1
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 24, 2000.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Act of 1934 for the transition period from
__________________________ to __________________________.
Commission File Number 0-3189
NATHAN'S FAMOUS, INC.
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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
(Address of principal executive offices including zip code)
(516) 338-8500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
At December 24, 2000, an aggregate of 7,065,324 shares of the registrant's
common stock, par value of $.01, were outstanding.
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NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - December 24, 2000 and
March 26, 2000 3
Consolidated Statements of Earnings - Thirteen Weeks
Ended December 24, 2000 and December 26, 1999 4
Consolidated Statements of Earnings - Thirty-nine Weeks
Ended December 24, 2000 and December 26, 1999 5
Consolidated Statements of Stockholders' Equity -
Thirty-nine Weeks Ended December 24, 2000 6
Consolidated Statements of Cash Flows - Thirty-nine Weeks
Ended December 24, 2000 and December 26, 1999 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Item 7A. Qualitative and Quantitative Disclosures about Market Risk 17
SIGNATURES 18
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Dec. 24, March 26,
2000 2000
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents including unexpended
marketing fund contributions of $2,903 and $509 and
restricted cash of $83 and $83, respectively $ 4,665 $ 2,397
Marketable securities and investment in limited partnership 5,324 2,997
Notes and accounts receivables, net 3,642 2,618
Inventories 643 543
Prepaid expenses and other current assets 837 635
Deferred income taxes 1,578 1,578
-------- --------
Total current assets 16,689 10,768
Notes receivable, net 2,254 2,527
Property and equipment, net 13,113 13,977
Assets held for sale 653 945
Intangible assets, net 19,375 19,092
Deferred income taxes 711 711
Other assets, net 438 563
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$ 53,233 $ 48,583
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable and capital lease obligations $ 607 $ 279
Accounts payable 1,813 1,727
Accrued expenses and other current liabilities 10,003 8,398
Deferred franchise fees 517 686
-------- --------
Total current liabilities 12,940 11,090
Notes payable and capital lease obligations, less current maturities 2,590 3,131
Other liabilities 2,454 1,015
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Total liabilities 17,984 15,236
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Stockholders' equity:
Common stock, $.01 par value - 30,000,000 and 30,000,000 shares
authorized, 7,065,324 and 7,040,196 issued and
outstanding , respectively 71 70
Additional paid-in capital 40,747 40,669
Accumulated deficit (5,569) (7,392)
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Total stockholders' equity 35,249 33,347
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$ 53,233 $ 48,583
======== ========
See accompanying notes to consolidated financial statements.
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NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen weeks ended December 24, 2000 and December 26, 1999
(In thousands, except per share amounts)
(Unaudited)
2000 1999
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Sales $ 8,287 $ 9,310
Franchise fees and royalties 2,251 2,076
License royalties 318 426
Equity in (losses) of unconsolidated affiliate -- (222)
Investment and other income 702 458
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Total revenues 11,558 12,048
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Costs and expenses:
Cost of sales 5,420 6,158
Restaurant operating expenses 2,197 2,506
Depreciation and amortization 407 507
Amortization of intangible assets 305 260
General and administrative expenses 2,302 2,264
Interest expense 84 112
Impairment charge on notes receivable (NOTE - E) -- 566
Lease termination and other expense 396 --
-------- --------
Total costs and expenses 11,111 12,373
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Income / (loss) before income taxes 447 (325)
Provision / (benefit) for income taxes (NOTE - H) 302 (98)
-------- --------
Net income / (loss) $ 145 $ (227)
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PER SHARE INFORMATION
Net income / (loss) per share
Basic $ 0.02 $ (0.03)
======== ========
Diluted $ 0.02 $ (0.03)
======== ========
Shares used in computing net income per share
Basic 7,065 7,040
======== ========
Diluted 7,065 7,040
======== ========
See accompanying notes to consolidated financial statements.
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NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Thirty-nine weeks ended December 24, 2000 and December 26, 1999
(In thousands, except per share amounts)
(Unaudited)
2000 1999
-------- --------
Sales $ 27,940 $ 22,589
Franchise fees and royalties 6,659 4,006
License royalties 1,495 1,340
Equity in (losses) of unconsolidated affiliate -- (163)
Investment and other income 1,435 569
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Total revenues 37,529 28,341
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Costs and expenses:
Cost of sales 18,070 14,324
Restaurant operating expenses 6,870 5,550
Depreciation and amortization 1,346 1,026
Amortization of intangible assets 707 485
General and administrative expenses 6,681 4,787
Interest expense 230 112
Impairment charge on notes receivable (NOTE - E) -- 566
Lease termination and other expense 396 --
-------- --------
Total costs and expenses 34,300 26,850
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Income before income taxes 3,229 1,491
Provision for income taxes (NOTE - H) 1,406 633
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Net income $ 1,823 $ 858
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PER SHARE INFORMATION
Net income per share
Basic $ 0.26 $ 0.16
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Diluted $ 0.26 $ 0.16
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Shares used in computing net income per share
Basic 7,057 5,495
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Diluted 7,087 5,495
======== ========
See accompanying notes to consolidated financial statements.
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NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Thirty-nine weeks ended December 24, 2000
(In thousands, except share amounts)
(Unaudited)
Total
Additional Accum- Stock-
Common Common Paid in- ulated holders'
Shares Stock Capital Deficit Equity
--------- --------- --------- --------- ---------
Balance, March 26, 2000 7,040,196 $ 70 $ 40,669 $ (7,392) $ 33,347
Warrants exercised in connection
with Miami Subs acquisition 3 -- -- -- --
Stock issued in connection
with Miami Subs acquisition 125 -- 1 -- 1
Stock compensation 25,000 1 77 -- 78
Net income 1,823 1,823
--------- --------- --------- --------- ---------
Balance, December 24, 2000 7,065,324 $ 71 $ 40,747 $ (5,569) $ 35,249
========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
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NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nine weeks ended December 24, 2000 and December 26, 1999
(In thousands)
(Unaudited)
2000 1999
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Cash flows from operating activities:
Net income $ 1,823 $ 858
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,346 1,026
Amortization of intangible assets 707 485
Impairment charge on notes receivable -- 566
Provision for doubtful accounts 88 290
Stock compensation expense 78 --
Equity in losses of unconsolidated affiliate -- 163
Deferred income taxes -- (5)
Other -- (5)
Changes in operating assets and liabilities, net of effects from
acquisition of business:
Marketable securities and investment in limited partnership (2,327) 357
Notes and accounts receivables, net (1,155) (843)
Inventories (100) (117)
Prepaid expenses and other current assets (202) (25)
Accounts payable and accrued expenses 1,691 (1,211)
Deferred franchise and area development fees (169) (99)
Other assets, net 125 120
Other non current liabilities 1,439 8
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Net cash provided by operating activities 3,344 1,568
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Cash flows from investing activities:
Cash acquired in connection with merger net of transaction costs -- 3,429
Purchase of property and equipment (1,354) (1,280)
Purchase of intellectual property -- (1,590)
Proceeds from sale of assets held for sale 45 110
Payments received on notes receivable 446 84
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Net cash (used in) / provided by investing activities (863) 753
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Cash flows from financing activities:
Principal repayment of borrowings and obligations under capital leases (213) (1,836)
------- -------
Net cash used in financing activities (213) (1,836)
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Net increase (decrease) in cash and cash equivalents 2,268 485
Cash and cash equivalents, beginning of period 2,397 2,165
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Cash and cash equivalents, end of period $ 4,665 $ 2,650
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 1,313 $ 459
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Cash paid during the period for interest $ 234 $ 128
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NONCASH FINANCING ACTIVITIES:
Common stock, warrants and options issued in connection with
the acquisition of Miami Subs Corporation $ 1 $ 8,269
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Loan to franchisee in connection with restaurant sale $ 130 $ --
======= =======
See accompanying notes to consolidated financial statements.
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NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 24, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Nathan's Famous, Inc. and
subsidiaries (collectively "Nathan's") for the thirteen and thirty-nine week
periods ended December 24, 2000 and December 26, 1999 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 26, 2000.
NOTE B - NF ROASTERS CORP. ACQUISITION
On February 19, 1999, the U. S. Bankruptcy Court for the Middle District of
North Carolina, Durham Division, confirmed the Joint Plan of Reorganization of
the Official Committee of Franchisees of Roasters Corp. and Roasters Franchise
Corp., operators of Kenny Rogers Roasters Restaurants. Under the joint plan of
reorganization, on April 1, 1999, Nathan's acquired the intellectual property
rights, including trademarks, recipes and franchise agreements of Roasters Corp.
and Roasters Franchise Corp. for $1,250,000 in cash plus related expenses of
approximately $340,000. NF Roasters Corp., a wholly owned subsidiary, was
created for the purpose of acquiring these assets. The acquired assets are
recorded as intangibles in the accompanying balance sheet and are being
amortized on a straight-line basis over 10 - 20 years. Results of operations are
included in these consolidated financial statements as of April 1, 1999. No
company-owned restaurants were acquired in this transaction. On November 17,
1999, NF Roasters Corp. acquired two restaurants from a franchisee for
approximately $400,000, which opened in March and April 2000.
NOTE C -MIAMI SUBS CORPORATION MERGER
On September 30, 1999, Nathan's completed the acquisition of Miami Subs and
acquired the remaining outstanding common stock of Miami Subs in exchange for
2,317,980 shares of Nathan's common stock, 579,040 warrants to purchase Nathan's
common stock, and the assumption of existing employee options and warrants to
purchase 542,284 shares of Miami Subs' common stock in connection with the
merger. The total purchase price was approximately $13,000,000 including
acquisition costs. In addition, Nathan's also assumed $5,340,000 of existing
Miami Subs debt. The acquisition was accounted for as a purchase under
Accounting Principles Board ("APB") Opinion No. 16, "Accounting for Business
Combinations". In accordance with APB No. 16, Nathan's allocated the purchase
price of Miami Subs based on the estimated fair value of the assets acquired and
liabilities assumed.
In connection with the acquisition of Miami Subs, Nathan's is executing its
plans to permanently close up to 18 underperforming company-owned restaurants.
Nathan's expects to sell such related assets at amounts below the historical
carrying amounts recorded by Miami Subs. In accordance with APB 16 "Business
Combinations" the write down of these assets is reflected as part of the
preliminary purchase price allocations and are included in assets held for sale
in the accompanying balance sheet. To date, Nathan's has sold assets available
for sale for $175,000. As of December 24, 2000, Nathan's has accrued
approximately $1,045,000 for lease termination costs, as part of the
acquisition. Nathan's also expects to further accrue, as part of the
acquisition, the estimated future cash payments, consisting primarily of future
lease payments including costs and expenses associated with terminating such
leases when it
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can be reasonably estimated. Accordingly, excess purchase price associated with
this acquisition will increase based upon the reserve for the closing of
acquired company-owned restaurants. As of January 26, 2001, Nathan's has
terminated 9 of these leases at a total cost of $502,000. As of December 24,
2000, minimum annual lease payments for the remaining stores were approximately
$706,000, with remaining lease terms ranging from 1 year up to approximately 17
years. Preliminary goodwill of $2,773,000 resulted from the acquisition of Miami
Subs and is being amortized over 20 years.
NOTE D - UNAUDITED PRO FORMA INFORMATION
Summarized below are the unaudited pro forma results of operations for the
thirty-nine weeks ended December 26, 1999 of Nathan's as though the Miami Subs
acquisition had occurred at the beginning of the period presented. Adjustments
have been made for amortization of goodwill based upon a preliminary allocation
of the purchase price, reversal of Miami Subs merger costs and elimination of
Nathan's 30% equity earnings.
Thirty-nine weeks ended
December 26
1999
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Proforma
Total revenues $40,687
=======
Income before income taxes $ 1,468
=======
Net income $ 705
=======
Net earnings per share
Basic $ 0.10
=======
Diluted $ 0.10
=======
Shares used in computing net income
Basic 7,041
=======
Diluted 7,041
=======
The unaudited pro forma information for the thirty-nine weeks ended December 26,
1999 combines Nathan's results of operations for the thirty-nine weeks ended
December 26, 1999 with Miami Subs' results of operations for the nine months
ended December 31, 1999, respectively.
The pro forma results of operations have been prepared for comparative purposes
only and are not necessarily indicative of actual results of operations that
would have occurred had the acquisition been made at the beginning of the period
presented or of the results which may occur in the future.
NOTE E - IMPAIRMENT CHARGE ON NOTES RECEIVABLE
In accordance with Statement of Financial Accounting Standards ("SFAS") No.114
"Accounting by Creditors for Impairment of a Loan" Nathan's applies the
provisions thereof to value Miami Subs' notes receivable. Pursuant to SFAS No.
114, a loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. When evaluating a note for
impairment, the factors that should be considered include 1)indications that the
borrower is experiencing business problems such as operating losses, marginal
working capital, inadequate cash flow or business interruptions; 2)notes being
secured by collateral that is not readily marketable; or 3)notes that are
susceptible to
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deterioration in realizable value. In certain cases where Nathan's has
determined that a loan has been impaired it does not expect to extend or renew
the related leases. During the fiscal year ended March 26, 2000, Nathan's had
determined that certain notes were impaired and recorded impairment charges
against those notes. Nathan's continues to monitor its notes receivable for any
further impairment.
NOTE F - 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 24, 2000 and December 26, 1999, respectively.
THIRTEEN WEEKS Net Income /
(Loss)
Net Income / (Loss) Number of Shares Per Share
------------------ ------------------ ----------------
2000 1999 2000 1999 2000 1999
----- ----- ----- ----- ---- ----
Basic EPS
Basic calculation $ 145 $(227) 7,065 7,041 $.02 $(.03)
Effect of dilutive employee stock
options and warrants -- -- -- -- -- --
----- ----- ----- ----- ---- ----
Diluted EPS
Diluted calculation $ 145 $(227) 7,065 7,041 $.02 $(.03)
===== ===== ===== ===== ==== ====
THIRTY-NINE WEEKS
Net Income
Net Income Number of Shares Per Share
-------------------- -------------------- ----------------
2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ---- ----
Basic EPS
Basic calculation $1,823 $ 858 7,057 5,495 $.26 $.16
Effect of dilutive employee stock
options and warrants -- -- 30 -- -- --
------ ------ ------ ------ ---- ----
Diluted EPS
Diluted calculation $1,823 $ 858 7,087 5,495 $.26 $.16
====== ====== ====== ====== ==== ====
NOTE G - CONTINGENCIES
On January 5, 1999, Miami Subs was served with a class action lawsuit entitled
Robert J. Feeney, on behalf of himself and all others similarly situated vs.
Miami Subs Corporation, et al., in Circuit Court, in Broward County, Florida,
which was filed against Miami Subs, its directors and Nathan's in a Florida
state court by a shareholder of Miami Subs. Since that time, Nathan's and its
designees to the Miami Subs board were also served. The suit alleged that the
proposed merger between Miami Subs and Nathan's, as contemplated by the
companies' non-binding letter of intent, was unfair to Miami Subs' shareholders
based on the price that Nathan's agreed to pay to the Miami Subs' shareholders
for their shares and constituted a breach by the defendants of their fiduciary
duties to the shareholders of Miami Subs. The plaintiff sought among other
things:
1. class action status;
2. preliminary and permanent injunctive relief against
consummation of the proposed merger; and
3. unspecified damages to be awarded to the shareholders of Miami
Subs.
On March 19, 1999, the court granted the plaintiff leave to amend his
complaint. The plaintiff then filed an amended complaint. Miami Subs moved to
dismiss the complaint on April 13, 1999. Nathan's and its designees on the Miami
Subs' board moved to dismiss the complaint on April 29, 1999. The court denied
the motions. On February 4, 2000, the court held an evidentiary hearing. As a
result
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of the hearing, the court struck the class action allegations from the
plaintiff's complaint. On April 7, 2000, the plaintiff filed his dismissal
without prejudice of the action, effectively ending the case against all
defendants.
NOTE H - MIAMI SUBS TAX AUDIT
As of the date of acquisition, Miami Subs' tax returns reflected net operating
loss carry-forwards of approximately $5.7 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 I - RECLASSIFICATIONS
Certain reclassifications of prior period balances have been made to conform to
the March 26, 2000 presentation.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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INTRODUCTION
During the prior fiscal year, Nathan's completed the acquisition of two highly
recognized brands. On April 1, 1999, Nathan's 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, Nathan's acquired the remaining
70% of the outstanding common stock of Miami Subs Corporation that it did not
already own. Revenues of the combined company are generated primarily from
operating company-owned restaurants, restaurant franchising under the Nathan's,
Kenny Rogers and Miami Subs brands, sales of Nathan's products under the Branded
Product Program and licensing agreements for the sale of Nathan's products
within supermarkets. The branded product program enables foodservice operators
to offer Nathan's hot dogs and certain 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.
At December 24, 2000, Nathan's combined system consisted of twenty-eight
company-owned units, four hundred and one franchised or licensed units and over
twelve hundred Branded Product points of sale that feature Nathan's world famous
all-beef hot dogs, located in forty-two states, the District of Columbia and
seventeen foreign countries. At December 24, 2000, Nathan's company-owned
restaurant system included eighteen Nathan's units, eight Miami Subs units and
two Kenny Rogers Roasters units as compared to twenty-three Nathan's and
thirteen Miami Subs units at December 26, 1999.
In addition to plans for expansion, Nathan's is in the process of capitalizing
on co-branding opportunities within its existing restaurant system. To date, the
Arthur Treachers brand has been introduced within one hundred and two Nathan's,
Kenny Rogers Roasters and Miami Subs restaurants , the Nathan's brand has been
added to the menu of twenty-eight Miami Subs and Kenny Rogers restaurants, while
the Kenny Rogers Roasters brand has been introduced into fourteen Miami Subs and
Nathan's restaurants. As of January, 2001 Nathan's has begun expanding the level
of co-branding by implementing its new co-branding strategy within the franchise
system.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED DECEMBER 24, 2000 COMPARED TO DECEMBER 26, 1999
Revenues
Total sales decreased by 11.0% or $1,023,000 to $8,287,000 for the thirteen
weeks ended December 24, 2000 ("third quarter fiscal 2001") as compared to
$9,310,000 for the thirteen weeks ended December 26, 1999 ("third quarter fiscal
2000"). The restaurant sales decline is primarily due to the operation of
fifteen less company-owned stores as compared to the prior fiscal period. This
reduction is the result of Nathan's franchising seven company-owned restaurants,
transferring two company-owned restaurants to franchisees pursuant to management
agreements, closing four unprofitable company-owned units (including two Miami
Subs restaurants pursuant to Nathan's divesture plan) and closing two units due
to lease expirations. The impact of these actions lowered restaurant sales by
$1,695,000 and improved restaurant operating profits by $178,000 versus the
third quarter fiscal 2000. Comparable restaurant sales of the Nathan's brand
also declined by 0.9% versus the third quarter fiscal 2000, due in part to three
restaurants having reached the anniversary of introducing new products, since
introducing new products generally results in sales increases. During the third
quarter fiscal 2001, sales from two new company-owned restaurants were $553,000.
Sales from the Branded Product Program increased by 87.8% to $1,035,000 for the
third quarter fiscal 2001 as compared to sales of $551,000 in the third quarter
fiscal 2000.
Franchise fees and royalties increased by 8.4% or $175,000 to $2,251,000 in the
third quarter fiscal 2001 compared to $2,076,000 in the third quarter fiscal
2000. Franchise sales of Nathan's three restaurant concepts were $51,834,000 in
the third quarter fiscal 2001 as compared to $54,326,000 in the third quarter
fiscal 2000. Franchise royalties were $2,096,000 in the third quarter fiscal
2001 as compared to $1,845,000 in the third quarter fiscal 2000. Franchise
royalties were 4.04% of franchise sales for the third quarter fiscal 2001 as
compared to 3.40% of franchise sales in the third quarter of fiscal 2000
primarily due to the amendment of certain franchise agreements and increased
contractual compliance. Franchise fee income derived from openings and
co-branding activities was $155,000 in the third quarter fiscal 2001 as compared
to $231,000 in the third quarter fiscal 2000. During the third quarter fiscal
2001, four new franchised or licensed units opened.
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License royalties were $318,000 in the third quarter fiscal 2001 as compared to
$426,000 in the third quarter fiscal 2000. Royalties earned from the sale of
Nathan's frankfurters within supermarkets and club stores were approximately
$246,000 in the third quarter fiscal 2001 as compared to $351,000 in the third
quarter fiscal 2000. The majority of these differences are due to the sliding
scale by which royalties are determined.
Equity in losses of unconsolidated affiliate of $222,000 in the third quarter
fiscal 2000 represented Nathans' proportionate share of Miami Subs' net loss for
the period September 1, 1999 through September 30, 1999, which has been reported
on a one month lag since the acquisition of the 30% equity interest. Included in
Miami Subs' net loss for the period were merger costs of $196,000.
Investment and other income was $702,000 in the third quarter fiscal 2001 versus
$458,000 in the third quarter fiscal 2000. The majority of this increase is
attributable to a transfer fee of $500,000 that was earned in connection with a
change in ownership of Nathan's licensee, SMG, Inc. Nathan's has also recognized
income of approximately $178,000 in connection with the introduction of a single
master food and paper distributor for Nathans' three restaurant concepts and the
ongoing amortization of deferred marketing support. Investment income was
reduced by approximately $335,000 as compared to the third quarter fiscal 2000
due to the difference in performance of the financial markets between the two
periods and a $79,000 decline attributable to subleasing activities.
Costs and Expenses
Cost of sales decreased by $738,000 to $5,420,000 in the third quarter fiscal
2001 from $6,158,000 in the third quarter fiscal 2000. During the third quarter
fiscal 2001, restaurant cost of sales, were lower than the third quarter fiscal
2000 by approximately $1,081,000. Cost of sales were lower by $1,239,000 as a
result of the actions taken with the fifteen company-owned restaurants
previously discussed as compared to the third quarter fiscal 2000. Cost of sales
attributable to two new company-owned restaurants along with higher food and
labor costs in the existing restaurants partially offset these lower costs. The
cost of restaurant sales at Nathans' comparable units was 61.9% as a percentage
of restaurant sales in the third quarter fiscal 2001 as compared to 60.5% as a
percentage of restaurant sales in the third quarter fiscal 2000 due primarily to
higher labor and associated labor costs. Higher cost of sales of approximately
$343,000 were incurred in connection with the growth of the Branded Product
Program.
Restaurant operating expenses decreased by $309,000 to $2,197,000 in the third
quarter fiscal 2001 from $2,506,000 in the third quarter fiscal 2000. Lower
costs of $566,000 were a result of the actions taken with the fifteen
company-owned restaurants previously discussed as compared to the third quarter
fiscal 2000 which were partially offset by the two new company-owned
restaurants.
Depreciation and amortization was $407,000 in the third quarter fiscal 2001 as
compared to $507,000 in the third quarter fiscal 2000. This decrease is
primarily attributed to lower depreciation resulting from operating fewer
restaurants during the third quarter fiscal 2001 as compared to the third
quarter fiscal 2000.
Amortization of intangibles was $305,000 in the third quarter fiscal 2001 as
compared to $260,000 in the third quarter fiscal 2000.
General and administrative expenses were $2,302,000 in the third quarter fiscal
2001 as compared to $2,264,000 in the third quarter fiscal 2000. General and
administrative expenses increased by $38,000, primarily due to higher spending
in connection with personnel costs and incentive compensation of approximately
$176,000 and Kenny Rogers administrative costs of $50,000, partially offset by
lower bad debt expense of approximately $88,000, reduced corporate development
costs of approximately $56,000 and certain rebates of approximately $24,000.
Interest expense of $84,000 during the third quarter fiscal 2001 as compared to
$112,000 during the third quarter fiscal 2000 relates principally to the
repayment of some of the Miami Subs' assumed indebtedness since the date of the
acquisition.
Other expense of $ 396,000 relates primarily to lease termination costs totaling
$366,000 associated with four underperforming units.
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Income Tax Expense
In the third quarter fiscal 2001, the income tax provision was $302,000 or 67.6%
of income before income taxes as compared to an income tax benefit of $98,000 or
30.2% of loss before income taxes in the third quarter fiscal 2000. Nathan's has
recently agreed to accept an offer by the Internal Revenue Service to conclude
the Miami Subs tax audit for the years 1991 through 1996. As part of that
agreement, Nathan's expects that certain amortization of intangible assets
previously deducted by Miami Subs will be reversed and will not be deductible in
the future. Consistent with the agreement with the Internal Revenue Service,
Nathan's has now treated these amortization expenses as permanent differences
and has recorded a year to date adjustment of approximately $86,000 during the
quarter. Excluding this adjustment, income tax expense would have been $216,000
or 48.3% of income before tax.
THIRTY-NINE WEEKS ENDED DECEMBER 24, 2000 COMPARED TO DECEMBER 26, 1999
Effective October 1, 1999 the results of Miami Subs Corporation have been
included in the consolidated results of Nathan's Famous, Inc. The results of
operations for the thirty-nine weeks ended December 26, 1999 included the
operations of Miami Subs for approximately 13 weeks as compared to 39 weeks of
operations for the period ended December 24, 2000. The results of Miami Subs'
operations for the twenty-six week period ended September 24, 2000 have been
separately stated to quantify that impact on the thirty-nine weeks of
operations.
Revenues
Total sales increased by 23.7% or $5,351,000 to $27,940,000 for the thirty-nine
weeks ended December 24, 2000 ("fiscal 2001 period") as compared to $22,589,000
for the thirty-nine weeks ended December 26, 1999 ("fiscal 2000 period"). Of the
total increase, sales increased by $5,968,000 during the twenty-six week period
ended September 24, 2000 as a result of the Miami Subs acquisition made last
year. The remaining restaurant sales decline is primarily due to the operation
of fifteen less company-owned stores as compared to the prior fiscal period.
This reduction is the result of Nathan's franchising seven company-owned
restaurants, transferring two company-owned restaurant to franchisees pursuant
to management agreements, closing four unprofitable company-owned units
(including two Miami Subs restaurants pursuant to Nathan's divesture plan) and
closing two units due to lease expirations. The impact of these actions lowered
restaurant sales by $3,019,000 and improved restaurant operating profits by
$265,000 versus the fiscal 2000 period. Additionally, one unit which re-opened
in October 2000 was temporarily closed during part of the fiscal 2001 period for
renovation. Comparable restaurant sales of the Nathan's brand also declined by
1.6% versus the fiscal 2000 period, due principally to weakness experienced at
the Coney Island restaurant primarily attributable to the unfavorable weather
conditions experienced earlier in the fiscal year. During the fiscal 2001
period, sales from two new company-owned restaurants were $1,883,000. Sales from
the Branded Product Program increased by 63.8% to $3,471,000 for the fiscal 2001
period as compared to sales of $2,119,000 in the fiscal 2000 period.
Franchise fees and royalties increased by 66.2% or $2,653,000 to $6,659,000 in
the fiscal 2001 period compared to $4,006,000 in the fiscal 2000 period.
Increases in franchise fees and royalties during the twenty-six week period
ended September 24, 2000 resulting from the Miami Subs acquisition made last
year was $2,397,000, which includes a royalty reconciliation of approximately
$54,000. Franchise sales of Nathan's three restaurant concepts increased by
59.6% to $160,138,000 in the fiscal 2001 period as compared to $100,326,000 in
the fiscal 2000 period due primarily to the inclusion of Miami Subs franchise
system sales for the twenty-six weeks ended September 24, 2000. Franchise
royalties were $6,453,000 in the fiscal 2001 period as compared to $3,523,000 in
the fiscal 2000 period. Franchise fee income derived from openings was $406,000
in the fiscal 2001 period as compared to $483,000 in the fiscal 2000 period.
This decrease was primarily attributable to the difference between expired
franchise fees recognized into income and number of franchised units open
between the two periods. During the fiscal 2001 period, twelve new franchised or
licensed units opened.
License royalties were $1,495,000 in the fiscal 2001 period as compared to
$1,340,000 in the fiscal 2000 period. Royalties earned from the sale of Nathan's
frankfurters within supermarkets and club stores were approximately $1,296,000
during the fiscal 2001 period as compared to $1,176,000 during the fiscal 2000
period.
Equity in losses of unconsolidated affiliate of $163,000 in the fiscal 2000
period represented Nathans' proportionate share of Miami Subs' net loss for the
period March 1, 1999 through September 30, 1999, which has been reported on a
one month lag since the acquisition of the 30% equity interest. Included in
Miami Subs' net loss for the period were merger costs of $325,000.
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Investment and other income increased by $866,000 to $1,435,000 in the fiscal
2001 period versus $569,000 in the fiscal 2000 period. Increases in other income
during the twenty-six week period ended September 24, 2000 as a result of the
Miami Subs acquisition made last year was $392,000. During the fiscal 2001
period Nathan's recognized income of approximately $577,000 in connection with
the introduction of a single master food and paper distributor for its three
restaurant concepts and the ongoing amortization of deferred marketing support.
This increase is also attributable to a transfer fee of $500,000 that was earned
in connection with a change in ownership of Nathan's licensee, SMG, Inc.
Investment income was reduced by approximately $464,000 as compared to the
fiscal 2000 period due to the difference in performance of the financial markets
between the two periods. Subleasing activities were reduced by $82,000 as
compared to the fiscal 2000 period.
Costs and Expenses
Cost of sales increased by $3,746,000 to $18,070,000 in the fiscal 2001 period
from $14,324,000 in the fiscal 2000 period. Of the total increase, cost of sales
increased by $3,837,000 during the twenty-six week period ended September 24,
2000 as a result of the Miami Subs acquisition made last year. Cost of sales
attributable to two new company-owned restaurants along with higher labor costs
in the Nathan's brand partially offset lower costs of operating fewer
company-owned restaurants totaling $3,161,000 as compared to the fiscal 2000
period. The cost of restaurant sales at Nathans' comparable units was 59.7% as a
percentage of restaurant sales in the fiscal 2001 period as compared to 58.4% as
a percentage of restaurant sales in the fiscal 2000 period due primarily to
higher food and labor costs. Higher cost of sales totaling approximately
$935,000 were incurred in connection with the growth of the Branded Product
Program.
Restaurant operating expenses increased by $1,320,000 from $5,550,000 in the
fiscal 2000 period to $6,870,000 in the fiscal 2001 period. Of the total
increase, restaurant operating expenses increased by $1,687,000 during the
twenty-six week period ended September 24, 2000 as a result of the Miami Subs
acquisition made last year. Lower costs of $1,107,000 were attributable to
operating fewer company-owned restaurants as compared to the end of the third
quarter fiscal 2000 which were partially offset by higher utility costs at
company-owned comparable restaurants.
Depreciation and amortization increased by $284,000 from $1,026,000 in the
fiscal 2000 period to $1,346,000 in the fiscal 2001 period. Depreciation expense
increased by $403,000 during the twenty-six week period ended September 24, 2000
as a result of the Miami Subs acquisition made last year. Depreciation expense
attributable two new company-owned restaurants partially offset the lower
depreciation expense of operating fewer company-owned restaurants versus the
fiscal 2000 period.
Amortization of intangibles increased by $222,000 from $485,000 in the fiscal
2000 period to $707,000 in the fiscal 2001 period. Amortization of intangibles
increased by $169,000 during the twenty-six week period ended September 24, 2000
as a result of the Miami Subs acquisition made last year which is attributable
to intangible assets acquired and the amortization of the excess purchase price.
General and administrative expenses increased by $1,894,000 to $6,681,000 in the
fiscal 2001 period as compared to $4,787,000 in the fiscal 2000 period. Of the
total increase, general and administrative expenses increased by approximately
$1,562,000 during the twenty-six week period ended September 24, 2000 as a
result of the Miami Subs acquisition made last year. General and administrative
expenses, excluding the impact of Miami Subs, increased by $332,000 primarily
due to higher spending in connection with personnel costs and incentive
compensation of approximately $444,000 and Kenny Rogers administrative costs of
$82,000, which were partially offset by lower bad debt expense of approximately
$120,000 and certain rebates of approximately $102,000.
Interest expense was $230,000 during the fiscal 2001 period as compared to
$112,000 during the fiscal 2000 period. Interest expense increased principally
due to the different periods of time that Miami Subs has been owned by Nathan's,
which expense has been reduced by the repayment of some of the Miami Subs'
assumed debt since the date of the acquisition.
Other expense of $ 396,000 relates primarily to lease termination costs totaling
$366,000 associated with four underperforming units.
Income Tax Expense
In the fiscal 2001 period, the income tax provision was $1,406,000 or 43.5% of
income before income taxes as compared to $633,000 or 42.5% of income before
income taxes in the fiscal 2000 period. Nathan's has recently agreed to accept
an offer by the Internal Revenue
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Service to conclude the Miami Subs tax audit for the years 1991 through 1996. As
part of that agreement, Nathan's expects that certain amortization of intangible
assets previously deducted by Miami Subs will be reversed and will not be
deductible in the future.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 24, 2000 aggregated $4,665,000, increasing
by $2,268,000 during the fiscal 2001 period. At December 24, 2000, marketable
securities and investment in limited partnership totaled $5,324,000 and net
working capital increased to $3,749,000 from a deficit of $322,000 at March 26,
2000. Cash and cash equivalents at December 24, 2000 included $2,903,000 held on
behalf of the Miami Subs Advertising Funds. A corresponding accrual has been
recorded within accrued expenses and other current liabilities.
Cash provided by operations of $3,344,000 in the fiscal 2001 period is primarily
attributable to net income of $1,823,000, non-cash charges of $2,219,000,
including depreciation and amortization of $2,053,000 and allowance for doubtful
accounts of $88,000, increases in accounts payable and accrued expenses and
other current liabilities of $1,691,000, an increase in other non current
liabilities of $1,439,000, a decrease in other assets of $125,000, all of which
were partially offset by an increase in marketable securities and investment in
limited partnership of $2,327,000, an increase in notes and accounts receivables
of $1,155,000, an increase in inventories of $100,000, an increase in prepaid
expenses and other current assets of $202,000 and a decrease in deferred
franchise fees of $169,000. During fiscal 2001 Nathan's received a marketing
advance from its beverage supplier in connection with a newly executed marketing
agreement.
Cash used in investing activities of $863,000 is comprised primarily of
$1,354,000 relating to capital improvements of company-owned restaurants and
other fixed asset additions, cash received on notes receivable of $446,000 and
proceeds from the sale of assets of $45,000.
Cash used in financing activities of $213,000 represents repayments of notes
payable and obligations under capital leases.
In connection with the acquisition of Miami Subs, Nathan's is executing its
plans to permanently close up to 18 underperforming company-owned restaurants.
Accordingly, Nathan's expects to incur future cash payments, consisting
primarily of future lease payments including costs and expenses associated with
terminating such leases. As of December 24, 2000, Nathan's has accrued
approximately $1,045,000 for lease termination costs, as part of the
acquisition. At present, Nathan's is unable to reasonably estimate these total
costs; however, as of January 26, 2001, Nathan's has terminated 9 of these
leases at a total cost of $502,000. As of December 24, 2000, minimum annual
lease payments for the remaining stores were approximately $706,000, with
remaining lease terms ranging from 1 year up to approximately 17 years.
Management believes that available cash, marketable investment securities, and
internally generated funds should provide sufficient capital to finance Nathan's
operations for at least the next twelve months. Nathan's maintains a $7,500,000
uncommitted bank line of credit and it has not borrowed any funds to date under
this line of credit.
FORWARD LOOKING STATEMENT
Certain statements contained in this report are forward-looking statements which
are subject to a number of known and unknown risks and uncertainties that could
cause Nathan's actual results and performance to differ materially from those
described or implied in the forward looking statements. These risks and
uncertainties, many of which are not within Nathan's 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; 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 Nathan's ability to attract competent
restaurant and managerial personnel. Such forward looking statements are
identified by expressions such as "expect", "anticipate", "believe", "intend",
and similar expressions.
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PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) No reports on Form 8-K were filed during the quarter ended December
24, 2000.
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, our
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 future contracts, options or other instruments to hedge against
changes in values of foreign currencies.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATHAN'S FAMOUS, INC.
Date: February 5, 2001 By: /s/Wayne Norbitz
-----------------------------------------
Wayne Norbitz
President and Chief Operating Officer
(Principal Executive Officer)
Date: February 5, 2001 By: /s/Ronald G. DeVos
-----------------------------------------
Ronald G. DeVos
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
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Exhibit Index
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Exhibit Description
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27 Financial Data Schedule