2 0 1 4 A N N U A L R E P O R T
FINANCIAL HIGHLIGHTS
(In thousands, except share and per share amounts)
2014
2013
2012
2011
Fiscal Year(1)
S E L EC T E D CO N S O L I DAT E D FI N A N C I A L DATA :
As Reported
Revenues from continuing operations
Income from continuing operations before income tax(2)
Net income(2)
Income per share(2)
Basic
Diluted
Weighted average shares used in computing income per share
Basic
Diluted
Total assets
Stockholders’ equity
$ 82,927
$ 71,543
$ 66,222
$ 57,255
$ 13,561
$ 12,139
$ 10,007
$ 3,320
$ 8,327
$ 7,468
$ 6,158
$ 2,213
$ 1.87
$ 1.70
$ 1.26
$ 0.41
$ 1.81
$ 1.63
$ 1.22
$ 0.40
4,450
4,605
4,400
4,588
4,906
5,049
5,403
5,504
$ 56,135
$ 49,662
$ 44,520
$ 52,958
$ 43,897
$ 34,148
$ 28,837
$ 38,078
(1) Our fiscal year ends on the last Sunday in March which results in a 52- or 53-week year. The fiscal years ended March 30, 2014, March 25, 2012 and
March 27, 2011 consisted of 52 weeks. The fiscal year ended March 31, 2013 consisted of 53 weeks.
(2) The fiscal year ended March 30, 2014, includes accrued interest of $135, the fiscal year ended March 31, 2013, includes accrued interest of $456 and legal
expenses of $8, the fiscal year ended March 25, 2012, includes accrued interest of $447 and legal expenses of $35, and the fiscal year ended March 27,
2011, includes a litigation accrual of $4,910, legal expenses of $628 and accrued interest of $63, before income taxes, all of which are related to the
damages awarded to SMG, Inc.
CO R P O R ATE PRO FI L E
Nathan’s began as a nickel hot dog stand on Coney Island in 1916 and has become a much-loved “New York institution” that
has evolved into a highly recognized brand throughout the United States and overseas.
Through our innovative points-of-distribution strategies, Nathan’s products are marketed within our restaurant system
and throughout a broad spectrum of other food-service and retail environments. Our programs provide for the sale of
Nathan’s World Famous Beef Hot Dogs, crinkle-cut French fries and other famous favorites to food-service locations nation-
wide and within eleven foreign territories and countries. In total, Nathan’s products are marketed for sale in close to 50,000
locations, including super markets and club stores throughout the United States. Last year, over 480 million Nathan’s Famous
hot dogs were sold.
Successful market penetration of our highly-recognized valued brand and products, through a wide variety of distribution
channels, continues to provide new and exciting growth opportunities.
R E V E N U E S FR O M
CO N T I N U I N G O P E R AT I O N S
($ in millions)
I N CO M E FR O M CO N T I N U I N G
O P E R AT I O N S B E F O R E
I N CO M E TA X
($ in millions)
N E T I N CO M E P E R S H A R E
$82.9
$71.5
$66.2
$57.3
$13.6
$12.1
$10.0
$1.81
$1.63
$1.22
$3.3
$0.40
’11
’12
’13
’14
’11
’12
’13
’14
’11
’12
’13
’14
SHAREHOLDER’S LETTER
Nathan’s Famous 1
Sochi Olympic Games. It is contemplated that those units will
be relocated and continue to operate as Nathan’s at other
locations in Russia.
During the past 18 months, we have signed Master Franchise
Agreements for Portugal and Costa Rica. We are also engaged
in discussions for exciting new franchise development pros-
pects in several other international territories.
In June 2014, we opened our first Nathan’s restaurant in Costa
Rica and our third in Mexico City.
Revenues from our Company-owned restaurants decreased
modestly by 1.3% to $13,231,000. The decrease in revenues
was caused by the lingering impact of Superstorm Sandy, the
damage from which prevented our flagship store in Coney
Island from re-opening until the third month of the Fiscal Year,
as well as the fact that our new store in Yonkers, New York did
not open for business until the eighth month of the Fiscal Year
(the old Yonkers store was closed in November 2012). On a
comparable basis, only looking at the same periods of both
Fiscal 2013 and 2014 when each of our Company-owned stores
were operating, revenues were up $600,000 or 5.7%. From
June to October 2013, which is the only comparable period
for the flagship Coney Island location, revenues were up
$428,000 or 9.4%.
The Branded Product Program
Sales of the Branded Product Program, which features the
sale of our World Famous Beef Hot Dogs to the food service
industry, increased by 20% to $51,877,000 during Fiscal 2014.
Pursuant to our Branded Product Program, Nathan’s World
Famous Beef Hot Dogs are sold in thousands of food service
locations throughout the United States, including over 900
Auntie Anne’s pretzel outlets, approximately 500 Regal
Cinemas, about 500 Sunoco gas and convenience stores, and
approximately 500 Hess gas and convenience stores. Our hot
dogs are now available for sale by many of the largest food
service distributors in the United States (including SYSCO,
U.S. Foodservice, Vistar and McClane) and are sold in many
movie theaters, convenience stores, casinos, amusement ven-
ues and a multitude of sports stadiums and arenas.
Product Licensing
During Fiscal 2014, license royalties decreased slightly by 0.7%
to $8,513,000.
Among our most significant product licenses is the license to
sell packaged Nathan’s Famous hot dogs through grocery
stores, supermarkets and club stores (pursuant to which our
products are sold in approximately 33,000 retail locations
E R I C G ATO F F
WAY N E N O R B I T Z
Fiscal 2014 was another strong year for Nathan’s Famous.
For the tenth consecutive year, we achieved a year-over-year
increase in revenues from continuing operations. During this
ten-year period, we have grown earnings from continuing
operations at a compounded annual rate of 19.4%.
Our primary objective continues to be to increase the number
and types of points of distribution for Nathan’s Famous prod-
ucts. This strategy has driven our success over the last several
years and transformed Nathan’s Famous from a regional quick
service restaurant concept to an internationally-recognized
brand with a wide variety of quality products sold throughout
varied channels of distribution. Today, Nathan’s Famous prod-
ucts are marketed for sale at approximately 50,000 food serv-
ice and retail locations throughout all 50 States, the District of
Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, the
Cayman Islands and 9 foreign countries. Through all channels
of distribution, over 480 million Nathan’s World Famous Beef
Hot Dogs were sold during Fiscal 2014.
FI N A N C I A L R E S U LT S
In Fiscal 2014, pre-tax earnings increased by 11.7% to $13,561,000.
After-tax earnings increased by 11.5% to $8,327,000 and earn-
ings per share increased by 11% to $1.81. Revenues increased
by 15.9% to 82,927,000.
Restaurant Operations
Revenues derived from our franchise system decreased by
2.1% to $5,718,000 during Fiscal 2014 compared to the prior
year. We believe restaurant sales were adversely impacted by
an unusually harsh winter.
During the year, we opened 56 new Nathan’s Famous franchised
units, including 9 Branded Menu Program units. The Branded
Menu Program is a new franchising concept developed by us
a few years ago which is perfect for placing limited menu
Nathan’s Famous units in co-branded settings where the fran-
chisees are not required to pay royalties.
Internationally, we have begun to roll out a specially created
Nathan’s hot dog and French fry kiosk program in Russia. As
of July 1, 2014, nine such outlets are operating in
Moscow. Additionally, Nathan’s hot dogs and
French fries were sold at 22 locations at the
Nathan’s Famous 2
throughout the United States). As most of our shareholders
are aware, this license was transitioned from Specialty Foods
Group, Inc. (or SFG) to John Morrell & Co. in March 2014. This
transition accounts for the small decrease of license royalties
during Fiscal 2014. Due to the fact that this was the last year of
SFG’s license agreement, they did not aggressively invest in or
promote the business, resulting in less pounds sold and lower
royalty payments to us. Additionally, because SFG’s agree-
ment expired at the end of February, we received no royalties
from them in the month of March. Furthermore, although
John Morrell’s new license commenced at the beginning of
March 2014, they did not actually start shipping product until
the end of the month, the result being that royalties for our
retail hot dog license in the month of March 2014 were lower.
As previously disclosed, we entered into a new 18-year license
and supply agreement with John Morrell & Co., a large meat
processing, consumer meat products and foodservice supply
company with which Nathan’s has done business for several
years. That new agreement commenced in March 2014.
Pursuant to this new agreement, John Morrell has become our
exclusive retail licensee for consumer packages of hot dogs and
sausages sold at retail, as well as a key supplier of hot dogs for
our restaurant system. The agreement also dramatically
increases John Morrell’s role as a supplier to our foodservice
business. From a consumer products/retail perspective, we
believe that John Morrell brings enormous sales and marketing
resources to the Nathan’s Famous brand. As a consequence,
we enthusiastically welcome and look forward to our new
business alliance with John Morrell. We remain confident that
the new license with John Morrell will provide significant
financial benefits to the Company and that those benefits will
begin to positively impact the Company in the first quarter of
Fiscal 2015.
Other licenses in our licensing program include a license to
sell bulk Nathan’s Famous hot dogs in specific foodservice
environments (pursuant to which our products are available,
among other places, in the foodservice cafes located in
approximately 570 Sam’s Clubs), as well as licenses to sell at
retail Nathan’s Famous Crinkle Cut French Fries, specialty
salty snacks, mustards, pickles, onion rings, franks ’n blankets
and mini bagel dogs.
B R A N D M A R K E T I N G
As a unique mainstay of our marketing efforts, we believe the
Nathan’s Famous July 4th International Hot Dog Eating Contest
is now firmly entrenched in America’s Independence Day
celebrations and we look forward to continuing the event well
into the future. In advance of this year’s contest on July 4th,
we conducted thirteen preliminary qualifying contests at high
profile locations throughout the United States. The main event
on July 4th in Coney Island attracts approximately 40,000
spectators, with millions more tuning in to watch on ESPN.
In collaboration with John Morrell, we have embarked on
many new and exciting brand marketing initiatives. Through
our relationship with John Morrell, the Nathan’s brand will be
represented as the primary or secondary sponsor of Richard
Petty Racing’s famed #43 car at nine Nascar events. We have
also worked with John Morrell to create a mobile marketing
replica of the Nathan’s experience at Coney Island, which will
be brought to more than 250 retail locations where Nathan’s
packaged products are sold. We have also partnered with an
organization called Kaboom!, through which our aim is to
sponsor free play events for children and establish Nathan’s
playgrounds in selected communities on an ongoing basis.
The Nathan’s Famous brand also continues to derive signifi-
cant marketing benefits from our sports stadium sponsorship
arrangements. In the New York area, we are proud to have our
brand and products featured at all home games of the
Yankees, Mets, Giants, Jets, Nets and Devils.
S T R AT EG I C D E V E LO P M E N T
During Fiscal 2014, we continued to execute our brand mar-
keting and points-of-distribution strategy. As a result, we
believe that the prominence of the Nathan’s Famous brand
and the presentation of Nathan’s Famous products are greater
today than ever before. We intend to continue to devote our
energies and resources to this successful strategy.
S TO C K R E P U R C H A S E S
During Fiscal 2014, we continued to return capital to our share-
holders by repurchasing 30,463 shares of common stock at a
cost of $1,486,000.
I N CO N C LU S I O N
Our focused strategies, creative approaches, and ever-
expanding opportunities should afford us with the ability to
continue to expose the Nathan’s Famous brand and advance
the sale of Nathan’s Famous products through a broad variety
of environments and distribution channels. As we seek to con-
tinue to expand and pursue profitable, new opportunities, we
will retain our steadfast commitment to quality and endeavor
to serve our shareholders responsibly. We remain extremely
appreciative of your continued support.
E R I C G ATO F F
WAY N E N O R B I T Z
Chief Executive Officer
President and Chief Operating Officer
2 0 1 4 F O R M 1 0 – K
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 30, 2014
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. 0-3189
NATHAN’S FAMOUS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
11-3166443
(I.R.S. Employer Identification No.)
One Jericho Plaza, Jericho, New York
(Address of principal executive offices)
Registrant’s telephone number, including area code:
11753
(Zip Code)
516-338-8500
Securities registered pursuant to Section 12(b) of the Act:
Common Stock – par value $.01
(Title of class)
Nasdaq Global Market
Name of each exchange on which registered
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __ No X
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 __ No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes X No __
Indicate by check mark 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. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check One):
Large accelerated filer __
Non-accelerated filer __
(Do not check if a smaller reporting company)
Accelerated filer X
Smaller reporting company __
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X
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 29, 2013 - was approximately $172,753,000.
As of June 6, 2014, there were outstanding 4,464,321 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 2014 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A of
the Securities Exchange Act of 1934.
TABLE OF CONTENTS
PART I
Page
Item 1
Business. ........................................................................................................................................................ 1
Item 1A Risk Factors. .................................................................................................................................................. 17
Item 1B Unresolved Staff Comments. ......................................................................................................................... 27
Properties. ...................................................................................................................................................... 28
Item 2
Item 3
Legal Proceedings. ......................................................................................................................................... 28
Item 4 Mine Safety Disclosures. ............................................................................................................................... 28
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities. ........................................................................................................................................................ 29
Selected Financial Data. .................................................................................................................................. 32
Item 6
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations. ......................... 33
Item 7A Quantitative and Qualitative Disclosures About Market Risk. ....................................................................... 46
Financial Statements and Supplementary Data. .............................................................................................. 47
Item 8
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. ........................ 47
Item 9
Item 9A Controls and Procedures. ................................................................................................................................ 48
Item 9B Other Information. .......................................................................................................................................... 48
PART III
Item 10. Directors, Executive Officers and Corporate Governance. ............................................................................ 50
Item 11. Executive Compensation. ............................................................................................................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. ...... 50
Item 13. Certain Relationships and Related Transactions, and Director Independence. .............................................. 50
Item 14. Principal Accountant Fees and Services. ....................................................................................................... 51
PART IV
Item 15. Exhibits and Financial Statement Schedules. .................................................................................................. 52
Signatures ....................................................................................................................................................................... 54
Index to Financial Statements ....................................................................................................................................... F-1
i
PART I
Forward-Looking Statements
Statements in this Form 10-K annual report may be “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements
that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future
activities or other future events or conditions. These statements are based on current expectations, estimates and projections
about our business based, in part, on assumptions made by management. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult to predict. These risks and uncertainties,
many of which are not within our control, include but are not limited to: economic, weather (including the three-year
drought in the Midwest, along with freezing temperatures during the winter causing a reduced supply of cattle and any
continued impact of Superstorm Sandy), and continued increases in the price of beef trimmings; our ability to pass on the
cost of any price increases in beef and beef trimmings; legislative and business conditions; the collectability of receivables;
changes in consumer tastes; the status of our licensing and supply agreements, any issues arising from or related to the
transition from SMG to John Morrell & Co. as our primary hot dog supplier and the termination in March 2014 of our
previous hot dog supply agreement with SMG; the ability to continue to attract franchisees; labor costs including no
material increases in the minimum wage or the impact of new union contracts; our ability to attract competent restaurant
and managerial personnel; the impact of changes in the economic relationship between the United States and Russia; and
the future effects of any food borne illness; such as bovine spongiform encephalopathy, BSE; as well as those risks
discussed from time to time in this Form 10-K annual report for the year ended March 30, 2014, and in other documents
which we file with the Securities and Exchange Commission. Therefore, actual outcomes and results may differ materially
from what is expressed or forecasted in the forward-looking statements. We generally identify forward-looking statements
with the words “believe,” “intend,” “plan,” “expect,” “anticipate,” “estimate,” “will,” “should” and similar expressions.
Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation
to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-K.
Item 1.
Business.
As used herein, unless we otherwise specify, the terms “we,” “us,” “our,” “Nathan’s,” “Nathan’s Famous” and
the “Company” mean Nathan’s Famous, Inc. and its subsidiaries, including NF Treacher’s Corp.
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. The Company considers itself to be in
the foodservice industry, and has pursued co-branding and co-hosting initiatives. Our major channels of distribution are as
follows:
(cid:404) 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.
(cid:404) Our Franchise program, including the Branded Menu Program. The Branded Menu Program enables qualified
foodservice operators to offer a menu of Nathan’s World Famous Beef Hot Dogs, crinkle-cut French fries,
proprietary toppings and other Nathan’s Famous menu offerings.
(cid:404) The Branded Product Program which allows foodservice operators to prepare and sell Nathan’s World Famous
Beef Hot Dogs and certain other proprietary products outside of the realm of a traditional franchise
relationship while making limited use of the Nathan’s Famous trademarks.
(cid:404) A licensing program, which authorizes various third parties to manufacture, market and distribute various bulk
and packaged products bearing the Nathan’s Famous trademarks to food service customers as well as retail
customers through supermarkets, club stores and other grocery-type outlets.
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.
1
In recent years, our primary focus has been to expand the market penetration of the Nathan’s Famous brand.
Specifically, we have sought to increase the number of points of brand representation and product sales throughout our
various channels of distribution. In this regard, we have concentrated our efforts on:
(cid:404)
(cid:404)
expanding the number of foodservice locations participating in the Nathan’s Famous Branded Product
Program;
expanding the number of domestic franchised Nathan’s Famous restaurant units through the opening of new
and innovative types of locations, such as through the Branded Menu Program, as well as the development of
an international franchising program;
(cid:404)
expanding our licensing programs for packaged Nathan’s Famous products through new product introductions
and geographic expansion; and
(cid:404) operating our existing Company-owned restaurants.
As a result of our efforts to expand the Nathan’s Famous brand, as of March 30, 2014:
(cid:404) our Nathan’s Famous restaurant system consisted of 324 franchised units and five Company-owned units
(including one seasonal unit) located in 28 states, the Cayman Islands, and eight foreign countries;
(cid:404) our Nathan’s Famous Branded Product Program distributes our Nathan’s World Famous Beef Hot Dogs
throughout all 50 states, the District of Columbia, Puerto Rico, Canada, the US Virgin Islands, Guam and
Mexico; and
(cid:404) Nathan’s Famous packaged hot dogs and other products continued to be offered for sale within approximately
33,000 supermarkets and club stores in 45 states.
Our revenues are generated primarily from sales of products sold through our Branded Product Program and
within our Company-owned restaurants, as well as from the royalties, fees and other sums we earn from our franchising
and licensing activities.
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, Branded Products, Branded
Menu and retail licensing programs. We may also selectively consider opening new Company-owned restaurants.
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 Corporation.
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.
2
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 51 and 34 units, respectively.
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 its secret blend of spices provided 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 in more than 97 years in our Company-owned and
franchised restaurants. Our signature crinkle-cut French fries, cooked in 100% trans-fat-free oil, 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 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: 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 individual items; 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 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 course of its evaluations, the Company seeks to respond
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.
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 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, kiosks and modular units generally carry only the core menu. This
menu is supplemented by a number of other menu selections in our other restaurant types.
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 our expanding Branded Menu Program or Branded Product Program.
All of these units feature the Nathan’s logo and utilize a contemporary design.
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 the Arthur Treacher’s and 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.
3
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 and Miami Subs restaurants existing at April 23, 2008, where the Kenny Rogers
products had already been introduced.
Franchise Operations
At March 30, 2014, our Nathan’s franchise system, including our Branded Menu Program, consisted of 324 units
operating in 28 states, the Cayman Islands, and eight foreign countries.
Our franchise system includes among its 146 franchisees such well-known companies as HMS Host, Compass
Group USA, Inc., Gourmet Dining Services, Inc., Delaware North, Areas USA FLTP, LLC, CulinArt, Cinemark Theaters,
National Amusements, Hershey Entertainment and Six Flags Theme Parks. We continue to market our franchising
programs to larger, 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.
During our fiscal year ended March 30, 2014, no single franchisee accounted for over 10% of our consolidated
revenue. At March 30, 2014, HMS Host operated 17 franchised outlets, including three units at airports, 13 units within
highway travel plazas and one unit within a mall. Additionally, at March 30, 2014, HMS Host operated 40 locations
featuring Nathan’s products pursuant to our Branded Product Program. At March 30, 2014, there were also 38 Kmart
locations and 44 Brusters Real Ice Cream shops selling Nathan’s products under our Branded Menu Program.
Nathan’s Standard Franchise Program
Franchisees are required to execute a standard franchise agreement prior to opening each Nathan’s Famous unit.
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. We may offer alternatives to the standard franchise agreement,
having to do with 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 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-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-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 system-wide benefits.
4
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 fiscal 2014, franchisees opened 21
new Nathan’s Famous franchised units in the United States (including seven Branded Menu Program units), and 35 units
internationally. In February 2014, we terminated our Development Agreement in Canada and entered into a new agreement
consisting of Foodservice Programs and a Retail Participation Program. As a result of the termination, the Master
Franchisee, no longer has the exclusive right to develop restaurants, either direct owned or franchised, or to operate a retail
program. Instead, the Master Franchisee may act as our sales agent to prospective restaurant operators for Nathan’s, in
Canada.
A franchisee who desires to open multiple units 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 units which the franchisee is authorized to open. As units are opened under such agreements, a portion of such
area development fee may be credited against the franchise fee payable to us, as provided in the standard franchise
agreement. We may also grant exclusive territorial rights in foreign countries for the development of Nathan’s units based
upon compliance with a predetermined development schedule. Additionally, we may further grant exclusive manufacturing
and distribution rights in foreign countries, and we expect to require an exclusivity fee to be conveyed for such exclusive
rights.
Nathan’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.
Nathan’s does not collect a royalty directly from the operator and the operator is not required to report sales to Nathan’s as
required by the standard franchise arrangements. The Branded Menu Program operator is required to purchase products
from Nathan’s approved distributors; we earn our royalties from such purchases.
As of March 30, 2014, the Nathan’s Branded Menu Program was comprised of 134 outlets, which included 38
Nathan’s Famous Branded Products within K-Marts and 44 Nathan’s Famous Branded Products within Brusters Real Ice
Cream shops, a premium ice cream franchisor headquartered in Western Pennsylvania with approximately 200 company-
owned and franchised ice cream shops located largely in the southeast United States.
Arthur Treacher’s
We are the sole owner of all rights to the Arthur Treacher’s brand and the exclusive franchisor of the Arthur
Treacher’s restaurant system (subject to a limited license granted to PAT Franchise Systems, Inc. (“PFSI”) in Indiana,
Michigan, Ohio, and Pennsylvania, (“the PFSI Markets”). Accordingly, we have no obligation to pay fees or royalties to
PFSI in connection with our use of the Arthur Treacher’s intellectual property. Similarly, PFSI has no obligation to pay
fees or royalties to us in connection 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.
As of March 30, 2014, Arthur Treacher’s co-branded operations were included within 51 Nathan’s Famous
restaurants. Historically, our primary intention was to continue including co-branded Arthur Treacher’s operations within
our Nathan’s Famous restaurants and explore alternative distribution channels for Arthur Treacher’s products. The Branded
Menu Program was extended on an opportunistic basis to include certain Arthur Treacher’s products to Nathan’s operators.
During fiscal 2014, we entered into our first Arthur Treacher’s Branded Menu Program agreement allowing a non-Nathan’s
restaurant to market the Arthur Treacher’s products. The development agreement provides for up to 55 locations in the
Rochester, New York area. The agreement requires opening fees be conveyed to Nathan’s in addition to ongoing royalties
5
based on the proprietary products purchased. The first location opened on March 9, 2014. We may seek to expand the
opportunity for an Arthur Treacher’s Branded Menu Program and may explore a franchising program focused on the
expansion of traditional, full-menu Arthur Treacher’s restaurants outside of the PFSI Markets in the future.
Company-owned Nathan’s Restaurant Operations
As of March 30, 2014, we operated five Company-owned Nathan’s units, including one seasonal location, in New
York. 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, re-opened on November 18, 2013 pursuant to a
new lease, after being closed for renovation since November 2012. Our Company-owned restaurants range in size from
approximately 3,500 square feet to 10,000 square feet, which are generally free-standing buildings 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. In March 2012, we relocated our seasonal restaurant to a more prominent
location on the Coney Island Boardwalk. We have entered into agreements to terminate our current lease and relocate to a
smaller location within the immediate area in Oceanside, NY. These agreements are contingent upon the landlord obtaining
the necessary permit and variances from the building department. We expect to operate at the current location through
November 2014, and are seeking to open in the new location in March 2015. 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 newer 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. To duplicate
these older units would require significantly higher levels of initial investment than current franchise restaurants and may
operate at a lower sales/investment ratio. Consequently, we do not intend to replicate these older designs in any future
Company-owned restaurants.
International Development
As of March 30, 2014, Nathan’s Famous franchisees operated 61 units in eight foreign countries, and the Cayman
Islands, having significant operations within Russia and Kuwait. During fiscal 2014 we opened 35 new units
internationally, including 34 franchise locations in Russia and our second location in Mexico. Of the locations opened in
Russia, 22 units were operated at the Sochi Olympics. Although some of the Sochi locations have closed, we expect that
the majority of those temporary units will be relocated to permanent locations.
In February 2014, we terminated our Development Agreement in Canada and entered into a new agreement
consisting of Foodservice Programs and a Retail Participation Program. As a result of the termination, the Master
Franchisee, no longer has the exclusive right to develop restaurants, either directly owned or franchised, or to operate a
retail program. Instead, the Master Franchisee may act as our sales agent to prospective restaurant operators on behalf of
Nathan’s, and if successfully opened, would receive a fee equal to 20% of any opening fee and ongoing royalties actually
earned and collected during the term. The Master Franchisee also has the exclusive right to license approved foodservice
operators to participate in the Nathan’s Branded Menu Program. The Master Franchisee is then obligated to pay Nathan’s
35% of all initial fees, subject to a minimum, and 35% of all rebates earned. Additionally, Nathan’s has licensed to John
Morrell & Co. the exclusive right to distribute, market and sell consumer packages of “Nathan’s Famous” hot dogs through
retail channels throughout Canada. Nathan’s has also agreed to pay 20% of its license royalties earned in Canada to the
Master Franchisee for 15 years.
As of March 30, 2014, we have executed Master Franchise Agreements and Retail Distribution Agreements
throughout Costa Rica and Lisbon, Portugal and have received non-refundable fees of $125,000 and $35,000, respectively.
The agreement for Lisbon, also provides for the option to further development throughout Portugal. We have executed a
Letter of Intent for the development of Nathan’s restaurants in Singapore and Malaysia, and a separate Letter of Intent for
Nigeria, for which we have received non-refundable deposits of $45,000 and $25,000, respectively.
6
We will 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.
Following is a summary of our international operations for the fiscal years ended March 30, 2014, March 31, 2013
and March 25, 2012: See Item 1A-“Risk Factors.”
Total revenue ....................................................................................... $
Gross profit (a) .................................................................................... $
March 30,
2014
3,531,000 $
1,765,000 $
March 31,
2013
3,044,000 $
1,193,000 $
March 25,
2012
1,688,000
726,000
(a) Gross profit represents the difference between revenue and cost of sales.
7
Location Summary
The following table shows the number of our Company-owned and franchised units in operation at March 30,
2014 and their geographical distribution:
Domestic Locations
Alabama ...................................................................................................
Arizona .....................................................................................................
Arkansas ...................................................................................................
California .................................................................................................
Connecticut ..............................................................................................
Florida ......................................................................................................
Georgia .....................................................................................................
Illinois ......................................................................................................
Kentucky ..................................................................................................
Maryland ..................................................................................................
Massachusetts ...........................................................................................
Michigan ..................................................................................................
Missouri ...................................................................................................
Mississippi ...............................................................................................
Nevada .....................................................................................................
New Hampshire ........................................................................................
New Jersey ...............................................................................................
New Mexico .............................................................................................
New York .................................................................................................
North Carolina ..........................................................................................
Ohio ..........................................................................................................
Pennsylvania ............................................................................................
Rhode Island ............................................................................................
South Carolina ..........................................................................................
Tennessee .................................................................................................
Texas ........................................................................................................
Vermont ...................................................................................................
Virginia ....................................................................................................
Domestic Subtotal ....................................................................................
Company
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5
-
-
-
-
-
-
-
-
-
5
Franchise (1)
2
1
1
3
7
27
22
1
6
3
9
5
1
1
13
1
38
2
71
2
10
19
2
7
2
3
1
3
263
Total (1)
2
1
1
3
7
27
22
1
6
3
9
5
1
1
13
1
38
2
76
2
10
19
2
7
2
3
1
3
268
International Locations
Company
Franchise (1)
Total (1)
Afghanistan ..............................................................................................
Canada ......................................................................................................
Cayman Islands ........................................................................................
Dominican Republic .................................................................................
Egypt ........................................................................................................
Jamaica .....................................................................................................
Kuwait ......................................................................................................
Mexico .....................................................................................................
Russia .......................................................................................................
International Subtotal ...............................................................................
Grand Total ..............................................................................................
-
-
-
-
-
-
-
-
-
-
5
1
4
1
6
1
2
13
2
31
61
324
1
4
1
6
1
2
13
2
31
61
329
(1)
Amounts include 135 units operated pursuant to our Nathan’s and Arthur Treacher’s Branded Menu Programs.
Units operating pursuant to our Branded Product Program are excluded.
8
Branded Product Program
Through the Branded Product Program, Nathan’s provides qualified foodservice operators in a variety of venues
the opportunity to capitalize on Nathan’s valued brand by marketing and selling certain Nathan’s Famous signature
products. We believe that the program is unique in its flexibility and broad appeal. Hot dogs are offered in a variety of sizes
and even come packaged with buns for vending machine use. 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 provide the products to retailers.
As of March 30, 2014, the Branded Product Program distributed product in all 50 states, the District of Columbia,
Puerto Rico, the U.S. Virgin Islands, Guam, Canada and Kuwait. During fiscal 2014, the number of locations offering
Nathan’s branded products continued to expand. Today, Nathan’s World Famous Beef Hot Dogs are being offered in
national restaurant chains such as Auntie Anne’s and Cheesecake Factory, national movie theater chains such as Regal
Entertainment, National Amusements and Rave Theaters, national retail chains such as Kmart, casino hotels such as
Foxwoods Casino in Connecticut and Turning Stone Casino in upstate New York and convenience store chains such as
Hess, Sunoco and Race Trac. The Branded Products Program also continued its representation 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, New York Islanders, Brooklyn Nets, Boston Celtics, Boston Bruins, Carolina Panthers and Charlotte
Bobcats. Additionally, our products are offered in numerous other foodservice operations including cafeterias, snack bars
and vending machines located in many different types of outlets and venues, including airports, highway travel plazas,
colleges and universities, military installations and Veteran’s Administration hospitals throughout the country.
Nathan’s expects to continue to seek out and evaluate a variety of alternative means designed to maximize the
value of 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. who expects to leverage this new relationship with full-scale marketing efforts, both inside and outside
of stores, highlighted by exciting customer events including a three race NASCAR Sprint Cup Series sponsorship with
Richard Petty Motorsports and the addition of new settings for the Hot Dog Eating Contest Qualifying Events.
Additionally, John Morrell & Co. has initiated a mobile marketing tour whereby merchandising trucks will make 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
intend to keep targeting sales to a broad line of food distributors, which we believe compliments our continuing focus on
sales to various retail chains. 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 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.
We believe that our international development efforts will continue 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 that 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.
9
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. During fiscal 2014, we expanded our Arthur
Treacher’s co-branding efforts beyond the Nathan’s restaurant system, by marketing the Branded Menu Program to a multi-
unit restaurant operator and 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 30, 2014, the Arthur Treacher’s brand was being sold within 51 Nathan’s restaurants and the Kenny
Rogers Roasters brand was being sold within 34 Nathan’s restaurants. We have the right to sell Kenny Rogers products in
our Nathan’s locations existing in April 2008 and to receive the revenue from those sales. Consequently, we have continued
co-branding with Kenny Rogers products within those Nathan’s Famous locations.
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.
We continue to market co-branded Nathan’s units with Arthur Treacher’s within the United States and
internationally. 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.
Licensing Program
Commencing March 2, 2014, John Morrell & Co., a subsidiary of Smithfield Foods, Inc., replaced SMG, Inc. as
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, sausage and corned beef products in refrigerated consumer packages to be resold through retail channels (e.g.,
supermarkets, groceries, mass merchandisers and club stores) within the United States, (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 Agreement 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. Nathan’s earned $548,000 during the
initial month of the Agreement with John Morrell & Co. Sales during this period were hampered as retail inventory
produced by SMG was being sold off. The prior agreement with SMG (the “SMG License Agreement”) provided for
royalties ranging between 3% and 5% of sales. The percentage varied based on sales volume, with escalating annual
minimum royalties. Nathan’s earned royalties of approximately $4,600,000 in fiscal 2014 and $5,506,000 in fiscal 2013
pursuant to the SMG License Agreement which exceeded their contractual minimums established under the Previous
License Agreement. While we believe our future operating results will be beneficially impacted by the terms and conditions
of the new agreement with John Morrell & Co., as compared to the terms and conditions of the previous agreement with
SMG, there can be no assurance thereof (See Item 1A - “Risk Factors”).
10
For eight years, John Morrell & Co. has licensed from us the right to manufacture and sell branded hot dogs and
sausages to selected foodservice accounts. Pursuant to this arrangement, we earned royalties of $1,594,000 and $1,442,000
during fiscal 2014 and 2013, respectively. The majority of these royalties were earned from one account. Effective March
2, 2014, this arrangement will now be governed by our new license/supply agreement with John Morrell & Co., pursuant to
which John Morrell & Co. will endeavor to perpetuate the business with the existing foodservice accounts they are
currently servicing with our bulk products, as well as look for new foodservice opportunities within the environments of
supermarkets, club stores, grocery stores and other retail locations that sell our consumer hot dog packages.
Under the new Agreement, the then-existing food service licensing arrangements terminated and were replaced by
the new license agreement whereby John Morrell & Co. has the exclusive right to supply only certain food service
customers including Sam’s Club and other food service operations that exist within supermarkets, club stores, grocery
stores and mass merchandisers.
As of March 30, 2014, packaged Nathan’s World Famous Beef Hot Dogs continued to be sold in approximately
33,000 supermarkets and mass merchandisers including Costco, Wal-Mart, Sam’s Clubs, Target and BJ’s located in 45
states. 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 these
three agreements were approximately 79.2% of our fiscal 2014 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. During fiscal 2014 and 2013, we earned $707,000 and $728,000, respectively, from this
license. In the past, Newly Weds Foods, Inc. provided Nathan’s with a secondary source of supply although they did not
supply any spices during fiscal 2014.
During fiscal 2014, our licensee ConAgra Foods Lamb Weston, Inc. continued to produce and distribute Nathan’s
Famous frozen French fries and onion rings for retail sale pursuant to a license agreement. These products were distributed
within 27 states, primarily on the East Coast and in the South-West and West Coast during fiscal 2014. During fiscal 2014
and 2013, we earned royalties of $335,000 and $297,000, respectively, under this agreement. For the contract year ended in
July 2013, we earned royalties of $19,000 in excess of the annual minimum. ConAgra Foods Lamb Weston, Inc. continues
to seek to further expand its market penetration in the Eastern United States and in the Mid-West. During fiscal 2013,
ConAgra Foods Lamb Weston, Inc. exercised its second option to extend the license agreement through July 2018,
pursuant to which the minimum royalties will increase 5% annually.
During fiscal 2014, we continued to license the right to manufacture and sell miniature bagel dogs, franks-in-a-
blanket and other hors d’oeuvres through club stores, supermarkets and other retail food stores. Royalties earned under this
agreement were approximately $340,000 during fiscal 2014 and $258,000 during fiscal 2013. In connection with the
extension of the agreement, we amended the license agreement reducing the minimum annual royalties to $225,000 for the
contract year ending September 2014.
In fiscal 2012, we entered into a new 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 $88,000 during fiscal 2014 and $130,000 during fiscal 2013.
We also have licensing agreements with Hermann Pickle Packers, Inc., Gold Pure Food Products Co., Inc. and
others. These companies licensed the “Nathan’s Famous” or “Arthur Treacher’s” name for the manufacture and sale of
various products including mustard, salsa, sauerkraut and pickles. These products have been distributed on a limited basis.
Fees and royalties earned from all of these products were approximately $301,000 during fiscal 2014 and $210,000 during
fiscal 2013.
11
Provisions and Supplies
Effective March 2, 2014, Nathan’s World Famous Beef Hot Dogs are being primarily manufactured by John
Morrell & Co. for sale by our restaurant system, Branded Product Program and at retail. Previously, John Morrell & Co.
manufactured our proprietary hot dogs in connection with sales pursuant to our Branded Product Program. Our proprietary
hot dogs for sale by our restaurant system, Branded Product Program and at retail were produced primarily by SMG 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 Specialties produces Nathan’s
proprietary spice formulations and we have, in the past, also engaged Newly Weds Foods, Inc. as an alternative source of
supply. Our frozen crinkle-cut French fries have been produced exclusively by ConAgra Foods Lamb Weston, Inc.
Beginning in fiscal 2013, we commenced a relationship with McCain Foods USA as a secondary source of supply of our
frozen French fries for our restaurant system. 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 quality items at competitive prices.
We utilize a unified source for the distribution needs of our restaurant system pursuant to a national food
distribution contract with US Foodservice, Inc. This agreement enables our restaurant operators to order and receive
deliveries for the majority of their food and paper products directly through this distributor. We believe that this
arrangement not only ensures availability of product but is more efficient and cost-effective than having multiple
distributors for our restaurant system. Effective August 1, 2013, we entered into a new agreement with US Foodservice that
expires on July 31, 2018. The terms and conditions are similar to their previous agreement. Our branded products are
delivered to our ultimate customers throughout the country by numerous distributors, including US Foodservice, Inc.,
SYSCO Corporation, Vistar / VSA, McLane and Performance Foodservice.
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 restaurants, the Branded
Product Program, the Branded Menu Program, within 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 the markets that we
serve and have also entered new markets. We also derive further brand recognition from the Nathan’s Famous Hot Dog
Eating Contests. In 2013, we hosted 12 regional 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 within the cities of St. Paul, MN, Atlanta, GA,
Miami, FL, Pittsburgh, PA, Cleveland, OH, Boston, MA and Calgary, Alberta (Canada). In 2014, the qualifying tour will
stop in four new cities. We are also premiering at NASCAR events including the annual Speed Street celebration in
Charlotte, NC, Long Pond Speedway in the Poconos and Sonoma Raceway in northern California. Nathan’s held its’ first-
ever qualifier at Busch Stadium prior to the St. Louis Cardinals Game in May. Our first regional contest of 2014 took place
in Las Vegas on April 26th and stops in 12 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 included the top finishing female
competitor from each qualifying regional contest. The regional contests typically garner significant amounts of local
publicity and the national championship contest that is held on July 4th each year generates significant nationwide publicity.
The national championship contest has been broadcast on ESPN since 2004.
Nathan’s and John Morrell & Co. will also participate together in running two 6-week radio campaigns during the
summer of 2014.
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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 sell its Nathan’s World
Famous Beef Hot Dog 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 premium seating areas. Some of Nathans’ current sports sponsorships include:
(cid:404) Professional Baseball: Yankee Stadium-New York Yankees, Citifield-New York Mets;
(cid:404) Professional Hockey and Basketball: The Barclays Center - Brooklyn Nets; The Prudential Center – New
Jersey Devils; TD Bank North Arena-Boston Celtics and Boston Bruins, Time Warner Cable Arena-Charlotte
Bobcats and The Scottrade Center – St. Louis Blues; and
(cid:404) Professional Football: MetLife Stadium-New York Giants and New York Jets,
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 must 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 are not obligated to contribute to the advertising fund.
Throughout fiscal 2014, Nathan’s primary restaurant marketing emphasis continued to be 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 marketing efforts include the use of free-standing inserts with coupons in Sunday newspapers. During
fiscal 2014, our marketing activities continued with the use of free-standing inserts in addition to a radio flight in June 2013
and use of a localized newsprint campaign in August 2013. Nathan’s plans to expand its radio campaign to support all of its
marketing activities and continue with the use of free-standing inserts during fiscal 2015. These media campaigns typically
reach more than eight million homes per insertion in the area surrounding more than 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 may add additional campaigns in the future.
The objective of our Branded Product Program has historically been to provide our foodservice operator customers
with value-added, high quality products supported with high quality and attractive point of sale materials and other forms
of operational support.
During fiscal 2014, Nathan’s marketing efforts for the Branded Product Program concentrated primarily on
participation in national, regional and local distributor trade shows. 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. 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 also are responsible for direct sales to
national, regional and “street” accounts.
During fiscal 2015, 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 in the process of upgrading our social media platforms by enhancing our corporate website and Facebook page
and expanding the use of Twitter.
13
Government Regulation
We are subject to 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 Rule”) requires us to disclose certain information to
prospective franchisees. Fifteen states, including New York, also require similar disclosure. While the FTC Rule does not
require registration or filing of the disclosure document, 14 states require franchisors to register the disclosure document (or
obtain exemptions from that requirement) before offering or selling a franchise. 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 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 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 are not aware of any pending franchise legislation in the U.S. 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.
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. 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 Federal Americans with
Disabilities Act 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.
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 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. Three of our Company-owned restaurants offer beer or wine coolers for sale. Each
of these restaurants has current alcoholic beverage licenses permitting the sale of these beverages. We have never had an
alcoholic beverage license revoked.
14
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 and rules promulgated thereunder by the 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 Rule and state franchise laws.
Employees
At March 30, 2014, we had 210 employees, 43 of whom were corporate management and administrative
employees, 22 of whom were restaurant managers and 145 of whom were hourly full-time and part-time foodservice
employees. We may also employ approximately 100 – 125 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, 2014. 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 41 years.
We provide a training program for managers and assistant managers of our new Company-owned and 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, and THE
ORIGINAL SINCE 1916 NATHAN’S FAMOUS and design within the United States, with some of these marks holding
corresponding foreign trademark and service mark registrations in 69 international jurisdictions, including Canada and
China. We also hold various related marks, FRANKSTERS, FROM A HOT DOG TO AN INTERNATIONAL HABIT,
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 and design in Canada and Mexico and ARTHUR TREACHER’S FISH &
CHIPS and design in Kuwait 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 business is affected by seasonal fluctuations, including the effects of weather and economic conditions.
Historically, sales from Company-owned restaurants, franchised restaurants from which 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. This seasonality is primarily attributable to weather conditions in the marketplace for our
Company-owned and franchised Nathan’s restaurants, which is principally the Northeast. 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.
15
Competition
The fast food restaurant industry is highly competitive and can be significantly affected by many factors, including
changes in local, regional or national economic conditions, changes in consumer tastes, consumer concerns about the
nutritional quality of quick-service food and increases in the number of, and particular 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 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. As fast food companies have experienced flattening growth rates and declining
average sales per restaurant, many of them 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 franchisors of restaurants 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-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 supermarkets competes primarily on the basis
of reputation, flavor, quality and price. In most cases, we compete against other nationally-recognized brands that have
significantly greater resources than those at our disposal.
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 Exchange Act are available free of charge on our website as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the SEC.
The Board of Directors 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.
16
Item 1A. Risk Factors.
Our business is subject to various risks. Certain risks are specific to each way we do business, such as through
Company-owned restaurants, franchised restaurants, 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.
Our agreement with SMG expired on March 1, 2014 and we entered into a new agreement with John Morrell &
Co. which commenced on March 2, 2014. The risks associated with a change of our primary supplier have the potential
to impact the operations and profitability of our Licensing, Branded Product Program (“BPP”) and Restaurant
businesses as well as Nathan’s reputation.
Our agreement with SMG expired on March 1, 2014 and we entered into a new agreement with John Morrell &
Co. to become our primary supplier / licensee commencing March 2, 2014. The risks associated with a change of our
primary supplier / licensee could materially impact the operations and profitability of our Licensing, BPP and Restaurant
businesses as well as Nathan’s overall brand reputation. There are risks associated with changing a key supplier including
whether we can successfully implement an orderly transition of the business to John Morrell & Co. and whether John
Morrell & Co. will perform its obligations or have the same level of commitment to perform its obligations for the duration
of the agreement. There are also certain risks associated with engaging John Morrell & Co. as the exclusive licensee
including (i) whether we can maintain or improve the quality and consistency of our products that is expected by our
customers (ii) whether John Morrell & Co. will have a sufficient supply of products available for our restaurant,
foodservice and retail customers on a timely basis and (iii) whether John Morrell & Co. will deliver sales and marketing
efforts at the retail level that are at least consistent with SMG.
While we believe that for the most part, we have been able to manage a transparent transition, the failure to
provide the same or higher quality and consistency and/or implement an orderly transition of the business could adversely
affect our reputation and results of operations of our licensing, Branded Product Program and restaurant businesses.
John Morrell & Co. currently has three manufacturing facilities producing different Nathan’s products and a
long-term significant interruption of a primary facility could potentially disrupt our operations.
John Morrell & Co. currently has three manufacturing facilities producing different Nathan’s products. A
temporary closure of any of the three plants could potentially cause a temporary disruption to Nathan’s source of supply,
potentially causing some or all of certain shipments to customers to be delayed. A longer-term significant interruption at
any 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 Morrell & Co. determined 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 Nathan’s
business, results of operations and financial condition. Furthermore, such a disruption in supply might affect Nathan’s in
the eyes of consumers and the retail trade, which damage might negatively impact the Company’s overall business in
general, which could result in a material adverse effect on our business, results of operations or financial condition.
17
The loss of one or more of our key suppliers could lead to supply disruptions, increased costs and lower
operating results.
The Company has historically relied on one supplier for the majority of its hot dogs and another supplier for a
majority of its supply of frozen French fries for its restaurant system. An interruption in the supply of product from either
one of these suppliers without the Company 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 agreement with a secondary hot dog manufacturer that continues to also
supply natural casing hot dogs for the Nathan’s restaurant business.
Additionally, a majority of the frozen crinkle-cut French fries sold through Nathan’s 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 fiscal 2014, McCain Foods USA supplied approximately 15% of
the frozen crinkle-cut French fries sold through Nathan’s franchised restaurants. We expect that McCain Foods USA will
supply between 10% and 15% of the frozen crinkle-cut French fries sold through Nathan’s franchised restaurants during
fiscal 2015.
In the event that the hot dog or French fry suppliers are unable to fulfill Nathan’s 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 the Company’s ability to operate its business on a day-to-day
basis.
In the event that the Company is 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 Company-owned restaurants, franchised restaurants and
Branded Product accounts, which would damage the Company, its franchisees and Branded Product customers and, in turn,
negatively impact the Company’s financial results. In addition, any gap in supply to retail customers would result in lost
royalty payments to the Company, which could have a significant adverse financial impact on the Company’s results of
operations. Furthermore, any gap in supply to retail customers may damage the Nathan’s Famous trademarks in the eyes of
consumers and the retail trade, which damage might negatively impact the Company’s overall business in general and
impair the Company’s ability to continue its retail licensing program.
Additionally, there is no assurance that any supplemental sources of supply would be capable of meeting the
Company’s specifications and quality standards on a timely and consistent basis or that the financial terms of such supply
arrangement will be as favorable as the Company’s present terms with its hot dog or French fry supplier, as the case may
be.
Any of the foregoing occurrences may cause disruptions in supply of the Company’s hot dog or French fry
products, as the case may be, damage the Company’s franchisees and Branded Product customers, adversely impact the
Company’s financial results and/or damage the Nathan’s Famous trademarks.
Nathan’s currently uses US Foodservice as the primary distributor for its Company-owned restaurants and the
vast majority of its franchise system, including its Branded Menu locations pursuant to a five-year contract.
Nathan’s currently uses US Foodservice as the primary distributor for its Company-owned restaurants and the vast
majority of its franchise system, including its Branded Menu locations pursuant to a five-year contract. In December 2013,
SYSCO Foods announced that they are seeking to acquire US Foodservice, Inc. The merger of these two national broad-
line distributors would provide the combined entity with an estimated market share of 30% of foodservice distribution
making them the single dominant distributor in the industry. This merger has the potential to significantly reduce
competition for foodservice distribution. Both SYSCO and US Foods purchase significant amounts of product from our
Branded Product Program. The merger has the potential to increase our cost of sales and use their size to negotiate lower
selling prices of our Branded Product Program.
18
A significant amount of 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 BPP accounts could harm our profitability and operating results.
SFG accounted for approximately 54% of our fiscal 2014 licensing revenue. John Morrell & Co. accounted for
approximately 34% of our fiscal 2014 licensing revenue whose business is weighted towards one high volume user who is
not sold pursuant to a formal agreement. It is expected that beginning in fiscal 2015, the vast majority of license royalties
will be earned from John Morrell & Co. In the event that this licensee or any other significant licensee, or its customers,
experience financial difficulties or is not willing to do business with us in the future on terms acceptable to management,
there could be a material adverse effect on our business, results of operations or financial condition.
In addition, approximately 76% of our Branded Product Program business is from seven accounts, including one
account representing approximately 27% of the Branded Product Program 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 us in the future on terms acceptable to management, there could be
a material adverse effect on our business, results of operations or financial condition.
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 regarding price, service,
location, personnel and type and quality of food. Nathan’s and its franchisees compete with international, national, regional
and local retailers primarily through the quality, variety and value perception of food products offered. Other key
competitive factors include the number and location of restaurants, quality and speed of service, attractiveness of facilities,
effectiveness of advertising and marketing programs, and new product development. Nathan’s anticipates competition will
continue to focus on pricing. Many of Nathan’s 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 Nathan’s. 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, Nathan’s system competes 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 Nathan’s is unable to
maintain its competitive position, it 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.
Changes in economic, market and other conditions could adversely affect Nathan’s and its franchisees, and
thereby Nathan’s 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, 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, fluctuating 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
affect restaurant operations and administrative expenses. The ability of Nathan’s and its franchisees to finance new
restaurant development, 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.
19
Current restaurant locations may become unattractive, and attractive new locations may not be available for a
reasonable price, if at all, which may reduce Nathan’s 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 Nathan’s
and its franchisees cannot obtain desirable additional and alternative locations at reasonable prices, Nathan’s 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
products.
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;
(cid:404)
(cid:404)
(cid:404) product tampering; and
(cid:404)
the potential cost and disruption of a product recall.
Our products are susceptible to contamination by disease-producing organisms, or pathogens, such as listeria
monocytogenes, salmonella, campylobacter, hepatitis A, trichinosis and generic E. coli. 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-operated 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. 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 incidents involving food-borne illnesses or food tampering, whether or not
accurate, can cause damage to each of Nathan’s 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 Nathan’s as well. Each of Nathan’s brand’s reputation is an
important asset to the business; as a result, anything that damages a brand’s reputation could immediately and severely hurt
systemwide sales and, accordingly, revenue and profits. If customers become ill from food-borne illnesses, Nathan’s could
also be forced to temporarily close some 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 systemwide 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 Nathan’s restaurants, could
materially harm Nathan’s business, results of operations and financial condition.
Additionally, the Company may be subject to liability if the consumption of any of its products causes injury,
illness, or death. A significant product liability judgment or a widespread product recall may negatively impact the
Company’s 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 Company products caused illness or injury could adversely affect the Company’s reputation
with existing and potential customers and its corporate and brand image. Injury to Nathans’ or a brand’s reputation would
likely reduce revenue and profits.
Changing health or dietary preferences may cause consumers to avoid products offered by Nathan’s in favor of
alternative foods.
The foodservice industry is affected by consumer preferences and perceptions. If prevailing health or dietary
preferences, perceptions and governmental regulation cause consumers to avoid the products offered by Nathan’s
restaurants in favor of alternative or healthier foods, demand for Nathan’s products may be reduced and its business could
be harmed.
20
Nathan’s is subject to health, employment, environmental and other government regulations, and failure to
comply with existing or future government regulations could expose Nathan’s to litigation, damage Nathan’s or its
brands’ reputation and lower profits.
Nathan’s and its franchisees are subject to various federal, state and local laws, rules or regulations affecting their
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 depend 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 Nathan’s fails to comply with any of
these laws, it may be subject to governmental action or litigation, and accordingly its reputation could be harmed.
Injury to Nathan’s or a 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, Nathan’s 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 its food products, which could increase expenses. The operation of Nathan’s 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 Nathans’ operations,
particularly its relationship with its 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 Nathans’ reported results of operations, which could cause its stock price to fluctuate or decline.
Nathan’s may not be able to adequately protect its intellectual property, which could decrease the value of
Nathan’s or its brands and products.
The success of Nathans’ business depends on the continued ability to use existing trademarks, service marks and
other components of each of Nathan’s brands in order to increase brand awareness and further develop branded products.
Nathan’s may not be able to adequately protect its trademarks, and the use of these trademarks may result in liability for
trademark infringement, trademark dilution or unfair competition. All of the steps Nathan’s has taken to protect its
intellectual property may not be adequate.
Nathan’s earnings and business growth strategy depends in large part on the success of its restaurant
franchisees and on new restaurant openings. Nathan’s or its brand’s reputation may be harmed by actions taken by
restaurant franchisees that are otherwise outside of Nathans’ control.
A significant portion of Nathans’ earnings comes from royalties, fees and other amounts paid by Nathan’s
restaurant franchisees. Nathan’s franchisees are independent contractors, and their employees are not employees of
Nathan’s. Nathan’s provides training and support to, and monitors the operations of, its franchisees, but the quality of their
restaurant operations may be diminished by any number of factors beyond Nathans’ control. Consequently, the franchisees
may not successfully operate their restaurants in a manner consistent with Nathans’ 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 Nathan’s system, thus damaging Nathan’s
or a brand’s reputation, potentially adversely affecting Nathans’ business, results of operations and financial condition.
21
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:
(cid:404) our ability to attract new franchisees;
(cid:404)
(cid:404)
the availability of site locations for new restaurants;
the ability of potential restaurant owners to obtain financing, which has become more difficult due to current
market conditions and operating results;
the ability of restaurant owners to hire, train and retain qualified operating personnel;
construction and development costs of new restaurants, particularly in highly-competitive markets;
the ability of restaurant owners to secure required governmental approvals and permits in a timely manner, or
at all; and
adverse weather conditions.
(cid:404)
(cid:404)
(cid:404)
(cid:404)
Nathan’s earnings and business growth strategy depends in large part on the success of its product licensees,
and product manufacturers. Nathan’s or its brand’s reputation may be harmed by actions taken by its product licensees
or product manufacturers that are otherwise outside of Nathans’ control.
A significant portion of Nathans’ earnings has come from royalties paid by Nathan’s product licensees such as
SMG, Inc., John Morrell & Co. and ConAgra Foods Lamb Weston, Inc., Saratoga Specialties, Inc., a wholly owned
subsidiary of John Morrell & Co. and Perfection Foods. Although our agreements with these licensees contain numerous
controls and safeguards, and Nathan’s monitors the operations of its product licensees, Nathan’s licensees are independent
contractors, and their employees are not employees of Nathan’s. Accordingly, Nathan’s cannot necessarily control the
performance of its licensees under their license agreements, including without limitation, the licensee’s continued best
efforts to manufacture Nathan’s products for retail distribution and our foodservice businesses, timely delivery of the
licensed products, market the licensed products and 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 Nathans’ 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 Nathan’s 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. While we believe that we will be
able to manage a transparent transition from SMG to John Morrell & Co., there can be no assurance that we will be
successful in these efforts. Our inability to successfully control the transition, as well as other risks associated with having a
new primary supplier of hot dogs could adversely affect our results of operations.
Leasing of real estate exposes Nathan’s to possible liabilities and losses.
Nathan’s leases 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 Nathan’s franchisees. Accordingly, Nathan’s is subject to all of the
risks associated with owning, leasing and sub-leasing real estate. Nathan’s generally cannot cancel these leases. If an
existing or future store is not profitable, and Nathan’s decides to close it, Nathan’s may nonetheless be committed to
perform its 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, Nathan’s may fail to negotiate renewals, either on commercially
acceptable terms or at all, which could cause Nathan’s to close stores in desirable locations.
22
Nathan’s 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.
Nathan’s future success may depend on opportunities to buy or obtain rights to other businesses that could
complement, enhance or expand its current business or products or that might otherwise offer growth opportunities. In
particular, Nathan’s may evaluate potential mergers, acquisitions, joint venture investments, strategic initiatives, alliances,
vertical integration opportunities and divestitures. Nathan’s has no commitments, agreements or understandings with
respect to any of such transactions. Any attempt by Nathan’s to engage in these transactions may expose it to various
inherent risks, including:
(cid:404) not accurately assessing the value, future growth potential, strengths, weaknesses, contingent and other
liabilities and potential profitability of acquisition candidates;
the potential loss of key personnel of an acquired business;
the ability to achieve projected economic and operating synergies;
(cid:404)
(cid:404)
(cid:404) difficulties in successfully integrating, operating, maintaining and managing newly-acquired operations
or employees;
(cid:404) difficulties maintaining uniform standards, controls, procedures and policies;
(cid:404) unanticipated changes in business and economic conditions affecting an acquired business;
(cid:404)
(cid:404)
the possibility of impairment charges if an acquired business performs below expectations; and
the diversion of management’s attention from the existing business to integrate the operations and personnel of
the acquired or combined business or implement the strategic initiative.
Nathan’s annual and quarterly financial results may fluctuate depending on various factors, many of which
are beyond its control, and, if Nathan’s fails to meet the expectations of investors, Nathan’s share price may decline.
Nathan’s sales and operating results can vary from quarter to quarter and year to year depending on various
factors, many of which are beyond its control. Certain events and factors may directly and immediately decrease demand
for Nathan’s products. These events and factors include:
changes in customer demand;
(cid:404)
(cid:404) variations in the timing and volume of Nathans’ sales and franchisees’ sales;
(cid:404)
changes in the terms of our existing license/supply agreements and/or the replacement of existing licenses or
suppliers;
sales promotions by Nathan’s and its competitors;
changes in average same-store sales and customer visits;
seasonal effects on demand for Nathan’s products;
(cid:404)
(cid:404)
(cid:404) variations in the price, availability and shipping costs of supplies;
(cid:404)
(cid:404) unexpected slowdowns in new store development efforts;
(cid:404)
(cid:404)
(cid:404) weather and acts of God; and
(cid:404)
changes in competitive and economic conditions generally;
changes in the cost or availability of ingredients or labor;
changes in the number of franchises sold and in franchise agreement renewals.
Nathans’ operations are influenced by adverse weather conditions.
Weather, which is unpredictable, can impact Nathans’ restaurant sales. Harsh weather conditions that keep
customers from dining out result in lost opportunities for our 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 the
Company-owned restaurants. Our flagship Coney Island restaurant and our new Boardwalk restaurant were closed for an
extended period of time and re-opened on May 20, 2013 and March 18, 2013, respectively. In addition, seventy-eight
franchised restaurants including 18 Branded Menu 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. These sales were significantly impacted due to the harsh winter weather experienced during the
fourth quarter fiscal 2014. 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 hurts our operating
23
margins, and can result in restaurant operating losses. For these reasons, a quarter-to-quarter comparison may not be a good
indication of Nathans’ performance or how it may perform in the future.
Due to the concentration of Nathan’s 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 30, 2014, we and our franchisees (excluding units operated pursuant to our Branded Menu Program)
operated Nathan’s restaurants in 28 states, the Cayman Islands, and eight foreign countries. As of March 30, 2014, the
highest concentration of operating units were 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 results of operations in the future.
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, despite our
considerable efforts and technological resources to secure our computer systems, point of sales 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 sales systems or information technology may result in adverse publicity, loss of sales and profits,
penalties or loss resulting from misappropriation of information.
We may be required to recognize additional asset impairment and other asset-related charges.
We have long-lived assets, a cost-method investment, goodwill and intangible assets and have incurred
impairment charges in the past with respect 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:
(cid:404)
significant adverse changes in the business climate;
(cid:404)
current period operating or cash flow losses combined with a history of operating or cash flow losses or a
projection or forecast that demonstrates continuing losses associated with long-lived assets;
(cid:404) operating or cash flow losses combined with a history of operating or cash flow losses or a projection or
forecast that demonstrates continuing losses associated with cost method investment;
(cid:404)
a current expectation that more-likely-than-not (e.g., a likelihood that is more than 50%) long-lived assets will
be sold or otherwise disposed of significantly before the end of their previously estimated useful life; and
(cid:404)
a significant drop in our stock price.
Based upon future economic and capital market conditions, future impairment charges could be incurred.
Catastrophic events may disrupt Nathans’ business.
Unforeseen events, or the prospect of such events, including war, terrorism and other international conflicts, such
as a continued interruption in the relationship between the United States and Russia, public health issues such as epidemics
or pandemics, 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 Nathans’ 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 Nathan’s products, or the ability to receive products
from suppliers. Nathan’s does not have insurance policies that insure against certain of these risks. To the extent that
Nathan’s does maintain insurance with respect to some of these risks, its receipt of the proceeds of such policies may be
delayed or the proceeds may be insufficient to offset its losses fully.
24
Nathans’ international operations are subject to various factors of uncertainty.
Nathans’ 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 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 Nathan’s believes it has
developed the support structure required for international growth, there is no assurance that such growth will occur or that
international operations will be profitable.
Increases in the cost of food and paper products could harm our profitability and operating results.
The cost of the food and paper products we use depends on a variety of factors, many of which are beyond our
control. 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. 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 and other factors beyond our control. For
example, in the past, reduced supply and increased demand in beef resulted in shortages, which required us to pay
significantly higher prices for the beef we purchased. For the fiscal year ended March 30, 2014, the market price for hot
dogs increased 7.5% compared to the fiscal year ended March 31, 2013. As the price of beef or other food products that we
use in our operations increases significantly, particularly in the Branded Product Program, and we choose not to pass, or
cannot pass, these increases on to our customers, our operating margins will decrease.
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 inability 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.
Nathan’s has sought to lock in the cost of a portion of its 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,
Nathan’s may be unable to enter into similar purchase commitments in the future. In addition, Nathan’s does not have the
ability to effectively hedge all of its beef purchases using futures or forward contracts without incurring undue financial
cost and risk.
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. In addition, increases in the minimum wage or labor regulation could increase labor costs. New
York State approved legislation which increased the minimum wage beginning December 31, 2013 and on December 31,
2014 and December 31, 2015. The voters in New Jersey voted to increase to the minimum wage in the 2013 general
election. Additionally, the Federal government and a number of other states are evaluating various proposals to increase
their respective minimum wage. Mayor DeBlasio, of the City of New York, has stated that New York City should have
additional increases in the minimum wage. Our primary union contract ends on June 30, 2014 and a new union contract
could result in additional costs to us. 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 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 Nathan’s business, results of operations and financial condition.
25
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 Branded Product Program and otherwise grow
our business in the United States and internationally.
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.
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 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:
(cid:404) Shareholder Rights Agreement. We adopted a new rights agreement which provided for a dividend distribution
of one right for each share to holders of record of common stock on June 17, 2013. The rights become
exercisable in the event any person or group accumulates 15% or more of our common stock, or if any person
or group announces an offer which would result in it owning 15% or more of our common stock and our
management does not approve of the proposed ownership.
(cid:404) Employment Contracts. The employment agreements between us and each of Wayne Norbitz, 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 six months for Mr. Norbitz and one year for each of Messrs. Gatoff and Lorber, of
his becoming aware of the change in control, to terminate his employment agreement. Upon such termination,
Mr. Norbitz has the right to receive a lump sum payment equal to three times his respective salary. 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.
26
The recent economic crisis and erosion of consumer confidence has negatively impacted the Company’s
profitability and operating results and may continue to do so.
Recently, the United States economy has experienced a severe recession, resulting in rising unemployment, an
upheaval in the credit markets and an erosion in consumer confidence. The Company believes this has resulted in reduced
sales at the Company’s owned and franchised restaurants, an increase in uncollectible accounts receivable and adversely
affected the ability of potential new franchisees from obtaining funding, all of which have adversely affected the
Company’s operating results. If the recent economic crisis continues to result in reduced sales at our Company-owned and
franchised restaurants and adversely impact franchisees’ ability to finance purchases or restructurings of restaurant
franchises, or if it begins to affect sales of licensed products for which we receive royalties, it will negatively impact the
Company’s business and operating results.
Changes in the U.S. healthcare system could increase our cost of doing business.
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 with minimum levels of healthcare coverage or incur
certain financial penalties. Nathan’s workforce includes numerous part-time workers, which may increase our health care
costs and expose Nathan’s to certain excise taxes beginning in 2014, in the event that healthcare is offered to less than 95%
of its full-time employees, as defined by the legislation.
Changes in tax laws and unfavorable resolution of tax contingencies could adversely affect our tax expense.
The Company’s 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 the Company’s effective tax rates. If changes to applicable tax laws are enacted, our results
of operations could be negatively impacted. The Company’s 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 the Company’s results of operations.
Item 1B. Unresolved Staff Comments.
None.
27
Item 2.
Properties.
Our principal executive offices consist of approximately 9,300 square feet of leased space in a modern office
building in Jericho, NY. The lease commenced 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.
At March 30, 2014, other Company-owned restaurants that were operating were located in leased space with terms
expiring as shown in the following table:
Nathan’s Restaurants
Coney Island
Coney Island Boardwalk
Long Beach Road
Central Park Avenue
Location
Brooklyn, NY
Brooklyn, NY
Oceanside, NY
Yonkers, NY
Current Lease
Expiration Date
December 2027
November 2019 (a)
May 2021 (b)
December 2023
Approximate
Square Footage
10,000
3,800
7,300
3,500
(a)
(b)
Seasonal satellite location.
On April 15, 2014, Nathan’s entered into agreements to terminate its current lease and relocate to a smaller
location within the immediate area in Oceanside, NY. These agreements are contingent upon the landlord
obtaining the necessary permit and variances from the building department. We expect to operate at the current
location through November 2014, and are seeking to open in the new location in March 2015.
Leases for Nathan’s restaurants typically provide for a base rent plus real estate taxes, insurance and other
expenses and, in some cases, provide for an additional percentage rent based on the restaurants’ revenues.
At March 30, 2014, in addition to the leases listed above, we were the sub-lessor of three properties to franchisees
which are located within the metropolitan New York area.
Aggregate rental expense, net of sublease income, under all current leases amounted to $1,391,000 in fiscal 2014.
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 money 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.
Not applicable.
28
PART II
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 the high and low closing sales prices per share for the periods indicated:
Fiscal year ended March 30, 2014
First quarter ...................................................................................................................... $
Second quarter ..................................................................................................................
Third quarter ....................................................................................................................
Fourth quarter ...................................................................................................................
Fiscal year ended March 31, 2013
First quarter ...................................................................................................................... $
Second quarter ..................................................................................................................
Third quarter ....................................................................................................................
Fourth quarter ...................................................................................................................
High
Low
54.00 $
61.13
53.95
51.09
28.96 $
33.48
34.00
42.38
42.45
48.99
48.23
47.61
21.00
27.45
27.71
33.22
At June 6, 2014, the closing price per share for our common stock, as reported by Nasdaq, was $49.59.
29
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).
Dividend Policy
We have not declared or paid a cash dividend on our common stock since our initial public offering and do not
anticipate that we will pay any cash dividends in the foreseeable future. It is our Board of Directors’ policy to retain all
available funds to finance the development and growth of our business and to purchase stock pursuant to our stock buyback
programs. The payment of any cash dividends in the future will be dependent upon our earnings and financial requirements.
Shareholders
As of June 6, 2014, we had approximately 603 shareholders 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
For the thirteen weeks and fiscal year ended March 30, 2014, the Company repurchased 25,085 shares at a cost of
$1,224,000 and 30,463 shares at a cost of $1,486,000, respectively. Since the commencement of the Company’s stock
buyback program in September 2001 through March 30, 2014, Nathan’s has purchased a total of 4,610,026 shares of
common stock at a cost of approximately $54,884,000 under all of its stock repurchase programs and the modified dutch
tender offer, which includes the shares purchased during the fiscal year ended March 30, 2014.
30
On February 1, 2011, the Company’s Board of Directors authorized an increase to the sixth stock repurchase plan
for the purchase of up to 800,000 shares of its common stock on behalf of the Company; as of March 30, 2014, Nathan’s
has repurchased 511,067 shares at a cost of $11,279,000 under the sixth stock repurchase plan. Purchases under the
Company’s stock repurchase program may be made from time to time, depending on market conditions, in open market or
privately-negotiated transactions, at prices deemed appropriate by management. There is no set time limit on the
repurchases.
Issuer Purchases of Equity Securities
Period (A)
December 30, 2013 - January 26, 2014
January 27, 2014 - February 23, 2014
February 24, 2014 -March 30, 2014
Total
(a)
Total
Number of
Shares
Purchased
-
12,945
12,140
25,085
(b)
Average
Price Paid
per Share
$-
$48.63
$48.94
$48.78
(c)
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans
-
(d)
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans
(B)
314,018
301,073
288,933
288,933
12,945
12,140
25,085
A)
B)
Represents the Company’s fiscal periods during the fourth quarter ended March 30, 2014.
At March 30, 2014, there were 288,933 shares remaining to be repurchased pursuant to the sixth stock repurchase
plan that was authorized on November 6, 2009, and amended on, February 1, 2011 for up to 800,000 shares. The
plan does not have a set expiration date.
31
Item 6.
Selected Financial Data.
March 30,
2014
March 31,
2013
Fiscal years ended (1)
March 25,
2012
(In thousands, except per share amounts)
March 27,
2011
March 28,
2010
Statement of Earnings Data:
Revenues:
Sales (3) ............................................................ $
Franchise fees and royalties ..............................
License royalties ...............................................
Insurance gain ...................................................
Interest and other income, net ...........................
Total revenues ...............................................
Costs and Expenses:
Cost of sales ......................................................
Restaurant operating expenses ..........................
Depreciation and amortization ..........................
General and administrative expenses ................
Litigation accrual ..............................................
Impairment charge on note receivable ..............
Impairment charge on long-term investment ....
Interest expense .................................................
Recovery of property taxes ...............................
Total costs and expenses ...............................
Income from continuing operations before
65,521 $
5,718
8,513
2,774
401
82,927
53,072
3,142
1,157
11,460
-
-
400
135
-
69,366
56,656 $
5,842
8,571
-
474
71,543
44,874
2,700
940
10,437
-
-
-
453
-
59,404
52,369 $
5,646
7,526
-
681
66,222
42,106
3,115
965
9,552
-
-
-
477
-
56,215
44,634 $
5,058
6,718
-
845
57,255
34,567
3,092
915
10,125
4,910
263
-
63
-
53,935
provision for income taxes ................................
Income tax expense ...............................................
Net income (3) .................................................. $
13,561
5,234
8,327 $
12,139
4,671
7,468 $
10,007
3,849
6,158 $
3,320
1,107
2,213 $
38,685
4,832
6,378
-
981
50,876
28,513
3,285
843
9,708
-
250
-
-
(13)
42,586
8,290
2,721
5,569
Basic income per share:
Net income (3) ............................................... $
1.87 $
1.70 $
1.26 $
0.41 $
1.00
Diluted income per share:
Net income (3) ............................................... $
1.81 $
1.63 $
1.22 $
0.40 $
0.97
Dividends ..............................................................
Weighted average shares used in computing net
income per share ...............................................
Basic ..................................................................
Diluted ..............................................................
Balance Sheet Data at End of Fiscal Year:
-
-
-
-
-
4,450
4,605
4,400
4,588
4,906
5,049
5,403
5,504
5,563
5,716
Working capital ................................................. $
Total assets ........................................................ $
Stockholders’ equity ......................................... $
35,378 $
56,135 $
43,897 $
27,525 $
49,662 $
34,148 $
21,989 $
44,520 $
28,837 $
31,454 $
52,958 $
38,078 $
36,668
53,374
44,312
Selected Restaurant Operating Data:
Company-owned restaurant sales (3) .................... $
Number of Units Open at End of Fiscal Year:
13,231 $
13,403 $
13,209 $
13,007 $
12,377
Company-owned restaurants (4) .......................
Franchised .........................................................
5
324
5
303
5
299
5
264
5
246
32
Notes to Selected Financial Data
(1)
(2)
(3)
Our fiscal year ends on the last Sunday in March, which results in a 52- or 53-week year. The fiscal years ended
March 30, 2014, March 25, 2012, March 27, 2011 and March 28, 2010 were each on the basis of a 52-week
reporting period whereas the fiscal year ended March 31, 2013 was on the basis of 53-week reporting period.
See Notes A, B and L of the Consolidated Financial Statements for the fiscal year ended March 30, 2014, for any
accounting changes, business combinations or dispositions of business operations that materially affect the
comparability of the information reflected in this Item 6.
During the fiscal years ended March 30, 2014 and March 31, 2013, the Company-owned restaurant sales were
negatively impacted due to temporary closings of the Coney Island restaurant due to Superstorm Sandy since
October 29, 2012 and the Yonkers restaurant since November 25, 2012 for renovation.
(4)
Included the Coney Island and Yonkers restaurants that were being re-developed on March 31, 2013.
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.
Additionally, 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.
These two events significantly impacted our results of operations and the comparability of restaurant operations
during the fiscal 2014 and 2013 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.
We are engaged primarily in the marketing of the “Nathan’s Famous” brand and the sale of products bearing the
“Nathan’s Famous” trademarks through several different channels of distribution. Historically, our business has been the
operation and franchising of quick-service restaurants featuring Nathan’s World Famous Beef Hot Dogs, crinkle-cut
French-fried potatoes, and a variety of other menu offerings. Our Company-owned and franchised units operate under the
name “Nathan’s Famous,” the name first used at our original Coney Island restaurant opened in 1916. Nathan’s product
licensing program began in 1978 by selling 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 our 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 our 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.
33
The following summary reflects the franchise openings and closings of the Nathan’s franchise system for the fiscal
years ended March 30, 2014, March 31, 2013, March 25, 2012, March 27, 2011 and March 28, 2010.
March 30,
2014
March 31,
2013
March 25,
2012
March 27,
2011
March 28,
2010
Franchised restaurants operating at the beginning
of the period ......................................................
Franchised restaurants opened during the period ..
Franchised restaurants closed during the period ...
Franchised restaurants operating at the end of the
303
56
(35)
299
40
(36)
264
67
(32)
246
40
(22)
period ................................................................
324
303
299
264
249
33
(36)
246
At March 30, 2014, our franchise system consisted of 324 Nathan’s franchised units located in 28 states, the
Cayman Islands, and eight foreign countries. We also operate five Company-owned Nathan’s units, including one seasonal
location, within the New York metropolitan area.
As described in Risk Factors and other sections in this Annual Report on Form 10-K for the year ended March 30,
2014, our future results could be impacted by many developments. In March 2014, John Morrell & Co., a subsidiary of
Smithfield Foods, Inc. became Nathan’s exclusive licensee to manufacture and sell hot dogs, sausage and corned beef at
retail. Our future operating results could be favorably impacted by the terms and conditions of our agreement with John
Morrell & Co. as compared to the terms and conditions of our agreement with SMG which expired on March 1, 2014,
although there can be no assurance thereof. 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 consistency of our products that is
expected by our customers (ii) John Morrell & Co. will have a sufficient supply of products available for our customers on
a timely basis and (iii) John Morrell & Co. will be able to provide sales and marketing efforts at least as comparable to
SMG.
Our future operating results could be impacted by supply constraints on beef, as a result of the lingering effect of
the drought in the Midwest on beef prices.
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.
Revenue Recognition
Sales by Company-owned restaurants, which are typically paid in cash by the customer, are recognized at the point
of sale. Sales are presented net 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.
34
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:
(cid:404) Approval of all site selections to be developed.
(cid:404) Provision of architectural plans suitable for restaurants to be developed.
(cid:404) Assistance in establishing building design specifications, reviewing construction compliance and equipping
the restaurant.
(cid:404) Provision of appropriate menus to coordinate with the restaurant design and location to be developed.
(cid:404) Provision of management training for the new franchisee and selected staff.
(cid:404) Assistance with the initial operations and marketing of restaurants being developed.
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
uncollectable 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 are earned and deemed collectible. Franchise fees and royalties that are not
deemed to be collectible are not recognized as revenue until paid by the franchisee, or until collectability is deemed to be
reasonably assured.
Nathan’s recognizes revenue from its Branded Menu Program either upon its sale of hot dogs or royalty income
when it has been determined that other qualifying products have been sold 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.
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 recognized on a monthly basis when it is earned and deemed collectable.
In 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. Accounts 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 of the aging of accounts receivable at the date of the financial statements, assessment of collectibility
based upon historical trends and an evaluation of the impact of current and projected economic conditions. In the event that
the collectibility 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.
35
Impairment of Goodwill and Other Intangible Assets
Goodwill and intangible assets are deemed to have indefinite lives, and accordingly, are not amortized, but are
evaluated annually (or more frequently if events or changes in circumstances indicate 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 charges may be required in the future. We conducted our
annual impairment tests and no goodwill or other intangible assets were determined to be impaired during the fiscal years
ended March 30, 2014, March 31, 2013 or March 25, 2012.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Impairment is measured by comparing the carrying value 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 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 Company considers a history of restaurant operating losses to be its primary
indicator of potential impairment for individual restaurant locations. As result of Superstorm Sandy, our Coney Island
restaurant sustained significant damage and was considered temporarily impaired for purposes of this analysis. The
restaurant was fully repaired and re-opened on May 20, 2013. No other impairment charges on long-lived assets were
recorded during the fiscal years ended March 30, 2014, March 31, 2013 or March 25, 2012.
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 another-than-temporary impairment has
occurred and recorded an impairment charge of $400,000 on this investment during the fifty-two week period ended March
30, 2014. We did not recognize any impairment on this investment during the fifty-three week period ended March 31,
2013.
Stock-Based Compensation
As discussed in Note K 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:
(a)
(b)
(c)
(d)
expected option term based upon expected termination behavior;
volatility based upon historical price changes of the Company’s common stock over a period equal to the
expected life of the option;
expected dividend yield; and
risk free interest rate on date of grant.
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
36
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 guidance for the determination of whether tax benefits claimed or
expected to be claimed on a tax return should be recorded in the 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 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, interest and penalties, accounting in interim periods and disclosure requirements. (See Note J
of the Notes to Consolidated Financial Statements.)
Adoption of New Accounting Pronouncements
In April 2014, the 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 is effective
for Nathan’s for annual periods beginning on or after December 15, 2014 and interim periods within those years, which for
Nathan’s will be the first quarter fiscal 2016 beginning March 30, 2015. Early adoption is permitted for disposals that have
not been previously reported in the financial statements. Nathan’s does not expect the adoption of this new guidance to
have a material impact on the results of operations or financial position.
In July 2012, the FASB issued new accounting guidance on testing indefinite-lived intangible assets for
impairment. The new guidance provides the entity with the option to first perform a qualitative assessment to determine
whether it is more likely than not that the fair value of an indefinite-lived asset is less than its carrying value. If it is not,
then no further analysis is required otherwise then the previously required quantitative testing is required. Nathan’s adopted
the new guidance beginning with its first quarter of fiscal of 2014. The adoption of this new guidance did not have a
material impact on the results of operations or financial position.
There are no other recently issued accounting pronouncements that have not yet been adopted that are expected,
when adopted, to have a material impact on the consolidated financial statements or notes thereto.
Results of Operations
Fiscal year ended March 30, 2014 compared to fiscal year ended March 31, 2013
Revenues
Total sales increased by 15.6% to $65,521,000 for the fifty-two weeks ended March 30, 2014 (“fiscal 2014”) as
compared to $56,656,000 for the fifty-three weeks ended March 31, 2013 (“fiscal 2013”). Foodservice sales from the
Branded Product Program increased by 20.0% to $51,877,000 for fiscal 2014 as compared to sales of $43,214,000 in fiscal
2013. This increase was primarily attributable to a 15.7% increase in the volume of products ordered, the impact of a
December price increase as well as a shift in the sales mix of products sold as compared to fiscal 2013. We estimate that the
additional week of operations during fiscal 2013 represented Branded Product sales of approximately $828,000. Total
Company-owned restaurant sales decreased by $172,000 to $13,231,000 during fiscal 2014 compared to $13,403,000
during fiscal 2013. Restaurant sales during the additional week of fiscal 2013 were approximately $70,000. Our Coney
Island restaurant was closed during April and May 2013 to complete the restoration after Superstorm Sandy losing eight (8)
weeks of the spring season during the fiscal 2014 period, compared to the post-Sandy closure of twenty-two (22) weeks
from November 2012 through March 2013 when sales at the restaurant are lower. We also temporarily closed our Yonkers
restaurant for redevelopment from November 2012 until November 2013. We estimate that the negative sales impact of
both restaurants attributable to the closed periods was approximately $2,087,000. This decline was partly offset by sales
37
during fiscal 2014 for the period of time when the restaurants were closed during fiscal 2013. We had higher sales of
approximately $876,000 or 12.1% at our two Coney Island locations for the comparative weeks of operations during fiscal
2014 as compared to fiscal 2013. During fiscal 2014, other sales, primarily to Wal-mart, were approximately $374,000
higher than fiscal 2013.
Franchise fees and royalties were $5,718,000 in fiscal 2014 as compared to $5,842,000 in fiscal 2013. Total
royalties were $4,855,000 in fiscal 2014 as compared to $4,990,000 in fiscal 2013. Royalties earned under the Branded
Menu Program were $1,011,000 in fiscal 2014 as compared to $943,000 in fiscal 2013 due principally to the additional
units in operation. Royalties earned under the Branded Menu Program are not based upon a percentage of restaurant sales
but are based upon product purchases. Traditional franchise royalties were $3,844,000 in fiscal 2014 as compared to
$4,047,000 in fiscal 2013. Franchise restaurant sales decreased to $85,850,000 in fiscal 2014 as compared to $90,401,000
in fiscal 2013 primarily due to the impact of closed restaurants. Comparable domestic franchise sales (consisting of 98
Nathan’s outlets, operating for 15 months prior to the beginning of the fiscal year, excluding sales under the Branded Menu
Program) were $60,228,000 in fiscal 2014 as compared to $61,989,000 in fiscal 2013, a decrease of 2.8%. Including the
effect of the additional week of operations during fiscal 2013, franchise sales within our entertainment venues and malls
declined by approximately 5.8% and 5.2%, respectively, compared to the prior period.
At March 30, 2014, 324 domestic and international franchised or Branded Menu Program franchise outlets were
operating as compared to 303 domestic and international franchised or Branded Menu Program franchise outlets at March
31, 2013. Total franchise fee income was $863,000 in fiscal 2014, including $288,000 of termination or cancellation fees
compared to $852,000 in fiscal 2013, including $190,000 of cancellation fees. Domestic franchise fee income was
$370,000 in fiscal 2014 compared to $324,000 in fiscal 2013. International franchise fee income was $205,000 in fiscal
2014, compared to $338,000 during fiscal 2013. 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. During fiscal 2013,
40 new franchised outlets opened, including our first two mobile trucks, our first location in Turkey, our first location in
Mexico City, our sixth restaurant in the Dominican Republic and 20 Branded Menu Program outlets, including ten units
operated by K-mart.
License royalties were $8,513,000 in fiscal 2014 as compared to $8,571,000 in fiscal 2013. Total royalties earned
on sales of hot dogs from our retail and foodservice license agreements were $6,742,000 in fiscal 2014 as compared to
$6,948,000 in fiscal 2013. In March 2014, John Morrell & Co. became Nathan’s exclusive licensee to manufacture and sell
branded hot dog, sausage and corned beef products at retail. Royalties earned during 11 months of the SMG contract,
primarily from the retail sale of hot dogs, were $4,600,000 during fiscal 2014 as compared to $5,506,000 during 12 months
of fiscal 2013. During March 2014, we earned royalties of $548,000 from approximately two weeks of sales by John
Morrell &Co. The decline in royalties from SMG is due primarily to the different periods of the contract and reduced
production by SMG, on which our royalties are based as the contract was expiring. Royalties earned from John Morrell &
Co. pursuant to our prior license agreement, substantially from sales of hot dogs to Sam’s Club, were $1,594,000 during
fiscal 2014 as compared to $1,442,000 during fiscal 2013. This increase is due primarily to the effect of a temporary
royalty concession on sales to Sam’s Club during fiscal 2013 partly offset by reduced sales to foodservice. Royalties earned
from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $148,000, during fiscal
2014, as compared to fiscal 2013.
Interest income was $325,000 in fiscal 2014 as compared to $392,000 in fiscal 2013, 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 anticipate lower investment income in the future.
Insurance gain of $2,774,000 during fiscal 2014 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 in addition to the settlement of the business interruption claim (See note L.4).
Other income, net of $76,000 in fiscal 2014 as compared to $82,000 in fiscal 2013 relates primarily to a sublease
of a non-franchised restaurant.
38
Costs and Expenses
Overall, our cost of sales increased by $8,198,000 to $53,072,000 in fiscal 2014 as compared to $44,874,000 in
fiscal 2013. Our gross profit (representing the difference between sales and cost of sales) was $12,449,000 or 19.0% of
sales during fiscal 2014 as compared to $11,782,000 or 20.8% of sales during fiscal 2013. 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 fiscal
2014 and the restaurant opening costs of the Coney Island and Yonkers restaurants.
Cost of sales in the Branded Product Program increased by approximately $7,848,000 during fiscal 2014 as
compared to fiscal 2013, primarily as a result of the higher sales volume in addition to the approximately 6.7% increased
average cost per pound of our hot dogs. During fiscal 2014, the market cost of our hot dogs was approximately 7.5% higher
than during fiscal 2013 due primarily to an increase in the beef trimmings markets during August and September 2013.
During fiscal 2014, our purchase commitments yielded savings of approximately $198,000. During fiscal 2013, our
purchase commitments to acquire hot dogs increased cost by approximately $39,000 due primarily to the unexpected
decline in the market cost of one of the beef components during fiscal 2013. During fiscal 2014, approximately 13.4% of
our product was purchased pursuant to our purchase commitments as compared to approximately 26.7% during fiscal 2013.
The purchase commitments lowered our costs by approximately $0.011 per pound during fiscal 2014 and increased our
costs by approximately $0.002 per pound during fiscal 2013. We have recently been forced to pass on the recent cost
increases through price increases, and continue to monitor the beef markets. If the cost of beef and beef trimmings
increases and we are unable to pass on these higher costs through price increases or otherwise reduce any increase in our
costs through the use of purchase commitments, our margins will be adversely impacted.
With respect to Company-owned restaurants, our cost of sales during fiscal 2014 was $7,574,000 or 57.2% of
restaurant sales, as compared to $7,524,000 or 56.1% of restaurant sales in fiscal 2013 due partly to lower sales at our
Company-owned restaurants and the higher costs incurred in re-opening the Coney Island and Yonkers restaurants. On
December 31, 2013, the New York minimum wage increased to $8.00 which amounted to a 4.6% average salary increase
for our employees that were affected. We estimate that this increase in minimum wage could increase our restaurant cost of
sales by approximately 0.5% of restaurant sales if prices remain the same. Effective April 1, 2014, The City of New York,
passed legislation requiring employers to offer paid sick leave to all employees, including part-time employees, that work
more than 80 hours for the employer. Nathan’s operates three restaurants that will be affected by this new legislation and is
currently evaluating the potential impact on its results of operations.
Restaurant operating expenses were $3,142,000 in fiscal 2014 as compared to $2,700,000 in fiscal 2013. The
increase in restaurant operating costs results primarily from the different number of months that the Coney Island restaurant
operated in the two fiscal periods. During fiscal 2014, the Coney Island restaurant operated for approximately 10 months as
compared to operating for approximately 7 months during fiscal 2013. Nathan’s ongoing occupancy and insurance costs at
the Coney Island restaurant subsequent to the storm were recovered as part of our business interruption claim. We incurred
higher percentage rent on the increased sales at the Boardwalk location. In connection with our October 2013 insurance
renewal, we incurred a significant increase in insurance costs, primarily property insurance, due to the impact of
Superstorm Sandy on the insurance marketplace. We incurred lower restaurant operating expenses at our Yonkers
restaurant which operated for approximately 4 months during fiscal 2014 as compared to approximately 8 months during
fiscal 2013. Although utility costs were comparable during fiscal 2014 and fiscal 2013, we continue to be concerned about
the volatile market conditions for oil and natural gas.
Depreciation and amortization was $1,157,000 in fiscal 2014 as compared to $940,000 in fiscal 2013. This
increase is primarily attributable to the increased depreciation at the Coney Island and Yonkers restaurants. Since re-
opening our Coney Island restaurant, we have incurred higher depreciation of approximately $191,000. Since re-opening
our Yonkers restaurant, we have incurred higher depreciation of approximately $31,000 and expect to incur approximately
$136,000 of depreciation per annum in connection with the redevelopment of the Yonkers restaurant.
General and administrative expenses increased by $1,023,000 or 9.8% to $11,460,000 in fiscal 2014 as compared
to $10,437,000 in fiscal 2013. The increase in general and administrative expenses was primarily due to increased
compensation costs, including stock-based compensation and payroll related taxes of $587,000, professional fees of
$115,000, marketing and travel expense of $112,000 and manager training expenses of $37,000 in connection with the re-
opening of our Coney Island and Yonkers restaurants.
39
Interest expense of $135,000 in fiscal 2014 and $453,000 in fiscal 2013 represents accrued interest in connection
with Nathan’s appeal of the SMG damages award calculated at the New York State statutory rate of 9% per annum. On
March 31, 2011, Nathan’s was required to enter into both a security agreement and a blocked deposit account control
agreement and to deposit approximately $4,910,000 into the account and agree to deposit additional amounts monthly in an
amount equal to the post-judgment interest. On July 24, 2013, we satisfied the judgment, in full settlement of this matter
and no additional interest will accrue on this judgment.
The Company recognized an, other-than-temporary impairment charge on its long-term investment of $400,000 in
fiscal 2014 based on management’s assessment of the future recoverability of the investment.
Provision for Income Taxes
In fiscal 2014, the income tax provision was $5,234,000 or 38.6% of earnings before income taxes as compared to
$4,671,000 or 38.5% of earnings before income taxes in fiscal 2013. Nathan’s effective tax rate was reduced by 0.9%
during fiscal 2014 and reduced by 1.3% during fiscal 2013, due to the differing effects of tax-exempt interest income.
During fiscal 2014, Nathan’s resolved certain uncertain tax positions, reducing the associated unrecognized tax benefits,
along with the related accrued interest and penalties, by approximately $67,000, which lowered the effective tax rate by
0.5%. Additionally, during fiscal 2013, Nathan’s resolved certain uncertain tax positions, reducing the associated
unrecognized tax benefits, along with the related accrued interest and penalties, by approximately $38,000, which lowered
the effective tax rate by 0.3%. Nathan’s effective tax rates without these adjustments would have been 40.0% for fiscal
2014 and 40.1% for fiscal 2013. Nathan’s estimates that its unrecognized tax benefits, including the related accrued interest
and penalties could be reduced by up to $124,000 during fiscal 2015.
Fiscal year ended March 31, 2013 compared to fiscal year ended March 25, 2012
Revenues
Total sales increased by 8.2% to $56,656,000 for the fifty-three weeks ended March 31, 2013 (“fiscal 2013”) as
compared to $52,369,000 for the fifty-two weeks ended March 25, 2012 (“fiscal 2012”). Foodservice sales from the
Branded Product and Branded Menu Programs increased by 12.2% to $43,214,000 for fiscal 2013 as compared to sales of
$38,506,000 in fiscal 2012. This increase was primarily attributable to a 10.4% increase in the volume of products ordered
and the impact of price increases that took effect during the fiscal 2013 and fiscal 2012 periods. We estimate that the
additional week of operations during fiscal 2013 represented approximately $828,000 of the sales increase. Total
Company-owned restaurant sales, comprised of five Nathan’s restaurants in both periods (including one seasonal
restaurant), increased by $194,000 to $13,403,000 during fiscal 2013 compared to $13,209,000 during fiscal 2012. This
increase was primarily attributed to the increased sales at our relocated and expanded seasonal Boardwalk restaurant in
Coney Island that opened in April 2012. Weather conditions had generally been favorable throughout the first twenty-six
weeks of fiscal 2013 as compared to the first twenty-six weeks of the fiscal 2012 period. Sales since the third quarter fiscal
2013 were negatively affected due to the closures of our flagship Coney Island and Oceanside locations caused by
Superstorm Sandy and the closure of our Yonkers, New York, restaurant for redevelopment. Based on our fiscal 2012
results, we estimate that, compared to fiscal 2012, the closures of our Coney Island and Oceanside restaurants due to the
storm reduced sales by approximately $1,095,000 and $66,000, respectively. Additionally, we estimate that the closing of
our Yonkers restaurant for redevelopment in November 2012, further reduced sales by approximately $632,000 as
compared to fiscal 2012. During fiscal 2012, we were forced to temporarily close all of our restaurants during tropical
storm Irene for the weekend of August 27, 2011 and experienced much more rain than usual, particularly during weekends,
and a cold Labor Day weekend which we believe further decreased sales particularly at our Coney Island locations. During
fiscal 2013, other sales were approximately $615,000 lower than fiscal 2012 primarily because Nathan’s terminated our
agreement with the QVC television network in March 2012.
40
Franchise fees and royalties were $5,842,000 in fiscal 2013 as compared to $5,646,000 in fiscal 2012. Total
royalties were $4,990,000 in fiscal 2013 as compared to $4,726,000 in fiscal 2012. Royalties earned under the Branded
Menu program were $943,000 in fiscal 2013 as compared to $768,000 in fiscal 2012 due principally to the additional units
in operation. Royalties earned under the Branded Menu Program are not based upon a percentage of restaurant sales but are
based upon product purchases. Traditional franchise royalties were $4,047,000 in fiscal 2013 as compared to $3,958,000 in
fiscal 2012. Franchise restaurant sales were $90,401,000 in fiscal 2013 as compared to $90,022,000 in fiscal 2012. We
estimate that the additional week of operations during fiscal 2013 resulted in $939,000 of additional total franchise sales or
royalties of approximately $48,000. We believe that fiscal 2013 sales were negatively impacted by approximately $510,000
attributable to the franchised restaurants in the Northeast that were closed due to Superstorm Sandy. One of these
restaurants affected remains closed. Comparable domestic franchise sales (consisting of 117 Nathan’s outlets, operating for
15 months prior to the beginning of the fiscal year, excluding sales under the Branded Menu Program) were $58,092,000 in
fiscal 2013 as compared to $59,180,000 in fiscal 2012, a decrease of 1.8%. Excluding the effect of the additional week of
operations, franchise sales within our entertainment venues declined by approximately 4.8% compared to the prior period,
including significant sales declines at two franchised locations that have been negatively affected by adjacent long term
construction projects. During the second quarter fiscal 2012, most of our franchised locations in the Northeast were also
negatively affected by tropical storm Irene.
At March 31, 2013, 303 domestic and international franchised or Branded Menu Program franchise outlets were
operating as compared to 299 domestic and international franchised or Branded Menu Program franchise outlets at March
25, 2012.Total franchise fee income was $852,000 in fiscal 2013, including cancellation fees of $190,000, compared to
$920,000 in fiscal 2012, including cancellation fees of $74,000. Domestic franchise fee income was $324,000 in fiscal
2013 compared to $547,000 in fiscal 2012, primarily due to opening fewer Branded Menu Program outlets within K-marts.
International franchise fee income was $338,000 in fiscal 2013, compared to $299,000 during fiscal 2012. During fiscal
2013, 40 new franchised outlets opened, including our first two mobile trucks, our first location in Turkey, our first location
in Mexico City, our sixth restaurant in the Dominican Republic and twenty Branded Menu Program outlets, including ten
units operated by K-mart. During fiscal 2012, 67 new franchised outlets opened, including two locations in Canada, China,
Jamaica, Kuwait and the Dominican Republic and 43 Branded Menu Program outlets, including 28 units operated by
Kmart.
License royalties were $8,571,000 in fiscal 2013 as compared to $7,526,000 in fiscal 2012. We do not believe that
the additional week of operations had a significant impact on royalties as our licensees continued to report based upon their
fiscal reporting periods. Total royalties earned on sales of hot dogs from our retail and foodservice license agreements
increased 15.1% to $6,948,000 from $6,037,000 primarily due to higher sales by SMG and higher royalties from a change
in packaging on certain products sold by SMG in fiscal 2013. Royalties earned from SMG, primarily from the retail sale of
hot dogs, were $5,506,000 during fiscal 2013 as compared to $4,503,000 during fiscal 2012. Royalties earned from our
foodservice licensee, substantially from sales of hot dogs to Sam’s Club and Kroger’s, were $1,442,000 during fiscal 2013
as compared to $1,534,000 during fiscal 2012. This decrease is due primarily to a temporary royalty concession for the
period April 2012 through July 2012, on sales to Sam’s Club and lower sales volume to Kroger’s. During fiscal 2013, we
earned incremental royalties of $114,000 from a new agreement for the sale of salty snacks. Royalties earned from all other
licensing agreements for the manufacture and sale of Nathan’s products were $1,509,000, during fiscal 2013, as compared
to $1,489,000 during fiscal 2012.
Interest income was $392,000 in fiscal 2013 as compared to $573,000 in fiscal 2012, primarily due to lower
interest income of approximately $151,000 earned on marketable securities and lower interest earned on the Miami Subs
note of approximately $30,000. 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. On June 29, 2011, we
completed the sale of the Miami Subs note receivable and no longer earned interest income of 8.5% on this note receivable.
Other income was $82,000 in fiscal 2013 as compared to $108,000 in fiscal 2012. This decrease is due primarily
to the impact of a one-time gain of $125,000 in fiscal 2012 which was partly offset by an increase due to a renegotiated
sublease of a non-franchised restaurant in fiscal 2013. In November 2011, Nathan’s received $125,000 in full satisfaction
of Nathan’s rights under the irrevocable direction entered into in connection with its sale of Miami Subs.
41
Costs and Expenses
Overall, our cost of sales increased by $2,768,000 to $44,874,000 in fiscal 2013 as compared to $42,106,000 in
fiscal 2012. Our gross profit (representing the difference between sales and cost of sales) was $11,782,000 or 20.8% of
sales during fiscal 2013 as compared to $10,263,000 or 19.6% of sales during fiscal 2012. The margin improvement was
primarily due to the impact of sales price increases that have been previously implemented to offset the higher cost of hot
dogs for our Branded Product Program.
Cost of sales in the Branded Product Program increased by approximately $3,592,000 during fiscal 2013 as
compared to fiscal 2012, primarily as a result of the higher sales volume and the approximately 1.0% increased cost of our
hot dogs. During fiscal 2013, the market price of hot dogs was approximately 0.1% lower than during fiscal 2012. During
fiscal 2013, our purchase commitments increased cost by approximately $39,000. During fiscal 2012, our purchase
commitments to acquire hot dogs yielded savings of approximately $275,000. This difference is due primarily to the
unexpected decline in the cost of one of the beef components in the first quarter fiscal 2013, the result of which did not
yield the anticipated savings but raised costs by approximately $142,000 as compared to market prices. During fiscal 2013,
approximately 73.3% of our product was purchased at prevailing market prices as compared to approximately 90.0%
during fiscal 2012. The purchase commitments increased our costs by approximately $0.002 per pound during fiscal 2013
and reduced our costs by approximately $0.019 per pound during fiscal 2012. The cost of beef could further increase due to
the record high corn prices as a result of the drought in the Midwest during 2012. If the cost of beef and beef trimmings
increases and we are unable to pass on these higher costs through price increases or otherwise reduce any increase in our
costs through the use of purchase commitments, our margins will be adversely impacted.
With respect to Company-owned restaurants, our cost of sales during fiscal 2013 was $7,525,000 or 56.1% of
restaurant sales, as compared to $7,767,000 or 58.8% of restaurant sales in fiscal 2012. The primary reason for this decline
in cost of sales was the result of not operating the Coney Island restaurant during the winter months of fiscal 2013. During
the winter, our cost of sales, which includes labor, typically are higher as a percentage of sales, due to the lower sales at the
restaurant during the off-season. Other cost of sales declined by $582,000 in fiscal 2013, primarily because of the
termination of our agreement with the QVC television network in March 2012.
Restaurant operating expenses were $2,700,000 in fiscal 2013 as compared to $3,115,000 in fiscal 2012. Prior to
Superstorm Sandy, restaurant operating costs were higher than the same period in fiscal 2012 by approximately $204,000
primarily due to higher percentage rent due on the increased sales at the new Boardwalk location. After the Hurricane,
restaurant operating costs declined primarily as a result of the ongoing expenses incurred during the period of closure, at
our Coney Island restaurants, which have been offset against an insurance advance received relating to damages from
Superstorm Sandy (See Note L.4 “Superstorm Sandy” in the accompanying Notes to the Consolidated Financial
Statements) . We incurred further savings from the closure of our Yonkers restaurant in November 2012. Although our
utility costs declined as a percentage of restaurant sales during fiscal 2013, we continue to be concerned about the volatile
market conditions for oil and natural gas.
Depreciation and amortization was $940,000 in fiscal 2013 as compared to $965,000 in fiscal 2012. This decrease
is primarily attributable to the disposal of the assets destroyed at our Coney Island location due to Superstorm Sandy and
lower corporate depreciation which was partly offset by the investment made at the new Boardwalk location and higher
depreciation on newly-added consigned equipment by our Branded Product Program. We expect to incur higher
depreciation due to our investments in the redevelopment of the Coney Island and Yonkers restaurants in fiscal 2014.
General and administrative expenses increased by $885,000 or 9.3% to $10,437,000 in fiscal 2013 as compared to
$9,552,000 in fiscal 2012. The increase in general and administrative expenses was primarily due to increased
compensation costs of $1,025,000, including higher share-based compensation of approximately $352,000, additional
personnel costs and associated expenses including approximately $80,000 due to the fifty-third week of operations, and
higher payroll taxes from the exercise of employee stock options. These expenses were partly offset by lower professional
fees of approximately $124,000.
Interest expense of $453,000 in fiscal 2013 and $477,000 in fiscal 2012 primarily represents accrued interest in
connection with Nathan’s appeal of the SMG damages award calculated at the New York State statutory rate of 9% per
annum. In connection with its appeal, on March 31, 2011, Nathan’s was required to enter into both a security agreement
and a blocked deposit account control agreement and to deposit approximately $4,910,000 into the account and agree to
deposit additional amounts monthly in an amount equal to the post-judgment interest. Nathan’s expects to continue to
accrue these charges during the term of the appeal.
42
Provision for Income Taxes
In fiscal 2013, the income tax provision was $4,671,000 or 38.5% of earnings before income taxes as compared to
$3,849,000 or 38.5% of earnings before income taxes in fiscal 2012. Nathan’s effective tax rate was reduced by 1.3%
during fiscal 2013 and reduced by 2.1% during fiscal 2012, due to the differing effects of tax-exempt interest income.
During fiscal 2013, Nathan’s resolved certain uncertain tax positions, reducing the associated unrecognized tax benefits,
along with the related accrued interest and penalties, by approximately $38,000, which lowered the effective tax rate by
0.3%. During fiscal 2012, Nathan’s recorded additional taxes of $49,000 primarily in connection with the audit of its prior
year tax returns increasing the effective tax rate by 0.5%. Additionally, during fiscal 2012, Nathan’s resolved certain
uncertain tax positions, reducing the associated unrecognized tax benefits, along with the related accrued interest and
penalties, by approximately $75,000, which lowered the effective tax rate by 0.7%. Nathan’s effective tax rates without
these adjustments would have been 40.1% for fiscal 2013 and 40.8% for fiscal 2012. Nathan’s estimates that its
unrecognized tax benefits, including the related accrued interest and penalties could be reduced by up to $67,000 during
fiscal 2014.
Off-Balance Sheet Arrangements
At March 31, 2013, Nathan’s had open purchase commitments for hot dogs at a total cost of $5,000,000 which
were purchased between April and July 2013. At March 30, 2014, Nathan’s did not have any open purchase commitments
for hot dogs outstanding. Nathan’s may continue to enter into additional purchase commitments in the future as favorable
market conditions become available.
Liquidity and Capital Resources
Cash and cash equivalents at March 30, 2014 aggregated $22,077,000, increasing by $8,674,000 during fiscal
2014. At March 30, 2014, marketable securities were $11,187,000 compared to $12,307,000 at March 31, 2013 and net
working capital increased to $35,378,000 from $27,525,000 at March 31, 2013.
Cash provided by operations of $2,876,000, in fiscal 2014 is primarily attributable to net income of $8,327,000 in
addition to other non-cash operating items of $1,327,000. However, changes in Nathan’s operating assets and liabilities
decreased cash by $6,778,000, primarily resulting from the payment of $6,009,000, in satisfaction of the SMG litigation,
inclusive of current year interest of $135,000, increased accounts and other receivables, net of $927,000 and increased
prepaid and other current assets of $2,033,000 partially offset by increased accounts payable, accrued expenses and other
current liabilities of $2,329,000. The increase in accounts and other receivables is primarily due to increased sales by the
Branded Product Program and increased operating costs from our Coney Island restaurant that were reimbursed pursuant to
our business interruption policy in April 2014. The increase in prepaid expenses primarily relates to higher prepaid
estimated income taxes and insurance which were partly offset by the utilization of prepaid sponsorships. The increase in
accounts payable, accrued expenses and other current liabilities is due primarily from increased payables in connection
with our Branded Product Program, construction associated with the Yonkers renovation, accrued compensation and
insurance premiums.
Cash provided by investing activities was $4,917,000 in fiscal 2014. We received cash proceeds of $2,711,000 for
the settlement of our property claim for the damage incurred primarily at our Flagship Coney Island restaurant and
$2,890,000 from the redemption of maturing available-for-sale securities. On July 24, 2013, SMG, Inc. withdrew
$6,009,000 from the restricted cash account, including cumulative interest of $1,099,000, satisfying the judgment of the
SMG damages award. We incurred capital expenditures of $4,339,000 primarily in connection with the rebuilding of our
Flagship Coney Island and Yonkers restaurants and our Branded Product Program, and funded interest of $135,000 into the
restricted cash account. We estimate we will invest approximately $1,250,000 in connection with the redevelopment of our
Oceanside restaurant during fiscal 2015. We purchased available-for-sale securities of $2,219,000.
Cash provided by financing activities of $881,000 in fiscal 2014 includes the expected realization of the tax
benefits associated with employee stock option exercises of $2,195,000 and proceeds from the exercise of employee stock
options of $944,000 reduced by $772,000 for the payment of withholding tax on the net share settlement exercise of
employee stock options. We repurchased treasury stock in the amount of $1,486,000.
43
During the period from October 2001 through March 30, 2014, Nathan’s purchased 4,610,026 shares of its
common stock at a cost of approximately $54,884,000 including 30,463 shares of stock costing $1,486,000 during fiscal
2014 pursuant to its stock repurchase plans previously authorized by the Board of Directors. Since March 26, 2007, to date,
we have repurchased 2,718,926 shares at a total cost of approximately $47,726,000, reducing the number of shares then-
outstanding by 45.2%.
On November 3, 2009, Nathan’s Board of Directors authorized its sixth stock repurchase plan for the purchase of
up to 500,000 shares of its common stock on behalf of the Company. On February 1, 2011, Nathan’s Board of Directors
authorized a 300,000 share increase of shares that the Company may repurchase. As of March 30, 2014, the Company had
repurchased 511,067 shares at a cost of $11,279,000 under the sixth stock repurchase plan.
As of March 30, 2014, an aggregate of 288,933 shares were available to be purchased under Nathan’s existing
stock buy-back program. Purchases may be made from time to time, depending on market conditions, in open market or
privately-negotiated transactions, at prices deemed appropriate by management. There is no set time limit on the
repurchases to be made under these stock-repurchase plans.
Management believes that available cash, marketable securities and cash generated from operations should
provide sufficient capital to finance our operations and stock repurchases for at least the next 12 months.
As discussed above, we had cash and cash equivalents at March 30, 2014 aggregating $22,077,000, and
marketable securities of $11,187,000. Our Board routinely monitors and assesses its cash position and our current and
potential capital requirements. We may continue to return capital to our shareholders through stock repurchases, although
there is no assurance that the Company will make any repurchases under its existing stock-repurchase plan.
We expect that in the future we will make investments in certain existing restaurants, support the growth of the
Branded Product and Branded Menu Programs and continue our stock repurchase programs, funding those investments
from our operating cash flow. We may also incur capital and other expenditures or engage in investing activities in
connection with opportunistic situations that may arise on a case-by-case basis.
At March 30, 2014, there were three properties that we lease from third parties which we sublease to three
franchisees. We remain contingently liable for all costs associated with these properties including: rent, property taxes and
insurance. We may incur future cash payments with respect to such properties, consisting primarily of future lease
payments, including costs and expenses associated with terminating any of such leases.
On December 1, 2009, a wholly-owned subsidiary of the Company executed a Guaranty of Lease in connection
with its re-franchising of a restaurant located in West Nyack, New York. The guaranty could be called upon in the event of
a default by the tenant/franchisee. The guaranty extends through the fifth Lease Year, as defined in the lease, and will not
exceed an amount equal to the highest amount of the annual minimum rent, percentage rent and any additional rent payable
pursuant to the lease and reasonable attorney’s fees and other costs. We have recorded a liability of approximately
$193,000 in connection with this guaranty, which does not include potential real estate tax increases and attorney’s fees and
other costs as these amounts are not reasonably determinable at this time. In connection with the Nathan’s Franchise
Agreement, Nathan’s has received a personal guaranty from the franchisee for all obligations under the guaranty.
44
The following schedule represents Nathan’s cash contractual obligations and commitments by maturity as of
March 30, 2014 (in thousands):
Cash Contractual Obligations
Employment Agreements ...................................... $
Operating Leases (a) .............................................
Gross Cash Contractual Obligations .....................
Sublease Income ....................................................
Net Cash Contractual Obligations ......................... $
Total
4,298 $
16,287
20,585
3,073
17,512 $
Payments Due by Period
Less than
1 Year
1-3 Years 3-5 Years
More than
5 Years
1,569 $
1,785
3,354
404
2,950 $
1,679 $
3,339
5,018
524
4,494 $
650 $
3,403
4,053
528
3,525 $
400
7,760
8,160
1,617
6,543
a) Nathan’s has entered into contingent agreements to terminate its lease for the existing Oceanside restaurant and
relocate to a smaller restaurant in the same area. Contingent upon the landlord’s receipt of the necessary permits
and variances, we expect to close the existing restaurant in November 2014 and commence operations of new
Oceanside restaurant in March 2015.
b) At March 30, 2014, the Company had unrecognized tax benefits of $283,000. The Company believes that it is
reasonably possible that the unrecognized tax benefits may decrease by $64,000 within the next year. A reasonable
estimate of the timing of the remaining liabilities is not practicable.
Inflationary Impact
We do not believe that general inflation has materially impacted earnings since 2006. However, we have
experienced significant volatility in our costs for our hot dogs and certain food products, distribution costs and utilities. In
an effort to reduce the impact of increasing market prices, we have entered into purchase commitments for a portion of our
hot dogs since January 2008. Beginning in January 2010, the cost of hot dogs continued to increase until the summer of
2012, when the market price of “fresh 50’s” unexpectedly dropped significantly. Since then, the cost of this product has
rebounded. The market price of hot dogs during fiscal 2014 was approximately 7.5% higher than fiscal 2013 however, the
market price of hot dogs was approximately 7.8% higher in the fourth quarter fiscal 2014 than the fourth quarter fiscal
2013. The fiscal 2013 price of hot dogs was approximately 0.01% higher than fiscal 2012. These increases are in addition
to fiscal 2012’s increase of approximately 12.9% over fiscal 2011. The market price also increased during fiscal 2011 by
9.9% over fiscal 2010. We are unable to predict the future cost of our hot dogs and expect to experience continued price
volatility for our beef products during fiscal 2015. In addition, beef prices continue to be extremely volatile due to the
supply constraints, as a result of the lingering effect of the drought in the Midwest during 2012. 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 increased insurance costs resulting from the hardening 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 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 2014 or incur new penalties beginning January
2015 which may increase our health care costs.
From time to time, various Federal and New York State legislators have proposed changes to the minimum wage
requirements. The New York State minimum wage increased to $8.00 on December 31, 2013 and will increase to $8.75
and $9.00 per hour on December 31, 2014 and December 31, 2015, respectively. The impact of the New York minimum
wage increase on the Company amounted to a 4.6% average salary increase for our employees that were affected. On
November 5, 2013, the New Jersey Minimum Wage Increase Amendment was affirmatively voted in favor in the general
election increasing the New Jersey minimum wage to $8.25 per hour, with annual cost of living increases. Effective
January 1, 2013, ten states increased their minimum wage up to a low of $7.35 to a high of $9.19. In addition, there have
been recent protests in the City of New York and other municipalities relating to compensation at fast food restaurants.
Mayor DeBlasio, of the City of New York, has stated that New York City should have additional increases in the minimum
wage. We estimate that this increase in minimum wage has the potential to increase our restaurant cost of sales by
approximately 50 bps if prices remain the same. Although we only operate five Company-owned restaurants, we believe
that ongoing increases in the minimum wage could have a significant financial impact on our financial results and the
results of our franchisees.
45
April 1, 2014, the City of New York, passed legislation requiring employers to offer paid sick leave to all
employees, including part-time employees, that work more than 80 hours for the employer. Nathan’s operates three
restaurants that will be affected by this new legislation and is currently evaluating the potential impact on its results of
operations.
In addition, our union contract expires in June 2014 and a new union contract could also significantly increase
labor and associated costs.
Continued increases in labor, food and other operating expenses, including health care, could adversely affect our
operations and those of the restaurant industry and we might have to further reconsider our pricing strategy as a means to
offset reduced operating margins.
The Company’s business, financial condition, operating results and cash flows can be impacted by a number of
factors, including but not limited to those set forth above in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” any one of which could cause our actual results to vary materially from recent results
or from our anticipated future results. For a discussion identifying additional risk factors and important factors that could
cause actual results to differ materially from those anticipated, also see the discussions in “Forward-Looking Statements,”
“Risk Factors” and “Notes to Consolidated Financial Statements” in this Form 10-K.
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 30, 2014, Nathan’s cash and cash equivalents aggregated $22,077,000. Earnings on these cash and cash equivalents
would increase or decrease by approximately $55,000 per annum for each 0.25% change in interest rates.
Marketable Securities
We have invested our marketable securities in intermediate term, fixed rate, highly rated and highly liquid
instruments. These investments are subject to fluctuations in interest rates. As of March 30, 2014, the market value of
Nathan’s marketable securities aggregated $11,187,000. Interest income on these marketable securities would increase or
decrease by approximately $28,000 per annum for each 0.25% change in interest rates. The following chart presents the
hypothetical changes in the fair value of the marketable investment securities held at March 30, 2014 that are sensitive to
interest rate fluctuations:
Valuation of securities
Given an interest rate
Decrease of X Basis points
Fair
Value
Valuation of securities
Given an interest rate
Increase of X Basis points
+150BPS
(50BPS)
Municipal notes and bonds .. $11,191,000 $11,191,000 $11,190,000 $11,187,000 $11,186,000 $ 11,186,000 $11,185,000
(150BPS) (100BPS)
+100BPS
+50BPS
Borrowings
At March 30, 2014, we had no outstanding indebtedness. If we were to borrow money in the future, such
borrowings would be based upon the then-prevailing interest rates. We do not anticipate entering into interest rate swaps or
other financial instruments to hedge our borrowings.
46
Commodity Costs
The cost of commodities is subject to market fluctuation. Beginning January 2010, the cost of hot dogs has
continued to increase until the summer of 2012, when the market price of “fresh 50’s” unexpectedly dropped significantly.
Since then, the cost of this product has rebounded to its normal range. The market price of hot dogs during fiscal 2014 was
approximately 7.5% higher than fiscal 2013. The market price of hot dogs during fiscal 2013 was approximately 0.01%
higher than fiscal 2012. This increase is in addition to fiscal 2012’s increase of approximately 12.9% over fiscal 2011. The
market price also increased during fiscal 2011 by 9.9% over fiscal 2010. We have attempted to enter into purchase
commitments for hot dogs from time to time in order to reduce the impact of increasing market prices. With the exception
of those commitments, we have not attempted to hedge against fluctuations in the prices of the commodities we purchase
using future, forward, option or other instruments. As a result, we expect that the majority of our future commodity
purchases will be subject to market changes in the prices of such commodities. Generally, we have attempted to pass
through permanent increases in our commodity prices to our customers, thereby reducing the impact of long-term increases
on our financial results. A short-term increase or decrease of 10.0% in the cost of our food and paper products for the fifty-
two weeks ended March 30, 2014 would have increased or decreased our cost of sales by approximately $4,708,000.
Foreign Currencies
Foreign franchisees generally conduct business with us and make payments in United States dollars, reducing the
risks inherent with changes in the values of foreign currencies. As a result, we have not purchased future contracts, options
or other instruments to hedge against changes in values of foreign currencies and we do not believe fluctuations in the value
of foreign currencies would have a material impact on our financial results.
Item 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.
None
47
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer, Chief Operating Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures, as required by Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer, Chief
Operating 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’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. Our internal control over financial reporting includes those policies and procedures that:
(cid:404) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of our assets;
(cid:404) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial
statements in accordance with generally accepted accounting principles in the United States, and that our
receipts and expenditures are being made only in accordance with authorizations of our management and
directors; and
(cid:404) 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
30, 2014. In making this assessment, management used the framework in Internal Control — Integrated Framework issued
in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment
and the criteria set forth by COSO in 1992, management believes that Nathan’s maintained effective internal control over
financial reporting as of March 30, 2014. The effectiveness of our internal control over financial reporting as of March 30,
2014, has been audited by Grant Thornton 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 Reporting
There were no changes in our internal controls over financial reporting that occurred during the thirteen weeks
ended March 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Limitations on the Effectiveness of Controls
We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance
that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures
are designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer, Chief
Operating Officer and Chief Financial Officer have concluded that such controls and procedures are effective at the
reasonable assurance level.
Item 9B. Other Information.
None.
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Nathan’s Famous, Inc.
We have audited the internal control over financial reporting of Nathan’s Famous, Inc. (a Delaware corporation) and
subsidiaries (the “Company”) as of March 30, 2014, based on criteria established in the 1992 Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’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 Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We conducted our audit 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 effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
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’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 its 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 30, 2014, based on criteria established in the 1992 Internal 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 30, 2014, and our report
dated June 13, 2014 expressed an unqualified opinion on those financial statements.
New York, New York
June 13, 2014
49
Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
The information required in response to this Item is incorporated herein by reference from the discussions under
the captions Proposal 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 Operating 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.
The information required in response to this Item is incorporated herein by reference from the discussion under the
caption Executive Compensation, including the Summary Compensation and other tables, Non-Qualified Deferred
Compensation, Risk Consideration in our Compensation Programs and 2014 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.
The information required in response to this Item is incorporated herein by reference from the discussion under the
caption Equity Plan Information 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.
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
caption Corporate Governance – Director Independence and Corporate Governance – Certain Relationships and Related
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.
50
Item 14.
Principal Accountant Fees and Services.
Audit Fees
We were billed by Grant Thornton LLP the aggregate amount of approximately $245,000 in respect of fiscal 2014
and $250,000 in respect of fiscal 2013 for fees for professional services rendered for the audit of our annual financial
statements and review of our financial statements included in our Forms 10-Q as well as fees related to the Company’s
filing of a Registration Statement on Form S-8 in fiscal 2013.
Audit-Related Fees
Grant Thornton LLP did not render any audit-related services for fiscal 2014 and 2013 and, accordingly, did not
bill for any such services.
Tax Fees
Grant Thornton LLP did not render any tax compliance, tax advice or tax planning services for fiscal 2014 and
2013 and, accordingly, did not bill for any such services.
All Other Fees
Grant Thornton LLP did not render any other services for fiscal 2014 and 2013 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 Thornton LLP of all audit and non-audit services.
Our Audit Committee approved all of the audit services provided by Grant Thornton LLP during 2014 and 2013.
51
Item 15.
Exhibits and Financial Statement Schedules.
(a)(1) Consolidated Financial Statements
PART IV
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)
Financial Statement Schedule
The consolidated financial statement schedule listed in the accompanying index to the consolidated financial
statements and schedule on Page F-1 is filed as part of this Report.
(3)
Exhibits
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
3.2
3.3
4.1
4.2
4.3
Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1 No.
33- 56976.)
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.)
By-Laws, as amended. (Incorporated by reference to Exhibit 3.1 to Form 8-K dated November 1, 2006.)
Specimen Stock Certificate. (Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1 No.
33-56976.)
Specimen Rights Certificate. (Incorporated by reference to Exhibit 2 to Form 8-A/A dated December 10, 1999.)
Rights Agreement, dated as of June 5, 2013, between Nathan’s Famous, Inc. and American Stock Transfer and
Trust Company, LLC, as Rights Agent, which includes form of Rights Certificate as Exhibit A and the Summary of
Rights to Purchase as Exhibit B. (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report filed
on Form 8-K dated June 11, 2013.)
10.1 Employment Agreement with Wayne Norbitz, dated December 28, 1992. (Incorporated by reference to Exhibit 10.1
10.2
10.3
to Registration Statement on Form S-1 No. 33-56976.)
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.
Lease with NWCM Corp. for premises at Oceanside, New York, dated March 14, 1975. (Incorporated by reference
to Exhibit 10.5 to Registration Statement on Form S-1 No. 33-56976.)
10.4 Form of Standard Franchise Agreement. (Incorporated by reference to Exhibit 10.12 to Registration Statement on
Form S-1 No. 33-56976.)
10.5 401K Plan and Trust. (Incorporated by reference to Exhibit 10.5 to Registration Statement on Form S-1 No. 33-
56976.)
10.6 Amendment dated November 8, 1993, to the Employment Agreement, dated December 28, 1992, with Wayne
Norbitz. (Incorporated by reference to Exhibit 10.19 to the Annual Report filed on Form 10-K for the fiscal year
ended March 27, 1994.)
10.7 License Agreement dated as of February 28, 1994, among Nathan’s Famous Systems, Inc. and SMG, Inc.,
including amendments and waivers thereto. (Incorporated by reference to Exhibit 10.21 to the Annual Report filed
on Form 10-K for the fiscal year ended March 27, 1994.)
10.8 Modification Agreement dated December 31, 1996, to the Employment Agreement with Wayne Norbitz.
(Incorporated by reference to Exhibit 10.1 to the Quarterly Report filed on Form 10-Q for the fiscal quarter ended
December 29, 1996.)
52
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
Amendment to License Agreement dated as of February 28, 1994, among Nathan’s Famous Systems, Inc. and
SMG, Inc. including waivers and amendments thereto. (Incorporated by reference to Exhibit 10.2 to the Quarterly
Report filed on Form 10-Q for the fiscal quarter ended December 29, 1996.)
2002 Stock Incentive Plan. (Incorporated by reference to Exhibit 4 to Registration Statement on Form S-8 No. 333-
101355.)
Employment Agreement with Howard M. Lorber, dated as of December 15, 2006. (Incorporated by reference to
Exhibit 10.1 to Form 8-K dated December 15, 2006.)
Employment Agreement with Eric Gatoff, dated as of December 15, 2006. (Incorporated by reference to Exhibit
10.2 to Form 8-K dated December 15, 2006.)
Amendment to Employment Agreement with Eric Gatoff dated August 3, 2010. (Incorporated by reference to
Exhibit 10.1 to Form 10-Q for the fiscal quarter ended June 27, 2010.)
License Agreement dated April 23, 2008 between Roasters Asia Pacific (Cayman) Limited and Nathan’s Famous,
Inc. (Incorporated by reference to Exhibit 10.2 to Form 8-K dated April 23, 2008.)
Agreement of Lease between One-Two Jericho Plaza Owner LLC and Nathan’s Famous Services, Inc. dated
September 11, 2009, (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 27,
2009.)
Guaranty by Nathan’s Famous, Inc. of Agreement of Lease with One-Two Jericho Plaza Owner LLC dated
September 11, 2009, (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended September 27,
2009.)
2010 Stock Incentive Plan (Incorporated by reference to Exhibit A to Proxy Statement on Schedule 14A dated July
23, 2010).
Amendment to 2010 Stock Incentive Plan (Incorporated by reference to Exhibit A to Proxy Statement on Schedule
14A dated July 23, 2012).
Amendment to Employment Agreement with Howard M. Lorber, dated November 1, 2012. (Incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 23, 2012.)
Restricted Stock Agreement with Howard M. Lorber, dated November 1, 2012. (Incorporated by reference to
Exhibit 10.1 to Form 10-Q for the quarter ended September 23, 2012.)
***Letter agreement dated December 5, 2012 between Nathan’s Famous Systems, Inc. and John Morrell & Co.
(Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended December 23, 2012).
Restricted Stock Agreement with Eric Gatoff, dated June 4, 2013. (Incorporated by reference to Exhibit 10.27 to
Form 10-K for the year ended March 31, 2013.)
*List of Subsidiaries of the Registrant.
21
23 *Consent of Grant Thornton LLP dated June 13, 2014.
31.1 *Certification by Eric Gatoff, Chief Executive Officer, pursuant to Rule 13a - 14(a).
31.2 *Certification by Ronald G. DeVos, Chief Financial Officer, pursuant to Rule 13a - 14(a).
32.1 *Certification by Eric Gatoff, Chief Executive Officer of Nathan’s Famous, Inc., pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 *Certification by Ronald G. DeVos, Chief Financial Officer of Nathan’s Famous, Inc., pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS **XBRL Instance Document.
101.SCH ** XBRL Taxonomy Extension Schema Document
101.CAL ** XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF ** XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB ** XBRL Taxonomy Extension Label Linkbase Document.
101.PRE ** XBRL Taxonomy Extension Presentation Linkbase Document.
*Filed herewith.
**In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Annual Report on Form 10-K
shall be deemed to be “furnished” and not “filed”.
***Filed with confidential portions omitted pursuant to request for confidential treatment. The omitted portions have been
separately filed with the SEC.
53
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 13th day of June,
2014.
SIGNATURES
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 13th day of June, 2014.
/s/ ERIC GATOFF
Eric Gatoff
Chief Executive Officer
(Principal Executive Officer)
/s/ HOWARD LORBER
Howard Lorber
Executive Chairman
/s/ WAYNE NORBITZ
Wayne Norbitz
President, Chief Operating Officer and Director
/s/ RONALD G. DEVOS
Ronald G. DeVos
Vice President - Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
/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
54
Nathan’s Famous, Inc. and Subsidiaries
TABLE OF CONTENTS
Page
Report of Independent Registered Public Accounting Firm ........................................................................................F-2
Consolidated Balance Sheets ......................................................................................................................................F-3
Consolidated Statements of Earnings ..........................................................................................................................F-4
Consolidated Statements of Comprehensive Income ..................................................................................................F-5
Consolidated Statements of Stockholders’ Equity ......................................................................................................F-6 – F-8
Consolidated Statements of Cash Flows .....................................................................................................................F-9
Notes to Consolidated Financial Statements ...............................................................................................................F-10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Nathan’s Famous, Inc.
We have audited the accompanying consolidated balance sheets of Nathan’s Famous, Inc. (a Delaware corporation) and
subsidiaries (the “Company”) as of March 30, 2014 and March 31, 2013, and the related consolidated statements of
earnings, comprehensive income, stockholders’ equity, and cash flows for each of the fifty-two weeks ended March 30,
2014, the fifty-three weeks ended March 31, 2013, and the fifty-two weeks ended March 25, 2012. Our audits of the basic
consolidated financial statements included the financial statement schedule listed in the index appearing under item
15(a)(2). 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 subsidiaries as of March 30, 2014 and March 31, 2013, and the results of their
operations and their cash flows for the fifty-two weeks ended March 30, 2014, the fifty-three weeks ended March 31, 2013,
and the fifty-two weeks ended March 25, 2012 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 respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of March 30, 2014, based on criteria established in the
1992 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated June 13, 2014 expressed an unqualified opinion.
New York, New York
June 13, 2014
F-2
Nathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
March 30,
March 31,
2014
2013
CURRENT ASSETS
ASSETS
Cash and cash equivalents ........................................................................................................... $
Marketable securities ..................................................................................................................
Restricted cash ............................................................................................................................
Accounts and other receivables, net ............................................................................................
Inventories ..................................................................................................................................
Prepaid expenses and other current assets (Note F) ....................................................................
Deferred income taxes ................................................................................................................
Total current assets ..........................................................................................
Property and equipment, net .......................................................................................................
Long-term investment (Note G) ..................................................................................................
Goodwill .....................................................................................................................................
Intangible asset............................................................................................................................
Deferred income taxes ................................................................................................................
Other assets .................................................................................................................................
22,077 $
11,187
-
7,823
947
3,129
26
45,189
8,970
100
95
1,353
-
428
13,403
12,307
5,874
6,917
1,046
1,096
345
40,988
5,788
500
95
1,353
480
458
$
56,135 $
49,662
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable ........................................................................................................................ $
Litigation accrual (Note L.2) .......................................................................................................
Accrued expenses and other current liabilities ...........................................................................
Deferred franchise fees ...............................................................................................................
Total current liabilities ....................................................................................
Other liabilities............................................................................................................................
Deferred income taxes ................................................................................................................
4,826 $
-
4,751
234
9,811
1,693
734
2,991
5,874
4,320
278
13,463
2,051
-
Total liabilities .................................................................................................
12,238
15,514
COMMITMENTS AND CONTINGENCIES (Note L)
STOCKHOLDERS’ EQUITY
Common stock, $.01 par value; 30,000,000 shares authorized; 9,092,183 and 8,958,181
shares issued; and 4,482,157 and 4,378,618 shares outstanding at March 30, 2014 and
March 31, 2013, respectively ..................................................................................................
Additional paid-in capital ............................................................................................................
Retained earnings ........................................................................................................................
Accumulated other comprehensive income ................................................................................
Treasury stock, at cost, 4,610,026 and 4,579,563 shares at March 30, 2014 and March 31,
2013, respectively ...................................................................................................................
Total stockholders’ equity ...............................................................................
91
57,578
40,963
149
98,781
(54,884)
43,897
90
54,491
32,636
329
87,546
(53,398)
34,148
$
56,135 $
49,662
The accompanying notes are an integral part of these statements.
F-3
Nathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share and per share amounts)
REVENUES
Sales ................................................................................................. $
Franchise fees and royalties .............................................................
License royalties ..............................................................................
Interest income ................................................................................
Insurance gain (Note L.4) ................................................................
Other income, net ............................................................................
Total revenues ................................................................
COSTS AND EXPENSES
Cost of sales .....................................................................................
Restaurant operating expenses .........................................................
Depreciation and amortization .........................................................
General and administrative expenses ...............................................
Impairment charge – long-term investment (Note G) ......................
Interest expense ...............................................................................
Total costs and expenses ................................................
Income from operations before provision for income taxes ................
Provision for income taxes ..................................................................
Net income .................................................................... $
PER SHARE INFORMATION
Income per share:
Fifty-Two
weeks ended
March 30,
2014
Fifty-Three
weeks ended
March 31,
2013
Fifty-Two
weeks ended
March 25,
2012
65,521 $
5,718
8,513
325
2,774
76
82,927
53,072
3,142
1,157
11,460
400
135
69,366
13,561
5,234
8,327 $
56,656 $
5,842
8,571
392
-
82
71,543
44,874
2,700
940
10,437
-
453
59,404
12,139
4,671
7,468 $
52,369
5,646
7,526
573
-
108
66,222
42,106
3,115
965
9,552
-
477
56,215
10,007
3,849
6,158
Basic ............................................................................................. $
Diluted ......................................................................................... $
1.87 $
1.81 $
1.70 $
1.63 $
1.26
1.22
Weighted average shares used in computing income per share:
Basic .............................................................................................
Diluted .........................................................................................
4,450,000
4,605,000
4,400,000
4,588,000
4,906,000
5,049,000
The accompanying notes are an integral part of these statements.
F-4
Nathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Fifty-Two
weeks ended
March 30,
2014
Fifty-Three
weeks ended
March 31,
2013
Fifty-Two
weeks ended
March 25,
2012
Net income .......................................................................................... $
8,327 $
7,468 $
6,158
Other comprehensive income (loss), net of deferred income taxes:
Unrealized gains (losses) on marketable securities ..................
Other comprehensive income (loss) .........................................
(180)
(180)
(168 )
(168 )
16
16
Comprehensive income ....................................................................... $
8,147 $
7,300 $
6,174
The accompanying notes are an integral part of these statements.
F-5
Nathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Fifty-two weeks ended March 30, 2014, the Fifty-three weeks ended March 31, 2013 and the Fifty-two weeks ended
March 25, 2012
(in thousands, except share amounts)
Common Common
Shares
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Treasury Stock,
at Cost
Shares
Amount
Total
Stockholders’
Equity
Balance, March 27,
2011 ......................... 8,837,991 $
88 $
52,945 $
19,010 $
481 3,755,278 $ (34,446) $
38,078
Shares issued in
connection with
share-based
compensation plans .
Repurchase of
17,272
1
64
common stock .........
-
-
-
Income tax benefit on
stock option
exercises ..................
Share-based
compensation ...........
Unrealized gains on
marketable
securities, net of
deferred income
taxes of $11 .............
Net income ...................
Balance, March 25,
-
-
-
-
-
-
-
-
-
113
-
274
-
-
-
-
-
6,158
-
-
-
65
-
736,208 (15,867)
(15,867)
-
-
16
-
-
-
-
-
-
-
-
-
113
274
16
6,158
2012 ......................... 8,855,263 $
89 $
53,396 $
25,168 $
497 4,491,486 $ (50,313) $
28,837
The accompanying notes are an integral part of these statements.
F-6
Nathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Fifty-two weeks ended March 30, 2014, the Fifty-three weeks ended March 31, 2013 and the Fifty-two weeks ended
March 25, 2012
(in thousands, except share amounts)
Common Common
Shares
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Treasury Stock,
at Cost
Shares
Amount
Total
Stockholders’
Equity
Balance, March 25,
2012 ........................ 8,855,263 $
89 $
53,396 $
25,168 $
497 4,491,486 $ (50,313) $
28,837
Shares issued in
connection with
share-based
compensation plans 102,918
Withholding tax on net
share settlement of
employee stock
options ....................
Repurchase of
common stock ........
Income tax benefit on
stock option
exercises .................
Share-based
compensation ..........
Unrealized losses on
marketable
securities, net of
deferred income tax
benefit of $105 .......
Net income ..................
Balance, March 31,
-
-
-
-
-
-
1
388
-
-
-
-
389
-
(982)
-
-
-
1,062
-
627
-
-
-
-
-
-
-
(982)
-
88,077
(3,085)
(3,085)
-
-
-
-
-
-
-
-
-
-
1,062
627
(168)
7,468
-
-
-
-
-
7,468
(168)
-
2013 ........................ 8,958,181 $
90 $
54,491 $
32,636 $
329 4,579,563 $ (53,398) $
34,148
The accompanying notes are an integral part of these statements.
F-7
Nathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Fifty-two weeks ended March 30, 2014, the Fifty-three weeks ended March 31, 2013 and the Fifty-two weeks ended
March 25, 2012
(in thousands, except share amounts)
Common Common
Shares
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Treasury Stock,
at Cost
Shares
Amount
Total
Stockholders’
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
Withholding tax on
net share
settlement of
employee stock
options ...................
Repurchase of
common stock .......
Income tax benefit on
stock option
exercises .................
Share-based
compensation ........
Unrealized losses on
marketable
securities, net of
deferred income
tax benefit of $119
Net income .................
Balance, March 30,
-
-
-
-
-
-
1
943
-
-
-
-
944
-
(772)
-
-
-
2,195
-
721
-
-
-
-
-
-
-
(772)
-
30,463
(1,486)
(1,486)
-
-
-
-
-
-
-
-
-
-
2,195
721
(180)
8,327
-
-
-
-
-
8,327
(180)
-
2014 ........................ 9,092,183 $
91 $
57,578 $
40,963 $
149 4,610,026 $ (54,884) $
43,897
The accompanying notes are an integral part of these statements.
F-8
Nathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income ................................................................................................................. $
8,327 $
7,468 $
6,158
Fifty-Two
weeks ended
March 30, 2014
Fifty-Three
weeks ended
March 31, 2013
Fifty-Two
weeks ended
March 25, 2012
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization ..........................................................................
Insurance gain ....................................................................................................
Amortization of bond premium ........................................................................
Share-based compensation expense ..................................................................
Provision for doubtful accounts ........................................................................
Impairment charge – long-term investment ......................................................
Deferred income taxes .......................................................................................
Changes in operating assets and liabilities:
Accounts and other receivables, net ..................................................................
Inventories .........................................................................................................
Prepaid expenses and other current assets .........................................................
Other assets ........................................................................................................
Accrued litigation ..............................................................................................
Accounts payable, accrued expenses and other current liabilities ....................
Advances of insurance proceeds .......................................................................
Deferred franchise fees ......................................................................................
Other liabilities ..................................................................................................
1,157
(2,774)
150
721
21
400
1,652
(927)
99
(2,033)
30
(5,874)
2,329
-
(44)
(358)
940
-
130
627
15
-
497
(397 )
79
298
7
455
(838 )
130
155
(72 )
965
-
193
274
86
-
2,041
(501)
14
(329)
(72)
447
347
-
(218)
207
Net cash provided by operating activities ............................................
2,876
9,494
9,612
Cash flows from investing activities:
Proceeds from sales and maturities of marketable securities .....................................
Insurance proceeds received for property and equipment (Note L.4) ........................
Purchase of long-term investment ..............................................................................
Change in restricted cash ............................................................................................
Purchase of property and equipment ..........................................................................
Purchase of available for sale securities .....................................................................
Payments received on sale of note receivable ............................................................
Litigation settlement (Note L.2) .................................................................................
Payments received on note receivable ........................................................................
2,890
2,711
-
(135)
(4,339)
(2,219)
-
6,009
-
Net cash provided by investing activities ............................................
4,917
Cash flows from financing activities:
Repurchase of treasury stock ......................................................................................
Proceeds from the exercise of stock options .............................................................
Income tax benefit on stock option exercises .............................................................
Payments of withholding tax on net share settlement of employee stock options ....
(1,486)
944
2,195
(772)
2,000
449
(500 )
(455 )
(998 )
-
-
-
-
496
(3,085 )
389
1,062
(982 )
4,050
-
-
(447)
(1,358)
-
900
-
21
3,166
(15,867)
65
113
-
Net cash provided by (used in) financing activities ...................................................
881
(2,616 )
(15,689)
Net increase (decrease) in cash and cash equivalents .....................................................
8,674
7,374
(2,911)
Cash and cash equivalents, beginning of year ................................................................
13,403
6,029
Cash and cash equivalents, end of year ........................................................................... $
22,077 $
13,403 $
Cash paid during the year for:
Interest ......................................................................................................................... $
Income taxes ............................................................................................................... $
1,099 $
3,457 $
- $
2,548 $
8,940
6,029
-
1,944
The accompanying notes are an integral part of these statements.
F-9
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
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 in the foodservice industry, and has pursued
co-branding and co-hosting initiatives.
At March 30, 2014, the Company’s restaurant system included five Company-owned units in the New York City
metropolitan area and 324 franchised or licensed units, located in 28 states, the Cayman Islands and eight foreign
countries.
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 consolidated financial statements 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-week reporting period.
The results of operations and cash flows for the fiscal year ended March 30, 2014 contained 52 weeks. The results
of operations and cash flows for the fiscal years ended March 31, 2013 contained 53 weeks and March 28, 2012
contained 52 weeks.
F-10
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America 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.
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, intangible assets and other long-lived assets.
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. Cash equivalents amounted to $330 and $172 at March 30, 2014 and March 31, 2013,
respectively. Substantially all of the Company’s cash and cash equivalents are in excess of government insurance.
Restricted cash, at March 31, 2013, represents amount held on deposit to secure Nathan’s obligation related to its
litigation accrual (Note L.).
5. Inventories
Inventories, which are stated at the lower of cost or market value, consist primarily of food items and supplies.
Cost is determined using the first-in, first-out method.
6. Marketable Securities
The Company determines the appropriate classification of securities at the time of purchase and reassesses the
appropriateness of the classification at each reporting date. At March 30, 2014 and March 31, 2013, all marketable
securities held by the Company have been classified as available-for-sale and, as a result, are stated at fair value,
based upon quoted market prices for similar assets as determined in active markets or model-derived valuations in
which all significant inputs are observable for substantially the full-term of the asset, with unrealized gains and
losses included as a component of accumulated other comprehensive income. Realized gains and losses on the sale
of securities are determined on a specific identification basis. Interest income is recorded when it is earned and
deemed realizable by the Company.
7. 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 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
F-11
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Goodwill and Intangible Assets
Goodwill and intangible assets consist of (i) goodwill of $95 resulting from the acquisition of Nathan’s in 1987;
and (ii) trademarks, trade names and other intellectual property of $1,353 in connection with Arthur Treacher’s.
The Company’s goodwill and intangible assets are deemed to have indefinite lives and, accordingly, are not
amortized, but are evaluated for impairment at least annually, but more often whenever changes in facts and
circumstances occur which may indicate that the carrying value may not be recoverable. As of March 30, 2014
and March 31, 2013, the Company performed its required annual impairment test of goodwill and intangible assets
and has determined no impairment is deemed to exist.
9. Long-lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Impairment is measured by comparing the carrying value 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 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 Company considers a history of restaurant operating losses to be its
primary indicator of potential impairment for individual restaurant locations. As a result of Hurricane Sandy, our
Coney Island restaurant sustained significant damage which resulted in the write-off of $449 related to destroyed
property (Note L.4). The restaurant was fully repaired and re-opened on May 20, 2013. No long-lived assets were
deemed impaired during the fiscal years ended March 30, 2014, March 31, 2013 and March 25, 2012.
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:
(cid:404)
(cid:404)
(cid:404)
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or
liability in an active market
Level 2 - inputs to the valuation methodology include quoted prices for a similar asset or liability in an
active market or model-derived valuations in which all significant inputs are observable for substantially
the full term of the asset or liability
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value
measurement of the asset or liability
F-12
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
The following table presents assets and liabilities measured at fair value on a recurring basis as of March 30, 2014
and March 31, 2013 based upon the valuation hierarchy:
March 30, 2014
Level 1
Level 2
Level 3
Marketable securities .................................................... $
Total assets at fair value ............................................... $
- $
- $
11,187 $
11,187 $
March 31, 2013
Level 1
Level 2
Level 3
Marketable securities ...................................................... $
Total assets at fair value .................................................. $
- $
- $
12,307 $
12,307 $
Carrying
Value
- $ 11,187
- $ 11,187
Carrying
Value
- $ 12,307
- $ 12,307
Nathan’s marketable securities, which consist primarily of municipal bonds, are not actively traded. The valuation
of such bonds is based upon quoted market prices for similar bonds currently trading in an active market or model-
derived valuations in which all significant inputs are observable for substantially the full term of the asset.
The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value due to
the short-term maturity of the instruments.
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 intangible assets and long-lived
assets. The Company utilized the income approach (Level 3 inputs) which utilized cash flow forecasts for future
income and were discounted to present value in performing its annual impairment testing of intangible assets.
11. Start-up Costs
Pre-opening and similar restaurant costs are expensed as incurred.
F-13
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 credit card by the customer, are
recognized at the point of sale. Sales are presented net of sales tax.
14. Revenue Recognition - Franchising Operations
In connection with its franchising operations, the Company 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 initially 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 the Company prior to the opening of a franchised restaurant:
o Approval of all site selections to be developed.
o Provision of architectural plans suitable for restaurants to be developed.
o Assistance in establishing building design specifications, reviewing construction compliance and
equipping the restaurant.
o Provision of appropriate menus to coordinate with the restaurant design and location to be developed.
o Provision of management training for the new franchisee and selected staff.
o Assistance with the initial operations of restaurants being developed.
At March 30, 2014 and March 31, 2013, $234 and $278, respectively, of deferred franchise fees are included in the
accompanying consolidated balance sheets. For the fiscal years ended March 30, 2014, March 31, 2013 and March
25, 2012, the Company earned franchise fees of $863, $852, and $920, respectively, from new unit openings,
transfers, co-branding and forfeitures.
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 uncollectable amounts, when all material services or conditions to the sale have been substantially
performed by the franchisor.
F-14
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. At March 30, 2014 and March 31, 2013, $200 and $401, respectively, of deferred
development fee revenue is included in other liabilities in the accompanying consolidated balance sheets.
The following is a summary of franchise openings and closings for the Nathan’s franchise restaurant system for the
fiscal years ended March 30, 2014, March 31, 2013 and March 25, 2012:
March 30,
2014
March 31,
March 25,
2013
2012
Franchised restaurants operating at the beginning of the period ...
New franchised restaurants opened during the period ..................
Franchised restaurants closed during the period ...........................
Franchised restaurants operating at the end of the period .............
303
56
(35)
324
299
40
(36 )
303
264
67
(32)
299
The Company recognizes franchise royalties on a monthly basis, which are generally based upon a percentage of
sales made by the Company’s franchisees, 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 primary
distributor or directly from the manufacturers.
Franchise fees and royalties that are not deemed to be collectible are not recognized as revenue until paid by the
franchisee or until collectibility is deemed to be reasonably assured.
Revenue from sub-leasing properties is recognized in income as the revenue is earned and deemed collectible. Sub-
lease rental income is presented net of associated lease costs in the accompanying consolidated statements of
earnings.
15. 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 recognized on a monthly basis when it is earned and deemed collectible.
F-15
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
16. Business Concentrations and Geographical Information
The Company’s accounts receivable consist principally of receivables from franchisees for royalties and advertising
contributions, from sales under the Branded Product Program, and from royalties from retail licensees. At March 30,
2014, three Branded Product customers represented 23%, 13% and 11%, of accounts receivable. At March 31, 2013,
one retail licensee and three Branded Product customers each represented 18%, 16%, 11% and 10%, respectively, of
accounts receivable. One Branded Products customer accounted for 17% and 12% of total revenue for the years
ended March 30, 2014 and March 31, 2013, respectively. No franchisee, retail licensee or Branded Product customer
accounted for 10% or more of total revenues during the fiscal year ended March 25, 2012.
The Company’s primary supplier of hot dogs represented 75%, 82% and 79% of product purchases for the fiscal
years ended March 30, 2014, March 31, 2013 and March 25, 2012, respectively. The Company’s distributor of
products to its Company-owned restaurants represented 5%, 7% and 8% of product purchases for the fiscal years
ended March 30, 2014, March 31, 2013 and March 25, 2012, respectively.
The Company’s revenues for the fiscal years ended March 30, 2014, March 31, 2013 and March 25, 2012 were
derived from the following geographic areas:
March 30,
2014
March 31,
2013
March 25,
2012
Domestic (United States) ................................ $
Non-domestic ..................................................
$
79,396 $
3,531
82,927 $
68,499 $
3,044
71,543 $
64,534
1,688
66,222
The Company’s sales for the fiscal years ended March 30, 2014, March 31, 2013 and March 25, 2012 were derived
from the following:
March 30,
2014
March 31,
2013
March 25,
2012
Branded Products ................................................... $
Company-owned restaurants ..................................
Other ......................................................................
$
51,877 $
13,231
413
65,521 $
43,214 $
13,403
39
56,656 $
38,506
13,209
654
52,369
17. Advertising
The Company administers an advertising fund on behalf of its franchisees to coordinate the marketing efforts of the
Company. Under this arrangement, the Company collects and disburses fees paid by manufacturers, franchisees and
Company-owned stores 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 store advertising expense, which is expensed as incurred, was $147, $144, and $227, for the fiscal
years ended March 30, 2014, March 31, 2013 and March 25, 2012, respectively, and have been included within
restaurant operating expenses in the accompanying consolidated statements of earnings.
F-16
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
18. Stock-Based Compensation
At March 30, 2014, the Company had one stock-based compensation plan in effect which is more fully described in
Note K.
The cost of all share-based payments, including grants of restricted stock and stock options, is recognized in the
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.
19. Classification of Operating Expenses
Cost of sales consists of the following:
o The cost of food and other products sold by Company-operated restaurants, through the Branded Product
Program and through other distribution channels.
o The cost of labor and associated costs of in-store restaurant management and crew.
o The cost of paper products used in Company-operated restaurants.
o Other direct costs such as fulfillment, commissions, freight and samples.
Restaurant operating expenses consist of the following:
o Occupancy costs of Company-operated restaurants.
o Utility costs of Company-operated restaurants.
o Repair and maintenance expenses of Company-operated restaurant facilities.
o Marketing and advertising expenses done locally and contributions to advertising funds for Company-
operated restaurants.
Insurance costs directly related to Company-operated restaurants.
o
20. 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.
F-17
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
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 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 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.
21. Reclassifications
Certain prior year balances have been reclassified to conform with current year presentation.
22. Adoption of New Accounting Pronouncements
In April 2014, the 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 is effective for Nathan’s for annual periods beginning on or after December
15, 2014 and interim periods within those years, which for Nathan’s will be the first quarter fiscal 2016 beginning
March 30, 2015. Early adoption is permitted for disposals that have not been previously reported in the financial
statements. Nathan’s does not expect the adoption of this new guidance to have a material impact on the results of
operations or financial position.
In July 2012, the FASB issued new accounting guidance on testing indefinite-lived intangible assets for
impairment. The new guidance provides the entity with the option to first perform a qualitative assessment to
determine whether it is more likely than not that the fair value of an indefinite-lived asset is less than its carrying
value. If it is not, then no further analysis is required otherwise then the previously required quantitative testing is
required. Nathan’s adopted the new guidance beginning with its first quarter of fiscal 2014. The adoption of this
new guidance did not have a material impact on the results of operations or financial position.
The Company does not believe that any other recently issued, but not yet effective accounting standards, when
adopted, will have a material effect on the accompanying financial statements.
F-18
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
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 effects 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 restricted stock, 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 30, 2014, March 31, 2013 and March 25, 2012, respectively:
2014
Net Income
2013
2012
2014
Shares
2013
2012
Net income per share
2013
2014
2012
Basic EPS
Basic
calculation $
Effect of
dilutive
employee
stock
options ......
Diluted EPS
Diluted
8,327 $
7,468 $
6,158 4,450,000 4,400,000 4,906,000 $
1.87 $
1.70 $
1.26
-
-
-
155,000
188,000
143,000
(.06)
(.07)
(.04)
calculation $
8,327 $
7,468 $
6,158 4,605,000 4,588,000 5,049,000 $
1.81 $
1.63 $
1.22
There were no options to purchase shares of common stock for the years ended March 30, 2014, March 31, 2013 and
March 25, 2012 that were excluded from the computation of diluted earnings per share.
NOTE D – MARKETABLE SECURITIES
The cost, gross unrealized gains, gross unrealized losses and fair market value for marketable securities, which consist
entirely of municipal bonds that are classified as available-for-sale securities are as follows:
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Market
Value
Cost
March 30, 2014 ............................................ $
10,947 $
March 31, 2013 .............................................. $
11,768 $
240 $
539 $
- $
11,187
- $
12,307
As of March 30, 2014, the municipal bonds mature at various dates between April 2014 and October 2019. The
following represents the bond maturities by period:
Fair value of Municipal Bonds
Less than
Total
1 Year
1 – 5
Years
5 – 10
Years
After
10 Years
March 30, 2014 ............................................ $
11,187 $
5,214 $
4,792 $
1,181 $
-
F-19
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE D – MARKETABLE SECURITIES (continued)
Proceeds from the sale of available-for-sale securities and the resulting gross realized gains included in the
determination of net income are as follows:
Available-for-sale securities:
Proceeds ................................................................................... $
Gross realized gains ................................................................. $
2,890 $
- $
2,000 $
- $
4,050
-
March 30,
March 31,
March 25,
2014
2013
2012
The change in net unrealized (losses) gains on available-for-sale securities for the fiscal years ended March 30, 2014,
March 31, 2013 and March 25, 2012, of $(180), $(168) and $16, respectively, which is net of deferred income taxes,
has been included as a component of comprehensive income. Accumulated other comprehensive income is comprised
entirely of the net unrealized gains on available-for-sale securities as of March 30, 2014 and March 31, 2013.
NOTE E - ACCOUNTS AND OTHER RECEIVABLES, NET
Accounts and other receivables, net, consist of the following:
March 30,
March 31,
2014
2013
Franchise and license royalties ........................................................................... $
Branded product sales .........................................................................................
Other ...................................................................................................................
1,658 $
5,141
1,457
8,256
Less: allowance for doubtful accounts ...............................................................
433
Accounts and other receivables, net ................................................................... $
7,823 $
2,355
4,071
621
7,047
130
6,917
Accounts receivable are due within 30 days and are stated at amounts due from franchisees, retail licensees and
Branded Product Program customers, net of an allowance for doubtful accounts. Accounts outstanding longer than the
contractual payment terms are generally considered past due.
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 uncollectable amounts through a charge to earnings. The Company writes off accounts receivable when they
are deemed to be uncollectible against the allowance for doubtful accounts.
F-20
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE E - ACCOUNTS AND OTHER RECEIVABLES, NET (continued)
Changes in the Company’s allowance for doubtful accounts for the fiscal years ended March 30, 2014, March 31, 2013
and March 25, 2012 are as follows:
March 30,
2014
March 31,
2013
March 25,
2012
Beginning balance ........................................................... $
Bad debt expense .........................................................
Uncollectible marketing fund contributions .................
Accounts written off ....................................................
Ending balance ................................................................ $
130 $
21
320
(38)
433 $
138 $
15
5
(28)
130 $
62
86
-
(10)
138
NOTE F – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
March 30,
March 31,
2014
2013
Income taxes ................................................................................................................. $
Insurance ......................................................................................................................
Other .............................................................................................................................
2,059 $
506
564
-
359
737
$
3,129 $
1,096
NOTE G – LONG-TERM INVESTMENT
In September 2012, Nathan’s purchased 351,550 shares of Series A Preferred Stock in a privately-owned corporation
for $500. Nathan’s investment originally represented a 2.5% equity ownership in the entity and Nathan’s does not have
the ability to exercise significant influence over the investee. The shares have voting rights on the same basis as the
common shareholders and have certain dividend rights, if declared. Nathan’s accounts for this investment pursuant to
the cost method and recognizes dividends distributed by the investee as income to the extent that dividends are
distributed from net accumulated earnings of the investee. There were no dividends declared by the investee during the
fifty-two week period ended March 30, 2014. Each reporting period, management reviews the carrying value of this
investment based upon the financial information provided by the investment’s management and considers 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 are required to recognize an
impairment on the investment if such impairment is considered to be other-than-temporary. We have performed our
evaluation of whether indicators of impairment existed, and determined that an other-than-temporary impairment has
occurred and recorded an impairment charge of $400 on this investment during the fifty-two week period ended March
30, 2014.
F-21
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE H - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
March 30,
March 31,
2014
2013
Land ............................................................................................................................. $
Building and improvements ........................................................................................
Machinery, equipment, furniture and fixtures .............................................................
Leasehold improvements .............................................................................................
Construction-in-progress .............................................................................................
Less: accumulated depreciation and amortization .......................................................
1,197 $
2,161
6,349
6,792
25
16,524
7,554
1,197
2,045
5,460
3,878
569
13,149
7,361
$
8,970 $
5,788
NOTE I – ACCRUED EXPENSES, OTHER CURRENT LIABILITIES AND OTHER LIABILITIES
Accrued expenses and other current liabilities consist of the following:
March 30,
March 31,
2014
2013
Payroll and other benefits ............................................................................................ $
Accrued rebates ...........................................................................................................
Rent and occupancy costs ............................................................................................
Deferred revenue .........................................................................................................
Construction costs .......................................................................................................
Unexpended advertising funds ....................................................................................
Other ............................................................................................................................ $
2,433 $
855
163
734
281
52
233 $
4,751
2,248
648
197
581
25
181
440
4,320
Other liabilities consist of the following:
Deferred development fees ........................................................................................... $
Reserve for uncertain tax positions (Note J) .................................................................
Deferred rental liability ................................................................................................
Other .............................................................................................................................
$
200 $
620
661
212
1,693 $
401
639
764
247
2,051
March 30,
March 31,
2014
2013
F-22
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE J - INCOME TAXES
The income tax provision consists of the following for the fiscal years ended March 30, 2014, March 31, 2013 and
March 25, 2012:
March 30,
2014
March 31,
March 25,
2013
2012
Federal
Current....................................................................................... $
Deferred .....................................................................................
State and local
Current.......................................................................................
Deferred .....................................................................................
$
2,664 $
1,421
4,085
918
231
1,149
5,234 $
3,237 $
377
3,614
937
120
1,057
4,671 $
1,274
1,566
2,840
534
475
1,009
3,849
The total income tax provision for the fiscal years ended March 30, 2014, March 31, 2013 and March 25, 2012 differs
from the amounts computed by applying the United States Federal income tax rate of 34% to income before income
taxes as a result of the following:
March 30,
March 31,
March 25,
2014
2013
2012
Computed “expected” tax expense ....................................... $
State and local income taxes, net of Federal income tax
benefit ................................................................................
Tax-exempt investment earnings ..........................................
Change in uncertain tax positions, net ..................................
Nondeductible meals and entertainment and other ...............
$
4,611 $
4,127 $
773
(110)
(22)
(18)
5,234 $
633
(133)
22
22
4,671 $
3,412
682
(178)
(24)
(43)
3,849
F-23
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE J - INCOME TAXES (continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax
liabilities are presented below:
March 30,
2014
March 31,
2013
Deferred tax assets
Accrued expenses ..........................................................................................................$
Allowance for doubtful accounts...................................................................................
Deferred revenue ...........................................................................................................
Deferred stock compensation ........................................................................................
Excess of straight line over actual rent ..........................................................................
Investment .....................................................................................................................
Other ..............................................................................................................................
Total gross deferred tax assets ............................................................................$
Deferred tax liabilities
Deductible prepaid expense ...........................................................................................
Unrealized gain on marketable securities ......................................................................
Depreciation expense ....................................................................................................
Deductible business interruption expenses ....................................................................
Amortization .................................................................................................................
Total gross deferred tax liabilities ......................................................................
Net deferred tax (liability) asset .........................................................................
Less current portion ...........................................................................................................
Long-term portion .............................................................................................................$
162 $
49
569
594
289
157
129
1,949 $
302
83
1,692
293
287
2,657
(708)
(26)
(734) $
166
49
510
646
316
-
127
1,814
223
202
321
-
243
989
825
(345)
480
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 gross 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 30, 2014, March 31, 2013 and March 25, 2012.
March 30,
March 31,
March 25,
2014
2013
2012
Unrecognized tax benefits, beginning of year ....................... $
Decreases of tax positions taken in prior years......................
Increase based on tax positions taken in current year ............
Settlements of tax positions taken in prior years ...................
Increase based on tax positions taken in prior years ..............
Unrecognized tax benefits, end of year ................................. $
296 $
(34)
21
-
-
283 $
422 $
(50 )
34
(110 )
-
296 $
318
(41)
26
-
119
422
F-24
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE J - INCOME TAXES (continued)
The amount of unrecognized tax benefits at March 30, 2014, March 31, 2013 and March 25, 2012 were $283, $296 and
$422, respectively, all of which would impact Nathan’s effective tax rate, if recognized. As of March 30, 2014 and
March 31, 2013, the Company had $329 and $337, respectively, accrued for the payment of interest and penalties. For
the fiscal years ended March 30, 2014, March 31, 2013 and March 25, 2012 Nathan’s recognized interest and penalties
in the amounts of $43, $46, and $47, respectively. The Company believes that it is reasonably possible that decreases
in unrecognized tax benefits of up to $64 may be recorded within the next year.
In May 2014, Nathan’s received notification from the Internal Revenue Service that it is seeking to review its tax
return for the year ended March 31, 2013. The earliest tax years’ that are subject to examination by taxing authorities
by major jurisdictions are as follows:
Jurisdiction
Federal .....................................................................................................
New York State ........................................................................................
New York City .........................................................................................
Fiscal Year
2011
2011
2011
NOTE K – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
1. Stock Incentive Plans
On September 14, 2010, the Company’s shareholders approved the Nathan’s Famous, Inc. 2010 Stock Incentive
Plan (the “2010 Plan”), which provides for the issuance of nonqualified stock options, restricted stock, restricted
stock units, stock appreciation rights and other stock-based awards to directors, officers and key employees. The
Company was initially authorized to issue up to 150,000 shares of common stock under the 2010 Plan, together
with any shares which had not been previously issued under the Company’s previous stock option plans as of July
19, 2010 (171,000 shares), plus any shares subject to any outstanding options or restricted stock grants under the
Company’s previous stock option plans that were outstanding as of July 19, 2010 and that subsequently expire
unexercised, or are otherwise forfeited, up to a maximum of an additional 100,000 shares. On September 13, 2012,
the Company amended the 2010 Plan increasing the number of shares available for issuance by 250,000 shares.
Shares to be issued under the 2010 Plan may be made available from authorized but unissued stock, common stock
held by the Company in its treasury, or common stock purchased by the Company on the open market or
otherwise. The number of shares issuable and the grant, purchase or exercise price of outstanding awards are
subject to adjustment in the amount that the Company’s Compensation Committee considers appropriate upon the
occurrence of certain events, including stock dividends, stock splits, mergers, consolidations, reorganizations,
recapitalizations, or other capital adjustments. In the event that the Company issues restricted stock awards
pursuant to the 2010 Plan, each share of restricted stock would reduce the amount of available shares for issuance
by either 3.2 shares for each share of restricted stock granted or 1 share for each share of restricted stock granted.
As of March 30, 2014, there were up to 318,500 shares available to be issued for future option grants or up to
219,844 shares of restricted stock that may be granted under the 2010 Plan.
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.
F-25
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE K – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
During the fiscal year ended March 30, 2014, the Company granted 25,000 shares of restricted stock at a fair value
of $49.80 per share representing the closing price on the date of grant, which will be fully vested five years from
the date of grant. The restrictions on the shares lapse ratably over a five-year period on the annual anniversary of
the date of grant. The compensation expense related to this restricted stock award is expected to be $1,245 and will
be recognized, commencing on the grant date, over the next five years.
During the fiscal year ended March 31, 2013, the Company granted 50,000 shares of restricted stock at a fair value
of $29.29 per share representing the closing price on the date of grant, which will be fully vested four years from
the date of grant. Upon grant, 10,000 shares vested immediately, and the restrictions on the remaining 40,000
shares lapse ratably over a four-year period on the annual anniversary of the date of grant.
During the fiscal ended March 25, 2012, the Company granted options to purchase 177,500 shares at an exercise
price of $17.75 per share, all of which expire five years from the date of grant. All such stock options vest ratably
over a four-year period commencing June 6, 2011.
The weighted-average option fair values, as determined using the Black-Scholes option valuation model, and the
assumptions used to estimate these values for stock options granted were as follows:
March 25,
2012
Weighted-average option fair values ................................................................................................... $
Expected life (years) ............................................................................................................................
Interest rate ..........................................................................................................................................
Volatility .............................................................................................................................................
Dividend yield .....................................................................................................................................
5.039
5.0
1.60%
28.90%
0%
The expected dividend yield is based on historical and projected dividend yields. The Company estimates
volatility based primarily on historical monthly price changes of the Company’s stock equal to the expected life of
the option. The risk free interest rate is based on the U.S. Treasury yield in effect at the time of the grant. The
expected option term is the number of years the Company estimates the options will be outstanding prior to
exercise based on expected employment termination behavior. The Company recognizes compensation cost for
unvested stock-based incentive awards on a straight-line basis over the requisite service period. Compensation cost
charged to expense under all stock-based incentive awards is as follows:
March 30,
March 31,
March 25,
2014
2013
2012
Stock options .................................................................. $
Restricted stock ..............................................................
$
224 $
497
721 $
224 $
403
627 $
274
-
274
F-26
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE K – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
The tax benefit on stock-based compensation expense was $286, $251 and $101 for the years ended March 30,
2014, March 31, 2013 and March 25, 2012, respectively. As of March 30, 2014, there was $2,075 of unamortized
compensation expense related to stock-based incentive awards. The Company expects to recognize this expense
over approximately one year and nine months, which represents the weighted average remaining requisite service
periods for such awards.
A summary of the status of the Company’s stock options at March 30, 2014, March 31, 2013 and March 25, 2012
and changes during the fiscal years then ended is presented in the tables below:
Options outstanding – beginning
Shares
2014
Weighted-
Average
Exercise
Price
2013
Weighted-
Average
Exercise
Price
Shares
2012
Weighted-
Average
Exercise
Price
Shares
of year .......................................
429,500 $
13.29
622,000 $
13.21
470,000 $
11.29
Granted .........................................
Expired .........................................
-
-
-
-
-
-
-
177,500
17.75
-
-
-
Exercised ......................................
(150,000)
9.71
(192,500)
13.04
(25,500)
9.36
Options outstanding - end of year .
279,500 $
15.22
429,500 $
13.29
622,000 $
13.21
Options exercisable - end of year .
190,750 $
14.04
296,375 $
11.29
444,500 $
11.40
Weighted-average fair value of
options granted ..........................
177,500 $
5.04
During the fiscal years ended March 30, 2014, March 31, 2013 and March 25, 2012, options to purchase 150,000,
192,500 and 25,500 shares were exercised which aggregated proceeds of $944, $389 and $65, respectively, to the
Company. The aggregate intrinsic values of the stock options exercised during the fiscal years ended March 30, 2014,
March 31, 2013 and March 25, 2012 was $6,038, $3,523 and $289 respectively.
The following table summarizes information about outstanding stock options at March 30, 2014:
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual Life
Aggregate
Intrinsic
Value
Shares
Options outstanding at March 30, 2014 .........
279,500 $
15.22
2.07 $
9,381
Options exercisable at March 30, 2014 .........
190,750 $
14.04
2.02 $
6,627
Exercise prices range from $5.62 to $17.75
F-27
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE K – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
Restricted stock:
Transactions with respect to restricted stock for the fiscal year ended March 30, 2014 are as follows:
Average
Grant-Date
Fair value
Per share
Shares
Unvested restricted stock at March 31, 2013 .............................................................
40,000 $
Granted ..................................................................................................................
25,000 $
Vested ....................................................................................................................
(10,000) $
Unvested restricted stock at March 30, 2014 .............................................................
55,000 $
29.29
49.80
29.29
38.61
The aggregate fair value of restricted stock vested during the fiscal years ended March 30, 2014, March 31, 2013
and March 25, 2012 was $533, $293 and $0, respectively.
2. Common Stock Purchase Rights
On June 5, 2013, Nathan’s adopted a new stockholder rights plan (the “2013 Rights Plan”) under which all
stockholders of record as of June 17, 2013 received rights to purchase shares of common stock (the “2013 Rights”)
and the previously existing “New Rights Plan” was terminated.
The 2013 Rights were distributed as a dividend. Initially, the 2013 Rights will attach to, and trade with, the
Company’s common stock. Subject to the terms, conditions and limitations of the 2013 Rights Plan, the 2013
Rights will become exercisable if (among other things) a person or group acquires 15% or more of the Company’s
common stock (“triggering event”). Upon such triggering event and payment of the purchase price of $100.00 (the
“2013 Right Purchase Price”), each 2013 Right (except those held by the acquiring person or group) will entitle
the holder to acquire one share of the Company’s common stock (or the economic equivalent thereof) or, if the
then-current market price is less than the then current 2013 Right Purchase Price, a number of shares of the
Company’s common stock which at the time of the transaction has a market value equal to the then current 2013
Right Purchase Price [at a purchase price per share equal to the then current market price of the Company’s
Common Stock].
The Company’s Board of Directors may redeem the 2013 Rights prior to the time they are triggered. Upon
adoption of the 2013 Rights Plan, the Company reserved 10,188,600 shares of common stock for issuance upon
exercise of the 2013 Rights. The 2013 Rights will expire on June 17, 2018 unless earlier redeemed or exchanged
by the Company.
At March 30, 2014, the Company has reserved 10,522,052 shares of common stock for issuance upon exercise of
the Common Stock Purchase Rights approved by the Board of Directors on June 5, 2013.
F-28
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE K – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
3. Stock Repurchase Programs
On December 13, 2013, the Company and Mutual Securities, Inc. (“MSI”) entered into an agreement pursuant to
which MSI has been authorized on the Company’s behalf to purchase shares of the Company’s common stock,
$.01 par value having a value of up to an aggregate of five million dollars ($5,000), which purchases could
commence on December 23, 2013. The agreement with MSI was adopted under the safe harbor provided by Rule
10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, as amended in order to assist the Company in
implementing its previously announced stock purchase plans described below and provides for the purchase of up
to an aggregate of 800,000 shares.
Through March 30, 2014, Nathan’s purchased a total of 4,610,026 shares of common stock at a cost of
approximately $54,884 pursuant to the various stock repurchase plans previously authorized by the Board of
Directors. Of these repurchased shares, 30,463 shares were repurchased at a cost of $1,486 during the year ended
March 30, 2014.
On November 9, 2009, Nathan’s Board of Directors authorized its sixth stock repurchase plan for the purchase of
up to 500,000 shares of its common stock on behalf of the Company. On February 1, 2011, Nathan’s Board of
Directors increased the authorization to purchase its common stock by an additional 300,000 shares. The Company
has repurchased 511,067 shares at a cost of $11,279 under the sixth stock repurchase plan through March 30,
2014, an aggregate of 288,933 shares are available to be purchased. Purchases under the existing stock repurchase
plan may be made from time to time, depending on market conditions, in open market or privately-negotiated
transactions, at prices deemed appropriate by management. There is no set time limit on the repurchases to be
made under the stock repurchase plan.
On December 1, 2011, the Company’s Board of Directors authorized the commencement of a modified dutch
tender offer to repurchase up to 500,000 shares of its common stock at a price of not less than $20.00 nor greater
than $22.00 per share. The tender offer expired on January 12, 2012.
4. Employment Agreements
Effective January 1, 2007, Howard M. Lorber, previously Chairman of the Board and Chief Executive Officer,
assumed the newly-created position of Executive Chairman of the Board of Nathan’s and Eric Gatoff, previously
Vice President and Corporate Counsel, became Chief Executive Officer of Nathan’s.
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”). Under the terms of the Lorber Employment Agreement, Mr. Lorber will serve as Executive
Chairman of the Board from January 1, 2007 until December 31, 2012, unless his employment is terminated in
accordance with the terms of the Lorber Employment Agreement. On November 1, 2012, the Company amended
its employment agreement with Mr. Lorber, extending the term of the employment agreement to December 31,
2017 and increasing the base compensation of Mr. Lorber to $600 per annum. In addition, Mr. Lorber received a
grant of 50,000 shares of restricted stock subject to vesting as provided in a Restricted Stock Agreement between
Mr. Lorber and the Company. Mr. Lorber will not receive a contractually-required bonus. The Lorber
Employment Agreement provides for a three-year consulting period after the termination of employment during
which Mr. Lorber will receive a consulting fee of $200 per year in exchange for his agreement to provide no less
than 15 days of consulting services per year, provided, Mr. Lorber is not required to provide more than 50 days of
consulting services per year.
F-29
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE K – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
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.
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, 2014,
based on the original terms, and no non-renewal notice has been given.
Pursuant to the agreement, Mr. Gatoff will receive a base salary, currently $350, and an annual bonus based on his
performance measured against the Company’s financial, strategic and operating objectives as determined by the
Compensation Committee. The Gatoff Employment Agreement provides for an automobile allowance and the
right of Mr. Gatoff to participate in employment benefits offered to other Nathan’s executives. During and after
the contract term, Mr. Gatoff is subject to certain confidentiality, non-solicitation and non-competition provisions
in favor of the Company. On June 4, 2013, Mr. Gatoff received a grant of 25,000 shares of restricted stock at a fair
value of $49.80 per share representing the closing price on the date of grant, subject to vesting as provided in a
Restricted Stock Agreement between Mr. Gatoff and the Company. The compensation expense related to this
restricted stock award is expected to be $1,245 and will be recognized, commencing of the grant date, over the
next five years.
The Company and its President and Chief Operating Officer entered into an employment agreement on December
28, 1992 for a period commencing on January 1, 1993 and ending on December 31, 1996. The employment
agreement automatically extends for successive one-year periods unless notice of non-renewal is provided in
accordance with the agreement. Consequently, the employment agreement has been extended annually through
December 31, 2014, based on the original terms, and no non-renewal notice is expected to be given. The
agreement provides for annual compensation, currently $289, plus certain other benefits. In November 1993, the
Company amended this agreement to include a provision under which the officer has the right to terminate the
agreement and receive payment equal to approximately three times annual compensation upon a change in control,
as defined.
F-30
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE K – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
Effective May 31, 2007, the Company and its Executive Vice President entered into a new employment agreement
which provided for annual compensation of $210 plus certain other benefits and automatically renews annually
unless 180 days prior written notice is given to the employee. In connection with the contemplated retirement of
the Executive Vice President, effective February 12, 2013, the Company and the Executive Vice President agreed
to amend the employment contract to extend the expiration of the employment term from September 30, 2013
until February 12, 2014 and the Company purchased his 67,619 shares of the Company’s common stock, $.01 par
value at a purchase price of $36.87 per share which was the closing price of the Company’s common stock as
reported on the Nasdaq Global Market on February 13, 2013. The amendment to the Employment Agreement
further provided that he will serve as a consultant to the Company from February 13, 2014 until February 12, 2015
and thereafter, at the discretion of the Company, he may serve as a consultant for an additional one year.
The Company and one employee of Nathan’s entered into a change of control agreement effective May 31, 2007
for annual compensation of $136 per year. The agreement additionally includes a provision under which the
employee has the right to terminate the agreement and receive payment equal to approximately three times his
annual compensation upon a change in control, as defined.
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.
5. Defined Contribution and Union Pension Plans
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 the fiscal years ended March
30, 2014, March 31, 2013 and March 25, 2012 were $34, $31 and $30, respectively.
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 Company has no plans or intentions to stop participating in the plan as of March 30,
2014 and does not believe that there is a reasonable possibility that a withdrawal liability will be incurred.
Contributions to the Union Plan were $10, $16 and $19 for the fiscal years ended March 30, 2014, March 31, 2013
and March 25, 2012, respectively.
6. Other Benefits
The Company provides, on a contributory basis, medical benefits to active employees. The Company does not
provide medical benefits to retirees.
F-31
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE L - COMMITMENTS AND CONTINGENCIES
1. Commitments
The Company’s operations are principally conducted in leased premises. The leases generally have initial terms
ranging from 5 to 20 years and usually provide for renewal options ranging from 5 to 20 years. Most of the leases
contain escalation clauses and common area maintenance charges (including taxes and insurance).
As of March 30, 2014, the Company had non-cancelable operating lease commitments, net of certain sublease
rental income, as follows:
Lease
commitments
Sublease
income
Net lease
commitments
2015 .......................................................................... $
2016 ..........................................................................
2017 ..........................................................................
2018 ..........................................................................
2019 ..........................................................................
Thereafter .................................................................
1,785 $
1,657
1,682
1,711
1,692
7,760
404 $
270
254
262
266
1,617
1,381
1,387
1,428
1,449
1,426
6,143
$
16,287 $
3,073 $
13,214
Aggregate rental expense, net of sublease income, under all current leases amounted to $1,391, $1,102 and $1,248
for the fiscal years ended March 30, 2014, March 31, 2013 and March 25, 2012, respectively. Sublease rental
income was $265, $353 and $229 for the fiscal years ended March 30, 2014, March 31, 2013 and March 25, 2012,
respectively.
Contingent rental payments on building leases are typically made based on the percentage of gross sales of the
individual restaurants that exceed predetermined levels. The percentage of gross sales to be paid and related gross
sales level vary by unit. Contingent rental expense, which is inclusive of common area maintenance charges, was
approximately $454, $399 and $151 for the fiscal years ended March 30, 2014, March 31, 2013 and March 25,
2012, respectively.
At March 30, 2014, the Company leases three sites which it in turn subleases to franchisees, which expire on
various dates through 2027 exclusive of renewal options. The Company remains liable for all lease costs when
properties are subleased to franchisees.
At March 31, 2013, Nathan’s had open purchase commitments for hot dogs at a total cost of $5,000 which have
been purchased between April and July 2013. The hot dogs purchased represented approximately 13.4% of
Nathan’s actual usage during the fiscal 2014 period. At March 30, 2014, Nathan’s fulfilled its obligation pursuant
to this purchase commitment and has not entered into any new purchase commitments during the fiscal 2014
period. However, Nathan’s may enter into additional purchase commitments in the future as favorable market
conditions become available.
At March 31, 2013, Nathan’s had open construction contracts of approximately $2,000 in connection with the
rebuilding of the Coney Island restaurant. At March 30, 2014, all open construction contacts had been completed
and all of these contracts had been paid or have been accrued to be paid.
F-32
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE L - COMMITMENTS AND CONTINGENCIES (continued)
2. Legal Proceedings
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.
The Company was also involved in the following legal proceeding:
The Company was a party to a License Agreement with SMG, Inc. (“SMG”) dated as of February 28, 1994, as
amended (the “License Agreement”) pursuant to which: (i) SMG acts as the Company’s exclusive licensee for the
manufacture, distribution, marketing and sale of packaged Nathan’s Famous frankfurter product at supermarkets,
club stores and other retail outlets in the United States; and (ii) the Company has the right, but not the obligation,
to require SMG to produce frankfurters for the Nathan’s Famous restaurant system and Branded Product Program.
On July 31, 2007, the Company provided notice to SMG that the Company has elected to terminate the License
Agreement, effective July 31, 2008 (the “Termination Date”), due to SMG’s breach of certain provisions of the
License Agreement. SMG has disputed that a breach has occurred and has commenced, together with certain of its
affiliates, an action in state court in Illinois seeking, among other things, a declaratory judgment that SMG did not
breach the License Agreement. The Company filed its own action on August 2, 2007, in New York State court
seeking a declaratory judgment that SMG has breached the License Agreement and that the Company has properly
terminated the License Agreement. On January 23, 2008, the New York court granted SMG’s motion to dismiss
the Company’s case in New York on the basis that the dispute was already the subject of a pending lawsuit in
Illinois. The Company answered SMG’s complaint in Illinois and asserted its own counterclaims which seek,
among other things, a declaratory judgment that SMG did breach the License Agreement and that the Company
has properly terminated the License Agreement. On July 31, 2008, SMG and Nathan’s entered into a Stipulation
pursuant to which Nathan’s agreed that it would not effectuate the termination of the License Agreement on the
grounds alleged in the present litigation until such litigation has been successfully adjudicated, and SMG agreed
that in such event, Nathan’s shall have the option to require SMG to continue to perform under the License
Agreement for an additional period of up to six months to ensure an orderly transition of the business to a new
licensee/supplier. On June 30, 2009, SMG and Nathan’s each filed motions for summary judgment. Both motions
for summary judgment were ultimately denied on February 25, 2010.
F-33
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE L - COMMITMENTS AND CONTINGENCIES (continued)
On January 28, 2010, SMG filed a motion for leave to file a Second Amended Complaint and Amended Answer,
which sought to assert new claims and affirmative defenses based on Nathan’s alleged breach of the parties’
License Agreement in connection with the manner in which Nathan’s profits from the sale of its proprietary
seasonings to SMG. On February 25, 2010, the court granted SMG’s motion for leave, and its Second Amended
Complaint and Amended Answer were filed with the court. On March 29, 2010, Nathan’s filed an answer to
SMG’s Second Amended Complaint, which denied substantially all of the allegations in the complaint. On
September 17, 2010, SMG filed a motion for summary judgment with respect to the claims relating to the sale of
Nathan’s proprietary seasonings to SMG. On October 5, 2010, Nathan’s filed an opposition to SMG’s motion for
summary judgment, and itself cross-moved for summary judgment. A trial on the claims relating to Nathan’s
termination of the License Agreement took place between October 6 and October 13, 2010. Oral argument on the
claims relating to the sale of Nathan’s proprietary seasonings took place prior to the start of the trial. On October
13, 2010, an Order was entered with the Court denying Nathan’s cross-motion and granting SMG’s motion for
summary judgment with respect to SMG’s claims relating to the sale of Nathan’s proprietary seasonings to SMG.
On December 17, 2010, the Court ruled that Nathan’s was not entitled to terminate the License Agreement. On
January 19, 2011, the parties submitted an agreed upon order which, among other things, assessed damages
against Nathan’s of approximately $4.9 million inclusive of pre-judgment interest, which has been accrued in the
accompanying consolidated financial statements. The final judgment was entered on February 4, 2011. On March
4, 2011, Nathan's filed a notice of appeal seeking to appeal the final judgment. In order to secure the final
judgment pending an appeal, on March 31, 2011, Nathan's entered into a Security Agreement with SMG and
Blocked Deposit Account Agreement with SMG and Citibank, N.A. On April 7, 2011, the Court entered a
stipulation and order which granted a stay of enforcement of the Judgment.
Nathan’s filed an appellate brief with the Appellate Court of Illinois, First Judicial District, on August 8, 2011. In
response, SMG filed an opposition appellate brief on October 21, 2011. Nathan’s filed a reply brief on November
14, 2011. On December 11, 2012, the Court heard oral arguments. On January 25, 2013, the Appellate Court
affirmed the trial court’s ruling. On February 15, 2013, Nathan’s filed a Petition for Re-hearing which was denied
on February 27, 2013. On April 3, 2013, Nathan’s filed a Petition for Leave to Appeal with the Illinois Supreme
Court. Subsequently, we were advised that the Illinois Supreme Court denied the Petition for Leave of Appeal. On
July 24, 2013, $6,009, inclusive of all post-judgment interest, was withdrawn by SMG from the blocked account,
in full satisfaction of this matter.
3. Guaranty
On December 1, 2009, a wholly-owned subsidiary of the Company executed a Guaranty of Lease (the “Guaranty”)
in connection with its re-franchising of a restaurant located in West Nyack, New York. The Guaranty could be
called upon in the event of a default by the tenant/franchisee. The Guaranty extends through the fifth Lease Year,
as defined in the lease, and shall not exceed an amount equal to the highest amount of the annual minimum rent,
percentage rent and any additional rent payable pursuant to the lease and reasonable attorney’s fees and other
costs. Nathan’s has recorded a liability of $193 in connection with the Guaranty, which does not include potential
real estate tax increases and attorney’s fees and other costs as these amounts are not reasonably determinable at
this time. In connection with the Nathan’s Franchise Agreement, Nathan’s has received a personal guaranty from
the franchisee for all obligations under the Guaranty. To date, Nathan’s has not been required to make any
payments pursuant to the Guaranty.
F-34
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE L - COMMITMENTS AND CONTINGENCIES (continued)
4. Hurricane Sandy
On October 29, 2012, Superstorm Sandy struck the Northeastern United States, which forced the closing of all of
the Company-owned restaurants. Seventy-eight franchised restaurants, including 18 Branded Menu locations,
were closed for varying periods of time, one of which remains closed. Our Company-owned restaurant in
Oceanside, New York was closed for approximately two weeks. Our flagship Coney Island restaurant and our
Coney Island Boardwalk restaurant were closed as a result of the storm. The Coney Island Boardwalk restaurant
sustained minor damage and re-opened on March 18, 2013. The Coney Island restaurant incurred significant
damage and re-opened on May 20, 2013. As a result of these damages, the Company incurred actual losses
through March 31, 2013, of approximately $1,340, inclusive of amounts written off of $449 related to destroyed or
damaged property and equipment and $42 of unsalable inventories.
As of March 30, 2014, the Company settled the property damage claim with its insurers and received payments of
approximately $3,400, net of fees, from our insurer and used these proceeds towards the rebuilding of the Coney
Island restaurant. In connection with the settlement of the property and casualty loss, the Company recognized a
gain of approximately $2,774 during the quarter ended June 30, 2013.
As of March 30, 2014, the Company had an outstanding claim under our business interruption insurance policy
which exceeded the amounts that had initially been recorded, which are included in accounts and other receivables
in the accompanying balance sheet, for reimbursable on-going business expenses incurred while the restaurant was
closed. In April 2014, Nathan’s settled and received payment on its business interruption claim for $718, net of
fees, which fully satisfied the accounts and other receivables recorded as of March 30, 2014.
NOTE M - RELATED PARTY TRANSACTIONS
An accounting firm of which Charles Raich, who serves on Nathan’s Board of Directors, serves as Managing
Partner, received ordinary tax preparation and other consulting fees of $130, $136 and $127 for the fiscal years
ended March 30, 2014, March 31, 2013 and March 25, 2012, respectively.
A firm to which Mr. Lorber is as an investor (and, prior to January 2012, a consultant), and the firm’s affiliates,
received ordinary and customary insurance commissions aggregating approximately $24, $25 and $26 for the
fiscal years ended March 30, 2014, March 31, 2013 and March 25, 2012, respectively.
F-35
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 30, 2014, March 31, 2013, and March 25, 2012
NOTE N - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal Year 2014
Total revenues ............................................................................... $
Gross profit (a) ..............................................................................
Net income ...................................................................................
23,401 $
3,475
3,354
23,662 $
4,513
2,648
18,533 $
2,457
1,107
17,331
2,004
1,218
Per share information
Net income per share
Basic (b) .................................................................................... $
Diluted (b) ................................................................................. $
.76 $
.73 $
.59 $
.57 $
.25 $
.24 $
.27
.27
Shares used in computation of net income per share
Basic (b) .................................................................................... 4,415,000 4,460,000 4,466,000 4,459,000
Diluted (b) ................................................................................. 4,588,000 4,625,000 4,622,000 4,594,000
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal Year 2013
Total revenues .............................................................................. $
Gross profit (a) ..............................................................................
Net income ...................................................................................
20,182 $
3,420
2,006
21,360 $
4,695
2,845
15,025 $
2,044
1,062
14,976
1,623
1,555
Per share information
Net income per share
Basic (b) .................................................................................... $
Diluted (b) ................................................................................. $
.46 $
.44 $
.65 $
.62 $
.24 $
.23 $
.35
.34
Shares used in computation of net incomeper share
Basic (b) .................................................................................... 4,368,000 4,407,000 4,414,000 4,411,000
Diluted (b) ................................................................................. 4,531,000 4,604,000 4,612,000 4,603,000
(a) Gross profit represents the difference between sales and cost of sales.
(b) The sum of the quarters may not equal the full year per share amounts included in the accompanying
consolidated statements of earnings due to the effect of the weighted average number of shares outstanding
during the fiscal years as compared to the quarters.
F-36
CORPOR ATE DIREC TORY
Nathan’s Famous, Inc. & Subsidiaries
L I S T O F D I R EC TO R S
Howard M. Lorber
Executive Chairman of the Board,
Nathan’s Famous, Inc.
Eric Gatoff
Chief Executive Officer,
Nathan’s Famous, Inc.
Wayne Norbitz
President & Chief Operating Officer,
Nathan’s Famous, Inc.
Robert J. Eide
Chairman & Chief Executive Officer,
AEGIS Capital Corp.
Barry Leistner
President & Chief Executive Officer,
Koenig Iron Works, Inc.
Brian S. Genson
President,
F1Collectors.com
A.F. Petrocelli
Chairman of the Board, President
& Chief Executive Officer,
United Capital Corp.
Charles Raich
Founding Partner,
Raich, Ende, Malter & Co. LLP
L I S T O F O FFI C E R S
Howard M. Lorber
Executive Chairman of the Board
Eric Gatoff
Chief Executive Officer
Wayne Norbitz
President & Chief Operating Officer
Ronald G. DeVos
Vice President—Finance,
Chief Financial Officer & Secretary
Randy K. Watts
Vice President—Franchise Operations
Donald P. Schedler
Vice President—Development,
Architecture & Construction
I N D E P E N D E N T R EG I S T E R E D
P U B L I C ACCO U N T I N G FI R M
Grant Thornton LLP
445 Broadhollow Road
Melville, New York 11747
CO R P O R AT E CO U N S E L
Olshan Frome & Wolosky LLP
65 East 55th Street
New York, New York 10022
T R A N S FE R AG E N T
American Stock Transfer &
Trust Company
59 Maiden Lane
New York, New York 10038
F O R M 10 - K
The Company’s annual report on
Form 10-K as filed with the Securities
and Exchange Commission, is available
without charge upon written request:
Secretary, Nathan’s Famous, Inc.
One Jericho Plaza
Second Floor—Wing A
Jericho, New York 11753
Q UA R T E R LY S H A R E H O L D E R
L E T T E R
Will be available on our website.
Copies will be provided upon request.
CO R P O R AT E H E A D Q UA R T E R S
One Jericho Plaza
Second Floor—Wing A
Jericho, New York 11753
516-338-8500 Telephone
516-338-7220 Facsimile
CO M PA N Y W E B S I T E
www.nathansfamous.com
A N N UA L S H A R E H O L D E R S’
M E E T I N G
The Annual Meeting of Shareholders
of the Company will be held at 10:00
a.m., EST on Tuesday, September 9,
2014, in the Offices of Nathan’s
Famous, Inc., One Jericho Plaza,
Second Floor—Wing A, Jericho,
New York 11753.
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com
One Jericho Plaza, Second Floor—Wing A
Jericho, New York 11753
www.nathansfamous.com