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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 28, 2004
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 (I.R.S. Employer Identification No.)
incorporation or organization)
1400 Old Country Road, Westbury, New York 11590
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516)338-8500
Securities registered pursuant to Section 12(b)of the Act:
Title of Class Name of Each Exchange on which Registered
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None None
Securities registered pursuant to Section 12(g)of the Act:
Common Stock - par value $.01
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of September 28, 2003 was approximately $23,747,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of June 7, 2004,
there were 5,213,901 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 franchised restaurants, expanding our
Nathan's Branded Product Program and our Nathan's branded retail licensing
programs, operating our existing company-owned restaurants and developing an
international master franchising program. In an effort to expand our restaurant
system and expand our brand portfolio, during fiscal 2000 we completed our
merger with Miami Subs Corp. and our acquisition of the intellectual property of
the Kenny Rogers Roasters franchise system. In addition, through our acquisition
of Miami Subs, we also secured certain co-branding rights to use the Arthur
Treachers' brand within the United States. During fiscal 2002 we offered the
Nathan's, Kenny Rogers Roasters and Arthur Treachers' signature products to the
Miami Subs franchise community. Since then, we have continued to capitalize on
the co-branding opportunities within the Nathan's restaurant system, as well as
seek to develop new multi-brand marketing and development plans.
At March 28, 2004, our system, consisting of Nathan's Famous, Kenny Rogers
Roasters and Miami Subs restaurants, included 338 franchised units, including
six units operating pursuant to management agreements, 7 company-owned units
concentrated in the New York metropolitan area and more than 3,300 branded
product points of sale under our Branded Product Program, located in 44 states,
the District of Columbia and 12 foreign countries.
We plan to seek to continue expanding the scope and market penetration of
our Branded Product Program, further develop the restaurant operations of
existing franchised and company-owned outlets ,open new franchised outlets in
traditional or captive market environments, expand the Nathan's retail licensing
programs and continue to introduce co-branding opportunities within our
restaurant system. We may selectively consider opening new company-owned
restaurants. We also plan to further develop an international presence through
the use of master franchising agreements based upon individual or combined use
of all three restaurant concepts.
We were incorporated in Delaware on July 10, 1992 under the name "Nathan's
Famous Holding Corporation" to act as the parent of a Delaware corporation
then-known as Nathan's Famous, Inc. On December 15, 1992, we changed our name to
Nathan's Famous, Inc. and our Delaware subsidiary changed its name to Nathan's
Famous Operating Corporation. The Delaware subsidiary was organized in October
1989 in connection with its reincorporation in Delaware from that of a New York
corporation named "Nathan's Famous, Inc." The New York Nathan's was incorporated
on July 10, 1925 as a successor to the sole proprietorship that opened the first
Nathan's restaurant in Coney Island in 1916. On July 23, 1987, Equicor Group,
Ltd. was merged with and into the New York Nathan's in a "going private"
transaction. The New York Nathan's, the Delaware subsidiary and Equicor may all
be deemed to be our predecessors.
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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. Our
hot dogs are prepared and served in accordance with procedures which have not
varied significantly in more than 88 years. Our signature crinkle-cut french
fried potatoes are featured at each Nathan's restaurant. Nathans' french fried
potatoes are cooked 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
including: chargrilled hamburgers, chargrilled chicken sandwiches, Philly
Cheesesteaks, selected seafood and other chicken items, a breakfast menu and
assorted desserts and snacks. While the number of supplemental menus carried
varies with the size of the unit, the specific supplemental menus chosen are
tailored to local food preferences and market conditions. Each of these
supplemental menu options consists of a number of individual items; for example,
the hamburger menu may include chargrilled bacon cheeseburgers, superburgers and
super cheeseburgers. We maintain the same quality standard with each of Nathan's
supplemental menus as we do with Nathans' core hot dog and french fried potato
menu. Thus, for example, hamburgers and sandwiches are prepared to order and not
pre-wrapped or kept warm under lights. Nathan's also has a "Kids Meal" program
in which various menu alternatives are combined with toys to appeal to the
children's market.
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.
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
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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 28, 2004, 73 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 54% of
sales in free-standing restaurants that maintain drive-thru service.
Currently, 81 Miami Subs restaurants offer our co-branded menu consisting
of various selections of Nathan's, Kenny Rogers Roasters or Arthur Treachers'
signature products and created a new image for Miami Subs based upon this
co-branding strategy called "Miami Subs Plus."
Kenny Rogers Roasters Concept and Menu
The Kenny Rogers Roasters concept was first introduced in 1991 with the
idea of serving home-style family foods based on a menu centered around
wood-fire rotisserie chicken. Kenny Rogers Roasters' unique proprietary marinade
and spice formula, combined with wood-fire roasting in a specifically designed
rotisserie, became the basis of a breakthrough taste in rotisserie chicken. The
menu, design and service style were created to position the concept midway
between quick-serve and casual dining. This format, coupled with a customer
friendly environment developed for dine-in or take-home consumers, is the
precursor of the Kenny Rogers Roasters system.
The distinctive flavoring of our Kenny Rogers Roasters chicken is the
result of a two step process. First, our chickens are marinated using a
specially flavored proprietary marinade. Then a second unique blend of spice is
applied to the chicken prior to cooking, often in an 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 or large in-line units 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.
Franchise Operations
At March 28, 2004, our franchise system, including our Nathan's, Miami
Subs and Kenny Rogers restaurant concepts, consisted of 338 units operating in
23 states and 10 foreign countries.
Today, our franchise system counts among its 129 franchisees and licensees
such well known companies as HMS Host , ARAMARK Leisure Services, Inc., CA1
Services, Inc., Centerplate (formerly known as Service America Corp.), Culinart
and National Amusements. We continue to seek to market our franchising program
to larger, experienced and successful operators with the financial and business
capability to develop multiple franchise units.
As of March 28, 2004, Host Marriott operated 37 franchised outlets,
including 14 units at airports, 18 units within highway travel plazas and five
units within malls. Additionally, Host Marriott operates 15 locations featuring
Nathan's products pursuant to our Branded Product Program.
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Nathan's Franchise Program
Franchisees are required to execute a standard franchise agreement prior
to opening each Nathan's Famous unit. Our current standard Nathan's franchise
agreement provides for, among other things, a one-time $30,000 franchise fee
payable upon execution of the agreement, a monthly royalty payment based on 5.0%
of restaurant sales and the expenditure of 2.0% of restaurant sales on
advertising. We also offer a modified franchise agreement tailored to meet the
needs of franchisees who desire to operate a Nathan's of a smaller size offering
a reduced menu. The modified franchise agreement provides for the initial
franchise fee of $15,000 which is payable upon execution of the agreement,
monthly royalties of 5.0% and the expenditure of 2.0% of restaurant sales on
advertising. We may offer alternatives to the standard franchise agreement,
having to do with franchise fees or advertising requirements. The initial term
of the typical franchise agreement is 20 years, with a 15-year renewal option by
the franchisee, subject to conditions contained in the franchise agreement.
Franchisees are approved on the basis of their business background,
evidence of restaurant management experience, net worth and capital available
for investment in relation to the proposed scope of the development agreement.
We provide numerous support services to our Nathan's franchisees. We
assist in and approve all site selections. Thereafter, we provide architectural
plans suitable for restaurants of varying sizes and configurations for use in
food-court, in-line and free-standing locations. We also assist in establishing
building design specifications, reviewing construction compliance, equipping the
restaurant and providing appropriate menus to coordinate with the restaurant
design and location selected by the franchisee. We typically do not sell food,
equipment or supplies to our Nathan's franchisees.
We offer various management training courses for management personnel of
company-owned and franchised Nathan's restaurants. At least one restaurant
manager from each restaurant must successfully complete our mandated management
training program. We also offer additional operations and general management
training courses for all restaurant managers and other managers with supervisory
responsibilities. We provide standard manuals to each franchisee covering
training and operations, products and equipment and local marketing programs. We
also provide ongoing advice and assistance to franchisees. We host periodic
"Focus on Food" meetings with our franchisees to discuss upcoming marketing
events, menu development and other topics, each of which is created to provide
systemwide benefits.
Franchised restaurants are required to be operated in accordance with
uniform operating standards and specifications relating to the selection,
quality and preparation of menu items, signage, decor, equipment, uniforms,
suppliers, maintenance and cleanliness of premises and customer service. All
standards and specifications are developed by us and applied on a system-wide
basis. We continuously monitor franchisee operations and inspect restaurants.
Franchisees are required to furnish us with detailed monthly sales or operating
reports which assist us in monitoring the franchisee's compliance with its
franchise or license agreement. We make both announced and unannounced
inspections of restaurants to ensure that our practices and procedures are being
followed. We have the right to terminate a franchise 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 28, 2004, ("fiscal 2004") franchisees have opened 21 new Nathan's
franchised units and one Nathan's franchise agreement for non-compliance was
terminated.
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
5
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 required by operators of traditional restaurants, typically
totaling 2.25%, to support various system-wide and local advertising funds.
In addition to individual franchise agreements, we have from time to time
entered into development agreements with certain franchisees. The development
agreement establishes a minimum number of restaurants that the franchisee is
required to open in an agreed upon exclusive area during the term of the
agreement. In addition to receiving a franchise fee for each restaurant opened,
we also receive a non-refundable fee based upon the number of restaurants
committed to be opened under the agreement.
Operations personnel train and assist Miami Subs franchisees in opening
new restaurants and monitor the operations of existing restaurants as part of
the support provided under the franchise program. New franchisees are required
to complete a six-week training program. Upon the opening of a new franchised
restaurant, we typically send representatives to the restaurant to assist the
franchisee during the opening period. These company representatives work in the
restaurant to monitor compliance with Miami Subs' standards and provide
additional on-site training of the franchisee's restaurant personnel.
We also provide development and construction support services to our Miami
Subs franchisees. We review and approve plans and specifications for the
restaurants before improvements begin. Our personnel typically visit the
facility during construction to verify that construction standards are met.
The six-week training program consists of formal classroom training and
in-restaurant training featuring various aspects of day-to-day operations
leading to certification in all functioning positions. Topics covered include
human resources, accounting and purchasing, in addition to labor and food
handling laws. Standard operating manuals are provided to each franchisee.
To maintain uniform standards of appearance, service and food and beverage
quality for our Miami Subs restaurants, we have adopted policies and implemented
a monitoring program. Franchisees are expected to adhere to specifications and
standards in connection with the selection and purchase of products used in the
operation of the Miami Subs restaurant. Detailed specifications are provided for
the products used, and franchisees must request approval for any deviations. We
do not generally sell equipment, supplies or products to our Miami Subs
franchisees. The franchise agreement requires franchisees to operate their
restaurants in accordance with Miami Subs' requirements. We require our
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.
During the past year, Miami Subs formed small groups of franchisees in its
primary market of south Florida and initiated meetings with each of the groups
of franchisees throughout the year. The purpose of these meetings was
principally to improve communications in areas of marketing, promotions, new
products, training and personnel motivation, operations and other areas
affecting the operation and performance of the franchised restaurants.
6
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 28, 2004, franchisees have opened two new Miami Subs franchised units and
we terminated one Miami Subs franchise agreement 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, 2005. 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 and monitor franchisee operations. Franchisees are required to furnish us
with detailed monthly sales or operating reports which assist us in monitoring
the franchisee's compliance with its franchise agreement. We have the right to
terminate a franchise if a franchisee does not operate and maintain a restaurant
in accordance with the requirements of its franchise or license agreement. We
also have the right to terminate a franchise for non-compliance with certain
other terms and conditions of the franchise agreement such as non-payment of
royalties, sale of unauthorized products, bankruptcy or conviction of a felony.
During the fiscal year ended March 28, 2004, no Kenny Rogers Roasters franchise
agreements were terminated for non-compliance.
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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. During fiscal 2004, we
renegotiated our agreement with Roasters Asia Pacific, our Master Developer in
the Far East. Under this agreement, we will receive an annual fee instead of
ongoing royalties and restaurant opening fees. The annual fee is scheduled to
increase on each anniversary of the agreement.
Company-owned Nathan's Restaurant Operations
As of March 28, 2004, we operated seven company-owned Nathan's units,
including one seasonal location, in New York. Company-owned units currently
range in size from approximately 440 square feet to 10,000 square feet and are
principally free-standing buildings. All restaurants, except our seasonal
boardwalk location, have seating to accommodate between 60 and 350 customers.
The restaurants are designed to appeal to all ages and are open seven days a
week. We have established high standards for food quality, cleanliness and
service at our restaurants and regularly monitor the operations of our
restaurants to ensure adherence to these standards. Restaurant service areas,
seating, signage and general decor are contemporary.
Three of these restaurants are older and significantly larger units which
do not conform to contemporary designs. These units carry a broader selection of
menu items than current designs. The items offered at our restaurants, other
than the core menu, tend to have lower margins than the core menu. The older
units require significantly higher levels of initial investment than current
franchise designs and tend to operate at a lower sales/investment ratio.
Consequently, we do not intend to replicate these older units in future
company-owned units.
We entered into a food service lease agreement with Home Depot U.S.A.,
Inc. ("Home Depot") under which we leased space in certain Home Depot
Improvement Centers to operate Nathan's restaurants. The term of each Home Depot
agreement was five years from the date on which the restaurant opens, with one
five year renewal option. In August 2002, Nathan's received written notice from
Home Depot that Home Depot terminated eight License Agreements with Nathan's
pursuant to which Nathan's operated Nathan's restaurants in certain Home Depot
Improvement Centers. In accordance with the termination notices, Nathan's ceased
its operations in those locations before February 20, 2003.
Company-owned Miami Subs Restaurant Operations
As of March 28, 2004, we did not operate any company-owned Miami Subs
restaurants. During fiscal 2004, our four company-operated restaurants located
in Southern Florida were franchised or transferred pursuant to Management
Agreements. These four company-owned Miami Subs restaurants were free-standing
restaurants offering drive-thru operations as well as dine-in seating. These
restaurants ranged in size from approximately 2,500 square feet to 4,000 square
feet with seating capacity for approximately 90 guests. At present, we do not
intend to open any new company-operated Miami Subs restaurants.
Company-owned Kenny Rogers Roasters Restaurant Operations
In April 2002, we opened a new limited-menu Kenny Rogers food court type
outlet, as part of a major remodeling of a large company-owned Nathan's facility
in Oceanside, New York.
At March 28, 2004, we did not operate any Company-owned Kenny Rogers
Roasters restaurants. At present, we do not intend to open any new
company-operated Kenny Rogers Roasters restaurants.
International Development
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As of March 28, 2004, our franchisees operated 99 units in 10 foreign
countries having significant operations 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 Japan and 14 Kenny Rogers Roasters restaurants as
follows: seven in the Philippines, three in Malaysia, three in China and one in
Hong Kong.
During fiscal 2004, we executed a Master Franchise Agreement and a
Distribution and Manufacturing Agreement for the Nathan's and Miami Subs rights
in Kuwait and are currently in various stages of negotiations for development in
other foreign countries. We may continue to grant exclusive territorial rights
for franchising and for the manufacturing and distribution rights in foreign
countries, which would require that an exclusivity fee be conveyed for these
rights. We plan to develop the restaurant franchising system internationally
through the use of master franchising agreements based upon individual or
combined use of all three restaurant concepts and for the distribution of
Nathan's products.
Location Summary
The following table shows the number of our company-owned and franchised or
licensed units in operation at March 28, 2004 and their geographical
distribution:
Franchise
Domestic Locations Company or License(1) Total
- ------------------ ------- ------------- -----
Alabama - 1 1
Arizona - 2 2
California - 3 3
Connecticut - 4 4
Delaware - 1 1
Florida - 89 89
Georgia - 4 4
Indiana - 1 1
Kentucky - 1 1
Maryland - 1 1
Massachusetts - 3 3
Minnesota - 2 2
Missouri - 3 3
Nevada - 4 4
New Jersey - 42 42
New York 7 59 66
North Carolina - 8 8
Ohio - 1 1
Pennsylvania - 3 3
South Carolina - 2 2
Tennessee - 1 1
Texas - 1 1
Virginia - 3 3
---- ----- ----
Domestic Subtotal 7 239 246
---- ----- ----
International Locations
Canada - 2 2
China - 8 8
Cypress - 1 1
Egypt - 4 4
Hong Kong - 2 2
Japan - 1 1
Malaysia - 31 31
Philippines - 44 44
Singapore - 4 4
United Arab Emirates - 2 2
--- ---- ---
International Subtotal - 99 99
--- ---- ---
Grand Total 7 338 345
--- ---- ---
9
(1) Amounts include 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
marketing Nathan's valued brand and selling Nathan's signature products. In
conjunction with the program, the operators are granted a limited use of the
Nathan's trademark, as well as Nathan's point of purchase materials. We sell
products either directly to the end users, or to various foodservice
distributors who provide the product to retailers.
As of March 2004, the Branded Product Program was comprised of
approximately 3,300 points of sale. The program is unique in its flexibility and
broad appeal. Hot dogs are offered in a variety of sizes and even come packaged
with buns for vending machine use. The Canteen Corporation, America's largest
vending company, uses Nathan's packaged hot dogs as part of its system. During
fiscal 2004, Nathan's hot dogs were promoted in Auntie Ann's pretzel dogs in
over 550 locations.
During the past two years the number of locations offering the Nathan's
branded products have been significantly expanded. Today, Nathan's hot dogs are
being offered in 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, also 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 the
official non-kosher hot dog of the New York Yankees for the 2001-2006 baseball
seasons.
Of particular significance is our expansion into over 1,500 convenience
stores with companies such as Exxon/Mobil. Additionally, 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. Our hot dogs are currently being
featured as a promotional pretzel dog in over 550 Auntie Ann's. As we expand the
program, we continue to encounter new business opportunities. Nathan's is
offered in retail environments, universities, entertainment centers, casinos,
airport and travel plazas and on Amtrak Trains throughout the nation.
Expansion Program
We expect to continue opening new franchised units individually and on a
co-branded basis, expanding product distribution through various means such as
branded products and retail licensing arrangements, developing master
franchising programs in foreign countries and continuing to introduce our
restaurant concepts' signature products through co-branding efforts within our
restaurant system.
We anticipate that we will open franchised units individually and develop
new co-branded outlets. We may selectively consider opening new company-owned
Nathan's units on an opportunistic basis. Existing company-owned units are
located in the New York metropolitan area, where we have extensive experience in
operating restaurants. We may consider new opportunities in both traditional and
captive market settings.
We 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, there
is the opportunity to further increase revenues by offering master development
agreements to qualified persons or entities allowing for the operation of
franchised restaurants, subfranchising restaurants to others, licensing the
manufacture of our signature products, selling our signature products through
supermarkets or other retail venues and allowing for the further development of
our Branded Product Program. Qualified persons or entities must have
satisfactory foodservice experience managing multiple units, the appropriate
infrastructure and the necessary financial resources to support the business
development.
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 to
10
Nathan's branded products throughout the foodservice industry. In addition,
certain Miami Subs, Kenny Rogers Roasters and additional Nathan's products may
be included as part of our Branded Product Program.
During fiscal 2004, we test marketed the sale of Nathan's hot dogs on QVC.
Based upon the results of this test, Nathan's was featured as a "Today's Special
Value" on May 20, 2004. We intend to further develop this distribution channel
throughout fiscal 2005.
Co-branding
We believe that there is a an opportunity for co-branding our restaurant
concepts. In addition to the three restaurant concepts that we own, we also
maintain certain co-branding rights for the use of the brand "Arthur Treacher's
Fish & Chips" within the United States. Franchisees wishing to co-brand with our
other brands receive a current Uniform Franchise Offering Circular ("UFOC") and
execute a participation agreement as a rider to their franchise agreement.
During the fiscal year ended March 31, 2002, 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. Since fiscal 2002, we continued to co-brand within our
system by adding the Kenny Rogers and Arthur Treacher's brands into Nathan's
restaurants, and we intend to continue these co-branding efforts during fiscal
2005.
Currently, the Arthur Treacher's brand is being sold within 118 Nathan's,
Kenny Rogers Roasters and Miami Subs restaurants, the Nathan's brand is included
on the menu of 71 Miami Subs and Kenny Rogers restaurants, while the Kenny
Rogers Roasters brand is being sold within 93 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 continue to market co-branded units, generally, promoting Nathan's as
the "Host Restaurant", within the United States and internationally. We believe
that a multi- branded restaurant concept offering strong lunch and dinner day
parts is very appealing to both consumers and potential franchisees. Such
restaurants are designed to allow the operator to increase sales and leverage
the cost of real estate and other fixed costs to 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 $1,994,000 in fiscal 2004 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 2004 retail license revenues.
11
During fiscal 2004, we licensed the sale of a Nathan's stove-top griddle
to be marketed via televised infomercial and direct retail. Revenues derived
under this agreement were $325,000 during the fiscal year. During fiscal 2005,
we intend to develop and market additional Nathan's non-food items.
We license the manufacture of the proprietary spices and marinade which
are used to produce Nathans' hot dogs and Kenny Rogers chicken. During fiscal
2004 and 2003, we earned $288,000 and $274,000, respectively, under these
agreements.
During fiscal 2004, we entered into an agreement with ConAgra to test the
production and retail distribution of Nathan's frozen french fries. The product
was solely available at Shop Rite supermarkets in the New York area during
fiscal 2004. Based on the success of this test, we expect to introduce Nathan's
frozen french fries in approximately 1,200 Publix and Winn-Dixie supermarkets in
Florida during the summer of 2004. Currently, discussions are underway to expand
distribution in the New York metropolitan area.
During fiscal 2004, 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 2004 have not been significant.
We have also executed a new license agreement for the manufacture and
distribution of certain meat products which are not covered by the SFG license
agreement and a separate license agreement with an internet marketing firm to
sell Nathan's food and non-food items via the internet.
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 2004, 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
12
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 .50%
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, 2005 have been waived. New franchisees will be
expected to spend on local marketing activities or contribute to the advertising
funds up to 2.5% of restaurant sales for advertising and promotion.
During the year, the Kenny Rogers Roasters' primary marketing focus has
been toward utilizing promotional "Limited Time Offers". We anticipate that
near-term marketing efforts for Kenny Rogers Roasters will continue to emphasize
local store marketing activities.
GOVERNMENT 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
13
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.
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 28, 2004, we offered for sale beer or wine in two
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 28, 2004, we had 285 employees, of whom 53 were corporate
management and administrative employees, 41 were restaurant managers and 191
were hourly full-time and part-time food-service employees. Food-service
employees at four locations are currently represented by Local 1102 RWSDU UFCW
AFL-CIO, CLC , Retail, Wholesale and Department store Union, under agreement
which expires in June 2006. We consider our employee relations to be good and
have not suffered any strike or work stoppage for more than 32 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.
14
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.
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.
15
We also compete with many franchisors of restaurants and other business
concepts for the sale of franchises 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
We file reports with the SEC, including an annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and a proxy
statement on Schedule 14A. The public may read and copy any materials filed by
us with the SEC at the SEC's public reference room at 450 Fifth Street, NW,
Washington D.C., 20549. The public may obtain information about the operation of
the SEC's public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC
also maintains a website at http://www.sec.gov that contains reports, proxy and
information statements and other information about issuers such as us that file
electronically with the SEC.
In addition, we make available free of charge on our website at
http://www.nathansfamous.com our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, proxy statement on Schedule 14A and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) under the Exchange Act as soon as reasonably practical after we
electronically file such material with, or furnish it to, the SEC.
ITEM 2. PROPERTIES
Our principal executive offices consist of approximately 9,700 sq. ft. of
leased space in a modern, high-rise office building in Westbury, New York which
expires in November 2009. We also own Miami Subs' regional office consisting of
approximately 8,500 sq. ft. in Fort Lauderdale, Florida. We currently own two
restaurant properties consisting of a 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
28, 2004, other company-owned restaurants which were operating or developed were
located in leased space with terms expiring as shown in the following table:
Current Lease Approximate
Nathan's Restaurants Location Expiration Date Square Footage
- -------------------- ------------ --------------- --------------
Coney Island Brooklyn, NY December 2007 10,000
Coney Island Boardwalk Brooklyn, NY October 2005 440
Long Beach Road Oceanside, NY May 2011 7,300
Central Park Avenue Yonkers, NY April 2010 10,000
Hempstead Turnpike (A) Levittown, NY September 2004 4,100
Broad Hollow Road Farmingdale, NY April 2008 2,200
A - This store will be closed due to its lease expiration.
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. Three of the
Nathan's leases provide for renewal options ranging between 10 and 20 years upon
expiration of the current 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 28, 2004, we were the sublessor to 31 properties pursuant to
these arrangements, nine of the restaurants leased/sub-leased to franchisees or
others are located outside of Florida or the metropolitan New York area.
Aggregate rental expense, net of sublease income, under all current leases
amounted to $1,584,000 in fiscal 2004.
16
ITEM 3. LEGAL PROCEEDINGS
We and our subsidiaries are from time to time involved in ordinary and
routine litigation. We are also involved in the following litigation:
Elizabeth B. Jackson and Joseph Jackson commenced an action, in the
Circuit Court of the Fifteenth Judicial Circuit, Palm Beach County, Florida in
September 2001 against Miami Subs and EKFD Corporation, a Miami Subs franchisee
("the franchisee") 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.
Cristobal Cuesta, an employee of a Miami Subs franchised restaurant,
commenced an action for unspecified damages in the United States District Court,
Southern District of Florida in January 2004 against Miami Subs Corporation,
Miami Subs USA, Inc, Nadia M. Investments, Inc. and DYV SYS International, Inc.,
both Miami Subs franchisees ("the franchisees"), claiming that he was not paid
overtime when he worked in excess of 40 hours per week, in violation of the Fair
Labor Standards Act. The action also seeks damages for any other employees of
the defendants who would be similarly entitled to overtime. Pursuant to the
terms of the Miami Subs Franchise Agreement, the franchisees are obligated to
operate their Miami Subs franchises in compliance with law, including all labor
laws. Miami Subs intends to assert that it is not an appropriate party to this
litigation, to deny any liability to Plaintiff and defend against this action
vigorously.
Ismael Rodriguez commenced an action, in the Supreme Court of the State of
New York, Kings County, in May 2004 against Nathan's Famous, Inc. seeking
damages of $1,000,000 for claims of age discrimination in connection with the
termination of Mr. Rodriguez's employment. Mr. Rodriguez was terminated from his
position in connection with his repeated violation of company policies and
failure to follow company-mandated procedures. Nathan's Famous, Inc. intends to
deny any liability and defend this action vigorously. Nathan's Famous, Inc. has
submitted this claim to its insurance carrier with the expectation that it will
be covered by its employment practices liability insurance policy.
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 sales
prices per share for the periods indicated:
High Low
------ -----
Fiscal year ended March 28, 2004
First quarter $ 3.93 $ 3.38
Second quarter 4.87 3.48
Third quarter 5.36 4.22
Fourth quarter 5.99 5.00
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
At June 7, 2004 the closing price per share for our common stock, as reported by
Nasdaq was $5.80.
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 7, 2004, we had 840 shareholders of record, excluding
shareholders whose shares were held by brokerage firms, depositories and other
institutional firms in "street name" for their customers.
18
ISSUER PURCHASES OF EQUITY SECURITIES
(c) TOTAL NUMBER (d) MAXIMUN
OF SHARES NUMBER OF SHARES
(a) TOTAL NUMBER PURCHASED AS PART THAT MAY YET BE
OF SHARES (b) AVERAGE PRICE OF PUBLICLY PURCHASED UNDER
PERIOD PURCHASED PAID PER SHARE ANNOUNCED PLANS THE PLAN
- ------------- ---------------- ---------------- ----------------- -----------------
DEC. 29, 2003 -
JAN. 25, 2004 6,609 $5.0350 1,792,154 207,846
JAN. 26, 2004 -
FEB. 22, 2004 11,100 $5.6974 1,803,254 196,746
FEB. 23, 2004 -
MAR. 28, 2004 48,047 $5.7478 1,851,301 148,699
------ ------- --------- -------
TOTAL 65,756 $5.6677 1,851,301 148,699
====== ======= ========= =======
On September 14, 2001, Nathan's was authorized to purchase up to one million
shares of its common stock. Pursuant to our stock repurchase program, we
repurchased one million shares of common stock in open market transactions and a
private transaction by September 29, 2002.
On October 7, 2002, Nathan's was authorized to purchase up to one million
additional shares of its common stock.
There is no set time limit on the purchases.
EQUITY COMPENSATION PLAN INFORMATION
The following chart summarizes the options and warrants outstanding and
available to be issued at March 28, 2004:
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EQUITY COMPENSATION
BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING
OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS AND SECURITIES REFLECTED IN
PLAN CATEGORY AND WARRANTS WARRANTS COLUMN (a))
(a) (b) (c)
------------- ----------------------- ----------------------- -----------------------
EQUITY COMPENSATION
PLANS APPROVED BY
SECURITY HOLDERS 1,297,436 $4.3220 348,500
EQUITY COMPENSATION
PLANS NOT APPROVED BY
SECURITY HOLDERS 650,000 $3.3344 -0-
--------- ------- -------
TOTAL 1,947,436 $3.9923 348,500
========= ======= =======
19
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 expired 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
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 7, 2004, 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 28, MARCH 30, MARCH 31, MARCH 25, MARCH 26
2004 2003 2002 (1) 2001 2000 (2)
--------- --------- --------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Operations Data:
Revenues:
Sales $20,765 $24,762 $27,425 $29,781 $25,511
Franchise fees and royalties 6,286 5,977 7,944 8,814 5,906
License royalties, investment and other income 3,628 3,033 4,106 3,561 2,343
------- ------- ------- ------- -------
Total revenues 30,679 33,772 39,475 42,156 33,760
------- ------- ------- ------- -------
Costs and Expenses:
Cost of sales 14,775 16,592 18,269 19,146 16,370
Restaurant operating expenses 3,806 5,621 6,559 7,621 7,231
20
Depreciation and amortization 971 1,314 1,395 1,535 1,142
Amortization of intangible assets 261 278 888 839 716
General and administrative expenses 7,519 8,600 9,292 8,978 8,222
Interest expense 75 132 256 310 198
Impairment of long-lived assets 25 1,367 392 127 465
Impairment of notes receivable 208 1,425 185 151 840
Other expense (income) 45 232 (210) 462 427
------- ------- ------- ------- -------
Total costs and expenses 27,685 35,561 37,026 39,169 35,611
------- ------- ------- ------- -------
Income (loss) from continuing operations
before income taxes 2,994 (1,789) 2,449 2,987 (1,851)
Provision (benefit) for income taxes 1,100 (283) 1,057 1,402 (382)
------- ------- ------- ------- -------
Income (loss) from continuing operations 1,894 (1,506) 1,392 1,585 (1,469)
------- ------- ------- ------- -------
Discontinued operations
(Loss) income from discontinued operations
before income taxes -- (206) (238) 35 331
(Benefit) provision for income taxes -- (82) (95) 14 132
------- ------- ------- ------- -------
(Loss) income from discontinued operations -- (124) (143) 21 199
------- ------- ------- ------- -------
Income (loss) before cumulative effect of
accounting change 1,894 (1,630) 1,249 1,606 (1,270)
Cumulative effect of change in accounting
principle, net of tax benefit of $854 in 2003 -- (12,338) -- -- --
------- ------- ------- ------- -------
Net income (loss) $ 1,894 ($13,968) $ 1,249 $ 1,606 (1,270)
======= ======== ======= ======= =======
Basic income (loss) per share:
Income (loss) from continuing operations $ 0.36 ($ 0.25) $ 0.20 $ 0.23 ($ 0.25)
Income (loss) from discontinued operations -- (0.03) (0.02) -- 0.03
Cumulative effect of change in accounting principle -- (2.06) -- -- --
------- ------- ------- ------- -------
Net income (loss) $ 0.36 ($ 2.34) $ 0.18 $ 0.23 ($ 0.22)
======= ======== ======= ======= ========
Diluted income (loss) per share:
Income (loss) from continuing operations $ 0.33 ($ 0.25) $ 0.20 $ 0.23 ($ 0.25)
Income (loss) from discontinued operations -- (0.03) (0.02) -- 0.03
Cumulative effect of change in accounting principle -- (2.06) -- -- --
------- ------- ------- ------- -------
Net income (loss) $ 0.33 ($ 2.34) $ 0.18 $ 0.23 ($ 0.22)
======= ======== ======= ======= ========
Dividends -- -- -- -- --
------- ------- ------- ------- -------
Weighted average shares used in computing
net income (loss) per share
Basic 5,306 5,976 7,048 7,059 5,881
Diluted (3) 5,678 5,976 7,083 7,098 5,881
21
Balance Sheet Data at End of Fiscal Year:
Working capital (deficit) $ 9,185 $ 5,935 $ 9,565 $ 5,210 ($ 322)
Total assets 27,584 25,886 48,745 51,826 48,583
Long term debt, net of current maturities 866 1,053 1,220 1,789 3,131
Stockholders' equity $17,352 $16,383 $36,145 $35,031 $33,347
======= ======= ======= ======= =======
Selected Restaurant Operating Data:
Company-owned Restaurant Sales (4) $12,780 $21,955 $27,484 $30,946 $27,478
======= ======= ======= ======= =======
Number of Units Open at End of Fiscal Year:
Company-owned 7 12 22 25 32
======= ======= ======= ======= =======
Franchised 338 343 364 386 415
======= ======= ======= ======= =======
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, due to the net loss, the
impact of their inclusion would have been anti-dilutive.
(4) Company-owned restaurant sales represent sales from restaurants presented
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
22
intellectual property rights, including trademarks, recipes and franchise
agreements of Roasters Corp. and Roasters Franchise Corp. On September 30, 1999,
we acquired the remaining 70% of the outstanding common stock of Miami Subs
Corporation we did not already own. Our revenues are generated primarily from
operating company-owned restaurants and franchising the Nathan's, Miami Subs and
Kenny Rogers restaurant concepts, selling products under Nathan's Branded
Product Program and licensing agreements for the sale of Nathan's products
within supermarkets. 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 continues to co-brand within its existing restaurant
system. Currently, the Arthur Treacher's brand is being sold within 118
Nathan's, Kenny Rogers Roasters and Miami Subs restaurants, the Nathan's brand
is included on the menu of 71 Miami Subs and Kenny Rogers restaurants, while the
Kenny Rogers Roasters brand is being sold within 93 Miami Subs and Nathan's
restaurants.
At March 31, 2002, Nathan's owned 22 company-operated restaurants. During
the fiscal year ended March 30, 2003, Nathan's abandoned eight company-operated
restaurants pursuant to early lease terminations which are presented as
discontinued operations pursuant to SFAS No. 144 in the accompanying financial
statements. Nathan's franchised two company-operated restaurants during the
fiscal year ended March 30, 2003. During the fiscal year ended March 28, 2004,
Nathan's has franchised three company-operated restaurants and entered into two
management agreements with franchisees to operate two company-operated
restaurants. These seven restaurants are presented as continuing operations in
the accompanying financial statements.
At March 28, 2004, our combined system consisted of 338 franchised or
licensed units, seven company-owned units and over 3,300 Nathan's Branded
Product points of sale that feature Nathan's world famous all-beef hot dogs,
located in 44 states, the District of Columbia and 12 foreign countries. At
March 28, 2004, our company-owned restaurant system included seven Nathan's
units, as compared to eight Nathan's units and four Miami Subs units at March
30, 2003.
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 tested
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 in fiscal 2003, Goodwill, Trademarks,
Trade Names and Recipes were deemed to be impaired and their carrying value was
written down by $13,192,000, or $12,338,000, net of 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
23
restaurant operating losses to be the primary indicator of potential impairment
of a restaurant's carrying value. During the fifty-two week period ended March
28, 2004, we identified one restaurant that had been impaired and recorded
impairment charges of approximately $25,000. During the fifty-two weeks ended
March 30, 2003, we identified seven restaurants that had been impaired and
recorded impairment charges of approximately $1,367,000.
Impairment of Notes Receivable
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," requires management judgements regarding
the future collectibility of notes receivable and the underlying fair market
value of collateral. We consider the following factors when evaluating a note
for impairment: a) indications that the borrower is experiencing business
problems, such as operating losses, marginal working capital, inadequate cash
flow or business interruptions; b) whether the loan is secured by collateral
that is not readily marketable; and/or c) whether the collateral is susceptible
to deterioration in realizable value. When determining possible impairment, we
also assess our future intention to extend certain leases beyond the minimum
lease term and the debtor's ability to meet its obligation over the projected
term. We have identified certain notes receivable that have been impaired and
recorded impairment charges of approximately $208,000 relating to two notes and
$1,425,000 relating to nine notes during the fifty-two weeks ended March 28,
2004 and March 30, 2003, respectively.
Revenue Recognition
Sales by Company-owned restaurants, which are typically paid in cash by
the customer, are recognized upon the performance of services.
In connection with its franchising operations, the Company receives
initial franchise fees, development fees, royalties, contributions to marketing
funds, and in certain cases, revenue from sub-leasing restaurant properties to
franchisees.
Franchise and area development fees, which are typically received prior to
completion of the revenue recognition process, are recorded as deferred revenue.
Initial franchise fees 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.
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.
Nathan's recognizes franchise royalties when they are earned and deemed
collectible. Franchise fees and royalties that are not deemed to be collectible
are not recognized as revenue until paid by the franchisee. 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.
Nathan's recognizes revenue from the Branded Product Program when it is
determined by the manufacturer 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.
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 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
24
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 each 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. During the fifty-two weeks ended March 28,
2004, we reversed approximately $268,000 of previously recorded insurance
accruals for items that have been concluded without further payment. Also,
during the fifty-two weeks ended March 30, 2003, we completed an
evaluation of the outstanding claims and reserves in conjunction with our
external risk manager and reversed $196,000 of previously recorded self
insurance accruals for those claims on which our exposure had been
settled.
RESULTS OF OPERATIONS
FISCAL YEAR END MARCH 28, 2004 COMPARED TO FISCAL YEAR ENDED MARCH 30,
2003
Revenues from Continuing Operations
Total sales from continuing operations decreased by 16.1% or
$3,997,000 to $20,765,000 for the fifty-two weeks ended March 28, 2004
("fiscal 2004") as compared to $24,762,000 for the fifty-two weeks ended
March 30, 2003 ("fiscal 2003"). Company-owned restaurant sales decreased
30.1% or $5,631,000 to $12,780,000 from $18,411,000 primarily due to the
operation of seven fewer company-owned restaurants as compared to the
prior fiscal year. The reduction in company-owned restaurants is the
result of our franchising or entering into management agreements for six
restaurants and selling one restaurant. The financial impact associated
with these seven restaurants lowered restaurant sales by $5,323,000 and
improved restaurant operating profits by $43,000 versus fiscal 2003. Sales
decreased 2.1% at our comparable company-owned restaurants (consisting of
seven Nathan's restaurants, including one seasonal restaurant). Sales from
the Branded Product Program increased by 20.5% to $7,651,000 in fiscal
2004 as compared to sales of $6,351,000 in fiscal 2003. This increase was
due to higher sales volume and the impact of the price increases
implemented during the second half of the fiscal year. Additionally,
during fiscal 2004, Nathan's realized sales of $334,000 in connection with
a test marketing program with QVC.
Franchise fees and royalties increased by $309,000 or 5.2% to
$6,286,000 in fiscal 2004 compared to $5,977,000 in fiscal 2003. Franchise
royalties increased by $483,000 or 9.0% to $5,835,000 in fiscal 2004 as
compared to $5,352,000 in fiscal 2003. This increase is due primarily to
the royalties earned from the new units that were opened or franchised
during fiscal 2004 and the full year earnings from units opened during
fiscal 2003, all of which have been recognized as income. Additionally, we
realized an improvement in the amount of unrealizable royalties which were
not previously recognized as revenues, primarily in the South Florida
marketplace for the Miami Subs brand, as compared to fiscal 2003. Domestic
franchise restaurant sales were virtually unchanged, decreasing by 0.3% to
$161,332,000 in fiscal 2004 as compared to $161,740,000 in fiscal 2003. At
March 28, 2004, 338 franchised or licensed restaurants were operating as
compared to 343 franchised or licensed restaurants at March 30, 2003. At
March 28, 2004, royalties from 35 domestic franchised locations have been
deemed unrealizable as compared to 59 domestic franchised locations at
March 30, 2003. The majority of this decline is attributable to the number
of unsuccessful units that have closed. Franchise fee income derived from
new openings and our co-branding activities was $428,000 in fiscal 2004 as
compared to $418,000 in fiscal 2003. During fiscal 2004, 40 franchised
units including the franchising of three company-owned restaurants and the
conversion of three company-owned restaurants into management agreements
were opened as compared to 24 franchise openings during fiscal 2003.
During fiscal 2003, Nathan's also earned $207,000 in connection with the
termination of two Master Development Agreements due to breaches by the
franchisees.
License royalties were $2,970,000 in fiscal 2004 as compared to
$2,585,000 in fiscal 2003. The majority of this increase is attributable
to revenues from new license agreements for the sale of Nathan's products,
primarily the Nathan's "Griddle" which was marketed via "infomercial"
throughout the year and by retailers during the Christmas 2003 season.
Interest income was $199,000 in fiscal 2004 versus $292,000 in
fiscal 2003 due primarily to lower interest
25
income earned on notes receivable which have been impaired during the
fiscal years ended March 28, 2004 and March 30, 2003.
Investment and other income increased by $303,000 to $459,000 in
fiscal 2004 versus $156,000 in fiscal 2003. During fiscal 2004, Nathan's
recognized net gains of $206,000 primarily in connection with the sale of
two company-owned restaurants to franchisees and additional miscellaneous
revenue of $31,000 which was partially offset by an increased subleasing
loss of $69,000. In fiscal 2003, Nathan's realized a gain of $135,000 in
connection with the early termination of a Branded Product Program sales
agreement. During fiscal 2003, Nathans' investment loss of approximately
$244,000 was primarily attributable to our investment in limited
partnership, which was liquidated during fiscal 2003.
Costs and Expenses from Continuing Operations
Cost of sales from continuing operations decreased by $1,817,000 to
$14,775,000 in fiscal 2004 from $16,592,000 in fiscal 2003. During fiscal
2004, restaurant cost of sales were lower than fiscal 2003 by
approximately $3,605,000. Cost of sales were lower by approximately
$3,520,000 as a result of operating fewer company-owned restaurants during
fiscal 2004. The cost of restaurant sales at our comparable units as a
percentage of restaurant sales was 61.2% in fiscal 2004 as compared to
60.2% in fiscal 2003 due primarily to higher labor and related costs.
Higher costs of approximately $1,480,000 were incurred primarily in
connection with the growth of our Branded Product Program and higher
commodity costs during fiscal 2004. Commodity costs of our beef products
were higher during fiscal 2004 than fiscal 2003. This increase has been
caused by reductions in the supply of beef primarily due to: 1) the
prohibition since May 2003 on importing of Canadian beef livestock into
the U.S. 2) the decrease in imports of Australian beef due to local
drought conditions and 3) the export of U.S. beef had increased through
December 23, 2003 when the first case of bovine spongiform encephalopathy,
otherwise known as BSE in the United States was reported. Although the
export of beef by the United States was significantly reduced as a result
of this finding, Nathan's had not realized a reduction in the cost of beef
during the fourth quarter of fiscal 2004. In response to these higher
costs, Nathan's had increased menu prices in its company-operated
restaurants by approximately 2.0% and increased prices within its Branded
Product Program to offset some of the margin pressure. Additionally,
Nathan's also incurred cost of sales of $327,000 in fiscal 2004 in
connection with the QVC test marketing program.
Restaurant operating expenses decreased by $1,815,000 to $3,806,000
in fiscal 2004 from $5,621,000 in fiscal 2003. Restaurant operating costs
were lower in fiscal 2004 by approximately $1,847,000, as compared to
fiscal 2003 as a result of operating seven fewer restaurants.
Depreciation and amortization decreased by $343,000 to $971,000 in
fiscal 2004 from $1,314,000 in fiscal 2003. Depreciation expense was lower
by approximately $255,000 as a result of operating fewer company-owned
restaurants and the effect of the impairment charges on long-lived assets
recorded during fiscal 2003.
Amortization of intangibles was $261,000 in fiscal 2004 as compared
to $278,000 in fiscal 2003.
General and administrative expenses decreased by $1,081,000 to
$7,519,000 in fiscal 2004 as compared to $8,600,000 in fiscal 2003. The
decrease in general and administrative expenses was due primarily to lower
personnel and incentive compensation expense of approximately $411,000
resulting from the implementation of an expense reduction plan (primarily
in connection with the reduction in the number of company-operated
restaurants), lower professional fees of $247,000, lower bad debts expense
of approximately $99,000, lower un-leased property expense of
approximately $86,000 and the expense reversal from the settlement of a
disputed claim of approximately $50,000.
Interest expense was $75,000 during fiscal 2004 as compared to
$132,000 during fiscal 2003. The reduction in interest expense relates
primarily to the repayment of outstanding loans between the two periods.
Impairment charge on notes receivable of $208,000 during fiscal 2004
represents the write-down of two non-performing notes receivable and
$1,425,000 during fiscal 2003 represents the write-down relating to nine
notes receivable.
Impairment charge on long-lived assets of $25,000 during fiscal 2004
represents the write-down of one restaurant scheduled to close in
September 2004 due to its lease expiration and $1,367,000 during fiscal
2003 representing the write-down relating to seven under-performing
restaurants.
26
Other expense of $45,000 in fiscal 2004 represents lease reserves
relating to two vacant properties. Other expense of $232,000 in fiscal
2003 represents lease reserves relating to four vacant properties.
Provision (Benefit) for Income Taxes from Continuing Operations
In fiscal 2004, the income tax provision on income from continuing
operations was $1,100,000 or 36.7% of income from continuing operations as
compared to the income tax (benefit) from continuing operations of
($283,000) or 15.8% of loss from continuing operations before income taxes
in fiscal 2003. The effective income tax rate was positively impacted in
fiscal 2004 as a result of a tax refund received of $62,000 as a result of
filing an amended fiscal 2002 tax return. The effective income tax rate
was lower in the fiscal 2003 period due in part to the adoption of SFAS
No. 142 which requires that goodwill no longer be amortized. Such goodwill
amortization was not tax deductible by Nathan's which increased the
effective tax rate in prior years.
Discontinued operations
No restaurants have been accounted for as discontinued operations
during fiscal 2004. Fiscal 2003 included the results of operations of
eight company-owned restaurants, all of which were abandoned by March 30,
2003, 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 fiscal 2003. Loss before income taxes
from these restaurants was $206,000 during fiscal 2003. The fiscal 2003
loss before tax included $428,000 of additional depreciation expense due
to a change in the estimated useful lives of the restaurants operating
within Home Depot Improvement Centers for which Nathan's received early
lease termination notifications during the second quarter of fiscal 2003.
Cumulative effect of change in accounting principle
In the first quarter fiscal 2003, we adopted SFAS No. 142,
"Accounting for Goodwill and Other Intangibles." In connection with the
implementation of this new standard, Goodwill, Trademarks, Trade Names and
Recipes were deemed to be impaired and their carrying value was written
down by $13,192,000, or $12,338,000, net of tax.
FISCAL YEAR ENDED MARCH 30, 2003 COMPARED TO FISCAL YEAR ENDED MARCH 31,
2002
Revenues from Continuing Operations
Total sales from continuing operations decreased by 9.7% or
$2,663,000 to $24,762,000 for the fifty-two weeks ended March 30, 2003
("fiscal 2003 period") as compared to $27,425,000 for the fifty-three
weeks ended March 31, 2002 ("fiscal 2002 period"). Sales from the Branded
Product Program increased by 32.4% to $6,351,000 for the fiscal 2003
period as compared to sales of $4,797,000 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
27
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.
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 $1,677,000 to
$16,592,000 in the fiscal 2003 period from $18,269,000 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
$984,000 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
28
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
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.
OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any off-balance sheet arrangements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 28, 2004 aggregated $3,449,000,
increasing by $2,034,000 during fiscal 2004. At March 28, 2004, marketable
securities increased by $2,854,000 from March 30, 2003 to $7,477,000 and
net working capital increased to $9,185,000 from $5,935,000 at March 30,
2003.
29
Cash provided by operations was $5,276,000 in fiscal 2004 as
compared to $2,296,000 in fiscal 2003. The fiscal 2004 increase resulted
primarily from higher operating profits. Additionally, Nathan's applied
its expected Net Operating Loss from the fiscal year ended March 2003
against its estimated tax payments for its fiscal year ending March 28,
2004 reducing current year Federal tax payments by approximately $668,000.
During fiscal 2004, Nathan's received repayments on notes receivable
of $797,000 and proceeds from the sale of three restaurants and other
fixed assets of $489,000. We incurred capital expenditures of $449,000
during fiscal 2004.
Nathan's continued to repurchase shares of common stock pursuant to
its Stock Repurchase Program having repurchased 210,063 shares of common
stock at a total cost of $928,000. We also repaid notes payable and
obligations under capital leases in the amount of $187,000 during fiscal
2004.
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 28, 2004, Nathan's purchased 851,301 shares of
common stock at a cost of approximately $3,251,000. Nathan's has not
purchased any additional shares of common stock after March 28, 2004. To
date, Nathan's has purchased a total of 1,851,301 shares of common stock
at a cost of approximately $6,921,000. Nathan's expects to make additional
purchases of stock from time to time, depending on market conditions, in
open market or in privately negotiated transactions, at prices deemed
appropriate by management. There is no set time limit on the purchases.
Nathan's expects to fund these stock repurchases from its operating cash
flow.
We expect that we will make additional investments in certain
existing restaurants and to support the growth of the Branded Product
Program in the future and to fund those investments from our operating
cash flow. We may further incur additional capital expenditures in
connection with the replacement of the restaurant whose lease will expire
in September 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. We have terminated leases on 17 of those properties and
sold the remaining property to a non-franchisee. Since acquiring Miami
Subs, we have accrued approximately $1,461,000 and made payments of
approximately $1,282,000 for lease obligations and termination costs, as
part of the acquisition, for units having total future minimum lease
obligations of $8,298,000 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.
At June 7, 2004, there were 30 properties that we either owned or
leased from third parties which we leased or sublet to franchisees,
operating managers 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 28, 2004 was approximately $566,000.
30
The following schedules represent Nathan's cash contractual
obligations and the expiration of other contractual commitments by
maturity (in thousands):
Payments Due by Period
Less than ----------------------
Cash Contractual Obligations Total 1 Year 1 - 3 Years 3-5 Years After 5 Years
- ---------------------------- ----- -------- ----------- ---------- -------------
Long-Term Debt $ 986 $ 167 $ 333 $ 333 $ 153
Capital Lease Obligations 53 6 16 19 12
Employment Agreements 494 494 - - -
Operating Leases 19,440 3,871 7,167 4,759 3,643
------- -------- --------- ---------- ---------
Gross Cash Contractual Obligations 20,973 4,538 7,516 5,111 3,808
Sublease Income 11,154 2,075 3,885 2,682 2,512
------- -------- --------- ---------- ---------
Net Cash Contractual Obligations $ 9,819 $ 2,463 $ 3,631 $ 2,429 $ 1,296
======= ======== ========= ========== =========
Total Amount of Commitment Expiration Per Period
Amounts Less than
Other Contractual Commitments Committed 1 Year 1 - 3 Years 3-5 Years After 5 Years
- ----------------------------- --------- -------- ----------- ---------- -------------
Loan Guarantees $ 566 $ 213 $ 347 $ 6 -
--------- ------ --------- ---------- -----------
Total Commercial Commitments $ 566 $ 213 $ 347 $ 6 -
========= ====== ========= ========== ===========
Management believes that available cash, marketable investment securities,
and internally generated funds should provide sufficient capital to finance our
operations for at least the next twelve months. We currently maintain a
$5,000,000 uncommitted bank line of credit and have never borrowed any funds
under any lines of credit.
Seasonality
Our business is affected by seasonal fluctuations, the effects of weather
and economic conditions. Historically, restaurant sales from Company-owned
restaurants, franchised restaurants from which royalties are earned and 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. Notwithstanding
the continued growth of our Branded Product Program and the changing composition
of our restaurants, we believe that future revenues and profits will continue to
be highest during our first two fiscal quarters with the fourth fiscal quarter
representing the slowest period.
Inflationary Impact
During the past three years, our commodity costs for beef have fluctuated
significantly while other costs have remained relatively stable. As such, we
believe that general 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 beef products reached their highest levels in
many years. Throughout fiscal 2003, these costs were in line with historical
norms. During fiscal 2004, the price of our beef products has risen dramatically
over historical norms and particularly as compared to fiscal 2003. We also
experienced increased costs for utilities and insurance during the fiscal 2002,
2003 and 2004 periods. In 2002 various Federal and New York State legislators
proposed changes to the minimum wage requirements, however, none of the
proposals were enacted. Although we only operate seven Company-owned
restaurants, we believe that significant 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.
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 28, 2004, Nathans' cash and cash equivalents aggregated $3,369,000.
Earnings on these cash and cash equivalents would increase or decrease by
approximately $8,400 per annum for each .25% change in interest rates.
31
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 28, 2004, the market
value of Nathans' marketable investment securities aggregated $7,477,000.
Interest income on these marketable investment securities would increase or
decrease by approximately $18,700 per annum for each .25% change in interest
rates. The following chart presents the hypothetical changes in the fair value
of the marketable investment securities held at March 28, 2004 that are
sensitive to interest rate fluctuations (in thousands):
Valuation of securities Valuation of securities
Given an interest rate Given an interest rate
Decrease of X Basis points Fair Increase of X Basis points
-------------------------- ---------------------------
(150BPS) (100BPS) (50BPS) Value +50BPS +100BPS +150BPS
-------------------------------------------------------------
Municipal notes and bonds $7,845 $7,716 $7,596 $7,477 $7,361 $7,248 $7,138
====== ====== ====== ====== ====== ====== ======
BORROWINGS
The interest rate on our borrowings are generally determined based upon
the prime rate and may be subject to market fluctuation as the prime rate
changes as determined within each specific agreement. We do not anticipate
entering into interest rate swaps or other financial instruments to hedge our
borrowings. At March 28, 2004, total outstanding debt, including capital leases,
aggregated $1,039,000 of which $986,000 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 $5,000,000 credit
line which bears interest at the prime rate plus 1.00% (5.00% at May 7, 2004).
Nathan's has never borrowed any funds under its line of credit. Accordingly,
Nathan's does not believe that fluctuations in interest rates would have a
material impact on its financial results.
COMMODITY COSTS
The cost of commodities are subject to market fluctuation. We have not
attempted to hedge against fluctuations in the prices of the commodities we
purchase using future, forward, option or other instruments. As a result, our
future commodities purchases are subject to changes in the prices of such
commodities. Generally, we attempt to pass through permanent increases in our
commodity prices to our customers, thereby reducing the impact of long-term
increases on our financial results. During the fifty-two week period ended March
28, 2004, the price of our beef products has risen dramatically over historical
norms and particularly as compared to last year. This increase has been caused
by reductions in the supply of beef primarily due to: 1) the prohibition since
May 2003 on importing of Canadian beef livestock into the U.S. 2) the decrease
in imports of Australian beef due to local drought conditions and 3) the export
of U.S. beef had increased through December 23, 2003 when the first case of
bovine spongiform encephalopathy, otherwise known as BSE in the United States
was reported. Nathan's has not experienced a softening in the price of beef
since December 23, 2003. Although the export of beef by the United States was
significantly reduced as a result of this finding, Nathan's had not realized a
reduction in the cost of beef during the fourth quarter of fiscal 2004. As a
result, Nathan's cost of its hot dogs was approximately 14.6% higher during the
fifty-two weeks ended March 28, 2004 than the fifty-two weeks ended March 30,
2003. Nathan's had already increased menu prices in its company-operated
restaurants by approximately 2.0% and had increased prices within its Branded
Product Program to offset some of the margin pressure. A short term increase or
decrease of 10% in the cost of our food and paper products for the entire
fifty-two weeks ended March 28, 2004 would have increased or decreased cost of
sales by approximately $983,000.
On December 23, 2003, the United States Department of Agriculture ("USDA")
announced that the first case of bovine spongiform encephalopathy, otherwise
known as BSE, or mad-cow disease was discovered in the United States in a single
cow in the State of Washington. Nathan's has obtained written assurances from
its beef processors that Nathan's products have not come from the meat
processing plants associated with the production of products having to do with
this incident. To date, Nathan's demand for its products continues to be strong.
Nathan's has not experienced any material financial impact in connection with
this incident.
FOREIGN CURRENCIES
Foreign franchisees generally conduct business with us and make payments
in United States dollars, reducing the risks
32
inherent with changes in the values of foreign currencies. As a result, we have
not purchased future contracts, options or other instruments to hedge against
changes in values of foreign currencies and we do not believe fluctuations in
the value of foreign currencies would have a material impact on our financial
results.
FORWARD LOOKING STATEMENT
Certain statements contained in this report are forward-looking
statements. Forward-looking statements represent our current judgment regarding
future events. Although we would not make forward-looking statements unless we
believe we have a reasonable basis for doing so, we cannot guarantee their
accuracy and actual results may differ materially from those we anticipated due
to a number of uncertainties, many of which we are not aware. These risks and
uncertainties, many of which are not within our control, include, but are not
limited to: the future effects of the first case of bovine spongiform
encephalopathy, BSE, identified in the United States on December 23, 2003;
economic, weather, legislative and business conditions; the collectibility of
receivables; the availability of suitable restaurant sites on reasonable rental
terms; changes in consumer tastes; the ability to continue to attract
franchisees; the ability to purchase our primary food and paper products at
reasonable prices; no material increases in the minimum wage; and our ability to
attract competent restaurant and managerial personnel. We generally identify
forward-looking statements with the words "believe," "intend," "plan," "expect,"
"anticipate," "estimate," "will," "should" and similar expressions.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In 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. Nathan's has evaluated the effect of adoption on its financial position
and results of operations, and has not had a material impact on the financial
position and results of operations of Nathan's.
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. SFAS
No. 145 has not had a material impact on the financial position and results of
operations of Nathan's.
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. The
adoption of SFAS No. 149 has not had a material impact on the financial position
and results of operations of Nathan's.
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. The adoption of SFAS No. 150 has not had a material impact on the
financial position and results of operations of Nathan's.
In December 2003, the FASB issued a revision to FASB Interpretation No.
46, " Consolidation of Variable Interest Entities, an Interpretation of ARB
No.51" ("FIN No. 46(R)"). FIN No. 46(R) clarifies the application of ARB No. 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional
33
subordinated financial support. FIN No. 46(R) requires the consolidation of
these entities, known as variable interest entities, by the primary beneficiary
of the entity. The primary beneficiary is the entity , if any, that will absorb
a majority of the entity's expected losses, receive a majority of the entity's
expected residual returns, or both.
The revisions of FIN No. 46(R) (a) clarified some requirements of the
original FIN No. 46, which had been issued in January 2003, (b) simplified some
of the implementation problems, and (c) added new scope exceptions. FIN No. 46R
delayed the effective date of the FIN No. 46(R) for public companies, to the end
of the first reporting period ending after March 15, 2004, except that all
public companies must at a minimum apply the unmodified provisions of FIN No.
46(R) to entities that were previously considered "special-purpose entities" in
practice and under the FASB literature prior to the issuance of FIN No. 46(R) by
the end of the first reporting period ending after December 15, 2003.
FIN No. 46(R) added several new scope exceptions, including one which
states that companies are not required to apply the provisions to an entity that
meets the criteria to be considered a "business" as defined in FIN No. 46(R)
unless one or more of four named conditions exist.
The Company has no equity ownership interests in its franchisees, and has
not consolidated any of these entities in the Company's financial statements.
The Company will continue to monitor developments regarding the Interpretation
as they occur. The Company adopted the provisions of FIN No. 46(R) in its fourth
fiscal quarter of 2004.
The Company does not provide more than half of the equity subordinated
debt or other subordinated financial support to any franchise entity. The
Company has further concluded that the franchise entities were not designed such
that substantially all of their activities either involve or are conducted on
behalf of Nathan's. As such, the Company has not consolidated any franchised
entity in the financial statements. If, at some future date, Nathan's does
provide more than half of the subordinated financial support to a franchise
entity, consolidation would not be automatic. The franchise entity would then be
subject to further testing under the guidelines of FIN No.46(R).
In December 2003, the SEC issued Staff Accounting Bulletin No. 104,
"Revenue Recognition" ("SAB No. 104"), which codifies, revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition in Financial Statements,"
in order to make this interpretative guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and regulations.
The changes noted in SAB No. 104 did not have a material impact on the financial
position and results of operations of Nathan's.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data is submitted
as a separate section of this report beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer,
Chief Operating Officer and Chief Financial Officer, conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures, as required by Exchange Act Rule 13a-15. Based on that evaluation,
the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer
have concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified by the SEC's rules and forms.
There were no significant changes in our internal controls over financial
reporting that occurred during the quarter ended March 28, 2004 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
We believe that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
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. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
We were billed by Grant Thornton LLP the aggregate amount of approximately
$149,000 in respect of fiscal 2004 and $146,000 in respect to fiscal 2003 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
$19,000 in respect of fiscal 2004 and $20,000 in respect to fiscal 2003 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 2004 and 2003.
ALL OTHER FEES
Grant Thornton LLP did not render any other services, other than as set
forth above, for fiscal 2004 and 2003. Consequently, aggregate fees billed for
all other services rendered by Grant Thornton LLP for fiscal 2004 and 2003 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.
35
PART IV
ITEM 15. 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 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.)
4.4 Specimen Rights Certificate (Incorporated by reference to Exhibit 2 to
Form 8-A/A dated December 10, 1999.)
10.1 Employment Agreement with Wayne Norbitz, dated December 28, 1992.
(Incorporated by reference to Exhibit 10.1 to Registration Statement on
Form S-1 No. 33-56976.)
10.2 Leases for premises at Coney Island, New York, as follows:
(Incorporated by reference Exhibit 10.3 to Registration Statement on
Form S-1 No. 33-56976.)
a) Lease, dated November 22, 1967, between Nathan's Realty Associates and
the Company.
b) Lease, dated November 22, 1967, between Ida's Realty Associates and the
Company.
c) Lease, dated November 17, 1967, between Ida's Realty Associates and the
Company.
10.3 Leases for the premises at Yonkers, New York, as follows: (Incorporated
by reference to Exhibit 10.4 to Registration Statement on Form S-1 No.
33-56976.)
a) Lease Modification of Land and Building Lease between the Yonkers Corp.
and the Company, dated November 19, 1980;
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.)
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.)
36
10.10 Amendment dated November 8, 1993, to the Employment Agreement, dated
December 28, 1992, with Wayne Norbitz. ( Incorporated by reference to
Exhibit 10.19 to the Annual Report filed on Form 10-K for the fiscal
year ended March 27, 1994.)
10.11 License Agreement dated as of February 28, 1994, among Nathan's Famous
Systems, Inc. and SMG, Inc., including
amendments and waivers thereto. ( Incorporated by reference to Exhibit
10.21 to the Annual Report filed on Form 10-K for the fiscal year ended
March 27, 1994.)
10.12 Outside Director Stock Option Plan. (Incorporated by reference to
Exhibit 10.22 to Registration Statement on Form S-8 No. 33-89442.)
10.13 Modification Agreement to the Employment Agreement with Wayne Norbitz,
dated December 28, 1992. (Incorporated by reference to Exhibit 10.1 to
the Quarterly Report filed on Form 10-Q for the fiscal quarter ended
December 29, 1996.)
10.14 Amendment to License Agreement dated as of February 28, 1994, among
Nathan's Famous Systems, Inc. and SMG, Inc. including waivers and
amendments thereto. (Incorporated by reference to Exhibit 10.2 to the
Quarterly Report filed on Form 10-Q for the fiscal quarter ended
December 29, 1996.)
10.15 1998 Stock Option Plan. (Incorporated by reference to Exhibit 10.26 to
the Annual Report filed on Form 10-K for the fiscal year ended March
29, 1998.)
10.16 North Fork Bank Promissory Note.(Incorporated by reference to Exhibit
10.21 to the Annual Report filed on Form 10-K for the fiscal year ended
March 28, 1999.)
10.17 Amended and Restated Employment Agreement with Donald L. Perlyn
effective September 30, 1999. (Incorporated by reference to Exhibit
10.20 to the Annual Report filed on Form 10-K for the fiscal year ended
March 26, 2000.)
10.18 Third Amended and Restated Rights Agreement dated as of December 10,
1999 between Nathan's Famous, Inc. and American Stock Transfer and
Trust Company (Incorporated by reference to Exhibit 2 to Form 8-A/A
dated December 10, 1999.)
10.19 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.)
10.20 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.)
10.21 2001 Stock Option Plan. (Incorporated by reference to Exhibit 4 to
Registration Statement on Form S-8 No. 333-82760.)
10.22 2002 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-8 No. 333-101355.)
10.23 Master Distributor Agreement with U.S. Foodservice, Inc. dated February
5, 2003. (Incorporated by reference to Exhibit 10.24 to the Annual
Report filed on Form 10-K for the fiscal year ended March 30, 2003.)
14. Code of Ethics
21 List of Subsidiaries of the Registrant.
23 Consent of Grant Thornton LLP dated May 26, 2004.
31.1 Certification by Howard M. Lorber, Chief Executive Officer, pursuant to
Rule 13a - 14(a).
31.2 Certification by Wayne Norbitz, Chief Operating Officer, pursuant to
Rule 13a - 14(a).
31.3 Certification by Ronald G. DeVos, Chief Financial Officer, pursuant to
Rule 13a - 14(a).
32.1 Certification by Howard M. Lorber, Chief Executive Officer of Nathan's
Famous, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Ronald G. DeVos, Chief Financial Officer of Nathan's
Famous, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
None
37
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 24th day of June,
2004. 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 24th day of June, 2004.
/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
- ------------------------
Charles Raich Director
38
Nathan's Famous, Inc. and Subsidiaries
TABLE OF CONTENTS
Page
----------
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-51
Schedule II - Valuation and Qualifying Accounts F-52
Consent of Independent Registered Public Accounting Firm
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of Nathan's Famous,
Inc. (a Delaware Corporation) and subsidiaries (the "Company") as of March 28,
2004 and March 30, 2003, and the related consolidated statements of operations,
stockholders' equity and cash flows for the fifty-two weeks ended March 28, 2004
and 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.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 consolidated financial position of
Nathan's Famous, Inc. and subsidiaries as of March 28, 2004 and March 30, 2003,
and the consolidated results of their operations and their consolidated cash
flows for the fifty-two weeks ended March 28, 2004 and March 30, 2003 and the
fifty-three weeks ended March 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
We have also audited Schedule II for the fifty-two weeks ended March 28, 2004
and 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.
GRANT THORNTON LLP
Melville, New York
May 26, 2004
F-2
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS MARCH 28, 2004 March 30, 2003
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 3,449 $ 1,415
Marketable securities 7,477 4,623
Notes and accounts receivable, net 2,352 2,607
Inventories 743 389
Assets available for sale 507 799
Prepaid expenses and other current assets 463 642
Deferred income taxes 1,326 2,079
-------------- --------------
Total current assets 16,317 12,554
Notes receivable, net 313 740
Property and equipment, net 5,094 6,263
Goodwill 95 95
Intangible assets, net 3,063 3,319
Deferred income taxes 2,452 2,647
Other assets, net 250 268
-------------- --------------
$ 27,584 $ 25,886
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of notes payable and capital lease obligations $ 173 $ 173
Accounts payable 1,950 1,377
Accrued expenses and other current liabilities 4,836 4,942
Deferred franchise fees 173 127
-------------- --------------
Total current liabilities 7,132 6,619
Notes payable and capital lease obligations, less current maturities 866 1,053
Other liabilities 2,234 1,831
-------------- --------------
Total liabilities 10,232 9,503
-------------- --------------
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 5,213,901 and 5,423,964
shares outstanding at March 28, 2004 and March 30, 2003, respectively 71 71
Additional paid-in capital 40,746 40,746
Accumulated deficit (16,611) (18,505)
Accumulated other comprehensive income 67 64
-------------- --------------
24,273 22,376
Treasury stock, at cost, 1,851,301 and 1,641,238 shares at March 28, 2004
and March 30, 2003, respectively (6,921) (5,993)
-------------- --------------
Total stockholders' equity 17,352 16,383
-------------- --------------
$ 27,584 $ 25,886
============== ==============
The accompanying notes are an integral part of these statements.
F-3
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
FIFTY-TWO Fifty-two Fifty-three
WEEKS ENDED weeks ended weeks ended
MARCH 28, 2004 March 30, 2003 March 31, 2002
-------------- -------------- --------------
REVENUES
Sales $ 20,765 $ 24,762 $ 27,425
Franchise fees and royalties 6,286 5,977 7,944
License royalties 2,970 2,585 2,038
Interest income 199 292 500
Investment and other income 459 156 1,568
-------------- -------------- --------------
Total revenues 30,679 33,772 39,475
-------------- -------------- --------------
COSTS AND EXPENSES
Cost of sales 14,775 16,592 18,269
Restaurant operating expenses 3,806 5,621 6,559
Depreciation and amortization 971 1,314 1,395
Amortization of intangible assets 261 278 888
General and administrative expenses 7,519 8,600 9,292
Interest expense 75 132 256
Impairment charge on long-lived assets 25 1,367 392
Impairment charge on notes receivable 208 1,425 185
Other expense (income), net 45 232 (210)
-------------- -------------- --------------
Total costs and expenses 27,685 35,561 37,026
-------------- -------------- --------------
Income (loss) from continuing operations before provision (benefit)
for income taxes 2,994 (1,789) 2,449
Provision (benefit) for income taxes 1,100 (283) 1,057
-------------- -------------- --------------
Income (loss) from continuing operations 1,894 (1,506) 1,392
Loss from discontinued operations, net of income tax
benefit of ($82) and ($95) in 2003 and 2002, respectively
- (124) (143)
-------------- -------------- --------------
Income (loss) from operations before cumulative effect of
a change in accounting principle 1,894 (1,630) 1,249
Cumulative effect of change in accounting principle, net of tax
benefit of ($854) in 2003 - (12,338) -
-------------- -------------- --------------
Net income (loss) $ 1,894 $ (13,968) $ 1,249
============== ============== ==============
PER SHARE INFORMATION
Basic income (loss) per share:
Income (loss) from continuing operations $ .36 $ (.25) $ .20
Loss from discontinued operations - (.03) (.02)
Cumulative effect of change in accounting principle - (2.06) -
-------------- -------------- --------------
Net income (loss) $ .36 $ (2.34) $ .18
============== ============== ==============
Diluted income (loss) per share:
Income (loss) from continuing operations $ .33 $ (.25) $.20
Loss from discontinued operations - (.03) (.02)
Cumulative effect of change in accounting principle - (2.06) -
-------------- -------------- --------------
Net income (loss) $ .33 $ (2.34) $ .18
============== ============== ==============
Weighted average shares used in computing net income (loss)
per share
Basic 5,306,000 5,976,000 7,048,000
============== ============== ==============
Diluted 5,678,000 5,976,000 7,083,000
============== ============== ==============
The accompanying notes are an integral part of these statements.
F-4
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Fifty-two weeks ended March 28, 2004 and March 30, 2003 and
fifty-three weeks ended March 31, 2002
(in thousands, except share amounts)
Accumulated
Additional other
Common Common paid-in Accumulated comprehensive
shares stock capital deficit 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 gains on marketable securities, net of
deferred income taxes of $50 - - - - 70
Reclassification adjustment for net gains realized in
net loss, net of deferred income taxes of $4 - - - - (6)
Net loss - - - (13,968) -
Comprehensive loss - - - - -
--------- --------- ---------- ----------- -------------
Balance, March 30, 2003 7,065,202 71 40,746 (18,505) 64
Repurchase of treasury stock - - - - -
Unrealized gains on marketable securities, net of
deferred income taxes of $7 - - - - 10
Reclassification adjustment for net gains realized in
net income, net of deferred
income taxes of $5 - - - - (7)
Net income - - - 1,894 -
Comprehensive income - - - - -
--------- --------- ---------- ----------- -------------
Balance, March 28, 2004 7,065,202 $ 71 $ 40,746 $ (16,611) $ 67
========= ========= ========== =========== =============
Total
Treasury stock, at cost stockholders' Comprehensive
Shares Amount Equity income (loss)
--------- ----------- ------------ -------------
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 gains on marketable securities, net of
deferred income taxes of $50 - - 70 $ 70
Reclassification adjustment for net gains realized in
net loss, net of deferred income taxes of $4 - - (6) (6)
Net loss - - (13,968) (13,968)
-------------
Comprehensive loss - - - $ (13,904)
--------- ----------- ------------ =============
Balance, March 30, 2003 1,641,238 (5,993) 16,383
Repurchase of treasury stock 210,063 (928) (928)
Unrealized gains on marketable securities, net of
deferred income taxes of $7 - - 10 $ 10
Reclassification adjustment for net gains realized in
net income, net of deferred
income taxes of $5 - - (7) (7)
Net income - - 1,894 1,894
-------------
Comprehensive income - - - $ 1,897
--------- ----------- ------------ =============
Balance, March 28, 2004 1,851,301 $ (6,921) $ 17,352
========= =========== ============
The accompanying notes are an integral part of this statement.
F-5
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FIFTY-TWO Fifty-two Fifty-three
WEEKS ENDED weeks ended weeks ended
MARCH 28, 2004 March 30, 2003 March 31, 2002
-------------- -------------- --------------
Cash flows from operating activities:
Net income (loss) $ 1,894 $ (13,968) $ 1,249
Adjustments to reconcile net income (loss) 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 971 1,907 1,661
Amortization of intangible assets 261 278 888
Amortization of bond premium 127 85 -
Gain on disposal of fixed assets (206) (39) (1,226)
Gain on sale of available for sale securities (12) (10) -
Impairment of long-lived assets 25 1,367 685
Impairment of notes receivable 208 1,425 185
(Recovery of) provision for doubtful accounts (17) 82 267
Deferred income taxes 945 (585) 509
Changes in operating assets and liabilities:
Marketable securities and investment in limited partnership - 981 (4,171)
Notes and accounts receivable 294 2 (26)
Inventories (354) 203 (69)
Prepaid expenses and other current assets 179 627 (295)
Other assets 18 32 104
Accounts payable, accrued expenses and other current liabilities 467 (1,647) (2,538)
Deferred franchise fees 46 (205) (324)
Other liabilities 430 (577) 20
-------------- -------------- --------------
Net cash provided by (used in) operating activities 5,276 2,296 (3,081)
-------------- -------------- --------------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 2,497 6,088 -
Purchase of available for sale securities (5,461) (2,884) -
Purchases of property and equipment (449) (562) (2,082)
Payments received on notes receivable 797 273 812
Proceeds from sales of property and equipment 489 781 3,348
-------------- -------------- --------------
Net cash (used in) provided by investing activities (2,127) 3,696 2,078
-------------- -------------- --------------
Cash flows from financing activities:
Principal repayments of notes payable and capitalized lease
obligations (187) (553) (1,353)
Repurchase of treasury stock (928) (5,858) (135)
-------------- -------------- --------------
Net cash used in financing activities (1,115) (6,411) (1,488)
-------------- -------------- --------------
Net change in cash and cash equivalents 2,034 (419) (2,491)
Cash and cash equivalents, beginning of year 1,415 1,834 4,325
-------------- -------------- --------------
Cash and cash equivalents, end of year $ 3,449 $ 1,415 $ 1,834
============== ============== ==============
Cash paid during the year for:
Interest $ 74 $ 138 $ 264
============== ============== ==============
Income taxes $ 253 $ 57 $ 149
============== ============== ==============
Noncash financing activities:
Loans to franchisees in connection with sale of restaurants $ 600 $ 44 $ 416
============== ============== ==============
The accompanying notes are an integral part of these statements.
F-6
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE A - DESCRIPTION AND ORGANIZATION OF BUSINESS
Nathan's Famous, Inc. and subsidiaries (collectively the "Company" or
"Nathan's") has historically operated or franchised a chain of retail fast
food restaurants featuring the Nathan's famous brand of all beef
frankfurters, fresh crinkle-cut french fried potatoes and a variety of
other menu offerings. Since fiscal 1998, the Company has supplemented the
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 28, 2004, the Company's restaurant system, consisting of Nathan's
Famous, Kenny Rogers Roasters and Miami Subs restaurants, included 7
company-owned units concentrated in the New York metropolitan area, 338
franchised or licensed units, including 6 units operating pursuant to
management agreements and approximately 3,300 branded product points of
sale under the Nathan's Branded Product Program, located in 44 states, the
District of Columbia, and 12 foreign countries.
F-7
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
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 years ended March 28, 2004 and March 30, 2003 are on
the basis of 52-week reporting periods. 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.
3. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates made by
management in preparing the consolidated financial statements include
revenue recognition, the allowance for doubtful accounts, the allowance
for impaired notes receivable, the self-insurance reserve and impairment
charges on goodwill and long-lived assets.
F-8
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
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 of
Nathan's in 1987 amounted to $83 at March 28, 2004 and March 30, 2003,
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 ("SFAS") No. 114 ("SFAS No. 114") "Accounting by Creditors for
Impairment of a Loan," as amended. Pursuant to SFAS No. 114, a loan is
impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When evaluating a note for
impairment, the factors considered include: (a) indications that the
borrower is experiencing business problems such as operating losses,
marginal working capital, inadequate cash flow or business interruptions,
(b) loans secured by collateral that is not readily marketable, or (c)
that are susceptible to deterioration in realizable value. When
determining impairment, management's assessment includes its intention to
extend certain leases beyond the minimum lease term and the debtor's
ability to meet its obligation over that extended term. In certain cases
where Nathan's has determined that a loan has been impaired, it generally
does not expect to extend or renew the underlying leases. Based on the
Company's analysis, it has determined that there are notes that have
incurred such an impairment. Following are summaries of impaired notes
receivable and the allowance for impaired notes receivable:
MARCH 28, March 30,
2004 2003
--------- ---------
Total recorded investment in impaired notes receivable $ 2,248 $ 2,598
Allowance for impaired notes receivable (2,051) (2,065)
--------- ---------
Recorded investment in impaired notes receivable, net $ 197 $ 533
========= =========
F-9
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE B (CONTINUED)
MARCH 28, March 30,
2004 2003
-------- --------
Allowance for impaired notes receivable at beginning of the fiscal year $ 2,065 $ 640
Impairment charges on notes receivable 208 1,425
Impaired notes written off (222) -
-------- --------
Allowance for impaired notes receivable at end of the fiscal year $ 2,051 $ 2,065
======== ========
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 28, March 30, March 31,
2004 2003 2002
--------- -------- -------
Interest income recorded on impaired notes receivable $ 19 $ 96 $ 47
Average recorded investment in impaired notes receivable $ 2,341 $ 1,624 $ 936
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-10
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE B (CONTINUED)
7. Marketable Securities
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 28,
2004 and March 30, 2003, all marketable securities held by the Company
have been classified as available-for-sale 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, 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.
8. Sales of Restaurants
The Company observes the provisions of SFAS No. 66, "Accounting for Sales
of Real Estate," ("SFAS No. 66") which establishes accounting standards
for recognizing profit or loss on sales of real estate. SFAS No. 66
provides for profit recognition by the full accrual method, provided (a)
the profit is determinable, that is, the collectibility of the sales price
is reasonably assured or the amount that will not be collectible can be
estimated, and (b) the earnings process is virtually complete, that is,
the seller is not obliged to perform significant activities after the sale
to earn the profit. Unless both conditions exist, recognition of all or
part of the profit shall be postponed and other methods of profit
recognition shall be followed. In accordance with SFAS No. 66, the Company
recognizes profit on sales of restaurants under the full accrual method,
the installment method and the deposit method, depending on the specific
terms of each sale. The Company continues to 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 28, 2004 and March 30, 2003, the Company had deposits on the
sales of restaurants of $0 and $161, respectively, included in accrued
expenses and other current liabilities in the accompanying consolidated
balance sheets.
F-11
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
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 of Nathan's in 1987; (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 requires that goodwill and
other intangibles be reported separately; eliminates the requirement to
amortize goodwill and indefinite-lived intangible assets; addresses the
amortization of intangible assets with a definite life; and addresses
impairment testing and recognition of goodwill and intangible assets. SFAS
No. 142 changes the method of accounting for the recoverability of
goodwill for the Company, such that it is evaluated at the brand level
based upon the estimated fair value of the brand. Fair value can be
determined based on discounted cash flows, on comparable sales or
valuations of other restaurant brands. The impairment review involves a
two-step process as follows:
Step 1: Compare the fair value for each reporting unit to its carrying
value, including goodwill. For each reporting unit where the carrying
value, including goodwill, exceeds the reporting unit's fair value,
move on to step 2. If a reporting unit's fair value exceeds the
carrying value, no further work is performed and no impairment charge
is necessary.
F-12
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
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 in April 2002, including an assessment of a valuation of
the Nathan's, Miami Subs and Roasters reporting units by an independent
valuation consultant, and has recorded an impairment charge requiring the
Company to write-off substantially all of the goodwill related to the
acquisitions, trademarks and recipes as a cumulative effect of accounting
change in the first quarter of fiscal 2003. The fair value was determined
through the combination of a present value analysis as well as prices of
comparative businesses. The changes in the net carrying amount of
goodwill, trademarks and recipes recorded in the first quarter of fiscal
2003 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-13
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE B (CONTINUED)
The table below presents amortized and unamortized intangible assets as of
March 28, 2004 and March 30, 2003:
MARCH 28, 2004 March 30, 2003
---------------------------------- -----------------------------------
GROSS NET Gross Net
CARRYING ACCUMULATED CARRYING Carrying Accumulated Carrying
AMOUNT AMORTIZATION AMOUNT Amount Amortization Amount
-------- ------------ -------- -------- ------------ --------
Amortized intangible assets:
Royalty streams $ 4,259 $ (1,269) $ 2,990 $ 4,259 $ (1,008) $ 3,251
Favorable leases 285 (285) - 285 (285) -
Other 6 (1) 5 16 (16) -
-------- ------------ -------- -------- ------------ --------
$ 4,550 $ (1,555) $ 2,995 $ 4,560 $ (1,309) $ 3,251
======== ============ ======== ============
Unamortized intangible assets:
Trademarks, tradenames and recipes 68 68
-------- --------
$ 3,063 $ 3,319
======== ========
Goodwill $ 95 $ 95
======== ========
The following table provides a reconciliation of the reported net income
(loss) and net income (loss) per share for the fiscal years ended March
28, 2004, March 30, 2003 and March 31, 2002, adjusted as though SFAS No.
142 had been effective for all periods:
2004 2003 2002
------ -------- ------
Reported net income (loss) before cumulative effect of
change in accounting principle $1,894 $ (1,630) $1,249
Add back discontinued amortization expense - - 555
------ -------- ------
Adjusted net income (loss) before cumulative effect of
change in accounting principle 1,894 (1,630) 1,804
Cumulative effect of change in accounting principle - (12,338) -
------ -------- ------
Adjusted net income (loss) $1,894 $(13,968) $1,804
====== ======== ======
Reported basic net income (loss) per common share before
cumulative effect of change in accounting principle $ .36 $ (.28) $ .18
Effect of discontinued amortization expense - - .08
------ -------- ------
Adjusted basic net income (loss) per common share before
cumulative effect of change in accounting principle .36 (.28) .26
Cumulative effect of change in accounting principle - (2.06) -
------ -------- ------
Adjusted basic net income (loss) per common share $ .36 $ (2.34) $ .26
====== ======== ======
Reported diluted net income (loss) per common share before
cumulative effect of change in accounting principle $ .33 $ (.28) $ .18
Effect of discontinued amortization expense - - .07
------ -------- ------
Adjusted diluted net income (loss) per common share before
cumulative effect of change in accounting principle .33 (.28) .25
Cumulative effect of change in accounting principle - (2.06) -
------ -------- ------
Adjusted diluted net income (loss) per common share $ .33 $ (2.34) $ .25
====== ======== ======
F-14
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE B (CONTINUED)
As of March 28, 2004, and March 30, 2003, the Company has reevaluated the
impact of SFAS No. 142 on its goodwill and intangible assets, and
determined no additional impairment charges were deemed necessary.
Total amortization expense for intangible assets was $261, $278 and $888
for the fiscal years ended March 28, 2004, March 30, 2003 and March 31,
2002. 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 were projected to incur negative cash flows
in fiscal 2004, was recorded as a component of impairment charge on
long-lived assets. (See Note B-11.)
11. Long-lived Assets
Long-lived assets and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate the carrying value
may not be recoverable. Impairment is measured by comparing the carrying
value of the long-lived assets to the estimated undiscounted future cash
flows expected to result from use of the assets and their ultimate
disposition. In instances where impairment is determined to exist, the
Company writes down the asset to its fair value based on the present value
of estimated future cash flows.
Impairment losses are recorded on long-lived assets on a
restaurant-by-restaurant basis whenever impairment factors are determined
to be present. The Company considers a history of restaurant operating
losses to be its primary indicator of potential impairment for individual
restaurant locations. The Company has identified one, seven and two units
that have been impaired, and recorded impairment charges of $25, $1,367,
(inclusive of $239 related to favorable leases discussed in Note B-10),
and $685 in the statements of operations for the fiscal years ended March
28, 2004, March 30, 2003 and March 31, 2002, 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 28,
2004 and March 31, 2002.
F-15
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
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 28, 2004 and March 30, 2003 were $346 and
$596, respectively and are included in "Accrued expenses and other current
liabilities" in the accompanying consolidated balance sheets. During the
fiscal year ended March 28, 2004, approximately $268 of previously
recorded insurance accruals for items that have been concluded without
further payment were reversed. During the fiscal year ended March 30,
2003, the self insurance accrual was reduced by approximately $829, due
principally to the satisfaction of a claim against the Company totaling
$659 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,
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 28, 2004, 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-16
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE B (CONTINUED)
The following table illustrates the effect on net income (loss) and net
income (loss) per share had the Company applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation.
Fiscal year ended
MARCH 28, March 30, March 31,
2004 2003 2002
-------- -------- --------
Net income (loss), as reported $ 1,894 $(13,968) $ 1,249
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method for all
awards (170) (165) (410)
-------- -------- --------
Pro forma net income (loss) $ 1,724 $(14,133) $ 839
======== ======== ========
Net income (loss) per share
Basic - as reported $ .36 $ (2.34) $ .18
======== ======== ========
Diluted - as reported $ .33 $ (2.34) $ .18
======== ======== ========
Basic - pro forma $ .32 $ (2.36) $ .12
======== ======== ========
Diluted - pro forma $ .30 $ (2.36) $ .12
======== ======== ========
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-17
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE B (CONTINUED)
The weighted-average option fair values and the assumptions used to
estimate these values are as follows:
2004 2003 2002
------ ------ ------
Weighted-average option fair values $ 1.60 $ 2.19 $ 1.30
Expected life (years) 7.0 10.0 6.6
Interest rate 3.85% 5.30% 4.06%
Volatility 30.6% 32.8% 32.3%
Dividend yield 0% 0% 0%
15. Start-up Costs
Preopening and similar costs are expensed as incurred.
16. Revenue Recognition - Company-owned Restaurants
Sales by Company-owned restaurants, which are typically paid in cash by
the customer, are recognized 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-18
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
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
28, 2004 and March 30, 2003, $173 and $127, respectively, of deferred
franchise fees are included in the accompanying consolidated balance
sheets. For the fiscal years ended March 28, 2004, March 30, 2003 and
March 31, 2002, the Company earned franchise fees from new unit openings,
transfers and co-branding of $428, $418 and $693, 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 28, 2004, March 30, 2003 and March 31, 2002:
2004 2003 2002
---- ---- ----
Franchised restaurants operating at the beginning of the period 343 364 386
New franchised restaurants opened during the period 40 24 18
Franchised restaurants closed during the period (45) (45) (40)
---- ---- ----
Franchised restaurants operating at the end of the period 338 343 364
==== ==== ====
F-19
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE B (CONTINUED)
The Company recognizes franchise royalties when they are earned and deemed
collectible. Franchise fees and royalties that are not deemed to be
collectible are not recognized as revenue until paid by the franchisee.
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.
18. Revenue Recognition - Branded Products Operations
The Company recognizes revenue from the Branded Product Program when it is
determined by the manufacturer 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
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 of
"Investment and other income". During the fiscal year ended March 30,
2003, the Company liquidated its investment in trading securities.
F-20
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE B (CONTINUED)
Investment and other income consists of the following:
2004 2003 2002
---- ---- ------
Gain on disposal of fixed assets $ 206 $ 39 $1,226
Realized gains (losses) on marketable securities 12 (242) 7
Unrealized losses of trading securities - - (43)
Loss on subleasing of rental properties (312) (243) (215)
Gain from the early termination of sales agreement - 135 -
Other income 553 467 593
----- ----- ------
$ 459 $ 156 $1,568
===== ===== ======
21. Concentrations of Credit Risk
The Company's accounts receivable consist principally of receivables from
franchisees for royalties and advertising contributions and receivables
from sales under the Branded Product Program. At March 28, 2004 and March
30, 2003, no franchisee or Branded Product Program customer represented
10% or greater of accounts receivable. (See 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%. Net Company-owned store advertising expense
was $241, $608 and $940, for the fiscal years ended March 28, 2004, March
30, 2003 and March 31, 2002, respectively.
F-21
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE B (CONTINUED)
23. Classification of Operating Expenses
Cost of sales consists of the following:
- The cost of products sold in the Company-operated restaurants,
Branded Product Program and other distribution channels.
- The cost of labor and associated costs of in-store restaurant
management and crew.
- The cost of paper products used in Company-operated restaurants.
- Other direct costs, such as fulfillment, commissions, freight and
samples.
Restaurant operating expenses consist of the following:
- Occupancy costs of Company-operated restaurants.
- Utility costs of Company-operated restaurants.
- Repair and maintenance expenses of the Company-operated restaurant
facilities.
- Marketing and advertising expenses done locally and contributions to
advertising funds for Company-operated restaurants.
- Insurance costs directly related to Company-operated restaurants.
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-22
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
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. The Company
has evaluated the effect of the adoption of SFAS No. 143 on its financial
position and results of operations, and it has not had 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. SFAS No. 145 has not
had a material impact on the financial position and results of operations
of the Company.
F-23
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE B (CONTINUED)
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 ("SFAS No. 149"), "Amendment of Statement No. 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. The adoption of SFAS No. 149 has not had a
material impact on the Company's 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. The adoption of SFAS No. 150 has
not had a material impact on the Company's financial position and results
of operations.
In December 2003, the FASB issued a revision to FASB Interpretation No.
46, "Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51" ("FIN No. 46(R)" or the "Interpretation"). FIN No. 46(R) clarifies
the application of ARB No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support. FIN No. 46(R) requires the consolidation
of these entities, known as variable interest entities, by the primary
beneficiary of the entity. The primary beneficiary is the entity, if any,
that will absorb a majority of the entity's expected losses, receive a
majority of the entity's expected residual returns, or both.
F-24
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE B (CONTINUED)
The revisions of FIN No. 46(R) (a) clarified some requirements of the
original FIN No. 46, which had been issued in January 2003, (b) simplified
some of the implementation problems, and (c) added new scope exceptions.
FIN No. 46R delayed the effective date of the FIN No. 46(R) for public
companies, to the end of the first reporting period ending after March 15,
2004, except that all public companies must at a minimum apply the
unmodified provisions of FIN No. 46(R) to entities that were previously
considered "special-purpose entities" in practice and under the FASB
literature prior to the issuance of FIN No. 46(R) by the end of the first
reporting period ending after December 15, 2003.
FIN No. 46(R) added several new scope exceptions, including one which
states that companies are not required to apply the provisions to an
entity that meets the criteria to be considered a "business" as defined in
FIN No. 46(R) unless one or more of four named conditions exist.
The Company has no equity ownership interests in its franchisees, and has
not consolidated any of these entities in the Company's financial
statements. The Company will continue to monitor developments regarding
the Interpretation as they occur. The Company adopted the provisions of
FIN No. 46(R) in its fourth fiscal quarter of 2004.
The Company does not provide more than half of the equity subordinated
debt or other subordinated financial support to any franchise entity. The
Company has further concluded that the franchise entities were not
designed such that substantially all of their activities either involve or
are conducted on behalf of Nathan's. As such, the Company has not
consolidated any franchised entity in the financial statements. If, at
some future date, Nathan's does provide more than half of the subordinated
financial support to a franchise entity, consolidation would not be
automatic. The franchise entity would then be subject to further testing
under the guidelines of FIN No.46(R).
In December 2003, the SEC issued Staff Accounting Bulletin No. 104,
"Revenue Recognition" ("SAB No. 104"), which codifies, revises and
rescinds certain sections of SAB No. 101, "Revenue Recognition in
Financial Statements," in order to make this interpretative guidance
consistent with current authoritative accounting and auditing guidance and
SEC rules and regulations. The changes noted in SAB No. 104 did not have a
material impact on the Company's financial position or 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 28, 2004, March 30, 2003 and March 31, 2002
NOTE C - INCOME (LOSS) PER SHARE
Basic income (loss) per common share is calculated by dividing income (loss)
by the weighted-average number of common shares outstanding and excludes any
dilutive effects of stock options or warrants. Diluted income (loss) per
common share gives effect to all potentially dilutive common shares that were
outstanding during the period. Dilutive common shares used in the computation
of diluted income (loss) per common share result from the assumed exercise of
stock options and warrants, using the treasury stock method.
The following chart provides a reconciliation of information used in
calculating the per share amounts for the fiscal years ended March 28, 2004,
March 30, 2003 and March 31, 2002, respectively:
Income (loss) Income (loss) per share
from continuing operations Shares From continuing operations
---------------------------- ------------------------------------ --------------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
------- -------- ------- --------- ----------- ----------- ----- ------ -----
Basic EPS
Basic calculation $ 1,894 $ (1,506) $ 1,392 5,306,000 5,976,000 7,048,000 $ .36 $ (.25) $ .20
Effect of dilutive
employee stock
options and warrants - - - 372,000 - 35,000 (.03) - -
------- -------- ------- --------- ----------- ----------- ----- ------ -----
Diluted EPS
Diluted calculation $ 1,894 $ (1,506) $ 1,392 5,678,000 $ 5,976,000 $ 7,083,000 $ .33 $ (.25) $ .20
======= ======== ======= ========= =========== =========== ===== ====== =====
Options and warrants to purchase 1,374,981 shares of the Company's common
stock for the year ended March 30, 2003 were excluded from the calculation of
diluted loss per share as the impact of their inclusion would have been
anti-dilutive. Options and warrants to purchase 811,918 and 862,838 shares of
common stock for the years ended March 28, 2004 and March 31, 2002,
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-26
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE D - NOTES AND ACCOUNTS RECEIVABLE, NET
Notes and accounts receivable, net, consist of the following:
MARCH 28, March 30,
2004 2003
--------- ---------
Notes receivable, net of impairment charges $ 573 $ 998
Franchise and license royalties 1,404 1,465
Branded product sales 687 737
Other 329 565
--------- ---------
2,993 3,765
Less: allowance for doubtful accounts 328 418
Less: notes receivable due after one year 313 740
--------- ---------
Notes and accounts receivable, net $ 2,352 $ 2,607
========= =========
Notes receivable at March 28, 2004 and March 30, 2003 principally resulted
from sales of restaurant businesses to Miami Sub's and Nathan's franchisees
and are generally guaranteed by the purchaser and collateralized by the
restaurant businesses and assets sold. The notes are generally due in monthly
installments of principal and interest with a balloon payment at the end of
the term, with interest rates ranging principally between 5% and 10% (See Note
B-5).
Accounts receivable are due within 30 days and are stated at amounts due from
franchisees and licensees, 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 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 are deemed to be
uncollectible.
F-27
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE D (CONTINUED)
Changes in the Company's allowance for doubtful accounts are as follows:
2004 2003 2002
------ ------ ------
Beginning balance $ 418 $ 644 $ 880
Bad debt (recoveries) expense (17) 82 267
Other - - 27
Accounts written off (73) (308) (530)
----- ------ ------
Ending balance $ 328 $ 418 $ 644
===== ====== ======
NOTE E - MARKETABLE SECURITIES
The cost, gross unrealized gains, gross unrealized losses and fair market
value for marketable securities by major security type at March 28, 2004 and
March 30, 2003 are as follows:
Gross Gross Fair
unrealized unrealized market
2004: Cost gains losses value
------- ---------- ---------- -------
Available-for-sale securities:
Bonds $ 7,382 $ 107 $ (12) $ 7,477
======= ========== ========== =======
2003:
Available-for-Sale securities:
Bonds $ 4,513 $ 181 $ (71) $ 4,623
======= ========== ========== =======
F-28
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
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:
2004 2003 2002
------- ------- -------
Available-for-sale securities:
Proceeds $ 2,497 $ 6,088 $ -
Gross realized gains 17 12 -
Gross realized losses (5) (2) -
Trading securities:
Proceeds - $ 767 $ 2,933
Gross realized gains - - 8
Gross realized losses - (252) (1)
Effective April 1, 2002, the Company transferred the Company's bond portfolio
formerly classified as trading securities to available for sale securities due
to a change in the Company's investment strategies. As required by SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities", the
transfer of these securities between categories of investments has been
accounted for at fair value and the unrealized holding loss previously
recorded through April 1, 2002 of $20 from the trading category has not been
reversed. The net unrealized gains for the fiscal years ended March 28, 2004
and March 30, 2003, respectively, of $3 and $64, net of deferred income taxes,
has been included as a component of comprehensive income.
During the fiscal year ended March 30, 2003, the Company liquidated its
investment in limited partnership and received proceeds of $767 and recorded a
loss of $252 which is included as a component of investment and other income
in the accompanying consolidated statement of operations for the fiscal year
ended March 30, 2003.
F-29
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE F - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
MARCH 28, March 30,
2004 2003
--------- ---------
Construction-in-progress $ 103 $ 31
Land 1,281 1,665
Building and improvements 1,854 2,255
Machinery, equipment, furniture and fixtures 5,980 5,297
Leasehold improvements 4,123 4,042
--------- ---------
13,341 13,290
Less: accumulated depreciation and amortization 8,247 7,027
--------- ---------
$ 5,094 $ 6,263
========= =========
Depreciation expense on property and equipment was $971, $1,907 and $1,661
for the fiscal years ended March 28, 2004, March 30, 2003 and March 31,
2002, respectively.
1. Sales of Restaurants
On April 1, 2002, the Company adopted the provisions of SFAS 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". SFAS No. 144 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-30
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE F (CONTINUED)
During the fiscal year ended March 28, 2004, the Company sold three
Company-owned restaurants for total consideration of $1,083 and entered
into two management agreements with franchisees to operate two
Company-owned restaurants. As the Company expects to have a continuing
stream of cash flows for all of these restaurants, the results of
operations for these Company-operated restaurants are included as a
component of continuing operations in the accompanying consolidated
statements of operations. The assets associated with these restaurants
that were sold were included in Assets held for sale in the March 30, 2003
consolidated balance sheet.
During the fiscal year ended March 30, 2003, the Company sold three
Company-owned restaurants for total consideration of $591. In August 2002,
an operating restaurant, which had been classified as held for sale at
March 30, 2003, was sold to a non-franchisee for $75. In October 2002, a
non-operating restaurant, which had been classified as held for sale was
sold to a non-franchisee for $466 and an operating restaurant was sold to
a franchisee in exchange for a $50 note. As these restaurants were either
classified as held-for-sale prior to the adoption of SFAS No. 144 or the
Company has a continuing stream of cash flows in the case of the
franchised restaurant, the results of operations for these
Company-operated restaurants that were sold are included as a component of
continuing operations in the accompanying consolidated statements of
operations for the fiscal years ended March 30, 2003 and March 31, 2002.
In December 2002, the Company abandoned the operations of one
Company-owned restaurant pursuant to a lease termination agreement with
the landlord. The results of operations for this restaurant have been
classified as discontinued operations for all periods presented as the
Company does not have any continuing involvement in the operations of this
restaurant 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 Home Improvement Centers. Pursuant to SFAS No.
144, the results of operations for all seven of these restaurants have
been presented as discontinued operations in the accompanying consolidated
statement of operations for all periods presented, as the Company has no
continuing involvement in the operations of these restaurants or cash
flows relating to any of these restaurants.
During the fiscal year ended March 31, 2002, the Company sold two
company-owned restaurants and a non-restaurant property for total proceeds
of $3,348. The Company recognized a gain of $1,226 in connection with
these sales.
In May 2001, the Company completed the sale of a restaurant property for
approximately $1,500 pursuant to an order of condemnation by the State of
Florida. Concurrent with the sale, the Company satisfied a related note
payable of approximately $793 plus accrued interest. The Company appealed
the value of this property and on November 19, 2001, an Order was entered
by the Circuit
F-31
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE F (CONTINUED)
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 for the year ended March 31, 2002.
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 in the operations of these restaurants or cash
flows relating to any of these restaurants. The Company revised the
estimated useful lives of these assets to reflect the shortened useful
lives and recorded additional depreciation expense of approximately $428
during the fiscal year ended March 30, 2003. Pursuant to the termination
provisions of certain of the lease agreements with Home Depot, the Company
received payments of $184.
Following is a summary of the results of operations for these seven
restaurants for the fiscal years ended March 30, 2003 and March 31, 2002:
2003 2002
------- -------
Revenues $ 3,096 $ 4,099
======= =======
(Loss) income before income taxes (A) $ (166) $ 316
======= =======
(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-32
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE F (CONTINUED)
3. Discontinued Operations
As described in Notes F-1 and F-2 above, the Company has classified the
results of operations of 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 and March 31, 2002:
2003 2002
------- -------
Revenues $ 3,543 $ 4,857
======= =======
Loss before income taxes (A) $ (206) $ (238)
======= =======
(A)- Loss before income taxes for the fiscal year ended March 30,
2003 includes additional depreciation expense of $428, as a
result of revising the estimated useful lives of these
restaurants.
There were no restaurants that were classified as discontinued operations
during fiscal 2004.
NOTE G - ACCRUED EXPENSES, OTHER CURRENT LIABILITIES AND OTHER LIABILITIES
Accrued expenses and other current liabilities consist of the following:
MARCH 28, March 30,
2004 2003
--------- ---------
Payroll and other benefits $ 1,369 $ 1,324
Professional and legal costs 259 349
Self-insured retention 346 596
Rent, occupancy and lease reserve termination costs 757 739
Taxes payable 544 556
Unexpended advertising funds 440 -
Deferred marketing funds 410 396
Other 711 982
--------- ---------
$ 4,836 $ 4,942
========= =========
F-33
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE G (CONTINUED)
Other liabilities consists of the following:
MARCH 28, March 30,
2004 2003
--------- ---------
Deferred income - supplier contracts $ 1,137 $ 1,148
Deferred development fees 453 170
Deferred gain on sales of fixed assets 269 183
Deferred rental liability 264 242
Tenant's security deposits on subleased property 111 88
--------- ----------
$ 2,234 $ 1,831
========= =========
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. The Company has closed or sold all 18 units.
As of March 28, 2004, the Company has recorded charges to operations of
approximately $1,461 ($877 after tax) for lease reserves and termination costs
in connection with these properties.
Changes in the Company's reserve for lease reserve and termination costs are
as follows:
2004 2003 2002
------ ------ ------
Beginning balance $ 529 $ 336 $ 678
Additions 80 209 30
Payments (77) (16) (372)
------ ------ ------
Ending balance $ 532 $ 529 $ 336
====== ====== ======
F-34
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE H - NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
A summary of notes payable and capitalized lease obligations is as follows:
MARCH 28, March 30,
2004 2003
--------- ---------
Note payable to bank at 8.5% through January 2003, 4.5% from February
2003 through January 2006 and adjusting to prime plus 0.25% in
February 2006 and February 2009 and maturing in 2010 $ 986 $ 1,167
Capital lease obligations 53 59
--------- ---------
1,039 1,226
Less current portion (173) (173)
--------- ---------
Long-term portion $ 866 $ 1,053
========= =========
The above notes are secured by the related property and equipment.
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 $261 as of March
28, 2004.
At March 28, 2004, the aggregate annual maturities of notes payable and
capitalized lease obligations are as follows:
2005 $ 173
2006 174
2007 175
2008 176
2009 176
Thereafter 165
-------
$ 1,039
=======
The Company maintains a $5,000 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, 2004, and bears
interest at the prime rate plus 1% (5.00% at March 28, 2004). There were no
borrowings outstanding under this line of credit as of March 28, 2004.
F-35
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE I - OTHER EXPENSE (INCOME), NET
Included in other expense (income), in the accompanying consolidated
statements of operations is (i) $45 of lease termination expense in connection
with two properties for the fiscal year ended March 28, 2004, (ii) $232 in
lease reserves in connection with four vacant properties for the fiscal year
ended March 30, 2003 and (iii) the reversal of a previous litigation accrual
of ($210) for the fiscal year ended March 31, 2002.
During the fiscal year ended March 31, 2002, 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. 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 28, 2004, March 30, 2003 and March 31, 2002:
2004 2003 2002
------- ------ -------
Federal
Current $ 94 $ - $ 985
Deferred 804 (281) (93)
------- ------ -------
898 (281) 892
------- ------ -------
State and local
Current 60 46 181
Deferred 142 (48) (16)
------- ------ -------
202 (2) 165
------- ------ -------
$ 1,100 $ (283) $ 1,507
======= ====== =======
F-36
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE J (CONTINUED)
Total income tax provision (benefit) for the fiscal years ended March 28,
2004, March 30, 2003 and March 31, 2002 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:
2004 2003 2002
------- ------ ------
Computed "expected" tax (benefit) expense $ 1,018 $ (609) $ 833
Nondeductible amortization 37 99 169
Impairment on nondeductible favorable lease intangible assets - 87 -
State and local income taxes, net of Federal income tax benefit 181 140 106
Tax-exempt investment earnings (46) (48) (68)
Tax refunds received (62) - -
Nondeductible meals and entertainment and other (28) 48 17
------- ------ -------
$ 1,100 $ (283) $ 1,057
======= ====== =======
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 28, March 30,
2004 2003
--------- ---------
Deferred tax assets
Accrued expenses $ 668 $ 672
Allowance for doubtful accounts 131 167
Impairment of notes receivable 908 855
Deferred revenue 816 806
Depreciation expense and impairment of long-lived assets 988 1,152
Expenses not deductible until paid 138 238
Amortization of intangibles 308 407
Net operating loss and other carryforwards 751 1,540
Other 65 101
--------- ---------
Total gross deferred tax assets $ 4,773 $ 5,938
--------- ---------
Deferred tax liabilities
Amortization of intangibles - 80
Difference in tax bases of installment gains not yet recognized 196 335
Unrealized gain on marketable securities and income on
investment in limited partnership 46 46
Other 2 -
--------- ---------
Total gross deferred tax liabilities 244 461
--------- ---------
Net deferred tax asset 4,529 5,477
Less valuation allowance (751) (751)
--------- ---------
$ 3,778 $ 4,726
========= =========
F-37
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE J (CONTINUED)
The Company utilized net operating loss carryforwards ("NOLs") of
approximately $1,965 during fiscal 2004. The determination that the net
deferred tax asset of $3,778 and $4,726, at March 28, 2004 and March 30, 2003,
respectively, is realizable is based on anticipated future taxable income.
At March 28, 2004, the Company had a 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 of Miami Subs. The
valuation allowance also includes various state NOL's related to the
post-acquisition losses of Miami Subs not utilized on a consolidated basis and
carried forward on a state basis.
NOTE K - STOCKHOLDER'S EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
1. Stock Option Plans
On December 15, 1992, the Company adopted the 1992 Stock Option Plan (the
"1992 Plan"), which provides for the issuance of incentive stock options
("ISO's") to officers and key employees and nonqualified stock options to
directors, officers and key employees. Up to 525,000 shares of common
stock have been reserved for issuance under the 1992 Plan. The terms of
the options are generally ten years, except for ISO's granted to any
employee, whom prior to the granting of the option, owns stock
representing more than 10% of the voting rights, for which the option term
will be five years. The exercise price for nonqualified stock options
outstanding under the 1992 Plan can be no less than the fair market value,
as defined, of the Company's common stock at the date of grant. For ISO's,
the exercise price can generally be no less than the fair market value of
the Company's common stock at the date of grant, with the exception of any
employee who prior to the granting of the option, owns stock representing
more than 10% of the voting rights, for which the exercise price can be no
less than 110% of fair market value of the Company's common stock at the
date of grant.
F-38
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
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. 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 $18.6120 per share and expire at
various times through September 30, 2009.
F-39
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
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
expired, unexercised in November 2003.
On July 17, 1997, the Company granted to its Chairman and Chief Executive
Officer a warrant to purchase 150,000 shares of the Company's common stock
at an exercise price of $3.50 per share, representing the market price of
the Company's common stock on the date of grant. 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, of
which 18,750 remain outstanding as of March 28, 2004. The exercise price
of these warrants is $16.55 per share and expire in March 2006.
F-40
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE K (CONTINUED)
A summary of the status of the Company's stock option plans and warrants,
excluding the 579,040 warrants issued to former shareholders of Miami
Subs, at March 28, 2004, March 30, 2003 and March 31, 2002 and changes
during the fiscal years then ended is presented in the tables below:
2004 2003 2002
---------------------- --------------------- ----------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average average
EXERCISE Exercise exercise
SHARES PRICE Shares price Shares price
--------- --------- --------- ------- -------- ----------
Options outstanding - beginning
of year 1,754,249 $ 4.01 1,821,146 $ 4.29 1,514,209 $ 3.86
Granted 65,000 4.03 40,000 3.96 307,000 3.20
Expired (40,563) 11.67 (106,897) 7.32 (63) 6.20
--------- --------- ---------
Options outstanding - end of year 1,778,686 3.92 1,754,249 4.01 1,821,146 4.29
========= ========= =========
Options exercisable - end of year 1,572,268 1,502,124 1,367,479
========= ========= =========
Weighted-average fair value of
options granted $ 1.60 $ 2.19 $ 1.30
======== ========= =========
Warrants outstanding - beginning
of year 318,750 $ 4.62 318,750 $ 4.62 368,750 $ 4.53
Expired (150,000) 4.50 - (50,000) 3.94
-------- ------- -------
Warrants outstanding - end of year 168,750 4.73 318,750 4.62 318,750 4.62
------- ------- -------
Warrants exercisable - end of year 168,750 318,750 318,750
======= ======= =======
Weighted-average fair value of
warrants granted $ - $ - $ -
======== ========= =========
At March 28, 2004, 348,500 common shares were reserved for future stock
option grants.
F-41
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE K (CONTINUED)
The following table summarizes information about stock options and
warrants (excluding the 579,040 warrants issued to the Miami Subs
shareholders as part of the merger consideration) at March 28, 2004:
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 3/28/04 contractual life price at 3/28/04 price
- ----------------- ----------- ---------------- --------- ----------- ---------
$ 3.19 to $ 4.00 1,534,558 4.9 $ 3.34 1,353,140 $ 3.37
4.01 to 6.60 382,128 1.7 5.40 357,128 5.47
6.61 to 18.61 30,750 1.3 17.30 30,750 17.30
---------- --- --------- --------- ---------
$ 3.19 to $ 18.61 1,947,436 4.2 $ 3.99 1,741,018 $ 4.04
========== === ========= ========= =========
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-42
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE K (CONTINUED)
At any time prior to the time at which a person or group or affiliated or
associated persons has acquired beneficial ownership of 15% or more of the
outstanding shares of the Common Stock of the Company, the Board of
Directors of the Company may redeem the Rights in whole, but not in part,
at a price of $.001 per Right. In addition, the Rights Agreement, as
amended, permits the Board of Directors, following the acquisition by a
person or group of beneficial ownership of 15% or more of the Common Stock
(but before an acquisition of 50% or more of Common Stock), to exchange
the Rights (other than Rights owned by such 15% person or group), in whole
or in part, for Common Stock, at an exchange ratio of one share of Common
Stock per Right.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the
right to vote or to receive dividends. The Company has reserved 9,940,178
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 28, 2004, 851,301 additional shares
have been repurchased at a cost of approximately $3,251.
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 one dollar 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-43
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
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, 2004, based on the
original terms, and no nonrenewal notice has been given as of May 25,
2004. 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 25, 2004. The agreement includes a provision under which
the officer has the right to terminate the agreement and receive payment
equal to approximately three times his annual compensation upon a change
in control, as defined. In the event a nonrenewal notice is delivered, the
Company must pay the officer an amount equal to the employee's base salary
as then in effect.
F-44
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
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 his annual compensation upon a change
in control, as defined.
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 ended on September 30, 2003 and for compensation at $90
per year. The agreement also provided for certain other benefits. The
agreement additionally included a provision under which the executive had
the right to terminate the agreement and receive payment equal to the
employee's annual compensation upon a change in control, as defined. Upon
termination of the employment agreement, this employee remained an
employee of the Company.
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 28, 2004, March
30, 2003 and March 31, 2002 were $21, $25 and $36, respectively.
7. Other Benefits
The Company provides, on a contributory basis, medical benefits to active
employees. The Company does not provide medical benefits to retirees.
F-45
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
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 28, 2004, the Company has
noncancelable operating lease commitments, net of certain sublease rental
income, as follows:
Lease Sublease Net lease
commitments income commitments
----------- -------- -----------
2005 $ 3,871 $ 2,075 $ 1,796
2006 3,682 1,990 1,692
2007 3,485 1,895 1,590
2008 2,855 1,593 1,262
2009 1,904 1,089 815
Thereafter 3,643 2,512 1,131
----------- -------- -----------
$ 19,440 $ 11,154 $ 8,286
=========== ======== ===========
Aggregate rental expense, net of sublease income, under all current leases
amounted to $1,584, $2,340 and $2,734 for the fiscal years ended March 28,
2004, March 30, 2003 and March 31, 2002, respectively.
The Company also owns or leases sites, which it in turn subleases to
franchisees which expire on various dates through 2016 exclusive of
renewal options. The Company remains liable for all lease costs when
properties are subleased to franchisees.
The Company also subleases locations to third parties. Such sub-leases
provide for minimum annual rental payments by the Company aggregating
approximately $2,081 and expire on various dates through 2010 exclusive of
renewal options.
F-46
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
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 $67, $88 and $129 for the fiscal years ended March 28, 2004,
March 30, 2003 and March 31, 2002, respectively.
2. Guarantees
The Company guarantees certain equipment financing for franchisees with a
third-party lender. The Company's maximum obligation, should the
franchisees default on the required monthly payment to the third-party
lender, for loans funded by the lender, as of March 28, 2004, was
approximately $305. 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 28, 2004, was
approximately $261.
The guarantees referred to above were entered into by the Company prior to
December 31, 2002 and have not been modified since that date, which was
the effective date for FIN 45 "Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Guarantees of Indebtedness of
Others."
3. Contingencies
An employee of a Miami Subs franchised restaurant, commenced an action for
unspecified damages in the United States District Court, Southern District
of Florida in January 2004 against Miami Subs Corporation, Miami Subs USA,
Inc. , Nadia M. Investments, Inc. and DYV SYS International, Inc., both
Miami Subs franchisees ("the franchisees"), claiming that he was not paid
overtime when he worked in excess of 40 hours per week, in violation of
the Fair Labor Standards Act. The action also seeks damages for any other
employees of the defendants who would be similarly entitled to overtime.
Pursuant to the terms of the Miami Subs Franchise Agreement, the
franchisees are obligated to operate their Miami Subs franchises in
compliance with the law, including all labor laws. Miami Subs intends to
assert that it is not an appropriate party to this litigation, to deny any
liability to Plaintiff and defend against this action vigorously.
F-47
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE L (CONTINUED)
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 it harmless
against claims asserted and procure an insurance policy which names Miami
Subs as an additional insured. Miami Subs has denied any liability to
plaintiffs and has made demand upon the franchisee's insurer to indemnify
and defend against the claims asserted. The insurer has agreed to
indemnify and defend Miami Subs and has assumed the defense of this action
for Miami Subs.
Miami Subs has received a claim from a landlord for a franchised location
that Miami Subs owes the landlord $150 in connection with the construction
of the leased premises. Miami Subs has been the primary tenant at the
location since 1993, when the lease was assigned to Miami Subs by the
initial tenant under the lease, the party to whom the construction loan
was made. To date, the landlord has not commenced legal action. Miami Subs
intends to continue to dispute its liability for the construction loan and
to vigorously defend any legal action.
Ismael Rodriguez commenced an action, in the Supreme Court of the State of
New York, Kings County, in May 2004 against Nathan's Famous, Inc. seeking
damages of $1,000 for claims of age discrimination in connection with the
termination of Mr. Rodriguez's employment. Mr. Rodriguez was terminated
from his position in connection with his repeated violation of company
policies and failure to follow company-mandated procedures. Nathan's
Famous, Inc. intends to deny any liability and defend this action
vigorously. Nathan's Famous, Inc. has submitted this claim to its
insurance carrier with the expectation that it will be covered by its
employment practices liability insurance policy.
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.
F-48
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE M - RELATED PARTY TRANSACTIONS
As of March 28, 2004, Miami Subs leased two restaurant properties from
Kavala, Inc., a private company owned by the estate of Gus Boulis, a
former shareholder of Miami Subs. Future minimum rental commitments due to
Kavala at March 28, 2004 under these existing leases was approximately
$1,074. Rent expense under these two leases amounted to $206, $198 and
$182 for the fiscal years ended March 28, 2004, March 30, 2003 and March
31, 2002, 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.
A firm on which Mr. Howard M. Lorber serves as chairman of the board of
directors, and the firm's affiliates received ordinary and customary
insurance commissions aggregating approximately $26, $41 and $41 for the
fiscal years ended March 28, 2004, March 30, 2003 and March 31, 2002,
respectively.
NOTE N - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 2004, the Company's management
continued to monitor and evaluate the collectibility and potential
impairment of its assets, in particular, notes receivable, certain fixed
assets and certain intangible assets. In connection therewith, impairment
charges on certain notes receivable of $108 and impairment charges on
fixed assets of $25 were recorded in the fourth quarter. It is
management's opinion that these adjustments are properly recorded in the
fourth quarter based upon the facts and circumstances that became
available in that period.
During the fourth quarter of fiscal 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.
F-49
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except share and per share amounts)
March 28, 2004, March 30, 2003 and March 31, 2002
NOTE N - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS (CONTINUED)
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 28, 2004, March 30, 2003 and March 31, 2002
NOTE O - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
FISCAL YEAR 2004
TOTAL REVENUES (a) $ 8,991 $ 8,703 $ 6,511 $ 6,474
GROSS PROFIT (b) 2,000 1,955 1,026 1,009
NET INCOME $ 744 $ 856 $ 237 $ 57
========= ========= ========= =========
PER SHARE INFORMATION
NET INCOME PER SHARE
BASIC (c) $ .14 $ .16 $ .04 $ .01
========= ========= ========= =========
DILUTED (c) $ .14 $ .15 $ .04 $ .01
========= ========= ========= =========
SHARES USED IN COMPUTATION OF NET INCOME
PER SHARE
BASIC (c) 5,370,000 5,313,000 5,286,000 5,255,000
========= ========= ========= =========
DILUTED (c) 5,478,000 5,593,000 5,742,000 5,901,000
========= ========= ========= =========
Fiscal Year 2003
Total revenues (a) $ 9,639 $ 9,516 $ 7,493 $ 7,124
Gross profit (b) 2,397 2,665 1,674 1,434
Net income (loss) $ (11,992) $ 110 $(106) $ (1,980)
========= ========= ===== =========
Per share information
Net income (loss) 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
========= ========= ========= =========
(a) Total revenues were adjusted from amounts previously reported to reflect a
reclassification of rebates from cost of sales to sales. This
reclassification had no impact on gross profit or net income.
(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
Nathan's Famous, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Fifty-two weeks ended March 28, 2004, March 30, 2003 and
fifty-three weeks ended March 31, 2002
(in thousands)
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-TWO WEEKS ENDED MARCH 28, 2004
ALLOWANCE FOR DOUBTFUL ACCOUNTS -
ACCOUNTS RECEIVABLE $ 418 $ - $ - $ 90(a) $ 328
========== ========== ============== ========== =============
LEASE RESERVE AND TERMINATION COSTS $ 529 $ 80 $ - $ 77(c) $ 532
========== ========== ============== ========== =============
Fifty-two weeks ended March 30, 2003
Allowance for doubtful accounts -
accounts receivable $ 644 $ 82 $ 27(b) $ 308(a) $ 418
========== ========== ============== ========== =============
Lease reserve and termination costs $ 336 $ 209 $ - $ 16(c) $ 529
========== ========== ============== ========== =============
Fifty-three weeks ended March 31, 2002
Allowance for doubtful accounts -
accounts receivable $ 880 $ 267 $ 27(b) $ 530(a) $ 644
========== ========== ============== ========== =============
Lease reserve and termination costs $ 678 $ 30 $ - $ 372(c) $ 336
========== ========== ============== ========== =============
(a) Uncollectible amounts written off/ Recoveries of bad debts
(b) Provision charged to advertising fund
(c) Payment of lease termination and other costs
F-52