NATHANS FAMOUS INC - 10-Q - 19990810 - MANAGEMENT_ANALYSIS
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION
On November 25, 1998, Nathan's acquired 8,121,000 shares, or approximately 29.9%
of the outstanding common stock, of Miami Subs Corporation for $4,200,000,
excluding transaction costs, and entered into a non-binding letter of intent
which contemplated the acquisition of the remaining outstanding shares of Miami
Subs. After giving effect to Miami Subs one-for-four reverse stock split in
January 1999, Nathan's now owns 2,030,250 shares of Miami Subs common stock. On
January 15, 1999, Nathan's and Miami Subs entered into a definitive merger
agreement under which Nathan's is expected to acquire the remaining outstanding
shares of Miami Subs in exchange for approximately 2,319,000 shares of Nathan's
common stock and warrants to acquire approximately 580,000 shares of Nathan's
common stock at a price of $6.00 per share. The merger is subject to certain
conditions, including approval by a majority of the stockholders of Nathan's and
Miami Subs. On June 30, 1999, Nathan's and Miami Subs successfully completed
their due diligence.
RESULTS OF OPERATIONS
Thirteen weeks ended June 27, 1999 compared to June 28, 1998
Revenues
Total sales increased $40,000 to $6,608,000 for the thirteen weeks ended June
27, 1999 ("first quarter fiscal 2000") from $6,568,000 for the thirteen weeks
ended June 28, 1998 ("first quarter fiscal 1999"). Company-owned restaurant
sales decreased 4.1% or $248,000 to $5,744,000 from $5,992,000. Restaurant sales
declined because two Company-owned restaurants were closed during fiscal 1999
due to the expiration of the leases for the locations.. These two stores
generated sales and profits of $460,000 and $105,000, respectively, during the
first quarter of fiscal 1999. At June 27, 1999 there were 25 company-owned units
as compared to 27 units at June 28, 1998. Comparable unit sales (units operating
for 18 months or longer as of the beginning of the fiscal year)
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increased 3.6% in the first quarter fiscal 2000 versus the first quarter fiscal
1999. The Company continues to emphasize local store marketing activities, new
product introductions and value pricing strategies. These activities are being
complimented by a regional newsprint campaign during the summer of 1999. Sales
from the Branded Product Program increased by 50.0% to $864,000 for the first
quarter fiscal 2000 as compared to sales of $576,000 in the first quarter fiscal
1999.
Franchise fees and royalties increased by $225,000 or 30.5% to $963,000 in the
first quarter fiscal 2000 compared to $738,000 in the first quarter fiscal 1999.
Franchise royalties increased by $148,000 to $786,000 in the first quarter
fiscal 2000 as compared to $638,000 in the first quarter fiscal 1999. Royalties
earned from the recently acquired Kenny Rogers Roasters restaurant system were
approximately $144,000 in the first quarter fiscal 2000. Franchise restaurant
sales of the Nathan's brand, were $15,538,000 in the first quarter fiscal 2000
as compared to $15,598,000 in the first quarter fiscal 1999. At June 27, 1999
there were 163 franchised or licensed restaurants within the Nathan's franchise
system as compared to 158 at June 28, 1998. Franchise fee income was $177,000 in
the first quarter fiscal 2000 as compared to $100,000 in the first quarter
fiscal 1999.This increase was primarily attributable to the difference between
expired franchise fees recognized between the two years. During the first
quarter fiscal 2000, 5 new Nathan's franchised or licensed units opened.
License royalties were $406,000 in the first quarter fiscal 2000 as compared to
$381,000 in the first quarter fiscal 1999.
Investment and other income was $97,000 in the first quarter fiscal 2000 versus
$134,000 in the first quarter fiscal 1999. Approximately $50,000 of the decrease
resulted from lower earnings from the reduced face value of marketable
investment securities and the difference in performance of the financial markets
between the two years.
Costs and Expenses
Cost of sales increased by $72,000 from $4,008,000 in the first quarter fiscal
1999 to $4,080,000 in the first quarter fiscal 2000. Higher costs were incurred
due to the growth of the Branded Product Program and the increase in comparable
store sales which were offset by the closure of two Company-owned restaurants.
The cost of restaurant sales was 58.1% of restaurant sales in the first quarter
fiscal 2000 as compared to 59.6% of restaurant sales in the first quarter fiscal
1999. The decrease, as a percentage of restaurant sales, is due primarily to,
increases in the Company's average check over the prior year without
proportionate percentage increases in direct costs resulting from the Company's
promotional activities. The Company 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 $78,000 from $1,451,000 in the first
quarter fiscal 1999 to $1,529,000 in the first quarter fiscal 2000. This
increase is primarily attributed to higher store marketing expenses of $64,000,
higher occupancy costs of $41,000 at a restaurant that was renovated last year
and a fiscal 1999
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property tax recovery of $30,000. Restaurant operating costs for the two closed
restaurants were $78,000 for the first quarter of fiscal 1999.
Depreciation and amortization increased by $5,000 or 2.0% from $254,000 in the
first quarter fiscal 1999 to $259,000 in the first quarter fiscal 2000.
Amortization of intangibles increased by $17,000 or 17.7% from $96,000 in the
first quarter fiscal 1999 to $113,000 in the first 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 $35,000 or 2.8% to $1,283,000
in the first quarter fiscal 2000 as compared to $1,248,000 in the first quarter
fiscal 1999. Approximately $98,000 of incremental expenses were incurred in the
first quarter fiscal 2000 associated with Kenny Rogers Roasters. The Company
plans to increase quarterly spending throughout the balance of the year in
connection with research & 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 $63,000 or 5.1% primarily due to
lower spending in connection with international development of approximately
$25,000, reduced additional compensation of approximately $22,000 and lower
corporate insurance of approximately $9,000.
Income Tax Provision
In the first quarter fiscal 2000, the income tax provision was $341,000 or 42.1%
of earnings before income taxes as compared to $189,000 or 24.8% of earnings
before income taxes in the first quarter fiscal 1999. The income tax provision
in the first quarter fiscal 1999 included a reduction to the Company's deferred
tax valuation allowance of $136,000. The first quarter fiscal 1999 provision
before adjustment for the valuation allowance was $325,000 or 42.5%.
Management of the Company 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 June 27, 1999 aggregated $1,600,000, decreasing by
$565,000 during the fiscal 2000 period. At June 27, 1999, marketable investment
securities totalled $3,296,000 and net working capital decreased to $2,668,000
from $3,708,000 at March 28, 1999.
Cash provided by operations of $1,452,000 in the fiscal 2000 period is primarily
attributable to net income of $469,000, non-cash charges of $390,000, including
depreciation and amortization of $372,000, decreases in
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prepaid and other current assets of $144,000, a decrease in other assets of
$135,000, increases in accounts payable and accrued expenses of $724,000, an
increase in franchise and other receivables of $248,000 and a decrease in
deferred franchise fees of $86,000.
Cash used in investing activities of $2,017,000 includes $1,849,000 for the
acquisition of the intellectual property of the Kenny Rogers Roasters restaurant
system and $168,000 primarily relating to capital improvements of the
Company-owned restaurants 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 2000. 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.
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 has notified its franchisees,
in the most recent monthly franchise mailing, 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
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truck. Nathan's expects to conclude evaluating this Year 2000 risk by the end of
September 1999 and thereafter will develop 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 the Company'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 the Company'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 the Company's ability to attract competent
restaurant, and managerial personnel.
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Assignment and Assumption of "Kenny Rogers Roaster" Franchise
Agreements, Master Development Agreements, and Intellectual Property.
(b) No reports on Form 8-K were filed during the quarter ended June 27,
1999.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATHAN'S FAMOUS, INC.
Date: August 9, 1999 By: /s/ Wayne Norbitz
------------------------------------------------
Wayne Norbitz
President and Chief Operating Officer
(Principal Executive Officer)
Date: August 9, 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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ASSIGNMENT AND ASSUMPTION OF
"KENNY ROGERS ROASTERS" FRANCHISE AGREEMENTS,
MASTER DEVELOPMENT AGREEMENTS, AND
INTELLECTUAL PROPERTY
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (the "AGREEMENT") is made and
entered into as of this 31st day of March 1999 (the "EFFECTIVE DATE"), by and
among ROASTERS CORP. and ROASTERS FRANCHISE CORP., Florida corporations, with
their principal office located at 6600 N. Andrews Drive, Suite 160, Ft.
Lauderdale, Florida 33309 (collectively the "DEBTORS"), and NF-ROASTERS
CORPORATION, a Delaware corporation with its principal office located at 1400
Old Country Road, Westbury, New York 11590 (the "COMPANY").
R E C I T A L S :
A. WHEREAS, On March 24, 1998, Roasters Corp. filed a voluntary
petition under Chapter 11 of the Bankruptcy Code, and its wholly owned
subsidiary, Roasters Franchise Corp., filed a voluntary petition under Chapter
11 of the Bankruptcy Code on May 6, 1998. The petitions were filed in the United
States Bankruptcy Court for the Middle District of North Carolina (the
"BANKRUPTCY COURT").
B. WHEREAS, On March 3, 1999, the Bankruptcy Court entered an order
confirming the First Amended Franchisee Plan of Reorganization dated January 15,
1999, as amended (the "PLAN"), and such order is now a final order which has not
been stayed and is no longer subject to review, reversal, modification or
amendment by appeal (the "CONFIRMATION ORDER").
C. WHEREAS, Pursuant to Section 3.5(b) of the Plan and paragraph 22 of
the Confirmation Order, the Debtors are authorized to assume and assign to the
Company the Kenny Rogers Roasters Franchise Agreements and Master Development
Agreements for the franchisees operating "Kenny Rogers Roasters" franchised
restaurants at the locations listed in Exhibit A attached hereto and
incorporated herein by reference (collectively, the "FRANCHISE AGREEMENTS").
D. WHEREAS, Each franchisee under the Franchise Agreements has
heretofore executed a Release in which the franchisee has: (i) consented to the
assumption and assignment of its respective franchise agreement; (ii) waived any
claims which such franchisee may have against the Debtors or the consolidated
estate arising in, arising under or related to its respective franchise
agreement; (iii) acknowledged that any default under the Franchise Agreement has
been cured; (iv) waived any requirement that the Debtors or the Company provide
adequate assurance of future performance under the Franchise Agreement; and (v)
consented to the assumption and assignment of its franchise agreement to the
Company.
E. WHEREAS, Each franchisee listed in Exhibit A has heretofore executed
a Uniform Amendment (or an "Amended and Restated Franchise Agreement") for each
of the franchised restaurants listed in Exhibit A
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F. WHEREAS, On March 3, 1999, the Bankruptcy Court appointed Mark
Gillis as Chapter 11 Liquidating Trustee (the "TRUSTEE") for the purpose of
facilitating the implementation and consummation of the Plan, and such Trustee
is now duly qualified and acting in such capacity.
NOW, THEREFORE, for good and valuable consideration, the sufficiency
and receipt of which are hereby acknowledged, the parties agree as follows:
1. Assumption. The Debtors, in accordance with and pursuant to Section 3.5(b) of
the Plan and the Releases heretofore executed by the respective franchisees,
hereby assume the Franchise Agreements.
2. Assignment of the Franchise Agreements. The Debtors, for good and valuable
consideration, and subject to the terms of the Plan and Confirmation Order, do
hereby assign and transfer to the Company all rights of the Debtors under the
Franchise Agreements, excluding and reserving therefrom the following: (i) the
right of the Debtors to receive and collect from the franchisees the amount of
post-petition franchise fees and royalties (as defined in the Plan) as
determined by the Bankruptcy Court or agreed upon by the parties as remaining
due and owing the Debtors; and (ii) the right to collect pre-petition franchise
fees and royalty fees owed to the Debtors by each such franchisee if the
franchisee fails to timely pay all post-petition franchise or royalty fees as
provided for under the Plan.
3. Assignment of the Intellectual Property. The Debtors, for good and valuable
consideration, and subject to the terms of the Plan and Confirmation Order, do
hereby assign and transfer to the Company all of the Debtors' intellectual
property, including without limitation any and all:
a. common law and unregistered trademarks and service marks (as well as
the goodwill associated with said trademarks and service marks)
b. trademark and service mark registrations (including but not limited
to the registrations listed in Exhibit B to this Agreement);
c. copyrights,
d. trade secrets,
e. patents, patent applications, and patent applications in process,
f. Internet domain names and Internet web pages,
g. recipes,
h. manuals, and
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i. advertising (whether in preparation, complete, or held for the
Debtors by one or more vendors, such as advertising agencies, creative agencies,
or other parties).
4. Assignment of the Advertising Fund. The Debtors, for good and valuable
consideration, and subject to the terms of the Plan and Confirmation Order:
a. Shall within ten (10) business days pay to the
Company the sum of Ninety Thousand Seven Hundred and
Eighteen Dollars and Four Cents ($90,718.04),
representing the sum of:
i. The post-petition payments of advertising
fund fees already made to the Debtors, less
amounts expended for such purposes; and
ii. All the funds on deposit in the advertising
fund account as of March 24, 1998, less
pro-rata portions of the fees, costs, or
distributions made by Barnett Bank from the
aggregate funds in the Debtors' garnish
accounts; and
b. Hereby assign and shall promptly upon receipt transfer to the
Company all funds hereafter collected from franchisees and other parties for, or
on account of, the advertising fund is, and shall be, Company's property, and
the Debtors shall promptly remit such collections to the Company for deposit
into the Kenny Rogers Roasters advertising fund. Debtors further authorize the
Company to collect overdue advertising fund contributions and other overdue sums
to be deposited into the Kenny Rogers Roasters advertising fund (accrued for
periods prior to today's date), subject only to the requirement that the Company
notify the Debtors in writing that such collections have been made.
5. Assignment of the Kenny Rogers License Agreement. The Debtors do hereby
assume and, for good and valuable consideration and subject to the terms of the
Plan and Confirmation Order, do hereby assign and transfer to the Company, all
of the Debtors' right, title, and interest in and to that certain license
agreement dated April 5, 1993, by and between Mr. Kenny Rogers, as licensor, and
Debtors' predecessor (Roasters Ltd.), as licensee.
6. Additional Documents. The Debtors agree that they shall, upon reasonable
request by the Company, execute such documents as the Company may deem
reasonably necessary in order to implement the terms of this Agreement.
7. Payment. On or before April 1, 1999, the Company shall remit to the Debtors
the sum of One Million Two Hundred and Fifty Thousand Dollars ($1,250,000).
8. Performance of Duties. The Company hereby assumes and agrees to perform all
of the Debtors' obligations under the Franchise Agreements as of the Effective
Date and shall indemnify and hold harmless the Debtors, from and against any
claim or demand made thereunder arising out of the Company's performance of, or
failure to perform, on or after the Effective Date.
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9. Counterparts and Faxed Signatures. This Agreement may be signed in
counterparts, and the parties agree that their signatures may be exchanged by
fax, and that a copy of this Agreement with such signatures shall be deemed an
original copy hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
ROASTERS CORP.
By: /s/ Mark Gillis
Mark Gillis, Chapter 11 Liquidating Trustee
ROASTERS FRANCHISE CORP.
By: /s/ Mark Gillis
Mark Gillis, Chapter 11 Liquidating Trustee
NF ROASTERS CORPORATION
By: /s/ Richard E. Buckley
Name: Richard E. Buckley
Title: President
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EXHIBIT A
FRANCHISEE STATE CITY
FEW, LLC AK Anchorage
Best Roasters, Inc., The AL Hoover
Carter Investment Co. AL Mobile
Carter Investment Co. AL Montgomery
Valley Roasters II, Inc. of CA CA Burbank, N. San Fernando Rd.
Valley Roasters III, Inc. CA Burbank, West Alameda Ave.
KR Roasters LP (Montelone Co.) CA Corona
Shin, Jay: Hollywood Roasters, LLC CA Hollywood, N. Highland Ave.
Shin, Jay: Lakewood Roasters, LLC CA Lakewood, Faculty St.
Soudani, Ahmad CA Los Angeles, Wilshire Blvd.
KR Roasters LP (Montelone Co.) CA Palm Desert
Shin, Jay: Reseda Roasters LLC CA Reseda (Reseda Blvd.)
IFCC, Inc. CA Santa Barbara
Shin, Jay: Temple Roasters LLC CA Temple, Rosemead Blvd.
Debard , Inc. CA West Hills (Vanowen St.)
MSK Enterprises FL Pembroke Pines
(12630 Pines Blvd.)
MSK Enterprises FL Pembroke Pines
(184th S.W Pines Blvd.)
Lion's Share Productions, Inc. (Kenny Rogers) GA Athens (2440 W. Broad St.)
Idaho Roasters, Inc. ID Boise (N. Milwaukee Ave.)
Idaho Roasters, Inc. ID Boise (Broadway Ave.)
Gem State Roasters ID Idaho Falls
Idaho Roasters, Inc. ID Nampa
Midwest Investors Limited Partnership, II IL Peoria
Teri Entertainment IL Rockford
Midwest Investors Limited Partnership, II IL Springfield
JPB Restaurant Concepts, II, Inc. MD Bel Air
JPB Restaurant Concepts, V, Inc. MD Cockeysville
JPB Restaurant Concepts, III, Inc. MD Ellicott
JPB Restaurant Concepts, IV, Inc. MD Frederick
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FRANCHISEE STATE CITY
JPB Restaurant Concepts, I, Inc. MD Laurel
JPB Restaurant Concepts, VI, Inc. MD Whitemarsh
Donmark, Inc MI Flint (Linden Rd,)
Chicken Chateau MI Saginaw
Rogers Nevada NV Henderson
Rogers Nevada NV Las Vegas (Fair Center Pkwy.)
Rogers Nevada NV Las Vegas (Rainbow Blvd.)
Rogers Nevada NV Las Vegas (Sahara Ave.)
Rogers Nevada NV Pahrump
Roasters of Long Island NY Commack
Roasters of Long Island NY East Meadow
Roasters of Long Island NY Huntington Station
Roasters of Long Island NY Rockville Center
Roasters of Long Island NY Selden
David Vance Group OH Akron
Cascade Hospitality, Inc. OR Springfield
Utah Roasters UT Orem
Utah Roasters UT St. George
Fox Valley Roasters, LLC WI Appleton (Northland Ave.)
Badger Roasters, LLC WI Appleton (W. Wisconsin Ave.)
Wisconsin Roasters, LLC WI Milwaukee
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