NATHANS FAMOUS, INC. - Quarter Report: 2019 December (Form 10-Q)

 

 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒

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

For the quarterly period ended December 29, 2019.

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 No. 001-35962

 

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 (Zip Code) of principal executive offices)

 

(516) 338-8500

(Registrant's telephone number, including area code)

                                                                                                                                                        

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $.01 per share		NATH		The NASDAQ Global Market

 

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 ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒   No ☐

 

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

 

	Large accelerated filer   ☐	Accelerated filer   ☒
	Non-accelerated filer   ☐
	Smaller reporting company   ☒	Emerging growth company   ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

At February 7, 2020, an aggregate of 4,213,320 shares of the registrant's common stock, par value of $.01, were outstanding.

 

 

 

NATHAN'S FAMOUS, INC. AND SUBSIDIARIES

 

INDEX

 

		Page
		Number
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements.	3
	Consolidated Financial Statements
	Consolidated Balance Sheets – December 29, 2019 (Unaudited) and March 31, 2019	3
	Consolidated Statements of Earnings (Unaudited) – Thirteen and Thirty-nine Weeks Ended December 29, 2019 and December 23, 2018	4
	Consolidated Statements of Stockholders’ (Deficit) (Unaudited) – Thirteen Weeks Ended December 29, 2019 and December 23, 2018	5
	Consolidated Statements of Stockholders’ (Deficit) (Unaudited) – Thirty-nine Weeks Ended December 29, 2019 and December 23, 2018	6
	Consolidated Statements of Cash Flows (Unaudited) – Thirty-nine Weeks Ended December 29, 2019 and December 23, 2018	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	35
Item 4.	Controls and Procedures.	36
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings.	37
Item 1A.	Risk Factors.	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	37
Item 3.	Defaults Upon Senior Securities.	37
Item 4.	Mine Safety Disclosures.	37
Item 5.	Other Information.	37
Item 6.	Exhibits.	38
SIGNATURES		39
Exhibit Index		40

 

 

 

		December 29, 2019				March 31, 2019
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note F)		$	77,395			$	75,446
Accounts and other receivables, net (Note H)			10,436				10,173
Inventories			599				535
Prepaid expenses and other current assets (Note I)			962				1,007
Total current assets			89,392				87,161
Property and equipment, net of accumulated depreciation of $9,481 and $8,611, respectively			4,365				4,889
Operating lease assets (Note P)			9,274				-
Goodwill			95				95
Intangible asset, net			1,297				1,353
Deferred income taxes			52				343
Other assets			455				465
Total assets		$	104,930			$	94,306
LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
CURRENT LIABILITIES
Current portion of operating lease liabilities (Note P)		$	1,449			$	-
Accounts payable			4,434				5,222
Accrued expenses and other current liabilities (Note J)			5,470				9,384
Deferred franchise fees			278				318
Total current liabilities			11,631				14,924
Long-term debt, net of unamortized debt issuance costs of $4,032 and $4,551, respectively (Note O)			145,968				145,449
Long-term operating lease liabilities (Note P)			8,663				-
Other liabilities (Note J)			801				1,390
Deferred franchise fees			2,036				2,687
Total liabilities			169,099				164,450
COMMITMENTS AND CONTINGENCIES (Note Q)
STOCKHOLDERS’ (DEFICIT)
Common stock, $.01 par value; 30,000,000 shares authorized; 9,368,792 and 9,336,338 shares issued; and 4,213,320 and 4,194,575 shares outstanding at December 29, 2019 and March 31, 2019, respectively			94				93
Additional paid-in capital			62,101				60,945
(Accumulated deficit)			(47,076	)			(52,879	)
Stockholders’ equity before treasury stock			15,119				8,159
Treasury stock, at cost, 5,155,472 and 5,141,763 shares at December 29, 2019 and March 31, 2019			(79,288	)			(78,303	)
Total stockholders’ (deficit)			(64,169	)			(70,144	)
Total liabilities and stockholders’ (deficit)		$	104,930			$	94,306

 

		Thirteen weeks ended								Thirty-nine weeks ended
		December 29, 2019				December 23, 2018				December 29, 2019				December 23, 2018
REVENUES
Sales		$	15,356			$	14,404			$	57,699			$	56,448
License royalties			4,412				4,316				18,559				18,160
Franchise fees and royalties			1,035				911				3,610				3,254
Advertising fund revenue			573				591				1,752				1,858
Total revenues			21,376				20,222				81,620				79,720
COSTS AND EXPENSES
Cost of sales			12,262				10,660				43,973				41,266
Restaurant operating expenses			764				766				2,791				2,817
Depreciation and amortization			294				278				941				962
General and administrative expenses			3,620				3,031				11,116				10,354
Advertising fund expense			573				591				2,122				1,858
Total costs and expenses			17,513				15,326				60,943				57,257
Income from operations			3,863				4,896				20,677				22,463
Gain on disposal of property and equipment			-				10,821				-				11,177
Interest expense			(2,650	)			(2,650	)			(7,951	)			(7,951	)
Interest income			338				277				1,074				453
Other income, net			22				5				61				189
Income before provision for income taxes			1,573				13,349				13,861				26,331
Provision for income taxes			360				3,627				3,621				7,330
Net income		$	1,213			$	9,722			$	10,240			$	19,001
PER SHARE INFORMATION
Weighted average shares used in computing income per share:
Basic			4,225,000				4,187,000				4,219,000				4,187,000
Diluted			4,225,000				4,221,000				4,219,000				4,226,000
Income per share:
Basic		$	.29			$	2.32			$	2.43			$	4.54
Diluted		$	.29			$	2.30			$	2.43			$	4.50
Dividends declared per share		$	.35			$	.25			$	1.05			$	.75

 

										Additional																Total
		Common				Common				Paid-in				(Accumulated				Treasury Stock, at Cost								Stockholders’
		Shares				Stock				Capital				Deficit)				Shares				Amount				(Deficit)
Balance, September 29, 2019			9,368,792			$	94			$	62,072			$	(46,810	)			5,141,763			$	(78,303	)		$	(62,947	)
Repurchase of common stock			-				-				-				-				13,709				(985	)			(985	)
Dividends on common stock			-				-				-				(1,479	)			-				-				(1,479	)
Share-based compensation			-				-				29				-				-				-				29
Net income			-				-				-				1,213				-				-				1,213
Balance, December 29, 2019			9,368,792			$	94			$	62,101			$	(47,076	)			5,155,472			$	(79,288	)		$	(64,169	)

										Additional																Total
		Common				Common				Paid-in				(Accumulated				Treasury Stock, at Cost								Stockholders’
		Shares				Stock				Capital				Deficit)				Shares				Amount				(Deficit)
Balance, September 23, 2018			9,318,942			$	93			$	60,887			$	(63,000	)			5,127,373			$	(77,303	)		$	(79,323	)
Repurchase of common stock			-				-				-				-				14,390				(1,000	)			(1,000	)
Dividends on common stock			-				-				-				(1,045	)			-				-				(1,045	)
Share-based compensation			-				-				29				-				-				-				29
Net income			-				-				-				9,722				-				-				9,722
Balance, December 23, 2018			9,318,942			$	93			$	60,916			$	(54,323	)			5,141,763			$	(78,303	)		$	(71,617	)

										Additional																Total
		Common				Common				Paid-in				(Accumulated				Treasury Stock, at Cost								Stockholders’
		Shares				Stock				Capital				Deficit)				Shares				Amount				(Deficit)
Balance, March 31, 2019			9,336,338			$	93			$	60,945			$	(52,879	)			5,141,763			$	(78,303	)		$	(70,144	)
Shares issued in connection with share-based compensation plans			32,454				1				1,077				-				-				-				1,078
Withholding tax on net share settlement of share-based compensation plans			-				-				(8	)			-				-				-				(8	)
Repurchase of common stock			-				-				-				-				13,709				(985	)			(985	)
Dividends on common stock			-				-				-				(4,437	)			-				-				(4,437	)
Share-based compensation			-				-				87				-				-				-				87
Net income			-				-				-				10,240				-				-				10,240
Balance, December 29, 2019			9,368,792			$	94			$	62,101			$	(47,076	)			5,155,472			$	(79,288	)		$	(64,169	)

										Additional																Total
		Common				Common				Paid-in				(Accumulated				Treasury Stock, at Cost								Stockholders’
		Shares				Stock				Capital				Deficit)				Shares				Amount				(Deficit)
Balance, March 25, 2018			9,311,922			$	93			$	60,823			$	(68,181	)			5,127,373			$	(77,303	)		$	(84,568	)
Cumulative effect of the adoption of ASC 606			-				-				-				(2,004	)			-				-				(2,004	)
Shares issued in connection with share-based compensation plans			7,020				-				134				-				-				-				134
Withholding tax on net share settlement of share-based compensation plans			-				-				(174	)			-				-				-				(174	)
Repurchase of common stock			-				-				-				-				14,390				(1,000	)			(1,000	)
Dividends on common stock			-				-				-				(3,139	)			-				-				(3,139	)
Share-based compensation			-				-				133				-				-				-				133
Net income			-				-				-				19,001				-				-				19,001
Balance, December 23, 2018			9,318,942			$	93			$	60,916			$	(54,323	)			5,141,763			$	(78,303	)		$	(71,617	)

 

		December 29, 2019				December 23, 2018
Cash flows from operating activities:
Net income		$	10,240			$	19,001
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			941				962
(Gain) on disposal of property and equipment			-				(11,177	)
Amortization of debt issuance costs			518				518
Share-based compensation expense			87				133
Income tax benefit on stock option exercises			228				47
Provision for doubtful accounts			7				48
Deferred income taxes			291				(27	)
Non-cash rental expense			100				-
Changes in operating assets and liabilities:
Accounts and other receivables, net			(270	)			865
Inventories			(64	)			(98	)
Prepaid expenses and other current assets			45				2,270
Other assets			10				(48	)
Accounts payable, accrued expenses and other current liabilities			(4,930	)			(5,196	)
Deferred franchise fees			(691	)			53
Other liabilities			150				22
Net cash provided by operating activities			6,662				7,373
Cash flows from investing activities:
Proceeds from disposal of property and equipment			-				12,775
Purchase of property and equipment			(361	)			(326	)
Net cash (used in) provided by investing activities			(361	)			12,449
Cash flows from financing activities:
Dividends paid to stockholders			(4,437	)			(3,289	)
Proceeds from exercise of stock options			1,078				134
Payments of withholding tax on net share settlement of share-based compensation plans			(8	)			(174	)
Repurchase of treasury stock			(985	)			(1,000	)
Net cash (used in) financing activities			(4,352	)			(4,329	)
Net increase in cash and cash equivalents			1,949				15,493
Cash and cash equivalents, beginning of period			75,446				57,339
Cash and cash equivalents, end of period		$	77,395			$	72,832
Cash paid during the period for:
Interest		$	9,938			$	9,936
Income taxes paid		$	3,269			$	2,658
Noncash financing activity:
Dividends declared per share		$	1.05			$	0.75

 

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 and thirty-nine week periods ended December 29, 2019 and December 23, 2018 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. 

 

We have reclassified certain prior period items in the Consolidated Statement of Cash Flows in the thirty-nine week period ended December 23, 2018 to conform with the classifications for the fiscal year ended March 31, 2019. These reclassifications had no effect on previously reported cash flows. 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 31, 2019.

 

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 31, 2019.

 

NOTE B – ADOPTION OF NEW ACCOUNTING STANDARDS

 

Leases

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance on leases, Topic 842, which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. The new guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases. The Company adopted the new guidance during the first quarter of fiscal 2020 using the effective date of April 1, 2019 as the date of initial application; therefore, the comparative period has not been adjusted and continues to be reported under the previous lease guidance.

 

The new standard provides for a number of practical expedients upon adoption. The Company elected the package of practical expedients, which permits the Company not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. For those leases that fall under the definition of a short-term lease, the Company elected the short-term lease recognition exemption. Under this practical expedient, for those leases that qualify, we did not recognize right-of-use (“ROU”) assets or liabilities. The Company also elected the practical expedient for lessees to account for lease components and non-lease components as a single lease component for all underlying classes of assets. The Company did not elect the use-of-hindsight practical expedient.

 

As a result of adopting this new guidance on the first day of fiscal year 2020, substantially all of the Company's operating lease commitments were subject to the new guidance and were recognized as operating lease assets and liabilities, initially measured as the present value of future lease payments for the remaining lease term discounted using the Company’s incremental borrowing rate based on the remaining lease term as of the adoption date. The Company recognized operating lease assets and liabilities of $7,804,000 and $8,533,000, respectively, as of the first day of fiscal year 2020. The difference between the assets and liabilities is attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right-of-use assets.

 

 

The effects of the changes made to the Company's consolidated balance sheet as of April 1, 2019 for the adoption of the new lease guidance were as follows (in thousands):

  

 

The adoption of the new guidance is non-cash in nature and had no impact on net cash flows from operating, investing, or financing activities.

 

See Note P for additional information regarding our lease arrangements and the Company's updated lease accounting policies.

 

NOTE C – NEW ACCOUNTING STANDARDS NOT YET ADOPTED

 

In June 2016, the FASB issued new guidance on the measurement of credit losses, which significantly changes the impairment model for most financial instruments. Current guidance requires the recognition of credit losses based on an incurred loss impairment methodology that reflects losses once the losses are probable. Under the new standard, the Company will be required to use a current expected credit loss model (“CECL”) that will immediately recognize an estimate of credit losses that are expected to occur over the life of the financial instruments that are in the scope of this update, including trade receivables. The CECL model uses a broader range of reasonable and supportable information in the development of credit loss estimates. In November 2019, the FASB deferred the effective date for smaller reporting companies for annual reporting periods beginning after December 15, 2022. This standard is required to take effect in Nathan’s first quarter (June 2023) of our fiscal year ending March 31, 2024. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued an update to the accounting guidance to simplify the testing for goodwill impairment. The update removes the requirement to determine the implied fair value of goodwill to measure the amount of impairment loss, if any, under the second step of the current goodwill impairment test. A company will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. A goodwill impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of the goodwill. The guidance is effective prospectively for public business entities for annual reporting periods beginning after December 15, 2019. This standard is required to take effect in Nathan’s first quarter (June 2020) of our fiscal year ending March 28, 2021. Nathan’s does not expect the adoption of this new guidance to have a material impact on its results of operations or financial position.

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. This standard is required to take effect in Nathan’s first quarter (June 2021) of our fiscal year ending March 27, 2022. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

 

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 consolidated financial statements.

 

 

 

NOTE D – REVENUES

 

The Company’s disaggregated revenues for the thirteen and thirty-nine weeks ended December 29, 2019 and December 23, 2018 are as follows (in thousands):

 

 

The following table disaggregates revenues by primary geographical market (in thousands):

 

 

Contract balances

 

The following table provides information about contract liabilities (Deferred franchise fees) from contracts with customers (in thousands):

 

 

(a)

Deferred franchise fees of $278 and $2,036 as of December 29, 2019 and $318 and $2,687 as of March 31, 2019 are included in Deferred franchise fees – current and long term, respectively.

 

Significant changes in Deferred franchise fees are as follows (in thousands):

                                            

 

(a)

Includes the cumulative effect of adopting Topic 606 of $2,735.

 

 

Anticipated Future Recognition of Deferred Franchise Fees

 

The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period (in thousands): 

 

 

(a)

Represents franchise fees expected to be recognized for the remainder of the 2020 fiscal year, which includes international development fees expected to be recognized over the duration of one year or less. Amount does not include $781 of franchise fee revenue recognized for the thirty-nine weeks ended December 29, 2019.

 

We have applied the optional exemption, as provided for under Topic 606, which allows us not to disclose the transaction price allocated to unsatisfied performance obligations when the transaction price is a sales-based royalty.

 

NOTE E – 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 and thirty-nine week periods ended December 29, 2019 and December 23, 2018, respectively.

 

 

 

Options to purchase 10,000 shares of common stock in the thirteen and thirty-nine week periods ended December 29, 2019 were not included in the computation of diluted EPS because the exercise price exceeded the average market price of common shares during the period.

 

 

 

NOTE F – CASH AND CASH EQUIVALENTS

 

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents at December 29, 2019 and March 31, 2019 were $20,000,000. Substantially all of the Company’s cash and cash equivalents are in excess of government insurance.

 

NOTE G – 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 face value and fair value of long-term debt as of December 29, 2019 and March 31, 2019 were as follows (in thousands):

 

 

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 and 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 December 29, 2019, no fair value adjustment or material fair value measurements were required for non-financial assets or liabilities.

 

NOTE H – ACCOUNTS AND OTHER RECEIVABLES, NET          

 

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

 

 

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 thirty-nine week period ended December 29, 2019 and the fiscal year ended March 31, 2019 are as follows (in thousands):

 

 

 

NOTE I – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

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

 

 

 

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

 

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

 

 

Other liabilities consist of the following (in thousands):

 

 

 

 

NOTE K – INCOME TAXES             

 

The income tax provisions for the thirty-nine week periods ended December 29, 2019 and December 23, 2018 reflect effective tax rates of 26.1% and 27.8%, respectively.

 

Nathan’s effective tax rates for the thirty-nine week periods ended December 29, 2019 and December 23, 2018 were reduced by 1.6% and 0.2%, respectively, as a result of the tax benefits associated with stock compensation. For the thirty-nine week periods ended December 29, 2019 and December 23, 2018, excess tax benefits of $228,000 and $47,000, respectively, were reflected in the Consolidated Statements of Earnings as a reduction in determining the provision for income taxes. Nathan’s effective tax rates without these adjustments would have been 27.8% for the fiscal 2020 period and 28.0% for the fiscal 2019 period.

 

The amount of unrecognized tax benefits at December 29, 2019 was $300,000 all of which would impact Nathan’s effective tax rate, if recognized. As of December 29, 2019, Nathan’s had $269,000 of accrued interest and penalties in connection with unrecognized tax benefits.

 

In November 2019, the State of New Jersey notified Nathan’s that our tax returns for the years ended March 2016, 2017, and 2018 will be audited. The audit is ongoing.

 

NOTE L – SEGMENT INFORMATION

 

Nathan’s considers itself to be a brand marketer of the Nathan’s Famous signature products to the foodservice industry pursuant to its various business structures. Nathan’s sells its products directly to consumers through its restaurant operations segment consisting of Company-operated and franchised restaurants, to distributors that resell our products to the foodservice industry through the Branded Product Program (“BPP”) and by third party manufacturers pursuant to license agreements that sell our products to club stores and grocery stores nationwide. The Company’s Chief Executive Officer has been identified as the Chief Operating Decision Maker (“CODM”) who evaluates performance and allocates resources for the Branded Product Program, Product Licensing and Restaurant Operations segments based upon a number of factors, the primary profit measure being income from operations. Certain administrative expenses are not allocated to the segments and are reported within the Corporate segment.

 

Branded Product Program – This segment derives revenue principally from the sale of hot dog products either directly to foodservice operators or to various foodservice distributors who resell the products to foodservice operators.

 

Product licensing – This segment derives revenue, primarily in the form of royalties, from licensing a broad variety of Nathan’s Famous branded products, including our hotdogs, sausage and corned beef products, frozen French fries and additional products through retail grocery channels and club stores throughout the United States.

 

Restaurant operations – This segment derives revenue from sale of our products at Company-owned restaurants and earns fees and royalties from its franchised restaurants.

 

Revenues from operating segments are from transactions with unaffiliated third parties and do not include any intersegment revenues.

 

Income from operations attributable to Corporate consists principally of administrative expenses not allocated to the operating segments such as executive management, finance, information technology, legal, insurance, corporate office costs, corporate incentive compensation, certain executive compensation, compliance costs and the operating results of the advertising fund.

 

Interest expense, interest income, gain on disposal of property and equipment, and other income, net, are managed centrally at the corporate level, and, accordingly, such items are not presented by segment since they are excluded from the measure of profitability reviewed by the CODM.

 

 

Operating segment information is as follows (in thousands):

 

 

(1)

Represents advertising fund revenue

 

NOTE M– SHARE-BASED COMPENSATION

 

Total share-based compensation during the thirteen-week periods ended December 29, 2019 and December 23, 2018 was $29,000 and $29,000, respectively. Total share-based compensation during the thirty-nine week periods ended December 29, 2019 and December 23, 2018 was $87,000 and $133,000, respectively. Total share-based compensation is included in general and administrative expenses in our accompanying Consolidated Statements of Earnings. As of December 29, 2019, there was $198,000 of unamortized compensation expense related to share-based incentive awards. We expect to recognize this expense over approximately twenty months, which represents the weighted average remaining requisite service periods for such awards.

 

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):

 

 

Stock options: 

 

There were no new share-based awards granted during the thirty-nine week period December 29, 2019.

 

During the fiscal year ended March 31, 2019, the Company granted options to purchase 10,000 shares at an exercise price of $89.90 per share, all of which expire five years from the date of grant. All such stock options vest ratably over a three-year period commencing September 12, 2019.

 

 

Transactions with respect to stock options for the thirty-nine weeks ended December 29, 2019 are as follows:

 

 

A-

Represents outstanding options after giving effect to the replacement options issued in connection with the Company’s special dividend to shareholders of record on December 22, 2017.

 

Restricted stock: 

 

Transactions with respect to restricted stock for the thirty-nine weeks ended December 29, 2019 are as follows:

 

 

 

NOTE N– STOCKHOLDERS’ EQUITY

 

1. Dividends

 

Effective June 14, 2019, the Board declared its first quarterly cash dividend of $0.35 per share for fiscal year 2020, aggregating $1,479,000, which was paid on June 28, 2019 to stockholders of record as of the close of business on June 24, 2019.

 

Effective August 9, 2019, the Board declared its second quarterly cash dividend of $0.35 per share, aggregating $1,479,000, which was paid on September 6, 2019 to stockholders of record as of the close of business on August 26, 2019.

 

Effective November 8, 2019, the Board declared its third quarterly cash dividend of $0.35 per share, aggregating $1,479,000, which was paid on December 6, 2019 to stockholders of record as of the close of business on November 25, 2019.

 

Effective February 7, 2020, the Board declared its fourth quarterly cash dividend of $0.35 per share payable on March 6, 2020 to stockholders of record as of the close of business on February 24, 2020.

 

Our ability to pay future dividends is limited by the terms of the Indenture with U.S. Bank National Association, as trustee and collateral trustee (see Note O). In addition to the terms of the Indenture, the declaration and payment of any cash dividends in the future are subject to final determination of the Board and will be dependent upon our earnings and financial requirements.

 

2. Stock Incentive Plans

 

On September 13, 2012, the Company amended the Nathan’s Famous, Inc. 2010 Stock Incentive Plan (the “2010 Plan”) increasing the number of shares available for issuance by 250,000 shares. Shares to be issued under the 2010 Plan may be made available from authorized but unissued stock, common stock held by the Company in its treasury, or common stock purchased by the Company on the open market or otherwise. The number of shares issuable and the grant, purchase or exercise price of outstanding awards are subject to adjustment in the amount that the Company’s Compensation Committee considers appropriate upon the occurrence of certain events, including stock dividends, stock splits, mergers, consolidations, reorganizations, recapitalizations, or other capital adjustments. In the event that the Company issues restricted stock awards pursuant to the 2010 Plan, each share of restricted stock would reduce the amount of available shares for issuance by either 3.2 shares for each share of restricted stock granted or 1 share for each share of restricted stock granted.

 

 

On September 18, 2019, the Company’s shareholders approved the Nathan’s Famous, Inc. 2019 Stock Incentive Plan (the “2019 Plan”). The 2019 Plan will be effective as of July 1, 2020 (the "Effective Date"). Following the Effective Date, (i) no additional stock awards shall be granted under the 2010 Plan and (ii) all outstanding stock awards previously granted under the 2010 Plan shall remain subject to the terms of the 2010 Plan. All awards granted on or after the Effective Date of the 2019 Plan shall be subject to the terms of the 2019 Plan.

 

Once effective, we will be able to issue up to: (a) 369,584 shares of common stock under the 2019 Plan which includes: (i) shares that have been authorized but not issued pursuant to the 2010 Plan as of July 1, 2020 up to a maximum of an additional 208,584 shares and (ii) any shares subject to any outstanding options or restricted stock grants under any plan of the Company that were outstanding as of July 1, 2020 and that subsequently expire unexercised, or are otherwise forfeited, up to a maximum of an additional 11,000 shares. As of December 29, 2019, there were up to 208,584 shares available to be issued for future option grants or up to 184,808 shares of restricted stock that may be granted under the 2010 Plan.

 

3. Stock Repurchase Program           

 

During the period from October 2001 through December 29, 2019, Nathan’s purchased 5,155,472 shares of common stock at a cost of approximately $79,288,000 pursuant to various stock repurchase plans previously authorized by the Board of Directors. During the thirty-nine week period ended December 29, 2019, we repurchased 13,709 shares of common stock at a cost of $985,000.

 

In 2016, the Company’s Board of Directors authorized increases to the sixth stock repurchase plan for the purchase of up to 1,200,000 shares of its common stock on behalf of the Company. As of December 29, 2019, Nathan’s had repurchased 967,841 shares at a cost of $31,627,000 under the sixth stock repurchase plan. At December 29, 2019, there were 232,159 shares remaining to be repurchased pursuant to the sixth stock repurchase plan. The plan does not have a set expiration date. Purchases under the Company’s stock repurchase program 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.

 

NOTE O – LONG-TERM DEBT

 

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

 

 

On November 1, 2017, the Company issued $150,000,000 of 6.625% Senior Secured Notes due 2025 (the "2025 Notes") in a private offering in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The 2025 Notes were issued pursuant to an indenture dated as of November 1, 2017 by and among the Company, certain of its wholly-owned subsidiaries and U.S. Bank National Association (the “Indenture”). The Company used the net proceeds of the 2025 Notes offering to satisfy and discharge the Indenture relating to the $135,000,000 of 10.000% Senior Secured Notes due 2020 and redeem such notes (the "Redemption"), paid a portion of a special $5.00 per share cash dividend to Nathan's stockholders of record, with the remaining net proceeds for general corporate purposes, including working capital. The Company also funded the majority of the special dividend of $5.00 per share through its existing cash. The Redemption occurred on November 16, 2017.

 

The 2025 Notes bear interest at 6.625% per annum, payable semi-annually on May 1^st and November 1^st of each year. The Company made its required semi-annual interest payments of $4,968,750 on May 1, 2019 and November 1, 2019.

 

The 2025 Notes have no scheduled principal amortization payments prior to its final maturity on November 1, 2025.

 

A summary of certain terms and conditions of the 2025 Notes is as follows (terms not defined shall have the meanings set forth in the Indenture):

 

There are no financial maintenance covenants associated with the 2025 Notes. As of December 29, 2019, Nathan’s was in compliance with all covenants associated with the 2025 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:

 

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 2025 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 2025 Notes may declare the 2025 Notes due and payable by providing notice to the Company. In case of default arising from certain events of bankruptcy or insolvency, the 2025 Notes will become immediately due and payable.

 

The 2025 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 2025 Notes, and are effectively junior to all existing and future indebtedness that is secured by assets other than the collateral securing the 2025 Notes.

 

Pursuant to the terms of a collateral trust agreement, the liens securing the 2025 Notes and the guarantees will be contractually subordinated to the liens securing any future credit facility.

 

The 2025 Notes and the guarantees are 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 2025 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 2025 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 2025 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 2025 Notes.

 

The Company may redeem the 2025 Notes in whole or in part prior to November 1, 2020, at a redemption price of 100% of the principal amount of the 2025 Notes redeemed plus the Applicable Premium, plus accrued and unpaid interest. An Applicable Premium is the greater of 1% of the principal amount of the 2025 Notes; or the excess of the present value at such redemption date of (i) the redemption price of the 2025 Notes at November 1, 2020 plus (ii) all required interest payments due on the 2025 Notes through November 1, 2020 (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 2025 Notes.

 

Prior to November 1, 2020, if using the net cash proceeds of certain equity offerings, the Company has the option to redeem up to 35% of the aggregate principal amount of the 2025 Notes at a redemption price equal to 106.625% of the principal amount of the 2025 Notes redeemed, plus accrued and unpaid interest and any additional interest.

 

 

On or after November 1, 2020, the Company may redeem some or all of the 2025 Notes at a decreasing premium over time, plus accrued and unpaid interest as follows:

 

 

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 2025 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 2025 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 2025 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 2025 Notes may be traded between qualified institutional buyers pursuant to Rule 144A of the Securities Act. We have recorded the 2025 Notes at cost.