NATHANS FAMOUS, INC. - Quarter Report: 2015 December (Form 10-Q)

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

For the quarterly period ended December 27, 2015.

OR

For the transition period from                            to                           .

 Commission file number 0-3189

NATHAN'S FAMOUS, INC.

(Exact name of registrant as specified in its charter)

(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 5, 2016 an aggregate of 4,348,722 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 27, 2015 and March 29, 2015

(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 27, 2015 and December 28, 2014

(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 27, 2015 and December 28, 2014

(in thousands)

(Unaudited)

The accompanying notes are an integral part of these statements.                

Nathan’s Famous, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIT)

Thirty-nine weeks ended December 27, 2015

(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 27, 2015 and December 28, 2014

(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 27, 2015

(Unaudited)

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 affects on the supply of cattle), and change in the price of beef trimmings; our ability to pass on the cost of any price increases in beef and beef trimmings, or labor costs; legislative and business conditions; the collectibility of receivables; changes in consumer tastes; the status of our licensing and supply agreements, including the impact of our supply agreement for hot dogs with John Morrell & Co., the impact of our debt service and repayment obligations under the Notes; the continued viability of Coney Island as a destination location for visitors; the ability to continue to attract franchisees; the impact of the new minimum wage legislation in New York State or other changes in labor laws, including regulations which could render a franchisor as a “joint employee” or the impact of our new union contract; 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 or e-coli; as well as those risks discussed from time to time in this Form 10-Q and our Form 10-K annual report for the year ended March 29, 2015, 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 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).

At December 27, 2015, our restaurant system consisted of 267 units, comprised of 262 Nathan’s franchised units, including 112 Branded Menu units, and five Company-owned units (including one seasonal unit), located in 23 states, and nine foreign countries. 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.

In addition to plans for expansion through our Branded Product Program, licensing and franchising, 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 December 27, 2015, the Arthur Treacher’s brand was sold within 45 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 seven locations are operating, 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 29, 2015, 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 supply constraints on beef and the volatility of beef prices.

Our future results could also be impacted by our obligations under the Notes. As a result of the issuance of the Notes, Nathan’s expects to incur interest expense of approximately $13.5 million per annum and annual amortization of debt discounts and issuance costs of approximately $1,185,000. The Indenture governing the Notes impose certain other restrictions on us. Because the Notes were issued in March 2015, and require us to make semi-annual interest payments, our net income for the thirteen and thirty-nine week periods ended December 27, 2015 is significantly negatively impacted compared to our reported net income for the thirteen and thirty-nine week periods ended December 28, 2014. Accordingly, as described below, we are also including information relating to EBITDA and Adjusted EBITDA in this Form 10-Q quarterly report.

Critical Accounting Policies and Estimates

As discussed in our Form 10-K for the fiscal year ended March 29, 2015, 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 29, 2015, there have been no changes in our critical accounting policies or significant changes to the assumptions and estimates related to them.

Adoption of New Accounting Pronouncements          

Please refer to Note C of the preceding consolidated financial statements for our discussion of the Adoption of New Accounting Pronouncements.

New Accounting Pronouncements Not Yet Adopted

Please refer to Note D of the preceding consolidated financial statements for our discussion of New Accounting Pronouncements Not Yet Adopted.

Reconciliation of GAAP and Non-GAAP Measures

The following is provided to supplement certain Non-GAAP financial measures.

In addition to disclosing results that are determined in accordance with Generally Accepted Accounting Principles in the United States of America ("US GAAP"), the Company has provided EBITDA which excludes (i) interest expense; (ii) provision for income taxes and (iii) depreciation and amortization expense. The Company has also provided Adjusted EBITDA excluding (i) stock-based compensation and (ii) amortization of bond premium on the Company’s available-for sale investments that the Company believes will impact the comparability of its results of operations.

EBITDA and Adjusted EBITDA are not recognized terms under US GAAP and should not be viewed as alternatives to net income (loss) or other measures of financial performance or liquidity in conformity with US GAAP. Additionally, our definitions of EBITDA and Adjusted EBITDA may differ from other companies. Analysis of results and outlook on a Non-US GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with US GAAP.

EBITDA and Adjusted EBITDA

The Company believes that EBITDA and Adjusted EBITDA, Non-US GAAP measures, are useful to investors to assist in assessing and understanding the Company's operating performance and underlying trends in the Company's business because EBITDA and Adjusted EBITDA are (i) among the measures used by management in evaluating performance and (ii) are frequently used by securities analysts, investors and other interested parties as a common performance measure.

The following is a reconciliation of Net income to Adjusted EBITDA (in thousands):

Results of Operations

Thirteen weeks ended December 27, 2015 compared to thirteen weeks ended December 28, 2014

Revenues

Total sales decreased by 8.9% to $15,763,000 for the thirteen weeks ended December 27, 2015 (“third quarter fiscal 2016”) as compared to $17,298,000 for the thirteen weeks ended December 28, 2014 (“third quarter fiscal 2015”). Foodservice sales from the Branded Product Program decreased by 9.3% to $13,565,000 for the third quarter fiscal 2016 as compared to sales of $14,956,000 in the third quarter fiscal 2015. This decrease was primarily attributable to a change in pricing strategy that is more closely correlated to the cost of product which lowered average selling prices by approximately 8.4% during the third quarter fiscal 2016 as compared to the third quarter of fiscal 2015. Our costs declined by approximately 19.8% for the same period. Total Company-owned restaurant sales were $2,030,000 during the third quarter fiscal 2016 as compared to $2,148,000 during the third quarter fiscal 2015. During the third quarter fiscal 2015, sales at our Oceanside location, that was being relocated, were exceptionally strong, representing approximately $79,000 of the comparative decline. Other sales, primarily to Wal-Mart, were approximately $26,000 lower in the third quarter fiscal 2016 than the third quarter fiscal 2015.

License royalties were $3,614,000 in the third quarter fiscal 2016 as compared to $3,546,000 in the third quarter fiscal 2015. Total royalties earned on sales of hot dogs from our license agreement with John Morrell & Co. at retail and foodservice, substantially from sales of hot dogs to Sam’s Club, increased 1.1% to $3,160,000 for the third quarter fiscal 2016 as compared to $3,126,000 in the third quarter fiscal 2015. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $34,000 during the third quarter fiscal 2016 as compared to the third quarter fiscal 2015.

Franchise fees and royalties were $1,187,000 in the third quarter fiscal 2016 as compared to $1,471,000 in the third quarter fiscal 2015. Total royalties were $1,006,000 in the third quarter fiscal 2016 as compared to $1,069,000 in the third quarter fiscal 2015. Royalties earned under the Branded Menu program were $253,000 in the third quarter fiscal 2016 as compared to $222,000 in the third quarter fiscal 2015. 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 $753,000 in the third quarter fiscal 2016 as compared to $847,000 in the third quarter fiscal 2015. Franchise restaurant sales decreased to $16,803,000 in the third quarter fiscal 2016 as compared to $18,665,000 in the third quarter fiscal 2015 primarily due to the impact of closed locations. Comparable domestic franchise sales (consisting of 102 Nathan’s outlets, excluding sales under the Branded Menu Program) were $13,632,000 in the third quarter fiscal 2016 as compared to $13,808,000 in the third quarter fiscal 2015, a decline of 1.3%.

At December 27, 2015, 262 domestic and international franchised or Branded Menu Program franchise outlets were operating as compared to 305 domestic and international franchised or Branded Menu Program franchise outlets at December 28, 2014. Total franchise fee income was $181,000 in the third quarter fiscal 2016 as compared to $402,000 in the third quarter fiscal 2015. Domestic franchise fee income was $125,000 in the third quarter fiscal 2016 as compared to $90,000 in the third quarter fiscal 2015. International franchise fee income was $26,000 in the third quarter fiscal 2016 as compared to $192,000 during the third quarter fiscal 2015. We also recognized forfeited fees of $30,000 during the third quarter fiscal 2016 and $120,000 during the third quarter fiscal 2015. During the third quarter fiscal 2016 period, 12 new franchised outlets opened, including five new Branded Menu Program outlets, including locations in Russia and Costa Rica. During the third quarter fiscal 2015 period, eight new franchised outlets opened, including locations in Costa Rica, the Dominican Republic and our first location in Malaysia.

Costs and Expenses

Overall, our cost of sales decreased by $2,622,000 to $12,082,000 in the third quarter fiscal 2016 as compared to $14,704,000 in the third quarter fiscal 2015. Our gross profit (representing the difference between sales and cost of sales) was $3,681,000 or 23.4% of sales during the third quarter fiscal 2016 as compared to $2,594,000 or 15.0% of sales during the third quarter fiscal 2015. The margin improvement was primarily due to the impact of the continued reduction in the cost of beef on our product costs since the summer, and the effect of selling price increases implemented in the Company-operated restaurants.

Cost of sales in the Branded Product Program decreased by approximately $2,511,000 during the third quarter fiscal 2016 period as compared to the third quarter fiscal 2015 period primarily due to the 19.8% reduction in the cost per pound of our hot dogs. We did not enter into any purchase commitments that affected cost of sales for the third quarter fiscal 2016 or third quarter fiscal 2015. Although the cost of beef and beef trimmings have declined, if we were unable to pass on future cost increases 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 third quarter fiscal 2016 was $1,329,000 or 65.5% of restaurant sales, as compared to $1,447,000 or 67.4% of restaurant sales in the third quarter fiscal 2015 due primarily to lower food costs. Our labor costs have increased beginning January 2016 as a result of the new minimum wage legislation in New York State. Since the minimum wage increase took effect, we estimate that restaurant labor costs have increased by approximately 12.2% because of that increase. If we are unable to fully offset these increases through pricing and operating efficiencies, our margins and profits will be negatively affected.

Restaurant operating expenses were $699,000 in the third quarter fiscal 2016 as compared to $788,000 in the third quarter fiscal 2015. The decrease in restaurant operating costs results primarily from the reduction in occupancy and related costs at our new Oceanside restaurant which is smaller and more efficient to operate than our previous Oceanside restaurant. Despite the recent reduction in our utility costs, we continue to be concerned about the volatile market conditions for oil and natural gas.

Depreciation and amortization was $303,000 in the third quarter fiscal 2016 as compared to $298,000 in the third quarter fiscal 2015. We expect to incur depreciation expense of approximately $100,000 per annum in connection with the new Oceanside restaurant.

General and administrative expenses increased by $285,000 or 10.3% to $3,045,000 in the third quarter fiscal 2016 as compared to $2,760,000 in the third quarter fiscal 2015. The increase in general and administrative expenses was primarily due to increased professional fees of $135,000, marketing expenses of $52,000 and compensation costs of $31,000. We have recently begun a new initiative to target franchising within captive markets by hiring a sales executive with a proven track record and are developing new menu items specifically for this venue.

Other Items

We did not hold any marketable securities during the third quarter fiscal 2016. Interest income was $21,000 in the third quarter fiscal 2015. We sold all of the tax-exempt marketable securities during the second quarter fiscal 2016 and are evaluating re-investing the proceeds into short-term taxable investments.

Other income, which primarily relates to a sublease of a franchised restaurant, was $21,000 in the third quarter fiscal 2016 as compared to $17,000 in the third quarter fiscal 2015.

Interest expense of $3,708,000 in the third quarter fiscal 2016 represents accrued interest of $3,412,000 on the Notes and amortization of debt discounts and issuance costs of $296,000 during the same period. As a result of the issuance of the Notes, Nathan’s expects to incur interest expense of approximately $13.5 million per annum and annual amortization of debt discounts and issuance costs of approximately $1,185,000.

Provision for Income Taxes

In the third quarter fiscal 2016, the income tax provision was $316,000 or 42.2% of earnings before income taxes as compared to $1,562,000 or 41.1% of earnings before income taxes in the third quarter fiscal 2015. During the third quarter fiscal 2016, we recorded a tax true-up of approximately $16,000 in connection with our tax returns for the year ended March 29, 2015. This adjustment increases our effective tax rate by 210 BPS for the quarter. Nathan’s effective tax rate was reduced by 0.2% during the third quarter fiscal 2015, due to the differing effects of tax-exempt interest income. Nathan’s effective tax rates without these adjustments would have been 42.2% for the third quarter fiscal 2016 and 41.3% for the third quarter fiscal 2015. Nathan’s estimates that its unrecognized tax benefits including the related accrued interest and penalties could be further reduced by up to $183,000 during the remainder of fiscal 2016. As described under Note L to the Consolidated Financial Statements, Nathan’s estimates that its annual tax rate for the fiscal year ending March 27, 2016 will be in the range of approximately 40.5% to 41.9% excluding the potential impact of any reduction to the Company’s unrecognized tax benefits.

Results of Operations

Thirty-nine weeks ended December 27, 2015 compared to thirty-nine weeks ended December 28, 2014

Revenues

Total sales increased by 3.3% to $62,627,000 for the thirty-nine weeks ended December 27, 2015 (“fiscal 2016 period”) as compared to $60,647,000 for the thirty-nine weeks ended December 28, 2014 (“fiscal 2015 period”). Foodservice sales from the Branded Product and Branded Menu Programs increased by 3.5% to $47,160,000 for the fiscal 2016 period as compared to sales of $45,568,000 for the fiscal 2015 period. This increase was primarily attributable to a 5.1% increase in the volume of products sold partially offset by lower average selling prices resulting from a change in pricing strategy more closely correlated to the cost of product. Total Company-owned restaurant sales increased $375,000 to $14,872,000 during the fiscal 2016 period as compared to $14,497,000 during the fiscal 2015 period due primarily to higher sales at both Coney Island locations. Other sales, primarily to Wal-Mart, also increased by $13,000 during the fiscal 2016 period, as compared to the fiscal 2015 period.

License royalties were $15,406,000 in the fiscal 2016 period as compared to $13,652,000 in the fiscal 2015 period. Total royalties earned on sales of hot dogs from our license agreement with John Morrell & Co. at retail and foodservice, substantially from sales of hot dogs to Sam’s Club, increased by 14.2% to $14,091,000 for the fiscal 2016 period as compared to $12,342,000 for the fiscal 2015 period. The increase is substantially attributable to the organic growth in our consumer packaged hot dog business as a result of more effective sales, marketing and promotional strategies. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $5,000 during the fiscal 2016 period as compared to the fiscal 2015 period.

Franchise fees and royalties were $3,804,000 in the fiscal 2016 period as compared to $4,473,000 in the fiscal 2015 period. Total royalties were $3,416,000 in the fiscal 2016 period as compared to $3,594,000 in the fiscal 2015 period. Royalties earned under the Branded Menu program were $826,000 in the fiscal 2016 period as compared to $766,000 in the fiscal 2015 period. 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 $2,590,000 in the fiscal 2016 period as compared to $2,828,000 in the fiscal 2015 period. Franchise restaurant sales decreased to $57,227,000 in the fiscal 2016 period as compared to $63,431,000 in the fiscal 2015 period primarily due to the impact of closed restaurants. Comparable domestic franchise sales (consisting of 100 Nathan’s outlets, excluding sales under the Branded Menu Program) were $44,870,000 in the fiscal 2016 period as compared to $44,886,000 in the fiscal 2015 period.

At December 27, 2015, 262 domestic and international franchised or Branded Menu Program franchise outlets were operating as compared to 305 domestic and international franchised or Branded Menu Program franchise outlets at December 28, 2014. Total franchise fee income was $388,000 in the fiscal 2016 period as compared to $879,000 in the fiscal 2015 period. Domestic franchise fee income was $301,000 in the fiscal 2016 period as compared to $211,000 in the fiscal 2015 period. International franchise fee income was $29,000 in the fiscal 2016 period as compared to $548,000 in the fiscal 2015 period. We also recognized forfeited fees of $58,000 during the fiscal 2016 period and $120,000 during the fiscal 2015 period. During the fiscal 2016 period, 35 new franchised outlets opened, including 11 international locations, including locations in Russia and Costa Rica, and 16 Branded Menu Program outlets. 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.

Costs and Expenses

Overall, our cost of sales decreased by $1,249,000 to $47,848,000 in the fiscal 2016 period as compared to $49,097,000 in the fiscal 2015 period. Our gross profit (representing the difference between sales and cost of sales) was $14,779,000 or 23.6% of sales during the fiscal 2016 period as compared to $11,550,000 or 19.0% of sales during the fiscal 2015 period. The margin improvement was primarily due to the impact of the continued reduction in the cost of beef on our product costs since the summer, and the effect of selling price increases implemented in the Company-operated restaurants.

Cost of sales in the Branded Product Program decreased by approximately $1,163,000 during the fiscal 2016 period as compared to the fiscal 2015 period, despite the higher sales volume, primarily as a result of an approximately 7.1% decrease in the average cost per pound of our hot dogs. We did not enter into any purchase commitments that affected the period results for the fiscal 2016 period or fiscal 2015 period results. Although the cost of beef and beef trimmings declined, if we are unable to pass on future cost increases 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 2016 period was $7,862,000 or 52.9% of restaurant sales, as compared to $7,995,000 or 55.1% of restaurant sales in the fiscal 2015 period due primarily to lower food and labor costs. Our labor costs have increased beginning January 2016 as a result of the new minimum wage legislation in New York State. Since the minimum wage increase took effect, we estimate that restaurant labor costs have increased by approximately 12.2% because of that increase. If we are unable to fully offset these increases through pricing and operating efficiencies, our margins and profits will be negatively affected.

Restaurant operating expenses were $2,890,000 in the fiscal 2016 period as compared to $3,138,000 in the fiscal 2015 period. The decrease in restaurant operating costs results primarily from the reduction in occupancy and related costs at our new Oceanside restaurant which is smaller and more efficient to operate than our previous Oceanside restaurant. We continue to be concerned about the volatile market conditions for oil and natural gas.

Depreciation and amortization was $975,000 in the fiscal 2016 period as compared to $985,000 in the fiscal 2015 period. We expect to incur depreciation expense of approximately $100,000 per annum in connection with the new Oceanside restaurant.

General and administrative expenses increased $1,086,000 or 12.7% to $9,647,000 in the fiscal 2016 period as compared to $8,561,000 in the fiscal 2015 period. The increase in general and administrative expenses was primarily due to increased severance costs of $210,000, legal and other professional fees of $341,000, recruitment fees of $71,000, marketing expenses of $106,000 and relocation expenses of $88,000. We have recently begun a new initiative to target franchising within captive markets by hiring a sales executive with a proven track record and are developing new menu items specifically for this venue.

Other Items

Interest income was $52,000 in the fiscal 2016 period as compared to $137,000 in the fiscal 2015 period, primarily due to lower interest income earned on marketable securities. We recently sold all of the tax-exempt marketable securities and are evaluating re-investing the proceeds into short-term taxable investments.

Other income, which primarily relates to a sublease of a franchised restaurant, was $72,000 in the fiscal 2016 period, as compared to $65,000 in the fiscal 2015 period.

Interest expense of $11,126,000 in the fiscal 2016 period represents interest of $10,237,000 on the Notes and amortization of debt discounts and issuance costs of $889,000 during the same period. As a result of the issuance of the Notes, Nathan’s expects to incur interest expense of approximately $13.5 million per annum and annual amortization of debt discounts and issuance costs of approximately $1,185,000.

Provision for Income Taxes

In the fiscal 2016 period, the income tax provision was $3,886,000 or 41.0% of earnings before income taxes as compared to $7,027,000 or 40.9% of earnings before income taxes in the fiscal 2015 period. During the third quarter fiscal 2016, we recorded a tax true-up of approximately $16,000 in connection with the filing of our tax returns for the year ended March 29, 2015. Nathan’s effective tax rate was reduced by 0.1% during the fiscal 2016 period and reduced by 0.3% during the fiscal 2015 period, due to the differing effects of tax-exempt interest income. Nathan’s effective tax rates without these adjustments would have been 41.1% for the fiscal 2016 period and 41.2% for the fiscal 2015 period. Nathan’s estimates that its unrecognized tax benefits including the related accrued interest and penalties could be further reduced by up to $183,000 during the remainder of fiscal 2016. As described under Note L to the Consolidated Financial Statements, Nathan’s estimates that its annual tax rate for the fiscal year ending March 27, 2016 will be in the range of approximately 40.5% to 41.9% excluding the potential impact of any reduction to the Company’s unrecognized tax benefits.

Off-Balance Sheet Arrangements

Nathan’s hot dog manufacturer, John Morrell & Co., completed manufacturing approximately 2.6 million pounds of hot dogs totaling approximately $5.2 million. Nathan’s expects to begin purchasing this product in February 2016 until this purchase commitment has been fulfilled.

Liquidity and Capital Resources

Cash and cash equivalents at December 27, 2015 aggregated $59,708,000, an $8,315,000 increase during the fiscal 2016 period as compared to cash and cash equivalents of $51,393,000 at March 29, 2015. At December 27, 2015, marketable securities had been converted into cash and cash equivalents as compared to $7,091,000 at March 29, 2015 and net working capital decreased to $57,373,000 from $61,605,000 at March 29, 2015.

On March 10, 2015, the Company completed an offering of $135.0 million aggregate principal amount of Notes. The Company used the net proceeds of the Notes offering to pay a special dividend of $25.00 per share (approximately $116.1 million in the aggregate) to Company stockholders of record and will use the remaining net proceeds for general corporate purposes, including working capital.

The Notes were issued pursuant to an indenture, dated as of March 10, 2015 (the “Indenture”), by and among the Company, certain of its wholly-owned subsidiaries, as guarantors, and U.S. Bank National Association, a national banking association, as trustee and collateral trustee.

The Notes mature on March 15, 2020 and bear interest at a rate of 10.000% per annum, payable semi-annually in cash in arrears on March 15 and September 15 of each year, beginning September 15, 2015. The Notes are redeemable under certain circumstances.

The Indenture contains certain covenants limiting the Company’s ability and the ability of its restricted subsidiaries (as defined in the Indenture) to, subject to certain exceptions and qualifications: (i) incur additional indebtedness; (ii) pay dividends or make other distributions on, redeem or repurchase, capital stock; (iii) make investments or other restricted payments; (iv) create or incur certain liens; (v) incur restrictions on the payment of dividends or other distributions from its restricted subsidiaries; (vi) enter into certain transactions with affiliates; (vii) sell assets; or (viii) effect a consolidation or merger.

The Indenture also contains customary events of default, including, among other things, failure to pay interest, failure to comply with agreements related to the Indenture, failure to pay at maturity or acceleration of other indebtedness, failure to pay certain judgments, and certain events of insolvency or bankruptcy. Generally, if any event of default occurs, the Trustee or the holders of at least 25% in principal amount of the Notes may declare the Notes due and payable by providing notice to the Company. In case of default arising from certain events of bankruptcy or insolvency, the Notes will become immediately due and payable.

As of December 27, 2015, Nathan’s was in compliance with all covenants associated with the Notes.

The Notes are general senior secured obligations, are fully and unconditionally guaranteed by substantially all of the Company’s wholly-owned subsidiaries and rank pari passu in right of payment with all of the Company’s existing and future indebtedness that is not subordinated, are senior in right of payment to any of the Company’s existing and future subordinated indebtedness, are structurally subordinated to any existing and future indebtedness and other liabilities of the Company’s subsidiaries that do not guarantee the Notes, and are effectively junior to all existing and future indebtedness that is secured by assets other than the collateral securing the Notes. Pursuant to the terms of a collateral trust agreement, the liens securing the Notes and the guarantees will be contractually subordinated to the liens securing any future credit facility.

The Notes and the guarantees will be the Company and the guarantors’ senior secured obligations and will rank:

Cash provided by operations of $13,288,000 in the fiscal 2016 period is primarily attributable to net income of $5,589,000 in addition to other non-cash operating items of $2,489,000, and increased changes in other operating assets and liabilities of $5,210,000. Accounts and other receivables decreased by $441,000 due primarily to seasonal reductions in royalties of $571,000, Branded Product Program sales of $323,000, and lower interest income receivable of $120,000, partly offset by advances to the Advertising Fund of $679,000. The decrease in prepaid expenses of $3,618,000 relates primarily to the utilization of prepaid income taxes at March 29, 2015 of $3,525,000 against Nathan’s current year estimated income tax payments, including the receipt of a refund of $1,500,000 from the IRS. The increase in accounts payable, accrued expenses and other current liabilities of $1,200,000 is primarily due to increased interest expense of $3,300,000 which was partially offset by lower accounts payable of $1,143,000 and a decrease of accrued incentive compensation of $752,000.

Cash provided by investing activities was $6,431,000 in the fiscal 2016 period. We received cash proceeds of $10,868,000 from the sales and maturity of available-for-sale securities. We sold all tax exempt municipal investments with the intent of re-investing in taxable investments. Prior to the sale, we purchased available-for-sale securities of $3,887,000. We also incurred capital expenditures of $550,000 primarily in connection with our Branded Product Program and select restaurant improvements.

Cash used in financing activities of $11,404,000 in the fiscal 2016 period relates to the Company’s purchase of 273,870 shares of its common stock at a cost of $11,270,000 during the fiscal 2016 period pursuant to our stock repurchase plan and the modified Dutch Auction tender offer, as more fully described below. Additionally, the Company incurred additional debt issuance costs of $60,000 and paid $260,000 for the payment of withholding tax on the net share settlement of employee stock options. Nathan’s expects to realize tax benefits associated with employee stock option exercises of $142,000 and also received proceeds from the exercise of employee stock options of $44,000.

During the period from October 2001 through December 27, 2015, Nathan’s purchased 4,921,557 shares of its common stock at a cost of approximately $68,070,000 pursuant to its stock repurchase plans previously authorized by the Board of Directors. Since March 26, 2007, to date, we have repurchased 3,030,457 shares at a total cost of approximately $60,912,000, reducing the number of shares then-outstanding by 50.4%.

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 27, 2015, the Company had repurchased 733,926 shares at a cost of $20,409,000 under the sixth stock repurchase plan.

An aggregate of 66,074 shares can still be purchased under Nathan’s existing stock buy-back program, as of December 27, 2015. On February 1, 2016, Nathan’s Board of Directors has authorized the purchase by Nathan’s of up to an additional 200,00 shares of its common stock. After giving effect to the increase in the number of shares, an aggregate 266,074 shares remain available for purchase under Nathan’s stock buy-back program. 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 the 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. As of December 27, 2015, all purchases pursuant to the 10b5-1 plan have been completed.

On December 2, 2015, we purchased 88,672 shares of common stock in a modified Dutch Auction tender offer at a price of $44.00 per share. The total cost was $4,056,000, including fees and expenses related to the modified Dutch Auction tender offer.

Management believes that available cash, and cash generated from operations should provide sufficient capital to finance our operations, satisfy our debt service requirements and for any stock repurchases for at least the next 12 months.

As discussed above, we had cash and cash equivalents at December 27, 2015 aggregating $59,708,000. Our Board routinely monitors and assesses its cash position and our current and potential capital requirements. In March 2015, we completed a dividend recapitalization, to return approximately $116,100,000 to our shareholders and 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.

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, service the outstanding debt 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. In the fiscal year ending March 27, 2016, we will be required to make interest payments of approximately $13.8 million. On September 15, 2015, Nathan’s paid interest of $6,937,500.

At December 27, 2015, we sublet one property to a franchisee that we lease from a third party. We remain contingently liable for all costs associated with this property including: rent, property taxes and insurance. We may incur future cash payments with respect to such property, consisting primarily of future lease payments, including costs and expenses associated with terminating such lease.

The following schedule represents Nathan’s cash contractual obligations and commitments by maturity as of December 27, 2015 (in thousands):