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 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 December 23, 2001, an aggregate of 7,029,686 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 - December 23, 2001 and
March 25, 2001 3
Consolidated Statements of Earnings - Thirteen Weeks
Ended December 23, 2001 and December 24, 2000 4
Consolidated Statements of Earnings - Thirty-nine Weeks
Ended December 23, 2001 and December 24, 2000 5
Consolidated Statements of Stockholders' Equity -
Thirty-nine Weeks Ended December 23, 2001 6
Consolidated Statements of Cash Flows -Thirty-nine Weeks
Ended December 23, 2001 and December 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 6. Exhibits and Reports on Form 8-K 17
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)
Dec. 23, March 25,
2001 2001
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(Unaudited)
Current assets:
Cash and cash equivalents including unexpended
marketing fund contributions of $475 and $2,104 and
restricted cash of $83 and $83, respectively $ 1,475 $ 4,325
Marketable securities and investment in limited partnership 8,232 4,648
Notes and accounts receivable, net 4,049 4,178
Inventories 636 523
Assets held for sale - 1,510
Prepaid expenses and other current assets 496 974
Deferred income taxes 1,748 1,714
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Total current assets 16,636 17,872
Notes receivable, net 2,009 1,729
Property and equipment, net 10,620 11,279
Assets held for sale 450 450
Intangible assets, net 17,345 18,011
Deferred income taxes 2,081 2,081
Other assets, net 340 404
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$ 49,481 $ 51,826
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Current liabilities:
Current maturities of notes payable and capital lease obligations $ 183 $ 1,343
Accounts payable 1,236 1,978
Accrued expenses and other current liabilities 7,096 8,731
Deferred franchise fees 471 610
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Total current liabilities 8,986 12,662
Notes payable and capital lease obligations, less current maturities 1,647 1,789
Other liabilities 2,051 2,344
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Total liabilities 12,684 16,795
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Stockholders' equity:
Common stock, $.01 par value - 30,000,000 shares authorized,
7,065,202 issued , respectively 71 71
Additional paid-in capital 40,746 40,746
Accumulated deficit (3,907) (5,786)
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36,910 35,031
Treasury stock at cost: 35,516 shares at Dec 23, 2001 (113) -
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Total stockholders' equity 36,797 35,031
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$ 49,481 $ 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 December 23, 2001 and December 24, 2000 (In thousands,
except per share amounts)
(Unaudited)
2001 2000
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Sales $ 7,268 $ 8,134
Franchise fees and royalties 1,733 2,251
License royalties 312 331
Investment and other income 1,067 702
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Total revenues 10,380 11,418
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Costs and expenses:
Cost of sales 4,951 5,280
Restaurant operating expenses 1,923 2,197
Depreciation and amortization 463 480
Amortization of intangible assets 221 232
General and administrative expenses 2,322 2,302
Interest expense 40 84
Other expense - 396
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Total costs and expenses 9,920 10,971
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Income before income taxes 460 447
Provision for income taxes 197 302
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Net income $ 263 $ 145
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PER SHARE INFORMATION
Net income per share
Basic $ 0.04 $ 0.02
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Diluted $ 0.04 $ 0.02
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Shares used in computing net income
Basic 7,038 7,065
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Diluted 7,062 7,065
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See accompanying notes to consolidated financial statements.
4
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Thirty-nine weeks ended December 23, 2001 and December 24, 2000
(In thousands, except per share amounts)
(Unaudited)
2001 2000
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Sales $ 24,941 $ 27,259
Franchise fees and royalties 5,974 6,659
License royalties 1,624 1,630
Investment and other income 1,502 1,435
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Total revenues 34,041 36,983
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Costs and expenses:
Cost of sales 16,436 17,524
Restaurant operating expenses 5,894 6,870
Depreciation and amortization 1,277 1,346
Amortization of intangible assets 663 707
General and administrative expenses 6,492 6,681
Interest expense` 147 230
Other (income) expense (210) 396
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Total costs and expenses 30,699 33,754
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Income before income taxes 3,342 3,229
Provision for income taxes 1,463 1,406
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Net income $ 1,879 $ 1,823
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PER SHARE INFORMATION
Net income per share
Basic $ 0.27 $ 0.26
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Diluted $ 0.27 $ 0.26
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Shares used in computing net income
Basic 7,056 7,057
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Diluted 7,075 7,087
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See accompanying notes to consolidated financial statements.
5
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Thirty-nine weeks ended December 23, 2001
(In thousands, except share amounts)
(Unaudited)
Total
Additional Accum- Stock-
Common Common Paid in- Treasury ulated holders'
Shares Stock Capital Stock Deficit Equity
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Balance, at
March 25, 2001 7,065,202 $ 71 $ 40,746 $ -- $( 5,786) $35,031
Purchase of
treasury stock (35,516) (113) (113)
Net earnings 1,879 1,879
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Balance at
Dec 23, 2001 7,029,686 $ 71 $ 40,746 $(113) $( 3,907) $36,797
========= ==== ======== ===== ======== =======
See accompanying notes to consolidated financial statements.
6
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nine weeks ended December 23, 2001 and December 24, 2000
(In thousands)
(Unaudited)
2001 2000
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Cash flows from operating activities:
Net income $ 1,879 $ 1,823
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,277 1,346
Amortization of intangible assets 663 707
Provision for doubtful accounts 123 88
Stock compensation expense - 78
Gain on sale of restaurants (916) -
Deferred income taxes (34) -
Changes in operating assets and liabilities:
Marketable securities and investment in limited partnership ( 3,584) (2,327)
Notes and accounts receivable, net ( 1,009) (1,155)
Inventories ( 113) (100)
Prepaid expenses and other current assets 478 (202)
Accounts payable and accrued expenses ( 2,377) 1,691
Deferred franchise and area development fees ( 139) ( 169)
Other assets, net 64 125
Other non current liabilities ( 293) 1,439
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Net cash (used in) provided by operating activities ( 3,981) 3,344
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Cash flows from investing activities:
Purchase of property and equipment ( 914) (1,354)
Proceeds from sale of restaurants, net 2,725 45
Payments received on notes receivable 735 446
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Net cash provided by (used in) investing activities 2,546 (863)
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Cash flows from financing activities:
Principal repayment of borrowings and obligations under capital leases (1,302) (213)
Purchase of treasury stock (113) -
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Net cash (used in) financing activities (1,415) (213)
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Net increase in cash and cash equivalents (2,850) 2,268
Cash and cash equivalents, beginning of period 4,325 2,397
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Cash and cash equivalents, end of period $ 1,475 $ 4,665
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 79 $ 1,313
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Cash paid during the period for interest $ 154 $ 234
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NONCASH FINANCING ACTIVITIES:
Loan to franchisee in connection with restaurant sale $ - $ 130
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Common stock, warrants and options issued in connection with
the acquisition of Miami Subs Corporation $ - $ 1
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See accompanying notes to consolidated financial statements.
7
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 23, 2001
(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 23, 2001 and December 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 those expected for 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 $1,245,000 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 thirty-nine week periods
ended December 23, 2001 and December 24, 2000, respectively.
Thirteen weeks Net Income
(In thousands, except per share amounts) Net Income Number of Shares Per Share
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2001 2000 2001 2000 2001 2000
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Basic EPS
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Basic calculation $ 263 $ 145 7,038 7,065 $ .04 $ .02
Effect of dilutive employee stock
options and warrants - - 24 - - -
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Diluted EPS
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Diluted calculation $ 263 $ 145 7,062 7,065 $ .04 $ .02
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8
Thirty-nine weeks Net Income
(In thousands, except per share amounts) Net Income Number of Shares Per Share
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2001 2000 2001 2000 2001 2000
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Basic EPS
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Basic calculation $1,879 $1,823 7,056 7,057 $ .27 $ .26
Effect of dilutive employee stock
options and warrants - - 19 30 - -
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Diluted EPS
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Diluted calculation $1,879 $1,823 7,075 7,087 $ .27 $ .26
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Options and warrants to purchase 1,347,901 shares of Common Stock in each of the
thirty-nine week and thirteen week periods ended December 23, 2001, and options
and warrants to purchase 1,509,939 and 2,002,497 shares of Common Stock in the
thirty-nine weeks and thirteen weeks ended December 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 - STOCK REPURCHASE PROGRAM
On September 14, 2001, Nathan's was authorized to purchase up to 1 million
shares of its common stock. Purchases of stock will be made from time to time,
depending on market conditions, in open market or in privately negotiated
transactions, at prices deemed appropriate by management. There is no set time
limit on the purchases. Nathan's expects to fund these stock repurchases from
its operating cash flow. Through December 23, 2001, 35,516 shares have been
repurchased at a cost of approximately $113,000.
NOTE E - CONTINGENCIES
Nathan's Famous, Inc. and Nathan's Famous Operating Corp. were named as two
of three defendants in an action commenced in July 2001, in the Supreme Court of
New York, Westchester County. According to the amended complaint, the
plaintiffs, a minor and her mother, are seeking damages in the amount of $17
million against Nathan's Famous and Nathan's Famous Operating Corp. and one of
Nathan's Famous' former employees claiming that the Nathan's entities failed to
properly supervise minor employees, failed to monitor its supervisory personnel,
and were negligent in hiring, retaining and promoting the individual defendant,
who allegedly molested, harassed and raped the minor plaintiff, who was also an
employee. 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 claimed 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 claimed
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. This action has been settled without the payment of any money by
Miami Subs.
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 has agreed to indemnify and defend Miami Subs and has
assumed the defense of this action for Miami Subs.
9
NOTE - F - 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 Section 382 of 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 indicated 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 2002, the Miami Subs
tax audit was settled with the IRS Appeals Office. The settlement resulted in
(a) an aggregate tax liability for the taxable years 1991 through 1996 of
$134,784 and (b) the Company retaining net operating loss carry-forwards of
approximately $4,005,000 (subject to limitations imposed under the Internal
Revenue Code). In addition to the tax, interest of approximately $218,000 will
be due. Due to the uncertain outcome of the 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 G - SALE OF PROPERTIES
On May 1, 2001, pursuant to an order of condemnation, Nathan's 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.
Nathan's appealed the value of this property and on November 19, 2001, an Order
was entered by the Circuit Court of the 11th Judicial Circuit of Florida in and
for Miami-Dade County pursuant to which the State of Florida Department of
Transportation was ordered to pay to Nathan's subsidiary, Miami Subs Real Estate
Corp., an aggregate value of $2,350,000, plus legal fees in the amount of
$252,500 in connection with the condemnation by the State of Florida of the
restaurant. On January 4, 2002, Nathan's received the additional proceeds of
$850,000 which are included as a current receivable in the accompanying
financial statements as of December 23, 2001. On June 22, 2001, Nathan's sold
its 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, on
January 17, 2002 Nathan's sold a non-restaurant property that it previously
sublet to a third party for $575,000 in cash and expects to realize a net gain
of approximately $330,000.
NOTE H - RECLASSIFICATIONS
Certain reclassifications of prior period balances have been made to
conform to the December 23, 2001 presentation.
NOTE I - 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 its next fiscal
year, commencing April 1, 2002. Nathan's is currently evaluating the effect that
adoption of the provisions of FAS 142 will have on its 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. Nathan's is
currently evaluating the effect of adoption on its 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, which the Company
expects will not be 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
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, 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 135 Nathan's, Kenny
Rogers Roasters and Miami Subs restaurants , the Nathan's brand has been added
to the menu of 87 Miami Subs and Kenny Rogers restaurants, while the Kenny
Rogers Roasters brand has been introduced into 79 Miami Subs and Nathan's
restaurants. We have begun testing the Miami Subs brand in 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.
In the wake of the events of September 11, 2001 we have experienced lower
sales at company-owned restaurants and lower royalties from franchised
restaurants that operate in markets which are significant tourist destinations
such as Las Vegas and South Florida. We have also realized declines at our
franchised restaurants operating at airports throughout the United States as a
result of the overall decline in airline traffic.
11
At December 23, 2001, our combined systems consisted of 23 company-owned
units, 377 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
39 states, the District of Columbia and 16 foreign countries. At December 23,
2001, our company-owned restaurant system included 16 Nathan's units, five Miami
Subs units and two Kenny Rogers Roasters units, as compared to 18 Nathan's
units, eight Miami Subs units and two Kenny Rogers Roasters units at December
24, 2000.
Results of Operations
Thirteen weeks ended December 23, 2001 compared to December 24, 2000
Revenues
- --------
Total sales decreased by 10.6% or $866,000 to $7,268,000 for the thirteen
weeks ended December 23, 2001 ("third quarter fiscal 2002") as compared to
$8,134,000 for the thirteen weeks ended December 24, 2000 ("third quarter fiscal
2001"). Sales from the Branded Product Program increased by 16.5% to $1,043,000
for the third quarter fiscal 2002 as compared to sales of $895,000 in the third
quarter fiscal 2001. Company-owned restaurant sales decreased 14.0% or
$1,014,000 to $6,225,000 from $7,239,000 primarily due to operating fewer
company-owned stores as compared to the third 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 $1,037,000 and restaurant operating profits by $64,000 versus the
fiscal 2001 period, excluding any one time gains or royalties to be received
from restaurants sold to franchisees. Comparable restaurant sales (consisting of
15 Nathan's and five Miami Subs restaurants that have been operating for 18
months or longer as of the beginning of the fiscal year) increased by 2.0%
versus the third quarter fiscal 2001.
Franchise fees and royalties decreased by 23.0% or $518,000 to $1,733,000
in the third quarter fiscal 2002 compared to $2,251,000 in the third quarter
fiscal 2001. Franchise royalties decreased by $469,000 or 23.0% to $1,573,000 in
the third quarter fiscal 2002 as compared to $2,042,000 in the third quarter
fiscal 2001. Domestic franchise restaurant sales decreased by 14.1% to
$44,513,000 in the third quarter fiscal 2002 as compared to $51,834,000 in the
third quarter fiscal 2001. The majority of this decline is due to fewer
franchised restaurants operating during the third quarter fiscal 2002 as
compared to the third quarter fiscal 2001. In additional, as a result of the
events of September 11, 2001, we have experienced lower royalties from
franchised restaurants that operate in markets which are significant tourist
destinations, such as Las Vegas and South Florida, and from franchised
restaurants operating at airports throughout the United States. Further
contributing to the decline is an increase in the amount of royalties deemed to
be unrealizable. At December 23, 2001, 377 franchised or licensed restaurants
were operating as compared to 401 franchised or licensed restaurants at December
24, 2000. Franchise fee income derived from new openings and co-branding was
$160,000 in the third quarter fiscal 2002 as compared to $209,000 in the third
quarter fiscal 2001. This decrease was primarily attributable to the difference
between the franchised units open between the two periods and the initial
co-branding fees earned from existing restaurants within our system. During the
third quarter fiscal 2002, five new franchised or licensed units opened and
eight units have been co-branded.
License royalties were $312,000 in the third quarter fiscal 2002 as
compared to $331,000 in the third quarter fiscal 2001. The majority of royalties
earned were in connection with our primary license agreement with SMG, Inc. The
decline is primarily attributable to the termination of a secondary license
agreement for Nathan's products in the fourth quarter fiscal 2001.
Investment and other income was $1,067,000 in the third quarter fiscal 2002
versus $702,000 in the third quarter fiscal 2001. During the third quarter
fiscal 2002, we recognized $850,000 of additional income resulting from the
successful appeal of a condemnation originally awarded by the State of Florida.
Nathans' investment and interest income was approximately $204,000 higher in the
third quarter fiscal 2002 than in the third quarter fiscal 2001 due primarily to
differences in performance of the financial markets between the two periods. In
the third quarter fiscal 2001, Nathan's earned a $500,000 transfer fee in
connection with a change in ownership of Nathan's licensee, SMG Inc. and
recognized income of approximately $80,000 in connection with the introduction
of a consolidated food distribution agreement.
12
Costs and Expenses
- ------------------
Cost of sales decreased by $329,000 to $4,951,000 in the third quarter
fiscal 2002 from $5,280,000 in the third quarter fiscal 2001. During the third
quarter fiscal 2002, restaurant cost of sales were lower than the third quarter
fiscal 2001 by approximately $509,000. Restaurant cost of sales were reduced by
approximately $627,000 as a result of operating fewer company-owned restaurants
which was partially offset by higher costs at our comparable restaurants due in
part to their sales increase. The cost of restaurant sales at our comparable
units as a percentage of restaurant sales was 63.7% in the third quarter fiscal
2002 as compared to 62.7% in the third quarter fiscal 2001 due primarily to
higher food and labor and related costs. Higher costs of approximately $180,000
were incurred in connection with the Branded Product Program primarily due to
the increased sales volume. Commodity prices of our primary meat products during
the third quarter fiscal 2002 were also higher than the third quarter fiscal
2001. We have raised our retail prices on a selective basis in an attempt to
partially offset these increases.
Restaurant operating expenses decreased by $274,000 to $1,923,000 in the
third quarter fiscal 2002 from $2,197,000 in the third quarter fiscal 2001.
Restaurant operating costs were reduced by approximately $346,000 as a result of
operating fewer restaurants. These reductions in restaurant operating expenses
were partially offset by an increase of approximately $72,000 at the comparable
restaurants primarily due to higher marketing costs.
Depreciation and amortization decreased by $17,000 to $463,000 in the third
quarter fiscal 2002 from $480,000 in the third quarter fiscal 2001. Lower
depreciation expense of operating fewer company-owned restaurants in the third
quarter fiscal 2002 versus the third quarter fiscal 2001 was partially offset by
additional depreciation expense attributable to last year's capital spending.
Amortization of intangibles decreased by $11,000 to $221,000 in the third
quarter fiscal 2002 from $232,000 in the third quarter fiscal 2001. Amortization
of intangibles decreased as a result of the final purchase price allocation of
the Miami Subs acquisition.
General and administrative expenses increased by $20,000 to $2,322,000 in
the third quarter fiscal 2002 as compared to $2,302,000 in the third quarter
fiscal 2001. The increase in general and administrative expenses was due
primarily to higher professional fees of $124,000 which were partly offset by
lower personnel and incentive compensation expense of approximately $100,000.
Interest expense was $40,000 during the third quarter fiscal 2002 as
compared to $84,000 during the third quarter fiscal 2001. The reduction in
interest expense relates primarily to the repayment of outstanding debt between
the two periods.
Other expense in the third quarter fiscal 2001 of $396,000 included lease
termination costs totaling $366,000 associated with four underperforming units.
Income Tax Expense
- ------------------
In the third quarter fiscal 2002, the income tax provision was $197,000 or
42.8% of income before income taxes as compared to $302,000 or 67.6% of income
before income taxes in the third 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. The
impact of this non-deductible amortization on the prior fiscal year was recorded
during the third quarter fiscal 2001. Accordingly, our fiscal 2002 income tax
expense rate is lower than that of the third quarter fiscal 2001due to the
cumulative year-to-date adjustment of such amortization expense during the third
quarter fiscal 2001.
Thirty-nine weeks ended December 23, 2001 compared to December 24, 2000
Revenues
- --------
Total sales decreased by 8.5% or $2,318,000 to $24,941,000 for the
thirty-nine weeks ended December 23, 2001 ("fiscal 2002 period") as compared to
$27,259,000 for the thirty-nine weeks ended December 24, 2000 ("fiscal 2001
period"). Sales from the Branded Product Program increased by 22.7% or $654,000
to $3,534,000 for the fiscal 2002 period as compared to sales of $2,880,000 in
the fiscal 2001 period. Company-owned restaurant sales decreased 12.2% or
$2,972,000 to $21,407,000 from $24,379,000 primarily due to operating nine 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.
13
These reductions were partially offset by sales during the fiscal 2002 period
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), selling one unit
pursuant to an order of condemnation and closing one unit due to its lease
expiration. The financial impact associated with these nine restaurants lowered
restaurant sales by $2,966,000 and improved restaurant operating profits by
$41,000 versus the fiscal 2001 period, excluding any one time gains or royalties
to be received from restaurants sold to franchisees. Comparable restaurant sales
(consisting of 15 Nathan's and five Miami Subs restaurants that have been
operating for 18 months or longer as of the beginning of the fiscal year)
increased by 2.2% versus the fiscal 2001 period.
Franchise fees and royalties decreased by 10.3% or $685,000 to $5,974,000
in the fiscal 2002 period compared to $6,659,000 in the fiscal 2001 period.
Franchise royalties decreased by $853,000 or 13.9% to $5,287,000 in the fiscal
2002 period as compared to $6,140,000 in the fiscal 2001 period. Domestic
franchise restaurant sales decreased by 11.8% to $141,178,000 in the fiscal 2002
period as compared to $160,138,000 in the fiscal 2001 period. The majority of
this decline is due to fewer franchised restaurants operating during the fiscal
2002 period as compared to the fiscal 2001 period. In addition, as a result of
the events of September 11, 2001, we have experienced lower royalties from
franchised restaurants that operate in markets which are significant tourist
destinations, such as Las Vegas and South Florida, and from franchised
restaurants operating at airports throughout the United States. Further
contributing to the decline is an increase in the amount of royalties deemed to
be unrealizable. At December 23, 2001, 377 franchised or licensed restaurants
were operating as compared to 401 franchised or licensed restaurants at December
24, 2000. Franchise fee income derived from new openings and co-branding was
$687,000 in the fiscal 2002 period as compared to $519,000 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, 18 new franchised or licensed units opened and 45 units have been
co-branded.
License royalties were $1,624,000 in the fiscal 2002 period as compared to
$1,630,000 in the fiscal 2001 period. This decrease is comprised of reduced
royalties from the termination of a secondary license agreement for Nathan's
products in the fourth quarter fiscal 2001which was partly offset by increased
royalties earned from sales by SMG, Inc., Nathans' licensee for the sale of
Nathan's frankfurters within supermarkets and club stores.
Investment and other income was $1,502,000 in the fiscal 2002 period versus
$1,435,000 in the fiscal 2001 period. During the fiscal 2002 period, Nathan's
recognized net gains of $916,000 in connection with the sale of two
company-owned restaurants. During the fiscal 2002 period, Nathans' investment
and interest income was approximately $176,000 higher 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 $447,000 in connection with the introduction of a consolidated
food distribution agreement and earned a $500,000 transfer fee in connection
with a change in ownership of Nathan's licensee, SMG Inc.
Costs and Expenses
- ------------------
Cost of sales decreased by $1,088,000 to $16,436,000 in the fiscal 2002
period from $17,524,000 in the fiscal 2001 period. During the fiscal 2002
period, restaurant cost of sales were lower than the fiscal 2001 period by
approximately $1,879,000. Restaurant cost of sales were reduced by approximately
$1,912,000 as a result of operating fewer company-owned restaurants.
Additionally, lower cost of sales at the two Kenny Rogers Roasters restaurants
opened last year offset the 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 continue to seek to
increase sales at the two Kenny Rogers Roasters restaurants while attempting to
further reduce our cost of sales and are examining other alternatives with
respect to these two restaurants. The cost of restaurant sales at our comparable
units as a percentage of restaurant sales was 61.4% in the fiscal 2002 period as
compared to 60.8% in the fiscal 2001 period due primarily to higher labor and
related costs. Higher costs of approximately $791,000 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 the first
twenty-six weeks of fiscal 2002, commodity prices of our primary meat products
were at their highest levels in recent years causing the majority of the cost
increase. In response, we raised retail prices on a selective basis in an
attempt to partially offset these increases. During the third quarter fiscal
2002 we have seen these costs lowered to their historical levels. However,
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.
14
Restaurant operating expenses decreased by $976,000 to $5,894,000 in the
fiscal 2002 period from $6,870,000 in the fiscal 2001 period. Restaurant
operating costs were lower in the fiscal 2002 period by approximately
$1,096,000, as compared to the fiscal 2001 period as a result of operating fewer
restaurants. Restaurant operating expenses of the two restaurants opened last
year were $82,000 lower during the fiscal 2002 period due in part to the higher
costs attributable to last years' openings. These reductions in restaurant
operating expenses were partially offset by an increase of approximately
$187,000 at the comparable restaurants which were primarily driven by higher
energy and insurance costs.
Depreciation and amortization decreased by $69,000 to $1,277,000 in the
fiscal 2002 period from $1,346,000 in the fiscal 2001 period. Lower depreciation
expense of operating fewer company-owned restaurants during the fiscal 2002
period versus the fiscal 2001 period was partially offset by additional
depreciation expense attributable to last year's capital spending.
Amortization of intangibles decreased by $44,000 to $663,000 in the fiscal
2002 period from $707,000 in the fiscal 2001 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 $189,000 to $6,492,000 in
the fiscal 2002 period as compared to $6,681,000 in the fiscal 2001 period. The
decrease in general and administrative expenses was due primarily to lower
personnel and incentive compensation expense of approximately $324,000 which
were partially offset by higher professional fees of $99,000 and insurance costs
of $56,000.
Interest expense was $147,000 during the fiscal 2002 period as compared to
$230,000 during the fiscal 2001 period. The reduction in interest expense
relates primarily to the repayment of outstanding debt between the two periods.
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. Other expense in the fiscal 2001 period of $396,000
included lease termination costs totaling $366,000 associated with four
underperforming units.
Income Tax Expense
- ------------------
In the fiscal 2002 period, the income tax provision was $1,463,000 or 43.8%
of income before income taxes as compared to $1,406,000 or 43.5% of income
before income taxes in the fiscal 2001 period.
Liquidity and Capital Resources
Cash and cash equivalents at December 23, 2001 aggregated $1,475,000,
decreasing by $2,850,000 during the fiscal 2002 period. At December 23, 2001,
marketable securities and investment in limited partnership increased by
$3,584,000 from March 25, 2001 to $8,232,000 and net working capital increased
to $7,650,000 from $5,210,000 at March 25, 2001. Cash and cash equivalents at
December 23, 2001 included $475,000 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 $3,981,000 in the fiscal 2002 period is
primarily attributable to net income of $1,879,000, non- cash charges of
$2,063,000, including depreciation and amortization of $1,940,000 and provision
for doubtful accounts of $123,000, in addition to a decrease in prepaid and
other current assets of $478,000, which were more than offset by decreases in
accounts payable and accrued expenses of $2,377,000, an increase in marketable
securities and investment in limited partnership of $3,584,000,an increase in
notes and accounts receivable of $1,009,000, an increase in inventories of
$113,000, a decrease in other non-current liabilities of $293,000 and a decrease
in deferred franchise fees of $139,000.
Cash provided by investing activities of $2,546,000 is comprised primarily
of proceeds from the sale of two company-owned restaurants totaling $2,725,000.
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 of estimated expenses of
$25,000, and repaid the outstanding mortgage of approximately $793,000 plus
accrued interest. We successfully appealed the value of the property that was
condemned by the State of Florida and were awarded an additional $850,000 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, $914,000 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
$735,000.
15
Cash used in financing activities of $1,415,000 represents repayments of
notes payable and obligations under capital leases in the amount of $1,302,000.
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, as described
above.
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 have
repurchased 35,516 shares of common stock at a total cost of $113,000.
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 December 23,
2001, we have accrued approximately $1,461,000 and made payments of
approximately $1,245,000 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.
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.
We currently own or have leased from third parties 37 properties which we
lease or sublease to franchisees and non-franchisees and for which 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 23, 2001 was approximately $1.7 million.
Management believes that available cash, marketable investment securities,
and internally generated funds should provide sufficient capital to finance our
operations for at least the next twelve months. We maintain a $7,500,000
uncommitted bank line of credit and have not borrowed any funds to date under
this line of credit.
Forward Looking Statement
Certain statements contained in this report are forward-looking statements.
Forward-looking statements represent our current judgment regarding future
events. Although we would not make forward-looking statements unless we believe
we have a reasonable basis for doing so, we cannot guarantee their accuracy and
actual results may differ materially from those we anticipated due to a number
of uncertainties, many of which we are not aware. These risks and uncertainties,
many of which are not within our control, include, but are not limited to: the
ongoing effects of the events of September 11, 2001, economic, weather,
legislative and business conditions; the collectability of receivables; the
availability of suitable restaurant sites on reasonable rental terms; changes in
consumer tastes; the ability to continue to attract franchisees; the ability to
purchase our primary food and paper products at reasonable prices; no material
increases in the minimum wage; and our ability to attract competent restaurant
and managerial personnel. We generally identify forward-looking statements with
the words "believe", "intend," "plan," "expect," "anticipate," "estimate,"
"will," "should" and similar expressions.
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 were 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 claimed 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 claimed
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. This action has been settled without the payment of any money by
Miami Subs.
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 has agreed to indemnify and defend Miami Subs and has
assumed the defense of this action for Miami Subs.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K.
November 28, 2001 -Item 5- the Company reported that it was awarded $2,350,000
in connection with its appeal of a condemnation awarded by the State of Florida.
17
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: February 5, 2002 By: /s/Wayne Norbitz
Wayne Norbitz
President and Chief Operating Officer
(Principal Executive Officer)
Date: February 5, 2002 By: /s/Ronald G. DeVos
Ronald G. DeVos
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
19