SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 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 August 6, 2003
- ------------------------------ ------------------------------------
(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)
June 28, September 28,
2003 2002
----------- -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,884 $ 819
Accounts receivable 2,314 2,000
Employee receivable (net of reserves of $0 and $45, respectively) 953 1,045
Inventories 1,985 1,925
Current portion of long-term receivables 192 164
Prepaid expenses and other current assets 998 779
Refundable and prepaid income taxes 748 957
Deferred income taxes 278 293
------- -------
Total current assets 9,352 7,982
LONG-TERM RECEIVABLES 1,340 904
FIXED ASSETS - At Cost:
Leasehold improvements 33,776 33,542
Furniture, fixtures and equipment 28,631 28,320
Leasehold improvements in progress 438 --
------- -------
62,845 61,862
Less accumulated depreciation and
amortization 35,618 31,602
------- -------
27,227 30,260
INTANGIBLE ASSETS 3,809 3,782
DEFERRED INCOME TAXES 4,270 4,255
OTHER ASSETS 783 777
------- -------
TOTAL ASSETS $46,781 $47,960
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 5,292 $ 3,332
Accrued expenses and other current
liabilities 5,601 6,356
Current maturities of long-term debt 3,543 6,284
------- -------
Total current liabilities 14,436 15,972
LONG-TERM DEBT - net of current maturities 8,342 9,547
OPERATING LEASE DEFERRED CREDIT 1,004 995
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)
Receivables from Employees in respect of
stock option exercises (697) (716)
Retained earnings 17,252 15,718
------- -------
Total shareholders' equity 22,999 21,446
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $46,781 $47,960
======= =======
See notes to consolidated condensed financial statements.
-2-
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
(In Thousands, Except per share amounts)
13 Weeks Ended 39 Weeks Ended
------------------- -------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
-------- -------- -------- --------
TOTAL REVENUES $31,871 $33,331 $84,692 $85,545
COST AND EXPENSES:
Food and beverage cost of sales 8,035 8,378 21,112 21,463
Payroll expenses 10,070 10,232 28,408 27,861
Occupancy expenses 4,742 4,674 13,442 12,852
Other operating costs and expenses 4,142 3,948 11,121 9,880
General and administrative expenses 1,594 1,586 4,528 4,517
Depreciation and amortization expenses 1,089 1,220 3,294 3,911
Asset impairment -- -- 667 --
------- ------- ------- -------
Total costs and expenses 29,672 30,038 82,572 80,484
------- ------- ------- -------
OPERATING INCOME 2,199 3,293 2,120 5,061
------- ------- ------- -------
OTHER (INCOME) EXPENSE:
Interest expense, net 184 264 520 879
Other income (197) (35) (475) (193)
------- ------- ------- -------
Total other (income) expense (13) 229 45 686
------- ------- ------- -------
Income before provision
for income taxes 2,212 3,064 2,075 4,375
Provision for income taxes 593 1,229 541 1,755
------- ------- ------- -------
NET INCOME 1,619 1,835 1,534 2,620
RETAINED EARNINGS, Beginning
of period 15,633 12,274 15,718 11,489
------- ------- ------- -------
RETAINED EARNINGS, End of period $17,252 $14,109 $17,252 $14,109
======= ======= ======= =======
PER SHARE INFORMATION - BASIC AND DILUTED:
NET INCOME BASIC $ .51 $ .58 $ .48 $ .82
======= ======= ======= =======
NET INCOME DILUTED $ .50 $ .57 $ .48 $ .82
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 3,181 3,181 3,181 3,181
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED 3,207 3,216 3,197 3,199
======= ======= ======= =======
See notes to consolidated condensed financial statements.
-3-
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
39 Weeks Ended
-------------------
June 28, June 29,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,534 $ 2,620
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of fixed assets 3,321 3,591
Amortization of intangibles -- 248
Asset impairment 667 --
Operating lease deferred credit 9 --
Deferred income taxes -- 199
Reduction in allowance on long-term receivables (585) --
Changes in assets and liabilities:
Receivables (203) (292)
Inventories (60) 157
Prepaid expenses and other current assets (219) (130)
Refundable and prepaid income taxes 209 1,119
Other assets (6) 53
Accounts payable - trade 1,960 (704)
Accrued income taxes -- 117
Accrued expenses and other current liabilities (755) (1,347)
------- -------
Net cash provided by operating activities 5,872 5,631
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (1,070) (445)
Issuance of long-term receivables -- (70)
Proceeds from disposal of fixed assets 86 --
Payments received on long-term receivables 122 209
------- -------
Net cash used in investing activities (862) (306)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 1,100 1,500
Principal payment on long-term debt (5,045) (6,559)
Exercise of stock options -- 16
------- -------
Net cash used in financing activities (3,945) (5,043)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,065 282
CASH AND CASH EQUIVALENTS, Beginning of period 819 --
------- -------
CASH AND CASH EQUIVALENTS, End of period $ 1,884 $ 282
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 645 $ 681
======= =======
Income taxes $ 56 $ 187
======= =======
-4-
ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 28, 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 June 28, 2003 results of operations for
the 13 and 39 week periods ended June 28, 2003 and June 29, 2002, and cash flows
for the 39 week periods ended June 28, 2003 and June 29, 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 interim periods 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. This statement
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 June 29, 2002, a
reduction of amortization expense in pretax income of $92,000 or an increase of
$0.03 per share for the third quarter of fiscal year 2002 would have been
recorded. Had the provisions been in effect during the nine months ended June
29, 2002, a reduction of amortization expense in pretax income of $276,000 or an
increase of $0.09 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. (See
Note 3)
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 No. 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
-5-
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 June 28, 2003, as required. (See
Note 8)
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
whether 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.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS 133. SFAS 149 is generally effective for contracts
entered into or modified after June 30, 2003 (with a few exceptions) and for
hedging relationships designated after June 30, 2003. The Company does not
expect the provisions of SFAS 149 to have a material impact on its financial
position or results of operations.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 improves
the accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. The new Statement requires that those
instruments be classified as liabilities in statements of financial position.
This statement is effective at the beginning of the fourth quarter 2003. The
Company does not expect the provisions of SFAS 150 to have a material impact on
our financial position or results of operations.
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 $360,000 and $450,000 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 39-week
periods ended June 28, 2003 and June 29, 2002.
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 would
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 $969,000 remains in accrued expenses and
other current liabilities at June 28, 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), The Company believes that its restaurant, Lutece, located in New York
City has been impaired by the events of September 11th and the continued
weakness 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 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. 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
-6-
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. Consequently, the Company eliminated this reserve and included the
amount in revenue, in other income, for the quarter ended March 29, 2003.
5. LONG-TERM DEBT
As of June 28, 2003 the Company's Revolving Credit and Term Loan Facility
(the "Facility") with its main bank (Bank Leumi USA), 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 $11,200,000 outstanding on this facility at June 28, 2003. The
loan bears interest at 1/2% above the bank's prime rate and at June 28, 2003 the
interest rate on outstanding loans was 4.50%. 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 June 28,
2003. The Company received a waiver through June 28, 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 was reduced to $175,000 and will expire in
May 2004. As of June 28, 2003 the maximum potential amount of future payments
the Company could be required to make as a result of the Guaranty was $175,000.
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 $697,000 at June 28, 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 (4.5% at June 28, 2003).
7. INCOME PER SHARE OF COMMON STOCK
Net income per share is computed in accordance with 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-week and 39-week periods ended June 28, 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 and 39-week periods
ended June
-7-
29, 2002, options to purchase 240,000 shares of common stock at a price range of
$6.30 were included in diluted earnings per share. Options to purchase 193,000
shares of common stock at a price range of $7.50 to $12.00 were not included in
diluted earnings per share as their impact was antidilutive.
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 nine month periods ended
June 28, 2003 and June 29, 2002.
The weighted-average assumptions used for the quarters and nine-month periods
ended June 28, 2003 and June 29, 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:
13 Weeks ended 39 Weeks ended 13 Weeks ended 39 Weeks ended
June 28, 2003 June 28, 2003 June 29, 2002 June 29, 2002
-------------- -------------- -------------- --------------
Net income as reported $1,619 $1,534 $1,835 $2,620
Deduct stock based employee compensation expense
computed under the fair value method $ (30) $ (89) $ (35) $ (106)
Net income - pro forma $1,589 $1,445 $1,800 $2,514
Earnings per share as reported - basic $ 0.51 $ 0.48 $ 0.58 $ 0.82
Earnings per share as reported - diluted $ 0.50 $ 0.48 $ 0.57 $ 0.82
Earnings per share pro forma - basic $ 0.50 $ 0.45 $ 0.57 $ 0.79
Earnings per share pro forma - diluted $ 0.50 $ 0.45 $ 0.56 $ 0.79
9. RELATED PARTY TRANSACTIONS
Receivables due from officers and employees, excluding stock option
receivables, totaled $953,000 at June 28, 2003 and $1,045,000 at September 28,
2002. Such loans bear interest at the minimum statutory rate (1.49% at June 28,
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 decreased 4.4% in the 13-week period ended June 28, 2003
from the comparable period ended June 29, 2002.
Revenues in New York decreased $639,000 during the 13-week period ended
June 28, 2003. This result was net of an increase in revenues of $477,000
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 $166,000 in the just completed
quarter and was achieved despite a negative impact to revenue of $702,000
resulting from the abandonment, at the end of fiscal 2002, of the Company's
restaurant and food court operations at the Desert
-8-
Passage, the retail complex at the Aladdin Resort and Casino. Revenues decreased
by $946,000 in Washington D.C. in the period ended June 28, 2003 when compared
to the 13-week period ended June 29, 2002.
Company-wide same store sales decreased 3.6% for the 13-week period ended
June 28, 2003 from the comparable quarter ended June 29, 2002. In the third
quarter of fiscal 2003 same store sales decreased 8.5% in New York and 14.2% in
Washington D.C. from the corresponding 13-week period ended June 29, 2002.
Record rainfall during the third quarter of the year permitted limited use of
the Company's significant number of outdoor cafe seats in New York and
Washington D.C. In these two markets an additional 1,500 outdoor seats are added
each spring to several restaurants with a combined indoor seating capacity of
1,400. On a combined basis same-store sales at restaurants with outdoor seating,
in New York and Washington D.C., decreased 16.5% during the third quarter of
this year compared to last year. Same-store sales in restaurants without outdoor
seating, in these two markets, decreased by only 1.8% in the same comparable
quarter.
Total revenues for the 39-week period ended June 28, 2003 were $84,692,000
compared to $85,545,000 for the corresponding period ended June 29, 2002. On a
Company-wide basis, same store sales decreased .9% in the 39-week period ended
June 28, 2003 compared to the 39-week period ended June 29, 2002. Same store
sales increased 6% in Las Vegas during the first nine months of fiscal 2003
compared to the nine-month period ended June 29, 2002. The decreases in same
store sales in comparable 39-week periods ended June 28, 2003 and June 29, 2002
were 6.3% in New York and 11.7% in Washington D.C.
Costs and Expenses
Food and beverage costs for the 13-week period ended June 28, 2003 as a
percentage of total revenues stood at 25.2% compared to last year's 25.1%, while
food and beverage costs as a percentage of total revenues for the 39-week period
ended June 28, 2003 were 24.9% compared to last year's 25.1%.
Payroll expenses as a percentage of total revenues increased to 31.6% for
the 13-week period ended June 28, 2003 as compared to 30.7% last year. Payroll
expenses as a percentage of total revenues increased to 33.5% for the 39-week
period ended June 28, 2003 versus 32.6% during last years 39-week period ended
June 29, 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 39-week period ended June 29, 2002. During the 39-week
period ended June 28, 2003, payroll head count continues to be lower than prior
to September 11th. However, 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 increased
to 14.9% during the quarter ended June 28, 2003 compared to 14% for the 13-week
period ended June 29, 2002. This is attributable to the decrease in revenues
experienced during the third quarter of fiscal 2003 compared to the third
quarter of fiscal 2002. Occupancy and other expenses incurred during the 39-week
period ended June 28, 2003 increased to 15.9% of total revenues compared to 15%
last year. The difference is attributable to the decrease in revenue experienced
during the third quarter of fiscal 2003, as well as, rent concessions granted
the Company by landlords in the wake of the September 11th attacks which were
not available in the nine months ended June 28, 2003.
Other operating costs and expenses, as a percentage of total revenues
increased to 13% for the 13-week period ended June 28, 2003 from 11.8% during
last years third quarter. For the 39-week period ended June 28, 2003 other
operating costs and expenses as a percentage of total revenues increased to
13.1% compared to 11.5% for the 39-week period ended June 29, 2002. After the
September 11th attacks, the Company severely restricted discretionary spending.
The Company continues to maintain tight control over spending, however, various
maintenance projects delayed last year are being performed along with normal
ongoing maintenance this year. In addition, the Company has increased
advertising for several restaurants.
Interest expense was $217,00 for the 13-week period ended June 28, 2003
compared to $300,000 for the 13-week period ended June 29, 2002. For the 39-week
period ended June 28, 2003 interest expense was $645,000 compared to $981,000
during the 39-week period ended June 29, 2002. The decrease is due to lower
outstanding borrowings on the Company's credit facility. As of June 28, 2003 the
Company had borrowings of $11,200,000 on the credit facility compared to
$17,890,000 as of June 29, 2002.
The Company had net income of $1,619,000 for the 13-week period ended
June 28, 2003 compared to net income of $1,835,000 for the 13-week period
ended June 29, 2002. For the 39-week period ended June 28, 2003 net income
stood at $1,534,000 compared to $2,620,000 last year.
-9-
Income Taxes
The provision for income taxes reflects Federal income taxes calculated on
a consolidated basis and state and local income taxes calculated by each New
York subsidiary on a non-consolidated basis. Most of the restaurants owned or
managed by the Company are owned or managed by separate subsidiaries.
For state and local income tax purposes, the losses incurred by a
subsidiary may only be used to offset that subsidiary's income, with the
exception of the restaurants operating in the District of Columbia. Accordingly,
the Company's overall effective tax rate has varied depending on the level of
losses incurred at individual subsidiaries.
The Company's overall effective tax rate in the future will be affected by
factors such as the level of losses incurred at the Company's New York
facilities, which cannot be consolidated for state and local tax purposes,
pre-tax income earned outside of New York City, the utilization of state and
local net operating loss carry forwards and the utilization of FICA tax credits.
Nevada has no state income tax and other states in which the Company operates
have income tax rates substantially lower in comparison to New York. In order to
utilize more effectively tax loss carry forwards at restaurants that were
unprofitable, the Company has merged certain profitable subsidiaries with
certain loss subsidiaries.
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.
The Company had a working capital deficit of $5,084,000 at June 28, 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 June 28, 2003 the Company's Revolving Credit and Term Loan Facility
(the "Facility") with its main bank (Bank Leumi USA), 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 $11,200,000 outstanding on this Facility at June 28, 2003. The
loan bears interest at 1/2% above the bank's prime rate and at June 28, 2003 and
September 28, 2002 the interest rate on outstanding loans was $4.50% 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 June 28, 2003. The
Company received a waiver through June 28, 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 June 28, 2003 the
Company had $684,000 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
-10-
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 June 28, 2003, $969,000 remains
in accrued expenses and other current liabilities representing future operating
lease payments.
Restaurant Expansion
The Company is currently not committed to any projects.
Restaurant Conversion
The Company's restaurant Ernie's, located on the upper west side of
Manhattan opened in 1982. As a result of a steady decline in sales, the Company
felt that a new concept was needed at this location. The restaurant was closed
June 16, 2003 and will reopen in August 2003. The new restaurant, La Rambla,
will be Latin themed. Total cost of the conversion is estimated to be $350,000.
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 $360,000 and $450,000 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 39-week
period ended June 28, 2003 and June 29, 2002.
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 $969,000 remains in accrued and other current
liabilities at June 28, 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. The Company believes
that its restaurant, Lutece, located in New York City has been impaired by the
events of September 11th and the continued weakness 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
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. 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 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
-11-
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 Company's
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 No. 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 June 28,
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
whether 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.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities". SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS 133. SFAS 149 is generally
effective for contracts entered into or modified after June 30, 2003 (with a few
exceptions) and for hedging relationships designated after June 30, 2003. The
Company does not expect the provisions of SFAS 149 to have a material impact on
our financial position or results of operations.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" improves the accounting for
certain financial instruments that, under previous guidance, issuers could
account for as equity. The new Statement requires that those instruments be
classified as liabilities in statements of financial position. This statement is
effective at the beginning of the fourth quarter 2003. The Company does not
expect the provisions of SFAS 150 to have a material impact on our financial
position or results of operations.
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 an $11,200,000 (the outstanding balance at June 28, 2003)
term loan and a 100 basis point change in interest rates, annual interest
expense would change by $112,000.
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.
-12-
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.
-13-
PART II
OTHER INFORMATION
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits
*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.
-14-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 8, 2003
ARK RESTAURANTS CORP.
By: /s/ Michael Weinstein
-----------------------------------
Michael Weinstein
President & Chief Executive Officer
By: /s/ Robert J. Stewart
-----------------------------------
Robert Stewart
Chief Financial Officer
-15-
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.
August 8, 2003
/s/ Michael Weinstein
- -----------------------
Michael Weinstein
Chief Executive Officer
-16-
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.
August 8, 2003
/s/ Robert J. Stewart
-----------------------
Robert J. Stewart
Chief Financial Officer
-17-