NATHAN'S FAMOUS, INC. Introduction
Since the rapidly evolving COVID-19 outbreak and the implementation of "stay-at-home" and dining room closure orders inmid-March 2020 , operations at our Company-owned restaurants and our franchisees' restaurants have been disrupted. As ofMarch 29, 2020 , three of our four Company-owned restaurants are currently open, and those three Company-owned restaurants are only offering food through take-out and delivery as we are prohibited from offering dine-in seating and service at our restaurants resulting from restrictions due to the COVID-19 pandemic. Our seasonal location on the Coney IslandBoardwalk opened onMay 15, 2020 , observing the same cautions and restrictions. The majority of our franchised locations have been temporarily closed due to their locations in venues that are closed (such as shopping malls and movie theaters) or venues operating at significantly reduced traffic (such as airports and highway travel plazas). Such closures and disruptions have materially impacted revenues at our Company-owned restaurants with significant declines since the middle ofMarch 2020 , as compared to the same period last year. Although franchisees are beginning to slowly re-open, we expect that franchised locations and the royalty revenue we receive from our franchisees will be negatively impacted. We are principally focused on the well-being and safety of our guests, franchisees, restaurant associates and all other employees. Since the situation around the COVID-19 virus is constantly changing, we may implement additional measures to ensure the safety of our team members and guests over time. We also expect to realize declines in sales and profits from our Branded Product Program during this period as many of our customers operate in venues that are currently closed and may be slow to reopen, such as professional sports venues, amusement parks, shopping malls and movie theaters. DuringMarch 2020 , royalties from license agreements were significantly higher thanMarch 2019 due to significantly higher sales of consumer-packaged goods through grocery channels. During the continuation of shut-down regulations in response to COVID-19, we currently expect similar results although there can be assurance that this will continue to occur during such time. We are engaged primarily in the marketing of the "Nathan's Famous" brand and the sale of products bearing the "Nathan's Famous" trademarks through several different channels of distribution. Historically, our business has been the operation and franchising of quick-service restaurants featuring Nathan's World Famous Beef Hot Dogs, crinkle-cut French-fried potatoes, and a variety of other menu offerings. Our Company-owned and franchised units operate under the name "Nathan's Famous ," the name first used at our originalConey Island restaurant opened in 1916. Nathan's product licensing program began in 1978 by selling packaged hot dogs and other meat products to retail customers through supermarkets or grocery-type retailers for off-site consumption. During fiscal 1998, we introduced our Branded Product Program, which currently enables foodservice retailers and others to sell some of Nathan's proprietary products outside of the realm of a traditional franchise relationship. In conjunction with this program, purchasers of Nathan's products are granted a limited use of theNathan's Famous trademark with respect to the sale of the purchased products, including Nathan's World Famous Beef Hot Dogs, certain other proprietary food items and paper goods. Our Branded Menu Program is a limited franchise program, under which foodservice operators may sell a greater variety ofNathan's Famous menu items than under the Branded Product Program. Our revenues are generated primarily from selling products under Nathan's Branded Product Program, restaurant operations consisting of Company-owned restaurants and franchising the Nathan's restaurant concept (including under the Branded Menu Program) and product licensing agreements for the sale of Nathan's products within supermarkets and club stores, the manufacture of certain proprietary spices and the sale of Nathan's products directly to other foodservice operators. For further information, please see Note J - Segment Information in the accompanying financial statements. 42 --------------------------------------------------------------------------------
The following summary reflects the franchise openings and closings of the
Nathan's franchise system for the fiscal years ended
March 29, March 31, March 25, March 26, March 27,
2020 2019 2018 2017 2016
Franchised restaurants
operating at the beginning of
the period 255 276 279 259 296
Franchised restaurants opened
during the period 16 13 40 53 56
Franchised restaurants closed
during the period (55 ) (34 ) (43 ) (33 ) (93 )
Franchised restaurants
operating at the end of the
period 216 255 276 279 259
At March 29, 2020 , our franchise system consisted of 216 Nathan's franchised
units located in 21 states, and nine foreign countries. We also operate four
Company-owned Nathan's units, including one seasonal location, within the New
York metropolitan area.
As described in Risk Factors and other sections in this Annual Report on Form
10-K for the year ended March 29, 2020 , our future results could be impacted by
many developments. In March 2014 , John Morrell & Co. , a subsidiary of Smithfield
Foods, Inc. became Nathan's exclusive licensee to manufacture and sell hot dogs,
sausage and corned beef at retail. Our future operating results are
substantially dependent on our agreement with John Morrell & Co. There are also
certain risks associated with engaging John Morrell & Co. as exclusive licensee
including whether (i) we can maintain or improve the quality and consistency of
our products that is expected by our customers, and (ii) John Morrell & Co. will
have a sufficient supply of products available for our customers on a timely
basis, as well as the risks described under "Risk Factors - - Our licensing
revenue and overall profitability is substantially dependent on our agreement
with John Morrell & Co. and the loss or a significant reduction of this revenue
would have a material adverse effect on our financial condition and results of
operations."
Our future operating results could be impacted by supply constraints on beef prices and/or increases in beef prices.
OnNovember 1, 2017 , the Company completed the issuance of$150.0 million of 6.625% Senior Secured Notes due 2025 (the "2025 Notes") in a private offering in accordance with Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The 2025 Notes were issued pursuant to an indenture, datedNovember 1, 2017 , (the "Indenture") by and among the Company, certain of its wholly-owned subsidiaries, as guarantors, andU.S. Bank National Association , as trustee and collateral trustee. The Company used the net proceeds of the 2025 Notes offering to satisfy and discharge the indenture relating to the 2020 Notes (as hereinafter defined) and redeem the 2020 Notes (the "Redemption"), to fund a portion of a special$5.00 per share cash dividend to Nathan's stockholders of record (see Note K of the Notes to the Consolidated Financial Statements), and for general corporate purposes, including working capital. The Company also funded the majority of the special dividend of$5.00 per share through its existing cash. The Redemption occurred onNovember 16, 2017 . The Company performed the required evaluation of the refinancing and determined that a portion of the Redemption of the 2020 Notes was accounted for as a modification of the debt and a portion as an extinguishment of the debt. In connection with the Redemption, the Company recorded a loss on early extinguishment of debt of$8,872,000 for the year endedMarch 25, 2018 that primarily reflected a portion of the premium paid to redeem the 2020 Notes and the write-off of certain debt issuance costs. The 2025 Notes bear interest at 6.625% per annum, payable semi-annually onMay 1st andNovember 1st of each year. During the fiscal year endedMarch 29, 2020 , the Company made its required semi-annual interest payments of$4,968,750 onMay 1, 2019 andNovember 1, 2019 . OnMay 1, 2020 , the Company paid its semi-annual interest payment.
The 2025 Notes have no scheduled principal amortization payments prior to its
final maturity on
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Effective June 1, 2020 , Nathan's Board of Directors authorized the repurchase of
up to $10 million of the 2025 Notes by the Company (at par or better) from time
to time. There is no set time limit on the repurchases.
On March 10, 2015 , the Company completed the issuance of $135.0 million of
10.000% Senior Secured Notes due 2020 ("the 2020 Notes") in a Rule 144A
transaction. The 2020 Notes were issued pursuant to an indenture, dated March
10, 2015 , 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. Debt issuance costs of approximately
$5,985,000 were incurred, which were being amortized into interest expense over
the remaining 5-year term of the 2020 Notes, or until redeemed.
Our future results could also be impacted by our interest obligations under the
2025 Notes. As a result of the issuance of the 2025 Notes, Nathan's expects to
incur interest expense of $9,937,500 per annum and annual amortization of debt
issuance costs of approximately $691,000 . The terms and conditions of the 2025
Notes are as follows (terms not defined shall have the meanings set forth in the
Indenture):
There are no ongoing financial maintenance covenants associated with the 2025
Notes. As of
The Indenture contains certain covenants limiting the Company's ability and the ability of its restricted subsidiaries (as defined in the Indenture) to, subject to certain exceptions and qualifications: (i) incur additional indebtedness; (ii) pay dividends or make other distributions on, redeem or repurchase, capital stock; (iii) make investments or other restricted payments; (iv) create or incur certain liens; (v) incur restrictions on the payment of dividends or other distributions from its restricted subsidiaries; (vi) enter into certain transactions with affiliates; (vii) sell assets; or (viii) effect a consolidation or merger. Certain Restricted Payments which may be made or indebtedness incurred by Nathan's or its Restricted Subsidiaries may require compliance with the following financial ratios:
Fixed Charge Coverage Ratio: the ratio of the Consolidated Cash Flow to the Fixed Charges for the relevant period, currently set at 2.0 to 1.0 in the Indenture. The Fixed Charge Coverage Ratio applies to determining whether additional Restricted Payments may be made, certain additional debt may be incurred and acquisitions may be made.
Priority Secured Leverage Ratio: the ratio of (a) Consolidated Net Debt
outstanding as of such date that is secured by a Priority Lien to (b)
Consolidated Cash Flow of Nathan's for the Test Period then most recently ended,
in each case with such pro forma adjustments as are appropriate; currently set
at 0.40 to 1.00 in the Indenture.
Secured Leverage Ratio: the ratio of (a) Consolidated Net Debt outstanding as of
such date that is secured by a Lien on any property of Nathan's or any Guarantor
to (b) Consolidated Cash Flow of Nathan's for the Test Period then most recently
ended, in each case with such pro forma adjustments as are appropriate. The
Secured Leverage Ratio under the Indenture is 3.75 to 1.00 and applies if
Nathan's wants to incur additional debt on the same terms as the 2025 Notes.
The Indenture also contains customary events of default, including, among other
things, failure to pay interest, failure to comply with agreements related to
the Indenture, failure to pay at maturity or acceleration of other indebtedness,
failure to pay certain judgments, and certain events of insolvency or
bankruptcy. Generally, if any event of default occurs, the Trustee or the
holders of at least 25% in principal amount of the 2025 Notes may declare the
2025 Notes due and payable by providing notice to the Company. In case of
default arising from certain events of bankruptcy or insolvency, the 2025 Notes,
will become immediately due and payable.
The 2025 Notes are general senior secured obligations, are fully and
unconditionally guaranteed by substantially all of the Company's wholly-owned
subsidiaries and rank pari passu in right of payment with all of the Company's
existing and future indebtedness that is not subordinated, are senior in right
of payment to any of the Company's existing and future subordinated
indebtedness, are structurally subordinated to any existing and future
indebtedness and other liabilities of the Company's subsidiaries that do not
guarantee the 2025 Notes, and are effectively junior to all existing and future
indebtedness that is secured by assets other than the collateral securing the
2025 Notes.
Pursuant to the terms of a collateral trust agreement, the liens securing the
2025 Notes and the guarantees will be contractually subordinated to the liens
securing any future credit facility.
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--------------------------------------------------------------------------------The 2025 Notes and the guarantees are the Company and the guarantors' senior secured obligations and will rank:
? senior in right of payment to all of the Company and the guarantors' future
subordinated indebtedness;
? effectively senior to all unsecured senior indebtedness to the extent of the
value of the collateral securing the 2025 Notes and the guarantees;
? pari passu with all of the Company and the guarantors' other senior
indebtedness;
? effectively junior to any future credit facility to the extent of the value of
the collateral securing any future credit facility and the 2025 Notes and the
guarantees and certain other assets;
? effectively junior to any of the Company and the guarantors' existing and
future indebtedness that is secured by assets other than the collateral
securing the 2025 Notes and the guarantees to the extent of the value of any
such assets; and
? structurally subordinated to the indebtedness of any of the Company's current
and future subsidiaries that do not guarantee the 2025 Notes.
The Company may redeem the 2025 Notes in whole or in part prior to November 1,
2020 , at a redemption price of 100% of the principal amount of the 2025 Notes
redeemed plus the Applicable Premium, plus accrued and unpaid interest. An
Applicable Premium is the greater of 1% of the principal amount of the 2025
Notes; or the excess of the present value at such redemption date of (i) the
redemption price of the 2025 Notes at November 1, 2020 plus (ii) all required
interest payments due on the 2025 Notes through November 1, 2020 (excluding
accrued but unpaid interest to the redemption date), computed using a discount
rate equal to the Treasury Rate as of such redemption date plus 50 basis points;
over the then outstanding principal amount of the 2025 Notes.
Prior to November 1, 2020 , if using the net cash proceeds of certain equity
offerings, the Company has the option to redeem up to 35% of the aggregate
principal amount of the 2025 Notes at a redemption price equal to 106.625% of
the principal amount of the 2025 Notes redeemed, plus accrued and unpaid
interest and any additional interest.
On or after November 1, 2020 , the Company may redeem some or all of the 2025
Notes at a decreasing premium over time, plus accrued and unpaid interest as
follows:
YEAR PERCENTAGE
On or after
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 2025 Notes pursuant to the offer described below (the
"Change of Control Offer"). In the Change of Control Offer, the Company will be
required to offer payment in cash equal to 101% of the aggregate principal
amount of 2025 Notes repurchased plus accrued and unpaid interest, to the date
of purchase.
If the Company sells certain collateralized assets and does not use the net
proceeds as required, the Company will be required to use such net proceeds to
repurchase the 2025 Notes at 100% of the principal amount thereof, plus accrued
and unpaid interest and additional interest penalty, if any, to the date of
repurchase.
The 2025 Notes may be traded between qualified institutional buyers pursuant to Rule 144A of the Securities Act. We have recorded the 2025 Notes at cost.
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Effective June 1, 2020 , Nathan's Board of Directors authorized the repurchase of
up to $10 million of the 2025 Notes by the Company (at par or better) from time
to time. There is no set time limit on the repurchases.
Critical Accounting Policies and Estimates
Our consolidated financial statements and the notes to our consolidated financial statements contain information that is pertinent to management's discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. We believe the following critical accounting policies involve additional management judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related asset and liability amounts. Revenue Recognition From 2014 through 2017, theFinancial Accounting Standards Board ("FASB") issued new accounting standards to provide principles within a single framework for revenue recognition of transactions involving contracts with customers across all industries ("Topic 606"). We adopted Topic 606 at the beginning of the fiscal year endedMarch 31, 2019 . (See "Summary of Significant Accounting Policies", Note B.11 of the Notes to the Consolidated Financial Statements for further discussion on the impact on Nathan's.) Following are discussions of how our revenues are earned, and our accounting policies pertaining to revenue recognition prior to the adoption of Topic 606 ("Legacy GAAP") and subsequent to the adoption of Topic 606 and other required disclosures.
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.
The timing and amount of revenue recognized related to sales made by our Branded Product Program was not impacted by the adoption of Topic 606.
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.
The timing and amount of revenue recognized related to our Company-owned restaurant sales was not impacted by the adoption of Topic 606.
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.
The timing and amount of revenue recognized related to our license royalties was not impacted by the adoption of Topic 606.
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 area development fees, which are typically received prior to completion of the revenue recognition process, are recorded as deferred revenue.
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.
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Revenue from development agreements is deferred and prior to the adoption of
Topic 606 had been recognized, with an appropriate provision for estimated
uncollectible amounts, when all material services or conditions to the sale were
substantially performed by the franchisor. If substantial obligations under the
development agreement were not dependent on the number of individual franchise
locations to be opened, substantial performance was determined using the same
criteria applicable to an individual franchise, which was generally the opening
of the first location pursuant to the development agreement. If substantial
performance was dependent on the number of locations, then the development fee
was deferred and was recognized ratably over the term of the agreement, as
restaurants in the development area commenced operations on a pro rata basis to
the minimum number of restaurants required to be opened, or at the time the
development agreement was effectively canceled.
The following services are typically provided by the Company prior to the opening of a franchised restaurant.
? Approval of all site selections to be developed.
? Provision of architectural plans suitable for restaurants to be developed.
? Assistance in establishing building design specifications, reviewing
construction compliance and equipping the restaurant.
? Provision of appropriate menus to coordinate with the restaurant design and
locations to be developed.
? Provision of management training for the new franchisee and selected staff.
? Assistance with the initial operations of restaurants being developed. Under the adoption of Topic 606, the Company determined that the services provided in exchange for these upfront restaurant franchise fees do not contain separate and distinct performance obligations from the franchising right and beginningMarch 26, 2018 , these initial franchise fees, renewal fees and transfer fees shall be deferred and recognized over the term of each respective agreement, or upon termination of the franchise agreement. Under Legacy GAAP, franchise fees, which are non-refundable, were recognized as income when substantially all services to be performed by Nathan's and conditions relating to the sale of the franchise were performed or satisfied, which generally occurred when the franchise restaurant commenced operations. Under Legacy GAAP, international development fees were recognized, net of direct expenses, upon the opening of the first restaurant within the territory. Under the adoption of Topic 606, the Company determined that the services provided in exchange for these international development fees do not contain separate and distinct performance obligations from the franchise right and as ofMarch 26, 2018 , international development fees, shall be recognized over the term of each respective agreement. Certain other costs, such as legal expenses, shall be expensed as incurred. Nathan's recognizes franchise royalties on a monthly basis which are generally based upon a percentage of sales made by Nathan's franchisees, when they are earned and deemed collectible. Franchise fees and royalties that are not deemed to be collectible are not recognized as revenue until paid by the franchisee, or until collectability is deemed to be reasonably assured. Nathan's recognizes royalty revenue from its Branded Menu Program either upon its sale of hot dogs or royalty income when it has been determined that other qualifying products have been sold by the manufacturer to Nathan's Branded Menu Program franchisees or based upon product purchased by these franchisees from their primary distributor. Franchise fees and royalties that are not deemed to be collectible are recorded as bad debts until paid by the franchisee or until collectibility is deemed to be reasonably assured.
Revenue Recognition -
The Company maintains a national advertising fund (the "Advertising Fund") established to collect and administer funds contributed for use in advertising and promotional programs for Company-owned and franchised restaurants. Under Legacy GAAP, the revenues, expenses and cash flows of theAdvertising Fund were reported on the Company's Consolidated Balance Sheets and not included in the Company's Consolidated Statements of Earnings and Statements of Cash Flows because the contributions to theAdvertising Fund were designed for specific purposes and the Company acted as an agent, in substance, with regard to these contributions as a result of industry-specific guidance. 47 --------------------------------------------------------------------------------
Under the adoption of Topic 606, the revenue, expenses and cash flows of the
While this treatment impacts the gross amount of reported advertising fund revenue and related expenses, the impact is expected to be an offsetting increase to both revenue and expense after elimination of Company contributions, with no impact to income from operations or net income because the Company attempts to manage theAdvertising Fund to breakeven over the course of the fiscal year. However, any surplus or deficit in theAdvertising Fund will impact income from operations and net income. Revenue Recognition - Other Revenue from sub-leasing properties is recognized as income as the revenue is earned and becomes receivable and deemed collectible. Sub-lease rental income is presented net of associated lease costs in the Consolidated Statements of Earnings. In the normal course of business, we extend credit to franchisees and licensees for the payment of ongoing royalties and to trade customers of our Branded Product Program. Accounts and other receivables, net, as shown on our Consolidated Balance Sheets are net of allowances for doubtful accounts. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements, assessment of collectability based upon historical trends and an evaluation of the impact of current and projected economic conditions. The Company writes off accounts receivable when they are deemed uncollectible.
Impairment of
Goodwill and intangible assets consist of (i) goodwill of$95,000 resulting from the acquisition of Nathan's in 1987; and (ii) trademarks, trade names and other intellectual property of$1,269,000 in connection withArthur Treacher's . As ofMarch 29, 2020 andMarch 31, 2019 , the Company performed its annual impairment of goodwill and has determined that no impairment is deemed to exist. AtMarch 31, 2019 , the Company's intangible asset had a carrying amount of$1,353,000 for the trademarks, trade names and other intellectual property in connection withArthur Treacher's . During the fiscal year endedMarch 29, 2020 , the Company subsequently determined its indefinite-lived intangible asset to have a finite useful life based on the expected future use of this intangible asset. Based upon the review of the currentArthur Treacher's co-branding agreements, the Company determined that the remaining useful lives of these agreements is twelve years and the intangible asset is subject to annual amortization. The Company has recorded amortization expense of$84,000 for the fiscal year endingMarch 29 , 2020.We conducted our annual impairment tests and no goodwill or other intangible assets were determined to be impaired during the fiscal years endedMarch 29, 2020 andMarch 31, 2019 .
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Each reporting period, management reviews the carrying value of its investments based upon the financial information provided by the investment's management and considers whether indicators of an other-than-temporary impairment exists. 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. Impairment losses are recorded on long-lived assets on a restaurant-by-restaurant basis whenever impairment factors are determined to be present. The Company tests the recoverability of its long-lived assets with finite useful lives whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company tests for recoverability based on the projected undiscounted cash flows to be derived from such asset. If the projected undiscounted future cash flows are less than the carrying value of the asset, the Company will record an impairment loss, if any, based on the difference between the estimated fair value and the carrying value of the asset. The Company generally measures fair value by considering discounted estimated future cash flows from such asset. Cash flow projections and fair value estimates require significant estimates and assumptions by management. Should the estimates and assumptions prove to be incorrect, the Company may be required to record impairments in future periods and such impairments could be material. 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 endedMarch 29, 2020 andMarch 31, 2019 . 48 --------------------------------------------------------------------------------
Stock-Based Compensation As discussed in Note M.2 of the Notes to Consolidated Financial Statements, we have one active share-based compensation plan that provides stock options and restricted stock awards for certain employees and non-employee directors to acquire shares of our common stock. We consider the following factors in determining the value of stock-based compensation: (a) expected option term based upon expected termination behavior;
(b) volatility based upon historical price changes of the Company's common stock
over a period equal to the expected life of the option;
(c) expected dividend yield; and
(d) risk free interest rate on date of grant
Income Taxes
The Company's current provision for income taxes is based upon its estimated
taxable income in each of the jurisdictions in which it operates, after
considering the impact on taxable income of temporary differences resulting from
different treatment of items for tax and financial reporting purposes. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and any operating
loss or tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the year
in which those temporary differences are expected to be recovered or settled.
The ultimate realization of deferred tax assets is dependent upon the 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.
Financial Accounting Standards also provide guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure requirements. (See Note I of the Notes to Consolidated Financial Statements.)
Adoption of New Accounting Standards
Leases InFebruary 2016 , theFinancial Accounting Standards Board ("FASB") issued new guidance on leases, Topic 842, which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. The new guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases. The Company adopted the new guidance at the beginning of the fiscal year endedMarch 29, 2020 using the effective date ofApril 1, 2019 as the date of initial application; therefore, the comparative period has not been adjusted and continues to be reported under the previous lease guidance. 49 -------------------------------------------------------------------------------- The new standard provides for a number of practical expedients upon adoption. The Company elected the package of practical expedients, which permits the Company not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. For those leases that fall under the definition of a short-term lease, the Company elected the short-term lease recognition exemption. Under this practical expedient, for those leases that qualify, we did not recognize right-of-use ("ROU") assets or liabilities. The Company also elected the practical expedient for lessees to account for lease components and non-lease components as a single lease component for all underlying classes of assets. The Company did not elect the use-of-hindsight practical expedient. As a result of adopting this new guidance on the first day of fiscal year 2020, substantially all of the Company's operating lease commitments were subject to the new guidance and were recognized as operating lease assets and liabilities, initially measured as the present value of future lease payments for the remaining lease term discounted using the Company's incremental borrowing rate based on the remaining lease term as of the adoption date. The Company recognized operating lease assets and liabilities of$7,804,000 and$8,533,000 , respectively, as of the first day of fiscal year 2020. The difference between the assets and liabilities is attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right-of-use assets. The effects of the changes made to the Company's consolidated balance sheet as ofApril 1, 2019 for the adoption of the new lease guidance were as follows (in thousands): Adjustments due to adoption of Balance at the new lease Balance at March 31, 2019 guidance Reclassi-fications April 1, 2019 Other Assets Operating lease assets - 7,804 - 7,804 Other assets 465 - 31 496 Current Liabilities Current portion of operating lease liabilities - 1,162 - 1,162 Long Term Liabilities Long-term operating lease liabilities - 7,371 - 7,371 Other liabilities 1,390 (729 ) 31 692
The adoption of the new guidance is non-cash in nature and had no impact on net cash flows from operating, investing, or financing activities.
Please refer to Footnotes B and L in the accompanying Consolidated Financial Statements for additional information regarding our lease arrangements and the Company's updated lease accounting policies.
New Accounting Standards Not Yet Adopted
InJune 2016 , the FASB issued new guidance on the measurement of credit losses, which significantly changes the impairment model for most financial instruments. Current guidance requires the recognition of credit losses based on an incurred loss impairment methodology that reflects losses once the losses are probable. Under the new standard, the Company will be required to use a current expected credit loss model ("CECL") that will immediately recognize an estimate of credit losses that are expected to occur over the life of the financial instruments that are in the scope of this update, including trade receivables. The CECL model uses a broader range of reasonable and supportable information in the development of credit loss estimates. InNovember 2019 , the FASB deferred the effective date for smaller reporting companies for annual reporting periods beginning afterDecember 15, 2022 . This standard is required to take effect in Nathan's first quarter (June 2023 ) of our fiscal year endingMarch 31, 2024 . The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures. 50 -------------------------------------------------------------------------------- InJanuary 2017 , the FASB issued an update to the accounting guidance to simplify the testing for goodwill impairment. The update removes the requirement to determine the implied fair value of goodwill to measure the amount of impairment loss, if any, under the second step of the current goodwill impairment test. A company will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. A goodwill impairment charge will be recognized for the amount by which the reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of the goodwill. The guidance is effective prospectively for public business entities for annual reporting periods beginning afterDecember 15, 2019 . This standard is required to take effect in Nathan's first quarter (June 2020 ) of our fiscal year endingMarch 28, 2021 . Nathan's does not expect the adoption of this new guidance to have a material impact on its results of operations or financial position. InDecember 2019 , the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning afterDecember 15, 2020 . This standard is required to take effect in Nathan's first quarter (June 2021 ) of our fiscal year endingMarch 27, 2022 . The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.
The Company does not believe that any other recently issued, but not yet effective accounting standards, when adopted, will have a material effect on the accompanying consolidated financial statements.
Results of Operations
Fiscal year ended
Revenues Total sales were$70,559,000 for the fifty-two weeks endedMarch 29, 2020 ("fiscal 2020 period") as compared to$71,561,000 for the fifty-three weeks endedMarch 31, 2019 ("fiscal 2019 period"). Foodservice sales from the Branded Product Program were$57,586,000 for the fiscal 2020 period as compared to sales of$57,960,000 for the fiscal 2019 period. Foodservice sales during the 53rd week of fiscal 2019 were$2,090,000 . On a comparative 52-week basis, our fiscal 2019 sales would have been approximately$55,870,000 . During the 52-week fiscal 2020 period, the volume of business decreased by approximately 2.1% and our average selling prices increased by approximately 0.8% as compared to the 53-week fiscal 2019 period. During the fiscal 2018 period, we added a new distributor to our distribution network that increased our sales during implementation of the new distributor. In addition to the additional business realized, beginning in the third quarter fiscal 2018, this distributor temporarily provided distribution to a number of significant contract accounts, further increasing their fiscal 2018 purchases. During the first quarter of fiscal 2019, the temporary distribution to our significant contract accounts began reverting back to our traditional methodology, although not fully completed until the second quarter of fiscal 2019. Excluding the effects of the re-distributors' purchases in both years, we estimate that customer shipments decreased by approximately 1.0% through the second quarter fiscal 2020.Total Company -owned restaurant sales were$12,973,000 during the fiscal 2020 period compared to$13,601,000 during the fiscal 2019 period. Sales were reduced by$1,188,000 associated with the sale of a restaurant during the fiscal 2019 period. Sales from our Company-owned restaurants during the 53rd week of fiscal 2019 were approximately$142,000 .Comparable Company -owned restaurant sales, excluding sales from the restaurant that was sold last year, increased by approximately$560,000 or 4.5% as compared to the comparable period last year. 51
-------------------------------------------------------------------------------- License royalties were$25,859,000 in the fiscal 2020 period as compared to$23,615,000 in the fiscal 2019 period. Total royalties earned on sales of hot dogs from our license agreement withJohn Morrell & Co. at retail and foodservice, substantially from sales of hot dogs toSam's Club and WalMart, increased to$23,680,000 for the fiscal 2020 period as compared to$21,271,000 for the fiscal 2019 period. The increase at retail is primarily due to higher retail volume of 11.0% and a 2.0% increased average net selling price as compared to the fiscal 2019 period. Additionally, the foodservice business earned lower royalties of$165,000 as compared to the fiscal 2019 period due to a shift in theSam's Club business. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan's products declined by$165,000 during the fiscal 2020 period as compared to the fiscal 2019 period primarily due to the transition of our enrobed hot dog products to a new licensee. Licensee sales and royalties, which are reported by our licensees, were not affected by the additional week in fiscal 2019. Franchise fees and royalties were$4,572,000 in the fiscal 2020 period as compared to$4,171,000 in the fiscal 2019 period. Total royalties were$3,327,000 in the fiscal 2020 period as compared to$3,666,000 in the fiscal 2019 period. Royalties earned under the Branded Menu Program were$643,000 in the fiscal 2020 period as compared to$726,000 in the fiscal 2019 period. Royalties earned under the Branded Menu Program are not based upon a percentage of restaurant sales, but are based upon product purchases. Traditional franchise royalties were$2,684,000 in the fiscal 2020 period as compared to$2,940,000 in the fiscal 2019 period. Franchise restaurant sales decreased to$61,542,000 in the fiscal 2020 period as compared to$65,607,000 in the fiscal 2019 primarily due to the impact of units closed in the fiscal 2020 year, net of units opened, a 2.3% decrease in comparable domestic sales and the impact of the additional week in the fiscal 2019 period. Comparable domestic franchise sales (consisting of 82 Nathan's outlets, excluding sales under the Branded Menu Program) were$48,508,000 during the 52 weeks of the fiscal 2020 period as compared to$50,165,000 during the 53 weeks of fiscal 2019. Comparable sales during the 52 weeks of fiscal 2019 were approximately$49,322,000 , a 1.7% decline in comparable domestic sales on a basis of 52 weeks. At the beginning of the fiscal 2019 period we adopted Topic 606. Footnote B in the accompanying Consolidated Financial Statements provides a full explanation of this new accounting standard. The most significant component of this new standard affects the timing associated with Nathan's recognition of franchise fees. Franchise fee income is now recorded into income on a prorated basis over the term of the franchise agreement as compared to previously recognizing the full franchise fee into income upon the opening of a new restaurant. AtMarch 29, 2020 , 216 franchised outlets, including domestic, international and Branded Menu Program outlets were operating compared to 255 franchised outlets, including domestic, international and Branded Menu Program outlets atMarch 31, 2019 . Total franchise fee income was$1,245,000 in the fiscal 2020 period as compared to$505,000 in the fiscal 2019 period. Domestic franchise fee income was$143,000 in the fiscal 2020 period as compared to$155,000 in the fiscal 2019 period. International franchise fee income was$151,000 in the fiscal 2020 period as compared to$158,000 in the fiscal 2019 period. We recognized$951,000 of forfeited fees in the fiscal 2020 period primarily from the termination of our Master Franchise Agreements forRussia ,Kyrgyzstan ,Australia , TheUnited Kingdom ,Turkey and the closing of various domestic and international franchise locations as compared to forfeited fees of$192,000 in the fiscal 2019 period. During the fiscal 2020 period, total franchise fees would have been$166,000 , under the previous revenue recognition guidance. During the fiscal 2020 period, 16 franchised outlets opened, including five international units and three new Branded Menu Program outlets. During the fiscal 2019 period, 13 new franchised outlets opened, including five international locations and four new Branded Menu Program outlets.
Advertising fund revenue, after eliminating Company contributions, was
Costs and Expenses Overall, our cost of sales increased by$1,709,000 to$54,488,000 in the fiscal 2020 period as compared to$52,779,000 in the fiscal 2019 period. Our gross profit (representing the difference between sales and cost of sales) was$16,071,000 or 22.8% of sales during the 2020 period as compared to$18,782,000 or 26.2% of sales during the fiscal 2019 period. The reduction in margin was primarily due to the higher cost of beef in the Branded Product Program. Cost of sales in the Branded Product Program increased by approximately$2,179,000 during the fiscal 2020 period as compared to the fiscal 2019 period, primarily due to the 6.7% increase in the average cost per pound of our hot dogs. We did not make any purchase commitments for beef during the fiscal 2020 and 2019 periods. If the cost of beef and beef trimmings increases and we are unable to pass on these higher costs through price increases or otherwise reduce any increase in our costs through the use of purchase commitments, our margins will be adversely impacted. 52
-------------------------------------------------------------------------------- With respect to Company-owned restaurants, our cost of sales during the fiscal 2020 period was$7,337,000 or 56.6% of restaurant sales, as compared to$7,807,000 or 57.4% of restaurant sales in the fiscal 2019 period. Excluding the restaurant that was sold, cost of sales would have been 56.0% of restaurant sales in the fiscal 2019 period. We experienced higher prime costs due in part to the incremental food and labor costs associated with the rollout of various new products in addition to high commodity costs of beef. The impact of higher wages, principally associated with the effects of theNew York State minimum wage increase, were partly offset by the impact of higher sales at the comparable four Company-owned restaurants. We expect that our future labor costs at our restaurants outside ofNew York City will continue to be impacted by the remaining multi-year increase in minimum wage requirements inNew York State , as well as other new labor regulations and any increase in commodity costs. Restaurant operating expenses were$3,476,000 in the fiscal 2020 period as compared to$3,525,000 in the fiscal 2019 period. Excluding$283,000 of restaurant operating expenses from the fiscal 2019 period for the restaurant that was sold, we incurred higher insurance costs of$73,000 , higher occupancy costs of$58,000 , marketing expenses of$49,000 and maintenance and other expenses totaling$80,000 . Depreciation and amortization was$1,233,000 in the fiscal 2020 period as compared to$1,212,000 in the fiscal 2019 period as a result of amortization of the Arthur Treachers' intellectual property which was partly offset by lower capital spending and reduced depreciation and amortization attributable to the restaurant that was sold of$19,000 . General and administrative expenses increased$928,000 or 6.7% to$14,779,000 in the fiscal 2020 period as compared to$13,851,000 in the fiscal 2019 period. The increase in general and administrative expenses was primarily attributable to higher costs associated with the transformation efforts within our restaurant business including higher compensation expenses, including severance, marketing and franchise solicitation costs of approximately$950,000 . Advertising fund expense, after eliminating Company contributions, was$2,177,000 in the fiscal 2020 period, as compared to$2,506,000 in the fiscal 2019 period. Nathan's previously determined that the Advertising Funds' normal seasonal deficit was not expected to be fully recovered during the fiscal 2020 period, and recorded the projected$370,000 deficit in its second quarter fiscal 2020 results of operations. As a result of the escalation of the COVID-19 pandemic inMarch 2020 , a number of marketing initiatives were cancelled or delayed, thus reducing the anticipated spending during the fiscal 2020 period. Other Items Interest expense of$10,601,000 in the fiscal 2020 period represented accrued interest of$9,910,000 on the 2025 Notes at 6.625% per annum and amortization of debt issuance costs of$691,000 . Interest expense of$10,792,000 in the fiscal 2019 period represented accrued interest of$10,101,000 on the 2025 Notes at 6.625% per annum and amortization of debt issuance costs of$691,000 . Interest expense during fiscal 2019 was based upon a 371-day fiscal year as compared to a 364-day fiscal year during fiscal 2020.
Interest income was
During the fiscal 2019 period, we recognized gains of$11,177,000 from the sale of our Company-owned restaurant located inBay Ridge ,Brooklyn and from the sale of ourFlorida regional office. Other income relates primarily to sublease income from a franchised restaurant of$85,000 in each of the fiscal 2020 and fiscal 2019 periods, which was partly offset by miscellaneous asset disposals during the fiscal 2019 periods. During the fiscal 2019 period, we recognized a fee of$175,000 to extend the closing date of the sale of our restaurant located inBay Ridge ,Brooklyn, NY . 53 --------------------------------------------------------------------------------
Provision for Income Taxes The income tax provision for the fifty-two weeks endedMarch 29, 2020 and fifty-three weeks endedMarch 31, 2019 reflect effective tax rates of 25.4% and 26.9%, respectively. Nathan's effective tax rate for the fifty-two week period endedMarch 29, 2020 and fifty-three week period endedMarch 31, 2019 were reduced by 1.3% and 1.1%, respectively, as a result of the tax benefits associated with stock compensation. For the fifty-two week period endedMarch 29, 2020 and fifty-three week period endedMarch 31, 2019 , excess tax benefits of$228,000 and$310,000 , respectively, were reflected in the Consolidated Statements of Earnings as a reduction to the provision for income taxes. Nathan's effective tax rates without these adjustments would have been 26.7% for the fiscal 2020 period and 28.0% for the fiscal 2019 period. The Company's tax rate for the fiscal 2020 period was favorably affected by 0.3% due to its return to provision adjustment of approximately$52,000 in connection with the filing of itsMarch 2019 tax returns. InNovember 2019 , theState of New Jersey notified Nathan's that our tax returns for the years endedMarch 2016 , 2017, and 2018 will be audited. The review is ongoing. The amount of unrecognized tax benefits atMarch 29, 2020 was$311,000 all of which would impact Nathan's effective tax rate, if recognized. As ofMarch 29, 2020 , Nathan's had$259,000 of accrued interest and penalties in connection with unrecognized tax benefits. Nathan's estimates that its unrecognized tax benefit excluding accrued interest and penalties could be further reduced by up to$16,000 during the fiscal year endingMarch 28, 2021 .
Off-Balance Sheet Arrangements
AtMarch 29, 2020 andMarch 31, 2019 , Nathan's did not have any open purchase commitment to purchase hot dogs. Nathan's may continue to enter into additional purchase commitments in the future as favorable market conditions become available.
Liquidity and Capital Resources
Cash and cash equivalents atMarch 29, 2020 aggregated$77,117,000 , a$1,671,000 increase during the fiscal 2020 period as compared to cash and cash equivalents of$75,446,000 atMarch 31, 2019 . Net working capital increased to$75,165,000 from$72,237,000 atMarch 31, 2019 . ThroughMarch 29, 2020 , the Company declared and paid four regular dividends of$0.35 per common share aggregating$5,912,000 . During the fiscal 2020 period, the Company made its required semi-annual interest payments of$4,968,750 onMay 1, 2019 andNovember 1, 2019 . OnMay 1, 2020 , we made the first semi-annual interest payment of fiscal 2021. Cash provided by operations of$12,349,000 in the fiscal 2020 period is primarily attributable to net income of$13,435,000 in addition to other non-cash operating items of$2,923,000 , offset by changes in other operating assets and liabilities of$4,009,000 . Non-cash operating expenses consist principally of$1,233,000 of depreciation and amortization,$691,000 amortization of debt issuance cost,$352,000 of deferred income taxes,$228,000 of excess income tax benefits from stock-based compensation arrangements as a result of the accounting for certain aspects of its share-based payments to employees, share-based compensation expense of$116,000 and non-cash rental expense of$232,000 . In the fiscal 2020 period, accounts and other receivables increased by$1,006,000 due primarily to higher license royalties of$1,848,000 , which were partly offset by lower BPP receivables of$643,000 and lower franchise royalties of$210,000 both reductions are due in part to reduced sales as a result of the COVID-19 pandemic and fewer franchise restaurants. In the fiscal 2020 period, accounts payable, accrued expenses and other current liabilities decreased by$2,028,000 . Accounts payable decreased by$1,713,000 due principally to reduced product purchases made for the Branded Product Program due to the initial slowdown resulting from the COVID-19 pandemic. Rebates due under the Branded Product Program was lower by$256,000 due primarily to reduced sales inMarch 2020 as discussed above. Partially offsetting this reduction were increased accrued expenses for construction costs, professional services and other items.
Cash used in investing activities was
Cash used in financing activities of$9,808,000 in the fiscal 2020 period relates primarily to the payments of the Company's regular quarterly$0.35 per share cash dividend totaling$5,912,000 . During the fiscal 2020 period, Nathan's repurchased 85,642 shares of common stock for$4,966,000 . The Company also paid$8,000 for withholding taxes on the net share vesting of employee restricted stock. The Company also received$1,078,000 of proceeds from the exercise of stock options. 54
-------------------------------------------------------------------------------- During the period fromOctober 2001 throughMarch 29, 2020 , Nathan's purchased 5,227,405 shares of its common stock at a cost of approximately$83,269,000 pursuant to stock repurchase plans previously authorized by the Board of Directors. SinceMarch 26, 2007 , we have repurchased 3,336,305 shares at a total cost of approximately$76,111,000 , reducing the number of shares then-outstanding by 55.4%. In 2016, the Company's Board of Directors authorized increases to the sixth stock repurchase plan for the repurchase of up to 1,200,000 shares of the Company's common stock on behalf of the Company. As ofMarch 29, 2020 , Nathan's has repurchased 1,039,774 shares at a cost of approximately$35,607,000 under the sixth stock repurchase plan. AtMarch 29, 2020 , there were 160,226 shares remaining to be repurchased pursuant to the sixth stock repurchase plan. The plan does not have a set expiration date. Purchases under the Company's stock repurchase program may be made from time to time, depending on market conditions, in open market or privately-negotiated transactions, at prices deemed appropriate by management. There is no set time limit on the repurchases. OnMarch 13, 2020 , the Company's Board of Directors approved a 10b5-1 stock plan (the "10b5-1 Plan") which will expire on the earlier of (a)August 12, 2020 or (b) the earlier of when (i) the aggregate purchase price of all shares of common stock purchased under the 10b5-1 Plan equals$5.55 million and (ii) the aggregate purchases under the 10b5-1 Plan equals 100,000 shares unless terminated earlier by the Company's Board of Directors. During the fiscal year endedMarch 29, 2020 , the Company repurchased in open market transactions 50,918 shares of the Company's Common Stock at an average share price of$53.54 for a total cost of$2,727,000 under the 10b5-1 Plan.
At
Subsequent to
EffectiveJune 1, 2020 , Nathan's Board of Directors authorized the repurchase of up to$10 million of the 2025 Notes by the Company (at par or better) from time to time. There is no set time limit on the repurchases. As discussed above, we had cash and cash equivalents atMarch 29, 2020 aggregating$77,117,000 . Our Board routinely monitors and assesses its cash position and our current and potential capital requirements. InNovember 2017 , we refinanced our 2020 Notes through the issuance of the 2025 Notes and, our Board of Directors announced the payment of a$5.00 per share special dividend to the shareholders of record as of the close of business onDecember 22, 2017 . OnMay 31, 2018 , Nathans' Board of Directors authorized the commencement of a regular dividend of$1.00 per share per annum, payable at the rate of$0.25 per share per quarter. ThroughMarch 31, 2019 , the Company declared and paid four regular quarterly dividends of$0.25 per common share. OnJune 14, 2019 , Nathan's Board of Directors authorized increasing the quarterly dividend to$0.35 per common share. During the fiscal 2020 period, we have declared and paid four quarterly dividend distributions totaling$5,912,000 . EffectiveJune 12, 2020 , the Board declared its first quarterly cash dividend of$0.35 per share for fiscal 2021 which will be paid onJune 26, 2020 to stockholders of record as of the close of business onJune 22, 2020 . Our ability to pay future dividends is limited by the terms of the Indenture for the 2025 Notes. In addition, the payment of any cash dividends in the future, are subject to final determination of the Board and will be dependent upon our earnings and financial requirements. We may also return capital to our stockholders through stock repurchases, subject to any restrictions in the Indenture, although there is no assurance that the Company will make any repurchases under its existing stock-repurchase plan. We expect that in the future we will make investments in certain existing restaurants, support the growth of the Branded Product and Branded Menu Programs, service the outstanding debt, fund dividend distributions and continue our stock repurchase programs, funding those investments from our operating cash flow. We may also incur capital and other expenditures or engage in investing activities in connection with opportunistic situations that may arise on a case-by-case basis. In the fiscal year endingMarch 29, 2020 , we were required to make interest payments of$9,937,500 , all of which have been made as ofNovember 1, 2019 . During the fiscal year endingMarch 28, 2021 , we will be required to make interest payments of$9,937,500 . OnMay 1, 2020 , we made the first semi-annual interest payment of fiscal 2021. Management believes that available cash and cash equivalents, and cash generated from operations should provide sufficient capital to finance our operations, satisfy our debt service requirements and provide for our quarterly dividends and any stock repurchases for at least the next 12 months. AtMarch 29, 2020 , we sublet one property to a franchisee that we lease from a third party. We remain contingently liable for all costs associated with this property including: rent, property taxes and insurance. We may incur future cash payments with respect to such property, consisting primarily of future lease payments, including costs and expenses associated with terminating any of such leases. 55
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The following schedule represents Nathan's cash contractual obligations and
commitments by maturity as of
Payments Due by Period
Less than More than
Cash Contractual Obligations Total 1 Year 2-3 Years 4-5 Years 5 Years
Long term debt (a) $ 150,000 $ - $ - $ - $ 150,000
Employment Agreements (b) 4,517 1,167 2,000 950 400
Operating Leases 14,195 1,583 3,686 3,452 5,474
Gross Cash Contractual Obligations 168,712 2,750 5,686 4,402 155,874
Sublease Income 1,350 245 415 338 352
Net Cash Contractual Obligations
a) Represents the principal due on the 2025 Notes, but does not include interest
expense.
b) Reflects the Temporary Salary Reductions implemented in response to COVID-19,
estimated to remain in place for six months.
At March 29, 2020 , the Company had unrecognized tax benefits of $311,000 . The
Company believes that it is reasonably possible that the unrecognized tax
benefits may decrease by $16,000 within the next year. A reasonable estimate of
the timing of the remaining liabilities is not practicable.
Effective June 12, 2020 the Company declared its upcoming quarterly dividend of
$0.35 per common share to stockholders of record as of the close of business
June 22, 2020 , which is payable June 26, 2020 .
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 Company is
obligated to make payments under the Brooklyn Guaranty in the event of a default
by the tenant/franchisee. The Brooklyn Guaranty has an initial term of 10 years
and one 5-year option and is limited to 24 months of rent for the first three
years of the term. For the remainder of the term, the Brooklyn Guaranty is
limited to 12 months of rent plus reasonable costs of collection and attorney's
fees. As of March 29, 2020 , Nathan's has recorded a liability of $110,000 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.
Inflationary Impact
We do not believe that general inflation has materially impacted earnings since
2006. However, we have experienced significant volatility in our costs for our
hot dogs and certain food products, distribution costs and utilities. Between
April 2018 and March 2020 , beef prices traded within a range of + or - 10%.
Prices were at the lowest levels between October 2018 and March 2019 as compared
to higher levels between October 2019 and March 2020 . Our average cost of hot
dogs between October 2019 and March 2020 was approximately 11.4% higher than
before between October 2018 and March 2019 . As such, our market price for hot
dogs during our fiscal 2020 period was approximately 6.7% higher than the fiscal
2019 period.
Beginning in
We are unable to predict the future cost of our hot dogs and expect to
experience price volatility for our beef products during fiscal 2020. To the
extent that beef prices increase as compared to earlier periods, it could impact
our results of operations. In the past, we have entered into purchase
commitments for a portion of our hot dogs to reduce the impact of increasing
market prices. Our most recent purchase commitment was completed in 2016 for
approximately 2,600,000 pounds of hot dogs. We may attempt to enter into similar
purchase arrangements for hot dogs and other products in the future.
Additionally, we expect to continue experiencing volatility in oil and gas
prices on our distribution costs for our food products and utility costs in the
Company-owned restaurants and volatile insurance costs resulting from the
uncertainty of the insurance markets.
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New York State passed legislation increasing the minimum hourly wage for fast
food workers of restaurant chains with 30 or more locations nationwide. The
increase is being phased in differently between New York City and the rest of
New York State . Effective December 31, 2019 , the minimum wage was $15.00 in New
York City and increased to $13.75 per hour for the remainder of New York State .
The minimum hourly rate of pay for the remainder of
All of Nathan's Company-operated restaurants are withinNew York State , two of which operate withinNew York City that have been significantly affected by this legislation. The Company is further studying the impact on the Company's operations and is developing strategies and tactics, including pricing and potential operating efficiencies, to minimize the effects of these increases and future increases. We have recently increased certain selling prices to pass on recent cost of sales increases. However, if we are unable to fully offset these and future increases through pricing and operating efficiencies, our margins and profits will be negatively affected.
Effective
EffectiveNovember 27, 2017 , the City of New York Fair Work Week Legislation package of bills took effect that the city estimates will cover some 65,000 fast food workers by giving them more predictable work schedules. A key component of the package is a requirement that fast food restaurants schedule their workers at least two weeks in advance or pay employees between$10 to$75 per scheduling change, depending on the situation. Due to Nathan's dependency on weather conditions at our twoConey Island beach locations during the summer season, we are unable to determine the potential impact on our results of operations, which could be material. We believe that we have been able to implement tools to minimize the financial impact of this legislation. Nevertheless, we incurred approximately$6,000 of additional costs due to this legislation during the fiscal 2020 period. Continued increases in labor, food and other operating expenses, including health care, could adversely affect our operations and those of the restaurant industry and we might have to further reconsider our pricing strategy as a means to offset reduced operating margins. We believe the increases in the minimum wage and other changes in employment laws could have a significant financial impact on our financial results and the results of our franchisees that operate inNew York State . Our business could be negatively impacted if the decrease in margins for our franchisees results in the potential loss of new franchisees or the closing of a significant number of franchised restaurants. The Company's business, financial condition, operating results and cash flows can be impacted by a number of factors, including but not limited to those set forth above in "Management's Discussion and Analysis of Financial Condition and Results of Operations," any one of which could cause our actual results to vary materially from recent results or from our anticipated future results. For a discussion identifying additional risk factors and important factors that could cause actual results to differ materially from those anticipated, please see the discussions in "Forward-Looking Statements", "Risk Factors", and "Notes to Consolidated Financial Statements" in this Form 10-K. 57
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