Business Context and Reporting Period
This Form 10-Q covers the thirteen-week period ended June 25, 2000, for Nathan's Famous, Inc. The company operates and franchises restaurants under the Nathan's, Kenny Rogers Roasters, and Miami Subs brands, alongside a branded product program. As of the reporting date, the system included 30 company-owned units and 412 franchised or licensed units across 44 states and 16 foreign countries.
Key Financial Metrics
| Metric | Q1 2001 (13 weeks) | Q1 2000 (13 weeks) |
|---|---|---|
| Total Revenues | $13,104,000 | $8,074,000 |
| Net Income | $745,000 | $469,000 |
| Diluted EPS | $0.11 | $0.10 |
| Operating Cash Flow | $5,313,000 | $1,193,000 |
| Cash and Equivalents | $7,047,000 | $1,600,000 |
| Working Capital | $2,174,000 | ($322,000 deficit) |
| Total Liabilities | $20,394,000 | N/A |
| Stockholders' Equity | $34,092,000 | N/A |
Note: Prior period balance sheet data is not provided in the text for direct comparison of total liabilities and equity, though working capital improved significantly.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 62.3% to $13.1 million. This was driven primarily by the inclusion of the Miami Subs acquisition (completed Sept 1999), which contributed approximately $3.2 million in sales and $1.2 million in franchise fees.
- Profitability: Net income rose 58.9% to $745,000. Income before taxes was $1.25 million compared to $810,000 in the prior year.
- Cost Structure: Cost of sales increased 57.2% and general and administrative expenses increased 75.4%, largely due to the consolidation of Miami Subs operations and higher food/labor costs at comparable units.
- Liquidity: Cash and cash equivalents surged by $4.65 million to $7.05 million, fueled by strong operating cash flows of $5.3 million.
Outlook, Risks, and Contingencies
- Store Closures: Management plans to permanently close up to 18 underperforming Miami Subs company-owned restaurants. As of August 1, 2000, 6 leases were terminated at a cost of $266,000. Future costs for the remaining stores are estimated but not fully quantified.
- Tax Contingency: An IRS audit of Miami Subs tax returns (1991-1996) proposes additional taxes and penalties of approximately $2.4 million. The company is appealing these adjustments and has accrued $345,000 for the matter.
- Legal Resolution: A class action lawsuit regarding the Miami Subs merger was dismissed without prejudice in April 2000, effectively ending the case.
- Operational Risks: Comparable sales for the Nathan's brand declined 1.4% due to unfavorable weather at Coney Island. The company faces risks related to minimum wage increases, food costs, and franchisee recruitment.
- Capital Resources: The company maintains a $5 million uncommitted line of credit, though no funds have been borrowed. Management believes internal funds are sufficient for fiscal 2001 operations.
Investor Verification Checklist
- Verify the final cost and timeline for closing the remaining underperforming Miami Subs locations.
- Monitor the outcome of the IRS audit appeal regarding the $2.4 million proposed tax liability.
- Assess the sustainability of the 1.4% decline in comparable sales for the core Nathan's brand.
- Review the utilization of the $5.7 million in Miami Subs net operating loss carry-forwards, noting the Section 382 limitation of approximately $340,000 annually.
- Confirm the impact of the new single master distributor on future investment and other income.