NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
July 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 Article 10 of Regulation S-X. 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.
The Company had a working capital deficiency
of $15,230,000 at July 1, 2017 as a result of our purchase of the
Oyster House
properties in November 2016 and costs associated
with the renovation of our
Sequoia
property in Washington, DC. 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 the next 12 months.
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 for the 39-weeks ended July 2, 2016 related to the statement of income presentation of $883,000 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 39-week periods ended July 1, 2017
and July 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 July 1, 2017, the
Company made purchases from one vendor that
accounted for approximately 11% of total purchases. For the 13-week period ended July 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 July 1,
2017, 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.
NEW ACCOUNTING STANDARDS NOT YET
ADOPTED — In January 2017, the Financial Accounting Standards Board (“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:
|
|
July 1,
2017
|
|
October 1,
2016
|
|
|
(in thousands)
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
397
|
|
|
$
|
889
|
|
Accounts receivable
|
|
|
515
|
|
|
|
429
|
|
Inventories
|
|
|
22
|
|
|
|
23
|
|
Prepaid expenses and other current assets
|
|
|
258
|
|
|
|
228
|
|
Due from Ark Restaurants Corp. and affiliates (1)
|
|
|
306
|
|
|
|
-
|
|
Fixed assets - net
|
|
|
9
|
|
|
|
22
|
|
Other assets
|
|
|
71
|
|
|
|
71
|
|
Total assets
|
|
$
|
1,578
|
|
|
$
|
1,662
|
|
|
|
|
|
|
|
|
|
|
Accounts payable - trade
|
|
$
|
88
|
|
|
$
|
114
|
|
Accrued expenses and other current liabilities
|
|
|
212
|
|
|
|
238
|
|
Due to Ark Restaurants Corp. and affiliates (1)
|
|
|
-
|
|
|
|
173
|
|
Operating lease deferred credit
|
|
|
56
|
|
|
|
73
|
|
Total liabilities
|
|
|
356
|
|
|
|
598
|
|
Equity of variable interest entities
|
|
|
1,222
|
|
|
|
1,064
|
|
Total liabilities and equity
|
|
$
|
1,578
|
|
|
$
|
1,662
|
|
|
(1)
|
Amounts Due from and to 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
Income for the 13 and 39-weeks ended July 1, 2017 include revenues and income of approximately $5,569,000 and $12,015,000 and $864,000
and $1,387,000, respectively, related to the
Shuckers
and
Oyster House
properties. The 13 and 39-weeks ended July
2, 2016 include revenues and income of approximately $3,667,000 and $6,959,000 and $878,000 and $676,000, respectively, related
to
Sequoia DC
which was closed from January 1, 2017 through June 23, 2017. The unaudited pro forma financial information
set forth below is based upon the Company’s historical Consolidated Condensed Statements of Income for the 13 and 39-weeks
ended July 1, 2017 and July 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.
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
41,201
|
|
|
$
|
45,132
|
|
|
$
|
115,884
|
|
|
$
|
121,594
|
|
Net income
|
|
$
|
1,386
|
|
|
$
|
4,345
|
|
|
$
|
2,934
|
|
|
$
|
4,430
|
|
Net income per share - basic
|
|
$
|
0.40
|
|
|
$
|
1.27
|
|
|
$
|
0.86
|
|
|
$
|
1.30
|
|
Net income per share - diluted
|
|
$
|
0.39
|
|
|
$
|
1.24
|
|
|
$
|
0.83
|
|
|
$
|
1.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,424
|
|
|
|
3,418
|
|
|
|
3,424
|
|
|
|
3,418
|
|
Diluted
|
|
|
3,549
|
|
|
|
3,494
|
|
|
|
3,532
|
|
|
|
3,504
|
|
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.
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 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 entered into a temporary lease
and sub-lease arrangement which expired on July 18, 2017. The Company vacated the space in June. 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 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 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 July 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 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 $231,000 and $164,000 at July 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 $1,858,000 and $1,815,000, are included in Investment In and Receivable From New
Meadowlands Racetrack in the Consolidated Balance Sheets at July 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 July 1, 2017.
6.
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued expenses and other current liabilities
consist of the following:
|
|
July 1,
2017
|
|
October 1,
2016
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Sales tax payable
|
|
$
|
1,162
|
|
|
$
|
942
|
|
Accrued wages and payroll related costs
|
|
|
2,256
|
|
|
|
2,495
|
|
Customer advance deposits
|
|
|
3,520
|
|
|
|
4,077
|
|
Accrued occupancy and other operating expenses
|
|
|
2,919
|
|
|
|
3,041
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,857
|
|
|
$
|
10,555
|
|
Long-term debt consists of the following:
|
|
July 1,
2017
|
|
October 1,
2016
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Promissory Note - Rustic Inn purchase
|
|
$
|
2,694
|
|
|
$
|
3,907
|
|
Promissory Note - Shuckers purchase
|
|
|
3,333
|
|
|
|
4,084
|
|
Promissory Note - Oyster House purchase
|
|
|
7,067
|
|
|
|
-
|
|
|
|
|
13,094
|
|
|
|
7,991
|
|
Less: Current maturities
|
|
|
(4,040
|
)
|
|
|
(2,617
|
)
|
Less: Unamortized deferred financing costs
|
|
|
(43
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
9,011
|
|
|
$
|
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.
During the 13-weeks ended July 1, 2017,
the Company borrowed $3,897,000 under the Revolving Facility to finance a portion of the renovation of its
Sequoia DC
property.
As of July 1, 2017, such borrowings had a weighted average interest rate of 4.7%.
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 approximately $12,000 and $11,000 is included in interest expense for
the 13-weeks ended July 1, 2017 and July 2, 2016, respectively. Amortization expense of $35,000 and $32,000 is included in interest
expense for the 39-weeks ended July 1, 2017 and July 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 July 1, 2017 except for the fixed charge coverage ratio covenant. On August
11, 2017, we were issued a waiver for this covenant as of July 1, 2017.
8.
|
COMMITMENTS AND CONTINGENCIES
|
Leases
— The Company
leases several 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 cost approximately $10,000,000, of which approximately $8,500,000 has been incurred as of July 1, 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. The restaurant re-opened in
June 2017.
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 39-weeks ended July 1, 2017 and July 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 39-week period ended July 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
|
|
|
(4,308
|
)
|
|
$
|
18.74
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(90,000
|
)
|
|
$
|
32.15
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest, end of period
|
|
|
424,300
|
|
|
$
|
17.84
|
|
|
|
5.4 Years
|
|
|
$
|
2,719,000
|
|
Exercisable, end of period
|
|
|
424,300
|
|
|
$
|
17.84
|
|
|
|
5.4 Years
|
|
|
$
|
2,719,000
|
|
Compensation cost charged
to operations for each of the 13-week periods ended July 1, 2017 and July 2, 2016 was $0 and $79,000, respectively, and for the
39-week periods ended July 1, 2017 and July 2, 2016 was $0 and $286,000, respectively. The compensation cost recognized is classified
as a general and administrative expense in the Consolidated Condensed Statements of Income.
As of July 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 39-week periods ended July 1, 2017 and July 2, 2016 reflect effective tax
rates of approximately 28% and 25%, respectively. 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 PER SHARE OF COMMON STOCK
|
Net income per share is calculated on the
basis of the weighted average number of common shares outstanding during each period plus, for diluted net income per share, the
additional dilutive effect of potential common stock. Potential common stock using the treasury stock method consists of dilutive
stock options.
For the 13- and 39-week
periods ended July 1, 2017, the treasury stock impact of options to purchase 66,000, 158,800 and 199,500 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 39-week
periods ended July 2, 2016, the treasury stock impact of options to purchase 66,000 and 164,700 shares of common stock at exercise
prices of $12.04 and $14.40 per share, respectively, were included in diluted earnings per share. Options to purchase 203,000 shares
of common stock at an exercise price of $22.50 per share and options to purchase 90,000 shares of common stock at an exercise price
of $32.15 were not included in diluted earnings per share as their impact would be anti-dilutive.
On June 5, 2017, the Board
of Directors declared a quarterly dividend of $0.25 per share on the Company’s common stock to be paid on July 5, 2017 to shareholders
of record at the close of business on June 19, 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.