Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 27, 1998, for Nathan's Famous, Inc., a Delaware corporation operating company-owned and franchised restaurants and a branded product program. The filing includes unaudited consolidated financial statements for the thirteen and twenty-six weeks ended September 27, 1998, compared to the same periods in 1997.
Key Financial Metrics
| Metric | 13 Weeks Ended Sep 27, 1998 | 26 Weeks Ended Sep 27, 1998 |
|---|---|---|
| Total Revenues | $8,166,000 | $15,987,000 |
| Net Earnings | $751,000 | $1,325,000 |
| Diluted EPS | $0.16 | $0.28 |
| Net Cash from Operating Activities | N/A (26-week data only) | $102,000 |
| Cash and Cash Equivalents | $490,000 (Ending Balance) | $490,000 (Ending Balance) |
| Marketable Investment Securities | $9,261,000 | $9,261,000 |
| Net Working Capital | $7,286,000 | $7,286,000 |
| Total Liabilities | $5,567,000 | $5,567,000 |
| Cost of Sales Margin | 58.7% of Restaurant Sales | 59.1% of Restaurant Sales |
Material Changes vs. Prior Period
- Revenue Growth: Total sales increased 3.0% in the quarter and 6.9% for the year-to-date period. Franchise fees and royalties rose 16.6% (quarter) and 13.6% (YTD), driven by new unit openings and increased franchisee sales.
- Profitability: Net earnings increased 23.3% for the quarter ($751k vs $609k) and 22.3% YTD ($1.325m vs $1.083m). This was aided by a reduction in the income tax valuation allowance ($185k in Q2, $311k YTD).
- Investment Income Volatility: Investment income swung from a $166,000 gain in the prior year quarter to a $15,000 loss in the current quarter due to a $119,000 decline in portfolio value following market downturns in August 1998.
- Operating Expenses: Restaurant operating expenses decreased 13.3% in the quarter, largely due to a cost hiatus during the renovation of the Kings Plaza restaurant and successful property tax reductions.
- Unit Count: Company-owned units increased from 25 to 26. Franchised/licensed units grew from 154 to 164.
Outlook, Risks, and Management Commentary
- Liquidity: Management believes available cash ($490k), marketable securities ($9.26m), and internally generated funds are sufficient for operations through fiscal 1999. A $5 million uncommitted bank line of credit is available but currently unused.
- Capital Expenditures: Investing activities used $913,000 YTD, primarily for renovations of two company-owned restaurants (Kings Plaza and 86th Street).
- Year 2000 Compliance: The company is replacing its accounting systems with Lawson software to ensure Year 2000 compliance, estimating a capital cost of approximately $350,000. Risks remain regarding vendor compliance.
- Operational Risks: The company lost its lease for the Hicksville, NY location in August 1998 and is seeking a replacement. Management notes margin pressures from rising food and labor costs (including minimum wage increases) and the need for selective price adjustments.
- Forward-Looking Statements: Risks include economic conditions, weather, legislative changes, availability of sites, and consumer taste shifts.
Investor Verification Checklist
- Verify the sustainability of the income tax valuation allowance reduction ($311k YTD) which significantly boosted net earnings.
- Monitor the impact of the lost Hicksville lease and the timeline for securing a replacement site.
- Assess the Year 2000 conversion costs and potential disruptions to operations during the Lawson software implementation.
- Review the decline in investment income and the company's exposure to market volatility given the $9.26m securities portfolio.
- Confirm the cost of sales margin trends (59.1% YTD) against the backdrop of rising food and labor costs.