Revenue Recognition Self-insurance Liabilities Results of Operations Revenues from Continuing Operations 2004 Annual Report  Nathan’s Famous, Inc. & Subsidiaries page six Franchise fees and royalties increased by $309,000 or 5.2% to $6,286,000 in fiscal 2004 compared to $5,977,000 in fiscal 2003. Franchise royalties increased by $483,000 or 9.0% to $5,835,000 in fiscal 2004 as compared to $5,352,000 in fiscal 2003. This increase is due primarily to the royalties earned from the new units that were opened or franchised during fiscal 2004 and the full year earnings from units opened during fiscal 2003, all of which have been recog- nized as income. Additionally, we realized an improvement in the In the normal course of business, we extend credit to fran- chisees for the payment of ongoing royalties and to trade customers of our Branded Product Program. Notes and 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 eco- nomic conditions. In the event that the collectibility of a receivable is doubtful, the associated revenue is not recorded until the facts and circumstances change in accordance with Staff Accounting Bulletin SAB No. 101, “Revenue Recognition.” Nathan’s recognizes revenue from the Branded Product Program when it is determined by the manufacturer that the products have been delivered via third party common carrier to Nathan’s customers. An accrual for the cost of the product to the Company is recorded simultaneously with the revenue.  Total sales from continuing operations decreased by 16.1% or $3,997,000 to $20,765,000 for the fifty-two weeks ended March 28, 2004 (“fiscal 2004”) as compared to $24,762,000 for the fifty-two weeks ended March 30, 2003 (“fiscal 2003”). Company-owned restaurant sales decreased 30.1% or $5,631,000 to $12,780,000 from $18,411,000 primarily due to the operation of seven fewer Company- owned restaurants as compared to the prior fiscal year. The reduction in Company-owned restaurants is the result of our franchising or entering into management agreements for six restaurants and selling one restaurant. The financial impact associated with these seven restaurants lowered restaurant sales by $5,323,000 and improved restaurant operating profits by $43,000 versus fiscal 2003. Sales decreased 2.1% at our comparable Company-owned restaurants (con- sisting of seven Nathan’s restaurants, including one seasonal restau- rant). Sales from the Branded Product Program increased by 20.5% to $7,651,000 in fiscal 2004 as compared to sales of $6,351,000 in  fiscal 2003. This increase was due to higher sales volume and the impact of the price increases implemented during the second half  of the fiscal year. Additionally, during fiscal 2004, Nathan’s realized sales of $334,000 in connection with a test marketing program  with QVC.  Nathan’s recognizes franchise royalties 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 fran- chisee. Revenue from sub-leasing properties to franchisees is recog- nized 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 accompanying consolidated statements of operations. 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 as restaurants in the develop- ment area commence operations on a pro rata basis to the minimum number of restaurants required to be open, or at the time the devel- opment agreement is effectively canceled. Fiscal Year Ended March 28, 2004 Compared to Fiscal Year Ended March 30, 2003 We are self-insured for portions of our general liability coverage. As part of our risk management strategy, our insurance programs include deductibles for each incident and in the aggregate for each policy year. As such, we accrue estimates of our ultimate self-insurance costs throughout the policy year. These estimates have been devel- oped based upon our historical trends, however, the final cost of many of these claims may not be known for five years or longer. Accordingly, our annual self-insurance costs may be subject to adjust- ment from previous estimates as facts and circumstances change. During the fifty-two weeks ended March 28, 2004, we reversed approximately $268,000 of previously recorded insurance accruals for items that have been concluded without further payment. Also, during the fifty-two weeks ended March 30, 2003, we completed an evalu- ation of the outstanding claims and reserves in conjunction with our external risk manager and reversed $196,000 of previously recorded self-insurance accruals for those claims on which our exposure had been settled. 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, the Company receives initial franchise fees, development fees, royalties, contribu- tions to marketing funds, 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 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 per- formed or satisfied, which generally occurs when the franchised restaurant commences operations. beyond the minimum lease term and the debtor’s ability to meet its obligation over the projected term. We have identified certain notes receivable that have been impaired and recorded impairment charges of approximately $208,000 relating to two notes and $1,425,000 relating to nine notes during the fifty-two weeks ended March 28, 2004 and March 30, 2003, respectively.