SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2002
[ ] 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
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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 May 10, 2002
- ------------------------------ ----------------------------------
(Common stock, $.01 par value) 3,181,299
ARK RESTAURANTS CORP. AND SUBSIDIARIES
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INDEX
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PART I - FINANCIAL INFORMATION: Page
----
Item 1. Consolidated Financial Statements:
Consolidated Condensed Balance Sheets - March 30, 2002
(Unaudited) and September 29, 2001 3
Consolidated Condensed Statements of Operations and Retained Earnings -
13-week periods ended March 30, 2002 (Unaudited) and March 31, 2001
(Unaudited) and 26-week periods ended March 30, 2002 (Unaudited) and March
31, 2001 (Unaudited) 4
Consolidated Condensed Statements of Cash Flows - 26-week periods
ended March 30, 2002 (Unaudited) and March 31, 2001 (Unaudited) 5
Notes to Consolidated Condensed Financial
Statements (Unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II - OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
2
Part I - Financial Information
Item 1. Financial Statements
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
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March 30, September 29,
2002 2001
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(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 52 $ -
Accounts receivable 2,559 2,273
Inventories 1,983 2,110
Current portion of long-term receivables 151 203
Prepaid expenses and other current assets 777 655
Refundable and prepaid income taxes 978 1,119
Deferred income taxes 278 278
------- -------
Total current assets 6,778 6,638
LONG-TERM RECEIVABLES 1,030 1,082
FIXED ASSETS - At Cost:
Leasehold improvements 33,699 33,699
Furniture, fixtures and equipment 28,141 27,972
Leasehold improvements in progress 44 93
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61,884 61,764
Less accumulated depreciation and
amortization 29,513 27,035
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32,371 34,729
INTANGIBLE ASSETS - Less accumulated
amortization of $3,787 and $3,589 3,977 4,175
DEFERRED INCOME TAXES 5,857 6,056
OTHER ASSETS 397 395
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TOTAL ASSETS $50,410 $53,075
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 3,045 $ 4,232
Accrued expenses and other current
liabilities 5,340 6,744
Current maturities of long-term debt 5,196 2,247
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Total current liabilities 13,581 13,223
LONG-TERM DEBT - net of current maturities 17,876 21,700
OPERATING LEASE DEFERRED CREDIT 995 995
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share -
authorized, 10,000 shares;
issued, 5,249 shares 52 52
Additional paid-in capital 14,743 14,743
Treasury stock, 2,068 shares (8,351) (8,351)
Receivable from stockholders (760) (776)
Retained earnings 12,274 11,489
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Total shareholders' equity 17,958 17,157
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $50,410 $53,075
======= =======
See notes to consolidated condensed financial statements
3
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited) (In Thousands, Except per share amounts)
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13 Weeks Ended 26 Weeks Ended
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March 30, March 31, March 30, March 31,
2002 2001 2002 2001
--------- --------- --------- ---------
TOTAL REVENUES $26,287 $28,443 $52,213 $59,431
COST & EXPENSES:
Food & beverage cost of sales 6,775 7,349 13,085 15,203
Payroll expenses 9,147 10,658 17,629 21,864
Occupancy expenses 4,254 4,594 8,178 8,746
Other operating costs and expenses 3,311 3,607 5,932 7,254
General and administrative expenses 1,535 1,670 2,931 3,302
Depreciation and amortization expenses 1,352 1,481 2,691 2,920
Joint venture losses - 150 - 150
------- ------- ------- -------
Total costs and expenses 26,374 29,509 50,446 59,439
OPERATING INCOME (LOSS) (87) (1,066) 1,767 (8)
------- ------- ------- -------
OTHER (INCOME) EXPENSE:
Interest expense, net 293 624 615 1,333
Other income (68) (77) (159) (91)
------- ------- ------- -------
Total other (income) expense 225 547 456 1,242
------- ------- ------- ----------
INCOME (LOSS) before provision
(benefit) for income taxes (312) (1,613) 1,311 (1,250)
PROVISION (BENEFIT) for income taxes (123) (613) 526 (475)
------- ------- ------- -------
NET INCOME (LOSS) (189) (1,000) 785 (775)
RETAINED EARNINGS, Beginning
of period 12,463 18,562 11,489 18,337
------- ------- ------- -------
RETAINED EARNINGS, End of period $12,274 $17,562 $12,274 $17,562
======= ======= ======= =======
PER SHARE INFORMATION - BASIC & DILUTED:
NET INCOME (LOSS) ($.06) ($.31) $.25 ($.24)
==== ==== ==== ====
WEIGHTED AVERAGE NUMBER OF SHARES-BASIC 3,181 3,182 3,181 3,182
====== ====== ====== ======
WEIGHTED AVERAGE NUMBER OF SHARES-DILUTED 3,181 3,182 3,199 3,182
====== ====== ====== ======
See notes to consolidated condensed financial statements
4
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
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26 Weeks Ended
-----------------------
March 30, March 31,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 785 $ (775)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Write-off of joint venture advances - 150
Depreciation and amortization of fixed assets 2,478 2,706
Amortization of intangibles 213 214
Deferred income taxes 199 -
Changes in assets and liabilities:
Accounts receivable (286) 1,266
Inventories 127 (46)
Prepaid expenses and other current assets (137) (141)
Refundable and prepaid income taxes 141 (636)
Other assets (2) (136)
Accounts payable - trade (1,187) (739)
Accrued expenses and other current liabilities (1,404) (1,519)
------- -------
Net cash provided by operating activities 927 344
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets, net (120) (1,400)
Issuance of long term receivables (46) (49)
Payments received on long-term receivables 150 1,026
------- -------
Net cash in investing activities (16) (423)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 1,500 3,300
Principal payment on long-term debt (2,375) (5,052)
Proceeds from sale leaseback - 1,559
Payment of accounts receivables from stockholders 16 -
Purchase of treasury stock - (2)
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Net cash used in financing activities (859) (195)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 52 (274)
CASH AND CASH EQUIVALENTS, beginning of period - 697
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 52 $ 423
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during year for:
Interest $ 681 $ 1,417
======= =======
Income taxes $ 187 $ 360
======= =======
See notes to consolidated condensed financial statements.
5
ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(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 March 30, 2002 and results of
operations and changes in cash flows for the periods ended March 30, 2002 and
March 31, 2001 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These 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
September 29, 2001. The results of operations for the periods ended March 30,
2002 are not necessarily indicative of the operating results for the full year.
Certain reclassifications have been made to the 2001 financial statements to
conform to the 2002 presentation.
2. IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 142, Goodwill and Other Intangible Assets, addresses financial
accounting and reporting for acquired goodwill and other intangible assets.
Under SFAS No. 142, goodwill and some intangible assets will no longer be
amortized, but rather reviewed for impairment on a periodic basis. Impairment
losses for goodwill and certain intangible assets that arise due to the initial
application of this Statement are to be reported as resulting from a change in
accounting principle. The provisions of this Statement will be applied at the
beginning of the Company's 2003 fiscal year. The Company is in the process of
evaluating the financial statement impact from adopting this standard.
SFAS No. 143, Accounting for Asset Retirement Obligations, requires the
recording of the fair value of a liability for an asset retirement obligation in
the period in which it is incurred. The Statement is effective for the Company
at the beginning of fiscal year 2004. The Company does not expect the adoption
of this standard to have a material impact on the Company's financial position
or results of operations.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
supersedes existing accounting literature dealing with impairment and disposal
of long-lived assets, including discontinued operations. It addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of and expands current reporting for
discontinued operations to include disposals of a "component" of an entity that
has been disposed of or is classified as held for sale. The Statement is
effective for the Company at the beginning of fiscal year 2003. The Company is
in the process of evaluating the financial statement impact of this standard.
6
3. EFFECTS OF THE SEPTEMBER 11, 2001 TERRORISTS ATTACKS
One Company restaurant, the Grill Room, suffered some damage. The restaurant
is located in an office building adjacent to the World Trade Center (in 2 World
Financial Center) and will likely not reopen until late in fiscal 2002 due to
the damage sustained by the office building. Several other restaurants were also
closed from several days to a month due to their proximity to the World Trade
Center. The Company has extensive property and business interruption insurance
policies and the Company ultimately expects to recover a significant portion of
its physical costs and business interruption losses at these restaurants. The
Company has recorded $450,000 as a reduction of other operating costs and
expenses for the twenty-six week period ended March 30, 2002 for partial
insurance recoveries of certain out of pocket costs and business interruption
losses incurred. Additional recoveries are expected in future quarters as the
assessment of the damages is finalized.
The Company believes that its restaurant and food court operations at
Desert Passage which adjoins the Aladdin Casino Resort in Las Vegas, Nevada (the
"Aladdin") were significantly impaired by the events of September 11th. The
restaurant and food court operations experienced severe sales declines in the
aftermath of September 11th and the Aladdin declared bankruptcy on September 28,
2001. The Company determined that an impairment analysis under SFAS No. 121
needed to be performed.
Based upon the sum of the future undiscounted cash flow related to the
Company's long-lived assets at the Aladdin, the Company determined that
impairment had occurred. To estimate the fair value of such long-lived assets,
for determining the impairment amount, the Company used the expected present
value of the future cash flows. The Company projected continuing negative
operating cash flow for the foreseeable future with no value for subletting or
assigning the lease for the premises. Therefore, the Company determined that
there was no value to such long-lived assets. The Company had an investment of
$8,445,000 in leasehold improvements, and furniture, fixtures and equipment. The
Company believes that these assets would have nominal, if any, value upon
disposal. In addition, the estimated future payments under the lease for kitchen
equipment at the location totaled $1,600,000. The Company believes that unless
there is a significant change in current business circumstances the lease will
be abandoned. The Company recorded in the fiscal year ended September 29, 2002
an impairment charge of $8,445,000 for the net book value of the assets and
recorded an additional $1,600,000 of expense and liability for the future lease
payments.
4. LONG-TERM DEBT
The Company's Revolving Credit and Term Loan Facility (the "Facility") with
its main bank (Bank Leumi USA), as amended November 2001 and December 2001,
includes a $26,000,000 credit line to finance the development and construction
of new restaurants and for working capital purposes at the Company's existing
restaurants. The Company had borrowings of $22,000,000 outstanding on this
Facility at March 30, 2002. Outstanding loans bear interest at 1/2% above the
bank's prime rate and at March 30, 2002 the interest rate on outstanding loans
was 5.25%. Any outstanding loans on June 30, 2002 in excess of $22,000,000 are
due in full and the balance can be converted into a term loan payable over 36
months. The Facility also includes a $1,000,000 letter of credit facility for
use in lieu of lease security deposits. The Company had delivered $889,000 in
irrevocable letters of credit on this Facility. The Company generally is
required to pay commissions of 1 1/2% per annum on outstanding letters of
credit.
7
The Company's subsidiaries each guaranteed the obligations of the Company
under the foregoing Facility and granted security interests in their respective
assets as collateral for such guarantees. In addition, the Company pledged stock
of such subsidiaries as security for obligations of the Company under such
Facility.
The Facility includes restrictions relating to, among other things,
indebtedness for borrowed money, capital expenditures, mergers, sale of assets,
dividends and liens on the property of the Company. The Facility also requires
the Company to comply with certain financial covenants at the end of each
quarter such as minimum cash flow in relation to the Company's debt service
requirements, ratio of debt to equity, and the maintenance of minimum
shareholders' equity. In December 2001 the Company received a waiver for
covenants that the Company was not in compliance with at September 29, 2001 and
certain covenants in the Facility were modified for fiscal 2002 and beyond. The
Company was in compliance with all covenants at March 30, 2002.
5. RECEIVABLE FROM STOCKHOLDERS
Receivable from stockholders includes amounts due from officers and directors
totaling $717,000 at March 30, 2002 and March 31, 2001, respectively. 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.
6. INCOME PER SHARE OF COMMON STOCK
Net income per share is computed in accordance with Statement of Financial
Accounting Standards ("SFAS") 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 common stock equivalents. Common stock equivalents using the treasury stock
method consist of dilutive stock options and warrants.
For the 13-weeks ended March 30, 2002, options to purchase 438,000 shares of
common stock at price range of $6.30 to $12.00 are not included in diluted
earnings per share as the Company had a loss for the quarter. For the 13-weeks
ended March 31, 2001, options and warrants to purchase 377,000 shares of common
stock at price range of $7.50 to $12.00 are not included in diluted earnings per
share as the Company had a loss for the quarter. Due to the loss for the quarter
any common stock equivalents would have been antidilutive.
7. RELATED PARTY TRANSACTIONS
Mr. Donald D. Shack, a director of the Company, is a member of the firm Shack
Siegel Katz Flaherty & Goodman P.C., general counsel to the Company. The Company
incurred $263,000 and $250,000 in legal fees to such firm during the 26-week
periods ended March 30, 2002 and March 31, 2001, respectively.
8
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 contains 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 September 29,
2001.
Revenues
Total revenues decreased 7.6% in the 13-week period ended March 30, 2002
from the comparable period ended March 31, 2001. The Company's primary markets,
New York, Washington DC and Las Vegas rely heavily on tourism and corporate
business, and therefore the terrorist attacks of September 11th still greatly
impacted the sales results for the quarter. Total revenues decreased by $874,000
as a restaurant (the Grill Room) located in an office building adjacent to the
World Trade Center was closed due to damage sustained. Such restaurant (the
Grill Room) will likely not reopen until late in fiscal 2002. Total revenues
also decreased by $1,688,000 from a 6.2% decrease in same store sales on a
Company-wide basis. This decrease is an improvement in comparison to 13% same
store sale decline in the 13-weeks ended December 29, 2001. The New York and Las
Vegas markets have rebounded considerably while Washington DC continues to lag.
The decrease in same store sales was 5.1% in Las Vegas, 4.0% in New York City
and 16.4% in Washington, D.C. Such decreases were principally due to a decrease
in customer counts.
Total revenues decreased 12.1% in the 26-week period ended March 30, 2002
from the comparable period ended March 31, 2001. Total revenues decreased by
$1,934,000 as a restaurant (the Grill Room) was closed. Total revenues also
decreased by $5,279,000 from a 9.5% decrease in same store sales on a Company-
wide basis. The decrease in same store sales was 7.6% in Las Vegas, 8.9% in
New York City and 18.2% in Washington, D.C. Such decreases were principally due
to a decrease in customer counts.
Costs and Expenses
Food and beverage costs for the 13-week period ended March 30, 2002 as a
percentage of total revenues remained constant at 25.8% as compared to last
year, while food and beverage costs as a percentage of total revenues for the
26-week period ended March 30, 2002 was 25.1% as compared to 25.6% last year.
Payroll expenses as a percentage of total revenues decreased to 34.8% for the
13-weeks ended March 20, 2002 as compared to 37.5% last year and also decreased
in the 26-weeks ended March 30, 2002 to 33.8% of total revenues as compared to
36.8% last year. The Company aggressively adapted its cost structure in response
to lower sales expectations following September 11th. Payroll head count at
March 30, 2002 is approximately 300 personnel (13%) lower than the comparable
period last year through a combination of layoffs and delayed seasonal hiring.
Severance pay to key personnel was approximately $50,000 for the 26-weeks ended
March 30, 2002.
Occupancy and other expenses as a percentage of total revenues remained
constant at approximately 28.8% for the 13-weeks ended March 30, 2002 as
9
compared to last year and were 27.0% for the 26-week period ended March 30, 2002
as compared to 26.9% last year.
General and administrative expenses, as a percentage of total revenues,
remained constant at 5.9% for the 13-week period ended March 30, 2002 as
compared to last year and were constant at 5.6% during the 26-week period ended
March 30, 2002 as compared to last year. The Company has reduced its general and
administrative expenses in response to September 11th.
Interest expense was $293,000 for the 13-week period ended March 30, 2002
as compared to $624,000 last year and interest expense for the 26-week period
ended March 30, 2002 was $615,000 as compared to $1,333,000 last year. The
significant decrease in both periods as compared to last year is due to lower
outstanding borrowings on the Company's revolving credit facility and the
benefit from significant rate decreases in the prime-borrowing rate.
The Company had a net loss of $189,000 for the 13-week period ended March
30, 2002 as compared to a net loss of $1,000,000 last year and had a net profit
of $785,000 for the 26-week period ended March 30, 2002 as compared to a net
loss of $775,000 last year.
Net sales of managed restaurants were $1,281,000 during the 26-week period
ended March 30, 2002 as compared to $2,249,000 last year. In December 2000,
three restaurants which the Company managed at one site in Boston, Massachusetts
closed as the lease expired and was not renewed by the landlord. At March 30,
2002 the Company managed one restaurant. Net sales of managed restaurants are
not included in consolidated net sales.
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
subsidiary on a non consolidated basis. Most of the restaurants owned or managed
by the Company are owned or managed by a separate subsidiary.
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 which operate in the District of Columbia.
Accordingly, the Company's overall effective income tax rate has varied
depending on the level of the 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 (Nevada has no state income tax
and other states in which the Company operate have income tax rates
substantially lower in comparison to New York) and the utilization of state and
local net operating loss carry forwards. In order to more effectively utilize
tax loss carry forwards at restaurants that were unprofitable, the Company has
merged certain profitable subsidiaries with certain loss subsidiaries.
As a result of the enactment of the Revenue Reconciliation Act of 1993,
the Company is entitled to a tax credit based on the amount of FICA taxes paid
by the Company with respect to the tip income of restaurant service personnel.
The Company estimates that this credit will be in excess of $500,000 for the
current year.
10
The Company and the Internal Revenue Service finalized the adjustments to
the Company's federal income tax for the fiscal years ended September 30, 1995
through October 3, 1998. The adjustments primarily relate to travel and meal
expenses for which the Internal Revenue Service asserts the Company did not
comply with certain record keeping requirements of the Internal Revenue Code.
The settlement did not have a material effect on the Company's financial
condition.
Liquidity and Sources of Capital
The Company's primary source of capital is cash provided by operations and
funds available from the revolving credit agreement with 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 and
acquiring existing restaurants.
The Company's Revolving Credit and Term Loan Facility (the "Facility")
with its main bank (Bank Leumi USA), as amended November 2001 and December 2001,
includes a $26,000,000 credit line to finance the development and construction
of new restaurants and for working capital purposes at the Company's existing
restaurants. The Company had borrowings of $22,000,000 outstanding on this
Facility at March 30, 2002. Outstanding loans bear interest at 1/2% above the
bank's prime rate and at March 30, 2002 the interest rate on outstanding loans
was 5.25%. Any outstanding loans on June 30, 2002 in excess of $22,000,000 are
due in full and the balance can be converted into a term loan payable over 36
months. The Facility also includes a $1,000,000 letter of credit facility for
use in lieu of lease security deposits. The Company had delivered $889,000 in
irrevocable letters of credit on this Facility. The Company generally is
required to pay commissions of 1 1/2% per annum on outstanding letters of
credit.
At March 30, 2002, the Company had a working capital deficit of $6,803,000
as compared to a working capital deficit of $6,585,000 at September 29, 2001.
The restaurant business does not require the maintenance of significant
inventories or receivables, thus the Company is able to operate with minimal and
even negative working capital.
The Company's subsidiaries each guaranteed the obligations of the Company
under the foregoing Facility and granted security interests in their respective
assets as collateral for such guarantees. In addition, the Company pledged stock
of such subsidiaries as security for obligations of the Company under such
Facility.
The Facility includes restrictions relating to, among other things,
indebtedness for borrowed money, capital expenditures, mergers, sale of assets,
dividends and liens on the property of the Company. The Facility also requires
the Company to comply with certain financial covenants at the end of each
quarter such as minimum cash flow in relation to the Company's debt service
requirements, ratio of debt to equity, and the maintenance of minimum
shareholders' equity. In December 2001 the Company received a waiver for
covenants that the Company was not in compliance with at September 29, 2001 and
certain covenants in the Facility were modified for fiscal 2002 and beyond. The
Company was in compliance with all covenants at March 30, 2002.
In November 2000, the Company entered into a sale and leaseback agreement
with GE Capital for $1,652,000 to refinance the purchase of various restaurant
equipment at Dessert Passage, which adjoins the Aladdin Casino Resort in Las
11
Vegas, Nevada (the "Aladdin"). The lease, which is accounted for as an operating
lease, bears interest at 8.65% per annum and is payable in 48 equal monthly
installments of $31,785 until maturity in November 2004 at which time the
Company has an option to purchase the equipment for $519,440. Alternatively, the
Company can extend the lease for an additional 12 months at the same monthly
payment until maturity in November 2005 and repurchase the equipment at such
time for $165,242. At September 29, 2001 the Company determined that its food
service operations at the Aladdin were impaired and the lease will be abandoned
unless there is a significant change in current business circumstances.
Accordingly the Company accrued $1,600,000 of estimated future lease payments on
this lease. (See events of September 11th below)
The Company does not anticipate any capital-intensive projects during fiscal
2002 and expects that a significant portion of its projected cash flow will be
applied to debt reduction.
Restaurant Expansion
The Company will soon open a 200-seat restaurant and bar (the Saloon) at the
Neonopolis Center at Fremont Street in downtown Las Vegas, Nevada. The Company
received a $2,400,000 construction and operating allowance from the landlord and
expects to construct and open the restaurant within the limits of that
allowance.
The Company is not currently committed to any other projects.
Events of September 11, 2001
The Company experienced severe sales decreases in the immediate aftermath of
the September 11th terrorist attacks. The Company continues to experience
negative same store sales, although on a much improved level as compared to the
immediate weeks following the attack. The Company has aggressively reduced its
cost structure at restaurants and at the corporate level. In addition, the
Company's Revolving Credit Facility has been amended in the manner described
above under "Liquidity and Sources of Capital". As a result and given recent
sales trends, the Company believes that it will generate sufficient cash flow in
fiscal 2002 to meet its debt obligations.
One Company restaurant, the Grill Room, suffered some damage. The restaurant
is located in an office building adjacent to the World Trade Center (in 2 World
Financial Center) and will likely not reopen until late in fiscal 2002 due to
the damage sustained by the office building. Several other Company restaurants
were closed from several days to a month due to their proximity to the World
Trade Center. The Company has extensive property and business interruption
insurance policies and the Company ultimately expects to recover a significant
portion of its physical costs and business interruption losses at these
restaurants. The Company has recorded $450,000 as a reduction of other operating
costs and expenses in the 26-weeks ended March 30, 2002 for partial insurance
recoveries of certain out of pocket costs and business interruption losses
incurred. Additional recoveries are expected in future quarters as the
assessment of the damages is finalized.
The Company believes that its restaurant and food court operations at
Desert Passage which adjoins the Aladdin Casino Resort in Las Vegas, Nevada (the
"Aladdin") were significantly impaired by the events of September 11th. The
restaurant and food court operations experienced severe sales declines in the
aftermath of September 11th and the Aladdin declared bankruptcy on September 28,
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2001. The Company determined that an impairment analysis under SFAS No. 121
needed to be performed.
Based upon the sum of the future undiscounted cash flow related to the
Company's long-lived assets at the Aladdin, the Company determined that
impairment had occurred. To estimate the fair value of such long-lived assets,
for determining the impairment amount, the Company used the expected present
value of the future cash flows. The Company projected continuing negative
operating cash flow for the foreseeable future with no value for subletting or
assigning the lease for the premises. Therefore, the Company determined that
there was no value to such long-lived assets. The Company had an investment of
$8,445,000 in leasehold improvements, and furniture, fixtures and equipment. The
Company believes that these assets would have nominal, if any, value upon
disposal. In addition, the estimated future payments under the lease for kitchen
equipment at the location totaled $1,600,000. The Company believes that unless
there is a significant change in current business circumstances the lease will
be abandoned. The Company recorded in the fiscal year ended September 29, 2001
an impairment charge of $8,445,000 for the net book value of the assets and
recorded an additional $1,600,000 of expense and liability for the future lease
payments.
The long-term effects of the terrorist attacks cannot yet be determined. The
Company's restaurants in travel destinations, consisting of all of its
restaurants in Washington and Las Vegas and certain restaurants in New York, are
intended to benefit from high tourist traffic. The decline in travel resulting
from the attacks has had a material adverse effect on revenues from those
restaurants. Recovery of those restaurants depends upon restoration of public
confidence in the air transportation system and its willingness and inclination
to resume vacation and convention travel.
Critical Accounting Policies and Estimates
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 operation, differences in
actual results could be material to the financial statements.
The Company's significant accounting policies are more fully described in
Note 1 to the Company's annual report on Form 10-K for the year ended September
29, 2001. Below are listed certain policies that management believes are
critical.
Fixed Assets - The Company annually assesses any impairment in value of
long-lived assets and certain identifiable intangibles to be held and used. The
Company evaluates the possibility of impairment by comparing anticipated
undiscounted cash flows to the carrying amount of the related long-lived assets.
If such cash flows are less than carrying value the Company then reduces the
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asset to its fair value. Fair value is generally calculated using discounted
cash flows. Various factors such as sales growth and operating margins and
proceeds from a sale are part of this analysis. Future results could differ from
the Company's projections with a resulting adjustment to income in such period.
Deferred Income Tax Valuation Allowance - The Company provides such allowance
due to uncertainty that some of the deferred tax amounts may not be realized.
Certain items, such as state and local tax loss carryforwards, are dependent on
future earnings or the availability of tax strategies. Future results could
require an increase or decrease in the valuation allowance and a resulting
adjustment to income in such period.
Recent Developments
The Financial Accounting Standards Board has recently issued the following
accounting pronouncements:
SFAS No. 142 "Goodwill and Other Intangible Assets" addresses financial
accounting and reporting for acquired goodwill and other intangible assets.
Under SFAS No. 142, goodwill and some intangible assets will no longer be
amortized, but rather reviewed for impairment on a periodic basis. Impairment
losses for goodwill and certain intangible assets that arise due to the initial
application of this statement are to be reported as resulting from a change in
accounting principle. The provisions of this statement will be applied at the
beginning of the Company's 2003 fiscal year. The Company is in the process of
evaluating the financial statement impact from adopting this standard.
SFAS No. 143 "Accounting for Asset Retirement Obligations" requires the
recording of the fair value of a liability for an asset retirement obligation in
the period in which it is incurred. This statement is effective for the Company
at the beginning of the Company's 2004 fiscal year. The Company does not expect
the adoption of this standard to have a material impact on the Company's
financial position or results of operations.
SFAS No. 144 "Accounting for the Impairment or Disposal of Long Lived Assets"
supersedes existing accounting literature dealing with impairment and disposal
of long-lived assets, including discontinued operations. It addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of, and expands current reporting for
discontinued operations to include disposals of a "component" of an entity that
has been disposed of or is classified as held for sale. This statement is
effective for the Company at the beginning of the Company's 2003 fiscal year.
The Company is in the process of evaluating the financial statement impact of
this standard.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates with
respect to its outstanding credit agreement with its main bank, Bank Leumi USA.
The revolving credit line bears interest at prime plus one-half percent and is
scheduled to convert on June 30, 2002 to a term loan payable over three years.
Based upon a $22,000,000 term loan and a 100 basis point change in interest
rates, interest expense would change by $189,000 in the one-year period
beginning March 31, 2002.
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Part II - Other Information
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on March 27, 2002. The
following matters were submitted to a vote of the Company's stockholders:
(i) The election of nine directors;
(ii) An amendment to the Company's Certificate of Incorporation.
(iii) The ratification of the appointment of Deloitte & Touche LLP as
independent auditors for the 2002 fiscal year.
The Company's stockholders re-elected the entire Board of Directors
consisting of Ernest Bogen, Michael Weinstein, Vincent Pascal, Robert Towers,
Andrew Kuruc, Paul Gordon, Donald D.Shack, Jay Galin and Bruce Lewin. Each
director received at least 99% of the votes cast at the meeting.
The Company's stockholders approved an amendment to the Company's Certificate
of Incorporation by a vote of 1,705,187 for, 12,996 against, 1,346,472 non-votes
and 900 abstentions.
The Company's stockholders ratified the Board of Director's appointment of
Deloitte & Touche LLP as the Company's independent auditors for the 2002 fiscal
year by a vote of 3,064,555 for, 1,000 against and no abstentions.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Registrant, filed on
January 4, 1983, incorporated by reference to Exhibit 3.1 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended October 1, 1994 (the "1994 10-K").
3.2 Certificate of Amendment of the Certificate of Incorporation
of the Registrant filed on October 11, 1985, incorporated by
reference to Exhibit 3.2 to the 1994 10-K.
3.3 Certificate of Amendment of the Certificate of Incorporation
of the Registrant filed on July 21, 1988, incorporated by
reference to Exhibit 3.3 to the 1994 10-K.
3.4 Certificate of Amendment of the Certificate of Incorporation
of the Registrant filed on May 13, 1997, incorporated by
reference to Exhibit 3.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 29,
1997.
*3.5 Certificate of Amendment of the Certificate of Incorporation
of the Registrant filed on April 24, 2002.
3.6 By-Laws of the Registrant, incorporated by reference to
Exhibit 3.4 to the 1994 10-K.
*Filed herewith.
(b) Reports on Form 8-K: None
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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 10, 2002
ARK RESTAURANTS CORP.
By /s/ Michael Weinstein
---------------------------------
Michael Weinstein, President &
Chief Executive Officer
By /s/ Andrew Kuruc
---------------------------------
Andrew Kuruc,
Chief Financial Officer, Senior
Vice President, Controller and
Principal Accounting Officer
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