SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2003
Commission file number 0-14030
ARK RESTAURANTS CORP.
(Exact name of registrant as specified in its charter)
New York 13-3156768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
85 Fifth Avenue, New York, New York 10003
(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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 May 12, 2003
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(Common stock, $.01 par value) 3,181,299
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
March 29, September 28,
2003 2002
--------- -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 591 $ 819
Accounts receivable 2,066 2,000
Employee receivable (net of reserves of $0 and $45 respectively) 954 1,045
Inventories 1,952 1,925
Current portion of long-term receivables 137 164
Prepaid expenses and other current assets 1,259 779
Refundable and prepaid income taxes 1,264 957
Deferred income taxes 278 293
------- -------
Total current assets 8,501 7,982
LONG-TERM RECEIVABLES 1,444 904
FIXED ASSETS - At Cost:
Leasehold improvements 33,656 33,542
Furniture, fixtures and equipment 28,518 28,320
Leasehold improvements in progress 292 --
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62,466 61,862
Less accumulated depreciation and
amortization 34,572 31,602
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27,894 30,260
INTANGIBLE ASSETS - Less accumulated
amortization of $3,837 in 2002 3,810 3,782
DEFERRED INCOME TAXES 4,270 4,255
OTHER ASSETS 784 777
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TOTAL ASSETS $46,703 $47,960
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 2,809 $ 3,332
Accrued expenses and other current
liabilities 4,747 6,356
Current maturities of long-term debt 8,062 6,284
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Total current liabilities 15,618 15,972
LONG-TERM DEBT - net of current maturities 8,711 9,547
OPERATING LEASE DEFERRED CREDIT 1,003 995
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY:
2
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)
Receivables from Employees in respect of
stock option exercises (706) (716)
Retained earnings 15,633 15,718
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Total shareholders' equity 21,371 21,446
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $46,703 $47,960
======= =======
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)
13 Weeks Ended 26 Weeks Ended
--------------------- ---------------------
March 29, March 30, March 29, March 30,
2003 2002 2003 2002
--------- --------- --------- ---------
TOTAL REVENUES $26,555 $26,287 $52,821 $52,213
COST & EXPENSES:
Food & beverage cost of sales 6,479 6,775 13,077 13,085
Payroll expenses 9,198 9,147 18,338 17,629
Occupancy expenses 4,279 4,254 8,700 8,178
Other operating costs and expenses 3,368 3,311 6,979 5,932
General and administrative expenses 1,343 1,535 2,934 2,931
Depreciation and amortization expenses 1,058 1,352 2,205 2,691
Asset impairment 667 -- 667 --
------- ------- ------- -------
Total costs and expenses 26,392 26,374 52,900 50,446
OPERATING (LOSS) INCOME 163 (87) (79) 1,767
------- ------- ------- -------
OTHER (INCOME) EXPENSE:
Interest expense, net 122 293 337 615
Other income (8) (68) (278) (159)
------- ------- ------- -------
Total other (income) expense 114 225 59 456
------- ------- ------- -------
Income before provision
for income taxes 49 (312) (138) 1,311
Provision (benefit) for income taxes 19 (123) (53) 526
------- ------- ------- -------
NET INCOME (LOSS) 30 (189) (85) 785
RETAINED EARNINGS, Beginning
of period 15,603 12,463 15,718 11,489
------- ------- ------- -------
RETAINED EARNINGS, End of period $15,633 $12,274 $15,633 $12,274
======= ======= ======= =======
PER SHARE INFORMATION - BASIC & DILUTED:
NET INCOME (LOSS) BASIC $ .01 ($.06) ($.03) $ .25
======= ======= ======= =======
NET INCOME (LOSS) DILUTED $ .01 ($.06) ($.03) $ .25
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES-BASIC 3,181 3,181 3,181 3,181
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES-DILUTED 3,188 3,181 3,181 3,199
======= ======= ======= =======
See notes to consolidated condensed financial statements.
4
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
26 Weeks Ended
---------------------
March 29, March 30,
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ (85) $ 785
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization of fixed assets 2,205 2,478
Amortization of intangibles -- 213
Asset impairment 667 --
Operating lease deferred credit 9 --
Deferred income taxes -- 199
Reduction in allowance on long-term receivables (585) (46)
Changes in assets and liabilities:
Accounts receivable 35 (286)
Inventories (27) 127
Prepaid expenses and other current assets (480) (137)
Refundable and prepaid income taxes (307) 141
Other assets (36) (2)
Accounts payable - trade (523) (1,187)
Accrued expenses and other current liabilities (1,609) (1,404)
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Net cash (used in) provided by operating activities (736) 881
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (506) (120)
Payments received on long-term receivables 72 150
------- -------
Net cash used in by investing activities (434) 30
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 1,778 1,500
Principal payment on long-term debt (836) (2,375)
Exercise of stock options -- 16
------- -------
Net cash (used in) financing activities 942 (859)
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (228) 52
CASH AND CASH EQUIVALENTS, beginning of period 819 --
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 591 $ 52
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 428 $ 681
======= =======
Income taxes $ 125 $ 187
======= =======
See notes to consolidated condensed financial statements.
5
ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 29, 2003
(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 March 29, 2003 and results
of operations and cash flows for the 13 and 26 week periods ended March 29, 2003
and March 30, 2002 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 28, 2002. The results of operations for the periods ended March
29, 2003 are not necessarily indicative of the operating results for the full
year.
Certain reclassifications have been made to the 2002 financial
statements to conform to the 2003 presentation.
2. IMPACT OF NEW ACCOUNTING STANDARDS
"Goodwill and other Intangible Assets" ("SFAS 142"). As of September
29, 2002, the Company adopted the provisions for SFAS No. 142. SFAS No. 142
requires that goodwill and intangible assets with indefinite lives no longer be
amortized, but instead tested for impairment at least annually and written down
with a charge to operations when the carrying amount exceeds the estimated fair
value. Prior to the adoption of SFAS No. 142, the Company amortized the
goodwill. The amount of such amortized goodwill was $3,448,000 as of September
28, 2002. In accordance with SFAS No. 142 the Company discontinued the
amortization of goodwill effective September 29, 2002. Had the provisions of
SFAS No. 142 been in effect during the three months ended March 30, 2002, a
reduction of amortization expense in pretax income of $123,000 or an increase of
$0.04 per share for the second quarter of fiscal year 2002 would have been
recorded. Had the provisions been in effect during the six months ended March
30, 2002, a reduction of amortization expense in pretax income of $213,000 or an
increase of $0.07 per share would have been recorded. The Company has completed
its impairment analysis as of the transition date to SFAS No. 142 and has
determined that there is no impairment.
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 Company adopted this
standard in the first quarter of fiscal year 2003. The adoption of this standard
did not have a material impact on the Company's financial position or results of
operations; however, the Company will be required to separately disclose the
results of closed restaurants as discontinued operations in the future.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, was issued in July 2002. SFAS No. 146 replaces current accounting
literature and requires the recognition of costs associated with exit or
disposal activities when they are incurred rather than at the date of commitment
to an exit or disposal plan. The provisions of the Statement are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of this statement did not have a material effect on the Company's
financial statements.
FIN No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, was issued
in November 2002. This interpretation elaborates on the disclosures to be made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, while disclosure requirements are effective for interim or
annual periods ending after December 15, 2002. The Company adopted this standard
in the first quarter of fiscal year 2003. The adoption of this standard did not
have a material impact on the Company's financial position or results of
operations.
SFAS 148, Accounting for Stock-Based Compensation - Transition and
Disclosure was issued in December 2002. This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," providing alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the
6
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has adopted the disclosure-only provisions of SFAS No. 123.
Therefore, SFAS No. 148 will not affect the Company's results of operations or
financial position. The Company has applied the disclosure provisions of SFAS
No. 148 as of March 29, 2003, as required. (see Note 9)
FIN No. 46, Consolidation of Variable Interest Entities, was issued on
January 17, 2003. Such Interpretation addresses consolidation of entities that
are not controllable through voting interests or in which the equity investors
do not bear the residual economic risks and rewards. These entities have been
commonly referred to as special purpose entities. The Interpretation provides
guidance related to identifying variable interest entities and determining
wheter such entities should be consolidated. It also provides guidance related
to the initial and subsequent measurement of assets, liabilities and
noncontrolling interests in newly consolidated variable interest entities and
requires disclosure for both the primary beneficiary of a variable interest
entity and other beneficiaries of the entity. The Company believes the adoption
of this standard will not have a material effect on its financial statements.
3. EFFECTS OF THE SEPTEMBER 11th TERRORIST ATTACKS, GENERAL DECLINE IN TOURISM
The terrorist attacks on the World Trade Center in New York and the
Pentagon in Washington D.C. on September 11, 2001 have had a material adverse
effect on the Company's revenue. As a result of the attacks, one Company
restaurant, the Grill Room, suffered some damage, and was closed from September
11th, 2001 until December 2002, when the restaurant was reopened. The restaurant
is located in 2 World Financial Center, an office building adjacent to the World
Trade Center site. The Company recorded $163,000 and $325,000 as a reduction of
other operating costs and expenses for partial insurance recoveries of certain
out-of-pocket costs and business interruption losses incurred for the 13-week
periods ended March 29, 2003 and March 30, 2002, respectively.
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 flows 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. The Company believed that the lease will
be abandoned or terminated. 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 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 of which $1,064,000 remains in accrued expenses and
other current liabilities at March 29, 2003. In September 2002, the Company
abandoned its restaurant and food court operations at the Aladdin.
In October 2002, the Company sold certain furniture, fixtures and
equipment related to the Aladdin operations for $240,000. The Company recognized
a gain of $240,000 in fiscal 2003 with respect to the transaction (included in
other income), because all of the fixed assets for the Aladdin operations had
been written off during the year ended September 28, 2002.
The Company believes that its restaurant, Lutece, located in New York
City has been impaired by the events of September 11th and the continued
weakeness in the economy. Based upon the sum of the future undiscounted cash
flows related to the Company's long-lived fixed assets at Lutece, the Company
determined that impairment had occurred. To estimate the fair value of such
long-lived fixed assets, for determing 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. As a result, the Company
determined that there was no value to the long-lived fixed assets. The Company
had an investment of $667,000 in leasehold improvements, and furniture fixtures
and equipment. The Company believes that these assets would have nominal value
upon disposal. The Company recorded an impairment charge of $667,000 during the
fiscal quarter ended March 29, 2003. The Company continues to operate this
restaurant and has no immediate intention to discontinue the restaurant's
operation.
4. NOTE RECEIVABLE
The Company had previously established a reserve of $585,000 to
account for the probable loss resulting from its inability to collect a note
receivable in connection with the sale of a restaurant in October 1997. A review
of the performance of this note and the security underlying it has indicated
that the loss in no longer probable and , accordingly, the note no longer
requires a reserve.
7
Consequently, the Company eliminated this reserve and included the amount in
revenue, in the other income, for the quarter ended March 29, 2003.
5. LONG-TERM DEBT
As of March 29, 2003 the Company's Revolving Credit and Term Loan
Facility (the "Facility") with its main bank (Bank Leumi USA), as amended in
November 2001, December 2001, April 2002 and February 2003 included a
$17,000,000 credit line to finance the development and construction of new
restaurants and for working capital purposes at the Company's existing
restaurants. The credit line is reduced to $11,500,000 on June 29, 2003 and then
$8,500,000 on September 29, 2003 until the maturity date of February 12, 2005.
The Company had borrowings of $16,008,000 outstanding on this facility at March
29, 2003. The loan bears interest at 1/2% above the bank's prime rate and at
March 29, 2003 the interest rate on outstanding loans was 4.75%. The Facility
also includes a $500,000 letter of credit facility for use in lieu of lease
security deposits. The Company had delivered $495,000 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.
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 and April 2002, certain covenants in the
Facility were modified for fiscal 2002 and beyond. The Company violated a
covenant related to a limitation on cash flow during the quarter ended March 29,
2003. The Company received a waiver through March 29, 2003 from Bank Leumi USA
for the covenant with which it was not in compliance. The Company believes it
will be in compliance with this covenant during future quarters. If the Company
is not in compliance with any covenant in future quarters, the Company believes
that a waiver will be granted for such violation.
In September 2001, a subsidiary of the Company entered into a lease
agreement with World Entertainment Centers LLC regarding the leasing of premises
at the Neonopolis Center at Freemont Street for the restaurant Saloon. The
Company provided a lease guaranty ("Guaranty") to induce the landlord to enter
into the lease agreement. The Guaranty is for a term of two years from the date
of the opening of the Saloon, May 2002, and during the first year of the
Guaranty is in the amount of $350,000. Upon the first anniversary of the opening
of the Saloon, May 2003, the Guaranty is reduced to $175,000 and will expire in
May 2004. As of March 29, 2003 the maximum potential amount of future payments
the Company could be required to make as a result of the Guaranty was $350,000.
6. 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 $706,000 at March 29,
2003 and $716,000 at September 28, 2002. 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 (4.75% at March 29, 2003).
7. INCOME PER SHARE OF COMMON STOCK
Net income 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 common stock equivalents. Common stock equivalents using the treasury stock
method consist of dilutive stock options and warrants.
For the 13-week period ended March 29, 2003, options to purchase
215,000 shares of common stock at a price of $6.30 were included in diluted
earnings per share. Options to purchase 178,000 shares of common stock at a
price range of $7.50 to $10.00 were not included in diluted earnings per share
as their effect was antidilutive. For the 13-week period ended March 30, 2002,
options to purchase 438,000 shares of common stock at a price range of $6.30 to
$12.00 were not included in diluted earnings per share as the Company had a loss
for the quarter. For the 26-week period ended March 29, 2003, options to
purchase 393,000 shares of common stock at a price range of $6.30 to $10.00 were
not included in diluted earnings per share as the Company had a loss. For the
26-week period ended March 30, 2002, options to purchase 240,000 shares of
common stock at a price of $6.30 were included in diluted earnings per share.
Options to purchase 198,000 shares of common stock at a price of $7.50 to $10.00
were not included in diluted earnings per share as their effect was
antidilutive.
8
8. STOCK OPTIONS
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
Company to disclose pro forma net income and pro forma earning per share
information for employee stock option grants to employees as if the fair-value
method defined in SFAS No. 123 had been applied. The Company utilized the
Black-Scholes option-pricing model to quantify the pro forma effects on net
income and earning per share of the options granted for the quarter and six
month periods ended March 29, 2003 and March 30, 2002.
The weighted-average assumptions used for the quarters and six month periods
ended March 29, 2003 and March 30, 2002 include risk free interest rates of
4.25% and volatility of 35%. An expected life of four years for all options was
used. The weighted average grant date fair value of options granted and
outstanding during all the above mentioned periods was $2.05.
The pro forma impact is as follows:
(in Thousands, Except per Share Amounts)
-----------------------------------------------------------------
13 Weeks ended 26 Weeks ended 13 Weeks ended 26 Weeks ended
March 29, 2003 March 29, 2003 March 30, 2002 March 30, 2002
-------------- -------------- -------------- --------------
Net income (loss) as reported $ 30 $ (85) $ (189) $ 785
Deduct stock based employee compensation expense
computed under the fair value method $ (29) $ (60) $ (35) $ (70)
Net income (loss) - pro forma $ 1 $ (145) $ (224) $ 715
Earnings (loss) per share as reported - basic & diluted $0.01 $(0.03) $(0.06) $0.25
Earnings (loss) per share pro forma - basic & diluted 0.00 (0.05) (0.07) 0.22
9. RELATED PARTY TRANSACTIONS
Mr. Donald D. Shack, a former director of the Company, is a member of
the firm Shack Siegel Katz & Flaherty P.C., general counsel to the Company. Mr.
Shack did not stand for re-election at the 2003 Annual Shareholder Meeting held
on March 13, 2003 . The Company incurred $106,000 in legal fees to such firm for
the 13 weeks ended March 29, 2003.
Receivables due from officers and employees, excluding stock option
receivables, totaled $954,000 at March 29, 2003 and $1,045,000 at September 28,
2002. Such loans bear interest at the minimum statutory rate (1.57% at March 29,
2003).
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 28,
2002.
Revenues
Total revenues increased 1% in the 13-week period ended March 29, 2003
from the comparable period ended March 30, 2002. The release of an allowance for
an uncollectibale note receivable which totaled $585,000 impacted revenues
during the 13-week period ended March 29, 2003.
Revenues in New York decreased $374,000 during the 13-week period ended March
29, 2003 when compared to the previous comparable quarter revenues. This result
was affected by an increase in revenues of $457,000 resulting from the reopening
of the Grill Room a restaurant located in 2 World Financial Center, an office
building adjacent to the World Trade Center site. This restaurant was damaged in
the September 11th attacks and reopened on December 2, 2002. Revenues in Las
Vegas increased $401,000 in the quarter ended March 29, 2003 over the
corresponding 13-week period ended March 30, 2002. This increase was achieved
despite a
9
negative impact to revenue of $654,000 resulting from the abandonment,
at the end of fiscal 2002, of the Company's restaurant and food court operations
at the Desert Passage, the retail complex at the Aladdin Resort and Casino.
Revenues decreased by $408,000 in Washington D.C. in the period ended March 29,
2003 from the comparable period ended March 30, 2002.
Company-wide same store sales for the 13-week period ended March 29, 2003
decreased 1.5% from the 13-week period ended March 30, 2002. Same store sales
increased 4.3% in Las Vegas in the second quarter of fiscal 2003 over the second
quarter of fiscal 2002. In the second quarter of fiscal 2003 same store sales
decreased 8.6% in New York and 14.5% in Washington D.C. from the corresponding
13-week period ended March 30, 2002. Both of these markets were affected by
severe and lengthy winter weather and continued economic weakness.
Total revenues for the 26-week period ended March 29, 2003 were $52,821,000
compared to total revenues of $52,212,000 for the corresponding period ended
March 30, 2002. On a Company-wide basis, same store sales increased .6% in the
26-week period ended March 29, 2003 compared to the 26 week-period ended March
30, 2003. Same store sales increased 6% in Las Vegas during the first six months
of fiscal 2003 compared to the six-month period ended March 30, 2002. The
decreases in same store sales in the comparable 26-week periods ended March 29,
2003 and March 30, 2002 were 4.3% in New York and 9.4% in Washington D.C.
Costs and Expenses
Food and beverage costs for the 13-week period ended March 29, 2003 as a
percentage of total revenues stood at 24.4% compared to last year's 25.8%, while
food and beverage costs as a percentage of total revenues for the 26-week period
ended March 29, 2003 were 24.8% compared to 25.1% last year.
Payroll expenses as a percentage of total revenues decreased to 34.6% for the
13-week period ended March 29, 2003 as compared to 34.8% last year. Payroll
expenses as a percentage of total revenues increased to 34.7% for the 26-week
period ended March 29, 2003 versus 33.8% during last years 26-week period ended
March 30, 2002. During the 13-weeks ended December 29, 2001 the Company had
aggressively adapted its cost structure in response to lower sales expectations
following September 11th. Payroll and head count were significantly reduced,
overtime and vacation pay were eliminated, and salaries were temporarily
reduced. The reduced payroll costs incurred in the first quarter of fiscal 2002
are included in the 26-week period ended March 30, 2002. During the 26-week
period ended March 29, 2003, although payroll head count continues to be lower
than the payroll head count prior to September 11th; salary reductions and the
elimination of overtime and vacation pay were discontinued during the second
quarter of fiscal 2002.
Occupancy and other expenses as a percentage of total revenues decreased during
the quarter ended March 29, 2003 to16.1% compared to 16.2% during the quarter
ended March 30, 2002. Occupancy and other expenses incurred during the 26-week
period ended March 29, 2003 increased to 16.5% of total revenue compared to
15.7% last year. The difference is attributable to rent concessions granted the
Company by landlords in the wake of the September 11th tragedy which were not
available in the six months ended March 29, 2003.
Other operating costs and expenses, as a percentage of total revenues, increased
to 12.7% for the 13-week period ended March 29, 2003 from 12.6% for the 13-week
period ended March 30, 2003. Other operating costs and expenses for the 26-week
period ended March 29, 2003 increased to 13.2% of total revenues compared to
11.4% last year. After the September 11th attacks, the Company severely
restricted discretionary spending and received discounts from suppliers. Though
the Company continues to keep tight control over spending, maintenance of
restaurants is performed when required and the discounts received last year are
no longer available.
10
General and administrative expenses as a percentage of total revenues decreased
to 5.1% for the 13-week period ended March 29, 2003 compared to 5.8% for the
13-week period ended March 30, 2002. General and administrative expenses as a
percentage of total revenues stood at 5.6% for both 26-week periods ended March
29, 2003 and March 30, 2002.
The Company recorded an impairment charge of $667,000 in the quarter ended March
29, 2003, related to a write down of long lived fixed assets at its Lutece
restaurant in New York City,
Interest expense was $206,000 for the 13-week period ended March 29, 2003
compared to $326,000 for the 13-week period ended March 30, 2002. For the
26-week period ended March 29, 2003 interest expense was $428,000 compared to
$681,000 during last year's comparable 26-week period. The decrease is due to
lower outstanding borrowings on the Company's credit facility.
The Company had net income of $30,000 for the 13-week period ended March 29,
2003 as compared to a net loss of $189,000 last year and had a net loss of
$85,000 for the 26-week period ended March 29, 2003 as compared to net income of
$785,000 last year.
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 and the utilization of state and
local net operating loss carry forwards. 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
carry forwards at restaurants that were unprofitable, the Company has merged
certain profitable subsidiaries with certain loss subsidiaries.
The Revenue Reconciliation Act of 1993 provides tax credits to the Company
for FICA taxes paid by the Company on tip income of restaurant service
personnel. The Company estimates that this credit will be in excess of $500,000
for the current year.
Liquidity and Sources of Capital
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.
11
The Company had a working capital deficit of $7,116,000 at March 29,
2003 as compared to a working capital deficit of $7,990,000 at September 28,
2002. The restaurant business does not require the maintenance of significant
inventories or receivables; thus the Company is able to operate with negative
working capital.
As of March 29, 2003 the Company's Revolving Credit and Term Loan
Facility (the "Facility") with its main bank (Bank Leumi USA), as amended in
November 2001, December 2001, April 2002 and February 2003 included a
$17,000,000 credit line to finance the development and construction of new
restaurants and for working capital purposes at the Company's existing
restaurants. The credit line is reduced to $11,500,000 on June 29, 2003 and then
$8,500,000 on September 29, 2003 until the maturity date of February 12, 2005.
The Company had borrowings of $16,008,000 outstanding on this Facility at March
29, 2003. The loan bears interest at 1/2% above the bank's prime rate and at
March 29, 2003 and September 28, 2002 the interest rate on outstanding loans was
4.75% and 5.25%, respectively. The Facility also includes a $500,000 letter of
credit facility for use in lieu of lease security deposits. The Company had
delivered $495,00 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.
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 and April 2002, certain covenants in the
Facility were modified for fiscal 2002 and beyond. The Company violated a
covenant related to cash flow during the quarter ended March 29, 2003. The
Company received a waiver through March 29, 2003 from Bank Leumi USA for the
covenant with which it was not in compliance. The Company believes it will be in
compliance with this covenant during future quarters. If the Company is not in
compliance with any covenant in future quarters, the Company believes that a
waiver will be granted for such violation.
In April 2000, the Company borrowed $1,570,000 from its main bank at
an interest rate of 8.8% to refinance the purchase of various restaurant
equipment at the Venetian. The note which is payable in 60 equal monthly
installments through May 2005, is secured by such restaurant equipment. At March
29, 2003 the Company had $765,000 outstanding on this note.
The Company entered into a sale and leaseback agreement with GE
Capital for $1,652,000 in November 2000 to refinance the purchase of various
restaurant equipment at its food and beverage facilities at the Aladdin hotel in
Las Vegas, Nevada. The 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. The Company originally accounted for this
agreement as an operating lease and did not record the assets or the lease
liability in the financial statements. During the year ended September 29, 2001,
the Company recorded the entire amount payable under the lease as a liability of
$1,600,000 based on the anticipated abandonment of the Aladdin operations. In
2002, the operations at the Aladdin were abandoned and at March 29, 2003
$1,064,000 remains in accrued expenses and other current liabilities
representing future operating lease payments.
12
Restaurant Expansion
The Company is currently not committed to any projects.
Events of September 11, 2001 and General Decline in Tourism
The terrorist attacks on the World Trade Center in New York and the
Pentagon in Washington D.C. on September 11th have had a material adverse effect
on the Company's revenue. As a result of the attacks, one Company restaurant,
the Grill Room, suffered some damage, and was closed from September 11th until
December 2002, when the restaurant was reopened. The restaurant is located in 2
World Financial Center, an office building adjacent to the World Trade Center
site. The Company recorded $200,000 and $125,000 as a reduction of other
operating costs and expenses for partial insurance recoveries of certain
out-of-pocket costs and business interruption losses incurred for the 13-week
period ended December 28, 2002 and December 29, 2001.
The Company believed 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 flows 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. The Company believed that the lease will
be abandoned or terminated. 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
believed 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 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 of which $1,064,000 remains in accrued and other
current liabilities at March 29, 2003. In September 2002, the Company abandoned
its restaurant and food court operations at the Aladdin.
In October 2002, the Company sold certain furniture, fixtures and
equipment related to the Aladdin operations for $240,000. The Company recognized
a gain of $240,000 in fiscal 2003 with respect to the transaction, since all of
the fixed assets for the Aladdin operations had been written off during the year
ended September 28, 2002.
The Company believes that its restaurant, Lutece, located in New York
City has been impaired by the events of September 11th and the continued
weakeness in the economy. Based upon the sum of the future undiscounted cash
flows related to the Company's long-lived fixed assets at Lutece, the Company
determined that impairment had occurred. To estimate the fair value of such
long-lived fixed assets, for determing 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. As a result, the Company
determined that there was no value to the long-lived fixed assets. The Company
had an investment of $667,000 in leasehold improvements, and furniture fixtures
and equipment. The Company believes that these assets would have nominal value
upon disposal. The
13
Company recorded an impairment charge of $667,000 during the fiscal quarter
ended March 29, 2003. The Company continues to operate this restaurant and has
no immediate intention to discontinue its operation.
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 operation, differences in
actual results could be material to the financial statements.
The Company's critical accounting policies are described in the
Companies Form 10-K for the year ended September 28, 2002. There have been no
significant changes to such policies during fiscal 2003.
Recent Accounting Developments
The Financial Accounting Standards Board has recently issued the
following accounting pronouncements:
SFAS 148, Accounting for Stock-Based Compensation - Transition and
Disclosure was issued in December 2002. This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," providing alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company has applied the disclosure provisions of SFAS No. 148 as of March 29,
2003, as required.
FIN No. 46, Consolidation of Variable Interest Entities, was issued on
January 17, 2003. Such Interpretation addresses consolidation of entities that
are not controllable through voting interests or in which the equity investors
do not bear the residual economic risks and rewards. These entities have been
commonly referred to as special purpose entities. The Interpretation provides
guidance related to identifying variable interest entities and determining
wheter such entities should be consolidated. It also provides guidance related
to the initial and subsequent measurement of assets, liabilities and
noncontrolling interests in newly consolidated variable interest entities and
requires disclosure for both the primary beneficiary of a variable interest
entity and other beneficiaries of the entity. The Company believes the adoption
of this standard will not have a material effect on its financial statements.
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. Outstanding loans under the agreement bear interest at prime plus one-half
percent. Based upon a $16,008,000 (the outstanding balance at March 29, 2003)
term loan and a 100 basis point change in interest rates, annual interest
expense would change by $160,000.
14
Item 4. Controls and Procedures
As of a date within 90 days prior to the date of this report, the
Company's Chief Executive Officer and Chief Financial Officer carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as required by Exchange Act Rule 13a-14.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in ensuring that material information about the Company and its
subsidiaries, including the material information required to be disclosed in the
Company's filings under the Securities Exchange Act of 1934, is recorded,
processed, summarized and communicated to the Chief Executive Officer and the
Chief Financial Officer as appropriate to allow timely decisions regarding
required disclosure.
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of the most recent evaluation performed by the Company's Chief
Executive Officer and Chief Financial Officer, including any corrective actions
with regard to significant deficiencies and material weaknesses.
15
PART II
OTHER INFORMATION
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits
*10.14 Letter dated as of January 22, 2002 regarding Fourth Amended and
Restated Credit Agreement
*10.15 Fifth Amended and Restated Credit Agreement dated as of February 12,
2003 between the Company and Bank Leumi USA.
*99.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.
(b) Reports on Form 8-K.
None.
16
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 13, 2003
ARK RESTAURANTS CORP.
By: /s/ Michael Weinstein
-----------------------------------
Michael Weinstein
President & Chief Executive Officer
By: /s/ Robert J. Stewart
-----------------------------------
Robert Stewart
Chief Financial Officer
17
CERTIFICATIONS
I, Michael Weinstein, 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 quarterly 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 quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures 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 quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 13, 2003
/s/ Michael Weinstein
- ------------------------
Michael Weinstein
Chief Executive Officer
18
I, Robert J. 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 quarterly 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 quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures 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 quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 13, 2003
/s/ Robert J. Stewart
--------------------------------------
Robert J. Stewart
Chief Financial Officer
19