Nathan's Famous, Inc. (NATH) - Description of business

Opportunity Ventures” (the “FTC Rule”)
requires us to disclose certain information to prospective franchisees. Fifteen
states, including New York, also require similar disclosure. While the FTC
rule
does not require registration or filing of the disclosure document, fourteen
states require franchisors to register the disclosure document (or obtain
exemptions from that requirement) before offering or selling a franchise. The
laws of seventeen other states require some form of registration under “business
opportunity” laws, which sometimes apply to franchisors such as the franchisor
of the Nathan’s Famous, Miami Subs, Kenny Rogers Roasters and Arthur Treacher’s
franchise systems. Laws
that
regulate one or another aspect of the franchisor-franchisee relationship
presently exist in twenty-one states and the District of Columbia. These laws
regulate the franchise relationship by, for example, requiring the franchisor
to
deal with its franchisees in good faith, prohibiting interference with the
right
of free association among franchisees, limiting the imposition of standards
of
performance on a franchisee, and regulating discrimination among franchisees
in
charges, royalties or fees. These laws have not precluded us from seeking
franchisees in any given area. Although these laws may also restrict a
franchisor in the termination of a franchise agreement by, for example,
requiring “good cause” to exist as a basis for the termination, advance notice
to the franchisee of the termination, an opportunity to cure a default and
repurchase of inventory or other compensation, these provisions have not had
a
significant effect on our operations. We
are
not aware of any pending franchise legislation in the U.S. that we believe
is
likely to significantly affect our operations. Each
Company-owned and franchised restaurant is subject to regulation as to
operational matters by federal agencies and to licensing and regulation by
state
and local health, sanitation, safety, fire and other departments. Difficulties
or failures in obtaining the required licenses or approvals could delay or
prevent the opening of a new restaurant. We
are
also subject to the Federal Fair Labor Standards Act, which governs minimum
wages, overtime, working conditions and other matters. We are also subject
to
federal and state environmental regulations, which have not had a material
effect on our operations. More stringent and varied requirements of local
governmental bodies with respect to zoning, land use and environmental factors
could delay or prevent development of new restaurants in particular locations.
In addition, the Federal Americans with Disabilities Act (“ADA”) applies with
respect to the design, construction and renovation of all restaurants in the
United States. Compliance with the ADA’s requirements could delay or prevent the
development of, or renovations to, restaurants in certain locations, as well
as
add to the cost of such development or renovation. Each
company that manufactures, supplies or sells our products is subject to
regulation by federal agencies and to licensing and regulation by state and
local health, sanitation, safety and other departments. Difficulties or failures
by these companies in obtaining the required licenses or approvals could
adversely affect our revenue that is generated from these
companies. Alcoholic
beverage control regulations require each restaurant that sells such products
to
apply to a state authority and, in certain locations, county and municipal
authorities, for a license or permit to sell alcoholic beverages on the
premises. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operations of the restaurants, including
minimum age of customers and employees, hours of operation, advertising,
wholesale purchasing, inventory control and handling, storage and dispensing
of
alcoholic beverages. At March 26, 2006, we offered for sale beer or wine in
two
of our existing Company-operated restaurants. Each of these restaurants has
current alcoholic beverage licenses permitting the sale of these beverages.
We
have never had an alcoholic beverage license revoked. We
may be
subject in certain states to "dram-shop" statutes, which generally provide
a
person injured by an intoxicated person the right to recover damages from an
establishment which wrongfully served alcoholic beverages to such person. We
carry liquor liability coverage as part of our existing comprehensive general
liability insurance and have never been named as a defendant in a lawsuit
involving "dram-shop" statutes. The
Sarbanes-Oxley Act of 2002 and rules promulgated thereunder by the SEC and
the
Nasdaq Stock Market have imposed substantial new or enhanced regulations and
disclosure requirements in the areas of corporate governance (including director
independence, director selection and audit, corporate governance and
compensation committee responsibilities), equity compensation plans, auditor
independence, pre-approval of auditor fees and services and disclosure and
internal control procedures. We are committed to industry best practices in
these areas. We
believe that we operate in substantial compliance with applicable laws and
regulations governing our operations, including the FTC Rule and state franchise
laws. Employees At
March
26, 2006, we had 216 employees, 50 of whom were corporate management and
administrative employees, 24 of whom were restaurant managers and 142 of whom
were hourly full-time and part-time food-service employees. We may also employ
as many as 200 seasonal employees during the summer months. Food-service
employees at four locations are currently represented by Local 1102 RWSDU UFCW
AFL-CIO, CLC, Retail, Wholesale and Department Store Union, under agreement
that
expires in June 2006. We executed a new agreement through June 2010 and do
not
expect that the new agreement will significantly effect our results of
operations or financial position. We consider our employee relations to be
good
and have not suffered any strike or work stoppage for more than 34
years. We
provide a training program for managers and assistant managers of our new
Company-owned and franchised restaurants. Hourly food workers are trained on
site by managers and crew trainers following Company practices and procedures
outlined in our operating manuals. Trademarks We
hold
trademark and service mark registrations for NATHAN’S FAMOUS, NATHAN’S and
Design, NATHAN’S FAMOUS SINCE 1916 and SINCE 1916 NATHAN’S FAMOUS within the
United States, with some of these marks holding corresponding foreign trademark
and service mark registrations in more than 20 jurisdictions. We also hold
various related marks for restaurant services and some food items. We
have
registered the marks "MIAMI SUBS AND DESIGN” and “MIAMI SUBS GRILL AND DESIGN”
with the United States Patent and Trademark Office. In addition, the marks
have
been registered in numerous foreign countries. We
have
also filed the MIAMI SUBS PLUS trademark on February 15, 2001 and an Amendment
to Alleged Use on May 21, 2001. The MIAMI SUBS PLUS application with the U.S.
Patent and Trademark Office became effective on September 10, 2002. We
hold
trademark and service mark registrations for “KENNY ROGERS ROASTERS”, “KENNY
ROGERS ROASTERS WOOD FIRE ROASTED CHICKEN & DESIGN”, “ DOWN RIGHT KICKIN BBQ
CHICKEN”, “EVERYONE ELSE IS JUST PLAIN CHICKEN”, “THERE’S GOODNESS HERE”,
“YOU’RE GONNA LOVE THIS FOOD”, “YOUR HEART IS IN THE RIGHT PLACE”, “KENNY ROGERS
TAKE IT HOME & DESIGN” and “KENNY ROGERS ROASTERS EXPRESS & DESIGN”
within the United States. Some of these marks are covered by corresponding
foreign trademark and service mark registrations in more than 80 jurisdictions.
The “Kenny Rogers Roasters” marks are subject to the terms of an April 5, 1993
license from Mr. Kenny Rogers; that license agreement was assigned to us on
April 1, 1999, when we purchased certain assets relating to the “Kenny Rogers
Roasters” franchise system. We
hold
trademark and service mark registrations for “ARTHUR TREACHER’S”, “ARTHUR
TREACHER’S FISH & CHIPS”, “KRUNCH PUP” and “ORIGINAL” within the United
States. We also hold trademark and service mark registrations for “ARTHUR
TREACHER’S” in China and Japan. We
believe that our trademarks and service marks provide significant value to
us
and are an important factor in the marketing of our products and services.
We
believe that we do not infringe on the trademarks or other intellectual property
rights of any third parties. Competition The
fast
food restaurant industry is highly competitive and can be significantly affected
by many factors, including changes in local, regional or national economic
conditions, changes in consumer tastes, consumer concerns about the nutritional
quality of quick-service food and increases in the number of, and particular
locations of, competing restaurants. Factors such as inflation, increases in
food, labor and energy costs, the availability and cost of suitable sites,
fluctuating interest and insurance rates, state and local regulations and
licensing requirements and the availability of an adequate number of hourly
paid
employees can also adversely affect the fast food restaurant
industry. Our
restaurant system competes with numerous restaurants and drive-in units
operating on both a national and local basis, including major national chains
with greater financial and other resources than ours. Changes in pricing or
other marketing strategies by these competitors can have an adverse impact
on
our sales, earnings and growth. We also compete with local restaurants and
diners on the basis of menu diversity, food quality, price, size, site location
and name recognition. There is also active competition for management personnel
as well as suitable commercial sites for restaurants. We
believe that our emphasis on our signature products and the reputation of these
products for taste and quality set us apart from our major competitors. As
fast
food companies have experienced flattening growth rates and declining average
sales per restaurant, some of them have adopted “value pricing” and or deep
discount strategies. These strategies could have the effect of drawing customers
away from companies which do not engage in discount pricing and could also
negatively impact the operating margins of competitors which attempt to match
their competitors’ price reductions. We have introduced our own form of “value
pricing,” selling combinations of different menu items for a total price lower
than the usual sale price of the individual items and other forms of price
sensitive promotions. We have expanded our value pricing strategy by offering
multi-sized alternatives to our value priced combo meals. Extensive price
discounting in the fast food industry could have an adverse effect on our
financial results. We
also
compete with many franchisors of restaurants and other business concepts for
the
sale of franchises to qualified and financially capable franchisees. Our
Branded Product Program competes directly with a variety of nationally
recognized hot dog companies. Our products primarily compete based upon price,
quality and value to the foodservice operator and consumer. We believe that
the
reputation of the Nathan’s Famous brand for superior quality along with the
unique operational support provided to the foodservice operator provides
Nathan’s with a competitive advantage. Our
retail licensing program for the sale of packaged foods within supermarkets
competes primarily on the basis of reputation, flavor, quality and price. In
most cases, we compete against nationally recognized brands that have
significantly greater resources then those at our disposal. Available
Information We
file
reports with the SEC, including an annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and a proxy statement on Schedule
14A.
The public may read and copy any materials filed by us with the SEC at the
SEC’s
public reference room at 450 Fifth Street, NW, Washington D.C., 20549. The
public may obtain information about the operation of the SEC’s public reference
rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website
at
http://www.sec.gov
that
contains reports, proxy and information statements and other information about
issuers such as us that file electronically with the SEC. In
addition, we make available free of charge on our website at http://www.nathansfamous.com
our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K, proxy statement on Schedule 14A and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) under the Exchange Act as soon
as reasonably practical after we electronically file such material with, or
furnish it to, the SEC. Our
Board
of Directors has adopted a Code of Business Conduct applicable to the Company’s
officers and employees, and has also adopted a Code of Ethics for its senior
financial officers. These codes of ethics are posted on the Company’s website at
www.nathansfamous.com in the Investor Relations section. We intend to satisfy
the disclosure requirement under Item 10 of Form 8-K regarding an amendment
to,
or a waiver from, a provision of our code of ethics that applies to our
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions and that relates
to any element of our codes of ethics by posting such information on our website
within four business days of the date of such amendment or waiver. In the case
of a waiver, the nature of the waiver, the name of the person to whom the waiver
was granted and the date of the waiver will also be disclosed. The
Board
of Directors has also adopted, and we have posted in the Investor Relations
section of our website, written Charters for each of the Board’s standing
committees. We will provide without charge, upon a stockholder’s request to our
address set forth in the preceding section, a copy of the codes of ethics or
the
Charter of any standing committee of the Board. Item
1A. Risk Factors. The
following list of risk factors is not exhaustive. There can be no assurance
that
Nathan’s has correctly identified and appropriately assessed all factors
affecting its business operations or that the publicly available and other
information with respect to these matters is complete and correct. Additional
risks and uncertainties not presently known to Nathan’s or that it currently
believes to be immaterial also may adversely impact the business. Should any
risks or uncertainties develop into actual events, these developments could
have
material adverse effects on Nathan’s business, financial condition and results
of operations. The
quick service restaurant segment is highly competitive, and that competition
could lower revenues, margins and market share. The
quick-service restaurant segment of the foodservice industry is intensely
competitive regarding price, service, location, personnel and type and quality
of food. Nathan’s and its franchisees compete with international, national,
regional and local retailers primarily through the quality, variety and value
perception of food products offered. Other key competitive factors include
the
number and location of restaurants, quality and speed of service, attractiveness
of facilities, effectiveness of advertising and marketing programs, and new
product development. Nathan’s anticipates competition will continue to focus on
pricing. Many of Nathan’s competitors have substantially larger marketing
budgets, which may provide them with a competitive advantage. In addition,
Nathan’s system competes within the food service market and the quick service
restaurant segment not only for customers but also for management and hourly
employees and qualified franchisees. If Nathan’s is unable to maintain its
competitive position, it could experience downward pressure on prices, lower
demand for products, reduced margins, the inability to take advantage of new
business opportunities and the loss of market share. Changes
in economic, market and other conditions could adversely affect Nathan’s and its
franchisees, and thereby Nathan’s operating results. The
quick
service restaurant industry is affected by changes in international, national,
regional, and local economic conditions, consumer preferences and spending
patterns, demographic trends, consumer perceptions of food safety, weather,
traffic patterns, the type, number and location of competing restaurants, and
the effects of war or terrorist activities and any governmental responses
thereto. Factors such as inflation, higher costs for each of food, labor,
benefits and utilities, legal claims, and the availability of management and
hourly employees also affect restaurant operations and administrative expenses.
The ability of Nathan’s and its franchisees to finance new restaurant
development, improvements and additions to existing restaurants, and the
acquisition of restaurants from, and sale of restaurants to franchisees is
affected by economic conditions, including interest rates and other government
policies impacting land and construction costs and the cost and availability
of
borrowed funds. Events
reported in the media, such as incidents involving food-borne illnesses or
food
tampering, whether or not accurate, can cause damage to each of Nathan’s brand’s
reputation and affect sales and profitability. Reports, whether true or not,
of
food-borne illnesses (such as e-coli, avian flu, bovine spongiform
encephalopathy, hepatitis A, trichinosis or salmonella) and injuries caused
by
food tampering have in the past severely injured the reputations of participants
in the quick service restaurant segment and could in the future affect Nathan’s
as well. Each of Nathan’s brand’s reputation is an important asset to the
business; as a result, anything that damages a brand’s reputation could
immediately and severely hurt systemwide sales and, accordingly, revenues and
profits. If customers become ill from food-borne illnesses, Nathan’s could also
be forced to temporarily close some restaurants. In addition, instances of
food-borne illnesses or food tampering, even those occurring solely at the
restaurants of competitors, could, by resulting in negative publicity about
the
restaurant industry, adversely affect system sales on a local, regional or
systemwide basis. A decrease in customer traffic as a result of these health
concerns or negative publicity, or as a result of a temporary closure of any
of
Nathan’s restaurants, could materially harm Nathan’s business, results of
operations and financial condition. Current
restaurant locations may become unattractive, and attractive new locations
may
not be available for a reasonable price, if at all, which may reduce Nathan’s
revenue. The
success of any restaurant depends in substantial part on its location. There
can
be no assurance that current locations will continue to be attractive as
demographic patterns change. Neighborhood or economic conditions where
restaurants are located could decline in the future, thus resulting in
potentially reduced sales in those locations. If Nathan’s and its franchisees
cannot obtain desirable additional and alternative locations at reasonable
prices, Nathan’s results of operations would be adversely affected. Changing
health or dietary preferences may cause consumers to avoid products offered
by
Nathan’s in favor of alternative foods. The
foodservice industry is affected by consumer preferences and perceptions. If
prevailing health or dietary preferences and perceptions cause consumers to
avoid the products offered by Nathan’s restaurants in favor of alternative or
healthier foods, demand for Nathan’s products may be reduced and its business
could be harmed. Nathan’s
is subject to health, employment, environmental and other government
regulations, and failure to comply with existing or future government
regulations could expose Nathan’s to litigation, damage Nathan’s or a brand’s
reputation and lower profits. Nathan’s
and its franchisees are subject to various federal, state and local laws
affecting their businesses. The successful development and operation of
restaurants depend to a significant extent on the selection and acquisition
of
suitable sites, which are subject to zoning, land use (including the placement
of drive-thru windows), environmental (including litter), traffic and other
regulations. Restaurant operations are also subject to licensing and regulation
by state and local departments relating to health, food preparation, sanitation
and safety standards, federal and state labor laws (including applicable minimum
wage requirements, overtime, working and safety conditions and citizenship
requirements), federal and state laws prohibiting discrimination and other
laws
regulating the design and operation of facilities, such as the Americans with
Disabilities Act of 1990. If Nathan’s fails to comply with any of these laws, it
may be subject to governmental action or litigation, and its reputation could
be
accordingly harmed. Injury to Nathan’s or a brand’s reputation would, in turn,
likely reduce revenue and profits. In
recent
years, there has been an increased legislative, regulatory and consumer focus
on
nutrition and advertising practices in the food industry, particularly among
quick service restaurants. As a result, Nathan’s may become subject to
regulatory initiatives in the area of nutrition disclosure or advertising,
such
as requirements to provide information about the nutritional content of its
food
products, which could increase expenses. The operation of Nathan’s franchise
system is also subject to franchise laws and regulations enacted by a number
of
states and rules promulgated by the U.S. Federal Trade Commission. Any future
legislation regulating franchise relationships may negatively affect Nathan’s
operations, particularly its relationship with its franchisees. Failure to
comply with new or existing franchise laws and regulations in any jurisdiction
or to obtain required government approvals could result in a ban or temporary
suspension on future franchise sales. Changes in applicable accounting rules
imposed by governmental regulators or private governing bodies could also affect
Nathan’s reported results of operations, which could cause its stock price to
fluctuate or decline. Nathan’s
may not be able to adequately protect its intellectual property, which could
decrease the value of Nathan’s or its brands and products. The
success of Nathan’s business depends on the continued ability to use existing
trademarks, service marks and other components of each of Nathan’s brands in
order to increase brand awareness and further develop branded products. Nathan’s
may not be able to adequately protect its trademarks, and the use of these
trademarks may result in liability for trademark infringement, trademark
dilution or unfair competition. All of the steps Nathan’s has taken to protect
its intellectual property may not be adequate. Nathan’s
earnings and business growth strategy depends in large part on the success
of
its franchisees, and Nathan’s or a brand’s reputation may be harmed by actions
taken by franchisees that are outside of Nathan’s control. A
portion
of Nathan’s earnings comes from royalties, rents and other amounts paid by
Nathan’s franchisees. Franchisees are independent contractors, and their
employees are not employees of Nathan’s. Nathan’s provides training and support
to, and monitors the operations of, its franchisees, but the quality of their
restaurant operations may be diminished by any number of factors beyond Nathan’s
control. Consequently, franchisees may not successfully operate stores in a
manner consistent with Nathan’s high standards and requirements and franchisees
may not hire and train qualified managers and other restaurant personnel. Any
operational shortcoming of a franchise restaurant is likely to be attributed
by
consumers to an entire brand or Nathan’s system, thus damaging Nathan’s or a
brand’s reputation and potentially adversely affecting Nathan’s business,
results of operations and financial condition. Leasing
of significant amounts of real estate exposes Nathan’s to possible liabilities
and losses. Nathan’s
leases the land and/or the building, for certain system restaurants.
Accordingly, Nathan’s is subject to all of the risks associated with owning and
leasing real estate. Nathan’s generally cannot cancel these leases. If an
existing or future store is not profitable, and Nathan’s decides to close it,
Nathan’s may nonetheless be committed to perform its obligations under the
applicable lease including, among other things, paying the base rent for the
balance of the lease term. In addition, as each of the leases expires, Nathan’s
may fail to negotiate renewals, either on commercially acceptable terms or
at
all, which could cause Nathan’s to close stores in desirable locations. Nathan’s
may evaluate acquisitions, joint ventures and other strategic initiatives,
any
of which could distract management or otherwise have a negative effect on
revenues, costs and stock price. Nathan’s
future success may depend on opportunities to buy or obtain rights to other
businesses that could complement, enhance or expand its current business or
products or that might otherwise offer growth opportunities. In particular,
Nathan’s may evaluate potential mergers, acquisitions, joint venture
investments, strategic initiatives, alliances, vertical integration
opportunities and divestitures. Any attempt by Nathan’s to engage in these
transactions may expose it to various inherent risks, including:
· accurately
assessing the value, future growth potential, strengths, weaknesses,
contingent and other liabilities and potential profitability of
acquisition candidates;
· the
potential loss of key personnel of an acquired business;
· the
ability to achieve projected economic and operating synergies;
· difficulties
in successfully integrating, operating, maintaining and managing
newly
acquired operations or employees;
· difficulties
maintaining uniform standards, controls, procedures and policies;
· unanticipated
changes in business and economic conditions affecting an acquired
business;
· the
possibility of impairment charges if an acquired business performs
below
expectations; and
· the
diversion of management’s attention from the existing business to
integrate the operations and personnel of the acquired or combined
business or implement the strategic initiative. Nathan’s
annual and quarterly financial results may fluctuate depending on various
factors, many of which are beyond its control, and, if Nathan’s fails to meet
the expectations of securities analysts or investors, Nathan’s share price may
decline. Nathan’s
sales and operating results can vary from quarter to quarter and year to year
depending on various factors, many of which are beyond its control. Certain
events and factors may directly and immediately decrease demand for Nathan’s
products. If customer demand decreases rapidly, Nathan’s results of operations
would also decline. These events and factors include:
· variations
in the timing and volume of Nathan’s sales and franchisees’ sales;
· sales
promotions by Nathan’s and its competitors;
· changes
in average same-store sales and customer visits;
· variations
in the price, availability and shipping costs of supplies;
· seasonal
effects on demand for Nathan’s products;
· unexpected
slowdowns in new store development efforts;
· changes
in competitive and economic conditions generally;
· changes
in the cost or availability of ingredients or labor;
· weather
and acts of God; and
· changes
in the number of franchise agreement
renewals. Catastrophic
events may disrupt Nathan’s business. Unforeseen
events, including war, terrorism and other international conflicts, public
health issues, labor unrest and natural disasters such as earthquakes,
hurricanes or other adverse weather and climate conditions, whether occurring
in
the United States or abroad, could disrupt Nathan’s operations, disrupt the
operations of franchisees, suppliers or customers, or result in political or
economic instability. These events could reduce demand for Nathan’s products or
make it difficult or impossible to receive products from suppliers. Nathan’s
international operations are subject to various factors of uncertainty. Nathan’s
business outside of the United States is subject to a number of additional
factors, including international economic and political conditions, differing
cultures and consumer preferences, currency regulations and fluctuations,
diverse government regulations and tax systems, uncertain or differing
interpretations of rights and obligations in connection with international
franchise agreements and the collection of royalties from international
franchisees, the availability and cost of land and construction costs, and
the
availability of appropriate franchisees. Although Nathan’s believes it has
developed the support structure required for international growth, there is
no
assurance that such growth will occur or that international operations will
be
profitable. Nathan’s
may from time to time sell certain of its leasehold interests to various third
parties. The
disposition of leases to new or existing franchisees or other third parties
for
Company-operated restaurants or franchised restaurants where Nathan’s has
guaranteed the lease obligation has been part of Nathan’s strategy to develop
the overall health of the system by disposing of such interests where prudent.
The realization of gains from future dispositions of leasehold interests depends
in part on the ability of Nathan’s to complete any future disposition
transactions on acceptable terms. There are various reasons why the program
might be unsuccessful, including changes in economic, credit market, real estate
market or other conditions, and the ability of Nathan’s to complete sale
transactions on acceptable terms and at or near the prices estimated as
attainable by Nathan’s. Increases
in the cost of food and paper products could harm our profitability and
operating results. The
cost
of the food and paper products we use depends on a variety of factors, many
of
which are beyond our control. We purchase large quantities of beef and our
beef
costs in the United States represent approximately 85% of our food costs. The
market for beef is particularly volatile and is subject to significant price
fluctuations due to seasonal shifts, climate conditions, industry demand and
other factors. For example, recent increased demand in beef resulted in
shortages, requiring us to pay significantly higher prices for the beef we
purchased. We were unable to pass all of the recent price increases to our
customers. If the price of beef or other food products that we use in our
restaurants increase in the future and we choose not to pass, or cannot pass,
these increases on to our customers, our operating margins would decrease. Food
and
paper products typically represent approximately 25% to 30% of our cost of
sales. Fluctuations in weather, supply and demand and economic conditions could
adversely affect the cost, availability and quality of some of our critical
products, including beef. Our inability to obtain requisite quantities of
high-quality ingredients would adversely affect our ability to provide the
menu
items that are central to our business, and the highly competitive nature of
our
industry may limit our ability to pass through increased costs to our customers.
Continuing increases in the cost of fuel would increase the distribution costs
of our prime products thereby increasing the food and paper cost to us and
to
our franchisees, thus negatively affecting profitability. Labor
shortages or increases in labor costs could slow our growth or harm our
business. Our
success depends in part upon our ability to continue to attract, motivate and
retain regional operational and restaurant general managers with the
qualifications to succeed in our industry and the motivation to apply our core
service philosophy. If we are unable to continue to recruit and retain
sufficiently qualified managers or to motivate our employees to achieve
sustained high service levels, our business and our growth could be adversely
affected. Competition for these employees could require us to pay higher wages
that could result in higher labor costs. In addition, increases in the minimum
wage or labor regulation could increase our labor costs. We may be unable to
increase our prices in order to pass these increased labor costs on to our
customers, in which case our margins and our franchisees’ margins would be
negatively affected. We
face risks of litigation and pressure tactics, such as strikes, boycotts and
negative publicity from customers, franchisees, suppliers, employees and others,
which could divert our financial and management resources and which may
negatively impact our financial condition and results of operations. Class
action lawsuits have been filed, and may continue to be filed, against various
quick service restaurants alleging, among other things, that quick service
restaurants have failed to disclose the health risks associated with high-fat
foods and that quick service restaurant marketing practices have targeted
children and encouraged obesity. In addition, we face the risk of lawsuits
and
negative publicity resulting from injuries, including injuries to infants and
children, allegedly caused by our products, toys and other promotional items
available in our restaurants or our playground equipment. In
addition to decreasing our sales and profitability and diverting our management
resources, adverse publicity or a substantial judgment against us could
negatively impact our business, results of operations, financial condition
and
brand reputation, hindering our ability to attract and retain franchisees and
grow our business in the United States and internationally. In
addition, activist groups, including animal rights activists and groups acting
on behalf of franchisees, the workers who work for our suppliers and others,
have in the past, and may in the future, use pressure tactics to generate
adverse publicity about us by alleging, for example, inhumane treatment of
animals by our suppliers, poor working conditions or unfair purchasing policies.
These groups may be able to coordinate their actions with other groups, threaten
strikes or boycotts or enlist the support of well-known persons or organizations
in order to increase the pressure on us to achieve their stated aims. In the
future, these actions or the threat of these actions may force us to change
our
business practices or pricing policies, which may have a material adverse effect
on our business, results of operations and financial condition. Further,
we may be subject to employee, franchisee and other claims in the future based
on, among other things, mismanagement of the system, unfair or unequal
treatment, discrimination, harassment, wrongful termination and wage, rest
break
and meal break issues, including those relating to overtime compensation. We
have been subject to these types of claims in the past, and if one or more
of
these claims were to be successful or if there is a significant increase in
the
number of these claims, our business, results of operations and financial
condition could be harmed.