Business Context and Reporting Period
This Form 10-Q covers the thirteen-week period ended June 28, 1998 for Nathan's Famous, Inc., a Delaware corporation operating company-owned and franchised restaurants. The company reported 27 company-owned units and 158 franchised or licensed units as of the period end. The filing includes unaudited consolidated financial statements and management's discussion of results.
Key Financial Metrics
| Metric | Q1 1999 (Ended June 28, 1998) | Q1 1998 (Ended June 29, 1997) |
|---|---|---|
| Total Revenues | $7,821,000 | $7,362,000 |
| Net Earnings | $574,000 | $474,000 |
| Earnings Per Share (Diluted) | $0.12 | $0.10 |
| Net Cash from Operating Activities | $137,000 | $166,000 |
| Cash and Cash Equivalents | $1,105,000 | $241,000 |
| Marketable Investment Securities | $8,228,000 | $8,514,000 |
| Net Working Capital | $6,731,000 | $6,105,000 |
| Total Liabilities | $5,326,000 | $5,953,000 |
Margins: Cost of sales represented 59.6% of restaurant sales (up from 58.9%). Restaurant operating expenses were 24.2% of sales (down from 27.7%). The effective income tax rate was 24.8% (down from 40.3%) due to a reduction in the deferred tax valuation allowance.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 6.2% to $7.821 million. Company-owned restaurant sales rose 2.9%, while franchise royalties increased 12.3% driven by new unit openings.
- Profitability: Net earnings increased 21.1% to $574,000, aided by a significant reduction in the income tax provision.
- Expense Trends: Cost of sales increased $505,000 due to the expansion of the Branded Product Program and higher food/labor costs (including minimum wage increases). General and administrative expenses rose 13.1% to support growth initiatives.
- Investment Income: Investment and other income declined significantly to $134,000 from $379,000, primarily due to lower market returns and the absence of a $130,000 gain from the sale of a restaurant recorded in the prior year.
- Liquidity: Cash and cash equivalents decreased by $201,000 during the quarter, though total liquid assets (cash plus marketable securities) remain strong at approximately $9.3 million.
Outlook, Risks, and Unusual Items
- Expansion and Renovations: The company is renovating key locations (86th Street and Kings Plaza) and plans to modernize other units. Three new franchised/licensed units opened in the quarter.
- Year 2000 Compliance: The company identified a need to replace its accounting systems to ensure Year 2000 compliance. A contract was signed in July 1998 for Lawson Accounting software with an estimated capital cost of $350,000. Management cannot predict the impact of Y2K issues on vendors.
- Capital Resources: Management believes internal funds and a $5,000,000 uncommitted bank line of credit (currently unused) are sufficient for operations through fiscal 1999.
- Risks: Forward-looking statements highlight risks including economic conditions, weather, legislative changes, minimum wage increases, and the ability to attract franchisees and personnel.
Investor Verification Checklist
- Verify the sustainability of the reduced effective tax rate (24.8%) given the reliance on deferred tax valuation allowance adjustments.
- Monitor the impact of rising food and labor costs on the cost of sales margin, which increased to 59.6%.
- Confirm the timeline and actual costs associated with the $350,000 estimated Year 2000 system replacement.
- Assess the performance of the new "Branded Product Program" which contributed significantly to revenue growth but also increased costs.
- Review the stability of investment income, which dropped sharply due to market conditions and the lack of one-time asset sale gains.