SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2006
Commission file number 0-14030
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)
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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]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Class Outstanding shares at April 24, 2006
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(Common stock, $.01 par value) 3,462,299
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars and shares in Thousands)
April 1, October 1,
2006 2005
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(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 1,589 $ 5,723
Accounts receivable 5,232 2,821
Employee receivables 337 294
Current portion of long-term receivables 106 299
Inventories 1,744 1,615
Deferred income taxes 650 630
Prepaid expenses and other current assets 1,270 1,417
Assets held for sale 1,209 --
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Total current assets 12,137 12,799
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LONG-TERM RECEIVABLES 1,261 1,275
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FIXED ASSETS
Leasehold improvements 34,327 31,252
Furniture, fixtures and equipment 28,324 28,107
Construction in progress 9 1,782
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62,660 61,141
Less accumulated depreciation and amortization 38,399 37,096
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24,261 24,045
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INTANGIBLE ASSETS, NET 184 198
GOODWILL 3,440 3,440
DEFERRED INCOME TAXES 4,824 4,679
OTHER ASSETS 734 729
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TOTAL $ 46,841 $ 47,165
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 1,973 $ 2,740
Accrued expenses and other current liabilities 4,023 4,756
Accrued income taxes 523 1,004
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Total current liabilities 6,519 8,500
OPERATING LEASE DEFERRED CREDIT 3,853 878
OTHER LIABILITIES 337 374
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TOTAL LIABILITIES 10,709 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 18,811 18,437
Retained earnings 25,817 27,472
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44,684 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 36,132 37,413
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TOTAL $ 46,841 $ 47,165
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See notes to consolidated condensed financial statements.
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands, Except per share amounts)
13 Weeks Ended 26 Weeks Ended
-------------------- --------------------
April 1, April 2, April 1, April 2,
2006 2005 2006 2005
-------- -------- -------- --------
TOTAL REVENUES $ 25,592 $ 24,157 $ 52,954 $ 50,840
-------- -------- -------- --------
COST AND EXPENSES:
Food and beverage cost of sales 6,741 6,401 13,438 13,062
Payroll expenses 9,093 8,473 18,033 17,054
Occupancy expenses 4,064 3,729 8,296 7,769
Other operating costs and expenses 3,197 3,015 6,617 6,000
General and administrative expenses 1,839 1,734 3,561 3,555
Depreciation and amortization 840 673 1,619 1,494
-------- -------- -------- --------
Total costs and expenses 25,774 24,025 51,564 48,934
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OPERATING INCOME (LOSS) (182) 132 1,390 1,906
-------- -------- -------- --------
OTHER INCOME:
Interest income 22 28 47 53
Other income 181 226 390 295
-------- -------- -------- --------
Total other income 203 254 437 348
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Income from continuing operations before income taxes 21 386 1,827 2,254
Provision for income taxes 7 119 621 661
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Income from continuing operations 14 267 1,206 1,593
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DISCONTINUED OPERATIONS:
Income (loss) from operations of discontinued restaurants (250) 405 (668) 206
Provision (benefit) for income taxes (85) 118 (227) 60
-------- -------- -------- --------
Income (loss) from discontinued operations (165) 287 (441) 146
-------- -------- -------- --------
NET INCOME (LOSS) $ (151) $ 554 $ 765 $ 1,739
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PER SHARE INFORMATION - BASIC AND DILUTED:
Continuing operations basic $ .00 $ .08 $ .35 $ .47
Discontinued operations basic $ (.04) $ .08 $ (.13) $ .04
-------- -------- -------- --------
Basic $ (.04) $ .16 $ .22 $ .51
======== ======== ======== ========
Continuing operations diluted $ .00 $ .07 $ .34 $ .45
Discontinued operations diluted $ (.04) $ .08 $ (.12) $ .04
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Diluted $ (.04) $ .15 $ .22 $ .49
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WEIGHTED AVERAGE NUMBER OF SHARES-BASIC 3,462 3,433 3,462 3,414
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WEIGHTED AVERAGE NUMBER OF SHARES-DILUTED 3,546 3,586 3,546 3,560
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See notes to consolidated condensed financial statements.
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
26 Weeks Ended
--------------------
April 1, April 2,
2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 765 $ 1,739
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (165) 67
Stock-based compensation 374 --
Depreciation and amortization 1,805 1,672
Depreciation and amortization on discontinued operations 96 76
Operating lease deferred credit (25) (74)
Changes in operating assets and liabilities:
Accounts receivable (2,411) (1,126)
Employee receivables (43) 179
Inventories (129) 71
Prepaid expenses and other current assets 147 (151)
Other assets (5) (465)
Accounts payable - trade (767) 37
Accounts payable - discontinued operations (37) (42)
Accrued income taxes (481) (1,266)
Accrued expenses and other current liabilities (733) (458)
Cash received from landlord 3,000 --
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Net cash provided by operating activities 1,391 259
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (3,312) (974)
Additions to fixed assets - discontinued operations -- (620)
Issuance of long-term receivables - discontinued operations (700)
Payments received on long-term receivables 207 162
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Net cash used in investing activities (3,105) (2,132)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt -- (219)
Dividends paid (2,420) (2,385)
Exercise of stock options -- 404
Proceeds from stock option receivables -- 198
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Net cash used in financing activities (2,420) (2,002)
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NET DECREASE IN CASH (4,134) (3,875)
CASH, Beginning of period 5,723 4,435
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CASH, End of period $ 1,589 $ 560
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ -- $ 3
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Income taxes $ 1,252 $ 1,920
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See notes to consolidated condensed financial statements.
ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
April 1, 2006
(Unaudited)
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 April 1, 2006, results of operations for the 13-week and 26-week periods ended April 1, 2006 and April 2, 2005 and cash flows for the 26-week periods ended April 1, 2005 and April 2, 2006 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 the 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 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 $15,000 and income of $58,000, respectively, during the 13-week and 26-week periods ended April 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 $253,000 and $502,000, respectively, during the 13-week and 26-week periods ended April 1, 2006. The Company recorded an operating loss of $189,000 and $409,000, respectively, during the 13-week and 26-week periods ended April 2, 2005. These losses are included in discontinued operations.
3. RECEIVABLES FROM EMPLOYEES IN RESPECT OF STOCK OPTION EXERCISES
Receivables from employees in respect of stock option exercises includes amounts due from officers and directors totaling $166,000 at April 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 (7.75% at April 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 26-week periods ended April 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 26-week periods ended April 1, 2006. For the 13-week and 26-week periods ended April 2, 2005, options to purchase 330,000 shares of common stock at a price of $6.30 to $29.60 were included in diluted earnings per share.
During the 26 week period ended April 1, 2006, employees exercised no options to purchase shares of common stock.
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 Sock 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.
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 and second fiscal quarter of 2006 no excess tax benefits were generated.
The compensation cost charged against income in the second 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 26-week period ended April 2, 2006 for share-based compensation programs was $374,000, before a tax benefit of $128,000. The compensation cost recognized is classified as payroll expense in the consolidated statement of operations.
On November 2005, the FASB issued FASB Staff Position No. FAS 123R-3 "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards". 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 Average
Excersie Fair Contractual Intrinsic
Options Shares Price Value Term(Yrs.) Value
------- ------- -------- -------- ----------- -----------
Outstanding as October 1, 2005 301,000 $ 21.32 $ 8.23 5.97
Granted -- -- -- --
Exercised -- -- -- --
Forfeited/Cancelled -- -- -- --
------- -------- -------- ----------- -----------
Outstanding at April 1, 2006 301,000 $ 21.32 $ 8.23 5.97 $ 2,598,000
======= ======== ======== =========== ===========
Exercisable at April 1, 2006 204,000 $ 17.38 $ 7.38 4.94 $ 2,564,000
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Compensation cost is recognized on a straight-line basis over the vesting period during which employees perform related services. The Company recorded compensation expense of $187,000 and $374,000 during the 13-week and 26-week periods ended April 1, 2006, respectively. The Company has applied a forfeitures assumption of 5.1% per year in the calculation of such expense.
Had the Company accounted for its stock-based awards under the fair value method for the 13-week and 26-week periods ended April 2, 2005 the impact to its financial statements would have been as follows:
(in thousands, except per share amounts)
13 Weeks ended 26 Weeks ended
April 2, 2005 April 2, 2005
Net income as reported $ 554 $ 1,739
Deduct stock based employee compensation expense
computed under the fair value method $ (160) $ (198)
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Net income - pro forma $ 394 $ 1,541
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Earnings per share as reported -basic $ 0.16 $ 0.51
Earnings per share as reported - diluted $ 0.15 $ 0.49
Earnings per share pro forma - basic $ 0.11 $ 0.45
Earnings per share pro forma - diluted $ 0.11 $ 0.43
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As of April 1, 2006, there was approximately $537,000 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, and April 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 $337,000 at April 1, 2006 and $294,000 at October 1, 2005. Such loans bear interest at the minimum statutory rate (4.68% at April 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 another facility as "held for sale", the operations of these restaurants have been presented as discontinued operations for the 13-week and 26-week periods ended April 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."
Revenues
During the Company's second fiscal quarter of 2006, total revenues of $25,592,000 increased 5.9% compared to total revenues of $24,157,000 in the second fiscal quarter of 2005. Revenues for the second fiscal quarter of 2006 were reduced by $271,000 and revenues for the first fiscal quarter of 2005 were reduced by $1,196,000 as a result of the sale of one facility and the classification of another facility as "held for sale" and their reclassification to discontinued operations. The Company had a net loss of $151,000 in the second fiscal quarter of 2006 compared to net income of $554,000 in the second fiscal quarter of 2005. The second fiscal quarter of 2006 was negatively affected by pre-opening and early operating losses of $421,000 at the Company's Gallagher's Steakhouse and Luna Lounge, both located in Atlantic City, New Jersey. Both these facilities opened in late December 2005. The second fiscal quarter of 2006 was further negatively affected by an $187,000 expense related to the Company's share-based compensation plan. The second fiscal quarter of 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.
Same store sales in Las Vegas decreased by $211,000 or 1.3% in the second fiscal quarter of 2006 compared to the second fiscal quarter of 2005 generally because of less than expected business at the Venetian Casino Resort. Same store sales in New York increased $483,000 or 10.1% during the second quarter. Same store sales in Washington D.C. decreased by $20,000 or 0.7% during the second quarter. The increase in New York was principally due to the general improvement in economic conditions and milder winter weather.
During the Company's 26-week period ended April 1, 2006, total revenues of $52,954,000 increased 4.2% compared to total revenues of $50,840,000 in the 26-week period ended April 2, 2005. Revenues for the 26-week period ended April 1, 2006 were reduced by $576,000 and revenues for the 26-week period ended April 2, 2005 were reduced by $2,504,000 as a result of the sale of one facility and the classification of another facility as "held for sale" and their reclassification to discontinued operations. The Company had net income of $765,000 in the 26-week period ended April 1, 2006 compared to net income of $1,739,000 for the 26-week period ended April 2, 2005. Net income was negatively affected during the 26-week period ended April 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 $374,000 of compensation expense booked during fiscal 2006 related to the Company's share-based compensation plan. The 26-week period ended April 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 second quarter of 2006 as a percentage of total revenues were 26.3% compared to 26.5% in the second quarter of 2005. These costs for the 26-weeks ended April 1, 2006 as a percentage of total revenues were 25.4% compared to 25.7% in the 26-week period ended April 2, 2005.
Payroll expenses as a percentage of total revenues were 35.5% for the second quarter of 2006 as compared to 35.1% in the second quarter of 2005. Payroll expenses as a percentage of total revenues were 34.1% for the 26-week period ended April 1, 2006 as compared to 33.5% for the 26-week period ended April 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 15.9% during the first fiscal quarter of 2006 compared to 15.4% in the second quarter of 2005. Occupancy expenses as a percentage of total revenues were 15.7% during the 26-week period ended April 1, 2006 compared 15.3% for the 26-week period ended April 2, 2005. Other operating costs and expenses as a percentage of total revenues were 12.5% for the second quarter of both 2006 and 2005. Other operating costs and expenses as a percentage of total revenues were 12.5% for the 26-week period ended April 1, 2006 compared to 11.8% for the 26-week period ended April 2, 2005. General and administrative expenses as a percentage of total revenues were 7.2% for both the second quarter of 2006 and 2005. General and administrative expenses as a percentage of total revenue were 6.7% for the 26-week period ended April 1, 2006 compared to 7.0% for the 26-week period ended April 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 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 $5,618,000 at April 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. The Company anticipates entering into an agreement to operate at least one more facility at the Foxwoods Resort Casino during this year's third quarter.
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 the 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 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 recorded an operating loss of $13,000 for the first fiscal quarter of 2006 and operating income of $74,000 during the first fiscal quarter of 2005. The operating income and loss are included in discontinued operations. The sale was finalized during the second fiscal quarter of 2005.
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 has 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 $253,000 and $502,000, respectively, during the 13-week and 26-week periods ended April 1, 2006. The Company recorded an operating loss of $189,000 and $409,000, respectively, during the 13-week and 26-week periods ended April 2, 2005. These losses are included in discontinued operations.
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.
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 first quarter of fiscal year 2006 that materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
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: May 16, 2006
ARK RESTAURANTS CORP.
By: /s/ Michael Weinstein
---------------------
Michael Weinstein
Chairman, President & Chief Executive Officer
By: /s/ Robert J. Stewart
---------------------
Robert Stewart
Chief Financial Officer
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EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael Weinstein, President and Chief Executive Officer of Ark Restaurants Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ark Restaurants Corp.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's accountants and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Dated: May 16, 2006 /s/ MICHAEL WEINSTEIN ------------------------------------------------ Michael Weinstein Chairman, President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert Stewart, Chief Financial Officer of Ark Restaurants Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ark Restaurants Corp.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's accountants and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Dated: May 16, 2006 /s/ Robert Stewart -------------------------------- Robert Stewart Chief Financial Officer |
Exhibit 32
Certificate of Chief Executive and Chief Financial Officers
The following statement is being made to the Securities and Exchange Commission solely for purposes of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), which carries with it certain criminal penalties in the event of a knowing or willful misrepresentation.
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Re: Ark Restaurants Corp.
Ladies and Gentlemen:
In accordance with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 USC 1350), each of the undersigned hereby certifies that:
(i) this report on Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Ark Restaurants Corp.
Dated as of this 16th day of May 2006. /s/ Michael Weinstein /s/ Robert Stewart ------------------------------------ ------------------------ Michael Weinstein Robert Stewart Chairman, President and Chief Executive Officer Chief Financial Officer |