NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
March 26, 2017, March 27, 2016 and March 29, 2015
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 a brand marketer to the foodservice industry, pursuant to its various business structures. Nathan’s has also pursued co-branding and co-hosting initiatives.
At March 26, 2017, the Company’s restaurant system included five Company-owned units in the New York City metropolitan area and 279 franchised or licensed units, located in 19
states and 12
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 years ended March 26, 2017, March 27, 2016 and March 29, 2015 are on the basis of a 52-week reporting period.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates made by management in preparing the consolidated financial statements include revenue recognition, the allowance for doubtful accounts, valuation of stock-based compensation, accounting for income taxes, and the valuation of goodwill, intangible assets and other long-lived assets.
4.
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.
5. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Major improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred. Depreciation and amortization are calculated on the straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the estimated useful life or the lease term of the related asset. The estimated useful lives are as follows:
Building and improvements (in years)
|
|
|
5
|
–
|
25
|
|
Machinery, equipment, furniture and fixtures (in years)
|
|
|
3
|
–
|
15
|
|
Leasehold improvements (in years)
|
|
|
5
|
–
|
20
|
|
6. 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 26, 2017 and March 27, 2016, the Company performed its required annual impairment test of goodwill and intangible assets and has determined no impairment is deemed to exist.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. 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. No long-lived assets were deemed impaired during the fiscal years March 26, 2017, March 27, 2016 and March 29, 2015.
8. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).
The fair value hierarchy, as outlined in the applicable accounting guidance, is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions.
The fair value hierarchy consists of the following three levels:
|
●
|
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market
|
|
|
|
|
●
|
Level 2 - inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability
|
|
|
|
|
●
|
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability
|
The 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.
At March 26, 2017 and March 27, 2016, we did not have any assets or liabilities that were recorded at fair value.
The Company's long-term debt had a face value of $135,000 as of March 26, 2017 and a fair value of $145,125 as of March 26, 2017. 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.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
9.
Start-up Costs
Pre-opening and similar restaurant costs are expensed as incurred.
10. 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.
11. 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.
12. Revenue Recognition - Franchising Operations
In connection with its franchising operations, the Company receives initial franchise fees, international development fees, royalties, and in certain cases, revenue from sub-leasing restaurant properties to franchisees.
Franchise and international 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.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
|
International development fees are recognized, net of direct expenses, upon the opening of the first restaurant within the territory. In each case, this is when the Company has performed substantially all initial services required by the agreements.
At March 26, 2017 and March 27, 2016,
$98 and
$137, respectively, of deferred franchise fees are included in the accompanying consolidated balance sheets. For the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015, the Company earned franchise fees of $778, $751 and $1,043, 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 26, 2017 and March 27, 2016,
$67 and $129, respectively, of deferred development fee revenue is included in other liabilities in the accompanying consolidated balance sheets.
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 26, 2017, March 27, 2016 and March 29, 2015:
|
|
March
26
|
|
|
March 27,
|
|
|
March 29,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchised restaurants operating at the beginning of the period
|
|
|
259
|
|
|
|
296
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New franchised restaurants opened during the period
|
|
|
53
|
|
|
|
56
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchised restaurants closed during the period
|
|
|
(33
|
)
|
|
|
(93
|
)
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchised restaurants operating at the end of the period
|
|
|
279
|
|
|
|
259
|
|
|
|
296
|
|
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.
13. Revenue Recognition – License Royalties
The Company earns revenue from royalties on the licensing of the use of its intellectual property in connection with certain products produced and sold by outside vendors. The use of the Company’s intellectual property must be approved by the Company prior to each specific application to ensure proper quality and a consistent image. Revenue from license royalties is generally based on a percentage of sales, subject to certain annual minimum royalties, recognized on a monthly basis when it is earned and deemed collectible.
14. 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 26, 2017, four Branded Product customers represented 21%, 15%, 12% and 8%, of accounts receivable. At March 27, 2016, four Branded Product customers represented 19%, 14%, 9% and 8%, of accounts receivable. One Branded Products customer accounted for 12%, 14% and 17% of total revenue for the years ended March 26, 2017, March 27, 2016 and March 29, 2015, respectively. One retail licensee accounted for 20%, 19% and 17% of the total revenue for the years ended March 26, 2017, March 27, 2016 and March 29, 2015, respectively.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company’s primary supplier of hot dogs represented
78%,
81% and
83% of product purchases for the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015, respectively. The Company’s distributor of products to its Company-owned restaurants represented 5% of product purchases for each of the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015, respectively.
The Company’s revenues for the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015 were derived from the following geographic areas:
|
|
March 26,
2017
|
|
|
March 27,
2016
|
|
|
March 29,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (United States)
|
|
$
|
90,466
|
|
|
$
|
95,655
|
|
|
$
|
95,682
|
|
Non-domestic
|
|
|
6,186
|
|
|
|
5,235
|
|
|
|
3,430
|
|
|
|
$
|
96,652
|
|
|
$
|
100,890
|
|
|
$
|
99,112
|
|
The Company’s sales for the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015 were derived from the following:
|
|
March 26,
2017
|
|
|
March 27,
2016
|
|
|
March 29,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded Products
|
|
$
|
55,960
|
|
|
$
|
58,545
|
|
|
$
|
58,948
|
|
Company-owned restaurants
|
|
|
15,042
|
|
|
|
16,664
|
|
|
|
15,874
|
|
Other
|
|
|
214
|
|
|
|
822
|
|
|
|
698
|
|
|
|
$
|
71,216
|
|
|
$
|
76,031
|
|
|
$
|
75,520
|
|
15. Advertising
The Company administers an advertising fund on behalf of its restaurant system to coordinate the marketing efforts of the Company. Under this arrangement, the Company collects and disburses fees paid by manufacturers, franchisees and Company-owned 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 $182, $191 and $175, for the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015, respectively, and have been included within restaurant operating expenses in the accompanying consolidated statements of earnings.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
16. Stock-Based Compensation
At March 26, 2017, the Company had one stock-based compensation plan in effect which is more fully described in Note M.
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.
17. Classification of Operating Expenses
Cost of sales consists of the following:
|
o
|
The cost of food and other products sold by Company-operated restaurants, through the Branded Product Program and through other distribution channels.
|
|
o
|
The cost of labor and associated costs of in-store restaurant management and crew.
|
|
o
|
The cost of paper products used in Company-operated restaurants.
|
|
o
|
Other direct costs such as fulfillment, commissions, freight and samples.
|
Restaurant operating expenses consist of the following:
|
o
|
Occupancy costs of Company-operated restaurants.
|
|
o
|
Utility costs of Company-operated restaurants.
|
|
o
|
Repair and maintenance expenses of Company-operated restaurant facilities.
|
|
o
|
Marketing and advertising expenses done locally and contributions to advertising funds for Company-operated restaurants.
|
|
o
|
Insurance costs directly related to Company-operated restaurants.
|
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
18. 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 and income tax benefits from share-based payments, as fully described in Note B.19. 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.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
19
. Adoption of New Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (the “FASB”), issued new guidance which addresses how companies account for certain aspects of its share-based payments to employees. The update simplifies the accounting for the tax consequences. It also amends how excess tax benefits and a company’s payments to cover the tax bills for the shares’ recipients should be classified on the statement of cash flows related to share-based payments to employees. The amendments allow companies to estimate the number of stock awards they expect to vest, and the amendments revised the withholding requirements for classifying stock awards as equity. Previously, tax withholding was permitted only at the minimum statutory tax rates, which is being amended to permit higher income tax withholding as long as it does not exceed the maximum statutory tax rate for an employee in the applicable jurisdictions. This new standard is effective for public companies with fiscal years beginning after December 15, 2016 which will be Nathan’s first quarter ending (June 2017) of our fiscal year ending on March 25, 2018. However, early adoption is permitted.
The Company elected to early adopt this standard in the quarter ended June 26, 2016. The impact of the early adoption resulted in the Company recording tax benefits of $659 within income tax expense for the year ended March 26, 2017, related to the excess tax benefit on stock incentive awards that settled during the period. Prior to adoption of this guidance, this amount would have increased additional paid-in capital. These items shall not be factored into the projected annual income tax rate, but will be treated as discrete items when they occur. Accordingly, this new treatment will add additional volatility in the Company’s effective tax rate.
The excess tax benefits for the years ended March 27, 2016 and March 29, 2015 were $228 and $4,572, respectively which increased additional paid-in-capital.
The Company accounts for forfeitures as they occur. Under the new guidance, excess tax benefits related to employee share-based payments of $659 are classified as operating activities in the statement of cash flows for the fifty-two weeks ended March 26, 2017. The Company applied the effect of the guidance to the presentation of excess tax benefits in the statement of cash flows prospectively and no prior periods have been adjusted. The Company did not record any cumulative-effect adjustment to accumulated deficit or net assets as a result of adopting this new accounting standard. The Company also modified its diluted earnings per share calculation by excluding the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the thirteen and fifty-two weeks ended March 26, 2017.
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 is 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 guidance was effective for the Company beginning in the fourth quarter of fiscal 2017 and did not have a material impact on the Company’s results of operations or financial position.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2
0
.
New Accounting Pronouncements Not Yet
Adopt
ed
I
n May 2014, the FASB issued a new accounting standard that attempts to establish a uniform basis for recording income to virtually all industries financial statements, under U.S. GAAP as further amended during 2016. The FASB issued certain updates to the standard, including clarifying reporting revenue between Principle versus Agent and clarification in determining performance obligations and licenses guidance. The revenue standard’s core principle is built on the contract between a vendor and a customer for the 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 two basic transition methods that are available – full retrospective, or modified retrospective transition methods. Early adoption is prohibited. Public companies were originally expected to apply the new standard for annual periods beginning after December 15, 2016, including interim periods therein, which for Nathan’s would have been its first quarter of fiscal 2018, beginning on March 27, 2017. On July 9, 2015, the FASB agreed to delay the standard’s effective date to annual reporting periods beginning after December 15, 2017 which will now be our first quarter (June 2018) of our fiscal year ending March 31, 2019.
The Company does not believe that the standard will impact its recognition of revenue for its Branded Product Program, Company-operated restaurants or its recognition of royalties from its franchised restaurants or retail licenses, which are based on a percentage of sales. Currently, franchise and international development fees are recognized when the Company has performed substantially all initial services required by the agreements, which is generally when the franchisee begins operations. Under the new guidance, these fees may be recognized over the term of the agreements. The Company is currently evaluating the impact of the pending adoption of the new revenue recognition standard on its consolidated financial statements and has not yet selected a transition method. The Company anticipates assigning internal resources to assist with the evaluation and implementation of the new standard, and will continue to provide updates during fiscal year 2018.
In July 2015, the FASB updated U.S. accounting guidance to simplify the ways businesses measure inventory. Companies that use the first-in, first-out (FIFO) method or the average cost method will measure inventory at the lower of its cost or net realizable value. Net realizable value is the estimated selling price in the normal course of business, minus the cost of completion, disposal, and transportation. Companies will no longer consider replacement cost or net realizable value less a normal profit margin when measuring inventory. This new standard is effective for annual reporting periods beginning after December 15, 2016 which will be our first quarter (June 2017) of our fiscal year ending March 25, 2018. Nathan’s does not expect the adoption of this new guidance to have a material impact on its results of operations or financial position.
In February 2016, the FASB issued a new accounting standard on leases. The new standard, among other changes, will require lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases. The lease liability will be measured at the present value of the lease payments over the lease term. The right-of-use asset will be measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs (e.g. commissions). The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods. This standard is required to take effect in Nathan’s first quarter ending (June 2019) of our fiscal year ending March 29, 2020. The adoption will require a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest period presented. The Company is currently evaluating the impact of this new accounting standard on its consolidated financial position and results of operations.
In January 2017, the FASB issued a new accounting standard that narrows the definition of a business. The concept is fundamental in determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU revised the definition of a business to consist of the following key concepts:
|
●
|
A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.
|
|
●
|
To be capable of being conducted and managed for the purposes described above, an integrated set of activities and assets requires two essential elements–inputs and a substantive process(es) applied to those inputs.
|
The amendments are effective prospectively for public business entities for annual reporting periods beginning after December 15, 2017. This standard is required to take effect in Nathan’s first quarter ending (June 2018) of our fiscal year ending March 31, 2019. The Company does not expect this new accounting standard will have a material effect on the Company’s results of operations, cash flows or financial position. Early adoption is permitted when certain criteria are met.
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 effect of stock options. Diluted income per common share gives effect to all potentially dilutive common shares that were outstanding during the period. Dilutive common shares used in the computation of diluted income per common share result from the assumed exercise of stock options and warrants, as determined using the treasury stock method.
The following chart provides a reconciliation of information used in calculating the per-share amounts for the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015, respectively:
|
|
Net Income
|
|
|
Shares
|
|
|
Net income per share
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic calculation
|
|
$
|
7,485
|
|
|
$
|
6,096
|
|
|
$
|
11,703
|
|
|
|
4,172,000
|
|
|
|
4,430,000
|
|
|
|
4,486,000
|
|
|
$
|
1.79
|
|
|
$
|
1.38
|
|
|
$
|
2.61
|
|
Effect of dilutive
employee stock
options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,000
|
|
|
|
33,000
|
|
|
|
102,000
|
|
|
|
(.01
|
)
|
|
|
(.01
|
)
|
|
|
(.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted calculation
|
|
$
|
7,485
|
|
|
$
|
6,096
|
|
|
$
|
11,703
|
|
|
|
4,206,000
|
|
|
|
4,463,000
|
|
|
|
4,588,000
|
|
|
$
|
1.78
|
|
|
$
|
1.37
|
|
|
$
|
2.55
|
|
No options to purchase shares of common stock for the years ended March 26, 2017, March 27, 2016 and March 29, 2015 were excluded from the computation of diluted earnings per share.
NOTE D – MARKETABLE SECURITIES
At March 26, 2017 and March 27, 2016, we did not have any marketable securities.
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:
|
|
March 27,
2016
|
|
|
March 29,
2015
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Proceeds
|
|
$
|
10,868
|
|
|
$
|
8,020
|
|
Gross realized gains
|
|
$
|
26
|
|
|
$
|
-
|
|
As a result of the sale of all of the marketable securities during the fiscal year ended March 27, 2016, all prior unrealized gains have been realized and are included in net income and reclassified in determining other comprehensive income for the year ended March 27, 2016. The reclassification of unrealized gains for the year ended March 27, 2016 was $47, which was net of taxes of $25.
The change in net unrealized losses on available-for-sale securities for the fiscal year ended March 29, 2015, of $(102), which is net of deferred income taxes, has been included as a component of comprehensive income.
NOTE E - ACCOUNTS AND OTHER RECEIVABLES, NET
Accounts and other receivables, net, consist of the following:
|
|
March
26
,
|
|
|
March 27,
|
|
|
|
201
7
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Branded product sales
|
|
$
|
6,037
|
|
|
$
|
5,689
|
|
Franchise and license royalties
|
|
|
2,746
|
|
|
|
2,592
|
|
Other
|
|
|
622
|
|
|
|
911
|
|
|
|
|
9,405
|
|
|
|
9,192
|
|
|
|
|
|
|
|
|
|
|
Less: allowance for doubtful accounts
|
|
|
457
|
|
|
|
471
|
|
|
|
|
|
|
|
|
|
|
Accounts and other receivables, net
|
|
$
|
8,948
|
|
|
$
|
8,721
|
|
Accounts receivable are due within 30 days and are stated at amounts due from franchisees, retail licensees and Branded Product Program customers, net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are generally considered past due. The Company does not recognize franchise and license royalties that are not deemed to be realizable.
The Company individually reviews each past due account and determines its allowance for doubtful accounts by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current and expected future ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings. After the Company has used reasonable collection efforts, it writes off accounts receivable through a charge to the allowance for doubtful accounts.
Changes in the Company’s allowance for doubtful accounts for the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015 are as follows:
|
|
March 26,
2017
|
|
|
March 27,
2016
|
|
|
March 29,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
471
|
|
|
$
|
443
|
|
|
$
|
433
|
|
Bad debt expense
|
|
|
53
|
|
|
|
38
|
|
|
|
23
|
|
Accounts written off
|
|
|
(67
|
)
|
|
|
(10
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
457
|
|
|
$
|
471
|
|
|
$
|
443
|
|
NOTE F – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
|
|
March 26,
|
|
|
March 27,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
211
|
|
Insurance
|
|
|
319
|
|
|
|
488
|
|
Other
|
|
|
774
|
|
|
|
644
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets
|
|
$
|
1,093
|
|
|
$
|
1,343
|
|
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 26, 2017 or March 27, 2016. Each reporting period, management reviewed 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. At March 27, 2016, we performed our evaluation of whether indicators of impairment existed, and determined that an other-than-temporary impairment has occurred and recorded impairment charges of $100 on this investment during the fifty-two week periods ended March 27, 2016, based on the Company’s expected inability to recover its remaining investment. As of March 26, 2017 and March 27, 2016, the investment has been fully impaired and has no carrying value on the accompanying balance sheets.
NOTE H - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
|
|
March 26,
|
|
|
March 27,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,197
|
|
|
$
|
1,197
|
|
Building and improvements
|
|
|
2,119
|
|
|
|
2,029
|
|
Machinery, equipment, furniture and fixtures
|
|
|
5,749
|
|
|
|
5,698
|
|
Leasehold improvements
|
|
|
7,181
|
|
|
|
7,124
|
|
Construction-in-progress
|
|
|
120
|
|
|
|
155
|
|
Total property and equipment
|
|
|
16,366
|
|
|
|
16,203
|
|
Less: accumulated depreciation and amortization
|
|
|
7,522
|
|
|
|
7,190
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
8,844
|
|
|
$
|
9,013
|
|
NOTE I – ACCRUED EXPENSES, OTHER CURRENT LIABILITIES AND OTHER
LIABILITIES
Accrued expenses and other current liabilities consist of the following:
|
|
March 26,
|
|
|
March 27,
|
|
|
|
2017
|
|
|
2016
|
|
Payroll and other benefits
|
|
$
|
2,708
|
|
|
$
|
2,919
|
|
Accrued rebates
|
|
|
1,050
|
|
|
|
940
|
|
Rent and occupancy costs
|
|
|
215
|
|
|
|
218
|
|
Deferred revenue
|
|
|
723
|
|
|
|
679
|
|
Construction costs
|
|
|
160
|
|
|
|
183
|
|
Interest
|
|
|
463
|
|
|
|
507
|
|
Professional fees
|
|
|
109
|
|
|
|
101
|
|
Income taxes
|
|
|
143
|
|
|
|
82
|
|
Dividend payable
|
|
|
125
|
|
|
|
375
|
|
Other
|
|
|
169
|
|
|
|
172
|
|
Total accrued expenses and other current liabilities
|
|
$
|
5,865
|
|
|
$
|
6,176
|
|
Other liabilities consist of the following:
|
|
March 26,
|
|
|
March 27,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred development fees
|
|
$
|
67
|
|
|
$
|
129
|
|
Reserve for uncertain tax positions (Note J)
|
|
|
366
|
|
|
|
427
|
|
Deferred rental liability
|
|
|
786
|
|
|
|
893
|
|
Dividend payable
|
|
|
125
|
|
|
|
250
|
|
Other
|
|
|
211
|
|
|
|
7
|
|
Total other liabilities
|
|
$
|
1,555
|
|
|
$
|
1,706
|
|
NOTE J - INCOME TAXES
The income tax provision consists of the following for the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015:
|
|
March 26,
2017
|
|
|
March 27,
2016
|
|
|
March 29,
2015
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
3,024
|
|
|
$
|
3,176
|
|
|
$
|
5,992
|
|
Deferred
|
|
|
79
|
|
|
|
(11
|
)
|
|
|
60
|
|
Total Federal income tax
|
|
|
3,103
|
|
|
|
3,165
|
|
|
|
6,052
|
|
State and local
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,195
|
|
|
|
1,135
|
|
|
|
1,599
|
|
Deferred
|
|
|
21
|
|
|
|
(12
|
)
|
|
|
51
|
|
Total State and local income tax
|
|
|
1,216
|
|
|
|
1,123
|
|
|
|
1,650
|
|
Total provision for income taxes
|
|
$
|
4,319
|
|
|
$
|
4,288
|
|
|
$
|
7,702
|
|
The total income tax provision for the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015 differs from the amounts computed by applying the United States Federal income tax rate of
34%,
34% and 35%, respectively to income before income taxes as a result of the following:
|
|
March
26
,
201
7
|
|
|
March 27,
2016
|
|
|
March 29,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed “expected” tax expense
|
|
$
|
4,013
|
|
|
$
|
3,531
|
|
|
$
|
6,792
|
|
State and local income taxes, net of Federal income tax benefit
|
|
|
797
|
|
|
|
826
|
|
|
|
1,112
|
|
Tax-exempt investment earnings
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
(63
|
)
|
Change in uncertain tax positions, net
|
|
|
(11
|
)
|
|
|
(129
|
)
|
|
|
(62
|
)
|
Nondeductible meals and entertainment and other
|
|
|
61
|
|
|
|
69
|
|
|
|
(77
|
)
|
Nondeductible compensation
|
|
|
118
|
|
|
|
-
|
|
|
|
-
|
|
Tax benefit share based payments
|
|
|
(659
|
)
|
|
|
-
|
|
|
|
-
|
|
Total provision for income taxes
|
|
$
|
4,319
|
|
|
$
|
4,288
|
|
|
$
|
7,702
|
|
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
26
,
|
|
|
March 27,
|
|
|
|
201
7
|
|
|
2016
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
361
|
|
|
$
|
236
|
|
Allowance for doubtful accounts
|
|
|
59
|
|
|
|
62
|
|
Deferred revenue
|
|
|
347
|
|
|
|
393
|
|
Deferred stock compensation
|
|
|
224
|
|
|
|
271
|
|
Excess of straight line over actual rent
|
|
|
338
|
|
|
|
379
|
|
Investment
|
|
|
187
|
|
|
|
151
|
|
Other
|
|
|
104
|
|
|
|
119
|
|
Total gross deferred tax assets
|
|
$
|
1,620
|
|
|
$
|
1,611
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Deductible prepaid expense
|
|
|
288
|
|
|
|
263
|
|
Depreciation expense
|
|
|
1,771
|
|
|
|
1,717
|
|
Amortization
|
|
|
374
|
|
|
|
344
|
|
Total gross deferred tax liabilities
|
|
|
2,433
|
|
|
|
2,324
|
|
Net deferred tax (liability)
|
|
$
|
(813
|
)
|
|
$
|
(713
|
)
|
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 26, 2017, March 27, 2016 and March 29, 2015.
|
|
March 26,
2017
|
|
|
March 27,
2016
|
|
|
March 29,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits, beginning of year
|
|
$
|
208
|
|
|
$
|
266
|
|
|
$
|
283
|
|
Decreases of tax positions taken in prior years
|
|
|
(31
|
)
|
|
|
(98
|
)
|
|
|
(64
|
)
|
Increases based on tax positions taken in current year
|
|
|
41
|
|
|
|
43
|
|
|
|
47
|
|
Settlements of tax positions taken in prior years
|
|
|
(51
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
Unrecognized tax benefits, end of year
|
|
$
|
167
|
|
|
$
|
208
|
|
|
$
|
266
|
|
NOTE J
–
INCOME TAXES
(continued)
The amount of unrecognized tax benefits at March 26, 2017, March 27, 2016 and March 29, 2015 were $167
,
$208 and $266, respectively, all of which would impact Nathan’s effective tax rate, if recognized. As of March 26, 2017 and March 27, 2016, the Company had $183 and $200, respectively, accrued for the payment of interest and penalties. For the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015 Nathan’s recognized interest and penalties in the amounts of $29, $34 and $44, respectively. The Company believes that it is reasonably possible that decreases in unrecognized tax benefits of up to $5
may be recorded within the next year.
In June 2016, Nathan’s received notification from the Internal Revenue Service that it was seeking to review Nathan’s federal tax return for the period April 1, 2014 through March 31, 2015. The income tax examination has been completed with no changes to the original return as filed.
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 income tax examination has been completed with no changes to the original return as filed.
In June 2015, Nathan’s received notification from the New York State Department of Taxation and Finance that it will review Nathan’s tax returns for the period April 1, 2011 through March 31, 2014. The income tax examination has been completed with no changes to the original return as filed.
The earliest tax years’ that are subject to examination by taxing authorities by major jurisdictions are as follows:
Jurisdiction
|
Fiscal Year
|
Federal
|
2014
|
New York State
|
2014
|
New York City
|
2014
|
New Jersey
|
2013
|
Pennsylvania
|
2014
|
NOTE
K
–
SEGMENT
IN
FORMATION
Nathan’s considers itself to be a brand marketer of the Nathan’s Famous signature products to the foodservice industry pursuant to its various business structures. Nathan’s sells its products directly to consumers through its Restaurant operations segment consisting of Company-operated and franchised restaurants, to distributors that resell our products to the foodservice industry through the Branded Product Program (“BPP”) and by third party manufacturers pursuant to license agreements that sell our products to club stores and grocery stores nationwide. Historically, Nathan’s determined it was comprised of one segment using the management approach whereby the Company’s Chief Operating Decision Maker (“CODM”) responsibility was shared between the CEO and COO and considered itself to be solely in the foodservice segment. As a result of management changes that culminated during fiscal 2017 along with the implementation of a new executive incentive program aligning such compensation solely based on segment results, Nathan’s recognized its reporting structure into three segments to align with the current year organizational changes. Under our current structure, the Company's Chief Executive Officer has been identified as the CODM. The CODM evaluates performance and allocates resources for the Branded Product Program, Product Licensing and Restaurant Operations segments based upon a number of factors, the primary profit measure being income from operations. Certain costs are not allocated to the segments and are reported within Corporate. Prior year information has been presented to reflect the changes.
Revenues from operating segments are from transactions with unaffiliated third parties and do not include any intersegment revenues.
Income from operations attributable to Corporate consists principally of administrative expenses not allocated to the operating segments such as executive management, finance, information technology, legal, insurance, corporate office costs, corporate incentive compensation and compliance costs.
Interest expense, interest income, impairment charge – long-term investment and other income, net are managed centrally at the corporate level, and, accordingly, such items are not presented by segment since they are excluded from the measure of profitability reviewed by the CODM.
Corporate assets consist primarily of cash and long-lived assets.
Operating segment information is as follows:
|
|
Fifty-
Two
|
|
|
Fifty-Two
|
|
|
Fifty-Two
|
|
|
|
weeks ended
|
|
|
weeks ended
|
|
|
weeks ended
|
|
|
|
March
26, 2017
|
|
|
March 27, 2016
|
|
|
March 29, 2015
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded Product Program
|
|
$
|
56,174
|
|
|
$
|
59,367
|
|
|
$
|
59,646
|
|
Product licensing
|
|
|
20,368
|
|
|
|
19,815
|
|
|
|
18,011
|
|
Restaurant operations
|
|
|
20,110
|
|
|
|
21,708
|
|
|
|
21,455
|
|
Corporate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total revenues
|
|
$
|
96,652
|
|
|
$
|
100,890
|
|
|
$
|
99,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded Product Program
|
|
$
|
10,257
|
|
|
$
|
8,394
|
|
|
$
|
4,497
|
|
Product licensing
|
|
|
20,186
|
|
|
|
19,812
|
|
|
|
18,000
|
|
Restaurant operations
|
|
|
4,101
|
|
|
|
5,253
|
|
|
|
5,604
|
|
Corporate
|
|
|
(8,264
|
)
|
|
|
(8,496
|
)
|
|
|
(8,143
|
)
|
Income from operations
|
|
$
|
26,280
|
|
|
$
|
24,963
|
|
|
$
|
19,958
|
|
Interest expense
|
|
|
(14,665
|
)
|
|
|
(14,630
|
)
|
|
|
(816
|
)
|
Interest income
|
|
|
104
|
|
|
|
52
|
|
|
|
176
|
|
Impairment charge – long-term investment (Note G)
|
|
|
-
|
|
|
|
(100
|
)
|
|
|
-
|
|
Other income, net
|
|
|
85
|
|
|
|
99
|
|
|
|
87
|
|
Income before provision for income taxes
|
|
$
|
11,804
|
|
|
$
|
10,384
|
|
|
$
|
19,405
|
|
NOTE
K
–
SEGMENT
IN
FORMATION
(continued)
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded Product Program
|
|
$
|
7,113
|
|
|
$
|
6,827
|
|
|
$
|
7,802
|
|
Product licensing
|
|
|
2,003
|
|
|
|
1,832
|
|
|
|
1,822
|
|
Restaurant operations
|
|
|
8,740
|
|
|
|
9,054
|
|
|
|
9,284
|
|
Corporate
|
|
|
60,269
|
|
|
|
53,836
|
|
|
|
65,481
|
|
Total assets
|
|
$
|
78,125
|
|
|
$
|
71,549
|
|
|
$
|
84,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded Product Program
|
|
$
|
316
|
|
|
$
|
370
|
|
|
$
|
389
|
|
Product licensing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restaurant operations
|
|
|
762
|
|
|
|
710
|
|
|
|
644
|
|
Corporate
|
|
|
219
|
|
|
|
175
|
|
|
|
220
|
|
Total depreciation & amortization expense
|
|
$
|
1,297
|
|
|
$
|
1,255
|
|
|
$
|
1,253
|
|
NOTE
L
–
LONG-TERM DEBT
Long-term debt consists of the following:
|
|
March 2
6
,
|
|
|
March 27,
|
|
|
|
201
7
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
10.000% Senior Secured Notes due 2020
|
|
$
|
135,000
|
|
|
$
|
135,000
|
|
Less: unamortized debt issuance costs
|
|
|
(3,525
|
)
|
|
|
(4,734
|
)
|
Long-term debt, net
|
|
$
|
131,475
|
|
|
$
|
130,266
|
|
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 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 Company used the proceeds to pay a special cash dividend of approximately $116,100 (
see Note
M
.1
) with the remaining net proceeds for general corporate purposes, including working capital. Debt issuance costs of approximately $5,985 were incurred which will be amortized into interest expense over the remaining 5-year term of the Notes.
The Notes bear interest at 10.000% per annum, payable semi-annually on March 15th and September 15th with payments of $6,750 and $6,750 paid on September 15, 2016 and March 15, 2017, respectively. 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. As of March 26, 2017, Nathan’s was in compliance with all covenants associated with the Notes.
NOTE
L
–
LONG-TERM DEBT (continued)
The Indenture contains certain covenants limiting the Company’s ability and the ability of its restricted subsidiaries (as defined in the Indenture) to, subject to certain exceptions and qualifications: (i) incur additional indebtedness; (ii) pay dividends or make other distributions on, redeem or repurchase, capital stock; (iii) make investments or other restricted payments; (iv) create or incur certain liens; (v) incur restrictions on the payment of dividends or other distributions from its restricted subsidiaries; (vi) enter into certain transactions with affiliates; (vii) sell assets; or (viii) effect a consolidation or merger. Certain Restricted Payments which may be made or indebtedness incurred by Nathan’s or its Restricted Subsidiaries may require compliance with the following financial ratios:
Fixed Charge Coverage Ratio
: the ratio of the Consolidated Cash Flow to the Fixed Charges for the relevant period, currently set at 2.0 to 1.0 in the Indenture.
The Fixed Charge Coverage Ratio applies to determining whether additional Restricted Payments may be made, certain additional debt may be incurred and acquisitions may be made.
Priority Secured Leverage Ratio
: the ratio of (a) Consolidated Net Debt outstanding as of such date that is secured by a Priority Lien to (b) Consolidated Cash Flow of Nathan’s for the Test Period then most recently ended, in each case with such pro forma adjustments as are appropriate; currently set at 0.40 to 1.00 in the Indenture.
S
ecured Leverage Ratio
: the ratio of (a) Consolidated Net Debt outstanding as of such date that is secured by a Lien on any property of Nathan’s or any Guarantor to (b) Consolidated Cash Flow of Nathan’s for the Test Period then most recently ended, in each case with such pro forma adjustments as are appropriate. The Secured Leverage Ratio under the Indenture is 3.75 to 1.00 and applies if Nathan’s wants to incur additional debt on the same terms as the Notes.
The Indenture also contains customary events of default, including, among other things, failure to pay interest, failure to comply with agreements related to the Indenture, failure to pay at maturity or acceleration of other indebtedness, failure to pay certain judgments, and certain events of insolvency or bankruptcy. Generally, if any event of default occurs, the Trustee or the holders of at least 25% in principal amount of the Notes may declare the Notes due and payable by providing notice to the Company. In case of default arising from certain events of bankruptcy or insolvency, the Notes will become immediately due and payable.
The Notes are general senior secured obligations, are fully and unconditionally guaranteed by substantially all of the Company’s wholly-owned subsidiaries and rank
pari passu
in right of payment with all of the Company’s existing and future indebtedness that is not subordinated, are senior in right of payment to any of the Company’s existing and future subordinated indebtedness, are structurally subordinated to any existing and future indebtedness and other liabilities of the Company’s subsidiaries that do not guarantee the Notes, and are effectively junior to all existing and future indebtedness that is secured by assets other than the collateral securing the Notes.
Pursuant to the terms of a collateral trust agreement, the liens securing the Notes and the guarantees will be contractually subordinated to the liens securing any future credit facility.
NOTE
L
–
LONG-TERM DEBT (continued)
The Notes and the guarantees will be the Company and the guarantors’ senior secured obligations and will rank:
●
|
senior in right of payment to all of the Company and the guarantors’ future subordinated indebtedness;
|
|
|
●
|
effectively senior to all unsecured senior indebtedness to the extent of the value of the collateral securing the Notes and the guarantees;
|
|
|
●
|
pari passu
with all of the Company and the guarantors’ other senior indebtedness;
|
|
|
●
|
effectively junior to any future credit facility to the extent of the value of the collateral securing any future credit facility and the Notes and the guarantees and certain other assets;
|
|
|
●
|
effectively junior to any of the Company and the guarantors’ existing and future indebtedness that is secured by assets other than the collateral securing the Notes and the guarantees to the extent of the value of any such assets; and
|
|
|
●
|
structurally subordinated to the indebtedness of any of the Company’s current and future subsidiaries that do not guarantee the Notes.
|
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.
Prior to September 15, 2017, if using the net cash proceeds of certain equity offerings, the Company has the option to redeem up to 35% of the aggregate principal amount of the 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.
NOTE
L
–
LONG-TERM DEBT (continued)
On or after September 15, 2017, the Company may redeem some or all of the Notes at a decreasing premium over time, plus accrued and unpaid interest as follows:
YEAR
|
|
PERCENTAGE
|
|
On or after September 15, 2017 and prior to March 15, 2018
|
|
|
105.000%
|
|
On or after March 15, 2018 and prior to March 15, 2019
|
|
|
102.500%
|
|
On and after March 15, 2019
|
|
|
100.000%
|
|
In certain circumstances involving a change of control, the Company will be required to make an offer to repurchase all or, at the holder’s option, any part, of each holder’s Notes pursuant to the offer described below (the “Change of Control Offer”). In the Change of Control Offer, the Company will be required to offer payment in cash equal to 101% of the aggregate principal amount of Notes repurchased plus accrued and unpaid interest, to the date of purchase.
If the Company sells certain assets and does not use the net proceeds as required, the Company will be required to use such net proceeds to repurchase the Notes at 100% of the principal amount thereof, plus accrued and unpaid interest and additional interest penalty, if any, to the date of repurchase.
The Notes may be traded between qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933. We have recorded the Notes at cost.
NOTE
M
– STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
On March 10, 2015, the Company’s Board of Directors declared a special cash dividend of $25.00 per share payable to stockholders of record as of March 20, 2015 of which approximately $115,100 was paid on March 27, 2015 to the stockholders. The Company also accrued $1,000 for the expected dividends payable on unvested shares pursuant to the terms of the restricted stock agreements. As unvested restricted stock grants, the declared dividend will be paid. We have paid $750 of the accrued dividend and estimate that an additional $125 will also be paid during each of our fiscal years ending March 25, 2018 and March 31, 2019. 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.
NOTE
M
– STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
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 26, 2017, there were up to 223,698 shares available to be issued for future option grants or up to 190,218 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.
NOTE
M
– 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 during the year ended March 29, 2015 were as follows:
Weighted-average option fair values
|
|
$
|
11.970
|
|
|
|
|
|
|
Expected life (years)
|
|
|
4.5
|
|
|
|
|
|
|
Interest rate
|
|
|
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.
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 26,
2017
|
|
|
March 27,
2016
|
|
|
March 29,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
150
|
|
|
$
|
181
|
|
|
$
|
318
|
|
Restricted stock
|
|
|
432
|
|
|
|
541
|
|
|
|
541
|
|
|
|
$
|
582
|
|
|
$
|
722
|
|
|
$
|
859
|
|
NOTE
M
– STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
The tax benefit on stock-based compensation expense was $213, $298
and
$350 for the years ended March 26, 2017, March 27, 2016 and March 29, 2015, respectively. As of March 26, 2017, there was
$549 of unamortized compensation expense related to stock-based incentive awards. The Company expects to recognize this expense over approximately one year and four months, which represents the weighted average remaining requisite service periods for such awards.
A summary of the status of the Company’s stock options at March 26, 2017, March 27, 2016 and March 29, 2015 and changes during the fiscal years then ended is presented in the tables below:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Options outstanding – beginning of year
|
|
|
124,030
|
|
|
$
|
26.29
|
|
|
|
142,964
|
|
|
$
|
24.36
|
|
|
|
279,500
|
|
|
$
|
15.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
|
$
|
53.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,787
|
)
|
|
|
11.72
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(48,285
|
)
|
|
|
11.72
|
|
|
|
(15,147
|
)
|
|
|
11.72
|
|
|
|
(235,125
|
)
|
|
|
14.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding - end of year
|
|
|
75,745
|
|
|
$
|
35.58
|
|
|
|
124,030
|
|
|
$
|
26.29
|
|
|
|
94,375
|
|
|
$
|
36.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable - end of year
|
|
|
37,873
|
|
|
$
|
35.58
|
|
|
|
67,221
|
|
|
$
|
18.44
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of
options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
|
$
|
11.97
|
|
During the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015, options to purchase 48,285,
15,147 and 235,125 shares were exercised which aggregated proceeds of $44, $89 and
$880, respectively, to the Company. The aggregate intrinsic values of the stock options exercised during the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015 was $1,555, $486 and $13,040, respectively.
The following table summarizes information about outstanding stock options at March 26, 2017:
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Contractual Life
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 26, 2017
|
|
|
75,745
|
|
|
$
|
35.58
|
|
|
|
2.36
|
|
|
$
|
1,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 26, 2017
|
|
|
37,873
|
|
|
$
|
35.58
|
|
|
|
2.36
|
|
|
$
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise price is
$
35
.
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
M
– STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
R
eplacement
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 issued 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 granted to the 11 optionees were structured to equalize the award’s fair value before and after the modification and as a result there was 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
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Contractual Life
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock:
Transactions with respect to restricted stock for the fiscal year ended March 26, 2017 are as follows:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant-date
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Per share
|
|
Unvested restricted stock at March 27, 2016
|
|
|
25,000
|
|
|
$
|
41.59
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(15,000
|
)
|
|
$
|
36.13
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock at March 26, 2017
|
|
|
10,000
|
|
|
$
|
49.80
|
|
The aggregate fair value of restricted stock vested during the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015 was $736, $683 and $965, respectively.
NOTE
M
– STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
|
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 26, 2017, the Company has reserved 7,396,439 shares of common stock for issuance upon exercise of the Common Stock Purchase Rights approved by the Board of Directors on June 5, 2013.
|
4.
|
Stock Repurchase Programs
|
On September 11, 2015, Nathan’s Board of Directors authorized the commencement of a modified Dutch Auction tender offer to repurchase up to 500,000 shares of its common stock at a price not less than $33.00 nor greater than $36.00 per share. On November 13, 2015, the Pricing Committee authorized the Company to extend the expiration date of the modified Dutch Auction tender offer until 5:00PM EST on December 2, 2015 and increase the price range of the modified Dutch Auction tender offer to a price per share of not less than $41.00 nor greater than $44.00. Based on the final count by American Stock Transfer and Trust Company, the depositary of the tender, 88,672 shares of common stock were tendered and not withdrawn at or below the final purchase price of $44.00 per share. The tender offer was not fully subscribed, and all shares validly tendered and not withdrawn were accepted for purchase. All of such shares purchased in the tender offer were purchased at the same price of $44.00 per share, for a total cost of $4,056, including fees and expenses related to the modified Dutch Auction tender offer.
NOTE
M
– STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
During the period from October 2001 through March 26, 2017, Nathan’s purchased a total of 5,127,373 shares of common stock at a cost of approximately
$77,303 pursuant to the various stock repurchase plans previously authorized by the Board of Directors. During the fiscal year ended March 26, 2017, the Company repurchased 30,616 shares of common stock at a cost of $1,272.
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. On February 1, 2016, Nathan’s Board of Directors increased the authorization to purchase its common stock by an additional 200,000 shares. On March 11, 2016, Nathan’s Board of Directors increased the authorization to purchase its common stock by an additional 200,000 shares increasing the aggregate authorization under the Sixth Securities Repurchase Program to 1.2 million shares. The Company has repurchased 939,742 shares at a cost of $29,641 under the sixth stock repurchase plan through March 26, 2017.
On March 11, 2016, the Company and Mutual Securities, Inc. (“MSI”) entered into an agreement (the “Agreement”) pursuant to which MSI has been authorized on the Company’s behalf to purchase up to 175,000 shares of the Company’s common stock, $.01 par value, commencing on March 21, 2016. The Agreement was adopted under the safe harbor provided by Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, as amended, in order to assist the Company in implementing its stock purchase plans and terminated in August 2016.
On September 9, 2016, the Company and MSI entered into an agreement pursuant to which MSI was authorized on the Company’s behalf to purchase up to 100,000 shares of the Company’s common stock, commencing September 19, 2016. This Agreement was adopted under the safe harbor provided by Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, as amended, to assist the Company in implementing its stock purchase plans.
NOTE
M
– STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
As of March 26, 2017, an aggregate of 260,258 shares can still be purchased under Nathan’s existing stock buy-back program.
Purchases may be made from time to time, depending on market conditions, in open market or privately-negotiated transactions, at prices deemed appropriate by management. There is no set time limit on the repurchases to be made under the stock-repurchase plan.
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.
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.
NOTE
M
– STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
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, 2018, 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 $500 effective June 1, 2016, and an annual bonus based on his performance measured against the Company’s financial, strategic and operating objectives as determined by the Compensation Committee pursuant to the terms of the 2017 Management Incentive Plan approved by shareholders on September 14, 2016. 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.
NOTE
M
– STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
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 continued to serve as President and Chief Operating Officer of the Company through August 7, 2015 at which time he became 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 would receive a consulting fee of $16.3 per month. The Transition Agreement further provided that Mr. Norbitz would receive a severance payment of $289 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.
Effective August 4, 2016, the Company and Wayne Norbitz executed an Amendment to the Consulting Agreement (the “Amendment”), whereas the Term of the Agreement was originally extended to expire August 10, 2017 which has been further extended to expire on December 31, 2017. Pursuant to the terms of the Amendment, Mr. Norbitz shall provide consulting services one (1) day a week, as directed by the Board of Directors of the Company and/or Eric Gatoff, Chief Executive Officer of the Company. The Amendment provides that Mr. Norbitz will receive a consulting fee of $8.1 per month for services rendered.
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 26, 2017, March 27, 2016 and March 29, 2015 were $41
,
$35 and $30, respectively.
NOTE
M
– STOCKHOLDERS’ EQUITY, STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
(continued)
The Company participates in a noncontributory, multi-employer, defined benefit pension plan (the “Union Plan”) covering substantially all of the Company’s union-represented employees. The risks of participating in the Union Plan are different from a single-employer plan in the following aspects (a) assets contributed to the Union Plan by one employer may be used to provide benefits to employees of other participating employers; (b) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (c) if the Company chooses to stop participating in the Union Plan, the Company may be required to pay the Union Plan an amount based on the underfunded status of the Union Plan, referred to as a withdrawal liability. The Company has no plans or intentions to stop participating in the plan as of March 26, 2017 and does not believe that there is a reasonable possibility that a withdrawal liability will be incurred. Contributions to the Union Plan were $10
,
$8 and $10 for the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015, respectively.
The Company provides, on a contributory basis, medical benefits to active employees. The Company does not provide medical benefits to retirees.
NOTE N - COMMITMENTS AND CONTINGENCIES
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).
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.
NOTE N - COMMITMENTS AND CONTINGENCIES (continued)
As of March 26, 2017, the Company had non-cancelable operating lease commitments, net of certain sublease rental income, as follows:
|
|
Lease
|
|
|
Sublease
|
|
|
Net lease
|
|
|
|
commitments
|
|
|
income
|
|
|
commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
1,645
|
|
|
$
|
327
|
|
|
$
|
1,318
|
|
2019
|
|
|
1,654
|
|
|
|
330
|
|
|
|
1,324
|
|
2020
|
|
|
1,545
|
|
|
|
332
|
|
|
|
1,213
|
|
2021
|
|
|
1,063
|
|
|
|
309
|
|
|
|
754
|
|
2022
|
|
|
1,065
|
|
|
|
263
|
|
|
|
802
|
|
Thereafter
|
|
|
5,841
|
|
|
|
865
|
|
|
|
4,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,813
|
|
|
$
|
2,426
|
|
|
$
|
10,387
|
|
Aggregate rental expense, net of sublease income, under all current leases amounted to $1,566
,
$1,628 and $1,617 for the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015, respectively. Sublease rental income was $272, $270
and
$267 for the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015, 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 $457, $517
and
$489 for the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015, respectively.
At March 26, 2017, the Company leases one site which it in turn subleases to a franchisee, which expires in April 2027 exclusive of renewal options. The Company remains liable for all lease costs when property is subleased to a franchisee.
The Company and its subsidiaries are from time to time involved in ordinary and routine litigation. Management presently believes that the ultimate outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, cash flows or results of operations. Nevertheless, litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include money damages and, in such event, could result in a material adverse impact on the Company’s results of operations for the period in which the ruling occurs.
NOTE N - COMMITMENTS AND CONTINGENCIES (continued)
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 extended 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 and the Company reversed all previously recorded liabilities in connection with this guaranty as of March 29, 2015. In connection with the Nathan’s Franchise Agreement, Nathan’s also 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.
On February 27, 2017, a wholly-owned subsidiary of the Company executed a Guaranty of Lease (the “Brooklyn Guaranty”) in connection with its re-franchising of a restaurant located in Brooklyn, New York. The Brooklyn Guaranty could be called upon in the event of a default by the tenant/franchisee. The Brooklyn Guaranty is limited to 24 months of rent for the first three years of the term. Nathan’s has recorded a liability of $204 in connection with the Brooklyn Guaranty which does not include potential percentage rent, real estate tax increases, attorney’s fees and other costs as these amounts are not reasonably determinable at this time. Nathan’s has received a personal guaranty from the franchisee for all obligations under the Brooklyn Guaranty. For the remainder of the term, Brooklyn Guaranty is limited to 12 months of rent plus reasonable costs of collection and attorney’s fees.
NOTE O - RELATED PARTY TRANSACTIONS
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 $26, $19 and $24 for the fiscal years ended March 26, 2017, March 27, 2016 and March 29, 2015, respectively.
NOTE P - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 201
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
29,416
|
|
|
$
|
28,013
|
|
|
$
|
19,937
|
|
|
$
|
19,286
|
|
Gross profit (a)
|
|
|
5,804
|
|
|
|
6,402
|
|
|
|
4,074
|
|
|
|
2,906
|
|
Income from operations
|
|
|
8,824
|
|
|
|
8,031
|
|
|
|
4,754
|
|
|
|
4,671
|
|
Net income
|
|
|
3,550
|
|
|
|
2,507
|
|
|
|
699
|
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (b)
|
|
$
|
.85
|
|
|
$
|
.60
|
|
|
$
|
.17
|
|
|
$
|
.17
|
|
Diluted (b)
|
|
$
|
.85
|
|
|
$
|
.60
|
|
|
$
|
.17
|
|
|
$
|
.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation of net income
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (b)
|
|
|
4,166,000
|
|
|
|
4,172,000
|
|
|
|
4,175,000
|
|
|
|
4,176,000
|
|
Diluted (b)
|
|
|
4,191,000
|
|
|
|
4,207,000
|
|
|
|
4,209,000
|
|
|
|
4,217,000
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
30,654
|
|
|
$
|
30,619
|
|
|
$
|
20,564
|
|
|
$
|
19,053
|
|
Gross profit (a)
|
|
|
4,785
|
|
|
|
6,313
|
|
|
|
3,681
|
|
|
|
3,254
|
|
Income from operations
|
|
|
7,616
|
|
|
|
8,426
|
|
|
|
4,435
|
|
|
|
4,486
|
|
Net income
|
|
|
2,310
|
|
|
|
2,847
|
|
|
|
432
|
|
|
|
507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (b)
|
|
$
|
.50
|
|
|
$
|
.64
|
|
|
$
|
.10
|
|
|
$
|
.12
|
|
Diluted (b)
|
|
$
|
.50
|
|
|
$
|
.64
|
|
|
$
|
.10
|
|
|
$
|
.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation of net income
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (b)
|
|
|
4,584,000
|
|
|
|
4,432,000
|
|
|
|
4,408,000
|
|
|
|
4,297,000
|
|
Diluted (b)
|
|
|
4,621,000
|
|
|
|
4,449,000
|
|
|
|
4,444,000
|
|
|
|
4,337,000
|
|
|
(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.
|
NOTE Q - SUBSEQUENT EVENTS
On May 19, 2017, our hot dog manufacturer, John Morrell and Co. announced a voluntary recall of approximately 200,000 pounds of hot dogs, including Nathan’s hot dogs, after a small number of consumers reported seeing visible metal flakes between the hot dogs and the packaging film. The amount represents a miniscule percentage of the billions of pounds of products annually produced by John Morrell and Co. John Morrell and Co. has communicated with their customers and consumers asking anyone that purchased the affected product to discard it and contact John Morrell and Co. for a refund. John Morrell and Co. notified the United States Department of Agriculture which has designated the recall as a Class II Recall.