ARK RESTAURANTS CORP. - 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for ARK RESTAURANTS CORP. covering the 13-week period ended January 2, 1999. The company operates and manages restaurants and bars, with significant operations in New York and Las Vegas. As of February 12, 1999, there were 3,551,399 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q1 1999 (13 Weeks) | Q1 1998 (13 Weeks) |
|---|---|---|
| Net Sales | $26,933,000 | $26,940,000 |
| Gross Restaurant Profit | $19,823,000 | $19,692,000 |
| Operating Income | $1,667,000 | $1,129,000 |
| Net Income | $1,026,000 | $727,000 |
| Diluted EPS | $0.28 | $0.19 |
| Cash from Operations | $951,000 | $206,000 |
| Cash and Equivalents (End) | $1,111,000 | $495,000 |
| Working Capital | ($430,000) Deficit | ($719,000) Deficit |
| Long-Term Debt (Net) | $3,399,000 | $4,405,000 |
Margins: Cost of sales decreased to 26.4% of net sales (from 26.9%). Operating expenses decreased to 62.0% of net sales (from 64.5%), though this figure is net of gains from restaurant sales.
Material Changes vs. Prior Period
- Revenue Stability: Net sales remained flat year-over-year. This masks a $1.31 million increase from new locations (Las Vegas) offset by a $1.93 million decrease from sold locations (B. Smith's DC, Perretti Italian Cafe).
- Profitability Improvement: Net income increased 41% to $1.026 million. This was driven by a 2.5% increase in same-store sales (due to higher customer counts) and improved cost controls.
- Asset Sales: The company sold two restaurants (B. Smith's DC and Perretti Italian Cafe) for an aggregate price of $1.225 million, recognizing a pre-tax gain of $611,000. This contributed $388,000 to after-tax net income.
- Debt Reduction: Long-term debt decreased by approximately $1 million due to principal payments of $1.8 million, partially offset by $800,000 in new borrowings.
- Share Repurchases: The company spent $548,000 purchasing treasury stock during the quarter.
Outlook, Risks, and Management Commentary
- Expansion Plans:
- Washington D.C.: Constructing a 500+ seat Southwestern restaurant at Union Station. Expected cost: $1.8 million. Opening: March 1999.
- Southfield, Michigan: Joint venture to develop four restaurants (50,000 sq ft). Company's share of capital contribution: $6.5 million. Opening: September 1999.
- Liquidity: The company maintains a $10 million revolving credit facility with Bank Leumi USA. As of Jan 2, 1999, $1.7 million was outstanding. Management notes the business can operate with negative working capital.
- Year 2000 (Y2K) Risk: The company is assessing Y2K impacts on reporting and POS systems. Estimated remediation cost is under $150,000. Risks include potential failures of third-party vendors (e.g., New York-New York Hotel systems) and credit card processors, though major issuers are expected to be compliant.
- Tax Contingency: The IRS is examining returns for fiscal years 1991-1994 regarding capitalization of pre-opening expenses and travel records. The company contests these adjustments and does not believe they will be material.
Investor Verification Checklist
- Verify the sustainability of the 2.5% same-store sales increase and whether it is driven by temporary factors or permanent customer count growth.
- Confirm the funding sources for the $8.3 million in upcoming capital expenditures (D.C. and Michigan projects) given the current working capital deficit.
- Monitor the status of the IRS examination regarding pre-opening expenses and travel deductions to assess potential future tax liabilities.
- Review the progress of Y2K remediation for point-of-sale systems and third-party vendor dependencies (specifically the New York-New York Hotel).
- Assess the impact of the $611,000 gain from restaurant sales on the reported operating margin, noting that this is a non-recurring item.