<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 DECEMBER 26, 1999.
[ ] 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 Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
At December 26, 1999, an aggregate of 7,040,509 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> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - December 26, 1999 and
March 28, 1999 3
Consolidated Statements of Earnings - Thirteen Weeks
Ended December 26, 1999 and December 27, 1998 4
Consolidated Statements of Earnings - Thirty-nine Weeks
Ended December 26, 1999 and December 27, 1998 5
Consolidated Statements of Stockholders' Equity -
Thirty-nine Weeks Ended December 26, 1999 6
Consolidated Statements of Cash Flows - Thirty-nine Weeks
Ended December 26, 1999 and December 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 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</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>
December March
26, 1999 28, 1999
-------- --------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents including unexpended
marketing fund contributions of $880 and $0 and
restricted cash of $83 and $83, respectively $ 2,650 $ 2,165
Marketable investment securities 2,911 3,267
Notes, franchise and other receivables, net 3,944 1,578
Inventory 663 374
Prepaid expenses and other current assets 482 411
Deferred income taxes 627 622
-------- --------
Total current assets 11,277 8,417
Notes receivable, net 3,938 --
Property and equipment, net 11,450 6,293
Assets held for sale 1,761 --
Intangible assets, net 19,664 10,882
Investment in unconsolidated affiliate -- 4,441
Deferred income taxes 892 892
Other assets, net 610 325
-------- --------
$ 49,698 $ 31,250
======== ========
Current liabilities:
Current maturities of long term debt $ 322 $ --
Accounts payable 1,713 1,053
Accrued expenses and other current liabilities 6,924 3,434
Deferred franchise fees 198 222
-------- --------
Total current liabilities 9,157 4,709
Long term debt, less current maturities 3,182 --
Deferred franchise fees and other deferred revenue 791 --
Accrued expenses and other liabilities 1,093 193
-------- --------
Total liabilities 14,223 4,902
-------- --------
Stockholders' equity:
Common stock, $.01 par value - 30,000,000 shares
authorized, 7,040,509 and 4,722,216 issued and
outstanding , respectively 70 47
Additional paid-in-capital 40,669 32,423
Accumulated deficit (5,264) (6,122)
-------- --------
Total stockholders' equity 35,475 26,348
-------- --------
$ 49,698 $ 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 December 26, 1999 and
December 27, 1998
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Sales $ 9,310 $ 5,833
Franchise fees and royalties 2,076 859
License royalties 426 286
Equity in loss of Miami Subs prior to acquisition (222) --
Investment and other income 458 237
-------- --------
Total revenues 12,048 7,215
-------- --------
Costs and expenses:
Cost of sales 6,158 3,652
Restaurant operating expenses 2,506 1,523
Depreciation and amortization 507 264
Amortization of intangible assets 260 96
General and administrative 2,264 1,132
Interest expense 112 --
Impairment charge on notes receivable (NOTE - F) 566 --
-------- --------
Total costs and expenses 12,373 6,667
-------- --------
(Loss) / earnings before income taxes (325) 548
(Benefit) / provision for income taxes (98) 136
-------- --------
Net (loss) / earnings $ (227) $ 412
======== ========
PER SHARE INFORMATION
Net (loss) / earnings per share
Basic $ (0.03) $ 0.09
======== ========
Diluted $ (0.03) $ 0.09
======== ========
Shares used in computing net income
Basic 7,041 4,722
======== ========
Diluted 7,041 4,750
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Thirty-nine weeks ended December 26, 1999 and
December 27, 1998
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Sales $ 22,589 $ 19,190
Franchise fees and royalties 4,006 2,533
License royalties 1,340 1,123
Equity in loss of Miami Subs prior to acquisition (163) --
Investment and other income 569 356
-------- --------
Total revenues 28,341 23,202
-------- --------
Costs and expenses:
Cost of sales 14,324 11,799
Restaurant operating expenses 5,550 4,431
Depreciation and amortization 1,026 786
Amortization of intangible assets 485 288
General and administrative 4,787 3,598
Interest expense 112 1
Impairment charge on notes receivable (NOTE - F) 566 --
-------- --------
Total costs and expenses 26,850 20,903
-------- --------
Earnings before income taxes 1,491 2,299
Provision for income taxes 633 562
-------- --------
Net earnings $ 858 $ 1,737
======== ========
PER SHARE INFORMATION
Net earnings per share
Basic $ 0.16 $ 0.37
======== ========
Diluted $ 0.16 $ 0.37
======== ========
Shares used in computing net income
Basic 5,495 4,722
======== ========
Diluted 5,495 4,754
======== ========
</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
Thirty-nine weeks ended December 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
Common stock issued
in connection with Miami Subs
acquisition 2,318,293 23 7,367 7,390
Warrants issued in connection
with Miami Subs acquisition 330 330
Options assumed in connection
with Miami Subs acquisition 549 549
Net earnings 858 858
--------- --------- --------- --------- ---------
Balance, Dec. 26, 1999 7,040,509 $ 70 $ 40,669 $ (5,264) $ 35,475
========= ========= ========= ========= =========
</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
Thirty-nine weeks ended December 26, 1999 and December 27, 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 858 $ 1,737
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 1,026 786
Amortization of intangible assets 485 288
Impairment charge on notes receivable 566 --
Provision for doubtful accounts 290 45
Equity in unconsolidated affiliate 163 --
Amortization of deferred compensation -- 34
Deferred income taxes (5) (132)
Other (5) --
Changes in operating assets and liabilities, net of effects from
acquisition of business:
Marketable investment securities 357 4,413
Franchise and other receivables (843) (618)
Inventory (117) (46)
Prepaid and other current assets (25) 59
Accounts payable and accrued expenses (952) (341)
Deferred franchise and area development fees (99) 70
Other assets 120 4
Other non current liabilities 8 46
------- -------
Net cash provided by operating activities 1,827 6,345
------- -------
Cash flows from investing activities:
Cash acquired in connection with merger net of transaction costs 3,429 --
Purchase of property and equipment (1,280) (1,347)
Purchase of intellectual property (1,849) --
Investment in Miami Subs -- (4,286)
Proceeds from sale of restaurants 110 --
Payments received on notes receivable 84 --
------- -------
Net cash provided by (used in) investing activities 494 (5,633)
------- -------
Cash flows from financing activities:
Principal repayment of notes payable (1,836) --
Principal repayment of obligations under capital leases -- (7)
------- -------
Net cash used in financing activities (1,836) (7)
------- -------
Net increase in cash and cash equivalents 485 705
Cash and cash equivalents, beginning of period 2,165 1,306
------- -------
Cash and cash equivalents, end of period $ 2,650 $ 2,011
======= =======
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ACTIVITIES:
Common stock, warrants and options issued in connection with
the acquisition of Miami Subs Corporation $ 8,269 $ 0
======= =======
Loans to franchisee in connection with sale of restaurants $ 1,100 $ 0
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 459 $ 470
======= =======
Cash paid during the period for interest $ 128 $ 1
======= =======
</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
December 26, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Nathan's Famous, Inc. and
subsidiaries (collectively "Nathan's") for the thirteen and thirty-nine week
periods ended December 26, 1999 and December 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. 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 and are being
amortized on a straight-line basis over 10 - 20 years. These estimates of fair
value are preliminary and subject to adjustment for a period of up to one year
from the date of acquisition. Results of operations are included in these
consolidated financial statements as of April 1, 1999. No company-owned
restaurants were acquired in this transaction. On November 17, 1999, NF Roasters
Corp. acquired two restaurants from a franchisee for approximately $400,000. The
projected cost of the planned renovations are estimated to be approximately
$600,000.
NOTE C -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 2,318,293 shares of common stock then having a market price of
$3.1875 per share, approximately 579,573 warrants then valued at $0.57 per
warrant and assumed existing employee options and warrants to purchase 542,967
shares of common stock then valued at $549,000 in connection with the merger.
The total cost of the acquisition, including the November 1998 initial purchase
of approximately 30% of the outstanding common stock, was approximately
$13,352,000, including transaction fees. In addition, Nathan's assumed
$5,340,000 of existing Miami Subs debt. Since October 1, 1999 the results of
operations of Miami Subs have been included in Nathan's consolidated financial
statements. Prior to such date, Nathan's accounted for its 30% interest in Miami
Subs under the equity method of accounting. The merger will be accounted for
using the purchase method of accounting. The purchase price has been
preliminarily allocated based upon estimated fair values at the date of
acquisition, pending final appraisals and determination of certain acquired
balances and is subject to adjustment for a period of up to
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<PAGE> 9
one year from the date of acquisition (Note D). The preliminary excess over
purchase price of $1,362,000 will be amortized over a period of 20 years.
NOTE D - ACQUISITION RESERVE
In connection with the acquisition of Miami Subs, Nathan's is finalizing plans
to permanently close up to 20 underperforming company-owned restaurants.
Nathan's expects to sell such related assets at amounts below the historical
carrying amounts recorded by Miami Subs. In accordance with APB 16 "Business
Combinations" the write down of these assets are reflected as part of the
preliminary purchase price allocations and are included in assets held for sale
in the accompanying balance sheet. Nathan's also expects to accrue, as part of
the acquisition, the estimated future cash payments, consisting primarily of
future lease payments including costs and expenses associated with terminating
such leases when it can be reasonably estimated. Accordingly, excess purchase
price associated with this acquisition will increase based upon the reserve for
the closing of acquired company-owned restaurants. At September 30, 1999,
minimum annual lease payments for the affected stores was $1,750,000, with
remaining lease terms ranging from 2 years up to approximately 18 years.
NOTE E - UNAUDITED PRO FORMA INFORMATION
Summarized below are the unaudited pro forma results of operations for the
thirty-nine weeks ended December 26, 1999 and December 27, 1998 of Nathan's as
though the Miami Subs acquisition had occurred at the beginning of the periods
presented. Adjustments have been made for amortization of goodwill based upon a
preliminary allocation of the purchase price, salary expense based on employment
agreements, reversal of Miami Subs merger costs, elimination of Nathan's 30%
equity earnings in Miami Subs and reduction of interest income on marketable
securities used to purchase the initial 30% of Miami Subs common stock.
<TABLE>
<CAPTION>
Thirty-nine weeks ended
December 26 December 27
1999 1998
------- -------
<S> <C> <C>
Total revenues $40,687 $41,104
======= =======
Income before extraordinary items $ 1,468 $ 3,050
======= =======
Net income $ 705 $ 2,287
======= =======
Net earnings per share
Basic $ 0.10 $ 0.32
======= =======
Diluted $ 0.10 $ 0.32
======= =======
Shares used in computing net income
Basic 7,041 7,041
======= =======
Diluted 7,041 7,136
======= =======
</TABLE>
The unaudited pro forma information for the thirty-nine weeks ended December 26,
1999 and December 27, 1998 combines Nathan's results of operations for the
thirty-nine weeks ended December 26, 1999 and December 27, 1998 with Miami Subs'
results of operations for the nine months ended December 31, 1999 and December
31, 1998, respectively.
These pro forma results of operations have been prepared for comparative
purposes only and are not necessarily indicative of actual results of operations
that would have occurred had the acquisition been made at the beginning of the
periods presented or of the results, which may occur in the future.
NOTE F - IMPAIRMENT CHARGE ON NOTES RECEIVABLE
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<PAGE> 10
In accordance with Statement of Financial Accounting Standards ("SFAS") No.114
"Accounting by creditors for impairment of a loan" Nathan's applied the
provisions thereof to value Miami Subs notes receivable. Pursuant to SFAS No.
114, a loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. When evaluating a note for
impairment, the factors that should be considered include 1) indications that
the borrower is experiencing business problems such as operating losses,
marginal working capital, inadequate cash flow or business interruptions; 2)
loans secured by collateral that are not readily marketable 3) or that are
susceptible to deterioration in realizable value. In certain cases where
Nathan's has determined that a loan has been impaired it does not expect to
extend or renew the underlying leases. Nathan's analysis has determined that
there are four notes that have incurred such an impairment. Following is a
summary of the impaired notes receivable:
<TABLE>
<S> <C>
Total recorded investment in impaired notes receivable $ 1,119
Allowance for impaired notes receivable 566
-----------
Recorded investment in impaired notes receivable, net $ 553
===========
</TABLE>
NOTE G - 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 thirty-nine week periods ended December 26, 1999 and December 27,
1998. Nathan's comprehensive income is the same as its net income for all
periods presented.
NOTE H - EARNINGS PER SHARE
The following chart provides a reconciliation of information used in calculating
the per share amounts for the thirteen and thirty-nine week periods ended
December 26, 1999 and December 27, 1998, respectively.
<TABLE>
<CAPTION>
THIRTEEN WEEKS Net (Loss) / Income
Net (Loss) / Income Number of Shares Per Share
------------------- ------------------ --------------------------
1999 1998 1999 1998 1999 1998
----- ----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Basic calculation $(227) $ 412 7,041 4,722 $ (.03) $ .09
Effect of dilutive employee stock
options and warrants -- -- -- 28 -- --
----- ----- ----- ----- -------- --------
Diluted EPS
Diluted calculation $(227) $ 412 7,041 4,750 $ (.03) $ .09
===== ===== ===== ===== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THIRTY-NINE 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 $ 858 $1,737 5,495 4,722 $ .16 $ .37
Effect of dilutive employee stock
options and warrants -- -- -- 32 -- --
------ ------ ------ ------ ------ ------
Diluted EPS
Diluted calculation $ 858 $1,737 5,495 4,754 $ .16 $ 37
====== ====== ====== ====== ====== ======
</TABLE>
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<PAGE> 11
NOTE I - 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. On February 4, 2000, the court held an evidentiary hearing. As a
result of the hearing, the court struck the class action allegations from the
plaintiff's complaint. Accordingly, the case will proceed as an individual, not
as a class action. Nathans intends to defend against this suit vigorously.
NOTE - J - MIAMI SUBS TAX AUDIT
At December 26, 1999, Miami Subs' tax returns reflect net operating loss
carry-forwards of approximately $5.5 million which are available to reduce
future taxable income through 2012 (subject to limitations imposed under the
Internal Revenue Code regarding changes in ownership which limits utilization of
$2.8 million of the carry-forwards on an annual basis to approximately
$340,000). Miami Subs also has general business credit carry-forwards of
approximately $274,000 which can be used to offset tax liabilities through 2010.
Miami Subs' federal income tax returns for fiscal years 1991 through 1996,
inclusive, have been examined by the Internal Revenue Service. The reports of
the examining agent issued in connection with these examinations indicate that
additional taxes and penalties totaling approximately $2.4 million are due for
such years. The Company is appealing substantially all of the proposed
adjustments. Due to net operating losses anticipated to be lost in connection
with the examination, Nathan's has accrued $345,000 for this matter in the
accompanying consolidated balance sheet.
NOTE - K - SALE OF RESTAURANTS
Miami Subs sold 5 company-owned restaurants in Dallas, Texas for $150,000 in
cash and $1,100,000 of notes. Miami subs has received cash of $110.000 through
December 26, 1999 and received the remaining $40,000 in January 2000. Miami
Subs has received cash of $110,000 through December 26, 1999 and received the
remaining $40,000 in January 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION
During the current fiscal year, Nathan's completed the acquisition of two highly
recognized brands. On April 1, 1999, Nathan's 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, Nathan's acquired the remaining
70% of the outstanding common stock of Miami Subs Corporation not already owned
by Nathan's. Revenues of the combined company are generated primarily from
operating company-owned restaurants, restaurant franchising under the Nathan's,
Kenny Rogers and Miami Subs brands, licensing agreements for the sale of
Nathan's products within supermarkets and sales under Nathan's Branded Product
Program. The branded product program enables foodservice operators to offer
Nathans' hot dogs and other proprietary items
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<PAGE> 12
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
At December 26, 1999, Nathan's combined systems consisted of 36 company-owned
units, 424 franchised or licensed units in addition to over 950 Branded Product
points of distribution that feature Nathan's world famous all-beef hot dogs,
located in forty-three states, the District of Columbia and seventeen foreign
countries. At December 26, 1999 Nathan's Famous, Inc.'s company-owned restaurant
system included 23 Nathan's units and 13 Miami Subs units as compared to 26
Nathan's units at December 27, 1998
In connection with the acquisition of Miami Subs, Nathan's is finalizing plans
to permanently close up to 20 underperforming company-owned restaurants
including one restaurant that is currently operated by the company.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED DECEMBER 26, 1999 COMPARED TO DECEMBER 27, 1998
Revenues
Total sales were $9,310,000 for the thirteen weeks ended December 26, 1999
("third quarter fiscal 2000") as compared to $5,833,000 for the thirteen weeks
ended December 27, 1998 ("third quarter fiscal 1999"). Of the total increase,
sales increased by $4,033,000 as a result of the acquisitions made this year.
Company-owned restaurant sales of the Nathan's brand decreased 11.0% or $583,000
to $4,726,000 from $5,309,000. This restaurant sales decline is primarily due to
the impact of franchising two company-owned restaurants during the current
fiscal year and the closure of one company-owned unit in February 1999 due to
the expiration of its lease. These three stores generated sales and profits of
$312,000 and $24,000, respectively, during the third quarter fiscal 1999.
Comparable restaurant sales of the Nathan's brand also declined by 3.4% versus
the third quarter fiscal 1999, due principally to weakness experienced during
the holiday season. Nathan's continues to emphasize local store marketing
activities, new product introductions and value pricing strategies. Pursuant to
Miami Subs' exclusive co-branding agreement with Arthur Treachers, Nathan's
began test marketing Arthur Treachers signature products in four company-owned
restaurants during September and October 1999. Based upon the success of these
tests, Nathan's plans to extend these co-branding efforts within company-owned
units and expects to make Arthur Treachers products available to franchisees.
Sales from the Branded Product Program increased by 5.2% to $551,000 for the
third quarter fiscal 2000 as compared to sales of $524,000 in the third quarter
fiscal 1999.
Franchise fees and royalties were $2,076,000 in the third quarter fiscal 2000
compared to $859,000 in the third quarter fiscal 1999. Increases in franchise
income resulting from the acquisitions made this year were $1,215,000. Nathan's
franchise royalties increased by $39,000 or 5.2% to $747,000 in the third
quarter fiscal 2000 as compared to $708,000 in the third quarter fiscal 1999.
Franchise restaurant sales of the Nathan's brand increased by 3.6% to
$17,118,000 in the third quarter fiscal 2000 as compared to $16,518,000 in the
third quarter fiscal 1999. At December 26, 1999 there were 424 franchised or
licensed restaurants within the franchise system. Franchise fee income derived
from Nathan's openings was $114,000 in the third quarter fiscal 2000 as compared
to $152,000 in the third quarter fiscal 1999. This decrease was primarily
attributable to the difference between the number and types of franchised units
open between the two periods. At December 26, 1999, franchisees operating 26
Miami Subs restaurants had been granted a temporary waiver from paying royalties
or were delinquent and not paying royalties to Miami Subs. Such fees are not
accrued until they are considered collectible. During the third quarter fiscal
2000, five new Nathan's franchised or licensed units opened.
License royalties were $426,000 in the third quarter fiscal 2000 as compared to
$286,000 in the third quarter fiscal 1999. The majority of this increase is
attributable to sales by SMG, Inc., Nathans' licensee for the sale of Nathan's
frankfurters within supermarkets and club stores.
Equity in loss of Miami Subs represents Nathans' proportionate share of Miami
Subs' net loss for the period September 1, 1999 through September 30, 1999 which
has been reported on a one month lag since the acquisition of the 30% equity
interest. Included in Miami Subs' net loss for the period were merger costs of
$196,000.
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<PAGE> 13
Investment and other income was $458,000 in the third quarter fiscal 2000 versus
$237,000 in the third quarter fiscal 1999. Increases in other income as a result
of the acquisitions made this year were $239,000. During the third quarter
fiscal 2000 Nathan's earned approximately $34,000 less interest income than the
third quarter fiscal 1999 due primarily to the reduced amount of marketable
investment securities which was partially offset due to the difference in
performance of the financial markets between the two periods.
Costs and Expenses
Cost of sales increased by $2,506,000 from $3,652,000 in the third quarter
fiscal 1999 to $6,158,000 in the third quarter fiscal 2000. Of the total
increase, cost of sales increased by $2,855,000 as a result of the acquisitions
made this year. During the third quarter fiscal 2000, restaurant cost of sales
associated with the Nathan's brand were lower due primarily from operating three
fewer company-owned restaurants and lower costs of operating the Kings Plaza
restaurant which was renovated during the second quarter fiscal 1999. The
Nathan's brand cost of restaurant sales was 60.8% as a percentage of restaurant
sales in the third quarter fiscal 2000 as compared to 61.9% as a percentage of
restaurant sales in the third quarter fiscal 1999. Higher costs were incurred in
connection with the Branded Product Program of approximately $67,000.
Restaurant operating expenses increased by $983,000 from $1,523,000 in the third
quarter fiscal 1999 to $2,506,000 in the third quarter fiscal 2000. Of the total
increase, restaurant operating expenses increased by $1,127,000 as a result of
the acquisitions made this year. Restaurant operating expenses associated with
the Nathan's brand were $1,379,000 during the third quarter fiscal 2000 versus
$1,523,000 during the third quarter fiscal 1999. This decrease in restaurant
operating costs was due primarily to operating fewer company-owned restaurants
of $100,000 and lower marketing and contract services expenses of $14,000 and
$16,000, respectively
Depreciation and amortization increased by $243,000 from $264,000 in the third
quarter fiscal 1999 to $507,000 in the third quarter fiscal 2000. Depreciation
expense increased by $258,000 as a result of the acquisitions made this year.
Amortization of intangibles increased by $164,000 from $96,000 in the third
quarter fiscal 1999 to $260,000 in the third quarter fiscal 2000. This increase
is due to the amortization, based upon the preliminary purchase price
allocations, of the purchase price of the Kenny Rogers Roasters intellectual
property acquired on April 1, 1999 and the Miami Subs acquisition on September
30, 1999.
General and administrative expenses increased by $1,132,000 to $2264,000 in the
third quarter fiscal 2000 as compared to $1,132,000 in the third quarter fiscal
1999. Of the total increase, general and administrative expenses increased by
$1,085,000 as a result of the acquisitions made this year. General and
administrative expenses, excluding the impact of Miami Subs and Kenny Rogers
Roasters, increased by $47,000 or 4.2% primarily due to higher spending in
connection with international development of approximately $35,000, corporate
development of $28,000 and corporate insurance and occupancy costs of $23,000
which were partially offset by lower incentive compensation expense of
approximately $40,000.
Interest expense relates to the Miami Subs indebtedness as of the date of the
acquisition. Since the acquisition, Nathan's has repaid notes totaling
approximately $1,846,000 and anticipates lower interest expense in the future.
Impairment charges on notes receivable of $566,000, reflects an allowance
pursuant to SFAS No.114 - "Accounting by creditors for impairment of a loan", on
four of the Miami Subs notes receivable.
Income Tax Benefit
In the third quarter fiscal 2000, the income tax benefit was $98,000 or 30.2% of
loss before income taxes as compared to a provision of $136,000 or 24.8% of
earnings before income taxes in the third quarter fiscal 1999. The income tax
provision in the third quarter fiscal 1999 included a reduction to Nathan's
deferred tax valuation allowance of $115,000. The third quarter fiscal 1999
provision before adjustment for the valuation allowance was $251,000 or 45.8%.
-13-
<PAGE> 14
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, an adjustment to its
deferred tax valuation allowance in accordance with SFAS No. 109 "Accounting for
Income Taxes".
THIRTY-NINE WEEKS ENDED DECEMBER 26, 1999 COMPARED TO DECEMBER 27, 1998
Revenues
Total sales were $22,589,000 for the thirty-nine weeks ended December 26, 1999
("the fiscal 2000 period") as compared to $19,190,000 for the thirty-nine weeks
ended December 27, 1998 ("the fiscal 1999 period").Of the total increase, sales
increased by $4,087,000 as a result of the acquisitions made this year.
Company-owned restaurant sales of the Nathan's brand decreased 5.9% or
$1,023,000 to $16,383,000 from $17,406,000. Restaurant sales declined primarily
due to the impact of franchising two company-owned restaurants during the
current fiscal year and the closure of two company-owned units during the prior
fiscal year due to the lease expirations. The sales decline during the fiscal
2000 period resulting from these four stores is $1,226,000. Nathan's continues
to search for a suitable replacement site within the same geographic area as its
previous site in Hicksville, NY. Comparable restaurant sales of the Nathan's
brand increased slightly by 0.1% versus the fiscal 1999 period despite
experiencing weakness during the holiday season. 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. Pursuant to Miami Subs' exclusive co-branding
agreement with Arthur Treachers, Nathan's began test marketing Arthur Treachers
signature products in four company-owned restaurants during September and
October 1999. Based upon the success of these tests, Nathan's plans to extend
these co-branding efforts within company-owned units and expect to make Arthur
Treachers products available to franchisees. Sales from the Nathan's Branded
Product Program increased by 18.8% to $2,119,000 during the fiscal 2000 period
as compared to sales of $1,784,000 in the fiscal 1999 period.
Franchise fees and royalties were $4,006,000 in the fiscal 2000 period compared
to $2,533,000 in the fiscal 1999 period. Increases in franchise income resulting
from the acquisitions made this year were $1,517,000. Nathan's franchise
royalties increased by $72,000 or 3.5% to $2,123,000 in the fiscal 2000 period
as compared to $2,051,000 in the fiscal 1999 period. Franchise restaurant sales
of the Nathan's brand increased by 2.2% to $50,180,000 in the fiscal 2000 period
as compared to $49,111,000 in the fiscal 1999 period. At December 26, 1999 there
were 424 franchised or licensed restaurants within the franchise system.
Franchise fee income derived from Nathan's openings was $366,000 in the fiscal
2000 period as compared to $482,000 in the fiscal 1999 period. This decrease was
primarily attributable to the difference between the number and types of
franchised units opened between the two periods. During the fiscal 2000 period,
fourteen new Nathan's franchised or licensed units opened, including two units
in Egypt.
License royalties were $1,340,000 in the fiscal 2000 period as compared to
$1,123,000 in the fiscal 1999 period. The majority of this increase is
attributable to sales by SMG, Inc., Nathans' licensee for the sale of Nathan's
frankfurters within supermarkets and club stores.
Equity in loss of Miami Subs represents Nathans' proportionate share of Miami
Subs' net loss for the period March 1, 1999 through September 30, 1999. Included
in Miami Subs' net loss for the period were merger costs of $325,000.
Investment and other income was $569,000 in the fiscal 2000 period versus
$356,000 in the fiscal 1999 period. Increased other income attributable to the
acquisitions made this year were $240,000. During the fiscal 2000 period
Nathan's earned approximately $137,000 less interest income than the fiscal 1999
period due primarily to the reduced amount of marketable investment securities
which was partly offset due to the difference in performance of the financial
markets between the two periods.
Costs and Expenses
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<PAGE> 15
Cost of sales increased by $2,525,000 from $11,799,000 in the fiscal 1999 period
to $14,324,000 in the fiscal 2000 period. Of the total increase, cost of sales
increased by $2,890,000 as a result of the acquisitions made this year. Higher
costs of approximately $384,000 were incurred in connection with the Branded
Product Program. Restaurant cost of sales associated with the Nathan's brand
were lower due primarily to the closure of two company-owned restaurants during
the fiscal 1999 period and franchising of two company-owned units during the
fiscal 2000 period which were partly offset by the costs of operating the Kings
Plaza restaurant which was being renovated during the second quarter fiscal
1999. The Nathan's brand cost of restaurant sales was 59.1% of restaurant sales
in the fiscal 2000 period as compared to 59.9% 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 $1,119,000 from $4,431,000 in the
fiscal 1999 period to $5,550,000 in the fiscal 2000 period. Of the total
increase, restaurant operating expenses increased by $1,127,000 as a result of
the acquisitions made this year. Restaurant operating expenses associated with
the Nathan's brand were $4,424,000 during the fiscal 2000 period versus
$4,431,000 during the fiscal 1999 period. This decrease in restaurant operating
costs was due primarily to operating fewer company-owned restaurants of $266,000
and lower insurance and contract services expenses of $32,000 and $26,000,
respectively. These reductions were offset by higher costs of operating the
restaurant that was renovated last year of approximately $140,000, higher
occupancy costs of approximately $92,000 and higher marketing costs of
approximately $83,000, respectively.
Depreciation and amortization increased by $240,000 from $786,000 in the fiscal
1999 period to $1,026,000 in the fiscal 2000 period. Depreciation expense
increased as a result of the acquisitions made this year by $259,000.
Amortization of intangibles increased by $197,000 from $288,000 in the fiscal
1999 period to $485,000 in the fiscal 2000 period. This increase is due to the
amortization, based upon the preliminary purchase price allocations, of the
Kenny Rogers Roasters intellectual property acquired on April 1, 1999 and the
Miami Subs acquisition on September 30, 1999.
General and administrative expenses increased by $1,189,000 to $4,787,000 in the
fiscal 2000 period as compared to $3,598,000 in the fiscal 1999 period. Of the
total increase, general and administrative expenses increased by $1,298,000 as a
result of the acquisitions made this year. General and administrative expenses,
excluding the impact of Miami Subs and Kenny Rogers Roasters, decreased by
$109,000 or 3.0% primarily due to reduced additional compensation of
approximately $98,000.
Interest expense relates to Miami Subs indebtedness as of the date of the
acquisition. Since the acquisition, Nathan's has repaid notes totaling
approximately $1,846,000 and anticipates lower interest expense in the future.
Impairment charges on notes receivable of $566,000, reflects an allowance
pursuant to SFAS No.114 - "Accounting by creditors for impairment of a loan", on
four of the Miami Subs notes receivable.
Income Tax Provision
In the fiscal 2000 period, the income tax provision was $633,000 or 42.5% of
earnings before income taxes as compared to $562,000 or 24.4% 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
$426,000. The fiscal 1999 period provision before adjustment for the valuation
allowance was $988,000 or 43.0%.
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, an adjustment to its
deferred tax valuation allowance in accordance with SFAS No. 109 "Accounting for
Income Taxes".
-15-
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 26, 1999 aggregated $2,650,000, increasing
by $485,000 during the fiscal 2000 period. At December 26, 1999, marketable
investment securities totalled $2,911,000 and net working capital decreased to
$2,120,000 from $3,708,000 at March 28, 1999.
Cash provided by operations of $1,827,000 in the fiscal 2000 period is primarily
attributable to net income of $858,000, non-cash charges of $2,530,000,
including depreciation and amortization of $1,511,000, impairment charge on
notes receivable of $566,000, equity in loss of unconsolidated affiliate of
$163,000 and allowance for doubtful accounts of $290,000, decreases in
marketable investment securities of $357,000, a decrease in other assets of
$120,000, decreases in accounts payable and accrued expenses of $952,000, an
increase in franchise and other receivables of $843,000, an increase in
inventories of $117,000 and a decrease in deferred franchise and area
development fees of $99,000.
Cash provided by investing activities of $494,000 includes cash acquired in
connection with the Miami Subs merger of $3,429,000, net of acquisition costs,
proceeds from the sale of restaurants of $110,000 and payments received on notes
receivable of $84,000. Miamis Subs sold 5 company-owned restaurants in Dallas,
Texas for $150,000 in cash and $1,100,000 of notes. Through December 26, 1999,
Miami Subs has received cash of $110,000 and received the remaining $40,000 in
January 2000. Cash used in investing activities was $1,849,000 for the
acquisition of the intellectual property of the Kenny Rogers Roasters restaurant
system, including expenses and $1,280,000 primarily relating to the acquisition
of two Kenny Rogers Roasters restaurants and capital improvements of the
company-owned restaurants and other fixed asset additions. Nathan's plans to
invest approximately $600,000 renovating the two recently acquired Kenny Rogers
Roasters restaurants.
Cash used in financing activities of $1,836,000 represents repayments of assumed
Miami Subs notes payable. Management anticipates that it will further reduce the
amount of Miami Subs notes payable in the future.
In connection with the acquisition of Miami Subs, Nathan's is finalizing plans
to permanently close up to 20 underperforming company-owned restaurants.
Accordingly, Nathan's expects to incur estimated future cash payments,
consisting primarily of future lease payments including costs and expenses
associated with terminating such leases. At present we are unable to reasonably
estimate these total costs, however, at September 30, 1999, the minimum annual
lease payments for the affected stores was $1,750,000, with remaining lease
terms ranging from 2 years up to approximately 18 years.
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 it has not borrowed any funds to date under this line of
credit.
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. During December
1999, Nathan's concluded its own Year 2000 systems testing and did not
experience any problems with the new
-16-
<PAGE> 17
software and only minor problems with its legacy systems which were immediately
corrected. Nathan's has spent the planned expenditure of approximately $375,000
to ensure compliance of its internal systems.
Nathan's addressed the Year 2000 issue with its Point of Sale provider and
received assurance that their hardware was Year 2000 compliant and that the
software corrections already installed would make the POS systems Year 2000
compliant. To date, Nathan's is not aware of any Year 2000 problems with its POS
systems.
Nathan's has received assurances from its financial institutions that their
systems are or will be Year 2000 compliant before the end of 1999. Nathan's
contacted its key suppliers and distributors about their state of readiness and
has sought their assurances with respect to their Year 2000 compliance and
contingency plans. To date, Nathan's has not encountered any significant Year
2000 related problems with its internal systems, financial institutions,
suppliers nor distributors. Since it is early in the year, Nathan's cannot
predict the effect, if any, on any future 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 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.
-17-
<PAGE> 18
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. On February 4, 2000, the court held an evidentiary hearing. As a
result of the hearing, the court struck the class action allegations from the
plaintiff's complaint. Accordingly, the case will proceed as an individual, not
as a class action. Nathans intends to defend against this suit vigorously.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K. (Item 2) The Company filed the following
reports on Form 8-K during the period for which this report is filed.
On October 5, 1999 the Company reported on Form 8-K that it acquired all of the
outstanding shares of stock of Miami Subs Corporation in exchange for Nathan's
common stock plus warrants.
On December 3, 1999 the Company filed on Form 8-K/A (Item 7) which included the
required financial statement information that was permitted to be filed within
60 days of the underlying event that required the Form 8-K which was filed on
October 5, 1999.
On December 10, 1999 the Company reported on Form 8-K (Item 5) that it amended
its Shareholder's Rights Agreement.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATHAN'S FAMOUS, INC.
Date: February 9, 2000 By: /s/Wayne Norbitz
-------------------------------------
Wayne Norbitz
President and Chief Operating Officer
(Principal Executive Officer)
Date: February 9, 2000 By: /s/Ronald G. DeVos
-------------------------------------
Ronald G. DeVos
Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
-19-
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