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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 DECEMBER 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 _____
Indicate by check mark whether registrant is an accelerated filer (as defined by
Rule 12b-2 of the Exchange Act). Yes ____ No X
At February 11, 2003, an aggregate of 5,589,564 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 - December 29, 2002 and
March 31, 2002 3
Consolidated Statements of Operations - Thirteen weeks
Ended December 29, 2002 and December 23, 2001 4
Consolidated Statements of Operations - Thirty-nine weeks
Ended December 29, 2002 and December 23, 2001 5
Consolidated Statement of Stockholders' Equity -
Thirty-nine weeks ended December 29, 2002 6
Consolidated Statements of Cash Flows - Thirty-nine weeks
Ended December 29, 2002 and December 23, 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Qualitative and Quantitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 4. Submission of Matter to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
Certifications of principal executive officers 30
Certification of principal financial officer 32
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Dec. 29, March 31,
2002 2002
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents including restricted cash of $83 and
$83 at December 29, 2002 and March 31, 2002, respectively $ 1,117 $ 1,834
Marketable securities and investment in limited partnership 5,159 8,819
Notes and accounts receivable, net 2,849 2,808
Inventories 488 592
Assets held for sale 769 1,512
Prepaid expenses and other current assets 438 1,269
Deferred income taxes 1,747 1,747
--------- ---------
Total current assets 12,567 18,581
Notes receivable, net 1,662 2,277
Property and equipment, net 7,504 8,925
Goodwill, net 95 11,083
Intangible assets, net 3,627 6,040
Deferred income taxes 2,523 1,539
Other assets, net 270 300
--------- ---------
$ 28,248 $ 48,745
========= =========
Current liabilities:
Current maturities of notes payable and capital lease obligations $ 545 $ 559
Accounts payable 726 1,619
Accrued expenses and other current liabilities 4,574 6,506
Deferred franchise fees 335 332
--------- ---------
Total current liabilities 6,180 9,016
Notes payable and capital lease obligations, less current maturities 1,097 1,220
Other liabilities 1,838 2,364
--------- ---------
Total liabilities 9,115 12,600
--------- ---------
Stockholders' equity:
Common stock, $.01 par value - 30,000,000 shares authorized;
7,065,202 shares issued; 5,635,464 and 7,023,511 shares
outstanding at December 29, 2002 and March 31, 2002, respectively 71 71
Additional paid-in capital 40,746 40,746
Accumulated deficit (16,525) (4,537)
Accumulated other comprehensive income 62 -
--------- ---------
24,354 36,280
Treasury stock at cost, 1,429,738 and 41,691 shares at
December 29, 2002 and March 31, 2002, respectively (5,221) (135)
--------- ---------
Total stockholders' equity 19,133 36,145
--------- ---------
$ 28,248 $ 48,745
========= =========
See accompanying notes to consolidated financial statements.
-3-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen weeks ended December 29, 2002 and December 23, 2001
(In thousands, except per share amounts)
(Unaudited)
2002 2001
--------- -------
Sales $ 5,879 $ 6,889
Franchise fees and royalties 1,722 1,733
License royalties 523 312
Investment and other income 41 955
Interest income 71 112
--------- -------
Total revenues 8,236 10,001
--------- -------
Costs and expenses:
Cost of sales 3,977 4,654
Restaurant operating expenses 1,392 1,790
Depreciation and amortization 623 441
Amortization of intangible assets 69 221
General and administrative expenses 1,957 2,322
Interest expense 33 40
Impairment charge on long-lived assets 50 -
Impairment charge on notes receivable 222 -
--------- -------
Total costs and expenses 8,323 9,468
--------- -------
(Loss) income from continuing operations before income taxes ( 87) 533
(Benefit) provision for income taxes ( 35) 229
--------- -------
(Loss) income from continuing operations ( 52) 304
Discontinued operations
Loss from discontinued operations before income taxes (91) (73)
Income tax benefit (37) (32)
--------- -------
Loss from discontinued operations (54) (41)
Net (loss) income $ (106) $ 263
========= =======
Basic (loss) income per share
(Loss) income from continuing operations $ (0.01) $ 0.05
(Loss) from discontinued operations (0.01) (0.01)
--------- -------
Net (loss) income $ (0.02) $ 0.04
========= =======
Diluted (loss) income per share
(Loss) income from continuing operations $ (0.01) $ 0.05
(Loss) from discontinued operations (0.01) (0.01)
--------- -------
Net (loss) income $ (0.02) $ 0.04
========= =======
Weighted average shares used in computing net (loss) income per share
Basic 5,878 7,038
========= =======
Diluted 5,878 7,062
========= =======
See accompanying notes to consolidated financial statements.
-4-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirty-nine weeks ended December 29, 2002 and December 23, 2001
(In thousands, except per share amounts)
(Unaudited)
2002 2001
---------- ---------
Sales $ 22,213 $ 23,805
Franchise fees and royalties 4,715 5,974
License royalties 1,922 1,624
Investment and other income 92 1,131
Interest income 227 371
---------- ---------
Total revenues 29,169 32,905
---------- ---------
Costs and expenses:
Cost of sales 14,625 15,594
Restaurant operating expenses 4,869 5,519
Depreciation and amortization 1,472 1,212
Amortization of intangible assets 208 663
General and administrative expenses 6,117 6,492
Interest expense 111 147
Impairment charge on long-lived assets 471 -
Impairment charge on notes receivable 542 -
Other income - (210)
---------- ---------
Total costs and expenses 28,415 29,417
---------- ---------
Income from continuing operations before income taxes 754 3,488
Provision for income taxes 310 1,527
---------- ---------
Income from continuing operations 444 1,961
Discontinued operations
Loss from discontinued operations before income taxes (160) (146)
Income tax benefit (66) (64)
---------- ---------
Loss from discontinued operations (94) (82)
Income before cumulative effect of change in
accounting principle 350 1,879
Cumulative effect of change in accounting principle, net of
income taxes of $854 (12,338) -
---------- ---------
Net (loss) income $ (11,988) $ 1,879
========== =========
Basic (loss) income per share
Income from continuing operations $ 0.07 $ 0.28
(Loss) from discontinued operations (0.01) (0.01)
Cumulative effect of change in accounting principle (2.02) -
---------- ---------
Net (loss) income $ (1.96) $ 0.27
========== =========
Diluted (loss) income per share
Income from continuing operations $ 0.07 $ 0.28
(Loss) from discontinued operations (0.02) (0.01)
Cumulative effect of change in accounting principle (1.97) -
---------- ---------
Net (loss) income $ (1.92) $ 0.27
========== =========
Weighted average shares used in computing net (loss) income per share
Basic 6,113 7,056
========== =========
Diluted 6,256 7,075
========== =========
See accompanying notes to consolidated
financial statements.
-5-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Thirty-nine weeks ended December 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 1,388,047 (5,086) (5,086)
Net loss (11,988) (11,988)
Unrealized gains
on available for
sale securities,
net of tax
provision of $45 62 62
--------- -------- ---------- ------------ ----------- ---------- -------- --------
Balance at
December 29,
2002 7,065,202 $ 71 $ 40,746 $ (16,525) $ 62 1,429,738 $ (5,221) $ 19,133
========= ======== ========== =========== =========== ========== ======== ==========
See accompanying notes to consolidated financial statements.
-6-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nine weeks ended December 29, 2002 and December 23, 2001
(In thousands)
(Unaudited)
2002 2001
---------- --------
Cash flows from operating activities:
Net (loss) income $ (11,988) $ 1,879
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 1,569 1,277
Amortization of intangible assets 208 663
Provision for doubtful accounts 88 123
Amortization of bond premium 67 -
Gain on sale of available for sale securities (8) -
Gain on sale of fixed assets (31) (916)
Impairment charge on long-lived assets 471 -
Impairment charge on notes receivable 542 -
Deferred income taxes (129) (34)
Changes in operating assets and liabilities:
Marketable securities and investment in limited partnership 968 (3,584)
Notes and accounts receivable, net (227) (1,009)
Inventories 104 (113)
Prepaid expenses and other current assets 831 478
Accounts payable and accrued expenses (2,729) (2,377)
Deferred franchise and area development fees 3 (139)
Other assets, net 30 64
Other non current liabilities (570) (293)
---------- --------
Net cash provided by (used in) operating activities 1,537 (3,981)
---------- --------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 5,079 -
Purchase of available for sale securities (2,384) -
Purchase of property and equipment (452) (914)
Proceeds from sale of restaurants, net 79 2,725
Proceeds from sale of fixed assets 432 -
Payments received on notes receivable 215 735
---------- --------
Net cash provided by investing activities 2,969 2,546
---------- --------
Cash flows from financing activities:
Repurchase of common stock (5,086) (113)
Principal repayment of borrowings and obligations under capital leases (137) (1,302)
---------- --------
Net cash used in financing activities (5,223) (1,415)
---------- --------
Net decrease in cash and cash equivalents (717) (2,850)
Cash and cash equivalents, beginning of period 1,834 4,325
---------- --------
Cash and cash equivalents, end of period $ 1,117 $ 1,475
========== ========
CASH PAID DURING THE YEAR FOR:
Cash paid during the period for income taxes $ 45 $ 79
========== ========
Cash paid during the period for interest $ 112 $ 154
========== ========
NONCASH FINANCING ACTIVITY:
Loan to franchisee in connection with sale of restaurant $ 44 $ -
========== ========
See accompanying notes to consolidated financial statements.
-7-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 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 thirty-nine week periods ended December 29, 2002 and December 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 generally does not expect to extend or renew the underlying
leases. Based on the Company's analysis, it has determined that there are notes
that have incurred such an impairment. Following are summaries of impaired notes
receivable and the allowance for impaired notes receivable:
Dec. 29, March 31,
2002 2002
(In thousands) (In thousands)
------------ ------------
Total recorded investment in impaired notes receivable $ 1,723 $ 1,000
Allowance for impaired notes receivable (1,182) (640)
--------- -------
Recorded investment in impaired notes receivable, net $ 541 $ 360
========= =======
Thirty-nine Fifty-three
Weeks ended Weeks ended
Dec. 29, March 31,
2002 2002
(In thousands) (In thousands)
------------ ------------
Allowance for impaired notes receivable at beginning of fiscal year $ 640 $ 613
Impairment charges on notes receivable 542 185
Direct writedowns of impaired notes receivable - (240)
Other increases in allowance for impaired notes receivable - 82
--------- -------
Allowance for impaired notes receivable at end of fiscal period $ 1,182 $ 640
========= =======
-8-
Based on the present value of the estimated cash flows of identified
impaired notes receivable, the Company records interest income on its impaired
notes receivable on a cash basis. The following represents the interest income
recognized and average recorded investment of impaired notes receivable.
Thirteen Weeks Ended Thirty-nine Weeks Ended
(In thousands) (In thousands)
Dec. 29, Dec. 23, Dec. 29, Dec. 23,
2002 2001 2002 2001
---- ---- ---- ----
Interest income recorded on impaired
notes receivable $ 9 $ 10 $ 39 $ 30
======== ======== ======== ========
Average recorded investment in impaired
notes receivable $ 1,625 $ 832 $ 1,414 $ 914
======== ======== ======== ========
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. Through the thirteen and thirty-nine weeks ended December 29, 2002,
the Company had identified one and four units, which were expected to continue
to operate, that have been impaired and recorded impairment charges of $50,000
and $471,000 in the statement of operations. Three of these restaurants were
sold to a franchisee and 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 December 31, 2002, one of those three restaurants had
ceased operating.
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 its ultimate self insurance costs throughout
the policy year. These estimates have been developed based upon Nathan's
historical trends, however, the final cost of many of these claims may not be
known for five years or longer. Accordingly, Nathan's annual self insurance
costs may be subject to adjustment from previous estimates as facts and
circumstances change. The self insurance accruals at December 29, 2002 and March
31, 2002 were $517,000 and $1,346,000, respectively and are included in "Accrued
expenses and other current liabilities" in the accompanying consolidated balance
sheets. During the thirty-nine weeks ended December 29, 2002, the self insurance
accrual was reduced by approximately $829,000, due principally to the
satisfaction of a claim against the Company totaling $659,000 (See Note P) and
the reversal of approximately $196,000 of previously recorded self insurance
accruals in connection with the conclusion of claims relating to prior policy
years.
NOTE E - REVENUE RECOGNITION POLICIES
Company-owned Restaurants
Sales by Company-owned restaurants are recognized on a cash basis, upon
the performance of services.
-9-
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.
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.
. Provision of 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 December 29, 2002 and March 31, 2002,
$335,000 and $332,000, respectively, of deferred franchise fees are included in
the accompanying consolidated balance sheets. For the thirteen-week periods
ended December 29, 2002 and December 23, 2001, Nathan's earned franchise fees
from new unit openings, transfers and co-branding of $220,000 and $160,000,
respectively. For the thirty-nine week periods ended December 29, 2002 and
December 23, 2001, Nathan's earned franchise fees from new unit openings,
transfers and co-branding of $311,000 and $687,000, respectively. During the
thirteen week period ended December 29, 2002, the Company also recognized
revenue of $150,000 in connection with the termination by the Company of a
Master Development Agreement in accordance with its terms due to the breach by
the franchisee.
The following is a summary of franchise openings and closings for the
thirteen and thirty-nine week periods ended December 29, 2002 and December 23,
2001:
Thirteen Weeks Ended Thirty-nine Weeks Ended
Dec. 29, Dec. 23, Dec. 29, Dec. 23,
2002 2001 2002 2001
---- ---- ---- ----
Stores operating at beginning of period 350 379 364 386
New franchised stores opened 10 6 12 19
Franchised stores closed (9) (8) (25) (28)
-------- -------- -------- -------
Stores Operating at End of Period 351 377 351 377
======== ======== ======== =======
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.
-10-
Investment and other income
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.
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. During the thirteen week period ended December 29, 2002, the Company
substantially liquidated its investment in "trading securities".
Investment and other income consist of the following:
Thirteen Weeks Ended Thirty-nine Weeks Ended
(In thousands) (In thousands)
Dec. 29, Dec. 23, Dec. 29, Dec. 23,
2002 2001 2002 2001
---- ---- ---- ----
Gain on sale of fixed assets $ 21 $ 823 $ 31 $ 916
Realized losses on
marketable securities (2) (26) (243) (9)
Unrealized gains (losses) on
"trading" securities - 131 - (14)
Subleasing loss (87) (93) (176) (207)
Gain from early termination of
sales agreement - - 135 -
Other 109 120 345 445
---------- -------- -------- ---------
Investment and other income $ 41 $ 955 $ 92 $ 1,131
========== ======== ======== =========
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 $136,000 and $304,000 for the
thirteen week periods ended December 29, 2002 and December 23, 2001,
respectively. Net Company-owned store advertising expense was $490,000 and
$714,000 for thirty-nine week periods ended December 29, 2002 and December 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.
-11-
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.
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 recorded
in the first quarter of fiscal 2003 were 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 December 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 (loss)
income for the thirteen and thirty-nine week periods ended December 29, 2002 and
December 23, 2001, adjusted as though SFAS No. 142 had been effective for such
periods:
Thirteen Weeks Ended Thirty-nine Weeks Ended
(In thousands) (In thousands)
Dec. 29, Dec. 23, Dec. 29, Dec. 23,
NET (LOSS) INCOME 2002 2001 2002 2001
---- ---- ---- ----
Reported net (loss) income $ (106) $ 263 $ (11,988) $1,879
Add back discontinued amortization expense - 152 - 455
------ ----- --------- ------
Adjusted net (loss) income $ (106) $ 415 $ (11,988) $2,334
====== ===== ========= ======
-12-
Thirteen Weeks Ended Thirty-nine Weeks Ended
Dec. 29, Dec. 23, Dec. 29, Dec. 23,
DILUTED (LOSS) INCOME PER SHARE 2002 2001 2002 2001
---- ---- ---- ----
Reported net (loss) income $(0.02) $ 0.04 $ (1.92) $ 0.27
Add back discontinued amortization expense - 0.02 - 0.06
------ ----- --------- ------
Adjusted net (loss) income $(0.02) $ 0.06 $ (1.92) $ 0.33
====== ===== ========= ======
The table below presents amortized and unamortized intangible assets as
of December 29, 2002 and March 31, 2002 (In thousands):
December 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 $ (943) $ 3,316 $ 4,259 $ (747) $ 3,512
Favorable leases 285 ( 42) 243 285 (31) 254
Other 16 ( 16) - 62 (60) 2
-------- ------- ------- -------- --------- --------
$ 4,560 $(1,001) $ 3,559 $ 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
$208,000 for the thirteen and thirty-nine weeks ended December 29, 2002.
Nathan's estimates future annual amortization expense of approximately $280,000
per year for each of the next five years.
During the fiscal 2003 period, the Company adopted the provisions of
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). This statement supersedes SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
Accounting Principles Board Opinion No. 30, "Reporting Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". This Statement
retained the fundamental provisions of SFAS 121 for recognition and measurement
of impairment, but amends the accounting and reporting standards for segments of
a business to be disposed of. SFAS No. 144 has broadened the definition of
discontinued operations to include components of an entity whose cash flows are
clearly identifiable as compared to a segment of a business. SFAS No. 144
requires the Company to classify as discontinued operations any restaurant that
it sells, abandons or otherwise disposes of where the Company has no further
involvement in such restaurant's operations. In the case of restaurants to be
abandoned, depreciation expense is to be 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, and recorded an additional
expense of $422,000. During the fiscal 2003 period, two Company-owned
restaurants which were not considered available for sale at March 31, 2002 were
presented as discontinued operations, including the first restaurant that was
closed pursuant to the Home Depot License termination (See Note J). Pursuant to
SFAS No. 144, the results of the remaining restaurants operating within Home
Depot locations have been included with results of continuing operations until
these restaurants are abandoned.
Following is a summary of the results of operations for these two
restaurants for the thirteen and thirty-nine week periods ended December 29,
2002 and December 23, 2001:
Thirteen Weeks Ended Thirty-nine Weeks Ended
(In thousands) (In thousands)
Dec. 29, Dec. 23, Dec. 29, Dec. 23,
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 280 $ 379 $ 973 $ 1,136
====== ======= ====== =======
Income before income taxes $ (91) $ (73) $ (160) $ (146)
====== ======= ====== =======
-13-
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force (EITF) Issue No. 94-3. SFAS No.
146 requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF No. 94-3, a
liability for an exit cost was recognized at the date of a company's commitment
to an exit plan. SFAS No. 146 also establishes that the liability should
initially be measured and recorded at fair value. Nathan's expects to record a
charge of approximately $150,000 in the fourth quarter fiscal 2003 in connection
with the termination of 8 employees relating to a reduction in administrative
personnel.
Nathan's has adopted the provisions of FASB Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN No. 45"). For financial
statements of interim or annual periods ending after December 15, 2002 FIN No.
45 has clarified that a guarantor is required to disclose (a) the nature of
the guarantee; (b) maximum potential amount of future payments under the
guarantee; (c) carrying amount of the liability, if any, for the guarantor's
obligations under the guarantee; and (d) the nature and extent of any recourse
provisions or available collateral that would enable the guarantor to recover
the amounts paid under the guarantee. Also, beginning January 1, 2003, the
Company will have to recognize at the inception of a guarantee, a liability for
the obligations it has undertaken in issuing the guarantee.
The Company has guaranteed 34 equipment loans on behalf of its
franchisees principally in connection with the Company's co-branding
initiatives. The Company's maximum exposure for these loans is $651,000.
Currently the Company is making periodic payments on four loans on which the
franchisees have defaulted. The Company would generally obtain title to the
equipment in the event it was required to fully satisfy a defaulted obligation
and would seek to use the equipment itself or resell the equipment to another
franchisee. The Company will continue to guarantee the existing indebtedness
until fiscal 2008.
The Company has also guaranteed one real estate loan on behalf of a
franchisee having a maximum exposure of $306,000. In the event the Company is
required to cure a default by the franchisee, the Company would be able to gain
possession of the premises and operate the restaurant provided that the Company
complies with the lease. The Company will continue to guarantee this
indebtedness until August 2006.
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 obligated 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 December 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 thirty-nine weeks ended December 29, 2002, the Company sold
three Company-owned restaurants for a total of $591,000. In August 2002, an
operating restaurant, which had been classified as held for sale at March 31,
2002, was sold to a non-franchisee for $75,000. In October 2002, a
non-operating restaurant, which had been classified as held for sale was sold to
a non-franchisee for $466,000 and an operating restaurant was sold to a
franchisee in exchange for a $50,000 note. As these restaurants were either
classified as held-for-sale prior to the adoption of SFAS No. 144 or the Company
has a continuing stream of cash flows in the case of the franchised restaurant,
the results of operations for the Company-operated restaurants that were sold
are included in "(Loss) income from continuing operations before income taxes"
in the accompanying consolidated statements of operations for the thirteen and
thirty-nine week periods ended December 29, 2002 and December 23, 2001. During
the thirteen weeks ended December 29, 2002 and December 23, 2001 restaurant
sales were $28,000 and $555,000 from the operation of one and three sold
restaurants, respectively. During the thirty-nine weeks ended December 29, 2002
and December 23, 2001 restaurant sales were $769,000 and $2,247,000 from the
operation of two and four sold restaurants, respectively. Results of operations
of the two restaurants that have been abandoned subsequent to the adoption of
SFAS No. 144 have been included in discontinued operations (See Note H).
-14-
The results of operations for these Company-owned restaurants for the thirteen
and thirty-nine week periods ended December 29, 2002 and December 23, 2001 are
as follows:
Thirteen Weeks Ended Thirty-nine Weeks Ended
(In thousands) (In thousands)
Dec. 29, Dec. 23, Dec. 29, Dec. 23,
2002 2001 2002 2001
---- ---- ---- ----
Revenues (A) $ 28 $ 1,405 $ 769 $ 3,204
====== ======= ======= =======
(Loss) income from continuing
operations before income taxes (A) $ (11) $ 679 $ (69) $ 740
====== ======= ======= =======
A - Includes gains from the sales of restaurants of $850 and $ 957 during the
thirteen and thirty-nine week periods ended December 23, 2001.
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. As of December 29, 2002, one restaurant has ceased operating
and has been classified as discontinued operations. The Company has revised the
estimated useful lives of these assets to reflect the shortened useful lives
and recorded additional depreciation expense of approximately $320,000 and
$422,000 during the thirteen and thirty-nine week periods ended December 29,
2002. The Company conducted an impairment analysis and determined that no
impairment charge was deemed necessary at December 29, 2002.
Following is a summary of the results of operations for the restaurants
for the thirteen and thirty-nine week periods ended December 29, 2002 and
December 23, 2001:
Thirteen Weeks Ended Thirty-nine Weeks Ended
(In thousands) (In thousands)
Dec. 29, Dec. 23, Dec. 29, Dec. 23,
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 847 $ 997 $ 2,929 $ 3,113
======= ======= ======= =======
Income before income taxes (A) $ 16 $ 49 $ 216 $ 269
======= ======= ======= =======
(A) - Income before income taxes for the thirteen and thirty-nine week periods
ended December 29, 2002 excludes additional depreciation expense of $320 and
$422, respectively, 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 December 29, 2002 totaling
$62,000 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 a limited partnership and received proceeds of $751,000 and
recorded a loss of $241,000 which is included as a component of investment and
other income in the accompanying consolidated statement of operations for the
thirty-nine weeks ended December 29, 2002. At December 29, 2002, all marketable
securities are classified as available for sale.
-15-
NOTE L - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
Thirteen weeks ended Thirty-nine weeks ended
(In thousands) (In thousands)
December 29, 2002 December 29, 2002
----------------- -----------------
Net loss $ (106) $ (11,988)
Unrealized (loss) gain on available-for-sale securities,
Net of tax (benefit) provision of $(2)
and $50, respectively ( 3) 62
--------- ---------
Comprehensive loss $ (109) $ (11,926)
========= =========
Comprehensive income for the thirteen and thirty-nine week periods ended
December 23, 2001 was the same as net income for those periods.
NOTE M - OTHER INCOME
During the 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 the Murray Family Trust
compensatory damages in the amount of $200,000 which Miami Subs accrued for on
its books. Miami Subs appealed the damage award, and in December 1999, the
Supreme Court of New Hampshire heard the second appeal. On February 1, 2001, the
Supreme Court of New Hampshire ruled in favor of Miami Subs and vacated the
damage award. The plaintiff had the right to further appeal the reversal for a
period of 90 days, until May 2, 2001. No further action was taken by the
plaintiff and upon passage of the 90 day period the litigation award was
reversed into income.
NOTE N - INCOME (LOSS) FROM CONTINUING OPERATIONS PER SHARE
The following chart provides a reconciliation of information used in
calculating the per share amounts for the thirteen and thirty-nine week periods
ended December 29, 2002 and December 23, 2001, respectively.
THIRTEEN WEEKS
(Loss) Income from (Loss) Income from
Continuing Operations Number of Shares Continuing Operations
(In thousands) (In thousands) Per Share
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
BASIC EPS
Basic calculation $ ( 52) $ 304 5,878 7,038 $ (.01) $ .05
Effect of dilutive employee stock
options and warrants - - - 24 - -
-------- ------- ----- ----- ------ -----
Diluted EPS
Diluted calculation $ ( 52) $ 304 5,878 7,062 $ (.01) $ .05
======== ======= ===== ===== ====== =====
-16-
THIRTY-NINE WEEKS
Income from Income from
Continuing Operations Number of Shares Continuing Operations
(In thousands) (In thousands) Per Share
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Basic EPS
- ---------
Basic calculation $ 444 $ 1,961 6,113 7,056 $ .07 $ .28
Effect of dilutive employee stock
options and warrants - - 143 19 - -
-------- ------- ----- ----- ------ -----
Diluted EPS
- -----------
Diluted calculation $ 444 $ 1,961 6,256 7,075 $ .07 $ .28
======== ======= ===== ===== ====== =====
Common stock equivalents aggregating 89,000 shares have been excluded
from the diluted EPS calculation for the thirteen week period ended December 29,
2002 as the impact of their inclusion would have been anti-dilutive.
Options and warrants issued to employees to purchase 902,838 and
1,347,901 shares of common stock in each of the thirteen and thirty-nine week
periods ended December 29, 2002 and December 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 its 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. Through December 29, 2002, Nathan's purchased an
additional 429,738 shares of common stock at a cost of approximately $1,614,000
and through January 10, 2003, subsequently purchased an additional 45,900 shares
of common stock at a cost of approximately $168,000. 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.
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.
Nathan's Famous was served on January 10, 2003 with a summons in
connection with an action commenced by Mitchell Putterman and Michael Pellegrino
in the Supreme Court of New York, Suffolk County seeking damages of $1,000,000
for claims of breach of contract and fraud in connection with a letter of intent
with the Company's subsidiary, NF Roasters of Commack, Inc. Although the letter
of intent contains specific disclaimer language stating that it did not convey
any rights or obligations and contemplated the execution of a management
agreement, which was never executed, plaintiffs purport nonetheless to have
certain claims in connection therewith. The Company has served a notice of
appearance and demand for a complaint.
NOTE Q - RECLASSIFICATIONS
Certain reclassifications of prior period balances have been made to
conform to the December 29, 2002 presentation.
-17-
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 December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" which addresses financial
accounting and reporting for recording expenses for the fair value of stock
options. SFAS 148 provides alternative methods of transition for a voluntary
change to fair value based method of accounting for stock-based employee
compensation. Additionally, SFAS 148 requires more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. The provisions of this Statement are effective for fiscal years
ending after December 15, 2002, with early application permitted in certain
circumstances. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. Nathan's is currently evaluating the effect of adoption on
its financial position and results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
As used in this Report, the terms "we", "us", "our" and "Nathan's" mean
Nathan's Famous, Inc. and its subsidiaries (unless the context indicates a
different meaning).
During the fiscal year ended March 26, 2000, we completed two
acquisitions that provided us with two highly recognized brands. On April 1,
1999, we became the franchisor of the Kenny Rogers Roasters restaurant system by
acquiring the intellectual property rights, including trademarks, recipes and
franchise agreements of Roasters Corp. and Roasters Franchise Corp. On September
30, 1999, we acquired the remaining 70% of the outstanding common stock of Miami
Subs Corporation we did not already own. Our revenues are generated primarily
from operating company-owned restaurants and franchising the Nathan's, Miami
Subs and Kenny Rogers restaurant concepts, licensing agreements for the sale of
Nathan's products within supermarkets and selling products under Nathan's
Branded Product Program. The Branded Product Program enables foodservice
operators to offer Nathans' hot dogs and other proprietary items for sale within
their facilities. In conjunction with this program, foodservice operators are
granted a limited use of the Nathans' trademark with respect to the sale of hot
dogs and certain other proprietary food items and paper goods.
In addition to plans for expansion through franchising and our Branded
Product Program, Nathan's is continuing to capitalize on the co-branding
opportunities within our existing restaurant system. Currently, the Arthur
Treacher's brand is being sold within 126 Nathan's, Kenny Rogers Roasters and
Miami Subs restaurants, the Nathan's brand is included on the menu of 83 Miami
Subs and Kenny Rogers restaurants, while the Kenny Rogers Roasters brand is
being sold within 74 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 December 29, 2002, our combined system consisted of 351 franchised
or licensed units, 18 company-owned units and over 2,000 Nathan's Branded
Product points of sale that feature Nathan's world famous all-beef hot dogs,
located in 41 states, the District
-18-
of Columbia and 13 foreign countries. At December 29, 2002, our company-owned
restaurant system included 14 Nathan's units and four Miami Subs units, as
compared to 16 Nathan's units, five Miami Subs units and two Kenny Rogers
Roasters units at December 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, 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," 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 $471,000 relating to four
restaurants during the thirty-nine weeks ended December 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 $542,000 relating to four notes during the
thirty-nine weeks ended December 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".
-19-
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. In conjunction with our
external risk manager we have completed an evaluation of the outstanding claims
and reserves relating to prior years and have reversed $196,000 of previously
recorded self insurance accruals during the thirteen weeks ended December 29,
2002 for those claims on which the Company's exposure has been settled.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED DECEMBER 29, 2002 COMPARED TO DECEMBER 23, 2001
Revenues from Continuing Operations
Total sales decreased by 14.7% or $1,010,000 to $5,879,000 for the
thirteen weeks ended December 29, 2002 ("third quarter fiscal 2003") as compared
to $6,889,000 for the thirteen weeks ended December 23, 2001 ("third quarter
fiscal 2002"). Sales from the Branded Product Program increased by 35.4% to
$1,412,000 for the third quarter fiscal 2003 as compared to sales of $1,043,000
in the third quarter fiscal 2002. Company-owned restaurant sales decreased 23.6%
or $1,379,000 to $4,467,000 from $5,846,000 primarily due to the operation of
four fewer company-owned stores as compared to the third quarter fiscal 2002 and
a 10.4% sales decrease at our comparable restaurants (consisting of 14 Nathan's
and four Miami Subs restaurants). The reduction in company-owned stores is the
result of the franchise of two restaurants 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 four restaurants lowered restaurant sales
by $860,000 and improved restaurant operating profits by $82,000 versus the
fiscal 2002 period.
Franchise fees and royalties decreased by 0.6% or $11,000 to $1,722,000
in the third quarter fiscal 2003 compared to $1,733,000 in the third quarter
fiscal 2002. Franchise royalties decreased by 14.0% or $221,000 to $1,352,000 in
the third quarter fiscal 2003 as compared to $1,573,000 in the third 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 third quarter fiscal 2003 as compared to the third quarter fiscal
2002. Royalty income was not recorded from 63 domestic franchised locations for
the third quarter fiscal 2003 as compared to 43 domestic franchised locations
for the third quarter fiscal 2002 as a result of the determination that
collectibility of the royalties was not reasonably assured. Domestic franchise
restaurant sales decreased by 6.9% to $41,445,000 in the third quarter fiscal
2003 as compared to $44,513,000 in the third quarter fiscal 2002. At December
29, 2002, 351 franchised or licensed restaurants were operating as compared to
377 franchised or licensed restaurants at December 23, 2001. Franchise fee
income derived from new openings and our co-branding activities was $220,000 in
the third quarter fiscal 2003 as compared to $160,000 in the third quarter
fiscal 2002. During the third quarter fiscal 2003, 10 new franchised restaurants
were opened, including our first unit in China, as compared to six new
franchised restaurants during the third quarter fiscal 2002. Nathan's earned
$150,000 in connection with the termination of a Master Development Agreement in
the third quarter fiscal 2003 in accordance with its terms due to the breach by
the franchisee.
License royalties were $523,000 in the third quarter fiscal 2003 as
compared to $312,000 in the third quarter fiscal 2002. 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 and royalties earned under a new license agreement in connection with the
Branded Product Program.
Investment and other income decreased by $914,000 to $41,000 in the
third quarter fiscal 2003 versus $955,000 in the third quarter fiscal 2002.
During the third quarter fiscal 2003, Nathans' investment loss was approximately
$2,000 as compared to income of approximately $105,000 during the third quarter
fiscal 2002 due primarily to Nathan's liquidating its investment in a limited
partnership on October 3, 2002. During the third quarter fiscal 2002, Nathan's
recognized $850,000 of additional income resulting from the successful appeal of
a condemnation award from the State of Florida.
Interest income decreased by $41,000 to $71,000 in the third quarter
fiscal 2003 versus $112,000 in the third quarter fiscal 2002 due to lower
interest income on its investments in marketable securities and its notes
receivable
-20-
Costs and Expense from Continuing Operations
Cost of sales decreased by $677,000 to $3,977,000 in the third quarter
fiscal 2003 from $4,654,000 in the third quarter fiscal 2002. During the third
quarter fiscal 2003, restaurant cost of sales were lower than the third quarter
fiscal 2002 by approximately $893,000. Cost of sales was reduced by
approximately $622,000 as a result of operating four fewer company-owned
restaurants. The cost of restaurant sales at our comparable units was lower than
the third quarter fiscal 2002 although, as a percentage of restaurant sales was
65.0% in the third quarter fiscal 2003 as compared to 63.7% in the third quarter
fiscal 2002 due primarily to higher labor costs. Higher product and other direct
costs of approximately $216,000 were incurred in connection with the growth of
our Branded Product Program which was partially offset by lower commodity costs
during the third quarter fiscal 2003.
Restaurant operating expenses decreased by $398,000 to $1,392,000 in
the third quarter fiscal 2003 from $1,790,000 in the third quarter fiscal 2002.
Restaurant operating costs were lower in the third quarter fiscal 2003 by
approximately $330,000, as compared to the third quarter fiscal 2002 as a result
of operating four fewer restaurants. In addition to the reduction in restaurant
operating expenses from operating fewer restaurants, lower marketing costs more
than offset higher occupancy and current insurance costs during the third
quarter fiscal 2003.
Depreciation and amortization increased by $182,000 to $623,000 in the
third quarter fiscal 2003 from $441,000 in the third quarter fiscal 2002. The
Company recorded additional depreciation expense of $320,000 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 additional expense was
partly offset by the reduction in Company-owned restaurants operating between
the two periods.
Amortization of intangibles decreased by $152,000 to $69,000 in the
third quarter fiscal 2003 from $221,000 in the third quarter fiscal 2002.
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 $365,000 to $1,957,000
in the third quarter fiscal 2003 as compared to $2,322,000 in the third quarter
fiscal 2002. The difference in general and administrative expenses was due
primarily to lower professional fees of approximately $123,000, lower
compensation and related expenses of approximately $77,000, lower insurance
costs of approximately $72,000 due to the reversal of previously recorded self
insured reserves and lower bad debts expense of approximately $33,000.
Interest expense was $33,000 during the third quarter fiscal 2003 as
compared to $40,000 during the third 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 $222,000 during the third
quarter fiscal 2003 relates to the write-down of one note receivable.
Impairment charge on long-lived assets of $50,000 during the third
quarter fiscal 2003 relates to the write-down of one restaurant.
Provision for Income Taxes from Continuing Operations
In the third quarter fiscal 2003, the income tax benefit was $35,000 or
40.2% of loss from continuing operations as compared to the income tax provision
of $229,000 or 43.0% of income from continuing operations in the third quarter
fiscal 2002. The effective income tax rate was lower in the third 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.
Discontinued Operations
During the third quarter fiscal 2003, discontinued operations included
two Company-owned restaurants both of which were abandoned, including one which
was abandoned in connection with the Home Depot early lease terminations.
Revenues generated by these restaurants were $280,000 during the thirteen weeks
ended December 29, 2002 as compared to $379,000 during the thirteen weeks ended
December 23, 2001. Losses from these restaurants were $91,000 during the
thirteen weeks ended December 29, 2002 as compared to $73,000 during the
thirteen weeks ended December 23, 2001
-21-
THIRTY-NINE WEEKS ENDED DECEMBER 29, 2002 COMPARED TO DECEMBER 23, 2001
Revenues from Continuing Operations
Total sales decreased by 6.7% or $1,592,000 to $22,213,000 for the
thirty-nine weeks ended December 29, 2002 ("fiscal 2003 period") as compared to
$23,805,000 for the thirty-nine weeks ended December 23, 2001 ("fiscal 2002
period"). Sales from the Branded Product Program increased by 38.5% to
$4,894,000 for the fiscal 2003 period as compared to sales of $3,534,000 in the
fiscal 2002 period. Company-owned restaurant sales decreased 14.6% or $2,952,000
to $17,319,000 from $20,271,000 primarily due to the operation of five fewer
company-owned stores as compared to the prior fiscal year and a 3.1% sales
decrease at our comparable restaurants (consisting of 14 Nathan's and four Miami
Subs restaurants). The reduction in company-owned stores is the result of our
franchise of three restaurants 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 five restaurants lowered restaurant sales by
$2,483,000 and improved restaurant operating profits by $1,000 versus the fiscal
2002 period.
Franchise fees and royalties decreased by 21.1% or $1,259,000 to
$4,715,000 in the fiscal 2003 period compared to $5,974,000 in the fiscal 2002
period. Franchise royalties decreased by $1,033,000 or 19.5% to $4,254,000 in
the fiscal 2003 period as compared to $5,287,000 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. Royalty income was not recorded
from 63 domestic franchised locations during the fiscal 2003 period as compared
to 43 domestic franchised locations during the fiscal 2002 period as a result of
determining that collectibility of the royalties was not reasonably assured.
Domestic franchise restaurant sales decreased by 11.9% to $124,309,000 in the
fiscal 2003 period as compared to $141,178,000 in the fiscal 2002 period. At
December 29, 2002, 351 franchised or licensed restaurants were operating as
compared to 377 franchised or licensed restaurants at December 23, 2001.
Franchise fee income derived from new openings and our co-branding activities
was $311,000 in the fiscal 2003 period as compared to $687,000 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 2003 period, 12 new franchised restaurants were opened, including our
first unit in China, as compared to 19 new franchised restaurants during the
fiscal 2002 period. During the fiscal 2002 period, we earned $245,000 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 third quarter fiscal
2003, we earned $150,000 in connection with the termination of a Master
Development Agreement in accordance with its terms due to the breach by the
franchisee.
License royalties were $1,922,000 in the fiscal 2003 period as compared
to $1,624,000 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, the manufacture of
certain proprietary spices and seasonings, the sale of condiments sold under the
Nathan's brand and royalties earned under a new license agreement in connection
with the Branded Product Program.
Investment and other income decreased by $1,039,000 to $92,000 in the
fiscal 2003 period versus $1,131,000 in the fiscal 2002 period. During the
fiscal 2003 period, Nathans' investment loss was approximately $220,000 greater
than in the fiscal 2002 period due primarily to differences in performance of
the financial markets during the time that Nathan's maintained its investments
in "trading securities", which "trading securities" were substantially
liquidated October 2002, as compared to being held for the entire fiscal 2002
period. Nathan's loss from sub-leasing was approximately $31,000 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
$101,000 less miscellaneous income than in the fiscal 2002 period principally in
connection with its ice cream sales. During the fiscal 2002 period, Nathan's
recognized net gains of $916,000 primarily in connection with the sale of two
company-owned restaurants, which included $850,000 from the successful appeal of
a condemnation award from the State of Florida.
Interest income decreased by $144,000 to $227,000 in the fiscal 2003
period versus $371,000 in the fiscal 2002 period due to lower interest income on
its investments in marketable securities and its notes receivable.
Costs and Expenses from Continuing Operations
Cost of sales decreased by $969,000 to $14,625,000 in the fiscal 2003
period from $15,594,000 in the fiscal 2002 period. During the fiscal 2003
period, restaurant cost of sales were lower than the fiscal 2002 period by
approximately $1,840,000. Cost of sales
-22-
were lower by approximately $1,634,000 as a result of operating fewer
company-owned restaurants. The cost of restaurant sales at our comparable units
as a percentage of restaurant sales was 61.6% in the fiscal 2003 period as
compared to 60.9% in the fiscal 2002 period due primarily to higher labor costs.
Higher product and other direct costs of approximately $871,000 were incurred in
connection with the growth of our Branded Product Program which was partially
offset by lower commodity costs during the fiscal 2003 period. During the fiscal
2003 period, commodity prices of our primary meat products were in line with
historical norms as compared to being at their highest levels in recent years
through most of the twenty-six weeks ended September 23, 2001.
Restaurant operating expenses decreased by $650,000 to $4,869,000 in
the fiscal 2003 period from $5,519,000 in the fiscal 2002 period. Restaurant
operating costs were lower in the fiscal 2003 period by approximately $829,000,
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 occupancy, utility, and current
insurance costs during the fiscal 2003 period.
Depreciation and amortization increased by $260,000 to $1,472,000 in
the fiscal 2003 period from $1,212,000 in the fiscal 2002 period. The Company
recorded $442,000 of additional depreciation expense 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 $455,000 to $208,000 in the
fiscal 2003 period from $663,000 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 $375,000 to $6,117,000
in the fiscal 2003 period as compared to $6,492,000 in the fiscal 2002 period.
The difference in general and administrative expenses was due primarily to lower
professional fees of approximately $195,000, compensation and related expenses
of approximately $73,000, lower insurance costs of approximately $72,000 due to
the reversal of previously recorded self insured reserves and lower bad debts
expense of approximately $35,000.
Interest expense was $111,000 during the fiscal 2003 period as compared
to $147,000 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 $471,000 during the fiscal
2003 period represents the write-down relating to four under-performing stores,
two of which are expected to continue operating.
Impairment charge on notes receivable of $542,000 during the fiscal
2003 period relates to the write-down of four 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 from Continuing Operations
In the fiscal 2003 period, the income tax provision from continuing
operations was $310,000 or 41.1% of income from continuing operations before
income taxes as compared to $1,527,000 or 43.8% of income from continuing
operations before income taxes in the fiscal 2002 period. The effective income
tax rate was lower in the fiscal 2003 period due to the adoption of SFAS No.
142 which requires that goodwill no longer be amortized. Such goodwill
amortization was not tax deductible by Nathan's which increased the effective
tax rate in prior years.
Discontinued Operations
During the fiscal 2003 period , discontinued operations included two
Company-owned restaurants both of which were abandoned, including one which was
abandoned in connection with the Home Depot early lease terminations. Revenues
generated by these two restaurants were $973,000 during the thirty-nine weeks
ended December 29, 2002 as compared to $1,136,000 during the thirty-nine weeks
ended December 23, 2001. Losses from these restaurants were $160,000 during the
thirty-nine weeks ended December 29, 2002 as compared to $146,000 during the
thirty-nine weeks ended December 23, 2001.
-23-
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 December 29, 2002 aggregated $1,117,000,
decreasing by $717,000 during the fiscal 2003 period. At December 29, 2002,
marketable securities and investment in limited partnership decreased by
$3,660,000 from March 31, 2002 to $5,159,000 and net working capital decreased
to $6,387,000 from $9,565,000 at March 31, 2002. On October 3, 2002, Nathan's
substantially liquidated its investment in limited partnership and invested the
proceeds with its other marketable securities.
Cash provided by operations of $1,537,000 in the fiscal 2003 period is
primarily attributable to net loss of $11,988,000, non-cash charges of
$15,283,000, including the cumulative effect of accounting change of
$12,338,000, depreciation and amortization of $1,569,000, impairment charges on
long-lived assets and notes receivable of $1,013,000, amortization of intangible
assets of $208,000, provision for doubtful accounts of $88,000 and amortization
of bond premium of $67,000. Changes in the other assets and liabilities
consisted of decreases in marketable securities and investment in limited
partnership of $968,000 and prepaid expenses and other current assets of
$831,000, accounts payable and accrued expenses of $2,729,000, other liabilities
of $570,000 and an increase in notes and accounts receivable of $227,000.
Cash provided by investing activities of $2,969,000 in the fiscal 2003
period is comprised primarily of proceeds from the sale of securities of
$5,079,000, the sale of a restaurant and other fixed assets of $511,000 and
repayments on notes receivable of $215,000 which were partly offset by the
purchases of available for sale securities of $2,384,000 and expenditures
relating to capital improvements of selected company-owned restaurants and other
fixed asset additions of $452,000.
Cash used in financing activities of $5,223,000 in the fiscal 2003
period represents repurchases of 1,388,047 shares of common stock at a total
cost of $5,086,000 and repayments of notes payable and obligations under capital
leases in the amount of $137,000. On December 31, 2002, Nathan's paid off a
mortgage in the amount of $373,000.
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. Through December 29, 2002,
Nathan's purchased 429,738 shares of common stock at a cost of approximately
$1,551,000. Subsequent to December 29, 2002, Nathan's purchased an additional
45,900 shares of common stock at a cost of approximately $168,000. To date,
Nathan's has purchased a total of 1,475,638 shares of common stock at a cost of
approximately $5,389,000. We expect to make additional purchases of stock from
time to time, depending on market conditions, in open market or in privately
negotiated transactions, at prices deemed appropriate by management. There is no
set time limit on the purchases. Nathan's expects to fund these stock
repurchases from its operating cash flow.
We expect that we will make additional investments in certain existing
restaurants in the future and that we expect to fund those investments from our
operating cash flow. We do not expect to incur significant capital expenditures
to develop new company-owned restaurants through March 29, 2004.
In connection with our acquisition of Miami Subs, we determined that up
to 18 underperforming restaurants would be closed pursuant to our divestiture
plan. To date, we have terminated leases on 16 of those 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 31 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 December 29, 2002 was approximately $957,000.
24
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
Cash Contractual Obligations Total 1 Year 1-3 Years 4-5 Years After 5 Years
- ---------------------------- ----- ------ ----------- --------- -------------
Long-Term Debt $ 1,581 $ 539 $ 333 $ 333 $ 376
Capital Lease Obligations 61 6 13 16 26
Employment Agreements 1,055 805 250 - -
Operating Leases 26,110 4,174 7,835 7,051 7,050
-------- ------- -------- ------- --------
Gross Cash Contractual Obligations 28,807 5,524 8,431 7,400 7,452
Sublease Income 13,520 2,028 3,704 3,189 4,599
-------- ------- -------- ------- --------
Net Cash Contractual Obligations $ 15,287 $ 3,496 $ 4,727 $ 4,211 $ 2,853
======== ======= ======== ======= ========
Total Amount of Commitment Expiration Per Period
-------------------------------
Amounts Less than
Other Contractual Commitments Committed 1 Year 1-3 Years 4-5 Years After 5 Years
- ----------------------------- --------- --------- ----------- --------- -------------
Loan Guarantees $ 957 $ 330 $ 385 $ 242 -
--------- -------- -------- ------- ------------
Total Commercial Commitments $ 957 $ 330 $ 385 $ 242 -
========= ======== ======== ======= ============
Management believes that available cash, marketable investment
securities, and internally generated funds should provide sufficient capital to
finance our operations for at least the next twelve months. We maintain a
$7,500,000 uncommitted bank line of credit and have 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 December 29, 2002, Nathans' cash and cash equivalents aggregated
$1,117,000. Earnings on these cash and cash equivalents would increase or
decrease by approximately $2,800 per annum for each .25% change in interest
rates.
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 December 29, 2002, the
value of Nathans' marketable investment securities aggregated $5,144,000.
Interest income on these marketable investment securities would increase or
decrease by approximately $12,900 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 December 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 $ 5,348 $ 5,278 $ 5,210 $ 5,144 $ 5,080 $ 5,018 $ 4,957
======= ======= ======= ======= ======= ======= =======
-25-
INVESTMENT IN LIMITED PARTNERSHIP
We had invested in a highly liquid investment limited partnership that
invested principally in equity securities. These investments were subject to the
performance of the equity markets. On October 3, 2002, Nathan's substantially
liquidated its investment in limited partnership. As of December 29, 2002,
Nathans' investment in limited partnership aggregated approximately $15,000.
Accordingly, fluctuations in the value of this investment would be immaterial to
our financial results.
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
December 29, 2002, total outstanding debt, including capital leases, aggregated
$1,642,000 of which $1,208,000 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 4.50% based upon current market conditions. At
4.50%, Nathan's annualized interest expense would be approximately $51,000 less
than at the current rate. Nathan's also maintains a $7,500,000 credit line which
bears interest at the prime rate (4.25% at December 29, 2002). The Company has
never borrowed any funds under this line. Accordingly, the Company does not
believe that fluctuations in interest rates would have a material impact on its
financial results.
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 thirty-nine weeks ended
December 29, 2002 would have increased or decreased cost of sales by
approximately $883,000.
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.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of 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, there were
various in person and telephonic meetings as of a date within 90 days of the
date of this report during which there were evaluations of our disclosure
controls and procedures. Based on such evaluations, these officers have advised
us they believe such controls and procedures are effective.
Our principal executive officers and principal financial officer have
advised us that there have been no significant changes in our internal controls
or in other factors that would significantly affect our internal controls since
the date of their evaluation.
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
-26-
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.
-27-
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.
Nathan's Famous was served on January 10, 2003 with a summons in
connection with an action commenced by Mitchell Putterman and Michael Pellegrino
in the Supreme Court of New York, Suffolk County seeking damages of $1,000,000
for claims of breach of contract and fraud in connection with a letter of intent
with the Company's subsidiary, NF Roasters of Commack, Inc. Although the letter
of intent contains specific disclaimer language stating that it did not convey
any rights or obligations and contemplated the execution of a management
agreement, which was never executed, plaintiffs purport nonetheless to have
certain claims in connection therewith. The Company has served a notice of
appearance and demand for a complaint.
ITEM 4: SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
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.
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 December 29,
2002.
On October 7, 2002 - Item 5 - the Company announced a stock repurchase
program which authorized the purchase of up to 1 million shares of its common
stock.
-28-
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: February 11, 2003 By: /s/ Wayne Norbitz
-------------------------------------
Wayne Norbitz
President and Chief Operating Officer
(Principal Executive Officer)
Date: February 11, 2003 By: /s/ Ronald G. DeVos
-------------------------------------
Ronald G. DeVos
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
-29-
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: February 11, 2003 /s/ Howard M. Lorber
-------------------------------------
Howard M. Lorber
Chief Executive Officer
-30-
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: February 11, 2003 /s/ Wayne Norbitz
-------------------------------------
Wayne Norbitz
President and Chief Operating Officer
31
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: February 11, 2003 /s/ Ronald G. DeVos
-------------------------------------
Ronald G. DeVos
Chief Financial Officer
-32-