10-Q 1 a33190.txt ARK RESTAURANTS CORP. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 29, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 0-14030 ARK RESTAURANTS CORP. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New York 13-3156768 --------------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 85 Fifth Avenue, New York, New York 10003 ---------------------------------------- ----------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 206-8800 -----------------------
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- Indicate 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 12, 2002 ---------------------------- ------------------------------------- (Common stock, $.01 par value) 3,181,299
ARK RESTAURANTS CORP. AND SUBSIDIARIES --------------------------------------------------------------------------- INDEX ---------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION: Page ---- Item 1. Consolidated Financial Statements: Consolidated Condensed Balance Sheets - June 29, 2002 (Unaudited) and September 29, 2001 3 Consolidated Condensed Statements of Operations and Retained Earnings - 13-week periods ended June 29, 2002 (Unaudited) and June 30, 2001 (Unaudited) and 39-week periods ended June 29, 2002 (Unaudited) and June 30, 2001 (Unaudited) 4 Consolidated Condensed Statements of Cash Flows - 39-week periods ended June 29, 2002 (Unaudited) and June 30, 2001 (Unaudited) 5 Notes to Consolidated Condensed Financial Statements (Unaudited) 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-15 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 PART II - OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K 16
2 Part I - Financial Information Item 1. Financial Statements ARK RESTAURANTS CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in Thousands) -------------------------------------------------------------------------------
June 29, September 29, 2002 2001 -------- -------- ASSETS (unaudited) ------ CURRENT ASSETS: Cash and cash equivalents $ 282 $ -- Accounts receivable 2,565 2,273 Inventories 1,953 2,110 Current portion of long-term receivables 153 203 Prepaid expenses and other current assets 785 655 Refundable and prepaid income taxes -- 1,119 Deferred income taxes 278 278 -------- -------- Total current assets 6,016 6,638 LONG-TERM RECEIVABLES 992 1,082 FIXED ASSETS - At Cost: Leasehold improvements 33,699 33,699 Furniture, fixtures and equipment 28,242 27,972 Leasehold improvements in progress 268 93 -------- -------- 62,209 61,764 Less accumulated depreciation and amortization 30,626 27,035 -------- -------- 31,583 34,729 INTANGIBLE ASSETS - Less accumulated amortization of $3,837 and $3,589 3,927 4,175 DEFERRED INCOME TAXES 5,857 6,056 OTHER ASSETS 342 395 -------- -------- TOTAL ASSETS $ 48,717 $ 53,075 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable - trade $ 3,528 $ 4,232 Accrued income taxes 117 -- Accrued expenses and other current liabilities 5,397 6,744 Current maturities of long-term debt 7,036 2,247 -------- -------- Total current liabilities 16,078 13,223 LONG-TERM DEBT - net of current maturities 11,851 21,700 OPERATING LEASE DEFERRED CREDIT 995 995 COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY: Common stock, par value $.01 per share - authorized, 10,000 shares; issued, 5,249 shares 52 52 Additional paid-in capital 14,743 14,743 Treasury stock, 2,068 shares (8,351) (8,351) Receivables from Employees in respect of stock option exercises (760) (776) Retained earnings 14,109 11,489 -------- -------- Total shareholders' equity 19,793 17,157 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 48,717 $ 53,075 ======== ========
See notes to consolidated condensed financial statements 3 ARK RESTAURANTS CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Unaudited) (In Thousands, Except per share amounts) --------------------------------------------------------------------------------
13 Weeks Ended 39 Weeks Ended -------------------------- -------------------------- June 29, June 30, June 29, June 30, 2002 2001 2002 2001 -------- -------- -------- -------- TOTAL REVENUES $33,331 $36,931 $85,545 $96,423 COST & EXPENSES: Food & beverage cost of sales 8,378 9,247 21,463 24,450 Payroll expenses 10,232 11,913 27,861 33,777 Occupancy expenses 4,674 4,772 12,852 13,518 Other operating costs and expenses 3,948 4,079 9,880 11,333 General and administrative expenses 1,586 1,831 4,517 5,133 Depreciation and amortization expenses 1,220 1,476 3,911 4,396 Joint venture losses - - - 150 ------- ------- ------- ------- Total costs and expenses 30,038 33,318 80,484 92,757 OPERATING INCOME 3,293 3,613 5,061 3,666 -------- ------- ------- ------- OTHER (INCOME) EXPENSE: Interest expense, net 264 526 879 1,858 Other income (35) (71) (193) (100) ------- ------- ------- ------- Total other (income) expense 229 455 686 1,758 ------- ------- ------- ---------- INCOME before provision for income taxes 3,064 3,158 4,375 1,908 PROVISION for income taxes 1,229 1,200 1,755 725 ------- ------- ------- ------- NET INCOME 1,835 1,958 2,620 1,183 RETAINED EARNINGS, Beginning of period 12,274 17,562 11,489 18,337 ------- ------- ------- ------- RETAINED EARNINGS, End of period $14,109 $19,520 $14,109 $19,520 ======= ======= ======= ======= PER SHARE INFORMATION - BASIC & DILUTED: NET INCOME BASIC $.58 $.62 $.82 $.37 ==== ==== ==== ==== NET INCOME DILUTED $.57 $.62 $.82 $.37 ==== ==== ==== ==== WEIGHTED AVERAGE NUMBER OF SHARES-BASIC 3,181 3,182 3,181 3,182 ====== ====== ====== ====== WEIGHTED AVERAGE NUMBER OF SHARES-DILUTED 3,216 3,183 3,199 3,182 ====== ====== ====== ======
See notes to consolidated condensed financial statements 4 ARK RESTAURANTS CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in Thousands) --------------------------------------------------------------------------------
39 Weeks Ended ---------------------------- June 29, June 30, 2002 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $2,620 $ 1,183 Adjustments to reconcile net income to net cash provided by operating activities: Write-off of joint venture advances - 150 Depreciation and amortization of fixed assets 3,591 4,075 Amortization of intangibles 248 321 Deferred income taxes 199 - Changes in assets and liabilities: Accounts receivable (292) (47) Inventories 157 (118) Prepaid expenses and other current assets (130) (526) Refundable and prepaid income taxes 1,119 433 Other assets 53 (210) Accounts payable - trade (704) (987) Accrued income taxes 117 - Accrued expenses and other current liabilities (1,347) (2,536) ------- ------- Net cash provided by operating activities 5,631 1,738 ------ ------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to fixed assets, net (445) (2,453) Issuance of long-term receivables (70) (74) Payments received on long-term receivables 209 1,127 ------ ------- Net cash (used) in investing activities (306) (1,400) ------ -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of long-term debt 1,500 4,100 Principal payment on long-term debt (6,559) (6,584) Proceeds from sale leaseback - 1,559 Payment of accounts receivables from stockholders 16 - Purchase of treasury stock - (2) ------ ------- Net cash (used) in financing activities (5,043) (927) ------ ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 282 (589) CASH AND CASH EQUIVALENTS, beginning of period - 697 ------ ------- CASH AND CASH EQUIVALENTS, end of period $ 282 $ 108 ====== ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during year for: Interest $ 681 $ 1,969 ====== ======= Income taxes $ 187 $ 492 ====== =======
See notes to consolidated condensed financial statements. 5 ARK RESTAURANTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (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 June 29, 2002 and results of operations and cash flows for the periods ended June 29, 2002 and June 30, 2001 have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended September 29, 2001. The results of operations for the periods ended June 29, 2002 are not necessarily indicative of the operating results for the full year. Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation. 2. IMPACT OF NEW ACCOUNTING STANDARDS SFAS No. 142, Goodwill and Other Intangible Assets, addresses financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and some intangible assets will no longer be amortized, but rather reviewed for impairment on a periodic basis. Impairment losses for goodwill and certain intangible assets that arise due to the initial application of this Statement are to be reported as resulting from a change in accounting principle. The provisions of this Statement will be applied at the beginning of the Company's 2003 fiscal year. The Company is in the process of evaluating the financial statement impact from adopting this standard. SFAS No. 143, Accounting for Asset Retirement Obligations, requires the recording of the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The Statement is effective for the Company at the beginning of fiscal year 2004. The Company does not expect the adoption of this standard to have a material impact on the Company's financial position or results of operations. 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 Statement is effective for the Company at the beginning of fiscal year 2003. The Company is in the process of evaluating the financial statement impact of this standard. SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, was issued in April 2002. SFAS 145 rescinds SFAS 4 and 64, which required gains and losses from 6 extinguishments of debt to be classified as extraordinary items. SFAS 145 also rescinds SFAS 44 since the provisions of the Motor Carrier Act of 1980 are complete. SFAS 145 also amends SFAS 13 eliminating inconsistencies in certain sale-leaseback transactions. The provisions of SFAS 145 are effective for fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented shall be reclassified. The Company does not expect that the adoption of SFAS 145 will have a material effect on the Company's financial position or results of operations. SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued in July 2002. SFAS No. 146 replaces current accounting literature and requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. The provisions of the Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not anticipate the adoption of this statement will have a material effect on the Company's financial statements. 3. EFFECTS OF THE SEPTEMBER 11th, 2001 TERRORISTS ATTACKS One Company restaurant, the Grill Room, suffered some damage. The restaurant is located in 2 World Financial Center, an office building adjacent to the World Trade Center site. The Grill Room will likely not reopen until late in fiscal 2002, or early fiscal 2003, due to the damage sustained by the office building. Several other restaurants were also closed from several days to a month due to their proximity to the World Trade Center. The Company has extensive property and business interruption insurance policies and the Company ultimately expects to recover a significant portion of its physical costs and business interruption losses at these restaurants. The Company has recorded $450,000 as a reduction of other operating costs and expenses for the thirty-nine week period ended June 29, 2002 for partial insurance recoveries of certain out of pocket costs and business interruption losses incurred. Additional recoveries are expected in future quarters as the assessment of the damages is finalized. The Company believes that its restaurant and food court operations at Desert Passage which adjoins the Aladdin Casino Resort in Las Vegas, Nevada (the "Aladdin") were significantly impaired by the events of September 11th. The restaurant and food court operations experienced severe sales declines in the aftermath of September 11th and the Aladdin declared bankruptcy on September 28, 2001. The Company determined that an impairment analysis under SFAS No. 121 needed to be performed. Based upon the sum of the future undiscounted cash flows related to the Company's long-lived assets at the Aladdin, the Company determined that impairment had occurred. To estimate the fair value of such long-lived assets, for determining the impairment amount, the Company used the expected present value of the future cash flows. The Company projected continuing negative operating cash flow for the foreseeable future with no value for subletting or assigning the lease for the premises. The Company believes that the lease will be abandoned or terminated. Therefore, the Company determined that there was no value to such long-lived assets. The Company had an investment of $8,445,000 in leasehold improvements, and furniture, fixtures and equipment. The Company believes that these assets would have nominal, if any, value upon disposal. In addition, the estimated future payments under the lease for kitchen equipment at the location totaled $1,600,000. The Company recorded in the fiscal year ended 7 September 29, 2001 an impairment charge of $8,445,000 for the net book value of the assets and recorded an additional $1,600,000 of expense and liability for the future lease payments. 4. LONG-TERM DEBT As of June 29, 2002 the Company's Revolving Credit and Term Loan Facility (the "Facility") with its main bank (Bank Leumi USA), as amended in November 2001, December 2001 and April 2002, included a $26,000,000 credit line to finance the development and construction of new restaurants and for working capital purposes at the Company's existing restaurants. The Company had borrowings of $17,890,000 outstanding on this Facility at June 29, 2002. On July 1, 2002, the Facility converted into a term loan payable in 36 monthly installments. The loan bears interest at 1/2% above the bank's prime rate and at June 29, 2002 the interest rate on outstanding loans was 5.25%. The Facility also includes a $1,000,000 letter of credit facility for use in lieu of lease security deposits. The Company had delivered $389,000 in irrevocable letters of credit on this Facility. The Company generally is required to pay commissions of 1 1/2% per annum on outstanding letters of credit. The Company's subsidiaries each guaranteed the obligations of the Company under the foregoing Facility and granted security interests in their respective assets as collateral for such guarantees. In addition, the Company pledged stock of such subsidiaries as security for obligations of the Company under such Facility. The Facility includes restrictions relating to, among other things, indebtedness for borrowed money, capital expenditures, mergers, sale of assets, dividends and liens on the property of the Company. The Facility also requires the Company to comply with certain financial covenants at the end of each quarter such as minimum cash flow in relation to the Company's debt service requirements, ratio of debt to equity, and the maintenance of minimum shareholders' equity. In December 2001, the Company received a waiver for covenants that the Company was not in compliance with at September 29, 2001. In December 2001 and April 2002, certain covenants in the Facility were modified for fiscal 2002 and beyond. In August 2002, the Company received a waiver for the one covenant that the Company was not in compliance with at June 29, 2002, which waiver is valid for the twelve month period through and including September 27, 2002. 5. RECEIVABLES FROM EMPLOYEES IN RESPECT OF STOCK OPTION EXERCISES Receivables from employees in respect of stock option exercises includes amounts due from officers and directors totaling $717,000 at June 29, 2002 and September 29, 2001, respectively. Such amounts which are due from the exercise of stock options in accordance with the Company's Stock Option Plan are payable on demand with interest at 1/2% above prime. 6. INCOME PER SHARE OF COMMON STOCK Net income per share is computed in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, and is calculated on the basis of the weighted average number of common shares outstanding during each period plus, for diluted earnings per share, the additional dilutive effect of common stock equivalents. Common stock equivalents using the treasury stock method consist of dilutive stock options and warrants. 8 For the 13-weeks ended June 29, 2002, options to purchase 240,000 shares of common stock at a price of $6.30 were included in diluted earnings per share. Options to purchase 193,000 shares of common stock at a price range of $7.50 to $12.00 were not included in diluted earnings per share as their impact was antidilutive. For the 13-weeks ended June 30, 2001, options to purchase 10,000 shares of common stock at a price of $7.50 were included in diluted earnings per share. Options and warrants to purchase common stock at a price range of $9.50 to $12.00 are not included in diluted earnings per share as their effect was antidilutive. 7. RELATED PARTY TRANSACTIONS Mr. Donald D. Shack, a director of the Company, is a member of the firm Shack Siegel Katz Flaherty & Goodman P.C., general counsel to the Company. The Company incurred $345,000 and $317,000 in legal fees to such firm during the 39-week periods ended June 29, 2002 and June 30, 2001, respectively. Receivables due from officers and employees, excluding receivables from employees in respect of stock option exercises, totaled $930,000 at June 29, 2002 compared to $772,000 as at September 29, 2001. Such receivables are included in Accounts Receivable. 9 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 29, 2001. Revenues Total revenues decreased 9.8% in the 13-week period ended June 29, 2002 from the comparable period ended June 30, 2001. The Company continued to experience soft sales in two of its three major markets, New York and Washington D.C. The Company believes the September 11th attacks, the residual effects on tourism and the sluggish economy continue to impact sales in these two markets. The Las Vegas market has proven to be stable and sales have remained constant during the quarter. Total revenues decreased by $833,000 as a restaurant, the Grill Room, located in an office building adjacent to the World Trade Center site was closed due to damage sustained. The Grill Room will likely not reopen until late in fiscal 2002, or early fiscal 2003. Total revenues also decreased by $2,767,000 from a 8.8% decrease in same store sales on a Company-wide basis. The Las Vegas market has rebounded considerably while New York and Washington DC continue to lag. The decrease in same store sales was 5.3% in Las Vegas, 10.0% in New York City and 14% in Washington, D.C. Such decreases were principally due to a decrease in customer counts. Total revenues decreased 11.3% in the 39-week period ended June 29, 2002 from the comparable period ended June 30, 2001. Total revenues decreased by $2,767,000 as a restaurant, The Grill Room, was closed. Total revenues also decreased by $7,974,000 from a 8.8% decrease in same store sales on a Company-wide basis. The decrease in same store sales was 5.8% in Las Vegas, 9.5% in New York City and 16.2% in Washington, D.C. Such decreases were principally due to a decrease in customer counts. Costs and Expenses Food and beverage costs for the 13-week period ended June 29, 2002 as a percentage of total revenues stood at 25.1% as compared to last year's 25%, while food and beverage costs as a percentage of total revenues for the 39-week period ended June 29, 2002 was 25.1% as compared to 25.4% last year. Payroll expenses as a percentage of total revenues decreased to 30.7% for the 13-weeks ended June 29, 2002 as compared to 32.3% last year and also decreased in the 39-weeks ended June 29, 2002 to 32.6% of total revenues as compared to 35% last year. The Company aggressively adapted its cost structure in response to lower sales expectations following September 11th. Payroll head count at June 29, 2002 is approximately 400 employees (14.4%) lower than the comparable period last year through a combination of layoffs and reduced seasonal hiring. Severance pay to key personnel was approximately $50,000 for the 39-weeks ended June 29, 2002. Occupancy and other expenses as a percentage of total revenues increased during the quarter ended June 29, 2002 to 25.9% compared to 24% during the 10 quarter ended June 30, 2001. For the 39-week period ending June 29, 2002 occupancy and other expenses were 26.7 % as compared to 25.9% last year. Since such expenses are primarily fixed costs, they rose as a percentage of revenues because revenues declined. General and administrative expenses, as a percentage of total revenues, decreased to 4.8% from 5.0% for the 13-week period ended June 29, 2002 as compared to last year and were constant at 5.3% during the 39-week period ended June 29, 2002 as compared to last year. The Company has reduced its general and administrative expenses in response to September 11th and the sluggish economy. Interest expense was $300,000 for the 13-week period ended June 29, 2002 as compared to $553,000 last year and interest expense for the 39-week period ended June 29, 2002 was $981,000 as compared to $1,969,000 last year. The significant decrease in both periods as compared to last year is due to lower outstanding borrowings on the Company's revolving credit facility and the benefit from significant rate decreases in the prime-borrowing rate. The Company had net income of $1,835,000 for the 13-week period ended June 29, 2002 as compared to net income of $1,957,000 last year and had net income of $2,620,000 for the 39-week period ended June 29, 2002 as compared to net income of $1,183,000 last year. Net sales of managed restaurants were $2,184,000 during the 39-week period ended June 29, 2002 as compared to $3,213,000 last year. In December 2000, three restaurants which the Company managed at one site in Boston, Massachusetts closed as the lease expired and was not renewed by the landlord. At June 29, 2002 the Company managed one restaurant. Net sales of managed restaurants are not included in consolidated net sales. Income Taxes The provision for income taxes reflects Federal income taxes calculated on a consolidated basis and state and local income taxes calculated by each subsidiary on a non consolidated basis. Most of the restaurants owned or managed by the Company are owned or managed by a separate subsidiary. For state and local income tax purposes, the losses incurred by a subsidiary may only be used to offset that subsidiary's income, with the exception of the restaurants which operate in the District of Columbia. Accordingly, the Company's overall effective income tax rate has varied depending on the level of the 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 (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) and the utilization of state and local net operating loss carry forwards. In order to more effectively utilize tax loss carry forwards at restaurants that were unprofitable, the Company has merged certain profitable subsidiaries with certain loss subsidiaries. The Company is entitled to a tax credit based on the amount of FICA taxes paid by the Company with respect to the tip income of restaurant service 11 personnel. The Company estimates that this credit will be in excess of $500,000 for the current year. The Company and the Internal Revenue Service finalized the adjustments to the Company's federal income tax for the fiscal years ended September 30, 1995 through October 3, 1998. The adjustments primarily relate to travel and meal expenses for which the Internal Revenue Service asserts the Company did not comply with certain record keeping requirements of the Internal Revenue Code. The settlement did not have a material effect on the Company's financial condition. Liquidity and Sources of Capital The Company's primary source of capital is cash provided by operations and funds available from the Revolving Credit and Term Loan Facility (the "Facility") with 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 and acquiring existing restaurants. As of June 29, 2002, the Facility included a $26,000,000 credit line to finance the development and construction of new restaurants and for working capital purposes at the Company's existing restaurants. At June 29, 2002, the Company had borrowings of $17,890,000 outstanding on this Facility. On July 1, 2002, the Facility converted into a term loan payable over 36 months. The loan bears interest at 1/2% above the bank's prime rate and at June 29, 2002 the interest rate on outstanding loans was 5.25%. The Facility also includes a $1,000,000 letter of credit facility for use in lieu of lease security deposits. The Company had delivered $389,000 in irrevocable letters of credit on this Facility. The Company generally is required to pay commissions of 1 1/2% per annum on outstanding letters of credit. At June 29, 2002, the Company had a working capital deficit of $10,062,000 as compared to a working capital deficit of $6,585,000 at September 29, 2001. The restaurant business does not require the maintenance of significant inventories or receivables, thus the Company is able to operate with minimal and even negative working capital. 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 the Company received a waiver for covenants that the Company was not in compliance with at September 29, 2001. In December 2001 and April 2002 certain covenants in the Facility were modified for fiscal 2002 and beyond. In August 2002, the Company received a waiver for the one covenant that the Company was not in compliance with at June 29, 2002, which 12 waiver is valid for the twelve month period through and including September 27, 2002. In November 2000, the Company entered into a sale and leaseback agreement with GE Capital for $1,652,000 to refinance the purchase of various restaurant equipment at Dessert Passage, which adjoins the Aladdin Casino Resort in Las Vegas, Nevada (the "Aladdin"). The lease, which is accounted for as an operating 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. At September 29, 2001 the Company determined that its food service operations at the Aladdin were impaired and the lease will be abandoned unless there is a significant change in current business circumstances. Accordingly the Company accrued $1,600,000 of estimated future lease payments on this lease. (See events of September 11th below) The Company does not anticipate any capital-intensive projects for the remainder of fiscal 2002 and expects that a significant portion of its projected cash flow will be applied to debt reduction. Restaurant Expansion In June 2002 the Company opened a 200-seat restaurant and bar, the Saloon, at the Neonopolis Center at Fremont Street in downtown Las Vegas, Nevada. The Company received a $2,550,000 construction and operating allowance from the landlord and has completed the construction and opened the restaurant within the limits of that allowance. The Company is not currently committed to any other projects. Events of September 11, 2001 The Company experienced severe sales decreases in the immediate aftermath of the September 11th terrorist attacks. The Company continues to experience negative same store sales, although on a much improved level as compared to the immediate weeks following the attack. The Company has aggressively reduced its cost structure at restaurants and at the corporate level. One Company restaurant, the Grill Room, suffered some damage. The restaurant is located in 2 World Financial Center, an office building adjacent to the World Trade Center site. The Grill Room will likely not reopen until late in fiscal 2002, or early fiscal 2003, due to the damage sustained by the office building. Several other Company restaurants were closed from several days to a month due to their proximity to the World Trade Center. The long-term effects of the terrorist attacks cannot yet be determined. The Company's restaurants in travel destinations, consisting of all of its restaurants in Washington and Las Vegas and certain restaurants in New York, are intended to benefit from high tourist traffic. Though the Las Vegas market has shown resiliency, the decline in travel to both New York and Washington resulting from the attacks and the sluggish economy has had a material adverse effect on revenues from those restaurants. Recovery of those restaurants depends upon restoration of public confidence in the air transportation system 13 and its willingness and inclination to resume vacation and convention travel and an improvement in general economic conditions. Critical Accounting Policies and Estimates The preparation of financial statements requires the application of certain accounting policies, which may require the Company to make estimates and assumptions of future events. In the process of preparing its consolidated financial statements, the Company estimates the appropriate carrying value of certain assets and liabilities, which are not readily apparent from other sources. The primary estimates underlying the Company's financial statements include allowances for potential bad debts on accounts and notes receivable, the useful lives and recoverability of its assets, such as property and intangibles, fair values of financial instruments, the realizable value of its tax assets and other matters. Management bases its estimates on certain assumptions, which they believe are reasonable in the circumstances, and actual results, could differ from those estimates. Although management does not believe that any change in those assumptions in the near term would have a material effect on the Company's consolidated financial position or the results of operation, differences in actual results could be material to the financial statements. The Company's significant accounting policies are more fully described in Note 1 to the Company's annual report on Form 10-K for the year ended September 29, 2001. Below are listed certain policies that management believes are critical. Fixed Assets - The Company annually assesses any impairment in value of long-lived assets and certain identifiable intangibles to be held and used. The Company evaluates the possibility of impairment by comparing anticipated undiscounted cash flows to the carrying amount of the related long-lived assets. If such cash flows are less than carrying value the Company then reduces the asset to its fair value. Fair value is generally calculated using discounted cash flows. Various factors such as sales growth and operating margins and proceeds from a sale are part of this analysis. Future results could differ from the Company's projections with a resulting adjustment to income in such period. Deferred Income Tax Valuation Allowance - The Company provides such allowance due to uncertainty that some of the deferred tax amounts may not be realized. Certain items, such as state and local tax loss carry forwards, are dependent on future earnings or the availability of tax strategies. Future results could require an increase or decrease in the valuation allowance and a resulting adjustment to income in such period. Recent Developments The Financial Accounting Standards Board has recently issued the following accounting pronouncements: SFAS No. 142 "Goodwill and Other Intangible Assets" addresses financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and some intangible assets will no longer be amortized, but rather reviewed for impairment on a periodic basis. Impairment losses for goodwill and certain intangible assets that arise due to the initial application of this statement are to be reported as resulting from a change in accounting principle. The provisions of this statement will be applied at the 14 beginning of the Company's 2003 fiscal year. The Company is in the process of evaluating the financial statement impact from adopting this standard. SFAS No. 143 "Accounting for Asset Retirement Obligations" requires the recording of the fair value of a liability for an asset retirement obligation in the period in which it is incurred. This statement is effective for the Company at the beginning of the Company's 2004 fiscal year. The Company does not expect the adoption of this standard to have a material impact on the Company's financial position or results of operations. 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. This statement is effective for the Company at the beginning of the Company's 2003 fiscal year. The Company is in the process of evaluating the financial statement impact of this standard. SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued in April 2002. SFAS 145 rescinds SFAS 4 and 64, which required gains and losses from extinguishments of debt to be classified as extraordinary items. SFAS 145 also rescinds SFAS 44 since the provisions of the Motor Carrier Act of 1980 are complete. SFAS 145 also amends SFAS 13 eliminating inconsistencies in certain sale-leaseback transactions. The provisions of SFAS 145 are effective for fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented shall be reclassified. The Company does not expect that the adoption of SFAS 145 will have a material effect on the Company's financial position or results of operations. SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" was issued in July 2002. SFAS No. 146 replaces current accounting literature and requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. The provisions of the Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not anticipate the adoption of this statement will have a material effect on the Company's financial statements. 15 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates with respect to its outstanding credit agreement with its main bank, Bank Leumi USA. Outstanding loans under the agreement bear interest at prime plus one-half percent, and such loans converted on July 1, 2002 to a term loan payable over three years. Based upon a $17,890,000 (the outstanding balance at June 29, 2002) term loan and a 100 basis point change in interest rates, interest expense would change by $179,000 in the one-year period beginning June 30, 2002. Part II - Other Information Item 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Certificate of Incorporation of the Registrant, filed on January 4, 1983, incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended October 1, 1994 (the "1994 10-K"). 3.2 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed on October 11, 1985, incorporated by reference to Exhibit 3.2 to the 1994 10-K. 3.3 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed on July 21, 1988, incorporated by reference to Exhibit 3.3 to the 1994 10-K. 3.4 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed on May 13, 1997, incorporated by reference to Exhibit 3.4 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 29, 1997. 3.5 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed on April 24, 2002, incorporated by reference to Exhibit 3.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 2002. 3.6 By-Laws of the Registrant, incorporated by reference to Exhibit 3.4 to the 1994 10-K. *10.13 Amendment dated as of April 23, 2002 to the Fourth Amended and Restated Credit Agreement dated as of December 27, 1999 between the Company and Bank Leumi USA. *99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith (b) Reports on Form 8-K: None 16 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 12, 2002 ARK RESTAURANTS CORP. By /s/ Michael Weinstein ---------------------- Michael Weinstein, President & Chief Executive Officer By /s/ Robert J. Stewart ---------------------- Robert Stewart, Chief Financial Officer 17