Ark
Restaurants
Corp.
2012 ANNUAL REPORT
The Company
We are a New York corporation formed in 1983. As of the fiscal year ended September 29, 2012,
we owned and/or operated 21 restaurants and bars, 22 fast food concepts and catering operations
through our subsidiaries. Initially our facilities were located only in New York City. As of the
fiscal year ended September 29, 2012, seven of our restaurant and bar facilities are located in
New York City, three are located in Washington, D.C., seven are located in Las Vegas, Nevada,
two are located in Atlantic City, New Jersey, one is located at the Foxwoods Resort Casino in
Ledyard, Connecticut and one is located in the Faneuil Hall Marketplace in Boston,
Massachusetts.
In addition to the shift from a Manhattan-based operation to a multi-city operation, the nature of
the facilities operated by us has shifted from smaller, neighborhood restaurants to larger,
destination properties intended to benefit from high patron traffic attributable to the uniqueness of
the location. Most of our properties which have been opened in recent years are of the latter
description. As of the fiscal year ended September 29, 2012, these include the operations at the
12 fast food facilities in Tampa, Florida and Hollywood, Florida, respectively (2004); the
Gallagher’s Steakhouse and Gallagher’s Burger Bar in the Resorts Atlantic City Hotel and Casino
in Atlantic City, New Jersey (2005); The Grill at Two Trees at the Foxwoods Resort Casino in
Ledyard, Connecticut (2006); Durgin Park Restaurant and the Black Horse Tavern in the Faneuil
Hall Marketplace in Boston, Massachusetts (2007); Yolos at the Planet Hollywood Resort and
Casino in Las Vegas, Nevada (2007); Robert at the Museum of Arts & Design at Columbus
Circle in Manhattan (2010); and Clyde Frazier’s Wine and Dine in Manhattan (2012)
The names and themes of each of our restaurants are different except for our two Sequoia
restaurants and two Gallagher’s Steakhouse restaurants. The menus in our restaurants are
extensive, offering a wide variety of high-quality foods at generally moderate prices. The
atmosphere at many of the restaurants is lively and extremely casual. Most of the restaurants
have separate bar areas, are open seven days a week and most serve lunch as well as dinner. A
majority of our net sales are derived from dinner as opposed to lunch service
While decor differs from restaurant to restaurant, interiors are marked by distinctive architectural
and design elements which often incorporate dramatic interior open spaces and extensive glass
exteriors. The wall treatments, lighting and decorations are typically vivid, unusual and, in some
cases, highly theatrical.
We will provide, without charge, a copy of our Annual Report on Form 10-K for the fiscal year
ended September 29, 2012, including financial statements, exhibits and schedules thereto, to each
of our shareholders of record on February 11, 2013 and each beneficial holder on that date, upon
receipt of a written request therefore mailed to our offices, 85 Fifth Avenue, New York, NY
10003 Attention: Treasurer.
2
February 20, 2013
Dear Shareholders:
We had a better result this year after several years of mediocre performance in a still struggling
economy. Our initiative during the year to offset higher cost of goods with slight price increases
and a 5% reduction of protein in our recipes proved prudent. This, in combination with higher
sales throughout the Company, allowed us to achieve an improved gross profit. Higher sales
obviously lowered the percentage that non variable operating expenses and fixed occupancy costs
take up in our income statement as well. This produced substantially higher efficiency and
Adjusted EBITDA of $13,381,000 compared to $9,515,000 in the prior fiscal year.
We had two events in fiscal 2012 that were impactful and significantly reduced EBITDA. Early
in the year we reserved $500,000 for the severance pay related to the retirement of Robert Towers
who had been an executive with the Company for some thirty years. In March, we opened Clyde
Frazier’s Wine and Dine in partnership with Walt “Clyde” Frazier, the Hall of Fame New York
Knick basketball player. We had more than a disappointing start in this venue for the fiscal year
and suffered approximately $1,800,000 in operating losses (more on Clyde Frazier’s Wine and
Dine further down in this letter). My point in focusing on this combined $2.3 million in
reductions of Adjusted EBITDA is that without them, it is indicative of the strength of our core
business away from these two events.
We always have challenges, but the first quarter of the 2013 fiscal just ended was more
interesting than we would have wanted. Hurricane Sandy had a dramatic influence on our first
quarter fiscal 2013 with New York City and Atlantic City greatly disrupted. Many of our
restaurants were closed for a week or more. Sequoia and Red in New York City were near the
end of their lease terms and we determined that it was economically impractical to reopen them.
Besides significant lost sales during the quarter, we supported the salaries of many long term
employees of the two closed restaurants who were having difficulty finding new jobs. To a lesser
degree this is continuing into the second fiscal quarter. Absent from the quarter is the income
from The Grill Room which closed during the fiscal 2012 December quarter. Further Clyde
Frazier’s Wine and Dine had operating losses although it did make a small operating profit in
December (at the time of this writing it looks as if Clyde’s broke even on cash flow in January).
Certainly given these factors and weighing heavily the influence of Hurricane Sandy, the
December quarter has been a disappointment. However, we believe we are in a position to
improve EBITDA (this is not a prediction). While we are certainly far from a success, we have
an improving profile at Clyde’s Wine and Dine. We will not lose $1.8 million this year. We
expect some insurance proceeds from damage to assets caused by Hurricane Sandy, as well as
monies from our business interruption insurance. And significant to future earnings and cash
flow, we have acquired some of the partnership interests from the investors in our two Florida
properties.
We are taking steps to prepare for changes in health care. This is the most significant event that
will weigh on the Company’s future EBITDA. Although we offer health insurance to all of our
full time employees, there are a significant number who chose not to participate. We believe all
3
retailers and suppliers required to provide health insurance will need to raise prices to absorb
additional costs. But there are significant doubts for us to the degree of elasticity available and
therefore whether the expense can be fully amortized. Many restaurants with small numbers of
employees are not subject to the new laws. While most of our restaurants are in destinations that
do not compete with niche restaurants the latter do influence price acceptance. Certainly where
we have strong demand we have already made price adjustments in anticipation of the additional
expense. But we still have weak demand in Las Vegas and for those locations we are hesitant to
be an early adopter of any particular strategy. This is a market where we will wait to see what
measures others implement before clarifying what we will do. We are exploring the possibility of
a health insurance surcharge on our menus which we believe would be a better alternative to
menu price increases. Obviously we could not stand alone in this and the industry would have to
also adopt this mechanism for it to be a successful formula.
We are actively seeking to expand but at the same time remain conservative. Cash remains a
precious commodity. The $2,125,000 of long term debt on our balance sheet is the result of a
note we issued in conjunction with the acquisition of 250,000 shares of Ark at $12.50 per share
purchased in Fiscal 2012.
As you may well be aware, on February 6, 2013, the Company received an unsolicited offer to
purchase all of its outstanding capital stock for $22 a share in cash from Landry’s, Inc.
Consistent with its fiduciary duties, and in consultation with Duff & Phelps Corporation as its
financial advisors and Fried, Frank, Harris, Shriver & Jacobson LLP as its outside legal advisors,
the Board of Directors of the Company is reviewing the Landry’s proposal and will respond in
due course.
I remain grateful to our talented and hard-working executives, managers, chefs and employees.
They do an outstanding job and the good results this past year are their combined achievement.
Sincerely,
Michael Weinstein,
Chairman and Chief Executive Officer
4
ARK RESTAURANTS CORP.
Corporate Office
Michael Weinstein, Chairman and Chief Executive Officer
Robert Stewart, Chief Financial Officer and Treasurer
Vincent Pascal, Senior Vice President and Chief Operating Officer
Paul Gordon, Senior Vice President-Director of Las Vegas Operations
Walter Rauscher, Vice President-Corporate Sales & Catering
Nancy Alvarez, Controller
Marilyn Guy, Director of Human Resources
Jennifer Sutton, Director of Operations-Washington D.C.
Donna McCarthy, Director of Operations – Atlantic City
Scott Moon, Director of Catering-Washington D.C.
Andrea O’Brien, Director of Tour and Travel
John Oldweiler, Director of Purchasing
Luis Gomes, Director of Purchasing – Las Vegas Operations
Linda Clous, Director of Facilities Management
Evyette Ortiz, Director of Marketing
Veronica Mijelshon, Director of Architecture and Design
Oona Cassidy, Counsel and Secretary
Teresita Mendoza, Controller – Las Vegas Operations
Craig Tribus, Director of Operations – Las Vegas Operations
Welner Villatoro, Director of Maintenance – Las Vegas Operations
Nicole Calix Coy, Director of Human Resources – Las Vegas Operations
Corporate Executive Chef
David Waltuck
Executive Chefs
Damien McEvoy, Las Vegas
Paul Savoy, Executive Sous Chef, Las Vegas Operations
Restaurant General Managers-New York
Ruperto Ramirez, Canyon Road
Dianne Ashe-Giovannone, El Rio Grande
Donna Simms, Bryant Park Grill
Ana Harris, Robert
Jennifer Jordan, Clyde Frazier’s Wine and Dine
Bridgeen Rice, Clyde Frazier’s Wine and Dine
Restaurant General Managers-Washington D.C.
Bender Gamiao, Thunder Grill & Center Café
Maurizio Reyes, Sequoia
Restaurant General Managers-Las Vegas
Charles Gerbino, Las Vegas Employee Dining Facility
John Hausdorf, Las Vegas Room Service
Geri Ohta, Director of Sales and Catering
Kelly Rosas, America
Mary Massa, Gonzalez y Gonzalez
5
Restaurant General Managers-Las Vegas (continued)
Craig Tribus, Gallagher’s Steakhouse
Ivonne Escobedo, Village Streets
Jeff Stein, Broadway Burger Bar & Grill
Fidencio Chavez, Venetian Food Court
Christopher Waltrip, V-Bar
Staci Green, Yolos Mexican Grill
Restaurant General Manager-Boston
Patricia Reyes, Durgin-Park
Restaurant Chef-Boston
Melicia Phillips, Durgin-Park
Restaurant General Managers-Florida
Darvin Prats, Tampa Food Court
Restaurant General Manager-Foxwoods
Matilda Santana, Manager of Connecticut Operations
Keri House, The Grill at Two Trees
Restaurant Chefs-New York
Fermin Ramirez, El Rio Grande
Ruperto Ramirez, Canyon Road Grill
Gadi Weinreich, Bryant Park Grill
Louisa Fernandez, Robert
Armando Cortes, Clyde Frazier’s Wine and Dine
Restaurant Chefs-Washington D.C.
Michael Foo, Thunder Grill & Center Café
Fanor Baldarrama, Sequoia
Restaurant Chefs-Las Vegas
Jerome Lingle, America
Scott Tindel, Gallagher’s Steakhouse
Richard Harris, Banquets
Steve Shoun, Las Vegas Employee Dining Facility
Sergio Salazar, Gonzalez y Gonzalez
Justin Vega, Yolos Mexican Grill
Adam Payne, The Sporting House
Bernard Camat, Broadway Burger Bar & Grill
Restaurant Chef-Atlantic City
Sergio Soto, Gallagher’s Steakhouse
Restaurant Chefs-Florida
Artemio Espinoza, Hollywood Food Court
Nolberto Vernal, Tampa Food Court
Restaurant Chef-Foxwoods
Rosalio Fuentes, The Grill at Two Trees
6
Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
As of September 29, 2012, the Company owned and operated 21 restaurants and bars, 22 fast
food concepts and catering operations, exclusively in the United States, that have similar
economic characteristics, nature of products and service, class of customer and distribution
methods. The Company believes it meets the criteria for aggregating its operating segments into a
single reporting segment in accordance with applicable accounting guidance.
Accounting Period
Our fiscal year ends on the Saturday nearest September 30. We report fiscal years under a 52/53-
week format. This reporting method is used by many companies in the hospitality industry and is
meant to improve year-to-year comparisons of operating results. Under this method, certain years
will contain 53 weeks. The fiscal years ended September 29, 2012 and October 1, 2011 included
52 weeks.
Reclassifications
Certain reclassifications of prior period balances have been made to conform to the current period
presentation. In connection with the planned or actual sale or closure of various restaurants, the
operations of these businesses have been presented as discontinued operations in the consolidated
financial statements. Accordingly, the Company has reclassified its consolidated statement of
income for the prior period presented. These dispositions are discussed below in “Recent
Restaurant Dispositions.” In addition, the Company made minor reclassifications from common
stock to additional paid-in capital that did not impact results of operations, cash flows or earnings
per share.
Seasonality
The Company has substantial fixed costs that do not decline proportionally with sales. The first
and second fiscal quarters, which include the winter months, usually reflect lower customer
traffic than in the third and fourth fiscal quarters. In addition, sales in the third and fourth fiscal
quarters can be adversely affected by inclement weather due to the significant amount of outdoor
seating at the Company’s restaurants.
Results of Operations
The Company’s operating income of $9,991,000 for the year ended September 29, 2012 increased
73.5% compared to operating income of $5,759,000 for the year ended October 1, 2011. This
increase resulted primarily from: (i) significant improvements, due to mild weather conditions
and an early spring, in the performance of our properties in the New York and Washington, DC
markets (which was also negatively impacted by a flood in the third fiscal quarter of 2011) (ii)
improving conditions in our other markets as a result of improved economic conditions, and (iii)
improved menu costing, partially offset by pre-opening and operating losses in the amount of
approximately $1,800,000 related to our new restaurant in New York City, Clyde Frazier’s Wine
and Dine, which opened in March 2012 and a charge of $379,000 during the year ended
September 29, 2012 to impair the leasehold improvements and equipment of an underperforming
restaurant.
7
The following table summarizes the significant components of the Company’s operating results
for the years ended September 29, 2012 and October 1, 2011, respectively:
Year Ended
Variance
S eptember 29,
2012
October 1,
2011
(in thousands)
$
%
REVENUES:
Food and beverage sales
Other revenue
Total revenues
$
136,914
1,114
$
136,113
783
$ 801
331
138,028
136,896
1,132
COSTS AND EXPENSES:
Food and beverage cost of sales
Payroll expenses
Occupancy expenses
Other operating costs and expenses
General and administrative expenses
Impairment loss from write-down of ling-lived assets
Depreciation and amortization
35,157
43,406
17,702
17,915
9,368
379
4,110
36,742
44,596
18,562
17,792
9,476
-
3,969
(1,585)
(1,190)
(860)
123
(108)
379
141
Total costs and expenses
128,037
131,137
(3,100)
0.6%
42.3%
0.8%
-4.3%
-2.7%
-4.6%
0.7%
-1.1%
N/A
3.6%
-2.4%
OPERATING INCOM E
$
9,991
$
5,759
$ 4,232
73.5%
Revenues
During the Company’s year ended September 29, 2012, revenues increased 0.6% compared to the
year ended October 1, 2011. This slight increase is primarily due to: (i) significant improvements,
due to favorable weather conditions and an early spring, in the performance of our properties in
the New York and Washington, DC markets (which was also negatively impacted by a flood in
the third fiscal quarter of 2011), and (ii) revenues related to our new restaurant in New York City,
Clyde Frazier’s Wine and Dine, which opened in March 2012, partially offset by the closure of
both The Grill Room property located in New York and the America property located in
Washington, DC in the first quarter of fiscal 2012 and the food court operations at the MGM
Grand Casino at the Foxwoods Resort Casino in Ledyard, CT in the second quarter of fiscal 2012.
8
Food and Beverage Sales- Same Store Sales
On a Company-wide basis, same store food and beverage sales increased 4.8% for the year ended
September 29, 2012 as compared to the year ended October 1, 2011 as follows:
Year Ended
Variance
S eptember 29,
2012
October 1,
2011
(in thousands)
$
%
$
57,150
34,263
16,506
3,485
3,792
3,855
15,503
$
56,521
31,425
13,826
2,875
4,274
3,990
15,524
$
629
2,838
2,680
610
(482)
(135)
(21)
134,554
2,360
128,435
$
6,119
7,678
1.1%
9.0%
19.4%
21.2%
-11.3%
-3.4%
-0.1%
4.8%
Las Vegas
New York
Washington, DC
Atlantic City, NJ
Boston
Connecticut
Florida
Same Store Sales
Other
Food and beverage sales
$
136,914
$
136,113
Same store sales in Las Vegas increased by 1.1%, in fiscal 2012 compared to fiscal 2011
primarily as a result of an overall increase in traffic in connection with a general improvement in
economic conditions. Same-store sales in New York increased by 9.0% in fiscal 2012 compared
to fiscal 2011 primarily as a result of favorable weather conditions and an early spring as
compared to the prior year. Same-store sales in Washington, DC (which was negatively impacted
by a flood in the third fiscal quarter of 2011) increased by 19.4% in fiscal 2012 compared to
fiscal 2011 primarily as a result of favorable weather conditions and an early spring as compared
to the prior. Same-store sales in Atlantic City increased by 21.2% in fiscal 2012 compared to
2011 as result of new ownership at Resorts Casino Hotel and their significant marketing efforts
for the property. Same-store sales in Boston decreased 11.3% during fiscal 2012 compared to
2011 as the location continued to suffer the negative impact of a fire that temporarily closed the
property in the second fiscal quarter of 2012. Same store sales in Connecticut decreased 3.4%
during fiscal 2012 compared to fiscal 2011 as the property we operate at continues to attempt to
attract new customers. Same-store sales in Florida during fiscal 2012 compared to 2011 were
relatively flat as expected since the property has matured. Other food and beverage sales consist
of sales related to new restaurants opened during the applicable period and sales related to
properties that were closed during the period due to lease expiration and therefore not included in
discontinued operations.
Our restaurants generally do not achieve substantial increases in revenue from year to year, which
we consider to be typical of the restaurant industry. To achieve significant increases in revenue or
to replace revenue of restaurants that lose customer favor or which close because of lease
expirations or other reasons, we would have to open additional restaurant facilities or expand
existing restaurants. There can be no assurance that a restaurant will be successful after it is
opened, particularly since in many instances we do not operate our new restaurants under a trade
name currently used by us, thereby requiring new restaurants to establish their own identity.
9
Other Revenue
The increase in Other Revenue for fiscal 2012 as compared to fiscal 2011 is primarily due to an
increase in purchase service fees.
Costs and Expenses
Costs and expenses from continuing operations for the years ended September 29, 2012 and
October 1, 2011 were as follows (in thousands):
Year Ended
S eptember 29,
2012
%
to Total
Revenues
Year Ended
October 1,
2011
%
to Total
Revenues
Increase
(Decrease)
$
%
Food and beverage cost of sales
Payroll expenses
Occupancy expenses
Other operating costs and expenses
General and administrative expenses
Impairment loss from write-down of long-lived assets
Depreciation and amortization
$
35,157
43,406
17,702
17,915
9,368
379
4,110
25.5%
31.4%
12.8%
13.0%
6.8%
0.3%
3.0%
$
36,742
44,596
18,562
17,792
9,476
-
3,969
26.8%
32.6%
13.6%
13.0%
6.9%
0.0%
2.9%
$
(1,585)
(1,190)
(860)
123
(108)
379
141
-4.3%
-2.7%
-4.6%
0.7%
-1.1%
N/A
3.6%
$
128,037
$
131,137
$
(3,100)
Food and beverage costs as a percentage of total revenues for the year ended September 29, 2012
decreased as compared to the year ended October 1, 2011 as a result of improved menu costing
partially offset by higher commodity prices.
Payroll expenses as a percentage of total revenues for the year ended September 29, 2012
decreased as compared to the year ended October 1, 2011 as a result of higher than expected
payroll at The Sporting House in Las Vegas in the prior period combined with a reduction in
payroll expenses related to properties that were closed due to lease expiration partially offset by
payroll incurred at our new restaurant in New York City, Clyde Frazier’s Wine and Dine, which
opened in March 2012.
Occupancy expenses as a percentage of total revenues for the year ended September 29, 2012
decreased as compared to the year ended October 1, 2011 as a result of a reduction in costs
related to properties that were closed due to lease expiration partially offset by occupancy
expenses incurred at our new restaurant in New York City, Clyde Frazier’s Wine and Dine, which
opened in March 2012.
Other operating costs and expenses as a percentage of total revenues for the year ended
September 29, 2012 remained static as compared to the year ended October 1, 2011. A slight
increase in total costs were the result of the opening of Clyde Frazier’s Wine & Dine in March
2012, partially offset by cost cutting measures implemented in the latter part of fiscal 2011
combined with a reduction in other operating costs and expenses related to properties that were
closed due to lease expiration.
10
General and administrative expenses (which relate solely to the corporate office in New York
City) as a percentage of total revenues for the year ended September 29, 2012 decreased as
compared to the year ended October 1, 2011 as a result of cost cutting measures implemented in
the latter part of fiscal 2011 partially offset by amounts recorded in connection with the former
President’s separation agreement.
During the year ended September 29, 2012, the Company recorded a charge of $379,000 to
impair the leasehold improvements and equipment of an underperforming restaurant. During the
year ended October 1, 2011, the Company recorded an impairment charge of $2,603,000, which
represented the estimated fair value of the fixed assets, associated with its food court operations at
the MGM Grand Casino at the Foxwoods Resort Casino in Ledyard, CT. Such amount has been
reclassified to discontinued operations, along with operating losses of $1,049,000, net of tax, in
the Consolidated Statement of Income for the year ended October 1, 2011.
Interest expense was $23,000 in fiscal 2012 and $14,000 in fiscal 2011. Interest income was
$33,000 in fiscal 2012 and $17,000 in fiscal 2011. Investments are made in government securities
and investment quality corporate instruments.
Other income, which generally consists other rentals and insurance proceeds, was $454,000 and
$486,000 for fiscal 2012 and 2011, respectively.
Income Taxes
The provision for income taxes reflects federal income taxes calculated on a consolidated basis
and state and local income taxes which are calculated on a separate entity basis. Most of the
restaurants we own or manage are owned or managed by a separate legal entity.
For state and local income tax purposes, certain losses incurred by a subsidiary may only be used
to offset that subsidiary’s income, with the exception of the restaurants operating in the District of
Columbia. Accordingly, our overall effective tax rate has varied depending on the level of income
and losses incurred at individual subsidiaries.
Our overall effective tax rate in the future will be affected by factors such as the level of losses
incurred at our New York City facilities which cannot be consolidated for state and local tax
purposes, pre-tax income earned outside of New York City and the utilization of state and local
net operating loss carry forwards. Nevada has no state income tax and other states in which we
operate have income tax rates substantially lower in comparison to New York. In order to utilize
more effectively tax loss carry forwards at restaurants that were unprofitable, we have merged
certain profitable subsidiaries with certain loss subsidiaries.
The Revenue Reconciliation Act of 1993 provides tax credits to us for FICA taxes paid on tip
income of restaurant service personnel. The net benefit to us was $564,000 in both fiscal 2012
and fiscal 2011.
11
Liquidity and Capital Resources
Our primary source of capital has been cash provided by operations. We utilize cash generated
from operations to fund the cost of developing and opening new restaurants, acquiring existing
restaurants owned by others and remodeling existing restaurants we own.
Net cash provided by operating activities for the year ended September 29, 2012 was
$13,423,000, compared to $8,530,000 for the prior year. This net change was primarily
attributable to the increase in operating income as discussed above.
Net cash used in investing activities for the year ended September 29, 2012 was $5,862,000 and
resulted from net proceeds from the sales of investment securities offset by purchases of fixed
assets at existing restaurants and the construction of Clyde Frazier’s Wine and Dine in New York
City.
Net cash provided by investing activities for the year ended October 1, 2011 was $2,623,000 and
resulted from net proceeds from the sales of investment securities and the inclusion of cash
balances from VIEs in the amount of $757,000 partially offset by purchases of fixed assets at
existing restaurants and the construction of The Broadway Burger Bar located in the New York-
New York Hotel & Casino in Las Vegas, NV.
Net cash used in financing activities for the year ended September 29, 2012 of $6,636,000 was
principally used for the payment of dividends, purchase of treasury stock and distributions to non-
controlling interests.
Net cash used in financing activities for the year ended October 1, 2011 of $5,384,000 was
principally used for the payment of dividends and distributions to non-controlling interests.
The Company had a working capital surplus of $4,061,000 at September 29, 2012 as compared to
a working capital surplus of $4,080,000 at October 1, 2011. We believe that our existing cash
balances, investments and cash provided by operations will be sufficient to meet our liquidity and
capital spending requirements at least through the next 12 months.
On December 30, 2011, April 4, 2012, June 29, 2012 and October 2, 2012 the Company paid
quarterly cash dividends in the amount of $0.25 per share on the Company’s common stock. 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
In February 2010, we entered into an amendment to the lease for the food court space at the New
York-New York Hotel and Casino in Las Vegas, Nevada. Pursuant to this amendment, we agreed
to, among other things; commit no less than $3,000,000 to remodel the food court. In exchange
for this commitment, the landlord agreed to extend the food court lease for an additional four
years. As of September 29, 2012, we have spent approximately $2,150,000 related to this
commitment.
On June 7, 2011, we entered into a 10-year exclusive agreement to manage a restaurant and
catering service at Basketball City in New York City in exchange for a fee of $1,000,000 (all of
which has been paid as of December 29, 2012). Under the terms of the agreement the owner of
12
the property will construct the facility at their expense and we will pay the owner an annual fee
based on sales, as defined in the agreement. We expect to begin operating this property within the
next 12 months.
On November 28, 2012, we entered into an agreement to design and lease a restaurant at the
Tropicana Hotel and Casino in Atlantic City, NJ. The initial term of the lease for this facility will
expire 10 years after the date the property first opens for business to the public following its
current refurbishment and will have two five-year renewals. We anticipate the restaurant will
open during the third quarter of the 2013 fiscal year.
Restaurant Expansion
In August 2010, we entered into an agreement to lease the former ESPN Zone space at the New
York-New York Hotel & Casino Resort in Las Vegas and re-open the space under the name The
Sporting House. Such lease is cancellable upon 90 days written notice and provides for rent based
on profits only. This restaurant opened at the end of October 2010 and we did not invest
significant funds to re-open the space.
In the quarter ended January 1, 2011 we combined three fast food outlets located in the Village
Eateries in the New York-New York Hotel & Casino Resort in Las Vegas into a new
restaurant, The Broadway Burger Bar, which opened at the end of December 2010.
On March 18, 2011, we entered into a lease agreement to operate a restaurant and bar in New
York City named Clyde Frazier’s Wine and Dine. In connection with the agreement, the landlord
has agreed to contribute up to $1,800,000 towards the construction of the facility (of which
$1,500,000 was received as of September 29, 2012), which totaled approximately $7,000,000.
The initial term of the lease for this facility expires on March 31, 2027 and has one five-year
renewal. This restaurant opened during the second quarter of fiscal 2012 and, as a result, the
accompanying Consolidated Statement of Income for the year ended September 29, 2012
includes approximately $1,800,000 of pre-opening and operating losses related to this property.
The opening of a new restaurant is invariably accompanied by substantial pre-opening expenses
and early operating losses associated with the training of personnel, excess kitchen costs, costs of
supervision and other expenses during the pre-opening period and during a post-opening “shake
out” period until operations can be considered to be functioning normally. The amount of such
pre-opening expenses and early operating losses can generally be expected to depend upon the
size and complexity of the facility being opened.
Our restaurants generally do not achieve substantial increases in revenue from year to year, which
we consider to be typical of the restaurant industry. To achieve significant increases in revenue or
to replace revenue of restaurants that lose customer favor or which close because of lease
expirations or other reasons, we would have to open additional restaurant facilities or expand
existing restaurants. There can be no assurance that a restaurant will be successful after it is
opened, particularly since in many instances we do not operate our new restaurants under a trade
name currently used by us, thereby requiring new restaurants to establish their own identity.
We may take advantage of other opportunities we consider to be favorable, when they occur,
depending upon the availability of financing and other factors.
13
Recent Restaurant Dispositions and Charges
Lease Expirations – In the first quarter of fiscal 2011 we were advised by the landlord that we
would have to vacate the Gonzalez y Gonzalez property located in New York, NY, which was on
a month-to-month lease. The closure of this property occurred on January 31, 2011.
On July 8, 2011, we entered into an agreement with the landlord of The Grill Room property
located in New York City, whereby in exchange for a payment of $350,000 we vacated the
property on October 31, 2011. Such payment and the related loss on closure of the property, in
the amount of $179,000, are included in Other Operating Costs and Expenses in the
accompanying Consolidated Statement of Income for the year ended September 29, 2012. This
lease was scheduled to expire on December 31, 2011.
In the fourth quarter of fiscal 2011 we were advised by the landlord that we would have to vacate
the America property located in Washington, DC, which was on a month-to-month lease. The
closure of this property occurred on November 7, 2011. The related loss on closure of this
property, in the amount of $186,000, is included in Other Operating Costs and Expenses in the
accompanying Consolidated Statement of Income for the year ended September 29, 2012.
Discontinued Operations – Effective March 15, 2012, we vacated our food court operations at the
MGM Grand Casino at the Foxwoods Resort Casino in Ledyard, CT as we determined that we
would not be able to operate this facility profitably at this location at the current rent. As a result,
we recorded a disposal loss in the amount of $270,000, which was recorded during the second
quarter of fiscal 2012, as well as operating losses of $155,000 for the year ended September 29,
2012, all of which are included in discontinued operations, net of tax, in the accompanying
Consolidated Statement of Income for the year ended September 29, 2012. During the year ended
October 1, 2011, we recorded an impairment charge of $2,603,000, which represented the
estimated fair value of the fixed assets, associated with this property. Such amount, as well as
operating losses of $1,049,000, is included in discontinued operations, net of tax, in the
accompanying Consolidated Statement of Income for the year ended October 1, 2011.
During the fourth fiscal quarter of 2010, we closed our Pinch & S’Mac operation located in New
York City, and re-concepted the location as Polpette, which featured meatballs and other Italian
food. Sales at Polpette failed to reach the level sufficient to achieve the results the Company
required. On February 6, 2011, we closed this restaurant and on April 28, 2011 it was sold for
$400,000. We realized a loss on the sale of $71,000 which was recorded during the second
quarter of fiscal 2011 as well as operating losses of $152,000 for the year ended October 1, 2011,
all of which are included in discontinued operations in the accompanying Consolidated Statement
of Income.
Other – During the year ended September 29, 2012, the Company recorded a charge of $379,000
to impair the leasehold improvements and equipment of an underperforming restaurant.
14
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 1 to our consolidated
financial statements. While all these significant accounting policies impact our financial condition
and results of operations, we view certain of these policies as critical. Policies determined to be
critical are those policies that have the most significant impact on our consolidated financial
statements and require management to use a greater degree of judgment and estimates. Actual
results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that applying any other
reasonable judgments or estimate methodologies would cause a material effect on our
consolidated results of operations, financial position or cash flows for the periods presented in
this report.
Certain policies that management believes are critical are as follows:
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The accounting estimates that require our most difficult and
subjective judgments include allowances for potential bad debts on receivables, inventories, the
useful lives and recoverability of our assets, such as property and intangibles, fair values of
financial instruments and share-based compensation, the realizable value of our tax assets and
other matters. Because of the uncertainty in such estimates, actual results may differ from these
estimates.
Long-Lived Assets
Long-lived assets, such as property, plant and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In the evaluation of the fair value
and future benefits of long-lived assets, we perform 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 estimated future sales growth and estimated profit margins are included in this
analysis.
Management continually evaluates unfavorable cash flows, if any, related to underperforming
restaurants. Periodically it is concluded that certain properties have become impaired based on
their existing and anticipated future economic outlook in their respective markets. In such
instances, we may impair assets to reduce their carrying values to fair values. Estimated fair
values of impaired properties are based on comparable valuations, cash flows and/or management
judgment. During the year ended September 29, 2012, the Company recorded a charge of
$379,000 to impair the leasehold improvements and equipment of an underperforming restaurant.
Based on the current facts and circumstances, the property does not meet the criteria for held for
sale classification. During the year ended October 1, 2011, the Company recorded an impairment
charge of $2,603,000, which represented the estimated fair value of the fixed assets, associated
15
with this property. Such amount, as well as operating losses of $1,049,000, is included in
discontinued operations in the accompanying Consolidated Statement of Income for the year
ended October 1, 2011.
Leases
We recognize rent expense on a straight-line basis over the expected lease term, including option
periods as described below. Within the provisions of certain leases there are escalations in
payments over the base lease term, as well as renewal periods. The effects of the escalations have
been reflected in rent expense on a straight-line basis over the expected lease term, which
includes option periods when it is deemed to be reasonably assured that we would incur an
economic penalty for not exercising the option. Percentage rent expense is generally based upon
sales levels and is expensed as incurred. Certain leases include both base rent and percentage rent.
We record rent expense on these leases based upon reasonably assured sales levels. The
consolidated financial statements reflect the same lease terms for amortizing leasehold
improvements as were used in calculating straight-line rent expense for each restaurant. Our
judgments may produce materially different amounts of amortization and rent expense than
would be reported if different lease terms were used.
Deferred Income Tax Valuation Allowance
We provide such allowance due to uncertainty that some of the deferred tax amounts may not be
realized. Certain items, such as state and local tax loss carryforwards, 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.
Goodwill and Trademarks
Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair
value of the net identified tangible and intangible assets acquired. Trademarks, which were
acquired in connection with the Durgin Park acquisition, are considered to have an indefinite life.
Goodwill and trademarks are not amortized, but are subject to impairment analysis at least once
annually or more frequently upon the occurrence of an event or when circumstances indicate that
a reporting unit’s carrying amount is greater than its fair value. At September 29, 2012, the
Company performed both a qualitative and quantitative assessment of factors to determine
whether further impairment testing is required. Based on the results of the work performed, the
Company has concluded that no impairment loss was warranted at September 29, 2012.
Qualitative factors considered in this assessment include industry and market considerations,
overall financial performance and other relevant events, management expertise and stability at
key positions. Additional impairment analyses at future dates may be performed to determine if
indicators of impairment are present and, if so, such amount will be determined and the
associated charge will be recorded to the Consolidated Statement of Income.
Share-Based Compensation
The Company measures share-based compensation cost at the grant date based on the fair value
of the award and recognizes it as expense over the applicable vesting period using the straight-
line method. Excess income tax benefits related to share-based compensation expense that must
be recognized directly in equity are considered financing rather than operating cash flow
activities.
16
The fair value of each of the Company’s stock options is estimated on the date of grant using a
Black-Scholes option-pricing model that uses assumptions that relate to the expected volatility of
the Company’s common stock, the expected dividend yield of our stock, the expected life of the
options and the risk free interest rate. During fiscal 2012, options to purchase 251,500 shares of
common stock were granted and are 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. The Company did not grant any options during fiscal 2011. The
Company generally issues new shares upon the exercise of employee stock options.
Recent Developments
On October 29, 2012, the Company suffered a flood at its Red and Sequoia properties located in
New York, NY as a result of a hurricane. The Company does not expect these properties to
reopen as the underlying leases were due to expire in Q2 of 2013. The Company does not expect
losses that are not covered by insurance proceeds to have a material impact on its consolidated
financial position, results of operations or cash flows.
On November 28, 2012, the Company entered into an agreement to design and lease a restaurant
at the Tropicana Hotel and Casino in Atlantic City, NJ. The initial term of the lease for this
facility will expire 10 years after the date the property first opens for business to the public
following its current refurbishment and will have two five-year renewals. The Company
anticipates the restaurant will open during the third quarter of the 2013 fiscal year.
On November 29, 2012, the Board of Directors declared a quarterly dividend of $0.25 per share
on the Company’s common stock to be paid on December 28, 2012 to shareholders of record at
the close of business on December 14, 2012.
Subsequent to September 29, 2012, the Company purchased 14.39% of the members’ interests in
Ark Hollywood/Tampa Investment, LLC for an aggregate consideration of $2,965,000. The
Company now owns 64.39% of this partnership.
Recently Adopted and Issued Accounting Standards
See Notes 1 and 2 of Notes to Consolidated Financial Statements for a description of recent
accounting pronouncements, including those adopted in 2012 and the expected dates of adoption
and the anticipated impact on the Consolidated Financial Statements.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
17
Market For The Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market for Our Common Stock
Our Common Stock, $.01 par value, is traded in the over-the-counter market on the Nasdaq
National Market under the symbol “ARKR.” The high and low sale prices for our Common Stock
from October 3, 2010 through September 29, 2012 are as follows:
Calendar 2010
Fourth Quarter
Calendar 2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Calendar 2012
First Quarter
Second Quarter
Third Quarter
Dividend Policy
High
Low
$
15.00
$ 14.25
14.74
17.39
16.61
14.64
16.40
16.20
16.85
14.20
14.34
12.95
12.70
13.30
14.09
14.13
On November 23, 2010, March 4, 2011, June 17, 2011, September 8, 2011, December 7, 2011,
March 7, 2012, May 29, 2012, September 4, 2012 and November 28, 2012 our Board of Directors
declared quarterly cash dividends in the amount of $0.25 per share. We intend to continue to pay
such quarterly cash dividends for the foreseeable future; however, the payment of future
dividends is at the discretion of our Board of Directors and is based on future earnings, cash flow,
financial condition, capital requirements, changes in U.S. taxation and other relevant factors.
18
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Ark Restaurants Corp.
We have audited the accompanying consolidated balance sheets of Ark Restaurants Corp. and Subsidiaries as
of September 29, 2012 and October 1, 2011, and the related consolidated statements of income, changes in
equity and cash flows for each of the two years in the period ended September 29, 2012. 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 auditing standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Ark Restaurants Corp. and Subsidiaries as of September 29, 2012 and
October 1, 2011, and their consolidated results of operations and cash flows for each of the two years in the
period ended September 29, 2012 in conformity with accounting principles generally accepted in the United
States of America.
/s/ CohnReznick LLP
Jericho, New York
December 28, 2012
F-1
ARK RES TAURANTS CORP. AND S UBS IDIARIES
CONS OLIDATED BALANCE S HEETS
(In Thousands, Except Per Share Amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (includes $714 at September 29, 2012 and $852 at October 1, 2011 related to VIEs)
Short-term investments in available-for-sale securities
Accounts receivable (includes $1,776 at September 29, 2012 and $1,423 at October 1, 2011 related to VIEs)
Employee receivables
Inventories (includes $28 at September 29, 2012 and $23 at October 1, 2011 related to VIEs)
Prepaid and refundable income taxes (includes $235 at September 29, 2012 and $244 at October 1, 2011
related to VIEs)
Prepaid expenses and other current assets (includes $13 at September 29, 2012 and $9 at October 1, 2011
related to VIEs)
Total current assets
FIXED ASSETS - Net (includes $3,189 at September 29, 2012 and $3,660 at October 1, 2011 related to VIEs)
INTANGIBLE ASSETS - Net
GOODWILL
TRADEM ARKS
DEFERRED INCOM E TAXES
OTHER ASSETS (includes $71 at September 29, 2012 and October 1, 2011 related to VIEs)
TOTAL ASSETS
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable - trade (includes $153 at September 29, 2012 and $565 at October 1, 2011 related to VIEs)
Accrued expenses and other current liabilities (includes $1,950 at September 29, 2012 and
$2,076 at October 1, 2011 related VIEs)
Accrued income taxes
Current portion of note payable
Total current liabilities
OPERATING LEASE DEFERRED CREDIT
NOTE PAYABLE, LESS CURRENT PORTION
TOTAL LIABILITIES
COM M ITM ENTS AND CONTINGENCIES
EQUITY:
Common stock, par value $.01 per share - authorized, 10,000 shares; issued, 4,601 shares
at September 29, 2012 and October 1, 2011, respectively; outstanding, 3,245 shares
and 3,495 shares at September 29, 2012 and October 1, 2011, respectively
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Less stock option receivable
Less treasury stock, at cost, of 1,356 shares and 1,106 shares at September 29, 2012
and October 1, 2011, respectively
Total Ark Restaurants Corp. shareholders' equity
NON-CONTROLLING INTERESTS
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
See notes to consolidated financial statements.
September 29,
2012
October 1,
2011
(Note 1)
$
$
$
$
8,705
75
3,790
339
1,567
985
1,087
16,548
26,194
1,021
4,813
721
4,960
907
7,780
2,699
3,678
288
1,612
244
412
16,713
23,239
629
4,813
721
7,253
893
55,164
$
54,261
2,729
$
2,522
8,873
-
885
12,487
4,650
9,645
388
78
12,633
3,442
1,240
-
18,377
16,075
46
23,410
-3
22,372
45,828
-
(13,220)
32,608
46
23,302
20,128
43,479
(29)
(10,095)
33,355
4,179
4,831
36,787
38,186
$
55,164
$
54,261
F-2
ARK RES TAURANTS CORP. AND S UBS IDIARIES
CONS OLIDATED S TATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
REVENUES:
Food and beverage sales
Other revenue
Total revenues
COSTS AND EXPENSES:
Food and beverage cost of sales
Payroll expenses
Occupancy expenses
Other operating costs and expenses
General and administrative expenses
Impairment loss from write-down of long-lived assets
Depreciation and amortization
Total costs and expenses
OPERATING INCOM E
OTHER (INCOM E) EXPENSE:
Interest expense
Interest income
Other income, net
Total other income, net
INCOM E BEFORE PROVISION FOR INCOM E TAXES
Provision for income taxes
INCOM E FROM CONTINUING OPERATIONS
Loss from discontinued operations, net of income tax benefits
CONSOLIDATED NET INCOM E
Net income attributable to non-controlling interests
NET INCOM E ATTRIBUTABLE TO ARK RESTAURANTS CORP.
AM OUNTS ATTRIBUTABLE TO ARK RESTAURANTS CORP.:
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
NET INCOM E (LOSS) PER ARK RESTAURANTS CORP. COM M ON SHARE:
From continuing operations:
Basic
Diluted
From discontinued operations:
Basic
Diluted
From net income:
Basic
Diluted
WEIGHTED AVERAGE NUM BER OF COM M ON SHARES OUTSTANDING:
Basic
Diluted
See notes to consolidated financial statements.
F-3
Year Ended
September 29,
2012
October 1,
2011
(Note 1)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
136,914
1,114
138,028
35,157
43,406
17,702
17,915
9,368
379
4,110
128,037
9,991
23
(33)
(454)
(464)
10,455
3,013
7,442
(292)
7,150
(1,661)
5,489
5,748
(259)
5,489
1.75
1.73
(0.08)
(0.08)
1.67
1.65
3,292
3,327
136,113
783
136,896
36,742
44,596
18,562
17,792
9,476
-
3,969
131,137
5,759
14
(17)
(486)
(489)
6,248
1,473
4,775
(2,471)
2,304
(889)
1,415
2,695
(1,280)
1,415
0.77
0.76
(0.36)
(0.36)
0.41
0.40
3,494
3,525
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ARK RES TAURANTS CORP. AND S UBS IDIARIES
CONS OLIDATED S TATEMENTS OF CAS H FLOWS
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
$
7,150
$
2,304
Year Ended
September 29,
2012
October 1,
2011
Impairment loss from write-down of long-lived assets
Write-off of notes receivable from former president
Loss on closure of restaurants
Loss on disposal of discontinued operations
Deferred income taxes
Stock-based compensation
Excess tax benefits related to stock-based compensation
Depreciation and amortization
Operating lease deferred credit
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid, refundable and accrued income taxes
Prepaid expenses and other current assets
Other assets
Accounts payable - trade
Accrued expenses and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets
Purchase of management rights
Proceeds from sale of discontinued operation
Consolidated cash balances of VIEs
Loans and advances made to employees
Payments received on employee receivables
Purchases of investment securities
Proceeds from sales of investment securities
Payments received on long-term receivables
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable
Dividends paid
Proceeds from issuance of stock upon exercise of stock options
Excess tax benefits related to stock-based compensation
Purchase of treasury shares
Distributions to non-controlling interests
Net cash used in financing activities
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, Beginning of year
CASH AND CASH EQUIVALENTS, End of year
SUPPLEM ENTAL DISCLOSURES OF CASH FLOW INFORM ATION:
Cash paid during the year for:
Interest
Income taxes
Non-cash investing activity:
Note payable in connection with purchase of treasury shares
Non-cash financing activity:
Note received in connection with sale of discontinued operation
See notes to consolidated financial statements.
F-5
379
66
365
270
2,293
108
-
4,110
1,409
(112)
(232)
(1,129)
(675)
(14)
207
(772)
13,423
(7,995)
(400)
-
-
(175)
87
(441)
3,062
-
(5,862)
(78)
(3,245)
-48
-
(1,000)
(2,313)
(6,636)
925
7,780
8,705
23
2,363
2,125
-
$
$
$
$
$
2,603
-
-
71
(1,104)
190
(3)
4,491
(18)
182
51
101
142
(406)
(1,233)
1,159
8,530
(2,772)
(600)
400
757
(137)
139
(3,145)
7,879
102
2,623
(224)
(3,493)
3
-
(1,718)
(5,384)
5,769
2,011
7,780
12
1,201
-
100
$
$
$
$
$
ARK RESTAURANTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As of September 29, 2012, Ark Restaurants Corp. and Subsidiaries (the “Company”) owned and operated 21
restaurants and bars, 22 fast food concepts and catering operations, exclusively in the United States, that have
similar economic characteristics, nature of products and service, class of customers and distribution methods. The
Company believes it meets the criteria for aggregating its operating segments into a single reporting segment in
accordance with applicable accounting guidance. Seven restaurants are located in New York City, three are
located in Washington, D.C., seven are located in Las Vegas, Nevada, two are located in Atlantic City, New
Jersey, one is located at the Foxwoods Resort Casino in Ledyard, Connecticut and one is located in Boston,
Massachusetts. The Las Vegas operations include five restaurants within the New York-New York Hotel &
Casino Resort and operation of the hotel's room service, banquet facilities, employee dining room and six food
court concepts; one bar within the Venetian Casino Resort as well as three food court concepts; and one
restaurant within the Planet Hollywood Resort and Casino. In Atlantic City, New Jersey, the Company operates a
restaurant and a bar in the Resorts Atlantic City Hotel and Casino. The operation at the Foxwoods Resort Casino
consists of one fast food concept and a restaurant. In Boston, Massachusetts, the Company operates a restaurant
in the Faneuil Hall Marketplace. The Florida operations under management include five fast food facilities in
Tampa, Florida and seven fast food facilities in Hollywood, Florida, each at a Hard Rock Hotel and Casino.
Basis of Presentation — The accompanying consolidated financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC") and accounting principles
generally accepted in the United States of America ("GAAP"). The Company's reporting currency is the United
States dollar.
Accounting Period — The Company’s fiscal year ends on the Saturday nearest September 30. The fiscal years
ended September 29, 2012 and October 1, 2011 included 52 weeks.
Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The accounting estimates that require management’s most difficult and
subjective judgments include allowances for potential bad debts on receivables, inventories, the useful lives and
recoverability of its assets, such as property and intangibles, fair values of financial instruments and share-based
compensation, the realizable value of its tax assets and other matters. Because of the uncertainty in such
estimates, actual results may differ from these estimates.
Principles of Consolidation — The consolidated financial statements include the accounts of Ark Restaurants
Corp. and all of its wholly owned subsidiaries, partnerships and other entities in which it has a controlling
interest. Also included in the consolidated financial statements are certain variable interest entities (“VIEs”). All
significant intercompany balances and transactions have been eliminated in consolidation.
Reclassifications — Certain reclassifications of prior period balances have been made to conform to the current
period presentation. In connection with the planned or actual sale or closure of various restaurants, the operations
of these businesses have been presented as discontinued operations in the consolidated financial statements.
Accordingly, the Company has reclassified its consolidated statement of income for the prior period presented –
see Note 4 – Recent Restaurant Dispositions.
In addition, the Company made minor reclassifications from
common stock to additional paid-in capital that did not impact results of operations, cash flows or earnings per
share.
Non-Controlling Interests — Non-controlling interests represent capital contributions, income and loss
attributable to the shareholders of less than wholly-owned and consolidated entities.
F-6
Seasonality — The Company has substantial fixed costs that do not decline proportionally with sales. The
first and second fiscal quarters, which include the winter months, usually reflect lower customer traffic than in
the third and fourth fiscal quarters. In addition, sales in the third and fourth fiscal quarters can be adversely
affected by inclement weather due to the significant amount of outdoor seating at the Company’s restaurants.
Fair Value of Financial Instruments — The carrying amount of cash and cash equivalents, investments,
receivables, accounts payable, and accrued expenses approximate fair value due to the immediate or short-term
maturity of these financial instruments. The fair value of notes payable is determined using current applicable
rates for similar instruments as of the balance sheet date and approximates the carrying value of such debt.
Cash and Cash Equivalents — Cash and cash equivalents include cash on hand, deposits with banks and highly
liquid investments generally with original maturities of three months or less. Outstanding checks in excess of
account balances, typically vendor payments, payroll and other contractual obligations disbursed after the last day
of a reporting period are reported as a current liability in the accompanying consolidated balance sheets.
Available-For-Sale Securities — Available-for-sale securities consist primarily of United States Treasury Bills
and Notes, all of which have a high degree of liquidity and are reported at fair value, with unrealized gains and
losses recorded in Accumulated Other Comprehensive Income. The cost of investments in available-for-sale
securities is determined on a specific identification basis. Realized gains or losses and declines in value judged to
be other than temporary, if any, are reported in Other income (expense), net. The Company evaluates its
investments periodically for possible impairment and reviews factors such as the length of time and extent to
which fair value has been below cost basis and the Company’s ability and intent to hold the investment for a
period of time which may be sufficient for anticipated recovery in market value.
Concentrations of Credit Risk — Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents. The Company reduces credit risk by placing its cash
and cash equivalents with major financial institutions with high credit ratings. At times, such amounts may
exceed Federally insured limits.
For the years ended September 29, 2012 and October 1, 2011, the Company made purchases from one vendor
that accounted for approximately 13% of total purchases in each year.
Accounts Receivable — Accounts receivable is primarily comprised of normal business receivables such as
credit card receivables that are paid off in a short period of time and amounts due from the hotels operators where
the Company has a location, and are recorded when the products or services have been delivered. The Company
reviews the collectability of its receivables on an ongoing basis, and provides for an allowance when it considers
the entity unable to meet its obligation.
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.
Revenue Recognition — Company-owned restaurant sales are comprised almost entirely of food and beverage
sales. The Company records revenue at the time of the purchase of products by customers.
Included in Other
Revenues are purchase service fees which represent commissions earned by a subsidiary of the Company for
providing purchasing services to other restaurant groups.
The Company offers customers the opportunity to purchase gift certificates. At the time of purchase by the
customer, the Company records a gift certificate liability for the face value of the certificate purchased. The
Company recognizes the revenue and reduces the gift certificate liability when the certificate is redeemed. The
Company does not reduce its recorded liability for potential non-use of purchased gift cards. The Company also
issues gift cards to service providers and to others for no consideration. Costs associated with these issuances are
recognized at the time of redemption.
Additionally, the Company presents sales tax on a net basis in its consolidated financial statements.
F-7
less
Fixed Assets — Leasehold improvements and furniture, fixtures and equipment are stated at cost
accumulated depreciation and amortization. Depreciation of furniture, fixtures and equipment is computed using
the straight-line method over the estimated useful lives of the respective assets (three to seven years).
Amortization of improvements to leased properties is computed using the straight-line method based upon the
initial term of the applicable lease or the estimated useful life of the improvements, whichever is less, and ranges
from 5 to 30 years. For leases with renewal periods at the Company’s option, if failure to exercise a renewal
option imposes an economic penalty to the Company, management may determine at the inception of the lease
that renewal is reasonably assured and include the renewal option period in the determination of appropriate
estimated useful lives. Routine expenditures for repairs and maintenance are charged to expense when incurred.
Major replacements and improvements are capitalized. Upon retirement or disposition of fixed assets, the cost
and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized
in the Consolidated Statements of Income.
The Company includes in construction in progress improvements to restaurants that are under construction. Once
the projects have been completed, the Company begins 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.
Intangible Assets — Intangible assets consist principally of purchased leasehold rights, operating rights and
covenants not to compete. Costs associated with acquiring leases and subleases, principally purchased leasehold
rights, and operating rights have been capitalized and are being amortized on the straight-line method based upon
the initial terms of the applicable lease agreements, which range from 9 to 20 years. Covenants not to compete
arising from restaurant acquisitions are amortized over the contractual period, typically five years.
Long-lived Assets — Long-lived assets, such as property, plant and equipment, and purchased intangibles subject
to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
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 estimated future sales growth and estimated
profit margins are included in this analysis. See Note 6 for a discussion of impairment charges for long-lived
assets recorded in fiscal 2012. See Note 4 for a discussion of impairment charges for long-lived assets recorded
in fiscal 2011.
Goodwill and Trademarks — Goodwill is recorded when the purchase price paid for an acquisition exceeds the
estimated fair value of the net identified tangible and intangible assets acquired. Trademarks, which were
acquired in connection with the Durgin Park acquisition, are considered to have an indefinite life. Goodwill and
trademarks are not amortized, but are subject to impairment analysis at least once annually or more frequently
upon the occurrence of an event or when circumstances indicate that a reporting unit's carrying amount is greater
than its fair value. At September 29, 2012, the Company performed both a qualitative and quantitative
assessment of factors to determine whether further impairment testing is required. Based on the results of the
work performed, the Company has concluded that no impairment loss was warranted at September 29, 2012.
Qualitative factors considered in this assessment include industry and market considerations, overall financial
performance and other relevant events, management expertise and stability at key positions. Additional
impairment analyses at future dates may be performed to determine if indicators of impairment are present, and if
so, such amount will be determined and the associated charge will be recorded to the Consolidated Statements of
Income.
Leases — 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. Tenant
allowances are included in the straight-line calculations and are being deferred over the lease term and reflected
as a reduction in rent expense. Percentage rent expense is generally based upon sales levels and is expensed as
F-8
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.
Occupancy Expenses — Occupancy expenses include rent, rent taxes, real estate taxes, insurance and utility
costs.
Defined Contribution Plans — The Company offers a defined contribution savings plan (the “Plan”) to all of its
full-time employees. Eligible employees may contribute pre-tax amounts to the Plan subject to the Internal
Revenue Code limitations. Company contributions to the Plan are at the discretion of the Board of Directors.
During the years ended September 29, 2012 and October 1, 2011, the Company did not make any contributions to
the Plan.
Income Taxes — Income taxes are accounted for under the asset and liability method whereby 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.
The Company has recorded a liability for unrecognized tax benefits resulting from tax positions taken, or
expected to be taken, in an income tax return.
It is the Company’s policy to recognize interest and penalties
related to uncertain tax positions as a component of income tax expense. Uncertain tax positions are evaluated
and adjusted as appropriate, while taking into account the progress of audits of various taxing jurisdictions.
Non-controlling interests relating to the income or loss of consolidated partnerships includes no provision for
income taxes as any tax liability related thereto is the responsibility of the individual minority investors.
Income Per Share of Common Stock — Basic net income per share 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).
Share-based Compensation — The Company measures share-based compensation cost at the grant date based on
the fair value of the award and recognizes it as expense over the applicable vesting period using the straight-line
method. Upon exercise of options, excess income tax benefits related to share-based compensation expense that
must be recognized directly in equity are considered financing rather than operating cash flow activities.
During fiscal 2012, options to purchase 251,500 shares of common stock were granted at an exercise price of
$14.40 per share and are 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. Such options had
an aggregate grant date fair value of approximately $646,000. The Company did not grant any options during the
fiscal year 2011. The Company generally issues new shares upon the exercise of employee stock options.
The fair value of each of the Company’s stock options is estimated on the date of grant using a Black-Scholes
option-pricing model that uses assumptions that relate to the expected volatility of the Company’s common stock,
the expected dividend yield of the Company’s stock, the expected life of the options and the risk free interest rate.
The assumptions used for the 2012 grant include a risk free interest rate of 1.67%, volatility of 36.2%, a dividend
yield of 6.13% and an expected life of 6.25 years.
F-9
New Accounting Standards Adopted in Fiscal 2012 — In May 2011, the Financial Accounting Standards Board
(the “FASB”) issued guidance that amends GAAP to conform it with fair value measurement and disclosure
requirements in International Financial Reporting Standards (“IFRS”). The amendments changed the wording
used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about
fair value measurements. The provisions of this guidance, which were adopted effective for the Company’s
quarter ended March 31, 2012, did not have a material impact on the Company’s consolidated results of
operations, financial condition or disclosures.
In September 2011, the FASB issued new accounting guidance intended to simplify how an entity tests goodwill
for impairment. The guidance permits an entity to first assess qualitative factors to determine whether it is
necessary to perform the two-step quantitative goodwill impairment test. An entity is no longer required to
calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is
more likely than not that its fair value is less than its carrying amount. The new accounting guidance is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption
permitted. The early adoption of this guidance during fiscal 2012 did not have a material impact on the
Company’s consolidated financial condition or results of operations.
New Accounting Standards Not Yet Adopted — In June 2011, the FASB issued new accounting guidance on the
presentation of other comprehensive income. The new guidance eliminates the current option to present the
components of other comprehensive income as part of the statement of changes in equity. Instead, an entity has
the option to present the total of comprehensive income, the components of net income and the components of
other comprehensive income either in a single continuous statement of comprehensive income or in two separate
but consecutive statements. The new accounting guidance is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2011, with early adoption permitted. Full retrospective application is
required. As the new accounting guidance will only amend the presentation requirements of other comprehensive
income, the Company does not expect the adoption to have a significant impact on its consolidated financial
condition or results of operations.
In December 2011, the FASB issued amended standards to increase the prominence of offsetting assets and
liabilities reported in financial statements. These amendments require an entity to disclose information about
offsetting and the related arrangements to enable users of its financial statements to understand the effect of those
arrangements on its financial position. These amendments will enhance disclosures by requiring improved
information about financial instruments and derivative instruments that are either offset or subject to an
enforceable master netting arrangement or similar agreement. This information will enable users of an entity’s
financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial
position, including the effect or potential effect of rights of setoff associated with certain financial instruments
and derivative instruments. These revised standards are effective for annual reporting periods beginning on or
after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures
required by those amendments retrospectively for all comparative periods presented. These amended standards
may require additional footnote disclosures for these enhancements; however they will not affect our
consolidated financial position or results of operations.
2. CONSOLIDATION OF VARIABLE INTEREST ENTITIES
Upon adoption of new accounting guidance for VIEs on October 3, 2010, the Company determined that it is the
primary beneficiary of two VIEs which had not been previously consolidated, Ark Hollywood/Tampa
Investment, LLC and Ark Connecticut Investment, LLC. The new guidance requires that a single party
(including its related parties and de facto agents) be able to exercise their rights to remove the decision maker in
order for the “kick-out” rights to be considered substantive. Previously, a simple majority of owners that could
exercise kick-out rights was considered a substantive right. This change resulted in the need for consolidation.
F-10
The assets and liabilities associated with the Company’s consolidation of VIEs are as follows:
Cash and cash equivalents
Accounts receivable
Inventories
Prepaid income taxes
Prepaid expenses and other current assets
Due from Ark Restaurants Corp. and affiliates (1)
Fixed assets, net
Other long-term assets
Total assets
Accounts payable
Accrued expenses and other current liabilities
Total liabilities
Equity of variable interest entities
Total liabilities and equity
S eptember 29,
2012
October 1,
2011
(in thousands)
$
$
714
1,776
28
235
13
288
3,189
71
6,314
$
$
852
1,423
23
244
9
410
3,660
71
6,692
$
153
1,950
2,103
4,211
$
6,314
$
565
2,076
2,641
4,051
$
6,692
(1) Amounts due from Ark Restaurants Corp. and affiliates are eliminated upon consolidation.
The liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the
Company’s general assets; rather, they represent claims against the specific assets of the consolidated VIEs.
Conversely, assets recognized as a result of consolidating these VIEs do not represent additional assets that could
be used to satisfy claims against the Company’s general assets.
3. RECENT RESTAURANT EXPANSION
In August 2010, the Company entered into an agreement to lease the former ESPN Zone space at the New York-
New York Hotel & Casino Resort in Las Vegas and re-open the space under the name The Sporting House. Such
lease is cancellable upon 90 days written notice and provides for rent based on profits only. This restaurant
opened at the end of October 2010 and the Company did not invest significant funds to re-open the space.
In the quarter ended January 1, 2011, the Company combined three fast food outlets located in the Village
Eateries in the New York-New York Hotel & Casino Resort in Las Vegas into a new restaurant, The Broadway
Burger Bar, which opened at the end of December 2010.
On March 18, 2011, a subsidiary of the Company entered into a lease agreement to operate a restaurant and bar in
New York City named Clyde Frazier’s Wine and Dine. In connection with the agreement, the landlord has
agreed to contribute up to $1,800,000 towards the construction of the facility (of which $1,500,000 was received
as of September 29, 2012 and is being deferred over the lease term), which totaled approximately $7,000,000.
The initial term of the lease for this facility expires on March 31, 2027 and has one five-year renewal. This
restaurant opened during the second quarter of fiscal 2012 and, as a result, the Consolidated Statement of Income
for the year ended September 29, 2012 includes approximately $1,800,000 of pre-opening and operating losses
related to this property.
F-11
4.
RECENT RESTAURANT DISPOSITIONS
Lease Expirations – The Company was advised by the landlord that it would have to vacate the Gonzalez y
Gonzalez property located in New York, NY, which was on a month-to-month lease. The closure of this property
occurred on January 31, 2011 and did not result in a material charge.
On July 8, 2011, the Company entered into an agreement with the landlord of The Grill Room property located in
New York City, whereby in exchange for a payment of $350,000 the Company vacated the property on October
31, 2011. Such payment and the related loss on closure of the property, in the amount of $179,000, are included
in Other Operating Costs and Expenses in the Consolidated Statement of Income for the year ended September
29, 2012. This lease was scheduled to expire on December 31, 2011.
The Company was advised by the landlord that it would have to vacate the America property located in
Washington, DC, which was on a month-to-month lease. The closure of this property occurred on November 7,
2011. The related loss on closure of this property, in the amount of $186,000, is included in Other Operating
Costs and Expenses in the Consolidated Statement of Income for the year ended September 29, 2012.
Discontinued Operations – Effective March 15, 2012, the Company vacated its food court operations at the
MGM Grand Casino at the Foxwoods Resort Casino in Ledyard, CT. The Company determined that it would not
be able to operate this facility profitably at this location at the current rent. As a result, the Company recorded a
disposal loss in the amount of $270,000, which was recorded during the second quarter of fiscal 2012, as well as
operating losses of $155,000 for the year ended September 29, 2012, all of which are included in discontinued
operations, net of tax, in the Consolidated Statement of Income for the year ended September 29, 2012. During
the year ended October 1, 2011, the Company recorded an impairment charge of $2,603,000, which represented
the estimated fair value of the fixed assets, associated with this property. Such amount, as well as operating
losses of $1,049,000, is included in discontinued operations, net of tax, in the Consolidated Statement of Income
for the year ended October 1, 2011. Included in the Net (Income) Loss Attributable to Non-controlling Interests
line item in the accompanying Consolidated Statement of Income for the years ended September 29, 2012 and
October 1, 2011 are losses of $33,000 and $1,191,000, respectively, attributable to the limited partners in this
property.
During the fourth fiscal quarter of 2010, the Company closed its Pinch & S’Mac operation located in New York
City, and re-concepted the location as Polpette, which featured meatballs and other Italian food. Sales at Polpette
failed to reach the level sufficient to achieve the results the Company required. On February 6, 2011, the
Company closed this restaurant and on April 28, 2011 it was sold for $400,000. The Company realized a loss on
the sale of $71,000 which was recorded during the second quarter of fiscal 2011 as well as operating losses of
$152,000 for the year ended October 1, 2011, all of which are included in discontinued operations in the
Consolidated Statement of Income.
The results of discontinued operations were as follows:
Revenues
Costs and expenses
Loss before income taxes
Income tax benefit
Net loss
Year Ended
S eptember 29,
2012
October 1,
2011
(In thousands)
$
910
1,335
(425)
(133)
$
2,744
6,619
(3,875)
(1,404)
$
(292)
$
(2,471)
F-12
5.
INVESTMENT SECURITIES
Fair value is defined as the price that we would receive to sell an asset or pay to transfer a liability in an orderly
transaction between market participants on the measurement date. In determining fair value, the accounting
standards establish a three level hierarchy for inputs used in measuring fair value, as follows:
•
•
•
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or liability, either directly
or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
The following available-for-sale securities are re-measured to fair value on a recurring basis and are valued using
Level 1 inputs and the market approach as follows:
At S eptember 29, 2012
Available-for-sale short-term:
Government debt securities
At October 1, 2011
Available-for-sale short-term:
Government debt securities
Amortized Cost
Gross
Unrealized
Holding Gains
Gross
Unrealized
Holding Losses
(In thousands)
Fair Value
$
75
$
-
$
-
$
75
Amortized Cost
Gross
Unrealized
Holding Gains
Gross
Unrealized
Holding Losses
(In thousands)
Fair Value
$
2,696
$
3
$
-
$
2,699
At September 29, 2012, all of the Company’s government debt securities mature within fiscal year 2013.
F-13
6.
FIXED ASSETS
Fixed assets consist of the following:
Leasehold improvements
Furniture, fixtures and equipment
Construction in progress
Less: accumulated depreciation and amortization
S eptember 29,
2012
October 1,
2011
(In thousands)
$
41,028
$
36,472
34,161
-
75,189
48,995
34,144
587
71,203
47,964
$
26,194
$
23,239
Depreciation and amortization expense related to fixed assets for the year ended September 29, 2012 was
$4,102,000. Depreciation and amortization expense related to fixed assets for the year ended and October 1,
2011 was $4,483,000 of which $3,961,000 is included in costs and expenses and $522,000 is included
discontinued operations.
Management continually evaluates unfavorable cash flows, if any, related to underperforming restaurants.
Periodically it is concluded that certain properties have become impaired based on their existing and anticipated
future economic outlook in their respective markets. In such instances, we may impair assets to reduce their
carrying values to fair values. Estimated fair values of impaired properties are based on comparable valuations,
cash flows and/or management judgment. During the year ended September 29, 2012, the Company recorded a
charge of $379,000 to impair the leasehold improvements and equipment of an underperforming restaurant.
7.
INTANGIBLE ASSETS
Intangible assets consist of the following:
Purchased leasehold rights (a)
Operating rights (b)
Noncompete agreements and other
Less accumulated amortization
S eptember 29,
2012
October 1,
2011
(In thousands)
$
2,343
1,000
283
3,626
2,605
$
2,343
600
322
3,265
2,636
Total intangible assets
$
1,021
$
629
(a)
Purchased leasehold rights arose from acquiring leases and subleases of various restaurants.
(b)
Amounts paid in connection with Basketball City agreement – see Note 10.
Amortization expense related to intangible assets for each of the years ended September 29, 2012 and October 1,
2011 was $8,000.
F-14
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
September 29,
2012
October 1,
2011
(In thousands)
Sales tax payable
Accrued wages and payroll related costs
Customer advance deposits
Accrued occupancy and other operating expenses
$
852
1,475
2,811
3,735
$
953
2,325
2,180
4,187
$
8,873
$
9,645
9. NOTE PAYABLE FOR TREASURY STOCK REPURCHASE
On December 12, 2011, the Company, in a private transaction, purchased 250,000 shares of its common stock at
a price of $12.50 per share, or a total of $3,125,000. Upon the closing of the purchase, the Company paid the
seller $1,000,000 in cash and issued an unsecured promissory note to the seller for $2,125,000. The note bears
interest at 0.19% per annum and is payable in 24 equal monthly installments of $88,541, commencing on
December 1, 2012.
10. COMMITMENTS AND CONTINGENCIES
Leases — The Company leases its restaurants, bar facilities, and administrative headquarters through its
subsidiaries under terms expiring at various dates through 2032. 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 and in one instance based on
profits.
In February 2010, we entered into an amendment to the lease for the food court space at the New York-New
York Hotel and Casino in Las Vegas, Nevada. Pursuant to this amendment, we agreed to, among other things;
commit no less than $3,000,000 to remodel the food court. In exchange for this commitment, the landlord agreed
to extend the food court lease for an additional four years. As of September 29, 2012, the Company has spent
approximately $2,150,000 related to this commitment.
As of October 1, 2011, future minimum lease payments under noncancelable leases are as follows:
Fiscal Year
2013
2014
2015
2016
2017
Thereafter
Amount
(In thousands)
$
8,379
8,049
7,383
6,816
5,571
30,673
Total minimum payments
$
66,871
F-15
In connection with certain of the leases included in the table above, the Company obtained and delivered
irrevocable letters of credit in the aggregate amount of $419,000 as security deposits under such leases.
Rent expense from continuing operations was approximately $14,619,000 and $14,856,000 for the fiscal years
ended September 29, 2012 and October 1, 2011, respectively. Contingent rentals, included in rent expense, were
approximately $5,055,000 and $4,968,000 for the fiscal years ended September 29, 2012 and October 1, 2011,
respectively.
Legal Proceedings — In the ordinary course 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. Management believes, based in part on the advice
of counsel, that the ultimate resolution of these matters will not have a material adverse effect on the Company’s
consolidated financial position, results of operations or cash flows.
Other — On June 7, 2011, the Company entered into a 10-year exclusive agreement to manage a yet to be
constructed restaurant and catering service at Basketball City in New York City in exchange for a fee of
$1,000,000 (all of which has been paid as of September 29, 2012 and is included in Intangible Assets in the
accompanying Consolidated Balance Sheet). Under the terms of the agreement the owner of the property will
construct the facility at their expense and the Company will pay the owner an annual fee based on sales, as
defined in the agreement. The Company expects to begin operating this property within the next 12 months.
11. STOCK OPTIONS
The Company has options outstanding under two stock option plans, the 2004 Stock Option Plan (the “2004 Plan)
and the 2010 Stock Option Plan (the “2010 Plan”), which was approved by shareholders in the second quarter of
2010. Effective with this approval the Company terminated the 2004 Plan. This action terminated the 400
authorized but unissued options under the 2004 Plan, but it did not affect any of the options previously issued
under the 2004 Plan. 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.
The 2010 Stock Option Plan is the Company’s only equity compensation plan currently in effect. Under the 2010
Stock Option Plan, 500,000 options were authorized for future grant. Options granted under the 2010 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.
During fiscal 2012, options to purchase 251,500 shares of common stock were granted and are 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.
F-16
The following table summarizes stock option activity under all plans:
2012
Weighted
Average
Exercise
Price
Shares
Aggregate
Intrinsic
Value
Shares
2011
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
Outstanding, beginning of year
396,600
$
22.82
421,064
$
22.88
Options:
Granted
Exercised
Canceled or expired
Outstanding and expected to vest,
end of year (a)
$
14.40
251,500
-
-
-
(3,964)
(20,500)
$
$
12.04
26.13
648,100
$
19.56
$
1,415,116
396,600
$
22.82
$
202,642
Exercisable, end of year (a)
396,600
$
22.82
$
798,941
396,600
$
22.82
$
202,642
Weighted average remaining
contractual life
6.5 Years
Shares available for future grant
248,500
5.5 Years
500,000
(a)
Options become exercisable at various times and expire at various dates through 2022.
The following table summarizes information about stock options outstanding as of September 29, 2012 (shares in
thousands):
Options Outstanding
Options Exercisable
Range of Exercise Prices
Number of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
contractual
life (in years)
$12.04
$14.40
$29.60
$32.15
166,100
251,500
140,500
90,000
$
$
$
$
12.04
14.40
29.60
32.15
648,100
$
19.56
6.6
9.7
2.2
4.2
6.5
Weighted
Average
Exercise
Price
$
12.04
$
$
29.60
32.15
Number of
Shares
166,100
-
140,500
90,000
396,600
$
22.82
Weighted
Average
Remaining
contractual
life (in years)
6.6
2.2
4.2
4.5
Compensation cost charged to operations for the fiscal years ended 2012 and 2011 for share-based compensation
programs was approximately $108,000 and $190,000, respectively. The compensation cost recognized is
classified as a general and administrative expense in the Consolidated Statements of Income.
As of September 29, 2012, there was approximately $538,000 of unrecognized compensation cost related to
unvested stock options, which is expected to be recognized over a period of approximately two years.
F-17
12.
INCOME TAXES
The provision for income taxes attributable to continuing operations consists of the following:
Current provision:
Federal
State and local
Deferred provision:
Federal
State and local
Year Ended
S eptember 29,
2012
October 1,
2011
(In thousands)
$
469
251
720
$
848
907
1,755
3,140
(847)
2,293
240
(522)
(282)
$
3,013
$
1,473
The effective tax rate differs from the U.S. income tax rate as follows:
Provision at Federal statutory rate
(34% in 2012 and 2011)
State and local income taxes, net of
tax benefits
Tax credits
Income attributable to non-controlling interest
Other
Year Ended
S eptember 29,
2012
October 1,
2011
(In thousands)
$
3,555
$
2,124
312
(565)
(576)
287
109
(503)
(302)
45
$
3,013
$
1,473
F-18
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting and tax purposes. Significant components of the Company’s deferred tax assets
and liabilities are as follows:
Long-term deferred tax assets (liabilities):
State net operating loss carryforwards
Operating lease deferred credits
Depreciation and amortization
Deferred compensation
Partnership investments
Other
Total long-term deferred tax assets
Valuation allowance
S eptember 29,
2012
October 1,
2011
(In thousands)
$
3,357
1,069
(358)
1,431
(413)
108
5,194
(234)
$
2,607
1,228
538
1,172
1,948
122
7,615
(362)
Total net deferred tax assets
$
4,960
$
7,253
In assessing the realizability of deferred tax assets, Management considers whether it is more likely than not that
the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income. The deferred tax valuation allowance of $234,000 and $362,000 as of
September 29, 2012 and October 1, 2011, respectively, was attributable to state and local net operating loss
carryforwards which are not realizable on a more-likely-than-not basis.
A reconciliation of the beginning and ending amount of unrecognized tax benefits excluding interest and penalties
is as follows:
September 29,
2012
October 1,
2011
(In thousands)
Balance at beginning of year
$
209
$
209
Reductions due to settlements with taxing authorities
Reductions as a result of a lapse of the statute of limitations
Interest accrued during the current year
-
-
-
-
-
-
Balance at end of year
$
209
$
209
The entire amount of unrecognized tax benefits if recognized would reduce our annual effective tax rate. As of
September 29, 2012, the Company accrued approximately $108,000 of interest and penalties. The Company does
not expect its unrecognized tax benefits to change significantly over the next 12 months. Inherent uncertainties
exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded through the
various jurisdictions’ tax court systems.
F-19
The Company files tax returns in the U.S. and various state and local jurisdictions with varying statutes of
limitations. An examination of the Company’s Federal tax returns for the fiscal years 2008 and 2009 was
recently completed by the Internal Revenue Service and did not result in a material adjustment to the Company’s
consolidated financial position or results of operations. The 2010 and 2011 fiscal years remain subject to
examination by the Internal Revenue Service. The 2008 through 2011 fiscal years generally remain subject to
examination by most state and local tax authorities.
13. OTHER INCOME
Other income consists of the following:
Video arcade sales
Other rentals
Insurance proceeds
Other
Year Ended
S eptember 29,
2012
October 1,
2011
(In thousands)
$
74
35
325
20
$
103
106
225
52
$
454
$
486
F-20
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 September 29, 2012 and October 1, 2011 follows:
Year ended September 29, 2012
From continuing operations:
Basic EPS
Stock options
Diluted EPS
From discontinued operations:
Basic EPS
Stock options
Diluted EPS
From net income:
Basic EPS
Stock options
Diluted EPS
Year ended October 1, 2011
From continuing operations:
Basic EPS
Stock options
Diluted EPS
From discontinued operations:
Basic EPS
Stock options
Diluted EPS
From net income:
Basic EPS
Stock options
Diluted EPS
Net Income (Loss)
Attributable to Ark
Restaurants Corp.
(Numerator)
Shares
(Denominator)
Per Share
Amount
(In thousands, except per share amounts)
$
5,748
-
3,292
35
$
1.75
(0.02)
$
5,748
3,327
$
1.73
$
(259)
-
3,292
35
$
(0.08)
-
$
(259)
3,327
$
(0.08)
$
5,489
-
3,292
35
$
1.67
(0.02)
$
5,489
3,327
$
1.65
$
2,695
-
3,494
31
$
0.77
(0.01)
$
2,695
3,525
$
0.76
$
(1,280)
-
3,494
31
$
(0.36)
-
$
(1,280)
3,525
$
(0.36)
$
1,415
-
3,494
31
$
0.41
(0.01)
$
1,415
3,525
$
0.40
F-21
For the year ended September 29, 2012, options to purchase 166,100 shares of common stock at a price of $12.04
and options to purchase 251,500 shares of common stock at a price of $14.40 were included in diluted earnings
per share. Options to purchase 140,500 shares of common stock at a price of $29.60 and options to purchase
90,000 shares of common stock at a price of $32.15 per share were not included in diluted earnings per share as
their impact would be anti-dilutive.
For the year ended October 1, 2011, options to purchase 166,100 shares of common stock at a price of $12.04 were
included in diluted earnings per share. Options to purchase 140,500 shares of common stock at a price of $29.60
and options to purchase 90,000 shares of common stock at a price of $32.15 per share were not included in diluted
earnings per share as their impact would be anti-dilutive.
15. RELATED PARTY TRANSACTIONS
The Company’s former President and Chief Operating Officer resigned effective January 1, 2012. In connection
therewith, the Company forgave loans due totaling $66,000 ($29,000 for stock option exercises receivable and
$37,000 for other loans) and has recorded additional compensation in the amount of $475,400 in accordance with
his separation agreement and release. Such amounts are included in General and Administrative Expenses in the
Consolidated Condensed Statement of Income for the year ended September 29, 2012.
Receivables due from the former President, excluding stock option receivables, totaled $37,000 at October 1,
2011. Such amount was forgiven during the year ended September 29, 2012 in connection with his resignation.
Other employee loans totaled approximately $339,000 and $251,000 at September 29, 2012 and October 1, 2011,
respectively. Such amounts are payable on demand and bear interest at the minimum statutory rate (0.19% at
September 29, 2012 and 0.16% at October 1, 2011).
16. SUBSEQUENT EVENTS
On October 29, 2012, the Company suffered a flood at its Red and Sequoia properties located in New York, NY
as a result of a hurricane. The Company does not expect these properties to reopen as the underlying leases were
due to expire in Q2 of fiscal 2013. The Company does not expect losses that are not covered by insurance
proceeds to have a material impact on its consolidated financial position, results of operations or cash flows.
On November 28, 2012, the Company entered into an agreement to design and lease a restaurant at the Tropicana
Hotel and Casino in Atlantic City, NJ. The initial term of the lease for this facility will expire 10 years after the
date the property first opens for business to the public following its current refurbishment and will have two five-
year renewals. The Company anticipates the restaurant will open during the third quarter of the 2013 fiscal year.
On November 29, 2012, the Board of Directors declared a quarterly dividend of $0.25 per share on the
Company's common stock to be paid on December 28, 2012 to shareholders of record at the close of business on
December 14, 2012.
Subsequent to September 29, 2012, the Company purchased 14.39% of the member’s interests in Ark
Hollywood/Tampa Investment, LLC for an aggregate consideration of $2,965,000. The Company now owns
64.39% of this partnership.
******
F-22
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CORPORATE INFORMATION
BOARD OF DIRECTORS
Michael Weinstein
Chairman and Chief Executive Officer
Robert J. Stewart
Chief Financial Officer and Treasurer
Vincent Pascal
Senior Vice President --- Chief Operating Officer
Paul Gordon
Senior Vice President --- Director of Las Vegas Operations
Marcia Allen
Chief Executive Officer, Allen & Associates
Bruce R. Lewin
Chairman and President, Continental Hosts, Ltd.
Steve Shulman
President, Managing Director, Hampton Group Inc.
Arthur Stainman
Senior Managing Director, First Manhattan Co.
Stephen Novick
Senior Advisor, Andrea and Charles Bronfman Philanthropies
EXECUTIVE OFFICE
AUDITORS
Cohn Reznick 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 & Trust Company
17 Battery Place
New York, NY 10004