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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 30, 1997
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. 1-3189
NATHAN'S FAMOUS, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3166443
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1400 Old Country Road, Westbury, New York 11590
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 338-8500
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 4, 1997 was approximately $15,789,910.
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 4, 1997,
there were 4,722,216 shares of Common Stock, par value $.01 per share
outstanding.
Documents incorporated by reference: Part III - Registrant's definitive
proxy statement to be filed pursuant to Regulation 14-A of the Securities
Exchange Act of 1934.
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PART I
ITEM 1. BUSINESS
The Company operates and franchises or licenses fast food units featuring its
famous all beef frankfurters, fresh crinkle-cut french fried potatoes, and a
variety of other menu offerings. Company-owned and franchised units operate
under the name "Nathan's Famous," the name first used at the Company's original
Coney Island restaurant opened in 1916. During fiscal 1997, the Company has
launched it's Branded Product Program which enables approved retailers to sell
certain Nathan's products outside of the realm of a traditional franchise
relationship.
Franchise and license operations have expanded since March 25, 1990, increasing
from 35 to 147 units at March 30, 1997, including 27 carts, kiosks, and counter
units operating in 19 states, and the District of Columbia. Since establishing
the Branded Product Program in 1996, the Company has opened 57 branded outlets.
At March 30, 1997, the Company operated 26 Company-owned units, including one
cart, concentrated in the New York metropolitan area.
The Company plans to concentrate opening new Company-owned and franchised or
licensed outlets in non-traditional captive markets utilizing its smaller
restaurant prototypes, carts, kiosks and modular merchandising units. The
Company also plans to expand its newly created Branded Product Program.
RESTAURANT OPERATIONS
CONCEPT AND MENUS. The Nathan's concept offers a wide range of facility designs
and sizes, suitable to a vast variety of locations and features a core menu,
consisting of the "Nathan's Famous" all-beef frankfurters, fresh crinkle-cut
french fries and beverages. Nathan's 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
bundled with other nationally recognized brands.
Nathan's hot dogs are 100% 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 Nathan's hot dogs. Hot
dogs are prepared and served in accordance with procedures which have not varied
in more than 80 years. Fresh crinkle-cut french fried potatoes are prepared
daily at each Nathan's restaurant. Nathan's french fried potatoes are never
frozen, and are cooked to order in 100% cholesterol-free corn oil. The Company
estimates that approximately 65% to 70% of sales in its Company- owned units
consist of its famous hot dogs, fresh 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: a chargrilled
hamburger menu, a chargrilled chicken sandwich menu, a seafood menu, a fried
chicken menu, a specialty sandwich menu, a breakfast menu and dessert, salad and
snack menus. 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. Foods such as a chargrilled chicken breast,
fresh-squeezed lemonade and an assortment of salads, fresh fruits and yogurt
have been added to appeal to customers interested in lighter cuisine. Each of
these supplemental menus consist of a number of individual items; for example,
the hamburger menu may include chargrilled hamburgers, cheeseburgers,
chiliburgers, superburgers, "BLT" burgers and southwestern burgers. The Company
maintains the same quality standard with each supplemental menu as it does with
its core hot dog and french fried potato menus. Thus, for example, hamburgers
and sandwiches are prepared to order and not pre-wrapped or kept warm under
lights. The Company also has a "Kids Meal" program in which various menu
alternatives are combined with "frankster" toys to appeal to the children's
market.
The Company's prototype restaurant units are available in a range of sizes as
follows: Type A--300 to 1,200 sq. ft., Type B--approximately 2,200 sq. ft. and
Type C--approximately 4,000 sq. ft. The Company has also developed prototype
carts, kiosks, and modular merchandising units, all designated as Type D. Type A
units may not have customer seating areas, although they may often share seating
areas with other fast food outlets in food court settings. Type B and Type C
units generally provide seating for 45 to 50 and 75 to 125 customers,
respectively. Type A and D units generally carry only the core menu. This menu
is supplemented by a number of other menu selections in Type B units and even
greater menu selection in Type C units. The standardization of the Company's
prototype unit designs and menus has enabled the Company to minimize the cost of
constructing conforming restaurant units and the operating costs of these units.
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The Company believes its carts, kiosks and modular units 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. All prototypes utilize a uniform,
contemporary design.
FRANCHISE PROGRAM. The Company franchise operations have expanded since March
25, 1990, increasing from 35 to 147 units at March 30, 1997, operating in 19
states, and the District of Columbia. Such growth has been achieved through the
development and redefinition of its marketing and sales concepts. The Company
has developed restaurant designs, equipment configurations and specifications
for its Type A, B, C and D prototype units.
The Company continues to focus its marketing efforts on larger, experienced and
successful operators with the financial and business capability to develop
multiple franchise units.
The Company counts among it's 60 franchisees such well known companies as Host
Marriott Corporation ("Marriott"), ARAMARK, Service America, Ogden Foods,
Sodexho and Kentucky Fried Chicken Corp.
As of June 1997, franchised outlets include 16 units at airports and 16 within
highway travel plazas operated by Marriott.
Franchisees who desire to open multiple units in a specific territory generally
enter into a standard area development agreement pursuant to which the Company
receives 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 the Company as provided in its standard franchise agreement. In
certain circumstances, the Company may grant exclusive territorial rights,
including foreign countries, for the development of Nathan's units based upon
compliance to a predetermined development schedule. The Company may require that
an exclusivity fee be conveyed for these rights.
Franchisees are required to execute a standard franchise agreement or license
agreement prior to opening each "Nathan's Famous" unit. The Company's current
standard franchise agreement provides for, among other things, a one-time
$30,000 franchise fee payable upon execution of the agreement, a monthly royalty
payment based on 4.5% of restaurant sales and the expenditure of 2.5% of sales
on advertising. In certain specific situations, the Company may offer
alternatives to the standard one-time fee. Marriott and National Restaurant
Management, Inc., are among those who are not subject to the requirement to
spend a percentage of sales on advertising. The initial term of the typical
franchise agreement is 20 years, with a 15-year renewal option by the
franchisee, subject to certain conditions.
The standard license agreement provides for, among other things, a monthly
royalty payment based on 10% of restaurant sales up to $250,000, 8% of
restaurant sales between $250,000 and $500,000 and 6% of restaurant sales in
excess of $500,000 per annum. There is no one-time license fee upon execution of
the agreement or requirement to spend a percentage of restaurant sales on
advertising.
Franchisees are approved on the basis of their business background, net worth,
capital available for investment in relation to the proposed scope of the
development agreement and evidence of restaurant management experience. The
Company does not offer any financing arrangements to its franchisees.
The Company provides numerous support services to its franchisees. The Company
assists in and approves all site selections. Thereafter, the Company provides
architectural prototype plans suitable for restaurants of varying sizes and
configurations, for use in food-court, in-line and free-standing locations. The
Company also assists 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 franchisee. The Company typically does not sell food, equipment or
supplies to its franchisees.
The Company offers various management training courses for management personnel
of Company-owned and franchised restaurants. At least one restaurant manager
from each restaurant must successfully complete the Company's mandated
management training program. The Company also offers additional operations and
general management training courses for all restaurant managers and other
managers with supervisory responsibilities. The Company provides standard
manuals to each franchisee regarding training and operations, products and
equipment and local marketing programs. The Company provides ongoing advice and
assistance to franchisees.
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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 the Company and applied on a system-wide basis.
The Company continuously monitors franchisee operations and inspects
restaurants. Franchisees are required to furnish the Company with detailed
monthly sales or operating reports which assist the Company in monitoring the
franchisee's compliance with its franchise or license agreement. The Company
makes both announced and unannounced inspections of restaurants to ensure that
Company practices and procedures are being followed. The Company has 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. The Company also has the right to terminate a franchise for
non-compliance with certain other terms and conditions of the franchise or
license agreement. During Fiscal 1997, the Company terminated 4 franchise
agreements.
COMPANY-OWNED OPERATIONS. The Company currently operates 26 Company-owned units,
after closing it's Albany, NY location on April 2, 1997, including: 25
restaurants in New York, New Jersey, Connecticut and Pennsylvania and one cart.
Certain of the Company's restaurants are older and significantly larger units
which do not conform to current prototype designs. These units carry a broader
selection of menu items than current franchise prototype units. The items
offered at Company-owned restaurants, other than the core menu, tend to have
lower margins than the core menu. The older units required significantly higher
levels of initial investment than current franchise prototypes and tend to
operate at a lower sales/investment ratio. For this reason, the Company does not
intend to replicate these units in its planned expansion of Company-owned units.
The Company has entered into a food service lease agreement with Home Depot
U.S.A., Inc. pursuant to which the Company leases space within certain Home
Depot Improvement Centers to operate its restaurants. During fiscal 1997, the
Company opened one restaurant and one cart in Home Depot locations, increasing
the total number of units operating within Home Depots to eight. The Company
anticipates opening a new unit in August 1997 and has additional units presently
under various stages of consideration.
Since the Company's Initial Public Offering in February 1993, the Company has
acquired seven Company-owned restaurants from franchisees, opened fourteen new
Company-owned units, commenced operating two carts, and has closed five units.
The Company may close other units in the future.
Company-owned units currently range in size from approximately 200 square feet
to 10,000 square feet and are located principally in retail shopping
environments or are free-standing buildings. Certain restaurant designs do not
include seating and others include seating for 100 to 300 customers. The
restaurants are designed to appeal to all ages and generally are open seven days
a week. The Company has established high standards with respect to food quality,
cleanliness and service at its restaurants and regularly monitors the operations
of its restaurants to ensure adherence to these standards. Restaurant service
areas, seating, signage and general decor are contemporary. The average check at
the comparable Company-owned restaurants was approximately $5.34 for fiscal
1997.
BRANDED PRODUCT PROGRAM. During fiscal 1997, the Company launched its new
Branded Product Program in which approved foodservice operators may offer
Nathan's 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 Nathan's trademark with respect to the sale of hot dogs and certain
other items. The Company sells the products directly to various distributors who
are permitted to sell these proprietary products to retailers only upon approval
from the Company. Since the inception of the program, 57 branded outlets have
been opened.
The following table shows the number of outlets in operation at March 30, 1997
and their geographical distribution:
Branded
Location Company Franchise Outlets Total
-------- -------- --------- ------- -----
Alabama - - 2 2
Arizona - 2 1 3
California - 2 1 3
Connecticut 1 4 - 5
District of Columbia - 1 - 1
Florida - 13 3 16
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Georgia - - 2 2
Indiana - 1 - 1
Maryland - 1 - 1
Massachusetts - 3 1 4
Minnesota - 2 - 2
Nevada - 5 - 5
New Hampshire - 1 - 1
New Jersey 4 46 9 59
New York 19 57 34 110
North Carolina - 2 2 4
Ohio - 1 - 1
Pennsylvania 2 5 - 7
Rhode Island - 1 - 1
Virginia - - 2 2
--- --- --- ---
Total 26 147 57 230
=== === === ===
EXPANSION PROGRAM. The Company's expansion plans focus on opening Company-owned
and franchised units in non-traditional captive markets primarily utilizing
smaller facility types with limited menus. The Company has recently executed
co-branding agreements with TCBY, Pizza Hut, KFC Corporation and Blimpies
whereby Nathan's menu items will be sold together with their menu offerings. New
Company-owned units are expected to be opened primarily in the Northeastern
United States concentrated within the New York metropolitan area. The
Company-owned units are principally located in the New York metropolitan area
and the Company has extensive experience in operating restaurants in this
market. The Company intends to continue to focus on opportunities for locating
units in non-traditional or other special captive market settings. The Company
believes that a significant opportunity exists to convert existing sales of
nonbranded hot dogs into "Nathan's" hot dogs throughout the foodservice
industry, by franchisees, licensees or perhaps with branded retailers by
utilizing modular merchandising units, carts or kiosks in addition to
restaurants.
During fiscal 1997, new unit openings consisted of 2 Company-owned units, 38
franchised units and 57 branded outlets.
The Company expects that its franchisees and licensees will open approximately
30-40 new units and continued growth of new branded outlets in fiscal 1998. The
Company plans to continue opening Company-owned units within Home Depot
Improvement Centers.
The Company believes that opportunities may exist for franchising "Nathan's
Famous" restaurants in various foreign countries. To that end, the Company has
registered certain of its service marks and trademarks in more than 20 foreign
jurisdictions. In fiscal 1996, the Company executed a letter of intent to enter
into a Master License Agreement, contingent upon the ability of the counterpart
to secure financing, for the exclusive development of Nathan's in Russia.
LICENSING PROGRAM. The Company licenses SMG, Inc. ("SMG"), to produce packaged
hot dogs and other meat products according to Nathan's proprietary recipes and
spice formulations, and to use "Nathan's Famous" and related trademarks to sell
these products on an exclusive basis in the United States to supermarkets,
groceries and other outlets, thereby providing foods for off-premises
consumption. The SMG agreement expires in 2014 and provides for royalties of
approximately 3% to 5% of sales. The percentage varies based on sales volume,
with escalating minimum royalties. Earned royalties of $1,096,000 in fiscal 1997
exceeded the contractual minimum established under the agreement. The Company
believes 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. Hot dog sales are concentrated in the New York
metropolitan area, New England, Florida and California. Royalties from SMG
provided substantially all of the Company's retail license revenues. SMG has
continued to expand the products sold under the Nathan's trademark. In addition
to the basic hot dog products, SMG began selling certain Nathan's Deli products
and frozen Nathan's hamburgers in selected supermarkets two years ago. SMG has
also added four new meats to their product line and expanded the hot dog line to
now include foot long hot dogs and a new "jumbo" package containing 4 1/2 pounds
of hot dogs.
The Company has also entered into licensing agreements with Gold Pure Food
Product's Co, Inc. and United Pickle Packers, Inc. licensing the "Nathan's
Famous" name for the manufacture and sale of various condiments including
Mustard, Salsa, Sauerkraut
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and Pickles. These products have just begun to be distributed on a limited
basis. Fees and royalties earned during fiscal 1997 have not been significant.
PROVISIONS AND SUPPLIES. The Company's proprietary hot dogs are produced by SMG
and one other supplier in accordance with the Company's recipes, quality
standards and proprietary spice formulations. John Morrell & Company, the
Company's licensee prior to SMG, has retained the right to produce the Company's
proprietary spice formulations. All other Company provisions are purchased and
obtained from multiple sources to prevent disruption in supply and to obtain
competitive prices. The Company negotiates directly with its suppliers for all
primary food ingredients and beverage products sold at its restaurants to ensure
adequate supply and to obtain competitive prices. Franchised operators are free
to obtain frankfurters and other proprietary products from any approved supplier
and can obtain non-proprietary products from any source whose products meet the
Company's specifications.
MARKETING, PROMOTION AND ADVERTISING. The Company maintains advertising funds
("Funds") for local, regional and national advertising pursuant to the Nathan's
Famous Systems, Inc. Franchise Agreement. Franchisees are generally required to
spend or contribute to the Funds up to 2.5% of restaurant sales for advertising
and promotion. Marriott and National Restaurant Management, Inc. are among the
current franchisees who are not subject to this requirement. If a cooperative
advertising program exists in the franchised area, the applicable percentage can
be contributed to that program. Where no cooperative advertising program is
available, up to 1% of the franchisees' advertising budget must be contributed
to the Funds for national marketing support. The balance must be expended on
programs approved by the Company as to form, content and method of
dissemination. During Fiscal 1997, the Company spent approximately 2.6% of its
own restaurant sales for marketing activities.
During fiscal 1997, the Company's primary marketing emphasis was concentrated on
local store marketing campaigns featuring a value oriented strategy coupled with
promotional "Limited Time Offers." The Company anticipates that near term
marketing efforts will continue to emphasize local store marketing activities.
As the concentration of "Nathan's Famous" restaurants in particular geographic
areas increases, the Company believes the opportunity for effective regional
media advertising may exist.
In addition, SMG promotes and advertises the "Nathan's Famous" packaged retail
brand, particularly in the New York metropolitan area, California, the greater
Boston area and Florida. SMG has advised the Company that it may introduce and
advertise packaged hot dogs in additional areas as the concentration of
Company-owned and franchised restaurants increase therein. The Company believes
that the advertising by SMG increases brand recognition and thereby indirectly
benefits Company-owned and franchised restaurants in the areas in which SMG
conducts its campaigns. The Company also participates with SMG in certain joint
promotional activities.
GOVERNMENT REGULATION. The Company is subject to Federal Trade Commission
("FTC") regulation and several state laws which regulate the offer and sale of
franchises. The Company is 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" (commonly
referred to as the "FTC Rule") requires the Company to provide disclosure of
specified 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 Company.
Laws which regulate one or another aspect of the franchisor-franchisee
relationship presently exist in twenty-one states and the District of Columbia.
Such 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 the
Company from seeking franchisees in any given area. Although such laws may also
restrict a franchisor in the termination of a franchise agreement by, for
example, requiring "good cause" to exist as a basis for the termination, advance
notice to the franchisee of the termination, an opportunity to cure a default
and repurchase of inventory or other compensation, these provisions have not had
a significant effect on the Company's operations.
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The Company is not aware of any pending franchise legislation which in its view
is likely to significantly affect the operations of the Company. The Company
believes that its 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.
The Company is subject to federal and state environmental regulations, which
have not had a material effect on the Company's 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.
Each of the companies which manufactures, supplies or sells the Company's
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 such companies in obtaining the required licenses or
approvals could adversely effect the revenues of the Company which are generated
from such companies.
The Company believes that it operates in substantial compliance with applicable
laws and regulations governing its operations.
EMPLOYEES. The Company regularly employed an average of 608 persons during
fiscal 1997, of whom 30 were corporate management and administrative employees,
92 were restaurant managers or assistant managers and 486 were hourly food-
service employees (both full time and part time). The number of hourly
food-service employees ranged from a low of 467 to a high of 629. Food-service
employees at 6 locations are represented by 1115 Culinary Employees Union, a
division of 1115 Joint Board, under various agreements expiring between
September 1997 and March 1999. The Company considers its employee relations to
be good and has not suffered any strike or work stoppage for more than 22 years.
The Company provides a training program for managers and assistant managers of
its new Company-owned and franchised restaurants. Hourly food workers are
trained, on site, by managers and assistant managers following Company practices
and procedures outlined in its operating manuals.
TRADEMARKS. The Company holds trademark and service mark registrations for
NATHAN'S FAMOUS, NATHAN'S and Design, NATHAN'S FAMOUS SINCE 1916, 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. The Company also holds various related marks for restaurant
services and certain food items. The Company believes that its trademarks and
service marks provide significant value to the Company and are an important
factor in the marketing of its products and services. The Company believes that
it does not infringe on the trademarks or other intellectual property rights of
any third parties.
COMPETITION. The restaurant business is highly competitive and "Nathan's Famous"
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 the Company. The Company also competes with
local restaurants and diners on the basis of 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.
The Company believes that its emphasis on its proprietary 100% all beef
frankfurters and fresh crinkle-cut french fried potatoes and the reputation of
these products for taste and quality set it apart from its major competitors.
Additionally, the Company believes that it and its franchisees compete
effectively with other restaurants for patronage on the basis of the reputation
achieved by "Nathan's Famous" restaurants. As fast food companies have
experienced flattening growth rates and declining average sales per restaurant,
certain of such companies have adopted "value pricing" and or deep discount
strategies. Such 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. The Company has introduced its 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. Continued price discounting in the fast food industry
could have an adverse effect on the Company.
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The Company also competes with numerous companies in the sale and distribution
of its licensed hot dogs and other packaged foods, primarily on the basis of
reputation, flavor, quality and price.
EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as
follows:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Howard M. Lorber...................................... 48 Chairman and Chief Executive Officer
Wayne Norbitz......................................... 49 President and Chief Operating Officer
Richard E. Boudreaux.................................. 44 Executive Vice President
Carl Paley............................................ 60 Senior Vice President - Franchise
and Real Estate Development
Ronald G. DeVos....................................... 42 Vice President - Finance, Chief
Financial Officer and Secretary
Donald P. Schedler.................................... 44 Vice President - Architecture and Construction
Officers are elected to serve, subject to the discretion of the Board of
Directors, until their successors are appointed.
HOWARD M. LORBER has been Chairman of the Company since 1990, Chief Executive
Officer since 1993 and a Director since 1987. He is also the Chairman and Chief
Executive Officer of Hallman & Lorber Associates, Inc., an employee benefit and
pension consulting firm. Mr Lorber has served as President and Chief Operating
Officer of New Valley Corp. (formerly Western Union Corp.) since November 1994
and has served as a director since 1991. He also serves as a Director of United
Capital Corp., a manufacturer of antennas and a real estate owner, Alpine Lace
Brands, Inc., a manufacturer and distributor of cheese products and Prime
Hospitality Corporation, an owner and operator of hotel properties. He is also a
trustee of Long Island University.
WAYNE NORBITZ has been employed by the Company since 1975, he was elected
President of the Company and Director in October 1989. He previously held the
positions of Director of Operations, Vice President of Operations, Senior Vice
President of Operations and Executive Vice President. Prior to joining Nathan's,
Mr. Norbitz held the position of Director of Operations of Wetson's Corporation.
Mr. Norbitz also serves as a member of the Advisory Board of the Penton
Foodservice Branding Institute and is a member of the Board of Directors of the
Long Island Philharmonic Orchestra.
RICHARD E. BOUDREAUX joined the Company as Executive Vice President in December
1995. Prior thereto he was an executive at PepsiCo, Inc. where he served as Vice
President of Operations for Pizza Hut International Inc., from November 1992 to
November 1995, and Vice President of PFS Corporation, the purchasing and
logistics division of PepsiCo, Inc., from August 1988 to November 1992. Prior to
his positions at PepsiCo, Inc., Mr. Boudreaux worked in the chemical industry in
various domestic and international positions in Operations, Marketing and
Strategic Planning. Mr. Boudreaux holds an M.B.A. degree from Harvard and a B.S.
from Texas A&M University.
CARL PALEY joined the Company as Director of Franchise Development in May 1989
and was promoted to Vice President Franchise Development in September 1989 and
Senior Vice President in April 1993. From November 1985 to May 1989 he provided
consulting services to franchise companies through Carl Paley Enterprises. Mr.
Paley served as Vice President of Franchising of The Haagen-Dazs Shoppe Co.,
Inc. from June 1978 to November 1985. Prior thereto, Mr. Paley was a Vice
President of Carvel Corporation and was responsible for marketing, public
relations, advertising, promotions and training.
RONALD G. DEVOS joined the Company as Vice President - Finance and Chief
Financial Officer in January 1995 and became Secretary in April 1995. Prior
thereto, he was Controller of a large Wendy's franchisee, from June 1993 to
December 1994. Mr. DeVos was Vice President - Controller of Paragon Steakhouse
Restaurants, Inc., a wholly owned subsidiary of Kyotaru Company Ltd., from May
1989 to October 1992, and Controller of Paragon Restaurant Group, Inc. and its
predecessors, from October 1984 to May 1989. Mr. DeVos holds an M.B.A. from St.
John's University and a B.A. from Queens College.
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DONALD P. SCHEDLER joined Nathan's in March 1989 as Director of Architecture and
Construction and was made Vice President - Architecture and Construction in
February 1991. Prior thereto he was a Director of Construction for The Riese
Organization, restauranteurs, from January 1988 to February 1989 and an
Associate and Project Architect with Frank Guillot Architects, Ltd. from June
1985 to January 1988. Mr. Schedler is a registered architect in the states of
Vermont and New York, and holds a B.A. degree in economics from Susquehanna
University and a M.A. degree in architecture from Syracuse University.
ITEM 2. PROPERTIES
The Company's principal executive offices consist of approximately 10,000 sq.
ft. of leased space in a modern, high-rise office building in Westbury, New
York. One Company-owned, 2,650 sq. ft. restaurant, at 86th Street in Brooklyn,
New York, is located on a 25,000 sq. ft. lot owned by the Company. Other
Company-owned restaurants currently operating are located in leased space with
terms expiring as shown in the following table:
LEASE APPROXIMATE
LOCATION EXPIRATION DATE SQUARE FOOTAGE
-------- --------------- --------------
Coney Island Brooklyn, NY December 2008 10,000
Coney Island Boardwalk Brooklyn, NY October 2006 440
Kings Plaza Shopping Center Brooklyn, NY January 1998 5,500
Broadway Mall Hicksville, NY Month to Month 6,500
Long Beach Road Oceanside, NY May 2001 7,300
Central Park Avenue Yonkers, NY April 2000 10,000
Livingston Mall Livingston, NJ December 2000 2,650
Paramus Park Shopping Center Paramus, NJ August 1997 1,300
Jericho Turnpike Commack, NY March 2003 3,200
Hempstead Turnpike Levittown, NY September 2004 4,100
Connecticut Post Mall Milford, CT March 2002 1,000
Broadhollow Road Farmingdale, NY April 2003 2,200
Woodbridge Center Woodbridge, NJ May 2000 3,000
Galleria Mall White Plains, NY March 1999 1,000
Forest Avenue Staten Island, NY April 2013 3,000
Fifth Avenue New York, NY January 2009 4,000
Jericho Home Depot Jericho, NY September 2004 1,500
S. Plainfield Home Depot S. Plainfield, NJ October 2004 1,500
Copaigue Home Depot Copaigue, NY April 2005 1,200
Flushing Home Depot Flushing, NY June 2005 1,500
Larchmont Larchmont, NY Month to Month 5,400
Elmont Home Depot Elmont, NY October 2005 1,500
Philadelphia Home Depot Philadelphia, PA November 2005 1,530
Upper Darby Home Depot Upper Darby PA July 2006 1,560
Valley Stream Home Depot Valley Stream NY February 2007 200
The Company's leases typically provide for a base rental plus real estate taxes,
insurance and other expenses and, in some cases, provide for an additional
percentage rent based on the restaurants revenues. Aggregate rental expense
under the Company's current leases amounted to $2,371,000 in fiscal 1997.
The Company is currently developing one Company-owned restaurant within The Home
Depot Improvement Center in Staten Island, New York. The restaurant will be
approximately 1500 square feet and it is expected that the lease thereon will
have terms of ten years commencing with the restaurant opening.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in ordinary and routine litigation.
The Company is also involved in the following litigation.
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On April 7, 1995, an action entitled Erwin Protter, et al. v. Nathan's Famous
Systems, Inc., et al. was instituted in the United States District Court for the
Eastern Division of New York against a wholly owned subsidiary of the Company
and several of the Company's current or former executive officers. The complaint
relating to this action alleges that this subsidiary and such persons made
misstatements in connection with the acquisition by the plaintiffs of three (3)
franchised restaurants. This complaint seeks approximately $13,000,000 in
damages, plus punitive and treble damages, to the extent appropriate. On October
21, 1995, the original complaint was dismissed as inadequately pleaded and the
plaintiffs were granted leave to file an amended complaint. Plaintiffs did so,
and defendants again moved to dismiss it on several grounds. On May 10, 1996,
the Court granted the motion to dismiss, finding that plaintiff had failed to
plead violations of the RICO statute, which was the predicate for federal court
jurisdiction. The Court accordingly dismissed the complaint in its entirety,
refusing to assume jurisdiction over the remaining state court claims. On May
31, 1996, plaintiffs commenced an action in the Supreme Court of the State of
New York, Nassau County, alleging violations of the common law and state
franchise laws. The Company's motion to dismiss the complaint was granted with
regard to the common law fraud cause of action but denied as to the cause of
action for violation of the state franchise law. The Company has filed an answer
asserting counterclaims against the plaintiffs for unpaid advertising costs and
franchise fees and otherwise has filed a notice of appeal from so much of the
order which denied its motion to dismiss the cause of action for violation of
the State Franchise Law.
On February 28, 1995, an action entitled Textron Financial Corporation v. 1045
Rush Street Associates, Stephen Anfang, and Nathan's Famous, Inc. was instituted
in the Circuit Court of Cook County, Illinois County Department, Chancery
Division. The complaint alleges that the Company conspired to perpetrate a fraud
upon the plaintiff and alleges that the Company breached its lease with 1045
Rush Street Associates and the estoppel agreement delivered to the plaintiff in
connection therewith by subleasing these premises and thereafter assigning the
lease with respect thereto to a third party franchisee, and further by failing
to pay rent under this lease on and after July 1990. This complaint seeks
damages in the amount of at least $1,500,000. The Company has filed its answer
to this complaint denying the material allegations of the complaint and
asserting several affirmative defenses to liability including, but not limited
to, the absence initially or subsequent failure of consideration for the
estoppel agreement, equitable estoppel, release, failure to mitigate and other
equitable and legal defenses. The Company intends to defend this action
vigorously.
The Company has been named as one of several "generator defendants"in an action
brought by CSX Transportation, Inc. ("CSX") and Staten Island - Arlington, Inc.
("Arlington") in the Supreme Court of the State of New York, County of New York.
According to the complaint, CSX, through its wholly owned subsidiary, Arlington,
owned certain property in Staten Island (the "Arlington Yard") which, according
to the complaint, during the period May 15, 1988 through September 14, 1988 was
the site of illegal solid waste dumping activity allegedly orchestrated by
certain defendants convicted of such activity in United States v. Paccione, et
al. (the "Paccione Defendants"). Pursuant to an Order on Consent into which CSX
alleges it entered with the NYS Dept. of Environmental Conservation ("DEC"), CSX
undertook to remediate the site and to reimburse the DEC for amounts expended in
connection with a preliminary investigation of the site. CSX is now suing
several "transporter defendants" (ie., those who allegedly had wastes generated
by them transported to Arlington Yard), for damages and injunctive relief based
upon various theories of law, including private and public nuisance,
restitution, equitable indemnity and trespass. The Company has filed an answer
in which it denied any involvement with the site and perforce, any liability to
the plaintiffs under the Common law theories advanced, asserted affirmatively
several legal and equitable defenses to liability in these circumstances, and
alternatively, interposed cross claims for contribution against other
defendants.
In or about December, 1996, Nathan's Famous Systems, Inc. ("Systems") instituted
an action in the Supreme Court of New York, Nassau County, against Phylli Foods,
Inc. ("Foods") a franchisee, and Calvin Danzig as a guarantor of Foods' payment
and performance obligations, to recover royalty fees and advertising
contributions due to Systems in the aggregate amount of $35,567.20 under a
Franchise Agreement between Systems and Foods dated June 1, 1994. In their
answer, the defendants essentially denied the material allegations of the
complaint and interposed counterclaims against Systems in which they alleged
essentially that Systems fraudulently induced the defendants to purchase the
franchise from Systems or did so by means of negligent misrepresentations.
Defendants also alleged that reason of Systems' allegedly fraudulent and
deceitful conduct, Systems violated the General Business Law of New York. As a
consequence of the foregoing, the defendants are seeking damages in excess of
five million dollars, as well as statutory relief under the General Business
Law. Systems has moved to dismiss the counterclaims on the grounds that they are
insufficiently pleaded and otherwise fail to state a sustainable claim against
Systems upon which relief may be granted.
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In or about December, 1996, the Company instituted an action in the Civil Court
of the City of New York, Bronx County, against Bay Plaza Famous, Inc. ("Bay
Plaza"), as franchisee, and Daniel Rapoport ("Rapoport") and Theodore Wenacur as
guarantors of Bay Plaza's payment and performance obligations, to recover
royalty fees and advertising contributions due to the Company in the aggregate
amount of $24,672.09 under a Franchise Agreement between Bay Plaza and the
Company dated November 20, 1989. In their answer, Bay Plaza and Rapoport
essentially denied the material allegations of the complaint and interposed
counterclaims against the Company in which they alleged essentially that the
Company fraudulently induced the defendants to purchase the franchise from the
Company or did so by means of negligent misrepresentations. Bay Plaza and
Rapoport also alleged that by reason of the Company's allegedly fraudulent and
deceitful conduct, the Company violated the General Business Law of New York. As
a consequence of the foregoing, the defendants are seeking damages in excess of
5.5 million dollars, as well as statutory relief under the General Business Law.
The Company has moved to dismiss the counterclaims on the grounds that they are
insufficiently pleaded and otherwise fail to state a sustainable claim against
the Company upon which relief may be granted.
The Company was named as one of three defendants in an action recently
commenced in the Supreme Court of New York, Queens County. According to the
complaint, the plaintiff, a dentist, is seeking injunctive relief and damages
in an amount exceeding $5 million against the landlord, one of the company's
franchisees and the Company claiming that the operation of a restaurant in a
building in Long Island City created noxious and offensive fumes and odors that
allegedly were injurious to the health of the plaintiff and his employees and
patients, and interfered with, and irreparably damaged his practice. Plaintiff
also claims that the landlord fraudulently induced him to enter into a lease
extension by representing that the first floor of the building would be
occupied by a non-food establishment.
The Company believes that there is no merit to the plaintiff's claims
against it inasmuch as it never was a party to the lease, and the restaurant,
which closed in or about August 1995, was operated by a franchisee
exclusively. Accordingly, the Company intends to move to dismiss the complaint
and otherwise intends to defend the action vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
COMMON STOCK PRICES
The Company's common stock began trading on the over-the-counter market on
February 26, 1993 and is quoted on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") on the National Market System
under the symbol "NATH." The following table sets forth the high and low closing
share prices per share for the periods indicated:
High Low
- -------------------------------------------------------------------------------------------------------------------
Fiscal year ended March 31, 1996
First quarter $ 4 3/4 $ 3 3/4
Second quarter 4 7/8 3 1/2
Third quarter 4 7/16 3
Fourth quarter 6 3 1/4
Fiscal year ended March 30, 1997
First quarter $ 4 1/8 $ 3
Second quarter 3 1/2 2 3/4
Third quarter 4 2 15/16
Fourth quarter 4 7/16 3 1/2
At June 4, 1997 the closing price per share for the Company's common stock, as
reported by NASDAQ was $3 11/32.
DIVIDEND POLICY
The Company has not declared or paid a cash dividend on its common stock since
its initial public offering. It is the policy of the Board of Directors of the
Company to retain all available funds to finance the development and growth of
the Company's business. The payment of cash dividends in the future will be
dependent upon the earnings and financial requirements of the Company.
SHAREHOLDERS
As of June 4, 1997 the Company had 361 shareholders of record, exclusive of
shareholders whose shares were held by brokerage firms, depositories and other
institutional firms in "street name" for their customers.
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ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
MARCH 30, MARCH 31, MARCH 26, MARCH 27, MARCH 28,
1997 1996 (1) 1995 1994 1993
-----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Operations Data:
Revenues:
Sales $21,718 $21,167 $20,927 $20,214 $16,521
Franchise fees and royalties 3,238 3,249 3,448 3,591 4,408
License royalties and other income 1,619 2,025 1,826 1,297 800
----------------------------------------------------------------
Total revenues 26,575 26,441 26,201 25,102 21,729
----------------------------------------------------------------
Costs and Expenses:
Cost of restaurant sales 13,031 12,833 12,270 11,260 8,953
Restaurant operating expenses 6,602 6,730 6,396 5,616 4,280
Depreciation and amortization 1,013 1,724 1,588 1,422 1,026
Amortization of intangibles 406 665 581 527 993
General and administrative expenses 4,097 5,457 5,859 4,596 3,816
Interest expense 16 28 16 22 560
Impairment of long-lived assets ---- 3,907 ---- ---- ----
Other (income) and expense ---- 1,570 500 (706) ----
----------------------------------------------------------------
Total costs and expenses 25,165 32,914 27,210 22,737 19,628
----------------------------------------------------------------
Income (loss) before income taxes and
extraordinary item 1,410 (6,473) (1,009) 2,365 2,101
Income tax provision (benefit) 622 (94) (492) 900 1,017
----------------------------------------------------------------
Earnings (loss) before extraordinary item 788 (6,379) (517) 1,465 1,084
Extraordinary tax benefit from the utilization of
net operating loss carryforwards ---- ---- --- ---- 692
----------------------------------------------------------------
Net earnings (loss) $788 $(6,379) $(517) $1,465 $1,776
----------------------------------------------------------------
Per Share Data:
Net earnings (loss) per share before extraordinary $0.17 $(1.35) $(0.11) $0.31 $0.34
item
Extraordinary item ---- ---- ---- ---- $0.22
Net earnings (loss) per share $0.17 $(1.35) $(0.11) $0.31 $0.56
Dividends per share ---- ---- ---- ---- ----
Weighted average number of common shares
outstanding Note (2) 4,729 4,722 4,728 4,762 3,169
----------------------------------------------------------------
Balance Sheet Data at End of Fiscal Year:
Working capital $4,802 $3,937 $7,133 $8,044 $5,714
Total assets 27,794 27,765 32,430 33,002 29,507
Long term debt, net of current maturities 21 35 63 2 158
Stockholders' equity $21,976 $21,142 $27,474 $27,958 $24,507
----------------------------------------------------------------
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Selected Restaurant Operating Data:
Systemwide Restaurant Sales:
Company-owned $21,718 $21,167 $20,927 $20,214 $16,521
Franchised 63,564 68,009 73,465 68,454 59,158
================================================================
Total $85,282 $89,176 $94,392 $88,668 $75,679
================================================================
Number of Units Open at End of Fiscal Year:
Company-owned 26 27 24 16 11
Franchised 147 178 159 163 123
Branded outlets 57 0 0 0 0
================================================================
Total 230 205 183 179 134
================================================================
Notes to Selected Financial Data
(1) The Company's fiscal year ends on the last Sunday in March which results in
a 52 or 53 week year. Fiscal 1996 was a 53 week year.
(2) Restated to give effect to the .61458 to one reverse stock split effective
December 15, 1992, stock options granted under the 1992 Stock Option Plan
on December 15, 1992 and restricted stock grants awarded on December 21,
1992.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FISCAL YEAR ENDED MARCH 30, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996
REVENUES
Company-owned restaurant sales increased 2.6% or $551,000 to $21,718,000 for the
fiscal year ended March 30, 1997 ("fiscal 1997") from $21,167,000 for the fiscal
year ended March 31, 1996 ("fiscal 1996 "). Fiscal 1997 was a 52 week reporting
period while fiscal 1996 was a 53 week reporting period. Comparable restaurant
sales (units operating for 18 months or longer as of the beginning of the
current fiscal year) increased approximately 1.0% or $177,000 from $17,677,000
in fiscal 1996 to $17,854,000 in fiscal 1997 on a comparable 52 week basis. One
Company-owned unit was opened during fiscal 1997 generating $394,000 in
restaurant sales. The full year effect of the Company-owned units which operated
part of fiscal 1996 increased restaurant sales by $1,062,000. The increases were
partially offset by the sales decline from restaurant closures of $700,000 and
approximately $382,000 in restaurant sales which were generated during the
additional week of operations in fiscal 1996. Sales continue to be challenged by
the discount strategies of the Company's principal competitors, increased
competition and certain external factors that effect specific restaurants.
During fiscal 1997, the Company implemented a more aggressive local store
marketing campaign, value pricing strategies and introduced new products in
order to address the sales environment. In March 1996, the Company completed the
renovation of two of its larger restaurants and has experienced sales increases
at such stores over the prior fiscal year. The Company expects to complete the
renovation of another restaurant in June 1997. Plans have been developed to
renovate and modernize the appearance of certain other Company-owned units.
Franchise fees and royalties decreased by $11,000 or 0.3% to $3,238,000 in
fiscal 1997 compared to $3,249,000 in fiscal 1996. Franchise royalties was
$2,560,000 in fiscal 1997 as compared to $2,687,000 in fiscal 1996, representing
a decrease of 4.7% or $127,000. Franchise restaurant sales upon which royalties
are based were approximately $63,564,000 in fiscal 1997 as compared to
$68,009,000 in fiscal 1996. During fiscal 1997, Caldor, Inc. (who filed for
Bankruptcy protection in September 1995) closed all franchised food service
operations which included 53 Nathan's franchised units, which contributed
approximately $6,075,000 of systemwide sales and royalties of approximately
$243,000 in fiscal 1997. Franchise fee income increased to $678,000 in fiscal
1997 as compared to $562,000 in fiscal 1996. During fiscal 1997, the Company
opened 20 new franchised restaurants in which a franchise fee was earned and 18
new licensed units in which no initial fee was earned as compared to 19 and 15,
respectively, in the fiscal 1996 period. During fiscal 1997, the Company earned
$244,000 of fees associated with expired development agreements as compared to
$60,000 in fiscal 1996. Franchise fees during fiscal 1996 also included $150,000
earned from a non-refundable exclusivity fee associated with the sale of certain
exclusive rights for development within Russia. At the end of fiscal 1997 there
were 147 franchised or licensed units as compared to 178 at the end of fiscal
1996.
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License royalties decreased by $95,000 or approximately 7.5% to $1,177,000 in
fiscal 1997 as compared to $1,272,000 in fiscal 1996. The majority of this
decrease results from the Company no longer amortizing the deferred fee received
from SMG, Inc. in connection with their license agreement for the sale of
Nathan's frankfurters in supermarkets. The amortization period concluded in
February 1996.
Other income decreased by $311,000 or 41.3% to $442,000 in fiscal 1997 from
$753,000 in fiscal 1996 primarily due to reduced investment income derived from
the Company's investment in marketable securities.
COST AND EXPENSES
Cost of restaurant sales increased by $198,000 from $12,833,000 in fiscal 1996
to $13,031,000 in fiscal 1997. This increase primarily results from the fiscal
1997 change in restaurants operated as discussed along with the analysis of
Company-owned restaurant sales above. As a percentage of restaurant sales, the
cost of restaurant sales decreased to 60.0% in fiscal 1997 as compared to 60.6%
in fiscal 1996. The initial success of the Company's marketing activities
yielded the expected increases in food and paper costs as a percentage of sales
which were more than offset by lower labor and benefit costs as a percentage of
sales.
Restaurant operating expenses decreased as a percentage of restaurant sales from
31.8% in fiscal 1996 to 30.4% in the fiscal 1997. This decrease resulted
primarily from the benefit derived from closing two unprofitable restaurants in
the first quarter of fiscal 1997. Additionally, the Company renegotiated
occupancy costs in a third unprofitable restaurant and benefited from lower
property taxes in certain restaurants due to successful certiorri proceedings.
Depreciation and amortization decreased by $711,000 or 41.2% from $1,724,000 in
fiscal 1996 to $1,013,000 in fiscal 1997. Amortization of intangibles, debt
issuance and pre-opening costs decreased by $259,000 or 38.9% from $665,000 in
fiscal 1996 to $406,000 in fiscal 1997. These decreases are primarily
attributable to the reduced depreciation and amortization expense resulting from
the implementation of Financial Accounting Standards Board Statement No. 121
during the fourth quarter of fiscal 1996 which resulted in an impairment charge
of $3,907,000.
General and administrative expenses decreased by $1,360,000 or 24.9% to
$4,097,000 in fiscal 1997 as compared to $5,457,000 in fiscal 1996. This
decrease partially results from corporate staff reductions made during fiscal
1996 and the first quarter fiscal 1997. Additionally, certain one-time benefits
and timing differences further lowered general and administrative expenses for
fiscal 1997. As a percentage of total revenues, general and administrative costs
for fiscal 1997 were 15.4% as compared to 20.6% in fiscal 1996.
INCOME TAXES
In fiscal 1997, the income tax provision was $622,000 or 44.1% of income before
income taxes. Income tax expense of $622,000 included $487,000 of Federal tax
expense, $89,000 of current state and local income tax expense and an adjustment
of $46,000 to the beginning of the year deferred taxes. In fiscal 1996 the
income tax benefit was $94,000 or 1.5% of loss before income taxes.
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 26, 1995
REVENUES
Company-owned restaurant sales increased 1.1% or $240,000 to $21,167,000 for the
fiscal year ended March 31, 1996 ("fiscal 1996") from $20,927,000 for the fiscal
year ended March 26, 1995 ("fiscal 1995 "). Fiscal 1996 was a 53 week reporting
period while fiscal 1995 was a 52 week reporting period. Approximately $382,000
in revenue was generated during the additional week of operations. The opening
of 6 Company-owned units during fiscal 1996 contributed $2,309,000 in restaurant
sales. The increases were partially offset by the decline in comparable store
sales by approximately $1,997,000, or 10.8%, which was caused by increased
competition, the expansion of discounting strategies, and certain other external
factors affecting specific restaurants which are generally older and
significantly larger than the current restaurant designs and operate in mature
markets.
Franchise fees and royalties decreased by $199,000 or 5.8% to $3,249,000 in
fiscal 1996 compared to $3,448,000 in fiscal 1995. Franchise royalties decreased
to $2,687,000 in fiscal 1996 as compared to $2,890,000 in fiscal 1995,
representing a decrease of
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7.0% or $203,000. Franchise restaurant sales upon which royalties are based were
approximately $68,009,000 in fiscal 1996 as compared to $73,465,000 in fiscal
1995. In February, 1995, Caldor, Inc. decided to close all food service
operations in stores whose merchandise sales did not exceed a certain threshold,
which included 22 Nathan's franchised units, the effect of which lowered
systemwide sales by approximately $2,316,000 and royalties by approximately
$92,600 in fiscal 1996 as compared to fiscal 1995. Franchise fee income
increased to $562,000 in fiscal 1996 as compared to $558,000 in fiscal 1995.
During fiscal 1996, the company opened 19 new franchised restaurants in which a
franchise fee was earned and 15 new licensed units in which no initial fee was
earned as compared to 28 and 4, respectively, in the fiscal 1995 period.
Additionally, during fiscal 1996, the Company earned $150,000 in exclusivity
fees associated with the future development of Nathan's in Russia. At the end of
fiscal 1996 there were 178 franchise units as compared to 159 at the end of
fiscal 1995.
License royalties increased by $65,000 or 5.4% to $1,272,000 in fiscal 1996 as
compared to $1,207,000 in fiscal 1995. The majority of the increase relates to
increased royalties earned from SMG due to the increased sales of Nathan's
packaged frankfurters in supermarkets under its licensing arrangement.
Other income increased by $134,000 or 21.6% to $753,000 in fiscal 1996 from
$619,000 in fiscal 1995, primarily due to increased investment income derived
from the Company's investment in marketable securities.
COST AND EXPENSES
Cost of restaurant sales increased by $563,000 or 4.6% from $12,270,000 in
fiscal 1995 to $12,833,000 in fiscal 1996. This increase primarily resulted from
costs associated with the additional Company-owned restaurants operated in
fiscal 1996. As a percentage of restaurant sales, cost of restaurant sales
increased to 60.6% in fiscal 1996 as compared to 58.6% in fiscal 1995. This
increase is primarily due to increased labor and associated benefit costs
resulting from the impact of sales declines in the comparable stores on the
fixed labor cost components.
Restaurant operating expenses increased as a percentage of restaurant sales from
30.6% in fiscal 1995 to 31.8% in fiscal 1996 primarily due to higher energy and
occupancy costs as a percentage of sales. Much of the of this percentage
increase is attributable to the relatively fixed nature of certain costs, while
comparable store sales declined.
Depreciation and amortization increased by $136,000 or 8.6% from $1,588,000 in
fiscal 1995 to $1,724,000 in fiscal 1996. This increase is primarily
attributable to the depreciation on the additional Company-owned units.
Amortization of intangibles and debt issuance costs increased by $84,000 or
14.5% from $581,000 in fiscal 1995 to $665,000 in fiscal 1996. This increase is
primarily attributable to the additional amortization of pre-opening costs
associated with new restaurants.
General and administrative expenses decreased by $402,000 or 6.9% to $5,457,000
in fiscal 1996 as compared to $5,859,000 in fiscal 1995. This decrease is
primarily the result of corporate staff reductions implemented in the beginning
of the fiscal year.
In the fourth quarter of fiscal 1996, the Company has adopted SFAS 121. The
initial non-cash charge upon adoption of this new accounting standard was
$3,907,000, which included $609,000 associated with restaurants that were
decided to be closed. As a result of the reduced carrying value for the affected
long-lived assets that will continue to be used in the business, the Company
expects future annual depreciation expense to be reduced by approximately
$563,000. As the initial charge was based upon estimated cash flow forecasts
requiring significant judgement by management, actual results could differ
significantly from the estimates used.
In fiscal 1996, the Company provided $690,000 associated with certain store
closure costs, $500,000 relating to costs associated with outstanding litigation
and $380,000 relating to the default by a subtenant under the terms of a
sublease agreement which have been recorded as other income and (expense) in the
accompanying 1996 statement of operations.
INCOME TAXES
In fiscal 1996, the income tax benefit was $94,000 or 1.5% of loss before income
taxes. Income tax benefit of $94,000 included $571,000 of Federal tax benefits
offset by $60,000 of current state and local income tax expense and an
adjustment of $417,000
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to the beginning of of the year deferred taxes. The income tax benefit relating
to the fiscal 1996 loss before income taxes, before the valuation allowance, was
$2,460,000 or 38.0% of loss before income taxes. In fiscal 1995, the income tax
benefit was $492,000 or 48.8% of loss before income taxes.
FOURTH QUARTER ADJUSTMENTS
The fourth quarter of fiscal 1996 included adjustments of (i) $3,907,000
relating to the Company's decision to early adopt the provisions of SFAS No.
121; (ii) $690,000 for certain other store closure costs; (iii) $500,000 of
additional reserve relating to outstanding litigation against the Company; (iv)
$380,000 of accrued rental expenses resulting from the default of a sub-lessee
for space which is not expected to be utilized by the Company; and $324,000 of
severance and related costs with respect to limited staff reductions at the
corporate level.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 30, 1997 aggregated $647,000. At March 30,
1997, marketable investment securities totalled $7,640,000 and net working
capital increased to $4,802,000 from $3,937,000 at March 31, 1996. Shareholder's
equity was $21,976,000.
Cash provided by operations of $762,000 in fiscal 1997 is primarily attributable
to net income of $788,000, non-cash charges of $1,651,000, including
depreciation and amortization of $1,419,000, decreases in prepaid income taxes
of $746,000, decreases in accounts payable and accrued expenses of $306,000,
increase in marketable investment securities of $1,512,000, increases in
prepaids and other current assets of $178,000 and decreases in deferred area
development fees and other non-current liabilities of $200,000 and $271,000,
respectively.
Cash used in investing activities of $896,000 represents property and equipment
purchases relating to the construction of a new Company-owned unit which opened
in July 1996, and other fixed asset additions.
Management believes that available cash, marketable investment securities, and
internally generated funds should provide sufficient capital for its planned
operations and expansion program through fiscal 1997. The Company also maintains
a $5,000,000 uncommitted bank line of credit. The Company has not borrowed any
funds to date under this line of credit.
SEASONALITY
The Company's business is affected by seasonal fluctuations. Historically, sales
and earnings have been highest during the first two fiscal quarters with the
fourth fiscal quarter representing the slowest period. This seasonality is
primarily attributable to weather conditions in the Company's marketplace for
its Company-owned stores, which is principally the New York metropolitan area.
IMPACT OF INFLATION
During the past several years the Company's commodity costs have remained
relatively stable. As such, management believes that inflation has not
materially impacted earnings. Substantial increases in labor, food and other
operating expenses could adversely affect the operations of the Company and the
restaurant industry. In 1996, legislation was enacted which increased the
Federal minimum wage, from $4.25 per hour to $4.75 beginning October 1, 1996
with another increase to $5.15 per hour to take effect on September 1, 1997. The
Company expects to experience higher labor costs on a relatively small
proportion of its workforce. Management believes that there may be some ability
to adjust prices and implement cost controls to avoid reducing operating
margins.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Effective March 30, 1997, the Company adopted the disclosure only provisions of
Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting
for Stock-Based Compensation." This statement establishes financial accounting
and reporting
15
17
standards for stock-based employee compensations plans. The provisions of SFAS
No. 123 encourage entities to adopt a fair value based method of accounting for
stock compensation plans; however, these provisions also permit the Company to
continue to measure compensation costs under pre-existing accounting
pronouncements. If the fair value based method of accounting is not adopted,
SFAS No. 123 requires pro forma disclosures of net income and net income per
share in the notes to the financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS No. 128), "Earnings Per Share." This
statement establishes standards for computing and presenting earnings per share
("EPS"), replacing the presentation of currently required primary EPS with a
presentation of Basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both Basic EPS and Diluted EPS on
the face of the statement of operations. Under this new standard, Basic EPS is
computed based on weighted average shares outstanding and excludes any potential
dilution; Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock and is similar to the currently required fully diluted EPS. SFAS
No. 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods, and earlier application is not
permitted. When adopted, the Company will be required to restate its EPS data
for all prior periods presented. The Company does not expect the impact of the
adoption of this statement to be material to previously reported EPS amounts.
Effective March 31, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS No. 107), "Disclosures about Fair Value of Financial
Instruments." To meet the reporting requirements of SFAS No. 107, the Company
calculated the fair value of financial instruments and includes this additional
information in the notes to financial statements when the fair value is
different than the book value of those financial instruments. When the fair
value is equal to the book value, no additional disclosure is made. The Company
uses quoted market prices whenever available to calculate the fair value. When
quoted prices are not available, the Company uses standard pricing models for
various types of financial instruments which take into account the present value
of future cash flows. At March 30, 1997, the carrying value of all financial
instruments approximated fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data is
submitted as a separate section of this report beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On September 8, 1995, the Board of Directors determined to replace KPMG
Peat Marwick LLP, the Company's independent auditors for the fiscal year ended
March 26, 1995, with Arthur Andersen LLP, the Company's auditors for the fiscal
years ended March 31, 1996 and March 30, 1997. The decision to change
independent accountants was recommended to the Board of Directors by the Audit
Committee of the Board of Directors.
In connection with the audit for the Company's fiscal year ended March
26, 1995 and for the period from March 27, 1995 through the date of change in
auditors, there were no disagreements with KPMG Peat Marwick LLP on any matters
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to their
satisfaction, would have caused it to make a reference to the subject matter of
the disagreement in connection with its report.
The report of KPMG Peat Marwick LLP for the year ended March 26, 1995
does not contain an adverse opinion or a disclaimer of opinion, or a
qualification or modification as to uncertainty, audit scope or accounting
principles, except that the Company changed its method of accounting for
investments to adopt the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" at March 27, 1994 and its method of accounting for income
taxes in 1994 to adopt the provisions of SFAS No. 109, "Accounting for Income
Taxes."
The Company has not had any discussions nor received any written
reports or oral advice from Arthur Andersen LLP during the two most recent
fiscal years and any subsequent interim period with respect to either the
application of accounting principles to a specified transaction, either
completed or proposed, or as to the type of audit opinion that might be rendered
on the Company's financial statements.
16
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the executive officers of the Company,
see "Executive Officers of the Registrant" in Part I of this Report. Information
with respect to the Directors of the Company is incorporated herein by reference
to the Company's proxy statement to be filed with the Securities and Exchange
Commission pursuant to the 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 the Company's 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 the Company's 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 the Company's 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying index
to consolidated financial statements and schedule on Page F-1 are filed as part
of this report.
(2) FINANCIAL STATEMENT SCHEDULE
The consolidated financial statement schedule listed in the
accompanying index to consolidated financial statements and schedule on Page F-1
is filed as part of this report.
(3) EXHIBITS
Certain of the following exhibits (as indicated in the footnotes to the
list), were previously filed as exhibits to other reports or registration
statements filed by the Registrant under the Securities Act of 1993 or under the
Securities Exchange Act of 1934 and are herein incorporated by reference.
Exhibit
No. Exhibit
--- -------
3.1 Certificate of Incorporation of the Company.(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 of the Company.(Incorporated by reference to Exhibit 3.3 to
Registration Statement on Form S-1 No. 33-56976.)
3.4 Amendment to By-Laws of the Company (Incorporated by reference to
Exhibit 3.4 to the Annual Report on form 10-K for the year ended March
26, 1995.)
17
19
4.1 Specimen Stock Certificate. (Incorporated by reference to Exhibit 4.1
to Registration Statement on Form S-1 No. 33-56976.)
4.2 Form of Warrant issued to Ladenburg, Thalmann & Co., Inc. (Incorporated
by reference to Exhibit 4.2 to Registration Statement on Form S-1 No.
33-56976.)
4.3 Form of Warrant issued to Howard M. Lorber. (Incorporated by reference
to Exhibit 4.3 to the Annual Report filed on form 10-K for the fiscal
year ended March 27, 1994.)
4.4 Amendment to Warrant issued to Howard M. Lorber (Incorporated by
reference to Exhibit 4.4 to the Annual Report filed on form 10-K for
the fiscal year ended March 31, 1996.)
4.5 Specimen Rights Certificate (Incorporated by reference to Exhibit 4 to
the Current Report on form 8-K dated July 14, 1995.)
10.1 Employment Agreement between the Company and 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 Id"s Realty Associates and the
Company.
c) Lease, dated November 17, 1967, between Id"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 between the Company and 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 of the Company, as amended. (Incorporated by
reference to Exhibit 10.8 to Registration Statement on Form S-8 No.
33-93396.)
10.6 Area Development Agreement between the Company and 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 between the Company and 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 Area Development Agreement between the Company and Caldor, Inc. dated
March 31, 1992. (Incorporated by reference to Exhibit 10.11 to
Registration Statement on Form S-1 No. 33-56976.)
10.9 Form of Standard Franchise Agreement. (Incorporated by reference to
Exhibit 10.12 to Registration Statement on Form S-1 No. 33-56976.)
10.10 The Company's 401K Plan and Trust. (Incorporated by reference to
Exhibit 10.5 to Registration Statement on Form S-1 No. 33-56976.)
10.11 Settlement Agreement between the Company and Blackwell Estates, Inc.
and Ellen Investors Corp. relating to the 42nd Street urban development
condemnation award. (Incorporated by reference to Exhibit 10.16 to
Registration Statement on Form S-1 No. 33-56976.)
10.12 Restricted Stock Grant letter to Mr. Norbitz. (Incorporated by
reference to Exhibit 10.17 to Registration Statement on Form S-1 No.
33-56976.)
10.13 Agreement dated January 11, 1993, between the Company and Nathan's
Famous Associates. (Incorporated by reference to Exhibit 10.18 to
Registration Statement on Form S-1 No. 33-56976.)
10.14 Amendment dated November 8, 1993, to the Employment Agreement, dated
December 28, 1992, between the Company and 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.)
10.15 Employment Agreement between the Company and Howard M. Lorber dated
November 8, 1993. (Incorporated by reference to Exhibit 10.20 to the
Annual Report filed on form 10-K for the fiscal year ended March 27,
1994.)
10.16 Amendment dated January 26, 1996, to the Employment Agreement, dated
November 8, 1993, between the Company and Howard M. Lorber.
(Incorporated by reference to Exhibit 10.16 to the Annual Report filed
on form 10-K for the fiscal year ended March 31, 1996.)
18
20
10.17 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.)
10.18 Form of Grid Note from Nathan's Famous Operating Corp. to Chemical
Bank. (Incorporated by reference to Exhibit 10.18 to the Annual Report
filed on form 10-K for the fiscal year ended March 31, 1996.)
10.19 Outside Director Stock Option Plan. (Incorporated by reference to
Exhibit 10.22 to Registration Statement on Form S-8 No. 33-89442.)
10.20 Home Depot Food Service Lease Agreement. (Incorporated by reference to
Exhibit 10.24 to the Annual Report filed on form 10-K for the fiscal
year ended March 26, 1995.)
10.21 Form of Rights Agreement dated July 14, 1995 between the Company and
American Stock Transfer & Trust Company. (Incorporated by reference to
Exhibit 4 to the Current Report filed on form 8-K dated July 14, 1995.)
10.22 Modification Agreement to the Employment Agreement between the Company
and 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.)
10.23 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.)
10.24 Warrant Agreement dated November 24, 1996 between the Company and Jerry
Krevans.
21 List of Subsidiaries of the Registrant.
24.1 Consent of KPMG Peat Marwick LLP
24.2 Consent of Arthur Andersen LLP.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the last quarter covered
by this report.
19
21
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 18 day of June, 1997.
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 18th day of June, 1997.
/s/ HOWARD M. LORBER Chairman of the Board and Chief Executive
- ------------------------------ Officer (Principal Executive Officer)
Howard M. Lorber
/s/ WAYNE NORBITZ President, Chief Operating Officer and Director
- ------------------------------
Wayne Norbitz
/s/ RONALD G. DEVOS Vice President - Finance and Chief Financial
- ------------------------------ Officer (Principal Financial and Accounting
Ronald G. DeVos Officer)
/s/ ROBERT J. EIDE Director
- ------------------------------
Robert J. Eide
/s/ BARRY LEISTNER Director
- ------------------------------
Barry Leistner
/s/ JEFFREY A. LICHTENBERG Director
- ------------------------------
Jeffrey A. Lichtenberg
/s/ ATTILIO F. PETROCELLI Director
- ------------------------------
Attilio F. Petrocelli
20
22
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statement of Nathan's Famous, Inc. and
subsidiaries are included in item 8:
Page
----
Report of Independent Public Accountant Arthur Andersen LLP F-2
Report of Independent Public Accountant KPMG Peat Marwick LLP F-3
Consolidated Balance Sheets at March 30, 1997 and March 31, 1996 F-4
Consolidated Statements of Operations for the Fiscal Years ended
March 30, 1997, March 31, 1996 and March 26, 1995 F-5
Consolidated Statements of Stockholder Equity for the Fiscal Years
ended March 30, 1997, March 31, 1996 and March 26, 1995 F-6
Consolidated Statements of Cash Flows for the Fiscal Years ended
March 30, 1997, March 31, 1996 and March 26, 1995 F-7
Notes to the Consolidated Financial Statements F-8
F-1
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Nathan's Famous, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Nathan's Famous,
Inc., a Delaware Corporation, and subsidiaries as of March 30, 1997 and March
31, 1996 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nathan's Famous,
Inc. and subsidiaries as of March 30, 1997 and March 31, 1996, and the results
of their operations and their cash flows for each of the two years in the period
then ended in conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, in fiscal 1996,
the Company changed its method of accounting for long-lived assets to conform
with SFAS No. 121, and in connection therewith, recorded an impairment loss of
approximately $3,900,000.
Arthur Andersen LLP
Roseland, New Jersey
May 22, 1997
F-2
24
Independent Auditors' Report
The Board of Directors and Stockholders
Nathan's Famous, Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Nathan's Famous, Inc. and subsidiaries
for the year ended March 26, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Nathan's Famous, Inc. and subsidiaries for the year ended March 26, 1995 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Jericho, New York
May 16, 1995
F-3
25
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS March 30, March 31,
1997 1996
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 647 $ 801
Marketable investment securities 7,640 6,128
Franchise and other receivables, net 1,039 1,108
Inventories 213 226
Prepaid income taxes -- 746
Prepaid expenses and other current assets 502 331
Deferred income taxes 415 571
-------- --------
Total current assets 10,456 9,911
Property and equipment, net 5,480 5,615
Intangible assets, net 11,640 12,025
Other assets, net 218 214
-------- --------
$ 27,794 $ 27,765
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of obligations under capital leases $ 17 $ 23
Accounts payable 754 1,003
Accrued expenses and other current liabilities 4,614 4,671
Deferred franchise fees 269 277
-------- --------
Total current liabilities 5,654 5,974
Obligations under capital leases, net of current installments 21 35
Deferred area development fees -- 200
Other liabilities 143 414
-------- --------
Total liabilities 5,818 6,623
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000 shares authorized, 4,722,216 issued
and outstanding at March 30, 1997 and March 31, 1996,
respectively 47 47
Additional paid-in capital 32,307 32,261
Accumulated deficit (10,378) (11,166)
-------- --------
Total stockholders' equity 21,976 21,142
-------- --------
$ 27,794 $ 27,765
======== ========
The accompanying notes are an integral part of these balance sheets.
F-4
26
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
For the Fiscal Year Ended
---------------------------------------
March 30, March 31, March 26,
1997 1996 1995
---- ---- ----
REVENUES:
Sales $21,718 $ 21,167 $ 20,927
Franchise fees and royalties 3,238 3,249 3,448
License royalties 1,177 1,272 1,207
Investment and other income 442 753 619
------- -------- --------
Total revenues 26,575 26,441 26,201
------- -------- --------
COSTS AND EXPENSES:
Cost of restaurant sales 13,031 12,833 12,270
Restaurant operating expenses 6,602 6,730 6,396
Depreciation and amortization 1,013 1,724 1,588
Amortization of intangible assets 406 665 581
General and administrative expenses 4,097 5,457 5,859
Interest expense 16 28 16
Impairment of long-lived assets -- 3,907 --
Other expense -- 1,570 500
------- -------- --------
Total costs and expenses 25,165 32,914 27,210
------- -------- --------
Income (loss) before provision (benefit) for income taxes 1,410 (6,473) (1,009)
Provision (benefit) for income taxes 622 (94) (492)
------- -------- --------
Net income (loss) $ 788 $ (6,379) $ (517)
======= ======== ========
Net income (loss) per common share $ .17 $ (1.35) $ (.11)
======= ======== ========
Weighted average number of common and common
equivalent shares outstanding 4,729 4,722 4,728
======= ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-5
27
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Additional Total
Common Common Paid-in Deferred Accumulated Stockholders'
Shares Stock Capital Compensation Deficit Equity
------ ----- ------- ------------ ------- ------
BALANCE, March 27, 1994 4,732,232 $47 $ 32,457 $(276) $ (4,270) $ 27,958
Amortization of deferred compensation relating to
restricted stock -- -- -- 54 -- 54
Forfeiture of deferred compensation (10,016) -- (69) 48 -- (21)
Net loss -- -- -- -- (517) (517)
--------- --- -------- ----- -------- --------
BALANCE, March 26, 1995 4,722,216 47 32,388 (174) (4,787) 27,474
Amortization of deferred compensation relating to
restricted stock -- -- -- 47 -- 47
Net loss -- -- -- -- (6,379) (6,379)
--------- --- -------- ----- -------- --------
BALANCE, March 31, 1996 4,722,216 47 32,388 (127) (11,166) 21,142
========= === ======== ===== ======== ========
Amortization of deferred compensation relating to
restricted stock -- -- -- 46 -- 46
Net income -- -- -- -- 788 788
--------- --- -------- ----- -------- --------
BALANCE, March 30, 1997 4,722,216 $47 $32,388 $(81) $(10,378) $21,976
========= === ======== ===== ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-6
28
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Fiscal Year Ended
-----------------------------------
March 30, March 31, March 26,
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 788 $(6,379) $ (517)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,013 1,724 1,588
Impairment of long-lived assets -- 3,907 --
Amortization of intangible assets 406 665 581
Provision for doubtful accounts 30 339 252
Amortization of deferred compensation 46 47 33
Deferred income taxes 156 (154) (473)
Changes in operating assets and liabilities:
Marketable investment securities (1,512) (2,032) 3,848
Franchise and other receivables 39 (160) (383)
Inventories 13 15 16
Prepaid and other assets (178) (55) (434)
Prepaid income taxes 746 (122) (308)
Accounts payable and accrued expenses (306) 1,546 227
Deferred franchise fees (8) 77 (120)
Deferred area development fees (200) (85) 50
Other non-current liabilities (271) 256 (49)
------- ------- -------
Net cash provided by (used in) operating activities 762 (411) 4,311
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (896) (2,984) (2,108)
Disposals of property and equipment -- 125 --
------- ------- -------
Net cash used in investing activities (896) (2,859) (2,108)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of obligations under capital leases (20) (15) (26)
------- ------- -------
Net cash used in financing activities (20) (15) (26)
------- ------- -------
Net change in cash and cash equivalents (154) (3,285) 2,177
CASH AND CASH EQUIVALENTS, beginning of year 801 4,086 1,909
------- ------- -------
CASH AND CASH EQUIVALENTS, end of year $ 647 $ 801 $ 4,086
------- ------- -------
CASH PAID DURING THE YEAR FOR:
Interest $ 16 $ 26 $ 15
======= ======= =======
Income taxes $ 182 $ 685 $ 769
======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
F-7
29
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share amounts)
1. DESCRIPTION AND ORGANIZATION OF BUSINESS:
Description of Business
Nathan's Famous, Inc. and Subsidiaries (collectively the "Company") develops and
operates a chain of retail fast food style restaurants which prepare and serve
quality food products to the general public. Nathan's Famous Restaurants feature
a specialized menu which includes, among other things, hot dogs, manufactured
with a proprietary spice formula, hamburgers, crinkle-cut french fries, assorted
sandwiches and platters. The Company primarily operates in the eastern region of
the United States, with 26 Company-owned stores and 147 franchised units as of
March 30, 1997.
Organization of Business
In July 1987, all of the outstanding shares, options and warrants of Nathan's
Famous, Inc. (the "Predecessor Company"), a then publicly held New York
corporation, were acquired through a cash transaction, accounted for by the
purchase method of accounting (the "Acquisition"). In connection with the
Acquisition, a privately-held New York corporation (the "Acquiring Corporation")
was merged into the Predecessor Company. The purchase price exceeded the fair
value of the acquired assets of the Predecessor Company by $15,374, and such
amount is recorded net of accumulated amortization in the accompanying
consolidated balance sheets. In November 1989, the surviving corporation was
merged with Nathan's Newco, Inc., a Delaware corporation which, upon the
effectiveness of the merger, changed its name to Nathan's Famous, Inc. ("NFI").
In August 1992, as part of a bank refinancing, two new Delaware corporations
were formed, Nathan's Famous Holding Corp. ("NFH") and Krinkle Kut, Inc. ("KK").
Pursuant to a merger agreement, KK was merged into NFI and NFI became a
wholly-owned subsidiary of NFH. As a result of this merger, the former holders
of the outstanding common stock of NFI owned the outstanding shares of NFH in
the same proportion in which they formerly held the stock of NFI. On December
15, 1992, NFI and NFH amended their charter to change their respective names to
Nathan's Famous Operating Corp. ("NFOC") and Nathan's Famous, Inc.
On February 26, 1993, the Company completed an initial public offering in which
it sold 1,500,000 shares of common stock at an offering price of $9.00 per
share. The net proceeds from the offering, after deducting underwriters'
commissions and offering costs of approximately $1,850, was $11,654. The Company
used $5,917 of the net proceeds from the public offering to retire a term loan
with a bank. In April 1993, the underwriter exercised its overallotment option
to purchase an additional 225,000 shares of common stock at the offering price,
resulting in additional proceeds to the Company of $1,863, net of underwriters'
commissions.
In fiscal 1994, NFOC formed two new corporations, Nathan's Famous Systems, Inc.
and Nathan's Famous Services, Inc., for the purpose of establishing separate
franchise and restaurant management support organizations.
F-8
30
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Fiscal Year
The Company's fiscal year ends on the last Sunday in March, which results in a
52 or 53 week reporting period. The results of operations for fiscal 1996 are
presented on the basis of a 53 week reporting period, and fiscal 1997 and 1995
are presented on the basis of 52 week reporting periods.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of
three months or less to be cash equivalents. Cash restricted for untendered
shares associated with the Acquisition amounted to $280 at March 30, 1997 and
March 31, 1996, and is included in cash and cash equivalents.
Inventories
Inventories consist primarily of restaurant food items and supplies and are
stated at the lower of cost or market value. Cost is determined using the
first-in, first-out method.
Marketable Investment Securities
The Company classifies its investments in marketable investment securities as
"trading" in accordance with Statement of Financial Accounting Standards No. 115
("SFAS No. 115"), "Accounting for Certain Investments in Debt and Equity
Securities". Such securities are reported at fair value, with unrealized gains
and losses included in earnings. Gains and losses on the disposition of
securities are recognized on the specific identification method in the period in
which they occur.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is calculated primarily on the
straight-line basis over the estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the estimated useful life or the
lease term of the related asset. The 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
F-9
31
Intangible Assets
Intangible assets consist principally of the excess of cost over the fair value
of the assets acquired relating to the Acquisition and is being amortized over a
period of 40 years. Accumulated amortization at March 30, 1997 and March 31,
1996, was $3,734 and $3,349, respectively. Amortization expense was $414, $665
and $542 for fiscal years ended March 30, 1997, March 31, 1996, and March 26,
1995, respectively.
The Company assesses the recoverability of the excess of cost over the fair
value of assets acquired by determining whether the amortization of the balance
over its estimated remaining life can be recovered through, among other things,
undiscounted future operating cash flows of the acquired operations, franchise
fees earned from franchising operations and license fees earned from the
licensing of Company products. The amount of impairment, if any, is measured
based on projected undiscounted future operating cash flows.
Recently Issued Accounting Standards
Effective March 31, 1996, the Company adopted Statement of Financial Accounting
Standards No. 107 (SFAS No. 107), "Disclosures about Fair Value of Financial
Instruments". To meet the reporting requirements of SFAS No. 107, the Company
calculates the fair value of financial instruments and includes this additional
information in the notes to financial statements when the fair value is
different than book value of those financial instruments. When the fair value is
equal to the book value, no additional disclosure is made. The Company uses
quoted market prices whenever available to calculate the fair value. When quoted
market prices are not available, the Company uses standard pricing models for
various types of financial instruments which take into account the present value
of estimated future cash flows. At March 31, 1996, the carrying value of all
financial instruments approximated fair value (Note 5).
Effective March 30, 1997, the Company adopted the disclosure only provisions of
Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting
for Stock-Based Compensation". This statement establishes financial accounting
and reporting standards for stock-based employee compensation plans. The
provisions of SFAS No. 123 encourage entities to adopt a fair value based method
of accounting for stock compensation plans; however, these provisions also
permit the Company to continue to measure compensation costs under pre-existing
accounting pronouncements. If the fair value based method of accounting is not
adopted, SFAS No. 123 requires pro forma disclosures of net income and net
income per share in the notes to the financial statements (Note 10).
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
("EPS"), replacing the presentation of currently required primary EPS with a
presentation of Basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both Basic EPS and Diluted EPS on
the face of the statement of operations. Under this new standard, Basic EPS is
computed based on weighted average shares outstanding and excludes any potential
dilution; Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock and is similar to the currently required fully diluted EPS. SFAS
No. 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods, and earlier application is not
permitted. When adopted, the Company will be required to restate its EPS data
for all prior periods presented. The Company does not expect the impact of the
adoption of this statement to be material to previously reported EPS amounts.
F-10
32
Franchise and Area Development Fee Revenue Recognition
Franchisees are required to execute a separate franchise or license agreement
for each restaurant. Under an area development agreement, the number of
restaurants and the area designated for development are established and the
franchisee is required to construct and open such restaurants within a defined
timetable. For each restaurant under an area development agreement, a separate
franchise or license agreement is executed.
Franchisees under a franchise agreement are generally required to pay an initial
franchise fee and a monthly royalty of 4% - 4.5% of restaurant sales.
Franchisees under a license agreement do not pay an initial fee and remit
monthly royalty payments based on 10% of restaurant sales up to $250, 8% of
restaurant sales between $250 and $500 and 6% of restaurant sales in excess of
$500 per annum. Franchise fees are recognized as revenue when the Company
performs substantially all initial services required by the franchise agreement,
which is generally upon restaurant opening. Revenue under area development
agreements is recognized ratably over the number of restaurants opened, as
provided for in the respective agreements. Franchise royalties are accrued as
earned. Franchise and area development fees received prior to completion of the
revenue recognition process are recorded as deferred revenue. At March 30, 1997
and March 31, 1996, $269 and $477, respectively, of deferred franchise and area
development fees are included in the accompanying consolidated balance sheets.
Concentrations of Credit Risk
The Company's trade receivables consist principally of receivables from
franchisees for royalties and advertising contributions. At March 30, 1997 and
March 31, 1996, two and three franchisees, respectively, represented an
aggregate of approximately 40% and 39%, respectively, of franchise royalties
receivable. At March 26, 1995, no one franchise receivable exceeded 5% of
franchise royalties receivable.
Advertising
The Company maintains advertising funds for local, regional and national
advertising, in accordance with Section 10 of the Nathan's Famous Systems, Inc.
Franchise Agreement. Under this arrangement, the Company collects and disburses
fees paid by franchisees and Company-owned stores for the national and regional
advertising, promotional and public relations programs for the Nathan's Famous
concept. Contributions are based on specified percentages of net sales,
generally ranging between 0%-3%. Advertising contributions from Company-owned
stores are included in restaurant operating expenses in the accompanying
consolidated statements of operations. Total Company-owned store advertising
expense was $570, $625 and $1,009 for the fiscal years ended March 30, 1997,
March 31, 1996 and March 26, 1995, respectively. Total advertising contributions
realized from franchisees was $308, $377 and $517 for the fiscal years ended
March 30, 1997, March 31, 1996 and March 26, 1995, respectively, and is recorded
as an offset to advertising expense in general and administrative expenses. The
Company charges all production costs of advertising to expense when the
advertisements are run.
The Company funds, on an annual basis, the excess of any expenditures over
revenues, if any, and records such amount in general and administrative expenses
in the accompanying consolidated statements of operations. For the fiscal year
ended March 26, 1995, excess expenditures over revenues aggregated $439. There
were no excess expenditures for the years ended March 30, 1997 and March 31,
1996.
F-11
33
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes".
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. 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.
Earnings Per Share
Weighted average common and common equivalent shares outstanding for the fiscal
years ended March 30, 1997, March 31, 1996 and March 26, 1995 were 4,728,883,
4,722,216 and 4,727,732, respectively, and included common stock equivalents of
26,668, 0 and 0, respectively.
Reclassifications
Certain reclassifications of prior period balances have been made to conform
with the current year presentation.
3. IMPAIRMENT OF LONG-LIVED ASSETS:
The Company early adopted SFAS No. 121 in fiscal 1996 for purposes of
determining and measuring impairment of certain long-lived assets to be held and
used in the business as well as assets to be disposed of. The Company considers
a history of store operating losses to be its primary indicator of potential
impairment. Assets are grouped and evaluated for impairment at the lowest level
for which there are identifiable cash flows that are independent of the cash
flows of other groups of assets. The Company has identified the appropriate
grouping of assets to be individual restaurants, and such assets are deemed to
be impaired if a forecast of undiscounted future operating cash flows, including
disposal value, if any, is less than its carrying amount. The loss is measured
as the amount by which the carrying amount of the assets exceeds its fair value.
The Company generally measures fair value by discounting estimated future cash
flows. Considerable management judgment is necessary to estimate discounted
future cash flows and, accordingly, actual results could vary significantly from
such estimates.
The impairment loss recorded upon adoption of SFAS No. 121 was $3,907 in fiscal
1996, which includes $609 related to three restaurants for which closure
decisions were made upon adoption of SFAS No. 121. In addition, approximately
$690 was recorded relating to associated store closure costs. As a result of the
reduced carrying amount of the impaired assets, depreciation and amortization
expense for fiscal 1997 was reduced by approximately $563 for stores that
continue in operation.
The results of operations for stores to be closed were as follows for the years
ended March 30, 1997, March 31, 1996 and March 26, 1995:
1997 1996 1995
---- ---- ----
Revenues $ 331 $ 1,089 $ 541
Operating expenses 399 1,453 594
Depreciation -- 108 67
Losses from stores to be closed (68) (472) (120)
F-12
34
4. FRANCHISE AND OTHER RECEIVABLES:
Franchise and other receivables consists of the following:
1997 1996
------ ------
Franchise royalties $1,116 $1,304
License royalties 136 42
Other 368 341
------ ------
1,620 1,687
Less: allowance for doubtful accounts 581 579
------ ------
$1,039 $1,108
====== ======
5. MARKETABLE INVESTMENT SECURITIES:
Marketable investment securities at March 30, 1997 and March 31, 1996 consisted
of trading securities with aggregate fair values of $7,640 and $6,128,
respectively. Fair values of corporate and municipal bonds are based upon quoted
market prices. The investment in trading limited partnerships are based upon the
proportionate share of the underlying net assets of the partnerships.
The gross unrealized holding gains and fair values of trading securities by
major security type at March 30, 1997, March 31, 1996 and March 26, 1995 were as
follows:
1997 1996 1995
------------------------- ----------------------- -----------------------
Gross Gross Gross
Unrealized Fair Unrealized Fair Unrealized Fair
Holding Value of Holding Value of Holding Value of
Gain Investments Gain Investments Gain Investments
---- ----------- ---- ----------- ---- -----------
Commercial paper $ -- $2,275 $ -- $ -- $ -- $ --
Corporate bonds (2) 2,451 15 514 6 506
Municipal bonds 54 2,111 88 4,274 41 2,447
Investment in trading
limited partnerships 303 803 340 1,340 143 1,143
------- ------ ------ ------ ------ ------
$ 355 $7,640 $ 443 $6,128 $ 190 $4,096
======= ====== ====== ====== ====== ======
6. PROPERTY AND EQUIPMENT, net:
Property and equipment, net consists of the following:
1997 1996
------- -------
Construction in progress $ 184 $ 40
Land 896 896
Building and improvements 1,036 1,032
Machinery, equipment, furniture and fixtures 4,231 4,015
Leasehold improvements 5,699 5,140
------- -------
12,046 11,123
Less: accumulated depreciation and amortization 6,566 5,508
------- -------
$ 5,480 $ 5,615
======= =======
Related depreciation and amortization expense totalled $1,013, $1,724 and $1,588
for the fiscal years ended March 30, 1997, March 31, 1996 and March 26, 1995,
respectively.
F-13
35
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following:
1997 1996
------ ------
Accrued professional fees $ 526 $ 497
Accrued litigation 1,000 1,000
Accrued vacation 358 391
Accrued severance -- 324
Accrued store closure costs 30 545
Accrued insurance 563 209
Accrual for untendered shares 280 280
Sales and payroll taxes payable 279 334
Deferred revenue 366 46
Other 1,212 1,045
------ ------
$4,614 $4,671
====== ======
8. FINANCING ARRANGEMENTS:
The Company has a $5,000 line of credit with a certain financial 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 September 30, 1997, and bears interest at a rate
of prime plus 1 percent. There were no borrowings outstanding under this line of
credit at March 30, 1997 and March 31, 1996.
9. INCOME TAXES:
Income tax expense (benefit) consists of the following for the years ended March
30, 1997, March 31, 1996 and March 26, 1995:
1997 1996 1995
----- ----- -----
Federal:
Current $ 533 $ (68) $ (78)
Deferred -- (503) (377)
----- ----- -----
533 (571) (455)
----- ----- -----
State and local:
Current 89 60 59
Deferred -- -- (96)
----- ----- -----
89 60 (37)
----- ----- -----
Adjustment to valuation allowance relating to
opening net deferred tax asset -- 417 --
----- ----- -----
$ 622 $ (94) $(492)
===== ===== =====
F-14
36
Total income tax expense (benefit) for fiscal years ended March 30, 1997, March
31, 1996 and March 26, 1995 differed from the amounts computed by applying the
United States Federal income tax rate of 34% to income (loss) before income
taxes as a result of the following:
1997 1996 1995
----- ------- -----
Computed "expected" tax expense (benefit) $ 482 $(2,201) $(343)
Nondeductible amortization 144 131 131
State and local income taxes, net of Federal income
tax benefit 49 40 (24)
Tax-exempt investment earnings (50) (49) (65)
Change in the valuation allowance for net deferred
tax assets -- 1,949 --
Reversal of prior year over accruals -- -- (200)
Other (3) 36 9
----- ------- -----
$ 622 $ (94) $(492)
===== ======= =====
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
1997 1996
------- -------
Deferred tax assets:
Accrued vacation pay $ 204 $ 146
Allowance for doubtful accounts 217 226
Deferred revenue 143 --
Depreciation expense 618 678
Expenses not deductible until paid 712 623
Impairment of long-lived assets 1,404 1,524
Insurance 149 --
Accrual for store closing and severance costs 73 339
Net operating loss carryforward 47 68
Other 24 10
------- -------
Total gross deferred tax assets 3,591 3,614
------- -------
Deferred tax liabilities:
Involuntary conversion 504 504
Unrealized gain on marketable investment 221 173
securities
Other 85 --
------- -------
Total gross deferred tax liabilities 810 677
------- -------
Net deferred tax asset 2,781 2,937
Less: Valuation allowance (2,366) (2,366)
------- -------
$ 415 $ 571
======= =======
The Company anticipates utilizing a net operating loss for income tax purposes
of approximately $139,000 for the tax year ending March 30, 1997. At both March
30, 1997 and March 31, 1996, a valuation allowance of $2,366 has been provided
against that portion of net deferred tax assets for which it is more likely than
not that the deferred tax assets will not be realized.
F-15
37
10. STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS:
Stock Option Plans
On December 15, 1992, the Company adopted the 1992 Stock Option Plan (the
"Plan") which provides for the issuance of incentive stock options (ISO's) to
officers and key employees and non-qualified stock options to directors,
officers and key employees. Up to 525,000 shares of common stock have been
reserved for issuance under the Plan. The terms of the options are generally ten
years, except for ISO's granted to any employee, who prior to the granting of
the option, owns stock representing more than 10% of the voting rights, for
which the option term will be five years. The exercise price for non-qualified
stock options outstanding under the Plan can be no less than the fair market
value, as defined, of the Company common stock at the date of grant. For ISO's,
the exercise price can generally be no less than the fair market value of the
Company's common stock at the date of grant, with the exception of any employee
who prior to the granting of the option, owns stock representing more than 10%
of the voting rights, for which the exercise price can be no less than 110% of
fair market value of the Company's common stock at the date of grant.
On May 24, 1994, the Company adopted the Outside Director Stock Option Plan (the
"Directors' Plan") which provides for the issuance of non-qualified stock
options to non-employee directors, as defined, of the Company. Up to 200,000
shares of common stock have been reserved for issuance under the Directors'
Plan. The Directors' Plan provides that each non-employee director would be
granted an option to purchase 25,000 shares of common stock at a price of $6.25
per share effective June 1, 1994, and for each subsequent year through June 1,
1996, each non-employee director would be granted options to purchase 12,500
shares of common stock at 100% of the fair market value of the common stock on
the date of grant. Options awarded to each non-employee director shall vest over
a period of two years, subject to forfeiture under certain conditions and shall
be exercisable upon vesting. There were 50,000 options granted under the
provisions of the Directors Plan during the year ended March 30, 1997 and March
31, 1996, respectively.
The Plan and the Directors' Plan expire on December 2, 2002 and December 31,
2004, respectively, unless terminated earlier by the Board of Directors under
conditions specified in the Plan.
A summary of the status of the Company's two stock option plans at March 30,
1997, March 31, 1996 and March 26, 1995 and changes during the years then ended
is presented in the table and narrative below:
1997 1996 1995
---------------------- ---------------------- ----------------------
Weighted - Weighted - Weighted -
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Options outstanding-
beginning of year 511,167 $ 5.99 376,167 $ 6.80 190,667 $ 7.54
Granted 110,000 3.75 175,000 4.27 200,000 6.14
Exercised -- -- -- -- -- --
Canceled (20,000) 7.40 (40,000) 6.00 (14,500) 7.28
------- ------- -------
Options outstanding-
end of year 601,167 5.54 511,167 5.99 376,167 6.80
------- ------- -------
Options exercisable-
end of year 398,371 268,270 154,032
======= ======= =======
Weighted average fair
value of options granted $ 1.99 $ 2.06
======= =======
F-16
38
295,000 of the 601,167 options outstanding at March 30, 1997 have exercise
prices between $3.38 and $5.07, with a weighted average exercise price of $4.09
and a weighted average remaining contractual life of 8.75 years. 117,204 of
these options are exercisable; their weighted average exercise price is $4.18.
247,167 of the options outstanding at March 30, 1997 have exercise prices
between $5.07 and $7.61, with a weighted average exercise price of $6.55 and a
weighted average remaining contractual life of 6.70 years. 227,167 of these
options are exercisable; their weighted average exercise price is $6.58. The
remaining 59,000 options have exercise prices between $7.61 and $9.25 with a
weighted average exercise price of $8.53 and a weighted average remaining
contractual life of 6.08 years. 54,000 of these options are exercisable; their
weighted average exercise price is $8.46.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
1997 1996
---- ----
Expected life (years) 7.5 6.8
Interest rate 6.76% 5.96%
Volatility 33.75% 33.75%
Dividend yield 0% 0%
The Company has adopted the pro forma disclosure provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation". Accordingly, no compensation cost has been recognized
for the stock option plans. Had compensation cost for the Company's stock option
plans been determined under SFAS No. 123, the Company's net income and earnings
per share would approximate the pro forma amounts below:
(in thousands, except per share amounts)
1997 1996
---- ----
Net income (loss): As reported $798 $ (6,379)
Pro forma 768 (6,465)
Earnings (loss) per share As reported $.17 $ (1.35)
Pro forma .16 (1.37)
Because the SFAS No. 123 method of accounting is not applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
Common Stock Purchase Rights
On June 20, 1995, the Board of Directors declared a dividend distribution of one
common stock purchase right (the "Rights") for each outstanding share of Common
Stock of the Company. The distribution was paid on June 20, 1995 to the
shareholders of record on June 20, 1995. Each Right, as amended, entitles the
registered holder thereof to purchase from the Company one-half share of the
Common Stock at a price of $2.50 per one-half of a share (the "Purchase Price"),
subject to adjustment for anti-dilution. New Common Stock certificates issued
after June 20, 1995 upon transfer or new issuance of the Common Stock will
contain a notation incorporating the Rights Agreement by reference.
F-17
39
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 30%
or more of the outstanding shares of the Common Stock or (ii) ten business days
(or such later date as may be determined by action of the Board of Directors
prior to such time as any person becomes an Acquiring Person) following the
commencement, or announcement of an intention to make a tender offer or exchange
offer by a person (other than the Company, any wholly-owned subsidiary of the
Company or certain employee benefit plans) which, if consummated, would result
in such person becoming an Acquiring Person. The Rights will expire on June 19,
2005, unless earlier redeemed by the Company.
At any time prior to the time at which a person or group or affiliated or
associated persons has acquired beneficial ownership of 30% 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 permits the Board of Directors,
following the acquisition by a person or group of beneficial ownership of 30% or
more of the Common Stock (but before an acquisition of 50% or more the Common
Stock), to exchange the Rights (other than Rights owned by such 30% person or
group), in whole or in part, for Common Stock, at an exchange ratio of one-half
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. On June 20, 1995, 2,893,808 shares of Common Stock were
reserved for issuance upon exercise of the Rights.
Warrant
In November 1993, the Company granted to its Chairman and Chief Executive
Officer a warrant to purchase 150,000 shares of its 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. Commencing in November 1994, 37,500 shares
vest annually and the warrant expires in 2003. Effective January 26, 1996, the
warrant was amended to reduce the exercise price to $4.50 per share.
In November 1996, the Company granted to a non-employee consultant a warrant to
purchase 50,000 shares of its common stock at an exercise price of $3.94 per
share, which represented the market price of the Company's common stock on the
date of grant. Upon the date of grant, one-third of the shares vest immediately,
one-third on the first anniversary thereof, and the remaining one-third on the
second anniversary thereof. The warrant expires on November 24, 2001.
Restricted Stock Grants
On December 21, 1992, the Company awarded an aggregate of 50,016 shares of
common stock to two executive officers. Pursuant to the terms of the agreement,
the shares are subject to certain restrictions which expire on December 21,
1998. The restrictions shall lapse with respect to one-third of the shares on
every other December 21 beginning on December 21, 1994, and, with respect to all
shares, in the event of termination of employment for any reason other than for
"cause", voluntary termination for "good reason" and death or disability, as
defined. If any time prior to December 21, 1998, employment of either executive
officer is terminated for "cause" or any other reason not provided for under the
agreement, any such shares still subject to restrictions as previously described
shall be transferred to the Company without monetary consideration. In November
1994, 10,016 shares of common stock awarded as a restricted stock grant was
forfeited by one of the executive officers upon termination of employment.
F-18
40
Compensation expense, based upon the fair market value of the stock on the date
of grant, was determined by the Company to be $7 per share. Aggregate
compensation expense of $280 will be recognized ratably over the six year period
in which the restrictions lapse and has been included as deferred compensation
as a component of stockholders' equity in the accompanying consolidated
statement of stockholders' equity. Compensation expense was approximately $46,
$47 and $33 for the fiscal years ended March 30, 1997, March 31, 1996 and March
26, 1995, respectively.
Employment Agreements
The Company and its Chairman and Chief Executive Officer entered into an
employment agreement in November 1993 for a period commencing on November 1,
1993 and ending on October 31, 1997. This agreement provides for annual
incentive compensation equal to 5% of the consolidated pre-tax earnings of the
Company, as defined, and specified benefits. Pursuant to an amendment on January
26, 1996, the agreement also provides that upon a change in control, as defined,
the officer shall have the right to terminate the agreement and receive a
payment equal to approximately three times the average compensation received by
him from the Company over the previous five years, and in no event shall such
average compensation be deemed to be less than $200.
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 was extended
through December 31, 1997, based on the original terms. The agreement provides
for annual compensation of $250 plus certain other benefits. In November 1993,
the Company amended this agreement to include a provision under which the
officer shall have the right to terminate the agreement and receive payment
equal to approximately three times annual compensation upon a change in control,
as defined.
Each employment agreement terminates upon death or voluntary termination by the
respective employee or may be terminated by the Company upon 30 days prior
written notice by the Company in the event of disability or "cause", as defined
in each agreement.
401 (k) Plan
In March 1992, the Company adopted a defined contribution retirement plan under
Section 401(k) of the Internal Revenue Code covering all non-union employees
over age 21 who have been employed by the Company for at least one year.
Employees may contribute to the plan, on a tax deferred basis, up to 15% of
their total annual salary. Company contributions are discretionary. Beginning
with the plan year ending February 28, 1994, the Company elected to match
contributions at a rate of $.25 per dollar contributed by the employee up to a
maximum of 3% of the employee's total annual salary. Employer contributions for
the fiscal years ended March 30, 1997, March 31, 1996 and March 26, 1995 were
$5, $12 and $12, respectively.
Other Benefits
The Company provides, on a contributory basis, medical benefits to active
employees. The Company does not provide medical benefits to retirees.
F-19
41
11. COMMITMENTS AND CONTINGENCIES:
Commitments
The Company's operations are principally conducted in leased premises. Remaining
lease terms range from 1 to 18 years. Certain leases contain contingent rental
provisions based upon a percentage of gross sales and/or provide rent deferral
during the initial term of the lease. As of March 30, 1997, the Company has
non-cancellable operating lease commitments, net of certain sublease rental
income at the store level as follows:
Lease Sublease Net lease
Commitments Income Commitments
----------- ------ -----------
1998 $2,224 $114 $2,110
1999 2,226 114 2,112
2000 2,109 114 1,995
2001 1,467 37 1,430
2002 1,378 30 1,348
Thereafter 5,971 3 5,968
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 $163, $97
and $45 for the fiscal years ended March 30, 1997, March 31, 1996 and March 26,
1995, respectively.
Rent expense including contingent rental payments, net of sublease income, was
$2,186, $2,365 and $2,300 for the fiscal years ended March 30, 1997, March 31,
1996 and March 26, 1995, respectively.
Contingencies
On February 28, 1995, an action entitled Textron Financial Corporation v. 1045
Rush Street Associates, Stephen Anfang, and Nathan's Famous, Inc. was instituted
in the Circuit Court of Cook County, Illinois County Department, Chancery
Division. The complaint alleges that the Company conspired to perpetrate a fraud
upon the plaintiff and alleges that the Company breached its lease with 1045
Rush Street Associates and the estoppel agreement delivered to the plaintiff in
connection therewith by subleasing these premises and thereafter assigning the
lease with respect thereto to a third party franchisee, and further by failing
to pay rent under this lease on and after July 1990. This complaint seeks
damages in the amount of at least $1,500. The Company has filed its answer to
this complaint denying the material allegations of the complaint and asserting
several affirmative defenses to liability including, but not limited to, the
absence initially or subsequent failure of consideration for the estoppel
agreement, equitable estoppel, release, failure to mitigate and other equitable
and legal defenses. The Company intends to defend the action vigorously.
On April 7, 1995, an action entitled Erwin Protter, et al. v. Nathan's Famous
Systems, Inc., et al. was instituted in the United States District Court for the
Eastern Division of New York against a wholly owned subsidiary of the Company
and several of the Company's current or former executive officers. The complaint
relating to this action alleges that this subsidiary and such persons made
misstatements in connection with the acquisition by the plaintiffs of three (3)
franchised restaurants. This complaint seeks approximately $13,000 in damages,
plus punitive and treble damages, to the extent appropriate. On October 21,
1995, the original complaint was dismissed as inadequately pleaded and the
plaintiffs were granted leave to file an amended complaint. Plaintiffs did so,
and defendants again moved to dismiss it on several grounds. On May 10, 1996,
the Court granted the motion to dismiss, finding that
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plaintiff had failed to plead violations of the RICO statute, which was the
predicate for federal court violation. The Court accordingly dismissed the
complaint in its entirety, refusing to assume jurisdiction over the remaining
state court claims. On May 31, 1996, plaintiffs commenced an action in the
Supreme Court of the State of New York, Nassau County alleging violations of the
common law and state franchise laws. On February 5, 1997, the Court dismissed
the common law fraud cause of action but denied the cause of action for
violation of state franchise laws. The Company has filed an answer asserting
various counterclaims against the plaintiffs and otherwise has filed a notice of
appeal from so much of the order which denied its motion to dismiss the cause of
action for violation of state franchise law.
The Company has been named as one of several "generator defendants" in an action
brought by CSX Transportation, Inc. ("CSX") and Staten Island - Arlington, Inc.
("Arlington") in the Supreme Court of the State of New York, County of New York.
According to the complaint, CSX, through its wholly owned subsidiary, Arlington,
owned certain property in Staten Island (the "Arlington Yard") which, according
to the complaint, during the period May 15, 1988 through September 14, 1988 was
the site of illegal solid waste dumping activity allegedly orchestrated by
certain defendants convicted of such activity in United States v. Paccione, et
al (the "Paccione Defendants"). Pursuant to an Order on Consent into which CSX
alleges it entered with the NYS Dept. of Environmental Conservation ("DEC"), CSX
undertook to remediate the site and to reimburse the DEC for amounts expended in
connection with a preliminary investigation of the site. CSX is now suing
several "transporter defendants" (i.e., those who allegedly had wastes generated
by them transported to Arlington Yard), for damages and injunctive relief based
upon various theories of law, including private and public nuisance,
restitution, equitable indemnity and trespass. The Company has filed an answer
in which it denied any involvement with the site and perforce any liability to
the plaintiffs under the Common law theories advanced, asserted affirmatively
several legal and equitable defenses to liability in these circumstances, and
alternatively, interposed cross claims for contribution against other
defendants.
In or about December, 1996, Nathan's Famous Systems, Inc. ("Systems") instituted
an action in the Supreme Court of New York, Nassau County, against Phylli Foods,
Inc. ("Foods") a franchisee, and Calvin Danzig as a guarantor of Foods' payment
and performance obligations, to recover royalty fees and advertising
contributions due to Systems in the aggregate amount of $35 under a franchise
agreement between Systems and Foods dated June 1, 1994. In their answer, the
defendants essentially denied the material allegations of the complaint and
interposed counterclaims against Systems in which they alleged essentially that
Systems fraudulently induced the defendants to purchase the franchise from
Systems or did so by means of negligent misrepresentations. Defendants also
alleged that reason of Systems' allegedly fraudulent and deceitful conduct,
Systems violated the General Business Law of New York. As a consequence of the
foregoing, the defendants are seeking damages in excess of $5,000, as well as
statutory relief under the General Business Law. Systems has moved to dismiss
the counterclaims on the grounds that they are insufficiently pleaded and
otherwise fail to state a sustainable claim against Systems upon which relief
may be granted.
In or about December, 1996, the Company instituted an action in the Civil Court
of the City of New York, Bronx County, against Bay Plaza Famous, Inc. ("Bay
Plaza"), as franchisee, and Daniel Rapoport ("Rapoport") and Theodore Wenacur as
guarantors of Bay Plaza's payment and performance obligations, to recover
royalty fees and advertising contributions due to the Company in the aggregate
amount of $24 under a franchise agreement between Bay Plaza and the Company
dated November 20, 1989. In their answer, Bay Plaza and Rapoport essentially
denied the material allegations of the complaint and interposed counterclaims
against the Company in which they alleged essentially that the Company
fraudulently induced the defendants to purchase the franchise from the Company
or did so by means of negligent misrepresentations. Bay Plaza and Rapoport also
alleged that by reason of the Company's allegedly fraudulent and deceitful
conduct, the Company violated the General Business Law of New York. As a
consequence of the foregoing, the defendants are seeking damages in excess of
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$5,500, as well as statutory relief under the General Business Law. The Company
has moved to dismiss the counterclaims on the grounds that they are
insufficiently pleaded and otherwise fail to state a sustainable claim against
the Company upon which relief may be granted.
The Company was named as one of three defendants in an action recently
commenced in the Supreme Court of New York, Queens County. According to the
complaint, the plaintiff, a dentist, is seeking injunctive relief and damages
in an amount exceeding $5 million against the landlord, one of the company's
franchisees and the Company claiming that the operation of a restaurant in a
building in Long Island City created noxious and offensive fumes and odors that
allegedly were injurious to the health of the plaintiff and his employees and
patients, and interfered with, and irreparably damaged his practice. Plaintiff
also claims that the landlord fraudulently induced him to enter into a lease
extension by representing that the first floor of the building would be
occupied by a non-food establishment.
The Company believes that there is no merit to the plaintiff's claims against
it inasmuch as it never was a party to the lease, and the restaurant, which
closed in or about August 1995, was operated by a franchisee exclusively.
Accordingly, the Company intends to move to dismiss the complaint and otherwise
intends to defend the action vigorously.
The Company is involved in various other litigation in the normal course of
business, none of which, in the opinion of management, will have a significant
adverse impact on its financial position or results of operations.
12. FOURTH QUARTER ADJUSTMENTS:
The fourth quarter of fiscal 1996 included adjustments of (i) $3,907 relating to
the Company's decision to early adopt SFAS No. 121; (ii) $690 for certain other
store closure costs; (iii) $500 of additional reserve relating to outstanding
litigation against the Company; (iv) $380 of accrued rental expenses resulting
from the default of a sub-lessee for space which is not expected to be utilized
by the Company; and (v) $324 of severance and related costs.
The fourth quarter of fiscal 1995 included adjustments of (i) approximately $400
relating to an increased contribution by the Company to its advertising fund;
(ii) approximately $300 of professional fees associated with the completion of
the audit by the IRS of the Company's income tax returns; (iii) approximately
$200 addition bad debt expense; (iv) $500 of charges relating to costs
associated with outstanding litigation against the Company, which have been
recorded as other expense in the 1995 consolidated statement of operations and;
(v) an income tax benefit of $200 relating to the reversal of prior year's over
accruals.
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EXHIBIT INDEX
10.24 Warrant Agreement
21 Subsidiaries of the Registrant
24.1 Consent of KPMG Peat Marwick
24.2 Consent of Arthur Anderson LLP
27 Financial Data Schedule