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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 September 29, 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 1-3189
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
-----------------------------------------------------------
(Address of principal executive offices including zip code)
(516) 338-8500
--------------
(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 November 5, 2002, an aggregate of 5,876,079 shares of the registrant's common
stock, par value of $.01, were outstanding.
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - September 29, 2002 and
March 31, 2002 3
Consolidated Statements of Operations - Thirteen Weeks
Ended September 29, 2002 and September 23, 2001 4
Consolidated Statements of Operations - Twenty-six Weeks
Ended September 29, 2002 and September 23, 2001 5
Consolidated Statements of Stockholders' Equity -
Twenty-six Weeks Ended September 29, 2002 6
Consolidated Statements of Cash Flows -Twenty-six Weeks
Ended September 29, 2002 and September 23, 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Qualitative and Quantitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 4. Submission of Matter to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 28
Certifications of principal executive officers 29
Certification of principal financial officer 31
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Sept. 29, March 31,
2002 2002
--------- ----------
(Unaudited)
Current assets:
Cash and cash equivalents including restricted cash
of $83 and $83, respectively $ 2,241 $ 1,834
Marketable securities and investment in limited partnership 5,453 8,819
Notes and accounts receivable, net 2,833 2,808
Inventories 498 592
Assets held for sale 1,245 1,512
Prepaid expenses and other current assets 613 1,269
Deferred income taxes 1,747 1,747
--------- ----------
Total current assets 14,630 18,581
Notes receivable, net 1,807 2,277
Property and equipment, net 8,097 8,925
Goodwill, net 95 11,083
Intangible assets, net 3,696 6,040
Deferred income taxes 2,553 1,539
Other assets, net 291 300
-------- ----------
$ 31,169 $ 48,745
========= ==========
Current liabilities:
Current maturities of notes payable and capital lease obligations $ 547 $ 559
Accounts payable 1,151 1,619
Accrued expenses and other current liabilities 5,070 6,506
Deferred franchise fees 381 332
--------- ----------
Total current liabilities 7,149 9,016
Notes payable and capital lease obligations, less current maturities 1,140 1,220
Other liabilities 2,087 2,364
--------- ----------
Total liabilities 10,376 12,600
--------- ----------
Stockholders' equity:
Common stock, $.01 par value - 30,000,000 shares authorized;
7,065,202 shares issued; 6,065,202 and 7,023,511 shares outstanding
at September 29, 2002 and March 31, 2002, respectively 71 71
Additional paid-in capital 40,746 40,746
Accumulated deficit (16,419) (4,537)
Accumulated other comprehensive income 65 --
--------- ----------
24,463 36,280
Treasury stock at cost, 1,000,000 and 41,691 shares at
September 29, 2002 and March 31, 2002, respectively (3,670) (135)
--------- ----------
Total stockholders' equity 20,793 36,145
--------- ----------
$ 31,169 48,745
========= ==========
See accompanying notes to consolidated financial statements.
-3-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen weeks ended September 29, 2002 and
September 23, 2001 (In thousands, except
per share amounts)
(Unaudited)
2002 2001
--------- --------
Sales $ 8,668 $ 9,085
Franchise fees and royalties 1,451 2,052
License royalties 588 605
Investment and other (loss) (76) (74)
Interest income 81 117
-------- --------
Total revenues 10,712 11,785
-------- --------
Costs and expenses:
Cost of sales 5,635 5,885
Restaurant operating expenses 1,931 2,018
Depreciation and amortization 474 394
Amortization of intangible assets 69 220
General and administrative expenses 2,058 2,051
Interest expense 39 48
Impairment charge on notes receivable 320 --
-------- --------
Total costs and expenses 10,526 10,616
-------- --------
Operating income 186 1,169
Provision for income taxes 76 515
-------- --------
Net income $ 110 $ 654
======== ========
PER SHARE INFORMATION
Net income per share
Basic $ 0.02 $ 0.09
======== ========
Diluted $ 0.02 $ 0.09
======== ========
Weighted average shares outstanding
Basic 6,105 7,065
======== ========
Diluted 6,229 7,080
======== ========
See accompanying notes to consolidated financial statements.
-4-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Twenty-six weeks ended September 29, 2002 and
September 23, 2001 (In thousands, except
per share amounts)
(Unaudited)
2002 2001
--------- ---------
Sales $ 17,027 $ 17,673
Franchise fees and royalties 2,993 4,241
License royalties 1,399 1,312
Investment and other income 51 176
Interest income 156 259
-------- --------
Total revenues 21,626 23,661
-------- --------
Costs and expenses:
Cost of sales 11,153 11,485
Restaurant operating expenses 3,698 3,971
Depreciation and amortization 884 814
Amortization of intangible assets 139 442
General and administrative expenses 4,160 4,170
Interest expense 78 107
Impairment charge on long-lived assets 421 --
Impairment charge on notes receivable 320 --
Other (income) -- (210)
-------- --------
Total costs and expenses 20,853 20,779
-------- --------
Operating income 773 2,882
Provision for income taxes 317 1,266
-------- --------
Income before cumulative effect of change in
accounting principle 456 1,616
Cumulative effect of change in accounting principle, net of
income taxes of $855 (12,338) --
-------- --------
Net (loss) income $(11,882) $ 1,616
======== ========
Basic (loss) income per share
Income before cumulative effect of change in accounting principle $ 0.07 $ 0.23
Cumulative effect of change in accounting principle (1.98) --
-------- --------
Net (loss) income $ (1.91) $ 0.23
======== ========
Diluted (loss) income per share
Income before cumulative effect of change in accounting principle $ 0.07 $ 0.23
Cumulative effect of change in accounting principle (1.98) --
-------- --------
Net (loss) income $ (1.91) $ 0.23
======== ========
Weighted average shares outstanding
Basic 6,230 7,065
======== ========
Diluted 6,230 7,082
======== ========
See accompanying notes to consolidated financial statements.
-5-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Twenty-six weeks ended September 29, 2002
(In thousands, except share amounts)
(Unaudited)
Accumulated
Additional Other Treasury Total
Common Common Paid -in Accumulated Comprehensive 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 958,309 (3,535) (3,535)
Net loss (11,882) (11,882)
Unrealized gains
on available for
sale securities,
net of tax
provision of $47 65 65
--------- ------ ----------- ------------ ---------- --------- --------- --------
Balance at
September 29,
2002 7,065,202 $ 71 $ 40,746 $ (16,419) $ 65 1,000,000 $ (3,670) $ 20,793
========= ====== =========== ============ ========== ========= ========= ========
See accompanying notes to consolidated financial statements.
-6-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-six weeks ended September 29, 2002 and September 23, 2001
(In thousands)
(Unaudited)
2002 2001
-------- -------
Cash flows from operating activities:
Net (loss) income $(11,882) $ 1,616
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Cumulative effect of change in accounting principle, net of
deferred taxes 12,338 --
Depreciation and amortization 884 814
Amortization of intangible assets 139 442
Provision for doubtful accounts 81 83
Amortization of bond premium 63 --
Gain on sale of available for sale securities (10) --
Gain on sale of fixed assets (9) (93)
Impairment charge on long-lived assets 421 --
Impairment charge on notes receivable 320 --
Deferred income taxes (206) (27)
Changes in operating assets and liabilities:
Marketable securities and investment in limited partnership 251 (1,694)
Notes and accounts receivable, net (117) (47)
Inventories 94 (153)
Prepaid expenses and other current assets 656 658
Accounts payable and accrued expenses (1,808) (1,851)
Deferred franchise and area development fees 49 2
Other assets, net 9 32
Other non current liabilities (277) (188)
-------- -------
Net cash provided by (used in) operating activities 996 (406)
-------- -------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 4,282
Purchase of available for sale securities (1,108) --
Purchase of property and equipment (387) (673)
Proceeds from sale of restaurant, net 75 1,875
Proceeds from sale of fixed assets 15 --
Payments received on notes receivable 161 629
-------- -------
Net cash provided by investing activities 3,038 1,831
-------- -------
Cash flows from financing activities:
Repurchase of common stock (3,535) --
Principal repayment of borrowings and obligations under capital leases (92) (1,256)
-------- -------
Net cash used in financing activities (3,627) (1,256)
-------- -------
Net increase in cash and cash equivalents 407 169
Cash and cash equivalents, beginning of period 1,834 4,325
-------- -------
Cash and cash equivalents, end of period $ 2,241 $ 4,494
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 45 $ 77
======== =======
Cash paid during the period for interest $ 78 $ 114
======== =======
See accompanying notes to consolidated financial statements.
-7-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 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 and twenty-six week periods ended September 29, 2002 and September 23,
2001 have been prepared in accordance with accounting principles generally
accepted in the United States of America. The consolidated financial statements
include the accounts of the Company and all of its wholly-owned subsidiaries.
All intercompany balances and transactions have been eliminated in
consolidation. 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 - IMPAIRMENT OF NOTES RECEIVABLE
Nathan's follows the guidance in Statement of Financial Accounting
Standards No. 114 ("SFAS No. 114") "Accounting by Creditors for Impairment of a
Loan,". Pursuant to SFAS No. 114, a loan is impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. When
evaluating a note for impairment, the factors considered include: 1) indications
that the borrower is experiencing business problems such as operating losses,
marginal working capital, inadequate cash flow or business interruptions, 2)
loans secured by collateral that is not readily marketable, or 3) that are
susceptible to deterioration in realizable value. When determining impairment,
management's assessment includes its intention to extend certain leases beyond
the minimum lease term and the debtor's ability to meet its obligation over that
extended term. In certain cases where Nathan's has determined that a loan has
been impaired, it does not expect to extend or renew the underlying leases.
Based on the Company's analysis, it has determined that there are notes that
have incurred such an impairment. Following are summaries of impaired notes
receivable and the allowance for impaired notes receivable:
SEPTEMBER 29, March 31,
2002 2002
------------ ---------
Total recorded investment in impaired notes receivable $ 1,513 $ 1,000
Allowance for impaired notes receivable (960) (640)
--------- -------
Recorded investment in impaired notes receivable, net $ 553 $ 360
========= =======
TWENTY-SIX Fifty-three weeks
WEEKS ENDED ended
SEPTEMBER 29, March 31,
2002 2002
------------ -----------------
Allowance for impaired notes receivable at beginning of fiscal year $640 $ 613
Impairment charges on notes receivable 320 185
Direct writedowns of impaired notes receivable 0 (240)
Other increases in allowance for impaired notes receivable 0 82
---- -----
Allowance for impaired notes receivable at end of fiscal period $960 $ 640
==== =====
-8-
Based on the present value of the estimated cash flows of identified
impaired note receivables, the Company records interest income on its impaired
notes receivable on a cash basis. The following represents the interest income
recognized and average recorded investment of impaired notes receivable.
Thirteen Weeks Ended Twenty-six Weeks Ended
Sept. 29, Sept. 23, Sept. 29, Sept. 23,
2002 2001 2002 2001
------------ ----------- --------- --------
Interest income recorded on impaired
notes receivable $ 9,000 $ 4,000 $ 30,000 $ 20,000
============ =========== ========== =========
Average recorded investment in impaired
notes receivable $ 1,254,000 $ 957,000 $ 1,169,000 $1,007,000
============ =========== =========== ==========
NOTE C - LONG-LIVED ASSETS
Long-lived assets and intangible assets (See Note H) are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
value may not be recoverable. Impairment is measured by comparing the carrying
value of the long-lived assets to the estimated undiscounted future cash flows
expected to result from use of the assets and their ultimate disposition. In
instances where impairment is determined to exist, the Company writes down the
asset to its fair value based on the present value of estimated future cash
flows.
Impairment losses are recorded on long-lived assets on a
restaurant-by-restaurant basis whenever impairment factors are determined to be
present. The Company considers a history of restaurant operating losses to be
its primary indicator of potential impairment for individual restaurant
locations. At June 30, 2002, the Company had identified three units, which were
expected to continue to operate, that have been impaired and recorded impairment
charges of $421,000 in the statement of operations. These restaurants were sold
to a franchisee which are being accounted for under the "deposit method" (See
Note I). The impairment charge was determined based upon the probability of
future cash flows. At September 29, 2002, it appears likely that one of those
restaurants will cease operating by December 31, 2002.
NOTE D - SELF INSURANCE ACCRUALS
The Company is self-insured for portions of its general liability
coverage. As part of Nathan's risk management strategy, its insurance programs
include deductibles for each incident and in the aggregate for a policy year. As
such, Nathan's accrues estimates of our ultimate self insurance costs throughout
the policy year. These estimates have been developed based upon Nathan's
historical trends, however, the final cost of many of these claims may not be
known for five years or longer. Accordingly, Nathan's annual self insurance
costs may be subject to adjustment from previous estimates as facts and
circumstances change. The self insurance accruals at September 29, 2002 and
March 31, 2002 were $749,000 and $1,346,000, respectively. During the twenty-six
weeks ended September 29, 2002, the self insurance accrual was reduced by
approximately $597,000, due principally to the satisfaction of a claim against
the Company totaling $659,000 (See Note P).
NOTE E - REVENUE RECOGNITION POLICIES
Company-owned Restaurants
Sales by Company-owned restaurants are recognized on a cash basis, upon
the performance of services.
Franchising Operations
In connection with its franchising operations, the Company receives
initial franchise fees, development fees, royalties, contributions to marketing
funds, and in certain cases, revenue from sub-leasing restaurant properties to
franchisees.
-9-
Franchise and area development fees, which are typically received prior
to completion of the revenue recognition process are recorded as deferred
revenue. Initial franchise fees are recognized as income when substantially all
services to be performed by Nathan's and conditions 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 restaurant:
Approval of all site selections to be developed.
Provision of architectural plans suitable for restaurants to be
developed.
Assistance in establishing building design specifications, reviewing
construction compliance and equipping the restaurant.
Provision of appropriate menus to coordinate with the restaurant design
and location to be developed.
Provides management training for the new franchisee and selected staff.
Assistance with the initial operations of restaurants being developed.
Development fees are nonrefundable and the related agreements require
the franchisee to open a specified number of restaurants in the development area
within a specified time period or the agreements may be canceled by the Company.
Revenue from development agreements is deferred and recognized as restaurants in
the development area commence operations on a pro rata basis to the minimum
number of restaurants required to be open, or at the time the development
agreement is effectively canceled. At September 29, 2002 and March 31, 2002,
$381,000 and $332,000, respectively, of deferred franchise fees are included in
the accompanying consolidated balance sheets. For the thirteen-week periods
ended September 29, 2002 and September 23, 2001, Nathan's earned franchise fees
from new unit openings, transfers and co-branding of $35,000 and $185,000,
respectively. For the twenty-six week periods ended September 29, 2002 and
September 23, 2001, Nathan's earned franchise fees from new unit openings,
transfers and co- branding of $91,000 and $527,000, respectively.
The following is a summary of franchise openings and closings for the
thirteen and twenty-six week periods ended September 29, 2002 and September 23,
2001:
Thirteen Weeks Ended Twenty-six Weeks Ended
Sept. 29, Sept. 23, Sept. 29, Sept. 23,
2002 2001 2002 2001
-------- ------ -------- --------
Stores operating at beginning of period 354 384 364 386
New franchised stores opened 1 6 2 13
Franchised stores closed (5) ( 11) (16) ( 20)
-------- ------ -------- -------
Stores operating at end of period 350 379 350 379
======== ====== ======== =======
Revenue from sub-leasing properties to franchisees 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
accompanying consolidated statements of operations. 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.
Branded Products Operations
Revenue from the Branded Product Program is recognized by Nathan's when
Nathan's is notified by the manufacturer that the products have been shipped via
third party common carrier to Nathans' customers. An accrual for the cost of the
product to Nathan's is recorded simultaneously with the revenue.
Investment and other income (loss)
The Company recognizes gains on the sale of fixed assets upon the
change of title to such assets when the proceeds are received or are deemed
realizable by the Company.
Deferred revenue associated with supplier contracts is generally
amortized on a straight line basis over the life of the contract.
-10-
Investments classified as "trading securities" are recorded at fair
value and the unrealized gains or losses are recognized as a component to the
Company's "Investment and other income (loss)" on the consolidated statement of
operations.
Investment and other income (loss) consist of the following:
Thirteen Weeks Ended Twenty-six Weeks Ended
Sept. 29, Sept. 23, Sept. 29, Sept. 23,
2002 2001 2002 2001
-------- ------- -------- --------
Gain (loss) on sale of fixed assets $ 7 $ (3) $ 9 $ 93
Realized gains on
marketable securities -- 20 -- 17
Unrealized (losses) on
"trading" securities (141) (201) (241) (145)
Subleasing (loss) (67) (70) (89) (114)
Gain from early termination of
sales agreement -- -- 135 --
Other 125 180 237 325
----- ----- ---- ----
Investment and other income (loss) $ (76) $ (74) 51 $ 176
===== ===== ==== ====
Interest income
Interest income is accrued when it is earned and deemed realizable by
the Company.
NOTE F - ADVERTISING
The Company administers various advertising funds on behalf of its
subsidiaries and franchisees to coordinate the marketing efforts of the Company.
Under these arrangements, the Company collects and disburses fees paid by
franchisees and Company-owned stores for national and regional advertising,
promotional and public relations programs. Contributions to the advertising
funds are based on specified percentages of net sales, generally ranging up to
3%. These advertising funds are separate entities which are not a component of
the consolidated group. Revenues and expenses of these advertising funds are
excluded from the Company's statement of operations. Contributions to the
advertising funds from Company-owned stores are included in restaurant operating
expenses in the accompanying consolidated statements of operations. Net
company-owned store advertising expense was $162,000 and $206,000 for the
thirteen week periods ended September 29, 2002 and September 23, 2001,
respectively. Net Company-owned store advertising expense was $354,000 and
$410,000 for twenty-six week periods ended September 29, 2002 and September 23,
2001, respectively.
NOTE G - CLASSIFICATIONS OF EXPENSES
Cost of sales contains the following items:
The cost of products sold both in the Company-operated
restaurants and the Branded Product Program.
The cost of labor and associated costs of in-store restaurant
management and crew.
The cost of paper products used in the Company-operated
restaurants.
Other direct costs of the Branded Product Program, such as
commissions, freight and samples.
Restaurant operating expenses contains the following items:
Occupancy costs of Company-operated restaurants.
Utility costs of Company-operated restaurants.
Repair and maintenance expenses of the Company operated
restaurant facilities.
Marketing and advertising expenses done locally and
contributions to advertising funds for Company-operated
restaurants.
Insurance costs directly related to Company-operated
restaurants.
-11-
NOTE H - ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
During the first quarter of fiscal 2003, the Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), which supercedes
APB Opinion No. 17, "Intangible Assets" and certain provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of" ("SFAS No. 121"). SFAS No. 142 required that goodwill and other
intangibles be reported separately; eliminates the requirement to amortize
goodwill and indefinite-lived assets; addresses the amortization of intangible
assets with a defined life; and addresses impairment testing and recognition of
goodwill and intangible assets. SFAS No. 142 changes the method of accounting
for the 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 intangible assets, excluding
goodwill and liabilities. This will derive an implied fair
value for the reporting unit's goodwill. Then, compare the
implied fair value of the reporting unit's goodwill with the
carrying amount of reporting unit's goodwill. If the carrying
amount of the reporting unit's goodwill is greater than the
implied fair value of its goodwill, an impairment loss must be
recognized for the excess. The transitional impairment charge,
if any, is recorded as a cumulative effect of accounting
change for goodwill.
The Company completed its initial SFAS No. 142 transitional impairment
test of goodwill, including an assessment of a valuation of the Nathan's, Miami
Subs and Kenny Rogers Roasters reporting units by an independent valuation
consultant, and has recorded an impairment charge requiring the Company to
write-off substantially all of the goodwill related to the acquisitions,
trademarks and recipes as a cumulative effect of accounting change in the first
quarter of fiscal 2003. The fair value was determined through the combination of
a present value analysis as well as prices of comparative businesses. The
changes in the net carrying amount of goodwill, trademarks and recipes 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 September 29, 2002 $ 95 $ 68 $ -- $ 163
========= ========== =========== ========
Additionally, the Company ceased amortization of goodwill, trademarks
and recipes in accordance with SFAS No. 142,thus lowering amortization expense
by a estimated $600,000 per year, as such assets were deemed to have indefinite
lives. The following table provides a reconciliation of the reported net income
for the thirteen and twenty-six week periods ended September 29, 2002 and
September 23, 2001, adjusted as though SFAS No. 142 had been effective for such
periods:
Thirteen Weeks Ended Twenty-six Weeks Ended
(In thousands) (In thousands)
Sept 29, Sept. 23, Sept. 29, Sept. 23,
NET INCOME 2002 2001 2002 2001
----- ---- -------- ------
Reported net income (loss) $110 $654 $(11,882) $1,616
Add back discontinued amortization expense -- 153 -- 306
---- ---- -------- ------
Adjusted net income (loss) $110 $807 $(11,882) $1,922
==== ==== ======== ======
Thirteen Weeks Ended Twenty-six Weeks Ended
Sept 29, Sept. 23, Sept. 29, Sept. 23,
BASIC AND DILUTED INCOME PER SHARE 2002 2001 2002 2001
-------- -------- -------- --------
Reported net income (loss) $ 0.02 $ 0.09 $ (1.91) $ 0.23
Add back discontinued amortization expense -- 0.02 -- 0.04
-------- -------- -------- --------
Adjusted net income (loss) $ 0.02 $ 0.11 $ (1.91) $ 0.27
======== ======== ======== ========
-12-
The table below presents amortized and unamortized intangible assets as
of September 29, 2002 and March 31, 2002 (In thousands):
September 29, 2002 March 31, 2002
------------------ --------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
------ ------------ ------ ------ ------------ ------
Amortized intangible assets:
Royalty streams $ 4,259 $ (878) $ 3,381 $ 4,259 $ (747) $ 3,512
Favorable leases 285 ( 38) 247 285 ( 31) 254
Other 16 (16) -- 62 (60) 2
------- ------- ------- -------- ----------- --------
$ 4,560 $ (932) $ 3,628 $ 4,606 $ (838) $ 3,768
======= ======= ======= ======== =========== ========
Unamortized intangible assets:
Goodwill $ 95 $ 17,043 $ (5,960) $ 11,083
Trademarks, tradenames and recipes 68 2,425 (153) 2,272
------ -------- -------- --------
$ 163 $ 19,468 $ (6,113) $ 13,355
====== ======== ======== ========
Total amortization expense for the intangible assets was $69,000 and
$139,000 for the thirteen and twenty-six weeks ended September 29, 2002.
Nathan's estimates future annual amortization expense of approximately $280,000
per year for each of the next five years.
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). This statement
supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion
No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." This Statement retains the fundamental provisions of
SFAS No. 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 SFAS No. 144 on April 1, 2002, which adoption
requires the Company to classify as discontinued operations any restaurant that
it sells, abandons or otherwise disposes of where the Company has no further
involvement in such restaurant's operations. In the case of restaurants to be
abandoned, depreciation expense has been revised based upon the expected
remaining useful lives of the affected restaurants. During the second quarter
fiscal 2003, the Company revised its depreciation estimate on eight restaurants,
which are expected to be closed by February 20, 2003, (See Note J) and recorded
an additional expense of $102,000. The remaining depreciation of approximately
$237,000 will be recorded over the remaining useful lives of the assets.
NOTE I - SALES OF RESTAURANTS
The Company observes the provisions of SFAS No. 66, "Accounting for
Sales of Real Estate," which establishes accounting standards for recognizing
profit or loss on sales of real estate. SFAS No. 66 provides for profit
recognition by the full accrual method, provided (a) the profit is determinable,
that is, the collectibility of the sales price is reasonably assured or the
amount that will not be collectible can be estimated, and (b) the earnings
process is virtually complete, that is, the seller is not obliged to perform
significant activities after the sale to earn the profit. Unless both conditions
exist, recognition of all or part of the profit shall be postponed and other
methods of profit recognition shall be followed. In accordance with SFAS No. 66,
the Company recognizes profit on sales of restaurants under both the installment
method and the deposit method, depending on the specific terms of each sale. The
Company continues to record depreciation expense on the property subject to the
sales contracts that are accounted for under the deposit method and records any
principal payments received as a deposit until such time that the transaction
meets the sales criteria of SFAS No. 66.
As of September 29, 2002 and March 31, 2002, the Company had deposits
on sales of restaurants of $214,000 included in accrued expenses in the
accompanying consolidated balance sheets.
During the twenty-six week period ended September 29, 2002, the Company
entered into sales contracts for the sale of five company-operated restaurants
totaling $1,674,000. These restaurants had been classified as held for sale at
March 31, 2002. Nathan's completed the sale of one operating restaurant in
August 2002 to a non-franchisee for $75,000. The Company also completed the sale
of a non-operating restaurant in October 2002 to a non-franchisee totaling
$466,000 and expects the remaining three restaurants will
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be sold to a franchisee no later than December 15, 2002. All sales are in cash,
and are subject to certain conditions which may include financing. The results
of operation for the restaurant that was sold in August 2002, is shown as part
of operations as the restaurant was classified as held for sale prior to the
adoption of SFAS No. 144. The results of operations for this restaurant for the
thirteen and twenty- six week periods ended September 29, 2002 and September 23,
2001 are as follows:
Thirteen Weeks Ended Twenty-six Weeks Ended
(In thousands) (In thousands)
Sept 29, Sept. 23, Sept. 29, Sept. 23,
2002 2001 2002 2001
-------- -------- ------- -------
Revenues $ 90 $ 259 $ 334 $ 549
======== ======== ======= =======
Loss before income taxes $ (18) $ (76) $ (60) $ (110)
======== ======== ======= ========
NOTE J - FOOD SERVICE LICENSE TERMINATION WITHIN HOME DEPOT STORES
In August 2002, the Company received written notice from Home Depot
U.S.A., Inc. ("Home Depot") that Home Depot terminated eight License Agreements
with the Company pursuant to which the Company operates Nathan's restaurants in
certain Home Depot Improvement Centers. In accordance with the termination
notices, Nathan's expects to cease its operations in those locations before
February 20, 2003. Nathan's believes it is entitled to payments of approximately
$216,000 pursuant to the termination provisions of selected Lease Agreements.
Pursuant to SFAS No. 144, the results of operations for these
restaurants, which will be disposed of by other than sale, will continue to be
included with the results of continuing operations until the restaurants have
ceased operating. The Company has revised the estimated useful lives of these
assets to reflect the shortened useful lives and recorded additional
depreciation expense of approximately $102,000 during the thirteen week period
ended September 29, 2002. The Company conducted an impairment analysis and
determined that no impairment charge was deemed necessary at September 29, 2002.
Following is a summary of the results of operations for these
restaurants for the thirteen and twenty-six week periods ended September 29,
2002 and September 23, 2001:
Thirteen Weeks Ended Twenty-six Weeks Ended
(In thousands) (In thousands)
Sept 29, Sept. 23, Sept. 29, Sept. 23,
2002 2001 2002 2001
-------- -------- ------- --------
Revenues $ 995 $ 1,005 $ 2,082 $2,116
======== ======== ======= ========
Income before income taxes (A) $ 69 $ 72 $ 200 $ 220
======== ======== ======= ========
(A) - Income before income taxes for the thirteen and twenty-six week periods
ended September 29, 2002 excludes additional depreciation expense of $102 as a
result of revising the estimated useful lives of these restaurants.
NOTE K - 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 previously
recorded through the date of transfer from the trading category will not be
reversed. The unrealized gain for the period ended September 29, 2002 totaling
$65,000 net of income taxes has been included as a component of comprehensive
income. Investments classified as "trading securities" are recorded at fair
value and the unrealized gains or losses are recognized as a component to the
Company's "Investment and other income" in the consolidated statement of
operations. On October 3, 2002, the Company substantially liquidated its
investment in limited partnership and received proceeds of $751,000.
-14-
NOTE- L COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
Thirteen weeks ended Twenty-six weeks ended
(In thousands) (In thousands)
September 29, 2002 September 29, 2002
------------------ ------------------
Net income (loss) $ 110 $ (11,882)
Unrealized gain on available-for-sale securities,
Net of tax provisions of $22 and $47, respectively 30 65
---------- ----------
Comprehensive income (loss) $ 140 $ (11,817)
========== ==========
Comprehensive income for the thirteen and twenty-six week periods ended
September 23, 2001 was the same as net income for those periods.
NOTE M - OTHER INCOME
During the first quarter ended June 24, 2001, Nathans's reversed an
accrual of $210,000 related to its successful appeal of a previous award in an
action entitled: MIAMI SUBS CORPORATION OR MIAMI S V. MURRAY FAMILY
TRUST/KENNETH DASH PARTNERSHIP. In this case the court found that Miami Subs
breached a fiduciary duty it owed to defendants and awarded the Murray Family
Trust $200,000. Both Miami Subs and defendants appealed the court's decision,
and in November 1996, the appeal was argued before the Supreme Court of New
Hampshire. In December 1997, the Supreme Court ruled in favor of Miami Subs,
vacated the damage award, reversed the award of attorney fees and remanded to a
trial court for a determination of damages for the alleged breach of fiduciary
duty to Murray Family Trust. In May 1998, the trial court awarded Murray Family
Trust compensatory damages in the amount of $200,000 which Miami Subs recorded
on its books. Miami Subs appealed the damage award, and in December 1999, the
Supreme Court of New Hampshire heard the second appeal. On February 1, 2001, the
Supreme Court of New Hampshire ruled in favor of Miami Subs and vacated the
damage award. The plaintiff had the right to further appeal the reversal for a
period of 90 days, until May 2, 2001. No further action was taken by the
plaintiff and upon passage of the 90 day period the litigation award was
reversed from the books of Miami Subs Corp.
NOTE N - INCOME (LOSS) PER SHARE
The following chart provides a reconciliation of information used in
calculating the per share amounts for the thirteen and twenty-six week periods
ended September 29, 2002 and September 23, 2001, respectively.
THIRTEEN WEEKS
- -------------- Net Income Number of Shares Net Income
(In thousands) (In thousands) Per Share
2002 2001 2002 2001 2002 2001
---- ------ ---- ---- ------ -----
Basic EPS
Basic calculation $ 110 $ 654 6,105 7,065 $ .02 $ .09
Effect of dilutive employee stock
options and warrants -- -- 124 15 -- --
----- ------ ---- ---- ------ -----
Diluted EPS
Diluted calculation $ 110 $ 654 6,229 7,080 $ .02 $ .09
===== ====== ===== ===== ====== =====
TWENTY-SIX WEEKS Net (Loss) Income Number of Shares Net (Loss) Income
(In thousands) (In thousands) Per Share
2002 2001 2002 2001 2002 2001
---------- ------ ----- ----- ------- --------
Basic EPS
Basic calculation $(11,882) $1,616 6,230 7,065 $ (1.91) $ .23
Effect of dilutive employee stock
options and warrants -- -- -- 17 -- --
---------- ------ ----- ----- ------- --------
Diluted EPS
Diluted calculation $(11,882) $1,616 6,230 7,082 $ (1.91) $ .23
========== ====== ===== ===== ======= ========
-15-
Common stock equivalents aggregating 171,000 shares have been excluded
from the diluted EPS calculation for the twenty-six weeks period ended September
29, 2002 as the impact of their inclusion would have been anti-dilutive.
Options and warrants issued to employees to purchase 903,000 and
1,390,000 shares of common stock in each of the twenty-six and thirteen week
periods ended September 29, 2002 and September 23, 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 O - STOCK REPURCHASE PROGRAM
On September 14, 2001, Nathan's was authorized to purchase up to 1
million shares of its common stock. Nathan's completed it's initial Stock
Repurchase Program on August 30, 2002 at a cost of approximately $3,670,000. On
October 7, 2002, Nathan's was authorized to purchase up to 1 million additional
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. Subsequent to September 29, 2002, Nathan's purchased an
additional 189,126 shares of common stock at a cost of approximately $687,000.
NOTE P - 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, sought 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. The court approved the original settlement and on
September 9, 2002, the plaintiffs were paid $659,000 of which $650,000 had been
accrued as of March 31, 2002.
NOTE Q - RECLASSIFICATIONS
Certain reclassifications of prior period balances have been made to
conform to the September 29, 2002 presentation.
NOTE R - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB 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.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections" which will be effective for the Company for fiscal years beginning
after May 15, 2002, although earlier adoption is encouraged. SFAS No. 145
eliminates the classification of debt extinguishment activity as extraordinary
items, eliminates inconsistencies in lease modification treatment and makes
various technical corrections or clarifications of other existing authoritative
pronouncements. Nathan's has not yet determined the effect of adoption on its
financial position and results of operations.
In August 2002, the FASB issued SFAS No. 146, "Accounting for the Costs
Associated with Exit or Disposal Activities", which will be effective for the
Company after December 31, 2002, with early application encouraged. SFAS No. 146
primarily addresses the timing of when to record liabilities for decisions to
terminate operations and how to establish liabilities for employee termination
costs. Nathan's has not yet determined the effect of adoption on its financial
position and results of operations.
-16-
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. Currently, the Arthur
Treacher's brand is being sold within 134 Nathan's, Kenny Rogers Roasters and
Miami Subs restaurants, the Nathan's brand is included on the menu of 87 Miami
Subs and Kenny Rogers restaurants, while the Kenny Rogers Roasters brand is
being sold within 78 Miami Subs and Nathan's restaurants. We have continued
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, sold one of the
properties to a non-franchisee and are continuing to market the remaining
property 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.
At September 29, 2002, our combined system consisted of 350 franchised or
licensed units, 21 company-owned units and approximately 1,900 Nathan's Branded
Product points of sale that feature Nathan's world famous all-beef hot dogs,
located in 41 states, the District of Columbia and 13 foreign countries. At
September 29, 2002, our company-owned restaurant system included 16 Nathan's
units, four Miami Subs units and one Kenny Rogers Roasters unit, as compared to
16 Nathan's units, six Miami Subs units and two Kenny Rogers Roasters units at
September 23, 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 No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets,"
-17-
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 No. 144 has affected the amounts
and timing of charges to operating results in recent years. We evaluate possible
impairment of each restaurant individually, and record an impairment charge
whenever we determine that impairment factors exist. We consider a history of
restaurant operating losses to be the primary indicator of potential impairment
of a restaurant's carrying value. We have identified certain restaurants that
have been impaired and recorded impairment charges of approximately $421,000
relating to three restaurants during the twenty-six weeks ended September 29,
2002.
Impairment of Notes Receivable
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," requires management judgements regarding
the future collectibility of notes receivable and the underlying fair market
value of collateral. We consider the following factors when 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. We
have identified certain notes receivable that have been impaired and recorded
impairment charges of approximately $320,000 relating to three notes during the
twenty-six weeks ended September 29, 2002.
Revenue Recognition
In the normal course of business, we extend credit to franchisees for the
payment of ongoing royalties and to trade customers of our Branded Product
Program. Notes and accounts receivable, net, as shown on our consolidated
balance sheets are net of allowances for doubtful accounts. An allowance for
doubtful accounts is determined through analysis of the aging of accounts
receivable at the date of the financial statements, assessment of collectibility
based upon historical trends and an evaluation of the impact of current and
projected economic conditions. In the event that the collectibility of a
receivable is doubtful, the associated revenue is not recorded until the facts
and circumstances change in accordance with Staff Accounting Bulletin SAB No.
101, "Revenue Recognition".
Self-insurance Liabilities
We are self-insured for portions of our general liability coverage. As
part of our risk management strategy, our insurance programs include deductibles
for each incident and in the aggregate for a policy year. As such, we accrue
estimates of our ultimate self insurance costs throughout the policy year. These
estimates have been developed based upon our historical trends, however, the
final cost of many of these claims may not be known for five years or longer.
Accordingly, our annual self insurance costs may be subject to adjustment from
previous estimates as facts and circumstances change.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 29, 2002 COMPARED TO SEPTEMBER 23, 2001
Revenues
Total sales decreased by 4.6% or $417,000 to $8,668,000 for the thirteen
weeks ended September 29, 2002 ("second quarter fiscal 2003") as compared to
$9,085,000 for the thirteen weeks ended September 23, 2001 ("second quarter
fiscal 2002"). Sales from the Branded Product Program increased by 44.9% to
$1,816,000 for the second quarter fiscal 2003 as compared to sales of $1,253,000
in the second quarter fiscal 2002. Company-owned restaurant sales decreased
12.5% or $980,000 to $6,852,000 from $7,832,000 primarily due to the operation
of three fewer company- owned stores as compared to the second quarter fiscal
2002 and a 3.7% sales decrease at our comparable restaurants (consisting of 16
Nathan's, four Miami Subs and one Kenny Rogers Roasters restaurants). The
reduction in company-owned stores is the result of franchising one restaurant,
and the sale of two restaurants, one of which was to the State of Florida
pursuant to an order of condemnation. The financial impact associated with the
three restaurants lowered restaurant sales by $779,000 and improved restaurant
operating profits by $3,000 versus the fiscal 2002 period.
Franchise fees and royalties decreased by 29.3% or $601,000 to $1,451,000
in the second quarter fiscal 2003 compared to $2,052,000 in the second quarter
fiscal 2002. Franchise royalties decreased by 24.2% or $451,000 to $1,416,000 in
the second quarter
-18-
fiscal 2003 as compared to $1,867,000 in the second 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 second
quarter fiscal 2003 as compared to the second quarter fiscal 2002. For the
second quarter fiscal 2003, as a result of the determination that collectibility
was doubtful, royalty income was not recorded from 54 domestic franchised
locations as compared to 35 domestic franchised locations for the second quarter
fiscal 2002. Domestic franchise restaurant sales decreased by 9.8% to
$41,236,000 in the second quarter fiscal 2003 as compared to $45,723,000 in the
second quarter fiscal 2002. At September 29, 2002, 350 franchised or licensed
restaurants were operating as compared to 379 franchised or licensed restaurants
at September 23, 2001. Franchise fee income derived from new openings and our
co-branding activities was $35,000 in the second quarter fiscal 2003 as compared
to $185,000 in the second quarter fiscal 2002. This decrease was primarily
attributable to the difference between the number of franchised units opened
between the two periods and the absence during the second quarter fiscal 2003 of
initial fees earned from existing restaurants within our system that co-branded
during the second quarter fiscal 2002. During the second quarter fiscal 2002, we
earned $47,500 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
second quarter fiscal 2003, one new franchised unit opened.
License royalties were $588,000 in the second quarter fiscal 2003 as
compared to $605,000 in the second quarter fiscal 2002. This decrease is
attributable to lower royalties earned from sales made by SMG, Inc., Nathans'
licensee for the sale of Nathan's frankfurters within supermarkets and club
stores which was partly offset by higher royalties earned from the manufacturing
of certain proprietary spices and seasonings and the sale of condiments sold
under the Nathan's brand.
Investment and other (loss) increased by $2,000 to $76,000 in the second
quarter fiscal 2003 versus $74,000 in the second quarter fiscal 2002. During the
second quarter fiscal 2003, Nathans' investment loss was approximately $40,000
greater than in the second quarter fiscal 2002 due primarily to differences in
performance of the financial markets between the two periods. During the second
quarter fiscal 2003, Nathan's earned approximately $52,000 less miscellaneous
income than in the second quarter fiscal 2002 principally in connection with its
ice cream sales.
Interest income decreased by $36,000 to $81,000 in the second quarter
fiscal 2003 versus $117,000 in the second 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 $250,000 to $5,635,000 in the second quarter
fiscal 2003 from $5,885,000 in the second quarter fiscal 2002. During the second
quarter fiscal 2003, restaurant cost of sales were lower than the second quarter
fiscal 2002 by approximately $622,000. Cost of sales was reduced by
approximately $517,000 as a result of operating three fewer company-owned
restaurants. The cost of restaurant sales at our comparable units was lower than
the second quarter fiscal 2002 although, as a percentage of restaurant sales was
60.6% in the second quarter fiscal 2003 as compared to 60.4% in the second
quarter fiscal 2002 due primarily to higher labor and related costs. Higher
product and other direct costs of approximately $372,000 were incurred in
connection with the growth of our Branded Product Program which was partially
offset by lower commodity costs during the second quarter fiscal 2003. During
the second quarter fiscal 2003, commodity prices of our primary meat products
were in line with historical norms as compared to being at their highest levels
in recent years through most of the second quarter fiscal 2002.
Restaurant operating expenses decreased by $87,000 to $1,931,000 in the
second quarter fiscal 2003 from $2,018,000 in the second quarter fiscal 2002.
Restaurant operating costs were lower in the second quarter fiscal 2003 by
approximately $265,000, as compared to the second quarter fiscal 2002 as a
result of operating three fewer restaurants. The reduction in restaurant
operating expenses from operating fewer restaurants was partially offset by
higher costs of utilities occupancy and insurance during the second quarter
fiscal 2003.
Depreciation and amortization increased by $80,000 to $474,000 in the
second quarter fiscal 2003 from $394,000 in the second quarter fiscal 2002.
Approximately $102,000 of this increase was due to a change in the estimated
useful lives of the eight restaurants operating within Home Depot Improvement
Centers for which Nathan's received early lease termination notifications during
the second quarter fiscal 2003. This increase was partly offset by the reduction
in company-owned restaurants operating between the two periods.
Amortization of intangibles decreased by $151,000 to $69,000 in the second
quarter fiscal 2003 from $220,000 in the second quarter fiscal 2002.
Amortization of intangibles decreased as a result of the adoption of SFAS No.
142 " Goodwill and Other Intangible
-19-
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 increased by $7,000 to $2,058,000 in
the second quarter fiscal 2003 as compared to $2,051,000 in the second quarter
fiscal 2002. The difference in general and administrative expenses was due
primarily to higher compensation and related expenses of approximately $29,000,
international development costs of approximately $29,000 and marketing and sales
solicitation expenses of approximately $24,000 which were partly offset by lower
bad debts expense of approximately $46,000 and various other cost reductions.
Interest expense was $39,000 during the second quarter fiscal 2003 as
compared to $48,000 during the second quarter fiscal 2002. The reduction in
interest expense relates primarily to the repayment of outstanding trade debt
between the two periods.
Impairment charge on notes receivable of $320,000 during the second
quarter fiscal 2003 relates to the write-down of three notes receivable.
Provision for Income Taxes
In the second quarter fiscal 2003, the income tax provision on operating
income was $76,000 or 40.9% of operating income as compared to $515,000 or
44.1% of operating income. The effective income tax rate was lower in the second
quarter fiscal 2003 due to the adoption of SFAS No. 142 which requires that
goodwill no longer be amortized. Such goodwill amortization was not tax
deductible by Nathan's which increased the effective tax rate in prior years.
TWENTY-SIX WEEKS ENDED SEPTEMBER 29, 2002 COMPARED TO SEPTEMBER 23, 2001
Revenues
Total sales decreased by 3.7% or $646,000 to $17,027,000 for the
twenty-six weeks ended September 29, 2002 ("fiscal 2003 period") as compared to
$17,673,000 for the twenty-six weeks ended September 23, 2001 ("fiscal 2002
period"). Sales from the Branded Product Program increased by 39.8% to
$3,482,000 for the fiscal 2003 period as compared to sales of $2,491,000 in the
fiscal 2002 period. Company-owned restaurant sales decreased 10.8% or $1,637,000
to $13,545,000 from $15,182,000 primarily due to the operation of four fewer
company-owned stores as compared to the prior fiscal year and a 0.6% sales
decrease at our comparable restaurants (consisting of 16 Nathan's, four Miami
Subs and one Kenny Rogers Roasters restaurants). The reduction in company-owned
stores is the result of our franchising two restaurants last year and the sale
of two restaurants, one of which was to the State of Florida pursuant to an
order of condemnation. The financial impact associated with these three
restaurants lowered restaurant sales by $1,611,000 and lowered restaurant
operating profits by $74,000 versus the fiscal 2002 period.
Franchise fees and royalties decreased by 29.4% or $1,248,000 to
$2,993,000 in the fiscal 2003 period compared to $4,241,000 in the fiscal 2002
period. Franchise royalties decreased by $812,000 or 21.9% to $2,902,000 in the
fiscal 2003 period as compared to $3,714,000 in the fiscal 2002 period. 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 fiscal 2003
period as compared to the fiscal 2002 period. For the twenty-six weeks ended
September 29, 2002, as a result of the determination that collectibility was
doubtful, royalty income was not recorded from 54 domestic franchised locations
as compared to 35 domestic franchised locations for the twenty-six weeks ended
September 23, 2001. Domestic franchise restaurant sales decreased by 14.3% to
$82,864,000 in the fiscal 2003 period as compared to $96,665,000 in the fiscal
2002 period. At September 29, 2002, 350 franchised or licensed restaurants were
operating as compared to 379 franchised or licensed restaurants at September 23,
2001. Franchise fee income derived from new openings and our co-branding
activities was $91,000 in the fiscal 2003 period as compared to $527,000 in the
fiscal 2002 period. This decrease was primarily attributable to the difference
between the number of franchised units opened between the two periods and the
absence during the fiscal 2003 period of initial fees earned from existing
restaurants within our system that co-branded during the fiscal 2002 period.
During the fiscal 2002 period, we earned $220,000 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 fiscal 2003 period, two
new franchised units opened.
-20-
License royalties were $1,399,000 in the fiscal 2003 period as compared to
$1,312,000 in the fiscal 2002 period. This increase is attributable to higher
royalties earned from sales made by SMG, Inc., Nathans' licensee for the sale of
Nathan's frankfurters within supermarkets and club stores, manufacturing of
certain proprietary spices and seasonings and the sale of condiments sold under
the Nathan's brand.
Investment and other income decreased by $125,000 to $51,000 in the fiscal
2003 period versus $176,000 in the fiscal 2002 period. During the fiscal 2003
period, Nathans' investment loss was approximately $113,000 higher than in the
fiscal 2002 period due primarily to differences in performance of the financial
markets between the two periods and its loss from sub-leasing was
approximately $25,000 less than in the fiscal 2002 period. In the fiscal 2003
period, Nathan's realized a gain of $135,000 in connection with the early
termination of a Branded Product Program sales agreement. During the fiscal
2003 period, Nathan's earned approximately $88,000 less miscellaneous income
than in the fiscal 2002 period principally in connection with its ice cream
sales. During the fiscal 2002 period, Nathan's recognized a net gain of $93,000
primarily in connection with the sale of a company-owned restaurant.
Interest income decreased by $103,000 to $156,000 in the fiscal 2003
period versus $259,000 in the fiscal 2002 period due to lower interest income on
its investments in marketable securities and its notes receivable.
Costs and Expenses
Cost of sales decreased by $332,000 to $11,153,000 in the fiscal 2003
period from $11,485,000 in the fiscal 2002 period. During the fiscal 2003
period, restaurant cost of sales were lower than the fiscal 2002 period by
approximately $987,000. Lower cost of sales attributable to operating fewer
company-owned restaurants of approximately $1,046,000 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 61.2% in the fiscal
2003 period as compared to 60.6% in the fiscal 2002 period due primarily to
higher labor and related costs. Higher product and other direct costs of
approximately $655,000 were incurred in connection with the growth of our
Branded Product Program which was partially offset by lower commodity costs
during the fiscal 2003 period. During the fiscal 2003 period, commodity prices
of our primary meat products were in line with historical norms as compared to
being at their highest . levels in recent years through most of the fiscal 2002
period.
Restaurant operating expenses decreased by $273,000 to $3,698,000 in the
fiscal 2003 period from $3,971,000 in the fiscal 2002 period. Restaurant
operating costs were lower in the fiscal 2003 period by approximately $491,000,
as compared to the fiscal 2002 period as a result of operating fewer
restaurants. The reduction in restaurant operating expenses from operating fewer
restaurants was partially offset by higher costs of utilities, occupancy,
insurance and marketing during the fiscal 2003 period.
Depreciation and amortization increased by $70,000 to $884,000 in the
fiscal 2003 period from $814,000 in the fiscal 2002 period. Approximately
$102,000 of this increase was due to a change in the estimated useful lives of
the eight restaurants operating within Home Depot Improvement Centers for which
Nathan's received early lease termination notifications during the second
quarter fiscal 2003, which was partly offset by the reduction in company-owned
restaurants operating between the two periods.
Amortization of intangibles decreased by $303,000 to $139,000 in
the fiscal 2003 period from $442,000 in the fiscal 2002 period. Amortization of
intangibles decreased as a result of the adoption of SFAS No. 142 " Goodwill and
Other Intangible Assets" in the first quarter 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 $10,000 to $4,160,000 in
the fiscal 2003 period as compared to $4,170,000 in the fiscal 2002 period. The
difference in general and administrative expenses was due primarily to lower
professional fees of approximately $55,000, lower personnel and incentive
compensation of $9,000 and other cost reductions which were partly offset by
higher marketing and sales solicitation expenses of approximately $38,000 and
international development cost of approximately $24,000.
Interest expense was $78,000 during the fiscal 2003 period as compared to
$107,000 during the fiscal 2002 period. 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 fiscal 2003
period represents the write-down relating to three under-performing stores, two
of which are expected to continue operating.
-21-
Impairment charge on notes receivable of $320,000 during the second
quarter fiscal 2003 relates to the write-down of three notes receivable.
Other income of $210,000 in the fiscal 2002 period represents the reversal
of a previously recorded litigation provision for an award that was settled,
upon appeal, in our favor.
Provision for Income Taxes
In the fiscal 2003 period, the income tax provision on operating income
(before cumulative effect of change in accounting principle) was $317,000 or
41.0% of operating income before income taxes as compared to $1,266,000 or 43.9%
of operating income in the fiscal 2002 period. The effective income tax rate was
lower in the fiscal 2003 period due to the adoption of SFAS No. 142 which
requires that goodwill no longer be amortized. Such goodwill amortization was
not tax deductible by Nathan's which increased the effective tax rate in prior
years.
Cumulative effect of change in accounting principle
In the first quarter fiscal 2003, Nathan's adopted SFAS No. 142, "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 H).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at September 29, 2002 aggregated $2,241,000,
increasing by $407,000 during the fiscal 2003 period. At September 29, 2002,
marketable securities and investment in limited partnership decreased by
$3,366,000 from March 31, 2002 to $5,453,000 and net working capital decreased
to $7,566,000 from $9,565,000 at March 31, 2002. On October 3, 2002, Nathan's
substantially liquidated its investment in limited partnership.
Cash provided by operations of $996,000 in the fiscal 2003 period is
primarily attributable to net loss of $11,882,000, non-cash charges of
$14,246,000, including the cumulative effect of accounting change of
$12,338,000, depreciation and amortization of $884,000, impairment charges on
long-lived assets and notes receivable of $741,000, amortization of intangible
assets of $139,000, provision for doubtful accounts of $81,000 and amortization
of bond premium of $63,000, in addition to decreases in prepaid expenses and
other current assets of $656,000 and marketable securities and investment in
limited partnership of $251,000, which were partly offset by decreases in
accounts payable and accrued expenses of $1,808,000, an increase in notes and
accounts receivable of $117,000 and a decrease in other liabilities of $277,000.
Cash provided by investing activities of $3,038,000 in the fiscal 2003
period is comprised primarily of proceeds from the sale of securities of
$4,282,000, repayments on notes receivable of $161,000 and the sale of a
restaurant and other fixed assets of $90,000 which were partly offset by the
purchases of securities of $1,108,000 and expenditures relating to capital
improvements of selected company-owned restaurants and other fixed asset
additions of $387,000.
Cash used in financing activities of $3,627,000 in the fiscal 2003 period
represents repurchases of 958,309 shares of common stock at a total cost of
$3,535,000 and repayments of notes payable and obligations under capital leases
in the amount of $92,000.
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 1 million shares of common stock in open market transactions and a
private transaction at a total cost of $3,670,000 through the quarter ended
September 29, 2002. On October 7, 2002, Nathan's was authorized to purchase up
to 1 million additional shares of its common stock. Subsequent to September 29,
2002, Nathan's purchased an additional 189,126 shares of common stock at a cost
of approximately $687,000. We expect to make additional purchases of stock from
time to time, depending on market conditions, in open market or in privately
negotiated transactions, at prices deemed appropriate by management. There is no
set time limit on the purchases. Nathan's expects to fund these stock
repurchases from its operating cash flow.
We expect that we will make additional investments in certain existing
restaurants in the future and that we will fund those investments from our
operating cash flow. We do not expect to incur significant capital expenditures
to develop new company-owned
-22-
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, sold one of the
remaining properties to a non-franchisee and are continuing to market the
remaining property for sale. The sale of the restaurant was consummated on
October 4, 2002. 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 September 29, 2002 was approximately $1.1 million. The following schedules
represent Nathan's cash contractual obligations and the expiration of other
contractual commitments by maturity (In thousands):
Payments Due by Period
-------------------------------------------
Less than After
Cash Contractual Obligations Total 1 Year 1 - 3 Years 4-5 Years 5 Years
- ---------------------------- ------- ------- ------- ------- -------
Long-Term Debt $ 1,625 $ 541 $ 333 $ 334 $ 417
Capital Lease Obligations 62 6 13 16 27
Employment Agreements 1,290 909 381 -- --
Operating Leases 29,847 4,479 8,256 7,647 9,465
------- ------- ------- ------- -------
Gross Cash Contractual Obligations 32,824 5,935 8,983 7,997 9,909
Sublease Income 16,328 2,335 4,219 3,769 6,005
------- ------- ------- ------- -------
Net Cash Contractual Obligations $16,496 $ 3,600 $ 4,764 $ 4,228 $ 3,904
======= ======= ======= ======= =======
Amount of Commitment Expiration Per Period
---------------------------------------------
Total
Amounts Less than
Other Contractual Commitments Committed 1 Year 1-3 Years 4-5 Years After 5 Years
- ----------------------------- --------- ------ ----------- --------- -------------
Loan Guarantees $1,056 $ 346 $ 564 $ 146 --
------ ------ ------- ------ ------
Total Commercial Commitments $1,056 $ 346 $ 564 $ 146 --
====== ====== ======= ====== ======
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 maintained a $7,500,000
uncommitted bank line of credit through October 1, 2002. The lending bank has
advised us that it is willing to extend availability of our line of credit
through December 2002. There is no assurance that the line will be so extended.
We have never borrowed any funds under this line of credit.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
CASH AND CASH EQUIVALENTS
We have historically invested our cash and cash equivalents in short term,
fixed rate, highly rated and highly liquid instruments which are 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. As of
September 29, 2002, Nathans' cash and cash equivalents aggregated $2,241,000.
Earnings on these cash and cash equivalents would increase or decrease by
approximately $5,600 per annum for each .25% change in interest rates.
-23-
MARKETABLE INVESTMENT SECURITIES
We have invested our marketable investment securities in intermediate
term, fixed rate, highly rated and highly liquid instruments. These investments
are subject to fluctuations in interest rates. As of September 29, 2002, the
value of Nathans' marketable investment securities aggregated $4,687,000.
Interest income on these marketable investment securities would increase or
decrease by approximately $11,700 per annum for each .25% change in interest
rates. The following chart presents the hypothetical changes in the fair value
of the marketable investments securities held at September 29, 2002 that are
sensitive to interest rate fluctuations (in thousands):
Valuation of securities Valuation of securities
Given an interest rate Given an interest rate
Decrease of X Basis points Increase of X Basis points
---------------------------- Fair ----------------------------
(150BPS) (100BPS) (50BPS) Value +50BPS +100BPS +150BPS
------ ------ ------ ------ ------ ------ ------
Municipal notes and bonds $4,840 $4,787 $4,736 $4,687 $4,639 $4,592 $4,546
====== ====== ====== ====== ====== ====== ======
INVESTMENT IN LIMITED PARTNERSHIP
We have invested in a highly liquid investment limited partnership that
invests principally in equities. These investments are subject to the
performance of the equity markets. As of September 29, 2002, Nathans' investment
in limited partnership aggregated $766,000. On October 3, 2002 Nathan's
substantially liquidated its investment in limited partnership.
BORROWINGS
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. At
September 29, 2002 total outstanding debt, including capital leases, aggregated
$1,687,000 of which $1,250,000 is at risk due to changes in interest rates. The
current interest rate is 8.75% per annum and will adjust in January 2003, 2006
and 2009 to prime plus .25%, or 5.00% based upon current market conditions. At
5.00%, Nathan's annualized interest expense would be approximately $48,000 less
than at the current rate. The Company does not believe that fluctuations in
interest rates would have a material impact on our financial results.
COMMODITY COSTS
The cost of commodities are subject to market fluctuation. We have not
attempted to hedge against fluctuations in the prices of the commodities we
purchase using future, forward, option or other instruments. As a result, our
future commodities purchases are subject to changes in the prices of such
commodities. Generally, we attempt to pass through permanent increases in our
commodity prices to our customers, thereby reducing the impact of long term
increases on our financial results. A short term increase or decrease of 10% in
the cost of our food and paper products for the entire twenty-six weeks ended
September 29, 2002 would have increased or decreased cost of sales by
approximately $645,000.
FOREIGN CURRENCIES
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 and we do not believe fluctuations in the value of foreign currencies
would have a material impact on our financial results.
-24-
ITEM 4. CONTROLS AND PROCEDURES
On November 11, 2002, our Chairman of the Board and our President, who are
our principal executive officers, and our Vice President - Finance, who is our
principal financial officer, participated in various in person and telephonic
meetings during which there were evaluations of our disclosure controls and
procedures. They have advised us that based on such evaluations, they believe
such controls and procedures are effective.
Our Chairman of the Board and our President, who are our principal
executive officers, and our Vice President - Finance, who is our principal
financial officer, are involved in ongoing evaluations of internal controls. Our
principal executive officers and principal financial officer have advised us
that, they have determined that there have been no significant changes in our
internal controls or in other factors that would significantly affect our
internal controls since March 31, 2002.
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.
-25-
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, sought 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. The court approved the original settlement and on
September 9, 2002 the plaintiffs were paid $659,000 of which $650,000 had been
accrued as of March 31, 2002.
ITEM 4: SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
(a) The Registrant held its Annual Meeting of Stockholders on September
12, 2002.
(b) Seven Directors were elected at the Annual Meeting to serve until
the Annual Meeting of Stockholders in 2003. The names of these
Directors and votes cast in favor of their election and shares
withheld are as follows:
NAME FOR WITHHELD
- ---------------- --------- -------
Howard M. Lorber 5,518,320 275,084
Wayne Norbitz 5,518,320 275,084
Donald Perlyn 5,518,320 275,084
Robert J. Eide 5,518,320 275,084
Brian Genson 5,518,320 275,084
Barry Leistner 5,518,320 275,084
A.F. Petrocelli 5,518,320 275,084
(c) The Company's shareholders approved the 2002 Stock Incentive Plan
authorizing the issuance of options to purchase up to 300,000 shares
of common stock, including the issuance of up to 100,000 shares of
restricted stock. The votes cast in favor of adopting the plan and
shares withheld or abstained are as follows:
FOR WITHHELD ABSTAINED
--- -------- ---------
Adopt 2002 Stock Incentive Plan 5,274,891 503,849 14,664
(d) Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification by Howard M. Lorber, Chief Executive Officer of
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.
-26-
99.2 Certification by Ronald G. DeVos, Chief Financial Officer of 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) Reports on Form 8-K filed during the quarter ended September 29, 2002
On September 4, 2002 - Item 5 - the Company reported that it completed the
repurchase of 1 million shares of its common stock authorized by the Board of
Directors on September 14, 2001.
On September 20, 2002 - Item 5 - the Company reported that it received
notice from Home Depot U.S.A., Inc. terminating eight License Agreements
pursuant to which eight Nathan's restaurants are operated.
-27-
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: November 13, 2002 By: /s/Wayne Norbitz
----------------
Wayne Norbitz
President and Chief Operating Officer
(Principal Executive Officer)
Date: November 13, 2002 By: /s/Ronald G. DeVos
------------------
Ronald G. DeVos
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
-28-
CERTIFICATION
I, Howard M. Lorber, Chief Executive Officer, of Nathan's Famous, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nathan's Famous,
Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Howard M. Lorber
-------------------------------
Howard M. Lorber
Chief Executive Officer
-29-
CERTIFICATION
I, Wayne Norbitz, President and Chief Operating Officer, of Nathan's
Famous, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nathan's Famous,
Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/Wayne Norbitz
----------------------------------------
Wayne Norbitz
President and Chief Operating Officer
-30-
CERTIFICATION
I, Ronald G. DeVos, Chief Financial Officer, of Nathan's Famous, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nathan's Famous,
Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/Ronald G. DeVos
----------------------------------
Ronald G. DeVos
Chief Financial Officer
-31-