FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Act
of 1934 for the quarterly period ended September 23, 2001.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Act
of 1934 for the transition period from to .
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Commission File Number 0-3189
NATHAN'S FAMOUS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-3166443
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(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
1400 Old Country Road, Westbury, New York 11590
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(Address of principal executive offices including zip code)
(516) 338-8500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
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At September 23, 2001, an aggregate of 7,065,202 shares of the registrant's
common stock, par value of $.01, were outstanding.
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
INDEX
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Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - September 23, 2001 and
March 25, 2001 3
Consolidated Statements of Earnings - Thirteen Weeks
Ended September 23, 2001 and September 24, 2000 4
Consolidated Statements of Earnings - Twenty-six Weeks
Ended September 23, 2001 and September 24, 2000 5
Consolidated Statements of Stockholders' Equity -
Twenty-six Weeks Ended September 23, 2001 6
Consolidated Statements of Cash Flows -Twenty-six Weeks
Ended September 23, 2001 and September 24, 2000 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4 Submission of Matter to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Item 7A. Qualitative and Quantitative Disclosures about Market Risk 18
SIGNATURES 19
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
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NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Sept. March
23, 2001 25, 2001
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(Unaudited)
Current assets:
Cash and cash equivalents including unexpended
marketing fund contributions of $301 and $2,104 and
restricted cash of $83 and $83, respectively $ 4,494 $ 4,325
Marketable securities and investment in limited partnership 6,342 4,648
Notes and accounts receivables, net 3,523 4,178
Inventories 676 523
Assets held for sale - 1,510
Prepaid expenses and other current assets 316 974
Deferred income taxes 1,741 1,714
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Total current assets 17,092 17,872
Notes receivable, net 1,719 1,729
Property and equipment, net 10,868 11,279
Assets held for sale 450 450
Intangible assets, net 17,567 18,011
Deferred income taxes 2,081 2,081
Other assets, net 372 404
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$ 50,149 $ 51,826
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Current liabilities:
Current maturities of notes payable and capital lease obligations $ 183 $ 1,343
Accounts payable 2,003 1,978
Accrued expenses and other current liabilities 6,855 8,731
Deferred franchise fees 612 610
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Total current liabilities 9,653 12,662
Notes payable and capital lease obligations, less current maturities 1,693 1,789
Other liabilities 2,156 2,344
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Total liabilities 13,502 16,795
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Stockholders' equity:
Common stock, $.01 par value - 30,000,000 shares authorized,
7,065,202 issued and outstanding , respectively 71 71
Additional paid-in capital 40,746 40,746
Accumulated deficit (4,170) (5,786)
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Total stockholders' equity 36,647 35,031
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$ 50,149 $ 51,826
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See accompanying notes to consolidated financial statements.
3
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen weeks ended September 23, 2001 and September 24, 2000
In thousands, except per share amounts)
(Unaudited)
2001 2000
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Sales $ 9,085 $ 9,493
Franchise fees and royalties 2,052 2,119
License royalties 605 658
Investment and other income 43 396
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Total revenues 11,785 12,666
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Costs and expenses:
Cost of sales 5,885 6,035
Restaurant operating expenses 2,018 2,216
Depreciation and amortization 394 434
Amortization of intangible assets 220 238
General and administrative expenses 2,051 2,138
Interest expense 48 74
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Total costs and expenses 10,616 11,135
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Income before income taxes 1,169 1,531
Provision for income taxes 515 598
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Net income $ 654 $ 933
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PER SHARE INFORMATION
Net income per share
Basic $ 0.09 $ 0.13
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Diluted $ 0.09 $ 0.13
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Shares used in computing net income
Basic 7,065 7,065
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Diluted 7,080 7,155
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See accompanying notes to consolidated financial statements.
4
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Twenty-six weeks ended September 23, 2001 and September 24, 2000
(In thousands, except per share amounts)
(Unaudited)
2001 2000
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Sales $ 17,673 $ 19,125
Franchise fees and royalties 4,241 4,408
License royalties 1,312 1,299
Investment and other income 435 733
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Total revenues 23,661 25,565
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Costs and expenses:
Cost of sales 11,485 12,244
Restaurant operating expenses 3,971 4,673
Depreciation and amortization 814 866
Amortization of intangible assets 442 475
General and administrative expenses 4,170 4,379
Interest expense 107 146
Other (income) (210) -
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Total costs and expenses 20,779 22,783
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Income before income taxes 2,882 2,782
Provision for income taxes 1,266 1,104
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Net income $ 1,616 $ 1,678
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PER SHARE INFORMATION
Net income per share
Basic $ 0.23 $ 0.24
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Diluted $ 0.23 $ 0.24
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Shares used in computing net income
Basic 7,065 7,053
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Diluted 7,082 7,099
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See accompanying notes to consolidated financial statements.
5
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Twenty-six weeks ended September 23, 2001
(In thousands, except share amounts)
(Unaudited)
Total
Additional Accum- Stock-
Common Common Paid-in ulated holders'
Shares Stock Capital Deficit Equity
------ ------ ---------- ------- -------
Balance, March 25, 2001 7,065,202 $ 71 $ 40,746 $( 5,786) $ 35,031
Net income - - - 1,616 1,616
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Balance, Sept. 23, 2001 7,065,202 $ 71 $ 40,746 $( 4,170) $ 36,647
========= ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
6
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-six weeks ended September 23, 2001 and September 24, 2000
(In thousands)
(Unaudited)
2001 2000
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Cash flows from operating activities:
Net income $ 1,616 $ 1,678
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 814 866
Amortization of intangible assets 442 475
Provision for doubtful accounts 83 27
Stock compensation expense - 78
Gain on sale of restaurant (93) -
Deferred income taxes (27) -
Changes in operating assets and liabilities:
Marketable securities and investment in
limited partnership (1,694) (2,138)
Notes and accounts receivables, net ( 47) (1,045)
Inventories ( 153) (54)
Prepaid expenses and other current assets 658 62
Accounts payable and accrued expenses (1,851) 1,516
Deferred franchise and area development fees 2 ( 167)
Other assets, net 32 47
Other non current liabilities ( 188) 1,451
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Net cash (used in) provided by operating
activities ( 406) 2,796
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Cash flows from investing activities:
Purchase of property and equipment ( 673) ( 778)
Proceeds from sale of restaurants, net 1,875 45
Payments received on notes receivable 629 378
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Net cash provided by (used in) investing
activities 1,831 (355)
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Cash flows from financing activities:
Principal repayment of borrowings and obligations
under capital leases (1,256) (138)
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Net cash used in financing activities (1,256) (138)
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Net increase in cash and cash equivalents 169 2,303
Cash and cash equivalents, beginning of period 4,325 2,397
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Cash and cash equivalents, end of period $4,494 $4,700
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 77 $1,041
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Cash paid during the period for interest $ 114 $ 149
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NONCASH FINANCING ACTIVITIES:
Loan to franchisee in connection with restaurant
sale $ - $ 130
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See accompanying notes to consolidated financial statements.
7
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 23, 2001
(unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Nathan's Famous, Inc.
and subsidiaries (collectively "Nathan's") for the thirteen and twenty-six week
periods ended September 23, 2001 and September 24, 2000 have been prepared in
accordance with generally accepted accounting principles. 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 generally accepted accounting principles 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 25, 2001.
NOTE B - MIAMI SUBS ACQUISITION RESERVE
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 15 of those properties. We are continuing
to market two of the remaining properties for sale and will terminate the lease
for the last unit upon the lease expiration in May 2002. Since acquiring Miami
Subs, we have accrued approximately $1,461,000 and made payments of
approximately $1,216,000 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.
NOTE C - EARNINGS PER SHARE
The following chart provides a reconciliation of information used in
calculating the per share amounts for the thirteen and twenty-six week periods
ended September 23, 2001 and September 24, 2000, respectively.
Thirteen weeks Net Income
-------------- Net Income Number of Shares Per Share
----------- ---------------- ---------
2001 2000 2001 2000 2001 2000
Basic EPS ---- ---- ---- ---- ---- ----
---------
Basic calculation $654 $933 7,065 7,065 $ .09 $ .13
Effect of dilutive employee stock
options and warrats - - 15 90 - -
---- ---- ----- ----- ----- -----
Diluted EPS
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Diluted calculation $654 $933 7,080 7,155 $ .09 $ .13
==== ==== ===== ===== ===== =====
8
Twenty-six weeks Net Income
-------------- Net Income Number of Shares Per Share
----------- ---------------- ---------
2001 2000 2001 2000 2001 2000
Basic EPS ---- ---- ---- ---- ---- ----
---------
Basic calculation $1,616 $1,678 7,065 7,053 $ .23 $ .24
Effect of dilutive employee stock
options and warrants - - 17 46 - -
------ ------ ----- ----- ----- -----
Diluted EPS
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Diluted calculation $1,616 $1,678 7,082 7,099 $ .23 $ .24
====== ====== ===== ===== ===== =====
Options and warrants to purchase 1,390,400 shares of Common Stock in each of the
twenty-six week and thirteen week periods ended September 23, 2001, and options
and warrants to purchase 1,071,100 and 1,033,600 shares of Common Stock in the
twenty-six weeks and thirteen weeks ended September 24, 2000, 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 D - CONTINGENCIES
Nathan's Famous, Inc. and Nathan's Famous Operating Corp. were named as two
of three defendants in an action commenced in July 2001, in the Supreme Court of
New York, Westchester County. According to the amended complaint, the
plaintiffs, a minor and her mother, are seeking damages in the amount of $17
million against Nathan's Famous and Nathan's Famous Operating Corp. and one of
Nathan's Famous' former employees claiming that the Nathan's entities failed to
properly supervise minor employees, failed to monitor its supervisory personnel,
and was negligent in hiring, retaining and promoting the individual defendant,
who allegedly molested, harassed and raped the minor plaintiff, who was also an
employee. The Nathan's entities intend to defend the action vigorously.
Teamspirit Enterprises, Inc. and Ross Kyriacethys ("Plaintiffs") commenced
an action, as amended, in the Circuit Court of the Seventeenth Judicial Circuit,
Broward County, Florida in March 2001 against the Estate of Konstantinos "Gus"
Boulis and Miami Subs USA, Inc ("Miami Subs") claiming fraud, conspiracy to
defraud, breach of contract and breach of the covenant of good faith and fair
dealing in connection with Plaintiff's purchase of a Miami Subs franchise from
Gus Boulis for $400,000. Plaintiffs claim that Miami Subs induced Plaintiffs to
purchase the franchise by making warranties and representations that: (a) Boulis
was a franchisee of Baskin-Robbins USA, Inc. ("Baskin-Robbins") and had the
authority to grant and transfer that franchise to Plaintiffs; and (b) that the
franchise location purchased by Plaintiffs was in full compliance with the
requirements of the Americans With Disabilities Act. Plaintiffs also claim that
Miami Subs failed to pay royalty revenues to Baskin-Robbins that were collected
from Plaintiffs and were allegedly supposed to be remitted to Baskin-Robbins.
Plaintiffs have not specified the amount of damages which they are seeking.
Miami Subs intends to vigorously defend against these claims.
The Company was named as one of three defendants in an action commenced in
June 1997, in the Supreme Court of New York, Queens County. According to the
complaint, the plaintiff, a dentist, sought injunctive relief and damages in an
amount exceeding $5 million against the landlord, one of the Company's
franchisees and the Company claiming that the operation of a restaurant in a
building in Long Island City created noxious and offensive fumes and odors that
allegedly were injurious to the health of the plaintiff and his employees and
patients, and interfered with, and irreparably damaged his practice. Plaintiff
also claimed that the landlord fraudulently induced him to enter a lease
extension by representing that the first floor of the building would be occupied
by a non-food establishment. As a result of a motion for summary judgement by
the Company and Nathan's Famous Systems, Inc. ("Systems") which as the actual
franchisor was added to the action as a defendant, the Company was dismissed
from the action. The action was settled in October 2001 by the payment of $7,000
to the plaintiff and in exchange, Systems has received a full release.
Elizabeth B. Jackson and Joseph Jackson commenced an action, in the Circuit
Court of the Fifteenth Judicial Circuit, Palm Beach County, Florida in September
2001 against Miami Subs and EKFD Corporation, a Miami Subs franchisee ("the
franchisee") claiming negligence in connection with a slip and fall which
allegedly occurred on the premises of the franchisee for unspecified damages.
9
Pursuant to the terms of the Miami Subs Franchise Agreement, the franchisee is
obligated to indemnify Miami Subs and hold them harmless against claims asserted
and procured an insurance policy which named Miami Subs as an additional
insured. Miami Subs has denied any liability to Plaintiffs and has made demand
upon the franchisee's insurer to indemnify and defend against the claims
asserted. The insurer is presently assessing Miami Subs' demand and has not yet
acknowledged its obligation to indemnify and provide a defense for Miami Subs.
NOTE - E - MIAMI SUBS TAX AUDIT
As of the date of acquisition, Miami Subs' tax returns reflected net
operating loss carry-forwards of approximately $5.9 million which are available
to reduce future taxable income through 2019 (subject to limitations imposed
under the Internal Revenue Code regarding changes in ownership which limits
utilization of $2.8 million of the carry-forwards on an annual basis to
approximately $340,000). Miami Subs also has general business credit
carry-forwards of approximately $274,000 which can be used to offset tax
liabilities through 2010. Miami Subs' federal income tax returns for fiscal
years 1991 through 1996, inclusive, have been examined by the Internal Revenue
Service. The reports of the examining agent issued in connection with these
examinations indicate that additional taxes and penalties totaling approximately
$2.4 million are due for such years. The Company appealed substantially all of
the proposed adjustments. In January 2001, the Miami Subs tax audit was
tentatively settled with the IRS Appeals Office. If approved on review, the
settlement will result in (a) an aggregate tax liability for the taxable years
1991 through 1996 of $101,520 and (b) the Company retaining net operating loss
carry-forwards of approximately $3,200,000 (subject to limitations imposed under
the Internal Revenue Code). In addition to the tax, interest will be due; the
total amount of tax and interest will be less than $300,000. Nathan's has
accrued $345,000 for this matter in the accompanying consolidated balance sheet.
Due to the uncertain outcome of the IRS examination and Section 382 limitation,
Nathan's has recorded a valuation allowance for the deferred tax asset related
to Miami Subs carry-forwards. Pursuant to SFAS No. 109 "Accounting for Income
Taxes", any future reduction in the acquired Miami Subs valuation allowance will
reduce goodwill.
NOTE F - SALES OF RESTAURANTS
On May 1, 2001, pursuant to an order of condemnation, we sold a
company-owned restaurant to the State of Florida for $1,475,000, net, and repaid
the outstanding mortgage of approximately $793,000 plus accrued interest. We
have appealed the value of this property and expect to have our claim mediated
in November 2001. From May 1, 2001 through October 21, 2001, this restaurant was
operated pursuant to a short term lease with the State of Florida. Additionally,
on June 22, 2001, we sold our restaurant in the Paramus Park Mall to a
franchisee for $400,000 in cash and concurrently entered into a sub-lease for
the property.
NOTE G - RECLASSIFICATIONS
Certain reclassifications of prior period balances have been made to
conform to the September 23, 2001 presentation.
NOTE H - RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141") and
No. 142 Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, Nathan's is required to adopt FAS 142 effective in our next fiscal
year, commencing April 1, 2002. We are currently evaluating the effect that
adoption of the provisions of FAS 142 will have on our results of operations and
financial position.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations". This statement addresses financial and reporting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
10
certain obligations of lessees. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. We are
currently evaluating the effect of adoption on our financial position and
results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"). This statement supersedes FAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and Accounting Principles Board Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". This Statement retains the fundamental provisions of FAS 121 for
recognition and measurement of impairment, but amends the accounting and
reporting standards for segments of a business to be disposed of. The provisions
of this statement are required to be adopted no later than fiscal years
beginning after December 31, 2001, with early adoption encouraged. The Company
is currently evaluating the impact of the adoption of FAS 144 of which the
Company expects will be not material.
In September 2001, the Emerging Issues Task Force ("EITF") issued EITF
Issue No. 01-10, "Accounting for the Impact of the Terrorist Attacks of
September 11, 2001", which provides guidance on how the costs related to the
terrorist attacks should be classified, how to determine whether an asset
impairment should be recognized and how liabilities for losses and other costs
should be recognized. The impact of adopting EITF Issue No. 01-10 and the events
of September 11, 2001 did not have a material effect on the Company's
consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
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Introduction
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, Kenny Rogers
and Miami Subs 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, Nathan's has continued to capitalize on
the co-branding opportunities within its existing restaurant system. To date,
the Arthur Treacher's brand has been introduced within 133 Nathan's, Kenny
Rogers Roasters and Miami Subs restaurants , the Nathan's brand has been added
to the menu of 84 Miami Subs and Kenny Rogers restaurants, while the Kenny
Rogers Roasters brand has been introduced into 77 Miami Subs and Nathan's
restaurants. We have begun testing the Miami Subs brand in two company-owned
Nathan's restaurants.
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 15 of those properties. We continue to market
two of those properties for sale and will terminate the lease for the last unit
upon the lease expiration in May 2002. We also terminated 10 additional leases
for properties outside of the divestiture plan. .
At September 23, 2001, our combined systems consisted of 24 company-owned
units, 379 franchised or licensed units and over 1,400 Nathan's Branded Product
points of sale that feature Nathan's world famous all-beef hot dogs, located in
41 states, the District of Columbia and 17 foreign countries. At September 23,
2001, our company-owned restaurant system included 16 Nathan's units, six Miami
Subs units and two Kenny Rogers Roasters units, as compared to 18 Nathan's
units, 8 Miami Subs units and two Kenny Rogers Roasters units at September 24,
2000. On October 21, 2001, the company-owned unit that operated under a
short-term lease with the State of Florida since May 1, 2001, was permanently
closed.
11
Results of Operations
Thirteen weeks ended September 23, 2001 compared to September 24, 2000
Revenues
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Total sales decreased by 4.3% or $408,000 to $9,085,000 for the thirteen
weeks ended September 23, 2001 ("second quarter fiscal 2002") as compared to
$9,493,000 for the thirteen weeks ended September 24, 2000 ("second quarter
fiscal 2001"). Sales from the Branded Product Program increased by 17.1% to
$1,253,000 for the second quarter fiscal 2002 as compared to sales of $1,070,000
in the second quarter fiscal 2001. Company-owned restaurant sales decreased 7.0%
or $591,000 to $7,832,000 from $8,423,000 primarily due to operating fewer
company-owned stores as compared to the second quarter fiscal 2001 and lower
sales at two new restaurants that began operating during the prior fiscal year.
The financial impact associated with the closed restaurants lowered restaurant
sales by $769,000 and improved restaurant operating profits by $77,000 versus
the fiscal 2001 period. Comparable restaurant sales (consisting of 15 Nathan's
and six Miami Subs restaurants) increased by 5.2% versus the second quarter
fiscal 2001 primarily due to increased sales at the Coney Island restaurant
during the summer season.
Franchise fees and royalties decreased by 3.2% or $67,000 to $2,052,000 in
the second quarter fiscal 2002 compared to $2,119,000 in the second quarter
fiscal 2001. Franchise royalties decreased by $131,000 or 6.6% to $1,867,000 in
the second quarter fiscal 2002 as compared to $1,998,000 in the second quarter
fiscal 2001. Domestic franchise restaurant sales decreased by 17.4% to
$45,723,000 in the second quarter fiscal 2002 as compared to $55,367,000 in the
second quarter fiscal 2001. The majority of this decline is due to fewer
franchised restaurants operating during the second quarter fiscal 2002 as
compared to the second quarter fiscal 2001. At September 23, 2001, 379
franchised or licensed restaurants were operating as compared to 396 franchised
or licensed restaurants at September 24, 2000. Franchise fee income derived from
new openings and co-branding was $185,0000 in the second quarter fiscal 2002 as
compared to $121,000 in the second quarter fiscal 2001. This increase was
primarily attributable to the difference between the number of franchised units
open between the two periods and the initial co-branding fees earned from
existing restaurants within our system. During the second quarter fiscal 2002, 6
new franchised or licensed units opened and 8 units have been co-branded.
License royalties were $605,000 in the second quarter fiscal 2002 as
compared to $658,000 in the second quarter fiscal 2001. This decline is
attributable to reduced royalties from secondary license agreements for Nathan's
products which were partially offset by higher royalties earned from increased
sales by SMG, Inc., Nathans' licensee for the sale of Nathan's frankfurters
within supermarkets and club stores.
Investment and other income was $43,000 in the second quarter fiscal 2002
versus $396,000 in the second quarter fiscal 2001. During the second quarter
fiscal 2002, Nathans' investment income was approximately $172,000 lower than in
the second quarter fiscal 2001 due primarily to differences in performance of
the financial markets between the two periods which was partly offset by higher
interest income. In the second quarter fiscal 2001, Nathan's recognized income
of approximately $146,000 in connection with the introduction of a consolidated
food distribution agreement.
Costs and Expenses
------------------
Cost of sales decreased by $150,000 from $6,035,000 in the second quarter
fiscal 2001 to $5,885,000 in the second quarter fiscal 2002. During the second
quarter fiscal 2002, restaurant cost of sales were lower than the second quarter
fiscal 2001 by approximately $421,000. Restaurant cost of sales were reduced by
approximately $525,000 as a result of operating fewer company- owned
restaurants. Additionally, lower restaurant cost of sales at the two Kenny
Rogers Roasters restaurants opened last year more than offset higher costs at
our comparable restaurants which was due in part to the sales increase. The cost
of restaurant sales at our comparable units as a percentage of restaurant sales
was 60.3% in the second quarter fiscal 2002 as compared to 60.0% in the second
quarter fiscal 2001. Higher costs of approximately $271,000 were incurred in
connection with the Branded Product Program. During most of the second quarter
fiscal 2002, commodity prices of our primary meat products were at their highest
levels in recent years causing the majority of the increase. We have raised our
retail prices in select situations in an attempt to partially offset these
increases. In recent weeks we have seen these costs lowered to their historical
levels. Should costs escalate again for an extended period, we may determine to
further examine our pricing structure to attempt to reduce the impact on our
margins.
Restaurant operating expenses decreased by $198,000 from $2,216,000 in the
second quarter fiscal 2001 to $2,018,000 in the second quarter fiscal 2002.
Restaurant operating costs were reduced by approximately $320,000 as a result of
operating fewer restaurants. Restaurant operating expenses of the two
12
restaurants opened last year, which included higher costs attributable to their
openings, were $21,000 lower during the second quarter of fiscal 2002. These
reductions in restaurant operating expenses were partially offset by an increase
of approximately $122,000 at the comparable restaurants primarily due to higher
energy and insurance costs.
Depreciation and amortization decreased by $40,000 from $434,000 in the
second quarter fiscal 2001 to $394,000 in the second quarter fiscal 2002. Lower
depreciation expense of operating fewer company-owned restaurants versus the
second quarter fiscal 2001 was partially offset by additional depreciation
expense attributable to last year's capital spending.
Amortization of intangibles decreased by $18,000 from $238,000 in the
second quarter fiscal 2001 to $220,000 in the second quarter fiscal 2002.
Amortization of intangibles decreased as a result of the final purchase price
allocation of the Miami Subs acquisition.
General and administrative expenses decreased by $87,000 to $2,051,000 in
the second quarter fiscal 2002 as compared to $2,138,000 in the second quarter
fiscal 2001. The decrease in general and administrative expenses was due
primarily to lower personnel and incentive compensation expense of approximately
$78,000.
Interest expense was $48,000 during the second quarter fiscal 2002 as
compared to $74,000 during the second quarter fiscal 2001. The reduction in
interest expense relates primarily to the repayment of outstanding debt between
the two periods.
Income Tax Expense
------------------
In the second quarter fiscal 2002, the income tax provision was $515,000 or
44.1% of income before income taxes as compared to $598,000 or 39.1% of income
before income taxes in the second quarter fiscal 2001. In January 2001, we
reached a tentative agreement to settle the Miami Subs' Internal Revenue Service
audit. Based upon this agreement, we determined that certain amortization
expense, originally expected to be tax deductible, would be disallowed.
Accordingly, our fiscal 2002 income tax expense rate is higher than that of the
second quarter fiscal 2001 to reflect the non-deductibility of such amortization
expense. The impact of this non-deductible amortization on the prior fiscal year
was recorded during the third quarter fiscal 2001.
Twenty-six weeks ended September 23, 2001 compared to September 24, 2000
Revenues
--------
Total sales decreased by 7.6% or $1,452,000 to $17,673,000 for the
twenty-six weeks ended September 23, 2001 ("fiscal 2002 period") as compared to
$19,125,000 for the twenty-six weeks ended September 24, 2000 ("fiscal 2001
period"). Sales from the Branded Product Program increased by 25.5% or $506,000
to $2,491,000 for the fiscal 2002 period as compared to sales of $1,985,000 in
the fiscal 2001 period. Company-owned restaurant sales decreased 11.4% or
$1,958,000 to $15,182,000 from $17,140,000 primarily due to operating eight
fewer company-owned stores as compared to the prior fiscal period and lower
sales at the two new restaurants that began operating during the fiscal 2001
period. These reductions were partially offset by sales from a restaurant that
was closed for renovation during the fiscal 2001 period and increased sales at
the Coney Island restaurant during the summer season. The unit reduction is the
result of our franchising two company-owned restaurants, transferring one
company-owned restaurant to a franchisee pursuant to a management agreement,
closing four unprofitable company-owned units (including three Miami Subs
restaurants pursuant to our divesture plan) and closing one unit due to its
lease expiration. The financial impact associated with these eight restaurants
lowered restaurant sales by $1,821,000 and improved restaurant operating profits
by $180,000 versus the fiscal 2001 period. Comparable restaurant sales
(consisting of 15 Nathan's and six Miami Subs restaurants) increased by 1.4%
versus the fiscal 2001 period.
Franchise fees and royalties decreased by 3.8% or $167,000 to $4,241,000 in
the fiscal 2002 period compared to $4,408,000 in the fiscal 2001 period.
Franchise royalties decreased by $384,000 or 9.4% to $3,714,000 in the fiscal
2002 period as compared to $4,098,000 in the fiscal 2001 period. Domestic
franchise restaurant sales decreased by 10.8% to $96,665,000 in the fiscal 2002
period as compared to $108,408,000 in the fiscal 2001 period. The majority of
this decline is due to fewer franchised restaurants operating during the fiscal
13
2002 period as compared to the fiscal 2001 period. At September 23, 2001, 379
franchised or licensed restaurants were operating as compared to 396 franchised
or licensed restaurants at September 24, 2000. Franchise fee income derived from
new openings and co-branding was $527,000 in the fiscal 2002 period as compared
to $310,000 in the fiscal 2001 period. This increase was primarily attributable
to the fees earned from the co-branding initiative within the existing
restaurant system. During the fiscal 2002 period, 13 new franchised or licensed
units opened and 37 units have been co-branded.
License royalties were $1,312,000 in the fiscal 2002 period as compared to
$1,299,000 in the fiscal 2001 period. This increase is attributable to increased
sales by SMG, Inc., Nathans' licensee for the sale of Nathan's frankfurters
within supermarkets and club stores which was partially offset by reduced
royalties from other license agreements for Nathan's products.
Investment and other income was $435,000 in the fiscal 2002 period versus
$733,000 in the fiscal 2001 period. During the fiscal 2002 period, Nathan's
recognized a net gain of $93,000 in connection with the sale of a company-owned
restaurant to a franchisee. During the fiscal 2002 period, Nathans' investment
income was approximately $28,000 lower than in the fiscal 2001 period due
primarily to differences in performance of the financial markets between the two
periods. In the fiscal 2001 period, Nathan's recognized income of approximately
$367,000 in connection with the introduction of a consolidated food distribution
agreement.
Costs and Expenses
------------------
Cost of sales decreased by $759,000 from $12,244,000 in the fiscal 2001
period to $11,485,000 in the fiscal 2002 period. During the fiscal 2002 period,
restaurant cost of sales were lower than the fiscal 2001 period by approximately
$1,370,000. Restaurant cost of sales were reduced by approximately $1,226,000 as
a result of operating fewer company-owned restaurants. Additionally, lower cost
of sales at the two Kenny Rogers Roasters restaurants opened last year more than
offset higher costs at our comparable restaurants. Notwithstanding the lower
costs and expenses of the two Kenny Rogers Roasters restaurants, these
restaurants continue to underperform. We are seeking to increase sales at the
two Kenny Rogers Roasters and other restaurants while attempting to further
reduce our costs of sales and may examine our other alternatives with respect to
the two Kenny Rogers Roasters restaurants. The cost of restaurant sales at our
comparable units as a percentage of restaurant sales was 60.6% in the fiscal
2002 period as compared to 60.1% in the fiscal 2001 period due primarily to
higher food and labor costs. Higher costs of approximately $611,000 were
incurred in connection with the growth of our Branded Product Program and higher
product costs incurred for the majority of the fiscal 2002 period. During most
of the fiscal 2002 period, commodity prices of our primary meat products were at
their highest levels in recent years causing the majority of the increase. We
have raised our retail prices in select situations in an attempt to partially
offset these increases. In recent weeks we have seen these costs lowered to
their historical levels. Should costs escalate again for an extended period, we
may determine to further examine our pricing structure to attempt to reduce the
impact on our margins.
Restaurant operating expenses decreased by $702,000 from $4,673,000 in the
fiscal 2001 period to $3,971,000 in the fiscal 2002 period. Restaurant operating
costs were lower in the fiscal 2002 period by approximately $775,000, as
compared to the fiscal 2001 period as a result of operating fewer restaurants.
Restaurant operating expenses of the two restaurants opened last year, which
included higher costs attributable to their openings, were $92,000 lower during
the fiscal 2002 period. These reductions in restaurant operating expenses were
partially offset by an increase of approximately $138,000 at the comparable
restaurants which were primarily driven by higher energy and insurance costs.
Depreciation and amortization decreased by $52,000 from $866,000 in the
fiscal 2001 period to $814,000 in the fiscal 2002 period. Lower depreciation
expense of operating fewer company-owned restaurants versus the fiscal 2001
period was partially offset by additional depreciation expense attributable to
last year's capital spending.
Amortization of intangibles decreased by $33,000 from $475,000 in the
fiscal 2001 period to $442,000 in the fiscal 2002 period. Amortization of
intangibles decreased as a result of the final purchase price allocation of the
Miami Subs acquisition.
General and administrative expenses decreased by $209,000 to $4,170,000 in
the fiscal 2002 period as compared to $4,379,000 in the fiscal 2001 period. The
decrease in general and administrative expenses was due primarily to lower
personnel and incentive compensation expense of approximately $224,000.
Interest expense was $107,000 during the fiscal 2002 period as compared to
$146,000 during the fiscal 2001 period. The reduction in interest expense
relates primarily to the repayment of outstanding debt between the two periods.
14
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.
Income Tax Expense
------------------
In the fiscal 2002 period, the income tax provision was $1,266,000 or 43.9%
of income before income taxes as compared to $1,104,000 or 39.7% of income
before income taxes in the fiscal 2001 period. In January 2001, we reached a
tentative agreement to settle the Miami Subs' Internal Revenue Service audit.
Based upon this agreement, we determined that certain amortization expense,
originally expected to be tax deductible, would be disallowed. Accordingly, our
fiscal 2002 income tax expense rate is higher than that of the fiscal 2001
period to reflect the non-deductibility of such amortization expense. The impact
of this non-deductible amortization on the prior fiscal year was recorded during
the third quarter fiscal 2001.
Liquidity and Capital Resources
Cash and cash equivalents at September 23, 2001 aggregated $4,494,000,
increasing by $169,000 during the fiscal 2002 period. At September 23, 2001,
marketable securities and investment in limited partnership increased by
$1,694,000 from March 25, 2001 to $6,342,000 and net working capital increased
to $7,439,000 from $5,210,000 at March 25, 2001. Cash and cash equivalents at
September 23, 2001 included $301,000 held on behalf of the Miami Subs
Advertising Funds. A corresponding accrual has been recorded within accrued
expenses and other current liabilities.
Cash used in operations of $406,000 in the fiscal 2002 period is primarily
attributable to net income of $1,616,000, non-cash charges of $1,339,000,
including depreciation and amortization of $1,256,000 and provision for doubtful
accounts of $83,000 in addition to a decrease in prepaid and other current
assets of $658,000, which were more than offset by decreases in accounts payable
and accrued expenses of $1,851,000, an increase in marketable securities and
investment in limited partnership of $1,694,000,an increase in inventories of
$153,000, an increase in notes and accounts receivable of $47,000 and a decrease
in other non current liabilities of $188,000.
Cash provided by investing activities of $1,831,000 is comprised primarily
of proceeds from the sale of two company-owned restaurants totaling $1,875,000.
On May 1, 2001, pursuant to an order of condemnation, we sold a company-owned
restaurant to the State of Florida for $1,475,000, net, and repaid the
outstanding mortgage of approximately $793,000 plus accrued interest. We have
appealed the value of the property that was condemned by the State of Florida
and expect to have our claim mediated in November 2001. On June 22, 2001, we
also sold our restaurant in the Paramus Park Mall to a franchisee for $400,000
in cash and concurrently entered into a sub-lease for the property.
Additionally, $673,000 was expended relating to capital improvements of the
company- owned restaurants and other fixed asset additions and was partially
offset by repayments on notes receivable of $629,000.
Cash used in financing activities of $1,256,000 represents repayments of
notes payable and obligations under capital leases. The majority of the
repayments arose from the repayment of an outstanding mortgage of approximately
$793,000 plus accrued interest in connection with the condemnation of a
company-owned restaurant by the State of Florida.
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 15 of those properties. We are continuing
to market two of the remaining properties for sale and will terminate the lease
for the last unit upon the lease expiration in May 2002. As of September 23,
2001, we have accrued approximately $1,461,000 and made payments of
approximately $1,216,000 for lease obligations and termination costs, as part of
the acquisition, for units with 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.
On September 14, 2001, Nathan's was authorized to purchase up to 1 million
shares of its common stock. Purchases will be made from time to time, depending
on market conditions, in open market or privately negotiated transactions, at
prices deemed appropriate by management. There is no set time limit on the
repurchases. We expect to fund these stock repurchases from our operating cash
flow.
15
We expect that we will make additional investments in certain existing
restaurants in the future and that we will fund those investments from our
operating cash flow. We do not expect to incur significant capital expenditures
to develop new company-owned restaurants in our current fiscal year.
Management believes that available cash, marketable investment securities,
and internally generated funds should provide sufficient capital to finance our
operations for at least the next twelve months. We maintain a $7,500,000
uncommitted bank line of credit and have not borrowed any funds to date under
this line of credit.
Forward Looking Statement
Certain statements contained in this report are forward-looking statements.
Forward-looking statements represent our current judgment regarding future
events. Although we would not make forward-looking statements unless we believe
we have a reasonable basis for doing so, we cannot guarantee their accuracy and
actual results may differ materially from those we anticipated due to a number
of uncertainties, many of which we are not aware. These risks and uncertainties,
many of which are not within our control, include, but are not limited to:
economic, weather, legislative and business conditions; the availability of
suitable restaurant sites on reasonable rental terms; changes in consumer
tastes; the ability to continue to attract franchisees; the ability to purchase
our primary food and paper products at reasonable prices; no material increases
in the minimum wage; and our ability to attract competent restaurant and
managerial personnel. We generally identify forward-looking statements with the
words "believe", "intend," "plan," "expect," "anticipate," "estimate," "will,"
"should" and similar expressions.
16
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Nathan's Famous, Inc. and Nathan's Famous Operating Corp. were named as two
of three defendants in an action commenced in July 2001, in the Supreme Court of
New York, Westchester County. According to the amended complaint, the
plaintiffs, a minor and her mother, are seeking damages in the amount of $17
million against Nathan's Famous and Nathan's Famous Operating Corp. and one of
Nathan's Famous' former employees claiming that the Nathan's entities failed to
properly supervise minor employees, failed to monitor its supervisory personnel,
and was negligent in hiring, retaining and promoting the individual defendant,
who allegedly molested, harassed and raped the minor plaintiff, who was also an
employee. The Nathan's entities intend to defend the action vigorously.
Teamspirit Enterprises, Inc. and Ross Kyriacethys ("Plaintiffs") commenced
an action, as amended, in the Circuit Court of the Seventeenth Judicial Circuit,
Broward County, Florida in March 2001 against the Estate of Konstantinos "Gus"
Boulis and Miami Subs USA, Inc ("Miami Subs") claiming fraud, conspiracy to
defraud, breach of contract and breach of the covenant of good faith and fair
dealing in connection with Plaintiff's purchase of a Miami Subs franchise from
Gus Boulis for $400,000. Plaintiffs claim that Miami Subs induced Plaintiffs to
purchase the franchise by making warranties and representations that: (a) Boulis
was a franchisee of Baskin-Robbins USA, Inc. ("Baskin-Robbins") and had the
authority to grant and transfer that franchise to Plaintiffs; and (b) that the
franchise location purchased by Plaintiffs was in full compliance with the
requirements of the Americans With Disabilities Act. Plaintiffs also claim that
Miami Subs failed to pay royalty revenues to Baskin-Robbins that were collected
from Plaintiffs and were allegedly supposed to be remitted to Baskin-Robbins.
Plaintiffs have not specified the amount of damages which they are seeking.
Miami Subs intends to vigorously defend against these claims.
The Company was named as one of three defendants in an action commenced in
June 1997, in the Supreme Court of New York, Queens County. According to the
complaint, the plaintiff, a dentist, sought injunctive relief and damages in an
amount exceeding $5 million against the landlord, one of the Company's
franchisees and the Company claiming that the operation of a restaurant in a
building in Long Island City created noxious and offensive fumes and odors that
allegedly were injurious to the health of the plaintiff and his employees and
patients, and interfered with, and irreparably damaged his practice. Plaintiff
also claimed that the landlord fraudulently induced him to enter a lease
extension by representing that the first floor of the building would be occupied
by a non-food establishment. As a result of a motion for summary judgement by
the Company and Nathan's Famous Systems, Inc. ("Systems") which as the actual
franchisor was added to the action as a defendant, the Company was dismissed
from the action. The action was settled in October 2001 by the payment of $7,000
to the plaintiff and in exchange, Systems has received a full release.
Elizabeth B. Jackson and Joseph Jackson commenced an action, in the Circuit
Court of the Fifteenth Judicial Circuit, Palm Beach County, Florida in September
2001 against Miami Subs and EKFD Corporation, a Miami Subs franchisee ("the
franchisee") claiming negligence in connection with a slip and fall which
allegedly occurred on the premises of the franchisee for unspecified damages.
Pursuant to the terms of the Miami Subs Franchise Agreement, the franchisee is
obligated to indemnify Miami Subs and hold them harmless against claims asserted
and procured an insurance policy which named Miami Subs as an additional
insured. Miami Subs has denied any liability to Plaintiffs and has made demand
upon the franchisee's insurer to indemnify and defend against the claims
asserted. The insurer is presently assessing Miami Subs' demand and has not yet
acknowledged its obligation to indemnify and provide a defense for Miami Subs.
Item 4: Submission of Matter to a Vote of Security Holders
(a) The Registrant held its Annual Meeting of Stockholders on September
14, 2001.
(b) Seven Directors were elected at the Annual Meeting to serve until the
Annual Meeting of Stockholders in 2002. The names of these Directors
and votes cast in favor of their election and shares withheld are as
follows:
17
NAME FOR WITHHELD
---- --- --------
Howard M. Lorber 4,710,853 1,419,758
Wayne Norbitz 4,710,866 1,419,745
Donald Perlyn 4,710,853 1,419,758
Robert J. Eide 4,711,195 1,419,416
Brian Genson 4,711,228 1,419,383
Barry Leistner 4,710,878 1,419,733
A.F. Petrocelli 4,710,853 1,419,758
(c) The Company's shareholders approved the 2001 Stock Option Plan
authorizing the issuance of options to purchase up to 350,000 shares
of common stock. The votes cast in favor of adopting the plan and
shares withheld or abstained are as follows:
FOR WITHHELD ABSTAINED
--- -------- ---------
Adopt 2001 Stock Option Plan 4,427,652 1,683,131 19,825
(d) Not applicable.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Master Distribution Agreement with Marriott Distribution Services,
Inc.
(b) No reports on Form 8-K were filed during the quarter ended September
23, 2001.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
-------- ----------------------------------------------------------
Nathan's has historically invested its 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 Nathan's existing
investments in cash equivalents are not considered at risk with respect to
changes in interest rates or markets for these instruments, Nathan's rate of
return on short-term investments could be affected at the time of reinvestment
as a result of intervening events.
Nathan's has invested its marketable investment securities in intermediate
term, fixed rate, highly rated and highly liquid instruments and a highly liquid
investment limited partnership that invests principally in equities. These
investments are subject to fluctuations in interest rates and the performance of
the equity markets.
The interest rates on Nathan's 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. Nathan's does not
anticipate entering into interest rate swaps or other financial instruments to
hedge its borrowings.
The cost of commodities are subject to market fluctuation. Nathan's has not
attempted to hedge against fluctuations in the prices of the commodities it
purchases using future, forward, option or other instruments. As a result,
Nathan's future commodities purchases are subject to changes in the prices of
such commodities.
Foreign franchisees generally conduct business with Nathan's and make
payments to Nathan's in United States dollars, reducing the risks inherent with
changes in the values of foreign currencies. As a result, Nathan's has not
purchased futures contracts, options or other instruments to hedge against
changes in values of foreign currencies.
18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATHAN'S FAMOUS, INC.
Date: November 6, 2001 By: /s/Wayne Norbitz
---------------------------------------
Wayne Norbitz
President and Chief Operating Officer
(Principal Executive Officer)
Date: November 6, 2001 By: /s/Ronald G. DeVos
---------------------------------------
Ronald G. DeVos
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer)