SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________.
Commission file number 0-14030
ARK RESTAURANTS CORP.
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(Exact name of registrant as specified in its charter)
New York 13-3156768
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
85 Fifth Avenue, New York, New York 10003
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 206-8800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Exchange Act Rule 12b-2).
Yes [ ] No [X]
As of July 25, 2006 there were 3,462,299 outstanding shares of the registrant's
$0.01 par value common stock.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars and shares in Thousands)
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July 1, October 1,
2006 2005
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ASSETS (unaudited) (Note 1)
CURRENT ASSETS:
Cash $ 5,889 $ 5,723
Accounts receivable 4,114 2,821
Employee receivables 330 294
Current portion of long-term receivables 58 299
Inventories 1,769 1,615
Deferred income taxes 628 630
Prepaid expenses and other current assets 514 1,417
Assets held for sale 1,450 -
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Total current assets 14,752 12,799
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LONG-TERM RECEIVABLES 1,204 1,275
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FIXED ASSETS:
Leasehold improvements 34,925 31,252
Furniture, fixtures and equipment 28,463 28,107
Construction in progress 6 1,782
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63,394 61,141
Less accumulated depreciation and amortization 38,907 37,096
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24,487 24,045
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INTANGIBLE ASSETS, NET 106 198
GOODWILL 3,440 3,440
DEFERRED INCOME TAXES 4,662 4,679
OTHER ASSETS 737 729
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TOTAL $ 49,388 $ 47,165
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 2,257 $ 2,740
Accrued expenses and other current liabilities 4,277 4,756
Accrued income taxes 1,239 1,004
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Total current liabilities 7,773 8,500
OPERATING LEASE DEFERRED CREDIT 3,703 878
OTHER LIABILITIES 319 374
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TOTAL LIABILITIES 11,795 9,752
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share -
authorized, 10,000 shares; issued, 5,533 shares 56 56
Additional paid-in capital 18,998 18,437
Retained earnings 27,091 27,472
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46,145 45,965
Less stock option receivable (166) (166)
Less treasury stock of 2,070 shares (8,386) (8,386)
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Total shareholders' equity 37,593 37,413
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TOTAL $ 49,388 $ 47,165
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See notes to consolidated condensed financial statements.
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ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands, Except per share amounts)
--------------------------------------------------------------------------------
13 Weeks Ended 39 Weeks Ended
------------------- -------------------
July 1, July 2, July 1, July 2,
2006 2005 2006 2005
-------- -------- -------- --------
TOTAL REVENUES $ 32,606 $ 32,206 $ 85,321 $ 82,717
-------- -------- -------- --------
COST AND EXPENSES:
Food and beverage cost of sales 8,095 8,065 21,477 21,044
Payroll expenses 9,814 9,325 27,761 26,303
Occupancy expenses 4,365 4,046 12,623 11,764
Other operating costs and expenses 3,800 3,745 10,394 9,719
General and administrative expenses 1,874 1,900 5,435 5,455
Depreciation and amortization 835 749 2,421 2,209
-------- -------- -------- --------
Total costs and expenses 28,783 27,830 80,111 76,494
-------- -------- -------- --------
OPERATING INCOME 3,823 4,376 5,210 6,223
-------- -------- -------- --------
OTHER INCOME:
Interest income 23 5 70 58
Other income 178 137 569 432
-------- -------- -------- --------
Total other income 201 142 639 490
-------- -------- -------- --------
Income from continuing operations before income
taxes 4,024 4,518 5,849 6,713
Provision for income taxes 1,368 1,505 1,989 2,148
-------- -------- -------- --------
Income from continuing operations 2,656 3,013 3,860 4,565
-------- -------- -------- --------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued restaurants (255) (271) (921) (6)
Benefit for income taxes (87) (80) (313) (2)
-------- -------- -------- --------
Loss from discontinued operations (168) (191) (608) (4)
-------- -------- -------- --------
NET INCOME $ 2,488 $ 2,822 $ 3,252 $ 4,561
======== ======== ======== ========
PER SHARE INFORMATION - BASIC AND DILUTED:
Continuing operations basic $ .77 $ .87 $ 1.11 $ 1.33
Discontinued operations basic $ (.05) $ (.05) $ (.17) $ (.00)
-------- -------- -------- --------
Basic $ .72 $ .82 $ .94 $ 1.33
======== ======== ======== ========
Continuing operations diluted $ .75 $ .85 $ 1.09 $ 1.28
Discontinued operations diluted $ (.05) $ (.05) $ (.17) $ (.00)
-------- -------- -------- --------
Diluted $ .70 $ .80 $ .92 $ 1.28
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES-BASIC 3,462 3,457 3,462 3,428
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES-DILUTED 3,546 3,546 3,546 3,555
======== ======== ======== ========
See notes to consolidated condensed financial statements.
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ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
--------------------------------------------------------------------------------
39 Weeks Ended
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July 1, July 2,
2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,252 $ 4,561
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 19 (33)
Stock-based compensation 561 -
Depreciation and amortization 2,421 2,209
Operating lease deferred credit (175) (111)
Changes in operating assets and liabilities:
Accounts receivable (1,293) (848)
Employee receivables (36) 238
Inventories (154) 17
Prepaid expenses and other current assets 903 (13)
Other assets (8) (436)
Accounts payable - trade (483) (810)
Accrued income taxes 235 (758)
Accrued expenses and other current liabilities (479) 298
Cash received from landlord 3,000 -
-------- --------
Net cash provided by continuing operating
activities 7,763 4,314
Net cash provided by (used in) discontinued
operating activities (342) 527
-------- --------
Net cash provided by operating activities 7,421 4,841
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (3,932) (1,710)
Payments received on long-term receivables 312 239
-------- --------
Net cash used in continuing investing activities (3,620) (1,471)
Net cash used in discontinued investing activities - (1,458)
-------- --------
Net cash used in investing activities (3,620) (2,929)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt - (251)
Dividends paid (3,635) (3,591)
Exercise of stock options - 420
Proceeds from stock option receivables - 198
-------- --------
Net cash used in continuing financing activities (3,635) (3,224)
Net cash used in discontinued financing activities - -
-------- --------
Net cash used in financing activities (3,635) (3,224)
NET INCREASE (DECREASE) IN CASH 166 (1,312)
CASH, Beginning of period 5,723 4,435
-------- --------
CASH, End of period $ 5,889 $ 3,123
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ - $ 3
======== ========
Income taxes $ 2,343 $ 1,920
======== ========
See notes to consolidated condensed financial statements.
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ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
July 1, 2006
(Unaudited)
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1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The consolidated condensed financial statements have been prepared by Ark
Restaurants Corp. (the "Company"), without audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position at July 1, 2006, results of operations for
the 13-week and 39-week periods ended July 1, 2006 and July 2, 2005 and cash
flows for the 39-week periods ended July 1, 2006 and July 2, 2005 have been
made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted. These consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended October 1, 2005. The results of
operations for interim periods are not necessarily indicative of the operating
results to be expected for the full year.
Certain reclassifications have been made to the 2005 financial statements
to conform to the 2006 presentation.
2. RECENT RESTAURANT DISPOSITIONS
The Company entered into a sale and leaseback agreement with GE Capital in
November 2000 to refinance the purchase of various restaurant equipment at its
food and beverage facilities at Desert Passage, the retail complex at the
Aladdin Resort & Casino in Las Vegas, Nevada. In 2002, the operations at the
Aladdin were abandoned. The lease matured in November 2005 and, in connection
therewith, the Company made an unprovided for lump sum payment of $142,000 due
under this lease. This lump sum payment is included in discontinued operations.
The Company's restaurant, America, located in New York City had
experienced declining sales for several years. In March 2004, the Company
entered into a new lease for this restaurant at a significantly increased rent.
The Company entered into this lease with the belief that due to the location and
the uniqueness of the space the lease had value. On January 19, 2005, the
Company signed a definitive agreement for the sale of this restaurant which
closed on March 15, 2005. The Company realized a gain of $644,000 on the sale of
this restaurant. The Company recorded a loss of $1,000 and income of $57,000,
respectively, during the 13-week and 39-week periods ended July 2, 2005. The
gain on sale, income and loss were included in discontinued operations.
The Company's bar/nightclub facility Venus, located at the Venetian Casino
Resort, experienced a steady decline in sales and the Company 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 have failed to reach the level sufficient to
achieve the results the Company required and the Company has identified a buyer
for this facility. As of December 31, 2005, the Company 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 initial
offers made on this facility, the Company does not anticipate a loss on the
sale. The Company recorded an operating loss of $276,000 and $778,000,
respectively, during the 13-week and 39-week periods ended July 1, 2006. The
Company recorded an operating loss of $284,000 and $693,000, respectively,
during the 13-week and 39-week periods ended July 2, 2005. These losses are
included in discontinued operations.
Effective August 22, 2004, the Company's lease for The Saloon at the
Neonopolis Center at Fremont Street was converted into a management agreement
whereby the Company received a management fee of $7,000 per month regardless of
the results of operations of this restaurant. In June 2006, the owner of the
Neonopolis Center at Fremont Street sold the building to a new entity who, on
June 25, 2006, exercised its option to terminate the management agreement upon
thirty days written notice to the Company.
On July 6, 2006, the landlord for the Vico's Burrito's fast food facility
at the Venetian Casino Resort, General Growth Properties, notified the Company
that the landlord was exercising an option granted to it pursuant to the lease
for the facility to terminate the lease in exchange for the landlord providing
the Company with the unamortized portion of the non-removable improvements
located in the facility. On August 10, 2006, the Company and its landlord for
this facility entered into a letter
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agreement pursuant to which the landlord agreed to pay the Company $200,000 for
the unamortized portion of the non-removable improvements located in the
facility by September 10, 2006. As of July 1, 2006, the Company classified the
assets and liabilities of this fast food 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
negotiations with the landlord, the Company does not anticipate a loss on the
termination of the lease.
3. RECEIVABLES FROM EMPLOYEES IN RESPECT OF STOCK OPTION EXERCISES
Receivables from employees resulting from stock option exercises includes
amounts due from officers and directors totaling $166,000 at July 1, 2006 and
October 1, 2005. Such amounts, which are due from the exercise of stock options
in accordance with the Company's Stock Option Plan, are payable on demand with
interest at 1/2% above prime (8.25% at July 1, 2006).
4. INCOME (LOSS) PER SHARE OF COMMON STOCK
Net income (loss) per share is computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share, and is calculated on
the basis of the weighted average number of common shares outstanding during
each period plus, for diluted earnings per share, the additional dilutive effect
of potential common stock. Potential common stock using the treasury stock
method consists of dilutive stock options and warrants.
For the 13-week and 39-week periods ended July 1, 2006, options to
purchase 107,000 shares of common stock at a price of $6.30 were included in
diluted earnings per share. Options to purchase 194,000 shares of common stock
at a price of $29.60 were not included in diluted earnings per share as their
impact was antidilutive for the 13-week and 39-week periods ended July 1, 2006.
For the 13-week period ended July 2, 2005, options to purchase 112,500
shares of common stock at a price of $6.30 were included in diluted earnings per
share. Options to purchase 194,000 shares of common stock at a price of $29.60
were not included in diluted earnings per share as their impact was
antidilutive. For the 39-week period ended July 2, 2005, options to purchase
306,500 shares of common stock at a price range of $6.30 to $29.60 were included
in diluted earnings per share.
5. SHARE-BASED COMPENSATION
Effective October 2, 2005, the Company adopted Statement of Financial
Accounting Standards No. 123R, "Share-Based Payment" ("SFAS No. 123R"), and
related interpretations and began expensing the grant-date fair value of
employee stock options. Prior to October 2, 2005, the Company applied Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation expense was recognized in net income for employee stock options,
as options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant.
The Company has options outstanding under two stock option plans, the 1996
Stock Option Plan (the "1996 Plan") and the 2004 Stock Option Plan (the "2004
Plan"). In 2004, the Company terminated the 1996 Plan. This action terminated
the 257,000 authorized but unissued options under the 1996 Plan but it did not
affect any of the options previously issued under the 1996 Plan.
Options granted under the 1996 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 five years after the date of grant and are generally
exercisable as to 25% of the shares commencing on the first anniversary of the
date of grant and as to an additional 25% commencing on each of the second,
third and fourth anniversaries of the grant date.
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 and are generally
exercisable as to 50% of the shares commencing on the first anniversary of the
date of grant and as to an additional 50% commencing on the second anniversary
of the date of grant.
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Upon adoption of SFAS 123R, the Company elected to value employee stock
options using the Black-Scholes option valuation method that uses assumptions
that relate to the expected volatility of the Company's common stock, the
expected dividend yield of our stock, the expected life of the options and the
risk free interest rate. The assumptions used for the options granted on
December 21, 2004, which were unvested at the time of the adoption of SFAS 123R,
included a risk free interest rate of 3.37%, volatility of 37%, a dividend yield
of 3% and an expected life of three years.
The Company adopted SFAS No. 123R using the modified prospective
transition method and therefore has not restated prior periods. Under this
transition method, compensation cost associated with employee stock options
recognized during fiscal 2006 includes amortization related to the remaining
unvested portion of stock awards granted prior to October 2, 2005.
Prior to the adoption of SFAS No. 123R, the Company presented tax benefits
resulting from share-based compensation as operating cash flows in the
consolidated statements of cash flows. SFAS No. 123R requires that cash flows
resulting from tax deductions in excess of compensation cost recognized in the
financial statements be classified as an operating cash outflow and a financing
cash inflow. For the first, second and third fiscal quarters of 2006 no excess
tax benefits were generated.
The compensation cost charged against income in the third fiscal quarter
of 2006 for share-based compensation programs was $187,000, before a tax benefit
of $64,000. The compensation cost charged for the 39-week period ended July 1,
2006 for share-based compensation programs was $561,000, before a tax benefit of
$191,000. The compensation cost recognized is classified as payroll expense in
the consolidated statement of operations.
In November 2005, the FASB issued FASB Staff Position No. FAS 123R3
"Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards" ("FAS 123R"). The Company has elected to adopt the alternative
transition method provided in this FASB Staff Position for calculating the tax
effects of share-based compensation pursuant to FAS 123R. The alternative
transition method includes a simplified method to establish the beginning
balance of the additional paid-in capital pool (APIC pool) related to the
effects of employee share-based compensation, which is available to absorb tax
deficiencies recognized subsequent to the adoption of FAS 123R.
A summary of stock option activity is presented below:
Weighted Weighted Weighted
Average Average Average Aggregate
Excersie Fair Contractual Intrinsic
Options Shares Price Value Term (Yrs.) Value
------------------- ------- -------- -------- ----------- ------------
Outstanding as
October 1, 2005 301,000 $ 21.32 $ 5.97 8.23
Granted - - - -
Exercised - - - -
Forfeited/Cancelled - - - -
------- -------- -------- ----------- ------------
Outstanding at
July 1, 2006 301,000 $ 21.32 $ 5.97 8.23 $ 2,341,000
------- -------- -------- ----------- ------------
Exercisable at
July 1, 2006 204,000 $ 17.38 $ 4.94 7.38 $ 2,341,000
------- -------- -------- ----------- ------------
Had the Company accounted for its stock-based awards under the fair value method
for the 13-week and 39-week periods ended July 2, 2005 the impact to its
financial statements would have been as follows:
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(in thousands, except per share amounts)
---------------------------------------
13 Weeks ended 39 Weeks ended
July 2, 2005 July 2, 2005
Net income as reported $ 2,822 $ 4,561
Deduct stock based employee compensation
expense computed under the fair value method $ (153) $ (342)
------- -------
Net income - pro forma $ 2,669 $ 4,219
======= =======
Earnings per share as reported -basic $ 0.82 $ 1.33
Earnings per share as reported - diluted $ 0.80 $ 1.28
Earnings per share pro forma - basic $ 0.77 $ 1.23
Earnings per share pro forma - diluted $ 0.75 $ 1.19
As of July 1, 2006, there was approximately $350,000 of unrecognized
compensation cost related to unvested stock options, which is expected to be
recognized over a period of approximately one year.
The Company, generally, issues new shares upon the exercise of employee
stock options.
6. DIVIDENDS
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 on January 12, April 12, July 12 and
October 11, 2005 and January 12, April 12 and July 12, 2006. Prior to this, the
Company had not paid any cash dividends since its inception. 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.
7. RELATED PARTY TRANSACTIONS
Receivables due from officers and employees, excluding stock option
receivables, totaled $330,000 at July 1, 2006 and $294,000 at October 1, 2005.
Such loans bear interest at the minimum statutory rate (4.96% at July 1, 2006).
8. LEASE ACCOUNTING
Leasehold improvements funded by landlord incentives are recorded as
deferred rent and amortized as reductions to lease expense of the lease term in
accordance with Statement of Financial Accounting Standards No. 13, "Accounting
for Leases". The Company has received $3,000,000 during fiscal 2006 in
connection with the construction of its two facilities in Atlantic City, New
Jersey.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements. Certain of these risks and
uncertainties are discussed under the heading "forward looking statements" in
the Company's Annual Report on Form 10-K for the fiscal year ended October 1,
2005.
In connection with the sale of one facility and the classification of two
facilities as "held for sale", the operations of these restaurants have been
presented as discontinued operations for the 13-week and 39-week periods ended
July 1, 2006 and the Company has reclassified its statements of operations and
cash flow data for the prior periods presented below, in accordance with FAS 144
based on the fact that the Company has met the criteria under FAS 144. These
dispositions are discussed below in "Recent Restaurant Dispositions."
- 8 -
Revenues
During the Company's third fiscal quarter of 2006, total revenues of
$32,606,000 increased 1.2% compared to total revenues of $32,206,000 in the
third fiscal quarter of 2005. Revenues for the third fiscal quarter of 2006 were
reduced by $243,000 and revenues for the third fiscal quarter of 2005 were
reduced by $560,000 as a result of the sale of one facility and the
classification of four facilities as "held for sale" and their reclassification
to discontinued operations. The Company had net income of $2,488,000 in the
third fiscal quarter of 2006 compared to net income of $2,822,000 in the third
fiscal quarter of 2005. The third fiscal quarter of 2006 was negatively affected
by unusually hot and/or inclement weather during significant portions of the
quarter. The third fiscal quarter of 2006 was further negatively affected by an
$187,000 expense related to the Company's share-based compensation plan.
Same store sales in Las Vegas decreased by $53,000 or 0.4% in the third
fiscal quarter of 2006 compared to the third fiscal quarter of 2005 generally
because of less than expected business at the Venetian Casino Resort. Same store
sales in New York increased $240,000 or 2.3% during the third quarter. Same
store sales in Washington D.C. decreased by $644,000 or 10.4% during the third
quarter. The decrease in Washington D.C. was principally due to unusually hot
and/or inclement weather during significant portions of the quarter in the area.
During the Company's 39-week period ended July 1, 2006, total revenues of
$85,321,000 increased 3.1% compared to total revenues of $82,717,000 in the
39-week period ended July 2, 2005. Revenues for the 39-week period ended July 1,
2006 were reduced by $1,058,000 and revenues for the 39-week period ended July
2, 2005 were reduced by $3,393,000 as a result of the sale of one facility and
the classification four facilities as "held for sale" and their reclassification
to discontinued operations. The Company had net income of $3,252,000 in the
39-week period ended July 1, 2006 compared to net income of $4,561,000 for the
39-week period ended July 2, 2005. Net income was negatively affected during the
39-week period ended July 1, 2006 as a result of $447,000 pre-opening and early
operating losses experienced at the Company's Gallagher's Steakhouse and Luna
Lounge, both located in Atlantic City, New Jersey. The Company's income has also
been negatively affected by $561,000 of compensation expense booked during
fiscal 2006 related to the Company's share-based compensation plan. The 39-week
period ended July 2, 2005 was positively affected by a $644,000 gain realized as
a result of the sale of the Company's America restaurant which was located in
New York City.
Costs and Expenses
Food and beverage costs for the third quarter of 2006 as a percentage of
total revenues were 24.8% compared to 25.0% in the third quarter of 2005. These
costs for the 39-weeks ended July 1, 2006 as a percentage of total revenues were
25.2% compared to 25.4% in the 39-week period ended July 2, 2005.
Payroll expenses as a percentage of total revenues were 30.1% for the
third quarter of 2006 as compared to 29.0% in the third quarter of 2005. Payroll
expenses as a percentage of total revenues were 32.5% for the 39-week period
ended July 1, 2006 as compared to 31.8% for the 39-week period ended July 2,
2005. Minimum wage increase in both New York and Washington D.C. has adversely
affected payroll expenses. Occupancy expenses as a percentage of total revenues
were 13.4% during the third fiscal quarter of 2006 compared to 12.6% in the
third quarter of 2005. Occupancy expenses as a percentage of total revenues were
14.8% during the 39-week period ended July 1, 2006 compared 14.2% for the
39-week period ended July 2, 2005. Other operating costs and expenses as a
percentage of total revenues were 11.7% for the third quarter of 2006 compared
to 11.6% in the third quarter of 2005. Other operating costs and expenses as a
percentage of total revenues were 12.2% for the 39-week period ended July 1,
2006 compared to 11.8% for the 39-week period ended July 2, 2005. General and
administrative expenses as a percentage of total revenues were 5.7% for the
third quarter of 2006 as compared to 5.9% for the third quarter of and 2005.
General and administrative expenses as a percentage of total revenue were 6.4%
for the 39-week period ended July 1, 2006 compared to 6.6% for the 39-week
period ended July 2, 2005.
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 owned or
managed by the Company are owned or managed by separate subsidiaries.
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,
the Company's overall effective tax rate has varied depending on the level of
losses incurred at individual subsidiaries.
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
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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. In order to utilize more
effectively tax loss carryforwards at restaurants that were unprofitable, the
Company has merged certain profitable subsidiaries with certain loss
subsidiaries.
Liquidity and Capital Resources
The Company's primary source of capital has been cash provided by
operations and funds available from its main bank, Bank Leumi USA. The Company
from time to time also utilizes equipment financing in connection with the
construction of a restaurant and seller financing in connection with the
acquisition of a restaurant. The Company utilizes capital primarily to fund the
cost of developing and opening new restaurants, acquiring existing restaurants
owned by others and remodeling existing restaurants owned by the Company.
The Company had a working capital surplus of $6,979,000 at July 1, 2006 as
compared to a working capital surplus of $4,299,000 at October 1, 2005.
The Company's Revolving Credit and Term Loan Facility with its main bank
(Bank Leumi USA), which included a $8,500,000 credit line to finance the
development and construction of new restaurants and for working capital purposes
at the Company's existing restaurants, matured on March 12, 2005. The Company
does not currently plan to enter into another credit facility and expects
required cash to be provided by operations.
Restaurant Expansion
In December 2005, the Company opened a restaurant, Gallagher's Steakhouse,
and a bar, Luna Lounge, at the Resorts Atlantic City Hotel and Casino in
Atlantic City, New Jersey.
During the second fiscal quarter of 2006, the Company entered into an
agreement to operate a marketplace style restaurant known as the Fifth Street
Cafe in the poker room at the Foxwoods Resort Casino in Mashantucket,
Connecticut. The Fifth Street Cafe opened on March 17, 2006. In addition, in May
2005, the Company entered into an agreement to operate a fast-casual restaurant
known as Lucky Seven in the Bingo Hall at the Foxwoods Resort Casino. Lucky
Seven opened on May 15, 2006. Outside investors invested in a limited liability
company established to manage these facilities. The Company is the managing
member of this limited liability company and, through the limited liability
company, the Company leases and manages each of these facilities in exchange for
a monthly management fee equal to five-percent of the gross receipts of these
facilities. Neither the Company nor any of its subsidiaries contributed any
capital to this limited liability company. None of the obligations of this
limited liability company are guaranteed by the Company and investors in this
limited liability company have no recourse against the Company or any of its
assets.
On July 27, 2006, the Company entered into an agreement to operate a
casual sit-down restaurant known as The Grill at Two Trees in the Two Trees Inn,
a facility owned by the Mashantucket Pequot Tribal Nation and used by Foxwoods
Resort Casino, in Ledyard, Connecticut. The agreement provides that the Company
cannot take possession of the restaurant until the Company obtains a liquor
license for the facility. The Company is currently in the process of applying
for such liquor license.
Recent Restaurant Dispositions
The Company entered into a sale and leaseback agreement with GE Capital in
November 2000 to refinance the purchase of various restaurant equipment at its
food and beverage facilities at Desert Passage, the retail complex at the
Aladdin Resort & Casino in Las Vegas, Nevada. In 2002, the operations at the
Aladdin were abandoned. The lease matured in November 2005 and, in connection
therewith, the Company made an unprovided for lump sum payment of $142,000 due
under this lease. This lump sum payment is included in discontinued operations.
The Company's restaurant, America, located in New York City has
experienced declining sales for several years. In March 2004, the Company
entered into a new lease for this restaurant at a significantly increased rent.
The Company entered into this lease with the belief that due to the location and
the uniqueness of the space the lease had value. On January 19, 2005, the
Company signed a definitive agreement for the sale of this restaurant which
closed on March 15, 2005. The Company realized a gain of $644,000 on the sale of
this restaurant. The Company recorded a loss of $1,000 and income of $57,000,
respectively, during the 13-week and 39-week periods ended July 2, 2005. The
gain on sale, income and loss were included in discontinued operations.
The Company's bar/nightclub facility Venus, located at the Venetian Casino
Resort, experienced a steady decline in sales and the Company felt that a new
concept was needed at this location. During the first quarter of 2005, this
bar/nightclub
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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 have failed to reach the level sufficient to achieve the
results the Company required and the Company is seeking a buyer for this
facility. As of December 31, 2005, the Company has 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 Company has met the criteria under SFAS No. 144. The Company recorded
an operating loss of $276,000 and $778,000, respectively, during the 13-week and
39-week periods ended July 1, 2006. The Company recorded an operating loss of
$284,000 and $693,000, respectively, during the 13-week and 39-week periods
ended July 2, 2005. These losses are included in discontinued operations.
Effective August 22, 2004, the Company's lease for The Saloon at the
Neonopolis Center at Fremont Street was converted into a management agreement
whereby the Company received a management fee of $7,000 per month regardless of
the results of operations of this restaurant. In June 2006, the owner of the
Neonopolis Center at Fremont Street sold the building to a new entity who, on
June 25, 2006, exercised its option to terminate the management agreement upon
thirty days written notice to the Company.
On July 6, 2006, the landlord for the Vico's Burrito's fast food facility
at at the Venetian Casino Resort, General Growth Properties, notified the
Company that the landlord was exercising an option granted to it pursuant to the
lease for the facility to terminate the lease in exchange for the landlord
providing the Company with the unamortized portion of the non-removable
improvements located in the facility. On August 10, 2006, the Company and its
landlord for this facility entered into a letter agreement pursuant to which the
landlord agreed to pay the Company $200,000 for the unamortized portion of the
non-removable improvements located in the facility by September 10, 2006. Based
on the negotiations with the landlord, the Company does not anticipate a loss on
the termination of the lease.
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
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 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, 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 financial statements.
The Company's critical accounting policies are described in the Company's
Form 10-K for the year ended October 1, 2005. With the exception of the
application of SFAS No. 123R, as previously discussed, there have been no
significant changes to such policies during fiscal 2006.
Recent Accounting Developments
The Financial Accounting Standards Board has recently issued the following
accounting pronouncement:
In May 2005, the Financial Accounting Standards Board issued SFAS No. 154,
Accounting Changes and Error Corrections ("SFAS No. 154"), a replacement of APB
Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, changing the requirements
for the accounting for and reporting of a change in accounting principle. SFAS
No. 154 was effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The Company does not anticipate
SFAS No. 154 will have a material effect on its consolidated financial position,
results of operations and cash flows.
In June 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income taxes - an
interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial statements in
accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The Company is required to adopt the provisions of
FIN 48 during the first fiscal year beginning after December 15, 2006. The
Company is currently evaluating the impact of FIN 48 on its consolidated results
of operations and financial position.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
None.
Item 4. Controls and Procedures
Based on their evaluation, the Company's principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) are effective
as of December 31, 2005 to ensure that information required to be disclosed by
the Company in reports that the Company files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
There were no changes in the Company's internal control over financial
reporting during the third quarter of fiscal year 2006 that materially affected
or are reasonably likely to materially affect the Company's internal control
over financial reporting.
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PART II
OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits
31.1 Certification of Principal Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certificate of Chief Executive and Chief Financial Officers
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 15, 2006
ARK RESTAURANTS CORP.
By: /s/ Michael Weinstein
---------------------
Michael Weinstein
Chairman, President & Chief Executive Officer
By: /s/ Robert J. Stewart
---------------------
Robert J. Stewart
Chief Financial Officer
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