NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
July 2, 2016
(Unaudited)
1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The consolidated condensed balance sheet
as of October 3, 2015, which has been derived from audited financial statements included in the Form 10-K, and the unaudited interim
consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with GAAP have been condensed or omitted. All adjustments that, in the
opinion of management are necessary for a fair presentation for the periods presented, have been reflected as required by Regulation
S-X, Rule 10-01. Such adjustments are of a normal, recurring nature. These consolidated condensed financial statements should
be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report
on Form 10-K for the year ended October 3, 2015. 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 identified an immaterial
error in previously issued financial statements related to an overstatement of a rent liability in the amount of $261,000
($191,000 net of tax or $0.06 per basic and $0.05 per diluted share for the 13 and 39-weeks ended July 2, 2016). The Company
reviewed this accounting error utilizing SEC Staff Accounting Bulletin No. 99, “Materiality” (“SAB
99”) and SEC Staff Accounting Bulletin No. 108, “Effects of Prior Year Misstatements on Current Year Financial
Statements” (“SAB 108”) and determined the impact of the error to be immaterial to any prior period’s
presentation. The accompanying consolidated condensed financial statements as of July 2, 2016 reflect the correction of the
aforementioned immaterial error.
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.
SEASONALITY — The Company has substantial
fixed costs that do not decline proportionally with sales. The first and second fiscal quarters, which include the winter
months, usually reflect lower customer traffic than in the third and fourth fiscal quarters. In addition, sales in the third and
fourth fiscal quarters can be adversely affected by inclement weather due to the significant amount of outdoor seating at the
Company’s restaurants.
FAIR VALUE OF FINANCIAL INSTRUMENTS —
The carrying amount of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value due
to the immediate or short-term maturity of these financial instruments. The fair values of notes receivable and payable are determined
using current applicable rates for similar instruments as of the consolidated condensed balance sheet date and approximate the
carrying value of such debt instruments.
CASH AND CASH EQUIVALENTS — Cash and cash equivalents
include cash on hand, deposits with banks and highly liquid investments generally with original maturities of three months or
less. Outstanding checks in excess of account balances, typically vendor payments, payroll and other contractual obligations disbursed
after the last day of a reporting period are reported as a current liability in the accompanying consolidated condensed balance
sheets.
CONCENTRATIONS
OF CREDIT RISK
— Financial instruments that potentially subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents and accounts receivable. The Company reduces credit risk by placing its cash and
cash equivalents with major financial institutions with high credit ratings. At times, such amounts may exceed Federally insured
limits. Accounts receivable are primarily comprised of normal business receivables, such as credit card receivables, that are
paid off in a short period of time and amounts due from the hotel operators where the Company has a location, and are recorded
when the products or services have been delivered. The Company reviews the collectability of its receivables on an ongoing basis,
and provides for an allowance when it considers the entity unable to meet its obligation. The concentration of credit risk with
respect to accounts receivable is generally limited due to the short payment terms extended by the Company and the number of customers
comprising the Company’s customer base.
For the 13 and 39-week periods ended July
2, 2016 and June 27, 2015, 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 2,
2016, the Company owned and operated 21 restaurants and bars, 19 fast food concepts and catering operations, exclusively in the
United States, that have similar economic characteristics, nature of products and service, class of customers and distribution
methods. The Company believes it meets the criteria for aggregating its operating segments into a single reporting segment in
accordance with applicable accounting guidance.
RECENTLY ADOPTED ACCOUNTING STANDARDS —
In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, which changes the presentation of debt issuance costs
in a reporting entity’s financial statements. Under this new guidance, debt issuance costs will be presented as a direct deduction
from the related debt liability instead of an asset. This accounting change is consistent with the current presentation under
GAAP for debt discounts and it also converges the guidance under GAAP with that in the International Financial Reporting Standards.
Debt issuance costs will reduce the proceeds from debt borrowings in the statement of cash flows instead of being presented as
a separate caption in the financing section of that statement. Amortization of debt issuance costs will continue to be reported
as interest expense in the statements of income. This accounting update does not affect the current accounting guidance for the
recognition and measurement of debt issuance costs. This update is effective for public business entities for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for all entities for
financial statements that have not been previously issued. This guidance has been adopted by the Company as of October 4, 2015
and did not have a material impact on its consolidated condensed financial statements.
In September 2015, the FASB issued ASU
No. 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments.
The new guidance simplifies the accounting
for adjustments made to provisional amounts recognized in a business combination and eliminates the requirement to retrospectively
account for those adjustments. The amendments in this update are effective for annual periods, and interim periods within those
annual periods, beginning after December 15, 2015, with early adoption permitted. The new guidance has been adopted by the Company
as of October 4, 2015 and did not have a material impact on our consolidated condensed financial statements.
In November 2015, the FASB issued ASU No.
2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.
The new guidance requires that all deferred
tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The
guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016,
with early adoption permitted. The new guidance has been adopted on a prospective basis by the Company for the fiscal year ended
October 3, 2015.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
— In May 2014, the FASB issued updated accounting guidance that 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. Additionally, this guidance expands related disclosure
requirements. The pronouncement is effective for annual and interim reporting periods beginning after December 15, 2017. Early
application is not permitted. This update permits the use of either the retrospective or cumulative effect transition method.
The Company is evaluating the impact of the adoption of this guidance on its financial condition, results of operations or cash
flows as well as the expected adoption method.
In June 2014, the FASB issued guidance
which clarifies the recognition of stock-based compensation over the required service period, if it is probable that the performance
condition will be achieved. This guidance is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2015 and should be applied prospectively. The adoption of this guidance is not expected to have a significant impact
on the Company’s consolidated condensed financial condition or results of operations.
In August 2014, the FASB issued guidance
that requires management to evaluate, at each annual and interim reporting period, the company’s ability to continue as a going
concern within one year of the date the financial statements are issued and provide related disclosures. This accounting guidance
is effective for the Company on a prospective basis beginning in the first quarter of fiscal 2017 and is not expected to have
a material effect on the Consolidated Condensed Financial Statements.
In January 2015, the FASB issued guidance
simplifying the income statement presentation by eliminating the concept of extraordinary items. Extraordinary items are events
and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary
classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration.
The amendments are effective for annual reporting periods, including interim periods within those reporting periods, beginning
after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the annual reporting
period. The Company does not believe this guidance will have a material impact on its Consolidated Condensed Financial Statements.
In February 2015, the FASB amended the
consolidation standards for reporting entities that are required to evaluate whether they should consolidate certain legal entities.
Under the new guidance, all legal entities are subject to reevaluation under the revised consolidation model. Specifically, the
guidance (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities
(VIEs) or voting interest entities; (ii) eliminates the presumption that a general partner should consolidate a limited partnership;
(iii) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements
and related party relationships; and (iv) provides a scope exception from consolidation guidance for reporting entities with interests
in legal entities that are required to comply with or operate in
accordance with requirements that are similar
to those in Rule 2a-7 of the Investment Company Act for registered money market funds. The amendments are effective for annual
reporting periods, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The
Company is currently evaluating the impact of this guidance on its Consolidated Condensed Financial Statements.
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 public
entities for fiscal years beginning after December 15, 2016, including interim periods within those years. 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 its financial position 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 fiscal years beginning after December
15, 2017, including interim periods within those fiscal years. 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 ASU on its
consolidated condensed financial statements.
In February 2016, the FASB issued ASU No.
2016-02,
Leases
. This ASU is intended to improve the reporting of leasing transactions to provide users of financial statements
with more decision-useful information. This ASU will require organizations that lease assets to recognize on the balance sheet
the assets and liabilities for the rights and obligations created by those leases. The amendments in this update are effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.
The Company is currently assessing the potential impact of this ASU on its consolidated condensed financial statements.
In March 2016, the FASB issued ASU No.
2016-08,
Revenue from Contracts with Customers – Principal versus Agent Considerations
. This ASU is intended to clarify
revenue recognition accounting when a third party is involved in providing goods or services to a customer. The amendments in
this update are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim
periods within those annual periods, and early application is permitted, but no earlier than fiscal years beginning after December
16, 2016. The Company is currently assessing the impact of this ASU on its consolidated condensed financial statements.
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 periods beginning after December 15, 2016, including interim periods within
those annual periods, and early application is permitted as of the beginning of an interim or annual reporting period. The Company
is currently assessing the impact of this ASU on its consolidated condensed financial statements.
In April 2016, the FASB issued ASU No.
2016-10,
Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing.
This ASU is intended
to clarify identifying performance obligations and licensing implementation guidance. The amendments in this update are effective
for financial statements issued for annual periods beginning after December 15, 2017, and early application is permitted, but
no earlier than fiscal years beginning after December 16, 2016. The Company is currently assessing the impact of this ASU 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 2,
2016
|
|
|
October 3,
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
876
|
|
|
$
|
604
|
|
Accounts receivable
|
|
|
432
|
|
|
|
303
|
|
Inventories
|
|
|
22
|
|
|
|
24
|
|
Prepaid expenses and other current assets
|
|
|
228
|
|
|
|
216
|
|
Due from Ark Restaurants Corp. and affiliates (1)
|
|
|
24
|
|
|
|
103
|
|
Fixed assets - net
|
|
|
26
|
|
|
|
40
|
|
Other assets
|
|
|
71
|
|
|
|
71
|
|
Total assets
|
|
$
|
1,679
|
|
|
$
|
1,361
|
|
|
|
|
|
|
|
|
|
|
Accounts payable - trade
|
|
$
|
77
|
|
|
$
|
81
|
|
Accrued expenses and other current liabilities
|
|
|
326
|
|
|
|
131
|
|
Operating lease deferred credit
|
|
|
75
|
|
|
|
81
|
|
Total liabilities
|
|
|
478
|
|
|
|
293
|
|
Equity of variable interest entities
|
|
|
1,201
|
|
|
|
1,068
|
|
Total liabilities and equity
|
|
$
|
1,679
|
|
|
$
|
1,361
|
|
|
(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 above purchase price allocation resulted
in an increase (decrease) related to the trademarks, customer list and goodwill of $240,000, $(110,000) and $(130,000), respectively,
from the preliminary allocation. The resulting changes to customer list amortization were not material to any period presented.
The Consolidated Condensed Statements of
Income for the 13 and 39-weeks ended July 2, 2016 include revenues and earnings of approximately $1,286,000 and $116,000 and
$3,867,000 and $657,000, respectively, related to
Shuckers
. 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 2,
2016 and June 27, 2015 and includes the results of operations for
Shuckers
for the period prior to acquisition. The unaudited
pro forma financial information is presented for informational purposes only and may not be indicative of what actual results
of operations would have been had the acquisition of
Shuckers
occurred on the dates indicated, nor does it purport to represent
the results of operations for future periods.
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
July 2,
2016
|
|
|
June 27,
2015
|
|
|
July 2,
2016
|
|
|
June 27,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
41,233
|
|
|
$
|
41,776
|
|
|
$
|
111,856
|
|
|
$
|
109,507
|
|
Net income
|
|
$
|
3,367
|
|
|
$
|
3,396
|
|
|
$
|
3,064
|
|
|
$
|
4,293
|
|
Net income per share - basic
|
|
$
|
0.99
|
|
|
$
|
1.00
|
|
|
$
|
0.90
|
|
|
$
|
1.27
|
|
Net income per share - diluted
|
|
$
|
0.96
|
|
|
$
|
0.97
|
|
|
$
|
0.87
|
|
|
$
|
1.23
|
|
On July 18, 2014, the Company, through
a wholly-owned subsidiary, Ark Jupiter RI, LLC, entered into an agreement with Crab House, Inc., and acquired certain assets and
the related lease for a restaurant and bar located in Jupiter, Florida for approximately $250,000. In connection with this transaction,
the Company entered into an amended lease for an initial period expiring through December 31, 2015. In June 2015, the Company
exercised its option to extend the lease through December 31, 2023. The Company has additional options to extend the lease through
2033. Renovations to the property totaled approximately $750,000. The restaurant opened as
The Rustic Inn
in the last week
of January 2015.
On March 27, 2015, the Company, through
a wholly-owned subsidiary, entered into an agreement to operate a kiosk in Bryant Park, NY for the sale of food and beverages
for an initial period expiring through March 31, 2020 with an option to extend the agreement for five additional years. Renovations
totaled approximately $400,000 and the property opened in July 2015.
On July 24, 2015, the Company, through
a wholly-owned subsidiary, paid $544,000 (including a $144,000 security deposit) to assume the lease for an event space located
in New York, NY. The assumed lease expires through March 31, 2026 with an option to extend the agreement for five additional years
and provides for annual rent in the amount of approximately $300,000.
4. RECENT RESTAURANT DISPOSITIONS
Lease Expirations
– On October
31, 2014, the Company’s lease at the
Towers Deli
located at the Venetian Casino Resort in Las Vegas, NV expired.
The closure of this property did not result in a material charge.
On November 30, 2014, the Company’s
lease at the
Shake & Burger
located at the Venetian Casino Resort in Las Vegas, NV expired. The closure of this property
did not result in a material charge.
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.
5. INVESTMENT IN NEW MEADOWLANDS RACETRACK
On March 12, 2013, the Company made a $4,200,000
investment in the New Meadowlands Racetrack LLC (“NMR”) through its purchase of a membership interest in Meadowlands
Newmark, LLC, an existing member of NMR. On November 19, 2013, the Company invested an additional $464,000 in NMR through a purchase
of an additional membership interest in Meadowlands Newmark, LLC resulting in a total ownership of 11.6% of Meadowlands Newmark,
LLC, subject to dilution. In 2015, the Company invested an additional $222,000, as a result of capital calls, bringing its total
investment to $4,886,000 with no change in ownership.
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. This investment has been accounted for
based on the cost method. The Company periodically reviews its investments for impairment. If the Company determines that an other-than-temporary
impairment has occurred, it will write-down the investment to its fair value. No indication of impairment was noted as of July
2, 2016.
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 2, 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 $161,000 and $272,000 at July 2, 2016 and October 3, 2015, 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. The principal and accrued
interest related to this note totaled $1,602,609 and $1,566,997 at July 2, 2016 and October 3, 2015, respectively.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities
consist of the following:
|
|
July 2,
2016
|
|
|
October 3,
2015
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Sales tax payable
|
|
$
|
1,344
|
|
|
$
|
992
|
|
Accrued wages and payroll related costs
|
|
|
2,167
|
|
|
|
1,832
|
|
Customer advance deposits
|
|
|
3,545
|
|
|
|
3,967
|
|
Accrued occupancy and other operating expenses
|
|
|
3,091
|
|
|
|
3,541
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,147
|
|
|
$
|
10,332
|
|
7. NOTES PAYABLE - BANK
On February 25, 2013, the Company issued
a promissory note to Bank Hapoalim B.M. (the “BHBM”) for $3,000,000. The note bore interest at LIBOR plus 3.5% per
annum, and was payable in 36 equal monthly installments of $83,333, commencing on March 25, 2013. On February 24, 2014, in connection
with the acquisition of
The Rustic Inn
, the Company borrowed an additional $6,000,000 from BHBM under the same terms and
conditions as the original loan which was consolidated with the remaining principal balance from the original borrowing at that
date. The new loan is payable in 60 equal monthly installments of $134,722, which commenced on March 25, 2014. As of July 2, 2016,
the outstanding balance of this note payable was approximately $4,311,000.
On October 22, 2015, in connection with
the acquisition of
Shuckers
, the Company issued a promissory note to BHBM for $5,000,000. The note bears interest at LIBOR
plus 3.5% per annum, and is payable in 60 equal monthly installments of $83,333, commencing on November 22, 2015. As of July 2,
2016, the outstanding balance of this note payable was approximately $4,333,000.
On October 22, 2015, in connection with
the
Shuckers
transaction, the Company also entered into a credit agreement (the “Revolving Facility”) with BHBM
which expires on October 21, 2017 and provides for total availability of the lesser of (i) $10,000,000 and (ii) $20,000,000 less
the then aggregate amount of all indebtedness and obligations to BHBM. Borrowings under the Revolving Facility will be evidenced
by a promissory note (the “Revolving Note”) in favor of BHBM and will be payable over five years with interest at an
annual rate equal to LIBOR plus 3.5% per year. As of July 2, 2016, no additional amounts were outstanding under the Revolving Facility.
Deferred financing costs incurred in connection
with the Revolving Facility in the amount of $130,585 are being amortized over the life of the agreements on a straight line basis.
Amortization expense of $11,395 and $31,680 for the 13 and 39-weeks ended July 2, 2016 is included in interest expense.
Borrowings under the Revolving
Facility, which include both of the above promissory notes, are secured by all tangible and intangible personal property
(including accounts receivable, inventory, equipment, general intangibles, documents, chattel paper, instruments, letter-of-credit
rights, investment property, intellectual property and deposit accounts) and fixtures of the Company.
The loan agreements provide, among other
things, that the Company meet minimum quarterly tangible net worth amounts, as defined, maintain a fixed charge coverage ratio
of not less than 1.1:1 and minimum annual net income amounts, and contain customary representations, warranties and affirmative
covenants. The agreements also contain customary negative covenants, subject to negotiated exceptions, on liens, relating to other
indebtedness, capital expenditures, liens, affiliate transactions, disposal of assets and certain changes in ownership. The Company
was in compliance with all debt covenants as of July 2, 2016.
8. COMMITMENTS AND CONTINGENCIES
Leases
— The Company
leases its restaurants, bar facilities, and administrative headquarters through its subsidiaries under terms expiring at various
dates through 2032. Most of the leases provide for the payment of base rents plus real estate taxes, insurance and other expenses
and, in certain instances, for the payment of a percentage of the restaurant’s sales in excess of stipulated amounts at such
facility and in one instance based on profits.
On January 12, 2016, the
Company entered into an Amended and Restated Lease for its
Sequoia
property in Washington D.C. extending the lease for 15
years through November 30, 2032 with one additional five-year option. Annual rent under the new lease is approximately $1,200,000
increasing annually through expiration. Under the terms of the agreement, the property will be closed from January 1, 2017 through
March 31, 2017 for renovation and reconcepting. The Company is currently developing the concept and design relating to the renovated
space and estimates the total cost to be approximately $4,000,000 to $5,000,000.
Legal
Proceedings
— In the ordinary course of its business, the Company is a party to various lawsuits arising from accidents at its
restaurants and worker’s compensation claims, which are generally handled by the Company’s insurance carriers. The
employment by the Company of management personnel, waiters, waitresses and kitchen staff at a number of different restaurants
has resulted, from time to time, in litigation alleging violation by the Company of employment discrimination laws. Management
believes, based in part on the advice of counsel, that the ultimate resolution of these matters will not have a material adverse
effect on the Company’s consolidated financial position, results of operations or cash flows.
9. STOCK OPTIONS
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.
Under the 2010 Plan, 500,000 options were
authorized for future 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.
No options were granted during the 39-week
period ended July 2, 2016.
A summary of stock option activity is presented
below:
|
|
2016
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
|
523,800
|
|
|
$
|
20.29
|
|
|
|
6.1 Years
|
|
|
|
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(100
|
)
|
|
$
|
14.40
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest, end of period
|
|
|
523,700
|
|
|
$
|
20.29
|
|
|
|
5.4 Years
|
|
|
$
|
2,163,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
422,200
|
|
|
$
|
19.76
|
|
|
|
4.8 Years
|
|
|
$
|
2,130,734
|
|
Compensation cost charged to operations
for the 13-week periods ended July 2, 2016 and June 27, 2015 was $79,000 and $105,000, respectively and for the 39-week periods
ended July 2, 2016 and June 27, 2015 was $286,000 and $313,000, respectively. The compensation cost recognized is classified as
a general and administrative expense in the Consolidated Condensed Statements of Income.
As of July 2, 2016, there
was no unrecognized compensation cost related to unvested stock options.
10. INCOME TAXES
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 provision for the 39-week periods ended July 2, 2016 and June 27, 2015 reflects effective tax rates of approximately
25% and 23%, respectively. The Company expects its effective tax rate for its current fiscal year to be significantly
lower than the statutory rate as a result of the generation of FICA tax credits and operating income attributable to the non-controlling
interests of the VIEs that is not taxable to the Company. The final annual tax rate cannot be determined until the end of the fiscal
year; therefore, the actual tax rate could differ from current estimates.
The Company’s overall effective tax
rate in the future will be affected by factors such as the utilization of state and local net operating loss carryforwards, the
generation of FICA tax credits and the mix of earnings by state taxing jurisdiction as Nevada does not impose a state income
tax, as compared to the other major state and local jurisdictions in which the Company has operations.
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 2, 2016, options to purchase 66,000 shares of common stock at an exercise price of $12.04 per share and options
to purchase 164,700 shares of common stock at an exercise price of $14.40 per share 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.
For the 13 and 39-week
periods ended June 27, 2015, options to purchase 74,000 shares of common stock at an exercise price of $12.04 per share, options
to purchase 169,800 shares of common stock at an exercise price of $14.40 per share and options to purchase 205,500 shares of common
stock at an exercise price of $22.50 per share were included in diluted earnings per share. Options to purchase 90,000 shares of
common stock at an exercise price of $32.15 were not included in diluted earnings per share as their impact would be anti-dilutive.
12. DIVIDENDS
On June 2, 2016, the Board
of Directors declared a quarterly dividend of $0.25 per share on the Company’s common stock to be paid on July 1, 2016 to shareholders
of record at the close of business on June 16, 2016. The Company intends to continue to pay such quarterly cash dividends for the
foreseeable future, however, the payment of future dividends is at the discretion of the Company’s Board of Directors and
is based on future earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation and other relevant
factors.
13. SUBSEQUENT EVENTS
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 “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.
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 in Note 5.
Two subsidiaries of the
Company (“the Ark Subsidiaries”), which operate food courts on Federally protected Indian land, have been involved
in litigation with the state in which they operate, whereby the state has attempted to collect commercial rent tax from the Ark
Subsidiaries. The Company had continued to accrue such taxes as the litigation has 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 has reversed the accrual of these
liabilities in the amount of $945,205 as of July 2, 2016. Such reversal is included in the Consolidated Condensed Statements of
Income for the 13 and 39-weeks ended July 2, 2016 as a reduction of Occupancy Expenses with corresponding adjustments to Net Income
Attributable to Non-controlling Interests and Tax Expense in the amounts of $336,622 and $158,840, respectively.