Note 2 - Summary of Significant Accounting Policies

12 Months Ended

Mar. 31, 2013

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 year ended March 31, 2013, contained 53 weeks. The results of operations and cash flows for the fiscal years ended March 28, 2012, and March 27, 2011 contained 52 weeks.

3.    Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts

of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

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

4.    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 $172 and $92at March 31, 2013 and March 25, 2012, respectively. Substantially all of the Company’s cash and cash equivalents are in excess of government insurance.

5.    Note Receivable

During the fiscal year ended March 27, 2011, the Company recognized an impairment charge of $263 on a then-existing note receivable from the sale of a formerly wholly owned subsidiary Miami Subs Corp. During the fiscal year ended March 25, 2012, the note receivable was sold and the Company received total proceeds of $900.

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 31, 2013 and March 25, 2012, all marketable securities held by the Company have been classified as available-for-sale and, as a result, are stated at fair value, based upon quoted market prices for similar assets as determined in active markets or model-derived valuations in which all significant inputs are observable for substantially the full-term of the asset, with unrealized gains and losses included as a component of accumulated other comprehensive income. Realized gains and losses on the sale of securities are determined on a specific identification basis. Interest income is recorded when it is earned and deemed realizable by the Company.

8.    Property and Equipment

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

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

9.     Goodwill and Intangible Assets

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

The Company’s goodwill and intangible assets are deemed to have indefinite lives and, accordingly, are not amortized, but are evaluated for impairment at least annually, but more often whenever changes in facts and circumstances occur which may indicate that the carrying value may not be recoverable. As of March 31, 2013 and March 25, 2012, 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.  As result of Hurricane Sandy, our Coney Island restaurant sustained significant damage and was considered temporarily impaired for purposes of this analysis. The restaurant was fully repaired and re-opened on May 20, 2013. No units were deemed impaired during the fiscal years ended March 31, 2013, March 25, 2012 and March 27, 2011.

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 table present assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and March 25, 2012 based upon the valuation hierarchy:

March 31, 2013	Level 1		Level 2		Level 3		Carrying Value
Marketable securities	$	-	$	12,307	$	-	$	12,307
Total assets at fair value	$	-	$	12,307	$	-	$	12,307

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

Nathan’s marketable securities, which consist primarily of municipal bonds, are not actively traded.  The valuation of such bonds is based upon quoted market prices for similar bonds currently trading in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset.

It was not practicable to estimate the fair value of the long-term investment, without incurring excessive costs, representing 2.5% of the equity ownership of a privately-owned company; that investment is carried at its original cost of $500 in the accompanying consolidated balance sheets.  At March 31, 2013, the total assets reported by the privately-owned company were $2,426, total equity was $1,817, total revenues for the quarter then-ended were $616 and net loss was $528.

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

The majority of the Company’s non-financial assets and liabilities are not required to be carried at fair value on a recurring basis.  However, the Company is required on a non-recurring basis to use fair value measurements when analyzing asset impairment as it relates to goodwill and other indefinite-lived intangible assets and long-lived assets. The Company utilized the income approach (Level 3 inputs) which utilized cash flow forecasts for future income and were discounted to present value in performing its annual impairment testing of intangible assets. 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 31, 2013 and March 25, 2012, $278 and $123, respectively, of deferred franchise fees are included in the accompanying consolidated balance sheets. For the fiscal years ended March 31, 2013, March 25, 2012 and March 27, 2011, the Company earned franchise fees of $852, $920, and $663, 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 shall be recognized, with an appropriate provision for estimated uncollectable amounts, when all material services or conditions to the sale have been substantially performed by the franchisor.

If substantial obligations under the development agreement are not dependent on the number of individual franchise locations to be opened, substantial performance shall be determined using the same criteria applicable to individual franchise, which is generally the opening of the first location pursuant to the development agreement. If substantial performance is dependent on the number of locations, then the development fee is deferred and recognized ratably over the term of the agreement, as restaurants in the development area commence operations on a pro rata basis to the minimum number of restaurants required to be open, or at the time the development agreement is effectively canceled. At March 31, 2013 and March 25, 2012, $452 and $603, respectively, of deferred development fee revenue is included in other liabilities 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 31, 2013, March 25, 2012 and March 27, 2011:

	March 31, 2013			March 25, 2012			March 27, 2011
Franchised restaurants operating at the beginning of the period		299			264			246
New franchised restaurants opened during the period		40			67			40
Franchised restaurants closed during the period		(36	)		(32	)		(22	)
Franchised restaurants operating at the end of the period		303			299			264

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

Franchise fees and royalties that are not deemed to be collectible are not recognized as revenue until paid by the franchisee or until collectibility is deemed to be reasonably assured.

Revenue from sub-leasing properties is recognized in income as the revenue is earned and deemed collectible.  Sub-lease rental income is presented net of associated lease costs in the accompanying consolidated statements of earnings.

16.         Revenue Recognition – License Royalties

The Company earns revenue from royalties on the licensing of the use of its intellectual property in connection with on 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 project a consistent image.  Revenue from license royalties is recognized on a monthly basis when it is earned and deemed collectible.

17.      Business Concentrations and Geographical Information

The Company’s accounts receivable consist principally of receivables from franchisees for royalties and advertising contributions, from sales under the Branded Product Program, and from royalties from retail licensees.  At March 31, 2013, one retail licensee and three Branded Product customers each represented 18%, 16%, 11% and 10%, respectively, of accounts receivable. At March 25, 2012, one retail licensee and three Branded Product customers each represented 19%, 14%, 13% and 12%, respectively, of accounts receivable. One Branded Products customer accounted for 12% of total revenue for the year ended March 31, 2013. No franchisee, retail licensee or Branded Product customer accounted for 10% or more of total revenues during the fiscal years ended March 25, 2012 and March 27, 2011.

The Company’s primary supplier of hot dogs represented 82%,79% and 75% of product purchases for the fiscal years ended March 31, 2013, March 25, 2012 and March 27, 2011, respectively.  The Company’s distributor of products to its Company-owned restaurants represented 7%, 8% and 9% of product purchases for the fiscal years ended March 31, 2013, March 25, 2012 and March 27, 2011, respectively.

The Company’s revenues for the fiscal years ended March 31, 2013, March 25, 2012 and March 27, 2011 were derived from the following geographic areas:

	March 31, 2013		March 25, 2012		March 27, 2011
Domestic (United States)	$	68,499	$	64,534	$	55,824
Non-domestic		3,044		1,688		1,431
	$	71,543	$	66,222	$	57,255

The Company’s sales for the fiscal years ended March 31, 2013, March 25, 2012 and March 27, 2011 were derived from the following:

	March 31, 2013		March 25, 2012		March 27, 2011
Branded Products	$	43,214	$	38,506	$	30,497
Company-operated restaurants		13,403		13,209		13,007
Other		39		654		1,130
	$	56,656	$	52,369	$	44,634

18.     Advertising

The Company administers an advertising fund on behalf of its franchisees to coordinate the marketing efforts of the Company. Under this arrangement, the Company collects and disburses fees paid by manufacturers, franchisees and Company-owned stores for national and regional advertising, promotional and public relations programs. Contributions to the advertising fund are based on specified percentages of net sales, generally ranging up to 2%. Net Company-owned store advertising expense, which is expensed as incurred, was$144, $227, and $233, for the fiscal years ended March 31, 2013, March 25, 2012 and March 27, 2011, respectively, and have been included within restaurant operating expenses in the accompanying consolidated statements of earnings.

19.     Stock-Based Compensation
 

At March 31, 2013, the Company had one stock-based compensation plan in effect which is more fully described in Note K.

The cost of all share-based payments, including grants of restricted stock and stock options, is recognized in the financial statements based on their fair values measured at the grant date, or the date of any later modification, over the requisite service period. The Company recognizes compensation cost for unvested stock awards on a straight-line basis over the requisite vesting period.

20.      Classification of Operating Expenses

Cost of sales consists of the following:

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

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

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

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

Restaurant operating expenses consist of the following:

o Occupancy costs of Company-operated restaurants.

o Utility costs of Company-operated restaurants.

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

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

o Insurance costs directly related to Company-operated restaurants.

21.     Income Taxes

The Company’s current provision for income taxes is based upon its estimated taxable income in each of the jurisdictions in which it operates, after considering the impact on taxable income of temporary differences resulting from different treatment of items for tax and financial reporting purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and any operating loss or tax credit carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible.  Should management determine that it is more likely than not that some portion of the deferred tax assets will not be realized, a valuation allowance against the deferred tax assets would be established in the period such determination was made.

Uncertain Tax Positions

The Company has recorded liabilities for underpayment of income taxes and related interest and penalties for uncertain tax positions based on the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.  The tax benefits recognized in the financial statements from such position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.  Nathan’s recognizes accrued interest and penalties associated with unrecognized tax benefits as part of the income tax provision.

22. Adoption of New Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board, (“FASB”) issued final guidance for new presentation requirements for reclassifications out of accumulated other comprehensive income and to resolve certain cost/benefit concerns related to reporting reclassification adjustments. This guidance provides entities with two basic options for reporting the effect of significant reclassifications - either 1) on the face of the statement where net income is presented or 2) as a separate footnote disclosure. Public entities will report reclassifications in both annual and interim periods.For public entities, the new guidance is effective prospectively for annual and interim for reporting periods beginning after December 15, 2012 which for Nathan’s was the fourth quarter of its fiscal year ended March 31, 2013. The adoption of this new guidance did not have a material impact on the results of operations or financial position.

In July 2012, the FASB issued new accounting guidance on testing indefinite-lived intangible assets for impairment. The new guidance provides the entity with the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived asset is less than its carrying value. If it is not, then no further analysis is required otherwise then the previously required quantitative testing is required. The new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, which for Nathan’s will be the first quarter of its fiscal 2014. Early adoption is permitted. We do not expect the adoption of this new guidance to have a material impact on the 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.