NATH

Business Context and Reporting Period

Company: Nathan's Famous, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 23, 2007 (13 and 26 weeks)
Business Overview: The Company operates and franchises Nathan's Famous restaurants, licenses its brand for retail products, and operates a Branded Product Program. A significant event during the period was the sale of its wholly-owned subsidiary, Miami Subs Corporation, on June 7, 2007, which is now reported as discontinued operations.

Key Financial Metrics

Note: Net Income for the 13-week period in 2006 included $367,000 from discontinued operations. The 26-week period in 2007 included $1,728,000 from discontinued operations.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 12.2% for the 13 weeks and 11.2% for the 26 weeks compared to the prior year. Sales from the Branded Product Program grew 6.9% (13 weeks) and 11.9% (26 weeks), driven by volume.
• Margin Compression: Gross profit margin for continuing operations declined to 29.1% (13 weeks) and 26.9% (26 weeks) from 32.5% and 30.3% respectively. Management attributes this primarily to an 11.2% to 11.8% increase in beef costs.
• Discontinued Operations: The 26-week period included a significant gain of $2,489,000 from the sale of Miami Subs Corporation and leasehold interests, compared to $400,000 in the prior year. This non-recurring gain significantly boosted net income for the 26-week period.
• Interest Income: Increased significantly due to higher yields on marketable securities and interest earned on the promissory note from the Miami Subs sale.

Guidance, Outlook, and Risks

Management Commentary

Management expects to incur higher general and administrative expenses for the remainder of the fiscal year due to litigation costs with SMG, Inc. (the Company's primary frankfurter supplier) and increased SOX 404 compliance costs. The Company has initiated a "Limited Menu Licensed Operations" program to expand brand presence in existing food service establishments.

Risks and Contingencies

• Supplier Litigation: The Company is in active litigation with SMG, Inc., its exclusive licensee and primary supplier. The Company has notified SMG of its intent to terminate the agreement effective July 31, 2008, citing breach of contract. SMG disputes this. There is a risk of supply disruption if an alternative supplier cannot be secured in time.
• Commodity Costs: The Company is exposed to volatile beef prices, which represent 80-85% of food costs. While price increases are passed to customers, there is a lag and uncertainty regarding future costs.
• Legal Proceedings: A personal injury lawsuit exists regarding a leased property in Huntington, NY. While the Company is not a named defendant, it may have indemnification obligations.

Capital Resources

The Company completed a stock repurchase program, buying back 2,000,000 shares at a total cost of approximately $9.1 million. On November 5, 2007, the Board authorized an additional repurchase of up to 500,000 shares. The Company maintains a $7.5 million uncommitted line of credit with no outstanding borrowings.

Investor Verification Checklist

• Supply Chain Continuity: Verify the status of the SMG, Inc. litigation and the Company's progress in securing alternative frankfurter suppliers to avoid disruption post-July 2008.
• Beef Cost Trajectory: Monitor beef commodity prices and the Company's ability to pass these costs to franchisees and retail customers without impacting volume.
• Discontinued Operations Impact: Distinguish between recurring earnings from continuing operations and the one-time gains from the Miami Subs sale when valuing the company.
• Stock Repurchase Activity: Track the execution of the newly authorized 500,000 share buyback program.
• Franchise Growth: Review the performance of the new "Limited Menu Licensed Operations" and the net addition of franchised units (11 new units in Q2).