delivering expansion seizing oppor tuni ty 2001 Annual Repor t Profile Nathan’s has truly become a “Family of Brands,” uniquely and attractively positioned in today’s marketplace. Nathan’s Famous, Kenny Rogers Roasters, and Miami Subs are being advanced independently and in concer t with one another, through co-branding, in traditional and captive-market restaurant environ- ments, both domestically and internationally. The signature products of each brand may also be marketed throughout a wide and diverse spectrum of alternate channels of distribution. Leveraging the equity of our highly-recognized and valued brands and quality products through the implementation of a brand marketing and points-of-distribution strategy provides for new and exciting, expansive growth opportunities. The world’s greatest tastes...all in one place. FinancialH i g h l i g h t s Systemwide Data: Sales** Number of outlets, at year end*** Selected Consolidated Financial Data: Revenues Income (loss) before taxes* Net earnings (loss)* Net earnings (loss) per share* Basic Diluted Weighted average number of common shares outstanding Basic Diluted Total assets Stockholders’ equity Fiscal Year 2001 2000 1999 (Dollars in thousands, except per share amounts) $287,005 411 $221,014 447 $117,539 188 $ 47,174 3,022 1,606 $ 38,528 (1,520) (1,270) $ 29,582 2,310 2,728 $ $ 0.23 0.23 $ $ (0.22) (0.22) $ $ 0.58 0.57 7,059 7,098 51,826 35,031 5,881 5,881 48,583 33,347 4,722 4,753 31,250 26,348 1 *In 2000, provisions of $2.5 million or $0.42 per share were recorded associated with asset impairments, franchisee guarantees, restaurant closures, and bad debts. **Includes Company-owned and franchise restaurant sales, sales to supermarkets by SMG, Inc., and sales of proprietary food and related items under the Branded Product Program. ***Includes Company-owned restaurants and franchised and licensed restaurants. Systemwide Sales** (dollars in millions) Income (Loss) Before Taxes* (dollars in thousands) Stockholders’ Equity (dollars in millions) $300 250 200 150 100 50 0 $3,200 2,400 1,600 800 0 ’99 ’00 ’01 -1,600 ’99 ’00 ’01 $40 35 30 25 20 15 10 5 0 ’99 ’00 ’01 Stockholders’ L e t t e r Fellow Shareholders: Fiscal 2001 was highlighted by significant growth, primarily attributable to our recent To date, the Arthur Treacher’s brand and signature products are featured in 96 Miami acquisitions of Miami Subs and Kenny Rogers Roasters, as well as the exclusive rights Subs restaurants, 25 Nathan’s restaurants, and 4 Kenny Rogers Roasters restaurants. to market Ar thur Treacher’s Fish and Chip products in co-branded settings. We The Nathan’s brand and products are in 66 Miami Subs restaurants and 5 Kenny enhanced our restaurant system by combining our highly-valued brands through the Rogers Roasters restaurants. A Kenny Rogers Express module is situated within 62 initial implementation of our co-branding plan. Miami Subs restaurants and 3 Nathan’s restaurants and a recently developed Miami We are continuing our successful brand-marketing approach and points-of-distribution Subs Express is presently being tested within a Nathan’s restaurant. strategy. As a result, the market exposure of the Nathan’s brand and sales of our The successful roll out of our co-branding plan is most visible in the Miami Subs system signature hot dog products continue to increase substantially throughout established where 105 restaurants now utilize two or more of our brands and proprietary prod- 2 and newly-cultivated channels of distribution. ucts. Of these 105 restaurants, 70 have undergone a marketing repositioning and are 3 Due to our recent acquisitions and our expanded distribution, we realized record system-wide sales, revenues, and pretax profits during this past year. C o - B r a n d i n g E x i s t i n g O p e r a t i o n s A primary objective of our acquisitions was to capitalize on the combined use of our brands within company-owned and franchised restaurants. now known as “Miami Subs Plus!”. The transformation to our recently created Miami Subs Plus! concept will continue. The introduction will be suppor ted by an exciting multi-media, advertising campaign featuring the use of television, radio, outdoor billboards, and print media commencing in southern Florida in July 2001. E x p a n s i o n We intend to expand each restaurant concept in traditional and captive-market locations, both independently and in concert with one another with an emphasis on We are continuing our successful brand-marketing approach and points-of-distribution strategy. Opportuni ties co-branding. New restaurant prototypes and down-sized foodser vice modules are being developed and tested to help us achieve our expansion plans, both domestically and internationally. We expect to continue our progress with the growth of the Nathan’s Branded- Product Program. Today, there are over 1,200 locations featuring the sale of Nathan’s hot dogs in highly-visible settings which include airpor ts, universities, casino hotels, theaters, convenience stores, stadiums, as well as a wide variety of other foodservice environments. 4 During this past year we have realized an increase in the sale of Nathan’s products in supermarkets and club stores. We anticipate exploring oppor tunities to market Kenny Rogers Roasters and Miami Subs products outside of restaurants, as we have successfully accomplished with Nathan’s. We continue to negotiate with prospective international master franchisees for the potential development of our restaurant concepts and distribution strategies in several foreign countries. 5 Potential I n C o n c l u s i o n We have completed the integration of Miami Subs and Kenny Rogers Roasters and continue to improve our entire system’s performance by capitalizing on our brand marketing and points-of-distribution strategy. Today, our company is engaged in business in 42 states, the District of Columbia, and 16 foreign countries featuring the Nathan’s, Miami Subs, and Kenny Rogers Roasters brands. Our focused strategies, creative approaches, ever-expanding oppor tunities, and commitment to quality highlight Nathan’s path towards continued long-term success. We believe significant benefit will be afforded to our consumers, business partners, employees, 7 and to you—our shareholders. We are appreciative of your continued support. Howard M. Lorber Chairman and Chief Executive Officer Wayne Norbitz President and Chief Operating Officer 6 Nathan’s Famous, Inc. & Subsidiaries S e l e c t e d C o n s o l i d a t e d F i n a n c i a l D a t a (in thousands, except per share amounts) Fiscal years ended March 25, March 26, March 28, March 29, March 30, 1999 2001 2000 1998 1997 Statement of Operations Data: Revenues: Sales Franchise fees and royalties License royalties and other income Total revenues Costs and Expenses: Cost of sales Restaurant operating expenses Depreciation and amortization Amortization of intangible assets General and administrative expenses Interest expense Impairment of long-lived assets Impairment of notes receivable Other expense (income) Total costs and expenses Income (loss) before provision (benefit) for income taxes Provision (benefit) for income taxes 8 Net income (loss) Per Share Data: Net income (loss) Basic Diluted Dividends Number of common shares used in computing net income (loss) per share Basic Diluted(1) Balance Sheet Data at End of Fiscal Year: Working capital (deficit) Total assets Long-term debt, net of current maturities Stockholders’ equity Selected Restaurant Operating Data: Systemwide Restaurant Sales: Company-owned Franchised Total Number of Units Open at End of Fiscal Year: Company-owned Franchised Total $ 34,799 8,814 3,561 $ 29,642 5,906 2,343 $23,964 3,230 1,953 $22,971 3,062 2,393 $21,718 3,238 1,619 47,174 37,891 29,147 28,426 26,575 22,530 8,964 1,791 839 8,978 310 127 151 462 44,152 3,022 1,416 18,977 8,208 1,358 716 8,222 198 465 840 427 39,411 (1,520) (250) 14,932 5,780 1,065 384 4,722 1 302 — (349) 26,837 2,310 (418) 14,017 6,411 1,035 384 4,755 6 — — — 26,608 1,818 290 13,031 6,602 1,013 406 4,097 16 — — — 25,165 1,410 622 $ 1,606 $ (1,270) $ 2,728 $ 1,528 $ 788 $ $ 0.23 0.23 — $ $ (0.22) (0.22) — $ 0.58 $ 0.57 — $ 0.32 $ 0.32 — $ 0.17 $ 0.17 — 7,059 7,098 5,881 5,881 4,722 4,753 4,722 4,749 4,722 4,729 $ 5,210 51,826 1,789 $ 35,031 $ (147) 48,583 3,131 $ 33,347 $ 3,708 31,250 0 $26,348 $ 6,105 29,539 9 $23,586 $ 4,802 27,794 21 $21,976 $ 30,946 208,899 $ 27,478 152,627 $21,981 64,178 $22,332 58,802 $21,718 68,564 $239,835 $180,105 $86,159 $81,134 $85,282 25 386 411 32 415 447 25 163 188 27 156 183 26 147 173 Notes to Selected Financial Data (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. Nathan’s Famous, Inc. & Subsidiaries M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s of Financial Condition and Results of Operations I n t ro d u c t i o n R e s u l t s o f O p e r a t i o n s 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 restau- rants and franchising the Nathan’s, Kenny Rogers and Miami Subs 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 foodser vice 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’ trade- mark with respect to the sale of hot dogs and certain other proprietary food items and paper goods. At March 25, 2001, our combined systems consisted of 25 company-owned units, 386 franchised or licensed units and over 1,200 Nathan’s Branded Product points of distribution that feature Nathan’s world famous all-beef hot dogs, located in 42 states, the District of Columbia and sixteen foreign countries. At March 25, 2001, our company-owned restau- rant system included 17 Nathan’s units, six Miami Subs units and two Kenny Rogers Roasters units, as compared to 19 Nathan’s units, 11 Miami Subs units and two Kenny Rogers Roasters units at March 26, 2000. In addition to plans for expansion, Nathan’s is in the process of capitalizing on co-branding opportunities within its existing restaurant system. To date, the Arthur Treacher’s brand has been introduced within 125 Nathan’s, Kenny Rogers Roasters and Miami Subs restaurants, the Nathan’s brand has been added to the menu of 71 Miami Subs and Kenny Rogers restaurants, while the Kenny Rogers Roasters brand has been introduced into 65 Miami Subs and Nathan’s restaurants. In connection with our acquisition of Miami Subs, we deter- mined that up to 18 underperforming restaurants would be closed pursuant to our divestiture plan. To date, we have ter- minated leases on 15 of those proper ties. We continue to market two of those properties for sale and will terminate the lease for the last unit upon the lease expiration in May 2002. We also terminated 10 additional leases for properties out- side of the divestiture plan and incurred a charge to earnings of approximately $463,000 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 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 res- taurant to a franchisee pursuant to a management agreement, closing seven unprofitable company-owned units (including three Miami Subs restaurants pursuant to our divestiture 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 par t 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. 9 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 per iod compared to twent y-six week s for the f iscal 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 con- versions and the difference between expired franchise fees recognized into income. During the fiscal 2001 period, seven- teen 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 frankfur ters within super- markets and club stores were approximately $1,614,000 dur- ing 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 fis- cal 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 repor ted 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 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 perform- ance of the financial markets between the two periods which was par tially offset by higher interest income of approxi- mately $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 amor tization 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 spend- ing for the fiscal 2001 period was partially offset by the lower depreciation expense of operating fewer company-owned restaurants versus the fiscal 2000 period. Amor tization 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 acquisi- tion 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 administra- tive 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 cer tain rebates of approximately $178,000, which were partially offset by higher spending in connection with personnel costs and incentive compensation of approximately $245,000. 10 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. Other expense of $462,000 during the fiscal 2001 period relates primarily to lease termination expenses of units that were not par t 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 com- pared 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 cer tain nondeductible expenses. Nathan’s has agreed to accept an offer by the Internal Revenue Ser vice to conclude the Miami Subs tax audit for the years 1991 through 1996. As part of that agree- ment, Nathan’s expects that certain amortization of intangi- ble assets previously deducted by Miami Subs will be reversed and will not be deductible in the future. Fiscal Year Ended March 26, 2000 Compared to Fiscal Year Ended March 28, 1999 Revenues Total sales were $29,642,000 for the fifty-two weeks ended March 26, 2000 (“the fiscal 2000 period”) as compared to $23,964,000 for the fifty-two weeks ended March 28, 1999 (“the fiscal 1999 period”). Of the total increase, sales increased by $6,985,000 as a result of the acquisitions made this year. Company-owned restaurant sales of the Nathan’s brand decreased 6.0% or $1,318,000 to $20,664,000 from $21,982,000. This restaurant sales decline is primarily due to the impact of franchising three company-owned restaurants and closing three other unprofitable company-owned restau- rants during the current fiscal year and closing two company- owned units during the prior fiscal year due to the lease expirations. The total sales decline during the fiscal 2000 period attributable to these eight stores was $1,763,000. Comparable restaurant sales of the Nathan’s brand increased by 1.1% versus the fiscal 1999 period. We continued to emphasize local store marketing activities, new product intro- ductions and value pricing strategies for the Nathan’s brand. These activities were supplemented by a regional newsprint campaign during the summer of 1999. Pursuant to our exclu- sive co-branding agreement with Arthur Treacher’s, we began test marketing Ar thur Treacher’s signature products in four company-owned Nathan’s restaurants during September and October 1999. Based upon the success of these tests, we extended these co-branding effor ts within company-owned units and made Arthur Treacher’s products available to fran- chisees. At June 15, 2000 Ar thur Treachers’ products were featured in 14 Nathan’s restaurants. Sales from the Branded Product Program increased to $2,163,000 during the fiscal 2000 period as compared to sales of $1,983,000 in the fiscal 1999 period. Franchise fees and royalties increased by 82.8% or $2,676,000 to $5,906,000 in the fiscal 2000 period compared to $3,230,000 in the fiscal 1999 period. Increases in franchise income resulting from the acquisitions made during the fiscal 2000 period were $2,685,000. Nathans’ franchise royalties increased by $60,000 or 2.2% to $2,758,000 in the fiscal 2000 period as compared to $2,698,000 in the fiscal 1999 period. Franchise restaurant sales of the Nathan’s brand increased by 2.0% to $65,458,000 in the fiscal 2000 period as compared to $64,178,000 in the fiscal 1999 period. At March 26, 2000, there were 415 franchised or licensed restaurants within the franchise system, including 160 Nathan’s locations. Franchise fee income derived from Nathan’s restaurant openings was $463,000 in the fiscal 2000 period as compared to $532,000 in the fiscal 1999 period. This decrease was primarily attribut- able to the difference between the number and types of fran- chised units opened between the two periods. During the fiscal 2000 period, 21 new Nathan’s franchised or licensed units opened, including two units in Egypt. License royalties were $1,906,000 in the fiscal 2000 period as compared to $1,527,000 in the fiscal 1999 period. Increases in license royalties resulting from the acquisitions made during the fiscal 2000 period were $86,000. The major- ity of the remaining increase is attributable to sales by SMG, Inc., our licensee for the sale of Nathan’s frankfurters within supermarkets and club stores. Royalties from the sale of proprietar y spices and marinade were approximately $184,000 in the fiscal 2000 period as compared to $112,000 in the fiscal 1999 period Equity in (losses) earnings of unconsolidated affiliate of ($163,000), represents our propor tionate share of Miami Subs’ net loss for the period March 1, 1999 through the date of the merger on September 30, 1999. Included in Miami Subs’ net loss for that period were merger costs of $325,000. Investment and other income was $600,000 in the fiscal 2000 period versus $400,000 in the fiscal 1999 period. Increased other income attributable to the acquisitions made during the fiscal 2000 period were $308,000. During the fiscal 2000 period our marketable investment securities earned approxi- mately $132,000 more than the prior fiscal year. This was due to earning less interest income than the fiscal 1999 period due primarily to the reduced amount of our fixed income securities which was more than offset by the difference in performance of the equity markets between the two periods. Additionally, we earned approximately $118,000 less miscella- neous income during the fiscal 2000 period as compared to the fiscal 1999 period and recognized a loss of approximately $123,000 on the disposal of fixed assets. 11 Costs and Expenses Cost of sales increased by $4,045,000 from $14,932,000 in the fiscal 1999 period to $18,977,000 in the fiscal 2000 period. Of the total increase, cost of sales increased by $4,831,000 as a result of the acquisitions made during the fis- cal 2000 period. Higher costs of approximately $194,000 were incurred in connection with the Nathan’s Branded Product Program. Restaurant cost of sales associated with the Nathan’s brand were lower due primarily to the closure of two company-owned Nathan’s restaurants during the fiscal 1999 period, the closure of three unprofitable company- owned Nathan’s restaurants during the fiscal 2000 period and the franchising of three company-owned Nathan’s units dur- ing the fiscal 2000 period which were par tly offset by the exclusion of costs of operating the Nathan’s Kings Plaza restaurant which was being renovated during fiscal 1999. Our cost of restaurant sales for the Nathan’s brand was 60.5% of restaurant sales in the fiscal 2000 period as compared to 61.0% of restaurant sales in the fiscal 1999 period. The decrease, as a percentage of restaurant sales, is due partly to the increase in the amount of the average check over the prior period and lower costs of food and labor as a percent- age of restaurant sales during the fiscal 2000 period. We con- tinue to seek to operate more efficiently as a means to minimize the margin pressures which have become an integral part of competing in the current value conscious marketplace. Restaurant operating expenses increased by $2,428,000 from $5,780,000 in the fiscal 1999 period to $8,208,000 in the fiscal 2000 period. Of the total increase, restaurant operating expenses increased by $2,366,000 as a result of the acquisi- tions made this year. Restaurant operating expenses associ- ated with the Nathan’s brand were $5,842,000 during the fiscal 2000 period versus $5,780,000 during the fiscal 1999 period. This increase in restaurant operating costs was due primarily to higher costs of operating the restaurant that was renovated last year of approximately $146,000, higher occu- pancy costs of approximately $107,000, higher insurance costs of approximately $68,000 and higher marketing costs of approximately $138,000, which were par tly offset by lower costs due to operating fewer company-owned restaurants of approximately $430,000. Depreciation and amor tization increased by $293,000 from $1,065,000 in the fiscal 1999 period to $1,358,000 in the fiscal 2000 period. Depreciation expense increased as a result of the acquisitions made during the fiscal 2000 period by $323,000. Amortization of intangible assets increased by $332,000 from $384,000 in the fiscal 1999 period to $716,000 in the fiscal 2000 period. This increase is due to the amortization, based upon the preliminary purchase price allocations, of the Kenny Rogers Roasters intellectual proper ty acquired on April 1, 1999 and the Miami Subs acquisition on September 30, 1999. General and administrative expenses increased by $3,500,000 to $8,222,000 in the fiscal 2000 period as compared to $4,722,000 in the fiscal 1999 period. Of the total increase, general and administrative expenses increased by $2,692,000 as a result of the acquisitions made during the fiscal 2000 period. General and administrative expenses, excluding the impact of Miami Subs and Kenny Rogers Roasters, increased by $808,000 or 17.1% primarily due to increased compensa- tion expense of $339,000, increased provisions for doubtful accounts of approximately $262,000, higher professional fees for legal, audit and tax services of approximately $148,000 and approximately $76,000 associated with costs in connec- tion with the migration of the Miami Subs support functions to New York which commenced effective March 27, 2000. Interest expense of $198,000 primarily relates to assumed indebtedness as of the date of the acquisition. Since the acquisition, we have repaid notes totaling approximately $1,929,000 and therefore anticipate lower interest expense in the future. Impairment charges on notes receivable of $840,000, reflects write-downs on six notes receivable. Impairment charges on fixed assets of $465,000 during the fiscal 2000 period and $302,000 during the fiscal 1999 period reflect write-downs relating to three under-performing stores in the fiscal 2000 period and four under-performing stores in the fiscal 1999 period. Other expense (income) of $427,000 during the fiscal 2000 period includes approximately $191,000 in lease expense resulting from the default of subleases and $236,000 in con- nection with the satisfaction of cer tain financial guarantees, compared to the prior fiscal year when we reversed previous litigation accruals in the amount of $349,000 resulting from the conclusion of the associated litigation. Income Taxes In the fiscal 2000 period, the income tax benefit was ($250,000) or (16.4%) of loss before income taxes as com- pared to the income tax benefit of ($418,000) or (18.1%) of income before taxes in the fiscal 1999 period. During fiscal 1999 management determined that, based upon the facts and circumstances at the time, it was more likely than not that a portion of our deferred tax assets would be real- ized. Accordingly, we reduced our valuation allowance by $1,443,000 in fiscal 1999. The fiscal 1999 provision before adjustment for the valuation allowance was $1,025,000 or 44.4% of income before taxes. Management will continue to monitor the likelihood of continued realizability of its deferred tax asset and may, if deemed appropriate under the facts and circumstances at that time, recognize further adjustments to our deferred tax valuation allowance in accordance with Financial Accounting Standards Board Statement No. 109 “Accounting for Income Taxes.” 12 L i q u i d i t y a n d C ap i t a l R e s o u rc e s Cash and cash equivalents at March 25, 2001 aggregated $4,325,000, increasing by $1,928,000 during the fiscal 2001 period. At March 25, 2001, marketable securities and invest- ment in limited partnership totaled $4,648,000 and net work- ing capital increased to $5,210,000 from a deficit of $147,000 at March 26, 2000. Cash and cash equivalents at March 25, 2001 included $2,104,000 held on behalf of the Miami Subs Advertising Funds. A corresponding accrual has been recorded within accrued expenses and other current liabilities. Cash provided by operations of $4,149,000 in the fiscal 2001 period is primarily attributable to net income of $1,606,000, non-cash charges of $3,490,000, including depreciation and amortization of $2,630,000, impairment charges of $278,000, deferred income taxes of $313,000 and allowance for doubt- ful accounts of $191,000, in addition to an increase in other non-current liabilities of $1,329,000, increases in accounts payable and accrued expenses and other current liabilities of $961,000, decreases in other assets of $159,000, all of which were partially offset by an increase in marketable securities and investment in limited par tnership of $1,651,000, an increase in notes and accounts receivables of $1,350,000, an increase in prepaid expenses and other current assets of $339,000 and a decrease in deferred franchise fees of $76,000. During fiscal 2001, Nathan’s received a marketing advance from its beverage supplier in connection with a newly executed marketing agreement. Cash used in investing activities of $1,943,000 is comprised primarily of $1,458,000 relating to capital improvements of company-owned restaurants and other fixed asset additions, lease termination costs and other costs of $1,036,000 pur- suant to our final divestiture plan in connection with our acquisition of Miami Subs, cash received on notes receivable of $506,000 and proceeds from the sale of assets of $45,000. Cash used in financing activities of $278,000 represents repay- ments of notes payable and obligations under capital leases. In connection with our acquisition of Miami Subs, we deter- mined that up to 18 underperforming restaurants would be closed pursuant to our divestiture plan. To date, we have ter- minated leases on 15 of those properties. We are continuing to market two of the remaining properties for sale and will terminate the lease for the last unit upon the lease expiration in May 2002. As of March 25, 2001, we have accrued approx- imately $1,461,000 for lease reserves 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 1 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 addi- tional leases that were not part of our divestiture plan. On May 1, 2001, pursuant to an order of condemnation, we sold a company-owned restaurant to the State of Florida for $1,500,000 and repaid the outstanding mortgage of approxi- mately $793,000 plus accrued interest . Additionally, in June 2001, we expect to sell our restaurant in the Paramus Park Mall to a franchisee for $400,000 in cash and concurrently enter into a sub-lease for the property. We expect that we will reinvest in certain existing restaurants in the future and that we will fund those investments from our operating cash flow. We do not currently expect to incur significant capital expenditures to develop new company- owned restaurants. We also guarantee cer tain equipment financing for fran- chisees with a third par ty lender. Our maximum obligation for loans funded by the lender as of March 25, 2001 was approximately $1.3 million. Management believes that available cash, marketable invest- ment 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. S e a s o n a l i t y 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. I m p a c t o f I n f l a t i o n 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. Last year, various legislators proposed additional changes to the minimum wage requirements. During 2000, different bills were passed by the Senate and the House of Representatives proposing to fur ther increase the Federal minimum wage, although, no legislation was passed. At this time, there are 13 no pending Federal minimum wage proposals, however, we believe that there will be continued pressure to pass new Federal minimum wage legislation in the future. We further believe that any further increases in the minimum wage could have a significant financial impact on us. 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. A d o p t i o n o f N ew A c c o u n t i n g P ro n o u n c e m e n t s In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which establishes accounting and report- ing standards for derivative instruments, including cer tain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for all fiscal years beginning after June 15, 2000 and will not require retroactive restate- ment of prior period financial statements. This statement requires the recognition of all derivative instruments as either assets or liabilities in the balance sheet, measured at fair value. Derivative instruments will be recognized as gains or losses in the period of change. The adoption of SFAS No. 133 will not have a material impact on our financial position or results of its operations as we do not presently make use of derivative instruments. In December 1999, the SEC staff released Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition,” which pro- vides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101 explains the SEC staff’s general framework for recognizing revenue, spe- cific criteria to be met, along with required disclosures related to revenue recognition. SAB No. 101 did not have a material impact on our financial position or results of operations. Fo r w a rd - L o o k i n g S t a t e m e n t s Cer tain statements contained in this repor t 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 materi- ally from those we anticipated due to a number of uncertain- ties, many of which we are not aware. These risks and uncer tainties, many of which are not within our control, include, but are not limited to: economic, weather, legislative and business conditions; the availability of suitable restaurant sites on reasonable rental terms; changes in consumer tastes; ability to continue to attract franchisees; the ability to pur- chase its primar y food and paper products at reasonable prices; no material increases in the minimum wage; and our ability to attract competent restaurant and managerial per- sonnel. We generally identify forward-looking statements with the words “believe,” “intend,” “plan,” “expect,” “anticipate,” “estimate,” “will,” “should” and similar expressions. 14 Nathan’s Famous, Inc. & Subsidiaries C o n s o l i d a t e d B a l a n c e S h e e t s (in thousands, except share amounts) A S S E T S Current Assets: Cash and cash equivalents Marketable securities and investment in limited partnership Notes and accounts receivable, net Inventories Assets available for sale Prepaid expenses and other current assets Deferred income taxes Total current assets Notes receivable, net Property and equipment, net Assets available for sale Intangible assets, net Deferred income taxes Other assets, net L I A B I L I T I E S A N D S TO C K H O L D E R S ’ E Q U I TY Current Liabilities: Current maturities of notes payable and capital lease obligations Accounts payable Accrued expenses and other current liabilities Deferred franchise fees Total current liabilities Notes payable and capital lease obligations, less current maturities Other liabilities Total liabilities Commitments and Contingencies (Note 14) Stockholders’ Equity: Common stock, $.01 par value; 30,000,000 shares authorized, 7,065,202 and 7,040,196 issued and outstanding at March 25, 2001 and March 26, 2000, respectively Additional paid-in capital Accumulated deficit Total stockholders’ equity The accompanying notes are an integral part of these consolidated balance sheets. March 25, March 26, 2001 2000 $ 4,325 4,648 4,178 523 1,510 974 1,714 17,872 1,729 11,279 450 18,011 2,081 404 $ 2,397 2,997 2,618 543 175 635 1,578 10,943 2,527 11,655 3,092 19,092 711 563 $51,826 $48,583 $ 1,343 1,978 8,731 610 $ 279 1,727 8,398 686 12,662 11,090 1,789 2,344 16,795 3,131 1,015 15,236 71 40,746 (5,786) 35,031 70 40,669 (7,392) 33,347 $51,826 $48,583 15 Nathan’s Famous, Inc. & Subsidiaries C o n s o l i d a t e d S t a t e m e n t s o f O p e r a t i o n s (in thousands, except share and per share amounts) For the Fiscal Year Ended March 25, March 26, March 28, 2000 2001 1999 Revenues: Sales Franchise fees and royalties License royalties Equity in (losses) earnings of unconsolidated affiliate Investment and other income Total revenues Costs and Expenses: Cost of sales Restaurant operating expenses Depreciation and amortization Amortization of intangible assets General and administrative expenses Interest expense Impairment charge on notes receivable Impairment charge on long-lived assets Other expense (income), net (Note 11) Total costs and expenses Income (loss) before provision (benefit) for income taxes Provision (benefit) for income taxes (Note 12) Net income (loss) 16 Per Share Information (Note 4): Net income (loss) per share: Basic Diluted Weighted average shares used in computing net income (loss) per share: Basic Diluted The accompanying notes are an integral part of these consolidated statements. $34,799 8,814 1,958 — 1,603 $29,642 5,906 1,906 (163) 600 $23,964 3,230 1,527 26 400 47,174 37,891 29,147 22,530 8,964 1,791 839 8,978 310 151 127 462 44,152 3,022 1,416 18,977 8,208 1,358 716 8,222 198 840 465 427 39,411 (1,520) (250) 14,932 5,780 1,065 384 4,722 1 — 302 (349) 26,837 2,310 (418) $ 1,606 $ (1,270) $ 2,728 $ $ .23 .23 $ $ (.22) (.22) $ $ .58 .57 7,059,000 5,881,000 4,722,000 7,098,000 5,881,000 4,753,000 Nathan’s Famous, Inc. & Subsidiaries C o n s o l i d a t e d S t a t e m e n t s o f S t o c k h o l d e r s ’ E q u i t y (in thousands, except share amounts) Balance, March 29, 1998 Amortization of deferred compensation relating to restricted stock Net income Balance, March 28, 1999 Common stock issued in connection with merger Warrants issued in connection with merger Options assumed in connection with merger Net loss Balance, March 26, 2000 Stock compensation Warrants exercised Net income Common Common Shares Stock Additional Paid-in Capital Compensation Deferred Total Accumulated Stockholders’ Deficit Equity 4,722,216 $47 $ 32,423 $(34) $ (8,850) $ 23,586 — — 4,722,216 2,317,980 — — — 7,040,196 25,000 6 — — — 47 23 — — — 70 1 — — — — 32,423 7,367 330 549 — 40,669 77 — — 34 — — — — — — — — — — — 2,728 (6,122) — — — (1,270) (7,392) — — 1,606 34 2,728 26,348 7,390 330 549 (1,270) 33,347 78 — 1,606 Balance, March 25, 2001 7,065,202 $71 $40,746 $ — $(5,786) $35,031 The accompanying notes are an integral part of these consolidated statements. 17 Nathan’s Famous, Inc. & Subsidiaries C o n s o l i d a t e d S t a t e m e n t s o f C a s h F l o w s (in thousands) For the Fiscal Year Ended March 25, March 26, March 28, 2000 2001 1999 18 Cash Flows From Operating Activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization Amortization of intangible assets Amortization of deferred compensation Loss on disposal of fixed assets Stock compensation expense Impairment of long-lived assets Impairment of notes receivable Provision for doubtful accounts Equity in losses/(earnings) of unconsolidated affiliate Deferred income taxes Changes in operating assets and liabilities, net of effects from acquisition of Miami Subs: Marketable securities and investment in limited partnership Notes and accounts receivable Inventories Prepaid expenses and other current assets Other assets Accounts payable, accrued expenses and other current liabilities Deferred franchise fees Other liabilities Net cash provided by operating activities Cash Flows From Investing Activities: Cash acquired in connection with merger, net of transaction costs Lease terminations and other costs in connection with acquisition Purchases of property and equipment Purchase of intellectual property Investment in unconsolidated affiliate Payments received on notes receivable Proceeds from sale of restaurant Net cash provided by (used in) investing activities Cash Flows From Financing Activities: Principal repayments of borrowing Net cash used in financing activities Net change in cash and cash equivalents Cash and Cash Equivalents, beginning of year Cash and Cash Equivalents, end of year Cash Paid During the Year For: Interest Income taxes Noncash Financing Activities: $ 1,606 $(1,270) $ 2,728 1,791 839 — — 78 127 151 191 — 313 (1,651) (1,350) 20 (339) 159 961 (76) 1,329 4,149 — (1,036) (1,458) — — 506 45 (1,943) (278) (278) 1,928 2,397 $ 4,325 1,358 716 — 123 — 465 840 895 163 (958) 270 (504) 3 (187) 182 (158) 721 (682) 1,977 3,429 — (1,975) (1,590) — 320 — 184 (1,929) (1,929) 232 2,165 $ 2,397 1,065 384 34 — — 302 — 44 (26) (1,036) 5,247 (646) (18) (268) — (1,177) 97 50 6,780 — — (1,485) — (4,415) — — (5,900) (21) (21) 859 1,306 $ 2,165 $ 317 $ 1,508 $ $ 207 831 $ $ 1 218 Loan to franchisee in connection with sale of restaurant $ 130 $ — $ — Common stock, warrants and options issued in connection with acquisition $ — $ 8,269 $ — The accompanying notes are an integral part of these consolidated statements. Nathan’s Famous, Inc. & Subsidiaries N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s (in thousands, except share and per share amounts) 1 . D e s c r i p t i o n a n d O r g a n i z a t i o n o f B u s i n e s s Description of Business Nathan’s Famous, Inc. and Subsidiaries (collectively the “Company” or “Nathan’s”) has historically operated 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 foodser vice retailers to sell some of Nathan’s proprietar y products outside of the realm of a traditional franchise relationship. During fiscal 2000, the Company acquired the intellectual proper ty 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 rotis- serie chicken. At March 25, 2001, the Company’s restaurant system, con- sisting of Nathan’s Famous, Kenny Rogers Roasters and Miami Subs restaurants, included 25 company-owned units concen- trated in the New York metropolitan area, (including New Jersey and Florida), 386 franchised or licensed units, including 4 units operating pursuant to management agreements and over 1,200 branded product points of sale under the Nathan’s Branded Product Program, located in 42 states, the District of Columbia, and 16 foreign countries. Organization of Business In July 1987, all of the outstanding shares, options and war- rants of Nathan’s Famous, Inc. (the “Predecessor Company”), a then publicly held New York corporation, were acquired through a cash transaction, accounted for by the purchase method of accounting (the “Acquisition”). In connection with the Acquisition, a privately-held New York corporation (the “Acquiring Corporation”) was merged into the Predecessor Company. The purchase price exceeded the fair value of the acquired assets of the Predecessor Company by $15,374, and such amount is recorded net of accumulated amortization in the accompanying consolidated balance sheets. In November 1989, the sur viving 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. 2 . S u m m a r y o f S i g n i f i c a n t A c c o u n t i n g Po l i c i e s Principles of Consolidation The consolidated financial statements include the accounts of the Company and all its wholly-owned subsidiaries. All inter- company balances and transactions have been eliminated in consolidation. Segment Disclosures The Company has adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 131 “Disclosures About Segments of an Enterprise and Related Information.” Pursuant to this pronouncement, operating segments are defined as components of an enterprise about which sepa- rate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources in assessing performance. Nathan’s con- siders its subsidiaries to be in the food service industry, and has pursued co-branding and co-hosting initiatives; accord- ingly management has evaluated the Company as one single reporting operating unit. Fiscal Year The Company’s fiscal year ends on the last Sunday in March, which results in a 52 or 53 week repor ting period. The results of operations for all periods presented are on the basis of a 52 week reporting period. Use of Estimates The preparation of financial statements in conformity with 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the repor ting period. Actual results could differ from those estimates. 19 Cash and Cash Equivalents The Company considers all highly liquid instruments pur- chased with an original maturity of three months or less to be cash equivalents. Cash restricted for untendered shares asso- ciated with the Acquisition amounted to $83 at March 25, 2001 and March 26, 2000, and is included in cash and cash equivalents. At March 25, 2001 and March 26, 2000, cash and cash equivalents included unexpended Miami Subs’ advertising funds of $2,104 and $509, respectively, with the offset classi- fied as current liabilities in the accompanying consolidated bal- ance sheets. Impairment of Notes Receivable In accordance with 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, mar- ginal working capital, inadequate cash flow or business inter- ruptions, 2) loans secured by collateral that is not readily marketable or 3) that are susceptible to deterioration in real- izable value. When determining impairment, management’s assessment includes its intention to extend cer tain leases beyond the minimum lease term and the note holder’s ability to meet its obligation over that extended term. In cer tain cases where Nathan’s has determined that a loan has been impaired, it does not expect to extend or renew the underly- ing leases. Based on the Company’s analysis, it has determined that there are notes that have incurred such an impairment (Note 5). Following is a summar y of the impaired notes receivable: March 25, March 26, 2001 2000 Total recorded investment in impaired notes receivable Allowance for impaired notes receivable Recorded investment in impaired notes receivable, net $1,105 (613) $1,830 (840) $ 492 $ 990 Based on the present value of the estimated cash flows of identified impaired notes receivable, the Company has recog- nized approximately $63 and $44 of interest income on these notes for the fiscal years ended March 25, 2001 and March 26, 2000, respectively. 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. Marketable Securities and Investment in Limited Partnership The Company classifies its investments in marketable securi- ties as “trading” in accordance with SFAS No. 115, “Account- ing for Cer tain Investments in Debt and Equity Securities.” Such securities are repor ted at fair value, with unrealized gains and losses included as a component of net income. Gains and losses on the disposition of securities are recog- nized on the specific identification method in the period in which they occur. Investment income in the trading limited par tnership is based upon Nathan’s propor tionate share of the change in the underlying net assets of the par tnership. The partnership invests primarily in publicly traded common stocks with a concentration in securities traded on exchanges in the United States. Sales of Restaurants The Company obser ves 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. This Statement provides for profit recognition by the full accrual method, provided (a) the profit is deter- minable, that is, the collectibility of the sales price is reason- ably 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 this Statement, the Company recognizes profit on sales of restaurants under both the installment method and the deposit method, depending on the specific terms of each sale. During fiscal 2000, the Company entered into contracts to sell six restaurants in two separate transactions, for an aggre- gate sales price of $1,775. The sales price consists of down payments totaling $230, and the issuance of notes receivable by the buyers totaling $1,545. In accordance with the SFAS No. 66, profit from these sales is being recognized under the deposit method. For the fiscal years ended March 25, 2001 and March 26, 2000, no revenue related to these sales has been recognized and the notes receivable have not been recorded. The Company continues to record depreciation expense on the property subject to the sales contracts 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 25, 2001 and March 26, 2000, the Company has deposits of $332 and $231, respectively and are included in accrued expenses in the accompanying consol- idated balance sheets. In June 2001, the Company entered into a sales contract to sell one restaurant for a total cash purchase price of $400. Concurrent with the agreement for sale, the Company shall enter into a sub-lease agreement with this franchisee. 20 Property and Equipment Stock-Based Compensation Proper ty and equipment is stated at cost less accumulated depreciation and amor tization. Depreciation and amor- tization is calculated primarily on the straight-line basis over the estimated useful lives of the assets. Leasehold improve- ments are amortized over the shorter of the estimated useful life or the lease term of the related asset . The Company suspends depreciation and amortization on assets related to restaurants that are held for sale. The estimated useful lives are as follows: Building and improvements Machinery, equipment, furniture and fixtures Leasehold improvements 5–25 years 5–15 years 5–20 years In accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” 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 individ- ual restaurant locations. The Company has identified one, three and four units that have been impaired, and recorded charges of $127, $465 and $302 to the statements of opera- tions for the fiscal years ended March 25, 2001, March 26, 2000 and March 28, 1999, respectively. Intangible Assets Intangible assets consist of (i) the goodwill resulting from the Acquisition; (ii) trademarks and tradenames, franchise rights and recipes in connection with Roasters and (iii) goodwill and certain identifiable intangibles resulting from the Miami Subs acquisition (Note 3). These intangible assets are being amor- tized over periods from 10 to 40 years. The Company period- ically reviews intangible assets for impairment, whenever events or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable. Management believes that there is no impairment with respect to such intangible assets as of March 25, 2001. 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. Fair Value of Financial Instruments The Company accounts for the fair value of its financial instruments in accordance with SFAS No. 107, “Disclosures about Fair Value of Financial Instruments.” The carrying value of all financial instruments reflected in the accompanying balance sheets approximated fair value at March 25, 2001 and March 26, 2000, respectively. 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 (Note 13). Comprehensive Income The Company follows the provisions of SFAS No. 130, “Reporting Comprehensive Income,” which requires compa- nies to report all changes in equity during a period, except those resulting from investment by owners and distributions to owners, for the period in which they are recognized. Comprehensive income is the total of net income and all other nonowner changes in equity (or other comprehensive income), such as unrealized gains or losses on securities classified as available for sale, foreign currency translation adjustments and minimum pension liability adjustments. Comprehensive income must be reported on the face of the consolidated statements of operations or the consolidated statements of stockholders’ equity. The Company’s opera- tions did not give rise to items includable in comprehensive income, which were not already in net income (loss) for the three fiscal years in the period ended March 25, 2001. Accordingly, the Company’s comprehensive income is the same as its net income for all years presented. Start-Up Costs The Company accounts for pre-opening and similar costs in accordance with Statement of Position (“SOP”) 98-5 “Report- ing on the Costs of Start-up Activities” which required com- panies to expense all those costs as incurred in the future. Revenue Recognition In December 1999, the SEC staff released Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition,” which pro- vides guidance on the recognition, presentation and disclo- sure of revenue in financial statements. SAB No. 101 explains the SEC staff’s general framework for recognizing revenue, specific criteria to be met, along with required disclosures related to revenue recognition. SAB No. 101 did not have a material impact on the Company’s financial position or results of its operations. 21 Franchise and Area Development Fee Revenue Recognition In connection with its franchising operations, the Company receives initial franchise fees, development fees, royalties, con- tributions to marketing funds, and in cer tain cases, revenue from sub-leasing restaurant proper ties 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 non-refundable and the related agree- ments 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 com- mence operations on a pro rata basis to the minimum num- ber 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 collectible. Revenue from sub-leasing properties to franchisees is recognized as income as the rev- enue is earned and becomes receivable and 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 com- pletion of the revenue recognition process are recorded as deferred revenue. At March 25, 2001 and March 26, 2000, $610 and $686, respectively, of deferred franchise fees are included in the accompanying consolidated balance sheets. Concentrations of Credit Risk The Company’s accounts receivable consist principally of receivables from franchisees for royalties and adver tising contributions and from sales under the Branded Product Program. At March 25, 2001, one franchisee represented 10% of franchise royalties receivable and at March 26, 2000, two franchisees each represented approximately 11% of franchise royalties receivable (Note 5). Advertising The Company administers various advertising funds on behalf of its subsidiaries and franchisees to coordinate the marketing effor ts 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%. Adver tising contributions from Company-owned stores are included in restaurant operating expenses in the accompanying consolidated statements of operations. Net Company-owned store adver tising expense was $1,602, $888, and $436 for the fiscal years ended March 25, 2001, March 26, 2000 and March 28, 1999, respectively. Income Taxes The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and oper- ating 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 tempo- rary differences are expected to be recovered or settled. Reclassifications Certain prior year balances have been reclassified to conform with current year presentation. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities,” which establishes accounting and report- ing standards for derivative instruments, including cer tain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for all fiscal years beginning after June 15, 2000 and will not require retroactive restatement of prior period financial statements. This state- ment requires the recognition of all derivative instruments as either assets or liabilities in the balance sheet, measured at fair value. Derivative instruments will be recognized as gains or losses in the period of change. The adoption of SFAS No. 133 will not have a material impact on its financial position or results of its operations as the Company does not presently make use of derivative instruments. 3 . A c q u i s i t i o n s On February 19, 1999, the U. S. Bankruptcy Cour t for the Middle District of Nor th Carolina, Durham Division, con- firmed 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 proper ty 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 bal- ance sheet and are being amor tized on a straight-line basis over periods of 10 to 20 years. No company-owned restau- rants were acquired in this transaction. Results of operations are included in these consolidated financial statements as of April 1, 1999. On November 17, 1999, NF Roasters acquired two restaurants from a franchisee for approximately $400, which opened in March and April 2000. 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 com- mon 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 pur- suant to which Nathan’s would acquire the remaining out- standing shares of Miami Subs in exchange for shares of and warrants to purchase Nathan’s common stock. 22 On September 30, 1999, Nathan’s completed the acquisition of Miami Subs and acquired the remaining outstanding com- mon 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, includ- ing acquisition costs. The acquisition was accounted for as a purchase under APB Opinion No. 16, “Accounting for Business Combinations.” 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. 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 carr ying 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 accom- panying consolidated balance sheet for the remaining units to be sold. As of March 25, 2001, 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 Property and equipment Assets held for sale Intangibles Goodwill Notes receivable—long-term Other assets Liabilities assumed Total $ 5,481 7,060 653 5,441 1,668 3,860 2,212 (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 and March 28, 1999 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. Total revenues Net (loss) income Net (loss) income per share: Basic Diluted Weighted average shares used in computing net (loss) income per share Basic Diluted Fifty-Two Weeks Ended March 26, 2000 March 28, 1999 Unaudited $50,455 $53,278 $ (1,466) $ 3,436 $ $ (.21) (.21) $ 0.49 $ 0.49 7,040,000 7,040,000 7,040,000 7,071,000 These pro forma results of operations have been prepared for comparative purposes only and are not necessarily indica- tive of actual results of operations that would have occurred had the acquisition been made at the beginning of the periods presented or of the results which may occur in the future. 4 . N e t I n c o m e ( L o s s ) Pe r S h a r e The Company complies with the provisions of SFAS No. 128, “Earnings Per Share.” Under SFAS No. 128, Basic Earnings Per Share is computed based on weighted average shares out- standing and excludes any potential dilution; Diluted Earnings Per Share reflects potential dilution from the exercise or con- version of securities into common stock or from other con- tracts to issue common stock. 23 The following chart provides a reconciliation of information used in calculating the per share amounts for the years ended March 25, 2001, March 26, 2000 and March 28, 1999, respectively: Basic EPS Basic calculation Effect of dilutive employee stock options and warrants Diluted EPS Diluted calculation Net Income (Loss) 2001 2000(1) 1999 2001 Shares 2000(1) Net Income (Loss) Per Share 1999 2001 2000(1) 1999 $1,606 $(1,270) $2,728 7,059,000 5,881,000 4,722,000 $.23 $(.22) $ .58 — — — 39,000 — 31,000 — — (.01) $1,606 $(1,270) $2,728 7,098,000 5,881,000 4,753,000 $.23 $(.22) $ .57 (1) Common stock equivalents have been excluded from the computation for earnings per share for the year end March 26, 2000 as their inclusion would be anti-dilutive. 5 . N o t e s a n d A c c o u n t s R e c e i v a bl e , n e t Notes and accounts receivable, net, consists of the following: Notes receivable, net of impairment charges Franchise and license royalties Branded product sales Other Less: allowance for doubtful accounts Notes receivable due after one year 2001 2000 $2,874 2,499 730 684 6,787 880 1,729 $3,226 2,110 365 253 5,954 809 2,527 Notes and accounts receivable $4,178 $2,618 Notes receivable at March 25, 2001 and March 26, 2000 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 install- ments of principal and interest with a balloon payment at the end of the term, with interest rates ranging principally between 8% and 12%. 6 . M a r ke t a bl e S e c u r i t i e s a n d I nve s t m e n t i n L i m i t e d Pa r t n e r s h i p Marketable securities at March 25, 2001 and March 26, 2000 consisted of trading securities with aggregate fair values of $4,648 and $2,997, 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 propor tionate 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 at March 25, 2001, March 26, 2000 and March 28, 1999 were as follows: Corporate bonds Municipal bonds Investment in trading limited partnerships* 2001 2000 1999 Gross Unrealized Holding Gain/(Loss) Fair Value of Gross Unrealized Holding Fair Value of Gross Unrealized Holding Investments Gain/(Loss) Investments Gain/(Loss) Fair Value of Investments $ — 16 (438) $(422) $ — 3,628 1,020 $4,648 $ — 3 420 $423 $ — 1,540 1,457 $2,997 $ 1 63 23 $87 $ 219 2,011 1,037 $3,267 *Subject to the terms of the partnership, the Company has the right to liquidate its investment in the trading limited partnerships without penalty. 7 . P ro p e r t y a n d E q u i p m e n t , n e t Property and equipment consist of the following: 24 Construction in progress Land Building and improvements Machinery, equipment, furniture and fixtures Leasehold improvements Less: accumulated depreciation and amortization 2001 2000 $ 141 1,983 3,083 $ 1,055 1,983 3,537 7,202 7,949 6,167 6,891 9,079 7,978 $11,279 $11,655 Included in proper ty and equipment, net, is approximately $1,395 and $1,459, respectively, of assets subject to sales contracts and $299 for the Paramus location for which the Company has agreed to sell (Note 2). In May 2001, the Company completed the sale of a restau- rant proper ty for approximately $1.5 million pursuant to an order of condemnation by the State of Florida (“State”) and will continue to operate the restaurant for 6 months pursuant to an operating lease with the State. The fair value of the assets (which approximated the carr ying value) is included in the current portion of assets available for sale at March 25, 2001 and the net book value of these assets have been reclassified to assets available for sale as of March 26, 2000 in the accompanying consolidated balance sheets. Concurrent with the sale, the Company satisfied the related note payable and accordingly has classified the remaining balance at March 25, 2001 as current in the accompanying consolidated balance sheets. Intangible assets consist of the following: Goodwill Trademark, tradename, franchise rights and recipes Less: accumulated amortization Intangible assets, net 2001 2000 $17,043 $17,477 7,031 24,074 6,063 6,839 24,316 5,224 $18,011 $19,092 Amortization expense related to these intangible assets was $839, $716 and $384 for each of the three fiscal years ended March 25, 2001. 20,358 19,633 8 . I n t a n g i bl e A s s e t s , n e t 9 . A c c r u e d E x p e n s e s a n d O t h e r C u rr e n t L i a b i l i t i e s Accrued expenses and other current liabilities consist of the following: March 25, March 26, Payroll and other benefits Professional and legal costs Insurance Rent, occupancy and sublease termination costs Taxes payable Unexpended advertising funds Other 2001 $1,365 898 825 1,236 512 2,104 1,791 2000 $1,536 1,240 837 1,846 443 509 1,987 $8,731 $8,398 credit is not a commitment and, therefore, credit availability is subject to ongoing approval. The line of credit expires on October 1, 2001, and bears interest at the prime rate. There were no borrowings outstanding under this line of credit as of March 25, 2001. 1 1 . O t h e r E x p e n s e ( I n c o m e ) , n e t Included in other expense (income), in the accompanying consolidated statements of operations is (i) $463 in lease ter- mination costs for the year ended March 25, 2001, (ii) $236 in connection with the satisfaction of certain financial guaran- tees and $191 in lease expense resulting from the default of subleases for the year ended March 26, 2000 and (iii) the reversal of a previous litigation accrual of $349 for the year ended March 28, 1999. 1 0 . N o t e s Paya bl e a n d C ap i t a l i ze d L e a s e O bl i g a t i o n s A summary of notes payable and capitalized lease obligations is as follows: 2001 2000 1 2 . I n c o m e Ta xe s Income tax expense (benefit) consists of the following for the years ended March 25, 2001, March 26, 2000 and March 28, 1999: 2001 2000 1999 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 Note payable to bank at 8.0% through January 2002 adjusting to prime plus 0.25% in 2002 and 2005 and maturing in 2008 Note payable to bank at 1.5% over prime (9.5% at March 25, 2001) and maturing in 2001 Note payable to bank at 8.75% and maturing in 2003 Capital lease obligations and other Total Less current portion Long-term portion $ 1,505 $1,667 806 869 354 397 70 389 406 79 3,132 (1,343) 3,410 (279) $ 1,789 $3,131 The above notes are secured by proper ty and equipment with a book value of approximately $784 at March 25, 2001, and notes and accounts receivable of approximately $1 million. At March 25, 2001, the approximate annual maturities of notes payable and capitalized lease obligations for each of the next five years are $1,343, $563, $173, $173 and $173, and $707 thereafter. The Company also maintains a $7,500 line of credit with its primar y banking institution. Borrowings under the line of credit are intended to be used to meet the normal shor t- term working capital needs of the Company. The line of Federal: Current Deferred State and local: Current Deferred $ 868 246 $ 461 (719) $ 1,114 (258) 235 67 302 247 (239) 8 453 297 750 165 110 275 Adjustment to valuation allowance relating to opening net deferred tax asset — — (1,443) $1,416 $(250) $ (418) 25 Total income tax (benefit) expense for fiscal years ended March 25, 2001, March 26, 2000 and March 28, 1999 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: 2001 2000 1999 Computed “expected” tax expense (benefit) Nondeductible amortization State and local income taxes, net of Federal income tax benefit Tax-exempt investment earnings Change in the valuation allowance for net deferred tax assets Nondeductible meals and entertainment and other $1,027 222 $(516) 212 $ 785 131 199 (30) 8 (30) 181 (112) — — (1,443) (2) 76 40 $1,416 $(250) $ (418) The tax effects of temporary differences that give rise to sig- nificant portions of the deferred tax assets and deferred tax liabilities are presented below: Deferred tax assets: Accrued expenses Allowance for doubtful accounts Impairment of notes receivable Deferred revenue Depreciation expense and impairment of long-lived assets Expenses not deductible until paid Amortization of intangibles Net operating loss and other carry-forwards Other Total gross deferred tax assets Deferred tax liabilities: Amortization of intangibles Unrealized gain on marketable securities and income on investment in limited partnership Other Total gross deferred tax liabilities Net deferred tax asset Less: Valuation allowance 2001 2000 $ 602 352 245 1,243 2,134 372 70 2,326 106 7,450 $ 601 409 352 501 898 789 — 2,326 181 6,057 — 297 209 720 929 6,521 (2,726) 402 343 1,042 5,015 (2,726) $ 3,795 $ 2,289 In fiscal year 1999, management of the Company determined that, more likely than not, a significant portion of its previously- reserved deferred tax assets would be realized and, accord- ingly, reduced the related valuation allowance. The reduction in the valuation allowance is included in the income tax provi- sion (benefit) in the accompanying consolidated statement of operations for fiscal 1999. The determination that the net deferred tax asset of $3,795 at March 25, 2001 is realizable is based on anticipated future taxable income. As of the date of the acquisition, Miami Subs had net operat- ing loss carry-forwards of approximately $5.9 million which were available to reduce future taxable income through 2019 subject to limitations imposed under the Internal Revenue Code regarding changes in ownership which limits utilization of the carry-forwards on an annual basis. Miami Subs also has general business credit carry-forwards of approximately $274, which can be used to offset tax liabilities through 2010. Miami Subs’ federal income tax returns for fiscal years 1991 through 1996, inclusive, have been examined by the Internal Revenue Service (“IRS”). The reports of the examining agent issued in connection with these examinations indicate that additional taxes and penalties totaling approximately $2.4 million are due for such years. The Company appealed substantially all of the proposed adjustments. In January 2001, the Miami Subs tax audit was tentatively settled with the IRS Appeals Office. If approved on review, the settlement will result in (a) an aggregate tax liability for the taxable years 1991 through 1996 of $102 and (b) the Company retaining net operating loss carry-forwards of approximately $3.2 million (subject to limi- tations imposed under the Internal Revenue Code). In addi- tion to the tax, interest and penalties will be due; the total amount of tax, interest and penalties is expected to be less than $300. The Company has accrued $345 for this matter in the accompanying consolidated balance sheets. Due to the outcome of the IRS examination and the Section 382 limita- tions, the Company has recorded a valuation allowance for the remaining Miami Subs loss carry-forwards. In accordance with SFAS No. 109 “Accounting for Income Taxes” any future reduction in the acquired Miami Subs valuation allowance will reduce goodwill. 1 3 . S t o c k P l a n s a n d O t h e r E m p l oye e B e n e f i t P l a n s Stock Option Plans On December 15, 1992, the Company adopted the 1992 Stock Option Plan (the “Plan”) which provides for the issuance of incentive stock options (“ISO’s”) to officers and key employees and non-qualified stock options to directors, officers and key employees. Up to 525,000 shares of com- mon stock have been reserved for issuance under the Plan. The terms of the options are generally ten years, except for ISO’s granted to any employee, whom prior to the granting of the option, owns stock representing more than 10% of the voting rights, for which the option term will be five years. The exercise price for non-qualified stock options outstanding under the Plan can be no less than the fair market value, as defined, of the Company’s common stock at the date of grant. For ISO’s, the exercise price can generally be no less than the fair market value of the Company’s common stock at the date of grant, with the exception of any employee who prior to the granting of the option, owns stock representing more than 10% of the voting rights, for which the exercise price can be no less than 110% of fair market value of the Company’s common stock at the date of grant. On May 24, 1994, the Company adopted the Outside Director Stock Option Plan (the “Directors’ Plan”) which provides for the issuance of non-qualified stock options to non-employee directors, as defined, of the Company. Under the Directors’ Plan, 200,000 shares of common stock have been authorized and issued pursuant to the Directors’ Plan. Options awarded to each non-employee director are fully vested, subject to forfeiture under certain conditions and shall be exercisable upon vesting. There were no options granted under the provisions of the Directors’ Plan during the years ended March 25, 2001, March 26, 2000 and March 28, 1999, respectively. In April 1998, the Company adopted the Nathan’s Famous Inc. 1998 Stock Option Plan (the “New Plan”), which provides for the issuance of non-qualified stock options to directors, officers and key employees. Up to 500,000 shares of com- mon stock have been reserved for issuance under the New Plan. In April 1998, the Company granted 120,000 ISO’s under the 1992 Stock Option Plan and the Company also issued 30,000 stock options to its non-employee directors under the New Plan. In October 1999, the Company granted 465,000 stock options under the New Plan. The Plan, the New Plan and the Directors’ Plan expire on December 2, 2002, April 5, 2008 and December 31, 2004, respectively, unless terminated earlier by the Board of Directors under conditions specified in the Plan. 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 26 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. Warrants In November 1996, the Company granted to a non-employee consultant a warrant to purchase 50,000 shares of its com- mon stock at an exercise price of $3.94 per share, which rep- resented 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, which is fully vested, expires on November 24, 2001. On July 17, 1997, the Company also granted an additional warrant to purchase 150,000 shares of its common stock at an exercise price of $3.25 per share, the actual market price of the Company’s common stock on the date of grant, to its Chairman and Chief Executive Officer. 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 25, 2001, March 26, 2000 and March 28, 1999 and changes during the years then ended is presented in the tables and narrative below: 2001 2000 1999 Options outstanding—beginning of year Granted Exercised Replacement options—Miami Subs Canceled Weighted Average Exercise Price $ 4.79 — — — 10.60 Shares 1,614,924 — — — (100,715) Shares 707,667 512,006 — 478,584 (83,333) Options outstanding—end of year 1,514,209 3.86 1,614,924 Options exercisable—end of year 1,220,876 1,086,424 Weighted average fair value of options granted Warrants outstanding—beginning of year Granted Replacement warrants—Miami Subs Expired Warrants outstanding—end of year Warrants exercisable—end of year Weighted average fair value of warrants granted 401,200 — — (32,450) 368,750 368,750 $ — 5.66 — — 18.61 4.53 $ — 350,000 — 63,700 (12,500) 401,200 401,200 Weighted Average Exercise Price $5.08 3.34 — 6.04 5.50 4.79 $2.10 $3.88 — 24.09 49.63 5.66 $ — Weighted Average Exercise Price $5.03 4.83 — — 5.08 5.08 $1.77 $3.88 — — — 3.88 $1.68 Shares 600,167 150,000 — — (42,500) 707,667 528,167 350,000 — — — 350,000 237,500 27 At March 25, 2001, 110,666 common shares were reserved for future stock option grant. 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 25, 2001: Options and Warrants Outstanding Options and Warrants Exercisable Range of Exercise Prices $3.19 to $ 4.00 4.01 to 7.00 7.01 to 22.25 $3.19 to $22.25 Number Outstanding at 3/25/01 1,202,558 580,651 99,750 1,882,959 Weighted Average Remaining Contractual Life 5.5 3.5 2.8 4.7 Weighted Average Exercise Price $ 3.41 5.41 12.61 $ 5.04 Number Exercisable at 3/25/01 909,225 580,651 99,750 1,589,626 Weighted Average Exercise Price $ 3.43 5.41 12.61 $ 4.73 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: Expected life (years) Interest rate Volatility Dividend yield 2000 6.3 6.22% 59.3% 0% 1999 6.5 5.58% 32.77% 0% There were no options or warrants granted during fiscal 2001. The Company has adopted the pro forma disclosure pro- visions 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 and earnings per share would approximate the pro forma amounts below: (in thousands, except per share amounts) Net income (loss): As reported Pro forma Net income (loss) per share: Basic As reported Pro forma Diluted As reported Pro forma 2001 2000 1999 $1,606 1,248 $(1,270) (1,907) $2,728 2,247 $ $ .23 .18 .23 .18 $ (.22) (.32) $ .58 .48 $ (.22) (.32) $ .57 .47 Because the SFAS No. 123 method of accounting is not applied to options granted prior to Januar y 1, 1995, the resulting pro forma compensation cost may not be repre- sentative of that to be expected in future years. 28 Common Stock Purchase Rights On June 20, 1995, the Board of Directors declared a dividend distribution of one common stock purchase right (the “Rights”) for each outstanding share of Common Stock of the Company. The distribution was paid on June 20, 1995 to the shareholders of record on June 20, 1995. The terms of the Rights were amended on April 6, 1998 and December 8, 1999. Each Right, as amended, entitles the registered holder thereof to purchase from the Company one share of the Common Stock at a price of $4.00 per share (the “Purchase Price”), subject to adjustment for anti-dilution. New Common Stock certificates issued after June 20, 1995 upon transfer or new issuance of the Common Stock will contain a notation incorporating the Rights Agreement by reference. The Rights are not exercisable until the Distribution Date. The Distribution Date is the earlier to occur of (i) ten days following a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) acquired, or obtained the right to acquire, beneficial owner- ship 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 announce- ment of an intention to make a tender offer or exchange offer by a person (other than the Company, any wholly-owned subsidiar y of the Company or cer tain 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 owner- ship 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 par t, at a price of $.001 per Right . In addition, the Rights Agreement, as amended, permits the Board of Directors, fol- lowing 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 9,058,827 shares of Common Stock for issuance upon exercise of the Rights. Restricted Stock Grants In December 1992, the Company awarded an aggregate of 50,016 shares of common stock to two executive officers. Pursuant to the terms of the agreement, the shares were sub- ject to cer tain restrictions. Compensation expense, based upon the fair market value of the stock on the date of grant, was determined by the Company to be $7 per share. Aggregate compensation expense of $280 has been recog- nized ratably over the six year period in which the restrictions lapse and has been included as deferred compensation as a component of stockholders’ equity in the accompanying con- solidated statement of stockholders’ equity. Compensation expense was approximately $0, $0, and $34 for the fiscal years ended March 25, 2001, March 26, 2000 and March 28, 1999, respectively. The restrictions lapsed for all shares in December 1998. Employment Agreements The Company and its Chairman and Chief Executive Officer entered into a new employment agreement effective as of Januar y 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 pre-tax earnings for each fiscal year, with a minimum bonus of $250. The new employ- ment agreement further provides for a three-year consulting period after termination of employment during which the offi- cer 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 fis- cal year of termination of his employment. The employment agreement also provides for the continuation of certain bene- fits following death or disability. In connection with the agree- ment, 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 with- out cause, he is entitled to receive his salary and incentive payment, if any, for the remainder of the contract term. The employment agreement fur ther 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 prorated 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 termina- tion, as well as a lump sum cash payment equal to the differ- ence 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 mar- ket 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, 2000, based on the original terms, and no non-renewal notice has been given as of June 14, 2001. The agreement provides for annual compensation of $275 plus cer tain other benefits. In November 1993, the Company amended this agreement to include a provision under which the officer has the right to terminate the agreement and receive payment equal to approximately three times annual compensation upon a change in control, as defined. The Company and the President of Miami Subs, pursuant to the merger agreement, entered into an employment agree- ment 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 cer tain 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 pay- ment equal to approximately three times annual compensa- tion upon a change in control, as defined. The Company and its Vice President—Finance and Chief Financial Officer entered into an employment agreement on January 31, 2000 that ends on January 31, 2002. The agree- ment provides for annual compensation of $155 plus certain other benefits. This 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 an employment agreement effective as of July 1, 2001 for a period commencing on the date of the agreement and ending on July 1, 2003. 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 com- pensation 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 termi- nate the agreement and receive payment equal to approxi- mately three times annual compensation upon a change in control, as defined. Each employment agreement terminates upon death or vol- untary termination by the respective employee or may be terminated by the Company upon 30 days prior written notice by the Company in the event of disability or “cause,” as defined in each agreement. 401(k) Plan The Company has a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code covering all non-union employees over age 21 who have been employed by the Company for at least one year. Employees may contribute to the plan, on a tax-deferred basis, up to 15% of their total annual salary. Company contributions are discretionary. Beginning with the plan year ending February 28, 1994, the Company elected to match contributions at a rate of $.25 per dollar contributed by the employee on up to a maximum of 3% of the employee’s total annual salar y. Employer contributions for the fiscal years ended March 25, 2001, March 26, 2000 and March 28, 1999 were $25, $21 and $13, respectively. Other Benefits The Company provides, on a contributory basis, medical ben- efits to active employees. The Company does not provide medical benefits to retirees. 1 4 . C o m m i t m e n t s a n d C o n t i n ge n c i e s 29 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 escala- tion clauses and common area maintenance charges (includ- ing taxes and insurance). Cer tain of the leases require additional (contingent) rental payments if sales volumes at the related restaurants exceed specified limits. As of March 25, 2001, the Company has non-cancelable operating lease com- mitments, net of certain sublease rental income, as follows: Lease Commitments Sublease Income Net lease Commitments 2002 2003 2004 2005 2006 Thereafter 5,354 4,611 4,130 4,013 3,790 16,887 2,637 2,388 2,019 1,854 1,749 8,866 2,717 2,223 2,111 2,159 2,041 8,021 Aggregate rental expense, net of sublease income, under all current leases amounted to $3,549, $2,848 and $2,093 for the three fiscal years ended March 25, 2001. 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 par ties. Such sub-leases provide for minimum annual rental payments by the Company aggregating approximately $2.1 million and expire on various dates through 2010 exclu- sive 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 percent- age of gross sales to be paid and related gross sales level vary by unit. Contingent rental expense was approximately $123, $123 and $113 for the fiscal years ended March 25, 2001, March 26, 2000 and March 28, 1999, respectively. The Company also guarantees cer tain equipment financing for franchisees with a third party lender. The Company’s max- imum obligation for loans funded by the lender as of March 25, 2001, was approximately $1.3 million. Contingencies On February 28, 1995, an action entitled Textron Financial Corporation v. 1045 Rush Street Associates, Stephen Anfang, and Nathan’s Famous, Inc. was instituted in the Circuit Court of Cook County, Illinois County Depar tment, Chancer y Division. The complaint alleged that the Company conspired to perpetrate a fraud upon the plaintiff and alleges that the Company breached its lease with 1045 Rush Street Associates and the estoppel agreement delivered to the plaintiff in con- nection therewith by subleasing these premises and thereafter assigning the lease with respect to the premises to a third party franchisee, and further by failing to pay rent under this lease on and after July 1990. This complaint sought damages in the amount of at least $1,500. The Company filed its answer to this complaint denying the material allegations of the com- plaint and asser ting several affirmative defenses to liability including, but not limited to, the absence initially or subse- quent failure of consideration for the estoppel agreement, equitable estoppel, release, failure to mitigate and other equi- table and legal defenses. The plaintiff added as additional par- ties defendant, the attorney who represented the landlord in the financing transaction in connection with which the Estoppel Agreement was required. The Company and some of the named defendants entered into a Settlement with Textron whereby all of the plaintiff’s claims against the Company and the other defendants were resolved under a Settlement Agreement and Mutual Release that provide for payments to be made jointly by all of the defendants on or before December 30, 1998 and January 15, 1999, which pay- ments were made (Note 11). On or about December 1996, Nathan’s Famous Systems, Inc. (“Systems”) instituted an action in the Supreme Cour t of New York, Nassau County, against Phylli Foods, Inc. a fran- chisee, and Calvin Danzig as a guarantor of Phylli Foods’ pay- ment and performance obligations, to recover royalty fees and advertising contributions due to Systems in the aggregate amount of $36 under a franchise agreement between Systems and Phylli Foods dated June 1, 1994. In their answer, the defendants essentially denied the material allegations of the complaint and interposed counterclaims against Systems in which they alleged essentially that Systems fraudulently induced the defendants to purchase the franchise from Systems or did so by means of negligent misrepresentation. Defendants also alleged that by reason of Systems’ allegedly fraudulent and deceitful conduct, Systems violated the General Business Law of New York. As a consequence of the foregoing, the defendants sought damages in excess of five million dollars, as well as statutory relief under the General Business Law. A subsequent motion for summary judgment against Phylli Foods was successful and the action was settled by a payment from the defendants to Systems of $22.5. The Company was named as one of three defendants in an action commenced in June 1997, in the Supreme Cour t of New York, Queens County. According to the complaint, the plaintiff, a dentist, is seeking injunctive relief and damages in an amount exceeding $5,000 against the landlord, one of the Company’s franchisees and the Company claiming that the operation of a restaurant in a building in Long Island City cre- ated noxious and offensive fumes and odors that allegedly were injurious to the health of the plaintiff and his employees and patients, and interfered with, and irreparably damaged his practice. Plaintiff also claims that the landlord fraudulently induced him to enter a lease extension by representing that the first floor of the building would be occupied by a non- food establishment . As a result of a motion for summar y judgment by the Company and Nathan’s Famous Systems, Inc. (“Systems”) which, as the actual franchisor was added to the action as a defendant, the Company was dismissed from the action. Neither the Company or Systems believes that there is any merit to the plaintiff’s claims against Systems inasmuch as Systems never was a party to the lease, and the restaurant, which closed in or about August 1995, was operated by a franchisee exclusively. By stipulation, the plaintiff has recently agreed to limit his damages only to the costs associated with relocating his practice which are less than $500. The Company is defending the action vigorously. On Januar y 5, 1999, Miami Subs was ser ved with a class action lawsuit entitled Robert J. Feeney, on behalf of himself and all other similarly situated vs. Miami Subs Corporation, et al., in Broward County Circuit Court, which was filed against Miami Subs, its directors and Nathan’s in a Florida state court by a shareholder of Miami Subs. Since that time, the Company and its designees to the Miami Subs board have also been served. The suit alleged that the proposed merger between Miami Subs and the Company, as contemplated by the com- panies’ non-binding letter of intent, is unfair to Miami Subs’ shareholders and constitutes a breach by the defendants of their fiduciary duties to the shareholders of Miami Subs. The plaintiff seeks among other things: (i) class action status; (ii) preliminary and permanent injunctive relief against consum- mation of the proposed merger; and (iii) unspecified damages to be awarded to the shareholders of Miami Subs. On April 7, 2000, the plaintiff filed his dismissal without prejudice of the action, effectively ending the case against all the defendants. The Company is involved in various other litigation in the nor- mal course of business, none of which, in the opinion of man- agement, will have a significant adverse impact on its financial position or results of operations. 30 1 5 . R e l a t e d Pa r t y Tr a n s a c t i o n s As of March 25, 2001, Miami Subs leased five restaurant proper ties from Kavala, Inc., a private company owned by Gus Boulis, a former shareholder of Miami Subs. Future mini- mum rental commitments due to Kavala at March 25, 2001 under these existing leases was approximately $1.1 million. In 1997, Miami Subs leased a then vacant, non-Miami Subs prop- erty to a company owned by Boulis. In connection with the acquisition of Miami Subs in November 1998, Nathan’s pur- chased all of the shares of Miami Subs Common Stock owned by Boulis for $4,200 and he resigned all positions therein. 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 serves as a member of the Board of Directors of Arthur Treacher’s Inc. Miami Subs has been granted cer tain exclusive co-branding rights by Ar thur Treacher’s, Inc. and Mr. Perlyn has been granted options to acquire approximately 175,000 shares of Arthur Treachers’ common stock. Nathan’s purchases its insurance from Harbor Group, Ltd., a company which is 50% owned by Howard Lorber, Nathan’s Chairman of the Board and Chief Executive Officer. During fiscal year 2001, Nathan’s paid Harbor Group $548. 1 6 . S i g n i f i c a n t Fo u r t h Q u a r t e r A d j u s t m e n t s During the fourth quarter of fiscal 2000, the Company’s man- agement continued to monitor and evaluate the collectibility and potential impairment of its assets, in par ticular, notes receivable and certain fixed assets. In connection therewith, additional allowances for doubtful accounts of $399, impair- ment charges on certain notes receivable of $273 and impair- ment charges on fixed assets of $465 were recorded in the fourth quarter. Additionally, Nathan’s recorded a $191 lease rental reser ve 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. 1 7 . Q u a r t e r l y F i n a n c i a l I n fo r m a t i o n ( U n a u d i t e d ) (in thousands, except share data) Fiscal Year 2001 Revenues Gross profit(a) Net income (loss) Per share information: Net income (loss) per share: Basic(b) Diluted(b) Shares used in computation of net income (loss) per share: First Quarter Second Quarter Third Quarter Fourth Quarter $12,899 3,423 745 $12,666 3,457 933 $11,418 2,821 145 $10,191 2,568 (217) $ $ .11 .11 $ $ .13 .13 $ $ .02 .02 $ $ (.03) (.03) 31 Basic(b) Diluted(b) Fiscal Year 2000 Revenues Gross profit(a) Net income Per share information: Net income (loss) per share: Basic Diluted Shares used in computation of net income (loss) per share: Basic Diluted 7,040,000 7,065,000 7,065,000 7,065,000 7,044,000 7,155,000 7,065,000 7,130,000 $ 7,914 2,487 469 $ 8,068 2,540 616 $ 11,899 3,110 (227) $ 10,010 2,528 (2,128) $ $ .10 .10 $ $ .13 .13 $ $ (.03) (.03) $ $ (.30) (.30) 4,722,000 4,722,000 7,040,000 7,040,000 4,744,000 4,722,000 7,040,000 7,040,000 (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. R e p o r t o f I n d e p e n d e n t P u b l i c A c c o u n t a n t s 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, stock- holders’ 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 state- ments based on our audits. We conducted our audits in accordance with auditing stan- dards generally accepted in the United States. Those stan- dards 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 examin- ing, on a test basis, evidence supporting the amounts and dis- closures in the financial statements. An audit also includes assessing the accounting principles used and significant esti- mates 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. Melville, New York June 14, 2001 Nathan’s Famous, Inc. & Subsidiaries M a r k e t f o r R e g i s t r a n t ’ s C o m m o n S t o c k and Related Stockholder Matters 32 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(cid:2) System (“Nasdaq”) under the symbol “NATH.” The following table sets forth the high and low clos- ing share prices per share for the periods indicated: Fiscal year ended March 26, 2000 First quarter Second quarter Third quarter Fourth quarter Fiscal year ended March 25, 2001 First quarter Second quarter Third quarter Fourth quarter High Low $4.19 3.69 3.66 4.75 $3.50 3.13 3.16 3.06 $ 4.00 3.94 3.81 3.88 $ 2.75 2.88 2.56 2.88 At June 6, 2001 the closing price per share for our common stock, as reported by Nasdaq was $3.30. Dividend Policy We have not declared or paid a cash dividend on our com- mon 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 earn- ings and financial requirements. Shareholders As of June 6, 2001, we had 840 shareholders of record, excluding shareholders whose shares were held by brokerage firms, depositories and other institutional firms in “street name” for their customers. Annual Shareholders’ Meeting The Annual Meeting of Shareholders of the Company will be held at 10:00 a.m., EST on Friday, September 14, 2001 at the deSeversky Conference Center, Nor thern Boulevard, Old Westbury, New York. Nathan’s Famous, Inc. & Subsidiaries C o r p o r a t e D i r e c t o r y L I S T O F D I R E C TO R S Howard M. Lorber Chairman & Chief Executive Officer, Nathan’s Famous, Inc. Wayne Norbitz President & Chief Operating Officer, Nathan’s Famous, Inc. Donald L. Perlyn Executive Vice President, Nathan’s Famous, Inc. Robert Eide Chairman, AEGIS Capital Corp. Barry Leistner President & Chief Executive Officer, Koenig Iron Works, Inc. Brian Genson President, Pole Position Investments A.F. Petrocelli Chairman & President, United Capital Corp. L I S T O F O F F I C E R S Howard M. Lorber Chairman & Chief Executive Officer Wayne Norbitz President & Chief Operating Officer Donald L. Perlyn Executive Vice President Carl Paley Senior Vice President—Franchise & Real Estate Development Ronald G. DeVos Vice President—Finance, Chief Financial Officer & Secretary Donald Schedler Vice President—Architecture & Construction I N D E P E N D E N T AU D I TO R S Arthur Andersen, LLP 115 Broad Hollow Road, Melville, New York 11747 C O R P O R AT E C O U N S E L Blau, Kramer, Wactlar & Lieberman, P.C. 100 Jericho Quadrangle, Jericho, New York 11753 T R A N S F E R AG E N T American Stock Transfer & Trust Company 40 Wall Street, New York, New York 10005 F O R M 1 0 - K The Company’s annual report on Form 10-K as filed with the Securities and Exchange Commission, is available upon written request: Secretary, Nathan’s Famous, Inc., 1400 Old Country Road, Westbury, New York 11590 Q UA RT E R LY S H A R E H O L D E R L E T T E R Will be available on our website. Copies will be provided upon request. C O R P O R AT E H E A D Q UA RT E R S 1400 Old Country Road, Westbury, New York 11590 516-338-8500 Telephone 516-338-7220 Facsimile C O M PA N Y W E B S I T E www.nathansfamous.com m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b d e n g i s e D 1 4 0 0 O l d C o u n t r y R o a d , S u i t e 4 0 0 / W e s t b u r y , N e w Y o r k 1 1 5 9 0 Life is short. Make fun of it.