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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 March 27, 2004
Commission file number 0-14030
ARK RESTAURANTS CORP.
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(Exact name of registrant as specified in its charter)
New York 13-3156768
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
85 Fifth Avenue, New York, New York 10003
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(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 April 29, 2004
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(Common stock, $.01 par value) 3,382,399
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars and shares in Thousands)
March 27, September 27,
2004 2003
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ASSETS (unaudited)
CURRENT ASSETS:
Cash $ 251 $ 486
Accounts receivable 1,810 1,677
Employee receivables 218 255
Inventories 1,820 1,997
Current portion of long-term receivables 202 193
Prepaid expenses and other current assets 1,097 886
Prepaid income taxes 117 --
Deferred income taxes 281 281
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Total current assets 5,796 5,775
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LONG-TERM RECEIVABLES 1,176 1,291
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FIXED ASSETS
Leasehold improvements 31,424 34,385
Furniture, fixtures and equipment 27,677 29,427
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59,101 63,812
Less accumulated depreciation and
amortization 34,671 36,748
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24,430 27,064
INTANGIBLE ASSETS, NET 3,992 3,988
DEFERRED INCOME TAXES 4,494 4,622
OTHER ASSETS 972 895
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TOTAL ASSETS $40,860 $43,635
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 3,661 $ 3,443
Accrued expenses and other current
liabilities 5,545 5,586
Accrued income taxes -- 1,198
Current maturities of long-term debt 3,291 350
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Total current liabilities 12,497 10,577
LONG-TERM DEBT - net of current maturities 64 7,226
OPERATING LEASE DEFERRED CREDIT 852 1,006
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TOTAL LIABILITIES 13,413 18,809
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share -
authorized, 10,000 shares; issued,
5,424 and 5,249 shares 55 52
Additional paid-in capital 16,692 14,743
Treasury stock, 2,068 shares (8,351) (8,351)
Receivables from Employees from stock
option exercises (427) (655)
Retained earnings 19,478 19,037
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Total shareholders' equity 27,447 24,826
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $40,860 $43,635
======= =======
See notes to consolidated condensed financial statements.
-2-
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands, Except per share amounts)
13 Weeks Ended 26 Weeks Ended
--------------------- ---------------------
March 27, March 29, March 27, March 29,
2004 2003 2004 2003
--------- --------- --------- ---------
TOTAL REVENUES $25,732 $23,392 $51,485 $47,055
------- ------- ------- -------
COST AND EXPENSES:
Food and beverage cost of sales 6,692 5,715 13,306 11,584
Payroll expenses 8,751 8,111 17,297 16,287
Occupancy expenses 3,962 3,751 8,069 7,647
Other operating costs and expenses 3,143 2,862 6,376 5,989
General and administrative expenses 1,487 1,344 2,960 2,934
Depreciation and amortization expenses 1,039 1,017 2,048 2,023
------- ------- ------- -------
Total costs and expenses 25,074 22,800 50,056 46,464
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OPERATING INCOME 658 592 1,429 591
------- ------- ------- -------
OTHER (INCOME) EXPENSE:
Interest expense, net 54 122 113 337
Other income (171) (1) (256) (267)
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Total other (income) expense (117) 121 (143) 70
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Income from continuing operations
before income taxes 775 471 1,572 521
Provision for income taxes 271 179 550 198
------- ------- ------- -------
Income from continuing operations 504 292 1,022 323
DISCONTINUED OPERATIONS:
Loss from operations of discountinued restaurants
(including gains on disposal of $108,000 for the
13-weeks ended 3/27/2004 and $332,000 for the
26-weeks ended 3/27/2004, respectively) (951) (422) (893) (659)
Benefit for income taxes (333) (160) (312) (251)
------- ------- ------- -------
Loss from discontinued operations (618) (262) (581) (408)
NET INCOME (LOSS) $ (114) $ 30 $ 441 $ (85)
======= ======= ======= =======
PER SHARE INFORMATION - BASIC AND DILUTED:
Continuing operations basic $ .15 $ .09 $ .32 $ .10
Discountinued operations basic $ (.19) $ (.08) $ (.18) $ (.13)
------- ------- ------- -------
Net basic $ (.04) $ .01 $ .14 $ (.03)
======= ======= ======= =======
Continuing operations diluted $ .15 $ .09 $ .30 $ .10
Discontinued operations diluted $ (.19) $ (.08) $ (.17) $ (.13)
------- ------- ------- -------
Net diluted $ (.04) $ .01 $ .13 $ (.03)
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES-BASIC 3,267 3,181 3,224 3,181
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES-DILUTED 3,267 3,188 3,371 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)
26 Weeks Ended
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March 27, March 29,
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 1,022 $ 323
Adjustments to reconcile net income from continuing operations
to net cash provided by (used in) operating activities:
Deferred income taxes 128 --
Depreciation and amortization 2,048 2,023
Operating lease deferred credit (7) 9
Changes in operating assets and liabilities:
Receivables (112) (60)
Employee receivables 37 91
Inventories 59 (39)
Prepaid expenses and other current assets (497) (428)
Prepaid income taxes 187 (307)
Other assets (213) (62)
Accounts payable - trade 309 (551)
Accrued income taxes (1,198) --
Accrued expenses and other current liabilities 239 (1,666)
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Net cash provided by (used in) operating activities 2,002 (667)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (872) (592)
Payments received on long-term receivables 106 72
------- -------
Net cash used in investing activities (766) (520)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt -- 1,778
Principal payments on long-term debt (4,221) (836)
Exercise of stock options 1,648 --
Proceeds from stock option receivables 228 10
------- -------
Net cash provided by (used in) in financing activities (2,345) 952
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NET CASH USED IN CONTINUING OPERATIONS (1,109) (235)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 874 7
------- -------
NET DECREASE IN CASH (235) (228)
CASH, Beginning of period 486 819
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CASH, End of period $ 251 $ 591
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 113 $ 428
======= =======
Income taxes $ 1,198 $ 125
======= =======
See notes to consolidated condensed financial statements.
-4-
ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 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 March 27, 2004, results of operations
for the 13-week and 26-week periods ended March 27, 2004 and March 29, 2003, and
cash flows for the 26-week periods ended March 27, 2004 and March 29, 2003, have
been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States 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. 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 fiscal 2003. Due
to continued weak sales, the Company closed Lutece during the second quarter of
2004. The Company recorded net operating losses of $765,000 and $691,000,
respectively, during the 26-week and 13-week periods ended March 27, 2004. These
losses are included in losses from discontinued operations. The Company also
incurred a one-time charge of $470,000 related to pension plan contributions
required in connection with the closing of Lutece which is payable monthly over
a nine year period beginning May 17, 2004 and bears interest at a rate of
8% per annum.
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 $145,000 were recorded in discontinued
operations in the 26-week period ended March 27, 2004. Net operating losses of
$2,000 were recorded in losses from discontinued operations during the quarter
ended March, 27, 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 and realized a gain on the
sale of this restaurant of approximately $107,000. Net operating losses of
$116,000 were included in losses from discontinued operations during the during
the 26-week period ended March 27, 2004. Net operating losses of $55,000 were
recorded in discontinued operations during the 13-week period ended March 27,
2004.
The Company's restaurant Jack Rose located on the west side of Manhattan
has experienced weak sales for several years. In addition, this restaurant did
not fit the Company's desired profile of being in a landmark destination
location. As a result, the Company sold this restaurant on February 23, 2004.
The Company realized a loss on the sale of this restaurant of $175,000 which was
recorded during the second quarter of fiscal 2004. The Company recorded net
operating losses of $24,000 and $156,000, respectively, during the 26-week and
13-week periods ended March 27, 2004. These losses are included in losses from
discontinued operations.
-5-
3. LONG-TERM DEBT
As of March 27, 2004 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
$2,925,000 outstanding on this facility at March 27, 2004. The loan bears
interest at 1/2% above the bank's prime rate and at March 27, 2004 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 during the quarter ended March 27,
2004. The Company received a waiver through June 26, 2004 from Bank Leumi USA
for the covenant 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 March 27, 2004 the maximum potential amount of future payments
the Company could be required to make as a result of the Guaranty was $175,000.
4. 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 $427,000 at March 27, 2004 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 March 27, 2004).
5. 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 March 27, 2004 options to purchase 320,000
shares of common stock at a price range of $6.30 to $10.00 were not included in
diluted earnings per share as their impact was antidilutive. For the 26-week
period ended March 27, 2004, options to purchase 320,000 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 March 29, 2003, options to purchase 215,000 shares
of common stock at a price of $6.30 were included in diluted earnings per share.
Options to purchase 178,000 shares of common stock at a price range of $7.50 to
$10.00 were not included as their impact was antidilutive. For the 26-week
period ended March 29, 2003, options to purchase 393,000 shares of common stock
at a price range of $6.30 to $10.00 were not included as their impact was
antidilutive.
During the quarter ended March 27, 2004 employees exercised options to
purchase 147,000 shares of common stock at a price of $10.00 and 28,000 shares
of common stock at a price of $6.30. The Company received $1,648,000 as a result
of the exercise of these options. In accordance with the exercise of the stock
options, the Company derived a tax benefit of $304,000 during the period ended
March 27, 2004. Accordingly, the Company reduced its tax liability and increased
additional paid in capital for the same amount.
-6-
6. 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 March 27, 2004 and March 29, 2003.
The weighted-average assumptions used for the 13-week and 26-week periods
ended March 27, 2004 and March 29, 2003 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.
The pro forma impact is as follows:
(in Thousands, Except per Share Amounts)
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13 Weeks ended 13 Weeks ended 26 Weeks ended 26 Weeks ended
March 27, 2004 March 29, 2003 March 27, 2004 March 29, 2003
-------------- -------------- -------------- --------------
Net income (loss) as reported $ (114) $ 30 $ 441 $ (85)
Deduct stock based employee compensation expense
computed under the fair value method $ (19) $ (28) $ (39) $ (55)
Net income (loss) - pro forma $ (133) $ 2 $ 402 $ (140)
Earnings (loss) per share as reported - net basic $(0.04) $0.01 $0.14 $(0.03)
Earnings (loss) per share as reported - net
diluted $(0.04) $0.01 $0.12 $(0.04)
Earnings (loss) per share pro forma - net basic $(0.04) $0.00 $0.12 $(0.04)
Earnings (loss) per share pro forma - net diluted $(0.04) $0.00 $0.12 $(0.04)
7. RELATED PARTY TRANSACTIONS
Receivables due from officers and employees, excluding stock option
receivables, totaled $218,000 at March 27, 2004 and $255,000 at September 27,
2003. Such loans bear interest at the minimum statutory rate (1.58% at March 27,
2004).
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.
During the Company's second fiscal quarter ended March 27, 2004, the
Company sold or disposed of three restaurants. All revenue, cost and expense
items associated with these restaurants for the relevant periods of fiscal 2004
and 2003 have been reclassified in the Company's financial statements to
discontinued operations. These dispositions are discussed below in "Recent
Restaurant Dispositions."
Revenues
During the Company's second fiscal quarter of 2004, total revenues of
$25,732,000 increased 10.0% compared to total revenues of $23,392,000 in the
second fiscal quarter of 2003. Revenues for the second fiscal quarter of 2004
were reduced
-7-
by $481,000 and revenues for the second fiscal quarter of 2003 were
reduced by $2,610,000 as a result of the sale of three restaurants and the
closure of one restaurant and their reclassification to discontinued operations.
The Company had a net loss of $114,000 in the second fiscal quarter of 2004
compared to net income of $30,000 in the second fiscal quarter of 2003. Net
income was positively effected in the second fiscal quarter of 2003 due to the
recovery during this period of $366,000 in insurance proceeds for repairs to The
Grill Room, a restaurant located in the World Financial Center, which was
damaged in the attack on the World Trade Center on September 11, 2001, while net
income during the second fiscal quarter of 2004 was negatively effected by a
one-time charge of $470,000 related to pension plan contributions required in
connection with the closing of the Company's Lutece restaurant in New York City.
These items effecting net income are discussed below in "Costs and Expenses" and
"Recent Restaurant Dispositions".
Same store sales in Las Vegas increased by $1,735,000 or 11.1% in the
second fiscal quarter of 2004 compared to the second fiscal quarter of 2003 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 increased $301,000 or 5.7% during the second
quarter as the New York market showed signs of recovery. Same store sales in
Washington D.C. increased by $314,000 or 13.1% during the second quarter as
tourism has shown improvement in that market. Company-wide same store sales
increased 10.1% for the second quarter.
During the Company's 26-week period ended March 27, 2004, total revenues of
$51,485,000 increased 9.4% compared to total revenues of $47,055,000 in the
26-week period ended March 29, 2003. Revenues for this 26-week period ended
March 27, 2004 were reduced by $2,872,000 and revenues for the 26-week period
ended March 29, 2003 were reduced by $5,238,000 as a result of the sale or
closure of four restaurants and their reclassification to discontinued
operations. The Company had net income of $441,000 in the 26-week period ended
March 27, 2004 compared to a net loss of $85,000 for the 26-week period ended
March 29, 2003. Net income during these periods were likewise effected due to
the insurance recovery and required pension plan contributions discussed above.
During this period, same store sales in Las Vegas increased by 11.7% compared to
the 26-week period ended March 29, 2003, while same store sales in New York and
Washington DC increased by 1.6% and 9.1% respectively.
Costs and Expenses
Food and beverage costs for the second quarter of 2004 as a percentage of
total revenues were 26.0% compared to 24.4% in the second quarter of 2003. These
costs for the 26-weeks ended March 27, 2004 as a percentage of total revenues
were 25.8% compared to 24.6% in the 26-week period ended March 29, 2003.
Increased food costs during this period had a negative effect on this category
of expenses. Although the Company had not raised the price of menu items offered
to its customers for several years due to business conditions, the impact of the
increase in food costs has caused the Company to review the price of menu items
offered to its customers. The Company has determined to increase the price of
menu items offered to its customers and the impact of these price increases will
be realized in the later half of the third quarter of 2004 in specific locations
where the Company believes consumer demand has created some elasticity.
Payroll expenses as a percentage of total revenues were 34.0% for the
second quarter of 2004 as compared to 34.7% in the second quarter of 2003.
Payroll expenses as a percentage of total revenues were 33.6% for the 26-week
period ended March 27, 2004 as compared to 34.6% in the 26-week period ended
March 29, 2003. Due to the increase in sales during the Company's second fiscal
quarter of 2004, the Company had increased its payroll expenses incrementally
during this same period. The Company continually evaluates its payroll expenses
as they relate to sales. Occupancy expenses as a percentage of total revenues
were 15.4% during the second fiscal quarter of 2004 compared to 16.0% in the
second quarter of 2003. Occupancy expenses as a percentage of total revenues
were 15.7% during the 26-week period ended March 27, 2004 compared to 16.3% in
the 26-week period ended March 29, 2003. Other operating costs and expenses as a
percentage of total revenues were 12.2% for the second quarter of 2004, which is
the same percentage as in the second quarter of 2003. These costs and expenses
as a percentage of total revenues were 12.4% for the 26-week period ended March
27, 2004 compared to 12.7% during the 26-week period ended March 29, 2003. These
expenses increased $470,000 during the second fiscal quarter of 2004 due to a
one-time expense related to pension plan contributions the Company is required
to make in connection with the closing of the Company's Lutece restaurant in New
York City. In contrast, these expenses were decreased by $366,000 during the
second quarter of 2003 due to insurance proceeds recovered by the Company for
repairs to The Grill Room, a restaurant located in the World Financial Center,
which was damaged in the attack on the World Trade Center on September 11, 2001.
General and administrative expenses as a percentage of total revenues were 5.8%
in the second quarter of 2004 compared to 5.7% in last year's second quarter.
These expenses as a percentage of total revenues were 5.7% in the 26-week period
ended March 27, 2004 compared to 6.2% in the 26-week period ended March 29,
2003. The decrease in payroll, occupancy and other operating costs and expenses
as a percentage of total revenues is primarily due to the respective 10.0% and
9.4% increases in total revenues during the 13-week and 26-week periods ended
March 27, 2004. The Company expects to see continued favorable trends in these
and other expense items with increased sales.
-8-
Interest expense was $85,000 for the second quarter of 2004 compared to
$206,000 for the second quarter of 2003 and was $178,000 for the 26-week period
ended March 27, 2004 compared to $428,000 for the 26-week period ended March 29,
2003. The decrease is due to lower outstanding borrowings on the Company's
credit facility. As of March 27, 2004 the Company had borrowings of $2,925,000
on its credit facility compared to $16,008,000 as of March 29, 2003.
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 $6,701,000 at March 27, 2004
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 March 27, 2004 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
$2,925,000 outstanding on this Facility at March 27, 2004. The loan bears
interest at 1/2% above the bank's prime rate and at March 27, 2004 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.
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 March 27,
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2004. The Company received a waiver through May 11, 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 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 March 27, 2004 the
Company had $430,000 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 March 27, 2004, $717,000 remains
in accrued expenses and other current liabilities representing future operating
lease payments.
During the 26-week period ended March 27, 2004 the Company issued 175,000
shares of common stock to various employees upon their exercise of outstanding
stock options. The Company realized proceeds of $1,646,000 from these issuances
of common stock.
Restaurant Expansion
The Company has committed to build and operate fast food facilities at two
casino properties operated by the Seminole Indian Tribe in Tampa and Hollywood,
Florida. On February 27, 2004 the Company opened five fast food facilities at
the Tampa property. On May 7, 2004 the Company opened eight fast food facilities
at the Hollywood property. The Company has partners in this venture who assumed
the financial risk.
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 fiscal 2003. Due
to continued weak sales, the Company closed Lutece during the second quarter of
2004. The Company recorded net operating losses of $765,000 and $691,000,
respectively, during the 26-week and 13-week periods ended March 27, 2004. These
losses are included in losses from discontinued operations. The Company also
incurred a one-time charge of $470,000 related to pension plan contributions
required in connection with the closing of Lutece which is payable monthly over
a nine year period beginning May 17, 2004 and bears interest at a rate of
8% per annum.
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 $145,000 were recorded in discountinued
operations in the in the 26-week period ended March 27, 2004. Net operating
losses of $2,000 were recorded in losses from discontinued operations during the
quarter ended March, 27, 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 and realized a gain on the
sale of this restaurant of approximately $107,000. Net operating losses
of $116,000 were included in losses from discontinued operations during the
during the 26-week period ended March 27, 2004. Net operating losses of $55,000
were recorded in discountinued operations during the 13-week period ended March
27, 2004.
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The Company's restaurant Jack Rose located on the west side of Manhattan
has experienced weak sales for several years. In addition, this restaurant did
not fit the Company's desired profile of being in a landmark destination
location. As a result, the Company sold this restaurant on February 23, 2004.
The Company realized a loss on the sale of this restaurant of $175,000 which was
recorded during the second quarter of fiscal 2004. The Company recorded net
operating losses of $24,000 and $156,000 respectively, during the 26-week and
13-week periods ended March 27, 2004. These losses are included in losses from
discontinued operations.
Terrorism, International Unrest and Decline in Tourism
The terrorist attacks on the World Trade Center in New York and the
Pentagon in Washington, D.C. on September 11, 2001 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 2004.
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
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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 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 a $2,925,000 (the outstanding balance at March 27, 2004)
term loan and a 100 basis point change in interest rates, annual interest
expense would change by $29,256.
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 March 27, 2004 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 second 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 4 - Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on March 11, 2004. The
following matters were submitted to a vote of the Company's stockholders:
(i) The election of seven directors;
(ii) The approval of the Company's 2004 Stock Option Plan; and
(iii) The ratification of the appointment of JH Cohn LLP as independent
auditors for the 2004 fiscal year.
The Company's stockholders elected a Board of Directors consisting of Ernest
Bogen, Michael Weinstein, Robert Towers, Bruce Lewin, Marcia Allen, Paul Gordon
and Steven Shulman. Each director received at least 90% of the votes cast at the
meeting.
The Company's stockholders approved the Company's 2004 Stock Option Plan by a
vote of 1,574,981 for, 470,062 against, 1,023,537 non-votes and 750 abstentions.
The Company's stockholders ratified the Board of Director's appointment of JH
Cohn LLP as the Company's independent auditors for the 2004 fiscal year by a
vote of 3,063,670 for, 5,010 against and 650 abstentions.
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 February 9, 2004 was
filed during the second quarter of fiscal 2004 to provide the full text of the
press release announcing the Company's first quarter financial results for 2004.
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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: May 11, 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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