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ARKR > SEC Filings for ARKR > Form 10-Q/A on 17-Jun-2014All Recent SEC Filings

Show all filings for ARK RESTAURANTS CORP

Form 10-Q/A for ARK RESTAURANTS CORP


17-Jun-2014

Quarterly Report


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

Overview

As of March 29, 2014, the Company owned and operated 21 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. The Consolidated Condensed Statements of Operations for the 13 and 26-weeks ended March 29, 2014 include revenues and earnings of approximately $1,642,000 and $352,000, respectively related to The Rustic Inn.

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 March 29, 2014 and March 30, 2013 included 13 and 26 weeks, respectively.

Seasonality

The Company has substantial fixed costs that do not decline proportionately 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 for the 13 weeks ended March 29, 2014 was $149,000 as compared to an operating loss of $282,000 for the 13 weeks ended March 30, 2013. This increase resulted primarily from operating income of The Rustic Inn of $352,000 for the period from the date of acquisition. The Company's operating income for the 26 weeks ended March 29, 2014 was $1,351,000 as compared to $0 for the 26 weeks ended March 30, 2013. This increase resulted from a combination of factors including: (i) operating income of The Rustic Inn of $352,000 for the period from the date of acquisition, (ii) strong catering revenues in New York, (iii) an improvement in the performance of Clyde Frazier's Wine and Dine, and (iv) 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 and 26-week periods ended March 29, 2014 and March 30, 2013, respectively:

                          13 Weeks Ended                 Variance                 26 Weeks Ended                 Variance
                     March 29,       March 30,                               March 29,       March 30,
                       2014            2013            $           %           2014            2013            $          %
                          (in thousands)                                          (in thousands)
REVENUES:
Food and beverage
sales               $    30,680     $    28,788     $ 1,892         6.6 %   $    62,437     $    59,817     $ 2,620        4.4 %
Other revenue               357             302          55        18.2 %           739             609         130       21.3 %
Total revenues           31,037          29,090       1,947         6.7 %        63,176          60,426       2,750        4.6 %

COSTS AND
EXPENSES:
Food and beverage
cost of sales             8,373           7,434         939        12.6 %        16,227          15,183       1,044        6.9 %
Payroll expenses         10,559          10,118         441         4.4 %        21,038          20,962          76        0.4 %
Occupancy
expenses                  4,154           4,086          68         1.7 %         8,555           8,621         (66 )     -0.8 %
Other operating
costs and
expenses                  4,322           4,057         265         6.5 %         8,529           8,397         132        1.6 %
General and
administrative
expenses                  2,374           2,756        (382 )     -13.9 %         5,223           5,166          57        1.1 %
Depreciation and
amortization              1,106             921         185        20.1 %         2,253           2,097         156        7.4 %
Total costs and
expenses                 30,888          29,372       1,516         5.2 %        61,825          60,426       1,399        2.3 %
OPERATING INCOME
(LOSS)              $       149     $      (282 )   $   431        (a)      $     1,351     $         -     $ 1,351       (a)

(a) Not meaningful

- 13 -

Revenues

During the Company's 13 and 26-week periods ended March 29, 2014, revenues increased 6.7% and 4.6% as compared to revenues in the 13 and 26-week periods ended March 30, 2013. This increase resulted primarily from: (i) revenues related to The Rustic Inn in the amount of $1,642,000 for the period from the date of acquisition, (ii) strong catering revenues in New York, (iii) revenues related to our new restaurant in Atlantic City, NJ, Broadway Burger Bar and Grill, which opened in June 2013, and (iv) 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 decreased 1.5% during the second
fiscal quarter of 2014 compared to the same period last year as follows:



                                         13 Weeks Ended                 Variance
                                    March 29,       March 30,
                                      2014            2013           $           %
                                         (in thousands)
         Las Vegas                 $    14,375     $    14,734     $ (359 )      -2.4 %
         New York                        5,681           5,080        601        11.8 %
         Washington, DC                  2,118           2,337       (219 )      -9.4 %
         Atlantic City, NJ                 799             781         18         2.3 %
         Boston                            607             613         (6 )      -1.0 %
         Connecticut                       957             990        (33 )      -3.3 %
         Florida                         3,507           3,948       (441 )     -11.2 %
         Same-store sales               28,044          28,483     $ (439 )      -1.5 %
         Other                           2,636             305
         Food and beverage sales   $    30,680     $    28,788

Same-store sales in Las Vegas decreased 2.4% 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 11.8%, primarily as a result of strong catering revenues. Same-store sales in Washington, DC decreased 9.4% as a result of poor weather conditions combined with increased competition. Same-store sales in Atlantic City (which exclude Broadway Burger Bar and Grill, which opened in June 2013) increased 2.3%, primarily 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 3.3% due to declining traffic at the Foxwoods Resort and Casino where our properties are located. Same-store sales in Florida (which exclude The Rustic Inn, which was acquired on February 24, 2014) decreased 11.2% 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 The Rustic Inn, 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.

Costs and Expenses



Costs and expenses from continuing operations for the 13 and 26-weeks ended
March 29, 2014 and March 30, 2013 were as follows (in thousands):



                                       13 Weeks                    13 Weeks                                            26 Weeks                    26 Weeks
                                         Ended           %           Ended           %             Increase              Ended         % to          Ended         % to            Increase
                                       March 29,     to Total      March 30,     to Total         (Decrease)           March 29,       Total       March 30,       Total          (Decrease)
                                         2014        Revenues        2013        Revenues         $          %           2014        Revenues        2013        Revenues         $         %

Food and beverage cost of sales       $     8,373        27.0 %   $     7,434        25.6 %   $   939        12.6 %   $  16,227          25.7 %   $  15,183          25.1 %   $ 1,044        6.9 %
Payroll expenses                           10,559        34.0 %        10,118        34.8 %       441         4.4 %      21,038          33.3 %      20,962          34.7 %        76        0.4 %
Occupancy expenses                          4,154        13.4 %         4,086        14.0 %        68         1.7 %       8,555          13.5 %       8,621          14.3 %       (66 )     -0.8 %
Other operating costs and expenses          4,322        13.9 %         4,057        13.9 %       265         6.5 %       8,529          13.5 %       8,397          13.9 %       132        1.6 %
General and administrative expenses         2,374         7.6 %         2,756         9.5 %      (382 )     -13.9 %       5,223           8.3 %       5,166           8.5 %        57        1.1 %
Depreciation and amortization               1,106         3.6 %           921         3.2 %       185        20.1 %       2,253           3.6 %       2,097           3.5 %       156        7.4 %
                                      $    30,888                 $    29,372                 $ 1,516                 $  61,825                   $  60,426                   $ 1,399

- 14 -

Increases in food and beverage costs as a percentage of total revenues for the 13 and 26-weeks ended March 29, 2014 compared to the same periods of fiscal 2013 are a direct result of higher food costs as a percentage of sales related to The Rustic Inn, which is a seafood restaurant which, consistent with the industry, operates at a higher food cost structure. Excluding the impact of these costs, food and beverage costs as a percentage of total revenues were consistent with the same periods of fiscal 2013.

Payroll expenses as a percentage of total revenues for the 13 and 26-weeks ended March 29, 2014 decreased as compared to the same periods 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 and 26-weeks ended March 29, 2014 decreased as compared to the same periods 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 March 29, 2014 were consistent as compared to the same period of fiscal 2013. Other operating costs and expenses for the 26 weeks ended March 29, 2014 decreased as compared to the same period of fiscal 2013 primarily as a result of losses related to the two properties in New York closed 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 March 29, 2014 decreased compared to the same period of fiscal 2013 primarily as a result of increased professional fees in the prior period related to the unsolicited bid made for the Company by Landry's. General and administrative expenses for the 26 weeks ended March 29, 2014 increased compared to the same period of fiscal 2013 primarily as a result of increased professional fees in the current year related to the acquisition of The Rustic Inn, partially offset by increased professional fees in the prior period related to the unsolicited bid made for the Company by Landry's.

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 26-week periods ended March 29, 2014 and March 30, 2013 reflect effective tax rates of approximately 32% and 34%, 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.

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 26-week period ended March 29, 2014 was $3,462,000 and resulted primarily from purchases of fixed assets at existing restaurants, an additional $464,000 investment in New Meadowlands Racetrack LLC and the cash portion of the purchase of The Rustic Inn in the amount of $1,710,000.

Net cash used in investing activities for the 26-week period ended March 30, 2013 was $8,197,000 and resulted primarily from purchases of fixed assets at existing restaurants, the purchase by the Company of the Florida membership interests in the amount of $2,965,000 and a $4,200,000 investment in New Meadowlands Racetrack LLC.

Net cash used in financing activities for the 26-week period ended March 29, 2014 of $3,164,000 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 26-week period ended March 30, 2013 of $63,000 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.

The Company had a working capital deficiency of $3,298,000 at March 29, 2014, 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

- 15 -

and our acquisition 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 February 28, 2014, the Board of Directors declared a quarterly dividend of $0.25 per share on the Company's common stock to be paid on April 4, 2014 to shareholders of record at the close of business on March 14, 2014. 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 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.

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.

On February 24, 2014, the Company, through a wholly-owned subsidiary, Ark Rustic Inn LLC, completed its acquisition of the assets of The Rustic Inn Crab House ("The Rustic Inn"), a restaurant and bar located in Dania Beach, Florida, for a total purchase price of approximately $7,710,000. The acquisition is accounted for as a business combination and was financed with a bank loan in the amount of $6,000,000 and cash from operations. The fair values of the assets acquired were allocated as follows:

                 Inventory                           $   210,000
                 Land and building                     4,800,000
                 Furniture, fixtures and equipment       200,000
                 Trademarks                              500,000
                 Goodwill                              2,000,000
                                                     $ 7,710,000

The Consolidated Condensed Statement of Operations for the 26 weeks ended March 29, 2014 include revenues and earnings of approximately $1,642,000 and $352,000, respectively, related to The Rustic Inn. Transaction costs incurred in the amount of approximately $150,000 are included in general and administrative expenses in the Consolidated Condensed Statement of Operations for the 26 weeks ended March 29, 2014. The Company expects the Goodwill and Indefinite Life Trademarks to be deductible for tax purposes.

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 Operations for the 26 weeks ended March 30, 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 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.

- 16 -

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.

- 17 -

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