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: OCTOBER 2, OCTOBER 3, 1999 1998 Revolving Credit and Term Loan Facility with interest at the prime rate, plus 1/2%, payable on April 30, 2001 (a) $5,850,000 $2,600,000 Notes issued in connection with refinancing of restaurant equipment, at 8.75%, payable in monthly installments through January 2002 (b) 1,439,171 1,990,827 Note issued in connection with acquisition of restaurant site, at 7.25%, payable in monthly installments through January 1, 2000 (c) 366,235 423,807 ---------- ---------- 7,655,406 5,014,634 Less current maturities 972,330 609,283 ---------- ---------- $6,683,076 $4,405,351 ========== ========== (a) The Company's Revolving Credit and Term Loan Facility with its main bank (Bank Leumi USA), as amended September 1999, includes a $16,000,000 facility to finance the development and construction of new restaurants and for working capital purposes at the Company's existing restaurants. Outstanding loans bear interest at 1/2% above the bank's prime rate. Any outstanding loans on April 2001 are due in full. The Facility also includes a two-year Letter of Credit Facility for use in lieu of lease security deposits. The Company generally is required to pay commissions of 1 1/2% per annum on outstanding letters of credit. The Company's subsidiaries each guaranteed the obligations of the Company under the foregoing facilities and granted security interests in their respective assets as collateral for such guarantees. In addition, the Company pledged stock of such subsidiaries as security for obligations of the Company under such facilities. F-13 The agreement includes restrictions relating to, among other things, indebtedness for borrowed money, capital expenditures, advances to managed businesses, mergers, sale of assets, dividends and liens on the property of the Company. The agreement also contains financial covenants requiring the Company to maintain a minimum ratio of debt to net worth, minimum shareholders' equity and a minimum ratio of cash flow prior to debt service. The Company is in compliance with all covenants. (b) In January 1997, the Company borrowed from its main bank, $2,851,000 to refinance the purchase of various restaurant equipment at its food and beverage facilities in a hotel and casino in Las Vegas, Nevada. The notes bear interest at 8.75% per annum and are payable in 60 equal monthly installments of $58,833 inclusive of interest, until maturity in January 2002. The Company granted the bank a security interest in such restaurant equipment. In connection with such financing, the Company granted the bank the right to purchase 35,000 shares of the Company's common stock at the exercise price of $11.625 per share through December 2001. The fair value of the warrants was estimated at the date of grant, credited to additional paid-in capital and is being amortized over the life of the warrant. (c) In November 1994, the Company issued a $600,000 note in connection with the acquisition of a restaurant in the Florida Keys. The Company remits monthly payments of $7,044 inclusive of interest until January 1, 2000, at which time the outstanding balance of $358,511 is due. The debt is secured by the leasehold improvements and tangible personal property at the restaurant. Required principal payments on long-term debt are as follows: YEAR AMOUNT 2000 $ 972,330 2001 6,509,122 2002 173,954 ---------- $7,655,406 ========== During the fiscal years ended October 2, 1999, October 3, 1998 and September 27, 1997, interest expense was $526,411, $608,278 and $931,383, respectively, of which $101,000 and $176,000 was capitalized during the fiscal years ended October 2, 1999 and September 27, 1997, respectively. The carrying value of the Company's long-term debt approximates its current aggregate fair value. 8. COMMITMENTS AND CONTINGENCIES LEASES - The Company leases its restaurants, bar facilities, and administrative headquarters through its subsidiaries under terms expiring at various dates through 2029. Most of the 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 restaurants' sales in excess of stipulated amounts at such facility. F-14 As of October 2, 1999, future minimum lease payments, net of sublease rentals, under noncancelable leases are as follows: OPERATING CAPITAL YEAR LEASES LEASES 2000 $ 7,147,104 $154,281 2001 7,353,938 -- 2002 7,406,725 -- 2003 7,406,003 -- 2004 6,845,236 -- Thereafter 24,392,535 -- ----------- -------- Total minimum payments $60,551,541 154,281 =========== Less amount representing interest 5,624 -------- Present value of net minimum lease payments $148,657 ======== In connection with the leases included in the table above, the Company obtained and delivered irrevocable letters of credit in the aggregate amount of $488,750 as security deposits under such leases. Rent expense was $9,638,551, $9,940,639 and $9,102,267 during the fiscal years ended October 2, 1999, October 3, 1998 and September 27, 1997, respectively. Rent expense for the fiscal years ended October 2, 1999, October 3, 1998 and September 27, 1997 includes approximately $149,000, $57,000 and $19,000 operating lease deferred credits, representing the difference between rent expense recognized on a straight-line basis and actual amounts currently payable. Contingent rentals, included in rent expense, were $2,799,585, $2,769,721 and $2,432,404 for the fiscal years ended October 2, 1999, October 3, 1998 and September 27, 1997, respectively. 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. 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 F-15 sustained in this action will have a materially adverse effect on the Company's business or 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 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 the first allegation is entirely without merit and that the Company has no liability. 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 results of 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 practice charges will have a material adverse effect upon the Company's financial condition or results of operations. The Company believes that these unfair labor practice charges and the litigation 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 support. The Company believes the union is seeking to achieve recognition as the bargaining agent for such employees through a campaign directed not at the Company's employees but at the Company 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 7 present and former employees of the restaurants owned by such subsidiaries alleging violations of the District of Columbia Wage & Hours 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. F-16 9. SHAREHOLDERS' EQUITY COMMON STOCK PRIVATE PLACEMENT - In December 1996, the Company raised net proceeds of $6,028,626 in a private placement of 551,454 shares of its common stock at $11 per share. The proceeds of such offering were used to repay a portion of the Company's outstanding bank borrowings and for the payment of capital expenditures on its Las Vegas restaurant facilities at the New York New York Hotel & Casino in Las Vegas which opened in January 1997. COMMON STOCK REPURCHASE PLAN - In August 1998, the Company authorized the repurchase of up to 500,000 shares of the Company outstanding common stock. In April 1999, the Company authorized the repurchase of an additional 300,000 shares of the Company outstanding common stock. For the years ended October 2, 1999 and October 3, 1998 the Company repurchased 422,700 and 159,000 shares at a total cost of $4,228,162 and $1,522,496, respectively. 10. STOCK OPTIONS On October 15, 1985, the Company adopted a Stock Option Plan (the "Plan") pursuant to which the Company reserved for issuance an aggregate of 175,000 shares of common stock. In May 1991 and March 1994, the Company amended such Plan to increase the number of shares issuable under the Plan to 350,000 and 447,650, respectively. In March 1996, the Company adopted a second plan and reserved for issuance an additional 135,000 shares. In March 1997, the Company amended this plan to increase the number of shares included under the plan to 270,000. Options granted under the Plans to key employees are exercisable at prices at least equal to the fair market value of such stock on the dates the options were granted. The options expire five years after the date of grant and are generally exercisable as to 25% of the shares commencing on the first anniversary of the date of grant and as to an additional 25% commencing on each of the second, third and fourth anniversaries of the date of grant. F-17 Additional information follows: 1999 1998 1997 -------------------------------------------------------------- ------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE Outstanding, beginning of year 311,500 $10.86 227,500 $10.38 105,625 $ 7.18 Options: Granted 214,000 10.00 100,000 11.38 150,000 11.71 Exercised (20,500) 8.00 (10,000) 6.50 (17,500) 4.89 Canceled or expired (16,500) 9.24 (6,000) 8.63 (10,625) 6.37 --------- -------- -------- Outstanding, end of year (a) 488,500 10.65 311,500 10.86 227,500 10.38 --------- -------- -------- Price Range, Outstanding Shares $8.00 - $12.00 $8.00 - $12.00 $6.50 - $12.00 Weighted Average Years 3.3 years 3.2 years 3.53 years Shares available for future grant 22,500 20,000 120,000 --------- -------- -------- Options exercisable (a) 178,917 10.78 117,583 10.13 47,500 7.65 --------- -------- -------- (a) Options become exercisable at various times until expiration dates ranging from October 1999 through April 2004. Statement of Financial Accountings Standards No. 123, Accounting for Stock-Based Compensation, ("SFAS No. 123") requires the Company to disclose pro forma net income and pro forma earnings per share information for employee stock option grants to employees as if the fair-value method defined in SFAS No. 123 had been applied. The fair value of each stock-option grant is estimated on the date of grant using the Black-Scholes option pricing. The assumptions for fiscal 1999 include: risk-free interest rate of 6.25%; no dividend yield; expected life of four years; and expected volatility of 38%. The assumptions for fiscal 1998 include; risk free interest rate of 5.5%; no dividend yield; expected life of four years; and expected volatility of 75%. The assumptions for fiscal 1997 include; risk-free interest rate of 6.5%; no dividend yield; expected life of 4 years and expected volatility of 38%. The pro forma impact was as follows: YEAR ENDED ------------------------------------------------------ OCTOBER 2, OCTOBER 3, SEPTEMBER 27, 1999 1998 1997 Net earnings as reported $4,494,731 $4,612,141 $1,737,655 Net earnings - pro forma 4,307,357 4,464,576 1,694,991 Earnings per share as reported - basic $ 1.30 $ 1.21 $ 0.47 Earnings per share as reported - diluted 1.29 1.20 0.46 Earnings per share pro forma - basic 1.24 1.17 0.46 Earnings per share pro forma - diluted 1.24 1.16 0.45 F-18 The exercise of nonqualified stock options in the fiscal years ended October 2, 1999, October 3, 1998 and September 27, 1997 resulted in income tax benefits of $21,263, $18,615 and $57,580, respectively, which were credited to additional paid-in capital. The income tax benefits result from the difference between the market price on the exercise date and the option price. 11. MANAGEMENT FEE INCOME As of October 2, 1999, the Company provides management services to five restaurants owned by outside parties. In accordance with the contractual arrangements, the Company earns fixed fees and management fees based on restaurant sales and operating profits as defined by the various management agreements. Restaurants managed had net sales of $9,803,693, $12,738,639 and $14,151,888 during the management periods within the years ended October 2, 1999, October 3, 1998 and September 27, 1997, respectively, which are not included in consolidated net sales of the Company. 12. INCOME TAXES The provision for income taxes reflects Federal income taxes calculated on a consolidated basis and state and local income taxes calculated by each subsidiary on a nonconsolidated basis. For New York State and City income tax purposes, the losses incurred by a subsidiary may only be used to offset that subsidiary's income. The provision for income taxes consists of the following: YEAR ENDED ------------------------------------------------------ OCTOBER 2, OCTOBER 3, SEPTEMBER 27, 1999 1998 1997 Current provision: Federal $1,298,451 $1,892,997 $ 668,391 State and local 894,533 1,117,363 908,183 ---------- ---------- ---------- 2,192,984 3,010,360 1,576,574 ---------- ---------- ---------- Deferred provision (credit): Federal 349,299 100,486 (329,602) State and local 33,325 (42,105) (102,364) ---------- ---------- ---------- 382,624 58,381 (431,966) ---------- ---------- ---------- $2,575,608 $3,068,741 $1,144,608 ========== ========== ========== F-19 The provision for income taxes differs from the amount computed by applying the Federal statutory rate due to the following: Year Ended ------------------------------------------------- October 2, October 3, September 27, 1999 1998 1997 Provision for Federal income taxes (34%) $ 2,404,000 $ 2,612,000 $ 980,000 State and local income taxes net of Federal tax benefit 612,000 710,000 532,000 Amortization of goodwill 26,000 26,000 26,000 Tax credits (512,000) (506,000) (373,000) Other 45,608 226,741 (20,392) ----------- ----------- ----------- $ 2,575,608 $ 3,068,741 $ 1,144,608 =========== =========== =========== Deferred tax assets or liabilities are established for (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss carryforwards. The tax effects of items comprising the Company's net deferred tax asset are as follows: October 2, October 3, 1999 1998 Deferred tax assets: Operating loss carryforwards $ 1,035,396 $ 839,253 Operating lease deferred credits 570,370 634,516 Carryforward tax credits 976,725 1,086,025 Depreciation and amortization 114,662 22,104 Deferred Gains (270,112) -- Valuation allowance (870,289) (642,522) ----------- ----------- $ 1,556,752 $ 1,939,376 =========== =========== A valuation allowance for deferred taxes is required if, based on the evidence, it is more likely than not that some of the deferred tax assets will not be realized. The Company believes that uncertainty exists with respect to future realization of certain operating loss carryforwards and operating lease deferred credits. Therefore, the Company provided a valuation allowance of $870,289 at October 2, 1999 and $642,522 at October 3, 1998. The Company has state operating loss carryforwards of $11,671,000 and local operating loss carryforwards of $8,270,000, which expire in the years 2002 through 2014. The Internal Revenue Service is currently examining the Company's federal income tax returns for fiscal years ended September 28, 1991 through October 1, 1994, and the Internal Revenue Service 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 F-20 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. 13. OTHER INCOME Other income consists of the following: YEAR ENDED ---------------------------------------- October 2, October 3, September 27, 1999 1998 1997 Purchasing service fees $ 88,061 $124,455 $ 86,073 Insurance proceeds (a) -- -- 377,427 Sales of logo T-shirts and hats 133,819 160,596 171,259 Other 213,730 205,067 145,522 -------- -------- -------- $435,610 $490,118 $780,281 ======== ======== ======== (a) In July 1994, the Company was required to close a restaurant in Manhattan (Ernie's) on a temporary basis to enable structural repairs to be made to the ceiling of the restaurant. The cost of such repairs, other ongoing restaurant operating expenses and a guaranteed profit were borne by a third party. The restaurant reopened in February 1995 and the agreement provided that the third party continue to guarantee some level of operating profits through January 1998. During the fiscal year ended September 27, 1997, the Company received $377,427 in excess of the continuing restaurant operating expenses. 14. INCOME PER SHARE OF COMMON STOCK The Company adopted in the first quarter of fiscal 1998, The Financial Accounting Standards Board Statement No. 128, "Earnings per Share," which established new standards for computing and presenting earnings per share. The Company now discloses "Basic Earnings per Share," which is based upon the weighted average number of shares of common stock outstanding during each period and "Diluted Earnings per Share," which requires the Company to include common stock equivalents consisting of dilutive stock options and warrants. The Company also retroactively applied the new standard to all periods presented. F-21 A reconciliation of the numerators and denominators of the basic and diluted per share computations follow. Income Shares Per-share (Numerator) (Denominator) Amount Year ended October 2, 1999: Basic EPS $4,494,731 3,460,865 $ 1.30 Stock options and warrants -- 15,115 0.01 ---------- --------- ------ Diluted EPS 4,494,731 3,475,980 1.29 Year ended October 3, 1998: Basic EPS 4,612,141 3,826,255 1.21 Stock options and warrants -- 25,764 0.01 ---------- --------- ------ Diluted EPS 4,612,141 3,852,019 1.20 Year ended September 27, 1997: Basic EPS 1,737,655 3,714,116 0.47 Stock options and warrants -- 28,695 0.01 ---------- --------- ------ Diluted EPS 1,737,655 3,742,811 0.46 15. QUARTERLY INFORMATION (UNAUDITED) The following table sets forth certain quarterly operating data. Fiscal Quarter Ended ------------------------------------------------------------------- January 2 April 3 July 3 October 2, 1999 1999 1999 1999 1999 Net sales $26,933,489 $ 23,344,731 $31,563,976 $28,958,717 Gross restaurant profit 19,823,052 16,983,679 23,408,382 21,284,497 Net income (loss) 1,025,576 (156,178) 2,115,333 1,510,000 Net income (loss) per share - basic $ 0.28 $ (0.04) $ 0.63 $ 0.46 Net income (loss) per share - diluted $ 0.28 $ (0.04) $ 0.63 $ 0.45 Fiscal Quarter Ended ------------------------------------------------------------------- December 27, March 28, June 27, October 3, 1997 1998 1998 1998 1998 Net sales $26,940,384 $ 25,198,012 $33,029,512 $32,230,545 Gross restaurant profit 19,692,165 18,345,554 24,432,866 23,662,166 Net income (loss) 727,441 (254,154) 2,428,676 1,710,178 Net income (loss) per share - basic and diluted $ 0.19 $ (0.07) $ 0.63 $ 0.45 F-22 FISCAL QUARTER ENDED ------------------------------------------------------------------- December 28, March 29, June 28, September 27, 1996 1997 1997 1997 1997 Net sales $ 18,166,656 $ 24,887,795 $31,469,304 $29,802,631 Gross restaurant profit 13,068,926 17,775,683 22,922,594 22,107,296 Net income (loss) (552,503) (1,108,203) 1,947,476 1,450,885 Net income (loss) per share basic and diluted $ (0.16) $ (0.29) $ 0.51 $ 0.38 16. SUBSEQUENT EVENTS (UNAUDITED) 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 will be converted into term loans payable over 36 months. Outstanding loans bear interest at prime + 1/2%. The agreement 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. ****** F-23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 27th day of December, 1999. ARK RESTAURANTS CORP. By: s/ Michael Weinstein ----------------------------- MICHAEL WEINSTEIN, President Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been duly signed by the following persons in the capacities and on the date indicated. Signature Title Date --------- ----- ---- s/Ernest Bogen Chairman of the Board December 27, 1999 ----------------------- (Ernest Bogen) s/Michael Weinstein President and Director December 27, 1999 ----------------------- (Michael Weinstein) s/Vincent Pascal Vice President, December 27, 1999 ----------------------- Secretary and Director (Vincent Pascal) s/Robert Towers Vice President, Treasurer, December 27, 1999 ----------------------- Principal Financial Officer (Robert Towers) and Director s/Andrew Kuruc Vice President, Controller, December 27, 1999 ----------------------- Principal Accounting Officer (Andrew Kuruc) and Director Donald D. Shack Director December 27, 1999 ----------------------- (Donald D. Shack) s/Jay Galin Director December 27, 1999 ----------------------- (Jay Galin) s/Paul Gordon Director December 27, 1999 ----------------------- (Paul Gordon) EX-10 2 EXHIBIT 10.4 EXHIBIT 10.4 FOURTH AMENDED AND RESTATED CREDIT AGREEMENT, dated as of the 27th day of December, 1999 by and between ARK RESTAURANTS CORP., a New York corporation (the "Company") and BANK LEUMI USA, a New York banking corporation (the "Bank"). A. Pursuant to a Revolving Credit Loan Agreement between the Bank and the Company dated as of March 3, 1989, as amended by Agreement dated August 3, 1989, the Bank made available to the Company a revolving credit facility, a standby letter of credit facility, and other financial accommodations (collectively, the "Initial Facility"). B. On or about December 30, 1992, the Bank and the Company entered into an Amended and Restated Credit Agreement, dated as of said date (the "Restated Agreement"), wherein and whereby the Bank and the Company, among other things, renewed and increased the Initial Facility. The Restated Agreement was amended by an Agreement dated August 10, 1994. C. On or about March 5, 1996, the Bank and the Company entered into a Second Amended and Restated Credit Agreement, dated as of said date (the "Second Restated Agreement") wherein and whereby the Bank and the Company, among other things (i) renewed, increased and made amendments to the Initial Facility, and (ii) the Bank provided the Company with a second loan facility and a second letter of credit facility. The Second Restated Agreement was amended by Agreements dated as of March 31, 1996, and as of December 24, 1996. D. On or about May 28, 1998, the Bank and the Company entered into a Third Amended and Restated Credit Agreement, dated said date (the "Third Restated Agreement") wherein and whereby the Bank and the Company, among other things, renewed and extended and made amendments to the loan facilities and revolving credit facilities. The Third Restated Agreement was amended by Agreements, dated as of April 27, 1999, November 10, 1999 and December 13, 1999. E. The Bank and the Company have agreed (i) that the revolving loan facility will be increased and amended, (ii) that the term of the revolving loan facility will be extended to the Conversion Date (as herein defined), (iii) that the Letter of 1 Credit facilities made available to the Company will be renewed, increased and amended, (iv) that on the Conversion Date the then outstanding principal balance of the Loans made pursuant to the revolving credit facility will be converted into the Term Loan, and (v) to certain other modifications of the existing arrangements. The Bank and the Company have agreed to reflect these changes in this Fourth Amendment and Restated Credit Agreement. NOW, THEREFORE, IT IS AGREED: 1. DEFINITIONS Unless the context otherwise requires, for all purposes of this Agreement and of the other Loan Documents (as hereinafter defined), all capitalized terms used in this Agreement and in the other Loan Documents without definition shall have the respective meanings provided therefor or referred to below: 1.1 The term "Affiliate" means with reference to any Person, any director, officer or employee of such Person, any Person in which such Person has a direct or indirect controlling interest or by which such person is directly or indirectly controlled or which is under direct or indirect common control with such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") when used with respect to any specified Person shall mean the power to direct or cause the direction of the actions, management or policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and whether or not such power is actually exercised. 1.2 The term "Agreement" means this Fourth Amended and Restated Credit Agreement, including all of the Schedules and Exhibits hereto, as the same may be amended or otherwise modified from time to time, and the terms "herein", "hereof", "hereunder" and like terms shall be taken as referring to this Agreement in its entirety and shall not be limited to any particular section or provision hereof. 1.3 The term "Bank Debt" means and includes all (i) Consolidated Indebtedness for money borrowed, unless it meets 2 the definition of Purchase Money Indebtedness (ii) the amount of any letters of credit outstanding for the account of the Company or any Subsidiary and (iii) the aggregate amount of all equipment leases entered into by the Company or any Subsidiary where the rental payments would be required to be capitalized under generally accepted accounting principles, unless such lease meets the definition of Purchase Money Indebtedness. 1.4 The term "Capital Expenditures" means assets purchased for use in a Restaurant Related Business (other than assets purchased on a non-recourse Purchase Money Indebtedness basis), including Indebtedness to the Company of any newly organized Subsidiary (or any such Indebtedness guaranteed by the Company) in connection with the development or acquisition of a Restaurant Related Business. 1.5 The term "Capitalized Leases" means all capitalized leases made to the Bank, or an Affiliate of the Bank, as lessor, and the Borrower or any Subsidiary as lessee. 1.6 The term "Commitment" means the Commitment (as defined in Section 2.1.1). 1.7 The term "Company's Collateral" means all of the issued and outstanding shares of capital stock of each of the Subsidiaries, other than shares of stock issued by one Subsidiary to another Subsidiary, and the "security", as such term is defined in paragraph 3 of the Company's Security Agreement. 1.8 The term "Consolidated Debt Service" means interest expense and required amortization cost for the applicable period on all of the Company's Consolidated Indebtedness. 1.9 The term "Consolidated Indebtedness" means the aggregate consolidated Indebtedness of the Company and its consolidated Subsidiaries. It is understood that in the calculation of Consolidated Indebtedness, if one or more Letters of Credit, Guarantees or similar obligations relate to the same underlying liability, only the amount of the underlying liability will be included in Consolidated Indebtedness. 1.10 The term "Consolidated Operating Cash Flow" 3 means consolidated after-tax earnings of the Company computed in accordance with generally accepted accounting principles for the period of calculation, plus depreciation and interest expense for such period on all Consolidated Indebtedness. 1.11 The term "Consolidated Net Worth" shall mean the excess of total assets over total liabilities of the Company and its consolidated Subsidiaries total assets and total liabilities each to be determined as to both classification of items and amounts in accordance with generally accepted accounting principles, and consistent with the standards applied in the financial statements referred to in Section 4.9; provided there shall be excluded from total assets (i) cash set apart and held in a sinking or other analogous fund established for the purposes of redemption or other retirement of capital stock, (ii) any revaluation or other write-up in book value of assets subsequent to the date hereof, and (iii) amounts owed to the Company or any Subsidiary from any of the officers, directors or employees thereof or any of their Affiliates in excess of $300,000 at any one time outstanding. 1.12 The term "Consolidated Trade Indebtedness" means Current Liabilities of the Company and its consolidated Subsidiaries for trade or other obligations, not outstanding more than sixty (60) days, incurred in the ordinary course of their respective businesses and not as a result of money borrowed. 1.13 The term "Conversion Date" means the date set forth in Section 2.1.1. 1.14 The term "Current Assets", with respect to any entity, means as of the date of determination thereof, (i) cash and cash items on hand or in transit to or on deposit in any bank or trust company which has not suspended business and which is located in the United States of America; (ii) stocks, bonds and other securities or obligations which are readily marketable in the United States of America, all taken on the basis of cost or market value whichever note is lower; (iii) good and collectible accounts and s receivable (including drafts, acceptances and letters of credit), in good standing and payable in currency of the United States of America and incurred or created less than one hundred twenty (120) days prior to such date of determination; (iv) inventories of merchandise and 4 supplies located in the United States of America, all taken on the basis of cost or market value, whichever is lower, and (v) subject to the limitations and qualifications set forth in clauses (i) through (iv) of this paragraph, such other assets located in the United States of America which in accordance with generally accepted accounting principles would be included on a balance sheet as current assets; all after write-offs and write-downs and after deducting adequate reserves, in each case where a write-off, write-down or reserve is proper in accordance with generally accepted accounting principles. 1.15 The term "Current Liabilities", with respect to any entity, includes, as of the date of determination thereof, all Indebtedness maturing on demand or within one year from the date as of which such determination is made, serial maturities, fixed sinking fund payments or other prepayments required to be made with respect to any Indebtedness within one year after such date, and all other items (including taxes accrued as estimated) which in accordance with generally accepted accounting principles would be included on a balance sheet as current liabilities. 1.16 The term "Disclosure Schedule" means the Disclosure Schedule, dated as of even date herewith, executed by an officer of the Company and delivered to the Bank setting forth certain information with respect to the Company and the Subsidiaries, as same may be amended or modified from time to time. 1.17 The term "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereof. 1.18 The term "ERISA Affiliate" means any trade or business (whether or not incorporated) which together with the Company would be treated as a single employer under Section 4001 (b)(1) of ERISA. 1.19 The term "Events(s) of Default" shall have the meaning provided therefor in Section 8.1. 1.20 The term "Indebtedness", as applied to a Person (an "obligor") at any time, shall mean the following amounts and liabilities: 5 1.20.1. all amounts which, in accordance with generally accepted accounting principles, are or should be treated as liabilities or other obligations on the liabilities side of a balance sheet of such obligor prepared in accordance with generally accepted accounting principles; provided, however, that amounts accrued by such obligor in respect of operating lease deferred credits shall not be deemed indebtedness; and 1.20.2. also, to the extent not so treated, (i) letters of credit (whether revocable or irrevocable) issued for the account of such obligor, but only to the extent drawn upon and not repaid to the issuer; (ii) liabilities of any other Person guaranteed directly or indirectly, in any manner by such obligor; (iii) liabilities of or to any Person in effect guaranteed, directly or indirectly, by such obligor through any agreement, endorsement or understanding, contingent or otherwise (except liabilities arising from endorsement of negotiable instruments for deposit or collection in the ordinary course of business) of such obligor entered into for the purpose, or which is used for the purpose, in whole or in part, of enabling the debtor to pay, indemnify against or otherwise satisfy a liability or obligation or to assure the obligee of the liability against loss, including without limitation (x) agreements, commitments or understandings to repay amounts drawn down by beneficiaries of letters of credit (whether revocable or irrevocable) whether or not issued, directly or indirectly, for the account of such obligor (y) statements or representations to the effect that such obligor will not permit any other person to default in respect of any liability or will maintain minimum net worth of another person, or (z) agreements, commitments or understandings (A) to purchase securities or Indebtedness, or (B) to purchase or sell services, products, raw materials or other property of any description, outside of the ordinary course of its business, or (C) to supply funds to or in any other manner make an investment in the debtor; (iv) all liabilities secured (directly or indirectly) by a lien or encumbrance upon any property or asset of such obligor regardless of whether such obligor has assumed or 6 become liable for the payment of such liabilities; and (v) amounts equal to any reserves or commitments which are, or, under generally accepted accounting principles, should be, reflected on the liabilities side of a balance sheet of such obligor in respect of contingent or disputed claims, debts or other similar monetary obligations, either direct or guaranteed, to the extent that the same are not included pursuant to (i), (ii) or (iii) above; provided, however, that items includable as stockholders' equity (or parts thereof), minority interests and reserves for deferred income taxes, each as determined or set aside in accordance with generally accepted accounting principles, shall not be deemed to be "Indebtedness". Obligations in respect of leases shall be included as "Indebtedness" only to the extent that the same are treated as liabilities or obligations by such obligor on its balance sheets prepared in accordance with generally accepted accounting principles, except that operating lease deferred credits shall not be included as "Indebtedness". 1.21 The term "Letter of Credit" shall have the meaning provided therefor in Section 2.1.5 hereof. 1.22 The term "Lien" means any charge, lien, mortgage, pledge, security interest or other encumbrance of any nature whatsoever upon, of or in property or other assets of a Person, whether absolute or conditional, voluntary or involuntary, whether created pursuant to agreement, arising by force of statute, by judicial proceedings or otherwise. 1.23 The terms "Loan and "Loans" shall mean all of the Revolving Loans and the Term Loan. 1.24 The term "Loan Documents" shall mean and include this Agreement, the Notes, the Guarantees, the Security Agreements and all other documents executed by the Company or any Subsidiary pursuant hereto or thereto, as same may be amended, modified, renewed or restated from time to time. 1.25 The term "Maturity Date" shall have the meaning provided therefor in Section 2.1.3 hereof. 1.26 The term "Multiemployer Plan" means a Plan 7 described in Section 4001(a)(3) of ERISA which covers employees of the Company or any ERISA Affiliate. 1.27 The terms "Note" and "Notes", respectively, shall mean the Revolving Note and the Term Note. 1.28 The term "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. 1.29 The term "Person" shall include an individual, a partnership, a joint venture, a corporation (including, without limitation, the Company or any Subsidiary), a limited liability company, a trust, an estate, an unincorporated organization or association, a governmental agency and any other business or legal entity. 1.30 The term "Plan" means any employee benefit plan as defined in Section 3(2) of ERISA. 1.31 The term "Prohibited Transaction" means any transaction set forth in Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended from time to time. 1.32 The term "Purchase Money Indebtedness" means purchase money Indebtedness incurred by a Subsidiary at the time of the acquisition of Restaurant-Related Business assets, which Indebtedness is secured only by the assets of the business being acquired and not guaranteed by the Company or any Subsidiary of the Company and for which the instrument or instruments relating to the Indebtedness does not provide recourse against the Company or any Subsidiary of the Company other than the Subsidiary issuing the Indebtedness. 1.33 The term "Reference Rate" means the rate designated by the Bank, and in effect from time to time, as its reference rate, adjusted when such reference rate changes. 1.34 The term "Reportable Event" means any of the events set forth in Section 4043 of ERISA. 1.35 The term "Restaurant-Related Business" means a restaurant, catering, hospitality, food preparation or food service business. 8 1.36 The term "Revolving Note" shall have the meaning defined in Section 2.1.3. 1.37 The term "Security Agreement" and "Security Agreements" mean each security agreement made by the Company or a Subsidiary, as debtor, in favor of the Bank, as secured party, and all of the foregoing. 1.38 The term "Shareholders' Equity" means the excess of the total assets of the Company and its consolidated Subsidiaries over their total liabilities, in each case as such items would be classified on the consolidated balance sheet of the Company and its consolidated Subsidiaries determined in accordance with generally accepted accounting principles. 1.39 The term "Subsidiary" and "Subsidiaries" mean, respectively, each of the corporations listed on the Disclosure Schedule, and any other corporation or Person, not less than a majority of the outstanding shares of the class or classes of stock or other equity interest of which, having by the terms thereof ordinary voting power to elect a majority of the directors or manage such corporation or Person, are at any time owned by the Company or by a Subsidiary of the Company, or by the Company and one or more Subsidiaries of the Company. 1.40 The terms "Subsidiary's Collateral" and "Subsidiaries Collateral", respectively, shall mean all of the assets of a Subsidiary and all of the assets of all of the Subsidiaries, except as is otherwise provided in the Disclosure Schedule, including shares of stock in any other Subsidiary. 1.41 The term "Term Note" shall have the meaning defined in Section 2.1.4. 1.42 The term "United States of America", when used in a geographical sense, means all of the States of the United States of America and the District of Columbia and, so long as they continue as possessions or territories of the United States, Puerto Rico and the Virgin Islands. 1.43 The term "Working Capital", with respect to any corporation, means the excess, if any, of the Current Assets over the Current Liabilities of such corporation. 9 2. THE LOAN 2.1 Amount and Terms of Credit. 2.1.1. Commitment of the Bank. The Bank shall, subject to and upon the terms and conditions herein set forth, make available to the Company until the second annual anniversary of the date of this Agreement (the "Conversion Date") loans (each a "Loan" and collectively the "Loans"). The Loans made available to the Company pursuant to this revolving loan facility are to finance the development and construction of new restaurants and to provide working capital for the Company's operations. The aggregate principal amount of the Loans, at any time outstanding, shall not exceed $28,000,000 (the "Commitment"). Subject to the foregoing, until the Conversion Date, the Company may borrow, repay and reborrow the Loans to the limit of the Commitment. 2.1.2. Notice of Borrowing. If and whenever the Company desires to borrow under the Commitment it shall give the Bank prior written notice, specifying the date of the proposed borrowing, and the amount to be borrowed (which shall be not less than $250,000). Subject to all the terms and conditions of this Agreement, the Bank shall make available to the Company in immediately available funds at the Bank's office specified in Section 9.6, not later than 11 a.m. current local time on the date specified in such notice, the amount to be advanced hereunder. 2.1.3. Conversion to Term Loan. On and after the Conversion Date, the Company shall no longer have the right to request borrowings under the Commitment. The principal sum of the Revolving Loans outstanding on the Conversion Date, as same may be reduced by reason of the prepayment provided for in Section 2.2.2 of this Agreement (the "Term Loan Amount") shall be converted to a term loan made by the Bank to the Company (the "Term Loan"), and shall be repaid by the Company to the Bank in thirty-six (36) consecutive equal monthly installments. The first installment under the Term Loan shall be due and payable on the first day of the month immediately subsequent to the Conversion Date, and each subsequent installment shall be due on the first day of each month thereafter. The maturity date of the 10 Term Loan is thirty six (36) months after the Conversion Date (the "Maturity Date"). 2.1.4. Notes. The Revolving Loans shall be evidenced by a promissory note evidencing the Loans substantially in the form of Exhibit A annexed, with the blanks completed in conformity herewith (the "Revolving Note") duly executed by the Company and payable to the order of the Bank and (i) be dated as of the date of this Agreement; (ii) be in the principal amount of $28,000,000; (iii) bear interest at a fluctuating rate per annum equal to one half of one (1/2%) percent above the Reference Rate, in effect from time to time, until maturity (whether by acceleration or otherwise) and thereafter at a fluctuating rate per annum equal to three (3%) percent above the Reference Rate, in effect from time to time; and (iv) be payable as to interest at such rate in arrears on the first day of each month commencing with the first day of the month following the date of this Agreement and thereafter on the first day of each month until (a) the Conversion Date, or (b) maturity by acceleration, and both before and after judgment, until the principal amount is paid in full. On the Conversion Date, the Company shall deliver the Revolving Note to the Bank upon delivery by the Company to the Bank, at the Bank's office specified in Section 9.6, (i) the prepayment, if any, provided for in Section 2.2.2 of this Agreement, (ii) a note evidencing the Term Loan (the "Term Note") substantially in the form of Exhibit B annexed, completed in conformity herewith, (iii) payment of the conversion fee in an amount equal to three eighths of one (3/8%) percent of the Term Loan Amount, and (iv) such other documents and papers as are provided for herein. The Term Note shall be duly executed by the Company and payable to the order of the Bank, and (i) be dated the Conversion Date, (ii) be for the applicable Term Loan Amount, (iii) bear interest at a fluctuating rate per annum equal to one half of one (1/2%) percent above the Reference Rate, in effect from time to time, until maturity (whether by acceleration or otherwise), and thereafter at a fluctuating rate per annum equal to three (3%) percent above the Reference Rate, in effect from time to time, (iv) be payable as to interest at such rate in arrears on the first day of each month, commencing on the first day of the first month immediately subsequent to the Conversion Date and thereafter on the first date of every month until maturity (whether by acceleration or at the Maturity Date), until the principal amount is paid in full, and (v) be payable as to 11 principal in thirty-six (36) equal consecutive monthly installments, commencing on the first day of the first month immediately subsequent to the Conversion Date, and thereafter on the first day of every month thereafter until the maturity (whether by acceleration or at the Maturity Date), when the entire then unpaid balance and interest accrued thereon shall be due and payable. 2.1.5. Letters of Credit. Subject to and upon the terms and conditions contained in this Agreement (including compliance with the conditions precedent to the obligations of the Bank to make the initial Loan to the Company and the Application (as hereinafter defined) and provided the Company is not then in default of any of its obligations under this Agreement, the Bank agrees (i) until the Conversion Date to issue, from time to time, one or more letters of credit (each a "Letter of Credit"), and (ii) before and after the Conversion Date to renew currently outstanding letters of credit at the request and for the account of the Company. The letters of credit to be made available by the Bank to the Company shall be for the Company's current operations. The maximum contingent liability of the Bank (including therein any payments made by the Bank to the beneficiaries of such Letters of Credit which have not been repaid to the Bank) under all Letters of Credit issued for the account of the Company shall not at any time exceed the sum of $2,000,000. If and whenever the Company desires to obtain a Letter of Credit from the Bank for its account, it shall apply to the Bank for such Letter of Credit in accordance with the Bank's normal practices as in effect at that time, and shall execute and deliver to the Bank such application and agreement as the Bank normally requires in connection with such transactions (an "Application") and such other documents as may be required thereunder. The Bank shall maintain a record of the Letters of Credit and all transactions thereunder, which records shall be conclusive evidence of the matters set forth therein, absent manifest error. In the event of any inconsistency between any provision of this Agreement and any provision of the Application, this Agreement shall govern and prevail. As consideration to the Bank for the issuance of the Letters of Credit, the Company shall pay a commission to the Bank in an amount equal to 1 and 1/2% per annum of the maximum amount which may be drawn under each Letter of Credit; provided, however, that the commission payable to the Bank on the renewal of any Letter of Credit outstanding on the 12 date of this Agreement shall be at a rate equal to the rate then payable with respect to such Letter of Credit. All commissions shall be paid by the Company upon issuance of the Letter of Credit. The obligation of the Bank to issue or extend any Letter of Credit for the account of the Company hereunder shall exist at any time only if at that time all conditions under Section 5.2 of this Agreement to the Bank's obligation to make a Loan to the Company would have been satisfied in full if the Company had requested a Loan in such amount. Each Letter of Credit issued or renewed under this Section 2.1.5 shall have an expiration date no later than one year from the date it is issued or renewed and if renewal shall have an expiration date which is not beyond the Maturity Date, and shall be renewable only in the sole discretion of the Bank. Commencing on the Conversion Date and on the first day of each month thereafter, the Company shall deposit cash collateral with the Bank equal to 1/36 of the face amount of the outstanding Letters of Credit on the Conversion Date, until such time as such cash collateral equals the face amount of the then outstanding Letters of Credit. If at any time the cash collateral exceeds the face amount of the outstanding Letters of Credit, unless an Event of Default shall have occurred, the excess shall be released to the Company. 2.2 Prepayments. 2.2.1. Voluntary Prepayments. The Company may prepay the Loans, or any of them, in part or in full at any time, and from time to time, without premium or penalty, upon prior written notice to the Bank, provided that each such prepayment shall be in the amount of $100,000 or any integral multiple thereof. In the absence of any such designation, the Bank may apply such prepayment at its discretion. 2.2.2. Mandatory Payment. On the Conversion Date, the Company, without premium or penalty, shall prepay the Loans to the extent, if any, by which the outstanding principal balance of the Loans exceeds $22,000,000. 2.2.3. Prepayments Generally. Any prepayments, whether mandatory or voluntary, shall be accompanied by the payment of any accrued interest on the principal amount so prepaid. 13 2.2.4. Application of Life Insurance Proceeds. The Bank will apply any proceeds received by the Bank upon the policy or policies of insurance assigned to the Bank upon the life of Michael Weinstein, in its discretion, to the payment or prepayment of the Loans, or other obligations, as the case may be, of the Company or the Subsidiaries to the Bank. 2.3 General Provisions Concerning Loans. Interest, including additional interest, shall be computed for the actual number of days elapsed on the basis of a 360- day year. All mandatory and voluntary payments or prepayments of principal and all payments of interest under either of the Notes shall be made by the Company directly to the Bank in immediately available funds. To effect the payment of any amount due hereunder, the Bank may, but shall not be obligated to, charge any deposit account maintained by the Company with the Bank. If any payment of principal of or interest on either of the Notes, the commitment fee, agency fee or any other payment required to be made by the Company hereunder or pursuant to any of the Loan Documents, becomes due and payable on a day on which the Bank is closed (as required or permitted by law or otherwise), the due date thereof shall be extended to the next succeeding full business day and, in the case of principal, interest thereon shall be payable at the applicable rate during such extension. All notations and entries made by the Bank, or the holder of the Revolving Note, on the grid attached thereto shall be presumptive evidence of the correctness of such notations and entries, absent manifest error. The failure of the Bank to make any notation or entry on any such grid shall not, however, limit or otherwise affect the obligations of the Company under this Agreement or under the Revolving Note. 2.4 Security For the Loans. 2.4.1. Concurrently with the execution and delivery of the Restated Agreement, the Company granted a valid and perfected first priority security interest to the Bank in the Company's Collateral, pursuant to a security agreement, dated as of even date therewith, which security agreement was amended and restated concurrently with the 14 execution and delivery of the Second Restated Agreement and is concurrently being amended and restated in the form annexed as Exhibit C-1 (the "Company's Security Agreement"). 2.4.2. Each of the Subsidiaries identified on the Disclosure Schedule heretofore granted a valid and perfected security interest to the Bank in such of the Subsidiary's Collateral as was owned by it pursuant to a security agreement, which security agreement, concurrently with the execution and delivery of this Agreement, is being amended and confirmed, as provided in Exhibit C-2 annexed. Each existing security agreement, as concurrently amended and confirmed, and each security agreement hereinafter executed by a Subsidiary is a "Subsidiary's Security Agreement" and collectively they are "Subsidiary' Security Agreements". Each security interest granted by a Subsidiary's Security Agreement is a first priority security interest, subject only to the security interests heretofore granted by each such Subsidiary, as set forth on Schedule 4.13 and Purchase Money Indebtedness. 2.5 Guarantees. The Subsidiaries identified on the Disclosure Schedule heretofore guaranteed all of the obligations of the Company to the Bank pursuant to an unlimited guarantee executed by each such Subsidiary. Concurrently with the execution and delivery of this Agreement, each of such Subsidiary is reaffirming its Guaranty, by its execution of a Confirmation of Guarantee, annexed as Exhibit C-2. Each existing Guarantee as concurrently confirmed, or hereinafter executed by a Subsidiary, is individually a "Guaranty" and collectively are the "Guarantees". 3. USE OF PROCEEDS. The Company represents, warrants and covenants that the proceeds of the Loans will be used for the following purposes and no others: to finance the development and construction of new restaurants, Restaurant Related Businesses and for working capital. 4. REPRESENTATIONS AND WARRANTIES. 15 In order to induce the Bank to enter into this Agreement and to make the Loans, the Company represents and warrants to the Bank that: 4.1 Corporate Existence and Power. 4.1.1. The Company and each Subsidiary is a corporation duly incorporated, validly existing and in good standing under the law of its state of incorporation, and is duly qualified as a foreign corporation in each jurisdiction wherein the character of the property owned or the nature of the business being transacted by it makes such qualification necessary; and the Company has the corporate power to execute and deliver this Agreement, the Revolving Note and all other documents to be executed and delivered by the Company in connection herewith, and each Subsidiary has the corporate power to execute and deliver, as is applicable (i) the Confirmation of Guarantees and Amendment and Confirmation of Security Agreements and (ii) all other documents executed and delivered by such Subsidiary in connection herewith (collectively, the "Loan Documents") and to incur and perform their respective obligations hereunder and thereunder. 4.1.2. Except as is otherwise set forth on the Disclosure Schedule, all of the issued and outstanding shares of capital stock of each of the Subsidiaries are owned of record and beneficially by the Company. The Disclosure Schedule accurately sets forth the class and number of shares issued by each Subsidiary, all of which shares have been duly issued, fully paid and non-assessable. There are no outstanding warrants, options or other rights to acquire any shares in any of the Subsidiaries. 4.2 Authorization. The Company and each of the Subsidiaries has all requisite legal right, power and authority to execute, deliver and perform the terms and provisions of this Agreement, the Loan Documents executed by it, and all other instruments and documents delivered by it pursuant hereto and thereto. The Company and each of the Subsidiaries has taken or caused to be taken all necessary action to authorize the execution, delivery and performance of this Agreement, the Loan Documents executed by it, the Revolving Note, and any other related agreements, instruments 16 or documents delivered or to be delivered by the Company or the Subsidiaries pursuant hereto and thereto. This Agreement, the Loan Documents and all related agreements, instruments and documents delivered or to be delivered pursuant hereto or thereto constitute and will constitute legal, valid and binding obligations of the Company (and, to the extent executed by them, the Subsidiaries) enforceable in accordance with their respective terms. 4.3 No Conflicts. Neither the execution and delivery of this Agreement, the Loan Documents or any of the instruments and documents delivered or to be delivered pursuant hereto or thereto, nor the consummation of the transactions herein or therein contemplated, nor compliance with the provisions hereof or thereof, will violate any law or regulation, or any order, writ or decree of any court or governmental instrumentality, or will conflict with, or result in the breach of, or constitute a default in any respect under, any indenture, mortgage, deed of trust, agreement or other instrument to which the Company or any of the Subsidiaries is a party, or by which any of them or any of their respective properties may be bound or affected, or will result in the creation or imposition of any lien, charge or encumbrance upon any of the property of any of them (except as contemplated hereunder or under the Loan Documents) or will violate any provision of the certificate or articles of incorporation (as amended to date) or by-laws (as currently in effect) of the Company or any of the Subsidiaries. 4.4 Compliance and Other Agreements. 4.4.1. Neither the Company nor any of the Subsidiaries is in default under any indenture, mortgage, deed of trust, agreement or other instrument to which it is a party, or by which it or any of its properties may be bound or affected, except for such defaults which, individually or in the aggregate, will not have a material and adverse effect on the business, operations, property or assets or in the condition, financial or otherwise, of the Company or any of the Subsidiaries. 4.4.2. Neither the Company nor any of the Subsidiaries is in default with respect to any order, writ, 17 injunction or decree of any court or of any federal, state, municipal or other governmental department, commission, board, bureau, agency or authority, domestic or foreign, or in violation of any law, statute or regulation, domestic or foreign, to which it is, or any of its properties are subject, except for such defaults or violations which, in the aggregate, will not have a material or adverse effect on the business, operations, property or assets or on the condition, financial or otherwise, of the Company or any of the Subsidiaries. 4.4.3. Neither the Company nor any of the Subsidiaries is a party to or bound by, nor are any of their respective properties bound or affected by, any agreement, deed, lease or other instrument, or subject to any charter or other corporate restriction or any judgment, order, writ, injunction, decree or award, or any law, statute, rule or regulation, any of which materially and adversely affects or in the future may (so far as the Company or any Subsidiary should reasonably foresee) materially and adversely affect the business, operations, prospects, properties or assets, or the condition, financial or otherwise, of the Company or any of the Subsidiaries. 4.5 ERISA. Each of the Company and the Subsidiaries is in compliance in all material respects with all applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited Transaction has occurred and is continuing with respect to any Plan; no notice of intent to terminate a Plan has been filed nor has any Plan been terminated; no circumstances exist which constitute grounds under Section 4042 of ERISA entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administrate, a Plan, nor has the PBGC instituted any such proceedings; neither the Company, any Subsidiary, nor any ERISA Affiliate has completely or partially withdrawn under Sections 4201 or 4204 of ERISA from a Multiemployer Plan; the Company, the Subsidiaries and each of their respective ERISA Affiliates have met their minimum funding requirements under ERISA with respect to all of their Plans and the present fair market value of all Plan assets exceeds the present value of all vested benefits under each Plan, as determined on the most recent valuation date of the Plan and in accordance with the provisions of ERISA and the regulations thereunder for 18 calculating the potential liability of the Company, the Subsidiaries or any of their respective ERISA Affiliates to PBGC or the Plan under Title IV of ERISA; and neither the Company nor any of the Subsidiaries or their respective ERISA Affiliates has incurred any liability to the PBGC under ERISA. 4.6 Investment Company. Neither the Company nor any of the Subsidiaries is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. 4.7 Approvals and Consents. All authorizations, consents, registrations, exemptions, approvals and licenses (governmental or otherwise) or the taking of any other action (including, without limitation, by the shareholders of the Company or any of the Subsidiaries) which are required as a condition to the validity or enforceability of this Agreement, the Loan Documents, or any of the instruments or documents delivered or to be delivered pursuant hereto or thereto have been effected or obtained and are in full force and effect. 4.8 Regulation U, etc. Neither the Company nor any of the Subsidiaries is engaged in the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U or G of the Board of Governors of the Federal Reserve System). None of the proceeds of the Loans will be used, directly or indirectly, in violation of Regulation U for the purpose of purchasing or carrying any margin stock or for any other purpose which might constitute the loan contemplated hereby a "purpose credit" within the meaning of such Regulation U which would be in violation of Regulation U. 4.9 Financial Condition. 4.9.1. The audited consolidated balance sheets of the Company and its Subsidiaries as at September 30, 1999 and the audited consolidated statements of operations, shareholders' equity and cash flows of the Company and its Subsidiaries for the fiscal year then ended, copies of which have been furnished to the Bank, are complete and correct and fairly present the consolidated financial 19 condition and results of operations of the Company and its Subsidiaries as at the dates and for the periods indicated. All of such financial statements have been prepared in conformity with generally accepted accounting principles and practices applied on a basis consistently maintained throughout the periods involved. 4.9.2. There are no material liabilities, direct or indirect, fixed or contingent, of the Company or the Subsidiaries as of the dates of such financial statements which were not reflected therein or in the notes thereto. Since the date of the most recent financial statements, there has been no material adverse change in the condition, financial or otherwise, or the business, operations, prospects, properties or assets of the Company and its Subsidiaries on a consolidated basis or of the Company individually. 4.10 Taxes. The Company and each Subsidiary has filed or caused to be filed, all tax returns required to be filed, and has paid all taxes (including interest and penalties) shown to be due and payable on said returns or any assessments made against it, and no tax liens have been filed and no claims are being asserted with respect to such taxes which are not reflected in the financial statements referred to in Section 4.9.1 hereof. The Company has no knowledge of any proposed material tax assessment against or affecting it or any of the Subsidiaries and is not otherwise obligated by any agreement, instrument or otherwise to contribute to the payment of taxes owed by any other Person. All material tax liabilities are adequately provided for or reserved against on the books of the Company and/or the Subsidiaries, as is applicable, in accordance with generally accepted accounting principles. 4.11 Litigation. Except as set forth on Schedule 4.11 annexed, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or the property of any of them before any court, arbitrator or governmental department, commission, board, bureau, agency or instrumentality which, (i) if not covered by insurance seeks recovery of more than $200,000 or if covered by insurance seeks recovery of an amount in excess of the 20 applicable insurance limits, (ii) either in any case or in the aggregate, if adversely determined, would have a material adverse effect on the financial condition, business or operations of the Company or any Subsidiary, or (iii) question the validity or enforceability of this Agreement, the Third Restated Agreement, the Loan Documents, or any action to be taken in connection with the transactions contemplated hereby or thereby. 4.12 Chief Executive Office; Collateral Locations. The address of the chief executive office of the Company is set forth in the Company's Security Agreement. The only locations of any of the Company's Collateral, other than such of the Company's Collateral as the Bank shall take possession of to perfect its lien and security interest therein, and the chief executive office of the Company, are those listed in the Company's Security Agreement. The Chief Executive Office and principal place of business of each of the Subsidiaries is set forth on the Disclosure Schedule and in such Subsidiaries Security Agreement. The only other locations of any of the Subsidiaries Collateral, other than their Chief Executive Office or principal places of business, are listed in the Subsidiaries Security Agreements. 4.13 Title to Properties/Priority of Liens. 4.13.1. The Company and its Subsidiaries have good and marketable title to, or valid leasehold interests in, all of the properties and assets reflected on the most recent of the financial statements delivered to the Bank pursuant to Section 4.9.1 or acquired by it after the date of such financial statements and prior to the date hereof, except for those properties and assets which have been disposed of since such date in the ordinary course of business. All such properties and assets are owned or leased by the Company or a Subsidiary free and clear of all mortgages, pledges, liens, security interests, encumbrances or charges of any kind, except (i) such as are disclosed on Schedule 4.13 hereto, (ii) such as are in favor of the Bank, and (iii) such as are permitted under the provisions of Section 7.5 hereof. 4.13.2. The liens and security interest granted by the Company to the Bank under the Company's 21 Security Agreement constitute valid and perfected first priority liens and security interest in the Company's Collateral. Except as disclosed on Schedule 4.13 hereto, the liens and security interests granted by each of the Subsidiaries to the Bank under the Subsidiaries Security Agreements constitute valid and perfected first priority liens and security interests in each Subsidiary's Collateral. 4.14 Insurance. All physical properties and assets of the Company and each of the Subsidiaries are insured in accordance with the requirements of Section 6.5 hereof. 4.15 Subsidiaries. Except for shares of stock in the Subsidiaries, neither the Company nor any Subsidiaries owns shares of stock in, or has any option, warrant or other right to purchase or subscribe to shares of stock in or otherwise acquire an equity interest in any Person which upon effecting such purchase would be a Subsidiary. 4.16 Year 2000. The Company has (i) undertaken a sufficient inventory, review and assessment of all of the Company's areas within its business and operations that could be adversely affected by the failure of the Company to be Year 2000 Compliant on a timely basis, (ii) developed a plan and timeline for becoming Year 2000 Compliant on a timely basis, (iii) to date, implemented that plan in accordance with that timeline in all material respects and, (iv) made inquiry of its key suppliers, vendors and customers as to whether such person(s) will, on a timely basis, be Year 2000 Compliant in all material respects and on the basis of such inquiry reasonably believes that all such person(s) will be Year 2000 Compliant. "Year 200 Compliant" shall mean that, in all material respects, all computer and software related applications shall be able to recognize and perform properly, date sensitive functions involving dates prior to and after December 31, 1999. The Company shall take all action necessary to ensure that the Company shall be Year 2000 Compliant and that no material adverse change will arise in the Company's financial condition as a result of its efforts or failure to be year 2000 Compliant. 4.17 Disclosure. No certificate, statement, report or other document furnished to the Bank by or on 22 behalf of the Company or any of the Subsidiaries in connection herewith or in connection with any transaction contemplated hereby, or this Agreement, each agreement which this Agreement restates or any Loan Document, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained therein not misleading. 4.18 No Event of Default. After giving effect to the transactions contemplated by this Agreement, the Loan Documents and the other instruments or documents delivered in connection herewith and therewith, there does not exist at the date hereof any condition, event or act which constitutes an Event of Default hereunder or which, after notice or lapse of time, or both, would constitute an Event of Default hereunder. 5. CONDITIONS TO LOANS. 5.1 Initial Loan. The obligation of the Bank to make the initial Loan to the Company hereunder on or after the date hereof is subject to the satisfaction, on or before the date of the making of such Loan, of each of the following conditions precedent: 5.1.1. Loan Documents. The Company and each of the Subsidiaries shall have executed and delivered to the Bank the Loan Documents to be executed by each of them, and all other agreements, instruments and documents required or contemplated by this Agreement and the Loan Documents. The liens and security interests created by the Company's Security Agreement shall have been perfected and be first and prior to any other lien with respect to the Company's Collateral, and the liens and security interests created by each of the Subsidiaries Security Agreements shall have been perfected and be first and be prior to any other lien with respect to such of the Subsidiaries Collateral as is owned by the Subsidiaries executing and delivering such Subsidiaries Security Agreement, except as set forth on Schedule 4.13 hereof. 5.1.2. Opinion of the Company's Counsel. The Bank shall have received a written opinion of Shack & Siegel, P.C., counsel to the Company and each of the 23 Subsidiaries, dated as of even date herewith, to the effect set forth in Exhibit D annexed, and covering such other matters incident to the transactions herein contemplated as the Bank may reasonably request. 5.1.3. Supporting Documents - Initial Loan. The Bank shall have received the following: (a) a certificate of the Secretary or an Assistant Secretary of the Company and of each Subsidiary, dated as of even date herewith, certifying as to (i) the By-laws of the Company and each such Subsidiary as then in effect, or in the case of any Subsidiary a certification by an officer thereof that its by-laws have not been amended or repealed since the date of the last copy thereof provided by such Subsidiary to the Bank; (ii) resolutions of the Board of Directors of the Company and each such Subsidiary authorizing the execution, delivery and performance of this Agreement, the Revolving Note, the amendment to and confirmation of the Company's Security Agreement, the Subsidiaries Security Agreements, on any applicable amendments thereto and confirmation thereof, the Guarantees, or as applicable confirmations thereof, and the other Loan Documents and the borrowing(s) hereunder, to the extent being executed by each such corporation; (iii) the full force and effect of such resolutions on the date hereof; and (iv) the incumbency and signature of each of the officers of the Company and each Subsidiary signing such Loan Documents and all other closing papers hereunder; (b) a certified copy of the Certificate or Articles of Incorporation of the Company and each Subsidiary, as amended through the date hereof, or in the case of any Subsidiary a certification by an officer that its Certificate of Articles of Incorporation have not been amended since the date of the last certified copy thereof provided by the Subsidiary to the Bank; (c) a long-form certificate of subsistence from the Secretary of State of the State of New York in respect of the Company and certificates of subsistence or good standing from the appropriate official in the jurisdiction of incorporation of each Subsidiary; (d) the tax status reports in respect of the Company and each Subsidiary from state tax authorities; and (e) such additional supporting documents as the Bank may reasonably request. 5.1.4. Insurance. The Bank shall have received one or more certificates, in form and substance 24 satisfactory to the Bank, evidencing the existence of the insurance required by the provisions of Section 6.5 hereof. 5.1.5. Assignment of Life Insurance Policy. The Bank shall have received confirmation satisfactory to it that the assignment of life insurance in the aggregate amount of $3,000,000 on the life of Michael Weinstein, made as condition to the effectiveness of the Second Restated Agreement, remains in full force and effect. 5.1.6. Commitment Fee. The Borrower shall have paid to the Bank a commitment fee in the sum of $125,000, and the first annual installment of the agency fee provided for in Section 5.2.6. 5.2 All Loans. In addition to the conditions set forth above with respect to the initial Loan, each of the following conditions precedent shall be applicable thereto and to any subsequent Loans hereunder. 5.2.1. Revolving Note. The Revolving Note shall have been duly completed, executed and delivered to the Bank. 5.2.2. No Default. After giving effect to each Loan there shall exist no Event of Default and no condition, event or act which, with notice or lapse of time, or both, would constitute such an Event of Default. 5.2.3. Representations. All representations and warranties contained herein, or otherwise made in writing in connection herewith by the Company or any Subsidiary, shall be true and correct, with the same force and effect as if made on and as of the date of such Loan, and the representations and warranties set forth in Section 4.9.1 shall also be true and correct (and shall be deemed repeated as of the date of such Loan) in respect of all of the Company's financial statements and all other information furnished to the Bank as at any such date, or with respect to any period, subsequent to September 30, 1999. 5.2.4. Officers' Certificate. At the time of the making of the initial Loan and at the time of the making of such subsequent Loan, the Company shall deliver to 25 the Bank a certificate signed by the chief executive and the chief financial officers of the Company, dated such date, certifying and confirming that (i) no default exists as set forth in Section 5.2.2, (ii) the representations and warranties referred to in Section 5.2.3 are true and correct and (iii) all conditions to the Bank's obligation to make the Loan have been fully satisfied. 5.2.5. Form U-1. If required by the Bank at any time, the Company shall have furnished to the Bank its duly executed Federal Reserve Form U-1, in form and substance reasonably satisfactory to the Bank. 5.2.6. Agency Fee. Concurrently with the execution and delivery of this Agreement, and on each annual anniversary thereof, until the Maturity Date, the Borrower shall pay the Bank an agency fee of $25,000. 5.2.7. Proceedings. All corporate and legal proceedings and all instruments and agreements in connection with the transactions contemplated by this Agreement shall be satisfactory in form, scope and substance to the Bank and its counsel, and the Bank and such counsel shall have received all information and copies of all documents, including reports of corporate proceedings, which the Bank or its counsel may reasonably have requested in connection therewith, such documents where appropriate to be certified by proper corporate and governmental authorities. 5.2.8. No Adverse Change. There shall have been no material adverse change in the operations, business, property or assets or in the condition (financial or otherwise) of the Company or any of the Subsidiaries. Each borrowing hereunder shall constitute a representation and warranty by the Company to the Bank that all of the conditions specified in this Section 5 have been satisfied as of that time. 6. AFFIRMATIVE COVENANTS. The Company covenants and agrees that from and after the date hereof and so long as any Loan (including interest or any other obligation incurred hereunder) is outstanding or any Commitment is in effect, unless the Bank 26 shall otherwise consent in a writing delivered to the Company, the Company and each Subsidiary will: 6.1 Financial Statements. Furnish to the Bank: 6.1.1. as soon as practicable, but in any event not later than forty-five (45) days after the end of each of the first three (3) fiscal quarters in each fiscal year of the Company, consolidated and consolidating balance sheets of the Company and its Subsidiaries as at such date and consolidated and consolidating statements of operations, shareholders' equity and cash flows of the Company and its Subsidiaries for the period commencing at the beginning of such fiscal year and ending on the last day of such quarter, together with the comparative financial statements for the corresponding period of the preceding fiscal year, in each case duly certified by an authorized officer of the Company as being complete and correct and as having been prepared in accordance with generally accepted accounting principles consistently applied; 6.1.2. as soon as practicable, but in any event not later than ninety (90) days after the end of each fiscal year, consolidated balance sheets of the Company and its Subsidiaries as at such date and consolidated statements of operations, shareholders' equity and cash flows of the Company and its Subsidiaries for such fiscal year, together with the comparative financial statements for the preceding fiscal year, in each case certified by independent certified public accountants of recognized standing acceptable to the Bank; 6.1.3. together with the financial statements referred to in Sections 6.1.1 and 6.1.2, a certificate of an authorized officer of the Company (a) stating that no event has occurred and is continuing which constitutes an Event of Default or which with notice and/or lapse of time would constitute an Event of Default, or if an Event of Default or such event has occurred and is continuing, stating the nature thereof and the action which the Company proposes to take in connection therewith; and (b) setting forth the information (including detailed calculations) required in order to establish whether the 27 Company was in compliance with the covenants set forth in Section 7 hereof during and as of the end of the period covered by the financial statements then being furnished; 6.1.4. together with the financial statements referred to in Section 6.1.2, the related consolidating financial statements of the Company and its Subsidiaries, which need not be certified; and 6.1.5. as soon as practicable, but in any event not later than forty-five (45) days prior to the end of each fiscal year, a projection for the next following fiscal year, in form and substance acceptable to the Bank. 6.2 SEC Filings. So long as the Company is registered with the Securities and Exchange Commission ("SEC") pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, the Company will furnish to the Bank, promptly following the filing thereof with the SEC or any securities exchange, copies of all regular and periodic reports, notices, registration statements, proxy statements and other documents filed by the Company with the SEC or any securities exchange. 6.3 Notice of Default; Litigation. Furnish to the Bank (i) as soon as practicable and in any event within five (5) days after the occurrence of each Event of Default or each event which, with notice and/or lapse of time, would constitute an Event of Default, the statement of an authorized officer of the Company setting forth details of such Event of Default or event, and the action which the Company proposes to take in connection therewith; and (ii) promptly after the occurrence thereof, notice of the commencement of any action or proceeding of the type described in Section 4.11 hereof and notice of any material development in any such action or proceeding. 6.4 Payment of Taxes. Pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or its income or profits, or upon any of its properties, or the income, profits or property of any Subsidiary, prior to the date on which penalties attach thereto, except those which are being contested in good faith and by proper proceedings; provided, however, that the 28 Company or Subsidiary, as the case may be, shall have established appropriate and proper reserves which are reflected on its books, to the extent required by generally accepted accounting principles. 6.5 Maintenance of Insurance. Maintain insurance with responsible and reputable insurers reasonably acceptable to the Bank in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general locations in which the Company and each Subsidiary operates. All such insurance on the Company's Collateral and the Subsidiaries Collateral (unless prohibited by the terms of any lease to which the Company or such Subsidiary is a party) shall name the Bank as loss payee in an amount not less than the maximum obligation of the Company to the Bank hereunder, and shall contain such other provisions as the Bank may reasonably require to fully protect its interest in the Company's Collateral and the Subsidiaries Collateral, provided, however, that the Company or a Subsidiary may be named as initial loss payee of such insurance in an aggregate amount not exceeding $50,000 for each occurrence; provided, however, the aggregate amount for which the Company and all Subsidiaries shall be named as the initial loss payee(s) shall not exceed $100,000 in any fiscal year of the Company. In the event that the Bank shall receive any such insurance proceeds, it shall remit such proceeds to the Company or the Subsidiary which suffered the insured loss, which proceeds shall be used either (i) to restore or replace the fixtures, furniture, furnishings or equipment as were the subject of the insured loss or (ii) for working capital purposes. Notwithstanding the foregoing, the Bank shall have the right to apply any such amount received by it to the payment of the Revolving Note, or Term Note, as is applicable, or other obligation of the Company or the Subsidiaries to the Bank should an Event of Default occur, and to retain such amount on deposit if an event, condition or act which with notice or the lapse of time, or both, would constitute an Event of Default, has occurred and is continuing. 6.6 Access to Premises, Books and Records. At any reasonable time during normal business hours and from time to time, upon reasonable prior notice, permit the Bank or any of its agents or representatives to examine and make 29 copies of and abstracts from its records and books of account, visit its properties and discuss its affairs, finances and accounts with any of its officers, directors or independent accountants. 6.7 Books of Account. Keep proper records and books of account, in which complete entries will be made in accordance with generally accepted accounting principles consistently applied, reflecting all of its financial transactions. 6.8 Preservation of Corporate Existence. Preserve and maintain its corporate existence, rights, franchises and privileges, and those of each of the Subsidiaries, in the jurisdiction of its incorporation and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary or desirable in view of its business and operations or the ownership of its properties; provided, however, that the Company shall not be required to maintain the existence, rights, franchises and privileges of any Subsidiary which shall no longer conduct any operations or own any property; and provided, further, that any Subsidiary may be merged with and into the Company or another Subsidiary. 6.9 Maintenance of Properties. Maintain, preserve and keep all of its properties and assets in reasonably good working order and condition, ordinary wear and tear excepted, and make all necessary and proper renewals, replacements, additions and improvements thereto. 6.10 ERISA. Maintain compliance in all material respects with the applicable provisions of ERISA. The Company will deliver to the Bank, promptly after the filing or receiving thereof, copies of all reports, including annual reports and notices, which the Company or any Subsidiary files with or receives from the PBGC or the U.S. Department of Labor under ERISA; and as soon as possible and in any event within thirty (30) days after the Company knows or has reason to know that any Reportable Event or Prohibited Transaction has occurred with respect to any Plan or that the PBGC, the Company or any Subsidiary has instituted or will institute proceedings under Title IV of ERISA to terminate any Plan, the Company will deliver to the Bank a certificate 30 of the chief executive officer or chief financial officer of the Company setting forth the details as to such Reportable Event or Prohibited Transaction or Plan termination and the action the Borrower and/or each affected Subsidiary proposes to take with respect thereto. 6.11 Change in Business. The Company and each Subsidiary will not make any material change in the character of its business as carried on at the date hereof. 6.12 Compliance. The Company and each Subsidiary will comply with the requirements of all applicable laws, rules, regulations, orders of any governmental authority, and all agreements to which it is a party, a noncompliance with which laws, rules, regulations, orders and agreements would materially adversely affect the business, operations, prospects or assets, or the condition, financial or otherwise, of the Company. 6.13 Additional Notification to Bank. The Company shall promptly notify the Bank of (i) each and every default by the Company or any Subsidiary under any obligation for borrowed money which would permit the holder of such obligation to accelerate its maturity, including the names and addresses of the holders of such obligation and the amount thereof, in each case describing the nature thereof and the action the Company, or the applicable Subsidiary, as the case may be, proposes to take with respect thereto, and (ii) any change in the chief executive office of the Company or location of any of the Company's Collateral or any Subsidiaries Collateral from that listed in the Company's Security Agreement or any of the Subsidiaries Security Agreements. 6.14 Additional Subsidiaries. In the event that the Company or any Subsidiary shall cause a new Subsidiary to be formed, or acquire such shares of any corporation, or such equity interest in any other Person, that it shall become a Subsidiary, the Company shall give the Bank not less than fifteen (15) days notice following the formation or acquisition of a new Subsidiary or of such Subsidiary, which notice shall (i) specify the name and state of incorporation or formation of such new Subsidiary, identify each of the shareholders, or other equity owners 31 therein, and state the number of shares or other equity interest owned by each of them, (ii) state whether it is to be a party to a lease or management agreement and identify the other party thereto, (iii) give the address of any Restaurant-Related Business or other facility to be operated or managed by such Subsidiary, and (iv) state the amount to be invested by the Company in such Subsidiary or to be paid by it to acquire same. Concurrently with the Company's creating or acquiring a new Subsidiary, such Subsidiary shall execute and deliver a Guaranty to the Bank, and a Subsidiary's Security Agreement pursuant to which such Subsidiary, as debtor, shall grant to the Bank a first priority perfected security interest in its Subsidiary's Collateral subject only to the lien of Purchase Money Indebtedness in respect thereof. All of the shares in any such Subsidiary which have been issued to the Company or to any Subsidiary, together with stock powers executed in blank by the record owner of such shares, or if applicable a collateral assignment of any other form of equity interest in a Subsidiary, sufficient to transfer such shares or other interest upon delivery, shall be delivered by the Company to the Bank promptly after the Company, or such other Subsidiary's receipt thereof, which shares and stock powers or collateral assignment will thereupon become part of the Company's Collateral or the other Subsidiary's Collateral. 6.15 Notification of Write-offs of Investments and Sales of Assets. Within ten (10) days of (a) the write-off or write-down of the Company's or any Subsidiary's investments in or advances to any Restaurant- Related Businesses in excess of an aggregate of $1,000,000 in any fiscal year, or (b) the sale of any assets of the Company or any Subsidiary in excess of $250,000 other than in the ordinary course of business, the Company shall deliver a written notice to the Bank describing such event in reasonable detail. 6.16 Description of New Restaurant Arrangements. Upon entering into a letter of intent or similar document setting forth the terms of the arrangements for the development or acquisition of a new Restaurant- Related Business, the Company will deliver to the Bank a copy thereof, will advise the Bank of the material terms (including, without limitation, the amount of the proposed 32 investment, any indebtedness proposed to be incurred, and whether such indebtedness is to be non-recourse or with recourse) and will thereafter keep the Bank informed of any material developments in respect thereof. Within ten (10) days after execution thereof, the Company will deliver to the Bank a copy of any acquisition agreement or lease relating thereto. 6.17 Further Assurances. The Company and each Subsidiary will duly execute and deliver, or will cause to be duly executed and delivered, such further instruments and documents, including, without limitation, additional security agreements, Uniform Commercial Code financing statements or amendments or continuations thereof, and will do or use its best efforts to cause to be done such further acts as may be necessary or proper in the Bank's reasonable opinion to effectuate the provisions or purposes of this Agreement or the Loan Documents. 7. NEGATIVE COVENANTS. The Company covenants and agrees that from and after the date hereof and so long as any Loan (including interest or any other obligations incurred hereunder) is outstanding or any Commitment is in effect, unless the Bank shall otherwise consent in writing delivered to the Company, the Company will not, and will not permit or suffer any Subsidiary to: 7.1 Indebtedness. Create, incur, assume or suffer to exist, any Indebtedness except: 7.1.1. Indebtedness listed in the financial statements described in Section 4.9.1, but no renewals, extensions or refinancings thereof; 7.1.2. Purchase Money Indebtedness; 7.1.3. Indebtedness of any Subsidiary (other than Purchase Money Indebtedness) for assets purchased for use in the Restaurant-Related Business of such Subsidiary, which shall be deemed a capital expenditure and shall be subject to the limitation of Section 7.8; 33 7.1.4. Indebtedness of the Company for assets purchased for use in the Restaurant-Related Business conducted by the Company or any Subsidiary, which, if such Indebtedness provides for non-recourse liability limited to the asset purchased, shall constitute, for the purposes of the second sentence of Section 7.1.9, Purchase Money Indebtedness, or which, if such Indebtedness does not so provide, shall be deemed a capital expenditure and shall be subject to the limitation of Section 7.8, and which Indebtedness may be secured by the asset purchased; 7.1.5. Indebtedness of any Subsidiary to the Company, which Indebtedness is created for working capital purposes and not in connection with the development or acquisition of a Restaurant-Related Business in an amount not exceeding $250,000, and any such Indebtedness of such Subsidiary exceeding such amount, which excess shall be deemed a capital expenditure subject to the limitation set forth in Section 7.8. Indebtedness of the Company to a Subsidiary, or of a Subsidiary to a Subsidiary, is permitted without limitation. 7.1.6. Indebtedness to the Company of any newly-organized Subsidiary (or any such Indebtedness guaranteed by the Company) in connection with the development or acquisition of a Restaurant-Related Business, which shall be deemed a capital expenditure subject to the limitation set forth in Section 7.8. 7.1.7. Consolidated Trade Indebtedness; 7.1.8. Indebtedness of the Company and the Subsidiaries in respect of endorsements made in connection with the deposit of items for credit or collection in the normal and ordinary course of business; and 7.1.9. Consolidated Indebtedness, which in the aggregate does not exceed (i) $26,000,000 prior to June 30, 2000, (ii) $33,000,000 from July 1, 2000 through June 30, 2001, and (iii) thereafter $24,000,000 until the Conversion Date, and subsequently $24,000,000 minus scheduled monthly amortization on the Term Loan and Capitalized Leases; in each of (i), (ii) and (iii) exclusive of (a) Consolidated 34 Trade Indebtedness, (b) Purchase Money Indebtedness, and (c) outstanding Letters of Credit against which there has not been a draw. This Section 7.1.9 is a maintenance test as well as an incurrence test in that calculations will be made on a quarterly basis to determine compliance. Nothing in this Section 7.1.9, or elsewhere in this Agreement, shall permit the Company or any Subsidiary to incur, assume or suffer to exist any Indebtedness except for Indebtedness which is required in the normal course of the business of operating and acquiring Restaurant-Related Businesses. 7.2 Cash Flow. Maintain Consolidated Operating Cash Flow, calculated as of each September 30 on the basis of the twelve (12) full calendar months preceding such calculation, of less than the product of (a) 2.0 and (b) the Consolidated Debt Service for such twelve (12) month period; provided, however, that if Consolidated Operating Cash Flow for any such twelve (12) month period shall be less than the product determined pursuant to the first clause of this sentence, then Working Capital must equal or exceed the total amounts paid or payable for Consolidated Debt Service for such twelve (12) month period, and provided, further, that Consolidated Operating Cash Flow for any such twelve (12) month period shall at all times at least equal the amount of Consolidated Debt Service for such twelve (12) month period. 7.3 Consolidated Net Worth. Maintain Consolidated Net Worth which is less than (i) at March 31, 2000 of not less than $27,000,000, (ii) at September 30, 2000 of not less than $32,000,000, (iii) at March 31, 2001 of not less than $31,000,000, (iv) at June 30, 2001 of not less than $$35,000,000, (v) at September 30, 2001 of not less than $37,000,000, and (vi) $5,000,000 more than the required Consolidated Net Worth for the prior fiscal year, on each such date during each subsequent fiscal year of the Borrower until the Maturity Date; provided, however, that the dollar thresholds set forth in this Section 7.3 shall be reduced on a dollar-for-dollar basis to the extent of cash dividends paid and expenditures made by the Company to redeem its capital stock, to the extent permitted by Section 7.11 of this Agreement. 35 7.4 Ratio of Consolidated Indebtedness to Shareholders' Equity. Maintain a ratio of total Consolidated Indebtedness to Shareholders' Equity of more than (i) 1:50 to 1:00 at any time through March 31, 2001, and (ii) 1.0 to 1.0 at any time thereafter. 7.5 Liens. Directly or indirectly, create, incur, assume or permit or suffer to exist any mortgage, lien, security interest, charge or encumbrance on, or pledge or deposit of or conditional sale, lease or other title retention agreement with respect to, any of its properties or assets, whether now owned or hereafter acquired or created, or be bound by or subject to any agreement or option to do so, provided that the foregoing restrictions shall not apply to: 7.5.1. liens for taxes, assessments or governmental charges or levies the payment of which is not yet due or is being contested in good faith by appropriate proceedings; 7.5.2. liens incurred by the Company or the Subsidiaries or deposits made by the Company or the Subsidiaries in the ordinary course of business in connection with worker's compensation or unemployment insurance or to secure the performance of tenders, statutory obligations, surety and appeal bonds, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); 7.5.3. good faith deposits (in amounts not greater than the amounts normally required under leases of that type) under leases of real property to which the Company or any of the Subsidiaries is a party; 7.5.4. zoning restrictions, easements, rights-of-way, restrictions, exceptions, reservations, covenants and other similar title exceptions or encumbrances affecting real property, provided the same are not incurred in connection with the borrowing of money and do not in the aggregate materially detract from the value of said properties or materially interfere with their use in the ordinary course of business; 36 7.5.5. statutory or common law possessory liens for charges incurred by the Company or the Subsidiaries in the ordinary course of business, the payment of which is not yet due or is being contested in good faith by appropriate steps promptly initiated and diligently conducted, if adequate reserves or other appropriate provision, if any, as shall be required by generally accepted accounting principles shall have been made therefor; 7.5.6. the mortgages, liens and encumbrances disclosed on Schedule 4.13 hereto; 7.5.7. purchase money liens securing Indebtedness permitted to be incurred under Section 7.1 hereof, including conditional sale or related lease arrangements, created or executed concurrently with or immediately following the time of acquisition of such property; 7.5.8. purchase money liens created by any Subsidiary securing Purchase Money Indebtedness or the assumption by any Subsidiary of existing purchase money liens in connection with the acquisition by such Subsidiary of any additional Restaurant-Related Business acquired by any Subsidiary, provided, however, that such liens extend only to the assets of the Restaurant-Related Business acquired; 7.5.9. a lien arising from a judgment which does not at the time constitute the basis for a default under the provisions of Section 8.1.8 hereof; and 7.5.10. liens created in connection with the issuance of (or to further secure) Bank Debt. 7.6 Loans, Advances, Investments. Except (i) loans made to fund the purchase of the Company's shares pursuant to its stock option plans, (ii) loans to the Company's employees other than as provided for in (i), which loans shall not exceed $600,000 in the aggregate, and (iii) other loans with the prior written consent of the Bank, which consent shall not be unreasonably withheld or delayed: 7.6.1. make any loan, advance or capital contribution or extend any credit to any Person (except to 37 employees or to a Subsidiary in the ordinary course of business, to the extent permitted in this Agreement), or make any commitment to purchase or otherwise acquire any stock, bond, debenture, note or other security or obligation of any Person if such loan, advance, capital contribution, extension of credit or purchase or acquisition (an "Investment") is to or in a Person engaged in other than a Restaurant-Related Business and such Investment, together with all other outstanding Investments and the cost of any mergers, consolidations or acquisitions of corporations engaged in other than Restaurant-Related Businesses pursuant to Section 7.9 hereof, exceeds the sum of $500,000; and 7.6.2. make any Investment in any Restaurant-Related Businesses managed (but not owned by) the Company or a Subsidiary if such Investment, together with all other such Investments made in any twelve (12) month period, exceeds the sum of $1,000,000. For the purposes of this subsection 7.6.2, a Restaurant-Related Business which is "owned" by the Company shall include a Restaurant-Related Business in which an Investment is permitted pursuant to Section 7.6.3. 7.6.3. without the prior written consent of the Bank, make any Investment in any Restaurant-Related Business, unless the Company, directly or indirectly, shall own not less than 51% of both the equity and voting interests in the Person owning and operating such Restaurant-Related Business. The Bank hereby consents to the Company's (i) owning a 50% membership interest in Southfield Restaurant Company, L.L.C.; provided, however, that the Investment of the Company in Southfield Restaurant Company, L.L.C. for construction of restaurants, but not including loans to cover pre-opening expenses and operating losses, shall not exceed $8,000,000, and (ii) obtaining a 50% membership interest in Ark/EPE Restaurant Company LLC, which will construct and operate a museum (including Elvis Presley artifacts), restaurants and a gift shop to be located in Las Vegas, Nevada; provided, however, that the Investment of the Company in Ark/EPE Restaurant Company, L.L.C. for the construction of Restaurants, but not including loans to cover pre-opening expenses and operating losses, shall not exceed $10,000,000. 38 7.7 Guarantees. Assume, guarantee, endorse or otherwise be or become directly or contingently responsible or liable for the obligations of any Person (including, but not limited to, an agreement to purchase any obligation, stock, assets, goods or services or to supply or advance any funds, assets, goods, or services other than in the ordinary course of business, or otherwise to assure the creditors of any Person against loss) other than (i) guarantees by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business, (ii) guarantees by the Company of the obligations of any Subsidiary, or by any Subsidiary of the obligations of the Company or any other Subsidiary, (iii) guarantees in favor of the Bank, or (iv) other guarantees by the Company or a Subsidiary not otherwise permitted hereunder, provided that the amount thereof shall be deemed a capital expenditure, subject to the limitation set forth in Section 7.8. 7.8 Capital Expenditures. Make, in the aggregate (by the Company and any Subsidiary) in any fiscal year, any expenditures for fixed or capital assets whether by purchase or capitalized lease (including such loans, advances, investments, recourse purchase money indebtedness and guarantees as are deemed capital expenditures under Sections 7.1.3, 7.1.4, 7.1.5 and 7.1.6 of this Agreement), (i) $33,000,000 for the fiscal year ending September 30, 2000, and (ii) in excess of an aggregate of 30% of Consolidated Net Worth at the end of each subsequent fiscal year. 7.9 Mergers, Consolidations, Acquisitions. Except with the prior written consent of the Bank, which consent shall not be unreasonably withheld or delayed, merge into or consolidate with or into any corporation (and, for purposes of this Section 7.9, the acquisition by the Company or any Subsidiary, by lease, purchase or otherwise, of all or substantially all of the assets of any corporation shall be deemed a merger of such corporation with the Company or such Subsidiary), if such corporation is not engaged in Restaurant-Related Businesses, except that the Company or any Subsidiary may merge into, consolidate with or into or acquire any corporation or corporations engaged in other than Restaurant-Related Businesses without the prior consent of 39 the Bank if the aggregate cost thereof or purchase price therefor, together with the amount of any Investments in other than Restaurant-Related Businesses, does not exceed $500,000. 7.10 Sales of Assets. Sell, lease, assign, transfer or otherwise dispose of all or substantially all of its assets; except any Subsidiary may sell, lease, assign or otherwise dispose of substantially all of its assets. 7.11 Dividends, Redemptions. Declare or pay any dividend, purchase, redeem or otherwise acquire for value any of its capital stock now or hereafter outstanding or return any capital or make any distribution of assets to stockholders, except that Subsidiaries may declare and pay dividends, return capital and make distributions of assets to the Company and the Company may (i) declare and pay cash dividends in any fiscal year, and redeem shares of its capital stock in an aggregate amount not exceeding 20% of Consolidated Operating Cash Flow for such fiscal year, and (ii) declare and pay stock dividends. 7.12 Transactions with Affiliates. Enter into any transaction, including, without limitation, the lease, purchase, sale or exchange of property or the making of any loans or the entering into agreements for any payments with respect to, or the making of any payment of, any fees, charges or other expenses resulting from any allocation of general overhead, management fees or other similar services, with any Affiliate of the Company or any of the Subsidiaries except in the ordinary course of and pursuant to the reasonable requirements of the business of the Company or such Subsidiary and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would obtain in a comparable arm's-length transaction with a Person other than an Affiliate. 7.13 Sale of Subsidiary's Shares or Assets. Sell any of the capital stock of any Subsidiary, or all, or substantially all, of the assets of any Subsidiary, unless the net proceeds of any such sale are used for working capital purposes of the Company or a Subsidiary. 40 8. DEFAULTS AND REMEDIES. 8.1 Events of Default. In the case of the occurrence of any of the following events for any reason whatsoever, and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any governmental body or otherwise (each herein sometimes called an "Event of Default"): 8.1.1. the Company shall fail to make any payment of principal of or interest on either of the Notes, or any commitment fee, facility fee or deficiency fee within three (3) days after notice of a default in such payment; 8.1.2. the Company or any Subsidiary shall default in the performance or observance of any covenant or agreement contained in Section 7 hereof; 8.1.3. the Company or any Subsidiary shall default in the performance of any other covenant or agreement contained in this Agreement which shall remain unremedied for a period of ten (10) days after notice of the occurrence thereof; 8.1.4. an event of default or default shall occur and be continuing under any other Loan Document; 8.1.5. any representation or warranty made by or on behalf of the Company or any Subsidiary in this Agreement, either of the Notes, in any other Loan Document or in any other certificate, agreement, instrument or statement delivered to the Bank by or on behalf of the Company shall at any time prove to have been incorrect when made in any material respect; 8.1.6. the Company or any Subsidiary shall default in the payment of principal of or interest on any Indebtedness for borrowed money or the deferred purchase price of property (including any such Indebtedness in the 41 nature of a lease) or shall default in the performance or observance of the terms of any instrument pursuant to which such Indebtedness was created or is secured, the effect of which default is to cause or permit any holder of any such Indebtedness to cause the same to become due prior to its stated maturity (and whether or not such default is waived by the holder thereof); 8.1.7. Michael Weinstein shall not at all times be active in the management of the Company, other than by reason of his death or disability; 8.1.8. any judgment against the Company or any Subsidiary or any attachment, levy or execution against any of its properties for an amount in excess of $100,000 shall remain unpaid, or shall not be released, discharged, dismissed, stayed or fully bonded for a period of thirty (30) days or more after its entry, issue or levy, as the case may be; 8.1.9. the Company or any Subsidiary shall become insolvent (however evidenced) or be unable, or admit in writing its inability, to pay its debts as they mature; or 8.1.10. the Company or any Subsidiary shall make an assignment for the benefit of creditors, or a trustee, receiver or liquidator shall be appointed for the Company or any Subsidiary, or for any of its property, or any proceedings by or against the Company or any Subsidiary under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt, receivership, liquidation or dissolution law or statute shall be commenced and which, if not consented to by the Company or such Subsidiary, shall continue undischarged for a period of thirty (30) days; 8.1.11. If the Company shall suspend or have suspended (voluntarily or involuntarily and for whatever reason) the operation of a material portion of the business conducted by the Company and the Subsidiaries; or 8.1.12. If (i) a reportable event (within the meaning of Section 4043(b) of ERISA) (whether or not waived) shall have occurred with respect to a Plan which 42 could, in the opinion of the Bank, have a material adverse effect on the financial condition of the Company or of any Subsidiary, (ii) the filing by the Company, any Subsidiary or an administrator of any Plan of a notice of intent to terminate such Plan in a "distress termination" under the provisions of Section 4041 of ERISA, (iii) the receipt of notice by the Company, any Subsidiary or an administrator of a Plan that the PBGC has instituted proceedings to terminate (or appoint a trustee to administer) such a Plan, (iv) any other event or condition exists which might, in the opinion of the Bank, constitute grounds under the provisions of Section 4042 of ERISA for the termination of (or the appointment of a trustee to administer) any Plan by the PBGC, (v) a Plan shall fail to maintain the minimum funding standard required by Section 412 of the Internal Revenue Code for any plan year or a waiver of such standard is sought or granted under the provisions of Section 412(d) of the Internal Revenue Code which could, in the opinion of the Bank, have material adverse effect on the financial condition of the Company or of any Subsidiary, (vi) the Company or any Subsidiary has incurred, or is likely to incur, a liability under the provisions of Sections 4062, 4063, 4064 or 4201 of ERISA which could, in the opinion of the Bank, have a material adverse effect on the financial condition of the Company or any Subsidiary; and in each case in clauses (i) through (vi) of this Section 8.1.12, such event or condition, together with all other such events or conditions, if any, could subject the Company or any Subsidiary to any tax, penalty or other liabilities in the aggregate material in relation to the business, operations, property or financial or other condition of the Company or any Subsidiary. Then, if any event described in Section 8.1.10 above shall have occurred the then extant Note shall immediately become due and payable, and if any event described in any other subsection of this Section 8.1 shall have occurred, and at any time thereafter, if any such event shall then be continuing, the Bank may take either or both of the following actions by notice to the Company: (i) declare the principal of and accrued interest on the Revolving Note or Term Note, as applicable, and any other notes or evidences of Indebtedness of the Company or any Subsidiary then held by the Bank, to be due and payable, both as to principal and 43 interest, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, anything contained herein or in either of the Notes or in such other note or evidence of Indebtedness to the contrary notwithstanding; and (ii) declare the Commitment terminated immediately. Upon termination of the Commitment under this Section 8.1, any accrued fees shall be and become forthwith due and payable to the Bank without further notice. 8.2 Suits for Enforcement. In case any one or more of such Events of Default shall occur and be continuing, the Bank, or any other holder of either of the Notes may proceed, to the extent permitted by law, to protect and enforce such holder's rights either by suit in equity or by action at law, or both, whether for the specific performance of any covenant, condition or agreement contained in this Agreement or either of the Notes or in aid of the exercise of any power granted in this Agreement or either of the Notes or proceed to enforce the payment of the such of the Revolving Note or Term Note, as is extant, or to enforce any other legal or equitable right of the holder of either of the Notes. 8.3 Remedies Cumulative. No right or remedy herein or in any other agreement or instrument conferred upon the Bank or the holder of either of the Notes is intended to be exclusive of any other right or remedy, and each and every such right or remedy shall be cumulative and shall be in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. Without limiting the generality of the foregoing, if either of the Notes or any of the other obligations of the Company to the Bank shall not be paid when due, whether at the stated maturity thereof, by acceleration or otherwise, the Bank shall not be required to resort to any particular security, right or remedy or to proceed in any particular order of priority and the Bank shall have the right at any time and from time to time, in any manner and in any order, to enforce its security interests, liens, rights and remedies, or any of them, as it deems appropriate in the circumstances including, without limitation, all of the rights and remedies of a secured party under the 44 Uniform Commercial Code of the State of New York and under the Uniform Commercial Code of any other jurisdiction in which any of the Company's Collateral or any Subsidiary's Collateral may be situated and apply the proceeds of such collateral to such obligations of the Company and the Subsidiaries as it determines in its sole discretion. 9. MISCELLANEOUS. 9.1 No Waiver. No failure on the part of the Bank to exercise, and no delay in exercising, any right hereunder or under any of the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise by the Bank of any right hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right. The rights and remedies of the Bank hereunder and under the Loan Documents and under any other present and future agreements between the Bank and the Company or any Subsidiary are cumulative and not exclusive of any rights or remedies provided by law, or under any of said Loan Documents or agreements, and all such rights and remedies may be exercised successively or concurrently. 9.2 Costs and Expenses. The Company shall reimburse the Bank for all costs and expenses incurred by it, and shall pay the reasonable fees and disbursements of counsel to the Bank, in connection with the preparation of this Agreement, the Notes and all other Loan Documents. The Company shall also pay the costs and expenses incurred by the Bank, including reasonable attorneys' fees, in connection with the enforcement of the Bank's rights hereunder and under the Notes and the other Loan Documents. The Company shall also pay any and all taxes (other than taxes on or measured by net income of the holder of either of the Notes) incurred or payable in connection with the execution and delivery of the Notes. 9.3 Amendments. No amendment, modification or waiver of any provision of this Agreement, either of the Notes nor consent to any departure by the Company therefrom shall be effective unless the same shall be in writing and signed by the Bank and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 45 9.4 Survival of Representations. All representations and warranties made herein or in any other writing furnished to the Bank shall survive the delivery of both of the Notes. 9.5 Construction. This Agreement and each of the Notes shall be deemed to be contracts made under the laws of the State of New York and shall be construed in accordance with the laws of said State applicable to contracts made and to be performed entirely within such State. 9.6 Notices. All notices, approvals, consents, requests, demands or other communications (collectively, "Communications") to or upon the respective parties hereto shall be made in writing in one of the following ways and shall be deemed to have been given, received and dated: If by hand, immediately upon delivery; if by facsimile transmission, telex or telegram, immediately upon receipt of answerback or confirmation; if by express mail or any other overnight delivery service, one (1) day after dispatch; and if by certified mail, return receipt requested, four (4) days after mailing. All Communications are to be given to the following addresses (or to such other address as any party may designate by Communication in accordance with this Section): If to the Bank: Bank Leumi USA 562 Fifth Avenue New York, New York 10036 Attn: Mr. Richard Oleszewski First Vice President with a copy to: Warshaw Burstein Cohen Schlesinger & Kuh LLP 555 Fifth Avenue New York, New York 10017 Attn: Allen N. Ross, Esq. If to the Company or a Subsidiary: Ark Restaurants, Inc. 85 Fifth Avenue New York, New York 10003 Attn: Michael Weinstein, President 46 with a copy to: Shack & Siegel, P.C. 530 Fifth Avenue New York, New York 10036 Attn: Paul Goodman, Esq. 9.7 Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns and the terms hereof shall inure to the benefit of the Bank and its successor and assigns, including a subsequent holder of either of the Notes. 9.8 Further Assurances. The Company agrees to execute and deliver such further documents and to do such other acts and things as the Bank may reasonably request in order further to effect the purposes of this Agreement and the due performance by the Company of its obligations hereunder. 9.9 Severability. The provisions of this Agreement are severable, and if any provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall not in any manner affect such provision in any other jurisdiction or any other provision of this Agreement in any jurisdiction. 9.10 JURISDICTION; WAIVER OF JURY TRIAL. THE COMPANY HEREBY IRREVOCABLY CONSENTS TO THE JURISDICTION OF ANY NEW YORK STATE OR FEDERAL COURT LOCATED IN NEW YORK CITY OVER ANY ACTION OR PROCEEDING ARISING OUT OF ANY DISPUTE BETWEEN THE COMPANY AND THE BANK WITH RESPECT TO THE SUBJECT MATTER HEREOF AND THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF A COPY OF SUCH PROCESS TO THE COMPANY AT THE ADDRESS SET FORTH ABOVE. IN THE EVENT OF LITIGATION BETWEEN THE COMPANY AND THE BANK OVER ANY MATTER CONNECTED WITH THIS AGREEMENT OR RESULTING FROM TRANSACTIONS HEREUNDER, THE RIGHT TO A TRIAL BY JURY IS HEREBY WAIVED BY THE COMPANY AND THE BANK. 9.11 Bank's Right of Set-Off. Upon the occurrence of an Event of Default or of any condition, event or act which, with notice or lapse of time, or both, would 47 constitute such an Event of Default, the Bank is hereby authorized at any time or from time to time, without notice to the Company, any Subsidiary or any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (generally or special) and any other Indebtedness or property at any time held or owing by the Bank to or for the credit or the account of the Company or any Subsidiary, whether or not related to this Agreement or any transaction or occurrence hereunder, against and on account of any and all obligations and liabilities of the Company or any Subsidiary to the Bank, including (without limitation) all claims of any nature or description arising out of or connected with this Agreement and/or either of the Notes held by the Bank, irrespective of whether or not the Bank shall have made any demand hereunder and although such obligations, liabilities or claims, or any of them, shall be contingent or unmatured. In addition, as security for any and all Indebtedness and other liabilities of the Company or any Subsidiary to the Bank, whether direct or contingent, now existing or hereafter arising, the Bank is hereby granted a lien and security interest in all property of the Company or any Subsidiary held by the Bank, including, without limitation, all property of every description, now or hereafter in the possession or custody of or in transit to the Bank for any purpose, including safekeeping, collection or pledge, for the account of the Company or any Subsidiary, or as to which the Company or any Subsidiary may have any right or power. The rights and/or remedies granted to the Bank under this Section 9.11 shall be in addition to, and not in substitution for, any rights of set-off and banker's lien, to which the Bank may otherwise be entitled. 9.12 Use of Accounting Terms. Except as otherwise provided herein, accounting terms used herein shall be construed, calculations hereunder shall be made and financial data required hereunder shall be prepared, both as to classification of items and as to amounts, in accordance with generally accepted accounting principles. 9.13 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute an original, and all of which taken together shall constitute one and the same agreement. 48 9.14 Headings. Section headings are for convenience only and shall not affect the interpretation or construction of this Agreement or either of the Notes. IN WITNESS WHEREOF, the Company and the Bank have duly executed this Agreement as of the date first above written. ARK RESTAURANTS CORP. By:__________________________ Robert Towers, Executive Vice President BANK LEUMI USA By:___________________________ Iris Schechter, Vice President By:___________________________ Richard E. Oleszewski, First Vice President 49 EX-21 3 EXHIBIT 21 EXHIBIT 21 Subsidiaries of the Registrant Jurisdiction of Subsidiary Incorporation ---------- ------------- Columbus Cafe Corp. New York SSWB Restaurants, Inc. New York MEB Emporium Corp. New York MEB Dining 18, Inc. New York MEB On First, Inc. New York Conis Realty Corp. New York Ernie's Hackensack, Inc. New Jersey Ark 47th St. Corp. New York Ark 27th Street, Inc. New York Ark Seventh Avenue South Corp. New York Ark Rio Corp. New York Ark Operating Corp. New York Ark Sub-One Corp. New York Ark 474 Corp. New York Ark Twenty-Ninth Street Corp. New York Ark Boston Corp. Massachusetts Ark Union Station, Inc. District of Columbia Ark D.C. Kiosk, Inc. District of Columbia Ark Potomac Corporation District of Columbia Washington Parties & Events Related Industries, Inc. District of Columbia Aroc and Ark Corporation New York Ark Bryant Park Corp. New York Ark of the Seaport, Inc. New York Ark Parties, Inc. New York Tysons America Corp. Virginia Ark JC Corp. Florida Ark Oxnard Corp. California Ark California Restaurants Corp. California Ark JMR Corp. New York Ark Fifth Avenue Corp. New York Ark Islamorada Corp. Florida Lutece, Inc. New York La Femme Noire D.C. Incorporated District of Columbia Ark Cafeteria Corp. New Jersey Las Vegas Steakhouse Corp. Nevada Las Vegas America Corp. Nevada Las Vegas Festival Food Corp. Nevada Ark WFC Corp. New York Ark Las Vegas Restaurant Corp. Nevada Ark Fulton Street Corp. New York Ark Southfield Corp. Michigan Ark Southwest D.C. Corp. District of Columbia Las Vegas Downstairs Deli Corp. Nevada Las Vegas Mexico Corp. Nevada Las Vegas Asia Corp. Nevada Las Vegas Lutece Corp. Nevada Las Vegas Venice Deli Corp. Nevada Las Vegas Venice Food Corp. Nevada AFC Restaurant, Inc. Nevada Al's Pizza, Inc. Nevada EX-23 4 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Form S-8 Registration Statement No. 33-48217 and Registration Statement No. 33-85724 of Ark Restaurants Corp. of our report dated November 22, 1999, appearing in the Annual Report on Form 10-K of Ark Restaurants Corp. for the year ended October 2, 1999. Deloitte & Touche LLP New York, New York December 29, 1999 EX-27 5 EXHIBIT 27 5 The schedule contains summary financial information extracted from the consolidated balance sheet of Ark Restaurants Corp. and its subsidiaries as of October 2, 1999, and the related consolidated statement of operations, and is qualified in its entirety by reference to such financial statements. 1,000 PERIOD-TYPE YEAR FISCAL-YEAR-END DEC-31-1999 PERIOD-START JAN-01-1999 PERIOD-END OCT-02-1999 CASH 333,621 SECURITIES 0 RECEIVABLES 3,073,615 ALLOWANCES 0 INVENTORY 1,916,436 CURRENT-ASSETS 6,815,851 PP&E 47,260,429 DEPRECIATION 18,162,614 TOTAL-ASSETS 47,379,103 CURRENT-LIABILITIES 9,860,055 BONDS 7,804,065 COMMON 52,084 PREFERRED-MANDATORY 0 PREFERRED 0 OTHER-SE 29,461,888 TOTAL-LIABILITY-AND-EQUITY 47,379,103 SALES 110,800,913 TOTAL-REVENUES 110,800,913 CGS 29,301,303 TOTAL-COSTS 29,301,303 OTHER-EXPENSES 69,465,087 LOSS-PROVISION 0 INTEREST-EXPENSE 425,141 INCOME-PRETAX 7,070,339 INCOME-TAX 2,575,608 INCOME-CONTINUING 4,494,731 DISCONTINUED 0 EXTRAORDINARY 0 CHANGES 0 NET-INCOME 0 EPS-BASIC 1.30 EPS-DILUTED 1.29