1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Act
of 1934 for the quarterly period ended DECEMBER 27, 1998.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Act
of 1934 for the transition period from ____________to____________ .
Commission File Number 1-3189
NATHAN'S FAMOUS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3166443
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
1400 OLD COUNTRY ROAD, WESTBURY, NEW YORK 11590
(Address of principal executive offices including zip code)
(516) 338-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
At December 27, 1998, an aggregate of 4,722,216 shares of the registrant's
common stock, par value of $.01, were outstanding.
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NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - December 27, 1998 and
March 29, 1998 3
Consolidated Statements of Earnings - Thirteen Weeks
Ended December 27, 1998 and December 28, 1997 4
Consolidated Statements of Earnings - Thirty-nine Weeks
Ended December 27, 1998 and December 28, 1997 5
Consolidated Statements of Stockholders' Equity -
Thirty-nine Weeks Ended December 27, 1998 6
Consolidated Statements of Cash Flows - Thirty-nine Weeks
Ended December 27, 1998 and December 28, 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 18
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Dec. March
27, 1998 29, 1998
-------- --------
(Unaudited)
Current assets:
Cash and cash equivalents including restricted cash of
$83 and $273, respectively $ 2,011 $ 1,306
Marketable investment securities 4,101 8,514
Franchise and other receivables, net 1,549 976
Inventory 402 356
Prepaid expenses and other current assets 217 276
Deferred income taxes 610 478
-------- --------
Total current assets 8,890 11,906
Property and equipment, net 6,735 6,171
Intangible assets, net 10,979 11,270
Investment in unconsolidated affiliate 4,286 --
Other assets, net 188 192
-------- --------
$ 31,078 $ 29,539
======== ========
Current liabilities:
Accounts payable $ 987 $ 956
Accrued expenses and other current liabilities 4,336 4,708
Deferred franchise fees 195 125
Current installments of obligations under capital leases 5 12
-------- --------
Total current liabilities 5,523 5,801
Obligations under capital leases, net of current installments 9 9
Other liabilities 189 143
-------- --------
Total liabilities 5,721 5,953
-------- --------
Stockholders' equity:
Common stock, $.01 par value - 20,000,000 shares
authorized, 4,722,216 issued and outstanding 47 47
Additional paid-in-capital 32,423 32,389
Accumulated deficit (7,113) (8,850)
-------- --------
Total stockholders' equity 25,357 23,586
-------- --------
$ 31,078 $ 29,539
======== ========
See accompanying notes to consolidated financial statements.
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NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THIRTEEN WEEKS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
(In thousands, except per share amounts)
(Unaudited)
1998 1997
------ ------
Sales $5,833 $5,638
Franchise fees and royalties 859 863
License royalties 286 252
Investment and other income 237 72
------ ------
Total revenues 7,215 6,825
------ ------
Costs and expenses:
Cost of sales 3,652 3,515
Restaurant operating expenses 1,523 1,434
Depreciation and amortization 264 246
Amortization of intangible assets 96 112
General and administrative 1,132 1,106
------ ------
Total costs and expenses 6,667 6,413
------ ------
Earnings before income taxes 548 412
Provision for income taxes 136 170
------ ------
Net earnings $ 412 $ 242
====== ======
PER SHARE INFORMATION
Net earnings per share
Basic $ 0.09 $ 0.05
====== ======
Diluted $ 0.09 $ 0.05
====== ======
Shares used in computing net income
Basic 4,722 4,722
====== ======
Diluted 4,750 4,771
====== ======
See accompanying notes to consolidated financial statements.
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NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THIRTY-NINEWEEKS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
(In thousands, except per share amounts)
(Unaudited)
1998 1997
------- -------
Sales $19,190 $18,137
Franchise fees and royalties 2,533 2,337
License royalties 1,123 1,194
Investment and other income 356 617
------- -------
Total revenues 23,202 22,285
------- -------
Costs and expenses:
Cost of sales 11,799 10,911
Restaurant operating expenses 4,431 4,727
Depreciation and amortization 786 758
Amortization of intangible assets 288 311
General and administrative 3,598 3,359
Interest expense 1 4
------- -------
Total costs and expenses 20,903 20,070
------- -------
Earnings before income taxes 2,299 2,215
Provision for income taxes 562 890
------- -------
Net earnings $ 1,737 $ 1,325
======= =======
PER SHARE INFORMATION
Net earnings per share
Basic $ 0.37 $ 0.28
======= =======
Diluted $ 0.37 $ 0.28
======= =======
Shares used in computing net income
Basic 4,722 4,722
======= =======
Diluted 4,754 4,773
======= =======
See accompanying notes to consolidated financial statements.
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NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THIRTY-NINE WEEKS ENDED DECEMBER 27, 1998
(In thousands, except share amounts)
(Unaudited)
Total
Additional Deferred Accum- Stock-
Common Common Paid in- Compen- ulated holders'
Shares Stock Capital sation Deficit Equity
-------- -------- ---------- ---------- -------- ---------
Balance, March
29, 1998 4,722,216 $ 47 $ 32,423 $ (34) $ (8,850) $ 23,586
Amortization
of deferred
compensation
relating to
restricted stock 34 34
Net earnings 1,737 1,737
--------- --------- --------- ------------ --------- ---------
Balance, Dec.
27, 1998 4,722,216 $ 47 $ 32,423 $ -0- $ (7,113) $ 25,357
========= ========= ========= =========== ========= =========
See accompanying notes to consolidated financial statements.
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NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTY-NINE WEEKS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
(In thousands)
(Unaudited)
1998 1997
------- -------
Cash flows from operating activities:
Net earnings $ 1,737 $ 1,325
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 786 758
Amortization of intangible assets 288 311
Provision for doubtful accounts 45 45
Amortization of deferred compensation 34 36
Gain on the sale of restaurant -- (130)
Deferred income taxes (132) --
Changes in assets and liabilities:
Marketable investment securities 4,413 (820)
Franchise and other receivables (618) (312)
Inventory (46) (72)
Prepaid and other current assets 59 132
Accounts payable and accrued expenses (341) (1)
Deferred franchise fees 70 (114)
Other assets 4 25
Other non current liabilities 46 151
------- -------
Net cash provided by operating activities 6,345 1.334
------- -------
Cash flows from investing activities:
Purchase of property and equipment (1,347) (1,359)
Purchase of equity interest in Miami Subs Corp. (4,286) --
Proceeds from the sale of property and equipment -- 130
------- -------
Net cash used in investing activities (5,633) (1,229)
------- -------
Cash flows from financing activities:
Principal repayment of obligations under capital leases (7) (8)
------- -------
Net cash used in financing activities (7) (8)
------- -------
Net increase in cash and cash equivalents 705 97
Cash and cash equivalents, beginning of period 1,306 647
------- -------
Cash and cash equivalents, end of period $ 2,011 $ 744
======= =======
Cash paid during the period for:
Interest $ 1 $ 1
Income taxes 470 416
See accompanying notes to consolidated financial statements.
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NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Nathan's Famous, Inc. and
subsidiaries ("Nathan's" or the "Company") for the thirteen and thirty-nine week
periods ended December 27, 1998 and December 28, 1997 have been prepared in
accordance with generally accepted accounting principles. The unaudited
financial statements include all adjustments (consisting of normal recurring
adjustments) which, in the opinion of management, were necessary for a fair
presentation of financial condition, results of operations and cash flows for
such periods presented. However, these results are not necessarily indicative of
results for any other interim period or the full year.
Certain information and footnote disclosures normally included in financial
statements in accordance with generally accepted accounting principles have been
omitted pursuant to the requirements of the Securities and Exchange Commission.
Management believes that the disclosures included in the accompanying interim
financial statements and footnotes are adequate to make the information not
misleading, but should be read in conjunction with the consolidated financial
statements and notes thereto included in Nathan's Annual Report on Form 10-K for
the fiscal year ended March 29, 1998.
NOTE B - RECLASSIFICATIONS
Certain reclassifications of prior period items have been made to conform to the
December 27, 1998 presentation.
NOTE C - EARNINGS PER SHARE
The following chart provides a reconciliation of information used in calculating
the per share amounts for the thirteen and thirty-nine week periods ended
December 27, 1998 and December 28, 1997, respectively.
Thirteen weeks Net Income
- -------------- Net Income Number of Shares Per Share
---------- ---------------- ---------
1998 1997 1998 1997 1998 1997
-------- -------- ----- ----- -------- --------
Basic EPS
- ---------
Basic calculation $ 412 $ 242 4,722 4,722 $ .09 $ .05
Effect of dilutive employee stock
Options and warrants -- -- 28 49 -- --
-------- -------- ----- ----- -------- --------
Diluted EPS
- -----------
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Diluted calculation $412 $242 4,750 4,771 $ .09 $ .05
==== ==== ===== ===== ===== =====
Thirty-nine weeks Net Income
- ----------------- Net Income Number of Shares Per Share
---------- ---------------- ---------
1998 1997 1998 1997 1998 1997
------ ------ ------ ------ -------- --------
Basic EPS
Basic calculation $1,737 $1,325 4,722 4,722 $ .37 $ .28
Effect of dilutive employee stock
Options and warrants -- -- 32 51 -- --
------ ------ ------ ------ -------- --------
Diluted EPS
- -----------
Diluted calculation $1,737 $1,325 4,754 4,773 $ .37 $ 28
====== ====== ====== ====== ======== ========
NOTE D - INCOME TAXES
In the fourth quarter fiscal 1998, management of the Company determined that,
more likely than not, a portion of its previously-reserved deferred tax assets
would be realized and, accordingly, reduced the related valuation allowance.
Management continues to monitor the likelihood of the realizability of its
deferred tax asset and based upon the current facts and circumstances, has
recognized during fiscal 1999, further adjustment to its deferred tax valuation
allowance in accordance with Financial Accounting Standards Board Statement No.
109 "Accounting for Income Taxes". On January 22, 1999, Nathan's filed amended
New York State tax returns for the fiscal years end March 1995, 1996 and 1997,
and anticipated a refund of approximately $600,000.
NOTE E - COMPREHENSIVE INCOME
In the first quarter of fiscal 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income", which requires companies to report all changes
in equity during a period, except those resulting from investment by owners and
distribution to owners, in a financial statement for the period in which they
are recognized. Comprehensive income is the total of net income and all nonowner
changes in equity (or other comprehensive income) such as unrealized gains /
losses on securities available-for-sale, foreign currency translation
adjustments and minimum pension liability adjustments. Comprehensive and other
comprehensive income must be reported on the face of the annual financial
statements or in the case of interim reporting, in the footnotes to the
financial statements. For the fiscal periods ended December 27, 1998 and
December 28, 1997 and for the quarters ended December 27, 1998 and December 28,
1997, Nathan's operations did not give rise to items includible in comprehensive
income which were not already included in net income. Therefore, Nathan's
comprehensive income is the same as its net income for all periods presented.
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NOTE F - INVESTMENT IN MIAMI SUBS CORPORATION
On November 25, 1998 the Company acquired 8,121,000 shares (2,030,250 shares
after the effect of a 1-for-4 reverse stock split) or 29.9% of the outstanding
common stock of Miami Subs Corporation (NASDAQ:SUSCD) for $4,200,000, excluding
transaction costs, and entered into a letter of intent to acquire the remaining
outstanding shares of Miami Subs Corporation in an exchange for Nathan's stock
and warrants. This transaction will be accounted for under the equity method of
accounting for investments.
NOTE G - SUBSEQUENT EVENTS
On January 15, 1999 Nathan's Famous, Inc. and Miami Subs Corporation entered
into a definitive merger agreement pursuant to which Nathan's is expected to
acquire the remaining outstanding shares of Miami Subs Corporations in exchange
for approximately 2,375,000 shares of Nathan's Common Stock and warrants to
acquire approximately 593,000 shares of Nathan's Common Stock at a price of
$6.00 per share. The merger is subject to certain conditions, including
completion of due diligence, receipt of fairness opinions and approval by a
majority of the stockholders of both companies.
On January 12, 1999, the Official Committee of Franchisees (the "Franchisee
Committee") of Roasters Corp. and Roasters Franchise Corp. submitted its
disclosure statement describing its plan of reorganization for Roasters Corp.
and Roasters Franchise Corp. (the "Debtors"). Under the Franchisee Committee
plan, Nathan's would become the franchisor for Kenny Rogers Roasters and assume
the contract and other intellectual property rights necessary to enable it to
act as franchisor in exchange for the payment by Nathan's of $1,250,000. At the
time that the Franchisee Committee's plan was submitted to the bankruptcy court,
Nathan's deposited $100,000 of such payment in an escrow account , which would
be refunded in the event that the Franchisee Committee's plan is not approved.
Approval of the Franchisee Committee plan is subject to an affirmative vote of
the Debtors' creditors and the confirmation of the bankruptcy court. The Debtors
have also submitted their own plan for approval by creditors. Consequently,
there can be no assurance that the Franchisee Committee's plan will be approved
and that Nathan's will become the franchisor of Kenny Rogers Roasters.
The Company and certain other of the named defendants in the action entitled
Textron Financial Corporation v. Nathan's Famous, Inc. et al, entered into a
settlement with Textron whereby all of the plaintiff's claims against the
Company and such other defendants were resolved pursuant to a Settlement
Agreement and Mutual Release that provided for payments to be made jointly by
all of said defendants on or before December 30, 1998 and January 15, 1999.
Amounts due under the settlement have been previously accrued for in accordance
with SFAS No 5, "Accounting for Contingencies."
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED DECEMBER 27, 1998 COMPARED TO DECEMBER 28, 1997
Revenues
Total sales increased 3.5% or $195,000 to $5,833,000 for the thirteen weeks
ended December 27, 1998 ("third quarter fiscal 1999") from $5,638,000 for the
thirteen weeks ended December 28, 1997 ("third quarter fiscal 1998").
Company-owned restaurant sales were $5,309,000 in the third quarter fiscal 1999
compared to $5,342,000 in the third quarter fiscal 1998. Comparable unit sales
(units operating for 18 months or longer as of the beginning of the fiscal year)
increased by approximately 3.6% in the third quarter fiscal 1999 versus the
third quarter fiscal 1998. The Company continues to emphasize local store
marketing activities, new product introductions and value pricing strategies. At
December 27, 1998 and December 28, 1997, there were 26 and 25 Company-owned
units, respectively. Sales from the Branded Product Program were $524,000 for
the third quarter fiscal 1999, compared to sales of $296,000 in the third
quarter fiscal 1998.
Franchise fees and royalties were $859,000 in the third quarter fiscal 1999
compared to $863,000 in the third quarter fiscal 1998. Franchise royalties
increased by $12,000 or 1.7% to $707,000 in the third quarter fiscal 1999
compared to $695,000 in the third quarter fiscal 1998. Franchise restaurant
sales, upon which royalties are based, increased by $1,009,000, to $16,518,000
in the third quarter fiscal 1999 as compared to $15,509,000 in the third quarter
fiscal 1998. Fiscal 1998 results included a one-time reconciliation of
approximately $40,000. The majority of the sales increase can be attributed to
the new franchised and licensed units operating during the third quarter fiscal
1999. Franchise fee income was $152,000 in the third quarter fiscal 1999
compared to $168,000 in the third quarter fiscal 1998. During the third quarter
fiscal 1999, 9 new franchised or licensed units opened, including the second
restaurant in Israel and the first Kosher Nathan's restaurant in Brooklyn, New
York.
License royalties increased by $34,000 or 13.5% to $286,000 in the third quarter
fiscal 1999, as compared to $252,000 in the third quarter fiscal 1998. This
increase is primarily attributable to higher royalties recognized by the Company
from its licensee, SMG, Inc., from the sale of Nathan's frankfurters in
supermarkets and royalties earned under a new license agreement of approximately
$25,000 for the sale of Nathan's home meal replacements in supermarkets. During
the third quarter fiscal 1998, the Company recognized income of $60,000 from the
amortization of the deferred fee received from SMG, Inc. which was fully
amortized in March 1998.
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Investment and other income was $237,000 in the third quarter fiscal 1999 versus
$72,000 in the third quarter fiscal 1998. The Company experienced a $156,000
increase in the value of its investment portfolio for the third quarter fiscal
1999, compared to a decrease of $72,000 during the third quarter fiscal 1998
resulting from the difference between the performance of the financial markets
during those periods.
Costs and Expenses
Cost of sales increased by $137,000 from $3,515,000 in the third quarter fiscal
1998 to $3,652,000 in the third quarter fiscal 1999. Higher costs were incurred
in conjunction with the growth of the Branded Product Program, the additional
restaurant operating during the third quarter fiscal 1999 and higher costs of
restaurant sales. The cost of restaurant sales was 61.9% of restaurant sales in
the third quarter fiscal 1999 as compared to 61.4% of restaurant sales in the
third quarter fiscal 1998. This increase is due primarily to higher food and
labor costs associated with Nathan's ongoing promotional activities which
Nathan's believes is an integral part of competing in the current value
conscious marketplace.
Restaurant operating expenses increased by $89,000 from $1,434,000 in the third
quarter fiscal 1998 to $1,523,000 in the third quarter fiscal 1999. This
increase can be partially attributed to the cost of operating an additional
restaurant during the third quarter fiscal 1999, as well as the costs associated
with the Company's marketing efforts. As a percentage of restaurant sales,
restaurant operating expenses were 28.7% in the third quarter fiscal 1999,
compared to 26.8% in the third quarter fiscal 1998.
Depreciation and amortization increased by $18,000 or 7.3% from $246,000 in the
third quarter fiscal 1998 to $264,000 in the third quarter fiscal 1999.
Amortization of intangibles was $96,000 in the third quarter fiscal 1999,
compared to $112,000 in the third quarter fiscal 1998.
General and administrative expenses increased by $26,000 or 2.4% to $1,132,000
in the third quarter fiscal 1999, as compared to $1,106,000 in the third quarter
fiscal 1998. Approximately $32,000 of the increase relates to salaries of
additional personnel hired primarily to support Nathan's new growth initiatives
and $40,000 is associated with management incentive plans based upon the
achievement of predetermined financial targets which were partially offset by
other G&A savings.
Income Tax Provision
In the third quarter fiscal 1999, the income tax provision was $136,000 or 24.7%
of earnings before income taxes. In the third quarter fiscal 1999, the Company
reduced its valuation allowance by $115,000. The third quarter fiscal 1999
provision before adjustment for the valuation allowance was $251,000 or 45.8% of
income before income taxes. In the third quarter fiscal 1998, the income tax
provision was $170,000 or 41.3% of income before income taxes.
THIRTY-NINE WEEKS ENDED DECEMBER 27, 1998 COMPARED TO DECEMBER 28, 1997
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Revenues
Total sales increased 5.8% or $1,053,000 to $19,190,000 for the thirty-nine
weeks ended December 27, 1998 ("fiscal 1999") from $18,137,000 for the
thirty-nine weeks ended December 28, 1997 ("fiscal 1998"). Company-owned
restaurant sales increased 0.8% or $131,000 to $17,406,000 from $17,275,000.
Comparable unit sales (units operating for 18 months or longer as of the
beginning of the fiscal year), increased by approximately 2.1% in fiscal 1999
versus fiscal 1998. The Company continues to emphasize local store marketing
activities, new product introductions and value pricing strategies. These
activities were supplemented with a radio and billboard campaign during the
summer 1998. During fiscal 1999, the Company completed the renovation of the
86th Street restaurant in Brooklyn, NY, which included a drive thru operation,
and its restaurant in the Kings Plaza Shopping Center. Plans are currently being
considered to renovate and modernize the appearance and design of certain other
Company-owned units. At December 27, 1998 and December 28, 1997, there were 26
and 25 Company-owned units, respectively. Sales from the Branded Product Program
were $1,784,000 for fiscal 1999 as compared to $862,000 for fiscal 1998.
Franchise fees and royalties increased by $196,000 or 8.4% to $2,533,000 in
fiscal 1999 compared to $2,337,000 in fiscal 1998. Franchise royalties increased
by $166,000 or 8.8% to $2,051,000 in fiscal 1999 as compared to $1,885,000 in
fiscal 1998. Franchise restaurant sales, upon which royalties are based,
increased by 10.4% or $4,629,000, to $49,111,000 in fiscal 1999, compared to
$44,482,000 in fiscal 1998. The majority of the sales increase can be attributed
to the new franchised and licensed units operating during fiscal 1999. Franchise
fee income was $482,000 in fiscal 1999, compared to $452,000 in fiscal 1998.
During fiscal 1999, 19 new franchised or licensed units opened, including the
second restaurant in Israel, and the first Kosher Nathan's restaurant in
Brooklyn, New York. The Company also executed an agreement for international
development within Egypt. At December 27, 1998, there were 168 franchised or
licensed restaurants as compared to 154 at December 28, 1997.
License royalties decreased by $71,000 or 5.9% to $1,123,000 in fiscal 1999,
compared to $1,194,000 in fiscal 1998. During fiscal 1999 the Company earned
royalties of approximately $100,000 under a new license agreement for the sale
of Nathan's home meal replacements in supermarkets. Fiscal 1998 results included
$180,000 of income recognized from the amortization of the deferred fee received
from SMG, Inc., which was fully amortized in March 1998.
Investment and other income was $356,000 in fiscal 1999 versus $617,000 in
fiscal 1998. Approximately $176,000 of the decrease is the result of lower
earnings on Nathan's marketable investment securities resulting from the
difference in the performance of the financial markets between the two years.
During fiscal 1998, the Company also recognized a gain of approximately $130,000
from the sale of an underperforming restaurant.
Costs and Expenses
Cost of sales increased by $888,000 from $10,911,000 in fiscal 1998 to
$11,799,000 in fiscal 1999. Higher costs were incurred in conjunction with the
growth of the Branded Product Program, the additional restaurants
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operating during fiscal 1999 and the higher costs of restaurant sales. The cost
of restaurant sales was 60.0% of restaurant sales in fiscal 1999 as compared to
59.2% of restaurant sales in fiscal 1998. This increase is due primarily to
higher food and labor costs associated with Nathan's ongoing promotional
activities and the impact of the minimum wage increase which took effect in
September 1997. The Company continues to seek to operate more efficiently and
expects to seek selective price adjustments wherever available to minimize the
margin pressures which have become an integral part of competing in the current
value conscious marketplace.
Restaurant operating expenses decreased by $296,000 from $4,727,000 in fiscal
1998 to $4,431,000 in fiscal 1999. This decrease can be primarily attributed to
a four month cost hiatus during the renovation of the Kings Plaza restaurant,
reduced costs of property taxes arising from successful tax certiorari
proceedings, overall lower costs of insurance and utilities and the change in
restaurants operated between the two periods. As a percentage of restaurant
sales, restaurant operating expenses were 25.5% in fiscal 1999 as compared to
27.4% in fiscal 1998.
Depreciation and amortization increased by $28,000 or 3.7% from $758,000 in
fiscal 1998 to $786,000 in fiscal 1999. Amortization of intangibles was $288,000
in fiscal 1999 as compared to $311,000 in fiscal 1998.
General and administrative expenses increased by $239,000 or 7.1% to $3,598,000
in fiscal 1999, compared to $3,359,000 in fiscal 1998. Approximately $133,000 of
the increase relates to salaries of additional personnel primarily to support
Nathan's new growth initiatives, $35,000 relates to international development
efforts and $83,000 is associated with management incentive plans based upon the
achievement of predetermined financial targets.
Income Tax Provision
In fiscal 1999, the income tax provision was $562,000 or 24.4% of earnings
before income taxes. In fiscal 1999 the Company reduced its valuation allowance
by $426,000. The fiscal 1999 provision before adjustment for the valuation
allowance was $988,000 or 43.0% of income before taxes. In fiscal 1998, the
income tax provision was $890,000 or 40.2% of income before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 27, 1998 aggregated $2,011,000, increasing
by $705,000 during the fiscal 1999 period. At December 27, 1998, marketable
investment securities totalled $4,101,000 and net working capital decreased to
$3,367,000 from $6,105,000 at March 29, 1998.
Cash provided by operations of $6,345,000 in the fiscal 1999 period is primarily
attributable to net income of $1,737,000, non-cash charges of $1,153,000,
including depreciation and amortization of $1,074,000, a decrease in marketable
investment securities of $4,413,000 and an increase in deferred franchise fees
of $70,000, an increase in franchise and other receivables of $618,000, and a
decrease in accounts payable and accrued expenses of $341,000.
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Cash used in investing activities of $5,633,000 represents $1,347,000 for
capital acquisitions relating primarily to the renovation of two Company-owned
restaurants and other fixed asset additions. Additionally, on November 25, 1998
the Company acquired 8,121,000 shares or approximately 29.9% of the outstanding
common stock of Miami Subs Corporation (NASDAQ:SUSCD) for $4,200,000, excluding
transaction costs, and entered into a letter of intent to acquire the remaining
outstanding shares of Miami Subs Corporation in an exchange for Nathan's stock
and warrants. On January 15, 1999 Nathan's Famous, Inc. and Miami Subs
Corporation entered into a definitive merger agreement pursuant to which
Nathan's is expected to acquire the remaining outstanding shares of Miami Subs
Corporation in exchange for approximately 2,375,000 shares of Nathan's Common
Stock and warrants to acquire approximately 593,000 shares of Nathan's Famous,
Inc Common Stock at a price of $6.00 per share. The merger is subject to certain
conditions, including completion of due diligence, receipt of fairness opinions
and approval by a majority of the stockholders of Nathan's and Miami Subs
Corporation.
Management believes that available cash, marketable investment securities, and
internally generated funds should provide sufficient capital for its planned
operations and expansion program through fiscal 1999. The Company maintains a
$5,000,000 uncommitted bank line of credit. The Company has not borrowed any
funds to date under its line of credit.
YEAR 2000
The Company has undergone an internal evaluation of its computer systems and has
determined that its existing computer systems would require a significant amount
of effort and cost in order to make them Year 2000 compliant. Accordingly, in
order to meet its growing business requirements and assure Year 2000 compliance,
the Company decided to replace its existing accounting systems. In July 1998,
the Company entered into a contract to license Lawson Accounting software which
has been certified to be Year 2000 compliant. The Company has successfully
completed the conversion of its financial systems and believes that the
remaining aspects of the complete Lawson implementation can be accomplished in a
timely manner. The Company estimates the total capital cost associated with this
effort to be approximately $350,000, however, there can be no assurance to this
effect. Additionally, the Company has addressed the Year 2000 issue with its
Point of Sale provider and has been assured that their systems will be Year 2000
compliant. The Company cannot predict the effect of the Year 2000 problem on the
vendors and others with which the Company transacts business and there can be no
assurance that the effect of the Year 2000 problem on such entities will not
have a material adverse effect on Nathan's business, operating results and
financial position.
FORWARD LOOKING STATEMENT
Certain statements contained in this report are forward-looking statements which
are subject to a number of known and unknown risks and uncertainties that could
cause Nathan's actual results and performance to differ materially from those
described or implied in the forward looking statements. These risks and
uncertainties, many of which are not within Nathan's control, include, but are
not limited to economic, weather, legislative and business conditions; the
availability of suitable restaurant sites on reasonable rental terms; changes in
consumer tastes; ability to continue to attract franchisees; the ability to
purchase our primary food and paper products at
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16
reasonable prices; no material increases in the minimum wage; and Nathan's
ability to attract competent restaurant, and managerial personnel.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Textron Financial Corporation v. Nathan's Famous, Inc. et al
The Company and certain other of the named defendants entered into a Settlement
with Textron whereby all of the plaintiff's claims against the Company and such
other defendants were resolved pursuant to a Settlement Agreement and Mutual
Release that provided for payments to be made jointly by all of said defendants
on or before December 30, 1998 and January 15, 1999.
ITEM 5: OTHER INFORMATION
On January 12, 1999, the Official Committee of Franchisees (the "Franchisee
Committee") of Roasters Corp. and Roasters Franchise Corp. submitted its
disclosure statement describing its plan of reorganization for Roasters Corp.
and Roasters Franchise Corp. (the "Debtors"). Under the Franchisee Committee
plan, Nathan's would become the franchisor for Kenny Rogers Roasters and assume
the contract and other intellectual property rights necessary to enable it to
act as franchisor in exchange for the payment by Nathan's of $1,250,000. At the
time that the Franchisee Committee's plan was submitted to the bankruptcy court,
Nathan's deposited $100,000 of such payment, which would be refunded in the
event that the Franchisee Committee's plan is not approved. Approval of the
Franchisee Committee plan is subject to an affirmative vote of the Debtors'
creditors and the confirmation of the bankruptcy court. The Debtors have also
submitted their own plan for approval by creditors. Consequently, there can be
no assurance that the Franchisee Committee's plan will be approved and that
Nathan's will become the franchisor of Kenny Rogers Roasters.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
On January 5, 1999 the Company reported on Form 8-K that it acquired 8,121,000
shares of Miami Subs Corporation for $4,200,000 in a private transaction, and
that Nathan's entered into a letter of intent with Miami
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Subs Corporation to acquire the remaining outstanding common stock in exchange
for Nathan's common stock plus warrants.
On February 1, 1999 the Company reported on Form 8-K that it executed a merger
agreement with Miami Subs Corporation in which Nathan's proposes to acquire the
remaining outstanding common stock of Miami Subs Corporation in exchange for
Nathan's common stock plus warrants.
On February 5, 1999 the Company filed on Form 8-K/A which included the required
financial statement information that was permitted to be filed within 60 days of
the underlying event that required the Form 8-K which was filed on January 5,
1999.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATHAN'S FAMOUS, INC.
Date: February 8, 1999 By: /s/ Wayne Norbitz
-------------------------------------------------
Wayne Norbitz
President and Chief Operating Officer
(Principal Executive Officer)
Date: February 8, 1999 By: /s/ Ronald G. DeVos
-------------------------------------------------
Ronald G. DeVos
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
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5
1000
US DOLLARS
3-MOS 9-MOS
MAR-28-1999 MAR-28-1999
SEP-28-1998 MAR-30-1998
DEC-27-1998 DEC-27-1998
1 1
0 2011
0 4101
0 2041
0 492
0 402
0 8890
0 19186
0 12451
0 31078
0 5523
0 0
0 0
0 0
0 47
0 25310
0 31078
5833 19190
7215 23202
3652 11799
1883 5505
1117 3553
15 45
0 1
548 2299
136 562
412 1737
0 0
0 0
0 0
412 1737
0.09 0.37
0.09 0.37
