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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 28, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-3189
NATHAN'S FAMOUS, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3166443
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1400 Old Country Road, Westbury, New York 11590
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 338-8500
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 4, 1999 was approximately $17,413,172.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of June 4, 1999,
there were 4,722,216 shares of Common Stock, par value $.01 per share
outstanding.
Documents incorporated by reference: None
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PART I
ITEM 1. BUSINESS
Nathan's Famous, Inc. ("Nathan's" or the "Company") currently operates
and franchises or licenses 188 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 Nathans' original Coney Island
restaurant opened in 1916. Since fiscal 1997, Nathan's supplemented its
franchise program with its Branded Product Program which enables foodservice
retailers to sell some of Nathan's proprietary products outside of the realm of
a traditional franchise relationship.
Over the past five years, Nathan's has been focused on developing its
restaurant system by operating Company-owned restaurants and opening franchised
or licensed restaurants while developing complimentary lines of business, such
as expanding its supermarket licensing program, implementing its Branded Product
Program and developing an international master franchising program.
At March 28, 1999, the Nathan's Famous system included 25 Company-owned
units concentrated in the New York metropolitan area, New Jersey, Pennsylvania
and Connecticut, 163 franchised or licensed units, including 28 carts, kiosks,
and counter units and over 700 branded product outlets under its Branded Product
Program, operating in 37 states, the District of Columbia, Israel and the
islands of Jamaica and Aruba.
Nathan's plans to further expand its market penetration by growing its
Branded Product Program, opening new Company-owned, franchised or licensed
outlets emphasizing continued introduction into non-traditional captive markets
such as airports, highway travel plazas, universities, convenience stores and
certain other retailers and other high traffic areas. These types of locations
allow Nathans' to maximize its return on investment by minimizing its capital
investment and reducing its advertising costs while simplifying the unit's
operation. Nathan's also plans to develop an international presence through the
use of master franchising agreements.
Nathan's was incorporated in Delaware on July 10, 1992 under the name
"Nathan's Famous Holding Corporation" to act as the parent of a Delaware
corporation then-known as Nathan's Famous, Inc. On December 15, 1992, Nathan's
changed its name to Nathan's Famous, Inc. and its Delaware subsidiary changed
its name to Nathan's Famous Operating Corporation. The Delaware subsidiary was
organized in October 1989 in connection with its reincorporation in Delaware
from that of a New York corporation named "Nathan's Famous, Inc." The New York
Nathan's was incorporated on July 10, 1925 as a successor to the sole
proprietorship that opened the first Nathan's restaurant in Coney Island in
1916. On July 23, 1987, Equicor Group, Ltd. was merged with and into the New
York Nathan's in a "going private" transaction. The New York Nathan's, the
Delaware subsidiary and Equicor may all be deemed to be predecessors of
Nathan's.
RECENT DEVELOPMENTS
On February 19, 1999, the U. S. Bankruptcy Court for the Middle District
of North Carolina, Durham Division, confirmed the Joint Plan of Reorganization
of the Official Committee of Franchisees of Roasters Corp. and Roasters
Franchise Corp., operators of Kenny Rogers Roasters Restaurants. Under the joint
plan of reorganization, on April 1, 1999, Nathan's acquired the intellectual
property rights, including trademarks, recipes and franchise agreements of
Roasters Corp. and Roasters Franchise Corp. for $1,250,000 in cash plus related
expenses, which was paid out of Nathan's' working capital. Nathan's anticipates
that this acquisition will enable it to further the market penetration it has
achieved to date, although there is no assurance in this regard.
On November 25, 1998, Nathan's acquired 8,121,000 shares, or approximately 29.9%
of the outstanding common stock, of Miami Subs Corporation for $4,200,000,
excluding transaction costs, and entered into a non-binding letter of intent
which contemplated the acquisition of the remaining outstanding shares of Miami
Subs. After giving effect to Miami Subs one-for-four reverse stock split in
January 1999, Nathan's now owns 2,030,250 shares of Miami Subs common stock. On
January 15, 1999, Nathan's and Miami Subs entered into a definitive merger
agreement under which Nathan's is expected to acquire the remaining outstanding
shares of Miami Subs in exchange for approximately 2,319,000 shares of Nathan's
common stock and
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warrants to acquire approximately 580,000 shares of Nathan's common stock at a
price of $6.00 per share. The merger is subject to certain conditions, including
completion of due diligence, receipt of fairness opinions and approval by a
majority of the stockholders of Nathan's and Miami Subs.
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 "Nathans 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.
Nathans' hot dogs are all-beef and are free from all fillers and
starches. Hot dogs are flavored with the original secret blend of spices created
by Ida Handwerker in 1916, which historically have distinguished Nathans' hot
dogs. Hot dogs are prepared and served in accordance with procedures which have
not varied significantly in more than 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. Nathan's
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:
chargrilled hamburgers, chargrilled chicken sandwiches, Philly Cheesesteaks,
selected seafood and fried chicken items, a breakfast menu and assorted desserts
and snacks. While the number of supplemental menus carried varies with the size
of the unit, the specific supplemental menus chosen are tailored to local food
preferences and market conditions. 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 menu options consists of a number of individual
items; for example, the hamburger menu may include chargrilled bacon
cheeseburgers, cheeseburgers, superburgers and "BLT" burgers. Nathan's 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.
Nathan's also has a "Kids Meal" program in which various menu alternatives are
combined with toys to appeal to the children's market.
Nathans' 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. Nathan's 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 D units generally carry only the core menu. This menu is supplemented by a
number of other menu selections in Type A & B units and even greater menu
selection in Type C units. The standardization of Nathans' prototype unit
designs and menus has enabled Nathan's to reduce the cost of constructing
conforming restaurant units and the operating costs of these units.
Nathan's 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. Many of these smaller units have been
designed specifically to support Nathan's expanding Branded Product Program. All
prototypes utilize a uniform, contemporary design.
Franchise Program
Nathans' franchise operations included 163 units at March 28, 1999,
operating in 18 states, the Island of Aruba and the State of Israel. During the
current fiscal year, Nathans' franchising program has expanded internationally
having executed Master Development Agreements for the State of Israel and Egypt.
Two restaurants are currently operating in Israel and 3 units are under various
stages of development in Egypt. Another Nathan's franchisee has executed a
master development
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agreement for the development of Nathan's Kosher restaurants within the United
States. The first Kosher Nathan's restaurant opened in December 1998.
Today, Nathan's counts among its 82 franchisees and licensees such well
known companies as Host Marriott Services USA, Inc., ARAMARK Leisure Services,
Inc., CA1 Services, Inc., Service America Corp., Ogden Services Corp. and
Sodexho USA. Nathan's 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.
As of March 28, 1999, Host Marriott operated 29 franchised outlets
including 14 units at airports and 15 within highway travel plazas.
Franchisees who desire to open multiple units in a specific territory
generally enter into a standard area development agreement under which Nathan's
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 Nathan's as provided in its standard franchise agreement. In some
circumstances, Nathan's may grant exclusive territorial rights, including
foreign countries, for the development of Nathan's units based upon compliance
with a predetermined development schedule. Nathan's may require that an
exclusivity fee be conveyed for these rights. Additionally, under some
circumstances, Nathan's may pay fees associated with the development of some
geographic areas.
Franchisees are required to execute a standard franchise agreement or
license agreement prior to opening each "Nathan's Famous" unit. Nathans' 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. Nathan's also offers a modified franchise agreement tailored to
meet the needs of franchisees who desire to operate a Nathan's of a smaller size
offering a reduced menu. The modified franchise agreement provides for the
initial franchise fee of $15,000 which is payable upon execution of the
agreement, monthly royalties of 4.5% and the expenditure of 2.5% of sales on
advertising. In some specific situations, Nathan's may offer alternatives to the
standard franchise agreement. 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 conditions
contained in the franchise agreement.
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.
Nathan's does not offer any financing arrangements to its franchisees.
Nathan's provides numerous support services to its franchisees. Nathan's
assists in and approves all site selections. Thereafter, Nathan's provides
architectural prototype plans suitable for restaurants of varying sizes and
configurations, for use in food-court, in-line and free-standing locations.
Nathan's 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. Nathan's typically does not sell food, equipment or supplies
to its franchisees.
Nathan's 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 Nathans' mandated
management training program. Nathan's also offers additional operations and
general management training courses for all restaurant managers and other
managers with supervisory responsibilities. Nathan's provides standard manuals
to each franchisee covering training and operations, products and equipment and
local marketing programs. Nathan's also provides ongoing advice and assistance
to franchisees.
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Franchised restaurants are required to be operated in accordance with
uniform operating standards and specifications relating to the selection,
quality and preparation of menu items, signage, decor, equipment, uniforms,
suppliers, maintenance and cleanliness of premises and customer service. All
standards and specifications are developed by Nathan's and applied on a
system-wide basis. Nathan's continuously monitors franchisee operations and
inspects restaurants. Franchisees are required to furnish Nathan's with detailed
monthly sales or operating reports which assist Nathan's in monitoring the
franchisee's compliance with its franchise or license agreement. Nathan's makes
both announced and unannounced inspections of restaurants to ensure that company
practices and procedures are being followed. Nathan's 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. Nathan's
also has the right to terminate a franchise for non-compliance with certain
other terms and conditions of the franchise or license agreement such as
non-payment of royalties, sale of unauthorized products, bankruptcy or
conviction of a felony. During the fiscal year ended March 28, 1999, Nathan's
terminated 2 franchise agreements.
Company-owned Operations
As of March 28, 1999, Nathan's operated 25 Company-owned units,
including two kiosks, in New York, New Jersey, Connecticut and Pennsylvania.
Some of Nathans' 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, Nathan's does not intend to
replicate these units in its planned expansion of Company-owned units.
Nathan's has entered into a food service lease agreement with Home Depot
U.S.A., Inc. under which Nathan's leases space within certain Home Depot
Improvement Centers to operate its restaurants. The term of each Home Depot
agreement is five years from the date on which the restaurant opens, with two
five year renewal options. Nathan's currently operates 11 units within Home
Depot Improvement Centers, including 2 kiosks. Nathan's is currently developing
a new prototype unit which is expected to open in the winter of 2000. Nathan's
believes that this new unit may provide further development opportunities with
The Home Depot.
Since Nathans' initial public offering in February 1993, Nathan's has
acquired seven Company-owned restaurants from franchisees, opened 18 new
Company-owned units, commenced operating two carts, sold one unit and closed
nine units. Nathan's 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. Some restaurant designs do not
include seating and others include seating for 100 to 300 customers. The
restaurants are designed to appeal to all ages and generally are open seven days
a week. Nathan's 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 $5.28 for fiscal
1999.
The following table shows the number of Company-owned and
franchised or licensed units in operation at March 28, 1999 and their
geographical distribution:
Franchise
Location Company or License Total
- -------- ------- ---------- -----
Arizona -- 3 3
California -- 1 1
Colorado -- 1 1
Connecticut 1 4 5
Florida -- 17 17
Indiana -- 1 1
Maine -- 1 1
Maryland -- 2 2
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Massachusetts -- 3 3
Minnesota -- 1 1
Mississippi -- 1 1
Nevada -- 6 6
New Hampshire -- 1 1
New Jersey 6 44 50
New York 16 64 80
North Carolina -- 3 3
Pennsylvania 2 6 8
Rhode Island -- 1 1
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Domestic Subtotal 25 160 185
--- --- ---
International Locations
Aruba -- 1 1
Israel -- 2 2
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International Subtotal -- 3 3
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Grand Total 25 163 188
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Branded Product Program
During fiscal 1998, Nathan's launched its new "Branded Product Program"
in which qualified foodservice operators may offer Nathans' hot dogs and other
proprietary items for sale within their facilities. In conjunction with this
program, foodservice operators are granted a limited use of the Nathans'
trademark with respect to the sale of hot dogs and certain other proprietary
food items and paper goods. Nathan's sells the products directly to various
distributors who resell these proprietary products to retailers. Currently,
there are over 700 branded outlets operating under this program. The flexibility
of this program has allowed Nathan's to execute exclusive distribution
agreements with The Compass Group and Pierre Foods for the sale of pre-packaged
Nathan's branded hot dogs through vending machines, convenience stores and club
stores. Nathan's has also executed an exclusive agreement with Best Express
Foods, Inc. for the sale of Nathan's branded hot dogs to school systems
nationwide.
Expansion Program
Nathans' 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 increasing the market penetration of its Branded
Product Program. Smaller designs have been developed specifically to encourage
co-branding by our business partners. Many of Nathans' franchisees currently
operate units that are co-branded with various nationally recognized brands. 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 Nathan's has extensive experience in operating restaurants in this market.
Nathan's intends to continue to focus on opportunities for locating units in
non-traditional or other special captive market settings. Nathan's believes that
a significant opportunity exists to convert existing sales of non-branded 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.
For the year ended March 28, 1999, franchisees have opened 21 new
franchised units including 2 units in the State of Israel and the first Kosher
Nathan's restaurant. The Branded Product Program has also added over 400 branded
outlets, exclusive of the points of distribution added under the Pierre Foods,
The Compass Group and Best Express Foods contracts.
Nathan's expects that its franchisees and licensees will open
approximately 20-25 new units and that it will seek continued growth of the
Branded Product Program in fiscal 2000. Nathan's plans to continue opening
Company-owned units within Home Depot Improvement Centers as new opportunities
arise.
During fiscal 1999, Nathan's has continued its international development
initiative recognizing that opportunities exist for franchising "Nathan's
Famous" restaurants in various foreign countries. Nathan's believes that in
addition to
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restaurant franchising it has the opportunity to offer master development
agreements to qualified persons or entities allowing for the operation of
franchised restaurants, the ability to subfranchise restaurants to others and
also license the manufacture, sale of Nathans' products through supermarkets and
also allow for the development of a Branded Product Program. Qualified persons
or entities must have satisfactory foodservice experience managing multiple
units, a solid infrastructure and the necessary financial resources to support
the business development. During fiscal 1999, a Nathan's franchisee has opened 2
units in the State of Israel under a master development agreement and another
franchisee has 3 units under development pursuant to a master development
agreement for Egypt. Nathan's has also retained a consultant to assist in the
development and marketing efforts of the international program. Nathan's has
registered some of its service marks and trademarks in more than 20 foreign
jurisdictions.
Licensing Program
Nathan's licenses SMG, Inc. to produce packaged hot dogs and
other meat products according to Nathans' proprietary recipes and spice
formulations, and to use "Nathan's Famous" and related trademarks to sell these
products on an exclusive basis in the United States to supermarkets, groceries
and other outlets, thereby providing foods for off-premises consumption. The SMG
agreement expires in 2014 and provides for royalties ranging between 3% to 5% of
sales. The percentage varies based on sales volume, with escalating minimum
royalties. Earned royalties of $1,236,000 in fiscal 1999 exceeded the
contractual minimum established under the agreement. Nathan's 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 the majority of Nathans's fiscal 1999 retail license revenues.
In November 1997, Nathan's 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 Nathan's to receive
royalties based upon sales, subject to minimum annual royalties, as specified in
the agreement. During fiscal 1999, Nathan's received the minimum royalties of
$100,000 payable for calendar 1998.
Nathan's products are also distributed under licensing agreements
with Gold Pure Food Product's Co., Inc. and United Pickle Packers, Inc. Both
companies license 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 1999 have not been significant.
PROVISIONS AND SUPPLIES
Nathans' proprietary hot dogs are produced by SMG and Russer
Foods, a division of IBP, Inc., in accordance with Nathans' recipes, quality
standards and proprietary spice formulations. John Morrell & Company, Nathans'
licensee prior to SMG, has retained the right to produce Nathans' proprietary
spice formulations. All other company provisions are purchased and obtained from
multiple sources to prevent disruption in supply and to obtain competitive
prices. Nathan's 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 Nathans'
specifications.
MARKETING, PROMOTION AND ADVERTISING
Nathan's maintains advertising funds for local, regional and
national advertising under the Nathan's Famous Systems, Inc. Franchise
Agreement. Franchisees are generally required to spend or contribute to the
advertising funds up to 2.5% of restaurant sales for advertising and promotion.
Marriott and National Restaurant Management, Inc. are among the current
franchisees who are not subject to this requirement. If a cooperative
advertising program exists in the franchised area, the applicable percentage can
be contributed to that program. Where no cooperative advertising program is
available, up to 1% of the franchisees' advertising budget must be contributed
to the advertising funds for national marketing support. The balance must be
expended on programs approved by Nathan's as to form, content and method of
dissemination. Through March 28, 1999, Nathans' gross spending for marketing
activities was approximately 2.4% of its own restaurant sales.
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Through March 28, 1999, Nathan's continued its primary marketing
emphasis on local store marketing campaigns featuring a value oriented strategy
complimented with promotional "Limited Time Offers." Nathan's anticipates that
near term marketing efforts will continue to emphasize local store marketing
activities. These activities were supplemented with a radio and billboard
campaign during the summer of 1998. As the concentration of "Nathan's Famous"
restaurants in particular geographic areas increases, Nathan's 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.
Nathan's 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, Nathan's also
participates with SMG in joint promotional activities.
GOVERNMENT REGULATION
Nathan's is subject to Federal Trade Commission regulation and
several state laws which regulate the offer and sale of franchises. Nathan's 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" requires Nathan's 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 Nathan's.
Laws which regulate one or another aspect of the
franchisor-franchisee relationship presently exist in twenty-one states and the
District of Columbia. These laws regulate the franchise relationship by, for
example, requiring the franchisor to deal with its franchisees in good faith,
prohibiting interference with the right of free association among franchisees,
limiting the imposition of standards of performance on a franchisee, and
regulating discrimination among franchisees in charges, royalties or fees. These
laws have not precluded Nathan's from seeking franchisees in any given area.
Although these laws may also restrict a franchisor in the termination of a
franchise agreement by, for example, requiring "good cause" to exist as a basis
for the termination, advance notice to the franchisee of the termination, an
opportunity to cure a default and repurchase of inventory or other compensation,
these provisions have not had a significant effect on Nathans' operations.
Nathan's is not aware of any pending franchise legislation which
in its view is likely to significantly affect the operations of Nathan's.
Nathan's 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.
Nathan's is subject to federal and state environmental
regulations, which have not had a material effect on Nathans' operations. More
stringent and varied requirements of local governmental bodies with respect to
zoning, land use and environmental factors could delay or prevent development of
new restaurants in particular locations. In addition, the federal Americans with
Disabilities Act ("ADA") applies with respect to the design, construction and
renovation of all restaurants in the United States. Compliance with the ADA's
requirements could delay or prevent the development of, or renovation to
restaurants in certain locations, as well as add to the cost of such
development.
Each of the companies which manufactures, supplies or sells
Nathans' products is subject to regulation by federal agencies and to licensing
and regulation by state and local health, sanitation, safety and other
departments. Difficulties or failures by these companies in obtaining the
required licenses or approvals could adversely effect the revenues of Nathan's
which are generated from these companies.
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Nathan's believes that it operates in substantial compliance with
applicable laws and regulations governing its operations.
EMPLOYEES
Nathan's regularly employed an average of approximately 590
persons during fiscal 1999, of whom 35 were corporate management and
administrative employees, 110 were restaurant managers and 476 were hourly
full-time and part-time food-service employees. The number of hourly
food-service employees ranged from a low of 411 to a high of 500. Food-service
employees at five locations are represented by 1115 Culinary Employees Union, a
division of 1115 Joint Board, under various agreements which are expected to be
renegotiated by August 1999. Nathan's considers its employee relations to be
good and for more than 27 years has not suffered any strike or work stoppage.
Nathan's 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 crew trainers following company
practices and procedures outlined in its operating manuals.
TRADEMARKS
Nathan's holds trademark and service mark registrations for
NATHAN'S FAMOUS, NATHAN'S and Design, NATHAN'S FAMOUS SINCE 1916 and SINCE 1916
NATHAN'S FAMOUS within the United States with some of these marks holding
corresponding foreign trademark and service mark registrations in more than 20
jurisdictions. Nathan's also holds various related marks for restaurant services
and some food items. Nathan's believes that its trademarks and service marks
provide significant value to Nathan's and are an important factor in the
marketing of its products and services. Nathan's 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 Nathan's. Nathan's 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.
Nathan's 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, Nathan's 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, some of them
have adopted "value pricing" and or deep discount strategies. These strategies
could have the effect of drawing customers away from companies which do not
engage in discount pricing and could also negatively impact the operating
margins of competitors which attempt to match their competitors' price
reductions. Nathan's 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 Nathan's.
Nathan's 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.
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ITEM 2. PROPERTIES
Nathans' 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 Nathan's. At
March 28, 1999, other Company-owned restaurants then operating were located in
leased space with terms expiring as shown in the following table:
Current Lease Approximate
Location Expiration Date Square Footage
-------- --------------- --------------
Coney Island Brooklyn, NY December 2008 10,000
Coney Island Boardwalk Brooklyn, NY October 2000 440
Kings Plaza Shopping Center Brooklyn, NY September 2010 4,200
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 1999 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
Broad Hollow Road Farmingdale, NY April 2003 2,200
Woodbridge Center Woodbridge, NJ May 2000 3,000
Galleria Mall White Plains, NY June 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
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
Nathans' 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. Many of Nathans'
leases also provide for renewal options ranging between 5 - 25 years upon
expiration of the prime lease. Nathan's is currently renegotiating its lease in
the Galleria Mall which expired in March 1999 while the restaurant continues to
operate and is also renegotiating the lease within the Paramus Park Shopping
Center. Aggregate rental expense, net of sublease income, under Nathans' current
leases amounted to $2,093,000 in fiscal 1999.
ITEM 3. LEGAL PROCEEDINGS
Nathan's is from time to time involved in ordinary and routine litigation.
Nathan's is also involved in the following litigation:
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 Nathan's conspired to
perpetrate a fraud upon the plaintiff and alleges that Nathan's breached its
lease with 1045 Rush Street Associates and the estoppel agreement delivered to
the plaintiff in connection therewith by subleasing these premises and
thereafter assigning the lease with respect to the premises to a third party
franchisee, and further by failing to pay rent under this lease on and after
July 1990. This complaint seeks damages in the
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amount of at least $1,500,000. Nathan's 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. Nathan's and some of the named
defendants entered into a Settlement with Textron whereby all of the plaintiff's
claims against Nathan's and the other defendants were resolved under a
Settlement Agreement and Mutual Release that provided for payments to be made
jointly by all of the defendants on or before December 30, 1998 and January 15,
1999, which payments were made.
In or about December, 1996, Nathan's Famous Systems, Inc.
instituted an action in the Supreme Court of New York, Nassau County, against
Phylli Foods, Inc. a franchisee, and Calvin Danzig as a guarantor of 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 Phylli Foods dated June 1, 1994. In
their answer, the defendants essentially denied the material allegations of the
complaint and interposed counterclaims against Systems in which they alleged
essentially that Systems fraudulently induced the defendants to purchase the
franchise from Systems or did so by means of negligent misrepresentations.
Defendants also alleged that by reason of Systems' allegedly fraudulent and
deceitful conduct, Systems violated the General Business Law of New York. As a
consequence of the foregoing, the defendants 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.
Nathan's was named as one of three defendants in an action
commenced in June 1997, in the Supreme Court of New York, Queens County.
According to the complaint, the plaintiff, a dentist, is seeking injunctive
relief and damages in an amount exceeding $5 million against the landlord, one
of Nathan's franchisees and Nathan's claiming that the operation of a restaurant
in a building in Long Island City created noxious and offensive fumes and odors
that allegedly were injurious to the health of the plaintiff and his employees
and patients, and interfered with, and irreparably damaged his practice.
Plaintiff also claims that the landlord fraudulently induced him to enter a
lease extension by representing that the first floor of the building would be
occupied by a non-food establishment. Nathan's believes that there is no merit
to the plaintiff's claims against it inasmuch as it never was a party to the
lease, and the restaurant, which closed in or about August 1995, was operated by
a franchisee exclusively. Nathan's intends to defend the action vigorously.
On January 5, 1999, Miami Subs was served with a class action
lawsuit entitled Robert J. Feeney, on behalf of himself and all others similarly
situated vs. Miami Subs Corporation, et al., in Broward County Circuit Court,
which was filed against Miami Subs, its directors and Nathan's in a Florida
state court by a shareholder of Miami Subs. Since that time, Nathan's and its
designees to the Miami Subs Board have also been served. The suit alleges that
the proposed merger between Miami Subs and Nathan's, as contemplated by the
companies' non-binding letter of intent, is unfair to Miami Subs' shareholders
and constitutes a breach by the defendants of their fiduciary duties to the
shareholders of Miami Subs. The plaintiff seeks among other things: 1. class
action status; 2. preliminary and permanent injunctive relief against
consummation of the proposed merger; and 3. unspecified damages to be awarded to
the shareholders of Miami Subs.
On March 19, 1999, the Court granted the plaintiff leave to
amend his complaint. Thereafter, Plaintiff filed a First amended Complaint.
Nathan's and its designees on the Miami Subs' Board moved to dismiss the First
Amended Complaint. The Court held a hearing on the motion, but has not yet ruled
on it. In the event the Court denies the pending motion, Nathan's intends to
defend against this suit vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
COMMON STOCK PRICES
The Company's common stock began trading on the
over-the-counter market on February 26, 1993 and is quoted on the Nasdaq
National Market System ("Nasdaq") under the symbol "NATH." The following table
sets forth the high and low closing share prices per share for the periods
indicated:
High Low
---- ---
Fiscal year ended March 29, 1998
First quarter $ 3.88 $ 2.97
Second quarter 4.25 3.19
Third quarter 4.88 3.56
Fourth quarter 4.75 3.50
Fiscal year ended March 28, 1999
First quarter $ 4.44 $ 3.69
Second quarter 4.63 3.44
Third quarter 4.44 3.34
Fourth quarter 4.28 3.56
At June 4, 1999 the closing price per share for the Company's common stock, as
reported by Nasdaq was $3.6875.
DIVIDEND POLICY
The Company has not declared or paid a cash dividend on its common stock since
its initial public offering. It is the policy of the Board of Directors of the
Company to retain all available funds to finance the development and growth of
the Company's business. The payment of cash dividends in the future will be
dependent upon the earnings and financial requirements of the Company.
SHAREHOLDERS
As of June 4, 1999, the Company had 317 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 28, MARCH 29, MARCH 30, MARCH 31, MARCH 26,
1999 1998 1997 1996(1) 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Operations Data:
Revenues:
Sales $ 24,511 $ 23,530 $ 21,818 $ 21,167 $ 20,927
Franchise fees and royalties 3,230 3,062 3,238 3,249 3,448
License royalties and other income 1,841 2,285 1,619 2,025 1,826
-------- -------- -------- -------- --------
Total revenues 29,582 28,877 26,575 26,441 26,201
======== ======== ======== ======== ========
Costs and Expenses:
Cost of sales 15,367 14,468 13,031 12,833 12,270
Restaurant operating expenses 5,780 6,411 6,602 6,730 6,396
Depreciation and amortization 1,065 1,035 1,013 1,724 1,588
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Amortization of intangibles 384 384 406 665 581
General and administrative expenses 4,722 4,755 4,097 5,457 5,859
Interest expense 1 6 16 28 16
Impairment of long-lived assets -- -- -- 3,907 --
Other (income) and expense (47) -- -- 1,570 500
-------- -------- -------- -------- --------
Total costs and expenses 27,272 27,059 25,165 32,914 27,210
-------- -------- -------- -------- --------
Income (loss) before provision (benefit)
for income taxes 2,310 1,818 1,410 (6,473) (1,009)
Income tax provision (benefit) (418) 290 622 (49) (492)
-------- -------- -------- -------- --------
Net earnings (loss) $ 2,728 $ 1,528 $ 788 ($ 6,379) ($ 517)
======== ======== ======== ======== ========
Per Share Data:
Net earnings (loss)
Basic $ 0.58 $ 0.32 $ 0.17 ($ 1.35) ($ 0.11)
Diluted $ 0.57 $ 0.32 $ 0.17 ($ 1.35) ($ 0.11)
Dividends -- -- -- -- --
-------- -------- -------- -------- --------
Number of common shares used in computing
net income (loss) per share
Basic 4,722 4,722 4,722 4,722 4,728
Diluted 4,753 4,749 4,729 4,722 4,728
Balance Sheet Data at End of Fiscal Year:
Working capital $ 3,708 $ 6,105 $ 4,802 $ 3,937 $ 7,133
Total assets 31,250 29,539 27,794 27,765 32,430
Long term debt, net of current maturities 0 9 21 35 63
Stockholders' equity $ 26,348 $ 23,586 $ 21,976 $ 21,142 $ 27,474
======== ======== ======== ======== ========
Selected Restaurant Operating Data:
Systemwide Restaurant Sales:
Company-owned $ 21,981 $ 22,332 $ 21,718 $ 21,167 $ 20,927
Franchised 64,178 58,802 63,564 68,009 73,465
-------- -------- -------- -------- --------
Total $ 86,159 $ 81,134 $ 85,282 $ 89,176 $ 94,392
======== ======== ======== ======== ========
Number of Units Open at End of Fiscal Year:
Company-owned 25 27 26 27 24
Franchised 163 156 147 178 159
-------- -------- -------- -------- --------
Total 188 183 173 205 183
======== ======== ======== ======== ========
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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FISCAL YEAR ENDED MARCH 28, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 29,1998
Revenues
Total sales increased 4.2% or $981,000 to $24,511,000 for the
fifty-two weeks ended March 28, 1999 ("fiscal 1999") from $23,530,000 for the
fifty-two weeks ended March 29, 1998 ("fiscal 1998"). Sales from the Branded
Product Program, which was first introduced in fiscal 1998, increased by
$1,331,000 or 111% to $2,529,000 for fiscal 1999 as compared to $1,198,000 for
fiscal 1998. Company-owned restaurant sales decreased 1.6% or $350,000 to
$21,982,000 from $22,332,000. During fiscal 1999, Nathan's was forced to close
two of its restaurants which had previously been operating under month-to-month
leases and resulted in a sales decline of approximately $734,000 versus the
prior year. Comparable unit sales increased by approximately 1.3% in fiscal 1999
versus fiscal 1998. Comparable unit sales are based on units operating for 18
months or longer as of the beginning of the fiscal year. Nathan's continues to
emphasize local store marketing activities, new product introductions and value
pricing strategies. These activities were supplemented with a radio and
billboard campaign during the summer 1998. During fiscal 1999, Nathan's
completed the renovation of the 86th Street restaurant in Brooklyn, NY, which
included a drive-thru operation, and its restaurant in the Kings Plaza Shopping
Center. Plans are currently being considered to renovate and modernize the
appearance and design of certain other Company-owned units. At March 28, 1999
and March 29, 1998, there were 25 and 27 Company-owned units, respectively.
Franchise fees and royalties increased by $168,000 or 5.5% to
$3,230,000 in fiscal 1999 compared to $3,062,000 in fiscal 1998. Franchise
royalties increased by $209,000 or 8.4% to $2,698,000 in fiscal 1999 as compared
to $2,489,000 in fiscal 1998. Franchise restaurant sales, upon which royalties
are based, increased by 9.1% or $5,376,000, to $64,178,000 in fiscal 1999,
compared to $58,802,000 in fiscal 1998. The majority of the sales increase can
be attributed to the additional franchised and licensed units operating during
fiscal 1999. Franchise fee income was $532,000 in fiscal 1999, compared to
$573,000 in fiscal 1998 due primarily to the difference in the amount of
forfeitures and expirations recognized into income between the two years. During
fiscal 1999, 21 new franchised or licensed units opened, including the second
restaurant in Israel, and the first Kosher Nathan's restaurant in Brooklyn, New
York. Nathan's also executed an agreement for international development within
Egypt. At March 28, 1999, there were 163 franchised or licensed restaurants as
compared to 156 at March 29, 1998.
License royalties decreased by $80,000 or 5.4% to $1,415,000 in
fiscal 1999, compared to $1,495,000 in fiscal 1998. During fiscal 1999, Nathan's
earned royalties of approximately $137,000 under a new license agreement for the
sale of Nathans' home meal replacements in supermarkets. Fiscal 1998 results
included $240,000 of income recognized from amortization of a deferred fee
received from SMG, Inc., which was fully amortized in March 1998.
Investment and other income was $400,000 in fiscal 1999 versus
$790,000 in fiscal 1998. Approximately $263,000 of the decrease is the result of
lower earnings on Nathans' marketable investment securities resulting from the
difference in the performance of the financial markets between the two years,
the impact of the fiscal 1998 shift into tax exempt securities and lower
investment earnings from the reduced principle amount of marketable investment
securities after the Company made its equity investment in Miami Subs Corp.
During fiscal 1998, Nathan's also recognized a gain of approximately $130,000
from the sale of an underperforming restaurant.
Costs and Expenses
Cost of sales increased by $899,000 from $14,468,000 in fiscal
1998 to $15,367,000 in fiscal 1999. Higher costs were incurred in conjunction
with the growth of the Branded Product Program, the new restaurants opened in
the fourth quarter fiscal 1998 that operated during fiscal 1999 and the higher
costs of restaurant sales. The cost of restaurant sales was 61.0% of restaurant
sales in fiscal 1999 as compared to 60.5% of restaurant sales in fiscal 1998.
This increase is due primarily to higher food costs associated with Nathan's
ongoing promotional activities and an increase in labor costs of 0.6% of
restaurant sales due primarily to the impact of the minimum wage increase which
took effect in September 1997. Nathan's continues to seek to operate more
efficiently and expects to seek selective price adjustments wherever available
to minimize the margin pressures which have become an integral part of competing
in the current value conscious marketplace.
Restaurant operating expenses decreased by $631,000 from
$6,411,000 in fiscal 1998 to $5,780,000 in fiscal 1999. This decrease can be
primarily attributed to a four month cost hiatus during the renovation of the
Kings Plaza restaurant of
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approximately $72,000, reduced costs of property taxes arising from successful
tax certiorari proceedings of approximately $100,000, lower insurance costs of
approximately $106,000, lower utility costs of approximately $128,000 due
primarily to reduced electric rates on Long Island and the impact of restaurants
closed and other lower expenses resulting from the different restaurants
operated between the two periods. As a percentage of restaurant sales,
restaurant operating expenses were 26.3% in fiscal 1999 as compared to 28.4% in
fiscal 1998.
Depreciation and amortization increased by $30,000 or 2.9% from
$1,035,000 in fiscal 1998 to $1,065,000 in fiscal 1999. Amortization of
intangibles was $384,000 in fiscal 1999 as compared to $384,000 in fiscal 1998.
General and administrative expenses decreased by $33,000 to
$4,722,000 in fiscal 1999, compared to $4,755,000 in fiscal 1998 Nathan's
incurred lower general & administrative expenses for professional fees of
$236,000 and lower bad debts of approximately $36,000. Offsetting these savings
were increases of approximately $133,000 relating to salaries for additional
personnel primarily to support new growth initiatives, $42,000 relating to
international development efforts and $82,000 associated with management
incentive plans based upon the achievement of predetermined financial targets
Other income, net reflects the reversal of previous litigation
accruals in the amount of $349,000 resulting from the conclusion of the
associated litigation and an impairment charge of $302,000 associated with four
under-performing stores pursuant to Statement of Financial Standard No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of".
Income Taxes
In fiscal 1999, the income tax benefit was ($418,000) or (18.1%)
of income before taxes as compared to a provision of $290,000 in fiscal 1998.
For each fiscal year the Company reduced its valuation allowance because
management determined that, based upon the facts and circumstances at the time,
it was more likely than not that a portion of its deferred tax assets would be
realized. Accordingly, the Company reduced its valuation allowance by $1,443,000
in fiscal 1999 as compared to $523,000 in fiscal 1998 .The fiscal 1999 provision
before adjustment for the valuation allowance was $1,025,000 or 44.4% of income
before taxes as compared to the fiscal 1998 provision before adjustment for the
valuation allowance of $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".
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 $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
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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 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 28, 1999 aggregated
$2,165,000. At March 28, 1999, marketable investment securities totalled
$3,267,000 and net working capital decreased to $3,708,000 from $6,105,000 at
March 29, 1998.
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Cash provided by operations of $6,780,000 in fiscal 1999 is
primarily attributable to net income of $2,728,000, non-cash charges of
$1,829,000, including depreciation and amortization of $1,449,000, impairment of
long-lived assets of $302,000, a decrease in marketable investment securities of
$5,247,000, an increase in deferred franchise fees of $97,000, increases in
deferred income taxes of $1,036,000, franchise and other receivables of $646,000
and prepaid expenses and other assets of $268,000 and a decrease in accounts
payable and accrued expenses of $1,177,000.
Cash used in investing activities of $5,900,000 represents
$1,485,000 for capital acquisitions relating primarily to the renovation of two
Company-owned restaurants and other fixed asset additions. Additionally, on
November 25, 1998, Nathan's acquired 8,121,000 shares, or approximately 29.9% of
the outstanding common stock, of Miami Subs for $4,200,000, excluding
transaction costs, and entered into a non-binding letter of intent which
contemplated the acquisition of the remaining outstanding shares of Miami Subs.
After giving effect to Miami Subs one-for-four reverse stock split in January
1999, Nathan's now owns 2,030,250 shares of Miami Subs common stock. On January
15, 1999, Nathan's and Miami Subs entered into a definitive merger agreement
under which Nathan's is expected to acquire the remaining outstanding shares of
Miami Subs in exchange for approximately 2,319,000 shares of Nathan's common
stock and warrants to acquire approximately 580,000 shares of Nathan's common
stock at a price of $6.00 per share. The merger is subject to certain
conditions, including completion of due diligence, receipt of fairness opinions
and approval by a majority of the stockholders of Nathan's and Miami Subs.
On February 19, 1999, the U. S. Bankruptcy Court for the Middle
District of North Carolina, Durham Division, confirmed the Joint Plan of
Reorganization of the Official Committee of Franchisees of Roasters Corp. and
Roasters Franchise Corp., operators of Kenny Rogers Roasters Restaurants. Under
the joint plan of reorganization, on April 1, 1999, Nathan's acquired the
intellectual property rights, including trademarks, recipes and franchise
agreements of Roasters Corp. and Roasters Franchise Corp. for $1,250,000 in cash
plus related expenses, which was paid out of Nathans' working capital. As of
March 28, 1999, Nathan's had deposited $100,000 of the purchase price in escrow.
Nathan's expects that it will reinvest in certain existing
restaurants in the future and that it will fund those investments from its
operating cash flow. Nathan's does not currently expect to incur significant
capital expenditures to develop new Company-owned restaurants, which would
require debt or equity financing.
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 2000. Nathan's
maintains a $5,000,000 uncommitted bank line of credit. Nathan's has not
borrowed any funds to date under its 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 experienced higher
labor costs on a relatively small proportion of its workforce as a result of the
September 1997 increase. Currently, various legislators are re-examining
additional changes to the minimum wage requirements. At this time, no
legislative action has been taken. Management believes that any further
increases in the minimum wage could have a significant financial impact and the
Company might 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
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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. Nathan's
early adopted SOP 98-5 and the impact was not material to operations.
In the first quarter of fiscal 1999, Nathan's adopted SFAS No.
130, "Reporting Comprehensive Income", which requires companies to report all
changes in equity during a period, except those resulting from investment by
owners and distribution to owners, in a financial statement for the period in
which they are recognized. Comprehensive income is the total of net income and
all nonowner changes in equity or other comprehensive income such as unrealized
gains / losses on securities available-for-sale, foreign currency translation
adjustments and minimum pension liability adjustments. Comprehensive and other
comprehensive income must be reported on the face of the annual financial
statements or in the case of interim reporting, in the footnotes to the
financial statements. For the fiscal years ended March 28, 1999 and March 29,
1998, Nathans' operations did not give rise to items includible in comprehensive
income which were not already included in net income. Therefore, Nathans'
comprehensive income is the same as its net income for all periods presented.
YEAR 2000
Nathan's performed an internal evaluation of its computer systems
and 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 order to meet its growing business requirements and assure Year
2000 compliance, Nathan's decided to replace its existing accounting systems. In
July 1998, Nathan's entered into a contract to license Lawson Accounting
software which has been certified to be Year 2000 compliant. Nathan's
successfully completed the conversion of its financial systems in January 1999
and the remaining aspects of the complete Lawson implementation, were completed
in June 1999. With the implementation of this new system, all of Nathan's major
financial systems should be Year 2000 complaint; however, no assurance can be
given in this regard. Nathan's estimates that the total cost associated with
this effort to be approximately $350,000, and doesn't expect the final cost to
vary materially, however, there can be no assurance to this effect.
Nathan's has addressed the Year 2000 issue with its Point of Sale
provider and has received assurance that their hardware is Year 2000 compliant
and that the software corrections already installed will make the POS systems
Year 2000 compliant; however, no assurance can be given in this regard.
Nathan's will be notifying its franchisees, in the next monthly franchise
mailing, that they should contact their Point of Sale provider to be sure that
they have received and installed the correction software mentioned above.
Nathan's has received assurance from its financial institutions
that their systems are or will be Year 2000 compliant before the end of the
year. Nathan's is also beginning to contact key suppliers and distributors about
their state of readiness and will seek their assurances with respect to their
Year 2000 compliance and contingency plans. No assurances can be given that
such suppliers and distributors will in fact be Year 2000 compliant. Nathan's
believes that its primary Year 2000 risk relating to its operations is centered
upon the ability of its suppliers and distributors to continue to receive
Nathan's orders by telephone and have the product delivered by truck. During
the third quarter of 1999, Nathan's will conclude evaluating this Year 2000
risk and will develop any necessary contingency plans to assure continued
supply of products to its restaurants. Nathan's cannot predict the effect of
the Year 2000 problem on the vendors and others with which Nathan's transacts
business and there can be no assurance that the effect of the Year 2000 problem
on the entities Nathan's does business with will not have a material adverse
effect on Nathan'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 its 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 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 28, 1999, Nathan's held an investment in the common
stock of Miami Subs, which as a public company is exposed to price risk, with a
cost basis of $4,200,000 and a fair market value basis of $3,108,719.
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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
DIRECTORS OF THE COMPANY
The Company's Certificate of Incorporation presently provides for a
Board of Directors consisting of not less than three nor more than twenty-seven
directors. The Company's Board of Directors now consists of six directors, as
set forth below.
Principal Director
Name Age Occupation Since
- ---- --- ---------- --------
Wayne Norbitz.................. 51 President, Chief Operating 1989
Officer and Director
Robert J. Eide(1)(2)........... 46 Treasurer and Secretary - 1987
Aegis Capital Corp.
Barry Leistner(1)(2)........... 48 President and Chief Executive 1989
Officer - Koenig Iron Works, Inc.
Jeffrey A. Lichtenberg(1)(2)... 46 Vice Chairman - 1987
Newmark & Company Real Estate, Inc.
Howard M. Lorber............... 50 President and Chief Operating 1987
Officer - New Valley Corp.
A. F. Petrocelli(1)(2)......... 55 President and Chairman of the Board - 1993
United Capital Corp.
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
The following is a brief account of the business experience for the
past five years of the Company's directors:
HOWARD M. LORBER has been Chairman of Nathan's since 1990, Chief
Executive Officer since 1993 and a director since 1987. Mr. Lorber was elected
President and Chief Operating Officer of New Valley Corporation, a company
engaged in the ownership and management of commercial real estate in the United
States and, through its subsidiaries, in investment banking, brokerage and real
estate development in the United States and Russia since November 1994 and has
served as a director since 1991. He is also the Chairman and Chief Executive
Officer of Hallman & Lorber Associates, Inc., an employee benefit and pension
consulting firm. Mr. Lorber has been a director of Miami Subs Corporation since
November 25, 1998. He also serves as a Director of United Capital Corp., a
manufacturing and real estate company, Prime Hospitality Corporation, an owner
and operator of hotel properties and PLM International, Inc., a diversified
leasing company. He is also a trustee of Long Island University and Babson
College.
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WAYNE NORBITZ has been employed by Nathan's since 1975 and was
elected President 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 has been
a director of Miami Subs Corporation since November 25, 1998. 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 Long Island Philharmonic
Orchestra.
ROBERT J. EIDE, a director of Nathan's since 1987, has been
Chairman, Treasurer and a principal shareholder in Aegis Capital Corp., a broker
dealer and a member firm of the NASD, since 1984. He has been a director of
Brooke Group Ltd., a company engaged through its subsidiaries in the manufacture
and sale of cigarettes in the United States and Russia since November 1993, and
a director of each of its subsidiaries BGLS Inc. since November 1993 and New
Valley Holdings, Inc. since September 1994. Mr. Eide has been a director of
Miami Subs Corporation since November 25, 1998.
BARRY LEISTNER, a director of Nathan's since 1989, has been
President and Chief Executive Officer of Koenig Iron Works, Inc. since 1979. Mr.
Leistner is also a partner in Weinstock Brothers Hardware and is engaged in real
estate development in Maine and New York.
JEFFREY A. LICHTENBERG, a director of Nathan's since 1987, has been
the President and founder of Fountainhead Enterprises, Inc., real estate
brokers, for more than five years. Mr. Lichtenberg has been Vice Chairman of
Newmark & Company Real Estate, Inc. since May 1999. Previously, Mr. Lichtenberg
was associated with Edward S. Gordon, real estate brokers, since April 1995, and
with Peter R. Friedman, real estate brokers, for more than five years prior to
April 1995.
A. F. PETROCELLI, a director of Nathan's since 1993, has been the
Chairman of the Board and President of United Capital Corp. for more than the
last five years. Mr. Petrocelli is also a director of Prime Hospitality Corp.
since 1992 and Chairman, Chief Executive Officer and President since 1998. He
is a director of Philips International Realty Corp., a real estate investment
trust, since 1997 and a director of the Boyar Value Fund, Inc., a public mutual
fund, since 1997.
Each of the directors will serve until the next Annual Meeting of
Stockholders or until their successors have been chosen and qualify. Directors
who are not employees of the Company receive an annual fee of $7,500 and a fee
of $750 for each Board of Directors or committee meeting attended. In addition,
members of committees of the Board of Directors also receive an annual fee of
$1,000 for each committee on which they serve. There were five meetings of the
Board of Directors during the fiscal year ended March 28, 1999. Each director
attended or participated in at least 75% of the meetings of the Board of
Directors and the Committees thereof on which he served.
For the fiscal year ended March 28, 1999, there was one meeting of
the Audit Committee and one meeting of the Compensation Committee. The Company's
Audit Committee is involved in discussions with the Company's independent
auditors with respect to the scope and results of the Company's year-end audit,
the Company's internal accounting controls and the professional services
furnished by the independent auditors to the Company. The Compensation Committee
recommends to the Board of Directors executive compensation and the granting of
stock options to key employees. See "Compensation Committee Report on Executive
Compensation". During fiscal 1999, the Company had no standing nominating
committee or any committee performing similar functions.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Howard M. Lorber.......... 50 Chairman and Chief Executive Officer
Wayne Norbitz............. 51 President and Chief Operating Officer
Carl Paley................ 62 Senior Vice President - Franchise
and Real Estate Development
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NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Ronald G. DeVos........... 44 Vice President - Finance, Chief
Financial Officer and Secretary
Donald P. Schedler........ 46 Vice President - Architecture/Construction
Officers are elected to serve, subject to the discretion of the Board of
Directors, until their successors are appointed. For a description of the
business experience of Messrs. Lorber and Norbitz, see "Directors of the
Company" above.
CARL PALEY joined Nathan's 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 to November 1985, Mr. Paley was a
Vice President of Carvel Corporation and was responsible for marketing, public
relations, advertising, promotions and training.
RONALD G. DEVOS joined Nathan's as Vice President - Finance and Chief Financial
Officer in January 1995 and became Secretary in April 1995. Prior to January
1995, 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 to March 1989, 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 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by Nathan's to
its Chief Executive Officer and each of its four other highest paid executive
officers for the three fiscal years ended March 28, 1999, March 29, 1998 and
March 30, 1997.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------ -----------------------------
OTHER ANNUAL RESTRICTED SECURITIES
NAME AND FISCAL COMPENSATION STOCK AWARDS UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (1) ($) OPTIONS/SARS(#) COMPENSATION(2)
- ------------------ ------ -------- -------- ------------ ------------ --------------- ---------------
Howard M. Lorber 1999 $ 1 $121,586 $12,000(3) $ -- 40,000 $ 599
Chairman of the Board and 1998 1 95,684 12,000(3) -- 150,000(4) 252
Chief Executive Officer 1997 1 74,211 12,000(3) -- 25,000 252
Wayne Norbitz 1999 $250,000 $ 60,289 $ -- $ -- 30,000 $ 11,787
President and Chief 1998 250,000 35,275 -- -- -- 10,447
Operating Officer 1997 250,000 30,217 -- -- 15,000 9,995
Ronald G. DeVos 1999 $140,000 $ 33,762 $ -- $ -- 12,500 $ 1,691
Vice President- Finance and 1998 109,923 2,954 -- -- -- 1,099
Chief Financial Officer 1997 106,000 12,452 -- -- 5,000 1,140
Carl Paley 1999 $120,000 $ 25,021 $ -- $ -- 5,000 $ 1,530
Senior Vice President-- 1998 120,000 10,032 -- -- -- 1,263
Franchise and Real Estate 1997 120,000 14,804 -- -- 5,000 1,152
Development
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Donald P. Schedler 1999 $120,000 $ 10,000 $ -- $ -- 5,000 $ 1,536
Vice President--Architecture 1998 120,000 8,532 -- -- -- 1,252
and Development 1997 120,000 13,304 -- -- 5,000 1,152
- ----------
(1) Except where otherwise indicated, no other annual compensation is shown
because the amounts of perquisites and other non-cash benefits provided
by Nathan's do not exceed the lesser of $50,000 or 10% of the total
annual base salary and bonus disclosed in this table for the respective
officer.
(2) The amounts disclosed in this column include Nathans' contributions on
behalf of the named executive officer to Nathans' 401(k) retirement plan
and premiums for life and/or disability insurance, respectively, for
fiscal 1999 for Mr. Lorber in the sums of $0 and $599, for Mr. Norbitz
in the sums of $1,230 and $10,557, for Mr. DeVos in the sum of $1,092
and $599, for Mr. Paley in the sum of $931 and $599 and for Mr. Schedler
in the sums of $937 and $599.
(3) Represents automobile allowance.
(4) Common stock purchase warrant exercisable for an aggregate of 150,000
shares of Nathan's common stock at an exercise price equal to $3.25 per
share issued in connection with the extension of Mr. Lorber's employment
agreement.
EMPLOYMENT CONTRACTS
In November 1993, Nathan's entered into an employment agreement with
Howard M. Lorber, for a term expiring on October 31, 1997, providing for an
annual base salary of $1, incentive compensation in an amount equal to five
percent (5%) of the consolidated pre-tax earnings of Nathan's and various
benefits. The agreement, as amended, also provides, among other things, that the
employee shall have the right, exercisable for a six-month period, to terminate
this agreement and receive an amount equal to three times the employee's
compensation during the most recent fiscal year, less $100, in the event of a
change in control of Nathan's. For the purposes of this agreement, in no event
shall the average compensation be deemed to be less than $200,000. The
employment agreement was extended through November 2001 on the original terms
and in connection with such extension, Mr. Lorber was granted warrants to
purchase 150,000 shares of Nathan's common stock at a price of $3.25 per share
vesting over the term of the four year extension.
In December 1992, Nathan's entered into an employment agreement with
Wayne Norbitz, for a term expiring on December 31, 1996, providing for an annual
base salary of $250,000 and various benefits, including participation in
Nathans' executive bonus program. The agreement, as amended, also provides,
among other things, that the employee shall have the right, exercisable for a
six-month period, to terminate this agreement and receive an amount equal to
three times the employee's compensation during the most recent fiscal year, less
$100, in the event of a change in control of Nathan's and if Mr. Norbitz is
terminated without cause, Nathan's will pay to Mr. Norbitz his annual salary and
benefits for a six-month period following the delivery of the notice of
termination plus a severance benefit of one year's annual compensation. The
employment agreement was extended through December 31, 1999, on the original
terms and automatically renews for successive one year periods unless 180 days'
prior written notice is delivered to Mr. Norbitz. No non-extension notice has
been delivered to date.
Both of the agreements define a change in control as:
- - a change in control as defined in Rule 12b-2 under the Securities
Exchange Act of 1934;
- - a person other than a current director or officer of Nathan's becoming
the beneficial owner, directly or indirectly, of 20% of the voting power
of Nathans' outstanding securities; or
- - the members of the board of directors at the beginning of any two-year
period ceasing to constitute at least a majority of the board of
directors.
The following table sets forth certain information with respect to
stock options granted to the officers named in the Summary Compensation Table
during the fiscal year ended March 28, 1999.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants Potential Realized Value at
-------------------------------------------- Assumed Annual Rates
% of Total of Stock Price Appreciation
Number of Options Granted Exercise for Ten-Year Option Term (2)
Options Employees in Price Expiration ----------------------------
Name Granted (1) Fiscal Year per Share Date 5% 10%
- ---- ----------- --------------- --------- ------------- ----------- ------------
Howard M. Lorber 40,000 33% $3.9375 April 2, 2008 $ 98,900 $250,900
Wayne Norbitz 30,000 25% $3.9375 April 2, 2008 74,175 188,175
Ronald G. DeVos 12,500 10% $3.9375 April 2, 2008 30,906 78,406
Carl Paley 5,000 4% $3.9375 April 2, 2008 12,363 31,363
Donald P. Schedler 5,000 4% $3.9375 April 2, 2008 12,363 31,363
Increase in market value of Nathan's stock for all stockholders 5% 10%
at assumed annual rates of stock price appreciation over ten-year (to $6.41/sh) (to$10.21/sh)
period used in the table above (3) $11,693,000 $29,634,000
- ----------
(1) These options are exercisable for ten years. Each grant of these options
is exercisable for 50% of the shares covered thereby as of the first
anniversary from the date of grant and for the remaining 50% of the
shares covered on the second anniversary from the date of grant.
(2) Potential Realizable Value is based on the assumed annual growth rates
for the ten-year option term. Annual growth of 5% results in a stock
price of $6.41 per share and 10% results in a price of $10.21 per share.
Actual gains, if any, on stock option exercises are dependent on the
future performance of the stock. There can be no assurance that the
amounts reflected in this table will be achieved.
(3) These amounts represent the increase in the market value of Nathan's
outstanding shares (4.7 million) as of March 28, 1999, that would result
from the same stock price assumptions used to show the Potential
Realizable Value for the named executive.
INDEMNIFICATION AGREEMENTS
Nathan's has entered into separate indemnification agreements
with the officers and Directors of Nathan's. Nathan's has agreed to provide
indemnification with regard to specified legal proceedings so long as the
indemnified officer or director has acted in good faith and in a manner he or
she reasonably believed to be in, or not opposed to, the best interests of
Nathan's and, with respect to any criminal proceeding, had no reasonable cause
to believe his or her conduct was unlawful. Nathan's only provides
indemnification for expenses, judgments, fines and amounts paid in settlement
actually incurred by the relevant officer or Director, or on his or her behalf,
arising out of proceedings brought against the officer or Director by reason of
his or her corporate status.
STOCK OPTIONS
1992 STOCK OPTION PLAN
In December 1992, in order to attract and retain persons
necessary for Nathans' success, Nathan's adopted the 1992 Stock Option Plan, as
amended, covering up to 525,000 shares of Nathan's common stock, under which
Nathans' officers, Directors and key employees are eligible to receive incentive
and/or non-qualified stock options. The 1992 Plan, which expires on December 2,
2002, provides that it will be administered by the Board of Directors or a
committee designated by the Board of Directors, currently the Compensation
Committee. The selection of participants, allotments of shares, determination of
price and other conditions relating to options are determined by the Board of
Directors, or a committee thereof, in its sole discretion. Incentive stock
options granted under the 1992 Plan are exercisable for a period of up to ten
years from the date of grant at an exercise price which is not less than the
fair market value of the common stock on the date of the grant, except that the
term of an incentive stock option granted under the 1992 Plan to a stockholder
owning more than 10% of the outstanding common stock may not exceed five years
and its exercise price may not be less than 110% of the fair market value of the
common stock on the date of grant. At March 28, 1999, options for the following
shares, exercisable during a ten-year period, had been granted and were
outstanding under the 1992 Plan:
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96,167 shares exercisable at $7.00 per share as follows: 23,334 shares to
Howard M. Lorber; 23,333 shares to Jeffrey A. Lichtenberg; 25,000
shares to Wayne Norbitz; 6,000 shares to Carl Paley; 6,000 shares to
Donald Schedler and 12,500 shares in the aggregate to eight other
employees.
25,000 shares exercisable at $6.00 per share to Wayne Norbitz.
34,000 shares exercisable at $8.00 per share as follows: 26,000 shares to
Wayne Norbitz; 4,000 shares to Carl Paley; and 4,000 shares to Donald
P. Schedler.
25,000 shares exercisable at $6.60 per share to Howard M. Lorber.
25,000 shares exercisable at $9.25 per share to Wayne Norbitz.
100,000 shares exercisable at $4.375 per share to Howard M. Lorber.
10,000 shares exercisable at $4.81 per share to Ronald G. DeVos.
55,000 shares exercisable at $4.00 per share as follows: 25,000 shares to
Howard M. Lorber, 15,000 shares to Wayne Norbitz, and 5,000 shares to
each Carl Paley, Donald P. Schedler and Ronald G. DeVos.
Each of the above options is exercisable for 20% of the shares
covered thereby as of the date of grant and for an additional 20% of the shares
covered thereby each year thereafter.
107,500 Shares exercisable at $3.9375 per share as follows 40,000 shares to
Howard M. Lorber, 30,000 shares to Wayne Norbitz, 12,500 shares to
Ronald G. DeVos, 5,000 shares to Carl Paley 5,000 shares to
Donald P. Schedler and 15,000 shares in the aggregate to six other
employees.
Each of the above options is exercisable 50% on the first
anniversary of grant and 100% on the second anniversary of grant.
Through March 28, 1999, 30,000 options were cancelled under the 1992
Plan. Through March 28, 1999, 2,000 options granted under the 1992 Plan have
been exercised, 137,833 options have been cancelled and no options have lapsed
since the inception of the 1992 Plan.
OUTSIDE DIRECTOR PLAN
Nathan's adopted the Outside Director Stock Option Plan as of June
1, 1994 which covers up to 200,000 shares of Nathan's common stock. The primary
purposes of the Director Plan are to attract and retain well-qualified persons
for service as Directors of Nathan's and to provide its outside Directors with
the opportunity to increase their proprietary interest in Nathan's, and thereby
to increase their personal interest in Nathans' success and further align their
interests with the interests of the stockholders of Nathan's through the grant
of options to purchase shares of Nathan's common stock. All Directors of
Nathan's who are not employees of Nathan's, of which there are presently four,
are eligible to participate in the Director Plan. Options to purchase up to
200,000 shares of common stock, representing all of the shares available, have
been issued under the Director Plan.
Under the Director Plan, each non-employee Director received:
- - on September 8, 1994, the date on which the Director Plan was
approved by stockholders, options to purchase 25,000 shares of
common stock at a price of $6.25 per share, which was the
average of the mean between the last reported "bid" and "asked"
prices of shares of common stock on the five trading days
preceding June 1, 1994;
- - on June 1, 1995 options to purchase 12,500 shares of common
stock at a price of $4.50 per share, which was the average of
the mean between the last reported "bid" and "asked" prices of
shares of common stock on the five trading days preceding June
1, 1995; and
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- - on June 1, 1996 options to purchase 12,500 shares of common
stock at a price of $3.40 per share, which was the average of
the mean between the last reported "bid" and "asked" prices if
the common stock on the five trading days immediately preceding
June 1, 1996.
Options awarded to each non-employee Director vest over a period of
two years, subject to forfeiture under conditions specified in the option
agreements, and are exercisable by the non-employee Director upon vesting.
The Board of Directors has the responsibility and authority to
administer and interpret the provisions of the Director Plan. The Board shall
appropriately adjust the number of shares for which awards may be granted under
the Director Plan in the event of reorganization, recapitalization, stock split,
reverse stock split, stock dividend, exchange or combination of shares, merger,
consolidation, rights offering, or any change in capitalization. The Board of
Directors of Nathan's may at any time amend, rescind or terminate the Director
Plan, as it shall deem advisable; provided, however that:
1. no change may be made in awards previously granted under the
Director Plan which would impair participants' rights without their consent; and
2. no amendment to the Director Plan shall be made without approval
of Nathan's stockholders if the effect of the amendment would be to:
A. increase the number of shares reserved for issuance under the
Director Plan;
B. change the requirements for eligibility under the Director
Plan; or
C. materially modify the method of determining the number of
options awarded under the Director Plan.
1998 STOCK OPTION PLAN
In April 1998, the Board of Directors adopted the Nathan's Famous,
Inc. 1998 Stock Option Plan, under which any Director, officer, employee or
consultant of Nathan's, a subsidiary or an affiliate may be granted options to
purchase an aggregate 500,000 shares of Nathan's common stock. The 1998 Option
Plan is to be administered by the Board of Directors of Nathan's; provided,
however, that the Board may, in the exercise of its discretion, designate from
among its members a compensation committee or a stock option committee
consisting of no fewer than two "non-employee directors", as defined in the
Securities Exchange Act of 1934. The Compensation Committee administers the 1998
Option Plan. Subject to the terms of the 1998 Option Plan, the Board of
Directors or the committee may determine and designate those Directors,
officers, employees and consultants who are to be granted stock options under
the 1998 Option Plan and the number of shares to be subject to options and the
term of the options to be granted, which term may not exceed ten years. The
Board of Directors or the committee shall also, subject to the express
provisions of the 1998 Option Plan, have authority to interpret the 1998 Option
Plan and to prescribe, amend and rescind the rules and regulations relating to
the 1998 Option Plan. Only non-qualified stock options may be granted under the
terms of the 1998 Option Plan. The exercise price for the options granted under
the 1998 Option Plan will be not less than the fair market value on the date of
grant. The option price, as well as the number of shares subject to the option,
shall be appropriately adjusted by the committee in the event of stock splits,
stock dividends, recapitalizations, and other specified events involving a
change in Nathan's capital.
Under the 1998 Option Plan, each non-employee Director received on
April 6, 1998, options to purchase 7,500 shares of common stock at a price of
$3.9375 per share, which was the closing price of the common stock on April 3,
1998.
RESTRICTED STOCK GRANTS
In December 1992, under restricted stock agreement, Nathan's issued
40,000 shares of common stock to Wayne Norbitz. Under the terms of the
agreement, the shares were subject to restrictions which expired on December 21,
1998.
401(K) SAVINGS PLAN
Nathan's sponsors a retirement plan intended to be qualified under
Section 401(k) of the Internal Revenue Code of 1986. All non-union employees
over age 21 who have been employed by Nathan's for at least one year are
eligible to participate in the plan. Employees may contribute to the plan on a
tax deferred basis up to 15% of their total annual salary,
24
26
but in no event more than the maximum permitted by the Internal Revenue Code
($10,000 in calendar 1998). Company contributions are discretionary. For the
plan year ended December 31, 1998, Nathan's has elected to make matching
contributions at the rate of $.25 per dollar contributed by each employee
vesting at the cumulative rate of 20% per year of service starting one year
after commencement of service and, accordingly, after five years of an
employee's service with Nathan's, matching contributions by Nathan's are fully
vested. As of March 28, 1999, approximately 53 employees had elected to
participate in the plan. For the fiscal year ended March 28, 1999, Nathan's
contributed approximately $13,000 to the 401(k) plan, of which $1,230 was a
matching contribution for Mr. Norbitz, $1,092 was a matching contribution for
Mr. DeVos, $931 was a matching contribution for Mr. Paley and $937 was a
matching contribution for Mr. Schedler.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Compensation Committee of the Company's Board of Directors
consisted during fiscal 1999 of Messrs. Eide, Leistner, Lichtenberg and
Petrocelli, none of whom are employees of the Company or any of its
subsidiaries. During fiscal 1999, Howard M. Lorber, the Chairman of the Board
and Chief Executive Officer of the Company, served as a director of United
Capital Corp., and as a director and Chairman of the Compensation Committee of
the Board of Directors of Prime Hospitality Corp. A. F. Petrocelli, a director
of the Company and a member of the Compensation Committee of the Board of
Directors of the Company, is Chairman of the Board and President of United
Capital Corp. and of Prime Hospitality Corp.
In accordance with rules promulgated by the Securities and
Exchange Commission, the information included under the
caption "Compensation Committee Report on Executive
Compensation" and "Stock Performance Chart" will not be
deemed to be filed or to be proxy soliciting material or
incorporated by reference in any prior or future filings by
the Company under the Securities Act of 1933 or the
Securities Exchange Act of 1934.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation of the Company's executive officers is generally
determined by the Compensation Committee of the Board of Directors. Each member
of the Compensation Committee is a director who is not an employee of the
Company or any of its affiliates.
GENERAL POLICIES
The Company's compensation programs are intended to enable the
Company to attract, motivate, reward and retain the management talent required
to achieve aggressive corporate objectives in a rapidly changing industry, and
thereby increase stockholder value. It is the Company's policy to provide
incentives to its senior management to achieve both short-term and long-term
objectives and to reward exceptional performance and contributions to the
development of the Company's business. To attain these objectives, the Company's
executive compensation program includes a competitive base salary, coupled with
an executive bonus program which is "at risk" based on the performance of the
Company's business, primarily as reflected in the achievement of certain
earnings goals.
Many of the Company's employees, including its executive officers,
also are eligible to be granted stock options periodically in order to more
directly align their interests with the long-term financial interests of the
Company's stockholders.
RELATIONSHIP OF COMPENSATION TO PERFORMANCE
The Compensation Committee annually establishes, subject to the
approval of the Board of Directors and any applicable employment agreements, the
salaries which will be paid to the Company's executive officers during the
coming year. In setting salaries, the Compensation Committee takes into account
several factors, including competitive compensation data, the extent to which an
individual may participate in the incentive compensation and stock option plans
maintained by the Company and its affiliates, and qualitative factors bearing on
an individual's experience, responsibilities, management and leadership
abilities, and job performance.
The Compensation Committee also determines the terms of the Company's
executive bonus program. In doing so, the Compensation Committee reviews
management's plan for the Company's growth and profitability, determines the
criteria to be used for the determination of bonus awards under the executive
bonus program and fixes the levels of target and maximum awards for participants
and the level of attainment of financial performance objectives necessary for
awards to be made under the executive bonus program.
25
27
Stock options are granted to key employees, including the Company's
executive officers, by the Compensation Committee under the 1992 Stock Option
Plan. Among the Company's executive officers, the number of shares subject to
options granted to each individual generally depends upon his or her base salary
and the level of that officer's management responsibility. During fiscal 1999,
120,000 options were granted to 12 employees under the Plan.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
In fiscal 1994, the Company entered into an employment agreement with
Howard M. Lorber, the Company's Chairman of the Board and Chief Executive
Officer, the term of which was extended through November 2001. Pursuant to the
employment agreement, as amended, Mr. Lorber receives a base salary of $1 and an
incentive bonus equal to five percent (5%) of the Company's consolidated pre-tax
earnings, which bonus was $121,586 for fiscal 1999. In this way, Mr. Lorber's
cash compensation is tied directly to the Company's profitability. In light of
this employment agreement, the Compensation Committee was not required to make
any decision regarding the cash compensation of Mr. Lorber. In fiscal 1999, the
Company granted to Mr. Lorber options to purchase 40,000 shares of Common Stock
at an exercise price of $3.9375 per share, which represented 100% of the market
price of the Common Stock on the date of grant. In this way, Mr. Lorber's
interests are directly aligned with the interests of the Company's stockholders.
The Compensation Committee believes that these options provide an incentive for
Mr. Lorber to maximize long-term shareholder value.
Robert Eide
Barry Leistner
Jeffrey Lichtenberg
A. F. Petrocelli
26
28
STOCK PERFORMANCE CHART
The following graph illustrates a comparison of cumulative
shareholder return among the Company, Standard and Poors' 500 companies and
Standard and Poors' restaurant companies for the period from March 27, 1994
to its fiscal year end on March 28, 1999:
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG NATHAN'S FAMOUS, INC., THE S & P 500 INDEX
AND THE S & P RESTAURANTS INDEX
CUMULATIVE TOTAL RETURN
------------------------------------------------------
3/27/94 3/26/95 3/31/96 3/30/97 3/29/98 3/28/99
------- ------- ------- ------- ------- -------
NATHAN'S FAMOUS, INC. 100 65 55 55 53 53
S & P 500 100 116 153 183 271 321
S & P RESTAURANTS 100 115 159 154 193 304
* $100 Invested on March 27, 1994 in stock or in Index, including
reinvestment of dividends. Fiscal year ending March 28, 1999.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's executive
officers, Directors and persons who own more than ten percent of a registered
class of the Company's equity securities ("Reporting Persons") to file reports
of ownership and changes in ownership on Forms 3, 4, and 5 with the Securities
and Exchange Commission (the "SEC") and the National Association of Securities
Dealers (the "NASD"). These Reporting Persons are required by SEC regulation to
furnish the Company with copies of all Forms 3, 4 and 5 they file with the SEC
and NASD. Based solely on the Company's review of the copies of the forms it has
received, the Company believes that all Reporting Persons complied on a timely
basis with all filing requirements applicable to them with respect to
transactions during fiscal year 1999, except that Jeffrey Lichtenberg filed on
Form 5 certain acquisitions not timely filed on Form 4.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
27
29
The following table sets forth as of June 4, 1999 information with
regard to ownership of Nathan's common stock by (1) each beneficial owner of 5%
or more of Nathan's common stock, based on filings with the Commission; (2) each
executive officer named in Nathan's "Summary Compensation Table"; (3) each
director of Nathan's; and (4) all executive officers and directors of Nathan's
as a group:
COMMON STOCK PERCENT
NAME AND ADDRESS (1) BENEFICIALLY OWNED OF CLASS
- -------------------- ------------------ --------
Howard M. Lorber (2) 512,834 10.0%
Kenneth S. Hackel (3) 410,500 8.7%
Quest Equities Corp (4) 360,000 7.6%
Wayne Norbitz (5) 165,000 3.4%
Jeffrey A. Lichtenberg (6) 137,741 2.9%
A. F. Petrocelli (7) 102,250 2.1%
Robert J. Eide (7) 69,903 1.5%
Barry Leistner (7) 53,750 1.1%
Ronald G. DeVos (8) 19,250 *
Donald P. Schedler (9) 17,500 *
Carl Paley (9) 15,500 *
Directors and officers as a group (9 persons) (10) 1,093,728 19.7%
- ----------
* Less than 1%
(1) The addresses of the individuals and entities in this table are:
Kenneth S. Hackel, P.O Box 726 Alpine New Jersey 07620; Robert J.
Eide and Howard M. Lorber, 70 East Sunrise Highway, Valley Stream,
New York 11581; Jeffrey A. Lichtenberg, 125 Park Avenue, New York,
New York 10017; Quest Equities Corp., 8 Old Canal Crossing,
Farmington, Connecticut 06032; Barry Leistner, 8-14 37th Avenue, Long
Island City, New York 11101; A. F. Petrocelli, 9 Park Place, Suite
401, Great Neck, New York 11021; and Wayne Norbitz, Ronald G. DeVos,
Carl Paley and Donald Schedler, 1400 Old Country Road, Suite 400,
Westbury, New York 11590.
(2) Includes options exercisable within 60 days to purchase an aggregate
of 183,334 shares granted under Nathans' 1992 Stock Option Plan and
warrants exercisable within 60 days to purchase 225,000 shares of
common stock.
(3) According to Schedule 13-D as Filed with the Securities and Exchange
Commission.
(4) According to Schedule 13-D filed with the Securities and Exchange
Commission.
(5) Includes options exercisable within 60 days to purchase 125,000
shares of common stock granted under Nathans' 1992 Stock Option Plan.
(6) Includes 25,000 shares owned by Fountainhead Enterprises, Inc., and
an aggregate of 3,500 shares owned by Mr. Lichtenberg's wife and
children, as to which Mr. Lichtenberg may be deemed the beneficial
owner, options exercisable within 60 days to purchase 23,333 shares
of common stock granted under Nathans' 1992 Stock Option Plan,
options exercisable within 60 days to purchase 50,000 shares of
common stock granted under Nathans' Outside Director Stock Option
Plan and options exercisable within 60 days to purchase 3,750 shares
of common stock granted under Nathans' 1998 Stock Option Plan.
(7) Includes options exercisable within 60 days to purchase 50,000 shares
of common stock granted under Nathans' Outside Director Stock Option
Plan and options exercisable within 60 days to purchase 3,750 shares
of common stock granted under Nathans' 1998 Stock Option Plan.
(8) Includes options exercisable within 60 days to purchase 19,250 shares
of common stock granted under Nathans' 1992 Stock Option Plan.
(9) Includes options exercisable within 60 days to purchase 15,500 shares
of common stock granted under Nathans' 1992 Stock Option Plan.
(10) Includes 271,811 shares beneficially owned by Messrs. Eide, Lorber,
Lichtenberg, Petrocelli, Leistner, Norbitz, Paley and Schedler (see
note 6 and notes 8 through 11 above), 361,917 shares subject to stock
options exercisable within 60 days granted under Nathans' 1992 Stock
Option Plan, 200,000 shares subject to stock options exercisable
within 60 days granted under Nathans' Outside Director Stock Option
Plan, 15,000 shares subject to Stock Options exercisable within 60
days granted under Nathans' 1998 Stock Option Plan, and warrants
exercisable within 60 days by Mr. Lorber for 225,000 shares.
28
30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Nathan's and Miami Subs Corporation entered into a definitive merger
agreement dated January 15, 1999, under which Nathan's is to acquire the
remaining 70% of the outstanding common stock of Miami Subs and Miami Subs is to
become a wholly-owned subsidiary of the Nathan's. In connection with the merger,
Miami Subs is to enter into an amended and restated employment agreement with
Donald Perlyn, under which Mr. Perlyn is to receive a base salary of $200,000,
which agreement will be guaranteed by Nathan's. Under this amended and restated
employment agreement, Mr. Perlyn will become a director of Nathan's, and
Nathan's will grant Mr. Perlyn stock options for 192,558 shares of Nathan's
common stock at fair market value in exchange for the cancellation of his
385,116 Miami Subs stock options assumed by Nathan's in the merger.
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, as amended.
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;
b) Lease Modification of Land and Building Lease between
787 Central Park Avenue, Inc., and the Company dated
May 1, 1980.
29
31
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 Form of Standard Franchise Agreement. (Incorporated by
reference to Exhibit 10.12 to Registration Statement on Form
S-1 No. 33-56976.)
10.9 The Company's 401K Plan and Trust. (Incorporated by reference
to Exhibit 10.5 to Registration Statement on Form S-1 No.
33-56976.)
10.10 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.)
10.11 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.)
10.12 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.)
10.13 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.)
10.14 Outside Director Stock Option Plan. (Incorporated by reference
to Exhibit 10.22 to Registration Statement on Form S-8 No.
33-89442.)
10.15 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.)
10.16 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.)
10.17 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.)
10.18 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.)
10.19 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.)
10.20 1998 Stock Option Plan. (Incorporated by reference to Exhibit
10.26 to the Annual Report filed on form 10- K for the fiscal
year ended March 29, 1998.)
10.21 North Fork Bank Promissory Note.
21 List of Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
(b) REPORTS ON FORM 8-K
On February 1, 1999 the Company reported on Form 8-K that on January
15, 1999, it executed a merger agreement with Miami Subs Corporation pursuant to
which Nathan's proposes to acquire the remaining outstanding common stock of
Miami Subs Corporation in exchange for Nathan's common stock plus warrants.
30
32
SIGNATURES
Pursuant to the requirements of Section 12 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 23rd day of
June, 1999.
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 23rd day of June, 1999.
/s/ HOWARD M. LORBER Chairman of the Board and Chief Executive
- -------------------- Officer (Principal Executive Officer)
Howard M. Lorber
/s/ WAYNE NORBITZ President, Chief Operating Officer and Director
- -------------------
Wayne Norbitz
/s/ RONALD G. DEVOS Vice President - Finance and Chief Financial
- ------------------- Officer (Principal Financial and Accounting
Ronald G. Devos Officer)
/s/ ROVERT J. EIDE Director
- ------------------
Rovert J. Eide
/s/ BARRY LEISTNER Director
- ------------------
Barry Leistner
Director
- --------------------------
Jeffrey A. Lichtenberg
Director
- -------------------------
Attilio F. Petrocelli
33
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 Accountants F-2
Consolidated Balance Sheets as of March 28, 1999 and March 29, 1998 F-3
Consolidated Statements of Operations for the Fiscal Years ended
March 28, 1999, March 29, 1998 and March 30, 1997 F-4
Consolidated Statements of Stockholder Equity for the Fiscal years
ended March 28, 1999, March 29, 1998 and March 30, 1997 F-5
Consolidated Statements of Cash Flows for the Fiscal years ended
March 28, 1999, March 29, 1998 and March 30, 1997 F-6
Notes to the Consolidated Financial Statements F-7
34
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 28, 1999 and March
29, 1998 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 28, 1999 and March 29, 1998, 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 15, 1999
F-2
35
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 28, March 29,
ASSETS 1999 1998
------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 2,165 $ 1,306
Marketable investment securities 3,267 8,514
Franchise and other receivables, net 1,578 976
Inventories 374 356
Prepaid expenses and other current assets 411 276
Deferred income taxes 622 478
-------- --------
Total current assets 8,417 11,906
Investment in unconsolidated affiliate (Note 3) 4,441 --
Property and equipment, net 6,293 6,171
Intangible assets, net 10,882 11,270
Deferred income taxes 892 --
Other assets, net 325 192
-------- --------
$ 31,250 $ 29,539
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,053 $ 956
Accrued expenses and other current liabilities 3,434 4,708
Deferred franchise fees 222 125
Current installments of obligations under capital leases -- 12
-------- --------
Total current liabilities 4,709 5,801
Obligations under capital leases, net of current installments -- 9
Other liabilities 193 143
-------- --------
Total liabilities 4,902 5,953
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000 shares authorized, 4,722,216 issued and
outstanding at March 28, 1999 and March 29, 1998 47 47
Additional paid-in capital 32,423 32,389
Accumulated deficit (6,122) (8,850)
-------- --------
Total stockholders' equity 26,348 23,586
-------- --------
$ 31,250 $ 29,539
======== ========
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
36
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
For the Fiscal Year Ended
--------------------------------------------------
March 28, March 29, March 30,
1999 1998 1997
-------- -------- --------
REVENUES:
Sales $ 24,511 $ 23,530 $ 21,718
Franchise fees and royalties 3,230 3,062 3,238
License royalties 1,415 1,495 1,177
Equity in unconsolidated affiliate 26 -- --
Investment and other income 400 790 442
-------- -------- --------
Total revenues 29,582 28,877 26,575
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales 15,367 14,468 13,031
Restaurant operating expenses 5,780 6,411 6,602
Depreciation and amortization 1,065 1,035 1,013
Amortization of intangible assets 384 384 406
General and administrative expenses 4,722 4,755 4,097
Interest expense 1 6 16
Other income, net (Note 10) (47) -- --
-------- -------- --------
Total costs and expenses 27,272 27,059 25,165
-------- -------- --------
Income before (benefit) provision for income taxes 2,310 1,818 1,410
(Benefit) provision for income taxes (Note 11) (418) 290 622
-------- -------- --------
Net income $ 2,728 $ 1,528 $ 788
======== ======== ========
PER SHARE INFORMATION (Note 3):
Net income per share:
Basic $ .58 $ .32 $ .17
======== ======== ========
Diluted $ .57 $ .32 $ .17
======== ======== ========
Shares used in computing net income:
Basic 4,722 4,722 4,722
======== ======== ========
Diluted 4,753 4,749 4,729
======== ======== ========
The accompanying notes are an integral part
of these consolidated statements.
F-4
37
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Additional
Common Common Paid-in
Shares Stock Capital
BALANCE, March 31, 1996 4,722,216 $ 47 $ 32,388
Amortization of deferred compensation relating to restricted stock -- -- --
Net income -- -- --
--------- --------- ---------
BALANCE, March 30, 1997 4,722,216 47 32,388
Amortization of deferred compensation relating to restricted stock -- -- --
Fair value of stock warrants granted to non-employees -- -- 35
Net income -- -- --
--------- --------- ---------
BALANCE, March 29, 1998 4,722,216 47 32,423
Amortization of deferred compensation relating to restricted stock -- -- --
Net income -- -- --
--------- --------- ---------
BALANCE, March 28, 1999 4,722,216 $ 47 $ 32,423
========= ========= =========
Total
Deferred Accumulated Stockholders'
Compensation Deficit Equity
BALANCE, March 31, 1996 $ (127) $ (11,166) $ 21,142
Amortization of deferred compensation relating to restricted stock 46 -- 46
Net income -- 788 788
--------- --------- ---------
BALANCE, March 30, 1997 (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
Net income -- 1,528 1,528
--------- --------- ---------
BALANCE, March 29, 1998 (34) (8,850) 23,586
Amortization of deferred compensation relating to restricted stock 34 -- 34
Net income -- 2,728 2,728
--------- --------- ---------
BALANCE, March 28, 1999 $ -- $ (6,122) $ 26,348
========= ========= =========
The accompanying notes are an integral part of these
consolidated statements.
F-5
38
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Fiscal Year Ended
-------------------------------------------
March 28, March 29, March 30,
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,728 $ 1,528 $ 788
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,065 1,035 1,013
Impairment of long-lived assets 302 -- --
Amortization of intangible assets 384 384 406
Issuance of stock warrants for services received -- 35 --
Provision for doubtful accounts 44 80 30
Amortization of deferred compensation 34 47 46
Gain on sale of restaurant -- (130) --
Equity in unconsolidated affiliate (26) -- --
Deferred income taxes (1,036) (63) 156
Changes in operating assets and liabilities:
Marketable investment securities 5,247 (874) (1,512)
Franchise and other receivables (646) (17) 39
Inventories (18) (143) 13
Prepaid expenses and other assets (268) 252 (178)
Prepaid income taxes -- -- 746
Accounts payable and accrued expenses (1,177) 296 (306)
Deferred franchise fees 97 (144) (8)
Deferred area development fees -- -- (200)
Other non-current liabilities 50 -- (271)
------- ------- -------
Net cash provided by operating activities 6,780 2,286 762
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,485) (1,740) (896)
Investment in unconsolidated affiliate (4,415) -- --
Proceeds from sale of property and equipment -- 130 --
------- ------- -------
Net cash used in investing activities (5,900) (1,610) (896)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of obligations under capital leases (21) (17) (20)
------- ------- -------
Net cash used in financing activities (21) (17) (20)
------- ------- -------
Net change in cash and cash equivalents 859 659 (154)
CASH AND CASH EQUIVALENTS, beginning of year 1,306 647 801
------- ------- -------
CASH AND CASH EQUIVALENTS, end of year $ 2,165 $ 1,306 $ 647
======= ======= =======
CASH PAID DURING THE YEAR FOR:
Interest $ 1 $ 6 $ 16
======= ======= =======
Income taxes $ 218 $ 421 $ 182
======= ======= =======
NONCASH FINANCING ACTIVITIES:
Issuance of stock warrants for services received $ -- $ 35 $ --
======= ======= =======
The accompanying notes are an integral part of these
consolidated statements.
F-6
39
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(in thousands, except share amounts)
------------------------------------
1. DESCRIPTION, DEVELOPMENT 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 25 Company-owned stores and 163 franchised units
operating as of March 28, 1999. Since fiscal 1997, Nathan's supplemented its
franchise program with its "Branded Product Program" which enables foodservice
retailers to sell certain Nathan's proprietary products outside of the realm of
a traditional franchise relationship.
Development of Business
- -----------------------
On November 25, 1998, the Company acquired 8,121,000 (2,030,250 after giving
effect to a 4 for 1 reverse stock split) shares or approximately 30% of the then
outstanding common stock of Miami Subs Corporation ("MSC") for $4,200, excluding
transaction costs (Note 3). On January 15, 1999, the Company and MSC entered
into a definitive merger agreement pursuant to which Nathan's anticipates
acquiring the remaining outstanding shares of MSC in exchange for shares of
Nathan's common stock and warrants.
On April 1, 1999, the Company completed an acquisition of all of Roasters Corp.
and Roasters Franchise Corp.'s intellectual property rights, including
trademarks, recipes and franchise agreements. The Company purchased the assets
for $1,250 according to the terms of a Plan of Reorganization which was approved
during the Roasters Corp. and Roasters Franchise Corp. proceedings in the U.S.
Bankruptcy Court. The Company will own and operate Kenny Rogers Roasters in the
U.S. and internationally under the management of NF Roasters Corp., a
wholly-owned subsidiary of Nathan's Famous, Inc.
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").
F-7
40
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 all periods
presented are on the basis of a 52-week reporting period.
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 an original
maturity of three months or less to be cash equivalents. Cash restricted for
untendered shares associated with the Acquisition amounted to $83 and $273 at
March 28, 1999 and March 29, 1998, respectively, and is included in cash and
cash equivalents.
Inventories
- -----------
Inventories consist primarily of restaurant food items, supplies, marketing
items and equipment for sale under the Branded Product Program which 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
F-8
41
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 28, 1999 and March 29,
1998, was $4,503 and $4,118, respectively. Amortization expense for goodwill was
$384 for each of the three years in the period ended March 28, 1999.
Amortization expense for store pre-opening costs and other intangibles was $0
and $0 and $22 for the fiscal years ended March 28, 1999, March 29, 1998 and
March 30, 1997, 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.
Long-Lived Assets
- -----------------
The Company complies with the provisions of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The Company considers a history of store operating losses to be its primary
indicator of potential impairment. The Company has identified four units which
have been impaired, and recorded a charge to the statement of operations for the
fiscal year ended March 28, 1999 (Note 10).
Investment in Unconsolidated Affiliate
- --------------------------------------
The Company accounts for its investment in MSC under the equity method of
accounting. Accordingly, the carrying value of the investment is equal to the
Company's initial cash investment in MSC plus its share of the accumulated
income of MSC through February 28, 1999 (Note 3).
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 28, 1999 and March
29, 1998, respectively, with the exception of the investment in unconsolidated
affiliate which had a fair value of $3,109 at March 28, 1999.
Stock-Based Compensation
- ------------------------
The Company complies with the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement establishes financial
accounting and reporting standards for stock-based employee compensation plans.
The provisions of SFAS No. 123 encourage entities to adopt a fair value based
method of accounting for stock compensation plans; however, these provisions
also permit the Company to continue to measure compensation costs under
pre-existing accounting pronouncements. 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
12).
F-9
42
Comprehensive Income
- --------------------
During fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distributions to
owners, for the period in which they are recognized. Comprehensive income is the
total of net income and all other nonowner changes in equity (or other
comprehensive income) such as unrealized gains or losses on securities
classified as available-for-sale, foreign currency translation adjustments and
minimum pension liability adjustments. Comprehensive income must be reported on
the face of the consolidated statements of operations or the consolidated
statements of stockholders' equity. The Company's operations did not give rise
to items includable in comprehensive income, which were not already in net
income for the three years in the period ended March 28, 1999. Accordingly, the
Company's comprehensive income is the same as its net income for all years
presented.
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 28, 1999
and March 29, 1998, $222 and $125, respectively, of deferred franchise 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 and from sales under the Branded
Product Program. At March 28, 1999 and March 29, 1998, two and one franchisees,
respectively, represented an aggregate of approximately 12%, and 19%,
respectively, of franchise royalties receivable.
F-10
43
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 up to 3%. Advertising
contributions from Company-owned stores are included in restaurant operating
expenses in the accompanying consolidated statements of operations. Net
Company-owned store advertising expense was $436, $424 and $570 for the fiscal
years ended March 28, 1999, March 29, 1998 and March 30, 1997, 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.
3. INVESTMENT IN UNCONSOLIDATED AFFILIATE:
---------------------------------------
On November 25, 1998, Nathan's acquired 8,121,000 (2,030,250 after giving effect
to a 4 for 1 reverse stock split) shares of MSC in a private purchase
transaction from the former Chairman and CEO of MSC in consideration of the sum
of $4,200. The 2,030,250 shares represent approximately 30% of the then issued
and outstanding shares of MSC.
Condensed summarized financial data for MSC as of and for the three months ended
February 28, 1999, is as follows:
Condensed Balance Sheet Data
- ----------------------------
Current assets $ 6,196
Non-current assets 23,856
Current liabilities 5,684
Non-current liabilities $ 7,730
Condensed Statements of Income Data
- -----------------------------------
Revenue $ 5,707
Net income $ 83
The Company does not record in its investment balance the results of operations
of MSC for the month ended March 31, 1999, and accordingly a one-month reporting
lag exists in the investment in unconsolidated affiliate balance in the
accompanying balance sheet at March 28, 1999.
F-11
44
4. NET INCOME PER SHARE:
The Company complies with the provisions of SFAS No. 128, "Earnings Per Share".
Under SFAS No. 128, 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.
The following chart provides a reconciliation of information used in calculating
the per share amounts for the periods ended March 28, 1999, March 29, 1998 and
March 30, 1997, respectively:
Net Income Shares Net Income Per Share
---------- ------ --------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
Basic EPS
Basic calculation $2,728 $1,528 $ 788 4,722 4,722 $4,722 $ .58 $ .32 $ .17
Effect of dilutive employee
stock options and warrants -- -- -- 31 27 7 (.01) -- --
------ ------ ------ ------ ------ ----- ------- -------- ------
Diluted EPS
Diluted calculation $2,728 $1,528 $ 788 4,753 4,749 $4,729 $ .57 $ .32 $ .17
====== ====== ====== ====== ====== ====== ======== ======= ======
5. FRANCHISE AND OTHER RECEIVABLES, net:
Franchise and other receivables, net, consists of the following:
1999 1998
---- ----
Franchise and license royalties $1,192 $1,166
Branded product sales 460 --
Other 393 353
------ ------
2,045 1,519
Less: allowance for doubtful accounts 467 543
------ ------
$1,578 $ 976
====== ======
6. MARKETABLE INVESTMENT SECURITIES:
Marketable investment securities at March 28, 1999 and March 29, 1998 consisted
of trading securities with aggregate fair values of $3,267 and $8,514,
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.
The gross unrealized holding gains and fair values of trading securities by
major security type at March 28, 1999, March 29, 1998 and March 30, 1997 were as
follows:
1999 1998 1997
------------------------------- ---------------------------- --------------------------
Gross Gross Gross
Unrealized Fair Unrealized Fair Unrealized Fair
Holding Value of Holding Value of Holding Value of
Gain Investments Gain Investments Gain/(Loss) Investments
---- ----------- ---- ----------- ----------- -----------
Commercial paper $ -- $ -- $ -- $ -- $ -- $2,275
Corporate bonds 1 219 6 563 (2) 2,451
Municipal bonds 63 2,011 29 6,936 54 2,111
Investment in trading
limited partnerships * 23 1,037 212 1,015 303 803
------ ------ ------ ------ ------- ------
$ 87 $3,267 $ 247 $8,514 $ 355 $7,640
====== ====== ====== ====== ======= ======
* The Company can sell its investment in the trading limited partnerships
without penalty at any time.
F-12
45
7. PROPERTY AND EQUIPMENT, net:
Property and equipment, net, consists of the following:
1999 1998
---- ----
Construction in progress $ 94 $ 526
Land 896 896
Building and improvements 1,630 1,647
Machinery, equipment, furniture and fixtures 4,703 4,566
Leasehold improvements 6,659 6,146
------- -------
13,982 13,781
Less: accumulated depreciation and amortization 7,689 7,610
------- -------
$ 6,293 $ 6,171
======= =======
Related depreciation and amortization expense totalled $1,065, $1,035 and $1,013
for the fiscal years ended March 28, 1999, March 29, 1998 and March 30, 1997,
respectively.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following:
1999 1998
---- ----
Accrued professional fees $ 492 $ 495
Accrued legal costs 41 1,027
Accrued vacation 376 362
Accrued store closure costs -- 90
Accrued insurance 719 675
Accrual for untendered shares 83 273
Sales and payroll taxes payable 291 272
Deferred revenue 222 409
Other 1,210 1,105
------ ------
$3,434 $4,708
====== ======
9. FINANCING ARRANGEMENTS:
The Company has a $5,000 line of credit with its primary banking institution.
Borrowings under the line of credit are intended to be used to meet the normal
short-term working capital needs of the Company. The line of credit is not a
commitment and, therefore, credit availability is subject to ongoing approval.
The line of credit expires on October 1, 1999, and bears interest at the prime
rate. There were no borrowings outstanding under this line of credit at March
28, 1999 and March 29, 1998, respectively.
10. OTHER INCOME, NET:
Included in other income, net, in the accompanying consolidated statements of
operations is; (i) the reversal of a previous litigation accrual of $349,000
(Note 13), and (ii) a $302,000 impairment charge for four under-performing
stores pursuant to the provisions of SFAS No. 121 (Note 2).
F-13
46
11. INCOME TAXES:
Income tax (benefit) expense consists of the following for the years ended March
28, 1999, March 29, 1998 and March 30, 1997:
1999 1998 1997
---- ---- ----
Federal:
Current $ 453 $ 255 $399
Deferred 297 331 134
------- ----- ----
750 586 533
------- ----- ----
State and local:
Current 165 98 67
Deferred 110 129 22
------- ----- ----
275 227 89
------- ----- ----
Adjustment to valuation allowance relating to opening net deferred
tax asset
(1,443) (523) --
------- ----- ----
$ (418) $ 290 $622
======= ===== ====
Total income tax (benefit) expense for fiscal years ended March 28, 1999, March
29, 1998 and March 30, 1997 differed from the amounts computed by applying the
United States Federal income tax rate of 34% to income before income taxes as a
result of the following:
1999 1998 1997
---- ---- ----
Computed "expected" tax expense $ 785 $ 618 $ 482
Nondeductible amortization 131 131 144
State and local income taxes, net of Federal income tax benefit 181 149 49
Tax-exempt investment earnings (112) (55) (50)
Change in the valuation allowance for net deferred tax assets (1,443) (523) --
Other 40 (30) (3)
------- ----- -----
$ (418) $ 290 $ 622
======= ===== =====
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
1999 1998
---- ----
Deferred tax assets:
Accrued expenses $ 591 $ 564
Allowance for doubtful accounts 196 209
Deferred revenue 43 118
Depreciation expense and impairment of long-lived assets 1,292 1,532
Expenses not deductible until paid -- 639
Other 11 --
------- -------
Total gross deferred tax assets 2,133 3,062
------- -------
Deferred tax liabilities:
Involuntary conversion -- 504
Unrealized gain on marketable investment securities 219 211
Other -- 26
------- -------
Total gross deferred tax liabilities 219 741
------- -------
Net deferred tax asset 1,914 2,321
Less: Valuation allowance (400) (1,843)
------- -------
$ 1,514 $ 478
======= =======
F-14
47
In both fiscal 1999 and 1998, management of the Company determined that, more
likely than not, a significant portion of its previously-reserved deferred tax
assets would be realized and, accordingly, reduced the related valuation
allowance. The reduction in the valuation allowance is included in the income
tax (benefit) provision in the accompanying consolidated statement of operations
for fiscal 1999 and 1998. The determination that the net deferred tax asset of
$1,514 at March 28, 1999 is realizable is based on the Company's profitability
during the past three fiscal years , and the continued positive impact of the
sales performance of its products.
12. STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS:
---------------------------------------------
Stock Option Plans
- ------------------
On December 15, 1992, the Company adopted the 1992 Stock Option Plan (the
"Plan") which provides for the issuance of incentive stock options (ISO's) to
officers and key employees and non-qualified stock options to directors,
officers and key employees. Up to 525,000 shares of common stock have been
reserved for issuance under the Plan. The terms of the options are generally ten
years, except for ISO's granted to any employee, whom prior to the granting of
the option, owns stock representing more than 10% of the voting rights, for
which the option term will be five years. The exercise price for non-qualified
stock options outstanding under the Plan can be no less than the fair market
value, as defined, of the Company's common stock at the date of grant. For
ISO's, the exercise price can generally be no less than the fair market value of
the Company's common stock at the date of grant, with the exception of any
employee who prior to the granting of the option, owns stock representing more
than 10% of the voting rights, for which the exercise price can be no less than
110% of fair market value of the Company's common stock at the date of grant.
On May 24, 1994, the Company adopted the Outside Director Stock Option Plan (the
"Directors' Plan") which provides for the issuance of non-qualified stock
options to non-employee directors, as defined, of the Company. Under the
Directors' Plan, 200,000 shares of common stock have been authorized and issued
pursuant to the Directors' Plan. Options awarded to each non-employee director
are fully vested, subject to forfeiture under certain conditions and shall be
exercisable upon vesting. There were 0, 0 and 50,000 options granted under the
provisions of the Directors Plan during the years ended March 28, 1999, March
29, 1998 and March 30, 1997, respectively.
In April 1998, the Company adopted the Nathan's Famous Inc. 1998 Stock Option
Plan (the "New Plan"), which provides for the issuance of non-qualified stock
options to directors, officers and key employees. Up to 500,000 shares of common
stock have been reserved for issuance under the New Plan. In April 1998, the
Company granted 120,000 ISO's under the 1992 Stock Option Plan and the Company
also issued 30,000 stock options to its non-employee directors under the New
Plan.
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 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 anniversary thereof, and the remaining
one-third on the second anniversary thereof. The warrant expires on November 24,
2001.
F-15
48
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.
A summary of the status of the Company's stock option plans and warrants at
March 28, 1999, March 29, 1998 and March 30, 1997 and changes during the years
then ended is presented in the tables and narrative below:
1999 1998 1997
------------------------- ------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options outstanding - beginning of year 600,167 $5.03 601,167 $5.54 511,167 $5.99
Granted 150,000 4.83 - - 110,000 3.75
Exercised - - - - - -
Canceled (42,500) 5.08 (1,000) - (20,000) 7.40
------- --------- -------
Options outstanding - end of year 707,667 5.08 600,167 5.03 601,167 5.54
======= ======= =======
Options exercisable - end of year 528,167 485,503 398,371
======= ======= =======
Weighted average fair value of options granted $1.77 - $1.99
===== =====
Warrants outstanding - beginning of year 350,000 $3.88 200,000 $4.36 150,000 $4.50
Granted - - 150,000 3.25 50,000 3.94
------- ------- --------
Warrants outstanding - end of year 350,000 3.88 350,000 3.88 200,000 4.36
------- ------- -------
Warrants exercisable - end of year 237,500 145,834 91,667
======= ======= ========
Weighted average fair value of warrants granted $1.68 $1.56 $1.78
===== ===== =====
At March 28, 1999, 517,333 common shares were reserved for future stock option
issuance.
The following table summarizes information about stock options and warrants
outstanding at March 28, 1999:
Options and
Options and Warrants Outstanding Warrants Exercisable
----------------------------------------------------- ------------------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
at Remaining Exercise at Exercise
Range of Exercise Prices 3/28/99 Contractual Life Price 3/28/99 Price
$ 3.25 to $ 4.88 752,500 8.50 $ 3.99 460,500 $ 4.17
4.89 to 7.34 246,167 6.80 6.55 246,167 6.55
7.35 to 9.25 59,000 6.25 8.53 59,000 8.53
------------- ------------- ---------- ------------ ----------
$ 3.25 to $ 9.25 1,057,667 7.98 $ 4.84 765,667 $ 5.16
============= ============= ======== ============ ========
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:
1999 1998
---- ----
Expected life (years) 6.5 6.7
Interest rate 5.58% 6.20%
Volatility 32.77% 33.99%
Dividend yield 0% 0%
F-16
49
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
in the accompanying financial statements for the stock option plans. Had
compensation cost for the Company's stock option plans been determined under
SFAS No. 123, the Company's net income and earnings per share would approximate
the pro forma amounts below:
(in thousands, except per share amounts)
1999 1998
---- ----
Net income: As reported $ 2,728 $ 1,528
Pro forma 2,247 1,208
Net income per share: Basic
As reported $ .58 $ .32
Pro forma .48 .26
Diluted
As reported $ .57 $ .32
Pro forma .47 .25
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.
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 of 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.
F-17
50
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, 6,297,216 shares of Common
Stock for issuance upon exercise of the Rights.
Restricted Stock Grants
- -----------------------
In December 1992, the Company awarded an aggregate of 50,016 shares of common
stock to two executive officers. Pursuant to the terms of the agreement, the
shares were subject to certain restrictions.
Compensation expense, based upon the fair market value of the stock on the date
of grant, was determined by the Company to be $7 per share. Aggregate
compensation expense of $280 has been recognized ratably over the six year
period in which the restrictions lapse and has been included as deferred
compensation as a component of stockholders' equity in the accompanying
consolidated statement of stockholders' equity. Compensation expense was
approximately $34, $47 and $46 for the fiscal years ended March 28, 1999, March
29, 1998 and March 30, 1997, respectively. The restrictions lapsed for all
shares in December 1998.
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, 1999, based on the original terms, and no
non-renewal notice has been given as of June 11, 1999. The agreement provides
for annual compensation of $250 plus certain other benefits. In November 1993,
the Company amended this agreement to include a provision under which the
officer shall have the right to terminate the agreement and receive payment
equal to approximately three times annual compensation upon a change in control,
as defined.
Each employment agreement terminates upon death or voluntary termination by the
respective employee or may be terminated by the Company upon 30 days prior
written notice by the Company in the event of disability or "cause", as defined
in each agreement.
401(k) Plan
- -----------
In March 1992, the Company adopted a defined contribution retirement plan under
Section 401(k) of the Internal Revenue Code covering all non-union employees
over age 21 who have been employed by the Company for at least one year.
Employees may contribute to the plan, on a tax-deferred basis, up to 15% of
their total annual salary. Company contributions are discretionary. Beginning
with the plan year ending February 28, 1994, the Company elected to match
contributions at a rate of $.25 per dollar contributed by the employee on up to
a maximum of 3% of the employee's total annual salary. Employer contributions
for the fiscal years ended March 28, 1999, March 29, 1998 and March 30, 1997
were $13, $12 and $5, respectively.
F-18
51
Other Benefits
The Company provides, on a contributory basis, medical benefits to active
employees. The Company does not provide medical benefits to retirees.
13. 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 28, 1999, the Company has
non-cancellable operating lease commitments, net of certain sublease rental
income, as follows:
Lease Sublease Net lease
Commitments Income Commitments
2000 2,139 171 1,968
2001 1,925 167 1,758
2002 1,782 101 1,681
2003 1,716 61 1,655
2004 1,703 36 1,667
Thereafter 5,445 125 5,320
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 $113, $124
and $163 for the fiscal years ended March 28, 1999, March 29, 1998 and March 30,
1997, respectively.
Rent expense, including contingent rental payments, net of sublease income, was
$2,093, $2,151 and $2,186 for the fiscal years ended March 28, 1999, March 29,
1998 and March 30, 1997, 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 compliant 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 to the premises to a third party franchisee, and further by
failing to pay rent under this lease on and after July 1990. This compliant
seeks damages in the amount of at least $1,500. The Company has filed its answer
to this compliant 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 and some of the named defendants entered into a Settlement with Textron
whereby all of the plaintiff's claims against the Company and the other
defendants were resolved under a Settlement Agreement and Mutual Release that
provide for payments to be made jointly by all of the defendants on or before
December 30, 1998 and January 15, 1999, which payments were made.
F-19
52
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. 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 Phylli Foods dated June 1, 1994. In their answer, the
defendants essentially denied the material allegations of the complaint and
interposed counterclaims against Systems in which they alleged essentially that
Systems fraudulently induced the defendants to purchase the franchise from
Systems or did so by means of negligent misrepresentation. Defendants also
alleged that by reason of Systems' allegedly fraudulent and deceitful conduct,
Systems violated the General Business Law of New York. As a consequence of the
foregoing, the defendants 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
compliant, the plaintiff, a dentist, is seeking injunctive relief and damages in
an amount exceeding $5,000 against the landlord, one of the Company's
franchisees and the Company claiming that the operation of a restaurant in a
building in Long Island City created noxious and offensive fumes and odors that
allegedly were injurious to the health of the plaintiff and his employees and
patients, and interfered with, and irreparably damaged his practice. Plaintiff
also claims that the landlord fraudulently induced him to enter a lease
extension by representing that the first floor of the building would be occupied
by a non-food establishment. 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.
On January 5, 1999, Miami Subs was served with a class action lawsuit entitled
Robert J. Feeney, on behalf of himself and all other similarly situated vs.
Miami Subs Corporation, et al., in Broward County Circuit Court, which was filed
against Miami Subs, its directors and Nathan's in a Florida state court by a
shareholder of Miami Subs. Since that time, the Company and its designees to the
Miami Subs board have also been served. The suit alleges that the proposed
merger between Miami Subs and the Company, as contemplated by the companies'
non-binding letter of intent, is unfair to Miami Subs' shareholders and
constitutes a breach by the defendants of their fiduciary duties to the
shareholders of Miami Subs. The plaintiff seeks among other things: (i) class
action status; (ii) preliminary and permanent injunctive relief against
consummation of the proposed merger; and (iii) unspecified damages to be awarded
to the shareholders of Miami Subs. On March 19, 1999, the Court granted the
plaintiff leave to amend his compliant. Thereafter, Plaintiff filed a First
Amended Complaint. Nathan's and its designees on the Miami Subs' Board moved to
dismiss the First Amended Complaint. The Court held a hearing on the motion, but
has not yet ruled on it. In the event the Court denies the pending motion, the
Company intends to defend against this suit vigorously.
The Company is involved in various other litigation in the normal course of
business, none of which, in the opinion of management, will have a significant
adverse impact on its financial position or results of operations.
F-20
53
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
(IN THOUSANDS, EXCEPT SHARE DATA)
---------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
FISCAL YEAR 1999
Revenues........................................... $ 7,821 $ 8,166 $ 7,215 $ 6,380
Gross profit(a).................................... 2,560 2,650 2,181 1,753
Net income......................................... 574 751 412 991
=========== =========== =========== ===========
Per share information:
Net income per share:
Basic.................................... $ .12 $ .16 $ .09 $ .21
=========== =========== =========== ===========
Diluted.................................. $ .12 $ .16 $ .09 $ .21
=========== =========== =========== ===========
Shares used in computation of net income per share:
Basic......................................... 4,722 4,722 4,722 4,722
=========== =========== =========== ===========
Diluted....................................... 4,762 4,754 4,750 4,753
=========== =========== =========== ===========
FISCAL YEAR 1998
Revenues........................................... $ 7,362 $ 8,098 $ 6,825 $ 6,592
Gross profit(a).................................... 2,404 2,699 2,123 1,836
Net income......................................... 474 609 242 203
=========== =========== =========== ===========
Per share information:
Net income per share:
Basic.................................... $ .10 $ .13 $ .05 $ .04
=========== =========== =========== ===========
Diluted.................................. $ .10 $ .13 $ .05 $ .04
=========== =========== =========== ===========
Shares used in computation of net income per share:
Basic......................................... 4,722 4,722 4,722 4,722
=========== =========== =========== ===========
Diluted....................................... 4,766 4,782 4,771 4,749
=========== =========== =========== ===========
- ---------------
(a) Gross profit represents the difference between restaurant sales and the
cost of food and paper products.
54
EXHIBIT INDEX
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, as amended.
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;
b) Lease Modification of Land and Building Lease between
787 Central Park Avenue, Inc., and the Company dated
May 1, 1980.
55
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 Form of Standard Franchise Agreement. (Incorporated by
reference to Exhibit 10.12 to Registration Statement on Form
S-1 No. 33-56976.)
10.9 The Company's 401K Plan and Trust. (Incorporated by reference
to Exhibit 10.5 to Registration Statement on Form S-1 No.
33-56976.)
10.10 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.)
10.11 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.)
10.12 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.)
10.13 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.)
10.14 Outside Director Stock Option Plan. (Incorporated by reference
to Exhibit 10.22 to Registration Statement on Form S-8 No.
33-89442.)
10.15 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.)
10.16 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.)
10.17 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.)
10.18 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.)
10.19 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.)
10.20 1998 Stock Option Plan. (Incorporated by reference to Exhibit
10.26 to the Annual Report filed on form 10- K for the fiscal
year ended March 29, 1998.)
10.21 North Fork Bank Promissory Note.
21 List of Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.