Nathan's Famous, Inc. Annual Report 2003

FY2003 Annual Report · Nathan's Famous, Inc.

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2 0 0 3 A N N U A L R E P O R T

F I N A N C I A L H I G H L I G H T S
(dollars in thousands, except per share amounts)

Systemwide Data:

Sales**
Number of outlets, at year end***

Selected Consolidated Financial Data:
Revenues from continuing operations
(Loss) income from continuing operations
(Loss) income from discontinued operations
Cumulative effect of accounting change
Net earnings (loss)****
Basic (loss) earnings per share****

(Loss) income from continuing operations
(Loss) income from discontinued operations
Cumulative effect of accounting change
Basic (loss) earnings per share****

Diluted (loss) earnings per share****

(Loss) income from continuing operations
(Loss) income from discontinued operations
Cumulative effect of accounting change
Diluted (loss) earnings per share****

Weighted-average number of common shares outstanding

Basic
Diluted*****

Total assets
Stockholders’ equity

Fiscal Year

2003

2002*

2001

$248,722
355

$265,478
386

$287,097
411

$ 33,930
$ 42,227
$ 39,542
$ (1,506) $ 1,392
$ 1,585
$
(124) $
21
(143) $
$ (12,338) $
$
0
0
$ (13,968) $ 1,249
$ 1,606

$
$
$
$

(0.25) $
(0.03) $
(2.06) $
(2.34) $

0.20
$
(0.02) $
$
0.00
$
0.18

0.23
0.00
0.00
0.23

5,976
5,976
$ 25,886
$ 16,383

7,048
7,083
$ 48,745
$ 36,145

7,059
7,098
$ 51,826
$ 35,031

*
**

Our fiscal year ends on the last Sunday in March which results in a 52- or 53-week year. Fiscal 2002 was a 53-week year.
Includes Company-owned and franchise restaurant sales, sales to supermarkets by SFG, Inc., and sales of proprietary food and related items under the Branded
Product Program.
Includes Company-owned restaurants and franchised and licensed restaurants.

***
**** In fiscal 2003, provisions, net of income taxes, of $14.2 million or $2.37 per share were recorded associated with asset impairments and vacant properties.
*****Common stock equivalents have been excluded in fiscal 2003 as the impact of their inclusion would have been anti-dilutive.

P R O F I L E

Nathan’s began as a nickel hot dog stand in Coney Island in 1916 and has become a much-loved “New York institution” now available
throughout the United States and overseas.

Through our innovative points-of-distribution strategies, Nathan’s products are marketed within our restaurants and throughout a wide spectrum
of other foodservice and retail environments. Our Branded Product Program provides for the sale of Nathan’s signature products in over 2,500
foodservice locations. Further, Nathan’s hot dogs are now featured in over 6,000 supermarkets and club stores throughout the United States.

Continued market penetration of our highly recognized and valued brands and products through a wide variety of distribution channels, continues
to provide new and exciting growth opportunities for our Company.

P r e s i d e n t ’s L e t t e r

Fiscal 2003 has been both an exciting year, highlighted

by certain significant advances, as well as a challenging
year of transition.

C O R P O R A T E

The Company completed the repurchase of one million
shares of its common stock pursuant to its share repurchase
program adopted on September 14, 2001. As of June 30,
2003, the Company has also repurchased an additional
698,838 shares pursuant to its share repurchase program
adopted on October 7, 2002, to repurchase up to an
additional million shares of its common stock.

The financial results of fiscal 2003 were substantially
effected by certain non-cash charges. We implemented a
new accounting standard, whereby goodwill and certain
other intangible assets were written down by $13,192,000.
In addition, we recorded other impairment charges totaling
$2,792,000 relating to seven underperforming restaurants
and nine notes receivable. Nathan’s also recorded an
additional depreciation expense of approximately $428,000
in connection with early restaurant lease terminations.

In conjunction with changes in our business, management
implemented a corporate expense reduction plan. We antic-
ipate that total corporate G&A expenses in fiscal 2004

will be approximately $1,000,000 lower than G&A
expenses incurred in fiscal 2003.

P O I N T S - O F - D I S T R I B U T I O N S T R A T E G Y

We continue to grow through advances in our points-of-

distribution strategy and brand-marketing approach.

The Branded Product Program, featuring the sale of
Nathan’s hot dogs to the foodservice industry, generated
sales of approximately $6,509,000 during fiscal 2003
as compared to sales of $4,864,000 during fiscal 2002.

Royalties derived from our supermarket licensing agree-

ments were about $2,470,000 during fiscal 2003 as
compared to royalties received in fiscal 2002 of about
$1,962,000.

We look forward to continuing our successful expansion
in these areas. Nathan’s signed a new three-year pact with
the New York Yankees and will remain the official hot dog
at Yankee Stadium through 2006. We also anticipate addi-
tional royalties from new licensing agreements, to include
testing the sales of Nathan’s french fries in supermarkets.

Excitement!

I N T R O D U C I N G N E W P R O D U C T S

n a m e r e c o g n i t i o n

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

P r e s i d e n t ’s L e t t e r

R E S T A U R A N T O P E R A T I O N S

During fiscal 2003, twelve new franchise outlets opened.

We project that more than twenty additional outlets will
open during fiscal 2004.

The number of company-owned restaurants has been
reduced over the course of the past two years. We intend to
limit our company-owned operations to seven financially-
strong units by the end of fiscal 2004.

Co-branding activities continue within our restaurant
system as certain Kenny Rogers Roasters signature products
are being introduced into Nathan’s restaurants.

Internationally, we opened our first Nathan’s franchised

restaurant in China and have signed agreements to
develop Nathan’s in Japan. In July of 2003, Nathan’s
products became available for purchase by U.S. troops
stationed in Kuwait.

C O N C L U S I O N

At June 30, 2003, Nathan’s Famous, Inc. consisted
of 348 franchised and licensed units, nine company-owned
units, and over 2,500 branded product points of sale,

located within forty-one states, the District of Columbia,
and twelve foreign countries featuring the Nathan’s,
Miami Subs, and Kenny Rogers Roasters brands. Further,
Nathan’s products are sold in over 6,000 supermarkets
and club stores throughout the U.S.

Our focused strategies, creative approaches, ever-
expanding opportunities 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 and to
you—our shareholders. We are appreciative of your
continued support.

Hot Dog!

N E W O P P O R T U N I T I E S

expanding our presence

H O WA R D M . L O R B E R
Chairman and Chief Executive Officer

WAY N E N O R B I T Z
President and Chief Operating Officer

S E L E C T E D C O N S O L I D AT E D F I N A N C I A L D ATA
(in thousands, except per share amounts)

Fiscal Years Ended

Statement of Operations Data:
Revenues:
Sales
Franchise fees and royalties
License royalties, 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 of long-lived assets
Impairment of notes receivable
Other (income) expense

Total costs and expenses

(Loss) income from continuing operations before income taxes
(Benefit) provision for income taxes

(Loss) income from continuing operations

Discontinued Operations:

(Loss) income from discontinued operations before income taxes
(Benefit) provision for income taxes

(Loss) income from discontinued operations

March 30, March 31, March 25, March 26, March 28,
2001

2000(2)

2002(1)

1999

2003

$ 24,920
5,977
3,033

$ 27,492
7,944
4,106

$ 29,852
8,814
3,561

$ 25,601
5,906
2,343

$19,756
3,230
1,953

33,930

39,542

42,227

33,850

24,939

16,750
5,621
1,314
278
8,600
132
1,367
1,425
232

35,719

(1,789)
(283)

(1,506)

(206)
(82)

(124)

18,336
6,559
1,395
888
9,292
256
392
185
(210)

37,093

2,449
1,057

1,392

(238)
(95)

(143)

1,249
—

19,217
7,621
1,535
839
8,978
310
127
151
462

39,240

2,987
1,402

1,585

35
14

16,460
7,231
1,142
716
8,222
198
465
840
427

35,701

(1,851)
(382)

(1,469)

331
132

199

1,606
—

(1,270)
—

12,252
4,862
851
384
4,722
1
302
—
(349)

23,025

1,914
(576)

2,490

396
158

238

2,728
—

(Loss) income before cumulative effect of accounting change
Cumulative effect of change in accounting principle, net of tax benefit of $854

(1,630)
(12,338)

Net (loss) income

Basic (Loss) Income Per Share:

(Loss) income from continuing operations
(Loss) income from discontinued operations
Cumulative effect of change in accounting principle

Net (loss) income

$ (13,968) $ 1,249

$ 1,606

$ (1,270)

$ 2,728

(0.25) $
(0.03)
(2.06)

0.20
(0.02)
—

0.23
0.00
—

(0.25)
0.03
—

$ 0.53
0.05
—

(2.34) $

0.18

0.23

(0.22)

$ 0.58

(Continued)

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

2 / 3

Fiscal Years Ended

March 30, March 31, March 25, March 26, March 28,
2001

2000(2)

2002(1)

1999

2003

Diluted (Loss) Income Per Share(3):

(Loss) income from continuing operations
(Loss) income from discontinued operations
Cumulative effect of change in accounting principle

Net (loss) income

Dividends
Weighted-average shares used in computing net income (loss) per share

Basic
Diluted(3)

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(4)
Franchised

Total

Number of Units Open at End of Fiscal Year:

Company-owned
Franchised

Total

(0.25) $
(0.03)
(2.06)

0.20
(0.02)
—

0.23
0.00
—

(0.25)
0.03
—

$ 0.52
0.05
—

(2.34) $

0.18

0.23

(0.22)

$ 0.57

—

5,976
5,976

7,048
7,083

7,059
7,098

5,881
5,881

4,722
4,753

$ 5,935
25,886
1,053
$ 16,383

$ 9,565
48,745
1,220
$ 36,145

$ 5,210
51,826
1,789
$ 35,031

(322)
48,583
3,131
$ 33,347

$ 3,708
31,250
0
$26,348

$ 21,955
161,740

$ 27,484
185,389

$ 30,946
208,889

$ 27,478
152,627

$21,981
64,178

$183,695

$212,873

$239,835

$180,105

$86,159

12
343

355

22
364

386

25
386

411

32
415

447

25
163

188

Notes to Selected Financial Data
(1) Our fiscal year ends on the last Sunday in March which results in a 52- or 53-week year. Fiscal 2002 was a 53-week year.
(2) On April 1, 1999, Nathan’s acquired the intellectual property of Roasters Corp. and Roasters Franchise Corp. On September 30, 1999, Nathan’s completed the

acquisition of Miami Subs Corp. by acquiring the remaining 70% of the outstanding common stock Nathan’s did not already own.

(3) Common stock equivalents have been excluded from the computation for the years ended March 30, 2003 and March 26, 2000 as the impact of their inclusion would

have been anti-dilutive.

(4) Company-owned restaurant sales represent sales from restaurants presented as continuing operations and discontinued operations.

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
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R AT I O N S

Introduction

As used in this Report, the terms “we,” “us,” “our” and “Nathan’s” mean
Nathan’s Famous, Inc. and its subsidiaries (unless the context indicates a
different meaning).

During the fiscal year ended March 26, 2000, we completed two
acquisitions that provided us with two highly recognized brands. On April
1, 1999, we became the franchisor of the Kenny Rogers Roasters restau-
rant system by acquiring the intellectual property rights, including trade-
marks, recipes and franchise agreements of Roasters Corp. and Roasters
Franchise Corp. On September 30, 1999, we acquired the remaining
70% of the outstanding common stock of Miami Subs Corporation we did
not already own. Our revenues are generated primarily from operating
company-owned restaurants and franchising the Nathan’s, Miami Subs
and Kenny Rogers restaurant concepts, licensing agreements for the sale
of Nathan’s products within supermarkets and selling products under
Nathan’s Branded Product Program. The Branded Product Program
enables foodservice operators to offer Nathan’s hot dogs and other pro-
prietary items for sale within their facilities. In conjunction with this pro-
gram, foodservice operators are granted a limited use of the Nathan’s
trademark with respect to the sale of hot dogs and certain other propri-
etary food items and paper goods.

In addition to plans for expansion through franchising and our Branded
Product Program, Nathan’s is continuing to capitalize on the co-branding
opportunities within our existing restaurant system. Currently, the Arthur
Treacher’s brand is being sold within 125 Nathan’s, Kenny Rogers
Roasters and Miami Subs restaurants, the Nathan’s brand is included on
the menu of 81 Miami Subs and Kenny Rogers restaurants, while the
Kenny Rogers Roasters brand is being sold within 69 Miami Subs and
Nathan’s restaurants.

At March 30, 2003, our combined system consisted of 343 fran-
chised or licensed units, 12 company-owned units and over 2,200
Nathan’s Branded Product points of sale that feature Nathan’s world
famous all-beef hot dogs, located in 41 states, the District of Columbia
and 12 foreign countries. At March 30, 2003, our company-owned
restaurant system included eight Nathan’s units and four Miami Subs units,
as compared to 16 Nathan’s units, four Miami Subs units and two Kenny
Rogers Roasters units at March 31, 2002.

Critical Accounting Policies and Estimates

Our consolidated financial statements and the notes to our consolidated
financial statements contain information that is pertinent to management’s
discussion and analysis. The preparation of financial statements in con-
formity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the

reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities. We believe the following critical accounting policies
involve additional management judgement due to the sensitivity of the
methods, assumptions and estimates necessary in determining the related
asset and liability amounts.

Impairment of Goodwill and Other Intangible Assets

Statement of Financial Accounting Standards No. 142, “Goodwill and
Other Intangible Assets,” (“SFAS No. 142”) requires that goodwill and
intangible assets with indefinite lives will no longer be amortized but will
be reviewed annually (or more frequently if impairment indicators arise) for
impairment. The most significant assumptions which are used in this test
are estimates of future cash flows. We typically use the same assumptions
for this test as we use in the development of our business plans. If these
assumptions differ significantly from actual results, additional impairment
expenses may be required. In the first quarter of fiscal 2003, Nathan’s
adopted SFAS No. 142. In connection with the implementation of this
new standard, Goodwill, Trademarks, Trade Names and Recipes were
deemed to be impaired and their carrying value was written down by
$13,192,000, or $12,338,000, net of income tax benefit of $854,000.

Impairment of Long-Lived Assets

Statement of Financial Accounting Standards No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”)
requires management judgements regarding the future operating and dis-
position plans for underperforming assets, and estimates of expected real-
izable values for assets to be sold. The application of SFAS No. 144 has
affected the amounts and timing of charges to operating results in recent
years. We evaluate possible impairment of each restaurant individually,
and record an impairment charge whenever we determine that impairment
factors exist. We consider a history of restaurant operating losses to be the
primary indicator of potential impairment of a restaurant’s carrying value.
We have identified certain restaurants that have been impaired and
recorded impairment charges of approximately $1,367,000 relating to
seven restaurants during the fifty-two weeks ended March 30, 2003.

Impairment of Notes Receivable

Statement of Financial Accounting Standards No. 114, “Accounting by
Creditors for Impairment of a Loan,” requires management judgements
regarding the future collectibility of notes receivable and the underlying fair
market value of collateral. We consider the following factors when evalu-
ating a note for impairment: a) indications that the borrower is experienc-
ing business problems such as operating losses, marginal working capital,
inadequate cash flow or business interruptions; b) whether the loan is
secured by collateral that is not readily marketable; or c) whether the col-
lateral is susceptible to deterioration in realizable value. When deter-
mining possible impairment, we also assess our future intention to extend
certain leases beyond the minimum lease term and the debtor’s ability to
meet its obligation over that extended term. We have identified certain
notes receivable that have been impaired and recorded impairment
charges of approximately $1,425,000 relating to nine notes during the
fifty-two weeks ended March 30, 2003.

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

4 / 5

Revenue Recognition

In the normal course of business, we extend credit to franchisees for the
payment of ongoing royalties and to trade customers of our Branded
Product Program. Notes and accounts receivable, net, as shown on our
consolidated balance sheets are net of allowances for doubtful accounts.
An allowance for doubtful accounts is determined through analysis of the
aging of accounts receivable at the date of the financial statements,
assessment of collectibility based upon historical trends and an evaluation
of the impact of current and projected economic conditions. In the event
that the collectibility of a receivable is doubtful, the associated revenue is not
recorded until the facts and circumstances change in accordance with
Staff Accounting Bulletin SAB No. 101, “Revenue Recognition.”

Self-insurance Liabilities

We are self-insured for portions of our general liability coverage. As
part of our risk management strategy, our insurance programs include
deductibles for each incident and in the aggregate for a policy year. As
such, we accrue estimates of our ultimate self insurance costs throughout
the policy year. These estimates have been developed based upon our his-
torical trends, however, the final cost of many of these claims may not be
known for five years or longer. Accordingly, our annual self-insurance costs
may be subject to adjustment from previous estimates as facts and circum-
stances change. In conjunction with our external risk manager, we have
completed an evaluation of the outstanding claims and reserves relating
to prior years and have reversed $196,000 of previously recorded self-
insurance accruals during the fiscal year ended March 30, 2003 for
those claims on which the Company’s exposure has been settled.

Results of Operations

Fiscal Year Ended March 30, 2003 Compared to Fiscal Year Ended
March 31, 2002

Revenues from Continuing Operations

Total sales from continuing operations decreased by 9.4% or
$2,572,000 to $24,920,000 for the fifty-two weeks ended March 30,
2003 (“fiscal 2003 period”) as compared to $27,492,000 for the fifty-
three weeks ended March 31, 2002 (“fiscal 2002 period”). Sales from
the Branded Product Program increased by 33.8% to $6,509,000 for the
fiscal 2003 period as compared to sales of $4,864,000 in the fiscal
2002 period. Company-owned restaurant sales decreased 18.6% or
$4,217,000 to $18,411,000 from $22,628,000 primarily due to the
operation of five fewer company-owned stores as compared to the prior
fiscal year and an overall 5.3% sales decrease at our comparable restau-
rants (consisting of eight Nathan’s and four Miami Subs restaurants). The
reduction in company-owned stores is the result of our franchising three
restaurants and selling two restaurants, one of which was to the State of
Florida pursuant to an order of condemnation. The financial impact asso-
ciated with these five restaurants lowered restaurant sales by $3,294,000
and improved restaurant operating profits by $52,000 versus the fiscal
2002 period. During the fiscal 2002 period, approximately $341,000 in
restaurant sales were generated during the additional week of operations.
Franchise fees and royalties decreased by 24.8% or $1,967,000 to
$5,977,000 in the fiscal 2003 period compared to $7,944,000 in the
fiscal 2002 period. Franchise royalties decreased by $1,409,000 or
20.8% to $5,352,000 in the fiscal 2003 period as compared to
$6,761,000 in the fiscal 2002 period. The majority of this decline is due
to the decrease in the amount of franchise sales, primarily within the South
Florida marketplace for the Miami Subs brand, causing an increase in the

amount of royalties deemed unrealizable during the fiscal 2003 period as
compared to the fiscal 2002 period. Royalty income was not recorded
from 59 domestic franchised locations during the fiscal 2003 period as
compared to 48 domestic franchised locations during the fiscal 2002
period as a result of determining that collectibility of the royalties was not
reasonably assured. Domestic franchise restaurant sales decreased by
12.8% to $161,740,000 in the fiscal 2003 period as compared to
$185,389,000 in the fiscal 2002 period. At March 30, 2003, 343
franchised or licensed restaurants were operating as compared to 364
franchised or licensed restaurants at March 31, 2002. Franchise fee
income derived from new openings, co-branding activities and forfeitures
was $625,000 in the fiscal 2003 period as compared to $1,183,000
in the fiscal 2002 period. This decrease was attributable to lower fran-
chise fees earned of $247,000, the reduction in co-branding fees earned
of $210,000 and lower forfeitures of $101,000 between the two peri-
ods. Revenues from new unit openings were lower during the fiscal 2003
period as compared to the fiscal 2002 period although 24 new fran-
chised restaurants were opened, including our first Nathan’s unit in China
and nine Kenny Rogers Roasters units in foreign countries, as compared to
18 new franchised restaurants during the fiscal 2002 period. Franchise
fees attributable to new Kenny Rogers Roasters restaurants is recognized
upon payment by the franchisee, which payments have not been received.
During the fiscal 2002 period, the one-time co-branding initiative was
substantially concluded. During the fiscal 2003 period, we earned
$207,000 in connection with the termination of two Master Development
Agreements in accordance with their terms due to non-compliance by the
franchisees as compared to $308,000 during the fiscal 2002 period in
connection with forfeited area development fees.

License royalties were $2,585,000 in the fiscal 2003 period as com-
pared to $2,038,000 in the fiscal 2002 period. This increase is attribut-
able to higher royalties earned from sales made by SFG, Inc., Nathan’s
licensee for the sale of Nathan’s frankfurters within supermarkets and
club stores, the manufacture of certain proprietary spices and seasonings,
the sale of condiments sold under the Nathan’s brand and royalties
earned under a new license agreement in connection with the Branded
Product Program.

Interest income decreased by $208,000 to $292,000 in the fiscal
2003 period versus $500,000 in the fiscal 2002 period due to lower
interest income on its investments in marketable securities and its notes
receivable.

Investment and other income decreased by $1,412,000 to $156,000
in the fiscal 2003 period versus $1,568,000 in the fiscal 2002 period.
During the fiscal 2003 period, Nathan’s investment loss was approxi-
mately $206,000 greater than in the fiscal 2002 period due primarily to
differences in performance of the financial markets during the time that
Nathan’s maintained its investments in “trading securities,” which “trading
securities” were substantially liquidated in October 2002, as compared
to being held for the entire fiscal 2002 period. Nathan’s loss from sub-
leasing was approximately $28,000 more than in the fiscal 2002
period. In the fiscal 2003 period, Nathan’s realized a gain of $135,000
in connection with the early termination of a Branded Product Program
sales agreement. During the fiscal 2003 period, Nathan’s earned approx-
imately $126,000 less miscellaneous income than in the fiscal 2002
period principally in connection with its ice cream sales. During the fiscal
2002 period, Nathan’s recognized net gains of $1,226,000 which
included $850,000 from the successful appeal of a condemnation award
from the State of Florida and gains primarily in connection with the sale of
two company-owned restaurants and one non-restaurant property.

Costs and Expenses from Continuing Operations

Cost of sales from continuing operations decreased by $1,586,000 to
$16,750,000 in the fiscal 2003 period from $18,336,000 in the fiscal
2002 period. During the fiscal 2003 period, restaurant cost of sales were
lower than the fiscal 2002 period by approximately $2,661,000. Cost
of sales were lower by approximately $2,237,000 as a result of operat-
ing fewer company-owned restaurants. The cost of restaurant sales at our
comparable units as a percentage of restaurant sales was 62.6% in the fis-
cal 2003 period as compared to 61.5% in the fiscal 2002 period due
primarily to higher labor costs. Higher product and other direct costs of
approximately $1,075,000 were incurred in connection with the growth
of our Branded Product Program which was partially offset by lower
commodity costs during the fiscal 2003 period. During the fiscal 2003
period, commodity prices of our primary meat products were in line with
historical norms as compared to being at their highest levels in recent
years through most of the twenty-six weeks ended September 23, 2001.
Restaurant operating expenses from continuing operations decreased
by $938,000 to $5,621,000 in the fiscal 2003 period from $6,559,000
in the fiscal 2002 period. Restaurant operating costs were lower in the
fiscal 2003 period by approximately $1,105,000, as compared to
the fiscal 2002 period as a result of operating fewer restaurants. The
reduction in restaurant operating expenses from operating fewer restau-
rants was partially offset by higher occupancy and current insurance costs
net of lower marketing and utility costs during the fiscal 2003 period.

Depreciation and amortization from continuing operations decreased
by $81,000 to $1,314,000 in the fiscal 2003 period from $1,395,000
in the fiscal 2002 period due to our additional capital spending.

Amortization of intangibles decreased by $610,000 to $278,000 in
the fiscal 2003 period from $888,000 in the fiscal 2002 period.
Amortization of intangibles decreased as a result of the adoption of SFAS
No. 142, “Goodwill and Other Intangible Assets” in the first quarter of
fiscal 2003. Pursuant to SFAS No. 142, we have discontinued the
amortization of Goodwill, Trademarks, Trade Names and Recipes.

General and administrative expenses decreased by $692,000 to
$8,600,000 in the fiscal 2003 period as compared to $9,292,000 in
the fiscal 2002 period. The decrease in general and administrative
expenses was due primarily to lower litigation expense of approximately
$450,000, lower bad debts expense of approximately $185,000,
lower compensation and related expenses of approximately $106,000
and lower travel expenses of $106,000 which were partly offset by
higher insurance costs of approximately $172,000.

Interest expense was $132,000 during the fiscal 2003 period as com-
pared to $256,000 during the fiscal 2002 period. The reduction in inter-
est expense relates primarily to the repayment of outstanding bank debt
between the two periods.

Impairment charge on long-lived assets of $1,367,000 during the
fiscal 2003 period represents the write-down relating to seven under-
performing stores, three of which are expected to continue operating.

Impairment charge on notes receivable of $1,425,000 during the

fiscal 2003 period relates to the write-down of nine notes receivable.

Other expense in the fiscal 2003 period represents lease reserves
relating to four vacant properties. Other income of $210,000 in the
fiscal 2002 period represents the reversal of a previously recorded litiga-
tion provision for an award that was settled, upon appeal, in our favor.

(Benefit) Provision for Income Taxes from Continuing Operations

In the fiscal 2003 period, the income tax benefit from continuing oper-
ations was $283,000 or 15.8% of loss from continuing operations before
income taxes as compared to a provision for income taxes of $1,057,000

or 43.2% of income from continuing operations before income taxes in the
fiscal 2002 period. The effective income tax rate was lower in the fiscal
2003 period due in part to the adoption of SFAS No. 142 which requires
that goodwill no longer be amortized. Such goodwill amortization was
not tax deductible by Nathan’s which increased the effective tax rate in
prior years.

Discontinued Operations

During the fiscal 2003 period, discontinued operations included eight
Company-owned restaurants, all of which were abandoned, including
seven which were abandoned in connection with the Home Depot early
lease terminations. Revenues generated by these eight restaurants were
$3,543,000 during the fiscal 2003 period as compared to $4,857,000
during the fiscal 2002 period. Losses before income taxes from these
restaurants were $206,000 during the fiscal 2003 period as compared
to $238,000 during the fiscal 2002 period. The fiscal 2003 loss
before tax included $428,000 of additional depreciation expense
due to a change in the estimated useful lives of the restaurants operating
within Home Depot Improvement Centers for which Nathan’s received
early lease termination notifications during the second quarter fiscal
2003 period.

Cumulative Effect of Change in Accounting Principle

In the first quarter fiscal 2003 period, Nathan’s adopted SFAS
No. 142, “Goodwill and Other Intangibles.” In connection with the imple-
mentation of this new standard, Goodwill, Trademarks, Trade Names and
Recipes were deemed to be impaired and their carrying value was written
down by $13,192,000, or $12,338,000, net of tax.

Fiscal Year Ended March 31, 2002 Compared to Fiscal Year Ended
March 25, 2001

Revenues from Continuing Operations

Total sales from continuing operations decreased by 7.9% or
$2,360,000 to $27,492,000 for the fifty-three weeks ended March 31,
2002 (“fiscal 2002 period”) as compared to $29,852,000 for the fifty-
two weeks ended March 25, 2001 (“fiscal 2001 period”). Sales from the
Branded Product Program increased by 26.2% or $1,011,000 to
$4,864,000 for the fiscal 2002 period as compared to sales of
$3,853,000 in the fiscal 2001 period. Company-owned restaurant sales
decreased 13.0% or $3,371,000 to $22,628,000 from $25,999,000
primarily due to operating nine fewer company-owned stores as com-
pared to the prior fiscal period and lower sales at the new restaurant that
began operating during the fiscal 2001 period. These reductions were
partially offset by sales during the fiscal 2002 period from a restaurant
that was closed for renovation during the fiscal 2001 period and
increased sales at the Coney Island restaurant during the summer season.
Fiscal 2002 was a 53-week reporting period while fiscal 2001 was a
52-week reporting period. Approximately $362,000 in restaurant sales
were generated during the additional week of operations. The unit reduc-
tion was the result of our franchising two company-owned restaurants,
transferring one company-owned restaurant to a franchisee pursuant to a
management agreement, closing four unprofitable company-owned units
(including three Miami Subs restaurants pursuant to our divestiture plan),
selling one unit pursuant to an order of condemnation and closing one
unit due to its lease expiration. The financial impact associated with these
nine restaurants lowered restaurant sales by $3,749,000 and improved
restaurant operating profits by $30,000 versus the fiscal 2001 period,
excluding any one time gains or royalties to be received from restaurants
sold to franchisees. Comparable restaurant sales (consisting of nine

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

6 / 7

Nathan’s and four Miami Subs restaurants that have been operating
for 18 months or longer as of the beginning of the fiscal year) during
the comparable 52-week period increased by 3.3% versus the fiscal
2001 period.

Franchise fees and royalties decreased by 9.9% or $870,000 to
$7,944,000 in the fiscal 2002 period compared to $8,814,000 in the
fiscal 2001 period. Franchise royalties decreased by $1,299,000 or
16.1% to $6,761,000 in the fiscal 2002 period as compared to
$8,060,000 in the fiscal 2001 period. Domestic franchise restaurant
sales decreased by 11.2% to $185,389,000 in the fiscal 2002 period
as compared to $208,889,000 in the fiscal 2001 period. The majority
of this decline was due to fewer franchised restaurants operating during
the fiscal 2002 period as compared to the fiscal 2001 period. During the
initial months subsequent to September 11, 2001, we experienced lower
royalties from franchised restaurants that operate in markets which are sig-
nificant tourist destinations, such as Las Vegas and South Florida, and from
franchised restaurants operating at airports throughout the United States.
Further contributing to the decline was an increase in the amount of royal-
ties deemed to be unrealizable. At March 31, 2002, 364 franchised or
licensed restaurants were operating as compared to 386 franchised or
licensed restaurants at March 25, 2001. Franchise fee income derived
from new openings and co-branding was $875,000 in the fiscal 2002
period as compared to $754,000 in the fiscal 2001 period. This
increase was primarily attributable to the fees earned from the co-branding
initiative within the existing restaurant system. During the fiscal 2002
period, 18 new franchised or licensed units opened and 47 units were
co-branded. During the fiscal 2002 period, we realized $308,000 in
connection with forfeited development fees.

License royalties were $2,038,000 in the fiscal 2002 period as
compared to $1,958,000 in the fiscal 2001 period. This increase was
comprised of higher royalties earned from sales by SFG, Inc., Nathan’s
licensee for the sale of Nathan’s frankfurters within supermarkets and
club stores.

Interest income was $500,000 in the fiscal 2002 period versus
$537,000 in the fiscal 2001 period which was due primarily to earning
lower interest rates on our investments due to changes in the marketplace.
Investment income was $1,568,000 in the fiscal 2002 period versus
$1,066,000 in the fiscal 2001 period. During the fiscal 2002 period,
Nathan’s recognized net gains of $1,226,000 in connection with the
sale of two company-owned restaurants and a third non-restaurant prop-
erty. During the fiscal 2002 period, Nathan’s investment loss was approx-
imately $384,000 less than in the fiscal 2001 period due primarily to
differences in performance of the financial markets between the two peri-
ods. In the fiscal 2001 period, Nathan’s recognized income of approxi-
mately $479,000 in connection with the introduction of a consolidated
food distribution agreement and earned a $500,000 transfer fee in con-
nection with a change in ownership of Nathan’s licensee, SFG, Inc.

Costs and Expenses from Continuing Operations

Cost of sales from continuing operations decreased by $881,000 to
$18,336,000 in the fiscal 2002 period from $19,217,000 in the fiscal
2001 period. During the fiscal 2002 period, restaurant cost of sales were
lower than the fiscal 2001 period by approximately $1,980,000.
Restaurant cost of sales were reduced by approximately $2,423,000 as
a result of operating fewer company-owned restaurants. Additionally,
lower cost of sales at one of the Kenny Rogers Roasters restaurants opened

last year partly offset the higher costs at our comparable restaurants.
Notwithstanding the lower costs and expenses of the Kenny Rogers
Roasters restaurant, this restaurant continued to underperform. Conse-
quently, we decided to sell the Kenny Rogers Roasters restaurant in
Rockville Centre, New York in fiscal 2003. The cost of restaurant sales at
our comparable units as a percentage of restaurant sales was 62.1% in
the fiscal 2002 period as compared to 60.9% in the fiscal 2001 period
due primarily to higher labor and related costs. Higher costs of approxi-
mately $1,100,000 were incurred in connection with the growth of our
Branded Product Program and higher product costs incurred for much of
the fiscal 2002 period. During the first twenty-six weeks of fiscal 2002,
commodity prices of our primary meat products were at their highest levels
in recent years causing the majority of the cost increase. In response, we
raised retail prices on a selective basis in an attempt to partially offset
these increases. Beginning in the third quarter fiscal 2002 these costs
were lowered to their historical levels.

Restaurant operating expenses from continuing operations decreased by
$1,062,000 to $6,559,000 in the fiscal 2002 period from $7,621,000
in the fiscal 2001 period. Restaurant operating costs were lower in the
fiscal 2002 period by approximately $1,357,000 as compared to the
fiscal 2001 period as a result of operating fewer restaurants. Restaurant
operating expenses of the Kenny Rogers Roasters restaurant opened last
year were $40,000 lower during the fiscal 2002 period due in part to
the higher costs attributable to last year’s openings. These reductions in
restaurant operating expenses were partially offset by an increase of
approximately $330,000 at the comparable restaurants which were pri-
marily driven by higher marketing and insurance costs.

Depreciation and amortization from continuing operations decreased by
$140,000 to $1,395,000 in the fiscal 2002 period from $1,535,000
in the fiscal 2001 period. Lower depreciation expense of operating fewer
company-owned restaurants during the fiscal 2002 period versus the fiscal
2001 period was partially offset by additional depreciation expense
attributable to fiscal 2001’s capital spending.

Amortization of intangibles increased by $49,000 to $888,000 in the
fiscal 2002 period from $839,000 in the fiscal 2001 period.
Amortization of intangibles increased as a result of fiscal 2001’s final
purchase price allocation of the Miami Subs acquisition.

General and administrative expenses increased by $314,000 to
$9,292,000 in the fiscal 2002 period as compared to $8,978,000
in the fiscal 2001 period. The increase in general and administrative
expenses was due primarily to higher legal and professional expenses of
approximately $544,000, including a litigation expense of $450,000,
and higher bad debts of approximately $76,000 which were partly offset
by lower personnel and incentive compensation expense of approximately
$389,000.

Interest expense was $256,000 during the fiscal 2002 period as
compared to $310,000 during the fiscal 2001 period. The reduction in
interest expense relates primarily to the repayment of outstanding debt
between the two periods.

Impairment charges on long-lived assets from continuing operations of
$392,000 during the fiscal 2002 period and $127,000 during the
fiscal 2001 period reflect write-downs relating to one underperforming
store in the fiscal 2002 period and one underperforming store in the fiscal
2001 period.

Impairment charges on notes receivable of $185,000 during the fiscal
2002 period and $151,000 during the fiscal 2001 period relate to
write-downs of two and one notes receivable, respectively.

Other income of $210,000 in the fiscal 2002 period represents the
reversal of a previously recorded litigation provision for an award that was
settled, upon appeal, in our favor. Other expense of $462,000 during
the fiscal 2001 period relates primarily to lease termination expenses of
units that were not part of the final divestiture plan of $463,000.

Provision for Income Taxes from Continuing Operations

In the fiscal 2002 period, the provision for income taxes from continu-
ing operations was $1,057,000 or 43.2% as compared to $1,402,000
or 46.9% of income from continuing operations before income taxes in the
fiscal 2001 period.

Discontinued Operations

Discontinued operations is comprised of eight Company-owned res-
taurants, all of which were abandoned during fiscal 2003, including
seven which were abandoned in connection with the Home Depot early
lease terminations. Revenues generated by these eight restaurants were
$4,857,000 during the fiscal 2002 period as compared to $4,947,000
during the fiscal 2001 period. Loss before income taxes from these restau-
rants was $238,000 during the fiscal 2002 period as compared to
income before income taxes of $35,000 during the fiscal 2001 period.

Liquidity and Capital Resources

Cash and cash equivalents at March 30, 2003 aggregated
$1,415,000, decreasing by $419,000 during the fiscal 2003 period.
At March 30, 2003, marketable securities and investment in limited
partnership decreased by $4,196,000 from March 31, 2002 to
$4,623,000 and net working capital decreased to $5,935,000 from
$9,565,000 at March 31, 2002. During fiscal 2003, Nathan’s liqui-
dated its investment in limited partnership and invested the proceeds with
its other marketable securities.

Cash provided by operations of $2,296,000 in the fiscal 2003
period is primarily attributable to net loss of $13,968,000, non-cash
charges of $17,482,000, including the cumulative effect of accounting
change of $12,338,000, depreciation and amortization of $1,907,000,
impairment charges on long-lived assets and notes receivable of
$2,792,000, amortization of intangible assets of $278,000, provision
for doubtful accounts of $82,000 and amortization of bond premium
of $85,000. Changes in the other assets and liabilities consisted of
decreases in marketable securities and investment in limited partnership
of $981,000, prepaid expenses and other current assets of $627,000,
inventories of $203,000, accounts payable and accrued expenses of
$1,647,000, other liabilities of $577,000 and deferred franchise fees
of $205,000.

Cash provided by investing activities of $3,696,000 in the fiscal
2003 period is comprised primarily of proceeds from the available for
sale securities of $6,088,000, proceeds from the sale of a restaurant and
other fixed assets of $781,000 and repayments on notes receivable
of $273,000 which were partly offset by the purchases of available for
sale securities of $2,884,000 and expenditures relating to capital
improvements of selected company-owned restaurants and other fixed
asset additions of $562,000.

Cash used in financing activities of $6,411,000 in the fiscal 2003
period represents repurchases of 1,599,547 shares of common stock
at a total cost of $5,858,000 and repayments of notes payable and
obligations under capital leases in the amount of $553,000, including
the repayment of a mortgage in the amount of $373,000 on December
31, 2002.

On September 14, 2001, Nathan’s was authorized to purchase up to
one million shares of its common stock. Pursuant to our stock repurchase
program, we repurchased one million shares of common stock in open
market transactions and a private transaction at a total cost of
$3,670,000 through the quarter ended September 29, 2002. On
October 7, 2002, Nathan’s was authorized to purchase up to one
million additional shares of its common stock. Through March 30, 2003,
Nathan’s purchased 641,238 shares of common stock at a cost of
approximately $2,323,000. Subsequent to March 30, 2003, Nathan’s
purchased an additional 57,600 shares of common stock at a cost
of approximately $211,000. To date, Nathan’s has purchased a total
of 1,698,838 shares of common stock at a cost of approximately
$6,204,000. We expect to make additional purchases of stock from time
to time, depending on market conditions, in open market or in privately
negotiated transactions, at prices deemed appropriate by management.
There is no set time limit on the purchases. Nathan’s expects to fund these
stock repurchases from its operating cash flow.

We expect that we will make additional investments in certain existing
restaurants in the future and that we expect to fund those investments from
our operating cash flow. We do not expect to incur significant capital
expenditures to develop new company-owned restaurants through March
29, 2004.

In connection with our acquisition of Miami Subs, we determined that
up to 18 underperforming restaurants would be closed pursuant to our
divestiture plan. To date, we have terminated leases on 16 of those prop-
erties, sold one of the remaining properties to a non-franchisee and are
continuing to market the remaining property for sale. The sale of the restau-
rant was consummated on October 4, 2002. Since acquiring Miami
Subs, we have accrued approximately $1,461,000 and made pay-
ments of approximately $1,273,000 for lease obligations and termina-
tion costs, as part of the acquisition, for units having total future minimum
lease obligations of $7,680,000 that had remaining lease terms of one
year up to approximately 17 years. We may incur future cash payments,
consisting primarily of future lease payments, including costs and expenses
associated with terminating additional leases, that were not part of our
divestiture plan.

There are currently 33 properties that we either own or lease from third
parties which we lease or sublease to franchisees and non-franchisees.
We remain contingently liable for all costs associated with these properties
including: rent, property taxes and insurance. Additionally, we guaranteed
financing on behalf of certain franchisees with two third-party lenders. Our
maximum obligation for loans funded by the lenders as of March 30,
2003 was approximately $1,004,000.

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

8 / 9

The following schedules represent Nathan’s cash contractual obligations and the expiration of other contractual commitments by maturity (in thousands):

Cash Contractual Obligations

Long-term debt
Capital lease obligations
Employment agreements
Operating leases

Gross cash contractual obligations

Sublease income

Net cash contractual obligations

Other Contractual Commitments

Loan guarantees

Total commercial commitments

Payments Due by Period

Less than
1 Year

$ 167
6
733
4,204

5,110
1,969

1–3
Years

$ 333
14
338
8,041

8,726
3,744

4–5
Years

$ 333
17
—
6,885

7,235
3,072

After
5 Years

$ 334
22
—
6,527

6,883
3,821

Total

$ 1,167
59
1,071
25,657

27,954
12,606

$15,348

$3,141

$4,982

$4,163

$3,062

Total
Amounts
Committed

Amount of Commitment
Expiration Per Period

Less than
1 Year

1–3
Years

4–5
Years

After
5 Years

$ 1,004

$ 363

$ 408

$ 233

$ —

$ 1,004

$ 363

$ 408

$ 233

$ —

Management believes that available cash, marketable investment secu-
rities, 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 never borrowed
any funds under this line of credit.

Seasonality

Our business is affected by seasonal fluctuations, the effects of weather
and economic conditions. Historically, sales and earnings have been high-
est during our first two fiscal quarters with the fourth fiscal quarter repre-
senting 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.
However, due to the changing composition of our restaurants, we believe
that future revenues will be highest during our first two fiscal quarters with
the fourth fiscal quarter representing the slowest period.

Impact of Inflation

During the past several years, our commodity costs have remained rel-
atively stable. As such, we believe that inflation has not materially
impacted earnings during that period of time. However, during the first half
of the fiscal 2002 period, commodity prices of our primary meat products
were at their highest levels in recent years. These costs were in line with
historical norms during the fiscal 2003 period. We also experienced
increased costs for utilities and insurance during the fiscal 2002 and
2003 periods. Last year, various Federal and New York State legislators
proposed changes to the minimum wage requirements, however, none of
the proposals were enacted. We believe that increases in the minimum
wage could have a significant financial impact on our financial results.
Prolonged increases in labor, food and other operating expenses could
adversely affect our operations and those of the restaurant industry and we
might have to reconsider our pricing strategy as a means to offset reduced
operating margins.

Adoption of New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”)
issued SFAS No. 143, “Accounting for Asset Retirement Obligations”
(“SFAS No. 143”). SFAS No. 143 addresses financial and reporting
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations asso-
ciated with the retirement of long-lived assets that result from acquisition,
construction, development and/or the normal operation of a long-lived
asset, except for certain obligations of lessees. SFAS No. 143 is effective
for financial statements issued for fiscal years beginning after June 15,
2002. Nathan’s has evaluated the effect of adoption on its financial posi-
tion and results of operations, and it is not expected to have a material
impact on the financial position and results of operations of the Company.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 (“SFAS No. 145”), “Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections.” SFAS No. 145 eliminates the current requirement
that gains and losses on debt extinguishment must be classified as extraor-
dinary items in the income statement. Instead, such gains and losses will
be classified as extraordinary items only if they are deemed to be unusual
and infrequent, in accordance with the current criteria for extraordinary
classification. Additionally, any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that
does not meet the criteria in APB Opinion No. 30 for classification as an
extraordinary item shall be reclassified. In addition, SFAS No. 145 elimi-
nates an inconsistency in lease accounting by requiring that modifications
of capital leases that result in reclassification as operating leases be
accounted for consistent with sale-leaseback accounting rules. SFAS No.
145 also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to debt extinguishment will
be effective for fiscal years beginning after May 15, 2002, and the
changes related to lease accounting will be effective for transactions
occurring after May 15, 2002. SFAS No. 145 has not had, and is not
expected to have, a material impact on the financial position and results
of operations of the Company.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (“SFAS No. 148”), “Accounting for Stock-Based
Compensation—Transition and Disclosure” which addresses financial
accounting and reporting for recording expenses for the fair value of stock
options. SFAS No. 148 provides alternative methods of transition for a vol-
untary change to fair value-based method of accounting for stock-based
employee compensation. Additionally, SFAS No. 148 requires more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The provisions of this Statement are
effective for fiscal years ending after December 15, 2002, with early
application permitted in certain circumstances. The interim disclosure pro-
visions are effective for financial reports containing financial statements for
interim periods beginning after December 15, 2002. The adoption of
SFAS No. 148 had no impact on the financial position and results of
operations of the Company.

In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 (“SFAS No. 149”), “Amendment of Statement 133
on Derivative Instruments and Hedging Activities,” which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, except for the
provisions that were cleared by the FASB in prior pronouncements. The
Company is currently evaluating the effect of the adoption of SFAS No.
149 on its financial position and results of operations.

In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 (“SFAS No. 150”), “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity.” This
Statement establishes standards for how an issuer classifies and measures
in its statement of financial position certain financial instruments with char-
acteristics of both liabilities and equity. In accordance with the standard,
financial instruments that embody obligations for the issuer are required to
be classified as liabilities. This Statement shall be effective for financial
instruments entered into or modified after May 31, 2003, and other-
wise shall be effective for the year ended December 31, 2003. The
Company is currently evaluating the effect of the adoption of SFAS No.
150 on its financial position and results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN
No. 45”), “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others.”
FIN No. 45 requires that upon issuance of a guarantee, a guarantor must
recognize a liability for the fair value of an obligation assumed under a
guarantee. FIN No. 45 also requires additional disclosures by a guar-
antor in its interim and annual financial statements about the obligations
associated with guarantees issued. The recognition provisions of FIN No.
45 are effective for any guarantees issued or modified after December 31,
2002. The disclosure requirements are effective for financial statements for

periods ending after December 15, 2002. The adoption of FIN No. 45
did not have a material impact on the Company’s financial position or
results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN
No. 46”), “Consolidation of Variable Interest Entities.” In general, a vari-
able interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A vari-
able interest entity often holds financial assets, including loans or receiv-
ables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in activities on behalf of another com-
pany. Until now, a company generally has included another entity in its
consolidated financial statements only if it controlled the entity through vot-
ing interests. FIN No. 46 changes that by requiring a variable interest
entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity’s activities or enti-
tled to receive a majority of the entity’s residual returns or both. FIN No.
46’s consolidation requirements apply immediately to variable interest enti-
ties created or acquired after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements
apply to all financial statements issued after January 31, 2003, regardless
of when the variable interest entity was established. The Company has
adopted FIN No. 46 effective January 31, 2003. The Company does
not anticipate that the adoption of FIN No. 46 will have a material impact
on the Company’s consolidated financial condition or results of operations
taken as a whole.

Forward-Looking Statements

Certain statements contained in this report are forward-looking state-
ments. Forward-looking statements represent our current judgment regard-
ing future events. Although we would not make forward-looking statements
unless we believe we have a reasonable basis for doing so, we cannot
guarantee their accuracy and actual results may differ materially from
those we anticipated due to a number of uncertainties, many of which we
are not aware. These risks and uncertainties, many of which are not within
our control, include, but are not limited to: economic, weather, legislative
and business conditions; the collectibility of receivables; the availability of
suitable restaurant sites on reasonable rental terms; changes in consumer
tastes; the ability to continue to attract franchisees; the ability to purchase
our primary food and paper products at reasonable prices; no material
increases in the minimum wage; and our ability to attract competent
restaurant and managerial personnel. We generally identify forward-
looking statements with the words “believe,” “intend,” “plan,” “expect,”
“anticipate,” “estimate,” “will,” “should” and similar expressions.

Qualitative and Quantitative Disclosures About Market Risk

Cash and Cash Equivalents

We have historically invested our cash and cash equivalents in short-
term, fixed rate, highly rated and highly liquid instruments which are rein-
vested when they mature throughout the year. Although our existing
investments are not considered at risk with respect to changes in interest
rates or markets for these instruments, our rate of return on short-term
investments could be affected at the time of reinvestment as a result of inter-
vening events. As of March 30, 2003, Nathan’s cash and cash equiva-
lents aggregated $1,415,000. Earnings on these cash and cash
equivalents would increase or decrease by approximately $3,500 per
annum for each .25% change in interest rates.

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

10 / 11

Marketable Investment Securities

We have invested our marketable investment securities in intermediate term, fixed rate, highly rated and highly liquid instruments. These investments
are subject to fluctuations in interest rates. As of March 30, 2003, the market value of Nathan’s marketable investment securities aggregated
$4,623,000. Interest income on these marketable investment securities would increase or decrease by approximately $11,600 per annum for each
.25% change in interest rates. The following chart presents the hypothetical changes in the fair value of the marketable investment securities held at March 30,
2003 that are sensitive to interest rate fluctuations (in thousands):

Valuation of Securities
Given an Interest Rate
Decrease of X Basis Points

(150BPS)

(100BPS)

(50BPS)

Valuation of Securities
Given an Interest Rate
Increase of X Basis Points

+50BPS

+100BPS

+150BPS

Fair
Value

Municipal notes and bonds

$4,843

$4,777

$4,712

$4,650

$4,589

$4,530

$4,473

Investment in Limited Partnership

Commodity Costs

We had invested in a highly liquid investment limited partnership that
invested principally in equity securities. These investments were subject to
the performance of the equity markets. During fiscal 2003, Nathan’s liqui-
dated its investment in limited partnership. Accordingly, Nathan’s invest-
ment in limited partnership has no further exposure to the equity markets.

Borrowings

The interest rate on our borrowings is generally determined based upon
prime rate and may be subject to market fluctuation as the prime
rate changes as determined within each specific agreement. We do not
anticipate entering into interest rate swaps or other financial instruments
to hedge our borrowings. At March 30, 2003, total outstanding debt,
including capital leases, aggregated $1,226,000 of which $1,167,000
is at risk due to changes in interest rates. The current interest rate is 4.50%
per annum and will adjust in January 2006 and 2009 to prime plus
.25%. Nathan’s also maintains a $7,500,000 credit line which bears
interest at the prime rate (4.25% at March 30, 2003). The Company has
never borrowed any funds under this line. Accordingly, the Company does
not believe that fluctuations in interest rates would have a material impact
on its financial results.

The cost of commodities are subject to market fluctuation. We have not
attempted to hedge against fluctuations in the prices of the commodities
we purchase using future, forward, option or other instruments. As a result,
our future commodities purchases are subject to changes in the prices of
such commodities. Generally, we attempt to pass through permanent
increases in our commodity prices to our customers, thereby reducing the
impact of long-term increases on our financial results. A short-term increase
or decrease of 10% in the cost of our food and paper products for the
entire fifty-two weeks ended March 30, 2003 would have increased or
decreased cost of sales by approximately $1,133,000.

Foreign Currencies

Foreign franchisees generally conduct business with us and make pay-
ments in United States dollars, reducing the risks inherent with changes in
the values of foreign currencies. As a result, we have not purchased future
contracts, options or other instruments to hedge against changes in values
of foreign currencies and we do not believe fluctuations in the value of for-
eign currencies would have a material impact on our financial results.

C O N S O L I D AT E D B A L A N C E S H E E T S
(in thousands, except share amounts)

ASSETS
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
Goodwill
Intangible assets, net
Deferred income taxes
Other assets, net

LIABILITIES AND STOCKHOLDERS’ EQUITY
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 L)

Stockholders’ Equity

Common stock, $.01 par value; 30,000,000 shares authorized; 7,065,202 and

7,065,202 shares issued; and 5,423,964 and 7,023,511 shares outstanding at
March 30, 2003 and March 31, 2002, respectively

Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income

Treasury stock, at cost, 1,641,238 and 41,691 shares at March 30, 2003 and

March 31, 2002, respectively

Total stockholders’ equity

The accompanying notes are an integral part of these statements.

March 30, March 31,

2003

2002

$ 1,415
4,623
2,607
389
799
642
2,079

12,554
740
6,263
95
3,319
2,647
268

$ 1,834
8,819
2,808
592
1,512
1,269
1,747

18,581
2,277
8,925
11,083
6,040
1,539
300

$ 25,886

$48,745

173
1,377
4,942
127

6,619
1,053
1,831

9,503

559
1,619
6,506
332

9,016
1,220
2,364

12,600

71
40,746
(18,505)
64

71
40,746
(4,537)
—

22,376

36,280

(5,993)

(135)

16,383

36,145

$ 25,886

$48,745

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

12 / 13

C O N S O L I D AT E D S TAT E M E N T S O F O P E R AT I O N S
(in thousands, except share and per share amounts)

Fifty-Two

Fifty-Three
Weeks Ended Weeks Ended Weeks Ended

Fifty-Two

Revenues
Sales
Franchise fees and royalties
License royalties
Interest income
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 long-lived assets
Impairment charge on notes receivable
Other expense (income), net

Total costs and expenses

(Loss) income from continuing operations before (benefit) provision for income taxes
(Benefit) provision for income taxes

(Loss) income from continuing operations

(Loss) income from discontinued operations, net of income tax (benefit) provision of

$(82), $(95) and $14 in 2003, 2002 and 2001, respectively

(Loss) income from operations before cumulative effect of accounting change
Cumulative effect of change in accounting principle, net of tax benefit of $854

Net (loss) income

Per Share Information

Basic (loss) income per share:

(Loss) income from continuing operations
Loss from discontinued operations
Cumulative effect of change in accounting principle

Net (loss) income

Diluted (loss) income per share:

(Loss) income from continuing operations
Loss from discontinued operations
Cumulative effect of change in accounting principle

Net (loss) income

Weighted-average shares used in computing net income (loss) per share

Basic

Diluted

The accompanying notes are an integral part of these statements.

March 30,
2003

March 31,
2002

March 25,
2001

$ 24,920
5,977
2,585
292
156

33,930

16,750
5,621
1,314
278
8,600
132
1,367
1,425
232

35,719

(1,789)
(283)

(1,506)

(124)

(1,630)
(12,338)

$27,492
7,944
2,038
500
1,568

39,542

18,336
6,559
1,395
888
9,292
256
392
185
(210)

37,093

2,449
1,057

1,392

(143)

1,249
—

$29,852
8,814
1,958
537
1,066

42,227

19,217
7,621
1,535
839
8,978
310
127
151
462

39,240

2,987
1,402

1,585

1,606
—

$(13,968)

$ 1,249

$ 1,606

(.25)
(.03)
(2.06)

$ (2.34)

(.25)
(.03)
(2.06)

$ (2.34)

.20
(.02)
—

.18

.20
(.02)
—

.18

.23
.00
—

.23

.23
.00
—

.23

5,976,000

7,048,000

7,059,000

5,976,000

7,083,000

7,098,000

C O N S O L I D AT E D S TAT E M E N T 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)

Fifty-Two Weeks Ended March 30, 2003, Fifty-Three Weeks Ended March 31, 2002 and
Fifty-Two Weeks Ended March 25, 2001

Common
Shares

Common
Stock

7,040,196
25,000
6
—

—

7,065,202
—
—

—

7,065,202
—

—
—

—

$70
1
—
—

—

71
—
—

—

71
—

—
—

—

Additional
Paid-in
Capital

$40,669
77
—
—

Accumulated
Deficit

$ (7,392)
—
—
1,606

—

40,746
—
—

—

40,746
—

(5,786)
—
1,249

—

(4,537)
—

—
—

—

—
(13,968)

—

Accumulated
Other
Compre-
hensive
Income

$ —
—
—
—

—

—
—
—

—

—
—

64
—

—

Treasury Stock, at Cost

Amount

Total
Stock-
holders’
Equity

Compre-
hensive
Income
(Loss)

— $
—
—
—

—

—
41,691
—

—

— $ 33,347
78
—
—
—
1,606
—

$ 1,606

—

—
(135)
—

—

— $ 1,606

35,031
(135)
1,249

$ 1,249

— $ 1,249

41,691
1,599,547

(135)
(5,858)

36,145
(5,858)

—
—

—

—
64
— (13,968)

64
(13,968)

—

— $(13,904)

Balance, March 26, 2000
Stock compensation
Warrants exercised
Net income

Comprehensive income

Balance, March 25, 2001
Repurchase of treasury stock
Net income

Comprehensive income

Balance, March 31, 2002
Repurchase of treasury stock
Unrealized gain on marketable
securities, net of deferred
income taxes of $46

Net loss

Comprehensive loss

Balance, March 30, 2003

7,065,202

$ 71

$ 40,746

$ (18,505)

$ 64

1,641,238 $ (5,993) $ 16,383

The accompanying notes are an integral part of this statement.

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

14 / 15

C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S
(in thousands)

Fifty-Two

Fifty-Three
Weeks Ended Weeks Ended Weeks Ended

Fifty-Two

Cash Flows From Operating Activities:

Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

$(13,968)

$ 1,249

$ 1,606

March 30,
2003

March 31,
2002

March 25,
2001

Cumulative effect of change in accounting principle, net of tax benefit
Depreciation and amortization
Amortization of intangible assets
Amortization of bond premium
Gain on disposal of fixed assets
Stock compensation expense
Gain on sale of available for sale securities
Impairment of long-lived assets
Impairment of notes receivable
Provision for doubtful accounts
Deferred income taxes

Changes in operating assets and liabilities:

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 (used in) operating activities

Cash Flows From Investing Activities:

Proceeds from sale of available for sale securities
Purchase of available for sale securities
Lease terminations and other costs in connection with acquisition
Purchases of property and equipment
Payments received on notes receivable
Proceeds from sales of property and equipment

Net cash provided by (used in) investing activities

Cash Flows From Financing Activities:
Principal repayments of borrowing
Repurchase of treasury stock

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:

Loan to franchisee in connection with sale of restaurant

The accompanying notes are an integral part of these statements.

12,338
1,907
278
85
(39)
—
(10)
1,367
1,425
82
(585)

981
2
203
627
32
(1,647)
(205)
(577)

2,296

6,088
(2,884)
—
(562)
273
781

3,696

(553)
(5,858)

(6,411)

(419)
1,834

—
1,661
888
—
(1,226)
—
—
685
185
267
509

(4,171)
(26)
(69)
(295)
104
(2,538)
(324)
20

(3,081)

—
—
—
(2,082)
812
3,348

2,078

(1,353)
(135)

(1,488)

(2,491)
4,325

—
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

$ 1,415

$ 1,834

$ 4,325

138

$ 264

$ 149

$ 317

$ 1,508

$ 416

$ 130

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
(in thousands, except share and per share amounts)
March 30, 2003, March 31, 2002 and March 25, 2001

Note A — Description and Organization of Business

Note B — Summary of Significant Accounting Policies

1. Description of Business

1. Principles of Consolidation

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 foodservice retail-
ers to sell some of Nathan’s proprietary products outside of the realm of a
traditional franchise relationship. During fiscal 2000, the Company
acquired the intellectual property rights, including trademarks, recipes and
franchise agreements of Roasters Corp. and Roasters Franchise Corp.
(“Roasters”), the franchisor of Kenny Rogers Roasters. In addition, Nathan’s
completed a merger with Miami Subs Corporation (“Miami Subs”)
whereby it acquired the remaining 70% of Miami Subs common stock not
previously owned by the Company. Miami Subs features a wide variety of
lunch, dinner and snack foods, including hot and cold sandwiches and
various ethnic foods. Roasters features home-style family foods based on
a menu centered around wood-fire rotisserie chicken. The Company con-
siders its subsidiaries to be in the food service industry, and has pursued
co-branding and co-hosting initiatives; accordingly, management has eval-
uated the Company as a single reporting unit.

At March 30, 2003, the Company’s restaurant system, consisting of
Nathan’s Famous, Kenny Rogers Roasters and Miami Subs restaurants,
included 12 company-owned units concentrated in the New York metro-
politan area and Florida, 343 franchised or licensed units, including 6
units operating pursuant to management agreements and approximately
2,200 branded product points of sale under the Nathan’s Branded
Product Program, located in 41 states, the District of Columbia, and 12
foreign countries.

2. Organization of Business

In July 1987, all of the outstanding shares, options and warrants of
Nathan’s Famous, Inc. (the “Predecessor Company”), a then publicly-held
New York corporation, were acquired through a cash transaction,
accounted for by the purchase method of accounting (the “Acquisition”). In
connection with the Acquisition, a privately-held New York corporation
(the “Acquiring Corporation”) was merged into the Predecessor Company.
In November 1989, the surviving corporation was merged with
Nathan’s Newco, Inc., a Delaware corporation which, upon the effec-
tiveness 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.

The consolidated financial statements include the accounts of the
Company and all of its wholly-owned subsidiaries. All intercompany bal-
ances and transactions have been eliminated in consolidation.

2. Fiscal Year

The Company’s fiscal year ends on the last Sunday in March, which
results in a 52- or 53-week reporting period. The results of operations
and cash flows for the fiscal year ended March 30, 2003 are on the
basis of a 52-week reporting period. The results of operations and cash
flows for the fiscal year ended March 31, 2002 are on the basis of a
53-week reporting period. The results of operations and cash flows for the
fiscal year ended March 25, 2001 are on the basis of a 52-week report-
ing period.

3. Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Significant estimates made by management in
preparing the consolidated financial statements include the allowance for
doubtful accounts, the allowance for impaired notes receivable, the self-
insurance reserve, impairment charges on goodwill and long-lived assets,
lease termination reserves and the deferred tax valuation allowance.

4. Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash
restricted for untendered shares associated with the Acquisition amounted
to $83 at March 30, 2003 and March 31, 2002, respectively, and is
included in cash and cash equivalents.

5. Impairment of Notes Receivable

Nathan’s follows the guidance in Statement of Financial Accounting
Standards No. 114 (“SFAS No. 114”), “Accounting by Creditors for
Impairment of a Loan,” as amended. 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: (a) indications that the
borrower is experiencing business problems such as operating losses,
marginal working capital, inadequate cash flow or business interruptions,
(b) loans secured by collateral that is not readily marketable, or (c) that

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

16 / 17

are susceptible to deterioration in realizable value. When determining
impairment, management’s assessment includes its intention to extend
certain leases beyond the minimum lease term and the debtor’s ability to
meet its obligation over that extended term. In certain cases where
Nathan’s has determined that a loan has been impaired, it generally does
not expect to extend or renew the underlying leases. Based on the
Company’s analysis, it has determined that there are notes that have
incurred such an impairment. Following are summaries of impaired notes
receivable and the allowance for impaired notes receivable:

Total recorded investment in impaired

notes receivable

Allowance for impaired notes receivable

Recorded investment in impaired notes

receivable, net

Allowance for impaired notes receivable at

beginning of fiscal year

Impairment charges on notes receivable
Direct writedowns of impaired notes receivable
Other increases in allowance for impaired

notes receivable

Allowance for impaired notes receivable at

end of fiscal period

March 30, March 31,

2003

2002

$ 2,598
(2,065)

$1,000
(640)

$ 533

$ 360

$ 640
1,425
—

$ 613
185
(240)

—

$ 2,065

$ 640

Based on the present value of the estimated cash flows of identified
impaired notes receivable, the Company records interest income on its
impaired notes receivable on a cash basis. The following represents the
interest income recognized and average recorded investment of impaired
notes receivable.

March 30, March 31, March 25,
2002

2001

2003

Interest income recorded on
impaired notes receivable
Average recorded investment in
impaired notes receivable

6. Inventories

$ 47

$ 112

$1,624

$936

$1,702

Inventories, which are stated at the lower of cost or market value, con-
sist primarily of restaurant food items, supplies, marketing items and equip-
ment in connection with the Branded Product Program. Cost is determined
using the first-in, first-out method.

7. Marketable Securities and Investment in Limited Partnership

In accordance with SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” the Company determines the
appropriate classification of securities at the time of purchase and
reassesses the appropriateness of the classification at each reporting date.
At March 30, 2003 and March 31, 2002, all marketable securities held
by the Company have been classified as either available for sale or trad-
ing and, as a result, are stated at fair value. Realized gains and losses on
the sale of securities, as determined on a specific identification basis, as
well as unrealized holding gains and losses on trading securities are
included in the accompanying consolidated statements of operations.
Unrealized gains and losses on available for sale securities are included
as a component of accumulated other comprehensive income in the
accompanying consolidated balance sheet. Investment income in the trad-
ing limited partnership is based upon Nathan’s proportionate share of the

change in the underlying net assets of the partnership. The partnership
invests primarily in publicly traded common stocks with a concentration in
securities traded on exchanges in the United States of America. During the
fiscal year ended March 30, 2003, the Company liquidated its invest-
ment in limited partnership.

8. Sales of Restaurants

The Company observes the provisions of SFAS No. 66, “Accounting
for Sales of Real Estate,” which establishes accounting standards for rec-
ognizing profit or loss on sales of real estate. SFAS No. 66 provides for
profit recognition by the full accrual method, provided (a) the profit is
determinable, that is, the collectibility of the sales price is reasonably
assured or the amount that will not be collectible can be estimated, and
(b) the earnings process is virtually complete, that is, the seller is not
obliged to perform significant activities after the sale to earn the profit.
Unless both conditions exist, recognition of all or part of the profit shall be
postponed and other methods of profit recognition shall be followed. In
accordance with SFAS No. 66, the Company recognizes profit on sales
of restaurants under the full accrual method, the installment method and the
deposit method, depending on the specific terms of each sale. The
Company continues to record depreciation expense on the property sub-
ject to the sales contracts that are accounted for under the deposit method
and records any principal payments received as a deposit until such time
that the transaction meets the sales criteria of SFAS No. 66.

As of March 30, 2003 and March 31, 2002, the Company had
deposits on the sales of restaurants of $161 and $214, respectively,
included in accrued expenses in the accompanying consolidated bal-
ance sheets.

9. Property and Equipment

Property and equipment are stated at cost less accumulated depre-
ciation and amortization. Depreciation and amortization are calculated
primarily on the straight-line basis over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of the
estimated useful life or the lease term of the related asset. The estimated
useful lives are as follows:

Building and improvements
Machinery, equipment, furniture and fixtures
Leasehold improvements

10. Intangible Assets

5–25 years
5–15 years
5–20 years

Intangible assets consist of (i) the goodwill resulting from the
Acquisition; (ii) trademarks and trade names, franchise rights and recipes
in connection with Roasters and (iii) goodwill and certain identifiable intan-
gibles resulting from the Miami Subs acquisition. These intangible assets
were being amortized over periods from 10 to 40 years through March
31, 2002.

On April 1, 2002, the Company adopted SFAS No. 142, “Goodwill
and Other Intangible Assets” (“SFAS No. 142”), which supercedes APB
Opinion No. 17, “Intangible Assets” and certain provisions of SFAS No.
121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of” (“SFAS No. 121”). SFAS No. 142 required
that goodwill and other intangibles be reported separately; eliminates the
requirement to amortize goodwill and indefinite-lived intangible assets;
addresses the amortization of intangible assets with a defined life; and
addresses impairment testing and recognition of goodwill and intangible
assets. SFAS No. 142 changes the method of accounting for the recover-
ability of goodwill for the Company, such that it is evaluated at the brand

level based upon the estimated fair value of the brand. Fair value can be
determined based on discounted cash flows, on comparable sales or valu-
ations of other restaurant brands. The impairment review involves a two-
step process as follows:

Step 1: Compare the fair value for each reporting unit to its carrying
value, including goodwill. For each reporting unit where the carry-
ing value, including goodwill, exceeds the reporting unit’s fair value,
move on to step 2. If a reporting unit’s fair value exceeds the carry-
ing value, no further work is performed and no impairment charge
is necessary.

Step 2: Allocate the fair value of the reporting unit to its identifiable
tangible and intangible assets, excluding goodwill and liabilities.
This will derive an implied fair value for the reporting unit’s goodwill.
Then, compare the implied fair value of the reporting unit’s goodwill
with the carrying amount of reporting unit’s goodwill. If the carrying
amount of the reporting unit’s goodwill is greater than the implied
fair value of its goodwill, an impairment loss must be recognized for
the excess. The transitional impairment charge, if any, is recorded as
a cumulative effect of accounting change for goodwill.

The Company completed its initial SFAS No. 142 transitional impairment test of goodwill, including an assessment of a valuation of the Nathan’s,
Miami Subs and Roasters reporting units by an independent valuation consultant, and has recorded an impairment charge requiring the Company
to write-off substantially all of the goodwill related to the acquisitions, trademarks and recipes as a cumulative effect of accounting change in the first
quarter of fiscal 2003. The fair value was determined through the combination of a present value analysis as well as prices of comparative businesses.
The changes in the net carrying amount of goodwill, trademarks and recipes recorded in the first quarter of fiscal 2003 are as follows:

Balance as of April 1, 2002
Cumulative effect of accounting change for goodwill and other intangible assets

Balance as of March 30, 2003

Goodwill

Trademarks

Recipes

Total

$ 11,083
(10,988)

$ 2,242
(2,174)

$ 30
(30)

$ —

$ 13,355
(13,192)

163

The table below presents amortized and unamortized intangible assets as of March 30, 2003 and March 31, 2002:

March 30, 2003

March 31, 2002

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

$ 3,512
254
2

Amortized intangible assets:

Royalty streams
Favorable leases
Other

Unamortized intangible assets:

Trademarks, tradenames and recipes

Goodwill

$4,259
285
16

$4,560

$(1,008)
(285)
(16)

$(1,309)

$3,251
—
—

$ 4,259
285
62

$ (747)
(31)
(60)

3,251

$ 4,606

$ (838)

3,768

2,425

(153)

2,272

$3,319

$ 7,031

$ (991)

$ 6,040

$17,043

$(5,960)

$11,083

The following table provides a reconciliation of the reported net (loss) income and net (loss) income per share for the fiscal years ended March 30,

2003, March 31, 2002 and March 25, 2001, adjusted as though SFAS No. 142 had been effective for all periods:

Reported net (loss) income before cumulative effect of change in accounting principle
Add back discontinued amortization expense

Adjusted net (loss) income before cumulative effect of change in accounting principle
Cumulative effect of change in accounting principle

Adjusted net (loss) income

Reported basic net (loss) income per common share before cumulative effect of change in accounting principle
Effect of discontinued amortization expense

Adjusted basic net (loss) income per common share before cumulative effect of change in accounting principle
Cumulative effect of change in accounting principle

Adjusted basic net (loss) income per common share

Reported diluted net (loss) income per common share before cumulative effect of change in accounting principle
Effect of discontinued amortization expense

Adjusted diluted net (loss) income per common share before cumulative effect of change in accounting principle
Cumulative effect of change in accounting principle

Adjusted diluted net (loss) income per common share

2003

2002

2001

$ (1,630)
—

$1,249
555

$1,606
555

(1,630)
(12,338)

1,804
—

2,161
—

$(13,968)

$1,804

$2,161

(.28)
—

$ .18
.08

$ .23
.08

(.28)
(2.06)

.26
—

.31
—

$ (2.34)

$ .26

$ .31

(.28)
—

$ .18
.07

$ .23
.07

(.28)
(2.06)

.25
—

.30
—

$ (2.34)

$ .25

$ .30

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

18 / 19

As of March 30, 2003, the Company has reevaluated the impact of
SFAS No. 142 on its goodwill, and no additional impairment charges
were deemed necessary.

Total amortization expense for intangible assets was $278, $888 and
$839 for the fiscal years ended March 30, 2003, March 31, 2002 and
March 25, 2001. The Company estimates future annual amortization
expense of approximately $261 per year for each of the next five years.
In the fourth quarter of fiscal 2003, the Company recorded an impairment
charge of $239 related to its favorable leases. This impairment charge,
which was based upon the fact that such locations had incurred negative
cash flows from operations for fiscal 2003 and are projected to incur
negative cash flows in fiscal 2004, is recorded as a component of impair-
ment charge on long-lived assets. (See Note B–11.)

11. Long-Lived Assets

Long-lived assets and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate the carrying value
may not be recoverable. Impairment is measured by comparing the carry-
ing value of the long-lived assets to the estimated undiscounted future cash
flows expected to result from use of the assets and their ultimate disposi-
tion. In instances where impairment is determined to exist, the Company
writes down the asset to its fair value based on the present value of esti-
mated future cash flows.

Impairment losses are recorded on long-lived assets on a restaurant-
by-restaurant basis whenever impairment factors are determined to be
present. The Company considers a history of restaurant operating losses to
be its primary indicator of potential impairment for individual restaurant
locations. The Company has identified seven, two and one units that have
been impaired, and recorded impairment charges of $1,367 (inclusive of
$239 related to favorable leases), $685 and $127 in the statements of
operations for the fiscal years ended March 30, 2003, March 31, 2002
and March 25, 2001, respectively.

The Company periodically reviews intangible assets for impairment,
whenever events or changes in circumstances indicate that the carrying
amounts of those assets may not be recoverable. (See Note B–10 for a
description of impairment charges recorded on goodwill and other intan-
gible assets during the fiscal year ended March 30, 2003 as a result of
the adoption of SFAS No. 142.) No impairment charges were recorded
with respect to such intangible assets for the fiscal years ended March 31,
2002 and March 25, 2001.

12. Self-Insurance

The Company is self-insured for portions of its general liability cover-
age. As part of Nathan’s risk management strategy, its insurance programs
include deductibles for each incident and in the aggregate for a policy
year. As such, Nathan’s accrues estimates of its ultimate self-insurance
costs throughout the policy year. These estimates have been developed
based upon Nathan’s historical trends, however, the final cost of many of
these claims may not be known for five years or longer. Accordingly,
Nathan’s annual self-insurance costs may be subject to adjustment from
previous estimates as facts and circumstances change. The self-insurance
accruals at March 30, 2003 and March 31, 2002 were $596 and
$1,346, respectively, and are included in “Accrued expenses and other
current liabilities” in the accompanying consolidated balance sheets.
During the fiscal year ended March 30, 2003, the self-insurance accrual
was reduced by approximately $829, due principally to the satisfaction of
a claim against the Company totaling $659 (see Note L) and the reversal
of approximately $196 of previously recorded self-insurance accruals in
connection with the conclusion of claims relating to prior policy years.

13. Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, marketable secu-
rities and investment in limited partnership, accounts receivable and
accounts payable approximate fair value due to the short-term maturities of
the instruments. The carrying amounts of note payable and capital lease
obligations and notes receivable approximate their fair values as the cur-
rent interest rates on such instruments approximates current market interest
rates on similar instruments.

14. Stock-Based Compensation

At March 30, 2003, the Company has five stock-based employee
compensation plans, which are described more fully in Note K. The
Company accounts for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related Interpretations
(“APB No. 25”) and has adopted the disclosure provisions of SFAS No.
148, “Accounting for Stock-Based Compensation—Transition and Disclo-
sure.” Under APB No. 25, when the exercise price of the Company’s
employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized. Accordingly,
no compensation expense has been recognized in the consolidated finan-
cial statements in connection with employee stock option grants.

The following table illustrates the effect on net income and earnings per
share had the Company applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, “Accounting for
Stock-Based Compensation,” to stock-based employee compensation.

Fiscal Year Ended

March 30, March 31, March 25,
2002

2001

2003

Net (loss) income, as reported
Deduct: Total stock-based employee

compensation expense determined
under fair value-based method for
all awards

$(13,968)

$1,249

$1,606

(165)

(410)

(358)

Pro forma net (loss) income

$(14,133)

$ 839

$1,248

(Loss) earnings per share
Basic—as reported

$ (2.34)

$ .18

$ .23

Diluted—as reported

$ (2.34)

$ .18

$ .23

Basic—pro forma

Diluted—pro forma

$ (2.36)

$ .12

$ .18

$ (2.36)

$ .12

$ .18

Pro forma compensation expense may not be indicative of pro forma
expense in future years. For purposes of estimating the fair value of each
option on the date of grant, the Company utilized the Black-Scholes
option-pricing model.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restric-
tions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company’s employee stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management’s opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.

The weighted-average option fair values and the assumptions used to

estimate these values are as follows:

Weighted-average option fair values
Expected life (years)
Interest rate
Volatility
Dividend yield

2003

2002

$2.19
10.0
5.30%
32.8%
0%

$1.30
6.6
4.06%
32.3%
0%

There were no options or warrants granted during fiscal 2001.

15. Start-up Costs

Preopening and similar costs are expensed as incurred.

16. Revenue Recognition—Company-owned Restaurants

Sales by Company-owned restaurants are recognized on a cash basis,

upon the performance of services.

17. Revenue Recognition—Franchising Operations

In connection with its franchising operations, the Company receives ini-
tial franchise fees, development fees, royalties, contributions to marketing
funds, and in certain cases, revenue from subleasing restaurant properties
to franchisees.

Franchise and area development fees, which are typically received
prior to completion of the revenue recognition process, are recorded as
deferred revenue. Initial franchise fees are recognized as income when
substantially all services to be performed by Nathan’s and conditions relat-
ing to the sale of the franchise have been performed or satisfied, which
generally occurs when the franchised restaurant commences operations.
The following services are typically provided by the Company prior to the
opening of a franchised restaurant:

• Approval of all site selections to be developed.
• Provision of architectural plans suitable for restaurants to be

developed.

• Assistance in establishing building design specifications, review-

ing construction compliance and equipping the restaurant.

• Provision of appropriate menus to coordinate with the restaurant

design and location to be developed.

• Provide management training for the new franchisee and sel-

ected staff.

• Assistance with the initial operations of restaurants being developed.
Development fees are nonrefundable and the related agreements
require the franchisee to open a specified number of restaurants in the
development area within a specified time period or the agreements may
be canceled by the Company. Revenue from development agreements
is deferred and recognized as restaurants in the development area
commence operations on a pro rata basis to the minimum number of
restaurants required to be open, or at the time the development agreement
is effectively canceled. At March 30, 2003 and March 31, 2002, $127
and $332, respectively, of deferred franchise fees are included in the
accompanying consolidated balance sheets. For the fiscal years ended
March 30, 2003, March 31, 2002 and March 25, 2001, the
Company earned franchise fees from new unit openings, transfers and co-
branding of $417, $693 and $525, respectively. During the fiscal year
ended March 30, 2003, the Company recognized $207 in connection
with the forfeiture of two Master Development Agreements.

The following is a summary of franchise openings and closings for
the fiscal years ended March 30, 2003, March 31, 2002 and March
25, 2001:

Franchised restaurants operating at the

beginning of the period

New franchised restaurants opened during

the period

Franchised restaurants closed during the period

Franchised restaurants operating at the end of

2003

2002

2001

364

386

415

24
(45)

18
(40)

21
(50)

the period

343

364

386

Revenue from subleasing properties to franchisees is recognized as
income as the revenue is earned and becomes receivable and deemed
collectible. Sublease rental income is presented net of associated lease
costs in the accompanying consolidated statements of operations. The
Company recognizes franchise royalties when they are earned and
deemed collectible. Franchise fees and royalties that are not deemed to
be collectible are not recognized as revenue until paid by the franchisee.

18. Revenue Recognition—Branded Products Operations

The Company recognizes revenue from the Branded Product Program
when it is determined by the manufacturer that the products have been
delivered via third-party common carrier to Nathan’s customers. An
accrual for the cost of the product to the Company is recorded simultane-
ously with the revenue.

19. Interest Income

Interest income is accrued when it is earned and deemed realizable by

the Company.

20. Investment and Other Income (Loss)

The Company recognizes gains on the sale of fixed assets under the
full accrual method in accordance with provisions of SFAS No. 66. (See
Note B–8.)

Deferred revenue associated with supplier contracts is generally amor-

tized on a straight-line basis over the life of the contract.

Investments classified as trading securities are recorded at fair value
and the unrealized gains or losses are recognized as a component to the
Company’s “Investment and other income (loss)” on the consolidated state-
ment of operations. During the fiscal year ended March 30, 2003, the
Company liquidated its investment in trading securities.

Investment and other income (loss) consists of the following:

Gain on disposal of fixed assets
Realized gains (losses) on
marketable securities

Unrealized losses of trading securities
Loss on subleasing of rental properties
Gain from the early termination of

sales agreement

Other income

2003

2002

2001

$ 39

$1,226

$ —

(242)
—
(243)

135
467

7
(43)
(215)

—
593

(2)
(420)
(194)

—
1,682

$ 156

$1,568

$1,066

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

20 / 21

21. Concentrations of Credit Risk

The Company’s accounts receivable consist principally of receivables
from franchisees for royalties and advertising contributions and from sales
under the Branded Product Program. At March 30, 2003, no franchisee
represented 10% or greater of franchise royalties receivable. At March
31, 2002, one franchisee represented 13% of franchise royalties receiv-
able (Note D).

22. Advertising

The Company administers various advertising funds on behalf of
its subsidiaries and franchisees to coordinate the marketing efforts of
the Company. Under these arrangements, the Company collects and
disburses fees paid by franchisees and Company-owned stores for
national and regional advertising, promotional and public relations pro-
grams. Contributions to the advertising funds are based on specified per-
centages of net sales, generally ranging up to 3%. These advertising funds
are separate entities, which are not a component of the consolidated
group. Revenues and expenses of these advertising funds are excluded
from the Company’s statement of operations. Contributions to the advertis-
ing funds from Company-owned stores are included in restaurant operat-
ing expenses in the accompanying consolidated statements of operations.
Net Company-owned store advertising expense was $608, $940 and
$1,602, for the fiscal years ended March 30, 2003, March 31, 2002
and March 25, 2001, respectively.

23. Classification of Operating Expenses
Cost of sales consists of the following:

• The cost of products sold both in the Company-operated restau-

rants and the Branded Product Program.

• The cost of labor and associated costs of in-store restaurant man-

agement and crew.

• The cost of paper products used in Company-operated restaurants.
• Other direct costs of the Branded Product Program, such as com-

missions, freight and samples.

Restaurant operating expenses consist of the following:

• Occupancy costs of Company-operated restaurants.
• Utility costs of Company-operated restaurants.
• Repair and maintenance expenses of the Company-operated

restaurant facilities.

• Marketing and advertising expenses done locally and contribu-

tions to advertising funds for Company-operated restaurants.

• Insurance costs directly related to Company-operated restaurants.

24. Income Taxes

Deferred tax assets and liabilities are recognized for the future tax con-
sequences attributable to differences between the financial statement car-
rying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the year in which those temporary differences are
expected to be recovered or settled. A valuation allowance has been
established to reduce deferred tax assets attributable to net operating
losses and credits of Miami Subs.

25. Reclassifications

Certain prior year balances have been reclassified to conform with

current year presentation.

26. Recently Issued Accounting Standards

the associated asset retirement costs. It applies to legal obligations associ-
ated with the retirement of long-lived assets that result from acquisition,
construction, development and/or the normal operation of a long-lived
asset, except for certain obligations of lessees. SFAS No. 143 is effective
for financial statements issued for fiscal years beginning after June 15,
2002. The Company has evaluated the effect of the adoption of SFAS
No. 143 on its financial position and results of operations, and it is not
expected to have a material impact on the financial position and results of
operations of the Company.

In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 (“SFAS No. 145”), “Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections.” SFAS No. 145 eliminates the current requirement
that gains and losses on debt extinguishment must be classified as extraor-
dinary items in the income statement. Instead, such gains and losses will
be classified as extraordinary items only if they are deemed to be unusual
and infrequent, in accordance with the current criteria for extraordinary
classification. Additionally, any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that
does not meet the criteria in APB Opinion No. 30 for classification as an
extraordinary item shall be reclassified. In addition, SFAS No. 145 elimi-
nates an inconsistency in lease accounting by requiring that modifications
of capital leases that result in reclassification as operating leases be
accounted for consistent with sale-leaseback accounting rules. SFAS No.
145 also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting will be effective for transactions occurring after
May 15, 2002. SFAS No. 145 has not had, and is not expected to
have, a material impact on the financial position and results of operations
of the Company.

In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 (“SFAS No. 146”), “Accounting for Costs Associated
with Exit or Disposal Activities,” which addresses accounting for restructur-
ing and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force (“EITF”) Issue No. 94-3.
SFAS No. 146 requires that the liability for costs associated with an exit or
disposal activity be recognized when the liability is incurred. Under EITF
No. 94-3, a liability for an exit cost was recognized at the date of a
company’s commitment to an exit plan. SFAS No. 146 also establishes
that the liability should initially be measured and recorded at fair value.
SFAS No. 146 is effective for disposal activities initiated after December
31, 2002. The adoption of SFAS No. 146 did not have a material
impact on the financial position and results of operations of the Company.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (“SFAS No. 148”), “Accounting for Stock-Based
Compensation—Transition and Disclosure,” which addresses financial
accounting and reporting for recording expenses for the fair value of stock
options. SFAS No. 148 provides alternative methods of transition for a
voluntary change to fair value-based method of accounting for stock-
based employee compensation. Additionally, SFAS No. 148 requires
more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. The provisions of this
Statement are effective for fiscal years ending after December 15, 2002,
with early application permitted in certain circumstances. As discussed in
Note B–14, the Company continues to account for stock-based compen-
sation using the intrinsic value method in accordance with APB No. 25
and has adopted the disclosure provisions of SFAS No. 148. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The
adoption of SFAS No. 148 had no impact on the financial position and
results of operations of the Company.

In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 (“SFAS No. 149”), “Amendment of Statement No. 133
on Derivative Instruments and Hedging Activities,” which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 except for the
provisions that were cleared by the FASB in prior pronouncements. The
Company is currently evaluating the effect of the adoption of SFAS No.
149 on its financial position and results of operations.

In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 (“SFAS No. 150”), “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity.” This state-
ment establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with character-
istics of both liabilities and equity. In accordance with the standard, finan-
cial instruments that embody obligations for the issuer are required to be
classified as liabilities. This Statement shall be effective for financial instru-
ments entered into or modified after May 31, 2003, and otherwise shall
be effective for the year ended December 31, 2003. The Company is
currently evaluating the effect of the adoption of SFAS No. 150 on its
financial position and results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN
No. 45”), “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others.”
FIN No. 45 requires that upon issuance of a guarantee, a guarantor must
recognize a liability for the fair value of an obligation assumed under a
guarantee. FIN No. 45 also requires additional disclosures by a guaran-
tor in its interim and annual financial statements about the obligations asso-
ciated with guarantees issued. The recognition provisions of FIN No. 45

are effective for any guarantees issued or modified after December 31,
2002. The disclosure requirements are effective for financial statements
for periods ending after December 15, 2002. The adoption of FIN No.
45 did not have a material impact on the Company’s financial position or
results of operations.

Note C — (Loss) Income Per Share

Basic (loss) earnings per common share is calculated by dividing (loss) income by the weighted-average number of common shares outstanding and
excludes any dilutive effects of stock options or warrants. Diluted earnings per common share gives effect to all potentially dilutive common shares
that were outstanding during the period. Dilutive common shares used in the computation of diluted earnings per common share result from the assumed
exercise of stock options and warrants, using the treasury stock method.

The following chart provides a reconciliation of information used in calculating the per share amounts for the fiscal years ended March 30, 2003,

March 31, 2002 and March 25, 2001, respectively:

Basic EPS

Basic calculation
Effect of dilutive employee stock

options and warrants

Diluted EPS

Diluted calculation

(Loss) Income
from Continuing Operations

2003

2002

2001

2003

2002

(Loss) Income Per Share
from Continuing Operations

2001

2003

2002

2001

$(1,506)

$1,392

$1,585

5,976,000

7,048,000

7,059,000

$(.25)

$.20

$.23

—

35,000

39,000

—

$(1,506)

$1,392

$1,585

5,976,000

7,083,000

7,098,000

$(.25)

$.20

$.23

Options, warrants and common stock purchase rights to purchase 12,369,280 shares of the Company’s common stock for the year ended March
30, 2003 were excluded from the calculation of diluted loss per share as the impact of their inclusion would have been anti-dilutive. Options, warrants
and common stock purchase rights to purchase 11,226,016 and 11,019,142 shares of common stock for the years ended March 31, 2002 and
March 25, 2001, respectively, were not included in the computation of diluted earnings per share because the exercise prices exceeded the average
market price of common shares during the respective periods.

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

22 / 23

Note D — Notes and Accounts Receivable, Net

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
Less: notes receivable due after one year

March 30, March 31,

2003

$ 998
1,465
737
565

3,765
418
740

2002

$2,662
1,376
785
906

5,729
644
2,277

Proceeds from the sale of available for sale and trading securities and
the resulting gross realized gains and losses included in the determination
of net income are as follows:

Available for sale securities:

Proceeds
Gross realized gains
Gross realized losses

Trading securities:

Proceeds
Gross realized gains
Gross realized losses

2003

2002

2001

$6,088
12
(2)

$ — $ —
—
—

—
—

$ 767
—
(252)

$2,933
8
(1)

$2,564
—
(2)

Notes and accounts receivable, net

$2,607

$2,808

Notes receivable at March 30, 2003 and March 31, 2002 princi-
pally resulted from sales of restaurant businesses to Miami Subs’ and
Nathan’s franchisees and are generally guaranteed by the purchaser and
collateralized by the restaurant businesses and assets sold. The notes are
generally due in monthly installments of principal and interest with a bal-
loon payment at the end of the term, with interest rates ranging principally
between 5% and 10%.

Accounts receivable are due within 30 days and are stated at amounts
due from franchisees and licensees, net of an allowance for doubtful
accounts. Accounts outstanding longer than the contractual payment terms
are considered past due. The Company determines its allowance by con-
sidering a number of factors, including the length of time trade accounts
receivable are past due, the Company’s previous loss history, the cus-
tomer’s current ability to pay its obligation to the Company, and the con-
dition of the general economy and the industry as a whole. The Company
writes off accounts receivable when they become uncollectible.

Changes in the Company’s allowance for doubtful accounts are as follows:

Effective April 1, 2002, the Company transferred the Company’s bond
portfolio formerly classified as trading securities to available for sale securities
due to a change in the Company’s investment strategies. As required by
FASB Statement No. 115, “Accounting for Certain Investments in Debt
and Equity Securities,” the transfer of these securities between categories
of investments has been accounted for at fair value and the unrealized
holding loss previously recorded before April 1, 2002 of $20 from the
trading category has not been reversed. The unrealized gain for the fiscal
year ended March 30, 2003 totaling $64 net of income taxes has been
included as a component of comprehensive income. Investments classified
as trading securities are recorded at fair value and the unrealized gains or
losses are recognized as a component of investment and other income in
the consolidated statement of operations. During the fiscal year ended
March 30, 2003, the Company liquidated its investment in limited part-
nership and received proceeds of $767 and recorded a loss of $252
which is included as a component of investment and other income in the
accompanying consolidated statement of operations for the fiscal year
ended March 30, 2003.

2003

2002

2001

Note F — Property and Equipment, Net

Beginning balance

Bad debt expense
Other
Accounts written off

Ending balance

$ 644
82
—
(308)

$ 880
267
27
(530)

$ 809
191
27
(147)

$ 418

$ 644

$ 880

Note E — Marketable Securities and Investment in Limited Partnership

The cost, gross unrealized gains, gross unrealized losses and fair mar-
ket value for marketable securities by major security type at March 30,
2003 and March 31, 2002 are as follows:

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Market
Value

Cost

2003:
Available for sale securities:

Property and equipment consist of the following:

Construction-in-progress
Land
Building and improvements
Machinery, equipment, furniture and fixtures
Leasehold improvements

Less: accumulated depreciation and amortization

March 30, March 31,

2003

2002

31
1,665
2,255
5,297
4,042

13,290
7,027

842
1,665
2,245
6,602
7,201

18,555
9,630

$ 6,263

$ 8,925

Depreciation expense on property and equipment was $1,907,
$1,661 and $1,791 for the fiscal years ended March 30, 2003, March
31, 2002 and March 25, 2001, respectively.

Bonds

$ 4,513

$181

$ (71)

$ 4,623

1. Sales of Restaurants

2002:
Trading securities:

Bonds
Investment in limited

partnership

$7,821

$ —

$(20)

$7,801

1,020

—

(2)

1,018

$8,841

$ —

$(22)

$8,819

On April 1, 2002, the Company adopted the provisions of Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 144, “Accounting for the Impairment or Disposal of Long-
Lived Assets” (“SFAS No. 144”). This statement supersedes SFAS No. 121
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of” and Accounting Principles Board Opinion
No. 30, “Reporting Results of Operations—Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions.” This Statement retained

the fundamental provisions of SFAS No. 121 for recognition and meas-
urement of impairment, but amends the accounting and reporting stan-
dards for segments of a business to be disposed of. SFAS No. 144 has
broadened the definition of discontinued operations to include compo-
nents of an entity whose cash flows are clearly identifiable as compared
to a segment of a business. SFAS No. 144 requires the Company to
classify as discontinued operations any restaurant that it sells, abandons
or otherwise disposes of where the Company will have no further involve-
ment in such restaurant’s operations.

During the fiscal year ended March 30, 2003, the Company sold
three Company-owned restaurants for a total of $591,000. In August
2002, an operating restaurant, which had been classified as held for
sale at March 31, 2002, was sold to a non-franchisee for $75,000.
In October 2002, a non-operating restaurant, which had been classified
as held for sale was sold to a non-franchisee for $466,000 and an oper-
ating restaurant was sold to a franchisee in exchange for a $50,000
note. As these restaurants were either classified as held for sale prior to
the adoption of SFAS No. 144 or the Company has a continuing stream
of cash flows in the case of the franchised restaurant, the results of opera-
tions for the Company-operated restaurants that were sold are included
as a component of continuing operations in the accompanying consoli-
dated statements of operations for the fiscal year ended March 30,
2003. In December 2002, the Company abandoned the operations of
one Company-owned restaurant pursuant to a lease termination agree-
ment with the landlord. The results of operations for this restaurant have
been classified as discontinued operations as the Company does not
have any continuing involvement or a continuing stream of cash flows with
this restaurant.

As discussed in Note F–2 below, during fiscal 2003, the Company
also abandoned the operations of seven company-operated restaurants
located within certain Home Depot Home Improvement Centers. Pursuant
to SFAS No. 144, the results of operations for all seven of these restau-
rants have been presented as discontinued operations in the accompany-
ing consolidated statement of operations, as the Company has no
continuing involvement or cash flows relating to any of these restaurants.

During the fiscal year ended March 31, 2002, the Company sold
two company-owned restaurants and a non-restaurant property for total
proceeds of $3,348. The Company recognized a gain of $1,226 in
connection with these sales.

In May 2001, the Company completed the sale of a restaurant prop-
erty for approximately $1,500 pursuant to an order of condemnation by
the State of Florida. The fair value of the assets (which approximated the
carrying value) was included in the current portion of assets available for
sale at March 25, 2001. Concurrent with the sale, the Company satisfied
the related note payable of approximately $793 plus accrued interest,
and accordingly, had classified the remaining balance at March 25,
2001 as current in the consolidated balance sheet. The Company
appealed the value of this property and on November 19, 2001, an
Order was entered by the Circuit Court of the 11th Judicial Circuit of
Florida in and for Miami-Dade County pursuant to which the State of
Florida Department of Transportation was ordered to pay to the Company
an aggregate value of $2,350, plus legal fees in the amount of $253 in
connection with the condemnation by the State of Florida of the restaurant.
The additional proceeds received by the Company of approximately
$850 is recorded as a component of “investment and other income” in the
accompanying consolidated statement of operations.

2. Food Service License Termination Within Home Depot Stores

In August 2002, the Company received written notice from Home
Depot U.S.A., Inc. (“Home Depot”) that Home Depot terminated seven
License Agreements with the Company pursuant to which the Company
operated Nathan’s restaurants in certain Home Depot Improvement
Centers. In accordance with the termination notices, the Company ceased
its operations in all seven Home Depot locations during the fiscal year
ended March 30, 2003.

Pursuant to SFAS No. 144, the results of operations for all seven of
these restaurants, have been presented as discontinued operations in the
accompanying consolidated statement of operations as the Company has
no continuing involvement or cash flows relating to any of these restau-
rants. The Company revised the estimated useful lives of these assets to
reflect the shortened useful lives and recorded additional depreciation
expense of approximately $428 during the fiscal year ended March 30,
2003. Pursuant to the termination provisions of certain of the lease agree-
ments with Home Depot, the Company received payments of $184.

Following is a summary of the results of operations for these seven
restaurants for the fiscal years ended March 30, 2003, March 31, 2002
and March 25, 2001:

Revenues

2003

2002

2001

$3,096

$4,099

$3,990

(Loss) income before income taxes(A)

$ (166)

$ 316

$ 262

(A) (Loss) income before income taxes for the fiscal year ended March 30, 2003 includes addi-
tional depreciation expense of $428, as a result of revising the estimated useful lives of
these restaurants.

3. Discontinued Operations

As described in Notes F–1 and F–2 above, the Company has classi-
fied the results of eight restaurants as discontinued operations in accor-
dance with SFAS No. 144. The following is a summary of the results of
operations for these eight restaurants for the fiscal years ended March 30,
2003, March 31, 2002 and March 25, 2001:

Revenues

2003

2002

2001

$3,543

$4,857

$4,947

(Loss) income before income taxes(A)

$ (206)

$ (238)

At March 30, 2003, in accordance with SFAS No. 144, the
Company has classified the net fixed assets of four restaurants as held for
sale in the accompanying consolidated balance sheet.

Note G — Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

Payroll and other benefits
Professional and legal costs
Self-insured retention
Rent, occupancy and lease reserve termination costs
Taxes payable
Other

March 30, March 31,

2003

$1,324
349
596
739
556
1,378

$4,942

2002

$1,455
407
1,346
831
595
1,872

$6,506

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

24 / 25

Lease Reserve Termination Costs

Note I — Other Expense (Income), Net

In connection with the Company’s acquisition of Miami Subs, Nathan’s
planned to permanently close 18 underperforming company-owned
restaurants, Nathan’s expected to abandon or sell the related assets at
amounts below the historical carrying amounts recorded by Miami Subs.
In accordance with APB No. 16, “Business Combinations,” the write-
down of these assets was reflected as part of the purchase price alloca-
tion. To date, the Company has closed or sold 17 units. The Company
continues to market the remaining property for sale. As of March 30,
2003, the Company has recorded charges to operations of approxi-
mately $1,461 ($877 after tax) for lease reserves and termination costs in
connection with these properties.

Note H — Notes Payable and Capitalized Lease Obligations

A summary of notes payable and capitalized lease obligations is

as follows:

March 30, March 31,

2003

2002

Note payable to bank at 8.5% through January
2003, 4.5% from February 2003 through
January 2006 and adjusting to prime plus
0.25% in February 2006 and 2009 and
maturing in 2010

Note payable to bank at 8.75% and maturing

in 2003

Capital lease obligations and other

Less current portion

Long-term portion

$1,167

$1,333

—
59

1,226
(173)

381
65

1,779
(559)

$1,053

$1,220

The above notes are secured by the related property and equipment.
In August 2001, Miami Subs entered into an agreement with a fran-
chisee and a bank, which called for the assumption of a note payable by
the franchisee and the repayment of an existing note receivable from the
franchisee. The Company guarantees the franchisee’s note payable with
the bank. The Company’s maximum obligation for loans funded by the
lender was approximately $297 as of March 30, 2003.

At March 30, 2003, the aggregate annual maturities of notes payable

and capitalized lease obligations are as follows:

2004
2005
2006
2007
2008
Thereafter

$ 173
173
174
175
175
356

$1,226

The Company maintains a $7,500 line of credit with its primary bank-
ing institution. Borrowings under the line of credit are intended to be used
to meet the normal short-term working capital needs of the Company. The
line of credit is not a commitment and, therefore, credit availability is
subject to ongoing approval. The line of credit expires on October 1,
2003, and bears interest at the prime rate (4.25% at March 30, 2003).
There were no borrowings outstanding under this line of credit as of
March 30, 2003.

Included in other expense (income) in the accompanying consolidated
statements of operations is (i) $232 in lease reserves in connection with
four vacant properties for the fiscal year ended March 30, 2003, (ii) the
reversal of a previous litigation accrual of ($210) for the fiscal year ended
March 31, 2002 and (iii) $463 in lease termination costs for the fiscal
year ended March 25, 2001.

During the quarter ended June 24, 2001, the Company reversed an
accrual of $210 related to its successful appeal of a previous award in an
action entitled: Miami Subs Corporation or MIAMI S V. MURRAY FAMILY
TRUST/KENNETH DASH PARTNERSHIP. In this case, the court found that
Miami Subs breached a fiduciary duty it owed to defendants and
awarded the Murray Family Trust $200. Both Miami Subs and defendants
appealed the court’s decision, and in November 1996, the appeal was
argued before the Supreme Court of New Hampshire. In December
1997, the Supreme Court ruled in favor of Miami Subs, vacated the dam-
age award, reversed the award of attorney fees and remanded to a trial
court for a determination of damages for the alleged breach of fiduciary
duty to the Murray Family Trust. In May 1998, the trial court awarded the
Murray Family Trust compensatory damages in the amount of $200,
which Miami Subs accrued for on its books. Miami Subs appealed the
damage award, and in December 1999, the Supreme Court of New
Hampshire heard the second appeal. On February 1, 2001, the Supreme
Court of New Hampshire ruled in favor of Miami Subs and vacated the
damage award. The plaintiff had the right to further appeal the reversal for
a period of 90 days, until May 2, 2001. No further action was taken by
the plaintiff and upon passage of the 90-day period the litigation award
was reversed into income.

Note J — Income Taxes

Income tax provision (benefit) consists of the following for the fiscal
years ended March 30, 2003, March 31, 2002 and March 25, 2001:

Federal

Current
Deferred

State and local
Current
Deferred

2003

2002

2001

$ — $ 985
(93)

(281)

$ 865
246

(281)

892

1,111

46
(48)

(2)

181
(16)

165

224
67

291

$(283)

$1,057

$1,402

Total income tax (benefit) provision for the fiscal years ended March
30, 2003, March 31, 2002 and March 25, 2001 differs 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:

Computed “expected” tax (benefit) expense
Nondeductible amortization
Impairment on nondeductible favorable lease

intangible assets

State and local income taxes, net of Federal

income tax benefit

Tax-exempt investment earnings
Nondeductible meals and entertainment

and other

2003

2002

2001

$(609)
99

$ 833
169

$1,016
222

140
(48)

—

106
(68)

—

199
(30)

(5)

$(283)

$1,057

$1,402

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are pre-
sented below:

March 30, March 31,

2003

2002

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 carryforwards
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

$ 672
167
855
806

1,152
238
407
1,540
101

5,938

46
335

461

$1,164
291
256
978

1,101
130
105
676
59

4,760

422

207
320

949

5,477
(751)

3,811
(525)

$4,726

$3,286

The determination that the net deferred tax asset of $4,726 and
$3,286 at March 30, 2003 and March 31, 2002, respectively, is real-
izable is based on anticipated future taxable income.

At March 30, 2003, as result of settling the Miami Subs IRS audits for
the years 1991 through 1996, the Company had a net operating loss
carryforward (“NOL”) of approximately $1,289 remaining (after certain
IRS agreed-upon adjustments and other reductions due to expiring losses)
which is available to offset future taxable income through 2005 and gen-
eral business credit carryforwards remaining of approximately $120
which may be used to offset liabilities through 2008. These losses and
credits are subject to limitations imposed under the Internal Revenue Code
pursuant to Sections 382 and 383 regarding changes in ownership. As a
result of these limitations, the Company has recorded a valuation
allowance for the Miami Subs loss carryforwards and credits related to the
acquisition (See Note L–3). The valuation allowance also includes various
state NOL’s related to the post-acquisition losses of Miami Subs not utilized
on a consolidated basis and carried forward on a state basis.

Note K—Stockholder’s Equity, Stock Plans and Other Employee

Benefit Plans

1. Stock Option Plans

On December 15, 1992, the Company adopted the 1992 Stock
Option Plan (the “1992 Plan”), which provides for the issuance of incen-
tive stock options (“ISO’s”) to officers and key employees and nonqualified
stock options to directors, officers and key employees. Up to 525,000
shares of common stock have been reserved for issuance under the 1992
Plan. The terms of the options are generally ten years, except for ISO’s
granted to any employee, whom prior to the granting of the option, owns
stock representing more than 10% of the voting rights, for which the option
term will be five years. The exercise price for nonqualified stock options
outstanding under the 1992 Plan can be no less than the fair market
value, as defined, of the Company’s common stock at the date of grant.
For ISO’s, the exercise price can generally be no less than the fair market
value of the Company’s common stock at the date of grant, with the

exception of any employee who prior to the granting of the option, owns
stock representing more than 10% of the voting rights, for which the exer-
cise 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 nonemployee directors, as defined, of the
Company. Under the Directors’ Plan, 200,000 shares of common stock
have been authorized and issued pursuant to the Directors’ Plan. Options
awarded to each nonemployee director are fully vested, subject to forfei-
ture under certain conditions and shall be exercisable upon vesting.

In April 1998, the Company adopted the Nathan’s Famous, Inc. 1998
Stock Option Plan (the “1998 Plan”), which provides for the issuance of
nonqualified stock options to directors, officers and key employees. Up to
500,000 shares of common stock have been reserved for issuance under
the 1998 Plan.

In June 2001, the Company adopted the Nathan’s Famous, Inc. 2001
Stock Option Plan (the “2001 Plan”), which provides for the issuance of
nonqualified stock options to directors, officers and key employees. Up to
350,000 shares of common stock have been reserved for issuance under
the 2001 Plan.

In June 2002, the Company adopted the Nathan’s Famous, Inc. 2002
Stock Incentive Plan (the “2002 Plan”), which provides for the issuance of
nonqualified stock options or restricted stock awards to directors, officers
and key employees. Up to 300,000 shares of common stock have been
reserved for issuance under the 2002 Plan.

The 1992 Plan expired with respect to the granting of new options on
December 2, 2002. The 1998 Plan, the 2001 Plan, the 2002 Plan and
the Directors’ Plan expire on April 5, 2008, June 13, 2011, June 17,
2012 and December 31, 2004, respectively, unless terminated earlier by
the Board of Directors under conditions specified in the Plan.

The Company issued 478,584 stock options to employees of Miami
Subs Corporation to replace 957,168 of previously issued Miami Subs
options pursuant to the merger agreement and issued 47,006 new
options. All options were fully vested upon consummation of the merger.
Exercise prices range from a low of $3.1875 to a high of $22.2517 per
share and expire at various times through September 30, 2009.

2. Warrants

In November 1993, the Company granted to its Chairman and Chief
Executive Officer a warrant to purchase 150,000 shares of the Company’s
common stock at an exercise price of $9.71 per share, representing
105% of the market price of the Company’s common stock on the date of
grant, which exercise price was reduced on January 26, 1996 to $4.50
per share. The shares vested at a rate of 25% per annum commencing
November 1994 and the warrant expires in November 2003.

On July 17, 1997, the Company granted to its Chairman and Chief
Executive Officer a warrant to purchase 150,000 shares of the
Company’s common stock at an exercise price of $3.50 per share, repre-
senting the market price of the Company’s common stock on the date of
grant. The shares vested at a rate of 25% per annum commencing July 17,
1998 and the warrant expires in July 2007.

In November 1996, the Company granted to a nonemployee consult-
ant a warrant to purchase 50,000 shares of its common stock at an exer-
cise price of $3.94 per share, which represented the market price of
the Company’s common stock on the date of grant. Upon the date of
grant, one-third of the shares vested immediately, one-third vested on
the first anniversary thereof, and the remaining one-third vested on the
second anniversary thereof. The warrant expired, unexercised, on
November 24, 2001.

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

26 / 27

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

30, 2003, March 31, 2002 and March 25, 2001 and changes during the fiscal years then ended is presented in the tables and narrative below:

Options outstanding—beginning of year

Granted
Expired

Options outstanding—end of year

Options exercisable—end of year

Weighted-average fair value of options granted

Warrants outstanding—beginning of year

Expired

Warrants outstanding—end of year

Warrants exercisable—end of year

Weighted-average fair value of warrants granted

2003

2002

2001

1,821,146
40,000
(106,897)

1,754,249

1,502,124

318,750
—

318,750

Weighted-
Average
Exercise
Price

$4.29
3.96
7.32

4.01

$2.19

$4.62

4.62

$ —

Weighted-
Average
Exercise
Price

$3.86
3.20
6.20

1,614,924
—
(100,715)

$ 4.79
—
10.60

1,514,209
307,000
(63)

1,821,146

4.29

1,514,209

3.86

1,367,479

1,220,876

368,750
(50,000)

318,750

$1.30

$4.53
3.94

4.62

$ —

401,200
(32,450)

368,750

$ —

$ 5.66
18.61

4.53

—

$ —

At March 30, 2003, 413,500 common shares were reserved for future stock option grants.
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 30, 2003:

Range of
Exercise Prices

$3.19 to $ 4.00
4.01 to
6.60
6.61 to 22.25

$3.19 to $22.25

Options and Warrants Outstanding

Options and Warrants Exercisable

Number
Outstanding
at 3/30/03

1,499,558
507,691
65,750

2,072,999

Weighted-Average
Remaining
Contractual Life

Weighted-Average
Exercise Price

5.8
1.7
1.4

4.7

$ 3.36
5.18
14.99

$ 4.18

Number
Exercisable
at 3/30/03

1,247,433
507,691
65,750

1,820,874

Weighted-Average
Exercise Price

$ 3.37
5.18
14.99

$ 4.30

3. Common Stock Purchase Rights

On June 20, 1995, the Board of Directors declared a dividend distri-
bution of one common stock purchase right (the “Rights”) for each out-
standing 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 nota-
tion incorporating the Rights Agreement by reference.

The Rights are not exercisable until the Distribution Date. The Distribu-
tion 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, benefi-
cial ownership of 15% or more of the outstanding shares of the Common
Stock, as amended, or (ii) ten business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any
person becomes an Acquiring Person) following the commencement, or
announcement of an intention to make a tender offer or exchange offer by

a person (other than the Company, any wholly-owned subsidiary of the
Company or certain employee benefit plans) which, if consummated,
would result in such person becoming an Acquiring Person. The Rights will
expire on June 19, 2005, unless earlier redeemed by the Company.

At any time prior to the time at which a person or group or affiliated or
associated persons has acquired beneficial ownership of 15% or more of
the outstanding shares of the Common Stock of the Company, the Board
of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $.001 per Right. In addition, the Rights Agreement, as
amended, permits the Board of Directors, following the acquisition by a
person or group of beneficial ownership of 15% or more of the Common
Stock (but before an acquisition of 50% or more of Common Stock), to
exchange the Rights (other than Rights owned by such 15% person or
group), in whole or in part, for Common Stock, at an exchange ratio of
one share of Common Stock per Right.

Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the
right to vote or to receive dividends. The Company has reserved
10,130,741 shares of Common Stock for issuance upon exercise of
the Rights.

4. Stock Repurchase Plan

On September 14, 2001, the Board of Directors of the Company
authorized the repurchase of up to 1,000,000 shares of the Company’s
common stock. As part of the stock repurchase plan, on April 10, 2002,
the Company repurchased 751,000 shares of the Company’s common
stock for aggregate consideration of $2,741 in a private transaction with
a stockholder. The Company completed its initial Stock Repurchase Plan at
a cost of approximately $3,670 during the fiscal year ended March 30,
2003. On October 7, 2002, the Board of Directors of the Company
authorized the repurchase of up to 1,000,000 additional shares of the
Company’s common stock. Purchases of stock will be made from time to
time, depending on market conditions, in open market or in privately
negotiated transactions, at prices deemed appropriate by management.
There is no set time limit on the purchases. The Company expects to fund
these stock repurchases from its operating cash flow. Through March 30,
2003, 641,238 additional shares have been repurchased at a cost of
approximately $2,323.

5. Employment Agreements

The Company and its Chairman and Chief Executive Officer entered
into a new employment agreement effective as of January 1, 2000. The
new employment agreement expires December 31, 2004. Pursuant to the
agreement, the officer receives a base salary of $1.00 and an annual
bonus equal to 5% of the Company’s consolidated pretax earnings for
each fiscal year, with a minimum bonus of $250. The new employment
agreement further provides for a three-year consulting period after termina-
tion of employment during which the officer will receive consulting pay-
ments in an annual amount equal to two-thirds of the average of the
annual bonuses awarded to him during the three fiscal years preceding
the fiscal year of termination of his employment. The employment agree-
ment also provides for the continuation of certain benefits following death
or disability. In connection with the agreement, the Company issued to the
officer 25,000 shares of common stock with a fair market value at the
date of grant of approximately $78.

In the event that the officer’s employment is terminated without cause,
he is entitled to receive his salary and incentive payment, if any, for the
remainder of the contract term. The employment agreement further pro-
vides that in the event there is a change in control of the Company, as
defined therein, the officer has the option, exercisable within one year
after such an event, to terminate his employment agreement. Upon such
termination, he has the right to receive a lump sum payment equal to the
greater of (i) his salary and annual bonuses for the remainder of the
employment term (including a pro rated bonus for any partial fiscal year),
which bonus shall be equal to the average of the annual bonuses
awarded to him during the three fiscal years preceding the fiscal year of
termination; or (ii) 2.99 times his salary and annual bonus for the fiscal
year immediately preceding the fiscal year termination, as well as a lump
sum cash payment equal to the difference between the exercise price of
any exercisable options having an exercise price of less than the current
market price of the Company’s common stock and such then current 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 com-
mencing on January 1, 1993 and ending on December 31, 1996. The
employment agreement has been extended annually through December
31, 2002, based on the original terms, and no nonrenewal notice has
been given as of May 23, 2003. The agreement provides for annual

compensation of $275 plus certain 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 agreement on September 30,
1999 for a period commencing on September 30, 1999 and ending on
September 30, 2002. The agreement provides for annual compensation
of $200 plus certain other benefits and automatically renews annually
unless 180 days prior written notice is given to the employee. No non-
renewal notice has been given as of May 23, 2003. The agreement
includes a provision under which the officer has the right to terminate the
agreement and receive payment equal to approximately three times
annual compensation upon a change in control, as defined. In the event a
nonrenewal notice is delivered, the Company must pay the officer an
amount equal to the employee’s base salary as then in effect.

The Company and one executive of Miami Subs entered into a change
of control agreement effective November 1, 2001 for annual compensa-
tion of $130 per year. The agreement additionally includes a provision
under which the executive has the right to terminate the agreement and
receive payment equal to approximately three times annual compensation
upon a change in control, as defined.

The Company and one executive of Miami Subs entered into an
employment agreement effective as of July 1, 2001 for a period com-
mencing on the date of the agreement and ending in July 2003 and for
compensation of $125 per year. In March 2003, the Company notified
the executive that it did not intend to renew the employment agreement
with the employee. The Company and another executive of Miami Subs
entered into an employment agreement effective August 1, 2001 for a
period commencing on the date of the agreement and ending on
September 30, 2003 and for compensation at $90 per year. Each
agreement also provides for certain other benefits. Each agreement addi-
tionally includes a provision under which the executive has the right to ter-
minate the agreement and receive payment equal to the employee’s
annual compensation upon a change in control, as defined.

Each employment agreement terminates upon death or voluntary termi-
nation by the respective employee or may be terminated by the Company
upon 30-days’ prior written notice by the Company in the event of dis-
ability or “cause,” as defined in each agreement.

6. 401(k) Plan

The Company has a defined contribution retirement plan under Section
401(k) of the Internal Revenue Code covering all nonunion employees
over age 21 who have been employed by the Company for at least one
year. Employees may contribute to the plan, on a tax-deferred basis, up to
15% of their total annual salary. Company contributions are discretionary.
Beginning with the plan year ending February 28, 1994, the Company
elected to match contributions at a rate of $.25 per dollar contributed by
the employee on up to a maximum of 3% of the employee’s total annual
salary. Employer contributions for the fiscal years ended March 30,
2003, March 31, 2002 and March 25, 2001 were $25, $36 and
$25, respectively.

7. Other Benefits

The Company provides, on a contributory basis, medical benefits to
active employees. The Company does not provide medical benefits
to retirees.

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

28 / 29

Note L — Commitments and Contingencies

1. Commitments

The Company’s operations are principally conducted in leased prem-
ises. The leases generally have initial terms ranging from 5 to 20 years
and usually provide for renewal options ranging from 5 to 20 years. Most
of the leases contain escalation clauses and common area maintenance
charges (including taxes and insurance). Certain of the leases require
additional (contingent) rental payments if sales volumes at the related
restaurants exceed specified limits. As of March 30, 2003, the Company
has noncancelable operating lease commitments, net of certain sublease
rental income, as follows:

2004
2005
2006
2007
2008
Thereafter

Lease
Commitments

$ 4,204
4,110
3,931
3,753
3,132
6,527

Sublease
Income

$ 1,969
1,928
1,816
1,682
1,390
3,821

Net Lease
Commitments

$ 2,235
2,182
2,115
2,071
1,742
2,706

$25,657

$12,606

$13,051

Aggregate rental expense, net of sublease income, under all current
leases amounted to $2,340, $2,734 and $3,549 for the fiscal years
ended March 30, 2003, March 31, 2002 and March 25, 2001,
respectively.

The Company also owns or leases sites, which it leases or subleases to
franchisees, which expire on various dates through 2016 exclusive of
renewal options. 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 subleases provide for minimum annual rental payments by the
Company aggregating approximately $2,179 and expire on various
dates through 2010 exclusive of renewal options.

Contingent rental payments on building leases are typically made
based on the percentage of gross sales on the individual restaurants that
exceed predetermined levels. The percentage of gross sales to be paid
and related gross sales level vary by unit. Contingent rental expense was
approximately $88, $129 and $123 for the fiscal years ended March
30, 2003, March 31, 2002 and March 25, 2001, respectively.

The Company guarantees certain equipment financing for franchisees
with a third-party lender. The Company’s maximum obligation, should the
franchisees default on the required monthly payment to the third-party
lender, for loans funded by the lender, as of March 30, 2003, was
approximately $707. The equipment financing expires at various dates
through fiscal 2008.

The Company also guarantees a franchisee’s note payable with a
bank. The note payable matures in fiscal 2007. The Company’s maximum
obligation, should the franchisee default on the required monthly payments
to the bank, for loans funded by the lender, as of March 30, 2003, was
approximately $297.

2. Contingencies

An action has been commenced, in the Circuit Court of the Fifteenth
Judicial Circuit, Palm Beach County, Florida in September 2001 against
Miami Subs and EKFD Corporation, a Miami Subs franchisee (“the fran-
chisee”) claiming negligence in connection with a slip and fall which
allegedly occurred on the premises of the franchisee for unspecified dam-
ages. Pursuant to the terms of the Miami Subs Franchise Agreement, the

franchisee is obligated to indemnify Miami Subs and hold them harmless
against claims asserted and procured an insurance policy which named
Miami Subs as an additional insured. Miami Subs has denied any liability
to plaintiffs and has made demand upon the franchisee’s insurer to indem-
nify and defend against the claims asserted. The insurer has agreed to
indemnify and defend Miami Subs and has assumed the defense of this
action for Miami Subs.

Nathan’s Famous, Inc. and Nathan’s Famous Operating Corp. were
named as two of three defendants in an action commenced in July 2001,
in the Supreme Court of New York, Westchester County. According to the
amended complaint, the plaintiffs, a minor and her mother, sought dam-
ages in the amount of $17 million against Nathan’s Famous and Nathan’s
Famous Operating Corp. and one of Nathan’s Famous’ former employees
claiming that the Nathan’s entities failed to properly supervise minor
employees, failed to monitor its supervisory personnel, and were negligent
in hiring, retaining and promoting the individual defendant, who allegedly
molested, harassed and raped the minor plaintiff, who was also an
employee. On May 29, 2002, as a result of a mediation, this action was
settled, subject to court approval. The court approved the original settle-
ment and on September 9, 2002, the plaintiffs were paid $659 of which
$650 had been accrued as of March 31, 2002.

Nathan’s Famous was served on January 10, 2003 with a summons in
connection with an action commenced by Mitchell Putterman and Michael
Pellegrino in the Supreme Court of New York, Suffolk County seeking
damages of $1,000 for claims of breach of contract and fraud in con-
nection with a letter of intent with the Company’s subsidiary, NF Roasters
of Commack, Inc. Although the letter of intent contains specific disclaimer
language stating that it did not convey any rights or obligations and con-
templated the execution of a management agreement, which was never
executed, plaintiffs purport nonetheless to have certain claims in con-
nection therewith. The Company had served a notice of appearance and
demand for a complaint. On March 31, 2003, this action was dismissed
without prejudice by stipulation.

The Company is involved in various other litigation in the normal course
of business, none of which, in the opinion of management, will have a sig-
nificant adverse impact on its financial position or results of operations.

3. Miami Subs Tax Audit

As a result of the Miami Subs acquisition, the Company obtained a net
operating loss carryforward of approximately $5,900 and a general busi-
ness credit carryforward of approximately $274. The Miami Subs Federal
income tax returns for all fiscal years 1991 through 1996, inclusive, have
been examined by the Internal Revenue Service. In January 2002, the
Miami Subs tax audit was settled with the IRS Appeals Office. The settle-
ment resulted in a reduction of the net operating loss carryforward to
$4,004 and an adjustment to the general business credit to $300. Each
of these carryforwards were subject to reductions due to various expiration
dates. In addition to these adjustments, the Company made tax and inter-
est payments totaling $344 in full settlement of the audit. As of March 30,
2003, the remaining net operating loss carryforward is $1,289 and the
remaining general business credit is $120. These losses and credits are
subject to limitations imposed under the Internal Revenue Code pursuant to
Sections 382 and 383 regarding changes in ownership. As a result of
these limitations, the Company has recorded a valuation allowance for the
remaining Miami Subs loss carryforwards and credits related to the acqui-
sition. The valuation allowance also includes various state NOL’s related to
the post-acquisition losses of Miami Subs not utilized on a consolidated
basis and carried forward on a state basis.

Note M — Related Party Transactions

As of March 30, 2003, Miami Subs leased two restaurant properties
from Kavala, Inc., a private company owned by Gus Boulis, a former
shareholder of Miami Subs. Future minimum rental commitments due to
Kavala at March 30, 2003 under these existing leases was approxi-
mately $1,074. Rent expense under these two leases amounted to $198,
$182 and $181 for the fiscal years ended March 30, 2003, March 31,
2002 and March 25, 2001, respectively.

Mr. Donald L. Perlyn has been an officer of Miami Subs since 1990, a
Director since 1997 and President and Chief Operating Officer since July
1998. Mr. Perlyn has been a director of Nathan’s since October 1999.
Mr. Perlyn served as a member of the Board of Directors of Arthur
Treacher’s, Inc. until March 2002 when Arthur Treacher’s, Inc. was sold
in a private transaction. Miami Subs has been granted certain exclusive
co-branding rights by Arthur Treacher’s, Inc. and Mr. Perlyn had been
granted options to acquire approximately 175,000 shares of Arthur
Treacher’s, Inc. common stock. These options were converted into options
of the entity that sold Arthur Treacher’s, Inc.

Note N — Significant Fourth Quarter Adjustments

During the fourth quarter of fiscal 2003, the Company’s management
continued to monitor and evaluate the collectibility and potential impair-
ment of its assets, in particular, notes receivable, certain fixed assets and
certain intangible assets. In connection therewith, impairment charges on
certain notes receivable of $883 and impairment charges on fixed assets
of $896 were recorded in the fourth quarter. It is management’s opinion
that these adjustments are properly recorded in the fourth quarter based
upon the facts and circumstances that became available in that period.

During the fourth quarter of fiscal 2002, the Company’s management
continued to monitor and evaluate the collectibility and potential impair-
ment of its assets, in particular, notes receivable and certain fixed assets.
In connection therewith, impairment charges on certain notes receivable of
$185 and impairment charges on fixed assets of $685 were recorded in
the fourth quarter. It is management’s opinion that these adjustments are
properly recorded in the fourth quarter based upon the facts and circum-
stances that became available in that period.

Note O—Quarterly Financial Information (Unaudited)

Fiscal Year 2003
Total revenues(a)
Gross profit (a), (b)
Net (loss) income

Per share information
Net (loss) income per share

Basic(c)

Diluted(c)

Shares used in computation of net (loss) income per share

Basic(c)

Diluted(c)

Fiscal Year 2002
Total revenues(a)
Gross profit(a), (b)
Net income (loss)

Per share information
Net income (loss) per share

Basic(c)

Diluted(c)

Shares used in computation of net (loss) income per share

Basic(c)

Diluted(c)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

$ 9,666
2,397
(11,992)

$ 9,565
2,665
110

$ 7,536
1,674
(106)

$ 7,163
1,434
(1,980)

$ (1.89)

.02

$ (.02)

$ (.36)

$ (.02)

$ (.36)

6,354,000

6,105,000

5,878,000

5,568,000

6,354,000

6,229,000

5,878,000

5,568,000

$10,558
2,514
962

$10,591
2,820
654

$9,184
1,960
263

$9,209
1,862
(630)

.14

.09

$ .04

$ (.09)

$ .04

$ (.09)

7,065,000

7,038,000

7,024,000

7,084,000

7,080,000

7,062,000

7,024,000

(a) Quarterly results have been adjusted to reflect the results of operations of restaurants that are classified as discontinued operations at March 30, 2003 as discontinued operations for all periods

presented.

(b) Gross profit represents the difference between sales and cost of sales.
(c) 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.

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

30 / 31

R E P O R T O F I N D E P E N D E N T C E R T I F I E D P U B L I C A C C O U N TA N T S

Board of Directors and Shareholders
Nathan’s Famous, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of
Nathan’s Famous, Inc. (a Delaware Corporation) and subsidiaries (the
“Company”) as of March 30, 2003 and March 31, 2002, and the
related consolidated statements of operations, stockholders’ equity and
cash flows for the fifty-two weeks ended March 30, 2003 and the fifty-
three weeks ended March 31, 2002. These financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
financial statements of the Company for the fifty-two weeks ended March
25, 2001 were audited by other auditors who have ceased operations.
Those auditors expressed an unqualified opinion on those financial state-
ments in their report dated June 14, 2001.

We conducted our audits in accordance with auditing standards gen-
erally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Nathan’s
Famous, Inc. and subsidiaries as of March 30, 2003 and March 31,
2002, and the results of their operations and their cash flows for the fifty-
two weeks ended March 30, 2003 and the fifty-three weeks ended
March 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.

As described in Notes B and F to the consolidated financial statements,
the Company adopted Statements of Financial Accounting Standards
Nos. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”)
and 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” (“SFAS No. 144”) on April 1, 2002.

As described above, the financial statements of the Company for the
fifty-two weeks ended March 25, 2001, were audited by other auditors
who have ceased operations. As described in Notes B and F, these finan-
cial statements have been revised to include the transitional disclosures
required by SFAS No. 142 and the reclassification and disclosures of
discontinued operations required by SFAS No. 144. Our audit proce-
dures with respect to the disclosures in Note B with respect to 2001
included agreeing the previously reported net income to the previously
issued financial statements and the adjustments to reported net income
representing amortization expense (including related tax effects) rec-
ognized in that period related to goodwill and intangible assets that are
no longer amortized, as a result of initially applying SFAS No. 142,
to the Company’s underlying records obtained from management. We
also tested the mathematical accuracy of the reconciliation of adjusted
net income to reported net income, and the related earnings-per-share
amounts. Our audit procedures with respect to the reclassification of the
financial statement and the disclosures in Note F with respect to 2001
included agreeing the amounts reclassified to discontinued operations
to the Company’s underlying records obtained from management and test-
ing the mathematical accuracy of the revision in income from continuing
operations and discontinued operations and the related earnings-per-share
amounts. In our opinion, the reclassification and disclosures for the fifty-two
weeks ended March 25, 2001 contained in the financial statement and
Notes B and F are appropriate and have been appropriately applied.
However, we were not engaged to audit, review, or apply any pro-
cedures to the 2001 financial statements of the Company other than with
respect to such reclassification and disclosures and, accordingly, we
do not express an opinion or any other form of assurance on the 2001
financial statements taken as a whole.

Melville, New York
May 23, 2003

The below report of Arthur Andersen LLP (“Andersen”) is a copy of the previously issued report of Andersen and the report has not been

reissued by Andersen.

Note that this previously issued Andersen report contains references to certain fiscal years and periods, which are not required to be presented
in the accompanying financial statements as of and for the three fiscal years ended March 30, 2003. As discussed in Notes B and F, the Company
has revised its financial statements for the fifty-two weeks ended March 25, 2001 to include the transitional disclosures required by Statement of
Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” and the reclassification of discontinued operations and net
assets held for sale required by Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.” The Andersen report does not extend to these changes. The revisions to the 2001 financial statements related to these transitional disclo-
sures and reclassifications were reported on by Grant Thornton LLP, as stated in their report appearing herein.

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 TA 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, stockholders’ equity and cash flows for each of
the three fiscal years ended March 25, 2001. These financial statements
are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assess-
ing the accounting principles used and significant estimates made by

management, as well as evaluating the overall financial statement pres-
entation. 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 gener-
ally accepted in the United States.

Melville, New York
June 14, 2001

Nathan’s Famous, Inc. & Subsidiaries 2003 Annual Report

C O R P O R AT E D I R E C T O R Y
Nathan’s Famous, Inc. & Subsidiaries

List of Directors

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 J. Eide
Chairman & Chief Executive Officer, AEGIS Capital Corp.

Barry Leistner
President & Chief Executive Officer, Koenig Iron Works, Inc.

Brian Genson
President, Pole Position Investments

A.F. Petrocelli
Chairman, President & Chief Executive Officer, United Capital Corp.

List of Officers

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 P. Schedler
Vice President—Development, Architecture & Construction

Independent Auditors
Grant Thornton LLP
445 Broadhollow Road, Melville, New York 11747

Corporate Counsel
Kramer, Coleman, Wactlar & Lieberman, P.C.
100 Jericho Quadrangle, Jericho, New York 11753

Transfer Agent
American Stock Transfer & Trust Company
40 Wall Street, New York, New York 10005

Form 10-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

Quarterly Shareholder Letter
Will be available on our website. Copies will be provided upon request.

Corporate Headquarters
1400 Old Country Road, Westbury, New York 11590
516-338-8500 Telephone
516-338-7220 Facsimile

Company Website
www.nathansfamous.com

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 A N D R E L AT E D S T O C K H O L D E R M AT T E R S

Common Stock Prices

Dividend Policy

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)
(“Nasdaq(cid:2)”) under the symbol “NATH.” The following table sets forth the
high and low closing share prices per share for the periods
indicated:

Fiscal year ended March 30, 2003

First quarter
Second quarter
Third quarter
Fourth quarter

Fiscal year ended March 31, 2002

First quarter
Second quarter
Third quarter
Fourth quarter

High

Low

$4.31
4.00
3.82
3.70

$3.50
3.55
3.60
3.62

$3.35
3.07
3.04
3.50

$2.87
3.10
3.07
3.21

At June 6, 2003, the closing price per share for our common stock, as

reported by Nasdaq, was $3.63.

We have not declared or paid a cash dividend on our common stock
since our initial public offering and do not anticipate that we will pay any
dividends in the foreseeable future. It is our Board of Directors’ policy to
retain all available funds to finance the development and growth of our
business and to purchase stock pursuant to our stock buyback program.
The payment of cash dividends in the future will be dependent upon our
earnings and financial requirements.

Shareholders

As of June 6, 2003, we had 822 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 12, 2003 in the Confer-
ence Room on the lower level of 1400 Old Country Road, Westbury,
New York.

1400 Old Country Road, Suite 400
Westbury, New York 11590