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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 29, 1998
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.
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(Exact name of registrant as specified in its charter)
Delaware 11-3166443
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1400 Old Country Road, Westbury, New York 11590
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number,
including area code: (516) 338-8500
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Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - par value $.01
(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 5, 1998 was approximately $18,298,587.
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 5, 1998,
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 183 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. Since fiscal 1997, the Company
supplemented its franchise program with its Branded Product Program which
enables approved foodservice retailers to sell certain Nathan's proprietary
products outside of the realm of a traditional franchise relationship.
At March 29, 1998, the Nathan's Famous system included 27 Company-owned units
concentrated in the New York metropolitan area, New Jersey, Pennsylvania and
Connecticut, 156 franchised or licensed units, including 24 carts, kiosks, and
counter units and 308 branded outlets under the Branded Product Program,
operating in 27 states, the District of Columbia and the islands of Jamaica and
Aruba.
The Company plans to further expand its market penetration through the growth of
the Branded Product Program, opening of new Company-owned, franchised or
licensed outlets emphasizing non-traditional captive markets and the development
of an international presence through the use of master franchising arrangements.
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
co-branded with other nationally recognized brands.
Nathan's hot dogs are all-beef and are free from all fillers and starches. Hot
dogs are flavored with the original secret blend of spices created by Ida
Handwerker in 1916, which historically have distinguished Nathan's hot dogs. Hot
dogs are prepared and served in accordance with procedures which have not varied
significantly 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
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 frozen
yogurts 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 and "BLT" burgers. The Company maintains the same
quality standard with each supplemental menu as it does with its core hot dog
and french fried potato menu. Thus, for example, hamburgers and sandwiches are
prepared to order and not pre-wrapped or kept warm under lights. The Company
also has a "Kids Meal" program in which various menu alternatives are combined
with 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 reduce 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's franchise operations have grown to 156 units at
March 29, 1998, operating in 17 states and Aruba. On April 27, 1998, the first
Nathan's franchised restaurant in Israel was opened. 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 seek to market the franchising program to larger,
experienced and successful operators with the financial and business capability
to develop multiple franchise units.
Today, the Company counts among its 71 franchisees and licensees such well known
companies as Marriott Corporation ("Marriott"), ARAMARK Leisure Services, Inc.,
Service America Corp., Ogden Services Corp. and Sodexho USA.
As of June 1998, 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. Additionally, under certain
circumstances, the Company may pay fees associated with the development of
certain geographic areas.
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, evidence of
restaurant management experience, net worth and capital available for investment
in relation to the proposed scope of the development agreement. 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
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each franchisee regarding training and operations, products and equipment and
local marketing programs. The Company provides ongoing advice and assistance to
franchisees.
Franchised restaurants are required to be operated in accordance with uniform
operating standards and specifications relating to the selection, quality and
preparation of menu items, signage, decor, equipment, uniforms, suppliers,
maintenance and cleanliness of premises and customer service. All standards and
specifications are developed by 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 the fiscal year ended March 29, 1998, the Company
terminated 2 franchise agreements.
Company-owned Operations. The Company currently operates 27 Company-owned units,
including two kiosks, in New York, New Jersey, Connecticut and Pennsylvania.
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 1998, the
Company opened two restaurants and two kiosks in Home Depot locations, for a
total of 11 units within Home Depot Improvement Centers as of March 29, 1998.
Since the Company's Initial Public Offering in February 1993, the Company has
acquired seven Company-owned restaurants from franchisees, opened (18) new
Company-owned units, commenced operating two carts, sold one unit and closed
seven units. Recently, the Company was notified that it would soon lose its
lease for a restaurant property that has been operating on a month-to-month
basis since December 1995. The Company may close other units in the future.
Company-owned units currently range in size from approximately 440 square feet
to 10,000 square feet and are located principally in retail shopping
environments or are free-standing buildings. 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 $5.42 for fiscal
1998.
Branded Product Program. During fiscal 1998, 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. At March 29, 1998, 308 branded outlets were operating under
this program.
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The following table shows the number of outlets in operation at March 29, 1998
and their geographical distribution:
Branded
Product
Location Company Franchise Outlets Total
-------- -------- --------- ------- -----
Alabama -- -- 2 2
Arizona -- 3 16 19
California -- 1 10 11
Connecticut 1 5 6 12
Delaware -- -- 3 3
District of Columbia -- -- 2 2
Florida -- 15 11 26
Georgia -- -- 4 4
Indiana -- 1 -- 1
Maine -- -- 2 2
Maryland -- 2 2 4
Massachusetts -- 2 104 106
Minnesota -- 2 1 3
Mississippi -- 1 -- 1
Nevada -- 6 -- 6
New Hampshire -- 1 1 2
New Jersey 6 47 54 107
New York 18 59 53 130
North Carolina -- 3 2 5
Ohio -- 1 6 7
Oklahoma -- -- 3 3
Pennsylvania 2 5 9 16
Rhode Island -- 1 -- 1
South Carolina -- -- 2 2
Tennessee -- -- 2 2
Texas -- -- 3 3
Utah -- -- 1 1
Vermont -- -- 2 2
Virginia -- -- 4 4
--- --- --- ---
Domestic Subtotal 27 155 305 487
--- --- --- ---
International Locations
Jamaica, West Indies -- -- 3 3
Aruba -- 1 -- 1
--- --- --- ---
International Subtotal -- 1 3 4
Grand Total 27 156 308 491
=== === === ===
Expansion Program. The Company's expansion plans focus on opening Company-owned
and franchised units primarily in non-traditional captive markets by utilizing
smaller facility types with limited menus and increase the market penetration of
its Branded Product Program. The Company has 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. Existing 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 retailers by utilizing branded modular
merchandising units, carts or kiosks in addition to restaurants.
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During fiscal 1998, new unit openings consisted of 4 Company-owned units, 28
franchised units and the addition of 251 branded product outlets.
The Company expects that its franchisees and licensees will open approximately
25-30 new units and continued growth of the Branded Product Program in fiscal
1999. The Company plans to continue opening Company-owned units within Home
Depot Improvement Centers as new opportunities arise.
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. During the last year, the Company opened its first international
units in Aruba and Jamaica, West Indies in addition to signing a development
agreement for Israel. The first restaurant in Israel opened on April 27, 1998.
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. The counterpart
has represented that a financing commitment has been obtained and the Company is
currently in contract negotiations. The Company has rencently entered into two
non-binding letters of intent for development within Egypt and Poland.
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
ranging between 3% to 5% of sales. The percentage varies based on sales volume,
with escalating minimum royalties. Earned royalties of $1,217,000 in fiscal 1998
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.
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 and pickles. These products have been distributed on
a limited basis. Fees and royalties earned during fiscal 1998 have not been
significant.
In November 1997, the Company executed a license agreement with J.J. Mathews &
Co, Inc. to produce and market packaged Home Meal Replacement menu items for
sale within supermarkets. The agreement calls for the Company to receive
royalties based upon sales, subject to certain minimum annual royalties. During
fiscal 1998, there were no royalties earned, consistent with the Company's
expectations.
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 1998, the Company's gross spending for marketing
activities was approximately 2.5% of its own restaurant sales.
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During fiscal 1998, the Company continued its primary marketing emphasis on
local store marketing campaigns featuring a value oriented strategy complimented
with promotional "Limited Time Offers." The Company anticipates that near term
marketing efforts will continue to emphasize local store marketing activities.
The Company also anticipates supplementing its marketing efforts with a radio
advertising campaign during the summer of 1998. 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, Phoenix, Arizona and throughout Florida. 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. From time to time, 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.
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.
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Employees. The Company regularly employed an average of 690 persons during
fiscal 1998, of whom 34 were corporate management and administrative employees,
104 were restaurant managers or assistant managers and 552 were hourly
food-service employees (both full-time and part-time). The number of hourly
food-service employees ranged from a low of 514 to a high of 552. 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 23 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 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. Extensive price
discounting in the fast food industry could have an adverse effect on the
Company.
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............... 49 Chairman and Chief Executive Officer
Wayne Norbitz.................. 50 President and Chief Operating Officer
Richard E. Boudreaux........... 45 Executive Vice President
Carl Paley..................... 61 Senior Vice President - Franchise
and Real Estate Development
Ronald G. DeVos................ 43 Vice President - Finance, Chief
Financial Officer and Secretary
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Donald P. Schedler............. 45 Vice President -
Architecture/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 manufacturing and real estate company 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, 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.
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 12,000 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
8
10
Kings Plaza Shopping Center Brooklyn, NY September 2010 4,200
Broadway Mall Hicksville, NY July 1998 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 1998 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
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
Union Home Depot Union, NJ January 2008 960
Jersey City Home Depot Jersey City, NJ January 2008 830
Staten Island Home Depot Staten Island, NY July 2007 1,680
Brooklyn Home Depot Brooklyn, NY March 2008 950
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, net
of sublease income, under the Company's current leases amounted to $2,151,000 in
fiscal 1998.
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.
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. On July 19, 1996, defendants filed a motion to dismiss the state
court claims for failure to state a claim and as barred by the applicable
statute of limitations. By decision dated February 5, 1997, the Supreme Court
dismissed all of the causes of action in the plaintiffs' complaint except for
the cause of action asserting a violation of the New York State Franchise Act.
Defendant appealed the Supreme Court's order and on January 20, 1998, the
Appellate Division, Second Department, reversed and dismissed for untimeliness
the New York State Franchise Act cause of action. On May 14, 1998, the
plaintiffs' motion for leave to appeal to the Court of Appeals was denied, and
the action was dismissed.
9
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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 plaintiff has added as additional parties
defendant, the attorney who represented the landlord in the financing
transaction in connection with which the Estoppel Agreement was required. The
Company intends to defend this action vigorously.
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 by reason of Systems' allegedly fraudulent and
deceitful conduct, Systems violated the General Business Law of New York. As a
consequence of the foregoing, the defendants 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. During fiscal 1998, Systems motion was
granted except for the claim seeking statutory relief under the General Business
Law.
The Company was named as one of three defendants in an action commenced in June
1997, in the Supreme Court of New York, Queens County. According to the
complaint, the plaintiff, a dentist, is seeking injunctive relief and damages in
an amount exceeding $5 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 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. The Company 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 Nasdaq on the National Market System
("Nasdaq") under the symbol "NATH." The following table sets forth the high and
low closing share prices per share for the periods indicated:
High Low
- --------------------------------------------------------------------------------
Fiscal year ended March 30, 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
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Fiscal year ended March 29, 1998
First quarter $ 3 7/8 $ 2 31/32
Second quarter 4 1/4 3 3/16
Third quarter 4 7/8 3 9/16
Fourth quarter 4 3/4 3 1/2
At June 5, 1998 the closing price per share for the Company's common stock, as
reported by Nasdaq was $3.875.
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 5, 1998 the Company had 329 shareholders of record, exclusive of
shareholders whose shares were held by brokerage firms, depositories and other
institutional firms in "street name" for their customers.
Item 6. Selected Consolidated Financial Data
Fiscal years ended
March 29, March 30, March 31, March 26, March 27,
1998 1997 1996(1) 1995 1994
-----------------------------------------------------------------
(In thousands, except per share amounts)
Statement of Operations Data:
Revenues:
Sales $23,530 $21,818 $21,167 $20,927 $20,214
Franchise fees and royalties 3,062 3,238 3,249 3,448 3,591
License royalties and other income 2,285 1,619 2,025 1,826 1,297
-----------------------------------------------------------------
Total revenues 28,877 26,575 26,441 26,201 25,102
-----------------------------------------------------------------
Costs and Expenses:
Cost of sales 14,468 13,031 12,833 12,270 11,260
Restaurant operating expenses 6,411 6,602 6,730 6,396 5,616
Depreciation and amortization 1,035 1,013 1,724 1,588 1,422
Amortization of intangibles 384 406 665 581 527
General and administrative expenses 4,755 4,097 5,457 5,859 4,596
Interest expense 6 16 28 16 22
Impairment of long-lived assets -- -- 3,907 -- --
Other (income) and expense -- -- 1,570 500 (706)
-----------------------------------------------------------------
Total costs and expenses 27,059 25,165 32,914 27,210 22,737
-----------------------------------------------------------------
Income (loss) before provision (benefit)
for income taxes 1,818 1,410 (6,473) (1,009) 2,365
Income tax provision (benefit) 290 622 (49) (492) 900
-----------------------------------------------------------------
Net earnings (loss) $ 1,528 $ 788 $(6,379) $ (517) $ 1,465
=================================================================
11
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Per Share Data:
Net earnings (loss)
Basic $ 0.32 $ 0.17 $(1.35) $ (0.11) $ 0.31
Diluted $ 0.32 $ 0.17 $(1.35) $ (0.11) $ 0.31
Dividends -- -- -- -- --
Number of common shares used in computing
net income (loss) per share
Basic 4,722 4,722 4,722 4,728 4,732
Diluted 4,749 4,729 4,722 4,728 4,762
Balance Sheet Data at End of Fiscal Year:
Working capital $ 6,105 $ 4,802 $ 3,937 $ 7,133 $ 8,044
Total assets 29,539 27,794 27,765 32,430 33,002
Long term debt, net of current maturities 9 21 35 63 2
Stockholders' equity $23,586 $21,976 $21,142 $27,474 $27,958
=================================================================
Selected Restaurant Operating Data:
Systemwide Restaurant Sales:
Company-owned $22,332 $21,718 $21,167 $20,927 $20,214
Franchised 58,802 63,564 68,009 73,465 68,454
-----------------------------------------------------------------
Total $81,134 $85,282 $89,176 $94,392 $88,668
=================================================================
Number of Units Open at End of Fiscal Year:
Company-owned 27 26 27 24 16
Franchised 156 147 178 159 163
Branded outlets 308 57 0 0 0
-----------------------------------------------------------------
Total 491 230 205 183 179
=================================================================
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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Fiscal Year Ended March 29, 1998 Compared to Fiscal Year Ended March 30, 1997
REVENUES
Total sales increased 8.3% or $1,812,000 to $23,530,000 for the fiscal year
ended March 29, 1998 ("fiscal 1998") from $21,718,000 for the fiscal year ended
March 30, 1997 ("fiscal 1997"). Company-owned restaurant sales increased 2.8% or
12
14
$614,000 to $22,332,000 from $21,718,000. Comparable Company-owned unit sales
(units operating for 18 months or longer as of the beginning of the fiscal
year), increased by 3.8% in fiscal 1998 versus fiscal 1997. The Company has
continued to expand its local store marketing activities and value pricing
strategies that were implemented last year. During the year, the Company opened
four Company-owned units within Home Depot Improvement Centers in Staten Island,
NY, Brooklyn, NY, Union, NJ and Jersey City, NJ. Additionally, in June 1997, the
Company completed the renovation of its Yonkers, NY restaurant which is now
operated as a co-branded Nathan's / Pizza Hut / TCBY. Construction is currently
underway for the renovation of our 86th Street location in Brooklyn, NY and our
restaurant in the Kings Plaza Shopping Center. Additionally, plans are being
considered to renovate and modernize the appearance and design of other units.
Sales from the Branded Product Program that was implemented in April 1997 were
$1,198,000 for fiscal 1998.
Franchise fees and royalties decreased by $176,000 or 5.4% to $3,062,000 in
fiscal 1998 compared to $3,238,000 in fiscal 1997. Franchise royalties decreased
by $71,000 or 2.8% to $2,489,000 in fiscal 1998 as compared to $2,560,000 in
fiscal 1997. Franchise restaurant sales, upon which royalties are based, were
$58,802,000 in fiscal 1998 as compared to $63,564,000 in fiscal 1997. The
reductions in systemwide sales and franchise royalties are primarily attributed
to the 53 Caldor units that were closed between November 1996 and February 1997.
In fiscal 1997, these units generated sales and royalties of approximately
$6,075,000 and $243,000, respectively. During fiscal 1998, franchisees and
licensees opened 28 new units. At March 29, 1998, there were 156 franchised or
licensed restaurants as compared to 147 at March 30, 1997. Franchise fee income
was $573,000 in fiscal 1998 as compared to $678,000 in fiscal 1997. The majority
of this difference is due to higher franchise fees being earned in fiscal 1997
associated with expired development agreements.
License royalties increased by $318,000 or 27.0% to $1,495,000 in fiscal 1998 as
compared to $1,177,000 in fiscal 1997. The majority of this increase is a result
of the Company's license arrangement with SMG, Inc., for the sale of Nathan's
frankfurters in supermarkets. Of the total $318,000 increase, $180,000
represents higher amortization of the deferred fee received from SMG, Inc. in
conjunction with the renegotiation of their contract which took effect January
1, 1997. As of March 29, 1998, this fee was fully amortized. The remainder of
the difference is primarily attributed to royalties earned from higher sales to
supermarkets by the licensee.
Investment and other income was $790,000 in fiscal 1998 as compared to $442,000
in fiscal 1997. The Company's investment income in fiscal 1998 was higher than
in fiscal 1997 by $238,000 due in part to the increased amount of marketable
investment securities and the disparity in the performance of the financial
markets. In fiscal 1998, the Company also recognized net gains of approximately
$170,000 from the disposal of three underperforming restaurants and other real
estate transactions.
Costs and Expenses
Cost of sales increased by $1,437,000 from $13,031,000 in fiscal 1997 to
$14,468,000 in fiscal 1998. The majority of this increase is attributable to the
cost of product associated with the new Branded Product Program. As a percentage
of restaurant sales, cost of restaurant sales were 60.5% in fiscal 1998 as
compared to 60.0% in fiscal 1997. The Company continues to take steps to reverse
the margin erosion which has become essential to remain competitive in the
current value conscious marketplace and to offset the impact of the recent
minimum wage increase.
Restaurant operating expenses decreased by $191,000 from $6,602,000 in fiscal
1997 to $6,411,000 in fiscal 1998. This decrease can be attributed to the
closure of two of the three underperforming restaurants which were unprofitable,
partially offset by $66,000 of pre-opening costs, expensed as incurred, in
accordance with the adoption of a new accounting standard. As a percentage of
restaurant sales, restaurant operating expenses were 28.8% in fiscal 1998 as
compared to 30.4% in fiscal 1997.
Depreciation and amortization was $1,035,000 in fiscal 1998 as compared to
$1,013,000 in fiscal 1997. Amortization of intangibles was $384,000 in fiscal
1998 as compared to $406,000 in fiscal 1997.
General and administrative expenses were $4,755,000 in fiscal 1998 as compared
to $4,097,000 in fiscal 1997. Approximately $183,000 of the increase relates to
costs associated with Company-owned and franchised restaurant supervision and
marketing efforts for the Branded Product Program. Legal and other professional
fees and international development expenses represent approximately $172,000 of
the increase. The Company also increased its provision for doubtful accounts by
$50,000
13
15
more than in fiscal 1997. Finally, approximately $145,000 of the increase
relates to the effect of certain one-time benefits recognized in fiscal 1997.
Income Tax Provision
In fiscal 1998, the income tax provision was $290,000 or 16.0% of income before
taxes. Management of the Company determined that, it was more likely than not
that, a portion of its deferred tax assets would be realized and, accordingly,
reduced its valuation allowance by $523,000. The fiscal 1998 provision before
adjustment for the valuation allowance was $814,000 or 44.8% of income before
taxes. Management will continue to monitor the likelihood of continued
realizability of its deferred tax asset and may, if deemed appropriate under the
facts and circumstances at that time, recognize further adjustments to its
deferred tax valuation allowance in accordance with Financial Accounting
Standards Board Statement No. 109 "Accounting for Income Taxes". In fiscal 1997,
the income tax provision was $622,000 or 44.1% of income before income taxes.
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.
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.
14
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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 certiorari 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.
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 sublessee
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 29, 1998, aggregated $1,306,000, increasing
by $659,000 during the fiscal 1998 period. At March 29, 1998, marketable
investment securities totalled $8,514,000 and net working capital increased to
$6,105,000 from $4,802,000 at March 30, 1997.
Cash provided by operations of $2,286,000 in fiscal 1998 is primarily
attributable to net income of $1,528,000, total non-cash charges of $1,581,000,
including depreciation and amortization of $1,419,000, an increase in accounts
payable and accrued expenses of $296,000 and a decrease in prepaid expenses and
other current assets of $252,000 which were offset by increases in marketable
investment securities of $874,000 and inventories of $143,000 as well as a
decrease in deferred franchise fees of $144,000.
15
17
Net cash used in investing activities of $1,610,000 represents capital
expenditures of $1,740,000 for property and equipment relating to the
construction of four new Company-owned units, which opened during fiscal 1998,
the renovation of the Yonkers, NY restaurant and other fixed asset additions.
Proceeds received from the sale of property of $130,000 relates to the sale of
an underperforming restaurant.
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 1999. The Company also maintains
a $5,000,000 uncommitted bank line of credit, which has been extended to
September 30, 1998. The Company has not borrowed any funds to date under this
line of credit.
SEASONALITY
The Company's business is affected by seasonal fluctuations, the effects of
weather and economic conditions. 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 on October 1, 1996 with
another increase to $5.15 on September 1, 1997. The Company has experienced
higher labor costs on a relatively small proportion of its workforce. Currently,
Congress is contemplating additional increases to the minimum wage requirements.
At this time, no legislative action has been taken. Management believes that in
the event the minimum wage is increased, the Company may have to reconsider its
pricing strategy as a means to offset any legislated increase to avoid reducing
operating margins.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the Financial Accounting Standards Board issued Statement of
Position (SOP 98-5) "Reporting on the Costs of Start-Up Activities". SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred and is effective for financial statements for fiscal years beginning
after December 15, 1998. Earlier application is encouraged in fiscal years for
which annual financial statements previously have not been issued. The Company
early adopted SOP 98-5 and the impact was not material to operations.
In March 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. The Company adopted SFAS No. 128,
and the impact was not material to previously reported EPS amounts.
YEAR 2000
In July, 1996, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue 96-14, "Accounting for the Costs
Associated with Modifying Computer Software for the Year 2000", which requires
that costs associated with modifying computer software for the Year 2000 be
expensed as incurred.
The Company has undergone an internal evaluation of its computer systems and has
determined that its existing computer systems would require a significant amount
of effort and cost in order to make them Year 2000 compliant. Accordingly, in
16
18
order to meet the growing business requirements and assure Year 2000 compliance,
the Company has decided to replace its existing accounting systems and
undertaken an evaluation of alternatives. The Company believes that the
implementation can be accomplished in a timely manner and that the costs of such
conversion will not have a material effect on the results of operations or
financial position although there can be no assurance to this effect.
Additionally, the Company has addressed the Year 2000 issue with its Point of
Sale provider and has been assured that their systems will be Year 2000
compliant. The Company cannot predict the effect of the Year 2000 problem on the
vendors and others with which the Company transacts business and there can be no
assurance that the effect of the Year 2000 problem on such entities will not
have a material adverse effect on the Company's business, operating results and
financial position.
FORWARD LOOKING STATEMENT
Certain statements contained in this report are forward-looking statements which
are subject to a number of known and unknown risks and uncertainties that could
cause the Company's actual results and performance to differ materially from
those described or implied in the forward looking statements. These risks and
uncertainties, many of which are not within the Company's control, including,
but not limited to economic, weather, legislative and business conditions; the
availability of suitable restaurant sites on reasonable rental terms; changes in
consumer tastes; ability to continue to attract franchisees; the ability to
purchase our primary food and paper products at reasonable prices; no material
increases in the minimum wage; and the Company's ability to attract competent
restaurant, and managerial personnel.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data is submitted
as a separate section of this report beginning on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
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.
17
19
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.)
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 Ida's Realty Associates
and the Company.
c) Lease, dated November 17, 1967, between Ida's Realty Associates
and the Company.
10.3 Leases for the premises at Yonkers, New York, as follows:
(Incorporated by reference to Exhibit 10.4 to Registration Statement
on Form S-1 No. 33-56976.)
a) Lease Modification of Land and Building Lease between the
Yonkers Corp. and the Company, dated November 19, 1980;
18
20
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.)
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. (Incorporated by reference to Exhibit 10.24 to the
Annual Report filed on Form 10-K for the fiscal year ended March 30,
1997.)
10.25 Second Amended and Restated Rights Agreement dated as of April 6,
1998 between the Company and American Stock Transfer and Trust
Company (Incorporated by reference to Exhibit 2 to Form 8-A/A dated
April 6, 1998.)
10.26 1998 Stock Option Plan.
19
21
21 List of Subsidiaries of the Registrant.
23.1 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.
20
22
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 16 day of June, 1998.
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 16th day of June, 1998.
/s/ HOWARD M. LORBER
- ----------------------------
Howard M. Lorber Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
/s/ WAYNE NORBITZ President, Chief Operating Officer and
- ---------------------------- Director
Wayne Norbitz
/s/ RONALD G. DEVOS Vice President - Finance and Chief
- ---------------------------- Financial Officer (Principal Financial
Ronald G. DeVos and Accounting Officer)
/s/ ROBERT J. EIDE
- ----------------------------
Robert J. Eide Director
/s/ BARRY LEISTNER
- ----------------------------
Barry Leistner Director
/s/ JEFFREY A. LICHTENBERG
- ----------------------------
Jeffrey A. Lichtenberg Director
/s/ ATTILIO F. PETROCELLI
- ----------------------------
Attilio F. Petrocelli Director
21
23
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
Consolidated Balance Sheets at March 29, 1998 and
March 30, 1997 F-3
Consolidated Statements of Operations for the Fiscal Years
ended March 29, 1998, March 30, 1997 and March 31, 1996 F-4
Consolidated Statements of Stockholder Equity for the Fiscal
Years ended March 29, 1998, March 30, 1997 and
March 31, 1996 F-5
Consolidated Statements of Cash Flows for the Fiscal Years
ended March 29, 1998, March 30, 1997 and March 31, 1996 F-6
Notes to the Consolidated Financial Statements F-7
F-1
24
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 29, 1998 and March
30, 1997 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three 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 29, 1998 and March 30, 1997, and the results
of their operations and their cash flows for each of the three years in the
period then ended in conformity with generally accepted accounting principles.
Roseland, New Jersey
June 16, 1998
F-2
25
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 29, March 30,
ASSETS 1998 1997
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 1,306 $ 647
Marketable investment securities 8,514 7,640
Franchise and other receivables, net 976 1,039
Inventories 356 213
Prepaid expenses and other current assets 276 502
Deferred income taxes 478 415
-------- --------
Total current assets 11,906 10,456
Property and equipment, net 6,171 5,480
Intangible assets, net 11,270 11,640
Other assets, net 192 218
-------- --------
$ 29,539 $ 27,794
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 956 $ 754
Accrued expenses and other current liabilities 4,708 4,614
Deferred franchise fees 125 269
Current installments of obligations under capital leases 12 17
-------- --------
Total current liabilities 5,801 5,654
Obligations under capital leases, net of current installments 9 21
Other liabilities 143 143
-------- --------
Total liabilities 5,953 5,818
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000 shares authorized,
4,722,216 issued and outstanding at March 29, 1998 and
March 30, 1997 47 47
Additional paid-in capital 32,389 32,307
Accumulated deficit (8,850) (10,378)
-------- --------
Total stockholders' equity 23,586 21,976
-------- --------
$ 29,539 $ 27,794
======== ========
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
26
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
For the Fiscal Year Ended
--------------------------------
March 29, March 30, March 31,
1998 1997 1996
---- ---- ----
REVENUES:
Sales $ 23,530 $ 21,718 $ 21,167
Franchise fees and royalties 3,062 3,238 3,249
License royalties 1,495 1,177 1,272
Investment and other income 790 442 753
-------- -------- --------
Total revenues 28,877 26,575 26,441
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales 14,468 13,031 12,833
Restaurant operating expenses 6,411 6,602 6,730
Depreciation and amortization 1,035 1,013 1,724
Amortization of intangible assets 384 406 665
General and administrative expenses 4,755 4,097 5,457
Interest expense 6 16 28
Impairment of long-lived assets -- -- 3,907
Other expense -- -- 1,570
-------- -------- --------
Total costs and expenses 27,059 25,165 32,914
-------- -------- --------
Income (loss) before provision (benefit) for income taxes 1,818 1,410 (6,473)
Provision (benefit) for income taxes (Note 10) 290 622 (94)
-------- -------- --------
Net income (loss) $ 1,528 $ 788 $ (6,379)
======== ======== ========
PER SHARE INFORMATION (Note 3):
Net income (loss) per share:
Basic $ .32 $ .17 $ (1.35)
======== ======== ========
Diluted $ .32 $ .17 $ (1.35)
======== ======== ========
Shares used in computing net income (loss):
Basic 4,722 4,722 4,722
======== ======== ========
Diluted 4,749 4,729 4,722
======== ======== ========
The accompanying notes are an integral part of these
consolidated statements.
F-4
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 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
Amortization of deferred compensation relating
to restricted stock -- -- -- 47 -- 47
Fair value of stock warrants granted to
non-employees -- -- 35 -- -- 35
Net income -- -- -- -- 1,528 1,528
--------- --------- --------- ---------- ---------- ----------
BALANCE, March 29, 1998 4,722,216 $ 47 $ 32,423 $ (34) $ (8,850) $ 23,586
========= ========= ========= ========== ========== ==========
The accompanying notes are an
integral part of these consolidated statements.
F-5
28
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Fiscal Year Ended
--------------------------------
March 29, March 30, March 31,
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,528 $ 788 $(6,379)
Adjustments to reconcile net income (loss) to net
cash provided by (used in)
operating activities:
Depreciation and amortization 1,035 1,013 1,724
Impairment of long-lived assets -- -- 3,907
Amortization of intangible assets 384 406 665
Issuance of stock warrants for services received 35 -- --
Provision for doubtful accounts 80 30 339
Amortization of deferred compensation 47 46 47
Gain on sale of restaurant (130) -- --
Deferred income taxes (63) 156 (154)
Changes in operating assets and liabilities:
Marketable investment securities (874) (1,512) (2,032)
Franchise and other receivables (17) 39 (160)
Inventories (143) 13 15
Prepaid expenses and other assets 252 (178) (55)
Prepaid income taxes -- 746 (122)
Accounts payable and accrued expenses 296 (306) 1,546
Deferred franchise fees (144) (8) 77
Deferred area development fees -- (200) (85)
Other non-current liabilities -- (271) 256
------- -------- -------
Net cash provided by (used in) operating activities 2,286 762 (411)
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,740) (896) (2,984)
Proceeds from sale of property and equipment 130 -- 125
------- -------- -------
Net cash used in investing activities (1,610) (896) (2,859)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of obligations under capital leases (17) (20) (15)
------- -------- -------
Net cash used in financing activities (17) (20) (15)
------- -------- -------
Net change in cash and cash equivalents 659 (154) (3,285)
CASH AND CASH EQUIVALENTS, beginning of year 647 801 4,086
------- -------- -------
CASH AND CASH EQUIVALENTS, end of year $ 1,306 $ 647 $ 801
======= ======== =======
CASH PAID DURING THE YEAR FOR:
Interest $ 6 $ 16 $ 26
======= ======== =======
Income taxes $ 421 $ 182 $ 685
======= ======== =======
NONCASH FINANCING ACTIVITIES:
Issuance of stock warrants for services received $ 35 $ -- $ --
======= ======== =======
The accompanying notes are an integral part of these
consolidated statements.
F-6
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 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 27 Company-owned stores and 156 franchised units
operating as of March 29, 1998.
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").
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, were $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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. 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 1998 and
1997 are presented on the basis of a 52-week reporting period, and fiscal 1996
is presented on the basis of 53-week reporting period.
F-7
30
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 $273 and $280 at March 29,
1998 and March 30, 1997, respectively, 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
("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
Intangible Assets
Intangible assets consist principally of the excess of cost over the fair value
of the assets acquired relating to the Acquisition and are being amortized over
a period of 40 years. Accumulated amortization at March 29, 1998 and March 30,
1997, was $4,118 and $3,734, respectively. Amortization expense for goodwill was
$384 for each of the three years in the period ended March 29, 1998.
Amortization expense for store pre-opening costs and other intangibles was $0,
$22 and $281 for the fiscal years ended March 29, 1998, March 30, 1997 and March
31, 1996, 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.
F-8
31
Fair Value of Financial Instruments
The Company accounts for the fair value of its financial instruments in
accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments". The carrying value of all financial instruments reflected in the
accompanying balance sheets approximated fair value at March 29, 1998 and March
30, 1997, respectively.
Stock-Based Compensation
Effective March 30, 1997, the Company adopted the disclosure only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation". This statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans. The provisions of SFAS No. 123 encourage entities
to adopt a fair value based method of accounting for stock compensation plans;
however, these provisions also permit the Company to continue to measure
compensation costs under pre-existing accounting pronouncements. 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 11).
Recently Issued Accounting Standards
In April 1998, the Financial Accounting Standards Board issued Statement of
Position ("SOP") 98-5 "Reporting on the Costs of Start-Up Activities". SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred and is effective for financial statements for fiscal years beginning
after December 15, 1998. Earlier application is encouraged in fiscal years for
which annual financial statements previously have not been issued. The Company
early adopted this SOP during fiscal 1998 and the impact was not material to the
results of operations.
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 29, 1998
and March 30, 1997, $125 and $269, respectively, of deferred franchise and area
development fees are included in the accompanying consolidated balance sheets.
Concentrations of Credit Risk
The Company's receivables consist principally of receivables from franchisees
for royalties and advertising contributions. At March 29, 1998 and March 30,
1997, one and two franchisees, respectively, represented an aggregate of
approximately 19% and 23%, respectively, of franchise royalties receivable.
F-9
32
Advertising
The Company administers the Nathan's Famous Systems, Inc. Advertising Fund, a
separate legal entity, to coordinate the marketing efforts for the Nathan's
Famous System. 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. 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.
Net Company-owned store advertising expense was $424, $570 and $625 for the
fiscal years ended March 29, 1998, March 30, 1997 and March 31, 1996,
respectively.
Income Taxes
The Company accounts for income taxes in accordance with 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.
Reclassifications
Certain reclassifications of prior period balances have been made to conform
with the current year presentation.
3. NET INCOME (LOSS) PER SHARE
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". This statement changes the standards for computing and
presenting earnings per share ("EPS"), replacing the presentation of primary EPS
as previously required by Accounting Principles Board Opinion No. 15, 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 fully diluted EPS calculation previously
required by APB No. 15.
The following chart provides a reconciliation of information used in calculating
the per share amounts for the periods ended March 29, 1998 and March 30, 1997,
respectively. No information is presented for the period ended March 31, 1996 as
the calculation would present anti-dilutive results:
Net Income
Net Income Shares Per Share
---------- ------ ---------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Basic EPS
Basic calculation $ 1,528 $ 788 4,722 4,722 $ .32 $ .17
Effect of dilutive employee stock options and
warrants -- -- 27 7 -- --
------- ------ ----- ----- ----- -----
F-10
33
Diluted calculation $ 1,528 $ 788 4,749 4,729 $ .32 $ .17
======= ===== ===== ===== ===== =====
4.IMPAIRMENT OF LONG-LIVED ASSETS:
The Company early adopted SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", 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. As a result of the reduced carrying amount of the impaired assets,
depreciation and amortization expense for fiscal 1998 and 1997 was reduced by
approximately $563 for stores that continued in operation.
As of March 29, 1998, the Company has closed 5 stores which relate to the
impairment charge. The results of operations for stores to be closed were as
follows for the years ended March 29, 1998, March 30, 1997 and March 31, 1996:
1998 1997 1996
---- ---- ----
Revenues $ 504 $ 331 $ 1,089
Operating expenses (588) (399) (1,453)
Depreciation -- -- (108)
------- ------- -------
Losses from stores to be closed (84) (68) (472)
5. FRANCHISE AND OTHER RECEIVABLES, net:
Franchise and other receivables, net, consists of the following:
1998 1997
---- ----
Franchise royalties $1,166 $1,116
License royalties -- 136
Other 353 368
------ ------
1,519 1,620
Less: allowance for doubtful accounts 543 581
------ ------
$ 976 $1,039
====== ======
6. MARKETABLE INVESTMENT SECURITIES:
Marketable investment securities at March 29, 1998 and March 30, 1997 consisted
of trading securities with aggregate fair values of $8,514 and $7,640,
respectively. Fair values of corporate and municipal bonds are based upon quoted
market prices. The investment in trading limited partnerships is based upon the
proportionate share of the underlying net assets of the partnerships.
F-11
34
The gross unrealized holding gains and fair values of trading securities by
major security type at March 29, 1998, March 30, 1997 and March 31, 1996 were as
follows:
1998 1997 1996
---- ---- ----
Gross Gross Gross
Unrealized Fair Unrealized Fair Unrealized Fair
Holding Value of Holding Value of Holding Value of
Gain Investments Gain/(Loss) Investment Gain Investments
---- ----------- ----------- ---------- ---- -----------
Commercial paper $ -- $ -- $ -- $ 2,275 $ -- $ --
Corporate bonds 6 563 (2) 2,451 15 514
Municipal bonds 29 6,936 54 2,111 88 4,274
Investment in trading
limited partnerships * 212 1,015 303 803 340 1,340
------- ------- ------- ------- ------- -------
$ 247 $ 8,514 $ 355 $ 7,640 $ 443 $ 6,128
======= ======= ======= ======= ======= =======
* The Company can sell its investment in the trading limited partnerships
without penalty at any time.
7. PROPERTY AND EQUIPMENT, net:
Property and equipment, net, consists of the following:
1998 1997
---- ----
Construction in progress $ 526 $ 184
Land 896 896
Building and improvements 1,647 1,036
Machinery, equipment, furniture and fixtures 4,566 4,231
Leasehold improvements 6,146 5,699
------- -------
13,781 12,046
Less: accumulated depreciation and amortization 7,610 6,566
------- -------
$ 6,171 $ 5,480
======= =======
F-12
35
Related depreciation and amortization expense totalled $1,035, $1,013 and $1,724
for the fiscal years ended March 29, 1998, March 30, 1997 and March 31, 1996,
respectively.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following:
1998 1997
---- ----
Accrued professional fees $ 495 $ 526
Accrued litigation 1,027 1,000
Accrued vacation 362 358
Accrued store closure costs 90 30
Accrued insurance 675 563
Accrual for untendered shares 273 280
Sales and payroll taxes payable 272 279
Deferred revenue 409 366
Other 1,105 1,212
-------- --------
$ 4,708 $ 4,614
======== ========
9. 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, 1998, and bears interest at the
prime rate. There were no borrowings outstanding under this line of credit at
March 29, 1998 and March 30, 1997, respectively.
10. INCOME TAXES:
Income tax expense (benefit) consists of the following for the years ended March
29, 1998, March 30, 1997 and March 31, 1996:
1998 1997 1996
---- ---- ----
Federal:
Current $ 255 $ 399 $ (68)
Deferred 331 134 (503)
----- ----- -----
586 533 (571)
----- ----- -----
State and local:
Current 98 67 60
Deferred 129 22 --
----- ----- -----
227 89 60
----- ----- -----
Adjustment to valuation allowance relating
to opening net deferred tax asset (523) -- 417
----- ----- -----
$ 290 $ 622 $ (94)
===== ===== =====
F-13
36
Total income tax expense (benefit) for fiscal years ended March 29, 1998, March
30, 1997 and March 31, 1996 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:
1998 1997 1996
---- ---- ----
Computed "expected" tax expense (benefit) $ 618 $ 482 $(2,201)
Nondeductible amortization 131 144 131
State and local income taxes, net of Federal income tax benefit 149 49 40
Tax-exempt investment earnings (55) (50) (49)
Change in the valuation allowance for net deferred tax assets (523) -- 1,949
Other (30) (3) 36
------- ------- -------
$ 290 $ 622 $ (94)
======= ======= =======
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
1998 1997
---- ----
Deferred tax assets:
Accrued expenses $ 564 $ 426
Allowance for doubtful accounts 209 217
Deferred revenue 118 143
Depreciation expense 431 618
Expenses not deductible until paid 639 712
Impairment of long-lived assets 1,101 1,404
Net operating loss carryforward -- 47
Other -- 24
------- -------
Total gross deferred tax assets 3,062 3,591
------- -------
Deferred tax liabilities:
Involuntary conversion 504 504
Unrealized gain on marketable investment securities 211 221
Other 26 85
------- -------
Total gross deferred tax liabilities 741 810
------- -------
Net deferred tax asset 2,321 2,781
Less: Valuation allowance (1,843) (2,366)
------- -------
$ 478 $ 415
======= =======
In fiscal 1998, management of the Company determined that, more likely than not,
a portion of its previously-reserved deferred tax assets would be realized and,
accordingly, reduced the related valuation allowance. The reduction in the
valuation allowance is included in the income tax provision (benefit) in the
accompanying consolidated statement of operations for fiscal 1998. The
determination that the net deferred tax asset of $478 at March 29, 1998 is
realizable is based on the Company's profitability during fiscal 1998, and the
continued positive impact of the sales performance of its products.
F-14
37
11. STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS:
Stock Option Plans
On December 15, 1992, the Company adopted the 1992 Stock Option Plan (the
"Plan") which provides for the issuance of incentive stock options (ISO's) to
officers and key employees and non-qualified stock options to directors,
officers and key employees. Up to 525,000 shares of common stock have been
reserved for issuance under the Plan. The terms of the options are generally ten
years, except for ISO's granted to any employee, whom prior to the granting of
the option, owns stock representing more than 10% of the voting rights, for
which the option term will be five years. The exercise price for non-qualified
stock options outstanding under the Plan can be no less than the fair market
value, as defined, of the Company's common stock at the date of grant. For
ISO's, the exercise price can generally be no less than the fair market value of
the Company's common stock at the date of grant, with the exception of any
employee who prior to the granting of the option, owns stock representing more
than 10% of the voting rights, for which the exercise price can be no less than
110% of fair market value of the Company's common stock at the date of grant.
On May 24, 1994, the Company adopted the Outside Director Stock Option Plan (the
"Directors' Plan") which provides for the issuance of non-qualified stock
options to non-employee directors, as defined, of the Company. 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 0, 50,000 and 50,000 options granted
under the provisions of the Directors Plan during the years ended March 29,
1998, March 30, 1997 and March 31, 1996, respectively.
Subsequent to March 29, 1998, the Company adopted the Nathan's Famous Inc. 1998
Stock Option Plan (the "New Plan"), which provides for the issuance of
non-qualified stock options to directors, officers and key employees. Up to
500,000 shares of common stock have been reserved for issuance under the New
Plan. In April 1998, the Company granted the remaining 120,000 ISO's under the
1992 Stock Option Plan and the Company also issued 30,000 stock options under
the New Plan.
The Plan, the New Plan and the Directors' Plan expire on December 2, 2002, April
5, 2008 and December 31, 2004, respectively, unless terminated earlier by the
Board of Directors under conditions specified in the Plan.
Warrants
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.
On July 17, 1997, the Company also granted an additional warrant to purchase
150,000 shares of its common stock at an exercise price of $3.25 per share, the
actual market price of the Company's common stock on the date of grant, to its
Chairman and Chief Executive Officer. Commencing on July 17, 1998, 37,500 shares
vest annually and the warrant expires in July 2007.
In November 1996, the Company granted to a non-employee consultant a warrant to
purchase 50,000 shares of its common stock at an exercise price of $3.94 per
share, which represented the market price of the Company's common stock on the
date of grant. Upon the date of grant, one-third of the shares vested
immediately, one-third on the first
F-15
38
anniversary thereof, and the remaining one-third on the second anniversary
thereof. The warrant expires on November 24, 2001.
F-16
39
A summary of the status of the Company's stock option plans and warrants at
March 29, 1998, March 30, 1997 and March 31, 1996 and changes during the years
then ended is presented in the table and narrative below:
1998 1997 1996
---------------------------- -------------------------- -----------------------
Weighted - Weighted - Weighted -
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Options and warrants outstanding-
beginning of year 601,167 $ 5.54 511,167 $ 5.99 376,167 $ 6.80
Granted 150,000 3.25 110,000 3.75 175,000 4.27
Exercised -- -- -- -- -- --
Canceled (1,000) -- (20,000) 7.40 (40,000) 6.00
------- ------- -------
Options and warrants outstanding-
end of year 750,167 5.03 601,167 5.54 511,167 5.99
======= ======= =======
Options and warrants exercisable-
end of year 485,503 398,371 268,270
======= ======= =======
Weighted average fair value of
options and warrants granted $ 1.56 $ 1.99 $ 2.06
======= ======= =======
The following table summarizes information about stock options and warrants
outstanding at March 29, 1998:
Options and Warrants
Options and Warrants Outstanding Exercisable
------------------------------------------------------- ----------------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
at Remaining Exercise at Exercise
Range of Exercise Prices 3/29/98 Contractual Life Price 3/29/98 Price
------------------------ ------- ---------------- ----- ------- -----
$ 3.25 to $4.88 445,000 8.75 $ 4.09 190,336 $ 4.18
4.89 to 7.34 246,167 6.70 6.55 236,167 6.58
7.35 to 9.25 59,000 6.08 8.53 59,000 8.46
------- ---- ------ ------- ------
$ 3.25 to $9.25 750,167 7.87 $ 5.03 485,503 $ 5.87
======= ==== ====== ======= ======
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
1998 1997
---- ----
Expected life (years) 6.7 7.5
Interest rate 6.20% 6.76%
F-17
40
Volatility 33.99% 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)
1998 1997
---- ----
Net income: As reported $ 1,528 $798
Pro forma 1,286 601
Net income per share: Basic
As reported $ .32 $ .17
Pro forma .27 .13
Diluted
As reported $ .32 $ .17
Pro forma .27 .13
Because the SFAS No. 123 method of accounting is not applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
Common Stock Purchase Rights
On June 20, 1995, the Board of Directors declared a dividend distribution of one
common stock purchase right (the "Rights") for each outstanding share of Common
Stock of the Company. The distribution was paid on June 20, 1995 to the
shareholders of record on June 20, 1995. The terms of the Rights were amended on
April 6, 1998. Each Right, as amended, entitles the registered holder thereof to
purchase from the Company one share of the Common Stock at a price of $4.00 per
share (the "Purchase Price"), subject to adjustment for anti-dilution. New
Common Stock certificates issued after June 20, 1995 upon transfer or new
issuance of the Common Stock will contain a notation incorporating the Rights
Agreement by reference.
The Rights are not exercisable until the Distribution Date. The Distribution
Date is the earlier to occur of (I) ten days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") acquired, or obtained the right to acquire, beneficial ownership of 20%
or more of the outstanding shares of the Common Stock, as amended, or (ii) ten
business days (or such later date as may be determined by action of the Board of
Directors prior to such time as any person becomes an Acquiring Person)
following the commencement, or announcement of an intention to make a tender
offer or exchange offer by a person (other than the Company, any wholly-owned
subsidiary of the Company or certain employee benefit plans) which, if
consummated, would result in such person becoming an Acquiring Person. The
Rights will expire on June 19, 2005, unless earlier redeemed by the Company.
F-18
41
At any time prior to the time at which a person or group or affiliated or
associated persons has acquired beneficial ownership of 20% or more of the
outstanding shares of the Common Stock of the Company, the Board of Directors of
the Company may redeem the Rights in whole, but not in part, at a price of $.001
per Right. In addition, the Rights Agreement, as amended, permits the Board of
Directors, following the acquisition by a person or group of beneficial
ownership of 20% 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 20% person or group), in whole or in part, for Common Stock, at an exchange
ratio of one share of Common Stock per Right.
Until a Right is exercised, the holder thereof, as such, will have no rights as
a shareholder of the Company, including, without limitation, the right to vote
or to receive dividends. The Company has reserved, 6,047,216 shares of Common
Stock for issuance upon exercise of the Rights.
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 at 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.
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 is being 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 $47, $46 and $47 for the fiscal years ended March 29, 1998, March
30, 1997 and March 31, 1996, 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. In July 1997 the employment agreement was
extended through July 17, 2000 based on the original terms. 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 has been extended
annually through December 31, 1998, 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.
F-19
42
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 29, 1998, March 30, 1997 and March 31, 1996 were
$12, $5 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.
12. 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 29, 1998, 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
----------- ------ -----------
1999 2,130 139 1,991
2000 2,050 139 1,911
2001 1,863 134 1,729
2002 1,782 68 1,714
2003 1,716 28 1,688
Thereafter 7,064 150 6,914
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 $124, $163
and $97 for the fiscal years ended March 29, 1998, March 30, 1997 and March 31,
1996, respectively.
Rent expense, including contingent rental payments, net of sublease income, was
$2,151, $2,186 and $2,365 for the fiscal years ended March 29, 1998, March 30,
1997 and March 31, 1996, 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
F-20
43
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
Plaintiff has added as additional parties defendant, the attorney who
represented the landlord in the financing transaction in connection with which
the Estoppel Agreement was required. The Company 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 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. On July 19, 1996, defendants filed a motion to dismiss the state
court claims for failure to state a claim and as barred by the applicable
statute of limitations. By decision dated February 5, 1997, the Supreme Court
dismissed all of the causes of action in the plaintiffs complaint except for the
cause of action asserting a violation of the New York State Franchise Act.
Defendant appealed the Supreme Court's order and on January 20, 1998, the
Appellate Division reversed and dismissed for untimeliness the New York State
Franchise Act cause of action. On May 14, 1998, the plaintiffs' motion for leave
to appeal to the Court of Appeals was denied, and the action was dismissed.
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 by reason of Systems' allegedly fraudulent and deceitful conduct,
Systems violated the General Business Law of New York. As a consequence of the
foregoing, the defendants 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. During fiscal 1998, Systems motion was granted except for the
claim seeking statutory relief under the General Business Law.
The Company was named as one of three defendants in an action commenced in June
1997, in the Supreme Court of New York, Queens County. According to the
complaint, the plaintiff, a dentist, is seeking injunctive relief and damages in
an amount exceeding $5,000 against the landlord, one of the Company's
franchisees and the Company claiming that the operation of a restaurant in a
building in Long Island City created noxious and offensive fumes and odors that
allegedly were injurious to the health of the plaintiff and his employees and
patients, and interfered with, and irreparably damaged his practice. Plaintiff
also claims that the landlord fraudulently induced him to enter 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. The Company intends to defend the action vigorously.
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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.
13. 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.
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