NATH

Business Context and Reporting Period

Company: Nathan's Famous, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Thirteen and thirty-nine weeks ended December 29, 2002 (Fiscal 2003).
Business Overview: The Company operates and franchises Nathan's, Miami Subs, and Kenny Rogers Roasters restaurants. It also licenses its brand for branded products sold in supermarkets and foodservice facilities. As of December 29, 2002, the system included 351 franchised/licensed units and 18 company-owned units.

Key Financial Metrics

(In thousands, except per share data)

Material Changes vs. Prior Period

• Revenue Decline: Total sales decreased 14.7% ($1.0M) for the quarter and 6.7% ($1.6M) for the 39-week period compared to the prior year. This was driven by a 23.6% drop in company-owned restaurant sales due to the closure/sale of four units and a 10.4% decline in comparable store sales.
• Accounting Change Impact: The adoption of SFAS No. 142 (Goodwill and Other Intangible Assets) resulted in a non-cash cumulative effect charge of $12.3 million (net of tax), wiping out goodwill and intangible assets. This charge caused the significant net loss for the 39-week period, despite positive income from continuing operations ($444k).
• Impairment Charges: The Company recorded $471,000 in impairment charges on long-lived assets (four restaurants) and $542,000 on notes receivable during the 39-week period.
• Home Depot Termination: Home Depot terminated eight license agreements. The Company recorded additional depreciation of $422,000 due to shortened asset useful lives for these locations.
• Branded Product Growth: Sales from the Branded Product Program increased 35.4% for the quarter and 38.5% for the 39-week period, partially offsetting declines in restaurant sales.

Guidance, Outlook, and Risks

• Liquidity: Management believes available cash ($1.1M), marketable securities ($5.2M), and operating cash flow are sufficient to fund operations for the next 12 months. The Company maintains an uncommitted $7.5M bank line of credit.
• Capital Allocation: The Company is actively repurchasing common stock. Through December 29, 2002, it had repurchased 1.48 million shares for approximately $5.4M. No significant capital expenditures for new company-owned restaurants are expected through March 2004.
• Restructuring: The Company continues to close underperforming units acquired with Miami Subs. It has terminated leases on 16 of 18 planned closures and is marketing the remaining property.
• Legal Contingencies:
  • Settled: A $17M lawsuit regarding employee misconduct was settled for $659,000 (paid Sept 2002).
  • Pending: A new lawsuit filed Jan 10, 2003, seeks $1M in damages for breach of contract/fraud regarding a letter of intent with a subsidiary.
• Market Risks: Exposure to interest rate fluctuations on $1.2M of variable-rate debt and commodity price volatility (a 10% change in food/paper costs would impact cost of sales by ~$883k).

Investor Verification Checklist

• Goodwill Write-off: Verify the impact of the $12.3M SFAS 142 charge on the balance sheet and confirm that future earnings will not be burdened by goodwill amortization.
• Franchise Royalty Collectibility: Review the 63 domestic locations where royalty income was not recorded due to collectibility concerns; assess the risk of further franchisee defaults.
• Home Depot Exposure: Confirm the final financial impact of the eight terminated Home Depot locations and the status of the remaining lease obligations.
• Stock Repurchase Funding: Monitor cash flow to ensure the aggressive stock buyback program ($5.4M spent YTD) does not strain liquidity given the reduced operating cash generation.
• Impaired Notes Receivable: Review the $1.7M recorded investment in impaired notes and the $1.2M allowance to assess potential future write-downs.