SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (MARK ONE) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - -- SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended September 28, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - -- SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _________________ Commission file number 0-14030 ARK RESTAURANTS CORP. (Exact name of Registrant as specified in its charter) New York 13-3156768 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 85 Fifth Avenue, New York, N.Y. 10003 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (212) 206-8800 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Common Stock, $.01 par value NASDAQ/NMS Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ X ]. The aggregate market value at December 19, 1996 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 $29,668,000. Solely for the purposes of this calculation, shares held by directors and officers of the Registrant have been excluded. Such exclusion should not be deemed a determination or an admission by the Registrant that such individuals are, in fact, affiliates of the Registrant. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: At December 19, 1996, there were outstanding 3,814,999 shares of the Registrant's Common Stock, $.01 par value. Document Incorporated by Reference: Certain portions of the Registrant's definitive proxy statement to be filed not later than January 27, 1997 pursuant to Regulation 14A are incorporated by reference in Items 10 through 13 of Part III of this Annual Report on Form 10-K. -2- PART I ITEM 1. BUSINESS GENERAL Ark Restaurants Corp. (the "Registrant" or the "Company") is a holding company which, through subsidiaries, operates 26 restaurants, two bakeries and two corporate dining facilities. Of those facilities, 20 restaurants and two bakeries are owned by the Company and six restaurants and the two corporate dining facilities are owned by others and managed by the Company. The Company was formed in 1983 to concentrate the ownership of four restaurants previously operated by the Company's principals. Until 1987 all of the Company's facilities were located in the New York City metropolitan area. In 1987, three facilities were opened in Boston, Massachusetts. Since then the Company has opened five facilities in the Washington, D.C. metropolitan area, one in Islamorada, Florida, one in Rhinebeck, New York and one in Jersey City, New Jersey. The Company will open in early January 1997 a group of restaurants in the 2,100-room hotel to be known as New York, New York Hotel & Casino under construction in Las Vegas, Nevada. In addition to the shift from a Manhattan-based operation, the nature of the facilities operated by the Company has shifted from smaller, neighborhood restaurants to larger, destination restaurants intended to benefit from high patron traffic attributable to the uniqueness of the restaurant's location. Most of the restaurants opened in recent years are of the latter description and the Company intends to concentrate on developing or acquiring similar facilities in the future. In fiscal 1995, the Company opened two such restaurants (B. Smith's in Washington and Bryant Park Grill and Cafe in New York). The restaurant operations in Las Vegas will constitute the Company's largest facilities at one place and are to be situated in a new, destination-type hotel and casino in a major destination city. The names and themes of each of the Company's restaurants are different except for the Company's three America restaurants, two B. Smith's restaurants and two Sequoia restaurants. The Company intends to open a fourth America restaurant and a second Gonzalez y Gonzalez restaurant in Las Vegas, Nevada at the New York, New York Hotel & Casino. The menus in the Company's restaurants are extensive, offering a wide variety of high quality foods at generally moderate prices. Two of the Company's restaurants, Lutece and An American Place, may be classified as expensive. The atmosphere at many of the restaurants is lively and extremely casual. Most of the restaurants have separate bar areas utilized by diners awaiting tables. A majority of the net sales of the Company is derived from dinner as opposed to lunch service. Most of the restaurants are open seven days a week and most serve lunch as well as dinner. While decors differ 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. -3- The following table sets forth certain information with respect to the Company's facilities currently in operation. Seating Capacity(2) Restaurant Size Indoor- Lease Name Location Year Opened(1) (Square feet) (Outdoor) Expiration(3) Perretti Columbus Avenue 1977 1,600 124 2003 New York, New York (between 72nd and 73rd Streets) Metropolitan Cafe First Avenue 1982 4,000 180-(50) 2006 New York, New York (between 52nd and 53rd Streets) Ernie's Broadway 1983 6,600 300 2008 New York, New York (between 75th and 76th Streets) America 18th Street 1984 9,600 350 2004 New York, New York (between 5th Avenue and Broadway) Woody's (4) Seventh Avenue South 1986 1,700 90 1999 New York, New York (between Charles and 10th Streets) B. Smith's (5) Eighth Avenue 1986 8,000 400 2006 New York, New York (at 47th Street) The Marketplace Faneuil Hall Market 1987 3,000 100 2000 Cafe (4) Boston, Massachusetts El Rio Grande Third Avenue 1987 4,000 160 2014 (4)(6) New York, New York (between 38th and 39th Streets) The Brewskeller Faneuil Hall Market 1987 1,500 50 2000 Pub (4) Boston, Massachusetts An American Park Avenue 1986 6,000 180 2005 Place New York, New York (at 32nd Street) Gonzalez y Broadway 1989 6,000 250 1999 Gonzalez New York, New York (between Houston and Bleeker Streets) -4- Seating Capacity(2) Restaurant Size Indoor- Lease Name Location Year Opened(1) (Square feet) (Outdoor) Expiration(3) America Union Station 1989 10,000 400 2009 Washington, D.C. Center Cafe Union Station 1989 4,000 200 2009 Washington, D.C. Sequoia Washington Harbour 1990 26,000 600-(400) 2005 Washington, D.C. Sequoia South Street Seaport 1991 12,000 300-(100) 2006 New York, New York Beekman 1766 Mill Street 1991 5,000 225 2001 Tavern Rhinebeck, New York Canyon Road First Avenue 1984 2,500 130 2004 New York, New York (between 76th and 77th Streets) Louisiana Broadway 1992 4,500 130 1999 Community Bar & New York, New York Grill (between Houston & Bleeker Streets) Oar Bar & Grill Faneuil Hall Market 1987 2,500 130 2000 (4) Boston, Massachusetts Jim McMullen Third Avenue 1993 6,000 250 2002 New York, New York (between 76th and 77th Streets) America Tyson's Corner 1994 11,000 400 2014 McLean, Virginia B. Smith's(5) Union Station 1994 8,600 280 2009 Washington, D.C. Lutece East 50th Street 1994 2,500 92 2019 New York, New York (between 2nd and 3rd Avenues) Lorelei Restaurant Islamorada, Florida 1994 10,000 400 2029 and Cabana Bar Columbus Bakery Columbus Avenue 1988 2,000 25 2002 New York, New York (between 82nd and 83rd Streets) Bryant Park Grill Bryant Park 1995 25,000 180-(820) 2025 & Cafe New York, New York -5- Seating Capacity(2) Restaurant Size Indoor- Lease Name Location Year Opened(1) (Square feet) (Outdoor) Expiration(3) Columbus Bakery First Avenue 1995 2000 75 2006 New York, New York (between 52nd and 53rd Streets) The Market at Newport Office Tower 1995 7,500 250 2015 Newport (7) 525 Washington Blvd. Jersey City, New Jersey Universal Studios 100 Universal City 1996 8,000 280 (8) Cafeteria (7) Plaza, Unviveral City, California The Moving Warner Bros. 1996 1,000 48 (8) Picture Cafe (4) Studio Store New York, New York (at 57th Street) (1) Restaurants are, from time to time, renovated and/or renamed. "Year Opened" refers to the year in which the Company or an affiliated predecessor of the Company first opened, acquired or began managing a restaurant at the applicable location, notwithstanding that the restaurant may have been renovated and/or renamed since that date. (2) Seating capacity refers to the seating capacity of the indoor part of a restaurant available for dining in all seasons and weather conditions. Outdoor seating capacity, if applicable, is set forth in parentheses and refers to the seating capacity of terraces and sidewalk cafes which are available for dining only in the warm seasons and then only in clement weather. (3) Assumes the exercise of all available lease renewal options. (4) Restaurant owned by a third party and managed by the Company. Management fees earned by the Company are based either on a percentage of cash flow of the restaurant or a fixed amount or a combination of the two. (5) 20% of the stock of each of the corporate subsidiaries operating the two B. Smith's restaurants is owned by the manager of the restaurant. The corporate subsidiaries owning or managing all of the other facilities are wholly-owned by the Company. (6) The Company owns a 19% interest in the partnership which owns El Rio Grande. (7) Corporate cafeteria managed by the Company. (8) The management agreement for this corporate dining facility is terminable by either party upon 60 days' notice. -6- RESTAURANT EXPANSION The Company has entered into an agreement with New York, New York Hotel & Casino, a joint venture between Primadonna Resorts, Inc. and MGM Grand, Inc., for the Company to design, build and operate a group of restaurants in the 2,100-room Las Vegas resort casino which is currently under construction and is expected to open in early January 1997. The Company is in the process of building a 450-seat restaurant (to be named America and to be modeled after the Company's other America restaurants), a 160-seat steakhouse (to be named Gallagher's under a license agreement from the owner of the New York restaurant of that name), a 120-seat restaurant (to be named Gonzalez y Gonzalez and to be modeled after the Company's New York restaurant of the same name) and a group of nine small fast food restaurants in a food court with a New York theme. In addition, the Company will operate the hotel's room service, its banquet facilities and its employee cafeteria. The restaurant facilities at the New York, New York Hotel & Casino represent the Company's first effort at designing, constructing and operating restaurants in Las Vegas and the first such facilities in conjunction with a large-scale hotel and casino operation. The number of patrons expected to be served at the various facilities at the New York, New York Hotel & Casino far exceeds the number of patrons served by the Company in any other single location. The Company recently signed a lease for a 10,000 square foot site in the World Financial Center in downtown New York City where the Company intends to open An American Place Grill restaurant. The site was formerly occupied by a restaurant and the Company does not therefore anticpate that it will be necessary to incur significant capital expenditures in connection with the opening of this restaurant. The Company has also recently reached an agreement in principle to manage the restaurant and other food service facilities at three hotel and casino facilities located in Primm, Nevada and owned by Primadonna Resorts, Inc., one of the partners in the New York, New York Hotel & Casino. During the third quarter of fiscal 1996, the Company purchased two restaurants, Jim McMullen and Mackinac Bar and Grill, which it had been managing. During the first quarter of fiscal 1995, the Company opened its second B. Smith's, this one in Union Station, Washington D.C. During fiscal 1994, the Company entered into agreements to acquire Lutece in New York City and the Lorelei Restaurant and Cabana Bar in Islamorada, Florida, both of which acquisitions were completed in the first quarter of fiscal 1995. During the first quarter of fiscal 1996, the Company opened a bakery (another Columbus Bakery), operating on a retail basis similar to that of the existing Columbus Bakery, in premises adjacent to the Company's Metropolitan Cafe restaurant on First Avenue in Manhattan. During fiscal 1995, the Company converted a restaurant on Columbus Avenue in Manhattan into the Columbus Bakery. Both Columbus Bakery facilities supply baked goods to other facilities of the Company in Manhattan and also sell at retail, coffee, baked goods and prepared foods on a "take out" basis or for on premise consumption. In the third fiscal quarter of 1995, the Company opened a major facility in Bryant Park, Manhattan. The facility includes a restaurant, the Bryant Park Grill and an outdoor cafe, the Bryant Park Cafe. The Bryant Park Grill has 180 seats indoors plus 350 additional seats on its roof and in an adjacent outdoor garden. The Bryant Park Cafe has 470 outdoor seats in the Bryant Park terrace. The opening of a new restaurant is invariably accompanied by substantial pre-opening expenses and early operating losses associated with the training of personnel, excess kitchen costs and costs of supervision and other expenses during the pre-opening period and during a post-opening "shake out" period until operations can be considered to be functioning normally. The amount of such pre-opening expense and early -7- operating loss can generally be expected to depend upon the size and complexity of the facility being opened. The Company estimates that such pre-opening expenses and early operating losses were approximately $950,000 in fiscal 1995 in connection with the opening of B. Smith's in Washington, the Columbus Bakery and the Company's Bryant Park facilities and approximately $200,000 in fiscal 1996 in connection with the opening of the facilities at the New York, New York Hotel & Casino. The Company expects to incur extensive additional pre-opening expenses and early operating losses in connection with the opening of its Las Vegas operations. The Company's restaurants generally do not achieve substantial increases from year to year in net sales or profits. The Company will have to continue to open new and successful restaurants or expand existing restaurants to achieve significant increases in net sales or to replace net sales of restaurants which experience declining popularity or which close because of lease expirations or other reasons. After a restaurant is opened, there can be no assurance that such restaurant will be successful, particularly since in many instances the Company will not operate new restaurants under a tradename currently used by the Company, thereby requiring each new restaurant to establish its own identity. The Company intends to continue to direct its restaurant expertise and financial resources in developing larger restaurants benefitting from the high patron traffic of unique locations, such as the Sequoia restaurants in the South Street Seaport in New York and the Washington Harbour in Washington, the America and B. Smith's restaurants in Union Station in Washington, the Bryant Park facilities in New York and the planned Las Vegas facilities. Nevertheless, the Company also intends to take advantage of other opportunities considered to be favorable when they occur, such as the acquisition of the highly regarded restaurant Lutece. RECENT RESTAURANT DISPOSITIONS In the third quarter of fiscal 1996, the Company sold the Whale's Tail restaurant in Oxnard, California, which the Company had acquired in November 1993. In the first quarter of fiscal 1997, the Company sold three of its smaller restaurants (Mackinac Bar & Grill, The Museum Cafe and Albuquerque Eats/The Rodeo Bar), each of which was operating at a loss at the time of its sale. RESTAURANT MANAGEMENT Each restaurant is managed by its own manager and has its own chef. Food products and other supplies are purchased from various unaffiliated suppliers, in most cases by the Company's headquarters personnel. Each of the Company's restaurants has two or more assistant managers and assistant chefs. The executive chef department designs menus and supervises the kitchens. Financial and management control is maintained at the corporate level through the use of an automated data processing system that includes centralized accounting and reporting. The Company has developed its own proprietary software which processes information input daily at the Company's restaurants. The Company believes that the information generated by this process enables it to monitor closely the activities at each restaurant and enhances the Company's ability to effectively manage its restaurants. EMPLOYEES At December 7, 1996, the Company employed 1,942 persons (including employees at managed facilities), 37 of whom were headquarters personnel, 127 of whom were restaurant management personnel, 530 of whom were kitchen personnel and 1,175 of whom were restaurant service personnel. A number of the -8- Company's restaurant service personnel are employed on a part-time basis. Changes in minimum wage levels may affect the labor costs of the Company and the restaurant industry generally because a large percentage of restaurant personnel are paid at or slightly above the minimum wage. With the exception of the employees at Lutece in New York, the Company's employees are not covered by a collective bargaining agreement. The Company believes its employee relations are satisfactory. COMPETITION The restaurant business is intensely competitive and involves a high degree of risk. The Company believes that a large number of new restaurants open each year and that a significant number of them do not succeed. Even successful restaurants can rapidly lose popularity due to changes in consumer tastes, economic conditions and population and traffic patterns, turnover in key personnel, the opening of competitive restaurants, unfavorable reviews and other factors. There is active competition for competent chefs and management personnel and intense competition among major restaurateurs and food service companies for the larger, unique sites suitable for restaurants. GOVERNMENT REGULATION The Company is subject to various federal, state and local laws and regulations affecting its business, including a variety of regulatory provisions relating to the wholesomeness of food, sanitation, health, safety and licensing in the sale of alcoholic beverages. A number of the Company's restaurants have open or enclosed outdoor cafes which require the approval of, or licensing by, a number of governmental agencies. The suspension by any regulatory agency of the food service or the liquor license of any of the Company's restaurants would have a material adverse effect upon the affected restaurant and may adversely affect the Company as a whole. The New York State Liquor Authority must approve any transaction in which a shareholder of the Company increases his holdings to 10% or more of the outstanding capital stock of the Company and any transaction involving 10% or more of the outstanding capital stock of the Company. SEASONAL NATURE OF BUSINESS The Company's business is highly seasonal. The second quarter of the Company's fiscal year, consisting of the non-holiday portion of the cold weather season in New York, Boston and Washington (January, February and March), is the poorest performing quarter. The Company achieves its best results during the warm weather, attributable to the Company's extensive outdoor dining availability, particularly at Bryant Park and Sequoia in Washington (the Company's largest restaurants) and the Company's outdoor cafes. The Company anticipates that its facilities in Las Vegas will operate on a more level basis through the year and, accordingly, may have the effect of reducing the seasonal nature of the Company's business as it currently exists. -9- ITEM 2. PROPERTIES The Company's restaurant facilities identified in the chart above and its executive offices are occupied under leases. Most of the Company's restaurant leases provide for the payment of base rents plus real estate taxes, insurance and other expenses and, in certain instances, for the payment of a percentage of the Company's sales at such facility. These leases (excluding leases for managed restaurants) have initial terms expiring as follows: Years Lease Number of Term Expire Facilities 1996-2000 8 2001-2005 8 2006-2010 8 2011-2015 3 2016-2020 1 2021-2025 1 2026-2030 1 The Company's executive, administrative and clerical offices, located in approximately 8,500 square feet of office space at 85 Fifth Avenue, New York, New York, are occupied under a lease which expires in October 2008, which includes one five-year renewal option. The Company maintains an office in Washington, D.C. for its catering operations, the lease for which expires in December 1997. For information concerning the Company's future minimum rental commitments under non-cancelable operating leases, see Note 8 of Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of its business, the Company is a party to various lawsuits arising from accidents at its restaurants and workmen's compensation claims, which are generally handled by the Company's insurance carriers. 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. Various discrimination suits are currently pending, some of which involve substantial claims for compensatory and punitive damages. The Company does not believe that any of such suits will have a materially adverse effect upon the Company, its financial condition or operations. A minority shareholder of two of the Company's subsidiaries has made various demands which, if proven, would result in a claim against the Company for approximately $300,000. The Company believes the demands are without merit and the Company intends to defend against them vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. -10- EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the names and ages of executive officers of the Company and all offices held by each person: Name Age Positions and Offices Michael Weinstein 53 President Vincent Pascal 53 Vice President and Secretary Robert Towers 49 Vice President and Treasurer Andrew Kuruc 38 Vice President and Controller Each executive officer of the Company serves at the pleasure of the Board of Directors and until his successor is duly elected and qualifies. Michael Weinstein has been President and a director of the Company since its inception in January 1983. Since 1978, Mr. Weinstein has been an officer, director and 25% shareholder of Easy Diners, Inc., a restaurant management company which operates two restaurants in New York City. Since 1976, Mr. Weinstein has been an officer, director and shareholder of Teacher's Restaurant Limited, which owns and operates another restaurant in New York City. Neither Easy Diners, Inc. nor Teachers Restaurant Limited is a parent, subsidiary or other affiliate of the Company. Mr. Weinstein spends substantially all of his business time on Company-related matters. Vincent Pascal was elected Vice President, Assistant Secretary and a director of the Company in October 1985. Mr. Pascal became Secretary of the Company in January 1994. Robert Towers has been employed by the Company since November 1983 and was elected Vice President, Treasurer and a director in March 1987. Andrew Kuruc has been employed as Controller of the Company since April 1987 and was elected as a director of the Company in November 1989. -11- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Effective December 14, 1994, the Company's Common Stock, $.01 par value, began trading in the over-the-counter market on the Nasdaq National Market ("Nasdaq") under the symbol "ARKR". For more than the two-year period prior thereto, the Company's Common Stock was traded on the American Stock Exchange ("AMEX"). The high and low sale prices for the Common Stock from October 3, 1994 through September 30, 1996 are as follows: Calendar 1994 High Low Fourth Quarter October 1 - December 13 (AMEX) 8 3/8 7 December 14 - December 31 (Nasdaq) 8 1/2 7 Calendar 1995 First Quarter 10 1/4 7 1/2 Second Quarter 10 1/2 8 1/4 Third Quarter 10 1/4 8 Fourth Quarter 10 7 1/4 Calendar 1996 First Quarter 8 6 Second Quarter 11 1/2 7 1/4 Third Quarter 10 7 3/4 DIVIDENDS The Company has not any paid cash dividends since its inception and does not intend to pay dividends in the foreseeable future. Under the terms of the Second Amended and Restated Credit Agreement between the Company and its main lender, the Company may pay cash dividends and redeem shares of Common Stock in any fiscal year only to the extent of an aggregate amount equal to 20% of the Company's consolidated operating cash flow for such fiscal year. NUMBER OF SHAREHOLDERS As of December 19, 1996, there were 104 holders of record of the Company's Common Stock. -12- ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth certain financial data for the fiscal years ended 1992 through 1996. This information should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto appearing at page F-1. Year Ended ---------------------------------------------------------------------- September 28, September 30, October 1, October 2, October 3, 1996 1995 1994 1993 1992 OPERATING DATA: Net sales $76,795,940 $73,026,907 $60,404,339 $55,973,227 $49,283,481 Gross restaurant profit 55,934,475 53,001,963 43,562,653 40,364,491 35,406,559 Operating income 507,996 960,794 840,452 3,384,230 2,671,891 Other income, net 743,615 937,763 507,200 268,606 250,558 Income before provision for income taxes and extraordinary item 1,241,611 1,898,557 1,347,652 3,652,836 2,922,449 Income (loss) before extraordinary item 788,762 1,121,126 643,032 1,817,637 1,473,133 NET INCOME (LOSS) 788,762 1,121,126 1,150,802 1,936,737 1,546,033 Income (loss) per share before extraordinary item and cumulative effect of accounting change $ 0.24 $ 0.34 $ 0.20 $ 0.57 $ 0.48 NET INCOME (LOSS) PER SHARE $ 0.24 $ 0.34 $ 0.36 $ 0.61 $ 0.50 Weighted average number of shares used in computation 3,241,394 3,251,336 3,225,680 3,198,429 3,101,719 BALANCE SHEET DATA (end of period): Total assets 32,379,479 28,541,920 21,768,747 19,037,744 17,579,531 Working capital (deficit) (1,303,920) 40,996 1,517,601 490,956 (151,773) Long-term debt 6,403,866 4,014,162 761,386 165,728 1,537,243 Shareholders' equity 17,804,394 16,706,301 15,210,202 13,908,116 11,444,566 Shareholders' equity per share 5.49 5.24 4.88 4.51 3.88 Facilities in operation at end of year, including managed 32 32 27 26 24 -13- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACCOUNTING PERIOD The Company's fiscal year ends on the Saturday nearest September 30. The fiscal years ended September 28, 1996, September 30, 1995 and October 1, 1994 included 52 weeks. NET SALES Net sales at restaurants and bars owned by the Company increased by 5.2% from fiscal 1995 to fiscal 1996 and by 20.9% from fiscal 1994 to fiscal 1995. The increase in fiscal 1996 was primarily due to the first full operating year of one of the Company's largest restaurant which opened in fiscal 1995 (Bryant Park Grill & Cafe) and a full operating year of a restaurant which was closed for part of fiscal 1995 (Ernie's), offset in part by a decrease in sales resulting from a restaurant which the Company sold in fiscal 1996 (Whale's Tail) and from declining net sales at four restaurants classified as restaurants held for sale (of which three were sold in the first quarter of fiscal 1997 (Museum Cafe, Rodeo Bar and Mackinac Bar and Grill). Same store sales in fiscal 1996 decreased by 3.0% principally due to decreased customer counts. The increase in fiscal 1995 was due primarily to sales from restaurants acquired or opened in fiscal 1995 (Bryant Park Grill & Cafe, B. Smith's in Washington, DC, Lorelei Restaurant and Cabana Bar and Lutece) and the first full operating year of a restaurant opened in fiscal 1994 (America in McLean, Virginia). Same store sales in fiscal 1995 decreased by 0.8%. COSTS AND EXPENSES The Company's cost of sales consists principally of food and beverage costs at restaurants and bars owned by the Company. Cost of sales as a percentage of net sales was 27.2% in fiscal 1996, 27.4% in fiscal 1995 and 27.9% in 1994. The Company believes its sophisticated centralized purchasing system has enabled it to efficiently utilize its purchasing power by upgrading product quality while controlling costs. Operating expenses of the Company, consisting of restaurant payroll, occupancy and other expenses at restaurants and bars owned by the Company, as a percentage of net sales, were 67.9% in fiscal 1996, as compared to 66.7% in fiscal 1995 and 64.2% in fiscal 1994. The increase in fiscal 1996 from fiscal 1995 was primarily due to a decline in same store sales in particular at the restaurants held for sale combined with certain losses on the disposition of those restaurants. Restaurant payroll as a percentage of net sales was 36.1% in fiscal 1996, 35.9% in fiscal 1995 and 34.9% in fiscal 1994. Payroll expenses in fiscal 1995 were impacted by costs associated with new restaurant openings and to a special charge related to the settlement of a claim at one of the Company's New York restaurants alleging violations of federal and state wage and hour laws. Occupancy expenses (consisting of rent, rent taxes, real estate taxes, insurance and utility costs) was 12.8% in fiscal 1996 and were approximately 12.5% in both fiscal 1995 and fiscal 1994. The Company incurred approximately $200,000 of pre-opening and early operating losses at newly opened restaurants in fiscal 1996, $950,000 in fiscal 1995 and $430,000 in fiscal 1994. The Company typically incurs significant pre-opening expenses in connection with its new restaurants which are expensed as incurred. Furthermore, it is not uncommon that such restaurants experience operating losses during the early months of operation. -14- General and administrative expenses, as a percentage of net sales, remained constant at 5.8% in fiscal 1996 as compared to fiscal 1995 and were 6.6% in fiscal 1994. The decrease in fiscal 1995 was primarily due to the fact that the Company was able to manage the 20.9% increase in net sales with only a nominal increase in general and administrative expenses. In fiscal 1994 the Company had increased development staff in expectation of the fiscal 1995 new restaurants and acquisitions. If net sales at managed restaurants were included in consolidated net sales, general and administrative expenses as a percentage of net sales would have been 5.0% in both fiscal 1996 and fiscal 1995 and 5.6% in fiscal 1994. As of September 28, 1996 the Company managed seven facilities owned by others (El Rio Grande, and Woody's in Manhattan, The Universal Studios Corporate Dining Facilities in Universal City, California, The Market at Newport in Jersey City, New Jersey, the Marketplace Cafe, Oar Bar & Grill, and the Brewskeller Pub in Boston, Massachusetts). Net sales of these restaurants, which are not included in net sales, were $12,802,000 during fiscal 1996, $10,839,000 during fiscal 1995 and, $10,643,000 during fiscal 1994. Management fee income in fiscal 1994 is net of charges totaling $719,000 from the write-off of unrecoverable advances to a managed restaurant in Miami, Florida, which the Company no longer manages and from the write-off of a discontinued New York catering operation. Interest expense was $426,000 in fiscal, $359,00 in fiscal 1995 and $143,000 in fiscal 1994. The increases in fiscal 1996 from fiscal 1995 and in fiscal 1995 from 1994 were principally due to borrowings to finance the new restaurant openings and acquisitions. Interest income was $87,000 in fiscal 1996, $78,000 in fiscal 1995, $93,000 in fiscal 1994. Other income, which generally consists of purchasing service fees, and the sale of logo T-shirts at various restaurants, was $1,083,000 in fiscal 1996, $1,219,000 in fiscal 1995 and $557,000 in fiscal 1994. A significant portion of the amounts received in fiscal 1996 and fiscal 1995 were principally due to amounts the Company received by a third party due to the temporary closing in fiscal 1994 and fiscal 1995 of a restaurant (Ernie's). INCOME TAXES The provision for income taxes reflects Federal income taxes calculated on a consolidated basis and state and local income taxes calculated by each New York subsidiary on a non consolidated basis. Most of the restaurants owned or managed by the Company are owned or managed by a separate subsidiary. For state and local income tax purposes, the losses incurred by a subsidiary may only be used to offset that subsidiary's income with the exception of the restaurants which operate in the District of Columbia . Accordingly, the Company's overall effective tax rate has varied depending on the level of losses incurred at individual subsidiaries. The Company's overall effective tax rate was 37% in fiscal 1996, 40% in fiscal 1995 and 52% in fiscal 1994. The Company's effective rate in fiscal 1996 and fiscal 1995 was significantly benefited by tax credits available to the Company for FICA taxes paid by the Company with respect to tip income of service personnel. The effective tax rate in fiscal 1994 was negatively impacted by the charges to management fee income totaling $719,000 from the write-off of unrecoverable advances to a managed restaurant in Miami, Florida, which the Company no longer manages and from the write-off of a discontinued New York catering operation. The Company's overall effective tax rate in the future will be affected by factors such as the level of losses incurred at the Company's New York facilities (which cannot be consolidated for state and local tax purposes), pre-tax income earned outside of New York City (where income tax rates are substantially lower in comparison to New York income tax rates) and the utilization of state and local net operating loss -15- carry forwards. In order to more effectively utilize tax loss carry forwards at restaurants that were unprofitable, the Company has merged certain profitable subsidiaries with certain loss subsidiaries. As a result of the enactment of the Revenue Reconciliation Act of 1993, the Company is entitled, commencing January 1, 1994, to a tax credit based on the amount of FICA taxes paid by the Company with respect to the tip income of restaurant service personnel. The net benefit to the Company was $349,000 in fiscal, $299,000 in fiscal 1995 and $173,000 in fiscal 1994. The Company adopted the Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" (SFAS No. 109), as of the beginning of fiscal 1994. This statement supersedes Accounting Principles Board Opinion No. 11 and requires an asset and liability approach for financial accounting and reporting of income taxes. The cumulative effect of this adoption was to increase net income by $508,000 in fiscal 1994. LIQUIDITY AND SOURCES OF CAPITAL The Company's primary source of capital is cash provided by operations and funds available from the $12,000,000 revolving credit agreement with its main bank. The Company utilizes capital primarily to fund the cost of developing and opening new restaurants and acquiring existing restaurants. The net cash used in investing activities in fiscal 1996 ($6,693,000) fiscal 1995 ($9,096,000) and fiscal 1994 ($3,008,000) was principally from the Company's continued investment in fixed assets associated with constructing new restaurants and acquiring existing restaurants. In fiscal 1996 the Company commenced construction of a group of restaurant facilities (the "Business -- Restaurant Expansion") in the 2,035 room New York New York Hotel & Casino resort in Las Vegas, Nevada which is scheduled to open in January 1997. In fiscal 1995, the Company opened a 1,000 seat restaurant in Bryant Park, a nine-acre park behind the New York City Public Library (Bryant Park Grill & Cafe) and opened another restaurant in Union Station in Washington, DC (B.Smith's, the Company's second such restaurant). The Company also acquired two restaurants - a renowned French restaurant in New York City (Lutece) and a casual restaurant and bar in the Florida Keys (Lorelei Restaurant and Cabana Bar). In fiscal 1994, the Company opened a 400 seat restaurant (America in Tyson's Corner Shopping Complex in McLean, Virginia) and completed the acquisition of a restaurant in Oxnard, California (Whale's Tail). The net cash provided by financing activities in fiscal 1996 was principally from the Company's borrowings on its main credit facility exceeding repayments on such facility. In fiscal 1995 net cash provided by financing activities was principally from the Company's borrowings on its main credit facility exceeding repayments on such facility and from the sale leaseback of various kitchen equipment in a restaurant opened in New York City (Bryant Park Grill & Cafe). In fiscal 1994 the Company received proceeds from the sale leaseback of various kitchen equipment in the restaurant opened in McLean, Virginia (America). At September 28, 1996 the Company had a working capital deficit of $1,304,000 as compared to working capital of $41,000 at September 30, 1995. The significant decrease in working capital in fiscal 1996 from fiscal 1995 was principally due to cash expended for the Las Vegas restaurants. The restaurant business does not require the maintenance of significant inventories of receivables, thus the Company is able to operate with minimal and even negative working capital. In March 1996 the Company and its main bank agreed to an extension and increase of the existing Revolving Credit and Term Loan Facility. The agreement includes a $5,000,000 facility for working capital purposes at the Company's existing restaurants and a $7,000,000 facility for use in construction of -16- and as working capital for the Las Vegas restaurants which are scheduled to open in January 1997. The Company expects that its capital commitments for the Las Vegas restaurants to be approximately $15,000,000. The two facilities each have two year terms enabling the Company to borrow until March 1998 at which time outstanding loans may be converted into two year term loans. The $5,000,000 facility will convert into a two year self-amortizing term loan and the $7,000,000 facility will convert into a two year loan amortizing $6,000,000 over the two year period with the balance of $1,000,000 paid at maturity. At September 28, 1996, the Company had borrowings of $5,400,000 outstanding under this agreement. The Company also a four year $2,000,000 Letter of Credit Facility for use in lieu of lease security deposits and a one year (extendible for an additional six months) $2,000,000 Letter of Credit of Facility to be used to assure construction of the Las Vegas restaurants. At September 28, 1996 the Company had delivered $3,325,000 in irrevocable letters of credit on these two facilities. In December 1996, the Company raised $6,065,994 through a private placement of 551,454 shares of its common stock at $11 per share. The proceeds were used to repay a portion of the Company's outstanding borrowings on its Revolving Credit and Term Loan Facility and for the payment of capital expenditures on the Las Vegas restaurants. The amount of indebtedness that may be incurred by the Company is limited by the revolving credit agreement with its main bank. Certain provisions of the agreement may impair the Company's ability to borrow funds. RESTAURANT EXPANSION The Company recently signed a lease for a new facility in the World Financial Center in downtown New York City where the Company intends to open An American Place Grill restaurant. The site was formerly occupied by a restaurant and the Company does not therefore anticpate that it will be necessary to incur significant capital expenditures in connection with the opening of this restaurant. The Company has also recently reached an agreement in principle to manage the restaurant and other food service facilities at three hotel and casino facilities located in Primm, Nevada and owned by Primadonna Resorts, Inc., one of the partners in the New York, New York Hotel & Casino. These arrangements will not require any significant capital expenditures by the Company. Although the Company is not currently committed to any other projects, the Company is exploring additional opportunities for expansion of its business. The Company expects to fund its projects through cash from operations and existing credit facilities. Additional expansion may require additional external financing. RECENT DEVELOPMENTS In the first quarter of fiscal 1997, the Company sold three of its smaller restaurants (Mackinac Bar & Grill, The Museum Cafe and Albuquerque Eats/The Rodeo Bar), each of which was operating at a loss at the time of its sale. The Company recognized a net gain of approximately $150,000 in connection with these sales. -17- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS ON WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL DISCLOSURE None. -18- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See Part I, Item 4. "Executive Officers of the Company." Other information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than January 27, 1997 pursuant to Regulation 14A of the General Rules and Regulations ("Regulation 14A") under the Securities Exchange Act of 1934, as amended. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than January 27, 1997 pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than January 27, 1997 pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than January 27, 1997 pursuant to Regulation 14A. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS: PAGE Report of Independent Certified Public Accountants F-1 Consolidated Balance Sheets -- at September 28, 1996 and September 30, 1995 F-2 Consolidated Statements of Operations -- For each of the three fiscal years ended September 28, 1996, September 30, 1995 and October 1, 1994 F-3 Consolidated Statements of Shareholders' Equity -- For each of the three fiscal years ended September 28, 1996, September 30, 1995 and October 1, 1994 F-4 Consolidated Statements of Cash Flows -- For each of the three fiscal years ended September 28, 1996, September 30, 1995 and October 1, 1994 F-5 Notes to Consolidated Financial Statements F-6 -19- (2) EXHIBITS: 3.1 Certificate of Incorporation of the Registrant, filed on January 4, 1983, incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended October 1, 1994 (the "1994 10-K"). 3.2 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed on October 11, 1985, incorporated by reference to Exhibit 3.2 to the 1994 10-K. 3.3 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed on July 21, 1988, incorporated by reference to Exhibit 3.3 to the 1994 10-K. 3.4 By-Laws of the Registrant, incorporated by reference to Exhibit 3.4 to the 1994 10-K. 10.1 Amended and Restated Redemption Agreement dated June 29, 1993 between the Registrant and Michael Weinstein, incorporated by reference to Exhibit 10.1 to the 1994 10-K. 10.2 Form of Indemnification Agreement entered into between the Registrant and each of Michael Weinstein, Ernest Bogen, Vincent Pascal, Robert Towers, Jay Galin, Andrew Kuruc and Donald D. Shack, incorporated by reference to Exhibit 10.2 to the 1994 10-K. 10.3 Ark Restaurants Corp. Amended Stock Option Plan, incorporated by reference to Exhibit 10.3 to the 1994 10-K. 10.4 Second Amended and Restated Credit Agreement dated as of March 5, 1996 between the Company and Bank Leumi Trust Company of New York, incorporated by reference to Exhibit 10.52 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1996 (the "March 1996 10-Q"). 10.5 Ark Restaurants Corp. 1996 Stock Option Plan, incorporated by reference to Exhibit 10.53 to the March 1996 10-Q. *21 Subsidiaries of the Registrant. *23 Consent of Deloitte & Touche LLP. *27 Financial Data Schedule pursuant to Article 5 of Regulation S-X filed with EDGAR Version only. --------------------------------- *Filed Herewith (b) Reports on Form 8-K: None -20- INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Ark Restaurants Corp. We have audited the accompanying consolidated balance sheets of Ark Restaurants Corp. and its subsidiaries as of September 28, 1996 and September 30, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended September 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ark Restaurants Corp. and subsidiaries as of September 28, 1996 and September 30, 1995, and the results of their operations and their cash flows for each of the three fiscal years in the period ended September 28, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective October 3, 1993, the Company changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. New York, New York December 6, 1996 F-1 ARK RESTAURANTS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ---------------------------------------------------------------------------------------------------- September 28, September 30, ASSETS 1996 1995 CURRENT ASSETS: Cash and cash equivalents $ 907,003 $ 1,271,284 Accounts receivable 1,462,499 1,273,827 Current portion of long-term receivables (Note 2) 93,951 163,436 Inventories (Note 3) 840,216 888,344 Deferred income taxes (Note 11) 631,027 395,539 Prepaid expenses 464,571 957,018 Other current assets 409,374 534,852 ---------- ----------- Total current assets 4,808,641 5,484,300 ---------- ----------- LONG-TERM RECEIVABLES (Note 2) 360,344 1,414,909 ASSETS HELD FOR SALE (Note 3) 2,614,090 - FIXED ASSETS - At cost (Notes 4 and 7): Leasehold improvements 13,019,524 14,421,187 Furniture, fixtures and equipment 11,113,933 12,369,017 Leasehold improvements in progress 6,289,726 133,789 ---------- ----------- 30,423,183 26,923,993 Less accumulated depreciation and amortization 11,325,141 10,548,687 ---------- ----------- 19,098,042 16,375,306 ---------- ----------- INTANGIBLE ASSETS - Net (Note 4) 3,885,095 4,336,347 DEFERRED INCOME TAXES (Note 11) 933,547 476,543 OTHER ASSETS (Note 5) 679,720 454,515 ---------- ----------- $32,379,479 $ 28,541,920 ---------- ----------- ---------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable - trade $ 2,365,939 $ 2,035,769 Accrued expenses and other current liabilities (Note 6) 3,030,684 2,849,292 Current maturities of capital lease obligations (Note 8) 240,855 204,042 Current maturities of long-term debt (Note 7) 150,689 88,832 Accrued income taxes (Note 11) 324,394 265,369 ---------- ----------- Total current liabilities 6,112,561 5,443,304 ---------- ----------- OBLIGATIONS UNDER CAPITAL LEASES (Note 8) 662,347 929,985 LONG-TERM DEBT - Net of current maturities (Notes 4 and 7) 6,253,177 3,925,330 OPERATING LEASE DEFERRED CREDIT (Note 8) 1,547,000 1,537,000 COMMITMENTS (Notes 7 and 8) SHAREHOLDERS' EQUITY (Notes 7 and 9): Common stock par value S.01 per share - authorized, 10,000,000 shares; issued, 4,608,882 and 4,536,382 shares, respectively 46,089 45,364 Additional paid-in capital 7,79O,242 7,481,636 Retained earnings 11,215,462 10,426,700 ---------- ----------- 19,051,793 17,953,700 Less treasury stock, 1,345,337 shares 1,247,399 1,247,399 ---------- ----------- 17,804,394 16,706,301 ---------- ----------- $ 32,379,479 $ 28,541,920 ---------- ----------- ---------- ----------- See notes to consolidated financial statements. F-2 ARK RESTAURANTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------------------------------------------ Year Ended ------------------------------------------------------ September 28, September 30, October 1, 1996 1995 1994 NET SALES $ 76,795,940 $ 73,026,907 $ 60,404,339 COST OF SALES 20,861,465 20,024,944 16,841,686 ------------ ------------ ----------- Gross restaurant profit 55,934,475 53,001,963 43,562,653 MANAGEMENT FEE INCOME (Note 10) 1,204,808 925,332 59,159 ------------ ------------ ----------- 57,139,283 53,927,295 43,621,812 OPERATING EXPENSES: Payroll and payroll benefits 27,740,390 26,191,191 21,092,870 Occupancy 9,843,110 9,035,078 7,554,536 Depreciation 2,664,892 2,289,211 1,694,530 Other 11,918,198 11,227,851 8,427,639 ------------ ------------ ----------- 52,166,590 48,743,331 38,769,575 GENERAL AND ADMINISTRATIVE EXPENSES 4,474,697 4,223,170 4,011,785 ------------ ------------ ----------- 56,641,287 52,966,501 42,781,360 ------------ ------------ ----------- OPERATING INCOME 497,996 960,794 840,452 ------------ ------------ ----------- OTHER EXPENSE (INCOME): Interest expense (Note 7) 425,810 359,159 143,130 Interest income (86,708) (77,856) (93,347) Other income (Note 12) (1,082,717) (1,219,066) (556,983) ------------ ------------ ----------- (743,615) (937,763) (507,200) ------------ ------------ ----------- INCOME BEFORE PROVISION FOR INCOME TAXES AND CUMU- LATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 1,241,611 1,898,557 1,347,652 PROVISION FOR INCOME TAXES (Note 11) 452,849 777,431 704,620 ------------ ------------ ----------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 788,762 1,121,126 643,032 CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (Note 11) - - 507,770 ------------ ------------ ----------- NET INCOME $ 788,762 $ 1,121,126 $ 1,150,802 ------------ ------------ ----------- ------------ ------------ ----------- INCOME PER SHARE: Income before cumulative effect of a change in accounting principle $ .24 $ .34 $ .20 Cumulative effect of a change in accounting principle - - .16 ------------ ------------ ----------- NET INCOME $ .24 $ .34 $ .36 ------------ ------------ ----------- ------------ ------------ ----------- WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATIONS 3,241,394 3,251,336 3,225,680 ------------ ------------ ----------- ------------ ------------ ----------- See notes to consolidated financial statements. F-3 ARK RESTAURANTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock Additional Total --------------- Paid-In Retained Treasury Shareholders' Shares Amount Capital Earnings Stock Equity BALANCE, OCTOBER 2, 1993 4,430,582 $44,306 $6,956,437 $8,154,772 $(1,247,399) $13,908,116 Exercise of stock options 31,250 312 67,813 - - 68,125 Tax benefit on exercise of options - - 83,159 - - 83,159 Net income - - - 1,150,802 - 1,150,802 --------- -------- ---------- ----------- ------------ ---------- BALANCE, OCTOBER 1, 1994 4,461,832 44,618 7,107,409 9,305,574 (1,247,399) 15,210,202 Exercise of stock options 74,550 746 182,111 - - 182,857 Tax benefit on exercise of options - - 192,116 - - 192,116 Net income - - - 1,121,126 - 1,121,126 --------- -------- ---------- ----------- ------------ ---------- BALANCE SEPTEMBER 30, 1995 4,536,382 45,364 7,481,636 10,426,700 (1,247,399) 16,706,301 Exercise of stock options 72,500 725 183,650 184,375 Tax benefit on exercise of options 124,956 124,956 Net income 788,762 - 788,762 --------- -------- ---------- ----------- ----------- ---------- BALANCE, SEPTEMBER 28, 1996 4,608,882 $ 46,089 $7,790,242 $11,215,462 $(1,247,399) $17,804,394 --------- -------- ---------- ----------- ----------- ---------- --------- -------- ---------- ----------- ----------- ---------- See notes to consolidated financial statements. F-4 ARK RESTAURANTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended ------------------------------------------------------ September 28, September 30, October 1, 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Income before cumulative effect of a change in accounting principle $ 788,762 $1,121,126 $ 643,032 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of fixed assets 2,324,304 1,988,968 1,508,489 Amortization of intangibles 492,207 450,787 264,092 Provision for loss on sale of restaurants 297,000 - - Provision for uncollectible long-term receivables 96,000 100,000 200,000 Operating lease deferred credit 10,000 151,000 220,000 Deferred income taxes (692,492) (302,100) (107,005) Changes in assets and liabilities: Increase in accounts receivable (184,672) (188,651) (420,737) (Increase) decrease in inventories (79,847) (126,205) 9,450 Decrease (increase) in prepaid expenses 492,447 (564,747) 34,734 (Increase) decrease in other assets, net (106,727) 223,411 647,891 Increase in accounts payable - trade 330,167 229,830 315,830 Increase (decrease) in accrued income taxes 59,025 238,211 (47,819) Increase (decrease) in accrued expenses and other current liabilities 181,392 397,528 (66,257) ----------- ----------- ----------- Net cash provided by operating activities 4,007,566 3,719,158 3,201,700 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to fixed assets (6,833,018) (6,610,540) (2,820,366) Additions to intangible assets (110,849) (145,872) (39,887) Issuance of demand notes and long-term receivables (63,O92) (224,913) (206,512) Payments received on demand notes and long-term receivables 171,651 220,772 58,940 Restaurant sale 250,000 - - Restaurant acquisitions (108,000) (2,335,712) - ----------- ----------- ----------- Net cash used in investing activities (6,693,308) (9,O96,265) (3,007,825) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payment on long-term debt (1,857,045) (1,847,224) (2,095,342) Issuance of long-tam debt 4,100,000 4,500,000 2,250,000 Exercise of stock options 309,331 374,973 151,284 Principal payment on capital lease obligations (230,825) (117,218) (52,144) Proceeds from sale lease back - 824,947 478,442 ----------- ----------- ----------- Net cash provided by financing activities 2,321,461 3,735,478 732,240 ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (364,281) (1,641,629) 926,115 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,271,284 2,912,913 1,986,798 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 907,003 $ 1,271,284 $ 2,912,913 ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL INFORMATION: Cash payments for the following were: Interest $ 515,810 $ 422,159 $ 143,130 ----------- ----------- ------------ ----------- ----------- ------------ Income taxes $ 966,434 $ 649,689 $ 776,473 ----------- ----------- ------------ ----------- ----------- ------------ See notes to consolidated financial statements. F-5 ARK RESTAURANTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994 - -------------------------------------------------------------------------------- 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ark Restaurants Corp. and subsidiaries (the "Company") own and operate 20 restaurants, and manage 5 restaurants, of which 15 are in New York City, 4 in Washington, D.C., three in Boston and one each in Rhinebeck, New York, McLean, Virginia, and Islamorada, Florida. Additionally, the Company operates catering businesses in New York City and Washington, D.C., as well as wholesale and retail bakeries in New York City, a cafe at the Warner Bros. store in New York City and corporate dining facilities at Universal Studios, California and in an office building in Jersey City, New Jersey. ACCOUNTING PERIOD - The Company's fiscal year ends on the Saturday nearest September 30. The fiscal years ended September 28, 1996, September 30, 1995 and October 1, 1994 included 52 weeks. SIGNIFICANT ESTIMATES - In the process of preparing its consolidated financial statements, the Company estimates the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. The primary estimates underlying the Company's financial statements include allowances for potential bad debts on accounts and notes receivable, the useful lives and recoverability of its assets, such as property and intangibles, fair values of financial instruments, the realizable value of its tax assets and other matters. Management bases its estimates on certain assumptions, which they believe are reasonable in the circumstances, and while actual results could differ from those estimates, management does not believe that any change in those assumptions in the near term would have a material effect on the Company's consolidated financial position or the results of operation. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliated companies where the Company is able to exercise significant influence over operating and financial policies even though the Company holds 50% or less of the voting stock, are accounted for under the equity method. CASH EQUIVALENTS - Cash equivalents include instruments with original maturities of three months or less. INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out) or market, and consist of food and beverages. FIXED ASSETS - Leasehold improvements and furniture, fixtures and equipment are stated at cost. Depreciation of furniture, fixtures and equipment (including equipment under capital leases) is computed using the straight-line method over the estimated useful lives of the respective assets (7 years). Amortization of improvements to leased properties is computed using the straight-line method based upon the initial term of the applicable lease or the estimated useful life of the improvements, whichever is less, and ranges from 5 to 35 years. F-6 Certain costs incurred during the construction period of restaurants, including rental of premises, training and payroll, are expensed as incurred. INTANGIBLE AND OTHER ASSETS - Costs associated with acquiring leases and subleases, principally purchased leasehold rights, have been capitalized and are being amortized on the straight-line method based upon the initial terms of the applicable lease agreements, which range from 10 to 21 years. Goodwill recorded in connection with the acquisition of shares of the Company's common stock from a former shareholder, as discussed in Note 4, is being amortized over a period of 40 years. Goodwill arising from restaurant acquisitions is being amortized over a period of 15 years. Legal and other costs incurred to organize restaurant corporations are capitalized as organization costs and are amortized over a period of 5 years. Covenants not to compete arising from restaurant acquisitions are amortized over the contractual period of 5 years. Certain legal and bank commitment fees incurred in connection with the Company's Revolving Credit and Term Loan Facility were capitalized as deferred financing fees and are being amortized over four years, the term of the facility. The Company periodically assesses the recoverability of intangible assets on an asset by asset basis using the projected undiscounted operating income. OPERATING LEASE DEFERRED CREDIT - Several of the Company's operating leases contain predetermined increases in the rentals payable during the term of such leases. For these leases, the aggregate rental expense over the lease term is recognized on a straight-line basis over the lease term. The excess of the expense charged to operations in any year and amounts payable under the leases during that year are recorded as a deferred credit. The deferred credit subsequently reverses over the lease term (Note 8). OCCUPANCY EXPENSES - Occupancy expenses include rent, rent taxes, real estate taxes, insurance and utility costs. INCOME TAXES - In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Statement 109 requires a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes enactment date. Effective October 3, 1993, the Company adopted Statement 109 and has reported the cumulative effect of that change in the method of accounting for income taxes in the 1994 statement of operations. F-7 INCOME PER SHARE OF COMMON STOCK - Per share data is based upon the weighted average number of shares of common stock and common stock equivalents outstanding during each year. Common stock equivalents consist of dilutive stock options. Fully dilutive income per share of common stock is not shown for the effect is not material. FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - The Financial Accounting Standards Board has issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for the Impairment of Long-Lived Assets to Be Disposed of ("SFAS 121"), which requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This Statement will be adopted by the Company as of September 29, 1996. The effect of the adoption of SFAS 121 on the Company's consolidated financial statements is not expected to be material. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. Under the provisions of SFAS No. 123, effective for the fiscal year beginning September 29, 1996, the Company may either adopt the new fair value-based accounting method or continue the intrinsic value-based method for employee stock-based compensation and provide pro forma disclosure of net income and earnings per share as if the accounting provisions of SFAS No. 123 had been adopted. The Company plans to adopt only the disclosure requirements of SFAS No. 123. The Company generally does not grant options to outsiders, accordingly, the adoption of SFAS No. 123 is not expected to have a material effect on the Company's consolidated net earnings or cash flows. RECLASSIFICATIONS - Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. F-8 2. LONG-TERM RECEIVABLES Long-term receivables consist of the following: September 28, September 30, 1996 1995 Advances for construction, working capital and certain bankruptcy claims, at one of the Company's managed locations, at prime interest rate plus 2% (a) $ - $ 860,131 Advances for construction and working capital, at one of the Company's managed locations, at 15% interest; due in monthly installments through December 2000 270,829 311,674 Advances for construction, at one of the Company's managed locations, at prime plus 1%; due in monthly installments through December 1999 79,521 99,244 Note receivable, at 8% interest, due in monthly installments, through August2001 (b) - 186,612 Note receivable, secured by personal guarantees of officers of a managed restaurant and fixed assets at that location, at 15% interest; due in monWy installments, through September 2000 98,548 115,287 Other 5,397 5,397 -------- ---------- 454,295 1,578,345 -------- ---------- Less current portion 93,951 163,436 -------- ---------- $360,344 $1,414,909 -------- ---------- -------- ---------- (a) In June 1996 the Company acquired this restaurant which had been operated under a management agreement since December 1990. The Company paid the former owners $108,000 in cash and canceled advances totaling approximately $880,000. The purchase price totaling $1,026,000 was then allocated to fixed assets and intangible assets (Note 4). (b) In fiscal 1993 the Company was issued a note by a third party who subleased and operated a restaurant since 1989 from the Company. In fiscal 1996, the third party defaulted on the payments. The Company subsequently received approximately $91,000 on settlement of the outstanding receivable and wrote off the remaining balance of approximately $96,000. 3. ASSETS HELD FOR SALE At September 28, 1996 the Company was actively pursuing the sale of four restaurants and accordingly reclassified the net fixed assets ($2,248,231), net intangible assets ($503,884) and inventories ($61,975) as assets held for sale. The Company also provided a $200,000 charge as its estimated loss on disposal of these restaurants. (See Notes 4 and 14.) F-9 4. INTANGIBLE ASSETS Intangible assets consist of the following: September 28, September 30, 1996 1995 Goodwill (a) $3,962,877 $3,812,877 Purchased leasehold rights (b) 552,740 1,277,740 Noncompete agreements and other (a) 840,000 1,158,000 Organization costs 600,030 575,949 ---------- ---------- 5,955,647 6,824,566 Less accumulated amortization 2,070,552 2,488,219 ---------- ---------- $3,885,095 $4,336,347 ---------- ---------- ---------- ---------- (a) In August 1985, certain subsidiaries of the Company acquired approximately one-third of the then outstanding shares of common stock (964,599 shares), from a former officer and director of the Company for a purchase price of $3,000,000. The consolidated balance sheets reflect the allocation of $2,946,000 to goodwill. During fiscal 1996 the Company acquired two restaurants for approximately $108,000 in cash, the cancellation of long-term receivables of $880,000 and the assumption of notes payable totaling $550,000. The acquisitions were accounted for as purchase transactions with the purchase price allocated as follows: inventories $28,000, leasehold improvements $575,000, furniture, fixtures and equipment $350,000 and intangible assets $679,000. During fiscal 1995, the Company acquired two restaurants for approximately $2,336,000 in cash plus the assumption of $900,000 in liabilities. These acquisitions were accounted for as purchase transactions with the purchase prices allocated as follows: inventories, $348,000; other assets, $30,000; leasehold improvements, $865,000; furniture, fixtures and equipment, $393,000; and intangible assets, $1,600,000. (b) Purchased leasehold rights arise from acquiring leases and subleases of various restaurants. 5. OTHER ASSETS Other assets consist of the following: September 28, September 30, 1996 1995 Deposits $ 453,038 $ 392,018 Investments in and advances to affiliates (a) 53,740 62,497 Deferred financing fees 172,942 - --------- --------- $ 679,720 $ 454,515 --------- --------- --------- --------- F-10 (a) The Company, through a wholly owned subsidiary, became a general partner with a 19% interest in a partnership which acquired on July 1, 1987 an existing Mexican food restaurant, El Rio Grande, in New York City. Several related parties also participate as limited partners in the partnership. The Company's equity in earnings of the limited partnership was $48,000, $60,000, and $75,000 for the years ended September 28, 1996, September 30, 1995 and October 1, 1994, respectively. The Company also manages El Rio Grande through another wholly owned subsidiary on behalf of the partnership. Management fee income relating to these services was $450,000, $519,000 and $383,000 for the years ended September 28, 1996, September 30, 1995 and October 1, 1994, respectively (Note 10). 6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following: SEPTEMBER 30, SEPTEMBER 30, 1996 1995 Sales tax payable $ 569,731 $ 667,399 Accrued wages and payroll related costs 717,772 636,734 Other current liabilities 1,743,181 1,545,159 ------------- ------------- $ 3,030,684 $ 2,849,292 ------------- ------------- ------------- ------------- 7. LONG-TERM DEBT Long-term debt consists of the following: SEPTEMBER 30, SEPTEMBER 30, 1996 1995 Revolving Credit and Term Loan Facility with interest at the prime rate, plus 1%, payable on March 1, 1998 (a) $ 5,400,000 $ 3,000,000 Promissory note payable to a landlord of a restaurant site, payable in monthly installments through May 1996 - 29,717 Note issued in connection with acquisition of restaurant site, at 7.25%, payable in monthly installments through January 1, 2000 (b) 516,320 572,063 Note issued in connection with acquistion of restaurant site, at 8.5%, payable in monthly installments through April 2001 (c) 487,546 - Note issued in conneciton with acquisition of restaurant site, at prime plus 2.5%, payable in monthly installments through February 1997 (d) - 412,382 ------------- ------------- 6,403,866 4,014,162 Less current maturities 150,689 88,832 ------------- ------------- $ 6,253,177 $ 3,925,330 ------------- ------------- ------------- ------------- F-11 (a) In March 1996, the Company and its main bank agreed to an extension and increase of the existing Revolving Credit and Term Loan Facility. The agreement includes a $5,000,000 facility for working capital purposes at the Company's existing restaurants and a $7,000,000 facility for use in construction of and as working capital for restaurant facilities to be operated by the Company in a new resort/casino under construction in Las Vegas, Nevada. The facilities each have two-year revolving terms, at the end of which they will convert into term loans payable over 24 months. The $5,000,000 facility will convert into a two-year self-amortizing term loan, and the $7,000,000 facility will convert into a two-year loan amortizing $6,000,000 over the two-year period with the $1,000,000 balance due at maturity. Outstanding revolving loans bear interest at 1% above the bank's prime rate until converted into term loans, at which time the interest rate is 1 1/2% above the bank's prime rate. The Company paid a commitment fee of $150,000 at closing and a facility of 1/2% is due on any unused portion of the revolving credit facility. The agreement includes a four-year $2,000,000 Letter of Credit Facility for use for the Company's existing restaurants, and a one-year (with a six-month extension available at the Company's option) $2,000,000 Letter of Credit Facility for the Las Vegas Project. The Company is generally required to pay commissions of 1 1/2% per annum on outstanding letters of credit. The Company's subsidiaries each guaranteed the obligations of the Company under the foregoing facilities and granted security interests in their respective assets as collateral for such guarantees. In addition, the Company pledged stock of such subsidiaries as security for obligations of the Company under such facilities. The agreement includes restrictions relating to, among other things, indebtedness for borrowed money, capital expenditures, advances to managed businesses, mergers, sale of assets, dividends, and liens on the property of the Company. The agreement also contains financial covenants requiring the Company to maintain a minimum ratio of debt to net worth, minimum shareholders' equity, and a minimum ratio of cash flow prior to debt service. The Company is in compliance with all covenants. (b) In November 1994, the Company issued a $600,000 note in connection with the acquisition of a restaurant in the Florida Keys. The Company remits monthly payments of $7,044 inclusive of interest until January 1, 2000, at which time the outstanding balance of $358,511 is due. The debt is secured by the leasehold improvements and tangible personal property at the restaurant. (c) In April 1996 the Company acquired a restaurant for $550,000, which was financed by issuing a note payable in monthly installments of $13,461, inclusive of interest. (d) In March 1996 the Company sold a restaurant in Oxnard, California to the note holder. The note holder remitted $250,000 in cash to the Company and released the Company from its then-remaining note obligation totaling $404,589, resulting in a loss of $97,000. F-12 Required principal payments on long-term debt are as follows: YEAR AMOUNT 1997 $ 150,689 1998 1,525,534 1999 2,497,840 2000 2,229,803 ---------- $6,403,866 ---------- ---------- During the fiscal years ended September 28, 1996, September 30, 1995 and October 1, 1994, interest expense was $515,810, $422,159 and $143,130, respectively, of which $90,000 and $63,000 was capitalized during the fiscal years ended September 28, 1996 and September 30, 1995. The carrying value of the Corporation's long-term debt approximates its current aggregate fair value. 8. LEASES The Company leases its restaurants, bar facilities, and administrative headquarters through its subsidiaries under terms expiring at various dates through 2029. Most of the leases provide for the payment of base rents plus real estate taxes, insurance and other expenses and, in certain instances, for the payment of a percentage of the restaurants' sales in excess of stipulated amounts at such facility. As of September 28, 1996, future minimum lease payments, net of sublease rentals, under noncancellable leases are as follows: OPERATING CAPITAL YEAR LEASES LEASES 1997 $ 6,698,957 $ 321,235 1998 7,218,288 321,235 1999 6,805,795 263,365 2000 6,456,808 154,118 2001 6,587,227 - Thereafter 38,218,707 - ----------- ----------- Total minimum payments $71,985,782 1,059,953 ----------- ----------- Less amount representing interest 156,751 ----------- Present value of net minimum lease payments $ 903,202 ----------- ----------- In connection with the leases included in the table above, the Company obtained and delivered irrevocable letters of credit in the aggregate amount of $3,325,130 as security deposits under such leases. Rent expense (net of sublease rental income of $124,025 and $182,800 for the fiscal years ended September 30, 1995 and October 1, 1994, respectively) was $6,117,296, $5,633,662 and $4,558,202, during the fiscal years ended September 28, 1996, September 30, 1995 and October 1, 1994, respectively. Rent expense for the fiscal years ended September 28, 1996, September 30, 1995 and October 1, 1994 F-13 includes approximately $10,000, $151,000 and $220,000 of operating lease deferred credits, representing the difference between rent expense recognized on a straight-line basis and actual amounts currently payable. Contingent rentals, included in rent expense, were $547,038, $405,399 and $253,725 for the fiscal years ended September 28, 1996, September 30, 1995 and October 1, 1994, respectively. 9. STOCK OPTIONS On October 15, 1985, the Company adopted a Stock Option Plan (the "Plan") pursuant to which the Company reserved for issuance an aggregate of 175,000 shares of common stock. In May 1991 and March 1994, the Company amended such Plan to increase the number of shares issuable under the Plan to 350,000 and 447,650, respectively. In March 1996, the Company adopted a second plan and reserved for issuance an additional 135,000 shares. Options granted under the Plans to key employees and directors are exercisable at prices at least equal to the fair market value of such stock on the dates the options were granted. The options expire five years after the date of grant and are generally exercisable as to 25% of the shares commencing on the first anniversary of the date of grant and as to an additional 25% commencing on each of the second, third and fourth anniversaries of the date of grant. Additional information follows: 1996 1995 1994 Shares under option, beginning of year 189,125 183,800 195,050 Options: Granted - 81,000 20,000 Exercised (72,500) (74,550) (31,250) Canceled or expired (11,000) (1,125) - ------------ ----------- ------------ Shares under option, end of year (a) 105,625 189,125 183,800 ------------ ----------- ------------ Shares available for future grant 135,000 20,075 99,950 ------------ ----------- ------------ Options exercisable (a) 43,125 88,125 162,550 ------------ ----------- ------------ Price range of outstanding options (b) $4.375-$8.00 $2.25-$8.00 $2.125-$6.50 ------------ ----------- ------------ ------------ ----------- ------------ (a) Options become exercisable at various times until expiration dates ranging from May 1997 through October 1999. (b) Prices reflect the fair market value on the dates of grant. The exercise of nonqualified stock options in the fiscal years ended September 28, 1996, September 30, 1995 and October 1, 1994 resulted in income tax benefits of $124,956, $192,116 and $83,159, respectively, which were credited to additional paid-in capital. The income tax benefits result from the difference between the market price on the exercise date and the option price. F-14 10. MANAGEMENT FEE INCOME As of September 28, 1996, the Company provides management services to five restaurants and two corporate dining facilities owned by outside parties. In accordance with the contractual arrangements, the Company earns fixed fees and management fees based on restaurant sales and operating profits as defined by the various management agreements. The Company terminated a management agreement for a restaurant located in Miami, Florida in fiscal 1994 and incurred a charge of approximately $507,000 from uncollectible advances for working capital and restaurant supplies at such location. Restaurants managed had net sales of $12,802,305, $10,838,664 and $10,642,895 during the management periods within the years ended September 28, 1996, September 30, 1995 and October 1, 1994, respectively, which are not included in consolidated net sales of the Company. 11. INCOME TAXES As discussed in Note 1, the Company adopted Statement 109 as of October 3, 1993. The cumulative effect of this change in accounting for income taxes of $507,770 is determined as of October 3, 1993 and is reported separately in the statement of operations for the year ended October 1, 1994. The provision for income taxes reflects Federal income taxes calculated on a consolidated basis and state and local income taxes calculated by each subsidiary on a nonconsolidated basis. For New York State and City income tax purposes, the losses incurred by a subsidiary may only be used to offset that subsidiary's income. The provision for income taxes consists of the following: YEAR ENDED ------------------------------------------- SEPTEMBER 28, SEPTEMBER 30, OCTOBER 1, 1996 1995 1994 Current provision: Federal $ 519,771 $ 532,947 $ 365,464 State and local 625,570 475,062 446,161 ------------- ------------- ---------- 1,145,341 1,008,009 811,625 ------------- ------------- ---------- Deferred provision (credit): Federal (592,721) (314,745) (206,955) State and local (99,771) 84,167 99,950 ------------- ------------- ---------- (692,492) (230,578) (107,005) ------------- ------------- ---------- $ 452,849 $ 777,431 $ 704,620 ------------- ------------- ---------- ------------- ------------- ---------- F-15 The provision for income taxes differs from the amount computed by applying the Federal statutory rate due to the following: YEAR ENDED ------------------------------------------- SEPTEMBER 28, SEPTEMBER 30, OCTOBER 1, 1996 1995 1994 Provision for Federal income taxes (34%) $ 426,000 $ 646,000 $ 458,000 State and local income taxes net of Federal tax benefit 347,000 369,000 360,000 Amortization of goodwill 26,000 26,000 26,000 Tax credits (349,000) (299,000) (173,000) Other 2,849 35,431 33,620 ------------- ------------- ---------- $ 452,849 $ 777,431 $ 704,620 ------------- ------------- ---------- ------------- ------------- ---------- 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 28, SEPTEMBER 30, 1996 1995 Deferred tax assets: Operating loss carryforwards $ 804,641 $ 639,096 Operating lease deferred credits 671,537 673,530 Carryforward tax credits 835,721 361,539 Provision for uncollectible long-term receivable 68,000 34,000 Valuation allowance (738,277) (690,204) ------------- ------------- 1,641,622 1,017,961 Deferred tax liabilities: Depreciation and amortization 77,048 145,879 ------------- ------------- Net deferred tax asset $ 1,564,574 $ 872,082 ------------- ------------- ------------- ------------- 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 $738,277 at September 28, 1996 and $690,204 at September 30, 1995. The Company has state operating loss carryforwards of $9,819,734 and local operating loss carryforwards of $7,101,623, which expire in the years 2000 through 2010. F-16 12. OTHER INCOME Other income consists of the following: YEAR ENDED ------------------------------------------- SEPTEMBER 28, SEPTEMBER 30, OCTOBER 1, 1996 1995 1994 Purchasing service fees $ 55,551 $ 67,367 $126,780 Insurance proceeds (a) 726,415 914,475 242,666 Sales of logo T-shirts and hats 214,291 180,364 67,455 Other 86,460 56,860 120,082 ------------- ------------- ---------- $ 1,082,717 $ 1,219,066 $556,983 ------------- ------------- ---------- ------------- ------------- ---------- (a) In July 1994, the Company was required to close a restaurant in Manhattan (Ernie's) on a temporary basis to enable structural repairs to be made to the ceiling of the restaurant. The cost of such repairs, other ongoing restaurant operating expenses and a guaranteed profit were borne by a third party. The restaurant reopened in February 1995 and the agreement provides that the third party continue to guarantee some level of operating profits through January 1998. During the fiscal years ended September 28, 1996 and September 30, 1995, the Company received $726,415 and $914,475, respectively, in excess of the continuing restaurant operating expenses. 13. QUARTERLY INFORMATION (UNAUDITED) The following table sets forth certain quarterly operating data. FISCAL QUARTER ENDED ------------------------------------------------------------ DECEMBER 30, MARCH 30, JUNE 29, SEPTEMBER 28, 1995 1996 1996 1996 1996 Net sales $18,723,119 $15,450,293 $22,600,958 $20,021,570 Gross restaurant profit 13,545,173 11,147,783 16,684,719 14,556,800 Net income (loss) 25,108 (1,028,807) 1,137,265 655,196 Net income (loss) per share $ 0.01 $ (0.32) $ 0.35 $ 0.20 F-17 FISCAL QUARTER ENDED --------------------------------------------------------- SEPTEMBER DECEMBER 31, APRIL 1, JULY 1, 30, 1995 1996 1996 1996 1995 Net sales $16,357,705 $14,759,085 $21,046,818 $ 20,863,299 Gross restaurant profit 11,837,623 10,584,425 15,359,109 15,220,807 Net income (loss) 291,213 (482,122) 635,834 676,200 Net income (loss) per share $ 0.09 $ (0.15) $ 0.20 $ 0.20 14. SUBSEQUENT EVENTS (UNAUDITED) COMMON STOCK PRIVATE PLACEMENT - In December 1996, the Company raised $6,065,994 in a private placement of 551,454 shares of its common stock at $11 per share. The proceeds of such offering were used to repay a portion of the Company's outstanding bank debt and for the payment of capital expenditures on its Las Vegas restaurant facilities at the New York-New York Hotel & Casino in Las Vegas which is scheduled to open in January 1997. RESTAURANT SALES - In the first quarter of fiscal 1997, the Company sold three of its smaller restaurants located in the borough of Manhattan in New York City. The aggregate purchase price for the restaurants was $1,362,000, of which an aggregate of $308,000 was paid in cash and balance of $1,054,000 is payable over various periods. Gains of approximately $150,000 were recognized on these sales. ****** F-18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 20th day of December, 1996. ARK RESTAURANTS CORP. By: /s/Michael Weinstein ------------------------------- MICHAEL WEINSTEIN, President Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been duly signed by the following persons in the capacities and on the date indicated. SIGNATURE TITLE DATE /s/ Ernest Bogen Chairman of the Board December 20, 1996 - ---------------- (Ernest Bogen) /s/ Michael Weinstein President and Director December 20, 1996 - --------------------- (Michael Weinstein) /s/ Vincent Pascal Vice President, December 20, 1996 - ------------------ Secretary and Director (Vincent Pascal) /s/ Robert Towers Vice President, Treasurer, December 20, 1996 - ----------------- Principal Financial Officer (Robert Towers) and Director /s/ Andrew Kuruc Vice President, Controller, December 20, 1996 - ---------------- Principal Accounting Officer (Andrew Kuruc) and Director /s/ Donald D. Shack Director December 20, 1996 - ------------------- (Donald D. Shack) /s/ Jay Galin Director December 20, 1996 - -------------- (Jay Galin) /s/ Paul Gordon Director December 20, 1996 - ------------------- (Paul Gordon)