NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
December 31, 2016
|
(Unaudited)
|
|
1.
|
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
The consolidated condensed balance sheet
as of October 1, 2016, which has been derived from audited financial statements included in the Company’s annual report on
Form 10-K for the year ended October 1, 2016 (“Form 10-K”), and the unaudited interim consolidated condensed financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with
GAAP have been condensed or omitted. All adjustments that, in the opinion of management are necessary for a fair presentation for
the periods presented, have been reflected as required by Regulation S-X, Rule 10-01. Such adjustments are of a normal, recurring
nature. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements
and notes thereto included in the Form 10-K. The results of operations for interim periods are not necessarily indicative of the
operating results to be expected for the full year or any other interim period.
PRINCIPLES OF CONSOLIDATION — The
consolidated condensed interim 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, collectively herein referred to as the “Company”.
Also included in the consolidated condensed interim financial statements are certain variable interest entities (“VIEs”).
All significant intercompany balances and transactions have been eliminated in consolidation.
RECLASSIFICATIONS — Certain reclassifications
of prior period balances related to the income statement presentation of $822,000 of certain administrative fees related to catering
revenue received have been reclassified from payroll expense to revenue to conform to the current period presentation.
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. In addition, 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 consolidated condensed balance sheet date and approximate the
carrying value of such debt instruments.
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 condensed 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 13-week periods ended December 31,
2016 and January 2, 2016, the Company did not make purchases from any one vendor that accounted for 10% or greater of total purchases
for the respective period.
SEGMENT REPORTING — As of December
31, 2016, the Company owned and operated 22 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.
RECENTLY ADOPTED ACCOUNTING STANDARDS —
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 did not
have any impact on the Consolidated Condensed 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. The adoption of this guidance did not have any impact on the Consolidated Condensed 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 adoption of this guidance
did not have any impact on the Consolidated Condensed Financial Statements.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
— In January 2017, the FASB issued guidance clarifying the definition of a business. The update provides that when substantially
all the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets,
the set is not a business. The new rules will be effective for the Company in the first quarter of 2019. The Company is currently
evaluating the potential impact adoption of this guidance on its Consolidated Condensed Financial Statements.
In January 2017, the FASB guidance simplifying
the test for goodwill impairment. The update simplifies how an entity is required to test goodwill for impairment by eliminating
Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting
unit’s goodwill with the carrying amount. The new rules will be effective for the Company in the first quarter of 2021. The
Company is currently evaluating the potential impact adoption of this guidance on its Consolidated Condensed Financial Statements.
2.
|
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:
|
|
December 31,
2016
|
|
|
October 1,
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
511
|
|
|
$
|
889
|
|
Accounts receivable
|
|
|
476
|
|
|
|
429
|
|
Inventories
|
|
|
18
|
|
|
|
23
|
|
Prepaid expenses and other current assets
|
|
|
226
|
|
|
|
228
|
|
Due from Ark Restaurants Corp. and affiliates (1)
|
|
|
38
|
|
|
|
-
|
|
Fixed assets - net
|
|
|
18
|
|
|
|
22
|
|
Other assets
|
|
|
71
|
|
|
|
71
|
|
Total assets
|
|
$
|
1,358
|
|
|
$
|
1,662
|
|
|
|
|
|
|
|
|
|
|
Accounts payable - trade
|
|
$
|
55
|
|
|
$
|
114
|
|
Accrued expenses and other current liabilities
|
|
|
299
|
|
|
|
238
|
|
Due to Ark Restaurants Corp. and affiliates (1)
|
|
|
-
|
|
|
|
173
|
|
Operating lease deferred credit
|
|
|
67
|
|
|
|
73
|
|
Total liabilities
|
|
|
421
|
|
|
|
598
|
|
Equity of variable interest entities
|
|
|
937
|
|
|
|
1,064
|
|
Total liabilities and equity
|
|
$
|
1,358
|
|
|
$
|
1,662
|
|
(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.
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 an adjacent retail shopping plaza 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.
The total purchase price was for $10,750,000 plus inventory of approximately $293,000. The acquisition is 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. A preliminary allocation of the fair values of the assets acquired, subject to final acquisition accounting, is as
follows:
Inventory
|
|
$
|
293,000
|
|
Land, buildings and fixed assets
|
|
|
7,950,000
|
|
Goodwill and Intangibles
|
|
|
2,800,000
|
|
|
|
$
|
11,043,000
|
|
The Consolidated Condensed Statements of
Income for the 13-weeks ended December 31, 2016 include revenues and losses of approximately $1,680,000 and $(54,000), respectively,
related to the
Shuckers
and
Oyster House
properties. The unaudited pro forma financial information set forth below
is based upon the Company’s historical Consolidated Condensed Statements of Income for the 13-weeks ended December 31, 2016
and January 2, 2016 and includes the results of operations for
Shuckers
and the
Oyster House
properties for the periods
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.
|
|
13 Weeks Ended
|
|
|
December 31,
2016
|
|
January 2,
2016
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
40,205
|
|
|
$
|
39,393
|
|
Net income
|
|
$
|
1,941
|
|
|
$
|
426
|
|
Net income per share - basic
|
|
$
|
0.57
|
|
|
$
|
0.12
|
|
Net income per share - diluted
|
|
$
|
0.55
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,423
|
|
|
|
3,418
|
|
Diluted
|
|
|
3,507
|
|
|
|
3,517
|
|
4.
|
RECENT RESTAURANT DISPOSITIONS
|
Lease Expirations
– 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.
Other
– 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 on April 30, 2017, at which time the Company expects to vacate the space. In connection
with these transactions the Company recognized a gain in the amount of $1,637,000 during the 13-weeks ended December 31, 2016.
The Company’s is in the process of
transferring its lease and the related assets of
Canyon Road
located in New York, NY to an unrelated third party. In connection
with this pending transfer, the Company recognized an impairment loss included in depreciation and amortization expense in the
amount of $75,000 for the 13-weeks ended December 31, 2016.
5.
|
INVESTMENT IN 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, subject to dilution. 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. .
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 December 31, 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 $11,000 and $164,000 at December 31, 2016 and October 1, 2016, respectively, and are included
in Prepaid Expenses and Other Current Assets in the Consolidated Condensed 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 $1,830,000 and $1,815,000, are included in Investment In and Receivable From New Meadowlands Racetrack in the Consolidated Balance
Sheets at December 31, 2016 and October 1, 2016, 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. 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 funded its proportionate share
of a $3 million capital call rather than having its interest diluted (see Note 13).
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 December 31, 2016.
6.
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued expenses and other current liabilities
consist of the following:
|
|
December 31,
2016
|
|
|
October 1,
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Sales tax payable
|
|
$
|
1,044
|
|
|
$
|
942
|
|
Accrued wages and payroll related costs
|
|
|
1,862
|
|
|
|
2,495
|
|
Customer advance deposits
|
|
|
1,772
|
|
|
|
4,077
|
|
Accrued occupancy and other operating expenses
|
|
|
3,841
|
|
|
|
3,041
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,519
|
|
|
$
|
10,555
|
|
Long-term debt consists of the following:
|
|
December 31,
2016
|
|
October 1,
2016
|
|
|
(In thousands)
|
|
|
|
|
|
Promissory Note - Rustic Inn purchase
|
|
$
|
3,503
|
|
|
$
|
3,907
|
|
Promissory Note - Shuckers purchase
|
|
|
3,833
|
|
|
|
4,084
|
|
Promissory Note - Oyster House purchase
|
|
|
8,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,336
|
|
|
|
7,991
|
|
Less: Current maturities
|
|
|
(4,216
|
)
|
|
|
(2,617
|
)
|
Less: Unamortized deferred financing costs
|
|
|
(49
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
11,071
|
|
|
$
|
5,321
|
|
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. As of December 31, 2016, the
outstanding balance of this note payable was $3,503,000.
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. As of December 31,
2016, the outstanding balance of this note payable was $3,833,000.
On November 30, 2016, in connection with the
acquisition of the
Oyster House
properties, the Company issued a promissory note to BHBM for $8,000,000. The note bears
interest at LIBOR plus 3.5% per annum, and is payable in 60 equal monthly installments of $133,273, commencing on January 1, 2017.
As of December 31, 2016, the outstanding balance of this note payable was $8,000,000.
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 July 2, 2016, no additional amounts were outstanding under the Revolving Facility.
Deferred financing costs incurred in connection
with the Revolving Facility in the amount of $130,585 are being amortized over the life of the agreements on a straight-line basis.
Amortization expense of $11,000 and $9,000 is included in interest expense for the 13-weeks ended December 31, 2016 and January
2, 2016, respectively.
Borrowings under the Revolving Facility, which
include all 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 December 31, 2016.
|
8.
|
COMMITMENTS AND CONTINGENCIES
|
Leases
— The Company leases
its restaurants, bar facilities, and administrative headquarters through its subsidiaries under terms expiring at various dates
through 2032. 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 restaurant’s sales in excess of stipulated amounts at such facility
and in one instance based on profits.
On January 12, 2016, the Company
entered into an Amended and Restated Lease for its
Sequoia
property in Washington D.C. extending the lease for 15 years
through November 30, 2032 with one additional five-year option. Annual rent under the new lease is approximately $1,200,000 increasing
annually through expiration. Under the terms of the agreement, the property will be closed from January 1, 2017 through March 31,
2017 for renovation and reconcepting. The Company is currently developing the concept and design relating to the renovated space
and estimates the total cost to be approximately $6,000,000 to $7,000,000.
Legal
Proceedings
— In the ordinary course of 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, from time to time, in 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 during the 13-weeks ended December 31, 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.
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.
During the quarter ended December 31, 2016,
options to purchase 90,000 shares of common stock at an exercise price of $29.60 per share expired unexercised.
No options or performance-based awards were
granted during the 13-week period ended December 31, 2016.
A summary of stock option activity is presented
below:
|
|
2017
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding,
beginning of period
|
|
|
518,608
|
|
|
$
|
19.76
|
|
|
|
5.1
Years
|
|
|
|
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
or expired
|
|
|
(90,000
|
)
|
|
$
|
32.15
|
|
|
|
|
|
|
|
|
|
Outstanding
and expected to vest, end of period
|
|
|
428,608
|
|
|
$
|
17.85
|
|
|
|
5.9
Years
|
|
|
$
|
2,743,000
|
|
Exercisable,
end of period
|
|
|
428,608
|
|
|
$
|
17.85
|
|
|
|
5.9
Years
|
|
|
$
|
2,743,000
|
|
Compensation cost charged to operations for
the 13-week periods ended December 31, 2016 and January 2, 2016 was $0 and $103,000, respectively. The compensation cost recognized
is classified as a general and administrative expense in the Consolidated Condensed Statements of Income.
As of December 31, 2016, there
was no unrecognized compensation cost related to unvested stock options.
The Company’s provision for income taxes
consists of Federal, state and local taxes in amounts necessary to align the Company’s year-to-date provision for income
taxes with the effective tax rate that the Company expects to achieve for the full year. Each quarter, the Company updates its
estimate of the annual effective tax rate and records cumulative adjustments as deemed necessary. The income tax provisions for
the 13-week periods ended December 31, 2016 and January 2, 2016 reflect effective tax rates of approximately 30% and 23%, respectively. The
Company expects its effective tax rate for its current fiscal year to be significantly lower than the statutory rate as a result
of the generation of FICA tax credits and operating income attributable to the non-controlling interests of the VIEs that is not
taxable to the Company. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual
tax rate could differ from current estimates.
The Company’s overall effective tax rate
in the future will be affected by factors such as the utilization of state and local net operating loss carryforwards, the generation
of FICA tax credits and the mix of earnings by state taxing jurisdiction as Nevada does not impose a state income tax, as
compared to the other major state and local jurisdictions in which the Company has operations.
During the 13-weeks ended December 31, 2016,
certain equity compensation awards expired unexercised. As such, the Company reversed the related deferred tax asset in the amount
of approximately $397,000 as a charge to Additional Paid-in Capital as there was a sufficient pool of windfall tax benefit available.
|
11.
|
INCOME PER SHARE OF COMMON STOCK
|
Net income per share is calculated on the basis
of the weighted average number of common shares outstanding during each period plus, for diluted net income per share, the additional
dilutive effect of potential common stock. Potential common stock using the treasury stock method consists of dilutive stock options.
For the 13-week period ended
December 31, 2016, options to purchase 66,000 shares of common stock at an exercise price of $12.04 per share and options to purchase
160,800 shares of common stock at an exercise price of $14.40 per share were included in diluted earnings per share. Options to
purchase 201,808 shares of common stock at an exercise price of $22.50 per share were not included in diluted earnings per share
as their impact would be anti-dilutive.
For the 13-week period ended
January 2, 2016, options to purchase 66,000 shares of common stock at an exercise price of $12.04 per share, options to purchase
164,700 shares of common stock at an exercise price of $14.40 per share and options to purchase 203,000 shares of common stock
at an exercise price of $22.50 per share were included in diluted earnings per share. Options to purchase 90,000 shares of common
stock at an exercise price of $32.15 were not included in diluted earnings per share as their impact was anti-dilutive.
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. The Company intends to continue to pay such quarterly cash dividends for
the foreseeable future, however, the payment of future dividends is at the discretion of the Company’s Board of Directors
and is based on future earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation and other relevant
factors.
On January 4, 2017, the Company
closed its
Sequoia
property in Washington, DC for a major renovation. The restaurant is expected to re-open in May 2017.
In connection with this closure, the Company recognized an impairment loss related to fixed asset disposals in the amount of $283,000,
which is included in Depreciation and Amortization Expense for the 13-weeks ended December 31, 2016.
On February 7, 2017, the Company
invested an additional $222,000 in NMR as a result of a capital call bringing its total equity investment to $5,108,000.