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| ARKR > SEC Filings for ARKR > Form 10-K on 23-Dec-2008 | All Recent SEC Filings |
23-Dec-2008
Annual Report
Accounting period
Our fiscal year ends on the Saturday nearest September 30. We report fiscal years under a 52/53-week format. This reporting method is used by many companies in the hospitality industry and is meant to improve year-to-year comparisons of operating results. Under this method, certain years will contain 53 weeks. The fiscal years ended September 29, 2007 and September 27, 2008 each included 52 weeks.
Overview
We have reclassified our consolidated statements of operations data for the prior periods presented below, in accordance with SFAS 144, as a result of the:
-- sale of two of our restaurants and the closure of three of our restaurants during the fiscal year ended September 29, 2007; and
-- closure of two of our restaurants during the fiscal year ended September 27, 2008.
The operations of these restaurants have been presented as discontinued operations for the fiscal years ended September 29, 2007 and September 27, 2008. See "Item 1 -Recent Restaurant Dispositions and Charges", "Item 7 - Recent Restaurant Dispositions" and Note 3 of Consolidated Financial Statements.
Revenues
Total revenues increased by 6.4% from fiscal 2007 to fiscal 2008. Revenues for fiscal 2008 were reduced by $3,100,000 and revenues for fiscal 2007 were reduced by $2,686,000 as a result of the sale of two facilities and the closure of five of our facilities and their reclassification to discontinued operations.
Same store sales increased 0.9%, or $1,052,000, on a Company-wide basis from fiscal 2007 to fiscal 2008. Same store sales in Las Vegas decreased by $90,000, or 0.2%, in fiscal 2008 compared to fiscal 2007. Same store sales in New York increased $1,371,000, or 4.3%, during fiscal 2008. Same store sales in Washington D.C. decreased by $169,000, or 0.9%, during fiscal 2008. Same store sales in Atlantic City decreased by $294,000 or 8.2% in fiscal 2008 compared to fiscal 2007. Same store sales in Boston increased $121,000, or 3.5%, during fiscal 2008. Same store sales in Connecticut increased $113,000, or 7.9%, during fiscal 2008.
Other operating income, which consists of the sale of merchandise at various restaurants, management fee income and door sales were $2,456,000 in fiscal 2008 and $2,145,000 in fiscal 2007.
Costs and Expenses
Food and beverage cost of sales as a percentage of total revenue was 26.2% in fiscal 2008 and 25.7% in fiscal 2007.
Payroll expenses as a percentage of total revenues was 30.6% in fiscal 2008 compared to 30.2% in fiscal 2007. Payroll expense was $38,325,000 and $35,630,000 in fiscal 2008 and 2007, respectively. In fiscal 2008, increased sales resulted in an increase in payroll expenses. We continually evaluate our payroll expenses as they relate to sales.
We typically incur significant pre-opening expenses in connection with our new restaurants that are expensed as incurred. Furthermore, it is not uncommon that such restaurants experience operating losses during the early months of operation.
In fiscal 2008, we began operating a Mexican restaurant and lounge, Yolos, at the rethemed Planet Hollywood Casino in Las Vegas, Nevada, and entered into an agreement to lease space for a yet to be named restaurant at the Museum of Arts & Design at Columbus Circle in Manhattan. The obligation to pay rent for the restaurant at the Museum of Arts & Design is not effective until the earlier to occur of the date the restaurant opens for business or Mach 1, 2009. We anticipate that:
-- investors will invest in the limited liability company that leases the space and such investors will reimburse this limited liability company for all pre-opening expenses;
-- we will be the managing member of this limited liability company and, through this limited liability company, we will manage the operations of the restaurant in exchange for a monthly management fee equal to five-percent of the gross receipts of the restaurant;
-- neither we nor any of our subsidiaries will contribute any capital to this limited liability company; and
-- none of the obligations of this limited liability company will be guaranteed by us and investors in this limited liability company will have no recourse against us or any of our assets.
However, due to the current economic climate, we cannot be certain that such investors will be available. In such a situation, we anticipate we will contribute capital for pre-opening expenses and operate this restaurant through this limited liability company as a subsidiary.
In fiscal 2007, we:
-- converted our bar, Luna Lounge, at the Resorts Atlantic City Hotel and Casino in Atlantic City, New Jersey, into a restaurant, Gallagher's Burger Bar;
-- expanded our operations at the Foxwoods Resort Casino by opening The Grill at Two Trees in the Two Trees Inn, a facility owned by the Mashantucket Pequot Tribal Nation and a part of the Foxwoods Resort Casino, in Ledyard, Connecticut;
-- began construction of Yolos; and
-- began operating the Durgin Park Restaurant and the Black Horse Tavern in Boston, Massachusetts.
We experienced $210,000 and $129,000 in pre-opening and early operating losses at our facilities in fiscal 2008 and fiscal 2007, respectively.
General and administrative expenses, as a percentage of total revenue, were 7.3% in fiscal 2008 and 7.7% in fiscal 2007.
We manage:
-- two consolidated facilities we do not own (El Rio Grande and The Food Market at the MGM Grand),
-- the Tampa and Hollywood Florida food court operations, and
Sales of El Rio Grande were $4,312,000 and $3,873,000 during fiscal 2008 and 2007, respectively. Sales of the The Food Market at the MGM Grand were $1,457,000 during the portion of fiscal 2008 in which it was open. The Food Market at the MGM Grand was not open during fiscal 2007. Sales of the Tampa and Hollywood Florida food court operations were $12,454,000 during fiscal 2008 and $12,170,000 during fiscal 2007. Sales of Lucky Seven were $2,608,000 and $2,691,000 during fiscal 2008 and 2007, respectively.
Interest expense was $57,000 in fiscal 2008 and $65,000 in fiscal 2007. Interest income was $490,000 in fiscal 2008 and $417,000 in fiscal 2007. During fiscal 2007 we began an investment program utilizing our large cash balances. Investments are made in government securities and investment quality corporate instruments.
Other income, which generally consists of purchasing service fees, equity in losses of affiliates and other income at various restaurants, was $716,000 and $798,000 for fiscal 2008 and 2007, respectively.
Income Taxes
The provision for income taxes reflects Federal income taxes calculated on a consolidated basis and state and local income taxes calculated by each New York subsidiary on a non-consolidated basis. Most of the restaurants we own or manage are owned or managed by a separate subsidiary.
For state and local income tax purposes, the losses incurred by a subsidiary may only be used to offset that subsidiary's income, with the exception of the restaurants operating in the District of Columbia. Accordingly, our overall effective tax rate has varied depending on the level of losses incurred at individual subsidiaries.
Our overall effective tax rate in the future will be affected by factors such as the level of losses incurred at our New York facilities, which cannot be consolidated for state and local tax purposes, pre-tax income earned outside of New York City and the utilization of state and local net operating loss carry forwards. Nevada has no state income tax and other states in which we operate have income tax rates substantially lower in comparison to New York. In order to utilize more effectively tax loss carry forwards at restaurants that were unprofitable, we have merged certain profitable subsidiaries with certain loss subsidiaries.
The Revenue Reconciliation Act of 1993 provides tax credits to us for FICA taxes paid on tip income of restaurant service personnel. The net benefit to us was $832,000 in fiscal 2008 and $799,000 in fiscal 2007.
Our tax return for the fiscal year ended September 30, 2006 is currently under audit by the Internal Revenue Service. We expect no material adjustments will result from this examination.
Liquidity and Capital Resources
Our primary source of capital has been cash provided by operations. We have, from time to time, also utilized equipment financing in connection with the construction of a restaurant and seller financing in connection with the acquisition of a restaurant. We utilize capital primarily to fund the cost of developing and opening new restaurants, acquiring existing restaurants owned by others and remodeling existing restaurants we own.
The net cash used in investing activities in fiscal 2008 was $6,928,000. Cash was used for the replacement of fixed assets at existing restaurants and the construction of Yolos, a Mexican restaurant, at the Planet Hollywood Resort and Casino (formerly known as the Aladdin Resort and Casino) in Las Vegas, Nevada. Cash was also used to purchase investment securities. Cash provided by investing activities was generated from the sale of discontinued operations and the sale of investment securities.
The net cash used in investing activities in fiscal 2007 was $117,000. Cash was used for the replacement of fixed assets at existing restaurants, converting our bar, Luna Lounge, at the Resorts Atlantic City Hotel and Casino in Atlantic City, New Jersey, into a restaurant, Gallagher's Burger Bar, opening The Grill at Two Trees in the Two Trees Inn, a facility owned by the Mashantucket Pequot Tribal Nation and a part of the Foxwoods Resort Casino, in Ledyard, Connecticut, purchasing the Durgin Park Restaurant and the Black Horse Tavern in Boston, Massachusetts from the previous owner for $2,000,000 in cash and a $1,000,000 five year promissory note bearing interest at a rate of 7% per year, and the construction of Yolos in Las Vegas, Nevada. Cash was also used to purchase investment securities. Cash provided by investing activities was generated from the sale of discontinued operations and the sale of investment securities.
The net cash used in financing activities in fiscal 2008 of $5,461,000 and $15,309,000 in fiscal 2007 was principally used for the payment of dividends.
We had a working capital surplus of $9,144,000 at September 27, 2008 as compared to a working capital surplus of $11,571,000 at September 29, 2007.
A quarterly cash dividend in the amount of $0.35 per share was declared on October 12, 2004. Subsequent to October 12, 2004, quarterly cash dividends in the amount of $0.35 per share were declared October 10 and December 20, 2006 and on April 12, 2007. We declared an increase in our quarterly cash dividend to $0.44 per share on May 23, 2007 and subsequent quarterly cash dividends reflecting this increased amount were declared on October 12, 2007 and January 11, April 11, July 11 and October 10, 2008. In addition, we declared a special cash dividend in the amount of $3.00 per share on December 20, 2006. Prior to this, we had not paid any cash dividends since our inception. We intend to continue to pay such quarterly cash dividend for the foreseeable future, however, the payment of future dividends is at the discretion of our Board of Directors and is based on future earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation and other relevant factors.
Restaurant Expansion
During the fiscal year ended September 27, 2008, we:
-- expanded our operations at the Foxwoods Resort Casino by opening The Food Market in the MGM Grand Casino, a facility part of the Foxwoods Resort Casino, in Ledyard, Connecticut;
-- began operating a Mexican restaurant and lounge, Yolos, at the rethemed Planet Hollywood Casino in Las Vegas, Nevada; and
-- entered into an agreement to lease space for a yet to be named restaurant at the Museum of Arts & Design at Columbus Circle in Manhattan.
The obligation to pay rent for the restaurant at the Museum of Arts & Design is not effective until the earlier to occur of the date the restaurant opens for business or Mach 1, 2009. We anticipate that:
-- investors will invest in the limited liability company that leases the space and such I investors will reimburse this limited liability company for all pre-opening expenses;
-- we will be the managing member of this limited liability company and, through this limited liability company, we will manage the operations of the restaurant in exchange for a monthly management fee equal to five-percent of the gross receipts of the restaurant;
-- neither we nor any of our subsidiaries will contribute any capital to this limited liability company; and
-- none of the obligations of this limited liability company will be guaranteed by us and investors in this limited liability company will have no recourse against us or any of our assets.
However, due to the current economic climate, we cannot be certain that such investors will be available. In such a situation, we anticipate we will contribute capital for pre-opening expenses and operate this restaurant through this limited liability company as a subsidiary.
The opening of a new restaurant is invariably accompanied by substantial pre-opening expenses and early operating losses associated with the training of personnel, excess kitchen costs, costs of supervision and other expenses during the pre-opening period and during a post-opening "shake out" period until operations can be considered to be functioning normally. The amount of such pre-opening expenses and early operating losses can generally be expected to depend upon the size and complexity of the facility being opened. We incurred $210,000 in pre-opening expenses in fiscal 2008.
Our restaurants generally do not achieve substantial increases in revenue from year to year, which we consider to be typical of the restaurant industry. To achieve significant increases in revenue or to replace revenue of restaurants that lose customer favor or which close because of lease expirations or other reasons, we would have to open additional restaurant facilities or expand existing restaurants. There can be no assurance that a restaurant will be successful after it is opened, particularly since in many instances we do not operate our new restaurants under a trade name currently used by us, thereby requiring new restaurants to establish their own identity.
Recent Restaurant Dispositions and Charges
Our bar/nightclub facility Venus, located at the Venetian Casino Resort, experienced a steady decline in sales and we felt that a new concept was needed at this location. During the first quarter of 2005, this bar/nightclub facility was closed for re-concepting and re-opened as "Vivid" on February 4, 2005. Total conversion costs were approximately $400,000. Sales at the new bar/nightclub facility subsequently failed to reach a level sufficient to achieve the results we required and we have identified a buyer for this facility. As of December 31, 2005, we classified the assets and liabilities of this bar/nightclub facility as "held for sale" in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") based on the fact that the facility has met the criteria under SFAS No. 144. Based on the offers made for this facility, we recorded an impairment charge of $537,000 during the first fiscal quarter of 2007. An additional impairment charge of $38,000 was recorded during the fourth fiscal quarter of 2007 as a result of the sale of the facility. We recorded operating losses of $188,000 during the fiscal year ended September 29, 2007. The impairment charges and operating losses are included in discontinued operations.
Also during fiscal 2006, we were approached by the Venetian Casino Resort who indicated that, due to the expansion of the Grand Canal Shoppes, our Lutece and Tsunami locations, as well as a portion of our Vivid location, in the Grand Canal Shoppes were desired by other tenants. The Venetian Casino Resort offered to purchase these locations from us for an aggregate of $14,000,000. After evaluating the offer, we determined that such offer made it advantageous for us to redeploy these assets. Effective December 1, 2006, our subsidiaries that leased each of our Lutece, Tsunami and Vivid locations at the Venetian Resort Hotel Casino in Las Vegas, Nevada, entered into an agreement to sell Lutece, Tsunami and a portion of the Vivid location used by Lutece as a prep kitchen to Venetian Casino Resort, LLC for an aggregate of $14,000,000. Our Lutece location closed on December 3, 2006 and our Tsunami location closed on January 3, 2007. We realized a gain of $7,814,000 ($5,196,000 after taxes, or $1.45 per share) on the sale of these facilities. We recorded operating income of $34,000 for the fiscal year ended September 29, 2007. The gain on sale and income are included in discontinued operations.
During the first fiscal quarter of 2008, we discontinued the operation of our Columbus Bakery retail and wholesale bakery located in New York City. Columbus Bakery was originally intended to serve as the bakery that would provide all of our New York restaurants with baked goods as well as being a retail bakery operation. As a result of the sale and closure of several of our restaurants in New York City during the last several years, this bakery operation was no longer profitable. During the second fiscal quarter of 2008 we opened, along with certain third party investors, a new concept at this location called "Pinch & S'Mac" which features pizza and macaroni and cheese. We contributed Columbus Bakery's net fixed assets and cash into this venture and received an ownership interest of 37.5% . These operations are not consolidated in the Company's consolidated financial statements.
Effective June 30, 2008, the lease for our Stage Deli facility at the Forum Shops in Las Vegas, Nevada expired. The landlord for this facility offered to renew the lease at this location prior to its expiration at a significantly increased rent. The Company determined that it would not be able to operate this facility profitably at this location at the rent offered in the landlord's renewal proposal. As a result, the Company discontinued these operations during the third fiscal quarter of 2008 and took a charge for the impairment of goodwill of $294,000 and a loss on disposal of $19,000. The impairment charge and disposal loss are included in discontinued operations.
Critical Accounting Policies
Financial Reporting Release No. 60, published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or cash flows for the periods presented in this report.
Below are listed certain policies that management believes are critical:
Use of Estimates
The preparation of financial statements requires the application of certain accounting policies, which may require us to make estimates and assumptions of future events. In the process of preparing its consolidated financial statements, we estimate the appropriate carrying value of certain assets and liabilities, which are not readily apparent from other sources. The primary estimates underlying our consolidated financial statements include allowances for potential bad debts on accounts and notes receivable, 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 other matters. Management bases its estimates on certain assumptions, which they believe are reasonable in the circumstances and actual results could differ from those estimates.
Long-Lived Assets
We annually assess any impairment in value of long-lived assets to be held and used. We evaluate the possibility of impairment by comparing anticipated undiscounted cash flows to the carrying amount of the related long-lived assets. If such cash flows are less than carrying value we then reduce the asset to its fair value. Fair value is generally calculated using discounted cash flows. Various factors such as sales growth and operating margins and proceeds from a sale are part of this analysis. Future results could differ from our projections with a resulting adjustment to income in such period.
Leases
We are obligated under various lease agreements for certain restaurants. We recognize 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 we would incur an economic penalty for not exercising the option. Percentage rent expense is generally based upon sales levels and is expensed as incurred. Certain leases include both base rent and percentage rent. We record 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. Our judgments may produce materially different amounts of amortization and rent expense than would be reported if different lease terms were used.
We provide such allowance due to uncertainty that some of the deferred tax amounts may not be realized. Certain items, such as state and local tax loss carry forwards, are dependent on future earnings or the availability of tax strategies. Future results could require an increase or decrease in the valuation allowance and a resulting adjustment to income in such period.
Accounting for Goodwill and Other Intangible Assets
During 2001, the FASB issued SFAS 142, which requires that for us, effective September 28, 2002, goodwill, including the goodwill included in the carrying value of investments accounted for using the equity method of accounting, and certain other intangible assets deemed to have an indefinite useful life, cease amortizing. SFAS 142 requires that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of the reporting unit (the Company is being treated as one reporting unit) with its net book value (or carrying amount), including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The impairment test for other intangible assets consists of a comparison of the fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Determining the fair value of the reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of the reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. To assist in the process of determining goodwill impairment, we obtain appraisals from independent valuation firms. In addition to the use of independent valuation firms, we perform internal valuation analyses and consider other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flows and market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected future cash flows (including timing), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables. Based on the above policy no impairment charges were recorded during the fiscal years ended 2008 and 2007.
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