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ARKR > SEC Filings for ARKR > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for ARK RESTAURANTS CORP

Form 10-Q for ARK RESTAURANTS CORP


13-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

As of June 29, 2013, the Company owned and operated 20 restaurants and bars, 22 fast food concepts and catering operations, exclusively in the United States, that have similar economic characteristics, nature of products and service, class of customer 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.

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 periods ended June 29, 2013 and June 30, 2012 included 13 and 39 weeks.

Reclassifications

Certain reclassifications of prior period balances have been made to conform to the current period presentation. In connection with the planned or actual sale or closure of various restaurants, the operations of these businesses have been presented as discontinued operations in the consolidated condensed financial statements. Accordingly, the Company has reclassified its consolidated condensed statements of operations for the prior periods presented. These dispositions are discussed below in "Recent Restaurant Dispositions."

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.

Results of Operations

The Company's operating income was $4,387,000 for both the 13 and 39-weeks ended June 29, 2013 as compared to operating income of $4,512,000 and $6,186,000 for the 13 and 39-weeks ended June 30, 2012, respectively. These decreases resulted from a combination of factors including: (i) decreased traffic at our properties in Washington, DC due to poor weather and increased competition, (ii) increased competition and a decrease in the usage of complimentaries by the ownership of the casinos at our Florida properties, (iii) professional fees related to the unsolicited bid made for the Company by Landry's, (iv) the negative impact of additional room capacity without a corresponding increase in overall traffic in Las Vegas, (v) the closure of our properties Red and Sequoia located in New York, NY in October 2012 as a result of a hurricane, and (vi) early operating losses in the amount of $100,000 at our new restaurant, Broadway Burger Bar, at the Tropicana Hotel and Casino in Atlantic City, NJ, all partially offset by strong catering revenues in NY combined with a significant improvement in the performance of Clyde Frazier's Wine and Dine, which opened in March 2012.

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The following table summarizes the significant components of the Company's operating results for the 13 and 39-week periods ended June 29, 2013 and June 30, 2012, respectively:

                            13 Weeks Ended                Variance               39 Weeks Ended                Variance
                        June 29,      June 30,                               June 29,      June 30,
                          2013          2012           $            %          2013          2012           $            %
                            (in thousands)                                       (in thousands)
REVENUES:
Food and beverage
sales                   $  36,153     $  38,888     $ (2,735 )      -7.0 %   $  95,970     $ 101,115     $ (5,145 )      -5.1 %
Other revenue                 320           305           15         4.9 %         929           831           98        11.8 %
Total revenues             36,473        39,193       (2,720 )      -6.9 %      96,899       101,946       (5,047 )      -5.0 %

COSTS AND EXPENSES:
Food and beverage
cost of sales               8,959         9,992       (1,033 )     -10.3 %      24,142        26,020       (1,878 )      -7.2 %
Payroll expenses           10,805        11,702         (897 )      -7.7 %      31,767        32,758         (991 )      -3.0 %
Occupancy expenses          4,442         4,494          (52 )      -1.2 %      13,063        13,485         (422 )      -3.1 %
Other operating costs
and expenses                4,400         5,156         (756 )     -14.7 %      12,797        13,250         (453 )      -3.4 %
General and
administrative
expenses                    2,398         2,240          158         7.1 %       7,564         7,271          293         4.0 %
Depreciation and
amortization                1,082         1,097          (15 )      -1.4 %       3,179         2,976          203         6.8 %
Total costs and
expenses                   32,086        34,681       (2,595 )      -7.5 %      92,512        95,760       (3,248 )      -3.4 %
OPERATING INCOME        $   4,387     $   4,512     $   (125 )      -2.8 %   $   4,387     $   6,186     $ (1,799 )     -29.1 %

Revenues

During the Company's 13 and 39-week periods ended June 29, 2013, revenues decreased 6.9% and 5.0% as compared to revenues in the 13 and 39-week periods ended June 30, 2012. This decrease resulted primarily from: (i) the negative effects of Hurricane Sandy on our businesses located in New York, Atlantic City, NJ and Washington, DC and the related closure of our properties Redand Sequoia located in New York, NY in October 2012 as a result, and (ii) the negative impact of additional room capacity in Las Vegas, NV, partially offset by strong catering revenues in NY combined with revenues related to our new restaurant in New York City, Clyde Frazier's Wine and Dine, which opened in March 2012.

Food and Beverage Same-Store Sales

On a Company-wide basis, same store sales decreased 2.2% during the third fiscal quarter of 2013 compared to the same period last year as follows:

                                        13 Weeks Ended                Variance
                                    June 29,      June 30,
                                      2013          2012           $            %
                                        (in thousands)

          Las Vegas                 $  13,728     $  14,218     $   (490 )      -3.4 %
          New York                     10,555         9,275        1,280        13.8 %
          Washington, DC                5,155         6,230       (1,075 )     -17.3 %
          Atlantic City, NJ               805           851          (46 )      -5.4 %
          Boston                        1,008         1,116         (108 )      -9.7 %
          Connecticut                     923           947          (24 )      -2.5 %
          Florida                       3,457         3,783         (326 )      -8.6 %
          Same Store Sales             35,631        36,420     $   (789 )      -2.2 %
          Other                           522         2,468
          Food and beverage sales   $  36,153     $  38,888

Same-store sales in Las Vegas decreased 3.4% primarily as a result of the negative impact of additional room capacity without a corresponding increase in overall traffic. Same-store sales in New York (which exclude the Red and Sequoia properties as they were closed in October 2012) increased 13.8% as a result of strong catering revenues. Same-store sales in Washington, DC decreased 17.3% primarily as a result of decreased traffic due to poor weather as compared to last year and increased competition. Same-store sales in Atlantic City decreased 5.4% due to the continued decline in overall traffic in Atlantic City, NJ. Same-store sales in Boston decreased 9.7% primarily as a result of poor weather conditions. Same-store sales in Connecticut decreased 2.5% due to declining traffic at the Foxwoods Resort and Casino where our properties are located. Same-store sales in Florida decreased 8.6% due to increased competition at one of our properties combined with a decrease in the usage

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of complimentaries by the ownership of the casinos where our properties are located. Other food and beverage sales consist of sales related to new restaurants opened during the applicable period and sales related to properties that were closed during the period due to lease expiration and other closures and therefore not included in discontinued operations.

Costs and Expenses



Costs and expenses from continuing operations for the 13 and 39-weeks ended June
29, 2013 and June 30, 2012 were as follows (in thousands):



                         13 Weeks                             13 Weeks                                                              39 Weeks                             39 Weeks
                           Ended               %                Ended               %                      Increase                   Ended               %                Ended               %                     Increase
                         June 29,           to Total          June 30,           to Total                 (Decrease)                June 29,           to Total          June 30,           to Total                (Decrease)
                           2013             Revenues            2012             Revenues             $                %              2013             Revenues            2012             Revenues             $               %
Food and beverage
cost of sales            $   8,959               24.6 %       $   9,992               25.5 %       $ (1,033 )         -10.3 %       $  24,142               24.9 %       $  26,020               25.5 %       $ (1,878 )         -7.2 %
Payroll expenses            10,805               29.6 %          11,702               29.9 %           (897 )          -7.7 %          31,767               32.8 %          32,758               32.1 %           (991 )         -3.0 %
Occupancy expenses           4,442               12.2 %           4,494               11.5 %            (52 )          -1.2 %          13,063               13.5 %          13,485               13.2 %           (422 )         -3.1 %
Other operating
costs and expenses           4,400               12.1 %           5,156               13.2 %           (756 )         -14.7 %          12,797               13.2 %          13,250               13.0 %           (453 )         -3.4 %
General and
administrative
expenses                     2,398                6.6 %           2,240                5.7 %            158             7.1 %           7,564                7.8 %           7,271                7.1 %            293            4.0 %
Depreciation and
amortization                 1,082                3.0 %           1,097                2.8 %            (15 )          -1.4 %           3,179                3.3 %           2,976                2.9 %            203            6.8 %
                         $  32,086                            $  34,681                            $ (2,595 )                       $  92,512                            $  95,760                            $ (3,248 )

Food and beverage costs as a percentage of total revenues for the 13 and 39-weeks ended June 29, 2013 decreased slightly compared to the same periods of fiscal 2012 and reflect improved menu costing partially offset by higher commodity prices.

Payroll expenses as a percentage of total revenues for the 13 and 39-weeks ended June 29, 2013 remained relatively consistent as compared to the same periods of fiscal 2012. Decreases in expense amounts as compared to the same periods of fiscal 2012 are the result of a reduction in payroll expenses related to properties that were closed (as discussed above) due to flooding from Hurricane Sandy partially offset by payroll incurred at our new restaurant in New York City, Clyde Frazier's Wine and Dine, which opened in March 2012.

Occupancy expenses as a percentage of total revenues for the 13 and 39-weeks ended June 29, 2013 increased as compared to the same periods of fiscal 2012 as a result of a lower sales at properties where rents are relatively fixed partially offset by a reduction in costs related to properties that were closed (as discussed above) due to flooding from Hurricane Sandy.

Other operating costs and expenses for the 13 and 39-weeks ended June 29, 2013 decreased as compared to the same period of fiscal 2012 primarily as the result of (i) non-recurring expenses in the prior period associated with one of our properties, and (ii) a reduction in other operating costs and expenses related to properties that were closed (as discussed above) due to flooding from Hurricane Sandy, partially offset by losses related to the closure of the two properties in New York combined with expenses associated with the opening of Clyde Frazier's Wine & Dine in March 2012.

General and administrative expenses (which relate solely to the corporate office in New York City) for the 13-weeks ended June 29, 2013 increased compared to the same period of fiscal 2012 primarily as a result of share-based compensation and professional fees related to the unsolicited bid made for the Company by Landry's. General and administrative expenses for the 39-weeks ended June 29, 2013 increased slightly compared to the same period of fiscal 2012 primarily as a result of share-based compensation and professional fees related to the unsolicited bid made for the Company by Landry's, Inc. partially offset by the inclusion of our former President's severance in the prior period in connection with his resignation in December 2011.

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. The income tax provision on income from continuing operations for the 39-week periods ended June 29, 2013 and June 30, 2012 reflect effective tax rates of approximately 26% and 28%, respectively. The Company expects its effective tax rate for its current fiscal year to be lower than the statutory rate as a result of the inclusion of 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 level of losses incurred at the Company's New York facilities, which cannot be consolidated for state and local tax purposes, pre-tax income earned outside of New York City, the utilization of state and local net operating loss carryforwards and the utilization of FICA tax credits. Nevada has no state income tax and other states in which the Company operates have income tax rates substantially lower in comparison to New York.

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Liquidity and Capital Resources

Our primary source of capital has been cash provided by operations. We utilize cash generated from operations to fund the cost of developing and opening new restaurants, acquiring existing restaurants owned by others and remodeling existing restaurants we own.

Net cash used in investing activities for the 39-week period ended June 29, 2013 was $10,081,000 and resulted primarily from purchases of fixed assets at existing restaurants, the purchase by the Company of the Florida membership interests and a $4,200,000 investment in New Meadowlands Racetrack LLC.

Net cash used in investing activities for the 39-week period ended June 30, 2012 was $5,688,000 and resulted primarily from purchases of fixed assets at existing restaurants, the construction of Clyde Frazier's Wine and Dine located at the New York City partially offset by net proceeds from sales of investment securities.

Net cash used in financing activities for the 39-week period ended June 29, 2013 of $1,947,000 resulted from the payment of dividends, principal payments on notes payable and distributions to non-controlling interests offset by proceeds of $3,000,000 from the issuance of a note payable to a bank.

Net cash used in financing activities for the 39-week period ended June 30, 2012 of $5,337,000 was principally used for the payment of dividends, purchase of treasury stock and distributions to non-controlling interests.

The Company had a working capital deficiency of $2,177,000 at June 29, 2013, as compared to a working capital surplus of $4,061,000 at September 29, 2012. This resulted primarily from the purchase of the Florida membership interests and the investment in New Meadowlands Racetrack LLC. We believe that our existing cash balances and cash provided by operations will be sufficient to meet our liquidity and capital spending requirements at least through the next 12 months.

On December 28, 2012, March 28, 2013 and June 28, 2013, the Company paid a quarterly cash dividend in the amount of $0.25 per share on the Company's common stock. The Company intends to continue to pay such quarterly cash dividend 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 June 7, 2011, the Company entered into a 10-year exclusive agreement to manage a yet to be constructed restaurant and catering service at Basketball City in New York City in exchange for a fee of $1,000,000. Under the terms of the agreement, the owner of the property was to construct the facility, at its expense, and the Company would pay the owner an annual fee based on sales, as defined in the agreement. As of June 7, 2013, the owner of the property had not delivered the premises to the Company as required by the agreement and, as such, the Company demanded the return of its exclusivity fee as well as an additional $200,000 the Company had advanced the owner. The total amount of $1,200,000 has been reclassified to Other Assets in the accompanying Consolidated Condensed Balance Sheet at June 29, 2013 as the Company is negotiating the terms of a promissory note for repayment by the owner.

Recent Restaurant Expansion

On March 18, 2011, a subsidiary of the Company entered into a lease agreement to operate a restaurant and bar in New York City named Clyde Frazier's Wine and Dine. In connection with the agreement, the landlord agreed to contribute up to $1,800,000 towards the construction of the facility (of which $1,500,000 was received as of June 29, 2013 and is being deferred over the lease term), which totaled approximately $7,000,000. The initial term of the lease for this facility expires on March 31, 2027 and has one five-year renewal. This restaurant opened during the second quarter of fiscal 2012.

On November 28, 2012, a subsidiary of the Company entered into an agreement to design and lease a restaurant at the Tropicana Hotel and Casino in Atlantic City, NJ. The cost to construct this restaurant was approximately $1,350,000. The initial term of the lease for this facility expires June 7, 2023 and has two five-year renewals. The restaurant, Broadway Burger Bar, opened during the third quarter of fiscal 2013 and, as a result, the Consolidated Statement of Income for the 39-weeks ended June 29, 2013 includes approximately $100,000 of pre-opening and early operating losses related to this property.

Recent Restaurant Dispositions

Lease Expirations - On July 8, 2011, the Company entered into an agreement with the landlord of The Grill Room property located in New York City, whereby in exchange for a payment of $350,000 the Company vacated the property on October 31, 2011. Such payment and the related loss on closure of the property, in the amount of $179,000, are included in Other Operating Costs and Expenses in the Consolidated Condensed Statement of Income for the 29-weeks ended June 30, 2012. This lease was scheduled to expire on December 31, 2011.

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The Company was advised by the landlord that it would have to vacate the America property located in Washington, DC, which was on a month-to-month lease. The closure of this property occurred on November 7, 2011. The related loss on closure of this property, in the amount of $186,000, is included in Other Operating Costs and Expenses in the Consolidated Condensed Statement of Income for the 39-weeks ended June 30, 2012.

Discontinued Operations - Effective March 15, 2012, the Company vacated its food court operations at the MGM Grand Casino at the Foxwoods Resort Casinoin Ledyard, CT. The Company determined that it would not be able to operate this facility profitably at this location at the current rent. During the quarter ended June 29, 2013, the Company reclassified the remaining non-controlling interest of $691,000 to additional paid-in capital upon the final dissolution of this partnership.

The results of discontinued operations were as follows:

                                     13 Weeks Ended                 39 Weeks Ended
                                June 29,        June 30,      June 29,         June 30,
                                  2013            2012          2013             2012
                                     (In thousands)                 (In thousands)

     Revenues                   $       -       $       -     $       -       $      910
     Costs and expenses                 -               -             -            1,525
     Loss before income taxes           -               -             -             (615 )
     Income tax benefit                 -             (41 )           -             (220 )

     Net loss                   $       -       $      41     $       -       $     (395 )

Other - On October 29, 2012, the Company suffered a flood at its Red and Sequoia properties located in New York, NY as a result of a hurricane. The Company did not reopen these properties as the underlying leases were due to expire in the second quarter of fiscal 2013. Losses related to the closure of these properties, in the amount of $256,000, are included in Other Operating Costs and Expenses in the Consolidated Condensed Statement of Income for the 39-weeks ended June 29, 2013.

Critical Accounting Policies

The preparation of financial statements requires the application of certain accounting policies, which may require the Company to make estimates and assumptions of future events. In the process of preparing its consolidated condensed financial statements, the Company estimates the appropriate carrying value of certain assets and liabilities, which are not readily apparent from other sources. The primary estimates underlying the Company's consolidated condensed financial statements include allowances for potential bad debts on accounts and notes receivable, leases, the useful lives and recoverability of its assets, such as property and intangibles, fair values of financial instruments, 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. Although management does not believe that any change in those assumptions in the near term would have a material effect on the Company's consolidated financial position or the results of operations, differences in actual results could be material to the consolidated condensed financial statements.

The Company's critical accounting policies are described in the Company's Form 10-K for the year ended September 29, 2012. There have been no significant changes to such policies during fiscal 2013 other than those disclosed in Note 1 to the Consolidated Condensed Financial Statements.

Recently Adopted and Issued Accounting Standards

See Note 1 to the Consolidated Condensed Financial Statements for a description of recent accounting pronouncements, including those adopted in fiscal 2013 and the expected dates of adoption and the anticipated impact on the Consolidated Condensed Financial Statements.

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