Ark Restaurants Annual Report 2005

FY2005 Annual Report · Ark Restaurants

Loading PDF…

Ark
Restaurants
Corp.

2005 ANNUAL REPORT

The Company

Ark Restaurants Corp. (the “Registrant” or the “Company”) is a New York corporation formed in
1983. Through its subsidiaries, it owns and operates 23 restaurants and bars, 26 fast food
concepts, catering operations, and wholesale and retail bakeries. Initially its facilities were
located only in New York City. At this time, eight of the restaurants are located in New York
City, four are located in Washington, D.C., nine are located in Las Vegas, Nevada, and two are
located in Atlantic City, New Jersey. The Company’s 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 operations;

two restaurants, two bars and four food court facilities at the Venetian Casino

Resort;

one restaurant at the Neonopolis Center at Fremont Street; and

one restaurant within the Forum Shops at Caesar’s Shopping Center.

The Company will provide without charge a copy of the Company’s Annual Report on Form 10-
K for the fiscal year ended October 1, 2005, including financial statements and schedules thereto,
to each of the Company’s shareholders of record on February 6, 2006 and each beneficial holder
on that date, upon receipt of a written request therefore mailed to the Company’s offices, 85 Fifth
Avenue, New York, NY 10003 Attention: Treasurer.

Dear Shareholder:

February 9, 2006

We continue our conservative discipline for your Company while focusing on the maximization
of cash flow. Your Company has no debt, a strong working capital position, a healthy balance
sheet and annually pays a $1.40 dividend for each common share.

We seek only landmark properties with strong tenant lease positions for our restaurant locations.
This requires patience, but over the long term we are convinced that building shareholder value is
best accomplished by this strategy. We are mindful that our cash is a precious commodity, and
there is always a risk element in any business arrangement. Therefore, our plan remains that
much of the capital for new opportunities will come primarily from real estate developers or
investor/partners willing to accept some or all of risk while we are paid for our management
talent with fees that include incentives.

In the 2005 fiscal year our cash position and balance sheet improved. However, EBITDA from
continuing operations for fiscal 2005 was $12,617,000, which was below the $13,803,000
EBITDA of fiscal year 2004. One reason for lower EBITDA is the 52/53 week format used by
the Company for reporting purposes in which certain years contain 52 weeks and others 53
weeks. The fiscal year ended October1, 2005 was a 52 week year and we were comparing to a 53
week prior fiscal year. Beyond this, there were several other contributing factors to our lower
EBITDA.

Most notably, sales declined dramatically at The Venetian Hotel in Las Vegas after several years
of good growth. We are working with Venetian management to strengthen our operations and we
hope to benefit from the reconfiguration or relocation of several of our concepts at the hotel. This
will not require a substantial capital investment from your Company. The hotel is expanding their
retail component and increasing the number of guest rooms from 4,000 to 7,000. If discussions
with Venetian management are successful, positive results will not be immediate as part of the
solution is tied to their construction program which is to be completed by late spring 2007.
However, in the time frame of the current year, we are confident that operating results at the
Venetian will show some improvement. Meanwhile, sales at New York New York Hotel and
Casino and at The Stage Deli in The Forum Shops improved, but this positive was not able to
offset the larger decline at The Venetian and comparative sales for all Las Vegas operations
declined this past fiscal year by 2% (adjusted for the extra week in the 2004 fiscal year).

Another influence on EBITDA is in revenue that we missed. We had planned to open two new
projects, Luna Lounge and Gallagher’s Steak House, in Atlantic City’s Resorts International
Hotel and Casino in mid-summer 2005. These were delayed by labor disputes at the hotel and we
were not in business until December 2005, our first quarter of the 2006 fiscal year. Similarly, an
expansion of our tequila bar at Gonzalez y Gonzalez and a new interior and expansion of seating
capacity at America in the New York New York Hotel and Casino in Las Vegas, due for early
summer completion, were delayed by a management change at the hotel and were not completed
until January 2006.

Our cost structure was impacted by higher minimum wages in New York City and Washington
D.C.; higher energy costs increased utility, commodity and delivery expenses; and substantial
compliance costs were incurred in implementing new accounting and securities law regulations.

Our ability to keep payroll and cost of goods as a percentage of sales in line with the previous
fiscal year is a testament to the focus of management at the operating level.

Sales in New York City and Washington, D.C. increased on a comparative store basis by 5.7%
and 5.3% respectively (adjusted for the extra week in the 2004 fiscal year). At our two Florida
operations there was double digit sales growth. The Florida properties continue to exceed our
upside projections.

In fiscal 2006, we should continue to be advantaged by the trending up of sales in New York
City, Washington D.C. and Florida. We are also positioned to benefit from our expansion of
capacity at Gonzalez y Gonzalez and America at the New York New York Hotel and Casino and
the addition of our two Atlantic City operations. If fundamentals at the Venetian Hotel start to
improve, then we are in for a good year.

We made two significant additions to our Board of Directors in the past year:

Stephen Novick serves as Senior Advisor for the Andrea and Charles Bronfman
Philanthropies, a private family foundation. From 1990 to 2004, Mr. Novick served as Chief
Creative Officer of Grey Global Group, an advertising agency. Mr. Novick continues to serve as a
consultant for Grey Global Group. He also serves as a member of the Board of Directors of Toll
Brothers, Inc.

Robert Thomas Zankel has been a portfolio manager at Iridian Asset Management LLC, an
institutional money management company with over $10 billion under management, since
January 2004. From March 1995 to December 2003, Mr. Zankel was an analyst for Iridian Asset
Management LLC.

I wish to thank every one working with us for their commitment to your Company.

Sincerely,

Michael Weinstein,

Chairman, Chief Executive Officer and President

ARK RESTAURANTS CORP.

Corporate Office
Michael Weinstein, President and Chief Executive Officer
Robert Towers, Executive Vice President, Chief Operating Officer and Treasurer
Robert Stewart, Chief Financial Officer
Vincent Pascal, Senior Vice President-Operations
Paul Gordon, Senior Vice President-Director of Las Vegas Operations
Walter Rauscher, Vice President-Corporate Sales & Catering
Nancy Alvarez, Controller
Kathryn Green, Controller-Las Vegas Operation
Marilyn Guy, Director of Human Resources
Colleen Hennigan, Director of Operations-Washington Division
John Oldweiler, Director of Purchasing
Luis Gomes, Director of Purchasing – Las Vegas Operation
Jennifer Sutton, Director of Operations and Financial Analysis
Joe Vazquez, Director of Facilities Management
Evyette Ortiz, Director of Marketing
Michael Buck, General Counsel and Secretary

Corporate Executive Chef
Bill Lalor

Executive Chefs
Chun Liao, Washington D.C.
Damien McEvoy, Las Vegas

Restaurant General Managers-New York
Liz Caro, The Grill Room
Patricia Almonte, Columbus Bakery I
Rosana Skeeter, Columbus Bakery II
Stephanie Torres, Columbus Bakery III
Kelly Gallo, Canyon Road
Bridgeen Hale, Metropolitan Café
Jennifer Baquierzo, El Rio Grande
Debra Lomurno, Sequoia
Donna Simms, Bryant Park Grill
Ridgley Trufant, Red
Ana Harris, Gonzalez y Gonzalez

Restaurant General Managers-Washington D.C.
Kyle Carnegie, Sequoia
Bender Gamiao, Thunder Grill
Matt Mitchell, America & Center Café

Restaurant Managers-Las Vegas
Patty Kuaranta, The Saloon
Charles Gerbino, Las Vegas Employee Dining Facility
Larry Downey, Gallagher’s
Paul Savoy, Village Streets

John Hausdorf, Las Vegas Room Service
Chris Taggert, Tsunami Grill
Mary Massa, Gonzalez y Gonzalez
Marcel Serapio, America
Patty Geist, Stage Deli
Vince Adams, Lutece
Maria Payumo, Venetian Food Court
Drew Dixon, V-Bar and Vivid

Restaurant Manager-Atlantic City
Donna McCarthy, Gallagher’s and Luna Lounge

Restaurant Managers-Florida
Mamunur Rosid, Hollywood Food Court
Darvin Prats, Tampa Food Court

Restaurant Chefs-New York
Armando Cortes, The Grill Room
Rosalio Fuentes, Metropolitan Café
Santiago Pascual, Sequoia
Santiago Moran, Red
Virgilio Ortega, Columbus Bakery
Fermin Ramirez, El Rio Grande
Ruperto Ramirez, Canyon Road Grill
Mariano Veliz, Gonzalez y Gonzalez
Gadi Weinreich, Bryant Park Grill

Restaurant Chefs-Washington D.C.
Michael Foo, America & Center Café
Chun Liao, Sequoia
Pang Sing Tang, Thunder Grill

Restaurant Chefs-Las Vegas
David Abraczinskas, Stage Deli
Hector Hernandez, America
Florence Duff, Tsunami Grill
Pedro Gonzalez, Vico’s Burritos
Luigi Guiga, Gallagher’s
Joshua Schlink, Banquet
John Miller, The Saloon
Andreas Baecker, Lutece
Ernesto Suenaga, Las Vegas Employee Dining Facility
Sergio Salazar, Gonzalez y Gonzalez

Restaurant Chef-Atlantic City
Jim Waninger, Gallagher’s

Restaurant Chefs-Florida
Asher Feldman, Hollywood Food Court
Artemio Espinoza, Tampa Food Court

Selected Consolidated Financial Data

The table on the following page sets forth certain financial data for the fiscal years
ended in 2001 through 2005. During fiscal year 2005, the Company sold one of its restaurants
which was considered held for sale in accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("FAS 144"), during part of fiscal year 2004 and part of fiscal year 2005. During fiscal year 2004,
the Company sold three of its restaurants and closed one restaurant. The operations of these
restaurants have been presented as discontinued operations for the 2004 and 2005 fiscal years,
and the Company has reclassified its statements of operations data for the prior periods presented
below, in accordance with FAS 144. This information should be read in conjunction with the
Company’s Consolidated Financial Statements and the notes thereto beginning at page F-1.

October 1,
2005

Years Ended
Septem ber 27,
2003

October 2,
2004
(In thousands, except per share data)

2002

(a)

2001

(b)

Septem ber 28,Septem ber 29,

OPERATING DATA:

Total revenues

115,577

115,698

102,733

101,625

106,844

Cost and expenses

(107,325)

(106,081)

(96,980)

(95,153)

(101,198)

6,472

5,646

(607)

(2,223)

5,865

1,474

4,391

(217)

(55)

(162)

4,229

3,423

1,123

2,300

(13,614)

(4,466)

(9,148)

(6,848)

0.72
(2.88)
(2.16)

0.72
(2.88)

(2.16)

3,181
3,186

53,091
(6,569)
21,700
17,173
5.40

46
1

$
$
$

$
$

Operating income

Other income (expense), net

Income from continuing operations
before provision for income taxes
Provision for income taxes

Income from continuing operations

Income (loss) from discontinued
operations before provision for

income taxes

Provision (benefit) for income taxes

Income from discontinued operations

NET INCOM E (LOSS)

NET INCOM E (LOSS) PER SHARE:

8,252

747

8,999

2,782

6,217

525

163

362

6,579

Continuing operations basic
Discontinued operations basic

Net basic

Continuing operations diluted
Discontinued operations diluted

Net diluted

Weighted average number of shares

$
$
$

1.81
0.11
1.92

$
$

1.75
0.10

1.85

9,617

543

10,160

2,804

7,356

(965)

(266)

(699)

6,657

5,753

403

6,156

1,486

4,670

(1,781)

(430)

(1,351)

3,319

$
$
$

2.22
(0.21)
2.01

$
$

2.13
(0.20)

1.93

$
$
$

1.46
(0.42)
1.04

$
$

1.45
(0.42)

1.03

$
$
$

1.38
(0.05)
1.33

$
$

1.37
(0.05)

1.32

Basic
Diluted

3,436
3,555

3,305
3,444

3,181
3,213

3,181
3,206

BALANCE SHEET DATA
(end of period):

Total assets
Working capital (deficit)

Long-term debt
Shareholders’ equity
Shareholders’ equity per share

Facilities in operations—end of year,
Owned
M anaged

47,165
4,299
-

37,413
10.89

44,894
1,893
-

34,200
10.35

43,635
(4,802)
7,226
24,826
7.80

47,960
(7,990)
9,547
21,446
6.74

44
4

45
3

40
1

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 Company reports
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 years ended September 27, 2003 and
October 1, 2005 each included 52 weeks. The fiscal year ended October 2, 2004 included 53
weeks.

Overview

The Company has reclassified its statements of operations data for the prior periods presented
below, in accordance with FAS 144, as a result of the sale of three of the Company's restaurants
and the closure of one restaurant during the fiscal year ended October 2, 2004 and the sale of
another restaurant during the fiscal year ended October 1, 2005. The operations of these
restaurants have been presented as discontinued operations for the fiscal years ended October 2,
2004 and October 1, 2005. See “Item 1 -Recent Restaurant Dispositions and Charges”, “Item 7 -
Recent Restaurant Dispositions” and Note 2 of Notes to Consolidated Financial Statements.

Revenues

Total revenues at restaurants owned by the Company decreased by 1.1% from fiscal 2004 to
fiscal 2005 and increased by 12.4% from fiscal 2003 to fiscal 2004.

Same store sales decreased 0.9%, or $989,000, on a Company-wide basis from fiscal 2004 to
fiscal 2005. This decrease was primarily due to the fact that fiscal 2004 contained an extra week
of sales as opposed to fiscal 2005, resulting in a 4.0%, or $2,678,000, decrease in same store sales
at the Company’s Las Vegas restaurants, a 3.6%, or $1,122,000, increase in same store sales at
the Company’s New York restaurants and a 3.2%, or $567,000, increase in same store sales at the
Company’s Washington D.C. restaurants. If the fifty-third week of fiscal 2004 were excluded
from same store sales, the result would be a 1.2%, or $1,381,000, increase in same store sales on
a Company-wide basis, a 2.0%, or $1,312,000, decrease in same store sales at the Company’s
Las Vegas restaurants, a 5.7%, or $1,791,000, increase in same store sales at the Company’s New
York restaurants and a 5.3%, or $902,000, increase in same store sales at the Company’s
Washington D.C. restaurants. The increases in New York and Washington D.C. were principally
due to a general improvement in economic conditions and the public’s willingness and inclination
to resume vacation and convention travel.

During the fourth quarter of 2002 the Company abandoned its 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 the Company’s 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.

Other operating income, which consists of the sale of merchandise at various restaurants,
management fee income and door sales were $1,826,000 in fiscal 2005, $850,000 in fiscal 2004
and $679,000 in fiscal 2003.

Costs and Expenses

Food and beverage cost of sales as a percentage of total revenue was 25.1% in fiscal 2005, 25.5%
in fiscal 2004 and 24.7% in fiscal 2003.

Total costs and expenses increased by $1,244,000, or 1.2%, 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.

Total costs and expenses increased by $9,101,000, or 9.4%, from fiscal 2003 to fiscal 2004.
Increases in food costs, rent and payroll, as a result of the increase in total revenues, contributed
to this increase. Sales increases in restaurants where the Company pays a percentage rent resulted
in an increase in percentage rent of $374,000 during fiscal 2004 compared to fiscal 2003. Other
operating costs and expenses also increased in fiscal 2004 due to the increase in total revenue and
a one time charge of $270,000 used to pay for casino entertainment tax liability. The Company
had previously thought that certain of its 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 the Company determined to include such charge in other operating
costs and expenses.

Payroll expenses as a percentage of total revenues was 31.3% in fiscal 2005 compared to 31.2%
in fiscal 2004 and 32.3% in fiscal 2003. Payroll expense was $36,212,000, $36,045,000 and
$33,176,000 in fiscal 2005, 2004 and 2003, respectively. In fiscal 2003, the Company had
aggressively adapted its cost structure in response to lower sales expectations following
September 11th. Due to the increase in sales during fiscal 2004, the Company had increased its
payroll expenses incrementally. In fiscal 2005, the increase of the minimum wage in New York
and Washington, D.C. resulted in an increase in payroll expenses. The Company continually
evaluates its payroll expenses as they relate to sales.

No pre-opening expenses and early operating losses were incurred during fiscal 2005, 2004 or
2003. The Company did not open any new restaurants during fiscal 2005, 2004 and 2003. The
Company typically incurs significant pre-opening expenses in connection with its new restaurants
that are expensed as incurred. Furthermore, it is not uncommon that such restaurants experience
operating losses during the early months of operation.

General and administrative expenses, as a percentage of total revenue, were 6.3% in fiscal 2005,
5.6% in fiscal 2004 and 6.5% in fiscal 2003. The decrease in these expenses as a percentage of
total revenue during fiscal 2004 is primarily due to increased total revenue during this period.

The Company managed two restaurants it did not own (The Saloon and El Rio Grande) and also
managed the Tampa and Hollywood Florida food court operations at October 1, 2005. The
Company managed two restaurants it did not own (The Saloon and El Rio Grande) at October 2,
2004. The Company managed one restaurant it did not own (El Rio Grande) at September 27,

2003. Sales of El Rio Grande, which are not included in consolidated sales, were $3,262,000 in
fiscal 2005, $2,786,000 in fiscal 2004 and $2,765,000 in fiscal 2003. The Company’s lease of
The Saloon was converted into a management agreement effective as of August 22, 2004,
whereby the Company receives a management fee of $7,000 per month regardless of the results
of operations of this restaurant. During fiscal 2004, the Company 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 $8,843,000 during the 2005 fiscal year.

Interest expense was $25,000 in fiscal 2005, $190,000 in fiscal 2004 and $732,000 in fiscal 2003.
The significant decreases during these periods was due to lower outstanding borrowings on the
Company’s credit facility and the benefit from rate decreases in the prime-borrowing rate. As of
October 1, 2005, the Company had no borrowings on its credit facility. Interest income was
$101,000 in fiscal 2005, $138,000 in fiscal 2004 and $162,000 in fiscal 2003.

Other income, which generally consists of purchasing service fees and other income at various
restaurants, was $671,000, $595,000 and $973,000 for fiscal 2005, 2004 and 2003, respectively.
Other income was impacted during fiscal 2003 by the Company’s receipt of $508,000 in World
Trade Center Grants for four restaurants located in downtown New York that were adversely
impacted by the September 11, 2001 terrorist attacks.

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 operating 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. During fiscal 2002 the Company abandoned its
restaurant and food court operations at the Desert Passage, the retail complex at the Aladdin
Resort & Casino in Las Vegas. In fiscal 2002, the Company was 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, the Company 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.

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 and the utilization of
state and local net operating loss carry forwards. Nevada has no state income tax and other states
in which the Company operates 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, the Company has merged certain profitable subsidiaries with certain loss
subsidiaries.

The Revenue Reconciliation Act of 1993 provides tax credits to the Company for FICA taxes
paid by the Company on tip income of restaurant service personnel. The net benefit to the
Company was $779,000 in fiscal 2005, $591,000 in fiscal 2004 and $132,000 in fiscal 2003.

During fiscal 2002, the Company and the Internal Revenue Service finalized the adjustments to
the Company’s Federal income tax returns for fiscal years 1995 through 1998. The settlement did
not have a material effect on the Company’s consolidated financial statements. During fiscal
2006, the Company and the Internal Revenue Service finalized the adjustments to the Company’s
Federal income tax returns for fiscal years 1999 through 2004. This settlement did not have a
material effect on the Company’s consolidated financial statements.

Liquidity and Sources of Capital

The Company's primary source of capital has been cash provided by operations and funds
available from its main bank, Bank Leumi USA. The Company from time to time also utilizes
equipment financing in connection with the construction of a restaurant and seller financing in
connection with the acquisition of a restaurant. The Company utilizes capital primarily to fund
the cost of developing and opening new restaurants, acquiring existing restaurants owned by
others and remodeling existing restaurants owned by the Company.

The net cash used in investing activities in fiscal 2005 of ($3,836,000) 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 primarily used for the replacement of fixed assets at existing restaurants. The net cash used
in investing activities in fiscal 2003 of ($1,434,000) was used for the expansion of an existing
restaurant in Las Vegas and for the replacement of fixed assets at existing restaurants.

The net cash used in financing activities in fiscal 2005 ($4,397,000), was principally used for the
payment of dividends. The net cash used in financing activities in fiscal 2004 ($5,106,000) and
fiscal 2003 ($8,356,000) was principally due to repayments of long-term debt on the Company’s
main credit facility in excess of borrowings on such facility.

The Company had a working capital surplus of $4,299,000 at October 1, 2005 as compared to a
working capital surplus of $1,893,000 at October 2, 2004.

The Company’s Revolving Credit and Term Loan Facility (the “Facility”) with its 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 the Company’s existing
restaurants, matured on March 12, 2005. The Company does not currently plan to enter into
another credit facility and expects required cash to be provided by operations. As of October 1,
2005, the Company had no borrowings on its credit facility. The Facility also includes a
$500,000 Letter of Credit Facility for use in lieu of lease security deposits. The Company has
delivered $253,000 in irrevocable letters of credit on this Facility at October 1, 2005. The
Company generally is required to pay commissions of 1(cid:1)% per annum on outstanding letters of
credit.

The Company's subsidiaries each guaranteed the obligations of the Company under the Facility
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 Facility.

In April 2000, the Company borrowed $1,570,000 from its main bank at an interest rate of 8.8%
to refinance the purchase of various restaurant equipment at the Venetian. The note which was
payable in 60 equal monthly installments through May 2005, was secured by such restaurant
equipment. At October 1, 2005 the Company had nothing outstanding on this facility.

The Company 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 its food and
beverage facilities in a hotel and casino in Las Vegas, Nevada. The lease bears interest at 8.65%
per annum and is payable in 48 equal monthly installments of $32,000 until maturity in
November 2004 at which time the Company 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, the Company chose to extend the lease for an additional 12 months.

The Company 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, the Company recorded the entire amount payable under the lease as a liability of
$1,600,000 based on the anticipated abandonment of the Aladdin operations. In 2002, the
operations at the Aladdin were abandoned and at October 1, 2005 $117,000 remained accrued in
other current liabilities representing future operating lease payments.

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. Prior to this, the Company had
not paid any cash dividends since its inception. The Company intends to continue to pay such
quarterly cash dividend for the foreseeable future, however, the payment of future dividends is at
the discretion of the Company’s 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:

Paym ents Due by Period

Total

Within
1 year

2-3 years
(in thousands of dollars)

4-5 years

After 5
years

Contractual Obligations:

Operating Leases

58,528 7,631

12,348 10,443 28,106

Total Contractual Cash Obligations

$ 58,528 $ 7,631 $ 12,348 $ 10,443 $ 28,106

Am ount of Com m itm ent Expiration Per Period

Total

Within

1 year

2-3 years

4-5 years

After 5

years

(in thousands of dollars)

Other Commercial Commitments:

Letters of Credit

253

$
-

253

$
-

Total Commercial Commitments

253

$
-

253

$
-

Restaurant Expansion

In December 2005, the Company opened a restaurant, Gallagher’s Steakhouse, and a bar, Luna
Lounge, at the Resorts Atlantic City Hotel and Casino in Atlantic City, New Jersey.

Recent Restaurant Dispositions and Charges

In fiscal 2003, the Company determined that its 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 the Company's 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. The Company had an investment of $667,000 in 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 a net operating loss of $60,000 during the fiscal year ended October 1, 2005
which is 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.

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. 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 the Company required. As a result, the Company
sold this restaurant on January 1, 2004 and realized a gain on the sale of this restaurant of
approximately $214,000. Net operating losses of $12,000 were included in losses from
discontinued operations for the fiscal year ended October 1, 2005.

The Company’s restaurant Jack Rose located on the west side of Manhattan has 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 $19,000 were
included in losses from discontinued operations for the fiscal year ended October 1, 2005.

The Company’s restaurant, America, located in New York City has experienced declining sales
for several years. In March 2004, the Company entered into a new lease for this restaurant at a
significantly increased rent. The Company 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, 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. Net operating income
of $47,000 was included in losses from discontinued operations for the fiscal year ended October
1, 2005.

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. The Company’s significant accounting policies are more fully described in Note 1 to
the Company's consolidated financial statements. While all these significant accounting policies
impact its financial condition and results of operations, the Company views certain of these
policies as critical. Policies determined to be critical are those policies that have the most
significant impact on the Company's consolidated financial statements and require management
to use a greater degree of judgment and estimates. Actual results may differ from those estimates.

The Company believes that given current facts and circumstances, it is unlikely that applying any
other reasonable judgments or estimate methodologies would cause a material effect on the
Company's 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 the Company to make estimates and assumptions of future events. 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 actual results could differ from those
estimates. Although 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, differences in actual results could be material to the financial statements.

Long-Lived Assets

The Company annually assesses any impairment in value of long-lived assets to be held and used.
The Company evaluates 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 the Company then reduces 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 the
Company’s projections with a resulting adjustment to income in such period.

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 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.

Deferred Income Tax Valuation Allowance

The Company provides 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 the Company, 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 (the Company 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 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.

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 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 2005, 2004
and 2003.

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (R),
“Accounting for Stock-Based Compensation.” SFAS No. 123 (R) establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments for goods or
services. SFAS No. 123 (R) focuses primarily on accounting for transactions in which an entity
obtains employee services through the issuance of stock options and other share-based payment
transactions. SFAS No. 123 (R) requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are performed. Prior to
SFAS No. 123 (R), only certain pro forma disclosures of fair value were required. SFAS No. 123
(R) shall be effective for public entities that do not file as small business issuers as of the
beginning of the first annual reporting period that begins after December 15, 2005. SFAS No.
123 (R) shall be effective for the Company beginning in its first quarter of fiscal 2006. The
Company has not determined if the adoption of this new accounting pronouncement is expected
to have a material impact on the financial statements of the Company for fiscal 2006.

Quantitative and Qualitative Disclosures About Market Risk

None.

Market Information

The Company’s 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 the
Common Stock from September 27, 2003 through September 30, 2005 are as follows:

Calendar 2003

Fourth Quarter

Calendar 2004

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Calendar 2005

First Quarter
Second Quarter
Third Quarter

High

$ 14.35

Low

$ 11.15

17.70
23.55
26.11
39.22

41.88
32.80
34.59

13.50
17.01
21.62
27.07

29.61
25.52
27.26

Dividends

Number of Shareholders

As of December 9, 2005, there were 45 holders of record of the Company’s Common Stock, $.01
par value. This does not include the number of persons whose stock is in nominee or “street
name” accounts through brokers.

INDEPENDENT AUDITORS’ REPORT

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 October 1, 2005 and October 2, 2004, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the years then ended. 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 October 1,
2005 and October 2, 2004, and results of operations and cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America.

/s/ J.H. Cohn LLP

New York, New York
December 23, 2005

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Ark Restaurants Corp.

We have audited the accompanying consolidated statements of operations, shareholders’ equity and
cash flows of Ark Restaurants Corp. and subsidiaries (the “Company”) for the fiscal year ended
September 27, 2003. 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 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. The Company is
not required to have, nor were we engaged to perform, and audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the results
of operations and cash flows of Ark Restaurants Corp. and subsidiaries for the fiscal year ended
September 27, 2003, in conformity with accounting principles generally accepted in the United States
of America.

Deloitte and Touche LLP /s/
New York, New York

December 24, 2003
(December 30, 2004 as to the reclassifications described in the final paragraph of Note 2)

F-2

ARK RESTAURANTS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands)

ASSETS

CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable
Employee receivables
Current portion of long-term receivables (Note 3)
Inventories
Deferred income taxes (Note 12)
Prepaid expenses and other current assets
Assets held for sale (Note 2)

Total current assets

LONG-TERM RECEIVABLES (Note 3)

FIXED ASSETS—At cost:
Leasehold improvements
Furniture, fixtures and equipment
Construction in progress

Less accumulated depreciation and amortization

INTANGIBLE ASSETS—Net (Note 4)

GOODWILL

DEFERRED INCOME TAXES (Note 12)

OTHER ASSETS (Note 5)

TOTAL

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable—trade
Accrued expenses and other current liabilities (Note 6)
Current maturities of long-term debt (Note 7)
Accrued income taxes

Total current liabilities

OPERATING LEASE DEFERRED CREDIT (Notes 1 and 8)

OTHER LIABILITES (Note 2)

TOTAL LIABILITIES

COMMITMENTS AND CONTINGENCIES (Note 8)

SHAREHOLDERS’ EQUITY (Notes 9, 10 and 16):
Common stock, par value $.01 per share—authorized, 10,000
shares; issued 5,533 and 5,462 at October 1, 2005
and October 2, 2004, respectively
Additional paid-in capital
Retained earnings

Less stock option receivable
Less treasury stock of 2,070 shares at October 1, 2005
and October 2, 2004

Total shareholders’ equity

TOTAL

See notes to consolidated financial statements.

F-3

October 1,
2005

October 2,
2004

5,723
2,821
294
299
1,615
630
1,417
-

12,799

1,275

31,252
28,107
1,782

61,141

37,096

24,045

198

3,440

4,679

729

4,435
2,171
330
208
1,731
630
1,615
128

11,248

1,082

29,720
27,178
-

56,898

33,437

23,461

224

3,515

4,591

773

47,165

44,894

2,740
4,756
-
1,004

8,500

878

374

9,752

18,437
27,472

45,965

166

8,386

37,413
47,165

2,230
4,781
251
2,093

9,355

899

440

10,694

17,202
25,694

42,950

364

8,386

34,200
44,894

Years Ended

October 1,
2005

October 2,
2004

September 27,
2003

113,751
1,826

114,848
850

102,054
679

115,577

115,698

102,733

ARK RESTAURANTS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

REVENUES:
Food and beverage sales
Other income (Note 11)

Total revenues

COST AND EXPENSES:
Food and beverage cost of sales
Payroll expenses
Occupancy expenses
Other operating costs and expenses
General and administrative expenses
Depreciation and amortization

Total cost and expenses

OPERATING INCOME

OTHER (INCOME) EXPENSE:
Interest expense (Note 7)
Interest income
Other income (Note 13)

INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES

PROVISION FOR INCOME TAXES (Note 12)

INCOME FROM CONTINUING OPERATIONS

DISCONTINUED OPERATIONS:
INCOME (LOSS) FROM OPERATIONS OF DISCONTINUED RESTAURANTS
(INCLUDING NET GAINS ON DISPOSAL OF $644,000 FOR THE FISCAL YEAR

ENDED OCTOBER 1, 2005 AND NET LOSSES OF $168,000 ON DISPOSAL FOR

THE FISCAL YEAR ENDED OCTOBER 2, 2004)

PROVISION (BENEFIT) FOR INCOME TAXES (Note 12)

INCOME (LOSS) FROM DISCONTINUED OPERATIONS

28,973
36,212
16,505
14,623
7,318
3,694

29,554
36,045
15,900
14,492
6,499
3,591

107,325

106,081

8,252

9,617

25
(101)
(671)

(747)

8,999

2,782

6,217

525

163

362

190
(138)
(595)

(543)

10,160

2,804

7,356

(965)

(266)

(699)

NET INCOME

6,579

6,657

PER SHARE INFORMATION - BASIC AND DILUTED

Continuing operations basic
Discontinued operations basic
NET BASIC

Continuing operations diluted
Discontinued operations diluted
NET DILUTED

WEIGHTED AVERAGE NUMBER OF SHARES—Basic

WEIGHTED AVERAGE NUMBER OF SHARES—Diluted

See notes to consolidated financial statements.

$
$
$

1.81
0.11
1.92

1.75
0.10
1.85

3,436

3,555

$
$
$

2.22
(0.21)
2.01

2.13
(0.20)
1.93

3,305

3,444

F-4

25,392
33,176
15,525
12,312
6,665
3,910

96,980

5,753

732
(162)
(973)

(403)

6,156

1,486

4,670

(1,781)

(430)

(1,351)

3,319

1.46
(0.42)
1.04

1.45
(0.42)
1.03

3,181

3,213

$
$
$

ARK RESTAURANT CORP. AND SUBSIDIARIES

CONS OLIDATED S TATEM ENTS OF CAS H FLOW S
(In thousa nds)

Net cas h p ro v id ed b y o p eratin g activ ities

9,722

CA SH FLOW S FROM OPERA TING A CTIVITIES:
In co me fro m co n tin u in g o p eratio n s
A d ju s tmen ts to reco n cile in co me fro m

co n tin u in g o p eratio n s to n et cas h p ro v id ed
b y o p eratin g activ ities :

Deferred in co me taxes
Dep reciatio n an d amo rtizatio n
Op eratin g leas e d eferred cred it
Ch an g es in o p eratin g as s ets an d liab ilities

Receiv ab les
Emp lo y ee receiv ab les
In v en to ries
Prep aid exp en s es an d o th er cu rren t as s ets
Prep aid in co me taxes
Oth er as s ets
A cco u n ts p ay ab le - trad e
A ccru ed in co me taxes
A ccru ed exp en s es an d o th er cu rren t liab ilities

CA SH FLOW S FROM INVESTING A CTIVITIES:

A d d itio n s to fixed as s ets
Pay men ts receiv ed o n n o te receiv ab les

Net cas h u s ed in in v es tin g activ ities

CA SH FLOW S FROM FINA NCING A CTIVITIES:
Pro ceed s fro m is s u an ce o f lo n g -term d eb t
Prin cip al p ay men ts o n lo n g -term d eb t
Exercis e o f s to ck o p tio n s
Pay men ts receiv ed u n d er s to ck o p tio n s receiv ab les
Pay men t o f d eb t is s u an ce co s ts
Pay men t o f d iv id en d s
Pu rch as e o f treas u ry s to ck

Net cas h u s ed in fin an cin g activ ities

NET CA SH PROVIDED BY
CONTINUING OPERA TIONS

NET CA SH (USED IN) PROVIDED BY
DISCONTINUED OPERA TIONS

NET INCREA SE (DECREA SE) IN CA SH
A ND CA SH EQUIVA LENTS

CA SH A ND CA SH EQUIVA LENTS—

Beg in n in g o f y ear

Octobe r 1,
2005

Ye a rs Ende d
Octobe r 2,
2004

S e pte m be r 27,
2003

6,217

7,356

4,670

187
3,694
(21)

(650)
36
116
198
-

43
510
(583)
(25)

(4,252)
416

(3,836)

-
(251)
457
198
-
(4,801)
-

(4,397)

(144)
3,591
53

(514)
(75)
133
(1,025)
-
208
(1,213)
1,357
(805)

8,922

(1,529)
193

(1,336)

-
(7,328)
1,966
291
-
-
(35)

(5,106)

(355)
3,910
4

288
790
(65)
18
957
(314)
111
1198
(770)

10,442

(1,603)
169

(1,434)

1,100
(9,355)
-

61
(162)
-
-

(8,356)

1,489

2,480

652

(201)

1,288

1,469

3,949

(985)

(333)

4,435

486

819

CA SH A ND CA SH EQUIVA LENTS— En d o f y ear

5,723

4,435

486

SUPPLEM ENTA L INFORM A TION:

Cas h p ay men ts fo r:
In teres t

In co me taxes

SUPPLEM ENTA L DICLOSURE OF NON-CA SH INVESTING

A ND FINA NCING A CTIVITIES
Tax b en efit o n exercis e o f s to ck o p tio n s

See n o tes to co n s o lid ated fin an cial s tatemen ts .

3,341

264

1,455

768

114

780

495

$ -

F-5

l
a
t
o
T

’
s
r
e
d
o
h
e
r
a
h
S

k
c
o
t
S

s
n
o
i
t
p
O

y
t
i
u
q
E

e
l
b
a
v
i
e
c
e
R

y
r
u
s
a
e
r
T

k
c
o
t

d
e
n
i
a
t
e
R

s
g
n
n
r
a
E

n
I
-
d
i
a
P

l
a
t
i
p
a
C

t
n
u
o
m
A

s
e
r
a
h
S

k
c
o
t
S
n
o
m
m
o
C

a
n
o
i
t
i
d
d
A

3
0
0
2

,
7
2
R
E
B
M
E
T
P
E
S
D
N
A
4
0
0
2

,
2
R
E
B
O
T
C
O

,
5
0
0
2

,
1
R
E
B
O
T
C
O
D
E
D
N
E
S
R
A
E
Y

)
s
d
n
a
s
u
o
h
t
n
I
(

6
4
4
,
1
2

)
6
1
7
(

)
1
5
3
,
8
(

8
1
7

5
1

3
4
7

4
1

2
5

9
4
2

2
0
0
2

,
8
2

r
e
b
m
e
t
p
e
S

E
C
N
A
L
A
B

1
6

9
1
3
,
3

1
6

9
1
3

)
5
3
(

5
9
4

1
9
2

6
6
9
,
1

7
5
6
,
6

1
9
2

)
5
3
(

7
5
6

5
9
4

4
6
9

6
2
8
,
4
2

)
5
5
6
(

)
1
5
3
,
8
(

7
3
0

9
1

3
4
7

4
1

0
0
2
,
4
3

)
4
6
3
(

)
6
8
3
,
8
(

4
9
6

5
2

2
0
2

7
1

7
5
4

0
8
7

8
9
1

)
1
0
8
,
4
(

9
7
5
,
6

8
9
1

)
1
0
8

4
(

9
7
5

5
5
4

0
8
7

2
5

4
5

9
4
2

3
1
2

1
7

2
6
4

s
e
l
b
a
v
i
e
c
e
r

s
n
o
i
t
p
o
k
c
o
t
s
n
o

t
n
e
m
y
a
p

t
e
N

e
m
o
c
n
i

t
e
N

s
e
l
b
a
v
i
e
c
e
r

s
n
o
i
t
p
o
k
c
o
t
s
n
o

t
n
e
m
y
a
P

s
n
o
i
t
p
o
f
o

e
s
i
c
r
e
x
e
n
o

t
i
f
e
n
e
b
x
a
T

k
c
o
t
s
y
r
u
s
a
e
r
t

f
o

e
s
a
h
c
r
u
P

s
n
o
i
t
p
o
k
c
o
t
s

f
o

e
s
i
c
r
e
x
E

e
m
o
c
n
i

t
e
N

3
0
0
2

,
7
2

r
e
b
m
e
t
p
e
S
—
E
C
N
A
L
A
B

4
0
0
2

,
2

r
e
b
o
t
c
O
—
E
C
N
A
L
A
B

e
r
a
h
s

r
e
p

0
4
.
1
$
-

s
d
n
e
d
i
v
i
d
f
o

t
n
e
m
y
a
P

s
e
l
b
a
v
i
e
c
e
r

s
n
o
i
t
p
o
k
c
o
t
s
n
o

t
n
e
m
y
a
P

s
n
o
i
t
p
o
f
o

e
s
i
c
r
e
x
e
n
o

t
i
f
e
n
e
b
x
a
T

s
n
o
i
t
p
o
k
c
o
t
s

f
o

e
s
i
c
r
e
x
E

e
m
o
c
n
i

t
e
N

F-6

3
1
4
,
7
3

)
6
6
1
(

)
6
8
3
,
8
(

2
7
4

7
2

7
3
4

8
1

6
5

3
3
5

5
0
0
2

,
1

r
e
b
o
t
c
O
—
E
C
N
A
L
A
B

Y
T
U
Q
E

’

S
R
E
D
L
O
H
E
R
A
H
S
F
O
S
T
N
E
M
E
T
A
T
S
D
E
T
A
D
L
O
S
N
O
C

S
E
R
A
D
S
B
U
S
D
N
A

P
R
O
C
S
T
N
A
R
U
A
T
S
E
R
K
R
A

ARK RESTAURANTS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 1, 2005, OCTOBER 2, 2004 AND SEPTEMBER 27, 2003

BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Ark Restaurants Corp. and subsidiaries (the “Company”) own and operate 23 restaurants, 26 fast food
concepts, catering operations and wholesale and retail bakeries. Nine restaurants are located in
New York City, nine in Las Vegas, Nevada and four in Washington, D.C. 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 four food court concepts; one
restaurant is within the Forum Shops at Caesar’s Shopping Center and one restaurant is in downtown
Las Vegas at the Neonopolis Center. The Company also 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. One restaurant and one bar are located in the
Resorts Casino in Atlantic City, New Jersey.

Accounting Period—The Company’s fiscal year ends on the Saturday nearest September 30. The fiscal
year ended October 1, 2005 included 52 weeks. The fiscal years ended October 2, 2004 and September
27, 2003 included 53 weeks and 52 weeks, respectively.

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, the realizable value of its
tax assets and other matters. Management bases its estimates on certain assumptions, which it believes
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 statements.

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.

Cash Equivalents—Cash equivalents include instruments with maturities of three months or less, when
purchased.

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. See Notes 16 and 17 for a discussion
of related party receivables.

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-7

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 (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 October 1, 2005 and October 2, 2004, no impairment charges were deemed
necessary. For the year ended September 27, 2003, an impairment charge of $667,000 was incurred on
the restaurant Lutece (Note 2).

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
the Company 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. 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 used
to identify potential impairment by comparing the fair value of the reporting unit (the Company 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 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

F-8

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 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 2005,
2004 and 2003.

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.

Covenants not to compete arising from restaurant acquisitions are amortized over the contractual period
of five years.

Amortization expense for intangible assets not including goodwill was $28,000, $27,000 and $15,000
for the years ended October 1, 2005, October 2, 2004, and September 27, 2003, 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
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.

Other Assets— Certain legal and bank commitment fees incurred in connection with the Company’s
Revolving Credit and Term Loan Facility, as discussed in Note 7, were capitalized as deferred financing
fees and were amortized over two years, the remaining term of the facility.

Operating Lease Deferred Credit—Several of the Company’s operating leases contain predetermined
increases in the rentals payable during the term of such leases. For these leases, the aggregate rental
expense over the lease term is recognized on a straight-line basis over the lease term. The excess of the

F-9

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—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).

Stock Options—The Company accounts for stock options granted to employees under the intrinsic
value-based method for employee stock-based compensation and provides pro forma disclosure of net
income and earnings per share as if the accounting provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”) had been adopted.
The Company generally does not grant options to outsiders.

SFAS No. 123 requires the Company to disclose pro forma net income and pro forma earnings per share
information for employee stock option grants to employees as if the fair-value method defined in SFAS
No. 123 had been applied. The Company utilized the Black-Scholes option-pricing model to quantify the
pro forma effects on net income and earnings per share of all options granted. During fiscal 2005
194,000 options to purchase common stock were granted. There were no options granted during fiscal
2004 and 2003 and no charges to operations for options issued to employees during fiscal 2005, 2004
and 2003.

In accordance with Statement of Financial Accounting Standards No. 148 (“SFAS No. 148”) and SFAS
No. 123, the Company’s pro forma option expense is computed using Black-Scholes option pricing
model. To comply with SFAS No. 148, the Company is presenting the following table to illustrate the
effect on the net income and income per share if it had applied the fair value recognition provisions of
SFAS No. 123, as amended, to options granted under the stock-based employee compensation plan. For
purposes of this pro forma disclosure, the estimated value of the options is amortized ratably to expense
over the options’ vesting periods.

F-10

The pro forma impact was as follows:

October 1,
2005

Years Ended
October 2,
2004
(In thousands, except per share amounts)

September 27,
2003

Net income as reported
Deduct stock based compensation expense
computed under the fair value method

Net income - pro forma

Net income per share as reported - basic
Net income per share as reported - diluted

Net income per share pro forma - basic
Net income per share pro forma - diluted

6,579

6,657

3,319

494

6,085

1.92
1.85

1.77
1.71

$
$

6,572

$
$

2.01
1.93

1.99
1.91

118

3,201

1.04
1.03

1.01
1.00

$
$

On December 21, 2004, the company granted options to employees to purchase 194,000 shares of
common stock at a price of $29.60 per share. These options will vest after two years and expire ten
years after the date of grant. The Company did not record any intrinsic value for these options. The
assumptions used for fiscal 2005 for the pro forma effects of options granted on December 21, 2004
included a risk-free interest rate of 3.37%, volatility of 37%, a dividend yield of 3% and an expected life
of three years.

Reclassifications—Certain reclassifications of prior year balances have been made to conform to the
current year presentation.

2. RECENT RESTAURANT DISPOSITIONS

In fiscal 2003, the Company determined that its 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 the Company's 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. The Company had an investment of
$667,000 in 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 $804,000 for Lutece during the fiscal year ended October
2, 2004 which are included in losses from discontinued operations. In 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 8% per annum. Net operating losses of $60,000 were included in losses from discontinued
operations for the fiscal year ended October 1, 2005.

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

F-11

of fiscal 2004 which is included in losses from discontinued operations. Net operating losses of
$145,000 were recorded in discontinued operations in fiscal 2004. There were no additional expenses
related to this restaurant during the fiscal year ended October 2, 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. 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 the Company required. As a result, the Company sold this restaurant on January 1,
2004 and realized a gain on the sale of this restaurant of approximately $214,000. Net operating losses
of $230,000 were included in losses from discontinued operations for the fiscal year ended October 2,
2004. Net operating losses of $12,000 were included in losses from discontinued operations for the fiscal
year ended October 1, 2005.

The Company’s restaurant Jack Rose located on the west side of Manhattan has 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. The Company recorded net operating losses of $148,000 during fiscal 2004 for
this restaurant. These losses are included in losses from discontinued operations. Net operating losses of
$19,000 were included in losses from discontinued operations for the fiscal year ended October 1, 2005.

The Company’s restaurant America, located in New York City, has experienced declining sales for
several years. In March 2004, the Company entered into a new lease for this restaurant at a significantly
increased rent. The Company 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, 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. Net operating income of $47,000 was recorded in
income from discontinued operations for the fiscal year ended October 1, 2005.

In accordance with SFAS No. 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
flows of these discontinued operations. Total revenues of these discontinued operations were
$1,871,000, $6,501,000 and $13,860,000 in fiscal 2005, 2004 and 2003, 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.

F-12

3. LONG-TERM RECEIVABLES

Long-term receivables consist of the following:

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)
Note receivable collateralized by fixed assets and lease at a
restaurant sold by the Company, at 7.5% interest; due in
monthly installments through December 2008 (b)
Note receivable collateralized by fixed assets and lease at a
restaurant sold by the Company, at 7.0% interest; due in
monthly installments through December 2007 (c)

Note receivable collateralized by fixed assets and lease at a
restaurant sold by the Company, at 6% interest, due in
monthly installments through June 2011 (d)

Less current portion

October 1,
2005

October 2,
2004

(In thousands)

111

192

788

1,009

675

1,574

299

1,290

208

1,275

1,082

(a)

(b)

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.

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, will be paid in 104 monthly installments of $15,000
commencing May 2000 and ending December 2008. At December 2008, the then outstanding
balance of $519,000 matures.

The Company recognized a gain of approximately $585,000 in the fiscal year ended
September 27, 2003 in connection with the sale of this restaurant. The gain recognized
reflected the realization of a gain that had been deferred originally due to the length of the
note and the substantial balance due upon maturity ($519,000). A review of the performance
of this note and the security underlying it has lead management to conclude that the full
amount will likely be collected and, accordingly, the note no longer requires a reserve.
Consequently, the Company eliminated this reserve and included the amount in revenue, in
other income, for the year ended September 27, 2003. As a result of the reclassification of
discontinued operations this gain is included in losses from discontinued operations for fiscal
2003.

(c)

In June 2000, the Company sold this restaurant for $438,000. Cash of $188,000 was received
on sale and the balance was due in installments through June 2006. In February 2001, the
buyer defaulted and the Company took possession of this restaurant and sold it to another

F-13

party in June 2002. The total price was $270,000, cash of $145,000 was received on sale and
the balance was due in installments through December 2007. The buyer fully paid the note
during fiscal 2005.

(d)

In March 2005, the Company sold this 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 during the year ended October 1, 2005 of $644,000.

The carrying value of the Company’s long-term receivables approximates their current aggregate fair
value.

INTANGIBLE ASSETS

Intangible assets consist of the following:

Purchased leasehold rights (a)
Noncompete agreements and other

Less accumulated amortization

October 1,
2005

October 2,
2004

(In thousands)

611
600

1,211

1,013

611
600

1,211

987

Total intangible assets

198

224

(a) Purchased leasehold rights arise from acquiring leases and subleases of various restaurants.

F-14

5. OTHER ASSETS

Other assets consist of the following:

Deposits and other
Deferred financing fees
Landlord receivable (a)

October 1,
2005

October 2,
2004

(In thousands)

350
-
379

350
27
396

729

773

(a) This balance represents certain costs paid by the Company on behalf of a landlord, that under an

agreement with the landlord will be used as a future offset to contingent rent payments for certain
Las Vegas restaurants.

6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

Sales tax payable
Accrued wages and payroll related costs
Customer advance deposits
Accrued and other liabilities
Abandonment accrual (a)

October 1,
2005

October 2,
2004

(In thousands)

763
1,756
986
1,134
117

833
1,430
853
1,169
496

4,756

4,781

(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.

F-15

7. NOTES PAYABLE

The Company’s debt consisted of the following:

October 1,
2005

October 2,
2004

(In thousands)

Notes issued in connection with refinancing of restaurant
equipment, with interest at 8.80%, payable in monthly
installments through May 2005 (a)

Less current maturities

251

251
251

(a)

In April 2000, the Company borrowed from its main bank $1,570,000 to refinance the purchase
of various restaurant equipment at its food and beverage facilities in a hotel and casino in
Las Vegas, Nevada. The notes bear interest at 8.80% per annum and are payable in 60 equal
monthly installments of $32,439 inclusive of interest, paid off in May 2005.

8. COMMITMENTS AND CONTINGENCIES

Leases—The Company leases its restaurants, bar facilities, and administrative headquarters through its
subsidiaries under terms expiring at various dates through 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 October 1, 2005, future minimum lease payments under noncancelable leases are as follows:

Fiscal Year

2006
2007
2008
2009
2010
Thereafter

Total minimum payments

F-16

Amount
(In thousands)

7,631
6,537
5,811
5,349
5,094
28,106

58,528

In connection with the leases included in the table above, the Company obtained and delivered
irrevocable letters of credit in the aggregate amount of $253,000 as security deposits under such leases.

Rent expense was $11,978,000, $12,104,000 and $11,027,000 during the fiscal years ended October 1,
2005, October 2, 2004 and September 27, 2003, respectively. Contingent rentals, included in rent
expense, were $4,160,000, $4,153,000 and $3,366,000 for the fiscal years ended October 1, 2005,
October 2, 2004 and September 27, 2003, respectively.

In August 2004, the Company entered into a lease agreement to operate a Gallagher’s Steakhouse and
separate bar, Lunar Lounge, at the Resorts International Hotel and Casino in Atlantic City, New Jersey.
The landlord has agreed to contribute up to $3,000,000 towards the construction of these facilities. The
Company estimates the Company will provide an additional $1,000,000 towards the construction. The
bar opened in December 2005 and the Company anticipates that the restaurant will be opened on New
Years Eve 2005. The future minimum lease payments from these lease agreements 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. In October 2003, the Company’s landlord for its executive, administrative and clerical
offices located in New York, New York commenced an action against the Company in the Supreme
Court, New York County asserting the Company had failed to validly exercise its option with respect to
the premises at issue and that the Landlord was entitled to immediate and exclusive possession of the
premises. The Company answered and asserted affirmative defenses and counterclaims. By an order
dated May 25, 2004, the court denied the landlord's motion for summary judgment on its complaint
while granting, in part, the landlord's motion to dismiss the Company's affirmative defenses and
counterclaims. Both the landlord and the Company appealed from the May 25, 2004 order, but no
decision on the appeals has been issued. Pending the outcome of this litigation, the Company remains in
possession of the premises.

9. COMMON STOCK REPURCHASE PLAN

In August 1998, the Company authorized the repurchase of up to 500,000 shares of the Company’s
outstanding common stock. In April 1999, the Company authorized the repurchase of an additional
300,000 shares of the Company’s outstanding common stock. For the years ended October 1, 2005 and
September 27, 2003, there were no repurchases of common stock. For the year ended October 2, 2004
the Company repurchased 2,500 shares at a total cost of $35,000.

10. 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

F-17

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
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 follows:

2005

2004

2003

Weighted
Average
Exercise
Price

Outstanding, beginning of year

178,000

7.91

392,500

7.91

392,500

7.91

Options:
Granted
Exercised
Canceled or expired

194,000
(71,000)
-

29.60
6.47

-
(212,500)
(2,000)

Outstanding, end of year (a)

301,000

21.32

178,000

Exercise price, outstanding options $6.30 - 29.60

Weighted average years

6.38 Years

Shares available for future grant (b)

256,000

Options exercisable (a)

107,000

Fair value of options granted

194,000

6.30

8.13

$6.30 - 7.50

2.14 Years

450,000

60,500

9.18
10.00

6.30

-
-
-

392,500

7.91

$6.30 - 10.00

2.06 Years

257,000

220,000

9.10

(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.

11. MANAGEMENT FEE INCOME

As of October 1, 2005, the Company provides management services to two fast food courts and one
restaurant it does not own. In accordance with the contractual arrangements, the Company earns
management fees based on operating profits as defined by the agreement.

Management fee income relating to these services was $1,568,000, $386,000 and $120,000 for the years
ended October 1, 2005, October 2, 2004 and September 27, 2003, respectively.

F-18

Restaurants managed had sales of $12,105,000, $9,566,000 and $2,765,000 during the management
periods within the years ended October 1, 2005, October 2, 2004 and September 27, 2003, respectively,
which are not included in consolidated net sales of the Company.

12. INCOME TAXES

The provision for income taxes reflects Federal income taxes calculated on a consolidated basis and state
and local income taxes calculated by each subsidiary on a nonconsolidated basis. For New York State
and City income tax purposes, the losses incurred by a subsidiary may only be used to offset that
subsidiary’s income.

The provision (benefit) for income taxes attributable to continuing and discontinued operations consists
of the following:

Current provision (benefit):
Federal
State and local

Deferred provision (benefit):
Federal
State and local

October 1,
2005

Years Ended

October 2,
2004
(In thousands)

September 27,
2003

2,189
569

2,168
514

1,534
316

2,758

2,682

1,850

413
(226)

187

259
(403)

(144)

3
(797)

(794)

2,945

2,538

1,056

F-19

The provision for income taxes differs from the amount computed by applying the Federal statutory rate
due to the following:

Provision for Federal
income taxes (34%)

State and local income taxes net of Federal
tax benefit

Tax credits

State and local net operating loss carryforward
allowance adjustment

Other

October 1,
2005

Years Ended

October 2,
2004
(In thousands)

September 27,
2003

3,238

3,126

1,488

309

(514)

(125)

334

208

(591)

(132)

(395)

(445)

(63)

2,945

2,538

1,056

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:

Current deferred tax assets (liabilities):
Operating loss carryforwards
Carryforward tax credits

Inventory

October 1,
2005

October 2,
2004

(In thousands)

300
600
(270)

Total current net deferred tax assets

630

Long-term deferred tax assets (liabilities):
Operating loss carryforwards
Operating lease deferred credits
Carryforward tax credits
Depreciation and amortization
Deferred gains
Valuation allowance

Pension withdrawal liability

Total long-term net deferred tax assets

1,853
320
3,970
(973)
(260)
(358)
127

4,679

1,828
377
4,424
(1,598)
(107)
(486)
153

4,591

Total net deferred tax assets

5,309

5,221

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 $358,000 at October 1, 2005,
$486,000 at October 2, 2004. The Company decreased its allowance for the utilization of the deferred tax
asset arising from state and local operating loss carryforwards by $125,000 and $395,000 for the years
ended October 1, 2005 and October 2, 2004, respectively, based on the merger of certain unprofitable
subsidiaries into profitable ones. The Company has state operating loss carryforwards of $27,296,000,
which expire in the years 2006 through 2020.

Subsequent to the fiscal year ended October 1, 2005 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 involve 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 financial condition.

During the fiscal year ended September 27, 2003, the Company and the Internal Revenue Service
finalized the adjustments to the Company’s Federal income tax returns for the fiscal years ended
September 30, 1995 through October 3, 1998. The final adjustments primarily relate to: (i) legal and
accounting expenses incurred in connection with new or acquired restaurants that the Internal Revenue
Service asserts should have been capitalized and amortized rather than currently expensed and (ii) travel
and meal expenses for which the Internal Revenue Service asserts the Company did not comply with
certain record keeping requirements or the Internal Revenue Code. These settlements did not have a
material effect on the Company’s financial condition.

13. OTHER INCOME

Other income consists of the following:

Purchasing service fees
World Trade Center Recovery Grants (a)
Other

October 1,
2005

Years Ended
October 2,
2004
(In thousands)

September 27,
2003

41
-
630

671

61
-
534

595

58
508
407

973

F-21

(a) During the fiscal year ended September 27, 2003, the Company applied for grants to the World
Trade Center Business Recovery Grant Program for four restaurants located in downtown New
York. The program was established to compensate businesses for economic losses resulting from
the September 11, 2001 disaster. As a result of our applications, the Company received
compensation of $508,000 during the fourth quarter of the year ended September 27, 2003.

14.

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 October 1, 2005, October 2, 2004 and September 27, 2003 follows.

Year ended October 1, 2005:

Basic EPS
Stock options

Diluted EPS

Year ended October 2, 2004:

Basic EPS
Stock options

Diluted EPS

Year ended September 27, 2003:

Basic EPS
Stock options

Diluted EPS

Shares
Income
(Denominator)
(Numerator)
(In thousands, except per share amounts)

Per-Share
Amount

6,579
-

6,579

6,657
-

6,657

3,319
-

3,436
119

3,555

3,305
139

3,444

3,181
32

1.92
(0.07)

1.85

2.01
(0.08)

1.93

1.04
(0.01)

3,319

3,213

1.03

For the year ended September 27, 2003, stock options for shares of 168,000 were not included in the
computation of diluted EPS because to do so would have been antidilutive.

F-22

15. QUARTERLY INFORMATION (UNAUDITED)

The following table sets forth certain quarterly operating data.

2005

Food and beverage sales
Income from continuing operations
Income (loss) from discontinued operations
Net income (loss)

Per share information - basic and diluted:

Continuing operations basic
Discontinued operations basic
Net basic

Continuing operations diluted
Discontinued operations diluted
Net diluted

Fiscal Quarters Ended

January 1,
2005

April 2,
2005

July 2,
2005

October 1,
2005

(In thousands except per share amounts)

26,734
1,169
15
1,184

0.34
0.01
0.35

0.33
0.01
0.34

24,309
135
419
554

0.04
0.12
0.16

32,205
2,850
(28)
2,822

0.82
0.00
0.82

0.80
0.00
0.80

30,503
2,063
(44)
2,019

0.60
(0.01)
0.59

0.58
(0.01)
0.57

Fiscal Quarters Ended

December 27,
2003

March 27,
2004

June 26,
2004

October 2,
2004

(In thousands except per share amounts)

2004

Food and beverage sales

24,592

24,739

32,504

33,013

Income from continuing operations
Income (loss) from discontinued operations
Net income (loss)

Per share information - basic and diluted:

Continuing operations basic
Discontinued operations basic
Net basic

Continuing operations diluted
Discontinued operations diluted
Net diluted

494
(608)
(114)

3,094
(34)
3,060

3,350
(195)
3,155

0.15
(0.19)
(0.04)

0.89
(0.01)
0.88

0.85
(0.01)
0.84

0.99
(0.06)
0.93

0.95
(0.06)
0.89

418
138
556

0.13
0.05
0.18

0.13
0.04
0.17

F-23

16. STOCK OPTION RECEIVABLES

Stock option receivables include amounts due from officers and directors totaling $166,000 and
$364,000 at October 1, 2005 and October 2, 2004, respectively. 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 (6.75% at October 1, 2005 and 4% at October 2, 2004).

17. RELATED PARTY TRANSACTIONS

Receivables due from officers and directors, excluding stock option receivables, totaled $37,000 at
October 1, 2005 compared to $52,000 at October 2, 2004. Other employee loans totaled $257,000 at
October1, 2005 compared to $278,000 at October 1, 2004. Such loans bear interest at the minimum
statutory rate (3.83% at October 1, 2005 and 2.24% at October 2, 2004).

18. SUBSEQUENT EVENTS

On October 11, 2005 the Company declared its regular quarterly dividend of $.35 per share on the
Company’s outstanding common stock payable November 1, 2005 to shareholders of record at the close
of business October 21, 2005. On November 1, 2005 the Company paid dividends of $1,212,000.

******

F-24

CORPORATE INFORMATION

BOARD OF DIRECTORS

Michael Weinstein
Chairman, President and Chief Executive Officer

Robert Towers
Executive Vice President, Chief Operating Officer and Treasurer

Vincent Pascal
Senior Vice President --- Operations and Secretary

Paul Gordon
Senior Vice President --- Director of Las Vegas Operations

Marcia Allen
President, Allen & Associates

Bruce Lewin
Member, Continental Hosts, Ltd.

Steve Shulman
President, Managing Director, Hampton Group Inc.

Arthur Stainman
Senior Managing Director, First Manhattan Co.

Edward Lowenthal
President, Ackeman Management, LLC

Stephen Novick
Senior Advisor, Andrea and Charles Bronfman Philanthropies

Robert Thomas Zankel
Portfolio Manager, Iridian Asset Management LLC

EXECUTIVE OFFICE

AUDITORS

J.H. Cohn LLP
1212 Avenue of the Americas
New York, NY 10036

85 Fifth Avenue
New York, NY 10003
(212) 206-8800

TRANSFER AGENT

Continental Stock Transfer
17 Battery Place
New York, NY 10004