NATH

Business Context and Reporting Period

Company: Nathan's Famous, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 27, 2004 (Thirteen weeks)
Business Overview: The Company operates and franchises Nathan's, Miami Subs, and Kenny Rogers Roasters restaurant concepts. It also generates revenue through a Branded Product Program selling hot dogs and condiments to supermarkets and foodservice operators. As of June 27, 2004, the system included 345 franchised/licensed units, 7 Company-owned units, and over 4,100 Branded Product points of sale.

Key Financial Metrics

Note: Operating cash flow turned negative due to seasonal increases in accounts receivable and reductions in accounts payable.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 5.5% to $9.484 million. Sales from the Branded Product Program rose 14.8% due to price increases and higher volume. Conversely, Company-owned restaurant sales decreased 16.4% primarily due to the franchising of four Company-owned units.
• Profitability: Net income increased 27.7% to $950,000. This was driven by higher franchise royalties (up 7.1%) and reduced operating expenses from fewer Company-owned stores, despite higher commodity costs for hot dogs (up 8.4%).
• Cost Structure: Cost of sales increased $454,000, largely due to the growth of the Branded Product Program and QVC marketing initiatives. Restaurant operating expenses decreased $344,000 due to the reduction in Company-owned units.
• Cash Flow: Operating cash flow swung from a positive $916,000 in the prior year to a negative $235,000. This was primarily caused by a $1.135 million increase in accounts receivable and a $396,000 reduction in accounts payable/accrued expenses.

Outlook, Risks, and Contingencies

• Guidance: Management expects to fund future investments in existing restaurants and the Branded Product Program through operating cash flow. No specific numerical guidance for the full year was provided in this filing.
• Stock Repurchases: The Company has an authorization to purchase up to 1 million additional shares. No shares were repurchased during the quarter. Total repurchases to date are 1,851,301 shares at a cost of approximately $6.9 million.
• Legal Proceedings:
  • Overtime Claim: A lawsuit regarding unpaid overtime by a Miami Subs franchisee employee was settled on July 27, 2004, without payment to plaintiffs.
  • Slip and Fall: A negligence claim against Miami Subs and a franchisee is being defended by the franchisee's insurer.
  • Age Discrimination: A former employee sued for $1 million in age discrimination damages. The Company intends to deny liability and expects insurance coverage.
• Market Risks: The Company is exposed to commodity price fluctuations (specifically beef) and interest rate changes on variable-rate debt. It does not currently hedge these risks.
• Guarantees: The Company guarantees approximately $457,000 in equipment financing and notes payable for franchisees.

Investor Verification Checklist

• Accounts Receivable: Verify the collectibility of the $1.135 million increase in receivables, which significantly impacted operating cash flow.
• Commodity Costs: Monitor the impact of rising beef prices on the Branded Product Program margins and the ability to pass costs to customers.
• Franchisee Performance: Review the number of franchise locations with unrealizable royalties (30 locations in Q1 2005 vs. 44 in Q1 2004) to assess franchisee health.
• Legal Exposure: Track the status of the age discrimination lawsuit and any potential uninsured liabilities.
• Debt Maturity: Confirm the schedule for debt repayments, noting $167,000 due within one year and interest rate adjustments in 2006 and 2009.