Paul Robert Stewart - Chief Financial Officer, Principal Accounting Officer, Treasurer and Director Michael Weinstein - Founder, Chairman and Chief Executive Officer

Justyn Putnam

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Ark Restaurants First Quarter 2013 Results Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, February 12, 2013. At this time, I'd like to turn the conference over to Mr. Bob Stewart, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Good morning, and thank you for joining us on our conference call for the first fiscal quarter ended December 29, 2012. With me on the call today are Michael Weinstein, our Chairman and CEO; and Vinny Pascal, our COO. For those of you who have not yet obtained a copy of our press release, it was issued over the Newswire yesterday and is available on our website. To review the full text of that press release, along with the associated financial tables, please go to our homepage at www.arkrestaurants.com. Before we begin, however, I'd like to read the Safe Harbor statement. I need to remind everyone that part of our discussion this afternoon will include forward-looking statements and that these statements are not guarantees of future performance, and therefore, undue reliance should not be placed on them. We refer everyone to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks that may have a direct bearing on our operating results, performance and financial condition. As was announced Friday, we received an unsolicited proposal from Landry's to acquire the company for $22 per share. As we indicated, our Board of Directors will review the Landry's proposal with the assistance of its advisers and will respond in due course. At this time, we will not say anything further or respond to questions regarding the Landry's proposal or the board's review of the proposal. I will now turn the call over to Michael.

Hi, everybody. This is a challenging first quarter. We always have challenges, but this was sort of more interesting than we would've wanted. Hurricane Sandy on the East Coast had a dramatic influence on our first quarter with New York City and Atlantic City greatly disrupted. Many of our restaurants were closed for a week or more. Sequoia and Red at the South Street Seaport in New York City were near the end of their lease terms, and turned in [ph] that it was just economically impractical to reopen them. But besides a significant loss of sales during the quarter due to the hurricane, we are supporting the salaries of many long-term employees of the 2 closed restaurants who have yet to find jobs. This will continue to a lesser degree in the second quarter. Absent from the quarter this year is the income from The Grill Room, which closed during the fiscal 2012 December quarter. Further, Clyde's Wine and Dine had operating losses, although it did make a small operating profit in December. I may also add that at this time, it made a small amount of cash flow in January and will make a small amount of cash flow in February as well. All this said and done, we believe we are in a position to prove the EBITDA this year, even though this quarter was greatly impacted by the hurricane. While we are certainly far from success at Clyde's, we certainly aren't going to lose $1.8 million, which is what we've lost in the last fiscal year. We expect some insurance proceeds from damages to assets caused by Sandy, as well as some monies from some business interruption insurance. And significant to future cash flow, we have acquired some of the partnership interests of the variable interest entities that we own in Florida. We have investives [ph] in the 2 Hard Rock Casinos. These have been great returns for our investors. They've been great management fees for us. And by buying some of these variable interest entity partnership shares, we now participate on both sides, and this will have significant positive going forward. We are taking great steps to try to figure out health insurance. We believe that this is probably the most significant event that will weigh on our company and all companies like us. We offer health insurance to all our full-time employees. But because we deal with -- or our employee base tends to be very young people who are single, many of them do not participate in our health insurance. Under ObamaCare, they will all participate and we will have a significant, significant expense. And we don't know whether elasticity in prices are there to cover these expenses. More importantly than this, many small restaurants with fewer employees, fewer than the guidelines that require you to provide health care, they do not have to provide it, don't have the expense of it and therefore, they are going to be more price-competitive, if the way to solve this problem is to raise prices. So we are fortunate in that in many of our locations in casinos especially, or in train stations or in Bryant Park in New York, we are not competing with those restaurants. But where we have, and there are a few of them, restaurants on the street surrounded by smaller restaurants, it's going to be more difficult to find relief from raising prices. We are hopeful that the industry comes up with a common way to deal with this. We don't know what that is yet. But that, in the future, is going to be a concern. I hope I've explained that equivocally this December quarter. I'm happy to take questions.

[Operator Instructions] And I do have a question from the line of Justyn Putnam with Talanta Investment Group.

Your distributions to non-controlling interests, what was that for the first quarter?

One second, Bob will look it up. Is this related to the Hollywood and Tampa properties...

Well, I'm just trying to get an idea. I mean, I think it was $2 million, $2.3 million for fiscal 2012. And I was just trying to understand if that's changing materially going forward.

It will change materially on the plus side.

Probably to $500,000 a year, I would think, we will pick up.

We'll pick up $500,000 to $600,000 a year. I agree with that. It did not affect us that much in the December quarter because we closed on this in late October. And as a matter fact, we're still -- there's still people who -- at least one person who wants to sell his partnership interest that we have not closed on yet. So little by little, we're trying to grab this up. So it's going to be a $500,000 to $600,000 plus this year. Does that answer your question?

Well, except for the December quarter, it was, what, about $600,000 or so?

Yes.

And then for the year though, you expect it to be $500,000 or $600,000 less than what it was last year.

Right.

[Operator Instructions] Next question is from the line of Tom Winner, private investor.

I had a question about Basketball City and its operations. I believe you felt that they would begin in January 2013. Is that still the case?

Yes. They got hit really hard by the hurricane there on the East River. They just recently reopened. Our deal with them doesn't really start until they can complete a restaurant for us inside the facility. That's part of the deal. And right now, there's no activity that we know of in getting that restaurant up and operating. I think they're waiting for insurance proceeds to help them with that. So we don't have a definitive date at which that will start.

I see. One second question, in past calls, probably a year ago, you had mentioned opening a new property on the Brooklyn waterfront. Is that still in the works?

We said we were looking at it, that we had not yet executed it at least. But we thought it was an interesting development, which we still do. But we have gotten in a very positive way distracted by other things that we're doing.

Our next question is from the line of Michael Margolis, private investor.

Mike, can you make some comments on sources of growth in terms of new properties over the next 12 months?

Yes. So look, I think this begs a larger question. And where we have made a left turn where other people made a right turn, we haven't developed brands. But if we do have a brand, in a sense, it's our ability to operate large scale food operations, great quality at price points that seem to be very attractive. So for instance, and I always use this as an example, at 6:00 on a Thursday night in Bryant Park, which is in the center of New York City, on a nice Thursday, the restaurant has a scattering of people in it, but by 6:05, there are 1,000 people sitting. And we will turn those tables 3 times serving full dinners. And we'll serve 3,000 people. And everybody will get out on time and everybody will have a good meal and everybody will be happy with the price of their check. On a good day in New York, New York, we serve 16,000 people. From a variety of outlets, from fast food, the in-room dining to employee dining room to 3 full-service restaurants, we are good at large scale. And when you get something that's right at large scale, you get huge cash flow that doesn't look like any other restaurant, maybe Cheesecake Factory, when they get a $20 million deal, approaches the percentage of cash flow on sales that we generate. So we are more interested in looking at those type of development deals than we are building a 200-seat restaurant. Now that doesn't mean we won't build a 200-seat restaurant. We have a lease signed to the Tropicana in Atlantic City, which we think we have a great location and it's not an expensive build-out and will be open sometime in late summer with another Burger Bar. We have one at New York, New York that we built about 1.5 years ago that's hugely successful. We just built a small doughnut shop in New York, New York. So we will expand where we're operating in cities we're operating, where we can leverage the same overhead. If we find a good location and a build-out that makes sense, we would think the return on equity is going to be very efficient, we will continue to build. But the projects that we look at are almost exclusively now large scale projects, where we're going to be feeding thousands of people a day or catering facilities, where we know that business and we can feed a large number of people, who are an event and leverage our event department. We have been getting more and more into the idea that our catering facilities are as competitive as anybody's in the city. We leverage many kitchens in New York, Washington, in Las Vegas and therefore, we could be more price-efficient, and we think the quality is as good as anybody out there. And apparently, the corporations and event planners think that as well because our business is increasing nicely year-to-year. So we now have, I think, 6 people in our event department as sales managers. And these events have taken -- largely been placed in our restaurants, but we're now looking more and more at off-premises. And that was one of the reasons for Basketball City. It's a 65,000 square foot facility, where we think it's going to be a big event. So that's the nature of our business line.

Is it fair to say that what you just described, and I think your implications was that this differentiates Ark from other operations in the industry?

I don't know. I know what we are doing, I know we do it well and I know we're looking for more opportunities. And it doesn't look like there's a lot going on at certain times because what we're negotiating is very, very complicated. And I would tell you, we're close to making some interesting deals, but we haven't made them yet. And it's a lot of conversations and a lot of meetings. But it's much, much different than going to a landlord, who has a 2,000, 3,000 square foot space at some city block and say, "We want to lease this and how much, and let's get a lease going." It's much more than that. But we think leveraging our knowledge and our ability to feed on a scale that's unlike most people at the quality level, it's certainly unlike most food and beverage companies. We think that's an important inroad for us in growing this company.

Okay. And then finally, in terms of the remainder of the fiscal year, what specific properties are already announced and slated to open?

We never announced anything, quite honestly. But we have opened the doughnut shop, which is small but it will be incremental in New York, New York, not for millions of dollars, but it will add to profitability. And we think this Burger Bar that the we're opening at the Tropicana in late summer is significant. We also -- we feel we got a handle on Clyde's now. So this is -- I mean, you've never seen anything like this, it's embarrassing. We lost $1.8 million in about 5 or 6 months in operating expenses, and that's really unfair. We had huge pre-opening expenses because the permits were very much delayed going through the city process. And we had full staff on there for months, thinking the permits would be issued any day. And we completely miscalculated that. So you're going to pick up EBITDA just by Clyde's losing less. And we don't think the losses would be -- the cash flow losses won't be that significant. We have about $1 million in depreciation a year there. But certainly on an operating basis before depreciation, there'll be maybe a slight loss to a slight cash flow positive, I guess. And Robert's continues to add volume and significant bottom line results. And the good thing is we have an Atlantic City, which is suffering dramatically. I mean, Atlantic City is a mess. We have 2 facilities down there that's doing kind of good in Resorts. And Resorts is converting to a Margaritaville, and we think that benefits our 2 restaurants also significantly. So we have between stuff that we're -- the little add-ons we're doing right now and stuff that's going well and seems to be increasing in volume. I think we are in for a very solid year. And then hopefully, we have some significant developments that we could tell you about during this fiscal year.

Okay. And the demand for Clyde's, you're satisfied with that. That's looking...

No, nowhere near satisfied with it. I mean, it's a big facility, it occupies a block front from 37th Street to 38th Street on 10th Avenue. That spans about 220 feet of frontage that we have. So one would think that it would be seen. It's not like you've got an awning outside, you've got a whole block front. And certainly, you've got the right icon, New York, with him. I mean, he's beloved. And he's still the commentator for MSG TV on the Knick games and has a program on ESPN. And he's seen all over the place in ads. And we thought that he'd be the pied piper. And it didn't turn out that way. And it's not for lack of his efforts. He's there every night. People love him. When he's in New York, he's there. But it has been very slow to build. But we do feel we have some traction. The volumes are for, I think, the last 13 weeks, 12 of them were above breakeven. We're running it well. The numbers are coming in; food cost, liquor cost, payroll cost are terrific. We have a terrific rent with 20 years left. I certainly don't want to wait for 20 years to see it be successful. We're working very, very hard on it, very hard. I've said to people, "I don't think I've worked harder on a restaurant in my whole life because we believe in it so much." We just believe it's going to be successful. Now, we may be blind and not understand it, but there's certainly extraordinary value in the lease if we wanted to sell it. We acquired that lease in 2009 at $35 a foot. A lease up the block for the same amount of space, 1 block south of us, just went to $75 a foot. So we are controlling an assignable lease that we think has value, but we're not looking to assign it. We think this is going to be successful. It's going to take some more time, but we're getting there. We're getting there.

[Operator Instructions] Gentlemen, I'm showing no further questions at this time. I'll turn the conference back over to you.

Thank you very much. We'll speak to you after the March quarter. We appreciate the attendance and your listening. Have a good day.

Thank you, sir. Ladies and gentlemen, this does conclude the Ark Restaurants First Quarter 2013 Results Conference Call. Thank you very much for your participation, and you may now disconnect.