ARK RESTAURANTS CORP annual report, FY2011

ARK Restaurants Corp. — FY2011 Form 10-K

Reporting period: Fiscal year ended October 1, 2011 (52 weeks), compared with the 52 weeks ended October 2, 2010. This is an annual report, not a standalone fourth-quarter report. The company owns or operates 22 restaurants and bars, 28 fast-food concepts and catering operations across several U.S. markets; certain locations are in casinos.

Financial performance and liquidity

Metric	FY2011	FY2010
Consolidated revenue	$139.445 million	$117.768 million
Operating income	$1.902 million	$2.999 million
Income from continuing operations attributable to ARK	$1.562 million	$2.605 million
Net income attributable to ARK	$1.415 million	$2.605 million
Diluted EPS	$0.40	$0.74
Net cash provided by operating activities	$8.530 million	$5.548 million

Revenue comparability: FY2011 consolidated results include $22.216 million of revenue from two variable interest entities (VIEs) newly consolidated under an accounting-standard change. Excluding those VIEs, management reported revenue of $117.229 million, down 0.5% from FY2010. The consolidation materially limits direct year-over-year comparison.
Margins and costs: Management’s ratios excluding VIE costs were food and beverage costs 27.0% of revenue (25.8% in FY2010), payroll 34.2% (32.3%), occupancy 14.1% (14.2%), other operating costs 13.4% (13.8%) and corporate G&A 8.1% (8.1%). Higher commodity costs and elevated payroll at The Sporting House pressured results. Reported operating margin was approximately 1.4%, versus 2.5% in FY2010.
Cash, liquidity and debt: Year-end cash and cash equivalents were $7.780 million and short-term investments were $2.699 million. Working capital surplus was $4.170 million, excluding a $0.090 million working-capital deficit in the VIEs, versus $4.897 million in FY2010. Year-end notes payable totaled $0.078 million, all current; no long-term note payable was reported. Operating lease commitments totaled $68.373 million, including $9.041 million due in FY2012.
Cash uses: Investing activities provided $2.623 million, including net proceeds from investment-security sales and $0.757 million of VIE cash balances, partly offset by fixed-asset spending. Financing activities used $5.384 million, principally dividends and distributions to non-controlling interests. FY2011 dividends paid were $3.493 million ($1.00 per share).

Material changes and notable items

Operating income fell 36.6%, primarily reflecting a $2.603 million impairment charge for an underperforming restaurant, the Sequoia Washington, D.C. flood disruption, higher food costs, weather-related softness at outdoor-seating properties and the closure of Gonzalez y Gonzalez. VIE operating income partly offset these pressures.
Company-wide same-store sales increased 1.6% ($1.670 million), with notable variation by market: Atlantic City +16.3%, Las Vegas +2.9%, Washington, D.C. −1.2%, Boston −1.3%, and Connecticut −11.9%. New York sales were essentially unchanged.
The company adopted revised VIE-consolidation guidance effective October 3, 2010, consolidating Ark Hollywood/Tampa Investment, LLC and Ark Connecticut Investment, LLC. Their FY2011 revenue and operating expenses were $22.216 million and $17.569 million. The filing states their recognized liabilities are claims on VIE assets, not additional claims on the company’s general assets.
The company closed Gonzalez y Gonzalez in January 2011 and Polpette in February 2011; Polpette was sold for $0.400 million, with a $0.071 million loss on disposal and $0.151 million of operating losses reported in discontinued operations. The Grill Room was vacated October 31, 2011 for a $0.350 million payment; the Washington, D.C. America location was vacated November 7, 2011.

Outlook, risks and contingencies

No quantified earnings or revenue guidance was provided. Management anticipated a new New York restaurant opening in FY2012’s second quarter, with expected construction costs of $6–$7 million and landlord contributions of up to $1.8 million. It also expected to begin managing a restaurant and catering operation at Basketball City in that quarter; the owner is to construct the facility, while ARK paid a $1.0 million management-agreement fee, of which $0.6 million had been paid by year-end.
ARK committed at least $3.0 million to remodel the New York-New York Hotel food court by March 2012; approximately $1.3 million had been spent by year-end. The Sporting House lease is cancellable on 90 days’ notice and rent is based on profits.
The April 2011 Sequoia D.C. flood interrupted business. Management expected substantially all losses to be recovered through insurance and/or the landlord and did not expect unrecovered costs to materially affect results or cash flows.
Key risks include economic and consumer-spending weakness, food and labor cost increases, weather and seasonality, intense competition, dependence on casino traffic and geographically concentrated markets, restaurant execution and expansion risks, and licensing and regulatory requirements. The second fiscal quarter is typically the weakest; outdoor locations are weather-sensitive.
Ordinary-course accident, workers’ compensation and employment-related litigation is disclosed. The company retained a $0.150 million accrual after settling a claim for approximately $0.350 million during FY2011. Management reported effective disclosure controls and internal control over financial reporting; the financial statements received an unqualified audit opinion.
After year-end, ARK repurchased 250,000 shares for $3.125 million, paying $1.0 million in cash and issuing a $2.125 million unsecured note, payable in 24 monthly installments beginning December 2012. A quarterly dividend of $0.25 per share was also declared. The president, COO and treasurer announced retirement effective December 31, 2011; a separation agreement was being negotiated.

Important facts for investors to verify

Reconcile reported consolidated revenue growth with management’s 0.5% decline excluding newly consolidated VIEs, and assess the effect of the accounting change on cash flow and year-over-year comparisons.
Review the impaired restaurant’s outlook and the assumptions supporting its remaining asset value; the filing does not identify the restaurant by name in the cited impairment disclosure.
Track recovery proceeds and operating effects from the Sequoia D.C. flood, and verify whether the expected recoveries were realized.
Assess funding needs for the food-court remodel and planned New York opening alongside lease commitments, dividends and the post-year-end share-repurchase note.
Monitor same-store sales in Connecticut and other casino-dependent markets, as well as leadership transition and the execution of planned openings.