Business Context and Reporting Period
Company: Nathan's Famous, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002 (Thirteen weeks)
Business Overview: The Company operates and franchises Nathan's, Miami Subs, and Kenny Rogers Roasters restaurants, and licenses branded products. As of June 30, 2002, the system included 354 franchised/licensed units and 22 company-owned units.
Key Financial Metrics
| Metric (in thousands) | Q1 2003 (Ended June 30, 2002) | Q1 2002 (Ended June 24, 2001) |
|---|---|---|
| Total Revenues | $10,914 | $11,876 |
| Operating Income | $587 | $1,676 |
| Net Income (Loss) | $(11,992) | $962 |
| Diluted EPS | $(1.89) | $0.14 |
| Cash and Cash Equivalents | $1,839 | $2,882 |
| Net Working Capital | $7,541 | $9,565 |
| Total Debt (Notes Payable) | $1,733 | Not explicitly stated for prior period |
Note: Net loss for Q1 2003 includes a non-cash cumulative effect of accounting change of $(12,338) thousand.
Material Changes vs. Prior Period
- Accounting Change (SFAS 142): The primary driver of the net loss was the adoption of SFAS No. 142, resulting in a one-time impairment charge of $13,192,000 (net of tax: $12,338,000) to write off substantially all goodwill, trademarks, and recipes. This charge is non-cash.
- Revenue Decline: Total revenues decreased 8.1% to $10,914,000. Sales decreased 2.7% due to operating three fewer company-owned stores, partially offset by a 34.6% increase in Branded Product Program sales. Franchise fees and royalties dropped 29.6% due to lower franchise sales and increased unrealizable royalties.
- Operating Expenses: Amortization of intangible assets decreased by $152,000 due to the cessation of goodwill amortization under SFAS 142. However, an impairment charge of $421,000 was recorded for three underperforming company-owned restaurants.
- Cash Flow: Net cash used in operating activities was $261,000, compared to $2,232,000 used in the prior year. Investing activities provided $3,167,000 primarily from the sale of securities. Financing activities used $2,901,000, largely due to stock repurchases.
Guidance, Outlook, and Risks
- Outlook: Management expects available cash, marketable securities, and internally generated funds to finance operations for at least the next twelve months. No significant capital expenditures for new company-owned restaurants are expected for the fiscal year ending March 30, 2003.
- Restaurant Divestiture: The Company continues to close underperforming Miami Subs locations. Five company-operated restaurants were contracted for sale subsequent to June 30, 2002, with closings expected by October 2002.
- Stock Repurchase: The Company repurchased 780,425 shares during the quarter. Subsequent to the quarter end, an additional 168,949 shares were purchased.
- Risks and Contingencies:
- Legal Settlement: A $17 million lawsuit regarding employee misconduct was settled for $650,000, which was accrued as of March 31, 2002.
- Market Conditions: Revenues in South Florida remain negatively impacted by the events of September 11, 2001, though Las Vegas and airport locations have rebounded.
- Commodity Prices: The Company does not hedge against commodity price fluctuations.
Investor Verification Checklist
- Non-GAAP Adjustments: Verify the impact of the $12.3 million non-cash accounting charge on the reported net loss to assess underlying operational performance.
- Franchise Health: Investigate the 18.3% decline in domestic franchise restaurant sales and the 39 locations with unrealizable royalties.
- Liquidity Position: Confirm the sufficiency of the $1.8 million cash balance and $5.6 million in marketable securities given the recent operating cash outflows.
- Asset Disposition: Monitor the completion of the five restaurant sales contracted post-quarter end to realize expected proceeds of $1.674 million.
- Legal Exposure: Confirm the final court approval of the $650,000 litigation settlement.