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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
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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
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ARK RESTAURANTS CORP.
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(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
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(212) 206-8800
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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)