NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
April 1, 2017
(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 statement of operations 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 26-week periods ended April 1,
2017 and April 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. For the 13-week period ended April 1, 2017, the Company made purchases from one vendor that accounted
for approximately 10% of total purchases. For the 13-week period ended April 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 April 1,
2017, 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.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
— In May 2014, the Financial Accounting Standards Board (the “FASB”) issued guidance which establishes a new
standard on revenue recognition. The new standard outlines a single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.
The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. The standard is designed to create greater comparability for financial statement users across industries and
jurisdictions and also requires enhanced disclosures. The guidance is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2017, with early adoption permitted for fiscal years beginning after December 15, 2016. The
Company is in the process of evaluating the impact that will result from the adoption of the new standard but we do not anticipate
a significant impact on our Consolidated Condensed Financial Statements. We currently plan to apply the new standard using the
modified retrospective method beginning in fiscal 2019.
In February 2016, the FASB issued guidance
to improve financial reporting about leasing transactions. This guidance will require organizations that lease assets (“lessees”)
to recognize a lease liability and a right-of-use asset on its balance sheet for all leases with terms of more than twelve months.
A lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and
a right-of-use asset represents the lessee’s right to use, or control use of, a specified asset for the lease term. The guidance
is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for
capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired
before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The
Company is evaluating the potential impact of this guidance on its Consolidated Condensed Financial Statements.
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:
|
|
April 1,
2017
|
|
|
October 1,
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
103
|
|
|
$
|
889
|
|
Accounts receivable
|
|
|
848
|
|
|
|
429
|
|
Inventories
|
|
|
17
|
|
|
|
23
|
|
Prepaid expenses and other current assets
|
|
|
227
|
|
|
|
228
|
|
Due from Ark Restaurants Corp. and affiliates (1)
|
|
|
539
|
|
|
|
—
|
|
Fixed assets - net
|
|
|
13
|
|
|
|
22
|
|
Other assets
|
|
|
71
|
|
|
|
71
|
|
Total assets
|
|
$
|
1,818
|
|
|
$
|
1,662
|
|
|
|
|
|
|
|
|
|
|
Accounts payable - trade
|
|
$
|
401
|
|
|
$
|
114
|
|
Accrued expenses and other current liabilities
|
|
|
339
|
|
|
|
238
|
|
Due to Ark Restaurants Corp. and affiliates (1)
|
|
|
—
|
|
|
|
173
|
|
Operating lease deferred credit
|
|
|
62
|
|
|
|
73
|
|
Total liabilities
|
|
|
802
|
|
|
|
598
|
|
Equity of variable interest entities
|
|
|
1,016
|
|
|
|
1,064
|
|
Total liabilities and equity
|
|
$
|
1,818
|
|
|
$
|
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. The fair values of the assets acquired were allocated as follows (amounts in thousands):
Inventory
|
|
$
|
293
|
|
Land and buildings
|
|
|
6,650
|
|
Furniture, fixtures and equipment
|
|
|
395
|
|
Trademarks
|
|
|
1,720
|
|
Goodwill and Intangibles
|
|
|
1,985
|
|
|
|
$
|
11,043
|
|
The Consolidated Condensed Statements of
Operations for the 13 and 26-weeks ended April 1, 2017 include revenues and income of approximately $4,765,000 and $6,445,000 and
$577,000 and $523,000, 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 Operations
for the 26-weeks ended April 1, 2017 and April 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
and the
Oyster House
properties occurred on the dates indicated, nor does it purport to represent the results
of operations for future periods.
|
|
26 Weeks Ended
|
|
|
|
April 1,
2017
|
|
|
April 2,
2016
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
74,683
|
|
|
$
|
76,463
|
|
Net income
|
|
$
|
1,548
|
|
|
$
|
85
|
|
Net income per share - basic
|
|
$
|
0.45
|
|
|
$
|
0.02
|
|
Net income per share - diluted
|
|
$
|
0.44
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,423
|
|
|
|
3,418
|
|
Diluted
|
|
|
3,541
|
|
|
|
3,418
|
|
|
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 July 18, 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 transferred its lease and the
related assets of
Canyon Road
located in New York, NY to an unrelated third party. In connection with this 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 with a 63.7% ownership interest. 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 effective ownership interest in NMR of 7.4%, subject to dilution. In 2015, the Company
invested an additional $222,000 in NMR and on February 7, 2017, the Company invested an additional $222,000 in NMR, both as a result
of capital calls, bringing its total investment to $5,108,000 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 April 1, 2017, 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 $233,000 and $164,000 at April 1, 2017 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 $1,843,000 and $1,815,000, are included in Investment In and Receivable From New Meadowlands Racetrack in the Consolidated Balance
Sheets at April 1, 2017 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. State law prohibits the issue from being put on the ballot before voters for the following two years. 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 April 1, 2017.
6.
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued expenses and other current liabilities
consist of the following:
|
|
April 1,
2017
|
|
|
October 1,
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
Sales tax payable
|
|
$
|
1,042
|
|
|
$
|
942
|
|
Accrued wages and payroll related costs
|
|
|
2,006
|
|
|
|
2,495
|
|
Customer advance deposits
|
|
|
3,825
|
|
|
|
4,077
|
|
Accrued occupancy and other operating expenses
|
|
|
2,854
|
|
|
|
3,041
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,727
|
|
|
$
|
10,555
|
|
Long-term debt consists of the following:
|
|
April 1,
|
|
|
October 1,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Promissory Note - Rustic Inn purchase
|
|
$
|
3,099
|
|
|
$
|
3,907
|
|
Promissory Note - Shuckers purchase
|
|
|
3,583
|
|
|
|
4,084
|
|
Promissory Note - Oyster House purchase
|
|
|
7,600
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,282
|
|
|
|
7,991
|
|
Less: Current maturities
|
|
|
(4,216
|
)
|
|
|
(2,617
|
)
|
Less: Unamortized deferred financing costs
|
|
|
(46
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
10,020
|
|
|
$
|
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.
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.
Also on October 22, 2015, 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 are 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.
On November 30, 2016, in connection with
the acquisition of the
Oyster House
properties, the Company issued a promissory note under the Revolving Facility 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.
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
and included in interest expense. Amortization expense of $12,000 and $11,000 is included in interest expense for the 13-weeks
ended April 1, 2017 and April 2, 2016, respectively. Amortization expense of $23,000 and $20,000 for the 26-weeks ended
April 1, 2017 and April 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 of its financial covenants under the Revolving Facility as of April 1, 2017 except for the fixed charge
coverage ratio covenant. On May 11, 2017, we were issued a waiver for this covenant as of April 1, 2017. The Company believes,
based on current projections that it will be in compliance with such covenant in 2017.
|
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 was
closed January 1, 2017 for renovation and reconcepting which is estimated to cost approximately $8,000,000 to $9,000,000, of
which approximately $3,900,000 has been incurred as of April 1, 2017. The restaurant is expected to re-open in June 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.
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 26-weeks ended April 1, 2017 and April 2, 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 $32.15 per share expired unexercised.
No options or performance-based awards
were granted during the 26-week period ended April 1, 2017.
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
|
|
|
$
|
20.33
|
|
|
5.1 Years
|
|
|
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,308
|
)
|
|
$
|
15.48
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(90,000
|
)
|
|
$
|
32.15
|
|
|
|
|
|
|
|
Outstanding and expected to vest, end of period
|
|
|
426,300
|
|
|
$
|
17.86
|
|
|
5.7 Years
|
|
$
|
3,166,000
|
|
Exercisable, end of period
|
|
|
426,300
|
|
|
$
|
17.86
|
|
|
5.7 Years
|
|
$
|
3,166,000
|
|
Compensation cost charged
to operations for each of the 13-week periods ended April 1, 2016 and April 2, 2016 was $0 and $103,000, respectively, and for
the 26-week periods ended April 1, 2017 and April 2, 2016 was $0 and $207,000, respectively. The compensation cost recognized
is classified as a general and administrative expense in the Consolidated Condensed Statements of Operations.
As of April 1, 2017,
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 26-week periods ended April 1, 2017 and April 2, 2016 reflect effective tax rates of approximately 30% and 65%, respectively.
The effective tax rate for the 26-week period ended April 2, 2016 was significantly higher than the statutory rate due to lower
income from continuing operations in the first half of the year and discrete items included in tax expense. The Company expects
its effective tax rate for its current fiscal year to be 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 (LOSS) PER SHARE OF COMMON STOCK
|
Net income (loss) 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 April 1, 2017, options to purchase 66,000, 158,800 and 201,500 shares of common stock at exercise prices of $12.04, $14.40
and $22.50 per share, respectively, were not included in diluted earnings per share as their impact was anti-dilutive.
For the 26-week period
ended April 1, 2017, the treasury stock impact of options to purchase 66,000, 158,800 and 201,500 shares of common stock at exercise
prices of $12.04, $14.40 and $22.50 per share, respectively, were included in diluted earnings per share.
For the 13- and 26-week
periods ended April 2, 2016, options to purchase 66,000, 164,700, 203,000 and 90,000 shares of common stock at exercise prices
of $12.04, $14.40, $22.50 and $32.15 per share, respectively, were not included in diluted earnings per share as their impact was
anti-dilutive.
On March 1, 2017, the
Board of Directors declared a quarterly dividend of $0.25 per share on the Company’s common stock to be paid on April 3,
2017 to shareholders of record at the close of business on March 17, 2017. 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.