise operations. During the current fiscal year, our
international franchising program opened nine Roasters as follows: four in the
Philippines, four in Malaysia and one in Brunei. We also opened three Nathan's
units in Egypt and one in Israel. There are currently two new units and one
co-branded unit under various stages of development.
To date, we also executed Letters of Intent to enter into Master
Development Agreements for the rights to China, Japan, and Turkey and are
currently in various stages of discussions for development in other foreign
countries. We may grant exclusive territorial rights, in foreign countries,
based upon compliance with a pre-determined development schedule and would
require that an exclusivity fee be conveyed for these rights. We plan to develop
internationally through the use of master franchising agreements based upon
individual or combined use of all three restaurant concepts.
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Location Summary
The following table shows the number of our company-owned and franchised or
licensed units in operation or under development at March 25, 2001 and their
geographical distribution:
Franchise
Location Company or License(1) Total
- -------- ------- ------------- -----
Alabama -- 3 3
Arizona -- 3 3
California -- 10 10
Colorado -- 1 1
Connecticut -- 3 3
Florida 6 118 124
Georgia -- 2 2
Idaho -- 1 1
Indiana -- 2 2
Maryland -- 2 2
Massachusetts -- 1 1
Michigan -- 2 2
Minnesota -- 2 2
Mississippi -- 1 1
Missouri -- 2 2
Nevada -- 6 6
New Jersey 2 44 46
New York 17 57 74
North Carolina -- 15 15
Pennsylvania -- 7 7
Rhode Island -- 1 1
South Carolina -- 2 2
Tennessee -- 2 2
Texas -- 5 5
Wisconsin -- 1 1
--- --- ---
Domestic Subtotal 25 293 318
--- --- ---
International Locations
Aruba -- 1 1
Bahamas -- 3 3
Brunei -- 1 1
Canada -- 3 3
China -- 5 5
Cypress -- 1 1
Dominican Republic -- 2 2
Egypt -- 6 6
Indonesia -- 1 1
Israel -- 1 1
Malaysia -- 27 27
Philippines -- 32 32
Puerto Rico -- 2 2
Saudi Arabia -- 2 2
Singapore -- 4 4
United Arab Emirates -- 2 2
--- --- ---
International Subtotal -- 93 93
--- --- ---
Grand Total 25 386 411
--- --- ---
(1) Includes 4 units operating by third parties pursuant to management
agreements and does not include our Branded Product Program.
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Branded Product Program
Our "Branded Product Program" was launched during fiscal 1998, for our
Nathan's Famous brand in which qualified foodservice operators may offer
Nathans' hot dogs and certain other proprietary items for sale within their
facilities. In conjunction with this program, foodservice operators are granted
a limited use of the Nathans' trademark for the sale of hot dogs and certain
other proprietary food items and paper goods. We sell the products directly to
various distributors who resell these proprietary products to retailers. At
March 25, 2001, the Branded Product Program was comprised of over 1,200 points
of sale. The flexibility of this program allows us to market the Nathan's brand
and sell Nathan's hot dogs through new and varied means of distribution. For
example, Nathan's pre-packaged branded hot dogs are being sold through vending
machines, convenience stores and club stores pursuant to exclusive distribution
agreements with The Compass Group and Pierre Foods. Other venues that now
feature Nathan's hot dogs through the Branded Product Program include hospitals,
casinos, department stores, colleges, Business & Industry accounts, beaches and
sports arenas and stadiums. We are proud to be part of the menu offerings at
Walter Reed and NYU Medical Hospitals, Caesar's Palace, UCLA, The Kennedy Space
Center, The House of Representatives, Jones Beach, Royal Caribbean Cruise Lines,
and of having been named the official hot dog of the New York Yankees for the
2001 through 2003 baseball seasons.
Expansion Program
The foundation of our expansion program centers around our marketing of
each brands' signature products. We expect to further focus on introducing each
restaurant concepts' signature products through co-branding efforts within our
existing restaurant system, opening new units for each restaurant concept
individually and on a co-branded basis and expanding product distribution
through alternative means such as branded products or supermarket licensing
arrangements.
We may selectively open new company-owned units, concentrated within
the New York metropolitan area or in Southern Florida using a co-branded format.
Existing company-owned units are principally located in the New York
metropolitan area and Southern Florida market where we have extensive experience
in operating restaurants. We intend to consider new opportunities in both
traditional and captive market settings.
We anticipate that we will open franchised units of all three
restaurant concepts individually and develop new co-branded outlets. We have
recently engaged an imaging and equipment design firm to assist us with the
development of certain prototype restaurants.
During fiscal 2002, we expect to continue opening new franchised units
for all three of our restaurant concepts and introducing our co-branded products
in new environments.
We expect that during fiscal 2002 our international development efforts
will take on added dimensions as a result of the co-branding opportunities that
we now offer. We believe that in addition to restaurant franchising of our three
restaurant concepts, there is the opportunity to 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
in fiscal 2002 which may include certain Miami Subs products, Kenny Rogers
Roasters products and additional Nathan's products, as well as through the
addition of new points of sale. 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 into branded products throughout the foodservice industry.
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Co-branding
We believe that there is a substantial opportunity for co-branding
among our restaurant concepts. In addition to the three restaurant concepts that
we own, we also maintain certain exclusive co-branding rights for the use of the
brand "Arthur Treachers Fish & Chips" within the United States.
During the fiscal year ended March 25, 2001, our strategy emphasized
co-branding within our existing restaurant system. "Host Restaurants" would
continue to operate pursuant to their current franchise agreements. Existing
franchisees would simply execute an addendum to their agreement which defined
the terms of our co-branding relationship. As part of our 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 expanded
the implementation of 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. We are presently developing
co-branding strategies for the Nathan's and Kenny Rogers franchise communities.
We expect to continue to provide co-branding throughout the upcoming fiscal
year.
We believe that our brand offerings compliment each other and will
enable us to market franchises of co-branded units and co-branding to 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 believe that the added variety has resulted
in increased sales.
To date, in the Miami Subs restaurant system, Nathan's products have
been introduced into 66 restaurants, Kenny Rogers products have been introduced
into 62 restaurants and Arthur Treachers products have been introduced into 96
restaurants. The Nathan's restaurant system has introduced Arthur Treachers
products into 25 restaurants and Kenny Rogers products into three restaurants.
The Kenny Rogers restaurant system has introduced Nathan's products into five
restaurants and Arthur Treachers products into four restaurants.
We expect to market co-branded units within the United States and
internationally. We believe that a multi-branded restaurant concept offering
strong lunch and dinner day parts will be very appealing to both consumers and
potential franchisees. Such restaurants should allow the operator to increase
sales and leverage the cost of real estate and other fixed costs which may
provide superior investment returns as compared to many restaurants that are
single branded.
Licensing Program
We license 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, groceries and other
outlets, thereby providing foods for off-premises consumption. The SMG 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 $1,614,000 in fiscal 2001 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 and certain other select markets. Royalties from
SMG provided the majority of our fiscal 2001 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.
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During fiscal 2001, our products were also distributed under licensing
agreements with Gold Pure Food Product's Co., Inc. and United 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 2001 have not been significant.
PROVISIONS AND SUPPLIES
Our proprietary hot dogs are produced by SMG and Russer Foods, a
division of IBP, Inc., in accordance with Nathans' recipes, quality standards
and proprietary spice formulations. John Morrell & Company, our licensee prior
to SMG, has retained the right to produce Nathans' proprietary spice
formulations. Kenny Rogers Roasters proprietary chicken is produced by ConAgra
based upon exacting quality, weight, processing and packaging standards.
Proprietary marinade and spice formulations are produced by McCormick and Co.,
Inc. All 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 U.S.
Foodservice. 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. Marriott and National Restaurant Management, Inc.
are among the current franchisees who are not subject to this requirement. If a
cooperative advertising program exists in the franchised area, the applicable
percentage can be contributed to that program. Where no cooperative advertising
program is available, up to 1% of the franchisees' advertising budget must be
contributed to the advertising funds for national marketing support. The balance
must be expended on local programs approved by us as to form, content and method
of dissemination.
Throughout fiscal 2001, 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, SMG 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 SMG increases brand recognition and thereby indirectly
benefits Nathan's restaurants in the areas in which SMG conducts its campaigns.
From time to time, we also participate with SMG in joint promotional activities.
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 are 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, 2002 have been waived. New franchisees will be
expected to spend on local marketing activities or contribute to the advertising
funds up to 2.5% of restaurant sales for advertising and promotion.
During the year, the Kenny Rogers Roasters' primary marketing focus has
been toward utilizing promotional "Limited Time Offers". We anticipate that
near-term marketing efforts for Kenny Rogers Roasters will continue to emphasize
local store marketing activities.
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We maintain a separate Production Advertising Fund for the creation and
development of advertising, marketing, public relations, research and related
programs for the Miami Subs system, as well as for other activities that we may
deem appropriate. Franchisee and company-operated restaurants contribute .5% of
each restaurants' 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' 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' gross sales for local advertising.
Our 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. Our Miami Subs radio advertisements are broadcast
principally in markets where there are sufficient restaurants to benefit from
such advertisements. In the summer 2001, we expect to use a television, radio
and newsprint campaign to introduce the new co-branded Miami Subs Plus concept
in Southern Florida.
The physical facility of each Miami Subs restaurant represents a key
component of our 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.
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, Kenny Rogers Roasters, and Miami Subs 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
particular
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locations. In addition, the federal Americans with Disabilities Act ("ADA")
applies with respect to the design, construction and renovation of all
restaurants in the United States. Compliance with the ADA's requirements could
delay or prevent the development of, or renovations to, restaurants in certain
locations, as well as add to the cost of such development or renovation.
Each of the companies which manufactures, supplies or sells our
products is subject to regulation by federal agencies and to licensing and
regulation by state and local health, sanitation, safety and other departments.
Difficulties or failures by these companies in obtaining the required licenses
or approvals could adversely effect our revenues which are generated from these
companies.
Alcoholic beverage control regulations require each restaurant that
sells such products to apply to a state authority and, in certain locations,
county and municipal authorities, for a license or permit to sell alcoholic
beverages on the premises. Typically, licenses must be renewed annually and may
be revoked or suspended for cause at any time. Alcoholic beverage control
regulations relate to numerous aspects of the daily operations of the
restaurants, including minimum age of customers and employees, hours of
operation, advertising, wholesale purchasing, inventory control and handling,
storage and dispensing of alcoholic beverages. At March 25, 2001, we offered for
sale beer or wine in eight 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 25, 2001, we had approximately 733 employees, of whom 66 were
corporate management and administrative employees, 111 were restaurant managers
and 556 were hourly full-time and part-time food-service employees. Food-service
employees at five locations are represented by Local 1115-NY, a division of
District 1115, AFL - CIO CLC, under various agreements which will expire in
April 2003. We consider our employee relations to be good and have not suffered
any strike or work stoppage for more than 29 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 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
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assigned to us on April 1, 1999, when we purchased certain assets relating to
the "Kenny Rogers Roasters" franchise system.
We have registered the marks "MIAMI SUBS AND DESIGN" and "MIAMI SUBS
GRILL AND DESIGN" with the United States Patent and Trademark Office. In
addition, the marks have been registered in approximately 50 foreign countries.
We have also filed the MIAMI SUBS PLUS trademark on February 15,
2001 and an Amendment to Alleged Use on May 21, 2001. MIAMI SUBS PLUS is a
pending application with the U.S. Patent and Trademark Office. It generally
takes approximately 18 months for the approval of an application.
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 compete 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. Extensive price discounting in the fast
food industry could have an adverse effect on us.
We also compete for the sale of franchises with many franchisors of
restaurants and other business concepts to qualified and financially capable
franchisees and with numerous companies for the sale and distribution of our
licensed hot dogs and other packaged foods, within supermarkets, primarily on
the basis of reputation, flavor, quality and price.
ITEM 2. PROPERTIES
Our principal executive offices consist of approximately 12,000 sq. ft.
of leased space in a modern, high-rise office building in Westbury, New York. We
also own Miami Subs' regional office consisting of approximately 8,500 sq. ft.
in Fort Lauderdale, Florida. We currently own three restaurant properties
consisting of 2,650 sq. ft. Nathan's restaurant, at 86th Street in Brooklyn, New
York located on a 25,000 sq. ft. lot, a 2,400 sq. ft. Miami Subs restaurant in
Largo, FL located on a 47,000 sq. ft. lot and a 2,600 sq. Ft. Miami Subs
restaurant in Miami, FL located on a 25,000
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sq. ft. lot. At March 25, 2001, 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
Location Expiration Date Square Footage
-------- --------------- --------------
Nathan's Restaurants
Coney Island Brooklyn, NY December 2007 10,000
Coney Island Boardwalk Brooklyn, NY October 2002 440
Kings Plaza Shopping Center Brooklyn, NY July 2010 4,200
Long Beach Road Oceanside, NY May 2011 7,300
Central Park Avenue Yonkers, NY April 2010 10,000
Paramus Park Shopping Center (1) Paramus, NJ August 2010 875
Jericho Turnpike Commack, NY March 2003 3,200
Hempstead Turnpike Levittown, NY September 2004 4,100
Broad Hollow Road Farmingdale, NY April 2003 2,200
Jericho Home Depot Jericho, NY September 2004 1,500
Copiague Home Depot Copiague, NY April 2005 1,200
Flushing Home Depot Flushing, NY June 2005 1,500
Elmont Home Depot Elmont, NY October 2005 1,500
Union Home Depot Union, NJ January 2008 960
Staten Island Home Depot Staten Island, NY July 2007 1,680
Brooklyn Home Depot Brooklyn, NY March 2008 950
Kenny Rogers Roasters
Commack Roasters Commack, NY October 2013 3,100
Rockville Centre Roasters Rockville Centre, NY April 2018 4,000
Miami Subs Restaurants
17th Street Ft. Lauderdale, FL August 2003 3,000
Lauderhill Lauderhill, FL May 2002 4,000
Okeechobee West Palm Beach, FL December 2001 3,500
South Miami Miami, FL August 2006 3,500
Lejune and 11th Miami, FL September 2002 2,500
Lejune (2) Miami FL November 2001 2,400
(1) Property is expected to be sublet to a franchisee in connection with sale
of restaurant.
(2) Sold to the State of Florida pursuant to an order of condemnation on May 1,
2001 and entered into a six month operating lease.
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. Many of the
Nathan's leases also provide for renewal options ranging between five and 25
years upon expiration of the prime lease.
We assumed the leases for the two properties operated as Kenny Rogers
Roasters from the previous restaurant operator. These leases have remaining
terms of 12 and 17 years and also provide for a base rent plus real estate
taxes, insurance and other expenses.
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
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franchisees or others. At March 25, 2001, we were the sublessor to 39 properties
pursuant to these arrangements. Not included in the above table are eight
properties we lease which were closed as of March 25, 2001. We are attempting to
terminate these leases or sublease the properties to third parties. Thirteen of
the restaurants leased/sub-leased to franchisees or others are located outside
of Florida.
Aggregate rental expense, net of sublease income, under all current
leases amounted to $3,549,000 in fiscal 2001.
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:
In or about December, 1996, Nathan's Famous Systems, Inc. instituted an
action in the Supreme Court of New York, Nassau County, against Phylli Foods,
Inc. a franchisee, and Calvin Danzig as a guarantor of Phylli Foods' payment and
performance obligations, to recover royalty fees and advertising contributions
due to Systems in the aggregate amount of $35,567 under a franchise agreement
between Systems and Phylli Foods dated June 1, 1994. In their answer, the
defendants essentially denied the material allegations of the complaint and
interposed counterclaims against Systems in which they alleged essentially that
Systems fraudulently induced the defendants to purchase the franchise from
Systems or did so by means of negligent misrepresentations. Defendants also
alleged that by reason of Systems' allegedly fraudulent and deceitful conduct,
Systems violated the General Business Law of New York. As a consequence of the
foregoing, the defendants sought damages in excess of five million dollars, as
well as statutory relief under the General Business Law. Systems moved to
dismiss the counterclaims on the grounds that they were insufficiently pleaded
and otherwise fail to state a sustainable claim against Systems upon which
relief may be granted. During fiscal 1998, Systems' motion was granted except
for the claim seeking statutory relief under the General Business Law. A
subsequent motion for summary judgement against Phylli Foods and Danzig was
successful and the action ultimately was settled by a payment from the
defendants to Systems of $22,500.
Nathan's was named as one of three defendants in an action commenced in
June 1997, in the Supreme Court of New York, Queens County. According to the
complaint, the plaintiff, a dentist, is seeking injunctive relief and damages in
an amount exceeding $5 million against the landlord, one of Nathan's franchisees
and Nathan's claiming that the operation of a restaurant in a building in Long
Island City created noxious and offensive fumes and odors that allegedly were
injurious to the health of the plaintiff and his employees and patients, and
interfered with, and irreparably damaged his practice. Plaintiff also claims
that the landlord fraudulently induced him to enter a lease extension by
representing that the first floor of the building would be occupied by a
non-food establishment. Nathan's believes that there is no merit to the
plaintiff's claims against it inasmuch as it never was a party to the lease, and
the restaurant, which closed in or about August 1995, was operated by a
franchisee exclusively. Nathan's intends to defend the action vigorously.
On January 5, 1999, Miami Subs was served with a class action lawsuit
entitled Robert J. Feeney, on behalf of himself and all others similarly
situated vs. Miami Subs Corporation, et al., in Broward County Circuit Court,
which was filed against Miami Subs, its directors and Nathan's in a Florida
state court by a shareholder of Miami Subs. Subsequently, Nathan's and its
designees to the Miami Subs Board were also served. The suit alleged that the
proposed merger between Miami Subs and Nathan's, as contemplated by the
companies' non-binding letter of intent, was unfair to Miami Subs' shareholders
and constituted a breach by the defendants of their fiduciary duties to the
shareholders of Miami Subs. The plaintiff sought among other things: 1. class
action status; 2. preliminary and permanent injunctive relief against
consummation of the proposed merger; and 3. unspecified damages to be awarded to
the shareholders of Miami Subs. On April 7, 2000 the plaintiff filed his
dismissal without prejudice of the action, effectively ending the case against
all of the defendants
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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
share prices per share for the periods indicated:
High Low
---- ---
Fiscal year ended March 26, 2000
First quarter $ 4.19 $ 3.50
Second quarter 3.69 3.13
Third quarter 3.66 3.16
Fourth quarter 4.75 3.06
Fiscal year ended March 25, 2001
First quarter $ 4.00 $ 2.75
Second quarter 3.94 2.88
Third quarter 3.81 2.56
Fourth quarter 3.88 2.88
At June 6, 2001 the closing price per share for our common stock, as reported by
Nasdaq was $3.30.
DIVIDEND POLICY
We have not declared or paid a cash dividend on our common stock since
our initial public offering. It is our Board of Directors' policy to retain all
available funds to finance the development and growth of our business. The
payment of cash dividends in the future will be dependent upon our earnings and
financial requirements.
SHAREHOLDERS
As of June 6, 2001, we had 840 shareholders of record, excluding
shareholders whose shares were held by brokerage firms, depositories and other
institutional firms in "street name" for their customers.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FISCAL YEARS ENDED
MARCH 25, MARCH 26, MARCH 28, MARCH 29, MARCH 30
2001 2000 1999 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Operations Data:
Revenues:
Sales $34,799 $29,642 $23,964 $22,971 $21,718
Franchise fees and royalties 8,814 5,906 3,230 3,062 3,238
License royalties and other income 3,561 2,343 1,953 2,393 1,619
--------------------------------------------------------
Total revenues 47,174 37,891 29,147 28,426 26,575
--------------------------------------------------------
Costs and Expenses:
Cost of sales 22,530 18,977 14,932 14,017 13,031
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Restaurant operating expenses 8,964 8,208 5,780 6,411 6,602
Depreciation and amortization 1,791 1,358 1,065 1,035 1,013
Amortization of intangible assets 839 716 384 384 406
General and administrative expenses 8,978 8,222 4,722 4,755 4,097
Interest expense 310 198 1 6 16
Impairment of long-lived assets 127 465 302 -- --
Impairment of notes receivable 151 840 -- -- --
Other expense (income) 462 427 (349) -- --
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Total costs and expenses 44,152 39,411 26,837 26,608 25,165
-------------------------------------------------------------------
Income (loss) before provision (benefit)
for income taxes 3,022 (1,520) 2,310 1,818 1,410
Provision (benefit) for income taxes 1,416 (250) (418) 290 622
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Net income (loss) 1,606 ($ 1,270) $ 2,728 $ 1,528 $ 788
===================================================================
Per Share Data:
Net income (loss)
Basic $ 0.23 ($ 0.22) $ 0.58 $ 0.32 $ 0.17
Diluted $ 0.23 ($ 0.22) $ 0.57 $ 0.32 $ 0.17
Dividends -- -- -- -- --
-------------------------------------------------------------------
Number of common shares used in computing
net income (loss) per share
Basic 7,059 5,881 4,722 4,722 4,722
Diluted (1) 7,098 5,881 4,753 4,749 4,729
Balance Sheet Data at End of Fiscal Year:
Working capital (deficit) $ 5,210 ($ 322) $ 3,708 $ 6,105 $ 4,802
Total assets 51,826 48,583 31,250 29,539 27,794
Long term debt, net of current maturities 1,789 3,131 0 9 21
Stockholders' equity $ 35,031 $ 33,347 $ 26,348 $ 23,586 $ 21,976
===================================================================
Selected Restaurant Operating Data:
Systemwide Restaurant Sales:
Company-owned $ 30,946 $ 27,478 $ 21,981 $ 22,332 $ 21,718
Franchised 208,899 152,627 64,178 58,802 68,564
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Total $ 239,835 $ 180,105 $ 86,159 $ 81,134 $ 85,282
===================================================================
Number of Units Open at End of Fiscal Year:
Company-owned 25 32 25 27 26
Franchised 386 415 163 156 147
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Total 411 447 188 183 173
===================================================================
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Notes to Selected Financial Data
(1) Common Stock equivalents have been excluded from the computation for the
year ended March 26, 2000 as the impact of their inclusion would have been
anti-dilutive.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
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,
Kenny Rogers and Miami Subs restaurant concepts, licensing agreements for the
sale of Nathan's products within supermarkets and selling products under
Nathan's Branded Product Program. 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.
At March 25, 2001, our combined systems consisted of 25 company-owned
units, 386 franchised or licensed units and to over 1,200 Nathan's Branded
Product points of distribution that feature Nathan's world famous all-beef hot
dogs, located in 42 states, the District of Columbia and sixteen foreign
countries. At March 25, 2001, our company-owned restaurant system included 17
Nathan's units, six Miami Subs units and two Kenny Rogers Roasters units, as
compared to 19 Nathan's units, 11 Miami Subs units and two Kenny Rogers Roasters
units at March 26, 2000.
In addition to plans for expansion, Nathan's is in the process of
capitalizing on co-branding opportunities within its existing restaurant system.
To date, the Arthur Treachers brand has been introduced within 125 Nathan's,
Kenny Rogers Roasters and Miami Subs restaurants , the Nathan's brand has been
added to the menu of 71 Miami Subs and Kenny Rogers restaurants, while the Kenny
Rogers Roasters brand has been introduced into 65 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 15 of those properties. We continue
to market two of those properties for sale and will terminate the lease for the
last unit upon the lease expiration in May 2002. We also terminated 10
additional leases for properties outside of the divestiture plan and incurred a
charge to earnings of approximately $463,000 in the fiscal 2001 period.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 25, 2001 COMPARED TO FISCAL YEAR ENDED MARCH 26, 2000
Effective October 1, 1999, the results of Miami Subs Corporation have
been included in the consolidated results of Nathan's Famous, Inc. Our results
of operations for the 52 weeks ended March 26, 2000 included the operations of
Miami Subs for approximately 26 weeks as compared to including 52 weeks of such
operations for the period ended March 25, 2001. The results of Miami Subs'
operations for the twenty-six week period ended September 24, 2000 have been
separately stated to quantify that impact on the fifty-two weeks of operations
for the non-comparable period.
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Revenues
Total sales increased by 17.4% or $5,157,000 to $34,799,000 for the
fifty-two weeks ended March 25, 2001 ("fiscal 2001 period") as compared to
$29,642,000 for the fifty-two weeks ended March 26, 2000 ("fiscal 2000 period").
Of the total increase, sales increased by $5,968,000 during the twenty-six week
period ended September 24, 2000 as a result of the Miami Subs acquisition made
last year, offset by a sales decline of $811,000 primarily due to the operation
of 18 fewer company-owned stores as compared to the prior fiscal period which
was partly offset by sales from newly opened restaurants and increased sales of
our Branded Products. This unit reduction is the result of our franchising eight
company-owned restaurants, transferring one company-owned restaurant to a
franchisee pursuant to a management agreement, closing seven unprofitable
company-owned units (including three Miami Subs restaurants pursuant to our
divesture plan) and closing two units due to lease expirations. The financial
impact associated with these 18 restaurants lowered restaurant sales by
$4,299,000 and improved restaurant operating profits by $135,000 versus the
fiscal 2000 period. Additionally, one unit was temporarily closed during part of
the fiscal 2001 period for renovation. This unit re-opened in October 2000.
Comparable restaurant sales of the company-owned Nathan's brand (neither Miami
Subs nor Roasters company-owned restaurants were deemed to be comparable units
based upon their period of operation under our ownership) also declined by 1.5%
versus the fiscal 2000 period, due principally to weakness experienced at the
Coney Island restaurant primarily attributable to the unfavorable weather
conditions experienced earlier in the fiscal year. During the fiscal 2001
period, sales from two new company-owned restaurants were $2,343,000. Sales from
the Branded Product Program increased by 78.1% to $3,853,000 for the fiscal 2001
period as compared to sales of $2,163,000 in the fiscal 2000 period.
Franchise fees and royalties increased by 49.2% or $2,908,000 to
$8,814,000 in the fiscal 2001 period compared to $5,906,000 in the fiscal 2000
period. Increases in franchise fees and royalties during the twenty-six week
period ended September 24, 2000 resulting from the Miami Subs acquisition made
last year was $2,397,000. Franchise sales of Nathan's three restaurant concepts
increased by 36.9% to $208,889,000 in the fiscal 2001 period as compared to
$152,627,000 in the fiscal 2000 period due primarily to the inclusion of Miami
Subs franchise system sales for the entire fiscal 2001 period compared to
twenty-six weeks for the fiscal 2000 period. Franchise royalties were $8,060,000
in the fiscal 2001 period as compared to $5,167,000 in the fiscal 2000 period.
Franchise fee income derived from new unit openings and our co-branding
initiative were $754,000 in the fiscal 2001 period as compared to $739,000 in
the fiscal 2000 period. This increase was primarily attributable to the number
of franchised units opened between the two periods, franchise fees earned from
the co-branded restaurant conversions and the difference between expired
franchise fees recognized into income. During the fiscal 2001 period, seventeen
new franchised or licensed units opened.
License royalties were $1,958,000 in the fiscal 2001 period as compared
to $1,906,000 in the fiscal 2000 period. Royalties earned from the sale of
Nathan's frankfurters within supermarkets and club stores were approximately
$1,614,000 during the fiscal 2001 period as compared to $1,432,000 during the
fiscal 2000 period. Royalties from the sale of proprietary spices and marinade
were approximately $228,000 in the fiscal 2001 period as compared to $184,000 in
the fiscal 2000 period. During the fiscal 2001 period, we terminated an
agreement with a licensee which lowered our revenue for the fiscal 2001 period
by approximately $125,000 as compared to the fiscal 2000 period.
Equity in losses of unconsolidated affiliate of $163,000 in the fiscal
2000 period represented Nathans' proportionate share of Miami Subs' net loss for
the period March 1, 1999 through September 30, 1999, which has been reported on
a one month lag since the acquisition of the 30% equity interest. Included in
Miami Subs' net loss for the period were merger costs of $325,000.
Investment and other income increased by $1,003,000 to $1,603,000 in
the fiscal 2001 period versus $600,000 in the fiscal 2000 period. Increases in
other income during the twenty-six week period ended September 24, 2000 as a
result of the Miami Subs acquisition made last year was $392,000. During the
fiscal 2001 period Nathan's recognized income of approximately $694,000 in
connection with the introduction of a consolidated food distribution system for
its three restaurant concepts and the ongoing recognition of deferred marketing
support. The increase is also attributable to a transfer fee of $500,000 that
was earned in connection with a change in ownership of Nathan's licensee, SMG,
Inc. Investment and interest income was approximately $756,000 less than the
fiscal 2000 period due primarily to the difference in performance of the
financial markets between the two periods, which was partially offset by higher
interest income of approximately $195,000.
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Costs and Expenses
Cost of sales increased by $3,553,000 to $22,530,000 in the fiscal 2001
period from $18,977,000 in the fiscal 2000 period. Of the total increase, cost
of sales increased by $3,837,000 during the twenty-six week period ended
September 24, 2000 as a result of the Miami Subs acquisition made last year.
Cost of sales attributable to two new company-owned restaurants along with
higher labor costs in the Nathan's brand partially offset lower costs of
operating fewer company-owned restaurants totaling $2,969,000 as compared to the
fiscal 2000 period. The cost of restaurant sales at Nathans' comparable units
was 60.2% as a percentage of restaurant sales in the fiscal 2001 period as
compared to 60.0% as a percentage of restaurant sales in the fiscal 2000 period
due primarily to higher labor costs (neither Miami Subs nor Roasters
company-owned restaurants were deemed to be comparable units based upon their
period of operation under our ownership). Higher cost of sales totaling
approximately $1,152,000 were incurred in connection with the growth of the
Branded Product Program.
Restaurant operating expenses increased by $756,000 to $8,964,000 in
the fiscal 2001 period from $8,208,000 in the fiscal 2000 period. Restaurant
operating expenses increased by $1,687,000 during the twenty-six week period
ended September 24, 2000 as a result of the Miami Subs acquisition made last
year. Lower costs of $1,622,000 were attributable to the closed company-owned
restaurants as compared to the end of fiscal 2000 which were partially offset by
higher costs of approximately $735,000 from operating two new Roasters
restaurants and higher utility costs at company-owned comparable restaurants.
Depreciation and amortization increased by $433,000 to $1,791,000 in
the fiscal 2001 period from $1,358,000 in the fiscal 2000 period. Depreciation
expense increased by $403,000 during the twenty-six week period ended September
24, 2000 as a result of the Miami Subs acquisition made last year. Depreciation
expense attributable two new company-owned restaurants and the remaining capital
spending for the fiscal 2001 period was partially offset by the lower
depreciation expense of operating fewer company-owned restaurants versus the
fiscal 2000 period.
Amortization of intangibles increased by $123,000 to $839,000 in the
fiscal 2001 period from $716,000 in the fiscal 2000 period primarily as a result
of the Miami Subs acquisition made last year which is attributable to intangible
assets acquired and the amortization of the excess purchase price.
General and administrative expenses increased by $756,000 to $8,978,000
in the fiscal 2001 period as compared to $8,222,000 in the fiscal 2000 period.
General and administrative expenses increased by approximately $1,562,000 during
the twenty-six week period ended September 24, 2000 as a result of the Miami
Subs acquisition made last year. General and administrative expenses, excluding
the impact of Miami Subs, decreased by $806,000 primarily due to lower bad debt
expense of approximately $739,000 and certain rebates of approximately $178,000,
which were partially offset by higher spending in connection with personnel
costs and incentive compensation of approximately $245,000.
Interest expense was $310,000 during the fiscal 2001 period as compared
to $198,000 during the fiscal 2000 period. Interest expense increased
principally due to the different periods of time that Miami Subs has been owned
by Nathan's, which expense has been reduced by the repayment of some of the
Miami Subs' assumed debt since the date of the acquisition.
Impairment charges on notes receivable of $151,000 during the fiscal
2001 period and $840,000 during the fiscal 2000 period relate to write-downs of
one and six notes receivable, respectively.
Impairment charges on fixed assets of $127,000 during the fiscal 2001
period and $465,000 during the fiscal 2000 period reflect write-downs relating
to one under-performing store in the fiscal 2001 period and three
under-performing stores in the fiscal 2000 period.
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. During the fiscal 2000 period, other expense of
$427,000 included approximately $191,000 in lease expense resulting from the
default of subleases and $236,000 in connection with the satisfaction of certain
financial guarantees.
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Income Tax Expense
In the fiscal 2001 period, the income tax provision was $1,416,000 or
46.9% of income before income taxes as compared to an income tax benefit of
($250,000) or(16.4%) of loss before income taxes in the fiscal 2000 period.
These rates are higher than the statutory federal tax rate due to the effect of
state and local taxes and certain nondeductible expenses. Nathan's has agreed to
accept an offer by the Internal Revenue Service to conclude the Miami Subs tax
audit for the years 1991 through 1996. As part of that agreement, Nathan's
expects that certain amortization of intangible assets previously deducted by
Miami Subs will be reversed and will not be deductible in the future.
FISCAL YEAR ENDED MARCH 26, 2000 COMPARED TO FISCAL YEAR ENDED MARCH 28, 1999
Revenues
Total sales were $29,642,000 for the fifty-two weeks ended March 26,
2000 ("the fiscal 2000 period") as compared to $23,964,000 for the fifty-two
weeks ended March 28, 1999 ("the fiscal 1999 period"). Of the total increase,
sales increased by $6,985,000 as a result of the acquisitions made this year.
Company-owned restaurant sales of the Nathan's brand decreased 6.0% or
$1,318,000 to $20,664,000 from $21,982,000. This restaurant sales decline is
primarily due to the impact of franchising three company-owned restaurants and
closing three other unprofitable company-owned restaurants during the current
fiscal year and closing two company-owned units during the prior fiscal year due
to the lease expirations. The total sales decline during the fiscal 2000 period
attributable to these eight stores was $1,763,000. Comparable restaurant sales
of the Nathan's brand increased by 1.1% versus the fiscal 1999 period. We
continued to emphasize local store marketing activities, new product
introductions and value pricing strategies for the Nathan's brand. These
activities were supplemented by a regional newsprint campaign during the summer
of 1999. Pursuant to our exclusive co-branding agreement with Arthur Treachers,
we began test marketing Arthur Treachers signature products in four
company-owned Nathan's restaurants during September and October 1999. Based upon
the success of these tests, we extended these co-branding efforts within
company-owned units and made Arthur Treachers products available to franchisees.
At June 15, 2000 Arthur Treachers' products were featured in 14 Nathan's
restaurants. Sales from the Branded Product Program increased to $2,163,000
during the fiscal 2000 period as compared to sales of $1,983,000 in the fiscal
1999 period.
Franchise fees and royalties increased by 82.8% or $2,676,000 to
$5,906,000 in the fiscal 2000 period compared to $3,230,000 in the fiscal 1999
period. Increases in franchise income resulting from the acquisitions made
during the fiscal 2000 period were $2,685,000. Nathans' franchise royalties
increased by $60,000 or 2.2% to $2,758,000 in the fiscal 2000 period as compared
to $2,698,000 in the fiscal 1999 period. Franchise restaurant sales of the
Nathan's brand increased by 2.0% to $65,458,000 in the fiscal 2000 period as
compared to $64,178,000 in the fiscal 1999 period. At March 26, 2000, there were
415 franchised or licensed restaurants within the franchise system, including
160 Nathan's locations. Franchise fee income derived from Nathan's restaurant
openings was $463,000 in the fiscal 2000 period as compared to $532,000 in the
fiscal 1999 period. This decrease was primarily attributable to the difference
between the number and types of franchised units opened between the two periods.
During the fiscal 2000 period, 21 new Nathan's franchised or licensed units
opened, including two units in Egypt.
License royalties were $1,906,000 in the fiscal 2000 period as compared
to $1,527,000 in the fiscal 1999 period. Increases in license royalties
resulting from the acquisitions made during the fiscal 2000 period were $86,000.
The majority of the remaining increase is attributable to sales by SMG, Inc.,
our licensee for the sale of Nathan's frankfurters within supermarkets and club
stores. Royalties from the sale of proprietary spices and marinade were
approximately $184,000 in the fiscal 2000 period as compared to $112,000 in the
fiscal 1999 period
Equity in (losses) earnings of unconsolidated affiliate of ($163,000),
represents our proportionate share of Miami Subs' net loss for the period March
1, 1999 through the date of the merger on September 30, 1999. Included in Miami
Subs' net loss for that period were merger costs of $325,000.
Investment and other income was $600,000 in the fiscal 2000 period
versus $400,000 in the fiscal 1999 period. Increased other income attributable
to the acquisitions made during the fiscal 2000 period were $308,000. During the
fiscal 2000 period our marketable investment securities earned approximately
$132,000 more than the prior fiscal year. This was due to earning less interest
income than the fiscal 1999 period due primarily to the reduced amount of our
fixed income securities which was more than offset by the difference in
performance of the equity markets between the two
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periods. Additionally, we earned approximately $118,000 less miscellaneous
income during the fiscal 2000 period as compared to the fiscal 1999 period and
recognized a loss of approximately $123,000 on the disposal of fixed assets.
Costs and Expenses
Cost of sales increased by $4,045,000 from $14,932,000 in the fiscal
1999 period to $18,977,000 in the fiscal 2000 period. Of the total increase,
cost of sales increased by $4,831,000 as a result of the acquisitions made
during the fiscal 2000 period. Higher costs of approximately $194,000 were
incurred in connection with the Nathan's Branded Product Program. Restaurant
cost of sales associated with the Nathan's brand were lower due primarily to the
closure of two company-owned Nathan's restaurants during the fiscal 1999 period,
the closure of three unprofitable company-owned Nathan's restaurants during the
fiscal 2000 period and the franchising of three company-owned Nathan's units
during the fiscal 2000 period which were partly offset by the exclusion of costs
of operating the Nathan's Kings Plaza restaurant which was being renovated
during fiscal 1999. Our cost of restaurant sales for the Nathan's brand was
60.5% of restaurant sales in the fiscal 2000 period as compared to 61.0% of
restaurant sales in the fiscal 1999 period. The decrease, as a percentage of
restaurant sales, is due partly to the increase in the amount of the average
check over the prior period and lower costs of food and labor as a percentage of
restaurant sales during the fiscal 2000 period. We continue to seek to operate
more efficiently as a means to minimize the margin pressures which have become
an integral part of competing in the current value conscious marketplace.
Restaurant operating expenses increased by $2,428,000 from $5,780,000
in the fiscal 1999 period to $8,208,000 in the fiscal 2000 period. Of the total
increase, restaurant operating expenses increased by $2,366,000 as a result of
the acquisitions made this year. Restaurant operating expenses associated with
the Nathan's brand were $5,842,000 during the fiscal 2000 period versus
$5,780,000 during the fiscal 1999 period. This increase in restaurant operating
costs was due primarily to higher costs of operating the restaurant that was
renovated last year of approximately $146,000, higher occupancy costs of
approximately $107,000, higher insurance costs of approximately $68,000 and
higher marketing costs of approximately $138,000, which were partly offset by
lower costs due to operating fewer company-owned restaurants of approximately
$430,000.
Depreciation and amortization increased by $293,000 from $1,065,000 in
the fiscal 1999 period to $1,358,000 in the fiscal 2000 period. Depreciation
expense increased as a result of the acquisitions made during the fiscal 2000
period by $323,000.
Amortization of intangible assets increased by $332,000 from $384,000
in the fiscal 1999 period to $716,000 in the fiscal 2000 period. This increase
is due to the amortization, based upon the preliminary purchase price
allocations, of the Kenny Rogers Roasters intellectual property acquired on
April 1, 1999 and the Miami Subs acquisition on September 30, 1999.
General and administrative expenses increased by $3,500,000 to
$8,222,000 in the fiscal 2000 period as compared to $4,722,000 in the fiscal
1999 period. Of the total increase, general and administrative expenses
increased by $2,692,000 as a result of the acquisitions made during the fiscal
2000 period. General and administrative expenses, excluding the impact of Miami
Subs and Kenny Rogers Roasters, increased by $808,000 or 17.1% primarily due to
increased compensation expense of $339,000, increased provisions for doubtful
accounts of approximately $262,000, higher professional fees for legal, audit
and tax services of approximately $148,000 and approximately $76,000 associated
with costs in connection with the migration of the Miami Subs support functions
to New York which commenced effective March 27, 2000.
Interest expense of $198,000 primarily relates to assumed indebtedness
as of the date of the acquisition. Since the acquisition, we have repaid notes
totaling approximately $1,929,000 and therefore anticipate lower interest
expense in the future.
Impairment charges on notes receivable of $840,000, reflects
write-downs on six notes receivable.
Impairment charges on fixed assets of $465,000 during the fiscal 2000
period and $302,000 during the fiscal 1999 period reflect write-downs relating
to three under-performing stores in the fiscal 2000 period and four
under-performing stores in the fiscal 1999 period.
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Other expense (income) of $427,000 during the fiscal 2000 period
includes approximately $191,000 in lease expense resulting from the default of
subleases and $236,000 in connection with the satisfaction of certain financial
guarantees, compared to the prior fiscal year when we reversed previous
litigation accruals in the amount of $349,000 resulting from the conclusion of
the associated litigation.
Income Taxes
In the fiscal 2000 period, the income tax benefit was ($250,000)
or(16.4%) of loss before income taxes as compared to the income tax benefit of
($418,000) or (18.1%) of income before taxes in the fiscal 1999 period. During
fiscal 1999 management determined that, based upon the facts and circumstances
at the time, it was more likely than not that a portion of our deferred tax
assets would be realized. Accordingly, we reduced our valuation allowance by
$1,443,000 in fiscal 1999. The fiscal 1999 provision before adjustment for the
valuation allowance was $1,025,000 or 44.4% of income before taxes. Management
will continue to monitor the likelihood of continued realizability of its
deferred tax asset and may, if deemed appropriate under the facts and
circumstances at that time, recognize further adjustments to our deferred tax
valuation allowance in accordance with Financial Accounting Standards Board
Statement No. 109 "Accounting for Income Taxes".
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 25, 2001 aggregated $4,325,000,
increasing by $1,928,000 during the fiscal 2001 period. At March 25, 2001,
marketable securities and investment in limited partnership totaled $4,648,000
and net working capital increased to $5,210,000 from a deficit of $147,000 at
March 26, 2000. Cash and cash equivalents at March 25, 2001 included $2,104,000
held on behalf of the Miami Subs Advertising Funds. A corresponding accrual has
been recorded within accrued expenses and other current liabilities.
Cash provided by operations of $4,149,000 in the fiscal 2001 period is
primarily attributable to net income of $1,606,000, non-cash charges of
$3,490,000, including depreciation and amortization of $2,630,000, impairment
charges of $278,000, deferred income taxes of $ 313,000 and allowance for
doubtful accounts of $191,000, in addition to an increase in other non current
liabilities of $1,329,000, increases in accounts payable and accrued expenses
and other current liabilities of $961,000, decreases in other assets of
$159,000, all of which were partially offset by an increase in marketable
securities and investment in limited partnership of $1,651,000, an increase in
notes and accounts receivables of $1,350,000, an increase in prepaid expenses
and other current assets of $339,000 and a decrease in deferred franchise fees
of $76,000. During fiscal 2001, Nathan's received a marketing advance from its
beverage supplier in connection with a newly executed marketing agreement.
Cash used in investing activities of $1,943,000 is comprised primarily
of $1,458,000 relating to capital improvements of company-owned restaurants and
other fixed asset additions, lease termination costs and other costs of
$1,036,000 pursuant to our final divestiture plan in connection with our
acquisition of Miami Subs, cash received on notes receivable of $506,000 and
proceeds from the sale of assets of $45,000.
Cash used in financing activities of $278,000 represents repayments of
notes payable and obligations under capital leases.
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 15 of those properties. We are
continuing to market two of the remaining properties for sale and will terminate
the lease for the last unit upon the lease expiration in May 2002. As of March
25, 2001, we have accrued approximately $1,461,000 for lease reserves and
termination costs, as part of the acquisition, for units with total future
minimum lease obligations of $7,680,000 with remaining lease terms of 1 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.
On May 1, 2001, pursuant to an order of condemnation, we sold a
company-owned restaurant to the State of Florida for $1,500,000 and repaid the
outstanding mortgage of approximately $793,000 plus accrued interest.
Additionally, in June 2001, we expect to sell our restaurant in the Paramus Park
Mall to a franchisee for $400,000 in cash and concurrently enter into a
sub-lease for the property.
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We expect that we will reinvest in certain existing restaurants in the
future and that we will fund those investments from our operating cash flow. We
do not currently expect to incur significant capital expenditures to develop new
company-owned restaurants.
We also guarantee certain equipment financing for franchisees with a
third party lender. Our maximum obligation for loans funded by the lender as of
March 25, 2001 was approximately $1.3 million.
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 maintain a
$7,500,000 uncommitted bank line of credit and have not borrowed any funds to
date under this line of credit.
SEASONALITY
Our business is affected by seasonal fluctuations, the effects of
weather and economic conditions. Historically, sales and 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 Nathan's stores,
which is principally the New York metropolitan area. Miami Subs' restaurant
sales have historically been strongest during the period March through August,
which approximates our first and second quarters, as a result of a heavy
concentration of restaurants being located in Florida. As a result, we believe
that future revenues may become slightly more seasonal.
IMPACT OF INFLATION
During the past several years, our commodity costs have remained
relatively stable. As such, we believe that inflation has not materially
impacted earnings during that period of time. Last year we experienced increased
costs of our meat products and utilities resulting from increased commodity
costs. We also experienced increased costs for insurance attributable to the
hardening of the insurance markets. Last year, various legislators proposed
additional changes to the minimum wage requirements. During 2000, different
bills were passed by the Senate and the House of Representatives proposing to
further increase the Federal minimum wage, although, no legislation was passed.
At this time, there are no pending Federal minimum wage proposals, however, we
believe that there will be continued pressure to pass new Federal minimum wage
legislation in the future. We further believe that any further increases in the
minimum wage could have a significant financial impact on us. Prolonged
increases in labor, food and other operating expenses could adversely affect our
operations and those of the restaurant industry and we might have to reconsider
our pricing strategy as a means to offset reduced operating margins.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138,
is effective for all fiscal years beginning after June 15, 2000 and will not
require retroactive restatement of prior period financial statements. This
statement requires the recognition of all derivative instruments as either
assets or liabilities in the balance sheet, measured at fair value. Derivative
instruments will be recognized as gains or losses in the period of change. The
adoption of SFAS No. 133 will not have a material impact on our financial
position or results of its operations as we do not presently make use of
derivative instruments.
In December 1999, the SEC staff released Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition," which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
SAB No. 101 explains the SEC staff's general framework for recognizing revenue,
specific criteria to be met, along with required disclosures related to revenue
recognition. SAB No. 101 did not have a material impact on our financial
position or results of operations.
26
28
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
availability of suitable restaurant sites on reasonable rental terms; changes in
consumer tastes; ability to continue to attract franchisees; the ability to
purchase its 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 RISK
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 or reinvestment as a result of intervening events.
We have invested our marketable investment securities in intermediate
term, fixed rate, highly rated and highly liquid instruments and a highly liquid
investment limited partnership that invests principally in equities. These
investments are subject to fluctuations in interest rates and the performance of
the equity markets.
The interest rate on our borrowings are generally determined based upon
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.
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.
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.
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
None
27
29
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.
28
30
PART IV
ITEM 14. EXHIBITS, 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 1993 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, 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;
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.)
29
31
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 Home Depot Food Service Lease Agreement. (Incorporated by reference to Exhibit 10.24 to the Annual
Report filed on form 10-K for the fiscal year ended March 26, 1995.)
10.14 Modification Agreement to the Employment Agreement with Wayne Norbitz, dated December 28, 1992.
(Incorporated by reference to Exhibit 10.1 to the Quarterly Report filed on form 10-Q for the
fiscal quarter ended December 29, 1996.)
10.15 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.)
10.16 Warrant Agreement dated November 24, 1996 between the Company and Jerry Krevans. (Incorporated by
reference to Exhibit 10.24 to the Annual Report filed on form 10-K for the fiscal year ended March
30, 1997.)
10.17 Second Amended and Restated Rights Agreement dated as of April 6, 1998 between Nathan's Famous, Inc. and
American Stock Transfer and Trust Company (Incorporated by reference to Exhibit 2 to Form 8-A/A dated April 6, 1998.)
10.18 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.)
10.19 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.)
10.20 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.)
10.21 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.)
10.22 Employment Agreement dated as of January 31, 2000 with Ronald DeVos.(Incorporated by reference to Exhibit
10.22 to the Annual Report filed on form 10-K for the fiscal year ended March 26, 2000.)
10.23 Master Distributor Agreement with U.S. Foodservice, Inc..(Incorporated by reference to Exhibit 10.23 to
the Annual Report filed on form 10-K for the fiscal year ended March 26, 2000.)
10.24 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.)
10.25 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.)
21 List of Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
(b) REPORTS ON FORM 8-K
None.
30
32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statement of Nathan's Famous, Inc. and
subsidiaries are included in item 8:
Financial Statements Page
- -------------------- ----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of March 25, 2001 and March 26, 2000 F-3
Consolidated Statements of Operations for the Fiscal Years ended
March 25, 2001, March 26, 2000 and March 28, 1999 F-4
Consolidated Statements of Stockholder Equity for the Fiscal Years
ended March 25, 2001, March 26, 2000, and March 28, 1999 F-5
Consolidated Statements of Cash Flows for the Fiscal Years ended
March 25, 2001, March 26, 2000 and March 28, 1999 F-6
Notes to the Consolidated Financial Statements F-7
Financial Statement Schedules
- -----------------------------
Report of Independent Public Accountants S-1
Schedule II for the Fiscal Years ended March 25, 2001, March 26, 2000, S-2
and March 28, 1999
F-1
33
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-2
34
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS March 25,2001 March 26, 2000
------ ------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,325 $ 2,397
Marketable securities and investment in limited partnership 4,648 2,997
Notes and accounts receivable, net 4,178 2,618
Inventories 523 543
Assets available for sale 1,510 175
Prepaid expenses and other current assets 974 635
Deferred income taxes 1,714 1,578
-------- --------
Total current assets 17,872 10,943
Notes receivable, net 1,729 2,527
Property and equipment, net 11,279 11,655
Assets available for sale 450 3,092
Intangible assets, net 18,011 19,092
Deferred income taxes 2,081 711
Other assets, net 404 563
-------- --------
$ 51,826 $ 48,583
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of notes payable and capital lease obligations $ 1,343 $ 279
Accounts payable 1,978 1,727
Accrued expenses and other current liabilities 8,731 8,398
Deferred franchise fees 610 686
-------- --------
Total current liabilities 12,662 11,090
Notes payable and capital lease obligations, less current maturities 1,789 3,131
Other liabilities 2,344 1,015
-------- --------
Total liabilities 16,795 15,236
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 30,000,000 shares authorized, 7,065,202 and
7,040,196 issued and outstanding at March 25, 2001 and March 26, 2000,
respectively
71 70
Additional paid-in capital 40,746 40,669
Accumulated deficit (5,786) (7,392)
-------- --------
Total stockholders' equity 35,031 33,347
-------- --------
$ 51,826 $ 48,583
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
35
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
For the Fiscal Year Ended
March 25, 2001 March 26, 2000 March 28, 1999
-------------- --------------- --------------
REVENUES:
Sales $ 34,799 $ 29,642 $ 23,964
Franchise fees and royalties 8,814 5,906 3,230
License royalties 1,958 1,906 1,527
Equity in (losses) earnings of unconsolidated affiliate -- (163) 26
Investment and other income 1,603 600 400
----------- ----------- -----------
Total revenues 47,174 37,891 29,147
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 22,530 18,977 14,932
Restaurant operating expenses 8,964 8,208 5,780
Depreciation and amortization 1,791 1,358 1,065
Amortization of intangible assets 839 716 384
General and administrative expenses 8,978 8,222 4,722
Interest expense 310 198 1
Impairment charge on notes receivable 151 840 --
Impairment charge on long lived assets 127 465 302
Other expense (income), net (Note 11) 462 427 (349)
----------- ----------- -----------
Total costs and expenses 44,152 39,411 26,837
----------- ----------- -----------
Income (loss) before provision (benefit) for income taxes 3,022 (1,520) 2,310
Provision (benefit) for income taxes (Note 12) 1,416 (250) (418)
----------- ----------- -----------
Net income (loss) $ 1,606 $ (1,270) $ 2,728
=========== =========== ===========
PER SHARE INFORMATION (Note 4):
Net income (loss) per share:
Basic $ .23 $ (.22) $ .58
=========== =========== ===========
Diluted $ .23 $ (.22) $ .57
=========== =========== ===========
Weighted average shares used in computing net income (loss) per share:
Basic 7,059,000 5,881,000 4,722,000
=========== =========== ===========
Diluted 7,098,000 5,881,000 4,753,000
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-4
36
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Additional Total
Common Common Paid-in Deferred Accumulated Stockholders'
Shares Stock Capital Compensation Deficit Equity
--------- --------- ---------- ------------ ----------- ------------
BALANCE, March 29, 1998 4,722,216 $ 47 $ 32,423 $ (34) $ (8,850) $ 23,586
Amortization of deferred compensation relating
to restricted stock -- -- -- 34 -- 34
Net income -- -- -- -- 2,728 2,728
--------- --------- --------- --------- --------- ---------
BALANCE, March 28, 1999 4,722,216 47 32,423 -- (6,122) 26,348
Common stock issued in connection with merger 2,317,980 23 7,367 -- -- 7,390
Warrants issued in connection with merger -- -- 330 -- -- 330
Options assumed in connection with merger -- -- 549 -- -- 549
Net loss -- -- -- -- (1,270) (1,270)
--------- --------- --------- --------- --------- ---------
BALANCE, March 26, 2000 7,040,196 70 40,669 -- (7,392) 33,347
Stock compensation 25,000 1 77 -- -- 78
Warrants exercised 6 -- -- -- -- --
Net income -- -- -- -- 1,606 1,606
--------- --------- --------- --------- --------- ---------
BALANCE, March 25, 2001 7,065,202 $ 71 $ 40,746 $ -- $ (5,786) $ 35,031
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-5
37
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Fiscal Year Ended
March 25, 2001 March 26, 2000 March 28, 1999
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,606 $(1,270) $ 2,728
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,791 1,358 1,065
Amortization of intangible assets 839 716 384
Amortization of deferred compensation -- -- 34
Loss on disposal of fixed assets -- 123 --
Stock compensation expense 78 -- --
Impairment of long-lived assets 127 465 302
Impairment of notes receivable 151 840 --
Provision for doubtful accounts 191 895 44
Equity in losses/(earnings) of unconsolidated affiliate -- 163 (26)
Deferred income taxes 313 (958) (1,036)
Changes in operating assets and liabilities, net of effects from acquisition
of Miami Subs:
Marketable securities and investment in limited partnership (1,651) 270 5,247
Notes and accounts receivable (1,350) (504) (646)
Inventories 20 3 (18)
Prepaid expenses and other current assets (339) (187) (268)
Other assets 159 182 --
Accounts payable, accrued expenses and other current liabilities 961 (158) (1,177)
Deferred franchise fees (76) 721 97
Other liabilities 1,329 (682) 50
------- ------- -------
Net cash provided by operating activities 4,149 1,977 6,780
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in connection with merger, net of transaction costs -- 3,429 --
Lease terminations and other costs in connection with acquisition (1,036) -- --
Purchases of property and equipment (1,458) (1,975) (1,485)
Purchase of intellectual property -- (1,590) --
Investment in unconsolidated affiliate -- -- (4,415)
Payments received on notes receivable 506 320 --
Proceeds from sale of restaurant 45 -- --
------- ------- -------
Net cash provided by (used in) investing activities (1,943) 184 (5,900)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of borrowing (278) (1,929) (21)
------- ------- -------
Net cash used in financing activities (278) (1,929) (21)
------- ------- -------
Net change in cash and cash equivalents 1,928 232 859
CASH AND CASH EQUIVALENTS, beginning of year 2,397 2,165 1,306
------- ------- -------
CASH AND CASH EQUIVALENTS, end of year $ 4,325 $ 2,397 $ 2,165
======= ======= =======
CASH PAID DURING THE YEAR FOR:
Interest $ 317 $ 207 $ 1
======= ======= =======
Income taxes $ 1,508 $ 831 $ 218
======= ======= =======
NONCASH FINANCING ACTIVITIES:
Loan to franchisee in connection with sale of restaurant $ 130 $ -- $ --
======= ======= =======
Common stock, warrants and options issued in connection with
acquisition $ -- $ 8,269 $ --
======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
F-6
38
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
1. DESCRIPTION AND ORGANIZATION OF BUSINESS
Description of Business
Nathan's Famous, Inc. and Subsidiaries (collectively the "Company" or "Nathans")
has historically operated a chain of retail fast food restaurants featuring
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 Company
has supplemented Nathan's franchise program with the Nathan's 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, the Company acquired the intellectual property
rights, including trademarks, recipes and franchise agreements of Roasters Corp.
and Roasters Franchise Corp. ("Roasters"), the franchisor of Kenny Rogers
Roasters. In addition, Nathans completed a merger with Miami Subs Corporation
("Miami Subs") whereby it acquired the remaining 70% of Miami Subs common stock
not already owned. 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.
At March 25, 2001, the Company's restaurant system, consisting of Nathan's
Famous, Kenny Rogers Roasters and Miami Subs restaurants, included 25
company-owned units concentrated in the New York metropolitan area, (including
New Jersey and Florida), 386 franchised or licensed units, including 4 units
operating pursuant to management agreements and over 1,200 branded product
points of sale under the Nathan's Branded Product Program, located in 42 states,
the District of Columbia, and 17 foreign countries.
Organization of Business
In July 1987, all of the outstanding shares, options and warrants of Nathan's
Famous, Inc. (the "Predecessor Company"), a then publicly held New York
corporation, were acquired through a cash transaction, accounted for by the
purchase method of accounting (the "Acquisition"). In connection with the
Acquisition, a privately-held New York corporation (the "Acquiring Corporation")
was merged into the Predecessor Company. The purchase price exceeded the fair
value of the acquired assets of the Predecessor Company by $15,374, and such
amount is recorded net of accumulated amortization in the accompanying
consolidated balance sheets.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
Segment Disclosures
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 131 "Disclosures About Segments of an Enterprise and
Related Information". Pursuant to this pronouncement, operating segments are
defined as components of an enterprise about which separate financial
information is available and is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources in assessing performance.
Nathans 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 one single reporting operating unit.
F-7
39
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Fiscal Year
The Company's fiscal year ends on the last Sunday in March, which results in a
52 or 53 week reporting period. The results of operations for all periods
presented are on the basis of a 52-week reporting period.
Use of Estimates
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
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.
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. Cash restricted for
untendered shares associated with the Acquisition amounted to $83 at March 25,
2001 and March 26, 2000, respectively, and is included in cash and cash
equivalents. At March 25, 2001 and March 26, 2000, cash and cash equivalents
included unexpended Miami Subs' advertising funds of $2,104 and $509,
respectively, with the offset classified as current liabilities in the
accompanying consolidated balance sheets.
Impairment of Notes Receivable
In accordance with SFAS No.114 "Accounting by Creditors for Impairment of a
Loan", Nathan's applies the provisions thereof to value notes receivable.
Pursuant to SFAS No. 114, a loan is impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. When evaluating a
note for impairment, the factors considered include: 1) indications that the
borrower is experiencing business problems such as operating losses, marginal
working capital, inadequate cash flow or business interruptions, 2) loans
secured by collateral that is not readily marketable or 3) that are susceptible
to deterioration in realizable value. When determining impairment, management's
assessment includes its intention to extend certain leases beyond the minimum
lease term and the note holder'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 does not expect to extend or renew the underlying leases.
Based on the Company's analysis, it has determined that there are notes that
have incurred such an impairment (Note 5). Following is a summary of the
impaired notes receivable:
March 25, March 26,
2001 2000
--------- ---------
Total recorded investment in impaired notes receivable $ 1,105 $ 1,830
Allowance for impaired notes receivable (613) (840)
------- -------
Recorded investment in impaired notes receivable, net $ 492 $ 990
======= =======
Based on the present value of the estimated cash flows of identified impaired
note receivables, the Company has recognized approximately $63 and $44 of
interest income on these notes for the fiscal years ended March 25, 2001 and
March 26, 2000, respectively.
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.
Marketable Securities and Investment in Limited Partnership
The Company classifies its investments in marketable securities as "trading" in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Such securities are reported at fair value, with unrealized
gains and losses included as a component of net income. Gains and losses on the
disposition of securities
F-8
40
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
are recognized on the specific identification method in the period in which they
occur. Investment income in the trading limited partnership is based upon
Nathans 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.
Sales of Restaurants
The Company observes the provisions of SFAS No. 66, "Accounting for Sales of
Real Estate," which establishes accounting standards for recognizing profit or
loss on sales of real estate. This Statement 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 this Statement, the Company
recognizes profit on sales of restaurants under both the installment method and
the deposit method, depending on the specific terms of each sale.
During fiscal 2000, the Company entered into contracts to sell 6 restaurants in
two separate transactions, for an aggregate sales price of $1,775. The sales
price consists of down payments totaling $230, and the issuance of notes
receivable by the buyers totaling $1,545. In accordance with the SFAS No. 66,
profit from these sales is being recognized under the deposit method. For the
fiscal years ended March 25, 2001 and March 26, 2000, no revenue related to
these sales has been recognized and the notes receivable have not been recorded.
The Company continues to record depreciation expense on the property subject to
the sales contracts 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 25, 2001 and March 26, 2000, the Company has deposits of $332 and $231,
respectively and are included in accrued expenses in the accompanying
consolidated balance sheets.
In June 2001, the Company entered into a sales contract to sell one restaurant
for a total cash purchase price of $400. Concurrent with the agreement for sale,
the Company shall enter into a sub-lease agreement with this franchisee.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is 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 Company suspends depreciation and
amortization on assets related to restaurants that are held for sale. 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
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," 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. The Company has identified one,
three and four units that have been impaired, and recorded charges of $127, $465
and $302 to the statements of operations for the fiscal years ended March 25,
2001, March 26, 2000 and March 28, 1999, respectively.
Intangible Assets
Intangible assets consist of (i) the goodwill resulting from the Acquisition;
(ii) trademarks and tradenames, franchise rights and recipes in connection with
Roasters and (iii) goodwill and certain identifiable intangibles resulting from
the Miami Subs acquisition (Note 3). These intangible assets are being amortized
over periods from 10 to 40 years. 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. Management believes
that there is no impairment with respect to such intangible assets as of March
25, 2001.
F-9
41
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Investment in Unconsolidated Affiliate
The Company accounted for its initial investment in Miami Subs under the equity
method of accounting until the completion of the merger. Accordingly, the
carrying value of the investment, prior to the acquisition, was equal to the
Company's initial cash investment in Miami Subs, plus its share of the loss of
Miami Subs through September 30, 1999.
Fair Value of Financial Instruments
The Company accounts for the fair value of its financial instruments in
accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments". The carrying value of all financial instruments reflected in the
accompanying balance sheets approximated fair value at March 25, 2001 and March
26, 2000, respectively.
Stock-Based Compensation
The Company complies with the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement establishes financial
accounting and reporting standards for stock-based employee compensation plans.
The provisions of SFAS No. 123 encourage entities to adopt a fair value based
method of accounting for stock compensation plans; however, these provisions
also permit the Company to continue to measure compensation costs under
pre-existing accounting pronouncements. Pursuant to SFAS No. 123, the Company
has elected to continue the accounting set forth in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and to
provide the necessary pro forma disclosures (Note 13).
Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive
Income", which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distributions to
owners, for the period in which they are recognized. Comprehensive income is the
total of net income and all other nonowner changes in equity (or other
comprehensive income), such as unrealized gains or losses on securities
classified as available-for-sale, foreign currency translation adjustments and
minimum pension liability adjustments. Comprehensive income must be reported on
the face of the consolidated statements of operations or the consolidated
statements of stockholders' equity. The Company's operations did not give rise
to items includable in comprehensive income, which were not already in net
income (loss) for the three fiscal years in the period ended March 25, 2001.
Accordingly, the Company's comprehensive income is the same as its net income
for all years presented.
Start-Up Costs
The Company accounts for pre-opening and similar costs in accordance with
Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-up
Activities" which required companies to expense all those costs as incurred in
the future.
Revenue Recognition
In December 1999, the SEC staff released Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition," which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No. 101
explains the SEC staff's general framework for recognizing revenue, specific
criteria to be met, along with required disclosures related to revenue
recognition. SAB No. 101 did not have a material impact on the Company's
financial position or results of its operations.
F-10
42
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Franchise and Area Development Fee Revenue Recognition
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. Initial franchise fees are recognized as income when substantially
all services and conditions relating to the sale of the franchise have been
performed or satisfied, which generally occurs when the franchised restaurant
commences operations. 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. Royalties, which are
based upon a percentage of the franchisee's gross sales, are recognized as
income when the fees are earned and become receivable and collectible. Revenue
from sub-leasing properties to franchisees is recognized as income as the
revenue is earned and becomes receivable and collectible. Sub-lease rental
income is presented net of associated lease costs in the accompanying
consolidated financial statements. Franchise and area development fees received
prior to completion of the revenue recognition process are recorded as deferred
revenue.
At March 25, 2001 and March 26, 2000, $610 and $686, respectively, of deferred
franchise fees are included in the accompanying consolidated balance sheets.
Concentrations of Credit Risk
The Company's accounts receivable consist principally of receivables from
franchisees for royalties and advertising contributions and from sales under the
Branded Product Program. At March 25, 2001, one franchisee represented 10% of
franchise royalties receivable and at March 26, 2000, two franchisees each
represented approximately 11% of franchise royalties receivable (Note 5).
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 are based on specified percentages of
net sales, generally ranging up to 3%. Advertising contributions from
Company-owned stores are included in restaurant operating expenses in the
accompanying consolidated statements of operations. Net Company-owned store
advertising expense was $1,602, $888, and $436 for the fiscal years ended March
25, 2001, March 26, 2000 and March 28, 1999, respectively.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of SFAS
No. 109, "Accounting for 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 which those temporary
differences are expected to be recovered or settled.
Reclassifications
Certain prior year balances have been reclassified to conform with current year
presentation.
F-11
43
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138,
is effective for all fiscal years beginning after June 15, 2000 and will not
require retroactive restatement of prior period financial statements. This
statement requires the recognition of all derivative instruments as either
assets or liabilities in the balance sheet, measured at fair value. Derivative
instruments will be recognized as gains or losses in the period of change. The
adoption of SFAS No. 133 will not have a material impact on its financial
position or results of its operations as the Company does not presently make use
of derivative instruments.
3. ACQUISITIONS
On February 19, 1999, the U. S. Bankruptcy Court for the Middle District of
North Carolina, Durham Division, confirmed the Joint Plan of Reorganization of
the Official Committee of Franchisees of Roasters Corp. and Roasters Franchise
Corp., operators of Kenny Rogers Roasters Restaurants. Under the Joint Plan of
Reorganization, on April 1, 1999, Nathan's acquired the intellectual property
rights, including trademarks, recipes and franchise agreements, of Roasters
Corp. and Roasters Franchise Corp. for $1,250 in cash plus related expenses of
approximately $340. NF Roasters Corp., a wholly-owned subsidiary, was created
for the purpose of acquiring these assets. The acquired assets are recorded as
intangibles in the accompanying consolidated balance sheet and are being
amortized on a straight-line basis over periods of 10 to 20 years. No
company-owned restaurants were acquired in this transaction. Results of
operations are included in these consolidated financial statements as of April
1, 1999. On November 17, 1999, NF Roasters acquired two restaurants from a
franchisee for approximately $400, which opened in March and April 2000.
On November 25, 1998, the Company acquired 8,121,000 (2,030,250 after giving
effect to a 4 for 1 reverse stock split) shares, or approximately 30% of the
then outstanding common stock, of Miami Subs Corporation for $4,200, excluding
transaction costs. On January 15, 1999, the Company and Miami Subs entered into
a definitive merger agreement pursuant to which Nathan's would acquire the
remaining outstanding shares of Miami Subs in exchange for shares of and
warrants to purchase Nathan's common stock.
On September 30, 1999, Nathan's completed the acquisition of Miami Subs and
acquired the remaining outstanding common stock of Miami Subs in exchange for
2,317,980 shares of Nathan's common stock, 579,040 warrants to purchase Nathan's
common stock, and the assumption of existing employee options and warrants to
purchase 542,284 shares of Miami Subs' common stock in connection with the
merger. The total purchase price was approximately $13,000, including
acquisition costs. The acquisition was accounted for as a purchase under APB
Opinion No. 16, "Accounting for Business Combinations". In accordance with APB
No. 16, the Company allocated the purchase price of Miami Subs based on the fair
value of the assets acquired and liabilities assumed. Goodwill of $1,668
resulted from the acquisition of Miami Subs and is being amortized over a period
of 20 years.
In connection with the acquisition of Miami Subs, Nathan's planned to
permanently close 18 under performing company-owned restaurants. Nathan's
expected to abandon or sell the related assets at amounts below the historical
carrying amounts recorded by Miami Subs. In accordance with APB No. 16, the
write-down of these assets was reflected as part of the purchase price
allocation. To date the Company has closed or sold 15 units. The Company
continues to market two of these properties for sale and will cease operations
of the remaining unit upon lease expiration. The estimated disposal value is
included in assets held for sale in the accompanying consolidated balance sheet
for the remaining units to be sold. As of March 25, 2001, as part of the
acquisition, the Company has recorded approximately $1,461 ($877 after tax) for
lease reserves and termination costs.
F-12
44
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
The allocation of purchase price is as follows:
Current assets $ 5,481
Property and equipment 7,060
Assets held for sale 653
Intangibles 5,441
Goodwill 1,668
Notes receivable - long-term 3,860
Other assets 2,212
Liabilities assumed (13,364)
--------
Total $ 13,011
========
The consolidated results of operations for Miami Subs are included in the
consolidated financial statements as of the date of acquisition. Summarized
below are the unaudited pro forma results of operations for the fifty-two weeks
ended March 26, 2000 and March 28, 1999 of Nathan's as though the Miami Subs
acquisition had occurred as of the beginning of the periods presented.
Adjustments have been made for amortization of goodwill based upon salary
expense based on employment agreements, reversal of Miami Subs merger costs,
elimination of Nathan's 30% equity earnings in Miami Subs, issuance of common
stock, and reduction of interest income on marketable securities used to
purchase the initial 30% of Miami Subs' common stock.
Fifty-Two Weeks Ended
--------------------------------
March 26, 2000 March 28, 1999
-------------- --------------
Unaudited
Total revenues $ 50,455 $ 53,278
============== ==========
Net (loss) income $ (1,466) $ 3,436
============== ==========
Net (loss) income per share:
Basic $ (.21) $ 0.49
============== ==========
Diluted $ (.21) $ 0.49
============== ==========
Weighted average shares used in computing net (loss)
income per share
Basic 7,040,000 7,040,000
============== ==========
Diluted 7,040,000 7,071,000
============== ==========
These pro forma results of operations have been prepared for comparative
purposes only and are not necessarily indicative of actual results of operations
that would have occurred had the acquisition been made at the beginning of the
periods presented or of the results which may occur in the future.
4. NET INCOME (LOSS) PER SHARE
The Company complies with the provisions of SFAS No. 128, "Earnings Per Share".
Under SFAS No. 128, Basic Earnings Per Share is computed based on weighted
average shares outstanding and excludes any potential dilution; Diluted Earnings
Per Share reflects potential dilution from the exercise or conversion of
securities into common stock or from other contracts to issue common stock.
F-13
45
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
The following chart provides a reconciliation of information used in calculating
the per share amounts for the years ended March 25, 2001, March 26, 2000 and
March 28, 1999, respectively:
Net Income (Loss) Shares Net Income (Loss) Per Share
-------------------------------- ------------------------------- -----------------------------
2001 2000(1) 1999 2001 2000(1) 1999 2001 2000(1) 1999
--------- --------- --------- --------- --------- --------- -------- -------- --------
Basic EPS
Basic calculation $ 1,606 $ (1,270) $ 2,728 7,059,000 5,881,000 4,722,000 $ .23 $ (.22) $ .58
Effect of dilutive employee
stock options and warrants -- -- -- 39,000 -- 31,000 -- -- (.01)
--------- --------- --------- --------- --------- --------- -------- -------- --------
Diluted EPS
Diluted calculation $ 1,606 $ (1,270) $ 2,728 7,098,000 5,881,000 4,753,000 $ .23 $ (.22) $ .57
========= ========= ========= ========= ========= ========= ======== ======== ========
(1) Common stock equivalents have been excluded from the computation for
earnings per share for the year end March 26, 2000 as their inclusion
would be anti-dilutive.
5. NOTES AND ACCOUNTS RECEIVABLE, net
Notes and accounts receivable, net, consists of the following:
2001 2000
------ ------
Notes receivable, net of impairment charges $2,874 $3,226
Franchise and license royalties 2,499 2,110
Branded product sales 730 365
Other 684 253
------ ------
6,787 5,954
Less: allowance for doubtful accounts 880 809
Notes receivable due after one year 1,729 2,527
------ ------
Notes and accounts receivable $4,178 $2,618
====== ======
Notes receivable at March 25, 2001 and March 26, 2000 principally resulted from
sales of restaurant businesses to Miami Subs 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 8% and 12%.
6. MARKETABLE SECURITIES AND INVESTMENT IN LIMITED PARTNERSHIP
Marketable securities at March 25, 2001 and March 26, 2000 consisted of trading
securities with aggregate fair values of $4,648 and $2,997, respectively. Fair
values of corporate and municipal bonds are based upon quoted market prices.
Investment income in trading limited partnerships is based on the Company's
proportionate share of the change in the underlying net assets of the
partnership.
The gross unrealized holding gains and fair values of trading securities by
major security type at March 25, 2001, March 26, 2000 and March 28, 1999 were as
follows:
2001 2000 1999
--------------------------- --------------------------- --------------------------
Gross Gross Gross
Unrealized Fair Unrealized Fair Unrealized Fair
Holding Value of Holding Value of Holding Value of
Gain/(Loss) Investments Gain/(Loss) Investments Gain/(Loss) Investments
----------- ----------- ----------- ----------- ----------- -----------
Corporate bonds $ -- $ -- $ -- $ -- $ 1 $ 219
Municipal bonds 16 3,628 3 1,540 63 2,011
Investment in trading limited
partnerships * (438) 1,020 420 1,457 23 1,037
------- ------- ------- ------- ------- -------
$ (422) $ 4,648 $ 423 $ 2,997 $ 87 $ 3,267
======= ======= ======= ======= ======= =======
F-14
46
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
* Subject to the terms of the partnership, the Company has the right to
liquidate its investment in the trading limited partnerships without
penalty.
7. PROPERTY AND EQUIPMENT, net
Property and equipment consist of the following:
2001 2000
------- -------
Construction in progress $ 141 $ 1,055
Land 1,983 1,983
Building and improvements 3,083 3,537
Machinery, equipment, furniture and fixtures 7,202 6,167
Leasehold improvements 7,949 6,891
------- -------
20,358 19,633
Less: accumulated depreciation and amortization 9,079 7,978
------- -------
$11,279 $11,655
======= =======
Included in property and equipment, net, is approximately $1,395 and $1,459,
respectively, of assets subject to sales contracts and $299 for the Paramus
location for which the Company has agreed to sell (Note 2).
In May 2001, the Company completed the sale of a restaurant property for
approximately $1.5 million pursuant to an order of condemnation by the State of
Florida ("State") and will continue to operate the restaurant for 6 months
pursuant to an operating lease with the State. The fair value of the assets
(which approximated the carrying value) is included in the current portion of
assets available for sale at March 25, 2001 and the net book value of these
assets have been reclassified to assets available for sale as of March 26, 2000
in the accompanying consolidated balance sheets. Concurrent with the sale, the
Company satisfied the related note payable and accordingly has classified the
remaining balance at March 25, 2001 as current in the accompanying consolidated
balance sheets.
8. INTANGIBLE ASSETS, net
Intangible assets consist of the following:
2001 2000
------- -------
Goodwill $17,043 $17,477
Trademark, tradename, franchise rights and recipes 7,031 6,839
------- -------
24,074 24,316
Less: accumulated amortization 6,063 5,224
------- -------
Intangible assets, net $18,011 $19,092
======= =======
Amortization expense related to these intangible assets was $839, $716 and $384
for each of the three fiscal years ended March 25, 2001.
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
March 25, March 26,
2001 2000
-------- ---------
Payroll and other benefits $1,365 $1,536
Professional and legal costs 898 1,240
Insurance 825 837
Rent, occupancy and sublease termination costs 1,236 1,846
Taxes payable 512 443
Unexpended advertising funds 2,104 509
Other 1,791 1,987
------ ------
$8,731 $8,398
====== ======
F-15
47
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
10. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
A summary of notes payable and capitalized lease obligations is as follows:
2001 2000
------- -------
Note payable to bank at 8.5% through January 2003 and adjusting to prime plus 0.25%
in 2003, 2006, and 2009 and maturity in 2010 $ 1,505 $ 1,667
Note payable to bank at 8.0% through January 2002 adjusting to prime plus 0.25% in
2002 and 2005 and maturing in 2008 806 869
Note payable to bank at 1.5% over prime (9.5% at March 25, 2001) and maturing in 2001 354 389
Note payable to bank at 8.75% and maturing in 2003 397 406
Capital lease obligations and other 70 79
------- -------
Total 3,132 3,410
Less current portion (1,343) (279)
------- -------
Long-term portion $ 1,789 $ 3,131
======= =======
The above notes are secured by property and equipment with a book value of
approximately $784 at March 25, 2001, and notes and accounts receivable of
approximately $1 million.
At March 25, 2001, the approximate annual maturities of notes payable and
capitalized lease obligations for each of the next five years are $1,343, $563,
$173, $173 and $173, and $707 thereafter.
The Company also 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, 2001, and bears interest at
the prime rate. There were no borrowings outstanding under this line of credit
as of March 25, 2001.
11. OTHER EXPENSE (INCOME), NET
Included in other (expense) income, in the accompanying consolidated statements
of operations is (i) $463 in lease termination costs for the year ended March
25, 2001, (ii) $236 in connection with the satisfaction of certain financial
guarantees and $191 in lease expense resulting from the default of subleases for
the year ended March 26, 2000 and (iii) the reversal of a previous litigation
accrual of $349 for the year ended March 28, 1999.
12. INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended March
25, 2001, March 26, 2000 and March 28, 1999:
2001 2000 1999
------- ------- -------
Federal:
Current $ 868 $ 461 $ 453
Deferred 246 (719) 297
------- ------- -------
1,114 (258) 750
------- ------- -------
State and local:
Current 235 247 165
Deferred 67 (239) 110
------- ------- -------
302 8 275
------- ------- -------
Adjustment to valuation allowance relating to opening net deferred tax
asset -- -- (1,443)
------- ------- -------
$ 1,416 $ (250) $ (418)
======= ======= =======
F-16
48
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Total income tax (benefit) expense for fiscal years ended March 25, 2001, March
26, 2000 and March 28, 1999 differed 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:
2001 2000 1999
------- ------- -------
Computed "expected" tax (benefit) expense $ 1,027 $ (516) $ 785
Nondeductible amortization 222 212 131
State and local income taxes, net of Federal income tax benefit 199 8 181
Tax-exempt investment earnings (30) (30) (112)
Change in the valuation allowance for net deferred tax assets -- -- (1,443)
Nondeductible meals and entertainment and other (2) 76 40
------- ------- -------
$ 1,416 $ (250) $ (418)
======= ======= =======
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
2001 2000
------- -------
Deferred tax assets:
Accrued expenses $ 602 $ 601
Allowance for doubtful accounts 352 409
Impairment of notes receivable 245 352
Deferred revenue 1,243 501
Depreciation expense and impairment of long-lived assets 2,134 898
Expenses not deductible until paid 372 789
Amortization of intangibles 70 --
Net operating loss and other carryforwards 2,326 2,326
Other 106 181
------- -------
Total gross deferred tax assets 7,450 6,057
------- -------
Deferred tax liabilities:
Amortization of intangibles -- 297
Unrealized gain on marketable securities and income on investment in
limited partnership 209 402
Other 720 343
------- -------
Total gross deferred tax liabilities 929 1,042
------- -------
Net deferred tax asset 6,521 5,015
Less: Valuation allowance (2,726) (2,726)
------- -------
$ 3,795 $ 2,289
======= =======
In fiscal year 1999, management of the Company determined that, more likely than
not, a significant portion of its previously-reserved deferred tax assets would
be realized and, accordingly, reduced the related valuation allowance. The
reduction in the valuation allowance is included in the income tax provision
(benefit) in the accompanying consolidated statement of operations for fiscal
1999. The determination that the net deferred tax asset of $3,795 at March 25,
2001 is realizable is based on anticipated future taxable income.
As of the date of the acquisition, Miami Subs' had net operating loss carry
forwards of approximately $5.9 million which were available to reduce future
taxable income through 2019 subject to limitations imposed under the Internal
Revenue Code regarding changes in ownership which limits utilization of the
carry-forwards on an annual basis. Miami Subs also has general business credit
carry-forwards of approximately $274, which can be used to offset tax
liabilities through 2010. Miami Subs' federal income tax returns for fiscal
years 1991 through 1996, inclusive, have been examined by the Internal Revenue
Service ("IRS"). The reports of the examining agent issued in connection with
these examinations indicate that additional taxes and penalties totaling
approximately $2.4 million are due for such years. The Company appealed
substantially all of the proposed adjustments. In January 2001, the Miami Subs
tax audit was tentatively settled with the IRS Appeals Office. If approved on
review, the settlement will result in (a) an
F-17
49
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
aggregate tax liability for the taxable years 1991 through 1996 of $102 and (b)
the Company retaining net operating loss carry-forwards of approximately $3.2
million (subject to limitations imposed under the Internal Revenue Code). In
addition to the tax, interest and penalties will be due; the total amount of
tax, interest and penalties is expected to be less than $300. The Company has
accrued $345 for this matter in the accompanying consolidated balance sheets.
Due to the outcome of the IRS examination and the Section 382 limitations, the
Company has recorded a valuation allowance for the remaining Miami Subs loss
carry-forwards. In accordance with SFAS No. 109 "Accounting for Income Taxes"
any future reduction in the acquired Miami Subs valuation allowance will reduce
goodwill.
13. STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
Stock Option Plans
On December 15, 1992, the Company adopted the 1992 Stock Option Plan (the
"Plan") which provides for the issuance of incentive stock options ("ISO's") to
officers and key employees and non-qualified stock options to directors,
officers and key employees. Up to 525,000 shares of common stock have been
reserved for issuance under the 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 non-qualified
stock options outstanding under the 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.
On May 24, 1994, the Company adopted the Outside Director Stock Option Plan (the
"Directors' Plan") which provides for the issuance of non-qualified stock
options to non-employee 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. Options awarded to each non-employee director
are fully vested, subject to forfeiture under certain conditions and shall be
exercisable upon vesting. There were no options granted under the provisions of
the Directors Plan during the years ended March 25, 2001, March 26, 2000 and
March 28, 1999, respectively.
In April 1998, the Company adopted the Nathan's Famous Inc. 1998 Stock Option
Plan (the "New Plan"), which provides for the issuance of non-qualified stock
options to directors, officers and key employees. Up to 500,000 shares of common
stock have been reserved for issuance under the New Plan. In April 1998, the
Company granted 120,000 ISO's under the 1992 Stock Option Plan and the Company
also issued 30,000 stock options to its non-employee directors under the New
Plan. In October 1999, the Company granted 465,000 stock options under the New
Plan.
The Plan, the New Plan and the Directors' Plan expire on December 2, 2002, April
5, 2008 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 agreement 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 per share and expire at various times through September 30,
2009.
Warrants
In November 1996, the Company granted to a non-employee 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, which
is fully vested, expires on November 24, 2001.
On July 17, 1997, the Company also granted an additional warrant to purchase
150,000 shares of its common stock at an exercise price of $3.25 per share, the
actual market price of the Company's common stock on the date of grant, to
F-18
50
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
its Chairman and Chief Executive Officer.
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 expire on September 30, 2004 and have an exercise price of $6.00
per share. The Company also issued 63,700 warrants to purchase common stock to
the former warrant holders of Miami Subs. Exercise prices range between $16.55
per share and $49.63 per share expiring through March 2006.
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 25,
2001, March 26, 2000 and March 28, 1999 and changes during the years then ended
is presented in the tables and narrative below:
2001 2000 1999
--------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- ------ ---------
Options outstanding-- beginning of year 1,614,924 4.79 707,667 $5.08 600,167 $5.03
Granted -- 512,006 3.34 150,000 4.83
Exercised -- -- --
Replacement options-- Miami Subs -- 478,584 6.04 -- --
Canceled (100,715) 10.60 (83,333) 5.50 (42,500) 5.08
---------- --------- -------
Options outstanding-- end of year 1,514,209 3.86 1,614,924 4.79 707,667 5.08
========== ========= =======
Options exercisable-- end of year 1,220,876 1,086,424 528,167
========== ========= =======
Weighted average fair value of options
granted $ -- $2.10 $1.77
========== ===== =====
Warrants outstanding-- beginning of year 401,200 5.66 350,000 $3.88 350,000 $3.88
Granted -- -- -- -- --
Replacement warrants-- Miami Subs -- 63,700 24.09 -- --
Expired (32,450) 18.61 (12,500) 49.63 -- --
---------- --------- ------- -----
Warrants outstanding-- end of year 368,750 4.53 401,200 5.66 350,000 3.88
---------- --------- -------
Warrants exercisable-- end of year 368,750 401,200 237,500
========== ========= -------
Weighted average fair value of warrants
granted $ -- $ -- $1.68
====== ===== =====
At March 25, 2001, 110,666 common shares were reserved for future stock option
grant.
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 25, 2001:
Options and
Options and Warrants Outstanding Warrants Exercisable
-------------------------------------------------- ---------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Outstanding Remaining Exercise Exercisable Exercise
Range of Exercise Prices at 3/25/01 Contractual Life Price at 3/25/01 Price
------------------------ ------------- ---------------- --------- ----------- ----------
$ 3.19 to $ 4.00 1,202,558 5.5 $ 3.41 909,225 $ 3.43
4.01 to 7.00 580,651 3.5 5.41 580,651 5.41
7.01 to 22.25 99,750 2.8 12.61 99,750 12.61
--------- ----- -------- --------- --------
$ 3.19 to $ 22.25 1,882,959 4.7 $ 5.04 1,589,626 $ 4.73
========= ===== ======== ========= ========
F-19
51
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
2000 1999
------- -------
Expected life (years) 6.3 6.5
Interest rate 6.22% 5.58%
Volatility 59.3% 32.77%
Dividend yield 0% 0%
There were no options or warrants granted during fiscal 2001.
The Company has adopted the pro forma disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost has
been recognized in the accompanying financial statements for the stock option
plans. Had compensation cost for the Company's stock option plans been
determined under SFAS No. 123, the Company's net income and earnings per share
would approximate the pro forma amounts below:
(in thousands, except per share amounts)
2001 2000 1999
--------- --------- ------
Net income (loss): As reported $ 1,606 $ (1,270) $2,728
Pro forma 1,248 (1,907) 2,247
Net income (loss) per share: Basic
As reported $ .23 $ (.22) $ .58
Pro forma .18 (.32) .48
Diluted
As reported $ .23 $ (.22) $ .57
Pro forma .18 (.32) .47
Because the SFAS No. 123 method of accounting is not applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
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 will expire on June 19, 2005, unless earlier redeemed by the Company.
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
F-20
52
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
ownership of 15% or more of the Common Stock (but before an acquisition of 50%
or more of Common Stock), to exchange the Rights (other than Rights owned by
such 15% person or group), in whole or in part, for Common Stock, at an exchange
ratio of one share of Common Stock per Right.
Until a Right is exercised, the holder thereof, as such, will have no rights as
a shareholder of the Company, including, without limitation, the right to vote
or to receive dividends. The Company has reserved 9,058,827 shares of Common
Stock for issuance upon exercise of the Rights.
Restricted Stock Grants
In December 1992, the Company awarded an aggregate of 50,016 shares of common
stock to two executive officers. Pursuant to the terms of the agreement, the
shares were subject to certain restrictions. Compensation expense, based upon
the fair market value of the stock on the date of grant, was determined by the
Company to be $7 per share. Aggregate compensation expense of $280 has been
recognized ratably over the six year period in which the restrictions lapse and
has been included as deferred compensation as a component of stockholders'
equity in the accompanying consolidated statement of stockholders' equity.
Compensation expense was approximately $0, $0, and $34 for the fiscal years
ended March 25, 2001, March 26, 2000 and March 28, 1999, respectively. The
restrictions lapsed for all shares in December 1998.
Employment Agreements
The Company and its Chairman and Chief Executive Officer entered into a new
employment agreement effective as of January 1, 2000. The new employment
agreement expires December 31, 2004. Pursuant to the agreement, the officer
receives a base salary of $1.00 and an annual bonus equal to 5% of the company's
consolidated pre-tax earnings for each fiscal year, with a minimum bonus of
$250. The new employment agreement further provides for a three-year consulting
period after termination of employment during which the officer will receive
consulting payments in an annual amount equal to two thirds of the average of
the annual bonuses awarded to him during the three fiscal years preceding the
fiscal year of termination of his employment. The employment agreement also
provides for the continuation of certain benefits following death or disability.
In connection with the agreement, the Company issued to the officer 25,000
shares of common stock with a fair market value at the date of grant of
approximately $78.
In the event that the officer's employment is terminated without cause, he is
entitled to receive his salary and incentive payment, if any, 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, the
officer 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 payment equal to the greater of (i) his salary and annual
bonuses for the remainder of the employment term (including a prorated 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) 2.99 times his salary and annual bonus for the
fiscal year immediately preceding the fiscal year 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 current market
price of the Company's common stock and such then current market price. In
addition, the Company will provide the officer with a tax gross-up payment to
cover any excise tax due.
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, 2000, based on the original terms, and no
non-renewal notice has been given as of June 14, 2001. The agreement provides
for annual compensation of $275 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 plus certain other benefits and
automatically renews annually unless 180 days prior written notice is given to
the employee. The agreement includes a provision under which the officer has the
right to terminate the agreement and receive payment equal to approximately
three times
F-21
53
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
annual compensation upon a change in control, as defined.
The Company and its Vice President - Finance and Chief Financial Officer entered
into an employment agreement on January 31, 2000 that ends on January 31, 2002.
The agreement provides for annual compensation of $155 plus certain other
benefits. This agreement includes 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 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 on July 1, 2003. The Company and another executive of Miami
Subs entered into an employment agreement effective August 1, 2001 for a period
commencing on the date of the agreement and ending on September 30, 2003 and for
compensation at $90 per year. Each agreement also provides for certain other
benefits. Each agreement additionally includes a provision under which the
executive has the right to terminate the agreement and receive payment equal to
approximately three times 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.
401(k) Plan
The Company has a defined contribution retirement plan under Section 401(k) of
the Internal Revenue Code covering all non-union 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, the Company elected to match 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 25, 2001, March 26, 2000 and March 28, 1999 were $25, $21 and $13,
respectively.
Other Benefits
The Company provides, on a contributory basis, medical benefits to active
employees. The Company does not provide medical benefits to retirees.
14. COMMITMENTS AND CONTINGENCIES
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 25, 2001, the Company has non-cancelable operating lease commitments,
net of certain sublease rental income, as follows:
Lease Sublease Net lease
Commitments Income Commitments
----------- ------ -----------
2002 5,354 2,637 2,717
2003 4,611 2,388 2,223
2004 4,130 2,019 2,111
2005 4,013 1,854 2,159
2006 3,790 1,749 2,041
Thereafter 16,887 8,866 8,021
F-22
54
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Aggregate rental expense, net of sublease income, under all current leases
amounted to $3,549, $2,848 and $2,093 for the three fiscal years ended March 25,
2001.
The Company also owns or leases sites, which it leases or subleases to
franchisees. 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 $2.1 million and expire on various dates through 2010 exclusive of
renewal options.
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 $123, $123
and $113 for the fiscal years ended March 25, 2001, March 26, 2000 and March 28,
1999, respectively.
The Company also guarantees certain equipment financing for franchisees with a
third party lender. The Company's maximum obligation for loans funded by the
lender as of March 25, 2001, was approximately $1.3 million.
Contingencies
On February 28, 1995, an action entitled Textron Financial Corporation v. 1045
Rush Street Associates, Stephen Anfang, and Nathan's Famous, Inc. was instituted
in the Circuit Court of Cook County, Illinois County Department, Chancery
Division. The complaint alleged that the Company conspired to perpetrate a fraud
upon the plaintiff and alleges that the Company breached its lease with 1045
Rush Street associates and the estoppel agreement delivered to the plaintiff in
connection therewith by subleasing these premises and thereafter assigning the
lease with respect to the premises to a third party franchisee, and further by
failing to pay rent under this lease on and after July 1990. This complaint
sought damages in the amount of at least $1,500. The Company filed its answer to
this complaint denying the material allegations of the complaint and asserting
several affirmative defenses to liability including, but not limited to, the
absence initially or subsequent failure of consideration for the estoppel
agreement, equitable estoppel, release, failure to mitigate and other equitable
and legal defenses. The plaintiff added as additional parties defendant, the
attorney who represented the landlord in the financing transaction in connection
with which the Estoppel Agreement was required. The Company and some of the
named defendants entered into a Settlement with Textron whereby all of the
plaintiff's claims against the Company and the other defendants were resolved
under a Settlement Agreement and Mutual Release that provide for payments to be
made jointly by all of the defendants on or before December 30, 1998 and January
15, 1999, which payments were made (Note 11).
On or about December 1996, Nathan's Famous Systems, Inc. ("Systems") instituted
an action in the Supreme Court of New York, Nassau County, against Phylli Foods,
Inc. a franchisee, and Calvin Danzig as a guarantor of Phylli Foods' payment and
performance obligations, to recover royalty fees and advertising contributions
due to Systems in the aggregate amount of $36 under a franchise agreement
between Systems and Phylli Foods dated June 1, 1994. In their answer, the
defendants essentially denied the material allegations of the complaint and
interposed counterclaims against Systems in which they alleged essentially that
Systems fraudulently induced the defendants to purchase the franchise from
Systems or did so by means of negligent misrepresentation. Defendants also
alleged that by reason of Systems' allegedly fraudulent and deceitful conduct,
Systems violated the General Business Law of New York. As a consequence of the
foregoing, the defendants sought damages in excess of five million dollars, as
well as statutory relief under the General Business Law. A subsequent motion for
summary judgement against Phylli Foods was successful and the action was settled
by a payment from the defendants to Systems of $22.5.
F-23
55
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
The Company was named as one of three defendants in an action commenced in June
1997, in the Supreme Court of New York, Queens County. According to the
complaint, the plaintiff, a dentist, is seeking injunctive relief and damages in
an amount exceeding $5,000 against the landlord, one of the Company's
franchisees and the Company claiming that the operation of a restaurant in a
building in Long Island City created noxious and offensive fumes and odors that
allegedly were injurious to the health of the plaintiff and his employees and
patients, and interfered with, and irreparably damaged his practice. Plaintiff
also claims that the landlord fraudulently induced him to enter a lease
extension by representing that the first floor of the building would be occupied
by a non-food establishment. As a result of a motion for summary judgement by
the Company and Nathans Famous Systems, Inc. ("Systems") which, as the actual
franchisor was added to the action as a defendant, the Company was dismissed
from the action. Neither the Company or Systems believes that there is any merit
to the plaintiff's claims against Systems inasmuch as Systems never was a party
to the lease, and the restaurant, which closed in or about August 1995, was
operated by a franchisee exclusively. By stipulation, the plaintiff has recently
agreed to limit his damages only to the costs associated with relocating his
practice which are less than $500. The Company is defending the action
vigorously.
On January 5, 1999, Miami Subs was served with a class action lawsuit entitled
Robert J. Feeney, on behalf of himself and all other similarly situated vs.
Miami Subs Corporation, et al., in Broward County Circuit Court, which was filed
against Miami Subs, its directors and Nathan's in a Florida state court by a
shareholder of Miami Subs. Since that time, the Company and its designees to the
Miami Subs board have also been served. The suit alleged that the proposed
merger between Miami Subs and the Company, as contemplated by the companies'
non-binding letter of intent, is unfair to Miami Subs' shareholders and
constitutes a breach by the defendants of their fiduciary duties to the
shareholders of Miami Subs. The plaintiff seeks among other things: (i) class
action status; (ii) preliminary and permanent injunctive relief against
consummation of the proposed merger; and (iii) unspecified damages to be awarded
to the shareholders of Miami Subs. On April 7, 2000, the plaintiff filed his
dismissal without prejudice of the action, effectively ending the case against
all the defendants.
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.
15. RELATED PARTY TRANSACTIONS
As of March 25, 2001, Miami Subs leased five restaurant properties from Kavala,
Inc., a private company owned by Gus Boulis, a former shareholder of Miami Subs.
Future minimum rental commitments due to Kavala at March 25, 2001 under these
existing leases was approximately $1.1 million. In 1997, Miami Subs leased a
then vacant, non-Miami Subs property to a company owned by Boulis. In connection
with the acquisition of Miami Subs in November 1998, Nathan's purchased all of
the shares of Miami Subs Common Stock owned by Boulis for $4,200 and he resigned
all positions therein.
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 serves as a
member of the Board of Directors of Arthur Treachers Inc. Miami Subs has been
granted certain exclusive co-branding rights by Arthur Treachers, Inc. and Mr.
Perlyn has been granted options to acquire approximately 175,000 shares of
Arthur Treachers' common stock.
Nathan's purchases its insurance from Harbor Group, Ltd., a company which is 50%
owned by Howard Lorber, Nathan's Chairman of the Board and Chief Executive
Officer. During fiscal year 2001, Nathan's paid Harbor Group $548.
16. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 2000, the Company's management continued to
monitor and evaluate the collectibility and potential impairment of its assets,
in particular, notes receivable and certain fixed assets. In connection
therewith, additional allowances for doubtful accounts of $399, impairment
charges on certain notes receivable of $273 and impairment charges on fixed
assets of $465 were recorded in the fourth quarter. Additionally, Nathan's
recorded a $191 lease rental reserve resulting from the default of subleases for
space which is not expected to be utilized by Nathan's and $236 in connection
with the satisfaction of certain financial guarantees. It is
F-24
56
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
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.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except share data)
-------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Fiscal Year 2001
Revenues $ 12,899 $ 12,666 $ 11,418 $ 10,191
Gross profit (a) 3,423 3,457 2,821 2,568
Net income (loss) 745 933 145 (217)
=========== =========== =========== ===========
Per share information:
Net income (loss) per share:
Basic (b) $ .11 $ .13 $ .02 $ (.03)
=========== =========== =========== ===========
Diluted (b) $ .11 $ .13 $ .02 $ (.03)
=========== =========== =========== ===========
Shares used in computation of net income (loss) per share:
Basic (b) 7,040,000 7,065,000 7,065,000 7,065,000
=========== =========== =========== ===========
Diluted (b) 7,044,000 7,155,000 7,065,000 7,130,000
=========== =========== =========== ===========
Fiscal Year 2000
Revenues $ 7,914 $ 8,068 $ 11,899 $ 10,010
Gross profit (a) 2,487 2,540 3,110 2,528
Net income 469 616 (227) (2,128)
=========== =========== =========== ===========
Per share information:
Net income (loss) per share:
Basic $ .10 $ .13 $ (.03) $ (.30)
=========== =========== =========== ===========
Diluted $ .10 $ .13 $ (.03) $ (.30)
=========== =========== =========== ===========
Shares used in computation of net income (loss) per share:
Basic 4,722,000 4,722,000 7,040,000 7,040,000
=========== =========== =========== ===========
Diluted 4,744,000 4,722,000 7,040,000 7,040,000
=========== =========== =========== ===========
(a) Gross profit represents the difference between sales and the cost sales.
(b) The sum of the quarters does not equal the full year per share amounts
included in the accompanying consolidated statements of operations due to
the effect of the weighted average number of shares outstanding during the
fiscal years as compared to the quarters.
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57
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Nathan's Famous, Inc. and Subsidiaries:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Nathan's Famous, Inc.
and subsidiaries, included in this Form 10-K and have issued our report thereon
dated June 14, 2001. Our audits were made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The accompanying schedule is
the responsibility of the Company's management and is presented for the purpose
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/Arthur Andersen LLP
Melville, New York
June 14, 2001
F-26
58
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
----------- --------- ------------------------- ---------- -------------
(1) (2)
Balance Additions Additions
at charged to charged to
beginning costs and other Balance at
Description of period expenses accounts Deductions end of period
----------- --------- ---------- ----------- ---------- -------------
YEAR ENDED MARCH 25, 2001
Allowance for doubtful accounts - notes and
accounts receivable $ 809 $ 191 $ 27 (c) $ 147 (a) $ 880
========= ========= ========= ======== =========
Lease reserve and termination costs $ 974 $ 463 $ 801 (d) $ 1,560 (f) $ 678
========= ========= ========= ======== =========
YEAR ENDED MARCH 26, 2000
Allowance for doubtful accounts - notes and 404 (e)
===========
accounts receivable $ 467 $ 895 $ 32 (c) $ 989 (a) $ 809
========= ========= ========= ======== =========
274 (e)
===========
Lease reserve and termination costs $ -- $ 191 $ 660 (d) $ 151 $ 974
========= ========== ========= ======== =========
YEAR ENDED MARCH 28, 1999:
Allowance for doubtful accounts - notes and $ 79 (a)
========
accounts receivable $ 543 $ 44 $ 29 (c) $ 70 (b) $ 467
========= ========= ========= ======== =========
(a) Uncollectible amounts written off
(b) Uncollectible advertising fund receivables
(c) Provision charged to advertising fund
(d) Lease termination charge to purchase accounting
(e) Assumed as part of the Miami Subs acquisition
(f) Payment of Lease termination and other costs
F-27
59
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 15th day of June,
2001. 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 15th day of June, 2001.
/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/ ROBERT J. EIDE
- ---------------------------------
Robert J. Eide Director
- ---------------------------------
Barry Leistner Director
/s/ BRIAN GENSON
- -----------------------------------
Brian Genson Director
- ---------------------------------
Attilio F. Petrocelli Director
F-28