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 September 29, 2018, Ark Restaurants
Corp. and Subsidiaries (the “Company”) owned and operated 20 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 five restaurants
in New York City, two in Washington, D.C., five in Las Vegas, Nevada, three in Atlantic City, New Jersey, one in Boston, Massachusetts,
two in Florida and two on the gulf coast of Alabama. 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. In Boston, Massachusetts, the Company operates
a restaurant in the Faneuil Hall Marketplace. The Florida operations include the Rustic Inn in Dania Beach, Florida and 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. In Alabama, the Company operates two Original Oyster Houses, one in Gulf Shores,
Alabama and one in Spanish Fort, Alabama.
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.
The Company had a working capital
deficiency of $4,628,000 at September 29, 2018. We believe that our existing cash balances, current banking facilities and cash
provided by operations will be sufficient to meet our liquidity and capital spending requirements at least through December 31,
2019.
Accounting Period
—
The Company’s fiscal year ends on the Saturday nearest September 30. The fiscal years ended September 29, 2018 and September
30, 2017 included 52 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 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 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.
As of September 29, 2018 the Company
had accounts receivable balances due from two hotel operators totaling 47% of total accounts receivable. As of September 30, 2017,
the Company had accounts receivable balances due from two hotel operators totaling 39% of total accounts receivable.
For the years ended September 29,
2018 and September 30, 2017, the Company made purchases from one vendor that accounted for 10% of total purchases.
As of September 29, 2018, all debt
outstanding is with one lender (see Note 9 – Notes Payable – Bank)
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. Based on this analysis, no impairment charges were warranted at September 29, 2018.
See Notes 4 and 10 for information regarding impairment charges for the year ended September 30, 2017.
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 September 29, 2018 and September 30,
2017, the Company performed qualitative assessments of factors to determine whether further impairment testing is required. Based
on this assessment, no impairment losses were warranted at September 29, 2018 and September 30, 2017 as the fair value of the Company’s
equity is well in excess of its carrying amount. 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, as well as license fees, property
management fees and other rentals.
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 September 29, 2018 and September 30, 2017, the total liability for gift cards in the amounts of approximately $170,000 and
$158,000, respectively, are included in Accrued Expenses and Other Current Liabilities in the Consolidated Balance Sheets.
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 September 29, 2018 and September
30, 2017, 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). The dilutive effect of stock options is reflected in diluted
earnings per share by application of the treasury stock method. Under the treasury stock method, if the average market price of
a share of common stock increases above the option’s exercise price, the proceeds that would be assumed to be realized from
the exercise of the option would be used to acquire outstanding shares of common stock. The dilutive effect of awards is directly
correlated with the fair value of the shares of common stock.
Stock-based Compensation
—
Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee
directors. The Company measures stock-based compensation at the grant date based on the estimated fair value of the award and recognize
the cost (net of estimated forfeitures) as compensation expense on a straight-line basis over the requisite service period. Upon
exercise of options, all excess tax benefits and tax deficiencies resulting from the difference between the deduction for tax purposes
and the stock-based compensation cost recognized for financial reporting purposes are included as a component of income tax expense.
Recently
Adopted Accounting Standards
— In March 2016, the Financial Accounting Standard Board (the “FASB”) issued
Accounting Standards Update (“ASU”) No. 2016-09,
Compensation – Stock Compensation – Improvements to
Employee Share-Based Payment Accounting
, which contains amended guidance for share-based payment accounting. We adopted the
provisions of this standard during the first quarter of 2018. Under ASU 2016-09, all excess tax benefits and tax deficiencies resulting
from the difference between the deduction for tax purposes and the stock-based compensation cost recognized for financial reporting
purposes are included as a component of income tax expense as of October 1, 2017. Prior to the implementation of ASU 2016-09, excess
tax benefits were recorded as a component of Additional paid-in capital and tax deficiencies were recognized either as an offset
to accumulated excess tax benefits or in the income statement if there were no accumulated excess tax benefits. As a result of
the adoption of ASU 2016-09 we have recorded a cumulative effect adjustment as of October 1, 2017 in the amount of $392,000 and
reduced income tax expense by approximately $135,000 for the year ended September 29, 2018. The ASU clarifies the classification
of certain share based payment activities within the statements of cash flows.
We have elected to prospectively present
the amount of excess tax benefits related to stock compensation as a component of cash flows from operating activities and not
adjust prior periods.
Additionally, cash payments made to taxing authorities on an employee’s
behalf when directly withholding shares for tax-withholding purposes, which were previously included as cash flows from operating
activities, are now required to be presented as cash flows from financing activities within the statement of cash flows. Such amounts
were not material to our consolidated financial statements.
New Accounting Standards
Not Yet Adopted
— In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
. The
guidance 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. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash
flows arising from customer contracts. This update is effective for the Company in the first quarter of fiscal 2019, which is when
we plan to adopt these provisions. This update permits the use of either the retrospective or cumulative effect transition method,
however we have not yet selected a transition method. Upon initial evaluation, we do not believe this guidance will have a significant
impact on our recognition of revenue from company-owned restaurants, which is our primary source of revenue. We are continuing
to evaluate the effect this guidance will have on other, less significant revenue sources, including catering revenues. The Company
continues to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may,
in conjunction with the completion of the Company’s overall assessment of the new guidance, impact the Company’s current
conclusions.
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 the Company in the first quarter
of fiscal 2019. 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 guidance on its consolidated financial statements.
In February 2016, the FASB issued
ASU No. 2016-02,
Leases
. This update requires a lessee to recognize on the balance sheet a liability to make lease payments
and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures about the amount,
timing and uncertainty of cash flows arising from leases. This update is effective for the Company in the first quarter of fiscal
2020, which is when we plan to adopt these provisions. We plan to elect the available practical expedients on adoption and we expect
our balance sheet presentation to be materially impacted upon adoption due to the recognition of right-of-use assets
and lease liabilities for operating
leases. We are continuing to evaluate the effect this guidance will have on our consolidated financial statements and related disclosures.
In August 2016, FASB issued ASU
No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments
. This update provides clarification regarding how
certain cash receipts and cash payments are presented and classified in the statement of cash flows and addresses eight specific
cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim
periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019
using a retrospective approach. Early adoption is permitted. We do not expect the adoption of this guidance to have a material
impact on our 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 guidance address
the income tax consequences of intra-entity transfers of assets other than inventory. Current guidance prohibits the recognition
of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. In addition,
interpretations of this guidance have developed in practice over the years for transfers of certain intangible and tangible assets.
The amendments in the update will require recognition of current and deferred income taxes resulting from an intra-entity transfer
of an asset other than inventory when the transfer occurs. This update is effective for us in the first quarter of fiscal 2019,
which is when we plan to adopt these provisions using a modified retrospective approach. We do not expect the adoption of this
guidance to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued
ASU No. 2017-01,
Business Combinations: Clarifying the Definition of a Business.
This 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. This update will be effective for the Company in the first quarter of 2019. We do not expect the adoption
of this guidance to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued
ASU No. 2017-04,
Intangibles-Goodwill and Other: 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 financial statements.
In August 2018, the FASB issued
ASU No. 2018-16
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting
for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
, which provides guidance for
the accounting for implementation costs of hosting arrangements that are considered service contracts. This pronouncement is effective
for annual periods beginning after December 15, 2020 and interim periods within annual periods after December 15, 2021. We do not
expect the adoption of this guidance to have a material impact on our consolidated financial statements. .
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2.
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CONSOLIDATION OF VARIABLE INTEREST ENTITIES
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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:
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|
September 29,
2018
|
|
September 30,
2017
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
181
|
|
|
$
|
363
|
|
Accounts receivable
|
|
|
354
|
|
|
|
367
|
|
Inventories
|
|
|
19
|
|
|
|
22
|
|
Prepaid and refundable income taxes
|
|
|
241
|
|
|
|
226
|
|
Prepaid expenses and other current assets
|
|
|
51
|
|
|
|
63
|
|
Due from Ark Restaurants Corp. and affiliates (1)
|
|
|
338
|
|
|
|
534
|
|
Fixed assets - net
|
|
|
-
|
|
|
|
6
|
|
Other assets
|
|
|
82
|
|
|
|
71
|
|
Total assets
|
|
$
|
1,266
|
|
|
$
|
1,652
|
|
|
|
|
|
|
|
|
|
|
Accounts payable - trade
|
|
$
|
158
|
|
|
$
|
116
|
|
Accrued expenses and other current liabilities
|
|
|
348
|
|
|
|
260
|
|
Operating lease deferred credit
|
|
|
(21
|
)
|
|
|
51
|
|
Total liabilities
|
|
|
485
|
|
|
|
427
|
|
Equity of variable interest entities
|
|
|
781
|
|
|
|
1,225
|
|
Total liabilities and equity
|
|
$
|
1,266
|
|
|
$
|
1,652
|
|
|
(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 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, none of which are amortizable, were allocated as
follows (amounts in thousands):
Inventory
|
|
$
|
293
|
|
Land and buildings
|
|
|
6,650
|
|
Furniture, fixtures and equipment
|
|
|
395
|
|
Trademarks
|
|
|
1,720
|
|
Goodwill
|
|
|
1,985
|
|
|
|
$
|
11,043
|
|
The Consolidated Statement of Income
for the year ended September 30, 2017 includes revenues and pre-tax income of approximately $11,804,000 and $1,243,000, respectively,
related to the
Oyster House
properties. The unaudited pro forma financial information set forth below is based upon the
Company’s historical Consolidated Statements of Income for the year ended September 30, 2017 and includes the results of
operations for 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 the
Oyster House
properties occurred on the dates indicated, nor does it purport to represent the results
of operations for future periods.
|
|
Year Ended
|
|
|
September 30,
2017
|
|
|
(unaudited)
|
|
|
|
|
|
|
Total revenues
|
|
$
|
155,690
|
|
Net income
|
|
$
|
4,246
|
|
Net income per share - basic
|
|
$
|
1.24
|
|
Net income per share - diluted
|
|
$
|
1.20
|
|
|
|
|
|
|
Basic
|
|
|
3,424
|
|
Diluted
|
|
|
3,531
|
|
|
4.
|
RECENT RESTAURANT DISPOSITIONS
|
Lease Expirations
–
The Company was advised by the landlord that it would have to vacate
The Grill at Two Trees
property at the Foxwoods Resort
and Casino in Ledyard, CT, which had a no rent lease. The closure of this property occurred on January 1, 2017 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 operated 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 $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 $8,250,000. In connection with the sale, Ark
Jupiter and 1065 A1A, LLC entered into a temporary lease and sub-lease arrangement which expired on July 18, 2017. The Company
vacated the space in June 2017. In connection with these transactions the Company recognized a gain in the amount of $1,637,000
during the year ended September 30, 2017.
The Company transferred its lease
and the related assets of
Canyon Road
located in New York, NY to a former employee. 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 year ended
September 30, 2017.
|
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 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. We have 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 $0 and $9,000 at September 29, 2018 and September 30, 2017, 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 discussed above. The principal and accrued interest related to this note
in the amounts of $1,928,000 and $1,871,000, are included in Investment In and Receivable From New Meadowlands Racetrack in the
Consolidated Balance Sheets at September 29, 2018 and September 30, 2017, 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. No events or changes in circumstances have occurred during the year ended September 29, 2018 that have had a significant
adverse effect on the fair value our Investment in NMR. As a result of the above, no impairment was deemed necessary as of September
29, 2018.
Fixed assets consist of the following:
|
|
September 29,
2018
|
|
September 30,
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Land and building
|
|
$
|
18,029
|
|
|
$
|
17,164
|
|
Leasehold improvements
|
|
|
53,310
|
|
|
|
50,127
|
|
Furniture, fixtures and equipment
|
|
|
37,910
|
|
|
|
35,978
|
|
Construction in progress
|
|
|
59
|
|
|
|
980
|
|
|
|
|
109,308
|
|
|
|
104,249
|
|
Less: accumulated depreciation and amortization
|
|
|
64,044
|
|
|
|
59,034
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,264
|
|
|
$
|
45,215
|
|
Depreciation and amortization expense
related to fixed assets for the years ended September 29, 2018 and September 30, 2017 was $5,014,000 and $4,096,000, 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. Included in 2017 are impairment charges of $75,000 related to
Canyon
Road
(see Note 4), $45,000 related to
Branches
, which is included in other operating costs and expenses,
and
$283,000 related to
Sequoia
(see Note 10).
|
7.
|
INTANGIBLE ASSETS, GOODWILL AND TRADEMARKS
|
Intangible assets consist of the following:
|
|
September 29,
2018
|
|
September 30,
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Purchased leasehold rights (a)
|
|
$
|
2,395
|
|
|
$
|
2,395
|
|
Noncompete agreements and other
|
|
|
253
|
|
|
|
253
|
|
|
|
|
2,648
|
|
|
|
2,648
|
|
Less accumulated amortization
|
|
|
2,299
|
|
|
|
2,239
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
349
|
|
|
$
|
409
|
|
|
(a)
|
Purchased leasehold rights arose from acquiring leases and subleases of various restaurants.
|
Amortization expense related to
intangible assets for the years ended September 29, 2018 and September 30, 2017 was $60,000 and $42,000, respectively. Amortization
expense for each of the next five years is expected to be $38,000.
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 September 29, 2018 and September 30, 2017 are as follows:
|
|
Goodwill
|
|
Trademarks
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 1, 2016
|
|
$
|
7,895
|
|
|
$
|
1,611
|
|
|
|
|
|
|
|
|
|
|
Acquired during the year
|
|
|
1,985
|
|
|
|
1,720
|
|
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2017
|
|
|
9,880
|
|
|
|
3,331
|
|
|
|
|
|
|
|
|
|
|
Acquired during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 29, 2018
|
|
$
|
9,880
|
|
|
$
|
3,331
|
|
|
8.
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued expenses and other current liabilities consist
of the following:
|
|
September 29,
2018
|
|
September 30,
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Sales tax payable
|
|
$
|
820
|
|
|
$
|
813
|
|
Accrued wages and payroll related costs
|
|
|
3,226
|
|
|
|
2,475
|
|
Customer advance deposits
|
|
|
4,439
|
|
|
|
4,186
|
|
Accrued occupancy and other operating expenses
|
|
|
2,217
|
|
|
|
2,702
|
|
|
|
$
|
10,702
|
|
|
$
|
10,176
|
|
Long-term debt consists of the
following:
|
|
September 29,
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Promissory Note - Rustic Inn purchase
|
|
$
|
4,327
|
|
|
$
|
2,290
|
|
Promissory Note - Shuckers purchase
|
|
|
5,015
|
|
|
|
3,083
|
|
Promissory Note - Oyster House purchase
|
|
|
5,346
|
|
|
|
6,667
|
|
Credit Facility
|
|
|
6,568
|
|
|
|
6,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,256
|
|
|
|
18,238
|
|
Less: Current maturities
|
|
|
(1,251
|
)
|
|
|
(10,372
|
)
|
Less: Unamortized deferred financing costs
|
|
|
(145
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
19,860
|
|
|
$
|
7,824
|
|
On June 1, 2018, the Company refinanced
its then existing indebtedness with its current lender, Bank Hapoalim B.M. (“BHBM”), by entering into an amended and
restated credit agreement (the “New Revolving Facility”), which expires on May 31, 2021. The New Revolving Facility
provides for total availability of the lesser of (i) $10,000,000 and (ii) $25,000,000 less the then aggregate amount of all indebtedness
and obligations to BHBM. Borrowings under the New Revolving Facility are payable upon maturity of the New Revolving Facility with
interest payable monthly at LIBOR plus 3.25%, subject to adjustment based on certain ratios. As of September 29, 2018 and September
30, 2017, borrowings of $6,568,000 and $6,198,000, respectively, were outstanding under the Revolving Facility and had a weighted
average interest rate of 5.4% and 4.7%, respectively.
In connection with the refinancing,
the Company also amended the principal amounts and payment terms of its outstanding term notes with BHBM as follows:
|
·
|
Promissory Note – Rustic Inn purchase
– On February 25, 2013, the Company issued
a promissory note to 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 was payable in 60
equal monthly installments of $134,722, which commenced on March 25, 2014. In connection with the above refinancing, this note
was amended and restated and increased by $2,783,333 of credit facility borrowings. The new principal amount of $4,400,000, which
is secured by a mortgage on
The Rustic Inn
real estate, is payable in 27 equal quarterly installments of $73,334, which
commenced on September 1, 2018, with a balloon payment of $2,419,990 on June 1, 2025 and bears interest at LIBOR plus 3.25% per
annum.
|
|
·
|
Promissory Note – Shuckers purchase
– 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 bore interest at LIBOR
plus 3.5% per annum, and was payable in 60 equal monthly installments of $83,333, commencing on November 22, 2015. In connection
with the above refinancing, this note was amended and restated and increased by $2,433,324 of credit facility borrowings. The new
principal amount of $5,100,000, which is secured by a mortgage on the
Shuckers
real estate, is payable in 27 equal quarterly
installments of $85,000, which commenced on September 1, 2018, with a balloon payment of $2,804,988 on June 1, 2025 and bears interest
at LIBOR plus 3.25% per annum.
|
|
·
|
Promissory Note – Oyster House purchase
– 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 bore interest at LIBOR plus 3.5% per annum, and was payable in 60 equal monthly installments of $133,273,
commencing on January 1, 2017. In connection with the above refinancing, this note was amended and restated and separated into
two notes. The first note, in the principal amount of $3,300,000, is secured by a mortgage on the
Oyster House Gulf Shores
real estate, is payable in 19 equal quarterly installments of $117,854, which commenced on September 1, 2018, with a balloon payment
of $1,060,717 on June 1, 2023 and bears interest at LIBOR plus 3.5% per annum. The second note, in the principal amount of $2,200,000,
is secured by a mortgage on the
Oyster House Spanish Fort
real estate, is payable in 27 equal quarterly installments of
$36,667, which commenced on September 1, 2018, with a balloon payment of $1,209,995 on June 1, 2025 and bears interest at LIBOR
plus 3.25% per annum.
|
Deferred financing costs incurred
in connection with the Revolving Facility in the amount of $125,000 are being amortized over the life of the agreements on a straight-line
basis and included in interest expense. Amortization expense was $21,000 and $46,000 for the years ended September 29, 2018 and
September 30, 2017, 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 September 29, 2018.
As of September 29, 2018, the aggregate
amounts of notes payable maturities are as follows:
|
2019
|
|
|
$
|
1,251
|
|
|
2020
|
|
|
|
1,251
|
|
|
2021
|
|
|
|
1,251
|
|
|
2022
|
|
|
|
1,251
|
|
|
2023
|
|
|
|
2,076
|
|
|
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 September 29, 2018, future
minimum lease payments under noncancelable leases are as follows:
|
|
Amount
|
Fiscal Year
|
|
(In thousands)
|
|
|
|
|
|
2019
|
|
$
|
9,529
|
|
2020
|
|
|
9,041
|
|
2021
|
|
|
7,993
|
|
2022
|
|
|
7,496
|
|
2023
|
|
|
6,759
|
|
Thereafter
|
|
|
31,578
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
72,396
|
|
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
$14,649,000 and $13,547,000 for the fiscal years ended September 29, 2018 and September 30, 2017, respectively. Contingent rentals,
included in rent expense, were approximately $5,454,000 and $4,420,000 for the fiscal years ended September 29, 2018 and September
30, 2017, respectively.
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 cost approximately $11,000,000. 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 year ended September
30, 2017. The restaurant re-opened in June 2017.
Legal
Proceedings
— In the ordinary course its business, the Company is a party to various lawsuits arising from accidents at its restaurants
and workers’ 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.
The Company’s defined contribution
savings plan is currently under examination by the United States Department of Labor. The Company does not expect a material liability
to result from this examination.
The Company has options outstanding
under two stock option plans, the 2010 Stock Option Plan (the “2010 Plan”) and the 2016 Stock Option Plan (the “2016
Plan”). Options granted under both plans are exercisable at prices at least equal to the fair market value of such stock
on the dates the options were granted and expire ten years after the date of grant.
On August 10, 2018, options to
purchase 5,000 shares of common stock were granted at an exercise price of $20.36 per share and on September 4, 2018 options to
purchase 20,000 shares of common stock were granted at an exercise price of $22.30 per share. Both grants are exercisable as to
50% of the shares commencing on the date of grant and as to an additional 50% commencing on the first anniversary of the date of
grant. Such options had an aggregate grant date fair value of approximately $94,000. The Company did not grant any options during
the fiscal year 2017. 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. The assumptions used for the 2018 grant include a risk free interest rates
of 2.87% - 2.90%, volatility of 30.7%, a dividend yield of 5.6% and an expected life of 10 years.
During the year ended September 29, 2018, options to purchase 26,050 shares of common stock at a weighted average price of $18.60 per share expired
unexercised or were forfeited. During the year ended September
30, 2017, options to purchase 90,000 shares of common stock at an exercise price of $32.15 per share expired unexercised. No options
were granted during the year ended September 30, 2017. The following table summarizes stock option activity under all plans:
|
|
2018
|
|
2017
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
|
421,800
|
|
|
$
|
17.86
|
|
|
5.2 Years
|
|
|
|
|
|
|
518,608
|
|
|
$
|
20.29
|
|
|
|
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
25,000
|
|
|
$
|
21.91
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(42,000
|
)
|
|
$
|
14.39
|
|
|
|
|
|
|
|
|
|
(6,808
|
)
|
|
$
|
17.15
|
|
|
|
|
|
Canceled or expired
|
|
|
(26,050
|
)
|
|
$
|
18.60
|
|
|
|
|
|
|
|
|
|
(90,000
|
)
|
|
$
|
32.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest, end of period
|
|
|
378,750
|
|
|
$
|
18.46
|
|
|
4.8 Years
|
|
$
|
1,824,400
|
|
|
|
421,800
|
|
|
$
|
17.86
|
|
|
$
|
2,745,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
366,250
|
|
|
$
|
18.35
|
|
|
4.6 Years
|
|
$
|
1,807,300
|
|
|
|
421,800
|
|
|
$
|
17.86
|
|
|
$
|
2,745,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available for future grant
|
|
|
475,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
Compensation cost charged to operations
for the fiscal years ended September 29, 2018 and September 30, 2017 for share-based compensation programs was approximately $47,000
and $0, respectively. The compensation cost recognized is classified as a general and administrative expense in the Consolidated
Statements of Income.
As of September 29, 2018, there
was approximately $47,000 of unrecognized compensation cost related to unvested stock options, which is expected to be recognized
over a period of one year.
The following table summarizes information
about stock options outstanding as of September 29, 2018:
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise Prices
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
contractual
life (in years)
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
contractual
life (in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$12.04
|
|
|
35,000
|
|
|
$
|
12.04
|
|
|
|
0.6
|
|
|
|
35,000
|
|
|
$
|
12.04
|
|
|
|
0.6
|
|
$14.40
|
|
|
141,750
|
|
|
$
|
14.40
|
|
|
|
3.7
|
|
|
|
141,750
|
|
|
$
|
14.40
|
|
|
|
3.7
|
|
$22.50
|
|
|
177,000
|
|
|
$
|
22.50
|
|
|
|
5.7
|
|
|
|
177,000
|
|
|
$
|
22.50
|
|
|
|
5.7
|
|
$20.26 - $22.30
|
|
|
25,000
|
|
|
$
|
21.91
|
|
|
|
9.9
|
|
|
|
12,500
|
|
|
$
|
21.91
|
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
378,750
|
|
|
$
|
18.46
|
|
|
|
4.8
|
|
|
|
366,250
|
|
|
$
|
18.35
|
|
|
|
4.6
|
|
The Company also maintains a Section
162(m) Cash Bonus Plan. 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.
On December 22, 2017 the U.S. government
enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). Under Accounting Standards
Codification (“ASC”) 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation
is enacted. The TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S.
federal corporate tax rate from 35% to 21% effective January 1, 2018; (2) changing rules related to uses and limitations of net
operating loss carryforwards created in tax years beginning after December 31, 2017; (3) accelerated expensing on certain qualified
property; (4) creating a new limitation on deductible interest expense to 30% of tax adjusted EBITDA through 2021 and then 30%
of tax adjusted EBIT thereafter; (5) eliminating the corporate alternative minimum tax; and (6) further limitations on the deductibility
of executive compensation under IRC §162(m) for tax years beginning after December 31, 2017. As the reduction in the U.S.
federal corporate tax rate is administratively effective on January 1, 2018, our blended U.S. federal tax rate for the year ended
September 29, 2018 was approximately 24%.
In response to the TCJA, the U.S.
Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 118 (“SAB 118”),
which provides guidance on accounting for the tax effects of TCJA. The purpose of SAB 118 was to address any uncertainty or diversity
of view in applying ASC Topic 740, Income Taxes in the reporting period in which the TCJA was enacted. SAB 118 addresses situations
where the accounting is incomplete for certain income tax effects of the TJCA upon issuance of a company’s financial statements
for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to be recorded if it is a reasonable
estimate of the impact of the TCJA. Additionally, SAB 118 allows for a measurement period to finalize the impacts of the TCJA,
not to extend beyond one year from the date of enactment.
In connection with the TCJA, the
Company recorded an income tax benefit of $1,382,000 related to the re-measurement of our deferred tax assets and liabilities for
the reduced U.S. federal corporate tax rate of 21%. The Company’s accounting for the TCJA is complete as of September 29,
2018 with no significant differences from our provisional estimates recorded during interim periods.
The provision for income taxes
consists of the following:
|
|
Year Ended
|
|
|
September 29,
2018
|
|
September 30,
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Current provision (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
30
|
|
|
$
|
(144
|
)
|
State and local
|
|
|
320
|
|
|
|
287
|
|
|
|
|
350
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(798
|
)
|
|
|
1,391
|
|
State and local
|
|
|
(699
|
)
|
|
|
134
|
|
|
|
|
(1,497
|
)
|
|
|
1,525
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,147
|
)
|
|
$
|
1,668
|
|
The effective tax rate differs from
the U.S. income tax rate as follows:
|
|
Year Ended
|
|
|
September 29,
2018
|
|
September 30,
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Provision at Federal statutory rate (24% in 2018 and 34% in 2017)
|
|
$
|
953
|
|
|
$
|
2,185
|
|
State and local income taxes, net of tax benefits
|
|
|
-
|
|
|
|
255
|
|
Tax credits
|
|
|
(789
|
)
|
|
|
(632
|
)
|
Income attributable to non-controlling interest
|
|
|
(102
|
)
|
|
|
(244
|
)
|
Changes in tax rates
|
|
|
181
|
|
|
|
8
|
|
Impact of Federal tax reform
|
|
|
(1,382
|
)
|
|
|
-
|
|
Change in valuation allowance
|
|
|
(43
|
)
|
|
|
-
|
|
Other
|
|
|
35
|
|
|
|
96
|
|
|
|
$
|
(1,147
|
)
|
|
$
|
1,668
|
|
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:
|
|
September 29,
2018
|
|
September 30,
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
State net operating loss carryforwards
|
|
$
|
4,141
|
|
|
$
|
3,210
|
|
Operating lease deferred credits
|
|
|
513
|
|
|
|
826
|
|
Deferred compensation
|
|
|
364
|
|
|
|
580
|
|
Tax credits
|
|
|
802
|
|
|
|
-
|
|
Other
|
|
|
98
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, before valuation allowance
|
|
|
5,918
|
|
|
|
4,715
|
|
Valuation allowance
|
|
|
(311
|
)
|
|
|
(354
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
|
5,607
|
|
|
|
4,361
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(2,080
|
)
|
|
|
(2,160
|
)
|
Partnership investments
|
|
|
(329
|
)
|
|
|
(291
|
)
|
Prepaid expenses
|
|
|
(210
|
)
|
|
|
(419
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(2,619
|
)
|
|
|
(2,870
|
)
|
|
|
|
|
|
|
|
|
|
Net defereed tax asssets (liabilities)
|
|
$
|
2,988
|
|
|
$
|
1,491
|
|
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 $311,000 and $354,000 as of September 29, 2018 and September 30, 2017, respectively;
attributable to state and local net operating loss carryforwards which are not realizable on a more-likely-than-not basis. During
fiscal 2018, the Company’s valuation allowance decreased by approximately $43,000 as the Company determined that certain
state net operating losses became realizable on a more-likely-than-not basis.
As of September 29, 2018, the Company
had General Business Credit carryforwards of approximately $802,000 which expires in fiscal 2038. In addition, the Company has
New York State net operating losses of approximately $21,544,000 and New York City net operating loss carryforwards of approximately
$19,963,000 that expire through fiscal 2038.
During fiscal 2017, certain equity
compensation awards expired unexercised. As such, the Company reversed the related deferred tax asset in the amount of approximately
$389,000 as a charge to Additional Paid-in Capital as there was a sufficient pool of windfall tax benefit available.
A reconciliation of the beginning
and ending amount of unrecognized tax benefits excluding interest and penalties is as follows:
|
|
September 29,
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
152
|
|
|
$
|
367
|
|
|
|
|
|
|
|
|
|
|
Additions based on tax positions taken in current and prior years
|
|
|
125
|
|
|
|
15
|
|
Settlements
|
|
|
(167
|
)
|
|
|
(134
|
)
|
Decreases based on tax postions taken in prior years
|
|
|
-
|
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
110
|
|
|
$
|
152
|
|
The entire amount of unrecognized
tax benefits if recognized would reduce our annual effective tax rate. As of September 29, 2018, the Company accrued approximately
$66,000 of interest and penalties as a component of income tax expense. The Company expects that its unrecognized tax benefits
will further decline over the next 12 months to the anticipated resolution of various tax examinations.
The Company files tax returns in
the U.S. and various state and local jurisdictions with varying statutes of limitations. The 2015 through 2018 fiscal years remain
subject to examination by the Internal Revenue Service and most state and local tax authorities.
|
13.
|
INCOME PER SHARE OF COMMON STOCK
|
Basic earnings per share is computed
by dividing net income attributable to Ark Restaurants Corp. by the weighted-average number of common shares outstanding for the
period. Our diluted earnings per share is computed similarly to basic earnings per share, except that it reflects the effect of
common shares issuable upon exercise of stock options, using the treasury stock method in periods in which they have a dilutive
effect.
A reconciliation of the numerators
and denominators of the basic and diluted per share computations for the fiscal years ended September 29, 2018 and September 30,
2017 follows:
|
|
Net Income
Attributable to
Ark Restaurants
Corp.
(Numerator)
|
|
Weighted-Average
Number of
Shares
(Denominator)
|
|
Earnings
Per Share
Amount
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 29, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4,655
|
|
|
|
3,439
|
|
|
$
|
1.35
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
-
|
|
|
|
110
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
4,655
|
|
|
$
|
3,549
|
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4,039
|
|
|
|
3,424
|
|
|
$
|
1.18
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
-
|
|
|
|
107
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
4,039
|
|
|
|
3,531
|
|
|
$
|
1.14
|
|
|
14.
|
RELATED PARTY TRANSACTIONS
|
Employee receivables totaled approximately
$386,000 and $399,000 at September 29, 2018 and September 30, 2017, respectively. Such amounts consist of loans that are payable
on demand and bear interest at the minimum statutory rate (1.63% at September 29, 2018 and 1.29% at September 30, 2017).
Prior to joining the Company on
September 4, 2018, the Chief Financial Officer was a member of a firm that provided consulting services to the Company. Total fees
billed by this firm were $303,000 and $178,000 for the years ended September 29, 2018 and September 30, 2017, respectively. The
Company ceased utilizing the services of this firm upon hiring of the Chief Financial Officer.
On October 12, 2018, the Company
filed a registration statement on Form S-8 to register the 500,000 shares of common stock under the Company’s 2016 Plan.
On December 3, 2018, 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, 2019
to shareholders of record at the close of business on December 18, 2018.
******