FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ x ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Act
of 1934 for the quarterly period ended SEPTEMBER 28, 2003.
[ ] 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
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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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At October 31, 2003, an aggregate of 5,287,357 shares of the registrant's common
stock, par value of $.01, were outstanding.
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited) 3
Consolidated Balance Sheets - September 28, 2003 and
March 30, 2003 3
Consolidated Statements of Operations - Thirteen Weeks
Ended September 28, 2003 and September 29, 2002 4
Consolidated Statements of Operations - Twenty-six Weeks
Ended September 28, 2003 and September 29, 2002 5
Consolidated Statement of Stockholders' Equity -
Twenty-six Weeks Ended September 28, 2003 6
Consolidated Statements of Cash Flows-Twenty-six Weeks
Ended September 28, 2003 and September 29, 2002 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Qualitative and Quantitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matter to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
-2-
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Sept. 28, March 30,
2003 2003
---------- ----------
(Unaudited)
Current assets:
Cash and cash equivalents including restricted cash
of $83 and $83, respectively $ 2,515 $ 1,415
Marketable securities 7,116 4,623
Notes and accounts receivable, net 2,457 2,607
Inventories 373 389
Assets held for sale 251 799
Prepaid expenses and other current assets 367 642
Deferred income taxes 2,079 2,079
---------- ----------
Total current assets 15,158 12,554
Notes receivable, net 400 740
Property and equipment, net 5,992 6,263
Goodwill 95 95
Intangible assets, net 3,194 3,319
Deferred income taxes 2,639 2,647
Other assets, net 259 268
---------- ----------
$ 27,737 $ 25,886
========== ==========
Current liabilities:
Current maturities of notes payable and capital lease obligations $ 173 $ 173
Accounts payable 805 1,377
Accrued expenses and other current liabilities 6,154 4,942
Deferred franchise fees 145 127
---------- ----------
Total current liabilities 7,277 6,619
Notes payable and capital lease obligations, less current maturities 953 1,053
Other liabilities 2,026 1,831
---------- ----------
Total liabilities 10,256 9,503
---------- ----------
Stockholders' equity:
Common stock, $.01 par value - 30,000,000 shares authorized;
7,065,202 shares issued; 5,290,057 and 5,423,964 shares
outstanding at September 28, 2003 and March 30, 2003,
respectively 71 71
Additional paid-in capital 40,746 40,746
Accumulated deficit (16,905) (18,505)
Accumulated other comprehensive income 65 64
---------- ----------
23,977 22,376
Treasury stock at cost, 1,775,145 and 1,641,238 at September 28,
2003 and March 30, 2003, respectively (6,496) (5,993)
---------- ----------
Total stockholders' equity 17,481 16,383
---------- ----------
$ 27,737 $ 25,886
========== ==========
See accompanying notes to consolidated financial statements.
-3-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen weeks ended September 28, 2003 and September 29, 2002
(In thousands, except per share amounts)
(Unaudited)
2003 2002
---------- ----------
Sales $ 6,299 $ 7,520
Franchise fees and royalties 1,502 1,451
License royalties 786 588
Investment and other income 105 (76)
Interest income 62 81
---------- ----------
Total revenues 8,754 9,564
---------- ----------
Costs and expenses:
Cost of sales 4,344 4,855
Restaurant operating expenses 909 1,633
Depreciation and amortization 254 321
Amortization of intangible assets 66 69
General and administrative expenses 1,697 2,058
Interest expense 25 39
Impairment charge on notes receivable 56 320
---------- ----------
Total costs and expenses 7,351 9,295
---------- ----------
Income from continuing operations before income taxes 1,403 269
Provision for income taxes 547 109
---------- ----------
Income from continuing operations 856 160
---------- ----------
Discontinued operations
Loss from discontinued operations before income taxes - (83)
Benefit from income taxes - (33)
---------- ----------
Loss from discontinued operations - (50)
---------- ----------
Net income $ 856 $ 110
========== ==========
PER SHARE INFORMATION
Basic income (loss) per share
Income from continuing operations $ 0.16 $ 0.03
Loss from discontinued operations 0.00 (0.01)
---------- ----------
Net income $ 0.16 $ 0.02
========== ==========
Diluted income (loss) per share
Income from continuing operations $ 0.15 $ 0.03
Loss from discontinued operations 0.00 (0.01)
---------- ----------
Net income $ 0.15 $ 0.02
========== ==========
Weighted average shares used in computing per share information
Basic 5,313 6,105
========== ==========
Diluted 5,593 6,229
========== ==========
See accompanying notes to consolidated financial statements.
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NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Twenty-six weeks ended September 28, 2003 and September 29, 2002
(In thousands, except per share amounts)
(Unaudited)
2003 2002
---------- ----------
Sales $ 12,634 $ 14,631
Franchise fees and royalties 3,063 2,993
License royalties 1,656 1,399
Investment and other income 293 51
Interest income 126 156
---------- ----------
Total revenues 17,772 19,230
---------- ----------
Costs and expenses:
Cost of sales 8,679 9,569
Restaurant operating expenses 2,091 3,101
Depreciation and amortization 511 675
Amortization of intangible assets 131 139
General and administrative expenses 3,616 4,160
Interest expense 39 78
Impairment charge on long-lived assets - 421
Impairment charge on notes receivable 56 320
---------- ----------
Total costs and expenses 15,123 18,463
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Income from continuing operations before income taxes 2,649 767
Provision for income taxes 1,049 315
---------- ----------
Income from continuing operations 1,600 452
---------- ----------
Discontinued operations
Income from discontinued operations before income taxes - 6
Provision for income taxes - 2
---------- ----------
Income from discontinued operations - 4
---------- ----------
Income from operations before cumulative effect of change in accounting
principle 1,600 456
Cumulative effect of change in accounting principle, net of income tax
benefit of $854 in 2002 - (12,338)
---------- ----------
Net income (loss) $ 1,600 $ (11,882)
========== ==========
PER SHARE INFORMATION
Basic income (loss) per share
Income from continuing operations $ 0.30 $ 0.07
Income from discontinued operations 0.00 0.00
Cumulative effect of change in accounting principle 0.00 (1.98)
---------- ----------
Net income (loss) $ 0.30 $ (1.91)
========== ==========
Diluted income (loss) per share
Income from continuing operations $ 0.29 $ 0.07
Income from discontinued operations 0.00 0.00
Cumulative effect of change in accounting principle 0.00 (1.93)
---------- ----------
Net income (loss) $ 0.29 $ (1.86)
========== ==========
Weighted average shares used in computing per share information
Basic 5,342 6,230
========== ==========
Diluted 5,536 6,401
========== ==========
See accompanying notes to consolidated financial statements.
-5-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Twenty-six weeks ended September 28, 2003
(In thousands, except share amounts)
(Unaudited)
Accumulated
Other
Additional Comprehen- Tresury Total
Common Common Paid-in Accumulated sive Treasury Stock Stockholders'
Shares Stock Capital Deficit Income Shares at cost Equity
------ ----- ------- ------- ------ ------ ------- ------
Balance at March 30, 2003 7,065,202 $ 71 $ 40,746 $ (18,505) $ 64 1,641,238 $ (5,993) $ 16,383
Purchase of treasury stock 133,907 (503) (503)
Comprehensive income:
Net income 1,600 1,600
Unrealized gains on available
for sale securities, net of
tax provision of $1 1 1
--------- ------ ---------- ---------- ----------- --------- -------- -------------
Balance at
Sept. 28, 2003 7,065,202 $ 71 $ 40,746 $ (16,905) $ 65 1,775,145 $ (6,496) $ 17,481
========= ====== ========== ========== =========== ========= ======== =============
See accompanying notes to consolidated financial statements.
-6-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-six weeks ended September 28, 2003 and September 29, 2002
(In thousands)
(Unaudited)
2003 2002
----------- ----------
Cash flows from operating activities:
Net income (loss) $ 1,600 $ (11,882)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of change in accounting principle, net of
deferred taxes - 12,338
Depreciation and amortization 511 884
Amortization of intangible assets 131 139
Amortization of bond premium 30 63
Provision for doubtful accounts 18 81
Gain on sale of available for sale securities (12) (10)
Gain on sale of restaurant (108) (9)
Impairment charge on long-lived assets - 421
Impairment charge on notes receivable 56 320
Deferred income taxes 7 (206)
Changes in operating assets and liabilities:
Marketable securities and investment in limited partnership - 251
Notes and accounts receivable, net 131 (117)
Inventories 16 94
Prepaid expenses and other current assets 275 656
Accounts payable and accrued expenses 640 (1,808)
Deferred franchise fees 18 49
Other assets, net 9 9
Other non current liabilities 97 (277)
----------- ----------
Net cash provided by operating activities 3,419 996
----------- ----------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 1,322 4,282
Purchase of available for sale securities (3,832) (1,108)
Purchase of property and equipment (219) (387)
Proceeds from sale of restaurants, net 466 75
Proceeds from sale of fixed assets 6 15
Payments received on notes receivable 541 161
----------- ----------
Net cash (used in) provided by investing activities (1,716) 3,038
----------- ----------
Cash flows from financing activities:
Repurchase of common stock (503) (3,535)
Principal repayment of borrowings and obligations under capital leases (100) (92)
----------- ----------
Net cash used in financing activities (603) (3,627)
----------- ----------
Net increase in cash and cash equivalents 1,100 407
Cash and cash equivalents, beginning of period 1,415 1,834
----------- ----------
Cash and cash equivalents, end of period $ 2,515 $ 2,241
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash (refunded) paid during the period for income taxes $ (56) $ 45
=========== ==========
Cash paid during the period for interest $ 44 $ 78
=========== ==========
NONCASH FINANCING ACTIVITIES:
Loan to franchisee in connection with sale of restaurant $ 300 $ -
=========== ==========
See accompanying notes to consolidated financial statements.
-7-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 2003
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Nathan's Famous,
Inc. and subsidiaries (collectively "Nathan's" or the "Company") for the
thirteen and twenty-six week periods ended September 28, 2003 and September 29,
2002 have been prepared in accordance with accounting principles generally
accepted in the United States of America. The unaudited financial statements
include all adjustments (consisting of normal recurring adjustments) which, in
the opinion of management, were necessary for a fair presentation of financial
condition, results of operations and cash flows for such periods presented.
However, these results are not necessarily indicative of results for any other
interim period or the full year.
Certain information and footnote disclosures normally included in
financial statements in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to the requirements
of the Securities and Exchange Commission. Management believes that the
disclosures included in the accompanying interim financial statements and
footnotes are adequate to make the information not misleading, but should be
read in conjunction with the consolidated financial statements and notes thereto
included in Nathan's Annual Report on Form 10-K for the fiscal year ended March
30, 2003.
NOTE B - ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 addresses financial and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. Nathan's has evaluated the effect of adoption on its financial
position and results of operations, and it has not had a material impact on the
financial position and results of operations of the Company.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No.
145 eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current criteria for extraordinary classification. Additionally, any gain or
loss on extinguishment of debt that was classified as an extraordinary item in
prior periods presented that does not meet the criteria in APB Opinion No. 30
for classification as an extraordinary item shall be reclassified. In addition,
SFAS No. 145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. SFAS
No. 145 also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the changes related
to lease accounting will be effective for transactions occurring after May 15,
2002. SFAS No. 145 has not had a material impact on the financial position and
results of operations of the Company.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure" which addresses financial accounting and
reporting for recording expenses for the fair value of stock options. SFAS No.
148 provides alternative methods of transition for a voluntary change to fair
value based method of accounting for stock-based employee compensation.
Additionally, SFAS No. 148 requires more prominent and more frequent disclosures
in financial statements about the effects of stock-based compensation. The
adoption of SFAS No. 148 had no impact on the financial position and results of
operations of the Company.
-8-
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement No. 133 on Derivative Instruments and
Hedging Activities" ("SFAS No. 149"), which amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 except for the provisions that were cleared by the
FASB in prior pronouncements. The adoption of SFAS No. 149 has not had, and is
not expected to have, a material effect on Nathan's financial position and
results of operations.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity"("SFAS No. 150"). This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. This Statement shall be effective for financial instruments entered
into or modified after May 31, 2003, and otherwise shall be effective for the
year ended December 31, 2003. The adoption of SFAS No. 150 has not had, and is
not expected to have, a material effect on Nathan's financial position and
results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46
"Consolidation of Variable Interest Entities" ("FIN No. 46"). In general, a
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in activities on behalf of another company.
Until now, a company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN No. 46 changes that by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN No. 46's consolidation
requirements apply immediately to variable interest entities created or acquired
after January 31, 2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply to all financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. The Company has adopted FIN No. 46 effective January 31, 2003. The
adoption of FIN No. 46 has not had, and is not expected to have, a material
effect on Nathan's financial position and results of operations.
NOTE C - INCOME FROM CONTINUING OPERATIONS PER SHARE
Basic income from continuing operations per common share is calculated
by dividing income from continuing operations by the weighted-average number of
shares outstanding and excludes any dilutive effect of stock options or
warrants. Diluted income from continuing operations per common share gives
effect to all potentially dilutive common shares that were outstanding during
the period. Dilutive common shares used in the computation of diluted income
from continuing operations per common share result from the assumed exercise of
stock options and warrants, using the treasury stock method. Income from
continuing operations was the controlling number in determining the number of
shares outstanding used in the calculation of diluted earnings per share for the
twenty-six week period ended September 29, 2002.
The following chart provides a reconciliation of information used in
calculating the per share amounts for the thirteen and twenty-six week periods
ended September 28, 2003 and September 29, 2002, respectively.
THIRTEEN WEEKS
Income from Income from
Continuing Operations Number of Shares Continuing Operations
(In thousands) (In thousands) Per Share
-------------- -------------- ---------
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
Basic EPS
Basic calculation $ 856 $ 160 5,313 6,105 $ 0.16 $ 0.03
Effect of dilutive employee stock
options and warrants - - 280 124 (0.01) -
---------- --------- ----- ----- -------- ---------
Diluted EPS
Diluted calculation $ 856 $ 160 5,593 6,229 $ 0.15 $ 0.03
========== ========= ===== ===== ======== =========
-9-
TWENTY-SIX WEEKS
Income from Income from
Continuing Operations Number of Shares Continuing Operations
(In thousands) (In thousands) Per Share
-------------- -------------- ---------
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
Basic EPS
Basic calculation $ 1,600 $ 452 5,342 6,230 $ 0.30 $ 0.07
Effect of dilutive employee stock
options and warrants - - 194 171 (0.01) -
--------- --------- ----- ----- --------- ---------
Diluted EPS
Diluted calculation $ 1,600 $ 452 5,536 6,401 $ 0.29 $ 0.07
========= ========= ===== ===== ========= =========
Options and warrants to purchase 573,066 and 902,838 shares of common stock in
the thirteen and twenty-six week periods ended September 28, 2003 and September
29, 2002, respectively, were not included in the computation of diluted EPS
because the exercise prices exceeded the average market price of common shares
during the respective periods. These options and warrants were still outstanding
at the end of the respective periods.
NOTE D - STOCK BASED COMPENSATION
At September 28, 2003, the Company had five stock-based employee
compensation plans. The Company accounts for stock-based compensation using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations
("APB No. 25") and has adopted the disclosure provisions of SFAS No. 148
"Accounting for Stock-Based Compensation-Transition and Disclosure." Under APB
No. 25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized. Accordingly, no compensation expense has been recognized
in the consolidated financial statements in connection with employee stock
option grants.
The following table illustrates the effect on net income (loss)and income (loss)
per share had the Company applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation.
Thirteen Weeks Ended Twenty-six Weeks Ended
(In thousands) (In thousands)
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported $ 856 $ 110 $ 1,600 $ (11,882)
Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards (41) (41) (82) (82)
--------- --------- --------- ---------
Pro forma net income (loss) $ 815 $ 69 $ 1,518 $ (11,964)
========= ========= ========= =========
Income (loss) per Share
Basic - as reported $ 0.16 $ 0.02 $ 0.30 $ (1.91)
========= ========= ========= =========
Diluted - as reported $ 0.15 $ 0.02 $ 0.29 $ (1.86)
========= ========= ========= =========
Basic - pro forma $ 0.15 $ 0.01 $ 0.28 $ (1.92)
========= ========= ========= =========
Diluted - pro forma $ 0.15 $ 0.01 $ 0.27 $ (1.87)
========= ========= ========= =========
-10-
Pro forma compensation expense may not be indicative of pro forma expense in
future years. For purposes of estimating the fair value of each option on the
date of grant, the Company utilized the Black-Scholes option-pricing model.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NOTE E - SALES OF RESTAURANTS
The Company observes the provisions of SFAS No. 66, "Accounting for
Sales of Real Estate," which establishes accounting standards for recognizing
profit or loss on sales of real estate. SFAS No. 66 provides for profit
recognition by the full accrual method, provided (a) the profit is determinable,
that is, the collectibility of the sales price is reasonably assured or the
amount that will not be collectible can be estimated, and (b) the earnings
process is virtually complete, that is, the seller is not obligated to perform
significant activities after the sale to earn the profit. Unless both conditions
exist, recognition of all or part of the profit shall be postponed and other
methods of profit recognition shall be followed. In accordance with SFAS No. 66,
the Company recognizes profit on sales of restaurants under both the installment
method and the deposit method, depending on the specific terms of each sale. The
Company continues to record depreciation expense on the property subject to the
sales contracts that are accounted for under the deposit method and records any
principal payments received as a deposit until such time that the transaction
meets the sales criteria of SFAS No. 66.
During the twenty-six weeks ended September 28, 2003, the Company sold
three Company-owned restaurants for total consideration of $1,083,000 and
entered into two management agreements with franchisees to operate two
Company-owned restaurants. During the fiscal year ended March 30, 2003, the
Company sold two Company-operated restaurants and one non-operated restaurant
for a total of $591,000, one of which was sold during the twenty-six weeks ended
September 29, 2002 for $75,000. As these restaurants were either classified as
held-for-sale prior to the adoption of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") or the Company
expects to have a continuing stream of cash flows in the case of the franchised
restaurants, the results of operations for these Company-operated restaurants
are included in "Income from continuing operations" in the accompanying
consolidated statements of operations for the thirteen and twenty-six week
periods ended September 28, 2003 and September 29, 2002. The assets associated
with the restaurants that were sold during the twenty-six weeks ended September
28, 2003 were included in Assets held for sale in the March 30, 2003
consolidated balance sheet. Results of operations of eight restaurants that have
been abandoned subsequent to the adoption of SFAS No. 144 through March 30,
2003, have been included in results from discontinued operations for the
thirteen and twenty-six week periods ended September 29, 2002 (See Note F).
The results of operations for those Company-owned restaurants which have been
sold and included in continuing operations for the thirteen and twenty-six week
periods ended September 28, 2003 and September 29, 2002 are as follows (in
thousands):
Thirteen Weeks Ended Twenty-six Weeks Ended
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2003 2002 2003 2002
---- ---- ---- ----
Sales $ 313 $ 1,722 $ 1,237 $ 3,719
========= ========= ========= =========
Loss from operations before income taxes $ (94) $ (30) $ (124) $ (10)
========= ========= ========= =========
NOTE F - DISCONTINUED OPERATIONS
On April 1, 2002, the Company adopted the provisions of SFAS No. 144.
This statement supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and
-11-
Infrequently Occurring Events and Transactions". SFAS No. 144 retained the
fundamental provisions of SFAS No. 121 for recognition and measurement of
impairment, but amended the accounting and reporting standards for segments of a
business to be disposed of. SFAS No. 144 has broadened the definition of
discontinued operations to include components of an entity whose cash flows are
clearly identifiable, as compared to a segment of a business. SFAS No. 144
requires the Company to classify as discontinued operations any restaurant that
it sells, abandons or otherwise disposes of where the Company has no further
involvement in such restaurant's operations. In the case of restaurants to be
abandoned, depreciation expense is to be revised based upon the expected
remaining useful lives of the affected restaurants. In August 2002, the Company
received written notice from Home Depot U.S.A., Inc. ("Home Depot") that Home
Depot terminated seven License Agreements with the Company pursuant to which the
Company operated Nathan's restaurants in certain Home Depot Improvement Centers.
During the second quarter fiscal 2003, the Company revised its depreciation
estimate on eight restaurants which were closed during the fiscal year ended
March 30, 2003. During the thirteen and twenty-six week periods ended September
29, 2002, eight Company-owned restaurants which were not considered available
for sale at March 31, 2002 are presented as discontinued operations.
Following is a summary of the results of operations for these eight restaurants
for the thirteen and twenty-six week periods ended September 29, 2002 (in
thousands):
Thirteen weeks ended Twenty-six weeks ended
September 29, 2002 September 29, 2002
Sales $ 1,148 $ 2,396
======== =======
(Loss) income from operations before
income taxes $ (83) $ 6
======== =======
NOTE G - STOCK REPURCHASE PROGRAM
On September 14, 2001, Nathan's was authorized to purchase up to one
million shares of its common stock. Pursuant to our stock repurchase program, we
repurchased one million shares of common stock in open market transactions and a
private transaction at a total cost of $3,670,000 through the quarter ended
September 29, 2002. On October 7, 2002, Nathan's was authorized to purchase up
to one million additional shares of its common stock. Through September 28,
2003, Nathan's purchased 775,145 shares of common stock at a cost of
approximately $2,826,000. Subsequent to September 28, 2003, Nathan's purchased
an additional 2,700 shares of common stock at a cost of approximately $11,000.
To date, Nathan's has purchased a total of 1,777,845 shares of common stock at a
cost of approximately $6,507,000. Nathan's expects to make additional purchases
of stock from time to time, depending on market conditions, in open market or in
privately negotiated transactions, at prices deemed appropriate by management.
There is no set time limit on the purchases. Nathan's expects to fund these
stock repurchases from its operating cash flow.
NOTE H - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows (in thousands):
Thirteen Weeks Ended Twenty-six Weeks Ended
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $ 856 $ 110 $ 1,600 $ (11,882)
Unrealized gain on available-for-sale
securities, net of tax (benefit)
provision of ($10), $22, $1 and $47,
respectively (14) 30 1 65
--------- --------- --------- ---------
Comprehensive income (loss) $ 842 $ 140 $ 1,601 $ (11,817)
========= ========= ========= =========
Accumulated other comprehensive income at September 28, 2003 and March 30, 2003
consists entirely of unrealized gains on available-for-sale securities, net of
deferred taxes.
NOTE I - COMMITMENTS AND CONTINGENCIES
-12-
CONTINGENCIES
Elizabeth B. Jackson and Joseph Jackson commenced an action, for
unspecified damages, 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. 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 procure 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.
NOTE J - RECLASSIFICATIONS
Certain reclassifications of prior period balances have been made to
conform to the September 28, 2003 presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION
As used in this Report, the terms "we", "us", "our" and "Nathan's" mean
Nathan's Famous, Inc. and its subsidiaries (unless the context indicates a
different meaning).
During the fiscal year ended March 26, 2000, we completed two
acquisitions that provided us with two highly recognized brands. On April 1,
1999, we became the franchisor of the Kenny Rogers Roasters restaurant system by
acquiring the intellectual property rights, including trademarks, recipes and
franchise agreements of Roasters Corp. and Roasters Franchise Corp. On September
30, 1999, we acquired the remaining 70% of the outstanding common stock of Miami
Subs Corporation we did not already own. Our revenues are generated primarily
from operating company-owned restaurants and franchising the Nathan's, Miami
Subs and Kenny Rogers restaurant concepts, selling products under Nathan's
Branded Product Program and licensing agreements for the sale of Nathan's
products within supermarkets. The Branded Product Program enables foodservice
operators to offer Nathans' hot dogs and other proprietary items for sale within
their facilities. In conjunction with this program, foodservice operators are
granted a limited use of the Nathans' trademark with respect to the sale of hot
dogs and certain other proprietary food items and paper goods.
In addition to plans for expansion through franchising and our Branded
Product Program, Nathan's continues to co-brand within its existing restaurant
system. Currently, the Arthur Treacher's brand is being sold within 126
Nathan's, Kenny Rogers Roasters and Miami Subs restaurants, the Nathan's brand
is included on the menu of 78 Miami Subs and Kenny Rogers restaurants, while the
Kenny Rogers Roasters brand is being sold within 83 Miami Subs and Nathan's
restaurants.
At March 31, 2002, Nathan's owned 22 company-operated restaurants.
During the fiscal year ended March 30, 2003, Nathan's abandoned eight
company-operated restaurants pursuant to early lease terminations which are
presented as discontinued operations pursuant to SFAS No. 144 in the
accompanying financial statements. Nathan's sold two company-operated
restaurants during the fiscal year ended March 30, 2003 and has sold three
company-operated restaurants and entered into two management agreements with
franchisees to operate two company-operated restaurants during the twenty-six
weeks ended September 28, 2003. These seven restaurants are presented as
continuing operations in the accompanying financial statements.
At September 28, 2003, our combined system consisted of 341 franchised
or licensed units, seven company-owned units and over 3,000 Nathan's Branded
Product points of sale that feature Nathan's world famous all-beef hot dogs,
located in 42 states, the District of Columbia and 13 foreign countries. At
September 28, 2003, our company-owned restaurant system included seven Nathan's
units, as compared to 16 Nathan's units, four Miami Subs units and one Kenny
Rogers Roasters unit at September 29, 2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements and the notes to our consolidated
financial statements contain information that is pertinent to management's
discussion and analysis. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities. We
believe the following critical accounting policies involve
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additional management judgement due to the sensitivity of the methods,
assumptions and estimates necessary in determining the related asset and
liability amounts.
Impairment of Goodwill and Other Intangible Assets
Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," ("SFAS No. 142") requires that goodwill and intangible
assets with indefinite lives will no longer be amortized but will be tested
annually (or more frequently if impairment indicators arise) for impairment. The
most significant assumptions which are used in this test are estimates of future
cash flows. We typically use the same assumptions for this test as we use in the
development of our business plans. If these assumptions differ significantly
from actual results, additional impairment expenses may be required. In the
first quarter of fiscal 2003, Nathan's adopted SFAS No. 142. In connection with
the implementation of this new standard, Goodwill, Trademarks, Trade Names and
Recipes were deemed to be impaired and their carrying value was written down by
$13,192,000, or $12,338,000, net of income tax benefit of $854,000.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144") requires
management judgements regarding the future operating and disposition plans for
underperforming assets, and estimates of expected realizable values for assets
to be sold. The application of SFAS No. 144 has affected the amounts and timing
of charges to operating results in recent years. We evaluate possible impairment
of each restaurant individually, and record an impairment charge whenever we
determine that impairment factors exist. We consider a history of restaurant
operating losses to be the primary indicator of potential impairment of a
restaurant's carrying value. During the twenty-six week period ended September
29, 2002, we identified three restaurants that had been impaired and recorded
impairment charges of approximately $421,000. No restaurants were determined to
be impaired during the twenty-six weeks ended September 28, 2003.
Impairment of Notes Receivable
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," requires management judgements regarding
the future collectibility of notes receivable and the underlying fair market
value of collateral. We consider the following factors when evaluating a note
for impairment: a) indications that the borrower is experiencing business
problems, such as operating losses, marginal working capital, inadequate cash
flow or business interruptions; b) whether the loan is secured by collateral
that is not readily marketable; or c) whether the collateral is susceptible to
deterioration in realizable value. When determining possible impairment, we also
assess our future intention to extend certain leases beyond the minimum lease
term and the debtor's ability to meet its obligation over the projected term. We
have identified certain notes receivable that have been impaired and recorded
impairment charges of approximately $56,000 relating to one note and $320,000
relating to three notes during the twenty-six weeks ended September 28, 2003 and
September 29, 2002, respectively.
Revenue Recognition
In the normal course of business, we extend credit to franchisees for
the payment of ongoing royalties and to trade customers of our Branded Product
Program. Notes and accounts receivable, net, as shown on our consolidated
balance sheets are net of allowances for doubtful accounts. An allowance for
doubtful accounts is determined through analysis of the aging of accounts
receivable at the date of the financial statements, assessment of collectibility
based upon historical trends and an evaluation of the impact of current and
projected economic conditions. In the event that the collectibility of a
receivable is doubtful, the associated revenue is not recorded until the facts
and circumstances change in accordance with Staff Accounting Bulletin SAB No.
101, "Revenue Recognition."
Self-insurance Liabilities
We are self-insured for portions of our general liability coverage. As
part of our risk management strategy, our insurance programs include deductibles
for each incident and in the aggregate for a policy year. As such, we accrue
estimates of our ultimate self insurance costs throughout the policy year. These
estimates have been developed based upon our historical trends, however, the
final cost of many of these claims may not be known for five years or longer.
Accordingly, our annual self insurance costs may be subject to adjustment from
previous estimates as facts and circumstances change. During the twenty-six
weeks ended September 28, 2003, we reversed approximately $240,000 of previously
recorded insurance accruals for items that have been concluded without further
payment.
-14-
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 28, 2003 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 29, 2002
Revenues from Continuing Operations
Total sales from continuing operations decreased by 16.2% or $1,221,000
to $6,299,000 for the thirteen weeks ended September 28, 2003 ("second quarter
fiscal 2004") as compared to $7,520,000 for the thirteen weeks ended September
29, 2002 ("second quarter fiscal 2003"). Company-owned restaurant sales
decreased 25.8% or $1,474,000 to $4,230,000 from $5,704,000 primarily due to the
operation of seven fewer company-owned restaurants as compared to the prior
fiscal year. The reduction in company-owned restaurants is the result of our
franchising or entering into management agreements for six restaurants and
selling one restaurant. The financial impact associated with these seven
restaurants lowered restaurant sales by $1,409,000 and lowered restaurant
operating profits by $64,000 versus the second quarter fiscal 2003. Sales at our
comparable company-owned restaurants (consisting of seven Nathan's restaurants)
decreased by only 0.1% in spite of the unseasonable weather experienced in the
Northeast United States during the summer of 2003, where all of our
company-owned restaurants are now located. Sales from the Branded Product
Program increased by 5.9% to $1,923,000 for the second quarter fiscal 2004 as
compared to sales of $1,816,000 in the second quarter fiscal 2003. Additionally,
Nathan's realized sales of $146,000 in connection with a test marketing program
with a marketer of retail products.
Franchise fees and royalties increased by $51,000 or 3.5% to $1,502,000
in the second quarter fiscal 2004 compared to $1,451,000 in the second quarter
fiscal 2003. Franchise royalties increased by $26,000 or 1.8% to $1,442,000 in
the second quarter fiscal 2004 as compared to $1,416,000 in the second quarter
fiscal 2003. This increase in royalty income is due primarily to royalties
earned from new franchised restaurants which were partially offset by the
increase in royalties deemed unrealizable which are not recognized as revenues,
primarily in the South Florida marketplace for the Miami Subs brand, during the
second quarter fiscal 2004 as compared to the second quarter fiscal 2003. At
September 28, 2003, royalties from 44 domestic franchised locations have been
deemed unrealizable as compared to 54 domestic franchised locations at September
29, 2002. Domestic franchise restaurant sales decreased by 0.5% to $41,048,000
in the second quarter fiscal 2004 as compared to $41,236,000 in the second
quarter fiscal 2003. At September 28, 2003, 341 franchised or licensed
restaurants were operating as compared to 350 franchised or licensed restaurants
at September 29, 2002. Franchise fee income was $60,000 in the second quarter
fiscal 2004 as compared to $35,000 in the second quarter fiscal 2003. This
increase was primarily attributable to the opening of one new franchised unit
and the franchising of one company-owned restaurant during the second quarter
fiscal 2004 as compared to one new franchise opening during the second quarter
fiscal 2003.
License royalties were $786,000 in the second quarter fiscal 2004 as
compared to $588,000 in the second quarter fiscal 2003. The majority of this
increase is attributable to revenues from new license agreements and increased
royalties earned from SFG, Inc. (previously known as SMG, Inc.), Nathans'
licensee for the sale of Nathan's frankfurters within supermarkets and club
stores.
Investment and other income was $105,000 in the second quarter fiscal
2004 versus a loss of $76,000 in the second quarter fiscal 2003. During the
second quarter fiscal 2003, Nathans' investment loss of approximately $141,000
was attributable to the investment in limited partnership, which was
subsequently liquidated during the third and fourth quarters of fiscal 2003.
Interest income was $62,000 in the second quarter fiscal 2004 versus
$81,000 in the second quarter fiscal 2003 due primarily to lower interest income
earned on notes receivable as a result of the impairment charges recorded during
the fiscal year ended March 30, 2003. The decline was partly offset by higher
interest earned on Nathans' marketable securities.
Costs and Expenses from Continuing Operations
Cost of sales from continuing operations decreased by $511,000 from
$4,855,000 in the second quarter fiscal 2003 to $4,344,000 in the second quarter
fiscal 2004. During the second quarter fiscal 2004, restaurant cost of sales
were lower than the second quarter fiscal 2003 by approximately $876,000. Cost
of sales were lower by approximately $900,000 as a result of operating fewer
company-owned restaurants during the second quarter fiscal 2004. The cost of
restaurant sales at our company-owned comparable units as a percentage of
restaurant sales was 57.6% in the second quarter fiscal 2004 as compared to
55.9% in the second quarter fiscal 2003 due primarily to higher labor and
related costs. Higher costs of approximately $219,000 were incurred in
connection with our Branded Product Program due primarily to higher commodity
costs during the second quarter fiscal 2004. Commodity costs of our beef
products were higher during the second quarter fiscal 2004 than the first
quarter fiscal 2003 as a result of supply shortages. In response, Nathan's has
already increased menu prices in its company-operated restaurants by
approximately 2.0% and is seeking to assess a temporary surcharge within its
Branded Product Program to offset some of the margin pressure. Nathan's also
incurred cost of sales of $146,000 in connection with a test marketing program
with a marketer of retail products.
-15-
Restaurant operating expenses decreased by $724,000 from $1,633,000 in
the second quarter fiscal 2003 to $909,000 in the second quarter fiscal 2004.
Restaurant operating costs were lower in the second quarter fiscal 2004 by
approximately $445,000 as compared to the second quarter fiscal 2003 as a result
of operating fewer restaurants. Nathan's also incurred lower utility and
insurance costs during the second quarter fiscal 2004.
Depreciation and amortization decreased by $67,000 from $321,000 in the
second quarter fiscal 2003 to $254,000 in the second quarter fiscal 2004.
Depreciation expense was lower by approximately $44,000 as a result of operating
fewer company-owned restaurants and $24,000 as a result of the impairment
charges on long-lived assets recorded during fiscal 2003.
Amortization of intangibles was $69,000 in the second quarter fiscal
2003 as compared to $66,000 in the second quarter fiscal 2004.
General and administrative expenses decreased by $361,000 to $1,697,000
in the second quarter fiscal 2004 as compared to $2,058,000 in the second
quarter fiscal 2003. The decrease in general and administrative expenses was due
primarily to lower personnel and incentive compensation expense of approximately
$125,000 resulting from the implementation of an expense reduction plan, lower
insurance expense of approximately $87,000, expense reversal from the settlement
of a disputed claim of approximately $50,000 and lower property expense of
approximately $32,000.
Interest expense was $25,000 during the second quarter fiscal 2004 as
compared to $39,000 during the second quarter fiscal 2003. The reduction in
interest expense relates primarily to the repayment of outstanding loans between
the two periods.
Impairment charge on notes receivable of $56,000 during the second
quarter fiscal 2004 represents the write-down of one non-performing note
receivable and $320,000 during the second quarter fiscal 2003 represents the
write-down relating to three notes receivable.
Provision for Income Taxes from Continuing Operations
In the second quarter fiscal 2004, the income tax provision on income
from continuing operations was $547,000 or 39.0% as compared to $109,000 or
40.5% in the second quarter fiscal 2003.
Discontinued operations
The second quarter fiscal 2003 included the results of operations of
eight company-owned restaurants, all of which were abandoned by March 30, 2003,
including seven which were abandoned in connection with the Home Depot early
lease terminations. Revenues generated by these eight restaurants were
$1,148,000 during the second quarter fiscal 2003. Loss before income taxes from
these restaurants was $83,000 during the second quarter fiscal 2003. No
restaurants have been accounted for as discontinued operations during fiscal
2004.
TWENTY-SIX WEEKS ENDED SEPTEMBER 28, 2003 COMPARED TO TWENTY-SIX WEEKS ENDED
SEPTEMBER 29, 2002
Revenues from Continuing Operations
Total sales from continuing operations decreased by 13.6% or $1,997,000
to $12,634,000 for the twenty-six weeks ended September 28, 2003 ("fiscal 2004
period") as compared to $14,631,000 for the twenty-six weeks ended September 29,
2002 ("fiscal 2003 period"). Company-owned restaurant sales decreased 25.4% or
$2,831,000 to $8,318,000 from $11,149,000 primarily due to the operation of
seven fewer company-owned restaurants as compared to the prior fiscal year. The
reduction in company-owned restaurants is the result of our franchising or
entering into management agreements for six restaurants and selling one
restaurant. The financial impact associated with these seven restaurants lowered
restaurant sales by $2,482,000 and lowered restaurant operating profits by
$113,000 versus the fiscal 2003 period. Sales decreased 3.9% at our comparable
company-owned restaurants (consisting of seven Nathan's restaurants). The sales
decline at our comparable company-owned restaurants was primarily due to the
unseasonable weather experienced in the Northeast United States during the
spring and summer of 2003, where all of our company-owned restaurants are now
located. Sales from the Branded Product Program increased by 19.8% to $4,170,000
for the fiscal 2004 period as compared to sales of $3,482,000 in the fiscal 2003
period. Additionally, Nathan's realized sales of $146,000 in connection with a
test marketing program with a marketer of retail products.
Franchise fees and royalties increased by $70,000 or 2.3% to
$3,063,000 in the fiscal 2004 period compared to $2,993,000
-16-
in the fiscal 2003 period. Franchise royalties decreased by $61,000 or 2.1% to
$2,841,000 in the fiscal 2004 period as compared to $2,902,000 in the fiscal
2003 period. This decrease is due to the decrease in domestic franchise
restaurant sales and the increase in royalties deemed unrealizable which are not
recognized as revenues, primarily in the South Florida marketplace for the Miami
Subs brand, during the fiscal 2004 period as compared to the fiscal 2003 period.
Domestic franchise restaurant sales decreased by 2.3% to $80,918,000 in the
fiscal 2004 period as compared to $82,864,000 in the fiscal 2003 period. At
September 28, 2003, 341 franchised or licensed restaurants were operating as
compared to 350 franchised or licensed restaurants at September 29, 2002. At
September 28, 2003, royalties from 44 domestic franchised locations have been
deemed unrealizable as compared to 54 domestic franchised locations at September
29, 2002. Franchise fee income derived from new openings and our co-branding
activities was $222,000 in the fiscal 2004 period as compared to $91,000 in the
fiscal 2003 period. This increase was primarily attributable to the opening of
11 new franchised units and the franchising of three company-owned restaurants
during the fiscal 2004 period as compared to two new franchise openings during
the fiscal 2003 period.
License royalties were $1,656,000 in the fiscal 2004 period as compared
to $1,399,000 in the fiscal 2003 period. The majority of this increase is
attributable to revenues from new license agreements.
Investment and other income increased by $242,000 to $293,000 in the
fiscal 2004 period versus $51,000 in the fiscal 2003 period. During the fiscal
2004 period, Nathan's recognized a net gain of $108,000 primarily in connection
with the sale of a company-owned restaurant to a franchisee. In the fiscal 2003
period, Nathan's realized a gain of $135,000 in connection with the early
termination of a Branded Product Program sales agreement. During the fiscal 2003
period, Nathans' investment loss of approximately $241,000 was primarily
attributable to our investment in limited partnership, which was subsequently
liquidated during the third and fourth quarters of fiscal 2003.
Interest income was $126,000 in the fiscal 2004 period versus $156,000
in the fiscal 2003 period due primarily to lower interest income earned on notes
receivable as a result of the impairment charges recorded during the fiscal year
ended March 30, 2003. The decline was partly offset by higher interest earned on
Nathans' marketable securities.
Costs and Expenses from Continuing Operations
Cost of sales from continuing operations decreased by $890,000 from
$9,569,000 in the fiscal 2003 period to $8,679,000 in the fiscal 2004 period.
During the fiscal 2004 period, restaurant cost of sales were lower than the
fiscal 2003 period by approximately $1,745,000. Cost of sales were lower by
approximately $1,589,000 as a result of operating fewer company-owned
restaurants during the fiscal 2004 period. The cost of restaurant sales at our
comparable units as a percentage of restaurant sales was 58.1% in the fiscal
2004 period as compared to 57.3% in the fiscal 2003 period due primarily to
higher labor and related costs. Higher costs of approximately $709,000 were
incurred in connection with the growth of our Branded Product Program and higher
commodity costs during the fiscal 2004 period. Commodity costs of our beef
products were higher during the fiscal 2004 period than the fiscal 2003 period
as a result of supply shortages. In response, Nathan's has already increased
menu prices in its company-operated restaurants by approximately 2.0% and is
seeking to assess a temporary surcharge within its Branded Product Program to
offset some of the margin pressure. Nathan's also incurred cost of sales of
$146,000 in connection with a test marketing program with a marketer of retail
products.
Restaurant operating expenses decreased by $1,010,000 from $3,101,000
in the fiscal 2003 period to $2,091,000 in the fiscal 2004 period. Restaurant
operating costs were lower in the fiscal 2004 period by approximately $780,000,
as compared to the fiscal 2003 period as a result of operating fewer
restaurants. Nathan's also incurred lower utility costs during the fiscal 2004
period.
Depreciation and amortization decreased by $164,000 from $675,000 in
the fiscal 2003 period to $511,000 in the fiscal 2004 period. Depreciation
expense was lower by approximately $73,000 as a result of operating fewer
company-owned restaurants and $47,000 as a result of the impairment charges on
long-lived assets recorded during fiscal 2003.
Amortization of intangibles was $139,000 in the fiscal 2003 period as
compared to $131,000 in the fiscal 2004 period.
General and administrative expenses decreased by $544,000 to $3,616,000
in the fiscal 2004 period as compared to $4,160,000 in the fiscal 2003 period.
The decrease in general and administrative expenses was due primarily to lower
personnel and incentive compensation expense of approximately $222,000 resulting
from the implementation of an expense reduction plan, lower insurance expense of
approximately $82,000, lower bad debts expense of approximately $63,000, expense
reversal from the settlement of a disputed claim of approximately $50,000 and
lower property expense of approximately $55,000.
Interest expense was $39,000 during the fiscal 2004 period as
compared to $78,000 during the fiscal 2003 period. The reduction
-17-
in interest expense relates primarily to the repayment of outstanding loans
between the two periods.
Impairment charge on notes receivable of $56,000 during the fiscal 2004
period represents the write-down of one non-performing note receivable and
$320,000 during the fiscal 2003 period represents the write-down relating to
three notes receivable.
Impairment charge on long-lived assets of $421,000 during the fiscal
2003 period represents the write-down relating to three under-performing stores.
Provision for Income Taxes from Continuing Operations
In the fiscal 2004 period, the income tax provision on income from
continuing operations was $1,049,000 or 39.6% compared to $315,000 or 41.1% in
the fiscal 2003 period.
Discontinued operations
The fiscal 2003 period included the results of operations of eight
company-owned restaurants, all of which were abandoned by March 30, 2003,
including seven which were abandoned in connection with the Home Depot early
lease terminations. Revenues generated by these eight restaurants were
$2,396,000 during the fiscal 2003 period. Income before income taxes from these
restaurants was $6,000 during the fiscal 2003 period. No restaurants have been
accounted for as discontinued operations during fiscal 2004.
Cumulative effect of change in accounting principle
In the first quarter fiscal 2003, we adopted SFAS No. 142, "Accounting
for Goodwill and Other Intangibles." In connection with the implementation of
this new standard, Goodwill, Trademarks, Trade Names and Recipes were deemed to
be impaired and their carrying value was written down by $13,192,000, or
$12,338,000, net of tax.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at September 28, 2003 aggregated $2,515,000,
increasing by $1,100,000 during the fiscal 2004 period. At September 28, 2003,
marketable securities increased by $2,493,000 from March 30, 2003 to $7,116,000
and net working capital increased to $7,881,000 from $5,935,000 at March 30,
2003.
Cash provided by operations of $3,419,000 in the fiscal 2004 period is
primarily attributable to net income of $1,600,000, non-cash charges of
$746,000, including depreciation and amortization of $672,000, an impairment
charge on a note receivable of $56,000 and provision for doubtful accounts of
$18,000, in addition to decreases in prepaid expenses and other current assets
of $275,000, notes and accounts receivable of $131,000, increases in accounts
payable and accrued expenses of $640,000 and other liabilities of $97,000.
Cash used in investing activities of $1,716,000 is comprised primarily
of the purchase of available-for-sale securities of $3,832,000, and capital
expenditures of $219,000 which were partly offset from proceeds from the sale of
available-for-sale securities of $1,322,000, repayments on notes receivable of
$541,000 and proceeds from the sale of restaurants and other fixed assets of
$472,000.
Cash used in financing activities of $603,000 represents repurchases of
133,907 shares of common stock at a total cost of $503,000 and repayments of
notes payable and obligations under capital leases in the amount of $100,000.
On September 14, 2001, Nathan's was authorized to purchase up to one
million shares of its common stock. Pursuant to our stock repurchase program, we
repurchased one million shares of common stock in open market transactions and a
private transaction at a total cost of $3,670,000 through the quarter ended
September 29, 2002. On October 7, 2002, Nathan's was authorized to purchase up
to one million additional shares of its common stock. Through September 28,
2003, Nathan's purchased 775,145 shares of common stock at a cost of
approximately $2,826,000. Subsequent to September 28, 2003, Nathan's purchased
an additional 2,700 shares of common stock at a cost of approximately $11,000.
To date, Nathan's has purchased a total of 1,777,845 shares of common stock at a
cost of approximately $6,507,000. Nathan's expects to make additional purchases
of stock from time to time, depending on market conditions, in open market or in
privately negotiated transactions, at prices deemed appropriate by management.
There is no set time limit on the purchases. Nathan's expects to fund these
stock repurchases from its operating cash flow.
We expect that we will make additional investments in certain existing
restaurants in the future and to fund those investments
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from our operating cash flow. We do not expect to incur significant capital
expenditures to develop new company-owned restaurants through March 29, 2004.
In connection with our acquisition of Miami Subs, we determined that up
to 18 underperforming restaurants would be closed pursuant to our divestiture
plan. We have terminated leases on 17 of those properties and sold the remaining
property to a non-franchisee. The sale of the restaurant was consummated on
October 4, 2002. Since acquiring Miami Subs, we have accrued approximately
$1,461,000 and made payments of approximately $1,282,000 for lease obligations
and termination costs, as part of the acquisition, for units having total future
minimum lease obligations of $8,298,000 that had remaining lease terms of one
year up to approximately 17 years. We may incur future cash payments, consisting
primarily of future lease payments, including costs and expenses associated with
terminating additional leases, that were not part of our divestiture plan.
There are currently 33 properties that we either own or lease from
third parties which we lease or sublease to franchisees, operating managers and
non-franchisees. Additionally, there are currently 2 vacant properties which
were previously sublet to franchisees. We remain contingently liable for all
costs associated with these properties including: rent, property taxes and
insurance. Additionally, we guaranteed financing on behalf of certain
franchisees with two third-party lenders. Our maximum obligation for loans
funded by the lenders as of September 28, 2003 was approximately $731,000.
The following schedules represent Nathan's cash contractual obligations and the
expiration of other contractual commitments by maturity (in thousands):
Payments Due by Period
----------------------
Less than
Cash Contractual Obligations Total 1 Year 1-3 Years 4-5 Years After 5 Years
- ------------------------------------ -------- --------- --------- --------- -------------
Long-Term Debt $ 1,069 $ 167 $ 333 $ 333 $ 236
Capital Lease Obligations 57 6 15 18 18
Employment Agreements 857 726 131 - -
Operating Leases 23,634 4,127 7,931 6,123 5,453
-------- ------- --------- --------- -------------
Gross Cash Contractual Obligations 25,617 5,026 8,410 6,474 5,707
Sublease Income 13,859 2,344 4,535 3,462 3,518
-------- ------- --------- --------- -------------
Net Cash Contractual Obligations $ 11,758 $ 2,682 $ 3,875 $ 3,012 $ 2,189
======== ======= ========= ========= =============
Amount of Commitment Expiration Per Period
Total ------------------------------------------
Amounts Less than
Other Contractual Commitments Committed 1 Year 1-3 Years 4-5 Years After 5 Years
- ----------------------------- --------- -------- --------- --------- -------------
Loan Guarantees $ 731 $ 290 $ 433 $ 8 -
--------- -------- --------- --------- -------------
Total Commercial Commitments $ 731 $ 290 $ 433 $ 8 -
========= ======== ========= ========= =============
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 currently
maintain a $5,000,000 uncommitted bank line of credit and have never borrowed
any funds under the Company's lines of credit.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
CASH AND CASH EQUIVALENTS
We have historically invested our cash and cash equivalents in short
term, fixed rate, highly rated and highly liquid instruments which are
reinvested when they mature throughout the year. Although our existing
investments are not considered at risk with respect to changes in interest rates
or markets for these instruments, our rate of return on short-term investments
could be affected at the time of reinvestment as a result of intervening events.
As of September 28, 2003, Nathans' cash and cash equivalents aggregated
$2,515,000. Earnings on these cash and cash equivalents would increase or
decrease by approximately $6,300 per annum for each .25% change in interest
rates.
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MARKETABLE INVESTMENT SECURITIES
We have invested our marketable investment securities in intermediate
term, fixed rate, highly rated and highly liquid instruments. These investments
are subject to fluctuations in interest rates. As of September 28, 2003, the
market value of Nathans' marketable investment securities aggregated $7,116,000.
Interest income on these marketable investment securities would increase or
decrease by approximately $17,800 per annum for each .25% change in interest
rates. The following chart presents the hypothetical changes in the fair value
of the marketable investment securities held at September 28, 2003 that are
sensitive to interest rate fluctuations (in thousands):
Valuation of securities Valuation of securities
Given an interest rate Given an interest rate
Decrease of X Basis points Increase of X Basis points
-------------------------- Fair --------------------------
(150BPS) (100BPS) (50BPS) Value +50BPS +100BPS +150BPS
-------- -------- ------- ----- ------ ------- -------
Municipal notes and bonds $5,446 $5,366 $5,287 $5,211 $5,137 $5,065 $4,994
====== ====== ====== ====== ====== ====== ======
BORROWINGS
The interest rate on our borrowings are generally determined based upon
the prime rate and may be subject to market fluctuation as the prime rate
changes as determined within each specific agreement. We do not anticipate
entering into interest rate swaps or other financial instruments to hedge our
borrowings. At September 28, 2003, total outstanding debt, including capital
leases, aggregated $1,126,000 of which $1,069,000 is at risk due to changes in
interest rates. The current interest rate is 4.50% per annum and will adjust in
January 2006 and 2009 to prime plus .25%. Nathan's also maintains a $5,000,000
credit line which bears interest at the prime rate plus 1.00% (5.25% at
October 1, 2003). The Company has never borrowed any funds under its line of
credit. Accordingly, the Company does not believe that fluctuations in interest
rates would have a material impact on its financial results.
COMMODITY COSTS
The cost of commodities are subject to market fluctuation. We have not
attempted to hedge against fluctuations in the prices of the commodities we
purchase using future, forward, option or other instruments. As a result, our
future commodities purchases are subject to changes in the prices of such
commodities. Generally, we attempt to pass through permanent increases in our
commodity prices to our customers, thereby reducing the impact of long-term
increases on our financial results. During the twenty-six week period ended
September 28, 2003, the price of our beef products has risen dramatically over
historical norms and particularly last year. This increase has been caused by
reductions in the supply of beef primarily due to: 1) Import of Canadian beef
livestock into the U.S. has been banned since May 2003, 2) Import of Australian
products is down 37% due to local drought conditions and 3) U.S. exports of beef
have increased. Nathan's cost of its hot dogs was approximately 17.4% higher
during the twenty-six weeks ended September 28, 2003 than the twenty-six weeks
ended September 29, 2002. Nathan's has already increased menu prices in its
company-operated restaurants by approximately 2.0% and is seeking to assess a
temporary surcharge within its Branded Product Program to offset some of the
margin pressure. A short term increase or decrease of 10% in the cost of our
food and paper products for the entire twenty-six weeks ended September 28, 2003
would have increased or decreased cost of sales by approximately $566,000.
FOREIGN CURRENCIES
Foreign franchisees generally conduct business with us and make
payments in United States dollars, reducing the risks inherent with changes in
the values of foreign currencies. As a result, we have not purchased future
contracts, options or other instruments to hedge against changes in values of
foreign currencies and we do not believe fluctuations in the value of foreign
currencies would have a material impact on our financial results.
Item 4. Controls and Procedures
EVALUATION AND DISCLOSURE CONTROLS AND PROCEDURES
Based on their evaluation as of a date within 90 days of the filing of
this form 10-Q, our management, with the participation of our Chief Executive
Officer, Chief Operating Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as required by Exchange Act Rule 13a-15. Based on that
evaluation, the Chief Executive Officer, Chief Operating Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the exchange act is recorded, processed,
summarized and reported within the time periods specified by the SEC's rules and
forms.
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CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls over financial
reporting that occurred during the quarter ended september 28, 2003 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
We believe that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
FORWARD LOOKING STATEMENT
Certain statements contained in this report are forward-looking statements.
Forward-looking statements represent our current judgment regarding future
events. Although we would not make forward-looking statements unless we believe
we have a reasonable basis for doing so, we cannot guarantee their accuracy and
actual results may differ materially from those we anticipated due to a number
of uncertainties, many of which we are not aware. These risks and uncertainties,
many of which are not within our control, include, but are not limited to:
economic, weather, legislative and business conditions; the collectibility of
receivables; the availability of suitable restaurant sites on reasonable rental
terms; changes in consumer tastes; the ability to continue to attract
franchisees; the ability to purchase our primary food and paper products at
reasonable prices; no material increases in the minimum wage; and our ability to
attract competent restaurant and managerial personnel. We generally identify
forward-looking statements with the words "believe," "intend," "plan," "expect,"
"anticipate," "estimate," "will," "should" and similar expressions.
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PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
We and our subsidiaries are from time to time involved in ordinary and
routine litigation. We are also involved in the following litigation:
Elizabeth B. Jackson and Joseph Jackson commenced an action, for
unspecified damages, 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. 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 procure 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 4: SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
(a) The Registrant held its Annual Meeting of Stockholders on
September 12, 2003.
(b) Seven Directors were elected at the Annual Meeting to serve
until the Annual Meeting of Stockholders in 2004. The names of
these Directors and votes cast in favor of their election and
shares withheld are as follows:
NAME FOR WITHHELD
---- --------- --------
Howard M. Lorber 4,522,816 58,405
Wayne Norbitz 4,522,966 58,255
Donald Perlyn 4,522,916 58,305
Robert J. Eide 4,522,723 58,498
Brian Genson 4,522,965 58,256
Barry Leistner 4,522,816 58,405
A.F. Petrocelli 4,522,831 58,390
(d) Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Operating Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.3 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by Howard M. Lorber, CEO, Nathan's Famous, Inc.,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Ronald G. DeVos, CFO, Nathan's Famous, Inc.,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) No reports on Form 8-K were filed during the quarter ended
September 28, 2003.
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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: November 10, 2003 By: /s/Wayne Norbitz
-------------------------------------
Wayne Norbitz
President and Chief Operating Officer
(Principal Executive Officer)
Date: November 10, 2003 By: /s/Ronald G. DeVos
-------------------------------------
Ronald G. DeVos
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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