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Article by DailyStocks_admin    (05-20-08 09:05 AM)

The Daily Magic Formula Stock for 05/20/2008 is Nathan's Famous Inc. According to the Magic Formula Investing Web Site, the ebit yield is 14% and the EBIT ROIC is >100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

As used herein, unless we otherwise specify, the terms “we,” “us,” “our,” “Nathan’s” and the “Company” mean Nathan’s Famous, Inc. and its subsidiaries, including Miami Subs Corporation, owner of the Miami Subs brand, NF Roasters Corp., owner of the Kenny Rogers brand, and NF Treachers Corp., owner of the Arthur Treachers brand.

On June 7, 2007, Nathan’s completed the sale of its wholly owned subsidiary, Miami Subs Corporation to Miami Subs Capital Partners I, Inc. effective as of May 31, 2007. Pursuant to the Stock Purchase Agreement Nathan’s sold all of the stock of Miami Subs Corporation in exchange for $3,250,000, consisting of $850,000 in cash and the Purchaser’s promissory note in the principal amount of $2,400,000.

We have historically operated and franchised fast food units featuring Nathan’s Famous brand all beef frankfurters, crinkle-cut French-fried potatoes, and a variety of other menu offerings. Our Nathan’s brand Company-owned and franchised units operate under the name "Nathan’s Famous," the name first used at our original Coney Island restaurant opened in 1916. Nathan’s licensing program began in 1978 by selling packaged hot dogs and other meat products to retail customers through supermarkets or grocery-type retailers for off-site consumption. During fiscal 1998, we introduced our Branded Product Program, which enables foodservice retailers to sell some of Nathan’s proprietary products outside of the realm of a traditional franchise relationship. In conjunction with this program, foodservice operators are granted a limited use of the Nathan’s Famous trademark with respect to the sale of hot dogs and certain other proprietary food items and paper goods.

On April 1, 1999, we became the franchisor of the Kenny Rogers Roasters restaurant system by acquiring the intellectual property rights, including trademarks, recipes and franchise agreements, of Roasters Corp. and Roasters Franchise Corp. On September 30, 1999, we acquired the remaining 70% of the outstanding common stock of Miami Subs Corporation we did not already own, and also provided us with co-branding rights to the Arthur Treachers brand in the United States. On February 28, 2006, we acquired all of the intellectual property rights, including, but not limited to, trademarks, trade names, and recipes, of the Arthur Treachers Fish N Chips brand.

Our revenues are generated primarily from selling products under Nathan’s Branded Product Program, and in our Company-owned restaurants. We also earn royalties by franchising the Nathan’s, Miami Subs and Kenny Rogers restaurant concepts and pursuant to various licensing agreements for the sale of Nathan’s products primarily within supermarkets and club stores.

Over the past six years, we have focused on expanding our Nathan’s Branded Product Program; developing our restaurant franchise system by continuing to open new franchised restaurants; expanding our Nathan’s branded retail licensing programs; operating our existing Company-owned restaurants; and developing an international franchising program. In an effort to expand our restaurant system and expand our brand portfolio, during fiscal 2000 we completed our merger with Miami Subs Corp. and our acquisition of the intellectual property of the Kenny Rogers Roasters franchise system. In addition, through our acquisition of Miami Subs, we also secured certain co-branding rights to use the Arthur Treachers’ brand within the United States. During fiscal 2002, we began offering the Nathan’s, Kenny Rogers Roasters and Arthur Treachers’ signature products to the Miami Subs franchise community. Since then, we have sought to continue to capitalize on the co-branding opportunities for the Arthur Treacher’s and Kenny Rogers Roasters brands within the Nathan’s restaurant system, as well as seek to develop new multi-brand marketing and development plans. As a result of the co-branding success, we acquired the intellectual property of the Arthur Treachers brand on February 28, 2006.

At March 25, 2007, our combined restaurant system consisted of 357 franchised or licensed units, including three units operating pursuant to management agreements, and six Company-owned units (including one seasonal unit), located in 22 states and 11 foreign countries.

We plan to continue expanding the scope and market penetration of our Branded Product Program, further develop the restaurant operations of existing franchised and Company-owned outlets, open new franchised outlets in traditional or captive market environments, expand the Nathan’s retail licensing programs and continue to co-brand within our restaurant system . We may also selectively consider opening new Company-owned restaurants. We shall attempt to further develop our international presence through the use of franchising agreements based upon individual or combined use of our brands.

We were incorporated in Delaware on July 10, 1992 under the name “Nathan’s Famous Holding Corporation” to act as the parent of a Delaware corporation then-known as Nathan’s Famous, Inc. On December 15, 1992, we changed our name to Nathan’s Famous, Inc. and our Delaware subsidiary changed its name to Nathan’s Famous Operating Corporation. The Delaware subsidiary was organized in October 1989 in connection with its re-incorporation in Delaware from that of a New York corporation named “Nathan’s Famous, Inc.” The New York Nathan’s was incorporated on July 10, 1925 as a successor to the sole proprietorship that opened the first Nathan’s restaurant in Coney Island in 1916. On July 23, 1987, Equicor Group, Ltd. was merged with and into the New York Nathan’s in a “going private” transaction. The New York Nathan’s, the Delaware subsidiary and Equicor may all be deemed to be our predecessors.

Restaurant Operations

Nathan’s Concept and Menus

Our Nathan’s concept offers a wide range of facility designs and sizes, suitable to a vast variety of locations and features a core menu, consisting of “Nathan’s Famous” all beef frankfurters, crinkle-cut French fries and beverages. Nathan’s menu is designed to take advantage of site-specific market opportunities by adding complementary food items to the core menu. The Nathan’s concept is suitable to stand-alone or can be co-branded with other nationally recognized brands.

Nathan’s hot dogs are all beef and are free from all fillers and starches. Hot dogs are flavored with the original secret blend of spices provided by Ida Handwerker in 1916, which historically have distinguished Nathan’s hot dogs. Our hot dogs are prepared and served in accordance with procedures which have not varied significantly in more than 90 years. Our signature crinkle-cut French fried potatoes are featured at each Nathan’s restaurant. Nathan’s French fried potatoes are cooked in 100% cholesterol-free corn oil. We believe that the majority of sales in our Company-owned units consist of Nathan’s Famous hot dogs, crinkle-cut French fried potatoes and beverages.

Individual Nathan’s restaurants supplement their core menu of hot dogs, French fries and beverages with a variety of other quality menu choices including: char-grilled hamburgers, crispy chicken tenders, char-grilled chicken sandwiches, Philly cheese-steaks, selected seafood items, a breakfast menu and assorted desserts and snacks. While the number of supplemental menu items carried varies with the size of the unit, the specific supplemental menus chosen are tailored to local food preferences and market conditions. Each of these supplemental menu options consists of a number of individual items; for example, the hamburger menu may include char-grilled bacon cheeseburgers, double-burgers and super cheeseburgers. We maintain the same quality standard with each of Nathan’s supplemental menus as we do with Nathans’ core hot dog and French fried potato menu. Thus, for example, hamburgers and sandwiches are prepared to order and not pre-wrapped or kept warm under lights. Nathan’s also has a “Kids Meal” program in which various menu alternatives are combined with toys to appeal to the children’s market. Soft drinks, iced tea, coffee and old fashioned lemonade are also offered. The Company continually evaluates new products. In the course of its evaluations, the Company is cognizant of consumer trends, including a trend toward perceived “healthier” products. In addition to its well-established, signature products, the Company offers for sale in many of its restaurants up to seven chicken products, six fish products, and five salad, soup, and vegetable products. Additionally, in all restaurants French fries are prepared in cholesterol-free oil.

Nathan’s restaurant designs are available in a range of sizes from 300 to 4,000 sq. ft. We have also developed Nathan’s carts, kiosks, and modular units. Our smaller units may not have customer seating areas, although they may often share seating areas with other fast food outlets in food court settings. Other units generally provide seating for 45 to 125 customers. Carts, kiosks and modular units generally carry only the core menu. This menu is supplemented by a number of other menu selections in our other restaurant types .

We believe Nathan’s carts, kiosks, modular units and food court designs are particularly well-suited for placement in non-traditional sites, such as airports, travel plazas, stadiums, schools, convenience stores, entertainment facilities, military facilities, business and industry food service, within larger retail operations and other captive markets. Many of these smaller units have been designed specifically to support our expanding Branded Product Program. All of these units feature the Nathan’s logo and utilize a contemporary design.

Miami Subs Concept and Menu

The Miami Subs concept features a wide variety of moderately priced lunch, dinner and snack foods, including hot and cold submarine sandwiches, various ethnic foods such as gyros and pita sandwiches, flame grilled hamburgers and chicken breast sandwiches, cheese-steaks, chicken wings, fresh salads, ice cream and other desserts. Soft drinks, iced tea, coffee and old fashioned lemonade are offered. Beer and wine may also be offered.

Freshness and quality of breads, produce and other ingredients are emphasized in Miami Subs restaurants. The Miami Subs menu may include low-fat selections such as salads, grilled chicken breasts, and non-fat frozen yogurt. We believe Miami Subs has become known for certain "signature" foods, such as grilled chicken on pita bread, gyros on pita bread, cheese-steaks and chicken wings.

Miami Subs restaurants typically feature a distinctive decor unique to the Miami Subs concept. The exterior of freestanding restaurants feature an unusual roof design and neon pastel highlights for easy recognition. Interiors have a tropical motif in a neon pink and blue color scheme with murals of fish, mermaids, flamingos and tropical foliage. Exteriors and interiors are brightly lit to create an inviting, attractive ambience to distinguish the restaurants from those of our competitors. At March 25, 2007, 53 of the Miami Subs restaurants were located in freestanding buildings, ranging between 2,000 and 5,000 square feet. Certain other Miami Subs restaurants are scaled down to accommodate non-traditional captive market environments.

Miami Subs restaurants are typically open seven days a week, generally opening at 10:30 am, with many of the restaurants having extended late-night hours. Indoor service is provided at a walk-up counter where the customer places an order and is given an order number and a drink cup. The customer then proceeds to a self-service soda bar while the food is prepared to order. Drive-thru service is provided at substantially all free standing Miami Subs restaurants. We estimate that drive-thru sales account for approximately 40% to 60% of sales in free standing restaurants that maintain drive-thru service.

At March 25, 2007, 53 Miami Subs restaurants offered our co-branded menu consisting of various selections of Nathan’s, Kenny Rogers Roasters or Arthur Treachers’ signature products.

Kenny Rogers Roasters Concept and Menu

The Kenny Rogers Roasters concept was first introduced in 1991 with the idea of serving home-style family foods, based on a menu that is centered on wood-fire rotisserie chicken. Kenny Rogers Roasters’ unique proprietary marinade and spice formula combined with wood-fire roasting in a specifically-designed rotisserie became the basis of a breakthrough taste in rotisserie chicken. The menu, design and service style were created to position the concept midway between quick-serve and casual dining. This format, coupled with a customer friendly environment developed for dine-in or take-home consumers, is the precursor of the Kenny Rogers Roasters system.

The distinctive flavoring of our Kenny Rogers Roasters chicken is the result of a two-step process. First, our chickens are marinated using a specially flavored proprietary marinade. Then a second unique blend of spice is applied to the chicken prior to cooking, often in an open flame wood-fire rotisserie in full view of customers at the restaurant. Other entrees offered in Kenny Rogers Roasters restaurants may include Honey Bourbon BBQ ribs and rotisserie turkey. Complimenting Kenny Rogers Roasters main courses are a wide variety of freshly prepared side dishes, corn muffins, soups, salads and sandwiches. The menu offers a healthful alternative to traditional quick-serve menu offerings that caters to families and individuals.

A traditional Kenny Rogers Roasters restaurant is a freestanding building or large in-line unit offering dine-in and drive thru delivery options ranging in size between 3,000 and 4,000 square feet with seating capacity for approximately 125 guests. Other prototype restaurant designs that have been considered include food court units and scaled down in-line and freestanding restaurant types.

A restaurant that has been co-branded with Kenny Rogers Roasters will serve certain “signature” products as part of the restaurant’s menu offerings which may include chicken sandwiches, chicken tenders and chicken wings.

The Kenny Rogers Roasters restaurant system consists primarily of approximately 97 traditional restaurants operating internationally and 95 co-branded representations whereby certain signature items are included on the menu within our Nathan’s and Miami Subs domestic restaurant systems.

Arthur Treachers Fish-n-Chips Concept and Menu

Arthur Treacher’s Fish-n-Chips, Inc. was originally founded in 1969. Arthur Treacher's main product is its "Original Fish N Chips" product consisting of fish fillets coated with a special batter prepared under a proprietary formula, deep-fried golden brown, and served with English-style chips and corn meal "hush puppies." The full menu restaurants emphasize the preparation and sale of batter-dipped fried seafood and chicken dishes served in a quick service environment. Other Arthur Treacher's products that may be offered in full menu restaurants include chicken, shrimp, clams and an assortment of other seafood combination dishes. The full menu restaurants operate a sit-down style, quick serve operation under a uniform business format consisting of methods, procedures, building designs, décor, color schemes and trade dress. The restaurant format also utilizes certain service marks, logos, copyrights and commercial symbols. Currently, we co-brand Arthur Treacher’s products within 106 Nathan’s and Miami Subs restaurants, whereby the menu generally consists of fish fillets, shrimp, clams and hush puppies. The Arthur Treacher’s brand is generally represented in these restaurants by the use of limited trade dress, certain service marks, logos, copyrights and commercial symbols.

Franchise Operations

At March 25, 2007, our franchise system, including our Nathan’s, Miami Subs and Kenny Rogers restaurant concepts, consisted of 357 units operating in 22 states and 11 foreign countries.

Today, our franchise system counts among its 125 franchisees and licensees such well-known companies as HMS Host, ARAMARK Leisure Services, Inc., CA1 Services, Inc., Centerplate (formerly known as Service America Corp.), Culinart, Loews Cineplex and National Amusements. We continue to seek to market our franchising program to larger, experienced and successful operators with the financial and business capability to develop multiple franchise units.

During our fiscal year ended March 25, 2007, no single franchisee accounted for over 10% of our consolidated revenue. At March 25, 2007, HMS Host operated 30 franchised outlets, including nine units at airports, 16 units within highway travel plazas and five units within malls. Additionally, HMS Host operates 32 locations featuring Nathan’s products pursuant to our Branded Product Program.

Nathan’s Standard Franchise Program

Franchisees are required to execute a standard franchise agreement prior to opening each Nathan’s Famous unit. Our current standard Nathan’s franchise agreement provides for, among other things, a one-time $30,000 franchise fee payable upon execution of the agreement, a monthly royalty payment based on 5.0% of restaurant sales and the expenditure of 2.0% of restaurant sales on advertising. We may offer alternatives to the standard franchise agreement, having to do with franchise fees or advertising requirements. The initial term of the typical franchise agreement is 20 years, with a 15-year renewal option by the franchisee, subject to conditions contained in the franchise agreement.

Franchisees are approved on the basis of their business background, evidence of restaurant management experience, net worth and capital available for investment in relation to the proposed scope of the development agreement.

We provide numerous support services to our Nathan’s franchisees. We assist in and approve all site selections. Thereafter, we provide architectural plans suitable for restaurants of varying sizes and configurations for use in food court, in-line and free standing locations. We also assist in establishing building design specifications, reviewing construction compliance, equipping the restaurant and providing appropriate menus to coordinate with the restaurant design and location selected by the franchisee. We typically do not sell food, equipment or supplies to our Nathan’s franchisees.

We offer various management-training courses for management personnel of Company-owned and franchised Nathan’s restaurants. At least one restaurant manager from each restaurant must successfully complete our mandated management-training program. We also offer additional operations and general management training courses for all restaurant managers and other managers with supervisory responsibilities. We provide standard manuals to each franchisee covering training and operations, products and equipment and local marketing programs. We also provide ongoing advice and assistance to franchisees. We host periodic “Focus on Food” meetings with our franchisees to discuss upcoming marketing events, menu development and other topics, each of which is created to provide system-wide benefits.

Franchised restaurants are required to be operated in accordance with uniform operating standards and specifications relating to the selection, quality and preparation of menu items, signage, decor, equipment, uniforms, suppliers, maintenance and cleanliness of premises and customer service. All standards and specifications are developed by us and applied on a system-wide basis. We continuously monitor franchisee operations and inspect restaurants. Franchisees are required to furnish us with detailed monthly sales or operating reports which assist us in monitoring the franchisee’s compliance with its franchise or license agreement. We make both announced and unannounced inspections of restaurants to ensure that our practices and procedures are being followed. We have the right to terminate a franchise if a franchisee does not operate and maintain a restaurant in accordance with the requirements of its franchise or license agreement including for non-payment of royalties, sale of unauthorized products, bankruptcy or conviction of a felony. During the fiscal year ended March 25, 2007, (“fiscal 2007") franchisees have opened 13 new Nathan’s franchised units in the United States and no agreements were terminated for non-compliance.

Franchisees who desire to open multiple units in a specific territory within the United States may enter into an area development agreement under which we would expect to receive an advance fee based upon the number of proposed units which the franchisee is authorized to open. As units are opened under such agreements, a portion of such advance may be credited against the franchise fee payable to us as provided in the standard franchise agreement. We may also grant exclusive territorial rights in foreign countries for the development of Nathan’s units based upon compliance with a predetermined development schedule. Additionally, we may further grant exclusive manufacturing and distribution rights in foreign countries. In all situations we expect to require an exclusivity fee to be conveyed for such exclusive rights.

Miami Subs Franchise Program

Pursuant to a Stock Purchase Agreement dated June 7, 2007, we sold our Miami Subs Corporation subsidiary effective May 31, 2007. Consequently, effective May 31, 2007, although our Nathan’s and Arthur Treachers menus are still being co-branded in certain Miami Subs restaurants, we no-longer have any interest in Miami Subs’ franchise operations, other than the rights pursuant to the co-branding agreement.

Prior to the sale of the Miami Subs franchise operations, we entered into s tandard franchise agreements relating to the operation of each Miami Subs restaurant. The original term of the franchise agreement was between 10 and 20 years, and the initial franchise fee was $30,000 for traditional restaurants and $15,000 for certain non-traditional restaurants and provided for the payment of a monthly royalty fee of 4.5% of gross sales in traditional restaurants or 5.0% of gross sales in certain non-traditional restaurants for the term of the franchise agreement. Additional charges, based on a percentage of restaurant sales, were required by operators of traditional restaurants, typically totaling 2.25%, to support various system-wide and local advertising funds.

The training and support provided to Miami Subs franchisees was similar to that provided to our Nathan’s franchisees, in terms of personnel; site selection and development and monitoring of operations to ensure compliance with the specifications and standards we have established for appearance, service and food and beverage quality Franchisees were required to furnish us with detailed monthly sales or operating reports which assist us in monitoring the franchisee’s compliance with its franchise agreement. We had the right to terminate a franchise if a franchisee did not operate and maintain a restaurant in accordance with the requirements of its franchise agreement. We also had the right to terminate a franchise for non-compliance with certain other terms and conditions of the franchise agreement such as non-payment of royalties, sale of unauthorized products, bankruptcy or conviction of a felony. During the fiscal year ended March 25, 2007, no new Miami Subs franchised restaurants were opened and no Miami Subs franchise agreements were terminated for non-compliance.

Kenny Rogers Roasters Domestic Franchise Program

Kenny Rogers Roasters domestic franchisees from the previous franchise system were required to execute amended and restated franchise agreements in order to preserve their franchised units. The amended and restated franchise agreement affirmed the franchisees responsibilities and offered reduced royalties to 3% of sales and waived advertising fund payments through March 31, 2001. These reduced rates have been permanently changed. At March 25, 2007, there was one operating domestic franchisee .

Subsequent to the acquisition, we have emphasized co-branding certain signature items from the Kenny Rogers Roasters menu into our Nathan’s and Miami Subs restaurant systems and have not sought to add new franchisees of traditional Kenny Rogers Roasters restaurants to the franchise system.

We do not currently intend to resume such a franchising program. In the event that we determine to resume franchising of Kenny Rogers Roasters restaurants, we expect to do so on substantially the same terms as are made available to Nathan’s franchisees.

Arthur Treachers

At the time of our acquisition of Miami Subs in fiscal 2000, Miami Subs had an existing co-branding agreement with the franchisor of the Arthur Treacher’s Fish N Chips restaurant system, permitting Miami Subs to include limited-menu Arthur Treacher’s restaurant operations within Miami Subs restaurants (the “AT Co-Branding Agreement”). Through our acquisition of Miami Subs, we were able to extend the terms of the AT Co-Branding Agreement to allow the inclusion of a limited number of Arthur Treacher’s menu items within Nathan’s Famous restaurants as well. Since that time, our co-branding efforts with the Arthur Treacher’s concept have been extremely successful. As of March 25, 2007, there were Arthur Treacher’s co-branded operations included within 106 Nathan’s Famous and Miami Subs restaurants.

To enable us to further develop the Arthur Treacher’s brand, we acquired all trademarks and other intellectual property relating to the Arthur Treacher’s brand from PAT Franchise Systems, Inc. (“PFSI”) on February 28, 2006 and terminated the AT Co-Branding Agreement. Simultaneously, we granted back to PFSI a limited license to use the Arthur Treacher’s intellectual property solely for the purposes of: (a) PFSI continuing to permit the operation of its existing Arthur Treacher’s franchised restaurant system (which PFSI informs us consisted of approximately 60 restaurants); and (b) PFSI granting rights to third parties who wish to develop new traditional Arthur Treacher’s quick service restaurants in Indiana, Maryland, Michigan, Ohio, Pennsylvania, Virginia, Washington D.C. and areas of Northern New York State (collectively, the “PFSI Markets”). We retained certain rights to sell franchises for the operation of Arthur Treacher’s restaurants in certain circumstances within the geographic scope of the PFSI Markets.

The result of this transaction is that we are now the sole owner of all rights to the Arthur Treacher’s brand and the exclusive franchisor of the Arthur Treacher’s restaurant system (subject to the limited license granted back to PFSI for the PFSI Markets). We no longer have any ongoing obligation to pay fees or royalties to PFSI in connection with our use of the Arthur Treacher’s system. Similarly, PFSI has no obligation to pay fees or royalties to us in connection with its use of the Arthur Treacher’s system within the PFSI Markets.

Our primary intention is to continue to include co-branded Arthur Treacher’s operations within existing and new Nathan’s Famous and Miami Subs restaurants, as well as to explore the alternative distribution channels for Arthur Treacher’s products. Additionally, we may explore in the future a franchising program focused on the expansion of traditional, full-menu Arthur Treacher’s restaurants outside of the PFSI Markets.

Company-owned Nathan’s Restaurant Operations

As of March 25, 2007, we operated six Company-owned Nathan’s units, including one seasonal location in New York. Company-owned units currently range in size from approximately 440 square feet to 10,000 square feet and are principally freestanding buildings. All restaurants, except our seasonal boardwalk location in Coney Island, New York, have seating to accommodate between 60 and 350 customers. The restaurants are designed to appeal to all ages and are open seven days a week. We have established high standards for food quality, cleanliness and service at our restaurants and regularly monitor the operations of our restaurants to ensure adherence to these standards. Restaurant service areas, seating, signage and general decor are contemporary.

Three of these restaurants are older and significantly larger units, which do not conform to contemporary designs. These units carry a broader selection of menu items than current designs. The items offered at our restaurants, other than the core menu, tend to have lower margins than the core menu. The older units require significantly higher levels of initial investment than current franchise designs and tend to operate at a lower sales/investment ratio. Consequently, we do not intend to replicate these older units in future Company-owned units.

Company-owned Miami Subs Restaurant Operations

During the fiscal years ended March 25, 2007 and March 26, 2006, we did not operate any Company-owned Miami Subs restaurants. During fiscal 2004, our four Company-operated restaurants located in southern Florida were franchised or transferred pursuant to Management Agreements.

Company-owned Kenny Rogers Roasters Restaurant Operations

In April 2002, we opened a new limited-menu Kenny Rogers food court type outlet as part of a major remodeling of a large Company-owned Nathan’s facility in Oceanside, New York. That particular Kenny Rogers Roasters operation was discontinued in June 2005.

At March 25, 2007, we did not operate any Company-owned stand-alone Kenny Rogers Roasters restaurants. At present, we do not intend to open any new Company-operated Kenny Rogers Roasters restaurants.

International Development

As of March 25, 2007, our franchisees operated 117 units in 11 foreign countries having significant operations within Malaysia and the Philippines. The vast majority of foreign operations consists of approximately 97 Kenny Rogers Roasters units, although the Nathan’s restaurant concept also has 20 foreign franchise operations . During the current fiscal year our international franchising program included the openings of four Nathan’s restaurants in Kuwait, one Nathan’s restaurant in Japan and one Nathan’s restaurant in the Dominican Republic.

During fiscal 2003, we executed a Master Franchise Agreement and a Distribution and Manufacturing Agreement for the Nathan’s and Miami Subs rights in Japan. During fiscal 2004, we executed a Master Franchise Agreement and a Distribution and Manufacturing Agreement for the Nathan’s and Miami Subs rights in Kuwait. We may continue to grant exclusive territorial rights for franchising and for the manufacturing and distribution rights in foreign countries, which would require that an exclusivity fee be conveyed for these rights. We plan to develop the restaurant franchising system internationally though the use of master franchising agreements based upon individual or combined use of our existing restaurant concepts and for the distribution of Nathan’s products. During the fiscal years ended March 25, 2007, March 25, 2006 and March 27, 2005, total revenue derived from Nathan’s international operations, was approximately 3.0%, 3.3% and 3.3% respectively of total revenue was derived from Nathan’s international operations. See “Risk Factors”.

CEO BACKGROUND

Robert J. Eide has been the Chairman and Chief Executive Officer of Aegis Capital Corp., a registered broker-dealer, since 1984. Mr. Eide has been a director of Vector Group Ltd., a company engaged through its subsidiaries in the manufacture and sale of cigarettes in the United States and Russia, and VGR Holding, Inc., since November 1993. Mr. Eide also serves as a director of Ladenburg Thalmann Financial Services, Inc., an investment banking and brokerage firm.

Eric Gatoff has been our Chief Executive Officer since January 2007. Prior to becoming our Chief Executive Officer, he was our Vice President and Corporate Counsel from October 2003. Prior to joining us, Mr. Gatoff was a partner at Grubman, Indursky & Schindler, P.C., a law firm specializing in intellectual property, media and entertainment law. Mr. Gatoff is a member of the New York State Bar Association and holds a B.B.A. in Finance from George Washington University and a J.D. from Fordham University School of Law.

Brian S. Genson has been President of Pole Position Investments, a company engaged in the motor sport business, since 1989. Mr. Genson also serves as a managing director of F1 Action located in Stanstead England, which is engaged in investing in the motor sport industry. Mr. Genson has been a director of Ladenburg Thalmann Financial Services, Inc., an investment banking and brokerage firm, since 2004. Mr. Genson was also responsible for introducing Ben and Jerry’s Ice Cream Company to the Japanese market. Mr. Genson previously served as a director of Nathan’s from 1987 to 1989.

Barry Leistner has been President and Chief Executive Officer of Koenig Iron Works, Inc., a company engaged in the fabrication and erection of structural steel, since 1979. Mr. Leistner is also engaged in general construction and real estate development in New York.

Howard M. Lorber has been Executive Chairman of the Board since 2007 and a director since 1987. Mr. Lorber also served as our Chairman of the Board from 1990 through December 2006 and as Chief Executive Officer from 1993 until December 2006. Mr. Lorber has been Chief Executive Officer of Vector Group Ltd., a holding company, since January 2006 and a director since January 2001 and was President and Chief Operating Officer from January 2001 until December 2005. Mr. Lorber has been Vice Chairman of the Board of Ladenburg Thalmann Financial Services, Inc., an investment banking and brokerage firm, since July 2006. Previously he was Chairman of the Board of Ladenburg Thalmann Financial Services from May 2001 to July 2006. Mr. Lorber has been a stockholder and registered representative of Aegis Capital Corp., a broker-dealer and member firm of the NASD, since 1984. Mr. Lorber also serves as a director of United Capital Corp., a manufacturing and real estate company, since May 1991. He is also a trustee of Long Island University and is on the board of Babson College.

Wayne Norbitz has been an employee since 1975 and has been our President since October 1989. He previously held the positions of Director of Operations, Vice President of Operations, Senior Vice President of Operations and Executive Vice President. Prior to joining us, Mr. Norbitz held the position of Director of Operations of Wetson’s Corporation. Mr. Norbitz is also a member of the Board of Directors of the American Heart Association—Long Island Region.

Donald L. Perlyn has been an Executive Vice President since September 2000. Prior to our merger with Miami Subs Corporation, Mr. Perlyn was a member of Miami Subs’ board of directors. In July 1998, Mr. Perlyn was appointed President and Chief Operating Officer of Miami Subs and continued to serve in that capacity until our sale of Miami Subs in June 2007. From September 1990 to July 1998, Mr. Perlyn held various other positions at Miami Subs, and between August 1990 and December 1991, he was Senior Vice President of Franchising and Development for QSR, Inc., one of Miami Subs’ predecessors and an affiliate. Mr. Perlyn also serves as a director of IMSI, Inc., a software company, affiliated with DCDC, the former owner of Arthur Treacher’s, Inc.

A. F. Petrocelli has been the Chairman of the Board and Chief Executive Officer of United Capital Corp., a company engaged in the ownership and management of real estate and the manufacture and sale of engineered products, since 1987, President since June 1991 and from June 1983 to March 1989 and a director since June 1981. He is a director of the Boyar Value Fund, Inc., a public mutual fund, since 1997.

Charles Raich has been the Managing Partner for more than the past five years of Raich, Ende, Malter & Co., LLP, a registered public accounting firm, which he founded in 1972. His early career
includes positions at both Lybrand, Ross Brothers and Montgomery and Gruntal & Co. Mr. Raich is a graduate of Hofstra University and is a certified public accountant.

COMPENSATION

Current Executive Compensation Program Elements

We currently have employment agreements in place for four of our named executive officers—Eric Gatoff, Howard M. Lorber, Wayne Norbitz and Donald L. Perlyn—each of which is described in further detail below in this section. There is no employment agreement in effect for Ronald G. DeVos.

Eric Gatoff. On December 15, 2006, the Company entered into an employment agreement with Eric Gatoff pursuant to which Mr. Gatoff was appointed as Chief Executive Officer effective January 1, 2007. Under the terms of the agreement, Mr. Gatoff has agreed to serve as Chief Executive Officer effective from January 1, 2007 until December 31, 2008, which period shall extend for additional one-year periods unless either party delivers notice of non-renewal no less than 180 days prior to the end of the term then in effect.

Howard M. Lorber. On December 15, 2006, the Company entered into an employment agreement with Howard M. Lorber pursuant to which Mr. Lorber was appointed as Executive Chairman of the Board of the Company effective from January 1, 2007 until December 31, 2012. The agreement supersedes Mr. Lorber’s previous employment agreement.

Wayne Norbitz. In December 1992, we entered into an employment agreement with Wayne Norbitz, for a term expiring on December 31, 1996. The employment agreement was extended through December 31, 1997 on the original terms and automatically renews for successive one-year periods unless 180 days’ prior written notice is delivered to Mr. Norbitz. No such non-extension notice has been delivered to date.

Donald L. Perlyn. On September 30, 1999, in connection with our acquisition of Miami Subs, Miami Subs entered into an employment agreement with Donald L. Perlyn, for a term expiring on September 30, 2003. The Company has guaranteed the obligations of Miami Subs under that agreement, which has not been terminated. In connection with the sale of Miami Subs, the Company and the buyer agreed that the buyer would not have any continuing liability under that agreement after the closing of the sale. Accordingly, the Company is performing under the guarantee notwithstanding the sale of Miami Subs. The term of the agreement automatically extends for successive one year periods unless 180 days’ prior written notice is delivered by one party to the other. No such non-extension notice has been delivered to date. The Company expects to enter into a new agreement between the Company and Mr. Perlyn on the same terms provided in his existing agreement.

Base Salaries

Like most companies, Nathan’s’ policy is to pay our executives’ base salaries in cash.

For the four Named Officers with employment agreements, base salaries are determined in accordance with the terms of such agreements. The base salaries reflected in the employment agreements for Messrs. Gatoff and Lorber were established by the Compensation Committee in consultation with the Company’s outside compensation consulting firm. The base salary initially payable to each of Messrs. Norbitz and Perlyn pursuant to his respective employment agreement was the product of arms-length negotiations at the time his employment commenced, which base salaries have been increased by the Compensation Committee in consultation with our Executive Chairman (who previously served as our Chairman and Chief Executive Officer). The base salary of Mr. DeVos is determined annually by the Compensation Committee in consultation with our Executive Chairman, taking into consideration his role and responsibility within our Company, as well as his experience and prior performance. In addition, the base salaries of all of our Named Officers are reviewed annually by the Compensation Committee, which may make adjustments for cost-of-living increases.

The base salary that was paid to each Named Officer in fiscal 2007 is the amount reported for such officer in the designated column of the Summary Compensation Table.

Annual Bonuses

Nathan’s policy is to pay any annual bonuses to the Named Officers in cash.

Pursuant to Mr. Gatoff’s employment agreement, the amount of his bonus may equal 100% of his base salary and is dependent upon Nathan’s’ achievement of performance goals established and agreed to by the Compensation Committee and Mr. Gatoff for each fiscal year during the employment term; provided that the bonus payable to Mr. Gatoff for the fiscal year ended March 25, 2007, is to be determined by the Compensation Committee in its discretion, based on Mr. Gatoff’s status as Vice President and Corporate Counsel through December 31, 2006, and provided , further , that Mr. Gatoff is entitled to a minimum bonus of 50% of his base salary for the first two years of the employment agreement.

Each of the Named Officers is eligible to receive a bonus, as determined by the Compensation Committee. Other than the bonuses payable to Messrs. Gatoff and Lorber pursuant to the terms of their employment agreements (described below), the payment and amount of any such bonus is discretionary and is based on a determination of the Compensation Committee following a review of our performance during the relevant fiscal year, taking into consideration historical performance and whether or not the executive has taken steps designed to enable Nathan’s to achieve strategic planning objectives, including objectives that may not be realized until succeeding fiscal periods. In making its determination, our Compensation Committee considers the recommendation of our Executive Chairman and our Chief Executive Officer, as well as any factors that are deemed to be appropriate, including the achievement of individual targets.

Mr. Lorber’s current employment agreement does not provide for a contractually-required bonus other than entitlement to receive a pro-rata portion of the bonus payable under his previous agreement. Nevertheless, the Compensation Committee may award bonuses to Mr. Lorber from time to time as it deems appropriate.

Perquisites

In addition to base salaries and annual bonus opportunities, Nathan’s provides the Named Officers with certain perquisites and personal benefits. We believe that certain perquisites and personal benefits are often a tax-advantaged way to provide the Named Officers with additional annual compensation that supplements their base salaries and bonus opportunities. When determining each Named Officer’s base salary, either by contract or otherwise, we take into consideration the value of each Named Officer’s perquisites and personal benefits.

The perquisites and personal benefits paid to each Named Officer in 2007 are reported in the “All Other Compensation” column of the Summary Compensation Table below, and are further described in the “All Other Compensation” table following the Summary Compensation Table.

Equity-Based Compensation

Nathan’s policy is that the Named Officers’ long-term compensation should be linked to the value provided to stockholders of Nathan’s common stock. Accordingly, the Compensation Committee has periodically granted equity awards under Nathan’s stock incentive and stock option plans. Grants of equity awards are designed to reward our executives for assisting the Company in achieving its long-term objectives and link an increase in stockholder value to compensation.

Only 6,000 shares are currently available for grant under the Nathan’s 2001 Stock Option Plan and 2002 Stock Incentive Plan. In the event that stockholders approve Proposal 2 increasing the number of shares available for grants under the 2001 Stock Option Plan, an aggregate 281,000 shares will be available for grants of options; however, up to 2,500 of such shares could be granted in the form of restricted stock. Restricted stock will be subject to such restrictions as the Compensation Committee may impose; provided that the term of the restriction cannot be less than one year unless otherwise determined by the Compensation Committee. Historically, the term of each option generally has been ten years, however, the plan has been amended to provide that future option grants will have a term of no more than five years. The term of an option is determined at the time of grant. The purchase price of the shares of common stock subject to each option granted is not less than 100% of the fair market value of our common stock at the date of grant.

All of our stock plans provide that the Compensation Committee may adjust the number of shares under outstanding awards and for which future awards may be granted in the event of reorganization, stock split, reverse split, stock dividend, exchange or combination of shares, merger or any other change in capitalization. The participants in these plans are officers, directors and employees of, or consultants to, Nathan’s and its subsidiaries or affiliates, except that only non-employee directors received grants under the Outside Director Plan, which has now expired and under which no options remain outstanding. In reviewing the form of stock compensation (i.e., stock options v. restricted stock) granted to any or all eligible employee(s), the Compensation Committee has historically considered a variety of important administrative and technical factors, including, but not limited to: (1) the overall availability of shares under the stock compensation plan; (2) the additional shareholder dilution effects of shares granted under the plan; (3) the number of stock options and restricted shares currently outstanding under the current plan and all previous plans (individually and in the aggregate); (4) the number of options or restricted shares previously vested and/or exercised (individually and in the aggregate); (5) the overall compensation expense and current accounting impact to Nathan’s of any past or future grants; and (6) the applicable company and employee tax implications of any such grant. When considering whether or not to make an equity grant, the Compensation Committee considers each Named Officer’s responsibilities, his performance during the prior year, his expected future contribution to Nathan’s’ performance and, for certain Named Officers, competitive data on grant values at comparable companies.

During 2007, the Compensation Committee made no awards of restricted stock to employees, including the Named Officers, and awarded an aggregate 100,000 stock options to the Named Officers. The Compensation Committee believes that the use of these awards encourages executives to continue to use their best professional skills and to remain in Nathan’s’ employ.

MANAGEMENT DISCUSSION FROM LATEST 10K

Introduction

We have historically operated and franchised fast food units featuring Nathan’s Famous brand all beef frankfurters, crinkle-cut French-fried potatoes, and a variety of other menu offerings. Our Nathan’s brand Company-owned and franchised units operate under the name "Nathan’s Famous," the name first used at our original Coney Island restaurant opened in 1916. Nathan’s licensing program began in 1978 by selling packaged hot dogs and other meat products to retail customers through supermarkets or grocery-type retailers for off-site consumption. During fiscal 1998, we introduced our Branded Product Program, which enables foodservice retailers to sell some of Nathan’s proprietary products outside of the realm of a traditional franchise relationship. In conjunction with this program, foodservice operators are granted a limited use of the Nathan’s Famous trademark with respect to the sale of hot dogs and certain other proprietary food items and paper goods.

On April 1, 1999, we became the franchisor of the Kenny Rogers Roasters restaurant system by acquiring the intellectual property rights, including trademarks, recipes and franchise agreements of Roasters Corp. and Roasters Franchise Corp. On September 30, 1999, we acquired the remaining 70% of the outstanding common stock of Miami Subs Corporation we did not already own, which also provided us with co-branding rights to the Arthur Treachers brand in the United States. On February 28, 2006, we acquired all of the intellectual property rights, including, but not limited to, trademarks, trade names, and recipes, of the Arthur Treachers Fish N Chips Brand. On June 7, 2007, Nathan’s completed the sale of its wholly owned subsidiary Miami Subs Corporation, effective as of May 31, 2007.

Our revenues are generated primarily from selling products under Nathan’s Branded Product Program, operating Company-owned restaurants, franchising the Nathan’s, Miami Subs and Kenny Rogers restaurant concepts and licensing agreements for the sale of Nathan’s products within supermarkets and club stores and for the manufacturing of certain proprietary spices and also for the sale of Nathan’s products directly to other foodservice operators.

In addition to plans for expansion through franchising, licensing and our Branded Product Program, Nathan’s continues to co-brand within its existing restaurant system. Currently, the Arthur Treacher’s brand is being sold within 106 Nathan’s, Kenny Rogers Roasters and Miami Subs restaurants, the Nathan’s brand is included on the menu of 47 Miami Subs and Kenny Rogers restaurants, while the Kenny Rogers Roasters brand is being sold within 95 Miami Subs and Nathan’s restaurants.

At March 30, 2003, Nathan’s owned 12 Company-operated restaurants. During the fiscal year ended March 28, 2004, Nathan’s franchised three Company-operated restaurants and entered into two management agreements with franchisees to operate two Company-operated restaurants. During the fiscal year ended March 27, 2005, Nathan’s closed one Company-operated restaurant due to its lease expiration. The remaining six restaurants are presented as continuing operations in the accompanying financial statements.

At March 25, 2007, our franchise system, consisting of Nathan’s Famous, Kenny Rogers Roasters and Miami Subs restaurants, included 357 franchised units, including three units operating pursuant to management agreements, located in 22 states and 11 foreign countries. We also operated six Company-owned Nathan’s units, including one seasonal location, within the New York metropolitan area.

Critical Accounting Policies and Estimates

Our consolidated financial statements and the notes to our consolidated financial statements contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. We believe the following critical accounting policies involve additional management judgment 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 tested annually (or more frequently if events or changes in circumstances indicate the carrying value may not be recoverable) 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 charges may be required in the future. We conducted our annual impairment tests and no goodwill or other intangible assets were determined to be impaired during the fifty-two week periods ended March 25, 2007, March 26, 2006 or March 27, 2005.

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 to make judgments regarding the future operating and disposition plans for under-performing assets, and estimates of expected realizable 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. During the fifty-two week periods ended March 25, 2007, March 26, 2006, and March 27, 2005, no impairment charges on long-lived assets were recorded.

Impairment of Notes Receivable

Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended, requires management judgments regarding the future collectibility of notes receivable and the underlying fair market value of collateral. We consider the following factors when evaluating a note for impairment: a) indications that the borrower is experiencing 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; and/or c) whether the collateral is susceptible to deterioration in realizable value. When determining possible impairment, we also assess our future intention to extend certain leases beyond the minimum lease term and the debtor’s ability to meet its obligation over the projected term. During the fifty-two week periods ended March 25, 2007, March 26, 2006, and March 27, 2005, no impairment charges on notes receivable were recorded.

Revenue Recognition

Sales by Company-owned restaurants, which are typically paid in cash by the customer, are recognized upon the performance of services.

In connection with its franchising operations, Nathan’s receives initial franchise fees, development fees, royalties, and in certain cases, revenue from sub-leasing 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, which are non-refundable, are recognized as income when substantially all services to be performed by Nathan’s and conditions relating 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 Nathan’s prior to the opening of a franchised restaurant:


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Approval of all site selections to be developed.


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Provision of architectural plans suitable for restaurants to be developed.


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Assistance in establishing building design specifications, reviewing construction compliance, and equipping the restaurant.


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Provision of appropriate menus to coordinate with the restaurant design and location to be developed.


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Provide management training for the new franchisee and selected staff.


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Assistance with the initial operations of restaurants being developed.

Development fees are non-refundable and the related agreements require the franchisee to open a specified number of restaurants in the development area within a specified time period or Nathan’s may cancel the agreements. 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.

Nathan’s 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, or until collectibility is deemed to be reasonably assured. The number of non-performing units is determined by analyzing the number of months that royalties have been paid during a period. When royalties have been paid for less than the majority of the time frame reported, such location is deemed non-performing. Accordingly, the number of non-performing units may differ between the quarterly results and year to date results. Revenue from sub-leasing properties is recognized as income as the revenue is earned and becomes receivable and deemed collectible. Sub-lease rental income is presented net of associated lease costs in the consolidated statements of earnings.

Nathan’s recognizes revenue from the Branded Product Program when it is determined that the products have been delivered via third party common carrier to Nathans’ customers.

Nathan’s recognizes revenue from royalties on the licensing of the use of its name on certain products produced and sold by outside vendors. The use of Nathan’s name and symbols must be approved by Nathan’s prior to each specific application to ensure proper quality and project a consistent image. Revenue from license royalties is recognized when it is earned and deemed collectible.

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 at the date of the transaction is doubtful, the associated revenue is not recorded until the facts and circumstances change in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”

Share-Based Compensation

As discussed in Notes B and K of Notes to Consolidated Financial Statements, we have various share-based compensation plans that provide stock options and restricted awards for certain employees and non-employee directors to acquire shares of our common stock. Prior to our adoption of SFAS 123R at the beginning of fiscal 2007, we accounted for share-based compensation in accordance with APB 25, which utilizes the intrinsic value method of accounting, as opposed to using the fair value method prescribed in SFAS 123R. During fiscal years ended March 25, 2007 and March 26, 2007, we recorded share-based compensation expense of $367,000 and $73,000, respectively. (See Note B for a discussion of assumptions used to determine the fair value of share-based compensation.)

Income Taxes

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

Results of Operations

Fiscal year ended March 25, 2007 compared to Fiscal year ended March 26, 2006

Revenues from Continuing Operations

Total sales increased by $ 3,640,000 or 12.2% to $33,425,000 for the fiscal year ended March 25, 2007 ("fiscal 2007 period") as compared to $29,785,000 for the fiscal year ended March 26, 2006 (“fiscal 2006 period"). Sales from the Branded Product Program increased by 13.9% to $18,774,000 for the fiscal 2007 period as compared to sales of $16,476,000 in the fiscal 2006 period. This increase was primarily attributable to increased volume of approximately 16.4%, which was partly offset by higher rebates to various large customers in connection with the Branded Product Program. During the fiscal 2007 period, approximately 1,800 new points of distribution were opened under our Branded Product Program, including approximately 750 units within K-Mart stores. Total Company-owned restaurant sales (representing six comparable Nathan’s restaurants, including one seasonal unit) increased by 3.9% to $11,863,000 as compared to $11,419,000 during the fiscal 2006 period. During the second and third quarters of fiscal 2007, we experienced favorable weather conditions in the northeastern United States, which we believe was a contributing factor to the sales increase at our Company-owned restaurants. Direct sales, predominantly to our television retailer were approximately $898,000 higher during the fiscal 2007 period than the fiscal 2006 period resulting from the introduction of new products offered and 20 more Nathan’s television airings during the fiscal 2007 period.

Franchise fees and royalties were $7,160,000 in the fiscal 2007 period compared to $6,785,000 in the fiscal 2006 period. Franchise royalties were $6,518,000 in the fiscal 2007 period as compared to $6,016,000 in the fiscal 2006 period. Domestic franchise restaurant sales decreased by 2.4% to $157,004,000 in the fiscal 2007 period, as compared to $160,803,000 in the fiscal 2006 period. This decline of $3,799,000 represents the net sales difference between new units that have opened and the units that have closed between the periods, which were partly offset by higher sales from our comparable restaurants. Comparable domestic franchise sales (consisting of 194 restaurants) were $134,639,000 in the fiscal 2007 period as compared to $134,510,000 in the fiscal 2006 period. On October 24, 2005, during fiscal 2006, Hurricane Wilma hit southern Florida, where our franchisees operated 71 restaurants. Most of these restaurants were affected by the storm and were temporarily closed during the fiscal 2006 period. One Miami Subs restaurant sustained significant damage and was permanently closed. We estimated that franchisee sales from the affected stores were reduced during the third quarter fiscal 2006 by approximately $885,000 due to the period that the restaurants were closed. During the fiscal 2007 period, we realized $151,000 of royalties that were previously deemed to be uncollectible, received franchise termination fees of $204,000 in connection with the sale of two franchise restaurants and recorded increased royalty income of approximately $107,000 as a result of our acquisition of the Arthur Treacher’s intellectual property. At March 25, 2007, 357 domestic and international franchised or licensed units were operating as compared to 362 domestic and international franchised or licensed units at March 26, 2006. During the fiscal year ended March 25, 2007, royalty income from 16 domestic franchised locations has been deemed unrealizable as compared to 21 domestic franchised locations during the fiscal year ended March 26, 2006. Domestic franchise fee income was $351,000 in the fiscal 2007 period as compared to $389,000 in the fiscal 2006 period. International franchise fee income was $291,000 in the fiscal 2007 period, as compared to $314,000 during the fiscal 2006 period. During the fiscal 2007 period , 19 new franchised units opened, including four units in Kuwait, one unit in Japan and one unit in the Dominican Republic. During the fiscal 2006 period, 30 new franchised units were opened, including five units in Kuwait, three units in Japan, two units in the United Arab Emirates, and one unit in the Dominican Republic. We also franchised one unit that previously operated pursuant to a management agreement. During the fiscal 2006 period, Nathan’s also recognized $104,000 in connection with three forfeited franchise fees.

License royalties were $4,239,000 in the fiscal 2007 period as compared to $3,569,000 in the fiscal 2006 period. This increase was attributable to higher royalties from the sale of hot dogs, including the newly introduced Nathan’s Kosher Hot Dogs, and new agreements to license our trademarks for use with hors d’oeuvres and other items. We also recovered royalties of approximately $168,000 relating to prior year pricing discrepancies, resulting from an internal review performed by our hot dog licensee of their reported sales

Interest income was $663,000 in the fiscal 2007 period versus $459,000 in the fiscal 2006 period, primarily due to higher interest earned on the increased amount of cash and marketable securities that were invested at higher rates during the fiscal 2007 period as compared to the fiscal 2006 period.

Other income was $243,000 in the fiscal 2007 period versus $651,000 in the fiscal 2006 period. This reduction was primarily due to lower revenues under supplier contracts of $254,000 which was amortized into income of a six-year period that concluded in May 2006, and lower income from subleasing activities of $125,000.

Costs and Expenses from Continuing Operations

Cost of sales increased by $1,855,000 to $24,080,000 in the fiscal 2007 period from $22,225,000 in the fiscal 2006 period. Overall, during the fiscal 2007 period, our Branded Product Program incurred higher product costs totaling approximately $830,000. This increase is the result of the higher volume during the fiscal 2007 period than in the fiscal 2006 period; however, the increase was significantly reduced because of the lower cost of product during the fiscal 2007 period. Our gross profit (representing the difference between sales and cost of sales) was $9,345,000 or 28.0% of sales during the fiscal 2007 period as compared to $7,560,000 or 25.4% of sales during the fiscal 2006 period. The primary reason for this improved margin is the impact that the lower cost of beef has had on our Branded Product Program during the fiscal 2007 period. Commodity costs of our hot dogs had continuously risen during the prior three consecutive years. Beginning in the summer of 2005, prices began to soften and that trend continued during most of the fiscal 2007 period. Our cost of hot dogs was approximately 10.0% lower during the fiscal 2007 period than the fiscal 2006 period; however, there is no assurance that the current pricing will continue. Beginning February 2007 , we have experienced an increase in our cost for our product, as compared to the previous seven months. During the fiscal 2007 period, the cost of restaurant sales at our six comparable Company-owned units was $7,087,000, or 59.7% of restaurant sales, as compared to $6,694,000, or 58.6% of restaurant sales in the fiscal 2006 period. The increase was primarily due to higher labor and related costs. Cost of sales also increased by $632,000 in the fiscal 2007 period primarily due to higher sales volume to our television retailer.

Restaurant operating expenses were $3,194,000 in the fiscal 2007 period as compared to $3,180,000 in the fiscal 2006 period. During the fiscal 2007 period, we incurred higher costs of $47,000 in connection with recruiting and maintenance at our Coney Island restaurant in preparation for the summer season, which were partly offset by lower self-insurance costs and utility costs.

Depreciation and amortization was $782,000 in the fiscal 2007 period as compared to $803,000 in the fiscal 2006 period.

Amortization of intangible assets was $262,000 in both the fiscal 2007 and fiscal 2006 periods.

General and administrative expenses increased by $699,000 to $9,251,000 in the fiscal 2007 period as compared to $8,552,000 in the fiscal 2006 period. During the fiscal 2007 period we incurred a new expense of $295,000 in connection with the adoption of SFAS No. 123R “Share Based Payment,” which now requires Nathan’s to record an expense for the fair value of options granted over the vesting period (See Note E). In June 2006, Nathan’s granted 197,500 options having a total fair value of $1,218,000. We also incurred a new expense of $172,000 for professional services in connection with our ongoing Sarbanes-Oxley Section 404 compliance efforts, higher business development costs of $97,000 in connection with our Branded Product Program during the fiscal 2007 period than during the fiscal 2006 period, severance costs of $73,000, and higher professional fees of $7,000.

Interest expense was $1,000 during the fiscal 2007 period as compared to interest expense of $31,000 during the fiscal 2006 period. This was due to the reduction of interest expense repayment of an outstanding bank loan in January 2006, and the early termination of a capital lease obligation in July 2006.

Provision for Income Taxes from Continuing Operations

In the fiscal 2007 period, the income tax provision was $2,917,000 or 35.9 % of income from continuing operations before income taxes as compared to $2,315,000 or 37.4% of income from continuing operations before income taxes in the fiscal 2006 period. Nathan’s tax provision, excluding the effects of tax-exempt interest income, was 39.0% during the fiscal period 2007 as compared to 40.2% for the fiscal 2006 period.

Discontinued Operations

On July 13, 2005, we sold a vacant piece of property in Brooklyn, New York, to a third party. We also sold our leasehold interest in an adjacent property on January 17, 2006 to the same buyer. During the fiscal 2006 period, we recognized a gain of $2,919,000, net of associated expenses in connection with the sale of our vacant piece of property, which was partly offset by an operating loss of $80,000 during the fiscal 2006 period, in connection with this property. At March 26, 2006, the buyer owed Nathan’s $439,000 from the sale of our leasehold interest and certain reimbursable operating expenses, whose collectability was not then reasonably assured and therefore not included in income. In July 2006, we received $39,000 for the reimbursement of operating expenses from December 2005 and January 2006. In October 2006, we received $400,000 relating to the sale of our leasehold interest, which was due in July 2006. During the fiscal 2007 period, income of $39,000 and gain of $400,000 were recorded into income from discontinued operations resulting from these collections.

On January 26, 2006, two of Nathan’s wholly-owned subsidiaries entered into a Lease Termination Agreement with respect to three (3) leased properties in Fort Lauderdale, Florida, with its landlord, and CVS 3285 FL, L.L.C., (“CVS”) to sell our leasehold interests to CVS for $2,000,000` before expenses. Pursuant to the Lease Termination Agreement, within 180 days following delivery of notice from CVS to Nathan’s, we are required to deliver the vacated properties to CVS. On November 30, 2006, CVS provided Nathan’s with notice that all necessary permits and approvals have been obtained and that all contingencies have either been waiver or satisfied. This transaction was concluded on June 5, 2007. During the third quarter fiscal 2007, we reclassified the results of operations based upon the November 30 notice. Total revenues from these three properties were $100,000 and $84,000 for the fiscal year ended March 25, 2007 and March 26, 2006, respectively. Income before taxes from these three properties were $93,000 and $78,000 for the fiscal year ended March 25, 2007 and March 26, 2006, respectively.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Thirteen weeks ended December 23, 2007 compared to thirteen weeks ended December 24, 2006

Revenues from Continuing Operations

Total sales increased by $80,000 or 1.0% to $7,775,000 for the thirteen weeks ended December 23, 2007 ("third quarter fiscal 2008") as compared to $7,695,000 for the thirteen weeks ended December 24, 2006 ("third quarter fiscal 2007"). Sales from the Branded Product Program increased by $48,000 or 1.0% to $4,831,000 for the third quarter fiscal 2008 as compared to sales of $4,783,000 in the third quarter fiscal 2007. Total Company-owned restaurant sales (representing five comparable Nathan’s restaurants) were $2,231,000 as compared to $2,228,000 during the third quarter fiscal 2007. During December 2007, the unfavorable weather conditions in the Northeast had a negative impact on sales at our Company-owned locations as compared to December 2006. Sales to our television retailer during the third quarter fiscal 2008 were approximately $29,000 higher than the third quarter fiscal 2007. Nathan’s products aired 15 times during the third quarter fiscal 2008 and the third quarter fiscal 2007.

Franchise fees and royalties increased by $116,000 or 10.1% to $1,267,000 in the third quarter fiscal 2008 compared to $1,151,000 in the third quarter fiscal 2007. Franchise royalties were $1,023,000 in the third quarter fiscal 2008 as compared to $962,000 in the third quarter fiscal 2007. Franchise restaurant sales decreased by $112,000 to $23,387,000 in the third quarter fiscal 2008 as compared to $23,499,000 in the third quarter fiscal 2007. Comparable domestic franchise sales (consisting of 140 restaurants) decreased by $123,000 or 0.6% to $19,619,000 in the third quarter fiscal 2008 as compared to $19,742,000 in the third quarter fiscal 2007. During December 2007, the unfavorable weather conditions in the Northeast had a negative impact on sales at a number of franchised locations as compared to December 2006. At December 23, 2007, 318 domestic and international franchised or limited-menu licensed units were operating as compared to 293 domestic and international franchised or licensed units at December 24, 2006. Royalty income from four domestic franchised locations was deemed unrealizable during the thirteen weeks ended December 23, 2007, as compared to two domestic franchised locations during the thirteen weeks ended December 24, 2006. Domestic franchise fee income was $161,000 in the third quarter fiscal 2008 as compared to $128,000 in the third quarter fiscal 2007. International franchise fee income was $83,000 in the third quarter fiscal 2008, as compared to $61,000 during the third quarter fiscal 2007. During the third quarter fiscal 2008, 15 new franchised units opened, including ten limited-menu license units and one unit in the Dominican Republic. During the third quarter fiscal 2007, six new franchised units were opened, including one in Kuwait.

License royalties increased by $80,000 or 9.5% to $924,000 in the third quarter fiscal 2008 as compared to $844,000 in the third quarter fiscal 2007. Total royalties earned on sales of hot dogs from our retail and foodservice license agreements of $625,000 increased by $31,000 or 5.2%. Royalties earned from SMG, primarily from the retail sale of hot dogs, were $546,000 during the third quarter fiscal 2008 as compared to $477,000 during the third quarter fiscal 2007. We also earned higher royalties of $47,000 from our agreements for the sale of Nathans’ hors d’oeuvres at retail. Net royalties from all other license agreements in the third quarter fiscal 2008 were $2,000 higher than the third quarter fiscal 2007.

Interest income was $287,000 in the third quarter fiscal 2008 versus $176,000 in the third quarter fiscal 2007 primarily due to higher interest earned on the increased amount of marketable securities owned during the third quarter fiscal 2008 as compared to the third quarter fiscal 2007. Interest income during the third quarter fiscal 2008 also included $45,000 earned on the promissory note held in connection with the sale of Miami Subs during the thirteen weeks ended June 24, 2007.

Other income was $27,000 in the third quarter fiscal 2008 versus $10,000 in the third quarter fiscal 2007. This increase was primarily due to higher amounts earned on Arthur Treachers’ products sold by other restaurant companies.

Costs and Expenses from Continuing Operations

Cost of sales increased by $194,000 to $5,883,000 in the third quarter fiscal 2008 from $5,689,000 in the third quarter fiscal 2007. Our gross profit (representing the difference between sales and cost of sales) was $1,892,000 or 24.3% during the third quarter fiscal 2008 as compared to $2,006,000 or 26.1% during the third quarter fiscal 2007. The reduced margin is primarily due to the higher cost of beef, especially in connection with the Branded Product Program, where the cost of our hot dogs was approximately 2.9% higher during the third quarter fiscal 2008 than the third quarter fiscal 2007. Commodity costs of our hot dogs were higher at the beginning of the third quarter fiscal 2008 than they were at the beginning of the third quarter fiscal 2007. During the third quarter fiscal 2008, these costs had been declining as compared to more stable pricing environment during the third quarter fiscal 2007. We are uncertain about the future cost of our hot dogs. Overall, our Branded Product Program incurred higher costs totaling approximately $110,000. This increase is the result of the increased cost of product and higher sales volume during the third quarter fiscal 2008 as compared to the third quarter fiscal 2007. During the third quarter fiscal 2008, the cost of restaurant sales at our five comparable Company-owned units was $1,513,000 or 67.8% of restaurant sales as compared to $1,477,000 or 66.3% of restaurant sales in the third quarter fiscal 2007. The percentage increase was primarily due to the effect of higher food prices and higher labor costs. Cost of sales also increased by $48,000 in the third quarter fiscal 2008 in connection with sales to our television retailer.

Restaurant operating expenses were $715,000 in both the third quarter fiscal 2008 and third quarter fiscal 2007. Higher marketing and repair costs were substantially offset by lower utility and insurance costs during the third quarter fiscal 2008.

Depreciation and amortization was $190,000 in the third quarter fiscal 2008 as compared to $186,000 in the third quarter fiscal 2007.

Amortization of intangible assets was $8,000 in the third quarter fiscal 2008 and $9,000 in the third quarter fiscal 2007.

General and administrative expenses increased by $121,000 to $2,172,000 in the third quarter fiscal 2008. The difference in general and administrative expenses was primarily due to professional fees of $96,000 associated with Nathan’s litigation against SMG, higher compensation costs of $67,000, higher business development costs of $31,000 in connection with the Branded Product Program and a $20,000 increase in Nathan’s stock-based compensation expense. These cost increases were partly offset by lower costs related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”). We incurred $20,000 in SOX 404 compliance costs during the third quarter fiscal 2008 compared to $80,000 incurred in the third quarter fiscal 2007. We expect to incur higher general and administrative expenses during the remainder of the fiscal year related to future SMG litigation costs. The actual amounts of future SMG litigation costs are not presently determinable. We also expect to incur higher costs of SOX 404 compliance and the associated independent audit, which are estimated to be approximately $140,000 in SOX 404 compliance costs in the balance of the fiscal year.

Provision for Income Taxes from Continuing Operations

In the third quarter fiscal 2008, the income tax provision was $435,000 or 33.2% of income from continuing operations before income taxes as compared to $406,000 or 33.1% of income from continuing operations before income taxes in the third quarter fiscal 2007. For the thirteen weeks, Nathan’s tax provision, excluding the effects of tax-exempt interest income, was 40.6% during the third quarter fiscal 2008 and 38.7% during the third quarter fiscal 2007.

Discontinued Operations

On June 7, 2007, Nathan’s completed the sale of its wholly-owned subsidiary, Miami Subs to Miami Subs Capital Partners I, Inc. effective as of May 31, 2007. The results of operations of Miami Subs have been included as discontinued operations for the thirteen weeks ended December 24, 2006.

On January 26, 2006, two of Nathan’s wholly-owned subsidiaries entered into a Lease Termination Agreement with respect to three leased properties in Fort Lauderdale, Florida, with its landlord and CVS 3285 FL, L.L.C., (“CVS”) to sell our leasehold interests to CVS. The sale was completed during the first quarter fiscal 2008. The results of operations for these properties have been included as discontinued operations for the thirteen weeks ended December 24, 2006.

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