UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2006
Commission file number 0-14030
ARK RESTAURANTS CORP.
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(Exact Name of Registrant as Specified in Its Charter)
New York 13-3156768
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
85 Fifth Avenue, New York, NY 10003
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 206-8800
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the
Act: Common Stock, par value $0.01.
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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes __ No _X_
Indicate by check mark whether the Registrant is a shell company (as
defined in Exchange Act Rule 12b-2). Yes __ No _X_
The aggregate market value at December 14, 2006 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 $62,721,035. 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.
At December 14, 2006, there were outstanding 3,569,299 shares of the
Registrant's Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
proxy statement to be filed not later than 120 days after the end of the fiscal
year covered by this form are incorporated by reference in Part III, Items 10,
11, 12, 13 and 14 of this Report.
PART I
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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On one or more occasions, we may make statements in this Annual Report on Form
10-K regarding our assumptions, projections, expectations, targets, intentions
or beliefs about future events. All statements, other than statements of
historical facts, included or incorporated by reference herein relating to
management's current expectations of future financial performance, continued
growth and changes in economic conditions or capital markets are forward looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.
Words or phrases such as "anticipates," "believes," "estimates," "expects,"
"intends," "plans," "predicts," "projects," "targets," "will likely result,"
"hopes," "will continue" or similar expressions identify forward looking
statements. Forward-looking statements involve risks and uncertainties which
could cause actual results or outcomes to differ materially from those
expressed. We caution that while we make such statements in good faith and we
believe such statements are based on reasonable assumptions, including without
limitation, management's examination of historical operating trends, data
contained in records and other data available from third parties, we cannot
assure you that our projections will be achieved. Factors that may cause such
differences include: economic conditions generally and in each of the markets in
which we are located, the amount of sales contributed by new and existing
restaurants, labor costs for our personnel, fluctuations in the cost of food
products, adverse weather conditions, changes in consumer preferences and the
level of competition from existing or new competitors.
We have attempted to identify, in context, certain of the factors that we
believe may cause actual future experience and results to differ materially from
our current expectation regarding the relevant matter of subject area. In
addition to the items specifically discussed above, our business, results of
operations and financial position and your investment in our common stock are
subject to the risks and uncertainties described in "Item 1A Risk Factors" of
this Annual Report on Form 10-K.
From time to time, oral or written forward-looking statements are also included
in our reports on Forms 10-K, 10-Q and 8-K, our Schedule 14A, our press releases
and other materials released to the public. Although we believe that at the time
made, the expectations reflected in all of these forward-looking statements are
and will be reasonable, any or all of the forward-looking statements in this
Annual Report on Form 10-K, our reports on Forms 10-Q and 8-K, our Schedule 14A
and any other public statements that are made by us may prove to be incorrect.
This may occur as a result of inaccurate assumptions or as a consequence of
known or unknown risks and uncertainties. Many factors discussed in this Annual
Report on Form 10-K, certain of which are beyond our control, will be important
in determining our future performance. Consequently, actual results may differ
materially from those that might be anticipated from forward-looking statements.
In light of these and other uncertainties, you should not regard the inclusion
of a forward-looking statement in this Annual Report on Form 10-K or other
public communications that we might make as a representation by us that our
plans and objectives will be achieved, and you should not place undue reliance
on such forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, your attention is directed to any further disclosures made on related
subjects in our subsequent periodic reports filed with the Securities and
Exchange Commission on Forms 10-Q and 8-K and Schedule 14A.
Unless the context requires otherwise, references to "we," "us," "our," "ARKR"
and the "Company" refer specifically to Ark Restaurants Corp. and its
subsidiaries and predecessor entities.
ITEM 1. BUSINESS
Overview
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We are a New York corporation formed in 1983. As of the fiscal year ended
September 30, 2006, we owned and/or operated 23 restaurants and bars, 25 fast
food concepts, catering operations, and wholesale and retail bakeries through
its subsidiaries. Initially our facilities were located only in New York City.
As of the fiscal year ended September 30, 2006, seven of our restaurants are
located in New York City, four are located in Washington, D.C., eight are
located in Las Vegas, Nevada, two are located in Atlantic City, New Jersey, and
two are located at the Foxwoods Resort Casino in Ledyard, Connecticut. As of the
fiscal year ended September 30, 2006, our Las Vegas operations included:
-- three restaurants within the New York-New York Hotel & Casino
Resort, and operation of the resort's room service, banquet facilities, employee
dining room and nine food court operations;
-- two restaurants, two bars and three food court facilities at
the Venetian Casino Resort; and
-- one restaurant within the Forum Shops at Caesar's Shopping
Center.
In 2004, we established operations in Florida which include five fast food
facilities in Tampa, Florida and eight fast food facilities in Hollywood,
Florida, each at a Hard Rock Hotel and Casino operated by the Seminole Indian
Tribe at these locations. All pre-opening expenses were borne by outside
investors who invested in a limited liability company established to develop,
construct, operate and manage these facilities. We are the managing member of
this limited liability company and, through this limited liability company, we
lease and manage the operations of each of these facilities in exchange for a
monthly management fee equal to five-percent of the gross receipts of these
facilities. Neither us nor any of our subsidiaries contributed any capital to
this limited liability company. None of the obligations of this limited
liability company are guaranteed by us and investors in this limited liability
company have no recourse against us or any of our assets.
In December 2005, we established operations in Atlantic City, New Jersey by
opening a bar, LUNA LOUNGE, and a separate restaurant, a GALLAGHER'S STEAKHOUSE,
in the Resorts Atlantic City Hotel and Casino.
During the fiscal year ended September 30, 2006, we established operations at
the Foxwoods Resort Casino in Ledyard, Connecticut by opening a restaurant, THE
FIFTH STREET CAFE, in its newly expanded poker room in March 2006 and a
fast-casual restaurant, LUCKY SEVEN, in the Bingo Hall in May 2006. All
pre-opening expenses were borne by outside investors who invested in a limited
liability company established to develop, construct, operate and manage these
facilities. We are the managing member of this limited liability company and,
through this limited liability company, we lease and manage the operations of
each of these facilities in exchange for a monthly management fee equal to
five-percent of the gross receipts of these facilities. Neither we nor any of
our subsidiaries contributed any capital to this limited liability company. None
of the obligations of this limited liability company are guaranteed by us and
investors in this limited liability company have no recourse against us or any
of our assets.
In addition to the shift from a Manhattan-based operation to a multi-city
operation, the nature of the facilities operated by us 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 our restaurants which are in operation and which have been
opened in recent years are of the latter description. As of the fiscal year
ended September 30, 2006, these include the restaurant operations at the New
York-New York Hotel & Casino in Las Vegas, Nevada (1997); the STAGE DELI located
at the Forum Shops in Las Vegas, Nevada; RED, located at the South Street
Seaport in New York
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(1998); THUNDER GRILL in Union Station, Washington, D.C. (1999); two restaurants
and four food court facilities at the Venetian Casino Resort in Las Vegas,
Nevada (2000); the 13 fast food facilities in Tampa, Florida and Hollywood,
Florida, respectively (2004); the GALLAGHER'S STEAKHOUSE and LUNA LOUNGE in the
Resorts Atlantic City Hotel and Casino in Atlantic City, New Jersey (2005); and
THE FIFTH STREET CAFE and the fast-casual restaurant in the Bingo Hall at the
Foxwoods Resort Casino in Ledyard, Connecticut (2006).
Further, in September 2006, we entered into an agreement to lease a to be named
Mexican restaurant at the to be developed Planet Hollywood Resort and Casino
(formerly known as the Aladdin Resort and Casino) in Las Vegas, Nevada, and
entered into an agreement to purchase the restaurant known as the DURGIN PARK
RESTAURANT AND THE BLACK HORSE TAVERN in Boston, Massachusetts. The obligation
to pay rent for the to be named Mexican restaurant is not effective until the
restaurant opens for business. We anticipate this restaurant to open during our
third quarter of the 2007 fiscal year. The agreement to purchase the DURGIN PARK
facility provides that we cannot take possession of the restaurant until we
obtain a liquor license for the facility. We are currently in the process of
obtaining such liquor license.
Finally, in December 2006, we expanded our operations at the Foxwoods Resort
Casino by opening THE GRILL AT TWO TREES in the Two Trees Inn, a facility owned
by the Mashantucket Pequot Tribal Nation and a part of the Foxwoods Resort
Casino, in Ledyard, Connecticut.
The names and themes of each of our restaurants are different except for our two
AMERICA restaurants, two SEQUOIA restaurants, two GONZALEZ Y GONZALEZ
restaurants and two GALLAGHER'S STEAKHOUSE restaurants. The menus in our
restaurants are extensive, offering a wide variety of high quality foods at
generally moderate prices. Of our restaurants owned or managed as of September
30, 2006, only the LUTECE restaurant may be classified as expensive. The LUTECE
restaurant was closed effective December 3, 2006. The atmosphere at many of the
restaurants is lively and extremely casual. Most of the restaurants have
separate bar areas. A majority of our net sales are 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 the facilities we lease and operate as of
September 30, 2006:
Seating
Capacity(2)
Year Restaurant Size Indoor- Lease
Name Location Opened(1) (Square Feet) (Outdoor) Expiration(3)
---- -------- --------- ------------- --------- -------------
Metropolitan First Avenue 1982 4,000 180(50) 2006
Cafe(4) (between 52nd and 53rd
Streets)
New York, New York
4
Seating
Capacity(2)
Year Restaurant Size Indoor- Lease
Name Location Opened(1) (Square Feet) (Outdoor) Expiration(3)
---- -------- --------- ------------- --------- -------------
Gonzalez y Broadway 1989 6,000 250 2007
Gonzalez (between Houston and
Bleecker Streets)
New York, New York
America Union Station 1989 10,000 400(50) 2009
Washington, D.C.
Center Cafe Union Station 1989 4,000 200 2009
Washington, D.C.
Sequoia Washington Harbour 1990 26,000 600(400) 2017
Washington, D.C.
Sequoia South Street Seaport 1991 12,000 300(100) 2008
New York, New York
Canyon Road First Avenue 1984 2,500 130 2014
(between 76th and 77th
Streets) New York, New York
Columbus Columbus Avenue 1988 3,000 75 2012
Bakery (between 82nd and 83rd
Streets)
New York, New York
Bryant Park Bryant Park 1995 25,000 180(820) 2025
Grill & Cafe(5) New York, New York
Columbus First Avenue 1995 2000 75 2006
Bakery(4) (between 52nd and 53rd
Streets)
New York, New York
America(6) New York-New York Hotel 1997 20,000 450 2017
and Casino
Las Vegas, Nevada
Gallagher's New York-New York 1997 5,500 260 2017
Steakhouse(6) Hotel & Casino
Las Vegas, Nevada
Gonzalez y New York-New York 1997 2,000 120 2017
Gonzalez(6) Hotel & Casino
Las Vegas, Nevada
5
Seating
Capacity(2)
Year Restaurant Size Indoor- Lease
Name Location Opened(1) (Square Feet) (Outdoor) Expiration(3)
---- -------- --------- ------------- --------- -------------
Village Eateries New York-New York 1997 6,300 400(*) 2017
(6)(7) Hotel & Casino
Las Vegas, Nevada
The Grill Room (8) World Financial Center 1997 10,000 250 2011
New York, New York
The Stage Deli Forum Shops 1997 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 3,980 300(*) 2014
Court(9) Las Vegas, Nevada
Tsunami Venetian Casino Resort 1999 13,000 300 2019
Grill(10)(11) Las Vegas, Nevada
Lutece(10) Venetian Casino Resort 1999 6,400 90(90) 2019
Las Vegas, Nevada
Vivid(12) Venetian Casino Resort 2001 9,700 250 2019
Las Vegas, Nevada
V-Bar Venetian Casino Resort 2000 3,000 100 2015
Las Vegas, Nevada
Gallagher's Resorts Atlantic City 2005 6,280 196 2020
Steakhouse Hotel and Casino
Atlantic City, New Jersey
Luna Lounge Resorts Atlantic City 2005 2,270 114 2020
Hotel and Casino
Atlantic City, New Jersey
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(1) Restaurants are, from time to time, renovated, renamed and/or converted
from or to managed or owned facilities. "Year Opened" refers to the
year in which we, or an affiliated predecessor of us, first opened,
acquired or began managing a restaurant at the applicable location,
notwithstanding that the restaurant may have been renovated, renamed
and/or converted from or to a managed or owned facility since that
date.
6
(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) These leases were terminated at the landlord's option effective October
1, 2006.
(5) The lease governing a substantial portion of the outside seating area
of this restaurant expires on April 30, 2012.
(6) Includes two five-year renewal options exercisable by us 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 STEAKHOUSE 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
each respective restaurant.
(7) We operate eight small food court restaurants in the VILLAGES EATERIES
food court at the New York-New York Hotel & Casino. We also operate
that hotel's room service, banquet facilities and employee cafeteria.
(8) This restaurant experienced damage in the attack on the World Trade
Center on September 11, 2001. In addition, substantial damage was
sustained by the World Financial Center in which the restaurant is
located. The restaurant closed on September 11, 2001 and reopened in
early December 2002.
(9) Our landlord for this facility paid us $200,000 for the unamortized
portion of the non-removable improvements located in the facility and
closed this facility on August 10, 2006.
(10) These restaurants were sold effective December 1, 2006.
(11) We shall continue to operate this restaurant until December 31, 2006.
(12) This bar changed its name from Venus to Vivid in January 2005.
(*) Represents common area seating.
The following table sets forth the facilities managed by us as of September 30,
2006:
Seating
Capacity(2)
Year Restaurant Size Indoor- Lease
Name Location Opened(1) (Square Feet) (Outdoor) Expiration(3)
---- -------- --------- ------------- --------- -------------
El Rio Grande Third Avenue 1987 4,000 160 2014
(4)(5) (between 38th and 39th
Streets)
New York, New York
The Saloon(6) Neonopolis Center 2002 6,000 200 2014
at Fremont Street
Las Vegas, Nevada
7
Seating
Capacity(2)
Year Restaurant Size Indoor- Lease
Name Location Opened(1) (Square Feet) (Outdoor) Expiration(3)
---- -------- --------- ------------- --------- -------------
Tampa Food Hard Rock Hotel and 2004 4,000 250(*) 2029
Court(7) Casino
Tampa, Florida
Hollywood Food Hard Rock Hotel and 2004 5,000 250(*) 2029
Court(7) Casino
Hollywood, Florida
Fifth Street Foxwoods Resort Casino 2006 4,825 68 2026
Cafe(7) Ledyard, Connecticut
Lucky Seven(7) Foxwoods Resort Casino 2006 6,858 4,000 (**) 2026
Ledyard, Connecticut
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(1) Restaurants are, from time to time, renovated, renamed and/or converted
from or to managed or owned facilities. "Year Opened" refers to the
year in which we, or an affiliated predecessor of us, first opened,
acquired or began managing a restaurant at the applicable location,
notwithstanding that the restaurant may have been renovated, renamed
and/or converted from or to a managed or owned facility 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) Management fees earned are based on a percentage of cash flow of the
restaurant.
(5) We own a 19% interest in the partnership that owns EL RIO GRANDE.
(6) We received $7,000 per month for managing the restaurant. This
restaurant closed effective July 25, 2006.
(7) Management fees earned are based on a percentage of gross sales of the
restaurant(s).
(*) Represents common area seating.
(**) Represents number of seats in the Bingo Hall.
Revenues from facilities managed by us are not included in our consolidated
sales.
Restaurant Expansion
8
We opened a GALLAGHER'S STEAKHOUSE restaurant in the Resorts Atlantic City Hotel
and Casino in Atlantic City, New Jersey in December 2005.
During the fiscal year ended September 30, 2006, we established operations at
the Foxwoods Resort Casino in Ledyard, Connecticut by opening a restaurant, THE
FIFTH STREET CAFE, in its newly expanded poker room in March 2006 and a
fast-casual restaurant, LUCKY SEVEN, in the Bingo Hall in May 2006. All
pre-opening expenses were borne by outside investors who invested in a limited
liability company established to develop, construct, operate and manage these
facilities. We are the managing member of this limited liability company and,
through this limited liability company, we lease and manage the operations of
each of these facilities in exchange for a monthly management fee equal to
five-percent of the gross receipts of these facilities. Neither we nor any of
our subsidiaries contributed any capital to this limited liability company. None
of the obligations of this limited liability company are guaranteed by us and
investors in this limited liability company have no recourse against us or any
of our assets.
In addition, in September 2006, we entered into an agreement to lease a to be
named Mexican restaurant at the to be developed Planet Hollywood Resort and
Casino (formerly known as the Aladdin Resort and Casino) in Las Vegas, Nevada,
and entered into an agreement to purchase the restaurant known as the DURGIN
PARK RESTAURANT AND THE BLACK HORSE TAVERN in Boston, Massachusetts. The
obligation to pay rent for the to be named Mexican restaurant is not effective
until the restaurant opens for business. We anticipate this restaurant to open
during our third quarter of the 2007 fiscal year. The agreement to purchase the
DURGIN PARK facility provides that we cannot take possession of the restaurant
until we obtain a liquor license for the facility. We are currently in the
process of obtaining such liquor license.
Finally, in December 2006, we expanded our operations at the Foxwoods Resort
Casino by opening THE GRILL AT TWO TREES in the Two Trees Inn, a facility owned
by the Mashantucket Pequot Tribal Nation and a part of the Foxwoods Resort
Casino, in Ledyard, Connecticut.
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, 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 expenses and early operating losses can generally be expected to
depend upon the size and complexity of the facility being opened. We incurred
$15,000 in pre-opening expenses in fiscal 2006.
Our restaurants generally do not achieve substantial increases in revenue from
year to year, which we consider to be typical of the restaurant industry. To
achieve significant increases in revenue or to replace revenue of restaurants
that lose customer favor or which close because of lease expirations or other
reasons, we would have to open additional restaurant facilities or expand
existing restaurants. There can be no assurance that a restaurant will be
successful after it is opened, particularly since in many instances we do not
operate our new restaurants under a trade name currently used by us, thereby
requiring new restaurants to establish their own identity.
Apart from these agreements, we are not currently committed to any projects. We
may take advantage of opportunities we consider to be favorable, when they
occur, depending upon the availability of financing and other factors.
Recent Restaurant Dispositions and Charges
We entered into a sale and leaseback agreement with GE Capital in November 2000
to refinance the purchase of various restaurant equipment at our food and
beverage facilities at Desert Passage, the retail
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complex at the Aladdin Resort & Casino in Las Vegas, Nevada. In 2002, the
operations at the Aladdin were abandoned. The lease matured in November 2005
and, in connection therewith, we made an unprovided for lump sum payment of
$142,000 due under this lease. This lump sum payment is included in discontinued
operations.
In fiscal 2003, we determined that our restaurant, Lutece, located in New York
City, had been impaired by the events of September 11th and the continued
weakness in the economy. Based upon the sum of the future undiscounted cash
flows related to our long-lived fixed assets at Lutece, we determined that
impairment had occurred. To estimate the fair value of such long-lived fixed
assets, for determining the impairment amount, we used the expected present
value of the future cash flows. We projected continuing negative operating cash
flow for the foreseeable future with no value for subletting or assigning the
lease for the premises. As a result, we determined that there was no value to
the long-lived fixed assets. We had an investment of $667,000 in leasehold
improvements, furniture fixtures and equipment. We believed that these assets
would have nominal value upon disposal and recorded an impairment charge of
$667,000 during fiscal 2003. Due to continued weak sales, we closed Lutece
during the second quarter of 2004. We recorded a net operating loss of $27,000
during the fiscal year ended September 30, 2006 which is included in losses from
discontinued operations. In fiscal 2004, we also incurred a one-time charge of
$470,000 related to pension plan contributions required in connection with the
closing of Lutece which is payable monthly over a nine year period beginning May
17, 2004 and bears interest at a rate of 8% per annum.
On December 1, 2003, we sold a restaurant, Lorelei, for approximately $850,000.
The book value of inventory, fixed assets, intangible assets and goodwill
related to this entity was approximately $625,000. We recorded a gain on the
sale of approximately $225,000 during the first quarter of fiscal 2004.
Our restaurant, Ernie's, located on the upper west side of Manhattan opened in
1982. As a result of a steady decline in sales, we felt that a new concept was
needed at this location. The restaurant was closed June 16, 2003 and reopened in
August 2003. Total conversion costs were approximately $350,000. Sales at the
new restaurant, La Rambla, failed to reach the level sufficient to achieve the
results we required. As a result, we sold this restaurant on January 1, 2004 and
realized a gain on the sale of this restaurant of approximately $214,000. Net
operating income of $5,000 was included in losses from discontinued operations
for the fiscal year ended September 30, 2006.
Our restaurant Jack Rose located on the west side of Manhattan has experienced
weak sales for several years. In addition, this restaurant did not fit our
desired profile of being in a landmark destination location. As a result, we
sold this restaurant on February 23, 2004. We realized a loss on the sale of
this restaurant of $137,000 which was recorded during the second quarter of
fiscal 2004. Net operating losses of $3,000 were included in losses from
discontinued operations for the fiscal year ended September 30, 2006.
Our restaurant, America, located in New York City has experienced declining
sales for several years. In March 2004, we entered into a new lease for this
restaurant at a significantly increased rent. We entered into this lease with
the belief that due to the location and the uniqueness of the space the lease
had value. On January 19, 2005, we signed a definitive agreement for the sale of
this restaurant which closed on March 15, 2005. We realized a pre-tax gain of
$644,000 on the sale of this restaurant. Net operating losses of $12,000 were
included in losses from discontinued operations for the fiscal year ended
September 30, 2006.
Our bar/nightclub facility Venus, located at the Venetian Casino Resort,
experienced a steady decline in sales and we felt that a new concept was needed
at this location. During the first quarter of 2005, this
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bar/nightclub facility was closed for re-concepting and re-opened as "Vivid" on
February 4, 2005. Total conversion costs were approximately $400,000. Sales at
the new bar/nightclub facility have failed to reach the level sufficient to
achieve the results we required and we have identified a buyer for this
facility. As of December 31, 2005, we classified the assets and liabilities of
this bar/nightclub facility as "held for sale" in accordance with Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144") based on the fact that the
facility has met the criteria under SFAS No. 144. Based on the initial offers
made on this facility, we do not anticipate a loss on the sale. Net operating
losses of $486,000 are included in losses from discontinued operations for the
fiscal year ended September 30, 2006.
Effective August 22, 2004, our lease for The Saloon at the Neonopolis Center at
Fremont Street was converted into a management agreement whereby we received a
management fee of $7,000 per month regardless of the results of operations of
this restaurant. In June 2006, the owner of the Neonopolis Center at Fremont
Street sold the building to a new entity who, on June 25, 2006, exercised its
option to terminate the management agreement upon thirty days written notice to
us.
On July 6, 2006, the landlord for the Vico's Burrito's fast food facility at the
Venetian Casino Resort, General Growth Properties, notified us that the landlord
was exercising an option granted to it pursuant to the lease for the facility to
terminate the lease in exchange for the landlord providing us with the
unamortized portion of the non-removable improvements located in the facility.
On August 10, 2006, we and our landlord for this facility entered into a letter
agreement pursuant to which the landlord agreed to pay us $200,000 for the
unamortized portion of the non-removable improvements located in the facility.
We realized a pre-tax loss of $70,000 on the closure of this restaurant. Net
operating income of $35,000 is included in losses from discontinued operations
for the fiscal year ended September 30, 2006.
As a result of the above mentioned sales or closures, we allocated $75,000 of
goodwill to these restaurants and reduced goodwill by this amount in fiscal
2005.
Effective December 1, 2006, our subsidiaries that lease each of Lutece, Tsunami
and our Vivid location at The Venetian Resort Hotel Casino in Las Vegas, Nevada,
have entered into an agreement to sell Lutece, Tsunami and a portion of the
Vivid location used by Lutece as a prep kitchen to Venetian Casino Resort, LLC
for an aggregate of $14,000,000. Our Lutece location closed as of the close of
business on December 3, 2006 and it is contemplated that our Tsunami location
will close at the end of the calendar year. We do not anticipate a loss on the
sale of these restaurants.
Restaurant Management
Each restaurant is managed by its own manager and has its own chef. Food
products and other supplies are purchased primarily from various unaffiliated
suppliers, in most cases by our headquarters' personnel. Our Columbus Bakery
supplies bakery products to most of our New York City restaurants in addition to
operating a retail bakery. Our Columbus Bakery in Las Vegas supplies bakery
products to most of our Las Vegas restaurants in addition to operating a
wholesale bakery. Each of our restaurants has two or more assistant managers and
sous chefs (assistant chefs). Financial and management control is maintained at
the corporate level through the use of automated systems that include
centralized accounting and reporting.
Purchasing and Distribution
We strive to obtain quality menu ingredients, raw materials and other supplies
and services for our operations from reliable sources at competitive prices.
Substantially all menu items are prepared on each
11
restaurant's premises daily from scratch, using fresh ingredients. Each
restaurant's management determines the quantities of food and supplies required
and orders the items from local, regional and national suppliers on terms
negotiated by our centralized purchasing staff. Restaurant-level inventories are
maintained at a minimum dollar-value level in relation to sales due to the
relatively rapid turnover of the perishable produce, poultry, meat, fish and
dairy commodities that are used in operations.
We attempt to negotiate short-term and long-term supply agreements depending on
market conditions and expected demand. However, we do not contract for long
periods of time for our fresh commodities such as produce, poultry, meat, fish
and dairy items and, consequently, such commodities can be subject to unforeseen
supply and cost fluctuations. Independent foodservice distributors deliver most
food and supply items daily to restaurants. The financial impact of such supply
agreements would not have a material adverse effect on our financial position.
Employees
At December 10, 2006, we employed 2,117 persons (including employees at managed
facilities), 1,544 of whom were full-time employees, 573 of whom were part-time
employees, 30 of whom were headquarters personnel, 214 of whom were restaurant
management personnel, 586 of whom were kitchen personnel and 1,287 of whom were
restaurant service personnel. A number of our restaurant service personnel are
employed on a part-time basis. Changes in minimum wage levels may affect our
labor costs and the restaurant industry generally because a large percentage of
restaurant personnel are paid at or slightly above the minimum wage. Our
employees are not covered by a collective bargaining agreement.
Government Regulation
We are subject to various federal, state and local laws affecting our business.
Each restaurant is subject to licensing and regulation by a number of
governmental authorities that may include alcoholic beverage control, health,
sanitation, environmental, zoning and public safety agencies in the state or
municipality in which the restaurant is located. Difficulties in obtaining or
failures to obtain the required licenses or approvals could delay or prevent the
development and openings of new restaurants, or could disrupt the operations of
existing restaurants.
Alcoholic beverage control regulations require each of our restaurants to apply
to a state authority and, in certain locations, county and municipal authorities
for licenses and permits to sell alcoholic beverages on the premises. Typically,
licenses must be renewed annually and may be subject to penalties, temporary
suspension or revocation for cause at any time. Alcoholic beverage control
regulations impact many aspects of the daily operations of our restaurants,
including the minimum ages of patrons and employees consuming or serving such
beverages; employee alcoholic beverages training and certification requirements;
hours of operation; advertising; wholesale purchasing and inventory control of
such beverages; seating of minors and the service of food within our bar areas;
and the storage and dispensing of alcoholic beverages. State and local
authorities in many jurisdictions routinely monitor compliance with alcoholic
beverage laws. The failure to receive or retain, or a delay in obtaining, a
liquor license for a particular restaurant could adversely affect our ability to
obtain such licenses in jurisdictions where the failure to receive or retain, or
a delay in obtaining, a liquor license occurred.
We are subject to "dram-shop" statutes in most of the states in which we have
operations, which generally provide a person injured by an intoxicated person
the right to recover damages from an establishment that wrongfully served
alcoholic beverages to such person. We carry liquor liability coverage as part
of our existing comprehensive general liability insurance. A settlement or
judgment against us under a "dram-shop" statute in excess of liability coverage
could have a material adverse effect on our operations.
12
Various federal and state labor laws govern our operations and our relationship
with employees, including such matters as minimum wages, breaks, overtime,
fringe benefits, safety, working conditions and citizenship requirements. We are
also subject to the regulations of the Immigration and Naturalization Service
(INS). If our employees do not meet federal citizenship or residency
requirements, this could lead to a disruption in our work force. Significant
government-imposed increases in minimum wages, paid leaves of absence and
mandated health benefits, or increased tax reporting, assessment or payment
requirements related to employees who receive gratuities could be detrimental to
our profitability.
Our facilities must comply with the applicable requirements of the Americans
With Disabilities Act of 1990 ("ADA") and related state statutes. The ADA
prohibits discrimination on the basis of disability with respect to public
accommodations and employment. Under the ADA and related state laws, when
constructing new restaurants or undertaking significant remodeling of existing
restaurants, we must make them more readily accessible to disabled persons.
The New York State Liquor Authority must approve any transaction in which a
shareholder of the licensee increases his holdings to 10% or more of the
outstanding capital stock of the licensee and any transaction involving 10% or
more of the outstanding capital stock of the licensee.
Seasonal Nature Of Business
Our business is highly seasonal. The second quarter of our fiscal year,
consisting of the non-holiday portion of the cold weather season in New York and
Washington (January, February and March), is the poorest performing quarter. We
achieve our best results during the warm weather, attributable to our extensive
outdoor dining availability, particularly at BRYANT PARK in New York and SEQUOIA
in Washington, D.C. (our largest restaurants) and our outdoor cafes. However,
even during summer months these facilities can be adversely affected by
unusually cool or rainy weather conditions. Our facilities in Las Vegas
generally operate on a more consistent basis through the year.
Terrorism and International Unrest
The terrorist attacks on the World Trade Center in New York and the Pentagon in
Washington, D.C. on September 11, 2001 had a material adverse effect on our
revenues. As a result of the attacks, one of our restaurants, THE GRILL ROOM,
located at 2 World Financial Center, which is adjacent to the World Trade
Center, experienced some damage. THE GRILL ROOM was closed from September 11,
2001 and reopened in early December 2002.
Our restaurants in New York, Las Vegas, Washington D.C. and Florida benefit from
tourist traffic. Though the Las Vegas market has shown resiliency, the sluggish
economy and the lingering effects of September 11, 2001 have had an adverse
effect on our restaurants. Recovery depends upon a general improvement in
economic conditions and the public's willingness and inclination to resume
vacation and convention travel. Additional acts of terrorism in the United
States or substantial international unrest may have a material adverse effect on
our business and revenues.
ITEM 1A. RISK FACTORS.
The following are the most significant risk factors applicable to us:
13
RISKS RELATED TO OUR BUSINESS
-----------------------------
OUR UNFAMILIARITY WITH NEW MARKETS MAY PRESENT RISKS, WHICH COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR FUTURE GROWTH AND PROFITABILITY.
Due to higher operating costs caused by temporary inefficiencies typically
associated with expanding into new regions and opening new restaurants, such as
lack of market awareness and acceptance and limited availability of experienced
staff, continued expansion may result in an increase in our operating costs. New
markets may have different competitive conditions, consumer tastes and
discretionary spending patterns than our existing markets, which may cause our
restaurants in these new markets to be less successful than our restaurants in
our existing markets. We cannot assure you that restaurants in new markets will
be successful.
Our ability to open new restaurants efficiently is subject to a number of
factors beyond our control, including:
-- Selection and availability of suitable restaurant sites;
-- Negotiation of acceptable lease or purchase terms for such sites;
-- Negotiation of reasonable construction contracts and adequate
supervision of construction;
-- Our ability to secure required governmental permits and approvals for
both construction and operation;
-- Availability of adequate capital;
-- General economic conditions; and
-- Adverse weather conditions.
We may not be successful in addressing these factors, which could adversely
affect our ability to open new restaurants on a timely basis, or at all. Delays
in opening or failures to open new restaurants could cause our business, results
of operations and financial condition to suffer.
TERRORISM AND WAR MAY HAVE MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Terrorist attacks, such as the attacks that occurred in New York and Washington,
D.C. on September 11, 2001, and other acts of violence or war in the United
States or abroad, such as the war in Iraq, may affect the markets in which we
operate and our business, results of operations and financial conditions. The
potential near-term and long-term effects these events may have on our business
operations, our customers, the markets in which we operate and the economy is
uncertain. Because the consequences of any terrorist attacks, or any armed
conflicts, are unpredictable, we may not be able to foresee events that could
have an adverse effect on our markets or our business.
OUR PROFITABILITY IS DEPENDENT IN LARGE MEASURE ON FOOD, BEVERAGE AND SUPPLY
COSTS WHICH ARE NOT WITHIN OUR CONTROL.
Our profitability is dependent in large measure on our ability to anticipate and
react to changes in food, beverage and supply costs. Various factors beyond our
control, including climatic changes and government regulations, may affect food
and beverage costs. Specifically, our dependence on frequent, timely deliveries
of fresh beef, poultry, seafood and produce subjects us to the risks of possible
shortages or interruptions in supply caused by adverse weather or other
conditions, which could adversely affect the availability and cost of any such
items. We cannot assure you that we will be able to anticipate or react to
increasing food and supply costs in the future. The failure to react to these
increases could materially and adversely affect our business, results of
operations and financial condition.
THE RESTAURANT INDUSTRY IS AFFECTED BY CHANGES IN CONSUMER PREFERENCES AND
DISCRETIONARY SPENDING PATTERNS THAT COULD RESULT IN A REDUCTION IN OUR
REVENUES.
14
Consumer preferences could be affected by health concerns or by specific events
such as the outbreak of or scare caused by "mad cow disease", the popularity of
the Atkins diet and the South Beach diet and changes in consumer preferences,
such as "carb consciousness". If we were to have to modify our restaurants'
menus, we may lose customers who would be less satisfied with a modified menu,
and we may not be able to attract a new customer base to generate the necessary
revenues to maintain our income from restaurant operations. A change in our
menus may also result in us having different competitors. We may not be able to
successfully compete against established competitors in the general restaurant
market. Our success also depends on various factors affecting discretionary
consumer spending, including economic conditions, disposable consumer income,
consumer confidence and the United States participation in military activities.
Adverse changes in these factors could reduce our customer base and spending
patterns, either of which could reduce our revenues and results of operations.
OUR GEOGRAPHIC CONCENTRATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We currently operate in six regions, New York City, Washington, D.C., Las Vegas,
Nevada, Tampa and Hollywood, Florida, Atlantic City, New Jersey and Ledyard,
Connecticut, and our Las Vegas, Florida, Atlantic City, and Connecticut
operations are all located in casinos. We also expect to take over the Durgin
Park location in Boston, Massachusetts in the second quarter of 2007. As a
result, we are particularly susceptible to adverse trends and economic
conditions in these markets, including its labor market, and the casino market
in general, which could have a negative impact on our profitability as a whole.
In addition, given our geographic concentration, negative publicity regarding
any of our restaurants could have a material adverse effect on our business,
results of operations and financial condition, as could other regional
occurrences such as acts of terrorism, local strikes, natural disasters or
changes in laws or regulations.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO SEASONALITY AND OTHER
FACTORS BEYOND OUR CONTROL.
Our business is subject to seasonal fluctuations, which may vary greatly
depending upon the region of the United States in which a particular restaurant
is located. In addition to seasonality, our quarterly and annual operating
results and comparable unit sales may fluctuate significantly as a result of a
variety of factors, including:
-- The amount of sales contributed by new and existing restaurants;
-- The timing of new openings;
-- Increases in the cost of key food or beverage products;
-- Labor costs for our personnel;
-- Our ability to achieve and sustain profitability on a quarterly or
annual basis;
-- Adverse weather;
-- Consumer confidence and changes in consumer preferences;
-- Health concerns, including adverse publicity concerning food-related
illness;
-- The level of competition from existing or new competitors;
-- Economic conditions generally and in each of the market in which we are
located; and
-- Acceptance of a new or modified concept in each of the new markets in
which we could be located.
15
These fluctuations make it difficult for us to predict and address in a timely
manner factors that may have a negative impact on our business, results of
operations and financial condition.
ANY EXPANSION MAY STRAIN OUR INFRASTRUCTURE, WHICH COULD SLOW RESTAURANT
DEVELOPMENT.
Any expansion may place a strain on our management systems, financial controls,
and information systems. To manage growth effectively, we must maintain the high
level of quality and service at our existing and future restaurants. We must
also continue to enhance our operational, information, financial and management
systems and locate, hire, train and retain qualified personnel, particularly
restaurant managers. We cannot predict whether we will be able to respond on a
timely basis to all of the changing demands that any expansion will impose on
management and those systems and controls. If we are not able to effectively
manage any one or more of these or other aspects of expansion, our business,
results of operations and financial condition could be materially adversely
affected.
WE COULD FACE LABOR SHORTAGES, INCREASED LABOR COSTS AND OTHER ADVERSE EFFECTS
OF VARYING LABOR CONDITIONS.
The development and success of our restaurants depend, in large part, on the
efforts, abilities, experience and reputations of the general managers and chefs
at such restaurants. In addition, our success depends in part upon our ability
to attract, motivate and retain a sufficient number of qualified employees,
including restaurant managers, kitchen staff and wait staff. Qualified
individuals needed to fill these positions are in short supply and the inability
to recruit and retain such individuals may delay the planned openings of new
restaurants or result in high employee turnover in existing restaurants. A
significant delay in finding qualified employees or high turnover of existing
employees could materially and adversely affect our business, results of
operations and financial condition. Also, competition for qualified employees
could require us to pay higher wages to attract sufficient qualified employees,
which could result in higher, labor costs. In addition, increases in the minimum
hourly wage, employment tax rates and levies, related benefits costs, including
health insurance, and similar matters over which we have no control may increase
our operating costs.
UNANTICIPATED COSTS OR DELAYS IN THE DEVELOPMENT OR CONSTRUCTION OF FUTURE
RESTAURANTS COULD PREVENT OUR TIMELY AND COST-EFFECTIVE OPENING OF NEW
RESTAURANTS.
We depend on contractors and real estate developers to construct our
restaurants. Many factors may adversely affect the cost and time associated with
the development and construction of our restaurants, including:
-- Labor disputes;
-- Shortages of materials or skilled labor;
-- Adverse weather conditions;
-- Unforeseen engineering problems;
-- Environmental problems;
-- Construction or zoning problems;
-- Local government regulations;
-- Modifications in design; and
-- Other unanticipated increases in costs.
Any of these factors could give rise to delays or cost overruns, which may
prevent us from developing additional restaurants within our anticipated budgets
or time periods or at all. Any such failure could cause our business, results of
operations and financial condition to suffer.
16
WE MAY NOT BE ABLE TO OBTAIN AND MAINTAIN NECESSARY FEDERAL, STATE AND LOCAL
PERMITS WHICH COULD DELAY OR PREVENT THE OPENING OF FUTURE RESTAURANTS.
Our business is subject to extensive federal, state and local government
regulations, including regulations relating to:
-- Alcoholic beverage control;
-- The purchase, preparation and sale of food;
-- Public health and safety;
-- Sanitation, building, zoning and fire codes; and
-- Employment and related tax matters.
All of these regulations impact not only our current operations but also our
ability to open future restaurants. We will be required to comply with
applicable state and local regulations in new locations into which we expand.
Any difficulties, delays or failures in obtaining licenses, permits or approvals
in such new locations could delay or prevent the opening of a restaurant in a
particular area or reduce operations at an existing location, either of which
would materially and adversely affect our business, results of operations and
financial condition.
THE RESTAURANT INDUSTRY IS AFFECTED BY LITIGATION AND PUBLICITY CONCERNING FOOD
QUALITY, HEALTH AND OTHER ISSUES, WHICH CAN CAUSE GUESTS TO AVOID OUR
RESTAURANTS AND RESULT IN LIABILITIES.
Health concerns, including adverse publicity concerning food-related illness,
although not specifically related to our restaurants, could cause guests to
avoid our restaurants, which would have a negative impact on our sales. We may
also be the subject of complaints or litigation from guests alleging
food-related illness, injuries suffered on the premises or other food quality,
health or operational concerns. A lawsuit or claim could result in an adverse
decision against us that could have a material adverse effect on our business
and results of operations. We may also be subject to litigation which,
regardless of the outcome, could result in adverse publicity. Adverse publicity
resulting from such allegations may materially adversely affect us and our
restaurants, regardless of whether such allegations are true or whether we are
ultimately held liable. Such litigation, adverse publicity or damages could have
a material adverse effect on our competitive position, business, results of
operations and financial condition and results of operations.
MANY OF OUR OPERATIONS ARE LOCATED IN CASINOS AND MUCH OF OUR SUCCESS WILL BE
DEPENDENT ON THE SUCCESS OF THOSE CASINOS.
The success of the business of our restaurants located in Las Vegas, Nevada,
Atlantic City, New Jersey, Tampa and Hollywood, Florida, and Ledyard,
Connecticut will be substantially dependent on the success of the casinos in
which the company operates in these locations to attract customers for
themselves and for our restaurants. The successful operation of the casinos in
these locations is subject to various risks and uncertainties including:
-- The risk associated with governmental approvals of gaming;
-- The risk of a change in laws regulating gaming operations;
-- Operating in a limited market;
-- Competitive risks relating to casino operations; and
17
-- Risks of terrorism and war.
RISKS RELATED TO OUR COMMON STOCK
---------------------------------
THE FACT THAT A RELATIVELY SMALL NUMBER OF INVESTORS HOLD OUR PUBLICLY TRADED
COMMON STOCK COULD CAUSE OUR STOCK PRICE TO FLUCTUATE.
The market price of our common stock could fluctuate as a result of sales by our
existing stockholders of a large number of shares of our common stock in the
market or the perception that such sales could occur. A large number of shares
of our common stock is concentrated in the hands of a small number of individual
and institutional investors and is thinly traded. An attempt to sell by a large
holder could adversely affect the price of our stock.
OWNERSHIP OF APPROXIMATELY 66% OF OUR OUTSTANDING COMMON STOCK BY TWELVE
STOCKHOLDERS WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE MATTERS.
A substantial majority of our capital stock is held by a limited number of
stockholders. Twelve stockholders, including our officers and directors and
parties affiliated with or related to such persons or to us, own approximately
66% of the shares of common stock outstanding. Accordingly, such stockholders
will likely have a strong influence on major decisions of corporate policy, and
the outcome of any major transaction or other matters submitted to our
stockholders or board of directors, including potential mergers or acquisitions,
and amendments to our Amended and Restated Certificate of Incorporation.
Stockholders other than these principal stockholders are therefore likely to
have little influence on decisions regarding such matters.
THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY.
The price at which our common stock will trade may fluctuate significantly. The
stock market has from time to time experienced significant price and volume
fluctuations. The trading price of our common stock could be subject to wide
fluctuations in response to a number of factors, including:
-- Fluctuations in quarterly or annual results of operations;
-- Changes in published earnings estimates by analysts and whether our
actual earnings meet or exceed such estimates;
-- Additions or departures of key personnel; and
-- Changes in overall stock market conditions, including the stock prices
of other restaurant companies.
In the past, companies that have experienced extreme fluctuations in the market
price of their stock have been the subject of securities class action
litigation. If we were to be subject to such litigation, it could result in
substantial costs and a diversion of our management's attention and resources,
which may have a material adverse effect on our business, results of operations,
and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES
Our restaurant facilities and our executive offices are occupied under leases.
Most of our 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 our sales at such facility. As of September 30, 2006,
18
these leases (including leases for managed restaurants) have terms (including
any available renewal options) expiring as follows:
Years Lease Number of
Terms Expire Facilities
------------ ----------
2006-2010 7
2011-2015 8
2016-2020 11
2021-2025 1
2026-2030 4
Our executive, administrative and clerical offices are located in approximately
8,500 square feet of office space at 85 Fifth Avenue, New York, New York. Our
lease for this office space expires in 2015.
Our lease for office space related to our Washington, D.C. catering operations
expires in 2012.
For information concerning our future minimum rental commitments under
non-cancelable operating leases, see Note 7 of the Consolidated Financial
Statements.
See also "Item 1. Business - Overview" for a list of restaurant properties.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, we are a party to various lawsuits
arising from accidents at our restaurants and workers' compensation claims,
which are generally handled by our insurance carriers.
Our employment 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 us of employment discrimination laws.
We do not believe that any of such suits will have a materially adverse effect
upon us, our financial condition or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of our executive officers and
all offices held by each person:
19
Name Age Positions and Offices
---- --- ---------------------
Michael Weinstein 63 Chairman, President and Chief
Executive Officer
Vincent Pascal 63 Senior Vice President
Robert Towers 59 Executive Vice President, Chief
Operating Officer and Treasurer
Paul Gordon 55 Senior Vice President
Robert Stewart 50 Chief Financial Officer
Each of our executive officers serves at the pleasure of the Board of Directors
and until his successor is duly elected and qualifies.
Michael Weinstein has been our President and a director since our inception in
January 1983. During the past five years, Mr. Weinstein has been an officer,
director and 25% shareholder of Easy Diners, Inc., RSWB Corp. and BSWR Corp.
(since 1998). Mr. Weinstein is the owner of 24% of the membership interests in
each of Dockeast, LLC and Dockwest, LLC. These companies operate four
restaurants in New York City, and none of these companies is a parent,
subsidiary or other affiliate of us. Mr. Weinstein spends substantially all of
his business time on Company-related matters.
Vincent Pascal was elected our Vice President, Assistant Secretary and a
director in October 1985. Mr. Pascal became a Senior Vice President in 2001.
Robert Towers has been employed by us since November 1983 and was elected Vice
President, Treasurer and a director in March 1987. Mr. Towers became an
Executive Vice President and Chief Operating Officer in 2001.
Paul Gordon has been employed by us since 1983 and was elected as a director in
November 1996 and a Senior Vice President in 2001. Mr. Gordon is the manager of
our Las Vegas operations. Prior to assuming that role in 1996, Mr. Gordon was
the manager of our operations in Washington, D.C. since 1989.
Robert Stewart has been employed by us since June 2002 and was elected Chief
Financial Officer effective as of June 24, 2002. For the three years prior to
joining us, Mr. Stewart was a Chief Financial Officer and Executive Vice
President at Fortis Capital Holdings. For eleven years prior to joining Fortis
Capital Holdings, Mr. Stewart held senior financial and audit positions in
Skandinaviska Enskilda Banken in their New York, London and Stockholm offices.
20
PART II
ITEM 5. Market For Our Common Equity and
Related Stockholder Matters
---------------------------
Market Information
Our Common Stock, $.01 par value, is traded in the over-the-counter market on
the Nasdaq National Market under the symbol "ARKR." The high and low sale prices
for our Common Stock from September 27, 2003 through September 30, 2005 are as
follows:
Calendar 2004 High Low
------------- ---- ---
Fourth Quarter $ 39.22 $ 27.07
Calendar 2005
-------------
First Quarter 41.88 29.61
Second Quarter 32.80 25.52
Third Quarter 34.59 27.26
Fourth Quarter 31.23 26.70
Calendar 2006
-------------
First Quarter 30.50 27.00
Second Quarter 30.50 27.11
Third Quarter 28.57 23.09
A quarterly cash dividend in the amount of $0.35 per share was declared on
October 12, 2004. Subsequent to October 12, 2004, quarterly cash dividends in
the amount of $0.35 per share were declared on January 12, April 12, July 12 and
October 11, 2005 and on January 12, April 12, July 12, October 10, 2006 and
December 20, 2006. In addition, we declared a special cash dividend in the
amount of $3.00 per share on December 20, 2006. Prior to this, we had not paid
any cash dividends since our inception. We intend to continue to pay such
quarterly cash dividend for the foreseeable future, however, the payment of
future dividends is at the discretion of our Board of Directors and is based on
future earnings, cash flow, financial condition, capital requirements, changes
in U.S. taxation and other relevant factors.
On August 22, 2006, our Board of Directors authorized a stock repurchase program
under which up to four million dollars of our common stock may be acquired in
the open market over the twelve months following such authorization at our
discretion.
The shares may be purchased from time to time at prevailing market prices
through open market or unsolicited negotiated transactions, depending on market
conditions. Under the program, the purchases are to be funded from available
working capital, and the repurchased shares will be held in treasury or used for
ongoing stock issuances. At September 30, 2006, no shares had been purchased by
us under the program. There is no guarantee as to the exact number of shares
which we will repurchase, and we may discontinue the program at any time.
21
As of December 14, 2006, there were 40 holders of record of our Common Stock,
$.01 par value. This does not include the number of persons whose stock is in
nominee or "street name" accounts through brokers.
22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain financial data for the fiscal years ended
in 2002 through 2006. During fiscal year 2004, we sold three of our restaurants
and closed one restaurant. During fiscal year 2005, we sold one of our
restaurants which was considered held for sale in accordance with FAS 144 during
part of fiscal year 2004 and part of fiscal year 2005. During fiscal year 2006,
we classified one of our restaurants as held for sale in accordance with FAS 144
and closed one restaurant. The operations of these restaurants have been
presented as discontinued operations for the 2004, 2005 and 2006 fiscal years,
and we have reclassified its statements of operations data for all periods
presented, in accordance with FAS 144. This information should be read in
conjunction with our Consolidated Financial Statements and the notes thereto
beginning at page F-1.
23
YEARS ENDED
--------------------------------------------------------------------------------
SEPTEMBER 30, OCTOBER 1, OCTOBER 2, SEPTEMBER 27, SEPTEMBER 28,
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Total revenues $ 115,969 $ 113,237 $ 112,271 $ 99,153 $ 99,709
Cost and expenses (108,253) (104,127) (102,824) (94,069) (92,663)
Operating income 7,716 9,110 9,447 5,084 7,046
Other (income) expense, net (795) (748) (542) (404) 611
Income from continuing operations
before provision for income taxes 8,511 9,858 9,989 5,488 7,657
Provision for income taxes 2,824 3,048 2,757 1,325 1,617
Income from continuing operations 5,687 6,810 7,232 4,163 6,040
Loss from discontinued
operations before benefit for
income taxes (699) (334) (794) (1,113) (787)
Benefit for income taxes (232) (103) (219) (269) (198)
Loss from discontinued operations (467) (231) (575) (844) (589)
NET INCOME 5,220 6,579 6,657 3,319 5,451
NET INCOME (LOSS) PER SHARE:
Continuing operations basic $ 1.64 $ 1.98 $ 2.19 $ 1.31 $ 1.52
Discontinued operations basic $ (0.14) $ (0.06) $ (0.18) $ (0.27) $ (0.19)
--------- --------- --------- --------- ---------
Net basic $ 1.50 $ 1.92 $ 2.01 $ 1.04 $ 1.33
Continuing operations diluted $ 1.60 $ 1.92 $ 2.10 $ 1.30 $ 1.50
Discontinued operations diluted $ (0.13) $ (0.07) $ (0.17) $ (0.27) $ (0.18)
--------- --------- --------- --------- ---------
Net diluted $ 1.47 $ 1.85 $ 1.93 $ 1.03 $ 1.32
Weighted average number of shares
Basic 3,472 3,436 3,305 3,181 3,181
Diluted 3,548 3,555 3,444 3,213 3,206
BALANCE SHEET DATA
(end of period):
Total assets $ 52,120 $ 47,435 $ 44,894 $ 43,635 $ 47,960
Working capital (deficit) 8,398 3,399 1,893 (4,802) (7,990)
Long-term debt -- -- 7,226 9,547
Shareholders' equity 39,753 37,413 34,200 24,826 21,446
Shareholders' equity per share 11.45 10.89 10.35 7.80 6.74
Facilities in operation--end of year,
Owned 43 44 45 40 40
Managed 5 4 3 1 1
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Accounting period
Our fiscal year ends on the Saturday nearest September 30. We report fiscal
years under a 52/53-week format. This reporting method is used by many companies
in the hospitality industry and is meant to improve year-to-year comparisons of
operating results. Under this method, certain years will contain 53 weeks. The
fiscal year ended October 1, 2005 and September 30, 2006 each included 52 weeks.
The fiscal year ended October 2, 2004 included 53 weeks.
Overview
We have reclassified our statements of operations data for the prior periods
presented below, in accordance with FAS 144, as a result of the sale of three of
our restaurants and the closure of one restaurant during the fiscal year ended
October 2, 2004, the sale of another restaurant during the fiscal year ended
October 1, 2005 and the classification of another restaurant as held for sale
and the closure of one restaurant during the fiscal year ended September 30,
2006. The operations of these restaurants have been presented as discontinued
operations for the fiscal years ended October 2, 2004, October 1, 2005 and
September 30, 2006. See "Item 1 -Recent Restaurant Dispositions and Charges",
"Item 7 - Recent Restaurant Dispositions" and Note 2 of Consolidated Financial
Statements.
Revenues
Total revenues increased by 2.4% from fiscal 2005 to fiscal 2006 and increased
by 0.9% from fiscal 2004 to fiscal 2005. Revenues for fiscal 2006 were reduced
by $1,159,000 and revenues for fiscal 2005 were reduced by $4,010,000 as a
result of the sale of one facility, the classification of one facility as "held
for sale", the closure of one facility and their reclassification to
discontinued operations.
Same store sales increased 0.2%, or $244,000, on a Company-wide basis from
fiscal 2005 to fiscal 2006. Same store sales in Las Vegas decreased by $63,000,
or 0.1%, in fiscal 2006 compared to fiscal 2005 generally because of less than
expected business at the Venetian Casino Resort. We sold our Tsunami and Lutece
locations at the Venetian Casino Resort effective December 1, 2006. Same store
sales in New York increased $1,862,000, or 5.8%, during fiscal 2006. Same store
sales in Washington D.C. decreased by $1,364,000, or 7.6%, during fiscal 2006.
The increase in New York was principally due to a general improvement in
economic conditions and the public's willingness and inclination to resume
vacation and convention travel. The decrease in Washington D.C. was principally
due to poor weather.
During the fourth quarter of 2002 we abandoned our restaurant and food court
operations at the Desert Passage, the retail complex at the Aladdin Resort &
Casino in Las Vegas. From fiscal 2002 to fiscal 2001 sales decreased at this
location from $4,999,000 to $2,853,000, or 42.9%, resulting in our decision to
abandon these operations.
Of the $5,219,000 decrease in revenues from fiscal 2001 to fiscal 2002,
$3,282,000 is attributable to the year long closure of the GRILL ROOM restaurant
located in 2 World Financial Center, an office building adjacent to the World
Trade Center site. This restaurant was damaged in the September 11, 2001 attack
and reopened in early fiscal 2003. A $256,000 increase in sales is attributable
to the opening of the SALOON at the Neonopolis Center in downtown Las Vegas.
25
Other operating income, which consists of the sale of merchandise at various
restaurants, management fee income and door sales were $2,423,000 in fiscal
2006, $1,826,000 in fiscal 2005 and $742,000 in fiscal 2004.
Costs and Expenses
Food and beverage cost of sales as a percentage of total revenue was 25.3% in
fiscal 2006, 25.2% in fiscal 2005 and 25.8% in fiscal 2004.
Total costs and expenses increased by $4,126,000, or 4.0%, from fiscal 2005 to
fiscal 2006 primarily due to an increase in the minimum wage in New York and
Washington, D.C., a $748,000 expense related to our share-based compensation
plan and increased occupancy costs.
Total costs and expenses increased by $1,303,000, or 1.3%, from fiscal 2004 to
fiscal 2005. The increase in the minimum wage in New York and Washington, D.C.,
the cost of compliance with the Sarbanes-Oxley Act and increased energy costs
contributed to this increase. Other operating costs and expenses also increased
in fiscal 2004 due to an increase in total revenue and a one time charge of
$270,000 used to pay for casino entertainment tax liability. We had previously
thought that certain of our operations at the VENETIAN HOTEL RESORT CASINO were
exempt from casino entertainment tax due to the fact that such operations were
not on the casino floor. As subsequent tax ruling by tax authorities determined
that such operations were subject to casino entertainment tax and we determined
to include such charge in other operating costs and expenses.
Payroll expenses as a percentage of total revenues was 32.3% in fiscal 2006
compared to 31.4% in fiscal 2005 and 31.5% in fiscal 2004. Payroll expense was
$37,418,000, $35,550,000 and $35,363,000 in fiscal 2006, 2005 and 2004,
respectively. In fiscal 2003, we had aggressively adapted our cost structure in
response to lower sales expectations following September 11th. Due to the
increase in sales during fiscal 2004, we had increased our payroll expenses
incrementally. In fiscal 2005 and 2006, the increase of the minimum wage in New
York and Washington, D.C. resulted in an increase in payroll expenses. We
continually evaluate our payroll expenses as they relate to sales.
We typically incur significant pre-opening expenses in connection with our new
restaurants that are expensed as incurred. Furthermore, it is not uncommon that
such restaurants experience operating losses during the early months of
operation.
In fiscal 2006, we established operations in Atlantic City, New Jersey by
opening a bar, LUNA LOUNGE, and a separate restaurant, a GALLAGHER'S STEAKHOUSE,
in the Resorts Atlantic City Hotel and Casino. We experienced $447,000 in
pre-opening and early operating losses at these facilities in fiscal 2006.
Further during fiscal 2006, we established operations at the Foxwoods Resort
Casino in Ledyard, Connecticut by opening a restaurant, THE FIFTH STREET CAFE,
in its newly expanded poker room in March 2006 and a fast-casual restaurant,
LUCKY SEVEN, in the Bingo Hall in May 2006. All pre-opening expenses were borne
by outside investors who invested in a limited liability company established to
develop, construct, operate and manage these facilities. We did not open any new
restaurants and no pre-opening expenses and early operating losses were incurred
during fiscal 2005 and 2004.
General and administrative expenses, as a percentage of total revenue, were 6.2%
in fiscal 2006, 6.5% in fiscal 2005 and 5.8% in fiscal 2004. The decrease in
these expenses as a percentage of total revenue during fiscal 2004 is primarily
due to increased total revenue during this period.
26
During the fiscal year ended September 30, 2006, we managed two restaurants we
did not own (THE SALOON and EL RIO GRANDE) and also managed our Tampa and
Hollywood Florida food court operations and our Foxwoods operations. We managed
two restaurants we did not own (THE SALOON and EL RIO GRANDE) and also managed
the Tampa and Hollywood Florida food court operations at October 1, 2005. We
managed two restaurants we did not own (THE SALOON and EL RIO GRANDE) at October
2, 2004. Sales of EL RIO GRANDE, which are not included in consolidated sales,
were $3,519,000 in fiscal 2006, $3,345,000 in fiscal 2005 and $2,786,000 in
fiscal 2004. Our lease of THE SALOON was converted into a management agreement
effective as of August 22, 2004, whereby we received a management fee of $7,000
per month regardless of the results of operations of this restaurant. This
restaurant closed effective July 25, 2006. During fiscal 2004, we entered into
agreements to manage 11 fast food restaurants located in the Hard Rock Casinos
in Hollywood and Tampa, Florida. Sales from these operations totaled $10,469,000
during the 2006 fiscal year and $8,843,000 during the 2005 fiscal year. During
fiscal 2006, we established operations at the Foxwoods Resort Casino in Ledyard,
Connecticut by managing a restaurant, THE FIFTH STREET CAFE, in its newly
expanded poker room in March 2006 and a fast-casual restaurant, LUCKY SEVEN, in
the Bingo Hall in May 2006. Sales from these operations totaled $2,389,000
during the 2006 fiscal year.
Interest expense was $8,000 in fiscal 2006, $25,000 in fiscal 2005 and $190,000
in fiscal 2004. The significant decreases in interest expense during these
periods was due to lower outstanding borrowings on our credit facility and the
benefit from rate decreases in the prime-borrowing rate. As of September 30,
2006, we had no borrowings on its credit facility. Interest income was $90,000
in fiscal 2006, $101,000 in fiscal 2005 and $138,000 in fiscal 2004.
Other income, which generally consists of purchasing service fees and other
income at various restaurants, was $713,000, $672,000 and $594,000 for fiscal
2006, 2005 and 2004, respectively.
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 we own or manage
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 operating in the District of Columbia. Accordingly, our overall
effective tax rate has varied depending on the level of losses incurred at
individual subsidiaries. During fiscal 2002 we abandoned our restaurant and food
court operations at the Desert Passage, the retail complex at the Aladdin Resort
& Casino in Las Vegas. In fiscal 2002, we were able to utilize the deferred tax
asset created in fiscal 2001 by the impairment of these operations. During the
years ended October 2, 2004 and October 1, 2005, we decreased its allowance for
the utilization of the deferred tax asset arising from state and local operating
loss carryforwards by $395,000 and $125,000 in such years based on the merger of
certain unprofitable subsidiaries into profitable ones.
Our overall effective tax rate in the future will be affected by factors such as
the level of losses incurred at our New York facilities, which cannot be
consolidated for state and local tax purposes, pre-tax income earned outside of
New York City and the utilization of state and local net operating loss carry
forwards. Nevada has no state income tax and other states in which we operate
have income tax rates substantially lower in comparison to New York. In order to
utilize more effectively tax loss carry forwards at restaurants that were
unprofitable, we have merged certain profitable subsidiaries with certain loss
subsidiaries.
27
The Revenue Reconciliation Act of 1993 provides tax credits to us for FICA taxes
paid on tip income of restaurant service personnel. The net benefit to us was
$733,000 in fiscal 2006, $779,000 in fiscal 2005 and $591,000 in fiscal 2004.
The settlement did not have a material effect on our consolidated financial
statements. During fiscal 2006, we and the Internal Revenue Service finalized
the adjustments to our Federal income tax returns for fiscal years 1999 through
2004. This settlement did not have a material effect on our consolidated
financial statements.
Liquidity and Capital Resources
Our primary source of capital has been cash provided by operations and funds
available from our main bank, Bank Leumi USA. We have, from time to time, also
utilized equipment financing in connection with the construction of a restaurant
and seller financing in connection with the acquisition of a restaurant. We
utilize capital primarily to fund the cost of developing and opening new
restaurants, acquiring existing restaurants owned by others and remodeling
existing restaurants we own.
The net cash used in investing activities in fiscal 2006 of $4,934,000 was
primarily used for the replacement of fixed assets at existing restaurants, the
construction of a restaurant and bar in Atlantic City, New Jersey and the
construction of a to be named Mexican restaurant at the to be developed Planet
Hollywood Resort and Casino (formerly known as the Aladdin Resort and Casino) in
Las Vegas, Nevada. The net cash used in investing activities in fiscal 2005 of
$4,236,000 was primarily used for the replacement of fixed assets at existing
restaurants and the construction of a restaurant and bar in Atlantic City, New
Jersey. The net cash used in investing activities in fiscal 2004 of $1,336,000
was used for the replacement of fixed assets at existing restaurants.
The net cash used in financing activities in fiscal 2006 of $3,628,000 and
fiscal 2005 of $4,397,000 was principally used for the payment of dividends. The
net cash used in financing activities in fiscal 2004 of $5,106,000 was
principally due to repayments of long-term debt on our main credit facility in
excess of borrowings on such facility.
We had a working capital surplus of $8,398,000 at September 30, 2006 as compared
to a working capital surplus of $3,399,000 at October 1, 2005.
Our Revolving Credit and Term Loan Facility (the "Facility") with our main bank
(Bank Leumi USA), which included a $8,500,000 credit line to finance the
development and construction of new restaurants and for working capital purposes
at our existing restaurants, matured on March 12, 2005. We do not currently plan
to enter into another credit facility and expect required cash to be provided by
operations.
We entered into a sale and leaseback agreement with GE Capital for $1,652,000 in
November 2000 to refinance the purchase of various restaurant equipment at our
food and beverage facilities in a hotel and casino in Las Vegas, Nevada. The
lease bore interest at 8.65% per annum and was payable in 48 equal monthly
installments of $32,000 until maturity in November 2004 at which time we had an
option to purchase the equipment for $519,000 or extend the lease for an
additional 12 months at the same monthly payment until maturity in November 2005
and repurchase the equipment at such time for $165,000. In November 2004, we
chose to extend the lease for an additional 12 months.
We originally accounted for this agreement as an operating lease and did not
record the assets or the lease liability in the financial statements. During the
year ended September 29, 2001, we recorded the entire amount payable under the
lease as a liability of $1,600,000 based on the anticipated abandonment of the
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Aladdin operations. In 2002, the operations at the Aladdin were abandoned and at
September 30, 2006 the lease was fully paid.
A quarterly cash dividend in the amount of $0.35 per share was declared on
October 12, 2004. Subsequent to October 12, 2004, quarterly cash dividends in
the amount of $0.35 per share were declared on January 12, April 12, July 12 and
October 11, 2005 and on January 12, April 12, July 12, October 10, and December
20, 2006. In addition, we declared a special cash dividend in the amount of
$3.00 per share on December 20, 2006. Prior to this, we had not paid any cash
dividends since our inception. We intend to continue to pay such quarterly cash
dividend for the foreseeable future, however, the payment of future dividends is
at the discretion of our Board of Directors and is based on future earnings,
cash flow, financial condition, capital requirements, changes in U.S. taxation
and other relevant factors.
Contractual Obligations and Commercial Commitments
To facilitate an understanding of our contractual obligations and commercial
commitments, the following data is provided:
PAYMENTS DUE BY PERIOD
--------------------------------------------
WITHIN AFTER 5
TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
(IN THOUSANDS OF DOLLARS)
Contractual Obligations:
Operating Leases $58,086 $ 7,187 $12,525 $11,677 $26,697
------- ------- ------- ------- -------
Total Contractual Cash Obligations $58,086 $ 7,187 $12,525 $11,677 $26,697
======= ======= ======= ======= =======
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
--------------------------------------------
WITHIN AFTER 5
TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
(IN THOUSANDS OF DOLLARS)
Other Commercial Commitments:
Letters of Credit $ 466 $ -- $ 466 $ -- $ --
------- ------- ------- ------- -------
Total Commercial Commitments $ 466 $ -- $ 466 $ -- $ --
======= ======= ======= ======= =======
Restaurant Expansion
We opened a GALLAGHER'S STEAKHOUSE restaurant the Resorts Atlantic City Hotel
and Casino in Atlantic City, New Jersey in December 2005.
During the fiscal year ended September 30, 2006, we established operations at
the Foxwoods Resort Casino in Ledyard, Connecticut by opening a restaurant, THE
FIFTH STREET CAFE, in its newly expanded poker room in March 2006 and a
fast-casual restaurant, LUCKY SEVEN, in the Bingo Hall in May 2006. All
pre-opening expenses were borne by outside investors who invested in a limited
liability company established to develop, construct, operate and manage these
facilities. We are the managing member of this limited liability company and,
through this limited liability company, we lease and manage the
29
operations of each of these facilities in exchange for a monthly management fee
equal to five-percent of the gross receipts of these facilities. Neither we nor
any of our subsidiaries contributed any capital to this limited liability
company. None of the obligations of this limited liability company are
guaranteed by us and investors in this limited liability company have no
recourse against us or any of our assets.
In addition, in September 2006, we entered into an agreement to lease a to be
named Mexican restaurant at the to be developed Planet Hollywood Resort and
Casino (formerly known as the Aladdin Resort and Casino) in Las Vegas, Nevada,
and entered into an agreement to purchase the restaurant known as the DURGIN
PARK RESTAURANT AND THE BLACK HORSE TAVERN in Boston, Massachusetts. The
obligation to pay rent for the to be named Mexican restaurant is not effective
until the restaurant opens for business. We anticipate this restaurant to open
during our third quarter of the 2007 fiscal year. The agreement to purchase the
DURGIN PARK facility provides that we cannot take possession of the restaurant
until we obtain a liquor license for the facility. We are currently in the
process of obtaining such liquor license.
Finally, in December 2006, we expanded our operations at the Foxwoods Resort
Casino by opening THE GRILL AT TWO TREES in the Two Trees Inn, a facility owned
by the Mashantucket Pequot Tribal Nation and a part of the Foxwoods Resort
Casino, in Ledyard, Connecticut.
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, 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 expenses and early operating losses can generally be expected to
depend upon the size and complexity of the facility being opened. We incurred
$15,000 in pre-opening expenses in fiscal 2006.
Our restaurants generally do not achieve substantial increases from year to year
in revenue, which we consider to be typical of the restaurant industry. To
achieve significant increases in revenue or to replace revenue of restaurants
that lose customer favor or which close because of lease expirations or other
reasons, we would have to open additional restaurant facilities or expand
existing restaurants. There can be no assurance that a restaurant will be
successful after it is opened, particularly since in many instances we do not
operate our new restaurants under a trade name currently used by us, thereby
requiring new restaurants to establish their own identity.
Apart from these agreements, we are not currently committed to any projects. We
may take advantage of opportunities we consider to be favorable, when they
occur, depending upon the availability of financing and other factors.
Recent Restaurant Dispositions and Charges
We entered into a sale and leaseback agreement with GE Capital in November 2000
to refinance the purchase of various restaurant equipment at our food and
beverage facilities at Desert Passage, the retail complex at the Aladdin Resort
& Casino in Las Vegas, Nevada. In 2002, the operations at the Aladdin were
abandoned. The lease matured in November 2005 and, in connection therewith, we
made an unprovided for lump sum payment of $142,000 due under this lease. This
lump sum payment is included in discontinued operations in fiscal 2006.
In fiscal 2003, we determined that our restaurant, Lutece, located in New York
City, had been impaired by the events of September 11th and the continued
weakness in the economy. Based upon the sum of the future undiscounted cash
flows related to our long-lived fixed assets at Lutece, we determined that
impairment had occurred. To estimate the fair value of such long-lived fixed
assets, for determining the
30
impairment amount, we used the expected present value of the future cash flows.
We projected continuing negative operating cash flow for the foreseeable future
with no value for subletting or assigning the lease for the premises. As a
result, we determined that there was no value to the long-lived fixed assets. We
had an investment of $667,000 in leasehold improvements, furniture fixtures and
equipment. We believed that these assets would have nominal value upon disposal
and recorded an impairment charge of $667,000 during fiscal 2003. Due to
continued weak sales, we closed Lutece during the second quarter of 2004. We
recorded a net operating loss of $27,000 during the fiscal year ended September
30, 2006 which is included in losses from discontinued operations. In fiscal
2004, we also incurred a one-time charge of $470,000 related to pension plan
contributions required in connection with the closing of Lutece which is payable
monthly over a nine year period beginning May 17, 2004 and bears interest at a
rate of 8% per annum.
On December 1, 2003, we sold a restaurant, Lorelei, for approximately $850,000.
The book value of inventory, fixed assets, intangible assets and goodwill
related to this entity was approximately $625,000. We recorded a gain on the
sale of approximately $225,000 during the first quarter of fiscal 2004.
Our restaurant, Ernie's, located on the upper west side of Manhattan opened in
1982. As a result of a steady decline in sales, we felt that a new concept was
needed at this location. The restaurant was closed June 16, 2003 and reopened in
August 2003. Total conversion costs were approximately $350,000. Sales at the
new restaurant, La Rambla, failed to reach the level sufficient to achieve the
results we required. As a result, we sold this restaurant on January 1, 2004 and
realized a gain on the sale of this restaurant of approximately $214,000.
Operating income of $5,000 was included in losses from discontinued operations
for the fiscal year ended September 30, 2006.
Our restaurant Jack Rose located on the west side of Manhattan has experienced
weak sales for several years. In addition, this restaurant did not fit our
desired profile of being in a landmark destination location. As a result, we
sold this restaurant on February 23, 2004. We realized a loss on the sale of
this restaurant of $137,000 which was recorded during the second quarter of
fiscal 2004. Operating losses of $3,000 were included in losses from
discontinued operations for the fiscal year ended September 30, 2006.
Our restaurant, America, located in New York City has experienced declining
sales for several years. In March 2004, we entered into a new lease for this
restaurant at a significantly increased rent. We entered into this lease with
the belief that due to the location and the uniqueness of the space the lease
had value. On January 19, 2005, we signed a definitive agreement for the sale of
this restaurant which closed on March 15, 2005. We realized a pre-tax gain of
$644,000 on the sale of this restaurant. Operating losses of $12,000 were
included in losses from discontinued operations for the fiscal year ended
September 30, 2006.
Our bar/nightclub facility Venus, located at the Venetian Casino Resort,
experienced a steady decline in sales and we felt that a new concept was needed
at this location. During the first quarter of 2005, this bar/nightclub facility
was closed for re-concepting and re-opened as "Vivid" on February 4, 2005. Total
conversion costs were approximately $400,000. Sales at the new bar/nightclub
facility have failed to reach the level sufficient to achieve the results we
required and we have identified a buyer for this facility. As of December 31,
2005, we classified the assets and liabilities of this bar/nightclub facility as
"held for sale" in accordance with Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
No. 144") based on the fact that the facility has met the criteria under SFAS
No. 144. Based on the initial offers made on this facility, we do not anticipate
a loss on the sale. Operating losses of $486,000 are included in losses from
discontinued operations for the fiscal year ended September 30, 2006.
31
Effective August 22, 2004, our lease for The Saloon at the Neonopolis Center at
Fremont Street was converted into a management agreement whereby we received a
management fee of $7,000 per month regardless of the results of operations of
this restaurant. In June 2006, the owner of the Neonopolis Center at Fremont
Street sold the building to a new entity who, on June 25, 2006, exercised its
option to terminate the management agreement upon thirty days written notice to
us.
On July 6, 2006, the landlord for the Vico's Burrito's fast food facility at the
Venetian Casino Resort, General Growth Properties, notified us that the landlord
was exercising an option granted to it pursuant to the lease for the facility to
terminate the lease in exchange for the landlord providing us with the
unamortized portion of the non-removable improvements located in the facility.
On August 10, 2006, we and our landlord for this facility entered into a letter
agreement pursuant to which the landlord agreed to pay us $200,000 for the
unamortized portion of the non-removable improvements located in the facility.
We realized a loss of $70,000 on the closure of this restaurant which is
included in discontinued operations. Operating income of $35,000 is included in
discontinued operations for the fiscal year ended September 30, 2006.
As a result of the above mentioned sales, we allocated $75,000 of goodwill to
these restaurants and reduced goodwill by this amount in fiscal 2005. No
allocation was required during fiscal 2006.
Effective December 1, 2006, our subsidiaries that lease each of Lutece, Tsunami
and our Vivid location at The Venetian Resort Hotel Casino in Las Vegas, Nevada,
have entered into an agreement to sell Lutece, Tsunami and a portion of the
Vivid location used by Lutece as a prep kitchen to Venetian Casino Resort, LLC
for an aggregate of $14,000,000. Our Lutece location closed as of the close of
business on December 3, 2006 and it is contemplated that our Tsunami location
will close at the end of the calendar year. We do not anticipate a loss on the
sale of these restaurants.
Critical Accounting Policies
Financial Reporting Release No. 60, published by the SEC, recommends that all
companies include a discussion of critical accounting policies used in the
preparation of their financial statements. Our significant accounting policies
are more fully described in Note 1 to our consolidated financial statements.
While all these significant accounting policies impact our financial condition
and results of operations, we view certain of these policies as critical.
Policies determined to be critical are those policies that have the most
significant impact on our consolidated financial statements and require
management to use a greater degree of judgment and estimates. Actual results may
differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that
applying any other reasonable judgments or estimate methodologies would cause a
material effect on our consolidated results of operations, financial position or
cash flows for the periods presented in this report.
Below are listed certain policies that management believes are critical:
Use of Estimates
The preparation of financial statements requires the application of certain
accounting policies, which may require us to make estimates and assumptions of
future events. In the process of preparing its consolidated financial
statements, we estimate the appropriate carrying value of certain assets and
liabilities, which are not readily apparent from other sources. The primary
estimates underlying our
32
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 and share-based
compensation, the realizable value of its tax assets and other matters.
Management bases its estimates on certain assumptions, which they believe are
reasonable in the circumstances and actual results could differ from those
estimates.
Long-Lived Assets
We annually assess any impairment in value of long-lived assets to be held and
used. We evaluate the possibility of impairment by comparing anticipated
undiscounted cash flows to the carrying amount of the related long-lived assets.
If such cash flows are less than carrying value we then reduce the asset to its
fair value. Fair value is generally calculated using discounted cash flows.
Various factors such as sales growth and operating margins and proceeds from a
sale are part of this analysis. Future results could differ from our projections
with a resulting adjustment to income in such period.
Leases
We are obligated under various lease agreements for certain restaurants. We
recognize rent expense on a straight-line basis over the expected lease term,
including option periods as described below. Within the provisions of certain
leases there are escalations in payments over the base lease term, as well as
renewal periods. The effects of the escalations have been reflected in rent
expense on a straight-line basis over the expected lease term, which includes
option periods when it is deemed to be reasonably assured that we would incur an
economic penalty for not exercising the option. Percentage rent expense is
generally based upon sales levels and is expensed as incurred. Certain leases
include both base rent and percentage rent. We record rent expense on these
leases based upon reasonably assured sales levels. The consolidated financial
statements reflect the same lease terms for amortizing leasehold improvements as
were used in calculating straight-line rent expense for each restaurant. Our
judgments may produce materially different amounts of amortization and rent
expense than would be reported if different lease terms were used.
Deferred Income Tax Valuation Allowance
We provide such allowance due to uncertainty that some of the deferred tax
amounts may not be realized. Certain items, such as state and local tax loss
carry forwards, are dependent on future earnings or the availability of tax
strategies. Future results could require an increase or decrease in the
valuation allowance and a resulting adjustment to income in such period.
Accounting for Goodwill and Other Intangible Assets
During 2001, the FASB issued FAS 142, which requires that for us, effective
September 28, 2002, goodwill, including the goodwill included in the carrying
value of investments accounted for using the equity method of accounting, and
certain other intangible assets deemed to have an indefinite useful life, cease
amortizing. FAS 142 requires that goodwill and certain intangible assets be
assessed for impairment using fair value measurement techniques. Specifically,
goodwill impairment is determined using a two-step process. The first step of
the goodwill impairment test is used to identify potential impairment by
comparing the fair value of the reporting unit (we is being treated as one
reporting unit) with its net book value (or carrying amount), including
goodwill. If the fair value of the reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not impaired and the second step of
the impairment test is unnecessary. If the carrying amount of the reporting unit
exceeds its fair value, the second step of the goodwill impairment test is
performed to measure the amount of impairment loss, if any. The second step of
the goodwill impairment test compares the implied fair value of the reporting
unit's goodwill with
33
the carrying amount of that goodwill. If the carrying amount of the reporting
unit's goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount equal to that excess. The implied fair value of
goodwill is determined in the same manner as the amount of goodwill recognized
in a business combination. That is, the fair value of the reporting unit is
allocated to all of the assets and liabilities of that unit (including any
unrecognized intangible assets) as if the reporting unit had been acquired in a
business combination and the fair value of the reporting unit was the purchase
price paid to acquire the reporting unit. The impairment test for other
intangible assets consists of a comparison of the fair value of the intangible
asset with its carrying value. If the carrying value of the intangible asset
exceeds its fair value, an impairment loss is recognized in an amount equal to
that excess.
Determining the fair value of the reporting unit under the first step of the
goodwill impairment test and determining the fair value of individual assets and
liabilities of the reporting unit (including unrecognized intangible assets)
under the second step of the goodwill impairment test is judgmental in nature
and often involves the use of significant estimates and assumptions. Similarly,
estimates and assumptions are used in determining the fair value of other
intangible assets. These estimates and assumptions could have a significant
impact on whether or not an impairment charge is recognized and also the
magnitude of any such charge. To assist in the process of determining goodwill
impairment, we obtain appraisals from independent valuation firms. In addition
to the use of independent valuation firms, we perform internal valuation
analyses and consider other market information that is publicly available.
Estimates of fair value are primarily determined using discounted cash flows and
market comparisons and recent transactions. These approaches use significant
estimates and assumptions including projected future cash flows (including
timing), discount rate reflecting the risk inherent in future cash flows,
perpetual growth rate, determination of appropriate market comparables and the
determination of whether a premium or discount should be applied to comparables.
Based on the above policy no impairment charges were recorded during the fiscal
years ended 2006, 2005 and 2004.
Share-Based Compensation
Effective October 2, 2005 the Company adopted Statement of Financial Accounting
Standards No. 123R, "SHARE-BASED PAYMENT" ("SFAS No. 123R"), and related
interpretations and began expensing the grant-date fair value of employee stock
options. Prior to October 2, 2005, the Company applied Accounting Principles
Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related
interpretations in accounting for its stock option plans. Accordingly, prior to
October 2, 2005, no compensation expense has been recognized in net income for
employee stock options, as options granted had an exercise price equal to the
market value of the underlying common stock on the date of grant.
Upon adoption of SFAS 123R, the Company elected to value employee stock options
using the Black-Scholes option valuation method that uses assumptions that
relate to the expected volatility of the Company's common stock, the expected
dividend yield of our stock, the expected life of the options and the risk free
interest rate. The assumptions used for the options granted on December 21,
2004, which were unvested at the time of the adoption of SFAS 123R, included a
risk free interest rate of 3.37%, volatility of 37%, a dividend yield of 3% and
an expected life of three years.
The Company adopted SFAS No. 123R using the modified prospective transition
method and therefore has not restated prior periods. Under this transition
method, compensation cost associated with employee stock options recognized
during fiscal 2006 includes amortization related to the remaining unvested
portion of stock awards granted prior to October 2, 2005. No options were
granted during fiscal year 2006.
34
Recently Issued Accounting Standards
The Financial Accounting Standards Board has recently issued the following
accounting pronouncement:
In June 2005 the Emerging Issues Task Force (EITF) issued EITF No. 04-5,
INVESTOR'S ACCOUNTING FOR AN INVESTMENT IN A LIMITED PARTNERSHIP WHEN THE
INVESTOR IS THE SOLE GENERAL PARTNER AND THE LIMITED PARTNERS HAVE CERTAIN
RIGHTS ("EITF 04-5"). EITF 04-5 presumes that a general partner controls a
limited partnership and therefore should consolidate the partnership. This
presumption can be overcome if the limited partners have kick-out or substantive
participating rights. The Company is required to adopt the provisions of EITF
04-05 during fiscal years beginning after December 15, 2005. The Company is
currently evaluating the impact of EITF 04-05 on its consolidated results of
operations and financial position.
In June 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - AN
INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial statements in
accordance with FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES. FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The Company is required to adopt the provisions of
FIN 48 during fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact of FIN 48 on its consolidated results of
operations and financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements are included in this report immediately
following Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Incorporated herein by this reference is the discussion under Item 4 of our
Current Report on Form 8-K, filed on January 15, 2004, and Item 4 of our Current
Report on Form 8-K/A, filed on January 16, 2004, reporting a change in
certifying accountants. There were no disagreements related to that change in
accountants.
ITEM 9A.
Controls and Procedures; Internal Control over Financial Reporting
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation, our
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) are effective as of September 30, 2006 to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
35
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no changes in
our internal control over financial reporting during the fourth quarter of
fiscal year 2006 that materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
36
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See PART I, ITEM 4. "Executive Officers of the Registrant." Other information
relating to our directors and executive officers is incorporated by reference to
the definitive proxy statement for our 2007 annual meeting of stockholders to be
filed with the Securities and Exchange Commission (the "SEC") pursuant to
Regulation 14A no later than 120 days after the end of the fiscal year covered
by this form (the "Proxy Statement"). Information relating to compliance with
Section 16(a) of the Exchange Act is incorporated by reference to the Proxy
Statement.
Code of Ethics.
We have adopted a code of ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer or
controller, and persons performing similar functions. We will provide any person
without charge, upon request, a copy of such code of ethics by mailing the
request to us at 85 Fifth Avenue, New York, NY 10003, Attention: Robert Towers.
Audit Committee Financial Expert
Our Board of Directors has determined that Marcia Allen, Director, is our Audit
Committee Financial Expert, as defined under Section 407 of the Sarbanes-Oxley
Act of 2002 and the rules promulgated by the SEC in furtherance of Section 407.
Ms. Allen is independent of management. Other information regarding the Audit
Committee is incorporated by reference from the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the Proxy
Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the Proxy
Statement.
37
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements: Page
----
Reports of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets --
at September 30, 2006 and October 1, 2005 F-2
Consolidated Statements of Operations -- For each of the
three fiscal years ended September 30, 2006, October 1,
2005 and October 2, 2004 F-3
Consolidated Statements of Cash Flows -- For each of the
three fiscal years ended September 30, 2006, October 1,
2005 and October 2, 2004 F-4
Consolidated Statements of Shareholders' Equity -- For
each of the three fiscal years ended September 30, 2006,
October 1, 2005 and October 2, 2004 F-5
Notes to Consolidated Financial Statements F-6
(2) Financial Statement Schedules
None
(3) Exhibits:
3.1 Certificate of Incorporation of the Registrant, filed
with the Secretary of State of the State of New York 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 September 28, 2002 ("2002 10-K").
3.2 Certificate of Amendment of the Certificate of
Incorporation of the Registrant filed with the Secretary
of State of the State of New York on October 11, 1985,
incorporated by reference to Exhibit 3.2 to the 2002
10-K.
3.3 Certificate of Amendment of the Certificate of
Incorporation of the Registrant filed with the Secretary
of State of the State of New York on July 21, 1988,
incorporated by reference to Exhibit 3.3 to the 2002
10-K.
3.4 Certificate of Amendment of the Certificate of
Incorporation of the Registrant filed with the Secretary
of State of the State of New York on May 13, 1997,
incorporated by reference to Exhibit 3.4 to the 2002
10-K.
3.5 Certificate of Amendment of the Certificate of
Incorporation of the Registrant filed on April 24, 2002
incorporated by reference to Exhibit 3.5 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 30, 2002 (the "Second
Quarter 2002 Form 10-Q").
38
3.6 By-Laws of the Registrant, incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement
on Form S-18 filed with the Securities and Exchange
Commission on October 17, 1985.
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
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 2, 1994 ("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, Robert
Stewart, Bruce R. Lewin, Paul Gordon 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.
10.4 Fourth Amended and Restated Credit Agreement dated as of
December 27, 1999 between we and Bank Leumi USA,
incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 2, 1999.
10.5 Ark Restaurants Corp. 1996 Stock Option Plan, as
amended, incorporated by reference to the Registrant's
Definitive Proxy Statement pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. 1)
filed on March 16, 2001.
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 10.6 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.
10.9 Amendment dated August 21, 2000 to the Fourth Amended
and Restated Credit Agreement dated as of December 27,
1999 between we and Bank Leumi USA, incorporated by
reference to Exhibit 10.9 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September
30, 2000 (the "2000 10-K").
10.10 Amendment dated November 21, 2000 to the Fourth Amended
and Restated Credit Agreement dated as of December 27,
1999 between we and Bank Leumi USA, incorporated by
reference to Exhibit 10.10 to the 2000 10-K.
10.11 Amendment dated November 1, 2001 to the Fourth Amended
and Restated Credit Agreement dated as of December 27,
1999 between we and Bank Leumi USA, incorporated by
reference to Exhibit 10.11 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September
29, 2001 (the "2001 10-K").
10.12 Amendment dated December 20, 2001 to the Fourth Amended
and Restated Credit Agreement dated as of December 27,
1999 between we and Bank Leumi USA, incorporated by
reference to Exhibit 10.11 of the 2001 10-K.
10.13 Amendment dated as of April 23, 2002 to the Fourth
Amended and Restated Credit Agreement dated as of
December 27, 1999 between we and Bank Leumi USA,
incorporated by reference to Exhibit 10.13 of the Second
Quarter 2002 Form 10-Q.
39
10.14 Amendment dated as of January 22, 2002 to the Fourth
Amended and Restated Credit Agreement dated as of
December 27, 1999 between we and Bank Leumi USA,
incorporated by reference to Exhibit 10.14 of the First
Quarter 2003 Form 10-Q.
10.15 Ark Restaurants Corp. 2004 Stock Option Plan, as
amended, incorporated by reference to the Registrant's
Definitive Proxy Statement pursuant to Section 14(a) of
the Securities Exchange Act of 1934 filed on January 26,
2004.
14 Code of Ethics, incorporated by reference to Exhibit
14.1 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended September 27, 2003.
16 Letter from Deloitte & Touche LLP regarding change in
certifying accountants, incorporated by reference from
the exhibit included with our Current Report on Form 8-K
filed with the SEC on January 15, 2004 and our Current
Report on Form 8-K/A filed with the SEC on January 16,
2004.
*21 Subsidiaries of the Registrant.
*23 Consent of J.H. Cohn LLP.
*31.1 Certification of Chief Executive Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Chief Financial Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
*32 Section 1350 Certification
(b) Reports Report on Form 8-K dated December 22, 2005
on
Form Report on Form 8-K/A dated January 12, 2006
8-K
Report on Form 8-K dated February 14, 2006
Report on Form 8-K dated April 12, 2006
Report on Form 8-K dated May 16, 2006
Report on Form 8-K dated July 12, 2006
Report on Form 8-K dated August 15, 2006
Report on Form 8-K dated August 23, 2006
Report on Form 8-K dated October 10, 2006
Report on Form 8-K dated December 4, 2006
--------------
* Filed herewith.
40
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Ark Restaurants Corp.
We have audited the accompanying consolidated balance sheets of Ark Restaurants
Corp. and Subsidiaries as of September 30, 2006 and October 1, 2005, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended September 30, 2006. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Ark
Restaurants Corp. and Subsidiaries as of September 30, 2006 and October 1, 2005,
and their consolidated results of operations and cash flows for each of the
three years in the period ended September 30, 2006, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for share-based compensation in fiscal
year 2006.
/s/ J.H. Cohn LLP
Jericho, New York
December 22, 2006
F-1
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
--------------------------------------------------------------------------------
SEPTEMBER 30, OCTOBER 1,
2006 2005
------------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $7,671 $ 5,723
Accounts receivable 2,587 2,370
Related party receivables 1,446 451
Employee receivables 394 294
Current portion of long-term receivables 131 299
Inventories 1,675 1,615
Prepaid expenses and other current assets 700 1,417
Assets held for sale 1,657 --
------ -------
Total current assets 16,261 12,169
------ -------
LONG-TERM RECEIVABLES 1,025 1,275
------ -------
FIXED ASSETS--At cost:
Leasehold improvements 34,807 31,252
Furniture, fixtures and equipment 28,408 28,107
Construction in progress 159 1,782
------ -------
63,374 61,141
Less accumulated depreciation and amortization 39,230 37,096
------ -------
FIXED ASSETS--Net 24,144 24,045
INTANGIBLE ASSETS--Net 100 198
GOODWILL 3,440 3,440
DEFERRED INCOME TAXES 6,305 5,579
OTHER ASSETS 845 729
------ -------
TOTAL $52,120 $47,435
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable--trade $2,193 $ 2,740
Accrued expenses and other current liabilities 4,218 4,756
Accrued income taxes 1,452 1,004
Defered income taxes -- 270
------ -------
Total current liabilities 7,863 8,770
OPERATING LEASE DEFERRED CREDIT 4,203 878
OTHER LIABILITES 301 374
------ -------
TOTAL LIABILITIES 12,367 10,022
------ -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share--authorized, 10,000
shares; issued 5,632 and 5,533 at September 30, 2006 57 56
and October 1, 2005, respectively
Additional paid-in capital 20,403 18,437
Retained earnings 27,845 27,472
------ -------
48,305 45,965
Less stock option receivable (166) (166)
Less treasury stock of 2,070 shares (8,386) (8,386)
------ -------
Total shareholders' equity 39,753 37,413
------- -------
TOTAL $52,120 $47,435
======= =======
See notes to consolidated financial statements.
F-2
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
YEARS ENDED
---------------------------------------------
SEPTEMBER 30, OCTOBER 1, OCTOBER 2,
2006 2005 2004
------------- ---------- ----------
REVENUES:
Food and beverage sales $ 113,546 $ 111,411 $ 111,529
Other income 2,423 1,826 742
--------- --------- ---------
Total revenues 115,969 113,237 112,271
--------- --------- ---------
COST AND EXPENSES:
Food and beverage cost of sales 29,376 28,591 28,985
Payroll expenses 37,418 35,550 35,363
Occupancy expenses 16,683 16,095 15,458
Other operating costs and expenses 14,224 13,469 13,468
General and administrative expenses 7,231 7,318 6,499
Depreciation and amortization 3,321 3,104 3,051
--------- --------- ---------
Total cost and expenses 108,253 104,127 102,824
--------- --------- ---------
OPERATING INCOME 7,716 9,110 9,447
--------- --------- ---------
OTHER (INCOME) EXPENSE:
Interest expense 8 25 190
Interest income (90) (101) (138)
Other income (713) (672) (594)
--------- --------- ---------
OTHER INCOME - NET (795) (748) (542)
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 8,511 9,858 9,989
PROVISION FOR INCOME TAXES 2,824 3,048 2,757
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 5,687 6,810 7,232
--------- --------- ---------
DISCONTINUED OPERATIONS:
LOSS FROM OPERATIONS OF DISCONTINUED RESTAURANTS
(Includes net losses on disposal of $70 and $168 for the fiscal years ended
2006 and 2004, repsectively, and a net gain on disposal of $644 for the fiscal
year ended 2005) (699) (334) (794)
BENEFIT FOR INCOME TAXES (232) (103) (219)
--------- --------- ---------
LOSS FROM DISCONTINUED OPERATIONS (467) (231) (575)
--------- --------- ---------
NET INCOME $ 5,220 $ 6,579 $ 6,657
========= ========= =========
PER SHARE INFORMATION - BASIC AND DILUTED
Continuing operations basic $ 1.64 $ 1.98 $ 2.19
Discontinued operations basic $ (0.14) $ (0.06) $ (0.18)
--------- --------- ---------
NET BASIC $ 1.50 $ 1.92 $ 2.01
========= ========= =========
Continuing operations diluted $ 1.60 $ 1.92 $ 2.10
Discontinued operations diluted $ (0.13) $ (0.07) $ (0.17)
--------- --------- ---------
NET DILUTED $ 1.47 $ 1.85 $ 1.93
========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES--Basic 3,472 3,436 3,305
========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES--Diluted 3,548 3,555 3,444
========= ========= =========
See notes to consolidated financial statements.
F-3
ARK RESTAURANT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
--------------------------------------------------------------------------------
YEARS ENDED
----------------------------------------------
SEPTEMBER 30, OCTOBER 1, OCTOBER 2,
2006 2005 2004
------------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,220 $ 6,579 $ 6,657
Adjustments to reconcile net income
to net cash provided
by operating activities:
Deferred income taxes (401) 187 (144)
Tax benefit on exercise of stock options (595) -- --
Stock-based compensation 748 -- --
Depreciation and amortization 3,778 3,694 3,591
Operating lease deferred credit 23 (21) 53
Changes in operating assets and liabilities
Accounts receivable (217) (826) 113
Related party receivables (995) 176 (627)
Employee receivables (100) 36 (75)
Inventories (60) 116 133
Prepaid expenses and other current assets 1,019 198 (1,025)
Other assets (116) 43 208
Accounts payable - trade (547) 510 (1,213)
Accrued income taxes 448 (583) 1,357
Accrued expenses and other current liabilities (538) (25) (805)
Cash received from landlord 3,000 -- --
-------- -------- --------
Net cash provided by continuing operating activities 10,667 10,084 8,223
Net cash provided by (used in) discontinued
operating activities (157) (163) 2,168
-------- -------- --------
Net cash provided by operating activities 10,510 9,921 10,391
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (5,352) (4,252) (1,529)
Payments received on notes receivable 418 416 193
-------- -------- --------
Net cash used in continuing investing activities (4,934) (3,836) (1,336)
Net cash used in discontinued
investing activities -- (400) --
-------- -------- --------
Net cash used in investing activities (4,934) (4,236) (1,336)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment on long-term debt -- (251) (7,328)
Dividends paid (4,847) (4,801) --
Exercise of stock options 624 457 1,966
Tax benefit on exercise of stock options 595 -- --
Payment received under stock option receivable -- 198 291
Purchase of treasury stock -- -- (35)
-------- -------- --------
Net cash used in continuing financing activities (3,628) (4,397) (5,106)
Net cash used in discontinued financing activities -- -- --
-------- -------- --------
Net cash used in financing activities (3,628) (4,397) (5,106)
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,948 1,288 3,949
CASH AND CASH EQUIVALENTS, Beginning of the year 5,723 4,435 486
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of year $ 7,671 $ 5,723 $ 4,435
======== ======== ========
SUPPLEMENTAL INFORMATION:
Cash paid during year for:
Interest $ 8 $ 25 $ 264
======== ======== ========
Income taxes $ 2,136 $ 3,341 $ 1,455
======== ======== ========
See notes to consolidated financial statements.
F-4
ARK RESTAURANTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2006, OCTOBER 1, 2005 AND OCTOBER 2, 2004
(IN THOUSANDS)
--------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL STOCK TOTAL
------------------ PAID-IN RETAINED TREASURY OPTION SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK RECEIVABLE EQUITY
------- --------- ---------- ---------- --------- ------------ -----------
BALANCE--September 27, 2003 5,249 $ 52 $ 14,743 $ 19,037 $ (8,351) $ (655) $ 24,826
Exercise of stock options 213 2 1,964 -- -- -- 1,966
Tax benefit on exercise of stock options -- -- 495 -- -- -- 495
Purchase of treasury stock -- -- -- -- (35) -- (35)
Payment on stock options receivables -- -- -- -- -- 291 291
Net income -- -- -- 6,657 -- -- 6,657
----- -------- -------- -------- -------- -------- --------
BALANCE--October 2, 2004 5,462 54 17,202 25,694 (8,386) (364) 34,200
Exercise of stock options 71 2 455 -- -- -- 457
Tax benefit on exercise of stock options -- -- 780 -- -- -- 780
Payment on stock options receivables -- -- -- -- -- 198 198
Payment of dividends - $1.40 per share -- -- (4,801) (4,801)
Net income -- -- -- 6,579 -- -- 6,579
----- -------- -------- -------- -------- -------- --------
BALANCE--October 1, 2005 5,533 56 18,437 27,472 (8,386) (166) 37,413
Exercise of stock options 99 1 623 -- -- -- 624
Tax benefit on exercise of stock options -- -- 595 -- -- -- 595
Stock-based compensation -- -- 748 -- -- -- 748
Payment of dividends - $1.40 per share -- -- -- (4,847) -- -- (4,847)
Net income -- -- -- 5,220 -- -- 5,220
----- -------- -------- -------- -------- -------- --------
BALANCE--September 30, 2006 5,632 $ 57 $ 20,403 $ 27,845 $ (8,386) $ (166) $ 39,753
===== ======== ======== ======== ======== ======== ========
F-5
ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2006, OCTOBER 1, 2005 AND OCTOBER 2, 2004
--------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ark Restaurants Corp. and subsidiaries (the "Company") owns and/or
operates 23 restaurants and bars, 25 fast food concepts, catering
operations and wholesale and retail bakeries. Seven restaurants are
located in New York City, eight in Las Vegas, Nevada, four in Washington,
D.C, two are located in Atlantic City, New Jersey, and two are located at
the Foxwoods Resort Casino in Ledyard, Connecticut. The Las Vegas
operations include three restaurants within the New York-New York Hotel &
Casino Resort and operation of the resort's room service, banquet
facilities, employee dining room and nine food court concepts. Four
restaurants and bars are within the Venetian Casino Resort as well as
three food court concepts and one restaurant is within the Forum Shops at
Caesar's Shopping Center. The Company manages five fast food facilities in
Tampa, Florida and eight fast food facilities in Hollywood, Florida, each
at a Hard Rock Hotel and Casino owned by the Seminole Indian Tribe at
these locations. The Company also manages two fast food restaurants at the
Foxwoods Resort Casino in Ledyard, Connecticut.
ACCOUNTING PERIOD--The Company's fiscal year ends on the Saturday nearest
September 30. The fiscal year ended September 30, 2006 and October 1, 2005
included 52 weeks. The fiscal year ended October 2, 2004 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 long-term
receivables, the useful lives and recoverability of its assets, such as
property and intangibles, fair values of financial instruments and
share-based compensation, the realizable value of its tax assets and other
matters.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
RECLASSIFICATIONS--Certain reclassifications of prior year balances have
been made to conform to the current year presentation.
CASH EQUIVALENTS--Cash equivalents include instruments with maturities of
three months or less, when purchased.
The Company maintains the majority of its cash and cash equivalents with
high quality financial institutions. Deposits held with banks exceed
insurance limits. These deposits may be redeemed upon demand and
therefore bear minimal risk.
ACCOUNTS RECEIVABLE--Accounts receivable is primarily composed of normal
business receivables such as credit card receivables that are paid off in
a short period of time.
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.
F-6
REVENUE RECOGNITION--The Company-owned restaurant sales are composed
almost entirely of food and beverage sales. The Company records revenue at
the time of the purchase of products by customers.
Management fees, which are included in Revenues - Other Income, are
related to the Company's managed restaurants and are based on either gross
restaurant sales or cash flow. The company recognizes management fee
income in the period sales are made or cash flow is generated.
The Company offers customers the opportunity to purchase gift
certificates. At the time of purchase by the customer, the Company records
a gift certificate liability for the face value of the certificate
purchased. The Company recognizes the revenue and reduces the gift
certificate liability when the certificate is redeemed. The Company does
not reduce its recorded liability for potential non-use of purchased gift
cards.
FIXED ASSETS--Leasehold improvements and furniture, fixtures and equipment
are stated at cost. Depreciation of furniture, fixtures and equipment is
computed using the straight-line method over the estimated useful lives of
the respective assets (three to 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 30 years. For
leases with renewal periods at the Company's option, if failure to
exercise a renewal option imposes an economic penalty to the Company,
management may determine at the inception of the lease that renewal is
reasonably assured and include the renewal option period in the
determination of appropriate estimated useful lives.
The Company includes in construction in progress improvements in
restaurants that are under construction. Once the projects have been
completed, the Company will begin depreciating and amortizing the assets.
Start-up costs incurred during the construction period of restaurants,
including rental of premises, training and payroll, are expensed as
incurred.
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS,
which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the asset's carrying amount. In the evaluation of the fair value and
future benefits of long-lived assets, the Company performs an analysis of
the anticipated undiscounted future net cash flows of the related
long-lived assets. If the carrying value of the related asset exceeds the
undiscounted cash flows, the carrying value is reduced to its fair value.
Various factors including future sales growth and profit margins are
included in this analysis. Management believes at this time that carrying
values and useful lives continue to be appropriate.
For the years ended September 30, 2006, October 1, 2005 and October 2,
2004, no impairment charges were deemed necessary.
INTANGIBLE ASSETS AND GOODWILL--As of September 29, 2002, the Company
adopted the provisions of SFAS No. 142, ACCOUNTING FOR GOODWILL AND OTHER
INTANGIBLE ASSETS. This statement requires that for goodwill, including
the goodwill included in the carrying value of investments accounted for
using the equity method of accounting, and certain other intangible assets
deemed to have an indefinite useful life, the Company cease amortization.
SFAS No. 142 requires that goodwill and certain intangible assets be
assessed for impairment using fair value measurement techniques.
Specifically, goodwill impairment is determined using a two-step process.
The first step of the goodwill impairment test is to identify potential
impairment by comparing the fair value of the reporting unit (the Company
is being treated as
F-7
one reporting unit) with its net book value (or carrying amount),
including goodwill. If the fair value of the reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not impaired
and the second step of the impairment test is unnecessary. If the carrying
amount of the reporting unit exceeds its fair value, the second step of
the goodwill impairment test is performed to measure the amount of
impairment loss, if any. The second step of the goodwill impairment test
compares the implied fair value of the reporting unit's goodwill with the
carrying amount of that goodwill. If the carrying amount of the reporting
unit's goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. The
implied fair value of goodwill is determined in the same manner as the
amount of goodwill recognized in a business combination. That is, the fair
value of the reporting unit is allocated to all of the assets and
liabilities of that unit (including any unrecognized intangible assets) as
if the reporting unit had been acquired in a business combination and the
fair value of the reporting unit was the purchase price paid to acquire
the reporting unit. The impairment test for other intangible assets
consists of a comparison of the fair value of the intangible asset with
its carrying value. If the carrying value of the intangible asset exceeds
its fair value, an impairment loss is recognized in an amount equal to
that excess.
Determining the fair value of the reporting unit under the first step of
the goodwill impairment test and determining the fair value of individual
assets and liabilities of the reporting unit (including unrecognized
intangible assets) under the second step of the goodwill impairment test
is judgmental in nature and often involves the use of significant
estimates and assumptions. Similarly, estimates and assumptions are used
in determining the fair value of other intangible assets. These estimates
and assumptions could have a significant impact on whether or not an
impairment charge is recognized and also the magnitude of any such charge.
To assist in the process of determining goodwill impairment, the Company
obtains appraisals from independent valuation firms. In addition to the
use of independent valuation firms, the Company performs internal
valuation analyses and considers other market information that is publicly
available. Estimates of fair value are primarily determined using
discounted cash flows, market comparisons and recent transactions. These
approaches use significant estimates and assumptions including projected
future cash flows (including timing), a discount rate reflecting the risk
inherent in future cash flows, perpetual growth rate, determination of
appropriate market comparables and the determination of whether a premium
or discount should be applied to comparables. Based on the above policy no
impairment charges were recorded during the fiscal years ended 2006, 2005
and 2004.
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 9 to 20 years.
Covenants not to compete arising from restaurant acquisitions are
amortized over the contractual period, typically five years.
Amortization expense for intangible assets not including goodwill was
$29,000, $28,000 and $27,000 for the years ended September 30, 2006,
October 1, 2005 and October 2, 2004, respectively.
LEASES -- The Company is obligated under various lease agreements for
certain restaurants. The Company recognizes rent expense on a
straight-line basis over the expected lease term, including option periods
as described below. Within the provisions of certain leases there are
escalations in payments over the base lease term, as well as renewal
periods. The effects of the escalations have been reflected in rent
expense on a straight-line basis over the expected lease term, which
includes option periods when it is deemed to be reasonably assured that
the Company would incur an economic penalty for not exercising the option.
Percentage rent expense is generally based upon sales levels and is
expensed as incurred. Certain leases include both base rent and percentage
rent. The Company records rent expense
F-8
on these leases based upon reasonably assured sales levels. The
consolidated financial statements reflect the same lease terms for
amortizing leasehold improvements as were used in calculating
straight-line rent expense for each restaurant. The judgments of the
Company may produce materially different amounts of amortization and rent
expense than would be reported if different lease terms were used.
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 deferred credits
that reverse over the lease term.
OCCUPANCY EXPENSES--Occupancy expenses include rent, rent taxes, real
estate taxes, insurance and utility costs.
INCOME TAXES--Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to the temporary differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that
includes the enactment date. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized
INCOME PER SHARE OF COMMON STOCK--Basic 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 of the weighted
average number of common shares outstanding during each period. Diluted
net income per share reflects the additional dilutive effect of
potentially dilutive shares (principally those arising from the assumed
exercise of stock options).
F-9
SHARE-BASED COMPENSATION--Effective October 2, 2005 the Company adopted
Statement of Financial Accounting Standards No. 123R, "SHARE-BASED
PAYMENT" ("SFAS 123R"), and related interpretations and began expensing
the grant-date fair value of employee stock options. Prior to October 2,
2005, the Company applied Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related interpretations in
accounting for its stock option plans. Accordingly, prior to October 2,
2005, no compensation expense has been recognized for employee stock
options, as options granted had an exercise price equal to the market
value of the underlying common stock on the date of grant.
Upon adoption of SFAS 123R, the Company elected to value employee stock
options using the Black-Scholes option valuation method that uses
assumptions that relate to the expected volatility of the Company's common
stock, the expected dividend yield of our stock, the expected life of the
options and the risk free interest rate. The assumptions used for the
options granted on December 21, 2004, which were unvested at the time of
the adoption of SFAS 123R, included a risk free interest rate of 3.37%,
volatility of 37%, a dividend yield of 3% and an expected life of three
years.
The Company adopted SFAS 123R using the modified prospective transition
method and therefore has not restated prior periods. Under this transition
method, compensation cost associated with employee stock options
recognized during fiscal 2006 includes amortization related to the
remaining unvested portion of stock awards granted prior to October 2,
2005. No options were granted during fiscal year 2006.
Prior to the adoption of SFAS 123R, the Company presented tax benefits
resulting from share-based compensation as operating cash flows in the
consolidated statements of cash flows. SFAS 123R requires that cash flows
resulting from tax deductions in excess of compensation cost recognized in
the financial statements be classified as an operating cash outflow and a
financing cash inflow.
The compensation cost charged to operations for the fiscal year ended
September 30, 2006 for share-based compensation programs was $748,000,
before a tax benefit of $256,000. The compensation cost recognized is
classified as payroll expense in the consolidated statement of operations.
In November 2005, the FASB issued FASB Staff Position No. FAS 123R-3
"Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards" ("FAS 123R-3"). The Company has elected to
adopt the alternative transition method provided in this FASB Staff
Position for calculating the tax effects of share-based compensation
pursuant to FAS 123R-3. The alternative transition method includes a
simplified method to establish the beginning balance of the additional
paid-in capital pool (APIC pool) related to the effects of employee
share-based compensation, which is available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS 123R.
F-10
A summary of stock option activity is presented below:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AGGREGATE
EXCERSIE FAIR CONTRACTUAL INTRINSIC
OPTIONS SHARES PRICE VALUE TERM (YRS.) VALUE
------- ------ ----- ----- ----------- -----
Outstanding as October 1, 2005 301,000 $ 21.32 $ 5.97 8.23
Granted -- -- -- --
Exercised (99,000) 6.30 2.05 0.21
Forfeited/Cancelled -- -- -- --
-------
Outstanding at September 30, 2006 202,000 $ 28.68 $ 8.06 7.91 $167,000
======= ========= ======== ==== ========
Exercisable at September 30, 2006 105,000 $ 27.82 $ 7.99 7.62 $167,000
======= ========= ======== ==== ========
Had the Company accounted for its share-based awards under the fair value
method for the fiscal years ended October 1, 2005 and October 2, 2004 the
impact on its financial statements would have been as follows:
YEARS ENDED
----------------------------------------
OCTOBER 1, OCTOBER 2,
2005 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income as reported $6,579 $6,657
Deduct share-based compensation expense
computed under the fair value method 494 85
------ ------
Net income - pro forma $6,085 $6,572
====== ======
Net income per share as reported - basic $ 1.92 $ 2.01
Net income per share as reported - diluted $ 1.85 $ 1.93
Net income per share pro forma - basic $ 1.77 $ 1.99
Net income per share pro forma - diluted $ 1.71 $ 1.91
As of September 30, 2006, there was approximately $163,000 of unrecognized
compensation cost related to unvested stock options, which is expected to
be recognized over a period of approximately one year.
The Company, generally, issues new shares upon the exercise of employee
stock options.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS-- In June 2005, the Emerging
Issues Task Force ("EITF") issued EITF No. 04-5, INVESTOR'S ACCOUNTING FOR
AN INVESTMENT IN A LIMITED PARTNERSHIP WHEN THE INVESTOR IS THE SOLE
GENERAL PARTNER AND THE LIMITED PARTNERS HAVE CERTAIN RIGHTS ("EITF
04-5"). EITF 04-5 presumes that a general partner controls a limited
partnership and therefore should consolidate the partnership. This
presumption can be overcome if the limited partners have kick-out or
F-11
substantive participating rights. The Company is required to adopt the
provisions of EITF 04-05 during fiscal years beginning after December 15,
2005. The Company is currently evaluating the impact of EITF 04-05 on
its consolidated results of operations and financial position.
In June 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - AN
INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial
statements in accordance with FASB Statement No. 109, ACCOUNTING FOR
INCOME TAXES. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. The
Company is required to adopt the provisions of FIN 48 during fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact of FIN 48 on its consolidated results of operations and financial
position.
2. RECENT RESTAURANT DISPOSITIONS
In November 2000 the Company entered into a sale and leaseback agreement
to refinance the purchase of various restaurant equipment at its food and
beverage facilities at Desert Passage, the retail complex at the Aladdin
Resort & Casino in Las Vegas, Nevada. In 2002, the operations at the
Aladdin were abandoned. During fiscal 2006 the Company made an unprovided
for lump sum payment of $142,000 due under this lease which is included in
discontinued operations for fiscal year 2005.
In fiscal 2003, the Company determined that the restaurant, Lutece,
located in New York City, had been impaired by the events of September
11th and the continued weakness in the economy. Based upon the sum of the
future undiscounted cash flows related to long-lived fixed assets at
Lutece, the Company determined that impairment had occurred. To estimate
the fair value of such long-lived fixed assets, for determining the
impairment amount, the Company used the expected present value of the
future cash flows. The Company projected continuing negative operating
cash flow for the foreseeable future with no value for subletting or
assigning the lease for the premises. As a result, the Company determined
that there was no value to the long-lived fixed assets of $667,000
comprised of leasehold improvements, furniture fixtures and equipment. The
Company believed that these assets would have nominal value upon disposal
and recorded an impairment charge of $667,000 during fiscal 2003. Due to
continued weak sales, the Company closed Lutece during the second quarter
of 2004. The Company recorded net operating losses of $27,000, $60,000 and
$804,000 during the fiscal years ended September 30, 2006, October 1, 2005
and October 2, 2004, respectively, which are included in losses from
discontinued operations. In fiscal 2004, the Company also incurred a
one-time charge of $470,000 related to pension plan contributions required
in connection with the closing of Lutece which is payable monthly over a
nine year period beginning May 17, 2004 and bears interest at a rate of 8%
per annum.
On December 1, 2003, the Company sold a restaurant, Lorelei, for
approximately $850,000. The book value of inventory, fixed assets,
intangible assets and goodwill related to this entity was approximately
$625,000. The Company recorded a gain on the sale of approximately
$225,000 during the first quarter of fiscal 2004 which, along with losses
from operations of $145,000, are included in discontinued operations.
There were no additional losses incurred related to this restaurant after
fiscal 2004.
The Company's restaurant, Ernie's, located on the upper west side of
Manhattan opened in 1982. As a result of a steady decline in sales, the
Company felt that a new concept was needed at this location and,
accordingly, the restaurant was closed on June 16, 2003 and reopened in
August 2003. Total conversion costs were approximately $350,000. Sales at
the new restaurant, La Rambla, failed to reach the level sufficient to
achieve the results the Company required. As a result, the Company sold
this restaurant on
F-12
January 1, 2004 and realized a gain of approximately $214,000. Net
operating income of $5,000 and net operating losses of $12,000 and
$230,000 are included in discontinued operations for the fiscal years
ended September 30, 2006, October 1, 2005 and October 2, 2004,
respectively.
The Company's restaurant Jack Rose located on the west side of Manhattan
had experienced weak sales for several years. In addition, this restaurant
did not fit the Company's desired profile of being in a landmark
destination location. As a result, the Company sold this restaurant on
February 23, 2004. The Company realized a loss on the sale of this
restaurant of $137,000 which was recorded during the second quarter of
fiscal 2004. Net operating losses of $3,000, $19,000 and $148,000 are
included in discontinued operations for the fiscal year ended September
30, 2006, October 1, 2005 and October 2, 2004, respectively.
The Company's restaurant, America, located in New York City had
experienced declining sales for several years. In March 2004, the Company
entered into a new lease for this restaurant at a significantly increased
rent. This lease was entered into with the belief that due to the location
and the uniqueness of the space the lease had value. On January 19, 2005,
the Company signed a definitive agreement for the sale of this restaurant
which closed on March 15, 2005. The Company realized a pre-tax gain of
$644,000 on the sale of this restaurant. An operating loss of $12,000 and
operating income of $47,000 are included in discontinued operations
for the fiscal years ended September 30, 2006 and October 1, 2005,
respectively.
The Company's bar/nightclub facility Venus, located at the Venetian Casino
Resort, experienced a steady decline in sales and the Company felt that a
new concept was needed at this location. During the first quarter of 2005,
this bar/nightclub facility was closed for re-concepting and re-opened as
"Vivid" on February 4, 2005. Total conversion costs were approximately
$400,000. Sales at the new bar/nightclub facility failed to reach the
level sufficient to achieve the results the Company required. As of
December 31, 2005, the Company classified the assets and liabilities of
this facility as "held for sale" in accordance with Statement of Financial
Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS ("SFAS 144") based on the fact that the facility has met
the criteria for such under SFAS 144. Based on the initial offers made on
this facility, the Company does not anticipate a loss on the sale. Net
operating losses of $486,000 are included in loss from discontinued
operations for the fiscal year ended September 30, 2006.
Effective August 22, 2004, the Company's lease for The Saloon at the
Neonopolis Center at Fremont Street was converted into a management
agreement whereby the Company received a management fee of $7,000 per
month regardless of the results of operations of this restaurant. In June
2006, the owner of the Neonopolis Center at Fremont Street sold the
building to a new entity who, on June 25, 2006, exercised its option to
terminate the management agreement upon thirty days written notice to the
Company.
On July 6, 2006, the landlord for the Vico's Burrito's fast food facility
at the Venetian Casino Resort notified the Company that they were
exercising their option to terminate the lease in exchange for the
landlord providing the Company with the unamortized portion of the
non-removable improvements located in the facility. On August 10, 2006,
the Company entered into a letter agreement pursuant to which the landlord
agreed to pay $200,000 for the unamortized portion of the non-removable
improvements located in the facility. The Company realized a loss on the
closure of this restaurant of $70,000 which is included in discontinued
operations. Operating income of $35,000 is included in discontinued
operations for the fiscal year ended September 30, 2006.
In accordance with SFAS 144, all prior years included in the accompanying
consolidated statements of operations and cash flows have been
reclassified to separately show the results of operations and cash
F-13
flows of these discontinued operations. Total revenues of these
discontinued operations were $1,159,000, $4,010,000 and $9,821,000 in
fiscal 2006, 2005 and 2004, respectively.
As a result of the above mentioned sales, the Company allocated $75,000 of
goodwill to these restaurants and reduced goodwill by this amount in
fiscal 2005. No allocation was required during fiscal 2006.
3. LONG-TERM RECEIVABLES
Long-term receivables consist of the following:
SEPTEMBER 30, OCTOBER 1,
2006 2005
(IN THOUSANDS)
Note receivable collateralized by fixed assets and lease at a
restaurant sold by the Company, at 8% interest; due in
monthly installments through December 2006 (a) $ 23 $ 111
Note receivable collateralized by fixed assets and lease at a
restaurant sold by the Company, at 7.5% interest; due in
monthly installm ents through December 2008 (b) 558 788
Note receivable collateralized by fixed assets and lease at a
restaurant sold by the Company, at 6% interest, due in
monthly installm ents through June 2011 (c) 575 675
------ ------
1,156 1,574
Less current portion 131 299
------ ------
$1,025 $1,275
====== ======
(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 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 7.5%.
One note, with an initial principal balance of $400,000, was paid in
24 monthly installments of $19,000 through April 2000. The second
note, with an initial principal balance of $1,150,000, is being paid
in 104 monthly installments of principal and interest totaling
$15,000 commencing May 2000 and ending December 2008. At December
2008, the then outstanding balance of $519,000 matures. In
connection with this note, the buyer has prepaid $240,000 as of
September 30, 2006. Such prepayment has been offset against future
maturities.
(c) In March 2005, the Company sold a restaurant for $1,300,000. Cash of
$600,000 was included on the sale. Of the $600,000 cash, $200,000
was paid to the Company as a fee to manage the restaurant for four
months prior to closure and the balance was paid directly to the
landlord. The remaining $700,000 was received in the form of a note
payable in installments through June 2011. The Company recognized a
gain of $644,000 during the year ended October 1, 2005 in connection
with this sale.
F-14
The carrying value of the Company's long-term receivables approximates
their current aggregate fair value.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
SEPTEMBER 30, OCTOBER 1,
2006 2005
(IN THOUSANDS)
Purchased leasehold rights (a) $ 490 $ 611
Noncompete agreements and other 483 600
------- --------
973 1,211
Less accumulated amortization 873 1,013
------- --------
Total intangible assets $ 100 $ 198
======= ========
(a) Purchased leasehold rights arise from acquiring leases and subleases
of various restaurants.
5. OTHER ASSETS
Other assets consist of the following:
SEPTEMBER 30, OCTOBER 1,
2006 2005
(IN THOUSANDS)
Deposits and other $ 465 $ 350
Landlord receivable (a) 380 379
-------- --------
$ 845 $ 729
======== ========
(a) This balance represents certain costs paid by the Company on behalf
of a landlord, which under an agreement with the landlord will be
used as a future offset to contingent rent payments for certain Las
Vegas restaurants.
F-15
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
SEPTEMBER 30, OCTOBER 1,
2006 2005
(IN THOUSANDS)
Sales tax payable $ 696 $ 763
Accrued wages and payroll related costs 1,094 1,756
Customer advance deposits 1,120 986
Accrued and other liabilities 1,308 1,134
Abandonment accrual (a) -- 117
---------- ---------
$ 4,218 $ 4,756
========== =========
(a) During the year ended September 29, 2001, the Company recorded the
entire amount payable under an operating lease for restaurant
equipment for the Aladdin operations as a liability of $1,600,000
based on their anticipated abandonment. During the year ended
September 28, 2002, the operations at the Aladdin were abandoned.
See Note 2.
7. COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases its restaurants, bar facilities, and
administrative headquarters through its subsidiaries under terms expiring
at various dates through 2021. 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.
As of September 30, 2006, future minimum lease payments under
noncancelable leases are as follows:
AMOUNT
FISCAL YEAR (IN THOUSANDS)
2007 $ 7,187
2008 6,487
2009 6,038
2010 5,797
2011 5,880
Thereafter 26,697
-------
Total minimum payments $58,086
=======
In connection with certain of the leases included in the table above, the
Company obtained and delivered irrevocable letters of credit in the
aggregate amount of $466,000 as security deposits under such leases.
Rent expense was $12,299,000, $11,978,000 and $12,104,000 during the
fiscal years ended September 30, 2006, October 1, 2005 and October 2,
2004, respectively. Contingent rentals, included in rent expense, were
$4,392,000, $4,160,000 and $4,153,000 for the fiscal years ended September
30, 2006, October 1, 2005 and October 2, 2004, respectively.
F-16
In August 2004, the Company entered into a lease agreement to operate a
Gallagher's Steakhouse and separate bar, Luna Lounge, at the Resorts
International Hotel and Casino in Atlantic City, New Jersey. In connection
with this lease the landlord contributed $3,000,000 towards the
construction of these facilities. The Company received the $3,000,000
during the fiscal year ended September 30, 2006. As a result of cost
overruns the landlord provided the Company with a rent credit which
totaled $500,000. These amounts are included in the Operating Lease
Deferred Credit Liability as of September 30, 2006.
In July 2006, the Company entered into an agreement to lease The Grill at
Two Trees in the Two Trees Inn, a facility owned by the Mashantucket
Pequot Tribal Nation and a part of the Foxwoods Resort Casino, in Ledyard,
Connecticut. This restaurant opened in December 2006.
In September 2006, the Company entered into an agreement to lease a to be
named Mexican restaurant at the to be developed Planet Hollywood Resort
and Casino (formerly known as the Aladdin Resort and Casino) in Las Vegas,
Nevada. Lease payments do not commence until construction of this
restaurant is completed. This restaurant is expected to open during the
second fiscal quarter of 2007.
The future minimum lease payments from the above noted leases are included
in the above schedule.
LEGAL PROCEEDINGS--In the ordinary course of its business, the Company is
a party to various lawsuits arising from accidents at its restaurants and
worker'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's consolidated financial statements.
8. COMMON STOCK REPURCHASE PLAN
In August 2006, the Company authorized the repurchase of up to $4,000,000
of the Company's outstanding common stock which may be acquired in open
market purchases over the twelve months following the date of the
authorization. For the fiscal year ended September 30, 2006, there were no
repurchases of common stock.
9. STOCK OPTIONS
The Company has options outstanding under two stock option plans, the 1996
Stock Option Plan (the "1996 Plan) and the 2004 Stock Option Plan (the
"2004 Plan"). In 2004 the Company terminated the 1996 Plan. This action
terminated the 257,000 authorized but unissued options under the 1996 Plan
but it did not affect any of the options previously issued under the 1996
Plan.
Options granted under the 1996 Plan 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 grant date.
Options granted under the 2004 Plan 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 ten years after the date of grant and
F-17
are generally exercisable as to 50% of the shares commencing on the first
anniversary of the date of grant and as to an additional 50% commencing on
the second anniversary of the date of grant.
Additional information as of the end of each respective fiscal year is as
follows:
2006 2005 2004
---------------------------- -------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding, beginning of year 301,000 $ 6.30 178,000 $ 7.91 392,500 $ 7.91
Options:
Granted -- 194,000 29.60 --
Exercised (99,000) 6.30 (71,000) 6.47 (212,500) 9.18
Canceled or expired -- -- (2,000) 10.00
-------- -------- --------
Outstanding, end of year (a) 202,000 28.68 301,000 21.32 178,000 7.91
======== ======== ========
Exercise price, outstanding options $6.30 - 29.60 $6.30 - 29.60 $6.30 - 7.50
Weighted average years 7.91 6.38 Years 2.14 Years
Shares available for future grant (b) 256,000 256,000 450,000
Options exercisable (a) 105,000 27.82 107,000 6.30 60,500 6.30
Fair value of options granted -- 194,000 8.13 --
(a) Options become exercisable at various times until expiration dates
ranging from December 2003 through December 2014.
(b) The 2004 Stock Option Plan, which was approved by shareholders, is
the Company's only equity compensation plan currently in effect.
Under the 2004 Stock Option Plan, 450,000 options were authorized
for future grant and 194,000 of these options were issued during
fiscal 2005. The Company, with the approval of the shareholders,
terminated the 1996 Stock option Plan. This action terminated the
257,000 authorized but unissued options under the 1996 Stock Option
Plan but it did not affect any of the options previously issued
under the 1996 Stock Option Plan.
10. MANAGEMENT FEE INCOME
As of September 30, 2006, the Company provides management services to two
fast food courts and three restaurants it does not own. In accordance with
the contractual arrangements, the Company earns management fees based on
gross sales or cash flow as defined by the agreements. Management fee
income relating to these services was $1,980,000, $1,568,000 and $386,000
for the years ended September 30, 2006, October 1, 2005 and October 2,
2004, respectively. Such amount for the year ended September 30, 2006
included $932,000 for management fees and $1,048,000 for profit
distributions. Such amount for the year ended October 1, 2005 included
$851,000 for management fees and $717,000 for profit distributions. For
the year ended October 2, 2004 the entire amount of $386,000 was for
management fees.
Receivables from managed restaurants, classified as Related Party
receivable in the accompanying Consolidated Balance Sheet, were $1,446,000
and $451,000 at September 30, 2006 and October 1, 2005, respectively. Such
amount for the year ended September 30, 2006 included $161,000 for
management
F-18
fees, $250,000 for profit distributions and $1,035,000 for expense
advances. Such amount at October 1, 2005 included $133,000 for management
fees and $318,000 for expense advances.
Managed restaurants had sales of $16,377,000, $12,105,000 and $9,566,000
during the management periods within the years ended September 30, 2006,
October 1, 2005 and October 2, 2004, respectively, which are not included
in consolidated net sales of the Company.
11. 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 state and local income tax
purposes, the losses incurred by a subsidiary may only be used to offset
that subsidiary's income.
The provision (benefit) for income taxes attributable to continuing and
discontinued operations consists of the following:
YEARS ENDED
------------------------------------
SEPTEMBER 30, OCTOBER 1, OCTOBER 2,
2006 2005 2004
(IN THOUSANDS)
Current provision:
Federal $ 2,985 $ 2,189 $ 2,168
State and local 603 569 514
-------- -------- --------
3,588 2,758 2,682
-------- -------- --------
Deferred provision (benefit):
Federal (967) 413 259
State and local (29) (226) (403)
-------- -------- --------
(996) 187 (144)
-------- -------- --------
$ 2,592 $ 2,945 $ 2,538
======== ======== ========
The provision for income taxes differs from the amount computed by
applying the Federal statutory rate due to the following:
F-19
YEARS ENDED
----------------------------------------
SEPTEMBER 30, OCTOBER 1, OCTOBER 2,
2006 2005 2004
(IN THOUSANDS)
Provision for Federal
income taxes (34%) $ 2,656 $ 3,238 $ 3,126
State and local income taxes net of Federal
tax benefit 502 309 334
Tax credits (484) (514) (591)
State and local net operating loss carryforward
allowance adjustment (134) (125) (395)
Other 52 37 64
-------- -------- --------
$ 2,592 $ 2,945 $ 2,538
======== ======== ========
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:
SEPTEMBER 30, OCTOBER 1,
2006 2005
(IN THOUSANDS)
Current deferred tax assets (liabilities):
Inventory $ -- $ (270)
------- -------
Total current net deferred tax assets -- (270)
------- -------
Long-term deferred tax assets (liabilities):
Operating loss carryforwards 2,513 2,153
Operating lease deferred credits 1,407 320
Carryforward tax credits 2,574 4,570
Depreciation and amortization 53 (973)
Deferred gains (416) (260)
Valuation allowance (224) (358)
Deferred compensation 284 --
Pension withdrawal liability 114 127
------- -------
Total long-term net deferred tax assets 6,305 5,579
------- -------
Total net deferred tax assets $ 6,305 $ 5,309
======= =======
F-20
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 $224,000 at September 30, 2006 and $358,000 at
October 1, 2005. The Company decreased its allowance for the utilization
of the deferred tax asset arising from state and local operating loss
carryforwards by $134,000 and $125,000 for the years ended September 30,
2006 and October 1, 2005, respectively, based on the merger of certain
unprofitable subsidiaries into profitable ones. The Company has state
operating loss carryforwards of $19,726,000, which expire in the years
2007 through 2020.
During the fiscal year ended September 30, 2006, the Company agreed to a
settlement with the Internal Revenue Service which covered fiscal years
ended October 2, 1999 through October 2, 2004. The final adjustments
primarily related to the timing of deductions made during the fiscal year
ended September 28, 2003 relating to the abandonment of the Company's
restaurant and food court operations at Desert Passage which adjoins the
Aladdin Casino Resort in Las Vegas, Nevada. This settlement did not have a
material effect on the Company's consolidated financial condition.
12. OTHER INCOME
Other income consists of the following:
YEARS ENDED
----------------------------------------
SEPTEMBER 30, OCTOBER 1, OCTOBER 2,
2006 2005 2004
(IN THOUSANDS)
Purchasing service fees $ 60 $ 41 $ 61
Other 653 631 533
-------- -------- ---------
$ 713 $ 672 $ 594
======== ======== =========
13. INCOME PER SHARE OF COMMON STOCK
A reconciliation of the numerators and denominators of the basic and
diluted per share computations for the fiscal years ended September 30,
2006, October 1, 2005 and October 2, 2004 follows:
F-21
NET
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended September 30, 2006:
Basic EPS $5,220 3,472 $ 1.50
Stock options -- 76 (0.03)
------ ----- --------
Diluted EPS $5,220 3,548 $ 1.47
====== ===== ========
Year ended October 1, 2005:
Basic EPS $6,579 3,436 $ 1.92
Stock options -- 119 (0.07)
------ ----- --------
Diluted EPS $6,579 3,555 $ 1.85
====== ===== ========
Year ended October 2, 2004:
Basic EPS $6,657 3,305 $ 2.01
Stock options -- 139 (0.08)
------ ----- --------
Diluted EPS $6,657 3,444 $ 1.93
====== ===== ========
For the year ended September 30, 2006, stock options for 194,000 shares
were not included in the computation of diluted EPS because to do so would
have been antidilutive. For the fiscal years ended October 1, 2005 and
October 2, 2004 all outstanding stock options were included in the
computation of diluted EPS.
F-22
14. QUARTERLY INFORMATION (UNAUDITED)
The following tables set forth certain unaudited results of operations for
each quarter during 2006 and 2005. The unaudited information has been
prepared on the same basis as the audited consolidated financial
statements and includes all adjustments which management considers
necessary for a fair presentation of the financial data shown. The
operating results for any quarter are not necessarily indicative of the
results to be attained for any future period. Basic and diluted earnings
(loss) per share are computed independently for each of the periods
presented. Accordingly, the sum of the quarterly earnings (loss) per share
may not agree to the total for the year (in thousands, except per share
data).
FISCAL QUARTERS ENDED
-----------------------------------------------
DECEMBER 31, APRIL 1, JULY 1 SEPTEMBER 30,
2005 2006 2006 2006
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2006
Revenues $27,247 $25,468 $32,606 $30,648
======= ======= ======= =======
Income from continuing operations $ 1,192 $ 14 $ 2,656 $ 1,825
Income (loss) from discontinued
operations (276) (165) (168) 142
------- ------- ------- -------
Net income (loss) $ 916 $ (151) $ 2,488 $ 1,967
======= ======= ======= =======
Per share information - basic
and diluted:
Continuing operations basic $ 0.34 $ 0.00 $ 0.77 $ 0.53
Discontinued operations basic (0.08) (0.04) (0.05) 0.03
------- ------- ------- -------
Net basic $ 0.26 $ (0.04) $ 0.72 $ 0.56
======= ======= ======= =======
Continuing operations diluted
$ 0.34 $ 0.00 $ 0.75 $ 0.51
Discontinued operations diluted (0.08) (0.04) (0.05) 0.04
------- ------- ------- -------
Net diluted $ 0.26 $ (0.04) $ 0.70 $ 0.55
======= ======= ======= =======
F-23
FISCAL QUARTERS ENDED
---------------------------------------------
JANUARY 1, APRIL 2, JULY 2, OCTOBER 1,
2005 2005 2005 2005
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2005
Revenues $26,516 $23,995 $32,206 $30,520
======= ======= ======= =======
Income from continuing operations $ 1,301 $ 291 $ 3,013 $ 2,205
Income (loss) from discontinued
operations (117) 263 (191) (186)
------- ------- ------- -------
Net income (loss) $ 1,184 $ 554 $ 2,822 $ 2,019
======= ======= ======= =======
Per share information - basic and
diluted:
Continuing operations basic
$ 0.38 $ 0.08 $ 0.87 $ 0.64
Discontinued operations basic (0.03) 0.08 (0.05) (0.06)
------- ------- ------- -------
Net basic $ 0.35 $ 0.16 $ 0.82 $ 0.58
Continuing operations diluted $ 0.37 $ 0.08 $ 0.85 $ 0.62
Discontinued operations diluted (0.03) 0.07 (0.05) (0.05)
------- ------- ------- -------
Net diluted $ 0.34 $ 0.15 $ 0.80 $ 0.57
======= ======= ======= =======
15. STOCK OPTION RECEIVABLES
Stock option receivables include amounts due from officers and directors
totaling $166,000 at September 30, 2006 and October 1, 2005. Such amounts
which are due from the exercise of stock options in accordance with the
Company's Stock Option Plan are payable on demand with interest (8.25% at
September 30, 2006 and 6.75% at October 1, 2005).
16. RELATED PARTY TRANSACTIONS
Receivables due from officers and directors, excluding stock option
receivables, totaled $37,000 at September 30, 2006 and October 1, 2005.
Other employee loans totaled $357,000 at September 30, 2006 compared to
$257,000 at October1, 2005. Such loans bear interest at the minimum
statutory rate (4.96% at September 30, 2006 and 3.83% at October 1, 2005).
17. SUBSEQUENT EVENTS
The Company entered into an agreement to purchase the restaurant known as
Durgin Park Restaurant and the Black Horse Tavern in Boston,
Massachusetts. The agreement to purchase the Durgin Park facility provides
that the Company cannot take possession of the restaurant until it obtains
a liquor license for the facility.
On October 10, 2006, the Company declared its regular quarterly dividend
of $.35 per share on the Company's outstanding common stock payable
November 1, 2006 to shareholders of record at the close of business
October 20, 2006. On November 1, 2006, the Company paid dividends of
$1,246,000.
F-24
Effective December 1, 2006, Las Vegas Asia Corp. and Las Vegas Lutece
Corp., the wholly-owned subsidiaries of the Company which lease the
Company's Tsunami and Lutece locations at The Venetian Resort Hotel Casino
in Las Vegas, Nevada, respectively, sold the Lutece and Tsunami locations,
and a portion of the Company's Vivid location used by the Lutece location
as a prep kitchen, for an aggregate of $14,000,000 to Venetian Casino
Resort, LLC.
On December 20, 2006, the Company declared a special dividend of $3.00 per
share on the Company's common stock to be paid on February 1, 2007 to
shareholders of record at the close of business on January 24, 2007.
******
F-25
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.
ARK RESTAURANTS CORP.
By: /s/Michael Weinstein
-----------------------------------------
Michael Weinstein
President and Chief Executive Officer
Date: December 29, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Michael Weinstein Chairman of the Board, President, December 29, 2006
-------------------------------- and Chief Executive Officer
(Michael Weinstein)
/s/Vincent Pascal Senior Vice President December 29, 2006
-------------------------------- and Director
(Vincent Pascal)
/s/Robert Towers Executive Vice President, December 29, 2006
-------------------------------- Treasurer, Chief Operating
(Robert Towers) Officer and Director
/s/Robert Stewart Chief Financial Officer December 29, 2006
--------------------------------
(Robert Stewart)
/s/Marcia Allen Director December 29, 2006
--------------------------------
(Marcia Allen)
/s/Steven Shulman Director December 29, 2006
--------------------------------
(Steven Shulman)
/s/Paul Gordon Senior Vice President December 29, 2006
-------------------------------- and Director
(Paul Gordon)
/s/Bruce R. Lewin Director December 29, 2006
(Bruce R. Lewin)
/s/Arthur Stainman Director December 29, 2006
--------------------------------
(Arthur Stainman)
/s/Edward Lowenthal Director December 29, 2006
--------------------------------
(Edward Lowenthal)
/s/ Stephen Novick Director December 29, 2006
--------------------------------
(Stephen Novick)
/s/ Robert Thomas Zankel Director December 29, 2006
--------------------------------
(Robert Thomas Zankel)
EXHIBITS INDEX
3.1 Certificate of Incorporation of the Registrant, filed with the
Secretary of State of the State of New York on January 4,
1983.
3.2 Certificate of Amendment of the Certificate of Incorporation
of the Registrant filed with the Secretary of State of the
State of New York on October 11, 1985.
3.3 Certificate of Amendment of the Certificate of Incorporation
of the Registrant filed with the Secretary of State of the
State of New York on July 21, 1988.
3.4 Certificate of Amendment of the Certificate of Incorporation
of the Registrant filed with the Secretary of State of the
State of New York on May 13, 1997.
3.5 Certificate of Amendment of the Certificate of Incorporation
of the Registrant filed on April 24, 2002 incorporated by
reference to Exhibit 3.5 to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended March 30, 2002
(the "Second Quarter 2002 Form 10-Q").
3.6 By-Laws of the Registrant, incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form
S-18 filed with the Securities and Exchange Commission on
October 17, 1985.
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 Registrant's Annual Report on
Form 10-K for the fiscal year ended October 2, 1999 ("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, Robert Stewart,
Bruce R. Lewin, Paul Gordon 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.
10.4 Fourth Amended and Restated Credit Agreement dated as of
December 27, 1999 between we and Bank Leumi USA, incorporated
by reference to Exhibit 10.4 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended October 2, 1999.
10.5 Ark Restaurants Corp. 1996 Stock Option Plan, as amended,
incorporated by reference to the Registrant's Definitive Proxy
Statement pursuant to Section 14(a) of the Securities Exchange
Act of 1934 (Amendment No. 1) filed on March 16, 2001.
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 10.6 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.
10.9 Amendment dated August 21, 2000 to the Fourth Amended and
Restated Credit Agreement dated as of December 27, 1999
between we and Bank Leumi USA, incorporated by reference to
Exhibit 10.9 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 2000 (the "2000
10-K").
10.10 Amendment dated November 21, 2000 to the Fourth Amended and
Restated Credit Agreement dated as of December 27, 1999
between we and Bank Leumi USA, incorporated by reference to
Exhibit 10.10 to the 2000 10-K.
10.11 Amendment dated November 1, 2001 to the Fourth Amended and
Restated Credit Agreement dated as of December 27, 1999
between we and Bank Leumi USA, incorporated by reference to
Exhibit 10.11 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 29, 2001 (the "2001
10-K").
10.12 Amendment dated December 20, 2001 to the Fourth Amended and
Restated Credit Agreement dated as of December 27, 1999
between we and Bank Leumi USA, incorporated by reference to
Exhibit 10.11 of the 2001 10-K.
10.13 Amendment dated as of April 23, 2002 to the Fourth Amended and
Restated Credit Agreement dated as of December 27, 1999
between we and Bank Leumi USA, incorporated by reference to
Exhibit 10.13 of the Second Quarter 2002 Form 10-Q.
10.14 Amendment dated as of January 22, 2002 to the Fourth Amended
and Restated Credit Agreement dated as of December 27, 1999
between we and Bank Leumi USA, incorporated by reference to
Exhibit 10.14 of the First Quarter 2003 Form 10-Q.
10.15 Ark Restaurants Corp. 2004 Stock Option Plan, as amended,
incorporated by reference to the Registrant's Definitive Proxy
Statement pursuant to Section 14(a) of the Securities Exchange
Act of 1934 filed on January 26, 2004.
14 Code of Ethics, incorporated by reference to Exhibit 14.1 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 27, 2003.
16 Letter from Deloitte & Touche LLP regarding change in
certifying accountants, incorporated by reference from the
exhibit included with our Current Report on Form 8-K filed
with the SEC on January 15, 2004 and our Current Report on
Form 8-K/A filed with the SEC on January 16, 2004.
*21 Subsidiaries of the Registrant.
*23 Consent of J.H. Cohn LLP.
*31.1 Certification of Chief Executive Officer pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Chief Financial Officer pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002.
*32 Section 1350 Certification.
* Filed herewith.