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NATH > SEC Filings for NATH > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for NATHANS FAMOUS INC


9-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Statements in this Form 10-Q annual report may be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These risks and uncertainties, many of which are not within our control, include but are not limited to: economic, weather (including the continued impact of Hurricane Sandy and the draught in the Midwest which has caused an increase in corn pricing), legislative and business conditions; the collectibility of receivables; changes in consumer tastes; the status of our licensing and supply agreements, including the impact of a new supply agreement for hot dogs with John Morrell & Co. and the termination in 2014 of our existing hot dog supply agreement with SMG; the ability to continue to attract franchisees; no material increases in the minimum wage; our ability to attract competent restaurant and managerial personnel; and the future effects of any food borne illness; such as bovine spongiform encephalopathy, BSE; as well as those risks discussed from time to time in this Form 10-K annual report for the year ended March 31, 2013, and in other documents which we file with the Securities and Exchange Commission. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. We generally identify forward-looking statements with the words "believe," "intend," "plan," "expect," "anticipate," "estimate," "will," "should" and similar expressions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q.

Introduction

As used in this Report, the terms "we", "us", "our", "Nathan's" or the "Company" mean Nathan's Famous, Inc. and its subsidiaries (unless the context indicates a different meaning).

We are engaged primarily in the marketing of the "Nathan's Famous" brand and the sale of products bearing the "Nathan's Famous" trademarks through several different channels of distribution. Historically, our business has been the operation and franchising of quick-service restaurants featuring Nathan's World Famous Beef Hot Dogs, crinkle-cut French-fried potatoes, and a variety of other menu offerings. Our Company-owned and franchised units operate under the name "Nathan's Famous," the name first used at our original Coney Island restaurant opened in 1916. Nathan's product licensing program began in 1978 by selling packaged hot dogs and other meat products to retail customers through supermarkets or grocery-type retailers for off-site consumption. During fiscal 1998, we introduced our Branded Product Program, which currently enables foodservice retailers and others to sell some of Nathan's proprietary products outside of the realm of a traditional franchise relationship. In conjunction with this program, purchasers of Nathan's products are granted a limited use of the Nathan's Famous trademark with respect to the sale of the purchased products, including Nathan's World Famous Beef Hot Dogs, certain other proprietary food items and paper goods. During fiscal 2008, we launched our Branded Menu Program, which is a limited franchise program, under which foodservice operators may sell a greater variety of Nathan's Famous menu items than under the Branded Product Program.

Our revenues are generated primarily from selling products under Nathan's Branded Product Program, operating Company-owned restaurants, franchising the Nathan's restaurant concept (including the Branded Menu Program) and licensing agreements for the sale of Nathan's products within supermarkets and club stores, the sale of Nathan's products directly to other foodservice operators and the manufacture of certain proprietary spices by third parties.

In addition to plans for expansion through our Branded Product Program, franchising and licensing, Nathan's continues to seek to co-brand within its restaurant system. Nathan's is also the owner of the Arthur Treacher's brand. At June 30, 2013, the Arthur Treacher's brand was being sold within 53 Nathan's restaurants.

At June 30, 2013, our restaurant system consisted of 310 Nathan's franchised units, including 131 Branded Menu units, and five Company-owned units (including one seasonal unit), located in 28 states, the Cayman Islands and nine foreign countries. At June 24, 2012, our restaurant system consisted of 307 Nathan's franchised units, including 127 Branded Menu units, and five Company-owned units (including one seasonal unit), located in 26 states, the Cayman Islands and seven foreign countries.

As described in our Annual Report on Form 10-K for the year ended March 31, 2013, our future results could be impacted by many developments including that the terms of our next primary license agreement for hot dogs may be more favorable, although there can be no assurance thereof, than our agreement with SMG which is scheduled to expire on February 28, 2014. In addition, our future operating results could be impacted by the record high corn prices, as a result of the drought in the Midwest, which could significantly increase the cost of beef.

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Critical Accounting Policies and Estimates

As discussed in our Form 10-K for the fiscal year ended March 31, 2013, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies and estimates relate to revenue recognition; impairment of goodwill and other intangible assets; impairment of long-lived assets; share-based compensation and income taxes (including uncertain tax positions). Since March 31, 2013, there have been no changes in our critical accounting policies or significant changes to the assumptions and estimates related to them.

Recently Issued Accounting Pronouncements Not Yet Adopted

There are no recently issued accounting pronouncements that have not yet been adopted that are expected, when adopted, to have a material impact on the consolidated financial statements or notes thereto.

Results of Operations

Thirteen weeks ended June 30, 2013 compared to thirteen weeks ended June 24, 2012

Revenues

Total sales increased by 2.9% to $16,880,000 for the thirteen weeks ended June 30, 2013 ("fiscal 2014 period") as compared to $16,405,000 for the thirteen weeks ended June 24, 2012 ("fiscal 2013 period"). Foodservice sales from the Branded Product and Branded Menu Programs increased by 11.3% to $13,141,000 for the fiscal 2014 period as compared to sales of $11,806,000 in the fiscal 2013 period. This increase was primarily attributable to a 10.5% increase in the volume of products ordered and the impact of a slight shift in the sales mix of products sold as compared to the fiscal 2013 period. Total Company-owned restaurant sales decreased by $862,000 to $3,726,000 during the fiscal 2014 period compared to $4,588,000 during the fiscal 2013 period. This decrease was primarily attributed to the sales decline at our Flagship Coney Island restaurant which operated for approximately 5 weeks during the fiscal 2014 period as compared to 13 weeks during the fiscal 2013. Additionally, our Yonkers restaurant, which has been closed for redevelopment since December 2012, negatively impacted our sales results. The comparative sales impact from both restaurants due to the closed periods was approximately $1,400,000. Since reopening, sales at our Flagship Coney Island restaurant for the last five weeks of the fiscal 2014 period were approximately 19% higher than the last five weeks of the fiscal 2013 period. Sales during the fiscal 2014 period at our seasonal Boardwalk restaurant in Coney Island were approximately 35% higher than the fiscal 2013 period, although there can be no assurance as to the continuation of these trends.

Franchise fees and royalties were $1,347,000 in the fiscal 2014 period as compared to $1,430,000 in the fiscal 2013 period. Total royalties were $1,257,000 in the fiscal 2014 period as compared to $1,281,000 in the fiscal 2013 period. Royalties earned under the Branded Menu program were $252,000 in the fiscal 2014 period as compared to $241,000 in the fiscal 2013 period due principally to the additional units in operation. Royalties earned under the Branded Menu Program are not based upon a percentage of restaurant sales but are based upon product purchases. Traditional franchise royalties were $1,005,000 in the fiscal 2014 period as compared to $1,040,000 in the fiscal 2013 period. Franchise restaurant sales decreased to $22,590,000 in the fiscal 2014 period as compared to $23,377,000 in the fiscal 2013 period primarily due to the decline in sales at our comparable restaurants. Comparable domestic franchise sales (consisting of 124 Nathan's outlets, excluding sales under the Branded Menu Program) were $17,404,000 in the fiscal 2014 period as compared to $17,676,000 in the fiscal 2013 period, a decrease of 1.5%.

At June 30, 2013, 310 domestic and international franchised or Branded Menu Program franchise outlets were operating as compared to 307 domestic and international franchised or Branded Menu Program franchise outlets at June 24, 2012. Total franchise fee income was $90,000 in the fiscal 2014 period compared to $149,000 in the fiscal 2013 period, including a $30,000 cancellation fee. Domestic franchise fee income was $85,000 in the fiscal 2014 period compared to $133,000 in the fiscal 2013 period. International franchise fee income was $5,000 in the fiscal 2014 period, compared to $16,000 during the fiscal 2013 period. During the fiscal 2014 period, eight new franchised outlets opened, including our first location in Moscow and four Branded Menu Program outlets. During the fiscal 2013 period, 13 new franchised outlets opened, including eight Branded Menu Program outlets.

License royalties were $2,265,000 in the fiscal 2014 period as compared to $2,229,000 in the fiscal 2013 period. Total royalties earned on sales of hot dogs from our retail and foodservice license agreements increased 4.3% to $1,881,000 from $1,803,000 in the fiscal 2014 period. Royalties earned from SMG, primarily from the retail sale of hot dogs, were $1,466,000 during the fiscal 2014 period as compared to $1,465,000 during the fiscal 2013 period. Royalties earned from our foodservice licensee, substantially from sales of hot dogs to Sam's Club, were $415,000 during the fiscal 2014 period as compared to $338,000 during the fiscal 2013 period. This increase is due primarily to the effect of the royalty concession on sales to Sam's Club during the fiscal 2013 period partly offset by reduced sales to foodservice. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan's products decreased by $42,000, during the fiscal 2014 period, as compared to the fiscal 2013 period.

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Interest income was $91,000 in the fiscal 2014 period as compared to $100,000 in the fiscal 2013 period, primarily due to lower interest income earned on marketable securities. As additional marketable securities mature or are called by the issuer and we are unable to earn similar returns upon reinvestment, we would anticipate lower investment income in the future.

Insurance gain of $2,801,000 during the fiscal 2014 period represents the difference between insurance proceeds received and the historical net book value of assets destroyed at our Flagship Coney Island restaurant and demolition costs resulting from Superstorm Sandy (See note M).

Other income of $17,000 in the fiscal 2014 period as compared to $18,000 in the fiscal 2013 period relates primarily to a sublease of a non-franchised restaurant.

Costs and Expenses

Overall, our cost of sales increased by $420,000 to $13,405,000 in the fiscal 2014 period as compared to $12,985,000 in the fiscal 2013 period. Our gross profit (representing the difference between sales and cost of sales) was $3,475,000 or 20.6% of sales during the fiscal 2014 period as compared to $3,420,000 or 20.8% of sales during the fiscal 2013 period. The margin decline was primarily due to the impact of lower sales at the Company-operated restaurants, as discussed previously, which was partly offset by a slightly lower average cost per pound of hot dogs for our Branded Product Program.

Cost of sales in the Branded Product Program increased by approximately $932,000 during the fiscal 2014 period as compared to the fiscal 2013 period, primarily as a result of the higher sales volume was partly offset by the approximately 0.5% decreased average cost per pound of our hot dogs. During the fiscal 2014 period, the market price of hot dogs was approximately 2.8% higher than during the fiscal 2013 period. During the fiscal 2014 period, our purchase commitments yielded savings of approximately $191,000. During the fiscal 2013 period, our purchase commitments to acquire hot dogs increased cost by approximately $141,000 due primarily to the unexpected decline in the market cost of one of the beef components during the fiscal 2013. During the fiscal 2014 period approximately 49.9% of our product was purchased pursuant to our purchase commitment as compared to approximately 40.4% during the fiscal 2013 period. The purchase commitments lowered our costs by approximately $0.039 per pound during the fiscal 2014 period and increased our costs by approximately $0.032 per pound during the fiscal 2013 period. If the cost of beef and beef trimmings increases and we are unable to pass on these higher costs through price increases or otherwise reduce any increase in our costs through the use of purchase commitments, our margins will be adversely impacted.

With respect to Company-owned restaurants, our cost of sales during the fiscal 2014 period was $2,063,000 or 55.4% of restaurant sales, as compared to $2,575,000 or 56.1% of restaurant sales in the fiscal 2013 period.

Restaurant operating expenses were $710,000 in the fiscal 2014 period as compared to $875,000 in the fiscal 2013 period. The decline in restaurant operating costs was primarily due to the closure of the Coney Island restaurant for eight weeks of the fiscal 2014 period and the Yonkers restaurant during the entire fiscal 2014 period. Nathan's expects the fixed costs at the Flagship Coney Island restaurant will be recovered pursuant to Nathan's business interruption insurance. We have also incurred higher percentage rent on the increased sales at the Boardwalk location. Utility costs at the three units that operated throughout the fiscal 2014 and 2013 periods increased by approximately 23% during the fiscal 2014 period as compared to the fiscal 2013 period. We continue to be concerned about the volatile market conditions for oil and natural gas.

Depreciation and amortization was $245,000 in the fiscal 2014 period as compared to $274,000 in the fiscal 2013 period. This decrease is primarily attributable to the reduced depreciation at the Coney Island and Yonkers restaurants while closed. We expect to incur higher depreciation of approximately $180,000 per annum in connection with our redevelopment of the Coney Island restaurant.

General and administrative expenses increased by $377,000 or 14.2% to $3,002,000 in the fiscal 2014 period as compared to $2,625,000 in the fiscal 2013 period. The increase in general and administrative expenses was primarily due to increased compensation costs, including stock-based compensation and payroll related taxes of $343,000 and professional fees of $29,000, partially offset by lower bad debts of $13,000.

Interest expense of $112,000 in the fiscal 2014 and fiscal 2013 periods represents accrued interest in connection with Nathan's appeal of the SMG damages award calculated at the New York State statutory rate of 9% per annum. In connection with its appeal, on March 31, 2011, Nathan's was required to enter into both a security agreement and a blocked deposit account control agreement and to deposit approximately $4,910,000 into the account and agree to deposit additional amounts monthly in an amount equal to the post-judgment interest. On July 24, 2013, we satisfied the judgment and will record additional interest of approximately $23,000 during July 2013, in full settlement of this matter.

The Company recognized an other-than-temporary impairment charge on its long-term investment of $400,000 in the fiscal 2014 period based on management's assessment of the future recoverability of the investment.

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Provision for Income Taxes

In the fiscal 2014 period, the income tax provision was $2,173,000 or 39.3% of earnings before income taxes as compared to $1,305,000 or 39.4% of income before income taxes in the fiscal 2013 period. Nathan's effective tax rate was reduced by 0.7% during the fiscal 2014 period and reduced by 1.2% during the fiscal 2013 period, due to the differing effects of tax-exempt interest income. Nathan's effective tax rates without these adjustments would have been 40.0% for the fiscal 2014 period and 40.6% for the fiscal 2013 period. Nathan's estimates that its unrecognized tax benefits and the related accrued interest and penalties could be further reduced by up to $67,000 during the remainder of fiscal 2014.

Off-Balance Sheet Arrangements

At March 31, 2013, Nathan's had open purchase commitments for hot dogs at a total cost of $5,000,000 for purchase between April and June 2013. The hot dogs purchased represented approximately 49.9% of Nathan's actual usage during the fiscal 2014 period. At June 30, 2013, approximately $190,000 of the purchase commitment remained to be purchased. Nathan's has not entered into any new purchase commitments during the fiscal 2014 period. However, Nathan's may enter into additional purchase commitments in the future as favorable market conditions become available.

Liquidity and Capital Resources

Cash and cash equivalents at June 30, 2013 aggregated $14,085,000, a $682,000 increase during the fiscal 2014 period. At June 30, 2013, marketable securities were $11,399,000 compared to $12,307,000 at March 31, 2013 and net working capital increased to $31,444,000 from $27,525,000 at March 31, 2013.

Cash used by operations of $1,296,000 in the fiscal 2014 period is primarily attributable to net income of $3,354,000 which was reduced by other non-cash operating items of $(736,000). Changes in Nathan's operating assets and liabilities decreased cash by $3,914,000, primarily resulting from increased accounts and other receivables, net of $2,889,000, higher prepaid expenses of $1,184,000 and increased inventories of $471,000 partly offset by increased accrued litigation, other liabilities and deferred franchise fees totaling $633,000. The increase in accounts and other receivables is primarily due to the normal seasonal increases of Branded Product Program sales, increased license royalties due from SMG, and increased operating costs from our Coney Island restaurant that are expected to be reimbursed pursuant to our business interruption policy. The increase in prepaid expenses primarily relates to the fiscal 2014 period estimated income tax payments, which were partly offset by the utilization of various prepaid expenses including marketing, insurance and rents.

Cash provided by investing activities was $668,000 in the fiscal 2014 period. We received cash proceeds of $2,711,000 for the settlement of our property claim for the damage incurred primarily at our Flagship Coney Island restaurant and $750,000 from the redemption of maturing available-for-sale securities. We incurred capital expenditures of $2,718,000 primarily in connection with the rebuilding of our Flagship Coney island restaurant and our Branded Product Program. We funded $75,000 of interest into the restricted cash account, through June 30th, the date on which we satisfied the judgment of the SMG damages award. We estimate that we will invest approximately $1,200,000 in connection with the redevelopment of our Yonkers restaurant this year.

Cash provided by financing activities of $1,310,000 in the fiscal 2014 period relates to the expected realization of the tax benefits associated with employee stock option exercises of $1,557,000 and proceeds from the exercise of employee stock options of $525,000 which were reduced by $772,000 for the payment of withholding tax on the net share settlement exercise of employee stock options. The Company has not purchased any of its stock during the fiscal 2014 period.

During the period from October 2001 through June 30, 2013, Nathan's purchased a total of 4,579,563 shares of its common stock at a cost of approximately $53,398,000 pursuant to its stock repurchase plans previously authorized by the Board of Directors.

On November 3, 2009, Nathan's Board of Directors authorized its sixth stock repurchase plan for the purchase of up to 500,000 shares of its common stock on behalf of the Company. On February 1, 2011, Nathan's Board of Directors authorized a 300,000 share increase in the number of shares that the Company may repurchase. As of June 30, 2013, the Company had repurchased 480,604 shares at a cost of $9,792,000 under the sixth stock repurchase plan.

Currently, an aggregate of 319,396 shares can still be purchased under Nathan's existing stock buy-back program, as of June 30, 2013. Purchases may be made from time to time, depending on market conditions, in open market or privately-negotiated transactions, at prices deemed appropriate by management. There is no set time limit on the repurchases to be made under these stock-repurchase plans.

Management believes that available cash, marketable securities and cash generated from operations should provide sufficient capital to finance our operations and stock repurchases for at least the next 12 months.

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As discussed above, we had cash and cash equivalents at June 30, 2013 aggregating $14,085,000, and marketable securities of $11,399,000. Our Board routinely monitors and assesses its cash position and our current and potential capital requirements. We may continue to return capital to our shareholders through stock repurchases, although there is no assurance that the Company will make any repurchases under its existing stock-repurchase plan. Since March 26, 2007, to date, we have repurchased 2,688,463 shares at a total cost of approximately $46,240,000, reducing the number of shares then-outstanding by 44.7%.

We expect that in the future we will make investments in certain existing restaurants, support the growth of the Branded Product and Branded Menu Programs and continue our stock repurchase programs, funding those investments from our operating cash flow. We may also incur capital and other expenditures or engage in investing activities in connection with opportunistic situations that may arise on a case-by-case basis.

At June 30, 2013, there were three properties that we lease from third parties which we sublease to two franchisees and a non-franchisee. We remain contingently liable for all costs associated with these properties including:
rent, property taxes and insurance. We may incur future cash payments with respect to such properties, consisting primarily of future lease payments, including costs and expenses associated with terminating any of such leases.

The following schedule represents Nathan's cash contractual obligations and commitments by maturity (in thousands):

                                                                        Payments Due by Period
Cash Contractual                              Less than                                      More than 5
Obligations                     Total          1 Year         1-3 Years       3-5 Years         Years
Employment Agreements         $    4,719     $     1,415     $     1,804     $       900     $        600
Purchase Commitment (a)              190             190               -               -                -
Operating Leases (b)              17,570           1,731           3,405           3,397            9,037
Gross Cash Contractual
Obligations                       22,479           3,336           5,209           4,297            9,637
Sublease Income                    3,342             397             636             515            1,794
Net Cash Contractual
Obligations                   $   19,137     $     2,939     $     4,573     $     3,782     $      7,843

a) At June 30, 2013 Nathan's had the remainder of an outstanding purchase commitment to acquire hot dogs at a total cost of $190,000.

b) Nathan's terminated its lease for the Yonkers restaurant which closed on November 25, 2012 and entered a new lease for a new restaurant in the same area. We expect that the new Yonkers restaurant will commence operations in December 2013.

c) At June 30, 2013, the Company had unrecognized tax benefits of $303,000. The Company believes that it is reasonably possible that the unrecognized tax benefits may decrease by $34,000 within the next year. A reasonable estimate of the timing of the remaining liabilities is not possible.

Inflationary Impact

We do not believe that general inflation has materially impacted earnings since 2006. However, we have experienced significant volatility in our costs for our hot dogs and certain food products, distribution costs and utilities. Our commodity costs for beef have been especially volatile since fiscal 2004. In an effort to reduce the impact of increasing market prices, we have entered into purchase commitments for a portion of our hot dogs since January 2008. Beginning in January 2010, the cost of hot dogs has continued to increase until the summer of 2012, when the market price of "fresh 50's" unexpectedly dropped significantly. Since then, the cost of this product has rebounded to its normal range. The market price of hot dogs during the fiscal 2014 period was approximately 2.8% higher that the fiscal 2013 period. The fiscal 2013 price of hot dogs was approximately 0.01% higher than fiscal 2012. These increases are in addition to fiscal 2012's increase of approximately 12.9% over fiscal 2011. The market price also increased during fiscal 2011 by 9.9% over fiscal 2010. We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during fiscal 2014. In addition, beef prices could further increase due to the record high corn prices, as a result of the lingering effect of the drought in the Midwest during 2012. We may attempt to enter into similar purchase arrangements for hot dogs and other products in the future. Additionally, we expect to continue experiencing volatility in oil and gas prices on our distribution costs for our food products and utility costs in the Company-owned restaurants and increased insurance costs resulting from the hardening of the insurance markets.

In March 2010, the Federal government passed new legislation to reform the U.S. . . .

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