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 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-3189
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NATHAN'S FAMOUS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-3166443
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1400 Old Country Road, Westbury, New York 11590
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 338-8500
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Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - par value $.01
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 7, 2002 was approximately $24,399,888.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of June 7, 2002,
there were 6,272,511 shares of Common Stock, par value $.01 per share
outstanding.
Documents incorporated by reference: Part III - Registrant's definitive
proxy statement to be filed pursuant to Regulation 14-A of the Securities
Exchange Act of 1934.
PART I
Item 1. Business
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As used herein, unless we otherwise specify, the terms "we," "us," "our"
and "Nathan's" mean Nathan's Famous, Inc. and its subsidiaries, including Miami
Subs Corporation, owner of the Miami Subs brand, and NF Roasters Corp., owner of
the Kenny Rogers brand.
We have historically operated and franchised fast food units featuring
Nathan's famous brand all beef frankfurters, crinkle-cut french fried potatoes,
and a variety of other menu offerings. Our Nathan's brand company-owned and
franchised units operate under the name "Nathan's Famous," the name first used
at our original Coney Island restaurant opened in 1916. Since fiscal 1998, we
supplemented our Nathan's franchise program with our Branded Product Program
which enables foodservice retailers to sell some of Nathan's proprietary
products outside of the realm of a traditional franchise relationship. During
fiscal 2000, we acquired the intellectual property rights, including trademarks,
recipes and franchise agreements of Roasters Corp. and Roasters Franchise Corp.
and also completed a merger with Miami Subs Corporation whereby we acquired the
remaining 70% of Miami Subs common stock we did not already own.
Over the past five years, we have focused on developing our restaurant system by
opening franchised restaurants, operating our existing company-owned
restaurants, expanding our supermarket licensing program of the Nathan's brand,
implementing our Nathan's Branded Product Program, and began developing an
international master franchising program. In an effort to expand our restaurant
system and expand our brand portfolio, during fiscal 2000 we completed our
merger with Miami Subs Corp. and our acquisition of the intellectual property of
the Kenny Rogers Roasters franchise system. In addition, through our acquisition
of Miami Subs, we also secured certain exclusive co- branding rights to use the
Arthur Treachers' brand within the United States. We have continued to
capitalize on the co-branding opportunities within our existing restaurant
system, as well as seek to develop new multi-brand marketing and development
plans.
At March 31, 2002, our system, consisting of Nathan's Famous, Kenny Rogers
Roasters and Miami Subs restaurants, included 364 franchised units, including
three units operating pursuant to management agreements, 22 company-owned units
concentrated in the New York metropolitan area (including New Jersey) and
Florida and approximately 1,500 branded product points of sale under our Branded
Product Program, located in 39 states, the District of Columbia, and 14 foreign
countries.
We plan to further introduce our co-branding opportunities within the
existing restaurant system, seek to expand the scope and market penetration of
our Branded Product Program, further develop the restaurant operations of
existing franchised and company-owned outlets for all restaurant concepts, and
open new franchised outlets of all of our restaurant concepts in traditional or
captive market environments. We may selectively consider opening new
company-owned restaurants. We also plan to develop an international presence
through the use of master franchising agreements based upon individual or
combined use of all three restaurant concepts.
We were incorporated in Delaware on July 10, 1992 under the name "Nathan's
Famous Holding Corporation" to act as the parent of a Delaware corporation
then-known as Nathan's Famous, Inc. On December 15, 1992, we changed our name to
Nathan's Famous, Inc. and our Delaware subsidiary changed its name to Nathan's
Famous Operating Corporation. The Delaware subsidiary was organized in October
1989 in connection with its reincorporation in Delaware from that of a New York
corporation named "Nathan's Famous, Inc." The New York Nathan's was incorporated
on July 10, 1925 as a successor to the sole proprietorship that opened the first
Nathan's restaurant in Coney Island in 1916. On July 23, 1987, Equicor Group,
Ltd. was merged with and into the New York Nathan's in a "going private"
transaction. The New York Nathan's, the Delaware subsidiary and Equicor may all
be deemed to be our predecessors.
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Acquisitions
Pursuant to the Joint Plan of Reorganization of the Official Committee of
Franchisees of Roasters Corp. and Roasters Franchise Corp. as confirmed by the
U. S. Bankruptcy Court for the Middle District of North Carolina, Durham
Division, we acquired through our wholly owned subsidiary, NF Roasters Corp.,
the intellectual property rights, including trademarks, recipes and franchise
agreements of Roasters Corp. and Roasters Franchise Corp. for $1,250,000 in cash
plus related expenses, which was paid out of working capital on April 1, 1999.
On November 25, 1998, we purchased 2,030,250 shares of Miami Subs
Corporation (after giving effect to a 4 for 1 reverse stock split), or
approximately 30% of its then outstanding common stock for $4,200,000. On
September 30, 1999, we completed our merger with Miami Subs and acquired the
remaining outstanding shares of Miami Subs in exchange for 2,317,980 shares of
our common stock and warrants to acquire 579,040 additional shares of our common
stock at a price of $6.00 per share.
Restaurant Operations
Nathan's Concept and Menus
Our Nathan's concept offers a wide range of facility designs and sizes,
suitable to a vast variety of locations and features a core menu, consisting of
the "Nathan's Famous" all-beef frankfurters, crinkle-cut french fries and
beverages. Nathans' menu is designed to be tailored to take advantage of
site-specific market opportunities by adding complementary food items to the
core menu. The Nathan's concept is suitable to stand alone or be co-branded with
other nationally recognized brands.
Nathans' hot dogs are all-beef and are free from all fillers and starches.
Hot dogs are flavored with the original secret blend of spices created by Ida
Handwerker in 1916, which historically have distinguished Nathans' hot dogs. Hot
dogs are prepared and served in accordance with procedures which have not varied
significantly in more than 86 years. Our signature crinkle-cut french fried
potatoes are featured at each Nathan's restaurant. Nathans' french fried
potatoes are cooked to order in 100% cholesterol-free corn oil. We believe that
the majority of sales in our company-owned units consist of Nathan's famous hot
dogs, crinkle-cut french fried potatoes and beverages.
Individual Nathan's restaurants supplement their core menu of hot dogs,
french fries and beverages with a variety of other quality menu choices:
chargrilled hamburgers, chargrilled chicken sandwiches, Philly Cheesesteaks,
selected seafood and other chicken items, a breakfast menu and assorted desserts
and snacks. While the number of supplemental menus carried varies with the size
of the unit, the specific supplemental menus chosen are tailored to local food
preferences and market conditions. Each of these supplemental menu options
consists of a number of individual items; for example, the hamburger menu may
include chargrilled bacon cheeseburgers, superburgers and super cheeseburgers.
We maintain the same quality standard with each of Nathan's supplemental menus
as we do with Nathans' core hot dog and french fried potato menu. Thus, for
example, hamburgers and sandwiches are prepared to order and not pre-wrapped or
kept warm under lights. Nathan's also has a "Kids Meal" program in which various
menu alternatives are combined with toys to appeal to the children's market.
Nathans' restaurant units are available in a range of sizes from 300 to
4,000 sq. ft. We have also developed Nathan's carts, kiosks, and modular units.
Our smaller units may not have customer seating areas, although they may often
share seating areas with other fast food outlets in food court settings. Other
units generally provide seating for 45 to 125 customers. Carts, kiosks and
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modular units generally carry only the core menu. This menu is supplemented by a
number of other menu selections in our other restaurant types.
We believe Nathan's carts, kiosks, modular units and food court designs are
particularly well-suited for placement in non-traditional sites, such as
airports, travel plazas, stadiums, schools, convenience stores, entertainment
facilities, military facilities, business and industry food service, within
larger retail operations and other captive markets. Many of these smaller units
have been designed specifically to support our expanding Branded Product
Program. All of these units feature the Nathan's logo and utilize a contemporary
design.
Miami Subs Concept and Menu
Our Miami Subs concept features a wide variety of moderately priced lunch,
dinner and snack foods, including hot and cold submarine sandwiches, various
ethnic foods such as gyros and pita sandwiches, flame grilled hamburgers and
chicken breast sandwiches, cheesesteaks, chicken wings, fresh salads, ice cream
and other desserts. Soft drinks, iced tea, coffee, beer and wine are also
offered.
Freshness and quality of breads, produce and other ingredients are
emphasized in Miami Subs restaurants. The Miami Subs menu may include low-fat
selections such as salads, grilled chicken breasts, and non-fat frozen yogurt
which we believe are perceived as nutritious and appealing to health conscious
consumers. We believe Miami Subs has become known for certain "signature" foods,
such as grilled chicken on pita bread, cheesesteaks and gyros on pita bread.
Miami Subs restaurants feature a distinctive decor unique to the Miami Subs
concept. The exterior of free- standing restaurants feature an unusual roof
design and neon pastel highlights for easy recognition. Interiors have a
tropical motif in a neon pink and blue color scheme with murals of fish,
mermaids, flamingos and tropical foliage. Exteriors and interiors are brightly
lit to create an inviting, attractive ambience to distinguish our restaurants
from those of our competitors. At March 31, 2002, 112 of the Miami Subs
restaurants were located in freestanding buildings, ranging between 2,000 and
5,000 square feet. Certain other Miami Subs restaurants are scaled down to
accommodate non-traditional captive market environments.
Miami Subs restaurants are typically open seven days a week, generally
opening at 10:30 am, with many of the restaurants having extended late-night
hours. Indoor service is provided at a walk-up counter where the customer places
an order and is given an order number and a drink cup. The customer then
proceeds to a self service soda bar while the food is prepared to order.
Drive-thru service is provided at substantially all free-standing Miami Subs
restaurants. We estimate that drive-thru sales account for approximately 45% of
sales in free-standing restaurants.
Currently, 102 Miami Subs restaurants have introduced our co-branded menu
consisting of Nathan's, Kenny Rogers Roasters or Arthur Treachers' signature
products. We have created a new image for Miami Subs based upon this co-branding
strategy called "Miami Subs Plus" which has been heavily marketed in Southern
Florida beginning in July 2001.
Kenny Rogers Roasters Concept and Menu
The Kenny Rogers Roasters concept was first introduced in 1991 with the
idea of serving home-style family foods based on a menu centered around
wood-fire rotisserie chicken. Kenny Rogers Roasters' unique proprietary marinade
and spice formula, combined with wood-fire roasting in a specifically designed
rotisserie, became the basis of a breakthrough taste in rotisserie chicken. The
menu, design and service style were created to position the concept midway
between quick-serve and casual dining. This format, coupled with a customer
friendly environment developed for dine-in or take-home consumers, is the
precursor of the Kenny Rogers Roasters system.
The distinctive flavoring of our Kenny Rogers Roasters chicken is the
result of a two step process. First, our chickens are marinated using a
specially flavored proprietary marinade. Then a second unique blend of spice is
applied to the chicken prior to cooking in the open flame wood-fire rotisserie
in full view of customers at the restaurant. Other entrees offered in Kenny
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Rogers Roasters restaurants may include Honey Bourbon BBQ ribs and rotisserie
turkey. Complimenting Kenny Rogers Roasters main courses are a wide variety of
freshly prepared side dishes, corn muffins, soups, salads and sandwiches. The
menu offers a healthful alternative to traditional quick-serve menu offerings
that caters to families and individuals.
The traditional Kenny Rogers Roasters restaurants are free standing buildings
offering dine-in and drive thru delivery options ranging in size between 3,000
and 4,000 sq. ft. with seating capacity for approximately 125 guests. Other
prototype restaurant designs that are being considered include food court units
and scaled down in-line and free standing restaurant types. We have recently
begun to co-brand Kenny Rogers Roasters with Nathan's by introducing Nathan's
famous all-beef frankfurters, crinkle-cut french fries and hamburger menus to
supplement Roasters' core menu offerings.
Franchise Operations
At March 31, 2002, our franchise system, including our Nathan's, Miami Subs
and Kenny Rogers restaurant concepts, consisted of 364 units operating in 22
states and 14 foreign countries.
Today, our franchise system counts among its 172 franchisees and licensees
such well known companies as Host Marriott Services USA, Inc., ARAMARK Leisure
Services, Inc., CA1 Services, Inc., Service America Corp., Culinart and Sodexho
USA. We continue to seek to market our franchising program to larger,
experienced and successful operators with the financial and business capability
to develop multiple franchise units.
As of March 31, 2002, Host Marriott operated 34 franchised outlets,
including 17 units at airports, 14 units within highway travel plazas and three
units within malls.
Nathan's Franchise Program
Franchisees are required to execute a standard franchise agreement prior to
opening each Nathan's Famous unit. Our current standard Nathan's franchise
agreement provides for, among other things, a one-time $30,000 franchise fee
payable upon execution of the agreement, a monthly royalty payment based on 5.0%
of restaurant sales and the expenditure of 2.0% of restaurant sales on
advertising. We also offer a modified franchise agreement tailored to meet the
needs of franchisees who desire to operate a Nathan's of a smaller size offering
a reduced menu. The modified franchise agreement provides for the initial
franchise fee of $15,000 which is payable upon execution of the agreement,
monthly royalties of 5.0% and the expenditure of 2.0% of restaurant sales on
advertising. We may offer alternatives to the standard franchise agreement,
particularly having to do with advertising requirements. Marriott and National
Restaurant Management, Inc., are among those franchisees 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.
Franchisees are approved on the basis of their business background,
evidence of restaurant management experience, net worth and capital available
for investment in relation to the proposed scope of the development agreement.
We provide numerous support services to our Nathan's franchisees. We assist
in and approve all site selections. Thereafter, we provide architectural plans
suitable for restaurants of varying sizes and configurations for use in
food-court, in-line and free-standing locations. We also assist in establishing
building design specifications, reviewing construction compliance, equipping the
restaurant and providing appropriate menus to coordinate with the restaurant
design and location selected by the franchisee. We typically do not sell food,
equipment or supplies to our Nathan's franchisees.
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We offer various management training courses for management personnel of
company-owned and franchised Nathan's restaurants. At least one restaurant
manager from each restaurant must successfully complete our mandated management
training program. We also offer additional operations and general management
training courses for all restaurant managers and other managers with supervisory
responsibilities. We provide standard manuals to each franchisee covering
training and operations, products and equipment and local marketing programs. We
also provide ongoing advice and assistance to franchisees.
Franchised restaurants are required to be operated in accordance with
uniform operating standards and specifications relating to the selection,
quality and preparation of menu items, signage, decor, equipment, uniforms,
suppliers, maintenance and cleanliness of premises and customer service. All
standards and specifications are developed by us and applied on a system-wide
basis. We continuously monitor franchisee operations and inspect restaurants.
Franchisees are required to furnish us with detailed monthly sales or operating
reports which assist us in monitoring the franchisee's compliance with its
franchise or license agreement. We make both announced and unannounced
inspections of restaurants to ensure that our practices and procedures are being
followed. We have the right to terminate a franchise if a franchisee does not
operate and maintain a restaurant in accordance with the requirements of its
franchise or license agreement. We also have the right to terminate a franchise
for non-compliance with certain other terms and conditions of the franchise or
license agreement such as non-payment of royalties, sale of unauthorized
products, bankruptcy or conviction of a felony. During the fiscal year ended
March 31, 2002, ("fiscal 2002") franchisees have opened 16 new Nathan's
franchised units and we did not terminate any Nathan's franchise agreements for
non-compliance.
Franchisees who desire to open multiple units in a specific territory
within the United States may enter into a standard area development agreement
under which we receive an advance fee based upon the number of proposed units
which the franchisee is authorized to open. This advance is credited against the
franchise fee payable to us as provided in the standard franchise agreement. We
may also grant exclusive territorial rights in foreign countries for the
development of Nathan's units based upon compliance with a predetermined
development schedule. We would require an exclusivity fee to be conveyed for
such exclusive rights.
Miami Subs Franchise Program
Franchisees are required to execute a standard franchise agreement relating
to the operation of each Miami Subs restaurant. Currently, the term of the
franchise agreement is between five and 20 years, and the initial franchise fee
is $30,000 for traditional restaurants and $15,000 for certain non-traditional
restaurants. The standard franchise agreement provides for the payment of a
monthly royalty fee of 4.5% on gross restaurant sales for the term of the
franchise agreement, and additional charges based on a percentage of restaurant
sales, typically totaling 2.25%, to support various system-wide and local
advertising funds.
In addition to individual franchise agreements, we have from time to time
entered into development agreements with certain franchisees. The development
agreement establishes a minimum number of restaurants that the franchisee is
required to open in an agreed upon exclusive area during the term of the
agreement. In addition to receiving a franchise fee for each restaurant opened,
we also receive a non-refundable fee based upon the number of restaurants
committed to be opened under the agreement.
Operations personnel train and assist Miami Subs franchisees in opening new
restaurants and monitor the operations of existing restaurants as part of the
support provided under the franchise program. New franchisees are required to
complete a six-week training program. Upon the opening of a new franchised
restaurant, we typically send representatives to the restaurant to assist the
franchisee during the opening period. These company representatives work in the
restaurant to monitor compliance with Miami Subs' standards and provide
additional on-site training of the franchisee's restaurant personnel.
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We also provide development and construction support services to our Miami
Subs franchisees. We review and approve plans and specifications for the
restaurants before improvements begin. Our personnel typically visit the
facility during construction to meet with the franchisee's site contractor and
to verify that construction standards are met.
The six-week training program consists of formal classroom training and
in-restaurant training featuring various aspects of day-to-day operations
leading to certification in all functioning positions. Topics covered include
human resources, accounting, purchasing and labor and food handling laws.
Standard operating manuals are provided to each franchisee.
To maintain uniform standards of appearance, service and food and beverage
quality for our Miami Subs restaurants, we have adopted policies and implemented
a monitoring program. Franchisees are expected to adhere to specifications and
standards in connection with the selection and purchase of products used in the
operation of the Miami Subs restaurant. Detailed specifications are provided for
the products used, and franchisees must request approval for any deviations. We
do not generally sell equipment, supplies or products to our Miami Subs
franchisees. The franchise agreement requires franchisees to operate their
restaurants in accordance with Miami Subs' requirements. We require our
franchisees to use specified kitchen equipment to maximize consistency and speed
of food preparation. Ongoing advice and assistance is provided to franchisees in
connection with the operation and management of each restaurant. Our area
consultants are responsible for oversight of franchisees and periodically visit
each restaurant. During such visits, the area consultant completes a report
which contains evaluations on speed of preparation for menu items, quality of
delivered product, cleanliness of restaurant facilities as well as evaluations
of managers and other personnel. The area consultants also make announced and
unannounced follow-up visits to ensure adherence to operational specifications.
Franchisees are required to furnish us with detailed monthly sales or
operating reports which assist us in monitoring the franchisee's compliance with
its franchise agreement. We have the right to terminate a franchise if a
franchisee does not operate and maintain a restaurant in accordance with the
requirements of its franchise agreement. We also have the right to terminate a
franchise for non-compliance with certain other terms and conditions of the
franchise agreement such as non-payment of royalties, sale of unauthorized
products, bankruptcy or conviction of a felony. During the fiscal year ended
March 31, 2002, franchisees have opened 4 new Miami Subs franchised units and we
did not terminate any Miami Subs franchise agreements for non-compliance.
Kenny Rogers Roasters Franchise Program
Kenny Rogers Roasters franchisees from the previous franchise system were
required to execute amended and restated franchise agreements in order to
preserve their franchised units. The amended and restated franchise agreement
affirmed the franchisees responsibilities and offered reduced royalties to 3% of
sales and waived advertising fund payments through March 31, 2001. These reduced
rates have been extended until March 31, 2003. Future Kenny Rogers Roasters
franchisees will have to execute our current standard franchise agreement which
provides for, among other things, a one-time $30,000 franchise fee payable upon
execution of the agreement, a monthly royalty payment based on 4.5% of
restaurant sales and the expenditure of 2.5% of restaurant sales on advertising.
In some specific situations, we may offer alternatives to the standard franchise
agreement. The initial term of the typical franchise agreement is 20 years, with
up to a 20-year renewal option by the franchisee, subject to conditions
contained in the franchise agreement.
Franchisees will be approved on the basis of their business background,
evidence of restaurant management experience, net worth and capital available
for investment in relation to the proposed scope of the development agreement.
We expect to provide numerous restaurant opening support services to future
Kenny Rogers Roasters franchisees. We expect to assist in and approve all Kenny
Rogers Roasters site selections. Thereafter, we expect to provide architectural
prototype plans suitable for Kenny Rogers Roasters restaurants of varying sizes
and configurations, for use in food-court, in-line and free-standing locations.
We will also assist in establishing building design specifications, reviewing
construction compliance, equipping the restaurant and providing appropriate
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menus to coordinate with the prototype restaurant design and location selected
by the Kenny Rogers Roasters franchisee. We do not typically sell food,
equipment or supplies to our Kenny Rogers Roasters franchisees.
We plan to offer various management training courses for management
personnel of future Kenny Rogers Roasters restaurants. At least one restaurant
manager from each new restaurant or co-branded restaurant will have to
successfully complete Kenny Rogers Roasters' mandated management training
program. We also plan to offer additional operations and general management
training courses to all Kenny Rogers Roasters restaurant managers and other
managers with supervisory responsibilities. We provide standard manuals to each
franchisee covering training and operations, products and equipment and local
marketing programs. We also provide ongoing advice and assistance to
franchisees.
Franchised restaurants are required to be operated in accordance with
uniform operating standards and specifications relating to the selection,
quality and preparation of menu items, signage, decor, equipment, uniforms,
suppliers, maintenance and cleanliness of premises and customer service. We
develop all standards and specifications, which are applied on a system-wide
basis. We continuously monitor franchisee operations. Franchisees are required
to furnish us with detailed monthly sales or operating reports which assist us
in monitoring the franchisee's compliance with its franchise agreement. We have
the right to terminate a franchise if a franchisee does not operate and maintain
a restaurant in accordance with the requirements of its franchise or license
agreement. We also have the right to terminate a franchise for non-compliance
with certain other terms and conditions of the franchise agreement such as non-
payment of royalties, sale of unauthorized products, bankruptcy or conviction of
a felony. During the fiscal year ended March 31, 2002, three Kenny Rogers
Roasters franchise agreements were terminated for non-compliance.
Franchisees who desire to open multiple units in a specific territory
within the United States may generally enter into a standard area development
agreement under which we would receive an advance fee based upon the number of
proposed units which the franchisee is authorized to open. This advance would be
credited against the franchise fee payable to us, as provided in its standard
franchise agreement. In some circumstances, we may grant exclusive territorial
rights in foreign countries for the development of Roasters units based upon
compliance with a predetermined development schedule
Company-owned Nathan's Restaurant Operations
As of March 31, 2002, we operated 16 company-owned Nathan's units,
including one kiosk and one seasonal location, in New York and New Jersey. Three
of these restaurants are older and significantly larger units which do not
conform to current designs. These units carry a broader selection of menu items
than current designs. The items offered at our restaurants, other than the core
menu, tend to have lower margins than the core menu. The older units require
significantly higher levels of initial investment than current franchise designs
and tend to operate at a lower sales/investment ratio. Consequently, we do not
intend to replicate these older units in future company-owned units.
We entered into a food service lease agreement with Home Depot U.S.A., Inc.
under which we lease space in certain Home Depot Improvement Centers to operate
Nathan's restaurants. The term of each Home Depot agreement is five years from
the date on which the restaurant opens, with one five year renewal option. We
currently operate seven units within Home Depot Improvement Centers, including
one kiosk.
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. All restaurants, except our
seasonal boardwalk location, have seating to accommodate between 30 and 325
customers. The restaurants are designed to appeal to all ages and generally are
open seven days a week. We have established high standards for food quality,
cleanliness and service at our restaurants and regularly monitor the operations
of our restaurants to ensure adherence to these standards. Restaurant service
areas, seating, signage and general decor are contemporary.
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Company-owned Miami Subs Restaurant Operations
As of March 31, 2002, we operated four Miami Subs restaurants located in
Southern Florida. All of our company-owned Miami Subs restaurants are
free-standing restaurants offering drive-thru operations as well as dine-in
seating. The restaurants generally are approximately 3,100 square feet with
seating capacity for approximately 90 guests. We are presently evaluating our
company-owned restaurants and might seek to franchise some of these restaurants.
Commencing January 2000, we introduced a re-engineered Miami Subs menu
within our company-owned restaurants. Throughout fiscal years 2001 and 2002, our
menu development activities emphasized our co-branding strategy of including
certain Nathan's, Kenny Rogers Roasters and Arthur Treachers' signature products
within the Miami Subs restaurant system.
Company-owned Kenny Rogers Roasters Restaurant Operations
At March 31, 2002, we operated two Kenny Rogers Roasters restaurants in
Rockville Centre and Commack New York. These units are traditional free-standing
buildings, each with a drive thru. In addition to the standard Kenny Rogers
Roasters menu, both restaurants feature Nathan's all-beef frankfurters,
crinkle-cut french fries, chargrilled hamburgers and other select Nathan's menu
items, including a newly formulated kids' menu. Arthur Treachers' products are
also featured in the Rockville Centre restaurant. As of March 31, 2002, we
decided to sell of our company-operated Kenny Rogers Roasters restaurant in
Rockville Centre, New York and are actively engaged in negotiations with a
prospective purchaser.
In April 2002, we opened a new limited-menu Kenny Rogers food court outlet,
as part of a major remodeling of a large Company-owned Nathan's facility in
Oceanside, New York.
International Franchising
As of March 31, 2002, our franchisees operated 90 units in 14 foreign
countries having significant representations within Malaysia, the Philippines,
and the Middle-East. The vast majority of foreign operations consist of Kenny
Rogers Roasters units, although our Nathan's and Miami Subs restaurant concepts
also have foreign franchise operations. During the current fiscal year, our
international franchising program opened 11 Roasters as follows: four in the
Philippines and seven in Malaysia.
To date, we also executed Letters of Intent to enter into Master
Development Agreements for the rights to China, Japan, India and Turkey and are
currently in various stages of discussions for development in other foreign
countries. We may grant exclusive territorial rights, in foreign countries,
based upon compliance with a pre-determined development schedule and would
require that an exclusivity fee be conveyed for these rights. We plan to develop
internationally through the use of master franchising agreements based upon
individual or combined use of all three restaurant concepts.
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Location Summary
The following table shows the number of our company-owned and franchised or
licensed units in operation or under development at March 31, 2002 and their
geographical distribution:
Franchise
Location Company or License(1) Total
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Alabama - 4 4
Arizona - 3 3
California - 5 5
Colorado - 1 1
Connecticut - 4 4
Florida 4 112 116
Georgia - 3 3
Idaho - 1 1
Indiana - 1 1
Maryland - 1 1
Massachusetts - 1 1
Michigan - 2 2
Minnesota - 2 2
Missouri - 4 4
Nevada - 4 4
New Jersey 2 44 46
New York 16 54 70
North Carolina - 15 15
Pennsylvania - 6 6
South Carolina - 2 2
Tennessee - 1 1
Texas - 4 4
-- --- ---
Domestic Subtotal 22 274 296
-- --- ---
International Locations
Bahamas - 2 2
Brunei - 1 1
Canada - 3 3
Cypress - 1 1
Dominican Republic - 2 2
Egypt - 4 4
Indonesia - 1 1
Israel - 1 1
Malaysia - 30 30
Philippines - 35 35
Puerto Rico - 2 2
Saudi Arabia - 2 2
Singapore - 4 4
United Arab Emirates - 2 2
-- --- ---
International Subtotal - 90 90
-- --- ---
Grand Total 22 364 386
-- --- ---
<FN>
(1) Includes 3 units operating by third parties pursuant to management
agreements and does not include our Branded Product Program.
</FN>
9
Branded Product Program
The "Branded Product Program" was launched during fiscal 1998. The program
was expressly created to provide a new vehicle for the sale of Nathan's hot dogs
and other proprietary items. Through the program, Nathan's provides qualified
foodservice operators in a variety of venues, the opportunity to capitalize on
Nathan's superior signature products and valued brand equity. In conjunction
with the program, the operators are granted a limited use of the Nathan's
trademark, as well as Nathan's point of purchase materials. We sell products
either directly to the end users, or to various foodservice distributors who
provide the product to retailers.
As of March 2002, the branded product program was comprised of
approximately 1,500 points of sale. The program is unique in its flexibility and
broad appeal. Hot dogs are offered in a variety of sizes and even come packaged
with buns for vending machine use. The Canteen Corporation, America's largest
vending company, uses Nathan's packaged hot dogs throughout its system.
During the past two years the locations offering the branded product have
been significantly expanded. Today, Nathan's hot dogs are being offered by major
hotel and casino operations such as Park Place Entertainment (Caesar's, Paris,
Bally's, Flamingo, etc.), as well as all of the Trump Casino operations in
Atlantic City, New Jersey. National movie theaters, such as, National Amusement
and Muvico, now offer Nathan's at their concession stands. A wide variety of
colleges and universities serve Nathan's hot dogs. Our product is also offered
in the cafeteria at the House of Representatives and the Kennedy Space Center.
Nathan's hot dog is the official hot dog of the New York Yankees for the
2001-2003 baseball seasons.
Of particular significance is our recent expansion into the fast food
arena, where Nathan's hot dogs are currently being offered at a variety of
restaurants such as, Johnny Rockets, Flamers, and A&W Hot Dogs & More. As we
expand the program, we continue to open new opportunities with high volume
potential. In addition to over 75 airport locations, Nathan's is now offered on
Amtrak Trains throughout the nation, as well as a number of highway travel
plazas.
Expansion Program
We expect to continue opening new franchised units for each restaurant
concept individually and on a co- branded basis, expanding product distribution
through alternative means such as branded products or supermarket licensing
arrangements, developing master franchising programs in foreign countries and
continue introducing each restaurant concepts' signature products through
co-branding efforts within our existing restaurant system.
During fiscal 2003, we may selectively open new company-owned units,
concentrated within the New York metropolitan area or in Southern Florida using
our co-branded format. Existing company-owned units are principally located in
the New York metropolitan area and Southern Florida market where we have
extensive experience in operating restaurants. We may consider new opportunities
in both traditional and captive market settings. We anticipate that we will open
franchised units of all three restaurant concepts individually and develop new
co-branded outlets. We have engaged an imaging and equipment design firm to
assist us with the development of certain prototype restaurants.
We expect that during fiscal 2003 our international development efforts
will take on added dimensions as a result of the co-branding opportunities that
we now offer. We believe that in addition to restaurant franchising of our three
restaurant concepts, there is the opportunity to further increase revenues by
offering master development agreements to qualified persons or entities allowing
for the operation of franchised restaurants, subfranchising restaurants to
others, licensing the manufacture of our signature products, selling our
signature products through supermarkets and allowing for the further development
of our Branded Product Program. Qualified persons or entities must have
satisfactory foodservice experience managing multiple units, the appropriate
infrastructure and the necessary financial resources to support the business
development.
10
We will also seek to continue the growth of our Branded Product Program in
fiscal 2003 through the addition of new points of sale for Nathan's hot dogs. We
believe that as consumers look to assure confidence in the quality of the food
that they purchase, there is great potential to increase our sales by converting
existing sales of non-branded products into branded products throughout the
foodservice industry. In addition, certain Miami Subs, Kenny Rogers Roasters and
Nathan's products may be included as part of our Branded Product Program.
Co-branding
We believe that there is a substantial opportunity for co-branding among
restaurant concepts. In addition to the three restaurant concepts that we own,
we also maintain certain co-branding rights for the use of the brand "Arthur
Treacher's Fish & Chips" within the United States.
During the fiscal year ended March 31, 2002, we began to implement our
co-branding strategy within our existing restaurant system. "Host Restaurants"
continue to operate pursuant to their current franchise agreements. Existing
franchisees executed an addendum to their agreement which defined the terms of
our co-branding relationship. As part of our co-branding strategy for the Miami
Subs franchise system, an entirely new marketing approach was developed to
include the name "Miami Subs Plus". In January 2001, we began to implement our
co-branding strategy by offering to the Miami Subs franchise community the
ability to add Nathan's, Kenny Rogers Roasters and Arthur Treachers' signature
products to their menus. During fiscal 2003, we intend to focus on co-branding
within the Nathan's system by adding the Kenny Rogers brand , and including the
Arthur Treacher's brand at additional Nathan's restaurants.
To date, the Arthur Treacher's brand has been introduced within 133
Nathan's, Kenny Rogers Roasters and Miami Subs restaurants, the Nathan's brand
has been added to the menu of 88 Miami Subs and Kenny Rogers restaurants, while
the Kenny Rogers Roasters brand has been introduced into 79 Miami Subs and
Nathan's restaurants. We have introduced the Miami Subs brand in three
company-owned Nathan's and one Kenny Rogers franchised restaurants.
We believe that our brand offerings compliment each other and will enable
us to market franchises of co- branded units and continue co-branding within
existing franchised units. The Nathan's and Miami Subs products are typically
stronger during lunch while the Kenny Rogers Roasters and Arthur Treachers'
products are generally stronger during dinner.
We expect to market co-branded units within the United States and
internationally. We believe that a multi- branded restaurant concept offering
strong lunch and dinner day parts will be very appealing to both consumers and
potential franchisees. Such restaurants should allow the operator to increase
sales and leverage the cost of real estate and other fixed costs which may
provide superior investment returns as compared to many restaurants that are
single branded.
Licensing Program
We license 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 approximately $1,724,000 in fiscal 2002 exceeded the contractual
minimum established under the agreement. We believe that the overall exposure of
the brand and opportunity for consumers to enjoy the "Nathan's Famous" hot dog
in their homes helps promote "Nathan's Famous" restaurant patronage. Supermarket
sales of our hot dogs are concentrated in the New York metropolitan area, New
England, Florida, California and certain other select markets. Royalties from
SMG provided the majority of our fiscal 2002 retail license revenues.
11
In November 1997, we executed a license agreement with J.J. Mathews & Co,
Inc. to market a variety of Nathan's packaged menu items for sale within
supermarkets and groceries. The agreement called for us to receive royalties
based upon sales, subject to minimum annual royalties, as specified in the
agreement. During fiscal 2001 the license agreement was terminated.
During fiscal 2002, certain products were also distributed under licensing
agreements with Gold Pure Food Product's Co., Inc. and Herman Pickle Packers,
Inc. Both companies licensed the "Nathan's Famous" name for the manufacture and
sale of various condiments including mustard, salsa, sauerkraut and pickles.
These products have been distributed on a limited basis. Fees and royalties
earned during fiscal 2002 have not been significant.
We also license the manufacture of the proprietary spices and marinade
which are used to produce Nathans' hot dogs and Kenny Rogers chicken. During
fiscal 2002 and 2001, we earned $249,000 and $284,000, respectively, under these
agreements.
Provisions and Supplies
Our proprietary hot dogs are produced by SMG, Inc. in accordance with
Nathans' recipes, quality standards and proprietary spice formulations. John
Morrell & Company, our licensee prior to SMG, has retained the right to produce
Nathans' proprietary spice formulations. Kenny Rogers Roasters proprietary
marinade and spice formulations are produced by McCormick and Co., Inc. All
other company provisions are purchased and obtained from multiple sources to
prevent disruption in supply and to obtain competitive prices. We approve all
products and product specifications. We negotiate directly with our suppliers on
behalf of the entire system for all primary food ingredients and beverage
products sold in the restaurants to ensure adequate supply of high quality items
at competitive prices.
We utilize a unified source for the distribution needs of all of our
restaurant concepts pursuant to a national food distribution contract with
Marriott Distribution Services. This agreement enables our restaurant operators
to order and receive deliveries for the majority of their food and paper
products directly through this distributor. We believe that this arrangement is
more efficient and cost effective than having multiple distributors.
Marketing, Promotion and Advertising
We maintain advertising funds for local, regional and national advertising
under the Nathan's Famous Systems, Inc. Franchise Agreement. Nathans'
franchisees are generally required to spend on local marketing activities or
contribute to the advertising funds up to 2.5% of restaurant sales for
advertising and promotion. Marriott and National Restaurant Management, Inc. are
among the current franchisees who are not subject to this requirement.
Franchisee contributions to the advertising fund for national marketing support
are generally based upon the type of restaurant and its location. The
difference, if any, between 2.5% and the contribution to the advertising fund
must be expended on local programs approved by us as to form, content and method
of dissemination.
Throughout fiscal 2002, Nathans' primary marketing emphasis continued to be
focused on local store marketing campaigns featuring a value oriented strategy
supplemented with promotional "Limited Time Offers." We anticipate that
near-term marketing efforts for Nathan's will continue to emphasize local store
marketing activities.
In addition, 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. We believe that
the advertising by SMG increases brand recognition and thereby indirectly
benefits Nathan's restaurants in the areas in which SMG conducts its campaigns.
From time to time, we also participate with SMG in joint promotional activities.
We maintain a separate Production Advertising Fund for the creation and
development of advertising, marketing, public relations, research and related
programs for the Miami Subs system, as well as for other activities that we may
deem appropriate. Franchisee and company-operated restaurants contribute .5% of
each restaurants' gross sales to this fund. In addition, we maintain certain
Regional Advertising Funds in which franchised and company-operated restaurants
in the region contribute 1.75% of each restaurants' gross sales. If a restaurant
12
is not located in an area where a regional advertising fund has been
established, the franchisee or company-operated restaurant is required to spend
at least 1.75% of the restaurants' gross sales for local advertising.
Our Miami Subs advertising programs principally use radio and print, and
carry the theme that Miami Subs offers a variety of menu selections at
competitive, fast food prices. Our Miami Subs radio advertisements are broadcast
principally in markets where there are sufficient restaurants to benefit from
such advertisements. In the summer 2001, we used a television, radio and
newsprint campaign to introduce the new co-branded Miami Subs Plus concept in
Southern Florida.
The physical facility of each Miami Subs restaurant represents a key
component of our Miami Subs marketing strategy. The restaurants have well-lit
exteriors featuring a distinctive roof design, an abundance of pastel neon
lights and a lively interior featuring a tropical motif which we believe creates
strong appeal during the day and night.
We maintain separate advertising funds on behalf of the Kenny Rogers
Roasters franchise system for regional and national advertising under the NF
Roasters Corp. Franchise Agreement. Franchisees who signed up to participate in
the new system are required to contribute to the advertising funds .50% of
restaurant sales for advertising and promotion for the year April 1, 1999
through March 31, 2000 and .75% of restaurant sales for advertising and
promotion thereafter. However, contributions to the marketing fund for the years
April 1, 2000 through March 31, 2003 have been waived. New franchisees will be
expected to spend on local marketing activities or contribute to the advertising
funds up to 2.5% of restaurant sales for advertising and promotion.
During the year, the Kenny Rogers Roasters' primary marketing focus has
been toward utilizing promotional "Limited Time Offers". We anticipate that
near-term marketing efforts for Kenny Rogers Roasters will continue to emphasize
local store marketing activities.
Government Regulation
We are subject to Federal Trade Commission ("FTC") regulation and several
state laws which regulate the offer and sale of franchises. We are also subject
to a number of state laws which regulate substantive aspects of the
franchisor-franchisee relationship.
The FTC's "Trade Regulation Rule Concerning Disclosure Requirements and
Prohibitions Concerning Franchising and Business Opportunity Ventures" requires
us to disclose certain information to prospective franchisees. Fifteen states,
including New York, also require similar disclosure. While the FTC rule does not
require registration or filing of the disclosure document, fourteen states
require franchisors to register the disclosure document (or obtain exemptions
from that requirement) before offering or selling a franchise. The laws of
seventeen other states require some form of registration under "business
opportunity" laws, which sometimes apply to franchisors such as the franchisor
of the Nathan's Famous, Miami Subs, and Kenny Rogers Roasters systems.
Laws that regulate one or another aspect of the franchisor-franchisee
relationship presently exist in twenty-one states and the District of Columbia.
These laws regulate the franchise relationship by, for example, requiring the
franchisor to deal with its franchisees in good faith, prohibiting interference
with the right of free association among franchisees, limiting the imposition of
standards of performance on a franchisee, and regulating discrimination among
franchisees in charges, royalties or fees. These laws have not precluded us from
seeking franchisees in any given area. Although these laws may also restrict a
franchisor in the termination of a franchise agreement by, for example,
requiring "good cause" to exist as a basis for the termination, advance notice
to the franchisee of the termination, an opportunity to cure a default and
repurchase of inventory or other compensation, these provisions have not had a
significant effect on our operations.
We are not aware of any pending franchise legislation in the U.S. that we
believe is likely to significantly affect our operations. We believe that our
operations comply substantially with the FTC rule and state franchise laws.
13
Each company-owned and franchised restaurant is subject to regulation by
federal agencies and to licensing and regulation by state and local health,
sanitation, safety, fire and other departments. Difficulties or failures in
obtaining the required licenses or approvals could delay or prevent the opening
of a new restaurant.
We are also subject to the Federal Fair Labor Standards Act, which governs
minimum wages, overtime, working conditions and other matters. We are also
subject to other federal and state environmental regulations, which have not had
a material effect on our operations. More stringent and varied requirements of
local governmental bodies with respect to zoning, land use and environmental
factors could delay or prevent development of new restaurants in particular
locations. In addition, the federal Americans with Disabilities Act ("ADA")
applies with respect to the design, construction and renovation of all
restaurants in the United States. Compliance with the ADA's requirements could
delay or prevent the development of, or renovations to, restaurants in certain
locations, as well as add to the cost of such development or renovation.
Each of the companies which manufactures, supplies or sells our products is
subject to regulation by federal agencies and to licensing and regulation by
state and local health, sanitation, safety and other departments. Difficulties
or failures by these companies in obtaining the required licenses or approvals
could adversely effect our revenues which are generated from these companies.
Alcoholic beverage control regulations require each restaurant that sells
such products to apply to a state authority and, in certain locations, county
and municipal authorities, for a license or permit to sell alcoholic beverages
on the premises. Typically, licenses must be renewed annually and may be revoked
or suspended for cause at any time. Alcoholic beverage control regulations
relate to numerous aspects of the daily operations of the restaurants, including
minimum age of customers and employees, hours of operation, advertising,
wholesale purchasing, inventory control and handling, storage and dispensing of
alcoholic beverages. At March 31, 2002, we offered for sale beer or wine in six
of our existing company-operated restaurants. Each of these restaurants have
current alcoholic beverage licenses permitting the sale of these beverages. We
have never had an alcoholic beverage license revoked.
We may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which wrongfully served alcoholic beverages to
such person. We carry liquor liability coverage as part of our existing
comprehensive general liability insurance and have never been named as a
defendant in a lawsuit involving "dram-shop" statutes.
We believe that we operate in substantial compliance with applicable laws
and regulations governing our operations.
Employees
At March 31, 2002, we had 557 employees, of whom 65 were corporate
management and administrative employees, 75 were restaurant managers and 417
were hourly full-time and part-time food-service employees. Food-service
employees at five locations are represented by Local 1115-NY, a division of
District 1115, AFL - CIO CLC, under various agreements which will expire in
April 2003. We consider our employee relations to be good and have not suffered
any strike or work stoppage for more than 30 years.
We provide a training program for managers and assistant managers of our
new company-owned and franchised restaurants. Hourly food workers are trained,
on site, by managers and crew trainers following company practices and
procedures outlined in our operating manuals.
Trademarks
We hold trademark and service mark registrations for NATHAN'S FAMOUS,
NATHAN'S and Design, NATHAN'S FAMOUS SINCE 1916 and SINCE 1916 NATHAN'S FAMOUS
within the United States, with some of these marks holding corresponding foreign
trademark and service mark registrations in more than 20 jurisdictions. We also
hold various related marks for restaurant services and some food items.
14
We have registered the marks "MIAMI SUBS AND DESIGN" and "MIAMI SUBS GRILL
AND DESIGN" with the United States Patent and Trademark Office. In addition, the
marks have been registered in approximately 50 foreign countries.
We have also filed the MIAMI SUBS PLUS trademark on February 15, 2001 and
an Amendment to Alleged Use on May 21, 2001. MIAMI SUBS PLUS is a pending
application with the U.S. Patent and Trademark Office. It generally takes
approximately 18 months for the approval of an application.
We hold trademark and service mark registrations for "KENNY ROGERS
ROASTERS", "KENNY ROGERS ROASTERS WOOD FIRE ROASTED CHICKEN & DESIGN", " DOWN
RIGHT KICKIN BBQ CHICKEN", "EVERYONE ELSE IS JUST PLAIN CHICKEN", "THERE'S
GOODNESS HERE", "YOU'RE GONNA LOVE THIS FOOD", "YOUR HEART IS IN THE RIGHT
PLACE", "KENNY ROGERS TAKE IT HOME & DESIGN" and "KENNY ROGERS ROASTERS EXPRESS
& DESIGN" within the United States. Some of these marks are covered by
corresponding foreign trademark and service mark registrations in more than 80
jurisdictions. The "Kenny Rogers Roasters" marks are subject to the terms of an
April 5, 1993 license from Mr. Kenny Rogers; that license agreement was assigned
to us on April 1, 1999, when we purchased certain assets relating to the "Kenny
Rogers Roasters" franchise system.
We believe that our trademarks and service marks provide significant value
to us and are an important factor in the marketing of our products and services.
We believe that we do not infringe on the trademarks or other intellectual
property rights of any third parties.
Competition
The fast food restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional or
national economic conditions, changes in consumer tastes, consumer concerns
about the nutritional quality of quick-service food and increases in the number
of, and particular locations of, competing restaurants. Factors such as
inflation, increases in food, labor and energy costs, the availability and cost
of suitable sites, fluctuating interest and insurance rates, state and local
regulations and licensing requirements and the availability of an adequate
number of hourly paid employees can also adversely affect the fast food
restaurant industry.
Our restaurants compete with numerous restaurants and drive-in units
operating on both a national and local basis, including major national chains
with greater financial and other resources than ours. Changes in pricing or
other marketing strategies by these competitors can have an adverse impact on
our sales, earnings and growth. We also compete with local restaurants and
diners on the basis of menu diversity, food quality, price, size, site location
and name recognition. There is also active competition for management personnel
as well as suitable commercial sites for restaurants.
We believe that our emphasis on our signature products and the reputation
of these products for taste and quality set us apart from our major competitors.
As fast food companies have experienced flattening growth rates and declining
average sales per restaurant, some of them have adopted "value pricing" and or
deep discount strategies. These strategies could have the effect of drawing
customers away from companies which do not engage in discount pricing and could
also negatively impact the operating margins of competitors which attempt to
match their competitors' price reductions. We have introduced our own form of
"value pricing," selling combinations of different menu items for a total price
lower than the usual sale price of the individual items and other forms of price
sensitive promotions. We have expanded our value pricing strategy by offering
multi-sized alternatives to our value priced combo meals. Extensive price
discounting in the fast food industry could have an adverse effect on us.
We also compete for the sale of franchises with many franchisors of
restaurants and other business concepts to qualified and financially capable
franchisees and with numerous companies for the sale and distribution of our
licensed hot dogs and other packaged foods, within supermarkets, primarily on
the basis of reputation, flavor, quality and price.
15
Item 2. Properties
- ------ ----------
Our principal executive offices consist of approximately 9,700 sq. ft. of
leased space in a modern, high-rise office building in Westbury, New York which
expires in November 2009. We also own Miami Subs' regional office consisting of
approximately 8,500 sq. ft. in Fort Lauderdale, Florida. We currently own three
restaurant properties consisting of 2,650 sq. ft. Nathan's restaurant, at 86th
Street in Brooklyn, New York located on a 25,000 sq. ft. lot, a 2,400 sq. ft.
Miami Subs restaurant in Largo, FL located on a 47,000 sq. ft. lot and a 2,600
sq. Ft. Miami Subs restaurant in Miami, FL located on a 25,000 sq. ft. lot. At
March 31, 2002, other company-owned restaurants which were operating or
developed were located in leased space with terms expiring as shown in the
following table:
Current Lease Approximate
Location Expiration Date Square Footage
-------- --------------- --------------
Nathan's Restaurants
--------------------
Coney Island Brooklyn, NY December 2007 10,000
Coney Island Boardwalk Brooklyn, NY October 2002 440
Kings Plaza Shopping Center Brooklyn, NY July 2010 4,200
Long Beach Road Oceanside, NY May 2011 7,300
Central Park Avenue Yonkers, NY April 2010 10,000
Jericho Turnpike Commack, NY March 2003 3,200
Hempstead Turnpike Levittown, NY September 2004 4,100
Broad Hollow Road Farmingdale, NY April 2003 2,200
Jericho Home Depot Jericho, NY September 2004 1,500
Copiague Home Depot Copiague, NY April 2005 1,200
Flushing Home Depot Flushing, NY June 2005 1,500
Elmont Home Depot Elmont, NY October 2005 1,500
Union Home Depot Union, NJ January 2008 960
Staten Island Home Depot Staten Island, NY July 2007 1,680
Brooklyn Home Depot Brooklyn, NY March 2008 950
Kenny Rogers Roasters
---------------------
Commack Roasters Commack, NY October 2013 3,100
Rockville Centre Roasters Rockville Centre, NY April 2018 4,000
Miami Subs Restaurants
----------------------
17th Street Ft. Lauderdale, FL August 2003 3,000
Lauderhill Lauderhill, FL May 2007 4,000
South Miami Miami, FL August 2006 3,500
Lejune and 11th Miami, FL September 2002 2,500
Leases for Nathan's restaurants typically provide for a base rent plus real
estate taxes, insurance and other expenses and, in some cases, provide for an
additional percentage rent based on the restaurants' revenues. Many of the
Nathan's leases also provide for renewal options ranging between five and 25
years upon expiration of the prime lease.
We assumed the leases for the two properties operated as Kenny Rogers
Roasters from the previous restaurant operator. These leases have remaining
terms of 11 and 12 years and also provide for a base rent plus real estate
taxes, insurance and other expenses. We are currently seeking to sell the
Rockville Centre restaurant and terminate the lease.
16
Properties leased by Miami Subs restaurants generally provide for an
initial lease term of up to 20 years and renewal terms of five to 20 years. The
leases generally provide for fixed rents plus adjustments based on changes in
the consumer price index or percentage rentals on gross sales. Restaurants and
other facilities are leased or sub-leased to franchisees or others on terms
which are generally similar to the terms in our lease with the third-party
landlord, except that in certain cases the rent has been increased. We remain
liable for all lease costs when properties are sub-leased to franchisees or
others. At March 31, 2002, we were the sublessor to 34 properties pursuant to
these arrangements, 11 of the restaurants leased/sub-leased to franchisees or
others are located outside of Florida.
Aggregate rental expense, net of sublease income, under all current leases
amounted to $2,734,000 in fiscal 2002.
Item 3. Legal Proceedings
- ------ -----------------
We and our subsidiaries are from time to time involved in ordinary and
routine litigation. We are also involved in the following litigation:
Nathan's Famous, Inc. and Nathan's Famous Operating Corp. were named as two
of three defendants in an action commenced in July 2001, in the Supreme Court of
New York, Westchester County. According to the amended complaint, the
plaintiffs, a minor and her mother, are seeking damages in the amount of $17
million against Nathan's Famous and Nathan's Famous Operating Corp. and one of
Nathan's Famous' former employees claiming that the Nathan's entities failed to
properly supervise minor employees, failed to monitor its supervisory personnel,
and were negligent in hiring, retaining and promoting the individual defendant,
who allegedly molested, harassed and raped the minor plaintiff, who was also an
employee. On May 29, 2002, as a result of a mediation, this action was settled,
subject to court approval. In the event the court approves the settlement, the
plaintiffs will be paid $650,000.
Elizabeth B. Jackson and Joseph Jackson commenced an action, in the Circuit
Court of the Fifteenth Judicial Circuit, Palm Beach County, Florida in September
2001 against Miami Subs and EKFD Corporation, a Miami Subs franchisee ("the
franchisee") claiming negligence in connection with a slip and fall which
allegedly occurred on the premises of the franchisee for unspecified damages.
Pursuant to the terms of the Miami Subs Franchise Agreement, the franchisee is
obligated to indemnify Miami Subs and hold them harmless against claims asserted
and procured an insurance policy which named Miami Subs as an additional
insured. Miami Subs has denied any liability to Plaintiffs and has made demand
upon the franchisee's insurer to indemnify and defend against the claims
asserted. The insurer has agreed to indemnify and defend Miami Subs and has
assumed the defense of this action for Miami Subs.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
None.
17
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
- ------ --------------------------------------------------------------------
Common Stock Prices
Our common stock began trading on the over-the-counter market on February
26, 1993 and is quoted on the Nasdaq National Market System ("Nasdaq") under the
symbol "NATH." The following table sets forth the high and low closing share
prices per share for the periods indicated:
High Low
- --------------------------------------------------------------------------------
Fiscal year ended March 31, 2002
First quarter $ 3.50 $ 2.87
Second quarter 3.55 3.10
Third quarter 3.60 3.07
Fourth quarter 3.62 3.21
Fiscal year ended March 25, 2001
First quarter $ 4.00 $ 2.75
Second quarter 3.94 2.88
Third quarter 3.81 2.56
Fourth quarter 3.88 2.88
At June 7, 2002 the closing price per share for our common stock, as reported by
Nasdaq was $3.8820.
Dividend Policy
We have not declared or paid a cash dividend on our common stock since our
initial public offering. It is our Board of Directors' policy to retain all
available funds to finance the development and growth of our business. The
payment of cash dividends in the future will be dependent upon our earnings and
financial requirements.
Shareholders
As of June 7, 2002, we had 830 shareholders of record, excluding
shareholders whose shares were held by brokerage firms, depositories and other
institutional firms in "street name" for their customers.
18
Equity Compensation Plan Information
The following chart summarizes the options and warrants outstanding and
available to be issued at March 31, 2002:
- ------------------------------ ---------------------------- ---------------------------- ----------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options and options and warrants future issuance under
warrants equity compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
- ------------------------------ ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by security holders 1,339,896 $4.8083 153,666
- ------------------------------ ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
not approved by security
holders 800,000 $3.5529 -0-
- ------------------------------ ---------------------------- ---------------------------- ----------------------------
Total 2,139,896 $4.3390 153,666
- ------------------------------ ---------------------------- ---------------------------- ----------------------------
Item 6. Selected Consolidated Financial Data
- ------- -------------------------------------
Fiscal years ended
March 31, March 25, March 26, March 28, March 29
2002 2001 2000 1999 1998
-------------------------------------------------------------------
(In thousands, except per share amounts)
Statement of Operations Data:
Revenues:
Sales $32,349 $34,799 $29,642 $23,964 $22,971
Franchise fees and royalties 7,944 8,814 5,906 3,230 3,062
License royalties, investment and other income 4,106 3,561 2,343 1,953 2,393
-------------------------------------------------------------------
Total revenues 44,399 47,174 37,891 29,147 28,426
-------------------------------------------------------------------
Costs and Expenses:
Cost of sales 21,643 22,530 18,977 14,932 14,017
Restaurant operating expenses 7,788 8,964 8,208 5,780 6,411
Depreciation and amortization 1,661 1,791 1,358 1,065 1,035
Amortization of intangible assets 888 839 716 384 384
General and administrative expenses 9,292 8,978 8,222 4,722 4,755
19
Interest expense 256 310 198 1 6
Impairment of long-lived assets 685 127 465 302 ---
Impairment of notes receivable 185 151 840 --- ---
Other (income) expense (210) 462 427 (349) ---
-------------------------------------------------------------------
Total costs and expenses 42,188 44,152 39,411 26,837 26,608
-------------------------------------------------------------------
Income (loss) before provision (benefit)
for income taxes 2,211 3,022 (1,520) 2,310 1,818
Provision (benefit) for income taxes 962 1,416 (250) (418) 290
-------------------------------------------------------------------
Net income (loss) 1,249 1,606 ($1,270) $2,728 $1,528
===================================================================
Per Share Data:
Net income (loss)
Basic $0.18 $0.23 ($0.22) $0.58 $0.32
Diluted $0.18 $0.23 ($0.22) $0.57 $0.32
Dividends ---- ---- ---- ---- ----
Weighted average shares used in computing
net income (loss) per share
Basic 7,048 7,059 5,881 4,722 4,722
Diluted (1) 7,083 7,098 5,881 4,753 4,749
Balance Sheet Data at End of Fiscal Year:
Working capital (deficit) $ 9,565 $5,210 ($ 322) $ 3,708 $ 6,105
Total assets 48,745 51,826 48,583 31,250 29,539
Long term debt, net of current maturities 1,220 1,789 3,131 0 9
Stockholders' equity $36,145 $35,031 $33,347 $26,348 $23,586
===================================================================
Selected Restaurant Operating Data:
Systemwide Restaurant Sales:
Company-owned $ 27,484 $30,946 $27,478 $21,981 $22,332
Franchised 185,389 208,889 152,627 64,178 58,802
-------------------------------------------------------------------
Total $212,873 $239,835 $180,105 $86,159 $81,134
===================================================================
Number of Units Open at End of Fiscal Year:
Company-owned 22 25 32 25 27
Franchised 364 386 415 163 156
-------------------------------------------------------------------
Total 386 411 447 188 183
===================================================================
Notes to Selected Financial Data
<FN>
(1) Common stock equivalents have been excluded from the computation for the
year ended March 26, 2000 as the impact of their inclusion would have been
anti-dilutive.
</FN>
20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
-------------
Introduction
As used in this Report, the terms "we", "us", "our" and "Nathan's" mean
Nathan's Famous, Inc. and its subsidiaries (unless the context indicates a
different meaning).
During the fiscal year ended March 26, 2000, we completed two acquisitions
that provided us with two highly recognized brands. On April 1, 1999, we became
the franchisor of the Kenny Rogers Roasters restaurant system by acquiring the
intellectual property rights, including trademarks, recipes and franchise
agreements of Roasters Corp. and Roasters Franchise Corp. On September 30, 1999,
we acquired the remaining 70% of the outstanding common stock of Miami Subs
Corporation we did not already own. Our revenues are generated primarily from
operating company-owned restaurants and franchising the Nathan's, Miami Subs and
Kenny Rogers restaurant concepts, licensing agreements for the sale of Nathan's
products within supermarkets and selling products under Nathan's Branded Product
Program. The Branded Product Program enables foodservice operators to offer
Nathans' hot dogs and other proprietary items for sale within their facilities.
In conjunction with this program, foodservice operators are granted a limited
use of the Nathans' trademark with respect to the sale of hot dogs and certain
other proprietary food items and paper goods.
In addition to plans for expansion through franchising and our Branded
Product Program, Nathan's is continuing to capitalize on the co-branding
opportunities within its existing restaurant system. To date, the Arthur
Treacher's brand has been introduced within 133 Nathan's, Kenny Rogers Roasters
and Miami Subs restaurants, the Nathan's brand has been added to the menu of 88
Miami Subs and Kenny Rogers restaurants, while the Kenny Rogers Roasters brand
has been introduced into 79 Miami Subs and Nathan's restaurants. We have begun
testing the Miami Subs brand in three company-owned Nathan's restaurants and one
Kenny Rogers franchised restaurant.
In connection with our acquisition of Miami Subs, we determined that up to
18 underperforming restaurants would be closed pursuant to our divestiture plan.
Through March 31, 2002, we have terminated leases on 15 of those properties. We
continue to market two of those properties for sale and terminated the lease for
the last unit upon the lease expiration in May 2002. We also terminated 10
additional leases for properties outside of the divestiture plan.
In the wake of the events of September 11, 2001, we have experienced lower
sales at company-owned restaurants and lower royalties from franchised
restaurants that operate in markets which are significant tourist destinations
such as Las Vegas and South Florida. During the initial months subsequent to
September 11, we realized declines at our franchised restaurants operating at
airports throughout the United States as a result of the overall decline in
airline traffic.
At March 31, 2002, our combined system consisted of 364 franchised or
licensed units, 22 company-owned units and approximately 1,500 Nathan's Branded
Product points of sale that feature Nathan's world famous all-beef hot dogs,
located in 39 states, the District of Columbia and 14 foreign countries. At
March 31, 2002, our company-owned restaurant system included 16 Nathan's units,
four Miami Subs units and two Kenny Rogers Roasters units, as compared to 17
Nathan's units, six Miami Subs units and two Kenny Rogers Roasters units at
March 25, 2001.
Critical Accounting Policies and Estimates
Our consolidated financial statements and the notes to our consolidated
financial statements contain information that is pertinent to management's
discussion and analysis. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities. We
believe the following critical accounting policies involve additional management
judgement due to the sensitivity of the methods, assumptions and estimates
necessary in determining the related asset and liability amounts.
Statement of Financial Accounting Standards, or SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," requires management judgements regarding the future operating and
disposition plans for underperforming assets, and estimates of expected
realizable values for assets to be sold. The application of SFAS 121 has
21
affected the amounts and timing of charges to operating results in recent years.
We evaluate possible impairment of each restaurant individually, and record an
impairment charge whenever we determine that impairment factors exist. We
consider a history of restaurant operating losses to be the primary indicator of
potential impairment of a restaurant's carrying value. We have identified
certain restaurants that have been impaired and recorded impairment charges of
approximately $685,000 (relating to two restaurants), $127,000 (relating to one
restaurant) and $465,000 (relating to three restaurants) in the consolidated
statements of operations for fiscal years 2002, 2001 and 2000, respectively.
Statement of Financial Accounting Standards, or SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," requires management judgements regarding
the future collectibility of notes receivable and the underlying fair market
value of collateral. We consider the following factors when evaluating a note
for impairment: 1) indications that the borrower is experiencing business
problems such as operating losses, marginal working capital, inadequate cash
flow or business interruptions; 2) whether the loan is secured by collateral
that is not readily marketable; or 3) whether the collateral is susceptible to
deterioration in realizable value. When determining possible impairment, we also
assess our future intention to extend certain leases beyond the minimum lease
term and the note holder's ability to meet its obligation over that extended
term. We have identified certain notes receivable that have been impaired and
recorded impairment charges of approximately $185,000 (relating to two loans),
$151,000 (relating to one loan) and $840,000 (relating to six loans) in the
consolidated statements of operations for fiscal years 2002, 2001 and 2000,
respectively.
In the normal course of business, we extend credit to franchisees for the
payment of ongoing royalties and to trade customers of our Branded Product
Program. Notes and accounts receivable, net, as shown on our consolidated
balance sheets were net of allowances for doubtful accounts. An allowance for
doubtful accounts is determined through analysis of the aging of accounts
receivable at the date of the financial statements, assessment of collectibility
based upon historical trends and an evaluation of the impact of current and
projected economic conditions. In the event that the collectibility of a
receivable is doubtful, the associated revenue is not recorded until the facts
and circumstances change in accordance with Staff Accounting Bulletin SAB No
101, "Revenue Recognition".
We are self-insured for portions of our general liability coverage. As part
of our risk management strategy, our insurance programs include deductibles for
each incident and in the aggregate for a policy year. As such, we accrue
estimates of our ultimate self insurance costs throughout the policy year. These
estimates have been developed based upon our historical trends, however, the
final cost of many of these claims may not be known for five years or longer.
Accordingly, our annual self insurance costs may be subject to adjustment from
previous estimates as facts and circumstances change.
Statement of Financial Accounting Standards, or SFAS No. 142, Goodwill and
Other Intangible Assets, requires that goodwill and intangible assets with
indefinite lives will no longer be amortized but will be reviewed annually (or
more frequently if impairment indicators arise) for impairment, requiring
significant management judgement. Separable intangible assets that are not
deemed to have indefinite lives will continue to be amortized over their useful
lives (but with no maximum life). The amortization provisions of SFAS 142 apply
to goodwill and intangible assets acquired after June 30, 2001. There are also
transition provisions that apply to business combinations completed before July
1, 2001, that were accounted for by the purchase method. With respect to its
goodwill and intangible assets acquired prior to July 1, 2001, Nathan's is
required to adopt SFAS 142 effective in its next fiscal year, commencing April
1, 2002. Nathan's will no longer amortize existing goodwill and certain
intangibles having indefinite lives, thus reducing amortization expense by
approximately $600,000 per year. We expect to complete our impairment analysis
during the first quarter fiscal 2003 and expect to recognize an impairment
charge of approximately $12 to $13 million upon adoption of SFAS No. 142.
Results of Operations
Fiscal Year Ended March 31, 2002 Compared to Fiscal Year Ended March 25, 2001
Revenues
- --------
Total sales decreased by 7.0% or $2,450,000 to $32,349,000 for the
fifty-three weeks ended March 31, 2002 ("fiscal 2002 period") as compared to
$34,799,000 for the fifty-two weeks ended March 25, 2001 ("fiscal 2001 period").
Sales from the Branded Product Program increased by 26.2% or $1,011,000 to
$4,864,000 for the fiscal 2002 period as compared to sales of $3,853,000 in the
22
fiscal 2001 period. Company-owned restaurant sales decreased 11.2% or $3,461,000
to $27,485,000 from $30,946,000 primarily due to operating nine fewer
company-owned stores as compared to the prior fiscal period and lower sales at
the two new restaurants that began operating during the fiscal 2001 period.
These reductions were partially offset by sales during the fiscal 2002 period
from a restaurant that was closed for renovation during the fiscal 2001 period
and increased sales at the Coney Island restaurant during the summer season.
Fiscal 2002 was a 53 week reporting period while fiscal 2001 was a 52 week
reporting period. Approximately $390,000 in restaurant sales were generated
during the additional week of operations. The unit reduction is the result of
our franchising two company-owned restaurants, transferring one company-owned
restaurant to a franchisee pursuant to a management agreement, closing four
unprofitable company-owned units (including three Miami Subs restaurants
pursuant to our divesture plan), selling one unit pursuant to an order of
condemnation and closing one unit due to its lease expiration. The financial
impact associated with these nine restaurants lowered restaurant sales by
$3,749,000 and improved restaurant operating profits by $30,000 versus the
fiscal 2001 period, excluding any one time gains or royalties to be received
from restaurants sold to franchisees. Comparable restaurant sales (consisting of
15 Nathan's and four Miami Subs restaurants that have been operating for 18
months or longer as of the beginning of the fiscal year) during the comparable
52 week period increased by 2.5% versus the fiscal 2001 period.
Franchise fees and royalties decreased by 9.9% or $870,000 to $7,944,000 in
the fiscal 2002 period compared to $8,814,000 in the fiscal 2001 period.
Franchise royalties decreased by $1,299,000 or 16.1% to $6,761,000 in the fiscal
2002 period as compared to $8,060,000 in the fiscal 2001 period. Domestic
franchise restaurant sales decreased by 11.2% to $185,389,000 in the fiscal 2002
period as compared to $208,889,000 in the fiscal 2001 period. The majority of
this decline is due to fewer franchised restaurants operating during the fiscal
2002 period as compared to the fiscal 2001 period. During the initial months
subsequent to September 11, 2001, we have experienced lower royalties from
franchised restaurants that operate in markets which are significant tourist
destinations, such as Las Vegas and South Florida, and from franchised
restaurants operating at airports throughout the United States. Further
contributing to the decline is an increase in the amount of royalties deemed to
be unrealizable. At March 31, 2002, 364 franchised or licensed restaurants were
operating as compared to 386 franchised or licensed restaurants at March 25,
2001. Franchise fee income derived from new openings and co-branding was
$875,000 in the fiscal 2002 period as compared to $754,000 in the fiscal 2001
period. This increase was primarily attributable to the fees earned from the
co-branding initiative within the existing restaurant system. During the fiscal
2002 period, 18 new franchised or licensed units opened and 47 units have been
co- branded. During the fiscal 2002 period we realized $308,000 in connection
with forfeited development fees.
License royalties were $2,038,000 in the fiscal 2002 period as compared to
$1,958,000 in the fiscal 2001 period. This increase is comprised of higher
royalties earned from sales by SMG, Inc., Nathans' licensee for the sale of
Nathan's frankfurters within supermarkets and club stores.
Investment and other income was $2,068,000 in the fiscal 2002 period versus
$1,603,000 in the fiscal 2001 period. During the fiscal 2002 period, Nathan's
recognized net gains of 1,226,000 in connection with the sale of two
company-owned restaurants and a third non-restaurant property. During the fiscal
2002 period, Nathans' investment and interest income was approximately $342,000
higher than in the fiscal 2001 period due primarily to differences in
performance of the financial markets between the two periods. In the fiscal 2001
period, Nathan's recognized income of approximately $479,000 in connection with
the introduction of a consolidated food distribution agreement and earned a
$500,000 transfer fee in connection with a change in ownership of Nathan's
licensee, SMG Inc.
Costs and Expenses
- ------------------
Cost of sales decreased by $887,000 to $21,643,000 in the fiscal 2002
period from $22,530,000 in the fiscal 2001 period. During the fiscal 2002
period, restaurant cost of sales were lower than the fiscal 2001 period by
approximately $1,986,000. Restaurant cost of sales were reduced by approximately
$2,423,000 as a result of operating fewer company-owned restaurants.
Additionally, lower cost of sales at the two Kenny Rogers Roasters restaurants
opened last year offset the higher costs at our comparable restaurants.
Notwithstanding the lower costs and expenses of the two Kenny Rogers Roasters
restaurants, these restaurants continued to underperform. Consequently, we have
decided to sell the Kenny Rogers Roasters restaurant in Rockville Centre, New
York. The cost of restaurant sales at our comparable units as a percentage of
restaurant sales was 62.5% in the fiscal 2002 period as compared to 61.3% in the
fiscal 2001 period due primarily to higher labor and related costs. Higher costs
of approximately $1,100,000 were incurred in connection with the growth of our
23
Branded Product Program and higher product costs incurred for much of the fiscal
2002 period. During the first twenty-six weeks of fiscal 2002, commodity prices
of our primary meat products were at their highest levels in recent years
causing the majority of the cost increase. In response, we raised retail prices
on a selective basis in an attempt to partially offset these increases.
Beginning in the third quarter fiscal 2002 these costs were lowered to their
historical levels. However, should costs escalate again for an extended period,
we may determine to further examine our pricing structure to attempt to reduce
the impact on our margins.
Restaurant operating expenses decreased by $1,176,000 to $7,788,000 in the
fiscal 2002 period from $8,964,000 in the fiscal 2001 period. Restaurant
operating costs were lower in the fiscal 2002 period by approximately
$1,357,000, as compared to the fiscal 2001 period as a result of operating fewer
restaurants. Restaurant operating expenses of the two restaurants opened last
year were $92,000 lower during the fiscal 2002 period due in part to the higher
costs attributable to last years' openings. These reductions in restaurant
operating expenses were partially offset by an increase of approximately
$268,000 at the comparable restaurants which were primarily driven by higher
marketing and insurance costs.
Depreciation and amortization decreased by $130,000 to $1,661,000 in the
fiscal 2002 period from $1,791,000 in the fiscal 2001 period. Lower depreciation
expense of operating fewer company-owned restaurants during the fiscal 2002
period versus the fiscal 2001 period was partially offset by additional
depreciation expense attributable to last year's capital spending.
Amortization of intangibles increased by $49,000 to $888,000 in the fiscal
2002 period from $839,000 in the fiscal 2001 period. Amortization of intangibles
increased as a result of last years' final purchase price allocation of the
Miami Subs acquisition.
General and administrative expenses increased by $314,000 to $9,292,000 in
the fiscal 2002 period as compared to $8,978,000 in the fiscal 2001 period. The
increase in general and administrative expenses was due primarily to higher
legal and professional expenses of approximately $544,000, including a
litigation expense of $450,000, and higher bad debts of approximately $76,000
which were partly offset by lower personnel and incentive compensation expense
of approximately $389,000.
Interest expense was $256,000 during the fiscal 2002 period as compared to
$310,000 during the fiscal 2001 period. The reduction in interest expense
relates primarily to the repayment of outstanding debt between the two periods.
Impairment charges on fixed assets of $685,000 during the fiscal 2002
period and $127,000 during the fiscal 2001 period reflect write-downs relating
to two under-performing stores in the fiscal 2002 period and one under-
performing store in the fiscal 2001 period.
Impairment charges on notes receivable of $185,000 during the fiscal 2002
period and $151,000 during the fiscal 2001 period relate to write-downs of two
and one notes receivable, respectively.
Other income of $210,000 in the fiscal 2002 period represents the reversal
of a previously recorded litigation provision for an award that was settled,
upon appeal, in our favor. Other expense of $462,000 during the fiscal 2001
period relates primarily to lease termination expenses of units that were not
part of the final divestiture plan of $463,000.
Income Tax Expense
- ------------------
In the fiscal 2002 period, the income tax provision was $962,000 or 43.5%
of income before income taxes as compared to $1,416,000 or 46.9% of income
before income taxes in the fiscal 2001 period.
Fiscal Year Ended March 25, 2001 Compared to Fiscal Year Ended March 26, 2000
Effective October 1, 1999, the results of Miami Subs Corporation have been
included in the consolidated results of Nathan's Famous, Inc. Our results of
operations for the 52 weeks ended March 26, 2000 included the operations of
24
Miami Subs for approximately 26 weeks as compared to including 52 weeks of such
operations for the period ended March 25, 2001. The results of Miami Subs'
operations for the twenty-six week period ended September 24, 2000 have been
separately stated to quantify that impact on the fifty-two weeks of operations
for the non-comparable period.
Revenues
- --------
Total sales increased by 17.4% or $5,157,000 to $34,799,000 for the
fifty-two weeks ended March 25, 2001 ("fiscal 2001 period") as compared to
$29,642,000 for the fifty-two weeks ended March 26, 2000 ("fiscal 2000 period").
Of the total increase, sales increased by $5,968,000 during the twenty-six week
period ended September 24, 2000 as a result of the Miami Subs acquisition made
last year, offset by a sales decline of $811,000 primarily due to the operation
of 18 fewer company-owned stores as compared to the prior fiscal period which
was partly offset by sales from newly opened restaurants and increased sales of
our Branded Products. This unit reduction is the result of our franchising eight
company-owned restaurants, transferring one company-owned restaurant to a
franchisee pursuant to a management agreement, closing seven unprofitable
company-owned units (including three Miami Subs restaurants pursuant to our
divesture plan) and closing two units due to lease expirations. The financial
impact associated with these 18 restaurants lowered restaurant sales by
$4,299,000 and improved restaurant operating profits by $135,000 versus the
fiscal 2000 period. Additionally, one unit was temporarily closed during part of
the fiscal 2001 period for renovation. This unit re- opened in October 2000.
Comparable restaurant sales of the company-owned Nathan's brand (neither Miami
Subs nor Roasters company-owned restaurants were deemed to be comparable units
based upon their period of operation under our ownership) also declined by 1.5%
versus the fiscal 2000 period, due principally to weakness experienced at the
Coney Island restaurant primarily attributable to the unfavorable weather
conditions experienced earlier in the fiscal year. During the fiscal 2001
period, sales from two new company-owned restaurants were $2,343,000. Sales from
the Branded Product Program increased by 78.1% to $3,853,000 for the fiscal 2001
period as compared to sales of $2,163,000 in the fiscal 2000 period.
Franchise fees and royalties increased by 49.2% or $2,908,000 to $8,814,000
in the fiscal 2001 period compared to $5,906,000 in the fiscal 2000 period.
Increases in franchise fees and royalties during the twenty-six week period
ended September 24, 2000 resulting from the Miami Subs acquisition made last
year was $2,397,000. Franchise sales of Nathan's three restaurant concepts
increased by 36.9% to $208,889,000 in the fiscal 2001 period as compared to
$152,627,000 in the fiscal 2000 period due primarily to the inclusion of Miami
Subs franchise system sales for the entire fiscal 2001 period compared to
twenty-six weeks for the fiscal 2000 period. Franchise royalties were $8,060,000
in the fiscal 2001 period as compared to $5,167,000 in the fiscal 2000 period.
Franchise fee income derived from new unit openings and our co-branding
initiative were $754,000 in the fiscal 2001 period as compared to $739,000 in
the fiscal 2000 period. This increase was primarily attributable to the number
of franchised units opened between the two periods, franchise fees earned from
the co-branded restaurant conversions and the difference between expired
franchise fees recognized into income. During the fiscal 2001 period, seventeen
new franchised or licensed units opened.
License royalties were $1,958,000 in the fiscal 2001 period as compared to
$1,906,000 in the fiscal 2000 period. Royalties earned from the sale of Nathan's
frankfurters within supermarkets and club stores were approximately $1,614,000
during the fiscal 2001 period as compared to $1,432,000 during the fiscal 2000
period. Royalties from the sale of proprietary spices and marinade were
approximately $228,000 in the fiscal 2001 period as compared to $184,000 in the
fiscal 2000 period. During the fiscal 2001 period, we terminated an agreement
with a licensee which lowered our revenue for the fiscal 2001 period by
approximately $125,000 as compared to the fiscal 2000 period.
Equity in losses of unconsolidated affiliate of $163,000 in the fiscal 2000
period represented Nathans' proportionate share of Miami Subs' net loss for the
period March 1, 1999 through September 30, 1999, which has been reported on a
one month lag since the acquisition of the 30% equity interest. Included in
Miami Subs' net loss for the period were merger costs of $325,000.
Investment and other income increased by $1,003,000 to $1,603,000 in the
fiscal 2001 period versus $600,000 in the fiscal 2000 period. Increases in other
income during the twenty-six week period ended September 24, 2000 as a result of
the Miami Subs acquisition made last year was $392,000. During the fiscal 2001
period Nathan's recognized income of approximately $694,000 in connection with
the introduction of a consolidated food distribution system for its three
restaurant concepts and the ongoing recognition of deferred marketing support.
The increase is also attributable to a transfer fee of $500,000 that was earned
25
in connection with a change in ownership of Nathan's licensee, SMG, Inc.
Investment income was approximately $756,000 less than the fiscal 2000 period
due primarily to the difference in performance of the financial markets between
the two periods which was partially offset by higher interest income of
approximately $195,000.
Costs and Expenses
- ------------------
Cost of sales increased by $3,553,000 to $22,530,000 in the fiscal 2001
period from $18,977,000 in the fiscal 2000 period. Of the total increase, cost
of sales increased by $3,837,000 during the twenty-six week period ended
September 24, 2000 as a result of the Miami Subs acquisition made last year.
Cost of sales attributable to two new company-owned restaurants along with
higher labor costs in the Nathan's brand partially offset lower costs of
operating fewer company-owned restaurants totaling $2,969,000 as compared to the
fiscal 2000 period. The cost of restaurant sales at Nathans' comparable units
was 60.2% as a percentage of restaurant sales in the fiscal 2001 period as
compared to 60.0% as a percentage of restaurant sales in the fiscal 2000 period
due primarily to higher labor costs (neither Miami Subs nor Roasters
company-owned restaurants were deemed to be comparable units based upon their
period of operation under our ownership). Higher cost of sales totaling
approximately $1,152,000 were incurred in connection with the growth of the
Branded Product Program.
Restaurant operating expenses increased by $756,000 to $8,964,000 in the
fiscal 2001 period from $8,208,000 in the fiscal 2000 period. Restaurant
operating expenses increased by $1,687,000 during the twenty-six week period
ended September 24, 2000 as a result of the Miami Subs acquisition made last
year. Lower costs of $1,622,000 were attributable to the closed company-owned
restaurants as compared to the end of fiscal 2000 which were partially offset by
higher costs of approximately $735,000 from operating two new Roasters
restaurants and higher utility costs at company-owned comparable restaurants.
Depreciation and amortization increased by $433,000 to $1,791,000 in the
fiscal 2001 period from $1,358,000 in the fiscal 2000 period. Depreciation
expense increased by $403,000 during the twenty-six week period ended September
24, 2000 as a result of the Miami Subs acquisition made last year. Depreciation
expense attributable two new company-owned restaurants and the remaining capital
spending for the fiscal 2001 period was partially offset by the lower
depreciation expense of operating fewer company-owned restaurants versus the
fiscal 2000 period.
Amortization of intangibles increased by $123,000 to $839,000 in the fiscal
2001 period from $716,000 in the fiscal 2000 period primarily as a result of the
Miami Subs acquisition made last year which is attributable to intangible assets
acquired and the amortization of the excess purchase price.
General and administrative expenses increased by $756,000 to $8,978,000 in
the fiscal 2001 period as compared to $8,222,000 in the fiscal 2000 period.
General and administrative expenses increased by approximately $1,562,000 during
the twenty-six week period ended September 24, 2000 as a result of the Miami
Subs acquisition made last year. General and administrative expenses, excluding
the impact of Miami Subs, decreased by $806,000 primarily due to lower bad debt
expense of approximately $739,000 and certain rebates of approximately $178,000,
which were partially offset by higher spending in connection with personnel
costs and incentive compensation of approximately $245,000.
Interest expense was $310,000 during the fiscal 2001 period as compared to
$198,000 during the fiscal 2000 period. Interest expense increased principally
due to the different periods of time that Miami Subs has been owned by Nathan's,
which expense has been reduced by the repayment of some of the Miami Subs'
assumed debt since the date of the acquisition.
Impairment charges on notes receivable of $151,000 during the fiscal 2001
period and $840,000 during the fiscal 2000 period relate to write-downs of one
and six notes receivable, respectively.
Impairment charges on fixed assets of $127,000 during the fiscal 2001
period and $465,000 during the fiscal 2000 period reflect write-downs relating
to one under-performing store in the fiscal 2001 period and three under-
performing stores in the fiscal 2000 period.
26
Other expense of $462,000 during the fiscal 2001 period relates primarily
to lease termination expenses of units that were not part of the final
divestiture plan of $463,000. During the fiscal 2000 period, other expense of
$427,000 included approximately $191,000 in lease expense resulting from the
default of subleases and $236,000 in connection with the satisfaction of certain
financial guarantees.
Income Tax Expense
- ------------------
In the fiscal 2001 period, the income tax provision was $1,416,000 or 46.9%
of income before income taxes as compared to an income tax benefit of ($250,000)
or(16.4%) of loss before income taxes in the fiscal 2000 period. These rates are
higher than the statutory federal tax rate due to the effect of state and local
taxes and certain nondeductible expenses. Nathan's has agreed to accept an offer
by the Internal Revenue Service to conclude the Miami Subs tax audit for the
years 1991 through 1996. As part of that agreement, Nathan's expects that
certain amortization of intangible assets previously deducted by Miami Subs will
be reversed and will not be deductible in the future.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2002 aggregated $1,834,000,
decreasing by $2,491,000 during the fiscal 2002 period. At March 31, 2002,
marketable securities and investment in limited partnership increased by
$4,171,000 from March 25, 2001 to $8,819,000 and net working capital increased
to $9,565,000 from $5,210,000 at March 25, 2001.
Cash used in operations of $3,081,000 in the fiscal 2002 period is
primarily attributable to net income of $1,249,000, non-cash charges of
$4,195,000, including depreciation and amortization of $2,549,000, impairment
charges of $870,000, deferred taxes of $509,000 and provision for doubtful
accounts of $267,000, in addition to a decrease in other assets of $104,000,
which were more than offset by decreases in accounts payable and accrued
expenses of $2,538,000, an increase in marketable securities and investment in
limited partnership of $4,171,000, an increase in prepaid expenses and other
current assets of $295,000, an increase in inventories of $69,000 and a decrease
in deferred franchise fees of $324,000.
Cash provided by investing activities of $2,078,000 is comprised primarily
of proceeds from the sale of two company-owned restaurants and one
non-restaurant property totaling $3,348,000. On May 1, 2001, pursuant to an
order of condemnation, we sold a company-owned restaurant to the State of
Florida for $1,475,000, net of estimated expenses of $25,000, and repaid the
outstanding mortgage of approximately $793,000 plus accrued interest. We
successfully appealed the value of the property that was condemned by the State
of Florida and were awarded an additional $850,000 in November 2001. On June 22,
2001, we also sold our restaurant in the Paramus Park Mall to a franchisee for
$400,000 in cash and concurrently entered into a sub-lease for the property. On
January 17, 2002, we also sold a non-restaurant location for $575,000.
Additionally, $2,082,000 was expended relating to capital improvements of the
company-owned restaurants and other fixed asset additions and was partially
offset by repayments on notes receivable of $812,000.
Cash used in financing activities of $1,488,000 represents repayments of
notes payable and obligations under capital leases in the amount of $1,353,000.
The majority of the repayments arose from the repayment of an outstanding
mortgage of approximately $793,000 plus accrued interest in connection with the
condemnation of a company-owned restaurant by the State of Florida, as described
above.
On September 14, 2001, Nathan's was authorized to purchase up to 1 million
shares of its common stock. Pursuant to our stock repurchase program, we
repurchased 41,691 shares of common stock in open market transactions at a total
cost of $135,000 as of March 31, 2002. On April 10, 2002, we repurchased 751,000
shares of common stock in a private transaction at a total cost of $2,741,500.
In connection with our acquisition of Miami Subs, we determined that up to
18 underperforming restaurants would be closed pursuant to our divestiture plan.
Through March 31, 2002, we have terminated leases on 15 of those properties. We
27
are continuing to market two of the remaining properties for sale and terminated
the lease for the last unit upon the lease expiration in May 2002. As of March
31, 2002, we have accrued approximately $1,461,000 and made payments of
approximately $1,273,000 for lease obligations and termination costs, as part of
the acquisition, for units with total future minimum lease obligations of
$7,680,000 with remaining lease terms of one year up to approximately 17 years.
We may incur future cash payments, consisting primarily of future lease
payments, including costs and expenses associated with terminating additional
leases, that were not part of our divestiture plan.
We expect that we will make additional investments in certain existing
restaurants in the future and that we will fund those investments from our
operating cash flow. We do not expect to incur significant capital expenditures
to develop new company-owned restaurants during our fiscal year ending March 30,
2003.
There are currently 34 properties that we either own or lease from third
parties which we lease or sublease to franchisees and non-franchisees. We remain
contingently liable for all costs associated with these properties.
Additionally, we guaranteed financing on behalf of certain franchisees with two
third party lenders. Our maximum obligation for loans funded by the lenders as
of March 31, 2002 was approximately $1.7 million.
Management believes that available cash, marketable investment securities,
and internally generated funds should provide sufficient capital to finance our
operations for at least the next twelve months. We maintain a $7,500,000
uncommitted bank line of credit and have not borrowed any funds to date under
this line of credit.
SEASONALITY
Our business is affected by seasonal fluctuations, the effects of weather
and economic conditions. Historically, sales and earnings have been highest
during our first two fiscal quarters with the fourth fiscal quarter representing
the slowest period. This seasonality is primarily attributable to weather
conditions in our marketplace for our company-owned Nathan's stores, which is
principally the New York metropolitan area. Miami Subs' restaurant sales have
historically been strongest during the period March through August, which
approximates our first and second quarters, as a result of a heavy concentration
of restaurants being located in Florida. As a result, we believe that future
revenues may become slightly more seasonal.
IMPACT OF INFLATION
During the past several years, our commodity costs have remained relatively
stable. As such, we believe that inflation has not materially impacted earnings
during that period of time. Last year we experienced increased costs of our meat
products and utilities resulting from increased commodity costs. We also
experienced increased costs for insurance attributable to the hardening of the
insurance markets. This year, various Federal and New York State legislators
have proposed changes to the existing minimum wage requirements. The New York
State Assembly has voted to increase the minimum wage to $6.75 an hour beginning
January 1, 2003 with automatic annual increases, commencing January 2004, based
upon increases in the state's average weekly pay. Before being enacted, this
proposal must be approved by the New York State Senate and signed by the
Governor. In addition, U.S. Senator Edward Kennedy has proposed increasing the
Federal minimum wage to $6.65 an hour which would be fully phased in by January
1, 2004. If this proposal is passed this year, the first increase of $0.60 an
hour would take effect 60 days later, followed by a $0.50 cent an hour increase
on January 1, 2003 and another $0.50 an hour increase on January 1, 2004. U.S.
Senate Majority Leader Tom Daschle has indicated that he wants to schedule a
vote on this matter in the summer of 2002. We believe that these increases in
the minimum wage could have a significant financial impact on our financial
results. Prolonged increases in labor, food and other operating expenses could
adversely affect our operations and those of the restaurant industry and we
might have to reconsider our pricing strategy as a means to offset reduced
operating margins.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("SFAS No.141")
and No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS No.141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS No.142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. There are also transition provisions that apply to business
combinations completed before July 1, 2001, that were accounted for by the
purchase method. With respect to its goodwill and intangible assets acquired
prior to July 1, 2001, Nathan's is required to adopt SFAS 142 effective in its
next fiscal year, commencing April 1, 2002. Nathan's will no longer amortize
existing goodwill and certain intangibles having indefinite lives, thus reducing
amortization expense by approximately $600,000 per year. We expect to complete
our impairment analysis during the first quarter fiscal 2003 and expect to
28
recognize an impairment charge of approximately $12 to $13 million upon adoption
of SFAS No. 142.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations"("SFAS No.143"). SFAS No.143 addresses financial and reporting
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from acquisition,
construction, development and/or the normal operation of a long-lived asset,
except for certain obligations of lessees. SFAS No.143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Nathan's is currently evaluating the effect of adoption on its financial
position and results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No.144"). SFAS No.144 supersedes FAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and Accounting Principles Board Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". SFAS No.144 retains the fundamental provisions of SFAS 121 for
recognition and measurement of impairment, but amends the accounting and
reporting standards for segments of a business to be disposed of. The provisions
of this statement are required to be adopted no later than fiscal years
beginning after December 31, 2001, with early adoption encouraged. Nathan's is
currently evaluating the impact of the adoption of SFAS 144, which Nathan's does
not expect to be material.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report are forward-looking statements.
Forward-looking statements represent our current judgment regarding future
events. Although we would not make forward-looking statements unless we believe
we have a reasonable basis for doing so, we cannot guarantee their accuracy and
actual results may differ materially from those we anticipated due to a number
of uncertainties, many of which we are not aware. These risks and uncertainties,
many of which are not within our control, include, but are not limited to: the
ongoing effects of the events of September 11, 2001; economic, weather,
legislative and business conditions; the collectibility of receivables; the
availability of suitable restaurant sites on reasonable rental terms; changes in
consumer tastes; the ability to continue to attract franchisees; the ability to
purchase our primary food and paper products at reasonable prices; no material
increases in the minimum wage; and our ability to attract competent restaurant
and managerial personnel. We generally identify forward- looking statements with
the words "believe", "intend," "plan," "expect," "anticipate," "estimate,"
"will," "should" and similar expressions.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
We have historically invested our cash and cash equivalents in short term,
fixed rate, highly rated and highly liquid instruments which are reinvested when
they mature throughout the year. Although our existing investments are not
considered at risk with respect to changes in interest rates or markets for
these instruments, our rate of return on short- term investments could be
affected at the time or reinvestment as a result of intervening events.
We have invested our marketable investment securities in intermediate term,
fixed rate, highly rated and highly liquid instruments and a highly liquid
investment limited partnership that invests principally in equities. These
investments are subject to fluctuations in interest rates and the performance of
the equity markets.
The interest rate on our borrowings are generally determined based upon
prime rate and may be subject to market fluctuation as the prime rate changes as
determined within each specific agreement. We do not anticipate entering into
interest rate swaps or other financial instruments to hedge our borrowings.
The cost of commodities are subject to market fluctuation. We have not
attempted to hedge against fluctuations in the prices of the commodities we
purchase using future, forward, option or other instruments. As a result, our
future commodities purchases are subject to changes in the prices of such
commodities.
29
Foreign franchisees generally conduct business with us and make payments
in, United States dollars, reducing the risks inherent with changes in the
values of foreign currencies. As a result, we have not purchased future
contracts, options or other instruments to hedge against changes in values of
foreign currencies.
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
The consolidated financial statements and supplementary data is submitted
as a separate section of this report beginning on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ -----------------------------------------------------------------------
Financial Disclosure
--------------------
On March 15, 2002, we dismissed Arthur Andersen LLP, our independent
auditors for the fiscal year ended March 25, 2001 and, effective March 25, 2002,
replaced them with Grant Thornton LLP, our auditors for the fiscal year ended
March 31, 2002. The decision to change accountants was ratified by our Audit
Committee on March 19, 2002.
The reports of Arthur Andersen LLP for the years ended March 25, 2001 and
March 26, 2000 do not contain an adverse opinion or a disclaimer of opinion, or
a qualification or modification as to uncertainty, audit scope or accounting
principles.
In connection with the audit for our fiscal years ended March 25, 2001 and
March 26, 2000 and for the period from March 26, 2001 through the date of change
in auditors, there were no disagreements with Arthur Andersen LLP on any matters
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to their
satisfaction, would have caused it to make a reference to the subject matter of
the disagreement in connection with its report.
We have not had any discussions nor received any written reports or oral
advice from Grant Thornton LLP during the two most recent fiscal years and any
subsequent interim period with respect to either the application of accounting
principles to a specified transaction, either completed or proposed, or as to
the type of audit opinion that might be rendered on our financial statements.
30
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------
The information required in response to this Item is incorporated herein by
reference to our proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year covered by this Report.
Item 11. Executive Compensation
- ------- ----------------------
The information required in response to this Item is incorporated herein by
reference to our proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year covered by this Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
The information required in response to this Item is incorporated herein by
reference to our proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year covered by this Report.
Item 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
The information required in response to this Item is incorporated herein by
reference to our proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year covered by this Report.
31
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.(Incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-1 No. 33-56976.)
3.2 Amendment to the Certificate of Incorporation, filed December 15,
1992.(Incorporated by reference to Exhibit 3.2 to Registration Statement on
Form S-1 No. 33-56976.)
3.3 By-Laws, as amended. (Incorporated by reference to Exhibit 3.3 to the
Annual Report on Form 10-K for the fiscal year ended March 28, 1999.)
4.1 Specimen Stock Certificate.(Incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-1 No. 33-56976.)
4.2 Form of Warrant issued to Ladenburg, Thalmann & Co., Inc. (Incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-1 No.
33-56976.)
4.3 Form of Warrant issued to Howard M. Lorber. ( Incorporated by reference to
Exhibit 4.3 to the Annual Report filed on form 10-K for the fiscal year
ended March 27, 1994.)
4.4 Amendment to Warrant issued to Howard M. Lorber (Incorporated by reference
to Exhibit 4.4 to the Annual Report filed on form 10-K for the fiscal year
ended March 31, 1996.)
4.5 Specimen Rights Certificate (Incorporated by reference to Exhibit 4 to the
Current Report on form 8-K dated July 14, 1995.)
10.1 Employment Agreement with Wayne Norbitz, dated December 28, 1992.
(Incorporated by reference to Exhibit 10.1 to Registration Statement on
Form S-1 No. 33-56976.)
10.2 Leases for premises at Coney Island, New York, as follows: (Incorporated by
reference Exhibit 10.3 to Registration Statement on Form S-1 No. 33-56976.)
a) Lease, dated November 22, 1967, between Nathan's Realty Associates and
the Company.
b) Lease, dated November 22, 1967, between Ida's Realty Associates and
the Company.
c) Lease, dated November 17, 1967, between Ida's Realty Associates and
the Company.
10.3 Leases for the premises at Yonkers, New York, as follows: (Incorporated by
reference to Exhibit 10.4 to Registration Statement on Form S-1 No.
33-56976.)
a) Lease Modification of Land and Building Lease between the Yonkers
Corp. and the Company, dated November 19, 1980;
b) Lease Modification of Land and Building Lease between 787 Central Park
Avenue, Inc., and the Company dated May 1, 1980.
10.4 Lease with NWCM Corp. for premises at Oceanside, New York, dated March 14,
1975. (Incorporated by reference to Exhibit 10.5 to Registration Statement
on Form S-1 No. 33-56976.)
10.5 1992 Stock Option Plan, as amended. (Incorporated by reference to Exhibit
10.8 to Registration Statement on Form S-8 No. 33-93396.)
10.6 Area Development Agreement with Marriott Corporation, dated February 19,
1993. (Incorporated by reference to Exhibit 10.9(a) to the Annual Report on
Form 10-K for the fiscal year ended March 28, 1993.)
32
10.7 Area Development Agreement with Premiere Foods, dated September 11, 1990.
(Incorporated by reference to Exhibit 10.10 to Registration Statement on
Form S-1 No. 33-56976.)
10.8 Form of Standard Franchise Agreement. (Incorporated by reference to Exhibit
10.12 to Registration Statement on Form S-1 No. 33-56976.)
10.9 401K Plan and Trust. (Incorporated by reference to Exhibit 10.5 to
Registration Statement on Form S-1 No. 33-56976.)
10.10 Amendment dated November 8, 1993, to the Employment Agreement, dated
December 28, 1992, with Wayne Norbitz. ( Incorporated by reference to
Exhibit 10.19 to the Annual Report filed on form 10-K for the fiscal year
ended March 27, 1994.)
10.11 License Agreement dated as of February 28, 1994, among Nathan's Famous
Systems, Inc. and SMG, Inc., including amendments and waivers thereto. (
Incorporated by reference to Exhibit 10.21 to the Annual Report filed on
form 10-K for the fiscal year ended March 27, 1994.)
10.12 Outside Director Stock Option Plan. (Incorporated by reference to Exhibit
10.22 to Registration Statement on Form S-8 No. 33-89442.)
10.13 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.)
10.14 Modification Agreement to the Employment Agreement with Wayne Norbitz,
dated December 28, 1992. (Incorporated by reference to Exhibit 10.1 to the
Quarterly Report filed on form 10-Q for the fiscal quarter ended December
29, 1996.)
10.15 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.)
10.16 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.)
10.17 Second Amended and Restated Rights Agreement dated as of April 6, 1998
between Nathan's Famous, Inc. and American Stock Transfer and Trust Company
(Incorporated by reference to Exhibit 2 to Form 8-A/A dated April 6, 1998.)
10.18 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.)
10.19 North Fork Bank Promissory Note.(Incorporated by reference to Exhibit
10.21 to the Annual Report filed on form 10-K for the fiscal year ended
March 28, 1999.)
10.20 Amended and Restated Employment Agreement with Donald L. Perlyn effective
September 30, 1999. (Incorporated by reference to Exhibit 10.20 to the
Annual Report filed on form 10-K for the fiscal year ended March 26, 2000.)
10.21 Third Amended and Restated Rights Agreement dated as of December 10, 1999
between Nathan's Famous, Inc. and American Stock Transfer and Trust Company
(Incorporated by reference to Exhibit 2 to Form 8- A/A dated December 10,
1999.)
10.22 Master Distributor Agreement with U.S. Foodservice, Inc..(Incorporated by
reference to Exhibit 10.23 to the Annual Report filed on form 10-K for the
fiscal year ended March 26, 2000.)
10.23 Employment Agreement dated as of January 1, 2000 with Howard M.
Lorber.(Incorporated by reference to Exhibit 10.24 to the Annual Report
filed on form 10-K for the fiscal year ended March 26, 2000.) 10.24
Marketing Agreement with beverage supplier. (Incorporated by reference to
Exhibit 10.25 to the Quarterly Report filed on form 10-Q for the fiscal
quarter ended June 25, 2000.)
21 List of Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP dated June 24, 2002.
(b) Reports on Form 8-K
On March 15, 2002 - Item 4 - the Company reported that it dismissed Arthur
Andersen LLP the Companies independent public accountants for the fiscal year
ended March 25, 2001.
On March 26, 2002 - Item 4 - the Company reported that it hired Grant
Thornton LLP as the Companies independent public accountants for the year ending
March 31, 2002.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized on the 24th day of June,
2002.
Nathan's Famous, Inc.
/s/ WAYNE NORBITZ
- ----------------------------
Wayne Norbitz, President and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated on the 24th day of June, 2002.
/s/ HOWARD M. LORBER
- -------------------------
Howard M. Lorber Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
/s/ WAYNE NORBITZ
- -------------------------
Wayne Norbitz President, Chief Operating Officer and Director
/s/ RONALD G. DEVOS
- -------------------------
Ronald G. DeVos Vice President - Finance and Chief Financial
Officer (Principal Financial and Accounting
Officer)
/s/ DONALD L. PERLYN
- -------------------------
Donald L. Perlyn Executive Vice President and Director
/s/ ROBERT J. EIDE
- -------------------------
Robert J. Eide Director
/s/ BARRY LEISTNER
- -------------------------
Barry Leistner Director
/s/ BRIAN GENSON
- -------------------------
Brian Genson Director
/s/ ATTILIO F. PETROCELLI
- -------------------------
Attilio F. Petrocelli Director
Nathan's Famous, Inc. and Subsidiaries
TABLE OF CONTENTS
Page
----
Report of Independent Certified Public Accountants: Grant Thornton LLP F-2
Report of Independent Public Accountants: Arthur Andersen LLP F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-41
Report of Independent Public Accountants on Schedule:
Arthur Andersen LLP F-42
Schedule II - Valuation and Qualifying Accounts F-43
Consent of Independent Certified Public Accountants F-44
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Nathan's Famous, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Nathan's Famous,
Inc. (a Delaware Corporation) and subsidiaries (the "Company") as of March 31,
2002, and the related consolidated statements of operations, stockholders'
equity and cash flows for the fifty-three weeks then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nathan's Famous, Inc. and
subsidiaries as of March 31, 2002, and the results of their operations and their
cash flows for the fifty-three weeks then ended in conformity with accounting
principles generally accepted in the United States of America.
We have also audited the financial statement schedule listed in the Index at
Item 14(a)(2) as of and for the fifty-three weeks ended March 31, 2002. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/GRANT THORNTON LLP
Melville, New York
May 24, 2002 (except for Note N-2, as to
which the date is May 29, 2002)
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Nathan's Famous, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Nathan's Famous,
Inc., (a Delaware Corporation) and subsidiaries as of March 25, 2001 and March
26, 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three fiscal years ended March 25, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nathan's Famous, Inc. and
subsidiaries as of March 25, 2001 and March 26, 2000, and the results of their
operations and their cash flows for each of the three fiscal years ended March
25, 2001 in conformity with accounting principles generally accepted in the
United States.
/s/Arthur Andersen LLP
Melville, New York
June 14, 2001
This Report of Independent Certified Public Accountants is a copy of a
previously issued Arthur Andersen LLP ("Andersen") report and has not been
reissued by Andersen. The inclusion of this previously issued Andersen report is
pursuant to the "Temporary Final Rule and Final Rule: Requirements for Arthur
Andersen LLP Auditing Clients," issued by the U.S. Securities and Exchange
Commission in March 2002. Note that this previously issued Andersen report
includes references to certain fiscal years, which are not required to be
presented in the accompanying consolidated financial statements as of and for
the fiscal years ended March 31, 2002.
F-3
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS March 31, 2002 March 25, 2001
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 1,834 $ 4,325
Marketable securities and investment in limited partnership 8,819 4,648
Notes and accounts receivable, net 2,808 4,178
Inventories 592 523
Assets available for sale 1,512 1,510
Prepaid expenses and other current assets 1,269 974
Deferred income taxes 1,747 1,714
-------- --------
Total current assets 18,581 17,872
Notes receivable, net 2,277 1,729
Property and equipment, net 8,925 11,279
Assets available for sale - 450
Intangible assets, net 17,123 18,011
Deferred income taxes 1,539 2,081
Other assets, net 300 404
-------- --------
$48,745 $51,826
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of notes payable and capital lease obligations $ 559 $ 1,343
Accounts payable 1,619 1,978
Accrued expenses and other current liabilities 6,506 8,685
Deferred franchise fees 332 656
-------- --------
Total current liabilities 9,016 12,662
Notes payable and capital lease obligations, less current maturities 1,220 1,789
Other liabilities 2,364 2,344
-------- --------
Total liabilities 12,600 16,795
-------- --------
COMMITMENTS AND CONTINGENCIES (Note N)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 30,000,000 shares authorized;
7,065,202 and 7,065,202 shares issued; and 7,023,511 and 7,065,202
shares outstanding at March 31, 2002 and March 25, 2001, respectively 71 71
Additional paid-in capital 40,746 40,746
Accumulated deficit (4,537) (5,786)
-------- --------
36,280 35,031
Treasury stock, 41,691 shares at cost (135) -
-------- --------
Total stockholders' equity 36,145 35,031
-------- --------
$ 48,745 $ 51,826
======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
F-4
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Fifty-three
weeks ended Fifty-two weeks ended
March 31, 2002 March 25, 2001 March 26, 2000
-------------- -------------- --------------
REVENUES
Sales $32,349 $34,799 $29,642
Franchise fees and royalties 7,944 8,814 5,906
License royalties 2,038 1,958 1,906
Equity in losses of unconsolidated affiliate - - (163)
Investment and other income 2,068 1,603 600
------- ------- -------
Total revenues 44,399 47,174 37,891
------- ------- -------
COSTS AND EXPENSES
Cost of sales 21,643 22,530 18,977
Restaurant operating expenses 7,788 8,964 8,208
Depreciation and amortization 1,661 1,791 1,358
Amortization of intangible assets 888 839 716
General and administrative expenses 9,292 8,978 8,222
Interest expense 256 310 198
Impairment charge on long-lived assets 685 127 465
Impairment charge on notes receivable 185 151 840
Other (income) expense, net (210) 462 427
------- ------- -------
Total costs and expenses 42,188 44,152 39,411
------- ------- -------
Income (loss) before provision (benefit) for income taxes 2,211 3,022 (1,520)
Provision (benefit) for income taxes 962 1,416 (250)
------- ------- -------
Net income (loss) $ 1,249 $ 1,606 $(1,270)
======= ======= =======
PER SHARE INFORMATION
Net income (loss) per share
Basic $.18 $.23 $(.22)
==== ==== =====
Diluted $.18 $.23 $(.22)
==== ==== =====
Weighted average shares used in computing net income (loss)
per share
Basic 7,048,000 7,059,000 5,881,000
========= ========= =========
Diluted 7,083,000 7,098,000 5,881,000
========= ========= =========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
F-5
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Fifty-three weeks ended March 31, 2002 and fifty-two weeks
ended March 25, 2001 and March 26, 2000
(in thousands, except share amounts)
Additional Total
Common Common paid-in Accumulated Treasury stock, at cost stockholders'
shares stock capital deficit Shares Amount equity
------------ ----------- ------------ -------------- -------- ------- -------------
Balance, March 29, 1999 4,722,216 $47 $32,423 $(6,122) - $ - $26,348
Common stock issued in connection
with merger 2,317,980 23 7,367 - - - 7,390
Warrants issued in connection
with merger - - 330 - - - 330
Options assumed in connection
with merger - - 549 - - - 549
Net loss - - - (1,270) - - (1,270)
--------- --- ------- ------- ----- ----- ------
Balance, March 26, 2000 7,040,196 70 40,669 (7,392) - - 33,347
Stock compensation 25,000 1 77 - - - 78
Warrants exercised 6 - - - - - -
Net income - - - 1,606 - - 1,606
--------- --- ------- ------- ----- ----- ------
Balance, March 25, 2001 7,065,202 71 40,746 (5,786) - - 35,031
Repurchase of treasury stock - - - - 41,691 (135) (135)
Net income - - - 1,249 - - 1,249
--------- --- ------- ------- ----- ------ ------
Balance, March 31, 2002 7,065,202 $71 $40,746 $(4,537) 41,691 $(135) $36,145
========= === ======= ======= ====== ====== =======
<FN>
The accompanying notes are an integral part of this statement.
</FN>
F-6
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fifty-three
weeks ended Fifty-two weeks ended
March 31, 2002 March 25, 2001 March 26, 2000
-------------- -------------- --------------
Cash flows from operating activities
Net income (loss) $ 1,249 $ 1,606 $(1,270)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities
Depreciation and amortization 1,661 1,791 1,358
Amortization of intangible assets 888 839 716
(Gain) loss on disposal of fixed assets (1,226) - 123
Stock compensation expense - 78 -
Impairment of long-lived assets 685 127 465
Impairment of notes receivable 185 151 840
Provision for doubtful accounts 267 191 895
Equity in losses of unconsolidated affiliate - - 163
Deferred income taxes 509 313 (958)
Changes in operating assets and liabilities, net of effects from
acquisition of Miami Subs
Marketable securities and investment in limited partnership (4,171) (1,651) 270
Notes and accounts receivable (26) (1,350) (504)
Inventories (69) 20 3
Prepaid expenses and other current assets (295) (339) (187)
Other assets 104 159 182
Accounts payable, accrued expenses and other current liabilities (2,538) 961 (158)
Deferred franchise fees (324) (76) 721
Other liabilities 20 1,329 (682)
------- ------- -------
Net cash (used in) provided by operating activities (3,081) 4,149 1,977
------- ------- -------
Cash flows from investing activities
Cash acquired in connection with merger, net of transaction costs - - 3,429
Lease terminations and other costs in connection with acquisition - (1,036) -
Purchases of property and equipment (2,082) (1,458) (1,975)
Purchase of intellectual property - - (1,590)
Payments received on notes receivable 812 506 320
Proceeds from sales of property and equipment 3,348 45 -
------- ------- -------
Net cash provided by (used in) investing activities 2,078 (1,943) 184
------- ------- -------
Cash flows from financing activities
Principal repayments of borrowing (1,353) (278) (1,929)
Repurchase of treasury stock (135) - -
------- ------- -------
Net cash used in financing activities (1,488) (278) (1,929)
------- ------- -------
Net change in cash and cash equivalents $(2,491) $ 1,928 $ 232
Cash and cash equivalents, beginning of year 4,325 2,397 2,165
------- ------- -------
Cash and cash equivalents, end of year $ 1,834 $ 4,325 $ 2,397
======= ======= =======
Cash paid during the year for
Interest $ 264 $ 317 $ 207
======= ======= =======
Income taxes $ 149 $ 1,508 $ 831
======= ======= =======
Noncash financing activities:
Loan to franchisee in connection with sale of restaurant $ 416 $ 130 $ -
======= ======= =======
Common stock, warrants and options issued in connection with
acquisition $ - $ - $ 8,269
======= ======= =======
<FN>
The accompanying notes are an integral part of these statements.
</FN>
F-7
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE A - DESCRIPTION AND ORGANIZATION OF BUSINESS
1. Description of Business
Nathan's Famous, Inc. and subsidiaries (collectively the "Company" or
"Nathan's") has historically operated, in one business segment, a chain of
retail fast food restaurants featuring Nathan's famous brand of all beef
frankfurters, fresh crinkle-cut french fried potatoes and a variety of
other menu offerings. Since fiscal 1998, the Company has supplemented
Nathan's franchise program with the Nathan's Branded Product Program, which
enables foodservice retailers to sell some of Nathan's proprietary products
outside of the realm of a traditional franchise relationship. During fiscal
2000, the Company acquired the intellectual property rights, including
trademarks, recipes and franchise agreements of Roasters Corp. and Roasters
Franchise Corp. ("Roasters"), the franchisor of Kenny Rogers Roasters. In
addition, Nathan's completed a merger with Miami Subs Corporation ("Miami
Subs") whereby it acquired the remaining 70% of Miami Subs common stock not
already owned. Miami Subs features a wide variety of lunch, dinner and
snack foods, including hot and cold sandwiches and various ethnic foods.
Roasters features home-style family foods based on a menu centered around
wood-fire rotisserie chicken.
At March 31, 2002, the Company's restaurant system, consisting of Nathan's
Famous, Kenny Rogers Roasters and Miami Subs restaurants, included 22
company-owned units concentrated in the New York metropolitan area,
(including New Jersey and Florida), 364 franchised or licensed units,
including 3 units operating pursuant to management agreements and
approximately 1,500 branded product points of sale under the Nathan's
Branded Product Program, located in 39 states, the District of Columbia,
and 14 foreign countries.
2. Organization of Business
In July 1987, all of the outstanding shares, options and warrants of
Nathan's Famous, Inc. (the "Predecessor Company"), a then publicly held New
York corporation, were acquired through a cash transaction, accounted for
by the purchase method of accounting (the "Acquisition"). In connection
with the Acquisition, a privately-held New York corporation (the "Acquiring
Corporation") was merged into the Predecessor Company. 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.
F-8
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE A (continued)
In November 1989, the surviving corporation was merged with Nathan's Newco,
Inc., a Delaware corporation which, upon the effectiveness of the merger,
changed its name to Nathan's Famous, Inc. ("NFI").
In August 1992, Nathan's Famous Holding Corp. ("NFH"), a new Delaware
corporation was formed. Pursuant to a merger agreement, NFI became a wholly
owned subsidiary of NFH. On December 15, 1992, NFI and NFH amended their
charter to change their respective names to Nathan's Famous Operating Corp.
("NFOC") and Nathan's Famous, Inc.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
2. Fiscal Year
The Company's fiscal year ends on the last Sunday in March, which results
in a 52- or 53-week reporting period. The results of operations for the
fiscal year ended March 31, 2002 is on the basis of a 53-week reporting
period. The results of operations for the fiscal years ended March 25, 2001
and March 26, 2000 are on the basis of a 52-week reporting period.
3. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-9
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE B (continued)
4. Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash
restricted for untendered shares associated with the Acquisition amounted
to $83 at March 31, 2002 and March 25, 2001, respectively, and is included
in cash and cash equivalents. At March 31, 2002 and March 25, 2001, cash
and cash equivalents included unexpended Miami Subs' advertising funds of
$0 and $2,104, respectively.
5. Impairment of Notes Receivable
In accordance with Statement of Financial Accounting Standards No. 114
("SFAS No. 114") "Accounting by Creditors for Impairment of a Loan,"
Nathan's applies the provisions thereof to value notes receivable. Pursuant
to SFAS No. 114, a loan is impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement. When
evaluating a note for impairment, the factors considered include: 1)
indications that the borrower is experiencing business problems such as
operating losses, marginal working capital, inadequate cash flow or
business interruptions, 2) loans secured by collateral that is not readily
marketable, or 3) that are susceptible to deterioration in realizable
value. When determining impairment, management's assessment includes its
intention to extend certain leases beyond the minimum lease term and the
note holder's ability to meet its obligation over that extended term. In
certain cases where Nathan's has determined that a loan has been impaired,
it does not expect to extend or renew the underlying leases. Based on the
Company's analysis, it has determined that there are notes that have
incurred such an impairment (Note E). Following is a summary of the
impaired notes receivable:
March 31, March 25,
2002 2001
--------- ---------
Total recorded investment in impaired notes receivable $1,000 $1,105
Allowance for impaired notes receivable (640) (613)
------ ------
Recorded investment in impaired notes receivable, net $ 360 $ 492
====== ======
F-10
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE B (continued)
Based on the present value of the estimated cash flows of identified
impaired note receivables, the Company has recognized approximately $47 and
$63 of interest income on these notes for the fiscal years ended March 31,
2002 and March 25, 2001, respectively.
6. Inventories
Inventories, which are stated at the lower of cost or market value, consist
primarily of restaurant food items, supplies, marketing items and equipment
in connection with the Branded Product Program. Cost is determined using
the first-in, first-out method.
7. Marketable Securities and Investment in Limited Partnership
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company determines the appropriate
classification of securities at the time of purchase and reassesses the
appropriateness of the classification at each reporting date. At March 31,
2002, all marketable securities and investment in limited partnership held
by the Company have been classified as trading and, as a result, are stated
at fair value. Realized gains and losses on the sale of securities, as
determined on a specific identification basis, as well as unrealized
holding gains and losses on trading securities are included in the
accompanying consolidated statements of operations. Investment income in
the trading limited partnership is based upon Nathan's proportionate share
of the change in the underlying net assets of the partnership. The
partnership invests primarily in publicly traded common stocks with a
concentration in securities traded on exchanges in the United States of
America.
8. Sales of Restaurants
The Company observes the provisions of SFAS No. 66, "Accounting for Sales
of Real Estate," which establishes accounting standards for recognizing
profit or loss on sales of real estate. SFAS No. 66 provides for profit
recognition by the full accrual method, provided (a) the profit is
determinable, that is, the collectibility of the sales price is reasonably
assured or the amount that will not be collectible can be estimated, and
(b) the earnings process is virtually complete, that is, the seller is not
obliged to perform significant activities after the sale to earn the
profit. Unless both conditions exist, recognition of all or part of the
profit shall be postponed and other methods of profit recognition shall be
followed. In accordance with SFAS No. 66, the Company recognizes profit on
F-11
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE B (continued)
sales of restaurants under both the installment method and the deposit
method, depending on the specific terms of each sale. The Company continues
to record depreciation expense on the property subject to the sales
contracts that are accounted for under the deposit method and records any
principal payments received as a deposit until such time that the
transaction meets the sales criteria of SFAS No. 66.
As of March 31, 2002 and March 25, 2001, the Company had deposits of $214
and $332 included in accrued expenses in the accompanying consolidated
balance sheets.
During the fiscal year ended March 31, 2002, the Company sold two
company-owned restaurants and a nonrestaurant property for total proceeds
of $3,348. The Company recognized a gain of $1,226 in connection with these
sales.
9. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated primarily on the
straight-line basis over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the estimated
useful life or the lease term of the related asset. The estimated useful
lives are as follows:
Building and improvements 5 - 25 years
Machinery, equipment, furniture and fixtures 5 - 15 years
Leasehold improvements 5 - 20 years
10. Intangible Assets
Intangible assets consist of (i) the goodwill resulting from the
Acquisition; (ii) trademarks and trade names, franchise rights and recipes
in connection with Roasters and (iii) goodwill and certain identifiable
intangibles resulting from the Miami Subs acquisition (Note C). These
intangible assets are being amortized over periods from 10 to 40 years.
F-12
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE B (continued)
11. Long-lived Assets
Long-lived assets and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate the carrying value may
not be recoverable. Impairment is measured by comparing the carrying value
of the long-lived assets to the estimated undiscounted future cash flows
expected to result from use of the assets and their ultimate disposition.
In instances where impairment is determined to exist, the Company writes
down the asset to its fair value based on the present value of estimated
future cash flows.
Impairment losses are recorded on long-lived assets on a
restaurant-by-restaurant basis whenever impairment factors are determined
to be present. The Company considers a history of restaurant operating
losses to be its primary indicator of potential impairment for individual
restaurant locations. The Company has identified two, one and three units
that have been impaired, and recorded impairment charges of $685, $127 and
$465 in the statements of operations for the fiscal years ended March 31,
2002, March 25, 2001 and March 26, 2000, respectively.
The Company periodically reviews intangible assets for impairment, whenever
events or changes in circumstances indicate that the carrying amounts of
those assets may not be recoverable. No impairment charges have been
recorded with respect to such intangible assets for the fiscal years ended
March 31, 2002, March 25, 2001 and March 26, 2000. (See Note B-22.)
12. Investment in Unconsolidated Affiliate
The Company accounted for its initial investment in Miami Subs under the
equity method of accounting until the completion of the merger.
Accordingly, the carrying value of the investment, prior to the
acquisition, was equal to the Company's initial cash investment in Miami
Subs, plus its share of the loss of Miami Subs through September 30, 1999.
13. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, marketable securities
and investment in limited partnership, accounts receivable and accounts
payable approximate fair value due to the short-term maturities of the
instruments. The carrying amounts of note payable and capital lease
obligations and notes receivable approximate their fair values.
F-13
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE B (continued)
14. 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. Pursuant
to SFAS No. 123, the Company has elected to continue the accounting set
forth in Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and to provide the necessary pro forma
disclosures.
15. Start-up Costs
Preopening and similar costs are expensed as incurred.
16. Revenue Recognition - Company-owned Restaurants
Sales by Company-owned restaurants are recognized on a cash basis, upon the
performance of services.
17. Revenue Recognition - Franchising Operations
In connection with its franchising operations, the Company receives initial
franchise fees, development fees, royalties, contributions to marketing
funds, and in certain cases, revenue from sub-leasing restaurant properties
to franchisees. Initial franchise fees are recognized as income when
substantially all services and conditions relating to the sale of the
franchise have been performed or satisfied, which generally occurs when the
franchised restaurant commences operations. Development fees are
nonrefundable and the related agreements require the franchisee to open a
specified number of restaurants in the development area within a specified
time period or the agreements may be canceled by the Company. Revenue from
development agreements is deferred and recognized as restaurants in the
development area commence operations on a pro rata basis to the minimum
number of restaurants required to be open, or at the time the development
agreement is effectively canceled. Royalties, which are based upon a
percentage of the franchisee's gross sales, are recognized as income when
the fees are earned and become receivable and deemed collectible. Revenue
from sub-leasing properties to franchisees is recognized as income as the
F-14
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE B (continued)
revenue is earned and becomes receivable and deemed collectible. Sub-lease
rental income is presented net of associated lease costs in the
accompanying consolidated financial statements. Franchise and area
development fees received prior to completion of the revenue recognition
process are recorded as deferred revenue.
At March 31, 2002 and March 25, 2001, $332 and $656, respectively, of
deferred franchise fees are included in the accompanying consolidated
balance sheets.
18. Concentrations of Credit Risk
The Company's accounts receivable consist principally of receivables from
franchisees for royalties and advertising contributions and from sales
under the Branded Product Program. At March 31, 2002, one franchisee
represented 13% of franchise royalties receivable and at March 25, 2001,
one franchisee represented 10% of franchise royalties receivable (Note E).
19. Advertising
The Company administers various advertising funds on behalf of its
subsidiaries and franchisees to coordinate the marketing efforts of the
Company. Under these arrangements, the Company collects and disburses fees
paid by franchisees and Company-owned stores for national and regional
advertising, promotional and public relations programs. Contributions 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 $940, $1,602
and $888, for the fiscal years ended March 31, 2002, March 25, 2001 and
March 26, 2000, respectively.
20. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the year in which those temporary differences
are expected to be recovered or settled.
21. Reclassifications
Certain prior year balances have been reclassified to conform with current
year presentation.
F-15
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE B (continued)
22. Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives (but
with no maximum life). The amortization provisions of SFAS No. 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect
to goodwill and intangible assets acquired prior to July 1, 2001, Nathan's
is required to adopt SFAS No. 142 effective in its next fiscal year,
commencing April 1, 2002.
The Company will no longer amortize existing goodwill and certain
intangible assets having indefinite lives, thereby reducing amortization
expense by approximately $600 per year. The Company expects to complete its
impairment analysis during the first quarter of fiscal 2003 and expects to
recognize an impairment charge of approximately $12.0 to $13.0 million upon
the adoption of SFAS No. 142.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No.
143 addresses financial and reporting obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. Nathan's
is currently evaluating the effect of adoption on its financial position
and results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS No. 144"). SFAS No. 144 supersedes SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This statement retains the fundamental provisions of SFAS
No.
F-16
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE B (continued)
121 for recognition and measurement of impairment, but amends the
accounting and reporting standards for segments of a business to be
disposed of. The provisions of SFAS No. 144 are required to be adopted no
later than fiscal years beginning after December 31, 2001, with early
adoption encouraged. The Company is currently evaluating the impact of the
adoption of SFAS No. 144, which the Company expects will not be material.
NOTE C - ACQUISITIONS
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 in
cash plus related expenses of approximately $340. NF Roasters Corp., a
wholly-owned subsidiary, was created for the purpose of acquiring these
assets. The acquired assets are recorded as intangibles in the accompanying
consolidated balance sheet and are being amortized on a straight-line basis
over periods of 10 to 20 years. No company-owned restaurants were acquired
in this transaction. Results of operations are included in these
consolidated financial statements as of April 1, 1999.
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 for
$4,200, excluding transaction costs. On January 15, 1999, the Company and
Miami Subs entered into a definitive merger agreement pursuant to which
Nathan's would acquire the remaining outstanding shares of Miami Subs in
exchange for shares of and warrants to purchase Nathan's common stock.
On September 30, 1999, Nathan's completed the acquisition of Miami Subs and
acquired the remaining outstanding common stock of Miami Subs in exchange
for 2,317,980 shares of Nathan's common stock, 579,040 warrants to purchase
Nathan's common stock, and the assumption of existing employee options and
warrants to purchase 542,284 shares of Miami Subs' common stock in
connection with the merger. The total purchase price was approximately
$13,000, including acquisition costs. The acquisition was accounted for as
a purchase under APB Opinion No. 16, "Accounting for Business Combinations"
("APB No. 16"). In accordance with APB No. 16, the Company allocated the
purchase price of Miami Subs based on the fair value of the assets acquired
and liabilities assumed. Goodwill of $1,668 resulted from the acquisition
of Miami Subs and is being amortized over a period of 20 years.
F-17
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE C (continued)
In connection with the acquisition of Miami Subs, Nathan's planned to
permanently close 18 under-performing company-owned restaurants. Nathan's
expected to abandon or sell the related assets at amounts below the
historical carrying amounts recorded by Miami Subs. In accordance with APB
No. 16, the write-down of these assets was reflected as part of the
purchase price allocation. To date the Company has closed or sold 15 units.
The Company continues to market two of these properties for sale and will
cease operations of the remaining unit upon lease expiration. The estimated
disposal value is included in assets held for sale in the accompanying
consolidated balance sheet for the remaining units to be sold. As of March
31, 2002, as part of the acquisition, the Company has recorded
approximately $1,461 ($877 after tax) for lease reserves and termination
costs.
The allocation of purchase price is as follows:
Current assets $ 5,481
Property and equipment 7,060
Assets held for sale 653
Intangibles 5,441
Goodwill 1,668
Notes receivable - long-term 3,860
Other assets 2,212
Liabilities assumed (13,364)
--------
$ 13,011
========
The consolidated results of operations for Miami Subs are included in the
consolidated financial statements as of the date of acquisition. Summarized
below are the unaudited pro forma results of operations for the fifty-two
weeks ended March 26, 2000 of Nathan's as though the Miami Subs acquisition
had occurred as of the beginning of the periods presented. Adjustments have
been made for amortization of goodwill based upon salary expense based on
employment agreements, reversal of Miami Subs merger costs, elimination of
Nathan's 30% equity earnings in Miami Subs, issuance of common stock, and
reduction of interest income on marketable securities used to purchase the
initial 30% of Miami Subs' common stock.
F-18
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE C (continued)
Fifty-two weeks ended
March 26, 2000
---------------------
Total revenues $ 50,455
========
Net loss $ (1,466)
========
Net loss per share
Basic $ (.21)
========
Diluted $ (.21)
========
Weighted average shares used in computing
net loss per share
Basic 7,040,000
=========
Diluted 7,040,000
=========
These pro forma results of operations have been prepared for comparative
purposes only and are not necessarily indicative of actual results of
operations that would have occurred had the acquisition been made at the
beginning of the period presented or of the results which may occur in the
future.
NOTE D - NET INCOME (LOSS) PER SHARE
Basic earnings per common share is calculated by dividing net income (loss)
by the weighted-average number of common shares outstanding and excludes
any dilutive effects of stock options or warrants. Diluted earnings per
common share gives effect to all potentially dilutive common shares that
were outstanding during the period. Dilutive common shares used in the
computation of diluted earnings per common share result from the assumed
exercise of stock options and warrants, using the treasury stock method.
F-19
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE D (continued)
The following chart provides a reconciliation of information used in
calculating the per share amounts for the fiscal years ended March 31,
2002, March 25, 2001 and March 26, 2000, respectively:
Net income (loss) Shares Net income (loss) per share
-------------------------- ------------------------------ ---------------------------
2002 2001 2000 (1) 2002 2001 2000 (1) 2002 2001 2000 (1)
---- ---- ---- ---- ---- ---- ---- ---- ----
Basic EPS
Basic calculation $1,249 $1,606 $(1,270) 7,048,000 7,059,000 5,881,000 $.18 $.23 $(.22)
Effect of dilutive
employee stock
options and warrants - - - 35,000 39,000 - - - -
------- ------ ------- --------- --------- --------- ---- ---- -----
Diluted EPS
Diluted calculation $1,249 $1,606 $(1,270) 7,083,000 7,098,000 5,881,000 $.18 $.23 $(.22)
======= ====== ======= ========= ========= ========= ==== ==== =====
<FN>
(1) Common stock equivalents have been excluded from the computation for net
income (loss) per share for the fiscal year end March 26, 2000 as their
inclusion would be anti-dilutive.
</FN>
NOTE E - NOTES AND ACCOUNTS RECEIVABLE, NET
Notes and accounts receivable, net, consists of the following:
March 31, March 25,
2002 2001
--------- ---------
Notes receivable, net of impairment charges $2,662 $2,874
Franchise and license royalties 1,376 2,499
Branded product sales 785 730
Other 906 684
------ ------
5,729 6,787
Less: allowance for doubtful accounts 644 880
Notes receivable due after one year 2,277 1,729
------ ------
Notes and accounts receivable, net $2,808 $4,178
====== ======
F-20
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE E (continued)
Notes receivable at March 31, 2002 and March 25, 2001 principally resulted
from sales of restaurant businesses to Miami Subs' franchisees and are
generally guaranteed by the purchaser and collateralized by the restaurant
businesses and assets sold. The notes are generally due in monthly
installments of principal and interest with a balloon payment at the end of
the term, with interest rates ranging principally between 5% and 10%.
NOTE F - MARKETABLE SECURITIES AND INVESTMENT IN
LIMITED PARTNERSHIP
Marketable securities at March 31, 2002 and March 25, 2001 consisted of
trading securities with aggregate fair values of $8,819 and $4,648,
respectively. Fair values of corporate and municipal bonds are based upon
quoted market prices. Investment income in trading limited partnerships is
based on the Company's proportionate share of the change in the underlying
net assets of the partnership.
The gross unrealized holding gains and fair values of trading securities by
major security type for the fiscal years ended March 31, 2002, March 25,
2001 and March 26, 2000 were as follows:
2002 2001 2000
----------------------------- ----------------------------- ------------------------
Gross Gross Gross
unrealized Fair unrealized Fair unrealized Fair
holding value of holding value of holding value of
gain (loss) investments gain (loss) investments gain (loss) investments
----------- ----------- ----------- ----------- ----------- -----------
Municipal bonds $(20) $7,801 $ 16 $3,628 $ 3 $1,540
Investment in trading
limited partnerships * (2) 1,018 (438) 1,020 420 1,457
---- ------ ----- ------ ---- ------
$(22) $8,819 $(422) $4,648 $423 $2,997
==== ====== ===== ====== ==== ======
<FN>
* Subject to the terms of the partnership, the Company has the right to
liquidate its investment in the trading limited partnerships without
penalty.
</FN>
F-21
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE G - PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
March 31, March 25,
2002 2001
---------- -----------
Construction-in-progress $ 842 $ 141
Land 1,665 1,983
Building and improvements 2,245 3,083
Machinery, equipment, furniture and fixtures 6,602 7,202
Leasehold improvements 7,201 7,949
-------- -------
18,555 20,358
Less: accumulated depreciation and amortization 9,630 9,079
-------- -------
$ 8,925 $ 11,279
Depreciation expense on property and equipment was $1,661, $1,791 and
$1,358 for the fiscal years ended March 31, 2002, March 25, 2001 and March
26, 2000, respectively.
In May 2001, the Company completed the sale of a restaurant property for
approximately $1.5 million pursuant to an order of condemnation by the
State of Florida. The fair value of the assets (which approximated the
carrying value) is included in the current portion of assets available for
sale at March 25, 2001 in the accompanying consolidated balance sheet.
Concurrent with the sale, the Company satisfied the related note payable of
approximately $793 plus accrued interest, and accordingly, had classified
the remaining balance at March 25, 2001 as current in the accompanying
consolidated balance sheet. The Company appealed the value of this property
and on November 19, 2001, an Order was entered by the Circuit Court of the
11th Judicial Circuit of Florida in and for Miami-Dade County pursuant to
which the State of Florida Department of Transportation was ordered to pay
to the Company, an aggregate value of $2,350, plus legal fees in the amount
of $253 in connection with the condemnation by the State of Florida of the
restaurant. The additional proceeds received by the Company of
approximately $850 is recorded in "investment and other income" in the
accompanying consolidated statement of operations.
F-22
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE H - INTANGIBLE ASSETS, NET
Intangible assets consist of the following:
March 31, March 25,
2002 2001
--------- --------
Goodwill $17,043 $17,043
Trademark, trade name, franchise rights and recipes 7,031 7,031
------- -------
24,074 24,074
Less accumulated amortization 6,951 6,063
------- -------
Intangible assets, net $17,123 $18,011
======= =======
Amortization expense related to these intangible assets was $888, $839 and
$716 for the fiscal years ended March 31, 2002, March 25, 2001 and March
26, 2000, respectively.
NOTE I - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
March 31, March 25,
2002 2001
------- -------
Payroll and other benefits $1,455 $1,365
Professional and legal costs 407 898
Self-insured retention 1,346 825
Rent, occupancy and sublease termination costs 831 1,236
Taxes payable 595 512
Unexpended advertising funds - 2,104
Other 1,872 1,745
------ ------
$6,506 $8,685
====== ======
F-23
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE J - NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
A summary of notes payable and capitalized lease obligations is as follows:
March 31, March 25,
2002 2001
--------- ---------
Note payable to bank at 8.5% through January 2003 and adjusting to prime
plus 0.25% in 2003, 2006, and 2009 and maturity in 2010 $1,333 $ 1,505
Note payable to bank at 8.0% through January 2002 - 806
Note payable to bank at 1.5% over prime and
maturing in 2001 - 354
Note payable to bank at 8.75% and maturing in 2003 381 397
Capital lease obligations and other 65 70
------ -------
1,779 3,132
Less current portion (559) (1,343)
------ -------
Long-term portion $1,220 $ 1,789
====== =======
The above notes are secured by the related property and equipment.
In August 2001, Miami Subs entered into an agreement with a franchisee and
a bank, which called for the assumption of a note payable by the franchisee
and the repayment of an existing note receivable from the franchisee. The
Company guarantees the franchisee's note payable with the bank. The
Company's maximum obligation for loans funded by the lender, as of March
31, 2002, was approximately $333.
At March 31, 2002, the aggregate annual maturities of notes payable and
capitalized lease obligations are as follows:
2003 $ 559
2004 173
2005 173
2006 174
2007 174
Thereafter 526
------
$1,779
======
F-24
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE J (continued)
The Company maintains a $7,500 line of credit with its primary banking
institution. Borrowings under the line of credit are intended to be used to
meet the normal short-term working capital needs of the Company. The line
of credit is not a commitment and, therefore, credit availability is
subject to ongoing approval. The line of credit expires on October 1, 2002,
and bears interest at the prime rate (4.75% at March 31, 2002). There were
no borrowings outstanding under this line of credit as of March 31, 2002.
NOTE K - OTHER (INCOME) EXPENSE, NET
Included in other (income) expense, in the accompanying consolidated
statements of operations is (i) the reversal of a previous litigation
accrual of ($210) for the fiscal year ended March 31, 2002 (ii) $463 in
lease termination costs for the fiscal year ended March 25, 2001, and (iii)
$236 in connection with the satisfaction of certain financial guarantees
and $191 in lease expense resulting from the default of subleases for the
fiscal year ended March 26, 2000.
NOTE L - INCOME TAXES
Income tax provision (benefit) consists of the following for the fiscal
years ended March 31, 2002, March 25, 2001 and March 26, 2000:
2002 2001 2000
---- ---- ----
Federal
Current $911 $ 868 $ 461
Deferred (93) 246 (719)
---- ------ -----
818 1,114 (258)
---- ------ -----
State and local
Current 160 235 247
Deferred (16) 67 (239)
---- ------ -----
144 302 8
---- ------ -----
$962 $1,416 $(250)
==== ====== =====
F-25
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE L (continued)
Total income tax provision (benefit) for the fiscal years ended March 31,
2002, March 25, 2001 and March 26, 2000 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:
2002 2001 2000
---- ------ -----
Computed "expected" tax (benefit) expense $752 $1,027 $(516)
Nondeductible amortization 169 222 212
State and local income taxes, net of Federal income tax benefit 106 199 8
Tax-exempt investment earnings (68) (30) (30)
Nondeductible meals and entertainment and other 3 (2) 76
---- ------ -----
$962 $1,416 $(250)
==== ====== =====
F-26
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE L (continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
March 31, March 25,
2002 2001
------- --------
Deferred tax assets
Accrued expenses $1,164 $ 602
Allowance for doubtful accounts 291 352
Impairment of notes receivable 256 245
Deferred revenue 978 1,243
Depreciation expense and impairment of long-lived assets 1,101 2,134
Expenses not deductible until paid 130 372
Amortization of intangibles 105 70
Net operating loss and other carryforwards 676 2,326
Other 59 106
------ -------
Total gross deferred tax assets 4,760 7,450
------ -------
Deferred tax liabilities
Amortization of intangibles 422 -
Unrealized gain on marketable securities and income on
investment in limited partnership 207 209
Other 320 720
------ -------
Total gross deferred tax liabilities 949 929
------ -------
Net deferred tax asset 3,811 6,521
Less valuation allowance (525) (2,726)
------ -------
$3,286 $ 3,795
====== =======
The determination that the net deferred tax asset of $3,286 and $3,795 at
March 31, 2002 and March 25, 2001, respectively, is realizable is based on
anticipated future taxable income.
F-27
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE L (continued)
At March 31, 2002, as result of settling the Miami Subs IRS audits for the
years 1991 through 1996, the Company had a net operating loss carryforward
of approximately $1,289 remaining (after certain IRS agreed-upon
adjustments and other reductions due to expiring losses) which is available
to offset future taxable income through 2005 and general business credit
carryforwards remaining of approximately $87 which may be used to offset
liabilities through 2008. These losses and credits are subject to
limitations imposed under the Internal Revenue Code pursuant to Section 382
regarding changes in ownership. As a result of these limitations, the
Company has recorded a valuation allowance for the Miami Subs loss
carryforwards and credits related to the acquisition. (See Note N-3).
NOTE M - STOCKHOLDER'S EQUITY, STOCK PLANS AND OTHER EMPLOYEE
BENEFIT PLANS
1. Stock Option Plans
On December 15, 1992, the Company adopted the 1992 Stock Option Plan (the
"1992 Plan") which provides for the issuance of incentive stock options
("ISO's") to officers and key employees and nonqualified stock options to
directors, officers and key employees. Up to 525,000 shares of common stock
have been reserved for issuance under the 1992 Plan. The terms of the
options are generally ten years, except for ISO's granted to any employee,
whom prior to the granting of the option, owns stock representing more than
10% of the voting rights, for which the option term will be five years. The
exercise price for nonqualified stock options outstanding under the 1992
Plan can be no less than the fair market value, as defined, of the
Company's common stock at the date of grant. For ISO's, the exercise price
can generally be no less than the fair market value of the Company's common
stock at the date of grant, with the exception of any employee who prior to
the granting of the option, owns stock representing more than 10% of the
voting rights, for which the exercise price can be no less than 110% of
fair market value of the Company's common stock at the date of grant.
On May 24, 1994, the Company adopted the Outside Director Stock Option Plan
(the "Directors' Plan") which provides for the issuance of nonqualified
stock options to nonemployee directors, as defined, of the Company. Under
the Directors' Plan, 200,000 shares of common stock have been authorized
and issued pursuant to the Directors' Plan. Options awarded to each
nonemployee
F-28
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE M (continued)
director are fully vested, subject to forfeiture under certain conditions
and shall be exercisable upon vesting.
In April 1998, the Company adopted the Nathan's Famous Inc. 1998 Stock
Option Plan (the "1998 Plan"), which provides for the issuance of
nonqualified stock options to directors, officers and key employees. Up to
500,000 shares of common stock have been reserved for issuance under the
1998 Plan.
In June 2001, the Company adopted the Nathan's Famous Inc. 2001 Stock
Option Plan (the "2001 Plan"), which provides for the issuance of
nonqualified stock options to directors, officers and key employees. Up to
350,000 shares of common stock have been reserved for issuance under the
1998 Plan.
The 1992 Plan, the 1998 Plan, the 2001 Plan and the Directors' Plan expire
on December 2, 2002, April 5, 2008, June 13, 2011 and December 31, 2004,
respectively, unless terminated earlier by the Board of Directors under
conditions specified in the Plan.
The Company issued 478,584 stock options to employees of Miami Subs
Corporation to replace 957,168 of previously issued Miami Subs options
pursuant to the merger agreement and issued 47,006 new options. All options
were fully vested upon consummation of the merger. Exercise prices range
from a low of $3.1875 to a high of $22.2517 per share and expire at various
times through September 30, 2009.
2. Warrants
In November 1996, the Company granted to a nonemployee consultant a warrant
to purchase 50,000 shares of its common stock at an exercise price of $3.94
per share, which represented the market price of the Company's common stock
on the date of grant. Upon the date of grant, one-third of the shares
vested immediately, one-third vested on the first anniversary thereof, and
the remaining one-third vested on the second anniversary thereof. The
warrant expired, unexercised, on November 24, 2001.
F-29
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE M (continued)
In connection with the merger with Miami Subs, the Company issued 579,040
warrants to purchase common stock to the former shareholders of Miami Subs.
These warrants expire on September 30, 2004 and have an exercise price of
$6.00 per share. The Company also issued 63,700 warrants to purchase common
stock to the former warrant holders of Miami Subs. Exercise prices range
between $16.55 per share and $49.63 per share expiring through March 2006.
A summary of the status of the Company's stock option plans and warrants,
excluding warrants issued to former shareholders of Miami Subs, at March
31, 2002, March 25, 2001 and March 26, 2000 and changes during the fiscal
years then ended is presented in the tables and narrative below:
2002 2001 2000
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------- -------- --------- ------- ------ --------
Options outstanding - beginning of year 1,514,209 $3.86 1,614,924 $ 4.79 707,667 $5.08
Granted 307,000 3.20 - - 512,006 3.34
Replacement options - Miami Subs - - - - 478,584 6.04
Canceled (63) 6.20 (100,715) 10.60 (83,333) 5.50
--------- --------- -------
Options outstanding - end of year 1,821,146 4.29 1,514,209 3.86 1,614,924 4.79
========= ========= =========
Options exercisable - end of year 1,367,479 1,220,876 1,086,424
Weighted-average fair value of options ========= ========= =========
granted $1.30 $ - $2.10
===== ========= =====
Warrants outstanding - beginning of year 368,750 $4.53 401,200 $ 5.66 350,000 $3.88
Replacement warrants - Miami Subs - - - - 63,700 24.09
Expired (50,000) 3.94 (32,450) 18.61 (12,500) 49.63
--------- --------- -------
Warrants outstanding - end of year 318,750 4.62 368,750 4.53 401,200 5.66
--------- --------- -------
Warrants exercisable - end of year 318,750 368,750 401,200
Weighted-average fair value of warrants ========= ========= =======
granted $ - $ - $ -
====== ======= ======
At March 31, 2002, 153,666 common shares were reserved for future stock
option grants.
F-30
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE M (continued)
The following table summarizes information about stock options and warrants
(excluding warrants issued to the Miami Subs shareholders as part of the
merger consideration) at March 31, 2002:
Options and
Options and warrants outstanding warrants exercisable
----------------------------------------------------- ----------------------------
Weighted- Weighted- Weighted-
Number average average Number average
Range of outstanding remaining exercise exercisable exercise
exercise prices at 3/31/02 contractual life price at 3/31/02 price
--------------- ----------- --------------------------------- ----------- --------
$ 3.19 to $ 4.00 1,459,558 6.7 $ 3.35 1,005,891 $ 3.39
4.01 to 7.00 580,588 2.5 5.41 580,588 5.41
7.01 to 22.25 99,750 1.8 12.61 99,750 12.61
--------- --- ------- --------- -------
$ 3.19 to $ 22.25 2,139,896 5.3 $ 4.34 1,686,229 $ 4.63
========= === ======= ========= =======
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:
2002 2000
---- ----
Expected life (years) 6.6 6.3
Interest rate 4.06% 6.22%
Volatility 32.3% 59.3%
Dividend yield 0% 0%
There were no options or warrants granted during fiscal 2001.
F-31
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE M (continued)
The Company has adopted the pro forma disclosure provisions of 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 (loss) and income (loss) per share would approximate
the pro forma amounts below:
2002 2001 2000
------ ------ ------
Net income (loss): As reported $1,249 $1,606 $(1,270)
Pro forma 839 1,248 (1,907)
Net income (loss) per share: Basic
-----
As reported $.18 $.23 $(.22)
Pro forma .12 .18 (.32)
Diluted
-------
As reported $.18 $.23 $(.22)
Pro forma .12 .18 (.32)
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.
3. Common Stock Purchase Rights
On June 20, 1995, the Board of Directors declared a dividend distribution
of one common stock purchase right (the "Rights") for each outstanding
share of Common Stock of the Company. The distribution was paid on June 20,
1995 to the shareholders of record on June 20, 1995. The terms of the
Rights were amended on April 6, 1998 and December 8, 1999. Each Right, as
amended, entitles the registered holder thereof to purchase from the
Company one share of the Common Stock at a price of $4.00 per share (the
"Purchase Price"), subject to adjustment for anti-dilution. New Common
Stock certificates issued after June 20, 1995 upon transfer or new issuance
of the Common Stock will contain a notation incorporating the Rights
Agreement by reference.
F-32
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE M (continued)
The Rights are not exercisable until the Distribution Date. The
Distribution Date is the earlier to occur of (i) ten days following a
public announcement that a person or group of affiliated or associated
persons (an "Acquiring Person") acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the outstanding shares of the Common
Stock, as amended, or (ii) ten business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any
person becomes an Acquiring Person) following the commencement, or
announcement of an intention to make a tender offer or exchange offer by a
person (other than the Company, any wholly-owned subsidiary of the Company
or certain employee benefit plans) which, if consummated, would result in
such person becoming an Acquiring Person. The Rights will expire on June
19, 2005, unless earlier redeemed by the Company.
At any time prior to the time at which a person or group or affiliated or
associated persons has acquired beneficial ownership of 15% or more of the
outstanding shares of the Common Stock of the Company, the Board of
Directors of the Company may redeem the Rights in whole, but not in part,
at a price of $.001 per Right. In addition, the Rights Agreement, as
amended, permits the Board of Directors, following the acquisition by a
person or group of beneficial ownership of 15% or more of the Common Stock
(but before an acquisition of 50% or more of Common Stock), to exchange the
Rights (other than Rights owned by such 15% person or group), in whole or
in part, for Common Stock, at an exchange ratio of one share of Common
Stock per Right.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the
right to vote or to receive dividends. The Company has reserved 9,358,764
shares of Common Stock for issuance upon exercise of the Rights.
4. Stock Repurchase Plan
On September 14, 2001, the Board of Directors of the Company authorized the
repurchase of up to 1,000,000 shares of the Company's common stock.
Purchases of stock will be made from time to time, depending on market
conditions, in open market or in privately negotiated transactions, at
prices deemed appropriate by management. There is no set time limit on the
purchases. The Company expects to fund these stock repurchases from its
operating cash flow. Through March 31, 2002, 41,691 shares have been
repurchased at a cost of approximately $135.
On April 10, 2002, the Company repurchased 751,000 shares of the Company's
common stock for aggregate consideration of $2,741 in a private transaction
with a stockholder.
F-33
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE M (continued)
5. Employment Agreements
The Company and its Chairman and Chief Executive Officer entered into a new
employment agreement effective as of January 1, 2000. The new employment
agreement expires December 31, 2004. Pursuant to the agreement, the officer
receives a base salary of $1.00 and an annual bonus equal to 5% of the
Company's consolidated pretax earnings for each fiscal year, with a minimum
bonus of $250. The new employment agreement further provides for a
three-year consulting period after termination of employment during which
the officer will receive consulting payments in an annual amount equal to
two thirds of the average of the annual bonuses awarded to him during the
three fiscal years preceding the fiscal year of termination of his
employment. The employment agreement also provides for the continuation of
certain benefits following death or disability. In connection with the
agreement, the Company issued to the officer 25,000 shares of common stock
with a fair market value at the date of grant of approximately $78.
In the event that the officer's employment is terminated without cause, he
is entitled to receive his salary and incentive payment, if any, for the
remainder of the contract term. The employment agreement further provides
that in the event there is a change in control of the Company, as defined
therein, the officer has the option, exercisable within one year after such
an event, to terminate his employment agreement. Upon such termination, he
has the right to receive a lump sum payment equal to the greater of (i) his
salary and annual bonuses for the remainder of the employment term
(including a pro rated bonus for any partial fiscal year), which bonus
shall be equal to the average of the annual bonuses awarded to him during
the three fiscal years preceding the fiscal year of termination; or (ii)
2.99 times his salary and annual bonus for the fiscal year immediately
preceding the fiscal year termination, as well as a lump sum cash payment
equal to the difference between the exercise price of any exercisable
options having an exercise price of less than the current market price of
the Company's common stock and such then current market price. In addition,
the Company will provide the officer with a tax gross-up payment to cover
any excise tax due.
The Company and its President and Chief Operating Officer entered into an
employment agreement on December 28, 1992 for a period commencing on
January 1, 1993 and ending on December 31, 1996. The employment agreement
has been extended annually through December 31, 2001, based on the original
terms, and no nonrenewal notice has been given as of May 24, 2002. The
agreement provides for annual compensation of $275 plus certain other
F-34
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE M (continued)
benefits. In November 1993, the Company amended this agreement to include a
provision under which the officer has the right to terminate the agreement
and receive payment equal to approximately three times annual compensation
upon a change in control, as defined.
The Company and the President of Miami Subs, pursuant to the merger
agreement, entered into an employment agreement on September 30, 1999 for a
period commencing on September 30, 1999 and ending on September 30, 2002.
The agreement provides for annual compensation of $200 plus certain other
benefits and automatically renews annually unless 180 days prior written
notice is given to the employee. The agreement includes a provision under
which the officer has the right to terminate the agreement and receive
payment equal to approximately three times annual compensation upon a
change in control, as defined.
The Company and one executive of Miami Subs entered into a change of
control agreement effective November 1, 2001 for annual compensation of
$130 per year. The agreement additionally includes a provision under which
the executive has the right to terminate the agreement and receive payment
equal to approximately three times annual compensation upon a change in
control, as defined.
The Company and one executive of Miami Subs entered into an employee
agreement effective as of July 1, 2001 for a period commencing on the date
of the agreement and ending on July 1, 2003 and for compensation of $125
per year. The Company and another executive of Miami Subs entered into an
employment agreement effective August 1, 2001 for a period commencing on
the date of the agreement and ending on September 30, 2003 and for
compensation at $90 per year. Each agreement also provides for certain
other benefits. Each agreement additionally includes a provision under
which the executive has the right to terminate the agreement and receive
payment equal to approximately three times the employee's annual
compensation upon a change in control, as defined.
F-35
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE M (continued)
Each employment agreement terminates upon death or voluntary termination by
the respective employee or may be terminated by the Company upon 30-days'
prior written notice by the Company in the event of disability or "cause",
as defined in each agreement.
6. 401(k) Plan
The Company has a defined contribution retirement plan under Section 401(k)
of the Internal Revenue Code covering all nonunion employees over age 21
who have been employed by the Company for at least one year. Employees may
contribute to the plan, on a tax-deferred basis, up to 15% of their total
annual salary. Company contributions are discretionary. Beginning with the
plan year ending February 28, 1994, the Company elected to match
contributions at a rate of $.25 per dollar contributed by the employee on
up to a maximum of 3% of the employee's total annual salary. Employer
contributions for the fiscal years ended March 31, 2002, March 25, 2001 and
March 26, 2000 were $36, $25 and $21, respectively.
7. Other Benefits
The Company provides, on a contributory basis, medical benefits to active
employees. The Company does not provide medical benefits to retirees.
NOTE N - COMMITMENTS AND CONTINGENCIES
1. Commitments
The Company's operations are principally conducted in leased premises. The
leases generally have initial terms ranging from 5 to 20 years and usually
provide for renewal options ranging from 5 to 20 years. Most of the leases
contain escalation clauses and common area maintenance charges (including
taxes and insurance). Certain of the leases require additional (contingent)
F-36
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE N (continued)
rental payments if sales volumes at the related restaurants exceed
specified limits. As of March 31, 2002, the Company has noncancelable
operating lease commitments, net of certain sublease rental income, as
follows:
Lease Sublease Net lease
commitments income Commitments
----------- -------- -----------
2003 $ 4,784 $ 2,434 $ 2,350
2004 4,313 2,080 2,233
2005 4,209 2,005 2,204
2006 3,988 1,904 2,084
2007 3,763 1,762 2,001
Thereafter 13,194 7,416 5,778
-------- -------- --------
$34,251 $17,601 $16,650
======== ======== ========
Aggregate rental expense, net of sublease income, under all current leases
amounted to $2,734, $3,549 and $2,848 for the fiscal years ended March 31,
2002, March 25, 2001 and March 26, 2000, respectively.
The Company also owns or leases sites, which it leases or subleases to
franchisees. The Company remains liable for all lease costs when properties
are subleased to franchisees.
The Company also subleases non-Miami Subs locations to third parties. Such
sub-leases provide for minimum annual rental payments by the Company
aggregating approximately $2.4 million and expire on various dates through
2010 exclusive of renewal options.
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
$129, $123, $123 for the fiscal years ended March 31, 2002, March 25, 2001
and March 26, 2000, respectively.
F-37
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE N (continued)
The Company guarantees certain equipment financing for franchisees with a
third-party lender. The Company's maximum obligation for loans funded by
the lender, as of March 31, 2002, was approximately $1.4 million.
The Company also guarantees a franchisee's note payable with a bank. The
Company's maximum obligation for loans funded by the lender, as of March
31, 2002, was approximately $333.
2. Contingencies
Nathan's Famous, Inc. and Nathan's Famous Operating Corp. were named as two
of three defendants in an action commenced in July 2001, in the Supreme
Court of New York, Westchester County. According to the amended complaint,
the plaintiffs, a minor and her mother, are seeking damages in the amount
of $17 million against Nathan's Famous and Nathan's Famous Operating Corp.
and one of Nathan's Famous' former employees claiming that the Nathan's
entities failed to properly supervise minor employees, failed to monitor
its supervisory personnel, and were negligent in hiring, retaining and
promoting the individual defendant, who allegedly molested, harassed and
raped the minor plaintiff, who was also an employee. On May 29, 2002, as a
result of a mediation, this action was settled, subject to final Court
approval. In the event the Court approves the settlement, the plaintiffs
will be paid $650, which has been accrued for as a component of "Accrued
expenses and other current liabilities" in the accompanying balance sheets.
An action has been commenced, in the Circuit Court of the Fifteenth
Judicial Circuit, Palm Beach County, Florida in September 2001 against
Miami Subs and EKFD Corporation, a Miami Subs franchisee ("the franchisee")
claiming negligence in connection with a slip and fall which allegedly
occurred on the premises of the franchisee for unspecified damages.
Pursuant to the terms of the Miami Subs Franchise Agreement, the franchisee
is obligated to indemnify Miami Subs and hold them harmless against claims
asserted and procured an insurance policy which named Miami Subs as an
additional insured. Miami Subs has denied any liability to plaintiffs and
has made demand upon the franchisee's insurer to indemnify and defend
against the claims asserted. The insurer has agreed to indemnify and defend
Miami Subs and has assumed the defense of this action for Miami Subs.
F-38
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE N (continued)
The Company is involved in various other litigation in the normal course of
business, none of which, in the opinion of management, will have a
significant adverse impact on its financial position or results of
operations.
3. Miami Subs Tax Audit
As a result of the Miami Subs acquisition, the Company obtained a net
operating loss carryforward of approximately $5.9 million and a general
business credit carryforward of approximately $274. The Miami Subs Federal
income tax returns for all fiscal years 1991 through 1996, inclusive, have
been examined by the Internal Revenue Service. In January 2002, the Miami
Subs tax audit was settled with the IRS Appeals Office. The settlement
resulted in a reduction of the net operating loss carryforward to $4,004
and an adjustment to the general business credit to $300. Each of these
carryforwards were subject to reductions due to various expiration dates.
In addition to these adjustments, the Company made tax and interest
payments totaling $344 in full settlement of the audit. As of March 31,
2002, the remaining net operating loss carryforward is $1,289 and the
remaining general business credit is $87. These losses and credits are
subject to limitations imposed under the Internal Revenue Code pursuant to
section 382 regarding changes in ownership. As a result of these
limitations, the Company has recorded a valuation allowance for the
remaining Miami Subs loss carryforwards and credits related to the
acquisition.
NOTE O - RELATED PARTY TRANSACTIONS
As of March 31, 2002, Miami Subs leased two restaurant properties from
Kavala, Inc., a private company owned by Gus Boulis, a former shareholder
of Miami Subs. Future minimum rental commitments due to Kavala at March 31,
2002 under these existing leases was approximately $1.2 million.
Mr. Donald L. Perlyn has been an officer of Miami Subs since 1990, a
Director since 1997 and President and Chief Operating Officer since July
1998. Mr. Perlyn has been a director of Nathan's since October 1999. Mr.
Perlyn served as a member of the Board of Directors of Arthur Treacher's
Inc. until March 2002 when Arthur Treacher's, Inc. was sold in a private
transaction. Miami Subs has been granted certain exclusive co-branding
rights by Arthur Treacher's, Inc. and Mr. Perlyn had been granted options
to acquire approximately 175,000 shares of Arthur Treachers' common stock.
These options were converted into options of the entity that sold Arthur
Treacher's, Inc.
F-39
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE P - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 2002, the Company's management
continued to monitor and evaluate the collectibility and potential
impairment of its assets, in particular, notes receivable and certain fixed
assets. In connection therewith, impairment charges on certain notes
receivable of $185 and impairment charges on fixed assets of $685 were
recorded in the fourth quarter. It is management's opinion that these
adjustments are properly recorded in the fourth quarter based upon the
facts and circumstances that became available in that period.
During the fourth quarter of fiscal 2000, the Company's management
continued to monitor and evaluate the collectibility and potential
impairment of its assets, in particular, notes receivable and certain fixed
assets. In connection therewith, additional allowances for doubtful
accounts of $399, impairment charges on certain notes receivable of $273
and impairment charges on fixed assets of $465 were recorded in the fourth
quarter. Additionally, Nathan's recorded a $191 lease rental reserve
resulting from the default of subleases for space which is not expected to
be utilized by Nathan's and $236 in connection with the satisfaction of
certain financial guarantees. It is management's opinion that these
adjustments are properly recorded in the fourth quarter based upon the
facts and circumstances that became available in that period.
F-40
Nathan's Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share amounts)
March 31, 2002, March 25, 2001 and March 26, 2000
NOTE Q - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Fiscal Year 2002
----------------
Revenues $11,876 $11,785 $10,380 $10,358
Gross profit (a) 2,988 3,200 2,317 2,201
Net income (loss) 962 654 263 (630)
======= ======= ======= =======
Per share information
Net income (loss) per share
Basic (b) $.14 $.09 $.04 $(.09)
==== ==== ==== =====
Diluted (b) $.14 $.09 $.04 $(.09)
==== ==== ==== ======
Shares used in computation of net income (loss)
per share
Basic (b) 7,065,000 7,065,000 7,038,000 7,024,000
========= ========= ========= =========
Diluted (b) 7,084,000 7,080,000 7,062,000 7,107,000
========= ========= ========= =========
Fiscal Year 2001
----------------
Revenues $12,899 $12,666 $11,418 $10,191
Gross profit (a) 3,423 3,457 2,821 2,568
Net income (loss) 745 933 145 (217)
======= ======= ======= =======
Per share information
Net income (loss) per share
Basic (b) $.11 $.13 $.02 $(.03)
==== ==== ==== =====
Diluted (b) $.11 $.13 $.02 $(.03)
==== ==== ==== =====
Shares used in computation of net income (loss)
per share
Basic (b) 7,040,000 7,065,000 7,065,000 7,065,000
========= ========= ========= =========
Diluted (b) 7,044,000 7,155,000 7,065,000 7,130,000
========= ========= ========= =========
<FN>
(a) Gross profit represents the difference between sales and the cost sales.
(b) The sum of the quarters does not equal the full year per share amounts
included in the accompanying consolidated statements of operations due to
the effect of the weighted average number of shares outstanding during the
fiscal years as compared to the quarters.
</FN>
F-41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Nathan's Famous, Inc. and Subsidiaries:
We have audited, in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements of Nathan's
Famous, Inc. and subsidiaries, included in this Form 10-K and have issued
our report thereon dated June 14, 2001. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The accompanying schedule is the responsibility of the Company's
management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
/s/Arthur Andersen LLP
Melville, New York
June 14, 2001
This Report of Independent Certified Public Accountants on Schedule is a copy of
a previously issued Arthur Andersen LLP ("Andersen") report and has not been
reissued by Andersen. The inclusion of this previously issued Andersen report is
pursuant to the "Temporary Final Rule and Final Rule: Requirements for Arthur
Andersen LLP Auditing Clients," issued by the U.S. Securities and Exchange
Commission in March 2002. Note that this previously issued Andersen report
refers to the Schedule as of and for the fifty-two weeks ended March 25, 2001
and March 26, 2000.
F-42
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------ --------- ------------------------ ---------- ------------
(1) (2)
Additions
Balance charged Additions
at to charged to Balance at
beginning costs and other Deductions end of period
Description of period expenses accounts
- ------------------------------------------------------ --------- ------------------------- ---------- ------------
Fifty-three weeks ended March 31, 2002
--------------------------------------
Allowance for doubtful accounts - notes and
accounts receivable $ 880 $ 267 $ 27(c) $ 530(a) $ 644
====== ====== ===== ====== ======
Lease reserve and termination costs $ 678 $ 30 $ - $ 372(f) $ 336
====== ====== ===== ====== ======
Fifty-two weeks ended March 25, 2001
------------------------------------
Allowance for doubtful accounts - notes and
accounts receivable $ 809 $ 191 $ 27 (c) $ 147 (a) $ 880
====== ====== ===== ====== ======
Lease reserve and termination costs $974 $ 463 $ 801 (d) $1,560 (f) $ 678
====== ====== ===== ====== ======
Fifty-two weeks ended March 26, 2000
------------------------------------
Allowance for doubtful accounts - notes and 404 (e)
=====
accounts receivable $ 467 $ 895 $ 32 (c) $ 989 (a) $ 809
====== ====== ===== ====== ======
274 (e)
=====
Lease reserve and termination costs $ - $ 191 $ 660 (d) $ 151 $ 974
====== ====== ===== ====== ======
<FN>
(a) Uncollectible amounts written off
(b) Uncollectible advertising fund receivables
(c) Provision charged to advertising fund
(d) Lease termination charge to purchase accounting
(e) Assumed as part of the Miami Subs acquisition
(f) Payment of lease termination and other costs
</FN>
F-43