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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-14030
ARK RESTAURANTS CORP.
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(Exact name of registrant as specified in its charter)
New York 13-3156768
- --------------------------------------- -----------------------
(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 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 12, 2002
- ---------------------------- -------------------------------------
(Common stock, $.01 par value) 3,181,299
ARK RESTAURANTS CORP. AND SUBSIDIARIES
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INDEX
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PART I - FINANCIAL INFORMATION: Page
----
Item 1. Consolidated Financial Statements:
Consolidated Condensed Balance Sheets - June 29, 2002
(Unaudited) and September 29, 2001 3
Consolidated Condensed Statements of Operations and Retained Earnings - 13-week
periods ended June 29, 2002 (Unaudited) and June 30, 2001 (Unaudited) and
39-week periods ended June 29, 2002 (Unaudited) and June 30, 2001
(Unaudited) 4
Consolidated Condensed Statements of Cash Flows - 39-week periods
ended June 29, 2002 (Unaudited) and June 30, 2001 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements (Unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II - OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 16
2
Part I - Financial Information
Item 1. Financial Statements
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
- -------------------------------------------------------------------------------
June 29, September 29,
2002 2001
-------- --------
ASSETS (unaudited)
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 282 $ --
Accounts receivable 2,565 2,273
Inventories 1,953 2,110
Current portion of long-term receivables 153 203
Prepaid expenses and other current assets 785 655
Refundable and prepaid income taxes -- 1,119
Deferred income taxes 278 278
-------- --------
Total current assets 6,016 6,638
LONG-TERM RECEIVABLES 992 1,082
FIXED ASSETS - At Cost:
Leasehold improvements 33,699 33,699
Furniture, fixtures and equipment 28,242 27,972
Leasehold improvements in progress 268 93
-------- --------
62,209 61,764
Less accumulated depreciation and
amortization 30,626 27,035
-------- --------
31,583 34,729
INTANGIBLE ASSETS - Less accumulated
amortization of $3,837 and $3,589 3,927 4,175
DEFERRED INCOME TAXES 5,857 6,056
OTHER ASSETS 342 395
-------- --------
TOTAL ASSETS $ 48,717 $ 53,075
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 3,528 $ 4,232
Accrued income taxes 117 --
Accrued expenses and other current
liabilities 5,397 6,744
Current maturities of long-term debt 7,036 2,247
-------- --------
Total current liabilities 16,078 13,223
LONG-TERM DEBT - net of current maturities 11,851 21,700
OPERATING LEASE DEFERRED CREDIT 995 995
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share -
authorized, 10,000 shares;
issued, 5,249 shares 52 52
Additional paid-in capital 14,743 14,743
Treasury stock, 2,068 shares (8,351) (8,351)
Receivables from Employees in respect of
stock option exercises (760) (776)
Retained earnings 14,109 11,489
-------- --------
Total shareholders' equity 19,793 17,157
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 48,717 $ 53,075
======== ========
See notes to consolidated condensed financial statements
3
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
(In Thousands, Except per share amounts)
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13 Weeks Ended 39 Weeks Ended
-------------------------- --------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
TOTAL REVENUES $33,331 $36,931 $85,545 $96,423
COST & EXPENSES:
Food & beverage cost of sales 8,378 9,247 21,463 24,450
Payroll expenses 10,232 11,913 27,861 33,777
Occupancy expenses 4,674 4,772 12,852 13,518
Other operating costs and expenses 3,948 4,079 9,880 11,333
General and administrative expenses 1,586 1,831 4,517 5,133
Depreciation and amortization expenses 1,220 1,476 3,911 4,396
Joint venture losses - - - 150
------- ------- ------- -------
Total costs and expenses 30,038 33,318 80,484 92,757
OPERATING INCOME 3,293 3,613 5,061 3,666
-------- ------- ------- -------
OTHER (INCOME) EXPENSE:
Interest expense, net 264 526 879 1,858
Other income (35) (71) (193) (100)
------- ------- ------- -------
Total other (income) expense 229 455 686 1,758
------- ------- ------- ----------
INCOME before provision
for income taxes 3,064 3,158 4,375 1,908
PROVISION for income taxes 1,229 1,200 1,755 725
------- ------- ------- -------
NET INCOME 1,835 1,958 2,620 1,183
RETAINED EARNINGS, Beginning
of period 12,274 17,562 11,489 18,337
------- ------- ------- -------
RETAINED EARNINGS, End of period $14,109 $19,520 $14,109 $19,520
======= ======= ======= =======
PER SHARE INFORMATION - BASIC & DILUTED:
NET INCOME BASIC $.58 $.62 $.82 $.37
==== ==== ==== ====
NET INCOME DILUTED $.57 $.62 $.82 $.37
==== ==== ==== ====
WEIGHTED AVERAGE NUMBER OF SHARES-BASIC 3,181 3,182 3,181 3,182
====== ====== ====== ======
WEIGHTED AVERAGE NUMBER OF SHARES-DILUTED 3,216 3,183 3,199 3,182
====== ====== ====== ======
See notes to consolidated condensed financial statements
4
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
- --------------------------------------------------------------------------------
39 Weeks Ended
----------------------------
June 29, June 30,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $2,620 $ 1,183
Adjustments to reconcile net income to net
cash provided by operating activities:
Write-off of joint venture advances - 150
Depreciation and amortization of fixed assets 3,591 4,075
Amortization of intangibles 248 321
Deferred income taxes 199 -
Changes in assets and liabilities:
Accounts receivable (292) (47)
Inventories 157 (118)
Prepaid expenses and other current assets (130) (526)
Refundable and prepaid income taxes 1,119 433
Other assets 53 (210)
Accounts payable - trade (704) (987)
Accrued income taxes 117 -
Accrued expenses and other current liabilities (1,347) (2,536)
------- -------
Net cash provided by operating activities 5,631 1,738
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets, net (445) (2,453)
Issuance of long-term receivables (70) (74)
Payments received on long-term receivables 209 1,127
------ -------
Net cash (used) in investing activities (306) (1,400)
------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 1,500 4,100
Principal payment on long-term debt (6,559) (6,584)
Proceeds from sale leaseback - 1,559
Payment of accounts receivables from stockholders 16 -
Purchase of treasury stock - (2)
------ -------
Net cash (used) in financing activities (5,043) (927)
------ -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 282 (589)
CASH AND CASH EQUIVALENTS, beginning of period - 697
------ -------
CASH AND CASH EQUIVALENTS, end of period $ 282 $ 108
====== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during year for:
Interest $ 681 $ 1,969
====== =======
Income taxes $ 187 $ 492
====== =======
See notes to consolidated condensed financial statements.
5
ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(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 29, 2002 and results
of operations and cash flows for the periods ended June 29, 2002 and June 30,
2001 have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's annual report on Form 10-K for the year
ended September 29, 2001. The results of operations for the periods ended June
29, 2002 are not necessarily indicative of the operating results for the full
year.
Certain reclassifications have been made to the 2001 financial
statements to conform to the 2002 presentation.
2. IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 142, Goodwill and Other Intangible Assets, addresses financial
accounting and reporting for acquired goodwill and other intangible assets.
Under SFAS No. 142, goodwill and some intangible assets will no longer be
amortized, but rather reviewed for impairment on a periodic basis. Impairment
losses for goodwill and certain intangible assets that arise due to the initial
application of this Statement are to be reported as resulting from a change in
accounting principle. The provisions of this Statement will be applied at the
beginning of the Company's 2003 fiscal year. The Company is in the process of
evaluating the financial statement impact from adopting this standard.
SFAS No. 143, Accounting for Asset Retirement Obligations, requires the
recording of the fair value of a liability for an asset retirement obligation in
the period in which it is incurred. The Statement is effective for the Company
at the beginning of fiscal year 2004. The Company does not expect the adoption
of this standard to have a material impact on the Company's financial position
or results of operations.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, supersedes existing accounting literature dealing with impairment and
disposal of long-lived assets, including discontinued operations. It addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of and expands current reporting for
discontinued operations to include disposals of a "component" of an entity that
has been disposed of or is classified as held for sale. The Statement is
effective for the Company at the beginning of fiscal year 2003. The Company is
in the process of evaluating the financial statement impact of this standard.
SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections, was issued in
April 2002. SFAS 145 rescinds SFAS 4 and 64, which required gains and losses
from
6
extinguishments of debt to be classified as extraordinary items. SFAS 145 also
rescinds SFAS 44 since the provisions of the Motor Carrier Act of 1980 are
complete. SFAS 145 also amends SFAS 13 eliminating inconsistencies in certain
sale-leaseback transactions. The provisions of SFAS 145 are effective for fiscal
years beginning after May 15, 2002. Any gain or loss on extinguishment of debt
that was classified as an extraordinary item in prior periods presented shall be
reclassified. The Company does not expect that the adoption of SFAS 145 will
have a material effect on the Company's financial position or results of
operations.
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
Company does not anticipate the adoption of this statement will have a material
effect on the Company's financial statements.
3. EFFECTS OF THE SEPTEMBER 11th, 2001 TERRORISTS ATTACKS
One Company restaurant, the Grill Room, suffered some damage. The
restaurant is located in 2 World Financial Center, an office building adjacent
to the World Trade Center site. The Grill Room will likely not reopen until late
in fiscal 2002, or early fiscal 2003, due to the damage sustained by the office
building. Several other restaurants were also closed from several days to a
month due to their proximity to the World Trade Center. The Company has
extensive property and business interruption insurance policies and the Company
ultimately expects to recover a significant portion of its physical costs and
business interruption losses at these restaurants. The Company has recorded
$450,000 as a reduction of other operating costs and expenses for the
thirty-nine week period ended June 29, 2002 for partial insurance recoveries of
certain out of pocket costs and business interruption losses incurred.
Additional recoveries are expected in future quarters as the assessment of the
damages is finalized.
The Company believes that its restaurant and food court operations at
Desert Passage which adjoins the Aladdin Casino Resort in Las Vegas, Nevada (the
"Aladdin") were significantly impaired by the events of September 11th. The
restaurant and food court operations experienced severe sales declines in the
aftermath of September 11th and the Aladdin declared bankruptcy on September 28,
2001. The Company determined that an impairment analysis under SFAS No. 121
needed to be performed.
Based upon the sum of the future undiscounted cash 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 believes 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
7
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.
4. LONG-TERM DEBT
As of June 29, 2002 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 and April 2002, included a $26,000,000 credit line
to finance the development and construction of new restaurants and for working
capital purposes at the Company's existing restaurants. The Company had
borrowings of $17,890,000 outstanding on this Facility at June 29, 2002. On July
1, 2002, the Facility converted into a term loan payable in 36 monthly
installments. The loan bears interest at 1/2% above the bank's prime rate and at
June 29, 2002 the interest rate on outstanding loans was 5.25%. The Facility
also includes a $1,000,000 letter of credit facility for use in lieu of lease
security deposits. The Company had delivered $389,000 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, the Company received a waiver for
covenants that the Company was not in compliance with at September 29, 2001. In
December 2001 and April 2002, certain covenants in the Facility were modified
for fiscal 2002 and beyond. In August 2002, the Company received a waiver for
the one covenant that the Company was not in compliance with at June 29, 2002,
which waiver is valid for the twelve month period through and including
September 27, 2002.
5. 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 $717,000 at June 29,
2002 and September 29, 2001, respectively. Such amounts which are due from the
exercise of stock options in accordance with the Company's Stock Option Plan are
payable on demand with interest at 1/2% above prime.
6. INCOME PER SHARE OF COMMON STOCK
Net income per share is computed in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, and is
calculated on the basis of the weighted average number of common shares
outstanding during each period plus, for diluted earnings per share, the
additional dilutive effect of common stock equivalents. Common stock equivalents
using the treasury stock method consist of dilutive stock options and warrants.
8
For the 13-weeks ended June 29, 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 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. For the 13-weeks ended June 30, 2001, options to purchase
10,000 shares of common stock at a price of $7.50 were included in diluted
earnings per share. Options and warrants to purchase common stock at a price
range of $9.50 to $12.00 are not included in diluted earnings per share as their
effect was antidilutive.
7. RELATED PARTY TRANSACTIONS
Mr. Donald D. Shack, a director of the Company, is a member of the firm
Shack Siegel Katz Flaherty & Goodman P.C., general counsel to the Company. The
Company incurred $345,000 and $317,000 in legal fees to such firm during the
39-week periods ended June 29, 2002 and June 30, 2001, respectively.
Receivables due from officers and employees, excluding receivables from
employees in respect of stock option exercises, totaled $930,000 at June 29,
2002 compared to $772,000 as at September 29, 2001. Such receivables are
included in Accounts Receivable.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements. Certain of these risks and
uncertainties are discussed under the heading "forward looking statements" in
the Company's annual report on form 10-K for the fiscal year ended September 29,
2001.
Revenues
Total revenues decreased 9.8% in the 13-week period ended June 29, 2002
from the comparable period ended June 30, 2001. The Company continued to
experience soft sales in two of its three major markets, New York and Washington
D.C. The Company believes the September 11th attacks, the residual effects on
tourism and the sluggish economy continue to impact sales in these two markets.
The Las Vegas market has proven to be stable and sales have remained constant
during the quarter. Total revenues decreased by $833,000 as a restaurant, the
Grill Room, located in an office building adjacent to the World Trade Center
site was closed due to damage sustained. The Grill Room will likely not reopen
until late in fiscal 2002, or early fiscal 2003. Total revenues also decreased
by $2,767,000 from a 8.8% decrease in same store sales on a Company-wide basis.
The Las Vegas market has rebounded considerably while New York and Washington DC
continue to lag. The decrease in same store sales was 5.3% in Las Vegas, 10.0%
in New York City and 14% in Washington, D.C. Such decreases were principally due
to a decrease in customer counts.
Total revenues decreased 11.3% in the 39-week period ended June 29,
2002 from the comparable period ended June 30, 2001. Total revenues decreased by
$2,767,000 as a restaurant, The Grill Room, was closed. Total revenues also
decreased by $7,974,000 from a 8.8% decrease in same store sales on a
Company-wide basis. The decrease in same store sales was 5.8% in Las Vegas, 9.5%
in New York City and 16.2% in Washington, D.C. Such decreases were principally
due to a decrease in customer counts.
Costs and Expenses
Food and beverage costs for the 13-week period ended June 29, 2002 as a
percentage of total revenues stood at 25.1% as compared to last year's 25%,
while food and beverage costs as a percentage of total revenues for the 39-week
period ended June 29, 2002 was 25.1% as compared to 25.4% last year.
Payroll expenses as a percentage of total revenues decreased to 30.7%
for the 13-weeks ended June 29, 2002 as compared to 32.3% last year and also
decreased in the 39-weeks ended June 29, 2002 to 32.6% of total revenues as
compared to 35% last year. The Company aggressively adapted its cost structure
in response to lower sales expectations following September 11th. Payroll head
count at June 29, 2002 is approximately 400 employees (14.4%) lower than the
comparable period last year through a combination of layoffs and reduced
seasonal hiring. Severance pay to key personnel was approximately $50,000 for
the 39-weeks ended June 29, 2002.
Occupancy and other expenses as a percentage of total revenues
increased during the quarter ended June 29, 2002 to 25.9% compared to 24% during
the
10
quarter ended June 30, 2001. For the 39-week period ending June 29, 2002
occupancy and other expenses were 26.7 % as compared to 25.9% last year. Since
such expenses are primarily fixed costs, they rose as a percentage of revenues
because revenues declined.
General and administrative expenses, as a percentage of total revenues,
decreased to 4.8% from 5.0% for the 13-week period ended June 29, 2002 as
compared to last year and were constant at 5.3% during the 39-week period ended
June 29, 2002 as compared to last year. The Company has reduced its general and
administrative expenses in response to September 11th and the sluggish economy.
Interest expense was $300,000 for the 13-week period ended June 29,
2002 as compared to $553,000 last year and interest expense for the 39-week
period ended June 29, 2002 was $981,000 as compared to $1,969,000 last year. The
significant decrease in both periods as compared to last year is due to lower
outstanding borrowings on the Company's revolving credit facility and the
benefit from significant rate decreases in the prime-borrowing rate.
The Company had net income of $1,835,000 for the 13-week period ended
June 29, 2002 as compared to net income of $1,957,000 last year and had net
income of $2,620,000 for the 39-week period ended June 29, 2002 as compared to
net income of $1,183,000 last year.
Net sales of managed restaurants were $2,184,000 during the 39-week
period ended June 29, 2002 as compared to $3,213,000 last year. In December
2000, three restaurants which the Company managed at one site in Boston,
Massachusetts closed as the lease expired and was not renewed by the landlord.
At June 29, 2002 the Company managed one restaurant. Net sales of managed
restaurants are not included in consolidated net sales.
Income Taxes
The provision for income taxes reflects Federal income taxes calculated
on a consolidated basis and state and local income taxes calculated by each
subsidiary on a non consolidated basis. Most of the restaurants owned or managed
by the Company are owned or managed by a separate subsidiary.
For state and local income tax purposes, the losses incurred by a
subsidiary may only be used to offset that subsidiary's income, with the
exception of the restaurants which operate in the District of Columbia.
Accordingly, the Company's overall effective income tax rate has varied
depending on the level of the losses incurred at individual subsidiaries.
The Company's overall effective tax rate in the future will be affected
by factors such as the level of losses incurred at the Company's New York
facilities (which cannot be consolidated for state and local tax purposes),
pre-tax income earned outside of New York City (Nevada has no state income tax
and other states in which the Company operates have income tax rates
substantially lower in comparison to New York) and the utilization of state and
local net operating loss carry forwards. In order to more effectively utilize
tax loss carry forwards at restaurants that were unprofitable, the Company has
merged certain profitable subsidiaries with certain loss subsidiaries.
The Company is entitled to a tax credit based on the amount of FICA
taxes paid by the Company with respect to the tip income of restaurant service
11
personnel. The Company estimates that this credit will be in excess of $500,000
for the current year.
The Company and the Internal Revenue Service finalized the adjustments
to the Company's federal income tax for the fiscal years ended September 30,
1995 through October 3, 1998. The adjustments primarily relate to travel and
meal expenses for which the Internal Revenue Service asserts the Company did not
comply with certain record keeping requirements of the Internal Revenue Code.
The settlement did not have a material effect on the Company's financial
condition.
Liquidity and Sources of Capital
The Company's primary source of capital is cash provided by operations
and funds available from the Revolving Credit and Term Loan Facility (the
"Facility") with its main bank, Bank Leumi USA. The Company from time to time
also utilizes equipment financing in connection with the construction of a
restaurant and seller financing in connection with the acquisition of a
restaurant. The Company utilizes capital primarily to fund the cost of
developing and opening new restaurants and acquiring existing restaurants.
As of June 29, 2002, the Facility included a $26,000,000 credit line to
finance the development and construction of new restaurants and for working
capital purposes at the Company's existing restaurants. At June 29, 2002, the
Company had borrowings of $17,890,000 outstanding on this Facility. On July 1,
2002, the Facility converted into a term loan payable over 36 months. The loan
bears interest at 1/2% above the bank's prime rate and at June 29, 2002 the
interest rate on outstanding loans was 5.25%. The Facility also includes a
$1,000,000 letter of credit facility for use in lieu of lease security deposits.
The Company had delivered $389,000 in irrevocable letters of credit on this
Facility. The Company generally is required to pay commissions of 1 1/2% per
annum on outstanding letters of credit.
At June 29, 2002, the Company had a working capital deficit of
$10,062,000 as compared to a working capital deficit of $6,585,000 at September
29, 2001. The restaurant business does not require the maintenance of
significant inventories or receivables, thus the Company is able to operate with
minimal and even negative working capital.
The Company's subsidiaries each guaranteed the obligations of the
Company under the foregoing Facility and granted security interests in their
respective assets as collateral for such guarantees. In addition, the Company
pledged stock of such subsidiaries as security for obligations of the Company
under such Facility.
The Facility includes restrictions relating to, among other things,
indebtedness for borrowed money, capital expenditures, mergers, sale of assets,
dividends and liens on the property of the Company. The Facility also requires
the Company to comply with certain financial covenants at the end of each
quarter such as minimum cash flow in relation to the Company's debt service
requirements, ratio of debt to equity, and the maintenance of minimum
shareholders' equity. In December 2001 the Company received a waiver for
covenants that the Company was not in compliance with at September 29, 2001. In
December 2001 and April 2002 certain covenants in the Facility were modified for
fiscal 2002 and beyond. In August 2002, the Company received a waiver for the
one covenant that the Company was not in compliance with at June 29, 2002, which
12
waiver is valid for the twelve month period through and including September 27,
2002.
In November 2000, the Company entered into a sale and leaseback
agreement with GE Capital for $1,652,000 to refinance the purchase of various
restaurant equipment at Dessert Passage, which adjoins the Aladdin Casino Resort
in Las Vegas, Nevada (the "Aladdin"). The lease, which is accounted for as an
operating lease, bears interest at 8.65% per annum and is payable in 48 equal
monthly installments of $31,785 until maturity in November 2004 at which time
the Company has an option to purchase the equipment for $519,440. Alternatively,
the Company can extend the lease for an additional 12 months at the same monthly
payment until maturity in November 2005 and repurchase the equipment at such
time for $165,242. At September 29, 2001 the Company determined that its food
service operations at the Aladdin were impaired and the lease will be abandoned
unless there is a significant change in current business circumstances.
Accordingly the Company accrued $1,600,000 of estimated future lease payments on
this lease. (See events of September 11th below)
The Company does not anticipate any capital-intensive projects for the
remainder of fiscal 2002 and expects that a significant portion of its projected
cash flow will be applied to debt reduction.
Restaurant Expansion
In June 2002 the Company opened a 200-seat restaurant and bar, the
Saloon, at the Neonopolis Center at Fremont Street in downtown Las Vegas,
Nevada. The Company received a $2,550,000 construction and operating allowance
from the landlord and has completed the construction and opened the restaurant
within the limits of that allowance.
The Company is not currently committed to any other projects.
Events of September 11, 2001
The Company experienced severe sales decreases in the immediate
aftermath of the September 11th terrorist attacks. The Company continues to
experience negative same store sales, although on a much improved level as
compared to the immediate weeks following the attack. The Company has
aggressively reduced its cost structure at restaurants and at the corporate
level.
One Company restaurant, the Grill Room, suffered some damage. The
restaurant is located in 2 World Financial Center, an office building adjacent
to the World Trade Center site. The Grill Room will likely not reopen until late
in fiscal 2002, or early fiscal 2003, due to the damage sustained by the office
building. Several other Company restaurants were closed from several days to a
month due to their proximity to the World Trade Center.
The long-term effects of the terrorist attacks cannot yet be
determined. The Company's restaurants in travel destinations, consisting of all
of its restaurants in Washington and Las Vegas and certain restaurants in New
York, are intended to benefit from high tourist traffic. Though the Las Vegas
market has shown resiliency, the decline in travel to both New York and
Washington resulting from the attacks and the sluggish economy has had a
material adverse effect on revenues from those restaurants. Recovery of those
restaurants depends upon restoration of public confidence in the air
transportation system
13
and its willingness and inclination to resume vacation and convention travel and
an improvement in general economic conditions.
Critical Accounting Policies and Estimates
The preparation of financial statements requires the application of
certain accounting policies, which may require the Company to make estimates and
assumptions of future events. In the process of preparing its consolidated
financial statements, the Company estimates the appropriate carrying value of
certain assets and liabilities, which are not readily apparent from other
sources. The primary estimates underlying the Company's financial statements
include allowances for potential bad debts on accounts and notes receivable, the
useful lives and recoverability of its assets, such as property and intangibles,
fair values of financial instruments, the realizable value of its tax assets and
other matters. Management bases its estimates on certain assumptions, which they
believe are reasonable in the circumstances, and actual results, could differ
from those estimates. Although management does not believe that any change in
those assumptions in the near term would have a material effect on the Company's
consolidated financial position or the results of operation, differences in
actual results could be material to the financial statements.
The Company's significant accounting policies are more fully described
in Note 1 to the Company's annual report on Form 10-K for the year ended
September 29, 2001. Below are listed certain policies that management believes
are critical.
Fixed Assets - The Company annually assesses any impairment in value of
long-lived assets and certain identifiable intangibles to be held and used. The
Company evaluates the possibility of impairment by comparing anticipated
undiscounted cash flows to the carrying amount of the related long-lived assets.
If such cash flows are less than carrying value the Company then reduces the
asset to its fair value. Fair value is generally calculated using discounted
cash flows. Various factors such as sales growth and operating margins and
proceeds from a sale are part of this analysis. Future results could differ from
the Company's projections with a resulting adjustment to income in such period.
Deferred Income Tax Valuation Allowance - The Company provides such
allowance due to uncertainty that some of the deferred tax amounts may not be
realized. Certain items, such as state and local tax loss carry forwards, are
dependent on future earnings or the availability of tax strategies. Future
results could require an increase or decrease in the valuation allowance and a
resulting adjustment to income in such period.
Recent Developments
The Financial Accounting Standards Board has recently issued the
following accounting pronouncements:
SFAS No. 142 "Goodwill and Other Intangible Assets" addresses financial
accounting and reporting for acquired goodwill and other intangible assets.
Under SFAS No. 142, goodwill and some intangible assets will no longer be
amortized, but rather reviewed for impairment on a periodic basis. Impairment
losses for goodwill and certain intangible assets that arise due to the initial
application of this statement are to be reported as resulting from a change in
accounting principle. The provisions of this statement will be applied at the
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beginning of the Company's 2003 fiscal year. The Company is in the process of
evaluating the financial statement impact from adopting this standard.
SFAS No. 143 "Accounting for Asset Retirement Obligations" requires the
recording of the fair value of a liability for an asset retirement obligation in
the period in which it is incurred. This statement is effective for the Company
at the beginning of the Company's 2004 fiscal year. The Company does not expect
the adoption of this standard to have a material impact on the Company's
financial position or results of operations.
SFAS No. 144 "Accounting for the Impairment or Disposal of Long Lived
Assets" supersedes existing accounting literature dealing with impairment and
disposal of long-lived assets, including discontinued operations. It addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of, and expands current reporting for
discontinued operations to include disposals of a "component" of an entity that
has been disposed of or is classified as held for sale. This statement is
effective for the Company at the beginning of the Company's 2003 fiscal year.
The Company is in the process of evaluating the financial statement impact of
this standard.
SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" was issued in
April 2002. SFAS 145 rescinds SFAS 4 and 64, which required gains and losses
from extinguishments of debt to be classified as extraordinary items. SFAS 145
also rescinds SFAS 44 since the provisions of the Motor Carrier Act of 1980 are
complete. SFAS 145 also amends SFAS 13 eliminating inconsistencies in certain
sale-leaseback transactions. The provisions of SFAS 145 are effective for fiscal
years beginning after May 15, 2002. Any gain or loss on extinguishment of debt
that was classified as an extraordinary item in prior periods presented shall be
reclassified. The Company does not expect that the adoption of SFAS 145 will
have a material effect on the Company's financial position or results of
operations.
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
Company does not anticipate the adoption of this statement will have a material
effect on the Company's financial statements.
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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, and such loans converted on July 1, 2002 to a term loan payable over
three years. Based upon a $17,890,000 (the outstanding balance at June 29, 2002)
term loan and a 100 basis point change in interest rates, interest expense would
change by $179,000 in the one-year period beginning June 30, 2002.
Part II - Other Information
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Registrant, filed
on January 4, 1983, incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form
10-K for the fiscal year ended October 1, 1994 (the
"1994 10-K").
3.2 Certificate of Amendment of the Certificate of
Incorporation of the Registrant filed on October 11,
1985, incorporated by reference to Exhibit 3.2 to the
1994 10-K.
3.3 Certificate of Amendment of the Certificate of
Incorporation of the Registrant filed on July 21,
1988, incorporated by reference to Exhibit 3.3 to the
1994 10-K.
3.4 Certificate of Amendment of the Certificate of
Incorporation of the Registrant filed on May 13, 1997,
incorporated by reference to Exhibit 3.4 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 29, 1997.
3.5 Certificate of Amendment of the Certificate of
Incorporation of the Registrant filed on April 24,
2002, incorporated by reference to Exhibit 3.5 to
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 30, 2002.
3.6 By-Laws of the Registrant, incorporated by reference
to Exhibit 3.4 to the 1994 10-K.
*10.13 Amendment dated as of April 23, 2002 to the Fourth
Amended and Restated Credit Agreement dated as of
December 27, 1999 between the Company and Bank Leumi
USA.
*99.1 Certification 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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 12, 2002
ARK RESTAURANTS CORP.
By /s/ Michael Weinstein
----------------------
Michael Weinstein, President &
Chief Executive Officer
By /s/ Robert J. Stewart
----------------------
Robert Stewart,
Chief Financial Officer
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