SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (MARK ONE) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended October 2, 1999 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 (IRS Employer Identification Number) incorporation or organization) 85 Fifth Avenue, New York, N.Y. 10003 ----------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (212) 206-8800 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- Common Stock, $.01 par value NASDAQ/NMS Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ]. The aggregate market value at December 27, 1999 of shares of the Registrant's Common Stock, $.01 par value (based upon the closing price per share of such stock on the Nasdaq National Market) held by non-affiliates of the Registrant was approximately $15,850,000. Solely for the purposes of this calculation, shares held by directors and officers of the Registrant have been excluded. Such exclusion should not be deemed a determination or an admission by the Registrant that such individuals are, in fact, affiliates of the Registrant. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: At December 27, 1999, there were outstanding 3,181,699 shares of the Registrant's Common Stock, $.01 par value. Document Incorporated by Reference: Certain portions of the Registrant's definitive proxy statement to be filed not later than January 31, 2000 pursuant to Regulation 14A are incorporated by reference in Items 10 through 13 of Part III of this Annual Report on Form 10-K. -2- PART I ITEM 1. BUSINESS GENERAL Ark Restaurants Corp. (the "Registrant" or the "Company") is a holding company which, through subsidiaries, owns and operates 22 restaurants and manages five restaurants owned by others. Fourteen of the restaurants owned or managed by the Company are located in New York City, four are located in Washington, D.C., four are located in Las Vegas, Nevada (one of which is within the Forum Shops at Caesar's Shopping Center and three of which are within the New York-New York Hotel & Casino), three are located in Boston, Massachusetts, and one is located in each of McLean, Virginia and Islamorada, Florida. At the New York-New York Hotel & Casino, the Company also operates the room service, banquet facilities and employee dining room and a complex of nine smaller eateries. The Company also owns and operates four food court facilities at the Venetian Casino Resort. The Company's other operations include catering businesses in New York City and Washington, D.C., as well as wholesale and retail bakeries in New York City. The Company is currently constructing significant additional facilities that are scheduled to be completed in fiscal 2000. In Las Vegas, Nevada, the Company is completing construction of two additional restaurants at the Venetian Casino Resort (one of which is scheduled to open in December 1999 and the second of which is scheduled to open in January 2000). A third restaurant at the Venetian Casino Resort is scheduled to open in the fourth quarter of fiscal 2000. Construction will commence shortly on two new facilities at the Aladdin Resort & Casino (a restaurant and a 15,000 square foot food court facility, both of which are scheduled to open during the fourth quarter of fiscal 2000). The Company also owns 50% of a limited liability company (and is the managing member of such company) that is constructing four restaurants at a large theater development in Southfield, Michigan. These restaurants are currently scheduled to open in the second quarter of fiscal 2000. The Company was formed in 1983 to concentrate the ownership of four restaurants previously operated by the Company's principals. Until 1987 all of the Company's facilities were located in the New York City metropolitan area. In 1987, three facilities were opened in Boston, Massachusetts. Since then the Company has opened five facilities in the Washington, D.C. metropolitan area (one of which has been sold), one in Islamorada, Florida and one in Jersey City, New Jersey (a management agreement that was terminated in fiscal 1998). In January 1997, the Company opened a group of restaurants in the 2,100-room hotel known as New York-New York Hotel & Casino in Las Vegas, Nevada. Since that time, the Company has significantly expanded its Las Vegas operations and, as noted above, is continuing at the present time to expand such operations. In addition to the shift from a Manhattan-based operation to a multi-city operation, the nature of the facilities operated by the Company has shifted from smaller, neighborhood restaurants to larger, destination restaurants intended to benefit from high patron traffic attributable to the uniqueness of the restaurant's location. Most of the restaurants opened in recent years are of the latter description and the Company intends to concentrate on developing or acquiring similar facilities in the future. The Company opened the restaurant operations at the New York-New York Hotel & Casino in Las Vegas, Nevada in fiscal 1997, opened two such destination restaurants in fiscal 1998 (the Stage Deli located at the Forum Shops in Las Vegas, Nevada and Red located at the South Street Seaport in New York) and one in fiscal 1999 (Thunder Grill in Union Station, Washington, D.C.). By the end of fiscal 2000, the Company expects to have opened three restaurants and four food court facilities at the Venetian Casino Resort and one restaurant and a 15,000 square foot food court containing multiple outlets at the Aladdin Resort & Casino, in Las Vegas, Nevada. The four restaurants at the theater development in Southfield, Michigan also fall within this category of larger, destination restaurants. In fiscal 1998 and 1999, the Company continued its efforts to sell some of its smaller, neighborhood restaurants. Three such facilities were sold in fiscal 1998 and two were sold in fiscal 1999. -3- The names and themes of each of the Company's restaurants are different except for the Company's four America restaurants, two Sequoia restaurants and two Gonzalez y Gonzalez restaurants. Also, two of the Company's planned restaurants will be known as Fat Anthony's. The menus in the Company's restaurants are extensive, offering a wide variety of high quality foods at generally moderate prices. One of the Company's restaurants, Lutece, may be classified as expensive. The atmosphere at many of the restaurants is lively and extremely casual. Most of the restaurants have separate bar areas utilized by diners awaiting tables. A majority of the net sales of the Company is derived from dinner as opposed to lunch service. Most of the restaurants are open seven days a week and most serve lunch as well as dinner. While decor differs from restaurant to restaurant, interiors are marked by distinctive architectural and design elements which often incorporate dramatic interior open spaces and extensive glass exteriors. The wall treatments, lighting and decorations are typically vivid, unusual and, in some cases, highly theatrical. The following table sets forth certain information with respect to the Company's facilities currently in operation and facilities with signed leases that are intended to be opened in fiscal 2000. Seating Capacity(2) Restaurant Size Indoor- Lease Name Location Year Opened(1) (Square feet) (Outdoor) Expiration(3) ---- -------- ----------- ------------- --------- ------------- Metropolitan Cafe First Avenue 1982 4,000 180-(50) 2006 New York, New York (between 52nd and 53rd Streets) Ernie's Broadway 1983 6,600 300 2008 New York, New York (between 75th and 76th Streets) America 18th Street 1984 9,600 350 2004 New York, New York (between 5th Avenue and Broadway) Arlo(4) Seventh Avenue South 1986(9) 1,700 90 2011 New York, New York (between Charles and 10th Streets) The Grill Eighth Avenue 1986(9) 8,000 400 2011 New York, New York (at 47th Street) The Marketplace Faneuil Hall Market 1987 3,000 100 2000 Cafe(4) Boston, Massachusetts El Rio Grande(4)(5) Third Avenue 1987 4,000 160 2014 New York, New York (between 38th and 39th Streets) -4- Seating Capacity(2) Restaurant Size Indoor- Lease Name Location Year Opened(1) (Square feet) (Outdoor) Expiration(3) ---- -------- ----------- ------------- --------- ------------- The Brewskeller Faneuil Hall Market 1987 1,500 50 2000 Pub(4) Boston, Massachusetts Gonzalez y Broadway 1989 6,000 250 month-to- Gonzalez New York, New York month (between Houston and Bleecker Streets) America Union Station 1989 10,000 400 2009 Washington, D.C. Center Cafe Union Station 1989 4,000 200 2009 Washington, D.C. Sequoia Washington Harbour 1990 26,000 600(400) 2010 Washington, D.C. Sequoia South Street Seaport 1991 12,000 300(100) 2006 New York, New York Canyon Road First Avenue 1984 2,500 130 2009 New York, New York (between 76th and 77th Streets) The Marketplace Faneuil Hall Market 1987(10) 2,500 130 2000 Grill(4) Boston, Massachusetts America(11) Tyson's Corner 1994 11,000 400 2014 McLean, Virginia Lutece East 50th Street 1994 2,500 92 2019 New York, New York (between 2nd and 3rd Avenues) Lorelei Restaurant Islamorada, Florida 1994 10,000 400 2029 and Cabana Bar Columbus Bakery Columbus Avenue 1988 3,000 75 2007 New York, New York (between 82nd and 83rd Streets) Bryant Park Grill Bryant Park 1995 25,000 180(820) 2025 & Cafe New York, New York Columbus Bakery First Avenue 1995 2,000 75 2006 New York, New York (between 52nd and 53rd Streets) America New York-New York 1997 20,000 450 2017(6) Hotel & Casino Las Vegas, Nevada -5- Seating Capacity(2) Restaurant Size Indoor- Lease Name Location Year Opened(1) (Square feet) (Outdoor) Expiration(3) ---- -------- ----------- ------------- --------- ------------- Gallagher's New York-New York 1997 5,000 160 2017(6) Hotel & Casino Las Vegas, Nevada Gonzalez y New York-New York 1997 2,000 120 2017(6) Gonzalez Hotel & Casino Las Vegas, Nevada Village Eateries(7) New York-New York 1997 6,300 400(8) 2017(6) Hotel & Casino Las Vegas, Nevada The Grill Room World Financial Center 1997 10,000 250 2012 New York, New York The Stage Deli Forum Shops 1998 5,000 200 2008 Las Vegas, Nevada Red South Street Seaport 1998 7,000 150(150) 2013 New York, New York Thunder Grill Union Station 1999 10,000 500 2019 Washington, D.C. Venetian Food Venetian Casino Resort 1999 5,000 300(8) 2014 Court Las Vegas, Nevada Tsunami Grill Venetian Casino Resort 1999(13) 13,000 300 2019 Las Vegas, Nevada Lutece Venetian Casino Resort 1999(12) 6,400 90(90) 2019 Las Vegas, Nevada Chulas Venetian Casino Resort 2000(14) 9,700 250 2019 Las Vegas, Nevada Volcano Grill Star Theatres 2000(13) 14,000 350 2029 Entertainment Complex Southfield, Michigan Fat Anthony's Star Theatres 2000(13) 10,000 250 2029 Entertainment Complex Southfield, Michigan Starlight Brewery Star Theatres 2000(13) 12,000 350 2029 Entertainment Complex Southfield, Michigan Z-Dim Star Theatres 2000(13) 9,000 300 2029 Entertainment Complex Southfield, Michigan Aladdin Food Aladdin Resort & 2000(14) 15,000 400(8) 2020 Court Casino Las Vegas, Nevada Fat Anthony's Aladdin Resort & 2000(14) 10,000 300 2020 Casino Las Vegas, Nevada -6- (1) Restaurants are, from time to time, renovated and/or renamed. "Year Opened" refers to the year in which the Company or an affiliated predecessor of the Company first opened, acquired or began managing a restaurant at the applicable location, notwithstanding that the restaurant may have been renovated and/or renamed since that date. (2) Seating capacity refers to the seating capacity of the indoor part of a restaurant available for dining in all seasons and weather conditions. Outdoor seating capacity, if applicable, is set forth in parentheses and refers to the seating capacity of terraces and sidewalk cafes which are available for dining only in the warm seasons and then only in clement weather. (3) Assumes the exercise of all available lease renewal options. (4) Restaurant owned by a third party and managed by the Company. Management fees earned by the Company are based either on a percentage of cash flow of the restaurant or a fixed amount or a combination of the two. (5) The Company owns a 19% interest in the partnership which owns El Rio Grande. (6) Includes two five-year renewal options exercisable by the Company if certain sales goals are achieved during the two year period prior to the exercise of the renewal option. Under the America lease, the sales goal is $6.0 million. Under the Gallagher's lease the sales goal is $3.0 million. Under the lease for Gonzalez y Gonzalez and the Village Eateries, the combined sales goal is $10.0 million. Each of the restaurants is currently operating at a level substantially in excess of the minimum sales level required to exercise the renewal option for such restaurant. (7) The Company operates nine small food court restaurants in a food court at this hotel facility. The Company also operates the hotel's room service, banquet facilities and employee cafeteria. (8) Represents common area seating. (9) The Company has operated a restaurant at this site since 1986. In the fourth quarter of fiscal 1999, the Company converted Woody's to Arlo. In the first quarter of fiscal 2000, the Company converted B. Smith's to The Grill. (10) The Company has operated a restaurant at this site since 1987. In fiscal 2000, the Company converted Savannah to The Marketplace Grill. (11) This restaurant is under contract to be sold. (12) Opening anticipated in the first quarter of fiscal 2000. (13) Opening anticipated in the second quarter of fiscal 2000. (14) Opening anticipated in the fourth quarter of fiscal 2000. -7- RESTAURANT EXPANSION The Company is constructing four restaurants containing a total of approximately 45,000 square feet at a large theater development in Southfield, Michigan, of which the Company owns 50% in a joint venture with Sony Theatres' Loeks Star Partners and Millennium Partners. The Company is the managing member of the limited liability company that owns the restaurants. The restaurants are currently scheduled to open in the second quarter of fiscal 2000. The Company is also constructing three restaurants at the recently opened Venetian Casino Resort in Las Vegas, Nevada, where the Company currently owns and operates four fast food outlets. One restaurant, Lutece, is modeled after the New York restaurant of the same name and is scheduled to open in December 1999. The second restaurant, Tsunami, a pan-Asian restaurant, is scheduled to open in January 2000. The third restaurant, Chulas, a mexican restaurant, is scheduled to open in the fourth quarter of fiscal 2000. During the fourth quarter of fiscal 2000, the Company expects to open one restaurant (Fat Anthony's) and one 15,000 square foot food court facility containing multiple outlets in the Aladdin Resort & Casino in Las Vegas, Nevada. In April 1999, the Company opened a 500 seat Southwestern style restaurant at Union Station in Washington, D.C., (Thunder Grill) where the Company operates two other restaurants (America & Center Cafe). During the second quarter of fiscal 1998, the Company purchased the Stage Deli in the Forum Shops at Caesar's Shopping Center in Las Vegas, Nevada. This 200-seat restaurant operates under a license agreement with the owner of the original Stage Deli in New York City. During the fourth quarter of fiscal 1998, the Company opened its second restaurant at the South Street Seaport in New York City. This facility, Red, is a 7,000 square foot restaurant with a Southwestern theme. During the second quarter of fiscal 1997, the Company's facilities at the New York-New York Hotel & Casino in Las Vegas, Nevada opened. The Company's facilities consist of a 450-seat restaurant (named America and modeled after the Company's other America restaurants), a 160-seat steakhouse (named Gallagher's under a license agreement from the owner of the New York restaurant of that name), a 120-seat restaurant (named Gonzalez y Gonzalez and modeled after the Company's New York restaurant of the same name) and a group of nine small fast food restaurants in a food court with a New York theme. In addition, the Company operates the hotel's room service, its banquet facilities and its employee cafeteria. The restaurant facilities at the New York-New York Hotel & Casino represented the Company's first effort at designing, constructing and operating restaurants in Las Vegas and the first such facilities in conjunction with a large-scale hotel and casino operation. The number of patrons served at the various facilities at the New York, New York Hotel & Casino far exceeds the number of patrons served by the Company in any other single location. During the third quarter of fiscal 1997, the Company opened The Grill Room at a 10,000 square foot site in the World Financial Center in downtown New York City. The opening of a new restaurant is invariably accompanied by substantial pre-opening expenses and early operating losses associated with the training of personnel, excess kitchen costs and costs of supervision and other expenses during the pre-opening period and during a post-opening "shake out" period until operations can be considered to be functioning normally. The amount of such pre-opening expense and early operating loss can generally be expected to depend upon the size and complexity of the facility being opened. The Company estimates that such pre-opening expenses and early operating losses were approximately $400,000 in fiscal 1999, $200,000 in fiscal 1998 and $2,000,000 in fiscal 1997. -8- The Company's restaurants generally do not achieve substantial increases from year to year in net sales or profits, which the Company considers to be typical of the restaurant industry. The Company will have to continue to open new and successful restaurants or expand existing restaurants to achieve significant increases in net sales or to replace net sales of restaurants which close because of lease expirations or other reasons. After a restaurant is opened, there can be no assurance that such restaurant will be successful, particularly since in many instances the Company will not operate new restaurants under a tradename currently used by the Company, thereby requiring each new restaurant to establish its own identity. The Company intends to continue to direct its restaurant expertise and financial resources in developing larger restaurants benefitting from the high patron traffic of unique locations, such as the Sequoia and Red restaurants in the South Street Seaport in New York, the Sequoia restaurant in Washington Harbour in Washington, the America restaurant in Union Station in Washington, the Bryant Park facilities in New York and the Las Vegas facilities. Nevertheless, the Company also intends to take advantage of other opportunities considered to be favorable when they occur, such as the acquisition of the highly regarded restaurant, Lutece. RECENT RESTAURANT DISPOSITIONS In the first quarter of fiscal 1997, the Company sold three of its smaller restaurants (Mackinac Bar & Grill, The Museum Cafe and Albuquerque Eats/The Rodeo Bar), each of which was operating at a loss at the time of its sale. In fiscal 1998, the Company sold three of its smaller restaurants (Jim McMullen, An American Place and Beekman 1776 Tavern). In the first quarter of fiscal 1999, the Company sold two of its smaller restaurants (Perretti's in New York City and B. Smith's in Washington, D.C.). In fiscal 1999, the Company entered into an agreement to sell its America restaurant in Tyson's Corner, McLean, Virginia. The transaction has not closed and the Company has asserted a claim against the buyer for its failure to close in accordance with the agreement. The Company continues to operate the restaurant America on this site. RESTAURANT MANAGEMENT Each restaurant is managed by its own manager and has its own chef. Food products and other supplies are purchased from various unaffiliated suppliers, in most cases by the Company's headquarters personnel. Each of the Company's restaurants has two or more assistant managers and assistant chefs. The executive chef department designs menus and supervises the kitchens. Financial and management control is maintained at the corporate level through the use of an automated data processing system that includes centralized accounting and reporting. The Company has developed its own proprietary software which processes information input daily at the Company's restaurants. The Company believes that the information generated by this process enables it to monitor closely the activities at each restaurant and enhances the Company's ability to effectively manage its restaurants. EMPLOYEES At December 4, 1999, the Company employed 2,320 persons (including employees at managed facilities), 1,823 of whom were full-time employees, 497 of whom were part-time employees, 38 of whom were headquarters personnel,222 of whom were restaurant management personnel, 641 of whom were kitchen personnel and 1,419 of whom were restaurant service personnel. A number of the Company's restaurant service personnel are employed on a part-time basis. Changes in minimum wage levels may affect the labor costs of the Company and the restaurant industry generally because a large percentage of restaurant personnel are paid at or slightly above the minimum wage. With the exception of the employees at Lutece in New York, the Company's employees are not covered by a collective bargaining agreement. The Company believes its employee relations are satisfactory. -9- GOVERNMENT REGULATION The Company is subject to various federal, state and local laws and regulations affecting its business, including a variety of regulatory provisions relating to the wholesomeness of food, sanitation, health, safety and licensing in the sale of alcoholic beverages. A number of the Company's restaurants have open or enclosed outdoor cafes which require the approval of, or licensing by, a number of governmental agencies. The suspension by any regulatory agency of the food service or the liquor license of any of the Company's restaurants would have a material adverse effect upon the affected restaurant and may adversely affect the Company as a whole. The New York State Liquor Authority must approve any transaction in which a shareholder of the Company increases his holdings to 10% or more of the outstanding capital stock of the Company and any transaction involving 10% or more of the outstanding capital stock of the Company. SEASONAL NATURE OF BUSINESS The Company's business is highly seasonal. The second quarter of the Company's fiscal year, consisting of the non-holiday portion of the cold weather season in New York, Boston and Washington (January, February and March), is the poorest performing quarter. The Company achieves its best results during the warm weather, attributable to the Company's extensive outdoor dining availability, particularly at Bryant Park and Sequoia in Washington (the Company's largest restaurants) and the Company's outdoor cafes. The Company's facilities in Las Vegas operate on a more level basis through the year. FORWARD LOOKING STATEMENTS This report contains forward looking statements that involve risks and uncertainties. Discussions containing such forward-looking statements may be found in the material set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as throughout this report generally. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below. Competition. The restaurant business is intensely competitive and involves an extremely high degree of risk. The Company believes that a large number of new restaurants open each year and that a significant number of them do not succeed. Even successful restaurants rapidly can lose popularity due to changes in consumer tastes, turnover in personnel, the opening of competitive restaurants, unfavorable reviews and other factors. There can be no assurance that the Company's existing restaurants will retain their current popularity or that new restaurants opened by the Company will be successful. There is active competition for competent chefs and management personnel and intense competition among major restaurateurs and food service companies for the larger, unique sites suitable for restaurants. Importance of New Restaurants. The Company's restaurants generally do not achieve substantial increases from year to year in net sales or profits. The Company will have to continue to open new and successful restaurants or expand existing restaurants to achieve significant increases in net sales or to replace net sales of restaurants which experience declining popularity or which close because of lease expirations or other reasons. The acquisition or construction of new restaurants requires significant capital resources. New large scale projects that have been the focus of the Company's efforts in recent years would likely require additional financing. -10- After a restaurant is opened, there can be no assurance that such restaurant will be successful, particularly since in many instances the Company will not operate new restaurants under a tradename currently used by the Company, thereby requiring each new restaurant to establish its own identity. Dependence on Key Personnel. The success of the Company depends to a significant extent upon the performance of senior management and in particular on the services of Michael Weinstein, President of the Company. The loss of the services of Mr. Weinstein would have a material adverse effect on the Company. Government Regulation. The Company is subject to various Federal, state and local laws and regulations affecting its business, including regulatory provisions relating to the wholesomeness of food, sanitation, health, safety and licensing in the sale of alcoholic beverages. The suspension by any regulatory agency of the food service or the liquor license of any of the Company's restaurants would have a material adverse effect upon the affected restaurant and may adversely affect the Company as a whole. The wholesomeness of food served at the Company's restaurants is dependent in part upon third party purveyors. ITEM 2. PROPERTIES The Company's restaurant facilities identified in the chart above and its executive offices are occupied under leases. Most of the Company's restaurant leases provide for the payment of base rents plus real estate taxes, insurance and other expenses and, in certain instances, for the payment of a percentage of the Company's sales at such facility. These leases (including leases for managed restaurants) have terms (including any available renewal options) expiring as follows: Years Lease Number of Term Expire Facilities ----------- ---------- 1999-2000 4 2001-2005 1 2006-2010 10 2011-2015 7 2016-2020 11 2021-2025 1 2026-2030 5 The Company's executive, administrative and clerical offices, located in approximately 8,500 square feet of office space at 85 Fifth Avenue, New York, New York, are occupied under a lease which expires in October 2008, which includes one five-year renewal option. The Company maintains an office in Washington, D.C. for its catering operations under a short-term lease. For information concerning the Company's future minimum rental commitments under non-cancelable operating leases, see Note 8 of Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of its business, the Company is a party to various lawsuits arising from accidents at its restaurants and workmen's compensation claims, which are generally handled by the Company's insurance carriers. -11- The employment by the Company of management personnel, waiters, waitresses and kitchen staff at a number of different restaurants has resulted in the institution, from time to time, of litigation alleging violation by the Company of employment discrimination laws. The Company does not believe that any of such suits will have a materially adverse effect upon the Company, its financial condition or operations. A lawsuit was commenced against the Company in October 1997 in the District Court for the Southern District of New York by 44 present and former employees alleging various violations of Federal wage and hour laws. The complaint seeks an injunction against further violations of the labor laws and payment of unpaid minimum wages, overtime and other allegedly required amounts, liquidated damages, penalties and attorneys fees. The Company believes that most of the claims asserted in this litigation, including those with respect to minimum wages, are insubstantial. The Company believes that there were certain violations of overtime requirements, which have today been largely corrected, for which the Company will have liability. The period of time in which affected employees could "opt-in" to the lawsuit asserting similar violations has expired and a total of 214 individuals have so elected. Discovery in this action has not been completed. This uncertainty prevents the Company from making any reasonable estimate of its ultimate liability. However, based upon information available to the Company at this time, the Company does not believe that the amount of liability which may be sustained in this action will have a materially adverse effect on its business and financial condition. A lawsuit was commenced against the Company in April 1997 in the District Court for Clark County, Nevada by one former employee and one current employee of the Company's Las Vegas subsidiary alleging that (i) the Company forced food service personnel at the Company's Las Vegas restaurant facilities to pay a portion of their tips back to the Company in violation of Nevada law and (ii) the Company failed to timely pay wages to terminated employees. The action was brought as a class action on behalf of all similarly situated employees. The Company believes that it will have no liability in connection with the first allegation. The Company also believes that its liability, if any, from an adverse result in connection with the second allegation would be inconsequential. The Company intends to vigorously defend against these claims. In addition, several unfair labor practice charges have been filed against the Company before the National Labor Relations Board with respect to the Company's Las Vegas subsidiary. One consolidated complaint alleged that the Company unlawfully terminated seven employees and disciplined seven other employees allegedly in retaliation for their union activities. An Administrative Law Judge (ALJ) found that five employees were terminated unlawfully and two were discharged for valid reasons. As far as the discipline, the Judge found that the Company acted legally in disciplining four employees but not lawfully with respect to three employees. The Company has appealed the adverse rulings of the ALJ to the National Labor Relations Board in Washington, D.C. The Company believes that there are reasonable grounds for obtaining a reversal of the unfavorable findings by the ALJ and does not believe that an adverse outcome in this proceeding will have a material adverse effect upon the Company's financial condition or operations. In May 1999, the ALJ issued a favorable decision involving unfair labor practice charges filed against the Company before the National Labor Relations Board with respect to the Company's Las Vegas subsidiary. The complaint alleged that four employees were terminated and three other employees disciplined because of their union activities. The ALJ found that none of the employees were terminated or disciplined for inappropriate reasons. The ALJ found two violations of management communications rules for which non-economic remedies were proposed. A second unfair labor practice matter is pending before the full National Labor Relations Board. The Company does not believe that an adverse outcome in any of the unfair labor practice charges will have a material adverse effect upon the Company's financial condition or operations. The Company believes that these unfair labor practice charges and the litigation pending in Nevada described above are part of an ongoing campaign by the Culinary Workers Union which is seeking to represent employees at the Company's Las Vegas restaurants. However, rather than pursue the normal election process pursuant to which employees are given the freedom to choose whether they should be represented by a union, a process which the Company supports, the Company believes the union is seeking to achieve recognition as the bargaining agent for such employees through a campaign directed not at the -12- Company's employees but at the Company itself and its stockholders. The Company intends to continue to support the right of its employees to decide such matters and to oppose the efforts of the Culinary Workers Union to circumvent that process. An action was commenced in May 1998 in Superior Court of the District of Columbia against the Company and its Washington, D.C. subsidiaries by seven present and former employees of the restaurants owned by such subsidiaries alleging violations of the District of Columbia Wage & Hour Act relating to minimum wages and overtime compensation. The Company does not believe that its liability if any, from an adverse result in this matter would have a material adverse effect upon its business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the names and ages of executive officers of the Company and all offices held by each person: Name Age Positions and Offices ---- --- --------------------- Michael Weinstein 56 President Vincent Pascal 56 Vice President and Secretary Robert Towers 52 Vice President and Treasurer Andrew Kuruc 41 Vice President and Controller Paul Gordon 48 Vice President Mitchell Levy 38 Vice President Each executive officer of the Company serves at the pleasure of the Board of Directors and until his successor is duly elected and qualifies. Michael Weinstein has been President and a director of the Company since its inception in January 1983. Since 1978, Mr. Weinstein has been an officer, director and 25% shareholder of Easy Diners, Inc., a restaurant management company which operates three restaurants in New York City. Easy Diners, Inc. is not a parent, subsidiary or other affiliate of the Company. Mr. Weinstein spends substantially all of his business time on Company-related matters. Vincent Pascal was elected Vice President, Assistant Secretary and a director of the Company in October 1985. Mr. Pascal became Secretary of the Company in January 1994. Robert Towers has been employed by the Company since November 1983 and was elected Vice President, Treasurer and a director in March 1987. Andrew Kuruc has been employed as Controller of the Company since April 1987 and was elected as a director of the Company in November 1989. -13- Paul Gordon has been employed by the Company since 1983 and was elected as a director in November 1996. He was elected Vice President of the Company in March 1998. Mr. Gordon is the manager of the Company's Las Vegas operations and Vice President and a director of the Company's Las Vegas subsidiaries. Prior to assuming that role in 1996, Mr. Gordon was the manager of the Company's operations in Washington, D.C. since 1989. Mitchell Levy has been employed as Vice President of the Company since March 1998. For more than five years prior to that time, Mr. Levy was a partner in the law firm of Solomon, Green & Ostrow. -14- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Common Stock, $.01 par value, is traded in the over-the-counter market on the Nasdaq National Market ("Nasdaq") under the symbol "ARKR". The high and low sale prices for the Common Stock from October 4, 1998 through October 2, 1999 are as follows: Calendar 1997 ------------- Third Quarter 11 1/2 8 1/4 Fourth Quarter 12 1/2 10 3/4 Calendar 1998 ------------- First Quarter 13 1/8 11 1/2 Second Quarter 12 1/8 11 Third Quarter 12 3/8 9 1/4 Fourth Quarter 11 5/8 8 1/4 Calendar 1999 ------------- First Quarter 10 1/4 9 1/2 Second Quarter 11 9 3/8 Third Quarter 11 5/8 9 3/8 DIVIDENDS The Company has not paid any cash dividends since its inception and does not intend to pay dividends in the foreseeable future. Under the terms of the Credit Agreement between the Company and its main lender, the Company may pay cash dividends and redeem shares of Common Stock in any fiscal year only to the extent of an aggregate amount equal to 20% of the Company's consolidated operating cash flow for such fiscal year. NUMBER OF SHAREHOLDERS As of December 27, 1999, there were 80 holders of record of the Company's Common Stock. -15- ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA -------------------------------------------------------------------------------- The following table sets forth certain financial data for the fiscal years ended 1995 through 1999. This information should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto appearing at page F-1. YEAR ENDED ----------------------------------------------------------------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30, 1999 1998 1997 1996 1995 OPERATING DATA: Net sales $110,800,913 $117,398,453 $104,326,386 $76,795,940 $73,026,907 Gross restaurant profit 81,499,610 86,132,751 75,874,499 55,934,475 53,001,963 Operating income 6,833,874 7,589,465 2,785,713 497,996 960,794 Other income, net 236,465 91,417 96,550 743,615 937,763 Income before provision for income taxes and extraordinary item 7,070,339 7,680,882 2,882,263 1,241,611 1,898,557 Income before extraordinary item 4,494,731 4,612,141 1,737,655 788,762 1,121,126 NET INCOME 4,494,731 4,612,141 1,737,655 788,762 1,121,126 NET INCOME PER SHARE: Basic $ 1.30 $ 1.21 $ 0.47 $ 0.24 $ 0.34 Diluted $ 1.29 $ 1.20 $ 0.46 $ 0.24 $ 0.34 Weighted average number of shares Basic 3,460,865 3,826,255 3,714,116 3,238,419 3,142,400 Diluted 3,475,890 3,852,019 3,742,811 3,272,857 3,252,669 BALANCE SHEET DATA (end of period): Total assets 47,379,103 44,045,179 42,079,098 33,020,479 28,541,920 Working capital (deficit) (3,044,204) (719,343) (2,373,859) (1,303,920) 40,996 Long-term debt 7,655,406 5,014,634 6,126,797 6,403,866 4,014,162 Shareholders' equity 29,513,971 29,062,140 25,888,880 17,804,394 16,706,301 Shareholders' equity per share 8.49 7.54 6.92 5.44 5.24 Facilities in operation at end of year, including managed 40 42 46 32 32 -16- ITEM 7 AND 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ACCOUNTING PERIOD The Company's fiscal year ends on the Saturday nearest September 30. The fiscal years ended October 2, 1999 and September 27, 1997 included 52 weeks while the fiscal year ended October 3, 1998 included 53 weeks. NET SALES Net sales at restaurants owned by the Company decreased by 5.6% from fiscal 1998 to fiscal 1999 and increased by 12.5% from fiscal 1997 to fiscal 1998. Net sales for fiscal 1999 decreased by $8,586,000 from the loss of sales at restaurants which the Company no longer operate (B. Smith's in Washington, D.C. and Perretti Italian Cafe were sold in fiscal 1999 and An American Place and the Beekman 1766 Tavern were sold in fiscal 1998). Additionally, fiscal 1999 included 52 weeks while fiscal 1998 included 53 weeks. This decrease in fiscal 1999 was offset in part by $3,827,000 in net sales from restaurants and food court operations which either opened in fiscal 1999 (Thunder Grill at Union Station in Washington, D.C. and Rialto Deli in the food court at the Venetian Casino Resort) or did not operate for the full fiscal 1998 year (Stage Deli of Las Vegas was acquired in February 1998 and Red opened in the fourth quarter of fiscal 1998). Same store sales were basically unchanged for the year. Same store sales for the year at the Company's Las Vegas operations increased by 2.0% offset in part by a 0.8% decrease at the Company's non-Las Vegas operations. The increase in fiscal 1998 was substantially due to sales from the food and beverage operations in the New York-New York Hotel & Casino resort in Las Vegas (the "New York-New York facilities") which opened in January 1997. At the New York-New York facilities the Company operates a 450 seat, twenty four hour a day restaurant (America); a 160 seat steakhouse (named Gallagher's under a license agreement with the owner of the New York restaurant of that name); a 120 seat Mexican restaurant (Gonzalez y Gonzalez); the resort's room service, banquet facilities and an employee dining facility. The Company also operates a complex of nine smaller eateries (Village Eateries) in the resort which simulate the experience of walking through New York City's Little Italy and Greenwich Village. The increase in fiscal 1998 was also due in part to the acquisition of a restaurant located in the Forum Shops at Caesar's Shopping Center in Las Vegas (Stage Deli of Las Vegas) and to the first full operating year of a restaurant which the Company opened in fiscal 1997 (The Grill Room). Same store sales in fiscal 1998 increased by 3.1% principally due to increased customer counts. COSTS AND EXPENSES The Company's cost of sales consists principally of food and beverage costs at restaurants owned by the Company. Cost of sales as a percentage of net sales was 26.4% in fiscal 1999, 26.6% in fiscal 1998, and 27.3% in fiscal 1997. Cost of sales in fiscal 1997 were impacted by higher cost of sales experienced during the early operating period at the Company's Las Vegas operations. Operating expenses of the Company, consisting of restaurant payroll, occupancy and other expenses at restaurants owned by the Company, as a percentage of net sales, were 62.7% in both fiscal 1999 and fiscal 1998, and 65.9% in fiscal 1997. This decrease in operating expenses in fiscal 1998 as compared to fiscal 1997 was principally due to efficiencies achieved at the Company's New York-New York facilities and to a lesser extent a benefit from the 3.1% increase in same store sales at the Company's other facilities. Operating expenses are net of gains on sale of restaurants totaling $752,000 or 0.7% of net sales in fiscal 1999, as compared to gains on sale of restaurants totaling $259,000 or 0.2% of sales in fiscal 1998. Gains on sale totaled $229,000 or 0.2% of sales in fiscal 1997. Restaurant payroll was 35.4% of sales in fiscal 1999, 35.1% in fiscal 1998, and 36.9% in fiscal 1997. Occupancy expenses -17- (consisting of rent, rent taxes, real estate taxes, insurance and utility costs) were 12.2% of net sales in fiscal 1999, 11.7% in fiscal 1998, and 12.5% in fiscal 1997. The Company incurred pre-opening expenses and early operating losses at newly opened restaurants of approximately $400,000 in fiscal 1999, $200,000 in fiscal 1998, and $2,000,000 in fiscal 1997. The fiscal 1997 pre-opening expenses and early operating losses were from the opening of the Company's New York-New York facilities. The Company typically incurs significant pre-opening expenses in connection with its new restaurants which are expensed as incurred. Furthermore, it is not uncommon that such restaurants experience operating losses during the early months of operation. General and administrative expenses, as a percentage of net sales, were 5.5% in fiscal 1999 and 5.2% in both fiscal 1998 and fiscal 1997. If net sales at managed restaurants were included in consolidated net sales, general and administrative expenses as a percentage of net sales would have been 5.0% in fiscal 1999, 4.7% in fiscal 1998, and 4.6% in fiscal 1997. As of October 2, 1999 the Company managed five restaurants owned by others (El Rio Grande and Arlo in Manhattan, the Marketplace Cafe, the Marketplace Grill, and the Brewskeller Pub in Boston, Massachusetts). Net sales of these restaurant facilities, which are not included in consolidated net sales were $9,804,000 in fiscal 1999, $12,390,000 in fiscal 1998, and $14,151,000 in fiscal 1997. The decrease in net sales at managed operations is principally due to the termination in fiscal 1998 of two management contracts at corporate dining facilities. Interest expense was $526,000 in fiscal 1999, $608,000 in fiscal 1998, and $931,000 in fiscal 1997. The decrease in fiscal 1999 from fiscal 1998 and the decrease in fiscal 1998 from fiscal 1997 is principally due to repayments of borrowings incurred in fiscal 1997. Such borrowings financed the construction costs and working capital requirements of the New York-New York facilities which opened in January 1997. Interest income was $226,000 in fiscal 1999, $210,000 in fiscal 1998, and $72,000 in fiscal 1997. The increase in fiscal 1999 and fiscal 1998 as compared to fiscal 1997 is due to interest earned on notes issued in connection with restaurants sold in fiscal 1997 and fiscal 1998. Other income, which generally consists of purchasing service fees, and the sale of logo merchandise at various restaurants, was $436,000 in fiscal 1999, $490,000 in fiscal 1998, and $780,000 in fiscal 1997. A significant portion of the amounts received in fiscal 1997 was principally due to amounts the Company received by a third party due to the temporary closing in fiscal 1994 and fiscal 1995 of a restaurant (Ernie's). INCOME TAXES The provision for income taxes reflects Federal income taxes calculated on a consolidated basis and state and local income taxes calculated by each New York subsidiary on a non consolidated basis. Most of the restaurants owned or managed by the Company are owned or managed by a separate subsidiary. For state and local income tax purposes, the losses incurred by a subsidiary may only be used to offset that subsidiary's income with the exception of the restaurants which operate 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 was 36.4% in fiscal 1999 and 40% in both fiscal 1998 and fiscal 1997. 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 operate have income tax rates substantially lower in comparison to New York) and the utilization of state and local net -18- 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. As a result of the enactment of the Revenue Reconciliation Act of 1993, the Company is entitled, commencing January 1, 1994, to a tax credit based on the amount of FICA taxes paid by the Company with respect to the tip income of restaurant service personnel. The net benefit to the Company was $512,000 in fiscal 1999, $506,000 in fiscal 1998 and $373,000 in fiscal 1997. The Internal Revenue Service is currently examining the Company's Federal Income Tax returns for the fiscal years ended September 28, 1991 through October 1, 1994, and has proposed certain adjustments, all of which are being contested by the Company. The adjustments primarily relate to (i) pre-opening, legal and accounting expenses incurred in connection with new or acquired restaurants that the Internal Revenue Service asserts should have been capitalized and amortized rather than currently expensed and (ii) travel and meal expenses for which the Internal Revenue Service asserts the Company did not comply with certain record keeping requirements of the Internal Revenue Code. The Company has reached an agreement in principle with the Internal Revenue Service to resolve the proposed adjustments. The Company does not believe that the final adjustments contemplated by the agreement in principle will 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 agreement 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. The net cash used in investing activities in fiscal 1999 ($6,096,027), fiscal 1998 ($4,179,043) and fiscal 1997 ($10,445,385) was principally from the Company's continued investment in fixed assets associated with constructing new restaurants and acquiring existing restaurants. In fiscal 1999, the Company opened a restaurant in Union Station in Washington, D.C. (Thunder Grill) and began constructing three restaurants and four food court outlets at the Venetian Casino Resort in Las Vegas, Nevada. In fiscal 1998, the Company acquired an existing restaurant in Las Vegas (the Stage Deli) and opened a new restaurant in Manhattan (Red). In fiscal 1997, the Company finished and opened the New York-New York facilities. The net cash used in financing activities in fiscal 1999 ($1,631,906) was due to the repurchase of 422,700 shares of the Company's outstanding common stock offset by a net increase in long-term debt in excess of debt repayments. The net cash used in financing activities in fiscal 1998 ($2,824,552) was principally due to the repurchase of 159,000 shares of the Company's outstanding common stock and repayments of debt on the Company's main credit facility in excess of borrowings on such facility. The net cash provided by financing activities in fiscal 1997 ($5,643,505) was principally due to proceeds of a private placement of 551,454 shares of the Company's common stock. At October 2, 1999, the Company had a working capital deficit of $3,044,204 as compared to working capital deficit of $719,343 at October 3,1998. Working capital deficit in fiscal 1999 was significantly impacted by cash expended for the construction of three restaurants and four food court outlets in the Venetian Casino Resort in Las Vegas, Nevada and four restaurants in Star Theatres entertainment center in Southfield, Michigan. The restaurant business does not require the maintenance of significant inventories or receivables, thus the Company is able to operate with negative working capital. The Company's Revolving Credit and Term Loan Facility with its main bank includes an $16,000,000 facility for use in construction of and acquisition of new restaurants and for working capital purposes at the Company's existing -19- restaurants. The facility allows the Company to borrow up to $16,000,000 (less the amount of any outstanding letters of credit) until April 2001 at which time outstanding loans mature. The loans bear interest at a rate of prime plus 1/2%. At October 2, 1999 the Company had borrowings of $5,850,000 outstanding on the facility. For each 1% change in the prime rate, the impact on the Company will be $60,000 based on the outstanding borrowings at October 2, 1999. The facility was amended in December 1999 to increase the Company's borrowing capacity. See "Recent Developments." The Company also has a $4,000,000 equipment financing line with its main bank, Bank Leumi for the acquisition of various kitchen equipment at the projects currently under construction in Las Vegas and Southfield, Michigan. The loans are repayable in 60 equal installments. As of October 2, 1999 the Company had no borrowings on this facility. The Revolving Credit and Term Loan Facility also includes a two year $2,000,000 Letter of Credit Facility for use in lieu of lease security deposits. At October 2, 1999 the Company had delivered $489,000 in irrevocable letters of credit on this facility. In December 1996, the Company raised net proceeds of $6,028,000 through a private placement of 551,454 shares of its common stock at $11 per share. The proceeds were used to repay a portion of the Company's outstanding borrowings on its Revolving Credit and Term Loan Facility and for the payment of capital expenditures on the Las Vegas restaurant facilities. The amount of indebtedness that may be incurred by the Company is limited by the revolving credit agreement with its main bank. Certain provisions of the agreement may impair the Company's ability to borrow funds. RESTAURANT EXPANSION The Company is constructing three restaurants in the recently opened Venetian Casino Resort in Las Vegas, Nevada. One restaurant is scheduled to open in the first quarter of fiscal 2000 and the other two will follow thereafter in fiscal 2000. The Company also opened one food court facility in May 1999 and three additional food court facilities opened in the first quarter of fiscal 2000. The Company expects to spend up to $15,000,000 to open and operate the restaurants and food court facilities at the Venetian Casino Resort. The Company is also constructing four restaurants, which are scheduled to open in the second quarter of fiscal 2000, at a large theatre development in Southfield, Michigan under a joint venture agreement with Sony Theatres' Loeks Star Partners and Millennium Partners. The Company anticipates that its share of the required capital contributions to meet the construction costs, initial inventories and pre-opening expenses will be $8,500,000. The Company has also signed leases to open one large restaurant along with a number of food court outlets at the new Aladdin Resort and Casino in Las Vegas, Nevada. This casino is currently under construction and is expected to open in the later part of fiscal 2000. The Company expects to spend up to $12,000,000 to open and operate these facilities. Although the Company is not currently committed to any other projects, the Company is exploring additional opportunities for expansion of its business. The Company expects to fund its projects through cash from operations and existing credit facilities. Additional expansion may require additional external financing. RECENT DEVELOPMENTS In December 1999, the Company entered into a new credit agreement with its main bank, Bank Leumi USA. The new agreement allows the Company to borrow up to $28,000,000 for use in construction of and acquisition of new restaurants and for working capital purposes at the Company's existing restaurants. After two years, the revolving loans -20- will be converted into term loans payable over 36 months. Outstanding loans bear interest at prime plus 1/2%. The new facility also includes a five-year $2,000,000 Letter of Credit Facility for use at the Company's restaurants in lieu of lease security deposits. At December 28, 1999, the Company had borrowings outstanding under the new facility in the amount of $16,800,000. The Financial Accounting Standards Board has recently issued several new accounting pronouncements: SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that the Company recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designed as a hedge of the exposure to changes in fair value of a recognized asset or liability or hedge of the exposure to variable cash flows of a forecasted transaction. The accounting for changes in fair value of a derivative (e.g. through earnings or outside earnings, through comprehensive income) depends on the intended use of the derivative and the resulting designation, SFAS No. 137 extends the effective date until fiscal years beginning after June 15, 2001. Statement of Position 98-5, Reporting on the Costs of Start-Up Activities, requires costs of start-up activities and organization costs to be expensed as incurred. The Statement is effective for fiscal years beginning after December 15, 1998. The Company currently expenses all start-up costs as incurred while organization costs are capitalized and amortized over five years. The initial application of this Statement will be reported by the Company in fiscal 2000 as a cumulative effect of a change in accounting principle. The Company had net deferred organization expenses of $300,513 in intangible assets as of October 2, 1999. SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, SFAS No. 135, Rescission of FASB Statement No. 75 and Technical Corrections, SFAS No. 136, Transfers of Assets to a Not-for-Profit Organization or Charitable Trust that Raises or Holds Contributions for Others, and SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities have been issued in the current year. YEAR 2000 The Company has assessed and continues to assess the impact of the Year 2000 issue on its reporting systems and operations. The Year 2000 issue exists because many computer systems and applications currently use two-digit fields to designate a year. When the century date occurs, date-sensitive systems may recognize the year 2000 as 1900 or not at all. This inability to recognize or properly treat the year 2000 may cause systems to process critical financial and operational information incorrectly. The Company's centralized financial accounting and reporting software system which processes information generated daily at each of the Company's restaurants is Year 2000 compliant. Additionally all hardware which processes such information is compliant at both corporate headquarters and the applicable restaurants. Several of the Company's restaurants had non-compliant point-of-sale systems. These systems process customer orders and generate billing information. The Company has modified those systems and or replaced the non-compliant systems. The Company's centralized purchasing system which process numerous orders from the Company's restaurants is Year 2000 compliant. All critical non-compliant systems have been remedied. The Company has contingency plans in place should there be a Year 2000 problem. Backup manual procedures are in place should the restaurant systems fail to properly address the Year 2000 date. The Company has spent to date approximately $115,000 and estimates that the additional cost of remediation will not exceed $10,000. -21- The Company has had communications with its significant vendors and service providers to determine the extent to which the Company's systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. At the Company's facilities at the New York-New York Hotel and Casino, for example, the Company utilizes and interfaces with systems provided by the Hotel and failure of the Hotel's computer systems to adequately address the Year 2000 issue may have a material adverse effect upon the Company. The Company has been advised by the Hotel that its systems are expected to be Year 2000 compliant. The Company is dependent upon major credit card issuers for the remittance to the Company of charges incurred by customers. The Company has been advised that the major credit card issuers in the United States have addressed the Year 2000 issues they confront and do expect that their systems will function properly in the Year 2000. Other vendors and service providers with which the Company does business may not have adequately addressed the year 2000 issue. However, the Company believes that there are numerous sources for the various products and services used by the Company and does not anticipate that Year 2000 compliance issues confronted by its vendors and service providers will have a material effect upon the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS ON WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL DISCLOSURE None. -22- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See Part I, Item 4. "Executive Officers of the Company." Other information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than January 31, 2000 pursuant to Regulation 14A of the General Rules and Regulations ("Regulation 14A") under the Securities Exchange Act of 1934, as amended. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than January 31, 2000 pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than January 31, 2000 pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than January 31, 2000 pursuant to Regulation 14A. -23- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS: PAGE ---- Independent Auditors' Report F-1 Consolidated Balance Sheets -- at October 2, 1999 and October 3, 1998 F-2 Consolidated Statements of Operations -- For each of the three fiscal years ended October 2, 1999, October 3, 1998 and September 27, 1997 F-3 Consolidated Statements of Shareholders' Equity -- For each of the three fiscal years ended October 2, 1999, October 3, 1998 and September 27, 1997 F-4 Consolidated Statements of Cash Flows -- For each of the three fiscal years ended October 2, 1999, October 3, 1998 and September 27, 1997 F-5 Notes to Consolidated Financial Statements F-6 (2) 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 By-Laws of the Registrant, incorporated by reference to Exhibit 3.4 to the 1994 10-K. 10.1 Amended and Restated Redemption Agreement dated June 29, 1993 between the Registrant and Michael Weinstein, incorporated by reference to Exhibit 10.1 to the 1994 10-K. 10.2 Form of Indemnification Agreement entered into between the Registrant and each of Michael Weinstein, Ernest Bogen, Vincent Pascal, Robert Towers, Jay Galin, Andrew Kuruc and Donald D. Shack, incorporated by reference to Exhibit 10.2 to the 1994 10-K. 10.3 Ark Restaurants Corp. Amended Stock Option Plan, incorporated by reference to Exhibit 10.3 to the 1994 10-K. -24- *10.4 Fourth Amended and Restated Credit Agreement dated as of December 27, 1999 between the Company and Bank Leumi USA. 10.5 Ark Restaurants Corp. 1996 Stock Option Plan, incorporated by reference to Exhibit 10.53 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 1996. 10.6 Lease Agreement dated May 17, 1996 between New York-New York Hotel, LLC, and Las Vegas America Corp., incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended October 3, 1998 (the "1998 10-K"). 10.7 Lease Agreement dated May 17, 1996 between New York-New York Hotel, LLC, and Las Vegas Festival Food Corp., incorporated by reference to Exhibit 10.7 to the 1998 10-K 10.8 Lease Agreement dated May 17, 1996 between New York-New York Hotel, LLC, and Las Vegas Steakhouse Corp., incorporated by reference to Exhibit 10.8 to the 1998 10-K *21 Subsidiaries of the Registrant. *23 Consent of Deloitte & Touche LLP. *27 Financial Data Schedule pursuant to Article 5 of Regulation S-X filed with EDGAR Version only. --------------------------------- *Filed Herewith (b) Reports on Form 8-K: None -25- INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Ark Restaurants Corp. We have audited the accompanying consolidated balance sheets of Ark Restaurants Corp. and its subsidiaries as of October 2, 1999 and October 3, 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended October 2, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ark Restaurants Corp. and subsidiaries as of October 2, 1999 and October 3, 1998, and the results of their operations and their cash flows for each of the three fiscal years in the period ended October 2, 1999, in conformity with generally accepted accounting principles. Deloitte & Touche LLP New York, New York November 22, 1999 ARK RESTAURANTS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -------------------------------------------------------------------------------- October 2, October 3, ASSETS 1999 1998 CURRENT ASSETS: Cash and cash equivalents $ 333,621 $ 1,023,046 Accounts receivable 3,073,615 3,450,307 Current portion of long-term receivables (Note 2) 446,043 415,755 Inventories 1,916,436 1,950,146 Deferred income taxes (Note 12) 710,095 908,468 Prepaid expenses and other current assets 336,041 491,129 ----------- ----------- Total current assets 6,815,851 8,238,851 ----------- ----------- LONG-TERM RECEIVABLES (Note 2) 1,184,331 1,119,110 ASSETS HELD FOR SALE (Note 3) 988,004 1,767,782 FIXED ASSETS - At cost Leasehold improvements 23,500,280 22,464,922 Furniture, fixtures and equipment 19,352,078 18,591,938 Leasehold improvements in progress 4,408,071 18,906 ----------- ----------- 47,260,429 41,075,766 Less accumulated depreciation and amortization 18,162,614 15,833,403 ----------- ----------- 29,097,815 25,242,363 ----------- ----------- INTANGIBLE ASSETS - Net (Note 4) 5,294,531 5,514,932 DEFERRED INCOME TAXES (Note 12) 846,657 1,030,908 OTHER ASSETS (Note 5) 3,151,914 1,131,233 ----------- ----------- $47,379,103 $44,045,179 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable - trade $ 3,815,760 $ 3,563,068 Accrued expenses and other current liabilities (Note 6) 4,736,897 3,850,766 Current maturities of capital lease obligations (Note 8) 148,657 229,944 Current maturities of long-term debt (Note 7) 972,330 609,283 Accrued income taxes (Note 12) 186,411 705,133 ----------- ----------- Total current liabilities 9,860,055 8,958,194 ----------- ----------- OBLIGATIONS UNDER CAPITAL LEASES (Note 8) -- 148,494 LONG-TERM DEBT - Net of current maturities (Notes 4 and 7) 6,683,076 4,405,351 OPERATING LEASE DEFERRED CREDIT (Notes 1 and 8) 1,322,000 1,471,000 COMMITMENTS AND CONTINGENCIES (Notes 5, 7 and 8) -- -- SHAREHOLDERS' EQUITY (Notes 7, 9 and 10): Common stock, par value $.01 per share - authorized, 10,000,000 shares; issued, 5,208,336 and 5,187,836 shares, respectively 52,084 51,879 Additional paid-in capital 14,399,956 14,214,898 Retained earnings 22,059,989 17,565,258 ----------- ----------- 36,512,029 31,832,035 Less treasury stock, 1,927,037 and 1,504,337 shares 6,998,057 2,769,895 ----------- ----------- 29,513,972 29,062,140 ----------- ----------- $47,379,103 $44,045,179 =========== =========== See notes to consolidated financial statements F-2 ARK RESTAURANT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS -------------------------------------------------------------------------------- YEAR ENDED -------------------------------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 27, 1999 1998 1997 NET SALES $110,800,913 $117,398,453 $104,326,386 COST OF SALES 29,301,303 31,265,702 28,451,887 ------------ ------------ ------------ Gross restaurant profit 81,499,610 86,132,751 75,874,499 MANAGEMENT FEE INCOME (Note 11) 869,254 1,139,799 1,153,264 ------------ ------------ ------------ 82,368,864 87,272,550 77,027,763 OPERATING EXPENSES: Payroll and payroll benefits 39,254,439 41,171,865 38,520,986 Occupancy 13,492,931 13,788,992 13,031,811 Depreciation and amortization 4,062,849 3,998,272 3,320,739 Other 12,654,868 14,671,521 13,922,524 ------------ ------------ ------------ 69,465,087 73,630,650 68,796,060 GENERAL AND ADMINISTRATIVE EXPENSES 6,069,903 6,052,435 5,445,990 ------------ ------------ ------------ 75,534,990 79,683,085 74,242,050 ------------ ------------ ------------ OPERATING INCOME 6,833,874 7,589,465 2,785,713 ------------ ------------ ------------ OTHER EXPENSE (INCOME): Interest expense (Note 7) 425,141 608,278 755,383 Interest income (225,996) (209,577) (71,652) Other income (Note 13) (435,610) (490,118) (780,281) ------------ ------------ ------------ (236,465) (91,417) (96,550) ------------ ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES 7,070,339 7,680,882 2,882,263 PROVISION FOR INCOME TAXES (Note 12) 2,575,608 3,068,741 1,144,608 ------------ ------------ ------------ NET INCOME $ 4,494,731 $ 4,612,141 $ 1,737,655 ============ ============ ============ NET INCOME PER SHARE - BASIC $ 1.30 $ 1.21 $ .47 ============ ============ ============ NET INCOME PER SHARE - DILUTED $ 1.29 $ 1.20 $ .46 ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 3,460,865 3,826,255 3,714,116 ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED 3,475,980 3,852,019 3,742,811 ============ ============ ============ See notes to consolidated financial statements. F-3 ARK RESTAURANTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997 ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK ADDITIONAL TOTAL --------------------- PAID-IN RETAINED TREASURY SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY BALANCE, SEPTEMBER 28, 1996 4,608,882 $ 46,089 $ 7,790,242 $11,215,462 $(1,247,399) $17,804,394 Common stock private placement 551,454 5,515 6,023,111 -- -- 6,028,626 Issuance of warrants -- -- 175,000 -- -- 175,000 Exercise of stock options 17,500 175 85,450 -- -- 85,625 Tax benefit on exercise of options -- -- 57,580 -- -- 57,580 Net income -- -- -- 1,737,655 -- 1,737,655 --------- -------- ------------ ------------ ----------- ------------ BALANCE, SEPTEMBER 27, 1997 5,177,836 51,779 14,131,383 12,953,117 (1,247,399) 25,888,880 Exercise of stock options 10,000 100 64,900 -- -- 65,000 Purchase of treasury stock -- -- -- -- (1,522,496) (1,522,496) Tax benefit on exercise of options -- -- 18,615 -- -- 18,615 Net income -- -- -- 4,612,141 -- 4,612,141 --------- -------- ------------ ------------ ----------- ------------ BALANCE, OCTOBER 3, 1998 5,187,836 51,879 14,214,898 17,565,258 (2,769,895) 29,062,140 Exercise of stock options 20,500 205 163,795 -- -- 164,000 Purchase of treasury stock -- -- -- -- (4,228,162) (4,228,162) Tax benefit on exercise of options -- -- 21,263 -- -- 21,263 Net income -- -- -- 4,494,731 -- 4,494,731 --------- -------- ------------ ------------ ----------- ------------ BALANCE, OCTOBER 2, 1999 5,208,336 $ 52,084 $ 14,399,956 $ 22,059,989 $(6,998,057) $ 29,513,972 ========= ======== ============ ============ =========== ============ See notes to consolidated financial statements F-4 ARK RESTAURANT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------------------------------------------------- YEAR ENDED -------------------------------------------------------------- OCTOBER 2, OCTOBER 3, SEPTEMBER 27, 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,494,731 $ 4,612,141 $ 1,737,655 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of fixed assets 3,330,568 3,432,104 3,047,422 Amortization of intangibles 732,281 566,168 445,123 Gain on sale of restaurants (752,274) (258,684) (229,000) Operating lease deferred credit (149,000) (57,000) (19,000) Deferred income taxes 382,624 57,164 (431,966) Changes in assets and liabilities: Decrease (increase) in accounts receivable 376,692 (663,873) (682,935) Decrease (increase) in inventories 33,710 (17,020) (890,567) Increase (decrease) in prepaid expenses and other current assets 155,088 (58,313) 112,961 (Increase) decrease in other assets, net (2,111,012) (543,820) 60,008 Increase in accounts payable - trade 252,692 2,818 1,194,311 Decrease (increase) in accrued income taxes (518,722) 291,263 89,476 Increase (decrease) in accrued expenses and other current liabilities 811,130 (58,590) 183,672 ----------- ----------- ------------ Net cash provided by operating activities 7,038,508 7,304,358 4,617,160 ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to fixed assets (6,989,405) (1,713,847) (11,006,116) Additions to intangible assets (384,880) (229,524) (11,639) Issuance of demand notes and long-term receivables (95,611) (81,580) - Payments received on demand notes and long-term receivables 398,869 315,908 264,370 Restaurant sales 975,000 265,000 308,000 Restaurant acquisitions - (2,735,000) - ----------- ----------- ------------ Net cash used in investing activities (6,096,027) (4,179,043) (10,445,385) ----------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payment on long-term debt (5,659,226) (8,012,164) (10,277,900) Issuance of long-term debt 8,300,000 6,900,000 10,000,831 Exercise of stock options 185,263 83,615 143,205 Principal payment on capital lease obligations (229,781) (273,507) (251,257) Purchase of treasury stock (4,228,162) (1,522,496) - Proceeds from common stock private placement - - 6,028,626 ----------- ----------- ------------ Net cash provided by (used in) financing activities (1,631,906) (2,824,552) 5,643,505 ----------- ----------- ------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (689,425) 300,763 (184,720) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,023,046 722,283 907,003 ----------- ----------- ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 333,621 $ 1,023,046 $ 722,283 =========== =========== ============ SUPPLEMENTAL INFORMATION: Cash payments for the following were: Interest $ 526,382 $ 608,278 $ 931,383 =========== =========== ============ Income taxes $ 2,690,443 $ 2,699,651 $ 1,502,643 =========== =========== ============ See notes to consolidated financial statements. F-5 ARK RESTAURANTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997 -------------------------------------------------------------------------------- 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ark Restaurants Corp. and subsidiaries (the "Company") own and operate 22 restaurants, and manage five restaurants, of which 14 are in New York City, four in Washington, D.C., four in Las Vegas, Nevada (three within the New York New York Hotel and Casino Resort), three in Boston, Massachusetts and one each in McLean, Virginia; and Islamorada, Florida. Along with the three restaurants within the New York New York Hotel & Casino Resort, the Company also operates the Resort's room service, banquet facilities, employee dining room and a complex of nine smaller cafes and food operations. The Company also operates four food court operations within the Venetian Casino Resort in Las Vegas, Nevada. The Company's other operations include catering businesses in New York City and Washington, D.C. as well as wholesale and retail bakeries in New York City. ACCOUNTING PERIOD - The Company's fiscal year ends on the Saturday nearest September 30. The fiscal years ended October 2, 1999, and September 27, 1997, included 52 weeks and the fiscal year ended October 3, 1998, included 53 weeks. SIGNIFICANT ESTIMATES - In the process of preparing its consolidated financial statements, the Company estimates the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. The primary estimates underlying the Company's financial statements include allowances for potential bad debts on accounts and notes receivable, the useful lives and recoverability of its assets, such as property and intangibles, fair values of financial instruments, the realizable value of its tax assets and other matters. Management bases its estimates on certain assumptions, which they believe are reasonable in the circumstances, and while actual results could differ from those estimates, management does not believe that any change in those assumptions in the near term would have a material effect on the Company's consolidated financial position or the results of operation. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliated companies where the Company is able to exercise significant influence over operating and financial policies even though the Company holds 50% or less of the voting stock, are accounted for under the equity method. CASH EQUIVALENTS - Cash equivalents include instruments with original maturities of three months or less. ACCOUNTS RECEIVABLE - Included in accounts receivable are amounts due from employees of $994,915 and $1,069,852 at October 2, 1999 and October 3, 1998, respectively. Such amounts, which are due on demand, are principally due from various employees exercising stock options in accordance with the Company's Stock Option Plan (see Note 10). F-6 INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out) or market, and consist of food and beverages, merchandise for sale and other supplies. FIXED ASSETS - Leasehold improvements and furniture, fixtures and equipment are stated at cost. Depreciation of furniture, fixtures and equipment (including equipment under capital leases) is computed using the straight-line method over the estimated useful lives of the respective assets (seven years). Amortization of improvements to leased properties is computed using the straight-line method based upon the initial term of the applicable lease or the estimated useful life of the improvements, whichever is less, and ranges from 5 to 35 years. The Company includes in leasehold improvements in progress restaurants that are under construction. Once the projects have been completed the Company will begin depreciating the assets. The Company annually assesses any impairments in value of long-lived assets and certain identifiable intangibles to be held and used. For the year ending October 2, 1999, no impairments were deemed necessary. Costs incurred during the construction period of restaurants, including rental of premises, training and payroll, are expensed as incurred. INTANGIBLE AND OTHER ASSETS - Costs associated with acquiring leases and subleases, principally purchased leasehold rights, have been capitalized and are being amortized on the straight-line method based upon the initial terms of the applicable lease agreements, which range from 10 to 21 years. Goodwill recorded in connection with the acquisition of shares of the Company's common stock from a former shareholder, as discussed in Note 4, is being amortized over a period of 40 years. Goodwill arising from restaurant acquisitions is being amortized over periods ranging from 10 to 15 years. Legal and other costs incurred to organize restaurant corporations are capitalized as organization costs and are amortized over a period of 5 years (See Future Impact of Recently Issued Accounting Standards). Covenants not to compete arising from restaurant acquisitions are amortized over the contractual period of 5 years. Certain legal and bank commitment fees incurred in connection with the Company's Revolving Credit and Term Loan Facility, as discussed in Note 7, were capitalized as deferred financing fees and are being amortized over four years, the term of the facility. OPERATING LEASE DEFERRED CREDIT - Several of the Company's operating leases contain predetermined increases in the rentals payable during the term of such leases. For these leases, the aggregate rental expense over the lease term is recognized on a straight-line basis over the lease term. The excess of the expense charged to operations in any year and amounts payable under the leases during that year are recorded as a deferred credit. The deferred credit subsequently reverses over the lease term (Note 8). OCCUPANCY EXPENSES - Occupancy expenses include rent, rent taxes, real estate taxes, insurance and utility costs. INCOME PER SHARE OF COMMON STOCK - Net income per share is computed in accordance with Statement of Financial Accounting Standard ("SFAS") No. 128, Earnings Per Share, and is calculated on the basis F-7 of the weighted average number of common shares outstanding during each period plus the additional dilutive effect of common stock equivalents. Common stock equivalents consist of dilutive stock options. STOCK OPTIONS - The Company accounts for its stock options granted to employees under the intrinsic value-based method for employee stock-based compensation and provides pro forma disclosure of net income and earnings per share as if the accounting provision of SFAS No.123 had been adopted. The Company generally does not grant options to outsiders. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - The Financial Accounting Standard Board has issued SFAS No. 130, Reporting Comprehensive Income, which is effective for fiscal years beginning after December 15, 1997 and establishes standards for reporting and display of comprehensive income and its components. There are no items that would require presentation in a separate statement of comprehensive income. SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also established standards for related disclosures about products and services, geographic areas, and major customers. Management views its operations as one segment. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Financial Accounting Standards Board has issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which revises employers' disclosures about pension and other postretirement benefit plans. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. This statement has no impact on the Company. FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - The Financial Accounting Standards Board has recently issued several new accounting pronouncements. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that the Company recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designed as a hedge of the exposure to changes in fair value of a recognized asset or liability or hedge of the exposure to variable cash flows of a forecasted transaction. The accounting for changes in fair value of a derivative (e.g., through earnings or outside earnings, through comprehensive income) depends on the intended use of the derivative and the resulting designation. SFAS No. 137 extends the effective date until fiscal years beginning after June 15, 2001. Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" requires costs of start-up activities and organization costs to be expensed as incurred. The Statement is effective for fiscal years beginning after December 15, 1998. The company currently expenses all start-up costs as incurred while organization costs are capitalized and amortized over five years. The initial application of this Statement will be reported by the Company in 2000 as a cumulative effect of a change in accounting principle. The Company carried approximately $300,000 of net deferred organizational expenses on its books as of October 2, 1999. F-8 SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, SFAS No. 135, Rescission of FASB Statement No. 75 and Technical Corrections, SFAS No. 136, Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions for Others, and SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities have all been issued in the current year. The effect of the adoption of the statements on the Company's consolidated financial statements is not expected to be material. RECLASSIFICATIONS - Certain reclassifications have been made to the 1998 and 1997 financial statements to conform to the 1999 presentation. F-9 2. LONG-TERM RECEIVABLES Long-term receivables consist of the following: October 2, October 3, 1999 1998 Note receivable secured by fixed assets and lease at a restaurant sold by the Company, at 8% interest; due in monthly installments through December 2006 (a) $ 514,706 $ 564,769 Note receivable secured by fixed assets and lease at a restaurant sold by the Company, at 7.5% interest; due in monthly installments through March 2002 (b) 112,571 153,187 Note receivable secured by fixed assets and lease at a restaurant sold by the Company, at 7.5% interest; due in monthly installments through April 2000 (c) 126,796 331,700 Note receivable secured by fixed assets and lease at a restaurant sold by the Company, at 7.5% interest; due in monthly installments commencing May 2000 through December 2008 (c) 445,118 207,983 Note receivable secured by fixed assets and lease at a restaurant sold by the Company, at 10.0% interest; due in monthly installments through April 2004 (d) 244,565 - Advances for construction and working capital, at one of the Company's managed locations, at 15% interest; due in monthly installments through December 2000 98,110 164,446 Advances for construction, at one of the Company's managed locations, at prime plus 1%; due in monthly installments through December 1999 9,390 33,662 Note receivable, secured by personal guarantees of officers of a managed restaurant and fixed assets at that location, at 15% interest; due in monthly installments, through September 2000 79,118 79,118 ----------- ----------- 1,630,374 1,534,865 Less current portion 446,043 415,755 ----------- ----------- $ 1,184,331 $ 1,119,110 =========== =========== (a) In December 1996, the Company sold a restaurant for $900,000. Cash of $50,000 was received on sale and the balance is due in installments through December 2006. (b) In October 1996, the Company sold a restaurant for $258,500. Cash of $50,000 was received on sale and the balance is due in installments through March 2002. The Company recognized a gain of $134,000 on this sale in the fiscal year ended September 27, 1997. F-10 (c) In October 1997, the Company sold a restaurant for $1,750,000, of which $200,000 was paid in cash and the balance is due in monthly installments under the terms of two notes bearing interest at a rate of 7.5%. One note, with an initial principal balance of $400,000, is being paid in 24 monthly installments of $18,569 through April 2000. The second note, with an initial principal balance of $1,150,000, will be paid in 104 monthly installments of $14,500 commencing May 2000 and ending December 2008. At December 2008, the then outstanding balance of $519,260 matures. The Company recognized a gain on sale of approximately $142,000, and $185,000 in the fiscal years ended October 2, 1999 and October 3, 1998, respectively. Additional deferred gains totaling $882,000 and $1,024,000 for the fiscal years ended October 2, 1999 and October 3, 1998, respectively, could be recognized in future period as the notes are collected. The Company deferred recognizing this additional gain and recorded an allowance for possible uncollectible note against the second outstanding note. This uncertainty is based on the significant length of time of this note (over 10 years) and the substantial balance which matures in December 2008 ($519,260). (d) In December 1998, the company sold a restaurant for $500,000, of which $250,000 was paid in cash and the balance of $250,000 was financed by a note. The note is due in monthly installments of $5,537, inclusive of interest at 10%, from May 1999 through April 2004. The Company recognized a gain of $207,220 on this sale in the fiscal year ended October 2, 1999. The carrying value of the Company's long-term receivables approximates its current aggregate fair value. 3. ASSETS HELD FOR SALE At October 2, 1999, the Company was actively pursuing the sale of one restaurant and accordingly reclassified the net fixed assets ($935,097) and inventories ($52,907) as assets held for sale. At October 3, 1998, the Company was actively pursuing the sale of two restaurants and accordingly reclassified the net fixed assets ($1,625,834) and inventories ($141,948) as assets held for sale. 4. INTANGIBLE ASSETS Intangible assets consist of the following: October 2, October 3, 1999 1998 Goodwill (a) $6,222,877 $6,222,877 Purchased leasehold rights (b) 750,740 652,740 Noncompete agreements and other (c) 790,000 790,000 Organization costs 789,521 678,491 ---------- ---------- 8,553,138 8,344,108 Less accumulated amortization 3,258,607 2,829,176 ---------- ---------- $5,294,531 $5,514,932 ========== ========== F-11 (a) In August 1985, certain subsidiaries of the Company acquired approximately one-third of the then outstanding shares of common stock (964,599 shares) from a former officer and director of the Company for a purchase price of $3,000,000. The consolidated balance sheets reflect the allocation of $2,946,000 to goodwill. (b) Purchased leasehold rights arise from acquiring leases and subleases of various restaurants. (c) During fiscal 1998, the Company acquired a restaurant for $2,735,000 in cash. The acquisition was accounted for as a purchase transaction with the purchase price allocated as follows: leasehold improvements $200,000; furniture, fixtures and equipment $300,000; and goodwill $2,235,000. 5. OTHER ASSETS Other assets consist of the following: October 2, October 3, 1999 1998 Deposits $ 313,142 $ 353,674 Deferred financing fees 144,195 214,192 Investments in and advances to affiliates (a) 2,694,577 563,367 ---------- ---------- $3,151,914 $1,131,233 ========== ========== (a) The Company, through a wholly owned subsidiary, became a general partner with a 19% interest in a partnership which acquired on July 1, 1987 an existing Mexican food restaurant, El Rio Grande, in New York City. Several related parties also participate as limited partners in the partnership. The Company's equity in earnings of the limited partnership was $65,000, $80,000 and $40,000, for the years ended October 2, 1999, October 3, 1998 and September 27, 1997, respectively. The Company also manages El Rio Grande through another wholly owned subsidiary on behalf of the partnership. Management fee income relating to these services was $358,000, $421,000 and $311,000 for the years ended October 2, 1999, October 3, 1998 and September 27, 1997, respectively (Note 11). The Company, through a wholly owned subsidiary, became a partner with a 50% interest in a partnership to construct and develop four restaurants at a large theatre development in Southfield, Michigan. At October 2, 1999 and October 3, 1998 the Company's investment in the partnership was $2,691,000 and $567,000, respectively. The Company is committed to investing $6,000,000 in the partnership, and also anticipates loaning an additional $2,500,000 to open the restaurants, which are expected to open in the March 2000 fiscal quarter. F-12 6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following: OCTOBER 2, OCTOBER 3, 1999 1998 Sales tax payable $ 782,365 $ 928,225 Accrued wages and payroll related costs 877,758 675,520 Customer advance deposits 1,083,000 943,000 Accrued and other liabilities 1,993,774 1,304,021 ---------- ---------- $4,736,897 $3,850,766 ========== ========== 7. LONG-TERM DEBT Long-term debt consists of the following: