UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 27, 201626, 2023
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.0-3189001-35962
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NATHAN’S FAMOUS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 11-3166443 | ||
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One Jericho Plaza, Jericho, New York | 11753 | |||
(Address of principal executive offices) | (Zip Code) | |||
Registrant’s telephone number, including area code: | 516-338-8500 |
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 |
Securities registered pursuant to Section 12(b)12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __☐ NoX ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __☐ NoX ☒
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. YesX ☒ 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesX ☒ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer | ☐ | Accelerated filer | ☒ | ||
Non-accelerated filer |
| Smaller reporting company | ☒ | ||
Emerging growth company |
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __☐ NoX ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter – September 27, 2015 -23, 2022- was approximately $120,986,000,$176,541,000, which value, solely for the purposes of this calculation excludes shares held by the registrant’s officers and directors. Such exclusion shall not be deemed a determination by registrant that all such individuals are, in fact, affiliates of the registrant.
As of June 6, 2016,2, 2023, there were outstanding 4,182,6994,079,720 shares of Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE– The information required by Part III, Items 10, 11, 12 and 13 is incorporated by reference from the registrant’s definitive proxy statement for the 2016Annual2023Annual Meeting of Shareholders which is expected to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934.1934 no later than 120 days after the conclusion of Nathan Famous, Inc.’s fiscal year ended March 26, 2023.
TABLE OF CONTENTS
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PART I |
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Item | Business. |
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Item | Risk Factors. | 20 |
Item | Unresolved Staff Comments. |
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Item | Properties. |
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Item | Legal Proceedings. |
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Item | Mine Safety Disclosures. |
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PART II | ||
Item | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
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Item | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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Item | Quantitative and Qualitative Disclosures About Market Risk. |
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Item | Financial Statements and Supplementary Data. |
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Item | Changes in and Disagreements |
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Item | Controls and Procedures. |
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Item | Other Information. |
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Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. | 50 |
PART III | ||
Item 10. | Directors, Executive Officers and Corporate Governance. |
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Item 11. | Executive Compensation. |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
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Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
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Item 14. | Principal Accountant Fees and Services. |
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PART IV | ||
Item 15. | Exhibits and Financial Statement Schedules. |
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Item 16. | Form 10-K Summary. | 56 |
Signatures | ||
Index to Financial Statements | F-1 |
PART I
Forward-Looking Statements
This Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1933, as amended, that involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes”, “expects”, “projects”, “may”, “would”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates”, “anticipates” or similar expressions that relate to our strategy, plans or intentions. All statements we make relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results or to our expectations regarding future industry trends are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements contained in this Form 10-K are based upon information available to us on the date of this Form 10-K.
Item 1. Business.
Item 1. | Business. |
As used herein, unless we otherwise specify, the terms “we,“we,” “us,“us,” “our,“our,” “Nathan’s,“Nathan’s,” “Nathan’s Famous”“Nathan’s Famous” and the “Company”“Company” mean Nathan’sNathan’s Famous, Inc. and its subsidiaries, including NF Treacher’s Corp.subsidiaries. References to the fiscal 20162023 period mean the fiscal year ended March 26, 2023 and references to the fiscal 2022 period mean the fiscal year ended March 27, 2016 and references to the fiscal 2015 period mean the fiscal year ended March 29, 2015.2022. In addition, references to the “Notes”, “2025 Notes” or the “2025 Senior Secured Notes” refer to the $80,000,000 6.625% Senior Secured Notes due 2025 and references to the “2020 Notes” or the “2020 Senior Secured Notes” refer to the $135,000,000 10.000% Senior Secured Notes due 2020.which were redeemed on November 16, 2017.
We are a leading branded licensor, wholesaler and retailer of products marketed under our Nathan’s Famous brand, including our popular Nathan’s World Famous Beef Hot Dogs. What began as a nickel hot dog stand on Coney Island in 1916 has evolved into a highly recognized brand throughout the United States and the world. Our innovative business model seeks to maximize the points of distribution for and the consumption of Nathan’s World Famous Beef Hot Dogs, crinkle-cut French fries and our other products across a wide-range of grocery retail and foodservice formats. Our products are currently marketed for sale in approximately 55,00079,000 locations, including supermarkets, mass merchandisers and club stores, selected foodservice locations and our Company-owned and franchised restaurants throughout the United States and in fifteen,eighteen foreign territories and countries. The Company considers itself to be in the foodservice industry and has pursued co-branding initiatives.initiatives within other foodservice environments. Our major channels of distribution are as follows:
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● | Operating quick-service restaurants featuring Nathan’s World Famous Beef Hot Dogs, crinkle-cut French fries, and a variety of other menu offerings, which operate under the name “Nathan’s Famous,” the name first used at our original Coney Island restaurant which opened in 1916. |
● | Our |
We also own through our subsidiary NF Treacher’s Corp., the Arthur Treacher’s brand and trademarks. We use the Arthur Treacher’s brand, products and trademarks as a branded seafood menu-line extension for inclusion in certain Nathan’s Famous restaurants. During fiscal 2014, we entered into our first multi-unit Branded Menu Program agreement with a qualified foodservice operator for inclusion in non-Nathan’s facilities and may seek to further market this program in the future.restaurants, as well as virtual kitchens.
AsOur Competitive Strengths
We believe that we celebratebenefit from the following competitive strengths:
Iconic Brand with Global Recognition
For over 100 years, we have cultivated Nathan’s Famous into an iconic brand with global recognition. From our centennial anniversary,authentic origins on Coney Island to our popular Nathan’s Famous Hot Dog Eating Contest, the Nathan’s Famous brand has become synonymous with premium hot dogs enjoyed throughout the year including cookouts, and July 4th celebrations. Over time, we have continued expanding the number and types of points of distribution for Nathan’s Famous products by leveraging our highly recognizable brand.
The Frank of Choice
Since our beginnings as a nickel hot dog stand in 1916, we have focused on creating the best premium hot dog. Using premium cuts of meat, our proprietary spice mix and based on a recipe originally developed in 1916, our hot dogs have a unique flavor and texture that consumers are drawn to.
Our hot dogs have received numerous awards and recognition from critics and reviewers.
Recognition as an award-winning hot dog has strengthened our brand and created a devoted fan base. We believe that our high brand awareness allows us to sell hot dogs at a premium price to competing brands across all channels of distribution.
Multi-Channel Business Model Provides Diversified Revenue Streams
We believe that our flexible business model enables us to diversify across multiple channels of distribution and customers. Our products are distributed through supermarkets, mass merchandisers, club stores, Company-owned restaurants, franchised restaurants, virtual kitchens, food service distributors and other food service operators such as gas stations, movie theaters and sporting venues. We believe that there is potential to increase our sales by converting sales of non-branded products throughout the foodservice industry.
High Margin Licensing Revenue Streams
We earn stable and high-margin revenue through multiple licensing programs. Through licensing programs with such companies as Smithfield Foods, Inc., and Lamb Weston, Inc., over twenty Nathan’s Famous branded SKUs are sold through grocery retail channels. All of our licensing agreements combined produced $33,455,000 and $31,824,000 of high margin revenue for fiscal 2023 and 2022, respectively.
Growth Strategies
We continue to pursue the following strategies:
Leverage Nathan’s Famous brand and iconic products to grow sales – We believe that our brand is widely recognized by virtue of our long history and broad geographic footprint, which allows us to enjoy high consumer awareness in the United States and abroad and allows us the abilityopportunity to grow in markets and channels where the brand is known but has not yet achieved optimal market penetration. We believe that our highly visible brand and reputation for high quality products have allowed us to expand our food offerings beyond our signature hot dogs and command a premium price premium across our portfolio of products. Over time, we have expanded menu options so
Retail licensing – We expect that our Company-owned restaurantsretail licensing program may continue to grow, centered around our licensing program with Smithfield Foods, Inc. Smithfield Foods, Inc. brings superior sales and franchisees can supplement their core menumarketing resources to our brand through its national scale, broad distribution platform, strong retail relationships and research and development infrastructure capable of Nathan’s World Famous Beef Hot Dogs, crinkle-cut French friesdeveloping and beverages withintroducing new products. As a variety of other quality menu choices. We have also developed a portfolio of licensed products for sale at retail and grocery locations. We seek to maintain the same quality standard with eachresult of our supplemental menu itemspartnership with Smithfield Foods, Inc., we expect Nathan’s Famous products to continue penetrating the grocery, mass merchandising and licensed products as we do with our core hot dogclub channels by expanding points of distribution in targeted, underpenetrated regions and French fries menu.through the development of new products. We intendbelieve Smithfield Foods, Inc. expects to continue to leverage this relationship with continued full-scale marketing efforts, both inside and outside of stores, highlighted by exciting customer events and brand representation and support of our highly recognized global brand and iconicNathan’s Famous Hot Dog Eating Contests.
We may offer the licensing of other signature products to introduceother qualified manufacturers.
Branded Products – We expect to continue the growth of our Branded Products Program through the addition of new products into our existing distribution network, open new points of distributionaccounts and grow our overall sales.venues. We believe that the flexible design of the Branded Products Program makes it well-suited for sales to all segments of the broad foodservice industry. We intend to keep targeting sales to a broad line of food distributors, which we believe complements our continuing focus on sales to various foodservice retailers. We continue to believe that as consumers look to brands and products with high standards, and integrity with the quality of the food that they purchase, there is great potential to increase our sales by converting existing sales of non-branded products to Nathan’s branded products throughout the foodservice industry.
In recent years,Franchising – We expect to continue to market our primary focus has beenfranchise program and Branded Menu Program to expandlarge, experienced and successful operators with the market penetration of the Nathan’s Famous brand. Specifically, we have soughtfinancial and business capability to increase the number of points of brand representation and grow product sales throughout our various channels of distribution. In this regard, we have concentrated our efforts on:
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As a result of our efforts to expand the Nathan’s Famous brand, as of March 27, 2016:
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Our revenues are generated primarily from sales of products sold through our Branded Product Program and within our Company-owned restaurants, as well as royalties from our retail licensing activitiesto individual-owner operators with evidence of restaurant management experience, net worth and the royalties, fees and other sums we earn from our restaurant franchising activities.sufficient capital. We also expect to continue developing master franchise programs in foreign countries.
We plan to expand the scope and market penetration of our Branded Product and Branded Menu Programs, further develop the restaurant operations of existing Nathan’s Famous franchised and Company-owned outlets, open new Nathan’s Famous franchised outlets in traditional or captive market environments and expand the Nathan’s Famous retail licensing programs. We also plan to further expand our international presence through our franchise, and retail licensing programs.restaurants – We may also selectively consider opening new Company-owned restaurants on an opportunistic basis. We may also consider new opportunities in both traditional and captive market settings.
Improve Company-owned restaurant profitability – We continue to focus on managing our expenses in the operation of our Company-owned restaurants, with a particular emphasis on cost of goods sold, including food costs, paper costs and labor costs while not sacrificing on overall quality and service that our customers expect. Macroeconomic factors including, but not limited to, inflation have resulted in upward pressures in certain of these operating costs. We continue to explore opportunities and strategies to help mitigate the impact on our operations.
Delivery Only Locations – We expect to continue our presence via delivery and virtual kitchens on an opportunistic basis.
These virtual kitchens have different rights and obligations than our traditional franchise agreements, including royalty rates and advertising contribution rates, and the sales levels at these locations differs from the sales levels at our traditional franchise restaurants.
Advertising and promotion – The Company continues to focus its efforts using a multiple pronged approach, with a particular emphasis on geo-targeted, social media advertising to drive customers directly to online restaurant menus for ease of ordering for delivery or pick-up. The online effort is focused on platforms including Facebook, Instagram and Twitter. Our marketing strategy focuses on our premium food offerings and limited time offerings to help drive sales and customer traffic.
Recent Developments
The impact of the global pandemic, COVID-19, in fiscal 2023 was more modest than in fiscal 2022. COVID-19 has contributed to labor challenges within our restaurant operations, including our Company-owned restaurants, our franchised locations, and our Branded Menu Program locations. These labor challenges have contributed to increased wages and salaries.
We continue to monitor the dynamic nature of the COVID-19 pandemic on our business; however, due to the continuous development and fluidity of this pandemic and potential resurgences of new variants of the virus we cannot determine the ultimate impact that the COVID-19 pandemic will have on our business, results of operations and financial condition.
Additionally, during the latter part of fiscal 2022 and extending throughout fiscal 2023, high rates of inflation have been experienced throughout the United States which have resulted in increases in commodity costs, including beef and beef trimmings, paper costs, labor costs and utility costs. These inflationary pressures have directly impacted our restaurant operations as well as our Branded Product Program.
Further inflationary pressures may have an adverse impact on our business and results of operations if we and our franchisees are unable to adjust prices to offset the impact of these cost increases.
The impact of the COVID-19 pandemic and inflationary pressures on our results of operations and liquidity is discussed in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.
Corporate History
We were incorporated in Delaware on July 10, 1992 under the name “Nathan’s Famous Holding Corporation” to act as the parent of a Delaware corporation then-known as Nathan’s Famous, Inc. On December 15, 1992, we changed our name to Nathan’s Famous, Inc., and our Delaware subsidiary changed its name to Nathan’s Famous Operating Corp. The Delaware subsidiary was organized in October 1989 in connection with its re-incorporation in Delaware from that of a New York corporation named “Nathan’s Famous, Inc.” The New York Nathan’s was incorporated on July 10, 1925, as a successor to the sole-proprietorship that opened the first Nathan’s restaurant in Coney Island in 1916. On July 23, 1987, Equicor Group, Ltd. was merged with and into the New York Nathan’s in a “going private” transaction. The New York Nathan’s, the Delaware subsidiary and Equicor may all be deemed to be our predecessors.
Restaurant Operations
Currently, our restaurant operations are comprised predominantly of Nathan’s Famous restaurants, which have been co-branded with Arthur Treacher’s and Kenny Rogers Roasters menu items in 47 and 19 units, respectively.
Nathan’s Famous Concept and MenusFiscal Year
Our Nathan’s Famous concept is scalable, offeringfiscal year ends on the last Sunday in March, which will result in a wide range52 or 53 week year. The fiscal years ended March 26, 2023 and March 27, 2022 were each on the basis of facility designs and sizes, suitable to a vast variety of locations, featuring a core menu consisting of Nathan’s World Famous Beef Hot Dogs, crinkle-cut French fries and beverages. Nathan’s menu is designed to take advantage of site-specific market opportunities by adding complementary food items to the core menu. The Nathan’s concept is suitable to stand-alone or can be co-branded with other nationally recognized brands.52 week reporting period.
Nathan’s World Famous Beef Hot Dogs are flavored with its secret blendRestaurant Operations
Company-owned restaurants
As of spices provided by Ida Handwerker in 1916, which historically have distinguished Nathan’s World Famous Beef Hot Dogs.March 26, 2023, we operated four Company-owned restaurants (including one seasonal unit), within the New York metropolitan area. Our hot dogs are prepared and served in accordance with procedures which have not varied significantly since our inception almost 100 years ago inseasonal location on the Coney Island Boardwalk was open from April 1, 2022 to October 30, 2022. It reopened for the summer season on March 26, 2023.
Threeof our Company-owned restaurants range in size from approximately 3,500 square feet to 10,000square feet and franchised restaurants. Our signature crinkle-cut French fries, cooked in 100% trans-fat-free oil,have seating to accommodate between 60 and 125 customers. These restaurants are featured at each Nathan’s restaurant. We believe the majority of sales in our Company-owned units consist of Nathan’s World Famous Beef Hot Dogs, crinkle-cut French friesopen seven days a week on a year-round basis and beverages.
Individual Nathan’s restaurants supplement their core menu of Nathan’s World Famous Beef Hot Dogs, crinkle-cut French fries and beverages with a variety of other quality menu choices including: char-grilled hamburgers, crispy chicken tenders, crispy chicken and char-grilled chicken sandwiches, Philly cheese steaks, selected seafood items, a breakfast menu and assorted desserts and snacks. We use the Arthur Treacher’s brand, products and trademarks as a branded seafood menu-line extension for inclusion in certain Nathan’s Famous restaurants. While the number of supplemental menu items carried varies with the size of the unit, the specific supplemental menus chosen are tailored to local food preferences and market conditions. Each supplemental menu option consists of a number of variations; for example, the hamburger menu may include char-grilled bacon cheeseburgers, double-burgers and super cheeseburgers. We seek to maintain the same quality standard with each of Nathan’s supplemental menus as we do with Nathans’ core hot dog and French fries menu. Thus, for example, hamburgers and sandwiches are prepared to order and not pre-wrapped or kept warm under lights. Nathan’s also has a “Kids Meal” program in which various menu alternatives are combined with toys designed to appeal to consumers of all ages. We have established high standards for food quality, cleanliness, and service at our restaurants and regularly monitor the children’s market. Soft drinks, iced tea, coffee and old fashioned lemonade and orangeade are also offered. The Company continually evaluates new products. In the courseoperations of its evaluations, the Company seeksour restaurants to respondensure adherence to changing consumer trends, including a trend toward perceived “healthier” products. In addition to its well-established, signature products, the Company offers for sale in many of its restaurants up to seven chicken products, six fish products, and five salad and soup products.these standards.
Two of our Company-owned restaurants have contemporary service areas, seating, signage, and general decor. Our Coney Island restaurant, which first opened in 1916, remains unique in its presentation and operations.
Nathan’s restaurant designs are available inOur Company-owned restaurants typically carry a rangebroader selection of sizes from 300menu items than our franchise restaurants and generally attain sales levels higher than the average of our newer franchise restaurants. The non-core menu items at the Company-owned restaurants, tend to 4,000 square feet. We have also developed various Nathan’s carts, kiosks, mobile food carts, trucks and modular units. Our smaller units may not have customer seating areas, although they may often share seating areas with other fast food outlets in food court settings. Other units generally provide seating for 45 to 125 customers. Carts, trucks, kiosks and modular units generally carry onlylower margins than the core menu. This menu
Our Company-owned restaurants contributed $12,161,000 in revenue in fiscal 2023, representing a 12% increase over fiscal 2022. Customer traffic at our Company-owned restaurants, in particular at Coney Island, during the fiscal 2023 period increased by approximately 12% over the fiscal 2022 period.
Our Coney Island flagship location has been open for over 100 years and is supplemented bythe home of the annual Nathan’s Hot Dog Eating Contest, which has been broadcast on ESPN each 4th of July since 2004 and achieved more than one million viewers in fiscal 2023.
COVID-19 related pressures on our Company-owned restaurants continued during the fiscal 2023 period, although to a numberlesser extent than during the fiscal 2022 period. As a result of other menu selectionsthe COVID-19 pandemic, we continue to focus on digital and social media initiatives, as well as direct mail, to enhance the customer experience; to increase customer traffic; and to promote off-premise capabilities. We believe that these initiatives play an important role in our other restaurant types.creating a more seamless and more efficient customer experience and meeting consumer expectations for speed and convenience.
We believe that Nathan’s carts, kiosks, modular unitsremain principally focused on the well-being and food court designs are particularly well-suited for placementsafety of our guests and restaurant employees. Since there continues to be uncertainty around the COVID-19 pandemic, as variants continue to emerge, we may implement additional safety measures in non-traditional sites, such as airports, travel plazas, stadiums, schools, convenience stores, entertainment facilities, military facilities, businessline with health authority recommendations and industry foodservice, within larger retail operations and other captive markets. Many of these settings may also be appropriate for our expanding Branded Menu Program or Branded Product Program. All of these units feature the Nathan’s logo and utilize a contemporary design.regulatory requirements.
Arthur Treacher’s Fish-n-Chips Concept and Menu
Arthur Treacher’s Fish-n-Chips, Inc. was originally founded in 1969. Arthur Treacher’s main product is its “Original Fish-n-Chips,” consisting of fish fillets coated with a special batter prepared under a proprietary formula, deep-fried golden brown, and served with English-style chips and corn meal “hush puppies.” We own all trademarks and other intellectual property relating to Arthur Treacher’s and have granted a limited license to the seller for the use of the Arthur Treacher’s intellectual property. Full menu restaurants emphasize the preparation and sale of batter-dipped fried seafood and chicken dishes served in a quick-service environment. We use the Arthur Treacher’s brand, products and trademarks as a branded seafood menu-line extension for inclusion in certain Nathan’s Famous restaurants. During fiscal 2014, we entered into our first multi-unit Branded Menu Program agreement with a qualified foodservice operator for inclusion in non-Nathan’s facilities and may seek to further market this program in the future.
Kenny Rogers Roasters
We have the right to use the Kenny Rogers Roasters trademarks for the continued sale of the Kenny Rogers Roasters products in the Nathan’s Famous restaurants existing at April 23, 2008, where the Kenny Rogers products had already been introduced.
Franchise Operations
At March 27, 2016,26, 2023, our Nathan’s franchise system, including our Branded Menu Program, consisted of 259 units232 locations operating in 21 17states and 1113 foreign countries. It also included 267 virtual kitchens (existing kitchens with no Nathan’s Famous branded storefront presence, used to fill online orders) located in 19 states and 4 foreign countries.
Our franchise operations contributed $4,292,000 in revenue in fiscal 2023, representing an 11% increase over fiscal 2022. As travel continued to increase during the COVID-19 recovery, we experienced increased customer traffic across our franchise system including airport locations; highway travel plazas; shopping malls; movie theaters; and casino locations, primarily in Las Vegas, Nevada.
Our franchise system includes among its 146 franchisees such well-known companies as Applegreen USA Welcome Centres, LLC, HMS Host, Compass GroupAreas USA, Inc., Gourmet Dining Services, Inc., CulinArt, National Amusements, Inc., Hershey Entertainment & Resorts Company, Six Flags Theme Parks and Bruster’s Real Ice Cream.Cream, and Frisch’s Big Boy. We continue to seek out and to market our franchising programs to larger, experienced and successful operators with the financial and business capability to develop multiple franchise units,locations, as well as to individual owner-operators with evidence of restaurant management experience, net worth and sufficient capital.
During the fiscal 2023 period, we entered into an agreement with Frisch’s Big Boy restaurants to carry our signature all-beef natural casing hot dogs. This agreement expands our presence in the Midwest, including Ohio, Kentucky and Indiana.
During the fiscal year ended March 27, 2016,2023 period, no single franchisee accounted for over 10% of our consolidated revenue. At March 27, 2016,26, 2023, Applegreen USA Welcome Centres, LLC operated seven franchised locations within highway travel plazas and HMS Host operated 14four franchised outlets,locations, including 3three units at airports, 10 units within highway travel plazas and one unit within a mall. Additionally, at March 27, 2016, HMS Host operated 48 locations featuring Nathan’s products pursuanttwenty-five mobile carts were registered to our Branded Product Program. At March 27, 2016, there were also nine Kmart locations and 25operate in New York, NY. Fifteen Bruster’s Real Ice Cream shops were selling Nathan’s products under our Branded Menu Program.
During the fiscal 2023 period, 11 franchised locations opened, including 3 Branded Menu Program locations. Additionally, 18 franchised locations closed, including 5 Branded Menu Program locations.
Nathan’s Famous Concept and Menus
Our Nathan’s Famous concept is scalable, offering a wide range of facility designs and sizes, suitable to a vast variety of locations, featuring a core menu consisting of Nathan’s World Famous Beef Hot Dogs, crinkle-cut French fries and beverages. Nathan’s menu is designed to take advantage of site-specific market opportunities by adding complementary food items to the core menu. The Nathan’s concept is suitable to stand-alone or can be co-branded with other nationally recognized brands.
Nathan’s World Famous Beef Hot Dogs are flavored with our secret blend of spices created by Ida Handwerker in 1916, which historically have distinguished Nathan’s World Famous Beef Hot Dogs. Our hot dogs are prepared and served in accordance with procedures which have not varied significantly since our inception over 100 years ago in our Company-owned and franchised restaurants. Our signature crinkle-cut French fries are featured at each Nathan’s restaurant. We believe the majority of sales in our Company-owned restaurants consist of Nathan’s World Famous Beef Hot Dogs, crinkle-cut French fries and beverages.
Individual Nathan’s restaurants supplement their core menu of Nathan’s World Famous Beef Hot Dogs, crinkle-cut French fries and beverages with a variety of other quality menu choices including: the Nathan’s Famous NY Cheesesteak by Pat LaFreida, our fresh angus hamburgers and our hand-dipped chicken. We have historically used the Arthur Treacher’s brand, products and trademarks as a branded seafood menu-line extension for inclusion in certain Nathan’s Famous restaurants, as well as virtual kitchens.
We also partner with major third-party delivery service providers, such as DoorDash, UberEats, GrubHub, and Postmates, providing multiple options for our guests to enjoy Nathan’s Famous products at home.
Nathan’s restaurant designs are available in a range of sizes from 300 to 4,000 square feet. We have also developed various Nathan’s carts, kiosks, mobile food carts, trucks and modular units. Our smaller units may not have customer seating areas, although they may often share seating areas with other fast food or quick service outlets in food court settings. Other units generally provide seating for 45 to 125 customers. Carts, kiosks and modular units generally carry only the core menu. Our food trucks may carry the full Nathan’s Famous menu.
We believe that Nathan’s carts, kiosks, modular units and food court designs are particularly well-suited for placement in non-traditional sites, such as airports, travel plazas, stadiums, schools, convenience stores, entertainment facilities, military facilities, business and industry foodservice, within larger retail operations and other captive markets. Many of these settings may also be appropriate for expanding our Branded Menu Program or Branded Product Program. All of these units feature the Nathan’s Famous logo and utilize a contemporary design.
Nathan’s Standard Franchise Program
Franchisees are required to execute a standard franchise agreement prior to opening each Nathan’s Famous unit.location. Our current standard Nathan’s Famous franchise agreement provides for, among other things, a one-time $30,000 franchise fee payable upon execution of the agreement, a monthly royalty payment based on 5.5% of restaurant sales and the expenditure of up to 2.0% of restaurant sales on advertising. The initial term of the typical franchise agreement is 10 years, with a 5-year renewal option by the franchisee, subject to conditions contained in the franchise agreement. We may offer alternatives to the standard franchise agreement, having to do with the term, franchise royalties, fees or advertising requirements. The initial term of the typical franchise agreement is 20 years, with a 15-year renewal option by the franchisee, subject to conditions contained in the franchise agreement.
Franchisees are approved on the basis of their business background, evidence of restaurant management experience, net worth and capital available for investment in relation to the proposed scope of the development agreement.
We provide numerous support services to our Nathan’s Famous franchisees. We assist in and approve all site selections. Thereafter, we provide architectural plans suitable for restaurants of varying sizes and configurations for use in food court, in-line and free standingfree-standing locations. We also assist in establishing building design specifications, reviewing construction compliance, equipping the restaurant and providing appropriate menus to coordinate with the restaurant design and location selected by the franchisee. We typically do not sell food, equipment or supplies to our standard franchisees.
We offer various management-trainingmanagement training courses for management personnel of Company-owned and franchised Nathan’s Famous restaurants. A restaurant manager from each restaurant must successfully complete our mandated management-trainingmanagement training program. We also offer additional operations and general management training courses for all restaurant managers and other managers with supervisory responsibilities. We provide standard manuals to each franchisee covering training and operations, products and equipment and local marketing programs. We also provide ongoing advice and assistance to franchisees. We meet with our franchisees to discuss upcoming marketing events, menu development and other topics, each of which is designed to provide individual restaurant and system-wide benefits.
Franchised restaurants are required to be operated in accordance with uniform operating standards and specifications relating to the selection, quality and preparation of menu items, signage, decor, equipment, uniforms, suppliers, maintenance and cleanliness of premises and customer service. All standards and specifications are developed by us to be applied on a system-wide basis. We regularly monitor franchisee operations and inspect restaurants. Franchisees are required to furnish us with monthly sales or operating reports which assist us in monitoring the franchisee’s compliance with its franchise agreement. We make both announced and unannounced inspections of restaurants to ensure that our practices and procedures are followed. We have the right to terminate a franchise if a franchisee does not operate and maintain a restaurant in accordance with the requirements of its franchise agreement, including for non-payment of royalties, sale of unauthorized products, bankruptcy or conviction of a felony. During the fiscal 2016 period, franchisees opened 31 new Nathan’s Famous franchised units in the United States (including 22 Branded Menu Program units), and 25 units internationally.
A franchisee who desires to open multiple unitslocations in a specific territory within the United States may enter into an area development agreement under which we would expect to receive an area development fee based upon the number of proposed unitslocations which the franchisee is authorized to open. With respect to our international development, we generally grant exclusive territorial rights in foreign countries for the development of Nathan’s unitslocations based upon compliance with a predetermined development schedule. Additionally, we may further grant exclusive manufacturing and distribution rights in foreign countries, and we may require an exclusivity fee to be conveyed for such exclusive rights.
Nathan’sNathan’s Branded Menu Program
Our Nathan’s Famous Branded Menu Program enables qualified foodservice operators to offer a Nathan’s Famous menu of Nathan’s World Famous Beef Hot Dogs, crinkle-cut French fries, proprietary toppings, and a limited menu of other Nathan’s products. Under the Branded Menu Program, the operator may use the Nathan’s Famous trademarks on signage and as part of its menu boards. Additionally, the operator may use Nathan’s Famous paper goods and point of sale marketing materials. Nathan’s also provides architectural and design services, training and operation manuals in conjunction with this program. The operator provides Nathan’s with a fee and is required to sign a 10-year agreement. We may offer alternatives to the term of the typical Branded Menu Program agreement. Nathan’s does not collect a royalty based on the operator’s sales and the operator is not required to report sales to Nathan’s as required by the standard franchise arrangements. Instead, the Branded Menu Program operator is required to purchase products from Nathan’s approved distributors;distributors and we earn our royalties from such purchases.
As of March 27, 2016, the Nathan’s Branded Menu Program was comprised of 100 outlets, which included 25 Nathan’s Famous Branded Products within Bruster’s Real Ice Cream shops, a premium ice cream franchisor headquartered in Western Pennsylvania.Arthur Treacher’s
Arthur Treacher’s
We are the sole owner of all rights to the Arthur Treacher’s brand and the exclusive franchisor of theFish-n-Chips, Inc. was originally founded in 1969. Arthur Treacher’s restaurant system (subject tomain product is its “Original Fish-n-Chips,” consisting of fish fillets coated with a limited license granted to PAT Franchise Systems, Inc. (“PFSI”) in Indiana, Michigan, Ohio,special batter prepared under a proprietary formula, deep-fried golden brown, and Pennsylvania, (“the PFSI Markets”.) Pursuant to the license, PFSI has no obligation to pay fees or royalties to us in connectionserved with its use of the Arthur Treacher’s intellectual property within the PFSI Markets. As a result of PFSI’s failure to satisfy the Development Schedules for each of the territories, all future development rights have reverted to Nathan’s.English-style chips and corn meal “hush puppies.”
As of March 27, 2016,26, 2023, Arthur Treacher’s, as a co-brand, was included within 47twenty-two Nathan’s Famous restaurants. Our primary intention was to continue including co-branded Additionally, there are sevenArthur Treacher’s operations within our Nathan’s Famous restaurantsBMP locations and explore alternative distribution channels for56 Arthur Treacher’s products. As of March 27, 2016, seven locations were operating outside of a Nathan’s restaurant. We may seek to expand the opportunity for an Arthur Treacher’s Branded Menu Programin the future.
Company-owned Nathan’s Restaurant Operations
As of March 27, 2016, we operated five Company-owned Nathan’s units, including one seasonal location, in New York. Since 2012, we have invested significantly in our Company-owned restaurants. In March 2012, we relocated our seasonal Coney Island Boardwalk restaurant to a more prominent location. Our Coney Island flagship location was rebuilt and re-opened on May 20,2013 after suffering severe damage as a result of Superstorm Sandy on October 29, 2012. Our Yonkers location was down-sized, relocated and re-opened on November 18, 2013 pursuant to its new lease, after being closed for renovation since November 2012 and our Oceanside restaurant was also relocated and downsized and re-opened on March 25, 2015, after being closed for approximately three months for development. Four of our Company-owned restaurants range in size from approximately 2,650 square feet to 10,000square feet and have seating to accommodate between 60 and 125 customers. These restaurants are open seven days a week on a year-round basis and are designed to appeal to consumers of all ages. We have established high standards for food quality, cleanliness, and service at our restaurants and regularly monitor the operations of our restaurants to ensure adherence to these standards.
Three of our Company-owned restaurants have contemporary service areas, seating, signage, and general decor. Our Coney Island restaurant, which first opened in 1916, remains unique in its presentation and operations.
Our Company-owned restaurants typically carry a broader selection of menu items than our franchise restaurants and generally attain sales levels higher than the average of our newer franchise restaurants. The items offered at the Company-owned restaurants, other than the core menu, tend to have lower margins than the core menu.virtual kitchens.
International Development
As of March 27, 2016,26, 2023, Nathan’s Famous franchisees operated 49 units74 locations in 11thirteen foreign countries. During the fiscal 2016 period we opened 25 new units internationally, including our first two units
Through separate licensed manufacturing agreements, Nathan’s World Famous Beef Hot Dogs are currently manufactured in each of Panama and Australia pursuant to new development agreements. Additionally, we opened 17 units in Russia, 2 units in Malaysia, one unit in Costa Rica and one unit in the Dominican Republic pursuant to existing development agreements. We expect to enter into a termination agreement with our Master Developer in Mexico to close the existing restaurants and reclaim the territorial rights for Mexico CityBrazil, Germany and the entire country.United Arab Emirates.
We willcontinue to pursue international expansion opportunities. During fiscal 2023, we opened franchised locations in the following international markets: Egypt and Mexico.
We may seek to continue granting exclusive territorial rights for franchising and for the manufacturing and distribution rights in foreign countries, and we expect to require that an exclusivity fee be conveyed for these rights. We plan to develop the restaurant franchising system internationally through the use of master franchising agreements based upon individual or combined use of our existing restaurant concepts and for the distribution of Nathan’s products.
FollowingThe following table is a summary of our international operations for the fiscal years ended March 27, 2016, March 29, 201526, 2023 and March 30, 2014:27, 2022: See Item 1A-“Risk Factors.”
March 26, | March 27, | |||||||||||||||||||
March27, 2016 | March 29, 2015 | March 30, 2014 | 2023 | 2022 | ||||||||||||||||
Total revenue | $ | 5,235,000 | $ | 3,430,000 | $ | 3,531,000 | $ | 5,898,000 | $ | 3,223,000 | ||||||||||
Gross profit (a) | $ | 1,655,000 | $ | 1,186,000 | $ | 1,765,000 | $ | 1,387,000 | $ | 1,023,000 |
(a) Gross profit represents the difference between revenue and cost of sales.
Location Summary
The following table shows the number of our Company-owned restaurants and franchised unitslocations in operation at March 27, 201626, 2023 and their geographical distribution:
Domestic Locations | Company | Franchise (1) | Total (1) | Company | Franchise (1) | Total (1) | |||||||||||||||
Arizona | - | 1 | 1 | ||||||||||||||||||
California | - | 1 | 1 | ||||||||||||||||||
Connecticut | - | 4 | 4 | - | 2 | 2 | |||||||||||||||
Florida | - | 24 | 24 | - | 21 | 21 | |||||||||||||||
Georgia | - | 13 | 13 | - | 5 | 5 | |||||||||||||||
Illinois | - | 1 | 1 | ||||||||||||||||||
Kentucky | - | 3 | 3 | - | 2 | 2 | |||||||||||||||
Maryland | - | 3 | 3 | - | 1 | 1 | |||||||||||||||
Massachusetts | - | 6 | 6 | - | 4 | 4 | |||||||||||||||
Missouri | - | 1 | 1 | - | 1 | 1 | |||||||||||||||
Nevada | - | 12 | 12 | - | 7 | 7 | |||||||||||||||
New Hampshire | - | 1 | 1 | ||||||||||||||||||
New Jersey | - | 31 | 31 | - | 23 | 23 | |||||||||||||||
New York | 5 | 79 | 84 | 4 | 69 | 73 | |||||||||||||||
North Carolina | - | 2 | 2 | - | 4 | 4 | |||||||||||||||
Ohio | - | 3 | 3 | - | 2 | 2 | |||||||||||||||
Pennsylvania | - | 12 | 12 | - | 8 | 8 | |||||||||||||||
Rhode Island | - | 1 | 1 | - | 2 | 2 | |||||||||||||||
South Carolina | - | 9 | 9 | - | 3 | 3 | |||||||||||||||
Texas | - | 2 | 2 | - | 2 | 2 | |||||||||||||||
Virginia | - | 1 | 1 | - | 2 | 2 | |||||||||||||||
Domestic Subtotal | 5 | 210 | 215 | 4 | 158 | 162 |
International Locations | Company | Franchise (1) | Total (1) | |||||||||
Australia | - | 2 | 2 | |||||||||
Costa Rica | - | 4 | 4 | |||||||||
Dominican Republic | - | 7 | 7 | |||||||||
Egypt | - | 1 | 1 | |||||||||
Jamaica | - | 2 | 2 | |||||||||
Kuwait | - | 9 | 9 | |||||||||
Malaysia | - | 3 | 3 | |||||||||
Mexico | - | 2 | 2 | |||||||||
Panama | - | 2 | 2 | |||||||||
Russia | - | 16 | 16 | |||||||||
Turkey | - | 1 | 1 | |||||||||
International Subtotal | - | 49 | 49 | |||||||||
Grand Total | 5 | 259 | 264 |
International Locations | Company | Franchise (1) | Total (1) | ||||||
Brazil | - | 3 | 3 | ||||||
Dominican Republic | - | 6 | 6 | ||||||
Egypt | - | 1 | 1 | ||||||
France | - | 8 | 8 | ||||||
Kazakhstan | - | 3 | 3 | ||||||
Kingdom of Saudi Arabia | - | 10 | 10 | ||||||
Mexico | - | 1 | 1 | ||||||
Panama | - | 4 | 4 | ||||||
Philippines | - | 4 | 4 | ||||||
Spain | - | 1 | 1 | ||||||
Ukraine (2) | - | 27 | 27 | ||||||
United Arab Emirates | - | 3 | 3 | ||||||
United Kingdom | - | 3 | 3 | ||||||
International Subtotal | - | 74 | 74 | ||||||
Grand Total | 4 | 232 | 236 |
(1) | Amounts include |
(2) | Two locations in Ukraine are temporarily closed as a result of the Russia-Ukraine conflict. |
Branded Product Program
ThroughThe impact of COVID-19 on our Branded Product Program eased significantly in fiscal 2023 as compared to fiscal 2022. As the level of comfort of consumers gathering in social settings increased and travel increased, our Branded Product Program customers, including professional sports arenas, amusement parks, shopping malls, and movies theaters experienced stronger traffic and attendance contributing to higher sales. The total volume of hot dogs sold in the Branded Product Program Nathan’s provides qualified foodservice operatorsincreased by approximately 15% over fiscal 2022, rebounding and exceeding pre-pandemic levels. Our Branded Product Program contributed $78,884,000 in revenue in fiscal 2023, representing a variety of venues the opportunity to capitalize on Nathan’s valued brand by marketing and selling primarily Nathan’s Famous hot dog products. We believe that the program is unique in its flexibility and broad appeal. Hot dogs are offered in a variety of sizes and additional specialty products are available to satisfy consumer needs. In conjunction with the program, the operators are granted a limited use of the Nathan’s Famous trademark, as well as Nathan’s point of purchase materials. We earn income by selling our products either directly to the end users or to various foodservice distributors who resell the products to specific operators.19% increase over fiscal 2022.
Beginning in fiscal 2022 and continuing in fiscal 2023, we have experienced inflationary pressures on commodity prices, including beef and beef trimmings. Our average cost of hot dogs during fiscal 2023 was approximately 1.4% higher than during fiscal 2022. Our average cost of hot dogs during fiscal 2022 was approximately 19% higher than fiscal 2021. We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during fiscal 2024.
As of March 27, 2016,26, 2023, the Branded Product Program distributed product in all 50 states, the District of Columbia, Puerto Rico, Canada, the U.S. Virgin Islands, Guam and Mexico. DuringPursuant to the fiscal 2016 period, we continued to open many new locations offering Nathan’s branded products. Today,Branded Product Program, Nathan’s World Famous Beef Hot Dogs are being offered in national restaurant chains such as Auntie Anne’s, and Hot Dog On A Stick and Johnny Rockets; national movie theater chains such as Regal Entertainment, and National Amusements and Cinemex in Mexico; amusement parks such as Universal Studios; casino hotels such as Foxwoods Casino in ConnecticutConnecticut; and convenience store chains such as Race Trac,RaceTrac and Holiday Station stores, and the Cinemex movie chain in Mexico.stores. The Branded Products Program also continued its representationdistributes product in professional sports arenas with Nathan’s World Famous Beef Hot Dogs now being served in stadiums and arenas that host the New York Yankees, New York Mets, Miami Marlins, Tampa Bay Rays, Brooklyn Nets,New York Islanders,New Jersey Devils, St. Louis Blues Dallas Cowboys, and Dallas Cowboys.Green Bay Packers.
Additionally, our products are offered in numerous other foodservice operations including cafeterias, snack bars and vending machines located in many different types of foodservice outlets and venues, including airports, highway travel plazas, colleges and universities, gas and convenience stores, military installations, and Veteran’sVeterans Administration hospitals throughout the country.United States.
Nathan’s expects to continue to seek out and evaluate a variety of alternative environments designed to maximize the value ofand grow our Branded Product Program.
Expansion Program
We expect that our retail licensing program will continue to grow centered around our new licensing program with John Morrell & Co. John Morrell brings superior sales and marketing resources to our brand through its national scale, broad distribution platform, strong retail relationships and research and development infrastructure capable of developing and introducing attractive new products.As a result of our partnership with John Morrell, we expectNathan’s Famous products to further penetrate the grocery, mass merchandising and club channels by expanding points of distribution in targeted, underpenetrated regions and through the development of new products.John Morrell expects to leverage this relationship with continued full-scale marketing efforts, both inside and outside of stores, highlighted by exciting customer events and brand representation and support at numerous Hot Dog Eating Contest Qualifying Events. Additionally, John Morrell & Co. will continue its mobile marketing tour throughout the year, whereby merchandising trucks will be making over 200 scheduled stops at supermarkets throughout the country and certain Hot Dog Eating Contests to bring the Nathan’s / Coney Island experience to new markets.
We expect to continue the growth of our Branded Product Program through the addition of new points of sale. We believe that the flexible design of the Branded Product Progam makes it well-suited for sales to all segments of the broad foodservice industry.We intend to keep targeting sales to a broad line of food distributors, which we believe compliments our continuing focus on sales to various foodservice retailers. We continue to believe that as consumers look to assure confidence in the quality of the food that they purchase, there is great potential to increase our sales by converting existing sales of non-branded products to Nathan’s branded products throughout the foodservice industry.
We will seek to market our franchise restaurant program to large, experienced and successful operators with the financial and business capability to develop multiple franchise units, as well as to individual owner-operators with evidence of restaurant management experience, net worth and sufficient capital.
We also expect to continue opening traditional and Branded Menu Nathan’s Famous franchised units individually and on a co-branded basis, expanding product distribution through various means such as branded products and retail licensing arrangements, developing master franchising programs in foreign countries and including our Arthur Treacher’s signature products both within our restaurant system and as a separate Branded Menu Program. We may selectively consider opening new Company-owned Nathan’s units on an opportunistic basis. Existing Company-owned units are located in the New York metropolitan area, where we have extensive experience in operating restaurants. We may consider new opportunities in both traditional and captive market settings.
Licensing Program
We believe that our international development efforts will continuePursuant to garner a variety of interest as a result of the unique product distribution opportunities that we offer. Because of the scalability of our concept and menu offerings, we believe that there are also opportunities to co-brand our restaurant concept and/or menu items with other restaurant concepts internationally. We believe thatan agreement expiring in addition to restaurant franchising, we could further increase revenues by continuing to offer master development agreements to qualified persons or entities allowing for the operation of franchised restaurants, sub-franchising of restaurants to others, licensing the manufacture of our signature products, selling our signature products through supermarkets or other retail venues and further developing our Branded Product Program. Qualified persons or entities must have satisfactory foodservice experience managing multiple units, the appropriate infrastructure and the necessary financial resources to support the anticipated development of the business.
Co-branding
We believe that there is a continuing opportunity for co-branding of our restaurant concept and/or menu items with other restaurant concepts, as well as within our restaurant system as new franchise opportunities are developed. Franchisees that have co-branded a Nathan’s Famous restaurant with our other brands received a then-current Uniform Franchise Offering Circular (“UFOC”) or Franchise Disclosure Document (“FDD”) and executed a participation agreement as a rider to their franchise agreement. We initially implemented our co-branding strategy within the Nathan’s Famous restaurant system by adding the Arthur Treacher’s and Kenny Rogers Roasters brands into Nathan’s Famous restaurants. Upon the sale of Kenny Rogers Roasters in April 2008, we discontinued co-branding that brand within new restaurants in the Nathan’s Famous system. We have continued our co-branding effort with the Arthur Treacher’s brand with new and existing Nathan’s Famous franchisees and expect to do so in the future. We may seek to further explore opportunities to co-brand the Arthur Treacher’s brand to other multi-unit foodservice operators in the future. At March 27, 2016, the Arthur Treacher’s brand was being sold within 47 Nathan’s restaurants and the Kenny Rogers Roasters brand was being sold within 19 Nathan’s restaurants. We have maintained the right to sell Kenny Rogers products in our Nathan’s locations that were existing prior to May 2008 and to receive the revenue from those sales without having to pay royalties.
We believe that our diverse brand offerings complement each other, which has enabled us to market franchises of co-branded units and continue co-branding within our franchised units. We also believe that our various restaurants’ products provide us with strong lunch and dinner day-parts as well as snacking occasions.
We believe that a multi-branded restaurant concept offering strong lunch and dinner day-parts is appealing to both consumers and potential franchisees. Such restaurants are designed to allow the operator to increase sales and leverage the cost of real estate and other fixed costs to provide superior investment returns as compared to many restaurants that are single branded. We have successfully co-branded Nathan’s with numerous business partners that were not Nathan’s franchisees because of our adaptability of our menu, to be limited or extensive, and the uniqueness of our signature hot dog product.
Licensing Program
Commencing March 2, 2014, John Morrell & Co., a subsidiary of2032, Smithfield Foods, Inc., became Nathan’s primary licensee. Pursuant to the Agreement, John Morrell & Co., for a term of 18 years has been granted, among other things, (i) the exclusive right and obligation to manufacture, distribute, market and sell “Nathan’s Famous” branded hot dog, sausagedogs, and corned beef productssausages in refrigerated consumer packages to be resold through retail channels (e.g., supermarkets, groceries, mass merchandisers and club stores) within the United States, (ii) a right of first offer to license any other “Nathan’s Famous” branded refrigerated meat products in consumer packages to be resold through retail channels within the United States, on terms to be negotiated in good faith, (iii) the right and obligation to manufacture “Nathan’s Famous” branded hot dog and sausage products in bulk for use in the food service industry within the United States, and (iv) the non-exclusive right and obligation to supply “Nathan’s Famous” natural casing and skinless hot dogs in bulk for use in the “Nathan’s Famous” restaurant system within the United States. The Agreementagreement provides for royalties on packaged products sold to supermarkets, club stores and grocery stores, payable on a monthly basis to the Company equal to 10.8% of net sales, subject to minimum annual guaranteed royalties of at least $10 million in the first year of the term and which minimum guaranteed royalties increase annually throughout the term.royalties. Pursuant to this agreement, Nathan’s earned royalties of approximately $16,586,000$28,688,000 in fiscal 20162023 and $14,367,000$27,907,000 in fiscal 2015.2022 representing 21.9% and 24.3% of total revenues, respectively. We believe our future operating results will continue to be beneficiallysubstantially impacted by the terms and conditions of the agreement with John Morrell & Co.Smithfield Foods, Inc., but there can be no assurance thereof (See Item 1A - “Risk Factors”).
For ten years, John Morrell & Co. Since 2002, Smithfield Foods, Inc. has licensed from us the right to manufacture and sell branded hot dogs and sausages to selectedselect foodservice accounts. Pursuant to this arrangement, we earned royalties of $1,389,000$1,310,000 and $1,738,000$1,063,000 during the fiscal 2016 period2023 and fiscal 2015 period,2022 periods, respectively. The majority of these royalties were earned from one account. Effective March 2, 2014, this arrangement is governed by our license/supply agreement with John Morrell & Co. Commencing April 2015, we agreed to reduce the royalty earned by $0.03 per pound in cooperation with John Morrell’s sales efforts to gain further retail distribution with that account.company. As of March 27, 2016,26, 2023, packaged Nathan’s World Famous Beef Hot Dogs continued to be sold in approximately 42,000 supermarkets, mass merchandisers and club stores including Walmart, Kroger, Ahold, Publix, Albertsons, Safeway, ShopRite, Walmart, Target, Sam’s Club, Costco and BJ’s Wholesale Club located in all 50 states.Westates. We believe that the overall exposure of the brand and opportunity for consumers to enjoy the Nathan’s World Famous Beef Hot Dog in their homes helps promote “Nathan’s Famous” restaurant patronage. Royalties earned from thisunder the retail agreement, including the foodservice program, were approximately 90.7%90% of our fiscal 20162023 period license revenues.
We license the manufacture of the proprietary spices which are used to produce Nathan’s World Famous Beef Hot Dogs to Saratoga Specialties.Specialties, Inc., a wholly-owned subsidiary of Solina. During fiscal 20162023 and 2015,2022, we earned $852,000royalties of $1,298,000 and $804,000,$1,216,000, respectively, from this license. Through this agreement, we are able to control the manufacture of all Nathan’s“Nathan’s Famous” branded hot dogs.
During fiscal 2016,2023, our licensee, ConAgra Foods Lamb Weston, Inc. produced, continued to produce and distributeddistribute Nathan’s Famous frozen crinkle-cut French fries and onion rings for retail sale pursuant to a license agreement. These products were distributed within 37 thirty-ninestates, primarily on the East Coast, and in the South-WestSouthwest and West Coast during fiscal 2016.2023. During fiscal 20162023 and 2015,2022, we earned royalties of $452,000$1,501,000 and $507,000,$954,000, respectively, under this agreement. For the contract year ended in July 2015,2022 we earned royalties of $136,000$581,000 in excess of the annual minimum. ConAgra Foods Lamb Weston, Inc. continues to seek to further expand its market penetration inthroughout the Eastern United States and in the Mid-West.ConAgra FoodsStates. Lamb Weston, Inc. previously exercised its secondfourth option to extend the license agreement through July 2018,2024, pursuant to which the minimum royalties will increase 5%4% annually.
During fiscal 2016, we2023, our licensee, Bran-Zan Holdings, LLC continued to license the right to manufactureproduce and selldistribute miniature bagel dogs, franks-in-a-blanket, mozzarella sticks and other hors d’oeuvres through club stores, supermarkets, and other retail food stores. RoyaltiesDuring fiscal 2023 and 2022, we earned royalties of $340,000 and $333,000, respectively, under this agreement were approximately $199,000 during fiscal 2016 and $217,000 during fiscal 2015.agreement.
We also have licensing agreements withDuring fiscal 2023, our licensee, Hermann Pickle Packers, Inc., Gold Pure Food Products Co., Inc. continued to produce and others. These companies licensed the “Nathan’s Famous” or “Arthur Treacher’s” name for the manufacture distribute Nathan’s Famous sauerkrautand salepickles pursuant to a license agreement. During fiscal 2023 and 2022, we earned royalties of various products including mustard, salsa, sauerkraut$318,000 and pickles. These products have been distributed on a limited basis. Fees and royalties earned from all of these products were approximately $288,000 during fiscal 2016 and $309,000 during fiscal 2015.$291,000, respectively, under this agreement.
We have a license agreement with Inventure Foods, Inc. for the manufacture and sale of Nathan’s branded potato chips and three other salty snack products. Royalties earned under this agreement were approximately $49,000 during fiscal 2016 and $69,000 during fiscal 2015. The agreement automatically renews until December 31, 2019, unless a non-renewal notice is received prior to expiration on December 31, 2016.
Provisions and Supplies
Nathan’s World Famous Beef Hot Dogs are primarily manufactured by John Morrell & Co.Smithfield Foods, Inc. for sale by our Branded Product Program, our restaurant system, and at retail. Previously, John Morrell & Co. manufactured our proprietary hot dogs in connection with sales pursuant to our Branded Product Program. John Morrell & Co.Smithfield Foods, Inc. and otheranother hot dog manufacturersmanufacturer supply the hot dogs for our Company-operatedCompany-owned and franchise-operated restaurants. All hot dogs are manufactured in accordance with Nathan’s recipes, quality standards and proprietary spice formulations. Nathan’s believes that it has reliable sources of supply; however, in the event of any significant disruption in supply, management believes that alternative sources of supply are available. (See Item 1A- “Risk Factors”).Saratoga.Saratoga Specialties, Inc. produces Nathan’s proprietary spice formulations, and we have, in the past, engaged Newly Weds Foods, Inc. as an alternative source of supply. Our frozen crinkle-cut French fries have been produced exclusivelyprimarily by ConAgra Foods Lamb Weston, Inc. McCain Foods USA is a secondary source of supply of our frozen French fries for our restaurant system. During fiscal 2016, McCain Foods USA provided approximately 15.6% of our frozen crinkle-cut French fries.
Most other Company provisions are purchased from multiple sources to prevent disruption in supply and to obtain competitive prices. We approve all products and product specifications. We negotiate directly with our suppliers on behalf of the entire system for all primary food ingredients and beverage products sold in the restaurants in an effort to ensure adequate supply of high qualityhigh-quality items at competitive prices.
We currently utilize a unified sourcecooperative distribution system pursuant to an agreement with UniPro Foodservice, Inc., National Distribution Alliance (formerly the Multi-Unit Group), which is comprised of institutional food and non-food distributors organized to procure, distribute, and market food service and non-food merchandise for the predominant distribution needs of our domestic restaurant system pursuant to a national food distribution contract with US Foodservice, Inc. Thissystem. The initial term of the agreement enables our restaurant operators to orderwas for five years through November 15, 2022. The agreement was subsequently renewed through June 30, 2025, and receive deliveriescontinuing for the majority of their food and paper products directly through this distributor.two (2) successive one (1) year renewal periods upon mutual consent. We believe that this arrangement not only ensures availability of product but isallows for more flexibility in expanding into new markets throughout the United States, as well as proves to be cost efficient and cost-effective than having multiple distributors for our restaurant system. Thiscurrent franchisees. The strategic distribution partners under this agreement expires on July 31, 2018. include: DiCarlo Distributors, Inc., Tapia Brothers Co., Cheney Brothers, Inc., Feesers, Inc., Lipari Foods, LLC, Hillcrest Foods, Sutherland’s Foodservice, and Chain Distribution Services LLC.Our branded products are delivered to our ultimate customers throughout the country by numerous distributors, including US Foodservice, Inc., SYSCO Corporation, Vistar / PFGPerformance Food Group Company, McLane Company, Inc. and McLane.DOT Foods.
Marketing, Promotion and Advertising
Nathan’s believes that an integral part of its brand marketing strategy is to continue to build brand awareness through its complimentary points of distribution strategy of selling its signature products through Company-owned and franchised restaurants (including virtual kitchens), the Branded Product Program, the Branded Menu Program, withinand through retail grocery channels including supermarkets and club stores. We believe that as we continue to build brand awareness and expand our reputation for quality and value, we have further penetrated thewill continue to seek to grow existing markets that we serve and have also enteredexpand into new markets. We also derive furtherThe Nathan’s Famous brand recognitioncontinues to enjoy tremendous exposure and awareness from theour Nathan’s Famous Hot Dog Eating Contests. In 2015, we hosted 15Due to the COVID-19 pandemic, all regional hot dog eating contests at a variety of high profile locations such as New York New York Hotel and Casino, Las Vegas, NV, and Citifield, Queens, NY, as well as withinwere canceled in fiscal 2023. However, while the cities of Atlanta, GA,Houston, TX,Nashville, TN, Lincoln, NE, Portsmouth, NH, Cleveland, OH and Sonoma, CA.In 2016, the qualifying tour will stop in four new cities. We are again holding contests at NASCAR events including theregionals were canceled, our annual Speed Street celebration in Charlotte, NC, Long Pond Speedway in the Poconos and Dover International Speedway, Dover, DE.Nathan’s held its’ first-ever qualifier at Busch Stadium prior to a St. Louis Cardinals Game in May 2014, returned in May 2015 and again for the third consecutive year on April 16, 2016. Our first regional contest of 2016 took place in Texas on March 19th and will occur in 11 additional cities. These regional contests culminate on July 4th each year as the regional champions converge at our flagship restaurant in Coney Island, NY, to compete for the coveted “Mustard Yellow Belt.” In 2011, we introduced our first-ever women’s-only Hot Dog Eating Contest which includedChampionship returned to our flagship restaurant on the top finishing female competitor from each qualifying regional contest. The regional contests typically garner significant amountscorner of local publicitySurf Avenue and the national championship contest that is held onStillwell Avenue in Coney Island, New York. ESPN aired our July 4th each year generates significant nationwide publicity. The national championship contestHot Dog Eating Championship Contest as it has been broadcast on ESPNdone since 2004.
Nathan’s and John Morrell & Co. participated together in running 2-week radio campaigns in support of certain promotions in 2015. In 2016, Nathan’s and John Morrell & Co. will run 9-week radio campaigns in support of certain promotions.
Nathan’s Famous continues to look to sports sponsorships as a strategic marketing opportunity to further our brand recognition. In addition to the branded signage opportunity, Nathan’s is given the opportunity to sellsells its Nathan’s World Famous Beef Hot DogDogs and crinkle-cut French fries. In many venues, Nathan’s World Famous Beef Hot Dogs and crinkle-cut French fries are sold at Nathan’s Famous trade-dressed concession stands and as menu items that are served in suites and throughout premium seating areas. Some of Nathans’Our current professional sports sponsorships include:
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We believe that the Company’s overall sales and exposure have also been complemented by the sales of Nathan’s World Famous Beef Hot Dogs and other Nathan’s products through the publicity generated by our Hot Dog Eating Contests and our affiliation with a number of high profile sports arenas. In addition to marketing our products at these venues, the Nathan’s Famous brand has also been televised regionally, nationally and internationally.
We maintain an advertising fund for local, regional and national advertising under the Nathan’s Famous Systems, Inc. Franchise Agreement. Nathan’s Famous franchisees are generally required to spend on local marketing activities or contribute to the advertising fund up to 2.0% of restaurant sales for advertising and promotion. Franchisee contributions to the advertising fund for national marketing support are generally based upon the type of restaurant and its location. The difference, if any, between 2.0% and the contribution to the advertising fund mustare to be expended on local programs approved by us as to form, content and method of dissemination. Certain franchisees, including those operating pursuant to our Branded Menu Program arewere not obligated to contribute to the advertising fund. Vendorsfund during fiscal 2023. Some vendors that supply products to the Company and our restaurant system also contribute to the advertising fund based upon purchases made by our franchisees and at Company-owned restaurants.
ThroughoutIn fiscal 2016,2023, Nathan’s primary restaurant marketing emphasis continued to beefforts were largely focused on local store marketing campaigns featuring a value-oriented strategy supplemented with promotional “Limited Time Offers.” We anticipate that near-term marketing efforts for Nathan’s will continue to emphasize local store marketing activities.
Nathan’s celebrates its 100the annual July 4th Year Anniversary in 2016Hot Dog Eating Contest and has developed specific marketing plans and campaigns celebrating our centennial. Our special public relations campaign is comprised of a general media campaign in addition to targeted efforts emphasizing the restaurant and grocery industries and general business media. These activities include television and radio, newsprint features and social media.
Additionally, on May 28, 2016, we hosted our 100th Year Anniversary celebration at our Flagship Coney Island restaurant by selling 5-cent hot dogs, which was at the heart of Nathan’s founding in 1916. On Labor Day weekend, we will also be hosting special events in New York City.
As part of this celebration, we have redesigned our restaurant signage, uniforms and paper productsits sports sponsorships, as well as digital and social media to drive customers directly to the packagingonline menus of our retail packaged products.franchisees. This included geo-targeted efforts and direct mail to generate awareness and sales through third party delivery platforms.
Nathan’s marketing efforts include employing an “always on” social media strategy to support the use of free-standing inserts with coupons in Sunday newspapers. During fiscal 2016brand and fiscal 2015,franchise operations through our marketing activities continued withcentralized brand presence. The social media objectives include increasing our reach among our core customer base, while building brand awareness amongst the use of free-standing inserts in addition to radio flights and use of a localized newsprint campaigns. These newsprint campaigns typically reach more than eight million homes per insertion in the area surrounding approximately 100 Nathan’s company-owned and franchised restaurants. These programs usually feature heavily discounted offers that are designed to attract customers to our restaurants. We monitor the results of these campaigns and have committed to additional campaigns in fiscal 2017.engaged younger generation.
The objective of our Branded Product Program has historically been to seek to provide our foodservice operator customers with value-added, highpremium quality products supported with meaningfuldifferentiated point of sale materials and other forms of operational support.
During fiscal 2016,2023, Nathan’s marketing efforts for the Branded Product Program concentrated primarily on participation in national industry trade shows, and regional, local distributor trade events.events, some of which were held virtually due to the COVID-19 pandemic. We have also advertised our products in distributor and trade periodicals and initiated distributor sales incentive contests. Most of the sales of new restaurant franchises to franchisees are achieved through the direct effort of Company personnel.periodicals. New arrangements with Branded Product Program points of sale are achieved through the combined efforts of Company personnel and a network of foodservice brokers and distributors who are also are responsible for direct sales to national, regional and “street” accounts.
During fiscal 2017,2024, we may seek to further expand our internal marketing resources along with our network of foodservice brokers and distributors. We may attempt to emphasize specific venues as we expand our broker network, focus management and broker responsibilities on a regional basis and expand the use of sales incentive programs. We are currently continuing the process of upgradingcontinue to upgrade our social media platforms by enhancing our corporate website and Facebook page and expanding the use of Instagram and Twitter.
Human Capital
As of March 26, 2023, the Company employed 138 people, 32 of whom were corporate management and administrative employees, 17 of whom were restaurant managers and 89 of whom were hourly full-time and part-time foodservice employees.
As of March 26, 2023, approximately 47% of our employees were female and approximately 69% of our employee population were comprised of racial and ethnic minorities.
We generally employ approximately 270-300 seasonal employees during the spring and summer months. Food service employees at two Company-owned restaurants are currently represented by Local 1102 RWSDU UFCW AFL-CIO, CLC, Retail, Wholesale and Department Store Union, under an agreement that expires on June 30, 2023. We expect to renew this agreement prior to its expiration. Employees at a third Company-owned restaurant are represented by the same union pursuant to a different agreement that expires on November 30, 2025.
We believe that our efforts to manage our workforce have been effective as evidenced by the fact that the Company has not suffered any strike or work stoppage for more than 49 years.
Culture and Diversity
Creating and fostering inclusive work environments and teams allows us to create an engaging and welcoming culture for our employees, which we believe positively affects the quality of products and experience we deliver to our customers.
The Company works to ensure our recruiting and hiring initiatives are reaching a broad audience, so that our workforce represents the communities in which we serve. We seek to provide opportunities for growth and development at all levels of our organization.
Our workforce represents nearly all demographics, with diversity in age, race, ethnicity and gender. Specifically, more employees identify as racial and ethnic minorities, than white.
We are committed to high standards of ethical, moral and legal business conduct and strive to be an open and honest workplace, providing a positive work environment. To support this commitment, we have a Code of Conduct that provides clear direction for behavioral expectations. We also provide annual training on sexual harassment. In addition, we maintain an anonymous hotline, which includes an 800 number where our employees can report theft or fraudulent behavior.
Compensation and Benefits
The Company is committed to providing market-competitive and equitable pay and benefits to attract and retain great talent. In addition to competitive hourly rates and base salaries, all management employees at our Company-owned restaurants are eligible for performance-based cash incentive bonuses based on the attainment of certain financial metrics, along with all corporate management and administrative employees, at the discretion of our Board of Directors.
The Company attempts to provide a range of benefits to its corporate and nonunion employees and their families, including medical and prescription drug, dental and vision, long-term disability coverage, as well as a 401(k) savings plan and flexible spending accounts. The Company has historically matched contributions to its 401(k) savings plan at a rate of $0.25 per dollar contributed by the employee up to a maximum of 3% of the employee’s annual salary. The Company pays the union medical and pension benefits on behalf of the union employees.
Talent Development
We offer various management training courses for management personnel of our Company-owned and franchised restaurants. A restaurant manager from each restaurant must successfully complete our mandated management training program.
Workplace Safety
We are committed to providing safe work environments and providing our employees with the resources they need to promote their well-being. We are also committed to providing a safe and healthy environment for our restaurant patrons. Since the onset of the COVID-19 pandemic, we continue to monitor public health guidance and to follow recommendations by federal, state and local governments.
Government Regulation
We are subject to a Federal Trade Commission (“FTC”) regulation and several states’ laws that regulate the offer and sale of franchises. We are also subject to a number of state laws which regulate substantive aspects of the franchisor-franchisee relationship.
The FTC’s “Trade Regulation Rule Concerning Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures” (the “FTC Franchise Rule”) requires us to disclose certain information to prospective franchisees. Fifteen states, including New York, also require similar disclosure. While the FTC Franchise Rule does not require registration or filing of the disclosure document at the federal level, 14 states require franchisors to register the disclosure document (or obtain exemptions from that requirement) before offering or selling a franchise.franchise in that state. The laws of 17 other states require some form of registration (or a determination that a company is exempt or otherwise not required to register) under “business opportunity” laws, which sometimes apply to franchisors such as the Company. These laws have not precluded us from seeking or awarding franchisees in any given area.
Laws that regulate one or another aspect of the franchisor-franchisee relationship presently exist in 24 states as well as Puerto Rico and the U.S. Virgin Islands. These laws regulate the franchise relationship by, for example, requiring the franchisor to deal with its franchisees in good faith, prohibiting interference with the right of free association among franchisees, limiting the imposition of standards of performance on a franchisee, and regulating discrimination among franchisees. Although these laws may also restrict a franchisor in the termination of a franchise agreement by, for example, requiring “good cause” to exist as a basis for the termination, advance notice to the franchisee of the termination, an opportunity to cure a default, and repurchase of inventory or other compensation, these provisions have not had a significant effect on our operations. Our international franchise operations are subject to franchise-related and other laws in the jurisdictions in which our franchisees operate. These laws in the United States and overseas have not precluded us from enforcing the terms of our franchise agreements, and we do not believe that these laws are likely to significantly affect our operations. We do not believe that the Russia-Ukraine conflict has had or will have a serious impact on our operations.
We are not aware of any pending franchise legislation in the U.S.United States that we believe is likely to significantly affect our operations.
Each Company-owned and franchised restaurant is subject to regulation as to operational matters by federal agencies and to licensing and regulation by state and local health, sanitation, safety, fire, and other departments. An inability to obtain or retain health department or other licenses could adversely affect our operations.
We are subject to the Federal Fair Labor Standards Act and various other federal and state laws that govern minimum wages, overtime, working conditions, mandatory benefits, health insurance, and other matters. Other regulatory interpretations (such as the NLRB’sNational Labor Relations Board’s review of joint employment standards under the National Labor Relations Act, the Labor Department’s review of the Fair Labor Standards Act, the SBA’sSmall Business Administration’s review of independence standards applicable to reviewing franchisee loan applications, etc.) may have an impact on our overall business as well, although we do not believe that these will significantly affect our operations.
Governmental authorities have placed an increased focus on environmental matters, particularly in the area of climate change. We cannot predict the precise nature of these initiatives. However, we expect that they may impact our business both directly and indirectly. There is a possibility that government initiatives, as well as the actual or perceived risks of climate change, could have an impact on our business, which we cannot predict at this time.
We are also subject to federal and state environmental regulations, which have not had a material effect on our operations. More stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay or prevent development of new restaurants in particular locations. In addition, the Federalfederal Americans with Disabilities Act of 1990 applies with respect to the design, construction, and renovation of all restaurants in the United States.
Each company that manufactures, supplies, or sells our products is subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, safety, and other departments.
In fiscal 2021, various governmental bodies in the United States addressed the spread of COVID-19 by imposing limitations on business operations or recommending that residents adopt stringent “social distancing” measures. These restrictions continued into fiscal 2022. As approved vaccines were more widely distributed and administered, these restrictions were significantly eased in fiscal 2023. Due to the fluidity and uncertainty around COVID-19, these measures may be reinstituted periodically and in some regions in an effort to inhibit the spread of new virus variants. Those formal and informal restraints, as well as consumer behavior and other factors (such as supply chain issues), may have a material impact on our ability to operate our business at least while those restrictions are in effect, which may possibly have a longer-term impact on our business and the demand for our products and restaurant services.
We are also subject to the requirement that our restaurants post certain calorie content information for standard menu items, pursuant to Section 4205 of the Patient Protection and Affordable Care Act of 2010. Some of our restaurants are subject to similar requirements that are imposed by certain localities around the country.
Alcoholic beverage control regulations require that each restaurant that sells such products to apply to a state authority and, in certain locations, county and municipal authorities, for a license or permit to sell alcoholic beverages on the premises. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of customers and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. TwoThree of our Company-owned restaurants offer beer or wine coolers for sale.Eachsale. Each of these restaurants has current alcoholic beverage licenses permitting the sale of these beverages. We have never had an alcoholic beverage license revoked.revoked.
We may be subject in certain states to “dram-shop” statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment which wrongfully served alcoholic beverages to such person. We carry liquor liability coverage as part of our existing comprehensive general liability insurance and have never been named as a defendant in a lawsuit involving “dram-shop” statutes.
The Sarbanes-Oxley Act of 2002, the Dodd-Frank Act of 2010, and rules promulgated thereunder by the SECSecurities and Exchange Commission (“SEC”) and the Nasdaq Stock Market have imposed substantial new or enhanced regulations and disclosure requirements in the areas of corporate governance (including director independence, director selection and audit, corporate governance and compensation committee responsibilities), equity compensation plans, auditor independence, pre-approval of auditor fees and services and disclosure and internal control procedures. We are committed to industry best practices in these areas.
We believe that we operate in substantial compliance with applicable laws and regulations governing our operations, including the FTC Franchise Rule and state franchise laws.
Employees
At March 27, 2016, we had 237 employees, 41 of whom were corporate management and administrative employees, 26 of who were restaurant managers and170 of whom were hourly full-time and part-time foodservice employees. We may also employ approximately 150 – 200 seasonal employees during the summer months. Foodservice employees at three Company-owned locations are currently represented by Local 1102 RWSDU UFCW AFL-CIO, CLC, Retail, Wholesale and Department Store Union, under an agreement that expires on June 30, 2017. Employees at a fourth location are represented by the same union pursuant to a different agreement that expires October 31, 2016. We consider our employee relations to be good and have not suffered any strike or work stoppage for more than 42 years.
We provide a training program for managers and assistant managers of our Company-owned and new franchised restaurants. Hourly food workers are trained on site by managers and crew trainers following Company practices and procedures outlined in our operating manuals.
Trademarks
We hold trademark and/or service mark registrations for NATHAN’S, NATHAN’S FAMOUS, NATHAN’S FAMOUS and design, NATHAN’S and Coney Island design, SINCE 1916 NATHAN’S FAMOUS and design, SINCE 1916 NATHAN’S FAMOUS, INC. and design, THE ORIGINAL SINCE 1916 NATHAN’S FAMOUS and design, SINCE 1916 NATHAN’S FAMOUS THIS IS THE ORIGINAL, THE ORIGINAL NATHAN’S FAMOUS, THE ORIGINAL NATHAN’S FAMOUS 100TH ANNIVERSARY and design in color, SINCE 1916 NATHAN’S FAMOUS and hot dog design in color, SINCE 1916 NATHAN’S FAMOUS and hot dog, fries and drink design in color, and NATHAN’S FAMOUS EXPRESS within the United States, with some of these marks holding corresponding foreign trademark and service mark registrations in 73over 80 international jurisdictions, including Canada and China. We also hold various package design registrations and other related marks, FRANKSTERS, FROM A HOT DOG TO AN INTERNATIONAL HABIT, and MORE THAN JUST THE BEST HOT DOG! and design, and Mr. Frankie design, for restaurant services and some food items.
We hold trademark and/or service mark registrations for the marks ARTHUR TREACHER’S (stylized), ARTHUR TREACHER’S FISH & CHIPS (stylized), KRUNCH PUP and ORIGINAL within the United States. We hold service mark registrations for ARTHUR TREACHER’S in China and Japan. We also hold service mark registrations for ARTHUR TREACHER’S FISH & CHIPS in Canada, ARTHUR TREACHER’S FISH & CHIPS and design in Canada and Mexico, and ARTHUR TREACHER’S FISH & CHIPS and design in Colombia, Costa Rica, Kuwait, Malaysia, Singapore and the United Arab Emirates.
Our trademark and service mark registrations were granted and expire on various dates. We believe that these trademarks and service marks provide significant value to us and are an important factor in the marketing of our products and services. We believe that we do not infringe on the trademarks or other intellectual property rights of any third parties. We also have licenses to use the Kenny Rogers trademarks and service marks in the then-existing Nathan’s restaurants existing on April 2, 2008.
Seasonality
Our routine business pattern is affected by seasonal fluctuations, including the effects of weather and economic conditions. Historically, sales from our Company-owned locations,restaurants, principally at Coney Island, and franchised restaurants from which franchise royalties are earned and the Company’s earnings have been highest during our first two fiscal quarters, with the fourth fiscal quarter typically representing the slowest period. ThisRoutine seasonality is primarily attributable to weather conditions in the marketplace for our Company-owned and franchised Nathan’s restaurants, which isare principally located in the Northeast.Northeast of the United States. Additionally, revenues from our Branded Product Program and retail licensing program generally follow similar seasonal fluctuations, although not to the same degree. We believe that future revenues and profits will continue to be highest during our first two fiscal quarters, with the fourth fiscal quarter representing the slowest period.
Competition
The fast foodfast-food restaurant industry is highly competitive and can be significantly affected by many factors, including changes in local, regional or national economic conditions, supply chain challenges, changes in consumer tastes, consumer concerns about the nutritional quality of quick-service food, andas well as the increases in the number of, and particularthe locations of, competing restaurants.
Our restaurant system competes with numerous restaurants and drive-in units operating on both a national and local basis, including major national chains with greater financial and other resources than ours. We also compete with local restaurants and diners on the basis of menu diversity, food quality, price, size, site location and name recognition. There is also active competition for management personnel, as well as for suitable commercial sites for ownedCompany-owned or franchised restaurants.
We believe that our emphasis on our signature products and the reputation of these products for taste and quality set us apart from our major competitors. Many fast foodfast-food companies have adopted “value pricing” and/or deep discount strategies. Nathan’s markets our own form of “value pricing,” selling combinations of different menu items for a total price lower than the usual sale price of the individual items and other forms of price sensitive promotions. Our value pricing strategy may offer multi-sized alternatives to our value-priced combo meals.
We also compete with many restaurant franchisors and other business concepts for the sale of franchises to qualified and financially capable franchisees.
Our Branded Product Program competes directly with a variety of other nationally-recognizednationally recognized hot dog companies and other food companies; many of these entities have significantly greater resources than we do. Our products primarily compete based upon price, quality and value to the foodservice operator and consumer. We believe that Nathan’s reputation for superior quality, along with the ability to provide operational support to the foodservice operator, provides Nathan’s with a competitive advantage.
Our retail licensing program for the sale of packaged foods within retail grocery channels including supermarkets and club stores competes primarily on the basis of reputation, flavor, quality and price. In most cases, we compete against other nationally-recognizednationally recognized brands that may have significantly greater resources than those at our disposal.
Segment Reporting
The Company is comprised of the following segments: (1) Branded Product Program, (2) Product licensing, and (3) Restaurant operations. Refer to Footnote I, Segment Information, in the notes to our consolidated financial statements for more information.
Available Information
We file reports with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and a proxy statement on Schedule 14A. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C., 20549. The public may obtain information about the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information about issuers such as us that file electronically with the SEC.
In addition, electronic copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statement on Schedule 14A and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”) are available free of charge on our website, www.nathansfamous.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The reference to our website address and the SEC website address do not constitute incorporation by reference of the information contained on the website and should not be considered part of this document.
The Board of Directors (“the Board”) has also adopted, and we have posted in the Investor Relations section of our website, written Charters for each of the Board’s standing committees. We will provide without charge a copy of the Charter of any standing committee of the Board upon a stockholder’s request to us at Nathan’s Famous, Inc., One Jericho Plaza, Second Floor - Wing A, Jericho, NY 11753, Attention: Secretary.
For financial information regarding our results of operations, please see our consolidated financial statements beginning on page F-1.
Item 1A. Risk Factors.
Item 1A. | Risk Factors. |
Our business is subject to various risks. Certain risks are specific to each waycertain ways we do business, such as through Company-owned restaurants, franchised restaurants, virtual kitchens, branded products and retail, while other risks, such as health-related or economic risks, may affect all of the ways that we do business.
Investors should carefully consider all of the information set forth in this Form 10-K, including the following risk factors, before deciding to invest in any of the Company’s securities. The following risk factors are not exhaustive. Additional risks and uncertainties not presently known to the Company may also adversely impact its business. The Company’s business, financial condition, results of operations or prospects could be materially adversely affected by any of these risks. In that case, the trading price of the Company’s common stock could decline. This Form 10-K also contains forward-looking statements that involve risks and uncertainties. The Company’s results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks it faces described below and elsewhere. See “Forward-Looking Statements” above.
Risks Related to Our Agreement with John MorrellBusiness and Operations
& Co.has resulted in a significant increase in our royalties comparedThe COVID-19 pandemic and local, state and federal government responses to the royalties wereceived in prior yearsCOVID-19 pandemic have previously significantly impacted our business and there can be no assurance that such increases will continue in the future.
We earned license royalties of approximately $16,586,000 in fiscal 2016 as compared to license royalties of $14,367,000 in fiscal 2015. The amount of license royalties we received in fiscal 2015 and fiscal 2016 constitute a significant increase in the amount of royalties we received compared to earlier periods. This increase is primarily due to our agreement with John Morrell as compared to the licensing revenues we received from our predecessor licensee, SMG. There can be no assurance that we willcould continue to derive the same increase inadversely affect our license royalties in the future or that our future license royalties will be similar to our fiscal 2016 license royalties.
If (i) our license revenues decrease or increase only by a nominal amount in future years or (ii) we fail to achieve cost savings as a result of the John Morrell agreement, it would have a material adverse effect on ourbusiness, financial condition, and results of operations.operations in the future.
A significant amountThe global crisis resulting from the spread of COVID-19 had a substantial impact on our licensing and BPP revenue is from a small number of licensees and BPP accounts. The loss of any one or more of those licensees or Branded BPP accounts could harm our profitability and operating results.
John Morrell accounted for approximately 95.0% and 93.9% of our licensing revenueoperations for the fiscal 2016 periodyear ended March 28, 2021 and fiscal 2015 period, respectively.John Morrell’s business is weighted towards one high volume user who is not sold pursuant to a formal agreement. As a result of the John Morrell Agreement, we expect that most of our license royalties will be earned from John Morrell for the foreseeable future. While our agreement with John Morrell expires in 2032, in the event that, (i) this licensee or any other significant licensee, or its customers, experience financial difficulties, (ii) there is a disruption or termination of this agreement or (iii) there is a significant decrease in our revenue from John Morrell, there could be a material adverse effect on our business, results of operations or financial condition.
In addition,lesser extent for the fiscal 2016 period, approximately 74%years ended March 27, 2022 and March 26, 2023. A recurrence of COVID-19 or new variants of COVID-19 could substantially impact customer traffic at our BPP business isCompany-owned restaurants and franchised restaurants, as well as sales to our Branded Product Program customers and royalties earned from seven accounts, including one account representing approximately 24%our licensing activities.
The Company cannot predict if new variants of COVID-19 will be discovered, what additional restrictions may be enacted by local, state and the federal government, to what extent it can maintain off-premises sales volumes, whether it can maintain sufficient staffing levels at our Company-owned restaurants, or if individuals will be comfortable congregating in our dining rooms or venues such as professional sports arenas, amusement parks, shopping malls or movie theaters or following social distancing protocols, and what long-lasting effects the COVID-19 pandemic may have on the Company as a whole. The COVID-19 pandemic has heightened many of the BPP business, with which we have relatively short-term contracts. In the event that these BPP customers experience financial difficulties or, upon the expiration of their existing agreements are not willing to do business with usother risks described in the future on terms acceptable to management, there could be a material adverse effect on our business, results of operations or financial condition.this Item 1A, “Risk Factors.”
Our increase in Adjusted EBITDA in fiscal 2016 compared to fiscal 2015 primarily results from a decrease in expenses.
While our Adjusted EBITDA increased from $22.5 million in fiscal 2015 to $27.2 million in fiscal 2016, such increase was primarily the result of a decrease in total costs and expenses (primarily beef costs) from $79.2 million in fiscal 2015 to $75.9 million in fiscal 2016. Our expenses are and will be impacted by commodity costs and other factors beyond our control, such as recently enacted increases in the minimum wage. Any significant increase in the cost of beef and our other expenses without a corresponding increase in revenues would have a material adverse effect on our business, results of operations and financial condition.
Increases in the cost of food and paper products could harm our profitability and operating results.
The costGeneral economic conditions, including economic downturns related to the COVID-19 pandemic, have adversely affected our results of theoperations and may continue to do so. Similarly, significant inflation has negatively affected our labor, food, commodity and paper products we use depends on a variety of factors, many of which are beyond our control. costs and may continue to do so.
Food and paper products typically represent approximately 25% to 30% of our cost of restaurant sales. We purchase large quantities of beef and our beef costs in the United States represent approximately 80% to 90% of our food costs.cost of sales. The market for beef is particularly volatile and is subject to significant price fluctuations due to seasonal shifts, climate conditions, such as the 2012 drought in the Midwest, industry demand, inflationary pressures and other macroeconomic factors beyond our control. For example,
We have experienced and may continue to experience certain supply chain disruptions resulting from, among other things, capacity, transportation, fuel costs, staffing, and other COVID-19 related challenges, which have and may continue to increase the cost of food, commodity and paper products and, in turn, may adversely affect our business, results of operations and financial condition. Future shortages or disruptions could be caused by the factors noted above as well as factors such as natural disasters, health epidemics and pandemics (including the COVID-19 pandemic), social unrest, the impacts of climate change, and inflationary pressures.
We cannot assure that our Company-owned restaurants or our franchised restaurants will be able to purchase its food, commodity or paper products at reasonable prices, or that the cost of such food, commodity or paper products will remain stable in the past, reduced supply and increased demand in beef resulted in shortages, which required usfuture.
We are unable to pay significantly higher prices forpredict the beef we purchased. After multi-year increases, beginning March 2015, the beef markets stabilized through June 2015 before subsequently declining by as much as 30%. As a resultfuture cost of the decline since June 2015, the market price ofour hot dogs and expect to experience price volatility for our beef products during fiscal 2024. To the fiscal 2016 period was approximately 11.6% lower than the fiscal 2015 period. The market priceextent that beef prices increase as compared to earlier periods, it could impact our results of hot dogs during the fiscal 2015 period was approximately 17.1% higher than the fiscal 2014 period.Asoperations. If the price of beef or other food products that we use in our operations significantly increases, significantly, particularly in the BPP,Branded Product Program, and we choose not to pass, or cannot pass, these increases on to our customers, our operating margins will decrease.decrease and such decrease in operating margins could have a material adverse effect on our business, results of operations or financial condition.
Fluctuations in weather, supply and demand and economic conditions could adversely affect the cost, availability and quality of some of our critical products, including beef. Our inabilityFrom time to obtain requisite quantities of high-quality ingredients would adversely affect our ability to provide the menu items that are central to our business, and the highly competitive nature of our industry may limit our ability to pass through increased costs to our customers. Continuing increases in the cost of fuel would increase the distribution costs of our prime products thereby increasing the food and paper cost to us and to our franchisees, thus negatively affecting profitability.
Wetime, we have sought to lock in the cost of a portion of our beef purchases by entering into various commitments to purchase hot dogs during certain periods in an effort to ensure supply of product at a fixed cost of product. However, we may be unable to enter into similar purchase commitments in the future. In addition, we do not have the ability to effectively hedge all of our beef purchases using futures or forward contracts without incurring undue financial cost and risk.
Price increases may impact customer visits.
The Company and our franchisees have increased prices on selected menu items in order to offset rising food and commodity costs. Although we have not experienced significant resistance to our past price increases, future price increases may deter customers from visiting our Company-owned restaurants and franchised restaurants and may adversely affect our restaurant operations.
Our licensing revenue and overall profitability is substantially dependent on our agreement with Smithfield Foods, Inc. and the loss or a significant reduction of this revenue would have a material adverse effect on our financial condition and results of operations.
We earned license royalties from Smithfield Foods, Inc. of approximately $29,998,000 in fiscal 2023 and approximately $28,970,000 in fiscal 2022 representing 23% and 25% of total revenues, respectively. As a result of our agreement with Smithfield Foods, Inc. which expires in 2032, we expect that most of our license revenues will be earned from Smithfield Foods, Inc. for the foreseeable future. In addition, the increase in our adjusted EBITDA (a non-GAAP financial measure (see Reconciliation of GAAP and Non-GAAP measures on page 44 of this report)) from $31,153,000 in fiscal 2022 to $36,383,000 in fiscal 2023 and income from operations from $29,863,000 in fiscal 2022 to $34,445,000 in fiscal 2023 was partially attributable to the license royalties earned from Smithfield Foods, Inc. Accordingly, in the event that (i) Smithfield Foods, Inc. experiences financial difficulties, (ii) there is a disruption or termination of the Smithfield Foods, Inc. agreement or (iii) there is a significant decrease in our revenue from Smithfield Foods, Inc., it would have a material adverse effect on our business, results of operations and financial condition.
John MorrellA significant amount of our Branded Product Program revenue is from a small number of accounts. The loss of any one or more of those accounts could harm our profitability and operating results.
A small number of our Branded Product Program customers account for a significant portion of our Branded Product Program revenues. Sales to our five largest Branded Product Program customers were 76% and 78% of our Branded Product Program revenues in fiscal 2023 and fiscal 2022, respectively. In the event that any one of these Branded Product Program customers experience financial difficulties or, upon the expiration of their existing agreements, if applicable, are not willing to do business with us in the future on terms acceptable to the Company, there could be a material adverse effect on our business, results of operations and financial condition.
Smithfield Foods, Inc. currently has threetwo manufacturing facilities producing different Nathan’sNathan’s products and a long-term significant interruption of a primary facility could potentially disrupt our operations.
John MorrellSmithfield Foods, Inc. currently has threetwo manufacturing facilities producing different Nathan’s products. A temporary closure at either of any of the threethese plants could potentially cause a temporary disruption to our source of supply, potentially causing some or all of certain shipments to customers to be delayed. A longer-term significant interruption at anyeither of these production facilities, whether as a result of a natural disaster or other causes, could significantly impair our ability to operate our business on a day-to-day basis while John MorrellSmithfield Foods, Inc. determines how to make up for any lost production capabilities, during which time we may not be able to secure sufficient alternative sources of supply on acceptable terms, if at all. In addition, a long-term disruption in supply to our customers could cause our customers to determine not to purchase some or all of their hot dogs from us in the future, which in turn would adversely affect our business, results of operations and financial condition. Furthermore, a supply disruption or other events might affect our brand in the eyes of consumers and the retail trade, which damage might negatively impact our overall business in general, which could result in a material adverse effect on our business, results of operations or financial condition.
The loss of one or more of our key suppliers could lead to supply disruptions, increased costs and lower operating results.
We have historically relied on one supplier for the majority of our hot dogs and another supplier for a majority of our supply of frozen crinkle-cut French fries for our restaurant system. An interruption in the supply of product from either of these suppliers without our obtaining an alternative source of supply on comparable terms could lead to supply disruptions, increased costs and lower operating results.
During fiscal 2013, we entered into a new We have an agreement with a secondary hot dog manufacturer that continues to also supply natural casing hot dogs for our restaurant business.
Additionally, a majority of the frozen crinkle-cut French fries sold through our franchised restaurants have been obtained from one supplier. Beginning in fiscal 2013, we began a relationship with a secondary source of supply of our frozen French fries for our restaurant system. During the fiscal years ended March 27, 2016 and March 29, 2015, McCain Foods USA supplied approximately 15.6% and 13.5%, respectively, of the frozen crinkle-cut French fries sold through our franchised restaurants.
In the event that the hot dog or French fry suppliers are unable to fulfill our requirements for any reason, including due to a significant interruption in its manufacturing operations, whether as a result of a natural disaster or for other reasons, such interruption could significantly impair our ability to operate our business on a day-to-day basis.
In the event that we are unable to find one or more alternative suppliers of hot dogs or French fries on a timely basis, there could be a disruption in the supply of product to our Company-owned restaurants, franchised restaurants and BPPBranded Product Program accounts, which would damage our business, our franchisees and our BPPBranded Product Program customers and, in turn, negatively impact our financial results. In addition, any gap in supply to retail customers would result in lost license royalty paymentsincome to us, which could have a significant adverse financial impact on our results of operations. Furthermore, any gap in supply to retail customers may damage our brand in the eyes of consumers and the retail trade, which damage might negatively impact our overall business in general and impair our ability to continue our retail licensing program.
Additionally, there is no assurance that any supplemental sources of supply would be capable of meeting our specifications and quality standards on a timely and consistent basis or that the financial terms of such supply arrangement will be as favorable as our present terms with our hot dog or French fry supplier, as the case may be.
Any of the foregoing occurrences may cause disruptions in the supply of our hot dog or French fry products, as the case may be, and may damage our franchisees and our BPPBranded Product Program customers, adversely impactwhich could result in a material adverse effect on our business, results of operations or financial results and/or damage our brand.condition.
Our earnings and business growth strategy dependsdepend in large part on the success of our product licensees and product manufacturers. Our reputation and the reputation of our brand may be harmed by actions taken by our product licensees or product manufacturers that are otherwise outside of our control.
A significant portion of our earnings has come from royalties paid by our product licensees, such as SMG, John Morrell and ConAgraSmithfield Foods, Lamb Weston, Inc., Saratoga Food Specialties, Inc., a wholly ownedwholly-owned subsidiary of John Morrell,Solina, and Perfection Foods.Lamb Weston Holdings, Inc. Although our agreements with these licensees contain numerous controls and safeguards, and we monitor the operations of our product licensees, our licensees are independent contractors, and their employees are not our employees. Accordingly, we cannot necessarily control the performance of our licensees under their license agreements, including without limitation, the licensee’s continued best efforts to manufacture our products for retail distribution and our foodservice businesses, to timely delivery ofdeliver the licensed products, to market the licensed products and to assure the quality of the licensed products produced and/or sold by a product licensee. Any shortcoming in the quality, quantity and/or timely delivery of a licensed product is likely to be attributed by consumers to an entire brand’s reputation, potentially adversely affecting our business, results of operations and financial condition. In addition, a licensee’s failure to effectively market the licensed products may result in decreased sales, which would adversely affect our business, results of operations and financial condition. Also, to the extent that the terms and conditions of any of these license agreements change or we change any of our product licensees, our business, results of operations and financial condition could be materially affected.
The quick-service restaurant business is highly competitive, and that competition could lower revenues, margins and market share.
The quick-service restaurant business of the foodservice industry is intensely competitive regardingwith respect to taste preferences, price, service, location, brand reputation, advertising and promotional initiatives, personnel, and the type and quality of food.menu offerings. We and our franchisees compete with international, national, regional and local retailers primarily through the quality, variety and value perception of food products offered.restaurant chains. Other key competitive factors include the number and location of restaurants, quality and speed of service, attractiveness of facilities, effectiveness of advertisingdigital and marketing programs,social media engagement, and new product development. We anticipate competition will continue to focus on quality, convenience and pricing. Many of our competitors have substantially larger marketing budgets, which may provide them with a competitive advantage. Changes in pricing or other marketing strategies by these competitors can have an adverse impact on our sales, earnings and growth. For example, many of those competitors have adopted “value pricing” strategies intended to lure customers away from other companies, including our Company. Consequently, these strategies could have the effect of drawing customers away from companies which do not engage in discount pricing and could also negatively impact the operating margins of competitors which attempt to match their competitors’ price reductions. Extensive price discounting in the quick-service restaurant business could have an adverse effect on our financial results.
In addition, we and our franchisees compete within the foodservice market and the quick-service restaurant business not only for customers but also for management and hourly employees and qualified franchisees. If we are unable to maintain our competitive position, we could experience downward pressure on prices, lower demand for products, reduced margins, the inability to take advantage of new business opportunities and the loss of market share.
New York State recently passed legislation increasingWe also face growing competition from food delivery services including virtual kitchens, particularly in urbanized areas, and this trend, which accelerated following the minimum hourly wage for fast food workersonset of restaurant chains with 30 or more locations nationwide.the COVID-19 pandemic, may continue.
New York State recently passed legislation increasing the minimum hourly wage for fast food workers of restaurant chains with 30 or more locations nationwide. The increases took effect beginning December 31, 2015 and will 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 our franchised restaurants that operate in New York State. As a result, we anticipate that our labor costs will increase. If 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.
Labor shortages or increases in labor costs could slow our growth or harm our business.
Our success depends in part upon our ability and the ability of our franchisees to continue to attract, motivate and retain regional, operational and restaurant general managers with the qualifications to succeed in our industry and the motivation to apply our core service philosophy. If we or our franchisees are unable to continue to recruit and retain sufficiently qualified managers or to motivate our employees to achieve sustained high service levels, our business and our growth could be adversely affected. Competition for these employees could require the payment of higher wages that could result in higher labor costs.
We must comply with the Fair Labor Standards Act and various federal and state laws governing minimum wages. Increases in the minimum wage or labor regulation could increase labor costs. The state of New York approved legislation which increased the minimum wage beginning December 31, 2013, December 31, 2014 and December 31, 2015. The impact of the New York minimum wage increases on our business amounted to 6.9% average salary increase in 2015 and approximately a 12.2% average increase in 2016 for our employees that are affected. In addition, voters in the state of New Jersey voted to increase the minimum wage in the 2013 general election, and the federal government and a number of other states are evaluating various proposals to increase their respective minimum wage. As minimum wage rates increase, we may need to increase not only the wages of our minimum wage employees but also the wages paid to employees at wage rates that are above minimum wage. In addition, effective April 1, 2014, the City of New York passed legislation extending paid sick leave to all employees, including part-time employees which potentially will increase our labor costs in three of our Company-operated restaurants. We may not be able to anticipate and react to changing costs by adjusting our purchasing practices and prices to sufficiently account for increased wage costs. We may be unable to increase our prices in order to pass these increased labor costs on to our customers, in which case our margins and our franchisees’ margins would be negatively affected. In the event that franchisees’ margins are adversely affected, it may affect our ability to attract new franchisees which would adversely affect our business, results of operations and financial condition.
Changes in economic, market and other conditions could adversely affect us and our franchisees, and thereby our operating results.
The quick-service restaurant business is affected by changes in international, national, regional, and local economic conditions, consumer preferences and spending patterns, demographic trends, consumer perceptions of food safety and health, diet and nutrition, weather, traffic patterns, the type, number and location of competing restaurants, and the effects of war or terrorist activities and any governmental responses thereto. Factors such as inflation, higher costs for each of food, labor, benefits and utilities, the availability and cost of suitable sites, fluctuatingrising insurance rates, state and local regulations and licensing requirements, legal claims, and the availability of an adequate number of qualified management and hourly employees also adversely affect restaurant operations and administrative expenses. Our ability and our franchisees’ ability to finance new restaurant development, to make improvements and additions to existing restaurants, and the acquisition of restaurants from, and sale of restaurants to, franchisees is affected by economic conditions, including interest rates and other government policies impacting land and construction costs and the cost and availability of borrowed funds.
Further, we are dependent upon consumer discretionary spending and are subject to changes in or uncertainty regarding macroeconomic conditions in the United States and in other regions of the world. If the economy experiences a downturn or there are other uncertainties regarding economic prosperity, or other negative global and local macroeconomic conditions, consumer spending may be negatively impacted which may adversely affect our sales and operating profit.
Current restaurant locations may become unattractive, and attractive new locations may not be available for a reasonable price, if at all, which may reduce our revenue.
The success of any restaurant depends in substantial part on its location. There can be no assurance that current locations will continue to be attractive as demographic patterns change. Neighborhood or economic conditions where restaurants are located could decline in the future, thus resulting in potentially reduced sales in those locations. If we and our franchisees cannot obtain desirable additional and alternative locations at reasonable prices, our results of operations would be adversely affected.
Any perceived or real health risks related to the food industry could adversely affect our ability to sell our productsproducts..
We are subject to risks affecting the food industry generally, including risks posed by the following: food spoilage or food contamination; consumer product liability claims; product tampering; and the potential cost and disruption of a product recall.
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Our products are susceptible to contamination by disease-producing organisms, or pathogens, such as listeria monocytogenes, salmonella, campylobacter,norovirus, hepatitis A, trichinosis and generic E. coli. In addition, our beef products are also subject to the risk of contamination from bovine spongiform encephalopathy. Because these pathogens are generally found in the environment, there is a risk that these pathogens could be introduced to our products as a result of improper handling at the manufacturing, processing, foodservice or consumer level. Our suppliers’ manufacturing facilities and products, as well as our franchisee and Company-operatedCompany-owned restaurant operations, are subject to extensive laws and regulations relating to health, food preparation, sanitation and safety standards. Difficulties or failures by these companies in obtaining any required licenses or approvals or otherwise complying with such laws and regulations could adversely affect our revenue that is generated from these companies.revenue. Furthermore, we cannot assure you that compliance with governmental regulations by our suppliers or in connection with restaurant operations will eliminate the risks related to food safety. In addition, our beef products are also subject to the risk of contamination from bovine spongiform encephalopathy.
Events reported in the media, such as orincidents involving food-borne illnesses or food tampering, whether or not accurate, can cause damage to our brand’s reputation and affect sales and profitability. Reports, whether true or not, of food-borne illnesses (such as e-coli, avian flu, bovine spongiform encephalopathy, hepatitis A, trichinosis or salmonella) and injuries caused by food tampering have in the past severely injured the reputations of participants in the quick-service restaurant business and could in the future affect our business as well. Our brand’s reputation is an important asset to the business; as a result, anything that damages our brand’s reputation could immediately and severely hurt systemwidesystem-wide sales and, accordingly, revenue and profits. If customers become ill from food-borne illnesses or food tampering, we could also be forced to temporarily close some, or all, restaurants. In addition, instances of food-borne illnesses or food tampering, even those occurring solely at the restaurants of competitors, could, by resulting in negative publicity about the restaurant industry, adversely affect system sales on a local, regional or systemwidesystem-wide basis. A decrease in customer traffic as a result of these health concerns or negative publicity, or as a result of a temporary closure of any of our Company-owned restaurants or our franchisees’ restaurants, could materially harm our business, results of operations and financial condition.
Additionally, we may be subject to liability if the consumption of any of our products causes injury, illness, or death. A significant product liability judgment or a widespread product recall may negatively impact our sales and profitability for a period of time depending on product availability, competitive reaction, and consumer attitudes. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image. Injury to our brand’s reputation would likely reduce revenue and profits.
Negative publicity, including complaints on social media platforms and other internet-based communications, could damage our reputation and harm our guest traffic, and in turn, negatively impact our business, financial condition, results of operations and prospects.
There has been a marked increase in the use of social media platforms and similar devices, including blogs, social media websites and other forms of internet-based communications, including video sharing and instant messaging platforms that allow individuals to access a broad audience of consumers and other interested persons. Consumers value readily available information concerning goods and services that they have or plan to purchase, and may act on such information without further investigation or authentication. The availability of information on these social media platforms and internet-based communications is virtually immediate, as is its impact. Many social media platforms immediately publish the content their subscribers and participants can post, often without filters or checks on accuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning our business and products may be posted on such platforms at any time. Information posted may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects or business. The harm may be immediate without affording us an opportunity for redress or correction. Such platforms could also be used for dissemination of trade secret information, compromising valuable Company assets. In sum, theThe dissemination of information online, regardless of its accuracy, could harm our business, financial condition, results of operations and prospects, as well as our ability to satisfy our obligations under the Notes.financial condition.
The use of social media has become a larger element of our advertising and promotional efforts. These marketing initiatives may not be successful, resulting in expenses incurred without a corresponding increase in sales, increased customer awareness or engagement or brand awareness.
Changing health or dietary preferences may cause consumers to avoid products offered by us in favor of alternative foods.
The foodservice industry is affected by consumer preferences and perceptions. Reports of the use of hormones, antibioticsperceptions, including calories, sodium, carbohydrates or pesticides in the production of certain food products may cause consumers to reduce or avoid consumption of such food products.fat. If prevailing health or dietary preferences, perceptions and governmental regulation cause consumers to avoid the products we offer in favor of alternative or healthier foods, demand for our products may be reduced and could materially adversely affect our business, could be harmed.
We are subject to health, employment, environmentalresults of operations and other government regulations, and failure to comply with existing or future government regulations could expose us to litigation, damage our corporate reputation or the reputation of our brands and lower profits.
We and our franchisees are subject to various federal, state and local laws, rules or regulations affecting our businesses. To the extent that the standards imposed by local, state and federal authorities are inconsistent, they can adversely affect popular perceptions of our business and increase our exposure to litigation or governmental investigations or proceedings. We may be unable to manage effectively the impact of new, potential or changing regulations that affect or restrict elements of our business. The successful development and operation of restaurants depends to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use (including the placement of drive-thru windows), environmental (including litter), traffic and other regulations. There can be no assurance that we and our franchisees will not experience material difficulties or failures in obtaining the necessary licenses or approvals for new restaurants which could delay the opening of such restaurants in the future. Restaurant operations are also subject to licensing and regulation by state and local departments relating to health, food preparation, sanitation and safety standards, federal and state labor laws (including applicable minimum wage requirements, overtime, working and safety conditions and citizenship requirements), federal and state laws prohibiting discrimination and other laws regulating the design and operation of facilities, such as the Federal Americans with Disabilities Act of 1990. If we fail to comply with any of these laws, we may be subject to governmental action or litigation, and accordingly our reputation could be harmed.financial condition.
Injury to us or our brand’s reputation would, in turn, likely reduce revenue and profits. In addition, difficulties or failures in obtaining any required licenses or approvals could delay or prevent the development or opening of a new restaurant or renovations to existing restaurants, which would adversely affect our revenue.
In recent years, there has been an increased legislative, regulatory and consumer focus on nutrition and advertising practices in the food industry, particularly among quick-service restaurants. As a result, we may become subject to regulatory initiatives in the area of nutrition disclosure or advertising, such as requirements to provide information about the nutritional content of our food products, which could increase expenses. The operation of our franchise system is also subject to franchise laws and regulations enacted by a number of states and rules promulgated by the U.S. Federal Trade Commission. Any future legislation regulating franchise relationships may negatively affect our operations, particularly our relationship with our franchisees. Failure to comply with new or existing franchise laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales. Changes in applicable accounting rules imposed by governmental regulators or private governing bodies could also affect our reported results of operations, which could cause our stock price to fluctuate or decline.
We may not be able to adequately protect our intellectual property, which could decrease the value of our business or the value of our brands and products.
The success of our business depends on the continued ability to use existing trademarks, service marks and other components of each of our brands in order to increase brand awareness and further develop branded products. We may not be able to adequately protect our trademarks, and the use of these trademarks may result in liability for trademark infringement, trademark dilution or unfair competition. All of the steps we have taken to protect our intellectual property may not be adequate.
We have registered or applied to register many of our trademarks and service marks both in the United States and in foreign countries. Because ofDue to the differences in foreign trademark laws, our trademark rights may not receive the same degree of protection in foreign countries as they would in the United States. We also cannot assure you that our trademark and service mark applications will be approved. In addition, third parties may oppose our trademark and service mark applications, or otherwise challenge our use of the trademarks or service marks. In the event that our trademarks or service marks are successfully challenged, we could be forced to rebrand our products and services, which could result in loss of brand recognition, and could require us to devote resources towards advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe upon our marks, or that we will have adequate resources to enforce our trademarks or service marks.
We also license third party franchisees and other licensees to use our trademarks and service marks. We enter into franchise agreements with our franchisees and license agreements with other licensees which govern the use of our trademarks and service marks. Although we make efforts to policemonitor the use of our trademarks and service marks by our franchisees and other licensees, we cannot assure you that these efforts will be sufficient to ensure that our franchisees and other licensees abide by the terms of the trademark licenses. In the event that our franchisees and licensees fail to do so, our trademark and service mark rights could be diluted.
Our earnings and business growth strategy dependsdepend in large part on the success of our restaurant franchisees and on new restaurant openings. Our corporate reputation or brand reputation may be harmed by actions taken by restaurant franchisees that are otherwise outside of our control.
A significant portion of our earnings comes from royalties, fees and other amounts paid by our restaurant franchisees. The opening and success of franchised restaurants depends on various factors, including the demand for our franchises and the selection of appropriate franchisee candidates, the availability of suitable restaurant sites, the negotiation of acceptable lease or purchase terms for new locations, permitting and regulatory compliance, the ability to meet construction schedules, the availability of financing and the financial and other capabilities of our franchisees and area developers. We cannot assure you that area developers planning the opening of franchised restaurants will have the business abilities or sufficient access to financial resources necessary to open the restaurants required by their agreements. We cannot assure you that franchisees will successfully participate in our strategic initiatives or operate their restaurants in a manner consistent with our concept and standards. Our franchisees are independent contractors, and their employees are not our employees. We provide training and support to, and monitor the operations of, our franchisees, but the quality of their restaurant operations may be diminished by any number of factors beyond our control. Consequently, the franchisees may not successfully operate their restaurants in a manner consistent with our high standards and requirements, and franchisees may not hire and train qualified managers and other restaurant personnel. Any operational shortcoming of a franchised restaurant is likely to be attributed by consumers to an entire brand or our system, thus damaging our corporate or brand reputation, potentially adversely affecting our business, results of operations and financial condition.
Growth in our restaurant revenue and earnings is significantly dependent on new restaurant openings. Numerous factors beyond our control may affect restaurant openings. These factors include but are not limited to:
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We cannot assure you that franchisees will renew their franchise agreements or that franchised restaurants will remain open. Closings of franchised restaurants are expected in the ordinary course and may cause our royalty revenues and financial performance to decline. Our principal competitors may have greater influence over their respective restaurant systems than we do because of their significantly higher percentage of company restaurants and/or ownership of franchisee real estate and, as a result, may have a greater ability to implement operational initiatives and business strategies, including their marketing and advertising programs.
As our franchisees are independent operators, we have limited influence over their ability to invest in other businesses or incur excessive indebtedness. Some of our franchisees have invested in other businesses, including other restaurant concepts. Such franchisees may use the cash generated by their Nathan’s restaurants to expand their other businesses or to subsidize losses incurred by such businesses. Additionally, as independent operators, franchisees do not require our consent to incur indebtedness. Consequently, our franchisees have in the past, and may in the future, experience financial distress as a result of over-leveraging. To the extent that our franchisees use the cash from their Nathan’s restaurants to subsidize their other businesses or experience financial distress, due to over-leveraging, delayed or reduced payments of royalties, advertising fund contributions and rents for properties we lease to them, or otherwise, it could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as our ability to satisfy our obligations under the Notes.financial condition. In addition, lenders to our franchisees may be less likely to provide current or prospective franchisees necessary financing on favorable terms, or at all, due to current market conditions and operating results.
Changes in franchise regulation laws could impact our ability to obtain or retain licenses or approvals and adversely affect our business, financial condition, results of operations and prospects.
We are also subject to federal statutes and regulations, including the rules promulgated by the U.S. Federal Trade Commission, as well as certain state laws governing the offer and sale of franchises. Many state franchise laws impose substantive requirements on franchise agreements, including limitations on non-competition provisions and on provisions concerning the termination or non-renewal of a franchise. Some states require that certain materials be filed for a franchisor to be registered and approved, before franchises can be offered or sold in that state. The failure to obtain or retain licenses or approvals to sell franchises could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as our ability to satisfy our obligations under the Notes.
We rely on the performance of major retailers, wholesalers, specialty distributors and mass merchants for the success of our business, and should they perform poorly or give higher priority to other brands or products, our business could be adversely affected.
We sell our products to retail outlets and wholesale distributors including, traditional supermarkets, mass merchandisers, warehouse clubs, wholesalers, food service distributors and convenience stores. The replacement by or poor performance of our major wholesalers, retailers or chains or our inability to collect accounts receivable from our customers could materially and adversely affect our business, results of operations and financial condition. In addition, our customers offer branded and private label products that compete directly with our products for retail shelf space and consumer purchases. Accordingly, there is a risk that our customers may give higher priority to their own products or to the products of our competitors. In the future, our customers may not continue to purchase our products or provide our products with adequate levels of promotional support. A significant decline in the purchase of our products would have a material adverse effect on our business, results of operations and financial condition.
The sophistication and buying power of our customers could have a negative impact on profits.
Our customers, such as supermarkets, warehouse clubs, and food distributors, have continued to consolidate, resulting in fewer customers with which to do business. These consolidations and the growth of supercenters have produced large, sophisticated customers with increased buying power and negotiating strength who are more capable of resisting price increases and can demand lower pricing, increased promotional programs, or specialty tailored products. In addition, larger retailers have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own retailer brands. If the larger size of these customers results in additional negotiating strength and/or increased private label or store brand competition, our profitability could decline.
Consolidation also increases the risk that adverse changes in our customers’ business operations or financial performance will have a corresponding material adverse effect on us. For example, if our customers cannot access sufficient funds or financing, then they may delay, decrease, or cancel purchases of our products, or delay or fail to pay us for previous purchases.
Failure by third-party manufacturers or suppliers of raw materials to comply with food safety, environmental or other regulations may disrupt our supply of certain products and adversely affect our business.
We rely on third-party manufacturers to produce our products and on other suppliers to supply raw materials. Such manufacturers and other suppliers, whether in the United States or outside the United States, are subject to a number of regulations, including food safety and environmental regulations. Failure by any of our manufacturers or other suppliers to comply with regulations, or allegations of compliance failure, may disrupt their operations. Disruption of the operations of a manufacturer or other suppliers could disrupt our supply of product or raw materials, which could have an adverse effect on our business, consolidated financial condition, results of operations or liquidity. Additionally, actions we may take to mitigate the impact of any such disruption or potential disruption, including increasing inventory in anticipation of a potential production or supply interruption, may adversely affect our business, consolidated financial condition, results of operations or liquidity.
Leasing of real estate exposes us to possible liabilities and losses.
We lease land and/or buildings for certain restaurants, which can include the sub-letting of leased land and/or buildings to franchisees or companies other than our franchisees. Accordingly, we are subject to all of the risks associated with owning, leasing and sub-leasing real estate. We generally cannot cancel these leases. If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform the obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. In addition, as each of the leases expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close stores in desirable locations.
We may evaluate acquisitions, joint ventures and other strategic initiatives, any of which could distract management or otherwise have a negative effect on revenue, costs and stock price.
Our future success may depend on opportunities to buy or obtain rights to other businesses that could complement, enhance or expand our current business or products or that might otherwise offer growth opportunities. In particular, we may evaluate potential mergers, acquisitions, joint venture investments, strategic initiatives, alliances, vertical integration opportunities and divestitures. We have no commitments, agreements or understandings with respect to any of such transactions. In addition, our ability to engage in these transactions may be impacted by the incurrence of debt as a result of our sale of the Notes. Any attempt by us to engage in these transactions may expose us to various inherent risks, including:
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Our annual and quarterly financial results may fluctuate depending on various factors, many of which are beyond our control, and, if we fail to meet the expectations of investors, our share price may decline.
Our sales and operating results can vary from quarter to quarter and year to year depending on various factors, many of which are beyond our control. Certain events and factors may directly and immediately decrease demand for our products. These events and factors include:
● | continued recovery from the COVID-19 pandemic; |
● | changes in customer demand; |
● | sales promotions by Nathan’s and its competitors; |
● | variations in the timing and volume of Nathan’s sales and franchisees’ sales; |
● | changes in the terms of our existing license/supply agreements and/or the replacement of existing licenses or suppliers; |
● | changes in average same-store sales and customer |
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● | changes in competitive and |
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● | changes in the number of franchises sold and |
Our operations are influenced by adverse weather conditions.
Weather, which is unpredictable, can impact our sales. Harsh weather conditions that keep customers from dining out result in lost opportunities for our Company-owned and our franchisees’ restaurants. A heavy snowstorm or a tropical storm or hurricane in the Northeast can shut down an entire metropolitan area, resulting in a reduction in sales in that area at Company-owned and franchised restaurants. For instance, Superstorm Sandy forced the temporary closing of all of our Company-owned restaurants. Our flagship Coney Island restaurant and our Boardwalk restaurant were closed for an extended period of time and re-opened on May 20, 2013 and March 18, 2013, respectively. In addition, 78 franchised restaurants including 18 BMP locations were closed for varying periods of time, one of which has not re-opened. Our fourth quarter includes winter months and historically has a lower level of sales at Company-owned and franchised restaurants. Restaurant sales were significantly impacted due to the harsh winter weather experienced during the fourth quarters of the fiscal 2015 period and the fiscal 2014 period. Additionally, our Company-owned restaurants at Coney Island are heavily dependent on favorable weather conditions during the summer season. Rain during the weekends and/or unseasonably cold temperatures will negatively impact the number of patrons going to the Coney Island beach locations. Because a significant portion of our restaurant operating costs is fixed or semi-fixed in nature, the loss of sales during these periods hurtsadversely impacts our operating margins, and can result in restaurant operating losses. For these reasons, a quarter-to-quarter comparison may not be a good indication of our performance or how it may perform in the future.
Due to the concentration of our restaurants in particular geographic regions, our business results could be impacted by the adverse economic conditions prevailing in those regions regardless of the state of the national economy as a whole.
As of March 27, 2016,26, 2023, we and our franchisees (including unitslocations operated pursuant to our BMP)Branded Menu Program) operated Nathan’s restaurants in 21 17states and 1113 foreign countries. As of March 27, 2016,26, 2023, the highest concentration of operating units was in the Northeast, principally in New York and New Jersey. This geographic concentration in the Northeast can cause economic conditions in particular areas of the country to have a disproportionate impact on our overall results of operations. It is possible that adverse economic conditions in states or regions that contain a high concentration of Nathan’s restaurants could have a material adverse impact on our business, results of operations in the future.and financial condition.
We rely extensively on computer systems, its point of sales system and information technology to manage our business. Any disruption in our computer systems, point of sales system or information technology may adversely affect our ability to run our business.
We are significantly dependent upon our computer systems, point of sales system and information technology to properly conduct our business. A failure or interruption of computer systems, point of sales systems or information technology could result in the loss of data, business interruptions or delays in business operations. Further, despiteMany of these systems are provided and managed by third parties, and we are reliant on these third-party providers to implement protective measures that ensure the security, availability and integrity of their systems. Despite our considerable efforts and technological resources to secure our computer systems point of salesand these third-party systems, and information technology, security breaches, such as unauthorized access and computer viruses, may occur resulting in system disruptions, shutdowns or unauthorized disclosure of confidential information. Any security breach of our computer systems, point of salesand/or these third-party systems or information technology may result in adverse publicity, loss of sales and profits, penalties or loss resulting from misappropriation of information.
If any of our critical information technology systems were to become unreliable, unavailable, compromised or otherwise fail, and we were unable to recover in a timely manner, we could experience an interruption that could have a material adverse effect on our business, results of operations and financial condition.
WeCyberattacks and breaches could cause operational disruptions, fraud or theft of sensitive information.
Aspects of our operations are reliant upon internet-based activities, such as ordering supplies and back-office functions such as accounting and transaction processing, making payments and accepting credit card payments in our restaurants, as well as at third party online ordering and delivery businesses, processing payroll and other administrative functions, etc. For instance, if we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be required to recognize additional asset impairmentliable for costs incurred by payment card issuing banks and other asset-related charges.third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs.
We have long-lived assets,also use third-party vendors. While we select third-party vendors carefully, we do not control their actions. Any problems caused by these third parties, including those resulting from breakdowns or other disruptions in communication services provided by a cost-method investment, goodwillvendor, failure of a vendor to handle current or higher volumes, cyberattacks and intangible assetssecurity breaches at a vendor could adversely affect our ability to deliver products and have incurred impairment charges in the past with respectservices to those assets. In accordance with applicable accounting standards, we test for impairment annually, or more frequently, if there are indicators of impairment, such as:
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Based upon future economic and capital market conditions, future impairment charges could be incurred.conduct our business.
Although we have taken measures to protect our technology systems and infrastructure, including working to upgrade our existing information technology systems and provide employee training around phishing, malware and other cyber risks, there can be no assurance that we will be successful and fully protected against cyber risks and security breaches. A security breach could result in operational disruptions, theft or fraud, or exposure of sensitive information to unauthorized parties. Such events could result in additional costs related to operational inefficiencies, damages, claims or fines.
Catastrophic events may disrupt our business.
Unforeseen events, or the prospect of such events, including war, terrorism and other international conflicts, such as a continued interruption inincluding the relationship between the United States and Russia,Russia-Ukraine conflict, public health issues such as epidemics or pandemics (including, without limitation, as a result of the COVID-19 pandemic), labor unrest and natural disasters such as earthquakes, hurricanes or other extreme adverse weather and climate conditions, whether occurring in the United States or abroad, could disrupt our operations, disrupt the operations of franchisees, suppliers or customers, or result in political or economic instability. These events could negatively impact consumer spending, thereby reducing demand for our products, or the ability to receive products from suppliers. We do not have insurance policies that insure against certain of these risks. To the extent that we do maintain insurance with respect to some of these risks, our receipt of the proceeds of such policies may be delayed or the proceeds may be insufficient to offset our losses fully.
Our international operations are subject to various factors of uncertainty.
Our business outside of the United States is subject to a number of additional factors, including international economic and political conditions, differing cultures and consumer preferences, currency regulations and fluctuations, diverse government regulations and tax systems, uncertain or differing interpretations of rights (including intellectual property rights) and obligations in connection with international franchise agreements and the collection of royalties from international franchisees, the availability and cost of land and construction costs, and the availability of appropriate franchisees. In developing markets, we may face risks associated with new and untested laws and judicial systems. Although we believe we have developed the support structure required for international growth, there is no assurance that such growth will occur or that international operations will be profitable.
Our business operations and future development could be significantly disrupted if we lose key members of our management team.personnel.
The success of our business continues to depend to a significant degree upon the continued contributions of our senior officers and key employees, both individually and as a group. Our future performance will be substantially dependent, in particular, on our ability to retain and motivate our executive officers, for certain of whom we currently have employment agreements in place. The loss of the services of any of our executive officers could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as our abilitywe may not be able to satisfy our obligations under the Notes. If we lose the services of any of thesefind suitable individuals in the foreseeable future; we currently have no effective replacement for any of these individuals due to their experience, reputation in the industry and special role in our operations.replace such personnel on a timely basis or without incurring increased costs, or at all.
A recent rulingAdditionally, our Company-owned restaurants and complaint filed byfranchised restaurants are highly service-oriented, and our success depends in part upon the general counselability to attract, retain and motivate a sufficient number of qualified employees, including franchisee management, restaurant managers and other crew members. The market for qualified employees in the National Labor Relations Board could, if upheld, make us liableretail food industry is very competitive. We are experiencing and may continue to experience a shortage of labor for violations of overtime, wage or union-organization violations bypositions in our franchisees.Company-owned restaurants and franchised restaurants, due to the current competitive labor market.
General Counsel of the National Labor Relations Board (NLRB) issued a statement announcing that McDonald’s Corp. might be charged with being jointly liable for labor and wage violations by its franchisees. Subsequently on December 19, 2014, the General Counsel issued complaints alleging that McDonald’s Corp. was a “joint employer” with its franchisees at certain franchised locations, under certain fact patterns. McDonald’s Corp. and its franchisees are currently in administrative litigation with the NLRB. If the complaints are not dismissed and the NLRB prevails in the administrative proceedings (as well as in related appeals in federal courts that will ensue), and depending upon the facts charged in that case, the “joint employment” principle may be extended more broadly to franchisors other than McDonald’s Corp. (such as Nathan’s). If that took place, then we might be held partly liable in cases of alleged overtime, wage, or union-organizing violations by our franchisees. Among other things, such an outcome may make it easier to organize our franchisees’ staff into unions, provide the staff and their union representatives with bargaining power to request that we have our franchisees raise wages, and make it more expensive and less profitable to operate a Nathan’s franchised restaurant. A decrease in profitability or the closing of a significant number of franchised restaurants could significantly impact our business (as well as our franchisees’ businesses), and we may also be significantly impacted if the NLRB successfully brought an action against our company alleging that we are a “joint employer” of our franchisees’ staffs.
We face risks of litigation and pressure tactics, such as strikes, boycotts and negative publicity from customers, franchisees, suppliers, employees and others, which could divert our financial, and management resources and which may negatively impact our financial condition and results of operations.
Class action lawsuits have been filed, and may continue to be filed, against various quick-service restaurants alleging, among other things, that quick-service restaurants have failed to disclose the health risks associated with high-fat foods and that quick-service restaurant marketing practices have targeted children and encouraged obesity. In addition, we face the risk of lawsuits and negative publicity resulting from injuries, including injuries to infants and children, allegedly caused by our products, toys and other promotional items available in our restaurants or by our playground equipment.
In addition to decreasing our sales and profitability and diverting our management resources, adverse publicity or a substantial judgment against us could negatively impact our business, results of operations, financial condition and brand reputation, hindering our ability to attract and retain franchisees, expand our BPP and otherwise grow our business in the United States and internationally.restaurants.
In addition, activist groups, including animal rights activists and groups acting on behalf of franchisees, the workers who work for suppliers and others, have in the past, and may in the future, use pressure tactics to generate adverse publicity by alleging, for example, inhumane treatment of animals by our suppliers, poor working conditions or unfair purchasing policies. These groups may be able to coordinate their actions with other groups, threaten strikes or boycotts or enlist the support of well-known persons or organizations in order to increase the pressure on us to achieve their stated aims. In the future, these actions or the threat of these actions may force us to change our business practices or pricing policies, which may have a material adverse effect on our business, results of operations and financial condition.
Further, we may be subject to employee, franchisee and other claims in the future based on, among other things, mismanagement of the system, unfair or unequal treatment, discrimination, harassment, wrongful termination and wage, rest break and meal break issues, including those relating to overtime compensation. We have been subject to these types of claims in the past, and if one or more of these claims were to be successful or if there is a significant increase in the number of these claims, our business, results of operations and financial condition could be harmed.
Risks Related to Regulatory Matters
General regulationChanges to minimum wage rates have increased our labor costs.
We must comply with the Fair Labor Standards Act and various federal and state laws governing minimum wages. Increases in the minimum wage and labor regulations have increased our labor costs. The minimum hourly wage in New York state for fast food workers of restaurant chains with 30 or more locations nationwide is $15.00 per hour. Additionally, the restaurant industryfederal government and a number of other states are evaluating various proposals to increase their respective minimum wage. As minimum wage rates increase, we may need to increase not only the wages of our minimum wage employees but also the wages paid to employees at wage rates that are above minimum wage. As a result, we anticipate that our labor costs will continue to increase. If we are unable to pass on these higher costs through price increases, our margins and profitability as well as the profitability and margins of our franchisees will be adversely impacted which could have a material adverse effect on our business, results of operations or financial condition. Our business could be further negatively impacted if the decrease in margins for our franchisees results in the potential loss of new franchisees or the closing of a significant number of existing franchised restaurants.
Changes in franchise regulations and laws could impact our ability to obtain or retain licenses or approvals and adversely impactaffect our business, financial condition, results of operations and prospects.
The restaurant industry isWe are subject to extensive federal statestatutes and local governmental regulations, including those relating to the preparationrules promulgated by the U.S. Federal Trade Commission, as well as certain state laws governing the offer and sale of foodfranchises. Many state franchise laws impose substantive requirements on franchise agreements, including limitations on non-competition provisions and those relating to building and zoning requirements. In recent years, there has been an increased legislative, regulatory and consumer focus on nutrition and advertising practices inprovisions concerning the food industry, particularly among restaurants. This focus has resulted in, and may continue to result in, the enactment of laws and regulations that impact the ingredients and nutritional content of our menu offerings. For example, a number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information available to customers,termination or have enacted legislation restricting the use of certain types of ingredients in restaurants. Furthermore, the 2010 Patient Protection and Affordable Care Act (“PPACA”) establishes a uniform, federal requirement for certain restaurants to post nutritional information on their menus. Specifically, the PPACA amended the Federal Food, Drug and Cosmetic Act to require chain restaurants with 20 or more locations operating under the same name and offering substantially the same menus to publish the total number of calories of standard menu items on menus and menu boards, along with a statement that puts this calorie information in the contextnon-renewal of a total daily calorie intake.franchise. Some states require that certain materials be filed for a franchisor to be registered and approved, before franchises can be offered or sold in that state. The PPACA also requires covered restaurantsfailure to provideobtain or retain licenses or approvals to consumers, upon request, a written summary of detailed nutritional information for each standard menu item, and to provide a statement on menus and menu boards about the availability of this information.
The PPACA further permits the United States Food and Drug Administration (the “FDA”) to require covered restaurants to make additional nutrient disclosures, such as disclosure of trans fat content. On November 25, 2014, the FDA announced its final rules for nationwide nutritional labeling on menus of establishments with at least 20 locations, as well as food trucks, vending machines, movie theaters, pizza parlors, amusement parks, grocery stores and anywhere else where ready-to-eat meals are sold. The nutritional labeling rules require establishments to post calorie counts on all menu items, calorie boards and drive-thru displays throughout the United States. Businesses affected by the new regulations have one year to comply. Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming.
An unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for our offerings. Additionally, if consumer health regulations or consumer eating habits change significantly, we may be required to modify or discontinue certain menu items, and we may experience higher costs associated with the implementation of those changes. Additionally, some government authorities are increasing regulations regarding trans fats and sodium, which may require us to limit or eliminate trans fats and sodium from our menu offerings, switch to higher cost ingredients or may hinder our ability to operate in certain markets. Failure to comply with these laws or regulationssell franchises could have a material adverse effect on our business, financial condition, results of operations and prospects. The FTC is also considering adopting changes to (and potentially bans upon) enforcement of covenants against competition and similar contractual arrangements between a business and its workers; although as announced by the FTC, that proposed regulation would not apply to franchisor-franchisee relationships. However, the FTC has sought comment on whether the pending regulation should apply to the franchisor-franchisee relationship and we cannot predict the form in which it will ultimately be promulgated by the FTC. In the form that the FTC originally proposed, we do not expect the pending non-competition rule to significantly impact our business; however, should the FTC limit enforcement of covenants against competition in franchise relationships, that might have a significant impact on our operations.
We are subject to health, employment, environmental and other government regulations, and failure to comply with existing or future government regulations could expose us to litigation, damage our corporate reputation or the reputation of our brands and lower profits.
We cannot makeand our franchisees are subject to various federal, state and local laws, rules or regulations affecting our businesses. To the extent that the standards imposed by local, state and federal authorities are inconsistent, they can adversely affect popular perceptions of our business and increase our exposure to litigation or governmental investigations or proceedings. We may be unable to manage effectively the impact of new, potential or changing regulations that affect or restrict elements of our business. The successful development and operation of restaurants depends to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use (including the placement of drive-thru windows), environmental (including litter), traffic and other regulations. There can be no assurance that we and our franchisees will not experience material difficulties or failures in obtaining the necessary licenses or approvals for new restaurants which could delay the opening of such restaurants in the future. Restaurant operations are also subject to licensing and regulation by state and local departments relating to health, food preparation, sanitation and safety standards, federal and state labor laws (including applicable minimum wage requirements, overtime, working and safety conditions and citizenship requirements), federal and state laws prohibiting discrimination and other laws regulating the design and operation of facilities. If we fail to comply with any assurances regardingof these laws, we may be subject to governmental action or litigation, and accordingly our abilityreputation could be harmed.
Injury to effectively respond to changes in consumer health perceptionsus or our abilitybrand’s reputation would, in turn, likely reduce revenue and profits. In addition, difficulties or failures in obtaining any required licenses or approvals could delay or prevent the development or opening of a new restaurant or renovations to successfully implementexisting restaurants, which would adversely affect our revenue.
Failure by third-party manufacturers or suppliers of raw materials to comply with food safety, environmental or other regulations may disrupt our supply of certain products and adversely affect our business.
We rely on third-party manufacturers to produce our products and on other suppliers to supply raw materials. Such manufacturers and other suppliers, whether in the nutrient content disclosure requirementsUnited States or outside the United States, are subject to a number of regulations, including food safety and environmental regulations. Failure by any of our manufacturers or other suppliers to adaptcomply with regulations, or allegations of compliance failure, may disrupt their operations. Disruption of the operations of a manufacturer or other suppliers could disrupt our menu offerings to trends in eating habits. The impositionsupply of menu-labeling lawsproduct or raw materials, which could have an adverse effect on our business, results of operations, and financial position,condition. Additionally, actions we may take to mitigate the impact of any such disruption or potential disruption, including increasing inventory in anticipation of a potential production or supply interruption, may adversely affect our business, results of operations, and financial condition.
Supply chain risk could increase our costs and limit the availability of ingredients and supplies that are critical to our operations. The markets for some of our ingredients, such as beef and beef trimmings are particularly volatile due to factors beyond our control such as limited sources, seasonal shifts, climate conditions and industry demand, including as a result of animal disease outbreaks, food safety concerns, product recalls and government regulation. In addition, we have a limited number of suppliers and distributors. We remain in regular contact with our major suppliers and to date we have not experienced significant disruptions in our supply chain; however, beginning in the latter part of fiscal 2022 and continuing during fiscal 2023 costs for certain supplies and ingredients, such as packaging, beef and beef trimmings, and freight, increased materially and rapidly, which combined with inflationary pressures could continue. Such factors may have a material adverse effect on our business, results of operations and financial condition.
We are subject to many federal, state and local laws, as well as statutory and regulatory requirements. Failure to comply with, or changes in these laws or requirements, could have an adverse impact on our business.
The National Labor Relations Board (“NLRB”) is considering, and has previously considered whether to hold certain franchisors responsible as a “joint employer” of its franchisees’ staff under certain fact patterns. There is also the possibility of administrative action from other agencies, state governments, and in private lawsuits that may allege that a franchisor and its franchisee “jointly employ” the franchisee’s staff, that the franchisor is responsible for the franchisees’ staff (under theories of apparent agency, ostensible agency, or actual agency), or otherwise. If the United States Department of Labor and agencies such as the Occupational Safety and Health Administration and the NLRB take a more aggressive position on defining and enforcing joint employer status, or if Congress passes the proposed “PRO Act,” and it is signed into law, that might change the status quo and expose Nathan’s to the possibility of being deemed a “joint employer” of our franchisees’ staff together with our franchisees and possibly to some franchisees being reclassified as “employees.”
Among other things, a determination that Nathan's and its franchisees are joint employers of one or more franchisees’ staff may make it easier to organize our franchisees’ staff into unions, provide the staff and their union representatives with bargaining power to request that we have our franchisees raise wages, and make it more expensive and less profitable to operate a Nathan’s franchised restaurant. A decrease in profitability or the closing of a significant number of franchised restaurants could significantly impact our business (as well as our franchisees’ businesses), and we may also be impacted if the NLRB or a private party, successfully brought an action alleging that we are a “joint employer” of our franchisees’ staff, all of which might impact our results of operations and financial condition.
Additionally, state and local laws such as the recently passed Fast Food Accountability and Standards (FAST) Recovery Act (AB257) in California may require wage increases and working hour and working condition standards that may increase our costs without corresponding benefits. Although implementation and enforcement of the FAST Act is stayed pending a referendum in 2024, it is possible that it will pass, and that other jurisdictions may pass similar laws.
California also adopted a new law to address data privacy. The California Consumer Privacy Act (“CCPA”) took effect at the beginning of 2020, and imposes stringent data security standards, which might apply more broadly than only within the borders of that state (for example, if a California resident buys products or has them shipped into the state and pays with a credit or debit card). Other states, including Connecticut, Colorado, Illinois, New York, Utah and Virginia have since adopted laws that apply to data and other biometric technology which may be broadly interpreted. It remains uncertain whether the CCPA and the laws adopted in other states will have a material impact on our operations or that of our franchisees.
Our business is subject to an increasing focus on Environmental, Social, and Governance (ESG) matters.
In recent years, there has been an increasing focus by stakeholders – including employees, franchisees, customers, suppliers, governmental and non-governmental organizations, and investors – on ESG matters. A failure, whether real or perceived, to address ESG could adversely affect our business, including by heightening other risks disclosed in this Item 1A, “Risk Factors.” In the restaurant industry, concerns have been expressed regarding energy management, water management, food and packaging waste management, supply chain management and labor practices.
We may also face increased pressure from stakeholders to provide expanded disclosure and establish additional commitments, targets or goals, and take actions to meet them, which could expose us to additional market, operational, execution and reputational costs and risks.
Changes in general.tax laws and unfavorable resolution of tax contingencies could adversely affect our tax expense.
Our future effective tax rates could be adversely affected by changes in tax laws, both domestically and internationally. From time to time, the United States Congress and foreign, state and local governments consider legislation that could increase our effective tax rates. If changes to applicable tax laws are enacted, our results of operations could be negatively impacted. Our tax returns and positions (including positions regarding jurisdictional authority of foreign governments to impose tax) are subject to review and audit by federal, state, local and international taxing authorities. An unfavorable outcome to a tax audit could result in higher tax expense, thereby negatively impacting our results of operations.
Risks Related to Organizational Structure
Our certificate of incorporation and by-laws and other corporate documents include anti-takeover provisions which may deter or prevent a takeover attempt.
Some provisions of our certificate of incorporation, by-laws, other corporate documents, including the terms and condition of our Notes, and provisions of Delaware law may discourage takeover attempts and hinder a merger, tender offer or proxy contest targeting us, including transactions in which stockholders might receive a premium for their shares. This may limit the ability of stockholders to approve a transaction that they may think is in their best interest.
The corporate documents include:
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| Employment Contracts. The employment agreements between us and each of Howard M. Lorber and Eric Gatoff provide that in the event there is a change in control of Nathan’s, the employee has the option, exercisable within one year for each of Messrs. Lorber and Gatoff, of his becoming aware of the change in control, to terminate his employment agreement. Upon such termination, Mr. Gatoff has the right to receive a lump sum payment equal to his salary and annual bonus for a one-year period, and Mr. Lorber has the right to receive a lump sum payment equal to the greater of (i) his salary and annual bonuses for the remainder of the employment term or (ii) 2.99 times his salary and annual bonus plus the difference between the exercise price of any exercisable options having an exercise price of less than the then current market price of our common stock and such current market price. Mr. Lorber will also receive a tax gross up payment to cover any excise tax. |
Changes inWhile we have approved a quarterly dividend policy, there can be no assurance as to the U.S. healthcare system could increase our costdeclaration of doing business.
In March 2010,future dividends or the federal government passed new legislation to reform the U.S. health care system. As partamount of the plan, employers will be expected to provide their employees with minimum levels of healthcare coverage or incur certain financial penalties. Our workforce includes numerous part-time workers, which may increase our health care costs and expose us to certain excise taxes, in the event that healthcare is offered to less than 95% of our full-time employees, as defined by the legislation. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Increased health care costs could have a material adverse effect on our business, financial condition and results of operations.
Changes in tax laws and unfavorable resolution of tax contingencies could adversely affect our tax expense.such dividends.
Our declaration and payment of future effective tax rates couldcash dividends are subject to the final determination by our Board of Directors that (i) the dividend will be adversely affected by changesmade in taxcompliance with laws both domesticallyapplicable to the declaration and internationally. From time to time,payment of cash dividends, including Section 170 of the United States CongressDelaware General Business Corporation Law, (ii) the dividend complies with the terms of the Indenture, and foreign, state(iii) the payment of dividends remains in our best interests, which determination will be based on a number of factors, including the impact of changing laws and local governments consider legislation that could increase our effective tax rates. If changes to applicable tax laws are enacted,regulations, economic conditions, our results of operations and/or financial condition, capital resources, the ability to satisfy financial covenants and other factors considered relevant by the Board of Directors. There can be no assurance our Board of Directors will approve the payment of cash dividends in the future or the amount of a cash dividend. Any discontinuance of the payment of a dividend or changes to the amount of a dividend compared to prior dividends could be negatively impacted. Our tax returns and positions (including positions regarding jurisdictional authority of foreign governmentscause our stock price to impose tax) are subject to review and audit by federal, state, local and international taxing authorities. An unfavorable outcome to a tax audit could result in higher tax expense, thereby negatively impacting our results of operations.decline.
Risks Related to the Notes
Our substantial indebtedness could adversely affectmakes us more sensitive to adverse economic conditions, may limit our financial healthability to plan for or respond to significant changes in our business, and prevent us from fulfillingrequires a significant amount of cash to service our debt payment obligations under theNotes and our other debt.that we may be unable to generate or obtain.
As of March 27, 2016,26, 2023, we had $135.0 milliontotal outstanding indebtedness of indebtedness under the Senior Secured Notes. Our substantial indebtedness could have important consequences$80,000,000 which is due in 2025. Subject to you. For example, it could:
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Moreover, because of the interest payments we are required to make, our net income for fiscal 2016 and beyond will have a significant negative impact compared to our reported net income in fiscal 2015 period and prior periods. As we entered into the indenture on March 10, 2015 we were only required to accrue interest expense for 20 days during the fiscal 2015 period. In contrast, the full year impact of interest expense on net income has been reflected in our year end results for the period ended March 27, 2016 and will be reflected in future periods so long as the Notes remain outstanding.
In addition, the terms of the indenture governing the Notes contain restrictive covenants that limitany future agreements, we and our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts, including the Notes. The occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of operations, prospects or ability to satisfy our obligations under the Notes.
Despite our current indebtedness level, we may still be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.
Wesubsidiaries may be able to incur substantial additional indebtedness, including additional Notes and other secured indebtedness in the future. Althoughfuture, which would increase the indenture governing the Notes will contain restrictions on the incurrencerisks related to our high level of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial.indebtedness. If new debt is added to our existing debt levels, the related risks that we face would intensify and we may not be able to meet all our debt obligations, including the repayment of the Notes. In addition, the indenture governing the Notes will not prevent us from incurring obligations that do not constitute indebtedness under the indenture.
To service
Specifically, our high level of indebtedness could have important potential consequences, including, but not limited to:
● | increasing our vulnerability to, and reducing our flexibility to plan for and respond to, adverse economic and industry conditions and changes in our business and the competitive environment; |
● | make it more difficult for us to satisfy our other financial obligations, including our obligations relating to the Notes; |
● | requiring the dedication of a substantial portion of our cash flow from operations to the payment of principal of, and interest on, indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, acquisitions, dividends, share repurchases or other corporate purposes; |
● | make it more difficult for us to satisfy our obligations to the holders of the Notes, resulting in possible defaults on and acceleration of such indebtedness; |
● | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
● | place us at a competitive disadvantage compared to our competitors that have less debt; |
● | increasing our vulnerability to a downgrade of our credit rating, which could adversely affect our cost of funds, liquidity, value and trading of the Notes and access to capital markets; |
● | restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; |
● | limit our ability to borrow additional funds or increase our cost of borrowing; |
● | placing us at a disadvantage compared to other less leveraged competitors or competitors with comparable debt at more favorable interest rates; |
● | increasing our exposure to the risk of increased interest rates insofar as current and future borrowings are subject to variable rates of interest; |
● | making it more difficult for us to repay, refinance or satisfy our obligations relating to the Notes; |
● | limiting our ability to borrow additional funds in the future and increasing the cost of any such borrowing; |
● | imposing restrictive covenants on our operations as the result of the terms of our indebtedness, which, if not complied with, could result in an event of default, which in turn, if not cured or waived, could result in the acceleration of our debts, including the Notes. |
There is no assurance that we will generate cash flow from operations or that future debt or equity financings will be available to us to enable us to pay our indebtedness we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. As such, we may not be able to generate sufficient cash to service theNotesor our other indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make payments on and to refinance our indebtedness, including the Notes, to fund planned capital expenditures and to maintain sufficient working capital will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
We cannot assure you thatliquidity needs. If our business willdoes not generate sufficient cash flow from operations or if future borrowings from other sourcesare not available to us in an amountamounts sufficient to enable us to servicepay our indebtedness including the Notes, or to fund our other liquidity needs. Ifneeds, our cash flowsfinancial condition and capital resources are insufficient to allow us to make scheduled payments on our indebtedness,results of operations may be adversely affected. As a result, we may need to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance all or a portion of our indebtedness including the Notes, on or before the maturity thereof, any of which could have a material adverse effect on our operations. We cannot assure youmaturity. There is no assurance that we will be able to refinance any of our indebtedness including the Notes, on commercially reasonablefavorable terms, or at all, or that the terms of that indebtedness will allow any of the above alternative measures or that these measures would satisfy our scheduled debt service obligations. If we are unableall. Any inability to generate sufficient cash flow to repay or refinance our debtindebtedness on favorable terms it could significantly adversely affect our financial condition, the value of our outstanding debt, including the Notes, and our ability to make any required cash payments under our indebtedness, including the Notes. Our ability to restructure or refinance our debt will dependhave a material adverse effect on the condition of the capital markets and our financial condition at that time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, any future credit facility may be secured by a priority lien on substantially all of our assets. As such, our ability to refinance the Notes or seek additional financing could be impaired as a result of such security interest.and financial condition.
We are subject to a number of restrictive covenants, which may restrict our business and financing activities.
The indenture governing the Notes will impose, and the terms of any future indebtedness may impose, operating and other restrictions on us. Such restrictions will affect, and in many respects limit or prohibit, among other things, our ability to:
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The restrictions in the indenture governing the Notes may prevent us from taking actions that we believe would be in the best interests of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We also may incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. Our ability to comply with these covenants in future periods will largely depend on the pricing of our products and services, and our ability to successfully implement our overall business strategy. We cannot assure you that we will be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements. The breach of any of these covenants and restrictions could result in a default under the indenture governing the Notes, which could result in an acceleration of our indebtedness.
Item 1B. Unresolved Staff Comments.
None.
Item 2. | Properties. |
Item 2. Properties.
Our principal executive offices consist ofWe currently lease approximately 9,300 square feet of leased space in a modern office buildingfor our executive offices in Jericho, NY. TheNew York for approximately $397,000 per year, under a lease commencedagreement which expires on January 1, 2010, has a ten (10) year term, with a five (5) year renewal right. We also own a regional office building consisting of approximately 9,500 square feet in Fort Lauderdale, Florida. We currently own one restaurant property consisting of a 2,650 square foot Nathan’s restaurant at 86th Street in Brooklyn, NY, located on a 25,000 square foot lot.March 31, 2029.
At March 27, 2016,26, 2023, other Company-owned restaurants that were operating were located in leased space with terms expiring as shown in the following table:
Nathan’s Restaurants | Location | Current Lease | Approximate | |||||
Coney Island | Brooklyn, NY | December 2027 | 10,000 | |||||
Coney Island Boardwalk (a) | Brooklyn, NY | November | 3,800 | |||||
Long Beach Road | Oceanside, NY | April 2030 | 4,100 | |||||
Central Park Avenue (b) | Yonkers, NY | December 2023 | 3,500 |
(a) | Seasonal satellite location. |
(b) |
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At March 27, 2016,26, 2023, in addition to the leases listed above, we were the sub-lessor of one property to a franchisee located within the metropolitan New York area.
Aggregate rental expense, net of sublease income, under all current leases amounted to $1,628,000$1,615,000 in fiscal 2016.2023.
Item 3. Legal Proceedings.
Item 3. | Legal Proceedings. |
We and our 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 our 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 moneymonetary damages and, in such event, could result in a material adverse impact on our results of operations for the period in which the ruling occurs.
Item 4. Mine Safety Disclosures.
Item 4. | Mine Safety Disclosures. |
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Common Stock Prices
Our common stock is quoted on the NASDAQ Global Market (“Nasdaq”) under the symbol “NATH.” The following table sets forth
Dividend Policy
During fiscal 2023, the highCompany declared and low closing sales pricespaid three quarterly dividends of $0.45 per share and one quarterly dividend of $0.50 per share. Effective June 8, 2023, the Board declared its first quarterly cash dividend of $0.50 per share for fiscal year 2024 which is payable on June 28, 2023 to stockholders of record as of the periods indicated without adjustment for the special dividend described below:
High | Low | |||||||
Fiscal year ended March 27, 2016 | ||||||||
First quarter | $ | 58.57 | $ | 36.26 | ||||
Second quarter | 42.77 | 30.36 | ||||||
Third quarter | 51.42 | 37.27 | ||||||
Fourth quarter | 54.44 | 42.03 | ||||||
Fiscal year ended March 29, 2015 | ||||||||
First quarter | $ | 56.93 | $ | 48.31 | ||||
Second quarter | 65.98 | 49.71 | ||||||
Third quarter | 79.22 | 66.25 | ||||||
Fourth quarter | 82.26 | 71.63 |
Atclose of business on June 6, 2016, the closing price per share for our common stock, as reported by Nasdaq, was $44.38.20, 2023.
On March 10, 2015, Nathan’s declared a special dividend of $25.00 per share. The record date was March 20, 2015 and the payment date was March 27, 2015. Pursuant to Nasdaq rules, March 30, 2015 (which was in the first quarter of fiscal 2016), was the ex-dividend date for Nathans’ $25.00 per share special dividend because the total amount of the dividend was greater than 25% of the Companies’ market capitalization. The closing sales prices listed above for the fiscal year ended March 29, 2015, represent the actual closing prices and have not been adjusted to reflect the special dividend.
Performance Graph
The graph below represents the Company’s cumulative 5-year total shareholder return on common stock with the cumulative total returns of the S&P 500 index and the S&P Restaurant Index. The graph tracks the performance of a $100 investment in our common stock and in each of our indexes (with the reinvestment of all dividends).
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Dividend Policy
On March 10, 2015, Nathan’s declared a special dividend of $25.00 per share which was paid on March 27, 2015. We do not anticipate that we will pay any cash dividends in the foreseeable future and ourOur ability to pay future dividends is limited by the terms of an Indenture, dated November 1, 2017, between the indenture with USCompany, certain of its wholly-owned subsidiaries, as guarantors and U.S. Bank Trust Company, National Association (formerly known as U.S. Bank National Association,Association), as trusteeTrustee and collateral trustee. Previously, we had not declared or paid a regular cash dividend on our common stock since our initial public offering.Collateral Trustee (the “Indenture”). It has been the Board of Directors’Board’s policy to return capital to our shareholders primarily through the purchase of stock pursuant to our stock buyback programs.
In addition to the terms of the Indenture, the payment of any cash dividends in the future will be dependent upon our earnings and financial requirements.requirements and there can be no assurance that we will declare and pay any dividends subsequent to the June 28, 2023 dividend.
Shareholders
As of June 6, 2016,2, 2023 we had approximately 492 323shareholders of record, excluding shareholders whose shares were held by brokerage firms, depositories and other institutional firms in “street name” for their customers.
Issuer Purchases of Equity Securities
The Company did not repurchase any of its common stock during the quarter ended March 26, 2023.
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December 28, 2015 January 24, 2016 |
- |
- |
- |
66,074 |
January 25, 2016 February 21, 2016 |
44,439 |
$48.13 |
44,439 |
221,631 |
February 22, 2016 March 27, 2016 |
130,761 |
$44.47 |
130,761 |
290,874 |
Total |
175,200 |
$45.40 |
175,200 |
290,874 |
Introduction
ForOverview of the thirteen weeks andImpact of COVID-19
In March 2020, the World Health Organization declared a global pandemic related to the outbreak of a novel strain of coronavirus, designated COVID-19.
COVID-19 related pressures continued during the fiscal year ended March 27, 2016, the Company repurchased 175,200 shares at26, 2023 (“fiscal 2023 period”), although to a cost of $7,960,000 and 449,070 shares at a cost of $19,231,000, respectively, of its common stock. Since the commencement of the Company’s stock buyback program in September 2001 through March 27, 2016, Nathan’s has purchased a total of 5,096,757 shares of common stock at a cost of approximately $76,031,000 under all of its stock repurchase programs and two modified Dutch Auction tender offers, which includes the shares purchasedlesser extent than during the fiscal year ended March 27, 2016.2022 (“fiscal 2022 period”).
On February 1, 2016Customer traffic at our Company-owned restaurants, in particular at Coney Island, during the fiscal 2023 period increased by approximately 12% over the fiscal 2022 period. Additionally, we experienced increased customer traffic within our franchise system, including airport locations; highway travel plazas; shopping malls; movie theaters; and March 11, 2016,casino locations, primarily in Las Vegas, Nevada. The increase in customer traffic translated into higher Company-owned restaurant sales and higher franchise fees and royalties during the Company’s Board of Directors authorized increasesfiscal 2023 period as compared to the sixth stock repurchase plan forfiscal 2022 period.
Additionally, as the purchaselevel of upcomfort of consumers gathering in social settings increased and travel continued to 1,200,000 sharesincrease, our Branded Product Program customers, including professional sports arenas, amusement parks, shopping malls and movie theaters experienced stronger attendance contributing to higher sales.
We continue to follow guidance from health officials in determining the appropriate restrictions, if any, to place within our operations. Our Company-owned and franchised restaurants could be disrupted by COVID-19 related employee absences or due to changes in the availability and cost of its common stock on behalflabor.
We cannot predict the ultimate duration, scope and severity of the Company. As of March 27, 2016, Nathan’s has repurchased 909,126 shares at a cost of $28,369,000 under the sixth stock repurchase plan. At March 27, 2016, there were 290,874 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, dependingCOVID-19 pandemic or its ultimate impact 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.
Item 6. Selected Financial Data.
Fiscal years ended (1) | ||||||||||||||||||||
March27, | March 29, | March 30, | March 31, | March 25, | ||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||
Statement of Earnings Data: | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Sales (3) | $ | 76,031 | $ | 75,520 | $ | 65,521 | $ | 56,656 | $ | 52,369 | ||||||||||
License royalties | 19,815 | 18,011 | 8,513 | 8,571 | 7,526 | |||||||||||||||
Franchise fees and royalties | 5,044 | 5,581 | 5,718 | 5,842 | 5,646 | |||||||||||||||
Total revenues | 100,890 | 99,112 | 79,752 | 71,069 | 65,541 | |||||||||||||||
Costs and Expenses: | ||||||||||||||||||||
Cost of sales | 57,998 | 61,951 | 53,072 | 44,874 | 42,106 | |||||||||||||||
Restaurant operating expenses | 3,557 | 3,747 | 3,142 | 2,700 | 3,115 | |||||||||||||||
Depreciation and amortization | 1,255 | 1,253 | 1,157 | 940 | 965 | |||||||||||||||
General and administrative expenses | 13,117 | 12,203 | 11,460 | 10,437 | 9,552 | |||||||||||||||
Total costs and expenses | 75,927 | 79,154 | 68,831 | 58,951 | 55,738 | |||||||||||||||
Income from operations | 24,963 | 19,958 | 10,921 | 12,118 | 9,803 | |||||||||||||||
Interest expense | (14,630 | ) | (816 | ) | (135 | ) | (453 | ) | (477 | ) | ||||||||||
Interest and other income, net | 151 | 263 | 401 | 474 | 681 | |||||||||||||||
Insurance gain | - | - | 2,774 | - | - | |||||||||||||||
Impairment charge long-term investment | (100 | ) | - | (400 | ) | - | - | |||||||||||||
Income before provision for income taxes | 10,384 | 19,405 | 13,561 | 12,139 | 10,007 | |||||||||||||||
Provision for income taxes | 4,288 | 7,702 | 5,234 | 4,671 | 3,849 | |||||||||||||||
Net income (3) | $ | 6,096 | $ | 11,703 | $ | 8,327 | $ | 7,468 | $ | 6,158 | ||||||||||
Income per share: | ||||||||||||||||||||
Basic (3) | $ | 1.38 | $ | 2.61 | $ | 1.87 | $ | 1.70 | $ | 1.26 | ||||||||||
Diluted (3) | $ | 1.37 | $ | 2.55 | $ | 1.81 | $ | 1.63 | $ | 1.22 | ||||||||||
Dividends declared per share | $ | - | $ | 25.00 | $ | - | $ | - | $ | - | ||||||||||
Dividends declared total | $ | - | $ | 116,110 | $ | - | $ | - | $ | - | ||||||||||
Weighted average shares used in computing net income per share | ||||||||||||||||||||
Basic | 4,430 | 4,486 | 4,450 | 4,400 | 4,906 | |||||||||||||||
Diluted | 4,463 | 4,588 | 4,605 | 4,588 | 5,049 | |||||||||||||||
Balance Sheet Data at End of Fiscal Year: | ||||||||||||||||||||
Working capital | $ | 49,779 | $ | 61,328 | $ | 35,378 | $ | 27,525 | $ | 21,989 | ||||||||||
Total assets | $ | 71,549 | $ | 84,389 | $ | 56,135 | $ | 49,662 | $ | 44,520 | ||||||||||
Long-term debt, net (4) | $ | 130,266 | $ | 129,140 | $ | - | $ | - | $ | - | ||||||||||
Stockholders’ (deficit) equity | $ | (72,336 | ) | $ | (59,908 | ) | $ | 43,897 | $ | 34,148 | $ | 28,837 | ||||||||
Supplemental Non-GAAP information (5): | ||||||||||||||||||||
EBITDA (6) | $ | 26,269 | $ | 21,474 | $ | 14,853 | $ | 13,532 | $ | 11,449 | ||||||||||
Adjusted EBITDA (7) | $ | 27,155 | $ | 22,497 | $ | 13,350 | $ | 14,289 | $ | 11,916 | ||||||||||
Selected Restaurant Operating Data: | ||||||||||||||||||||
Company-owned restaurant sales (3) | $ | 16,664 | $ | 15,874 | $ | 13,231 | $ | 13,403 | $ | 13,209 | ||||||||||
Number of Units Open at End of Fiscal Year: | ||||||||||||||||||||
Company-owned restaurants (8) | 5 | 5 | 5 | 5 | 5 | |||||||||||||||
Franchised | 259 | 296 | 324 | 303 | 299 |
Notes to Selected Financial Data
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Reconciliation of GAAP and Non-GAAP Measures
The following is provided to supplement certain Non-GAAP financial measures discussed in the Selected Financial Data presented above.
In additionshort or long-term. The ongoing economic impacts and health concerns associated with the pandemic may continue to disclosing resultsaffect consumer behavior, spending levels, and may result in reduced customer traffic and consumer spending trends 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 taxesmay adversely impact our financial condition and (iii) depreciation and amortization expense. The Company has also provided Adjusted EBITDA excluding (i) stock-based compensation; (ii) amortization of bond premium on the Company’s available-for sale investments; (iii) insurance gain and (iv) impairment charge on long-term investment that the Company believes will impact the comparability of its results of operations.
The Company believes that EBITDAInflation
We remain in regular contact with our major suppliers and Adjusted EBITDA are useful to investorsdate we have not experienced significant disruptions in our supply chain; however, we have experienced rising transportation costs, rising costs of hot dogs due to assistthe higher costs for beef and beef trimmings, and other food costs and paper products, which could continue into fiscal 2024.
In general, we have been able to offset cost increases resulting from inflation by increasing prices and adjusting product mix. We continue to monitor these inflationary pressures and will continue to implement mitigation plans as needed. Inherent volatility in assessingcommodity markets, including beef and understanding the Company's operating performancebeef trimmings, could have a significant impact on our results of operations. Delays in implementing price increases, competitive pressures, consumer spending levels and underlying trendsother factors may limit our ability to implement further price increases 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.
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.
Fiscal Year(1) | ||||||||||||||||||||
(In thousands) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Net income | 6,096 | 11,703 | 8,327 | 7,468 | 6,158 | |||||||||||||||
Interest expense | 14,630 | 816 | 135 | 453 | 477 | |||||||||||||||
Income taxes | 4,288 | 7,702 | 5,234 | 4,671 | 3,849 | |||||||||||||||
Depreciation & amortization | 1,255 | 1,253 | 1,157 | 940 | 965 | |||||||||||||||
EBITDA | 26,269 | 21,474 | 14,853 | 13,532 | 11,449 | |||||||||||||||
Insurance gain | - | - | (2,774 | ) | - | - | ||||||||||||||
Impairment charge long-term investment | 100 | - | 400 | - | - | |||||||||||||||
Amortization of bond premium | 64 | 164 | 150 | 130 | 193 | |||||||||||||||
Stock-based compensation | 722 | 859 | 721 | 627 | 274 | |||||||||||||||
ADJUSTED EBITDA | 27,155 | 22,497 | 13,350 | 14,289 | 11,916 |
(1) Our fiscal year ends on the last Sunday in March which results in a 52- 53-week year. The fiscal years ended March 27, 2016, March 29, 2015, March 30, 2014 and March 25, 2012 consisted of 52 weeks. The fiscal year ended March 31, 2013 consisted of 53 weeks.future.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
On October 29, 2012, the Northeastern United States was hit by Superstorm Sandy which caused significant damage to our Flagship Coney Island location closing the restaurant for repair from October 29, 2012 until May 20, 2013.
During the first quarter of fiscal 2014, Nathan’s settled the property claim with its insurance carriers and received approximately $3.4 million, net of fees, and used these proceeds towards the rebuilding of the restaurant. In April 2014, Nathan’s settled the business interruption claim with the insurance carrier and received approximately $718,000, net of fees.
On November 25, 2012, we closed the Company-owned restaurant in Yonkers, New York, as a part of a redevelopment of the property into a strip center, which includes a new Nathan’s Company-owned restaurant that re-opened on November 18, 2013.
Additionally, our Oceanside restaurant was also temporarily closed from January 4, 2015 until March 25, 2015 due to its relocation.
These three events significantly impacted our results of operations and the comparability of restaurant operations during the fiscal 2015 and fiscal 2014 periods reported.
As a result of the above, Nathan’s Management Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K will discuss significant attributes of the closed periods on Company-owned restaurant operations.Business Overview
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,French fries, and a variety of other menu offerings. Our Company-owned restaurants and franchised units operate under the name “Nathan’s Famous,” the name first used at our original Coney Island restaurant opened in 1916. Nathan’s product licensing program began in 1978 by sellingsells packaged hot dogs and other meat products to retail customers through supermarkets or grocery-type retailers for off-site consumption. During fiscal 1998, we introduced ourOur Branded Product Program which currently enables foodservice retailers and others to sell some of Nathan’s proprietary products outside of the realm of a traditional franchise relationship. In conjunction with this program, purchasers of Nathan’s products are granted a limited use of the Nathan’s Famous trademark with respect to the sale of the purchased products, including Nathan’s World Famous Beef Hot Dogs, certain other proprietary food items and paper goods. During fiscal 2008, we launched ourOur Branded Menu Program which is a limited franchise program, under which foodservice operators may sell a greater variety of Nathan’s Famous menu items than under the Branded Product Program.
Our revenues are generated primarily from selling products under Nathan’s Branded Product Program, operating Company-owned restaurants, franchising the Nathan’s restaurant concept (including under the Branded Menu Program) and licensing agreements for the sale of Nathan’s products within supermarkets and club stores, the manufacture of certain proprietary spices and the sale of Nathan’s products directly to other foodservice operators.operators, the manufacture of certain proprietary spices by third parties and franchising the Nathan’s restaurant concept (including the Branded Menu Program and virtual kitchens).
The following summary reflects the franchise openings and closings of the Nathan’s franchise system (including the Branded Menu Program) for the fiscal years ended March 27, 2016, March 29, 2015, March 30, 2014, March 31, 201326, 2023 and March 25, 2012.27, 2022.
March27, | March 29, | March 30, | March 31, | March 25, | ||||||||||||||||
Franchised restaurants operating at the beginning of the period | 296 | 324 | 303 | 299 | 264 | |||||||||||||||
Franchised restaurants opened during the period | 56 | 36 | 56 | 40 | 67 | |||||||||||||||
Franchised restaurants closed during the period | (93 | ) | (64 | ) | (35 | ) | (36 | ) | (32 | ) | ||||||||||
Franchised restaurants operating at the end of the period | 259 | 296 | 324 | 303 | 299 |
March 26, | March 27, | |||||||
Beginning balance | 239 | 213 | ||||||
Opened | 11 | 54 | ||||||
Closed | (18 | ) | (28 | ) | ||||
Ending balance | (A) (B) | 232 | 239 |
(a) | Including two Branded Menu Program locations in Ukraine which are temporarily closed as a result of the Russia-Ukraine conflict. |
(b) | Units operating pursuant to our Branded Product Program and our virtual kitchens are excluded. |
At March 27, 2016,26, 2023, our franchise system consisted of 259232 Nathan’s franchised unitslocations, including 120 Branded Menu locations located in 2117 states, and 1113 foreign countries. We also operate fivefour Company-owned Nathan’s units, includingrestaurants (including one seasonal location,unit), within the New York metropolitan area.
Our strategic emphasis is focused on increasing the number of distribution points for our products across all of our business platforms, including our Licensing Program for distribution of Nathan’s Famous branded consumer packaged goods, our Branded Products Program for distribution of Nathan’s Famous branded bulk products to the foodservice industry, and our namesake restaurant system comprised of both Company-owned restaurants and franchised units, including virtual kitchens. The primary drivers of our growth have been our Licensing and Branded Product Programs, which are the largest contributors to the Company’s revenues and profits.
While we do not expect to significantly increase the number of Company-owned restaurants, we may opportunistically and strategically invest in a small number of new units as showcase locations for prospective franchisees and master developers as we seek to grow our franchise system. We continue to seek opportunities to drive sales in a variety of ways as we adapt to the ever-changing consumer and business climate.
As described in Risk FactorsItem 1A. "Risk Factors" and other sections in this Annual Report on Form 10-K for the year ended March 27, 2016,26, 2023, our future results could be impacted by many developments. In March 2014, John Morrell & Co., a subsidiarydevelopments including the impact of the COVID-19 pandemic and inflationary pressures on our business, as well as our dependence on Smithfield Foods, Inc. became Nathan’s exclusive licensee to manufactureas our principal supplier, and sell hot dogs, sausage and corned beef at retail. Our future operating results could be negatively impacted if we do not continue to increase our license revenue under the John Morrell Agreement and achieve cost savings. There are also certain risks associated with engaging John Morrell & Co. as exclusive licensee including whether (i) we can maintain or improve the quality and consistencydependence of our products that is expected bylicensing revenue and overall profitability on our customers, and (ii) John Morrell & Co. will have a sufficient supply of products available for our customers on a timely basis.
agreement with Smithfield Foods, Inc. Our future operating results could be impacted by supply constraints on beef as a resultor by increased costs of the lingering effect of weather conditions in the Midwest on beef, prices.beef trimmings and other commodities due to inflationary pressures compared to earlier periods.
On March 10, 2015, we consummatedNovember 1, 2017, the Company issued $150,000,000 of 6.625% Senior Secured Notes due 2025 (the "2025 Notes") in a $135 millionprivate 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 November 1, 2017, (the “Indenture”) by and subsequentlyamong the Company, certain of its wholly-owned subsidiaries, as guarantors, and U.S. Bank Trust Company, National Association (formerly U.S. Bank National Association), as trustee and collateral trustee. The Company used the net proceeds of the 2025 Notes offering to redeem the 2020 Notes, paid a portion of a special $5.00 cash dividend and used the remaining proceeds for general corporate purposes, including working capital.
The 2025 Notes bear interest at 6.625% per annum, payable semi-annually on May 1st and November 1stof $25.00 per share (or approximately $116 million ineach year. During the aggregate). As we consummated the Notes offering on March 10, 2015, we were only required to accrue interest expense for 20 days during fiscal 2015. In contrast, the full year impact of interest expense on net income has been reflected in our year end results for the period ended March 27, 2016. 26, 2023, the Company made its required semi-annual interest payments on May 1, 2022 and November 1, 2022. On January 26, 2022, the Company redeemed $40,000,000 in aggregate principal amount of its 2025 Notes. On March 21, 2023, the Company redeemed an additional $30,000,000 in aggregate principal amount of its 2025 Notes. $80,000,000 of the 2025 Notes were outstanding as of March 26, 2023. On May 1, 2023, the Company paid its first semi-annual interest payment of fiscal 2024.
The 2025 Notes have no scheduled principal amortization payments prior to its final maturity on November 1, 2025.
Our future results could alsomay be impacted by our interest obligations under the 2025 Notes. As a result of the issuance of2025 Notes and the Notes, Nathan’ssubsequent partial redemption which occurred on March 21, 2023, the Company expects to incur annual interest expense of $13.5 million$5,300,000 per annum and annual amortization of debt issuance costs of $1,185,000. The Indenture governing the Notes imposes operating and other restrictions on us.approximately $369,000.
In the fiscal year ending March 27, 2016, we paid interest of $6,937,500 and $6,750,000 on September 15, 2015 and March 15, 2016, respectively.
Critical Accounting Policies and Estimates
Our consolidated financial statements and the notes to our consolidated financial statements contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. We believe the following critical accounting policies involve additional management judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related asset and liability amounts. The following discussion should be read in conjunction with the consolidated financial statements included in Part IV, Item 15 of this Form 10-K.
Revenue RecognitionLeases
Sales byWe determine if a contract contains a lease at inception. Our material operating leases consist of our Company-owned restaurants whichand Corporate office space. Renewal options are typically paidnot included in cashthe lease term as it is not reasonably certain at commencement date that we would exercise the option to extend the lease. Our real estate leases typically provide for fixed minimum rent payments and/or contingent rent payments based upon sales in excess of specified thresholds. Fixed minimum rent payments are recognized on a straight-line basis over the lease term. Contingent rent payments are recognized each period as the liability is incurred.
Operating lease assets and liabilities are recognized at time of lease inception. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for any payments made before the commencement date, initial direct costs and lease incentives earned.
The lease liability equals the present value of the remaining lease payments over the lease term and is discounted using the incremental borrowing rate, as the rate implicit in the Company’s leases is not readily determinable. This incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. If the estimate of our incremental borrowing rate was changed, our operating lease assets and liabilities could differ materially.
Revenue Recognition
We earn revenues through our Company-owned restaurants, franchised restaurants and virtual kitchens. Retail sales from franchised restaurants and virtual kitchens are reported to us by the customer,our franchisees and virtual kitchen operators and are not included in our revenues. Retail sales from Company-owned restaurants are recognized at the point of sale. SalesRoyalty revenues resulting from the retail sales from franchised restaurants and virtual kitchens are presented netgenerally based on a percentage of sales tax.
In connection with its franchising operations, Nathan’s receives initial franchise fees, area development fees, royalties, and in certain cases, revenue from sub-leasing restaurant properties to franchisees.
Franchise and area development fees, which are typically received prior to completion of the revenue recognition process, are recorded as deferred revenue. Initial franchise fees, which are non-refundable, are recognized as income when substantially all services to be performed by Nathan’s and conditions relating to the sale of the franchise have been performed or satisfied, which generally occurs when the franchised restaurant commences operations. The following services are typically provided by Nathan’s prior to the opening of a franchised restaurant:
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Development fees are nonrefundable and the related agreements require the franchisee to open a specified number of restaurants in the development area within a specified time period or the agreements may be canceled by the Company. Revenue from development agreements is deferred and shall be recognized, with an appropriate provision for estimated uncollectible amounts, when all material services or conditions to the sale have been substantially performed by the franchisor. If substantial obligations under the development agreement are not dependent on the number of individual franchise locations to be opened, substantial performance shall be determined using the same criteria applicable to an individual franchise, which is generally the opening of the first location pursuant to the development agreement. If substantial performance is dependent on the number of locations, then the development fee is deferred and recognized ratably over the term of the agreement, as restaurants in the development area commence operations on a pro rata basis to the minimum number of restaurants required to be open, or at the time the development agreement is effectively canceled.
Nathan’s recognizes franchise royalties on a monthly basis which are generally based upon a percentage of sales made by Nathan’s franchisees, when they areit is earned and deemed collectible. Franchise fees, renewal fees, area development fees, and royalties thattransfer fees are not deemed to be collectible are not recognized as revenue until paid byover the franchisee,term of each respective agreement, or until collectability is deemed to be reasonably assured.upon termination of the franchise agreement. Revenues from Company-owned restaurants and revenues from franchisees and our virtual kitchen operators can fluctuate from time-to-time as a result of restaurant count and sales level changes.
Nathan’s recognizes revenueWe may also generate revenues from its Branded Menu Program eitheradvertising contributions which are made to the Company’s advertising fund which are also generally based on a percentage of sales. Some vendors that supply products to the Company and our restaurant system also contribute to the advertising fund based upon its sale of hot dogs or royalty income when it has been determined that other qualifying products have been soldpurchases made by the manufacturer to Nathan’s Branded Menu Program franchisees.
Nathan’s recognizes revenue from the Branded Product Program upon delivery to Nathan’s customers via third party common carrier to Nathan’s customers. Rebates to customers are recorded as a reduction to sales.our franchisees and at Company-owned restaurants.
Revenue from sub-leasing properties is recognized as income as the revenue is earned and becomes receivable and deemed collectible. Sub-lease rental income is presented net of associated lease costs in the consolidated statements of earnings.
Nathan’s recognizes revenue from royalties on the licensing of the use of its intellectual property in connection with certain products produced and sold by outside vendors. The use of the Nathan’s intellectual property must be approved by Nathan’s prior to each specific application to ensure proper quality and project a consistent image. Revenue from license royalties is generally based on a percentage of sales, subject to certain annual minimum royalties, recognized on a monthly basis when it is earned and deemed collectible.
InThe Company recognizes sales from the normal course of business, we extend credit to franchisees and licensees for the payment of ongoing royalties and to trade customers of our Branded Product Program. AccountsProgram and other receivables, net, as shown on our consolidated balance sheets are net of allowances for doubtful accounts. An allowance for doubtful accounts is determined through analysis ofcertain products sold from the aging of accounts receivable at the date of the financial statements, assessment of collectability basedBranded Menu Program upon historical trends and an evaluation of the impact of current and projected economic conditions. In the event that the collectability of a receivable at the date of the transaction is doubtful, the associated revenue is not recorded until the facts and circumstances change in accordance with the applicable accounting standards. The Company writes off accounts receivable when they are deemed uncollectible.delivery to Nathan’s customers via third party common carrier.
Impairment of Goodwill and Other Intangible Assets
Goodwill and intangible assets are deemed to have indefinite lives,consist of (i) goodwill of $95,000 resulting from the acquisition of Nathan’s in 1987; and accordingly, are(ii) trademarks, and the trade name and other intellectual property of $869,000 in connection with Arthur Treacher’s. Goodwill is not amortized, but are evaluatedis tested for impairment annually (orduring the fourth quarter, or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable) for impairment. The most significant assumptions, which are used in this test, are estimates of future cash flows. We typically use the same assumptions for this test as we use in the development of our business plans. If these assumptions differ significantly from actual results, impairment chargesamount may be required inimpaired. As of March 26, 2023 and March 27, 2022, the future. We conducted ourCompany performed its annual impairment teststest of goodwill and has determined no goodwill or otherimpairment was deemed to exist.
The Company determined its intangible assets wereasset to have a finite useful life based on the expected future use of this intangible asset. Based upon the review of the current Arthur Treacher’s co-branding agreements, the Company determined that the remaining useful lives of these agreements is six years concluding in fiscal 2028 and the intangible asset is subject to be impairedannual amortization. The Company has recorded amortization expense of $174,000and $113,000 during each of the fiscal years endedending March 26, 2023 and March 27, 2016, March 29, 2015 and March 30, 2014.
Impairment of Long-Lived Assets
Long-lived assets are reviewed2022. The Company’s definite-lived intangible asset is tested for impairment wheneverat least annually, or more frequently if events or changes in circumstances indicate that the carrying valueasset may not be recoverable. Impairment is measured by comparing the carrying valueimpaired. The Company tested for recoverability of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their ultimate disposition. In instances where impairment is determined to exist, the Company writes down theits definite-lived intangible asset to its fair value based on the present valueprojected undiscounted cash flows to be derived from such co-branding agreements. Based on the quantitative test performed, the Company determined that the definite-lived intangible asset was recoverable and no impairment charge was recorded for the fiscal years ended March 26, 2023 and March 27, 2022. Cash flow projections require significant estimates and assumptions by management. Should the estimates and assumptions prove to be incorrect, the Company may be required to record an impairment charge in future periods and such impairment could be material.
Impairment of estimated future cash flows.Long-Lived Assets
Long-lived assets include property, equipment and right-of-use assets for operating leases with finite useful lives. Impairment losses are recorded on long-lived assets on a restaurant-by-restaurant basis whenever impairment factors are determined to be present. The Company considers a history of restaurant operating losses to be its primary indicator of potential impairment for individual restaurant locations. As a resultThe Company tests the recoverability of Superstorm Sandy, our Coney Island restaurant sustainedits long-lived assets with finite useful lives whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company tests for recoverability based on the projected undiscounted cash flows to be derived from such assets. If the projected undiscounted future cash flows are less than the carrying value of the assets, the Company will record an impairment loss, if any, based on the difference between the estimated fair value and the carrying value of the assets. The Company generally measures fair value by considering discounted estimated future cash flows from such assets. Cash flow projections and fair value estimates require significant damageestimates and was considered temporarily impaired for purposes of this analysis. The restaurant was fully repairedassumptions by management. Should the estimates and re-opened on May 20, 2013. No otherassumptions prove to be incorrect, the Company may be required to record impairment charges onin future periods and such impairments could be material. No long-lived assets were recordeddeemed impaired during the fiscal years ended March 27, 2016, March 29, 201526, 2023 and March 30, 2014.27, 2022.
Impairment of Long-Term Investment
We make judgments regarding the future realizability of this investment based upon the financial information provided to us by the investment’s management. We typically rely on management’s assumptions, of future revenues and cash flows based upon the annual business plans presented. If these assumptions differ significantly from actual results, we consider whether indicators of impairment exist. If an impairment indicator exists, management evaluates the fair value of its investment to determine if an, other than temporary impairment in value has occurred. We have performed our evaluation of whether indicators of impairment existed, and determined that an other-than-temporary impairment has occurred and recorded impairment charges of $100,000 and $400,000 on this investment during the fifty-two week periods ended March 27, 2016 and March 30, 2014, respectively. We have not recognized any impairment on our long-term investments during the fifty-two week period ended March 29, 2015.
Stock-Based Compensation
As discussed in Note L of the Notes to Consolidated Financial Statements, we have one active share-based compensation plan that provides stock options and restricted stock awards for certain employees and non-employee directors to acquire shares of our common stock. We consider the following factors in determining the value of stock-based compensation:
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Income Taxes
The Company’s current provision for income taxes is based upon its estimated taxable income in each of the jurisdictions in which it operates, after considering the impact on taxable income of temporary differences resulting from different treatment of items for tax and financial reporting purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and any operating loss or tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible. Should management determine that it is more likely than not that some portion of the deferred tax assets will not be realized, a valuation allowance against the deferred tax assets would be established in the period such determination was made.
Uncertain Tax Positions
Financial Accounting Standards establish guidanceThe Company has recorded liabilities for underpayment of income taxes and related interest and penalties for uncertain tax positions based on the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Financial Accounting Standards also provide guidance on derecognition, classification,Nathan’s recognizes accrued interest and penalties accounting in interim periods and disclosure requirements. (See Note Jassociated with unrecognized tax benefits as part of the Notes to Consolidated Financial Statements.)
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 the Company's 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 beginningprovision. See Note H 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 the Company’s results of operations ornotes to our consolidated financial position.
In November 2015, the FASB issued new accounting guidance requiring deferred tax assets and liabilities be presented as noncurrent in a classified balance sheet. This accounting principle change will be effective in calendar year 2017 for public entities with calendar year reporting periods. However, early adoption is permitted for any interim or annual period. Public entities are required to apply the new guidance in the annual reporting period beginning after December 15, 2016, including interim reporting periods within those annual reporting periods. This standard is required to take effect in Nathan’s first quarter ending (June 2017) of our fiscal year ending March 25, 2018. However, early adoption is permitted as of the beginning of any interim or annual reporting period. Nathan’s may apply the amendment prospectively or retrospectively to all periods presented. In case of a prospective application, Nathan’s would disclose in the first interim and annual period of change (i) the nature of and reason for the change in accounting principle, and (ii) a statement that prior periods were not adjusted. If the amendment is applied retrospectively, Nathan’s would have to disclose in the first interim and annual period of change (i) the nature of and reason for the change in accounting principle, and (ii) quantitative information about the effects of the accounting change on prior periods. The adoption did not have a material impact on the Company’s results of operations or financial position.statements.
New Accounting PronouncementsStandard Not Yet Adopted
In May 2014,June 2016, the FASB issued a new accounting standard that attempts to establish a uniform basisASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,”which significantly changes the impairment model for recording revenue to virtually all industriesmost financial statements, under U.S. GAAP as amended in March 2016 and April 2016. The FASB issued two updates toinstruments. Current guidance requires the standard clarifying reporting revenue between Principle versus Agent and clarification in determining performance obligations and licenses guidance. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provisionrecognition of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognitioncredit losses based on an incurred loss impairment methodology that reflects losses once 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. Therelosses are three basic transition methods that are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach.probable. Under the third alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. guidance 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. guidance. Early adoption is prohibited. 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. The Company does not believe that the standard will impact its recognition of revenue for its Branded Product Program, Company-operated restaurants or its recognition of royalties from its franchised restaurants or retail licensees, which are based on a percentage of sales. The Company is evaluating the impact the adoption of this standard will have on the recognition of fees received from international development fees from the sales of exclusive territorial right, initial fees from franchisees for new restaurant openings or extended franchise terms.
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 usersuse a current expected credit loss model (“CECL”) that will immediately recognize an estimate of credit losses that are expected to understand those conditionsoccur over the life of the consolidated financial instruments that are in the scope of this update, including trade receivables. The CECL model uses a broader range of reasonable and management’s plans to alleviate or mitigate those conditions. Thissupportable information in the development of credit loss estimates. The Company will adopt the new standard is effective for annual periods ending after December 15, 2016 and interim periods within annual periodsguidance on a modified retrospective basis beginning after December 16, 2016. This standard will take effect in Nathan’s fourthwith its first fiscal quarter of our fiscal year ending March 26, 2017.2024. The Company is currently evaluating the impact of this new accounting standard on its consolidated financial position and results of operations.
In July 2015, the FASB updated U.S. accounting guidance 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 is not expected to have a material impact on its results of operations or financial position.
In February 2016, the FASB issued a new accounting standard on leases. The new standard, among other changes, will require lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases. The lease liability will be measured at the present value of the lease payments over the lease term. The right-of-use asset will be measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs (e.g. commissions). The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods. This standard is required to take effect in Nathan’s first quarter ending (June 2019) of our fiscal year ending March 29, 2020. The adoption will require a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest period presented. The Company is currently evaluating the impact of this new accounting standard on its consolidated financial position and results of operations.
In March 2016, The FASB issued new guidance that will change how companies account for certain aspects of its share-based payments to employees.The update simplifies the accounting for a stock payment's tax consequences. It also amends how excess tax benefits and a business's payments to cover the tax bills for the shares' recipients should be classified. The amendments allow companies to estimate the number of stock awards they expect to vest, and they revised the withholding requirements for classifying stock awards as equity. Previously, tax withheld was permitted only at the minimum statutory tax rates, which is being amended to permit higher tax withholding as long as it does not exceed the maximum statutory tax rate for an employee in the applicable jurisdictions. This new standard will be effective for public companies with fiscal years beginning after December 15, 2016 which will be Nathan’s first quarter ending (June 2017) of our fiscal year ending in March 2018. However, early application is permitted. Nathan’s will early adopt effective its first fiscal quarter ending June 26, 2016 and is currently completing its evaluation of the effects of this new accounting standard on its financial position and results of operations. Pursuant to the standard, Nathan’s should recognize all excess tax benefits (“windfalls”) and tax deficiencies (“shortfalls”), including tax benefits of dividends on share-based payment awards, as income tax expense or benefit in the income statement. These items shall not be factored into to projected annual income tax rate, but will be treated as discrete items when they occur. Accordingly, this new treatment will add additional volatility in the Company’s effective tax rate.statements.
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.
Results of Operations
Fiscal year ended March 27, 201626, 2023 compared to fiscal year ended March 29, 201527, 2022
Revenues
Total sales were $76,031,000revenues increased by 14% to $130,785,000 for the fifty-two weeks ended March 26, 2023 ("fiscal 2023") as compared to $114,882,000 for the fifty-two weeks ended March 27, 2016 (“2022 ("fiscal 2016 period”2022").
Total sales increased by 18% to $91,045,000 for the fiscal 2023 period as compared to $75,520,000$77,227,000 for the fifty-two weeks ended March 29, 2015 (“fiscal 2015 period”).2022 period. Foodservice sales from the Branded Product Program were $58,545,000$78,884,000 for the fiscal 20162023 period as compared to sales of $58,948,000 in$66,322,000 for the fiscal 20152022 period. During the fiscal 20162023 period, the total volume of businesshot dogs sold in the Branded Product Program increased by approximately 4.6%. Because of a change in pricing strategy, which is more closely correlated to the cost of beef which declined by approximately 11.6%, our average selling prices were lowered by approximately 3.7% during the fiscal 2016 period15% as compared to the fiscal 20152022 period. Our average selling prices, which are partially correlated to the beef markets, increased by approximately 4% as compared to the fiscal 2022 period.
Total Company-owned restaurant sales increased 5.0%by 12% to $16,664,000$12,161,000 during the fiscal 20162023 period as compared to $15,874,000$10,905,000 during the fiscal 2015 period2022 period. The increase was primarily due primarily to higher salesan increase in traffic at bothour Coney Island locations. Other sales, primarily to Wal-Mart, also increased by $124,000 during the fiscal 2016 period compared to the fiscal 2015 period.
License royalties were $19,815,000increased by 5% to $33,455,000 in the fiscal 20162023 period as compared to $18,011,000$31,824,000 in the fiscal 20152022 period. Total royalties earned on sales of hot dogs from our license agreement with John Morrell & Co.Smithfield Foods, Inc. at retail and foodservice, substantially from sales of hot dogsincreased 4% to Sam’s Club, increased by 11.6% to $17,975,000$29,998,000 for the fiscal 20162023 period as compared to $16,105,000 during$28,970,000 for the fiscal 20152022 period. The increase is substantially attributable to the organic growth in our consumer packaged hot dog business as a result of more effective sales, marketing and promotional strategies. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products decreased by $66,000, during the fiscal 2016 period, compared to the fiscal 2015 period, primarily from lower royalties earned from the sale of French fries, condiments, mini-bagel dogs and franks-in-the-blanket and other hors d’oeuvres and salty snacks.
Franchise fees and royalties were $5,044,000 in the fiscal 2016 period as compared to $5,581,000 in the fiscal 2015 period. Total royalties were $4,293,000 in the fiscal 2016 period as compared to $4,538,000 in the fiscal 2015 period. Royalties earned under the Branded Menu programs were $1,000,000 in the fiscal 2016 period as compared to $957,000 in the fiscal 2015 period. Royalties earned under the Branded Menu Program are based on product purchases rather than a percentage of restaurant sales. Traditional franchise royalties were $3,293,000 in the fiscal 2016 period compared to $3,581,000 in the fiscal 2015 period. Franchise restaurant sales decreased to $73,276,000 in the fiscal 2016 period compared to $80,107,000 in the fiscal 2015 period primarily due to the impact of closed restaurants.Comparable domestic franchise sales (consisting of 99 Nathan’s outlets, excluding sales under the Branded Menu Program) were $56,548,000 in the fiscal 2016 period compared to $56,414,000 in the fiscal 2015 period, an increase of 0.2%.
At March 27, 2016, 259 domestic and international franchised or Branded Menu Program franchise outlets were operating as compared to 296 domestic and international franchised or Branded Menu Program franchise outlets at March 29, 2015. Total franchise fee income was $751,000 in the fiscal 2016 period, including $58,000 of cancellation or termination fees compared to $1,043,000 in the fiscal 2015 period including $143,000 of cancellation or termination fees. Domestic franchise fee income was $394,000 in the fiscal 2016 period compared to $276,000 in the fiscal 2015 period. International franchise fee income was $299,000 in the fiscal 2016 period, compared to $624,000 during the fiscal 2015 period. During the fiscal 2016 period, 56 new franchised outlets opened, including 25 international locations, and 22 Branded Menu Program outlets. During the fiscal 2016 period we opened our first two units in Panama and Australia pursuant to new development agreements. Additionally, we opened 17 units in Russia, 2 units in Malaysia, one unit in Costa Rica and one unit in the Dominican Republic. During the fiscal 2015 period, 36 new franchised outlets opened, including 13 international locations, including our first locations in Costa Rica and Malaysia, and 17 Branded Menu Program outlets opened, including six Arthur Treacher’s units. Additionally, during the fiscal 2015 period, a master franchisee exercised an option to acquire the rights to develop franchised outlets throughout Mexico.
Costs and Expenses
Overall, our cost of sales decreased by $3,953,000 to $57,998,000 in the fiscal 2016 period compared to $61,951,000 in the fiscal 2015 period. Our gross profit (representing the difference between sales and cost of sales) was $18,033,000 or 23.7% of sales during the fiscal 2016 period as compared to $13,569,000 or 18.0% of sales during the fiscal 2015 period. The margin improvement was primarily due to the impact of the continued reduction in the cost of beef on our product costs since the summer, and the effect of selling price increases implemented in the Company-operated restaurants.
Cost of sales in the Branded Product Program decreased approximately $4,160,000 during the fiscal 2016 period compared to the fiscal 2015 period, primarily as a result of an approximately 11.4% decrease in the average cost per pound of our hot dogs. In anticipation of higher costs beginning 2016, we entered into a purchase commitment for approximately 2.6 million pounds of hot dogs to be purchased after January 1, 2016. The market price remained abnormally low during January and February 2016, resulting in higher costs of approximately $87,000 during the fourth quarter of fiscal 2016 in connection with our purchase commitment, which we expect will be offset during the first quarter of fiscal 2017. During the fiscal 2016 period, the market cost of our hot dogs was approximately 11.6% lower than during the fiscal 2015 period. During the fiscal 2016 period, approximately 9.7% of our product was purchased pursuant to a purchase commitment.We did not enter any purchase commitments that affected cost of sales during the fiscal 2015 period.We have attempted to enter into sales agreements with our customers that are correlated to our cost of beef, thus reducing our market volatility. Although the cost of beef and beef trimmings have declined, if we were unable to pass on future cost increases through price increases or otherwise reduce any7% 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 $9,153,000 or 54.9% of restaurant sales, as compared to $9,072,000 or 57.2% of restaurant sales in the fiscal 2015 period due primarily to the impact of lower food and labor costs.Our average hourly labor costs have increased beginning January 2016 as a result of the new minimum wage legislation in New York State. Since the minimum wage increase took effect, we estimate that restaurant average hourly labor costs have increased by approximately 12.2%. We have recently increased certain selling prices to pass on recent cost of sales increases. However, if we are unable to fully offset these and future increases through pricing and operating efficiencies, our margins and profits will be negatively affected.
Restaurant operating expenses were $3,557,000 in the fiscal 2016 period compared to $3,747,000 in the fiscal 2015 period. The decrease in restaurant operating costs results primarily from the reduction of approximately $126,000 in occupancy and related costs at our new Oceanside restaurant which is smaller and more efficient to operate than our previous Oceanside restaurant and lower utility costs of approximately $110,000. 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 $1,255,000 in the fiscal 2016 period compared to $1,253,000 in the fiscal 2015 period. This change is primarily attributable to the increased depreciation from the investments made in the Oceanside restaurant. Approximately $94,000 of depreciation expense was in connection with the redevelopment of the relocated Oceanside restaurant that re-opened on March 25, 2015.
General and administrative expenses increased $914,000 or 7.5% to $13,117,000 in the fiscal 2016 period as compared to $12,203,000 in the fiscal 2015 period. The increase in general and administrative expenses was primarily due to increased severance costs of $197,000, legal and other professional fees of $375,000, recruitment fees of $71,000, marketing expenses of $111,000 and relocation expenses of $88,000. We have recently begun a new initiative to target franchising within captive markets by hiring a sales executive with a proven track record in the industry and are developing new menu items specifically for this venue.
Other Items
Interest income was $52,000 in the fiscal 2016 period compared to $176,000 in the fiscal 2015 period, primarily due to lower interest income earned on marketable securities. In July 2015, the Company sold all of its tax-exempt marketable securities and is seeking to re-invest a portion of its cash and cash equivalents in a higher yielding money market account.
Other income of $99,000 in the fiscal 2016 period as compared to $87,000 in the fiscal 2015 period relates primarily to a sublease of a co-branded franchised restaurant.
Interest expense of $14,630,000 in the fiscal 2016 period represents interest of $13,445,000 on the Notes commencing March 10, 2015 and amortization of debt discounts and issuance costs of $1,185,000 during the same period. Interest expense of $816,000 in the fiscal 2015 period represents accrued interest of $750,000 on the Notes and amortization of debt discounts and issuance costs of $66,000 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.
The Company recognized an, other-than-temporary impairment charge on its long-term investment of $100,000 in the fiscal 2016 period based on management’s assessment of the future recoverability of the investments.
Provision for Income Taxes
In the fiscal 2016 period, the income tax provision was $4,288,000 or 41.3% of earnings before income taxes compared to $7,702,000 or 39.7% 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. During the fiscal 2016 period, Nathan’s resolved certain uncertain tax positions, reducing the associated unrecognized tax benefits, along with the related accrued interest and penalties, by approximately $184,000, which lowered the effective tax rate by 1.8%. Additionally, during the fiscal 2015 period, Nathan’s resolved certain uncertain tax positions, reducing the associated unrecognized tax benefits, along with the related accrued interest and penalties, by approximately $126,000, which lowered the effective tax rate by 0.6%. During the fiscal 2016 period, Nathan’s effective tax rate increased by approximately 1.1% due to limitations associated with its tax exempt investments. Nathan’s effective tax rates without these adjustments would have been 42.1% for the fiscal 2016 period and 40.7% for the fiscal 2015 period. The effective tax rate in the fiscal 2016 period reflects higher state taxes in those states that we do business that do not permit the filing of consolidated tax returns. Nathan’s estimates that its unrecognized tax benefits including the related accrued interest and penalties could be further reduced by up to $60,000 during fiscal 2017.
Fiscal year ended March 29, 2015 compared to fiscal year ended March 30, 2014
Revenues
Total sales increased by 15.3% to $75,520,000 for the fiscal 2015 period as compared to $65,521,000 for the fifty-two weeks ended March 30, 2014 (“fiscal 2014 period”). Foodservice sales from the Branded Product Program increased by 13.6% to $58,948,000 for the fiscal 2015 period as compared to sales of $51,877,000 in the fiscal 2014 period. This increase was primarily attributable to a higher averagenet selling price due primarily to price increases as compared to the fiscal 2014 period. Total Company-owned restaurant sales increased 20.0% to $15,874,000 during the fiscal 20152022 period compared to $13,231,000 during the fiscal 2014 period. This increasewhich was primarily attributed to operating our Coney Island and Yonkers restaurants for the entire fiscal 2015 period. Our Flagship Coney Island restaurant operated for approximately forty-four weeks during the fiscal 2014 period and our Yonkers restaurant operated for nineteen weeks during the fiscal 2014 period.offset, in part, by a 4% decrease in retail volume. The sales impact while these restaurants were closed was approximately $2,233,000. Additionally, sales at our two Coney Island restaurants during the periods operated during the fiscal 2015 period were approximately $814,000foodservice business earned higher than the periods operated during the fiscal 2014 perioddue primarily to an increase in customer countsroyalties of approximately 5.9%. Additionally, our Oceanside restaurant temporarily closed in early January 2015 for relocation and re-opened on March 25, 2015. We estimate that this closure reduced sales by approximately $260,000. Other sales increased by $285,000 during the fiscal 2015 period$247,000 as compared to the fiscal 2014 period.
License royalties were $18,011,000 in the fiscal 2015 period as compared to $8,513,000 in the fiscal 2014 period. Total royalties earned on sales of hot dogs from our retail and foodservice license agreements increased 138.9% to $16,105,000 for the 2015 fiscal period compared to $6,742,000 during the fiscal 2014 period. Royalties earned from John Morrell & Co., primarily from the retail sale of hot dogs, were $14,367,000 during the fiscal 2015 period resulting mostly from the higher rate earned pursuant to the new agreement. During the fiscal 2014 period, royalties earned during 11 months of the SMG contract, primarily from the retail sale of hot dogs, were $4,600,000. Additionally, during March 2014, we earned royalties of $548,000 from approximately two weeks of sales by John Morrell & Co during the transition period between contracts. Royalties earned from our foodservice license agreement, substantially from sales of hot dogs to Sam’s Club, were $1,738,000 during the fiscal 2015 period compared to $1,594,000 during the fiscal 2014 period. License royalties earned from the sale of Nathan’s French fries increased by $172,000 to $507,000 during the fiscal 2015 period as compared to $335,000 in the fiscal 20142022 period. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products decreasedincreased by $37,000,$603,000 during the fiscal 20152023 period as compared to the fiscal 20142022 period primarily from lowerdue to additional royalties earned from the saleon sales of mini-bagel dogsFrench fries, cocktail franks, mozzarella sticks, pickles and franks-in-the-blanket and other hors d’oeuvres.seasonings.
Franchise fees and royalties were $5,581,000increased by 11% to $4,292,000 in the fiscal 20152023 period as compared to $5,718,000$3,859,000 in the fiscal 20142022 period. Total royalties were $4,538,000$3,636,000 in the fiscal 20152023 period as compared to $4,855,000$3,304,000 in the fiscal 20142022 period. Royalties earned under the Branded Menu programsProgram were $957,000$630,000 in the fiscal 20152023 period as compared to $1,011,000$580,000 in the fiscal 2014 period due principally to a fewer number of units operating.2022 period. Royalties earned under the Branded Menu Program are not based on product purchases rather thanupon a percentage of restaurant sales.sales but are based upon product purchases. Virtual kitchen royalties were $149,000 in the fiscal 2023 period as compared to $318,000 in the fiscal 2022 period. Traditional franchise royalties were $3,581,000$2,857,000 in the fiscal 20152023 period as compared to $3,844,000$2,406,000 in the fiscal 20142022 period. Franchise restaurant sales decreasedincreased to $80,107,000$63,739,000 in the fiscal 20152023 period as compared to $85,850,000$52,319,000 in the fiscal 2014 period2022 primarily due to the impact of closed restaurants.Comparablehigher sales at airport locations; highway travel plazas; shopping malls; movie theaters; and casino locations, primarily in Las Vegas, Nevada. Comparable domestic franchise sales (consisting of 9363 Nathan’s outlets,locations, excluding sales under the Branded Menu Program) were $53,992,000 in$51,926,000 during the fiscal 20152023 period as compared to $55,548,000 in$40,112,000 during the fiscal 2014 period, a decrease of 2.8%.2022 period.
At March 29, 2015, our franchise system consisted of 29626, 2023, 232 franchised locations, including domestic, and international franchised orand Branded Menu Program franchise outlets were operating as compared to 324 units239 franchised locations, including domestic, international and Branded Menu Program outlets at March 30, 2014.27, 2022. Total franchise fee income was $1,043,000$656,000 in the fiscal 20152023 period including $143,000 of cancellation or termination feesas compared to $863,000$555,000 in the fiscal 2014 period including $288,000 of cancellation or termination fees.2022 period. Domestic franchise fee income was $276,000$110,000 in the fiscal 20152023 period as compared to $370,000$133,000 in the fiscal 20142022 period. International franchise fee income was $624,000$280,000 in the fiscal 20152023 period as compared to $205,000$241,000 in the fiscal 2022 period.
We recognized $266,000 and $181,000 of forfeited fees in the fiscal 2023 and fiscal 2022 periods, respectively. During the fiscal 2023 period, 11 franchise locations opened, including 3 new Branded Menu Program outlets. Additionally, 18 franchise locations closed, including 5 Branded Menu Program outlets. During the fiscal 2022 period, 54 franchised locations opened, including 37Branded Menu Program outlets. Additionally, 28 franchise locations closed, including 9 Branded Menu Program outlets.
Advertising fund revenue, after eliminating Company contributions, was $1,993,000 in the fiscal 2023 period and $1,972,000 during the fiscal 20142022 period. During the fiscal 2015 period, 36 new franchised outlets opened, including 13 international locations, including our first locations in Costa Rica and Malaysia, and 17 Branded Menu Program outlets, including six Arthur Treacher’s units. Additionally, during the fiscal 2015 period, a master franchisee exercised an option to acquire the rights to develop franchised outlets throughout Mexico. During fiscal 2014, 56 new franchised outlets opened,including 34 locations in Russia and nine Branded Menu Program outlets, including our first Arthur Treacher’s unit.
Costs and Expenses
Overall, our cost of sales increased $8,879,000by 15% to $61,951,000$75,172,000 in the fiscal 20152023 period as compared to $53,072,000$65,164,000 in the fiscal 20142022 period. Our gross profit (representing the difference between sales and cost of sales) was $13,569,000$15,873,000 or 18.0%17% of sales during the fiscal 20152023 period as compared to $12,449,000$12,063,000 or 19.0%16% of sales during the fiscal 20142022 period. The margin decline was primarily due to the impact of a higher average cost per pound of hot dogs for our Branded Product Program during the second and third quarters fiscal 2015.
Cost of sales in the Branded Product Program increased approximately $7,173,000by 17% to $67,646,000 during the fiscal 20152023 period as compared to $57,942,000 in the fiscal 20142022 period, primarily due to the 15% increase in the volume of hot dogs sold as discussed above, as well as a result of an approximately 17.7%1.4% increase in the average cost per pound of our hot dogs. DuringInflationary pressures eased somewhat during the latter half of fiscal 2015 period, the market cost of our hot dogs was approximately 17.1% higher than2023, yet pricing pressures on commodities, including beef and beef trimmings remain.
We did not make any purchase commitments for beef during the fiscal 2014 period. During2023 or the fiscal 2014 period, our purchase commitments yielded savings of approximately $198,000. During the fiscal 2014 period, approximately 13.4% of our product was purchased pursuant to our purchase commitments. The purchase commitments lowered our costs by approximately $0.011 per pound during the fiscal 20142022 period. If the cost of beef and beef trimmings increases and we are unable to pass on these higher costs through price increases or otherwise reduce any increase in our costs through the use of purchase commitments, our margins will be adversely impacted. We have increased our selling prices to pass on these recent cost increases and expect to perform ongoing reviews based on market conditions, but there can be no assurance that we will be able to continue to increase our selling prices.
With respect to Company-owned restaurants, our cost of sales during the fiscal 20152023 period was $9,072,000$7,526,000 or 57.2%62% of restaurant sales, as compared to $7,574,000$7,222,000 or 57.2%66% of restaurant sales in the fiscal 2014 period due primarily to the impact of higher food costs which were offset from lower labor costs. We have recently increased certain selling prices to pass on recent2022 period. The increase in cost of sales increases.during the fiscal 2023 period was primarily due to the 12% increase in sales discussed above. The decrease in cost of sales, as a percent of total restaurant sales, was due to an increase in customer counts driving higher sales. Food and paper costs as a percentage of Company-owned restaurant sales were 29%, down from 30% in the comparable period of the prior year. Labor and related expenses as a percentage of Company-owned restaurant sales were 33%, down from 36% in the comparable period in the prior year due to labor wage increases as a result of competitive pressures, offset by higher sales.
Restaurant operating expenses were $3,747,000increased by $325,000 to $3,984,000 in the fiscal 2015 period compared to $3,142,000 in the fiscal 2014 period. The increase in restaurant operating costs results primarily from the different number of months that the Coney Island and Yonkers restaurants operated in the two fiscal periods. During the fiscal 2014 period, the Coney Island restaurant operated for approximately forty-four weeks and the Yonkers restaurant operated for approximately nineteen weeks. Incremental costs were approximately $441,000 during the fiscal 20152023 period as compared to the closed periods during$3,659,000 in the fiscal 2014 period.We also2022 period. We incurred higher operating costs at our two Coney Island locationsoccupancy expenses of approximately $263,000 during the fiscal 2015 period arising from$129,000, higher occupancyutility expenses of $19,000, higher marketing expenses of $60,000, higher repairs and other expenses. Due to the temporary closingmaintenance expenses of our Oceanside restaurant for approximately three months, our restaurant operating costs were lower than the fiscal 2014 period by approximately $110,000. In connection with our October 2013$23,000, and higher insurance renewal, we incurred a significant increase in insurance costs, primarily property insurance, due to the impactexpenses of Superstorm Sandy on the insurance marketplace. Utility costs of the three restaurants operating for comparative periods increased by approximately 38% from the fiscal 2014 period to the fiscal 2015 period. We continue to be concerned about the volatile market conditions for oil and natural gas.$88,000.
Depreciation and amortization, was $1,253,000which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, were $1,135,000 in the fiscal 20152023 period as compared to $1,157,000$1,054,000 in the fiscal 20142022 period. This increase is primarily attributable to the increased depreciation from the investments made in the Yonkers and Coney Island restaurants. We also expect to incur approximately $100,000 of depreciation expense per annum in connection with the redevelopment of the relocated Oceanside restaurant that re-opened on March 25, 2015.
General and administrative expenses increased $743,000$916,000 or 6.5%7% to $12,203,000$14,061,000 in the fiscal 20152023 period as compared to $11,460,000$13,145,000 in the fiscal 20142022 period. The increase in general and administrative expenses was primarily dueattributable to increasedhigher incentive compensation costs, including stock-basedexpenses of $161,000, higher share-based compensation and payroll related taxesexpense of $885,000,$184,000, higher occupancy costsbad debt expense of $53,000$271,000 and higher insurance costs of $29,000 which were partially offset by lower marketing and associatedtrade show related expenses of $167,000 and lower professional fees of $9,000.$284,000.
Other Items
Interest incomeAdvertising fund expense, after eliminating Company contributions, was $176,000$1,988,000 in the fiscal 2015 period compared to $325,000 in the fiscal 2014 period, primarily due to lower interest income earned on marketable securities. As additional marketable securities mature or are called by the issuer and we are unable to earn similar returns upon reinvestment, we would anticipate lower investment income in the future.
The insurance gain of $2,774,000 during the fiscal 2014 period represents the difference between insurance proceeds received and the historical net book value of assets destroyed at our Flagship Coney Island restaurant and demolition costs resulting from Superstorm Sandy (See Note M).
Other income of $87,000 in the fiscal 20152023 period, as compared to $76,000$1,997,000 in the fiscal 20142022 period. The Company had previously projected that the advertising fund’s normal seasonal deficit was not going to be recovered during the fiscal 2023 period relates primarily toand recorded a subleaseprojected $175,000 deficit in its second quarter fiscal 2023 results of operations. As a result of the cancellation of certain marketing initiatives in the fourth quarter fiscal 2023, the projected deficit was eliminated.
Other Items
On March 21, 2023, the Company completed the partial redemption, in the principal amount of $30,000,000, of the 2025 Notes. In connection with the partial redemption, the Company recorded a loss on early extinguishment of debt of $357,000 that reflected the write-off of a co-branded franchised restaurant.portion of previously recorded debt issuance costs.
On January 26, 2022, the Company completed the partial redemption, in the principal amount of $40,000,000, of the 2025 Notes. In connection with the partial redemption, the Company recorded a loss on early extinguishment of debt of $1,354,000 that primarily reflected the redemption premium of $662,000 and the write-off of a portion of previously recorded debt issuance costs of $692,000.
Interest expense of $816,000$7,742,000 in the fiscal 2015 period represents accrued2023 represented interest expense of $750,000$7,234,000 on the 10.000% Senior Secured2025 Notes commencing March 10, 2015 and amortization of debt discounts and issuance costs of $66,000 during the same period. As a result$508,000.
Interest expense of the issuance of the 10.000% Senior Secured Notes, Nathan’s expects to incur$10,135,000in fiscal 2022 represented interest expense of $13.5 million per annum$9,475,000 on the 2025 Notes and annual amortization of debt discounts and issuance costs of $1,185,000. $660,000.
Interest expenseincome of $135,000$440,000 for the fiscal 2023 period represented amounts earned by the Company on its interest bearing bank and money market accounts, as compared to $110,000 in the fiscal 20142022 period.
Other income, net was $18,000 in the fiscal 2023 period represented accrued interestwhich primarily related to sublease income from a franchised restaurant, offset by a net loss on disposal of assets for capitalized software no longer in connection with Nathan’s appealuse of the SMG damages award calculated at the New York State statutory rate of 9% per annum. On July 24, 2013, we satisfied the judgment in full settlement of this matter.$87,000.
Provision for Income Taxes
The Company recognized an, other-than-temporary impairment charge on its long-term investment of $400,000effective income tax rate for the fiscal 2023 period was 26.8% compared to 26.7% in the fiscal 2014 period based on management’s assessment of the future recoverability of the investment.
Provision2022 period. The effective income tax rate for Income Taxes
In the fiscal 20152023 period thereflected income tax provision was $7,702,000 or 39.7%expense of earnings before$7,181,000 recorded on $26,804,000 of pre-tax income. The effective income taxes compared to $5,234,000 or 38.6% of income before income taxes intax rate for the fiscal 2014 period.Nathan’s2022 period reflected income tax expense of $4,940,000 recorded on $18,536,000 of pre-tax income. The effective tax rates are higher than the statutory rates primarily due to state and local taxes.
The amount of unrecognized tax benefits at March 26, 2023 was $432,000 all of which would impact Nathan’s effective tax rate, was reduced by 0.4% during the fiscal 2015 period and reduced by 0.9% during the fiscal 2014 period, due to the differing effectsif recognized. As of tax-exempt interest income. During the fiscal 2015 period,March 26, 2023, Nathan’s resolved certain uncertain tax positions, reducing the associated unrecognized tax benefits, along with the relatedhad $305,000 of accrued interest and penalties by approximately $126,000, which lowered the effective tax rate by 0.6%. Additionally, during the fiscal 2014 period, Nathan’s resolved certain uncertain tax positions, reducing the associatedin connection with unrecognized tax benefits, along with the related accrued interest and penalties, by approximately $67,000, which lowered the effective tax rate by 0.5%. Nathan’s effective tax rates without these adjustments would have been 40.7% for the fiscal 2015 period and 40.0% for the fiscal 2014 period. benefits.
Nathan’s estimates that its unrecognized tax benefits including the relatedbenefit excluding accrued interest and penalties could be further reduced by up to $183,000$19,000 during the fiscal 2016.year ending March 31, 2024.
Off-Balance Sheet ArrangementsReconciliation of GAAP and Non-GAAP 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, a non-GAAP financial measure, which is defined as net income excluding (i) interest expense; (ii) provision for income taxes and (iii) depreciation and amortization expense. The Company has also provided Adjusted EBITDA, a non-GAAP financial measure, which is defined as EBITDA, excluding (i) the loss on disposal of property and equipment; (ii) loss on debt extinguishment; and (iii) share-based compensation that the Company believes will impact the comparability of its results of operations.
The Company believes that EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, are useful to investors to assist in assessing and understanding the Company's operating performance and underlying trends in the Company's business because EBITDA and Adjusted EBITDA are (i) among the measures used by management in evaluating performance and (ii) are frequently used by securities analysts, investors and other interested parties as a common performance measure.
EBITDA and Adjusted EBITDA are not recognized terms under US GAAP and should not be viewed as alternatives to net income 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.
Fiscal Year | ||||||||
(In thousands) | 2023 | 2022 | ||||||
Net income | $ | 19,623 | $ | 13,596 | ||||
Interest expense | 7,742 | 10,135 | ||||||
Income taxes | 7,181 | 4,940 | ||||||
Depreciation & amortization | 1,135 | 1,054 | ||||||
EBITDA | 35,681 | 29,725 | ||||||
Loss on disposal of property and equipment | 87 | - | ||||||
Loss on debt extinguishment | 357 | 1,354 | ||||||
Share-based compensation | 258 | 74 | ||||||
ADJUSTED EBITDA | $ | 36,383 | $ | 31,153 |
Liquidity and Capital Resources
Cash at March 26, 2023 aggregated $29,861,000, a $20,202,000 decrease during the fiscal 2023 period as compared to cash of $50,063,000 at March 27, 2022. Net working capital decreased to $30,652,000 from $48,988,000 at March 27, 2022 due primarily to the redemption of $30,000,000 of the Company’s 2025 Notes. Through March 26, 2023, the Company also declared and paid quarterly cash dividends aggregating $7,563,000. During the fiscal 2023 period, the Company made its required semi-annual interest payments on the 2025 Notes of $3,643,750 on May 1, 2022 and November 1, 2022, as well as its required interest payment of $773,000 on March 21, 2023 in connection with the partial redemption of its 2025 Notes. On May 1, 2023, we made the first semi-annual interest payment of $2,650,000 for fiscal 2024.
On February 14, 2023, the Company announced its intent to complete the partial redemption, in the principal amount of $30,000,000, of the 2025 Notes. On March 21, 2023, the Company completed the redemption by paying cash of $30,773,000, inclusive of accrued interest, and recognized a loss on early extinguishment of approximately $357,000 that primarily reflected the write-off of a portion of previously recorded debt issuance costs. Please refer to Note J – Long-Term Debt in the accompanying consolidated financial statements for a further discussion regarding the Company’s indebtedness.
Cash provided by operations of $19,837,000 in the fiscal 2023 period is primarily attributable to net income of $19,623,000 in addition to other non-cash operating items of $2,856,000, offset by changes in other operating assets and liabilities of $2,642,000. Non-cash operating expenses consist principally of a loss on debt extinguishment of $357,000, depreciation and amortization of $1,135,000, amortization of debt issuance costs of $508,000, share-based compensation expense of $258,000, bad debts of $457,000 and a loss on disposal of assets of $87,000. In the fiscal 2023 period, accounts and other receivables increased by $2,149,000 due primarily to higher Branded Product Program receivables of $1,788,000. Prepaid expenses and other current assets increased by $454,000 due primarily to an increase in prepaid income taxes of $146,000; an increase in prepaid marketing and other expenses of $239,000 and an increase in prepaid insurance expenses of $62,000. Accounts payable, accrued expenses and other current liabilities increased by $377,000 due principally to an increase in accrued payroll and other benefits of $301,000 due primarily to higher incentive compensation accruals; an increase in accrued rebates of $532,000 due under the Branded Product Program; and an increase in deferred revenue of $530,000. Offsetting these increases was a reduction in accrued interest expense of $825,000 due to the partial redemption of our 2025 Notes.
Cash used in investing activities was $584,000 in the fiscal 2023 period primarily in connection with capital expenditures incurred for our Branded Product Program, our Coney Island restaurants and our general ledger and accounting system upgrade.
Cash used in financing activities of $39,455,000 in the fiscal 2023 period relates primarily to the payment of $30,000,000 in connection with the partial redemption of the 2025 Notes and the payments of the Company’s quarterly $0.45 per share cash dividends on June 24, 2022, September 2, 2022, December 2, 2022 and the Company’s quarterly $0.50 per share cash dividend on March 3, 2023 totaling $7,563,000. Additionally, during the fiscal 2023 period, the Company repurchased 35,434 shares of common stock at an average price of $53.39 for $1,892,000 under a 10b5-1 Plan which expired on September 13, 2022.
At March 26, 2023 and March 27, 2016,2022, Nathan’s had andid not have any open purchase commitmentcommitments to purchase approximately 645,000 pounds of hot dogs. Nathan’s may continue to enter into additional purchase commitments in the future as favorable market conditions become available. At March 29, 2015, Nathan’s did not have any open purchase commitments.
Liquidity and Capital Resources
Cash and cash equivalents at March 29, 2016 aggregated $50,228,000, a $1,165,000 decrease during the fiscal 2016 period compared to cash and cash equivalents of $51,393,000 at March 29, 2015. At March 27, 2016, marketable securities had been converted into cash and cash equivalents as compared to $7,091,000 at March 29, 2015 and net working capital decreased to $49,779,000 from $61,328,000 at March 29, 2015. These decreases are primarily due to interest payments on the notes and stock repurchases, partly offset by income from operations.
On March 10, 2015, the Company completed an offering of $135.0 million aggregate principal amount of Notes. The Company used the net proceeds of the Notes offering to pay a special dividend of $25.00 per share (approximately $116.1 million) 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 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 March 27, 2016, Nathan’s was in compliance with all covenants associated with the Notes.
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 Notes are general senior secured obligations, are fully and unconditionally guaranteed by substantially all of the Company’s wholly-owned subsidiaries and rankpari 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 are the Company and the guarantors’ senior secured obligations and rank:
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Cash provided by operations of $12,480,000 in the fiscal 2016 period is primarily attributable to net income of $6,096,000 in addition to other non-cash operating items of $3,307,000, and increased changes in other operating assets and liabilities of $3,077,000. Accounts and other receivables decreased by $740,000 due primarily to Branded Product Program sales of $628,000, and interest receivables of $120,000, partly offset by advances to the Advertising Fund of $46,000. The decrease in prepaid expenses and other current assets of $3,189,000 relates primarily to the utilization of prepaid income taxes at March 27, 2016 of $3,380,000 against Nathan’s current year estimated income tax payments, including the receipt of a refund of $1,500,000 from the IRS. The decrease in accounts payable, accrued expenses and other current liabilities of $293,000 is primarily due to decreased accounts payable of $432,000 and decreases of accrued interest of $243,000 and accrued professional fees of $228,000 partly offset by higher accrued rebates and deferred revenue of $203,000. We also paid $375,000 of accrued dividends which is presented as a financing activity below. The decrease in other liabilities of $691,000 is primarily due to decreased dividends payable on restricted stock of $375,000, settlement of certain unrecognized tax benefits of $128,000, reduced deferred rents of $99,000 and development fees of $85,000.
Cash provided by investing activities was $5,989,000 in the fiscal 2016 period. We received cash proceeds of $10,868,000 from the maturity of available-for-sale securities and $133,000 from the disposal of property and equipment. We sold all tax exempt municipal investments with the intent of re-investing in taxable investments. Prior to the sale, we purchased available-for-sale securities of $3,887,000. We also incurred capital expenditures of $1,125,000 primarily in connection with our Branded Product Program and select restaurant improvements.
Cash used in financing activities of $19,634,000 in the fiscal 2016 period relates to the Company’s purchase of 449,070 shares of its common stock at a cost of $19,231,000 during the fiscal 2016 period pursuant to our stock repurchase plan and a modified Dutch Auction tender offer, as more fully described below. The Company paid dividends of $375,000 that were previously declared on its restricted stock. Additionally, the Company incurred additional debt issuance costs of $60,000 and paid $285,000 for the payment of withholding tax on the net share settlement of employee stock options. Nathan’s expects to realize tax benefits associated with employee stock option exercises of $228,000 and also received proceeds from the exercise of employee stock options of $89,000.
During the period from October 2001 through March 27, 2016, Nathan’s purchased 5,096,757 shares of its common stock at a cost of approximately $76,031,000 pursuant to its stock repurchase plans previously authorized by the Board of Directors. Since March 26, 2007, through March 27, 2016, we have repurchased 3,205,657 shares at a total cost of approximately $68,873,000, reducing the number of shares then-outstanding by 53.3%.
On February 1, 2016 and March 11, 2016, the Company’s Board of Directors authorized increases to the sixth stock repurchase plan for the purchaserepurchase of up to 1,200,000 shares of its common stock on behalf of the Company. As of March 27, 2016,26, 2023, Nathan’s has repurchased 909,1261,101,884 shares at a cost of $28,369,000approximately $39,000,000 under the sixth stock repurchase plan. At March 27, 2016,26, 2023, there were 290,87498,116 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-negotiatedprivately negotiated transactions, at prices deemed appropriate by management. There is no set time limit on the repurchases.
On March 11, 2016, the Company and Mutual Securities, Inc. (“MSI”) entered into an agreement (the “Agreement”) pursuant to which MSI has been authorized on the Company’s behalf to purchase up to 175,000 shares of the Company’s common stock, $.01 par value (the “Common Stock”), commencing on March 21, 2016. The MSI Agreement 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 stock purchase plans.
On December 2, 2015, we purchased 88,672 shares of common stock in a modified Dutch Auction tender offer at a price of $44.00 per share. The total cost was $4,056,000, including fees and expenses related to the modified Dutch Auction tender offer.
Management believes that available cash, 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 March 27, 201626, 2023 aggregating $50,228,000.$29,861,000. Our Board routinely monitors and assesses its cash position and our current and potential capital requirements. On February 2, 2023, the Board authorized the increase of its regular quarterly dividend to $0.50 from $0.45. During the fiscal 2023 period, the Company declared and paid three quarterly dividends of $0.45 per share and one quarterly dividend of $0.50 per share, aggregating $7,563,000.
Effective June 8, 2023, the Board declared its first quarterly cash dividend of $0.50 per share for fiscal 2024 which is payable on June 28, 2023 to stockholders of record as of the close of business on June 20, 2023.
If the Company pays regular quarterly cash dividends for the remainder of fiscal 2024 at the same rate as declared in the first quarter of fiscal 2024, the Company’s total cash requirement for dividends for all of fiscal 2024 would be approximately $8,159,000 based on the number of shares of common stock outstanding at June 2, 2023. The Company intends to declare and pay quarterly cash dividends; however, there can be no assurance that any additional quarterly dividends will be declared or paid or of the amount or timing of such dividends, if any.
Our ability to pay future dividends is limited by the terms of the Indenture for the 2025 Notes. In March 2015, we completed a dividend recapitalization,addition, the payment of any cash dividends in the future, are subject to return approximately $116,100,000 tofinal determination of the Board and will be dependent upon our shareholdersearnings and wefinancial requirements. We may continue toalso return capital to our shareholdersstockholders through stock repurchases, subject to any restrictions in the Indenture, although there is no assurance that the Company will make any repurchases under its existing stock-repurchasestock repurchase plan.
We may from time to time seek to redeem additional portions of our 2025 Notes, through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on market conditions, our liquidity requirements, and other factors.
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, fund our dividend program and may 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. Beginning inIn the fiscal year ending March 27, 2016,26, 2023, we were required to make interest payments of approximately $13.5 million.$8,061,000, all of which have been made as of March 21, 2023. During the fiscal year ending March 31, 2024, we will be required to make interest payments of $5,300,000. On September 15, 2015 and March 15, 2016, Nathan’s paid interest of $6,937,500 and $6,750,000, respectively. The September 15, 2015May 1, 2023, we made the first semi-annual interest payment included paymentof $2,650,000 for 5 days of interest accrued infiscal 2024.
Management believes that available cash and cash generated from operations should provide sufficient capital to finance our operations, satisfy our debt service requirements, fund dividend distributions and stock repurchases for at least the fiscal 2015 period.next 12 months.
At March 27, 2016,26, 2023, we sublet one property to a franchisee that we lease from a third party. We remain contingently liable for all costs associated with these propertiesthis property including: rent, property taxes and insurance. We may incur future cash payments with respect to such properties,property, consisting primarily of future lease payments, including costs and expenses associated with terminating any of such leases.lease.
On December 1, 2009, a wholly-owned subsidiaryOur contractual obligations primarily consist of the Company executed a Guaranty2025 Notes and the related interest payments, operating leases, and employment agreements with certain executive officers. These contractual obligations impact our short-term and long-term liquidity and capital resource needs. There have been no material changes in our contractual obligations since March 27, 2022 except for the partial redemption of Leasethe 2025 Notes on March 21, 2023 discussed above.
Inflationary Impact
Inflationary pressures on labor and rising commodity prices have impacted our consolidated results of operations during fiscal 2023, and we expect this trend will continue into fiscal 2024.
Our average cost of hot dogs during fiscal 2023 was approximately 1.4% higher than during fiscal 2022. Our average cost of hot dogs during fiscal 2022 was approximately 19% higher than during fiscal 2021. Inherent volatility experienced in connection with its re-franchising of a restaurant located in West Nyack, New York. The Guaranty extended through the fifth Lease Year,certain commodity markets, such as defined in the lease, which has expired. The Guarantythose for beef and beef trimmings due to seasonal shifts, climate conditions, industry demand, inflationary pressures and other macroeconomic factors could have been called upon in the eventan adverse effect on our results of a default by the tenant/franchisee. Nathan’s believes that its franchisee has fulfilled all of its obligations that Nathan’s guaranteedoperations. This impact will depend on our ability to manage such volatility through price increases and Nathan’s has not been required to make any payments pursuant to the Guaranty. In connection with the Nathan’s franchise agreement, Nathan’s has received a personal guaranty from the franchisee for all obligations under the Guaranty.
The following schedule represents Nathan’s cash contractual obligations and commitments by maturity as of March 27, 2016 (in thousands):
Payments Due by Period | ||||||||||||||||||||
Cash Contractual Obligations | Total | Less than | 1-3 Years | 3-5 Years | More than | |||||||||||||||
Long term debt (a) | $ | 135,000 | $ | - | $ | - | $ | 135,000 | $ | - | ||||||||||
Employment Agreements | 2,571 | 1,146 | 1,025 | 400 | - | |||||||||||||||
Purchase Commitment | 1,310 | 1,310 | - | - | - | |||||||||||||||
Dividends Payable | 625 | 375 | 250 | - | - | |||||||||||||||
Operating Leases | 14,431 | 1,618 | 3,299 | 2,608 | 6,906 | |||||||||||||||
Gross Cash Contractual Obligations | 153,937 | 4,449 | 4,574 | 138,008 | 6,906 | |||||||||||||||
Sublease Income | 2,728 | 303 | 656 | 641 | 1,128 | |||||||||||||||
Net Cash Contractual Obligations | $ | 151,209 | $ | 4,146 | $ | 3,918 | $ | 137,367 | $ | 5,778 |
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Inflationary Impactproduct mix.
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. From 2011 through 2014, we experienced unprecedented increases in the cost of beef. After multi-year increases, beginning March 2015, the beef markets stabilized through June 2015 before subsequently declining bycompetitive pressure on labor rates as much as 30%. As a result of the decline since June 2015,increase in the market price of hot dogsminimum hourly wage for fast food workers which increased to $15.00 in New York state during the fiscal 2016 period was approximately 11.6% lower 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.In anticipation of higher costs beginning 2016,2022 where our Company-owned restaurants are located. Additionally, there has been an increased demand for labor at all levels which has resulted in greater challenges retaining adequate staffing levels at our Company-owned restaurants; our franchised restaurants and Branded Menu Program locations; as well as for certain vendors in our supply chain that we entered into a purchase commitmentdepend on for approximately 2.6 million pounds of hot dogs to be purchased after January 1, 2016. The market price remained abnormally low during January and February 2016, resultingour commodities. We remain in higher costs of approximately $87,000 during the fourth quarter fiscal 2016 in connectioncontact with our purchase commitment, whichmajor suppliers and to date we expect will be offset during the first quarter fiscal 2017. In the past, we successfully entered into purchase commitments for a portion ofhave not experienced significant disruptions in our hot dogs to reduce the impact of increasing market prices. supply chain.
We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during fiscal 2017.2024. To the extent that beef prices increase as compared to earlier periods, it could impact our results of operations. In the past, we have entered into purchase commitments for a portion of our hot dogs to reduce the impact of increasing market prices. 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 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.
New York State recently passed legislation increasing the minimum hourly wage for fast food workers of restaurant chains with 30 or more locations nationwide. The increase will be phased in differently between New York City and the rest of New York State. Effective December 31, 2015, the minimum wage increased to $10.50 per hour and $9.75 per hour in New York City and outside of New York City, respectively.
In New York City, the hourly rateContinued increases in labor costs, commodity prices and other operating expenses, including health care, could adversely affect our operations. We attempt to manage inflationary pressures and rising commodity costs, at least in part, through raising prices. Delays in implementing price increases, competitive pressures, consumer spending levels and other factors may limit our ability to offset these rising costs. Volatility in commodity prices, including beef and beef trimmings could have a significant adverse effect on our results of pay will increase to:operations.
$12.00 on Dec. 31, 2016; $13.50 on Dec. 31, 2017; and $15.00 on Dec. 31, 2018.
The minimum hourly rate of pay for the remainder of New York State will increase to:
$10.75 on Dec. 31, 2016; $11.75 on Dec. 31, 2017; $12.75 on Dec. 31, 2018; $13.75 on Dec. 31, 2019;
$14.50 on Dec. 31, 2020; and $15.00 on July 1, 2021.
All of Nathan’s Company-operated restaurants are within New York State, three of which operate within New York City that have been affected by this new legislation. Our average hourly labor costs have increased beginning January 2016 as a result of the new minimum wage legislation in New York State. We estimate that restaurant average hourly labor costs have increased by approximately 12.2% because of the minimum wage increase.
The Company is further studying the impact on the Company’s operations and is developing strategies and tactics, including pricing and potential operating efficiencies, to minimize the effects of these increases. We have recently increased certain selling prices to pass on recent cost of sales increases. However, if we are unable to fully offset these and future increases through pricing and operating efficiencies, our margins and profits will be negatively affected. We believe that thesethe increases in the minimum wage couldand other changes in employment laws have had a significant financial impact on our financial results and the results of our franchisees that operate in New York State.
Effective April 1, 2014, Our business could be negatively impacted if the Citydecrease in margins for our franchisees results in the potential loss of New York, passed legislation requiring employers to offer paid sick leave to all employees, including part-time employees that work more than 80 hours fornew franchisees or 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 thoseclosing of the restaurant industry and we might have to further reconsider our pricing strategy as a means to offset reduced operating margins.significant number of franchised restaurants.
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,”Statements”, “Risk Factors”, and “Notes to Consolidated Financial Statements” in this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Cash and Cash Equivalents
We have historically invested our cash and cash equivalents in money market funds or short-term, fixed rate, highly rated and highly liquid instruments which are generally reinvested when they mature. Although these 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 March 27, 2016,26, 2023, Nathan’s cash andbalanceaggregated $29,861,000. Earnings on this cash equivalents aggregated $50,228,000.Earnings on these cash and cash equivalents would increase or decrease by approximately $126,000$75,000 per annum for each 0.25% change in interest rates.
Marketable Securities
As of March 27, 2016, Nathan’s did not have any marketable securities on hand. Nathan’s anticipates investing in marketable securities in the future. Marketable securities are considered at risk with respect to interest rates to determine their current market value. Our future rate of return could also be affected at the time of reinvestment as a result of intervening events.
Borrowings
At March 27, 2016,26, 2023, we had $135.0 million$80,000,000 of 6.625% 2025 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.November 2025. Interest expense on these borrowings would increase or decrease by approximately $338,000$200,000 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
TheInflationary pressures on labor and rising commodity prices have directly impacted our consolidated results of operation during fiscal 2023, most notably within our restaurant operations and Branded Product Program segments. We expect this trend to continue into fiscal 2024. Our average cost of commodities is subject to market fluctuation. From 2011 through 2014, we experienced unprecedented increases in the cost of beef. After multi-year increases, beginning March 2015, the beef markets stabilized through June 2015 before subsequently declining by as much as 30%. As a result of the decline since June 2015, the market price of hot dogs during the fiscal 2016 period2023 was approximately 11.6% lower than the fiscal 2015 period. The market price of hot dogs during the fiscal 2015 period was approximately 17.1%1.4% higher than theduring fiscal 2014 period.In anticipation of higher costs beginning 2016, we entered into a purchase commitment for approximately 2.6 million pounds of hot dogs to be purchased after January 1, 2016. The market price remained abnormally low during January and February 2016, resulting in higher costs of approximately $87,000 during the fourth quarter fiscal 2016 in connection with our purchase commitment, which we expect will be offset during the first quarter fiscal 2017. In the past, we have successfully entered into purchase commitments for a portion of our hot dogs to reduce the impact of increasing market prices. 2022.
We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during fiscal 2017.2024.Factors that affect beef prices are outside of our control and include foreign and domestic supply and demand, inflation, weather and seasonality. To the extent that beef prices increase as compared to earlier periods, it could impact our results of operations. In the past, we have entered into purchase commitments for a portion of our hot dogs to reduce the impact of increasing market prices. 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.rising rates.
With the exception of purchase 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. We have attempted to enter sales agreements with our customers that are correlated to our cost of beef, thus reducing our market volatility, or have passed through permanent increases in our commodity prices to our customers that are not on formula pricing, thereby reducing the impact of long-term increases on our financial results. A short-term increase or decrease of 10.0%10% in the cost of our food and paper products for the fifty-two weeksyear ended March 27, 201626, 2023 would have increased or decreased our cost of sales by approximately $5,164,000.$6,934,000.
Foreign Currencies
Foreign franchisees and other business partners 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 8. Financial Statements and Supplementary Data.
Item 8. | Financial Statements and Supplementary Data. |
The consolidated financial statements and supplementary data are submitted as a separate section of this report beginning on Page F-1.
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
None
Item 9A. | Controls and Procedures. |
Item 9A. 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 requireddefined by Exchange Act Rule 13a-15.13a-15(e) and Exchange Act Rule 15d-15(e). 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.
Management’sManagement’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting.reporting, as defined by Exchange Act Rule 13a-15(f) and Exchange Act Rule 15d-15(f). Our internal control over financial reporting includes those policies and procedures that:
● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
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● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Management has assessed the effectiveness of our system of internal control over financial reporting as of March 27, 2016.26, 2023. In making this assessment, management used the framework in Internal Control — Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment and the criteria set forth by COSO in 2013, management believes that Nathan’s maintained effective internal control over financial reporting as of March 27, 2016.26, 2023. The effectiveness of our internal control over financial reporting as of March 27, 2016,26, 2023, has been audited by Grant ThorntonMarcum LLP, an independent registered public accounting firm which has also audited our consolidated financial statements, as stated in its attestation report which is included herein.
Changes in Internal Control Over Financial ReportingControls
There were no changes in our internal controls over financial reporting that occurred during the thirteen weeksquarter ended March 27, 201626, 2023 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.
Item 9B. | Other Information. |
Item 9B. Other Information.
As disclosed in this Annual Report on Form 10-K, the Company’s Board of Directors has declared a $0.50 per share dividend payable on June 28, 2023 to shareholders of record at the close of business on June 20, 2023.
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. |
None.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders and Board of Directors and Shareholdersof
Nathan’s Famous, Inc.
Opinion on Internal Control over Financial Reporting
We have audited theNathan’s Famous, Inc. (the “Company”) and Subsidiaries’ internal control over financial reporting of Nathan’s Famous, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of March 27, 2016,26, 2023, based on criteria established in the 2013Internal Control—IntegratedControl-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Commission. In our opinion, the Companymaintained, in all material respects, effective internal control over financial reporting as of March 26, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets as of March 26, 2023 and March 27, 2022 and the related consolidated statements of earnings, stockholders’ deficit, and cash flows and the related notes for each of the fifty-two week periods ended March 26, 2023 and March 27, 2022of the Company, and our report dated June 8, 2023expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’sCompany's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s“Management Annual Report on Internal Control Overover Financial Reporting.Reporting”. Our responsibility is to express an opinion on the Company’sCompany's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, andrisk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of itsthe inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 27, 2016, based on criteria established in the 2013Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended March 27, 2016, and our report dated June 10, 2016 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Marcum llp
New York, New YorkNY
June 10, 20168, 2023
PART III
Item 10. | Directors, Executive Officers and Corporate Governance. |
The information required in response to this Item is incorporated herein by reference from the discussions under the captionsProposal 1 – Election of Directors, Corporate Governance Management and Security Ownership in our proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this Report.
Our Board of Directors has adopted a Financial Officer Code of Ethics applicable to the Company’s Chief Executive Officer, Chief Financial Officer and all other members of the Company’s Finance Department. This Code of Ethics is posted on the Company’s website within a broader Code of Business Conduct and Ethics at www.nathansfamous.com in the Investor Relations section. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or a waiver from, the provision of our Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and that relates to any element of such provision of our Code of Ethics by posting such information on our website within four business days of the date of such amendment or waiver. In the case of a waiver, the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver will also be disclosed.
Item 11. Executive Compensation.
Item 11. | Executive Compensation. |
The information required in response to this Item is incorporated herein by reference from the discussion under the captionExecutive Compensation, including the Summary Compensation and other tables, Non-Qualified Deferred Compensation, Risk Consideration in our Compensation Programs and 20162023 Director Compensation in our proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required in response to this Item is incorporated herein by reference from the discussion under the captionEquity Plan Information andSecurity Ownership in our proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this Report.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information required in response to this Item is incorporated herein by reference from the discussion under the captionCorporate Governance – Director Independence and Corporate Governance – Certain Relationships andRelated Persons transactions in our proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this Report.
Item 14. Principal Accountant Fees and Services.
Item 14. | Principal Accountant Fees and Services. |
Audit Fees
We were billed by Grant ThorntonMarcum LLP the aggregate amount of approximately $244,000$311,000 in respect ofthe fiscal 20162023 period and $429,000 $297,000in respect ofthe fiscal 20152022 period, for fees for professional services rendered for the audit of our annual financial statements and the effectiveness of our internal control over financial reporting, as well as the review of our financial statements included in our FormsForm 10-Q. The fiscal 2015 amount includes billings by Grant Thornton LLP of approximately $189,000 for fees for professional services rendered for the review of interim financial information in connection with the issuance of their comfort letter in conjunction with the private placement of the Company’s Notes.
Audit-Related Fees
Grant ThorntonMarcum LLP did not render any audit-related services for fiscal 20162023 and 20152022, respectively and, accordingly, did not bill for any such services.
Tax Fees
Grant ThorntonMarcum LLP did not render any tax compliance, tax advice or tax planning services for fiscal 20162023 and 20152022, respectively and, accordingly, did not bill for any such services.
All Other Fees
Grant ThorntonMarcum LLP did not render any other services for fiscal 20162023 and 20152022, respectively, and accordingly, did not bill for any such services.
Pre-Approval Policies
Our Audit Committee has not adopted any pre-approval policies. Instead, the Audit Committee will specifically pre-approve the provision by Grant ThorntonMarcum LLP of all audit and non-audit services.
Our Audit Committee approved all of the audit services provided by Grant ThorntonMarcum LLP during 2016fiscal 2023 and 2015.2022, respectively.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
Item 15. | Exhibits and Financial Statement Schedules. |
(a) (1) |
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The consolidated financial statements listed in the accompanying index to the consolidated financial statements and schedule on Page F-1 are filed as part of this Report.
(2) |
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None.
(3) |
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Certain of the following exhibits were previously filed as exhibits to other reports or registration statements filed by the Registrant under the Securities Act of 1933 or under the Securities Exchange Act of 1934 and are therefrom incorporated by reference.
Exhibit No. | Exhibit |
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 |
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4.3 | |
10.1 | Leases for premises at Coney Island, New York, as follows: (Incorporated by reference to Exhibit 10.3 to Registration Statement on Form S-1 No. 33-56976.) |
a) Lease, dated November 22, 1967, between Nathan’s Realty Associates and the Company. | |
b) Lease, dated November 22, 1967, between Ida’s Realty Associates and the Company. | |
10.2 | Form of Standard Franchise Agreement. (Incorporated by reference to Exhibit 10.12 to Registration Statement on Form S-1 No. 33-56976.) |
10.3 |
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10.17 | |
10.18 | |
10.19 | |
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10.22 | |
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10.24 | |
16.1 | |
19.1 | |
19.2 | (1) Policy on Trading Procedures For Covered Individuals |
21 | |
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31.1 |
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31.2 | |
32.1 | |
32.2 |
101.INS | Inline XBRL Instance Document. |
101.SCH | |
Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
*(1) Filed herewith.
**Filed with confidential portions omitted pursuant to request for confidential treatment. The omitted portions have been separately filed with the SEC.
*** Indicates a management plan or arrangement.
Item 16. | Form 10-K Summary. |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 10th8th day of June, 2016.2023.
Nathan’s Famous, Inc. | |
/s/ ERIC GATOFF | |
Eric Gatoff | |
Chief Executive Officer | |
(Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 10th8th day of June, 2016.2023.
/s/ ERIC GATOFF | |
Eric Gatoff | |
Chief Executive Officer | |
(Principal Executive Officer) | |
/s/ HOWARD LORBER | |
Howard Lorber | |
Executive Chairman | |
/s/ | |
| |
Vice President - Finance and Chief Financial Officer | |
(Principal Financial and Accounting Officer) | |
/s/ WAYNE NORBITZ | |
Wayne Norbitz | |
Director | |
/s/ ROBERT J. EIDE | |
Robert J. Eide | |
Director | |
/s/ BARRY LEISTNER | |
Barry Leistner | |
Director | |
| |
/s/ BRIAN GENSON | |
Brian Genson | |
Director | |
| |
/s/ ATTILIO F. PETROCELLI | |
Attilio F. Petrocelli | |
Director | |
| |
/s/ CHARLES RAICH | |
Charles Raich | |
Director | |
/s/ ANDREW LEVINE | |
Andrew Levine | |
Director |
Nathan’s Famous, Inc. and Subsidiaries
TABLE OF CONTENTS
Page | |
Report of Independent Registered Public Accounting Firm (PCAOB ID: 688) | F-2 |
Consolidated Balance Sheets | F-3 |
Consolidated Statements of Earnings | F-4 |
Consolidated Statements of | F-5 |
|
|
Consolidated Statements of Cash Flows |
|
Notes to Consolidated Financial Statements |
|
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors and Shareholdersof
Nathan’s Famous, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Nathan’s Famous, Inc. (a Delaware corporation) and subsidiaries (the “Company”) and Subsidiaries as of March 27, 201626, 2023 and March 29, 2015, and27, 2022, the related consolidated statements of earnings, comprehensive income, stockholders’ (deficit) equity,deficit and cash flows for each of the fifty-two weeksweek periods ended March 27, 2016, March 29, 2015,26, 2023 and March 30, 2014. Our audits of27, 2022, and the basic consolidated financial statements includedrelated notes(collectively referred to as the financial statement schedule listed in the index appearing under Item 15(a)(2)“financial statements”). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nathan’s Famous, Inc. and subsidiariesthe Company as of March 27, 201626, 2023 and March 29, 2015,27, 2022, and the results of theirits operations and theirits cash flows for each of the fifty-two weeksweekperiods ended March 27, 2016, March 29, 2015,26, 2023 and March 30, 201427, 2022, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material aspects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’sCompany's internal control over financial reporting as of March 27, 2016,26, 2023, based onthe criteria established in the 2013Internal Control—Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), in 2013 and our report dated June 10, 2016 8, 2023, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ GRANT THORNTONMarcum llp
Marcum LLP
We have served as the Company’s auditor since 2018.
New York, New York
NY
June 10, 2016
8, 2023
Nathan’sNathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| March 27, 2016 | March 29, 2015 | ||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 50,228 | $ | 51,393 | ||||
Marketable securities | - | 7,091 | ||||||
Accounts and other receivables, net | 8,721 | 9,499 | ||||||
Inventories | 687 | 822 | ||||||
Prepaid expenses and other current assets (Note F) | 1,343 | 4,532 | ||||||
Total current assets | 60,979 | 73,337 | ||||||
Property and equipment, net of accumulated depreciationof $7,190 and $6,946, respectively | 9,013 | 9,257 | ||||||
Goodwill | 95 | 95 | ||||||
Intangible asset | 1,353 | 1,353 | ||||||
Other assets | 109 | 347 | ||||||
$ | 71,549 | $ | 84,389 | |||||
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 4,887 | $ | 5,319 | ||||
Accrued expenses and other current liabilities | 6,176 | 6,412 | ||||||
Deferred franchise fees | 137 | 278 | ||||||
Total current liabilities | 11,200 | 12,009 | ||||||
Long-term debt, net of unamortized debt discounts and issuance costs of $4,734and $5,860, respectively (Note K) | 130,266 | 129,140 | ||||||
Other liabilities | 1,706 | 2,397 | ||||||
Deferred income taxes | 713 | 751 | ||||||
Total liabilities | 143,885 | 144,297 | ||||||
COMMITMENTS AND CONTINGENCIES (Note M) | ||||||||
STOCKHOLDERS’ (DEFICIT) | ||||||||
Common stock, $.01 par value; 30,000,000 shares authorized;9,274,066and 9,252,097shares issued; and 4,177,309 and 4,604,410shares outstanding at March 27, 2016 and March 29, 2015, respectively | 93 | 93 | ||||||
Additional paid-in capital | 60,950 | 60,196 | ||||||
(Accumulated deficit) | (57,348 | ) | (63,444 | ) | ||||
Accumulated other comprehensive income | - | 47 | ||||||
3,695 | (3,108 | ) | ||||||
Treasury stock, at cost, 5,096,757 and 4,647,687 shares at March 27, 2016and March 29, 2015, respectively | (76,031 | ) | (56,800 | ) | ||||
Total stockholders’ (deficit) | (72,336 | ) | (59,908 | ) | ||||
$ | 71,549 | $ | 84,389 |
| March 26, 2023 | March 27, 2022 | ||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash | $ | 29,861 | $ | 50,063 | ||||
Accounts and other receivables, net (Note D) | 15,066 | 13,374 | ||||||
Inventories | 539 | 522 | ||||||
Prepaid expenses and other current assets (Note E) | 1,895 | 1,441 | ||||||
Total current assets | 47,361 | 65,400 | ||||||
Property and equipment, net of accumulated depreciation of $10,871 and $10,344, respectively (Note F) | 3,321 | 3,785 | ||||||
Operating lease assets (Note K) | 6,421 | 7,416 | ||||||
Goodwill | 95 | 95 | ||||||
Intangible asset, net | 869 | 1,043 | ||||||
Deferred income taxes (Note H) | 375 | 582 | ||||||
Other assets | 168 | 195 | ||||||
Total assets | $ | 58,610 | $ | 78,516 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 6,461 | $ | 6,381 | ||||
Accrued expenses and other current liabilities (Note G) | 8,130 | 7,833 | ||||||
Current portion of operating lease liabilities (Note K) | 1,782 | 1,849 | ||||||
Deferred franchise fees | 336 | 349 | ||||||
Total current liabilities | 16,709 | 16,412 | ||||||
Long-term debt, net of unamortized debt issuance costs of $952 and $1,817, respectively (Note J) | 79,048 | 108,183 | ||||||
Operating lease liabilities (Note K) | 5,406 | 6,487 | ||||||
Other liabilities | 737 | 674 | ||||||
Deferred franchise fees | 1,272 | 1,748 | ||||||
Total liabilities | 103,172 | 133,504 | ||||||
COMMITMENTS AND CONTINGENCIES (Note M) | ||||||||
STOCKHOLDERS’ DEFICIT | ||||||||
Common stock, $.01 par value; 30,000,000 shares authorized; 9,369,235 shares issued; and 4,079,720 and 4,115,154 shares outstanding at March 26, 2023 and March 27, 2022, respectively | 94 | 94 | ||||||
Additional paid-in capital | 62,565 | 62,307 | ||||||
Accumulated deficit | (20,559 | ) | (32,619 | ) | ||||
Stockholders’ equity before treasury stock | 42,100 | 29,782 | ||||||
Treasury stock, at cost, 5,289,515 and 5,254,081 shares at March 26, 2023 and March 27, 2022, respectively | (86,662 | ) | (84,770 | ) | ||||
Total stockholders’ deficit | (44,562 | ) | (54,988 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 58,610 | $ | 78,516 |
The accompanying notes are an integral part of these consolidated financial statements.
Nathan’sNathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share and per share amounts)
Fifty-Two | Fifty-Two | |||||||||||||||||||
weeks ended | weeks ended | |||||||||||||||||||
Fifty-Two weeks ended March 27, 2016 | Fifty-Two weeks ended March 29, 2015 | Fifty-Two weeks ended March 30, 2014 | March 26, 2023 | March 27, 2022 | ||||||||||||||||
REVENUES | ||||||||||||||||||||
Sales | $ | 76,031 | $ | 75,520 | $ | 65,521 | $ | 91,045 | $ | 77,227 | ||||||||||
License royalties | 19,815 | 18,011 | 8,513 | 33,455 | 31,824 | |||||||||||||||
Franchise fees and royalties | 5,044 | 5,581 | 5,718 | 4,292 | 3,859 | |||||||||||||||
Advertising fund revenue | 1,993 | 1,972 | ||||||||||||||||||
Total revenues | 100,890 | 99,112 | 79,752 | 130,785 | 114,882 | |||||||||||||||
COSTS AND EXPENSES | ||||||||||||||||||||
Cost of sales | 57,998 | 61,951 | 53,072 | 75,172 | 65,164 | |||||||||||||||
Restaurant operating expenses | 3,557 | 3,747 | 3,142 | 3,984 | 3,659 | |||||||||||||||
Depreciation and amortization | 1,255 | 1,253 | 1,157 | 1,135 | 1,054 | |||||||||||||||
General and administrative expenses | 13,117 | 12,203 | 11,460 | 14,061 | 13,145 | |||||||||||||||
Advertising fund expense | 1,988 | 1,997 | ||||||||||||||||||
Total costs and expenses | 75,927 | 79,154 | 68,831 | 96,340 | 85,019 | |||||||||||||||
Income from operations | 24,963 | 19,958 | 10,921 | 34,445 | 29,863 | |||||||||||||||
Interest expense | (14,630 | ) | (816 | ) | (135 | ) | (7,742 | ) | (10,135 | ) | ||||||||||
Loss on debt extinguishment (NOTE J) | (357 | ) | (1,354 | ) | ||||||||||||||||
Interest income | 52 | 176 | 325 | 440 | 110 | |||||||||||||||
Insurance gain (Note M.4) | - | - | 2,774 | |||||||||||||||||
Impairment charge – long-term investment (Note G) | (100 | ) | - | (400 | ) | |||||||||||||||
Other income, net | 99 | 87 | 76 | 18 | 52 | |||||||||||||||
Income before provision for income taxes | 10,384 | 19,405 | 13,561 | 26,804 | 18,536 | |||||||||||||||
Provision for income taxes | 4,288 | 7,702 | 5,234 | 7,181 | 4,940 | |||||||||||||||
Net income | $ | 6,096 | $ | 11,703 | $ | 8,327 | $ | 19,623 | $ | 13,596 | ||||||||||
PER SHARE INFORMATION | ||||||||||||||||||||
Weighted average shares used in computing income per share: | ||||||||||||||||||||
Basic | 4,089,000 | 4,115,000 | ||||||||||||||||||
Diluted | 4,090,000 | 4,115,000 | ||||||||||||||||||
Income per share: | ||||||||||||||||||||
Basic | $ | 1.38 | $ | 2.61 | $ | 1.87 | $ | 4.80 | $ | 3.30 | ||||||||||
Diluted | $ | 1.37 | $ | 2.55 | $ | 1.81 | $ | 4.80 | $ | 3.30 | ||||||||||
Cash dividends declared per share | $ | - | $ | 25.00 | $ | - | ||||||||||||||
Weighted average shares used in computing incomeper share: | ||||||||||||||||||||
Basic | 4,430,000 | 4,486,000 | 4,450,000 | |||||||||||||||||
Diluted | 4,463,000 | 4,588,000 | 4,605,000 | |||||||||||||||||
Dividends declared per share | $ | 1.85 | $ | 1.50 |
The accompanying notes are an integral part of these consolidated financial statements.
Nathan’sNathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMESTOCKHOLDERS’ DEFICIT
Fifty-two weeks ended March 26, 2023 and the Fifty-two weeks ended March 27, 2022
(in thousands)thousands, except share and per share amounts)
Fifty-Two weeks ended March 27,2016 | Fifty-Two weeks ended March 29, 2015 | Fifty-Two weeks ended March 30, 2014 | ||||||||||
Net income | $ | 6,096 | $ | 11,703 | $ | 8,327 | ||||||
Other comprehensive loss, net of deferred income taxes: | ||||||||||||
Unrealized losses on marketable securities | - | (102 | ) | (180 | ) | |||||||
Less: Reclassification adjustment for gainsincluded in net income | 47 | - | - | |||||||||
Other comprehensive loss | (47 | ) | (102 | ) | (180 | ) | ||||||
Comprehensive income | $ | 6,049 | $ | 11,601 | $ | 8,147 |
Additional | Total | |||||||||||||||||||||||||||
Common | Common | Paid-in | Accumulated | Treasury Stock, at Cost | Stockholders’ | |||||||||||||||||||||||
Shares | Stock | Capital | Deficit | Shares | Amount | Deficit | ||||||||||||||||||||||
Balance, March 28, 2021 | 9,369,015 | $ | 94 | $ | 62,240 | $ | (40,042 | ) | 5,254,081 | $ | (84,770 | ) | $ | (62,478 | ) | |||||||||||||
Shares issued in connection with share-based compensation plans | 220 | - | - | - | - | - | - | |||||||||||||||||||||
Withholding tax on net share settlement of share-based compensation plans | - | - | (7 | ) | - | - | - | (7 | ) | |||||||||||||||||||
Dividends on common stock | - | - | - | (6,173 | ) | - | - | (6,173 | ) | |||||||||||||||||||
Share-based compensation | - | - | 74 | - | - | - | 74 | |||||||||||||||||||||
Net income | - | - | - | 13,596 | - | - | 13,596 | |||||||||||||||||||||
Balance, March 27, 2022 | 9,369,235 | $ | 94 | $ | 62,307 | $ | (32,619 | ) | 5,254,081 | $ | (84,770 | ) | $ | (54,988 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
Nathan’sNathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITYSTOCKHOLDERS’ DEFICIT
Fifty-two weeks ended March 27, 2016, Fifty-two weeks ended March 29, 201526, 2023 and the Fifty-two weeks ended March 30, 201427, 2022
(in thousands, except share and per share amounts)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common | Common | Paid-in | Retained | Comprehensive | Treasury Stock, at Cost | Stockholders’ | ||||||||||||||||||||||||||
Shares | Stock | Capital | Earnings | Income | Shares | Amount | Equity | |||||||||||||||||||||||||
Balance, March 31, 2013 | 8,958,181 | $ | 90 | $ | 54,491 | $ | 32,636 | $ | 329 | 4,579,563 | $ | (53,398) | $ | 34,148 | ||||||||||||||||||
Shares issued in connection with share-based compensation plans | 134,002 | 1 | 943 | - | - | - | - | 944 | ||||||||||||||||||||||||
Withholding tax on net share settlement of share-based compensation plans | - | - | (772 | ) | - | - | - | - | (772 | ) | ||||||||||||||||||||||
Repurchase of common stock | - | - | - | - | - | 30,463 | (1,486 | ) | (1,486 | ) | ||||||||||||||||||||||
Income tax benefit on stock option exercises | - | - | 2,195 | - | - | - | - | 2,195 | ||||||||||||||||||||||||
Share-based compensation | - | - | 721 | - | - | - | - | 721 | ||||||||||||||||||||||||
Unrealized losses on available-for-sale securities, net of deferred incometax benefit of $119 | - | - | - | - | (180 | ) | - | - | (180 | ) | ||||||||||||||||||||||
Net income | - | - | - | 8,327 | - | - | - | 8,327 | ||||||||||||||||||||||||
Balance, March 30, 2014 | 9,092,183 | $ | 91 | $ | 57,578 | $ | 40,963 | $ | 149 | 4,610,026 | $ | (54,884 | ) | $ | 43,897 |
Additional | Total | |||||||||||||||||||||||||||
Common | Common | Paid-in | Accumulated | Treasury Stock, at Cost | Stockholders’ | |||||||||||||||||||||||
Shares | Stock | Capital | Deficit | Shares | Amount | Deficit | ||||||||||||||||||||||
Balance, March 27, 2022 | 9,369,235 | $ | 94 | $ | 62,307 | $ | (32,619 | ) | 5,254,081 | $ | (84,770 | ) | $ | (54,988 | ) | |||||||||||||
Repurchase of common stock | - | - | - | - | 35,434 | (1,892 | ) | (1,892 | ) | |||||||||||||||||||
Dividends on common stock | - | - | - | (7,563 | ) | - | - | (7,563 | ) | |||||||||||||||||||
Share-based compensation | - | - | 258 | - | - | - | 258 | |||||||||||||||||||||
Net income | - | - | - | 19,623 | - | - | 19,623 | |||||||||||||||||||||
Balance, March 26, 2023 | 9,369,235 | $ | 94 | $ | 62,565 | $ | (20,559 | ) | 5,289,515 | $ | (86,662 | ) | $ | (44,562 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
Nathan’sNathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
Fifty-two weeks ended March 27, 2016, Fifty-two weeks ended March 29, 2015 and the Fifty-two weeks ended March 30, 2014CASH FLOWS
(in thousands, except share amounts)thousands)
Common | Common | Additional Paid-in | Retained Earnings (Accumulated | Accumulated Other Comprehensive | Treasury Stock, at Cost | Total Stockholders’ | ||||||||||||||||||||||||||
Shares | Stock | Capital | Deficit) | Income | Shares | Amount | (Deficit) | |||||||||||||||||||||||||
Balance, March 30, 2014 | 9,092,183 | $ | 91 | $ | 57,578 | $ | 40,963 | $ | 149 | 4,610,026 | $ | (54,884 | ) | $ | 43,897 | |||||||||||||||||
Shares issued in connection with share-based compensation plans | 159,914 | 2 | 880 | - | - | - | - | 882 | ||||||||||||||||||||||||
Withholding tax on net share settlement of share-based compensation plans | - | - | (3,693 | ) | - | - | - | - | (3,693 | ) | ||||||||||||||||||||||
Repurchase of common stock | - | - | - | - | - | 37,661 | (1,916 | ) | (1,916 | ) | ||||||||||||||||||||||
Income tax benefit on stock option exercises | - | - | 4,572 | - | - | - | - | 4,572 | ||||||||||||||||||||||||
Share-based compensation | - | - | 859 | - | - | - | - | 859 | ||||||||||||||||||||||||
Unrealized losses on available-for-sale securities, net of deferred income tax benefit of $66 | - | - | - | - | (102 | ) | - | - | (102 | ) | ||||||||||||||||||||||
Dividends declared | (116,110 | ) | (116,110 | ) | ||||||||||||||||||||||||||||
Net income | - | - | - | 11,703 | - | - | - | 11,703 | ||||||||||||||||||||||||
Balance, March 29, 2015 | 9,252,097 | $ | 93 | $ | 60,196 | $ | (63,444 | ) | $ | 47 | 4,647,687 | $ | (56,800 | ) | $ | (59,908 | ) |
Fifty-Two | Fifty-Two | |||||||
weeks ended | weeks ended | |||||||
March 26, 2023 | March 27, 2022 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 19,623 | $ | 13,596 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Loss on debt extinguishment | 357 | 1,354 | ||||||
Loss on disposal of property and equipment | 87 | - | ||||||
Depreciation and amortization | 1,135 | 1,054 | ||||||
Amortization of debt issuance costs | 508 | 660 | ||||||
Share-based compensation expense | 258 | 74 | ||||||
Provision for doubtful accounts | 457 | 186 | ||||||
Deferred income taxes | 207 | (444 | ) | |||||
Other non-cash items | (153 | ) | (133 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts and other receivables, net | (2,149 | ) | (1,908 | ) | ||||
Inventories | (17 | ) | 102 | |||||
Prepaid expenses and other current assets | (454 | ) | (116 | ) | ||||
Other assets | 27 | 133 | ||||||
Accounts payable, accrued expenses and other current liabilities | 377 | 1,695 | ||||||
Deferred franchise fees | (489 | ) | 324 | |||||
Other liabilities | 63 | (100 | ) | |||||
Net cash provided by operating activities | 19,837 | 16,477 | ||||||
Cash flows from investing activities: | ||||||||
Insurance proceeds for property and equipment | 42 | - | ||||||
Purchase of property and equipment | (626 | ) | (636 | ) | ||||
Net cash used in investing activities | (584 | ) | (636 | ) | ||||
Cash flows from financing activities: | ||||||||
Cash payments for extinguishment of debt | (30,000 | ) | (40,000 | ) | ||||
Premium paid for extinguishment of debt | - | (662 | ) | |||||
Dividends paid to stockholders | (7,563 | ) | (6,173 | ) | ||||
Repurchase of treasury stock | (1,892 | ) | - | |||||
Payments of withholding tax on net share settlement of share-based compensation plans | - | (7 | ) | |||||
Net cash used in financing activities | (39,455 | ) | (46,842 | ) | ||||
Net decrease in cash | (20,202 | ) | (31,001 | ) | ||||
Cash, beginning of year | 50,063 | 81,064 | ||||||
Cash, end of year | $ | 29,861 | $ | 50,063 | ||||
Cash paid during the year for: | ||||||||
Interest | $ | 8,061 | $ | 10,563 | ||||
Income taxes | $ | 7,160 | $ | 4,981 | ||||
Noncash financing activity: | ||||||||
Dividends declared per share | $ | 1.85 | $ | 1.50 |
The accompanying notes are an integral part of these consolidated financial statements.
Nathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
Fifty-two weeks ended March 27, 2016, Fifty-two weeks ended March 29, 2015 and the Fifty-two weeks ended March 30, 2014
(in thousands, except share amounts)
Common | Common | Additional Paid-in | (Accumulated | Accumulated Other Comprehensive | Treasury Stock, at Cost | Total 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 withshare-based compensation plans | 21,969 | - | 89 | - | - | - | - | 89 | ||||||||||||||||||||||||
Withholding tax on net share settlement of share-based compensation plans | - | - | (285 | ) | - | - | - | - | (285 | ) | ||||||||||||||||||||||
Repurchase of common stock | - | - | - | - | - | 449,070 | (19,231 | ) | (19,231 | ) | ||||||||||||||||||||||
Income tax benefit on stock option exercises | - | - | 228 | - | - | - | - | 228 | ||||||||||||||||||||||||
Share-based compensation | - | - | 722 | - | - | - | - | 722 | ||||||||||||||||||||||||
Reclassification adjustment for gainsincluded innetincome, netof deferred income taxbenefitof $25 | - | - | - | - | (47 | ) | - | - | (47 | ) | ||||||||||||||||||||||
Net income | - | - | - | 6,096 | - | - | - | 6,096 | ||||||||||||||||||||||||
Balance, March 27, 2016 | 9,274,066 | $ | 93 | $ | 60,950 | $ | (57,348 | ) | $ | - | 5,096,757 | $ | (76,031 | ) | $ | (72,336 | ) |
The accompanying notes are an integral part of these statements.
Nathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fifty-Two weeks ended March 27, 2016 | Fifty-Two weeks ended March 29, 2015 | Fifty-Two weeks ended March 30, 2014 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 6,096 | $ | 11,703 | $ | 8,327 | ||||||
Adjustments to reconcile net income to net cashprovided by operating activities | ||||||||||||
Depreciation and amortization | 1,255 | 1,253 | 1,157 | |||||||||
Insurance gain | - | - | (2,774 | ) | ||||||||
Amortization of bond premium | 64 | 164 | 150 | |||||||||
Gain on sale of marketable equity securities | (26 | ) | - | - | ||||||||
Gain on sale of property and equipment | (18 | ) | - | - | ||||||||
Amortization of debt discounts and issuance costs | 1,185 | 66 | - | |||||||||
Share-based compensation expense | 722 | 859 | 721 | |||||||||
Provision for doubtful accounts | 38 | 23 | 21 | |||||||||
Impairment charge – long-term investment | 100 | - | 400 | |||||||||
Deferred income taxes | (13 | ) | 111 | 1,652 | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts and other receivables, net | 740 | (2,417 | ) | (927 | ) | |||||||
Insurance proceeds received for business interruption claim | - | 718 | - | |||||||||
Inventories | 135 | 125 | 99 | |||||||||
Prepaid expenses and other current assets | 3,189 | (1,403 | ) | (2,033 | ) | |||||||
Other assets | 138 | 181 | 30 | |||||||||
Accrued litigation | - | - | (5,874 | ) | ||||||||
Accounts payable, accrued expenses and other current liabilities | (293 | ) | 1,779 | 2,329 | ||||||||
Deferred franchise fees | (141 | ) | 44 | (44 | ) | |||||||
Other liabilities | (691 | ) | 79 | (358 | ) | |||||||
Net cash provided by operating activities | 12,480 | 13,285 | 2,876 | |||||||||
Cash flows from investing activities: | ||||||||||||
Proceeds from sales and maturities of available-for-sale securities | 10,868 | 8,020 | 2,890 | |||||||||
Insurance proceeds received for property and equipment (Note M.4) | - | - | 2,711 | |||||||||
Change in restricted cash | - | - | (135 | ) | ||||||||
Proceeds from disposal of property and equipment | 133 | - | - | |||||||||
Purchase of property and equipment | (1,125 | ) | (1,538 | ) | (4,339 | ) | ||||||
Purchase of available-for-sale securities | (3,887 | ) | (4,258 | ) | (2,219 | ) | ||||||
Litigation settlement | - | - | 6,009 | |||||||||
Net cash provided by investing activities | 5,989 | 2,224 | 4,917 | |||||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from issuance of long-term debt | - | 135,000 | - | |||||||||
Debt discounts and issuance costs | (60 | ) | (5,926 | ) | - | |||||||
Dividends paid to stockholders | (375 | ) | (115,110 | ) | - | |||||||
Repurchase of treasury stock | (19,231 | ) | (1,916 | ) | (1,486 | ) | ||||||
Proceeds from the exercise of stock options | 89 | 880 | 944 | |||||||||
Income tax benefit on stock option exercises | 228 | 4,572 | 2,195 | |||||||||
Payments of withholding tax on net share settlement ofshare-based compensation plans | (285 | ) | (3,693 | ) | (772 | ) | ||||||
Net cash (used in) provided by financing activities | (19,634 | ) | 13,807 | 881 | ||||||||
Net (decrease) increase in cash and cash equivalents | (1,165 | ) | 29,316 | 8,674 | ||||||||
Cash and cash equivalents, beginning of year | 51,393 | 22,077 | 13,403 | |||||||||
Cash and cash equivalents, end of year | $ | 50,228 | $ | 51,393 | $ | 22,077 | ||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 13,688 | $ | - | $ | 1,099 | ||||||
Income taxes | $ | 848 | $ | 4,545 | $ | 3,457 |
The accompanying notes are an integral part of these statements.
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 26, 2023 and March 27, 2016, March 29, 2015 and March 30, 20142022
NOTE A - DESCRIPTION AND ORGANIZATION OF BUSINESS
Nathan’s Famous, Inc. and subsidiaries (collectively the “Company” or “Nathan’s”) has historically operated or franchised a chain of retail fast food restaurants featuring the “Nathan’s World Famous Beef Hot Dog”, crinkle-cut French-fried potatoes and a variety of other menu offerings. Nathan’s has also established a Branded Product Program, which enables foodservice retailers to sell select Nathan’s proprietary products outside of the realm of a traditional franchise relationship. Nathan’s also licenses the manufacture and sale of “Nathan’s Famous” packaged hot dogs, crinkle-cut French fries and a number of other products to a variety of third parties for sale to supermarkets, club stores and grocery stores. The Company is also the owner of the Arthur Treacher’s brand. Arthur Treacher’s main product is its "Original Fish & Chips" product consisting of fish fillets coated with a special batter prepared under a proprietary formula, deep-fried golden brown, and served with English-style chips and corn meal "hush puppies." The Company considers itself to be ina brand marketer of its products to the foodservice industry, and retail industries, pursuant to its various business structures. Nathan’s has also pursued co-branding and co-hosting initiatives.
At March 27, 2016,26, 2023, the Company’s restaurant system included fivefour Company-owned units in the New York City metropolitan area and 259232 franchised or licensed units, located in 21states and11foreign17 states and 13 foreign countries. It also included 267 virtual kitchens (existing kitchens with no Nathan’s Famous branded storefront presence, used to fill online orders) located in 19 states and 4 foreign countries.
COVID-19 and Macroeconomic Conditions
The outbreak of the COVID-19 pandemic in March 2020 had a number of adverse effects on our business including a reduction in customer traffic at our Company-owned restaurants and our franchised locations, as well as difficulty in staffing these locations. Additionally, it hampered many of our Branded Product Program customers including professional sports venues, amusement parks, shopping malls and movie theaters. While the disruptions to our business from the COVID-19 pandemic have mostly subsided, the resurgence of COVID-19 or its variants, as well as an outbreak of other widespread health epidemics or pandemics, may disrupt our operations and have an adverse effect on our business, financial condition and results of operations.
During fiscal 2023, the Company continued to experience rising labor costs, as well as higher commodity prices, packaging costs and fuel prices. We expect this trend to continue into fiscal 2024. Our average cost of hot dogs for the fiscal 2023 period was approximately 1.4% higher than during the fiscal 2022 period. In general, we have been able to offset increases resulting from inflation by increasing prices. We continue to monitor these inflationary pressures and will continue to implement mitigation plans as needed. Delays in implementing price increases, competitive pressures, consumer spending levels and other factors may limit our ability to implement further price increases in the future.
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 26, 2023 and March 27, 2022
NOTE A - DESCRIPTION AND ORGANIZATION OF BUSINESS (continued)
The extent to which COVID-19 and inflation will impact the Company will depend on future developments, which cannot be predicted. Such impacts may include non-cash asset impairments and difficulty collecting trade receivables, among other things.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies have been applied in the preparation of the consolidated financial statements:
1. | Principles of Consolidation |
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and all of its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
2. | Fiscal Year |
The Company’s fiscal year ends on the last Sunday in March, which results in a 52 or 53-week53 week reporting period. The results of operations and cash flows for the fiscal years ended March 27, 2016, March 29, 201526, 2023 and March 30, 201427, 2022 are on the basis of a 52-week52 week reporting period. All references to years and quarters relate to fiscal periods rather than calendar periods.
3. | Use of Estimates |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of AmericaGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.estimates due to risks and uncertainties, including uncertainty in the current economic environment due to the COVID-19 pandemic, inflation, and other factors.
Significant estimates made by management in preparing the consolidated financial statements include revenue recognition, the allowance for doubtful accounts, valuation of stock-based compensation, accounting for income taxes, and the valuation of goodwill,an intangible assetsasset and other long-lived assets.
4. Cash
Nathan’s Famous, Inc. and Cash EquivalentsSubsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 26, 2023 and March 27, 2022
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. | 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. CashThe Company did not have any cash equivalents amounted to$0 and$1,754 at March 26, 2023 or March 27, 20162022. The Company’s cash balances principally consist of cash in bank and money market accounts.
At March 26, 2023 and March 29, 2015, respectively. Substantially27, 2022, substantially all of the Company’s cash and cash equivalentsbalances are in excess of Federal government insurance.insurance limits. The Company has not experienced any losses in such accounts.
5. | Inventories |
Inventories, which are stated at the lower of cost or marketnet realizable value, consist primarily of food, itemsbeverages, and paper supplies. Cost is determined using the first-in, first-out method.
6.
| Property and Equipment |
Property and equipment are stated at cost less accumulated depreciation and amortization. Major improvements are capitalized, and minor replacements, maintenance and repairs are charged to expense as incurred. Depreciation and amortization are calculated on the straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining lease term of the related asset. The estimated useful lives are as follows:
Building and improvements (in years) | 5 | – | 25 | |||
Machinery, equipment, furniture and fixtures (in years) | 3 | – | 15 | |||
Leasehold improvements (in years) | 5 | – | 20 |
Building and improvements (years) | 5 | – | 25 | |||
Machinery, equipment, furniture and fixtures (years) | 3 | – | 15 | |||
Leasehold improvements (years) | 5 | – | 20 |
7. Goodwill and Intangible Asset Goodwill and intangible assets consist of (i) goodwill of $95 resulting from the acquisition of Nathan’s in 1987; and (ii) trademarks, and the trade Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Based upon the review of the current Arthur Treacher’s co-branding agreements, the Company determined that the remaining useful lives of these agreements is six years concluding in fiscal year 2028, and the intangible asset is subject to annual amortization. The Company has recorded amortization expense of $174 and $113 for each of the fiscal years ending March 26, 2023 and March 27, 2022, respectively. The Company’s definite-lived intangible asset is tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company tested for recoverability of its definite-lived intangible asset based on the projected undiscounted cash flows to be derived from such co-branding agreements. Based on the quantitative test performed, the Company determined that the definite-lived intangible asset was recoverable and no impairment charge was recorded for the fiscal years ended March 26, 2023 and March 27, 2022. Cash flow projections require significant estimates and assumptions by management. Should the estimates and assumptions prove to be incorrect, the Company may be required to record an impairment charge in future periods and such impairment could be material. Annual amortization of the intangible asset for the next five years will approximate the following: Estimate for fiscal year 2024 2025 2026 2027 2028 Total 8. Long-lived Assets Long-lived assets on a restaurant-by-restaurant basis are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Long-lived assets include property, equipment and right-of-use assets for operating leases with finite useful lives. Assets are grouped at the Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The Company tests for recoverability based on the projected undiscounted cash flows to be derived from such assets. If the projected undiscounted future cash flows are less than the carrying value of the assets, the Company will record on a 9. Leases Determination of Whether a Contract Contains a Lease ROU Model and Determination of Lease Term8. Goodwill and Intangible Assetsnamesname and other intellectual property of $1,353$869 in connection with Arthur Treacher’s.The Company’s goodwill and intangible assets are deemed to have indefinite lives and, accordingly, areGoodwill is not amortized, but are evaluatedis tested for impairment at least annually butduring the fourth quarter, or more often wheneverfrequently if events or changes in facts and circumstances occur which may indicate that the carrying valueamount may not be recoverable.impaired. As of March 27, 201626, 2023, and March 29, 2015,27, 2022 the Company performed its required annual quantitative impairment test of goodwill and intangible assets and has determined no impairment is deemed to exist.9. Long-lived Assets $ 174 174 174 174 173 $ 869 Impairment is measured by comparingcarrying valueindividual restaurant level which represents the lowest level for which cash flows can be identified largely independent of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of theother assets and their ultimate disposition. In instances where impairment is determined to exist, theliabilities. The Company writes down the asset to its fair value based on the present value of estimated future cash flows.Impairment losses are recorded on long-lived assets on a restaurant-by-restaurant basis whenever impairment factors are determined to be present. The Companygenerally considers a history of restaurant operating losses to be its primary indicator of potential impairment for individual restaurant locations. We relocated our Oceanside restaurant 2015 at26, 2023 and March 27, 2022total investmentrestaurant-by-restaurant basis, an impairment loss, if any, based on the difference between the estimated fair value and the carrying value of approximately $1,285. As a result of Hurricane Sandy, our Coney Island restaurant sustainedthe assets. The Company generally measures fair value by considering discounted estimated future cash flows from such assets. Cash flow projections and fair value estimates require significant damage (Note M.4). The restaurant was fully repairedestimates and re-opened on May 20, 2013.assumptions by management. Should the estimates and assumptions prove to be incorrect, the Company may be required to record impairment charges in future periods and such impairments could be material. No long-lived assets were deemed impaired during the fiscal years ended March 27, 2016, March 29, 201526, 2023 and March 30, 2014.27, 2022.10. Fair ValueWe determine if an arrangement is a lease at inception or modification of Financial Instrumentsa contract and classify each lease as either an operating or finance lease at commencement. The Company only reassesses lease classifications subsequent to commencement upon a change to the expected lease term or the contract being modified. Operating leases represent the Company’s right to use an underlying asset as lessee for the lease term, and lease obligations represent the Company’s obligation to make lease payments arising from the lease.
The Company uses the right-of-use (“ROU”) model to account for leases where the Company is the lessee, which requires an entity to recognize a lease liability and ROU asset on the lease commencement date. A lease liability is measured equal to the present value of the remaining lease payments over the lease term and is discounted using the incremental borrowing rate, as the rate implicit in the Company’s leases is not readily determinable. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease payments include payments made before the commencement date and any residual value guarantees, if applicable. The initial ROU asset consists of the initial measurement of the lease liability, adjusted for any payments made before the commencement date, initial direct costs and lease incentives earned. When determining the lease term, as both lessee and lessor, the Company includes option periods when it is reasonably certain that those options will be exercised.
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 26, 2023 and March 27, 2022
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Operating Leases
For operating leases, minimum lease payments or receipts, including minimum scheduled rent increases, are recognized as rent expense where the Company is a lessee, or income where the Company is a lessor, as applicable, on a straight-line basis (“Straight-Line Rent”) over the applicable lease terms. There is a period under certain lease agreements referred to as a rent holiday (“Rent Holiday”) that generally begins on the possession date and ends on the rent commencement date. During a Rent Holiday, no cash rent payments are typically due under the terms of the lease; however, rent expense is recorded for that period on a straight-line basis. The excess of the Straight-Line Rent over the minimum rents paid is included in the ROU asset where the Company is a lessee. The excess of the Straight-Line Rent over the minimum rents received is recorded as a deferred lease asset and is included in “Other Assets” where the Company is a lessor. The Company recorded $29 and $35 in Other Assets at March 26, 2023 and March 27, 2022, respectively. Certain leases contain provisions, referred to as contingent rent (“Contingent Rent”), that require additional rental payments based upon restaurant sales volume. Contingent Rent is recognized each period as the liability is incurred or the asset is earned.
Lease cost for operating leases is recognized on a straight-line basis and includes the amortization of the ROU asset and interest expense relating to the operating lease liability. Variable lease cost for operating leases include Contingent Rent and payments for executory costs such as real estate taxes, insurance and common area maintenance, which are excluded from the measurement of the lease liability. Short-term lease cost for operating leases includes rental expense for leases with a term of less than 12 months. Leases with an initial expected term of 12 months or less are not recorded in the Consolidated Balance Sheets and the related lease expense is recognized on a straight-line basis over the lease term. Lease costs are recorded in the Consolidated Statements of Earnings based on the nature of the underlying leases as follows: (1) rental expense related to leases for Company-owned restaurants is recorded to “Restaurant operating expenses,” (2) rental expense for leased properties that are subsequently subleased to franchisees is recorded to “Other Income, net” and (3) rental expense related to leases for corporate offices and equipment is recorded to “General and administrative expenses.”
Rental income for operating leases on properties subleased to franchisees is recorded net of associated lease costs to “Other income, net.” At March 26, 2023, the Company leases one site which it in turn subleases to a franchisee, which expires in April 2027 exclusive of renewal options. The Company remains liable for all lease costs when property is subleased to a franchisee.
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 26, 2023 and March 27, 2022
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Significant Assumptions and Judgement
Management makes certain estimates and assumptions regarding each new lease and sublease agreement, renewal and amendment, including, but not limited to, property values, market rents, property lives, discount rates and probable term, all of which can impact (1) the classification and accounting for a lease or sublease as operating or finance, (2) the Rent Holiday and escalations in payment that are taken into consideration when calculating Straight-Line Rent, (3) the term over which leasehold improvements for each restaurant are amortized and (4) the values and lives of adjustments to the initial ROU asset where the Company is the lessee, or favorable and unfavorable leases where the Company is the lessor. The amount of depreciation and amortization, interest and rent expense and income would vary if different estimates and assumptions were used.
10. | Fair Value of Financial Instruments |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).
The fair value hierarchy, as outlined in the applicable accounting guidance, is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions.
The fair value hierarchy consists of the following three levels:
● | Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market |
● | Level |
|
|
● | Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability |
The use of observable market inputs (quoted market prices) when measuring fair value and, specifically, the use of Level 1 quoted prices to measure fair value are required whenever possible. The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures quarterly and based on various factors, it is possible that an asset or liability may be classified differently from year to year.
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 26, 2023 and March 27, 2022
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
At March 26, 2023 and March 27, 2016,2022, we did not have any marketable securities.
The following table presents assets measuredor liabilities that were recorded at fair value on a recurring basis as of March 29, 2015 based upon the valuation hierarchy:
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 consisted primarily of municipal bonds, were not actively traded. The valuation of such bonds was 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.value.
The Company’s long-term debt had a carryingface value of $135,000$80,000 as of March 27, 201626, 2023 and a fair value of $142,425$80,080 as of March 27, 2016.26, 2023. 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 maturitynature of the instruments.those items.
The majority of the Company’s non-financial assets and liabilities are not required to be carried at fair value on a recurring basis. However, the Company is required on a non-recurring basis to use fair value measurements when analyzing asset impairment as it relates to goodwill and other indefinite-lived intangibledefinite- lived assets and long-lived assets. The Company utilized the income approach (Level 3 inputs) which utilized projected undiscounted cash flow forecasts for future income and were discounted to present valueflows in performing its annual impairment testing of the Company’s intangible asset and long-lived assets.
11. |
|
Pre-opening and similar restaurant costs are expensed as incurred and are included in “Restaurant operating expenses” in the accompanying Consolidated Statement of Earnings.
12. | Revenue Recognition - Branded Product Program |
The Company recognizes sales from the Branded Product Program and certain products sold from the Branded Menu Program upon delivery to Nathan’s customers via third party common carrier. Rebates provided to customers are classified as a reduction to sales.
13. | Revenue Recognition - Company-owned Restaurants |
Sales by Company-owned restaurants, which are typically paid in cash or with credit card by the customer, are recognized at the point of sale. Sales are presented net of sales tax collected from customers and remitted to governmental taxing authorities.
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 26, 2023 and March 27, 2022
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| Revenue Recognition - License Royalties |
The Company earns revenue from royalties on the licensing of the use of its intellectual property in connection with certain products produced and sold by outside vendors. The use of the Company’s intellectual property must be approved by the Company prior to each specific application to ensure proper quality and a consistent image. Revenue from license royalties is generally based on a percentage of sales, subject to certain annual minimum royalties, and is recognized on a monthly basis when it is earned and deemed collectible.
| Revenue Recognition - Franchising Operations |
In connection with its franchising operations, the Company receives initial franchise fees, international development fees, royalties, and in certain cases, revenue from sub-leasing restaurant properties to franchisees.
The following services are typically provided by the Company prior to the opening of a franchised restaurant:
|
The services provided in exchange for these upfront restaurant franchise fees do not contain separate and distinct performance obligations from the franchising right and these initial franchise fees, renewal fees and transfer fees are deferred and recognized over the term of each respective agreement, or upon termination of the franchise agreement.
The services provided in exchange for these international development fees do not contain separate and distinct performance obligations from the franchising right and these international development fees are deferred and recognized over the term of each respective agreement, or upon termination of the franchise agreement. Certain other costs, such as legal expenses, are expensed as incurred.
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 26, 2023 and March 27, 2022
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company recognizes franchise royalties on a monthly basis, which are generally based upon a percentage of sales made by the Company’s franchisees, including virtual kitchens, when they are earned and deemed collectible. The Company recognizes royalty revenue from its Branded Menu Program directly from the sale of Nathan’s products by its distributors or directly from the manufacturers.
Franchise fees and royalties that are subsequently deemed to be not collectible are recorded as bad debts until paid by the franchisee or until collectability is deemed to be reasonably assured.
The following is a summary of franchise openings and closings (excluding virtual kitchens) for the Nathan’s franchise restaurant system for the fiscal years ended March 26, 2023 and March 27, 2022:
March 26, | March 27, | |||||||
2023 | 2022 | |||||||
Franchised restaurants operating at the beginning of the period | 239 | 213 | ||||||
New franchised restaurants opened during the period | 11 | 54 | ||||||
Franchised restaurants closed during the period | (18 | ) | (28 | ) | ||||
Franchised restaurants operating at the end of the period | 232 | 239 |
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 26, 2023 and March 27, 2022
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Contract balances
The following table provides information about contract liabilities from contracts with customers:
March 26, 2023 | March 27, 2022 | |||||||
Deferred franchise fees (a) | $ | 1,608 | $ | 2,097 | ||||
Deferred revenues, which are included in | ||||||||
“Accrued expenses and other current liabilities” (b) | $ | 1,406 | $ | 876 |
(a) Deferred franchise fees of $336 and $1,272 as of March 26, 2023 and $349 and $1,748 as of March 27, 2022 are included in Deferred franchise fees – current and long term, respectively.
(b) Includes $906 of deferred license royalties and $500 of deferred advertising fund revenue as of March 26, 2023 and $876 of deferred license royalties as of March 27, 2022.
Significant changes in deferred franchise fees for the fiscal years ended March 26, 2023 and March 27, 2022 are as follows:
March 26, 2023 | March 27, 2022 | |||||||
Deferred franchise fees at beginning of period | $ | 2,097 | $ | 1,773 | ||||
New deferrals due to cash received and other | 167 | 879 | ||||||
Revenue recognized during the period | (656 | ) | (555 | ) | ||||
Deferred franchise fees at end of period | $ | 1,608 | $ | 2,097 |
Significant changes in deferred revenues for the fiscal years ended March 26, 2023 and March 27, 2022 are as follows:
March 26, 2023 | March 27, 2022 | |||||||
Deferred revenues at beginning of period | $ | 876 | $ | 841 | ||||
New deferrals due to cash received and other | 1,828 | 1,251 | ||||||
Revenue recognized during the period | (1,298 | ) | (1,216 | ) | ||||
Deferred revenues at end of period | $ | 1,406 | $ | 876 |
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:
Estimate for fiscal year | ||||
20241 | $ | 336 | ||
20251 | 320 | |||
20261 | 289 | |||
20271 | 172 | |||
20281 | 78 | |||
Thereafter1 | 413 | |||
Total | $ | 1,608 |
We have applied the optional exemption, as provided for under ASC Topic 606, “Revenues from Contracts with Customers,”which allows us not to disclose the transaction price allocated to unsatisfied performance obligations when the transaction price is a sales-based royalty.
16. |
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The Company maintains a national advertising fund (the “Advertising Fund”) established to collect and administer funds contributed for use in advertising and promotional programs for Company-owned and franchised restaurants.
The revenue, expenses and cash flows of the Advertising Fund are fully consolidated into the Company’s Consolidated Statements of Earnings and Statements of Cash Flows.
While this treatment impacts the gross amount of reported advertising fund revenue and related expenses, the impact is expected to approximately offset the increase to both revenue and expense, with minimal impact to income from operations or net income because the Company attempts to manage the Advertising Fund to breakeven over the course of the fiscal year. However, any surplus or deficit in the Advertising Fund will impact income from operations and net income.
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 26, 2023 and March 27, 2022
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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The Company’s accounts receivable consists principally of receivables from franchisees, including virtual kitchens, for royalties and advertising contributions, from sales under the Branded Product Program, and from royalties from retail licensees. At March 26, 2023, three Branded Product customers represented 23%, 13% and 12%, of accounts receivable. At March 27, 2022, threeBranded Product customers represented 19%, 14% and 13%, of accounts receivable. One Branded Products customer accounted for 18% and 16% of total revenue for the fiscal years ended March 26, 2023 and March 27, 2022, respectively. One retail licensee accounted for 24% and 26% of the total revenue for the fiscal years ended March 26, 2023 and March 27, 2022, respectively.
The Company’s primary supplier of hot dogs represented 95% and 94% of product purchases for each of the fiscal years ended March 26, 2023 and March 27, 2022, respectively. The Company’s primary distributor of products to its Company-owned restaurants represented 3% and 4% of product purchases for each of the fiscal years ended March 26, 2023 and March 27, 2022, respectively. If a disruption of service from a primary supplier or distributor was to occur, we could experience short-term increases in our costs while supply or distribution channels were adjusted.
The Company’s revenues for the fiscal years ended March 26, 2023 and March 27, 2022 were derived from the following geographic areas:
March 26, 2023 | March 27, 2022 | |||||||
Domestic (United States) | $ | 124,887 | $ | 111,659 | ||||
Non-domestic | 5,898 | 3,223 | ||||||
$ | 130,785 | $ | 114,882 |
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 26, 2023 and March 27, 2022
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company’s sales for the fiscal years ended March 26, 2023 and March 27, 2022 were derived from the following:
March 26, 2023 | March 27, 2022 | |||||||
Branded Products | $ | 78,884 | $ | 66,322 | ||||
Company-owned restaurants | 12,161 | 10,905 | ||||||
Total sales | $ | 91,045 | $ | 77,227 | ||||
License royalties | $ | 33,455 | $ | 31,824 | ||||
Royalties | 3,636 | 3,304 | ||||||
Franchise fees | 656 | 555 | ||||||
Total franchise fees and royalties | $ | 4,292 | $ | 3,859 | ||||
Advertising fund revenue | $ | 1,993 | $ | 1,972 | ||||
Total revenues | $ | 130,785 | $ | 114,882 |
18. | Advertising |
The Company administers an Advertising Fund on behalf of its restaurant system to coordinate the marketing efforts of the Company. Under this arrangement, the Company collects and disburses fees paid by manufacturers, franchisees and Company-owned restaurants for national and regional advertising, promotional and public relations programs. Contributions to the Advertising Fund are based on specified percentages of net sales, generally ranging up to 2%. Company-owned restaurant advertising expense, which is expensed as incurred, was $126and $67, for the fiscal years ended March 26, 2023 and March 27, 2022, respectively, and have been included in “Restaurant operating expenses” in the accompanying Consolidated Statements of Earnings.
19. | Share-Based Compensation |
At March 26, 2023, the Company had one share-based compensation plan in effect which is more fully described in Note L.2.
The cost of all share-based payments, including grants of restricted stock units and stock options, is recognized in the consolidated financial statements based on their fair values measured at the grant date, or the date of any later modification, over the requisite service period. The Company recognizes compensation cost for unvested stock awards on a straight-line basis over the requisite vesting period.
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 26, 2023 and March 27, 2022
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
20. | Classification of Operating Expenses |
Cost of sales consists of the following:
March 27, 2016 | March 29, 2015 | March 30, 2014 | ||||||||||
Branded Products | $ | 58,545 | $ | 58,948 | $ | 51,877 | ||||||
Company-owned restaurants | 16,664 | 15,874 | 13,231 | |||||||||
Other | 822 | 698 | 413 | |||||||||
$ | 76,031 | $ | 75,520 | $ | 65,521 |
● |
The cost of
Restaurant operating expenses consist of the following:
The Company’s current provision for income taxes is based upon its estimated taxable income in each of the jurisdictions in which it operates, after considering the impact on taxable income of temporary differences resulting from different treatment of items for tax and financial reporting purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and any operating loss or tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible. Should management determine that it is more likely than not that some portion of the deferred tax assets will not be realized, a valuation allowance against the deferred tax assets would be established in the period such determination was made. Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Uncertain Tax Positions The Company has recorded liabilities for underpayment of income taxes and related interest and penalties for uncertain tax positions based on the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Nathan’s recognizes accrued interest and penalties associated with unrecognized tax benefits as part of the income tax provision. See Note H for a further discussion of our income taxes.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,”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 consolidated 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. The Company will adopt the new guidance on a modified retrospective basis beginning with its first fiscal quarter of 2024. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements. 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. Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE C - 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 fiscal years ended March 26, 2023 and March 27, 2022, respectively:
Options to purchase 10,000 shares of common stock for the fiscal year ended March 26, 2023 were excluded in the computation of diluted earnings per share because the exercise price exceeded the average market price during the period. Options to purchase 20,000 shares of common stock for the fiscal year ended March 27, 2022 were excluded in the computation of diluted earnings per share because the exercise price exceeded the average market price of common shares during the period. Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE D - ACCOUNTS AND OTHER RECEIVABLES, NET Accounts and other receivables, net, consist of the following:
March 26, March 27, 2023 2022 Branded product sales Franchise and license royalties Other Less: allowance for doubtful accounts Accounts and other receivables, net Accounts receivable are due within 30 days and are stated at amounts due from franchisees, including virtual kitchens, 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 fiscal years ended March 26, 2023 and March 27, 2022 are as follows:
Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE E - PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of the following:
NOTE F - PROPERTY AND EQUIPMENT, NET Property and equipment consist of the following:
Depreciation and amortization expense related to property and equipment was $961 and $941 for the fiscal years ended March 26, 2023 and March 27, 2022, respectively. Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE G – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following:
NOTE H – INCOME TAXES The income tax provision consists of the following for the fiscal years ended March 26, 2023 and March 27, 2022:
The income tax provisions for the fiscal years ended March 26, 2023 and March 27, 2022 reflect effective tax rates of 26.8% and 26.7%, respectively. Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE H – INCOME TAXES (continued) The total income tax provision for the fiscal years ended March 26, 2023 and March 27, 2022 differs from the amounts computed by applying the United States Federal income tax rate of 21% to income before income taxes as a result of the following:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE H – INCOME TAXES (continued) A valuation allowance is provided when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. We consider the level of historical taxable income, scheduled reversal of temporary differences, tax planning strategies and projected future taxable income in determining whether a valuation allowance is warranted. Based upon these considerations, management believes that it is more likely than not that the Company will realize the benefit of its deferred tax asset. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, for the fiscal years ended March 26, 2023 and March 27, 2022.
The amount of unrecognized tax benefits included in Other liabilities at March 26, 2023 and March 27, 2022 were $432 and $403, respectively, all of which would impact Nathan’s effective tax rate, if recognized. As of March 26, 2023 and March 27, 2022, the Company had $305 and $271, respectively, accrued for the payment of interest and penalties. For the fiscal years ended March 26, 2023 and March 27, 2022 Nathan’s recognized interest and penalties in the amounts of $33and $15, respectively. During the fiscal year ending March 31, 2024, we believe it is reasonably possible the amount of unrecognized tax benefits, excluding the related accrued interest and penalties, could be reduced by up to $19,due primarily to the lapse of statutes of limitations which would favorably impact Nathan’s effective tax rate, although no assurances can be given in this regard. On August 16, 2022, the United States enacted the Inflation Reduction Act. Among other provisions, this new law imposes a 1% excise tax on stock buybacks made after December 31, 2022, with certain exceptions including stock repurchases of less than $1,000 within a tax year. We are not expecting this new law to have a material effect on our consolidated financial statements. The earliest tax
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.
Asset Sale Offer
If the Company sells certain collateralized 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
NOTE K – LEASES The Company is party as lessee to various leases for its Company-owned restaurants and lessee/sublessor to one franchised location property, including land and buildings, as well as leases for its corporate office and certain office equipment. Company as lessee The components of the net lease cost for the fiscal years ended March 26, 2023 and March 27, 2022 were as follows:
Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE K The components of the net lease cost on the Consolidated Statement of Earnings for the fiscal years ended March 26, 2023 and March 27, 2022 were as follows:
Cash paid for amounts included in the measurement of lease liabilities for the fiscal years ended March 26, 2023 and March 27, 2022 were as follows:
The weighted average remaining lease term and weighted average discount rate for operating leases for the fiscal years ended March 26, 2023 and March 27, 2022 were as follows:
Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE K – Future lease commitments to be paid and received by the Company as of March 26, 2023 were as follows:
Company as lessor The components of lease income for the fiscal years ended March 26, 2023 and March 27, 2022 were as follows:
Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE L – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
On On June 25, 2021, September 3, 2021 and December 3, 2021, the Company paid quarterly dividends of $0.35 per share. On February 4, 2022, the Board authorized the increase of its quarterly dividend from $0.35 per share to $0.45 per share. On March 4, 2022, the Company paid quarterly cash dividends of $0.45 per share. Through March 27, 2022, the Company paid quarterly cash dividends aggregating $6,173. Effective June 8,2023, the Board declared Our ability to pay future dividends is limited by the terms of
On September Nathan’s Famous, Inc. and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and March 26, 2023 and March 27, 2022 NOTE L – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS (continued) As of the Effective Date, we were able to issue up
In general, options granted under the Company’s stock incentive plans have terms of five or ten years and vest over periods of between three and five years. The Company has historically issued new shares of common stock for options that have been exercised and used the Black-Scholes option valuation model to determine the fair value of options granted at the grant date.
During the fiscal year ended March During the fiscal year ended March 27, 2022, the Company granted options to purchase
The
Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE L – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS (continued)
The expected dividend yield is based on historical and projected
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 for the fiscal years ended March 26, 2023 and March 27, 2022 is as follows:
The tax benefit on Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE L – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS (continued)
A summary of the status of the Company’s stock options at March
March
NOTE L – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS (continued)
Restricted
Transactions with respect to restricted stock units for the fiscal year ended March
On June
plan does not have a set expiration date. Purchases under the Nathan’s Famous, Inc. and Subsidiaries
(in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE L – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS (continued)
Effective January 1, 2007, Howard M. Lorber, previously Chairman of the Board and Chief Executive Officer, assumed the In connection with the foregoing, the Company entered into an employment agreement with each of Messrs. Lorber (as amended, the “Lorber Employment Agreement”) and Gatoff (as amended, the “Gatoff Employment Agreement”). On December 8, 2022, the
The Lorber Employment Agreement provides Mr. Lorber with the right to participate in employment benefits offered to other Nathan’s executives. During and after the contract term, Mr. Lorber is subject to certain confidentiality, non-solicitation and non-competition provisions in favor of the Company.
In the event that Mr. Lorber’s employment is terminated without cause, he is entitled to receive his salary and bonus for the remainder of the contract term. The Lorber Employment Agreement further provides that in the event there is a change in control, as defined in the agreement, Mr. Lorber has the option, exercisable within one year after such event, to terminate the agreement. Upon such termination, he has the right to receive a lump sum cash payment equal to the greater of (A) his salary and annual bonuses for the remainder of the employment term (including a prorated bonus for any partial fiscal year), which bonus shall be equal to the average of the annual bonuses awarded to him during the three fiscal years preceding the fiscal year of termination; or (B) 2.99 times his salary and annual bonus for the fiscal year immediately preceding the fiscal year of termination, in each case together with a lump sum cash payment equal to the difference between the exercise price of any exercisable options having an exercise price of less than the then current market price of the Company’s common stock and such then current market price. In addition, Nathan’s will provide Mr. Lorber with a tax gross-up payment to cover any excise tax due.
Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE L – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS (continued)
In the event of termination due to Mr. Lorber’s death or disability, he is entitled to receive an amount equal to his salary and annual bonuses for a three-year period, which bonus shall be equal to the average of the annual bonuses awarded to him during the three fiscal years preceding the fiscal year of termination.
Under the terms of the Gatoff Employment Agreement, Mr. Gatoff initially served as Chief Executive Officer from January 1, 2007 until December 31, 2008, which period automatically extends for additional one-year periods unless either party delivers notice of non-renewal no less than 180 days prior to the end of the term then in effect. Consequently, the Gatoff Employment Agreement is expected to be extended through December 31,
Pursuant to the agreement, Mr. Gatoff
Each employment agreement terminates upon death or voluntary termination by the respective employee or may be terminated by the Company on up to 30-days’ prior written notice by the Company in the event of disability or “cause,” as defined in each agreement.
The Company has a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code covering all nonunion employees over age 21, who have been employed by the Company for at least one year. Employees may contribute to the plan, on a tax-deferred basis, up to 20% of their total annual salary. Historically, the Company has matched contributions at a rate of $.25 per dollar contributed by the employee on up to a maximum of 3% of the employee’s total annual salary. Employer contributions for each of the fiscal years ended March 26, 2023 and March 27, 2022 were $35and are included in general and administrative expenses on the Consolidated Statements of Earnings. Nathan’s Famous, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) March 26, 2023 and March 27, 2022 NOTE L – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS (continued) The Company participates in a noncontributory, multi-employer, defined benefit pension plan (the “Union Plan”) covering substantially all of the Company’s union-represented employees. The risks of participating in the Union Plan are different from a single-employer plan in the following aspects: (a) assets contributed to the Union Plan by one employer may be used to provide benefits to employees of other participating employers; (b) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (c) if the Company chooses to stop participating in the Union Plan, the Company may be required to pay the Union Plan an amount based on the underfunded status of the Union Plan, referred to as a withdrawal liability. The most recent estimate of our potential withdrawal liability is $402 as of December 31, 2022. The Company has no plans or intentions to stop participating in the plan as of March 26, 2023 and does not believe that there is a reasonable possibility that a withdrawal liability will be incurred. Any adjustment for withdrawal liability will be recorded only when it is probable that a liability exists and can be reasonably estimated, in accordance with U.S. GAAP. Contributions to the Union Plan were $9 and $6 for the fiscal years ended March 26, 2023 and March 27, 2022, respectively.
The Company provides, on a contributory basis, medical benefits to active employees. The Company does not provide medical benefits to retirees.
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 N - RELATED PARTY TRANSACTIONS A firm to which the Company’s Executive Chairman of the Board is as an investor, and the firm’s affiliates, received ordinary and customary insurance commissions aggregating approximately $18and $27 for the fiscal years ended March 26, 2023 and March 27, 2022, respectively. NOTE O - SUBSEQUENT EVENTS The Company evaluated subsequent events through the date the consolidated financial statements were issued and filed with the U.S. Securities and Exchange Commission. There were no subsequent events that required recognition or disclosure.
F-45
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