Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 26, 1999, for Nathan's Famous, Inc., a Delaware corporation operating in the quick-service restaurant industry. The company operates company-owned restaurants and franchises its brand, including the recently acquired Kenny Rogers Roasters intellectual property. As of the reporting date, the company operated 25 company-owned units and 256 franchised or licensed restaurants.
Key Financial Metrics
Revenue and Profitability (Thirteen Weeks Ended Sept 26, 1999)
- Total Revenues: $8,219,000 (up from $8,166,000 in the prior year quarter).
- Net Earnings: $616,000 (down from $751,000 in the prior year quarter).
- Earnings Per Share (Diluted): $0.13 (down from $0.16).
- Cost of Sales: $4,086,000 (58.8% of restaurant sales).
Revenue and Profitability (Twenty-Six Weeks Ended Sept 26, 1999)
- Total Revenues: $16,293,000 (up from $15,987,000 in the prior year period).
- Net Earnings: $1,085,000 (down from $1,325,000 in the prior year period).
- Earnings Per Share (Diluted): $0.23 (down from $0.28).
Liquidity and Cash Flow (Twenty-Six Weeks Ended Sept 26, 1999)
- Cash and Cash Equivalents: $1,721,000 (decreased by $444,000 from the beginning of the period).
- Marketable Investment Securities: $3,237,000.
- Net Working Capital: $3,234,000 (decreased from $3,708,000).
- Net Cash Provided by Operating Activities: $1,939,000.
- Net Cash Used in Investing Activities: $2,383,000 (primarily due to acquisitions).
- Debt: The company maintains a $5,000,000 uncommitted bank line of credit with no borrowings as of the reporting date.
Material Changes Versus Prior Period
- Company-Owned Sales Decline: Sales from company-owned restaurants decreased 3.2% in the quarter and 3.6% for the year-to-date period. This was primarily due to the closure of two locations in Hicksville, NY, which generated $371,000 in sales and $60,000 in profit during the prior year quarter.
- Franchise Growth: Franchise royalties increased 26.5% in the quarter, driven by the inclusion of Kenny Rogers Roasters royalties ($159,000) and growth in the Nathan's brand franchise system.
- Acquisition Impact: The acquisition of Kenny Rogers Roasters intellectual property on April 1, 1999, contributed to increased intangible asset amortization ($112,000 for the quarter) and general and administrative expenses ($115,000 for the quarter).
- Tax Provision: The effective tax rate increased to 38.8% for the quarter (from 24.0% in the prior year) due to the absence of a $185,000 reduction in deferred tax valuation allowance that occurred in the prior year period.
Guidance, Outlook, Risks, and Unusual Items
Subsequent Event - Miami Subs Merger: On September 30, 1999, Nathan's consummated a merger with Miami Subs Corporation, acquiring the remaining 70% of the company. Nathan's issued approximately 2.3 million shares of common stock and 579,636 warrants. Results of Miami Subs will be included in future financial statements from the merger date.
Legal Contingencies: A class action lawsuit was filed in January 1999 by a Miami Subs shareholder alleging the proposed merger is unfair and constitutes a breach of fiduciary duty. The plaintiff seeks injunctive relief and unspecified damages. The company intends to defend the suit vigorously.
Year 2000 Compliance: The company has replaced its accounting systems to ensure Year 2000 compliance, spending approximately $349,000 with an estimated total cost of $375,000. While internal systems are certified, the company notes risks regarding the Year 2000 readiness of suppliers and distributors.
Outlook: Management believes available cash and internally generated funds are sufficient to finance operations through fiscal 2000. The company is testing Arthur Treacher's signature products in four company-owned restaurants and continues to search for replacement sites for closed locations.
Investor Verification Checklist
- Verify the financial impact and integration progress of the Miami Subs merger consummated immediately after the reporting period.
- Monitor the status of the class action lawsuit regarding the Miami Subs merger and potential liability.
- Assess the performance of the Kenny Rogers Roasters brand post-acquisition, specifically royalty generation versus amortization costs.
- Track the company's ability to secure replacement sites for the two closed company-owned restaurants in Hicksville, NY.
- Review the Year 2000 contingency plans for key suppliers and distributors to ensure supply chain continuity.