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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 June 26, 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
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding shares at August 9, 2004
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(Common stock, $.01 par value) 3,419,899
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars and shares in Thousands)
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June 26, September 27,
2004 2003
---- ----
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 1,494 $ 486
Accounts receivable 3,391 1,677
Employee receivables 161 255
Inventories 1,921 1,997
Current portion of long-term receivables 210 193
Prepaid expenses and other current assets 466 886
Prepaid income taxes 638 --
Deferred income taxes 281 281
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Total current assets 8,562 5,775
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LONG-TERM RECEIVABLES 1,123 1,291
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FIXED ASSETS
Leasehold improvements 31,472 34,385
Furniture, fixtures and equipment 28,167 29,427
------- -------
59,639 63,812
Less accumulated depreciation and
amortization 35,525 36,748
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24,114 27,064
INTANGIBLE ASSETS, NET 3,728 3,988
DEFERRED INCOME TAXES 2,933 4,622
OTHER ASSETS 877 895
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TOTAL ASSETS $41,337 $43,635
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 4,418 $ 3,443
Accrued expenses and other current
liabilities 4,672 5,586
Accrued income taxes -- 1,198
Current maturities of long-term debt 342 350
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Total current liabilities 9,432 10,577
LONG-TERM DEBT - net of current maturities -- 7,226
OPERATING LEASE DEFERRED CREDIT 892 1,006
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TOTAL LIABILITIES 10,324 18,809
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share -
authorized, 10,000 shares;
issued, 5,461 and 5,249 shares 55 52
Additional paid-in capital 17,134 14,743
Treasury stock, 2,068 shares (8,351) (8,351)
Receivables from Employees from
stock option exercises (364) (655)
Retained earnings 22,539 19,037
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Total shareholders' equity 31,013 24,826
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $41,337 $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)
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13 Weeks Ended 39 Weeks Ended
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June 26, June 28, June 26, June 28,
2004 2003 2004 2003
---- ---- ---- ----
TOTAL REVENUES $33,767 $29,223 $85,252 $76,318
------- ------- ------- -------
COST AND EXPENSES:
Food and beverage cost of sales 8,542 7,258 21,848 18,842
Payroll expenses 9,823 9,039 27,119 25,326
Occupancy expenses 4,441 4,222 12,510 11,869
Other operating costs and expenses 4,031 3,546 10,408 9,535
General and administrative expenses 1,531 1,594 4,491 4,528
Depreciation and amortization expenses 853 1,028 2,901 3,051
------- ------- ------- -------
Total costs and expenses 29,221 26,687 79,277 73,151
------- ------- ------- -------
OPERATING INCOME 4,546 2,536 5,975 3,167
------- ------- ------- -------
OTHER (INCOME) EXPENSE:
Interest expense, net 55 183 98 520
Other income (172) (98) (496) (325)
------- ------- ------- -------
Total other (income) expense (117) 85 (398) 195
------- ------- ------- -------
Income from continuing operations
before income taxes 4,663 2,451 6,373 2,972
Provision for income taxes 1,632 657 2,231 773
------- ------- ------- -------
Income from continuing operations 3,031 1,794 4,142 2,199
------- ------- ------- -------
DISCONTINUED OPERATIONS:
Loss from operations of discountinued restaurants
(including gains on disposal of $332,000 for the (91) (239) (985) (897)
39-weeks ended 6/26/2004)
Benefit for income taxes (32) (64) (345) (233)
------- ------- ------- -------
Loss from discontinued operations (59) (175) (640) (664)
------- ------- ------- -------
NET INCOME $ 2,972 $ 1,619 $ 3,502 $ 1,535
======= ======= ======= =======
PER SHARE INFORMATION - BASIC AND DILUTED:
Continuing operations basic $ .90 $ .56 $ 1.26 $ .69
Discontinued operations basic $ (.02) $ (.05) $ (.20) $ (.21)
------- ------- ------- -------
Net basic $ .88 $ .51 $ 1.06 $ .48
======= ======= ======= =======
Continuing operations diluted $ .86 $ .56 $ 1.21 $ .69
Discontinued operations diluted $ (.02) $ (.06) $ (.19) $ (.21)
------- ------- ------- -------
Net diluted $ .84 $ .50 $ 1.02 $ .48
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES-BASIC 3,377 3,181 3,275 3,181
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES-DILUTED 3,509 3,216 3,417 3,197
======= ======= ======= =======
See notes to consolidated condensed financial statements.
-3-
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
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39 Weeks Ended
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June 26, June 28,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 4,142 $ 2,199
Adjustments to reconcile net income from continuing operations to net
cash provided by operating activities:
Deferred income taxes 1,689 --
Depreciation and amortization 2,901 3,151
Operating lease deferred credit 32 9
Changes in operating assets and liabilities:
Receivables (1,700) (281)
Employee receivables 94 92
Inventories (42) (72)
Prepaid expenses and other current assets 139 (206)
Prepaid income taxes (176) 209
Other assets 126 (59)
Accounts payable - trade 1,072 1,957
Accrued income taxes (1,198) --
Accrued expenses and other current liabilities (586) (768)
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Net cash provided by operating activities 6,493 6,231
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (1,362) (934)
Payments received on long-term receivables 151 121
------- -------
Net cash used in investing activities (1,211) (813)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt -- 1,100
Principal payments on long-term debt (7,234) (5,045)
Exercise of stock options 1,932 --
Proceeds from stock option receivables 291 18
------- -------
Net cash used in financing activities (5,011) (3,927)
------- -------
NET CASH PROVIDED BY CONTINUING OPERATIONS 271 1,491
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 737 (426)
------- -------
NET INCREASE IN CASH 1,008 1,065
CASH, Beginning of period 486 819
------- -------
CASH, End of period $ 1,494 $ 1,884
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 192 $ 428
======= =======
Income taxes $ 1,648 $ 125
======= =======
See notes to consolidated condensed financial statements
-4-
ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 26, 2004
(Unaudited)
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1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The consolidated condensed financial statements have been prepared by
Ark Restaurants Corp. (the "Company"), without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position at June 26, 2004, results of
operations for the 13-week and 39-week periods ended June 26, 2004 and June 28,
2003, and cash flows for the 39-week periods ended June 26, 2004 and June 28,
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 $784,000 and $19,000, respectively, during the 39-week and 13-week
periods ended June 26, 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 discontinued operations.
Net operating losses of $145,000 were recorded in discontinued operations in the
39-week period ended June 26, 2004. There were no additional expenses related to
this restaurant during the quarter ended June 26, 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
$123,000 were included in losses from discontinued operations during the during
the 39-week period ended June 26, 2004. Net operating losses of $7,000 were
recorded in discontinued operations during the 13-week period ended June 26,
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 $90,000 and $66,000 respectively, during the
39-week and 13-week periods ended June 26, 2004. These losses are included in
losses from discontinued operations.
-5-
3. LONG-TERM DEBT
As of June 26, 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 no borrowings outstanding on the Facility at June 26, 2004.
Borrowings on the Facility bear interest at 1/2% above the bank's prime rate.
The Facility also includes a $500,000 letter of credit facility for use in lieu
of lease security deposits. The Company had delivered $354,000 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 June 26,
2004. The Company received a waiver through September 29, 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 expired in May
2004.
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 $364,000 at June 26,
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 June 26, 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 dilutive securities consist of stock options and warrants.
For the 13-week period ended June 26, 2004 options to purchase 215,500
shares of common stock at a price range of $6.30 to $10.00 were included in
diluted earnings per share. For the 39-week period ended June 26, 2004, options
to purchase 390,500 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 and 39-week periods
ended June 28, 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.
During the quarter ended June 26, 2004 employees exercised options to
purchase 18,500 shares of common stock at a price of $10.00 and 19,000 shares of
common stock at a price of $6.30. The Company received $305,000 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 $157,000 during the period ended
June 26, 2004. Accordingly, the Company reduced its tax liability and increased
additional paid in capital for the same amount.
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
-6-
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. 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 June 26, 2004 and June 28, 2003.
The weighted-average assumptions used for the 13-week and 39-week
periods ended June 26, 2004 and June 28, 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)
----------------------------------------
13 Weeks ended 13 Weeks ended 39 Weeks ended 39 Weeks ended
June 26, 2004 June 28, 2003 June 26, 2004 June 28, 2003
Net income as reported $2,972 $1,619 $3,502 $1,535
Deduct stock based employee compensation expense
computed under the fair value method (19) (29) (57) (87)
------ ------ ------ ------
Net income - pro forma $2,953 $1,590 $3,445 $1,448
====== ====== ====== ======
Earnings per share as reported -net basic $ 0.88 $ 0.51 $ 1.06 $ 0.48
Earnings per share as reported - net diluted $ 0.84 $ 0.50 $ 1.02 $ 0.48
Earnings per share pro forma - net basic $ 0.87 $ 0.50 $ 1.05 $ 0.48
Earnings per share pro forma - net diluted $ 0.84 $ 0.49 $ 1.01 $ 0.45
7. RELATED PARTY TRANSACTIONS
Receivables due from officers and employees, excluding stock option
receivables, totaled $161,000 at June 26, 2004 and $255,000 at September 27,
2003. Such loans bear interest at the minimum statutory rate (1.46% at June 26,
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.
All revenue, cost and expense items associated with the disposition of
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."
-7-
Revenues
During the Company's third fiscal quarter of 2004, total revenues of
$33,767,000 increased 15.5% compared to total revenues of $29,223,000 in the
third fiscal quarter of 2003. Revenues for the third fiscal quarter of 2003 were
reduced by $2,630,000 as a result of the sale of three restaurants and the
closure of one restaurant and their reclassification to discontinued operations.
These items effecting net income are discussed below in "Costs and Expenses" and
"Recent Restaurant Dispositions". The Company had net income of $2,972,000 in
the third fiscal quarter of 2004 compared to net income of $1,619,000 in the
third fiscal quarter of 2003.
Same store sales in Las Vegas increased by $1,914,000 or 12.7 % in the
third fiscal quarter of 2004 compared to the third 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 $1,957,000 or 21.8% during the third
quarter as the New York market continued to show signs of recovery. Same store
sales in Washington D.C. increased by $882,000 or 17.9% during the third quarter
as tourism has shown improvement in that market. Company-wide same store sales
increased 16.4% for the third quarter.
During the Company's 39-week period ended June 26, 2004, total revenues
of $85,252,000 increased 11.7% compared to total revenues of $76,318,000 in the
39-week period ended June 28, 2003. Revenues for this 39-week period ended June
26, 2004 were reduced by $2,853,000 and revenues for the 39-week period ended
June 28, 2003 were reduced by $7,736,000 as a result of the sale or closure of
four restaurants and their reclassification to discontinued operations. The
Company had net income of $3,502,000 in the 39-week period ended June 26, 2004
compared to net income of $1,535,000 for the 39-week period ended June 28, 2003.
During this period, same store sales in Las Vegas increased by 12.8% compared to
the 39-week period ended June 28, 2003, while same store sales in New York and
Washington DC increased by 10.0% and 13.3% respectively.
Costs and Expenses
Food and beverage costs for the third quarter of 2004 as a percentage
of total revenues were 25.3% compared to 24.8% in the third quarter of 2003.
These costs for the 39-weeks ended June 26, 2004 as a percentage of total
revenues were 25.6% compared to 24.7% in the 39-week period ended June 28, 2003.
Strong sales during this period allowed the Company the opportunity to create
relationships with new suppliers and offset certain increased food costs during
this period.
Payroll expenses as a percentage of total revenues were 29.1% for the
third quarter of 2004 as compared to 30.9% in the third quarter of 2003. Payroll
expenses as a percentage of total revenues were 31.8% for the 39-week period
ended June 26, 2004 as compared to 33.2% in the 39-week period ended June 28,
2003. Due to the increase in sales during the Company's third 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 13.2%
during the third fiscal quarter of 2004 compared to 14.4% in the third quarter
of 2003. Occupancy expenses as a percentage of total revenues were 14.7% during
the 39-week period ended June 26, 2004 compared to 15.6% in the 39-week period
ended June 28, 2003. Other operating costs and expenses as a percentage of total
revenues were 11.9% for the third quarter of 2004 as compared to 12.1% in the
third quarter of 2003. These costs and expenses as a percentage of total
revenues were 12.2% for the 39-week period ended June 26, 2004 compared to 12.5%
during the 39-week period ended June 28, 2003. General and administrative
expenses as a percentage of total revenues were 4.5% in the third quarter of
2004 compared to 5.5% in last year's third quarter. These expenses as a
percentage of total revenues were 5.3% in the 39-week period ended June 26, 2004
compared to 5.9% in the 39-week period ended June 28, 2003. The decrease in
payroll, occupancy, other operating costs and expenses and general and
administrative expenses as a percentage of total revenues is primarily due to
the respective 16.5% and 12.0% increases in total revenues during the 13-week
and 39-week periods ended June 26, 2004. The Company expects to see continued
favorable trends in these and other expense items with increased sales.
Interest expense was $85,000 for the third quarter of 2004 compared to
$217,000 for the third quarter of 2003 and was $192,000 for the 39-week period
ended June 26, 2004 compared to $645,000 for the 39-week period ended June 28,
2003. The decrease is due to lower outstanding borrowings on the Company's
credit facility. As of June 26, 2004 the Company had no borrowings on its credit
facility compared to $11,200,000 as of June 28, 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.
-8-
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 $870,000 at June 26, 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 June 26, 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 no borrowings outstanding on the Facility at June 26, 2004. The loan
bears interest at 1/2% above the bank's prime rate. 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 a limitation on cash flow during the quarter ended June 26,
2004. The Company received a waiver through September 29, 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 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 collateralized by such restaurant equipment. At June 26,
2004, the Company had $342,000 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
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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
June 26, 2004, $622,000 remains in accrued expenses and other current
liabilities representing future operating lease payments.
During the 13-week period ended June 26, 2004, the Company issued
37,500 shares of common stock to various employees upon their exercise of
outstanding stock options. The Company realized proceeds of $305,000 from these
issuances of common stock. During the 39-week period ended June 26, 2004, the
Company issued 215,500 shares of common stock to various employees upon their
exercise of outstanding stock options. The Company realized proceeds of
$1,932,000 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 $784,000 and $19,000, respectively, during the 39-week and 13-week
periods ended June 26, 2004. These losses are included in losses from
discontinued operations. The Company also incurred a one-time charge of $470,000
during the second quarter ended March 27, 2004 related to pension plan
contributions required in connection with the closing of Lutece. Contributions
are 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 discontinued operations.
Net operating losses of $145,000 were recorded in discontinued operations in the
in the 39-week period ended June 26, 2004. There were no additional expenses
related to this restaurant during the quarter ended June 26, 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
$123,000 were included in losses from discontinued operations during the during
the 39-week period ended June 26, 2004. Net operating losses of $7,000 were
recorded in discontinued operations during the 13-week period ended June 26,
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 $90,000 and $66,000 respectively, during the
39-week and 13-week periods ended June 26, 2004. These losses are included in
losses from discontinued operations.
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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 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 would be exposed to market risk from changes in interest
rates with respect to any outstanding credit under its borrowing agreement with
Bank Leumi USA. The Company does not currently have any borrowings outstanding
under this agreement.
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 June 26, 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 third 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 May 11, 2004 was
filed during the third quarter of fiscal 2004 to provide the full text of the
press release announcing the Company's second 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: August 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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