Business Context and Reporting Period
Company: Ark Restaurants Corp.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 13-week and 39-week periods ended June 27, 1998.
Business Overview: The Company operates and manages restaurants, including significant operations at the New York New York Hotel & Casino in Las Vegas. Key recent activities include the acquisition of the Stage Deli in Las Vegas and the sale of a Manhattan restaurant.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended June 27, 1998 |
39 Weeks Ended June 27, 1998 |
39 Weeks Ended June 28, 1997 |
|---|---|---|---|
| Net Sales | $33,030 | $85,168 | $74,524 |
| Gross Restaurant Profit | $24,434 | $62,471 | $53,767 |
| Operating Income | $4,066 | $4,793 | $317 |
| Net Income | $2,429 | $2,902 | $287 |
| Diluted EPS | $0.63 | $0.75 | $0.08 |
| Cash and Equivalents | $313 (Balance Sheet) | N/A | |
| Net Cash from Operations | N/A | $5,030 | $815 |
| Long-Term Debt (net) | $3,714 (Balance Sheet) | N/A |
Margins (39 Weeks 1998 vs 1997):
- Cost of Sales: 26.6% (down from 27.9%)
- Operating Expenses: 63.4% (down from 67.3%)
- General & Administrative: 5.4% (down from 5.7%)
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 5.0% in the 13-week period and 14.3% in the 39-week period compared to the prior year. Growth was driven by Las Vegas facilities and new acquisitions (Stage Deli, Grill Room), partially offset by the sale of Jim McMullen.
- Profitability Surge: Net income for the 39-week period jumped from $287,000 to $2,902,000. The prior year was significantly impacted by approximately $2,000,000 in pre-opening and early operating losses at Las Vegas facilities.
- Cost Efficiency: Cost of sales and operating expenses as a percentage of net sales decreased due to efficiencies at Las Vegas facilities and lower payroll expenses in non-Las Vegas operations.
- Cash Flow: Net cash provided by operating activities improved significantly to $5,030,000 from $815,000 in the prior year.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Expansion
- New Openings: A new Southwestern style restaurant in South Street Seaport, NYC, is expected to open in the September 1998 fiscal quarter with estimated capital expenditures of $1,200,000.
- Joint Venture: A project to develop four restaurants in Southfield, Michigan, is in the design phase with an anticipated opening in the first half of fiscal 1999. The Company's share of capital contributions is estimated at $6,000,000.
- Management Commentary: Management expects cost of sales percentages to continue to improve in the fourth quarter of fiscal 1998.
Risks and Contingencies
- Legal Proceedings:
- Wage and Hour Lawsuit: A class action lawsuit by 44 employees alleges violations of federal wage and hour laws. 71 employees have "opted-in" as of the filing date. The Company believes liability will not be material but cannot estimate the final amount.
- Executive Chef Dispute: An action by executive chef Larry Forgione regarding control of specific restaurants was withdrawn in June 1998 as part of an agreement for him to purchase two restaurants (An American Place and Beekman 1766 Tavern).
- DC Wage Lawsuit: A lawsuit in Washington, D.C., regarding wage violations is in early stages; the Company does not expect a material adverse effect.
- Tax Examination: The IRS is examining returns for fiscal years 1991-1994 regarding capitalization of pre-opening expenses and record-keeping for travel/meal expenses. The Company contests these adjustments and does not expect a material effect.
- Liquidity: The Company reported a working capital deficit of $1,522,000 at June 27, 1998, though management notes the restaurant business can operate with negative working capital. The Company maintains a $10,000,000 revolving credit facility.
Unusual Items
- Restaurant Sale: In the first quarter of fiscal 1998, the Company sold a Manhattan restaurant for $1,750,000. A gain of approximately $185,000 was recognized, with additional deferred gains of $1,000,000 pending collectibility of notes.
- Subsequent Event: In August 1998, the Company sold two restaurants to Larry Forgione for approximately $300,000, expecting to record a gain of $100,000.
Investor Verification Checklist
- Verify the collectibility of the $1,550,000 note receivable from the Manhattan restaurant sale and the timing of deferred gain recognition.
- Monitor the "opt-in" count for the federal wage and hour class action lawsuit to assess potential liability exposure.
- Confirm the timeline and capital requirements for the Southfield, Michigan joint venture ($6,000,000 contribution).
- Review the status of the IRS examination regarding pre-opening expense capitalization.
- Assess the impact of the new South Street Seaport restaurant opening on Q4 1998 cash flow and operating expenses.