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| NATH > SEC Filings for NATH > Form 10-K on 12-Jun-2008 | All Recent SEC Filings |
12-Jun-2008
Annual Report
Introduction
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 restaurant units featuring Nathan's Famous brand all beef frankfurters, crinkle-cut French-fried potatoes, and a variety of other menu offerings. Our Nathan's brand Company-owned and franchised units operate under the name "Nathan's Famous," the name first used at our original Coney Island restaurant opened in 1916. Nathan's 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 enables foodservice retailers to sell some of Nathan's proprietary products outside of the realm of a traditional franchise relationship. In conjunction with this program, foodservice operators are granted a limited use of the Nathan's Famous trademark with respect to the sale of hot dogs and certain other proprietary food items and paper goods.
On April 1, 1999, we became the franchisor of the Kenny Rogers Roasters restaurant system by acquiring the intellectual property rights, including trademarks, recipes and franchise agreements of Roasters Corp. and Roasters Franchise Corp. On September 30, 1999, we acquired the remaining 70% of the outstanding common stock of Miami Subs Corporation we did not already own, which also provided us with co-branding rights to the Arthur Treachers brand in the United States. On February 28, 2006, we acquired all of the intellectual property rights, including, but not limited to, trademarks, trade names, and recipes, of the Arthur Treachers Fish N Chips Brand. On June 7, 2007, Nathan's completed the sale of its wholly-owned subsidiary, Miami Subs Corporation, the franchisor of the Miami Subs brand effective as of May 31, 2007. On April 23, 2008, Nathan's completed the sale of its wholly-owned subsidiary, NF Roasters Corp., franchisor of the Kenny Rogers brand. Notwithstanding the sale of Miami Subs Corporation and NF Roasters Corp., we are entitled to continue using the Kenny Rogers trademarks and service marks in our existing Nathan's restaurant locations.
Our revenues are generated primarily from selling products under Nathan's Branded Product Program, operating Company-owned restaurants, franchising the Nathan's and Kenny Rogers restaurant concepts and licensing agreements for the sale of Nathan's products within supermarkets and club stores and for the manufacturing of certain proprietary spices and also for the sale of Nathan's products directly to other foodservice operators.
In addition to plans for expansion through franchising, licensing and our Branded Product Program, Nathan's continues to co-brand within its existing restaurant system. At March 30, 2008, the Arthur Treacher's brand was being sold within 57 Nathan's restaurants and the Kenny Rogers Roasters brand was being sold within 56 Nathan's restaurants.
At March 28, 2004, Nathan's owned seven Company-operated restaurants. During the fiscal year ended March 27, 2005, Nathan's closed one Company-operated restaurant due to its lease expiration. The remaining six restaurants are presented as continuing operations in the accompanying financial statements.
At March 30, 2008, our franchise system consisted of 224 Nathan's Famous franchised units and 98 Kenny Rogers Roasters franchised units located in 22 states and 11 foreign countries. We also operated six Company-owned Nathan's units, including one seasonal location, within the New York metropolitan area.
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 in the 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
Sales by Company-owned restaurants, which are typically paid in cash by the customer, are recognized upon the performance of services.
In connection with its franchising operations, Nathan's 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 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 Nathan's 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 location to be developed.
· Provision of management training for the new franchisee and selected staff.
· Assistance with the initial operations and marketing of restaurants being developed.
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 Nathan's may cancel the agreements. Revenue from development agreements is deferred and recognized 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.
Nathan's recognizes franchise royalties, 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 collectibility is deemed to be reasonably assured. The number of non-performing units is determined by analyzing the number of months that royalties have been paid during a period. When royalties have been paid for less than the majority of the time frame reported, such location is deemed non-performing. Accordingly, the number of non-performing units may differ between the quarterly results and year to date results.
Nathan's recognizes revenue from the Branded Product Program when it is determined that the products have been delivered via third party common carrier to Nathans' customers. Rebates to customers are recorded as a reduction to sales. Nathan's recognizes revenue from its Frank and Fry Program for the sale of hot dogs in the same way as for its Branded Product Program, described below, and royalty income when it has been determined that other qualifying products have been sold by the manufacturer to Nathan's limited-menu franchisees.
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.
Nathan's recognizes revenue from royalties on the licensing of the use of its name on certain products produced and sold by outside vendors. The use of Nathan's name and symbols must be approved by Nathan's prior to each specific application to ensure proper quality and project a consistent image. Revenue from license royalties is recognized when it is earned and deemed collectible.
In the normal course of business, we extend credit to franchisees for the payment of ongoing royalties and to trade customers of our Branded Product Program. Accounts receivable, 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 collectibility based upon historical trends and an evaluation of the impact of current and projected economic conditions. In the event that the collectibility of a receivable at the date of the transaction is doubtful, the associated revenue is not recorded until the facts and circumstances change in accordance with Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." The Company writes-off accounts receivable when they are deemed uncollectible.
Impairment of Goodwill and Other Intangible Assets
Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," ("SFAS No. 142") requires that goodwill and intangible assets with indefinite lives not to be amortized but tested annually (or more frequently if events or changes in circumstances indicate the carrying value may not be recoverable) for impairment. The most significant assumptions, which are used in this test, are estimates of future cash flows. We typically use the same assumptions for this test as we use in the development of our business plans. If these assumptions differ significantly from actual results, impairment charges may be required in the future. We conducted our annual impairment tests and no goodwill or other intangible assets were determined to be impaired during the fifty-three week period ended March 25, 2008, and the fifty-two week periods ended March 25, 2007 and March 26, 2006.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144") requires management to make judgments regarding the future operating and disposition plans for under-performing assets, and estimates of expected realizable values for assets to be sold. We evaluate possible impairment of each restaurant individually and record an impairment charge whenever we determine that impairment factors exist. We consider a history of restaurant operating losses to be the primary indicator of potential impairment of a restaurant's carrying value. During the fifty-three week period ended March 25, 2008, and the fifty-two week periods ended March 25, 2007 and March 26, 2006, no impairment charges on long-lived assets were recorded.
Impairment of Notes Receivable
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as amended, requires management judgments regarding the future collectibility of notes receivable and the underlying fair market value of collateral. We consider the following factors when evaluating a note for impairment: a) indications that the borrower is experiencing business problems, such as operating losses, marginal working capital, inadequate cash flow or business interruptions; b) whether the loan is secured by collateral that is not readily marketable; and/or c) whether the collateral is susceptible to deterioration in realizable value. When determining possible impairment, we also expect to assess our future intention to enter into a new lease or extend the lease beyond the minimum lease term and the debtor's ability to meet its obligation over the projected term. During the fifty-three week period ended March 30, 2008, and the fifty-two week periods ended March 25, 2007 and March 26, 2006, no impairment charges on notes receivable were recorded.
Stock-Based Compensation
As discussed in Note B of Notes to Consolidated Financial Statements, we have various share-based compensation plans that provide stock options and restricted awards for certain employees and non-employee directors to acquire shares of our common stock. Prior to our adoption of SFAS 123R at the beginning of fiscal 2007, we accounted for share-based compensation in accordance with APB 25, which utilizes the intrinsic value method of accounting, as opposed to using the fair-value method prescribed in SFAS 123R. During fiscal years ended March 30, 2008 and March 25, 2007, we recorded share-based compensation expense of $432,000 and $367,000, respectively. (See Note B for a discussion of assumptions used to determine the fair value of share-based compensation.)
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 such as depreciation, estimated self-insurance liabilities, allowance for doubtful accounts and tax credits and net operating losses ("NOL") for tax and 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 operating loss and tax credit carry-forwards. 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.
Uncertain Tax Positions
The Financial Accounting Standards Board issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, Accounting for Income Taxes" ("FIN No. 48") which was adopted by the Company on March 26, 2007. FIN No. 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN No. 48, 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. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure requirements. (See Note K)
Adoption of New Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN No. 48"), which clarified the accounting and disclosures for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN No. 48 also provided guidance on the de-recognition of uncertain tax positions, financial statement classification, accounting for interest and penalties, accounting for interim periods and added new disclosure requirements.
Nathan's adopted the provisions of FIN No. 48, as amended, on March 26, 2007
which resulted in a $155,000 adjustment to increase tax liabilities and decrease
opening retained earnings in connection with a cumulative effect of a change in
accounting principle. Nathan's recognizes accrued interest and penalties
associated with unrecognized tax benefits as part of the income tax provision.
(Refer to Note K to the Consolidated Financial Statements.)
As of the beginning of fiscal year ended March 25, 2007, Nathan's adopted SFAS
No. 123R, "Share-based Payment", ("SFAS No. 123R") using the modified
prospective method. SFAS No. 123R replaces SFAS No. 123, "Accounting for
Stock-Based Compensation, ("SFAS No. 123") and supersedes Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
SFAS No. 123R requires the cost of all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values measured at the grant date, or the date of
later modification, over the requisite service period. In addition, under the
modified prospective approach, SFAS No. 123R requires unrecognized cost (based
on the amounts previously disclosed in pro forma footnote disclosures) related
to awards vesting after the date of initial adoption to be recognized by the
Company in the financial statements over the remaining requisite service period.
Therefore, the amount of compensation costs to be recognized over the requisite
service period on a prospective basis after March 26, 2006 includes:
(i) previously unrecognized compensation cost for all share-based payments
granted prior to, but not yet vested as of, March 26, 2006 based on their fair
values measured at the grant date, (ii) compensation cost of all share-based
payments granted subsequent to March 26, 2006 based on their respective grant
date fair value, and (iii) the incremental fair value of awards modified
subsequent to March 26, 2006 measured as of the date of such modification.
In November 2005, the FASB issued Staff Position No. FAS 123R-3, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards." FAS 123R-3 provides that companies may elect to use a specified alternative method to calculate the historical APIC Pool of excess tax benefits available to absorb tax deficiencies recognized upon adoption of SFAS No. 123R.
Share-based compensation recognized pursuant to the adoption of SFAS 123R during
the fiscal years ended March 30, 2008 and March 25, 2007 was $359 and $295,
respectively, is included in general and administrative expense in the
accompanying Consolidated Statements of Earnings. As of March 30, 2008, there
was $1,324 of unamortized compensation expense related to stock options. The
Company expects to recognize this expense over approximately three years, eight
months, which represents the weighted average remaining requisite service
periods for such awards.
New Accounting Pronouncements Not Yet Adopted
In, September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements", ("SFAS No. 157,") to eliminate the diversity in practice that exists due to the different definitions of fair value. SFAS No. 157 retains the exchange price notion in earlier definitions of fair value, but clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or liability in the principal or most advantageous market for the asset or liability. SFAS No. 157 states that the transaction is hypothetical at the measurement date, considered from the perspective of the market participant who holds the asset or liability. As such, 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), as opposed to the price that would be paid to acquire the asset or received to assume the liability at the measurement date (an entry price). SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, which is the first quarter of fiscal 2009, except for with respect to certain non-financial assets and liabilities, for which the effective date will be our first quarter of fiscal 2010. The Company has not yet evaluated the impact of the adoption of SFAS No. 157 on the Company's financial position or results of operations.
In February 2007, the FASB issued SFAS No.159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115", ("SFAS No. 159,"). This standard amends SFAS No.115, "Accounting for Certain Investment in Debt and Equity Securities", with respect to accounting for a transfer to the trading category for all entities with available-for-sale and trading securities electing the fair value option. This standard allows companies to elect fair value accounting for many financial instruments and other items that currently are not required to be accounted for as such, allows different applications for electing the option for a single item or groups of items, and requires disclosures to facilitate comparisons of similar assets and liabilities that are accounted for differently in relation to the fair value option. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, which is the first quarter of fiscal 2009. The adoption will not have a material impact on the Company's financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The requirements of SFAS No. 141R are effective for fiscal years beginning on or after December 15, 2008, which for us is fiscal 2010. Earlier adoption is prohibited. The Company has not yet evaluated the impact of SFAS No. 141R on its consolidated financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS No.160"). SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, which for us is the first quarter of fiscal 2010. Earlier adoption is prohibited. The Company has not yet evaluated the impact of SFAS No. 160 on its consolidated financial position and results of operations.
Results of Operations
Fiscal year ended March 30, 2008 compared to Fiscal year ended March 25, 2007
Revenues from Continuing Operations
Total sales increased by $2,834,000 or 8.5% to $36,259,000 for the fifty-three
weeks ended March 30, 2008 ("fiscal 2008 period") as compared to $33,425,000 for
the fifty-two weeks ended March 25, 2007 ("fiscal 2007 period"). We estimate
that sales which arose during the additional week included in the fiscal 2008
period were approximately $528,000. Sales from the Branded Product Program
increased by 10.0% to $20,647,000 for the fiscal 2008 period as compared to
sales of $18,774,000 in the fiscal 2007 period. This increase was primarily
attributable to increased sales volume of 8.3%. During the fiscal 2008 period,
approximately 1,200 new accounts were opened. Total Company-owned restaurant
sales (representing five comparable Nathan's restaurants and one seasonal
restaurant) increased by 10.8% to $13,142,000 as compared to $11,863,000 during
the fiscal 2007 period. During the fiscal 2008 period, we experienced very
favorable weather conditions during the summer season that had a positive impact
on sales at our Coney Island locations. However, during December 2007, the
unfavorable weather conditions in the Northeast had a negative impact on sales
at our Company-owned locations as compared to December 2006. Nevertheless, the
overall weather conditions during the fiscal 2008 period had a positive impact
on the sales of our Company-owned restaurants. During the fiscal 2008 period,
sales to our television retailer were approximately $318,000 lower than the
fiscal 2007 period. Our television retailer reduced its number of special food
airings during the fiscal 2008 period. As a result, Nathan's did not run a
"Today's Special Value" which ran during the first quarter fiscal 2007. Nathan's
products were on air 55 times during the fiscal 2008 period as compared to 59
times during the fiscal 2007 period, which included eight "Today's Special
Value" airings.
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