Business Context and Reporting Period
Company: ARK RESTAURANTS CORP.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 13-week and 26-week periods ended March 28, 1998.
Business Overview: The Company operates and manages restaurants, including a significant portfolio in Las Vegas (New York New York Hotel & Casino) and New York City. The Company recently acquired the Stage Deli in Las Vegas and is developing new locations in New York City and Southfield, Michigan.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Mar 28, 1998 |
13 Weeks Ended Mar 29, 1997 |
26 Weeks Ended Mar 28, 1998 |
26 Weeks Ended Mar 29, 1997 |
|---|---|---|---|---|
| Net Sales | $25,198 | $24,887 | $52,138 | $43,054 |
| Gross Restaurant Profit | $18,345 | $17,775 | $38,037 | $30,844 |
| Operating Income (Loss) | $(402) | $(1,831) | $727 | $(2,914) |
| Net Income (Loss) | $(254) | $(1,108) | $473 | $(1,661) |
| EPS (Basic & Diluted) | $(0.07) | $(0.29) | $0.12 | $(0.46) |
| Cash and Equivalents | $695 | $722 | $695 | $451 |
| Working Capital | $202 | $(2,374) | $202 | $(2,374) |
| Total Debt (Current + Long-Term) | $8,770 | $(N/A) | $8,770 | $(N/A) |
Note: Total Debt calculated as Current maturities of long-term debt ($580) + Current maturities of capital lease obligations ($276) + Long-term debt ($7,912) + Obligations under capital leases ($242) = $8,770 (in thousands).
Material Changes vs. Prior Period
- Profitability Improvement: The Company reported a net loss of $254,000 for the 13-week period, a significant improvement from the $1,108,000 loss in the prior year. For the 26-week period, the Company returned to profitability with $473,000 in net income, compared to a $1,661,000 loss in the prior year.
- Revenue Growth: Net sales increased 1.2% for the 13-week period and 21.1% for the 26-week period. The 26-week increase was driven by the Las Vegas facilities, which opened in January 1997.
- Margin Expansion: Cost of sales as a percentage of net sales decreased to 27.2% (13-week) and 27.0% (26-week) from 28.6% and 28.4% respectively in the prior year. Operating expenses as a percentage of sales also declined significantly due to efficiencies at Las Vegas facilities.
- Working Capital: Working capital improved from a deficit of $2,374,000 at September 27, 1997, to a positive $202,000 at March 28, 1998.
- Restaurant Sales: The Company sold a Manhattan restaurant for $1.75 million, recognizing a gain of approximately $185,000, with the remainder deferred due to collectibility uncertainty.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Expansion
- Expansion Projects: The Company purchased the Stage Deli in Las Vegas for $2.735 million. It is constructing a new restaurant in New York City (expected opening September 1998) and a joint venture in Southfield, Michigan (expected opening first half of fiscal 1999).
- Financing: An agreement in principle was reached to extend the revolving credit facility to $10 million through April 2000. Interest is expected to be prime plus 0.5%.
- Management Commentary: Management expects cost of sales and operating expenses as a percentage of net sales to continue to improve in upcoming quarters.
Risks and Contingencies
- Legal Proceedings:
- Wage and Hour Lawsuit: A class action lawsuit by 44 employees alleges violations of federal wage and hour laws. The Company believes most claims are insubstantial but acknowledges potential liability for overtime violations. The aggregate liability is uncertain and depends on the number of employees who "opt-in."
- Executive Chef Lawsuit: Executive chef Larry Forgione filed an action seeking to enjoin the sale of certain restaurants and claiming unspecified damages. The Company believes the allegations are without merit.
- DC Wage Lawsuit: A separate action in Washington, D.C., alleges wage and hour violations. The Company does not believe this will have a material adverse effect.
- Tax Examination: The IRS is examining returns for fiscal years 1991-1994 regarding capitalization of pre-opening expenses and recordkeeping for travel/meal expenses. The Company contests these adjustments and does not expect a material effect.
Investor Verification Checklist
- Debt Covenants: Verify the final terms of the $10 million credit facility extension and any restrictive covenants that may impact future borrowing or operations.
- Legal Liability: Monitor the "opt-in" status of the wage and hour class action lawsuit to assess potential aggregate liability.
- Deferred Gains: Track the collectibility of the $1.55 million note receivable from the Manhattan restaurant sale to determine when the deferred $1 million gain can be recognized.
- Expansion Costs: Confirm capital expenditure requirements for the new Southfield, Michigan joint venture ($6 million estimated share) and the New York City location ($1.2 million).
- Tax Credit Utilization: Verify the realization of the estimated $400,000+ FICA tax credit on tip income for the current fiscal year.