NATH

Business Context and Reporting Period

Company: Nathan's Famous, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Thirteen and twenty-six weeks ended September 23, 2001 (Fiscal 2002).
Business Overview: The company operates and franchises Nathan's, Kenny Rogers Roasters, and Miami Subs restaurant concepts. It also licenses products for sale in supermarkets and other foodservice locations. As of September 23, 2001, the system included 24 company-owned units and 379 franchised/licensed units.

Key Financial Metrics

Note: Debt figures represent current maturities ($183) plus non-current notes ($1,693) as of Sept 23, 2001.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 7.0% for the 13-week period and 7.5% for the 26-week period compared to the prior year. This was primarily driven by a reduction in the number of company-owned restaurants (from 32 to 24) and fewer franchised units operating.
• Comparable Sales Growth: Despite the unit count reduction, comparable restaurant sales increased 5.2% for the 13-week period and 1.4% for the 26-week period, aided by strong summer performance at the Coney Island location.
• Cost Management: Cost of sales and operating expenses decreased significantly due to the closure of underperforming units. However, food costs for the Branded Product Program rose due to high commodity prices for meat products.
• Investment Income: Investment and other income dropped sharply ($396k to $43k for the quarter) due to weaker financial market performance compared to the prior year.
• Asset Sales: The company generated $1.875 million in proceeds from the sale of two company-owned restaurants (one condemned by the State of Florida, one sold to a franchisee).

Outlook, Risks, and Contingencies

• Divestiture Plan: The company is executing a plan to close up to 18 underperforming Miami Subs restaurants. Leases for 15 have been terminated; two remain for sale, and one will terminate in May 2002. Future lease termination costs may be incurred.
• Tax Audit Settlement: A tentative settlement with the IRS regarding Miami Subs tax audits (1991-1996) is pending. If approved, the liability will be approximately $101,520 plus interest (total under $300,000), significantly lower than the previously assessed $2.4 million. The company has accrued $345,000 for this matter.
• Legal Proceedings:
  • Employment Lawsuit: A $17 million lawsuit alleges negligence in hiring/supervising a former employee accused of molesting a minor employee. The company intends to defend vigorously.
  • Franchise Dispute: A lawsuit regarding a Miami Subs franchise purchase alleges fraud and breach of contract; damages are unspecified.
  • Slip and Fall: A negligence claim against a franchisee; the company is seeking indemnification from the franchisee's insurer.
• Stock Repurchase: Authorized to repurchase up to 1 million shares of common stock, funded by operating cash flow.
• Accounting Changes: The company is evaluating the impact of new FASB standards (FAS 141, 142, 144) regarding goodwill and asset impairment, effective in the next fiscal year.

Investor Verification Checklist

• Unit Count Impact: Verify the long-term revenue impact of reducing company-owned units from 32 to 24 and the success of the franchising strategy.
• Commodity Costs: Monitor meat commodity prices and the company's ability to pass costs to consumers without eroding margins.
• Legal Exposure: Track the status of the $17 million employment lawsuit and the franchise fraud claim, as outcomes could materially affect financials.
• Tax Resolution: Confirm the final approval of the IRS settlement to ensure the accrued liability of $345,000 is accurate.
• Cash Flow Sustainability: Review the negative operating cash flow ($406k used) for the 26-week period and ensure liquidity remains sufficient given the planned stock repurchases and lease termination costs.