Business Context and Reporting Period
Company: Nathan's Famous, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Thirteen and twenty-six weeks ended September 29, 2002 (Fiscal Year 2003).
Business Overview: The Company operates and franchises Nathan's, Miami Subs, and Kenny Rogers Roasters restaurants, and manages a Branded Product Program. As of September 29, 2002, the system included 350 franchised/licensed units and 21 company-owned units.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Sep 29, 2002 | 26 Weeks Ended Sep 29, 2002 |
|---|---|---|
| Total Revenues | $10,712 | $21,626 |
| Net Income (Loss) | $110 | $(11,882) |
| Operating Income | $186 | $773 |
| Cash and Cash Equivalents | $2,241 | $2,241 |
| Net Cash Provided by Operating Activities | N/A | $996 |
| Total Debt (Current + Long-term) | $1,687 | $1,687 |
| Working Capital | $7,481 | $7,481 |
Note: Net loss for the 26-week period includes a significant non-cash cumulative effect of a change in accounting principle.
Material Changes vs. Prior Period
- Revenue Decline: Total sales decreased 4.6% in the 13-week period and 3.7% in the 26-week period compared to the prior year. This was driven by a 12.5% drop in company-owned restaurant sales due to the closure/sale of three units and a 29.3% drop in franchise fees/royalties due to fewer new openings and increased uncollectible royalties.
- Accounting Change (SFAS No. 142): The adoption of SFAS No. 142 resulted in a one-time, non-cash impairment charge of $12,338,000 (net of tax) recorded in the first quarter of fiscal 2003. This charge wrote off substantially all goodwill, trademarks, and recipes. Consequently, the 26-week period reported a net loss of $(11,882,000), whereas operating income before this charge was positive ($456,000).
- Impairment Charges: The Company recorded a $421,000 impairment charge on long-lived assets (three underperforming restaurants) and a $320,000 impairment charge on notes receivable during the 26-week period.
- Stock Repurchases: The Company completed a $3,670,000 repurchase of 1 million shares of common stock during the period.
Guidance, Outlook, and Risks
- Home Depot Termination: In August 2002, Home Depot terminated license agreements for eight Nathan's restaurants. Operations are expected to cease by February 20, 2003. The Company recorded an additional $102,000 in depreciation expense related to these closures.
- Liquidity: Management believes available cash, marketable securities, and internally generated funds are sufficient for the next 12 months. The Company maintains a $7.5 million uncommitted bank line of credit, which was extended through December 2002.
- Legal Contingency: A $17 million lawsuit regarding employee misconduct was settled for $659,000, which was paid in September 2002. The majority of this amount had been previously accrued.
- Divestiture Plan: The Company continues to close underperforming Miami Subs locations acquired in a prior transaction, having terminated leases on 16 of 18 targeted properties.
Investor Verification Checklist
- Accounting Impact: Verify the magnitude of the $12.3 million goodwill impairment charge and confirm that operating cash flows remain positive despite the reported net loss.
- Franchise Health: Investigate the 29% decline in franchise fees and the increase in uncollectible royalties (54 locations vs. 35 in the prior year) to assess franchisee financial stability.
- Store Count: Confirm the net reduction in company-owned units and the timeline for the closure of the eight Home Depot locations.
- Debt Obligations: Review the $1.1 million in loan guarantees provided to franchisees and the maturity schedule of the Company's own debt.
- Stock Buyback: Note the completion of the initial 1 million share buyback and the authorization of an additional 1 million shares for future repurchase.