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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 30, 2003
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.
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(Exact name of registrant as specified in its charter)
Delaware 11-3166443
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1400 Old Country Road, Westbury, New York 11590
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(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
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 6, 2003 was approximately $19,479,901.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of June 6, 2003,
there were 5,366,364 shares of Common Stock, par value $.01 per share
outstanding.
Documents incorporated by reference: Part III (Items 10, 11, 12 and 13) -
Registrant's definitive proxy statement to be filed pursuant to Regulation 14-A
of the Securities Exchange Act of 1934.
PART I
ITEM 1. BUSINESS
AS USED HEREIN, UNLESS WE OTHERWISE SPECIFY, THE TERMS "WE," "US,"
"OUR" AND "NATHAN'S" MEAN NATHAN'S FAMOUS, INC. AND ITS SUBSIDIARIES, INCLUDING
MIAMI SUBS CORPORATION, OWNER OF THE MIAMI SUBS BRAND, AND NF ROASTERS CORP.,
OWNER OF THE KENNY ROGERS BRAND.
We have historically operated and franchised fast food units featuring
Nathan's famous brand all beef frankfurters, crinkle-cut french fried potatoes,
and a variety of other menu offerings. Our Nathan's brand company-owned and
franchised units operate under the name "Nathan's Famous," the name first used
at our original Coney Island restaurant opened in 1916. 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
franchise system by continuing to open new restaurants, expanding our Nathan's
Branded Product Program and our Nathan's branded retail licensing programs,
operating our existing company-owned restaurants and developing an international
master franchising program. In an effort to expand our restaurant system and
expand our brand portfolio, during fiscal 2000 we completed our merger with
Miami Subs Corp. and our acquisition of the intellectual property of the Kenny
Rogers Roasters franchise system. In addition, through our acquisition of Miami
Subs, we also secured certain co-branding rights to use the Arthur Treachers'
brand within the United States. During fiscal 2002 we offered the Nathan's,
Kenny Rogers Roasters and Arthur Treachers' signature products to the Miami Subs
franchise community. Since then, we have continued to capitalize on the
co-branding opportunities within our existing restaurant system, as well as seek
to develop new multi-brand marketing and development plans.
At March 30, 2003, our system, consisting of Nathan's Famous, Kenny
Rogers Roasters and Miami Subs restaurants, included 343 franchised units,
including six units operating pursuant to management agreements, 12
company-owned units concentrated in the New York metropolitan area and Florida
and approximately 2,200 branded product points of sale under our Branded Product
Program, located in 41 states, the District of Columbia and 12 foreign
countries.
We plan to seek to expand the scope and market penetration of our
Branded Product Program, further develop the restaurant operations of existing
franchised and company-owned outlets , open new franchised outlets in
traditional or captive market environments, expand the Nathan's retail licensing
programs and continue to introduce co-branding opportunities within the existing
restaurant system. We may selectively consider opening new company-owned
restaurants. We also plan to further develop an international presence through
the use of master franchising agreements based upon individual or combined use
of all 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.
1
ACQUISITIONS
Pursuant to the Joint Plan of Reorganization of the Official Committee
of Franchisees of Roasters Corp. and Roasters Franchise Corp. as confirmed by
the U. S. Bankruptcy Court for the Middle District of North Carolina, Durham
Division, we acquired through our wholly owned subsidiary, NF Roasters Corp.,
the intellectual property rights, including trademarks, recipes and franchise
agreements of Roasters Corp. and Roasters Franchise Corp. for $1,250,000 in cash
plus related expenses, which was paid out of working capital on April 1, 1999.
On November 25, 1998, we purchased 2,030,250 shares of Miami Subs
Corporation (after giving effect to a 4 for 1 reverse stock split), or
approximately 30% of its then outstanding common stock for $4,200,000. On
September 30, 1999, we completed our merger with Miami Subs and acquired the
remaining outstanding shares of Miami Subs in exchange for 2,317,980 shares of
our common stock and warrants to acquire 579,040 additional shares of our common
stock at a price of $6.00 per share.
RESTAURANT 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, 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 87 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, superburgers and super cheeseburgers.
We maintain the same quality standard with each of Nathan's supplemental menus
as we do with Nathans' core hot dog and french fried potato menu. Thus, for
example, hamburgers and sandwiches are prepared to order and not pre-wrapped or
kept warm under lights. Nathan's also has a "Kids Meal" program in which various
menu alternatives are combined with toys to appeal to the children's market.
Nathans' restaurant designs are available in a range of sizes from 300
to 4,000 sq. ft. We have also developed Nathan's carts, kiosks, and modular
units. Our smaller units may not have customer seating areas, although they may
often share seating areas with other fast food outlets in food court settings.
Other units generally provide seating for 45 to 125 customers. Carts, kiosks and
modular units generally carry only the core menu. This menu is supplemented by a
number of other menu selections in our other restaurant types.
We believe Nathan's carts, kiosks, modular units and food court designs
are particularly well-suited for placement in non-traditional sites, such as
airports, travel plazas, stadiums, schools, convenience stores, entertainment
facilities, military facilities, business and industry food service, within
larger retail operations and other captive markets. Many of these smaller units
have been designed specifically to support our expanding Branded Product
Program. All of these units feature the Nathan's logo and utilize a contemporary
design.
2
Miami Subs Concept and Menu
Our Miami Subs concept features a wide variety of moderately priced
lunch, dinner and snack foods, including hot and cold submarine sandwiches,
various ethnic foods such as gyros and pita sandwiches, flame grilled hamburgers
and chicken breast sandwiches, cheesesteaks, chicken wings, fresh salads, ice
cream and other desserts. Soft drinks, iced tea, coffee, beer and wine are also
offered.
Freshness and quality of breads, produce and other ingredients are
emphasized in Miami Subs restaurants. The Miami Subs menu may include low-fat
selections such as salads, grilled chicken breasts, and non-fat frozen yogurt
which we believe are perceived as nutritious and appealing to health conscious
consumers. We believe Miami Subs has become known for certain "signature" foods,
such as grilled chicken on pita bread, gyros on pita bread, cheesesteaks and
chicken wings.
Miami Subs restaurants feature a distinctive decor unique to the Miami
Subs concept. The exterior of free-standing restaurants feature an unusual roof
design and neon pastel highlights for easy recognition. Interiors have a
tropical motif in a neon pink and blue color scheme with murals of fish,
mermaids, flamingos and tropical foliage. Exteriors and interiors are brightly
lit to create an inviting, attractive ambience to distinguish our restaurants
from those of our competitors. At March 30, 2003, 89 of the Miami Subs
restaurants were located in freestanding buildings, ranging between 2,000 and
5,000 square feet. Certain other Miami Subs restaurants are scaled down to
accommodate non-traditional captive market environments.
Miami Subs restaurants are typically open seven days a week, generally
opening at 10:30 am, with many of the restaurants having extended late-night
hours. Indoor service is provided at a walk-up counter where the customer places
an order and is given an order number and a drink cup. The customer then
proceeds to a self service soda bar while the food is prepared to order.
Drive-thru service is provided at substantially all free-standing Miami Subs
restaurants. We estimate that drive-thru sales account for approximately 45% of
sales in free-standing restaurants that maintain drive-thru service.
Currently, 87 Miami Subs restaurants have introduced our co-branded
menu consisting of Nathan's, Kenny Rogers Roasters or Arthur Treachers'
signature products. We have created a new image for Miami Subs based upon this
co-branding strategy called "Miami Subs Plus" which has been heavily marketed in
Southern Florida beginning in July 2001.
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, soups, salads and sandwiches. The
menu offers a healthful alternative to traditional quick-serve menu offerings
that caters to families and individuals.
The traditional Kenny Rogers Roasters restaurants are 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
food court units and scaled down in-line and free standing restaurant types.
3
Franchise Operations
At March 30, 2003, our franchise system, including our Nathan's, Miami
Subs and Kenny Rogers restaurant concepts, consisted of 343 units operating in
22 states and 12 foreign countries.
Today, our franchise system counts among its 149 franchisees and
licensees such well known companies as Host Marriott Services USA, Inc., ARAMARK
Leisure Services, Inc., CA1 Services, Inc., Centerplate (formerly known as
Service America Corp.), Culinart 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 30, 2003, Host Marriott operated 34 franchised outlets,
including 15 units at airports, 15 units within highway travel plazas and 4
units within malls. Additionally, Host Marriott operates 17 locations featuring
Nathan's products pursuant to our Branded Product Program.
Nathan's Franchise Program
Franchisees are required to execute a standard franchise agreement
prior to opening each Nathan's Famous unit. Our current standard Nathan's
franchise agreement provides for, among other things, a one-time $30,000
franchise fee payable upon execution of the agreement, a monthly royalty payment
based on 5.0% of restaurant sales and the expenditure of 2.0% of restaurant
sales on advertising. We also offer a modified franchise agreement tailored to
meet the needs of franchisees who desire to operate a Nathan's of a smaller size
offering a reduced menu. The modified franchise agreement provides for the
initial franchise fee of $15,000 which is payable upon execution of the
agreement, monthly royalties of 5.0% and the expenditure of 2.0% of restaurant
sales on advertising. We may offer alternatives to the standard franchise
agreement, having to do franchise fees or advertising requirements. The initial
term of the typical franchise agreement is 20 years, with a 15-year renewal
option by the franchisee, subject to conditions contained in the franchise
agreement.
Franchisees are approved on the basis of their business background,
evidence of restaurant management experience, net worth and capital available
for investment in relation to the proposed scope of the development agreement.
We provide numerous support services to our Nathan's franchisees. We
assist in and approve all site selections. Thereafter, we provide architectural
plans suitable for restaurants of varying sizes and configurations for use in
food-court, in-line and free-standing locations. We also assist in establishing
building design specifications, reviewing construction compliance, equipping the
restaurant and providing appropriate menus to coordinate with the restaurant
design and location selected by the franchisee. We typically do not sell food,
equipment or supplies to our Nathan's franchisees.
We offer various management training courses for management personnel
of company-owned and franchised Nathan's restaurants. At least one restaurant
manager from each restaurant must successfully complete our mandated management
training program. We also offer additional operations and general management
training courses for all restaurant managers and other managers with supervisory
responsibilities. We provide standard manuals to each franchisee covering
training and operations, products and equipment and local marketing programs. We
also provide ongoing advice and assistance to franchisees.
Franchised restaurants are required to be operated in accordance with
uniform operating standards and specifications relating to the selection,
quality and preparation of menu items, signage, decor, equipment, uniforms,
suppliers, maintenance and cleanliness of premises and customer service. All
standards and specifications are developed by us and applied on a system-wide
basis. We continuously monitor franchisee operations and inspect restaurants.
Franchisees are required to furnish us with detailed monthly sales or operating
reports which assist us in monitoring the franchisee's compliance with its
franchise or license agreement. We make both announced and unannounced
inspections of restaurants to ensure that our practices and procedures are being
followed. We have the right to terminate a franchise
4
if a franchisee does not operate and maintain a restaurant in accordance with
the requirements of its franchise or license agreement. We also have the right
to terminate a franchise for non-compliance with certain other terms and
conditions of the franchise or license agreement such as non-payment of
royalties, sale of unauthorized products, bankruptcy or conviction of a felony.
During the fiscal year ended March 30, 2003, ("fiscal 2003") franchisees have
opened 13 new Nathan's franchised units and have terminated three Nathan's
franchise agreements for non-compliance.
Franchisees who desire to open multiple units in a specific territory
within the United States may enter into a standard area development agreement
under which we receive an advance fee based upon the number of proposed units
which the franchisee is authorized to open. This advance is credited against the
franchise fee payable to us as provided in the standard franchise agreement. We
may also grant exclusive territorial rights in foreign countries for the
development of Nathan's units based upon compliance with a predetermined
development schedule. Additionally, we may further grant exclusive manufacturing
and distribution rights in foreign countries. In all situations we expect to
require an exclusivity fee to be conveyed for such exclusive rights.
Miami Subs Franchise Program
Franchisees are required to execute a standard franchise agreement
relating to the operation of each Miami Subs restaurant. Currently, the term of
the franchise agreement is between ten and 20 years, and the initial franchise
fee is $30,000 for traditional restaurants and $15,000 for certain
non-traditional restaurants. The standard franchise agreement provides for the
payment of a monthly royalty fee of 4.5% of gross sales in traditional
restaurants or 5.0% of gross sales in non-traditional restaurants for the term
of the franchise agreement. Additional charges, based on a percentage of
restaurant sales are contributed by operators of traditional restaurants,
typically totaling 2.25%, to support various system-wide and local advertising
funds.
In addition to individual franchise agreements, we have from time to
time entered into development agreements with certain franchisees. The
development agreement establishes a minimum number of restaurants that the
franchisee is required to open in an agreed upon exclusive area during the term
of the agreement. In addition to receiving a franchise fee for each restaurant
opened, we also receive a non-refundable fee based upon the number of
restaurants committed to be opened under the agreement.
Operations personnel train and assist Miami Subs franchisees in opening
new restaurants and monitor the operations of existing restaurants as part of
the support provided under the franchise program. New franchisees are required
to complete a six-week training program. Upon the opening of a new franchised
restaurant, we typically send representatives to the restaurant to assist the
franchisee during the opening period. These company representatives work in the
restaurant to monitor compliance with Miami Subs' standards and provide
additional on-site training of the franchisee's restaurant personnel.
We also provide development and construction support services to our
Miami Subs franchisees. We review and approve plans and specifications for the
restaurants before improvements begin. Our personnel typically visit the
facility during construction to verify that construction standards are met.
The six-week training program consists of formal classroom training and
in-restaurant training featuring various aspects of day-to-day operations
leading to certification in all functioning positions. Topics covered include
human resources, accounting, purchasing in addition to labor and food handling
laws. Standard operating manuals are provided to each franchisee.
To maintain uniform standards of appearance, service and food and
beverage quality for our Miami Subs restaurants, we have adopted policies and
implemented a monitoring program. Franchisees are expected to adhere to
specifications and standards in connection with the selection and purchase of
products used in the operation of the Miami Subs restaurant. Detailed
specifications are provided for the products used, and franchisees must request
approval for any deviations. We do not generally sell equipment, supplies or
products to our Miami Subs franchisees. The franchise agreement requires
franchisees to operate their restaurants in accordance with Miami Subs'
requirements. We require our
5
franchisees to use specified kitchen equipment to maximize consistency of food
preparation. Ongoing advice and assistance is provided to franchisees in
connection with the operation and management of each restaurant. Our area
consultants are responsible for oversight of franchisees and periodically visit
each restaurant. During such visits, the area consultant evaluates speed of
preparation for menu items, quality of delivered product, cleanliness of
restaurant facilities as well as evaluations of managers and other personnel.
The area consultants also make announced and unannounced follow-up visits to
ensure adherence to operational specifications.
Franchisees are required to furnish us with detailed monthly sales or
operating reports which assist us in monitoring the franchisee's compliance with
its franchise agreement. We have the right to terminate a franchise if a
franchisee does not operate and maintain a restaurant in accordance with the
requirements of its franchise agreement. We also have the right to terminate a
franchise for non-compliance with certain other terms and conditions of the
franchise agreement such as non-payment of royalties, sale of unauthorized
products, bankruptcy or conviction of a felony. During the fiscal year ended
March 30, 2003, franchisees have opened two new Miami Subs franchised units and
we terminated two Miami Subs franchise agreements for 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 royalties to 3% of
sales and waived advertising fund payments through March 31, 2001. These reduced
rates have been extended until March 31, 2004. Future Kenny Rogers Roasters
franchisees will have to execute our current standard franchise agreement which
provides for, among other things, a one-time $30,000 franchise fee payable upon
execution of the agreement, a monthly royalty payment based on 4.5% of
restaurant sales and the expenditure of 2.5% of restaurant sales on advertising.
In some specific situations, we may offer alternatives to the standard franchise
agreement. The initial term of the typical franchise agreement is 20 years, with
up to a 20-year renewal option by the franchisee, subject to conditions
contained in the franchise agreement.
Franchisees will be approved on the basis of their business background,
evidence of restaurant management experience, net worth and capital available
for investment in relation to the proposed scope of the development agreement.
We expect to provide numerous restaurant opening support services to
future Kenny Rogers Roasters franchisees. We expect to assist in and approve all
Kenny Rogers Roasters site selections. Thereafter, we expect to provide
architectural prototype plans suitable for Kenny Rogers Roasters restaurants of
varying sizes and configurations, for use in food-court, in-line and
free-standing locations. We will also assist in establishing building design
specifications, reviewing construction compliance, equipping the restaurant and
providing appropriate menus to coordinate with the prototype restaurant design
and location selected by the Kenny Rogers Roasters franchisee. We do not
typically sell food, equipment or supplies to our Kenny Rogers Roasters
franchisees.
We plan to offer various management training courses for management
personnel of future Kenny Rogers Roasters restaurants. At least one restaurant
manager from each new restaurant or co-branded restaurant will have to
successfully complete Kenny Rogers Roasters' mandated management training
program. We also plan to offer additional operations and general management
training courses to all Kenny Rogers Roasters restaurant managers and other
managers with supervisory responsibilities. We provide standard manuals to each
franchisee covering training and operations, products and equipment and local
marketing programs. We also provide ongoing advice and assistance to
franchisees.
Franchised restaurants are required to be operated in accordance with
uniform operating standards and specifications relating to the selection,
quality and preparation of menu items, signage, decor, equipment, uniforms,
suppliers, maintenance and cleanliness of premises and customer service. We
develop all standards and specifications, which are applied on a system-wide
basis. We 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
6
its franchise agreement. We have the right to terminate a franchise if a
franchisee does not operate and maintain a restaurant in accordance with the
requirements of its franchise or license agreement. We also have the right to
terminate a franchise for non-compliance with certain other terms and conditions
of the franchise agreement such as non-payment of royalties, sale of
unauthorized products, bankruptcy or conviction of a felony. During the fiscal
year ended March 30, 2003, two Kenny Rogers Roasters franchise agreements were
terminated for non-compliance.
Franchisees who desire to open multiple units in a specific territory
within the United States may generally enter into a standard area development
agreement under which we would receive an advance fee based upon the number of
proposed units which the franchisee is authorized to open. This advance would be
credited against the franchise fee payable to us, as provided in its standard
franchise agreement. In some circumstances, we may grant exclusive territorial
rights in foreign countries for the development of Roasters units based upon
compliance with a predetermined development schedule
Company-owned Nathan's Restaurant Operations
As of March 30, 2003, we operated 8 company-owned Nathan's units,
including one seasonal location, in New York. Three of these restaurants are
older and significantly larger units which do not conform to contemporary
designs. These units carry a broader selection of menu items than current
designs. The items offered at our restaurants, other than the core menu, tend to
have lower margins than the core menu. The older units require significantly
higher levels of initial investment than current franchise designs and tend to
operate at a lower sales/investment ratio. Consequently, we do not intend to
replicate these older units in future company-owned units.
We entered into a food service lease agreement with Home Depot U.S.A.,
Inc. under which we leased space in certain Home Depot Improvement Centers to
operate Nathan's restaurants. The term of each Home Depot agreement was five
years from the date on which the restaurant opens, with one five year renewal
option. In August 2002, the company received written notice from Home Depot
U.S.A., INC. ("Home Depot") that Home Depot terminated eight license agreements
with the company pursant to which the company operated Nathan's Resturants in
certain Home Depot improvement centers. In accordance with the termination
notices, Nathan's ceased its operations in those locations before Feburary 20,
2003.
Company-owned units currently range in size from approximately 440
square feet to 10,000 square feet and are principally free-standing buildings.
All restaurants, except our seasonal boardwalk location, have seating to
accommodate between 60 and 350 customers. The restaurants are designed to appeal
to all ages and generally are open seven days a week. We have established high
standards for food quality, cleanliness and service at our restaurants and
regularly monitor the operations of our restaurants to ensure adherence to these
standards. Restaurant service areas, seating, signage and general decor are
contemporary.
Company-owned Miami Subs Restaurant Operations
As of March 30, 2003, we operated four 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 currently range in size from approximately 2,500 square
feet to 4,000 square feet with seating capacity for approximately 90 guests. On
March 31, 2003, one company-operated restaurant was sold to a franchisee and we
are presently seeking to franchise the remaining restaurants. On June 13, 2003,
we entered into an agreement whereby we expect to sell one company-owned
restaurant and enter into to management agreement for another company-owned
restaurant with a franchisee.
Commencing January 2000, we introduced a re-engineered Miami Subs menu
within our company-owned restaurants. Throughout fiscal years 2001 and 2002, our
menu development activities emphasized our co-branding strategy of including
certain Nathan's, Kenny Rogers Roasters and Arthur Treachers' signature products
within the Miami Subs restaurant system.
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Company-owned Kenny Rogers Roasters Restaurant Operations
At March 30, 2003, we ceased operating the Kenny Rogers Roasters
restaurants in Rockville Centre and Commack, New York. These units were
traditional free-standing buildings, each with a drive thru.
In April 2002, we opened a new limited-menu Kenny Rogers food court
outlet, as part of a major remodeling of a large company-owned Nathan's facility
in Oceanside, New York.
International Development
As of March 30, 2003, our franchisees operated 91 units in 12 foreign
countries having significant representations within Malaysia and the
Philippines. The vast majority of foreign operations consist of Kenny Rogers
Roasters units, although our Nathan's restaurant concept also has foreign
franchise operations. During the current fiscal year, our international
franchising program opened one Nathan's restaurant in China and nine Kenny
Rogers Roasters restaurants as follows: five in Malaysia, three in China and one
in Hong Kong.
During fiscal 2003, we executed a Master Franchise Agreement and a
Distribution and Manufacturing Agreement for the Nathan's and Miami Subs rights
to Japan and are currently in various stages of negotiations for development in
other foreign countries. We may continue to grant exclusive territorial rights
for franchising and for the manufacturing and distribution rights in foreign
countries, which would require that an exclusivity fee be conveyed for these
rights. We plan to develop the restaurant franchising system internationally
through the use of master franchising agreements based upon individual or
combined use of all three restaurant concepts and for the distribution of
Nathan's products.
Location Summary
The following table shows the number of our company-owned and franchised or
licensed units in operation at March 30, 2003 and their geographical
distribution:
Franchise
Location Company or License(1) Total
- -------- ------- ------------- -----
Alabama - 4 4
Arizona - 2 2
California - 4 4
Connecticut - 6 6
Delaware - 1 1
Florida 4 99 103
Georgia - 3 3
Idaho - 1 1
Indiana - 1 1
Maryland - 1 1
Michigan - 1 1
Minnesota - 2 2
Missouri - 4 4
Nevada - 4 4
New Jersey - 42 42
New York 8 57 65
North Carolina - 11 11
Pennsylvania - 3 3
South Carolina - 2 2
8
Tennessee - 1 1
Texas - 2 2
Virginia - 1 1
-- --- ---
Domestic Subtotal 12 252 264
-- ---- ---
International Locations
Brunei - 1 1
Canada - 2 2
China - 4 4
Cypress - 1 1
Egypt - 4 4
Indonesia - 1 1
Israel - 1 1
Hong Kong - 1 1
Malaysia - 35 35
Philippines - 35 35
Singapore - 4 4
United Arab Emirates - 2 2
-- --- ---
International Subtotal - 91 91
-- --- ---
Grand Total 12 343 355
-- --- ---
(1) Includes six units operated by third parties pursuant to management
agreements and does not include our Branded Product Program.
Branded Product Program
The "Branded Product Program" was launched during fiscal 1998. The
program was expressly created to provide a new vehicle for the sale of Nathan's
hot dogs and other proprietary items. Through the program, Nathan's provides
qualified foodservice operators in a variety of venues the opportunity to
capitalize on Nathan's superior signature products and valued brand equity. In
conjunction with the program, the operators are granted a limited use of the
Nathan's trademark, as well as Nathan's point of purchase materials. We sell
products either directly to the end users, or to various foodservice
distributors who provide the product to retailers.
As of March 2003, the Branded Product Program was comprised of
approximately 2,200 points of sale. The program is unique in its flexibility and
broad appeal. Hot dogs are offered in a variety of sizes and even come packaged
with buns for vending machine use. The Canteen Corporation, America's largest
vending company, uses Nathan's packaged hot dogs as part of its system.
During the past two years the locations offering the branded product
have been significantly expanded. Today, Nathan's hot dogs are being offered by
major hotel and casino operations such as Park Place Entertainment (Caesar's,
Paris, Bally's, Flamingo, etc.), as well as by all of the Trump Casino
operations in Atlantic City, New Jersey. National movie theaters, such as
National Amusement and Muvico, now offer Nathan's at their concession stands. A
wide variety of colleges and universities serve Nathan's hot dogs. Our products
are also offered in the cafeteria at the House of Representatives and the
Kennedy Space Center. Nathan's hot dog was named an official hot dog of the New
York Yankees for the 2001-2003 baseball seasons. We have recently executed a new
agreement naming Nathan's as the official non-kosher hot dog of the New York
Yankees for the 2004-2006 baseball seasons.
Of particular significance is our recent expansion into the convenience
store arena, where Nathan's hot dogs are currently being offered at a variety of
restaurant chains such as Johnny Rockets, Flamers, and A&W Hot Dogs & More. As
we expand the program, we continue to encounter new business opportunities. In
addition to over 1,100 convenience stores
9
(including gas stations), Nathan's is offered in retail environments,
universities, entertainment centers, airport and travel plazas and on Amtrak
Trains throughout the nation.
Expansion Program
We expect to continue opening new franchised units individually and on
a co-branded basis, expanding product distribution through various means such as
branded products and retail licensing arrangements, developing master
franchising programs in foreign countries and continuing to introduce each
restaurant concepts' signature products through co-branding efforts within our
existing restaurant system.
We anticipate that we will open franchised units individually and
develop new co-branded outlets. We may selectively consider opening new
company-owned units on an opportunistic basis within the New York metropolitan
area or in Southern Florida. Existing company-owned units are located in the New
York metropolitan area and Southern Florida market where we have extensive
experience in operating restaurants. We may consider new opportunities in both
traditional and captive market settings.
We expect that our international development efforts will take on added
dimensions as a result of the co-branding and product distribution opportunities
that we now offer. We believe that in addition to restaurant franchising of our
three restaurant concepts, there is the opportunity to further increase revenues
by offering master development agreements to qualified persons or entities
allowing for the operation of franchised restaurants, subfranchising restaurants
to others, licensing the manufacture of our signature products, selling our
signature products through supermarkets and allowing for the further development
of our Branded Product Program. Qualified persons or entities must have
satisfactory foodservice experience managing multiple units, the appropriate
infrastructure and the necessary financial resources to support the business
development.
We will also seek to continue the growth of our Branded Product Program
through the addition of new points of sale primarily for Nathan's hot dogs. We
believe that as consumers look to assure confidence in the quality of the food
that they purchase, there is great potential to increase our sales by converting
existing sales of non-branded products into branded products throughout the
foodservice industry. In addition, certain Miami Subs, Kenny Rogers Roasters and
additional Nathan's products may be included as part of our Branded Product
Program.
Co-branding
We believe that there is a an opportunity for co-branding among
restaurant concepts. In addition to the three restaurant concepts that we own,
we also maintain certain co-branding rights for the use of the brand "Arthur
Treacher's Fish & Chips" within the United States. Franchisees wishing to
co-brand with our other brands receive a current UFOC and execute a
participation agreement as a rider to their franchise agreement.
During the fiscal year ended March 31, 2002, we began to implement our
co-branding strategy within our existing restaurant system. "Host Restaurants"
operate pursuant to their original franchise agreements. Existing franchisees
executed 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 began to implement our
co-branding strategy by offering to the Miami Subs franchise community the
ability to add Nathan's, Kenny Rogers Roasters and Arthur Treachers' signature
products to their menus. During fiscal 2002 and fiscal 2003, we continued to
co-brand within our system by adding the Kenny Rogers and Arthur Treacher's
brands into Nathan's restaurants. During fiscal 2004, we intend to continue
these co-branding efforts.
10
Currently, the Arthur Treacher's brand is being sold within 125
Nathan's, Kenny Rogers Roasters and Miami Subs restaurants, the Nathan's brand
is included on the menu of 81 Miami Subs and Kenny Rogers restaurants, while the
Kenny Rogers Roasters brand is being sold within 69 Miami Subs and Nathan's
restaurants.
We believe that our diverse brand offerings compliment each other,
which has enabled us to market franchises of co-branded units and continue
co-branding within existing franchised units. The Nathan's and Miami Subs
products are typically stronger during lunch while the Kenny Rogers Roasters and
Arthur Treachers' products are generally stronger during dinner.
We 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 SFG, Inc.(successor to SMG, Inc.) to produce packaged hot
dogs and other meat products according to Nathans' proprietary recipes and spice
formulations, and to use "Nathan's Famous" and related trademarks to sell these
products on an exclusive basis in the United States to supermarkets, club stores
and groceries, thereby providing foods for off-premises consumption. The SFG
agreement expires in 2014 and provides for royalties ranging between 3% to 5% of
sales. The percentage varies based on sales volume, with escalating minimum
royalties. Earned royalties of approximately $2,091,000 in fiscal 2003 exceeded
the contractual minimum established under the agreement. We believe that the
overall exposure of the brand and opportunity for consumers to enjoy the
"Nathan's Famous" hot dog in their homes helps promote "Nathan's Famous"
restaurant patronage. Supermarket sales of our hot dogs are concentrated in the
New York metropolitan area, New England, Florida, California, the Mid-Atlantic
states and certain other select markets. Royalties from SFG provided the
majority of our fiscal 2003 retail license revenues.
In November 1997, we executed a license agreement with J.J. Mathews &
Co, Inc. to market a variety of Nathan's packaged menu items for sale within
supermarkets and groceries. The agreement called for us to receive royalties
based upon sales, subject to minimum annual royalties, as specified in the
agreement. During fiscal 2001 the license agreement was terminated.
During fiscal 2003, certain products were also distributed under
licensing agreements with Gold Pure Food Product's Co., Inc. and Herman Pickle
Packers, Inc. Both companies licensed the "Nathan's Famous" name for the
manufacture and sale of various condiments including mustard, salsa, sauerkraut
and pickles. These products have been distributed on a limited basis. Fees and
royalties earned during fiscal 2003 have not been significant.
We concluded an agreement for the sale of Nathan's in-home grills to be
marketed via televised infomercials in late fiscal 2003. Revenues derived under
this agreement were insignificant during the fiscal year. We believe that this
agreement will provide Nathan's additional revenues in fiscal 2004. Also, we may
market selected Nathan's products on QVC and over the Internet.
Additionally, we have reached an agreement with ConAgra to test the
production and retail distribution of Nathan's frozen french fries. We expect
that the product will be first available at Shop Rite supermarkets in the New
York area during the summer of 2003. Future availability shall be determined
based upon the outcome of this test.
We also license the manufacture of the proprietary spices and marinade
which are used to produce Nathans' hot dogs and Kenny Rogers chicken. During
fiscal 2003 and 2002, we earned $274,000 and $249,000, respectively, under these
agreements.
11
PROVISIONS AND SUPPLIES
Our proprietary hot dogs are produced by SFG, Inc. in accordance with
Nathans' recipes, quality standards and proprietary spice formulations. John
Morrell & Company, our licensee prior to SFG, has retained the right to produce
Nathans' proprietary spice formulations. Kenny Rogers Roasters proprietary
marinade and spice formulations are produced by McCormick and Co., Inc. Most
other company provisions are purchased and obtained from multiple sources to
prevent disruption in supply and to obtain competitive prices. We approve all
products and product specifications. We negotiate directly with our suppliers on
behalf of the entire system for all primary food ingredients and beverage
products sold in the restaurants to ensure adequate supply of high quality items
at competitive prices.
We utilize a unified source for the distribution needs of all of our
restaurant concepts pursuant to a national food distribution contract with US
Foodservice, Inc. This agreement enables our restaurant operators to order and
receive deliveries for the majority of their food and paper products directly
through this distributor. We believe that this arrangement is more efficient and
cost effective than having multiple distributors.
MARKETING, PROMOTION AND ADVERTISING
We maintain advertising funds for local, regional and national
advertising under the Nathan's Famous Systems, Inc. Franchise Agreement.
Nathans' franchisees are generally required to spend on local marketing
activities or contribute to the advertising funds up to 2.5% of restaurant sales
for advertising and promotion. Franchisee contributions to the advertising fund
for national marketing support are generally based upon the type of restaurant
and its location. The difference, if any, between 2.5% and the contribution to
the advertising fund must be expended on local programs approved by us as to
form, content and method of dissemination.
Throughout fiscal 2003, Nathans' primary marketing emphasis continued
to be focused on local store marketing campaigns featuring a value oriented
strategy supplemented with promotional "Limited Time Offers." We anticipate that
near-term marketing efforts for Nathan's will continue to emphasize local store
marketing activities.
In addition, SFG promotes and advertises the "Nathan's Famous" packaged
retail brand, particularly in the New York metropolitan area, California, the
greater Boston area, Phoenix, Arizona and throughout Florida. We believe that
the advertising by SFG increases brand recognition and thereby indirectly
benefits Nathan's restaurants in the areas in which SFG conducts its campaigns.
From time to time, we also participate with SFG in joint promotional activities.
We maintain a separate Production Advertising Fund for the creation and
development of advertising, marketing, public relations, research and related
programs for the Miami Subs system, as well as for other activities that are
deemed appropriate. Franchisee and 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.
Miami Subs' advertising programs principally use radio and print, and
carry the theme that Miami Subs offers a variety of menu selections at
competitive, fast food prices. Miami Subs' radio advertisements are broadcast
principally in markets where there are sufficient restaurants to benefit from
such advertisements.
The physical facility of each Miami Subs restaurant represents a key
component of Miami Subs' marketing strategy. The restaurants have well-lit
exteriors featuring a distinctive roof design, an abundance of pastel neon
lights and a lively interior featuring a tropical motif which we believe creates
strong appeal during the day and night.
We maintain separate advertising funds on behalf of the Kenny Rogers
Roasters franchise system for regional and national advertising under the NF
Roasters Corp. Franchise Agreement. Franchisees who signed up to participate in
the new system 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, 2004 have been waived.
12
New franchisees will be expected to spend on local marketing activities or
contribute to the advertising funds up to 2.5% of restaurant sales for
advertising and promotion.
During the year, the Kenny Rogers Roasters' primary marketing focus has
been toward utilizing promotional "Limited Time Offers". We anticipate that
near-term marketing efforts for Kenny Rogers Roasters will continue to emphasize
local store marketing activities.
GOVERNMENT REGULATION
We are subject to Federal Trade Commission ("FTC") regulation and
several state laws which regulate the offer and sale of franchises. We are also
subject to a number of state laws which regulate substantive aspects of the
franchisor-franchisee relationship.
The FTC's "Trade Regulation Rule Concerning Disclosure Requirements and
Prohibitions Concerning Franchising and Business Opportunity Ventures" requires
us to disclose certain information to prospective franchisees. Fifteen states,
including New York, also require similar disclosure. While the FTC rule does not
require registration or filing of the disclosure document, fourteen states
require franchisors to register the disclosure document (or obtain exemptions
from that requirement) before offering or selling a franchise. The laws of
seventeen other states require some form of registration under "business
opportunity" laws, which sometimes apply to franchisors such as the franchisor
of the Nathan's Famous, Miami Subs, and Kenny Rogers Roasters systems.
Laws that regulate one or another aspect of the franchisor-franchisee
relationship presently exist in twenty-one states and the District of Columbia.
These laws regulate the franchise relationship by, for example, requiring the
franchisor to deal with its franchisees in good faith, prohibiting interference
with the right of free association among franchisees, limiting the imposition of
standards of performance on a franchisee, and regulating discrimination among
franchisees in charges, royalties or fees. These laws have not precluded us from
seeking franchisees in any given area. Although these laws may also restrict a
franchisor in the termination of a franchise agreement by, for example,
requiring "good cause" to exist as a basis for the termination, advance notice
to the franchisee of the termination, an opportunity to cure a default and
repurchase of inventory or other compensation, these provisions have not had a
significant effect on our operations.
We are not aware of any pending franchise legislation in the U.S. that
we believe is likely to significantly affect our operations. We believe that our
operations comply substantially with the FTC rule and state franchise laws.
Each company-owned and franchised restaurant is subject to regulation
by federal agencies and to licensing and regulation by state and local health,
sanitation, safety, fire and other departments. Difficulties or failures in
obtaining the required licenses or approvals could delay or prevent the opening
of a new restaurant.
We are also subject to the Federal Fair Labor Standards Act, which
governs minimum wages, overtime, working conditions and other matters. We are
also subject to other federal and state environmental regulations, which have
not had a material effect on our operations. More stringent and varied
requirements of local governmental bodies with respect to zoning, land use and
environmental factors could delay or prevent development of new restaurants in
particular 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.
13
Alcoholic beverage control regulations require each restaurant that
sells such products to apply to a state authority and, in certain locations,
county and municipal authorities, for a license or permit to sell alcoholic
beverages on the premises. Typically, licenses must be renewed annually and may
be revoked or suspended for cause at any time. Alcoholic beverage control
regulations relate to numerous aspects of the daily operations of the
restaurants, including minimum age of customers and employees, hours of
operation, advertising, wholesale purchasing, inventory control and handling,
storage and dispensing of alcoholic beverages. At March 30, 2003, we offered for
sale beer or wine in six of our existing company-operated restaurants. Each of
these restaurants have current alcoholic beverage licenses permitting the sale
of these beverages. We have never had an alcoholic beverage license revoked.
We may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which wrongfully served alcoholic beverages to
such person. We carry liquor liability coverage as part of our existing
comprehensive general liability insurance and have never been named as a
defendant in a lawsuit involving "dram-shop" statutes.
We believe that we operate in substantial compliance with applicable
laws and regulations governing our operations.
EMPLOYEES
At March 30, 2003, we had 484 employees, of whom 56 were corporate
management and administrative employees, 54 were restaurant managers and 374
were hourly full-time and part-time food-service employees. Food-service
employees at four locations are currently represented by Local 1199 SEIU, New
York's Health & Human Service Union, an affiliate of the AFL - CIO, under
various agreements which expired in April 2003.The terms of the expired
contracts remain in force while we are currently negotiating new contracts with
the union. We consider our employee relations to be good and have not suffered
any strike or work stoppage for more than 31 years.
We provide a training program for managers and assistant managers of
our new company-owned and franchised restaurants. Hourly food workers are
trained, on site, by managers and crew trainers following company practices and
procedures outlined in our operating manuals.
TRADEMARKS
We hold trademark and service mark registrations for NATHAN'S FAMOUS,
NATHAN'S and Design, NATHAN'S FAMOUS SINCE 1916 and SINCE 1916 NATHAN'S FAMOUS
within the United States, with some of these marks holding corresponding foreign
trademark and service mark registrations in more than 20 jurisdictions. We also
hold various related marks for restaurant services and some food items.
We have registered the marks "MIAMI SUBS AND DESIGN" and "MIAMI SUBS
GRILL AND DESIGN" with the United States Patent and Trademark Office. In
addition, the marks have been registered in 53 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. The MIAMI SUBS PLUS application
with the U.S. Patent and Trademark Office became effective on September 10,
2002.
We hold trademark and service mark registrations for "KENNY ROGERS
ROASTERS", "KENNY ROGERS ROASTERS WOOD FIRE ROASTED CHICKEN & DESIGN", " DOWN
RIGHT KICKIN BBQ CHICKEN", "EVERYONE ELSE IS JUST PLAIN CHICKEN", "THERE'S
GOODNESS HERE", "YOU'RE GONNA LOVE THIS FOOD", "YOUR HEART IS IN THE RIGHT
PLACE", "KENNY ROGERS TAKE IT HOME & DESIGN" and "KENNY ROGERS ROASTERS EXPRESS
& DESIGN" within the United States. Some of these marks are covered by
corresponding foreign trademark and service mark registrations in more than 80
jurisdictions. The "Kenny Rogers Roasters" marks are subject to the terms of an
April 5, 1993 license from Mr. Kenny Rogers; that license agreement was assigned
to us on April 1, 1999, when we purchased certain assets relating to the "Kenny
Rogers Roasters" franchise system.
14
We believe that our trademarks and service marks provide significant
value to us and are an important factor in the marketing of our products and
services. We believe that we do not infringe on the trademarks or other
intellectual property rights of any third parties.
COMPETITION
The fast food restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional or
national economic conditions, changes in consumer tastes, consumer concerns
about the nutritional quality of quick-service food and increases in the number
of, and particular locations of, competing restaurants. Factors such as
inflation, increases in food, labor and energy costs, the availability and cost
of suitable sites, fluctuating interest and insurance rates, state and local
regulations and licensing requirements and the availability of an adequate
number of hourly paid employees can also adversely affect the fast food
restaurant industry.
Our restaurants 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. We have expanded our value pricing strategy
by offering multi-sized alternatives to our value priced combo meals. Extensive
price discounting in the fast food industry could have an adverse effect on us.
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 hot
dogs and licensed packaged foods within supermarkets, primarily on the basis of
reputation, flavor, quality and price.
AVAILABLE INFORMATION
The public may read and copy any materials filed by us with the SEC at
the SEC's public reference room at 450 Fifth Street, NW, Washington D.C., 20549.
The public may obtain information about the operation of the SEC's public
reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains a
website at http://www.sec.gov that contains reports, proxy and information
statements and other information about issuers such as us that file
electronically with the SEC.
In addition, we make available free of charge on our website at
http://www.nathansfamous.com our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) under the Exchange Act as soon
as reasonably practical after we electronically file such material with, or
furnish it to, the SEC.
ITEM 2. PROPERTIES
Our principal executive offices consist of approximately 9,700 sq. ft.
of leased space in a modern, high-rise office building in Westbury, New York
which expires in November 2009. We also own Miami Subs' regional office
consisting of approximately 8,500 sq. ft. in Fort Lauderdale, Florida. We
currently own two restaurant properties consisting of a
15
2,650 sq. ft. Nathan's restaurant, at 86th Street in Brooklyn, New York located
on a 25,000 sq. ft. lot, and a 2,600 sq. ft. Miami Subs restaurant in Miami, FL
located on a 25,000 sq. ft. lot. At March 30, 2003, 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 2005 440
Kings Plaza Shopping Center (A) Brooklyn, NY July 2010 4,200
Long Beach Road Oceanside, NY May 2011 7,300
Central Park Avenue Yonkers, NY April 2010 10,000
Hempstead Turnpike Levittown, NY September 2004 4,100
Broad Hollow Road Farmingdale, NY April 2008 2,200
Miami Subs Restaurants
17th Street (B) Ft. Lauderdale, FL August 2003 3,000
Lauderhill Lauderhill, FL May 2007 4,000
South Miami Miami, FL August 2006 3,500
Lejune and 11(C) Miami, FL September 2007 2,500
A - Restaurant was sold to a franchisee on May 1, 2003.
B - Exercised five year option on June 19, 2003.
C - Restaurant was sold to a franchisee on March 31, 2003.
Leases for Nathan's restaurants typically provide for a base rent plus
real estate taxes, insurance and other expenses and, in some cases, provide for
an additional percentage rent based on the restaurants' revenues. Many of the
Nathan's leases also provided for renewal options ranging between five and 25
years upon expiration of the prime lease.
Properties leased by Miami Subs restaurants generally provide for an
initial lease term of up to 20 years and renewal terms of five to 20 years. The
leases generally provide for fixed rents plus adjustments based on changes in
the consumer price index or percentage rentals on gross sales. Restaurants and
other facilities are leased or sub-leased to franchisees or others on terms
which are generally similar to the terms in our lease with the third-party
landlord, except that in certain cases the rent has been increased. We remain
liable for all lease costs when properties are sub-leased to franchisees or
others. At March 30, 2003, we were the sublessor to 33 properties pursuant to
these arrangements, 13 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 $2,340,000 in fiscal 2003.
ITEM 3. LEGAL PROCEEDINGS
We and our subsidiaries are from time to time involved in ordinary and
routine litigation. We are also involved in the following litigation:
Nathan's Famous, Inc. and Nathan's Famous Operating Corp. were named as
two of three defendants in an action commenced in July 2001, in the Supreme
Court of New York, Westchester County. According to the amended complaint, the
plaintiffs, a minor and her mother, sought damages in the amount of $17 million
against Nathan's Famous and Nathan's Famous Operating Corp. and one of Nathan's
Famous' former employees claiming that the Nathan's entities failed to properly
supervise minor employees, failed to monitor its supervisory personnel, and were
negligent in hiring, retaining and promoting the individual defendant, who
allegedly molested, harassed and raped the minor plaintiff, who was also an
employee. On May 29, 2002, as a result of a mediation, this action was settled,
subject to court approval. The court
16
approved the original settlement and on September 9, 2002, the plaintiffs were
paid $659,000 of which $650,000 had been accrued as of March 31, 2002.
Nathan's Famous was served on January 10, 2003 with a summons in
connection with an action commenced by Mitchell Putterman and Michael Pellegrino
in the Supreme Court of New York, Suffolk County seeking damages of $1,000,000
for claims of breach of contract and fraud in connection with a letter of intent
with the Company's subsidiary, NF Roasters of Commack, Inc. Although the letter
of intent contains specific disclaimer language stating that it did not convey
any rights or obligations and contemplated the execution of a management
agreement, which was never executed, plaintiffs purport nonetheless to have
certain claims in connection therewith. The Company has served a notice of
appearance and demand for a complaint. On March 31, 2003, this action was
dismissed without prejudice by stipulation.
Elizabeth B. Jackson and Joseph Jackson commenced an action, in the
circut court of the fifteenth Judical Circuit, Palm Beach County, Florida in
September 2001 against Miami Subs and EKFD corporation, a Miami Subs
franchaisee ("the franchaisee") claiming neglegence in connection with a slip
and fall which allegdly occured on the premises of the franchise agreement, the
franchisee is obligated to indemnify Miami Subs and hold them harmless against
claims asserted and procured an insurance policy which named Miami Subs as an
additional insured, Miami Subs has denied any liability to plantiffs and has
made demand upon the franchisee's insurer to indemnify and defend against the
claims asserted the insurer has agreed to indemnify and defend Miami subs and
has assumed the defense of this action for Miami Subs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
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 30, 2003
First quarter $ 4.31 $ 3.35
Second quarter 4.00 3.07
Third quarter 3.82 3.04
Fourth quarter 3.70 3.50
Fiscal year ended March 31, 2002
First quarter $ 3.50 $ 2.87
Second quarter 3.55 3.10
Third quarter 3.60 3.07
Fourth quarter 3.62 3.21
At June 6, 2003 the closing price per share for our common stock, as reported by
Nasdaq was $3.63.
DIVIDEND POLICY
We have not declared or paid a cash dividend on our common stock since
our initial public offering and do not anticipate that we will pay any dividends
in the foreseeable future. It is our Board of Directors' policy to retain all
available funds to finance the development and growth of our business and to
purchase stock pursuant to our stock buyback program. The payment of cash
dividends in the future will be dependent upon our earnings and financial
requirements.
SHAREHOLDERS
As of June 6, 2003, we had 822 shareholders of record, excluding
shareholders whose shares were held by brokerage firms, depositories and other
institutional firms in "street name" for their customers.
18
EQUITY COMPENSATION PLAN INFORMATION
The following chart summarizes the options and warrants outstanding and
available to be issued at March 30, 2003:
- ------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS AND PRICE OF OUTSTANDING (EXCLUDING SECURITIES
WARRANTS OPTIONS AND WARRANTS REFLECTED IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
- ------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY HOLDERS 1,272,999 $4.5711 413,500
- ------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS
NOT APPROVED BY SECURITY 800,000 $3.5529 -0-
HOLDERS
- ------------------------------------------------------------------------------------------------------------------
TOTAL 2,072,999 $4.1782 413,500
- ------------------------------------------------------------------------------------------------------------------
Warrants
In November 1993, we granted to our Chairman and Chief Executive
Officer a warrant to purchase 150,000 shares of our common stock at an exercise
price of $9.71 per share, representing 105% of the market price of our common
stock on the date of grant, which exercise price was reduced on January 26, 1996
to $4.50 per share. The shares vested at a rate of 25% per annum commencing
November 1994 and the warrant expires in November 2003.
On July 17, 1997, we granted to our Chairman and Chief Executive
Officer a warrant to purchase 150,000 shares of our common stock at an exercise
price of $3.50 per share, representing the market price of our common stock on
the date of grant. The shares vested at a rate of 25% per annum commencing July
17, 1998 and the warrant expires in July 2007.
1998 Stock Option Plan
In April 1998, our Board of Directors adopted the Nathan's Famous, Inc.
1998 Stock Option Plan, under which any of our directors, officers, employees or
consultants, or those of a subsidiary or an affiliate, may be granted options to
19
purchase an aggregate 500,000 shares of common stock. The 1998 Plan is to be
administered by the Board of Directors of Nathan's; provided, however, that the
Board may, in the exercise of its discretion, designate from among its members a
compensation committee or a stock option committee consisting of no fewer than
two "non-employee directors", as defined in the Securities Exchange Act of 1934.
The Compensation Committee currently administers the 1998 Plan. Subject to the
terms of the 1998 Plan, the Compensation Committee may determine and designate
those directors, officers, employees and consultants who are to be granted stock
options under the 1998 Plan and the number of shares to be subject to options
and the term of the options to be granted, which term may not exceed ten years.
The Board of Directors or the committee shall also, subject to the express
provisions of the 1998 Plan, have authority to interpret the 1998 Plan and to
prescribe, amend and rescind the rules and regulations relating to the 1998
Plan. Only non-qualified stock options may be granted under the terms of the
1998 Plan. The exercise price for the options granted under the 1998 Plan will
be not less than the fair market value on the date of grant. The option price,
as well as the number of shares subject to the option, shall be appropriately
adjusted by the committee in the event of stock splits, stock dividends,
recapitalizations, and other specified events involving a change in Nathan's
capital.
On June 6, 2003, there were options outstanding to purchase an
aggregate 500,000 shares of common stock with a weighted average exercise price
of $3.3597, each of which has a term of ten years from its grant date are issued
and outstanding. No options have lapsed since the inception of the 1998 Plan.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FISCAL YEARS ENDED
MARCH 30, MARCH 31, MARCH 25, MARCH 26, MARCH 28,
2003 2002 (1) 2001 2000 (2) 1999
-----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Operations Data:
Revenues:
Sales $ 24,920 $ 27,492 $ 29,852 $ 25,601 $ 19,756
Franchise fees and royalties 5,977 7,944 8,814 5,906 3,230
License royalties, investment and other income 3,033 4,106 3,561 2,343 1,953
-----------------------------------------------------------------
Total revenues 33,930 39,542 42,227 33,850 24,939
-----------------------------------------------------------------
Costs and Expenses:
Cost of sales 16,750 18,336 19,217 16,460 12,252
Restaurant operating expenses 5,621 6,559 7,621 7,231 4,862
Depreciation and amortization 1,314 1,395 1,535 1,142 851
Amortization of intangible assets 278 888 839 716 384
General and administrative expenses 8,600 9,292 8,978 8,222 4,722
Interest expense 132 256 310 198 1
Impairment of long-lived assets 1,367 392 127 465 302
Impairment of notes receivable 1,425 185 151 840 --
Other (income) expense 232 (210) 462 427 (349)
-----------------------------------------------------------------
Total costs and expenses 35,719 37,093 39,240 35,701 23,025
-----------------------------------------------------------------
(Loss) income from continuing operations before
income taxes (1,789) 2,449 2,987 (1,851) 1,914
(Benefit) provision for income taxes ( 283) 1,057 1,402 (382) (576)
-----------------------------------------------------------------
(Loss) income from continuing operations (1,506) 1,392 1,585 (1,469) 2,490
-----------------------------------------------------------------
20
Discontinued operations
(Loss) income from discontinued operations before
income taxes (206) (238) 35 331 396
(Benefit) provision for income taxes (82) (95) 14 132 158
-----------------------------------------------------------------
(Loss) income from discontinued operations (124) (143) 21 199 238
-----------------------------------------------------------------
(Loss) income before cumulative effect of accounting
change (1,630) 1,249 1,606 (1,270) 2,728
Cumulative effect of change in accounting principle,
net of tax benefit of $854 (12,338) -- -- -- --
-----------------------------------------------------------------
Net (loss) income ($ 13,968) $ 1,249 $ 1,606 ($ 1,270) $ 2,728
=================================================================
Basic (loss) income per share:
(Loss) income from continuing operations ($ 0.25) $ 0.20 $ 0.23 ($ 0.25) $ 0.53
(Loss) income from discontinued operations (0.03) (0.02) 0.00 0.03 0.05
Cumulative effect of change in accounting principle (2.06) -- -- -- --
-----------------------------------------------------------------
Net (loss) income ($ 2.34) $ 0.18 $ 0.23 ($ 0.22) $ 0.58
=================================================================
Diluted (loss) income per share:
(Loss) income from continuing operations ($ 0.25) $ 0.20 $ 0.23 ($ 0.25) $ 0.52
(Loss) income from discontinued operations (0.03) (0.02) 0.00 0.03 0.05
Cumulative effect of change in accounting principle (2.06) -- -- -- --
-----------------------------------------------------------------
Net (loss) income ($ 2.34) $ 0.18 $ 0.23 ($ 0.22) $ 0.57
=================================================================
Dividends -- -- -- -- --
-----------------------------------------------------------------
Weighted average shares used in computing
net income (loss) per share
Basic 5,976 7,048 7,059 5,881 4,722
Diluted (3) 5,976 7,083 7,098 5,881 4,753
Balance Sheet Data at End of Fiscal Year:
Working capital (deficit) $ 5,935 $ 9,565 $ 5,210 ($ 322) $ 3,708
Total assets 25,886 48,745 51,826 48,583 31,250
Long term debt, net of current maturities 1,053 1,220 1,789 3,131 0
Stockholders' equity $ 16,383 $ 36,145 $ 35,031 $ 33,347 $ 26,348
=================================================================
Selected Restaurant Operating Data:
Systemwide Restaurant Sales:
Company-owned $ 21,955 $ 27,484 $ 30,946 $ 27,478 $ 21,981
Franchised (4) 161,740 185,389 208,889 152,627 64,178
-----------------------------------------------------------------
Total $ 183,695 $ 212,873 $ 239,835 $ 180,105 $ 86,159
=================================================================
21
Number of Units Open at End of Fiscal Year:
Company-owned 12 22 25 32 25
Franchised 343 364 386 415 163
---------- --------- --------- --------- ---------
Total 355 386 411 447 188
=================================================================
Notes to Selected Financial Data
(1) Our fiscal year ends on the last Sunday in March which results in a 52
or 53 week year. Fiscal 2002 was a 53 week year.
(2) On April 1, 1999 Nathan's acquired the intellectual property of
Roasters Corp. and Roasters Franchise Corp. On September 30, 1999,
Nathan's completed the acquisition of Miami Subs Corp. by acquiring the
remaining 70% of the outstanding common stock Nathan's did not already
own.
(3) Common stock equivalents have been excluded from the computation for
the years ended March 30, 2003 and March 26, 2000 as the impact of
their inclusion would have been anti-dilutive.
(4) Company-owned restaurant sales represent sales from restaurants
presented as continuing operations and discontinued operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
As used in this Report, the terms "we", "us", "our" and "Nathan's" mean
Nathan's Famous, Inc. and its subsidiaries (unless the context indicates a
different meaning).
During the fiscal year ended March 26, 2000, we completed two
acquisitions that provided us with two highly recognized brands. On April 1,
1999, we became the franchisor of the Kenny Rogers Roasters restaurant system by
acquiring the intellectual property rights, including trademarks, recipes and
franchise agreements of Roasters Corp. and Roasters Franchise Corp. On September
30, 1999, we acquired the remaining 70% of the outstanding common stock of Miami
Subs Corporation we did not already own. Our revenues are generated primarily
from operating company-owned restaurants and franchising the Nathan's, Miami
Subs and Kenny Rogers restaurant concepts, 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.
In addition to plans for expansion through franchising and our Branded
Product Program, Nathan's is continuing to capitalize on the co-branding
opportunities within our existing restaurant system. Currently, the Arthur
Treacher's brand is being sold within 125 Nathan's, Kenny Rogers Roasters and
Miami Subs restaurants, the Nathan's brand is included on the menu of 81 Miami
Subs and Kenny Rogers restaurants, while the Kenny Rogers Roasters brand is
being sold within 69 Miami Subs and Nathan's restaurants.
In connection with our acquisition of Miami Subs, we determined that up
to 18 underperforming restaurants would be closed pursuant to our divestiture
plan. To date, we have terminated leases on 16 of those properties, sold one of
the
22
properties to a non-franchisee and are continuing to market the remaining
property for sale. We also terminated 10 additional leases for properties
outside of the divestiture plan and may terminate additional leases in the
future that were not part of our divestiture plan.
At March 30, 2003, our combined system consisted of 343 franchised or
licensed units, 12 company-owned units and over 2,200 Nathan's Branded Product
points of sale that feature Nathan's world famous all-beef hot dogs, located in
41 states, the District of Columbia and 12 foreign countries. At March 30, 2003,
our company-owned restaurant system included eight Nathan's units and four Miami
Subs units, as compared to 16 Nathan's units, four Miami Subs units and two
Kenny Rogers Roasters units at March 31, 2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements and the notes to our consolidated
financial statements contain information that is pertinent to management's
discussion and analysis. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities. We
believe the following critical accounting policies involve additional management
judgement due to the sensitivity of the methods, assumptions and estimates
necessary in determining the related asset and liability amounts.
Impairment of Goodwill and Other Intangible Assets
Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," ("SFAS No. 142") requires that goodwill and intangible
assets with indefinite lives will no longer be amortized but will be reviewed
annually (or more frequently if impairment indicators arise) for impairment. The
most significant assumptions which are used in this test are estimates of future
cash flows. We typically use the same assumptions for this test as we use in the
development of our business plans. If these assumptions differ significantly
from actual results, additional impairment expenses may be required. In the
first quarter of fiscal 2003, Nathan's adopted SFAS No. 142. In connection with
the implementation of this new standard, Goodwill, Trademarks, Trade Names and
Recipes were deemed to be impaired and their carrying value was written down by
$13,192,000, or $12,338,000, net of income tax benefit of $854,000.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144") requires
management judgements regarding the future operating and disposition plans for
underperforming assets, and estimates of expected realizable values for assets
to be sold. The application of SFAS No. 144 has affected the amounts and timing
of charges to operating results in recent years. We evaluate possible impairment
of each restaurant individually, and record an impairment charge whenever we
determine that impairment factors exist. We consider a history of restaurant
operating losses to be the primary indicator of potential impairment of a
restaurant's carrying value. We have identified certain restaurants that have
been impaired and recorded impairment charges of approximately $1,367,000
relating to seven restaurants during the fifty-two weeks ended March 30, 2003.
Impairment of Notes Receivable
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," requires management judgements regarding
the future collectibility of notes receivable and the underlying fair market
value of collateral. We consider the following factors when evaluating a note
for impairment: a) indications that the borrower is experiencing business
problems such as operating losses, marginal working capital, inadequate cash
flow or business interruptions; b) whether the loan is secured by collateral
that is not readily marketable; or c) whether the collateral is susceptible to
deterioration in realizable value. When determining possible impairment, we also
assess our future intention to extend certain leases beyond the minimum lease
term and the debtor's ability to meet its obligation over that extended term. We
have identified certain notes receivable that have been impaired and recorded
impairment charges of approximately $1,425,000 relating to nine notes during the
fifty-two weeks ended March 30, 2003.
Revenue Recognition
In the normal course of business, we extend credit to franchisees for
the payment of ongoing royalties and to trade customers of our Branded Product
Program. Notes and accounts receivable, net, as shown on our consolidated
balance sheets
23
are net of allowances for doubtful accounts. An allowance for doubtful accounts
is determined through analysis of the aging of accounts receivable at the date
of the financial statements, assessment of collectibility based upon historical
trends and an evaluation of the impact of current and projected economic
conditions. In the event that the collectibility of a receivable is doubtful,
the associated revenue is not recorded until the facts and circumstances change
in accordance with Staff Accounting Bulletin SAB No. 101, "Revenue Recognition".
Self-insurance Liabilities
We are self-insured for portions of our general liability coverage. As
part of our risk management strategy, our insurance programs include deductibles
for each incident and in the aggregate for a policy year. As such, we accrue
estimates of our ultimate self insurance costs throughout the policy year. These
estimates have been developed based upon our historical trends, however, the
final cost of many of these claims may not be known for five years or longer.
Accordingly, our annual self insurance costs may be subject to adjustment from
previous estimates as facts and circumstances change. In conjunction with our
external risk manager, we have completed an evaluation of the outstanding claims
and reserves relating to prior years and have reversed $196,000 of previously
recorded self insurance accruals during the fiscal year ended March 30, 2003 for
those claims on which the Company's exposure has been settled.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 30, 2003 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2002
Revenues from Continuing Operations
Total sales from continuing operations decreased by 9.4% or $2,572,000
to $24,920,000 for the fifty-two weeks ended March 30, 2003 ("fiscal 2003
period") as compared to $27,492,000 for the fifty-three weeks ended March 31,
2002 ("fiscal 2002 period"). Sales from the Branded Product Program increased by
33.8% to $6,509,000 for the fiscal 2003 period as compared to sales of
$4,864,000 in the fiscal 2002 period. Company-owned restaurant sales decreased
18.6% or $4,217,000 to $18,411,000 from $22,628,000 primarily due to the
operation of five fewer company-owned stores as compared to the prior fiscal
year and an overall 5.3% sales decrease at our comparable restaurants
(consisting of eight Nathan's and four Miami Subs restaurants). The reduction in
company-owned stores is the result of our franchising three restaurants and
selling two restaurants, one of which was to the State of Florida pursuant to an
order of condemnation. The financial impact associated with these five
restaurants lowered restaurant sales by $3,294,000 and improved restaurant
operating profits by $52,000 versus the fiscal 2002 period. During the fiscal
2002 period, approximately $341,000 in restaurant sales were generated during
the additional week of operations.
Franchise fees and royalties decreased by 24.8% or $1,967,000 to
$5,977,000 in the fiscal 2003 period compared to $7,944,000 in the fiscal 2002
period. Franchise royalties decreased by $1,409,000 or 20.8% to $5,352,000 in
the fiscal 2003 period as compared to $6,761,000 in the fiscal 2002 period. The
majority of this decline is due to the decrease in the amount of franchise
sales, primarily within the South Florida marketplace for the Miami Subs brand,
causing an increase in the amount of royalties deemed unrealizable during the
fiscal 2003 period as compared to the fiscal 2002 period. Royalty income was
not recorded from 59 domestic franchised locations during the fiscal 2003
period as compared to 48 domestic franchised locations during the fiscal 2002
period as a result of determining that collectibility of the royalties was not
reasonably assured. Domestic franchise restaurant sales decreased by 12.8% to
$161,740,000 in the fiscal 2003 period as compared to $185,389,000 in the
fiscal 2002 period. At March 30, 2003, 343 franchised or licensed restaurants
were operating as compared to 364 franchised or licensed restaurants at March
31, 2002. Franchise fee income derived from new openings, co-branding
activities and forfeitures was $625,000 in the fiscal 2003 period as compared
to $1,183,000 in the fiscal 2002 period. This decrease was attributable to
lower franchise fees earned of $247,000, the reduction in co-branding fees
earned of $210,000 and lower forfeitures of $101,000 between the two periods.
Revenues from new unit openings were lower during the fiscal 2003 period as
compared to the fiscal 2002 period although 24 new franchised restaurants were
opened, including our first Nathan's unit in China and nine Kenny Rogers
Roasters units in Foreign Countries, as compared to 18 new franchised
restaurants during the fiscal 2002 period. Franchise fees attributable to new
Kenny Rogers Roasters restaurants is recognized upon payment by the franchisee,
which payments have not been received. During the fiscal 2002 period, the
one-time co-branding initiative was substantially concluded. During the fiscal
2003 period, we earned $207,000 in connection with the termination of two
Master Development Agreements in accordance with their terms due to
non-compliance by the franchisees as compared to $308,000 during the fiscal
2002 period in connection with forfeited area development fees.
24
License royalties were $2,585,000 in the fiscal 2003 period as compared
to $2,038,000 in the fiscal 2002 period. This increase is attributable to higher
royalties earned from sales made by SFG, Inc., Nathans' licensee for the sale of
Nathan's frankfurters within supermarkets and club stores, the manufacture of
certain proprietary spices and seasonings, the sale of condiments sold under the
Nathan's brand and royalties earned under a new license agreement in connection
with the Branded Product Program.
Interest income decreased by $208,000 to $292,000 in the fiscal 2003
period versus $500,000 in the fiscal 2002 period due to lower interest income on
its investments in marketable securities and its notes receivable.
Investment and other income decreased by $1,412,000 to $156,000 in the
fiscal 2003 period versus $1,568,000 in the fiscal 2002 period. During the
fiscal 2003 period, Nathans' investment loss was approximately $206,000 greater
than in the fiscal 2002 period due primarily to differences in performance of
the financial markets during the time that Nathan's maintained its investments
in "trading securities", which "trading securities" were substantially
liquidated in October 2002, as compared to being held for the entire fiscal 2002
period. Nathan's loss from sub-leasing was approximately $28,000 more than in
the fiscal 2002 period. In the fiscal 2003 period, Nathan's realized a gain of
$135,000 in connection with the early termination of a Branded Product Program
sales agreement. During the fiscal 2003 period, Nathan's earned approximately
$126,000 less miscellaneous income than in the fiscal 2002 period principally in
connection with its ice cream sales. During the fiscal 2002 period, Nathan's
recognized net gains of $1,226,000 which included $850,000 from the successful
appeal of a condemnation award from the State of Florida and gains primarily in
connection with the sale of two company-owned restaurants and one non-restaurant
property.
Costs and Expenses from Continuing Operations
Cost of sales from continuing operations decreased by $1,586,000 to
$16,750,000 in the fiscal 2003 period from $18,336,000 in the fiscal 2002
period. During the fiscal 2003 period, restaurant cost of sales were lower than
the fiscal 2002 period by approximately $2,661,000. Cost of sales were lower by
approximately $2,237,000 as a result of operating fewer company-owned
restaurants. The cost of restaurant sales at our comparable units as a
percentage of restaurant sales was 62.6% in the fiscal 2003 period as compared
to 61.5% in the fiscal 2002 period due primarily to higher labor costs. Higher
product and other direct costs of approximately $1,075,000 were incurred in
connection with the growth of our Branded Product Program which was partially
offset by lower commodity costs during the fiscal 2003 period. During the fiscal
2003 period, commodity prices of our primary meat products were in line with
historical norms as compared to being at their highest levels in recent years
through most of the twenty-six weeks ended September 23, 2001.
Restaurant operating expenses from continuing operations decreased by
$938,000 to $5,621,000 in the fiscal 2003 period from $6,559,000 in the fiscal
2002 period. Restaurant operating costs were lower in the fiscal 2003 period by
approximately $1,105,000, as compared to the fiscal 2002 period as a result of
operating fewer restaurants. The reduction in restaurant operating expenses from
operating fewer restaurants was partially offset by higher occupancy and current
insurance costs net of lower marketing and utility costs during the fiscal 2003
period.
Depreciation and amortization from continuing operations decreased by
$81,000 to $1,314,000 in the fiscal 2003 period from $1,395,000 in the fiscal
2002 period due to our additional capital spending.
Amortization of intangibles decreased by $610,000 to $278,000 in the
fiscal 2003 period from $888,000 in the fiscal 2002 period. Amortization of
intangibles decreased as a result of the adoption of SFAS No. 142 " Goodwill and
Other Intangible Assets" in the first quarter of fiscal 2003. Pursuant to SFAS
No. 142, we have discontinued the amortization of Goodwill, Trademarks, Trade
Names and Recipes.
General and administrative expenses decreased by $692,000 to $8,600,000
in the fiscal 2003 period as compared to $9,292,000 in the fiscal 2002 period.
The decrease in general and administrative expenses was due primarily to lower
litigation expense of approximately $450,000, lower bad debts expense of
approximately $185,000, lower compensation and related expenses of approximately
$106,000 and lower travel expenses of $106,000 which were partly offset by
higher insurance costs of
25
approximately $172,000.
Interest expense was $132,000 during the fiscal 2003 period as compared
to $256,000 during the fiscal 2002 period. The reduction in interest expense
relates primarily to the repayment of outstanding bank debt between the two
periods.
Impairment charge on long-lived assets of $1,367,000 during the fiscal
2003 period represents the write-down relating to seven under-performing stores,
three of which are expected to continue operating.
Impairment charge on notes receivable of $1,425,000 during the fiscal
2003 period relates to the write-down of nine notes receivable.
Other expense in the fiscal 2003 period represents lease reserves
relating to four vacant properties. Other income of $210,000 in the fiscal 2002
period represents the reversal of a previously recorded litigation provision for
an award that was settled, upon appeal, in our favor.
(Benefit) provision for Income Taxes from Continuing Operations
In the fiscal 2003 period, the income tax benefit from continuing
operations was $283,000 or 15.8% of loss from continuing operations before
income taxes as compared to a provision for income taxes of $1,057,000 or 43.2%
of income from continuing operations before income taxes in the fiscal 2002
period. The effective income tax rate was lower in the fiscal 2003 period due in
part to the adoption of SFAS No. 142 which requires that goodwill no longer be
amortized. Such goodwill amortization was not tax deductible by Nathan's which
increased the effective tax rate in prior years.
Discontinued Operations
During the fiscal 2003 period, discontinued operations included eight
Company-owned restaurants, all of which were abandoned, including seven which
were abandoned in connection with the Home Depot early lease terminations.
Revenues generated by these eight restaurants were $3,543,000 during the fiscal
2003 period as compared to $4,857,000 during the fiscal 2002 period. Losses
before income taxes from these restaurants were $206,000 during the fiscal 2003
period as compared to $238,000 during the fiscal 2002 period. The fiscal 2003
loss before tax included $428,000 of additional depreciation expense due to a
change in the estimated useful lives of the restaurants operating within Home
Depot Improvement Centers for which Nathan's received early lease termination
notifications during the second quarter fiscal 2003 period.
Cumulative Effect of Change in Accounting Principle
In the first quarter fiscal 2003 period, Nathan's adopted SFAS No. 142,
"Goodwill and Other Intangibles." In connection with the implementation of this
new standard, Goodwill, Trademarks, Trade Names and Recipes were deemed to be
impaired and their carrying value was written down by $13,192,000, or
$12,338,000, net of tax.
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED TO FISCAL YEAR ENDED MARCH 25, 2001
Revenues from Continuing Operations
Total sales from continuing operations decreased by 7.9% or $2,360,000
to $27,492,000 for the fifty-three weeks ended March 31, 2002 ("fiscal 2002
period") as compared to $29,852,000 for the fifty-two weeks ended March 25, 2001
("fiscal 2001 period"). Sales from the Branded Product Program increased by
26.2% or $1,011,000 to $4,864,000 for the fiscal 2002 period as compared to
sales of $3,853,000 in the fiscal 2001 period. Company-owned restaurant sales
decreased 13.0% or $3,371,000 to $22,628,000 from $25,999,000 primarily due to
operating nine fewer company-owned stores as compared to the prior fiscal period
and lower sales at the new restaurant that began operating during the fiscal
2001 period. These reductions were partially offset by sales during the fiscal
2002 period from a restaurant that was closed for renovation during the fiscal
2001 period and increased sales at the Coney Island restaurant during the summer
season. Fiscal 2002 was
26
a 53 week reporting period while fiscal 2001 was a 52 week reporting period.
Approximately $362,000 in restaurant sales were generated during the additional
week of operations. The unit reduction was the result of our franchising two
company-owned restaurants, transferring one company-owned restaurant to a
franchisee pursuant to a management agreement, closing four unprofitable
company-owned units (including three Miami Subs restaurants pursuant to our
divesture plan), selling one unit pursuant to an order of condemnation and
closing one unit due to its lease expiration. The financial impact associated
with these nine restaurants lowered restaurant sales by $3,749,000 and improved
restaurant operating profits by $30,000 versus the fiscal 2001 period, excluding
any one time gains or royalties to be received from restaurants sold to
franchisees. Comparable restaurant sales (consisting of nine Nathan's and four
Miami Subs restaurants that have been operating for 18 months or longer as of
the beginning of the fiscal year) during the comparable 52 week period increased
by 3.3% versus the fiscal 2001 period.
Franchise fees and royalties decreased by 9.9% or $870,000 to
$7,944,000 in the fiscal 2002 period compared to $8,814,000 in the fiscal 2001
period. Franchise royalties decreased by $1,299,000 or 16.1% to $6,761,000 in
the fiscal 2002 period as compared to $8,060,000 in the fiscal 2001 period.
Domestic franchise restaurant sales decreased by 11.2% to $185,389,000 in the
fiscal 2002 period as compared to $208,889,000 in the fiscal 2001 period. The
majority of this decline was due to fewer franchised restaurants operating
during the fiscal 2002 period as compared to the fiscal 2001 period. During the
initial months subsequent to September 11, 2001, we experienced lower royalties
from franchised restaurants that operate in markets which are significant
tourist destinations, such as Las Vegas and South Florida, and from franchised
restaurants operating at airports throughout the United States. Further
contributing to the decline was an increase in the amount of royalties deemed to
be unrealizable. At March 31, 2002, 364 franchised or licensed restaurants were
operating as compared to 386 franchised or licensed restaurants at March 25,
2001. Franchise fee income derived from new openings and co-branding was
$875,000 in the fiscal 2002 period as compared to $754,000 in the fiscal 2001
period. This increase was primarily attributable to the fees earned from the
co-branding initiative within the existing restaurant system. During the fiscal
2002 period, 18 new franchised or licensed units opened and 47 units were
co-branded. During the fiscal 2002 period we realized $308,000 in connection
with forfeited development fees.
License royalties were $2,038,000 in the fiscal 2002 period as compared
to $1,958,000 in the fiscal 2001 period. This increase was comprised of higher
royalties earned from sales by SFG, Inc., Nathans' licensee for the sale of
Nathan's frankfurters within supermarkets and club stores.
Interest income was $500,000 in the fiscal 2002 period versus $537,000
in the fiscal 2001 period which was due primarily to earning lower interest
rates on our investments due the changes in the marketplace.
Investment income was $1,568,000 in the fiscal 2002 period versus
$1,066,000 in the fiscal 2001 period. During the fiscal 2002 period, Nathan's
recognized net gains of $1,226,000 in connection with the sale of two
company-owned restaurants and a third non-restaurant property. During the fiscal
2002 period, Nathans' investment loss was approximately $384,000 less than in
the fiscal 2001 period due primarily to differences in performance of the
financial markets between the two periods. In the fiscal 2001 period, Nathan's
recognized income of approximately $479,000 in connection with the introduction
of a consolidated food distribution agreement and earned a $500,000 transfer fee
in connection with a change in ownership of Nathan's licensee, SFG, Inc.
Costs and Expenses from Continuing Operations
Cost of sales from continuing operations decreased by $881,000 to
$18,336,000 in the fiscal 2002 period from $19,217,000 in the fiscal 2001
period. During the fiscal 2002 period, restaurant cost of sales were lower than
the fiscal 2001 period by approximately $1,980,000. Restaurant cost of sales
were reduced by approximately $2,423,000 as a result of operating fewer
company-owned restaurants. Additionally, lower cost of sales at one of the Kenny
Rogers Roasters restaurants opened last year partly offset the higher costs at
our comparable restaurants. Notwithstanding the lower costs and expenses of the
Kenny Rogers Roasters restaurant, this restaurant continued to underperform.
Consequently, we decided to sell the Kenny Rogers Roasters restaurant in
Rockville Centre, New York in fiscal 2003. The cost of restaurant sales at our
comparable units as a percentage of restaurant sales was 62.1% in the fiscal
2002 period as compared to 60.9% in the fiscal 2001 period due primarily to
higher labor and related costs. Higher costs of approximately $1,100,000 were
incurred in connection with the growth of our Branded Product Program and higher
product costs incurred for much of the fiscal 2002 period. During the first
twenty-six weeks of fiscal 2002, commodity prices of our primary meat products
were at their highest levels in recent years causing the majority of the cost
increase. In response, we raised retail prices on a selective basis in an
attempt to partially offset these increases. Beginning in the third quarter
fiscal 2002 these costs were lowered to their historical levels.
27
Restaurant operating expenses from continuing operations decreased by
$1,062,000 to $6,559,000 in the fiscal 2002 period from $7,621,000 in the fiscal
2001 period. Restaurant operating costs were lower in the fiscal 2002 period by
approximately $1,357,000, as compared to the fiscal 2001 period as a result of
operating fewer restaurants. Restaurant operating expenses of the Kenny Rogers
Roasters restaurant opened last year were $40,000 lower during the fiscal 2002
period due in part to the higher costs attributable to last years' openings.
These reductions in restaurant operating expenses were partially offset by an
increase of approximately $330,000 at the comparable restaurants which were
primarily driven by higher marketing and insurance costs.
Depreciation and amortization from continuing operations decreased by
$140,000 to $1,395,000 in the fiscal 2002 period from $1,535,000 in the fiscal
2001 period. Lower depreciation expense of operating fewer company-owned
restaurants during the fiscal 2002 period versus the fiscal 2001 period was
partially offset by additional depreciation expense attributable to fiscal
2001's capital spending.
Amortization of intangibles increased by $49,000 to $888,000 in the
fiscal 2002 period from $839,000 in the fiscal 2001 period. Amortization of
intangibles increased as a result of fiscal 2001's final purchase price
allocation of the Miami Subs acquisition.
General and administrative expenses increased by $314,000 to $9,292,000
in the fiscal 2002 period as compared to $8,978,000 in the fiscal 2001 period.
The increase in general and administrative expenses was due primarily to higher
legal and professional expenses of approximately $544,000, including a
litigation expense of $450,000, and higher bad debts of approximately $76,000
which were partly offset by lower personnel and incentive compensation expense
of approximately $389,000.
Interest expense was $256,000 during the fiscal 2002 period as compared
to $310,000 during the fiscal 2001 period. The reduction in interest expense
relates primarily to the repayment of outstanding debt between the two periods.
Impairment charges on long-lived assets from continuing operations of
$392,000 during the fiscal 2002 period and $127,000 during the fiscal 2001
period reflect write-downs relating to one under-performing store in the fiscal
2002 period and one under-performing store in the fiscal 2001 period.
Impairment charges on notes receivable of $185,000 during the fiscal
2002 period and $151,000 during the fiscal 2001 period relate to write-downs of
two and one notes receivable, respectively.
Other income of $210,000 in the fiscal 2002 period represents the
reversal of a previously recorded litigation provision for an award that was
settled, upon appeal, in our favor. Other expense of $462,000 during the fiscal
2001 period relates primarily to lease termination expenses of units that were
not part of the final divestiture plan of $463,000.
Provision for Income Taxes from Continuing Operations
In the fiscal 2002 period, the provision for income taxes from
continuing operations was $1,057,000 or 43.2% as compared to $1,402,000 or
46.9% of income from continuing operations before income taxes in the fiscal
2002 period.
Discontinued Operations
Discontinued operations is comprised of eight Company-owned
restaurants, all of which were abandoned during fiscal 2003, including seven
which were abandoned in connection with the Home Depot early lease terminations.
Revenues generated by these eight restaurants were $4,857,000 during the fiscal
2002 period as compared to $4,947,000 during the fiscal 2001 period. Loss before
income taxes from these restaurants was $238,000 during the fiscal 2002 period
as compared to income before income taxes of $35,000 during the fiscal 2001
period.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 30, 2003 aggregated $1,415,000,
decreasing by $419,000 during the fiscal 2003
28
period. At March 30, 2003, marketable securities and investment in limited
partnership decreased by $4,196,000 from March 31, 2002 to $4,623,000 and net
working capital decreased to $5,935,000 from $9,565,000 at March 31, 2002.
During fiscal 2003, Nathan's liquidated its investment in limited partnership
and invested the proceeds with its other marketable securities.
Cash provided by operations of $2,296,000 in the fiscal 2003 period is
primarily attributable to net loss of $13,968,000, non-cash charges of
$17,482,000, including the cumulative effect of accounting change of
$12,338,000, depreciation and amortization of $1,907,000, impairment charges on
long-lived assets and notes receivable of $2,792,000, amortization of intangible
assets of $278,000, provision for doubtful accounts of $82,000 and amortization
of bond premium of $85,000. Changes in the other assets and liabilities
consisted of decreases in marketable securities and investment in limited
partnership of $981,000, prepaid expenses and other current assets of $627,000,
inventories of $203,000, accounts payable and accrued expenses of $1,647,000,
other liabilities of $577,000 and deferred franchise fees of $205,000.
Cash provided by investing activities of $3,696,000 in the fiscal 2003
period is comprised primarily of proceeds from the sale of available-for-sale
securities of $6,088,000, proceeds from the sale of a restaurant and other fixed
assets of $781,000 and repayments on notes receivable of $273,000 which were
partly offset by the purchases of available-for-sale securities of $2,884,000
and expenditures relating to capital improvements of selected company-owned
restaurants and other fixed asset additions of $562,000.
Cash used in financing activities of $6,411,000 in the fiscal 2003
period represents repurchases of 1,599,547 shares of common stock at a total
cost of $5,858,000 and repayments of notes payable and obligations under capital
leases in the amount of $553,000, including the repayment of a mortgage in the
amount of $373,000 on December 31, 2002.
On September 14, 2001, Nathan's was authorized to purchase up to one
million shares of its common stock. Pursuant to our stock repurchase program, we
repurchased one million shares of common stock in open market transactions and a
private transaction at a total cost of $3,670,000 through the quarter ended
September 29, 2002. On October 7, 2002, Nathan's was authorized to purchase up
to one million additional shares of its common stock. Through March 30, 2003,
Nathan's purchased 641,238 shares of common stock at a cost of approximately
$2,323,000. Subsequent to March 30, 2003, Nathan's purchased an additional
57,600 shares of common stock at a cost of approximately $211,000. To date,
Nathan's has purchased a total of 1,698,838 shares of common stock at a cost of
approximately $6,204,000. We expect to make additional purchases of stock from
time to time, depending on market conditions, in open market or in privately
negotiated transactions, at prices deemed appropriate by management. There is
no set time limit on the purchases. Nathan's expects to fund these stock
repurchases from its operating cash flow.
We expect that we will make additional investments in certain existing
restaurants in the future and that we expect to fund those investments from our
operating cash flow. We do not expect to incur significant capital expenditures
to develop new company-owned restaurants through March 29, 2004.
In connection with our acquisition of Miami Subs, we determined that up
to 18 underperforming restaurants would be closed pursuant to our divestiture
plan. To date, we have terminated leases on 16 of those properties, sold one of
the remaining properties to a non-franchisee and are continuing to market the
remaining property for sale. The sale of the restaurant was consummated on
October 4, 2002. Since acquiring Miami Subs, we have accrued approximately
$1,461,000 and made payments of approximately $1,273,000 for lease obligations
and termination costs, as part of the acquisition, for units having total future
minimum lease obligations of $7,680,000 that had remaining lease terms of one
year up to approximately 17 years. We may incur future cash payments, consisting
primarily of future lease payments, including costs and expenses associated with
terminating additional leases, that were not part of our divestiture plan.
There are currently 33 properties that we either own or lease from
third parties which we lease or sublease to franchisees and non-franchisees. We
remain contingently liable for all costs associated with these properties
including: rent, property taxes and insurance. Additionally, we guaranteed
financing on behalf of certain franchisees with two third-party lenders. Our
maximum obligation for loans funded by the lenders as of March 30, 2003 was
approximately $1,004,000.
The following schedules represent Nathan's cash contractual obligations and the
expiration of other contractual commitments by maturity (in thousands):
29
Payments Due by Period
----------------------
Less than
Cash Contractual Obligations Total 1 Year 1 - 3 Years 4-5 Years After 5 Years
- ---------------------------- ----- ------- ----------- --------- -------------
Long-Term Debt $ 1,167 $ 167 $ 333 $ 333 $ 334
Capital Lease Obligations 59 6 14 17 22
Employment Agreements 1,071 733 338 -- --
Operating Leases 25,657 4,204 8,041 6,885 6,527
------- ------- ------- ------- -------
Gross Cash Contractual Obligations 27,954 5,110 8,726 7,235 6,883
Sublease Income 12,606 1,969 3,744 3,072 3,821
------- ------- ------- ------- -------
Net Cash Contractual Obligations $15,348 $ 3,141 $ 4,982 $ 4,163 $ 3,062
======= ======= ======= ======= =======
Amount of Commitment Expiration Per Period
Total ------------------------------------------
Amounts Less than
Other Contractual Commitments Committed 1 Year 1 - 3 Years 4-5 Years After 5 Years
- ----------------------------- --------- ------- ----------- --------- -------------
Loan Guarantees $ 1,004 $ 363 $ 408 $ 233 --
------- ------- ------- ------- -------
Total Commercial Commitments $ 1,004 $ 363 $ 408 $ 233 --
======= ======= ======= ======= =======
Management believes that available cash, marketable investment
securities, and internally generated funds should provide sufficient capital to
finance our operations for at least the next twelve months. We maintain a
$7,500,000 uncommitted bank line of credit and have never borrowed any funds
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. However, due to the
changing composition of our restaurants, we believe that future revenues will be
highest during our first two fiscal quarters with the fourth fiscal quarter
representing the slowest period.
IMPACT OF INFLATION
During the past several years, our commodity costs have remained
relatively stable. As such, we believe that inflation has not materially
impacted earnings during that period of time. However, during the first half of
the fiscal 2002 period, commodity prices of our primary meat products were at
their highest levels in recent years. These costs were in line with historical
norms during the fiscal 2003 period. We also experienced increased costs for
utilities and insurance during the fiscal 2002 and 2003 periods. Last year,
various Federal and New York State legislators proposed changes to the minimum
wage requirements, however, none of the proposals were enacted. We believe that
increases in the minimum wage could have a significant financial impact on our
financial results. 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 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143").
SFAS No. 143 addresses financial and reporting obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from acquisition, construction, development and/or
the normal operation of a long-lived asset, except for certain obligations of
lessees. SFAS No. 143 is effective for financial statements issued for fiscal
years beginning
30
after June 15, 2002. Nathan's has evaluated the effect of adoption on its
financial position and results of operations, and it is not expected to have a
material impact on the financial position and results of operations of the
Company.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No.
145 eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current criteria for extraordinary classification. Additionally, any gain or
loss on extinguishment of debt that was classified as an extraordinary item in
prior periods presented that does not meet the criteria in APB Opinion No. 30
for classification as an extraordinary item shall be reclassified. In addition,
SFAS No. 145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. SFAS
No. 145 also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the changes related
to lease accounting will be effective for transactions occurring after May 15,
2002. SFAS No. 145 has not had, and is not expected to have a material impact on
the financial position and results of operations of the Company.
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit
or Disposal Activities," which addresses accounting for restructuring and
similar costs. SFAS No. 146 supersedes previous accounting guidance, principally
Emerging Issues Task Force ("EITF") Issue No. 94-3. SFAS No. 146 requires that
the liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF No. 94-3, a liability for
an exit cost was recognized at the date of a company's commitment to an exit
plan. SFAS No. 146 also establishes that the liability should initially be
measured and recorded at fair value. SFAS No. 146 is effective for disposal
activities initiated after December 31, 2002. The adoption of SFAS No. 146 did
not have a material impact on the financial position and results of operations
of the Company.
In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure" which addresses financial accounting
and reporting for recording expenses for the fair value of stock options. SFAS
No. 148 provides alternative methods of transition for a voluntary change to
fair value based method of accounting for stock-based employee compensation.
Additionally, SFAS No. 148 requires more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. The provisions of this Statement are effective for fiscal years
ending after December 15, 2002, with early application permitted in certain
circumstances. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. The adoption of SFAS No. 148 had no impact on the financial
position and results of operations of the Company.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," which amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 except for the provisions that were cleared by the
FASB in prior pronouncements. The Company is currently evaluating the effect of
the adoption of SFAS No. 149 on its financial position and results of
operations.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS No. 150"), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. This Statement shall be effective for financial instruments entered
into or modified after May 31, 2003, and otherwise shall be effective for the
year ended December 31, 2003. The Company is currently evaluating the effect of
the adoption of SFAS No. 150 on its financial position and results of
operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No.
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires
that upon issuance of a guarantee, a guarantor must recognize a liability for
the fair value of an obligation assumed under a
31
guarantee. FIN No. 45 also requires additional disclosures by a guarantor in its
interim and annual financial statements about the obligations associated with
guarantees issued. The recognition provisions of FIN No. 45 are effective for
any guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements for periods ending after
December 15, 2002. The adoption of FIN No. 45 did not have a material impact on
the Company's financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46
("Fin No. 46") "Consolidation of Variable Interest Entities." In general, a
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in activities on behalf of another
company. Until now, a company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN No. 46 changes that by requiring a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. FIN No. 46's
consolidation requirements apply immediately to variable interest entities
created or acquired after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply to all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company has adopted FIN No. 46
effective January 31, 2003. The Company does not anticipate that the adoption
of FIN No. 46 will have a material impact on the Company's consolidated
financial condition or results of operations taken as a whole.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report are forward-looking
statements. Forward-looking statements represent our current judgment regarding
future events. Although we would not make forward-looking statements unless we
believe we have a reasonable basis for doing so, we cannot guarantee their
accuracy and actual results may differ materially from those we anticipated due
to a number of uncertainties, many of which we are not aware. These risks and
uncertainties, many of which are not within our control, include, but are not
limited to: economic, weather, legislative and business conditions; the
collectibility of receivables; the availability of suitable restaurant sites on
reasonable rental terms; changes in consumer tastes; the ability to continue to
attract franchisees; the ability to purchase our primary food and paper products
at reasonable prices; no material increases in the minimum wage; and our ability
to attract competent restaurant and managerial personnel. We generally identify
forward-looking statements with the words "believe," "intend," "plan," "expect,"
"anticipate," "estimate," "will," "should" and similar expressions.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
CASH AND CASH EQUIVALENTS
We have historically invested our cash and cash equivalents in short
term, fixed rate, highly rated and highly liquid instruments which are
reinvested when they mature throughout the year. Although our existing
investments are not considered at risk with respect to changes in interest rates
or markets for these instruments, our rate of return on short-term investments
could be affected at the time of reinvestment as a result of intervening events.
As of March 30, 2003, Nathans' cash and cash equivalents aggregated $1,415,000.
Earnings on these cash and cash equivalents would increase or decrease by
approximately $3,500 per annum for each .25% change in interest rates.
MARKETABLE INVESTMENT SECURITIES
We have invested our marketable investment securities in intermediate
term, fixed rate, highly rated and highly liquid instruments. These investments
are subject to fluctuations in interest rates. As of March 30, 2003, the market
value of Nathans' marketable investment securities aggregated $4,623,000.
Interest income on these marketable investment securities would increase or
decrease by approximately $11,600 per annum for each .25% change in interest
rates. The following chart presents the hypothetical changes in the fair value
of the marketable investments securities held at March 30, 2003 that are
sensitive to interest rate fluctuations (in thousands):
32
Valuation of securities Valuation of securities
Given an interest rate Given an interest rate
Decrease of X Basis points Increase of X Basis points
-------------------------- Fair --------------------------
(150BPS) (100BPS) (50BPS) Value +50BPS +100BPS +150BPS
---------------------------------------------------------------------------
Municipal notes and bonds $ 4,843 $ 4,777 $4,712 $4,650 $4,589 $4,530 $ 4,473
======= ======= ====== ====== ====== ====== =======
INVESTMENT IN LIMITED PARTNERSHIP
We had invested in a highly liquid investment limited partnership that
invested principally in equity securities. These investments were subject to the
performance of the equity markets. During fiscal 2003, Nathan's liquidated its
investment in limited partnership. Accordingly, Nathan's investment in limited
partnership has no further exposure to the equity markets.
BORROWINGS
The interest rate on our borrowings 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. At
March 30, 2003, total outstanding debt, including capital leases, aggregated
$1,226,000 of which $1,167,000 is at risk due to changes in interest rates. The
current interest rate is 4.50% per annum and will adjust in January 2006 and
2009 to prime plus .25%. Nathan's also maintains a $7,500,000 credit line which
bears interest at the prime rate (4.25% at March 30, 2003). The Company has
never borrowed any funds under this line. Accordingly, the Company does not
believe that fluctuations in interest rates would have a material impact on its
financial results.
COMMODITY COSTS
The cost of commodities are subject to market fluctuation. We have not
attempted to hedge against fluctuations in the prices of the commodities we
purchase using future, forward, option or other instruments. As a result, our
future commodities purchases are subject to changes in the prices of such
commodities. Generally, we attempt to pass through permanent increases in our
commodity prices to our customers, thereby reducing the impact of long-term
increases on our financial results. A short term increase or decrease of 10% in
the cost of our food and paper products for the entire fifty-two weeks ended
March 30, 2003 would have increased or decreased cost of sales by approximately
$1,133,000.
FOREIGN CURRENCIES
Foreign franchisees generally conduct business with us and make
payments in United States dollars, reducing the risks inherent with changes in
the values of foreign currencies. As a result, we have not purchased future
contracts, options or other instruments to hedge against changes in values of
foreign currencies and we do not believe fluctuations in the value of foreign
currencies would have a material impact on our financial results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data is
submitted as a separate section of this report beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 15, 2002, we dismissed Arthur Andersen LLP, our independent
auditors for the fiscal year ended March 25, 2001 and, effective March 25, 2002,
replaced them with Grant Thornton LLP, our auditors for the fiscal year ended
March 31, 2002. The decision to change accountants was ratified by our Audit
Committee on March 19, 2002.
The report of Arthur Andersen LLP for the year ended March 25, 2001
and does not contain an adverse opinion or a disclaimer of opinion, or a
qualification or modification as to uncertainty, audit scope or accounting
principles.
In connection with the audit for our fiscal year ended March 25, 2001
and for the period from March 26, 2001 through the date of change in auditors,
there were no disagreements with Arthur Andersen LLP on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to
33
their satisfaction, would have caused it to make a reference to the subject
matter of the disagreement in connection with its report.
We did not have any discussions nor received any written
reports or oral advice from Grant Thornton LLP during the fiscal year ended
March 25, 2001 and through March 24, 2002, with respect to either the
application of accounting principles to a specified transaction, either
completed or proposed, or as to the type of audit opinion that might be rendered
on our financial statements.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this Item is incorporated
herein by reference to our proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item is incorporated
herein by reference to our proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this Item is incorporated
herein by reference to our proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item is incorporated
herein by reference to our proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this Report.
ITEM 14. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our Chief
Executive Officer ("CEO"), Chief Operating Officer ("COO")and Chief Financial
Officer ("CFO") the Company's disclosure controls and procedures were evaluated
as of a date 90 days prior to the filing of this report. Based on that
evaluation, the Company's CEO, COO and CFO concluded that the company's
disclosure controls and procedures were effective.
(b) Our CEO, COO and CFO are involved in ongoing evaluations of our
internal controls. There have been no significant changes in our internal
controls or in other factors that could significantly affect our internal
controls subsequent to our last evaluation.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
We were billed by Grant Thornton LLP the aggregate amount of
approximately $146,000 in respect of fiscal 2003 and $128,500 in respect to
fiscal 2002 for fees for professional services rendered for the audit of our
annual financial statements and review of our financial statements included in
our forms 10-Q.
AUDIT-RELATED FEES
We were billed by Grant Thornton LLP the aggregate amount of
approximately $20,000 in respect of fiscal 2003 and $0 in respect to fiscal 2002
for fees for assurance and related services related to the performance of the
audit.
TAX FEES
Grant Thornton LLP did not render any tax compliance, tax advice or tax
planning services for fiscal 2003 and 2002.
35
ALL OTHER FEES
Grant Thornton LLP did not render any other services, other than as set
forth above, for fiscal 2003 and 2002. Consequently, aggregate fees billed for
all other services rendered by Grant Thornton LLP for fiscal 2003 and 2002 were
$0.
PRE-APPROVAL POLICIES
Our audit committee has not adopted any policies pursuant to which it
has pre-approved the provision by Grant Thornton LLP of any audit or non-audit
services.
Our audit committee approved all of the services provided by Grant
Thornton LLP and described in the preceding paragraphs.
36
PART IV
ITEM 16. 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 1933 or under the
Securities Exchange Act of 1934 and are herein incorporated by reference.
Exhibit
No. Exhibit
- ------- -------
3.1 Certificate of Incorporation.(Incorporated by reference to Exhibit
3.1 to Registration Statement on Form S-1 No. 33-56976.)
3.2 Amendment to the Certificate of Incorporation, filed December 15,
1992.(Incorporated by reference to Exhibit 3.2 to Registration
Statement on Form S-1 No. 33-56976.)
3.3 By-Laws, as amended. (Incorporated by reference to Exhibit 3.3 to
the Annual Report on Form 10-K for the fiscal year ended March 28,
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.)
37
10.7 Area Development Agreement with Premiere Foods, dated September 11,
1990. (Incorporated by reference to Exhibit 10.10 to Registration
Statement on Form S-1 No. 33-56976.)
10.8 Form of Standard Franchise Agreement. (Incorporated by reference to
Exhibit 10.12 to Registration Statement on Form S-1 No. 33-56976.)
10.9 401K Plan and Trust. (Incorporated by reference to Exhibit 10.5 to
Registration Statement on Form S-1 No. 33-56976.)
10.10 Amendment dated November 8, 1993, to the Employment Agreement, dated
December 28, 1992, with Wayne Norbitz. ( Incorporated by reference
to Exhibit 10.19 to the Annual Report filed on Form 10-K for the
fiscal year ended March 27, 1994.)
10.11 License Agreement dated as of February 28, 1994, among Nathan's
Famous Systems, Inc. and SMG, Inc., including amendments and waivers
thereto. ( Incorporated by reference to Exhibit 10.21 to the Annual
Report filed on Form 10-K for the fiscal year ended March 27, 1994.)
10.12 Outside Director Stock Option Plan. (Incorporated by reference to
Exhibit 10.22 to Registration Statement on Form S-8 No. 33-89442.)
10.13 Modification Agreement to the Employment Agreement with Wayne
Norbitz, dated December 28, 1992. (Incorporated by reference to
Exhibit 10.1 to the Quarterly Report filed on Form 10-Q for the
fiscal quarter ended December 29, 1996.)
10.14 Amendment to License Agreement dated as of February 28, 1994, among
Nathan's Famous Systems, Inc. and SMG, Inc. including waivers and
amendments thereto. (Incorporated by reference to Exhibit 10.2 to
the Quarterly Report filed on Form 10-Q for the fiscal quarter ended
December 29, 1996.)
10.15 Second Amended and Restated Rights Agreement dated as of April 6,
1998 between Nathan's Famous, Inc. and American Stock Transfer and
Trust Company (Incorporated by reference to Exhibit 2 to Form 8-A/A
dated April 6, 1998.)
10.16 1998 Stock Option Plan. (Incorporated by reference to Exhibit 10.26
to the Annual Report filed on Form 10-K for the fiscal year ended
March 29, 1998.)
10.17 North Fork Bank Promissory Note.(Incorporated by reference to
Exhibit 10.21 to the Annual Report filed on Form 10-K for the fiscal
year ended March 28, 1999.)
10.18 Amended and Restated Employment Agreement with Donald L. Perlyn
effective September 30, 1999. (Incorporated by reference to Exhibit
10.20 to the Annual Report filed on Form 10-K for the fiscal year
ended March 26, 2000.)
10.19 Third Amended and Restated Rights Agreement dated as of December 10,
1999 between Nathan's Famous, Inc. and American Stock Transfer and
Trust Company (Incorporated by reference to Exhibit 2 to Form 8-A/A
dated December 10, 1999.)
10.20 Employment Agreement dated as of January 1, 2000 with Howard M.
Lorber.(Incorporated by reference to Exhibit 10.24 to the Annual
Report filed on Form 10-K for the fiscal year ended March 26, 2000.)
10.21 Marketing Agreement with beverage supplier. (Incorporated by
reference to Exhibit 10.25 to the Quarterly Report filed on Form
10-Q for the fiscal quarter ended June 25, 2000.)
10.22 2001 Stock Option Plan. (Incorporated by reference to Exhibit 4 to
Registration Statement on Form S-8 No. 333-82760.)
10.23 2002 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1
to Registration Statement on Form S-8 No. 333-101355.)
10.24 Master Distributor Agreement with U.S. Foodservice, Inc. dated
February 5, 2003.
21 List of Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP dated June 26, 2003.
99.1 Certification by Howard M. Lorber, Chief Executive Officer of
Nathan's Famous, Inc., pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Ronald G. DeVos, Chief Financial Officer of
Nathan's Famous, Inc., pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
None
38
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 20th day of June,
2003.
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 20th day of June, 2003.
/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
/s/ BARRY LEISTNER
- ---------------------------
Barry Leistner Director
/s/ BRIAN GENSON
- ---------------------------
Brian Genson Director
/s/ ATTILIO F. PETROCELLI
- ---------------------------
Attilio F. Petrocelli Director
39
CERTIFICATION
I, Howard M. Lorber, Chief Executive Officer, of Nathan's Famous, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Nathan's
Famous, Inc;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 20, 2003 /s/ Howard M. Lorber
--------------------
Howard M. Lorber
Chief Executive Officer
40
CERTIFICATION
I, Wayne Norbitz, President and Chief Operating Officer, of Nathan's
Famous, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Nathan's
Famous, Inc;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 20, 2003 /s/ Wayne Norbitz
-----------------
Wayne Norbitz
President and Chief Operating Officer
41
CERTIFICATION
I, Ronald G. DeVos, Chief Financial Officer, of Nathan's Famous, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Nathan's
Famous, Inc;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 20, 2003 /s/ Ronald G. DeVos
-------------------
Ronald G. DeVos
Chief Financial Officer
42
Nathan's Famous, Inc. and Subsidiaries
TABLE OF CONTENTS
Page
----
Report of Independent Certified Public Accountants: Grant Thornton LLP F-2
Report of Independent Public Accountants: Arthur Andersen LLP F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-51
Report of Independent Public Accountants on Schedule F-52
Schedule II - Valuation and Qualifying Accounts F-53
Consent of Independent Certified Public Accountants
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of Nathan's Famous,
Inc. (a Delaware Corporation) and subsidiaries (the "Company") as of March 30,
2003 and March 31, 2002, and the related consolidated statements of operations,
stockholders' equity and cash flows for the fifty-two weeks ended March 30, 2003
and the fifty-three weeks ended March 31, 2002. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The financial
statements of the Company for the fifty-two weeks ended March 25, 2001
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those financial statements in their report
dated June 14, 2001.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nathan's Famous,
Inc. and subsidiaries as of March 30, 2003 and March 31, 2002, and the results
of their operations and their cash flows for the fifty-two weeks ended March 30,
2003 and the fifty-three weeks ended March 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
We have also audited Schedule II for the fifty-two weeks ended March 30, 2003
and the fifty-three weeks ended March 31, 2002. In our opinion, this schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information therein.
As described in Notes B and F to the consolidated financial statements, the
Company adopted Statements of Financial Accounting Standards Nos. 142, "Goodwill
and Other Intangible Assets," ("SFAS No. 142") and 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144") on April 1, 2002.
As described above, the financial statements of the Company for the fifty-two
weeks ended March 25, 2001 were audited by other auditors who have ceased
operations. As described in Notes B and F, these financial statements have been
revised to include the transitional disclosures required by SFAS No. 142 and the
reclassification and disclosures of discontinued operations required SFAS No.
144. Our audit procedures with respect to the disclosures in Note B with respect
to 2001 included agreeing the previously reported net income to the previously
issued financial statements and the adjustments to reported net income
representing amortization expense (including related tax effects) recognized in
that period related to goodwill and intangible assets that are no longer
amortized, as a result of initially applying SFAS No. 142, to the Company's
underlying records obtained from management. We also tested the mathematical
accuracy of the reconciliation of adjusted net income to reported net income and
the related earnings-per-share amounts. Our audit procedures with respect to the
reclassification of the financial statement and the disclosures in Note F with
respect to 2001 included agreeing the amounts reclassified to discontinued
operations to the Company's underlying records obtained from management and
testing the mathematical accuracy of the revision in income from continuing
operations and discontinued operations and the related earnings-per-share
amounts. In our opinion, the reclassification and disclosures for the fifty-two
weeks ended March 25, 2001 contained in the financial statement Notes B and F
are appropriate and have been appropriately applied. However, we were not
engaged to audit, review or apply any procedures to the 2001 financial
statements of the Company other than with respect to such reclassification and
disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 financial statements taken as a whole.
/s/ GRANT THORNTON LLP
- ------------------------
Melville, New York
May 23, 2003
F-2
THE BELOW REPORT OF ARTHUR ANDERSEN LLP ("ANDERSEN") IS A COPY OF THE PREVIOUSLY
ISSUED REPORT OF ANDERSEN AND THE REPORT HAS NOT BEEN REISSUED BY ANDERSEN.
NOTE THAT THIS PREVIOUSLY ISSUED ANDERSEN REPORT CONTAINS REFERENCES TO CERTAIN
FISCAL YEARS AND PERIODS, WHICH ARE NOT REQUIRED TO BE PRESENTED IN THE
ACCOMPANYING FINANCIAL STATEMENTS AS OF AND FOR THE THREE FISCAL YEARS ENDED
MARCH 30, 2003. AS DISCUSSED IN NOTES B AND F, THE COMPANY HAS REVISED ITS
FINANCIAL STATEMENTS FOR THE FIFTY-TWO WEEKS ENDED MARCH 25, 2001 TO INCLUDE THE
TRANSITIONAL DISCLOSURES REQUIRED BY STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS" AND THE RECLASSIFICATION OF
DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE REQUIRED BY STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 144, "ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS". THE ANDERSEN REPORT DOES NOT EXTEND TO THESE
CHANGES. THE REVISIONS TO THE 2001 FINANCIAL STATEMENTS RELATED TO THESE
TRANSITIONAL DISCLOSURES AND RECLASSIFICATIONS WERE REPORTED ON BY GRANT
THORNTON LLP, AS STATED IN THEIR REPORT APPEARING HEREIN.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Nathan's Famous, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Nathan's Famous,
Inc., (a Delaware Corporation) and subsidiaries as of March 25, 2001 and March
26, 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three fiscal years ended March 25, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nathan's Famous, Inc. and
subsidiaries as of March 25, 2001 and March 26, 2000, and the results of their
operations and their cash flows for each of the three fiscal years ended March
25, 2001 in conformity with accounting principles generally accepted in the
United States.
/s/Arthur Andersen LLP
Melville, New York
June 14, 2001
F-3
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
MARCH 30, 2003 March 31, 2002
-------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,415 $ 1,834
Marketable securities and investment in limited partnership 4,623 8,819
Notes and accounts receivable, net 2,607 2,808
Inventories 389 592
Assets available for sale 799 1,512
Prepaid expenses and other current assets 642 1,269
Deferred income taxes 2,079 1,747
--------- ---------
Total current assets 12,554 18,581
Notes receivable, net 740 2,277
Property and equipment, net 6,263 8,925
Goodwill 95 11,083
Intangible assets, net 3,319 6,040
Deferred income taxes 2,647 1,539
Other assets, net 268 300
--------- ---------
$ 25,886 $ 48,745
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of notes payable and capital lease obligations $ 173 $ 559
Accounts payable 1,377 1,619
Accrued expenses and other current liabilities 4,942 6,506
Deferred franchise fees 127 332
--------- --------
Total current liabilities 6,619 9,016
Notes payable and capital lease obligations, less current maturities 1,053 1,220
Other liabilities 1,831 2,364
--------- ---------
Total liabilities 9,503 12,600
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note L)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 30,000,000 shares authorized; 7,065,202 and
7,065,202 shares issued; and 5,423,964 and 7,023,511 shares outstanding
at March 30, 2003 and March 31, 2002, respectively 71 71
Additional paid-in capital 40,746 40,746
Accumulated deficit (18,505) (4,537)
Accumulated other comprehensive income 64 -
--------- ---------
22,376 36,280
Treasury stock, at cost, 1,641,238 and 41,691 shares at March 30, 2003
and March 31, 2002, respectively (5,993) (135)
--------- ---------
Total stockholders' equity 16,383 36,145
--------- ---------
$ 25,886 $ 48,745
========= =========
The accompanying notes are an integral part of these statements.
F-4
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
FIFTY-TWO Fifty-three Fifty-two
WEEKS ENDED weeks ended weeks ended
MARCH 30, 2003 March 31, 2002 March 25, 2001
-------------- -------------- --------------
REVENUES
Sales $ 24,920 $ 27,492 $ 29,852
Franchise fees and royalties 5,977 7,944 8,814
License royalties 2,585 2,038 1,958
Interest income 292 500 537
Investment and other income 156 1,568 1,066
---------- ----------- ----------
Total revenues 33,930 39,542 42,227
---------- ----------- ----------
COSTS AND EXPENSES
Cost of sales 16,750 18,336 19,217
Restaurant operating expenses 5,621 6,559 7,621
Depreciation and amortization 1,314 1,395 1,535
Amortization of intangible assets 278 888 839
General and administrative expenses 8,600 9,292 8,978
Interest expense 132 256 310
Impairment charge on long-lived assets 1,367 392 127
Impairment charge on notes receivable 1,425 185 151
Other expense (income), net 232 (210) 462
---------- ----------- ----------
Total costs and expenses 35,719 37,093 39,240
---------- ----------- ----------
(Loss) income from continuing operations before (benefit) provision
for income taxes (1,789) 2,449 2,987
(Benefit) provision for income taxes (283) 1,057 1,402
---------- ----------- ----------
(Loss) income from continuing operations (1,506) 1,392 1,585
(Loss) income from discontinued operations, net of income tax (benefit)
provision of $(82), $(95) and $14 in 2003, 2002 and 2001,
respectively (124) (143) 21
---------- ----------- ----------
(Loss) income from operations before cumulative effect of
accounting change (1,630) 1,249 1,606
Cumulative effect of change in accounting principle, net of tax
benefit of $854 (12,338) - -
---------- ----------- ----------
Net (loss) income $ (13,968) $ 1,249 $ 1,606
========== =========== ==========
PER SHARE INFORMATION
Basic (loss) income per share:
(Loss) income from continuing operations $ (.25) $ .20 $ .23
Loss from discontinued operations (.03) (.02) .00
Cumulative effect of change in accounting principle (2.06) - -
---------- ----------- ----------
Net (loss) income $ (2.34) $ .18 $ .23
========== =========== ==========
Diluted (loss) income per share:
(Loss) income from continuing operations $ (.25) $ .20 $ .23
Loss from discontinued operations (.03) (.02) .00
Cumulative effect of change in accounting principle (2.06) - -
---------- ----------- ----------
Net (loss) income $ (2.34) $ .18 $ .23
========== =========== ==========
Weighted average shares used in computing net income (loss)
per share
Basic 5,976,000 7,048,000 7,059,000
========== =========== ==========
Diluted 5,976,000 7,083,000 7,098,000
========== =========== ==========
The accompanying notes are an integral part of these statements.
F-5
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Fifty-two weeks ended March 30, 2003, fifty-three weeks ended March 31, 2002
and fifty-two weeks ended March 25, 2001
(in thousands, except share amounts)
Accumulated
Additional other
Common Common paid-in Accumulated comprehensive
shares stock capital deficit income
------ ----- ------- ------- ------
Balance, March 26, 2000 7,040,196 $ 70 $ 40,669 $ (7,392) -
Stock compensation 25,000 1 77 - -
Warrants exercised 6 - - - -
Net income - - - 1,606 -
Comprehensive income - - - - -
--------- ------ ---------- -------- ------
Balance, March 25, 2001 7,065,202 71 40,746 (5,786) -
Repurchase of treasury stock - - - - -
Net income - - - 1,249 -
Comprehensive income - - - - -
--------- ------ ---------- -------- ------
Balance, March 31, 2002 7,065,202 71 40,746 (4,537) -
REPURCHASE OF TREASURY STOCK - - - - -
UNREALIZED GAIN ON MARKETABLE
SECURITIES, NET OF DEFERRED
INCOME TAXES OF $46 - - - - $ 64
NET LOSS - - - (13,968) -
COMPREHENSIVE LOSS - - - - -
--------- ------ ---------- -------- ------
BALANCE, MARCH 30, 2003 7,065,202 $ 71 $ 40,746 $(18,505) $ 64
========= ====== ========== ======== ======
Total
Treasury stock, at cost stockholders' Comprehensive
Shares Amount equity income (loss)
------ ------ ------ -----------
Balance, March 26, 2000 - - $ 33,347
Stock compensation - - 78
Warrants exercised - - -
Net income - - 1,606 $ 1,606
-----------
Comprehensive income - - - $ 1,606
--------- ------- ---------- ===========
Balance, March 25, 2001 - - 35,031
Repurchase of treasury stock 41,691 $ (135) (135)
Net income - - 1,249 $ 1,249
-----------
Comprehensive income - - - $ 1,249
--------- ------- ---------- ===========
Balance, March 31, 2002 41,691 (135) 36,145
REPURCHASE OF TREASURY STOCK 1,599,547 (5,858) (5,858)
UNREALIZED GAIN ON MARKETABLE
SECURITIES, NET OF DEFERRED
INCOME TAXES OF $46 - - 64 $ 64
NET LOSS - - (13,968) (13,968)
-----------
COMPREHENSIVE LOSS - - - $ (13,904)
--------- ------- ---------- ===========
BALANCE, MARCH 30, 2003 1,641,238 $(5,993) $ 16,383
========= ======= ==========
The accompanying notes are an integral part of this statement.
F-6
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FIFTY-TWO Fifty-three Fifty-two
WEEKS ENDED weeks ended weeks ended
MARCH 30, 2003 March 31, 2002 March 25, 2001
-------------- -------------- --------------
Cash flows from operating activities:
Net (loss) income $ (13,968) $ 1,249 $ 1,606
Adjustments to reconcile net (loss) income to net cash
Provided by (used in) operating activities
Cumulative effect of change in accounting principle,
net of tax benefit 12,338 - -
Depreciation and amortization 1,907 1,661 1,791
Amortization of intangible assets 278 888 839
Amortization of bond premium 85 - -
Gain on disposal of fixed assets (39) (1,226) -
Stock compensation expense - - 78
Gain on sale of available for sale securities (10) - -
Impairment of long-lived assets 1,367 685 127
Impairment of notes receivable 1,425 185 151
Provision for doubtful accounts 82 267 191
Deferred income taxes (585) 509 313
Changes in operating assets and liabilities:
Marketable securities and investment in limited partnership 981 (4,171) (1,651)
Notes and accounts receivable 2 (26) (1,350)
Inventories 203 (69) 20
Prepaid expenses and other current assets 627 (295) (339)
Other assets 32 104 159
Accounts payable, accrued expenses and other current liabilities (1,647) (2,538) 961
Deferred franchise fees (205) (324) (76)
Other liabilities (577) 20 1,329
---------- -------- --------
Net cash provided by (used in) operating activities 2,296 (3,081) 4,149
---------- -------- --------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 6,088 - -
Purchase of available for sale securities (2,884) - -
Lease terminations and other costs in connection with acquisition - - (1,036)
Purchases of property and equipment (562) (2,082) (1,458)
Payments received on notes receivable 273 812 506
Proceeds from sales of property and equipment 781 3,348 45
---------- -------- --------
Net cash provided by (used in) investing activities 3,696 2,078 (1,943)
---------- -------- --------
Cash flows from financing activities:
Principal repayments of borrowing (553) (1,353) (278)
Repurchase of treasury stock (5,858) (135) -
---------- -------- --------
Net cash used in financing activities (6,411) (1,488) (278)
---------- -------- --------
Net change in cash and cash equivalents (419) (2,491) 1,928
Cash and cash equivalents, beginning of year 1,834 4,325 2,397
---------- -------- --------
Cash and cash equivalents, end of year $ 1,415 $ 1,834 $ 4,325
========== ======== ========
Cash paid during the year for:
Interest $ 138 $ 264 $ 317
========== ======== ========
Income taxes $ 57 $ 149 $ 1,508
========== ======== ========
Noncash financing activities:
Loan to franchisee in connection with sale of restaurant $ 44 $ 416 $ 130
========== ======== ========
The accompanying notes are an integral part of these statements.
F-7
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE A - DESCRIPTION AND ORGANIZATION OF BUSINESS
1. Description of Business
Nathan's Famous, Inc. and subsidiaries (collectively the "Company" or
"Nathan's") has historically operated 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, Nathan's completed a
merger with Miami Subs Corporation ("Miami Subs") whereby it acquired
the remaining 70% of Miami Subs common stock not previously owned by
the Company. Miami Subs features a wide variety of lunch, dinner and
snack foods, including hot and cold sandwiches and various ethnic
foods. Roasters features home-style family foods based on a menu
centered around wood-fire rotisserie chicken. The Company considers its
subsidiaries to be in the food service industry, and has pursued
co-branding and co-hosting initiatives; accordingly management has
evaluated the Company as a single reporting unit.
At March 30, 2003, the Company's restaurant system, consisting of
Nathan's Famous, Kenny Rogers Roasters and Miami Subs restaurants,
included 12 company-owned units concentrated in the New York
metropolitan area and Florida, 343 franchised or licensed units,
including 6 units operating pursuant to management agreements and
approximately 2,200 branded product points of sale under the Nathan's
Branded Product Program, located in 41 states, the District of
Columbia, and 12 foreign countries.
2. Organization of Business
In July 1987, all of the outstanding shares, options and warrants of
Nathan's Famous, Inc. (the "Predecessor Company"), a then publicly held
New York corporation, were acquired through a cash transaction,
accounted for by the purchase method of accounting (the "Acquisition").
In connection with the Acquisition, a privately-held New York
corporation (the "Acquiring Corporation") was merged into the
Predecessor Company.
F-8
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE A (CONTINUED)
In November 1989, the surviving corporation was merged with Nathan's
Newco, Inc., a Delaware corporation which, upon the effectiveness of
the merger, changed its name to Nathan's Famous, Inc. ("NFI").
In August 1992, Nathan's Famous Holding Corp. ("NFH"), a new Delaware
corporation was formed. Pursuant to a merger agreement, NFI became a
wholly owned subsidiary of NFH. On December 15, 1992, NFI and NFH
amended their charter to change their respective names to Nathan's
Famous Operating Corp. ("NFOC") and Nathan's Famous, Inc.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all of its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
2. Fiscal Year
The Company's fiscal year ends on the last Sunday in March, which
results in a 52- or 53-week reporting period. The results of operations
and cash flows for the fiscal year ended March 30, 2003 are on the
basis of a 52-week reporting period. The results of operations and cash
flows for the fiscal year ended March 31, 2002 are on the basis of a
53-week reporting period. The results of operations and cash flows for
the fiscal year ended March 25, 2001 are on the basis of a 52-week
reporting period.
3. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates
made by management in preparing the consolidated financial statements
include the allowance for doubtful accounts, the allowance for impaired
notes receivable, the self-insurance reserve, impairment charges on
goodwill and long-lived assets, lease termination reserves and the
deferred tax valuation allowance.
F-9
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
4. Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash
restricted for untendered shares associated with the Acquisition
amounted to $83 at March 30, 2003 and March 31, 2002, respectively, and
is included in cash and cash equivalents.
5. Impairment of Notes Receivable
Nathan's follows the guidance in Statement of Financial Accounting
Standards No. 114 ("SFAS No. 114") "Accounting by Creditors for
Impairment of a Loan," as amended. Pursuant to SFAS No. 114, a loan is
impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. When evaluating a note for
impairment, the factors considered include: (a) indications that the
borrower is experiencing business problems such as operating losses,
marginal working capital, inadequate cash flow or business
interruptions, (b) loans secured by collateral that is not readily
marketable, or (c) that are susceptible to deterioration in realizable
value. When determining impairment, management's assessment includes
its intention to extend certain leases beyond the minimum lease term
and the debtor's ability to meet its obligation over that extended
term. In certain cases where Nathan's has determined that a loan has
been impaired, it generally does not expect to extend or renew the
underlying leases. Based on the Company's analysis, it has determined
that there are notes that have incurred such an impairment. Following
are summaries of impaired notes receivable and the allowance for
impaired notes receivable:
MARCH 30, March 31,
2003 2002
--------- --------
Total recorded investment in impaired notes receivable $ 2,598 $1,000
Allowance for impaired notes receivable (2,065) (640)
------- ------
Recorded investment in impaired notes receivable, net $ 533 $ 360
======= ======
F-10
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
MARCH 30, March 31,
2003 2002
--------- --------
Allowance for impaired notes receivable at beginning of fiscal year $ 640 $ 613
Impairment charges on notes receivable 1,425 185
Direct writedowns of impaired notes receivable - (240)
Other increases in allowance for impaired notes receivable - 82
---------- --------
Allowance for impaired notes receivable at end of fiscal period $ 2,065 $ 640
========== ========
Based on the present value of the estimated cash flows of identified
impaired notes receivable, the Company records interest income on its
impaired notes receivable on a cash basis. The following represents the
interest income recognized and average recorded investment of impaired
notes receivable.
MARCH 30, March 31, March 25,
2003 2002 2001
--------- ---------- ---------
Interest income recorded on impaired notes receivable $ 96 $ 47 $ 112
Average recorded investment in impaired notes receivable $ 1,624 $ 936 $ 1,702
6. Inventories
Inventories, which are stated at the lower of cost or market value,
consist primarily of restaurant food items, supplies, marketing items
and equipment in connection with the Branded Product Program. Cost is
determined using the first-in, first-out method.
F-11
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
7. Marketable Securities and Investment in Limited Partnership
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company determines the appropriate
classification of securities at the time of purchase and reassesses the
appropriateness of the classification at each reporting date. At March
30, 2003 and March 31, 2002, all marketable securities held by the
Company have been classified as either available-for-sale or trading
and, as a result, are stated at fair value. Realized gains and losses
on the sale of securities, as determined on a specific identification
basis, as well as unrealized holding gains and losses on trading
securities are included in the accompanying consolidated statements of
operations. Unrealized gains and losses on available for sale
securities are included as a component of accumulated other
comprehensive income in the accompanying consolidated balance sheet.
Investment income in the trading limited partnership is based upon
Nathan's proportionate share of the change in the underlying net assets
of the partnership. The partnership invests primarily in publicly
traded common stocks with a concentration in securities traded on
exchanges in the United States of America. During the fiscal year ended
March 30, 2003, the Company liquidated its investment in limited
partnership.
8. Sales of Restaurants
The Company observes the provisions of SFAS No. 66, "Accounting for
Sales of Real Estate," which establishes accounting standards for
recognizing profit or loss on sales of real estate. SFAS No. 66
provides for profit recognition by the full accrual method, provided
(a) the profit is determinable, that is, the collectibility of the
sales price is reasonably assured or the amount that will not be
collectible can be estimated, and (b) the earnings process is virtually
complete, that is, the seller is not obliged to perform significant
activities after the sale to earn the profit. Unless both conditions
exist, recognition of all or part of the profit shall be postponed and
other methods of profit recognition shall be followed. In accordance
with SFAS No. 66, the Company recognizes profit on sales of restaurants
under the full accrual method, the installment method and the deposit
method, depending on the specific terms of each sale. The Company
continues to record depreciation expense on the property subject to the
sales contracts that are accounted for under the deposit method and
records any principal payments received as a deposit until such time
that the transaction meets the sales criteria of SFAS No. 66.
As of March 30, 2003 and March 31, 2002, the Company had deposits on
the sales of restaurants of $161 and $214, respectively, included in
accrued expenses in the accompanying consolidated balance sheets.
F-12
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
9. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are calculated
primarily on the straight-line basis over the estimated useful lives of
the assets. Leasehold improvements are amortized over the shorter of
the estimated useful life or the lease term of the related asset. The
estimated useful lives are as follows:
Building and improvements 5 - 25 years
Machinery, equipment, furniture and fixtures 5 - 15 years
Leasehold improvements 5 - 20 years
10. Intangible Assets
Intangible assets consist of (i) the goodwill resulting from the
Acquisition; (ii) trademarks and trade names, franchise rights and
recipes in connection with Roasters and (iii) goodwill and certain
identifiable intangibles resulting from the Miami Subs acquisition.
These intangible assets were being amortized over periods from 10 to 40
years through March 31, 2002.
On April 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), which supercedes APB Opinion No.
17, "Intangible Assets" and certain provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No. 142 required that
goodwill and other intangibles be reported separately; eliminates the
requirement to amortize goodwill and indefinite-lived intangible
assets; addresses the amortization of intangible assets with a defined
life; and addresses impairment testing and recognition of goodwill and
intangible assets. SFAS No. 142 changes the method of accounting for
the recoverability of goodwill for the Company, such that it is
evaluated at the brand level based upon the estimated fair value of the
brand. Fair value can be determined based on discounted cash flows, on
comparable sales or valuations of other restaurant brands. The
impairment review involves a two-step process as follows:
Step 1: Compare the fair value for each reporting unit to its
carrying value, including goodwill. For each reporting unit where
the carrying value, including goodwill, exceeds the reporting
unit's fair value, move on to step 2. If a reporting unit's fair
value exceeds the carrying value, no further work is performed and
no impairment charge is necessary.
F-13
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
Step 2: Allocate the fair value of the reporting unit to its
identifiable tangible and intangible assets, excluding goodwill
and liabilities. This will derive an implied fair value for the
reporting unit's goodwill. Then, compare the implied fair value of
the reporting unit's goodwill with the carrying amount of
reporting unit's goodwill. If the carrying amount of the reporting
unit's goodwill is greater than the implied fair value of its
goodwill, an impairment loss must be recognized for the excess.
The transitional impairment charge, if any, is recorded as a
cumulative effect of accounting change for goodwill.
The Company completed its initial SFAS No. 142 transitional impairment
test of goodwill, including an assessment of a valuation of the
Nathan's, Miami Subs and Roasters reporting units by an independent
valuation consultant, and has recorded an impairment charge requiring
the Company to write-off substantially all of the goodwill related to
the acquisitions, trademarks and recipes as a cumulative effect of
accounting change in the first quarter of fiscal 2003. The fair value
was determined through the combination of a present value analysis as
well as prices of comparative businesses. The changes in the net
carrying amount of goodwill, trademarks and recipes recorded in the
first quarter of fiscal 2003 are as follows:
Goodwill Trademarks Recipes Total
-------- ---------- ------- -----
Balance as of April 1, 2002 $ 11,083 $ 2,242 $ 30 $13,355
Cumulative effect of accounting change for
goodwill and other intangible assets (10,988) (2,174) (30) (13,192)
-------- ---------- ------- -------
Balance as of March 30, 2003 $ 95 $ 68 $ - $ 163
======== ========== ======= =======
F-14
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
The table below presents amortized and unamortized intangible assets as
of March 30, 2003 and March 31, 2002:
March 30, 2003 March 31, 2002
-------------- --------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
------ ------------ ------ ------ ------------ ------
Amortized intangible assets:
Royalty streams $4,259 $(1,008) $ 3,251 $ 4,259 $ (747) $ 3,512
Favorable leases 285 (285) - 285 (31) 254
Other 16 (16) - 62 (60) 2
------ ------- -------- ------- ------- -------
$4,560 $(1,309) 3,251 $ 4,606 $ (838) 3,768
====== ======= ======= =======
Unamortized intangible assets:
Trademarks, tradenames and recipes 68 2,425 (153) 2,272
-------- ------- ------- -------
$ 3,319 $ 7,031 $ (991) $ 6,040
======== ======= ======= =======
Goodwill $ 95 $17,043 $(5,960) $11,083
======== ======= ======= =======
The following table provides a reconciliation of the reported net
(loss) income and net (loss) income per share for the fiscal years
ended March 30, 2003, March 31, 2002 and March 25, 2001, adjusted as
though SFAS No. 142 had been effective for all periods:
2003 2002 2001
-------- ------ ------
Reported net (loss) income before cumulative
effect of change in accounting principle $ (1,630) $ 1,249 $ 1,606
Add back discontinued amortization expense - 555 555
--------- ------- -------
Adjusted net (loss) income before cumulative
effect of change in accounting principle $ (1,630) $ 1,804 $ 2,161
Cumulative effect of change in accounting principle (12,338) - -
--------- ------- -------
Adjusted net (loss) income $(13,968) $ 1,804 $ 2,161
========= ======= =======
Reported basic net (loss) income per common share before
cumulative effect of change in accounting principle $ (.25) $ .18 $ .23
Effect of discontinued amortization expense - .08 .08
--------- ------- ------
Adjusted basic net (loss) income per common share before
cumulative effect of change in accounting principle (.25) .26 .31
Cumulative effect of change in accounting principle (2.06) - -
--------- ------- ------
Adjusted basic net (loss) income per common share $ (2.34) $ .26 $ .31
========= ======= =======
Reported diluted net (loss) income per common share before
cumulative effect of change in accounting principle $ (.25) $ .18 $ .23
Effect of discontinued amortization expense - .07 .07
--------- ------- -------
Adjusted diluted net (loss) income per common share before
cumulative effect of change in accounting principle $ (.25) $ .25 $ .30
Cumulative effect of change in accounting principle (2.06) - -
--------- ------- -------
Adjusted diluted net (loss) income per common share $ (2.34) $ .25 $ .30
========= ======= =======
F-15
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
As of March 30, 2003, the Company has reevaluated the impact of SFAS
No. 142 on its goodwill, and no additional impairment charges were
deemed necessary.
Total amortization expense for intangible assets was $278, $888 and
$839 for the fiscal years ended March 30, 2003, March 31, 2002 and
March 25, 2001. The Company estimates future annual amortization
expense of approximately $261 per year for each of the next five years.
In the fourth quarter of fiscal 2003, the Company recorded an
impairment charge of $239 related to its favorable leases. This
impairment charge, which was based upon the fact that such locations
had incurred negative cash flows from operations for fiscal 2003 and
are projected to incur negative cash flows in fiscal 2004, is recorded
as a component of impairment charge on long-lived assets. (See Note
B-11.)
11. Long-lived Assets
Long-lived assets and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate the carrying value
may not be recoverable. Impairment is measured by comparing the
carrying value of the long-lived assets to the estimated undiscounted
future cash flows expected to result from use of the assets and their
ultimate disposition. In instances where impairment is determined to
exist, the Company writes down the asset to its fair value based on the
present value of estimated future cash flows.
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 seven,
two and one units that have been impaired, and recorded impairment
charges of $1,367 (inclusive of $239 related to favorable leases), $685
and $127 in the statements of operations for the fiscal years ended
March 30, 2003, March 31, 2002 and March 25, 2001, respectively.
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. (See Note B - 10 for a
description of impairment charges recorded on goodwill and other
intangible assets during the fiscal year ended March 30, 2003 as a
result of the adoption of SFAS No. 142.) No impairment charges were
recorded with respect to such intangible assets for the fiscal years
ended March 31, 2002 and March 25, 2001.
F-16
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
12. Self-Insurance
The Company is self-insured for portions of its general liability
coverage. As part of Nathan's risk management strategy, its insurance
programs include deductibles for each incident and in the aggregate for
a policy year. As such, Nathan's accrues estimates of its ultimate
self-insurance costs throughout the policy year. These estimates have
been developed based upon Nathan's historical trends, however, the
final cost of many of these claims may not be known for five years or
longer. Accordingly, Nathan's annual self-insurance costs may be
subject to adjustment from previous estimates as facts and
circumstances change. The self-insurance accruals at March 30, 2003 and
March 31, 2002 were $596 and $1,346, respectively and are included in
"Accrued expenses and other current liabilities" in the accompanying
consolidated balance sheets. During the fiscal year ended March 30,
2003, the self insurance accrual was reduced by approximately $829, due
principally to the satisfaction of a claim against the Company totaling
$659 (see Note L) and the reversal of approximately $196 of previously
recorded self insurance accruals in connection with the conclusion of
claims relating to prior policy years.
13. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, marketable
securities and investment in limited partnership, accounts receivable
and accounts payable approximate fair value due to the short-term
maturities of the instruments. The carrying amounts of note payable and
capital lease obligations and notes receivable approximate their fair
values as the current interest rates on such instruments approximates
current market interest rates on similar instruments.
14. Stock-Based Compensation
At March 30, 2003, the Company has five stock-based employee
compensation plans, which are described more fully in Note K. The
Company accounts for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations
("APB No. 25") and has adopted the disclosure provisions of SFAS No.
148 "Accounting for Stock-Based Compensation-Transition and
Disclosure." Under APB No. 25, when the exercise price of the Company's
employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Accordingly, no compensation expense has been recognized in the
consolidated financial statements in connection with employee stock
option grants.
F-17
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
The following table illustrates the effect on net income and earnings
per share had the Company applied the fair value recognition provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
Fiscal year ended
MARCH 30, March 31, March 25,
2003 2002 2001
--------- --------- ---------
Net (loss) income, as reported $(13,968) $ 1,249 $ 1,606
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method for all
Awards (165) (410) (358)
-------- ------- -------
Pro forma net (loss) income $(14,133) $ 839 $ 1,248
======== ======= =======
(Loss) earnings per share
Basic - as reported $ (2.34) $ .18 $ .23
======== ======= =======
Diluted - as reported $ (2.34) $ .18 $ .23
======== ======= =======
Basic - pro forma $ (2.36) $ .12 $ .18
======== ======= =======
Diluted - pro forma $ (2.36) $ .12 $ .18
======== ======= =======
Pro forma compensation expense may not be indicative of pro forma
expense in future years. For purposes of estimating the fair value of
each option on the date of grant, the Company utilized the
Black-Scholes option-pricing model.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-18
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
The weighted-average option fair values and the assumptions used to
estimate these values are as follows:
2003 2002
------ ------
Weighted-average option fair values $2.19 $1.30
Expected life (years) 10.0 6.6
Interest rate 5.30% 4.06%
Volatility 32.8% 32.3%
Dividend yield 0% 0%
There were no options or warrants granted during fiscal 2001.
15. Start-up Costs
Preopening and similar costs are expensed as incurred.
16. Revenue Recognition - Company-owned Restaurants
Sales by Company-owned restaurants are recognized on a cash basis, upon
the performance of services.
17. Revenue Recognition - Franchising Operations
In connection with its franchising operations, the Company receives
initial franchise fees, development fees, royalties, contributions to
marketing funds, and in certain cases, revenue from sub-leasing
restaurant properties to franchisees.
Franchise and area development fees, which are typically received prior
to completion of the revenue recognition process, are recorded as
deferred revenue. Initial franchise fees are recognized as income when
substantially all services to be performed by Nathan's and conditions
relating to the sale of the franchise have been performed or satisfied,
which generally occurs when the franchised restaurant commences
operations. The following services are typically provided by the
Company prior to the opening of a franchised restaurant:
F-19
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
- Approval of all site selections to be developed.
- Provision of architectural plans suitable for restaurants to
be developed.
- Assistance in establishing building design specifications,
reviewing construction compliance and equipping the
restaurant.
- Provision of appropriate menus to coordinate with the
restaurant design and location to be developed.
- Provide management training for the new franchisee and
selected staff.
- Assistance with the initial operations of restaurants being
developed.
Development fees are nonrefundable and the related agreements require
the franchisee to open a specified number of restaurants in the
development area within a specified time period or the agreements may
be canceled by the Company. Revenue from development agreements is
deferred and recognized as restaurants in the development area commence
operations on a pro rata basis to the minimum number of restaurants
required to be open, or at the time the development agreement is
effectively canceled. At March 30, 2003 and March 31, 2002, $127 and
$332, respectively, of deferred franchise fees are included in the
accompanying consolidated balance sheets. For the fiscal years ended
March 30, 2003, March 31, 2002 and March 25, 2001, the Company earned
franchise fees from new unit openings, transfers and co-branding of
$417, $693 and $525, respectively. During the fiscal year ended March
30, 2003, the Company recognized $207 in connection with the forfeiture
of two Master Development Agreements.
The following is a summary of franchise openings and closings for the
fiscal years ended March 30, 2003, March 31, 2002 and March 25, 2001:
2003 2002 2001
---- ---- ----
Franchised restaurants operating at the beginning of the period 364 386 415
New franchised restaurants opened during the period 24 18 21
Franchised restaurants closed during the period (45) (40) (50)
--- --- ---
Franchised restaurants operating at the end of the period 343 364 386
=== === ===
F-20
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
Revenue from sub-leasing properties to franchisees is recognized as
income as the revenue is earned and becomes receivable and deemed
collectible. Sub-lease rental income is presented net of associated
lease costs in the accompanying consolidated statements of operations.
The Company recognizes franchise royalties when they are earned and
deemed collectible. Franchise fees and royalties that are not deemed to
be collectible are not recognized as revenue until paid by the
franchisee.
18. Revenue Recognition - Branded Products Operations
The Company recognizes revenue from the Branded Product Program when it
is determined that the products have been delivered via third party
common carrier to Nathans' customers. An accrual for the cost of the
product to the Company is recorded simultaneously with the revenue.
19. Interest Income
Interest income is accrued when it is earned and deemed realizable by
the Company.
20. Investment and other income (loss)
The Company recognizes gains on the sale of fixed assets under the full
accrual method in accordance with provisions of SFAS No.66 (See Note
B-8).
Deferred revenue associated with supplier contracts is generally
amortized on a straight-line basis over the life of the contract.
Investments classified as trading securities are recorded at fair value
and the unrealized gains or losses are recognized as a component to the
Company's "Investment and other income (loss)" on the consolidated
statement of operations. During the fiscal year ended March 30, 2003,
the Company liquidated its investment in trading securities.
F-21
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
Investment and other income (loss) consists of the following:
2003 2002 2001
------ ------ ------
Gain on disposal of fixed assets $ 39 $1,226 $ -
Realized gains (losses) on marketable securities (242) 7 (2)
Unrealized losses of trading securities - (43) (420)
Loss on subleasing of rental properties (243) (215) (194)
Gain from the early termination of sales agreement 135 - -
Other income 467 593 1,682
----- ------ ------
$ 156 $1,568 $1,066
===== ====== ======
21. 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 30, 2003, no
franchisee represented 10% or greater of franchise royalties
receivable. At March 31, 2002, one franchisee represented 13% of
franchise royalties receivable (Note D).
22. Advertising
The Company administers various advertising funds on behalf of its
subsidiaries and franchisees to coordinate the marketing efforts of the
Company. Under these arrangements, the Company collects and disburses
fees paid by franchisees and Company-owned stores for national and
regional advertising, promotional and public relations programs.
Contributions to the advertising funds are based on specified
percentages of net sales, generally ranging up to 3%. These advertising
funds are separate entities, which are not a component of the
consolidated group. Revenues and expenses of these advertising funds
are excluded from the Company's statement of operations. Contributions
to the advertising funds from Company-owned stores are included in
restaurant operating expenses in the accompanying consolidated
statements of operations. Net Company-owned store advertising expense
was $608, $940 and $1,602, for the fiscal years ended March 30, 2003,
March 31, 2002 and March 25, 2001, respectively.
F-22
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
23. Classification of Operating Expenses
Cost of sales consists of the following:
- The cost of products sold both in the Company-operated
restaurants and the Branded Product Program.
- The cost of labor and associated costs of in-store restaurant
management and crew.
- The cost of paper products used in Company-operated
restaurants.
- Other direct costs of the Branded Product Program, such as
commissions, freight and samples.
Restaurant operating expenses consist of the following:
- Occupancy costs of Company-operated restaurants.
- Utility costs of Company-operated restaurants.
- Repair and maintenance expenses of the Company-operated
restaurant facilities.
- Marketing and advertising expenses done locally and
contributions to advertising funds for Company-operated
restaurants.
- Insurance costs directly related to Company-operated
restaurants.
24. 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. A
valuation allowance has been established to reduce deferred tax assets
attributable to net operating losses and credits of Miami Subs.
25. Reclassifications
Certain prior year balances have been reclassified to conform with
current year presentation.
F-23
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
26. Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.
143"). SFAS No. 143 addresses financial and reporting obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS No.
143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company has evaluated the effect of
the adoption of SFAS No. 143 on its financial position and results of
operations, and it is not expected to have a material impact on the
financial position and results of operations of the Company.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates the current requirement that
gains and losses on debt extinguishment must be classified as
extraordinary items in the income statement. Instead, such gains and
losses will be classified as extraordinary items only if they are
deemed to be unusual and infrequent, in accordance with the current
criteria for extraordinary classification. Additionally, any gain or
loss on extinguishment of debt that was classified as an extraordinary
item in prior periods presented that does not meet the criteria in APB
Opinion No. 30 for classification as an extraordinary item shall be
reclassified. In addition, SFAS No. 145 eliminates an inconsistency in
lease accounting by requiring that modifications of capital leases that
result in reclassification as operating leases be accounted for
consistent with sale-leaseback accounting rules. SFAS No. 145 also
contains other nonsubstantive corrections to authoritative accounting
literature. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the
changes related to lease accounting will be effective for transactions
occurring after May 15, 2002. SFAS No. 145 has not had, and is not
expected to have, a material impact on the financial position and
results of operations of the Company.
F-24
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force ("EITF")
Issue No. 94-3. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit
cost was recognized at the date of a company's commitment to an exit
plan. SFAS No. 146 also establishes that the liability should initially
be measured and recorded at fair value. SFAS No. 146 is effective for
disposal activities initiated after December 31, 2002. The adoption of
SFAS No. 146 did not have a material impact on the financial position
and results of operations of the Company.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure" which addresses financial
accounting and reporting for recording expenses for the fair value of
stock options. SFAS No. 148 provides alternative methods of transition
for a voluntary change to fair value-based method of accounting for
stock-based employee compensation. Additionally, SFAS No. 148 requires
more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. The provisions of this
Statement are effective for fiscal years ending after December 15,
2002, with early application permitted in certain circumstances. As
discussed in Note B-14, the Company continues to account for
stock-based compensation using the intrinsic value method in accordance
with APB No. 25 and has adopted the disclosure provisions of SFAS No.
148. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning
after December 15, 2002. The adoption of SFAS No. 148 had no impact on
the financial position and results of operations of the Company.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133. SFAS No. 149
is effective for contracts entered into or modified after June 30, 2003
except for the provisions that were cleared by the FASB in prior
pronouncements. The Company is currently evaluating the effect of the
adoption of SFAS No. 149 on its financial position and results of
operations.
F-25
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS No. 150"), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and
measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. In
accordance with the standard, financial instruments that embody
obligations for the issuer are required to be classified as
liabilities. This Statement shall be effective for financial
instruments entered into or modified after May 31, 2003, and otherwise
shall be effective for the year ended December 31, 2003. The Company is
currently evaluating the effect of the adoption of SFAS No. 150 on its
financial position and results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No.
45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."
FIN No. 45 requires that upon issuance of a guarantee, a guarantor must
recognize a liability for the fair value of an obligation assumed under
a guarantee. FIN No. 45 also requires additional disclosures by a
guarantor in its interim and annual financial statements about the
obligations associated with guarantees issued. The recognition
provisions of FIN No. 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are
effective for financial statements for periods ending after December
15, 2002. The adoption of FIN No. 45 did not have a material impact on
the Company's financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No.
46") "Consolidation of Variable Interest Entities." In general, a
variable interest entity is a corporation, partnership, trust, or any
other legal structure used for business purposes that either (a) does
not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the
entity to support its activities. A variable interest entity often
holds financial assets, including loans or receivables, real estate or
other property. A variable interest entity may be essentially passive
or it may engage in activities on behalf of another company. Until now,
a company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting
interests. FIN No. 46 changes that by requiring a variable interest
entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's
activities or
F-26
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE B (CONTINUED)
entitled to receive a majority of the entity's residual returns or
both. FIN No. 46's consolidation requirements apply immediately to
variable interest entities created or acquired after January 31, 2003.
The consolidation requirements apply to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of
the disclosure requirements apply to all financial statements issued
after January 31, 2003, regardless of when the variable interest entity
was established. The Company has adopted FIN No. 46 effective January
31, 2003. The Company does not anticipate that the adoption of FIN No.
46 will have a material impact on the Company's consolidated financial
condition or results of operations taken as a whole.
NOTE C - (LOSS) INCOME PER SHARE
Basic (loss) earnings per common share is calculated by dividing (loss)
income by the weighted-average number of common shares outstanding and
excludes any dilutive effects of stock options or warrants. Diluted earnings
per common share gives effect to all potentially dilutive common shares that
were outstanding during the period. Dilutive common shares used in the
computation of diluted earnings per common share result from the assumed
exercise of stock options and warrants, using the treasury stock method.
The following chart provides a reconciliation of information used in
calculating the per share amounts for the fiscal years ended March 30, 2003,
March 31, 2002 and March 25, 2001, respectively:
(Loss) income (Loss) income per share
from continuing operations Shares From continuing operations
--------------------------- ---------------------------------- --------------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
-------- ------ ------ --------- --------- --------- ------ ------ ------
Basic EPS
Basic calculation $(1,506) $1,392 $1,585 5,976,000 7,048,000 7,059,000 $(.25) $.20 $.23
Effect of dilutive
employee stock
options and warrants - - - - 35,000 39,000 - - -
------- ------ ------ --------- --------- --------- ----- ---- ----
Diluted EPS
Diluted calculation $(1,506) $1,392 $1,585 5,976,000 7,083,000 7,098,000 $(.25) $.20 $.23
======= ====== ====== ========= ========= ========= ===== ==== ====
Options, warrants and common stock purchase rights to purchase 12,369,280
shares of the Company's common stock for the year ended March 30, 2003 were
excluded from the calculation of diluted loss per share as the impact of
their inclusion would have been anti-dilutive. Options, warrants and common
stock purchase rights to purchase 11,226,016 and 11,019,142 shares of common
stock for the years ended March 31, 2002 and March 25, 2001, respectively,
were not included in the computation of diluted earnings per share because
the exercise prices exceeded the average market price of common shares
during the respective periods.
F-27
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE D - NOTES AND ACCOUNTS RECEIVABLE, NET
Notes and accounts receivable, net, consists of the following:
MARCH 30, March 31,
2003 2002
--------- ---------
Notes receivable, net of impairment charges $ 998 $ 2,662
Franchise and license royalties 1,465 1,376
Branded product sales 737 785
Other 565 906
------- -------
3,765 5,729
Less: allowance for doubtful accounts 418 644
Less: notes receivable due after one year 740 2,277
------- -------
Notes and accounts receivable, net $ 2,607 $ 2,808
======= =======
Notes receivable at March 30, 2003 and March 31, 2002 principally resulted
from sales of restaurant businesses to Miami Sub's and Nathan's franchisees
and are generally guaranteed by the purchaser and collateralized by the
restaurant businesses and assets sold. The notes are generally due in
monthly installments of principal and interest with a balloon payment at the
end of the term, with interest rates ranging principally between 5% and 10%.
Accounts receivable are due within 30 days and are stated at amounts due
from franchisees and licensors, net of an allowance for doubtful accounts.
Accounts outstanding longer than the contractual payment terms are
considered past due. The Company determines its allowance by considering a
number of factors, including the length of time trade accounts receivable
are past due, the Company's previous loss history, the customer's current
ability to pay its obligation to the Company, and the condition of the
general economy and the industry as a whole. The Company writes off accounts
receivable when they become uncollectible.
F-28
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE D (CONTINUED)
Changes in the Company's allowance for doubtful accounts is as follows:
2003 2002 2001
------ ------ ------
Beginning balance $ 644 $ 880 $ 809
Bad debt expense 82 267 191
Other - 27 27
Accounts written off (308) (530) (147)
----- ----- -----
Ending balance $ 418 $ 644 $ 880
===== ===== =====
NOTE E - MARKETABLE SECURITIES AND INVESTMENT IN LIMITED PARTNERSHIP
The cost, gross unrealized gains, gross unrealized losses and fair market
value for marketable securities by major security type at March 30, 2003 and
March 31, 2002 are as follows:
Gross Gross Fair
unrealized unrealized market
Cost gains losses value
------ ----- ------ ------
2003:
Available-for-sale securities:
Bonds $4,513 $ 181 $ (71) $4,623
====== ===== ===== ======
2002:
Trading securities:
Bonds $7,821 $ - $ (20) $7,801
Investment in limited partnership 1,020 - (2) 1,018
------ ----- ----- ------
$8,841 $ - $ (22) $8,819
====== ===== ===== ======
F-29
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE E (CONTINUED)
Proceeds from the sale of available-for-sale and trading securities and
the resulting gross realized gains and losses included in the
determination of net income are as follows:
2003 2002 2001
------ ------ ------
Available-for-sale securities:
Proceeds $6,088 $ - $ -
Gross realized gains 12 - -
Gross realized losses (2) - -
Trading securities:
Proceeds $ 767 $2,933 $2,564
Gross realized gains - 8 -
Gross realized losses (252) (1) (2)
Effective April 1, 2002, the Company transferred the Company's bond
portfolio formerly classified as trading securities to available securities
for sale due to a change in the Company's investment strategies. As required
by FASB Statement No. 115 "Accounting for Certain Investments in Debt and
Equity Securities", the transfer of these securities between categories of
investments has been accounted for at fair value and the unrealized holding
loss previously recorded through April 1, 2002 of $20 from the trading
category has not been reversed. The unrealized gain for the fiscal year
ended March 30, 2003 totaling $64 net of income taxes has been included as a
component of comprehensive income. Investments classified as trading
securities are recorded at fair value and the unrealized gains or losses are
recognized as a component of investment and other income in the consolidated
statement of operations. During the fiscal year ended March 30, 2003, the
Company liquidated its investment in limited partnership and received
proceeds of $767 and recorded a loss of $252 which is included as a
component of investment and other income in the accompanying consolidated
statement of operations for the fiscal year ended March 30, 2003.
F-30
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE F - PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
MARCH 30, March 31,
2003 2002
--------- ---------
Construction-in-progress $ 31 $ 842
Land 1,665 1,665
Building and improvements 2,255 2,245
Machinery, equipment, furniture and fixtures 5,297 6,602
Leasehold improvements 4,042 7,201
-------- --------
13,290 18,555
Less: accumulated depreciation and amortization 7,027 9,630
-------- --------
$ 6,263 $ 8,925
======== ========
Depreciation expense on property and equipment was $1,907, $1,661 and $1,791
for the fiscal years ended March 30, 2003, March 31, 2002 and March 25,
2001, respectively.
1. Sales of Restaurants
On April 1, 2002, the Company adopted the provisions of Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144"). This statement supersedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and Accounting Principles Board
Opinion No. 30, "Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". This
Statement retained the fundamental provisions of SFAS No. 121 for
recognition and measurement of impairment, but amends the accounting
and reporting standards for segments of a business to be disposed of.
SFAS No. 144 has broadened the definition of discontinued operations to
include components of an entity whose cash flows are clearly
identifiable as compared to a segment of a business. SFAS No. 144
requires the Company to classify as discontinued operations any
restaurant that it sells, abandons or otherwise disposes of where the
Company will have no further involvement in such restaurant's
operations.
F-31
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE F (CONTINUED)
During the fiscal year ended March 30, 2003, the Company sold three
Company-owned restaurants for a total of $591,000. In August 2002, an
operating restaurant, which had been classified as held for sale at
March 31, 2002, was sold to a non-franchisee for $75,000. In October
2002, a non-operating restaurant, which had been classified as held for
sale was sold to a non-franchisee for $466,000 and an operating
restaurant was sold to a franchisee in exchange for a $50,000 note. As
these restaurants were either classified as held-for-sale prior to the
adoption of SFAS No. 144 or the Company has a continuing stream of cash
flows in the case of the franchised restaurant, the results of
operations for the Company-operated restaurants that were sold are
included as a component of continuing operations in the accompanying
consolidated statements of operations for the fiscal year ended March
30, 2003. In December 2002, the Company abandoned the operations of one
Company-owned restaurant pursuant to a lease termination agreement with
the landlord. The results of operations for this restaurant have been
classified as discontinued operations as the Company does not have any
continuing involvement or a continuing stream of cash flows with this
restaurant.
As discussed in Note F-2 below, during fiscal 2003, the Company also
abandoned the operations of seven company-operated restaurants located
within certain Home Depot Improvement Centers. Pursuant to SFAS
No. 144, the results of operations for all seven of these restaurants
have been presented as discontinued operations in the accompanying
consolidated statement of operations, as the Company has no continuing
involvement or cash flows relating to any of these restaurants.
During the fiscal year ended March 31, 2002, the Company sold two
company-owned restaurants and a non-restaurant property for total
proceeds of $3,348. The Company recognized a gain of $1,226 in
connection with these sales.
In May 2001, the Company completed the sale of a restaurant property
for approximately $1,500 pursuant to an order of condemnation by the
State of Florida. The fair value of the assets (which approximated the
carrying value) was included in the current portion of assets available
for sale at March 25, 2001. Concurrent with the sale, the Company
satisfied the related note payable of approximately $793 plus accrued
interest, and accordingly, had classified the remaining balance at
March 25, 2001 as current in the consolidated balance sheet. The
Company appealed the value of this property and on November 19, 2001,
an Order was entered by the Circuit Court of the 11th Judicial Circuit
of Florida in and for Miami-Dade County pursuant to which the State of
Florida Department of Transportation was ordered to pay to the Company,
an aggregate value of $2,350, plus legal fees in the amount of $253 in
connection with the condemnation by the State of Florida of the
restaurant. The additional proceeds received by the Company of
approximately $850 is recorded as a component of "investment and other
income" in the accompanying consolidated statement of operations.
F-32
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE F (CONTINUED)
2. Food Service License Termination Within Home Depot Stores
In August 2002, the Company received written notice from Home Depot
U.S.A., Inc. ("Home Depot") that Home Depot terminated seven License
Agreements with the Company pursuant to which the Company operated
Nathan's restaurants in certain Home Depot Improvement Centers. In
accordance with the termination notices, the Company ceased its
operations in all seven Home Depot locations during the fiscal year
ended March 30, 2003.
Pursuant to SFAS No. 144, the results of operations for all seven of
these restaurants, have been presented as discontinued operations in
the accompanying consolidated statement of operations as the Company
has no continuing involvement or cash flows relating to any of these
restaurants. The Company revised the estimated useful lives of these
assets to reflect the shortened useful lives and recorded additional
depreciation expense of approximately $428 during the fiscal year ended
March 30, 2003. Pursuant to the termination provisions of certain of
the lease agreements with Home Depot, the Company received payments of
$184.
Following is a summary of the results of operations for these seven
restaurants for the fiscal years ended March 30, 2003, March 31, 2002
and March 25, 2001:
2003 2002 2001
------- ------- -------
Revenues $ 3,096 $ 4,099 $ 3,990
======= ======= =======
(Loss) income before income taxes (A) $ (166) $ 316 $ 262
======= ======= =======
(A) - (Loss) income before income taxes for the fiscal year ended March 30,
2003 includes additional depreciation expense of $428, as a result of
revising the estimated useful lives of these restaurants.
F-33
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE F (CONTINUED)
3. Discontinued Operations
As described in Notes F-1 and F-2 above, the Company has classified the
results of eight restaurants as discontinued operations in accordance
with SFAS No. 144. The following is a summary of the results of
operations for these eight restaurants for the fiscal years ended March
30, 2003, March 31, 2002 and March 25, 2001:
2003 2002 2001
------- ------- -------
Revenues $ 3,543 $ 4,857 $ 4,947
======= ======= =======
(Loss) income before income taxes (A) $ (206) $ (238) $ 35
======= ======= =======
(A) - (Loss) income before income taxes for the fiscal year ended March 30,
2003 includes additional depreciation expense of $428, as a result of
revising the estimated useful lives of these restaurants.
At March 30, 2003, in accordance with SFAS No. 144, the Company has
classified the net fixed assets of four restaurants as held for sale in
the accompanying consolidated balance sheet.
NOTE G - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
MARCH 30, March 31,
2003 2002
------ ------
Payroll and other benefits $1,324 $1,455
Professional and legal costs 349 407
Self-insured retention 596 1,346
Rent, occupancy and lease reserve termination costs 739 831
Taxes payable 556 595
Other 1,378 1,872
------ ------
$4,942 $6,506
====== ======
F-34
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE G (CONTINUED)
Lease Reserve Termination Costs
In connection with the Company's 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 "Business Combinations", the write-down of these assets was reflected
as part of the purchase price allocation. To date the Company has closed or
sold 17 units. The Company continues to market the remaining property for
sale. As of March 30, 2003, the Company has recorded charges to operations
of approximately $1,461 ($877 after tax) for lease reserves and termination
costs in connection with these properties.
NOTE H - NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
A summary of notes payable and capitalized lease obligations is as follows:
MARCH 30, March 31,
2003 2002
--------- ---------
Note payable to bank at 8.5% through January 2003, 4.5% from February
2003 through January 2006 and adjusting to prime plus 0.25% in
February 2006 and 2009 and maturing in 2010 $ 1,167 $ 1,333
Note payable to bank at 8.75% and maturing in 2003 - 381
Capital lease obligations and other 59 65
------- -------
1,226 1,779
Less current portion (173) (559)
------- -------
Long-term portion $ 1,053 $ 1,220
======= =======
The above notes are secured by the related property and equipment.
F-35
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE H (CONTINUED)
In August 2001, Miami Subs entered into an agreement with a franchisee and a
bank, which called for the assumption of a note payable by the franchisee
and the repayment of an existing note receivable from the franchisee. The
Company guarantees the franchisee's note payable with the bank. The
Company's maximum obligation for loans funded by the lender was
approximately $297 as of March 30, 2003.
At March 30, 2003, the aggregate annual maturities of notes payable and
capitalized lease obligations are as follows:
2004 $ 173
2005 173
2006 174
2007 175
2008 175
Thereafter 356
-------
$ 1,226
=======
The Company maintains a $7,500 line of credit with its primary banking
institution. Borrowings under the line of credit are intended to be used to
meet the normal short-term working capital needs of the Company. The line of
credit is not a commitment and, therefore, credit availability is subject to
ongoing approval. The line of credit expires on October 1, 2003, and bears
interest at the prime rate (4.25% at March 30, 2003). There were no
borrowings outstanding under this line of credit as of March 30, 2003.
NOTE I - OTHER EXPENSE (INCOME), NET
Included in other expense (income), in the accompanying consolidated
statements of operations is (i) $232 in lease reserves in connection with
four vacant properties for the fiscal year ended March 30, 2003 (ii) the
reversal of a previous litigation accrual of ($210) for the fiscal year
ended March 31, 2002 and (iii) $463 in lease termination costs for the
fiscal year ended March 25, 2001.
F-36
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE I (CONTINUED)
During the quarter ended June 24, 2001, the Company reversed an accrual of
$210 related to its successful appeal of a previous award in an action
entitled: Miami Subs Corporation or MIAMI S V. MURRAY FAMILY TRUST/KENNETH
DASH PARTNERSHIP. In this case the court found that Miami Subs breached a
fiduciary duty it owed to defendants and awarded the Murray Family Trust
$200. Both Miami Subs and defendants appealed the court's decision, and in
November 1996, the appeal was argued before the Supreme Court of New
Hampshire. In December 1997, the Supreme Court ruled in favor of Miami Subs,
vacated the damage award, reversed the award of attorney fees and remanded
to a trial court for a determination of damages for the alleged breach of
fiduciary duty to the Murray Family Trust. In May 1998, the trial court
awarded the Murray Family Trust compensatory damages in the amount of $200,
which Miami Subs accrued for on its books. Miami Subs appealed the damage
award, and in December 1999, the Supreme Court of New Hampshire heard the
second appeal. On February 1, 2001, the Supreme Court of New Hampshire ruled
in favor of Miami Subs and vacated the damage award. The plaintiff had the
right to further appeal the reversal for a period of 90 days, until May 2,
2001. No further action was taken by the plaintiff and upon passage of the
90-day period the litigation award was reversed into income.
NOTE J - INCOME TAXES
Income tax provision (benefit) consists of the following for the fiscal
years ended March 30, 2003, March 31, 2002 and March 25, 2001:
2003 2002 2001
------- ------- -------
Federal
Current $ - $ 985 $ 865
Deferred (281) (93) 246
------- ------- -------
(281) 892 1,111
------- ------- -------
State and local
Current 46 181 224
Deferred (48) (16) 67
------- ------- -------
(2) 165 291
------- ------- -------
$ (283) $ 1,057 $ 1,402
======= ======= =======
F-37
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE J (CONTINUED)
Total income tax (benefit) provision for the fiscal years ended March 30,
2003, March 31, 2002 and March 25, 2001 differs from the amounts computed by
applying the United States Federal income tax rate of 34% to income before
income taxes as a result of the following:
2003 2002 2001
------- ------- -------
Computed "expected" tax (benefit) expense $ (609) $ 833 $ 1,016
Nondeductible amortization 99 169 222
Impairment on nondeductible favorable lease intangible assets 87 - -
State and local income taxes, net of Federal income tax benefit 140 106 199
Tax-exempt investment earnings (48) (68) (30)
Nondeductible meals and entertainment and other 48 17 (5)
------- ------- -------
$ (283) $ 1,057 $ 1,402
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
MARCH 30, March 31,
2003 2002
------- -------
Deferred tax assets
Accrued expenses $ 672 $ 1,164
Allowance for doubtful accounts 167 291
Impairment of notes receivable 855 256
Deferred revenue 806 978
Depreciation expense and impairment of long-lived assets 1,152 1,101
Expenses not deductible until paid 238 130
Amortization of intangibles 407 105
Net operating loss and other carryforwards 1,540 676
Other 101 59
------- -------
Total gross deferred tax assets 5,938 4,760
------- -------
Deferred tax liabilities
Amortization of intangibles 80 422
Unrealized gain on marketable securities and income on
investment in limited partnership 46 207
Other 335 320
------- -------
Total gross deferred tax liabilities 461 949
------- -------
Net deferred tax asset 5,477 3,811
Less valuation allowance (751) (525)
------- -------
$ 4,726 $ 3,286
======= =======
F-38
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE J (CONTINUED)
The determination that the net deferred tax asset of $4,726 and $3,286 at
March 30, 2003 and March 31, 2002, respectively, is realizable is based on
anticipated future taxable income.
At March 30, 2003, as result of settling the Miami Subs IRS audits for the
years 1991 through 1996, the Company had a net operating loss carryforward
("NOL") of approximately $1,289 remaining (after certain IRS agreed-upon
adjustments and other reductions due to expiring losses) which is available
to offset future taxable income through 2005 and general business credit
carryforwards remaining of approximately $120 which may be used to offset
liabilities through 2008. These losses and credits are subject to
limitations imposed under the Internal Revenue Code pursuant to Sections 382
and 383 regarding changes in ownership. As a result of these limitations,
the Company has recorded a valuation allowance for the Miami Subs loss
carryforwards and credits related to the acquisition (See Note L-3). The
valuation allowance also includes various state NOL's related to the
post-acquisition losses of Miami Subs not utilized on a consolidated basis
and carried forward on a state basis.
NOTE K - STOCKHOLDER'S EQUITY, STOCK PLANS AND OTHER EMPLOYEE
BENEFIT PLANS
1. Stock Option Plans
On December 15, 1992, the Company adopted the 1992 Stock Option Plan
(the "1992 Plan"), which provides for the issuance of incentive stock
options ("ISO's") to officers and key employees and nonqualified stock
options to directors, officers and key employees. Up to 525,000 shares
of common stock have been reserved for issuance under the 1992 Plan.
The terms of the options are generally ten years, except for ISO's
granted to any employee, whom prior to the granting of the option, owns
stock representing more than 10% of the voting rights, for which the
option term will be five years. The exercise price for nonqualified
stock options outstanding under the 1992 Plan can be no less than the
fair market value, as defined, of the Company's common stock at the
date of grant. For ISO's, the exercise price can generally be no less
than the fair market value of the Company's common stock at the date of
grant, with the exception of any employee who prior to the granting of
the option, owns stock representing more than 10% of the voting rights,
for which the exercise price can be no less than 110% of fair market
value of the Company's common stock at the date of grant.
F-39
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE K (CONTINUED)
On May 24, 1994, the Company adopted the Outside Director Stock Option
Plan (the "Directors' Plan"), which provides for the issuance of
nonqualified stock options to nonemployee directors, as defined, of the
Company. Under the Directors' Plan, 200,000 shares of common stock have
been authorized and issued pursuant to the Directors' Plan. Options
awarded to each nonemployee director are fully vested, subject to
forfeiture under certain conditions and shall be exercisable upon
vesting.
In April 1998, the Company adopted the Nathan's Famous Inc. 1998 Stock
Option Plan (the "1998 Plan"), which provides for the issuance of
nonqualified stock options to directors, officers and key employees. Up
to 500,000 shares of common stock have been reserved for issuance under
the 1998 Plan.
In June 2001, the Company adopted the Nathan's Famous Inc. 2001 Stock
Option Plan (the "2001 Plan"), which provides for the issuance of
nonqualified stock options to directors, officers and key employees. Up
to 350,000 shares of common stock have been reserved for issuance under
the 2001 Plan.
In June 2002, the Company adopted the Nathan's Famous Inc. 2002 Stock
Incentive Plan (the "2002 Plan"), which provides for the issuance of
nonqualified stock options or restricted stock awards to directors,
officers and key employees. Up to 300,000 shares of common stock have
been reserved for issuance under the 2002 Plan.
The 1992 Plan expired with respect to the granting of new options on
December 2, 2002. The 1998 Plan, the 2001 Plan, the 2002 Plan and the
Directors' Plan expire on April 5, 2008, June 13, 2011, June 17, 2012
and December 31, 2004, respectively, unless terminated earlier by the
Board of Directors under conditions specified in the Plan.
The Company issued 478,584 stock options to employees of Miami Subs
Corporation to replace 957,168 of previously issued Miami Subs options
pursuant to the merger 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.
F-40
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE K (CONTINUED)
2. Warrants
In November 1993, the Company granted to its Chairman and Chief
Executive Officer a warrant to purchase 150,000 shares of the Company's
common stock at an exercise price of $9.71 per share, representing 105%
of the market price of the Company's common stock on the date of grant,
which exercise price was reduced on January 26, 1996 to $4.50 per
share. The shares vested at a rate of 25% per annum commencing November
1994 and the warrant expires in November 2003.
On July 17, 1997, the Company granted to its Chairman and Chief
Executive Officer a warrant to purchase 150,000 shares of the Company's
common stock at an exercise price of $3.50 per share, representing the
market price of the Company's common stock on the date of grant. The
shares vested at a rate of 25% per annum commencing July 17, 1998 and
the warrant expires in July 2007.
In November 1996, the Company granted to a nonemployee consultant a
warrant to purchase 50,000 shares of its common stock at an exercise
price of $3.94 per share, which represented the market price of the
Company's common stock on the date of grant. Upon the date of grant,
one-third of the shares vested immediately, one-third vested on the
first anniversary thereof, and the remaining one-third vested on the
second anniversary thereof. The warrant expired, unexercised, on
November 24, 2001.
In connection with the merger with Miami Subs, the Company issued
579,040 warrants to purchase common stock to the former shareholders of
Miami Subs. These warrants 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.
F-41
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE K (CONTINUED)
A summary of the status of the Company's stock option plans and
warrants, excluding warrants issued to former shareholders of Miami
Subs, at March 30, 2003, March 31, 2002 and March 25, 2001 and changes
during the fiscal years then ended is presented in the tables and
narrative below:
2003 2002 2001
---------------------- ------------------------ ----------------------
WEIGHTED- Weighted- Weighted-
AVERAGE average average
EXERCISE exercise exercise
SHARES PRICE Shares price Shares price
--------- --------- --------- ----------- --------- ---------
Options outstanding - beginning
of year 1,821,146 $ 4.29 1,514,209 $ 3.86 1,614,924 $ 4.79
Granted 40,000 3.96 307,000 3.20 - -
Expired (106,897) 7.32 (63) 6.20 (100,715) 10.60
--------- --------- ---------
Options outstanding - end of year 1,754,249 4.01 1,821,146 4.29 1,514,209 3.86
========= ========= =========
Options exercisable - end of year 1,502,124 1,367,479 1,220,876
========= ========= =========
Weighted-average fair value of
options granted $ 2.19 $ 1.30 $ -
========= =========== =========
Warrants outstanding - beginning
of year 318,750 $ 4.62 368,750 $ 4.53 401,200 $ 5.66
Expired - - (50,000) 3.94 (32,450) 18.61
--------- --------- ---------
Warrants outstanding - end of year 318,750 4.62 318,750 4.62 368,750 4.53
--------- --------- ---------
Warrants exercisable - end of year 318,750 318,750 368,750
========= ========= =========
Weighted-average fair value of
warrants granted $ - $ - $ -
========= =========== =========
At March 30, 2003, 413,500 common shares were reserved for future stock
option grants.
F-42
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE K (CONTINUED)
The following table summarizes information about stock options and
warrants (excluding warrants issued to the Miami Subs shareholders as
part of the merger consideration) at March 30, 2003:
Options and
Options and warrants outstanding warrants exercisable
-------------------------------------------------- --------------------------
Weighted- Weighted- Weighted-
Number average average Number average
Range of outstanding remaining exercise exercisable exercise
exercise prices at 3/30/03 contractual life price at 3/30/03 price
- ---------------- --------- ---------------- -------- ----------- --------
$ 3.19 to $ 4.00 1,499,558 5.8 $ 3.36 1,247,433 $ 3.37
4.01 to 6.60 507,691 1.7 5.18 507,691 5.18
6.61 to 22.25 65,750 1.4 14.99 65,750 14.99
--------- --- ------- --------- --------
$ 3.19 to$ 22.25 2,072,999 4.7 $ 4.18 1,820,874 $ 4.30
========= === ======== ========= ========
3. Common Stock Purchase Rights
On June 20, 1995, the Board of Directors declared a dividend
distribution of one common stock purchase right (the "Rights") for each
outstanding share of Common Stock of the Company. The distribution was
paid on June 20, 1995 to the shareholders of record on June 20, 1995.
The terms of the Rights were amended on April 6, 1998 and December 8,
1999. Each Right, as amended, entitles the registered holder thereof to
purchase from the Company one share of the Common Stock at a price of
$4.00 per share (the "Purchase Price"), subject to adjustment for
anti-dilution. New Common Stock certificates issued after June 20, 1995
upon transfer or new issuance of the Common Stock will contain a
notation incorporating the Rights Agreement by reference.
The Rights are not exercisable until the Distribution Date. The
Distribution Date is the earlier to occur of (i) ten days following a
public announcement that a person or group of affiliated or associated
persons (an "Acquiring Person") acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares
of the Common Stock, as amended, or (ii) ten business days (or such
later date as may be determined by action of the Board of Directors
prior to such time as any person becomes an Acquiring Person) following
the commencement, or announcement of an intention to make a tender
offer or exchange offer by a person (other than the Company, any
wholly-owned subsidiary of the Company or certain employee benefit
plans) which, if consummated, would result in such person becoming an
Acquiring Person. The Rights will expire on June 19, 2005, unless
earlier redeemed by the Company.
F-43
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE K (CONTINUED)
At any time prior to the time at which a person or group or affiliated
or associated persons has acquired beneficial ownership of 15% or more
of the outstanding shares of the Common Stock of the Company, the Board
of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $.001 per Right. In addition, the Rights Agreement,
as amended, permits the Board of Directors, following the acquisition
by a person or group of beneficial ownership of 15% or more of the
Common Stock (but before an acquisition of 50% or more of Common
Stock), to exchange the Rights (other than Rights owned by such 15%
person or group), in whole or in part, for Common Stock, at an exchange
ratio of one share of Common Stock per Right.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation,
the right to vote or to receive dividends. The Company has reserved
10,130,741 shares of Common Stock for issuance upon exercise of the
Rights.
4. Stock Repurchase Plan
On September 14, 2001, the Board of Directors of the Company authorized
the repurchase of up to 1,000,000 shares of the Company's common stock.
As part of the stock repurchase plan, on April 10, 2002, the Company
repurchased 751,000 shares of the Company's common stock for aggregate
consideration of $2,741 in a private transaction with a stockholder.
The Company completed its initial Stock Repurchase Plan at a cost of
approximately $3,670 during the fiscal year ended March 30, 2003. On
October 7, 2002, the Board of Directors of the Company authorized the
repurchase of up to 1,000,000 additional shares of the Company's common
stock. Purchases of stock will be made from time to time, depending on
market conditions, in open market or in privately negotiated
transactions, at prices deemed appropriate by management. There is no
set time limit on the purchases. The Company expects to fund these
stock repurchases from its operating cash flow. Through March 30, 2003,
641,238 additional shares have been repurchased at a cost of
approximately $2,323.
5. 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 pretax earnings for
each fiscal year, with a minimum bonus of $250. The new employment
agreement further provides for a three-year consulting period after
termination of employment during which the officer will receive
consulting payments in an annual amount equal to two thirds of the
average of the annual bonuses awarded to him during the three fiscal
years preceding the fiscal year of termination of his employment. The
employment
F-44
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE K (CONTINUED)
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 pro rated 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, 2002, based
on the original terms, and no nonrenewal notice has been given as of
May 23, 2003. 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. No nonrenewal
notice has been given as of May 23, 2003. The 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. In the event a
nonrenewal notice is delivered, the Company must pay the officer an
amount equal to the employee's base salary as then in effect.
F-45
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE K (CONTINUED)
The Company and one executive of Miami Subs entered into a change of
control agreement effective November 1, 2001 for annual compensation of
$130 per year. The agreement additionally includes a provision under
which the executive has the right to terminate the agreement and
receive payment equal to approximately three times annual compensation
upon a change in control, as defined.
The Company and one executive of Miami Subs entered into an employment
agreement effective as of July 1, 2001 for a period commencing on the
date of the agreement and ending in July 2003 and for compensation of
$125 per year. In March 2003, the Company notified the executive that
it did not intend to renew the employment agreement with the employee.
The Company and another executive of Miami Subs entered into an
employment agreement effective August 1, 2001 for a period commencing
on the date of the agreement and ending on September 30, 2003 and for
compensation at $90 per year. Each agreement also provides for certain
other benefits. Each agreement additionally includes a provision under
which the executive has the right to terminate the agreement and
receive payment equal to the employee's annual compensation upon a
change in control, as defined.
Each employment agreement terminates upon death or voluntary
termination by the respective employee or may be terminated by the
Company upon 30-days' prior written notice by the Company in the event
of disability or "cause," as defined in each agreement.
6. 401(k) Plan
The Company has a defined contribution retirement plan under Section
401(k) of the Internal Revenue Code covering all nonunion employees
over age 21 who have been employed by the Company for at least one
year. Employees may contribute to the plan, on a tax-deferred basis, up
to 15% of their total annual salary. Company contributions are
discretionary. Beginning with the plan year ending February 28, 1994,
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 30, 2003, March 31, 2002 and March 25, 2001 were $25, $36 and
$25, respectively.
7. Other Benefits
The Company provides, on a contributory basis, medical benefits to
active employees. The Company does not provide medical benefits to
retirees.
F-46
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE L - COMMITMENTS AND CONTINGENCIES
1. Commitments
The Company's operations are principally conducted in leased premises.
The leases generally have initial terms ranging from 5 to 20 years and
usually provide for renewal options ranging from 5 to 20 years. Most of
the leases contain escalation clauses and common area maintenance
charges (including taxes and insurance). Certain of the leases require
additional (contingent) rental payments if sales volumes at the related
restaurants exceed specified limits. As of March 30, 2003, the Company
has noncancelable operating lease commitments, net of certain sublease
rental income, as follows:
Lease Sublease Net lease
commitments income commitments
----------- -------- -----------
2004 $ 4,204 $ 1,969 $ 2,235
2005 4,110 1,928 2,182
2006 3,931 1,816 2,115
2007 3,753 1,682 2,071
2008 3,132 1,390 1,742
Thereafter 6,527 3,821 2,706
--------- ------ -------
$ 25,657 $ 12,606 $13,051
========= ======== =======
Aggregate rental expense, net of sublease income, under all current
leases amounted to $2,340, $2,734 and $3,549 for the fiscal years ended
March 30, 2003, March 31, 2002 and March 25, 2001, respectively.
The Company also owns or leases sites, which it leases or subleases to
franchisees which expire on various dates through 2016 exclusive of
renewal options. The Company remains liable for all lease costs when
properties are subleased to franchisees.
The Company also subleases non-Miami Subs locations to third parties.
Such sub-leases provide for minimum annual rental payments by the
Company aggregating approximately $2,179 and expire on various dates
through 2010 exclusive of renewal options.
F-47
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE L (CONTINUED)
Contingent rental payments on building leases are typically made based
on the percentage of gross sales on the individual restaurants that
exceed predetermined levels. The percentage of gross sales to be paid
and related gross sales level vary by unit. Contingent rental expense
was approximately $88, $129 and $123 for the fiscal years ended March
30, 2003, March 31, 2002 and March 25, 2001, respectively.
The Company guarantees certain equipment financing for franchisees with
a third-party lender. The Company's maximum obligation, should the
franchisees default on the required monthly payment to the third-party
lender, for loans funded by the lender, as of March 30, 2003, was
approximately $707. The equipment financing expires at various dates
through fiscal 2008.
The Company also guarantees a franchisee's note payable with a bank.
The note payable matures in fiscal 2007. The Company's maximum
obligation, should the franchisee default on the required monthly
payments to the bank, for loans funded by the lender, as of March 30,
2003, was approximately $297.
2. Contingencies
An action has been commenced, in the Circuit Court of the Fifteenth
Judicial Circuit, Palm Beach County, Florida in September 2001 against
Miami Subs and EKFD Corporation, a Miami Subs franchisee ("the
franchisee") claiming negligence in connection with a slip and fall
which allegedly occurred on the premises of the franchisee for
unspecified damages. Pursuant to the terms of the Miami Subs Franchise
Agreement, the franchisee is obligated to indemnify Miami Subs and hold
them harmless against claims asserted and procured an insurance policy
which named Miami Subs as an additional insured. Miami Subs has denied
any liability to plaintiffs and has made demand upon the franchisee's
insurer to indemnify and defend against the claims asserted. The
insurer has agreed to indemnify and defend Miami Subs and has assumed
the defense of this action for Miami Subs.
Nathan's Famous, Inc. and Nathan's Famous Operating Corp. were named as
two of three defendants in an action commenced in July 2001, in the
Supreme Court of New York, Westchester County. According to the amended
complaint, the plaintiffs, a minor and her mother, sought damages in
the amount of $17 million against Nathan's Famous and Nathan's Famous
Operating Corp. and one of Nathan's Famous' former employees claiming
that the Nathan's entities failed to properly supervise minor
employees, failed to monitor its supervisory personnel, and were
negligent in hiring, retaining and promoting the individual defendant,
who allegedly molested, harassed and raped the minor plaintiff, who was
also an employee. On May 29, 2002, as a result of a mediation, this
action was settled, subject to court approval. The court approved the
original settlement and on September 9, 2002, the plaintiffs were paid
$659 of which $650 had been accrued as of March 31, 2002.
F-48
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE L (CONTINUED)
Nathan's Famous was served on January 10, 2003 with a summons in
connection with an action commenced by Mitchell Putterman and Michael
Pellegrino in the Supreme Court of New York, Suffolk County seeking
damages of $1,000 for claims of breach of contract and fraud in
connection with a letter of intent with the Company's subsidiary, NF
Roasters of Commack, Inc. Although the letter of intent contains
specific disclaimer language stating that it did not convey any rights
or obligations and contemplated the execution of a management
agreement, which was never executed, plaintiffs purport nonetheless to
have certain claims in connection therewith. The Company had served a
notice of appearance and demand for a complaint. On March 31, 2003,
this action was dismissed without prejudice by stipulation.
The Company is involved in various other litigation in the normal
course of business, none of which, in the opinion of management, will
have a significant adverse impact on its financial position or results
of operations.
3. Miami Subs Tax Audit
As a result of the Miami Subs acquisition, the Company obtained a net
operating loss carryforward of approximately $5,900 and a general
business credit carryforward of approximately $274. The Miami Subs
Federal income tax returns for all fiscal years 1991 through 1996,
inclusive, have been examined by the Internal Revenue Service. In
January 2002, the Miami Subs tax audit was settled with the IRS Appeals
Office. The settlement resulted in a reduction of the net operating
loss carryforward to $4,004 and an adjustment to the general business
credit to $300. Each of these carryforwards were subject to reductions
due to various expiration dates. In addition to these adjustments, the
Company made tax and interest payments totaling $344 in full settlement
of the audit. As of March 30, 2003, the remaining net operating loss
carryforward is $1,289 and the remaining general business credit is
$120. These losses and credits are subject to limitations imposed under
the Internal Revenue Code pursuant to sections 382 and 383 regarding
changes in ownership. As a result of these limitations, the Company has
recorded a valuation allowance for the remaining Miami Subs loss
carryforwards and credits related to the acquisition. The valuation
allowance also includes various state NOL's related to the
post-acquisition losses of Miami Subs not utilized on a consolidated
basis and carried forward on a state basis.
F-49
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE M - RELATED PARTY TRANSACTIONS
As of March 30, 2003, Miami Subs leased two restaurant properties from
Kavala, Inc., a private company owned by Gus Boulis, a former shareholder of
Miami Subs. Future minimum rental commitments due to Kavala at March 30,
2003 under these existing leases was approximately $1,074. Rent expense
under these two leases amounted to $198, $182 and $181 for the fiscal years
ended March 30, 2003, March 31, 2002 and March 25, 2001, respectively.
Mr. Donald L. Perlyn has been an officer of Miami Subs since 1990, a
Director since 1997 and President and Chief Operating Officer since July
1998. Mr. Perlyn has been a director of Nathan's since October 1999. Mr.
Perlyn served as a member of the Board of Directors of Arthur Treacher's,
Inc. until March 2002 when Arthur Treacher's, Inc. was sold in a private
transaction. Miami Subs has been granted certain exclusive co-branding
rights by Arthur Treacher's, Inc. and Mr. Perlyn had been granted options to
acquire approximately 175,000 shares of Arthur Treacher's, Inc. common
stock. These options were converted into options of the entity that sold
Arthur Treacher's, Inc.
NOTE N - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 2003, the Company's management continued
to monitor and evaluate the collectibility and potential impairment of its
assets, in particular, notes receivable, certain fixed assets and certain
intangible assets. In connection therewith, impairment charges on certain
notes receivable of $883 and impairment charges on fixed assets of $896 were
recorded in the fourth quarter. It is management's opinion that these
adjustments are properly recorded in the fourth quarter based upon the facts
and circumstances that became available in that period.
During the fourth quarter of fiscal 2002, the Company's management continued
to monitor and evaluate the collectibility and potential impairment of its
assets, in particular, notes receivable and certain fixed assets. In
connection therewith, impairment charges on certain notes receivable of $185
and impairment charges on fixed assets of $685 were recorded in the fourth
quarter. It is management's opinion that these adjustments are properly
recorded in the fourth quarter based upon the facts and circumstances that
became available in that period.
F-50
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001
NOTE O - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
FISCAL YEAR 2003
TOTAL REVENUES (a) $ 9,666 $ 9,565 $ 7,536 $ 7,163
GROSS PROFIT (a), (b) 2,397 2,665 1,674 1,434
NET (LOSS) INCOME (11,992) 110 (106) (1,980)
=========== =========== =========== ===========
PER SHARE INFORMATION
NET (LOSS) INCOME PER SHARE
BASIC (c) $ (1.89) $ .02 $ (.02) $ (.36)
=========== =========== =========== ===========
DILUTED (c) $ (1.89) $ .02 $ (.02) $ (.36)
=========== =========== =========== ===========
SHARES USED IN COMPUTATION OF NET (LOSS) INCOME
PER SHARE
BASIC (c) 6,354,000 6,105,000 5,878,000 5,568,000
=========== =========== =========== ===========
DILUTED (c) 6,354,000 6,229,000 5,878,000 5,568,000
=========== =========== =========== ===========
Fiscal Year 2002
Total revenues (a) $ 10,558 $ 10,591 $ 9,184 $ 9,209
Gross profit (a), (b) 2,514 2,820 1,960 1,862
Net income (loss) 962 654 263 (630)
=========== =========== =========== ===========
Per share information
Net income (loss) per share
Basic (c) $ .14 $ .09 $ .04 $ (.09)
=========== =========== =========== ===========
Diluted (c) $ .14 $ .09 $ .04 $ (.09)
=========== =========== =========== ===========
Shares used in computation of net income (loss)
per share
Basic (c) 7,065,000 7,065,000 7,038,000 7,024,000
=========== =========== =========== ===========
Diluted (c) 7,084,000 7,080,000 7,062,000 7,024,000
=========== =========== =========== ===========
(a) Quarterly results have been adjusted to reflect the results of operations
of restaurants that are classified as discontinued operations at March 30,
2003 as discontinued operations for all periods presented
(b) Gross profit represents the difference between sales and cost of sales.
(c) The sum of the quarters does not equal the full year per share amounts
included in the accompanying consolidated statements of operations due to
the effect of the weighted average number of shares outstanding during the
fiscal years as compared to the quarters.
F-51
THE BELOW REPORT OF ARTHUR ANDERSEN LLP ("ANDERSEN") IS A COPY OF THE PREVIOUSLY
ISSUED REPORT OF ANDERSEN AND THE REPORT HAS NOT BEEN REISSUED BY ANDERSEN.
REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS ON SCHEDULE
To Nathan's Famous, Inc. and Subsidiaries:
We have audited, in accordance with auditing standards generally accepted in the
United States of America, the consolidated financial statements of Nathan's
Famous, Inc. and subsidiaries, included in this Form 10-K and have issued our
report thereon dated June 14, 2001. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
accompanying schedule is the responsibility of the Company's management and is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Melville, New York
June 14, 2001
F-52
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------- ---------- ---------------------------- ----------- -------------
(1) (2)
Additions
Balance at charged to Additions
beginning costs and charged to Balance at
Description of period expenses other accounts Deductions end of period
- ------------------------------------------- --------- ---------- -------------- ----------- -------------
FIFTY-THREE WEEKS ENDED MARCH 30, 2003
ALLOWANCE FOR DOUBTFUL ACCOUNTS - NOTES AND
ACCOUNTS RECEIVABLE $644 $ 82 $ - $ 308(a) $418
==== ==== ======= ======== ====
LEASE RESERVE AND TERMINATION COSTS $336 $209 $ - $ 16(d) $529
==== ==== ======= ======== ====
Fifty-three weeks ended March 31, 2002
Allowance for doubtful accounts - notes and
accounts receivable $880 $267 $ 27(b) $ 530(a) $644
==== ==== ======= ======== ====
Lease reserve and termination costs $678 $ 30 $ - $ 372(d) $336
==== ==== ======= ========== ====
Fifty-two weeks ended March 25, 2001
Allowance for doubtful accounts - notes and
accounts receivable $809 $191 $ 27 (b) $ 147(a) $880
==== ==== ======= ======== ====
Lease reserve and termination costs $974 $463 $ 801 (c) $ 1,560(d) $678
==== ==== ======= ======== ====
(a) Uncollectible amounts written off
(b) Provision charged to advertising fund
(c) Lease termination charge to purchase accounting
(d) Payment of lease termination and other costs
F-53