NATHANS FAMOUS, INC. - Quarter Report: 2014 December (Form 10-Q)

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

OR

Commission file number 0-3189

NATHAN'S FAMOUS, INC.

(Exact name of registrant as specified in its charter)

One Jericho Plaza, Second Floor – Wing A, Jericho, New York 11753

(Address of principal executive offices) 

(Zip Code)

 (516) 338-8500

 (Registrant's telephone number, including area code)

________________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

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 Exchange 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 __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No __

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X

At February 6, 2015, an aggregate of 4,496,704 shares of the registrant's common stock, par value of $.01, were outstanding.

NATHAN'S FAMOUS, INC. AND SUBSIDIARIES

INDEX

Nathan’s Famous, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 28, 2014 and March 30, 2014

(in thousands, except share and per share amounts)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

The accompanying notes are an integral part of these statements.

Nathan’s Famous, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

Thirteen and thirty-nine weeks ended December 28, 2014 and December 29, 2013

(in thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of these statements.

Nathan’s Famous, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Thirteen and thirty-nine weeks ended December 28, 2014 and December 29, 2013

(in thousands)

(Unaudited)

The accompanying notes are an integral part of these statements.                

Nathan’s Famous, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Thirty-nine weeks ended December 28, 2014

(in thousands, except share amounts)

(Unaudited)

The accompanying notes are an integral part of this statement.

Nathan’s Famous, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Thirty-nine weeks ended December 28, 2014 and December 29, 2013

(in thousands)

(Unaudited)

The accompanying notes are an integral part of these statements.

NATHAN'S FAMOUS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 28, 2014

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

Forward-Looking Statements

Statements in this Form 10-Q quarterly 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 three-year drought in the Midwest, along with freezing temperatures during the winter causing a reduced supply of cattle), and continued increases in the price of beef trimmings; our ability to pass on the cost of any price increases in beef and beef trimmings; 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 any issues arising from or related to the transition from SMG to John Morrell & Co. as our primary hot dog supplier; the continued viability of Coney Island as a destination location for visitors; the ability to continue to attract franchisees; no material increases in the minimum wage or other changes in labor laws; our ability to attract competent restaurant and managerial personnel; the enforceability of International franchising agreements 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-Q and our Annual Report on Form 10-K for the year ended March 30, 2014, and in other documents 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 sells packaged hot dogs and other meat products to retail customers through supermarkets or grocery-type retailers for off-site consumption. Our Branded Product Program 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. Our Branded Menu Program 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, 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 and franchising the Nathan’s restaurant concept (including the Branded Menu Program).

Effective March 1, 2014, Nathan’s commenced its new License Agreement with John Morrell & Co. replacing its prior licensee for the exclusive right and obligation to manufacture, distribute, market and sell “Nathan’s Famous” branded hot dog, sausage and corned beef products in refrigerated consumer packages to be resold through retail channels (e.g., supermarkets, groceries, mass merchandisers and club stores) within the United States, among other things. Royalties pursuant to the new agreement increased by 205.7% to $11,069,000 during the thirty-nine weeks ended December 28, 2014 as compared to $3,621,000 earned under the prior agreement during the thirty-nine weeks ended December 29, 2013. For the foreseeable future, our results of operations will be substantially dependent on the success of our agreement with John Morrell & Co.

On October 29, 2012, the Northeastern United States was hit by Superstorm Sandy which caused significant damage to our Flagship Coney Island location closing the restaurant for repair from October 29, 2012 until May 20, 2013. Additionally, we redeveloped our Yonkers restaurant which closed on November 25, 2012 and re-opened on November 18, 2013. The re-opening of these two restaurants significantly impacted our results of operations and the comparability of Company-owned restaurant operations during the thirteen and thirty-nine week periods reported.

At December 28, 2014, our restaurant system consisted of 310 units, comprised of 305 Nathan’s franchised units, including 122 Branded Menu units, and five Company-owned units (including one seasonal unit), located in 27 states, the Cayman Islands and ten foreign countries. At December 29, 2013, our restaurant system consisted of 310 units, comprised of 305 Nathan’s franchised units, including 139 Branded Menu units, and five Company-owned units (including one seasonal unit), located in 28 states, the Cayman Islands and nine foreign countries.

In addition to plans for expansion of the Nathan’s brand through our Branded Product Program, licensing and franchising, Nathan’s is also the owner of the Arthur Treacher’s brand. At December 28, 2014, the Arthur Treacher’s brand was sold within 49 Nathan’s restaurants. Additionally, during the fiscal year ended March 30, 2014, we entered into our first multi-unit Arthur Treacher’s Branded Menu Program agreement with a qualified foodservice operator for inclusion of Arthur Treacher’s products in non-Nathan’s facilities. Currently, six locations are operating with this program, and we may seek to further market this program in the future.

As described in our Annual Report on Form 10-K for the year ended March 30, 2014, our future results could be materially impacted by many developments including our dependence on John Morrell & Co. as our principal supplier. In addition, our future operating results could be impacted by the record high beef prices.

Critical Accounting Policies and Estimates

As discussed in our Form 10-K for the fiscal year ended March 30, 2014, 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 30, 2014, 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          

Please refer to Note B of the preceding consolidated financial statements for our discussion of Recently Issued Accounting Pronouncements Not Yet Adopted.

Results of Operations

Thirteen weeks ended December 28, 2014 compared to thirteen weeks ended December 29, 2013

Revenues

Total sales increased 13.5% to $17,298,000 for the thirteen weeks ended December 28, 2014 (“third quarter fiscal 2015”) as compared to $15,236,000 for the thirteen weeks ended December 29, 2013 (“third quarter fiscal 2014”). Foodservice sales from the Branded Product Program increased 13.7% to $14,956,000 for the third quarter fiscal 2015 as compared to sales of $13,156,000 in the third quarter fiscal 2014. This increase was primarily attributable to an increase in the average selling price of hot dogs due primarily to price increases as compared to the third quarter fiscal 2014. Total Company-owned restaurant sales increased 7.9% to $2,148,000 during the third quarter fiscal 2015 compared to $1,990,000 during the third quarter fiscal 2014. This sales increase was primarily attributable to higher sales from the Yonkers restaurant, which only operated for approximately six weeks in the third quarter fiscal 2014. The sales from the Yonkers restaurant during the third quarter fiscal 2015 were approximately $490,000. Other sales, primarily to Wal-Mart, were approximately $104,000 higher than the third quarter fiscal 2014.

License royalties were $3,546,000 in the third quarter fiscal 2015 as compared to $1,817,000 in the third quarter fiscal 2014. Total royalties earned on sales of hot dogs from our retail and foodservice license agreements increased 128.8% to $3,125,000 from $1,366,000 in the third quarter fiscal 2014. Royalties earned from John Morrell & Co., were $2,714,000 during the third quarter fiscal 2015 as compared to royalties earned from SMG, Inc. of $963,000 during the third quarter fiscal 2014 primarily resulting from the higher royalty rate earned pursuant to the new agreement. Royalties earned from our foodservice license agreement, substantially from sales of hot dogs to Sam’s Club, were $411,000 during the third quarter fiscal 2015 as compared to $403,000 during the third quarter fiscal 2014. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products decreased by $30,000, during the third quarter fiscal 2015, as compared to the third quarter fiscal 2014, primarily from lower royalties earned from the sale of mini-bagel dogs and franks-in-the-blanket and other hors d’oeuvres over the previous year partly offset by higher royalties on the sale of French fries and onion rings from Lamb Weston.

Franchise fees and royalties were $1,471,000 in the third quarter fiscal 2015 compared to $1,394,000 in the third quarter fiscal 2014. Total royalties were $1,069,000 in the third quarter fiscal 2015 compared to $1,125,000 in the third quarter fiscal 2014. Royalties earned under the Branded Menu programs were $222,000 in the third quarter fiscal 2015 as compared to $240,000 in the third quarter fiscal 2014 due principally to the reduced number of units in operation. Royalties earned under the Branded Menu Program are based upon product purchases rather than a percentage of restaurant sales. Traditional franchise royalties were $847,000 in the third quarter fiscal 2015 compared to $885,000 in the third quarter fiscal 2014. Franchise restaurant sales decreased to $18,665,000 in the third quarter fiscal 2015 as compared to $19,256,000 in the third quarter fiscal 2014 due to the impact of closed restaurants. Comparable domestic franchise sales (consisting of 107 Nathan’s outlets, excluding sales under the Branded Menu Program) were $15,063,000 in the third quarter fiscal 2015 as compared to $15,366,000 in the third quarter fiscal 2014, a decrease of 2.0%.

At December 28, 2014 and December 29, 2013, our franchise system consisted of 305 domestic and international franchised or Branded Menu Program franchise outlets. Total franchise fee income was $402,000 in the third quarter fiscal 2015, including $120,000 of cancellation or termination fees, compared to $269,000 in the third quarter fiscal 2014. Domestic franchise fee income was $90,000 in the third quarter fiscal 2015 compared to $176,000 in the third quarter fiscal 2014. International franchise fee income was $192,000 in the third quarter fiscal 2015, compared to $53,000 during the third quarter fiscal 2014. During the third quarter fiscal 2015, eight new franchised outlets opened, including locations in Costa Rica, the Dominican Republic and our first location in Malaysia. During the third quarter fiscal 2014, nine new franchised outlets opened, including two locations in Moscow and one location in Mexico.

Interest income was $21,000 in the third quarter fiscal 2015 as compared to $68,000 in the third quarter fiscal 2014, 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.

Other income, relating primarily to a sublease of a co-branded franchised restaurant, was $17,000 in the third quarter fiscal 2015 as compared to $18,000 in the third quarter fiscal 2014.

Costs and Expenses

Overall, our cost of sales increased by $1,925,000 to $14,704,000 in the third quarter fiscal 2015 compared to $12,779,000 in the third quarter fiscal 2014. Our gross profit (representing the difference between sales and cost of sales) was $2,594,000 or 15.0% of sales during the third quarter fiscal 2015 compared to $2,457,000 or 16.1% of sales during the third quarter fiscal 2014. The margin decline was primarily due to the impact of higher food costs for our Branded Product Program and Company-owned restaurants.

Cost of sales in the Branded Product Program increased approximately $1,787,000 during the third quarter fiscal 2015 compared to the third quarter fiscal 2014, primarily as a result of an approximately 19.5% increase in the average cost per pound of our hot dogs. We did not enter into any purchase commitments during the third quarter fiscal 2015 or the third quarter fiscal 2014. As a result, Nathan’s purchased all of its hot dogs at market price during the third quarter fiscal 2015 and the third quarter fiscal 2014. If the cost of beef and beef trimmings increase and we are unable to pass on these higher costs through price increases or otherwise reduce any increase in our costs through purchase commitments, our margins will be adversely impacted. We have recently increased our selling prices to pass on these recent cost increases and expect to perform ongoing reviews based on market conditions, but there can be no assurance that we will be able to continue to increase our selling prices.

With respect to Company-owned restaurants, our cost of sales during the third quarter fiscal 2015 was $1,447,000 or 67.4% of restaurant sales, as compared to $1,361,000 or 68.4% of restaurant sales in the third quarter fiscal 2014, due primarily to the impact of higher food and labor costs. We have recently increased certain selling prices to pass on recent cost increases.

Restaurant operating expenses were $788,000 in the third quarter fiscal 2015 as compared to $741,000 in the third quarter fiscal 2014. Approximately $21,000 of the increase in restaurant operating costs results from the Yonkers restaurant that operated for only six weeks during the third quarter fiscal 2014. Utility costs for the three restaurants operating for comparative periods increased by approximately $30,000 from the third quarter fiscal 2014 to the third quarter fiscal 2015. We continue to be concerned about the volatile market conditions for oil and natural gas.

Depreciation and amortization was $298,000 in the third quarter fiscal 2015 as compared to $306,000 in the third quarter fiscal 2014.

General and administrative expenses decreased by $138,000 or 4.8% to $2,760,000 in the third quarter fiscal 2015 as compared to $2,898,000 in the third quarter fiscal 2014. The decrease in general and administrative expenses was primarily due to decreased professional fees of $90,000, lower marketing costs of $79,000 and lower management training of $19,000 partially offset by higher compensation costs, including stock-based compensation and payroll related taxes of $87,000.

Provision for Income Taxes

In the third quarter fiscal 2015, the income tax provision was $1,562,000 or 41.1% of earnings before income taxes as compared to $702,000 or 38.8% of income before income taxes in the third quarter fiscal 2014. Nathan’s effective tax rate was reduced by 0.2% during the third quarter fiscal 2015 and reduced by 1.5% during the third quarter fiscal 2014, due to the differing effects of tax-exempt interest income. Nathan’s effective tax rates without these adjustments would have been 41.3% for the third quarter fiscal 2015 and 40.3% for the third quarter fiscal 2014. Nathan’s estimates that its unrecognized tax benefits including the related accrued interest and penalties could be further reduced by up to $124,000 during the remainder of fiscal 2015. As described under Note J to the Consolidated Financial Statements, Nathan’s estimates that its annual tax rate for the fiscal year ending March 29, 2015 will be in the range of approximately 39.5% to 41.5%.

Results of Operations

Thirty-nine weeks ended December 28, 2014 compared to thirty-nine weeks ended December 29, 2013

Revenues

Total sales increased by 16.6% to $60,647,000 for the thirty-nine weeks ended December 28, 2014 (“fiscal 2015 period”) as compared to $52,003,000 for the thirty-nine weeks ended December 29, 2013 (“fiscal 2014 period”). Foodservice sales from the Branded Product and Branded Menu Programs increased by 13.2% to $45,568,000 for the fiscal 2015 period as compared to sales of $40,256,000 in the fiscal 2014 period. This increase was primarily attributable to a higher average selling price due primarily to price increases as compared to the fiscal 2014 period. Total Company-owned restaurant sales increased 25.7% to $14,497,000 during the fiscal 2015 period compared to $11,536,000 during the fiscal 2014 period. This increase was primarily attributed to operating our Coney Island and Yonkers restaurants for the entire fiscal 2015 period. Our Flagship Coney Island restaurant operated for approximately thirty-one weeks during the fiscal 2014 period and our Yonkers restaurant operated for six weeks during the fiscal 2014 period. The sales impact while these restaurants were closed was approximately $2,233,000. Additionally, sales at our two Coney Island restaurants during the periods operated during the fiscal 2015 period were approximately $827,000 higher than the periods operated during the fiscal 2014 period due primarily to an increase in customer counts of approximately 8.3%.

License royalties were $13,652,000 in the fiscal 2015 period as compared to $6,211,000 in the fiscal 2014 period. Total royalties earned on sales of hot dogs from our retail and foodservice license agreements increased 155.2% to $12,342,000 for the 2015 fiscal period compared to $4,836,000 in the fiscal 2014 period. Royalties earned from John Morrell & Co., primarily from the retail sale of hot dogs, were $11,069,000 during the fiscal 2015 period compared to royalties earned from SMG, Inc. of $3,621,000 during the fiscal 2014 period primarily resulting from the higher royalty rate earned pursuant to the new agreement. Royalties earned from our foodservice license agreement, substantially from sales of hot dogs to Sam’s Club, were $1,273,000 during the fiscal 2015 period compared to $1,215,000 during the fiscal 2014 period. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products decreased by $65,000, during the fiscal 2015 period, compared to the fiscal 2014 period, primarily from lower royalties earned from the sale of mini-bagel dogs and franks-in-the-blanket and other hors d’oeuvres over the previous year partly offset by higher royalties on the sale of French fries and onion rings from Lamb Weston.

Franchise fees and royalties were $4,473,000 in the fiscal 2015 period as compared to $4,279,000 in the fiscal 2014 period. Total royalties were $3,594,000 in the fiscal 2015 period as compared to $3,780,000 in the fiscal 2014 period. Royalties earned under the Branded Menu programs were $766,000 in the fiscal 2015 period as compared to $793,000 in the fiscal 2014 period due principally to a fewer number of units operating. Royalties earned under the Branded Menu Program are based on product purchases rather than a percentage of restaurant sales. Traditional franchise royalties were $2,828,000 in the fiscal 2015 period compared to $2,987,000 in the fiscal 2014 period. Franchise restaurant sales decreased to $63,431,000 in the fiscal 2015 period compared to $66,016,000 in the fiscal 2014 period primarily due to the impact of closed restaurants. Comparable domestic franchise sales (consisting of 99 Nathan’s outlets, excluding sales under the Branded Menu Program) were $45,780,000 in the fiscal 2015 period compared to $46,870,000 in the fiscal 2014 period, a decrease of 2.3%.

At December 28, 2014 and December 29, 2013, our franchise system consisted of 305 domestic and international franchised or Branded Menu Program franchise outlets. Total franchise fee income was $879,000 in the fiscal 2015 period, including $120,000 of cancellation or termination fees compared to $499,000 in the fiscal 2014 period. Domestic franchise fee income was $211,000 in the fiscal 2015 period compared to $294,000 in the fiscal 2014 period. International franchise fee income was $548,000 in the fiscal 2015 period, compared to $165,000 during the fiscal 2014 period. During the fiscal 2015 period, 28 new franchised outlets opened, including 10 international locations, including our first locations in Costa Rica and Malaysia, and 14 Branded Menu Program outlets. Additionally, during the fiscal 2015 period, a master franchisee exercised an option to acquire the rights to develop franchised outlets throughout Mexico. During the fiscal 2014 period, twenty-six new franchised outlets opened, including eight locations in Moscow and six Branded Menu Program outlets.

Interest income was $137,000 in the fiscal 2015 period compared to $246,000 in the fiscal 2014 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.

The 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 N).

Other income of $65,000 in the fiscal 2015 period as compared to $56,000 in the fiscal 2014 period relates primarily to a sublease of a co-branded franchised restaurant.

Costs and Expenses

Overall, our cost of sales increased $7,539,000 to $49,097,000 in the fiscal 2015 period compared to $41,558,000 in the fiscal 2014 period. Our gross profit (representing the difference between sales and cost of sales) was $11,550,000 or 19.0% of sales during the fiscal 2015 period as compared to $10,445,000 or 20.1% of sales during the fiscal 2014 period. The margin decline was primarily due to the impact of higher average cost per pound of hot dogs for our Branded Product Program during the second and third quarters fiscal 2015.

Cost of sales in the Branded Product Program increased approximately $5,640,000 during the fiscal 2015 period compared to the fiscal 2014 period, primarily as a result of an approximately 17.7% increase in the average cost per pound of our hot dogs. During the fiscal 2015 period, the market cost of our hot dogs was approximately 17.0% higher than during the fiscal 2014 period. During the fiscal 2014 period, our purchase commitments yielded savings of approximately $198,000. During the fiscal 2014 period, approximately 17.3% of our product was purchased pursuant to our purchase commitments. The purchase commitments lowered our costs by approximately $0.014 per pound during the fiscal 2014 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. We have recently increased our selling prices to pass on these recent cost increases and expect to perform ongoing reviews based on market conditions, but there can be no assurance that we will be able to continue to increase our selling prices.

With respect to Company-owned restaurants, our cost of sales during the fiscal 2015 period was $7,995,000 or 55.1% of restaurant sales, as compared to $6,365,000 or 55.2% of restaurant sales in the fiscal 2014 period due primarily to the impact of higher food costs. We have recently increased certain selling prices to pass on recent cost increases.

Restaurant operating expenses were $3,138,000 in the fiscal 2015 period compared to $2,432,000 in the fiscal 2014 period. The increase in restaurant operating costs results primarily from the different number of months that the Coney Island and Yonkers restaurants operated in the two fiscal periods. During the fiscal 2014 period, the Coney Island restaurant operated for approximately thirty-one weeks and the Yonkers restaurant operated for approximately six weeks. Incremental costs were approximately $441,000 during fiscal 2015, as compared to the closed periods during fiscal 2014. In connection with our October 2013 insurance renewal, we incurred a significant increase in insurance costs, primarily property insurance, due to the impact of Superstorm Sandy on the insurance marketplace. Utility costs of the three restaurants operating for comparative periods increased by approximately 10.7% from the fiscal 2014 period to the fiscal 2015 period. We continue to be concerned about the volatile market conditions for oil and natural gas.

Depreciation and amortization was $985,000 in the fiscal 2015 period compared to $845,000 in the fiscal 2014 period. This increase is primarily attributable to the increased depreciation from the investments made in the Coney Island and Yonkers restaurants. We expect to incur approximately $350,000 and $130,000 of depreciation expense per annum in connection with the redevelopment of the Coney Island and Yonkers restaurants, respectively.

General and administrative expenses increased $42,000 or 0.5% to $8,561,000 in the fiscal 2015 period as compared to $8,519,000 in the fiscal 2014 period. The increase in general and administrative expenses was primarily due to increased compensation costs, including stock-based compensation and payroll related taxes of $253,000, higher insurance costs of $52,000 partially offset by lower marketing and associated expenses of $143,000 and professional fees of $46,000.

Interest expense of $135,000 in the fiscal 2014 period represented 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. On July 24, 2013, we satisfied the judgment 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.

Provision for Income Taxes

In the fiscal 2015 period, the income tax provision was $7,027,000 or 40.9% of earnings before income taxes compared to $4,598,000 or 39.3% of income before income taxes in the fiscal 2014 period. Nathan’s effective tax rate was reduced by 0.3% during the fiscal 2015 period and reduced by 0.8% during the fiscal 2014 period, due to the differing effects of tax-exempt interest income. Nathan’s effective tax rates without these adjustments would have been 41.2% for the fiscal 2015 period and 40.1% for the fiscal 2014 period. Nathan’s estimates that its unrecognized tax benefits including the related accrued interest and penalties could be further reduced by up to $124,000 during the remainder of fiscal 2015. As described under Note J to the Consolidated Financial Statements, Nathan’s estimates that its annual tax rate for the fiscal year ending March 29, 2015 will be in the range of approximately 39.5% to 41.5%.

Off-Balance Sheet Arrangements

Nathan’s has not entered into any purchase commitments for hot dogs since the completion of its last purchase commitment in July 2013. Nathan’s did not have any open purchase commitments for hot dogs outstanding as of December 28, 2014. In connection with the upcoming relocation of the Oceanside restaurant, Nathan’s has entered into construction contracts of approximately $700,000 in October 2014, which it expects will be completed within six months. Nathan’s may continue to enter into additional purchase commitments in the future as favorable market conditions become available.

Liquidity and Capital Resources

Cash and cash equivalents at December 28, 2014 aggregated $34,537,000, a $12,460,000 increase during the fiscal 2015 period compared to cash and cash equivalents of $22,077,000 at March 30, 2014. At December 28, 2014, marketable securities were $6,819,000 compared to $11,187,000 at March 30, 2014 and net working capital increased to $44,491,000 from $35,378,000 at March 30, 2014.

Cash provided by operations of $10,514,000 in the fiscal 2015 period is primarily attributable to net income of $10,166,000 and other non-cash operating items of $1,827,000, reduced by changes in other operating assets and liabilities of $1,479,000. Accounts and other receivables, net of insurance proceeds received, increased $2,589,000 due primarily to increased sales from our Branded Product Program, temporary advances to our advertising fund and higher license royalties from John Morrell & Co. The decrease in prepaid expenses and other current assets of $1,499,000 primarily relates to the utilization of prepaid income taxes at March 30, 2014 against Nathan’s estimated income tax payments for the fiscal 2015 period.

Cash provided by investing activities was $3,404,000 in the fiscal 2015 period. We received cash proceeds of $6,620,000 from the maturity of available-for-sale securities. We purchased available-for-sale securities of $2,521,000. We incurred capital expenditures of $695,000 in connection with our Branded Product Program and select restaurant improvements. We expect to incur capital spending of approximately $1,300,000 in connection with the relocation of our Company-owned restaurant in Oceanside, New York during the remainder of the current fiscal year.

Cash used in financing activities of $1,458,000 in the fiscal 2015 period relates to the Company’s purchase of 37,661 shares of its common stock at a cost of $1,916,000 during the fiscal 2015 period. Additionally, the Company paid $825,000 for the payment of withholding tax on the net share settlement exercise of share-based compensation plans. Nathan’s expects to realize tax benefits associated with employee stock option exercises of $1,061,000 and also received proceeds from the exercise of employee stock options of $222,000.

During the period from October 2001 through December 28, 2014, Nathan’s purchased 4,647,687 shares of its common stock at a cost of approximately $56,800,000 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 December 28, 2014, the Company had repurchased 548,728 shares at a cost of $13,194,000 under the sixth stock repurchase plan.

On September 11, 2014, the Company and Mutual Securities, Inc. (“MSI”) amended its existing agreement to provide MSI with authorization on the Company’s behalf to purchase shares of the Company’s common stock, $.01 par value having a value of up to an additional $6,000,000, which purchases could commence on September 24, 2014. The agreement with MSI was adopted under the safe harbor provided by Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, as amended to assist the Company in implementing its previously announced stock purchase plans.

An aggregate of 251,272 shares can still be purchased under Nathan’s existing stock buy-back program, as of December 28, 2014. 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.

As discussed above, we had cash and cash equivalents at December 28, 2014 aggregating $34,537,000, and marketable securities of $6,819,000. 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 2,756,587 shares at a total cost of approximately $49,642,000, reducing the number of shares then-outstanding by 45.8%.

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 December 28, 2014, we subleased to franchisees three properties we lease from third parties. 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.

On December 1, 2009, a wholly-owned subsidiary of the Company executed a Guaranty of Lease in connection with its re-franchising of a restaurant located in West Nyack, New York. The Guaranty could be called upon in the event of a default by the tenant/franchisee. The Guaranty extends through the fifth Lease Year, as defined in the lease, and shall not exceed an amount equal to the highest amount of the annual minimum rent, percentage rent and any additional rent payable pursuant to the lease and reasonable attorney’s fees and other costs. We have recorded a liability of approximately $76,000 in connection with this Guaranty, which does not include potential real estate tax increases and attorney’s fees and other costs as these amounts are not reasonably determinable at this time. In connection with the Nathan’s franchise agreement, Nathan’s has received a personal guaranty from the franchisee for all obligations under the Guaranty. To date, Nathan’s has not been required to make any payments pursuant to the Guaranty.

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

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. We continue to experience unprecedented increases in the cost of beef. The market price of hot dogs during the fiscal 2015 period was approximately 17.0% higher than the fiscal 2014 period. The market price of hot dogs during fiscal 2014 was approximately 7.4% higher than fiscal 2013. We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during the remainder of fiscal 2015. Beef prices continue to be extremely volatile due to the supply constraints, as a result of the lingering effect of the drought in the Midwest during 2012. Beginning January 2008, we had entered into purchase commitments for a portion of our hot dogs in an effort to reduce the impact of increasing market prices. Our last purchase commitment was completed in July 2013 and to date we have not entered in any new purchase commitments for beef. 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 volatile insurance costs resulting from the uncertainty of the insurance markets.

In March 2010, the Federal government passed new legislation to reform the U.S. health care system. As part of the plan, employers will be expected to provide their employees that work more than 30 hours per week with minimum levels of healthcare coverage or incur certain financial penalties. As Nathan’s workforce includes numerous part-time workers that typically are not offered healthcare coverage, we may be forced to expand healthcare coverage in 2015 or incur new penalties beginning January 2015 which may increase our health care costs.

From time to time, various Federal and New York State legislators have proposed changes to the minimum wage requirements. The New York State minimum wage increased to $8.00 on December 31, 2013 and $8.75 on December 31, 2014, and will increase to $9.00 per hour on December 31, 2015. The impact of the December 31, 2014 New York minimum wage increase on the Company amounted to a 6.9% average salary increase for our employees that were affected. There have been recent protests in New York and other municipalities relating to compensation at fast food restaurants. In Governor Cuomo’s State of The State address, he also called for an increase in New York State’s minimum wage to $10.50 per hour throughout New York State and $11.50 per hour in New York City. Mayor DeBlasio, of the City of New York, had previously stated that New York City should have additional increases in the minimum wage. We estimate that the recent increase in minimum wage has the potential to increase our restaurant cost of sales by approximately 80 bps if prices remain the same. Although we only operate five Company-owned restaurants, we believe that significant increases in the minimum wage could have a significant financial impact on our financial results and the results of our franchisees.

Effective April 1, 2014, the City of New York, passed legislation requiring employers to offer paid sick leave to all employees, including part-time employees that work more than 80 hours for the employer. Nathan’s operates three restaurants that will be affected by this new legislation and is currently evaluating the potential impact on its results of operations.

In addition, our union contract has been extended effective July 1, 2014 for three years which we believe will not have a material effect on our results of operations or financial condition.

Continued increases in labor, food and other operating expenses, including health care, could adversely affect our operations and those of the restaurant industry and we might have to further reconsider our pricing strategy as a means to offset reduced operating margins.

The Company’s business, financial condition, operating results and cash flows can be impacted by a number of factors, including but not limited to those set forth above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” any one of which could cause our actual results to vary materially from recent results or from our anticipated future results. For a discussion identifying additional risk factors and important factors that could cause actual results to differ materially from those anticipated, also see the discussions in “Forward-Looking Statements” and “Notes to Consolidated Financial Statements” in this Form 10-Q and “Risk Factors” in this Form 10-Q and our Annual Report on Form 10-K for our fiscal year ended March 30, 2014.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.          

Cash and Cash Equivalents                    

We have historically invested our cash and cash equivalents in short term, fixed rate, highly rated and highly liquid instruments which are generally reinvested when they mature throughout the year. Although our existing investments are not considered at risk with respect to changes in interest rates or markets for these instruments, our rate of return on short-term investments could be affected at the time of reinvestment as a result of intervening events. As of December 28, 2014, Nathan’s cash and cash equivalents aggregated $34,537,000. Earnings on this amount of cash and cash equivalents would increase or decrease by approximately $86,000 per annum for each 0.25% change in interest rates.

Marketable Securities

We have invested our marketable securities in intermediate term, fixed rate, highly rated and highly liquid instruments. These investments are subject to fluctuations in interest rates. As of December 28, 2014, the market value of Nathan’s marketable securities aggregated $6,819,000. These marketable securities are considered at risk with respect to interest rates to determine their current market value. As additional notes 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. Our future rate of return could also be affected at the time of reinvestment as a result of intervening events. Interest income on these marketable securities would increase or decrease by approximately $17,000 per annum for each 0.25% change in interest rates. The following chart presents the hypothetical changes in the fair value of the marketable investment securities held at December 28, 2014 that are sensitive to interest rate fluctuations (in thousands):

Borrowings

At December 28, 2014, we had no outstanding indebtedness. If we were to borrow money in the future, such borrowings would be based upon the then-prevailing interest rates. We do not anticipate entering into interest rate swaps or other financial instruments to hedge our borrowings.

Commodity Costs

The cost of commodities is subject to market fluctuation. Our commodity costs for beef have been especially volatile since fiscal 2004. We continue to experience unprecedented increases in the cost of beef. The market price of hot dogs during the fiscal 2015 period was approximately 17.0% higher than the fiscal 2014 period. The market price of hot dogs during fiscal 2014 was approximately 7.4% higher than fiscal 2013. We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during the remainder of fiscal 2015. Beef prices continue to be extremely volatile due to the supply constraints, as a result of the lingering effect of the drought in the Midwest during 2012. Beginning January 2008, we had entered into purchase commitments for a portion of our hot dogs in an effort to reduce the impact of increasing market prices. Our last purchase commitment was completed in July 2013 and to date we have not entered in any new purchase commitments for beef. 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 volatile insurance costs resulting from the uncertainty of the insurance markets. A short-term increase or decrease of 10% in the cost of our food and paper products for the thirty-nine weeks ended December 28, 2014 would have increased or decreased our cost of sales by approximately $4,399,000.

Foreign Currencies

Foreign franchisees generally conduct business with us and make payments in United States dollars, reducing the risks inherent with changes in the values of foreign currencies. As a result, we have not purchased future contracts, options or other instruments to hedge against changes in values of foreign currencies and we do not believe fluctuations in the value of foreign currencies would have a material impact on our financial results.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting that occurred during the quarter ended December 28, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures are effective at the reasonable assurance level.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the fiscal year ended March 30, 2014, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing Nathan's. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

A recent ruling and complaint filed by the general counsel of the National Labor Relations Board could, if upheld, make us liable for violations of overtime, wage or union-organization violations by our franchisees.

On July 29, 2014, the general counsel of the National Labor Relations Board ruled that McDonald’s could be held jointly liable for labor and wage violations by its franchise operations. Subsequently on December 19, 2014, the National Labor Relations Board issued complaints naming McDonald’s Corp. as a “joint employer” at its franchisees. While we believe McDonald’s will seek to dismiss these complaints, to the extent that the complaints are not dismissed and the National Labor Relations Board prevails in litigation and is deemed applicable to other businesses with a significant number of franchises such as Nathan’s, we could be held partly liable in cases of overtime, wage or union-organizing violations. By making us partly liable, the complaint, if upheld and ultimately applied to Nathan’s, could among other things give employees of our franchisee’s restaurants and labor unions leverage to make it easier to unionize employees at these restaurants and to request that Nathan’s have its franchisees raise wages. Unionization and a significant increase in wages at our franchisees could make it more difficult to operate a Nathan’s franchised restaurant. A decrease in profitability at our franchisee’s restaurants or the closing of a significant number of franchised restaurants could significantly impact our business and our business could also be significantly impacted if the National Labor Relations Board seeks to bring an action against Nathan’s as a “joint employer” is ultimately applied to Nathan’s and our liability for labor and wage violations increases.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.          

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

*Filed herewith.

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Exhibit Index.

*Filed herewith

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