Business Context and Reporting Period
Company: Nathan's Famous, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: March 31, 2002 (53-week fiscal year)
Business Overview: The Company operates and franchises fast-food restaurants under three primary brands: Nathan's Famous (hot dogs), Miami Subs (submarine sandwiches), and Kenny Rogers Roasters (rotisserie chicken). As of March 31, 2002, the system included 386 total units (22 company-owned, 364 franchised) and approximately 1,500 branded product points of sale across 39 states and 14 foreign countries.
Key Financial Metrics
| Metric (in thousands) | Fiscal 2002 | Fiscal 2001 |
|---|---|---|
| Total Revenues | $44,399 | $47,174 |
| Net Income | $1,249 | $1,606 |
| Diluted EPS | $0.18 | $0.23 |
| Cost of Sales | $21,643 | $22,530 |
| Restaurant Operating Expenses | $7,788 | $8,964 |
| Working Capital | $9,565 | $5,210 |
| Cash and Cash Equivalents | $1,834 | $4,325 |
| Long-Term Debt | $1,220 | $1,789 |
Note: Fiscal 2002 was a 53-week period, while Fiscal 2001 was a 52-week period.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 5.9% to $44.4 million. Company-owned restaurant sales dropped 11.2% primarily due to the closure of nine units (including unprofitable Miami Subs locations) and the impact of the September 11, 2001 events on tourist-heavy markets (Las Vegas, South Florida) and airport locations.
- Franchise Royalties: Franchise fees and royalties decreased 9.9% to $7.9 million, driven by a 16.1% drop in royalties due to fewer operating franchised units (364 vs. 386) and lower sales in tourist/airport markets.
- Branded Product Growth: Sales from the Branded Product Program (selling hot dogs to retailers) increased 26.2% to $4.9 million, offsetting some declines in restaurant sales.
- Impairment Charges: The Company recorded $685,000 in impairment charges for long-lived assets (two underperforming stores) and $185,000 for impaired notes receivable.
- Legal Settlement: A $17 million lawsuit regarding employee misconduct was settled for $650,000, which was accrued in the current period.
Guidance, Outlook, and Risks
- Accounting Change (SFAS 142): Upon adopting SFAS No. 142 in the next fiscal year (April 1, 2002), the Company expects to cease amortizing goodwill and certain intangibles, reducing annual amortization expense by approximately $600,000. However, management anticipates a one-time impairment charge of $12 million to $13 million upon adoption.
- Strategic Focus: Management plans to focus on co-branding opportunities (e.g., "Miami Subs Plus"), expanding the Branded Product Program, and international master franchising. Selective opening of new company-owned units is planned for the New York and Florida markets.
- Liquidity: The Company maintains a $7.5 million uncommitted line of credit (unused) and believes cash and internally generated funds are sufficient for the next 12 months.
- Risks:
- Seasonality: Sales are heavily dependent on weather and tourism, with the first two quarters historically being the strongest.
- Minimum Wage: Proposed increases in federal and New York State minimum wages could significantly impact operating margins.
- Commodity Costs: Fluctuations in meat and utility prices affect margins; the Company raised prices selectively in Fiscal 2002 to offset costs.
- Post-9/11 Impact: Ongoing effects on travel and tourism continue to suppress sales in key markets.
Investor Verification Checklist
- SFAS 142 Impact: Verify the timing and magnitude of the anticipated $12-$13 million goodwill impairment charge in the upcoming fiscal year.
- Unit Economics: Review the performance of the remaining company-owned units, particularly the two Kenny Rogers Roasters locations, one of which is currently being marketed for sale.
- Franchisee Health: Assess the collectibility of franchise royalties given the noted increase in unrealizable royalties and the economic downturn in tourist markets.
- Legal Exposure: Confirm the final court approval of the $650,000 settlement regarding the employee misconduct lawsuit.
- Minimum Wage Legislation: Monitor the status of proposed New York State and Federal minimum wage increases and their potential impact on labor costs.