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ARKR > SEC Filings for ARKR > Form 10-Q on 11-Feb-2014All Recent SEC Filings

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Form 10-Q for ARK RESTAURANTS CORP


11-Feb-2014

Quarterly Report


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

Overview

As of December 28, 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 December 28, 2013 and December 29, 2012 included 13 weeks.

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 $1,201,000 for the 13 weeks ended December 28, 2013 as compared to operating income of $282,000 for the 13 weeks ended December 29, 2012. This increase resulted from a combination of factors including: (i) strong catering revenues in New York, (ii) significant improvement in the performance of Clyde Frazier's Wine and Dine, (iii) the negative effects of Hurricane Sandy in the prior period on our businesses located in New York, Atlantic City, NJ and Washington, DC, all partially offset by increased competition and a decrease in the usage of complimentaries by the ownership of the casinos at our Florida properties and the negative impact of additional room capacity without a corresponding increase in overall traffic in Las Vegas.

The following table summarizes the significant components of the Company's operating results for the 13-week periods ended December 28, 2013 and December 29, 2012, respectively:

                                          13 Weeks Ended                         Variance
                                 December 28,        December 29,
                                     2013                2012               $               %
                                           (in thousands)

REVENUES:
Food and beverage sales         $       31,756      $       31,029      $      727             2.3 %
Other revenue                              382                 307              75            24.4 %
Total revenues                          32,138              31,336             802             2.6 %

COSTS AND EXPENSES:
Food and beverage cost of
sales                                    7,854               7,749             105             1.4 %
Payroll expenses                        10,478              10,845            (367 )          -3.4 %
Occupancy expenses                       4,401               4,535            (134 )          -3.0 %
Other operating costs and
expenses                                 4,207               4,339            (132 )          -3.0 %
General and administrative
expenses                                 2,850               2,410             440            18.3 %
Depreciation and
amortization                             1,147               1,176             (29 )          -2.5 %
Total costs and expenses                30,937              31,054            (117 )          -0.4 %
OPERATING INCOME                $        1,201      $          282      $      919           325.9 %

- 13 -

Revenues

During the Company's 13-week period ended December 28, 2013, revenues increased 2.6% as compared to revenues in the 13-week period ended December 29, 2012. This increase resulted primarily from: (i) strong catering revenues in New York, (ii) revenues related to our new restaurant in Atlantic City, NJ, Broadway Burger Bar and Grill, which opened in June 2013, and (iii) the negative impacts of Hurricane Sandy in the prior period, particularly at our properties in Atlantic City, NJ partially offset by increased competition and a decrease in the usage of complimentaries by the ownership of the casinos at our Florida properties and the negative impact of additional room capacity without a corresponding increase in overall traffic in Las Vegas.

Food and Beverage Same-Store Sales



On a Company-wide basis, same-store sales increased 1.8% during the first fiscal
quarter of 2014 compared to the same period last year as follows:



                                        13 Weeks Ended                    Variance
                                December 28,       December 29,
                                    2013               2012             $           %
                                        (in thousands)

     Las Vegas                 $       13,028     $       13,497     $  (469 )      -3.5 %
     New York                           9,216              7,959       1,257        15.8 %
     Washington, DC                     3,128              3,137          (9 )      -0.3 %
     Atlantic City, NJ                    711                538         173        32.2 %
     Boston                               964                960           4         0.4 %
     Connecticut                          860                876         (16 )      -1.8 %
     Florida                            2,969              3,357        (388 )     -11.6 %
     Same-store sales                  30,876             30,324     $   552         1.8 %
     Other                                880                705
     Food and beverage sales   $       31,756     $       31,029

Same-store sales in Las Vegas decreased 3.5% 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 15.8% as a result of strong catering revenues. Same-store sales in Washington, DC were flat as expected. Same-store sales in Atlantic City increased 32.2% due to the negative impacts of Hurricane Sandy in the prior period. Same-store sales in Boston were flat as expected. Same-store sales in Connecticut decreased 1.8% due to declining traffic at the Foxwoods Resort and Casino where our properties are located. Same-store sales in Florida decreased 11.6% due to increased competition at one of our properties combined with a decrease in the usage 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 weeks ended December
28, 2013 and December 29, 2012 were as follows (in thousands):



                                 13 Weeks                         13 Weeks
                                   Ended             %              Ended             %              Increase
                               December 28,       to Total      December 29,       to Total         (Decrease)
                                   2013           Revenues          2012           Revenues        $          %

Food and beverage cost of
sales                          $       7,854           24.4 %   $       7,749           24.7 %   $  105        1.4 %
Payroll expenses                      10,478           32.6 %          10,845           34.6 %     (367 )     -3.4 %
Occupancy expenses                     4,401           13.7 %           4,535           14.5 %     (134 )     -3.0 %
Other operating costs and
expenses                               4,207           13.1 %           4,339           13.8 %     (132 )     -3.0 %
General and administrative
expenses                               2,850            8.9 %           2,410            7.7 %      440       18.3 %
Depreciation and
amortization                           1,147            3.6 %           1,176            3.8 %      (29 )     -2.5 %
                               $      30,937                    $      31,054                    $ (117 )

- 14 -

Food and beverage costs as a percentage of total revenues for the 13 weeks ended December 28, 2013 decreased slightly compared to the same period of fiscal 2013 and reflect improved menu costing partially offset by higher commodity prices.

Payroll expenses as a percentage of total revenues for the 13 weeks ended December 28, 2013 decreased as compared to the same period of fiscal 2013 due primarily to severance payments to employees of closed properties in the prior period.

Occupancy expenses as a percentage of total revenues for the 13 weeks ended December 28, 2013 decreased as compared to the same period of fiscal 2013 as a result of higher sales at properties where rents are relatively fixed.

Other operating costs and expenses for the 13 weeks ended December 28, 2013 decreased as compared to the same period of fiscal 2013 primarily as the result of closure losses related to the two properties in New York as a result of Hurricane Sandy.

General and administrative expenses (which relate solely to the corporate office in New York City) for the 13 weeks ended December 28, 2013 increased compared to the same period of fiscal 2013 primarily as a result of increased salaries and benefits and professional fees.

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 13-week periods ended December 28, 2013 and December 29, 2012 reflect effective tax rates of approximately 32%. 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.

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; however, in recent years, we have utilized bank and other borrowings to finance specific transactions.

Net cash used in investing activities for the 13-week period ended December 28, 2013 was $1,817,000 and resulted primarily from purchases of fixed assets at existing restaurants, an additional $464,000 investment in New Meadowlands Racetrack LLC and an initial payment of $500,000 related to our to be closed purchase of The Rustic Inn.

Net cash used in investing activities for the 13-week period ended December 29, 2012 was $3,374,000 and resulted primarily from purchases of fixed assets at existing restaurants and the purchase of the Florida membership interests.

Net cash used in financing activities for the 13-week period ended December 28, 2013 of $1,530,000 resulted from the payment of dividends, principal payments on notes payable and distributions to non-controlling interests.

Net cash used in financing activities for the 13-week period ended December 29, 2012 of $1,499,000 was principally used for the payment of dividends and distributions to non-controlling interests.

The Company had a working capital deficiency of $874,000 at December 28, 2013, as compared to a working capital surplus of $306,000 at September 28, 2013. This resulted primarily from our additional investment in New Meadowlands Racetrack LLC and initial payment of $500,000 related to our to be closed purchase of The Rustic Inn. 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 4, 2013, the Board of Directors declared a quarterly dividend of $0.25 per share on the Company's common stock to be paid on December 30, 2013 to shareholders of record at the close of business on December 16, 2013. 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.

- 15 -

On November 22, 2013, the Company, through a wholly-owned subsidiary, Ark Rustic Inn LLC, entered into an Asset Purchase Agreement with W and O, Inc. to purchase the Rustic Inn Crab House, a restaurant and bar in Dania Beach, Florida, for $7,500,000 plus inventory. The acquisition is scheduled to close on or before February 28, 2014, subject to satisfactory completion of due diligence, execution of employment and non-competition agreements, Florida Liquor Authority approval and customary closing conditions. In connection with the signing of this agreement the Company made an initial deposit toward the purchase in the amount of $500,000 which is included in Other Assets in the Consolidated Condensed Balance Sheet at December 28, 2013. The balance of the purchase price is expected to be financed with bank borrowings.

Recent Restaurant Expansion

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 $1,750,000. 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

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 13-weeks ended December 29, 2012.

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 28, 2013. There have been no significant changes to such policies during fiscal 2014 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 2014 and the expected dates of adoption and the anticipated impact on the Consolidated Condensed Financial Statements.

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