Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended December 26, 1999, and the thirty-nine weeks ended on that date for Nathan's Famous, Inc. The company operates a restaurant system including Nathan's Famous, Kenny Rogers Roasters (acquired April 1999), and Miami Subs (fully acquired September 1999). As of the reporting date, the system included 36 company-owned units and 424 franchised or licensed units.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended 12/26/99 | 39 Weeks Ended 12/26/99 | 39 Weeks Ended 12/27/98 |
|---|---|---|---|
| Total Revenues | $12,048 | $28,341 | $23,202 |
| Net Earnings (Loss) | $(227) | $858 | $1,737 |
| Earnings Per Share (Diluted) | $(0.03) | $0.16 | $0.37 |
| Cash and Cash Equivalents | $2,650 | $2,650 | $2,011 |
| Working Capital | $2,120 | $2,120 | $3,708 |
| Total Debt (Current + Long Term) | $3,504 | $3,504 | $0 |
| Net Cash from Operating Activities | N/A | $1,827 | $6,345 |
Note: Debt figures reflect the assumption of Miami Subs debt upon acquisition. Prior period debt was negligible.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 67% for the 13-week period and 22% for the 39-week period, driven primarily by the acquisitions of Kenny Rogers Roasters and Miami Subs.
- Profitability Decline: Despite revenue growth, net earnings for the 39-week period dropped 51% to $858,000 from $1,737,000. The 13-week period resulted in a net loss of $227,000 compared to a profit of $412,000 in the prior year.
- Impairment Charge: A significant non-cash impairment charge of $566,000 was recorded on notes receivable related to Miami Subs, reducing net income.
- Operating Expenses: General and administrative expenses doubled in the 13-week period ($2.26M vs $1.13M) due to the integration of acquired entities.
- Comparable Sales: Comparable restaurant sales for the Nathan's brand declined 3.4% in the 13-week period due to holiday season weakness.
Guidance, Outlook, and Risks
- Store Closures: Management is finalizing plans to permanently close up to 20 underperforming company-owned Miami Subs restaurants. This will incur future lease termination costs; minimum annual lease payments for affected stores were $1.75 million as of September 1999.
- Debt Reduction: The company has repaid approximately $1.85 million of assumed Miami Subs debt since acquisition and anticipates lower interest expense in the future.
- Liquidity: Management believes available cash ($2.65M), marketable securities ($2.91M), and a $5 million uncommitted line of credit are sufficient to finance operations through fiscal 2000.
- Legal Contingency: A shareholder lawsuit regarding the fairness of the Miami Subs merger is proceeding as an individual suit (class action allegations were struck). The company intends to defend vigorously.
- Tax Audit: Miami Subs is under IRS examination for years 1991-1996 with proposed adjustments of $2.4 million. The company has accrued $345,000 for this matter and is appealing the adjustments.
Investor Verification Checklist
- Verify the final allocation of the Miami Subs purchase price and the impact of the $1.362 million excess purchase price amortization.
- Monitor the execution of the plan to close 20 underperforming Miami Subs locations and the associated lease termination costs.
- Review the status of the IRS audit regarding Miami Subs' tax returns and the potential utilization of $5.5 million in net operating loss carry-forwards.
- Assess the collectibility of the remaining $1.1 million in notes receivable from the sale of Miami Subs restaurants in Dallas.
- Track the performance of the Arthur Treachers co-branding initiative in company-owned units.