2 0 1 5 A N N U A L R E P O R T
FINANCIAL HIGHLIGHTS
(In thousands, except share and per share amounts)
SELECTED CONSOLIDATED FINANCIAL DATA:
As Reported
Total revenues
Income from operations(2)
Net income
Income per share
Basic
Diluted
Weighted average shares used in computing income per share
Basic
Diluted
Supplemental Non-GAAP information(3)
EBITDA(4)
Adjusted EBITDA(5)
Fiscal Year(1)
2015
2014
2013
2012
$ 99,112
$ 19,958
$ 11,703
$ 79,752
$ 10,921
$ 8,327
$ 71,069
$ 12,118
$ 7,468
$ 65,541
$ 9,803
$ 6,158
$ 2.61
$ 2.55
$ 1.87
$ 1.81
$ 1.70
$ 1.63
$ 1.26
$ 1.22
4,486
4,588
4,450
4,605
4,400
4,588
4,906
5,049
$ 21,474
$ 22,497
$ 14,853
$ 13,350
$ 13,532
$ 14,289
$ 11,449
$ 11,916
(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 29, 2015, March 30, 2014 and March
25, 2012 consisted of 52 weeks. The fiscal year ended March 31, 2013 consisted of 53 weeks.
(2) Represents total revenues less (i) cost of sales; (ii) restaurant operating expenses; (iii) general and administrative expenses and (iv) depreciation and
amortization.
(3) The Company has provided EBITDA and Adjusted EBITDA that the Company believes will impact the comparability of its results of operations. The
Company believes that EBITDA and Adjusted EBITDA are useful to investors to assist in assessing and understanding the Company’s operating
performance and underlying trends in the Company’s business because EBITDA and Adjusted EBITDA are (i) among the measures used by management in
evaluating performance and (ii) are frequently used by securities analysts, investors and other interested parties as a common performance measure.
EBITDA and Adjusted EBITDA are not recognized terms under US GAAP and should not be viewed as alternatives to net income (loss) or other measures
of financial performance or liquidity in conformity with US GAAP. Additionally, our definitions of EBITDA and Adjusted EBITDA may differ from other
companies. Analysis of results and outlook on a non-US GAAP basis should be used as a complement to, and in conjunction with, data presented in
accordance with US GAAP.
(4) EBITDA represents net income adjusted for the reversal of (1) interest expense; (2) provision for income taxes and (3) depreciation and amortization
expense.
(5) Adjusted EBITDA represents EBITDA adjusted for the reversal of (1) share-based compensation; (2) amortization of bond premium on available-for-sale
securities; and (3) insurance gain and impairment charge on long-term investment in fiscal 2014.
CORPORATE PROFILE
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 nationwide and
within fourteen foreign territories and countries. In total, Nathan’s products are marketed for sale in approximately 53,000
locations, including supermarkets and club stores throughout the United States. Last year, over 500 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.
TOTAL REVENUES
($ in millions)
INCOME FROM OPERATIONS(2)
($ in millions)
ADJUSTED EBITDA(5)
($ in millions)
$99.1
$79.8
$65.5
$71.1
$20.0
$22.5
$12.1
$10.9
$9.8
$14.3
$13.4
$11.9
’12
’13
’14
’15
’12
’13
’14
’15
’12
’13
’14
’15
SHAREHOLDER’S LETTER
Nathan’s Famous 1
ERIC GATOFF
Fiscal 2015 was another very successful and
exciting year for Nathan’s Famous, as we
achieved the highest level of revenues and
earnings in the Company’s history. It was also
the eleventh consecutive year in which we
achieved a year-over-year increase in revenues
from continuing operations. During this period,
we have grown income from operations at a
compounded annual rate of 25.3%.
Fiscal 2015 was also the first full year of our new license and
supply agreement with John Morrell & Co., who in March of
2014 became our exclusive licensee for Nathan’s Famous
packaged hot dog products at retail, as well our primary
supplier of hot dogs to the Branded Product Program and to
our restaurant system. This was a major change for us after 20
years with another company. We are pleased to report that
the transition went smoothly and that this year’s record finan-
cial results are directly related to this new relationship.
Our primary objective continues to be to increase the number
and types of points of distribution for Nathan’s Famous prod-
ucts. Our focus on 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 products are marketed for sale at approximately
53,000 food service and retail locations throughout all 50
States, the District of Columbia, Puerto Rico, Guam, the U.S.
Virgin Islands and 10 foreign countries. Through all channels
of distribution, over 500 million Nathan’s World Famous Beef
Hot Dogs were sold during Fiscal 2015.
FINANCIAL RESULTS
Our overall financial results for Fiscal 2015 were very strong.
Income from operations increased 82.7% to $19,958,000 and
adjusted EBITDA increased by 68.5% to $22,497,000. Net
income increased by 40.5% to $11,703,000 and earnings per
share increased by 40.9% to $2.55. Revenues increased by
24.3% to $99,112,000.
Product Licensing
During Fiscal 2015, license royalties increased by 111.6% to
$18,011,000.
As our shareholders know, our most significant licensed
product line is our portfolio of packaged Nathan’s Famous
hot dog products that are sold through grocery stores, super-
markets, mass merchandisers and club stores. This product
line was transitioned to John Morrell in March 2014 pursuant
to our new license and supply agreement. In the first full
fiscal year of the new deal, our financial results were
excellent, with royalties paid on this product
line increasing by 179.1% to $14,367,000,
exceeding the minimum royalty guarantee for
the year by over 40%.
Other licenses in our licensing program include
licenses to sell at retail Nathan’s Famous
Crinkle Cut French Fries, Nathan’s Famous
Beer Batter Onion Rings, specialty salty snacks,
mustards, pickles, franks ’n blankets and mini
bagel dogs. Additionally, we have a licensing program where
bulk Nathan’s Famous hot dogs are sold in specific food ser-
vice environments, including cafes located in approximately
570 Sam’s Clubs.
Restaurant Operations
Revenues from our Company-owned restaurants increased
by 20% to $15,874,000 during Fiscal 2015. The increase in
revenues was due partly to a 7% increase in comparable
store sales, and partly due to the fact that our flagship loca-
tion in Coney Island operated for the full 52 weeks of Fiscal
2015, as opposed to Fiscal 2014 when the store was still closed
for 7 weeks at the beginning of the year for repairs from
Superstorm Sandy.
Nathan’s began as a single hot dog stand in Coney Island in
1916. As we look forward to next year’s 100th anniversary for
the Company, it is gratifying to realize that our revenues and
operating profit derived from our Company owned opera-
tions in Coney Island during Fiscal 2015 were greater than at
any time in our storied history.
Revenues derived from our franchise system decreased
by 2.4% to $5,581,000 during Fiscal 2015 compared to the
prior year.
During the year, we opened 36 new Nathan’s Famous fran-
chised outlets, including 17 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 franchisees are not required to pay royalties.
Internationally, we opened 13 restaurant outlets, including 6 in
Russia, 3 in Costa Rica and 1 each in Mexico, Turkey and the
Dominican Republic. We also opened our first unit in Malaysia.
During the year, we signed master franchise agreements for
the development of Nathan’s in Portugal and Panama, and we
are currently pursuing prospects in several other international
territories.
Nathan’s Famous 2
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 13.6% to $58,948,000 during Fiscal
2015. 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, and approximately 500 Speedway/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 venues and a multitude of sports
stadiums and arenas.
BRAND MARKETING
The centerpiece of our marketing efforts continues to be
the Nathan’s Famous July 4th International Hot Dog Eating
Contest, which is now firmly entrenched in America’s Inde-
pendence Day celebrations. As has been the case during
each of the last several years, we conducted 13 preliminary
qualifying contests at high profile locations throughout the
United States in advance of the July 4th contest. The main
event on July 4th in Coney Island attracted approximately
40,000 spectators, with millions more tuning in to watch on
ESPN, and was won by the great Joey Chestnut for the 8th
consecutive year!
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 was
represented as the primary or secondary sponsor of Richard
Petty Racing’s famed #43 racecar at 9 NASCAR events during
Fiscal 2015. We have also worked with John Morrell to create
a mobile marketing replica of the Nathan’s experience at
Coney Island, which toured the country and visited approxi-
mately 200 retail locations where Nathan’s packaged prod-
ucts are sold. We have also partnered with an organization
called Kaboom!, through which we sponsored a number of
free play events for children and established a Nathan’s play-
ground in Kissimmee, Florida.
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 certain products fea-
tured at all home games of
the Yankees, Mets, Giants,
Jets, Nets and Devils.
STRATEGIC DEVELOPMENT
During Fiscal 2015, 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.
SPECIAL DIVIDEND
During Fiscal 2015, we issued $135 Million of senior secured
notes and used the vast majority of the proceeds to fund a
special, one-time $25 dividend to all shareholders of record as
of March 20, 2015. We currently estimate that approximately
40% of the special dividend will be taxable as a dividend, with
the remainder being treated as a non-dividend distribution.
Please check the Investor Relations page on our website at
www.nathansfamous.com to obtain further details.
STOCK REPURCHASES
During Fiscal 2015, we also returned $1.9 Million to our share-
holders through repurchases of our common stock.
MANAGEMENT
After 40 years of service to the Company, Wayne Norbitz is
retiring in August 2015. We are pleased that he will continue
his involvement with the Company as member of our Board
of Directors and as a special consultant. We thank Wayne for
his enormous contributions to the Company over the last
4 decades. A new Executive Vice President has joined the
Nathan’s management team in July 2015.
IN CONCLUSION
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.
ERIC GATOFF
Chief Executive Officer
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 29, 2015
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to__________
Commission File 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 26, 2014 - was approximately $208,235,000, which
value, solely for the purposes of this calculation excludes shares held by the registrant’s officers and directors. Such exclusion shall not be
deemed a determination by registrant that all such individuals are, in fact, affiliates of the registrant.
As of June 9, 2015, there were outstanding 4,583,498 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 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation
14A of the Securities Exchange Act of 1934.
TABLE OF CONTENTS
PART I
Item 1
Business. .....................................................................................................................................................
Item 1A Risk Factors. ...............................................................................................................................................
Item 1B Unresolved Staff Comments. ......................................................................................................................
Properties. ...................................................................................................................................................
Item 2
Item 3
Legal Proceedings. ......................................................................................................................................
Item 4 Mine Safety Disclosures. ............................................................................................................................
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities. ....................................................................................................................................................
Item 6
Selected Financial Data. ..............................................................................................................................
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations. .....................
Item 7A Quantitative and Qualitative Disclosures About Market Risk. ...................................................................
Item 8
Financial Statements and Supplementary Data. ..........................................................................................
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. ....................
Item 9
Item 9A Controls and Procedures. ............................................................................................................................
Item 9B Other Information. ......................................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance. .........................................................................
Item 11. Executive Compensation. ............................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. ...
Item 13. Certain Relationships and Related Transactions, and Director Independence. ...........................................
Item 14. Principal Accountant Fees and Services. ....................................................................................................
PART IV
Page
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15
30
30
30
30
31
33
35
48
49
49
50
50
53
53
53
53
53
Item 15. Exhibits and Financial Statement Schedules. ..............................................................................................
55
Signatures ....................................................................................................................................................................
58
Index to Financial Statements and Financial Statement Schedule .........................................................................
F-1
i
PART I
Forward-Looking Statements
This Form 10-K contains “forward-looking statements” that involve risks and uncertainties. You can identify
forward-looking statements because they contain words such as “believes”, “expects”, “projects”, “may”, “would”, “should”,
“seeks”, “approximately”, “intends”, “plans”, “estimates”, “anticipates” or similar expressions that relate to our strategy,
plans or intentions. All statements we make relating to our estimated and projected earnings, margins, costs, expenditures,
cash flows, growth rates and financial results or to our expectations regarding future industry trends are forward-looking
statements. In addition, we, through our senior management, from time to time make forward-looking public statements
concerning our expected future operations and performance and other developments. These forward-looking statements are
subject to known and unknown risks, uncertainties and other factors that may change at any time, and, therefore, our actual
results may differ materially from those that we expected. We derive many of our forward-looking statements from our
operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions
are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for
us to anticipate all factors that could affect our actual results. All forward-looking statements contained in this Form 10-K
are based upon information available to us on the date of this Form 10-K.
Item 1.
Business.
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. References to the fiscal
2015 period mean the fiscal year ended March 29, 2015 and references to the fiscal 2014 period mean the fiscal year ended
March 30, 2014. In addition, references to the Notes or the Senior Secured Notes refer to the $135,000,000 10.000% Senior
Secured Notes due 2020.
We are a leading branded licensor, wholesaler and retailer of products marketed under our Nathan’s Famous brand,
including our popular Nathan’s World Famous Beef Hot Dogs. What began as a nickel hot dog stand on Coney Island in
1916 has evolved into a highly recognized brand throughout the United States and the world. Our innovative business model
seeks to maximize the points of distribution for and the consumption of Nathan’s World Famous Beef Hot Dogs, crinkle-cut
French fries and our other products across a wide-range of grocery retail and foodservice formats. Our products are currently
marketed for sale in approximately 53,000 locations, including supermarkets, mass merchandisers and club stores, selected
foodservice locations and our Company-owned and franchised restaurants throughout the United States and in eleven foreign
territories and countries. The Company considers itself to be in the foodservice industry, and has pursued co-branding
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. Our franchised restaurant operations are
comprised predominately of our Nathan’s Famous concept, which features a menu consisting of Nathan’s World
Famous Beef Hot Dogs, crinkle-cut French fries and beverages as well as other items. We earn royalties on
restaurant sales at these franchise locations. In addition to our traditional franchised restaurants, we enable
approved 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 through our
Branded Menu Program (“BMP”). We earn royalties on Nathan’s products purchased by our BMP franchise
operators.
(cid:404) The Branded Product Program provides foodservice operators in a variety of venues the opportunity to capitalize
on our Nathan’s Famous brand by marketing and selling certain Nathan’s Famous hot dog products. We believe
that the program has broad appeal to foodservice operators due to its flexibility to deliver our products to a wide
variety of distribution channels. In conjunction with the program, operators are granted a limited use of the
Nathan’s Famous trademark, as well as Nathan’s point of purchase materials. Unlike our licensing and franchise
programs, we do not generate revenue from royalties, but rather by selling our hot dog products either directly
to the foodservice operators or to various foodservice distributors who provide the products to foodservice
operators.
1
(cid:404) Our licensing program contracts with certain third parties to manufacture, distribute, market and sell a broad
variety of Nathan’s Famous branded products including our hot dogs, sausages, frozen French fries and
additional products through retail grocery channels within the United States. As of March 29, 2015, packaged
Nathan’s World Famous Beef Hot Dogs continued to be sold in approximately 39,000 supermarkets, mass
merchandisers and club stores including Kroger, Publix, ShopRite, Walmart, Target, Sam’s Club, Costco and
BJ’s Wholesale Club located in 50 states. We earn revenue through royalties on products sold by our licensees.
(cid:404) 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.
Our brand is widely recognized by virtue of our long history and broad geographic footprint, which allows us to
enjoy high consumer awareness in the United States and abroad and allows us the ability to grow in markets and channels
where the brand is known but has not yet achieved optimal market penetration. We believe that our highly visible brand and
reputation for high quality products have allowed us to expand our food offerings beyond our signature hot dogs and
command a price premium across our portfolio of products. Over time, we have expanded menu options so that our Company-
owned restaurants and franchisees can 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. We have also developed a portfolio of licensed
products for sale at retail and grocery locations. We seek to maintain the same quality standard with each of our supplemental
menu items and licensed products as we do with our core hot dog and French fries menu. We intend to continue to leverage
our highly recognized global brand and iconic products to introduce new products into our existing distribution network,
open new points of distribution and grow our overall sales. We believe that there is great potential to increase our sales by
converting existing sales of non-branded products to Nathan’s branded products throughout the foodservice industry.
In recent years, 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 grow product sales throughout our
various channels of distribution. In this regard, we have concentrated our efforts on:
(cid:404)
(cid:404)
(cid:404)
(cid:404)
expanding the number of foodservice locations and distributors 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, including the Branded Menu Program, as well as continuing to develop master
franchising programs in foreign countries;
expanding our licensing programs for packaged Nathan’s Famous products through new product introductions
and geographic expansion; and
continuing to profitably operate our iconic Company-owned restaurants, and may opportunistically invest in
Company-owned restaurant expansion.
As a result of our efforts to expand the Nathan’s Famous brand, as of March 29, 2015:
(cid:404) our Nathan’s Famous restaurant system consisted of 296 franchised units and five Company-owned units
(including one seasonal unit) located in 27 states, the Cayman Islands, and ten 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
39,000 supermarkets and club stores in 50 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 royalties from our licensing activities and the royalties, fees and other sums we
earn from our franchising activities.
2
We plan to expand the scope and market penetration of our Branded Product and Branded Menu Programs, further
develop the restaurant operations of existing Nathan’s Famous franchised and Company-owned outlets, open new Nathan’s
Famous franchised outlets in traditional or captive market environments and expand the Nathan’s Famous retail licensing
programs. We also plan to further expand our international presence through our franchise, and retail licensing programs. 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.
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 48 and 25 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 98 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.
3
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. We use the Arthur Treacher’s brand, products and trademarks as a branded
seafood menu-line extension for inclusion in certain Nathan’s Famous restaurants. During fiscal 2014, we entered into our
first multi-unit Branded Menu Program agreement with a qualified foodservice operator for inclusion in non-Nathan’s
facilities and may seek to further market this program in the future.
Kenny Rogers Roasters
We have the right to use the Kenny Rogers Roasters trademarks for the continued sale of the Kenny Rogers Roasters
products in the Nathan’s Famous restaurants existing at April 23, 2008, where the Kenny Rogers products had already been
introduced.
Franchise Operations
At March 29, 2015, our Nathan’s franchise system, including our Branded Menu Program, consisted of 296 units
operating in 27 states, the Cayman Islands, and ten foreign countries.
Our franchise system includes among its 145 franchisees such well-known companies as HMS Host, Compass
Group USA, Inc., Gourmet Dining Services, Inc., CulinArt, National Amusements, Inc., Hershey Entertainment & Resorts
Company, Six Flags Theme Parks, Brusters Real Ice Cream and K-Mart. 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 29, 2015, no single franchisee accounted for over 10% of our consolidated
revenue. At March 29, 2015, HMS Host operated 17 franchised outlets, including 3 units at airports, 13 units within highway
travel plazas and one unit within a mall. Additionally, at March 29, 2015, HMS Host operated 49 locations featuring Nathan’s
products pursuant to our Branded Product Program. At March 29, 2015, there were also 35 Kmart locations and 31 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.
4
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 individual restaurant and system-wide benefits.
Franchised restaurants are required to be operated in accordance with uniform operating standards and specifications
relating to the selection, quality and preparation of menu items, signage, decor, equipment, uniforms, suppliers, maintenance
and cleanliness of premises and customer service. All standards and specifications are developed by us to be applied on a
system-wide basis. We regularly monitor franchisee operations and inspect restaurants. Franchisees are required to furnish
us with monthly sales or operating reports which assist us in monitoring the franchisee’s compliance with its franchise
agreement. We make both announced and unannounced inspections of restaurants to ensure that our practices and procedures
are followed. We have the right to terminate a franchise if a franchisee does not operate and maintain a restaurant in
accordance with the requirements of its franchise agreement, including for non-payment of royalties, sale of unauthorized
products, bankruptcy or conviction of a felony. During the fiscal 2015 period, franchisees opened 23 new Nathan’s Famous
franchised units in the United States (including 17 Branded Menu Program units), and 13 units internationally.
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. 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 may 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 29, 2015, the Nathan’s Branded Menu Program was comprised of 119 outlets, which included 35
Nathan’s Famous Branded Products within K-Marts and 31 Nathan’s Famous Branded Products within Brusters Real Ice
Cream shops, a premium ice cream franchisor headquartered in Western Pennsylvania with approximately 185 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 29, 2015, Arthur Treacher’s co-branded operations were included within 48 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 non-Nathan’s restaurants
to market the Arthur Treacher’s products. The development agreement provides for up to 55 locations in the Rochester, New
5
York area. The agreement requires opening fees be conveyed to Nathan’s in addition to ongoing royalties based on the
proprietary products purchased. The first location opened on March 9, 2014 and six new locations opened during the year
ended March 29, 2015. We may seek to expand the opportunity for an Arthur Treacher’s Branded Menu Program in the
future.
Company-owned Nathan’s Restaurant Operations
As of March 29, 2015, 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, was down-sized, and re-opened on November 18,
2013 pursuant to its new lease, after being closed for renovation since November 2012 and our Oceanside restaurant was also
relocated and downsized and re-opened on March 25, 2015, after being closed for approximately three months for relocation.
Our Company-owned restaurants range in size from approximately 2,650 square feet to 10,000 square feet and have seating
to accommodate between 60 and 125 customers. These restaurants are open seven days a week on a year-round basis and are
designed to appeal to consumers of all ages. In March 2012, we relocated our seasonal Coney Island Boardwalk restaurant
to a more prominent location. We have established high standards for food quality, cleanliness, and service at our restaurants
and regularly monitor the operations of our restaurants to ensure adherence to these standards.
Three of our Company-owned restaurants have contemporary service areas, seating, signage, and general decor. Our
Coney Island restaurant, which first opened in 1916, remains unique in its presentation and operations.
Our Company-owned restaurants typically carry a broader selection of menu items than our franchise restaurants
and generally attain sales levels higher than the average of our newer franchise restaurants. The items offered at the Company-
owned restaurants, other than the core menu, tend to have lower margins than the core menu.
International Development
As of March 29, 2015, Nathan’s Famous franchisees operated 62 units in ten foreign countries, and the Cayman
Islands. During the fiscal 2015 period we opened 13 new units internationally, including our first three units in Costa Rica
and first unit in Malaysia pursuant to new development agreements. Additionally, we opened 6 units in Russia, and one unit
in each of Mexico, Turkey and the Dominican Republic pursuant to existing development agreements.
As of March 29, 2015, we have executed a Master Franchise Agreement and a Retail Distribution Agreement for
the Republic of Panama and have received a non-refundable fee of $150,000.We have also executed a Letter of Intent to enter
into a Master Development Agreement for the Commonwealth of Australia and received a non-refundable deposit of $50,000.
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 29, 2015, March 30, 2014
and March 31, 2013: See Item 1A-“Risk Factors.”
Total revenue ................................................................................. $
Gross profit (a) .............................................................................. $
2015
3,430,000 $
1,186,000 $
2014
3,531,000 $
1,765,000 $
2013
3,044,000
1,193,000
March 29,
March 30,
March 31,
(a) Gross profit represents the difference between revenue and cost of sales.
6
Location Summary
The following table shows the number of our Company-owned and franchised units in operation at March 29, 2015
and their geographical distribution:
Domestic Locations
Alabama ..............................................
Arizona ................................................
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 ...............................
International Locations
Canada .................................................
Cayman Islands ...................................
Costa Rica ...........................................
Dominican Republic ............................
Egypt ...................................................
Jamaica ................................................
Kuwait .................................................
Malysia ................................................
Mexico ................................................
Russia ..................................................
Turkey .................................................
International Subtotal ..........................
Grand Total .........................................
Company
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5
-
-
-
-
-
-
-
-
-
5
Company
-
-
-
-
-
-
-
-
-
-
-
-
5
Franchise (1)
1
1
1
5
26
17
1
3
3
7
4
1
1
12
1
35
2
75
2
4
16
1
8
2
3
1
1
234
Franchise (1)
1
1
3
6
1
2
9
1
3
34
1
62
296
Total (1)
1
1
1
5
26
17
1
3
3
7
4
1
1
12
1
35
2
80
2
4
16
1
8
2
3
1
1
239
Total (1)
1
1
3
6
1
2
9
1
3
34
1
62
301
(1)
Amounts include 119 units operated pursuant to our Nathan’s and Arthur Treacher’s Branded Menu Programs. Units
operating pursuant to our Branded Product Program are excluded.
7
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 primarily Nathan’s Famous hot dog products.
We believe that the program is unique in its flexibility and broad appeal. Hot dogs are offered in a variety of sizes and 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 29, 2015, the Branded Product Program distributed product in all 50 states, the District of Columbia,
Puerto Rico, Canada, the U.S. Virgin Islands, Guam and Mexico. During the fiscal 2015 period, we continued to open many
new locations offering Nathan’s branded products. 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 and National Amusements, casino hotels such as Foxwoods Casino in Connecticut and convenience store
chains such as Speedway, 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, Brooklyn Nets, New Jersey Devils and Dallas Cowboys.
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, gas and convenience stores, 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. John Morrell brings additional sales and marketing resources to our brand through its national scale,
broad distribution platform, strong retail relationships and research and development infrastructure capable of developing
and introducing attractive new products. As a result of our partnership with John Morrell, we expect Nathan’s Famous
products to further penetrate the grocery, mass merchandising and club channels by expanding points of distribution in
targeted, underpenetrated regions and through the development of new products. John Morrell expects to leverage this
relationship with full-scale marketing efforts, both inside and outside of stores, highlighted by exciting customer events
including our NASCAR Sprint Cup Series sponsorship with Richard Petty Motorsports and brand representation and support
at numerous Hot Dog Eating Contest Qualifying Events. Additionally, John Morrell & Co. will continue its mobile marketing
tour throughout the year, whereby merchandising trucks will be making over 200 scheduled stops at supermarkets throughout
the country and certain Hot Dog Eating Contests to bring the Nathan’s / Coney Island experience to new markets. We expect
to continue our relationship with Kaboom as we prepare to celebrate our 100th anniversary in 2016.
We expect to continue the growth of our Branded Product Program through the addition of new points of sale. We
believe that the flexible design of the BPP makes it well-suited for sales to all segments of the broad foodservice industry.
We intend to keep targeting sales to a broad line of food distributors, which we believe compliments our continuing focus on
sales to various foodservice retailers. We continue to believe that as consumers look to assure confidence in the quality of
the food that they purchase, there is great potential to increase our sales by converting existing sales of non-branded products
to Nathan’s branded products throughout the foodservice industry.
We will seek to market our franchise restaurant program to large, experienced and successful operators with the
financial and business capability to develop multiple franchise units, as well as to individual owner-operators with evidence
of restaurant management experience, net worth and sufficient capital.
We also expect to continue opening traditional and Branded Menu Nathan’s Famous franchised units individually
and on a co-branded basis, expanding product distribution through various means such as branded products and retail
licensing arrangements, developing master franchising programs in foreign countries and including our Arthur Treacher’s
signature products both within our restaurant system and as a separate Branded Menu Program. We may selectively consider
opening new Company-owned Nathan’s units on an opportunistic basis. Existing Company-owned units are located in the
New York metropolitan area, where we have extensive experience in operating restaurants. We may consider new
opportunities in both traditional and captive market settings.
8
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.
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 2015, we continued to expand 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
who opened six units during the year ended March 29, 2015 and intends to further expand this program in the next fiscal
year. We may seek to further explore opportunities to co-brand the Arthur Treacher’s brand to other multi-unit foodservice
operators in the future.
At March 29, 2015, the Arthur Treacher’s brand was being sold within 48 Nathan’s restaurants and the Kenny
Rogers Roasters brand was being sold within 25 Nathan’s restaurants. We have the right to sell Kenny Rogers products in
our Nathan’s locations existing prior to May 2008 and to receive the revenue from those sales.
We believe that our diverse brand offerings complement each other, which has enabled us to market franchises of
co-branded units and continue co-branding within our franchised units. We also believe that our various restaurants’ products
provide us with strong lunch and dinner day-parts as well as snacking occasions.
We believe that a multi-branded restaurant concept offering strong lunch and dinner day-parts is appealing to both
consumers and potential franchisees. Such restaurants are designed to allow the operator to increase sales and leverage the
cost of real estate and other fixed costs to provide superior investment returns as compared to many restaurants that are single
branded.
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. 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 $14,367,000 in fiscal 2015 and $5,147,000
in fiscal 2014. We earned $4,600,000 pursuant to the SMG License Agreement during fiscal 2014 through the date of
expiration. While we believe our future operating results will continue to 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”).
9
For nine 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 $1,738,000 and $1,594,000
during the fiscal 2015 period and fiscal 2014 period, respectively. The majority of these royalties were earned from one
account. Effective March 2, 2014, this arrangement is governed by our new license/supply agreement with John Morrell &
Co.
As of March 29, 2015, packaged Nathan’s World Famous Beef Hot Dogs continued to be sold in approximately
39,000 supermarkets, mass merchandisers and club stores including Kroger, Publix, ShopRite, Walmart, Target, Sam’s Club,
Costco and BJ’s Wholesale Club located in 50 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 this agreement were approximately 89.4% of our fiscal 2015 period license revenues.
We license the manufacture of the proprietary spices which are used to produce Nathan’s World Famous Beef Hot
Dogs to Saratoga Specialties. During fiscal 2015 and 2014, we earned $804,000 and $707,000, 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 2015. Through this agreement, we are able to control the manufacture of all Nathan’s hot dogs.
During fiscal 2015, 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 36 states, primarily on the East Coast and in the South-West and West Coast during fiscal 2014. During fiscal 2015
and 2014, we earned royalties of $507,000 and $335,000, respectively, under this agreement. For the contract year ended in
July 2014, we earned royalties of $62,000 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. ConAgra Foods Lamb
Weston, Inc. previously exercised its second option to extend the license agreement through July 2018, pursuant to which the
minimum royalties will increase 5% annually.
During fiscal 2015, 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 $217,000 during fiscal 2015 and $340,000 during fiscal 2014. 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.
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 $309,000 during fiscal 2015 and $301,000 during
fiscal 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 $69,000 during fiscal 2015 and $88,000 during fiscal 2014.
Provisions and Supplies
Effective March 2, 2014, Nathan’s World Famous Beef Hot Dogs have been primarily manufactured by John
Morrell & Co. for sale by our 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. John Morrell & Co. and another hot
dog manufacturer supply the hot dogs for our Company-operated and franchise-operated restaurants. All hot dogs are
manufactured in accordance with Nathan’s recipes, quality standards and proprietary spice formulations. Nathan’s believes
that it has reliable sources of supply; however, in the event of any significant disruption in supply, management believes that
alternative sources of supply are available. (See Item 1A- “Risk Factors”). Saratoga 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. During fiscal 2015, McCain Foods USA provided approximately 13.5% of our frozen crinkle-cut
French fries. Most other Company provisions are purchased from multiple sources to prevent disruption in supply and to
obtain competitive prices. We approve all products and product specifications. We negotiate directly with our suppliers on
behalf of the entire system for all primary food ingredients and beverage products sold in the restaurants in an effort to ensure
adequate supply of high quality items at competitive prices.
10
We utilize a unified source for the predominant 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 /
PFG and McLane.
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
2014, we hosted 13 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, Savannah, GA, Houston, TX,
Nashville, TN, Lincoln, NE, Cleveland, OH, and Boston, MA. In 2015, the qualifying tour will stop in four new cities. We
are again holding contests at three 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 a St. Louis Cardinals Game in May 2014 and returned on May 16, 2015. Our first regional contest of 2015
took place in Florida on March 1st and will occur in 13 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. participated together in running two 6-week radio campaigns during the summer
of 2014. In 2015, John Morrell & Co. will run 2-week radio campaigns in support of certain promotions.
Nathan’s Famous continues to look to sports sponsorships as a strategic marketing opportunity to further our brand
recognition. In addition to the branded signage opportunity, Nathan’s is given the opportunity to 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
throughout 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; and The Scottrade Center – St. Louis Blues; and
(cid:404) Professional Football: MetLife Stadium-New York Giants and New York Jets and AT&T Stadium – Dallas
Cowboys.
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. Vendors that supply products to our restaurant system
also contribute to the advertising fund based upon purchases made by our franchisees and at Company-owned restaurants.
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Throughout fiscal 2015, 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 2015 and fiscal 2014, our marketing activities continued with the use of free-standing inserts in addition to radio flights
and use of a localized newsprint campaigns. During the fiscal 2015 period, we expanded our radio campaign and continued
with the use of free-standing inserts. These newsprint 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 have committed to additional campaigns in fiscal 2016.
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 2015, 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 2016, we may seek to further expand our internal marketing resources along with our network of
foodservice brokers and distributors. We may attempt to emphasize specific venues as we expand our broker network, focus
management and broker responsibilities on a regional basis and expand the use of sales incentive programs. We are currently
continuing the process of upgrading our social media platforms by enhancing our corporate website and Facebook page and
expanding the use of Twitter.
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.
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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. Two 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.
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 29, 2015, we had 228 employees, 42 of whom were corporate management and administrative employees,
26 of whom were restaurant managers and 160 of whom were hourly full-time and part-time foodservice employees. We may
also employ approximately 150 – 200 seasonal employees during the summer months. Foodservice employees at three
Company-owned locations are currently represented by Local 1102 RWSDU UFCW AFL-CIO, CLC, Retail, Wholesale and
Department Store Union, under an agreement that expires on June 30, 2017. Employees at a fourth location are represented
by the same union pursuant to a different agreement that expires October 31, 2016. We consider our employee relations to
be good and have not suffered any strike or work stoppage for more than 42 years.
We provide a training program for managers and assistant managers of our Company-owned and new franchised
restaurants. Hourly food workers are trained on site by managers and crew trainers following Company practices and
procedures outlined in our operating manuals.
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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 72 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 and franchised restaurants from which franchise royalties are earned and the
Company’s earnings have been highest during our first two fiscal quarters, with the fourth fiscal quarter typically representing
the slowest period. 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.
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.
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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.
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 John Morrell has resulted in a significant increase in our royalties compared to the royalties
we derived from SMG and there can be no assurance that such increases will continue in the future or that we will achieve
the cost savings we anticipate from the John Morrell agreement.
We earned license royalties of approximately $14,367,000 in fiscal 2015 as compared to license royalties of
$5,147,000 in fiscal 2014. The principal reason for this increase is the terms and conditions of our agreement with John
Morrell as compared to the terms and conditions of our agreement with SMG. There can be no assurance that we will continue
to derive the same increase in our license royalties in the future or that our future license royalties will be similar to our fiscal
2015 license royalties.
In addition, we expect to achieve cost savings from the John Morrell Agreement but there can be no assurance that
we will achieve the cost savings we anticipate.
If (i) our license revenues decrease or increase only by a nominal amount in future years or (ii) we fail to achieve
cost savings as a result of the John Morrell agreement, it would have a material adverse effect on our financial condition and
results of operations.
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Our agreement with SMG expired on March 1, 2014 and we entered into a new agreement with John Morrell
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, BPP and restaurant businesses as well as our reputation.
Our agreement with SMG expired on March 1, 2014 and we entered into a new agreement with John Morrell 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 our 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 and whether John Morrell 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 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 will have a
sufficient supply of products available for our restaurant, foodservice and retail customers on a timely basis and (iii) whether
John Morrell 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, BPP and restaurant businesses.
John Morrell 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 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 our 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 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 our business, results of operations and financial condition.
Furthermore, a supply disruption might affect our brand in the eyes of consumers and the retail trade, which damage might
negatively impact our overall business in general, which could result in a material adverse effect on our business, results of
operations or financial condition.
The loss of one or more of our key suppliers could lead to supply disruptions, increased costs and lower operating
results.
We have historically relied on one supplier for the majority of our hot dogs and another supplier for a majority of
our supply of frozen French fries for our restaurant system. An interruption in the supply of product from either of these
suppliers without our obtaining an alternative source of supply on comparable terms could lead to supply disruptions,
increased costs and lower operating results.
During fiscal 2013, we entered into a new agreement with a secondary hot dog manufacturer that continues to also
supply natural casing hot dogs for our restaurant business.
Additionally, a majority of the frozen crinkle-cut French fries sold through our franchised restaurants have been
obtained from one supplier. Beginning in fiscal 2013, we began a relationship with a secondary source of supply of our frozen
French fries for our restaurant system. During the fiscal years ended March 29, 2015 and March 30, 2014, McCain Foods
USA supplied approximately 13.5% and 15%, respectively, of the frozen crinkle-cut French fries sold through our franchised
restaurants.
In the event that the hot dog or French fry suppliers are unable to fulfill our requirements for any reason, including
due to a significant interruption in its manufacturing operations, whether as a result of a natural disaster or for other reasons,
such interruption could significantly impair our ability to operate our business on a day-to-day basis.
In the event that we are unable to find one or more alternative suppliers of hot dogs or French fries on a timely basis,
there could be a disruption in the supply of product to Company-owned restaurants, franchised restaurants and BPP accounts,
which would damage our business, our franchisees and our BPP customers and, in turn, negatively impact our financial
results. In addition, any gap in supply to retail customers would result in lost royalty payments to us, which could have a
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significant adverse financial impact on our results of operations. Furthermore, any gap in supply to retail customers may
damage our brand in the eyes of consumers and the retail trade, which damage might negatively impact our overall business
in general and impair our ability to continue our retail licensing program.
Additionally, there is no assurance that any supplemental sources of supply would be capable of meeting our
specifications and quality standards on a timely and consistent basis or that the financial terms of such supply arrangement
will be as favorable as our present terms with our hot dog or French fry supplier, as the case may be.
Any of the foregoing occurrences may cause disruptions in supply of our hot dog or French fry products, as the case
may be, damage our franchisees and our BPP customers, adversely impact our financial results and/or damage our brand.
We currently use US Foods, Inc. as the primary distributor for our Company-owned restaurants and the vast
majority of our franchise system, including our BMP locations pursuant to a five-year contract.
We currently use US Foods, Inc. as the primary distributor for our Company-owned restaurants and the vast majority
of our franchise system, including our BMP locations pursuant to a five-year contract. In December 2013, Sysco Corporation
announced that it is seeking to acquire US Foods, 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 it the single dominant
distributor in the industry. This merger has the potential to significantly reduce competition for foodservice distribution. Both
Sysco Corporation and US Foods, Inc. purchase significant amounts of product from our BPP. The merger has the potential
to increase our cost of sales and use their combined size to negotiate lower selling prices of our BPP.
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 Branded BPP accounts could harm our profitability and operating
results.
John Morrell accounted for approximately 93.9% and 34% of our licensing revenue for the fiscal 2015 period and
fiscal 2014 period, respectively. SMG accounted for approximately 54% of our licensing revenue for the fiscal year ended
March 30, 2014. John Morrell’s business is weighted towards one high volume user who is not sold pursuant to a formal
agreement. As a result of the John Morrell Agreement, we expect that most of our license royalties will be earned from John
Morrell for the foreseeable future. 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, for the fiscal 2015 period, approximately 73% of our BPP business is from seven accounts, including
one account representing approximately 28% of the BPP business, with which we have relatively short-term contracts. In the
event that these BPP customers experience financial difficulties or, upon the expiration of their existing agreements are not
willing to do business with 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.
Our earnings and business growth strategy depends in large part on the success of our product licensees and
product manufacturers. Our reputation and the reputation of our brand may be harmed by actions taken by our product
licensees or product manufacturers that are otherwise outside of our control.
A significant portion of our earnings has come from royalties paid by our product licensees such as SMG, John
Morrell and ConAgra Foods Lamb Weston, Inc., Saratoga Food Specialties, Inc., a wholly owned subsidiary of John Morrell,
and Perfection Foods. Although our agreements with these licensees contain numerous controls and safeguards, and we
monitor the operations of our product licensees, our licensees are independent contractors, and their employees are not our
employees. Accordingly, we cannot necessarily control the performance of our licensees under their license agreements,
including without limitation, the licensee’s continued best efforts to manufacture our products for retail distribution and our
foodservice businesses, 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
our business, results of operations and financial condition. In addition, a licensee’s failure to effectively market the licensed
products may result in decreased sales, which would adversely affect our business, results of operations and financial
condition. Also, to the extent that the terms and conditions of any of these license agreements change or we change any of
our product licensees, our business, results of operations and financial condition could be materially affected.
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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. We and our 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. We anticipate competition will continue to focus on
pricing. Many of our competitors have substantially larger marketing budgets, which may provide them with a competitive
advantage. Changes in pricing or other marketing strategies by these competitors can have an adverse impact on our sales,
earnings and growth. For example, many of those competitors have adopted “value pricing” strategies intended to lure
customers away from other companies, including our Company. Consequently, these strategies could have the effect of
drawing customers away from companies which do not engage in discount pricing and could also negatively impact the
operating margins of competitors which attempt to match their competitors’ price reductions. Extensive price discounting in
the quick-service restaurant business could have an adverse effect on our financial results.
In addition, we and our franchisees compete within the foodservice market and the quick-service restaurant business
not only for customers but also for management and hourly employees and qualified franchisees. If we are unable to maintain
our competitive position, we could experience downward pressure on prices, lower demand for products, reduced margins,
the inability to take advantage of new business opportunities and the loss of market share.
Changes in economic, market and other conditions could adversely affect us and our franchisees, and thereby
our operating results.
The quick-service restaurant business is affected by changes in international, national, regional, and local economic
conditions, consumer preferences and spending patterns, demographic trends, consumer perceptions of food safety, 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. Our ability and our franchisees’ ability 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.
Current restaurant locations may become unattractive, and attractive new locations may not be available for a
reasonable price, if at all, which may reduce our revenue.
The success of any restaurant depends in substantial part on its location. There can be no assurance that current
locations will continue to be attractive as demographic patterns change. Neighborhood or economic conditions where
restaurants are located could decline in the future, thus resulting in potentially reduced sales in those locations. If we and our
franchisees cannot obtain desirable additional and alternative locations at reasonable prices, our results of operations would
be adversely affected.
Any perceived or real health risks related to the food industry could adversely affect our ability to sell our
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
18
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 our brand’s reputation and affect sales and profitability. Reports, whether true or not, of food-
borne illnesses (such as e-coli, avian flu, bovine spongiform encephalopathy, hepatitis A, trichinosis or salmonella) and
injuries caused by food tampering have in the past severely injured the reputations of participants in the quick-service
restaurant business and could in the future affect our business as well. Our brand’s reputation is an important asset to the
business; as a result, anything that damages our brand’s reputation could immediately and severely hurt systemwide sales
and, accordingly, revenue and profits. If customers become ill from food-borne illnesses or food tampering, we could also be
forced to temporarily close some, or all, restaurants. In addition, instances of food-borne illnesses or food tampering, even
those occurring solely at the restaurants of competitors, could, by resulting in negative publicity about the restaurant industry,
adversely affect system sales on a local, regional or 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 our or our franchisees’ restaurants, could
materially harm our business, results of operations and financial condition.
Additionally, we may be subject to liability if the consumption of any of our products causes injury, illness, or death.
A significant product liability judgment or a widespread product recall may negatively impact our sales and profitability for
a period of time depending on product availability, competitive reaction, and consumer attitudes. Even if a product liability
claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness
or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image.
Injury to our brand’s reputation would likely reduce revenue and profits.
Negative publicity, including complaints on social media platforms and other internet-based communications,
could damage our reputation and harm our guest traffic, and in turn, negatively impact our business, financial condition,
results of operations and prospects.
There has been a marked increase in the use of social media platforms and similar devices, including blogs, social
media websites and other forms of internet-based communications that allow individuals to access a broad audience of
consumers and other interested persons. Consumers value readily available information concerning goods and services that
they have or plan to purchase, and may act on such information without further investigation or authentication. The
availability of information on social media platforms is virtually immediate, as is its impact. Many social media platforms
immediately publish the content their subscribers and participants can post, often without filters or checks on accuracy of the
content posted. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless
and readily available. Information concerning our business and products may be posted on such platforms at any time.
Information posted may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects
or business. The harm may be immediate without affording us an opportunity for redress or correction. Such platforms could
also be used for dissemination of trade secret information, compromising valuable Company assets. In sum, the dissemination
of information online, regardless of its accuracy, could harm our business, financial condition, results of operations and
prospects, as well as our ability to satisfy our obligations under the Notes.
Changing health or dietary preferences may cause consumers to avoid products offered by us in favor of
alternative foods.
The foodservice industry is affected by consumer preferences and perceptions. Reports of the use of hormones,
antibiotics or pesticides in the production of certain food products may cause consumers to reduce or avoid consumption of
such food products. If prevailing health or dietary preferences, perceptions and governmental regulation cause consumers to
avoid the products we offer in favor of alternative or healthier foods, demand for our products may be reduced and our
business could be harmed.
We are subject to health, employment, environmental and other government regulations, and failure to comply
with existing or future government regulations could expose us to litigation, damage our corporate reputation or the
reputation of our brands and lower profits.
We and our franchisees are subject to various federal, state and local laws, rules or regulations affecting our
businesses. To the extent that the standards imposed by local, state and federal authorities are inconsistent, they can adversely
affect popular perceptions of our business and increase our exposure to litigation or governmental investigations or
proceedings. We may be unable to manage effectively the impact of new, potential or changing regulations that affect or
19
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 we fail to comply with any of these laws, we may
be subject to governmental action or litigation, and accordingly our reputation could be harmed.
Injury to us or our brand’s reputation would, in turn, likely reduce revenue and profits. In addition, difficulties or
failures in obtaining any required licenses or approvals could delay or prevent the development or opening of a new restaurant
or renovations to existing restaurants, which would adversely affect our revenue.
In recent years, there has been an increased legislative, regulatory and consumer focus on nutrition and advertising
practices in the food industry, particularly among quick-service restaurants. As a result, we may become subject to regulatory
initiatives in the area of nutrition disclosure or advertising, such as requirements to provide information about the nutritional
content of our food products, which could increase expenses. The operation of our franchise system is also subject to franchise
laws and regulations enacted by a number of states and rules promulgated by the U.S. Federal Trade Commission. Any future
legislation regulating franchise relationships may negatively affect our operations, particularly our relationship with our
franchisees. Failure to comply with new or existing franchise laws and regulations in any jurisdiction or to obtain required
government approvals could result in a ban or temporary suspension on future franchise sales. Changes in applicable
accounting rules imposed by governmental regulators or private governing bodies could also affect our reported results of
operations, which could cause our stock price to fluctuate or decline.
We may not be able to adequately protect our intellectual property, which could decrease the value of our business
or the value of our brands and products.
The success of our business depends on the continued ability to use existing trademarks, service marks and other
components of each of our brands in order to increase brand awareness and further develop branded products. We may not
be able to adequately protect our trademarks, and the use of these trademarks may result in liability for trademark
infringement, trademark dilution or unfair competition. All of the steps we have taken to protect our intellectual property
may not be adequate.
We have registered or applied to register many of our trademarks and service marks both in the United States and
in foreign countries. Because of the differences in foreign trademark laws, our trademark rights may not receive the same
degree of protection in foreign countries as they would in the United States. We also cannot assure you that our trademark
and service mark applications will be approved. In addition, third parties may oppose our trademark and service mark
applications, or otherwise challenge our use of the trademarks or service marks. In the event that our trademarks or service
marks are successfully challenged, we could be forced to rebrand our products and services, which could result in loss of
brand recognition, and could require us to devote resources advertising and marketing new brands. Further, we cannot assure
you that competitors will not infringe our marks, or that we will have adequate resources to enforce our trademarks or service
marks.
We also license third party franchisees and other licensees to use our trademarks and service marks. We enter into
franchise agreements with our franchisees and license agreements with other licensees which govern the use of our trademarks
and service marks. Although we make efforts to police the use of our trademarks and service marks by our franchisees and
other licensees, we cannot assure you that these efforts will be sufficient to ensure that our franchisees and other licensees
abide by the terms of the trademark licenses. In the event that our franchisees fail to do so, our trademark and service mark
rights could be diluted.
Our earnings and business growth strategy depends in large part on the success of our restaurant franchisees
and on new restaurant openings. Our corporate reputation or brand reputation may be harmed by actions taken by
restaurant franchisees that are otherwise outside of our control.
A significant portion of our earnings comes from royalties, fees and other amounts paid by our restaurant franchisees.
The opening and success of franchised restaurants depends on various factors, including the demand for our franchises and
the selection of appropriate franchisee candidates, the availability of suitable restaurant sites, the negotiation of acceptable
lease or purchase terms for new locations, permitting and regulatory compliance, the ability to meet construction schedules,
20
the availability of financing and the financial and other capabilities of our franchisees and area developers. We cannot assure
you that area developers planning the opening of franchised restaurants will have the business abilities or sufficient access to
financial resources necessary to open the restaurants required by their agreements. We cannot assure you that franchisees
will successfully participate in our strategic initiatives or operate their restaurants in a manner consistent with our concept
and standards. Our franchisees are independent contractors, and their employees are not our employees. We provide training
and support to, and monitor the operations of, our franchisees, but the quality of their restaurant operations may be diminished
by any number of factors beyond our control. Consequently, the franchisees may not successfully operate their restaurants in
a manner consistent with our high standards and requirements, and franchisees may not hire and train qualified managers and
other restaurant personnel. Any operational shortcoming of a franchised restaurant is likely to be attributed by consumers to
an entire brand or our system, thus damaging our corporate or brand reputation, potentially adversely affecting our business,
results of operations and financial condition.
Growth in our restaurant revenue and earnings is significantly dependent on new restaurant openings. Numerous
factors beyond our control may affect restaurant openings. These factors include but are not limited to:
(cid:404) our ability to attract new franchisees;
(cid:404) the availability of site locations for new restaurants;
(cid:404) the ability of potential restaurant owners to obtain financing, which has become more difficult due to current
market conditions and operating results;
(cid:404) the ability of restaurant owners to hire, train and retain qualified operating personnel;
(cid:404) construction and development costs of new restaurants, particularly in highly-competitive markets;
(cid:404) the ability of restaurant owners to secure required governmental approvals and permits in a timely manner, or at
all; and
(cid:404) adverse weather conditions.
We cannot assure you that franchisees will renew their franchise agreements or that franchised restaurants will
remain open. Closings of franchised restaurants are expected in the ordinary course and may cause our royalty revenues and
financial performance to decline. Our principal competitors may have greater influence over their respective restaurant
systems than we do because of their significantly higher percentage of company restaurants and/or ownership of franchisee
real estate and, as a result, may have a greater ability to implement operational initiatives and business strategies, including
their marketing and advertising programs.
As our franchisees are independent operators, we have limited influence over their ability to invest in other
businesses or incur excessive indebtedness. Some of our franchisees have invested in other businesses, including other
restaurant concepts. Such franchisees may use the cash generated by their Nathan’s restaurants to expand their other
businesses or to subsidize losses incurred by such businesses. Additionally, as independent operators, franchisees do not
require our consent to incur indebtedness. Consequently, our franchisees have in the past, and may in the future, experience
financial distress as a result of over-leveraging. To the extent that our franchisees use the cash from their Nathan’s restaurants
to subsidize their other businesses or experience financial distress, due to over-leveraging, delayed or reduced payments of
royalties, advertising fund contributions and rents for properties we lease to them, or otherwise, it could have a material
adverse effect on our business, financial condition, results of operations and prospects, as well as our ability to satisfy our
obligations under the Notes. In addition, lenders to our franchisees may be less likely to provide current or prospective
franchisees necessary financing on favorable terms, or at all, due to current market conditions and operating results.
Changes in franchise regulation laws could impact our ability to obtain or retain licenses or approvals and
adversely affect our business, financial condition, results of operations and prospects.
We are also subject to federal statutes and regulations, including the rules promulgated by the U.S. Federal Trade
Commission, as well as certain state laws governing the offer and sale of franchises. Many state franchise laws impose
substantive requirements on franchise agreements, including limitations on non-competition provisions and on provisions
concerning the termination or non-renewal of a franchise. Some states require that certain materials be filed for a franchisor
to be registered and approved, before franchises can be offered or sold in that state. The failure to obtain or retain licenses or
approvals to sell franchises could have a material adverse effect on our business, financial condition, results of operations
and prospects, as well as our ability to satisfy our obligations under the Notes.
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We rely on the performance of major retailers, wholesalers, specialty distributors and mass merchants for the
success of our business, and should they perform poorly or give higher priority to other brands or products, our business
could be adversely affected.
We sell our products to retail outlets and wholesale distributors including, traditional supermarkets, mass
merchandisers, warehouse clubs, wholesalers, food service distributors and convenience stores. The replacement by or poor
performance of our major wholesalers, retailers or chains or our inability to collect accounts receivable from our customers
could materially and adversely affect our results of operations and financial condition. In addition, our customers offer
branded and private label products that compete directly with our products for retail shelf space and consumer purchases.
Accordingly, there is a risk that our customers may give higher priority to their own products or to the products of our
competitors. In the future, our customers may not continue to purchase our products or provide our products with adequate
levels of promotional support.
The sophistication and buying power of our customers could have a negative impact on profits.
Our customers, such as supermarkets, warehouse clubs, and food distributors, have continued to consolidate,
resulting in fewer customers with which to do business. These consolidations and the growth of supercenters have produced
large, sophisticated customers with increased buying power and negotiating strength who are more capable of resisting price
increases and can demand lower pricing, increased promotional programs, or specialty tailored products. In addition, larger
retailers have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and
market their own retailer brands. If the larger size of these customers results in additional negotiating strength and/or increased
private label or store brand competition, our profitability could decline.
Consolidation also increases the risk that adverse changes in our customers’ business operations or financial
performance will have a corresponding material adverse effect on us. For example, if our customers cannot access sufficient
funds or financing, then they may delay, decrease, or cancel purchases of our products, or delay or fail to pay us for previous
purchases.
Failure by third-party manufacturers or suppliers of raw materials to comply with food safety, environmental or
other regulations may disrupt our supply of certain products and adversely affect our business.
We rely on third-party manufacturers to produce our products and on other suppliers to supply raw materials. Such
manufacturers and other suppliers, whether in the United States or outside the United States, are subject to a number of
regulations, including food safety and environmental regulations. Failure by any of our manufacturers or other suppliers to
comply with regulations, or allegations of compliance failure, may disrupt their operations. Disruption of the operations of a
manufacturer or other suppliers could disrupt our supply of product or raw materials, which could have an adverse effect on
our business, consolidated financial condition, results of operations or liquidity. Additionally, actions we may take to mitigate
the impact of any such disruption or potential disruption, including increasing inventory in anticipation of a potential
production or supply interruption, may adversely affect our business, consolidated financial condition, results of operations
or liquidity.
Leasing of real estate exposes us to possible liabilities and losses.
We lease land and/or buildings for certain restaurants, which can include the sub-letting of leased land and or
buildings to franchisees or companies other than our franchisees. Accordingly, we are subject to all of the risks associated
with owning, leasing and sub-leasing real estate. We generally cannot cancel these leases. If an existing or future store is not
profitable, and we decide to close it, we may nonetheless be committed to perform the obligations under the applicable lease
including, among other things, paying the base rent for the balance of the lease term. In addition, as each of the leases expires,
we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close stores in
desirable locations.
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We may evaluate acquisitions, joint ventures and other strategic initiatives, any of which could distract
management or otherwise have a negative effect on revenue, costs and stock price.
Our future success may depend on opportunities to buy or obtain rights to other businesses that could complement,
enhance or expand our current business or products or that might otherwise offer growth opportunities. In particular, we may
evaluate potential mergers, acquisitions, joint venture investments, strategic initiatives, alliances, vertical integration
opportunities and divestitures. We have no commitments, agreements or understandings with respect to any of such
transactions. In addition, our ability to engage in these transactions may be impacted by the incurrence of debt as a result of
our sale of the Notes. Any attempt by us to engage in these transactions may expose us to various inherent risks, including:
(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.
Our annual and quarterly financial results may fluctuate depending on various factors, many of which are
beyond our control, and, if we fail to meet the expectations of investors, our share price may decline.
Our sales and operating results can vary from quarter to quarter and year to year depending on various factors, many
of which are beyond our control. Certain events and factors may directly and immediately decrease demand for our products.
These events and factors include:
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;
(cid:404)
(cid:404)
(cid:404) variations in the price, availability and shipping costs of supplies;
(cid:404)
seasonal effects on demand for Nathan’s products;
(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.
Our operations are influenced by adverse weather conditions.
Weather, which is unpredictable, can impact our sales. Harsh weather conditions that keep customers from dining
out result in lost opportunities for our and our franchisees’ restaurants. A heavy snowstorm or a tropical storm or hurricane
in the Northeast can shut down an entire metropolitan area, resulting in a reduction in sales in that area at Company-owned
and franchised restaurants. For instance, Superstorm Sandy forced the temporary closing of all of our Company-owned
restaurants. Our flagship Coney Island restaurant and our 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, 78 franchised restaurants including 18
BMP locations were closed for varying periods of time, one of which has not re-opened. Our fourth quarter includes winter
months and historically has a lower level of sales at Company-owned and franchised restaurants. Restaurant sales were
significantly impacted due to the harsh winter weather experienced during the fourth quarters of the fiscal 2015 period and
the fiscal 2014 period. Additionally, our Company-owned restaurants at Coney Island are heavily dependent on favorable
weather conditions during the summer season. Rain during the weekends and/or unseasonably cold temperatures will
negatively impact the number of patrons going to the Coney Island beach locations. Because a significant portion of our
restaurant operating costs is fixed or semi-fixed in nature, the loss of sales during these periods hurts our operating margins,
and can result in restaurant operating losses. For these reasons, a quarter-to-quarter comparison may not be a good indication
of our performance or how it may perform in the future.
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Due to the concentration of our restaurants in particular geographic regions, our business results could be
impacted by the adverse economic conditions prevailing in those regions regardless of the state of the national economy
as a whole.
As of March 29, 2015, we and our franchisees (including units operated pursuant to our BMP) operated Nathan’s
restaurants in 27 states, the Cayman Islands, and ten foreign countries. As of March 29, 2015, the highest concentration of
operating units was in the Northeast, principally in New York and New Jersey. This geographic concentration in the Northeast
can cause economic conditions in particular areas of the country to have a disproportionate impact on our overall results of
operations. It is possible that adverse economic conditions in states or regions that contain a high concentration of Nathan’s
restaurants could have a material adverse impact on our 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 our 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 our operations, disrupt the operations of
franchisees, suppliers or customers, or result in political or economic instability. These events could negatively impact
consumer spending, thereby reducing demand for our products, or the ability to receive products from suppliers. We do not
have insurance policies that insure against certain of these risks. To the extent that we do maintain insurance with respect to
some of these risks, our receipt of the proceeds of such policies may be delayed or the proceeds may be insufficient to offset
our losses fully.
Our international operations are subject to various factors of uncertainty.
Our business outside of the United States is subject to a number of additional factors, including international
economic and political conditions, differing cultures and consumer preferences, currency regulations and fluctuations, diverse
government regulations and tax systems, uncertain or differing interpretations of rights and obligations in connection with
international franchise agreements and the collection of royalties from international franchisees, the availability and cost of
24
land and construction costs, and the availability of appropriate franchisees. In developing markets, we may face risks
associated with new and untested laws and judicial systems. Although we believe we have developed the support structure
required for international growth, there is no assurance that such growth will occur or that international operations will be
profitable.
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 2015 period and the fiscal 2014 period, the market price for hot dogs increased 17.1%
and 7.5%, respectively compared to the fiscal years ended March 30, 2014 and the fiscal year ended March 31, 2013,
respectively. As the price of beef or other food products that we use in our operations increases significantly, particularly in
the BPP, 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.
We have sought to lock in the cost of a portion of our beef purchases by entering into various commitments to
purchase hot dogs during certain periods in an effort to ensure supply of product at a fixed cost of product. However, we may
be unable to enter into similar purchase commitments in the future. In addition, we do not have the ability to effectively hedge
all of our beef purchases using futures or forward contracts without incurring undue financial cost and risk.
Our business operations and future development could be significantly disrupted if we lose key members of our
management team.
The success of our business continues to depend to a significant degree upon the continued contributions of our
senior officers and key employees, both individually and as a group. Our future performance will be substantially dependent,
in particular, on our ability to retain and motivate our executive officers, for certain of whom we currently have employment
agreements in place. The loss of the services of any of our executive officers could have a material adverse effect on our
business, financial condition, results of operations and prospects, as well as our ability to satisfy our obligations under the
Notes. If we lose the services of any of these individuals in the foreseeable future; however, we currently have no effective
replacement for any of these individuals due to their experience, reputation in the industry and special role in our operations.
Labor shortages or increases in labor costs could slow our growth or harm our business.
Our success depends in part upon our ability and the ability of our franchisees to continue to attract, motivate and
retain regional operational and restaurant general managers with the qualifications to succeed in our industry and the
motivation to apply our core service philosophy. If we or our franchisees are unable to continue to recruit and retain
sufficiently qualified managers or to motivate our employees to achieve sustained high service levels, our business and our
growth could be adversely affected. Competition for these employees could require the payment of higher wages that could
result in higher labor costs.
We must comply with the Fair Labor Standards Act and various federal and state laws governing minimum wages.
Increases in the minimum wage or labor regulation could increase labor costs. The state of New York approved legislation
which increased the minimum wage beginning December 31, 2013, December 31, 2014 and December 31, 2015. The impact
of the New York minimum wage increases on our business amounted to a 4.6% average salary increase in 2014 and amounts
to a 6.9% average salary increase in 2015 for our employees that are affected. Mayor DeBlasio, of the City of New York, has
stated that New York City should increase its minimum wage to $15.00 per hour. In addition, voters in the state of New
Jersey voted to increase the minimum wage in the 2013 general election, and the federal government and a number of other
states are evaluating various proposals to increase their respective minimum wage. As minimum wage rates increase, we may
need to increase not only the wages of our minimum wage employees but also the wages paid to employees at wage rates
that are above minimum wage. In addition, effective April 1, 2014, the City of New York passed legislation extending paid
25
sick leave to all employees, including part-time employees which potentially will increase our labor costs in three of our
Company-operated restaurants. We may not be able to anticipate and react to changing costs by adjusting our purchasing
practices and prices to sufficiently account for increased wage costs. We may be unable to increase our prices in order to pass
these increased labor costs on to our customers, in which case our margins and our franchisees’ margins would be negatively
affected. In the event that franchisees’ margins are adversely affected, it may affect our ability to attract new franchisees
which would adversely affect our business, results of operations and financial condition.
A recent ruling and complaint filed by the general counsel of the National Labor Relations Board could, if
upheld, make us liable for violations of overtime, wage or union-organization violations by our franchisees.
On July 29, 2014, the general counsel of the National Labor Relations Board ruled that McDonald’s Corp. could be
held jointly liable for labor and wage violations by its franchise operations. Subsequently on December 19, 2014, the National
Labor Relations Board issued complaints naming McDonald’s Corp. as a “joint employer” at its franchisees. While we believe
McDonald’s Corp. will seek to dismiss these complaints, to the extent that the complaints are not dismissed and the National
Labor Relations Board prevails in litigation and is deemed applicable to other businesses with a significant number of
franchises, such as Nathan’s, we could be held partly liable in cases of overtime, wage or union-organizing violations. By
making us partly liable, the complaints, if upheld and ultimately applied to Nathan’s, could among other things give
employees of our franchisee’s restaurants and labor unions leverage to make it easier to unionize employees at these
restaurants and to request that we have our franchisees raise wages. Unionization and a significant increase in wages at our
franchisees could make it more difficult to operate a Nathan’s franchised restaurant. A decrease in profitability at our
franchisee’s restaurants or the closing of a significant number of franchised restaurants could significantly impact our
business, and our business could also be significantly impacted if the National Labor Relations Board seeks to bring a
successful action against us as a “joint employer” and our liability for labor and wage violations increases.
We face risks of litigation and pressure tactics, such as strikes, boycotts and negative publicity from customers,
franchisees, suppliers, employees and others, which could divert our financial, and management resources and which
may negatively impact our financial condition and results of operations.
Class action lawsuits have been filed, and may continue to be filed, against various quick-service restaurants
alleging, among other things, that quick-service restaurants have failed to disclose the health risks associated with high-fat
foods and that quick-service restaurant marketing practices have targeted children and encouraged obesity. In addition, we
face the risk of lawsuits and negative publicity resulting from injuries, including injuries to infants and children, allegedly
caused by our products, toys and other promotional items available in our restaurants or by our playground equipment.
In addition to decreasing our sales and profitability and diverting our management resources, adverse publicity or a
substantial judgment against us could negatively impact our business, results of operations, financial condition and brand
reputation, hindering our ability to attract and retain franchisees, expand our BPP and otherwise grow our business in the
United States and internationally.
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.
General regulation of the restaurant industry could adversely impact our business, financial condition, results of
operations and prospects.
The restaurant industry is subject to extensive federal, state and local governmental regulations, including those
relating to the preparation and sale of food and those relating to building and zoning requirements. In recent years, there has
been an increased legislative, regulatory and consumer focus on nutrition and advertising practices in the food industry,
particularly among restaurants. This focus has resulted in, and may continue to result in, the enactment of laws and regulations
26
that impact the ingredients and nutritional content of our menu offerings. For example, a number of states, counties and cities
have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information available
to customers, or have enacted legislation restricting the use of certain types of ingredients in restaurants. Furthermore, the
2010 Patient Protection and Affordable Care Act (“PPACA”) establishes a uniform, federal requirement for certain
restaurants to post nutritional information on their menus. Specifically, the PPACA amended the Federal Food, Drug and
Cosmetic Act to require chain restaurants with 20 or more locations operating under the same name and offering substantially
the same menus to publish the total number of calories of standard menu items on menus and menu boards, along with a
statement that puts this calorie information in the context of a total daily calorie intake. The PPACA also requires covered
restaurants to provide to consumers, upon request, a written summary of detailed nutritional information for each standard
menu item, and to provide a statement on menus and menu boards about the availability of this information.
The PPACA further permits the United States Food and Drug Administration (the “FDA”) to require covered
restaurants to make additional nutrient disclosures, such as disclosure of trans fat content. On November 25, 2014, the FDA
announced its final rules for nationwide nutritional labeling on menus of establishments with at least 20 locations, as well as
food trucks, vending machines, movie theaters, pizza parlors, amusement parks, grocery stores and anywhere else where
ready-to-eat meals are sold. The nutritional labeling rules require establishments to post calorie counts on all menu items,
calorie boards and drive-thru displays throughout the United States. Businesses affected by the new regulations have one
year to comply. Compliance with current and future laws and regulations regarding the ingredients and nutritional content of
our menu items may be costly and time-consuming.
An unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of
our menu items could negatively influence the demand for our offerings. Additionally, if consumer health regulations or
consumer eating habits change significantly, we may be required to modify or discontinue certain menu items, and we may
experience higher costs associated with the implementation of those changes. Additionally, some government authorities are
increasing regulations regarding trans fats and sodium, which may require us to limit or eliminate trans fats and sodium from
our menu offerings, switch to higher cost ingredients or may hinder our ability to operate in certain markets. Failure to comply
with these laws or regulations could have a material adverse effect on our business, financial condition, results of operations
and prospects.
We cannot make any assurances regarding our ability to effectively respond to changes in consumer health
perceptions or our ability to successfully implement the nutrient content disclosure requirements and to adapt our menu
offerings to trends in eating habits. The imposition of menu-labeling laws could have an adverse effect on our results of
operations and financial position, as well as the restaurant industry in general.
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.
27
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. Our workforce includes numerous part-time workers, which may increase our health care costs and expose
us to certain excise taxes, in the event that healthcare is offered to less than 95% of our full-time employees, as defined by
the legislation. Additionally, some states and localities have passed state and local laws mandating the provision of certain
levels of health benefits by some employers. Increased health care costs could have a material adverse effect on our business,
financial condition and results of operations.
Changes in tax laws and unfavorable resolution of tax contingencies could adversely affect our tax expense.
Our future effective tax rates could be adversely affected by changes in tax laws, both domestically and
internationally. From time to time, the United States Congress and foreign, state and local governments consider legislation
that could increase our effective tax rates. If changes to applicable tax laws are enacted, our results of operations could be
negatively impacted. Our tax returns and positions (including positions regarding jurisdictional authority of foreign
governments to impose tax) are subject to review and audit by federal, state, local and international taxing authorities. An
unfavorable outcome to a tax audit could result in higher tax expense, thereby negatively impacting our results of operations.
Risks Related to the Notes
Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our
obligations under the Notes and our other debt.
As of March 29, 2015, we had $135.0 million of indebtedness under the Senior Secured Notes. Our substantial
indebtedness could have important consequences to you. For example, it could:
increase our vulnerability to general adverse economic and industry conditions;
(cid:404)
(cid:404) make it more difficult for us to satisfy our other financial obligations, including our obligations relating to the
(cid:404)
(cid:404)
Notes;
restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness,
thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general
corporate purposes;
(cid:404) make it more difficult for us to satisfy our obligations to our lenders, resulting in possible defaults on and
acceleration of such indebtedness;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
(cid:404)
(cid:404) place us at a competitive disadvantage compared to our competitors that have less debt; and
(cid:404)
limit our ability to borrow additional funds or increase our cost of borrowing.
Moreover, because of the interest payments we are required to make in future periods, our net income will be
significantly negatively impacted compared to our reported net income in the fiscal 2015 period and prior periods. As we
entered into the indenture on March 10, 2015 we were only required to accrue interest expense for 20 days during the fiscal
2015 period but for the fiscal year ended March 28, 2016 and in future fiscal years we will be required to accrue interest
expense for the entire fiscal year. The impact of interest expense on net income will first be significantly reflected in our
quarterly results for the period ended June 28, 2015.
In addition, the terms of the indenture governing the Notes contain restrictive covenants that limit our ability to
engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an
event of default which, if not cured or waived, could result in the acceleration of all of our debts, including the Notes. The
occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of
operations, prospects or ability to satisfy our obligations under the Notes.
Despite our current indebtedness level, we may still be able to incur significant additional amounts of debt, which
could further exacerbate the risks associated with our substantial indebtedness.
We may be able to incur substantial additional indebtedness, including additional Notes and other secured
indebtedness, in the future. Although the indenture governing the Notes will contain restrictions on the incurrence of
additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under
certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be
28
substantial. If new debt is added to our existing debt levels, the related risks that we face would intensify and we may not be
able to meet all our debt obligations, including the repayment of the Notes. In addition, the indenture governing the Notes
will not prevent us from incurring obligations that do not constitute indebtedness under the indenture.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends
on many factors beyond our control. As such, we may not be able to generate sufficient cash to service the Notes or our
other indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may
not be successful.
Our ability to make payments on and to refinance our indebtedness, including the Notes, to fund planned capital
expenditures and to maintain sufficient working capital will depend on our ability to generate cash in the future. This, to a
certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond
our control.
We cannot assure you that our business will generate sufficient cash flow from operations or future borrowings from
other sources in an amount sufficient to enable us to service our indebtedness, including the Notes, or to fund our other
liquidity needs. If our cash flows and capital resources are insufficient to allow us to make scheduled payments on our
indebtedness, we may need to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or
refinance all or a portion of our indebtedness, including the Notes, on or before the maturity thereof, any of which could have
a material adverse effect on our operations. We cannot assure you that we will be able to refinance any of our indebtedness,
including the Notes, on commercially reasonable terms or at all, or that the terms of that indebtedness will allow any of the
above alternative measures or that these measures would satisfy our scheduled debt service obligations. If we are unable to
generate sufficient cash flow to repay or refinance our debt on favorable terms, it could significantly adversely affect our
financial condition, the value of our outstanding debt, including the Notes offered hereby, and our ability to make any required
cash payments under our indebtedness, including the Notes. Our ability to restructure or refinance our debt will depend on
the condition of the capital markets and our financial condition at that time. Any refinancing of our debt could be at higher
interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.
In addition, any future credit facility may be secured by a priority lien on substantially all of our assets. As such, our ability
to refinance the Notes or seek additional financing could be impaired as a result of such security interest.
We are subject to a number of restrictive covenants, which may restrict our business and financing activities.
The indenture governing the Notes will impose, and the terms of any future indebtedness may impose, operating
and other restrictions on us. Such restrictions will affect, and in many respects limit or prohibit, among other things, our
ability to:
(cid:404) incur or guarantee additional indebtedness or issue certain preferred stock;
(cid:404) pay dividends on or make distributions in respect of our equity interests;
(cid:404) redeem, repurchase or retire our equity interests, unsecured indebtedness or subordinated indebtedness;
(cid:404) make certain investments;
(cid:404) transfer or sell assets;
(cid:404) create or incur certain liens;
(cid:404) create restrictions on the ability of our subsidiaries to pay dividends or make other payments to us;
(cid:404) merge or consolidate with other companies or sell, transfer or otherwise dispose of all or substantially all of our
and our restricted subsidiaries’ assets;
(cid:404) engage in certain transactions with our affiliates; and
(cid:404) designate our subsidiaries as unrestricted subsidiaries.
The restrictions in the indenture governing the Notes may prevent us from taking actions that we believe would be
in the best interests of our business, and may make it difficult for us to successfully execute our business strategy or effectively
compete with companies that are not similarly restricted. We also may incur future debt obligations that might subject us to
additional restrictive covenants that could affect our financial and operational flexibility. Our ability to comply with these
covenants in future periods will largely depend on the pricing of our products and services, and our ability to successfully
implement our overall business strategy. We cannot assure you that we will be granted waivers or amendments to these
agreements if for any reason we are unable to comply with these agreements. The breach of any of these covenants and
restrictions could result in a default under the indenture governing the Notes, which could result in an acceleration of our
indebtedness.
29
Item 1B.
Unresolved Staff Comments.
None.
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 29, 2015, 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)
April 2030 (b)
December 2023
Approximate
Square Footage
10,000
3,800
4,100
3,500
(a)
(b)
Seasonal satellite location.
Reflects the relocated restaurant that opened on March 25, 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 29, 2015, in addition to the leases listed above, we were the sub-lessor of two 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 $1,617,000 in fiscal 2015.
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.
30
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 without adjustment for the special
dividend described below:
Fiscal year ended March 29, 2015
First quarter ...................................................................................................................... $
Second quarter ..................................................................................................................
Third quarter ....................................................................................................................
Fourth quarter ...................................................................................................................
Fiscal year ended March 30, 2014
First quarter ...................................................................................................................... $
Second quarter ..................................................................................................................
Third quarter ....................................................................................................................
Fourth quarter ...................................................................................................................
High
Low
56.93 $
65.98
79.22
82.26
54.00 $
61.13
53.95
51.09
48.31
49.71
66.25
71.63
42.45
48.99
48.23
47.61
At June 9, 2015, the closing price per share for our common stock, as reported by NASDAQ, was $40.52.
On March 10, 2015, Nathan’s declared a special dividend of $25.00 per share. The record date was March 20, 2015
and the payment date was March 27, 2015. Pursuant to NASDAQ rules, March 31, 2015, was the ex-dividend date for
Nathans’ $25.00 per share special dividend because the total amount of the dividend was greater than 25% of the Company’s
market capitalization. The closing sales prices listed above represent the actual closing prices and have not been adjusted to
reflect the special dividend.
31
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
On March 10, 2015, Nathan’s declared a special dividend of $25.00 per share which was paid on March 27, 2015.
We do not anticipate that we will pay any cash dividends in the foreseeable future and our ability to pay future dividends is
limited by the terms of the indenture with US Bank National Association, as trustee and collateral trustee. Previously, we had
not declared or paid a regular cash dividend on our common stock since our initial public offering. It has been the Board of
Directors’ policy to return capital to our shareholders primarily through the purchase of 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 9, 2015, we had approximately 550 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 ended March 29, 2015, the Company has not repurchased any shares of common stock. For
the fiscal year ended March 29, 2015, the Company purchased 37,661 shares of common stock at a cost of $1,916,000. Since
the commencement of the Company’s stock buyback program in September 2001 through March 29, 2015, Nathan’s has
purchased a total of 4,647,687 shares of common stock at a cost of approximately $56,800,000 under all of its stock
repurchase programs and the modified dutch tender offer, which includes the shares purchased during the fiscal year ended
March 29, 2015.
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 29, 2015, Nathan’s has
repurchased 548,728 shares at a cost of $13,194,000 under the sixth stock repurchase plan. At March 29, 2015, there were
251,272 shares remaining to be repurchased pursuant to the sixth stock repurchase plan. The plan does not have a set
expiration date. Purchases under the Company’s stock repurchase program may be made from time to time, depending on
market conditions, in open market or privately-negotiated transactions, at prices deemed appropriate by management. There
is no set time limit on the repurchases.
32
Item 6.
Selected Financial Data.
March 29,
2015
March 30,
2014
Fiscal years ended (1)
March 31,
2013
(In thousands, except per share amounts)
March 25,
2012
March 27,
2011
Statement of Earnings Data:
Revenues:
Sales (3) .................................................................... $
License royalties .......................................................
Franchise fees and royalties ......................................
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 ......................
Total costs and expenses ...........................................
75,520 $
18,011
5,581
99,112
61,951
3,747
1,253
12,203
-
-
79,154
65,521 $
8,513
5,718
79,752
53,072
3,142
1,157
11,460
-
-
68,831
56,656 $
8,571
5,842
71,069
44,874
2,700
940
10,437
-
-
58,951
52,369 $
7,526
5,646
65,541
42,106
3,115
965
9,552
-
-
55,738
44,634
6,718
5,058
56,410
34,567
3,092
915
10,125
4,910
263
53,872
Income from operations ............................................
19,958
10,921
12,118
9,803
2,538
Interest expense .........................................................
Interest and other income, net ...................................
Insurance gain ...........................................................
Impairment charge long-term investment .................
Income before provision for income taxes ....................
Provision for income taxes ............................................
Net income (3) .......................................................... $
(816)
263
-
-
19,405
7,702
11,703 $
(135)
401
2,774
(400)
13,561
5,234
8,327 $
(453)
474
-
-
12,139
4,671
7,468 $
(477)
681
-
-
10,007
3,849
6,158 $
Income per share:
Basic (3) ................................................................ $
Diluted (3) ............................................................. $
2.61 $
2.55 $
1.87 $
1.81 $
1.70 $
1.63 $
1.26 $
1.22 $
Dividends declared per share ........................................ $
Dividends declared total ................................................ $
Weighted average shares used in computing net
income per share
Basic .........................................................................
Diluted ......................................................................
Balance Sheet Data at End of Fiscal Year:
25.00 $
116,110 $
- $
- $
- $
- $
- $
- $
4,486
4,588
4,450
4,605
4,400
4,588
4,906
5,049
5,403
5,504
Working capital ......................................................... $
Total assets ................................................................ $
Long-term debt, net (4) ............................................. $
Stockholders’ (deficit) equity .................................... $
61,605 $
84,666 $
129,140 $
(59,908) $
35,378 $
56,135 $
- $
43,897 $
27,525 $
49,662 $
- $
34,148 $
21,989 $
44,520 $
- $
28,837 $
31,454
52,958
-
38,078
Supplemental Non-GAAP information (5):
EBITDA (6) .............................................................. $
Adjusted EBITDA (7) ............................................... $
21,474 $
22,497 $
14,853 $
13,350 $
13,532 $
14,289 $
11,449 $
11,916 $
4,298
10,024
Selected Restaurant Operating Data:
Company-owned restaurant sales (3) ............................ $
15,874 $
13,231 $
13,403 $
13,209 $
13,007
Number of Units Open at End of Fiscal Year:
Company-owned restaurants (8) ...............................
Franchised .................................................................
5
296
5
324
5
303
5
299
5
264
33
(63)
845
-
-
3,320
1,107
2,213
0.41
0.40
-
-
Notes to Selected Financial Data
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Our fiscal year ends on the last Sunday in March, which results in a 52- or 53-week year. The fiscal years ended
March 29, 2015, March 30, 2014, March 25, 2012 and March 27, 2011 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 29, 2015, 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.
Represents $135.0 million outstanding debt net of unamortized debt discounts and issuance costs of $5,860 at
March 29, 2015.
The Company has provided EBITDA and Adjusted EBITDA that the Company believes will impact the
comparability of its results of operations. The Company believes that EBITDA and Adjusted EBITDA are useful to
investors to assist in assessing and understanding the Company's operating performance and underlying trends in the
Company's business because EBITDA and Adjusted EBITDA are (i) among the measures used by management in
evaluating performance and (ii) are frequently used by securities analysts, investors and other interested parties as a
common performance measure. EBITDA and Adjusted EBITDA are not recognized terms under US GAAP and
should not be viewed as alternatives to net income (loss) or other measures of financial performance or liquidity in
conformity with US GAAP. Additionally, our definitions of EBITDA and Adjusted EBITDA may differ from other
companies. Analysis of results and outlook on a non-US GAAP basis should be used as a complement to, and in
conjunction with, data presented in accordance with US GAAP.
EBITDA represents net income adjusted for the reversal of (1) interest expense; (2) provision for income taxes and
(3) depreciation and amortization expense.
Adjusted EBITDA represents EBITDA adjusted for the reversal of (1) share-based compensation; (2) amortization
of bond premium on available-for-sale securities; (3) insurance gain and impairment charge on long-term investment
in fiscal 2014 and (4) litigation accrual and impairment charge on note receivable in fiscal 2011.
(8)
Included the Coney Island and Yonkers restaurants that were being re-developed on March 31, 2013.
Reconciliation of GAAP and Non-GAAP Measures
The following is provided to supplement certain Non-GAAP financial measures discussed in the Selected Financial
Data presented above.
In addition to disclosing results that are determined in accordance with Generally Accepted Accounting Principles
in the United States of America ("US GAAP"), the Company has provided EBITDA excluding (i) interest expense; (ii)
provision for income taxes and (iii) depreciation and amortization expense. The Company has also provided Adjusted
EBITDA excluding (i) stock-based compensation; (ii) amortization of bond premium on the Company's available-for sale
investments; (iii) insurance gain and (iv) impairment charge on long-term investment that the Company believes will impact
the comparability of its results of operations.
The Company believes that EBITDA and Adjusted EBITDA are useful to investors to assist in assessing and
understanding the Company's operating performance and underlying trends in the Company's business because EBITDA and
Adjusted EBITDA are (i) among the measures used by management in evaluating performance and (ii) are frequently used
by securities analysts, investors and other interested parties as a common performance measure.
EBITDA and Adjusted EBITDA are not recognized terms under US GAAP and should not be viewed as alternatives
to net income (loss) or other measures of financial performance or liquidity in conformity with GAAP. Additionally, our
definitions of EBITDA and Adjusted EBITDA may differ from other companies. Analysis of results and outlook on a non-
US GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with US GAAP.
34
(In thousands)
2015
2014
Fiscal Year (1)
2013
2012
2011
Net income ..........................................................
Interest expense ....................................................
Income taxes ........................................................
Depreciation & amortization ................................
11,703
816
7,702
1,253
8,327
135
5,234
1,157
7,468
453
4,671
940
6,158
477
3,849
965
2,213
63
1,107
915
EBITDA ...............................
21,474
14,853
13,532
11,449
4,298
Insurance gain ......................................................
Litigation accrual .................................................
Impairment charge note receivable ......................
Impairment charge long-term investments ...........
Amortization of bond premium ............................
Stock-based compensation ...................................
0
0
0
0
164
859
(2,774)
0
0
400
150
721
0
0
0
0
130
627
0
0
0
0
193
274
0
4,910
263
0
267
286
ADJUSTED EBITDA ..................
22,497
13,350
14,289
11,916
10,024
(1) Our fiscal year ends on the last Sunday in March which results in a 52- 53-week year. The fiscal years ended March 29,
2015, 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.
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.
35
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.
The following summary reflects the franchise openings and closings of the Nathan’s franchise system for the fiscal
years ended March 29, 2015, March 30, 2014, March 31, 2013, March 25, 2012 and March 27, 2011.
March 29,
2015
March 30,
2014
March 31,
2013
March 25,
2012
March 27,
2011
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
324
36
(64)
303
56
(35)
299
40
(36)
264
67
(32)
period ...............................................................
296
324
303
299
246
40
(22)
264
At March 29, 2015, our franchise system consisted of 296 Nathan’s franchised units located in 27 states, the Cayman
Islands, and ten 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 29,
2015, 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 and our future operating results could be negatively impacted if we do not continue
to increase our license revenue under the John Morrell Agreement and achieve cost savings. There are also certain risks
associated with engaging John Morrell & Co. as exclusive licensee including whether (i) we can maintain or improve the
quality and 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.
On March 10, 2015, we consummated a $135 million offering of 10.000% Senior Secured Notes and paid a dividend
of $25.00 per share (or approximately $116 million in the aggregate). Our future results could also be impacted by our
obligations under the Senior Secured Notes. As a result of the issuance of the 10.000% Senior Secured Notes, Nathan’s
expects to incur interest expense of $13.5 million per annum and annual amortization of debt issuance costs of $1,185,000.
The Indenture governing The Notes will impose operating and other restrictions on us.
Moreover, because of the interest payments we are required to make in future periods, our net income will be
significantly negatively impacted compared to our reported net income in the fiscal 2015 period and prior periods. As we
entered into the indenture on March 10, 2015 we were only required to accrue interest expense for 20 days during the fiscal
2015 period but for the fiscal year ended March 28, 2016 and in future fiscal years we will be required to accrue interest
expense for the entire fiscal year. The impact of interest expense on net income will first be significantly reflected in our
quarterly results for the period ended June 28, 2015.
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.
36
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.
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
uncollectible amounts, when all material services or conditions to the sale have been substantially performed by the
franchisor. If substantial obligations under the development agreement are not dependent on the number of individual
franchise locations to be opened, substantial performance shall be determined using the same criteria applicable to an
individual franchise, which is generally the opening of the first location pursuant to the development agreement. If substantial
performance is dependent on the number of locations, then the development fee is deferred and recognized ratably over the
term of the agreement, as restaurants in the development area commence operations on a pro rata basis to the minimum
number of restaurants required to be open, or at the time the development agreement is effectively canceled.
Nathan’s recognizes franchise royalties on a monthly basis, which are generally based upon a percentage of sales
made by Nathan’s franchisees, when they 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 collectibility 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 collectible.
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
37
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.
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 29, 2015, March 30, 2014 and March 31, 2013.
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 a 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 29, 2015, March 30, 2014 and March 31, 2013.
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-two week period ended March 29, 2015 or during the
fifty-three week period ended March 31, 2013.
Stock-Based Compensation
As discussed in Note L of the Notes to Consolidated Financial Statements, we have one active share-based
compensation plan that provides stock options and restricted stock awards for certain employees and non-employee directors
to acquire shares of our common stock. We consider the following factors in determining the value of stock-based
compensation:
(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
38
liabilities and their respective tax bases and any operating loss or tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences
are expected to be recovered or settled. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income in those periods in which temporary differences become deductible. Should management determine
that it is more likely than not that some portion of the deferred tax assets will not be realized, a valuation allowance against
the deferred tax assets would be established in the period such determination was made.
Uncertain Tax Positions
Financial Accounting Standards establish 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 Financial Accounting Standards Board (“FASB”) issued new accounting guidance changing the
criteria for reporting discontinued operations. The revised definition of a discontinued operation includes those components
of an entity or a group of components of an entity representing a strategic shift that has (or will have) a major effect on an
entity’s operations and financial results. The guidance eliminates the current requirement to assess continuing cash flow and
continuing involvement with the disposal group. The revised definition also includes a business or nonprofit activity that, on
acquisition, meets the criteria to be classified as held for sale. A disposal meeting the new definition is required to be reported
as discontinued operations when the component of an entity or group of components of an entity meets the held for sale
criteria, is actually disposed of by sales, or is disposed of through means other than a sale. The guidance 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 of fiscal 2016 beginning on 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 its results of operations or financial position.
In May 2014, the FASB issued a new accounting standard that attempts to establish a uniform basis for recording
revenue to virtually all industries’ financial statements, under U.S. GAAP. The revenue standard’s core principle is built on
the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of
rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor
is entitled. In order to accomplish this objective, companies must evaluate the following five basic steps: (i) identify the
contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv)
allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity
satisfies a performance obligation. There are three basic transition methods that are available – full retrospective, retrospective
with certain practical expedients, and a cumulative effect approach. Under the third alternative, an entity would apply the
new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application and
recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings. Prior years
would not be restated and additional disclosures would be required to enable users of the financial statements to understand
the impact of adopting the new standard in the current year compared to prior years that are presented under legacy U.S.
GAAP. Early adoption is prohibited under U.S. GAAP. Public companies must apply the new standard for annual periods
beginning after December 15, 2016, including interim periods therein, which for Nathan’s will be its first quarter of fiscal
2018, beginning on March 27, 2017. On April 29, 2015, the FASB issued a proposal to defer the standard's effective date
until 2018. On May 12, 2015, the FASB issued a second proposed update to the standard clarifying the distinction between
revenue from licenses of intellectual property that represent a promise to deliver a good or service over time versus a promise
to be satisfied at a point in time. The Company continues to monitor these proposals and currently expects to use the modified
retrospective method, recognizing a cumulative effect adjustment to retained earnings when adopted, and is currently
evaluating the impact of this new accounting standard on its consolidated financial position and results of operations.
In August 2014, the FASB issued new guidance that requires management to evaluate whether there are conditions
or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern
within one year after the date that the financial statements are issued. If such conditions exist, management will be required
to include disclosures enabling users to understand those conditions and management’s plans to alleviate or mitigate those
39
conditions. This new standard is effective for annual periods ending after December 15, 2016 and interim periods within
annual periods beginning after December 16, 2016. This standard will take effect in Nathan’s fourth quarter of our fiscal year
ending March 26, 2017.
In January 2015, the FASB issued new guidance to simplify the income statement presentation requirements by
eliminating the seldom-used concept of extraordinary items. Extraordinary items are events and transactions that are
distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary classification
simplifies the income statement presentation by no longer segregating such extraordinary items from the ordinary results of
operations and separately stating the amount, net of tax along with the effect on earnings per share. This new standard is
effective for annual periods beginning after December 15, 2015, including interim periods therein, which for Nathan’s would
be its first quarter of fiscal 2017 beginning March 28, 2016. Early adoption is permitted provided that the guidance is applied
from the beginning of the fiscal year of adoption. Nathan’s expects to early adopt this standard in the first quarter of our fiscal
year ending March 27, 2016 that begins on March 30, 2015. Nathan’s does not expect the adoption of this new guidance to
have a material impact on its results of operations or financial position.
In April 2015, the FASB issued new guidance to simplify the presentation of debt issuance costs. Under the new
standard, debt issuance costs related to a recognized debt liability shall be presented in the balance sheet as a direct deduction
to the carrying value of the debt and not as an asset. The amendment is effective for public entities with fiscal years beginning
after December 15, 2015 and interim periods within those periods and will be applied retroactively. Early adoption of the
amendment is permitted for financial statements that have not been previously issued. Nathan’s has early adopted this new
standard in its financial statements beginning with the period ended March 29, 2015. The adoption of this new guidance did
not have a material impact on its results of operations or financial position.
The Company does not believe that any other recently issued, but not yet effective accounting standards, when
adopted, will have a material effect on the accompanying financial statements.
Results of Operations
Fiscal year ended March 29, 2015 compared to fiscal year ended March 30, 2014
Revenues
Total sales increased by 15.3% to $75,520,000 for the fifty-two weeks ended March 29, 2015 (“fiscal 2015 period”)
as compared to $65,521,000 for the fifty-two weeks ended March 30, 2014 (“fiscal 2014 period”). Foodservice sales from
the Branded Product Program increased by 13.6% to $58,948,000 for the fiscal 2015 period as compared to sales of
$51,877,000 in the fiscal 2014 period. This increase was primarily attributable to a higher average selling price due primarily
to price increases as compared to the fiscal 2014 period. Total Company-owned restaurant sales increased 20.0% to
$15,874,000 during the fiscal 2015 period compared to $13,231,000 during the fiscal 2014 period. This increase was primarily
attributed to operating our Coney Island and Yonkers restaurants for the entire fiscal 2015 period. Our Flagship Coney Island
restaurant operated for approximately forty-four weeks during the fiscal 2014 period and our Yonkers restaurant operated for
nineteen weeks during the fiscal 2014 period. The sales impact while these restaurants were closed was approximately
$2,233,000. Additionally, sales at our two Coney Island restaurants during the periods operated during the fiscal 2015 period
were approximately $814,000 higher than the periods operated during the fiscal 2014 period due primarily to an increase in
customer counts of approximately 5.9%. Additionally, our Oceanside restaurant temporarily closed in early January 2015 for
relocation and re-opened on March 25, 2015. We estimate that this closure reduced sales by approximately $260,000. Other
sales increased by $285,000 during the fiscal 2015 period compared to the fiscal 2014 period.
License royalties were $18,011,000 in the fiscal 2015 period as compared to $8,513,000 in the fiscal 2014 period.
Total royalties earned on sales of hot dogs from our retail and foodservice license agreements increased 138.9% to
$16,105,000 for the 2015 fiscal period compared to $6,742,000 during the fiscal 2014 period. Royalties earned from John
Morrell & Co., primarily from the retail sale of hot dogs, were $14,367,000 during the fiscal 2015 period resulting mostly
from the higher rate earned pursuant to the new agreement. During the fiscal 2014 period, royalties earned during 11 months
of the SMG contract, primarily from the retail sale of hot dogs, were $4,600,000. Additionally, during March 2014, we earned
royalties of $548,000 from approximately two weeks of sales by John Morrell & Co during the transition period between
contracts. Royalties earned from our foodservice license agreement, substantially from sales of hot dogs to Sam’s Club, were
$1,738,000 during the fiscal 2015 period compared to $1,594,000 during the fiscal 2014 period. License royalties earned
from the sale of Nathan’s French fries increased by $172,000 to $507,000 firing the fiscal 2015 period as compared to
$335,000 in the fiscal 2014 period. Royalties earned from all other licensing agreements for the manufacture and sale of
Nathan’s products decreased by $37,000, during the fiscal 2015 period, compared to the fiscal 2014 period, primarily from
lower royalties earned from the sale of mini-bagel dogs and franks-in-the-blanket and other hors d’oeuvres.
40
Franchise fees and royalties were $5,581,000 in the fiscal 2015 period as compared to $5,718,000 in the fiscal 2014
period. Total royalties were $4,538,000 in the fiscal 2015 period as compared to $4,855,000 in the fiscal 2014 period.
Royalties earned under the Branded Menu programs were $957,000 in the fiscal 2015 period as compared to $1,011,000 in
the fiscal 2014 period due principally to a fewer number of units operating. Royalties earned under the Branded Menu
Program are based on product purchases rather than a percentage of restaurant sales. Traditional franchise royalties were
$3,581,000 in the fiscal 2015 period compared to $3,844,000 in the fiscal 2014 period. Franchise restaurant sales decreased
to $80,107,000 in the fiscal 2015 period compared to $85,850,000 in the fiscal 2014 period primarily due to the impact of
closed restaurants. Comparable domestic franchise sales (consisting of 93 Nathan’s outlets, excluding sales under the Branded
Menu Program) were $53,992,000 in the fiscal 2015 period compared to $55,548,000 in the fiscal 2014 period, a decrease of
2.8%.
At March 29, 2015, our franchise system consisted of 296 domestic and international franchised or Branded Menu
Program franchise outlets as compared to 324 units at March 30, 2014. Total franchise fee income was $1,043,000 in the
fiscal 2015 period, including $143,000 of cancellation or termination fees compared to $863,000 in the fiscal 2014 period
including $288,000 of cancellation or termination fees. Domestic franchise fee income was $276,000 in the fiscal 2015 period
compared to $370,000 in the fiscal 2014 period. International franchise fee income was $624,000 in the fiscal 2015 period,
compared to $205,000 during the fiscal 2014 period. During the fiscal 2015 period, 36 new franchised outlets opened,
including 13 international locations, including our first locations in Costa Rica and Malaysia, and 17 Branded Menu Program
outlets, including six Arthur Treacher’s units. Additionally, during the fiscal 2015 period, a master franchisee exercised an
option to acquire the rights to develop franchised outlets throughout Mexico. During fiscal 2014, 56 new franchised outlets
opened, including 34 locations in Russia and nine Branded Menu Program outlets, including our first Arthur Treacher’s unit.
Costs and Expenses
Overall, our cost of sales increased $8,879,000 to $61,951,000 in the fiscal 2015 period compared to $53,072,000
in the fiscal 2014 period. Our gross profit (representing the difference between sales and cost of sales) was $13,569,000 or
18.0% of sales during the fiscal 2015 period as compared to $12,449,000 or 19.0% of sales during the fiscal 2014 period.
The margin decline was primarily due to the impact of a higher average cost per pound of hot dogs for our Branded Product
Program during the second and third quarters fiscal 2015.
Cost of sales in the Branded Product Program increased approximately $7,173,000 during the fiscal 2015 period
compared to the fiscal 2014 period, primarily as a result of an approximately 17.7% increase in the average cost per pound
of our hot dogs. During the fiscal 2015 period, the market cost of our hot dogs was approximately 17.1% higher than during
the fiscal 2014 period. During the fiscal 2014 period, our purchase commitments yielded savings of approximately $198,000.
During the fiscal 2014 period, approximately 13.4% of our product was purchased pursuant to our purchase commitments.
The purchase commitments lowered our costs by approximately $0.011 per pound during the fiscal 2014 period. If the cost
of beef and beef trimmings increases and we are unable to pass on these higher costs through price increases or otherwise
reduce any increase in our costs through the use of purchase commitments, our margins will be adversely impacted. We have
increased our selling prices to pass on these recent cost increases and expect to perform ongoing reviews based on market
conditions, but there can be no assurance that we will be able to continue to increase our selling prices.
With respect to Company-owned restaurants, our cost of sales during the fiscal 2015 period was $9,072,000 or
57.2% of restaurant sales, as compared to $7,574,000 or 57.2% of restaurant sales in the fiscal 2014 period due primarily to
the impact of higher food costs which were offset from lower labor costs. We have recently increased certain selling prices
to pass on recent cost of sales increases.
Restaurant operating expenses were $3,747,000 in the fiscal 2015 period compared to $3,142,000 in the fiscal 2014
period. The increase in restaurant operating costs results primarily from the different number of months that the Coney Island
and Yonkers restaurants operated in the two fiscal periods. During the fiscal 2014 period, the Coney Island restaurant operated
for approximately forty-four weeks and the Yonkers restaurant operated for approximately nineteen weeks. Incremental costs
were approximately $441,000 during the fiscal 2015 period, as compared to the closed periods during the fiscal 2014 period.
We also incurred higher operating costs at our two Coney Island locations of approximately $263,000 during the fiscal 2015
period arising from higher occupancy and other expenses. Due to the temporary closing of our Oceanside restaurant for
approximately three months, our restaurant operating costs were lower than the fiscal 2014 period by approximately
$110,000. In connection with our October 2013 insurance renewal, we incurred a significant increase in insurance costs,
primarily property insurance, due to the impact of Superstorm Sandy on the insurance marketplace. Utility costs of the three
restaurants operating for comparative periods increased by approximately 38% from the fiscal 2014 period to the fiscal 2015
period. We continue to be concerned about the volatile market conditions for oil and natural gas.
41
Depreciation and amortization was $1,253,000 in the fiscal 2015 period compared to $1,157,000 in the fiscal 2014
period. This increase is primarily attributable to the increased depreciation from the investments made in the Yonkers and
Coney Island restaurants. We also expect to incur approximately $100,000 of depreciation expense per annum in connection
with the redevelopment of the relocated Oceanside restaurant that re-opened on March 25, 2015.
General and administrative expenses increased $743,000 or 6.5% to $12,203,000 in the fiscal 2015 period as
compared to $11,460,000 in the fiscal 2014 period. The increase in general and administrative expenses was primarily due
to increased compensation costs, including stock-based compensation and payroll related taxes of $885,000, higher
occupancy costs of $53,000 and higher insurance costs of $29,000 which were partially offset by lower marketing and
associated expenses of $167,000 and lower professional fees of $9,000.
Other Items
Interest income was $176,000 in the fiscal 2015 period compared to $325,000 in the fiscal 2014 period, primarily
due to lower interest income earned on marketable securities. As additional marketable securities mature or are called by the
issuer and we are unable to earn similar returns upon reinvestment, we would anticipate lower investment income in the
future.
The insurance gain of $2,774,000 during the fiscal 2014 period represents the difference between insurance proceeds
received and the historical net book value of assets destroyed at our Flagship Coney Island restaurant and demolition costs
resulting from Superstorm Sandy (See Note M).
Other income of $87,000 in the fiscal 2015 period as compared to $76,000 in the fiscal 2014 period relates primarily
to a sublease of a co-branded franchised restaurant.
Interest expense of $816,000 in the fiscal 2015 period represents accrued interest of $750,000 on the 10.000% Senior
Secured Notes commencing March 10, 2015 and amortization of debt discounts and issuance costs of $66,000 during the
same period. As a result of the issuance of the 10.000% Senior Secured Notes, Nathan’s expects to incur interest expense of
$13.5 million per annum and annual amortization of debt discounts and issuance costs of $1,185,000. Interest expense of
$135,000 in the fiscal 2014 period represented 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 July 24, 2013, we satisfied the judgment in full
settlement of this matter.
The Company recognized an, other-than-temporary impairment charge on its long-term investment of $400,000 in
the fiscal 2014 period based on management’s assessment of the future recoverability of the investment.
Provision for Income Taxes
In the fiscal 2015 period, the income tax provision was $7,702,000 or 39.7% of earnings before income taxes
compared to $5,234,000 or 38.6% of income before income taxes in the fiscal 2014 period. Nathan’s effective tax rate was
reduced by 0.4% during the fiscal 2015 period and reduced by 0.9% during the fiscal 2014 period, due to the differing effects
of tax-exempt interest income. During the fiscal 2015 period, Nathan’s resolved certain uncertain tax positions, reducing the
associated unrecognized tax benefits, along with the related accrued interest and penalties, by approximately $126,000, which
lowered the effective tax rate by 0.6%. Additionally, during the fiscal 2014 period, 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%. Nathan’s effective tax rates without these adjustments
would have been 40.7% for the fiscal 2015 period and 40.0% for the fiscal 2014 period. Nathan’s estimates that its
unrecognized tax benefits including the related accrued interest and penalties could be further reduced by up to $183,000
during fiscal 2016.
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 fiscal 2014 period 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 the fiscal 2014 period 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
42
$172,000 to $13,231,000 during the fiscal 2014 period 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 during the fiscal 2014 period 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 the fiscal 2014 period as compared to fiscal 2013. During
the fiscal 2014 period, other sales, primarily to Wal-mart, were approximately $374,000 higher than fiscal 2013.
Franchise fees and royalties were $5,718,000 in the fiscal 2014 period as compared to $5,842,000 in fiscal 2013.
Total royalties were $4,855,000 in the fiscal 2014 period as compared to $4,990,000 in fiscal 2013. Royalties earned under
the Branded Menu Program were $1,011,000 in the fiscal 2014 period 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 the fiscal 2014
period as compared to $4,047,000 in fiscal 2013. Franchise restaurant sales decreased to $85,850,000 in the fiscal 2014 period
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 the fiscal 2014 period 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 the fiscal 2014 period, 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 the fiscal 2014 period compared to $324,000 in fiscal 2013. International franchise fee income was
$205,000 in the fiscal 2014 period, compared to $338,000 during fiscal 2013. During the fiscal 2014 period, 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 the fiscal 2014 period 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 the fiscal 2014 period 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 the fiscal 2014 period 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 the fiscal 2014 period 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 the fiscal 2014 period, as compared to fiscal 2013.
Costs and Expenses
Overall, our cost of sales increased by $8,198,000 to $53,072,000 in the fiscal 2014 period 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 the fiscal 2014 period 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 the fiscal 2014 period 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 the fiscal 2014 period
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 the fiscal 2014 period, 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
43
2013. During the fiscal 2014 period, 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 the fiscal 2014 period,
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 the fiscal
2014 period 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 the fiscal 2014 period 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.
Restaurant operating expenses were $3,142,000 in the fiscal 2014 period 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 the fiscal 2014 period, 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 the fiscal 2014 period as compared to approximately
8 months during fiscal 2013. Although utility costs were comparable during the fiscal 2014 period 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 the fiscal 2014 period 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 the fiscal 2014 period 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.
Other Items
Interest income was $325,000 in the fiscal 2014 period 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 the fiscal 2014 period represents the difference between insurance proceeds
received and the historical net book value of assets destroyed at our Flagship Coney Island restaurant and demolition costs
resulting from Superstorm Sandy in addition to the settlement of the business interruption claim (See note M.4).
Other income, net of $76,000 in the fiscal 2014 period as compared to $82,000 in fiscal 2013 relates primarily to a
sublease of a non-franchised restaurant.
44
Interest expense of $135,000 in the fiscal 2014 period 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
the fiscal 2014 period based on management’s assessment of the future recoverability of the investment.
Provision for Income Taxes
In the fiscal 2014 period, 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 the fiscal 2014 period and reduced by 1.3% during fiscal 2013, due to the differing effects of tax-exempt interest
income. During the fiscal 2014 period, 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 the fiscal 2014 period 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.
Off-Balance Sheet Arrangements
At March 29, 2015 and 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 29, 2015 aggregated $51,393,000, a $29,316,000 increase during the fiscal 2015
period compared to cash and cash equivalents of $22,077,000 at March 30, 2014. At March 29, 2015, marketable securities
were $7,091,000 compared to $11,187,000 at March 30, 2014 and net working capital increased to $61,605,000 from
$35,378,000 at March 30, 2014. The increase in cash and cash equivalents is primarily due to the receipt of proceeds from
the Company’s Notes offering as described below and from cash provided from operations.
On March 10, 2015, the Company completed an offering of $135.0 million aggregate principal amount of 10.000%
Senior Secured Notes due 2020 (the “Notes”). The Company used the net proceeds of the Notes offering to pay a special
dividend of $25.00 per share (approximately $116.1 million) to Company stockholders of record and will use the remaining
net proceeds for general corporate purposes, including working capital.
The Notes were issued pursuant to an indenture, dated as of March 10, 2015 (the “Indenture”), by and among the
Company, certain of its wholly-owned subsidiaries, as guarantors, and U.S. Bank National Association, a national banking
association, as trustee and collateral trustee.
The Notes mature on March 15, 2020 and bear interest at a rate of 10.000% per annum, payable semi-annually in
cash in arrears on March 15 and September 15 of each year, beginning September 15, 2015. The Notes are redeemable under
certain circumstances.
The Indenture contains certain covenants limiting the Company’s ability and the ability of its restricted subsidiaries
(as defined in the Indenture) to, subject to certain exceptions and qualifications: (i) incur additional indebtedness; (ii) pay
dividends or make other distributions on, redeem or repurchase, capital stock; (iii) make investments or other restricted
payments; (iv) create or incur certain liens; (v) incur restrictions on the payment of dividends or other distributions from its
restricted subsidiaries; (vi) enter into certain transactions with affiliates; (vii) sell assets; or (viii) effect a consolidation or
merger.
45
The Indenture also contains customary events of default, including, among other things, failure to pay interest,
failure to comply with agreements related to the indenture, failure to pay at maturity or acceleration of other indebtedness,
failure to pay certain judgments, and certain events of insolvency or bankruptcy. Generally, if any event of default occurs,
the Trustee or the holders of at least 25% in principal amount of the Notes may declare the Notes due and payable by providing
notice to the Company. In case of default arising from certain events of bankruptcy or insolvency, the Notes will become
immediately due and payable.
As of March 29, 2015, Nathan’s was in compliance with all covenants associated with the Notes.
The Notes are fully and unconditionally guaranteed on a senior secured basis by each of the Company’s wholly-
owned domestic subsidiaries, with certain exceptions. Pursuant to the terms of a collateral trust agreement, the liens securing
the Notes and the guarantees will be contractually subordinated to the liens securing any future credit facility.
The Notes and the guarantees will be the Company and the guarantors’ senior secured obligations and will rank:
(cid:404) senior in right of payment to all of the Company and the guarantors’ future subordinated indebtedness;
(cid:404) effectively senior to all unsecured senior indebtedness to the extent of the value of the collateral securing the
Notes and the guarantees;
(cid:404) pari passu with all of the Company and the guarantors’ other senior indebtedness;
(cid:404) effectively junior to any future credit facility to the extent of the value of the collateral securing any future credit
facility and the Notes and the guarantees and certain other assets;
(cid:404) effectively junior to any of the Company and the guarantors’ existing and future indebtedness that is secured by
assets other than the collateral securing the Notes and the guarantees to the extent of the value of any such assets;
and
(cid:404) structurally subordinated to the indebtedness of any of the Company’s current and future subsidiaries that do not
guarantee the Notes.
Cash provided by operations of $13,285,000 in the fiscal 2015 period is primarily attributable to net income of
$11,703,000 and other non-cash operating items of $2,476,000, reduced by changes in other operating assets and liabilities
of $894,000. Accounts and other receivables, net of insurance proceeds received, increased $1,699,000 due primarily to
increased sales from our Branded Product Program, higher license royalties from John Morrell & Co. and temporary advances
to our advertising fund. The increase in prepaid expenses and other current assets of $1,403,000 primarily relates to prepaid
income taxes at March 29, 2015. The increase in accounts payable and other current liabilities of $1,779,000 relates to accrued
interest of $750,000, accrued incentive compensation of $517,000, dividends payable on unvested restricted stock of
$375,000 and accrued professional fees of $249,000.
Cash provided by investing activities was $2,224,000 in the fiscal 2015 period. We received cash proceeds of
$8,020,000 from the maturity of available-for-sale securities. We purchased available-for-sale securities of $4,258,000. We
incurred capital expenditures of $1,538,000 in connection with the relocation of our Company-owned restaurant in Oceanside,
New York, our Branded Product Program and other select restaurant improvements.
Cash provided by financing activities of $13,807,000 in the fiscal 2015 period is primarily attributable to the
Company’s issuance of $135.0 million of the Notes offset by, debt discounts and issuance costs paid of $5,926,000 offset by
a Special Dividend declared of $116,110,000 of which $115,110,000 was paid on March 27, 2015. The Company paid
withholding taxes of $3,693,000 on the net share settlement exercise of share-based compensation plans. Nathan’s expects
to realize tax benefits associated with employee stock option exercises of $4,572,000 and also received proceeds from the
exercise of employee stock options of $880,000. Nathan’s purchased 37,661 shares of its common stock at a cost of
$1,916,000 during the fiscal 2015 period.
During the period from October 2001 through March 29, 2015, Nathan’s purchased 4,647,687 shares of its common
stock at a cost of approximately $56,800,000 pursuant to its stock repurchase plans previously authorized by the Board of
Directors. Since March 26, 2007, to date, we have repurchased 2,756,587 shares at a total cost of approximately $49,642,000,
reducing the number of shares then-outstanding by 45.8%.
The Company currently has an aggregate of 251,272 shares 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.
46
On September 11, 2014, the Company and Mutual Securities, Inc. (“MSI”) amended its existing agreement to
provide MSI with authorization on the Company’s behalf to purchase shares of the Company’s common stock, $.01 par value
having a value of up to an additional $6,000,000, which purchases could commence on September 24, 2014. The agreement
with MSI was adopted under the safe harbor provided by Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of
1934, as amended to assist the Company in implementing its previously announced stock purchase plans.
Management believes that available cash, marketable securities and cash generated from operations should provide
sufficient capital to finance our operations, satisfy our debt service requirements and stock repurchases for at least the next
12 months.
As discussed above, we had cash and cash equivalents at March 29, 2015 aggregating $51,393,000, and marketable
securities of $7,091,000. Our Board routinely monitors and assesses its cash position and our current and potential capital
requirements. In March 2015, we completed a dividend recapitalization, returning approximately $116,110,000 to our
shareholders and we may continue to return capital to our shareholders through stock repurchases, although there is no
assurance that the Company will make any repurchases under its existing stock-repurchase plan. We expect that in the future
we will make investments in certain existing restaurants, support the growth of the Branded Product and Branded Menu
Programs, service the outstanding debt and continue our stock repurchase programs, funding those investments from our
operating cash flow. We may also incur capital and other expenditures or engage in investing activities in connection with
opportunistic situations that may arise on a case-by-case basis. In the Fiscal year ending March 27, 2016, we will be required
to make interest payments of approximately $13.8 million.
At March 29, 2015, we subleased to franchisees two properties we lease from third parties. We remain contingently
liable for all costs associated with these properties including: rent, property taxes and insurance. We may incur future cash
payments with respect to such properties, consisting primarily of future lease payments, including costs and expenses
associated with terminating any of such leases.
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 extended through the fifth Lease Year, as
defined in the lease, which has expired as of March 29, 2015.The Guaranty could have been called upon in the event of a
default by the tenant/franchisee. Nathan’s believes that its franchisee has fulfilled all of its obligations that Nathan’s
guaranteed and Nathan’s has not been required to make any payments pursuant to the Guaranty. In connection with the
Nathan’s franchise agreement, Nathan’s has received a personal guaranty from the franchisee for all obligations under the
Guaranty.
The following schedule represents Nathan’s cash contractual obligations and commitments by maturity as of
March 29, 2015 (in thousands):
Payments Due by Period
Less than
1 Year
Cash Contractual Obligations
Long term debt (a) ................................................ $
Employment Agreements .....................................
Dividends Payable ................................................
Operating Leases ..................................................
Gross Cash Contractual Obligations ....................
Sublease Income ...................................................
Net Cash Contractual Obligations ........................ $
Total
135,000 $
3,412
1,000
16,209
155,621
2,676
152,945 $
1-3 Years 3-5 Years
- $
- $
1,548
1,264
500
375
3,343
1,641
5,391
3,280
516
270
4,875 $
3,010 $
135,000 $
400
125
3,203
138,728
533
138,195 $
More than
5 Years
-
200
-
8,022
8,222
1,357
6,865
a) Represents 10.000% Senior Secured Notes due March 2020.
b) At March 29, 2015, the Company had unrecognized tax benefits of $266,000. The Company believes that it is
reasonably possible that the unrecognized tax benefits may decrease by $98,000 within the next year. A reasonable
estimate of the timing of the remaining liabilities is not practicable.
47
Inflationary Impact
We do not believe that general inflation has materially impacted earnings since 2006. However, we have experienced
significant volatility in our costs for our hot dogs and certain food products, distribution costs and utilities. Our commodity
costs for beef have been especially volatile since fiscal 2004. We continue to experience unprecedented increases in the cost
of beef. The market price of hot dogs during the fiscal 2015 period was approximately 17.1% higher than the fiscal 2014
period. The market price of hot dogs during the fiscal 2014 period was approximately 7.4% higher than the fiscal 2013 period.
We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during
the remainder of fiscal 2015. Beef prices continue to be extremely volatile due to the supply constraints, as a result of the
lingering effect of the drought in the Midwest during 2012. Beginning January 2008, we had entered into purchase
commitments for a portion of our hot dogs in an effort to reduce the impact of increasing market prices. Our last purchase
commitment was completed in July 2013 and to date we have not entered in any new purchase commitments for beef. We
may attempt to enter into similar purchase arrangements for hot dogs and other products in the future. Additionally, we expect
to continue experiencing volatility in oil and gas prices on our distribution costs for our food products and utility costs in the
Company-owned restaurants and volatile insurance costs resulting from the uncertainty of the insurance markets.
In March 2010, the Federal government passed new legislation to reform the U.S. health care system. As part of the
plan, employers will be expected to provide their employees that work more than 30 hours per week with minimum levels of
healthcare coverage or incur certain financial penalties. As Nathan’s workforce includes numerous part-time workers that
typically are not offered healthcare coverage, we have been forced to expand healthcare coverage in 2015 or incur new
penalties beginning January 2015 which will 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 $8.75 on December 31,
2014, and will increase to $9.00 per hour on December 31, 2015. The impact of the December 31, 2014 New York minimum
wage increase on the Company amounted to a 6.9% average salary increase for our employees that were affected. There have
been recent protests in New York and other municipalities relating to compensation at fast food restaurants. In Governor
Cuomo’s State of The State address, he also called for an increase in New York State’s minimum wage to $10.50 per hour
throughout New York State and $11.50 per hour in New York City. Mayor DeBlasio, of the City of New York, had previously
stated that New York City should have a minimum wage of $15.00 per hour. We estimate that the recent increase in minimum
wage has the potential to increase our restaurant cost of sales by approximately 80 bps if prices remain the same. Although
we only operate five Company-owned restaurants, we believe that significant increases in the minimum wage could have a
significant financial impact on our financial results and the results of our franchisees.
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 have been affected by this new legislation.
Continued increases in labor, food and other operating expenses, including health care, could adversely affect our
operations and those of the restaurant industry and we might have to further reconsider our pricing strategy as a means to
offset reduced operating margins.
The Company’s business, financial condition, operating results and cash flows can be impacted by a number of
factors, including but not limited to those set forth above in “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” any one of which could cause our actual results to vary materially from recent results or from
our anticipated future results. For a discussion identifying additional risk factors and important factors that could cause actual
results to differ materially from those anticipated, also see the discussions in “Forward-Looking Statements,” “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 29, 2015,
Nathan’s cash and cash equivalents aggregated $51,393,000. Earnings on these cash and cash equivalents would increase or
decrease by approximately $128,000 per annum for each 0.25% change in interest rates.
48
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 29, 2015, the market value of
Nathan’s marketable securities aggregated $7,091,000. Interest income on these marketable securities would increase or
decrease by approximately $18,000 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 29, 2015 that are sensitive to
interest rate fluctuations:
Valuation of securities
Given an interest rate
Increase of X Basis points
+50BPS +100BPS +150BPS
Municipal notes and bonds ............... $7,077,000 $7,081,000 $7,086,000 $7,091,000 $7,101,000 $7,110,000 $7,119,000
Valuation of securities
Given an interest rate
Decrease of X Basis points
(150BPS) (100BPS) (50BPS)
Fair
Value
Borrowings
At March 29, 2015, we had $135.0 million of Senior Secured Notes outstanding which are due in March 2020. Upon
maturity, we anticipate having to refinance a significant portion of the Notes and such refinancing would be based upon the
then-prevailing interest rates. Interest expense on these borrowings would increase or decrease by approximately $338,000
per annum for each 0.25% change in interest rates. We currently do not anticipate entering into interest rate swaps or other
financial instruments to hedge our borrowings.
Commodity Costs
The cost of commodities is subject to market fluctuation. Our commodity costs for beef have been especially volatile
since fiscal 2004. We continue to experience unprecedented increases in the cost of beef. The market price of hot dogs during
the fiscal 2015 period was approximately 17.1% higher than the fiscal 2014 period. The market price of hot dogs during the
fiscal 2014 period was approximately 7.4% higher than fiscal 2013. We are unable to predict the future cost of our hot dogs
and expect to experience price volatility for our beef products throughout fiscal 2016. Beef prices continue to be extremely
volatile due to the supply constraints, as a result of the lingering effect of the drought in the Midwest during 2012. Beginning
January 2008, we had entered into purchase commitments for a portion of our hot dogs in an effort to reduce the impact of
increasing market prices. Our last purchase commitment was completed in July 2013 and to date we have not entered in any
new purchase commitments for beef. We may attempt to enter into similar purchase arrangements for hot dogs and other
products in the future. Additionally, we expect to continue experiencing volatility in oil and gas prices on our distribution
costs for our food products and utility costs in the Company-owned restaurants and volatile insurance costs resulting from
the uncertainty of the insurance markets. A short-term increase or decrease of 10% in the cost of our food and paper products
for the fifty-two weeks ended March 29, 2015 would have increased or decreased our cost of sales by approximately
$5,587,000.
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
49
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 29, 2015. In making this assessment, management used the framework in Internal Control — Integrated Framework
issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our
assessment and the criteria set forth by COSO in 2013, management believes that Nathan’s maintained effective internal
control over financial reporting as of March 29, 2015. The effectiveness of our internal control over financial reporting as of
March 29, 2015, 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 29, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Limitations on the Effectiveness of Controls
We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that
the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are
designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer, 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.
On June 10, 2015, the Company and Wayne Norbitz entered into a Transition Agreement (the “Transition
Agreement”) relating to the retirement of Mr. Norbitz as President and Chief Operating Officer of the Company. Under the
Transition Agreement, Mr. Norbitz will continue to serve as President and Chief Operating Officer of the Company through
August 7, 2015 at which time he will become a Consultant to the Company pursuant to the terms of a one year Consulting
Agreement between him and the Company (the “Consulting Agreement”). The Consulting Agreement provides that Mr.
Norbitz will receive a consulting fee of $16,291 per month. The Transition Agreement further provides that Mr. Norbitz will
50
receive a severance payment of $288,750 and under the terms of the Transition Agreement the Company purchased from
Mr. Norbitz 56,933 shares of the Company’s common stock, $.01 par value (the “Common Stock”) at a purchase price of
$40.28 which was the closing price of the Common Stock as reported on the Nasdaq Global Market on June 10,2015. Mr.
Norbitz will also be included as a nominee on management’s slate of Directors at the Company’s upcoming annual meeting
of stockholders.
51
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 29, 2015, based on criteria established in the 2013 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 29, 2015, based on criteria established in the 2013 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 29, 2015, and our report dated
June 12, 2015 expressed an unqualified opinion on those financial statements.
New York, New York
June 12, 2015
52
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 2015 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.
Item 14.
Principal Accountant Fees and Services.
Audit Fees
We were billed by Grant Thornton LLP the aggregate amount of approximately $429,000 in respect of fiscal 2015
and $245,000 in respect of fiscal 2014 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. The fiscal 2015 amount includes billings by
Grant Thornton LLP of approximately $189,000 for fees for professional services rendered for the review of interim financial
information in connection with the issuance of their comfort letter in conjunction with the private placement of the Company’s
Senior Secured Notes.
Audit-Related Fees
Grant Thornton LLP did not render any audit-related services for fiscal 2015 and 2014 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 2015 and 2014
and, accordingly, did not bill for any such services.
53
All Other Fees
Grant Thornton LLP did not render any other services for fiscal 2015 and 2014 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 2015 and 2014.
54
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 Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1
No. 33- 56976.)
3.2 Amendment to the Certificate of Incorporation, filed December 15, 1992. (Incorporated by reference to Exhibit
3.2 to Registration Statement on Form S-1 No. 33-56976.)
3.3 By-Laws, as amended. (Incorporated by reference to Exhibit 3.1 to Form 8-K dated November 1, 2006.)
4.1 Specimen Stock Certificate. (Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1
No. 33-56976.)
4.2 Specimen Rights Certificate. (Incorporated by reference to Exhibit 2 to Form 8-A/A dated December 10, 1999.)
4.3 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.)
Indenture, dated as of March 10, 2015, by and among Nathan’s Famous, Inc., certain of its wholly owned
subsidiaries, as guarantors, and U.S. Bank National Association, a National Banking Association, as trustee and
collateral trustee (including the form of Note (Incorporated by reference to Exhibit 4.1 to the Company’s Current
Report filed on Form 8-K dated March 10, 2015.)
4.4
10.1 ***Employment Agreement with Wayne Norbitz, dated December 28, 1992. (Incorporated by reference to Exhibit
10.1 to Registration Statement on Form S-1 No. 33-56976.)
10.2 Leases for premises at Coney Island, New York, as follows: (Incorporated by reference to Exhibit 10.3 to
Registration Statement on Form S-1 No. 33-56976.)
a) Lease, dated November 22, 1967, between Nathan’s Realty Associates and the Company.
b) Lease, dated November 22, 1967, between Ida’s Realty Associates and the Company.
10.3 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.)
55
10.9 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.)
10.10 2002 Stock Incentive Plan. (Incorporated by reference to Exhibit 4 to Registration Statement on Form S-8
No. 333-101355.)
10.11 ***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.)
10.12 ***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.)
10.13 ***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.)
10.14 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.)
10.15 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.)
10.16 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.)
10.17 ***2010 Stock Incentive Plan (Incorporated by reference to Exhibit A to Proxy Statement on Schedule 14A dated
July 23, 2010).
10.18 ***Amendment to 2010 Stock Incentive Plan (Incorporated by reference to Exhibit A to Proxy Statement on
Schedule 14A dated July 23, 2012).
10.19 ***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.)
10.20 ***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.)
10.21 **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).
10.22 ***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.)
10.23 *Parity Lien Security Agreement dated as of March 10, 2015, by and among Nathan’s Famous, Inc. and Other
Assignors Identified therein and U.S. Bank National Association as Collateral Trustee.
10.24 *Transition Agreement and Release with Wayne Norbitz dated as of June 10, 2015.
10.25 *Consulting Agreement with Wayne Norbitz dated as of June 10, 2015.
10.26 10b5-1 Issuer Repurchase Instructions dated December 13, 2013, between the Company and Mutual Securities,
Inc. (Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated
December 13, 2013.)
10.27 Amendment to Issuer Repurchase Instructions, dated September 10, 2014, between the Company and Mutual
Securities, Inc. (Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated
September 11, 2014.)
21 *List of Subsidiaries of the Registrant.
23 *Consent of Grant Thornton LLP dated June 12, 2015.
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.
56
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
*Filed herewith.
**Filed with confidential portions omitted pursuant to request for confidential treatment. The omitted portions have been
separately filed with the SEC.
*** Indicates a management plan or arrangement.
57
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 12th day of June, 2015.
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 12th day of June, 2015.
/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
58
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’ (Deficit) 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 29, 2015 and March 30, 2014, and the related consolidated statements of earnings,
comprehensive income, stockholders’ (deficit) equity, and cash flows for each of the fifty-two weeks ended March 29, 2015,
the fifty-two weeks ended March 30, 2014, and the fifty-three weeks ended March 31, 2013. Our audit 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 29, 2015 and March 30, 2014, and the results of their
operations and their cash flows for the fifty-two weeks ended March 29, 2015, the fifty-two weeks ended March 30, 2104,
and the fifty-three weeks ended March 31, 2013 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all material aspects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of March 29, 2015, based on criteria established in the 2013
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated June 12, 2015 expressed an unqualified opinion.
New York, New York
June 12, 2015
F-2
Nathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
March 29,
March 30,
2015
2014
CURRENT ASSETS
ASSETS
Cash and cash equivalents ............................................................................................ $
Marketable securities ....................................................................................................
Accounts and other receivables, net .............................................................................
Inventories ....................................................................................................................
Prepaid expenses and other current assets (Note F) ......................................................
Deferred income taxes ..................................................................................................
Total current assets ............................................................................................
Property and equipment, net of accumulated depreciation of $6,946 and $7,554,
respectively ...............................................................................................................
Goodwill .......................................................................................................................
Intangible asset .............................................................................................................
Other assets ...................................................................................................................
51,393 $
7,091
9,499
822
4,532
277
73,614
9,257
95
1,353
347
22,077
11,187
7,823
947
3,129
26
45,189
8,970
95
1,353
528
$
84,666 $
56,135
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
CURRENT LIABILITIES
Accounts payable .......................................................................................................... $
Accrued expenses and other current liabilities ............................................................
Deferred franchise fees .................................................................................................
Total current liabilities .......................................................................................
Long-term debt, net of unamortized debt discounts and issuance costs of $5,860
(Note K) ....................................................................................................................
Other liabilities .............................................................................................................
Deferred income taxes ..................................................................................................
5,319 $
6,412
278
12,009
129,140
2,397
1,028
4,826
4,751
234
9,811
-
1,693
734
Total liabilities ...................................................................................................
144,574
12,238
COMMITMENTS AND CONTINGENCIES (Note M)
STOCKHOLDERS’ (DEFICIT) EQUITY
Common stock, $.01 par value; 30,000,000 shares authorized; 9,252,097 and
9,092,183 shares issued; and 4,604,410 and 4,482,157 shares outstanding at
March 29, 2015 and March 30, 2014, respectively ...................................................
Additional paid-in capital .............................................................................................
(Accumulated deficit) retained earnings .......................................................................
Accumulated other comprehensive income .................................................................
Treasury stock, at cost, 4,647,687 and 4,610,026 shares at March 29, 2015 and
March 30, 2014, respectively ....................................................................................
Total stockholders’ (deficit) equity ....................................................................
93
60,196
(63,444 )
47
(3,108 )
(56,800 )
(59,908 )
91
57,578
40,963
149
98,781
(54,884)
43,897
$
84,666 $
56,135
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)
Fifty-Two
Fifty-Two
weeks ended weeks ended weeks ended
March 29,
March 30,
March 31,
Fifty-Three
REVENUES
Sales ................................................................................................ $
License royalties .............................................................................
Franchise fees and royalties ............................................................
Total revenues ......................................................................
COSTS AND EXPENSES
Cost of sales ....................................................................................
Restaurant operating expenses ........................................................
Depreciation and amortization ........................................................
General and administrative expenses ..............................................
Total costs and expenses ......................................................
2015
2014
2013
75,520 $
18,011
5,581
99,112
61,951
3,747
1,253
12,203
79,154
65,521 $
8,513
5,718
79,752
53,072
3,142
1,157
11,460
68,831
56,656
8,571
5,842
71,069
44,874
2,700
940
10,437
58,951
Income from operations .......................................................
19,958
10,921
12,118
Interest expense ..............................................................................
Interest income ...............................................................................
Insurance gain (Note M.4) ..............................................................
Impairment charge – long-term investment (Note G) .....................
Other income, net ...........................................................................
(816)
176
-
-
87
Income before provision for income taxes .........................................
Provision for income taxes .................................................................
Net income .......................................................................... $
19,405
7,702
11,703 $
(135 )
325
2,774
(400 )
76
13,561
5,234
8,327 $
(453)
392
-
-
82
12,139
4,671
7,468
PER SHARE INFORMATION
Income per share:
Basic ............................................................................................ $
Diluted ........................................................................................ $
2.61 $
2.55 $
1.87 $
1.81 $
1.70
1.63
Cash dividends declared per share ..................................................... $
25.00 $
- $
-
Weighted average shares used in computing income per share:
Basic ............................................................................................
Diluted ........................................................................................
4,486,000
4,588,000
4,450,000
4,605,000
4,400,000
4,588,000
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
Fifty-Two
weeks ended weeks ended weeks ended
March 29,
March 31,
March 30,
Fifty-Three
2015
2014
2013
Net income ........................................................................................ $
11,703 $
8,327 $
7,468
Other comprehensive loss, net of deferred income taxes:
Unrealized losses on marketable securities .................................
Other comprehensive loss ...........................................................
(102)
(102)
(180 )
(180 )
(168)
(168)
Comprehensive income ...................................................................... $
11,601 $
8,147 $
7,300
The accompanying notes are an integral part of these statements.
F-5
Nathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
Fifty-two weeks ended March 29, 2015, the Fifty-two weeks ended March 30, 2014 and the Fifty-three weeks ended
March 31, 2013
(in thousands, except share amounts)
Additional
Accumulated
Other
Total
Common Common Paid-in
Capital
Stock
Shares
Retained Comprehensive Treasury Stock, at Cost Stockholders’
Shares
Earnings
Amount
Income
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
1
388
-
-
-
-
389
Withholding tax on net
share settlement of
share-based
compensation plans ...
Repurchase of common
stock ..........................
Income tax benefit on
stock option
exercises ....................
Share-based compensation
Unrealized losses on
available-for-sale
securities, net of
deferred income tax
benefit of $105 ..........
-
-
(982)
-
-
-
-
(982)
-
-
-
-
-
88,077
(3,085)
(3,085)
-
-
-
-
1,062
627
-
-
-
-
-
-
-
-
1,062
627
-
-
-
-
(168)
-
-
(168)
-
-
329 4,579,563 $ (53,398) $
-
7,468
34,148
Net income ........................
-
Balance, March 31, 2013 .. 8,958,181 $
-
90 $
-
7,468
54,491 $ 32,636 $
The accompanying notes are an integral part of these statements.
F-6
Nathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
Fifty-two weeks ended March 29, 2015, the Fifty-two weeks ended March 30, 2014 and the Fifty-three weeks ended
March 31, 2013
(in thousands, except share amounts)
Additional
Accumulated
Other
Total
Common Common Paid-in
Capital
Stock
Shares
Retained Comprehensive Treasury Stock, at Cost Stockholders’
Shares
Earnings
Amount
Income
Equity
Balance, March 31, 2013 .. 8,958,181 $
90 $
54,491 $ 32,636 $
329 4,579,563 $ (53,398) $
34,148
Shares issued in
connection with
share-based
compensation plans ... 134,002
1
943
-
-
-
-
944
Withholding tax on net
share settlement of
share-based
compensation plans ...
Repurchase of common
stock ..........................
Income tax benefit on
stock option
exercises ....................
Share-based
-
-
(772)
-
-
-
-
(772)
-
-
-
-
-
30,463
(1,486)
(1,486)
compensation ............
-
-
721
-
-
-
2,195
-
-
-
-
-
2,195
-
-
721
Unrealized losses on
available-for-sale
securities, net of
deferred income tax
benefit of $119 ...........
-
-
-
-
(180)
-
-
(180)
-
-
149 4,610,026 $ (54,884) $
-
8,327
43,897
-
Net income ........................
Balance, March 30, 2014 .. 9,092,183 $
-
91 $
-
8,327
57,578 $ 40,963 $
The accompanying notes are an integral part of these statements.
F-7
Nathan’s Famous, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
Fifty-two weeks ended March 29, 2015, the Fifty-two weeks ended March 30, 2014 and the Fifty-three weeks ended
March 31, 2013
(in thousands, except share amounts)
Additional
Retained
Earnings
Accumulated
Other
Total
Common Common Paid-in
Capital
Stock
Shares
(Accumulated Comprehensive Treasury Stock, at Cost Stockholders’
Deficit)
Income
Shares
Amount (Deficit) Equity
Balance, March 30,
2014 .......................... 9,092,183 $
91 $
57,578 $
40,963 $
149 4,610,026 $ (54,884) $
43,897
Shares issued in
connection with
share-based
compensation plans .
Withholding tax on net
share settlement of
share-based
compensation plans .
Repurchase of
common stock ..........
Income tax benefit on
stock option
exercises ...................
Share-based
compensation ...........
Unrealized losses on
available-for-sale
securities, net of
deferred income tax
benefit of $66 ...........
Dividends declared ......
Net income ....................
Balance, March 29,
159,914
2
880
-
-
-
-
-
(3,693)
-
-
-
4,572
-
859
-
-
-
-
-
-
-
-
882
-
-
-
(3,693)
-
37,661
(1,916)
(1,916)
-
-
-
-
-
-
4,572
859
-
-
-
-
(102)
-
-
(102)
-
-
-
11,703
-
-
-
11,703
(116,110)
(116,110)
2015 .......................... 9,252,097 $
93 $
60,196 $
(63,444) $
47 4,647,687 $ (56,800) $
(59,908)
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 .................................................................................................................. $
11,703 $
8,327 $
7,468
Fifty-Two
weeks ended
Fifty-Two
weeks ended
Fifty-Three
weeks ended
March 29, 2015 March 30, 2014
March 31, 2013
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization ......................................................................
Insurance gain ...............................................................................................
Amortization of bond premium ....................................................................
Amortization of debt discounts and issuance costs ......................................
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 ..............................................................
Insurance proceeds received for business interruption claim .......................
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 ..............................................................................................
1,253
-
164
66
859
23
-
111
(2,417)
718
125
(1,403)
181
-
1,779
-
44
79
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)
Net cash provided by operating activities ............................................
13,285
2,876
9,494
Cash flows from investing activities:
Proceeds from sales and maturities of available-for-sale securities ..........................
Insurance proceeds received for property and equipment (Note M.4) ......................
Purchase of long-term investment ..............................................................................
Change in restricted cash ............................................................................................
Purchase of property and equipment ..........................................................................
Purchase of available-for-sale securities ....................................................................
Litigation settlement ...................................................................................................
8,020
-
-
-
(1,538)
(4,258)
-
2,890
2,711
-
(135 )
(4,339 )
(2,219 )
6,009
Net cash provided by investing activities ............................................
2,224
4,917
Cash flows from financing activities:
Proceeds from issuance of long-term debt .................................................................
Debt discounts and issuance costs ..............................................................................
Dividends paid to stockholders ...................................................................................
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 share-based compensation
plans ........................................................................................................................
Net cash provided by (used in) financing activities ...................................................
135,000
(5,926)
(115,110)
(1,916)
880
4,572
(3,693)
13,807
-
-
-
(1,486 )
944
2,195
(772 )
881
Net increase in cash and cash equivalents ......................................................................
29,316
8,674
Cash and cash equivalents, beginning of year ................................................................
22,077
13,403
2,000
449
(500)
(455)
(998)
-
-
496
-
-
-
(3,085)
389
1,062
(982)
(2,616)
7,374
6,029
Cash and cash equivalents, end of year ........................................................................... $
51,393 $
22,077 $
13,403
Cash paid during the year for:
Interest ......................................................................................................................... $
Income taxes ............................................................................................................... $
- $
4,545 $
1,099 $
3,457 $
-
2,548
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 29, 2015, March 30, 2014 and March 31, 2013
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 29, 2015, the Company’s restaurant system included five Company-owned units in the New York City
metropolitan area and 296 franchised or licensed units, located in 27 states, the Cayman Islands and ten 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 29, 2015 contained 52 weeks. The results
of operations and cash flows for the fiscal years ended March 30, 2014 contained 52 weeks and March 31, 2013
contained 53 weeks.
3. Reclassifications
As of March 29, 2015, Nathan’s has adopted a new income statement format that it believes will better present its
results of operations. The Company concluded that it was appropriate to separately present its non-operating revenue
and expenses. Accordingly, interest expense, impairment charge-long-term investment, insurance gain, interest
income and other income, net, have been removed from total revenues and total costs and expenses. These prior
year balances have been reclassified to conform with the current year presentation.
4. 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.
F-10
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
5. 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 $1,754 and $330 at March 29, 2015 and March 30, 2014,
respectively. Substantially all of the Company’s cash and cash equivalents are in excess of government insurance.
6. 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.
7. 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 29, 2015 and March 30, 2014, 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.
8. 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 (years) .......................................................................
Machinery, equipment, furniture and fixtures (years) ............................................
Leasehold improvements (years) ............................................................................
5 – 25
3 – 15
5 – 20
9. 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 29, 2015 and
March 30, 2014, the Company performed its required annual impairment test of goodwill and intangible assets and
has determined no impairment is deemed to exist.
F-11
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. 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 M.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 29, 2015, March 30, 2014 and March 31, 2013.
11. 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) Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability
in an active market
(cid:404) 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
(cid:404) Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement
of the asset or liability
The use of observable market inputs (quoted market prices) when measuring fair value and, specifically, the use of
Level 1 quoted prices to measure fair value are required whenever possible. The determination of where an asset or
liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures
quarterly and based on various factors, it is possible that an asset or liability may be classified differently from year
to year.
F-12
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following table presents assets and liabilities measured at fair value on a recurring basis as of March 29, 2015
and March 30, 2014 based upon the valuation hierarchy:
March 29, 2015
Level 1
Level 2
Level 3
Carrying
Marketable securities.................................... $
Total assets at fair value ............................... $
- $
- $
7,091 $
7,091 $
Value
7,091
7,091
- $
- $
March 30, 2014
Level 1
Level 2
Level 3
Carrying
Marketable securities ...................................... $
Total assets at fair value .................................. $
- $
- $
11,187 $
11,187 $
Value
11,187
11,187
- $
- $
Nathan’s marketable securities, which consist primarily of municipal bonds, are not actively traded. The valuation
of such bonds is based upon quoted market prices for similar bonds currently trading in an active market or model-
derived valuations in which all significant inputs are observable for substantially the full term of the asset.
The Company’s long-term debt had a carrying value of $135,000 as of March 29, 2015 and a fair value of $141,835
as of March 29, 2015. The Company estimates the fair value of its long-term debt based upon review of
observable pricing in secondary markets as of the last trading day of the fiscal period. Accordingly, the Company
classifies its long-term debt as Level 2.
The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value due to
the short-term maturity of the instruments.
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.
12. Start-up Costs
Pre-opening and similar restaurant costs are expensed as incurred.
13. 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.
14. 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.
F-13
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
15. 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 29, 2015 and March 30, 2014, $278 and $234, respectively, of deferred franchise fees are included in the
accompanying consolidated balance sheets. For the fiscal years ended March 29, 2015, March 30, 2014 and
March 31, 2013, the Company earned franchise fees of $1,043, $863, and $852, respectively, from new unit
openings, transfers, co-branding and forfeitures.
Development fees are non-refundable and the related agreements require the franchisee to open a specified number
of restaurants in the development area within a specified time period or the agreements may be canceled by the
Company. Revenue from development agreements is deferred and shall be recognized, with an appropriate provision
for estimated uncollectible amounts, when all material services or conditions to the sale have been substantially
performed by the franchisor. If substantial obligations under the development agreement are not dependent on the
number of individual franchise locations to be opened, substantial performance shall be determined using the same
criteria applicable to an individual franchise, which is generally the opening of the first location pursuant to the
development agreement. If substantial performance is dependent on the number of locations, then the development
fee is deferred and recognized ratably over the term of the agreement, as restaurants in the development area
commence operations on a pro rata basis to the minimum number of restaurants required to be open, or at the time
the development agreement is effectively canceled. At March 29, 2015 and March 30, 2014, $214 and $200,
respectively, of deferred development fee revenue is included in other liabilities in the accompanying consolidated
balance sheets.
F-14
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following is a summary of franchise openings and closings for the Nathan’s franchise restaurant system for the
fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013:
March 29,
2015
March 30,
2014
March 31,
2013
Franchised restaurants operating at the beginning
of the period .........................................................
324
303
New franchised restaurants opened during the
period ...................................................................
Franchised restaurants closed during the period ......
36
(64)
56
(35)
Franchised restaurants operating at the end of the
period ...................................................................
296
324
299
40
(36)
303
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.
16. 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.
17. 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 29, 2015, three Branded Product customers represented 20%, 17% and 10%, of accounts receivable. 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%, 17% and 12% of
total revenue for the years ended March 29, 2015, March 30, 2014 and March 31, 2013, respectively. One retail
licensee accounted for 17% of total revenue for the year ended March 29, 2015.
F-15
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company’s primary supplier of hot dogs represented 83%, 75% and 82% of product purchases for the fiscal
years ended March 29, 2015, March 30, 2014 and March 31, 2013, respectively. The Company’s distributor of
products to its Company-owned restaurants represented 5%, 5% and 7% of product purchases for the fiscal years
ended March 29, 2015, March 30, 2014 and March 31, 2013, respectively.
The Company’s revenues for the fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013 were
derived from the following geographic areas:
March 29, 2015 March 30, 2014
March 31, 2013
Domestic (United States) ............................. $
Non-domestic ..............................................
$
95,682 $
3,430
99,112 $
76,221 $
3,531
79,752 $
68,025
3,044
71,069
The Company’s sales for the fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013 were derived
from the following:
March 29, 2015 March 30, 2014 March 31, 2013
Branded Products ............................................. $
Company-owned restaurants ............................
Other .................................................................
$
58,948 $
15,874
698
75,520 $
51,877 $
13,231
413
65,521 $
43,214
13,403
39
56,656
18. 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 $175, $147 and $144, for the fiscal
years ended March 29, 2015, March 30, 2014 and March 31, 2013, respectively, and have been included within
restaurant operating expenses in the accompanying consolidated statements of earnings.
19. Stock-Based Compensation
At March 29, 2015, the Company had one stock-based compensation plan in effect which is more fully described in
Note L.
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.
20. 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.
F-16
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
o Insurance costs directly related to Company-operated restaurants.
21. Income Taxes
The Company’s current provision for income taxes is based upon its estimated taxable income in each of the
jurisdictions in which it operates, after considering the impact on taxable income of temporary differences resulting
from different treatment of items for tax and financial reporting purposes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and any operating loss or tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the year in which those temporary differences are expected to be recovered or settled. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which
temporary differences become deductible. Should management determine that it is more likely than not that some
portion of the deferred tax assets will not be realized, a valuation allowance against the deferred tax assets would be
established in the period such determination was made.
Uncertain Tax Positions
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.
22. Adoption of New Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance changing the
criteria for reporting discontinued operations. The revised definition of a discontinued operation includes those
components of an entity or a group of components of an entity representing a strategic shift that has (or will have) a
major effect on an entity’s operations and financial results. The guidance eliminates the current requirement to assess
continuing cash flow and continuing involvement with the disposal group. The revised definition also includes a
business or nonprofit activity that, on acquisition, meets the criteria to be classified as held for sale. A disposal
meeting the new definition is required to be reported as discontinued operations when the component of an entity or
group of components of an entity meets the held for sale criteria, is actually disposed of by sales, or is disposed of
through means other than a sale. The guidance is effective for Nathan’s for annual periods beginning on or after
F-17
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
December 15, 2014 and interim periods within those years, which for Nathan’s will be the first quarter of fiscal 2016
beginning on 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
its results of operations or financial position.
In May 2014, the FASB issued a new accounting standard that attempts to establish a uniform basis for recording
revenue to virtually all industries’ financial statements, under U.S. GAAP. The revenue standard’s core principle is
built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict
the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the
consideration to which the vendor is entitled. In order to accomplish this objective, companies must evaluate the
following five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the
contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the
contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. There are three basic
transition methods that are available – full retrospective, retrospective with certain practical expedients, and a
cumulative effect approach. Under the third alternative, an entity would apply the new revenue standard only to
contracts that are incomplete under legacy U.S. GAAP at the date of initial application and recognize the cumulative
effect of the new standard as an adjustment to the opening balance of retained earnings. Prior years would not be
restated and additional disclosures would be required to enable users of the financial statements to understand the
impact of adopting the new standard in the current year compared to prior years that are presented under legacy U.S.
GAAP. Early adoption is prohibited under U.S. GAAP. Public companies must apply the new standard for annual
periods beginning after December 15, 2016, including interim periods therein, which for Nathan’s will be its first
quarter of fiscal 2018, beginning on March 27, 2017.
On April 29, 2015, the FASB issued a proposal to defer the standard's effective date until 2018. On May 12, 2015,
the FASB issued a second proposed update to the standard clarifying the distinction between revenue from licenses
of intellectual property that represent a promise to deliver a good or service over time versus a promise to be satisfied
at a point in time. The Company continues to monitor these proposals and currently expects to use the modified
retrospective method, recognizing a cumulative effect adjustment to retained earnings when adopted, and is currently
evaluating the impact of this new accounting standard on its consolidated financial position and results of operations.
In August 2014, the FASB issued new guidance that requires management to evaluate whether there are conditions
or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going
concern within one year after the date that the financial statements are issued. If such conditions exist, management
will be required to include disclosures enabling users to understand those conditions and management’s plans to
alleviate or mitigate those conditions. This new standard is effective for annual periods ending after December 15,
2016 and interim periods within annual periods beginning after December 16, 2016. This standard will take effect
in Nathan’s fourth quarter of our fiscal year ending March 26, 2017.
In January 2015, the FASB issued new guidance to simplify the income statement presentation requirements by
eliminating the seldom-used concept of extraordinary items. Extraordinary items are events and transactions that are
distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary
classification simplifies the income statement presentation by no longer segregating such extraordinary items from
the ordinary results of operations and separately stating the amount, net of tax along with the effect on earnings per
share. This new standard is effective for annual periods beginning after December 15, 2015, including interim
periods therein, which for Nathan’s would be its first quarter of fiscal 2017 beginning March 28, 2016. Early
adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.
Nathan’s expects to early adopt this standard in the first quarter of our fiscal year ending March 27, 2016 that begins
on March 30, 2015. Nathan’s does not expect the adoption of this new guidance to have a material impact on its
results of operations or financial position.
F-18
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In April 2015, the FASB issued new guidance to simplify the presentation of debt issuance costs. Under the new
standard, debt issuance costs related to a recognized debt liability shall be presented in the balance sheet as a direct
deduction to the carrying value of the debt and not as an asset. The amendment is effective for public entities with
fiscal years beginning after December 15, 2015 and interim periods within those periods and will be applied
retroactively. Early adoption of the amendment is permitted for financial statements that have not been previously
issued. Nathan’s has early adopted this new standard in its financial statements beginning with the period ended
March 29, 2015. The adoption of this new guidance did not have a material impact on its results of operations or
financial position.
The Company does not believe that any other recently issued, but not yet effective accounting standards, when
adopted, will have a material effect on the accompanying financial statements.
NOTE 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 29, 2015, March 30, 2014 and March 31, 2013, respectively:
Net Income
2015 2014 2013
2015
Shares
2014
Net income per share
2015 2014 2013
2013
Basic EPS
Basic calculation ... $ 11,703 $ 8,327 $ 7,468 4,486,000 4,450,000 4,400,000 $
Effect of dilutive
employee stock
options ............
188,000
102,000
155,000
-
-
-
2.61 $
1.87 $1.70
(.06)
(.06) (.07)
Diluted EPS
Diluted calculation $ 11,703 $ 8,327 $ 7,468 4,588,000 4,605,000 4,588,000 $
2.55 $
1.81 $1.63
There were no options to purchase shares of common stock for the years ended March 29, 2015, March 30, 2014
and March 31, 2013 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 29, 2015 .................................... $
7,019 $
72 $
- $
7,091
March 30, 2014 ..................................... $
10,947 $
240 $
- $
11,187
F-19
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE D – MARKETABLE SECURITIES (continued)
As of March 29, 2015, the municipal bonds mature at various dates between April 2015 and January 2017. The following
represents the bond maturities by period:
Fair value of Municipal Bonds
Total
Less than
1 Year
1 – 5 Years
5 – 10 Years
After
10 Years
March 29, 2015 ....................... $
7,091 $
4,650 $
2,441 $
- $
-
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 .............................................. $
8,020 $
- $
2,890 $
- $
2,000
-
March 29, 2015 March 30, 2014
March 31, 2013
The change in net unrealized losses on available-for-sale securities for the fiscal years ended March 29, 2015, March 30,
2014 and March 31, 2013, of $(102), $(180) and $(168), 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 29, 2015 and March 30, 2014.
NOTE E - ACCOUNTS AND OTHER RECEIVABLES, NET
Accounts and other receivables, net, consist of the following:
March 29,
2015
March 30,
2014
Branded product sales ................................................................................... $
Franchise and license royalties .....................................................................
Other ............................................................................................................
Less: allowance for doubtful accounts ........................................................
6,317 $
2,570
1,055
9,942
443
Accounts and other receivables, net ............................................................ $
9,499 $
5,141
1,658
1,457
8,256
433
7,823
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 does not recognize franchise and license royalties that
are not deemed to be realizable.
The Company individually reviews each past due account and determines its allowance for doubtful accounts by
considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous
loss history, the customer’s current and expected future ability to pay its obligation to the Company, the condition of the
general economy and the industry as a whole. Based on management’s assessment, the Company provides for estimated
uncollectible amounts through a charge to earnings. 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 29, 2015, March 30, 2014 and March 31, 2013
NOTE E - ACCOUNTS AND OTHER RECEIVABLES, NET (continued)
Changes in the Company’s allowance for doubtful accounts for the fiscal years ended March 29, 2015, March 30, 2014
and March 31, 2013 are as follows:
March 29, 2015 March 30, 2014 March 31, 2013
Beginning balance ................................................................ $
Bad debt expense ........................................................
Uncollectible marketing fund contributions ...............
Accounts written off ...................................................
Ending balance ..................................................................... $
433 $
23
-
(13)
443 $
130 $
21
320
(38)
433 $
138
15
5
(28)
130
NOTE F – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
March 29,
March 30,
2015
2014
Income taxes ..................................................................................................... $
Insurance ..........................................................................................................
Other .................................................................................................................
3,525 $
497
510
$
4,532 $
2,059
506
564
3,129
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 currently represents 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
periods ended March 29, 2015 or 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 29, 2015, March 30, 2014 and March 31, 2013
NOTE H - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
March 29,
March 30,
2015
2014
Land ...................................................................................................................... $
Building and improvements .................................................................................
Machinery, equipment, furniture and fixtures ......................................................
Leasehold improvements ......................................................................................
Construction-in-progress ......................................................................................
Less: accumulated depreciation and amortization ................................................
1,197 $
2,067
5,594
6,120
1,225
16,203
6,946
1,197
2,161
6,349
6,792
25
16,524
7,554
$
9,257 $
8,970
NOTE I – ACCRUED EXPENSES, OTHER CURRENT LIABILITIES AND OTHER LIABILITIES
Accrued expenses and other current liabilities consist of the following:
March 29,
March 30,
2015
2014
Payroll and other benefits ..................................................................................... $
Accrued rebates ....................................................................................................
Rent and occupancy costs .....................................................................................
Deferred revenue ..................................................................................................
Construction costs ................................................................................................
Unexpended advertising funds .............................................................................
Interest ..................................................................................................................
Professional fees ...................................................................................................
Dividend payable ..................................................................................................
Other .....................................................................................................................
$
2,847 $
815
206
601
269
-
750
329
375
220
6,412 $
2,433
855
163
734
281
52
-
81
-
152
4,751
Other liabilities consist of the following:
Deferred development fees ................................................................................... $
Reserve for uncertain tax positions (Note J) .........................................................
Deferred rental liability ........................................................................................
Dividend payable ..................................................................................................
Other .....................................................................................................................
$
214 $
555
991
625
12
2,397 $
200
620
661
-
212
1,693
March 29,
March 30,
2015
2014
F-22
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE J - INCOME TAXES
The income tax provision consists of the following for the fiscal years ended March 29, 2015, March 30, 2014 and
March 31, 2013:
March 29, 2015 March 30, 2014 March 31, 2013
Federal
Current .............................................................................. $
Deferred ............................................................................
State and local
Current ..............................................................................
Deferred ............................................................................
$
5,992 $
60
6,052
1,599
51
1,650
7,702 $
2,664 $
1,421
4,085
918
231
1,149
5,234 $
3,237
377
3,614
937
120
1,057
4,671
The total income tax provision for the fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013 differs
from the amounts computed by applying the United States Federal income tax rates of 35%, 34% and 34%, respectively,
to income before income taxes as a result of the following:
March 29, 2015 March 30, 2014 March 31, 2013
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 ...............
$
6,792 $
4,611 $
1,112
(63)
(62)
(77)
7,702 $
773
(110)
(22)
(18)
5,234 $
4,127
633
(133)
22
22
4,671
F-23
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
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 29,
March 30,
2015
2014
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) ........................................................................
Less current portion ............................................................................................
Long-term portion .............................................................................................. $
145 $
52
432
223
412
152
140
1,556 $
288
16
1,692
-
311
2,307
(751 )
(277 )
(1,028 ) $
162
49
569
594
289
157
129
1,949
302
83
1,692
293
287
2,657
(708)
(26)
(734)
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 29, 2015, March 30, 2014 and March 31, 2013.
March 29, 2015 March 30, 2014 March 31, 2013
Unrecognized tax benefits, beginning of year ...................... $
Decreases of tax positions taken in prior years.....................
Increases based on tax positions taken in current year .........
Settlements of tax positions taken in prior years ..................
Unrecognized tax benefits, end of year ............................. $
283 $
(64)
47
-
266 $
296 $
(34)
21
-
283 $
422
(50)
34
(110)
296
The amount of unrecognized tax benefits at March 29, 2015, March 30, 2014 and March 31, 2013 were $266, $283 and
$296, respectively, all of which would impact Nathan’s effective tax rate, if recognized. As of March 29, 2015 and
March 30, 2014, the Company had $289 and $329, respectively, accrued for the payment of interest and penalties. For
the fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013 Nathan’s recognized interest and penalties
in the amounts of $44, $43, and $46, respectively. The Company believes that it is reasonably possible that decreases in
unrecognized tax benefits of up to $98 may be recorded within the next year.
F-24
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE J - INCOME TAXES (continued)
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
2012
2012
2012
NOTE K – LONG-TERM DEBT
Long-term debt consists of the following:
March 29,
2015
10.000% Senior secured notes due 2020 ....................................................................................... $
Less: current maturities of long-term debt .....................................................................................
Less: unamortized debt discounts and issuance costs ....................................................................
$
135,000
-
(5,860)
129,140
On March 10, 2015, the Company completed the issuance of $135,000 of 10.000% Senior Secured Notes due 2020 (“The
Notes”) in a Rule 144A transaction. The Company used the proceeds to pay a special cash dividend of approximately
$116,100 (see Note L.1) with the remaining net proceeds for general corporate purposes, including working capital. Debt
discounts and issuance costs are presented net of the long-term debt of approximately $5,926 which will be amortized
into interest expense over the 5-year term of the Notes.
The notes bear interest at 10.000% per annum, payable semi-annually on March 15th and September 15th with the first
payment due on September 15, 2015. The Notes have no scheduled principal amortization payments prior to its final
maturity on March 10, 2020.
There are no financial maintenance covenants associated with the Notes. The Indenture contains certain covenants
limiting the Company’s ability and the ability of its restricted subsidiaries (as defined in the Indenture) to, subject to
certain exceptions and qualifications: (i) incur additional indebtedness; (ii) pay dividends or make other distributions on,
redeem or repurchase, capital stock; (iii) make investments or other restricted payments; (iv) create or incur certain liens;
(v) incur restrictions on the payment of dividends or other distributions from its restricted subsidiaries; (vi) enter into
certain transactions with affiliates; (vii) sell assets; or (viii) effect a consolidation or merger. Certain Restricted Payments
which may be made or indebtedness incurred by Nathan’s or its Restricted Subsidiaries may require compliance with
certain financial ratios.
The Indenture also contains customary events of default, including, among other things, failure to pay interest, failure to
comply with agreements related to the indenture, failure to pay at maturity or acceleration of other indebtedness, failure
to pay certain judgments, and certain events of insolvency or bankruptcy. Generally, if any event of default occurs, the
Trustee or the holders of at least 25% in principal amount of the Notes may declare the Notes due and payable by
providing notice to the Company. In case of default arising from certain events of bankruptcy or insolvency, the Notes
will become immediately due and payable.
As of March 29, 2015, Nathan’s was in compliance with all covenants associated with the Notes.
F-25
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE K – LONG-TERM DEBT (continued)
The finacial ratios are as follows:
Fixed Charge Coverage Ratio: the ratio of the Consolidated Cash Flow to the Fixed Charges for the relevant period,
currently set at 2.0 to 1.0 in the Indenture. The Fixed Charge Coverage Ratio applies to determining whether
additional Restricted Payments may be made, certain additional debt may be incurred and acquisitions may be
made.
Priority Secured Leverage Ratio: the ratio of (a) Consolidated Net Debt outstanding as of such date that is secured
by a Priority Lien to (b) Consolidated Cash Flow of Nathan’s for the Test Period then most recently ended, in
each case with such pro forma adjustments as are appropriate; currently set at 0.40 to 1.00 in the Indenture.
Secured Leverage Ratio: the ratio of (a) Consolidated Net Debt outstanding as of such date that is secured by a Lien
on any property of Nathan’s or any Guarantor to (b) Consolidated Cash Flow of Nathan’s for the Test Period
then most recently ended, in each case with such pro forma adjustments as are appropriate. The Secured
Leverage Ratio under the Indenture is 3.75 to 1.00 and applies if Nathan’s wants to incur additional debt on the
same terms as the Notes.
The Notes are general senior secured obligations, are guaranteed by substantially all of the Company’s wholly-owned
subsidiaries and rank pari passu in right of payment with all of the Company’s existing and future indebtedness that is
not subordinated, are senior in right of payment to any of the Company’s existing and future subordinated indebtedness,
are structurally subordinated to any existing and future indebtedness and other liabilities of the Company’s subsidiaries
that do not guarantee the Notes, and are effectively junior to all existing and future indebtedness that is secured by assets
other than the collateral securing the Notes.
Prior to September 15, 2017, the Company has the option to redeem up to 35% of the aggregate principal amount of the
Notes at a redemption price equal to 110% of the principal amount of the Notes redeemed, plus accrued and unpaid
interest and any additional interest, with the net cash proceeds of certain equity offerings.
The Company may redeem the Notes in whole or in part prior to September 15, 2017, at a redemption price of 100% of
the principal amount of the Notes plus the Applicable Premium, plus accrued and unpaid interest. An Applicable
Premium is the greater of 1% of the principal amount of the Notes; or the excess of the present value at such redemption
date of (i) the redemption price of the Notes at September 15, 2017 plus (ii) all required interest payments due on the
Notes through September 15, 2017 (excluding accrued but unpaid interest to the redemption date), computed using a
discount rate equal to the Treasury Rate as of such redemption date plus 50 basis points; over the then outstanding
principal amount of the Notes. On or after September 15, 2017, the Company may redeem some or all of the Notes at a
decreasing premium over time, plus accrued and unpaid interest as follows:
YEAR
On or after September 15, 2017 and prior to March 15, 2018 .............................................................
On or after March 15, 2018 and prior to March 15, 2019 ...................................................................
On and after March 15, 2019 ...............................................................................................................
PERCENTAGE
105.000%
102.500%
100.000%
In certain circumstances involving a change of control, the Company will be required to make an offer to repurchase all
or, at the holder’s option, any part, of each holder’s Notes pursuant to the offer described below (the “Change of Control
Offer”). In the Change of Control Offer, the Company will be required to offer payment in cash equal to 101% of the
aggregate principal amount of Notes repurchased plus accrued and unpaid interest, to the date of purchase.
If the Company sells certain assets and does not use the net proceeds as required, the Company will be required to use
such net proceeds to repurchase the Notes at 100% of the principal amount thereof, plus accrued and unpaid interest and
additional interest penalty, if any, to the date of repurchase.
F-26
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE K – LONG-TERM DEBT (continued)
The Notes may be traded between qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933. We
have recorded the Notes at cost. As of March 29, 2015, the fair value of the long-term debt was $141,835, as determined
based upon review of observable pricing in secondary markets as of the last trading day of the fiscal period. Accordingly,
the long-term debt is categorized as Level 2 for purposes of the fair value measurement hierarchy.
NOTE L – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
1. Dividend
On March 10, 2015, the Company’s Board of Directors declared a special cash dividend of $25.00 per share payable
to shareholders of record as of March 20, 2015. On March 27, 2015, the Company paid cash dividends of
approximately $115,100 to the shareholders of our outstanding common stock. The Company also accrued $1,000
for the expected dividends payable on unvested shares pursuant to the terms of the restricted stock agreements. As
certain restricted stock grants vest beginning in June 2015, the declared dividend will be paid. We estimate that
approximately $375 will be paid during the next fiscal year. The ex-date for the distribution was March 30, 2015
pursuant to NASDAQ regulations for dividend distributions that are greater than 25% of the Company’s market
capitalization.
2. 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 29, 2015, there were up to 268,500 shares available to be issued for future option grants or up to 204,219
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.
During the fiscal year ended March 29, 2015, the Company granted options to purchase 50,000 shares at an exercise
price of $53.89 per share, all of which expire five years from the date of grant. All such stock options vest ratably
over a four-year period commencing August 6, 2015.
F-27
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE L – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
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:
Weighted-average option fair values ..................................................................................... $
11.970
Expected life (years) ..............................................................................................................
Interest rate ............................................................................................................................
4.5
1.66%
Volatility ...............................................................................................................................
22.77%
Dividend Yield ......................................................................................................................
0%
The expected dividend yield is based on historical and projected yields for regular dividends. The Company
estimates expected 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.
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.
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 29, 2015 March 30, 2014 March 31, 2013
Stock options ................................................................. $
Restricted stock .............................................................
$
318 $
541
859 $
224 $
497
721 $
224
403
627
The tax benefit on stock-based compensation expense was $350, $286 and $251 for the years ended March 29, 2015,
March 30, 2014 and March 31, 2013, respectively. As of March 29, 2015, there was $1,815 of unamortized
compensation expense related to stock-based incentive awards. The Company expects to recognize this expense
over approximately one year and one month, which represents the weighted average remaining requisite service
periods for such awards.
F-28
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE L – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
A summary of the status of the Company’s stock options at March 29, 2015, March 30, 2014 and March 31, 2013
and changes during the fiscal years then ended is presented in the tables below:
2015
Weighted-
Average
Exercise
Price
Shares
Shares
2014
Weighted-
Average
Exercise
Price
Shares
2013
Weighted-
Average
Exercise
Price
Options outstanding – beginning
of year ........................................ 279,500 $
15.22 429,500 $
13.29 622,000 $
13.21
Granted ......................................
50,000 $
53.89
Expired.......................................
-
-
-
-
-
-
-
-
-
-
Exercised ................................... (235,125)
14.74 (150,000)
9.71 (192,500)
13.04
Options outstanding - end of year .
94,375 $
36.90 279,500 $
15.22 429,500 $
13.29
Options exercisable - end of year ..
- $
- 190,750 $
14.04 296,375 $
11.29
Weighted-average fair value of
options granted...........................
50,000 $
11.97
-
-
-
-
During the fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013, options to purchase 235,125,
150,000 and 192,500 shares were exercised which aggregated proceeds of $880, $944 and $389, respectively, to the
Company. The aggregate intrinsic values of the stock options exercised during the fiscal years ended March 29,
2015, March 30, 2014 and March 31, 2013 was $13,040, $6,038 and $3,523, respectively.
F-29
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE L – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
The following table summarizes information about outstanding stock options at March 29, 2015:
Weighted-
Weighted- Average
Average
Exercise
Price
Remaining Aggregate
Contractual
Life
Intrinsic
Value
Shares
Options outstanding at March 29, 2015 ................
94,375 $
36.90
2.87 $
3,460
Options exercisable at March 29, 2015 .................
- $
-
-
-
Exercise prices range from $17.75 to $53.89
Replacement stock options:
March 30, 2015, was the ex-dividend date for the Nathan’s dividend distribution that was paid on March 27, 2015.
Pursuant to the mandatory anti-dilution provisions of the option plan, the Company will issue replacement options
for the unvested stock options that were outstanding as of March 29, 2015. Nathan’s performed its evaluation based
on the closing price of its common stock on Friday March 27, 2015 of $73.56 per share, or $48.56 per share
excluding the dividend of $25.00 per share. No other terms or conditions of the outstanding options were modified.
The anti-dilution provisions of the original award were structured to equalize the award’s fair value before and after
the modification and as a result there will be no resulting incremental fair value after the modification to equalize
value.
The following table summarizes information about the replacement stock options outstanding after the conversion,
effective March 30, 2015:
Weighted- Weighted-
Average
Exercise
Price
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
Shares
Options outstanding at March 30, 2015 ................
142,964 $
24.36
2.87 $
3,460
Options exercisable at March 30, 2015 .................
- $
-
- $
-
Exercise prices range from $11.72 to $35.576
Diluted Earnings Per Share for the fiscal year ended March 29, 2015 would have been $2.53 per share, based upon
4,621,000 weighted average shares outstanding after giving effect to the issuance of the replacement options.
F-30
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE L – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
Restricted stock:
Transactions with respect to restricted stock for the fiscal year ended March 29, 2015 are as follows:
Weighted-
Average
Grant-date
Fair value
Per share
Shares
Unvested restricted stock at March 30, 2014 ............................................
55,000 $
38.61
Granted ..................................................................................................
-
Vested ....................................................................................................
(15,000) $
Unvested restricted stock at March 29, 2015 ............................................
40,000 $
-
36.13
39.54
The aggregate fair value of restricted stock vested during the fiscal years ended March 29, 2015 March 30, 2014
and March 31, 2013 was $965, $533 and $293, respectively.
3. 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 29, 2015, the Company has reserved 10,311,542 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-31
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE L – STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
4. 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.
On September 11, 2014, the Company and MSI amended its existing agreement pursuant to which MSI was
authorized on the Company’s behalf to purchase shares of the Company’s common stock, $.01 par value having a
value of up to an additional $6,000, which purchases could commence on September 24, 2014. The agreement with
MSI was adopted under the safe harbor provided by Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act
of 1934, as amended to assist the Company in implementing its previously announced stock purchase plans.
Through March 29, 2015, Nathan’s purchased a total of 4,647,687 shares of common stock at a cost of approximately
$56,800 pursuant to the various stock repurchase plans previously authorized by the Board of Directors. Of these
repurchased shares, 37,661 shares were repurchased at a cost of $1,916 during the year ended March 29, 2015.
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 548,728 shares at a cost of $13,194 under the sixth stock repurchase plan through March 29, 2015,
an aggregate of 251,272 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.
5. 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-32
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE L – 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, 2016, 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 $375, 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. The employment
agreement automatically extends for successive one-year periods unless notice of non-renewal is provided in
accordance with the agreement. 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. 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-33
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE L – 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. 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, at which time the consulting agreement terminated.
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.
6. 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 29, 2015,
March 30, 2014 and March 31, 2013 were $30, $34 and $31, 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 29, 2015
and does not believe that there is a reasonable possibility that a withdrawal liability will be incurred. Contributions
to the Union Plan were $10, $10 and $16 for the fiscal years ended March 29, 2015, March 30, 2014 and March 31,
2013, respectively.
7. Other Benefits
The Company provides, on a contributory basis, medical benefits to active employees. The Company does not
provide medical benefits to retirees.
F-34
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE M - 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 29, 2015, the Company had non-cancelable operating lease commitments, net of certain sublease rental
income, as follows:
Lease
commitments
Sublease
income
Net lease
commitments
2016 ............................................................. $
2017 .............................................................
2018 .............................................................
2019 .............................................................
2020 .............................................................
Thereafter ....................................................
1,641 $
1,658
1,685
1,658
1,545
8,022
270 $
254
262
266
267
1,357
1,371
1,404
1,423
1,392
1,278
6,665
$
16,209 $
2,676 $
13,533
Aggregate rental expense, net of sublease income, under all current leases amounted to $1,617, $1,391 and $1,102
for the fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013, respectively. Sublease rental income
was $267, $265 and $353 for the fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013,
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 $489, $454 and $399 for the fiscal years ended March 29, 2015, March 30, 2014 and March 31, 2013,
respectively.
At March 29, 2015, the Company leases two 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.
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.
F-35
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE M – COMMITMENTS AND CONTINGENCIES (continued)
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. The
guaranty expired as of March 29, 2015 and the Company has reversed all previously recorded liabilities in
connection with this guaranty. In connection with the Nathan’s Franchise Agreement, Nathan’s has received a
personal guaranty from the franchisee for all obligations under the Guaranty. Nathan’s has not been required to
make any payments pursuant to the Guaranty.
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 Coney Island Boardwalk restaurant sustained minor damage
and re-opened on March 18, 2013. Our flagship Coney Island restaurant incurred significant damage and re-opened
on May 20, 2013. As a result of these damages, the Company incurred actual losses during the fiscal year ended
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 fiscal ended March 30, 2014.
In April 2014, the Company settled its claim for reimbursable on-going business expenses while the restaurant was
closed of approximately $718, net of fees, that was included in accounts and other receivables in the accompanying
balance sheet as of March 30, 2014.
NOTE N - RELATED PARTY TRANSACTIONS
An accounting firm of which Charles Raich, who serves on Nathan’s Board of Directors, has been The Founding
Partner, received ordinary tax preparation and other consulting fees of $160, $130 and $136 for the fiscal years
ended March 29, 2015, March 30, 2014 and March 31, 2013, 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, $24 and $25 for the fiscal
years ended March 29, 2015, March 30, 2014 and March 31, 2013, respectively.
F-36
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE O - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal Year 2015
Total revenues ...................................................... $
Gross profit (a) ......................................................
Net income ...........................................................
27,668 $
4,240
4,071
28,953 $
4,716
3,854
22,353 $
2,594
2,241
20,401
2,019
1,537
Per share information
Net income per share
Basic (b) ............................................................. $
Diluted (b) .......................................................... $
.91 $
.89 $
.86 $
.84 $
.50 $
.49 $
.34
.34
Shares used in computation of net income per
share
Basic (b) .............................................................
Diluted (b) ..........................................................
4,471,000
4,593,000
4,472,000 4,482,000
4,593,000 4,603,000
4,521,000
4,562,000
After giving effect to the issuance of the replacement options, Diluted Earnings Per Share would have been $0.34
per share based upon 4,576,000 weighted average shares outstanding for the fourth quarter ended March 29, 2015.
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) .............................................................
Diluted (b) ..........................................................
4,415,000
4,588,000
4,460,000 4,466,000
4,625,000 4,622,000
4,459,000
4,594,000
(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-37
Nathan’s Famous, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 29, 2015, March 30, 2014 and March 31, 2013
NOTE P - SUBSEQUENT EVENT
On June 10, 2015, the Company and Wayne Norbitz entered into a Transition Agreement (the “Transition
Agreement”) relating to the retirement of Mr. Norbitz as President and Chief Operating Officer of the Company.
Under the Transition Agreement, Mr. Norbitz will continue to serve as President and Chief Operating Officer of the
Company through August 7, 2015 at which time he will become a Consultant to the Company pursuant to the terms
of a one year Consulting Agreement between him and the Company (the “Consulting Agreement”). The Consulting
Agreement provides that Mr. Norbitz will receive a consulting fee of $16,291 per month. The Transition Agreement
further provides that Mr. Norbitz will receive a severance payment of $288,750 and under the terms of the Transition
Agreement the Company purchased from Mr. Norbitz 56,933 shares of the Company’s common stock, $.01 par
value (the “Common Stock”) at a purchase price of $40.28 which was the closing price of the Common Stock as
reported on the Nasdaq Global Market on June 10,2015. Mr. Norbitz will also be included as a nominee on
management’s slate of Directors at the Company’s upcoming annual meeting of stockholders.
F-38
CORPORATE DIRECTORY
LIST OF DIRECTORS
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
Nathan’s Famous, Inc. & Subsidiaries
LIST OF OFFICERS
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
Scott Harvey
Executive Vice President
FORM 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
QUARTERLY SHAREHOLDER LETTER
Will be available on our website.
Copies will be provided upon request.
Randy K. Watts
Vice President—Franchise Operations
Donald P. Schedler
Vice President—Development,
Architecture & Construction
CORPORATE HEADQUARTERS
One Jericho Plaza
Second Floor—Wing A
Jericho, New York 11753
516-338-8500 Telephone
516-338-7220 Facsimile
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Grant Thornton LLP
445 Broadhollow Road
Melville, New York 11747
CORPORATE COUNSEL
Olshan Frome & Wolosky LLP
65 East 55th Street
New York, New York 10022
TRANSFER AGENT
American Stock Transfer &
Trust Company
59 Maiden Lane
New York, New York 10038
COMPANY WEBSITE
www.nathansfamous.com
ANNUAL SHAREHOLDERS’ MEETING
The Annual Meeting of Shareholders
of the Company will be held at 10:00
a.m., EST on Thursday, September 10,
2015, 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