ARK RESTAURANTS CORP. - 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Ark Restaurants Corp. for the 13-week and 39-week periods ended June 30, 2001. The company operates and manages restaurants, with significant locations in Las Vegas (Venetian Casino Resort, Desert Passage) and New York City. The report compares results to the same periods ended July 1, 2000.
Key Financial Metrics
| Metric | 13 Weeks Ended June 30, 2001 | 39 Weeks Ended June 30, 2001 |
|---|---|---|
| Net Sales | $36,805,000 | $96,037,000 |
| Net Income | $1,958,000 | $1,183,000 |
| Operating Income | $3,592,000 | $3,535,000 |
| Cash from Operations | N/A | $1,738,000 |
| Cost of Sales Margin | 25.1% | 25.5% |
| Operating Expense Ratio | 60.4% | 65.6% |
| Total Debt (Current + Long-Term) | $27,036,000 (as of June 30, 2001) | |
| Cash and Equivalents | $108,000 (as of June 30, 2001) | |
| Working Capital | Deficit of $5,573,000 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 8.9% for the quarter and 11.0% for the 39-week period compared to the prior year. Growth was driven by new locations (V-Bar, Fat Anthony's, Alakazam Food Court) and a 3.1% increase in same-store sales for the quarter.
- Profitability Turnaround: The company reported a net income of $1,183,000 for the 39-week period, a significant improvement from a net loss of $3,112,000 in the comparable prior period. The prior year loss included a $3,198,000 after-tax charge for a joint venture withdrawal in Southfield, Michigan.
- Expense Management: General and administrative expenses decreased as a percentage of sales (5.0% vs 5.5% for the quarter) due to sales growth outpacing expense increases.
- Managed Restaurants: Net sales from managed restaurants dropped significantly to $3,213,000 for the 39-week period from $6,254,000 last year, following the closure of three managed restaurants in Boston in December 2000.
Outlook, Risks, and Contingencies
- Liquidity and Debt: The company operates with a working capital deficit, which management notes is typical for the restaurant business. Total borrowings on the revolving credit facility were $25,350,000 at June 30, 2001, against a limit of $28,500,000. The company is required to reduce borrowings to $23,000,000 by September 30, 2001, and $22,000,000 by December 27, 2001.
- Covenant Compliance: As of June 30, 2001, the company was not in compliance with two covenants (minimum net worth and employee accounts receivable) but received a waiver from its bank, Bank Leumi USA.
- Expansion and Cash Flow: New Las Vegas locations (Venetian) are profitable, while Desert Passage operations are not yet profitable. With no other committed projects, management plans to apply a substantial portion of current cash flow to debt reduction.
- Tax Matters: The IRS is examining federal returns for fiscal years 1995-1998; the company does not expect a material impact. The company expects a FICA tip credit in excess of $500,000 for the current year.
- Accounting Changes: The company adopted SFAS 133 (Derivatives) with no material impact. SFAS 142 (Goodwill) will be effective in fiscal 2002, ending amortization of goodwill in favor of impairment testing.
Investor Verification Checklist
- Verify the company's ability to reduce debt to $23,000,000 by September 30, 2001, given the current cash balance of only $108,000.
- Confirm the profitability timeline for the Desert Passage operations in Las Vegas.
- Monitor the status of the IRS examination for fiscal years 1995-1998.
- Review the impact of the waiver on future borrowing capacity and covenant compliance.
- Assess the sustainability of same-store sales growth (3.1% for the quarter) in the current economic environment.