<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Act of 1934 for the quarterly period ended SEPTEMBER 26, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Act of
1934 for the transition period from to .
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Commission File Number 1-3189
NATHAN'S FAMOUS, INC.
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(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
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
--- ---
At September 26, 1999, an aggregate of 4,722,216 shares of the registrant's
common stock, par value of $.01, were outstanding.
<PAGE> 2
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - September 26, 1999 and
March 28, 1999 3
Consolidated Statements of Earnings - Thirteen Weeks
Ended September 26, 1999 and September 27, 1998 4
Consolidated Statements of Earnings - Twenty-six Weeks
Ended September 26, 1999 and September 27, 1998 5
Consolidated Statements of Stockholders' Equity -
Twenty-six Weeks Ended September 26, 1999 6
Consolidated Statements of Cash Flows - Twenty-six Weeks
Ended September 26, 1999 and September 27, 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Sept. March
26, 1999 28, 1999
-------- --------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents including restricted
cash of $83 and $83, respectively $ 1,721 $ 2,165
Marketable investment securities 3,237 3,267
Franchise and other receivables, net 2,145 1,578
Inventory 414 374
Prepaid expenses and other current assets 250 411
Deferred income taxes 622 622
-------- --------
Total current assets 8,389 8,417
Investment in unconsolidated affiliate 4,647 4,441
Property and equipment, net 6,146 6,293
Intangible assets, net 12,521 10,882
Deferred income taxes 892 892
Other assets, net 191 325
-------- --------
$ 32,786 $ 31,250
======== ========
Current liabilities:
Accounts payable $ 966 $ 1,053
Accrued expenses and other current liabilities 3,986 3,434
Deferred franchise fees 203 222
-------- --------
Total current liabilities 5,155 4,709
Other liabilities 198 193
-------- --------
Total liabilities 5,353 4,902
-------- --------
Stockholders' equity:
Common stock, $.01 par value - 20,000,000 shares
authorized, 4,722,216 issued and outstanding 47 47
Additional paid-in-capital 32,423 32,423
Accumulated deficit (5,037) (6,122)
-------- --------
Total stockholders' equity 27,433 26,348
-------- --------
$ 32,786 $ 31,250
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen weeks ended September 26, 1999 and September 27, 1998
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Sales $ 6,671 $ 6,789
Franchise fees and royalties 967 936
License royalties 508 456
Equity in unconsolidated affiliate 69 ---
Investment and other income (loss) 4 (15)
------- -------
Total revenues 8,219 8,166
------- -------
Costs and expenses:
Cost of sales 4,086 4,139
Restaurant operating expenses 1,515 1,457
Depreciation and amortization 260 268
Amortization of intangible assets 112 96
General and administrative 1,240 1,218
Interest expense --- ---
------- -------
Total costs and expenses 7,213 7,178
------- -------
Earnings before income taxes 1,006 988
Provision for income taxes 390 237
------- -------
Net earnings $ 616 $ 751
======= =======
PER SHARE INFORMATION
Net earnings per share
Basic $ 0.13 $ 0.16
======= =======
Diluted $ 0.13 $ 0.16
======= =======
Shares used in computing net income
Basic 4,722 4,722
======= =======
Diluted 4,722 4,754
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Twenty-six weeks ended September 26, 1999 and September 27, 1998
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
Sales $13,279 $13,357
Franchise fees and royalties 1,930 1,674
License royalties 914 837
Equity in unconsolidated affiliate 59 ---
Investment and other income 111 119
------- -------
Total revenues 16,293 15,987
------- -------
Costs and expenses:
Cost of sales 8,166 8,147
Restaurant operating expenses 3,044 2,908
Depreciation and amortization 519 522
Amortization of intangible assets 225 192
General and administrative 2,523 2,466
Interest expense -- 1
------- -------
Total costs and expenses 14,477 14,236
------- -------
Earnings before income taxes 1,816 1,751
Provision for income taxes 731 426
------- -------
Net earnings $ 1,085 $ 1,325
======= =======
PER SHARE INFORMATION
Net earnings per share
Basic $ 0.23 $ 0.28
======= =======
Diluted $ 0.23 $ 0.28
======= =======
Shares used in computing net income
Basic 4,722 4,722
======= =======
Diluted 4,722 4,756
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Twenty-six weeks ended September 26, 1999
(In thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Total
Additional Accum- Stock-
Common Common Paid in- ulated holders'
Shares Stock Capital Deficit Equity
--------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, March
28, 1999 4,722,216 $ 47 $ 32,423 $ (6,122) $ 26,348
Net earnings 1,085 1,085
--------- --------- --------- --------- ---------
Balance, Sept
26, 1999 4,722,216 $ 47 $ 32,423 $ (5,037) $ 27,433
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 7
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-six weeks ended September 26, 1999 and September 27, 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,085 $ 1,325
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 519 522
Amortization of intangible assets 225 192
Provision for doubtful accounts 38 30
Equity in unconsolidated affiliate (59) ---
Amortization of deferred compensation --- 23
Deferred income taxes --- (88)
Changes in assets and liabilities:
Marketable investment securities 30 (747)
Franchise and other receivables (605) (852)
Inventory (40) 28
Prepaid and other current assets 161 50
Accounts payable and accrued expenses 465 (609)
Deferred franchise fees (19) 190
Other assets 134 ---
Other non current liabilities 5 38
------- -------
Net cash provided by operating activities 1,939 102
------- -------
Cash flows from investing activities:
Purchase of property and equipment (387) (913)
Investment in wholly owned subsidiary (1,849) ---
Investment in unconsolidated affiliate (147) ---
------- -------
Net cash used in investing activities (2,383) (913)
------- -------
Cash flows from financing activities:
Principal repayment of obligations under capital leases --- (5)
------- -------
Net cash used in financing activities --- (5)
------- -------
Net decrease in cash and cash equivalents (444) (816)
Cash and cash equivalents, beginning of period 2,165 1,306
------- -------
Cash and cash equivalents, end of period $ 1,721 $ 490
======= =======
Cash paid during the period for:
Interest $ 0 $ 1
======= =======
Income taxes $ 302 $ 426
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 8
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 26, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Nathan's Famous, Inc. and
subsidiaries (the "Company") for the thirteen and twenty-six week periods ended
September 26, 1999 and September 27, 1998 have been prepared in accordance with
generally accepted accounting principles. The unaudited financial statements
include all adjustments (consisting of normal recurring adjustments) which, in
the opinion of management, were necessary for a fair presentation of financial
condition, results of operations and cash flows for such periods presented.
However, these results are not necessarily indicative of results for any other
interim period or the full year.
Certain information and footnote disclosures normally included in financial
statements in accordance with generally accepted accounting principles have been
omitted pursuant to the requirements of the Securities and Exchange Commission.
Management believes that the disclosures included in the accompanying interim
financial statements and footnotes are adequate to make the information not
misleading, but should be read in conjunction with the consolidated financial
statements and notes thereto included in Nathan's Annual Report on Form 10-K for
the fiscal year ended March 28, 1999.
NOTE B - NF ROASTERS CORP. ACQUISITION
On February 19, 1999, the U. S. Bankruptcy Court for the Middle District of
North Carolina, Durham Division, confirmed the Joint Plan of Reorganization of
the Official Committee of Franchisees of Roasters Corp. and Roasters Franchise
Corp., operators of Kenny Rogers Roasters Restaurants. Under the joint plan of
reorganization, on April 1, 1999, Nathan's acquired the intellectual property
rights, including trademarks, recipes and franchise agreements of Roasters Corp.
and Roasters Franchise Corp. for $1,250,000 in cash plus related expenses of
approximately $599,000, which were paid out of Nathans' working capital. NF
Roasters Corp., a wholly owned subsidiary, was created for the purpose of
acquiring these assets. The acquired assets are recorded as intangibles in the
accompanying balance sheet. Results of operations are included in these
consolidated financial statements as of the date of acquisition. No
company-owned restaurants were acquired in this transaction.
NOTE C - RECLASSIFICATIONS
Certain reclassifications of prior period items have been made to conform to the
September 26, 1999 presentation.
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<PAGE> 9
NOTE D - EARNINGS PER SHARE
The following chart provides a reconciliation of information used in calculating
the per share amounts for the thirteen and twenty-six week periods ended
September 26, 1999 and September 27, 1998, respectively.
<TABLE>
<CAPTION>
THIRTEEN WEEKS
- --------------
Net Income
Net Income Number of Shares Per Share
---------- ---------------- ---------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
- ---------
Basic calculation $ 616 $ 751 4,722 4,722 $.13 $.16
Effect of dilutive employee stock
options and warrants - - - 32 - -
----- ----- ----- ----- ---- ----
Diluted EPS
- -----------
Diluted calculation $ 616 $ 751 4,722 4,754 $.13 $.16
===== ===== ===== ===== ==== ====
</TABLE>
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
- ----------------
Net Income
Net Income Number of Shares Per Share
---------- ---------------- ---------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
- ---------
Basic calculation $1,085 $1,325 4,722 4,722 $ .23 $ .28
Effect of dilutive employee stock
options and warrants - - - 34 - -
------ ------ ------ ------ ------ ------
Diluted EPS
- -----------
Diluted calculation $1,085 $1,325 4,722 4,756 $ .23 $ 28
====== ====== ====== ====== ====== ======
</TABLE>
NOTE E - COMPREHENSIVE INCOME
In the first quarter of fiscal 1999, Nathan's adopted SFAS No. 130, "Reporting
Comprehensive Income". Comprehensive income is the total of net income and all
nonowner changes in equity (or other comprehensive income) such as unrealized
gains / losses on securities available-for-sale, foreign currency translation
adjustments and minimum pension liability adjustments. Comprehensive and other
comprehensive income must be reported on the face of the annual financial
statements or in the case of interim reporting, in the footnotes to the
financial statements. Nathan's operations did not give rise to items includible
in comprehensive income which were not already included in net income for the
thirteen and twenty-six week periods ended September 26, 1999 and September 27,
1998. Nathan's comprehensive income is the same as its net income for all
periods presented.
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<PAGE> 10
NOTE F - SUBSEQUENT EVENT - MIAMI SUBS CORP. MERGER
At a special meeting of stockholders held on September 28, 1999, the
stockholders of Nathan's approved the merger with Miami Subs Corporation whereby
Nathan's acquired the remaining 70% of Miami Subs common stock not already owned
by Nathan's. Additionally, Nathan's stockholders approved increasing the number
of authorized shares of common stock to 30,000,000 from 20,000,000. Shareholders
of Miami Subs approved the merger with Nathan's at a special meeting on
September 30, 1999. The merger was consummated on September 30, 1999. Each
former shareholder of Miami Subs, who has not exercised dissenters' rights, is
entitled to receive one share of Nathan's common stock in exchange for each two
shares of Miami Subs common stock then owned and one warrant to purchase one
share of Nathan's common stock for a period of five years at an exercise price
of $6.00 for each four shares of Nathan's common stock received. Nathan's issued
approximately 2,318,543 shares of common stock and approximately 579,636
warrants in connection with the merger. The merger will be accounted for using
the purchase method of accounting. Accordingly, the results of operations of
Miami Subs will be included in Nathan's financial statements from the date of
the merger.
NOTE G- CONTINGENCIES
On January 5, 1999, Miami Subs was served with a class action lawsuit entitled
Robert J. Feeney, on behalf of himself and all others similarly situated vs.
Miami Subs Corporation, et al., in Circuit Court, in Broward County, Florida,
which was filed against Miami Subs, its directors and Nathans in a Florida state
court by a shareholder of Miami Subs. Since that time, Nathans and its designees
to the Miami Subs board have also been served. The suit alleges that the
proposed merger between Miami Subs and Nathans, as contemplated by the
companies' non-binding letter of intent, is unfair to Miami Subs' shareholders
based on the price that Nathans is paying to the Miami Subs' shareholders for
their shares and constitutes a breach by the defendants of their fiduciary
duties to the shareholders of Miami Subs. The plaintiff seeks among other
things:
1. class action status;
2. preliminary and permanent injunctive relief against consummation
of the proposed merger; and
3. unspecified damages to be awarded to the shareholders of Miami
Subs.
On March 19, 1999, the court granted the plaintiff leave to amend his
complaint. The plaintiff then filed an amended complaint. Miami Subs moved to
dismiss the complaint on April 13, 1999. Nathans and its designees on the Miami
Subs' board moved to dismiss the complaint on April 29, 1999. The court denied
the motions. Nathans intends to defend against this suit vigorously.
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<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 26, 1999 COMPARED TO SEPTEMBER 27, 1998
Revenues
Total sales were $6,671,000 for the thirteen weeks ended September 26, 1999
("second quarter fiscal 2000") as compared to $6,789,000 for the thirteen weeks
ended September 27, 1998 ("second quarter fiscal 1999"). Company-owned
restaurant sales decreased 3.2% or $193,000 to $5,912,000 from $6,105,000.
Restaurant sales declined primarily because two company-owned restaurants were
closed during fiscal 1999 due to the expiration of the leases at these
locations. These two stores generated sales and profits of $371,000 and $60,000,
respectively, during the second quarter fiscal 1999. Nathan's continues to
search for a suitable replacement site within the same geographic area as its
previous site in Hicksville, NY. At September 26, 1999 there were 25
company-owned units as compared to 26 units at September 27, 1998. Nathan's
continues to emphasize local store marketing activities, new product
introductions and value pricing strategies. These activities were complimented
by a regional newsprint campaign during the summer of calendar 1999. During
September and October 1999 we began test marketing Arthur Treachers signature
products in four company-owned restaurants. Sales from the Branded Product
Program increased by 11.0% to $759,000 for the second quarter fiscal 2000 as
compared to sales of $684,000 in the second quarter fiscal 1999.
Franchise fees and royalties were $967,000 in the second quarter fiscal 2000
compared to $936,000 in the second quarter fiscal 1999. Franchise royalties
increased by $187,000 or 26.5% to $892,000 in the second quarter fiscal 2000 as
compared to $705,000 in the second quarter fiscal 1999. Royalties earned from
the recently acquired Kenny Rogers Roasters restaurant system were approximately
$159,000 in the second quarter fiscal 2000. Franchise restaurant sales of the
Nathan's brand, were $17,524,000 in the second quarter fiscal 2000 as compared
to $16,995,000 in the second quarter fiscal 1999. At September 26, 1999 there
were 256 franchised or licensed restaurants within our franchise system.
Franchise fee income was $75,000 in the second quarter fiscal 2000 as compared
to $231,000 in the second quarter fiscal 1999. This decrease was primarily
attributable to the difference between the number of franchised units opened
between the two periods and the impact of the international development
agreement executed in the second quarter fiscal 1999. During the second quarter
fiscal 2000, four new Nathan's franchised or licensed units opened, including
the first unit in Egypt.
License royalties were $508,000 in the second quarter fiscal 2000 as compared to
$456,000 in the second quarter fiscal 1999. The majority of this increase is
attributable to sales of Kenny Rogers Roasters proprietary marinade.
Investment and other income was $4,000 in the second quarter fiscal 2000 versus
a loss of $15,000 in the second quarter fiscal 1999. During the second quarter
fiscal 2000 Nathan's earned approximately $55,000 less interest income than the
second quarter fiscal 1999 due primarily to the reduced amount of marketable
investment
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<PAGE> 12
securities which was more than offset due to the difference in performance of
the financial markets between the two periods.
Costs and Expenses
Cost of sales decreased by $53,000 from $4,139,000 in the second quarter fiscal
1999 to $4,086,000 in the second quarter fiscal 2000. During the second quarter
fiscal 2000, restaurant cost of sales were lower due primarily to the closure of
two company-owned restaurants which were partly offset by the costs of operating
the Kings Plaza restaurant which was closed for renovation during the second
quarter fiscal 1999. Higher costs were incurred in connection with the Branded
Product Program of approximately $54,000. The cost of restaurant sales was 58.8%
of restaurant sales in the second quarter fiscal 2000 as compared to 58.7% of
restaurant sales in the second quarter fiscal 1999.
Restaurant operating expenses increased by $58,000 from $1,457,000 in the second
quarter fiscal 1999 to $1,515,000 in the second quarter fiscal 2000. This
increase is primarily attributed to higher restaurant operating costs of $91,000
at a restaurant that was renovated last year and higher store marketing expenses
for all company-owned stores of $51,000, which were partly offset by reduced
restaurant operating costs of $66,000 associated with two closed company-owned
restaurants that operated during the second quarter of fiscal 1999.
Depreciation and amortization decreased by $8,000 from $268,000 in the second
quarter fiscal 1999 to $260,000 in the second quarter fiscal 2000. Amortization
of intangibles increased by $16,000 or 16.7% from $96,000 in the second quarter
fiscal 1999 to $112,000 in the second quarter fiscal 2000. This increase is due
to the amortization, based upon the preliminary purchase price allocation, of
the Kenny Rogers Roasters intellectual property acquired on April 1, 1999.
General and administrative expenses increased by $22,000 or 1.8% to $1,240,000
in the second quarter fiscal 2000 as compared to $1,218,000 in the second
quarter fiscal 1999. Approximately $115,000 of expenses were incurred in the
second quarter fiscal 2000 associated with Kenny Rogers Roasters. Future
spending may increase throughout the balance of the year in connection with
development of the Kenny Rogers Brand, although no assurances can be given to
this effect. General and administrative expenses, excluding Kenny Rogers
Roasters, decreased by $93,000 or 7.6% primarily due to lower spending in
connection with international development of approximately $17,000, reduced
additional compensation of approximately $24,000, lower departmental costs of
approximately $35,000 due principally by not replacing the executive vice
president position and lower corporate insurance of approximately $15,000.
Income Tax Provision
In the second quarter fiscal 2000, the income tax provision was $390,000 or
38.8% of earnings before income taxes as compared to $237,000 or 24.0% of
earnings before income taxes in the second quarter fiscal 1999. The income tax
provision in the second quarter fiscal 1999 included a reduction to Nathan's
deferred tax valuation
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<PAGE> 13
allowance of $185,000. The second quarter fiscal 1999 provision before
adjustment for the valuation allowance was $422,000 or 42.7%.
Management had determined that, more likely than not, a portion of its
previously-reserved deferred tax assets would be realized and, accordingly,
initially reduced the related valuation allowance in fiscal 1998. Throughout
fiscal 1999, management continued to monitor the likelihood of the realizability
of its deferred tax asset, and in the fourth quarter fiscal 1999, fully
recognized, based upon the current facts and circumstances, adjustment to its
deferred tax valuation allowance in accordance with Financial Accounting
Standards Board Statement No. 109 "Accounting for Income Taxes".
TWENTY-SIX WEEKS ENDED SEPTEMBER 26, 1999 COMPARED TO SEPTEMBER 27, 1998
Revenues
Total sales were $13,279,000 for the twenty-six weeks ended September 26, 1999
("the fiscal 2000 period") as compared to $13,357,000 for the twenty-six weeks
ended September 27, 1998 ("the fiscal 1999 period"). Company-owned restaurant
sales decreased 3.6% or $441,000 to $11,657,000 from $12,097,000. Restaurant
sales declined primarily because two company-owned restaurants were closed
during fiscal 1999 due to the expiration of the leases at these
locations. These two stores generated sales and profits of $831,000 and
$165,000, respectively, during the fiscal 1999 period. Nathan's continues to
search for a suitable replacement site within the same geographic area as its
previous site in Hicksville, NY. At September 26, 1999 there were 25
company-owned units as compared to 26 units at September 27, 1998.Nathan's
continues to emphasize local store marketing activities, new product
introductions and value pricing strategies. These activities were complimented
by a regional newsprint campaign during the summer of 1999. During September and
October 1999 we began test marketing Arthur Treachers signature products in four
company-owned restaurants. Sales from the Branded Product Program increased by
28.7% to $1,622,000 during the fiscal 2000 period as compared to sales of
$1,260,000 in the fiscal 1999 period.
Franchise fees and royalties were $1,930,000 in the fiscal 2000 period compared
to $1,674,000 in the fiscal 1999 period. Franchise royalties increased by
$335,000 or 24.9% to $1,678,000 in the fiscal 2000 period as compared to
$1,343,000 in the fiscal 1999 period. Royalties earned from the recently
acquired Kenny Rogers Roasters restaurant system were approximately $303,000 in
the fiscal 2000 period. Franchise restaurant sales of the Nathan's brand were
$33,062,000 in the fiscal 2000 period as compared to $32,593,000 in the fiscal
1999 period. At September 26, 1999 there were 256 franchised or licensed
restaurants within the franchise system. Franchise fee income was $252,000 in
the fiscal 2000 period as compared to $331,000 in the fiscal 1999 period. This
decrease was primarily attributable to the difference between the number of
franchised units opened between the two periods. During the fiscal 2000 period,
seven new Nathan's franchised or licensed units opened, including the first unit
in Egypt.
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<PAGE> 14
License royalties were $914,000 in the fiscal 2000 period as compared to
$837,000 in the fiscal 1999 period. The increase is due primarily to sales of
Kenny Rogers Roasters proprietary marinade and to increased sales by our
licensee, SMG, Inc., for the sale of Nathan's frankfurters in supermarkets and
club stores.
Investment and other income was $111,000 in the fiscal 2000 period versus
$119,000 in the fiscal 1999 period. During the fiscal 2000 period Nathan's
earned approximately $127,000 less interest income than the fiscal 1999 period
due primarily to the reduced amount of marketable investment securities which
offset the difference in performance of the financial markets between the two
periods.
Costs and Expenses
Cost of sales increased by $19,000 from $8,147,000 in the fiscal 1999 period to
$8,166,000 in the fiscal 2000 period. Higher costs of approximately $352,000
were incurred in connection with the Branded Product Program and lower
restaurant cost of sales due primarily to the closure of two company-owned
restaurants which were partly offset by the costs of operating the Kings Plaza
restaurant which was being renovated during the second quarter fiscal 1999. The
cost of restaurant sales was 58.5% of restaurant sales in the fiscal 2000 period
as compared to 59.1% of restaurant sales in the fiscal 1999 period. The
decrease, as a percentage of restaurant sales, is due partly to the increase in
the amount of the average check over the prior period without proportionate
percentage increases in food costs resulting from our promotional activities
primarily during the first quarter of the fiscal 2000 period. Nathan's continues
to seek to operate more efficiently as a means to minimize the margin pressures
which have become an integral part of competing in the current value conscious
marketplace.
Restaurant operating expenses increased by $136,000 from $2,908,000 in the
fiscal 1999 period to $3,044,000 in the fiscal 2000 period. This increase is
primarily attributed to higher restaurant operating costs of $134,000 at a
restaurant that was renovated last year and higher store marketing expenses for
all company-owned stores of $115,000, which were partly offset by reduced
restaurant operating costs of $144,000 associated with two closed company-owned
restaurants that operated during the fiscal 1999 period.
Depreciation and amortization decreased by $3,000 from $522,000 in the fiscal
1999 period to $519,000 in the fiscal 2000 period. Amortization of intangibles
increased by $33,000 or 17.2% from $192,000 in the fiscal 1999 period to
$225,000 in the fiscal 2000 period. This increase is due to the amortization,
based upon the preliminary purchase price allocation, of the Kenny Rogers
Roasters intellectual property acquired on April 1, 1999.
General and administrative expenses increased by $57,000 or 2.3% to $2,523,000
in the fiscal 2000 period as compared to $2,466,000 in the fiscal 1999 period.
Approximately $213,000 of expenses were incurred in the fiscal 2000 period
associated with Kenny Rogers Roasters. Future spending may increase throughout
the balance of the year in connection with development of the Kenny Rogers
Brand, although no assurances can be given to this effect. General and
administrative expenses, excluding Kenny Rogers Roasters, decreased by $156,000
or 6.3% primarily due to lower spending in connection with international
development of approximately $42,000, reduced additional compensation of
approximately $46,000, lower departmental costs of approximately $42,000
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<PAGE> 15
due principally by not replacing the executive vice president position and lower
corporate insurance of approximately $24,000.
Income Tax Provision
In the fiscal 2000 period, the income tax provision was $731,000 or 40.3% of
earnings before income taxes as compared to $426,000 or 24.3% of earnings before
income taxes in the fiscal 1999 period. The income tax provision in the fiscal
1999 period included a reduction to Nathan's deferred tax valuation allowance of
$311,000. The fiscal 1999 period provision before adjustment for the valuation
allowance was $737,000 or 42.1%.
Management had determined that, more likely than not, a portion of its
previously-reserved deferred tax assets would be realized and, accordingly,
initially reduced the related valuation allowance in fiscal 1998. Throughout
fiscal 1999, management continued to monitor the likelihood of the realizability
of its deferred tax asset, and in the fourth quarter fiscal 1999, fully
recognized, based upon the current facts and circumstances, adjustment to its
deferred tax valuation allowance in accordance with Financial Accounting
Standards Board Statement No. 109 "Accounting for Income Taxes".
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at September 26, 1999 aggregated $1,721,000,
decreasing by $444,000 during the fiscal 2000 period. At September 26, 1999,
marketable investment securities totalled $3,237,000 and net working capital
decreased to $3,234,000 from $3,708,000 at March 28, 1999.
Cash provided by operations of $1,939,000 in the fiscal 2000 period is primarily
attributable to net income of $1,085,000, non-cash charges of $782,000,
including depreciation and amortization of $744,000, decreases in prepaid and
other current assets of $161,000, a decrease in other assets of $134,000,
increases in accounts payable and accrued expenses of $465,000, partially offset
by an increase in franchise and other receivables of $605,000 and an increase in
inventories of $40,000.
Cash used in investing activities of $2,383,000 includes $1,849,000 for the
acquisition of the intellectual property of the Kenny Rogers Roasters restaurant
system, including expenses, $387,000 primarily relating to capital improvements
of the company-owned restaurants and other fixed asset additions and $147,000 of
costs in connection with the acquisition of Miami Subs Corporation.
Management believes that available cash, marketable investment securities, and
internally generated funds should provide sufficient capital to finance its
operations through fiscal 2000. Nathan's maintains a $5,000,000 uncommitted bank
line of credit and we have not borrowed any funds to date under this line of
credit.
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<PAGE> 16
YEAR 2000
Nathan's performed an internal evaluation of its computer systems and determined
that its existing computer systems would require a significant amount of effort
and cost in order to make them Year 2000 compliant. Accordingly, in order to
meet its growing business requirements and assure Year 2000 compliance, Nathan's
decided to replace its existing accounting systems and modify its other
technology systems, other than its point of sale system as discussed below. In
July 1998, Nathan's entered into a contract to license Lawson Accounting
software which has been certified to be Year 2000 compliant. Nathan's
successfully completed the conversion of its financial systems in January 1999
and the remaining aspects of the complete Lawson implementation, were completed
in June 1999. With the implementation of this new system, all of Nathan's major
financial systems have been certified to be Year 2000 complaint; however, since
Nathan's has not conducted its own testing, no assurance can be given in this
regard. Nathan's has spent approximately $349,000 to date and estimates that the
total cost associated with ensuring compliance of its internal systems to be
approximately $375,000. Nathan's doesn't expect the final cost to vary
materially; however, there can be no assurance to this effect.
Nathan's has addressed the Year 2000 issue with its Point of Sale provider and
has received assurance that their hardware is Year 2000 compliant and that the
software corrections already installed will make the POS systems Year 2000
compliant; however, since Nathan's has not conducted its own testing, no
assurance can be given in this regard. Nathan's notified its franchisees, in
previous franchise mailings, that they should contact their Point
of Sale provider to be sure that they have received and installed the correction
software mentioned above.
Nathan's has received assurance from its financial institutions that their
systems are or will be Year 2000 compliant before the end of the year. Nathan's
has begun to contact key suppliers and distributors about their state of
readiness and is seeking their assurances with respect to their Year 2000
compliance and contingency plans. No assurances can be given that such suppliers
and distributors will in fact be Year 2000 compliant. Nathan's believes that its
primary Year 2000 risk relating to its operations is centered upon the ability
of its suppliers and distributors to continue to receive Nathan's orders by
telephone and have the product delivered by truck. Nathan's expects to conclude
evaluating this Year 2000 risk by the end of November 1999 and is currently
developing any necessary contingency plans to assure continued supply of
products to its restaurants. Nathan's cannot predict the effect of the Year 2000
problem on the vendors and others with which Nathan's transacts business and
there can be no assurance that the effect of the Year 2000 problem on the
entities Nathan's does business with will not have a material adverse effect on
Nathan's business, operating results and financial position.
FORWARD LOOKING STATEMENT
Certain statements contained in this report are forward-looking statements which
are subject to a number of known and unknown risks and uncertainties that could
cause Nathan's actual results and performance to differ materially from those
described or implied in the forward looking statements. These risks and
uncertainties, many of which are not within Nathan's control, include, but are
not limited to economic, weather, legislative and
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<PAGE> 17
business conditions; the availability of suitable restaurant sites on reasonable
rental terms; changes in consumer tastes; ability to continue to attract
franchisees; the ability to purchase our primary food and paper products at
reasonable prices; no material increases in the minimum wage; and Nathan's
ability to attract competent restaurant, and managerial personnel.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 5, 1999, Miami Subs was served with a class action lawsuit entitled
Robert J. Feeney, on behalf of himself and all others similarly situated vs.
Miami Subs Corporation, et al., in Circuit Court, in Broward County, Florida,
which was filed against Miami Subs, its directors and Nathans in a Florida state
court by a shareholder of Miami Subs. Since that time, Nathans and its designees
to the Miami Subs board have also been served. The suit alleges that the
proposed merger between Miami Subs and Nathans, as contemplated by the
companies' non-binding letter of intent, is unfair to Miami Subs' shareholders
based on the price that Nathans is paying to the Miami Subs' shareholders for
their shares and constitutes a breach by the defendants of their fiduciary
duties to the shareholders of Miami Subs. The plaintiff seeks among other
things:
1. class action status;
2. preliminary and permanent injunctive relief against consummation
of the proposed merger; and
3. unspecified damages to be awarded to the shareholders of Miami
Subs.
On March 19, 1999, the court granted the plaintiff leave to amend his
complaint. The plaintiff then filed an amended complaint. Miami Subs moved to
dismiss the complaint on April 13, 1999. Nathans and its designees on the Miami
Subs' board moved to dismiss the complaint on April 29, 1999. The court denied
the motions. Nathans intends to defend against this suit vigorously.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) No reports on Form 8-K were filed during the quarter ended September
26, 1999.
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<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATHAN'S FAMOUS, INC.
Date: November 8, 1999 By: /s/ Wayne Norbitz
--------------------------------------
Wayne Norbitz
President and Chief Operating Officer
(Principal Executive Officer)
Date: November 8, 1999 By: /s/ Ronald G. DeVos
-----------------------------------------------
Ronald G. DeVos
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
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