FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 290549 Mark One [ x ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Act of 1934 for the quarterly period ended December 29, 1996. [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Act of 1934 for the transition period from to . Commission File Number 1-3189 NATHAN'S FAMOUS, INC. (Exact name of registrant as specified in its charter) Delaware 11-3166443 (State or other jurisdiction of (IRS employer incorporation or organization) identification number) 1400 Old Country Road, Westbury, New York 11590 (Address of principal executive offices including zip code) (516) 338-8500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No At January 31, 1997, an aggregate of 4,722,216 shares of the registrant's common stock, par value of $.01, were outstanding.
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES INDEX Page Number ------- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets - December 29, 1996 and March 31, 1996 3 Consolidated Statements of Earnings - Thirteen Weeks Ended December 29, 1996 and December 24, 1995 4 Consolidated Statements of Earnings - Thirty-nine Weeks Ended December 29, 1996 and December 24, 1995 5 Consolidated Statements of Stockholders' Equity - Thirty-nine Weeks Ended December 29, 1996 6 Consolidated Statements of Cash Flows - Thirty-nine Weeks Ended December 29, 1996 and December 24, 1995 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14
PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements NATHAN'S FAMOUS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) <TABLE> <CAPTION> December March 29, 1996 31, 1996 --------- ---------- (Unaudited) Assets <S> <C> <C> Current assets: Cash and cash equivalents including restricted cash of $280 and $280, respectively $1,899 $ 801 Marketable investment securities 6,483 6,128 Franchise and other receivables 1,342 1,108 Inventory 223 226 Prepaid income taxes 319 746 Prepaid expenses and other current assets 293 331 Deferred income taxes 571 571 ------- ------- Total current assets 11,130 9,911 Property and equipment, net 5,511 5,615 Intangible assets, net 11,737 12,025 Other assets, net 196 214 ------- ------- $28,574 $27,765 ======= ======= Current liabilities: Current maturities of long-term debt $18 $23 Accounts payable 731 1,003 Accrued expenses and other current liabilities 4,927 4,671 Deferred franchise fees 198 277 ------- ------- Total current liabilities 5,874 5,974 Long-term debt, net of current maturities 23 35 Deferred area development fees 44 200 Deferred income taxes --- --- Other Liabilities 395 414 ------- ------- Total liabilities 6,336 6,623 Stockholders' equity: Common stock, $.01 par value - 20,000,000 shares authorized, 4,722,216 issued and outstanding 47 47 Additional paid-in-capital 32,296 32,261 Accumulated deficit (10,105) (11,166) ------- ------- Total stockholders' equity 22,238 21,142 ------- ------- $28,574 $27,765 ======= ======= See accompanying notes to consolidated financial statements. </TABLE>
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS THIRTEEN WEEKS ENDED DECEMBER 29, 1996 AND DECEMBER 24, 1995 (In thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> 1996 1995 ---- ---- <S> <C> <C> Sales $5,304 $5,104 Franchise fees and royalties 862 870 License royalties 299 365 Other income 134 190 ------- ------- Total revenues 6,599 6,529 ------- ------- Costs and expenses: Cost of restaurant sales 3,262 3,205 Restaurant operating expenses 1,623 1,706 Depreciation and amortization 253 395 Amortization of intangible assets, debt issuance and pre-opening costs 107 156 General and administrative 1,030 1,052 Interest expense 1 5 ------- ------- Total costs and expenses 6,276 6,519 ------- ------- Earnings before income taxes 323 10 Provision for income taxes 137 4 ------- ------- Net earnings $ 186 $ 6 ======= ======= Net earnings per common share $ 0.04 $ 0.00 ======= ======= Weighted average number of common and common equivalent shares outstanding 4,722 4,722 ======= ======= See accompanying notes to consolidated financial statements. </TABLE>
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS THIRTY-NINE WEEKS ENDED DECEMBER 29, 1996 AND DECEMBER 24, 1995 (In thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> 1996 1995 ---- ---- <S> <C> <C> Sales $17,034 $16,389 Franchise fees and royalties 2,556 2,570 License royalties 857 1,086 Other income 486 648 ------- ------- Total revenues 20,933 20,693 ------- ------- Costs and expenses: Cost of restaurant sales 10,002 9,638 Restaurant operating expenses 5,068 5,090 Depreciation and amortization 774 1,260 Amortization of intangible assets, debt issuance and pre-opening costs 306 450 General and administrative 2,953 3,365 Interest expense 15 17 ------- ------- Total costs and expenses 19,118 19,820 ------- ------- Earnings before income taxes 1,815 873 Provision for income taxes 754 399 ------- ------- Net earnings $ 1,061 $ 474 ======= ======= Net earnings per common share $ 0.22 $ 0.10 ======= ======= Weighted average number of common and common equivalent shares outstanding 4,722 4,722 ======= ======= See accompanying notes to consolidated financial statements. </TABLE>
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY THIRTY-NINE WEEKS ENDED DECEMBER 29, 1996 (In thousands, except share amounts) (Unaudited) <TABLE> <CAPTION> Total Additional Deferred Accum- Stock- Common Common Paid in- Compen- ulated holders' Shares Stock Capital sation Deficit Equity ------- ------ ----------- --------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Balance, March 31, 1996 4,722,216 $ 47 $ 32,388 $ (127) $(11,166) $21,142 Amortization of deferred compensation relating to restricted stock 35 35 1,061 1,061 Net earnings --------- -------- --------- --------- --------- --------- Balance, Dec. 29, 1996 4,722,216 $ 47 $ 32,388 $ (92) $(10,105) $22,238 ========= ======== ========= ========= ========= ========= See accompanying notes to consolidated financial statements. </TABLE>
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THIRTY-NINE WEEKS ENDED DECEMBER 29, 1996 AND DECEMBER 24, 1995 (In thousands) (Unaudited) <TABLE> <CAPTION> 1996 1995 ---- ---- <S> <C> <C> Cash flows from operating activities: Net earnings $ 1,061 474 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 774 1,260 Amortization of intangible assets 306 450 Provision for doubtful accounts 45 83 Other 35 35 Changes in assets and liabilities: Marketable investment securities (355) (2,683) Franchise and other receivables (279) (679) Inventory 3 (273) Prepaids and other current assets 465 52 Deferred income taxes - (41) Accounts payable and accrued expenses (16) (77) Deferred franchise fees (79) 2 Other assets 18 (33) Deferred area development fees (156) (82) Other non current liabilities (19) (59) ------- ------- Net cash (used in) provided by operating activities 1,803 (1,571) ------- ------- Cash flows from investing activities: Purchase of property and equipment (688) (1,889) Purchase of franchise restaurants - (150) ------- ------- Net cash used in investing activities (688) (2,039) ------- ------- Cash flows from financing activities: Principal repayment of borrowings (17) (46) Net cash used in financing activities (17) (46) ------- ------- Net increase (decrease) in cash and cash equivalents 1,098 (3,656) Cash and cash equivalents, beginning of period 801 4,086 ------- ------- Cash and cash equivalents, end of period $1,899 $ 430 ======= ======= Cash paid / (refunded) during the period for: Interest $ 16 $ 17 Income taxes (181) 631 See accompanying notes to consolidated financial statements. </TABLE>
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 29, 1996 NOTE A - BASIS OF PRESENTATION The accompanying consolidated financial statements of Nathan's Famous, Inc. and Subsidiaries (the "Company") for the thirteen and thirty-nine week periods ended December 29, 1996 and December 24, 1995 have been prepared in accordance with generally accepted accounting principles. These financial statements include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of financial condition, results of operations and cash flows for such periods. 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 the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996. NOTE B - RECLASSIFICATIONS Certain reclassifications of prior period balances have been made to conform to the December 29, 1996 presentation. NOTE C - EARNINGS PER SHARE Weighted average common shares outstanding for the thirteen and thirty-nine weeks ended December 29, 1996 and December 24, 1995 were 4,722,216. There were no common stock equivalents for the thirteen and thirty-nine weeks ended December 29, 1996 and December 24, 1995.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Thirteen weeks ended December 29, 1996 compared to December 24, 1995 Revenues Company-owned restaurant sales increased 3.9% or $200,000 to $5,304,000 for the thirteen weeks ended December 29, 1996 ("third quarter fiscal 1997") from $5,104,000 for the thirteen weeks ended December 24, 1995 ("third quarter fiscal 1996"). The Company opened one new unit during the current fiscal year which generated sales of $122,000 during the third quarter fiscal 1997. Comparable unit sales (units operating for 18 months or longer as of the beginning of the current fiscal year) increased $118,000 or 2.8% during the quarter. Throughout the third quarter fiscal 1997, the Company continued to focus on its aggressive local store marketing campaigns and value pricing strategy in order to address the competitive environment. In March 1996, the Company completed the renovation of two of its larger restaurants and since that time has experienced sales increases at such stores. Plans are currently being developed to renovate and modernize the appearance of certain other Company-owned units. At December 29, 1996 and December 24, 1995, there were 26 and 27 Company-owned units, respectively. Franchise fees and royalties decreased by $8,000 or 0.9% to $862,000 in the third quarter fiscal 1997 compared to $870,000 in the third quarter fiscal 1996. Franchise royalties decreased by $4,000 or 0.6% to $689,000 in the third quarter fiscal 1997 as compared to $693,000 in the third quarter fiscal 1996. Franchisee sales upon which royalties are based decreased to $17,128,000 in the third quarter fiscal 1997 as compared to $17,587,000 in the third quarter fiscal 1996 due primarily to lower comparable sales which were partially offset by sales from the new units opened during the current fiscal year. At December 29, 1996 there were 180 franchise units as compared to 176 at December 24, 1995. Franchise fee income was $173,000 in the third quarter fiscal 1997 as compared to $177,000 in the third quarter fiscal 1996. During the third quarter fiscal 1997 franchisees and licensees opened 7 new units as compared to 10 new units opened during the third quarter fiscal 1996. Franchise fees earned during fiscal 1996 also included revenue earned from a non refundable deposit associated with the sale of certain exclusive rights for development within Russia. License royalties decreased by $66,000 or 18.1% to $299,000 in the third quarter 1997 as compared to $365,000 in the third quarter fiscal 1996. This decrease primarily results from the Company no longer amortizing the deferred fee received from SMG, Inc., in connection with their license agreement for the sale of Nathan's frankfurters in supermarkets. The amortization period concluded in February 1996. Other income decreased to $134,000 in the third quarter fiscal 1997 from $190,000 in the third quarter fiscal 1996 primarily due to reduced investment income.
Costs and Expenses Cost of restaurant sales increased by $57,000 from $3,205,000 in the third quarter fiscal 1996 to $3,262,000 in the third quarter fiscal 1997. As a percentage of restaurant sales, cost of restaurant sales decreased to 61.5% in the third quarter fiscal 1997 as compared to 62.8% in the third quarter fiscal 1996 due principally to the net impact of higher percentage costs of food and paper resulting from the Company's marketing strategies which were offset by reduced labor and benefit costs as a percentage of restaurant sales. Restaurant operating expenses decreased as a percentage of restaurant sales from 33.4% in the third quarter fiscal 1996 to 30.6% in the third quarter fiscal 1997. This decrease primarily resulted from the benefit derived from closing two unprofitable restaurants in the first quarter of fiscal 1997. Depreciation and amortization decreased by $142,000 or 35.9% from $395,000 in the third quarter fiscal 1996 to $253,000 in the third quarter fiscal 1997. Amortization of intangibles, debt issuance and pre-opening costs decreased by $49,000 or 31.4% from $156,000 in the third quarter fiscal 1996 to $107,000 in the third quarter fiscal 1997. These decreases are primarily attributable to the reduced depreciation and amortization expense resulting from the implementation of Financial Accounting Standards Board Statement No. 121 during the fourth quarter of fiscal 1996. General and administrative expenses decreased by $22,000 or 2.1% to $1,030,000 in the third quarter fiscal 1997 as compared to $1,052,000 in the third quarter fiscal 1996. This decrease partially results from corporate staff reductions made during fiscal 1997. As a percentage of total revenues, general & administrative costs for the third quarter fiscal 1997 were 15.6% as compared to 16.1% for the third quarter fiscal 1996. Income Tax Provision In the third quarter fiscal 1997, the income tax provision was $137,000 or 42.4% of income before income taxes. In the third quarter fiscal 1996, the income tax provision was $4,000 or 40.0% of income before income taxes. Thirty-nine weeks ended December 29, 1996 compared to December 24, 1995 Revenues Restaurant sales increased 3.9% or $645,000 to $17,034,000 for the thirty-nine weeks ended December 29, 1996 ("fiscal 1997") from $16,389,000 for the thirty-nine weeks ended December 24, 1995 ("fiscal 1996"). The Company opened one new unit during fiscal 1997 which generated sales of $270,000. Comparable unit sales (units operating for 18 months or longer as of the beginning of the current fiscal year) declined $61,000 or 0.4% during the period. Sales continue to be challenged by the discount strategies of the Company's principal competitors, increased competition and certain external factors affecting specific restaurants. During fiscal 1997, the Company has implemented a more aggressive local store marketing campaign and value pricing strategy in order to address the sales softness. In March 1996, the Company completed the renovation of two of its larger restaurants and has experienced sales increases at such stores thus far. Plans are currently being developed to renovate and modernize the appearance of certain other Company-owned units.
Franchise fees and royalties decreased by $14,000 or 0.5% to $2,556,000 in fiscal 1997 compared to $2,570,000 in fiscal 1996. Franchise royalties declined to $2,005,000 in fiscal 1997 as compared to $2,050,000 in fiscal 1996, representing a decrease of 2.2% or $45,000. Franchise restaurant sales upon which royalties are based decreased to $50,293,000 in fiscal 1997 as compared to $52,213,000 in fiscal 1996 primarily due to lower comparable sales which were partially offset by sales from the new units opened during the current fiscal year. Franchise fee income increased to $551,000 in fiscal 1997 as compared to $520,000 in fiscal 1996. During fiscal 1997, franchisees and licensees opened 29 new units versus fiscal 1996 in which 30 new units were opened. Higher franchise fees were earned during fiscal 1997 as compared to fiscal 1996 due primarily to the higher recognition of fees associated with expired development agreements. Franchise fees earned during fiscal 1996 also included revenue earned from a non refundable deposit associated with the sale of certain exclusive rights for development within Russia. License royalties decreased by $229,000 or 21.1% to $857,000 in fiscal 1997 as compared to $1,086,000 in fiscal 1996. The majority of this decrease results from the Company no longer amortizing the deferred fee received from SMG, Inc., in connection with their license agreement for the sale of Nathan's frankfurters in supermarkets. The amortization period concluded in February 1996. Other income decreased to $486,000 in fiscal 1997 from $648,000 in fiscal 1996 primarily due to reduced investment income. Costs and Expenses Cost of restaurant sales increased by $364,000 from $9,638,000 in fiscal 1996 to $10,002,000 in fiscal 1997. This increase primarily results from costs associated with operating different units during fiscal 1997. As a percentage of restaurant sales, the cost of restaurant sales decreased to 58.7% in fiscal 1997 as compared to 58.8% in fiscal 1996 due principally to the net impact of higher percentage costs of food and paper resulting from the Company's marketing strategies which were offset by lower labor and benefit costs as a percentage of sales. Restaurant operating expenses decreased as a percentage of restaurant sales from 31.1% in fiscal 1996 to 29.8% in the fiscal 1997. This decrease primarily resulted from the benefit derived from closing two unprofitable restaurants in the first quarter of fiscal 1997. Depreciation and amortization decreased by $486,000 or 38.6% from $1,260,000 in fiscal 1996 to $774,000 in fiscal 1997. Amortization of intangibles, debt issuance and pre-opening costs decreased by $144,000 or 32.0% from $450,000 in fiscal 1996 to $306,000 in fiscal 1997. These decreases are primarily attributable to the reduced depreciation and amortization expense resulting from the implementation of Financial Accounting Standards Board Statement No. 121 during the fourth quarter of fiscal 1996. General and administrative expenses decreased by $412,000 or 12.2% to $2,953,000 in fiscal 1997 as compared to $3,365,000 in fiscal 1996. This decrease partially results from corporate staff reductions made during fiscal 1996 and the first quarter fiscal 1997. Additionally, certain one-time benefits and timing differences further lowered general and administrative expenses for fiscal 1997. As a percentage of total revenues, general and administrative costs for fiscal 1997 were 14.1% as compared to 16.3% in fiscal 1996.
Income Tax Provision In fiscal 1997 the income tax provision was $754,000 or 41.5% of income before income taxes. In fiscal 1996 the income tax provision was $399,000 or 45.7% of income before income taxes. The fiscal 1997 tax rate has been reduced to reflect the Company's estimated effective state tax rate. Liquidity and Capital Resources Cash and cash equivalents at December 29, 1996 aggregated $1,899,000, increasing by $1,098,000 during fiscal 1997. At December 29, 1996, marketable investment securities totalled $6,483,000 and net working capital increased to $5,256,000 from $3,937,000 at March 31, 1996. Cash provided by operations of $1,791,000 in fiscal 1997 is primarily attributable to net income of $1,061,000, non-cash charges of $1,160,000, including depreciation and amortization of $1,080,000, a decrease in prepaids and other current assets of $465,000, increases in marketable investment securities of $355,000, and franchise and other receivables of $279,000 and decreases in deferred area development fees and deferred franchise fees of $156,000 and $79,000, respectively. Cash used in investing activities of $688,000 represents property and equipment purchases relating to the construction of a new Company-owned unit which opened in July 1996, and other fixed asset additions. Management believes that available cash, marketable investment securities, and internally generated funds should provide sufficient capital for its planned operations and expansion program through fiscal 1997. The Company also maintains a $5,000,000 uncommitted bank line of credit. The Company has not borrowed any funds to date under this line of credit.
PART II. OTHER INFORMATION Item 1: Legal Proceedings CSX Transportation v. Nathan's et al. The Company has been named as one of several "generator defendants" in an action brought by CSX Transportation, Inc. ("CSX") and Staten Island - Arlington, Inc. ("Arlington") in the Supreme Court of the State of New York, County of New York. According to the complaint, CSX, through its wholly owned subsidiary, Arlington, owned certain property in Staten Island (the "Arlington Yard") which, according to the complaint, during the period May 15, 1988 through September 14, 1988 was the site of illegal solid waste dumping activity allegedly orchestrated by certain defendants convicted of such activity in United States v. Paccione, et al. (the "Paccione Defendants"). Pursuant to an Order on Consent into which CSX alleges it entered with the NYS Dept. of Environmental Conservation ("DEC"), CSX undertook to remediate the site and to reimburse the DEC for amounts expended in connection with a preliminary investigation of the site. CSX is now suing several "transporter defendants" (ie., those who allegedly had wastes generated by them transported to Arlington Yard), for damages and injunctive relief based upon various theories of law, including private and public nuisance, restitution, equitable indemnity and trespass. The Company has filed an answer in which it denied generally involvement with the site and perforce, any liability to the plaintiffs under the theories advanced, asserted affirmatively several legal and equitable defenses to liability in these circumstances, and alternatively, interposed cross claims for contribution against other defendants. Item 6: Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Modification Agreement to the Employment Agreement between the Company and Wayne Norbitz dated December 28, 1992. 10.2 Amendment to License Agreement dated as of February 28, 1994, among Nathan's Famous Systems, Inc. and SMG, Inc., including waivers and amendments thereto. (b) No reports on Form 8-K were filed during the quarter ended December 29, 1996.
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 4, 1997 By: /s/ Wayne Norbitz Wayne Norbitz President and Chief Operating Officer (Principal Executive Officer) Date: February 4, 1997 By: /s/ Ronald DeVos Ronald DeVos Vice President - Finance and Chief Financial Officer