ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1.
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BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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As of October 1, 2016, Ark
Restaurants Corp. and Subsidiaries (the “Company”) owned and operated 21 restaurants and bars, 19 fast food concepts
and catering operations, exclusively in the United States, that have similar economic characteristics, nature of products and service,
class of customers and distribution methods. The Company believes it meets the criteria for aggregating its operating segments
into a single reporting segment in accordance with applicable accounting guidance.
The Company operates six restaurants
in New York City, two in Washington, D.C., five in Las Vegas, Nevada, three in Atlantic City, New Jersey, one at the Foxwoods Resort
Casino in Ledyard, Connecticut, one in Boston, Massachusetts and three in Florida. The Las Vegas operations include four restaurants
within the New York-New York Hotel & Casino Resort and operation of the hotel’s room service, banquet facilities, employee
dining room and six food court concepts and one restaurant within the Planet Hollywood Resort and Casino. In Atlantic City, New
Jersey, the Company operates a restaurant and a bar in the Resorts Atlantic City Hotel and Casino and a restaurant and bar at the
Tropicana Hotel and Casino. The operation at the Foxwoods Resort Casino consists of one fast food concept and a restaurant. In
Boston, Massachusetts, the Company operates a restaurant in the Faneuil Hall Marketplace. The Florida operations include two Rustic
Inn’s, one in Dania Beach, Florida and one in Jupiter, Florida, Shuckers in Jensen Beach, Florida and the operation of five
fast food facilities in Tampa, Florida and seven fast food facilities in Hollywood, Florida, each at a Hard Rock Hotel and Casino.
Basis of Presentation
— The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America
(“GAAP”). The Company’s reporting currency is the United States dollar.
During the quarter ended July
2, 2016, the Company identified an immaterial error in previously issued financial statements related to an overstatement of a
rent liability in the amount of $261,000 ($191,000 net of tax or $0.06 per basic and $0.05 per diluted share for the 13 and 39-weeks
ended July 2, 2016). The Company reviewed this accounting error utilizing SEC Staff Accounting Bulletin No. 99, “Materiality”
(“SAB 99”) and SEC Staff Accounting Bulletin No. 108, “Effects of Prior Year Misstatements on Current Year Financial
Statements” (“SAB 108”) and determined the impact of the error to be immaterial to any prior period’s presentation.
The accompanying consolidated financial statements as of October 1, 2016 reflect the correction of the aforementioned immaterial
error.
Accounting Period
—
The Company’s fiscal year ends on the Saturday nearest September 30. The fiscal year ended October 1, 2016 included 52 weeks
and the fiscal year ended October 3, 2015 included 53 weeks.
Use of Estimates
—
The preparation of financial statements in conformity with GAAP 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. The accounting estimates that require
management’s most difficult and subjective judgments include allowances for potential bad debts on receivables, the useful
lives and recoverability of its assets, such as property and intangibles, fair values of financial instruments and share-based
compensation, the realizable value of its tax assets and determining when investment impairments are other-than-temporary. Because
of the uncertainty in such estimates, actual results may differ from these estimates.
Principles of Consolidation
—
The consolidated financial statements include the accounts of Ark Restaurants Corp. and all of its wholly-owned
subsidiaries, partnerships and other entities in which it has a controlling interest. Also included in the consolidated financial
statements are certain variable interest entities (“VIEs”). All significant intercompany balances and transactions
have been eliminated in consolidation.
Non-Controlling Interests
—
Non-controlling interests represent capital contributions, income and loss attributable to the shareholders
of less than wholly-owned and consolidated entities.
Seasonality
—
The Company has substantial fixed costs that do not decline proportionally with sales. The first and second fiscal quarters,
which include the winter months, usually reflect lower customer traffic than in the third and fourth fiscal quarters. However,
sales in the third and fourth fiscal quarters can be adversely affected by inclement weather due to the significant amount of outdoor
seating at the Company’s restaurants.
Fair Value of Financial
Instruments
—
The carrying amount of cash and cash equivalents, receivables, accounts payable and accrued
expenses approximate fair value due to the immediate or short-term maturity of these financial instruments. The fair values of
notes receivable and payable are determined using current applicable rates for similar instruments as of the balance sheet date
and approximate the carrying value of such debt.
Cash and Cash Equivalents
—
Cash and cash equivalents include cash on hand, deposits with banks and highly liquid investments
generally with original maturities of three months or less.
Outstanding checks in excess of account balances, typically
vendor payments, payroll and other contractual obligations disbursed after the last day of a reporting period are reported as a
current liability in the accompanying consolidated balance sheets.
Concentrations of Credit
Risk
— Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily
of cash and cash equivalents and accounts receivable. The Company reduces credit risk by placing its cash and cash equivalents
with major financial institutions with high credit ratings. At times, such amounts may exceed Federally insured limits. Accounts
receivable are primarily comprised of normal business receivables such as credit card receivables that are paid off in a short
period of time and amounts due from the hotel operators where the Company has a location, and are recorded when the products or
services have been delivered. The Company reviews the collectability of its receivables on an ongoing basis, and provides for an
allowance when it considers the entity unable to meet its obligation. The concentration of credit risk with respect to accounts
receivable is generally limited due to the short payment terms extended by the Company and the number of customers comprising the
Company’s customer base.
For the years ended October
1, 2016 and October 3, 2015, the Company did not make purchases from any one vendor that accounted for 10% or greater of total
purchases.
Inventories
—
Inventories are stated at the lower of cost (first-in, first-out) or market, and consist of food and beverages, merchandise for
sale and other supplies.
Fixed Assets
—
Fixed assets are stated at cost less accumulated depreciation and amortization. Depreciation is determined using the straight-line
method over the estimated useful lives of the assets. Estimated lives range from
three
to
seven
years
for furniture, fixtures and equipment and up to
40
years for buildings and related improvements.
Amortization of improvements to leased properties is computed using the straight-line method based upon the initial term of the
applicable lease or the estimated useful life of the improvements, whichever is less, and ranges from 5 to 30 years. For leases
with renewal periods at the Company’s option, if failure to exercise a renewal option imposes an economic penalty to the
Company, management may determine at the inception of the lease that renewal is reasonably assured and include the renewal option
period in the determination of appropriate estimated useful lives. Routine expenditures for repairs and maintenance are charged
to expense when incurred. Major replacements and improvements are capitalized. Upon retirement or disposition of fixed assets,
the cost and related accumulated depreciation are removed from the Consolidated Balance Sheets and any resulting gain or loss is
recognized in the Consolidated Statements of Income.
The Company includes in construction
in progress improvements to restaurants that are under construction or are undergoing substantial improvements. Once the projects
have been completed, the Company begins depreciating and amortizing the assets. Start-up costs incurred during the construction
period of restaurants, including rental of premises, training and payroll, are expensed as incurred.
Intangible Assets
—
Intangible assets consist principally of purchased leasehold rights, operating rights and covenants not to compete. Costs associated
with acquiring leases and subleases, principally purchased leasehold rights, and operating rights have been capitalized and are
being amortized on the straight-line method based upon the initial terms of the applicable lease agreements. Covenants not to compete
arising from restaurant acquisitions are amortized over the contractual period, typically five years.
Long-lived Assets
—
Long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In
the evaluation of the fair value and future benefits of long-lived assets, the Company performs an analysis of the anticipated
undiscounted future net cash flows of the related long-lived assets. If the carrying value of the related asset exceeds the undiscounted
cash flows, the carrying value is reduced to its fair value. Various factors including estimated future sales growth and estimated
profit margins are included in this analysis. No impairment charges were necessary for the years ended October 1, 2016 and October
3, 2015.
Goodwill and Trademarks
— Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net
identified tangible and intangible assets acquired. Trademarks are considered to have an indefinite life. Goodwill and trademarks
are not amortized, but are subject to impairment analysis at least once annually or more frequently upon the occurrence of an event
or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. At October 1, 2016, the
Company performed a qualitative assessment of factors to determine whether further impairment testing is required. Based on the
results of the work performed, the Company has concluded that no impairment loss was warranted at October 1, 2016. Qualitative
factors considered in this assessment include industry and market considerations, overall financial performance and other relevant
events, management expertise and stability at key positions. Additional impairment analyses at future dates may be performed to
determine if indicators of impairment are present, and if so, such amount will be determined and the associated charge will be
recorded to the Consolidated Statements of Income.
Investments
–
Each reporting period, the Company reviews its investments in equity and debt securities, except for those classified as trading,
to determine whether a significant event or change in circumstances has occurred that may have an adverse effect on the fair value
of such investment. When such events or changes occur, the Company evaluates the fair value compared to cost basis in the investment.
For investments in non-publicly traded companies, management’s assessment of fair value is based on valuation methodologies including
discounted cash flows, estimates of sales proceeds, and appraisals, as appropriate. The Company considers the assumptions that
it believes hypothetical marketplace participants would use in evaluating estimated future cash flows when employing the discounted
cash flow or estimates of sales proceeds valuation methodologies.
In the event the fair value
of an investment declines below the Company’s cost basis, management is required to determine if the decline in fair value
is other than temporary. If management determines the decline is other than temporary, an impairment charge is recorded. Management’s
assessment as to the nature of a decline in fair value is based on, among other things, the length of time and the extent to which
the market value has been less than the cost basis; the financial condition and near-term prospects of the issuer; and the Company’s
intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Leases
—
The Company recognizes rent expense on a straight-line basis over the expected lease term, including option periods as described
below. Within the provisions of certain leases there are escalations in payments over the base lease term, as well as renewal periods.
The effects of the escalations have been reflected in rent expense on a straight-line basis over the expected lease term, which
includes option periods when it is deemed to be reasonably assured that the Company would incur an economic penalty for not exercising
the option. Tenant allowances are included in the straight-line calculations and are being deferred over the lease term and reflected
as a reduction in rent expense. Percentage rent expense is generally based upon sales levels and is expensed as incurred. Certain
leases include both base rent and percentage rent. The Company records rent expense on these leases based upon reasonably assured
sales levels. The consolidated financial statements reflect the same lease terms for amortizing leasehold improvements as were
used in calculating straight-line rent expense for each restaurant. The judgments of the Company may produce materially different
amounts of amortization and rent expense than would be reported if different lease terms were used.
Revenue Recognition
—
Company-owned restaurant sales are comprised almost entirely of food and beverage sales. The Company records revenue at the time
of the purchase of products by customers. Included in Other Revenues are purchase service fees which represent commissions earned
by a subsidiary of the Company for providing purchasing services to other restaurant groups.
The Company offers customers
the opportunity to purchase gift certificates. At the time of purchase by the customer, the Company records a gift certificate
liability for the face value of the certificate purchased. The Company recognizes the revenue and reduces the gift certificate
liability when the certificate is redeemed. The Company does not reduce its recorded liability for potential non-use of purchased
gift cards. As of October 1, 2016, the total liability for gift cards in the amount of $161,487 is included in Accrued Expenses
and Other Current Liabilities in the Consolidated Balance Sheet.
Additionally, the Company presents
sales tax on a net basis in its consolidated financial statements.
Occupancy Expenses
—
Occupancy expenses include rent, rent taxes, real estate taxes, insurance and utility costs.
Defined Contribution
Plan
—
The Company offers a defined contribution savings plan (the “Plan”) to all of its full-time
employees. Eligible employees may contribute pre-tax amounts to the Plan subject to the Internal Revenue Code limitations. Company
contributions to the Plan are at the discretion of the Board of Directors. During the years ended October 1, 2016 and October 3,
2015, the Company did not make any contributions to the Plan.
Income Taxes
—
Income taxes are accounted for under the asset and liability method whereby deferred tax assets and liabilities are recognized
for future tax consequences attributable to the temporary differences between the financial statement carrying amounts of assets
and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes
the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be realized.
The Company has recorded a liability
for unrecognized tax benefits resulting from tax positions taken, or expected to be taken, in an income tax return.
It
is the Company’s policy to recognize interest and penalties related to uncertain tax positions as a component of income tax
expense.
Uncertain tax positions are evaluated and adjusted as appropriate, while taking into account the progress of audits
of various taxing jurisdictions.
Non-controlling
interests relating to the income or loss of consolidated partnerships includes no provision for income taxes as any tax liability
related thereto is the responsibility of the individual minority investors.
Income Per Share of Common
Stock
—
Basic net income per share is calculated on the basis of the weighted average number of common shares
outstanding during each period. Diluted net income per share reflects the additional dilutive effect of potentially dilutive shares
(principally those arising from the assumed exercise of stock options).
Stock-based Compensation
—
The Company
measures stock-based compensation cost at the grant date based on
the fair value of the award and recognizes it as expense over the applicable vesting period using the straight-line method. Upon
exercise of options, excess income tax benefits related to share-based compensation expense that must be recognized directly in
equity are considered financing rather than operating cash flow activities. The Company did not grant any options during the fiscal
years 2016 and 2015. The Company generally issues new shares upon the exercise of employee stock options.
The fair value of each of the
Company’s stock options is estimated on the date of grant using a Black-Scholes option-pricing model that uses assumptions
that relate to the expected volatility of the Company’s common stock, the expected dividend yield of the Company’s
stock, the expected life of the options and the risk free interest rate.
Recently Adopted Accounting
Standards
— In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards
Update (“ASU”) No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, which changes the presentation
of debt issuance costs in a reporting entity’s financial statements. Under this new guidance, debt issuance costs will be presented
as a direct deduction from the related debt liability instead of an asset. This accounting change is consistent with the current
presentation under GAAP for debt discounts and it also converges the guidance under GAAP with that in the International Financial
Reporting Standards. Debt issuance costs will reduce the proceeds from debt borrowings in the statement of cash flows
instead of being presented
as a separate caption in the financing section of that statement. Amortization of debt issuance costs will continue to be reported
as interest expense in the statements of income. This accounting update does not affect the current accounting guidance for the
recognition and measurement of debt issuance costs. This update is effective for public business entities for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for all entities for
financial statements that have not been previously issued. This guidance has been adopted by the Company as of October 4, 2015
and did not have a material impact on its consolidated financial statements.
In September 2015, the FASB
issued ASU No. 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments
. The new guidance simplifies the accounting
for adjustments made to provisional amounts recognized in a business combination and eliminates the requirement to retrospectively
account for those adjustments. The amendments in this update are effective for annual periods, and interim periods within those
annual periods, beginning after December 15, 2015, with early adoption permitted. The new guidance has been adopted by the Company
as of October 4, 2015 and did not have a material impact on our consolidated financial statements.
In November 2015, the FASB
issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
. The new guidance requires
that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance
sheet. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December
15, 2016, with early adoption permitted. The new guidance has been adopted on a prospective basis by the Company for the fiscal
year ended October 3, 2015.
New Accounting Standards
Not Yet Adopted
—
In May 2014, the FASB issued updated accounting guidance that provides
a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services
to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Additionally,
this guidance expands related disclosure requirements. The pronouncement is effective for annual and interim reporting periods
beginning after December 15, 2017. Early application is not permitted. This update permits the use of either the retrospective
or cumulative effect transition method. The Company is evaluating the impact of the adoption of this guidance on its financial
condition, results of operations or cash flows as well as the expected adoption method.
In June 2014, the FASB issued
guidance which clarifies the recognition of stock-based compensation over the required service period, if it is probable that the
performance condition will be achieved. This guidance is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2015 and should be applied prospectively. The adoption of this guidance is not expected to have a significant
impact on the Company’s consolidated financial condition or results of operations.
In August 2014, the FASB issued
guidance that requires management to evaluate, at each annual and interim reporting period, the company’s ability to continue as
a going concern within one year of the date the financial statements are issued and provide related disclosures. This accounting
guidance is effective for the Company on a prospective basis beginning in the first quarter of fiscal 2017 and is not expected
to have a material effect on the consolidated financial statements.
In January 2015, the FASB issued
guidance simplifying the income statement presentation by eliminating the concept of extraordinary items. Extraordinary items are
events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating
the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items
from consideration. The amendments are effective for annual reporting periods, including interim periods within those reporting
periods, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning
of the annual reporting period. The Company does not believe this guidance will have a material impact on its consolidated financial
statements.
In February 2015, the FASB
amended the consolidation standards for reporting entities that are required to evaluate whether they should consolidate certain
legal entities. Under the new guidance, all legal entities are subject to reevaluation under the revised consolidation model. Specifically,
the guidance (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities
(VIEs) or voting
interest entities; (ii) eliminates
the presumption that a general partner should consolidate a limited partnership; (iii) affects the consolidation analysis of reporting
entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (iv) provides
a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply
with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act for registered
money market funds. The amendments are effective for annual reporting periods, beginning after December 15, 2015. Early adoption
is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this guidance on its consolidated
financial statements.
In July 2015, the FASB issued
ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. The guidance requires an entity to measure
inventory at the lower of cost or net realizable value, which is the estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation, rather than the lower of cost or market in the previous
guidance. This amendment applies to inventory that is measured using first-in, first-out (FIFO). This amendment is effective for
public entities for fiscal years beginning after December 15, 2016, including interim periods within those years. A reporting entity
should apply the amendments prospectively with earlier application permitted as of the beginning of an interim or annual reporting
period. The Company does not expect the adoption of this guidance to have a material impact on its financial position or results
of operations.
In January 2016, FASB issued
ASU No. 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
.
The guidance will require equity investments in unconsolidated entities (other than those accounted for using the equity method
of accounting) to be measured at fair value with changes in fair value recognized in net income. The amendments in this update
will also simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative
assessment to identify impairment, eliminate the requirement for public business entities to disclose the method and significant
assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost
on the balance sheet and require these entities to use the exit price notion when measuring fair value of financial instruments
for disclosure purposes. This guidance also changes the presentation and disclosure requirements for financial instruments as well
as clarifying the guidance related to valuation allowance assessments when recognizing deferred tax assets resulting from unrealized
losses on available-for-sale debt securities. The amendments in this guidance are effective for fiscal years beginning after December
15, 2017, including interim periods within those fiscal years. Early adoption is permitted for financial statements of fiscal years
and interim periods that have not been issued. The Company is currently assessing the potential impact of this ASU on its consolidated
financial statements.
In February 2016, the FASB
issued ASU No. 2016-02,
Leases
. This ASU is intended to improve the reporting of leasing transactions to provide users of
financial statements with more decision-useful information. This ASU will require organizations that lease assets to recognize
on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The amendments in this
update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early
adoption is permitted. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.
In March 2016, the FASB issued
ASU No. 2016-08,
Revenue from Contracts with Customers – Principal versus Agent Considerations
. This ASU is intended
to clarify revenue recognition accounting when a third party is involved in providing goods or services to a customer. The amendments
in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim
periods within those annual periods, and early application is permitted, but no earlier than fiscal years beginning after December
16, 2016. The Company is currently assessing the impact of this ASU on its consolidated financial statements.
In March 2016, the FASB issued
ASU No. 2016-09,
Compensation – Stock Compensation – Improvements to Employee Share-Based Payment Accounting
.
This ASU is intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification
of awards as either equity or liabilities and classification on the statement of cash flows. The amendments in this update are
effective for financial statements issued for annual periods beginning after December 15, 2016, including interim periods within
those annual periods, and early application is permitted as of the beginning of an interim or annual
reporting period. The Company
is currently assessing the impact of this ASU on its consolidated financial statements.
In April 2016, the FASB issued
ASU No. 2016-10,
Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing
. This ASU
is intended to clarify identifying performance obligations and licensing implementation guidance. The amendments in this update
are effective for financial statements issued for annual periods beginning after December 15, 2017, and early application is permitted,
but no earlier than fiscal years beginning after December 16, 2016. The Company does not expect the adoption of this ASU to have
a material impact on its consolidated financial statements.
In August 2016, FASB issued
ASU No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments
. This ASU addresses eight specific cash flow
issues with the objective of reducing the existing diversity in practice. The guidance is to be applied using a retrospective transition
method to each period presented and is effective for annual periods beginning after December 15, 2017, including interim periods
within those annual periods. The Company is currently assessing the impact this ASU will have on its consolidated financial statements.
In October 2016, the FASB issued
ASU No. 2016-16,
Income Taxes: Intra-Entity Transfers of Assets Other than Inventory
. The amendments in this ASU remove
the prohibition against the recognition of current and deferred income tax effects of intra-entity transfers of assets other than
inventory until the asset has been sold to an outside party. The ASU is effective for fiscal years and interim periods within those
years beginning after December 15, 2017. The Company does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
In October 2016, the FASB issued
ASU No. 2016-17,
Consolidation: Interests Held through Related Parties That Are Under Common Control
. The amendments in
this ASU change how a reporting entity that is the single decision maker of a variable interest entity should treat indirect interests
in the entity held through related parties that are under common control with the reporting entity when determining whether it
is the primary beneficiary of that variable interest entity. The ASU is effective for fiscal years and interim periods within those
years beginning after December 15, 2016. The Company does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
In November 2016, the FASB
issued ASU No. 2016-18,
Statement of Cash Flows: Restricted Cash
. The amendments address diversity in practice that exists
in the classification and presentation of changes in restricted cash and require that a statement of cash flows explain the change
during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash
equivalents. This ASU is effective retrospectively for fiscal years and interim periods within those years beginning after December
15, 2017. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
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2.
|
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
|
The Company consolidates any
variable interest entities in which it holds a variable interest and is the primary beneficiary. Generally, a variable interest
entity, or VIE, is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not
sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the
holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting
or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected
residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests
and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately
few voting rights. The primary beneficiary of a VIE is generally the entity that has (a) the power to direct the activities of
the VIE that most significantly impact the VIE’s economic performance, and (b) the obligation to absorb losses or the right
to receive benefits that could potentially be significant to the VIE.
The Company has determined
that it is the primary beneficiary of three VIEs and, accordingly, consolidates the financial results of these entities. Following
are the required disclosures associated with the Company’s consolidated VIEs:
|
|
October 1,
2016
|
|
October 3,
2015
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
889
|
|
|
$
|
604
|
|
Accounts receivable
|
|
|
429
|
|
|
|
303
|
|
Inventories
|
|
|
23
|
|
|
|
24
|
|
Prepaid expenses and other current assets
|
|
|
228
|
|
|
|
216
|
|
Due from Ark Restaurants Corp. and affiliates (1)
|
|
|
-
|
|
|
|
103
|
|
Fixed assets - net
|
|
|
22
|
|
|
|
40
|
|
Other assets
|
|
|
71
|
|
|
|
71
|
|
Total assets
|
|
$
|
1,662
|
|
|
$
|
1,361
|
|
|
|
|
|
|
|
|
|
|
Accounts payable - trade
|
|
$
|
114
|
|
|
$
|
81
|
|
Accrued expenses and other current liabilities
|
|
|
238
|
|
|
|
131
|
|
Due to Ark Restaurants Corp. and affiliates (1)
|
|
|
173
|
|
|
|
-
|
|
Operating lease deferred credit
|
|
|
73
|
|
|
|
81
|
|
Total liabilities
|
|
|
598
|
|
|
|
293
|
|
Equity of variable interest entities
|
|
|
1,064
|
|
|
|
1,068
|
|
Total liabilities and equity
|
|
$
|
1,662
|
|
|
$
|
1,361
|
|
|
(1)
|
Amounts due from Ark Restaurants Corp. and affiliates are eliminated upon consolidation.
|
The liabilities recognized
as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they
represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating
these VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets.
|
3.
|
RECENT RESTAURANT EXPANSION
|
On October 22, 2015, the Company,
through its wholly-owned subsidiaries, Ark Shuckers, LLC and Ark Shuckers Real Estate, LLC, acquired the assets of Shuckers Inc.
(“Shuckers”), a restaurant and bar located at the Island Beach Resort in Jensen Beach, FL, and six condominium units
(four of which house the restaurant and bar operations). In addition, Ark Island Beach Resort LLC, a wholly-owned subsidiary of
the Company, acquired Island Beach Resort Inc., a management company that administers a rental pool of certain condominium units
under lease. The total purchase price was $5,717,000. The acquisition is accounted for as a business combination and was financed
with a bank loan in the amount of $5,000,000 and cash from operations. The fair values of the assets acquired were allocated as
follows:
Inventory
|
|
$
|
67,000
|
|
Commercial condominium units
|
|
|
3,584,800
|
|
Residential condominium units
|
|
|
263,000
|
|
Furniture, fixtures and equipment
|
|
|
240,000
|
|
Trademarks
|
|
|
390,000
|
|
Customer list
|
|
|
90,000
|
|
Goodwill
|
|
|
1,082,200
|
|
|
|
$
|
5,717,000
|
|
The above purchase price allocation
resulted in an increase (decrease) related to the trademarks, customer list and goodwill of $240,000, $(110,000) and $(130,000),
respectively, from the preliminary allocation. The resulting changes to customer list amortization were not material to any period
presented.
The Consolidated Statement
of Income for the year ended October 1, 2016 includes revenues and operating income of approximately $4,763,000 and $523,000, respectively,
related to Shuckers. Transaction costs incurred in the amount of approximately $170,000 are included in general and administrative
expenses in the Consolidated Statement of Income for the year ended October 1, 2016. The Company expects the Goodwill and indefinite
life Trademarks to be deductible for tax purposes.
The unaudited pro forma financial
information set forth below is based upon the Company’s historical Consolidated Statements of Income for the years ended
October 1, 2016 and October 3, 2015 and includes the results of operations for Shuckers for the period prior to acquisition. The
unaudited pro forma financial information is presented for informational purposes only and may not be indicative of what actual
results of operations would have been had the acquisition of Shuckers occurred on the dates indicated, nor does it purport to represent
the results of operations for future periods.
|
|
Year Ended
|
|
|
October 1,
2016
|
|
October 3,
2015
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
150,394
|
|
|
$
|
150,995
|
|
Net income
|
|
$
|
4,051
|
|
|
$
|
6,330
|
|
Net income per share - basic
|
|
$
|
1.19
|
|
|
$
|
1.87
|
|
Net income per share - diluted
|
|
$
|
1.16
|
|
|
$
|
1.80
|
|
On March 27, 2015, the Company,
through a wholly-owned subsidiary, entered into an agreement to operate a kiosk in Bryant Park, New York, NY for the sale of food
and beverages for an initial period expiring through March 31, 2020 with an option to extend the agreement for five additional
years. Renovations totaled approximately $400,000 and the property opened in July 2015.
On July 24, 2015, the Company,
through a wholly-owned subsidiary, paid $544,000 (including a $144,000 security deposit) to assume the lease for an event space
located in New York, NY. The assumed lease expires through March 31, 2026 with an option to extend the agreement for five additional
years and provides for annual rent in the amount of approximately $300,000.
|
4.
|
RECENT RESTAURANT DISPOSITIONS
|
Lease Expirations
–
On October 31, 2014, the Company’s lease at the Towers Deli located at the Venetian Casino Resort in Las Vegas, NV expired.
The closure of this property did not result in a material charge.
On November 30, 2014, the Company’s
lease at the Shake & Burger located at the Venetian Casino Resort in Las Vegas, NV expired. The closure of this property did
not result in a material charge.
On November 30, 2015, the Company’s
lease at the V-Bar located at the Venetian Casino Resort in Las Vegas, NV expired. The closure of this property did not result
in a material charge.
The Company was advised by
the landlord that it would have to vacate the Center Café property located at Union Station in Washington, DC which was
on a month-to-month lease. The closure of this property occurred in February 2016 and did not result in a material charge.
|
5.
|
INVESTMENT IN AND RECEIVABLE FROM NEW MEADOWLANDS RACETRACK
|
On March 12, 2013, the Company
made a $4,200,000 investment in the New Meadowlands Racetrack LLC (“NMR”) through its purchase of a membership interest
in Meadowlands Newmark, LLC, an existing member of NMR. On November 19, 2013, the Company invested an additional $464,000 in NMR
through a purchase of an additional membership interest in Meadowlands Newmark, LLC resulting in a total ownership of 11.6% of
Meadowlands Newmark, LLC and
an ownership interest of 7.4% of NMR. In 2015, the Company invested an additional $222,000, as a result of capital calls, bringing
its total investment to $4,886,000 with no change in ownership. This investment has been accounted for based on the cost method
and is included in Other Assets in the accompanying Consolidated Balance Sheets at October 1, 2016 and October 3, 2015.
In addition to the Company’s
ownership interest in NMR through Meadowlands Newmark, LLC, if casino gaming is approved at the Meadowlands and NMR is granted
the right to conduct said gaming, neither of which can be assured, the Company shall be granted the exclusive right to operate
the food and beverage concessions in the gaming facility with the exception of one restaurant.
In conjunction with this investment,
the Company, through a 97% owned subsidiary, Ark Meadowlands LLC (“AM VIE”), also entered into a long-term agreement
with NMR for the exclusive right to operate food and beverage concessions serving the new raceway facilities (the “Racing
F&B Concessions”) located in the new raceway grandstand constructed at the Meadowlands Racetrack in northern New Jersey.
Under the agreement, NMR is responsible to pay for the costs and expenses incurred in the operation of the Racing F&B Concessions,
and all revenues and profits thereof inure to the benefit of NMR. AM VIE receives an annual fee equal to 5% of the net profits
received by NMR from the Racing F&B Concessions during each calendar year. At October 1, 2016, it was determined that AM VIE
is a variable interest entity. However, based on qualitative consideration of the contracts with AM VIE, the operating structure
of AM VIE, the Company’s role with AM VIE, and that the Company is not obligated to absorb any expected losses of AM VIE,
the Company has concluded that it is not the primary beneficiary and not required to consolidate the operations of AM VIE.
The Company’s maximum
exposure to loss as a result of its involvement with AM VIE is limited to a receivable from AM VIE’s primary beneficiary
(NMR, a related party) which aggregated approximately $164,000 and $272,000 at October 1, 2016 and October 3, 2015, respectively,
and are included in Prepaid Expenses and Other Current Assets in the Consolidated Balance Sheets.
On April 25, 2014, the Company
loaned $1,500,000 to Meadowlands Newmark, LLC. The note bears interest at 3%, compounded monthly and added to the principal, and
is due in its entirety on January 31, 2024. The note may be prepaid, in whole or in part, at any time without penalty or premium.
On July 13, 2016, the Company made an additional loan to Meadowlands Newmark, LLC in the amount of $200,000. Such amount is subject
to the same terms and conditions as the original loan as discussed above. The principal and accrued interest related to this note
in the amounts of $1,814,659 and $1,566,997, are included in Investment In and Receivable From New Meadowlands Racetrack in the
Consolidated Balance Sheets at October 1, 2016 and October 3, 2015, respectively.
In accordance with the cost method,
our initial investment is recorded at cost and we record dividend income when applicable, if dividends are declared. We review
our Investment in NMR each reporting period to determine whether a significant event or change in circumstances has occurred that
may have an adverse effect on its fair value, such as the defeat of the referendum for casino gaming in Northern New Jersey in
November 2016 as discussed in Note 16.
As a result, we
performed an assessment of the recoverability of our indirect Investment in NMR as of October 1, 2016 which included
estimates requiring significant management judgment, include inherent uncertainties and are often ·interdependent;
therefore, they do not change in isolation. Factors that management estimated include, among others, the probability of
gambling being approved in Northern NJ which is the most heavily weighted assumption and NMR obtaining a license to operate a
casino, revenue levels, cost of capital, marketing spending, tax rates and capital spending.
In performing this assessment,
we estimated the fair value of our Investment in NMR using our best estimate of these assumptions which we believe would be consistent
with what a hypothetical marketplace participant would use. The variability of these factors depends on a number of conditions,
including uncertainty about future events and our inability as a minority shareholder to control certain outcomes and thus our
accounting estimates may change from period to period. If other assumptions and estimates had been used when these tests were performed,
impairment charges could have resulted. As a result of the above, no impairment was deemed necessary as of October 1, 2016.
Fixed assets consist of the following:
|
|
October 1,
2016
|
|
October 3,
2015
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Land and building
|
|
$
|
9,002
|
|
|
$
|
4,800
|
|
Leasehold improvements
|
|
|
43,402
|
|
|
|
43,960
|
|
Furniture, fixtures and equipment
|
|
|
36,062
|
|
|
|
35,806
|
|
Construction in progress
|
|
|
482
|
|
|
|
27
|
|
|
|
|
88,948
|
|
|
|
84,593
|
|
Less: accumulated depreciation and amortization
|
|
|
59,402
|
|
|
|
56,789
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,546
|
|
|
$
|
27,804
|
|
Depreciation and amortization
expense related to fixed assets for the years ended October 1, 2016 and October 3, 2015 was $4,490,000 and $4,399,000, respectively.
Management continually evaluates
unfavorable cash flows, if any, related to underperforming restaurants. Periodically it is concluded that certain properties have
become impaired based on their existing and anticipated future economic outlook in their respective markets. In such instances,
we may impair assets to reduce their carrying values to fair values. Estimated fair values of impaired properties are based on
comparable valuations, cash flows and/or management judgment. No impairment charges were necessary for the years ended October
1, 2016 and October 3, 2015.
|
7.
|
INTANGIBLE ASSETS, GOODWILL AND TRADEMARKS
|
Intangible assets consist of the following:
|
|
October 1,
2016
|
|
October 3,
2015
|
|
|
(In thousands)
|
|
|
|
|
|
Purchased leasehold rights (a)
|
|
$
|
2,737
|
|
|
$
|
2,737
|
|
Noncompete agreements and other
|
|
|
303
|
|
|
|
213
|
|
|
|
|
3,040
|
|
|
|
2,950
|
|
Less accumulated amortization
|
|
|
2,514
|
|
|
|
2,451
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
526
|
|
|
$
|
499
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Purchased
leasehold
rights
arose
from
acquiring
leases
and
subleases
of
various
restaurants.
|
Amortization
expense related to intangible assets for the years ended October 1, 2016 and October 3, 2015 was $63,000 and $16,000, respectively.
Amortization expense for each of the next five years will be $63,000.
Goodwill is the excess of cost over
fair market value of tangible and intangible net assets acquired. Goodwill is not presently amortized but tested for impairment
annually or when the facts or circumstances indicate a possible impairment of goodwill as a result of a continual decline in performance
or as a result of fundamental changes in a market. Trademarks, which have indefinite lives, are not currently amortized and are
tested for impairment annually or when facts or circumstances indicate a possible impairment as a result of a continual decline
in performance or as a result of fundamental changes in a market.
The changes in the carrying amount
of goodwill and trademarks for the years ended October 1, 2016 and October 3, 2015 are as follows:
|
|
Goodwill
|
|
Trademarks
|
|
|
(In thousands)
|
|
|
|
Balance as of September 27, 2014
|
|
$
|
4,813
|
|
|
$
|
721
|
|
Acquired during the year
|
|
|
2,000
|
|
|
|
500
|
|
Impairment losses
|
|
|
-
|
|
|
|
-
|
|
Balance as of October 3, 2015
|
|
|
6,813
|
|
|
|
1,221
|
|
Acquired during the year
|
|
|
1,082
|
|
|
|
390
|
|
Impairment losses
|
|
|
-
|
|
|
|
-
|
|
Balance as of October 1, 2016
|
|
$
|
7,895
|
|
|
$
|
1,611
|
|
|
8.
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued expenses and other current liabilities consist
of the following:
|
|
October 1,
|
|
October 3,
|
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Sales tax payable
|
|
$
|
942
|
|
|
$
|
992
|
|
Accrued wages and payroll related costs
|
|
|
2,495
|
|
|
|
1,832
|
|
Customer advance deposits
|
|
|
4,077
|
|
|
|
3,967
|
|
Accrued occupancy and other operating expenses
|
|
|
3,041
|
|
|
|
3,541
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,555
|
|
|
$
|
10,332
|
|
Two subsidiaries of the Company
(“the Ark Subsidiaries”), which operate food courts on Federally protected Indian land, had been involved in litigation
with the state in which they operate, whereby the state attempted to collect commercial rent tax from the Ark Subsidiaries. The
Company had continued to accrue such taxes as the litigation worked its way through the courts. During July 2016, the state agreed
to the entry of consent judgments in favor of the Ark Subsidiaries holding that the state is constitutionally prohibited from taxing
rentals of Indian land. In connection with this agreement, the Company reversed the accrual of these liabilities in the amount
of $945,000 during the three months ended July 2, 2016. In addition, the Company received a refund of previously paid amounts in
the amount of $157,000 in August 2016 related to the above matter. Such amounts are included in the Consolidated Statement of Income
for the year ended October 1, 2016 as a reduction of Occupancy Expenses.
On February 25, 2013, the Company
issued a promissory note to Bank Hapoalim B.M. (the “BHBM”) for $3,000,000. The note bore interest at LIBOR plus 3.5%
per annum, and was payable in 36 equal monthly installments of $83,333, commencing on March 25, 2013. On February 24, 2014, in
connection with the acquisition of
The Rustic Inn
, the Company borrowed an additional $6,000,000 from BHBM under the same
terms and conditions as the original loan which was consolidated with the remaining principal balance from the original borrowing
at that date. The new loan is payable in 60 equal monthly installments of $134,722, which commenced on March 25, 2014, and matures
February 24, 2019. As of October 1, 2016, the outstanding balance of this note payable was approximately $3,907,000.
On October 22, 2015, in connection
with the acquisition of Shuckers, the Company issued a promissory note to BHBM for $5,000,000. The note bears interest at LIBOR
plus 3.5% per annum, and is payable in 60 equal monthly installments of $83,333, commencing on November 22, 2015, and matures October
21, 2020. As of October 1, 2016, the outstanding balance of this note payable was approximately $4,084,000.
On October 22, 2015, in connection
with the Shuckers transaction, the Company also entered into a credit agreement (the “Revolving Facility”) with BHBM
which expires on October 21, 2017 and provides for total availability of the lesser of (i) $10,000,000 and (ii) $20,000,000 less
the then aggregate amount of all indebtedness and obligations to BHBM. Borrowings under the Revolving Facility will be evidenced
by a promissory note (the “Revolving Note”) in favor of BHBM and will be payable over five years with interest at an
annual rate equal to LIBOR plus 3.5% per year. As of October 1, 2016, no additional amounts were outstanding under the Revolving
Facility.
Deferred financing costs incurred
in connection with the Shuckers transaction in the amount of $130,585 are being amortized over the life of the agreements on a
straight line basis. Amortization expense of $43,075 for the year ended October 1, 2016 is included in interest expense.
Borrowings under the Revolving
Facility and both of the above promissory notes, are secured by all tangible and intangible personal property (including accounts
receivable, inventory, equipment, general intangibles, documents, chattel paper, instruments, letter-of-credit rights, investment
property, intellectual property and deposit accounts) and fixtures of the Company.
The loan agreements provide,
among other things, that the Company meet minimum quarterly tangible net worth amounts, as defined, maintain a fixed charge coverage
ratio of not less than 1.1:1 and minimum annual net income amounts, and contain customary representations, warranties and affirmative
covenants. The agreements also contain customary negative covenants, subject to negotiated exceptions, on liens, relating to other
indebtedness, capital expenditures, liens, affiliate transactions, disposal of assets and certain changes in ownership. The Company
was in compliance with all debt covenants as of October 1, 2016.
Long-term debt consists of
the following:
|
|
October 1,
|
|
October 3,
|
|
|
2016
|
|
2015
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Promissory Note - Rustic Inn purchase
|
|
$
|
3,907
|
|
|
$
|
5,524
|
|
Promissory Note - Shuckers purchase
|
|
|
4,084
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,991
|
|
|
|
5,524
|
|
Less: Current maturities
|
|
|
(2,617
|
)
|
|
|
(1,617
|
)
|
Less: Unamortized deferred financing costs
|
|
|
(53
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
5,321
|
|
|
$
|
3,907
|
|
As of October 1, 2016, the
aggregate amounts of notes payable maturities are as follows:
2017
|
|
$
|
2,617
|
|
2018
|
|
|
2,617
|
|
2019
|
|
|
1,674
|
|
2020
|
|
|
1,000
|
|
2021
|
|
|
83
|
|
|
|
|
|
|
|
|
$
|
7,991
|
|
|
10.
|
COMMITMENTS AND CONTINGENCIES
|
Leases
—
The
Company leases its restaurants, bar facilities, and administrative headquarters through its subsidiaries under terms expiring at
various dates through 2033. Most of the leases provide for the payment of base rents plus real estate taxes, insurance and other
expenses and, in certain instances, for the payment of a percentage of the restaurants’ sales in excess of stipulated amounts
at such facility and in one instance based on profits.
As of October 1, 2016, future
minimum lease payments under noncancelable leases are as follows:
|
|
Amount
|
Fiscal Year
|
|
(In thousands)
|
|
|
|
|
|
2017
|
|
$
|
10,056
|
|
2018
|
|
|
9,694
|
|
2019
|
|
|
8,881
|
|
2020
|
|
|
8,003
|
|
2021
|
|
|
7,042
|
|
Thereafter
|
|
|
41,492
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
85,168
|
|
In connection with certain
of the leases included in the table above, the Company obtained and delivered irrevocable letters of credit in the aggregate amount
of approximately $388,000 as security deposits under such leases.
Rent expense was approximately
$13,791,000 and $13,055,000 for the fiscal years ended October 1, 2016 and October 3, 2015, respectively. Contingent rentals, included
in rent expense, were approximately $4,382,000 and $4,211,000 for the fiscal years ended October 1, 2016 and October 3, 2015, respectively.
Legal
Proceedings
— In the ordinary course its business, the Company is a party to various lawsuits arising from accidents at its restaurants
and worker’s compensation claims, which are generally handled by the Company’s insurance carriers. The employment by
the Company of management personnel, waiters, waitresses and kitchen staff at a number of different restaurants has resulted in
the institution, from time to time, of litigation alleging violation by the Company of employment discrimination laws. Management
believes, based in part on the advice of counsel, that the ultimate resolution of these matters will not have a material adverse
effect on the Company’s consolidated financial position, results of operations or cash flows.
Share Repurchase Plan
— On July 5, 2016, the Board of Directors authorized a share repurchase program authorizing management to purchase
up to 500,000 shares of the Company’s common stock during the next twelve months. Any repurchase under the program will be
effected in compliance with Rule 10b-18 under the Securities Exchange Act of 1934 “Purchases of Certain Equity Securities
by the Issuer and Others”, funded using the Company’s working capital and be based on management’s evaluation
of market conditions and other factors. No repurchases were made for the year ended October 1, 2016.
The Company has options outstanding
under two stock option plans, the 2004 Stock Option Plan (the “2004 Plan”) and the 2010 Stock Option Plan (the “2010
Plan”), which was approved by shareholders in the second quarter of 2010. Effective with this approval, the Company terminated
the 2004 Plan. This action terminated the 400 authorized but unissued options under the 2004 Plan, but it did not affect any of
the options previously issued under the 2004 Plan. Options granted under the 2004 Plan are exercisable at prices at least equal
to the fair market value of such stock on the dates the options were granted. The options expire ten years after the date of grant.
Options granted under the 2010 Plan are exercisable at prices at least equal to the fair market value of such stock on the dates
the options were granted. The options expire ten years after the date of grant.
During the year ended October
3, 2015, options to purchase 136,500 shares of common stock at an exercise price of $29.60 per share expired unexercised and options
to purchase 3,000 shares of common stock at an exercise price of $22.50 were cancelled.
On April 5, 2016, the shareholders
of the Company approved the 2016 Stock Option Plan and the Section 162(m) Cash Bonus Plan. Under the 2016 Stock Option Plan, 500,000
options were authorized for future grant and are exercisable at prices at least equal to the fair market value of such stock on
the dates the options were granted.
The options expire ten years
after the date of grant. Under the Section 162(m) Cash Bonus Plan, compensation paid in excess of $1,000,000 to any employee who
is the chief executive officer, or one of the three highest paid executive officers on the last day of that tax year (other than
the chief executive officer or the chief financial officer) will meet certain “performance-based” requirements of Section
162(m) and the related IRS regulations in order for it to be tax deductible.
No options were granted during
the year ended October 1, 2016. The following table summarizes stock option activity under all plans:
|
|
2016
|
|
|
2015
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
Outstanding,
beginning of year
|
|
|
523,800
|
|
|
$
|
20.29
|
|
|
|
|
|
|
|
704,161
|
|
|
$
|
21.66
|
|
|
|
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,192
|
)
|
|
$
|
16.26
|
|
|
|
|
|
|
|
(40,861
|
)
|
|
$
|
12.84
|
|
|
|
|
|
Canceled
or expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
(139,500
|
)
|
|
$
|
29.36
|
|
|
|
|
|
Outstanding
and expected to vest, end of year
|
|
|
518,608
|
|
|
$
|
20.33
|
|
|
$
|
1,979,232
|
|
|
|
523,800
|
|
|
$
|
20.29
|
|
|
$
|
2,242,140
|
|
Exercisable,
end of year
|
|
|
518,608
|
|
|
$
|
20.33
|
|
|
$
|
1,979,232
|
|
|
|
422,300
|
|
|
$
|
19.76
|
|
|
$
|
2,191,390
|
|
Weighted average remaining contractual life
|
|
|
5.1
Years
|
|
|
|
|
|
|
|
|
|
|
|
5.5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available
for future grant
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
43,000
|
|
|
|
|
|
|
|
|
|
Compensation cost charged to
operations for the fiscal years ended October 1, 2016 and October 3, 2015 for share-based compensation programs was approximately
$286,000 and $426,000, respectively. The compensation cost recognized is classified as a general and administrative expense in
the Consolidated Statements of Income. As of October 1, 2016, there was no unrecognized compensation cost related to unvested stock
options.
The following table summarizes
information about stock options outstanding as of October 1, 2016:
|
|
Options Outstanding and Exercisable
|
Range of Exercise Prices
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
contractual
life (in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$12.04
|
|
|
66,000
|
|
|
$
|
12.04
|
|
|
|
2.6
|
|
$14.40
|
|
|
160,800
|
|
|
$
|
14.40
|
|
|
|
5.7
|
|
$22.50
|
|
|
201,808
|
|
|
$
|
22.50
|
|
|
|
7.7
|
|
$32.15
|
|
|
90,000
|
|
|
$
|
32.15
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
518,608
|
|
|
$
|
20.33
|
|
|
|
5.1
|
|
The provision for income taxes
attributable to continuing operations consists of the following:
|
|
Year Ended
|
|
|
October 1,
|
|
October 3,
|
|
|
2016
|
|
2015
|
|
|
(In
thousands)
|
|
|
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
778
|
|
|
$
|
1,684
|
|
State and local
|
|
|
192
|
|
|
|
699
|
|
|
|
|
970
|
|
|
|
2,383
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
915
|
|
|
|
342
|
|
State and local
|
|
|
213
|
|
|
|
(129
|
)
|
|
|
|
1,128
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,098
|
|
|
$
|
2,596
|
|
The effective tax rate differs from the U.S. income
tax rate as follows:
|
|
Year Ended
|
|
|
October 1,
|
|
October 3,
|
|
|
2016
|
|
2015
|
|
|
(In
thousands)
|
|
|
|
|
|
Provision
at Federal statutory rate (34% in 2016 and 2015)
|
|
$
|
2,580
|
|
|
$
|
3,056
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes, net of tax benefits
|
|
|
326
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
Tax credits
|
|
|
(611
|
)
|
|
|
(583
|
)
|
|
|
|
|
|
|
|
|
|
Income attributable to non-controlling interest
|
|
|
(501
|
)
|
|
|
(341
|
)
|
|
|
|
|
|
|
|
|
|
Changes in tax rates
|
|
|
9
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
295
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,098
|
|
|
$
|
2,596
|
|
Deferred income taxes reflect the net effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes. Significant components
of the Company’s deferred tax assets and liabilities are as follows:
|
|
October 1,
|
|
October 3,
|
|
|
2016
|
|
2015
|
|
|
(In
thousands)
|
|
|
|
|
|
Long-term deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
State net operating loss carryforwards
|
|
$
|
3,179
|
|
|
$
|
3,069
|
|
Operating lease deferred credits
|
|
|
772
|
|
|
|
793
|
|
Depreciation and amortization
|
|
|
(256
|
)
|
|
|
259
|
|
Deferred compensation
|
|
|
986
|
|
|
|
794
|
|
Partnership investments
|
|
|
(709
|
)
|
|
|
(220
|
)
|
Prepaid expenses
|
|
|
(444
|
)
|
|
|
(201
|
)
|
Other
|
|
|
230
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
Total long-term deferred tax assets
|
|
|
3,758
|
|
|
|
4,676
|
|
Valuation allowance
|
|
|
(342
|
)
|
|
|
(223
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$
|
3,416
|
|
|
$
|
4,453
|
|
In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. In the assessment of
the valuation allowance, appropriate consideration was given to all positive and negative evidence including recent operating profitability,
forecasts of future earnings and the duration of statutory carryforward periods. The Company recorded a valuation allowance of
$342,000 and $223,000 as of October 1, 2016 and October 3, 2015, respectively, attributable to state and local net operating loss
carryforwards which are not realizable on a more-likely-than-not basis. During fiscal 2016, the Company’s valuation allowance
increased by approximately $119,000 as the Company determined that certain state net operating losses became unrealizable on a
more-likely-than-not basis.
As of October 1, 2016, the
Company has New York State net operating losses of approximately $19,961,000 and New York City net operating loss carryforwards
of approximately $18,328,000 that expire through fiscal 2036.
During fiscal 2015, certain
equity compensation awards expired unexercised. As such, the Company reversed the related deferred tax asset in the amount of approximately
$548,000 as a charge to Additional Paid-in Capital as there was a sufficient pool of windfall tax benefit available. During fiscal
2016, the Company recorded a credit to Additional Paid-in Capital of $86,000 related to equity compensation.
A reconciliation of the beginning
and ending amount of unrecognized tax benefits excluding interest and penalties is as follows:
|
|
October 1,
|
|
October 3,
|
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
|
|
Balance at beginning of year
|
|
$
|
307
|
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
Additions based on tax positions taken in current and prior years
|
|
|
105
|
|
|
|
145
|
|
Settlements
|
|
|
(46
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
366
|
|
|
$
|
307
|
|
The entire amount of unrecognized
tax benefits if recognized would reduce our annual effective tax rate. As of October 1, 2016, the Company accrued approximately
$284,000 of interest and penalties. The Company does not expect its unrecognized tax benefits to change significantly over the
next 12 months. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded
through the various jurisdictions’ tax court systems.
The Company files tax returns
in the U.S. and various state and local jurisdictions with varying statutes of limitations. The 2013 through 2016 fiscal years
remain subject to examination by the Internal Revenue Service most state and local tax authorities.
Other income (expense) consists of the following:
|
|
Year Ended
|
|
|
October 1,
|
|
October 3,
|
|
|
2016
|
|
2015
|
|
|
(In
thousands)
|
|
|
|
|
|
Licensing fees
|
|
$
|
166
|
|
|
$
|
185
|
|
Management fees
|
|
|
203
|
|
|
|
-
|
|
Other rentals
|
|
|
3
|
|
|
|
16
|
|
Loss on disposal of assets
|
|
|
(16
|
)
|
|
|
-
|
|
Other
|
|
|
74
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
430
|
|
|
$
|
238
|
|
|
14.
|
INCOME PER SHARE OF COMMON STOCK
|
A reconciliation of the numerators
and denominators of the basic and diluted per share computations for the fiscal years ended October 1, 2016 and October 3, 2015
follows:
|
|
Net
Income
Attributable to
Ark Restaurants
Corp.
(Numerator)
|
|
Shares
(Denominator)
|
|
Per
Share
Amount
|
|
|
(In thousands, except per
share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 1, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
4,030
|
|
|
|
3,418
|
|
|
$
|
1.18
|
|
Stock
options
|
|
|
-
|
|
|
|
89
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
$
|
4,030
|
|
|
$
|
3,507
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 3, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
5,390
|
|
|
|
3,393
|
|
|
$
|
1.59
|
|
Stock
options
|
|
|
-
|
|
|
|
116
|
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
$
|
5,390
|
|
|
|
3,509
|
|
|
$
|
1.54
|
|
For the year ended October 1, 2016, options to purchase
66,000 shares of common stock at a price of $12.04, options to purchase 160,800 shares of common stock at a price of $14.40 and
options to purchase 201,808 shares of common stock at a price of $22.50 per were included in diluted earnings per share. Options
to purchase 90,000 shares of common stock at a price of $32.15 per share were not included in diluted earnings per share as their
impact would be anti-dilutive.
For the year ended October
3, 2015, options to purchase 66,000 shares of common stock at a price of $12.04, options to purchase 164,800 shares of common stock
at a price of $14.40 and options to purchase 203,000 shares of common stock at a price of $22.50 per were included in diluted earnings
per share. Options to purchase 90,000 shares of common stock at a price of $32.15 per share were not included in diluted earnings
per share as their impact would be anti-dilutive.
|
15.
|
RELATED PARTY TRANSACTIONS
|
Employee receivables totaled
approximately $453,000 and $485,000 at October 1, 2016 and October 3, 2015, respectively. Such amounts consist of loans that are
payable on demand and bear interest at the minimum statutory rate (0.66% at October 1, 2016 and 0.54% at October 3, 2015).
On November 18, 2016, Ark Jupiter
RI, LLC (“Ark Jupiter”), a wholly-owned subsidiary of the Company, entered into a ROFR Purchase and Sale Agreement
(the “ROFR”) with SCFRC-HWG, LLC, the landlord (the “Seller”) to purchase the land and building in which
the Company operates its Rustic Inn location in Jupiter, Florida. The Seller had entered into a Purchase and Sale Agreement with
a third party to sell the premises; however, Ark Jupiter’s lease provided the Company with a right of first refusal to purchase
the property. Ark Jupiter exercised the ROFR on October 4, 2016 and made a ten (10%) percent deposit on the purchase price of approximately
Five Million Two Hundred Thousand Dollars ($5,200,000). Concurrent with the execution of the ROFR, Ark Jupiter entered into
a Purchase and Sale Agreement with 1065 A1A, LLC to sell this same property for Eight Million Two Hundred Fifty Thousand Dollars
($8,250,000). In connection with the sale, Ark Jupiter and 1065 A1A, LLC have entered into a temporary lease and sub-lease arrangement
which expires April 30, 2017 at which time the Company expects to vacate the space.
On November 30, 2016, the Company,
through newly formed, wholly-owned subsidiaries, acquired the assets of the Original Oyster House, Inc., a restaurant and bar located
in the City of Gulf Shores, Baldwin County, Alabama and the related real estate and the Original Oyster House II, Inc., a restaurant
and bar located in the City of Spanish Fort, Baldwin County, Alabama and the related real estate and an adjacent retail shopping
plaza. The total purchase price was for $10,750,000 plus inventory. The acquisition will be accounted for as a business combination
and was financed with a bank loan from the Company’s existing lender in the amount of $8,000,000 and cash from operations.
The voter referendum for casino
gaming in Northern New Jersey was defeated in November 2016. State law prohibits the issue from being put on the ballot before
voters for the following two years. In connection with NMR’s restructuring of an existing loan which
comes due on June 30, 2018, and to extend the loan through December 2021, the Company expects to fund its proportionate share of
an anticipated $3 million capital call in January 2017 rather than having its interest diluted.
On December 7, 2016, the Board
of Directors declared a quarterly dividend of $0.25 per share on the Company’s common stock to be paid on January 3, 2017 to shareholders
of record at the close of business on December 20, 2016.
******