ARKR

Business Context and Reporting Period

Company: ARK RESTAURANTS CORP.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 13 weeks ended December 31, 2005 (First fiscal quarter of 2006).
Business Overview: The Company operates restaurants and bars, primarily in Las Vegas, New York, and Washington D.C. During the quarter, the Company opened Gallagher's Steakhouse and Luna Lounge in Atlantic City. Two facilities (America in NYC and Vivid in Las Vegas) were classified as discontinued operations or held for sale due to declining performance.

Key Financial Metrics

Margins: Food and beverage costs were 24.5% of revenue (vs. 25.0% prior year). Payroll expenses were 32.7% (vs. 32.2%). Occupancy expenses were 15.5% (vs. 15.1%).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 2.5% year-over-year. This growth was driven by a 13.3% increase in same-store sales in New York and a 3.3% increase in Washington D.C., offset by a 3.0% decline in Las Vegas same-store sales.
• Profitability Decline: Net income decreased 22.6% to $916,000. This was primarily due to a $276,000 loss from discontinued operations (compared to a $141,000 loss in the prior year) and increased operating costs.
• Cash Flow Improvement: Net cash provided by operating activities turned positive at $1.24 million, compared to a $1.50 million outflow in the prior year. This improvement was largely due to a $1.23 million cash receipt from a landlord for construction incentives in Atlantic City.
• Investing Activities: Cash used in investing activities increased significantly to $2.37 million (from $0.48 million) due to $2.47 million in additions to fixed assets, primarily for the new Atlantic City facilities.
• Discontinued Operations: The Company recorded operating losses of $250,000 for the "Vivid" facility and $13,000 for the "America" facility, both classified as discontinued operations.

Guidance, Outlook, and Risks

• Dividends: The Company declared a quarterly cash dividend of $0.35 per share on January 12, 2006, and intends to continue paying quarterly dividends, subject to Board discretion and financial conditions.
• Liquidity: The Company's revolving credit facility matured in March 2005. Management does not currently plan to enter into a new credit facility and expects operations to fund future requirements. The Company maintains a working capital surplus of $5.1 million.
• Dispositions: The Company is actively seeking a buyer for the "Vivid" facility in Las Vegas, which is classified as "held for sale." Management does not anticipate a loss on the sale based on initial offers.
• Accounting Changes: The Company adopted SFAS No. 123R effective October 2, 2005, requiring the expensing of stock-based compensation. This resulted in $187,000 of compensation cost in the current quarter.
• Risks: Results are sensitive to economic conditions affecting travel and conventions. The Company faces risks related to the successful sale of the "Vivid" facility and the performance of new locations in Atlantic City.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the specific financial impact of the "Vivid" and "America" closures on future quarters and the timeline for the sale of "Vivid."
• Atlantic City Performance: Monitor the revenue and profitability of the newly opened Gallagher's Steakhouse and Luna Lounge to ensure they meet projections.
• Liquidity Strategy: Confirm the Company's ability to fund expansion and operations without a revolving credit facility, given the significant cash outflow for fixed assets ($2.47M) in the quarter.
• Stock-Based Compensation: Review the impact of the new SFAS No. 123R accounting standard on future earnings, noting $724,000 of unrecognized compensation cost remains.
• Dividend Sustainability: Assess whether the current cash flow generation supports the continued $0.35 per share quarterly dividend policy.