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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 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 (I.R.S. Employer
incorporation or organization) Identification No.)
85 Fifth Avenue, New York, New York 10003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 206-8800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding shares at February 6, 2004
(Common stock, $.01 par value) 3,242,299
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars and shares in Thousands)
December 27, September 27,
2003 2003
------------ -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 429 $ 486
Accounts receivable 2,281 1,677
Due from affiliate 1,000 --
Employee receivables 252 255
Inventories 1,825 1,997
Current portion of long-term receivables 199 193
Prepaid expenses and other current assets 883 886
Deferred income taxes 281 281
Assets held for sale 337 --
------- -------
Total current assets 7,487 5,775
LONG-TERM RECEIVABLES
1,240 1,291
FIXED ASSETS
Leasehold improvements 33,192 34,385
Furniture, fixtures and equipment 28,445 29,427
------- -------
61,637 63,812
Less accumulated depreciation and
amortization 36,017 36,748
------- -------
25,620 27,064
INTANGIBLE ASSETS, NET 3,892 3,988
DEFERRED INCOME TAXES 4,445 4,622
OTHER ASSETS 881 895
------- -------
TOTAL ASSETS $43,565 $43,635
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 3,739 $ 3,443
Accrued expenses and other current
liabilities 5,004 5,586
Accrued income taxes 211 1,198
Current maturities of long-term debt 358 350
Liabilities held for disposition 45 --
------- -------
Total current liabilities 9,357 10,577
LONG-TERM DEBT - net of current maturities 7,934 7,226
OPERATING LEASE DEFERRED CREDIT 888 1,006
------- -------
TOTAL LIABILITIES 18,179 18,809
------- -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share -
authorized, 10,000 shares;
issued, 5,249 shares 52 52
Additional paid-in capital 14,743 14,743
Treasury stock, 2,068 shares (8,351) (8,351)
Receivables from Employees in respect of
stock option exercises (651) (655)
Retained earnings 19,593 19,037
------- -------
Total shareholders' equity 25,386 24,826
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $43,565 $43,635
======= =======
See notes to consolidated condensed financial statements.
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ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (Unaudited)
(In Thousands, Except per share amounts)
13 Weeks Ended
---------------------------
December 27, December28,
2003 2002
------------ ------------
TOTAL REVENUES $27,105 $24,965
COST AND EXPENSES:
Food and beverage cost of sales 6,998 6,217
Payroll expenses 9,007 8,662
Occupancy expenses 4,373 4,130
Other operating costs and expenses 3,409 3,407
General and administrative expenses 1,473 1,591
Depreciation and amortization expenses 1,063 1,134
------- -------
Total costs and expenses 26,323 25,141
------- -------
OPERATING INCOME (LOSS) 782 (176)
------- -------
OTHER (INCOME) EXPENSE:
Interest expense, net 58 215
Other income (92) (255)
------- -------
Total other (income) expense (34) (40)
------- -------
Income (loss) from continuing operations
before income taxes 816 (136)
Provision (benefit) for income taxes 286 (52)
------- -------
Income (loss) from continuing operations 530 (84)
DISCONTINUED OPERATIONS:
Income (loss) from operations of discountinued restaurants
(including gains on disposal of $225,000 and $0, respectively) 40 (51)
Provision (benefit) for income taxes 14 (19)
------- -------
Income (loss) from discontinued operations 26 (32)
NET INCOME (LOSS) $ 556 $ (116)
======= =======
RETAINED EARNINGS, Beginning
of period 19,037 15,718
------- -------
RETAINED EARNINGS, End of period $19,593 $15,602
======= =======
PER SHARE INFORMATION - BASIC AND DILUTED:
Continuing operations basic $ .17 $ (.03)
Discountinued operations basic $ .01 $ (.01)
------- -------
Net basic $ .18 $ (.04)
======= =======
Continuing operations diluted $ .16 $ (.03)
Discontinued operations diluted $ .01 $ (.01)
------- -------
Net diluted $ .17 $ (.04)
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES-BASIC 3,181 3,181
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES-DILUTED 3,322 3,181
======= =======
See notes to consolidated condensed financial statements.
-3-
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
13 Weeks Ended
---------------------------
December 27, December 28,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations $ 530 $ (84)
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by (used in) operating
activities:
Deferred income taxes 177
Depreciation and amortization 1,063 1,134
Changes in operating assets and liabilities:
Receivables (601) (638)
Inventories 133 (16)
Prepaid expenses and other current assets 3 67
Refundable and prepaid income taxes -- (207)
Other assets -- 5
Accounts payable - trade 320 34
Accrued income taxes (986) --
Accrued expenses and other current liabilities (504) (770)
------- ------
Net cash provided by (used in) operating activities 135 (475)
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (323) (234)
Additions to intangible assets (28) --
Advances to affiliate (1,000) --
Payments received on long-term receivables 45 59
------- ------
Net cash used in investing activities (1,306) (175)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 801 --
Principal payments on long-term debt (85) (78)
Proceeds from stock option receivables 4 --
------- ------
Net cash provided by (used in) in financing activities 720 (78)
------- ------
NET CASH USED IN CONTINUING OPERATIONS (451) (728)
NET CASH PROVIDED FROM (USED IN) DISCONTINUED OPERATIONS 394 (32)
------- ------
NET DECREASE IN CASH (57) (760)
CASH, Beginning of period 486 819
------- ------
$ 429 $ 59
------- ------
CASH, End of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 95 $ 221
------- ------
Income taxes $ 1,105 $ 125
======= ======
See notes to consolidated condensed financial statements.
-4-
ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
December 27, 2003
(Unaudited)
1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The consolidated condensed financial statements have been prepared by
Ark Restaurants Corp. (the "Company"), without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position at December 27, 2003, results
of operations for the 13 week periods ended December 27,2003 and December 28,
2002, and cash flows for the 13 week periods ended December 27, 2003 and
December 28, 2002, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended September 27, 2003. The results of operations
for interim periods are not necessarily indicative of the operating results to
be expected for the full year.
Certain reclassifications have been made to the 2003 financial
statements to conform to the 2004 presentation.
2. IMPACT OF NEW 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 position or results of
operations; however, the Company is now separately disclosing the results of
closed restaurants as discontinued operations in the future.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, was issued in July 2002. SFAS No. 146 replaces current accounting
literature and requires the recognition of costs associated with exit or
disposal activities when they are incurred rather than at the date of commitment
to an exit or disposal plan. The provisions of the Statement are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of this statement did not have a material effect on the Company's
financial statements.
FIN No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, was issued
in November 2002. This interpretation elaborates on the disclosures to be made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, while disclosure requirements are effective for interim or
annual periods ending after December 15, 2002. The Company adopted this standard
in the first quarter of fiscal year 2003. The adoption of this standard did not
have a material impact on the Company's financial position or results of
operations.
SFAS 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. Therefore,
SFAS No. 148 will not affect the Company's results of operations or financial
position. The Company has applied the disclosure provisions of SFAS No. 148, as
required.
FIN No. 46, Consolidation of Variable Interest Entities, was issued on
January 17, 2003. Such Interpretation addresses consolidation of entities that
are not controllable through voting interests or in which the equity investors
do not bear the residual economic risks and rewards. These entities have been
commonly referred to as special purpose entities. The
-5-
Interpretation provides guidance related to identifying variable interest
entities and determining whether such entities should be consolidated. It also
provides guidance related to the initial and subsequent measurement of assets,
liabilities and noncontrolling interests in newly consolidated variable interest
entities and requires disclosure for both the primary beneficiary of a variable
interest entity and other beneficiaries of the entity. The adoption of this
standard did not have a material effect on the Company's financial statements.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities" amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS 133. SFAS 149 is generally
effective for contracts entered into or modified after June 30, 2003 (with a few
exceptions) and for hedging relationships designated after June 30, 2003. The
adoption of this standard did not have a material effect on the Company's
financial statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 improves
the accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. The new Statement requires that those
instruments be classified as liabilities in statements of financial position.
This statement is effective at the beginning of the fourth quarter 2003. The
adoption of this standard did not have a material impact on the Company's
financial statements.
3. DUE FROM AFFILIATE
Construction is currently ongoing to build fast food facilities at two
casino properties operated by the Seminole Indian Tribe in Tampa and Hollywood,
Florida. The Company has partners in this venture who assumed the financial
risk. Prior to the completion of the funding of the investment vehicle set up
for this venture, contributions were required to pay for the affiliate's portion
of the common areas of the casinos. As a result, the Company advanced the
affiliate $1,000,000 to allow for the payment to be made.
4. RECENT RESTAURANT DISPOSITIONS
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, 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 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 $625,000. The
Company recorded a gain on the sale of approximately $225,000 during the first
quarter of fiscal 2004 which is included in losses from discountinued
operations. Net operating losses of $142,000 were recorded in discountinued
operations in the first quarter of 2004.
The Company's restaurant Ernie's, located on the upper west side of
Manhattan opened in 1982. As a result of a steady decline in sales, the Company
felt that a new concept was needed at this location. The restaurant was closed
June 16, 2003 and reopened in August 2003. Total conversion costs were
approximately $350,000. Sales at the new restaurant, La Rambla, failed to reach
the level sufficient to achieve the results the Company required. As a result,
the Company sold this restaurant on January 1, 2004. The Company realized a gain
on the sale of this restaurant of approximately $107,000. This gain will be
recorded in the second quarter of fiscal 2004. A net operating loss of $43,000
is included in income from discontinued operations during the first fiscal
quarter of 2004 as a result of the restaurant's classification of being held for
sale.
5. LONG-TERM DEBT
As of December 27, 2003 the Company's Revolving Credit and Term Loan
Facility (the "Facility") with its main bank (Bank Leumi USA), included a
$8,500,000 credit line to finance the development and construction of new
restaurants and for working capital purposes at the Company's existing
restaurants. The credit line has a maturity date of February 12, 2005. The
-6-
Company had borrowings of $7,775,000 outstanding on this facility at December
27, 2003. The loan bears interest at 1/2% above the bank's prime rate and at
December 27, 2003 the interest rate on outstanding loans was 4.50%. The Facility
also includes a $500,000 letter of credit facility for use in lieu of lease
security deposits. The Company had delivered $245,000 in irrevocable letters of
credit on this Facility. The Company generally is required to pay commissions of
1 1/2% per annum on outstanding letters of credit.
The Company's subsidiaries each guaranteed the obligations of the
Company under the foregoing Facility and granted security interests in their
respective assets as collateral for such guarantees. In addition, the Company
pledged stock of such subsidiaries as security for obligations of the Company
under such Facility.
The Facility includes restrictions relating to, among other things,
indebtedness for borrowed money, capital expenditures, mergers, sale of assets,
dividends and liens on the property of the Company. The Facility also requires
the Company to comply with certain financial covenants at the end of each
quarter such as minimum cash flow in relation to the Company's debt service
requirements, ratio of debt to equity, and the maintenance of minimum
shareholders' equity. In December 2001 and April 2002, certain covenants in the
Facility were modified for fiscal 2002 and beyond. The Company violated a
covenant related to a limitation on cash flow and a covenant related to
consolidated indebtedness during the quarter ended December 27, 2003. The
Company received a waiver through February 9, 2004 from Bank Leumi USA for the
covenants with which it was not in compliance. The Company has historically
received waivers for any covenant violation.
In September 2001, a subsidiary of the Company entered into a lease
agreement with World Entertainment Centers LLC regarding the leasing of premises
at the Neonopolis Center at Freemont Street for the restaurant Saloon. The
Company provided a lease guaranty ("Guaranty") to induce the landlord to enter
into the lease agreement. The Guaranty is for a term of two years from the date
of the opening of the Saloon, May 2002, and during the first year of the
Guaranty is in the amount of $350,000. Upon the first anniversary of the opening
of the Saloon, May 2003, the Guaranty was reduced to $175,000 and will expire in
May 2004. As of December 27, 2003 the maximum potential amount of future
payments the Company could be required to make as a result of the Guaranty was
$175,000.
6. RECEIVABLES FROM EMPLOYEES IN RESPECT OF STOCK OPTION EXERCISES
Receivables from employees in respect of stock option exercises
includes amounts due from officers and directors totaling $651,000 at December
27, 2003 and $655,000 at September 27, 2003. Such amounts, which are due from
the exercise of stock options in accordance with the Company's Stock Option Plan
are payable on demand with interest at 1/2% above prime (4.5% at December 27,
2003).
7. INCOME (LOSS) PER SHARE OF COMMON STOCK
Net income (loss) per share is computed in accordance with SFAS No.
128, Earnings Per Share, and is calculated on the basis of the weighted average
number of common shares outstanding during each period plus, for diluted
earnings per share, the additional dilutive effect of potential common stock.
Potential common stock using the treasury stock method consists of dilutive
stock options and warrants.
For the 13-week period ended December 27, 2003, options to purchase
393,000 shares of common stock at a price range of $6.30 to $10.00 were included
in diluted earnings per share. For the 13-week period ended December 28, 2002,
options to purchase 393,000 shares of common stock at a price range of $6.30 to
$10.00 were not included in diluted loss per share as their impact was
antidilutive.
8. STOCK OPTIONS
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
Company to disclose pro forma net income (loss) and pro forma earnings (loss)
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 (loss) and earnings (loss) per share of the options granted for the
quarters ended December 27, 2003 and December 28, 2002.
The weighted-average assumptions used for the quarters ended December 27, 2003
and December 28, 2002 include risk free interest rates of 4.25%, volatility of
35% and no dividends. An expected life of four years for all options was used.
The weighted average grant date fair value of options granted and outstanding
during all the above mentioned periods was $2.05.
-7-
The pro forma impact is as follows:
(in Thousands, Except per Share Amounts)
----------------------------------------
13 Weeks ended 13 Weeks ended
December 27, 2003 December 28, 2002
----------------- ------------------
Net income (loss) as reported $ 556 $ (116)
Deduct stock based employee compensation expense
computed under the fair value method $ (19) $ (30)
Net income (loss) - pro forma $ 537 $ (146)
Earnings (loss) per share as reported - net basic $0.18 $(0.04)
Earnings (loss) per share as reported - net diluted $0.17 $(0.04)
Earnings (loss) per share pro forma - net basic $0.17 $(0.04)
Earnings (loss) per share pro forma - net diluted $0.16 $(0.05)
9. RELATED PARTY TRANSACTIONS
Receivables due from officers and employees, excluding stock option
receivables, totaled $252,000 at December 27, 2003 and $255,000 at September 27,
2003. Such loans bear interest at the minimum statutory rate (1.68% at December
27, 2003).
Item 2. Management's Discussion And Analysis Of Financial Condition and Results
Of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements. Certain of these risks and
uncertainties are discussed under the heading "forward looking statements" in
the Company's Annual Report on Form 10-K for the fiscal year ended September 27,
2003.
Revenues
During the Company's first fiscal quarter of 2004 ended December 27,
2003, total revenues of $27,105,000 increased 8.6% compared to total revenues of
$24,965,000 in the first fiscal quarter of 2003. Revenues for the the first
fiscal quarter of 2004 were reduced by $1,015,000 and revenues for the first
fiscal quarter of 2003 were reduced by $1,301,000 as a result of the sale of two
restaurants and their reclassification to discontinued operations. The Company
had net income of $556,000 in the first fiscal quarter of 2004 compared to a net
loss of $116,000 in the first fiscal quarter of 2003.
Same store sales in Las Vegas increased by $1,632,000 or 12.4% in the
first fiscal quarter as a result of continued strong business in Las Vegas,
coupled with the addition of 90 seats at Gallagher's Steakhouse in the New York
- - New York Hotel and Casino and the opening of a new tower of hotel rooms at the
Venetian Casino Resort. Same store sales in New York decreased $188,000 or 2%
during the first fiscal quarter following continued weakness in the New York
market. Same store sales in Washington D.C. increased by $189,000 or 6.1% during
the first fiscal quarter as tourism has shown improvement in that market.
Company-wide same store sales increased 6% for the 13-week period ended December
27, 2003 from the comparable quarter ended December 28, 2002.
Costs and Expenses
Food and beverage costs for the 13-week period ended December 27, 2003
as a percentage of total revenues stood at 25.8% compared to last year's 24.9%.
Increases in food cost, particularly beef, have had a negative effect on this
category of expenses.
-8-
Payroll expenses as a percentage of total revenues were 33.2% for the
13-week period ended December 27, 2003 as compared to 34.7% last year. Occupancy
expense as a percentage of total revenues were 16.1% during the quarter ended
December 27, 2003 compared to 16.5% for the 13-week period ended December 28,
2002. Other operating costs and expenses, as a percentage of total revenues were
12.6% for the 13-week period ended December 27, 2003 compared to 13.6% during
the first quarter of fiscal 2003. General and administrative expenses as a
percentage of total revenues were 5.4% in the first fiscal quarter of 2004
compared to 6.4% in last year's first fiscal quarter. Each of these costs
decreased as a percentage of total revenues due to the 8.6% increase in total
revenues during the first fiscal quarter of 2004. The Company expects to see
continued favorably trends in these expense items with increased sales.
Interest expense was $92,985 for the 13-week period ended December 27,
2003 compared to $222,121 for the 13-week period ended December 28, 2002. The
decrease is due to lower outstanding borrowings on the Company's credit
facility. As of December 27, 2003 the Company had borrowings of $7,775,000 on
its credit facility compared to $14,800,000 as of December 28, 2002.
Income Taxes
The provision for income taxes reflects Federal income taxes
calculated on a consolidated basis and state and local income taxes calculated
by each New York subsidiary on a non-consolidated basis. Most of the restaurants
owned or managed by the Company are owned or managed by separate subsidiaries.
For state and local income tax purposes, the losses incurred by a
subsidiary may only be used to offset that subsidiary's income, with the
exception of the restaurants operating in the District of Columbia. Accordingly,
the Company's overall effective tax rate has varied depending on the level of
losses incurred at individual subsidiaries.
The Company's overall effective tax rate in the future will be
affected by factors such as the level of losses incurred at the Company's New
York facilities, which cannot be consolidated for state and local tax purposes,
pre-tax income earned outside of New York City, the utilization of state and
local net operating loss carryforwards and the utilization of FICA tax credits.
Nevada has no state income tax and other states in which the Company operates
have income tax rates substantially lower in comparison to New York. In order to
utilize more effectively tax loss carry forwards at restaurants that were
unprofitable, the Company has merged certain profitable subsidiaries with
certain loss subsidiaries.
The Revenue Reconciliation Act of 1993 provides tax credits to the
Company for FICA taxes paid by the Company on tip income of restaurant service
personnel. The Company estimates that this credit will be approximately $500,000
in the 2004 fiscal year.
Liquidity and Resources of Capital
The Company's primary source of capital has been cash provided by
operations and funds available from its main bank, Bank Leumi USA. The Company
from time to time also utilizes equipment financing in connection with the
construction of a restaurant and seller financing in connection with the
acquisition of a restaurant. The Company utilizes capital primarily to fund the
cost of developing and opening new restaurants, acquiring existing restaurants
owned by others and remodeling existing restaurants owned by the Company.
The Company had a working capital deficit of $1,870,000 at December
27, 2003 as compared to a working capital deficit of $4,802,000 at September 27,
2003. The restaurant business does not require the maintenance of significant
inventories or receivables; thus the Company is able to operate with negative
working capital.
As of December 27, 2003 the Company's Revolving Credit and Term Loan
Facility (the "Facility") with its main bank (Bank Leumi USA), included a
$8,500,000 credit line to finance the development and construction of new
restaurants and for working capital purposes at the Company's existing
restaurants. The credit line has a maturity date of February 12, 2005. The
Company had borrowings of $7,775,000 outstanding on this Facility at December
27, 2003. The loan bears interest at 1/2% above the bank's prime rate and at
December 27, 2003 the interest rate on outstanding loans was 4.50%. The Facility
also includes a $500,000 letter of credit facility for use in lieu of lease
security deposits. The Company had delivered $245,000 in irrevocable letters of
credit on this Facility. The Company generally is required to pay commissions of
1 1/2% per annum on outstanding letters of credit.
The Company's subsidiaries each guaranteed the obligations of the
Company under the foregoing Facility and granted security interests in their
respective assets as collateral for such guarantees. In addition, the Company
pledged stock of such subsidiaries as collateral for obligations of the Company
under such Facility.
-9-
The Facility includes restrictions relating to, among other things,
indebtedness for borrowed money, capital expenditures, mergers, sale of assets,
dividends and liens on the property of the Company. The Facility also requires
the Company to comply with certain financial covenants at the end of each
quarter such as minimum cash flow in relation to the Company's debt service
requirements, ratio of debt to equity, and the maintenance of minimum
shareholders' equity. In December 2001 and April 2002, certain covenants in the
Facility were modified for fiscal 2002 and beyond. The Company violated a
covenant related to cash flow and a covenant related to consolidated indebteness
during the quarter ended December 27, 2003. The Company received a waiver
through February 9, 2003 from Bank Leumi USA for the covenants with which it was
not in compliance. The Company has historically received waivers for any
covenant violation.
In April 2000, the Company borrowed $1,570,000 from its main bank at
an interest rate of 8.8% to refinance the purchase of various restaurant
equipment at the Venetian. The note, which is payable in 60 equal monthly
installments through May 2005, is secured by such restaurant equipment. At
December 27, 2003 the Company had $517,000 outstanding on this note.
The Company entered into a sale and leaseback agreement with GE
Capital for $1,652,000 in November 2000 to refinance the purchase of various
restaurant equipment at its food and beverage facilities at the Aladdin hotel in
Las Vegas, Nevada. The lease bears interest at 8.65% per annum and is payable in
48 equal monthly installments of $31,785 until maturity in November 2004 at
which time the Company has an option to purchase the equipment for $519,440.
Alternatively, the Company can extend the lease for an additional 12 months at
the same monthly payment until maturity in November 2005 and repurchase the
equipment at such time for $165,242. The Company originally accounted for this
agreement as an operating lease and did not record the assets or the lease
liability in the financial statements. During the year ended September 29, 2001,
the Company recorded the entire amount payable under the lease as a liability of
$1,600,000 based on the anticipated abandonment of the Aladdin operations. In
2002, the operations at the Aladdin were abandoned and at December 27, 2003,
$780,000 remains in accrued expenses and other current liabilities representing
future operating lease payments.
Restaurant Expansion
Presently the Company is in construction to build fast food facilities
at two casino properties operated by the Seminole Indian Tribe in Tampa and
Hollywood, Florida. The Tampa property fast food facilities will have five
concepts while it is anticipated that the Hollywood fast food facilities will
have eight. The Company has partners in this venture who assumed the financial
risk. The Tampa operations are scheduled to open on March 1, 2004 followed by
Hollywood on April 15, 2004.
Recent Restaurant Dispositions
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, 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 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 $625,000. The
Company recorded a gain on the sale of approximately $225,000 during the first
quarter of fiscal 2004 which is included in losses from discountinued
operations. Net operating losses of $142,000 were recorded in discountinued
operations in the first quarter of 2004.
The Company's restaurant Ernie's, located on the upper west side of
Manhattan opened in 1982. As a result of a steady decline in sales, the Company
felt that a new concept was needed at this location. The restaurant was closed
June 16, 2003 and reopened in August 2003. Total conversion costs were
approximately $350,000. Sales at the new restaurant, La Rambla, failed to reach
the level sufficient to achieve the results the Company required. As a result,
the Company sold this restaurant on January 1, 2004. The Company realized a gain
on the sale of this restaurant of approximately $107,000. This gain will be
recorded in the second quarter of fiscal 2004. A net operating loss of $43,000
is included in income from discontinued operations during the first fiscal
quarter of 2004 as a result of the restaurant's classification of being held for
sale.
Terrorism, International Unrest and Decline in Tourism
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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.
Critical Accounting Policies
The preparation of financial statements requires the application of
certain accounting policies, which may require the Company to make estimates and
assumptions of future events. In the process of preparing its consolidated
financial statements, the Company estimates the appropriate carrying value of
certain assets and liabilities, which are not readily apparent from other
sources. The primary estimates underlying the Company's financial statements
include allowances for potential bad debts on accounts and notes receivable, the
useful lives and recoverability of its assets, such as property and intangibles,
fair values of financial instruments, the realizable value of its tax assets and
other matters. Management bases its estimates on certain assumptions, which they
believe are reasonable in the circumstances, and actual results, could differ
from those estimates. Although management does not believe that any change in
those assumptions in the near term would have a material effect on the Company's
consolidated financial position or the results of operation, differences in
actual results could be material to the financial statements.
The Company's critical accounting policies are described in the
Company's Form 10-K for the year ended September 27, 2003. There have been no
significant changes to such policies during fiscal 2003.
Recent Accounting Developments
The Financial Accounting Standards Board has recently issued the
following accounting pronouncements:
SFAS No. 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.
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
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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.
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 adoption of this standard did not
have a material effect on the Company's 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 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates
with respect to its outstanding credit agreement with its main bank, Bank Leumi
USA. Outstanding loans under the agreement bear interest at prime plus one-half
percent. Based upon an $7,775,000 (the outstanding balance at December 27, 2003)
term loan and a 100 basis point change in interest rates, annual interest
expense would change by $78,000.
Item 4. 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, as amended (the "Exchange Act")) are effective
as of December 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.
There were no changes in the Company's internal control over financial
reporting during the first quarter of fiscal year 2004 that materially affected
or are reasonably likely to materially affect the Company's internal control
over financial reporting.
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PART II
OTHER INFORMATION
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits
31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certificate of Chief Executive and Chief Financial Officers
(b) Reports on Form 8-K
A Current Report on Form 8-K with a report date of December 18, 2003
was filed during the first quarter of fiscal 2004 to provide the full text of
the press release announcing the Company's fourth quarter and full year
financial results for 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 10, 2004
ARK RESTAURANTS CORP.
By: /s/ Michael Weinstein
-----------------------
Michael Weinstein
President & Chief Executive Officer
By: /s/ Robert J. Stewart
-----------------------
Robert Stewart
Chief Financial Officer
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