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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 27, 2003
Commission file number 0-14030
ARK RESTAURANTS CORP.
(Exact Name of Registrant as Specified in Its Charter)
New York 13-3156768
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
85 Fifth Avenue, New York, NY 10003
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 206-8800
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $0.01.
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 such 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value at December 23, 2003 of shares of the
Registrant's Common Stock, $.01 par value (based upon the closing price per
share of such stock on the Nasdaq National Market) held by non-affiliates of the
Registrant was approximately $23,201,000. Solely for the purposes of this
calculation, shares held by directors and officers of the Registrant have been
excluded. Such exclusion should not be deemed a determination or an admission by
the Registrant that such individuals are, in fact, affiliates of the Registrant.
At December 23, 2003, there were outstanding 3,181,299 shares of the
Registrant's Common Stock, $.01 par value.
Documents Incorporated by Reference: Portions of the Registrant's definitive
proxy statement to be filed not later than 120 days after the end of the fiscal
year covered by this form are incorporated by reference in Part III, Items 10,
11, 12, 13 and 14 of this Report.
PART I
Item 1. Business
Overview
Ark Restaurants Corp. (the "Registrant" or the "Company") is a New York
corporation formed in 1983. Through its subsidiaries, it owns and operates 24
restaurants and bars, 12 fast food concepts, catering operations, and wholesale
and retail bakeries. Initially its facilities were located only in New York
City. At this time, 12 of the restaurants are located in New York City, four are
located in Washington, D.C., and eight are located in Las Vegas, Nevada. The
Company's Las Vegas operations include three restaurants within the New York-New
York Hotel & Casino Resort, and operation of the resort's room service, banquet
facilities, employee dining room and eight food court operations. The Company
also owns and operates two restaurants, two bars and four food court facilities
at the Venetian Casino Resort, one restaurant at the Neonopolis Center at
Fremont Street, and one restaurant within the Forum Shops at Caesar's Shopping
Center.
In addition to the shift from a Manhattan-based operation to a multi-city
operation, the nature of the facilities operated by the Company has shifted from
smaller, neighborhood restaurants to larger, destination restaurants intended to
benefit from high patron traffic attributable to the uniqueness of the
restaurant's location. Most of the Company's restaurants which are in operation
and which have been opened in recent years are of the latter description. These
include the restaurant operations at the New York-New York Hotel & Casino in Las
Vegas, Nevada (1997); the Stage Deli located at the Forum Shops in Las Vegas,
Nevada, and Red, located at the South Street Seaport in New York (1998); Thunder
Grill in Union Station, Washington, D.C. (1999); two restaurants and four food
court facilities at the Venetian Casino Resort in Las Vegas, Nevada (2000); and
a restaurant, The Saloon, at the Neonopolis Center in downtown Las Vegas, Nevada
(2002). The Company recently entered into agreements to manage 11 fast food
restaurants to be constructed in the Hard Rock Casinos in Hollywood and Tampa,
Florida. Apart from these agreements, the Company is not currently committed to
any new projects. The Company has sold a number of its smaller, neighborhood
restaurants.
The names and themes of each of the Company's restaurants are different except
for the Company's three America restaurants, two Sequoia restaurants, two
Gonzalez y Gonzalez restaurants and two Lutece restaurants. The menus in the
Company's restaurants are extensive, offering a wide variety of high quality
foods at generally moderate prices. Of the Company's restaurants, the two Lutece
restaurants may be classified as expensive. The atmosphere at many of the
restaurants is lively and extremely casual. Most of the restaurants have
separate bar areas. A majority of the net sales of the Company is derived from
dinner as opposed to lunch service. Most of the restaurants are open seven days
a week and most serve lunch as well as dinner.
While decor differs from restaurant to restaurant, interiors are marked by
distinctive architectural and design elements which often incorporate dramatic
interior open spaces and extensive glass exteriors. The wall treatments,
lighting and decorations are typically vivid, unusual and, in some cases, highly
theatrical.
The following table sets forth information with respect to the Company's
facilities currently in operation.
2
Seating
Capacity(2)
Restaurant Size Indoor Lease
Name Location Year Opened(1) (Square Feet) (Outdoor) Expiration(3)
- ---------------------- ----------------------------- -------------- --------------- ----------- -------------
Metropolitan Cafe(4) First Avenue 1982 4,000 180(50) 2006
(between 52nd and 53rd
Streets)
New York, New York
La Rambla(5) Broadway 1983 6,600 300 2008
(between 75th and 76th
Streets) New York, New York
America 18th Street 1984 9,600 350 2004
(between Fifth Avenue and
Broadway) New York, New York
Jack Rose Eighth Avenue 1986 8,000 400 2011
(at 47th Street)
New York, New York
El Rio Grande (6)(7) Third Avenue 1987 4,000 160 2014
(between 38th and 39th
Streets) New York, New York
Gonzalez y Gonzalez Broadway 1989 6,000 250 2007
(between Houston and Bleecker
Streets) New York, New York
America Union Station 1989 10,000 400(50) 2009
Washington, D.C.
Center Cafe Union Station 1989 4,000 200 2009
Washington, D.C.
Sequoia Washington Harbour 1990 26,000 600(400) 2017
Washington, D.C.
Sequoia South Street Seaport 1991 12,000 300(100) 2006
New York, New York
Canyon Road First Avenue 1984 2,500 130 2009
(between 76th and 77th
Streets) New York, New York
3
Seating
Capacity(2)
Restaurant Size Indoor Lease
Name Location Year Opened(1) (Square Feet) (Outdoor) Expiration(3)
- ---------------------- ----------------------------- -------------- --------------- ----------- -------------
Lutece East 50th Street 1994 2,500 92 Month to
(between Second and Third Month
Avenues) New York, New York
Columbus Bakery Columbus Avenue 1988 3,000 75 2012
(between 82nd and 83rd
Streets) New York, New York
Bryant Park Grill & Bryant Park 1995 25,000 180(820) 2025
Cafe(8) New York, New York
Columbus Bakery First Avenue 1995 2000 75 2006
(between 52nd and 53rd
Streets)
New York, New York
America(9) New York-New York Hotel and 1997 20,000 450 2017(9)
Casino
Las Vegas, Nevada
Gallagher's New York-New York 1997 5,500 260 2017(9)
Steakhouse(9) Hotel & Casino
Las Vegas, Nevada
Gonzalez y Gonzalez(9) New York-New York 1997 2,000 120 2017(9)
Hotel & Casino
Las Vegas, Nevada
Village Eateries New York-New York 1997 6,300 400(*) 2017(9)
(9)(10) Hotel & Casino
Las Vegas, Nevada
The Grill Room (11) World Financial Center 1997 10,000 250 2011
New York, New York
The Stage Deli Forum Shops 1997 5,000 200 2008
Las Vegas, Nevada
Red South Street Seaport 1998 7,000 150(150) 2013
New York, New York
Thunder Grill Union Station 1999 10,000 500 2019
Washington, D.C.
Venetian Food Court Venetian Casino Resort 1999 5,000 300(*) 2014
Las Vegas, Nevada
4
Seating
Capacity(2)
Restaurant Size Indoor Lease
Name Location Year Opened(1) (Square Feet) (Outdoor) Expiration(3)
- ---------------------- ----------------------------- -------------- --------------- ----------- -------------
Tsunami Grill Venetian Casino Resort 1999 13,000 300 2019
Las Vegas, Nevada
Lutece Venetian Casino Resort 1999 6,400 90(90) 2019
Las Vegas, Nevada
Venus Venetian Casino Resort 2001 9,700 250 2019
Las Vegas, Nevada
V-Bar Venetian Casino Resort 2000 3,000 100 2015
Las Vegas, Nevada
The Saloon Neonopolis Center 2002 6,000 200 2014
at Fremont Street
Las Vegas, Nevada
- ----------
(1) Restaurants are, from time to time, renovated and/or renamed. "Year Opened"
refers to the year in which the Company or an affiliated predecessor of the
Company first opened, acquired or began managing a restaurant at the
applicable location, notwithstanding that the restaurant may have been
renovated and/or renamed since that date.
(2) Seating capacity refers to the seating capacity of the indoor part of a
restaurant available for dining in all seasons and weather conditions.
Outdoor seating capacity, if applicable, is set forth in parentheses and
refers to the seating capacity of terraces and sidewalk cafes which are
available for dining only in the warm seasons and then only in clement
weather.
(3) Assumes the exercise of all available lease renewal options.
(4) The landlord has the option to terminate the lease for this restaurant at
any time after October 1, 2003 with thirty (30) day's prior written notice.
(5) The landlord has the option to cancel the lease for this restaurant any
time after December 1, 2003 upon six month's prior written notice and the
payment of $250,000.
(6) Restaurant owned by a third party and managed by the Company. Management
fees earned by the Company are based on a percentage of cash flow of the
restaurant.
(7) The Company owns a 19% interest in the partnership that owns El Rio Grande.
(8) The lease governing a substantial portion of the outside eating area of
this restaurant expires in 2005.
(9) Includes two five-year renewal options exercisable by the Company if
certain sales goals are achieved during the two year period prior to the
exercise of the renewal option. Under the America lease, the sales goal is
$6.0 million. Under the Gallagher's Steakhouse lease the sales goal is $3.0
million. Under the lease for Gonzalez y Gonzalez and the Village Eateries,
the combined sales goal is $10.0 million. Each of
5
the restaurants is currently operating at a level substantially in excess
of the minimum sales level required to exercise the renewal option for each
respective restaurant.
(10) The Company operates eight small food court restaurants in the Villages
Eateries food court at the New York-New York Hotel & Casino. The Company
also operates that hotel's room service, banquet facilities and employee
cafeteria.
(11) The restaurant experienced damage in the attack on the World Trade Center
on September 11, 2001. In addition, substantial damage was sustained by the
World Financial Center in which the restaurant is located. The restaurant
closed on September 11, 2001 and reopened in early December 2002.
(*) Represents common area seating.
Restaurant Expansion
In fiscal 2002, the Company opened The Saloon at the new Neonopolis Center at
Fremont Street in downtown Las Vegas, Nevada. The Company received a
construction and pre-opening expense allowance from the landlord. The Saloon was
opened within the limits of that allowance.
The opening of a new restaurant is invariably accompanied by substantial
pre-opening expenses and early operating losses associated with the training of
personnel, excess kitchen costs, costs of supervision and other expenses during
the pre-opening period and during a post-opening "shake out" period until
operations can be considered to be functioning normally. The amount of such
pre-opening expenses and early operating losses can generally be expected to
depend upon the size and complexity of the facility being opened. The Company
incurred no pre-opening expenses or early operating losses in fiscal 2003 or
2002. The Company incurred pre-opening expenses and early operating losses of
approximately $100,000 in fiscal 2001.
The Company's restaurants generally do not achieve substantial increases from
year to year in revenue, which the Company considers to be typical of the
restaurant industry. To achieve significant increases in revenue or to replace
revenue of restaurants that lose customer favor or which close because of lease
expirations or other reasons, the Company would have to open additional
restaurant facilities or expand existing restaurants. There can be no assurance
that a restaurant will be successful after it is opened, particularly since in
many instances the Company does not operate its new restaurants under a trade
name currently used by the Company, thereby requiring new restaurants to
establish their own identity.
The Company recently entered into agreements to manage fast food restaurants
at the Hard Rock Casinos in Hollywood and Tampa, Florida. The agreements are
subject to approval by the United States Department of the Interior. Apart
from these agreements, the Company is not currently committed to any projects.
The Company may take advantage of opportunities it considers to be favorable,
when they occur, depending upon the availability of financing and other factors.
Recent Restaurant Dispositions and Charges
In fiscal 2002 the Company determined that its restaurant and food court
operations at the Aladdin in Las Vegas, Nevada were significantly impaired by
the events of September 11, 2001, Aladdin's bankruptcy on September 28, 2001 and
a general decline in tourism and economic conditions. In light of the declining
sales and Aladdin's bankruptcy, the Company negotiated a termination of the
lease, which related to both the food court and Fat Anthony's at the Aladdin.
The Company abandoned the space as of the close of business on September 23,
2002. The Company terminated the lease effective as of October 6, 2002, and has
no further liabilities under the lease. In addition, certain of the Company's
equipment
6
and trade fixtures at the Aladdin were sold for a total price of $240,000, in
October 2002. The Company recorded an impairment charge of $10,045,000 in fiscal
2001 related to the Aladdin.
In fiscal 2003, the Company determined that its restaurant, Lutece, located in
New York City had been impaired by the events of September 11th and the
continued weakness in the economy. Based upon the sum of the future undiscounted
cash flows related to the Company's long-lived fixed assets at Lutece, the
Company determined that impairment had occurred. To estimate the fair value of
such long-lived fixed assets, for determining the impairment amount, the Company
used the expected present value of the future cash flows. The Company projected
continuing negative operating cash flow for the foreseeable future with no value
for subletting or assigning the lease for the premises. As a result, the Company
determined that there was no value to the long-lived fixed assets. The Company
had an investment of $667,000 in leasehold improvements, and furniture fixtures
and equipment. The Company believed that these assets would have nominal value
upon disposal and recorded an impairment charge of $667,000 during the fiscal
quarter ended March 29, 2003.
On December 1, 2003, the Company sold a restaurant, Lorelei, for approximately
$850,000. The book value of inventory, fixed assets, intangible assets and
goodwill related to this entity was approximately $610,000. The Company recorded
a gain on the sale of approximately $240,000 during the first quarter of fiscal
2004.
Restaurant Management
Each restaurant is managed by its own manager and has its own chef. Food
products and other supplies are purchased primarily from various unaffiliated
suppliers, in most cases by Company headquarters' personnel. The Company's
Columbus Bakery supplies bakery products to most of the Company's New York City
restaurants in addition to operating a retail bakery. Each of the Company's
restaurants has two or more assistant managers and sous chefs (assistant chefs).
Financial and management control is maintained at the corporate level through
the use of an automated data processing system that includes centralized
accounting and reporting.
Purchasing and Distribution
The Company strives to obtain quality menu ingredients, raw materials and other
supplies and services for its operations from reliable sources at competitive
prices. Substantially all menu items are prepared on each restaurant's premises
daily from scratch, using fresh ingredients. Each restaurant's management
determines the quantities of food and supplies required and orders the items
from local, regional and national suppliers on terms negotiated by the Company's
centralized purchasing staff. Restaurant-level inventories are maintained at a
minimum dollar-value level in relation to sales due to the relatively rapid
turnover of the perishable produce, poultry, meat, fish and dairy commodities
that are used in operations.
The Company attempts to negotiate short-term and long-term supply agreements
depending on market conditions and expected demand. However, the Company does
not contract for long periods of time for its fresh commodities such as produce,
poultry, meat, fish and dairy items and, consequently, such commodities can be
subject to unforeseen supply and cost fluctuations. Independent foodservice
distributors deliver most food and supply items daily to restaurants. The
financial impact of such supply agreements, would not have a material adverse
effect on the Company's financial position.
Employees
7
At December 12, 2003, the Company employed 2,003 persons (including employees at
managed facilities), 1,442 of whom were full-time employees, 561 of whom were
part-time employees, 32 of whom were headquarters personnel, 196 of whom were
restaurant management personnel, 587 of whom were kitchen personnel and 1,186 of
whom were restaurant service personnel. A number of the Company's restaurant
service personnel are employed on a part-time basis. Changes in minimum wage
levels may affect the labor costs of the Company and the restaurant industry
generally because a large percentage of restaurant personnel are paid at or
slightly above the minimum wage. With the exception of some of the employees at
Lutece in New York, the Company's employees are not covered by a collective
bargaining agreement.
Government Regulation
The Company is subject to various federal, state and local laws affecting its
business. Each restaurant is subject to licensing and regulation by a number of
governmental authorities that may include alcoholic beverage control, health,
sanitation, environmental, zoning and public safety agencies in the state or
municipality in which the restaurant is located. Difficulties in obtaining or
failures to obtain the required licenses or approvals could delay or prevent the
development and openings of new restaurants, or could disrupt the operations of
existing restaurants.
Alcoholic beverage control regulations require each of our restaurants to apply
to a state authority and, in certain locations, county and municipal authorities
for licenses and permits to sell alcoholic beverages on the premises. Typically,
licenses must be renewed annually and may be subject to penalties, temporary
suspension or revocation for cause at any time. Alcoholic beverage control
regulations impact many aspects of the daily operations of our restaurants,
including the minimum ages of patrons and employees consuming or serving such
beverages; employee alcoholic beverages training and certification requirements;
hours of operation; advertising; wholesale purchasing and inventory control of
such beverages; seating of minors and the service of food within our bar areas;
and the storage and dispensing of alcoholic beverages. State and local
authorities in many jurisdictions routinely monitor compliance with alcoholic
beverage laws. The failure to receive or retain, or a delay in obtaining, a
liquor license for a particular restaurant could adversely affect the Company's
ability to obtain such licenses elsewhere.
The Company is subject to "dram-shop" statutes in most of the states in which it
has operations, which generally provide a person injured by an intoxicated
person the right to recover damages from an establishment that wrongfully served
alcoholic beverages to such person. The Company carries liquor liability
coverage as part of its existing comprehensive general liability insurance. A
settlement or judgment against the Company under a "dram-shop" statute in excess
of liability coverage could have a material adverse effect on operations.
Various federal and state labor laws govern the Company's operations and its
relationship with employees, including such matters as minimum wages, breaks,
overtime, fringe benefits, safety, working conditions and citizenship
requirements. The Company is also subject to the regulations of the Immigration
and Naturalization Service (INS). If employees of the Company do not meet
federal citizenship or residency requirements, this could lead to a disruption
in the Company's work force. Significant government-imposed increases in minimum
wages, paid leaves of absence and mandated health benefits, or increased tax
reporting, assessment or payment requirements related to employees who receive
gratuities could be detrimental to the profitability of the Company.
The Company's facilities must comply with the applicable requirements of the
Americans With Disabilities Act of 1990 ("ADA") and related state statutes. The
ADA prohibits discrimination on the
8
basis of disability with respect to public accommodations and employment. Under
the ADA and related state laws, when constructing new restaurants or undertaking
significant remodeling of existing restaurants, the Company must make them more
readily accessible to disabled persons.
The New York State Liquor Authority must approve any transaction in which a
shareholder of the Company increases his holdings to 10% or more of the
outstanding capital stock of the Company and any transaction involving 10% or
more of the outstanding capital stock of the Company.
Seasonal Nature Of Business
The Company's business is highly seasonal. The second quarter of the Company's
fiscal year, consisting of the non-holiday portion of the cold weather season in
New York and Washington (January, February and March), is the poorest performing
quarter. The Company achieves its best results during the warm weather,
attributable to the Company's extensive outdoor dining availability,
particularly at Bryant Park in New York and Sequoia in Washington, D.C. (the
Company's largest restaurants) and the Company's outdoor cafes. However, even
during summer months these facilities can be adversely affected by unusually
cool or rainy weather conditions. The Company's facilities in Las Vegas
generally operate on a more consistent basis through the year.
Terrorism and International Unrest
The terrorist attacks on the World Trade Center in New York and the Pentagon in
Washington, D.C. on September 11, 2001 had a material adverse effect on the
Company's revenues. As a result of the attacks, one Company restaurant, The
Grill Room, located at 2 World Financial Center, which is adjacent to the World
Trade Center, experienced some damage. The Grill Room was closed from September
11, 2001 and reopened in early December 2002.
The Company's restaurants in New York, Las Vegas, Washington D.C. and Florida
benefit from tourist traffic. Though the Las Vegas market has shown resiliency,
the sluggish economy and the lingering effects of September 11, 2001 have had an
adverse effect on the Company's restaurants. Recovery depends upon a general
improvement in economic conditions and the public's willingness and inclination
to resume vacation and convention travel. Additional acts of terrorism in the
United States or substantial international unrest may have a material adverse
effect on the Company's business and revenues.
Forward Looking Statements and Risk Factors
This report contains forward-looking statements that involve risks and
uncertainties. Discussions containing such forward-looking statements may be
found in the material set forth under "Item 1. Business" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as throughout this report generally. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those discussed below.
The restaurant business is intensely competitive and involves an extremely high
degree of risk. The Company believes that a large number of new restaurants open
each year and that a significant number of them do not succeed. Even successful
restaurants can rapidly lose popularity due to changes in consumer tastes,
turnover in personnel, the opening of competitive restaurants, unfavorable
reviews and other factors. There can be no assurance that the Company's existing
restaurants will retain such patronage as they currently enjoy or that new
restaurants opened by the Company will be successful. There is active
9
competition for competent chefs and management personnel and intense competition
among major restaurateurs and food service companies for the larger, unique
sites suitable for restaurants.
To achieve significant increases in revenue or to replace revenue of restaurants
which experience declining popularity or which close because of lease
expirations or other reasons, the Company would have to open additional
restaurant facilities. The opening of new restaurants is subject to a wide
variety of uncertainties, including the ability to negotiate favorable lease
provisions, the location of the restaurant, the development of a menu and
concept that appeals to consumers and the availability of skilled restaurant
managers. The acquisition or construction of new restaurants also requires
significant capital resources. New large-scale projects that have been the focus
of the Company's efforts in recent years would likely require additional
financing. If the Company were to identify a favorable restaurant opportunity,
there is no assurance that the required financing would be available.
Item 2. Properties
The Company's restaurant facilities and the Company's executive offices are
occupied under leases. Most of the Company's restaurant leases provide for the
payment of base rents plus real estate taxes, insurance and other expenses and,
in certain instances, for the payment of a percentage of the Company's sales at
such facility. These leases (including leases for managed restaurants) have
terms (including any available renewal options) expiring as follows:
Years Lease Number of
Terms Expire Facilities
- ------------ ----------
2004-2005 2
2006-2010 10
2011-2015 9
2016-2020 9
2021-2025 1
The Company's executive, administrative and clerical offices, located in
approximately 8,500 square feet of office space at 85 Fifth Avenue, New York,
New York, are occupied under a lease which expires in October 2008, including a
five-year renewal option. The Company terminated its lease for office space
related to its Washington, D.C. catering operations as of December 31, 2002, and
has moved into new facilities under a lease that expires in 2012.
For information concerning the Company's future minimum rental commitments under
non-cancelable operating leases, see Note 8 of Notes to Consolidated Financial
Statements.
See also "Item I. Business - Overview" for a list of restaurant properties.
Item 3. Legal Proceedings
In the ordinary course of its business, the Company is a party to various
lawsuits arising from accidents at its restaurants and workers' compensation
claims, which are generally handled by the Company's insurance carriers.
The employment by the Company of management personnel, waiters, waitresses and
kitchen staff at a number of different restaurants has resulted in the
institution, from time to time, of litigation alleging
10
violation by the Company of employment discrimination laws. The Company does not
believe that any of such suits will have a materially adverse effect upon the
Company, its financial condition or operations.
Several unfair labor practice charges were filed against the Company in 1997
with the National Labor Relations Board (NLRB) with respect to the Company's Las
Vegas subsidiary. The charges were heard in October 1997. At issue was whether
the Company unlawfully terminated nine employees and disciplined six other
employees allegedly in retaliation for their union activities. An Administrative
Law Judge (ALJ) found that six employees were terminated unlawfully, three were
discharged for valid reasons, four employees were disciplined lawfully and two
employees were disciplined unlawfully. On appeal, the NLRB found that the
Company lawfully disciplined five employees, and unlawfully disciplined one
employee. The Company appealed the adverse rulings of the NLRB to the D.C.
Circuit Court of Appeals. In July 2003 the D.C. Circuit Court of Appeals
affirmed the determinations of the NLRB. The Company has offered to reinstate
the employees and when an estimate of potential liability can be determined a
reserve will be established. The Company does not expect this reserve to have a
material impact on its financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
The following table sets forth the names and ages of executive officers of the
Company and all offices held by each person:
Name Age Positions and Offices
- ---- --- ---------------------
Michael Weinstein 60 President and Chief Executive Officer
Vincent Pascal 60 Senior Vice President and Secretary
Robert Towers 56 Executive Vice President, Chief Operating
Officer and Treasurer
Paul Gordon 52 Senior Vice President
Robert Stewart 47 Chief Financial Officer
Each executive officer of the Company serves at the pleasure of the Board of
Directors and until his successor is duly elected and qualifies.
Michael Weinstein has been the President and a director of the Company since its
inception in January 1983. During the past five years, Mr. Weinstein has been an
officer, director and 25% shareholder of Easy Diners, Inc., RSWB Corp. and BSWR
Corp. (since 1998). Mr. Weinstein is the owner of 24% of the membership
interests in each of Dockeast, LLC and Dockwest, LLC. These companies operate
four restaurants in New York City, and none of these companies is a parent,
subsidiary or other affiliate of the Company. Mr. Weinstein spends substantially
all of his business time on Company-related matters.
11
Vincent Pascal was elected Vice President, Assistant Secretary and a director of
the Company in October 1985. Mr. Pascal became Secretary of the Company in
January 1994. Mr. Pascal became a Senior Vice President in 2001.
Robert Towers has been employed by the Company since November 1983 and was
elected Vice President, Treasurer and a director in March 1987. Mr. Towers
became an Executive Vice President and Chief Operating Officer in 2001.
Paul Gordon has been employed by the Company since 1983 and was elected as a
director in November 1996 and a Senior Vice President in 2001. Mr. Gordon is the
manager of the Company's Las Vegas operations. Prior to assuming that role in
1996, Mr. Gordon was the manager of the Company's operations in Washington, D.C.
since 1989.
Robert Stewart has been employed by the Company since June 2002 and was elected
Chief Financial Officer effective as of June 24, 2002. For the three years prior
to joining the Company, Mr. Stewart was a Chief Financial Officer and Executive
Vice President at Fortis Capital Holdings. For nine years prior to joining
Fortis Capital Holdings, Mr. Stewart held senior financial and audit positions
in Skandinaviska Enskilda Banken in their New York, London and Stockholm
offices.
12
PART II
Item 5. Market For Registrant's Common Equity and
Related Stockholder Matters
Market Information
The Company's Common Stock, $.01 par value, is traded in the over-the-counter
market on the Nasdaq National Market under the symbol "ARKR." The high and low
sale prices for the Common Stock from October 1, 2001 through September 27, 2003
are as follows:
Calendar 2001 High Low
- -------------- ------ -----
Fourth Quarter $10.00 $6.75
Calendar 2002
- -------------
First Quarter 8.00 6.10
Second Quarter 8.15 6.41
Third Quarter 8.49 6.60
Fourth Quarter 7.42 6.05
Calendar 2003
- -------------
First Quarter 7.24 5.75
Second Quarter 7.75 6.20
Third Quarter 11.99 7.45
Dividends
The Company has not paid any cash dividends since its inception and does not
intend to pay dividends in the foreseeable future.
Number of Shareholders
As of December 21, 2003, there were 65 holders of record of the Company's Common
Stock, $.01 par value. This does not include the number of persons whose stock
is in nominee or "street name" accounts through brokers.
13
Item 6. Selected Consolidated Financial Data
The following table sets forth certain financial data for the fiscal years
ended in 1999 through 2003. This information should be read in conjunction with
the Company's Consolidated Financial Statements and the notes thereto beginning
at page F-1.
Years Ended
--------------------------------------------------------------------------
September 27, September 28, September 29, September 30, October 2,
2003 2002 2001 2000 1999
------------- ------------- ------------- ------------- ----------
(In thousands, except per share data)
(a) (b) (c)
OPERATING DATA:
Total revenue $ 116,593 $ 115,657 $ 127,553 $ 119,887 $ 111,884
Cost and expenses (112,632) (109,183) (135,591) (123,729) (104,836)
Operating income (loss) 3,961 6,474 (8,038) (3,842) 7,048
Other income (expense), net 414 (826) (2,152) (1,598) 23
Income (loss) before provision for
income taxes and cumulative
effect of accounting change 4,375 5,648 (10,190) (5,440) 7,071
Provision (benefit) for income taxes 1,056 1,419 (3,342) (1,906) 2,576
Income (loss) before cumulative
effect on accounting change 3,319 4,229 (6,848) (3,534) 4,495
Cumulative effect of accounting
charge--net -- -- -- (189) --
NET INCOME (LOSS) 3,319 4,229 (6,848) (3,723) 4,495
NET INCOME (LOSS) PER SHARE:
Basic $ 1.04 $ 1.33 $ (2.15) $ (1.17) $ 1.30
Diluted $ 1.03 $ 1.32 $ (2.15) $ (1.17) $ 1.29
Weighted average number of shares
Basic 3,181 3,181 3,181 3,186 3,461
Diluted 3,213 3,206 3,181 3,186 3,476
BALANCE SHEET DATA
(end of period):
Total assets $ 43,635 $ 47,960 $ 53,091 $ 66,297 $ 46,709
Working capital (deficit) (4,802) (7,990) (6,569) (5,640) (3,714)
Long-term debt 7,226 9,547 21,700 24,447 6,683
Shareholders' equity 24,826 21,446 17,173 24,065 28,843
Shareholders' equity per share 7.80 6.74 5.40 7.55 8.33
Facilities in operations--end of year,
including managed 41 41 47 49 42
(a) Fiscal 2003 income was adversely affected by an asset impairment charge
of $667,000 related to the fixed assets of a restaurant, Lutece, located in
New York.
(b) Fiscal 2001 income was adversely affected by an asset impairment charge
of $10,045,000 related to the Aladdin operations and a charge of $935,000
due to the cancellation of a development project.
14
(c) Fiscal 2000 income was adversely affected by an asset impairment charge
for a closed restaurant of $811,000, expenses of $280,000 from the sale of
a restaurant and a $1,300,000 charge associated with a wage and hour
lawsuit. Fiscal 2000 was also adversely affected by charges of $4,988,000
from the write-off of advances and working capital needs related to a
project the Company withdrew from.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Accounting period
The Company's fiscal year ends on the Saturday nearest September 30. The fiscal
years ended September 27, 2003, September 28, 2002 and September 29, 2001 each
included 52 weeks.
Revenues
Total revenues at restaurants owned by the Company increased by 0.8% from fiscal
2002 to fiscal 2003 and decreased by 9.4% from fiscal 2001 to fiscal 2002. Of
the $936,000 increase in revenues from fiscal 2002 to fiscal 2003, $585,000 is
attributable to the recognition of a previously deferred gain on the sale of a
restaurant in October 1997 resulting from the resolution of concerns regarding
the Company's ability to collect a note received in connection with the sale. A
review of the performance of this note and the security underlying it indicated
that the loss was no longer probable.
Same store sales increased 1.1%, or $1,230,000, on a Company-wide basis from
fiscal 2002 to fiscal 2003. This increase was the result of an 8.4%, or
$4,491,000, increase in same store sales at the Company's Las Vegas restaurants
offset by decreases in same store sales in New York and Washington D.C. of 5.0%
and 8.3%, respectively. The decreases in New York and Washington D.C. were
principally due to the residual effects on tourism of the terrorist attacks on
September 11th, the sluggish economy in these markets and record rainfalls in
these areas during late spring and early summer 2003 which limited the use of
outdoor cafe seating. Menu prices did not significantly change during fiscal
2003.
During the fourth quarter of 2002 the Company abandoned its restaurant and food
court operations at the Desert Passage, the retail complex at the Aladdin Resort
& Casino in Las Vegas. During fiscal 2002 sales decreased 42.9% at this location
compared to fiscal 2001, resulting in the Company's decision to abandon these
operations. If this decrease is excluded from same store Las Vegas sales, the
Company's remaining operations in Las Vegas experienced a sales increase of
$190,000 during fiscal 2002.
Of the $11,896,000 decrease in revenues from fiscal 2001 to fiscal 2002,
$3,282,000 is attributable to the year long closure of the Grill Room restaurant
located in 2 World Financial Center, an office building adjacent to the World
Trade Center site. This restaurant was damaged in the September 11, 2001 attack
and reopened in early fiscal 2003. A $256,000 increase in sales is attributable
to the opening of the Saloon at the Neonopolis Center in downtown Las Vegas.
Same store sales decreased 6.7% or $8,262,000, on a Company-wide basis from
fiscal 2001 to fiscal 2002. The decrease in same store sales was 3.3% in Las
Vegas, 8.1% in New York and 13.7% in Washington D.C. Such decreases were
principally due to a decrease in customer counts. The change in menu prices did
not significantly affect revenues. The Company believes its fiscal 2002 revenues
compared to fiscal 2001 were adversely affected by the terrorist attacks on
September 11th, the residual effects on tourism and the sluggish economy. While
Las Vegas has rebounded considerably in the past year, New York and Washington
continue to experience soft sales.
15
Other operating income, which consists of the sale of merchandise at various
restaurants, management fee income, door sales and for fiscal 2003 the reversal
of the previously mentioned provision, was $1,337,000 in fiscal 2003, $550,000
in fiscal 2002, and $546,000 in fiscal 2001.
Costs and Expenses
Food and beverage cost of sales as a percentage of total revenue was 25.1% in
fiscal 2003, 24.9% in fiscal 2002 and 25.5% in fiscal 2001.
Total costs and expenses increased by $3,449,000, or 3.2%, from fiscal 2002 to
fiscal 2003. Increases in rent, advertising and maintenance contributed to this
increase. During the first quarter of fiscal 2002 rent concessions granted by
landlords in the aftermath of the September 11, 2001 disaster were in place.
These concessions were not available during fiscal 2003 and as a result of this,
and other slight increases in rent levels, rent expense for fiscal 2003
increased by $224,000 when compared to fiscal 2002. Also, sales increases in
restaurants where the Company pays a percentage rent resulted in an increase in
percentage rent of $168,000 during fiscal 2003 compared to fiscal 2002. During
fiscal 2003 advertising expenses increased by $623,000 over fiscal 2002 as a
result of increased advertising for the Lutece restaurant in New York and
additional advertising for the operations in Las Vegas. Maintenance expenses
increased by $548,000 during fiscal 2003 compared to fiscal 2002. After
September 11, 2001 discretionary spending was sharply restricted. Though the
Company has continued to keep tight control over spending, maintenance of
restaurants has been performed when required and maintenance delayed during
fiscal 2002 has been completed.
Total costs and expenses decreased by $26,408,000, or 19.5%, from fiscal 2001 to
fiscal 2002. The main reasons for this decrease in total costs and expenses
include the reduction in payroll expenses of $7,673,000 from fiscal 2001 to
fiscal 2002 as a result of the Company's response to the events of September 11,
2001 and the continued weakened economy. Food and beverage costs decreased
$3,755,000 resulting from the decrease in food and beverage sales of
$11,900,000. Additionally, during fiscal 2001, total costs and expenses were
adversely affected by an asset impairment charge of $10,045,000 associated with
the write down of the Company's Desert Passage restaurant and food court
operations. Total costs and expenses were also impacted in fiscal 2001 by a
charge of $935,000 due to the cancellation of a development project.
Payroll expenses as a percentage of total revenues was 33.1% in fiscal 2003
compared to 32.3% in fiscal 2002 and 35.3% in fiscal 2001. Payroll expense was
$38,583,000, $37,412,000 and $45,085,000 in fiscal 2003, 2002 and 2001,
respectively. The Company aggressively adapted its cost structure in response to
lower sales expectations following September 11th and continues to review its
cost structure and make adjustments where appropriate. Head count stood at 2,003
as of year end 2003 compared to 1,959 and 2,070 at year-end 2002 and 2001
respectively. Severance pay to key personnel was approximately $250,000 during
fiscal 2002.
No pre-opening expenses and early operating losses were incurred during fiscal
2003 or 2002. The Company received a construction and operating allowance from
the landlord for the Saloon at the Neonopolis Center at Freemont Street in
downtown Las Vegas, the one restaurant opened in fiscal 2002. The Company
incurred pre-opening and early operating losses at newly opened restaurants of
approximately $100,000 in fiscal 2001. The Company typically incurs significant
pre-opening expenses in connection with its new restaurants that are expensed as
incurred. Furthermore, it is not uncommon that such restaurants experience
operating losses during the early months of operation.
16
General and administrative expenses, as a percentage of total revenue, were 5.7%
in fiscal 2003, 5.7% in fiscal 2002 and 5.5% in fiscal 2001. General and
administrative expenses were adversely impacted by a $370,000 increase in
casualty insurance costs during fiscal 2002. General and administrative expenses
in fiscal 2001 were impacted by $400,000 in legal expenses incurred in
connection with a potential transaction.
The Company managed one restaurant it did not own (El Rio Grande) at September
27, 2003, September 28, 2002 and September 29, 2001. Sales of this restaurant,
which are not included in consolidated sales, were $2,765,000 in fiscal 2003,
$2,973,000 in fiscal 2002 and $4,380,000 in fiscal 2001. The Company recently
entered into agreements to manage 11 fast food restaurants located in the Hard
Rock Casinos in Hollywood and Tampa, Florida.
Interest expense was $732,000 in fiscal 2003, $1,212,000 in fiscal 2002 and
$2,446,000 in fiscal 2001. The significant decrease from fiscal 2002 to fiscal
2003 and from fiscal 2001 to fiscal 2002 is due to lower outstanding borrowings
on the Company's credit facility and the benefit from rate decreases in the
prime-borrowing rate. Interest income was $163,000 in fiscal 2003, $133,000 in
fiscal 2002 and $150,000 in fiscal 2001.
Other income, which generally consists of purchasing service fees and other
income at various restaurants was $983,000, $253,000 and $144,000 for fiscal
203, 2002 and 2001, respectively. Other income was impacted during fiscal 2003
by the Company receipt of $508,000 in World Trade Center Grants for four
restaurants located in downtown New York that were adversely impacted by the
September 11, 2001 terrorist attacks.
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 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 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. Due to losses incurred in fiscal 2001 and the carry
back of such losses, the Company realized an overall tax benefit of 32.8% of
such losses in fiscal 2001. During fiscal 2002 the Company abandoned its
restaurant and food court operations at the Desert Passage, the retail complex
at the Aladdin Resort & Casino in Las Vegas. In fiscal 2002, the Company was
able to utilize the deferred tax asset created in fiscal 2001, by the impairment
of these operations. The Company's effective tax rate for fiscal 2003 was 24.1%.
During the year ended September 27, 2003, the Company decreased its allowance
for the utilization of the deferred tax asset arising from state and local
operating loss carryforwards by $445,000 in the current year based on the merger
of certain unprofitable subsidiaries into profitable ones.
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.
17
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 net benefit to the Company was $793,000 in fiscal 2003, $741,000 in fiscal
2002 and $489,000 in fiscal 2001.
During fiscal 2002, the Company and the Internal Revenue Service finalized the
adjustments to the Company's Federal income tax returns for fiscal years 1995
through 1998. The settlement did not have a material effect on the Company's
financial statements.
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 net cash used in investing activities in fiscal 2003 of ($1,851,000) was
used for the expansion of an existing restaurant in Las Vegas and for the
replacement of fixed assets at existing restaurants. The net cash used in
investing activities in fiscal 2002 ($153,000) was primarily used for the
replacement of fixed assets at existing restaurants. The net cash used in
investing activities in fiscal 2001 ($1,891,000) was principally used for the
Company's continued investment in fixed assets associated with constructing new
restaurants. In fiscal 2001 the Company opened two bars at the Venetian in Las
Vegas, Nevada (V-Bar and Venus).
The net cash used in financing activities in fiscal 2003 ($8,356,000), fiscal
2002 ($8,072,000) and fiscal 2001 ($5,618,000) was principally due to repayments
of long-term debt on the Company's main credit facility in excess of borrowings
on such facility.
The Company had a working capital deficit of $4,802,000 at September 27, 2003 as
compared to a working capital deficit of $7,990,000 at September 28, 2002. The
restaurant business does not require the maintenance of significant inventories
or receivables; thus the Company is able to operate with negative working
capital.
The Company's Revolving Credit and Term Loan Facility (the "Facility") with its
main bank (Bank Leumi USA), as amended in November 2001, December 2001 April
2002, and February 2003, included a $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. On July 1, 2002, the Facility converted
into a term loan in the amount of $17,890,000 payable in 36 monthly installments
of approximately $497,000. Upon amendment in February 2003, the term loan was
converted into a revolving loan. The credit line was reduced to $11,500,000 on
June 29, 2003 and $8,500,000 on September 29, 2003 until the maturity date of
February 12, 2005. The Company had borrowings of $6,975,000 outstanding on this
facility at September 27, 2003. The loan bears interest at 1/2% above the bank's
prime rate and at September 27, 2003 and September 28, 2002, the interest rate
on outstanding loans was 4.50% and 5.25% respectively. The Facility also
includes a $500,000 Letter of Credit Facility for use in lieu of lease security
deposits. The Company has delivered $495,000 in irrevocable letters of credit on
this Facility at September 27, 2003. The Company generally is required to pay
commissions of 1 1/2% per annum on outstanding letters of credit.
18
The Company's subsidiaries each guaranteed the obligations of the Company under
the 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.
At September 29, 2001, the Company was not in compliance with several of the
requirements of the Facility principally due to the impairment charges incurred
in connection with its restaurant and food service operations at the Aladdin in
Las Vegas, Nevada. The Company received a waiver from the bank to cure the
non-compliance. In December 2001, the covenants were amended for forthcoming
periods. During the year ended September 27, 2003, the Company violated
covenants related to a limitation on employee loans and maintaining minimum cash
flow in relation to the Company's debt service requirements. The Company
received waivers from the bank for the covenants it was not in compliance with,
for the year ended September 27, 2003 and through December 30, 2003.
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 September 27, 2003 the Company
had $601,000 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 in a hotel and casino in Las
Vegas, Nevada. The lease bears interest at 8.65% per annum and is payable in 48
equal monthly installments of $32,000 until maturity in November 2004 at which
time the Company has an option to purchase the equipment for $519,000.
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 $165,000.
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 at September 27, 2003 $874,000 remained accrued in other
current liabilities representing future operating lease payments.
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 was
in the amount of $350,000. Upon the first anniversary of the opening of the
Saloon, May 2003, the Guaranty was reduced to $175,000 and it will expire in May
2004.
Contractual Obligations and Commercial Commitments
19
To facilitate an understanding of our contractual obligations and commercial
commitments, the following data is provided:
Payments Due by Period
---------------------------------------------------
Within After 5
Total 1 year 2-3 years 4-5 years years
------- ------- --------- --------- -------
(in thousands of dollars)
Contractual Obligations:
Long Term Debt $ 7,576 $ 350 $ 7,226 $ -- $ --
Operating Leases 46,572 7,988 15,727 8,751 14,106
------- ------ ------- ------ -------
Total Contractual Cash Obligations $54,148 $8,338 $22,953 $8,751 $14,106
======= ====== ======= ====== =======
Amount of Commitment Expiration Per Period
---------------------------------------------------
Within After 5
Total 1 year 2-3 years 4-5 years years
------- ------- --------- --------- -------
(in thousands of dollars)
Other Commercial Commitments:
Letters of Credit $500 $-- $500 $-- $--
---- --- ---- --- ---
Total Commercial Commitments $500 $-- $500 $-- $--
==== === ==== === ===
Restaurant Expansion
The Company did not open any new restaurants in fiscal 2003. In fiscal 2002 the
Company opened one restaurant at the Neonopolis Center at Freemont Street in
downtown Las Vegas, Nevada (The Saloon). The Company opened two bars (V-Bar and
Venus) at the Venetian in Las Vegas, Nevada in fiscal 2001.
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.
20
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.
Long-Lived Assets - The Company annually assesses any impairment in value of
long-lived assets 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.
Accounting for Goodwill and Other Intangible Assets
During 2001, the FASB issued FAS 142, which requires that for the Company,
effective September 28, 2002, goodwill, including the goodwill included in the
carrying value of investments accounted for using the equity method of
accounting, and certain other intangible assets deemed to have an indefinite
useful life, cease amortizing. FAS 142 requires that goodwill and certain
intangible assets be assessed for impairment using fair value measurement
techniques. Specifically, goodwill impairment is determined using a two-step
process. The first step of the goodwill impairment test is used to identify
potential impairment by comparing the fair value of the reporting unit (the
Company is being treated as one reporting unit) with its net book value (or
carrying amount), including goodwill. If the fair value of the reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not
impaired and the second step of the impairment test is unnecessary. If the
carrying amount of the reporting unit exceeds its fair value, the second step of
the goodwill impairment test is performed to measure the amount of impairment
loss, if any. The second step of the goodwill impairment test compares the
implied fair value of the reporting unit's goodwill with the carrying amount of
that goodwill. If the carrying amount of the reporting unit's goodwill exceeds
the implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The implied fair value of goodwill is determined in
the same manner as the amount of goodwill recognized in a business combination.
That is, the fair value of the reporting unit is allocated to all of the assets
and liabilities of that unit (including any unrecognized intangible assets) as
if the reporting unit had been acquired in a business combination and the fair
value of the reporting unit was the purchase price paid to acquire the reporting
unit. The impairment test for other intangible assets consists of a comparison
of the fair value of the intangible asset with its carrying value. If the
carrying value of the intangible asset exceeds its fair value, an impairment
loss is recognized in an amount equal to that excess.
Determining the fair value of the reporting unit under the first step of the
goodwill impairment test and determining the fair value of individual assets and
liabilities of the reporting unit (including unrecognized intangible assets)
under the second step of the goodwill impairment test is judgmental in nature
and often involves the use of significant estimates and assumptions. Similarly,
estimates and assumptions are used in determining the fair value of other
intangible assets. These estimates and assumptions could have a significant
impact on whether or not an impairment charge is recognized and also the
magnitude of any such charge. To assist in the process of determining goodwill
impairment, the Company obtains appraisals from independent valuation firms. In
addition to the use of independent valuation firms, the
21
Company performs internal valuation analyses and considers other market
information that is publicly available. Estimates of fair value are primarily
determined using discounted cash flows and market comparisons and recent
transactions. These approaches use significant estimates and assumptions
including projected future cash flows (including timing), discount rate
reflecting the risk inherent in future cash flows, perpetual growth rate,
determination of appropriate market comparables and the determination of whether
a premium or discount should be applied to comparables. Based on the above
policy, no impairment charge was recorded upon adoption or during the year ended
September 27, 2003.
Recent Developments
The Financial Accounting Standards Board has recently issued the following
accounting pronouncements:
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 statements; however,
the Company will be required to separately disclose the results of closed
restaurants as discontinued operations in the future.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
was issued in July 2002. SFAS No. 146 replaces current accounting literature and
requires the recognition of costs associated with exit or disposal activities
when they are incurred rather than at the date of commitment to an exit or
disposal plan. The provisions of the Statement are effective for exit or
disposal activities that are initiated after December 31, 2002. The adoption of
this statement did not have a material effect on the Company's financial
statements.
FIN No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, was issued in November
2002. This interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of FIN No. 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 statements (see Note 8).
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure was issued in December 2002. This statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, providing alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company has adopted the disclosure-only provisions of SFAS No. 123 (see Note
10).
22
FIN No. 46, Consolidation of Variable Interest Entities, was issued on January
17, 2003. Such Interpretation addresses consolidation of entities that are not
controllable through voting interests or in which the equity investors do not
bear the residual economic risks and rewards. The Interpretation provides
guidance related to identifying variable interest entities and determining
whether such entities should be consolidated. In October 2003, the effective
date of FIN No. 46 was deferred for variable interests held by public companies
in all entities that were acquired prior to February 1, 2003. The deferral
revised the effective date for consolidation of these entities for the Company
to the quarter ended December 27, 2003. The Company believes the adoption of
this standard will not have a material effect on its financial statements.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003 (with a few exceptions)
and for hedging relationships designated after June 30, 2003. The adoption of
this statement did not have a material impact on the Company's financial
statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity" improves the accounting for certain financial
instruments that, under previous guidance, issuers could account for as equity.
The new statement requires that those instruments be classified as liabilities
in statements of financial position. This statement was adopted by the Company
in the quarter ended September 27, 2003, and it did not have a material impact
on the Company's financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates with
respect to its outstanding credit agreement with its main bank, Bank Leumi USA.
Outstanding loans under the agreement bear interest at prime plus one-half
percent. Based upon a loan balance of $6,975,000 (at September 27, 2003),
a 100 basis point change in interest rates would change annual interest expense
by $69,750.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements are included in this report
immediately following Part IV.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A.
Controls and Procedures; Internal Control over Financial Reporting
Evaluation of disclosure controls and procedures. Based on their evaluation, the
Company's principal executive officer and principal financial officer have
concluded that the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934,
23
as amended (the "Exchange Act")) are effective as of September 27, 2003 to
ensure that information required to be disclosed by the Company in reports that
the Company files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
Changes in internal control over financial reporting. There were no changes in
the Company's internal control over financial reporting during the fourth
quarter of fiscal year 2003 that materially affected or are reasonably likely to
materially affect the Company's internal control over financial reporting.
24
PART III
Item 10. Directors and Executive Officers of the Registrant
See Part I, Item 4. "Executive Officers of the Registrant." Other information
relating to the directors and executive officers of the Company is incorporated
by reference to the definitive proxy statement for the Company's 2004 annual
meeting of stockholders to be filed with the Securities and Exchange Commission
(the "SEC") pursuant to Regulation 14A no later than 120 days after the end of
the fiscal year covered by this form (the "Proxy Statement"). Information
relating to compliance with Section 16(a) of the Exchange Act is incorporated by
reference to the Proxy Statement.
Code of Ethics.
The Company has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or
controller, and persons performing similar functions. The Company will provide
any person without charge, upon request, a copy of such code of ethics by
mailing the request to the Company at 85 Fifth Avenue, New York, NY 10003,
Attention: Robert Towers.
Audit Committee Financial Expert
The Company's Board of Directors has determined that Marcia Allen, Director, is
the Company's Audit Committee Financial Expert, as defined under Section 407 of
the Sarbanes-Oxley Act of 2002 and the rules promulgated by the SEC in
furtherance of Section 407. Ms. Allen is independent of management. Other
information regarding the Audit Committee is incorporated by reference from the
Proxy Statement.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the Proxy
Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the Proxy
Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the Proxy
Statement.
25
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements: Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets --
at September 27, 2003 and September 28, 2002 F-2
Consolidated Statements of Operations -- For each of
the three fiscal years ended September 27, 2003,
September 28, 2002 and September 29, 2001 F-3
Consolidated Statements of Cash Flows -- For each of
the three fiscal years ended September 27, 2003,
September 28, 2002 and September 29, 2001 F-4
Consolidated Statements of Shareholders' Equity --
For each of the three fiscal years ended September
27, 2003, September 28, 2002 and September 29, 2001 F-5
Notes to Consolidated Financial Statements F-6
(2) Financial Statement Schedules
None
(3) 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 Exhibit 3.1 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 Exhibit 3.2 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 Exhibit 3.3 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 Exhibit 3.4 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 Quarterly Report
on Form 10-Q for the quarterly period ended March 30, 2002
(the "Second Quarter 2002 Form 10-Q").
26
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.
10.1 Amended and Restated Redemption Agreement dated June 29, 1993
between the Registrant and Michael Weinstein, incorporated by
reference to Exhibit 10.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended October 2, 1994 ("1994
10-K").
10.2 Form of Indemnification Agreement entered into between the
Registrant and each of Michael Weinstein, Ernest Bogen,
Vincent Pascal, Robert Towers, Jay Galin, Robert Stewart,
Bruce R. Lewin, Paul Gordon and Donald D. Shack, incorporated
by reference to Exhibit 10.2 to the 1994 10-K.
10.3 Ark Restaurants Corp. Amended Stock Option Plan, incorporated
by reference to Exhibit 10.3 to the 1994 10-K.
10.4 Fourth Amended and Restated Credit Agreement dated as of
December 27, 1999 between the Company and Bank Leumi USA,
incorporated by reference to Exhibit 10.4 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended October
2, 1999.
10.5 Ark Restaurants Corp. 1996 Stock Option Plan, as amended,
incorporated by reference to the Registrant's Definitive
Proxy Statement pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 1) filed on March 16,
2001.
10.6 Lease Agreement dated May 17, 1996 between New York-New York
Hotel, LLC, and Las Vegas America Corp., incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended October 3, 1998 (the
"1998 10-K").
10.7 Lease Agreement dated May 17, 1996 between New York-New York
Hotel, LLC, and Las Vegas Festival Food Corp., incorporated
by reference to Exhibit 10.7 to the 1998 10-K.
10.8 Lease Agreement dated May 17, 1996 between New York-New York
Hotel, LLC, and Las Vegas Steakhouse Corp., incorporated by
reference to Exhibit 10.8 to the 1998 10-K.
10.9 Amendment dated August 21, 2000 to the Fourth Amended and
Restated Credit Agreement dated as of December 27, 1999
between the Company and Bank Leumi USA, incorporated by
reference to Exhibit 10.9 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended September 30, 2000
(the "2000 10-K").
10.10 Amendment dated November 21, 2000 to the Fourth Amended and
Restated Credit Agreement dated as of December 27, 1999
between the Company and Bank Leumi USA, incorporated by
reference to Exhibit 10.10 to the 2000 10-K.
10.11 Amendment dated November 1, 2001 to the Fourth Amended and
Restated Credit Agreement dated as of December 27, 1999
between the Company and Bank Leumi USA, incorporated by
reference to Exhibit 10.11 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended September 29, 2001
(the "2001 10-K").
10.12 Amendment dated December 20, 2001 to the Fourth Amended and
Restated Credit Agreement dated as of December 27, 1999
between the Company and Bank Leumi USA, incorporated by
reference to Exhibit 10.11 of the 2001 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, incorporated by
reference to Exhibit 10.13 of the Second Quarter 2002 Form
10-Q.
27
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, incorporated by
reference to Exhibit 10.14 of the First Quarter 2003 Form
10-Q.
*14.1 Code of Ethics
*21 Subsidiaries of the Registrant.
*23 Consent of Deloitte & Touche LLP.
*31.1 Certification of Chief Executive Officer pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Chief Financial Officer pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002.
*32 Section 1350 Certification
(b) Reports Report on Form 8-K dated July 31, 2003
on
Form Report on Form 8-K dated August 5, 2003
8-K
- ----------
* Filed herewith.
28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Ark Restaurants Corp.
We have audited the accompanying consolidated balance sheets of Ark Restaurants
Corp. and subsidiaries (the "Company") as of September 27, 2003 and September
28, 2002, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three fiscal years in the period ended
September 27, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Ark Restaurants Corp. and
subsidiaries as of September 27, 2003 and September 28, 2002, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended September 27, 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte and Touche LLP
New York, New York
December 24, 2003
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------
September 27, September 28,
2003 2002
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 486 $ 819
Accounts receivable 1,677 2,000
Employee receivables (net of reserves of $0 and $45 respectively) 255 1,045
Current portion of long-term receivables (Note 3) 193 164
Inventories 1,997 1,925
Deferred income taxes (Note 12) 281 293
Prepaid expenses and other current assets 886 779
Refundable and prepaid income taxes -- 957
------- -------
Total current assets 5,775 7,982
------- -------
LONG-TERM RECEIVABLES (Note 3) 1,291 904
FIXED ASSETS--At cost:
Leasehold improvements 34,385 33,542
Furniture, fixtures and equipment 29,427 28,320
------- -------
63,812 61,862
Less accumulated depreciation and amortization 36,748 31,602
------- -------
27,064 30,260
------- -------
INTANGIBLE ASSETS--Net (Note 4) 473 341
GOODWILL 3,515 3,515
DEFERRED INCOME TAXES (Note 12) 4,622 4,255
OTHER ASSETS (Note 5) 895 703
------- -------
TOTAL $43,635 $47,960
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable--trade $ 3,443 $ 3,332
Accrued expenses and other current liabilities (Note 6) 5,586 6,356
Current maturities of long-term debt (Note 7) 350 6,284
Accrued income taxes 1,198 --
------- -------
Total current liabilities 10,577 15,972
------- -------
LONG-TERM DEBT--Net of current maturities (Note 7) 7,226 9,547
OPERATING LEASE DEFERRED CREDIT (Notes 1 and 8) 1,006 995
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Notes 7, 9 and 10):
Common stock, par value $.01 per share--authorized, 10,000
shares; issued, 5,249 52 52
Additional paid-in capital 14,743 14,743
Retained earnings 19,037 15,718
------- -------
33,832 30,513
Less stock options receivables 655 716
Less treasury stock, 2,068 shares 8,351 8,351
------- -------
Total shareholders' equity 24,826 21,446
------- -------
TOTAL $43,635 $47,960
======= =======
See notes to consolidated financial statements.
F-2
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
- --------------------------------------------------------------------------------
Years Ended
---------------------------------------------
September 27, September 28, September 29,
2003 2002 2001
------------- ------------- -------------
REVENUES:
Food and beverage sales $115,256 $115,107 $127,007
Other income 1,337 550 546
-------- -------- --------
Total revenues 116,593 115,657 127,553
-------- -------- --------
COST AND EXPENSES:
Food and beverage cost of sales 29,267 28,794 32,549
Payroll expenses 38,583 37,412 45,085
Occupancy expenses 18,200 17,306 18,320
Other operating costs and expenses 14,964 13,951 16,499
General and administrative expenses 6,665 6,548 7,005
Depreciation and amortization 4,286 5,172 5,938
Asset impairment (Note 2) 667 -- 10,045
Joint venture losses -- -- 150
-------- -------- --------
Total cost and expenses 112,632 109,183 135,591
-------- -------- --------
OPERATING INCOME (LOSS) 3,961 6,474 (8,038)
-------- -------- --------
OTHER (INCOME) EXPENSE:
Interest expense (Note 7) 732 1,212 2,446
Interest income (163) (133) (150)
Other income (Note 13) (983) (253) (144)
-------- -------- --------
(414) 826 2,152
-------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 4,375 5,648 (10,190)
PROVISION (BENEFIT) FOR INCOME TAXES (Note 12) 1,056 1,419 (3,342)
-------- -------- --------
NET INCOME (LOSS) $ 3,319 $ 4,229 $ (6,848)
======== ======== ========
NET INCOME (LOSS) PER SHARE--Basic: $ 1.04 $ 1.33 $ (2.15)
======== ======== ========
NET INCOME (LOSS) PER SHARE--Diluted: $ 1.03 $ 1.32 $ (2.15)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES--Basic 3,181 3,181 3,181
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES--Diluted 3,213 3,206 3,181
======== ======== ========
See notes to consolidated financial statements.
F-3
ARK RESTAURANT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- --------------------------------------------------------------------------------
Years Ended
---------------------------------------------
September 27, September 28, September 29,
2003 2002 2001
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,319 $ 4,229 $(6,848)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 4,286 5,172 5,938
Recognition of deferred gain on sale of restaurant (585) -- --
Gain on sale of restaurants -- (105) (209)
Loss on disposal of fixed assets and intangibles 57 -- --
Write-off of joint venture advances and investments -- -- 1,086
Impairment of fixed assets 667 -- 10,045
Write-off of accounts and notes receivable -- 165 209
Operating lease deferred credit 11 -- (218)
Deferred income taxes (355) 1,786 (3,107)
Changes in assets and liabilities:
Accounts receivable and employee receivables 1,113 (756) 1,037
Inventories (72) 185 23
Prepaid expenses and other
current assets (163) (124) (308)
Refundable and prepaid
income taxes 957 162 189
Other assets 100 (382) (502)
Accounts payable-trade 111 (900) (1,061)
Accrued income taxes 1,198 -- --
Accrued expenses and other current liabilities (770) (388) 538
------- ------- -------
Net cash provided by operating activities 9,874 9,044 6,812
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (1,884) (704) (3,014)
Proceeds from the disposal of fixed assets -- 394 --
Purchases of intangible assets (136) -- --
Issuance of demand notes and long-term receivables -- (125) (98)
Payments received on long-term receivables 169 282 1,221
------- ------- -------
Net cash used in investing activities (1,851) (153) (1,891)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,100 1,500 4,400
Principal payment on long-term debt (9,355) (9,616) (9,974)
Payment (borrowings) under stock options receivables 61 44 (41)
Payment of debt issuance costs (162) -- --
Purchase of treasury stock -- -- (3)
------- ------- -------
Net cash used in financing activities (8,356) (8,072) (5,618)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH AND CASH EQUIVALENTS (333) 819 (697)
CASH AND CASH EQUIVALENTS--
Beginning of year 819 -- 697
------- ------- -------
$ 486 $ 819 $ --
CASH AND CASH EQUIVALENTS--End of year ======= ======= =======
SUPPLEMENTAL INFORMATION:
Cash payments for:
Interest $ 768 $ 1,271 $ 2,446
======= ======= =======
Income taxes $ 114 $ 187 $ 852
======= ======= =======
See notes to consolidated financial statements.
F-4
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 27, 2003, SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001
(In thousands)
- --------------------------------------------------------------------------------
Common Stock Additional Stock Total
--------------- Paid-In Retained Treasury Options Shareholders'
Shares Amount Capital Earnings Stock Receivable Equity
------ ------ ---------- -------- -------- ---------- -------------
BALANCE, OCTOBER 1, 2000 5,249 $52 $14,743 $18,337 $(8,348) $(719) $24,065
Purchase of treasury stock -- -- -- -- (3) -- (3)
Net borrowings of stock option receivables -- -- -- -- -- (41) (41)
Net loss -- -- -- (6,848) -- -- (6,848)
----- ---- -------- ------- ------- ----- -------
BALANCE--September 29, 2001 5,249 52 14,743 11,489 (8,351) (760) 17,173
Net payment on stock options receivables -- -- -- -- -- 44 44
Net income -- -- -- 4,229 -- -- 4,229
----- --- ------- ------- ------- ----- -------
BALANCE--September 28, 2002 5,249 52 14,743 15,718 (8,351) (716) 21,446
Payment on stock options receivables -- -- -- -- -- 61 61
Net income -- -- -- 3,319 -- -- 3,319
----- --- ------- ------- ------- ----- -------
BALANCE--September 27, 2003 5,249 $52 $14,743 $19,037 $(8,351) $(655) $24,826
===== === ======= ======= ======= ===== =======
See notes to consolidated financial statements.
F-5
ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 27, 2003, SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001
- --------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ark Restaurants Corp. and subsidiaries (the "Company") own and operate 25
restaurants, 12 fast food concepts, catering operations and wholesale and
retail bakeries. Twelve restaurants are located in New York City, eight in
Las Vegas, Nevada, four in Washington, D.C., and one in Islamorada,
Florida. The Las Vegas operations include three restaurants within the New
York-New York Hotel & Casino Resort and operation of the resort's room
service, banquet facilities, employee dining room and eight food court
concepts. Four restaurants and bars are within the Venetian Casino Resort
as well as four food court concepts; one restaurant is within the Forum
Shops at Caesar's Shopping Center and one restaurant is in downtown Las
Vegas at the Neonopolis Center.
Accounting Period--The Company's fiscal year ends on the Saturday nearest
September 30. The fiscal years ended September 27, 2003, September 28,
2002, and September 29, 2001, included 52 weeks.
Significant Estimates--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 while actual results could differ from those estimates,
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 statements.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents--Cash equivalents include instruments with original
maturities of three months or less.
Accounts Receivable--Accounts receivable is primarily composed of normal
business receivables such as credit card receivables that are paid off in a
short period of time. See Notes 16 and 17 for a discussion of related party
receivables.
Inventories--Inventories are stated at the lower of cost (first-in,
first-out) or market, and consist of food and beverages, merchandise for
sale and other supplies.
F-6
Fixed Assets--Leasehold improvements and furniture, fixtures and equipment
are stated at cost. Depreciation of furniture, fixtures and equipment
(including equipment under capital leases) is computed using the
straight-line method over the estimated useful lives of the respective
assets (seven years). Amortization of improvements to leased properties is
computed using the straight-line method based upon the initial term of the
applicable lease or the estimated useful life of the improvements,
whichever is less, and ranges from 5 to 35 years.
The Company includes in leasehold improvements in progress restaurants that
are under construction. Once the projects have been completed the Company
will begin amortizing the assets. Start-up costs incurred during the
construction period of restaurants, including rental of premises, training
and payroll, are expensed as incurred.
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the asset's carrying amount. In the evaluation of the fair value and
future benefits of long-lived assets, the Company performs an analysis of
the anticipated undiscounted future net cash flows of the related
long-lived assets. If the carrying value of the related asset exceeds the
undiscounted cash flows, the carrying value is reduced to its fair value.
Various factors including future sales growth and profit margins are
included in this analysis. Management believes at this time that carrying
values and useful lives continue to be appropriate.
For the year ended September 27, 2003, an impairment charge of $667,000 was
incurred on the restaurant Lutece (Note 2). For the year ended September
28, 2002, no impairment charges were deemed necessary. For the year ended
September 29, 2001, an impairment charge of $10,045,000 was incurred on the
Company's restaurant operations at Desert Passage, the retail complex at
the Aladdin Resort & Casino in Las Vegas, Nevada (Note 2).
Intangible Assets and Goodwill--As of September 29, 2002, the Company
adopted the provisions for SFAS No. 142. This statement requires that
goodwill and intangible assets with indefinite lives no longer be
amortized, but instead be 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 goodwill. The amount of such amortized goodwill was
$3,515,000 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 years
ended September 28, 2002 and September 29, 2001, a reduction of
amortization expense in pretax income of $364,000 or an increase of $0.11
in basic and diluted earnings per share would have been recorded. The
Company has completed its impairment analysis as of the transition date to
SFAS No. 142 and as of September 27, 2003 and has determined that there is
no impairment of goodwill.
Costs associated with acquiring leases and subleases, principally purchased
leasehold rights, have been capitalized and are being amortized on the
straight-line method based upon the initial terms of the applicable lease
agreements, which range from 10 to 21 years.
Covenants not to compete arising from restaurant acquisitions are amortized
over the contractual period of five years.
Amortization expense for intangible assets not including goodwill was
$15,000, $39,000 and $95,000 for the years ended September 27, 2003,
September 28, 2002, and September 29, 2001, respectively.
F-7
Estimated aggregate amortization expense for each of the five succeeding
fiscal years is $56,000 for 2004 and 2005 and $53,000 for 2006-2008.
Other Assets-- Certain legal and bank commitment fees incurred in
connection with the Company's Revolving Credit and Term Loan Facility, as
discussed in Note 7, were capitalized as deferred financing fees and are
being amortized over two years, the remaining term of the facility.
Operating Lease Deferred Credit--Several of the Company's operating leases
contain predetermined increases in the rentals payable during the term of
such leases. For these leases, the aggregate rental expense over the lease
term is recognized on a straight-line basis over the lease term. The excess
of the expense charged to operations in any year and amounts payable under
the leases during that year are recorded as a deferred credit. The deferred
credit subsequently reverses over the lease term (Note 8).
Occupancy Expenses--Occupancy expenses include rent, rent taxes, real
estate taxes, insurance and utility costs.
Income Per Share of Common Stock--Net income per share is computed in
accordance with Statement of Financial Accounting Standard ("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 the
additional dilutive effect of common stock equivalents. Common stock
equivalents consist of dilutive stock options.
Stock Options--The Company accounts for its stock options granted to
employees under the intrinsic value-based method for employee stock-based
compensation and provides pro forma disclosure of net income and earnings
per share as if the accounting provision of SFAS No. 123 had been adopted.
The Company generally does not grant options to outsiders.
Statement of Financial Accountings Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"), requires the Company to disclose
pro forma net income and pro forma earnings per share information for
employee stock option grants to employees as if the fair-value method
defined in SFAS No. 123 had been applied. The Company utilized the
Black-Scholes option-pricing model to quantify the pro forma effects on net
income and earnings per share of the options granted and outstanding for
fiscal 2002 and fiscal 2001. There were no options granted during fiscal
2003.
The weighted-average assumptions which were used for fiscal 2002 and fiscal
2001 included risk free interest rates of 4.25% and 5.50% and volatility of
35% and 45%, respectively. An expected life of four years for both years
was used. No annual dividend yield was assumed. The weighted average grant
date fair value of options granted and outstanding during fiscal 2002 and
fiscal 2001 was $2.05 and $2.87 respectively.
F-8
The pro forma impact was as follows:
Years Ended
---------------------------------------------
September 27, September 28, September 29,
2003 2002 2001
------------- ------------- -------------
(In thousands, except per share amounts)
Net income (loss) as reported $3,319 $4,229 $(6,848)
Deduct stock based compensation expense
computed under the fair value method 118 141 205
Net income (loss) - pro forma $3,201 $4,088 $(7,053)
Net income (loss) per share as reported - basic $ 1.04 $ 1.33 $ (2.15)
Net income (loss) per share as reported - diluted $ 1.03 $ 1.32 $ (2.15)
Net income (loss) per share pro forma - basic $ 1.01 $ 1.29 $ (2.22)
Net income (loss) per share pro forma - diluted $ 1.00 $ 1.28 $ (2.22)
Impact of Recently Issued Accounting Standards-- 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 statements; however, the Company will be required to separately
disclose the results of closed restaurants as discontinued operations in
the future.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, was issued in July 2002. SFAS No. 146 replaces current
accounting literature and requires the recognition of costs associated with
exit or disposal activities when they are incurred rather than at the date
of commitment to an exit or disposal plan. The provisions of the Statement
are effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of this statement did not have a material
effect on the Company's financial statements.
FIN No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, was
issued in November 2002. This interpretation elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements
about its obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of FIN No. 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 statements (see Note 8).
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure was issued in December 2002. This statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, providing alternative methods of
transition for a voluntary change to the fair value based method of
F-9
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 (see Note 10).
FIN No. 46, Consolidation of Variable Interest Entities, was issued on
January 17, 2003. Such Interpretation addresses consolidation of entities
that are not controllable through voting interests or in which the equity
investors do not bear the residual economic risks and rewards. The
Interpretation provides guidance related to identifying variable interest
entities and determining whether such entities should be consolidated. In
October 2003, the effective date of FIN No. 46 was deferred for variable
interests held by public companies in all entities that were acquired prior
to February 1, 2003. The deferral revised the effective date for
consolidation of these entities for the Company to the quarter ended
December 27, 2003. The Company believes the adoption of this standard will
not have a material effect on its financial statements.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is
generally effective for contracts entered into or modified after June 30,
2003 (with a few exceptions) and for hedging relationships designated after
June 30, 2003. The adoption of this statement did not have a material
impact on the Company's financial statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" improves the accounting for
certain financial instruments that, under previous guidance, issuers could
account for as equity. The new statement requires that those instruments be
classified as liabilities in statements of financial position. This
statement was adopted by the Company in the quarter ended September 27,
2003, and it did not have a material impact on the Company's financial
statements.
Reclassifications--Certain reclassifications of prior year balances have
been made to conform with current year presentation.
2. EFFECTS OF THE SEPTEMBER 11, 2001 TERRORIST ATTACKS
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, experienced some damage. The Grill
Room, located at 2 World Financial Center which is adjacent to the World
Trade Center and which was substantially damaged, was closed for all of
fiscal 2002. The Grill Room reopened in early December 2002. The Company
recorded $450,000 as a reduction of other operating costs and expenses for
the year ended September 28, 2002 for partial insurance recoveries of
certain out of pocket costs and business interruption losses incurred.
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.
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
F-10
of the future cash flows. The Company projected continuing negative
operating cash flow for the foreseeable future with no value for subletting
or assigning the lease for the premises. Therefore, the Company determined
that there was no value to such long-lived assets. The Company had an
investment of $8,445,000 in leasehold improvements, and furniture, fixtures
and equipment. The Company believed that these assets would have nominal,
if any, value upon disposal. In addition, the estimated future payments
under the lease for kitchen equipment at the location totaled $1,600,000.
The Company recorded in the fiscal year ended September 29, 2001 an
impairment charge of $8,445,000 for the net book value of the assets and
recorded an additional $1,600,000 of expense and liability for the future
lease payments, of which $874,000 and $1,253,000 remained accrued in other
current liabilities at September 27, 2003 and September 28, 2002,
respectively. 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 non-operating income),
The Company believes that its restaurant, Lutece, located in New York City
has been impaired by the events of September 11th and the continued
weakness in the economy. Based upon the sum of the future undiscounted cash
flows related to the Company's long-lived fixed assets at Lutece, the
Company determined that impairment had occurred. To estimate the fair value
of such long-lived fixed assets, for determining the impairment amount, the
Company used the expected present value of the future cash flows. The
Company projected continuing negative operating cash flow for the
foreseeable future with no value for subletting or assigning the lease for
the premises. As a result, the Company determined that there was no value
to the long-lived fixed assets. The Company had an investment of $667,000
in leasehold improvements, and furniture fixtures and equipment. The
Company believes that these assets would have nominal value upon disposal.
The Company recorded an impairment charge of $667,000 during the fiscal
year ended September 27, 2003.
F-11
3. LONG-TERM RECEIVABLES
Long-term receivables consist of the following:
September 27, September 28,
2003 2002
------------- -------------
(In thousands)
Note receivable secured by fixed assets and lease at a
restaurant sold by the Company, at 8% interest; due in
monthly installments through December 2006 (a) $ 268 $ 337
Note receivable secured by fixed assets and lease at a
restaurant sold by the Company, at 7.5% interest; due in
monthly installments through December 2008 (b) 1,104 606
Note receivable secured by fixed assets and lease at a
restaurant at 7.0% interest; due in monthly installments
through December 2007 (c) 112 125
------ ------
1,484 1,068
Less current portion 193 164
------ ------
$1,291 $ 904
====== ======
(a) In December 1996, the Company sold a restaurant for $900,000.
Cash of $50,000 was received on sale and the balance is due in
installments through December 2006.
(b) In October 1997, the Company sold a restaurant for $1,750,000, of
which $200,000 was paid in cash and the balance is due in monthly
installments under the terms of two notes bearing interest at a
rate of 7.5%. One note, with an initial principal balance of
$400,000, was paid in 24 monthly installments of $19,000 through
April 2000. The second note, with an initial principal balance of
$1,150,000, will be paid in 104 monthly installments of $15,000
commencing May 2000 and ending December 2008. At December 2008,
the then outstanding balance of $519,000 matures.
The Company recognized a gain of approximately $585,000, $0, and
$209,000 in the fiscal years ended September 27, 2003, September
28, 2002, and September 29, 2001, respectively, in connection
with the sale of this restaurant. The gain of $585,000 recognized
during the year ended September 27, 2003 reflected the
realization of a gain that had been deferred originally due to
the length of the note and the substantial balance due upon
maturity ($519,000). A review of the performance of this note and
the security underlying it has lead management to conclude that
the full amount will likely be collected and, accordingly, the
note no longer requires a reserve. Consequently, the Company
eliminated this reserve and included the amount in revenue, in
other income, for the year ended September 27, 2003.
(c) In June 2000, the Company sold this restaurant for $438,000. Cash
of $188,000 was received on sale and the balance was due in
installments through June 2006. In February 2001, the buyer
defaulted and the Company took possession of this restaurant and
sold it to another
F-12
party in June 2002. The total price was $270,000, cash of
$145,000 was received on sale and the balance is due in
installments through December 2007.
The Company recognized a gain during the year ended September 28,
2002 of $105,000, the net of funds received from the buyer and
the outstanding $165,000 note which was written down on the
default.
The carrying value of the Company's long-term receivables approximates
their current aggregate fair value.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
September 27, September 28,
2003 2002
------------- -------------
(In thousands)
Intangible assets:
Purchased leasehold rights (a) $ 751 $ 751
Noncompete agreements and other 926 790
------ ------
1,677 1,541
Less accumulated amortization 1,204 1,200
------ ------
Total intangible assets $ 473 $ 341
====== ======
(a) Purchased leasehold rights arise from acquiring leases and
subleases of various restaurants.
5. OTHER ASSETS
Other assets consist of the following:
September 27, September 28,
2003 2002
------------- -------------
(In thousands)
Deposits and other $378 $261
Deferred financing fees 117 42
Landlord receivable (a) 400 400
---- ----
$895 $703
==== ====
F-13
(a) This balance represents certain costs paid on behalf of a
landlord, that under an agreement with the landlord will be used
as a future offset to contingent rent payments for certain Las
Vegas restaurants.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
September 27, September 28,
2003 2002
------------- -------------
(In thousands)
Sales tax payable $ 737 $ 673
Accrued wages and payroll related costs 1,390 1,508
Customer advance deposits 815 924
Accrued and other liabilities 1,770 1,998
Impairment accrual (a) 874 1,253
------ ------
$5,586 $6,356
====== ======
(a) During the year ended September 29, 2001, the Company recorded
the entire amount payable under an operating lease for restaurant
equipment for the Aladdin operations as a liability of $1,600,000
based on their anticipated abandonment. During the year ended
September 28, 2002, the operations at the Aladdin were abandoned
(see Note 2).
7. LONG-TERM DEBT
Long-term debt consists of the following:
September 27, September 28,
2003 2002
------------- -------------
(In thousands)
Revolving Credit and Term Loan Facility with interest at the
prime rate, plus 1/2%, due February 16, 2005 (a) $6,975 $14,908
Notes issued in connection with refinancing of restaurant
equipment, at 8.80%, payable in monthly installments
through May 2005 (b) 601 923
------ -------
7,576 15,831
Less current maturities 350 6,284
------ -------
$7,226 $ 9,547
====== =======
(a) The Company's Revolving Credit and Term Loan Facility (the
"Facility") with its main bank (Bank Leumi USA), as amended in
November 2001, December 2001 April 2002, and February 2003,
included a $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. On July 1, 2002, the
Facility converted into a term loan in the amount of $17,890,000
payable in 36 monthly installments of approximately $497,000.
Upon amendment in February 2003, the term loan was
F-14
converted into a revolving loan. The credit line was reduced to
$11,500,000 on June 29, 2003 and $8,500,000 on September 29, 2003
until the maturity date of February 12, 2005. The Company had
borrowings of $6,975,000 outstanding on this facility at
September 27, 2003. The loan bears interest at 1/2% above the
bank's prime rate and at September 27, 2003 and September 28,
2002, the interest rate on outstanding loans was 4.50% and 5.25%
respectively. The Facility also includes a $500,000 Letter of
Credit Facility for use in lieu of lease security deposits. The
Company has delivered $495,000 in irrevocable letters of credit
on this Facility as of September 27, 2003. 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 facilities 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 facilities.
The agreement 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 agreement also contains financial covenants 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. During the year ended September 27,
2003, the Company violated covenants related to a limitation on
employee loans and maintaining minimum cash flow in relation to
the Company's debt service requirements. The Company received
waivers from the bank for the covenants it was not in compliance
with, for the year ended September 27, 2003 and through December
30, 2003.
(b) In April 2000, the Company borrowed from its main bank $1,570,000
to refinance the purchase of various restaurant equipment at its
food and beverage facilities in a hotel and casino in Las Vegas,
Nevada. The notes bear interest at 8.80% per annum and are
payable in 60 equal monthly installments of $32,439 inclusive of
interest, until maturity in May 2005.
Required principal payments on long-term debt are as follows:
Amount
Fiscal Year (In thousands)
----------- --------------
2004 $ 350
2005 7,226
------
$7,576
======
During the fiscal years ended September 27, 2003, September 28, 2002 and
September 29, 2001, interest expense was $732,000, $1,212,000 and
$2,446,000, respectively, none of which was capitalized.
The carrying value of the Company's long-term debt approximates its current
aggregate fair value.
F-15
8. COMMITMENTS AND CONTINGENCIES
Leases--The Company leases its restaurants, bar facilities, and
administrative headquarters through its subsidiaries under terms expiring
at various dates through 2029. Most of the leases provide for the payment
of base rents plus real estate taxes, insurance and other expenses and, in
certain instances, for the payment of a percentage of the restaurants'
sales in excess of stipulated amounts at such facility.
As of September 27, 2003, future minimum lease payments, net of sublease
rentals, under noncancelable leases are as follows:
Amount
Fiscal Year (In thousands)
----------- --------------
2004 $ 7,988
2005 7,857
2006 7,870
2007 5,031
2008 3,720
Thereafter 14,106
-------
Total minimum payments $46,572
=======
In connection with the leases included in the table above, the Company
obtained and delivered irrevocable letters of credit in the aggregate
amount of $889,000 as security deposits under such leases.
Rent expense was $12,412,000, $12,001,000 and $12,756,000 during the fiscal
years ended September 27, 2003, September 28, 2002 and September 29, 2001,
respectively. Rent expense for the fiscal years ended September 27, 2003
and September 29, 2001 includes approximately $11,000 and $218,000 of
operating lease deferred credits, representing the difference between rent
expense recognized on a straight-line basis and actual amounts currently
payable. There was no effect for operating lease deferred credits for the
year ended September 28, 2002. Contingent rentals, included in rent
expense, were $3,366,000, $3,198,000 and $3,236,000 for the fiscal years
ended September 27, 2003, September 28, 2002 and September 29, 2001,
respectively.
Legal Proceedings--In the ordinary course of its business, the Company is a
party to various lawsuits arising from accidents at its restaurants and
worker's compensation claims, which are generally handled by the Company's
insurance carriers.
The employment by the Company of management personnel, waiters, waitresses
and kitchen staff at a number of different restaurants has resulted in the
institution, from time to time, of litigation alleging violation by the
Company of employment discrimination laws. The Company does not believe
that any of such suits will have a materially adverse effect upon the
Company's financial statements or operations.
F-16
A lawsuit was commenced against the Company in October 1997 in the District
Court for the Southern District of New York by 44 present and former
employees alleging various violations of Federal wage and hour laws. The
complaint sought an injunction against further violations of the labor laws
and payment of unpaid minimum wages, overtime and other allegedly required
amounts, liquidated damages, penalties and attorney's fees. The lawsuit was
settled for approximately $1,245,000 in May 2001. Based upon settlement
discussion in the fourth quarter of fiscal 2000, the Company recorded a
charge of $1,300,000 at that time.
Several unfair labor practice charges were filed against the Company in
1997 with the National Labor Relations Board (NLRB) with respect to the
Company's Las Vegas subsidiary. The charges were heard in October 1997. At
issue was whether the Company unlawfully terminated nine employees and
disciplined six other employees allegedly in retaliation for their union
activities. An Administrative Law Judge (ALJ) found that six employees were
terminated unlawfully, three were discharged for valid reasons, four
employees were disciplined lawfully and two employees were disciplined
unlawfully. On appeal, the NLRB found that the Company lawfully disciplined
five employees, and unlawfully disciplined one employee. The Company
appealed the adverse rulings of the NLRB to the D.C. Circuit Court of
Appeals. In July 2003, the D.C. Circuit Court of Appeals affirmed the
determinations of the NLRB. The Company has offered to reinstate the
employees and when an estimate of potential liability can be determined a
reserve will be established. The Company does not expect this reserve to
have a material impact on its financial statements or operations.
Guaranties-- 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 was in the amount of $350,000. Upon the
first anniversary of the opening of the Saloon, May 2003, the Guaranty was
reduced to $175,000 and it will expire in May 2004.
The Company has not provided any additional financial guaranties other than
discussed above as of September 27, 2003.
9. COMMON STOCK REPURCHASE PLAN
In August 1998, the Company authorized the repurchase of up to 500,000
shares of the Company's outstanding common stock. In April 1999, the
Company authorized the repurchase of an additional 300,000 shares of the
Company's outstanding common stock. For the year ended September 29, 2001,
the Company repurchased 400 shares at a total cost of $3,000. For the years
ended September 27, 2003 and September 28, 2002, there were no repurchases
of common stock.
10. STOCK OPTIONS
The Company has a Stock Option Plan (the "Plan") pursuant to which the
Company reserved for issuance an aggregate of 1,098,000 shares of common
stock. Options granted under the Plan to key employees are exercisable at
prices at least equal to the fair market value of such stock on the dates
the options were granted. The options expire five years after the date of
grant and are generally exercisable
F-17
as to 25% of the shares commencing on the first anniversary of the date of
grant and as to an additional 25% commencing on each of the second, third
and fourth anniversaries of the date of grant.
Additional information follows:
2003 2002 2001
------------------------ ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- -------- ------------- -------- -------------- --------
Outstanding, beginning of year 392,500 $7.91 330,000 $10.72 343,000 $10.76
Options:
Granted -- 240,000 6.30 10,000 7.50
Exercised -- -- --
Canceled or expired -- (177,500) 10.24 (23,000) 9.89
------------- ------------- --------------
Outstanding, end of year (a) 392,500 7.91 392,500 7.91 330,000 10.72
============= ============= ==============
Exercise price, outstanding options $6.30 - 10.00 $6.30 - 10.00 $7.50 - $12.00
Weighted average years 2.06 Years 3.06 Years 1.65 Years
Shares available for future grant 371,000 371,000 320,000
Options exercisable (a) 222,000 9.10 168,000 10.00 229,000 11.15
(a) Options become exercisable at various times until expiration
dates ranging from December 2003 through December 2006.
11. MANAGEMENT FEE INCOME
As of September 27, 2003, the Company provides management services to one
restaurant it does not own. In accordance with the contractual
arrangements, the Company earns management fees based on operating profits
as defined by the agreement.
Management fee income relating to these services was $120,000, $30,000 and
$181,000 for the years ended September 27, 2003, September 28, 2002 and
September 29, 2001, respectively.
Restaurants managed had sales of $2,765,000, $2,973,000 and $4,380,000
during the management periods within the years ended September 27, 2003,
September 28, 2002 and September 29, 2001, respectively, which are not
included in consolidated net sales of the Company.
12. 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 nonconsolidated basis. For New York State and City income
tax purposes, the losses incurred by a subsidiary may only be used to
offset that subsidiary's income.
F-18
The provision (benefit) for income taxes consists of the following:
Years Ended
---------------------------------------------
September 27, September 28, September 29,
2003 2002 2001
------------- ------------- -------------
(In thousands)
Current provision (benefit):
Federal $1,534 $(2,151) $(1,008)
State and local 316 872 773
------ ------- -------
1,850 (1,279) (235)
------ ------- -------
Deferred provision (benefit):
Federal 3 2,784 (3,022)
State and local (797) (86) (85)
------ ------- -------
(794) 2,698 (3,107)
------ ------- -------
$1,056 $ 1,419 $(3,342)
====== ======= =======
The provision for income taxes differs from the amount computed by applying
the Federal statutory rate due to the following:
Years Ended
---------------------------------------------
September 27, September 28, September 29,
2003 2002 2001
------------- ------------- -------------
(In thousands)
Provision (benefit) for Federal
income taxes (34%) $1,488 $1,920 $(3,465)
State and local income taxes net of
Federal tax benefit 208 575 454
Amortization of goodwill -- 26 26
Tax credits (132) (755) (489)
State and local net operating loss
carryforward allowance
adjustment (445) -- --
Other (63) (347) 132
------ ------ -------
$1,056 $1,419 $(3,342)
====== ====== =======
Deferred tax assets or liabilities are established for: (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes,
and (b) operating loss carryforwards. The tax effects of items comprising
the Company's net deferred tax asset are as follows:
F-19
September 27, September 28,
2003 2002
------------- -------------
(In thousands)
Deferred tax assets (liabilities):
Operating loss carryforwards $2,206 $1,721
Operating lease deferred credits 458 461
Carryforward tax credits 5,472 5,641
Depreciation and amortization (2,140) (1,829)
Deferred gains (151) (146)
Valuation allowance (900) (1,031)
Inventory (270) (269)
Asset impairment 228 --
------ ------
$4,903 $4,548
====== ======
A valuation allowance for deferred taxes is required if, based on the
evidence, it is more likely than not that some of the deferred tax assets
will not be realized. The Company believes that uncertainty exists with
respect to future realization of certain operating loss carryforwards and
operating lease deferred credits. Therefore, the Company provided a
valuation allowance of $900,000 at September 27, 2003 and $1,031,000 at
September 28, 2002. During the year ended September 27, 2003, the Company
decreased its allowance for the utilization of the deferred tax asset
arising from state and local operating loss carryforwards by $445,000
based on the merger of certain unprofitable subsidiaries into profitable
ones. The Company has state operating loss carryforwards of $27,652,000 and
local operating loss carryforwards of $22,595,000, which expire in the
years 2004 through 2017.
During the fiscal year ended September 27, 2003, the Company and the
Internal Revenue Service finalized the adjustments to the Company's Federal
income tax returns for the fiscal years ended September 30, 1995 through
October 3, 1998. The final adjustments, in both settlements, primarily
relate to: (i) legal and accounting expenses incurred in connection with
new or acquired restaurants that the Internal Revenue Service asserts
should have been capitalized and amortized rather than currently expensed
and (ii) travel and meal expenses for which the Internal Revenue Service
asserts the Company did not comply with certain record keeping requirements
or the Internal Revenue Code. These settlements did not have a material
effect on the Company's financial condition.
13. OTHER INCOME
Other income consists of the following:
Years Ended
---------------------------------------------
September 27, September 28, September 29,
2003 2002 2001
------------- ------------- -------------
(In thousands)
Purchasing service fees $ 58 $123 $106
World Trade Center Recovery Grants (a) 508 -- --
Other 417 130 38
---- ---- ----
$983 $253 $144
==== ==== ====
(a) During the fiscal year ended September 27, 2003, the Company
applied for grants to the World Trade Center Business Recovery
Grant Program for four restaurants located in downtown New
F-20
York. The program was established to compensate businesses for
economic loss resulting from the September 11, 2001 disaster. As
a result of our applications, the Company received compensation
of $508,000 during the fourth quarter of the year ended September
27, 2003.
14. INCOME PER SHARE OF COMMON STOCK
A reconciliation of the numerators and denominators of the basic and
diluted per share computations for the fiscal years ended September 27,
2003 and September 28, 2002 follows. For the year ended September 29, 2001,
there were no dilutive stock options and warrants.
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
(In thousands, except per share amounts)
Year ended September 27, 2003:
Basic EPS $3,319 3,181 $ 1.04
Stock options -- 32 (0.01)
------ ----- ------
Diluted EPS $3,319 3,213 $ 1.03
====== ===== ======
Year ended September 28, 2002:
Basic EPS 4,229 3,181 $ 1.33
Stock options -- 25 (0.01)
------ ----- ------
Diluted EPS $4,229 3,206 $ 1.32
====== ===== ======
For the years ended September 27, 2003, September 28, 2002, and September
29, 2001, stock options for shares of 168,000, 178,000, and 330,000,
respectively, were not included in the computation of diluted EPS because
to do so would have been antidilutive.
F-21
15. QUARTERLY INFORMATION (UNAUDITED)
The following table sets forth certain quarterly operating data.
Fiscal Quarters Ended
---------------------------------------------------
December 28, March 29, June 28, September 27,
2002 2003 2003 2003
------------ --------- -------- -------------
(In thousands except per share amounts)
2003
Food and beverage sales $26,169 $25,779 $31,642 $31,667
Net income (loss) (116) 30 1,619 1,786
Net income (loss) per share $ (0.04) $ 0.01 $ 0.51 $ 0.56
basic
Net income (loss) per share $ (0.04) $ 0.01 $ 0.50 $ 0.55
diluted
Fiscal Quarters Ended
---------------------------------------------------
December 31, March 29, June 29, September 28,
2001 2002 2002 2002
------------ --------- -------- -------------
(In thousands except per share amounts)
2002
Food and beverage sales $25,781 $26,149 $33,261 $29,916
Net income (loss) 974 (189) 1,836 1,608
Net income (loss) per share
basic $ 0.31 $ (0.06) $ 0.58 $ 0.51
Net income (loss) per share
diluted $ 0.31 $ (0.06) $ 0.57 $ 0.50
Fiscal Quarters Ended
---------------------------------------------------
December 30, March 31, June 30, September 29,
2000 2001 2001 2001
------------ --------- -------- -------------
(In thousands, except per share amounts)
2001
Food and beverage sales $30,815 $28,417 $36,805 $30,970
Net income (loss) 225 (1,000) 1,958 (8,031)
Net income (loss) per share
basic and diluted $ 0.07 $ (0.31) $ 0.62 $ (2.52)
F-22
16. STOCK OPTION RECEIVABLES
Stock option receivables include amounts due from officers and directors
totaling $655,000 and $716,000 at September 27, 2003 and September 28,
2002, 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 (4% at September 27, 2003 and 5.25% at September 28,
2002).
17. RELATED PARTY TRANSACTIONS
Mr. Donald D. Shack, a former director of the Company, who did not stand
for re-election at the 2003 annual shareholder meeting, is a member of the
firm Shack Siegel Katz Flaherty & Goodman P.C., which acts as counsel to
the Company. The Company incurred $69,000 to such firm, while a related
party, during the year ended September 27, 2003. The Company incurred
$353,000, and $436,000 in legal fees to such firm during the years ended
September 28, 2002, and September 29, 2001, respectively.
Receivables due from officers and directors, excluding stock option
receivables, totaled $85,000 at September 27, 2003 compared to $897,000 at
September 28, 2002. Other employee loans totaled $166,000 at September 27,
2003 compared to $148,000 at September 28, 2002. Such loans bear interest
at the minimum statutory rate (1.52% at September 27, 2003 and 2.13% at
September 28, 2002).
18. SUBSEQUENT EVENTS
On December 1, 2003, the Company sold a restaurant, Lorelei, for
approximately $850,000. The book value of inventory, fixed assets,
intangible assets and goodwill related to this entity was approximately
$610,000. The Company recorded a gain on the sale of approximately $240,000
during the first quarter of fiscal 2004.
In December 2003, the Company entered into agreements with the ultimate
intention to manage fast food operations at the Hard Rock Casinos in
Hollywood and Tampa, Florida. The agreements are subject to approval by the
Department of the Interior of the United States of America.
******
F-23
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ARK RESTAURANTS CORP.
By: /s/ Michael Weinstein
-------------------------------------
Michael Weinstein
President and Chief Executive Officer
Date: December 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Ernest Bogen Chairman of the Board and December 26, 2003
- --------------------- Director
(Ernest Bogen)
/s/ Michael Weinstein President, Chief Executive December 26, 2003
- --------------------- Officer and Director
(Michael Weinstein)
/s/ Vincent Pascal Senior Vice President, December 26, 2003
- --------------------- Secretary and Director
(Vincent Pascal)
/s/ Robert Towers Executive Vice President, December 26, 2003
- --------------------- Treasurer, Chief Operating
(Robert Towers) Officer and Director
/s/ Robert Stewart Chief Financial Officer December 26, 2003
- ---------------------
(Robert Stewart)
/s/ Marcia Allen Director December 26, 2003
- ---------------------
(Marcia Allen)
/s/ Steven Shulman Director December 26, 2003
- ---------------------
(Steven Shulman)
/s/ Paul Gordon Senior Vice President December 26, 2003
- --------------------- and Director
(Paul Gordon)
/s/ Bruce R. Lewin Director December 26, 2003
- ---------------------
(Bruce R. Lewin)
Exhibits Index
3.1 Certificate of Incorporation of the Registrant, filed with
the Secretary of State of the State of New York on January 4,
1983.
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.
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.
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.
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 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.
10.1 Amended and Restated Redemption Agreement dated June 29, 1993
between the Registrant and Michael Weinstein, incorporated by
reference to Exhibit 10.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended October 2, 1999 ("1994
10-K").
10.2 Form of Indemnification Agreement entered into between the
Registrant and each of Michael Weinstein, Ernest Bogen,
Vincent Pascal, Robert Towers, Jay Galin, Robert Stewart,
Bruce R. Lewin, Paul Gordon and Donald D. Shack, incorporated
by reference to Exhibit 10.2 to the 1994 10-K.
10.3 Ark Restaurants Corp. Amended Stock Option Plan, incorporated
by reference to Exhibit 10.3 to the 1994 10-K.
10.4 Fourth Amended and Restated Credit Agreement dated as of
December 27, 1999 between the Company and Bank Leumi USA,
incorporated by reference to Exhibit 10.4 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended October
2, 1999.
10.5 Ark Restaurants Corp. 1996 Stock Option Plan, as amended,
incorporated by reference to the Registrant's Definitive
Proxy Statement pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 1) filed on March 16,
2001.
10.6 Lease Agreement dated May 17, 1996 between New York-New York
Hotel, LLC, and Las Vegas America Corp., incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended October 3, 1998 (the
"1998 10-K").
10.7 Lease Agreement dated May 17, 1996 between New York-New York
Hotel, LLC, and Las Vegas Festival Food Corp., incorporated
by reference to Exhibit 10.7 to the 1998 10-K.
10.8 Lease Agreement dated May 17, 1996 between New York-New York
Hotel, LLC, and Las Vegas Steakhouse Corp., incorporated by
reference to Exhibit 10.8 to the 1998 10-K.
10.9 Amendment dated August 21, 2000 to the Fourth Amended and
Restated Credit Agreement dated as of December 27, 1999
between the Company and Bank Leumi USA, incorporated by
reference to Exhibit 10.9 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended September 30, 2000
(the "2000 10-K").
10.10 Amendment dated November 21, 2000 to the Fourth Amended and
Restated Credit Agreement dated as of December 27, 1999
between the Company and Bank Leumi USA, incorporated by
reference to Exhibit 10.10 to the 2000 10-K.
10.11 Amendment dated November 1, 2001 to the Fourth Amended and
Restated Credit Agreement dated as of December 27, 1999
between the Company and Bank Leumi USA, incorporated by
reference to Exhibit 10.11 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended September 29, 2001
(the "2001 10-K").
10.12 Amendment dated December 20, 2001 to the Fourth Amended and
Restated Credit Agreement dated as of December 27, 1999
between the Company and Bank Leumi USA, incorporated by
reference to Exhibit 10.11 of the 2001 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, incorporated by
reference to Exhibit 10.13 of the Second Quarter 2002 Form
10-Q.
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, incorporated by
reference to Exhibit 10.14 of the First Quarter 2003 Form
10-Q.
*14.1 Code of Ethics
*21 Subsidiaries of the Registrant.
*23 Consent of Deloitte & Touche LLP.
*31.1 Certification of Chief Executive Officer pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Chief Financial Officer pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002.
*32 Section 1350 Certification.
* Filed herewith.