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 25, 2005.
[ ] 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.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3166443
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
1400 OLD COUNTRY ROAD, WESTBURY, NEW YORK 11590
(Address of principal executive offices including zip code)
(516) 338-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange 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 November 7, 2005, an aggregate of 5,590,905 shares of the registrant's common
stock, par value of $.01, were outstanding.
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited) 3
Consolidated Balance Sheets - September 25, 2005 and
March 27, 2005 3
Consolidated Statements of Earnings - Thirteen Weeks
Ended September 25, 2005 and September 26, 2004 4
Consolidated Statements of Earnings - Twenty-six Weeks
Ended September 25, 2005 and September 26, 2004 5
Consolidated Statement of Stockholders' Equity -
Twenty-six Weeks Ended September 25, 2005 6
Consolidated Statements of Cash Flows -Twenty-six Weeks
Ended September 25, 2005 and September 26, 2004 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Qualitative and Quantitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits 25
SIGNATURES 26
-2-
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
at September 25, 2005 and March 27, 2005
(in thousands, except share and per share amounts)
Sept. 25, 2005 March 27, 2005
-------------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents including restricted cash of $83 $ 5,240 $ 2,935
Marketable securities 16,124 11,641
Notes and accounts receivable, net 3,461 3,591
Inventories 641 688
Assets available for sale -- 688
Prepaid expenses and other current assets 418 907
Deferred income taxes 1,168 1,168
------- --------
Total current assets 27,052 21,618
Notes receivable, net 121 136
Property and equipment, net 4,445 4,583
Goodwill 95 95
Intangible assets, net 2,669 2,800
Deferred income taxes 1,757 1,792
Other assets, net 257 245
------- --------
$36,396 $ 31,269
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of note payable and capital lease obligations $ 174 $ 174
Accounts payable 1,863 2,009
Accrued expenses and other current liabilities 5,947 5,088
Deferred franchise fees 324 338
------- --------
Total current liabilities 8,308 7,609
Note payable and capital lease obligations, less current maturities 605 692
Other liabilities 1,504 1,612
------- --------
Total liabilities 10,417 9,913
------- --------
COMMITMENTS AND CONTINGENCIES (Note H)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 30,000,000 shares authorized;
7,482,005 and 7,440,317 shares issued; and 5,590,905 and 5,549,217
shares outstanding at September 25, 2005 and March 27, 2005, respectively 75 74
Additional paid-in capital 42,947 42,665
Deferred compensation (245) (281)
Accumulated deficit (9,597) (13,874)
Accumulated other comprehensive loss (43) (70)
------- --------
33,137 28,514
Treasury stock, at cost, 1,891,100 shares (7,158) (7,158)
------- --------
Total stockholders' equity 25,979 21,356
------- --------
$36,396 $ 31,269
======= ========
-3-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen weeks ended September 25, 2005 and September 26, 2004
(in thousands, except share and per share amounts)
(Unaudited)
2005 2004
---------- ----------
REVENUES
Sales $ 8,780 $ 7,148
Franchise fees and royalties 1,738 1,670
License royalties 833 884
Interest income 187 156
Investment and other income 114 50
---------- ----------
Total revenues 11,652 9,908
---------- ----------
COSTS AND EXPENSES
Cost of sales 6,156 4,905
Restaurant operating expenses 851 839
Depreciation and amortization 192 225
Amortization of intangible assets 66 66
General and administrative expenses 2,121 2,042
Interest expense 9 12
---------- ----------
Total costs and expenses 9,395 8,089
---------- ----------
Income from continuing operations before provision
for income taxes 2,257 1,819
Provision for income taxes 871 717
---------- ----------
Income from continuing operations 1,386 1,102
Income (loss) from discontinued operations, including gain
from disposal of discontinued operations of $2,819 in 2005 2,816 (21)
Income tax expense (benefit) 1,094 (9)
---------- ----------
Income (loss) from discontinued operations 1,722 (12)
---------- ----------
Net income $ 3,108 $ 1,090
========== ==========
PER SHARE INFORMATION
Basic income (loss) per share:
Income from continuing operations $ .25 $ .21
Income (loss) from discontinued operations .31 --
---------- ----------
Net income $ .56 $ .21
========== ==========
Diluted income (loss) per share:
Income from continuing operations $ .21 $ .18
Income (loss) from discontinued operations .27 --
---------- ----------
Net income $ .48 $ .18
========== ==========
Weighted average shares used in computing income (loss)
per share
Basic 5,566,000 5,203,000
========== ==========
Diluted 6,527,000 5,924,000
========== ==========
The accompanying notes are an integral part of these statements.
-4-
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Twenty-six weeks ended September 25, 2005 and September 26, 2004
(in thousands, except share and per share amounts)
(Unaudited)
2005 2004
---------- ----------
REVENUES
Sales $ 17,002 $ 13,579
Franchise fees and royalties 3,486 3,335
License royalties 1,990 1,823
Interest income 333 338
Investment and other income 196 98
---------- ----------
Total revenues 23,007 19,173
---------- ----------
COSTS AND EXPENSES
Cost of sales 12,451 9,524
Restaurant operating expenses 1,634 1,598
Depreciation and amortization 391 443
Amortization of intangible assets 131 131
General and administrative expenses 4,226 4,066
Interest expense 20 24
---------- ----------
Total costs and expenses 18,853 15,786
---------- ----------
Income from continuing operations before provision
for income taxes 4,154 3,387
Provision for income taxes 1,593 1,333
---------- ----------
Income from continuing operations 2,561 2,054
Income (loss) from discontinued operations, including gain
from disposal of discontinued operations of $2,819 in 2005 2,806 (24)
Income tax expense (benefit) 1,090 (10)
---------- ----------
Income (loss) from discontinued operations 1,716 (14)
---------- ----------
Net income $ 4,277 $ 2,040
========== ==========
PER SHARE INFORMATION
Basic income (loss) per share:
Income from continuing operations $ .46 $ .39
Income (loss) from discontinued operations .31 --
---------- ----------
Net income $ .77 $ .39
========== ==========
Diluted income (loss) per share:
Income from continuing operations $ .39 $ .34
Income (loss) from discontinued operations .27 --
---------- ----------
Net income $ .66 $ .34
========== ==========
Weighted average shares used in computing income (loss)
per share
Basic 5,560,000 5,208,000
========== ==========
Diluted 6,501,000 5,918,000
========== ==========
The accompanying notes are an integral part of these statements.
-5-
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Twenty-six weeks ended September 25, 2005
(in thousands, except share amounts)
(Unaudited)
Accumulated Treasury Stock,
Additional Other at Cost Total
Common Common Paid-In Deferred Accumulated Comprehensive ------------------ Stockholders'
Shares Stock Capital Compensation Deficit Loss Shares Amount Equity
--------- ------ ---------- ------------ ----------- ------------- --------- ------- ------------
Balance, March 27, 2005 7,440,317 $74 $42,665 $(281) $(13,874) $(70) 1,891,100 $(7,158) $21,356
Shares issued in
connection with
exercise of
employee stock options 41,688 1 237 -- -- -- -- -- 238
Income tax benefit on
stock option
exercises -- -- 45 -- -- -- -- -- 45
Amortization of
deferred
compensation
relating to
restricted stock -- -- -- 36 -- -- -- -- 36
Unrealized gains on
marketable
securities, net of
deferred income tax
expense of $19 -- -- -- -- -- 27 -- -- 27
Net Income -- -- -- -- 4,277 -- -- -- 4,277
--------- --- ------- ----- -------- ---- --------- ------- -------
Balance, September 25,
2005 7,482,005 $75 $42,947 $(245) $ (9,597) $(43) 1,891,100 $(7,158) $25,979
========= === ======= ===== ======== ==== ========= ======= =======
The accompanying notes are an integral part of this statement.
-6-
Nathan's Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-six weeks ended September 25, 2005 and September 26, 2004
(in thousands)
(Unaudited)
2005 2004
------- -------
Cash flows from operating activities:
Net Income $ 4,277 $ 2,040
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 391 443
Amortization of intangible assets 131 131
Amortization of bond premium 105 64
Amortization of deferred compensation 36 --
Gain on disposal of fixed assets (2,869) (42)
Provision for doubtful accounts 5 5
Income tax benefit on stock option exercises 45 --
Deferred income taxes 16 18
Changes in operating assets and liabilities:
Accounts and notes receivable (155) (1,185)
Inventories 47 262
Prepaid expenses and other current assets 489 146
Other assets (12) (2)
Accounts payable, accrued expenses and other current liabilities 713 (274)
Deferred franchise fees (14) 140
Other liabilities (74) (299)
------- -------
Net cash provided by operating activities 3,131 1,447
------- -------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities 1,188 900
Purchases of available-for-sale securities (5,730) (1,323)
Purchases of property and equipment (251) (441)
Payments received on notes receivable 295 115
Proceeds from sales of property and equipment 3,521 12
------- -------
Net cash used in investing activities (977) (737)
------- -------
Cash flows from financing activities:
Principal repayments of notes payable and capitalized lease obligations (87) (86)
Repurchases of common stock -- (237)
Proceeds from the exercise of stock options and warrants 238 46
------- -------
Net cash provided by (used in) financing activities 151 (277)
------- -------
Net increase in cash and cash equivalents 2,305 433
Cash and cash equivalents, beginning of period 2,935 3,449
------- -------
Cash and cash equivalents, end of period $ 5,240 $ 3,882
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 20 $ 24
------- -------
Income taxes $ 1,512 $ 645
======= =======
The accompanying notes are an integral part of these statements.
-7-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 25, 2005
(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 25, 2005 and September 26, 2004 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
27, 2005.
A summary of the Company's significant accounting policies is identified in
Note B of the Notes to Consolidated Financial Statements included in the
Company's 2005 Annual Report on Form 10-K. There have been no changes to the
Company's significant accounting policies subsequent to March 27, 2005.
NOTE B - RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs--an amendment of ARB No.43" ("SFAS No.151"),
which is the result of its efforts to converge U.S. accounting standards for
inventories with International Accounting Standards. SFAS No.151 requires idle
facility expenses, freight, handling costs, and wasted material (spoilage) costs
to be recognized as current-period charges. It also requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No.151 will be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company has evaluated the impact of this standard on its consolidated financial
statements, and does not believe the adoption of SFAS No. 151 will have a
material impact on its results of operations.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment"
("SFAS No. 123R"), which revises SFAS No. 123, Accounting for Stock Based
Compensation, and generally requires, among other things, that all employee
stock-based compensation be measured using a fair value method and that the
resulting compensation cost be recognized in the financial statements. SFAS 123R
also provides guidance on how to determine the grant-date fair value for awards
of equity instruments, as well as alternative methods of adopting its
requirements. On April 14, 2005, the SEC delayed the effective date of required
adoption of SFAS No. 123R to the beginning of the first annual period after June
15, 2005. The Company plans to adopt the provisions of SFAS No. 123R in the
first quarter of fiscal year 2007. The Company is currently evaluating the
impact of adoption of the various provisions of SFAS No. 123R.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS No.154"). APB Opinion No. 20 previously required that most voluntary
changes in accounting principle be recognized by including in net income of the
period of the change the cumulative effect of changing to the new accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company does not expect the adoption of SFAS No. 154 to have an impact on
its consolidated financial statements.
NOTE C - INCOME PER SHARE
Basic income per common share is calculated by dividing income by the
weighted-average number of common shares outstanding and excludes any dilutive
effect of stock options or warrants. Diluted income 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 per
common share result from the assumed exercise of stock options and warrants,
using the treasury stock method.
-8-
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 25, 2005 and September 26, 2004, respectively.
THIRTEEN WEEKS
Income from
Income from Continuing Operations
Continuing Operations Number of Shares Per Share
--------------------- ---------------- ---------------------
2005 2004 2005 2004 2005 2004
------ ------ ----- ----- ------ ------
(in thousands) (in thousands)
Basic EPS
Basic calculation $1,386 $1,102 5,566 5,203 $ 0.25 $ 0.21
Effect of dilutive employee stock
options and warrants -- -- 961 721 (0.04) (0.03)
------ ------ ----- ----- ------ ------
Diluted EPS
Diluted calculation $1,386 $1,102 6,527 5,924 $ 0.21 $ 0.18
====== ====== ===== ===== ====== ======
TWENTY-SIX WEEKS
Income from
Income from Continuing Operations
Continuing Operations Number of Shares Per Share
--------------------- ---------------- ---------------------
2005 2004 2005 2004 2005 2004
------ ------ ----- ----- ------ ------
(in thousands) (in thousands)
Basic EPS
Basic calculation $2,561 $2,054 5,560 5,208 $ 0.46 $ 0.39
Effect of dilutive employee stock
options and warrants -- -- 941 710 (0.07) (0.05)
------ ------ ----- ----- ------ ------
Diluted EPS
Diluted calculation $2,561 $2,054 6,501 5,918 $ 0.39 $ 0.34
====== ====== ===== ===== ====== ======
Options and warrants to purchase 19,500 and 92,878 shares of common stock
in both the thirteen and twenty-six week periods ended September 25, 2005 and
September 26, 2004, 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.
NOTE D - STOCK BASED COMPENSATION
At September 25, 2005, 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 Statement of
Financial Accounting Standards ("SFAS") No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure." Under APB No. 25, when the exercise
price of stock options or warrants granted to employees or the Company's
independent directors 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 or independent director stock option
grants. Compensation expense for restricted stock awards is measured at the fair
value on the date of grant, based upon the number of shares granted and the
quoted market price of the Company's stock. Such value is recognized as expense
over the vesting period of the award.
-9-
The following table illustrates the effect on net income and earnings per
share had the Company applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation:
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------- ----------------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands) (in thousands)
Net income, as reported $3,108 $1,090 $4,277 $2,040
Add: Stock-based compensation
included in net income 11 -- 22 --
Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards (33) (51) (67) (102)
------ ------ ------ ------
Pro forma net income $3,086 $1,039 $4,232 $1,938
====== ====== ====== ======
Earnings per Share
Basic - as reported $ 0.56 $ 0.21 $ 0.77 $ 0.39
====== ====== ====== ======
Diluted - as reported $ 0.48 $ 0.18 $ 0.66 $ 0.34
====== ====== ====== ======
Basic - pro forma $ 0.55 $ 0.20 $ 0.76 $ 0.37
====== ====== ====== ======
Diluted - pro forma $ 0.47 $ 0.18 $ 0.65 $ 0.33
====== ====== ====== ======
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 and independent director 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 and independent director stock options.
During the twenty-six weeks ended September 26, 2004, the Company granted
95,000 options having an exercise price of $5.62. All of the options granted
vest as follows: 33 1/3% on the first anniversary of the date of grant, 66 2/3%
on the second anniversary of the date of grant and 100% on the third anniversary
of the date of grant. All options have an expiration date of ten years from the
date of grant. No options were granted during the twenty-six weeks ended
September 25, 2005.
The weighted average option fair values and the assumptions used to
estimate these values are as follows:
Twenty-six
Weeks Ended
Sept. 26, 2004
--------------
Option fair values $2.87
Expected life (years) 7.0
Interest rate 4.50%
Volatility 29.9%
Dividend yield 0.0%
-10-
NOTE E - PROPERTY AND EQUIPMENT, NET
1. SALE OF RESTAURANT
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 the full accrual method, 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 25, 2005, the Company sold one
Company-owned restaurant, that it had previously leased to the operator pursuant
to a management agreement, for total cash consideration of $515,000 and entered
into a franchise agreement with the buyer to continue operating the restaurant.
As the Company expects to have a continuing stream of cash flows from this
restaurant, the results of operations for this restaurant are included in
"Income from continuing operations before income taxes" in the accompanying
consolidated statements of operations for the thirteen and twenty-six week
periods ended September 25, 2005 through the date of sale. There were no sales
of Company-owned restaurants during the thirteen and twenty-six week periods
ended September 26, 2004.
The results for this restaurant are as follows:
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------- ----------------------
Sept. 25, Sept. 26, Sept.25, Sept. 26,
2005 2004 2005 2004
--------- --------- -------- ---------
(in thousands) (in thousands)
Total revenues $2 $12 $61 $24
--- --- --- ---
Income from continuing operations before income taxes $2 $11 $59 $21
=== === === ===
2. DISCONTINUED OPERATIONS
The Company follows the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No.144"), related to the
accounting and reporting for segments of a business to be disposed of. In
accordance with SFAS No. 144, the definition of discontinued operations includes
components of an entity whose cash flows are clearly identifiable. SFAS No. 144
requires the Company to classify as discontinued operations any restaurant or
property that Nathan's sells, abandons or otherwise disposes of where the
Company will have no further involvement in, or cash flows, from such
restaurant's operations.
On July 13, 2005, Nathan's sold all of its right, title and interest in and
to a vacant real estate parcel previously utilized as a parking lot, adjacent to
a Company-owned restaurant, located in Brooklyn, New York, in exchange for a
cash payment of $3,100,000. Nathan's also entered into an agreement pursuant to
which an affiliate of the buyer has assumed all of Nathan's rights and
obligations under a lease for an adjacent property and has agreed to pay
$500,000 to Nathan's over a period of up to three years, $100,000 of which has
been paid. Nathan's recognized a gain before income taxes of $2,819,000, net of
associated expenses. The operating expenses for this property have been included
in discontinued operations for the thirteen and twenty-six week periods ended
September 25, 2005 and September 26, 2004 as the Company has no continuing
involvement in the operation of the property or cash flows from this property.
During the fiscal year ended March 27, 2005, the Company ceased the
operations of one Company-owned restaurant pursuant to the termination of the
lease and notification by the landlord not to renew. The results of operations
for this restaurant have been included in discontinued operations for thirteen
and twenty-six week periods ended September 26, 2004 as the Company has no
continuing involvement in the operation of the restaurant or cash flows from
this restaurant.
-11-
The results of operations for these properties are as follows:
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------- ----------------------
Sept. 25, Sept. 26, Sept.25, Sept. 26,
2005 2004 2005 2004
--------- --------- -------- ---------
(in thousands) (in thousands)
Total revenue $ -- $187 $ -- $406
------ ---- ------ ----
Gain (loss) from discontinued operations before
income taxes (including gain on disposal of
$2,819 in 2005) $2,816 $(21) $2,806 $(24)
====== ==== ====== ====
NOTE F- - STOCK REPURCHASE PROGRAM
On September 14, 2001, Nathan's was authorized to purchase up to one
million shares of its common stock. Pursuant to its stock repurchase program, it
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 25,
2005, Nathan's purchased 891,100 shares of common stock at a cost of
approximately $3,488,000. To date, Nathan's has purchased a total of 1,891,100
shares of common stock at a cost of approximately $7,158,000. There were no
repurchases of the Company's common stock during the twenty-six weeks ended
September 25, 2005. 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 G - COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------- ----------------------
Sept. 25, Sept. 26, Sept.25, Sept. 26,
2005 2004 2005 2004
--------- --------- -------- ---------
(in thousands) (in thousands)
Net income $3,108 $1,090 $4,277 $2,040
Unrealized gain (loss) on available-for-sale
securities, net of tax provision (benefit) of
($35), $37, $19 and ($18), respectively (56) 63 27 (24)
------ ------ ------ ------
Comprehensive income $3,052 $1,153 $4,304 $2,016
====== ====== ====== ======
Accumulated other comprehensive income at September 25, 2005 and September
26, 2004 consists entirely of unrealized gains and (losses) on
available-for-sale securities, net of deferred taxes.
NOTE H - COMMITMENTS AND CONTINGENCIES
1. CONTINGENCIES
An action was commenced, in the Circuit Court of the Fifteenth Judicial
Circuit, Palm Beach County, Florida in September 2001 against Miami Subs and
EKFD Corporation, a Miami Subs franchisee ("the franchisee") claiming negligence
in connection with a slip and fall which allegedly occurred on the premises of
the franchisee for unspecified damages. Pursuant to the terms of the Miami Subs
Franchise Agreement, the franchisee is obligated to indemnify Miami Subs and
hold it harmless against claims asserted and procure an insurance policy which
names 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.
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Miami Subs has received a claim from a landlord for a franchised location
that Miami Subs owes the landlord $150,000 in connection with the construction
of the leased premises. Miami Subs had been the primary tenant at the location
since 1993, when the lease was assigned to Miami Subs by the initial tenant
under the lease, the party to whom the construction loan was made. On September
6, 2005, this claim was settled without payment by Miami Subs of any sums.
Ismael Rodriguez commenced an action, in the Supreme Court of the State of
New York, Kings County, in May 2004 against Nathan's Famous, Inc. seeking
damages of $1,000,000 for claims of age discrimination in connection with the
termination of Mr. Rodriguez's employment. Mr. Rodriguez was terminated from his
position in connection with his repeated violation of company policies and
failure to follow company-mandated procedures. On October 28, 2005, the parties
entered into a settlement and release of all claims by the employee against the
Company. Nathan's cost related to this claim, including its defense, was
$50,000.
In July 2001, a female manager at one of the Company-owned restaurants
filed a charge with the Equal Employment Opportunity Commission ("EEOC")
claiming sex discrimination in violation of Title VII of the Civil Rights Act of
1964 and a violation of the Equal Pay Act. The employee claimed that she was
being paid less than male employees for comparable work, which Nathan's denied.
In June and August 2004, the employee filed further charges with the EEOC
claiming that Nathan's had retaliated against her, first by refusing her request
for a shift change and then by terminating her employment in July 2004.
Following a determination by the EEOC in May 2005 that there was no reasonable
cause to believe that the employee was terminated in retaliation for filing a
charge of discrimination, but that there was reasonable cause to believe that
she was paid less than similarly situated males in violation of the Equal Pay
Act and Title VII and that she was denied a request for a change in shift in
retaliation for filing the discrimination charge, the EEOC advised that it would
engage in conciliation and settlement efforts to try to resolve the employee's
charges. On September 30, 2005, those efforts resulted in the settlement and
release of all claims by the employee against the Company, as well as any
related charges made by the EEOC against the Company. These financial statements
reflect the cost of the settlement, which did not have a material affect on our
financial position, results of operations or cash flows.
The Company is involved in various other litigation, in the normal course of
business, none of which, in the opinion of management, will have a significant
adverse impact on its financial position or results of operations.
2. GUARANTEES
The Company guarantees certain equipment financing for certain franchisees with
a third-party lender. The Company's maximum obligation, should all of the
franchisees default on the required monthly payment to the third-party lender
for loans funded by the lender, as of September 25, 2005, would be approximately
$45,000. The equipment financing expires at various dates through fiscal 2008.
The Company also guarantees a franchisee's note payable with a bank. The note
payable matures in August 2006. The Company's maximum obligation, should the
franchisee default on the required monthly payments to the bank, for loans
funded by the lender, as of September 25, 2005, would be approximately $207,000.
The guarantees referred to above were entered into by the Company prior to
December 31, 2002 and have not been modified since that date, which was the
effective date for FIN 45 "Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Guarantees of Indebtedness of Others."
3. EMPLOYMENT AGREEMENTS
On July 12, 2005, Miami Subs Corporation ("MSC"), and Donald Perlyn, entered
into an amendment to Mr. Perlyn's employment agreement with MSC dated as of
January 15, 1999. Mr. Perlyn is employed as President of MSC and is also an
Executive Vice President of Nathan's. Nathan's is a guarantor of MSC's
obligations under the Employment Agreement. Pursuant to the Amendment, (1) the
definition of a competing business has been expanded so that Mr. Perlyn is
prohibited from competing in the business of selling food products to the
foodservice industry and (2) the definition of a change in control has been
changed. The effect of the change in the definition of change in control is that
Mr. Perlyn will be entitled to receive a payment upon a change in control of
Nathan's, rather than upon a change in control of Nathan's or MSC. In connection
with the execution and delivery of the Amendment, Nathan's entered into a letter
agreement with Mr. Perlyn on the same date pursuant to which Nathan's agreed
that upon a sale by it of the stock of MSC and any termination of Mr. Perlyn's
Employment Agreement upon the consummation of such sale, Nathan's will enter
into an employment agreement with Mr. Perlyn on substantially the same terms and
conditions as those currently contained in the Employment Agreement.
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NOTE I - RECLASSIFICATIONS
Certain reclassifications of prior period balances have been made to
conform to the September 25, 2005 presentation.
NOTE J - SUBSEQUENT EVENT
On October 24, 2005, Hurricane Wilma struck the south Florida counties of
Miami-Dade, Broward and Palm Beach. The Company's franchisees operate 73
restaurants within these counties. As of November 2, 2005, 61 of these
restaurants have reopened. Nathan's has not incurred significant damage to its
owned property.
Nathan's is currently attempting to assess the financial impact that
Hurricane Wilma may have on our results of operations.
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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", "Nathan's" or "the
Company" mean Nathan's Famous, Inc. and its subsidiaries (unless the context
indicates a different meaning).
Our revenues are generated primarily from selling products under Nathan's
Branded Product Program, operating Company-owned restaurants, franchising the
Nathan's, Miami Subs and Kenny Rogers restaurant concepts and licensing the sale
of Nathan's products within supermarkets and other retail venues. 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 of our Branded Product Program and
through franchising, Nathan's continues to co-brand within its restaurant
system. Currently, the Arthur Treacher's brand is being sold within 122
Nathan's, Kenny Rogers Roasters and Miami Subs restaurants, the Nathan's brand
is included on the menu of 60 Miami Subs and Kenny Rogers restaurants, while the
Kenny Rogers Roasters brand is being sold within 121 Miami Subs and Nathan's
restaurants.
At September 25, 2005, our combined restaurant system consisted of 361
franchised or licensed units and six Company-owned units (including one seasonal
unit), located in 23 states, and 12 foreign countries. At September 25, 2005,
and September 26, 2004, our Company-owned restaurant system included six
Nathan's units.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements and the notes to our consolidated
financial statements contain information that is pertinent to management's
discussion and analysis. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities. We
believe the following critical accounting policies involve additional management
judgment 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 reviewed
annually (or more frequently if impairment indicators arise) for impairment. The
most significant assumptions 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. No goodwill
or other intangible assets were determined to be impaired during the twenty-six
weeks ended September 25, 2005.
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 judgments regarding the future operating and disposition plans for
under-performing 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. No restaurants were determined to be impaired
during the twenty-six weeks ended September 25, 2005.
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Impairment of Notes Receivable
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," requires management judgments 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 that extended term. No notes
receivable were determined to be impaired during the twenty-six weeks ended
September 25, 2005.
Revenue Recognition
Sales by Company-owned restaurants, which are typically paid in cash by the
customer, are recognized upon the performance of services.
In connection with its franchising operations, the Company receives initial
franchise fees, development fees, royalties, contributions to marketing funds,
and in certain cases, revenue from sub-leasing restaurant properties to
franchisees.
Franchise and area development fees, which are typically received prior to
completion of the revenue recognition process, are recorded as deferred revenue.
Initial franchise fees, which are non-refundable, are recognized as income when
substantially all services to be performed by Nathan's and conditions relating
to the sale of the franchise have been performed or satisfied, which generally
occurs when the franchised restaurant commences operations. The following
services are typically provided by the Company prior to the opening of a
franchised restaurant:
- Approval of all site selections to be developed.
- Provision of architectural plans suitable for restaurants to be
developed.
- Assistance in establishing building design specifications, reviewing
construction compliance and equipping the restaurant.
- Provision of appropriate menus to coordinate with the restaurant
design and location to be developed.
- Provide management training for the new franchisee and selected staff.
- Assistance with the initial operations of restaurants being developed.
Development fees are non-refundable and the related agreements require the
franchisee to open a specified number of restaurants in the development area
within a specified time period or the agreements may be canceled by the Company.
Revenue from development agreements is deferred and recognized as restaurants in
the development area commence operations on a pro rata basis to the minimum
number of restaurants required to be open, or at the time the development
agreement is effectively canceled.
Nathan's recognizes franchise royalties when they are earned and deemed
collectible. Franchise fees and royalties that are not deemed to be collectible
are not recognized as revenue until paid by the franchisee, or until
collectibility is deemed to be reasonably assured. The number of non-performing
units are determined by analyzing the number of months that royalties have been
paid during a period. When royalties have been paid for less than the majority
of the time frame reported, such location is deemed non-performing. Accordingly,
the number of non-performing units may differ between the quarterly results and
year to date results. Revenue from sub-leasing properties is recognized as
income as the revenue is earned and becomes receivable and deemed collectible.
Sub-lease rental income is presented net of associated lease costs in the
consolidated statements of earnings.
Nathan's recognizes revenue from the Branded Product Program when it is
determined that the products have been delivered via third party common carrier
to Nathans' customers.
Nathan's recognizes revenue from royalties on the licensing of the use of
its name on certain products produced and sold by outside vendors. The use of
Nathans' name and symbols must be approved by Nathan's prior to each specific
application to ensure proper quality and project a consistent image. Revenue
from license royalties is recognized when it is earned and deemed collectible.
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
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projected economic conditions. In the event that the collectibility of a
receivable at the date of the transaction is doubtful, the associated revenue is
not recorded until the facts and circumstances change in accordance with Staff
Accounting Bulletin ("SAB") No. 104, "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. The self-insurance accrual
at September 25, 2005, and September 26, 2004, was $315,000 and $330,000
respectively. During the twenty-six week periods ended September 25, 2005, and
September 26, 2004, we reversed approximately $38,000 and $33,000 of previously
recorded insurance accruals, to reflect the revised estimated cost of claims.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 25, 2005 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 26, 2004
Revenues from Continuing Operations
Total sales increased by $1,632,000 or 22.8% to $8,780,000 for the thirteen
weeks ended September 25, 2005 ("second quarter fiscal 2006") as compared to
$7,148,000 for the thirteen weeks ended September 26, 2004 ("second quarter
fiscal 2005"). Sales from the Branded Product Program increased by 49.5% to
$4,258,000 for the second quarter fiscal 2006 as compared to sales of $2,848,000
in the second quarter fiscal 2005. This increase was primarily attributable to
increased volume from new accounts, and a price increase of approximately 2.7%.
Total company-owned restaurant sales (representing our six comparable Nathan's
restaurants) increased by $166,000 or 4.2% to $4,115,000 from $3,949,000. During
the second quarter fiscal 2006, sales to our television retailer were
approximately $56,000 higher than the second quarter fiscal 2005.
Franchise fees and royalties increased by $68,000 or 4.1% to $1,738,000 in
the second quarter fiscal 2006 compared to $1,670,000 in the second quarter
fiscal 2005. Franchise royalties were $1,574,000 in the second quarter fiscal
2006 as compared to $1,528,000 in the second quarter fiscal 2005. Domestic
franchise restaurant sales increased by 1.5% to $42,141,000 in the second
quarter fiscal 2006 as compared to $41,518,000 in the second quarter fiscal
2005. Comparable domestic franchise sales (consisting of 191 restaurants)
increased by $932,000 or 2.6% to $36,193,000 in the second quarter fiscal 2006
as compared to $35,261,000 in the second quarter fiscal 2005. At September 25,
2005, 361 domestic and international franchised or licensed units were operating
as compared to 343 domestic and international franchised or licensed units at
September 26, 2004. During the thirteen weeks ended September 25, 2005, royalty
income from 26 domestic franchised locations have been deemed unrealizable as
compared to 30 domestic franchised locations during the thirteen weeks ended
September 26, 2004. Domestic franchise fee income was $87,000 in the second
quarter fiscal 2006 as compared to $42,000 in the second quarter fiscal 2005.
International franchise fee income was $74,000 in the second quarter fiscal
2006, as compared to $100,000 during the second quarter fiscal 2005. During the
second quarter fiscal 2006, six new franchised units opened, including one unit
in the Dominican Republic, and one unit in the United Arab Emirates. During the
second quarter fiscal 2005, five new franchised units were also opened. During
the second quarter fiscal 2006, Nathan's also recognized $3,000 of forfeited
franchise fees.
License royalties were $833,000 in the second quarter fiscal 2006 as
compared to $884,000 in the second quarter fiscal 2005. This decrease was
primarily attributable to lower royalties earned from the sale of Nathan's
frankfurters within supermarkets and club stores.
Investment and other income was $187,000 in the second quarter fiscal 2006
versus $156,000 in the second quarter fiscal 2005 due to higher income from
subleasing activities, which was partly offset by lower amortization of deferred
revenue and other income.
Interest income was $114,000 in the second quarter fiscal 2006 versus
$50,000 in the second quarter fiscal 2005 due primarily to higher interest
earned on the increased amount of our marketable securities during the second
quarter fiscal 2006 as compared to the second quarter fiscal 2005. We invest our
excess cash in marketable securities.
Costs and Expenses from Continuing Operations
Cost of sales increased by $1,251,000 to $6,156,000 in the second quarter
fiscal 2006 from $4,905,000 in the second quarter fiscal 2005. During the second
quarter fiscal 2006, the cost of restaurant sales at our six comparable
company-owned units was $2,211,000 or 53.7% of restaurant sales as compared to
$2,157,000 or 54.6% of restaurant sales in the second quarter fiscal 2005. This
reduction was primarily due to lower labor and associated costs. Food and paper
costs, as a percentage of restaurant sales, were
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slightly lower than last year due to the effects of re-engineering of our menu
and certain retail price increases to mitigate higher beef costs. We incurred
higher costs of our Branded Product Program totaling approximately $1,151,000
primarily in connection with the increased volume during the second quarter
fiscal 2006 as compared to the second quarter fiscal 2005. We also paid slightly
more for beef products during the second quarter fiscal 2006. Commodity costs of
our hot dogs, which have continued to increase for the third consecutive year,
were approximately 1.0 % higher during the second quarter fiscal 2006 than the
second quarter fiscal 2005. The beef cost increases caused us to increase our
selling prices beginning in June 2005 in an effort to reduce the margin pressure
that we continue to experience.
Restaurant operating expenses increased by $12,000 to $851,000 in the
second quarter fiscal 2006 from $839,000 in the second quarter fiscal 2005 due
primarily to higher utility costs. Based upon current market conditions for
natural gas and electricity, we expect continuing margin pressure in the future.
Depreciation and amortization decreased by $33,000 to $192,000 in the
second quarter fiscal 2006 from $225,000 in the second quarter fiscal 2005.
Amortization of intangible assets was $66,000 in the second quarter fiscal
2006 and second quarter fiscal 2005.
General and administrative expenses increased by $79,000 to $2,121,000 in
the second quarter fiscal 2006 as compared to $2,042,000 in the second quarter
fiscal 2005. The increase in general and administrative expenses was primarily
due to higher, net personnel and incentive compensation expense of $98,000,
arising from increased earnings due to the sale to a third party of a vacant
piece of property in Brooklyn, New York, as discussed below. We accrued $141,000
of incentive compensation during the second quarter fiscal 2006, which was
partly offset by the elimination of severance expense of $86,000 recorded during
the second quarter fiscal 2005.
Interest expense was $9,000 during the second quarter fiscal 2006 as
compared to $12,000 during the second quarter fiscal 2005. The reduction in
interest expense relates primarily to the repayment of outstanding loans between
the two periods.
Provision for Income Taxes from Continuing Operations
In the second quarter fiscal 2006, the income tax provision was $871,000 or
38.6% of income from continuing operations before income taxes as compared to
$717,000 or 39.4% of income from continuing operations before income taxes in
the second quarter fiscal 2005. The effective income tax rate was lower during
the second quarter fiscal 2006 due primarily to Nathan's earning higher tax
exempt interest income than during the second quarter fiscal 2005.
Discontinued Operations
On July 13, 2005, we sold a vacant piece of property in Brooklyn, New York,
to a third party, which property was classified as "available-for-sale" at March
27, 2005. The property had a carrying value of $187,000 and Nathan's recognized
a gain before income taxes of $2,819,000, net of associated expenses. In
addition, we previously closed one company-operated restaurant during fiscal
2005. Revenues from these properties were $187,000 during the second quarter
fiscal 2005.
Income before income taxes from discontinued operations during the second
quarter fiscal 2006 was $2,816,000 as compared to loss before income taxes from
discontinued operations during the second quarter fiscal 2005 of $21,000.
TWENTY-SIX WEEKS ENDED SEPTEMBER 25, 2005 COMPARED TO TWENTY-SIX WEEKS ENDED
SEPTEMBER 26, 2004
Revenues from Continuing Operations
Total sales increased by $3,423,000 or 25.2% to $17,002,000 for the
twenty-six weeks ended September 25, 2005, ("fiscal 2006 period") as compared to
$13,579,000 for the twenty-six weeks ended September 26, 2004 ("fiscal 2005
period"). Sales from the Branded Product Program increased by 58.7% to
$8,563,000 for the fiscal 2006 period as compared to sales of $5,396,000 in the
fiscal 2005 period. This increase was primarily attributable to increased volume
from new accounts, and a price increase of approximately 1.9%. The six
company-owned Nathan's restaurant sales increased by $278,000 or 3.9% to
$7,421,000 from $7,143,000 representing our comparable restaurants. During the
fiscal 2006 period, sales to our television retailer were approximately $22,000
lower than the fiscal 2005 period.
Franchise fees and royalties increased by $151,000 or 4.5% to $3,486,000 in
the fiscal 2006 period compared to $3,335,000 in the fiscal 2005 period.
Franchise royalties were $3,086,000 in the fiscal 2006 period as compared to
$3,025,000 in the fiscal 2005 period. Domestic franchise restaurant sales
increased to $83,235,000 in the fiscal 2006 period as compared to $83,018,000 in
the fiscal 2005 period. Comparable domestic franchise sales (consisting of 191
restaurants) increased by $1,871,000 or 2.7% to $71,565,000 in the fiscal 2006
period as compared to $69,694,000 in the fiscal 2005 period. At September 25,
2005, 361 domestic and international
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franchised or licensed units were operating as compared to 343 domestic and
international franchised or licensed units at September 26, 2004. During the
twenty-six weeks ended September 25, 2005, royalty income from 26 domestic
franchised locations have been deemed unrealizable as compared to 30 domestic
franchised locations during the twenty-six weeks ended September 26, 2004.
Domestic franchise fee income was $146,000 in the fiscal 2006 period as compared
to $186,000 in the fiscal 2005 period. International franchise fee income was
$185,000 in the fiscal 2006 period as compared to $124,000 in the fiscal 2005
period. During the fiscal 2006 period, 16 new franchised units opened, including
three units in Japan, one unit in Kuwait, one unit in the Dominican Republic and
two units in the United Arab Emirates. During the fiscal 2006 period, we
franchised one restaurant that previously operated pursuant to a management
agreement. During the fiscal 2005 period, 13 new domestic franchised units were
opened. During the fiscal 2006 period, Nathan's also recognized $69,000 in
connection with three forfeited franchise fees.
License royalties increased $167,000 or 9.2% to $1,990,000 in the fiscal
2006 period as compared to $1,823,000 in the fiscal 2005 period. This increase
is primarily attributable to higher royalties earned from the sale of Nathan's
frankfurters within supermarkets and club stores and new license agreements that
commenced operations over the last year.
Investment and other income was $333,000 in the fiscal 2006 period versus
$338,000 in the fiscal 2005 period due to reductions in amortization of deferred
revenue and other income, which was partly offset by higher subleasing income.
Interest income was $196,000 in the fiscal 2006 period versus $98,000 in
the fiscal 2005 period due primarily to higher interest earned on the increased
amount of our marketable securities during the fiscal 2006 period as compared to
the fiscal 2005 period. We invest our excess cash in marketable securities.
Costs and Expenses from Continuing Operations
Cost of sales increased by $2,927,000 to $12,451,000 in the fiscal 2006
period from $9,524,000 in the fiscal 2005 period. During the fiscal 2006 period,
the cost of restaurant sales at our six comparable units was $4,076,000 or 54.9%
of restaurant sales as compared to $4,029,000 or 56.4% of restaurant sales in
the fiscal 2005 period. This reduction was primarily due to lower labor and
associated costs. Food and paper costs, as a percentage of restaurant sales,
were slightly lower in the fiscal 2006 period than in the fiscal 2005 period due
to the effects of re-engineering of our menu and certain retail price increases
to mitigate higher beef costs. We incurred higher costs of our Branded Product
Program totaling approximately $2,915,000 primarily in connection with the
increased volume during the fiscal 2006 period as compared to the fiscal 2005
period. We also paid significantly more for beef products during the fiscal 2006
period. Commodity costs of our hot dogs, which have continued to increase for
the third consecutive year, were approximately 7.3% higher during the fiscal
2006 period than the fiscal 2005 period. These commodity cost increases caused
us to increase our selling prices beginning in June 2005 in an effort to reduce
the margin pressure that we continue to experience.
Restaurant operating expenses increased by $36,000 to $1,634,000 in the
fiscal 2006 period from $1,598,000 in the fiscal 2005 period due primarily to
higher utility costs. Based upon current market conditions for natural gas and
electricity, we expect continuing margin pressure in the future.
Depreciation and amortization decreased by $52,000 to $391,000 in the
fiscal 2006 period from $443,000 in the fiscal 2005 period.
Amortization of intangible assets was $131,000 in the fiscal 2006 period
and fiscal 2005 period.
General and administrative expenses increased by $160,000 to $4,226,000 in
the fiscal 2006 period as compared to $4,066,000 in the fiscal 2005 period. The
increase in general and administrative expenses was primarily due to higher net
personnel and incentive compensation expense of $182,000 and marketing costs of
$71,000 which were partly offset by lower professional fees of $38,000 and
corporate insurance expense of $18,000. Higher net personnel and incentive
compensation expense arose from increased earnings by the company due to the
sale to a third party of a vacant piece of property in Brooklyn, New York, as
discussed below. We accrued $141,000 of incentive compensation during the second
quarter fiscal 2006, which was partly offset by the elimination of severance
expense of $86,000 recorded during the second quarter fiscal 2005.
Interest expense was $20,000 during the fiscal 2006 period as compared to
$24,000 during the fiscal 2005 period. The reduction in interest expense relates
primarily to the repayment of outstanding loans between the two periods.
Provision for Income Taxes from Continuing Operations
In the fiscal 2006 period, the income tax provision was $1,593,000 or 38.3%
of income from continuing operations before income taxes as compared to
$1,333,000 or 39.4% of income from continuing operations before income taxes in
the fiscal 2005 period. The effective income tax rate was lower during the
fiscal 2006 period due in part to Nathan's earning higher tax exempt interest
income than during the fiscal 2005 period.
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Discontinued Operations
On July 13, 2005, we sold a vacant piece of property in Brooklyn, New York,
to a third party, which was classified as "available-for-sale" at March 27,
2005. The property had a carrying value of $187,000 and Nathan's recognized a
gain before income taxes of $2,819,000, net of associated expenses. In addition,
we previously closed one company-operated restaurant during fiscal 2005.
Revenues were $406,000 during the fiscal 2005 period.
Income before income taxes from discontinued operations during the fiscal
2006 period was $2,806,000 as compared to loss before income taxes from
discontinued operations of $24,000 during the fiscal 2005 period.
OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any off-balance sheet arrangements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at September 25, 2005 aggregated $5,240,000,
increasing by $2,305,000 during the fiscal 2006 period. At September 25, 2005,
marketable securities increased by $4,483,000 from March 27, 2005 to $16,124,000
and net working capital increased to $18,744,000 from $14,009,000 at March 27,
2005.
Cash provided by operations of $3,131,000 in the fiscal 2006 period is
primarily attributable to net income, excluding the gains on sales of fixed
assets, of $1,461,000, non-cash expenses of $729,000, a reduction of prepaid
expenses and other current assets of $489,000 and an increase in accounts
payable and accrued expenses of $713,000 which were partly reduced by increased
accounts receivable and notes receivable of $155,000 resulting primarily from
higher sales from the Branded Product Program and increased royalties from
franchisees.
We invested cash of $977,000 of which $4,542,000 resulted from the net
purchase of available-for-sale securities. We received proceeds of $3,521,000
from the sale of vacant land and from the sale of another restaurant to a
franchisee. Nathan's received payments on notes receivable of $295,000, and also
invested $251,000 in capital expenditures.
We received cash from our financing activities of $151,000, which is
comprised of proceeds received from the exercise of employee stock options of
$238,000 net of our repayment of bank debt in the amount of $87,000 during the
fiscal 2006 period.
On September 14, 2001, Nathan's was authorized to purchase up to one
million shares of its common stock. Pursuant to its stock repurchase program, it
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 25,
2005, Nathan's purchased 891,100 shares of common stock at a cost of
approximately $3,488,000. To date, Nathan's has purchased a total of 1,891,100
shares of common stock at a cost of approximately $7,158,000. There were no
repurchases of the Company's common stock during the twenty-six weeks ended
September 25, 2005. 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 and support the growth of the Branded Product Program in the future
and fund those investments from our operating cash flow. We may also incur
capital expenditures in connection with opportunistic investments on a
case-by-case basis.
There are currently 27 properties that we either own or lease from third
parties which we lease or sublease to franchisees, operating managers and
non-franchisees. We remain contingently liable for all costs associated with
these properties including: rent, property taxes and insurance. We may incur
future cash payments with respect to such properties, consisting primarily of
future lease payments, including costs and expenses associated with terminating
any of such leases. 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 25, 2005 was approximately $252,000.
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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 $ 736 $ 167 $ 333 $ 236 $ --
Capital Lease Obligations 43 7 18 18 --
Employment Agreements 1,633 749 572 312 --
Operating Leases 13,849 3,511 5,583 3,069 1,686
------- ------ ------ ------ ------
Gross Cash Contractual Obligations 16,261 4,434 6,506 3,635 1,686
Sublease Income 9,005 2,074 3,371 1,954 1,606
------- ------ ------ ------ ------
Net Cash Contractual Obligations $ 7,256 $2,360 $3,135 $1,681 $ 80
======= ====== ====== ====== ======
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 $252 $252 $-- $-- $--
---- ---- --- --- ---
Total Commercial Commitments $252 $252 $-- $-- $--
==== ==== === === ===
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
$7,500,000 uncommitted bank line of credit and have never borrowed any funds
under our lines of credit.
RISKS RELATED TO OUR BUSINESS
ANY INCREASES IN THE MINIMUM WAGE MAY ADVERSELY AFFECT OUR OPERATIONS.
We depend to a large degree, on employees who work at the minimum wage.
Substantial increases in the minimum wage could adversely affect our operations.
In addition, changes in other laws and regulations which govern our
relationships with our employees, such as minimum wage requirements, overtime
and working conditions and citizenship requirements may also adversely affect
our operations.
ANY INCREASES IN OUR FOOD AND OTHER COSTS MAY ADVERSELY AFFECT OUR
PROFITABILITY.
Commodity costs of our hot dogs have increased for the past three years. In
addition, recent increases in fuel costs have negatively affected our margins.
We have increased our selling prices in an attempt to reduce the negative impact
of the increases in the cost of beef on our profits, and have attempted to
reduce fuel costs by finding alternate suppliers. Continued increases in the
cost of our food products and fuel costs could adversely affect our
profitability.
INCREASES IN COSTS TO FRANCHISEES MAY ADVERSELY AFFECT OUR ABILITY TO ATTRACT
AND RETAIN FRANCHISEES, WHICH WOULD ADVERSELY AFFECT OUR PROFITABILITY.
In the event that our prospective franchisees are unable to locate suitable
restaurant sites on reasonable terms, it could adversely affect our franchisees
projected financial results and they may determine not to enter into franchise
agreements with us. Similarly, increased commodity and other costs which
adversely affect our prospective franchisees' profitability may cause them not
to enter into franchise agreements with us. In addition, such increased
commodity and other costs may reduce the profitability of our existing
franchisees, resulting in the termination of existing franchise agreements. Our
failure to attract new franchisees or retain our existing franchisees, whether
due to increased costs or otherwise, would result in a decrease in our franchise
fee revenue and adversely affect our profitability.
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IN THE EVENT THAT ANY OF OUR VENDORS OR LICENSEES ENCOUNTERS FINANCIAL
DIFFICULTIES AND FAILS TO PAY US, IT COULD ADVERSELY EFFECT OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
If the financial condition of any vendor or licensee deteriorates resulting
in an impairment of that party's ability to pay to us amounts owed in respect of
a significant amount of outstanding receivables, our financial condition would
be adversely effected.
WE CANNOT GUARANTEE MARKET ACCEPTANCE OF NEW PRODUCTS.
We cannot assure you that Nathan's, Miami Subs or Kenny Rogers will be able
to achieve the necessary market acceptance for any new products, or compete
effectively, in their product markets. Broad market acceptance of new products
is critical to our future success. We believe that factors affecting the ability
of our products to achieve broad market acceptance include:
- brand recognition,
- quality,
- broad variety, and
- price.
As a result, revenues for any future quarter may not be predictable with
any significant degree of accuracy. If revenue levels are below expectations,
operating results are likely to be adversely affected and may be below the
expectations of public market analysts and investors. In such event, the price
of the common stock would likely decrease.
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 25, 2005, Nathans' cash and cash equivalents aggregated $5,240,000.
Earnings on these cash and cash equivalents would increase or decrease by
approximately $13,100 per annum for each .25% change in interest rates.
MARKETABLE INVESTMENT SECURITIES
We have invested our marketable investment securities in intermediate term,
fixed rate, highly rated and highly liquid instruments. These investments are
subject to fluctuations in interest rates. As of September 25, 2005, the market
value of Nathans' marketable investment securities aggregated $16,124,000.
Interest income on these marketable investment securities would increase or
decrease by approximately $40,300 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 25, 2005 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 $17,105 $16,769 $16,442 $16,124 $15,814 $15,511 $15,214
======= ======= ======= ======= ======= ======= =======
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 25, 2005, total outstanding debt, including capital leases, aggregated
$779,000 of which $736,000 is subject to risk related to changes in interest
rates. The current interest rate is 4.50% per annum and will adjust in January
2006 and January 2009 to prime plus 0.25%. We also maintain a $7,500,000 credit
line at the prime rate (6.75% as of September 20, 2005). We have never borrowed
any funds under our credit lines. Interest expense on these borrowings would
increase or decrease by approximately $1,800 per annum for each .25% change in
interest rates. Accordingly, we do not believe that fluctuations in interest
rates would have a material impact on our financial results.
-22-
COMMODITY COSTS
The cost of commodities are subject to market fluctuation. We have not
attempted to hedge against fluctuations in the prices of the commodities we
purchase using future, forward, option or other instruments. As a result, our
future commodities purchases are subject to changes in the prices of such
commodities. Generally, we attempt to pass through permanent increases in our
commodity prices to our customers, thereby reducing the impact of long-term
increases on our financial results. A short term increase or decrease of 10% in
the cost of our food and paper products for the thirteen weeks ended September
25, 2005 would have increased or decreased cost of sales by approximately
$954,000.
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
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, as of the end of the period covered by this report, our
disclosure controls and procedures were effective to ensure that the 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.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls over financial
reporting that occurred during the quarter ended September 25, 2005 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. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives and our Chief Executive
Officer, Chief Operating Officer and Chief Financial Officer have concluded that
such controls and procedures are effective at the reasonable assurance level.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report are forward-looking statements.
We generally identify forward-looking statements with the words "believe,"
"intend," "plan," "expect," "anticipate," "estimate," "will," "should" and
similar expressions. 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 risks and uncertainties, many of which we are not
aware and / or cannot control. These risks and uncertainties include, but are
not limited to: the effect on sales over concerns relating to bovine spongiform
encephalopathy, BSE, which was first identified in the United States on December
23, 2003; economic, weather, legislative and business conditions; the
collectibility of receivables; changes in consumer tastes; our ability to
attract competent restaurant and managerial personnel; and the other risks
described above, under "Risks Related to Our Business".
-23-
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:
An action was commenced, in the Circuit Court of the Fifteenth Judicial
Circuit, Palm Beach County, Florida in September 2001 against Miami Subs and
EKFD Corporation, a Miami Subs franchisee ("the franchisee") claiming negligence
in connection with a slip and fall which allegedly occurred on the premises of
the franchisee for unspecified damages. Pursuant to the terms of the Miami Subs
Franchise Agreement, the franchisee is obligated to indemnify Miami Subs and
hold it harmless against claims asserted and procure an insurance policy which
names 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.
Ismael Rodriguez commenced an action, in the Supreme Court of the State of
New York, Kings County, in May 2004 against Nathan's Famous, Inc. seeking
damages of $1,000,000 for claims of age discrimination in connection with the
termination of Mr. Rodriguez's employment. Mr. Rodriguez was terminated from his
position in connection with his repeated violation of company policies and
failure to follow company-mandated procedures. On October 28, 2005, the parties
entered into a settlement and release of all claims by the employee against the
Company. Nathan's cost related to this claim, including its defense, was
$50,000.
In July 2001, a female manager at one of our company-owned restaurants
filed a charge with the Equal Employment Opportunity Commission ("EEOC")
claiming sex discrimination in violation of Title VII of the Civil Rights Act of
1964 and a violation of the Equal Pay Act. The employee claimed that she was
being paid less than male employees for comparable work, which Nathan's denied.
In June and August 2004, the employee filed further charges with the EEOC
claiming that Nathan's had retaliated against her, first by refusing her request
for a shift change and then by terminating her employment in July 2004.
Following a determination by the EEOC in May 2005 that there was no reasonable
cause to believe that the employee was terminated in retaliation for filing a
charge of discrimination, but that there was reasonable cause to believe that
she was paid less than similarly situated males in violation of the Equal Pay
Act and Title VII and that she was denied a request for a change in shift in
retaliation for filing the discrimination charge, the EEOC advised that it would
engage in conciliation and settlement efforts to try to resolve the employee's
charges. On September 30, 2005, those efforts resulted in the settlement and
release of all claims by the employee against the Company, and of any related
charges made by the EEOC against the Company. These financial statements reflect
the cost of the settlement, which did not have a material affect on our
financial position, results of operations or cash flows.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEED:
(c) We have not repurchased any equity securities during the quarter ended
September 25, 2005.
ITEM 4: SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
(a) The Registrant held its Annual Meeting of Stockholders on September 15,
2005.
(b) Nine Directors were elected at the Annual Meeting to serve until the Annual
Meeting of Stockholders in 2006. The names of these Directors and votes
cast in favor of their election and shares withheld are as follows:
FOR WITHHELD
--------- --------
WAYNE NORBITZ 4,698,960 70,050
ROBERT J. EIDE 4,697,580 71,430
ERIC GATOFF 4,698,656 70,354
BRIAN S. GENSON 4,699,027 69,983
BARRY LEISTNER 4,697,817 71,193
HOWARD M. LORBER 4,697,804 71,206
DONALD L. PERLYN 4,697,934 71,076
A.F. PETROCELLI 4,699,099 69,911
CHARLES RAICH 4,698,117 70,893
(c) Not applicable.
(d) Not applicable.
-24-
ITEM 6: EXHIBITS
(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.
-25-
SIGNATURES
Pursuant to the requirements of the Securities 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 07, 2005 By: /s/ Wayne Norbitz
-------------------------------------
Wayne Norbitz
President and Chief Operating Officer
(Principal Executive Officer)
Date: November 07, 2005 By: /s/ Ronald G. DeVos
-------------------------------------
Ronald G. DeVos
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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