NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
1.
|
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
The consolidated condensed balance sheet
as of September 30, 2017, which has been derived from audited financial statements included in the Company’s annual report
on Form 10-K for the year ended September 30, 2017 (“Form 10-K”), and the unaudited interim consolidated condensed
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements
prepared in accordance with GAAP have been condensed or omitted. All adjustments that, in the opinion of management are necessary
for a fair presentation for the periods presented, have been reflected as required by Article 10 of Regulation S-X. Such adjustments
are of a normal, recurring nature. These consolidated condensed financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Form 10-K.
USE OF ESTIMATES — The preparation
of financial statements in conformity with GAAP requires us 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. Actual results could differ from those estimates. The results
of operations for the three and nine months ended June 30, 2018 are not necessarily indicative of the results to be expected for
any other interim period or for the year ending September 29, 2018.
PRINCIPLES OF CONSOLIDATION — The
consolidated condensed interim financial statements include the accounts of Ark Restaurants Corp. and all of its wholly-owned subsidiaries,
partnerships and other entities in which it has a controlling interest, collectively herein referred to as the “Company”.
Also included in the consolidated condensed interim financial statements are certain variable interest entities (“VIEs”).
All significant intercompany balances and transactions have been eliminated in consolidation.
RECLASSIFICATIONS — Certain reclassifications
have been made to the prior year’s financial statements to enhance comparability with the current year’s presentation
of other income. As a result, comparative figures have been adjusted to conform to the current year’s presentation.
SEASONALITY — The Company has substantial
fixed costs that do not decline proportionally with sales. The first and second fiscal quarters, which include the winter months,
usually reflect lower customer traffic than in the third and fourth fiscal quarters. 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
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.
As of June 30, 2018 and September 30, 2017,
the Company had accounts receivable balances due from two hotel operators totaling 31% and 39%, respectively, of total accounts
receivable.
For the 13 and 39 week periods ended June
30, 2018, the Company made purchases from one vendor that accounted for 11% of total purchases. For the 39 week period ended July
1, 2017, the Company did not make purchases from any one vendor that accounted for 10% or greater of total purchases. For the 13
week period ended July 1, 2017, the Company made purchases from one vendor that accounted for 11% of total purchases.
SEGMENT REPORTING — As of June 30,
2018, the Company owned and operated 20 restaurants and bars, 19 fast food concepts and catering operations, exclusively in the
United States, that have similar economic characteristics, nature of products and service, class of customers and distribution
methods. The Company believes it meets the criteria for aggregating its operating segments into a single reporting segment in accordance
with applicable accounting guidance.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
— In May 2014, the Financial Accounting Standards Board (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. The Company
continues to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may,
in conjunction with the completion of the Company’s overall assessment of the new guidance, impact the Company’s current
conclusions.
In 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 Condensed Financial Statements and
related disclosures.
In January 2017, the FASB issued guidance
clarifying the definition of a business. The update provides that when substantially all the fair value of the assets acquired
is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The new rules
will be effective for the Company in the first quarter of fiscal 2019. The Company is currently evaluating the potential impact
of adoption of this guidance on its Consolidated Condensed Financial Statements.
In January 2017, the FASB issued guidance
simplifying the test for goodwill impairment. The update simplifies how an entity is required to test goodwill for impairment by
eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair
value of a reporting unit’s goodwill with the carrying amount. The new rules will be effective for the Company in the first
quarter of fiscal 2021. The Company is currently evaluating the potential impact of adoption of this guidance on its Consolidated
Condensed Financial Statements.
2.
|
VARIABLE INTEREST ENTITIES
|
The Company consolidates any variable interest
entities in which it holds a variable interest and is the primary beneficiary. Generally, a variable interest entity, or VIE, is
an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit
the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity
investment at risk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights,
(ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of
the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially
all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few
voting rights. The primary beneficiary of a VIE is generally the entity that has (a) the power to direct the activities of the
VIE that most significantly impact the VIE’s economic performance, and (b) the obligation to absorb losses or the right to
receive benefits that could potentially be significant to the VIE.
The Company has determined that it is the
primary beneficiary of three VIEs and, accordingly, consolidates the financial results of these entities. Following are the required
disclosures associated with the Company’s consolidated VIEs:
|
|
June 30,
2018
|
|
September 30,
2017
|
|
|
(in thousands)
|
Cash and cash equivalents
|
|
$
|
308
|
|
|
$
|
363
|
|
Accounts receivable
|
|
|
636
|
|
|
|
367
|
|
Inventories
|
|
|
21
|
|
|
|
22
|
|
Prepaid and refundable income taxes
|
|
|
238
|
|
|
|
226
|
|
Prepaid expenses and other current assets
|
|
|
50
|
|
|
|
63
|
|
Due from Ark Restaurants Corp. and affiliates (1)
|
|
|
133
|
|
|
|
534
|
|
Fixed assets - net
|
|
|
-
|
|
|
|
6
|
|
Other assets
|
|
|
82
|
|
|
|
71
|
|
Total assets
|
|
$
|
1,468
|
|
|
$
|
1,652
|
|
Accounts payable - trade
|
|
$
|
127
|
|
|
$
|
116
|
|
Accrued expenses and other current liabilities
|
|
|
426
|
|
|
|
260
|
|
Operating lease deferred credit
|
|
|
6
|
|
|
|
51
|
|
Total liabilities
|
|
|
559
|
|
|
|
427
|
|
Equity of variable interest entities
|
|
|
909
|
|
|
|
1,225
|
|
Total liabilities and equity
|
|
$
|
1,468
|
|
|
$
|
1,652
|
|
|
(1)
|
Amounts Due from and to Ark Restaurants Corp. and affiliates are
eliminated upon consolidation.
|
The liabilities recognized as a result
of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims
against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do
not represent additional assets that could be used to satisfy claims against the Company’s general assets.
3.
|
RECENT RESTAURANT EXPANSION
|
On November 30, 2016, the Company, through
newly formed, wholly-owned subsidiaries, acquired the assets of the Original Oyster House, Inc., a restaurant and bar located in
the City of Gulf Shores, Baldwin County, Alabama and the related real estate and an adjacent retail shopping plaza and the Original
Oyster House II, Inc., a restaurant and bar located in the City of Spanish Fort, Baldwin County, Alabama and the related real estate.
The total purchase price was for $10,750,000 plus inventory of approximately $293,000. The acquisition is accounted for as a business
combination and was financed with a bank loan from the Company’s existing lender in the amount of $8,000,000 and cash from
operations. The fair values of the assets acquired were allocated as follows (amounts in thousands):
Inventory
|
|
$
|
293
|
|
Land and buildings
|
|
|
6,650
|
|
Furniture, fixtures and equipment
|
|
|
395
|
|
Trademarks
|
|
|
1,720
|
|
Goodwill
|
|
|
1,985
|
|
|
|
$
|
11,043
|
|
The Consolidated Condensed Statements of
Operations for the 13 and 39 weeks ended June 30, 2018 include revenues and income of approximately $4,167,000 and $9,212,000 and
$617,000 and $486,000, respectively, related to the
Oyster House
properties. The unaudited pro forma financial information
set forth below is based upon the Company’s historical Consolidated Condensed Statements of Income for the 39 weeks ended
July 1, 2017 and includes the results of operations for the
Oyster House
properties 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 the
Oyster House
properties occurred on the dates indicated,
nor does it purport to represent the results of operations for future periods.
|
|
39 Weeks Ended
|
|
|
July 1,
|
|
|
2017
|
|
|
(unaudited)
|
Total revenues
|
|
$
|
116,223
|
|
Net income
|
|
$
|
2,934
|
|
Net income per share - basic
|
|
$
|
0.86
|
|
Net income per share - diluted
|
|
$
|
0.83
|
|
|
|
|
|
|
Basic
|
|
|
3,424
|
|
Diluted
|
|
|
3,532
|
|
4.
|
RECENT RESTAURANT DISPOSITIONS
|
Lease Expirations
– The Company
was advised by the landlord that it would have to vacate
The Grill at Two Trees
property at the Foxwoods Resort and Casino
in Ledyard, CT
,
which had a no rent lease. The closure of this property occurred on January 1, 2017 and did not result in
a material charge.
Other
– On November 18, 2016,
Ark Jupiter RI, LLC (“Ark Jupiter”), a wholly-owned subsidiary of the Company, entered into a ROFR Purchase and Sale
Agreement (the “ROFR”) with SCFRC-HWG, LLC, the landlord (the “Seller”), to purchase the land and building
in which the Company operates its
Rustic Inn
location in Jupiter, Florida. The Seller had entered into a Purchase and Sale
Agreement with a third party to sell the premises; however, Ark Jupiter’s lease provided the Company with a right of first
refusal to purchase the property. Ark Jupiter exercised the ROFR on October 4, 2016 and made a ten (10%) percent deposit on the
purchase price of approximately Five Million Two Hundred Thousand Dollars ($5,200,000). Concurrent with the execution of the ROFR,
Ark Jupiter entered into a Purchase and Sale Agreement with 1065 A1A, LLC to sell this same property for Eight Million Two Hundred
Fifty Thousand Dollars ($8,250,000). In connection with the sale, Ark Jupiter and 1065 A1A, LLC entered into a temporary lease
and sub-lease arrangement which expired on July 18, 2017. The Company vacated the space in June 2017. In connection with these
transactions the Company recognized a gain in the amount of $1,637,000 during the 13 weeks ended December 31, 2016.
The Company transferred its lease and the
related assets of
Canyon Road
located in New York, NY to a former employee. In connection with this transfer, the Company
recognized an impairment loss included in depreciation and amortization expense in the amount of $75,000 for the 13 weeks ended
December 31, 2016.
5.
|
INVESTMENT IN NEW MEADOWLANDS RACETRACK
|
On March 12, 2013, the Company made a $4,200,000
investment in the New Meadowlands Racetrack LLC (“NMR”) through its purchase of a membership interest in Meadowlands
Newmark, LLC, an existing member of NMR with a then 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 June 30, 2018, it was determined that AM VIE
is a variable interest entity. However, based on qualitative consideration of the contracts with AM VIE, the operating structure
of AM VIE, the Company’s role with AM VIE, and that the Company is not obligated to absorb expected losses of AM VIE, the
Company has concluded that it is not the primary beneficiary and not required to consolidate the operations of AM VIE.
The Company’s maximum exposure to
loss as a result of its involvement with AM VIE is limited to a receivable from AM VIE’s primary beneficiary (NMR, a related
party) which aggregated approximately $1,000 and $9,000 at June 30, 2018 and September 30, 2017, respectively, and is included
in Prepaid Expenses and Other Current Assets in the Consolidated Condensed Balance Sheets.
On April 25, 2014, the Company loaned $1,500,000
to Meadowlands Newmark, LLC. The note bears interest at 3%, compounded monthly and added to the principal, and is due in its entirety
on January 31, 2024. The note may be prepaid, in whole or in part, at any time without penalty or premium. On July 13, 2016, the
Company made an additional loan to Meadowlands Newmark, LLC in the amount of $200,000. Such amount is subject to the same terms
and conditions as the original loan as discussed above. The principal and accrued interest related to this note in the amounts
of $1,914,000 and $1,871,000 are included in Investment In and Receivable From New Meadowlands Racetrack in the Consolidated Condensed
Balance Sheets at June 30, 2018 and September 30, 2017, respectively.
In accordance with the cost method, our
initial investment is recorded at cost and we record dividend income when applicable, if dividends are declared. We review our
Investment in NMR each reporting period to determine whether a significant event or change in circumstances has occurred that may
have an adverse effect on its fair value, such as the defeat of the referendum for casino gaming in Northern New Jersey in November
2016. 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 which included estimates requiring
significant management judgment, which 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. No events or changes in circumstances have occurred during the 39 weeks ended June 30, 2018 that have
had a significant adverse effect on the fair value our Investment in NMR and therefore no impairment was deemed necessary as of
June 30, 2018.
6.
|
ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES
|
Accrued expenses and other current liabilities
consist of the following:
|
|
June 30,
2018
|
|
September 30,
2017
|
|
|
(In thousands)
|
Sales tax payable
|
|
$
|
1,053
|
|
|
$
|
813
|
|
Accrued wages and payroll related costs
|
|
|
2,512
|
|
|
|
2,475
|
|
Customer advance deposits
|
|
|
3,457
|
|
|
|
4,186
|
|
Accrued occupancy and other operating expenses
|
|
|
3,883
|
|
|
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,905
|
|
|
$
|
10,176
|
|
Long-term debt consists of the following:
|
|
June 30,
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
Promissory Note - Rustic Inn purchase
|
|
$
|
4,400
|
|
|
$
|
2,290
|
|
Promissory Note - Shuckers purchase
|
|
|
5,100
|
|
|
|
3,083
|
|
Promissory Note - Oyster House purchase
|
|
|
5,500
|
|
|
|
6,667
|
|
Credit Facility
|
|
|
6,568
|
|
|
|
6,198
|
|
|
|
|
21,568
|
|
|
|
18,238
|
|
Less: Current maturities
|
|
|
(1,251
|
)
|
|
|
(10,372
|
)
|
Less: Unamortized deferred financing
costs
|
|
|
(154
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
20,163
|
|
|
$
|
7,824
|
|
On June 1, 2018, the Company refinanced
its then existing indebtedness with its current lender, Bank Hapoalim B.M. (“BHBM”), by entering into an amended and
restated credit agreement (the “New Revolving Facility”), which expires on May 31, 2021. The New Revolving Facility
provides for total availability of the lesser of (i) $10,000,000 and (ii) $25,000,000 less the then aggregate amount of all indebtedness
and obligations to BHBM. Borrowings under the New Revolving Facility are payable upon maturity of the New Revolving Facility with
interest payable monthly at LIBOR plus 3.5%, subject to adjustment based on certain ratios. As of June 30, 2018 and September 30,
2017, borrowings of $6,568,000 and $6,198,000, respectively, were outstanding under the Revolving Facility and had a weighted average
interest rate of 5.4% and 4.7%, respectively.
In connection with the refinancing, the
Company also amended the principal amounts and payment terms of its outstanding term notes with BHBM as follows:
|
·
|
Promissory Note – Rustic Inn purchase
– On February 25, 2013,
the Company issued a promissory note to 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 was payable in 60 equal monthly installments
of $134,722, which commenced on March 25, 2014. In connection with the above refinancing, this note was amended
and restated and increased by $2,783,333 of credit facility borrowings. The new principal amount of $4,400,000,
which is secured by a mortgage on
The Rustic Inn
real estate, is payable in 27 equal quarterly installments of $73,334,
commencing on September 1, 2018, with a balloon payment of $2,419,990 on June 1, 2025 and bears interest at LIBOR plus 3.5%
per annum.
|
|
|
|
|
·
|
Promissory Note – Shuckers purchase
– On October 22, 2015, in connection with
the acquisition of
Shuckers
, the Company issued a promissory note to BHBM for $5,000,000. The note bore
interest at LIBOR plus 3.5% per annum, and was payable in 60 equal monthly installments of $83,333, commencing on November
22, 2015. In connection with the above refinancing, this note was amended and restated and increased by $2,433,324
of credit facility borrowings. The new principal amount of $5,100,000, which is secured by a mortgage on the
Shuckers
real estate, is payable in 27 equal quarterly installments of $85,000, commencing on September 1, 2018, with a balloon
payment of $2,804,988 on June 1, 2025 and bears interest at LIBOR plus 3.5% per annum.
|
|
|
|
|
·
|
Promissory Note – Oyster House purchase
– On November 30, 2016, in connection
with the acquisition of the
Oyster House
properties, the Company issued a promissory note under the Revolving Facility
to BHBM for $8,000,000. The note bore interest at LIBOR plus 3.5% per annum, and was payable in 60 equal monthly
installments of $133,273, commencing on January 1, 2017. In connection with the above refinancing, this note was
amended and restated and separated into two notes. The first note, in the principal amount of $3,300,000, is secured by a
mortgage on the
Oyster House Gulf Shores
real estate, is payable in 19 equal quarterly installments of $117,854, commencing
on September 1, 2018, with a balloon payment of $1,060,717 on June 1, 2023 and bears interest at LIBOR plus 3.5% per annum. The
second note, in the principal amount of $2,200,000, is secured by a mortgage on the
Oyster House Spanish Fort
real
estate, is payable in 27 equal quarterly installments of $36,667, commencing on September 1, 2018, with a balloon payment
of $1,209,995 on June 1, 2025 and bears interest at LIBOR plus 3.5% per annum.
|
Deferred financing costs incurred in connection
with the Revolving Facility in the amount of $125,000 are being amortized over the life of the agreements on a straight-line basis
and included in interest expense. Amortization expense of approximately $4,900 and $12,000 is included in interest expense for
the 13 weeks ended June 30, 2018 and July 1, 2017, respectively. Amortization expense was $13,000 and $35,000 for the 39 weeks
ended June 30, 2018 and July 1, 2017, respectively.
Borrowings under the Revolving Facility,
which include all of the above promissory notes, are secured by all tangible and intangible personal property (including accounts
receivable, inventory, equipment, general intangibles, documents, chattel paper, instruments, letter-of-credit rights, investment
property, intellectual property and deposit accounts) and fixtures of the Company.
The loan agreements provide, among other
things, that the Company meet minimum quarterly tangible net worth amounts, as defined, maintain a fixed charge coverage ratio
of not less than 1.1:1 and minimum annual net income amounts, and contain customary representations, warranties and affirmative
covenants. The agreements also contain customary negative covenants, subject to negotiated exceptions, on liens, relating to other
indebtedness, capital expenditures, liens, affiliate transactions, disposal of assets and certain changes in ownership. The Company
was in compliance with all of its financial covenants under the Revolving Facility as of June 30, 2018.
8.
|
COMMITMENTS AND CONTINGENCIES
|
Leases
— The Company
leases several restaurants, bar facilities, and administrative headquarters through its subsidiaries under terms expiring at various
dates through 2032. Most of the leases provide for the payment of base rents plus real estate taxes, insurance and other expenses
and, in certain instances, for the payment of a percentage of the restaurant’s sales in excess of stipulated amounts at such
facility and in one instance based on profits.
On January 12, 2016, the Company entered
into an Amended and Restated Lease for its
Sequoia
property in Washington D.C. extending the lease for 15 years through
November 30, 2032 with one additional five-year option. Annual rent under the new lease is approximately $1,200,000 increasing
annually through expiration. Under the terms of the agreement, the property was closed January 1, 2017 for renovation and reconcepting,
which cost approximately $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 13 weeks ended December
31, 2016. The restaurant re-opened in June 2017.
Legal
Proceedings
—
In the ordinary course of its business, the Company is a party
to various lawsuits arising from accidents at its restaurants and worker’s compensation claims, which are generally handled
by the Company’s insurance carriers. The employment by the Company of management personnel, waiters, waitresses and kitchen
staff at a number of different restaurants has resulted, from time to time, in litigation alleging violation by the Company of
employment discrimination laws. Management believes, based in part on the advice of counsel, that the ultimate resolution of these
matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or
cash flows.
The Company has options outstanding under
two stock option plans, the 2004 Stock Option Plan (the “2004 Plan”) and the 2010 Stock Option Plan (the “2010
Plan”), which was approved by shareholders in the second quarter of 2010. Effective with this approval, the Company terminated
the 2004 Plan. This action terminated the 400 authorized but unissued options under the 2004 Plan, but it did not affect any of
the options previously issued under the 2004 Plan. Options granted under the 2004 Plan are exercisable at prices at least equal
to the fair market value of such stock on the dates the options were granted. The options expire ten years after the date of grant.
Options granted under the 2010 Plan are exercisable at prices at least equal to the fair market value of such stock on the dates
the options were granted. The options expire ten years after the date of grant.
On April 5, 2016, the
shareholders of the Company approved the 2016 Stock Option Plan and the Section 162(m) Cash Bonus Plan. Under the 2016 Stock Option
Plan, 500,000 options were authorized for future grant and are exercisable at prices at least equal to the fair market value of
such stock on the dates the options were granted. The options expire ten years after the date of grant. Under the Section 162(m)
Cash Bonus Plan, compensation paid in excess of $1,000,000 to any employee who is the chief executive officer, or one of the three
highest paid executive officers on the last day of that tax year (other than the chief executive officer or the chief financial
officer) will meet certain “performance-based” requirements of Section 162(m) and the related IRS regulations in order
for it to be tax deductible.
During the quarter ended December 31, 2016,
options to purchase 90,000 shares of common stock at an exercise price of $32.15 per share expired unexercised.
No options or performance-based awards
were granted during the 39 week period ended June 30, 2018.
A summary of stock option activity is presented
below:
|
|
2018
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding, beginning of period
|
|
|
421,800
|
|
|
$
|
17.86
|
|
|
|
5.2
Years
|
|
|
|
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(42,000
|
)
|
|
$
|
14.39
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest,
end of period
|
|
|
379,800
|
|
|
$
|
18.25
|
|
|
|
4.7
Years
|
|
|
$
|
2,542,642
|
|
Exercisable, end of period
|
|
|
379,800
|
|
|
$
|
18.25
|
|
|
|
4.7
Years
|
|
|
$
|
2,542,642
|
|
No compensation costs
are included in the Consolidated Condensed Statements of Operations as all has been previously recognized
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 jurisdictions 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.
On December 22, 2017, the Tax Cuts and
Jobs Acts (“TCJA”) 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. Under ASC 740, the effects of changes in tax rates and laws are recognized
in the period in which the new legislation is enacted. As such, for the 39 weeks ended June 30, 2018, the Company revised its estimated
annual effective rate to reflect the change in the federal statutory rate from 34% to 21%. The rate change is administratively
effective at the beginning of our fiscal year, using a blended rate for the annual period. As a result, the blended statutory tax
rate for the year ending September 29, 2018 is estimated to be 24%.
The SEC issued SAB 118, which provides
guidance on accounting for the tax effects of TCJA. SAB 118 provides a measurement period that should not extend beyond one year
from the TCJA enactment date for companies to complete the accounting under ASC 740. To the extent that a company’s accounting
for certain income tax effects of the TCJA is incomplete but is able to determine a reasonable estimate, it must record a provisional
estimate in the financial statements.
Pursuant to SAB 118, the Company recorded
a provisional increase to its deferred tax assets and liabilities to reflect the new corporate tax rate. As a result, income tax
expense reported for the 39 weeks ended June 30, 2018 was adjusted to reflect the effects of the change in the tax law and resulted
in a discrete income tax benefit of approximately $1.2 million. The Company’s accounting for the TCJA was incomplete as of
the period ended December 30, 2017 and remains incomplete as of June 30, 2018. While we were able to make a reasonable estimate
of the impact of the reduction in the corporate tax rate, it may be affected by other analyses related to the TCJA.
The income tax provisions for the 39 week
periods ended June 30, 2018 and July 1, 2017 reflect effective tax rates of approximately (19.9)% and 28.0%, respectively. The
Company expects its effective tax rate for its current fiscal year to be significantly lower than the statutory rate principally
due to the discrete income tax benefit recorded in connection with the TCJA. 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 jurisdictions 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 June 30, 2018, the treasury stock impact of options to purchase 35,000, 154,300 and 190,500 shares of common stock
at exercise prices of $12.04, $14.40 and $22.50 per share, respectively, were included in diluted earnings per share.
For the 13 and 39 week
periods ended July 1, 2017, the treasury stock impact of options to purchase 66,000, 158,800 and 199,500 shares of common stock
at exercise prices of $12.04, $14.40 and $22.50 per share, respectively, were included in diluted earnings per share.
On June 12, 2018, the
Board of Directors declared quarterly dividends of $0.25 per share on the Company’s common stock to be paid on July 6, 2018 to
shareholders of record at the close of business on June 22, 2018. 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.
On July 29, 2018, the Company’s President
and Chief Financial Officer, Robert J. Stewart, passed away at the age of 61. The Company has begun the process of hiring a replacement
and expects the position to be filled prior to year-end.