FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Act
of 1934 for the quarterly period ended June 30, 2002.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Act
of 1934 for the transition period from _________ to ________.
Commission File Number 0-3189
NATHAN'S FAMOUS, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3166443
-------- ----------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
1400 Old Country Road, Westbury, New York 11590
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(Address of principal executive offices including zip code)
(516) 338-8500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
--- ---
At June 30, 2002, an aggregate of 6,243,086 shares of the registrant's common
stock, par value of $.01, were outstanding.
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
INDEX
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Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2002 and
March 31, 2002 3
Consolidated Statements of Earnings - Thirteen Weeks
Ended June 30, 2002 and June 24, 2001 4
Consolidated Statements of Stockholders' Equity -
Thirteen Weeks Ended June 30, 2002 5
Consolidated Statements of Cash Flows - Thirteen Weeks
Ended June 30, 2002 and June 24, 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Item 7A. Qualitative and Quantitative Disclosures about Market Risk 15
SIGNATURES 16
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
- -----------------------------------------
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
June March
30, 2002 31, 2002
-------- --------
(Unaudited)
Current assets:
Cash and cash equivalents including restricted cash
of $83 and $83, respectively $ 1,839 $ 1,834
Marketable securities and investment in limited partnership 5,583 8,819
Notes and accounts receivable, net 3,231 2,808
Inventories 541 592
Assets held for sale 1,452 1,512
Prepaid expenses and other current assets 819 1,269
Deferred income taxes 1,747 1,747
---------- ----------
Total current assets 15,212 18,581
Notes receivable, net 2,172 2,277
Property and equipment, net 8,270 8,925
Intangible assets, net 3,860 17,123
Deferred income taxes 2,567 1,539
Other assets, net 300 300
---------- ----------
$ 32,381 $ 48,745
========== ==========
Current liabilities:
Current maturities of notes payable and capital lease obligations $ 550 $ 559
Accounts payable 1,261 1,619
Accrued expenses and other current liabilities 5,539 6,506
Deferred franchise fees 321 332
---------- ----------
Total current liabilities 7,671 9,016
Notes payable and capital lease obligations, less current maturities 1,183 1,220
Other liabilities 2,194 2,364
---------- ----------
Total liabilities 11,048 12,600
---------- ----------
Stockholders' equity:
Common stock, $.01 par value - 30,000,000 shares authorized;
7,065,202 shares issued; 6,243,086 and 7,023,511 shares outstanding
at June 30, 2002 and March 31, 2002, respectively 71 71
Additional paid-in capital 40,746 40,746
Accumulated deficit (16,529) (4,537)
Accumulated other comprehensive income 35 -
---------- ----------
24,323 36,280
Treasury stock at cost, 822,116 and 41,691 at June 30, 2002
and March 31, 2002, respectively (2,990) (135)
---------- ----------
Total stockholders' equity 21,333 36,145
---------- ----------
$ 32,381 $ 48,745
========== ==========
See accompanying notes to consolidated financial statements.
3
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen weeks ended June 30, 2002 and June 24, 2001
(In thousands, except per share amounts)
(Unaudited)
2002 2001
---- ----
Sales $ 8,359 $ 8,588
Franchise fees and royalties 1,542 2,189
License royalties 811 707
Investment and other income 127 250
Interest income 75 142
-------- ---------
Total revenues 10,914 11,876
-------- ---------
Costs and expenses:
Cost of sales 5,518 5,600
Restaurant operating expenses 1,767 1,953
Depreciation and amortization 410 420
Amortization of intangible assets 70 222
General and administrative expenses 2,102 2,156
Interest expense 39 59
Impairment charge on long-lived assets 421 --
Other (income) -- (210)
-------- ---------
Total costs and expenses 10,327 10,200
-------- ---------
Operating income 587 1,676
Provision for income taxes 241 714
-------- ---------
Income before cumulative effect of change in accounting principle 346 962
Cumulative effect of change in accounting principle, net of
deferred taxes of $855 (12,338) --
-------- ---------
Net (loss) income $(11,992) $ 962
======== =========
Basic (loss) income per share
Income before cumulative effect of change in accounting principle $ 0.05 $ 0.14
Cumulative effect of change in accounting principle (1.94) --
-------- ---------
Net (loss) income $ (1.89) $ 0.14
======== =========
Diluted (loss) income per share
Income before cumulative effect of change in accounting principle $ 0.05 $ 0.14
Cumulative effect of change in accounting principle (1.94) --
-------- ---------
Net (loss) income $ (1.89) $ 0.14
======== =========
Shares used in computing net income
Basic 6,354 7,065
======== =========
Diluted 6,354 7,084
======== =========
See accompanying notes to consolidated financial statements.
4
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Thirteen weeks ended June 30, 2002
(In thousands, except share amounts)
(Unaudited)
Accumulated
Other
Additional Comprehen- Treasury Total
Common Common Paid -in Accumulated sive Treasury Stock, Stockholders'
Shares Stock Capital Deficit Income Shares at cost Equity
----- ------ --------- ----------- ---------- -------- --------- -------------
Balance at
April 1, 2002 7,065,202 $ 71 $ 40,746 $ ( 4,537) $ -- 41,691 $ (135) $ 36,145
Purchase of
treasury stock 780,425 (2,855) (2,855)
Comprehensive
earnings (losses):
Net loss (11,992) (11,992)
Other
Comprehensive
Income, net of
income taxes:
Unrealized gains
on available for
sale securities,
net of tax
provision of $25 35 ` 35
--------- ------ -------- ---------- ------ ------- ------- --------
Total
comprehensive
loss (11,957)
--------- ------ -------- ---------- ------ ------- ------- --------
Balance at
June 30, 2002 7,065,202 $ 71 $ 40,746 $(16,529) $ 35 822,116 $(2,990) $21,333
========= ====== ======== ========== ====== ======= ======= ========
See accompanying notes to consolidated financial statements.
5
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirteen weeks ended June 30, 2002 and June 24, 2001
(In thousands)
(Unaudited)
2002 2001
---- ----
Cash flows from operating activities:
Net (loss) income $(11,992) $ 962
Adjustments to reconcile net income to
net cash used in operating activities:
Cumulative effect of change in accounting principle, net of
deferred taxes 12,338 --
Depreciation and amortization 410 420
Amortization of intangible assets 70 222
Provision for doubtful accounts 74 30
Gain on sale of available for sale securities (10) --
Gain on sale of restaurant -- (96)
Impairment charge on long-lived assets 421 --
Deferred income taxes (198) (17)
Changes in operating assets and liabilities:
Marketable securities and investment in limited partnership 110 (1,354)
Notes and accounts receivable, net (479) (839)
Inventories 51 ( 67)
Prepaid expenses and other current assets 450 333
Accounts payable and accrued expenses (1,325) (1,727)
Deferred franchise and area development fees ( 11) 12
Other assets, net -- 24
Other non current liabilities (170) (135)
------ ------
Net cash used in operating activities (261) (2,232)
------ ------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 3,572 --
Purchase of available for sale securities (376) --
Purchase of property and equipment (116) (321)
Proceeds from sale of restaurants, net -- 1,875
Payments received on notes receivable 87 87
------ ------
Net cash provided by investing activities 3,167 1,641
------ ------
Cash flows from financing activities:
Repurchase of common stock (2,855) --
Principal repayment of borrowings and obligations under capital leases ( 46) (852)
------ ------
Net cash used in financing activities (2,901) (852)
------ ------
Net increase (decrease) in cash and cash equivalents 5 (1,443)
Cash and cash equivalents, beginning of period 1,834 4,325
------ ------
Cash and cash equivalents, end of period $1,839 $2,882
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 24 $ 15
====== ======
Cash paid during the period for interest $ 40 $ 63
====== ======
See accompanying notes to consolidated financial statements.
6
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Nathan's Famous, Inc.
and subsidiaries (collectively "Nathan's" or the "Company")for the thirteen week
periods ended June 30, 2002 and June 24, 2001 have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The unaudited financial statements include all adjustments (consisting of normal
recurring adjustments) which, in the opinion of management, were necessary for a
fair presentation of financial condition, results of operations and cash flows
for such periods presented. However, these results are not necessarily
indicative of results for any other interim period or the full year.
Certain information and footnote disclosures normally included in financial
statements in accordance with accounting principles generally accepted in the
United States of America have been omitted pursuant to the requirements of the
Securities and Exchange Commission. Management believes that the disclosures
included in the accompanying interim financial statements and footnotes are
adequate to make the information not misleading, but should be read in
conjunction with the consolidated financial statements and notes thereto
included in Nathan's Annual Report on Form 10-K for the fiscal year ended March
31, 2002.
NOTE B - ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
During the first quarter of fiscal 2003, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 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 121"). SFAS 142 required that goodwill and other intangibles
be reported separately; eliminates the requirement to amortize goodwill and
indefinite-lived assets; addresses the amortization of intangible assets with a
defined life; and addresses impairment testing and recognition of goodwill and
intangible assets. SFAS 142 changes the method of accounting for the
recoverability 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 valuations 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 carrying value,
including goodwill, exceeds the reporting unit's fair value, move on
to step 2. If a reporting unit's fair value exceeds the carrying
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 non-goodwill intangible assets 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.
7
The Company completed its initial SFAS 142 transitional impairment test of
goodwill including an assessment of a valuation of the Nathan's, Miami Subs and
Kenny Rogers Roasters reporting units provided by an outside 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 changes in the net carrying amount of goodwill,
trademarks and recipes for the first quarter of fiscal 2003 are as follows:
Goodwill Trademarks Recipes Total
(In thousands) (In thousands) (In thousands) (In thousands)
------------ ------------ ------------ ------------
Balance as of April 1, 2002 $ 11,083 $ 2,242 $ 30 $ 13,355
Cumulative effect of accounting change
for goodwill and other intangibles (10,988) ( 2,174) ( 30) (13,192)
--------- --------- ------- --------
Balance as of June 30, 2002 $ 95 $ 68 $ -- $ 163
========= ========= ======= ========
Additionally, the Company ceased amortization of goodwill, trademarks and
recipes in accordance with SFAS 142. The following table provides a
reconciliation of the reported net income for the first quarter of 2002 adjusted
as though SFAS 142 had been effective:
Thirteen Weeks Ended June 24, 2001
----------------------------------
Basic and
Amount Diluted Income Per
(In thousands) Share
------------ -----
Reported net income $ 962 $ 0.14
Add back discontinued amortization expense 153 0.02
-------- --------
Adjusted net income $ 1,115 $ 0.16
======== ========
The Company currently has intangible assets subject to amortization in the
form of future royalty streams and favorable leases. The net amount of royalty
streams was $2,889,000, as of June 30, 2002. The Company amortized $57,000 of
that asset during the first quarter of fiscal 2003. The estimated annual
aggregate amortization expense for the entire fiscal year ending March 30, 2003
is estimated to be approximately $280,000. Nathan's will no longer amortize
existing goodwill and certain intangibles having indefinite lives, thus reducing
amortization expense by approximately $600,000 per year
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"). This statement supersedes FAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and Accounting Principles Board Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". This Statement retains the fundamental provisions of FAS 121 for
recognition and measurement of impairment, but amends the accounting and
reporting standards for segments of a business to be disposed of. The provisions
of this statement are required to be adopted no later than fiscal years
beginning after December 31, 2001, with early adoption encouraged. The Company
adopted the provisions of FAS 144 on April 1, 2002, the adoption of such, did
not have a material impact on the financial position and results of operations
of the Company.
NOTE C - SALES OF RESTAURANTS
Subsequent to June 30, 2002, the Company entered into sales contracts for
the sale of five company-operated restaurants totaling $1,674,000. Nathan's
expects to complete the sale of two of the restaurants in August and September
8
2002 to non-franchisees and the remaining three restaurants are expected to be
sold to a franchisee no later than October 31, 2002. All sales are in cash, and
are subject to certain conditions which may include financing.
NOTE D - MARKETABLE SECURITIES and INVESTMENT IN LIMITED PARTNERSHIP
Effective April 1, 2002, the Company transferred certain securities
formerly classified as "trading" securities to "available for sale" due to a
change in the Company's investment strategies. As required by FASB Statement No.
115, the transfer of these securities between categories of investments has been
accounted for at fair value and the unrealized holding gain or loss on the
transfer from the trading category will not be reversed. The unrealized gain for
the period ended June 30, 2002 totaling $35,000 net of income taxes, has been
included as a component of the Company's comprehensive income.
NOTE E - INCOME (LOSS) PER SHARE
The following chart provides a reconciliation of information used in
calculating the per share amounts for the thirteen week periods ended June 30,
2002 and June 24, 2001, respectively.
Thirteen weeks Net (Loss) Income
- -------------- Net (Loss) Income Number of Shares Per Share
----------------- ---------------- ---------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Basic EPS
Basic calculation $(11,992) $962 6,354 7,065 $(1.89) $ .14
Effect of dilutive employee stock
options and warrants - - - 19 - -
-------- ---- ----- ----- ------ -----
Diluted EPS
Diluted calculation $(11,992) $962 6,354 7,084 $(1.89) $ .14
======== ==== ===== ===== ====== =====
Common stock equivalents aggregating 219,000 shares have been excluded from
the diluted EPS calculation for the period ended June 30, 2002 as the impact of
their inclusion would have been anti-dilutive.
Options and warrants issued to employees to purchase 902,838 and 1,390,401
shares of common stock in the thirteen week periods ended June 30, 2002 and June
24, 2001, respectively, were not included in the computation of diluted EPS
because the exercise prices exceeded the average market price of common shares
for the periods. These options and warrants were still outstanding at the end of
the related periods.
NOTE F - STOCK REPURCHASE PROGRAM
On September 14, 2001, Nathan's was authorized to purchase up to 1 million
shares of its 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. Nathan's expects to fund these stock repurchases from
its operating cash flow. Through June 30, 2002, 822,116 shares have been
repurchased at a cost of approximately $2,990,000. Subsequent to June 30, 2002,
through August 9, 2002, Nathan's purchased an additional 168,949 shares of
common stock at a cost of approximately $649,000.
NOTE G - CONTINGENCIES
Nathan's Famous, Inc. and Nathan's Famous Operating Corp. were named as two
of three defendants in an action commenced in July 2001, in the Supreme Court of
New York, Westchester County. According to the amended complaint, the
plaintiffs, a minor and her mother, are seeking damages in the amount of $17
million against Nathan's Famous and Nathan's Famous Operating Corp. and one of
Nathan's Famous' former employees claiming that the Nathan's entities failed to
properly supervise minor employees, failed to monitor its supervisory personnel,
and were negligent in hiring, retaining and promoting the individual defendant,
who allegedly molested, harassed and raped the minor plaintiff, who was also an
employee. On May 29, 2002, as a result of a mediation, this action was settled,
9
subject to court approval. In the event the court approves the settlement, the
plaintiffs will be paid $650,000 which has been accrued as of March 31, 2002, as
a component of "Accrued expenses and other current liabilities" in the
accompanying balance sheets.
NOTE H - RECLASSIFICATIONS
Certain reclassifications of prior period balances have been made to
conform to the June 30, 2002 presentation.
NOTE I - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations". This statement addresses financial and reporting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. Nathan's is
currently evaluating the effect of adoption on its financial position and
results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
Introduction
As used in this Report, the terms "we", "us", "our" and "Nathan's" mean
Nathan's Famous, Inc. and its subsidiaries (unless the context indicates a
different meaning).
During the fiscal year ended March 26, 2000, we completed two acquisitions
that provided us with two highly recognized brands. On April 1, 1999, we became
the franchisor of the Kenny Rogers Roasters restaurant system by acquiring the
intellectual property rights, including trademarks, recipes and franchise
agreements of Roasters Corp. and Roasters Franchise Corp. On September 30, 1999,
we acquired the remaining 70% of the outstanding common stock of Miami Subs
Corporation we did not already own. Our revenues are generated primarily from
operating company-owned restaurants and franchising the Nathan's, Miami Subs and
Kenny Rogers restaurant concepts, licensing agreements for the sale of Nathan's
products within supermarkets and selling products under Nathan's Branded Product
Program. The Branded Product Program enables foodservice operators to offer
Nathans' hot dogs and other proprietary items for sale within their facilities.
In conjunction with this program, foodservice operators are granted a limited
use of the Nathans' trademark with respect to the sale of hot dogs and certain
other proprietary food items and paper goods.
In addition to plans for expansion through franchising and our Branded
Product Program, Nathan's is continuing to capitalize on the co-branding
opportunities within our existing restaurant system. To date, the Arthur
Treacher's brand has been introduced within 133 Nathan's, Kenny Rogers Roasters
and Miami Subs restaurants, the Nathan's brand has been added to the menu of 88
Miami Subs and Kenny Rogers restaurants, while the Kenny Rogers Roasters brand
has been introduced into 79 Miami Subs and Nathan's restaurants. We have begun
testing the Miami Subs brand in three company-owned Nathan's restaurants and one
Kenny Rogers franchised restaurant.
In connection with our acquisition of Miami Subs, we determined that up to
18 underperforming restaurants would be closed pursuant to our divestiture plan.
To date, we have terminated leases on 16 of those properties and are continuing
to market two of the remaining properties for sale. We also terminated 10
additional leases for properties outside of the divestiture plan and may
terminate additional leases in the future that were not part of our divestiture
plan.
In the initial weeks following the events of September 11, 2001, there was
a decline in revenues in a significant number of company and franchised
restaurants, operating primarily in Las Vegas, south Florida, and at airports
throughout the United States. Sales have since rebounded in Las Vegas and at
airports, but have continued to be negatively impacted in the south-Florida
market.
At June 30, 2002, our combined system consisted of 354 franchised or
licensed units, 22 company-owned units and approximately 1,600 Nathan's Branded
Product points of sale that feature Nathan's world famous all-beef hot dogs,
located in 39 states, the District of Columbia and 13 foreign countries. At June
30, 2002, our company-owned restaurant system included 16 Nathan's units, four
Miami Subs units and two Kenny Rogers Roasters units, as compared to 16 Nathan's
10
units, six Miami Subs units and two Kenny Rogers Roasters units at June 24,
2001.
Critical Accounting Policies and Estimates
Our consolidated financial statements and the notes to our consolidated
financial statements contain information that is pertinent to management's
discussion and analysis. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities. We
believe the following critical accounting policies involve additional management
judgement due to the sensitivity of the methods, assumptions and estimates
necessary in determining the related asset and liability amounts.
Impairment of Goodwill and Other Intangible Assets
Statement of Financial Accounting Standards, or SFAS No. 142, Goodwill and
Other Intangible Assets, requires that goodwill and intangible assets with
indefinite lives will no longer be amortized but will be reviewed annually (or
more frequently if impairment indicators arise) for impairment. 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 then additional impairment expenses may be required.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards, or SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," requires management
judgements regarding the future operating and disposition plans for
underperforming assets, and estimates of expected realizable values for assets
to be sold. The application of SFAS 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 $421,000 relating
to three restaurants during the first quarter fiscal 2003.
Impairment of Notes Receivable
Statement of Financial Accounting Standards, or SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," requires management judgements regarding
the future collectibility of notes receivable and the underlying fair market
value of collateral. We consider the following factors when evaluating a note
for impairment: 1) indications that the borrower is experiencing business
problems such as operating losses, marginal working capital, inadequate cash
flow or business interruptions; 2) whether the loan is secured by collateral
that is not readily marketable; or 3) whether the collateral is susceptible to
deterioration in realizable value. When determining possible impairment, we also
assess our future intention to extend certain leases beyond the minimum lease
term and the debtor's ability to meet its obligation over that extended term.
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 were net of allowances for doubtful accounts. An allowance for
doubtful accounts is determined through analysis of the aging of accounts
receivable at the date of the financial statements, assessment of collectibility
based upon historical trends and an evaluation of the impact of current and
projected economic conditions. In the event that the collectibility of a
receivable is doubtful, the associated revenue is not recorded until the facts
and circumstances change in accordance with Staff Accounting Bulletin SAB No
101, "Revenue Recognition".
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 historical trends, however, the
11
final cost of many of these claims may not be known for five years or longer.
Accordingly, our annual self insurance costs may be subject to adjustment from
previous estimates as facts and circumstances change.
Results of Operations
Thirteen weeks ended June 30, 2002 compared to June 24, 2001
Revenues
- --------
Total sales decreased by 2.7% or $229,000 to $8,359,000 for the thirteen
weeks ended June 30, 2002 ("first quarter fiscal 2003") as compared to
$8,588,000 for the thirteen weeks ended June 24, 2001 ("first quarter fiscal
2002"). Sales from the Branded Product Program increased by 34.6% to $1,666,000
for the first quarter fiscal 2003 as compared to sales of $1,238,000 in the
first quarter fiscal 2002. Company-owned restaurant sales decreased 8.9% or
$657,000 to $6,693,000 from $7,350,000 primarily due to the operation of three
fewer company-owned stores as compared to the prior fiscal year which was
partially offset by a 1.9% sales increase at our comparable restaurants
(consisting of 16 Nathan's, four Miami Subs and two Kenny Rogers Roasters
restaurants) The reduction in company-owned stores is the result of our
franchising two restaurants, and the sale of one restaurant pursuant to an order
of condemnation. The financial impact associated with these three restaurants
lowered restaurant sales by $785,000 and lowered restaurant operating profits by
$53,000 versus the fiscal 2002 period.
Franchise fees and royalties decreased by 29.6% or $647,000 to $1,542,000
in the first quarter fiscal 2003 compared to $2,189,000 in the first quarter
fiscal 2002. Franchise royalties decreased by $315,000 or 17.6% to $1,474,000 in
the first quarter fiscal 2003 as compared to $1,789,000 in the first quarter
fiscal 2002. The majority of this decline is due to the decrease in the amount
of franchise sales and the increased amount of royalties deemed unrealizable
during the first quarter fiscal 2003 as compared to the first quarter fiscal
2002. Domestic franchise restaurant sales decreased by 18.3% to $41,628,000 in
the first quarter fiscal 2003 as compared to $48,951,000 in the first quarter
fiscal 2002. At June 30, 2002, 354 franchised or licensed restaurants were
operating as compared to 384 franchised or licensed restaurants at June 24,
2001. At June 30, 2002, royalties from 39 domestic franchised locations have
been deemed unrealizable. Franchise fee income derived from new openings and our
co-branding activities was $56,000 in the first quarter fiscal 2003 as compared
to $340,000 in the first quarter fiscal 2002. This decrease was primarily
attributable to the difference between the number of franchised units open
between the two periods and the initial fees earned from existing restaurants
within our system that co-branded during the first quarter fiscal 2002. During
the first quarter fiscal 2002, we earned $172,500 in connection with our
co-branding strategy within the Miami Subs system to offer Nathan's, Kenny
Rogers Roasters and Arthur Treacher's products. These activities were
substantially completed during fiscal 2002. During the first quarter fiscal
2003, one new franchised unit opened.
License royalties were $811,000 in the first quarter fiscal 2003 as
compared to $707,000 in the first quarter fiscal 2002. The majority of this
increase is attributable to increased sales by SMG, Inc., Nathans' licensee for
the sale of Nathan's frankfurters within supermarkets and club stores.
Investment and other income decreased by $123,000 to $127,000 in the first
quarter fiscal 2003 versus $250,000 in the first quarter fiscal 2002. During the
first quarter fiscal 2003, Nathans' investment income was approximately $154,000
lower than in the first quarter fiscal 2002 due primarily to differences in
performance of the financial markets between the two periods. In the first
quarter fiscal 2003, Nathan's realized a gain of $135,000 in connection with the
early termination of a Branded Product Program sales agreement. During the first
quarter fiscal 2002, Nathan's recognized a net gain of $96,000 primarily in
connection with the sale of a company-owned restaurant.
Interest income decreased by $67,000 to $75,000 in the first quarter fiscal
2003 versus $142,000 in the first quarter fiscal 2002 due to lower interest
income on its investments in marketable securities and its notes receivable
Costs and Expenses
- ------------------
Cost of sales decreased by $82,000 from $5,600,000 in the first quarter
fiscal 2002 to $5,518,000 in the first quarter fiscal 2003. During the first
quarter fiscal 2003, restaurant cost of sales were lower than the first quarter
fiscal 2002 by approximately $365,000. Lower cost of sales attributable to
operating fewer company-owned restaurants of approximately $507,000 more than
offset higher costs at our comparable restaurants. The cost of restaurant sales
at our comparable units as a percentage of restaurant sales was 62.1% in the
first quarter fiscal 2003 as compared to 61.1% in the first quarter fiscal 2002
due primarily to higher labor and related costs. Higher costs of approximately
$283,000 were incurred in connection with the growth of our Branded Product
Program which was partially offset by lower commodity costs during the first
quarter fiscal 2003. Through most of the first quarter fiscal 2002, commodity
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prices of our primary meat products were at their highest levels in recent years
as compared to costs during the first quarter fiscal 2003 which were in line
with historical norms.
Restaurant operating expenses decreased by $186,000 from $1,953,000 in the
first quarter fiscal 2002 to $1,767,000 in the first quarter fiscal 2003.
Restaurant operating costs were lower in the first quarter fiscal 2003 by
approximately $230,000, as compared to the first quarter fiscal 2002 as a result
of operating fewer restaurants. The reduction in restaurant operating expenses
from operating fewer restaurants was partially offset by higher ongoing costs of
marketing, occupancy and insurance during the first quarter fiscal 2003.
Depreciation and amortization decreased by $10,000 from $420,000 in the
first quarter fiscal 2002 to $410,000 in the first quarter fiscal 2003. Lower
depreciation expense of operating fewer company-owned restaurants versus the
first quarter fiscal 2002 was partially offset by additional depreciation
expense attributable to last year's capital spending.
Amortization of intangibles decreased by $152,000 from $222,000 in the
first quarter fiscal 2002 to $70,000 in the first quarter fiscal 2003.
Amortization of intangibles decreased as a result of the adoption of SFAS No.
142 " Accounting for Goodwill and Other Intangible Assets" in the first quarter
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 $54,000 to $2,102,000 in
the first quarter fiscal 2003 as compared to $2,156,000 in the first quarter
fiscal 2002. The decrease in general and administrative expenses was due
primarily to lower professional fees of approximately $54,000 and personnel and
incentive compensation expense of approximately $41,000 which were partly offset
by higher bad debts expense of approximately $44,000.
Interest expense was $39,000 during the first quarter fiscal 2003 as
compared to $59,000 during the first quarter fiscal 2002. The reduction in
interest expense relates primarily to the repayment of outstanding trade debt
between the two periods.
Impairment charge on long-lived assets of $421,000 during the first quarter
fiscal 2003 represents the write-down relating to three under-performing stores.
Other income of $210,000 in the first quarter fiscal 2002 represents the
reversal of a previously recorded litigation provision for an award that was
settled, upon appeal, in our favor.
Provision for Income Taxes
In the first quarter fiscal 2003, the income tax provision on earnings
before cumulative effect of change in accounting principle was $241,000 or 41.1%
of income before income taxes as compared to $714,000 or 42.6% of income before
income taxes in the first quarter fiscal 2002. The effective income tax rate was
lower in the first quarter fiscal 2003 due to the adoption of FASB No. 142 which
requires that goodwill no longer be amortized. Such goodwill amortization was
not tax deductible by the Company which increased the effective tax rate in
prior years.
Cumulative effect of change in accounting principle
- ---------------------------------------------------
In the first quarter fiscal 2003, we adopted SFAS No. 142, "Accounting for
Goodwill and Other Intangibles". 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 tax (See Note - B).
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 2002 aggregated $1,839,000,
increasing by $5,000 during the fiscal 2003 period. At June 30, 2002, marketable
securities and investment in limited partnership decreased by $3,236,000 from
March 31, 2002 to $5,583,000 and net working capital decreased to $7,541,000
from $9,565,000 at March 31, 2002.
Cash used in operations of $261,000 in the fiscal 2003 period is primarily
attributable to net loss of $11,992,000, non-cash charges of $13,313,000,
including cumulative effect of accounting change of $12,338,000, depreciation
and amortization of $480,000, impairment charges of $421,000 and provision for
doubtful accounts of $74,000, in addition to decreases in prepaid expenses and
13
other current assets of $450,000 and marketable securities and investment in
limited partnership of $110,000, which were more than offset by decreases in
accounts payable and accrued expenses of $1,325,000, an increase in notes and
accounts receivable of $479,000 and a decrease in other liabilities of $170,000.
Cash provided by investing activities of $3,167,000 is comprised primarily
of proceeds from the sale of securities of $3,572,000 and repayments on notes
receivable of $87,000 which were partly offset by the purchases of securities of
$376,000 and expenditures relating to capital improvements of the company-owned
restaurants and other fixed asset additions of $116,000.
Cash used in financing activities of $2,901,000 represents repurchases of
780,425 shares of common stock at a total cost of $2,855,000 and repayments of
notes payable and obligations under capital leases in the amount of $46,000.
On September 14, 2001, Nathan's was authorized to purchase up to 1 million
shares of its common stock. Pursuant to our stock repurchase program, we
repurchased 822,116 shares of common stock in open market transactions and a
private transaction at a total cost of $2,990,000 through the quarter ended June
30, 2002. Subsequent to June 30, 2002, through August 9, 2002, Nathan's
purchased an additional 168,949 shares of common stock at a cost of
approximately $649,000.
We expect that we will make additional investments in certain existing
restaurants in the future and that we will fund those investments from our
operating cash flow. We do not expect to incur significant capital expenditures
to develop new company-owned restaurants during our fiscal year ending March 30,
2003.
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 properties and are continuing
to market two of the remaining properties for sale. Since acquiring Miami Subs,
we have accrued approximately $1,461,000 and made payments of approximately
$1,273,000 for lease obligations and termination costs, as part of the
acquisition, for units having total future minimum lease obligations of
$7,680,000 with remaining lease terms of one year up to approximately 17 years.
We may incur future cash payments, consisting primarily of future lease
payments, including costs and expenses associated with terminating additional
leases, that were not part of our divestiture plan.
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.
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 June 30, 2002 was approximately $1.2 million.
Management believes that available cash, marketable investment securities,
and internally generated funds should provide sufficient capital to finance our
operations for at least the next twelve months. We maintain a $7,500,000
uncommitted bank line of credit and have not borrowed any funds to date under
this line of credit.
Forward Looking Statement
Certain statements contained in this report are forward-looking statements.
Forward-looking statements represent our current judgment regarding future
events. Although we would not make forward-looking statements unless we believe
we have a reasonable basis for doing so, we cannot guarantee their accuracy and
actual results may differ materially from those we anticipated due to a number
of uncertainties, many of which we are not aware. These risks and uncertainties,
many of which are not within our control, include, but are not limited to: the
ongoing effects of the events of September 11, 2001; economic, weather,
legislative and business conditions; the collectibility of receivables; the
availability of suitable restaurant sites on reasonable rental terms; changes in
consumer tastes; the ability to continue to attract franchisees; the ability to
purchase our primary food and paper products at reasonable prices; no material
increases in the minimum wage; and our ability to attract competent restaurant
and managerial personnel. We generally identify forward-looking statements with
the words "believe", "intend," "plan," "expect," "anticipate," "estimate,"
"will," "should" and similar expressions.
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PART II. OTHER INFORMATION
Item 1: Legal Proceedings
We and our subsidiaries are from time to time involved in ordinary and
routine litigation. We are also involved in the following litigation:
Nathan's Famous, Inc. and Nathan's Famous Operating Corp. were named as two
of three defendants in an action commenced in July 2001, in the Supreme Court of
New York, Westchester County. According to the amended complaint, the
plaintiffs, a minor and her mother, are seeking damages in the amount of $17
million against Nathan's Famous and Nathan's Famous Operating Corp. and one of
Nathan's Famous' former employees claiming that the Nathan's entities failed to
properly supervise minor employees, failed to monitor its supervisory personnel,
and were negligent in hiring, retaining and promoting the individual defendant,
who allegedly molested, harassed and raped the minor plaintiff, who was also an
employee. On May 29, 2002, as a result of a mediation, this action was settled,
subject to court approval. In the event the court approves the settlement, the
plaintiffs will be paid $650,000 which has been accrued as of March 31, 2002, as
a component of "Accrued expenses and other current liabilities" in the
accompanying balance sheets.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification by Howard M. Lorber, CEO, Nathan's Famous, Inc.,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by Ronald G. DeVos, CFO, Nathan's Famous, Inc., pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) No reports on Form 8-K were filed during the quarter ended June 30,
2002.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
We have historically invested our cash and cash equivalents in short term,
fixed rate, highly rated and highly liquid instruments which are reinvested when
they mature throughout the year. Although our existing investments are not
considered at risk with respect to changes in interest rates or markets for
these instruments, our rate of return on short-term investments could be
affected at the time of reinvestment as a result of intervening events.
We have invested our marketable investment securities in intermediate term,
fixed rate, highly rated and highly liquid instruments and a highly liquid
investment limited partnership that invests principally in equities. These
investments are subject to fluctuations in interest rates and the performance of
the equity markets.
The interest rate on our borrowings are generally determined based upon
prime rate and may be subject to market fluctuation as the prime rate changes as
determined within each specific agreement. We do not anticipate entering into
interest rate swaps or other financial instruments to hedge our borrowings.
The cost of commodities are subject to market fluctuation. We have not
attempted to hedge against fluctuations in the prices of the commodities we
purchase using future, forward, option or other instruments. As a result, our
future commodities purchases are subject to changes in the prices of such
commodities.
Foreign franchisees generally conduct business with us and make payments
in, United States dollars, reducing the risks inherent with changes in the
values of foreign currencies. As a result, we have not purchased future
contracts, options or other instruments to hedge against changes in values of
foreign currencies.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATHAN'S FAMOUS, INC.
Date: August 13, 2002 By: /s/Wayne Norbitz
-------------------------------------
Wayne Norbitz
President and Chief Operating Officer
(Principal Executive Officer)
Date: August 13, 2002 By: /s/Ronald G. DeVos
-------------------------------------
Ronald G. DeVos
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
16