Business Context and Reporting Period
This Form 10-Q covers the thirteen-week period ended June 29, 1997 (first quarter of fiscal 1998) for Nathan's Famous, Inc., a Delaware corporation operating company-owned and franchised restaurants. The company reported 24 company-owned units and 150 franchised or licensed units as of the period end.
Key Financial Metrics
| Metric | Q1 1998 (13 weeks) | Q1 1997 (13 weeks) |
|---|---|---|
| Total Revenues | $7,362,000 | $6,972,000 |
| Net Earnings | $474,000 | $395,000 |
| Earnings Per Share (Diluted) | $0.10 | $0.08 |
| Net Cash from Operating Activities | $296,000 | $318,000 |
| Cash and Cash Equivalents (End of Period) | $241,000 | $682,000 |
| Marketable Investment Securities | $7,850,000 | $7,640,000 |
| Net Working Capital | $4,961,000 | Filing text does not provide a clear value for prior period |
| Total Liabilities | $5,533,000 | $5,818,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 5.6% to $7.36 million. Company-owned restaurant sales rose 0.9% to $5.82 million, while comparable unit sales increased 0.9%.
- Franchise Decline: Franchise fees and royalties dropped 17.5% to $671,000, driven by a decrease in franchised restaurant sales ($13.96 million vs. $15.85 million) and the closure of 53 Caldor units in the prior year.
- License Royalties Surge: License royalties increased 59.4% to $405,000, primarily due to higher supermarket sales of frankfurters under an agreement with SMG, Inc. and amortization of a deferred fee.
- Investment Income: Investment and other income more than doubled to $379,000, aided by a $130,000 gain from the sale of an underperforming restaurant and improved marketable securities performance.
- Expense Trends: Cost of sales increased to 58.9% of restaurant sales (from 57.4%) due to higher labor costs. General and administrative expenses rose 13.0% to $1.10 million, partially offset by one-time benefits recognized in the prior year.
Outlook, Risks, and Management Commentary
- Expansion and Renovation: The company completed a renovation of its Yonkers, NY unit (now co-branded with Pizza Hut/TCBY) and is constructing a new company-owned unit expected to open in August 1997. Franchisees opened 9 new units in the quarter.
- Liquidity Position: Management believes available cash ($241,000), marketable securities ($7.85 million), and internally generated funds are sufficient for operations through fiscal 1998. An uncommitted $5 million bank line of credit is available but currently unused.
- Margin Pressure: Management noted margin erosion in cost of sales due to competitive labor market pressures and is taking steps to offset these costs.
- Risks: The filing notes that interim results are not necessarily indicative of full-year results. The company faces risks related to franchisee performance and the competitive landscape.
Investor Verification Checklist
- Verify the sustainability of the 59.4% increase in license royalties from the SMG, Inc. supermarket agreement.
- Monitor the impact of rising labor costs on the cost of sales margin, which increased to 58.9%.
- Confirm the timeline and financial performance of the new company-owned unit opening in August 1997.
- Assess the trend in franchise unit count, which declined from 175 to 150 units year-over-year.
- Review the composition of the $7.85 million in marketable investment securities and their liquidity.