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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 December 28, 2002
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
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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 February 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)
December 28, September 28,
2002 2002
---------- -----------
ASSETS (unaudited)
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 59 $ 819
Accounts receivable 2,694 2,000
Employee receivable (net of reserves of $0 and $45 respectively) 989 1,045
Inventories 1,941 1,925
Current portion of long-term receivables 148 164
Prepaid expenses and other current assets 712 779
Refundable and prepaid income taxes 1,164 957
Deferred income taxes 278 293
------- -------
Total current assets 7,985 7,982
LONG-TERM RECEIVABLES 861 904
FIXED ASSETS - At Cost:
Leasehold improvements 33,543 33,542
Furniture, fixtures and equipment 28,310 28,320
Leasehold improvements in progress 248 -
------- --------
62,101 61,862
Less accumulated depreciation and
amortization 32,776 31,602
------- -------
29,325 30,260
INTANGIBLE ASSETS - Less accumulated
amortization of $3,802 and $3,837 3,817 3,782
DEFERRED INCOME TAXES 4,270 4,255
OTHER ASSETS 773 777
------- -------
TOTAL ASSETS $47,031 $47,960
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable - trade $ 3,366 $ 3,332
Accrued expenses and other current
liabilities 5,586 6,356
Current maturities of long-term debt 6,285 6,284
------- -------
Total current liabilities 15,237 15,972
LONG-TERM DEBT - net of current maturities 9,469 9,547
OPERATING LEASE DEFERRED CREDIT 995 995
COMMITMENTS AND CONTINGENCIES - -
2
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 (716) (716)
Retained earnings 15,602 15,718
------- -------
Total shareholders' equity 21,330 21,446
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $47,031 $47,960
======= =======
See notes to consolidated condensed financial statements.
3
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
(In Thousands, Except per share amounts)
13 Weeks Ended
--------------------------
December 28, December 29,
2002 2001
----------- ----------
TOTAL REVENUES $26,215 $25,944
COST & EXPENSES:
Food & beverage cost of sales 6,598 6,310
Payroll expenses 9,140 8,481
Occupancy expenses 4,421 3,925
Other operating costs and expenses 3,611 2,621
General and administrative expenses 1,591 1,396
Depreciation and amortization expenses 1,147 1,339
------- -------
Total costs and expenses 26,508 24,072
OPERATING (LOSS) INCOME (293) 1,872
-------- -------
OTHER (INCOME) EXPENSE:
Interest expense, net 215 321
Other income (322) (72)
------- -------
Total other (income) expense (107) 249
-------- -------
Income before provision
for income (loss) taxes (186) 1,623
Provision (benefit) for income taxes (70) 649
-------- -------
NET INCOME (LOSS) (116) 974
RETAINED EARNINGS, Beginning
of period 15,718 11,489
------- -------
RETAINED EARNINGS, End of period $15,602 $12,463
======= =======
PER SHARE INFORMATION - BASIC & DILUTED:
NET INCOME (LOSS) BASIC ($.04) $.31
===== ====
NET INCOME (LOSS) DILUTED ($.04) $.31
===== ====
WEIGHTED AVERAGE NUMBER OF SHARES-BASIC 3,181 3,182
====== ======
WEIGHTED AVERAGE NUMBER OF SHARES-DILUTED 3,181 3,184
====== ======
See notes to consolidated condensed financial statements.
4
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
13 Weeks Ended
------------------------
December 28, December 29,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ (116) $ 974
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization of fixed assets 1,147 1,233
Amortization of intangibles - 106
Deferred income taxes - -
Changes in assets and liabilities:
Accounts receivable (638) (891)
Inventories (16) 50
Prepaid expenses and other current assets 67 (82)
Refundable and prepaid income taxes (207) 265
Other assets 5 6
Accounts payable - trade 34 (615)
Accrued income taxes - -
Accrued expenses and other current liabilities (770) (1,149)
------- -------
Net cash (used in) provided by operating activities (494) 96
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets, net (247) (8)
Issuance of long term receivables - (23)
Payments received on long-term receivables 59 77
------- -------
Net cash (used in) provided in investing activities (188) 46
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt - 1,000
Principal payment on long-term debt (78) (1,142)
------- -------
Net cash (used in) provided by financing activities (78) (142)
------- -------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (760) -
CASH AND CASH EQUIVALENTS, beginning of period 819 -
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 59 $ -
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 221 $ 355
======= =======
Income taxes $ 125 $ 185
======= =======
See notes to consolidated condensed financial statements.
5
ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
December 28, 2002
(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 December 28, 2002 and
results of operations and cash flows for the periods ended December 28, 2002 and
December 29, 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 28, 2002. The results of operations for the period ended
December 28, 2002 are not necessarily indicative of the operating results for
the full year.
Certain reclassifications have been made to the 2002 financial
statements to conform to the 2003 presentation.
2. IMPACT OF NEW ACCOUNTING STANDARDS
"Goodwill and other Intangible Assets" ("SFAS 142"). As of September
29, 2002, the Company adopted the provisions for SFAS No. 142. SFAS No. 142
requires that goodwill and intangible assets with indefinite lives no longer be
amortized, but instead tested for impairment at least annually and written down
with a charge to operations when the carrying amount exceeds the estimated fair
value. Prior to the adoption of SFAS No. 142 the Company amortized the goodwill.
The amount of such amortized goodwill was $3,448,000 as of September 28, 2002.
In accordance with SFAS No. 142 the Company discontinued the amortization of
goodwill effective September 29, 2002. Had the provisions of SFAS No. 142 been
in effect during the three months ended December 29, 2001 a reduction of
amortization expense in pretax income of $90,000 or an increase of $0.03 per
share for the first quarter of 2001 fiscal year would have been recorded. The
Company has not completed the transitional goodwill impairment test; however
the Company has concluded that the Company consists of one reporting unit at
this time.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, supersedes existing accounting literature dealing with impairment and
disposal of long-lived assets, including discontinued operations. It addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of and expands current reporting for
discontinued operations to include disposals of a "component" of an entity that
has been disposed of or is classified as held for sale. The Company adopted this
standard in the first quarter of fiscal year 2003. The adoption of this standard
did not have a material impact on the Company's financial position or results of
operations; however, the Company will be required to separately disclose the
results of closed restaurants as discontinued operations in the future.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, was issued in July 2002. SFAS No. 146 replaces current accounting
literature and requires the recognition of costs associated with exit or
disposal activities when they are incurred rather than at the date of commitment
to an exit or disposal plan. The provisions of the Statement are effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company does not anticipate the adoption of this statement will have a material
effect on the Company's financial statements.
FIN No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, was issued
in November 2002. This interpretation elaborates on the disclosures to be made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, while disclosure requirements are effective for interim or
annual periods ending after December 15, 2002. The Company adopted this standard
in the first quarter of fiscal year 2003. The adoption of this standard did not
have a material impact on the Company's financial position or results of
operations.
SFAS 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, was issued in December 2002. This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," providing alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial
6
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company has adopted
the disclosure-only provisions of SFAS No. 123. Therefore, SFAS No. 148 will not
affect the Company's results of operations or financial position. The new
disclosure requirements will be effective for the Company beginning in the
quarter ending March 29, 2003.
3. EFFECTS OF THE SEPTEMBER 11th TERRORIST ATTACKS 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 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 until December 2002, when the restaurant was reopened. The restaurant is
located in 2 World Financial Center, an office building adjacent to the World
Trade Center site. The Company recorded $200,000 and $125,000 as a reduction of
other operating costs and expenses for partial insurance recoveries of certain
out-of-pocket costs and business interruption losses incurred for the 13-week
periods ended December 28, 2002 and December 29, 2001, respectively. 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
September 29, 2001 an impairment charge of $8,445,000 for the net book value of
the assets and recorded an additional $1,600,000 of expense and liability for
the future lease payments of which $1,158,000 remains in accrued expenses and
other current liabilities at December 28, 2002. 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), since all of the fixed assets for the Aladdin operations had been
written off during the year ended September 28, 2002.
4. LONG-TERM DEBT
As of December 28, 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
December 28, 2002 the interest rate on outstanding loans was 4.75%. 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 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 employee loans during the quarter ended
December 28, 2002. The Company received a waiver through December 30, 2002 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.
7
In September 2001 a subsidiary of the Company entered into a Lease
Agreement with World Entertainment Centers LLC regarding the leasing of premises
at the Neonopolis Center at Freemont Street for the restaurant Saloon. The
Company provided a Lease Guaranty ("Guaranty") to induce the landlord to enter
into the Lease Agreement. The Guaranty is for a term of two years from the date
of the opening of the Saloon, May 2002, and during the first year of the
Guaranty is in the amount of $350,000. Upon the first anniversary of the opening
of the Saloon, May 2003, the Guaranty is reduced to $175,000 and will expire in
May 2004. As of December 28, 2002 the maximum potential amount of future
payments the Company could be required to make as a result of the Guaranty was
$350,000.
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 totaled $716,000 at December
28, 2002. Such amounts which are due from the exercise of stock options in
accordance with the Company's Stock Option Plan are payable on demand with
interest at 1/2% above prime (4.75% at December 28, 2002).
6. INCOME PER SHARE OF COMMON STOCK
Net income per share is computed in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, and is
calculated on the basis of the weighted average number of common shares
outstanding during each period plus, for diluted earnings per share, the
additional dilutive effect of common stock equivalents. Common stock equivalents
using the treasury stock method consist of dilutive stock options and warrants.
For the 13-week period ended December 28, 2002, options to purchase
393,000 shares of common stock at a price range of $6.30 to $10.00 were not
included in diluted earnings per share as their impact was antidilutive. For
the 13-weeks ended December 29, 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 P.C., general counsel to the Company. Mr. Shack is
not standing for re-election at the 2003 Annual Shareholder Meeting. The Company
incurred $69,000 in legal fees to such firm for the 13-weeks ended December 28,
2002.
Receivables due from officers and employees, excluding stock option
receivables, totaled $989,000 at December 28, 2002 and 1,045,000 at September
28, 2002. Such loans bear interest at the minimum statutory rate (1.84% at
December 28, 2002).
Item 2. Management's Discussion And Analysis Of Financial Condition and
Results Of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements. Certain of these risks and
uncertainties are discussed under the heading "forward looking statements" in
the Company's annual report on form 10-K for the fiscal year ended September 28,
2002.
Revenues
Total revenues increased 1% in the 13-week period ended December 28,
2002 from the comparable period ended December 29, 2001.
Revenues in New York of $9,285,000 were largely unchanged during the
13- week period ended December 28, 2002 when compared to $9,286,000 from the
prior period ended December 29, 2001. This result was achieved by an increase in
revenues of $296,000 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
8
increased by $549,000 in the quarter ended December 28, 2002 over the
corresponding 13-week period ending December 29,2001. This increase was achieved
despite a negative impact of $781,000 resulting from the abandonment, at the end
of fiscal 2002, of the Company's restaurant and food court operations at the
Desert Passage, the retail complex at the Aladdin Resort and Casino. Revenues
decreased by $166,000 in Washington D.C. in the period ended December 28,2002
from the comparable period ended December 29, 2001.
The Company believes the effects on tourism resulting from the attacks
of September 11th and the sluggish economy will continue to impact sales in New
York and Washington D.C. while Las Vegas will continue to experience sales
growth.
Company-wide same store sales for the 13-week period ended December 28,
2002 increased 2.7% from the 13-week period ended December 29, 2001. Same store
sales increased 9.7% in Las Vegas in the first quarter of fiscal 2003 over the
first quarter of fiscal 2002. A decrease in some store sales occurred in New
York and Washington D.C. The decreases for New York and Washington D.C. same
store sales were 2.9% in New York and 5% in Washington D.C. from the
corresponding 13-week period ended December 29, 2001. Such decreases were
principally due to a decrease in customer counts.
Costs and Expenses
Food and beverage costs for the 13-week period ended December 28, 2002
as a percentage of total revenues stood at 25.2% compared to last year's 24.3%.
The increase is attributable to discounts given by purveyors in the first
quarter of 2002 as a result of the September 11th attacks. Such discounts were
not available in the first quarter of 2003.
Payroll expenses as a percentage of total revenues increased to 34.9%
for the 13-week period ended December 28, 2002 compared to 32.7% for the 13-week
period ended December 29, 2001. 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 head count was significantly
reduced, overtime and vacation pay were eliminated, and salaries were
temporarily reduced. For the 13-week period ended December 28, 2002, although
payroll head count continues to be lower than payroll head count prior to
September 11th; head count for the entire quarter exceeded that of the
comparable 2001 quarter and salary reductions and the elimination of overtime
and vacation pay were discontinued in the quarter ended December 28, 2002.
Occupancy and other expenses as a percentage of total revenues
increased during the quarter ended December 28, 2002 to 16.9% compared to 15.1%
during the quarter ended December 29, 2001. The difference is attributable to
rent concessions granted to the Company by landlords in the wake of the
September 11th tragedy which were not available in the quarter ended December
28, 2002.
Other operating costs and expenses, as a percentage of total revenues,
increased to 13.8% for the 13-weeks ended December 28, 2002 from 10.1% for the
13-week period ended December 29, 2001. For the 13 weeks ended December 29,
2001, the Company severely restricted discretionary spending as a result of the
September 11th attacks, and the Company received significant discounts from many
suppliers. For the 13-weeks ended December 28, 2002, spending, though still
tightly controlled, has increased for maintenance in our restaurants and the
deep discounts given by suppliers after September 11th are no longer available.
General and administrative expenses as a percentage of total revenues
increased during the quarter ended December 28, 2002 to 6.1% compared to 5.4%
during the quarter ended December 29, 2001. This increase is attributable to the
Company's temporary reduction of certain expenses instituted after the September
11th attacks, such as the temporary reduction in salaries and the elimination of
vacation pay for the corporate staff, as well as a payroll head count reduction.
The reductions kept general and administrative expenses lower
9
during the first quarter of 2002 than the first quarter of 2003. For the 13
weeks ended December 28, 2002, while head count is still below pre-September
11th levels; however, new staff has been hired, head count in the first quarter
of fiscal 2003 exceeds that of the first quarter of 2002, temporary reduction in
pay has been eliminated and vacation pay has been restored.
Interest expense was $222,000 for the 13-week period ended December 28,
2002 compared to $355,000 for the 13-week period ended December 29, 2001. The
decrease is due to lower outstanding borrowings on the Company's credit
facility.
The Company had a net loss of $137,000 for the 13-week period ended
December 28, 2002 compared to net income of $974,000 for the 13-week period
ended December 29, 2001.
Income Taxes
The provision for income taxes reflects Federal income taxes calculated
on a consolidated basis and state and local income taxes calculated by each New
York subsidiary on a non-consolidated basis. Most of the restaurants owned or
managed by the Company are owned or managed by separate subsidiaries.
For state and local income tax purposes, the losses incurred by a
subsidiary may only be used to offset that subsidiary's income, with the
exception of the restaurants operating in the District of Columbia. Accordingly,
the Company's overall effective tax rate has varied depending on the level of
losses incurred at individual subsidiaries.
The Company's overall effective tax rate in the future will be affected
by factors such as the level of losses incurred at the Company's New York
facilities, which cannot be consolidated for state and local tax purposes,
pre-tax income earned outside of New York City and the utilization of state and
local net operating loss carry forwards. Nevada has no state income tax and
other states in which the Company operates have income tax rates substantially
lower in comparison to New York. In order to utilize more effectively tax loss
carry forwards at restaurants that were unprofitable, the Company has merged
certain profitable subsidiaries with certain loss subsidiaries.
The Revenue Reconciliation Act of 1993 provides tax credits to the
Company for FICA taxes paid by the Company on tip income of restaurant service
personnel. The Company estimates that this credit will be in excess of $500,000
for the current year.
Liquidity and Sources of Capital
The Company's primary source of capital has been cash provided by
operations and funds available from its main bank, Bank Leumi USA. The Company
from time to time also utilizes equipment financing in connection with the
construction of a restaurant and seller financing in connection with the
acquisition of a restaurant. The Company utilizes capital primarily to fund the
cost of developing and opening new restaurants, acquiring existing restaurants
owned by others and remodeling existing restaurants owned by the Company.
The Company had a working capital deficit of $7,240,000 at December 28,
2002 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 December 28, 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
10
$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 December 28, 2002 and September 28, 2002 the
interest rate on outstanding loans was 4.75% and 5.25%, respectively. 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 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 employee loans during the quarter ended
December 28, 2002. The Company received a waiver through December 30, 2002 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.
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 December 28, 2002
the Company had $827,000 outstanding on this facility.
The Company entered into a sale and leaseback agreement with GE Capital
for $1,652,000 in November 2000 to refinance the purchase of various restaurant
equipment at its food and beverage facilities at the Aladdin hotel in Las Vegas,
Nevada. The lease bears interest at 8.65% per annum and is payable in 48 equal
monthly installments of $31,785 until maturity in November 2004 at which time
the Company has an option to purchase the equipment for $519,440. Alternatively,
the Company can extend the lease for an additional 12 months at the same monthly
payment until maturity in November 2005 and repurchase the equipment at such
time for $165,242. The Company originally accounted for this agreement as an
operating lease and did not record the assets or the lease liability in the
financial statements. During the year ended September 29, 2001, the Company
recorded the entire amount payable under the lease as a liability of $1,600,000
based on the anticipated abandonment of the Aladdin operations. In 2002, the
operations at the Aladdin were abandoned and at December 28, 2002, $1,158,000
remains in accrued expenses and other current liabilities representing future
operating lease payments.
Restaurant Expansion
The Company is currently not committed to any projects.
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 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 until
11
December 2002, when the restaurant was reopened. The restaurant is located in 2
World Financial Center, an office building adjacent to the World Trade Center
site. The Company recorded $200,000 and $125,000 as a reduction of other
operating costs and expenses for partial insurance recoveries of certain
out-of-pocket costs and business interruption losses incurred for the 13-week
period ended December 28, 2002 and December 29, 2001. 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
September 29, 2001 an impairment charge of $8,445,000 for the net book value of
the assets and recorded an additional $1,600,000 of expense and liability for
the future lease payments of which $1,158,000 remains in accrued and other
current liabilities at December 28, 2002. In September 2002, the Company
abandoned its restaurant and food court operations at the Aladdin.
In October 2002, the Company sold certain furniture, fixtures and
equipment related to the Aladdin operations for $240,000. The Company recognized
a gain of $240,000 in fiscal 2003 with respect to the transaction, since all of
the fixed assets for the Aladdin operations had been written off during the year
ended September 28, 2002.
Critical Accounting Policies
The preparation of financial statements requires the application of
certain accounting policies, which may require the Company to make estimates and
assumptions of future events. In the process of preparing its consolidated
financial statements, the Company estimates the appropriate carrying value of
certain assets and liabilities, which are not readily apparent from other
sources. The primary estimates underlying the Company's financial statements
include allowances for potential bad debts on accounts and notes receivable, the
useful lives and recoverability of its assets, such as property and intangibles,
fair values of financial instruments, the realizable value of its tax assets and
other matters. Management bases its estimates on certain assumptions, which they
believe are reasonable in the circumstances, and actual results could differ
from those estimates. Although management does not believe that any change in
those assumptions in the near term would have a material effect on the Company's
consolidated financial position or the results of operation, differences in
actual results could be material to the financial statements.
The Company's significant accounting policies are more fully described
in Note 1 to the Company's financials. 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
12
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 Accounting Developments
The Financial Accounting Standards Board has recently issued the
following accounting pronouncements:
SFAS No. 142, Goodwill and Other Intangible Assets. As of September 29,
2002, the Company adopted the provisions for SFAS No. 142. SFAS No. 142
requires that goodwill and intangible assets with indefinite lives no longer be
amortized, but instead tested for impairment at least annually and written down
with a charge to operations when the carrying amount exceeds the estimated fair
value. Prior to the adoption of SFAS No. 142 the Company amortized the goodwill
of which remained $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 December 29, 2001, a reduction of amortization expense in
pretax income of $90,000 or an increase of $0.03 per share for the first quarter
2001 would have been recorded. The Company has not completed the
transactional goodwill impairment that however the Company has concluded that
the company consiists of one reporting unit at this time.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, supersedes existing accounting literature dealing with impairment and
disposal of long-lived assets, including discontinued operations. It addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of and expands current reporting for
discontinued operations to include disposals of a "component" of an entity that
has been disposed of or is classified as held for sale. The Company adopted this
standard in the first quarter of fiscal year 2003. The adoption of this standard
did not have a material impact on the Company's financial position or results of
operations; however, the Company will be required to separately disclose the
results of closed restaurants as discontinued operations in the future.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, was issued in July 2002. SFAS No. 146 replaces current accounting
literature and requires the recognition of costs associated with exit or
disposal activities when they are incurred rather than at the date of commitment
to an exit or disposal plan. The provisions of the Statement are effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company does not anticipate the adoption of this statement will 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
13
issued or modified after December 31, 2002, while disclosure requirements are
effective for interim or annual periods ending after December 15, 2002. The
Company adopted this standard in the first quarter of fiscal year 2003. The
adoption of this standard did not have a material impact on the Company's
financial position or results of operations.
SFAS 148, Accounting for Stock-Based Compensation - Transition and
Disclosure was issued in December 2002. This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," providing alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company has adopted the disclosure-only provisions of SFAS No. 123. Therefore,
SFAS No. 148 will not affect the Company's results of operations or financial
position. The new disclosure requirements will be effective for the company
beginning in the quarter ending March 29, 2003.
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 were converted on July 1, 2002 to a term loan payable
over three years. Based upon a $14,908,000 (the outstanding balance at December
28, 2002) term loan and a 100 basis point change in interest rates, annual
interest expense would change by $149,000.
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.
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.
14
PART II
OTHER INFORMATION
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Registrant, filed with the
Secretary of State of the State of New York on January 4, 1983,
incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended September 28, 2002 ("2002 10-K").
3.2 Certificate of Amendment of the Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of New York
on October 11, 1985, incorporated by reference to the 2002 10-K.
3.3 Certificate of Amendment of the Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of New York
on July 21, 1988, incorporated by reference to the 2002 10-K.
3.4 Certificate of Amendment of the Certificate of Incorporation of the
Registrant filed with the Secretary of State of the State of New York
on May 13, 1997 incorporated by reference to the 2002 10-K .
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 Exhibits: Quarterly Report on Form
10-Q for the quarterly period ended March 30, 2002 (the "Second
Quarter 2002 Form 10-Q").
3.6 By-Laws of the Registrant, incorporated by reference to Exhibit 3.2 to
the Registrant's Registration Statement on Form S-18 filed with the
Securities and Exchange Commission on October 17, 1985.
*10.14 Amendment dated as of January 22, 2002 to the Fourth Amended and
Restated Credit Agreement dated as of December 27, 1999 between the
Company and Bank Leumi USA.
*99.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.
(b) Reports on Form 8-K.
None.
15
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: February 11, 2003
ARK RESTAURANTS CORP.
By: /s/ Michael Weinstein
---------------------
Michael Weinstein
President & Chief Executive Officer
By: /s/ Robert J. Stewart
---------------------
Robert Stewart
Chief Financial Officer
16
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.
February 11, 2003
/s/ Michael Weinstein
- ---------------------
Michael Weinstein
Chief Executive Officer
17
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.
February 11, 2003
/s/ Robert J. Stewart
------------------------
Robert J. Stewart
Chief Financial Officer
18