FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[x][X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Act of
1934 for the quarterly period ended DECEMBERJUNE 26, 2004.2005.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Act of
1934 for the transition period from _____________________________ to ______________.__________.
Commission File Number 0-3189
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 Exchange 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]X No
[ ]----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]X
----- -----
At February 3,August 5, 2005, an aggregate of 5,456,3325,564,842 shares of the registrant's common
stock, par value of $.01, were outstanding.
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
INDEX
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Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited) 3
Consolidated Balance Sheets - DecemberJune 26, 20042005 and
March 28, 200427, 2005 3
Consolidated Statements of OperationsEarnings - Thirteen Weeks
Ended DecemberJune 26, 2005 and June 27, 2004 and December 28, 2003 4
Consolidated Statements of Operations - Thirty-nine Weeks
Ended December 26, 2004 and December 28, 2003 5
Consolidated Statement of Stockholders' Equity - Thirty-nineThirteen
Weeks Ended DecemberJune 26, 2004 62005 5
Consolidated Statements of Cash Flows -Thirty-nine- Thirteen Weeks
Ended DecemberJune 26, 2005 and June 27, 2004 and December 28, 2003 76
Notes to Consolidated Financial Statements 87
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 1513
Item 3. Qualitative and Quantitative Disclosures about Market Risk 2119
Item 4. Controls and Procedures 2220
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 2421
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 2421
Item 6. Exhibits and Reports on Form 8-K 2422
SIGNATURES 2523
-2-
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Dec.June 26, March 28,
2004 200427,
2005 2005
----------- --------- --------
(Unaudited)
Current assets:
Cash and cash equivalents including restricted cash
of $83 $ 3,0094,831 $ 3,4492,935
Marketable securities 10,673 7,477
Notes11,262 11,641
Accounts and accountsnotes receivable, net 3,224 2,3524,924 3,591
Inventories 468 743690 688
Assets held for sale 689 507187 688
Prepaid expenses and other current assets 655 463947 907
Deferred income taxes 1,331 1,326
---------1,168 1,168
-------- --------
Total current assets 20,049 16,31724,009 21,618
Notes receivable, net 157 313132 136
Property and equipment, net 4,761 5,0944,538 4,583
Goodwill 95 95
Intangible assets, net 2,866 3,0632,735 2,800
Deferred income taxes 2,446 2,4521,729 1,792
Other assets, net 248 250 ---------245
-------- --------
$ 30,62233,488 $ 27,58431,269
======== ========
Current liabilities:
Current maturities of notes payable and capital lease obligations $ 174 $ 173174
Accounts payable 1,354 1,9502,718 2,009
Accrued expenses and other current liabilities 5,349 4,8365,346 5,088
Deferred franchise fees 326 173
---------355 338
-------- --------
Total current liabilities 7,203 7,1328,593 7,609
Notes payable and capital lease obligations, less current maturities 736 866649 692
Other liabilities 1,796 2,234
---------1,528 1,612
-------- --------
Total liabilities 9,735 10,232
---------10,770 9,913
-------- --------
Stockholders' equity:
Common stock, $.01 par value - 30,000,000 shares authorized; 7,297,4327,455,317
and 7,065,2027,440,317 shares issued; 5,406,3325,564,217 and 5,213,9015,549,217 shares outstanding
at DecemberJune 26, 20042005 and March 28, 2004,27, 2005, respectively 73 7175 74
Additional paid-in capital 42,035 40,74642,756 42,665
Deferred compensation (263) (281)
Accumulated deficit (14,095) (16,611)(12,705) (13,874)
Accumulated other comprehensive income 32 67
---------(loss) 13 (70)
-------- 28,045 24,273--------
29,876 28,514
Treasury stock at cost, 1,891,100 and 1,851,301 shares at
December 26, 2004 and March 28, 2004, respectively (7,158) (6,921)
---------(7,158)
-------- --------
Total stockholders' equity 20,887 17,352
---------22,718 21,356
-------- --------
$ 30,62233,488 $ 27,58431,269
======== ========
See accompanying notes to consolidated financial statements.
-3-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONSEARNINGS
Thirteen weeks ended DecemberJune 26, 20042005 and December 28, 2003June 27, 2004
(In thousands, except per share amounts)
(Unaudited)
2005 2004
2003------- ------ -------
Sales $4,690 $ 3,8418,222 $6,431
Franchise fees and royalties 1,749 1,6901,748 1,665
License royalties 684 6741,157 939
Investment and other income 106 46146 182
Interest income 71 3982 48
------- ------ -------
Total revenues 7,300 6,29011,355 9,265
------- ------ -------
Costs and expenses:
Cost of sales 3,657 2,9026,295 4,619
Restaurant operating expenses 734 720783 759
Depreciation and amortization 220 226199 218
Amortization of intangible assets 65 65
General and administrative expenses 1,959 1,9072,105 2,024
Interest expense 11 12
16
Impairment charge on notes receivable - 44------- ------ -------
Total costs and expenses 6,647 5,8809,458 7,697
------- ------ -------
Income from continuing operations before income taxes 653 4101,897 1,568
Provision for income taxes 177 162722 616
------- ------ -------
Income from continuing operations 476 2481,175 952
------- ------ -------
Discontinued operations
Loss from discontinued operations before income taxes - (18)(10) (3)
Benefit from income taxes - (7)(4) (1)
------- ------ -------
Loss from discontinued operations - (11)(6) (2)
------- ------ -------
Net income $ 4761,169 $ 237950
======= ====== =======
PER SHARE INFORMATION
Basic income (loss) per share
Income from continuing operations $ 0.090.21 $ 0.040.18
Loss from discontinued operations 0.00 (0.00) (0.00)
------- ------ -------
Net income $ 0.090.21 $ 0.040.18
======= ====== =======
Diluted income (loss) per share
Income from continuing operations $ 0.080.18 $ 0.040.16
Loss from discontinued operations 0.00 (0.00) (0.00)
------- ------ -------
Net income $ 0.080.18 $ 0.040.16
======= ====== =======
Weighted average shares used in computing per share information
Basic 5,352 5,2865,555 5,214
======= ======
Diluted 6,474 5,913
======= Diluted 6,173 5,742
====== =======
See accompanying notes to consolidated financial statements.
-4-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSSTATEMENT OF OPERATIONS
Thirty-nineSTOCKHOLDERS' EQUITY
Thirteen weeks ended DecemberJune 26, 2004 and December 28, 20032005
(In thousands, except per share amounts)
(Unaudited)
2004 2003
-------- --------Additional
Common Paid-in Deferred
Shares Common Stock Capital Compensation
--------- ------------ ---------- ------------
Sales $ 18,269 $ 15,930
Franchise fees and royalties 5,084 4,753
License royalties 2,507 2,330
Investment and other income 435 339
Interest income 169 165
-------- --------
Total revenues 26,464 23,517
-------- --------
Costs and expenses:
Cost
Balance at March 27, 2005 7,440,317 $74 $42,665 $(281)
Shares issued in connection with
exercise of sales 13,181 11,210
Restaurant operating expenses 2,332 2,657
Depreciation and amortization 663 712employee stock options 15,000 1 71
Income tax benefit on employee
stock options 20
Amortization of intangible assets 196 196
General and administrative expenses 6,025 5,523
Interestdeferred
compensation relating to restricted
stock 18
Unrealized gains on available for
sale securities, net of deferred
income tax expense 36 55
Impairment charge on notes receivable - 100
-------- --------
Total costs and expenses 22,433 20,453
-------- --------
Income from continuing operations before income taxes 4,031 3,064
Provision for income taxes 1,506 1,213
-------- --------
Income from continuing operations 2,525 1,851
-------- --------
Discontinued operations
Loss from discontinued operations before income taxes (15) (23)
Benefit from income taxes (6) (9)
-------- --------
Loss from discontinued operations (9) (14)
-------- --------of $54
Net income
$ 2,516 $ 1,837
======== ========
PER SHARE INFORMATION
Basic--------- --- ------- -----
Balance at June 26, 2005 7,455,317 $75 $42,756 $(263)
========= === ======= =====
Accumulated
Other Treasury Total
Accumulated Comprehensive Treasury Stock, Stockholders'
Deficit Income Shares at cost Equity
----------- ------------- --------- -------- -------------
Balance at March 27, 2005 $(13,874) $(70) 1,891,100 $(7,158) $21,356
Shares issued in connection with
exercise of employee stock options 72
Income tax benefit on employee
stock options 20
Amortization of deferred
compensation relating to restricted
stock 18
Unrealized gains on available for
sale securities, net of deferred
income (loss) per share
Income from continuing operations $ 0.48 $ 0.35
Loss from discontinued operations (0.00) (0.00)
-------- --------tax expense of $54 83 83
Net income 1,169 1,169
-------- ---- --------- ------- -------
Balance at June 26, 2005 $(12,705) $ 0.48 $ 0.3513 1,891,100 $(7,158) $22,718
======== ========
Diluted income (loss) per share
Income from continuing operations $ 0.42 $ 0.33
Loss from discontinued operations (0.00) (0.00)
-------- --------
Net income $ 0.42 $ 0.33
======== ========
Weighted average shares used in computing per share information
Basic 5,256 5,323
======== ========
Diluted 6,003 5,604
======== ============ ========= ======= =======
See accompanying notes to consolidated financial statements.
-5-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Thirty-nine weeks ended December 26, 2004
(In thousands, except share amounts)
(Unaudited)
Accumulated
Other
Additional Comprehen- Treasury Total
Common Common Paid -in Accumulated sive Treasury Stock, Stockholders'
Shares Stock Capital Deficit Income Shares at cost Equity
--------- ------ ---------- ----------- ---------- --------- -------- ------------
Balance at
March 28, 2004 7,065,202 $ 71 $ 40,746 $ (16,611) $ 67 1,851,301 $ (6,921) $ 17,352
Repurchases of
treasury stock 39,799 (237) (237)
Proceeds received
from the exercise
of warrants 142,855 1 856 857
Proceeds received
from the exercise
of stock options 89,375 1 330 331
Income tax
benefit on stock
option exercises 103 103
Unrealized losses
on available for
sale securities,
net of deferred
income taxes of
$25 (35) (35)
Net income 2,516 2,516
--------- ------ ---------- ---------- ---------- --------- -------- ------------
Balance at
Dec. 26, 2004 7,297,432 $ 73 $ 42,035 $ (14,095) $ 32 1,891,100 $ (7,158) $ 20,887
========= ====== ========== ========== ========== ========= ======== ============
See accompanying notes to consolidated financial statements.
-6-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nineThirteen weeks ended DecemberJune 26, 20042005 and December 28, 2003June 27, 2004
(In thousands)
(Unaudited)
2005 2004 2003
------- -------
Cash flows from operating activities:
Net income $ 2,516 $ 1,8371,169 950
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 663 749199 218
Amortization of intangible assets 196 19665 65
Amortization of bond premium 105 9250 32
Amortization of deferred compensation 18 --
Provision for doubtful accounts 11 25
Gain on sale of available for sale securities - (12)3 6
Gain on disposal of property and equipment (67) (149)
Impairment chargefixed assets (25) (24)
Income tax benefit on notes receivable - 100stock option exercises 20 --
Deferred income taxes 27 1,1988 (2)
Changes in operating assets and liabilities:
NotesAccounts and accountsnotes receivable, net (959) 141(1,415) (1,135)
Inventories 275 45(2) 99
Prepaid expenses and other current assets (192) 70(40) (66)
Accounts payable and accrued expenses 20 (675)967 (396)
Deferred franchise fees 153 7817 129
Other assets, net 3 8(5) (1)
Other non current liabilities (383) 132(76) (110)
------- -------
Net cash provided by (used in) operating activities 2,368 3,835953 (235)
------- -------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 900 1,3221,000 650
Purchase of available for sale securities (4,261) (4,168)(533) --
Purchase of property and equipment (515) (307)
Proceeds from sale of restaurants, net - 583(151) (262)
Proceeds from sale of property and equipment 14 6515 5
Payments received on notes receivable 232 60383 77
------- -------
Net cash used inprovided by investing activities (3,630) (1,961)914 470
------- -------
Cash flows from financing activities:
Repurchases of common stock (237) (553)
Proceeds received from the exercise of stock options and warrants 1,188 -72 --
Principal repayment of borrowings and obligations under capital leases (129) (144)(43) (43)
------- -------
Net cash provided by (used in) financing activities 822 (697)29 (43)
------- -------
Net decreaseincrease in cash and cash equivalents (440) 1,1771,896 192
Cash and cash equivalents, beginning of period 2,935 3,449 1,415
------- -------
Cash and cash equivalents, end of period $ 3,0094,831 $ 2,5923,641
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 51261 $ 26630
======= =======
Cash paid during the period for interest $ 3611 $ 59
======= =======
NONCASH FINANCING ACTIVITIES:
Loan to franchisees in connection with sale of restaurants $ - $ 60012
======= =======
See accompanying notes to consolidated financial statements.
-7--6-
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DecemberJune 26, 20042005
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Nathan's Famous, Inc.
and subsidiaries (collectively "Nathan's" or the "Company") for the thirteen
and thirty-nine week periods ended DecemberJune 26, 20042005 and December 28,
2003June 27, 2004 have been prepared in
accordance with accounting principles generally accepted in the United States of
America. 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 accounting principles generally accepted in the
United States of America 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
28, 2004.27, 2005.
A summary of the Company's significant accounting policies is identified in
Note B of the Notes to Consolidated Financial Statements included in the
Company's 2005 Annual Report on Form 10-K. There have been no changes to the
Company's significant accounting policies subsequent to March 27, 2005.
NOTE B - ADOPTION OF NEWRECENTLY ISSUED ACCOUNTING PRONOUNCEMENTSSTANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs--an amendment of ARB No.43" ("SFAS No.151"),
which is the result of its efforts to converge U.S. accounting standards for
inventories with International Accounting Standards. SFAS No.151 requires idle
facility expenses, freight, handling costs, and wasted material (spoilage) costs
to be recognized as current-period charges. It also requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No.151 will be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company is evaluating the impact of this standard on its consolidated financial
statements.
In December 2003,2004, the FASB issuedissues SFAS No. 123R, "Share-Based Payment"
("SFAS No. 123R"), which revised SFAS No. 123, Accounting for Stock Based
Compensation, and generally requires, among other things, that all employee
stock-based compensation be measured using a revisionfair value method and that the
resulting compensation cost be recognized in the financial statements. SFAS 123R
also provides guidance on how to FASB Interpretation No.
46, "Consolidationdetermine the grant-date fair value for awards
of Variable Interest Entities, an Interpretationequity instruments, as well as alternative methods of ARB No.
51" ("FIN No. 46(R)" oradopting its
requirements. On April 14, 2005, the "Interpretation"). FIN No. 46(R) clarifies the
application of ARB No. 51, "Consolidated Financial Statements," to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support. FIN No. 46(R) requires the consolidation of these entities, known as
variable interest entities, by the primary beneficiary of the entity. The
primary beneficiary is the entity, if any, that will absorb a majority of the
entity's expected losses, receive a majority of the entity's expected residual
returns, or both.
The revisions of FIN No. 46(R) (a) clarified some requirements of the
original FIN No. 46, which had been issued in January 2003, (b) simplified some
of the implementation problems, and (c) added new scope exceptions. FIN No.
46(R)SEC delayed the effective date of the FINrequired
adoption of SFAS No. 46 for public companies,123R to the endbeginning of the first reportingannual period ending after MarchJune
15, 2004, except that all
public companies must at a minimum apply the unmodified provisions of FIN No.
46(R) to entities that were previously considered "special-purpose entities" in
practice and under the FASB literature prior to the issuance of FIN No. 46(R) by
the end of the first reporting period ending after December 15, 2003.
FIN No. 46(R) added several new scope exceptions, including one which
states that companies are not required to apply the provisions to an entity that
meets the criteria to be considered a "business" as defined in FIN No. 46(R)
unless one or more of four named conditions exist.2005. The Company has no equity ownership interests in its franchisees, and has
not consolidated any of these entities in the Company's financial statements.
The Company does not provide more than half of the equity, subordinated debt or
other subordinated financial supportplans to any franchise entity. The Company has
further concluded that the franchise entities were not designed such that
substantially all of their activities either involve or are conducted on behalf
of Nathan's. As such, the Company has not consolidated any franchised entity in
the financial statements. If, at some future date, Nathan's does provide more
than half of the subordinated financial support to a franchise entity,
consolidation would not be automatic. The franchise entity would then be subject
to further testing under the guidelines of FIN No.46(R). The Company will
continue to monitor developments regarding the Interpretation as they occur. The
Company adoptedadopt the provisions of FINSFAS No. 46(R)123R in its fourth fiscalthe
first quarter of 2004.Thefiscal year 2007. The Company is currently evaluating the
impact of adoption of FINthe various provisions of SFAS No. 46(R) did not have a material impact on the
Company's financial position and results of operations.
-8-
123R.
NOTE C - INCOME FROM CONTINUING OPERATIONS PER SHARE
Basic income from continuing operations per common share is calculated by dividing income from continuing operations by the
weighted-average number of common shares outstanding and excludes any dilutive
effect of stock options or warrants. Diluted income from continuing operations per common share gives
effect to all potentially dilutive common shares that were outstanding during
the period. Dilutive common shares used in the computation of diluted income from continuing operations per
common share result from the assumed exercise of stock options and warrants,
using the treasury stock method.
-7-
The following chart provides a reconciliation of information used in
calculating the per share amounts for the thirteen and thirty-nine week periods ended DecemberJune 26,
20042005 and December 28, 2003,June 27, 2004, respectively.
THIRTEEN WEEKS
Income from
Income from Continuing Operations
Continuing Operations Number of Shares Continuing Operations
(In thousands) (In thousands) Per Share
--------------------- ---------------- ---------------------
2005 2004 20032005 2004 20032005 2004
2003
-------- -------------- ---- ----- ----- -------- ------------- ------
(In thousands) (In thousands)
Basic EPS
Basic calculation $1,175 $952 5,555 5,214 $ 4760.21 $ 248 5,352 5,286 $ 0.09 $ 0.040.18
Effect of dilutive employee stock
options and warrants - - 821 456 (0.01) -
-------- ---------- -- 919 699 (0.03) (0.02)
------ ---- ----- ----- -------- ------------- ------
Diluted EPS
Diluted calculation $1,175 $952 6,474 5,913 $ 4760.18 $ 248 6,173 5,742 $ 0.08 $ 0.04
======== ========0.16
====== ==== ===== ===== ======== =======
THIRTY-NINE WEEKS
Income from Income from
Continuing Operations Number of Shares Continuing Operations
(In thousands) (In thousands) Per Share
--------------------- ---------------- ---------------------
2004 2003 2004 2003 2004 2003
------- -------- ----- ----- ------- --------
Basic EPS
Basic calculation $ 2,525 $ 1,851 5,256 5,323 $ 0.48 $ 0.35
Effect of dilutive employee stock
options and warrants - - 747 281 (0.06) (0.02)
------- -------- ----- ----- ------- --------
Diluted EPS
Diluted calculation $ 2,525 $ 1,851 6,003 5,604 $ 0.42 $ 0.33
======= ======== ===== ===== ======= ============== ======
Options and warrants to purchase 19,500 and 249,753761,909 shares of common stock
in both the thirteen and thirty-nine week periods ended DecemberJune 26, 20042005 and December 28, 2003,June 27, 2004,
respectively, were not included in the computation of diluted EPS because the
exercise prices exceeded the average market price of common shares during the
respective periods.
These options and warrants were still
outstanding at the end of the respective periods.
NOTE D - STOCK BASED COMPENSATION
At DecemberJune 26, 2004,2005, the Company had five stock-based employee compensation
plans. The Company accounts for stock-based compensation using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations ("APB
No. 25") and has adopted the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS")No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure." Under APB No. 25, when the exercise
price of stock options or warrants granted to employees or the Company's
employee stock optionsindependent directors equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized. NoAccordingly, no
compensation expense has been recognized in the consolidated financial
statements in connection with employee or independent director stock option
grants. -9-
Compensation expense for restricted stock awards is measured at the fair
value on the date of grant, based upon the number of shares granted and the
quoted market price of the Company's stock. Such value is recognized as expense
over the vesting period of the award.
The following table illustrates the effect on net income and earnings per
share had the Company applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation.
Thirteen Weeks Ended
Thirty-nine Weeks Ended--------------------
June 26, June 27,
2005 2004
-------- --------
(In thousands)
(In thousands)
Dec.26, Dec.28, Dec.26, Dec.28,
2004 2003 2004 2003
----------- --------- ---------- ---------
Net income, as reported $1,169 $ 476 $ 237 $ 2,516 $ 1,837950
Add: Stock-based compensation
included in net income 11 --
Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards (33) (51)
(46) (153) (128)
----------- --------- ---------- --------------- -----
Pro forma net income $1,147 $ 425 $ 191 $ 2,363 $ 1,709
=========== ========= ========== =========899
====== =====
Earnings per Share
Basic - as reported $ 0.09 $ 0.04 $ 0.48 $ 0.35
=========== ========= ========== =========0.21 $0.18
====== =====
Diluted - as reported $ 0.08 $ 0.04 $ 0.42 $ 0.33
=========== ========= ========== =========0.18 $0.16
====== =====
Basic - pro forma $ 0.08 $ 0.04 $ 0.45 $ 0.32
=========== ========= ========== =========0.21 $0.17
====== =====
Diluted - pro forma $ 0.07 $ 0.03 $ 0.39 $ 0.30
=========== ========= ========== =========0.18 $0.15
====== =====
-8-
Pro forma compensation expense may not be indicative of pro forma expense
in future years. For purposes of estimating the fair value of each option on the
date of grant, the Company utilized the Black-Scholes option-pricing model.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee and independent director stock
options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee and independent director stock options.
During the thirty-nine weeks ended December 26, 2004 and December 28,
2003, the Company granted 95,000 and 65,000 options having exercise prices of
$5.62 and $4.03 per share, respectively.
During the thirteen weeks ended December 28, 2003,June 27, 2004, the Company granted 25,00095,000
options athaving an exercise price of $4.38 per share. No options were granted during the thirteen weeks ended
December 26, 2004.$5.62. All of the options granted are vestedvest as
follows: 33 1/3% on the first anniversary of the date of grant, 66 2/3% on the
second anniversary of the date of grant and 100% on the third anniversary of the
date of grant. All options have an expiration date of ten years from the date of
grant. No options were granted during the thirteen weeks ended June 26, 2005.
The weighted average option fair values and the assumptions used to
estimate these values are as follows:
Thirty-nineThirteen Weeks Ended
Dec. 26, Dec. 28,June 27,
2004
2003
--------- -----------------------------
Option fair values $ 2.87 $ 1.60$2.87
Expected life (years) 7.0
7.0
Interest rate 4.50%
3.85%
Volatility 29.9%
30.6%
Dividend yield 0.0% 0.0%
NOTE E - SALESPROPERTY AND EQUIPMENT, NET
1. SALE OF RESTAURANTSRESTAURANT
The Company observes the provisions of SFAS No. 66, "Accounting for Sales
of Real Estate," which establishes accounting standards for recognizing profit
or loss on sales of real estate. SFAS No. 66 provides for profit recognition by
the full accrual method, provided (a) the profit is determinable, that is, the
collectibility of the sales price is reasonably assured or the amount that will
not be collectible can be estimated, and (b) the earnings process is virtually
complete, that is, the seller is not obligated to perform significant activities
after the sale to earn the profit. Unless both conditions exist, recognition of
all or part of the profit shall be postponed and -10-
other methods of profit
recognition shall be followed. In accordance with SFAS No. 66, the Company
recognizes profit on sales of restaurants under boththe full accrual method, the
installment method and the deposit method, depending on the specific terms of
each sale. The Company continues to record depreciation expense on the property
subject to the sales contracts that are accounted for under the deposit method
and records any principal payments received as a deposit until such time that
the transaction meets the sales criteria of SFAS No. 66.
During the thirty-ninethirteen weeks ended December 28, 2003,June 26, 2005, the Company sold threeone
Company-owned restaurantsrestaurant, that it had previously leased to the operator pursuant
to a management agreement, for total cash consideration of $1,083,000$515,000 and entered
into two management agreementsa franchise agreement with franchiseesthe buyer to operate two
Company-owned restaurants.continue operating the restaurant.
As the Company expects to have a continuing stream of cash flows from these restaurants,this
restaurant, the results of operations for these
Company-operated restaurantsthis restaurant are included in
"Income from continuing operations"operations before income taxes" in the accompanying
consolidated statements of operations for the thirteen and
thirty-nine week periodsperiod ended December 28, 2003June
26, 2005 through the date of sale. There have beenwere no sales of Company-owned
restaurants during the thirty-ninethirteen weeks ended December 26,June 27, 2004.
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The results of operations for these Company-owned restaurants for the
thirteen and thirty-nine week periods ended December 28, 2003this restaurant are as follows (in
thousands):follows:
Thirteen Weeks Ended
Thirty-nine Weeks Ended
Dec. 28, 2003 Dec. 28, 2003
------------- ---------------------------------
June 26, June 27,
2005 2004
-------- --------
(In thousands)
Sales $ - $ 1,237
============= =============
LossTotal revenues $59 $12
=== ===
Income from continuing operations before income taxes $ - $ (124)
============= =============$57 $10
=== ===
NOTE F -2. DISCONTINUED OPERATIONS
On September 12, 2004,The Company follows the Company ceased operating oneprovisions of its
Company-operated restaurants pursuant to the expiration and non-renewal of its
lease. The results of operations of this restaurant have been restated as
discontinued operations in the accompanying consolidated statements of
operations in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."
Following isAssets" ("SFAS No.144"), related to the
accounting and reporting for segments of a summarybusiness to be disposed of. In
accordance with SFAS No. 144, the definition of discontinued operations includes
components of an entity whose cash flows are clearly identifiable. SFAS No. 144
requires the Company to classify as discontinued operations any restaurant or
property that Nathan's sells, abandons or otherwise disposes of where the
Company will have no further involvement in, or cash flows, from such
restaurant's operations.
On July 13, 2005, Nathan's sold a parcel of land, previously utilized as a
parking lot adjacent to a company-owned restaurant (See Note K-2). The operating
expenses for this property have been included in discontinued operations for the
quarters ended June 26, 2005 and June 27, 2004 as the Company has no continuing
involvement in the operation of the property or cash flows from this property.
During the fiscal year ended March 27, 2005, the Company ceased the operations
of one Company-owned restaurant pursuant to the termination of the lease and
notification by the landlord not to renew. The results of operations for this
restaurant have been included in discontinued operations for first quarter ended
June 27, 2004 as the thirteen and thirty-nine week periods ended December 26, 2004 and
December 28, 2003 (in thousands):Company has no continuing involvement in the operation of
the restaurant or cash flows from this restaurant.
The results of operations for these properties are as follows:
Thirteen Weeks Ended
Thirty-nine Weeks Ended
Dec.--------------------
June 26, Dec. 28, Dec. 26, Dec. 28,June 27,
2005 2004
2003 2004 2003
---- ---- ---- ------------ --------
(In thousands)
SalesTotal revenue $ - $ 222 $ 415 $ 688-- $219
==== ===== ===== =====
Loss====
(Loss) from discontinued operations before income taxes $(10) $ - $ (18) $ (15) $ (23)(3)
==== ===== ===== =========
NOTE G -F -- STOCK REPURCHASE PROGRAM
On September 14, 2001, Nathan's was authorized to purchase up to one
million shares of its common stock. Pursuant to its stock repurchase program, it
repurchased one million shares of common stock in open market transactions and a
private transaction at a total cost of $3,670,000 through the quarter ended
September 29, 2002. On October 7, 2002, Nathan's was authorized to purchase up
to one million additional shares of its common stock. Through DecemberJune 26, 2004,2005,
Nathan's purchased 891,100 shares of common stock at a cost of approximately
$3,488,000 which includes the repurchase of 39,799 shares during the thirty-nine
weeks ended December 26, 2004 at a cost of $237,000. As of December 26, 2004,$3,488,000. To date, Nathan's has purchased a total of 1,891,100 shares of
common stock at a cost of approximately $7,158,000. There were no repurchases of
the Company's common stock during the thirteen weeks ended June 26, 2005.
Nathan's expects to make additional purchases of stock from time to time,
depending on market conditions, in open market or in privately negotiated
transactions, at prices deemed appropriate by management. There is no set time
limit on the purchases. Nathan's expects to fund these stock repurchases from
its operating cash flow.
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NOTE H - EXERCISE OF WARRANTS AND STOCK OPTIONS
In connection with the acquisition of Miami Subs Corporation ("Miami
Subs"), which was concluded during fiscal 2000, Nathan's issued 579,040 warrants
to purchase Nathans stock at $6.00 per share to the former shareholders of Miami
Subs. These warrants had an expiration date of September 29, 2004. During the
thirty-nine week period ended December 26, 2004,Nathan's
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received approximately $857,000 in connection with the exercise of 142,855
warrants in addition to the six warrants which were exercised prior to the
beginning of the fiscal year. The remaining 436,179 warrants expired unexercised
on September 29, 2004. During the thirty-nine weeks ended December 26, 2004,
Nathan's also received approximately $331,000 in connection with the exercise of
89,375 employee stock options.
NOTE IG - COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):follows:
Thirteen Weeks Ended
Thirty-nine Weeks Ended
Dec.--------------------
June 26, Dec. 28, Dec. 26, Dec. 28,June 27,
2005 2004 2003 2004 2003
-------- --------
-------- -------(In thousands)
Net income $ 476 $ 237 $ 2,516 $ 1,837$1,169 $950
Unrealized gain (loss) on available-for-sale securities, net
of tax provision (benefit) provision of ($7)$54 and $(55), $1, ($25),
$2, respectively (11) 2 (35) 3
-------- -------- -------- -------83 (87)
------ ----
Comprehensive income $ 465 $ 239 $ 2,481 $ 1,840
======== ======== ======== =======$1,252 $863
====== ====
Accumulated other comprehensive income at DecemberJune 26, 20042005 and March 28,June 27, 2004
consists entirely of unrealized gains and (losses) on available-for-sale
securities, net of deferred taxes.
NOTE JH - COMMITMENTS AND CONTINGENCIES
1. CONTINGENCIES
An action was commenced, in the Circuit Court of the Fifteenth Judicial
Circuit, Palm Beach County, Florida in September 2001 against Miami Subs and
EKFD Corporation, a Miami Subs franchisee (the "franchisee"("the franchisee") claiming negligence
in connection with a slip and fall which allegedly occurred on the premises of
the franchisee for unspecified damages. Pursuant to the terms of the Miami Subs
Franchise Agreement, the franchisee is obligated to indemnify Miami Subs and
hold it harmless against claims asserted and procure an insurance policy which
names Miami Subs as an additional insured. Miami Subs has denied any liability
to plaintiffs and has made demand upon the franchisee's insurer to indemnify and
defend against the claims asserted. The insurer has agreed to indemnify and
defend Miami Subs and has assumed the defense of this action for Miami Subs.
Miami Subs has received a claim from a landlord for a franchised location
that Miami Subs owes the landlord $150,000 in connection with the construction
of the leased premises. Miami Subs has been the primary tenant at the location
since 1993, when the lease was assigned to Miami Subs by the initial tenant
under the lease, the party to whom the construction loan was made. To date, the
landlord has not commenced legal action. Miami Subs intends to continue to
dispute its liability for the construction loan and to vigorously defend any
legal action.
Ismael Rodriguez commenced an action, in the Supreme Court of the State of
New York, Kings County, in May 2004 against Nathan's Famous, Inc. seeking
damages of $1,000,000 for claims of age discrimination in connection with the
termination of Mr. Rodriguez's employment. Mr. Rodriguez was terminated from his
position in connection with his repeated violation of company policies and
failure to follow company-mandated procedures. Initial discoveries and
depositions have commenced. Nathan's has denied any liability
and intends to
continue to defendis defending this action vigorously. Nathan's has submittedexpects that the cost of
defending this claim to
its insurance carrier and expects that it will not incur any material liability
that is notbe covered by its employment practices liability insurance, policy.subject to the policy
deductible.
An employee of a Miami Subs franchised restaurant commenced an action for
unspecified damages in the United States District Court, Southern District of
Florida in September 2004 against Miami Subs Corporation, Miami Subs USA, Inc.,
and three Miami Subs franchisees, FMJFMI Subs Corporation, NEESA Subs Corp. and
Muhammad Amin, (the "franchisees")franchisees), claiming that she was not paid overtime by the
franchisees when she worked in excess of 40 hours per week, in violation of the
Fair Labor Standards Act. The action also seekssought damages for any other employees
of the defendants who would be similarly entitled to overtime. PursuantOn May 27, 2005,
this action was settled without payment to the termsplaintiffs by Miami Subs
Corporation.
In July 2001, a female manager at one of the Miami Subs Franchise Agreement, the franchisees are obligated to operate
their Miami Subs franchises in complianceCompany-owned restaurants
filed a charge with the law, including all labor
laws. Miami SubsEqual Employment Opportunity Commission ("EEOC")
claiming sex discrimination in violation of Title VII of the Civil Rights Act of
1964 and a violation of the Equal Pay Act. The employee claimed that she was
being paid less than male employees for comparable work, which Nathan's denied.
Although the parties agreed to a settlement in March 2004 for approximately
$10,000, such agreement
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was not finalized and in June and August 2004, the employee filed further
charges with the EEOC claiming that Nathan's had retaliated against her, first
by refusing her request for a shift change and then by terminating her
employment in July 2004. Following a determination by the EEOC in May 2005 that
there was no reasonable cause to believe that the employee was terminated in
retaliation for filing a charge of discrimination, but that there was reasonable
cause to believe that she was paid less than similarly situated males in
violation of the Equal Pay Act and Title VII and that she was denied a request
for a change in shift in retaliation for filing the discrimination charge, the
EEOC advised that it would engage in conciliation and settlement efforts to try
to resolve the employee's charges. Nathan's intends to assertcooperate with the EEOC's
conciliation efforts in the hope that this matter can be settled on reasonable
terms. If it is not an appropriate party to this
litigation, to deny any liability to plaintiffcannot, and the employee or the EEOC commences legal proceedings,
Nathan's will defend against this actionthe matter vigorously.
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The Company is involved in various other litigation in the normal course of
business, none of which, in the opinion of management, will have a significant
adverse impact on its financial position or results of operations.
2. GUARANTEES
The Company guarantees certain equipment financing for certain franchisees
with a third-party lender. The Company's maximum obligation, should all of the
franchisees default on the required monthly paymentspayment to the third-party lender
for loans funded by the lender, as of DecemberJune 26, 2004 was2005 would be approximately
$128,000.$59,000. The equipment financing expires at various dates through fiscal 2008.
The Company also guarantees a franchisee's note payable with a bank. The
note payable matures in April 2007. The Company's maximum obligation, should the
franchisee default on the required monthly payments to the bank, for loans
funded by the lender, as of DecemberJune 26, 2004, was2005, would be approximately $234,000.
3. COMMITMENTS
We$216,000.
The guarantees referred to above were entered into a new employment agreement with Howard M. Lorber, our
Chairman and Chief Executive Officer, effective as of January 1, 2005. The
agreement expiresby the Company prior to
December 31, 2009. Pursuant to2002 and have not been modified since that date, which was the
agreement, Mr. Lorber
receives a base salaryeffective date for FIN 45 "Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Guarantees of $250,000 and an annual bonus equal to 5 percentIndebtedness of our
consolidated pre-tax earnings over $5,000,000 for each fiscal year. The
agreement further provides for a three-year consulting period after the
termination of employment during which Mr. Lorber will receive a consulting
payment of $225,000 per year. The employment agreement also provides for life
insurance and for the continuation of certain benefits following death or
disability. In connection with the agreement, we issued to Mr. Lorber 50,000
shares of restricted common stock which vest ratably over the 5-year term of the
employment agreement.
In the event that Mr. Lorber's officer's employment is terminated without
cause, he is entitled to receive his salary and bonus for the remainder of the
contract term. The employment agreement further provides that in the event there
is a change in the control, as defined in the agreement, Mr. Lorber has the
option, exercisable within one year after such event, to terminate his
employment agreement. Upon such termination, he has the right to receive a lump
sum cash payment equal to the greater of (A) his salary and annual bonuses for
the remainder of the employment term (including a prorated bonus for any partial
fiscal year), which bonus shall be equal to the average of the annual bonuses
awarded to him during the three fiscal years preceding the fiscal year of
termination; or (B) 2.99 times his salary and annual bonus for the fiscal year
immediately preceding the fiscal year of termination, as well as a lump sum cash
payment equal to the difference between the exercise price of any exercisable
options having an exercise price of less than the then current market price of
our common stock and such then current market price. In addition, we will
provide Mr. Lorber with a tax gross-up payment to cover any excise tax due. In
the event of termination of employment due to Mr. Lorber's death or disability,
he is entitled to receive an amount equal to his salary and annual bonuses for a
three-year period, which bonus shall be equal to the average of the annual
bonuses awarded to him during the three fiscal years preceding the fiscal year
of termination.Others."
NOTE K - RELATED PARTY TRANSACTIONS
An accounting firm of which Charles Raich, who joined Nathan's Board of
Directors on June 15, 2004, serves as Managing Partner, received ordinary tax
preparation and other consulting fees of $105,000 during the thirty-nine weeks
ended December 26, 2004.
NOTE LI - RECLASSIFICATIONS
Certain reclassifications of prior period balances have been made to
conform to the DecemberJune 26, 20042005 presentation.
NOTE MJ - NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTEDSUBSEQUENT EVENTS
1. EMPLOYMENT AGREEMENTS
On July 12, 2005, Miami Subs Corporation ("MSC"), a wholly-owned subsidiary
of Nathan's Famous, Inc. (the "Registrant") and Donald Perlyn, entered into an
amendment to Mr. Perlyn's employment agreement with MSC dated as of January 15,
1999. Mr. Perlyn is employed as President of MSC and is also an Executive Vice
President of Nathan's. Nathan's is a guarantor of MSC's obligations under the
Employment Agreement. Pursuant to the Amendment, (1) the definition of a
competing business has been expanded so that Mr. Perlyn is prohibited from
competing in the business of selling food products to the foodservice industry
and (2) the definition of a change in control has been changed. The effect of
the change in the definition of change in control is that Mr. Perlyn will be
entitled to receive a payment upon a change in control of Nathan's, rather than
upon a change in control of Nathan's or MSC. In November 2004,connection with the FASB issued FASB Statement No. 151, "Inventory
Costs--an amendmentexecution
and delivery of ARB No. 43" ("FAS 151"),the Amendment, Nathan's entered into a letter agreement with Mr.
Perlyn on the same date pursuant to which isNathan's agreed that upon a sale by it
of the resultstock of MSC and any termination of Mr. Perlyn's Employment Agreement
upon the consummation of such sale, Nathan's will enter into an employment
agreement with Mr. Perlyn on substantially the same terms and conditions as
those currently contained in the Employment Agreement.
2. SALE OF REAL ESTATE
On July 13, 2005, Nathan's sold all of its effortsright, title and interest in and
to converge U.S. accounting standardsa vacant real estate parcel located in Brooklyn, New York, in exchange for inventories with International
Accounting Standards. FAS No. 151 requires idle facility expenses, freight,
handling costs, and wasted material (spoilage) costsa
payment of $3,100,000. Nathan's also entered into an agreement pursuant to be recognized as
current-period charges. It also requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacitywhich
an affiliate of the production facilities. FAS No. 151 will be effectivebuyer has assumed all of Nathan's rights and obligations
under a lease for inventory costs
incurred during fiscalan adjacent property and has agreed to pay $500,000 to
Nathan's over a period of up to 3 years, beginning after June 15, 2005. We are evaluating
the impact$100,000 of this standard on our consolidated financial statements.
-13-
In December 2004, the FASB issued SFAS No. 123 (Revised 2004)
"Share-Based Payment" (SFAS No. 123R"). SFAS No. 123R addresses all forms of
share-based payment ("SBP") awards, including shares issued under employee stock
purchase plans, stock options, stock purchase plans, restricted stock and stock
appreciation rights. SFAS No. 123R will require Nathan's to expense SBP awards
with compensation cost for SBP transactions measured at fair value. The FASB
originally stated a preference for a lattice model because it believed that a
lattice model more fully captures the unique characteristics of employee stock
options in the estimate of fair value, as compared to the Black-Scholes model
which Nathan's currently uses for its footnote disclosure. The FASB decided to
remove its explicit preference for a lattice model and not require a single
valuation methodology. SFAS No. 123R requires Nathan's to adopt the new
accounting provisions beginning in our second quarter of 2005. Nathan's has not
yet determined the impact of applying the various provisions of SFAS No. 123R.
-14-was paid.
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION
As used in this Report, the terms "we", "us", "our", "Nathan's" and the
"Company"or "the
Company" mean Nathan's Famous, Inc. and its subsidiaries (unless the context
indicates a different meaning).
During the fiscal year ended March 26, 2000, we completed two acquisitions
that provided us with two highly recognized brands. On April 1, 1999, we became
the franchisor of the Kenny Rogers Roasters restaurant system by acquiring the
intellectual property rights, including trademarks, recipes and franchise
agreements of Roasters Corp. and Roasters Franchise Corp. On September 30, 1999,
we acquired the remaining 70% of the outstanding common stock of Miami Subs
Corporation we did not already own. Our revenues are generated primarily from
operating Company-owned restaurants, selling products under Nathan's
Branded Product Program, operating Company-owned restaurants and franchising the
Nathan's, Miami Subs and Kenny Rogers restaurant concepts and licensing
agreements for the sale of Nathan's products within supermarkets. The Branded
Product Program enables foodservice operators to offer Nathans' hot dogs and
other proprietary items for sale within their facilities. In conjunction with
this program, foodservice operators are granted a limited use of the Nathans'
trademark with respect to the sale of hot dogs and certain other proprietary
food items and paper goods.
In addition to plans for expansion throughof our Branded Product Program and
through franchising, Nathan's continues to co-brand within its existing restaurant
system and in new units that open.system. Currently, the Arthur Treacher's brand is being sold within 114116
Nathan's, Kenny Rogers Roasters and Miami Subs restaurants, the Nathan's brand
is included on the menu of 6462 Miami Subs and Kenny Rogers restaurants, while the
Kenny Rogers Roasters brand is being sold within 9088 Miami Subs and Nathan's
restaurants.
At DecemberJune 26, 2004,2005, our combined restaurant system consisted of 352363
franchised or licensed units and six Company-owned units and over 4,800 Nathan's Branded Product
points of sale that feature Nathan's world famous all-beef hot dogs,(including one seasonal
unit), located in 4623 states, the District of Columbia and 1311 foreign countries.
At DecemberJune 26, 2004,2005, our Company-owned restaurant system included six Nathan's
units, as compared to seven Nathan's units at December 28, 2003.June 27, 2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements and the notes to our consolidated
financial statements contain information that is pertinent to management's
discussion and analysis. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities. We
believe the following critical accounting policies involve additional management
judgement due to the sensitivity of the methods, assumptions and estimates
necessary in determining the related asset and liability amounts.
Impairment of Goodwill and Other Intangible Assets
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," ("SFAS No. 142") requires that goodwill and intangible
assets with indefinite lives will no longer be amortized but will be reviewed
annually (or more frequently if impairment indicators arise) for impairment. The
most significant assumptions which are used in this test are estimates of future
cash flows. We typically use the same assumptions for this test as we use in the
development of our business plans. If these assumptions differ significantly
from actual results, additional impairment expenses may be required. No goodwill
or other intangible assets were determined to be impaired during the thirty-ninethirteen
weeks ended DecemberJune 26, 2004.2005.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144") requires
management judgements regarding the future operating and disposition plans for
underperforming assets, and estimates of expected realizable values for assets
to be sold. The application of SFAS No. 144 has affected the amounts and timing
of charges to operating results in recent years. We evaluate possible impairment
of each restaurant individually and record an impairment charge whenever we
determine that impairment factors exist. We consider a history of restaurant
operating losses to be the primary indicator of potential impairment of a
restaurant's carrying value. No restaurants were determined to be impaired
during the thirty-ninethirteen weeks ended DecemberJune 26, 2004.
-15-
2005.
Impairment of Notes Receivable
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," requires management judgements regarding
the future collectibility of notes receivable and the underlying fair market
value of collateral.
-13-
We consider the following factors when evaluating a note for impairment: a)
indications that the borrower is experiencing business problems, such as
operating losses, marginal working capital, inadequate cash flow or business
interruptions; b) whether the loan is secured by collateral that is not readily
marketable; or c) whether the collateral is susceptible to deterioration in
realizable value. When determining possible impairment, we also assess our
future intention to extend certain leases beyond the minimum lease term and the
debtor's ability to meet its obligation over that extended term. No notes
receivable were determined to be impaired during the thirty-ninethirteen weeks ended DecemberJune
26, 2004.2005.
Revenue Recognition
Sales by Company-owned restaurants, which are typically paid in cash by the
customer, are recognized upon the performance of services.
In connection with its franchising operations, the Company receives initial
franchise fees, development fees, royalties, contributions to marketing funds,
and in certain cases, revenue from sub-leasing restaurant properties to
franchisees.
Franchise and area development fees, which are typically received prior to
completion of the revenue recognition process, are recorded as deferred revenue.
Initial franchise fees, which are non-refundable, are recognized as income when
substantially all services to be performed by Nathan's and conditions relating
to the sale of the franchise have been performed or satisfied, which generally
occurs when the franchised restaurant commences operations. The following
services are typically provided by the Company prior to the opening of a
franchised restaurant:
- - Approval of all site selections to be developed.
- - Provision of architectural plans suitable for restaurants to be developed.
- - Assistance in establishing building design specifications, reviewing
construction compliance and equipping the restaurant.
- - Provision of appropriate menus to coordinate with the restaurant design and
location to be developed.
- - Provide management training for the new franchisee and selected staff.
- - Assistance with the initial operations of restaurants being developed.
Development fees are non-refundable and the related agreements require the
franchisee to open a specified number of restaurants in the development area
within a specified time period or the agreements may be canceled by the Company.
Revenue from development agreements is deferred and recognized as restaurants in
the development area commence operations on a pro rata basis to the minimum
number of restaurants required to be open, or at the time the development
agreement is effectively canceled.
Nathan's recognizes franchise royalties when they are earned and deemed
collectible. Franchise fees and royalties that are not deemed to be collectible
are not recognized as revenue until paid by the franchisee.franchisee, or until
collectibility is deemed to be reasonably assured. The number of non-performing
units are determined by analyzing the number of months that royalties have been
paid during a period. When royalties have been paid for less thenthan the majority
of the time frame reported, such location is deemed non-performing. Accordingly,
the number of non-performing units may differ between the quarterly results and
year to date results. Revenue from sub-leasing properties is recognized as
income as the revenue is earned and becomes receivable and deemed collectible.
Sub-lease rental income is presented net of associated lease costs in the
accompanying consolidated statements of operations.earnings.
Nathan's recognizes revenue from the Branded Product Program when it is
determined by the manufacturer that the products have been delivered via third party common carrier
to Nathans' customers.
The purchaseNathan's recognizes revenue from royalties on the licensing of the productuse of
its name on certain products produced and sold by the
Companyoutside vendors. The use of
Nathans' name and symbols must be approved by Nathan's prior to each specific
application to ensure proper quality and project a consistent image. Revenue
from license royalties is recorded simultaneously with the revenue.recognized when it is earned and deemed collectible.
In the normal course of business, we extend credit to franchisees for the
payment of ongoing royalties and to trade customers of our Branded Product
Program. Notes and accounts receivable, net, as shown on our consolidated
balance sheets are net of allowances for doubtful accounts. An allowance for
doubtful accounts is determined through analysis of the aging
-14-
of accounts receivable at the date of the financial statements, assessment of
collectibility based upon historical trends and an evaluation of the impact of
current and projected economic conditions. In the event that the collectibility
of a receivable at the date of the transaction is doubtful, the associated
revenue is not recorded until the facts and circumstances change in accordance
with Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition."
Self-insurance Liabilities
We are self-insured for portions of our general liability coverage. As part
of our risk management strategy, our insurance programs include deductibles for
each incident and in the aggregate for a policy year. As such, we accrue
estimates of our ultimate self insurance costs throughout the policy year. These
estimates have been developed based upon our historical trends, however, the
final cost of many of these claims may not be known for five years or longer.
Accordingly, our annual self insurance costs may be subject to adjustment from
previous estimates as facts and circumstances change.
-16-
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED DECEMBERJUNE 26, 20042005 COMPARED TO THIRTEEN WEEKS ENDED DECEMBER
28, 2003JUNE 27,
2004
Revenues from Continuing Operations
Total sales increased by $849,000$1,791,000 or 22.1%27.8% to $4,690,000$8,222,000 for the thirteen
weeks ended DecemberJune 26, 20042005 ("thirdfirst quarter fiscal 2005"2006") as compared to
$3,841,000$6,431,000 for the thirteen weeks ended December 28, 2003June 27, 2004 ("thirdfirst quarter fiscal
2004"2005"). Sales from the Branded Product Program increased by 48.6%69.0% to $2,543,000$4,305,000
for the thirdfirst quarter fiscal 20052006 as compared to sales of $1,711,000$2,548,000 in the
thirdfirst quarter fiscal 2004.2005. This increase was primarily attributable to increased
volume and a volumeprice increase of approximately 42.0% and the impact of price increases implemented in the
second half of fiscal 2004 in response to commodity cost increases.1.0%. Company-owned restaurant
sales increased by $21,000 or 1.0% to $2,046,000 from
$2,025,000 primarily due to higher sales from the five comparable Company-owned
Nathan's restaurants (excluding one seasonal location) as compared to the prior
fiscal year. During the third quarter fiscal 2005, we realized sales of $101,000
as compared to $105,000 in the third quarter fiscal 2004 in connection with our
QVC marketing program.
Franchise fees and royalties increased by $59,000$112,000 or 3.5% to $1,749,000 in
the third quarter fiscal 2005 compared to $1,690,000 in the third quarter fiscal
2004. Franchise royalties increased by $106,000 or 7.3% to $1,564,000 in the
third quarter fiscal 2005 as compared to $1,458,000 in the third quarter fiscal
2004. This increase is due primarily to improved royalty collections and higher
domestic franchise sales. Domestic franchise restaurant sales increased by 1.5%
to $41,306,000 in the third quarter fiscal 2005 as compared to $40,706,000 in
the third quarter fiscal 2004. Comparable domestic franchise sales (consisting
of 179 restaurants) increased by $2,299,000 or 7.1% to $34,695,000 in the third
quarter fiscal 2005 as compared to $32,396,000 in the third quarter fiscal 2004.
At December 26, 2004, 352 domestic and international franchised or licensed
restaurants were operating as compared to 341 domestic and international
franchised or licensed restaurants at December 28, 2003. During the thirteen
weeks ended December 26, 2004, royalty income$3,306,000 from 21 domestic franchised
locations has been deemed unrealizable and, as a result, has not been recognized
as revenue by the Company as compared to 34 domestic franchised locations during
the thirteen weeks ended December 28, 2003. Domestic franchise fee income was
$74,000 in the third quarter fiscal 2005 as compared to $91,000 in the third
quarter fiscal 2004. During the third quarter fiscal 2005, ten new franchised
units opened as compared to opening five new franchised units during the third
quarter fiscal 2004. Seven of the new units that opened during the third quarter
fiscal 2005 were non-traditional stores whereby lower franchise fees are earned
as compared to two non-traditional units during the third quarter fiscal 2004.
During the third quarter fiscal 2005, Nathan's also recognized $51,000 in
connection with two forfeited franchise fees. International franchise fee income
was $60,000 in the third quarter fiscal 2005 as compared to $141,000 during the
third quarter fiscal 2004. During the third quarter fiscal 2005, three new
international units were opened. During the third quarter fiscal 2004, we
received approximately $75,000 of previously unrealized fees from the
international Master Franchisor of the Kenny Rogers Brand.
License royalties were $684,000 in the third quarter fiscal 2005 as
compared to $674,000 in the third quarter fiscal 2004. During the third quarter
fiscal 2005, higher royalties were earned from the sale of Nathan's frankfurters
within supermarkets and club stores, our license agreement for Nathan's french
fries, and other smaller license agreements which were substantially offset by
lower royalties earned from Nathan's non-food items. During the third quarter
fiscal 2004, we marketed the Nathan's "griddle" via infomercial and retailers
during the Christmas 2003 season.
Investment and other income was $106,000 in the third quarter fiscal 2005
versus $46,000 in the third quarter fiscal 2004. During the third quarter fiscal
2005, income from subleasing activities and other income was approximately
$80,000 higher than the third quarter fiscal 2004 primarily due to the
termination of unprofitable leases which was partially offset by lower
amortization of deferred income and other income.
Interest income was $71,000 in the third quarter fiscal 2005 versus
$39,000 in the third quarter fiscal 2004 due primarily to earning higher
interest income from the higher balances invested in marketable investment
securities.
Costs and Expenses from Continuing Operations
Cost of sales increased by $755,000 to $3,657,000 in the third quarter
fiscal 2005 from $2,902,000 in the third quarter fiscal 2004. Higher costs of
approximately $719,000 were incurred primarily in connection with the growth of
our Branded Product Program, and higher commodity costs during the third quarter
fiscal 2005. During the third quarter fiscal 2005, restaurant cost of sales were
higher than the third quarter fiscal 2004 by approximately $36,000. The cost of
restaurant sales at our comparable units as a percentage of restaurant sales was
66.1% in the third quarter fiscal 2005 as compared to 65.2% in the third quarter
fiscal 2004. This increase was the result of higher food and labor costs. The
cost of our beef products has continued to increase since the beginning of
fiscal 2004. The
-17-
cost of hot dogs was approximately 3.6% higher during the third quarter fiscal
2005 than the third quarter fiscal 2004. During the third quarter fiscal 2004,
the average cost of hot dogs was approximately 5.7% higher than the average cost
during the first six months of fiscal 2004. Since then, cost of hot dogs has
remained at exceptionally high levels. In response to the cost increases,
Nathan's increased selling prices within its Branded Product Program where
possible to offset some of the margin pressure during the second half of fiscal
2004. Nathan's had previously increased menu prices in its company-operated
restaurants due to these rising costs.
Restaurant operating expenses increased by $14,000 to $734,000 in the
third quarter fiscal 2005 from $720,000 in the third quarter fiscal 2004. This
increase is due primarily to higher occupancy and marketing costs which were
partly offset by lower utility and insurance costs.
Depreciation and amortization was $220,000 in the third quarter fiscal
2005 as compared to $226,000 in the third quarter fiscal 2004.
Amortization of intangible assets was $65,000 in both the third quarter
fiscal 2005 and the third quarter fiscal 2004.
General and administrative expenses increased by $52,000 to $1,959,000 in
the third quarter fiscal 2005 as compared to $1,907,000 in the third quarter
fiscal 2004. The increase in general and administrative expenses was due
primarily to higher personnel and incentive compensation expenses of
approximately $102,000 which was partly offset by lower corporate insurance
expense and professional fees of approximately $64,000.
Interest expense was $12,000 during the third quarter fiscal 2005 as
compared to $16,000 during the third quarter fiscal 2004. The reduction in
interest expense relates primarily to the repayment of outstanding loans between
the two periods.
No notes receivable were determined to be impaired during the third
quarter fiscal 2005. Impairment charge on notes receivable of $44,000 during the
third quarter fiscal 2004 represents the write-down of one non-performing note
receivable.
Provision for Income Taxes from Continuing Operations
In the third quarter fiscal 2005, the income tax provision was $177,000 or
27.1% of income from continuing operations before income taxes as compared to
$162,000 or 39.5% of income from continuing operations before income taxes in
the third quarter fiscal 2004. During the third quarter fiscal 2005, Nathan's
received a refund of prior years' state income taxes, which, net of applicable
federal income tax, was approximately $81,000, lowering the effective tax rate
by 12.4% during the third quarter fiscal 2005.
Discontinued operations
The third quarter fiscal 2004 includes the results of one restaurant that
was closed pursuant to its lease expiration on September 12, 2004. Revenues and
loss before income taxes from this restaurant during the third quarter fiscal
2004 were $222,000 and $18,000, respectively.
THIRTY-NINE WEEKS ENDED DECEMBER 26, 2004 COMPARED TO THIRTY-NINE WEEKS ENDED
DECEMBER 28, 2003
Revenues from Continuing Operations
Total sales increased by $2,339,000 or 14.7% to $18,269,000 for the
thirty-nine weeks ended December 26, 2004 ("fiscal 2005 period") as compared to
$15,930,000 for the thirty-nine weeks ended December 28, 2003 ("fiscal 2004
period"). Sales from the Branded Product Program increased by 36.8% to
$7,939,000 for the fiscal 2005 period as compared to sales of $5,803,000 in the
fiscal 2004 period. This increase was attributable to a volume increase of
approximately 29% and the impact of price increases implemented in the second
half of fiscal 2004 in response to commodity cost increases. Company-owned
restaurant sales decreased by $688,000 or 7.0% to $9,189,000 from $9,877,000
primarily due to the operation of five fewer Company-owned stores as compared to
the prior fiscal year, which was partly offset by a 6.4% sales increase at$3,194,000 representing
our comparable restaurants (consisting of six Nathan's including one seasonal
location)locations). The reduction in Company-owned stores is the result of our
franchising three restaurants and entering into two management agreements during
the fiscal 2004 period. The financial impact associated with these five
restaurants lowered restaurant sales by $1,237,000 and improved restaurant
operating profits by $125,000 versus the fiscal 2004 period. During the
first quarter fiscal 2005 period we realized2006, direct retail sales of $1,141,000 as compared to $250,000 inwere approximately $78,000 lower
than the first quarter fiscal 2004 period in connection with our QVC marketing program which was
introduced in September 2003. Much of the sales generated by QVC during the
fiscal 2005 period were in connection with the "Today's Special Value" program
held on May 20, 2004 featuring Nathan's hot dogs.
-18-
2004.
Franchise fees and royalties increased by $331,000$83,000 or 7.0%5.0% to $5,084,000$1,748,000 in
the first quarter fiscal 2005 period2006 compared to $4,753,000$1,665,000 in the first quarter fiscal
2004 period.2005. Franchise royalties increased by $291,000 or 6.8% to $4,589,000were $1,512,000 in the first quarter fiscal 2005 period2006 as
compared to $4,298,000$1,497,000 in the first quarter fiscal 2004 period. This increase
is due primarily2005. Domestic franchise
restaurant sales decreased by 1.0% to improved contract compliance and higher domestic franchise
sales. Domestic sales increased by 2.2% to $124,324,000$41,094,000 in the first quarter fiscal
2005
period2006 as compared to $121,625,000$41,500,000 in the first quarter fiscal 2004 period.2005. Comparable
domestic franchise sales (consisting of 176193 restaurants) increased by $5,811,000$766,000
or 6.1%2.2% to $100,931,000$35,982,000 in the first quarter fiscal 2005 period2006 as compared to
$95,120,000$35,216,000 in the first quarter fiscal 2004 period.2005. At DecemberJune 26, 2004, 3522005, 363 domestic and
international franchised or licensed restaurantsunits were operating as compared to 341345
domestic and international franchised or licensed restaurantsunits at December 28, 2003.June 27, 2004. During
the thirty-ninethirteen weeks ended DecemberJune 26, 2004,2005, royalty income from 2522 domestic
franchised locations have been deemed unrealizable as compared to 3430 domestic
franchised locations during the thirty-ninethirteen weeks ended December 28,
2003. Domestic franchiseJune 27, 2004. Franchise
fee income was $260,000$170,000 in the first quarter fiscal 2005 period2006 as compared to $291,000$168,000
in the first quarter fiscal 2004 period.2005. During the first quarter fiscal 2005 period,
222006, 11 new domestic
franchised units opened, as comparedincluding three units in Japan, one unit in Kuwait and
one unit in the United Arab Emirates. During the first quarter fiscal 2006, we
also franchised one restaurant that previously operated pursuant to opening 16a management
agreement. During the first quarter fiscal 2005, 11 new franchised units and franchising three Company-owned restaurants duringwere
also opened. During the first quarter fiscal 2004
period. Fourteen of the new units that opened during the fiscal 2005 period were
non-traditional stores whereby lower franchise fees are earned as compared to
eight non-traditional units during the fiscal 2004 period.2006, Nathan's also recognized
$51,000$66,000 in connection with two forfeited domestic franchise fees.
International franchise fee income was $184,000License royalties increased $218,000 or 23.2% to $1,157,000 in the first
quarter fiscal 2005 period2006 as compared to $141,000 during the fiscal 2004 period. During the fiscal 2005
period, six new international units were opened.
License royalties were $2,507,000$939,000 in the first quarter fiscal 2005 period as compared to
$2,330,000 in the fiscal 2004 period.2005.
This increase is primarily attributable to higher royalties earned from the sale
of Nathan's frankfurters within supermarkets and club stores and from ournew license
agreements for Nathan's french
fries and condiments which were partly offset by lower royalties earned fromthat commenced operations over the sale of the Nathan's "griddle" that was marketed via infomercial and retailers
during the Christmas 2003 season.last year.
Investment and other income was $435,000$146,000 in the first quarter fiscal 2006
versus $182,000 in the first quarter fiscal 2005 period versus
$339,000due to reductions in the fiscal 2004 period. During the fiscal 2005 period, income
from subleasing activities, amortization of deferred revenue and other income was approximately $227,000 higher than
the fiscal 2004 period primarily due to the termination of unprofitable leases
which was partially offset by lower investment income and amortized deferred
income. Gains associated with the sale of fixed assets were approximately
$82,000 lower during the fiscal 2005 period than during the fiscal 2004 period.
In the fiscal 2004 period net gains of $149,000 were realized, primarily in
connection with the sale of two Company-owned restaurants to franchisees.
Interest income was $169,000$82,000 in the first quarter fiscal 2005 period2006 versus $165,000$48,000
in the first quarter fiscal 2004 period2005 due primarily to earning higher interest income from ourearned on the
increased value of marketable investment securities and lower interest income on notes receivable
which were determined to be impaired during the first quarter fiscal year ended March 28,
2004.2006 as
compared to the first quarter fiscal 2005.
-15-
Costs and Expenses from Continuing Operations
Cost of sales increased by $1,971,000$1,676,000 to $13,181,000$6,295,000 in the first quarter
fiscal 2005
period2006 from $11,210,000$4,619,000 in the first quarter fiscal 2004 period. Higher costs of approximately
$2,634,000 were incurred primarily in connection with the growth of our Branded
Product Program. Increased costs were also incurred in connection with our QVC
marketing program and higher commodity costs of both programs during the fiscal
2005 period.2005. During the first
quarter fiscal 2005 period, restaurant cost of sales were lower
than2006, the fiscal 2004 period by approximately $663,000. Restaurant cost of sales
were lower by approximately $899,000 as a result of operating five fewer
Company-owned restaurants during the fiscal 2005 period. The cost of restaurant sales at our six comparable units
was $1,865,000 or 56.4% of restaurant sales as compared to $1,872,000 or 58.6%
of restaurant sales in the first quarter fiscal 2005. This reduction was
primarily due to lower labor and associated costs. Food costs, as a percentage
of restaurant sales, was 58.6%were approximately the same as last year due to the
re-engineering of our menu to mitigate higher beef costs and certain retail
price increases. We incurred higher costs in connection with the fiscal 2005 period as compared to 59.5% in the fiscal 2004 period. This
decrease was the resultincreased
volume of lower labor related costs whichour Branded Product Program that were partly offset by higher food costs. The costlower costs
from reduced sales from our direct retailing program totaling approximately
$1,683,000 during the first quarter fiscal 2006 as compared to the first quarter
fiscal 2005. We also paid much more for beef during the first quarter fiscal
2006. Commodity costs of beef products hasour hot dogs, which have continued to increase sincefor the
beginning of fiscal 2004. The cost of hot dogs wasthird consecutive year, were approximately 7.8%14.0% higher during the first quarter
fiscal 2005 period2006 than the first quarter fiscal 2004 period. In response to last
year's2005. These commodity cost increases
Nathan's increasedhave caused us to increase our selling prices within its Branded
Product Program where possiblebeginning in June 2005 in an
effort to offset some ofreduce the margin pressure during the
second half of fiscal 2004. Nathan's had previously increased menu prices in its
company-operated restaurants duethat we continued to these rising costs.experience.
Restaurant operating expenses decreasedincreased by $325,000$24,000 to $2,332,000$783,000 in the first
quarter fiscal 2006 from $759,000 in the first quarter fiscal 2005 period from $2,657,000 in the fiscal 2004 period. Restaurant
operating expenses were lower by $464,000 as a result of operating five fewer
restaurants which were partly offset bydue primarily
to higher marketing, insurancemaintenance and occupancyutility costs.
Depreciation and amortization decreased by $49,000$19,000 to $663,000$199,000 in the first
quarter fiscal 2005 period2006 from $712,000$218,000 in the first quarter fiscal 2004 period. Depreciation expense
was lower by approximately $25,000 as a result of operating five fewer
Company-owned restaurants.2005.
Amortization of intangible assets was $196,000$65,000 in both the first quarter fiscal
2005
period2006 and thefirst quarter fiscal 2004 period.
-19-
2005.
General and administrative expenses increased by $502,000$81,000 to $6,025,000$2,105,000 in
the first quarter fiscal 2005 period2006 as compared to $5,523,000$2,024,000 in the first quarter
fiscal 2004 period.2005. The increase in general and administrative expenses was primarily
due primarily to higher personnel and incentive compensation expensesexpense of approximately $370,000$84,000 and
highermarketing costs of $52,000 which were partly offset by lower professional fees
of $44,000 and corporate insurance expense of approximately $95,000. During the fiscal
2004 period, Nathan's recorded an expense reversal of approximately $50,000 from
the settlement of a disputed claim.$21,000.
Interest expense was $36,000$11,000 during the first quarter fiscal 2005 period2006 as
compared to $55,000$12,000 during the first quarter fiscal 2004 period.2005. The reduction in
interest expense relates primarily to the repayment of outstanding loans between
the two periods.
No notes receivable were determined to be impaired during the fiscal 2005
period. Impairment charge on notes receivable of $100,000 during the fiscal 2004
period represents the write-down of one non-performing note receivable.
Provision for Income Taxes from Continuing Operations
In the first quarter fiscal 2005 period,2006, the income tax provision was $1,506,000$722,000 or
37.4%38.1% of income from continuing operations before income taxes as compared to
$1,213,000$616,000 or 39.6%39.3% of income from continuing operations before income taxes in
the first quarter fiscal 2004 period. During2005. The effective income tax rate was lower during
the first quarter fiscal 2006 due in part to Nathan's earning higher tax exempt
interest income than during the first quarter fiscal 2005.
Discontinued Operations
On July 13, 2005, we sold a vacant piece of property to a third party which
was classified as "available-for-sale at March 27, 2005. In addition, we
previously closed one company-operated restaurant during fiscal 2005. Revenues
were $219,000 during the first quarter fiscal 2005. Loss before income taxes
during the first quarter fiscal 2006 and first quarter fiscal 2005 Nathan's received
a refund of prior years' state income taxes, which, net of applicable federal
income tax, was approximately $81,000, lowering the effective tax rate by 2.0%
for the fiscal 2005 period.
Discontinued operations
The fiscal 2005were $10,000
and fiscal 2004 periods include the results of one
restaurant that was closed pursuant to its lease expiration on September 12,
2004. Revenues generated by this restaurant were $415,000 and $688,000 during
the fiscal 2005 and 2004 periods, respectively. Losses before income taxes from
this restaurant were $15,000 and $23,000 during the fiscal 2005 and 2004
periods,$3,000, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any off-balance sheet arrangements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at DecemberJune 26, 20042005 aggregated $3,009,000,
decreasing$4,831,000,
increasing by $440,000$1,896,000 during the first quarter fiscal 2005 period.2006. At DecemberJune 26, 2004,2005,
marketable securities increaseddecreased by $3,196,000$379,000 from March 28, 200427, 2005 to $10,673,000$11,262,000
and net working capital increased to $12,743,000$15,416,000 from $9,185,000$14,009,000 at March 28,
2004.27,
2005.
Cash provided by operations of $2,368,000$953,000 in the first quarter fiscal 2005 period2006 is
due
primarily attributable to net income of $2,516,000 and$1,169,000, non-cash expenses of
$1,002,000$343,000 and an increase in accounts payable and accrued expenses of $987,000
which waswere partly reduced by increased accounts receivable and notes receivable
of $959,000$1,415,000 resulting primarily from higher sales from the Branded Product
sales-16-
Program and increased royalties.royalties from franchisees and retail licensees.
Cash used inprovided by investing activities of $3,630,000$914,000 is comprised primarily of
the net purchaseproceeds from the maturity of available for salemarketable securities of $3,361,000 and capital
expenditures$1,000,000 of which
$533,000 was re-invested in long-term securities. We also received proceeds of
$515,000 which were partially offset by repaymentsfrom the sale of a restaurant to a franchisee and payments received on
notes receivable of $232,000 and proceeds from$83,000. During the salefirst quarter fiscal 2006, we incurred
capital expenditures of other fixed assets of
$14,000.$151,000.
Cash provided by financing activities of $822,000was $29,000 which is comprised of
proceeds received from the exercise of warrants and employee stock options of $1,188,000$72,000 which
was partiallypartly offset by the repurchaserepayment of 39,799 sharesbank debt in the amount of common stock of
$237,000 and $129,000 for repayments of notes payable.$43,000 during
the first quarter fiscal 2006.
On September 14, 2001, Nathan's was authorized to purchase up to one
million shares of its common stock. Pursuant to its stock repurchase program, it
repurchased one million shares of common stock in open market transactions and a
private transaction at a total cost of $3,670,000 through the quarter ended
September 29, 2002. On October 7, 2002, Nathan's was authorized to purchase up
to one million additional shares of its common stock. Through DecemberJune 26, 2004,2005,
Nathan's purchased 891,100 shares of common stock at a cost of approximately
$3,488,000 which includes the repurchase of 39,799 shares during the thirty-nine
weeks ended December 26, 2004 at a cost of $237,000. As of December 26, 2004,$3,488,000. To date, Nathan's has purchased a total of 1,891,100 shares of
common stock at a cost of approximately $7,158,000. There were no repurchases of
the Company's common stock during the thirteen weeks ended June 26, 2005.
Nathan's expects to make additional purchases of stock from time to time,
depending on market conditions, in open market or in privately negotiated
transactions, at prices deemed appropriate by management. There is no set time
limit on the purchases. Nathan's expects to fund these stock repurchases from
its operating cash flow.
-20-
We expect that we will make additional investments in certain existing
restaurants and support the growth of the Branded Product Program in the future
and to fund those investments from our operating cash flow. We may also incur
additional
capital expenditures in connection with the replacement ofopportunistic investments on a Company-owned restaurant whose lease expired in September 2004.case-by-
case basis.
There are currently 2829 properties that we either own or lease from third
parties which we lease or sublease to franchisees, operating managers and
non-franchisees. Additionally, there is currently one leased vacant property
which was previously sublet to a franchisee. We remain contingently liable for all costs associated with
these properties including: rent, property taxes and insurance. We may incur
future cash payments, consisting primarily of future lease payments, including
costs and expenses associated with terminating any of such leases. Additionally,
we guaranteed financing on behalf of certain franchisees with two third-party
lenders. Our maximum obligation for loans funded by the lenders as of DecemberJune 26,
20042005 was approximately $362,000.$275,000.
The following schedules represent Nathan's cash contractual obligations and
the expiration of other contractual commitments by maturity (in thousands):
Payments Due by Period
--------------------------------------------------------------------------------
Less than
Cash Contractual Obligations Total 1 Year 1 - 31-3 Years 4-5 Years After 5 Years
- ---------------------------- ------- ------- ----------- --------- ----------------------- --------- -------------
Long-Term Debt $ 861778 $ 167 $ 333 $ 333278 $ 28--
Capital Lease Obligations 4945 7 1618 20 6--
Employment Agreements 1,696 696 500 500 -1,821 749 697 375 --
Operating Leases 15,779 3,632 6,526 3,592 2,02913,962 3,522 5,806 3,148 1,486
------- ------- ------- ------- ------------- ------ ------ ------
Gross Cash Contractual Obligations 18,385 4,502 7,37516,606 4,445 2,0636,854 3,821 1,486
Sublease Income 9,021 1,999 3,546 2,036 1,4408,763 2,063 3,473 1,870 1,357
------- ------- ------- ------- ------------- ------ ------ ------
Net Cash Contractual Obligations $ 9,3647,843 $2,382 $3,381 $1,951 $ 2,503 $ 3,829 $ 2,409 $ 623129
======= ======= ======= ======= ============= ====== ====== ======
Amount of Commitment Expiration Per Period
---------------------------------------------------
Total ---------------------------------------------
Amounts Less than
Other Contractual Commitments Committed 1 Year 1 - 31-3 Years 4-5 Years After 5 Years
- ----------------------------- --------- ------ -------------------- --------- --------- -------------
Loan Guarantees $362 $138 $224 $ - -
---- ---- ---- ----- ----$275 $91 $184 $-- $--
==== === ==== === ===
Total Commercial Commitments $362 $138 $224 $ - -$275 $91 $184 $-- $--
==== === ==== ==== ===== ======= ===
-17-
Management believes that available cash, marketable investment securities,
and internally generated funds should provide sufficient capital to finance our
operations for at least the next twelve months. As of October 1, 2004, we
maintainedWe currently maintain a
$7,500,000 uncommitted bank line of credit and have never borrowed any funds
under the company'sour lines of credit.
-18-
Item 3. Qualitative and Quantitative Disclosures About Market Risk
CASH AND CASH EQUIVALENTS
We have historically invested our cash and cash equivalents in short term,
fixed rate, highly rated and highly liquid instruments which are reinvested when
they mature throughout the year. Although our existing investments are not
considered at risk with respect to changes in interest rates or markets for
these instruments, our rate of return on short-term investments could be
affected at the time of reinvestment as a result of intervening events. As of
DecemberJune 26, 2004,2005, Nathans' cash and cash equivalents aggregated $3,009,000.$4,831,000.
Earnings on these cash and cash equivalents would increase or decrease by
approximately $7,500$12,100 per annum for each 0.25%.25% change in interest rates.
MARKETABLE INVESTMENT SECURITIES
We have invested our marketable investment securities in intermediate term,
fixed rate, highly rated and highly liquid instruments. These investments are
subject to fluctuations in interest rates. As of DecemberJune 26, 2004,2005, the market value
of Nathans' marketable investment securities aggregated $10,673,000.$11,262,000. Interest
income on these marketable investment securities would increase -21-
or decrease by
approximately $26,700$28,200 per annum for each 0.25%.25% change in interest rates. The
following chart presents the hypothetical changes in the fair value of the
marketable investment securities held at DecemberJune 26, 20042005 that are sensitive to
interest rate fluctuations (in thousands):
Valuation of securities Valuation of securities
Given an interest rate Given an interest rate
Decrease of X Basis points Fair Increase of X Basis points
--------------------------- Value ----------------------------------------------------- Fair --------------------------
(150BPS) (100BPS) (50BPS) Value +50BPS +100BPS +150BPS
-------- -------- ------- ------- ------- ------- -------
Municipal notes and bonds $11,205 $11,023 $10,846 $10,673 $10,504 $10,337 $10,173$11,835 $11,616 $11,403 $11,196 $10,994 $10,796 $10,601
======= ======= ======= ======= ======= ======= =======
BORROWINGS
The interest rate on our borrowings isare generally determined based upon the
prime rate and may be subject to market fluctuation as the prime rate changes,
as determined within each specific agreement. We do not anticipate entering into
interest rate swaps or other financial instruments to hedge our borrowings. At
DecemberJune 26, 2004,2005, total outstanding debt, including capital leases, aggregated
$910,000$823,000 of which $861,000$778,000 is atsubject to risk duerelated to changes in interest
rates. The current interest rate is 4.50% per annum and will adjust in January
2006 and January 2009 to prime plus 0.25%. Nathan'sWe also maintainsmaintain a $7,500,000 credit
line at the prime rate (5.25%(6.25% as of December 14, 2004)June 30, 2005). The Company hasWe have never borrowed any
funds under itsour credit lines. Interest expense on these borrowings would
increase or decrease by approximately $1,900 per annum for each .25% change in
interest rates. Accordingly, the Company doeswe do not believe that fluctuations in interest
rates would have a material impact on itsour financial results.
COMMODITY COSTS
The cost of commodities are subject to market fluctuation. We have not
attempted to hedge against fluctuations in the prices of the commodities we
purchase using future, forward, option or other instruments. As a result, our
future commodities purchases are subject to changes in the prices of such
commodities. Generally, we attempt to pass through permanent increases in our
commodity prices to our customers, thereby reducing the impact of long-term
increases on our financial results. A short term increase or decrease of 10% in
the cost of our food and paper products for the thirty-ninethirteen weeks ended DecemberJune 26,
20042005 would have increased or decreased cost of sales by approximately $958,000.$489,000.
FOREIGN CURRENCIES
Foreign franchisees generally conduct business with us and make payments in
United States dollars, reducing the risks inherent with changes in the values of
foreign currencies. As a result, we have not purchased future contracts, options
or other instruments to hedge against changes in values of foreign currencies
and we do not believe fluctuations in the value of foreign currencies would have
a material impact on our financial results.
-19-
Item 4. Controls and Procedures
EVALUATION AND DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer,Chief Executive Officer,
Chief Operating Officer and Chief Financial Officer, conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures, as of the end of the period covered by this quarterly report on form
10-Q as required by exchange act ruleExchange Act Rule 13a-15. Based on that evaluation,
the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer
have concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective to ensure that the information
required to be disclosed by us in the reports that we file or submit under the
exchange actExchange Act is recorded, processed, summarized and reported within the time
periods specified by the SEC's rules and forms.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls over financial
reporting that occurred during the quarter ended DecemberJune 26, 20042005 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
We believe that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and -22-
instances of fraud, if any, within a company have been
detected. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives and our Chief Executive
Officer, Chief Operating Officer and Chief Financial Officer have concluded that
such controls and procedures are effective at the reasonable assurance level.
FORWARD LOOKING STATEMENTsSTATEMENTS
Certain statements contained in this report are forward-looking statements.
We generally identify forward-looking statements with the words "believe,"
"intend," "plan," "expect," "anticipate," "estimate," "will," "should" and
similar expressions. Forward-looking statements represent our current judgment
regarding future events. Although we would not make forward-looking statements
unless we believe we have a reasonable basis for doing so, we cannot guarantee
their accuracy and actual results may differ materially from those we
anticipated due to a number of risks and uncertainties, many of which we are not
aware.aware and / or cannot control. These risks and uncertainties many of which are not within our control, include, but are
not limited to: the future effects of the first caseeffect on sales of bovine spongiform encephalopathy, BSE,
first identified in the United States on December 23, 2003; economic, weather,
legislative and business conditions; the collectibility of receivables; the
availability of suitable restaurant sites on reasonable rental terms; changes in
consumer tastes; the ability to continue to attract franchisees; the ability to
purchase our primary food and paper products at reasonable prices; no material
increases in the minimum wage; and our ability to attract competent restaurant
and managerial personnel.
We generally identify
forward-looking statements with the words "believe," "intend," "plan," "expect,"
"anticipate," "estimate," "will," "should" and similar expressions.
-23--20-
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
We and our subsidiaries are from time to time involved in ordinary and
routine litigation. We are also involved in the following litigation:
An action has beenwas commenced, in the Circuit Court of the Fifteenth
Judicial Circuit, Palm Beach County, Florida in September 2001 against
Miami Subs and EKFD Corporation, a Miami Subs franchisee (the "franchisee"("the franchisee")
claiming negligence in connection with a slip and fall which allegedly
occurred on the premises of the franchisee for unspecified damages.
Pursuant to the terms of the Miami Subs Franchise Agreement, the franchisee
is obligated to indemnify Miami Subs and hold it harmless against claims
asserted and procure an insurance policy which names Miami Subs as an
additional insured. Miami Subs has denied any liability to plaintiffs and
has made demand upon the franchisee's insurer to indemnify and defend
against the claims asserted. The insurer has agreed to indemnify and defend
Miami Subs and has assumed the defense of this action for Miami Subs.
Ismael Rodriguez commenced an action, in the Supreme Court of the
State of New York, Kings County, in May 2004 against Nathan's Famous, Inc.
seeking damages of $1,000,000 for claims of age discrimination in
connection with the termination of Mr. Rodriguez's employment. Mr.
Rodriguez was terminated from his position in connection with his repeated
violation of company policies and failure to follow company-mandated
procedures. Initial discoveries and
depositions have commenced. Nathan's has denied any liability and intends to
continue to defendis defending this action
vigorously. Nathan's has submittedexpects that the cost of defending this claim to
its insurance carrier and expects that it will not incur any material liability
that is notbe
covered by its employment practices liability insurance, policy.subject to the policy deductible.
An employee of a Miami Subs franchised restaurant commenced an action
for unspecified damages in the United States District Court, Southern
District of Florida in September 2004 against Miami Subs Corporation, Miami
Subs USA, Inc., and three Miami Subs franchisees, FMJFMI Subs Corporation,
NEESA Subs Corp. and Muhammad Amin, (the "franchisees")franchisees), claiming that she
was not paid overtime when she worked in excess of 40 hours per week, in
violation of the Fair Labor Standards Act. The action also seeks damages
for any other employees of the defendants who would be similarly entitled
to overtime. Pursuant to the terms of the Miami Subs Franchise Agreement,
the franchisees are obligated to operate their Miami Subs franchises in
compliance with the law, including all labor laws. On May 27, 2005, this
action was settled without payment to the plaintiffs by Miami Subs
Corporation.
In July 2001, a female manager at one of our company-owned restaurants
filed a charge with the Equal Employment Opportunity Commission ("EEOC")
claiming sex discrimination in violation of Title VII of the Civil Rights
Act of 1964 and a violation of the Equal Pay Act. The employee claimed that
she was being paid less than male employees for comparable work, which
Nathan's denied. Although the parties agreed to a settlement in March 2004
for approximately $10,000, such agreement was not finalized and in June and
August 2004, the employee filed further charges with the EEOC claiming that
Nathan's had retaliated against her, first by refusing her request for a
shift change and then by terminating her employment in July 2004. Following
a determination by the EEOC in May 2005 that there was no reasonable cause
to believe that the employee was terminated in retaliation for filing a
charge of discrimination, but that there was reasonable cause to believe
that she was paid less than similarly situated males in violation of the
Equal Pay Act and Title VII and that she was denied a request for a change
in shift in retaliation for filing the discrimination charge, the EEOC
advised that it would engage in conciliation and settlement efforts to try
to resolve the employee's charges. Nathan's intends to assertcooperate with the
EEOC's conciliation efforts in the hope that this matter can be settled on
reasonable terms. If it is not an appropriate party to this
litigation, to deny any liability to plaintiffcannot, and the employee or the EEOC commences
legal proceedings, Nathan's will defend against this actionthe matter vigorously.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(e) The Company has(c) We have not repurchased any equity securities during the quarter ended
DecemberJune 26, 2004.2005.
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ITEM 6: EXHIBITS
10.1 Employment Agreement between the Company and Howard Lorber dated as
of January 1, 2005.(a) Exhibits
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Operating Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.3 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification by Howard M. Lorber, CEO, Nathan's Famous, Inc.,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by Ronald G. DeVos, CFO, Nathan's Famous, Inc., pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-24--22-
SIGNATURES
Pursuant to the requirements of the Securities 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,August 09, 2005 By: /s/Wayne Norbitz
-------------------------------------------------------------------------------
Wayne Norbitz
President and Chief Operating Officer
(Principal Executive Officer)
Date: February 8,August 09, 2005 ByBy: /s/ Ronald G. DeVos
--------------------------------------------------------------------------------
Ronald G. DeVos
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
-25--23-