ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
As of September 30, 2017,
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 $16,072,000 at September 30, 2017 primarily 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 December 31, 2018. In addition, the Company is in the process of increasing the
amounts available under its existing credit facility and refinancing outstanding borrowings over longer repayment periods. Such
refinancing is expected to be completed in 2018.
Accounting Period
—
The Company’s fiscal year ends on the Saturday nearest September 30. The fiscal years ended September 30, 2017 and October
1, 2016 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 30, 2017 the
Company had accounts receivable balances due from two hotel operators totaling 39% of total accounts receivable. As of October
1, 2016, the Company had accounts receivable balances due from two hotel operators totaling 51% of total accounts receivable.
For the year ended September
30, 2017 the Company made purchases from one vendor that accounted for 10% of total purchases. For the year ended October 1, 2016,
the Company did not make purchases from any one vendor that accounted for 10% or greater of total purchases.
Inventories
—
Inventories are stated at the lower of cost (first-in, first-out) or market, and consist of food and beverages, merchandise for
sale and other supplies.
Fixed Assets
—
Fixed assets are stated at cost less accumulated depreciation and amortization. Depreciation is determined using the straight-line
method over the estimated useful lives of the assets. Estimated lives range from
three
to
seven
years
for furniture, fixtures and equipment and up to
40
years for buildings and related improvements.
Amortization of improvements to leased properties is computed using the straight-line method based upon the initial term of the
applicable lease or the estimated useful life of the improvements, whichever is less, and ranges from 5 to 30 years. For leases
with renewal periods at the Company’s option, if failure to exercise a renewal option imposes an economic penalty to the
Company, management may determine at the inception of the lease that renewal is reasonably assured and include the renewal option
period in the determination of appropriate estimated useful lives. Routine expenditures for repairs and maintenance are charged
to expense when incurred. Major replacements and improvements are capitalized. Upon retirement or disposition of fixed assets,
the cost and related accumulated depreciation are removed from the Consolidated Balance Sheets and any resulting gain or loss
is recognized in the Consolidated Statements of Income.
The Company includes in construction
in progress improvements to restaurants that are under construction or are undergoing substantial improvements. Once the projects
have been completed, the Company begins depreciating and amortizing the assets. Start-up costs incurred during the construction
period of restaurants, including rental of premises, training and payroll, are expensed as incurred.
Intangible Assets
—
Intangible assets consist principally of purchased leasehold rights, operating rights and covenants not to compete. Costs associated
with acquiring leases and subleases, principally purchased leasehold rights, and operating rights have been capitalized and are
being amortized on the straight-line method based upon the initial terms of the applicable lease agreements. Covenants not to
compete arising from restaurant acquisitions are amortized over the contractual period, typically five years.
Long-lived Assets
—
Long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
In the evaluation of the fair value and future benefits of long-lived assets, the Company performs an analysis of the anticipated
undiscounted future net cash flows of the related long-lived assets. If the carrying value of the related asset exceeds the undiscounted
cash flows, the carrying value is reduced to its fair value. Various factors including estimated future sales growth and estimated
profit margins are included in this analysis. See Notes 4 and 10 for information regarding impairment charges for the year ended
September 30, 2017. No impairment charges were necessary for the year ended October 1, 2016.
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 30,
2017 and October 1, 2016, the Company performed qualitative assessments of factors to determine whether further impairment testing
is required. Based on the results of the work performed, the Company has concluded that no impairment loss was warranted at September
30, 2017 and October 1, 2016. Qualitative factors considered in this assessment include industry and market considerations, overall
financial performance and other relevant events, management expertise and stability at key positions. Additional impairment analyses
at future dates may be performed to determine if indicators of impairment are present, and if so, such amount will be determined
and the associated charge will be recorded to the Consolidated Statements of Income.
Investments
– Each reporting period, the Company reviews its investments in equity and debt securities, except for those classified
as trading, to determine whether a significant event or change in circumstances has occurred that may have an adverse effect on
the fair value of such investment. When such events or changes occur, the Company evaluates the fair value compared to cost basis
in the investment. For investments in non-publicly traded companies, management’s assessment of fair value is based on valuation
methodologies including discounted cash flows, estimates of sales proceeds, and appraisals, as appropriate. The Company considers
the assumptions that it believes hypothetical marketplace participants would use in evaluating estimated future cash flows when
employing the discounted cash flow or estimates of sales proceeds valuation methodologies.
In the event the fair value
of an investment declines below the Company’s cost basis, management is required to determine if the decline in fair value
is other than temporary. If management determines the decline is other than temporary, an impairment charge is recorded. Management’s
assessment as to the nature of a decline in fair value is based on, among other things, the length of time and the extent to which
the market value has been less than the cost basis; the financial condition and near-term prospects of the issuer; and the Company’s
intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Leases
—
The Company recognizes rent expense on a straight-line basis over the expected lease term, including option periods as described
below. Within the provisions of certain leases there are escalations in payments over the base lease term, as well as renewal
periods. The effects of the escalations have been reflected in rent expense on a straight-line basis over the expected lease term,
which includes option periods when it is deemed to be reasonably assured that the Company would incur an economic penalty for
not exercising the option. Tenant allowances are included in the straight-line calculations and are being deferred over the lease
term and reflected as a reduction in rent expense. Percentage rent expense is generally based upon sales levels and is expensed
as incurred. Certain leases include both base rent and percentage rent. The Company records rent expense on these leases based
upon reasonably assured sales levels. The consolidated financial statements reflect the same lease terms for amortizing leasehold
improvements as were used in calculating straight-line rent expense for each restaurant. The judgments of the Company may produce
materially different amounts of amortization and rent expense than would be reported if different lease terms were used.
Reclassification
—
Certain reclassifications have been made to the prior year’s financial statements to enhance comparability with the current
year’s presentation of prepaid and refundable income taxes, as well as other income. As a result, comparative figures have
been adjusted to conform to the current year’s presentation.
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 30, 2017 and October 1, 2016, the total liability for gift cards in the amounts of $158,106 and $161,487,
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 30, 2017 and October
1, 2016, 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
—
The Company
measures stock-based compensation cost at the grant date based on
the fair value of the award and recognizes it as expense over the applicable vesting period using the straight-line method. Upon
exercise of options, excess income tax benefits related to share-based compensation expense that must be recognized directly in
equity are considered financing rather than operating cash flow activities. The
Company
did not grant any options during the fiscal years 2017 and 2016. The Company issues new shares upon the exercise of employee stock
options.
The fair value of each of
the Company’s stock options is estimated on the date of grant using a Black-Scholes option-pricing model that uses assumptions
that relate to the expected volatility of the Company’s common stock, the expected dividend yield of the Company’s
stock, the expected life of the options and the risk free interest rate.
Recently Adopted Accounting
Standards
—
In June 2014, the Financial Accounting Standards Board (the “FASB”)
issued guidance which clarifies the recognition of stock-based compensation over the required service period, if it is probable
that the performance condition will be achieved. This guidance was effective for the Company’s fiscal year ended September
30, 2017 and did not have an impact on the Company’s consolidated financial condition or results of operations.
In January 2015, the FASB
issued guidance simplifying the income statement presentation by eliminating the concept of extraordinary items. Extraordinary
items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating
the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary
items from consideration. The amendments were effective for the Company’s fiscal year ended September 30, 2017 and did not
have an impact on the Company’s consolidated financial condition or results of operations.
In February 2015, the FASB
amended the consolidation standards for reporting entities that are required to evaluate whether they should consolidate certain
legal entities. Under the new guidance, all legal entities are subject to reevaluation under the revised consolidation model.
Specifically, the guidance (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable
interest entities (VIEs) or voting interest entities; (ii) eliminates the presumption that a general partner should consolidate
a limited partnership; (iii) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly
those that have fee arrangements and related party relationships; and (iv) provides a scope exception from consolidation guidance
for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements
that are similar to those in Rule 2a-7 of the Investment Company Act for registered money market funds. The amendments were effective
for the Company’s fiscal year ended September 30, 2017 and did not have an impact on the Company’s consolidated financial
condition or results of operations.
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 impact 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.
In July 2015, the FASB issued
ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. The guidance requires an entity to measure
inventory at the lower of cost or net realizable value, which is the estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation, rather than the lower of cost or market in the
previous guidance. This amendment applies to inventory that is measured using first-in, first-out (FIFO). This amendment is effective
for the Company in the first quarter of fiscal 2018. A reporting entity should apply the amendments prospectively with earlier
application permitted as of the beginning of an interim or annual reporting period. The Company does not expect the adoption of
this guidance to have a material impact on the Company’s consolidated financial condition or results of operations.
In January 2016, FASB issued
ASU No. 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
.
The guidance will require equity investments in unconsolidated entities (other than those accounted for using the equity method
of accounting) to be measured at fair value with
changes in fair value recognized
in net income. The amendments in this update will also simplify the impairment assessment of equity investments without readily
determinable fair values by requiring a qualitative assessment to identify impairment, eliminate the requirement for public business
entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for
financial instruments measured at amortized cost on the balance sheet and require these entities to use the exit price notion
when measuring fair value of financial instruments for disclosure purposes. This guidance also changes the presentation and disclosure
requirements for financial instruments as well as clarifying the guidance related to valuation allowance assessments when recognizing
deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The amendments in this guidance are
effective for 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 March 2016, the FASB issued
ASU No. 2016-09,
Compensation – Stock Compensation – Improvements to Employee Share-Based Payment Accounting
.
This ASU is intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification
of awards as either equity or liabilities and classification on the statement of cash flows. The amendments in this update are
effective for financial statements issued for annual and interim periods beginning after December 15, 2016, which will require
us to adopt these provisions in the first quarter of fiscal 2018. The Company does not expect the adoption of this this guidance
to have a material impact on its consolidated financial statements.
In August 2016, FASB issued
ASU No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments
. This 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 October 2016, the FASB
issued ASU No. 2016-17,
Consolidation: Interests Held through Related Parties That Are Under Common Control
. The amendments
in this guidance change how a reporting entity that is the single decision maker of a variable interest entity should treat indirect
interests in the entity held through related parties that are under common control with the reporting entity when determining
whether it is the primary beneficiary of that variable interest entity. The amendments in this update are effective for financial
statements issued for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions
in the first quarter of fiscal 2018. The Company does not expect the adoption of this guidance to have a material impact on its
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. The Company is
currently evaluating the potential impact adoption of this guidance on its 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.
2.
|
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
|
The Company consolidates any
variable interest entities in which it holds a variable interest and is the primary beneficiary. Generally, a variable interest
entity, or VIE, is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not
sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the
holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting
or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected
residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests
and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately
few voting rights. The primary beneficiary of a VIE is generally the entity that has (a) the power to direct the activities of
the VIE that most significantly impact the VIE’s economic performance, and (b) the obligation to absorb losses or the right
to receive benefits that could potentially be significant to the VIE.
The Company has determined
that it is the primary beneficiary of three VIEs and, accordingly, consolidates the financial results of these entities. Following
are the required disclosures associated with the Company’s consolidated VIEs:
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
363
|
|
|
$
|
889
|
|
Accounts receivable
|
|
|
716
|
|
|
|
429
|
|
Inventories
|
|
|
22
|
|
|
|
23
|
|
Prepaid and refundable income taxes
|
|
|
226
|
|
|
|
178
|
|
Prepaid expenses and other current assets
|
|
|
63
|
|
|
|
50
|
|
Due from Ark Restaurants Corp. and affiliates
(1)
|
|
|
185
|
|
|
|
—
|
|
Fixed assets - net
|
|
|
6
|
|
|
|
22
|
|
Other assets
|
|
|
71
|
|
|
|
71
|
|
Total assets
|
|
$
|
1,652
|
|
|
$
|
1,662
|
|
|
|
|
|
|
|
|
|
|
Accounts payable - trade
|
|
$
|
116
|
|
|
$
|
114
|
|
Accrued expenses and other current liabilities
|
|
|
260
|
|
|
|
238
|
|
Due to Ark Restaurants Corp. and affiliates
(1)
|
|
|
—
|
|
|
|
173
|
|
Operating lease
deferred credit
|
|
|
51
|
|
|
|
73
|
|
Total liabilities
|
|
|
427
|
|
|
|
598
|
|
Equity of variable
interest entities
|
|
|
1,225
|
|
|
|
1,064
|
|
Total liabilities and equity
|
|
$
|
1,652
|
|
|
$
|
1,662
|
|
|
(1)
|
Amounts
due from Ark Restaurants Corp.
and affiliates are eliminated
upon consolidation.
|
The liabilities recognized
as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they
represent claims against the specific assets of the consolidated VIEs.
Conversely, assets recognized
as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against the Company’s
general assets.
3.
|
RECENT RESTAURANT EXPANSION
|
On October 22, 2015, the Company,
through its wholly-owned subsidiaries, Ark Shuckers, LLC and Ark Shuckers Real Estate, LLC, acquired the assets of
Shuckers
Inc
. (“
Shuckers
”), a restaurant and bar located at the Island Beach Resort in Jensen Beach, FL, and six
condominium units (four of which house the restaurant and bar operations). In addition, Ark Island Beach Resort LLC, a wholly-owned
subsidiary of the Company, acquired Island Beach Resort Inc., a management company that administers a rental pool of certain condominium
units under lease. The total purchase price was $5,717,000. The acquisition is accounted for as a business combination and was
financed with a bank loan in the amount of $5,000,000 and cash from operations. The fair values of the assets acquired were allocated
as follows:
Inventory
|
|
$
|
67,000
|
|
Commercial
condominium units
|
|
|
3,584,800
|
|
Residential
condominium units
|
|
|
263,000
|
|
Furniture,
fixtures and equipment
|
|
|
240,000
|
|
Trademarks
|
|
|
390,000
|
|
Customer list
|
|
|
90,000
|
|
Goodwill
|
|
|
1,082,200
|
|
|
|
|
|
|
|
|
$
|
5,717,000
|
|
The Consolidated Statement
of Income for the year ended October 1, 2016 includes revenues and operating income of approximately $4,763,000 and $523,000,
respectively, related to
Shuckers
. Transaction costs incurred in the amount of approximately $170,000 are included in general
and administrative expenses in the Consolidated Statement of Income for the year ended October 1, 2016. The Company expects the
Goodwill and indefinite life Trademarks to be deductible for tax purposes.
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 income of approximately $5,322,000 and $11,804,000 and $684,000
and $1,243,000, respectively, related to the
Shuckers
and
Oyster House
properties. The years ended September 30,
2017 and October 1, 2016 include revenues and income (loss) of approximately $4,409,000 and ($2,759,000) and $10,078,000 and $1,156,000,
respectively, related to
Sequoia
which was closed from January 4, 2017 through June 23, 2017. The unaudited pro forma financial
information set forth below is based upon the Company’s historical Consolidated Statements of Income for the years ended
September 30, 2017 and October 1, 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.
|
|
Year Ended
|
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
155,690
|
|
|
$
|
164,402
|
|
Net income
|
|
$
|
4,246
|
|
|
$
|
6,643
|
|
Net income per share - basic
|
|
$
|
1.24
|
|
|
$
|
1.94
|
|
Net income per share - diluted
|
|
$
|
1.20
|
|
|
$
|
1.89
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,424
|
|
|
|
3,418
|
|
Diluted
|
|
|
3,531
|
|
|
|
3,507
|
|
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 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 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
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. At October 1, 2016, it was determined that AM VIE
is a variable interest entity. However, based on qualitative consideration of the contracts with AM VIE, the operating structure
of AM VIE, the Company’s role with AM VIE, and that the Company is not obligated to absorb any expected losses of AM VIE,
the Company has concluded that it is not the primary beneficiary and not required to consolidate the operations of AM VIE.
The Company’s maximum exposure
to loss as a result of its involvement with AM VIE is limited to a receivable from AM VIE’s primary beneficiary (NMR, a related
party) which aggregated approximately $9,000 and $164,000 at September 30, 2017 and October 1, 2016, respectively, and are included
in Prepaid Expenses and Other Current Assets in the Consolidated Balance Sheets.
On April 25, 2014, the Company
loaned $1,500,000 to Meadowlands Newmark, LLC. The note bears interest at 3%, compounded monthly and added to the principal, and
is due in its entirety on January 31, 2024. The note may be prepaid, in whole or in part, at any time without penalty or premium.
On July 13, 2016, the Company made an additional loan to Meadowlands Newmark, LLC in the amount of $200,000. Such amount is subject
to the same terms and conditions as the original loan as discussed above. The principal and accrued interest related to this note
in the amounts of $1,871,144 and $1,814,659, are included in Investment In and Receivable From New Meadowlands Racetrack in the
Consolidated Balance Sheets at September 30, 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 September 30, 2017 and 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 September 30, 2017 and October 1, 2016.
Fixed assets consist of the following:
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
Land and building
|
|
$
|
17,164
|
|
|
$
|
9,002
|
|
Leasehold improvements
|
|
|
50,127
|
|
|
|
43,402
|
|
Furniture, fixtures and equipment
|
|
|
35,978
|
|
|
|
36,062
|
|
Construction in progress
|
|
|
980
|
|
|
|
482
|
|
|
|
|
104,249
|
|
|
|
88,948
|
|
Less: accumulated depreciation and amortization
|
|
|
59,034
|
|
|
|
59,402
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,215
|
|
|
$
|
29,546
|
|
Depreciation and amortization expense
related to fixed assets for the years ended September 30, 2017 and October 1, 2016 was $4,096,000 and $4,490,000, 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 30,
2017
|
|
|
October 1,
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
Purchased leasehold rights (a)
|
|
$
|
2,395
|
|
|
$
|
2,737
|
|
Noncompete agreements and other
|
|
|
253
|
|
|
|
303
|
|
|
|
|
2,648
|
|
|
|
3,040
|
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization
|
|
|
2,239
|
|
|
|
2,514
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
409
|
|
|
$
|
526
|
|
|
(a)
|
Purchased leasehold rights arose from acquiring leases and subleases of various restaurants.
|
Amortization expense related to
intangible assets for the years ended September 30, 2017 and October 1, 2016 was $42,000 and $63,000, 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 30, 2017 and October 1, 2016 are as follows:
|
|
Goodwill
|
|
Trademarks
|
|
|
(In
thousands)
|
|
|
|
Balance
as of October 3, 2015
|
|
$
|
6,813
|
|
|
$
|
1,221
|
|
Acquired
during the year
|
|
|
1,082
|
|
|
|
390
|
|
Impairment
losses
|
|
|
-
|
|
|
|
-
|
|
Balance
as of October 1, 2016
|
|
|
7,895
|
|
|
|
1,611
|
|
Acquired
during the year
|
|
|
1,985
|
|
|
|
1,720
|
|
Impairment
losses
|
|
|
-
|
|
|
|
-
|
|
Balance
as of September 30, 2017
|
|
$
|
9,880
|
|
|
$
|
3,331
|
|
|
8.
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued expenses and other current liabilities consist
of the following:
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
Sales tax payable
|
|
$
|
813
|
|
|
$
|
942
|
|
Accrued wages and payroll related costs
|
|
|
2,475
|
|
|
|
2,495
|
|
Customer advance deposits
|
|
|
4,186
|
|
|
|
4,077
|
|
Accrued occupancy and other operating expenses
|
|
|
2,702
|
|
|
|
3,041
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,176
|
|
|
$
|
10,555
|
|
Two subsidiaries of the Company
(“the Ark Subsidiaries”), which operate food courts on Federally protected Indian land, had been involved in litigation
with the state in which they operate, whereby the state attempted to collect commercial rent tax from the Ark Subsidiaries. The
Company had continued to accrue such taxes as the litigation worked its way through the courts. During July 2016, the state agreed
to the entry of consent judgments in favor of the Ark Subsidiaries holding that the state is constitutionally prohibited from taxing
rentals of Indian land. In connection with this agreement, the Company reversed the accrual of these liabilities in the amount
of $945,000 during the three months ended July 2, 2016. In addition, the Company received a refund of previously paid amounts in
the amount of $157,000 in August 2016 related to the above matter. Such amounts are included in the Consolidated Statement of Income
for the year ended October 1, 2016 as a reduction of Occupancy Expenses.
Long-term debt consists of the
following:
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
Promissory Note - Rustic Inn purchase
|
|
$
|
2,290
|
|
|
$
|
3,907
|
|
Promissory Note - Shuckers purchase
|
|
|
3,083
|
|
|
|
4,084
|
|
Promissory Note - Oyster House purchase
|
|
|
6,667
|
|
|
|
—
|
|
|
|
|
12,040
|
|
|
|
7,991
|
|
Less: Current maturities
|
|
|
(4,174
|
)
|
|
|
(2,617
|
)
|
Less: Unamortized deferred financing costs
|
|
|
(42
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
7,824
|
|
|
$
|
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, as amended, expires on October 21,
2019 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 year ended September
30, 2017, the Company borrowed $6,198,000 under the Revolving Facility to finance a portion of the renovation of its
Sequoia
property. As of September 30, 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 $46,000 and $43,000 is included in interest expense for the years
ended September 30, 2017 and October 1, 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 September 30, 2017 except for the fixed
charge coverage ratio covenant. On December 21, 2017, we were issued a waiver for this covenant as of September 30, 2017.
As of September 30, 2017, the aggregate
amounts of notes payable maturities are as follows:
|
2018
|
|
|
$
|
4,216
|
|
|
2019
|
|
|
|
3,273
|
|
|
2020
|
|
|
|
2,599
|
|
|
2021
|
|
|
|
1,682
|
|
|
2022
|
|
|
|
270
|
|
|
|
|
|
$
|
12,040
|
|
|
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 30, 2017, future
minimum lease payments under noncancelable leases are as follows:
|
|
Amount
|
|
Fiscal Year
|
|
(In thousands)
|
|
|
|
|
|
|
2018
|
|
$
|
9,720
|
|
2019
|
|
|
9,004
|
|
2020
|
|
|
8,118
|
|
2021
|
|
|
7,149
|
|
2022
|
|
|
6,649
|
|
Thereafter
|
|
|
34,439
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
75,079
|
|
In connection with certain of the
leases included in the table above, the Company obtained and delivered irrevocable letters of credit in the aggregate amount of
approximately $388,000 as security deposits under such leases.
Rent expense was approximately
$13,547,000 and $13,791,000 for the fiscal years ended September 30, 2017 and October 1, 2016, respectively. Contingent rentals,
included in rent expense, were approximately $4,420,000 and $4,382,000 for the fiscal years ended September 30, 2017 and October
1, 2016, 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 worker’s compensation claims, which are generally handled by the Company’s insurance carriers. The employment by
the Company of management personnel, waiters, waitresses and kitchen staff at a number of different restaurants has resulted in
the institution, from time to time, of litigation alleging violation by the Company of employment discrimination laws. Management
believes, based in part on the advice of counsel, that the ultimate resolution of these matters will not have a material adverse
effect on the Company’s consolidated financial position, results of operations or cash flows.
Share Repurchase Plan
—
On July 5, 2016, the Board of Directors authorized a share repurchase program authorizing management to purchase up to 500,000
shares of the Company’s common stock during the next twelve months. Any repurchase under the program will be effected in
compliance with Rule 10b-18 under the Securities Exchange Act of 1934 “Purchases of Certain Equity Securities by the Issuer
and Others”, funded using the Company’s working capital and be based on management’s evaluation of market conditions
and other factors. No repurchases were made during the years ended September 30, 2017 and October 1, 2016.
The Company has options outstanding
under two stock option plans, the 2004 Stock Option Plan (the “2004 Plan”) and the 2010 Stock Option Plan (the “2010
Plan”), which was approved by shareholders in the second quarter of 2010. Effective with this approval, the Company terminated
the 2004 Plan. This action terminated the 400 authorized but unissued options under the 2004 Plan, but it did not affect any of
the options previously issued under the 2004 Plan. Options granted under the 2004 Plan are exercisable at prices at least equal
to the fair market value of such stock on the dates the options were granted. The options expire ten years after the date of
grant. Options granted under the
2010 Plan are exercisable at prices at least equal to the fair market value of such stock on the dates the options were granted.
The options expire ten years after the date of grant.
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 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 years ended September 30, 2017 and October 1, 2016. The following table summarizes stock option activity under all plans:
|
|
2017
|
|
|
2016
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, beginning of year
|
|
|
518,608
|
|
|
$
|
20.33
|
|
|
|
5.1 Years
|
|
|
|
|
|
|
|
523,800
|
|
|
$
|
20.29
|
|
|
|
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,808
|
)
|
|
$
|
17.15
|
|
|
|
|
|
|
|
|
|
|
|
(5,192
|
)
|
|
$
|
16.26
|
|
|
|
|
|
Canceled or expired
|
|
|
(90,000
|
)
|
|
$
|
32.15
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest, end of year
|
|
|
421,800
|
|
|
$
|
17.86
|
|
|
|
5.2 Years
|
|
|
$
|
2,745,156
|
|
|
|
518,608
|
|
|
$
|
20.33
|
|
|
$
|
1,979,232
|
|
Exercisable, end of year
|
|
|
421,800
|
|
|
$
|
17.86
|
|
|
|
5.2 Years
|
|
|
$
|
2,745,156
|
|
|
|
518,608
|
|
|
$
|
20.33
|
|
|
$
|
1,979,232
|
|
Weighted average remaining contractual life
|
|
5.2 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.1 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available for future grant
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
Compensation cost charged to operations
for the fiscal years ended September 30, 2017 and October 1, 2016 for share-based compensation programs was approximately $0 and
$286,000, respectively. The compensation cost recognized is classified as a general and administrative expense in the Consolidated
Statements of Income. As of September 30, 2017, there was no unrecognized compensation cost related to unvested stock options.
The following table summarizes information
about stock options outstanding as of September 30, 2017:
|
|
Options Outstanding and Exercisable
|
|
Range of Exercise Prices
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
contractual
life (in years)
|
|
|
|
|
|
|
|
|
|
|
|
$12.04
|
|
|
66,000
|
|
|
$
|
12.04
|
|
|
|
1.6
|
|
$14.40
|
|
|
156,300
|
|
|
$
|
14.40
|
|
|
|
4.7
|
|
$22.50
|
|
|
199,500
|
|
|
$
|
22.50
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421,800
|
|
|
$
|
20.33
|
|
|
|
5.2
|
|
The provision for income taxes
consists of the following:
|
|
Year Ended
|
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
Current provision (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(144
|
)
|
|
$
|
778
|
|
State and local
|
|
|
287
|
|
|
|
192
|
|
|
|
|
143
|
|
|
|
970
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,391
|
|
|
|
915
|
|
State and local
|
|
|
134
|
|
|
|
213
|
|
|
|
|
1,525
|
|
|
|
1,128
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,668
|
|
|
$
|
2,098
|
|
The effective
tax rate differs from the U.S. income tax rate as follows:
|
|
Year Ended
|
|
|
|
September 30,
2017
|
|
|
October 1,
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
Provision at Federal statutory rate
(34% in 2017 and 2016)
|
|
$
|
2,185
|
|
|
$
|
2,580
|
|
State and
local income taxes, net of tax benefits
|
|
|
255
|
|
|
|
326
|
|
Tax credits
|
|
|
(632
|
)
|
|
|
(611
|
)
|
Income attributable to non-controlling interest
|
|
|
(244
|
)
|
|
|
(501
|
)
|
Changes in tax rates
|
|
|
8
|
|
|
|
9
|
|
Other
|
|
|
96
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,668
|
|
|
$
|
2,098
|
|
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 30,
2017
|
|
|
October 1,
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
Long-term deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
State net operating loss carryforwards
|
|
$
|
3,210
|
|
|
$
|
3,179
|
|
Operating lease deferred credits
|
|
|
826
|
|
|
|
772
|
|
Depreciation and amortization
|
|
|
(2,160
|
)
|
|
|
(256
|
)
|
Deferred compensation
|
|
|
580
|
|
|
|
986
|
|
Partnership investments
|
|
|
(291
|
)
|
|
|
(709
|
)
|
Prepaid expenses
|
|
|
(419
|
)
|
|
|
(444
|
)
|
Other
|
|
|
99
|
|
|
|
230
|
|
Total long-term deferred tax assets
|
|
|
1,845
|
|
|
|
3,758
|
|
Valuation allowance
|
|
|
(354
|
)
|
|
|
(342
|
)
|
Total net deferred tax assets
|
|
$
|
1,491
|
|
|
$
|
3,416
|
|
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
$354,000 and $342,000 as of September 30, 2017 and October 1, 2016, respectively, attributable to state and local net operating
loss carryforwards which are not realizable on a more-likely-than-not basis. During fiscal 2017, the Company’s valuation
allowance increased by approximately $12,000 as the Company determined that certain state net operating losses became unrealizable
on a more-likely-than-not basis.
As of September 30, 2017, the
Company has New York State net operating losses of approximately $20,030,000 and New York City net operating loss carryforwards
of approximately $18,455,000 that expire through fiscal 2037.
During fiscal 2017, certain
equity compensation awards expired unexercised. As such, the Company reversed the related deferred tax asset in the amount of approximately
$400,000 as a charge to Additional Paid-in Capital as there was a sufficient pool of windfall tax benefit available. During fiscal
2016, the Company recorded a credit to Additional Paid-in Capital of $11,000 related to equity compensation.
A reconciliation of the beginning
and ending amount of unrecognized tax benefits excluding interest and penalties is as follows:
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
366
|
|
|
$
|
307
|
|
|
|
|
|
|
|
|
|
|
Additions based on tax positions taken in current and prior years
|
|
|
15
|
|
|
|
105
|
|
Settlements
|
|
|
(134
|
)
|
|
|
(46
|
)
|
Decreases based on tax postions taken in prior years
|
|
|
(96
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
151
|
|
|
$
|
366
|
|
The entire amount of unrecognized
tax benefits if recognized would reduce our annual effective tax rate. As of September 30, 2017, the Company accrued approximately
$127,000 of interest and penalties. The Company does not expect its unrecognized tax benefits to change significantly over the
next 12 months. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded
through the various jurisdictions’ tax court systems.
The Company files tax returns
in the U.S. and various state and local jurisdictions with varying statutes of limitations. The 2014 through 2017 fiscal years
remain subject to examination by the Internal Revenue Service most state and local tax authorities.
|
13.
|
INCOME PER SHARE OF COMMON STOCK
|
A reconciliation of the numerators
and denominators of the basic and diluted per share computations for the fiscal years ended September 30, 2017 and October 1, 2016
follows:
|
|
Net Income Attributable to Ark Restaurants Corp.
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
|
|
(In thousands,
except per share amounts)
|
|
|
|
|
|
Year ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
4,039
|
|
|
|
3,424
|
|
|
$
|
1.18
|
|
Stock options
|
|
|
—
|
|
|
|
107
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
4,039
|
|
|
$
|
3,531
|
|
|
$
|
1.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 1, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
4,030
|
|
|
|
3,418
|
|
|
$
|
1.18
|
|
Stock options
|
|
|
—
|
|
|
|
89
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
4,030
|
|
|
|
3,507
|
|
|
$
|
1.15
|
|
For the year ended September
30, 2017, options to purchase 66,000 shares of common stock at a price of $12.04, options to purchase 156,300 shares of common
stock at a price of $14.40 and options to purchase 199,500 shares of common stock at a price of $22.50 per were included in diluted
earnings per share.
For the year ended October 1,
2016, options to purchase 66,000 shares of common stock at a price of $12.04, options to purchase 160,800 shares of common stock
at a price of $14.40 and options to purchase 201,808 shares of common stock at a price of $22.50 per were included in diluted earnings
per share. Options to purchase 90,000 shares of common stock at a price of $32.15 per share were not included in diluted earnings
per share as their impact would be anti-dilutive.
|
14.
|
RELATED PARTY TRANSACTIONS
|
Employee receivables totaled
approximately $399,000 and $453,000 at September 30, 2017 and October 1, 2016, respectively. Such amounts consist of loans that
are payable on demand and bear interest at the minimum statutory rate (1.29% at September 30, 2017 and 0.66% at October 1, 2016).
On December 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 January 3, 2018 to shareholders
of record at the close of business on December 19, 2017.
On December 12, 2017, the Company
amended its Revolving Facility to increase the total availability to be the lesser of (i) $12,000,000 and (ii) $22,000,000 less
the then aggregate amount of all indebtedness and obligations to BHBM.
On December 22, 2017, the
Tax Cuts and Jobs Acts (the “Act”) was enacted into law. The new legislation contains several key tax
provisions including the reduction of the corporate income tax rate to 21% effective January 1, 2018, as well as a
variety of other changes including limitation of the tax deductibility of interest expense, acceleration of expensing of certain
business assets and reductions in the amount of executive pay that could qualify as a tax deduction. The Company is
assessing the impact of the enacted tax law on its business and its consolidated financial statements and expects to record a
discrete tax benefit related to the remeasurement of its deferred tax assets and liabilities for the reduced federal tax
rates during the three-month period ending December 31, 2017.
******