Note 2 - Summary of Significant Accounting Policies
 12 Months Ended
Mar. 25, 2012
Significant Accounting Policies [Text Block]
 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following significant accounting policies have been applied in the preparation of the consolidated financial statements:

1.     Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries.  All significant inter-company balances and transactions have been eliminated in consolidation.

2.     Fiscal Year

The Company’s fiscal year ends on the last Sunday in March, which results in a 52- or 53-week reporting period.  The results of operations and cash flows for the fiscal years ended March 25, 2012, March 27, 2011, and March 28, 2010 are on the basis of a 52-week reporting period.

3.     Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Significant estimates made by management in preparing the consolidated financial statements include revenue recognition, the allowance for doubtful accounts, valuation of notes receivable, valuation of stock-based compensation, accounting for income taxes, and the valuation of goodwill, intangible assets and other long-lived assets.

4.     Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.  Cash equivalents amounted to $92 and $1,670 at March 25, 2012 and March 27, 2011, respectively. Substantially all of the Company’s cash and cash equivalents are in excess of government insurance.

5.     Impairment of Note Receivable

Nathan’s determines that a loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When evaluating a note for impairment, the factors considered include: (a) indications that the borrower is experiencing business problems such as late payments, operating losses, marginal working capital, inadequate cash flow or business interruptions, (b) loans secured by collateral that is not readily marketable, or (c) loans that are susceptible to deterioration in realizable value. The Company records interest income on its impaired notes receivable on an accrual basis, when collection is assured, based on the present value of the estimated cash flows of identified impaired notes receivable (See Note G).

6.     Inventories

Inventories, which are stated at the lower of cost or market value, consist primarily of food items and supplies. Inventories also include equipment and marketing items in connection with the Branded Product Program.  Cost is determined using the first-in, first-out method.

7.      Marketable Securities

The Company determines the appropriate classification of securities at the time of purchase and reassesses the appropriateness of the classification at each reporting date. At March 25, 2012 and March 27, 2011, all marketable securities held by the Company have been classified as available-for-sale and, as a result, are stated at fair value, based upon quoted market prices for similar assets as determined in active markets or model-derived valuations in which all significant inputs are observable for substantially the full-term of the asset, with unrealized gains and losses included as a component of accumulated other comprehensive income. Realized gains and losses on the sale of securities are determined on a specific identification basis. Interest income is recorded when it is earned and deemed realizable by the Company.

8.     Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Major improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred. Depreciation and amortization are calculated on the straight-line basis over the estimated useful lives of the assets.  Leasehold improvements are amortized over the shorter of the estimated useful life or the lease term of the related asset. The estimated useful lives are as follows:

Building and improvements
5 – 25 years
 
Machinery, equipment, furniture and fixtures
3 – 15 years
 
Leasehold improvements
5 – 20 years
 

9.     Goodwill and Intangible Assets

Goodwill and intangible assets consist of (i) goodwill of $95 resulting from the acquisition of Nathan’s in 1987; and (ii) trademarks, trade names and other intellectual property of $1,353 in connection with Arthur Treacher’s.

The Company’s goodwill and intangible assets are deemed to have indefinite lives and, accordingly, are not amortized, but are evaluated for impairment at least annually, but more often whenever changes in facts and circumstances occur which may indicate that the carrying value may not be recoverable. As of March 25, 2012 and March 27, 2011, the Company performed its required annual impairment test of goodwill and intangible assets and has determined no impairment is deemed to exist.

10.   Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  Impairment is measured by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their ultimate disposition.  In instances where impairment is determined to exist, the Company writes down the asset to its fair value based on the present value of estimated future cash flows.

Impairment losses are recorded on long-lived assets on a restaurant-by-restaurant basis whenever impairment factors are determined to be present.  The Company considers a history of restaurant operating losses to be its primary indicator of potential impairment for individual restaurant locations.  No units were deemed impaired during the fiscal years ended March 25, 2012, March 27, 2011 and March 28, 2010.

11.       Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).

The fair value hierarchy, as outlined in the applicable accounting guidance, is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable.  Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. 

The fair value hierarchy consists of the following three levels

 
·
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market

 
·
Level 2 - inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability

 
·
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability

The use of observable market inputs (quoted market prices) when measuring fair value and, specifically, the use  of Level 1 quoted prices to measure fair value are required whenever possible.  The determination of where an asset or liability falls in the hierarchy requires significant judgment.  The Company evaluates its hierarchy disclosures annually and based on various factors, it is possible that an asset or liability may be classified differently from year to year.

The following tables present assets and liabilities measured at fair value on a recurring basis as of March 25, 2012 and March 27, 2011 based upon the valuation hierarchy:

March 25, 2012
 
Level 1
   
Level 2
   
Level 3
   
Carrying Value
 
Marketable securities
  $ -     $ 14,710     $ -     $ 14,710  
Total assets at fair value
  $ -     $ 14,710     $ -     $ 14,710  
                                 
March 27, 2011
 
Level 1
   
Level 2
   
Level 3
   
Carrying Value
 
Marketable securities
  $ -     $ 18,906     $ -     $ 18,906  
Total assets at fair value
  $ -     $ 18,906     $ -     $ 18,906  

The carrying amounts of cash equivalents, accounts receivable, notes receivable and accounts payable approximate fair value due to the short-term maturity of the instruments.

The majority of the Company’s non-financial assets and liabilities are not required to be carried at fair value on a recurring basis.  However, the Company is required on a non-recurring basis to use fair value measurements when analyzing asset impairment as it relates to goodwill and other indefinite-lived intangible assets and long-lived assets. The Company utilized the income approach (Level 3 inputs) which utilized cash flow forecasts for future income and were discounted to present value in performing its annual impairment testing of intangible assets. For its annual goodwill impairment testing, the Company utilized an income approach (Level 3 inputs).

12.      Start-up Costs

Pre-opening and similar restaurant costs are expensed as incurred.

13.      Revenue Recognition - Branded Product Program

The Company recognizes sales from the Branded Product Program and certain products sold from the Branded Menu Program when it is determined that the products the Company has sold have been delivered via third party common carrier to Nathan’s customers. Rebates provided to customers are classified as a reduction to sales.

14.      Revenue Recognition - Company-owned Restaurants

Sales by Company-owned restaurants, which are typically paid in cash or credit card by the customer, are recognized upon the performance of services. Sales are presented net of sales tax.

15.      Revenue Recognition - Franchising Operations

In connection with its franchising operations, the Company receives initial franchise fees, development fees, royalties, and in certain cases, revenue from sub-leasing restaurant properties to franchisees.

Franchise and area development fees, which are typically received prior to completion of the revenue recognition process, are initially recorded as deferred revenue. Initial franchise fees, which are non-refundable, are recognized as income when substantially all services to be performed by Nathan’s and conditions relating to the sale of the franchise have been performed or satisfied, which generally occurs when the franchised restaurant commences operations.

The following services are typically provided by the Company prior to the opening of a franchised restaurant:

 
o
Approval of all site selections to be developed.

 
o
Provision of architectural plans suitable for restaurants to be developed.

 
o
Assistance in establishing building design specifications, reviewing construction compliance and equipping the restaurant.

 
o
Provision of appropriate menus to coordinate with the restaurant design and location to be developed.

 
o
Provision of management training for the new franchisee and selected staff.

 
o
Assistance with the initial operations of restaurants being developed.

At March 25, 2012 and March 27, 2011, $123 and $341, respectively, of deferred franchise fees are included in the accompanying consolidated balance sheets. For the fiscal years ended March 25, 2012, March 27, 2011 and March 28, 2010, the Company earned franchise fees of $920, $663, and $678, respectively, from new unit openings, transfers, co-branding and forfeitures.

Development fees are nonrefundable and the related agreements require the franchisee to open a specified number of restaurants in the development area within a specified time period or the agreements may be canceled by the Company.  Revenue from development agreements is deferred and recognized ratably over the term of the agreement, as restaurants in the development area commence operations on a pro rata basis to the minimum number of restaurants required to be open, or at the time the development agreement is effectively canceled. At March 25, 2012 and March 27, 2011, $603 and $425, respectively, of deferred development fee revenue is included in the accompanying consolidated balance sheets.

The following is a summary of franchise openings and closings for the Nathan’s franchise restaurant system for the fiscal years ended March 25, 2012, March 27, 2011 and March 28, 2010:

   
March 25,
2012
   
March 27,
2011
   
March 28,
2010
 
                   
Franchised restaurants operating at the beginning of the period
    264       246       249  
                         
New franchised restaurants opened during the period
    67       40       33  
                         
Franchised restaurants closed during the period
    (32 )     (22 )     (36 )
                         
Franchised restaurants operating at the end of the period
    299       264       246  

The Company recognizes franchise royalties on a monthly basis, which are generally based upon a percentage of sales made by the Company’s franchisees, when they are earned and deemed collectible. The Company recognizes royalty revenue from its Branded Menu Program directly from the sale of Nathan’s products by the manufacturers.

Franchise fees and royalties that are not deemed to be collectible are not recognized as revenue until paid by the franchisee or until collectibility is deemed to be reasonably assured. Revenue from sub-leasing properties is recognized in income as the revenue is earned and becomes receivable and deemed collectible.  Sub-lease rental income is presented net of associated lease costs in the accompanying consolidated statements of earnings.

17.      Revenue Recognition – License Royalties

The Company earns revenue from royalties on the licensing of the use of its name on certain products produced and sold by outside vendors.  The use of the Company name and symbols must be approved by the Company prior to each specific application to ensure proper quality and project a consistent image.  Revenue from license royalties is recognized on a monthly basis when it is earned and deemed collectible.

18.      Business Concentrations and Geographical Information

The Company’s accounts receivable consist principally of receivables from franchisees for royalties and advertising contributions, from sales under the Branded Product Program, and from royalties from retail licensees.  At March 25, 2012, one retail licensee and three Branded Product customers each represented 19%, 14%, 13% and 12%, respectively, of accounts receivable. At March 27, 2011, one retail licensee and three Branded Product customers each represented 11%, 16%, 13% and 11%, respectively, of accounts receivable.  No franchisee, retail licensee or Branded Product customer accounted for 10% or more of total revenues during the fiscal years ended March 25, 2012, March 27, 2011 and March 28, 2010.

The Company’s primary supplier of hot dogs represented 79%, 75% and 74% of product purchases for the fiscal years ended March 25, 2012, March 27, 2011 and March 28, 2010, respectively.  The Company’s distributor of product to its Company-owned restaurants represented 8%, 9% and 11% of product purchases for the fiscal years ended March 25, 2012, March 27, 2011 and March 28, 2010, respectively.

The Company’s revenues for the fiscal years ended March 25, 2012, March 27, 2011 and March 28, 2010 were derived from the following geographic areas:

   
March 25, 2012
   
March 27, 2011
   
March 28, 2010
 
                   
Domestic (United States)
  $ 64,534     $ 55,824     $ 49,747  
Non-domestic
    1,688       1,431       1,129  
    $ 66,222     $ 57,255     $ 50,876  

19.      Advertising

The Company administers an advertising fund on behalf of its franchisees to coordinate the marketing efforts of the Company. Under this arrangement, the Company collects and disburses fees paid by manufacturers, franchisees and Company-owned stores for national and regional advertising, promotional and public relations programs. Contributions to the advertising fund are based on specified percentages of net sales, generally ranging up to 2%. Net Company-owned store advertising expense, which is expensed as incurred, was $227, $233, and $247, for the fiscal years ended March 25, 2012, March 27, 2011 and March 28, 2010, respectively, have been included within restaurant operating expenses in the accompanying consolidated statements of earnings.

20.      Stock-Based Compensation

At March 25, 2012, the Company had several stock-based employee compensation plans in effect which are more fully described in Note K.

The cost of all share-based payments to employees, including grants of employee stock options, is recognized in the financial statements based on their fair values measured at the grant date, or the date of any later modification, over the requisite service period. The Company utilizes the straight-line attribution method to recognize the expense associated with awards with graded vesting terms.

21.      Classification of Operating Expenses

Cost of sales consist of the following:

 
o
The cost of products sold by Company-operated restaurants, through the Branded Product Program and through other distribution channels.

 
o
The cost of labor and associated costs of in-store restaurant management and crew.

 
o
The cost of paper products used in Company-operated restaurants.

 
o
Other direct costs such as fulfillment, commissions, freight and samples.

Restaurant operating expenses consist of the following:

 
o
Occupancy costs of Company-operated restaurants.

 
o
Utility costs of Company-operated restaurants.

 
o
Repair and maintenance expenses of Company-operated restaurant facilities.

 
o
Marketing and advertising expenses done locally and contributions to advertising funds for Company-operated restaurants.

 
o
Insurance costs directly related to Company-operated restaurants.

22.      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, if any, 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.

23.       Adoption of New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued a number of amendments in order to align the fair value measurement and disclosure requirements in U.S. Generally Accepted Accounting Principles (“US GAAP”) and International Financial Reporting Standards (“IFRS”). The amendments change the wording used to describe many of the requirements in US GAAP for measuring fair value or disclosing information about fair value measurements. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments modify a particular principle or requirement for measuring fair value or for disclosing fair value measurements. The amended guidance was effective for Nathan’s beginning with the first interim or annual reporting period beginning after December 15, 2011; early application was not permitted. We adopted these amendments during the fiscal period ended March 25, 2012, and these amendments did not have a material effect on our consolidated results of operations or financial position.

In June 2011, the FASB issued guidance covering the presentation of comprehensive income. Under this guidance, an entity has the option to present the total of comprehensive income, the components of net income, and components of other comprehensive income (“OCI”) either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Irrespective of the format that is chosen, an entity is required to present each component of net income along with total net income, each component of OCI along with a total for OCI, and a total for comprehensive income. Entities were also required to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where components of net income and components of OCI are presented. However, the implementation of this last requirement was deferred by the FASB in December 2011. Nathan’s elected to early adopt this accounting standard at March 25, 2012. The adoption of this new accounting standard modified the required disclosures, but did not have a material effect on our consolidated results of operations or financial position.

The Company does not believe that any other recently issued, but not yet effective accounting standards, when adopted, will have a material effect on the accompanying financial statements.