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

FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

(Mark One)

 

[ X ]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 28, 2015.

OR

[    ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934

 

For the transition period from                            to                           .

 

Commission file number 0-3189

 

NATHAN'S FAMOUS, INC.

(Exact name of registrant as specified in its charter)

 

   

Delaware

11-3166443  
  (State or other jurisdiction of incorporation or organization)

 (I.R.S. Employer Identification No.)

 

 

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):

Large accelerated filer __                                 

Accelerated filer X
  Non-accelerated filer __

Smaller reporting company __

 

(Do not check if a smaller reporting company)

 

 

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 August 5, 2015, an aggregate of 4,430,523 shares of the registrant's common stock, par value of $.01, were outstanding.

 

 
-1-

 

 

NATHAN'S FAMOUS, INC. AND SUBSIDIARIES

 

INDEX

 

PART I.

FINANCIAL INFORMATION

Page Number

Item 1.

Financial Statements.

3

     
  Consolidated Financial Statements  
  Consolidated Balance Sheets – June 28, 2015 (Unaudited) and March 29, 2015 3
     
  Consolidated Statements of Earnings (Unaudited) - Thirteen Weeks Ended June 28, 2015 and June 29, 2014 4
     
  Consolidated Statements of Comprehensive Income (Unaudited) - Thirteen Weeks Ended June 28, 2015 and June 29, 2014 5
 

 

 
  Consolidated Statement of Stockholders’ (Deficit) (Unaudited) – Thirteen Weeks Ended June 28, 2015 6
     
 

Consolidated Statements of Cash Flows (Unaudited) – Thirteen Weeks Ended June 28, 2015 and June 29, 2014

7
     
  Notes to Consolidated Financial Statements 8
     

Item 2.

Management's Discussion and Analysis of Financial

18
 

Condition and Results of Operations.

 
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

26

     

Item 4.

Controls and Procedures.

27

     

PART II.

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings.

28

     

Item 1A.

Risk Factors.

28

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

29

     

Item 3.

Defaults Upon Senior Securities.

29

     

Item 4.

Mine Safety Disclosures.

29

     

Item 5.

Other Information.

29

     

Item 6.

Exhibits.

30

     

SIGNATURES

 

31
     

Exhibit Index

 

32

 

 
-2-

 

 

Nathan’s Famous, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

June 28, 2015 and March 29, 2015

(in thousands, except share and per share amounts)

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ASSETS

 

June 28, 2015

   

March 29, 2015

 

CURRENT ASSETS

               

Cash and cash equivalents

  $ 51,603     $ 51,393  

Marketable securities

    7,832       7,091  

Accounts and other receivables, net

    12,542       9,499  

Inventories

    1,120       822  

Prepaid expenses and other current assets (Note H)

    1,360       4,532  

Deferred income taxes

    277       277  

Total current assets

    74,734       73,614  
                 

Property and equipment, net of accumulated depreciation of $7,285 and $6,946, respectively

    9,072       9,257  

Goodwill

    95       95  

Intangible asset

    1,353       1,353  

Other assets

    343       347  
                 
    $ 85,597     $ 84,666  
                 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT)

               
                 

CURRENT LIABILITIES

               

Accounts payable

  $ 7,118     $ 5,319  

Accrued expenses and other current liabilities (Note I)

    8,123       6,412  

Deferred franchise fees

    376       278  

Total current liabilities

    15,617       12,009  
                 

Long-term debt, net of unamortized debt discounts and issuance costs of $5,563 and $5,860, respectively (Note N)

    129,437       129,140  

Other liabilities

    2,193       2,397  

Deferred income taxes

    1,060       1,028  
                 

Total liabilities

    148,307       144,574  
                 

COMMITMENTS AND CONTINGENCIES (Note O)

               
                 

STOCKHOLDERS’ (DEFICIT)

               
Common stock, $.01 par value; 30,000,000 shares authorized; 9,263,408 and 9,252,097 shares issued; and 4,479,734 and 4,604,410 shares outstanding at June 28, 2015 and March 29, 2015, respectively     93       93  

Additional paid-in capital

    60,449       60,196  

Accumulated (deficit)

    (61,134 )     (63,444 )

Accumulated other comprehensive income

    42       47  
      (550 )     (3,108 )

Treasury stock, at cost, 4,783,674 and 4,647,687 shares at June 28, 2015 and March 29, 2015, respectively

    (62,160 )     (56,800 )

Total stockholders’ (deficit)

    (62,710 )     (59,908 )
                 
    $ 85,597     $ 84,666  

 

The accompanying notes are an integral part of these statements.

 

 
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Nathan’s Famous, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF EARNINGS

Thirteen weeks ended June 28, 2015 and June 29, 2014

(in thousands, except share and per share amounts)

(Unaudited)

 

   

June 28, 2015

   

June 29, 2014

 
                 

REVENUES

               

Sales

  $ 22,891     $ 20,528  

License royalties

    6,536       5,568  

Franchise fees and royalties

    1,227       1,489  

Total revenues

    30,654       27,585  
                 

COSTS AND EXPENSES

               

Cost of sales

    18,106       16,288  

Restaurant operating expenses

    969       1,064  

Depreciation and amortization

    339       346  

General and administrative expenses

    3,624       3,108  

Total costs and expenses

    23,038       20,806  
                 

Income from operations

    7,616       6,779  
                 

Interest expense

    (3,709 )     -  

Interest income

    5       62  

Other income, net

    26       21  
                 

Income before provision for income taxes

    3,938       6,862  

Provision for income taxes

    1,628       2,791  

Net income

  $ 2,310     $ 4,071  
                 

PER SHARE INFORMATION

               

Income per share:

               

Basic

  $ .50     $ .91  

Diluted

  $ .50     $ .89  
                 

Weighted average shares used in computing income per share:

               

Basic

    4,584,000       4,471,000  

Diluted

    4,621,000       4,593,000  

 

The accompanying notes are an integral part of these statements.

 

 
-4-

 

 

Nathan’s Famous, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Thirteen weeks ended June 28, 2015 and June 29, 2014

(in thousands)

(Unaudited)

 

 

   

June 28, 2015

   

June 29, 2014

 
                 

Net income

  $ 2,310     $ 4,071  
                 

Other comprehensive loss, net of deferred income taxes:

               
                 

Unrealized losses on marketable securities

    (5 )     (32 )
                 

Other comprehensive loss

    (5 )     (32 )
                 

Comprehensive income

  $ 2,305     $ 4,039  

 

The accompanying notes are an integral part of these statements.

 

 
-5-

 

 

Nathan’s Famous, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIT)

Thirteen weeks ended June 28, 2015

(in thousands, except share amounts)

(Unaudited)

 

                                   

Accumulated

                         
                   

Additional

           

Other

                   

Total

 
   

Common

   

Common

   

Paid-in

   

(Accumulated

   

Comprehensive

   

Treasury Stock, at Cost

   

Stockholders’

 
   

Shares

   

Stock

   

Capital

   

Deficit)

   

Income

   

Shares

   

Amount

   

(Deficit)

 
                                                                 

Balance, March 29, 2015

    9,252,097     $ 93     $ 60,196     $ (63,444 )   $ 47       4,647,687     $ (56,800 )   $ (59,908)  
                                                                 

Shares issued in connection with share- based compensation plans

    11,311       -       44                                       44  
                                                                 

Withholding tax on net share settlement of share-based compensation plans

                    (59 )                                     (59)  
                                                                 

Repurchase of common stock

                                            135,987       (5,360 )     (5,360)  
                                                                 

Income tax benefit on stock option exercises

                    65                                       65  
                                                                 

Share-based compensation

                    203                                       203  
                                                                 

Unrealized losses on available-for-sale securities, net of deferred income tax benefit of $(3)

                                    (5)                       (5)  
                                                                 

Net income

    -       -       -       2,310       -       -       -       2,310  

Balance, June 28, 2015

    9,263,408     $ 93     $ 60,449     $ (61,134 )   $ 42       4,783,674     $ (62,160 )   $ (62,710)  

                 

The accompanying notes are an integral part of this statement.

 

 
-6-

 

  

Nathan’s Famous, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Thirteen weeks ended June 28, 2015 and June 29, 2014

(in thousands)

(Unaudited)

   

June 28, 2015

   

June 29, 2014

 

Cash flows from operating activities:

               

Net income

  $ 2,310     $ 4,071  

Adjustments to reconcile net income to net cash provided by operating activities

               

Depreciation and amortization

    339       346  

Amortization of bond premium

    68       48  

Amortization of debt discounts and issuance costs

    297       -  

Share-based compensation expense

    203       191  

Provision for doubtful accounts

    16       -  

Deferred income taxes

    35       44  

Changes in operating assets and liabilities:

               

Accounts and other receivables, net

    (3,059 )     (3,337 )

Insurance proceeds received for business interruption claim

    -       718  

Inventories

    (298 )     (158 )

Prepaid expenses and other current assets

    3,172       2,440  

Other assets

    4       48  

Accounts payable, accrued expenses and other current liabilities

    3,635       (1,412 )

Deferred franchise fees

    98       85  

Other liabilities

    (204 )     (65 )
                 

Net cash provided by operating activities

    6,616       3,019  
                 

Cash flows from investing activities:

               

Proceeds from sale and maturities of available-for-sale securities

    3,070       1,670  

Purchase of property and equipment

    (154 )     (220 )

Purchase of available-for-sale securities

    (3,887 )     -  
                 

Net cash (used in) provided by investing activities

    (971 )     1,450  
                 

Cash flows from financing activities:

               

Income tax benefit on stock option exercises

    65       294  

Proceeds from exercise of stock options

    44       89  

Dividends paid upon vesting of restricted stock

    (125 )     -  

Payments of withholding tax on net share settlement of share-based compensation plans

    (59 )     (265 )

Repurchase of treasury stock

    (5,360 )     (1,559 )
                 

Net cash (used in) financing activities

    (5,435 )     (1,441 )
                 

Net increase in cash and cash equivalents

    210       3,028  
                 

Cash and cash equivalents, beginning of period

    51,393       22,077  
                 

Cash and cash equivalents, end of period

  $ 51,603     $ 25,105  
                 

Cash paid during the period for:

               

Interest

  $ -     $ -  

Income taxes (refunded) / paid

  $ (1,453 )   $ 36  

 

The accompanying notes are an integral part of these statements.

 

 
-7-

 

 

NATHAN'S FAMOUS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 28, 2015

(Unaudited)

NOTE A - BASIS OF PRESENTATION

 

The accompanying consolidated financial statements of Nathan's Famous, Inc. and subsidiaries (collectively “Nathan’s,” the “Company,” “we,” “us” or “our”) as of and for the thirteen week periods ended June 28, 2015 and June 29, 2014 have been prepared in accordance with accounting principles generally accepted in the United States of America. The unaudited financial statements include all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of financial condition, results of operations and cash flows for the periods presented. However, our results of operations are seasonal in nature, and the results of any interim period are not necessarily indicative of results for any other interim period or the full fiscal year.

 

Certain information and footnote disclosures normally included in financial statements in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the requirements of the Securities and Exchange Commission. Management believes that the disclosures included in the accompanying consolidated interim financial statements and footnotes are adequate to make the information not misleading, but should be read in conjunction with the consolidated financial statements and notes thereto included in Nathan’s Annual Report on Form 10-K for the fiscal year ended March 29, 2015.

 

A summary of the Company’s significant accounting policies is identified in Note B of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 29, 2015. There have been no changes to the Company’s significant accounting policies subsequent to March 29, 2015.

 

NOTE B – ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

 

In April 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance changing the criteria for reporting discontinued operations. The revised definition of a discontinued operation includes those components of an entity or a group of components of an entity representing a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The guidance eliminates the current requirement to assess continuing cash flow and continuing involvement with the disposal group. The revised definition also includes a business or nonprofit activity that, on acquisition, meets the criteria to be classified as held for sale. A disposal meeting the new definition is required to be reported as discontinued operations when the component of an entity or group of components of an entity meets the held for sale criteria, is actually disposed of by sales, or is disposed of through means other than a sale. The guidance was effective for the Company beginning in the first quarter of fiscal 2016 and did not have a material impact on its results of operations or financial position.

 

In January 2015, the FASB issued new guidance to simplify the income statement presentation requirements by eliminating the seldom-used concept of extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary classification simplifies the income statement presentation by no longer segregating such extraordinary items from the ordinary results of operations and separately stating the amount, net of tax along with the effect on earnings per share. This new standard is effective for annual periods beginning after December 15, 2015, including interim periods therein, which for Nathan’s would be its first quarter of fiscal 2017 beginning March 28, 2016. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company early adopted this standard beginning in the first quarter of fiscal 2016. The adoption did not have a material impact on its results of operations or financial position.

 

NOTE C – NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

 

In May 2014, the FASB issued a new accounting standard that attempts to establish a uniform basis for recording income to virtually all industries financial statements, under U.S. GAAP. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. In order to accomplish this objective, companies must evaluate the following five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. There are three basic transition methods that are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the third alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings. Prior years would not be restated and additional disclosures would be required to enable users of the financial statements to understand the impact of adopting the new standard in the current year compared to prior years that are presented under legacy U.S. GAAP. Early adoption is prohibited under U.S. GAAP. Public companies were originally expected to apply the new standard for annual periods beginning after December 15, 2016, including interim periods therein, which for Nathan’s would have been its first quarter of fiscal 2018, beginning on March 27, 2017. On May 12, 2015 the FASB issued a second proposed update to the standard clarifying the distinction between revenue from licenses of intellectual property that represent a promise to deliver a good or service over time versus a promise to be satisfied at a point in time. On July 9, 2015, the FASB agreed to delay the standard’s effective date to annual reporting periods beginning after December 15, 2017 which will now be our first quarter (June 2018) of our fiscal year ending March 31, 2019. The Company is currently evaluating the impact of this new accounting standard on its consolidated financial position and results of operations.

 

 
-8-

 

 

In August 2014, the FASB issued new guidance that requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. If such conditions exist, management will be required to include disclosures enabling users to understand those conditions and management’s plans to alleviate or mitigate those conditions. This new standard is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 16, 2016. This standard will take effect in Nathan’s fourth quarter of our fiscal year ending March 26, 2017.

 

In July 2015, the FASB updated U.S. GAAP to simplify the ways businesses measure inventory. Companies that use the first-in, first-out (FIFO) method or the average cost method will measure inventory at the lower of its cost or net realizable value. Net realizable value is the estimated selling price in the normal course of business, minus the cost of completion, disposal, and transportation. Companies will no longer consider replacement cost or net realizable value less a normal profit margin when measuring inventory. This new standard is effective for annual reporting periods beginning after December 15, 2016 which will be our first quarter (June 2017) of our fiscal year ending March 25, 2018. Nathan’s does not expect the adoption of this new guidance to have a material impact on its results of operations or financial position.

 

The Company does not believe that any other recently issued, but not yet effective accounting standards, when adopted, will have a material effect on the accompanying financial statements.

 

NOTE D – INCOME PER SHARE 

    

Basic income per common share is calculated by dividing income by the weighted-average number of common shares outstanding and excludes any dilutive effect of stock options. Diluted income per common share gives effect to all potentially dilutive common shares that were outstanding during the period. Dilutive common shares used in the computation of diluted income per common share result from the assumed exercise of stock options and warrants, as determined using the treasury stock method.

 

The following chart provides a reconciliation of information used in calculating the per-share amounts for the thirteen-week periods ended June 28, 2015 and June 29, 2014, respectively.

 

Thirteen weeks

                                               
                                   

Net Income

 
   

Net Income

   

Number of Shares

   

Per Share

 
   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

 
   

(in thousands)

   

(in thousands)

                 

Basic EPS

                                               

Basic calculation

  $ 2,310     $ 4,071       4,584       4,471     $ 0.50     $ 0.91  

Effect of dilutive employee stock options

    -       -       37       122       -       (0.02 )

Diluted EPS

                                               

Diluted calculation

  $ 2,310     $ 4,071       4,621       4,593     $ 0.50     $ 0.89  

 

There were no options to purchase shares of common stock for the thirteen week periods ended June 28, 2015 and June 29, 2014 that were excluded from the computation of diluted earnings per share.

 

 
-9-

 

 

NOTE E – FAIR VALUE MEASUREMENTS

 

Nathan’s follows a three-level fair value hierarchy that prioritizes the inputs to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:

 

●     Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market

 

●     Level 2 - inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability

 

●     Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability

 

The following table presents assets measured at fair value on a recurring basis as of June 28, 2015 and March 29, 2015 based upon the valuation hierarchy (in thousands):

 

 

June 28, 2015

 

Level 1

   

Level 2

   

Level 3

   

Carrying Value

 
                         

Marketable securities

  $ -     $ 7,832     $ -     $ 7,832  
                                 

Total assets at fair value

  $ -     $ 7,832     $ -     $ 7,832  

 

 

March 29, 2015

 

Level 1

   

Level 2

   

Level 3

   

Carrying Value

 
                         

Marketable securities

  $ -     $ 7,091     $ -     $ 7,091  
                                 

Total assets at fair value

  $ -     $ 7,091     $ -     $ 7,091  

 

 

Nathan’s marketable securities, which consist primarily of municipal bonds, are not actively traded. The valuation of such bonds is based upon quoted market prices for similar bonds currently trading in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset.

 

The Company’s long-term debt had a carrying value of $135,000,000 as of June 28, 2015 and a fair value of $144,788,000 as of June 28, 2015. The Company estimates the fair value of its long-term debt based upon review of observable pricing in secondary markets as of the last trading day of the fiscal period. Accordingly, the Company classifies its long-term debt as Level 2.

 

The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of the instruments.

 

Certain non-financial assets and liabilities are measured at fair value on a non-recurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances, such as when evidence of impairment exists. At June 28, 2015, no fair value adjustment or material fair value measurements were required for non-financial assets or liabilities.

 

NOTE F – MARKETABLE SECURITIES          

 

The Company determines the appropriate classification of securities at the time of purchase and reassesses the appropriateness of the classification at each reporting date. At June 28, 2015 and March 29, 2015, all marketable securities held by the Company have been classified as available-for-sale and, as a result, are stated at fair value (Note E), with unrealized gains and losses included as a component of accumulated other comprehensive income. Realized gains and losses on the sale of securities are determined on a specific identification basis. Interest income is recorded when it is earned and deemed realizable by the Company.

 

 
-10-

 

 

The cost, gross unrealized gains, gross unrealized losses and fair market value for marketable securities, which consist entirely of municipal bonds that are classified as available-for-sale securities, are as follows (in thousands):

 

   

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Market

Value

 
                                 

June 28, 2015

  $ 7,768     $ 64     $ -     $ 7,832  
                                 

March 29, 2015

  $ 7,019     $ 72     $ -     $ 7,091  

 

The municipal bonds held at June 28, 2015, mature at various dates between July 2015 and January 2017. The following represents the bond maturities by period (in thousands):    

      

Fair value of Municipal Bonds

 

Total

   

Less than

1 Year

   

1 – 5 Years

   

5 – 10 Years

   

After

10 Years

 
                                         

June 28, 2015

  $ 7,832     $ 6,767     $ 1,065     $ -     $ -  

 

The change in net unrealized losses on available-for-sale securities for the thirteen-week periods ended June 28, 2015 and June 29, 2014 of $5,000 and $32,000, respectively, which are net of deferred income tax benefit, of $3,000 and $22,000, respectively, have been included as a component of comprehensive income. Accumulated other comprehensive income is comprised entirely of the net unrealized gains on available-for-sale securities as of June 28, 2015 and March 29, 2015.

 

NOTE G – ACCOUNTS AND OTHER RECEIVABLES, NET

 

Accounts and other receivables, net, consist of the following (in thousands):

 

   

June 28,

   

March 29,

 
   

2015

   

2015

 
                 

Branded product sales

  $ 7,709     $ 6,317  

Franchise and license royalties

    3,708       2,570  

Other

    1,572       1,055  
      12,989       9,942  
                 

Less: allowance for doubtful accounts

    447       443  

Accounts and other receivables, net

  $ 12,542     $ 9,499  

 

Accounts receivable are due within 30 days and are stated at amounts due from franchisees, retail licensees and Branded Product Program customers, net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are generally considered past due. The Company does not recognize franchise and license royalties that are not deemed to be realizable.

 

The Company individually reviews each past due account and determines its allowance for doubtful accounts by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current and expected future ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings. After the Company has used reasonable collection efforts it writes off accounts receivable through a charge to the allowance for doubtful accounts.

 

Changes in the Company’s allowance for doubtful accounts for the thirteen-week period ended June 28, 2015 and the fiscal year ended March 29, 2015 are as follows (in thousands):  

   

   

June 28,

2015

   

March 29,

2015

 
                 

Beginning balance

  $ 443     $ 433  

Bad debt expense

    16       23  

Accounts written off

    (12 )     (13 )

Ending balance

  $ 447     $ 443  

 

 
-11-

 

 

NOTE H – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following (in thousands):

 

   

June 28,

   

March 29,

 
   

2015

   

2015

 
                 

Income taxes

  $ 532     $ 3,525  

Insurance

    303       497  

Other

    525       510  
    $ 1,360     $ 4,532  

 

NOTE I – ACCRUED EXPENSES, OTHER CURRENT LIABILITIES AND OTHER LIABILITIES

 

Accrued expenses and other current liabilities consist of the following (in thousands):

 

   

June 28,

   

March 29,

 
   

2015

   

2015

 

Payroll and other benefits

  $ 1,452     $ 2,847  

Accrued rebates

    789       815  

Rent and occupancy costs

    301       206  

Deferred revenue

    383       601  

Construction costs

    186       269  

Interest

    4,163       750  

Professional fees

    224       329  

Dividend payable

    375       375  

Other

    250       220  
    $ 8,123     $ 6,412  

 

Other liabilities consist of the following (in thousands):

 

   

June 28,

   

March 29,

 
   

2015

   

2015

 

Deferred development fees

  $ 177     $ 214  

Reserve for uncertain tax positions

    548       555  

Deferred rental liability

    961       991  

Dividend payable

    500       625  

Other

    7       12  
    $ 2,193     $ 2,397  

 

NOTE J – SALES

 

The Company’s sales for the thirteen weeks ended June 28, 2015 and June 29, 2014 are as follows (in thousands):

 

   

Thirteen weeks ended

 
   

June 28, 2015

   

June 29, 2014

 
                 

Branded Products

  $ 17,415     $ 15,064  

Company-operated restaurants

    5,299       5,291  

Other

    177       173  

Total sales

  $ 22,891     $ 20,528  

 

 
-12-

 

 

NOTE K – INCOME TAXES

 

The income tax provisions for the thirteen-week periods ended June 28, 2015 and June 29, 2014 reflect effective tax rates of 41.3% and 40.7%, respectively, which have been reduced from statutory rates by 0.1% and 0.4%, respectively, for the differing effects of tax exempt interest income.

 

The amount of unrecognized tax benefits at June 28, 2015 was $253,000, all of which would impact Nathan’s effective tax rate, if recognized. As of June 28, 2015, Nathan’s had $291,000 of accrued interest and penalties in connection with unrecognized tax benefits.

 

During the fiscal year ending March 27, 2016, Nathan’s will seek to settle additional uncertain tax positions with the tax authorities. As a result, it is reasonably possible the amount of unrecognized tax benefits, excluding the related accrued interest and penalties, could be reduced by up to $98,000, which would favorably impact Nathan’s effective tax rate, although no assurances can be given in this regard.

 

Nathan’s estimates that its annual tax rate for the fiscal year ending March 27, 2016 will be in the range of approximately 40.4% to 41.6%, excluding the potential impact of any reduction to the Company’s unrecognized tax benefits. The final annual tax rate is subject to many variables, including the effect of tax-exempt interest earned, among other factors, and therefore cannot be determined until the end of the fiscal year; therefore, the actual tax rate could differ from our current estimates.

 

In June 2015, Nathan’s received notification from the New York State Department of Taxation and Finance that it is seeking to review Nathan’s tax returns for the period April 1, 2011 through March 31, 2014.

 

NOTE L – SHARE-BASED COMPENSATION

 

Total share-based compensation during the thirteen-week periods ended June 28, 2015 and June 29, 2014 was $203,000 and $191,000, respectively. Total share-based compensation is included in general and administrative expense in our accompanying Consolidated Statements of Earnings. As of June 28, 2015, there was $1,599,000 of unamortized compensation expense related to share-based incentive awards. We expect to recognize this expense over approximately two years and eight months, which represents the weighted average remaining requisite service periods for such awards.

 

 

There were no new share-based awards granted during the thirteen-week period ended June 28, 2015.

 

The Company recognizes compensation cost for unvested stock-based incentive awards on a straight-line basis over the requisite service period. Compensation cost charged to expense under all stock-based incentive awards is as follows (in thousands):

 

   

Thirteen weeks ended

 
   

June 28, 2015

   

June 29, 2014

 
                 

Stock options

  $ 68     $ 56  

Restricted stock

    135       135  

Total compensation cost

  $ 203     $ 191  

 

 

Stock options outstanding: 

 

During the fiscal year ended March 29, 2015, the Company granted options to purchase 50,000 shares at an exercise price of $53.89 per share, all of which expire five years from the date of grant. All such stock options vest ratably over a four-year period commencing August 6, 2015.

 

The ex-dividend date for the special cash dividend was March 30, 2015, which was paid on March 27, 2015, to stockholders of record as of March 20, 2015. Pursuant to the anti-dilution provisions of the Company’s 2010 Stock Incentive Plan, as awarded, the Company issued 75,745 replacement options at an exercise price of $35.576 for the unvested stock options that were outstanding as of March 29, 2015. Nathan’s performed its evaluation based on the closing price of its common stock on Friday, March 27, 2015 of $73.56 per share, or $48.56 per share excluding the dividend of $25.00 per share. No other terms or conditions of the outstanding options were modified. The anti-dilution provisions of the original award were structured to equalize the award’s fair value before and after the modification.

 

 
-13-

 

 

Transactions with respect to stock options for the thirteen weeks ended June 28, 2015 are as follows:

 

           

Weighted-

   

Weighted-

   

Aggregate

 
           

Average

   

Average

   

Intrinsic

 
           

Exercise

   

Remaining

   

Value

 
   

Shares

   

Price

   

Contractual Life

   

(in thousands)

 
                                 
                                 

Options outstanding at the beginning of the fiscal year (A)

    142,964     $ 24.36       2.87     $ 3,460  
                                 

Granted

    -       -       -       -  
                                 

Expired

    (3,787 )   $ 11.72       -       -  
                                 

Exercised

    (9,467 )   $ 11.72       -       261  
                                 

Options outstanding at June 28, 2015

    129,710     $ 25.65       2.79     $ 1,423  
                                 

Options exercisable at June 28, 2015

    53,965     $ 11.72       0.94     $ 1,344  

 

 

 

 

A -

Represents outstanding options after giving effect to the replacement options issued in connection with the Company’s special dividend.

 

 

 

Restricted stock: 

 

Transactions with respect to restricted stock for the thirteen weeks ended June 28, 2015 are as follows:

 

           

Weighted-

 
           

Average

 
           

Grant-date

Fair value

 
   

Shares

   

Per share

 

Unvested restricted stock at March 29, 2015

    40,000     $ 39.54  
                 

Granted

    -       -  

Vested

    (5,000 )   $ 49.80  
                 

Unvested restricted stock at June 28, 2015

    35,000     $ 38.07  

 

NOTE M – STOCKHOLDERS’ EQUITY

 

 

1. Dividend

 

On March 10, 2015, the Company’s Board of Directors declared a special cash dividend of $25.00 per share payable to stockholders of record as of March 20, 2015. On March 27, 2015, the Company paid cash dividends of approximately $115,100,000 to the stockholders of our outstanding common stock. The Company also accrued $1,000,000 for the expected dividends payable on unvested shares pursuant to the terms of the restricted stock agreements. As certain restricted stock grants vest beginning in June 2015, the declared dividend will be paid. We have paid $125,000 of the accrued dividend and estimate that approximately $250,000 will also be paid during the remainder of the fiscal year. The ex-date for the distribution was March 30, 2015 pursuant to NASDAQ regulations for dividend distributions that are greater than 25% of the Company’s market capitalization.

 

2. Common Stock Purchase Rights

 

On June 5, 2013, Nathan’s adopted a new stockholder rights plan (the “2013 Rights Plan”) under which all stockholders of record as of June 17, 2013 received rights to purchase shares of common stock (the “2013 Rights”).

 

The 2013 Rights were distributed as a dividend. Initially, the 2013 Rights will attach to, and trade with, the Company’s common stock. Subject to the terms, conditions and limitations of the 2013 Rights Plan, the 2013 Rights will become exercisable if (among other things) a person or group acquires 15% or more of the Company’s common stock. Upon such an event and payment of the purchase price of $100.00 (the “2013 Right Purchase Price”), each 2013 Right (except those held by the acquiring person or group) will entitle the holder to acquire one share of the Company’s common stock (or the economic equivalent thereof) or, if the then-current market price is less than the then current 2013 Right Purchase Price, a number of shares of the Company’s common stock which at the time of the transaction has a market value equal to the then current 2013 Right Purchase Price at a purchase price per share equal to the then current market price of the Company’s Common Stock.

 

 
-14-

 

 

The Company’s Board of Directors may redeem the 2013 Rights prior to the time they are triggered. Upon adoption of the 2013 Rights Plan, the Company initially reserved 10,188,600 shares of common stock for issuance upon exercise of the 2013 Rights. The 2013 Rights will expire on June 17, 2018 unless earlier redeemed or exchanged by the Company.

 

At June 28, 2015, the Company has reserved 13,293,670 shares of common stock for issuance upon exercise of the Common Stock Purchase Rights approved by the Board of Directors on June 5, 2013.

 

3. Stock Repurchase Programs

 

During the period from October 2001 through June 28, 2015, Nathan’s purchased a total of 4,783,674 shares of its common stock at a cost of approximately $62,160,000 pursuant to various stock repurchase plans previously authorized by the Board of Directors. During the thirteen-week period ended June 28, 2015, we repurchased 135,987 shares of common stock at a cost of $5,360,000.

 

On September 11, 2014, the Company and Mutual Securities, Inc. (“MSI”) amended its existing agreement pursuant to which MSI was authorized 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 June 28, 2015, an aggregate of 115,285 shares can still be purchased under Nathan’s existing 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 these stock-repurchase plans.

 

NOTE N – LONG-TERM DEBT

 

Long-term debt consists of the following (in thousands):

 

   

June 28,

   

March 29,

 
   

2015

   

2015

 
                 

10.000% Senior secured notes due 2020

  $ 135,000     $ 135,000  

Less: unamortized debt discounts and issuance costs

    (5,563 )     (5,860 )
    $ 129,437     $ 129,140  

 

On March 10, 2015, the Company completed the issuance of $135,000,000 of 10.000% Senior Secured Notes due 2020 (“the Notes”) in a Rule 144A transaction. The Company used the proceeds to pay a special cash dividend of approximately $116,100,000 (see Note M) with the remaining net proceeds for general corporate purposes, including working capital. Debt discounts and issuance costs are presented net of the long-term debt of approximately $5,563,000 which will be amortized into interest expense over the remaining 5-year term of the Notes.

 

The Notes bear interest at 10.000% per annum, payable semi-annually on March 15th and September 15th with the first payment due on September 15, 2015. The Notes have no scheduled principal amortization payments prior to its final maturity on March 10, 2020.

 

There are no financial maintenance covenants associated with the Notes. 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. Certain Restricted Payments which may be made or indebtedness incurred by Nathan’s or its Restricted Subsidiaries may require compliance with the following financial ratios:

 

 
-15-

 

 

 

Fixed Charge Coverage Ratio: the ratio of the Consolidated Cash Flow to the Fixed Charges for the relevant period, currently set at 2.0 to 1.0 in the Indenture. The Fixed Charge Coverage Ratio applies to determining whether additional Restricted Payments may be made, certain additional debt may be incurred and acquisitions may be made.

 

Priority Secured Leverage Ratio: the ratio of (a) Consolidated Net Debt outstanding as of such date that is secured by a Priority Lien to (b) Consolidated Cash Flow of Nathan’s for the Test Period then most recently ended, in each case with such pro forma adjustments as are appropriate; currently set at 0.40 to 1.00 in the Indenture.

 

Secured Leverage Ratio: the ratio of (a) Consolidated Net Debt outstanding as of such date that is secured by a Lien on any property of Nathan’s or any Guarantor to (b) Consolidated Cash Flow of Nathan’s for the Test Period then most recently ended, in each case with such pro forma adjustments as are appropriate. The Secured Leverage Ratio under the Indenture is 3.75 to 1.00 and applies if Nathan’s wants to incur additional debt on the same terms as the Notes.

 

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 June 28, 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:

 

 

senior in right of payment to all of the Company and the guarantors’ future subordinated indebtedness;

     
 

effectively senior to all unsecured senior indebtedness to the extent of the value of the collateral securing the Notes and the guarantees;

     
 

pari passu with all of the Company and the guarantors’ other senior indebtedness;

     
 

effectively junior to any future credit facility to the extent of the value of the collateral securing any future credit facility and the Notes and the guarantees and certain other assets;

     
 

effectively junior to any of the Company and the guarantors’ existing and future indebtedness that is secured by assets other than the collateral securing the Notes and the guarantees to the extent of the value of any such assets; and

     
 

structurally subordinated to the indebtedness of any of the Company’s current and future subsidiaries that do not guarantee the Notes.

 

Prior to September 15, 2017, the Company has the option to redeem up to 35% of the aggregate principal amount of the Notes at a redemption price equal to 110% of the principal amount of the Notes redeemed, plus accrued and unpaid interest and any additional interest, with the net cash proceeds of certain equity offerings.

 

The Company may redeem the Notes in whole or in part prior to September 15, 2017, at a redemption price of 100% of the principal amount of the Notes plus the Applicable Premium, plus accrued and unpaid interest. An Applicable Premium is the greater of 1% of the principal amount of the Notes; or the excess of the present value at such redemption date of (i) the redemption price of the Notes at September 15, 2017 plus (ii) all required interest payments due on the Notes through September 15, 2017 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate as of such redemption date plus 50 basis points; over the then outstanding principal amount of the Notes.

 

 
-16-

 

 

On or after September 15, 2017, the Company may redeem some or all of the Notes at a decreasing premium over time, plus accrued and unpaid interest as follows:

 

YEAR     PERCENTAGE  

On or after September 15, 2017 and prior to March 15, 2018

    105.000%  

On or after March 15, 2018 and prior to March 15, 2019

    102.500%  

On or after March 15, 2019

    100.000%  

 

In certain circumstances involving a change of control, the Company will be required to make an offer to repurchase all or, at the holder’s option, any part, of each holder’s Notes pursuant to the offer described below (the “Change of Control Offer”). In the Change of Control Offer, the Company will be required to offer payment in cash equal to 101% of the aggregate principal amount of Notes repurchased plus accrued and unpaid interest, to the date of purchase.

 

If the Company sells certain assets and does not use the net proceeds as required, the Company will be required to use such net proceeds to repurchase the Notes at 100% of the principal amount thereof, plus accrued and unpaid interest and additional interest penalty, if any, to the date of repurchase.

 

The Notes may be traded between qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933. We have recorded the Notes at cost.

 

NOTE O – COMMITMENTS AND CONTINGENCIES

 

1. Contingencies

 

The Company and its subsidiaries are from time to time involved in ordinary and routine litigation. Management presently believes that the ultimate outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, cash flows or results of operations. Nevertheless, litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include money damages and, in such event, could result in a material adverse impact on the Company’s results of operations for the period in which the ruling occurs.

 

NOTE P – SUPERSTORM SANDY

 

October 29, 2012, Superstorm Sandy struck the Northeastern United States, which forced the closing of all of the Company-owned restaurants. During the fiscal year ended March 30, 2014, the Company settled its property damage claim and in April 2014, the Company settled its claim for reimbursable on-going business expenses.

 

NOTE Q - RECLASSIFICATIONS 

 

Nathan’s has adopted a new income statement format that it believes will better present its results of operations. The Company concluded that it was appropriate to separately present its non-operating revenues and expenses. Accordingly, interest expense, interest income and other income, net, have been removed from total revenues and total costs and expenses. These prior year balances have been reclassified to conform with the current year presentation.

 

 
-17-

 

 

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 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 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; no material increases in the minimum wage or other changes in labor laws or the impact of the 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; 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 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).

 

At June 28, 2015, our restaurant system consisted of 291 Nathan’s franchised units, including 118 Branded Menu units, and five Company-owned units (including one seasonal unit), located in 27 states, and ten foreign countries. At June 29, 2014, our restaurant system consisted of 311 Nathan’s franchised units, including 121 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 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 June 28, 2015, the Arthur Treacher’s brand was being 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, as a result of the lingering effect of the drought in the Midwest on beef prices.

 

 
-18-

 

 

On March 10, 2015, we consummated a $135 million offering of 10.000% Senior Secured Notes due 2020 (“the Notes”) and paid a dividend of $25.00 per share (or approximately $116.1 million in the aggregate). 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 $13.5 million per annum and annual amortization of debt discounts and issuance costs of $1,185,000. The Indenture governing the Notes will impose operating and other restrictions on us. Because the Notes were entered into in March 2015, and require us to make semi-annual interest payments, our net income for the quarter ended June 28, 2015 is significantly negatively impacted compared to our reported net income for the quarter ended June 29, 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 B 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 C of the preceding consolidated financial statements for our discussion of New Accounting Pronouncements Not Yet Adopted.

 

EBITDA and Adjusted EBITDA

 

The Company believes that EBITDA and Adjusted EBITDA 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.

 

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 excluding (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.

 

 
-19-

 

  

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

 

   

Thirteen weeks ended

 
   

June 28, 2015

   

June 29, 2014

 
                 
                 

Net income

  $ 2,310     $ 4,071  

Interest expense

    3,709       -  

Income taxes

    1,628       2,791  

Depreciation and amortization

    339       346  

EBITDA

    7,986       7,208  
                 

Stock-based compensation

    203       191  

Amortization of bond premium

    68       48  

Adjusted EBITDA

  $ 8,257     $ 7,447  

 

 

Results of Operations

 

Thirteen weeks ended June 28, 2015 compared to thirteen weeks ended June 29, 2014

 

Revenues

 

Total sales increased by 11.5% to $22,891,000 for the thirteen weeks ended June 28, 2015 (“fiscal 2016 period”) as compared to $20,528,000 for the thirteen weeks ended June 29, 2014 (“fiscal 2015 period”). Foodservice sales from the Branded Product Program increased by 15.6% to $17,415,000 for the fiscal 2016 period as compared to sales of $15,064,000 in the fiscal 2015 period. This increase was primarily attributable to approximately a 10.9% increase in the volume of products sold and the impact of higher average selling prices instituted throughout fiscal 2015. Total Company-owned restaurant sales were $5,299,000 during the fiscal 2016 period compared to $5,291,000 during the fiscal 2015 period. Direct retail sales also increased by $4,000 during the fiscal 2016 period as compared to the fiscal 2015 period.

 

License royalties were $6,536,000 in the fiscal 2016 period as compared to $5,568,000 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 19.7% to $6,095,000 for the 2016 fiscal period as compared to $5,090,000 in the fiscal 2015 period. The increase is substantially attributable to significant 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 decreased by $37,000 during the fiscal 2016 period as compared to the fiscal 2015 period. During the fiscal 2015 period, we recorded royalties in excess of the annual contractual minimum of $62,000 from our license for French Fries and Onion Rings.

 

Franchise fees and royalties were $1,227,000 in the fiscal 2016 period as compared to $1,489,000 in the fiscal 2015 period. Total royalties were $1,186,000 in the fiscal 2016 period as compared to $1,262,000 in the fiscal 2015 period. Royalties earned under the Branded Menu program were $308,000 in the fiscal 2016 period as compared to $283,000 in the fiscal 2015 period due principally to a higher royalty rate that took effect July 1, 2014. 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 $878,000 in the fiscal 2016 period as compared to $979,000 in the fiscal 2015 period. Franchise restaurant sales decreased to $19,413,000 in the fiscal 2016 period as compared to $21,696,000 in the fiscal 2015 period primarily due to the impact of closed locations. Comparable domestic franchise sales (consisting of 103 Nathan’s outlets, excluding sales under the Branded Menu Program) were $15,362,000 in the fiscal 2016 period as compared to $15,463,000 in the fiscal 2015 period, a decrease of 0.7%.

 

At June 28, 2015, 291 domestic and international franchised or Branded Menu Program franchise outlets were operating as compared to 311 domestic and international franchised or Branded Menu Program franchise outlets at June 29, 2014. Total franchise fee income was $41,000 in the fiscal 2016 period compared to $227,000 in the fiscal 2015 period. Domestic franchise fee income was $40,000 in the fiscal 2016 period compared to $35,000 in the fiscal 2015 period. International franchise fee income was $1,000 in the fiscal 2016 period compared to $192,000 during the fiscal 2015 period primarily due to store opening variances in our international franchising program. During the fiscal 2016 period, five new franchised outlets opened and ten new Branded Menu Program outlets opened. During the fiscal 2015 period, four new franchised outlets opened, including our first location in Costa Rica and five Branded Menu Program outlets opened, including three Arthur Treacher’s units.

 

 
-20-

 

 

Costs and Expenses

 

Overall, our cost of sales increased by $1,818,000 to $18,106,000 in the fiscal 2016 period as compared to $16,288,000 in the fiscal 2015 period. Our gross profit (representing the difference between sales and cost of sales) was $4,785,000 or 20.9% of sales during the fiscal 2016 period as compared to $4,240,000 or 20.7% of sales during the fiscal 2015 period. The margin improvement was primarily due to the impact of price increases previously taken during fiscal 2015 in the Branded Product Program and in the Company-operated restaurants.

 

Cost of sales in the Branded Product Program increased by approximately $1,879,000 during the fiscal 2016 period as compared to the fiscal 2015 period, primarily due to the higher volume of product sold and the 4.8% increase in the average cost per pound of our hot dogs. We have not entered into any purchase commitments during the fiscal 2016 period or fiscal 2015 period. If the cost of beef and beef trimmings increases and we are unable to pass on these higher costs through price increases or otherwise reduce any increase in our costs through the use of purchase commitments, our margins will be adversely impacted.

 

With respect to Company-owned restaurants, our cost of sales during the fiscal 2016 period was $2,827,000 or 53.3% of restaurant sales, as compared to $2,894,000 or 54.7% of restaurant sales in the fiscal 2015 period due primarily to lower food and labor costs at our Company-owned restaurants. Our costs going forward could also be impacted by proposed new minimum wage requirements in New York State.

 

Restaurant operating expenses were $969,000 in the fiscal 2016 period as compared to $1,064,000 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. Operating costs of the four comparable restaurants decreased by approximately $22,000 from the fiscal 2015 period to the fiscal 2016 period. 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 $339,000 in the fiscal 2016 period as compared to $346,000 in the fiscal 2015 period. This decrease is primarily attributable to decreased depreciation from the investments made in consigned equipment provided by our Branded Product Program, reduced depreciation and amortization of computer hardware and software which were partly offset by higher depreciation from expenditures made in our relocated Oceanside restaurant that re-opened in March 2015. We expect to incur depreciation expense of approximately $100,000 per annum in connection with this new restaurant.

 

General and administrative expenses increased by $516,000 or 16.6% to $3,624,000 in the fiscal 2016 period as compared to $3,108,000 in the fiscal 2015 period. The increase in general and administrative expenses was primarily due to increased severance costs of $263,000, professional fees of $117,000 and recruiting fees of $71,000.

 

Other Items

 

Interest income was $5,000 in the fiscal 2016 period compared to $62,000 in the fiscal 2015 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. We have recently sold all of the tax-exempt marketable securities and are in the process of re-investing the proceeds into short-term taxable bonds.

 

Other income of $26,000 in the fiscal 2016 period as compared to $21,000 in the fiscal 2015 period relates primarily to a sublease of a franchised restaurant.

 

Interest expense of $3,709,000 in the fiscal 2016 period represents accrued interest of $3,412,000 on the Notes and amortization of debt discounts and issuance costs of $297,000 during the same period. As a result of the issuance of the Notes, Nathan’s expects to incur interest expense of $13.5 million per annum and annual amortization of debt discounts and issuance costs of $1,185,000.

 

Provision for Income Taxes

 

In the fiscal 2016 period, the income tax provision was $1,628,000 or 41.3% of earnings before income taxes as compared to $2,791,000 or 40.7% of income before income taxes in the fiscal 2015 period. Nathan’s effective tax rate was reduced by 0.1% during the fiscal 2016 period and reduced by 0.4% 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 41.4% for the fiscal 2016 period and 41.1% 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 K 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 40.4% to 41.6% excluding the potential impact of any reduction to the Company’s unrecognized tax benefits.

 

 
-21-

 

 

Off-Balance Sheet Arrangements

 

Nathan’s did not have any open purchase commitments for hot dogs outstanding as of June 28, 2015. Nathan’s may enter into purchase commitments in the future as favorable market conditions become available.

 

Liquidity and Capital Resources

 

Cash and cash equivalents at June 28, 2015 aggregated $51,603,000, a $210,000 increase during the fiscal 2016 period as compared to cash and cash equivalents of $51,393,000 at March 29, 2015. At June 28, 2015, marketable securities were $7,832,000 compared to $7,091,000 at March 29, 2015 and net working capital decreased to $59,117,000 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 the 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 June 28, 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:

 

senior in right of payment to all of the Company and the guarantors’ future subordinated indebtedness;

   

effectively senior to all unsecured senior indebtedness to the extent of the value of the collateral securing the Notes and the guarantees;

   

pari passu with all of the Company and the guarantors’ other senior indebtedness;

   

effectively junior to any future credit facility to the extent of the value of the collateral securing any future credit facility and the Notes and the guarantees and certain other assets;

   

effectively junior to any of the Company and the guarantors’ existing and future indebtedness that is secured by assets other than the collateral securing the Notes and the guarantees to the extent of the value of any such assets; and

   

structurally subordinated to the indebtedness of any of the Company’s current and future subsidiaries that do not guarantee the Notes.

 

 
-22-

 

 

Cash provided by operations of $6,616,000 in the fiscal 2016 period is primarily attributable to net income of $2,310,000 in addition to other non-cash operating items of $958,000, and increased changes in other operating assets and liabilities of $3,348,000. Accounts and other receivables increased by $3,059,000 due primarily to increased sales from our Branded Product Program, higher license royalties from John Morrell & Co. and temporary advances to the Advertising Fund. The decrease in prepaid expenses of $3,172,000 primarily relates to the utilization of prepaid income taxes at March 29, 2015 against Nathan’s first quarter estimated income tax payments and the receipt of a quick refund of $1,500,000 from the IRS. The increase in accounts payable, accrued expenses and other current liabilities of $3,643,000 is primarily due to an increase of accrued interest of $3,413,000 on the Notes.

 

Cash used in investing activities was $971,000 in the fiscal 2016 period. We purchased available-for-sale securities of $3,887,000 and incurred capital expenditures of $154,000 in connection with our Branded Product Program and select restaurant improvements. We received cash proceeds of $3,070,000 from the maturity of available-for-sale securities.

 

Cash used in financing activities of $5,435,000 in the fiscal 2016 period relates to the Company’s purchase of 135,987 shares of its common stock at a cost of $5,360,000 during the fiscal 2016 period. We paid dividends of $125,000 relating to the previously declared special cash dividend in connection with the vesting of 5,000 shares of the Company’s restricted stock. Additionally, the Company paid $59,000 for the payment of withholding tax on the net share settlement exercise of employee stock options. Nathan’s expects to realize tax benefits associated with employee stock option exercises of $65,000 and also received proceeds from the exercise of employee stock options of $44,000.

 

During the period from October 2001 through June 28, 2015, Nathan’s purchased a total of 4,783,674 shares of its common stock at a cost of approximately $62,160,000 pursuant to its stock repurchase plans previously authorized by the Board of Directors. Since March 26, 2007, to date, we have repurchased 2,892,574 shares at a total cost of approximately $55,002,000, reducing the number of shares then-outstanding by 48.1%.

 

On November 3, 2009, Nathan’s Board of Directors authorized its sixth stock repurchase plan for the purchase of up to 500,000 shares of its common stock on behalf of the Company. On February 1, 2011, Nathan’s Board of Directors authorized a 300,000 share increase in the number of shares that the Company may repurchase. As of June 28, 2015, the Company had repurchased 684,715 shares at a cost of $18,554,000 under the sixth stock repurchase plan.

 

An aggregate of 115,285 shares can still be purchased under Nathan’s existing stock buy-back program, as of June 28, 2015. 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.

 

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.

 

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

 

As discussed above, we had cash and cash equivalents at June 28, 2015 aggregating $51,603,000, and marketable securities of $7,832,000. 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.

 

 
-23-

 

 

At June 28, 2015, we subleased two properties to franchisees that 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.

 

The following schedule represents Nathan’s cash contractual obligations and commitments by maturity as of June 28, 2015 (in thousands):     

 

   

Payments Due by Period

 

Cash Contractual Obligations

 

Total

   

Less than
1 Year

   

1-3 Years

   

3-5 Years

   

More than
5 Years

 

Long term debt (a)

  $ 135,000     $ -     $ -     $ 135,000     $ -  

Employment Agreements

    3,183       1,478       1,105       400       200  

Dividends Payable

    875       375       500       -       -  

Operating Leases

    15,760       1,644       3,347       3,012       7,757  

Gross Cash Contractual Obligations

    154,818       3,497       4,952       138,412       7,957  

Sublease Income

    2,615       271       514       534       1,296  

Net Cash Contractual Obligations

  $ 152,203     $ 3,226     $ 4,438     $ 137,878     $ 6,661  

 

 

a)

Represents 10.000% Senior Secured Notes due March 2020.

 

 

b)

At June 28, 2015, the Company had unrecognized tax benefits of $253,000. The Company believes that it is reasonably possible that the unrecognized tax benefits may decrease by $98,000 within the next year. A reasonable estimate of the timing of the remaining liabilities is not practicable.

 

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 have continued to experience unprecedented increases in the cost of beef since 2011. The market price of hot dogs during the fiscal 2016 period was approximately 4.8% higher than the fiscal 2015. The market price of hot dogs during the fiscal 2015 period was approximately 17.1% 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 fiscal 2016. 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 2016 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 $8.75 on December 31, 2014 and is scheduled to increase to $9.00 on December 31, 2015. Mayor DeBlasio, of the City of New York, has previously stated that New York City should have a minimum wage of $15.00 per hour. In addition, in July 2015 a commission appointed by Governor Cuomo approved a proposal which would raise the minimum wage of fast food workers in New York State, who are employed by restaurant chains with at least 30 or more national locations, to $15.00 per hour over a period of time. If adopted, the proposal would be phased in over three years in New York City and six years elsewhere in New York State beginning December 31, 2015. The Company currently has five-Company owned restaurants in New York State and 46 franchised locations throughout the State. The Company is in the process of studying the impact of the proposal on the Company’s operations. 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.

 

 
-24-

 

 

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, who work more than 80 hours for the employer. Nathan’s operates three restaurants that have been affected by this new legislation.

 

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 Form 10-K for our fiscal year ended March 29, 2015.

 

 
-25-

 

 

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 June 28, 2015, Nathan’s cash and cash equivalents aggregated $51,603,000. Earnings on this amount of cash and cash equivalents would increase or decrease by approximately $129,000 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 June 28, 2015, the market value of Nathan’s marketable securities aggregated $7,832,000. 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 $19,600 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 June 28, 2015 that are sensitive to interest rate fluctuations (in thousands):

 

 

   

Valuation of securities

           

Valuation of securities

 
   

Given an interest rate

           

Given an interest rate

 
   

Decrease of X Basis points

   

Fair

   

Increase of X Basis points

 
   

(150BPS)

   

(100BPS)

   

(50BPS)

   

Value

   

+50BPS

   

+100BPS

   

+150BPS

 
                                                         

Municipal bonds

  $ 7,838     $ 7,838     $ 7,838     $ 7,832     $ 7,808     $ 7,784     $ 7,760  

 

Borrowings

 

At June 28, 2015, we had $135.0 million of Notes outstanding which are due in March 2020. Upon maturity, we anticipate having to refinance a significant portion of the Notes and such refinancing would be based upon the then-prevailing interest rates. Interest expense on these borrowings would increase or decrease by approximately $337,000 per annum for each 0.25% change in interest rates. We currently 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 have continued to experience unprecedented increases in the cost of beef since 2011. The market price of hot dogs during the fiscal 2016 period was approximately 4.8% higher than the fiscal 2015 period. The market price of hot dogs during the fiscal 2015 period was approximately 17.1% higher than the fiscal 2014 period. The market price of hot dogs during fiscal 2014 was approximately 7.4% higher than fiscal 2013, and the fiscal 2013 price of hot dogs was approximately 0.01% higher than fiscal 2012. These increases are in addition to fiscal 2012’s increase of approximately 12.9% over fiscal 2011. The market price also increased during fiscal 2011 by 9.9% over fiscal 2010. We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during fiscal 2016. 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. With the exception of those commitments, we have not attempted to hedge against fluctuations in the prices of the commodities we purchase using future, forward, option or other instruments. As a result, we expect that the majority of our future commodity purchases will be subject to market changes in the prices of such commodities. Generally, we have attempted to pass through permanent increases in our commodity prices to our customers, thereby reducing the impact of long-term increases on our financial results. A short-term increase or decrease of 10.0% in the cost of our food and paper products for the thirteen weeks ended June 28, 2015 would have increased or decreased our cost of sales by approximately $1,629,000.

 

 
-26-

 

 

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 thirteen weeks ended June 28, 2015 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.

 

 

 
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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 29, 2015, 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 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. McDonald’s has stated that they will contest the joint employer allegation as well as the unfair labor practice charges in the proper forums. While we believe that to the extent that this ruling is not ultimately overturned 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 ruling, 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 ruling is ultimately applied to Nathan’s and our liability for labor and wage violations increases.    

 

A wage panel recently recommended that the minimum wage be raised for employees of fast-food chain restaurants operating within New York State to $15.00 per hour.

 

On July 23, 2015, a three-member wage panel that was formed in May 2015 to investigate and make recommendations for a minimum wage increase recommended that the minimum wage be raised for employees of fast-food chain restaurants in New York State to $15.00 per hour. The proposed increases would affect restaurant chains that operate 30 or more national establishments. The increases would take effect beginning December 31, 2015 and be fully phased in by December 31, 2018 in New York City, where we operate three Company-owned restaurants and by December 31, 2021 throughout the rest of New York State which would impact our two remaining Company-owned restaurants and the majority of our 46 franchised restaurants. If the cost of labor increases and we are unable to pass on these higher costs through price increases our margins and profitability will be adversely impacted. Additionally, a decrease in profitability at our franchisee’s restaurants, the potential loss of new franchisees or the closing of a significant number of existing franchised restaurants could significantly impact our business.

 

 
-28-

 

 

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

 

   ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

Period (A)

 

 

 

(a) Total Number of Shares Purchased

 

 

 

(b) Average Price Paid per Share

 

 

(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

 

March 30, 2015

April 26, 2015

 

-

 

  -

 

-

 

 

251,272

 

April 27, 2015

May 24, 2015

 

-

 -

 

-

 

 

251,272

 

May 25, 2015

June 28, 2015

 

135,987

 

 

$39.3932

 

135,987

 

 

115,285

 

 

Total

 

135,987

 

 

$39.3932

 

135,987

 

 

115,285

 

A) Represents the Company’s fiscal periods during the quarter ended June 28, 2015.

 

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

 

Item 4. Mine Safety Disclosures.

 

None.

 

 

Item 5. Other Information.

 

None.

 

 
-29-

 

 

Item 6. Exhibits.

 

3.1

Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1 No. 33- 56976.)

 

 

3.2

Amendment to the Certificate of Incorporation, filed December 15, 1992. (Incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 No. 33-56976.)

 

 

3.3

By-Laws, as amended. (Incorporated by reference to Exhibit 3.1 to Form 8-K dated November 1, 2006.)

   

4.1

Specimen Stock Certificate. (Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1 No. 33-56976.)

 

 

4.2

Rights Agreement, dated as of June 5, 2013, between Nathan’s Famous, Inc. and American Stock Transfer and Trust Company, LLC, as Rights Agent, which includes form of Rights Certificate as Exhibit A and the Summary of Rights to Purchase as Exhibit B. (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report filed on Form 8-K dated June 11, 2013.)
   

4.3

Indenture, dated as of March 10, 2015, by and among Nathan’s Famous, Inc., certain of its wholly owned subsidiaries, as guarantors, and U.S. Bank National Association, a National Banking Association, as trustee and collateral trustee (including the form of Note (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report filed on Form 8-K dated March 10, 2015.)
   

31.1

*Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

31.2

*Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

32.1

*Certification by Eric Gatoff, CEO, Nathan’s Famous, Inc., pursuant to 18 U.S.C. Section 1350, as adopted

 

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

32.2

*Certification by Ronald G. DeVos, CFO, Nathan’s Famous, Inc., pursuant to 18 U.S.C. Section 1350, as adopted

 

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

101.1

*The following materials from the Nathan’s Famous, Inc.,  Quarterly Report on Form 10-Q for the quarter ended June 28, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statement of Stockholders’ Equity, (iv) the Consolidated Statements

 

  

*Filed herewith.

 

 
-30-

 

 

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.

 

 

NATHAN'S FAMOUS, INC.

 

 Date: August 7, 2015

By:

/s/ Eric Gatoff

 

 

 

Eric Gatoff

 

 

 

Chief Executive Officer

 

   

(Principal Executive Officer)

 

 

 

 

 

 

 Date: August 7, 2015 

By:

/s/ Ronald G. DeVos

 

 

 

Ronald G. DeVos

 

 

 

Vice President - Finance and Chief Financial Officer

 

   

(Principal Financial and Accounting Officer)

 

 

 
-31-

 

 

Exhibit Index.

 

3.1

Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1 No. 33- 56976.)

   

3.2

Amendment to the Certificate of Incorporation, filed December 15, 1992. (Incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 No. 33-56976.)

   

3.3

By-Laws, as amended. (Incorporated by reference to Exhibit 3.1 to Form 8-K dated November 1, 2006.)

   

4.1

Specimen Stock Certificate. (Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1 No. 33-56976.)

   

4.2

Rights Agreement, dated as of June 5, 2013, between Nathan’s Famous, Inc. and American Stock Transfer and Trust Company, LLC, as Rights Agent, which includes form of Rights Certificate as Exhibit A and the Summary of Rights to Purchase as Exhibit B. (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report filed on Form 8-K dated June 11, 2013.)

   

4.3

Indenture, dated as of March 10, 2015, by and among Nathan’s Famous, Inc., certain of its wholly owned subsidiaries, as guarantors, and U.S. Bank National Association, a National Banking Association, as trustee and collateral trustee (including the form of Note (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report filed on Form 8-K dated March 10, 2015.)

   

31.1

*Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

31.2

*Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

32.1

*Certification by Eric Gatoff, CEO, Nathan’s Famous, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

32.2

*Certification by Ronald G. DeVos, CFO, Nathan’s Famous, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

101.1

*The following materials from the Nathan’s Famous, Inc., Quarterly Report on Form 10-Q for the quarter ended June 28, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statement of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) related notes.

 

     *Filed herewith.