UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT
Under Section 13 or 15(d) of the Securities Act of 1934
For the Fiscal Year Ended June 30, 1997
ARTHUR TREACHER'S, INC.
(Name of Small Business Issuer in Its Charter)
UTAH 34-1413104
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7400 Baymeadows Way, Suite 300, Jacksonville, Florida 32256
(Address of Principal Executive Offices) (Zip Code)
(904) 739-1200
(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes |___|
No |_X_| The Registrant became subject to such filing requirements within the
past 90 days.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB. |_X_|
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State issuer's revenues for its most recent fiscal year. $17,775,659
Shares outstanding. 14,399,248
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.)
$24,892,071
Note: if determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
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PART I
Item 1. Description of Business.
The Company is a fast service seafood restaurant chain based in Jacksonville,
Florida. The Company's principal business is the operation of Company owned
stores and the sale of franchises of "Arthur Treacher's Fish & Chips" fast food
restaurants. The Company has 117 restaurants in the Arthur Treacher's system,
consisting of 63 Company owned restaurants and 54 independently owned and
operated franchised locations. The restaurants are located in 11 states in the
mid-western and eastern United States as well as in Washington D.C. and the
province of Ontario, Canada.
(A) Background
The Company was originally founded in 1969 as Arthur Treacher's Fish & Chips,
Inc., a Delaware corporation. The Company operated a network of franchised and
Company owned restaurants in the United States and Canada. The Company's main
product was its "Original Fish & Chips" product consisting of two fish fillets
coated with a special batter prepared under a proprietary formula, deep-fried
golden brown and served with English-style chips and two corn meal "hush
puppies." The Company's other products included an assortment of other fried and
grilled seafood combination dishes including shrimp, clams and chicken.
In 1979, Mrs. Paul's, Inc. ("Mrs. Paul's") purchased Arthur Treacher's Fish &
Chips, Inc. Mrs. Paul's changed the products offered at the restaurants, which
resulted in severe dissatisfaction among the franchisees, a reduction in the
number of restaurants and litigation between certain franchisees and Mrs.
Paul's. In 1982, Lumara Foods of America, Inc. ("Lumara") acquired the assets of
Arthur Treacher's Fish & Chips, Inc. from Mrs. Paul's. Lumara was unable to
achieve profitability and consequently sought bankruptcy protection in 1983. In
December 1983, Arthur Treacher's Inc., an Ohio corporation, entered into an
agreement to purchase the assets of Lumara, during Chapter XI bankruptcy
proceedings. In February 1984, Arthur Treacher's Inc., an Ohio corporation,
merged into El Charro, Inc., a Utah corporation, which consummated the
acquisition of the assets of Lumara and changed its name to Arthur Treacher's,
Inc.
The Company reduced its size from approximately 200 to 117 stores between 1984
and 1997, primarily through a net reduction from more than 180 franchised
locations to 95 franchised locations, under the management of President and
principal shareholder, James R. Cataland. In 1984, only 74 of the more than 180
franchised locations were in good standing. The franchise network was rebuilt
and expanded in the early 1990's under the management of Mr. Cataland.
In 1993, three investors, including Mr. Bruce R. Galloway, the current Chairman
of the Board of the Company, and Mr. Fred Knoll, a Director designee of the
Company, acquired from the Company an aggregate of 2,000,000 shares of Common
Stock for $1,000,000. On May 31, 1996, an investor group organized by Mr.
Galloway acquired control of the Company through the purchase of an additional
2,000,000 shares from the then principal shareholder and President, Mr.
Cataland.
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Contemporaneously with such acquisition, Mr. R. Frank Brown became President,
Chief Executive Officer and Treasurer of the Company, and the current Board of
Directors was elected.
Under Mr. Brown's direction, the Company has taken several steps to improve its
operations. The Company has also commenced testing of its "Seafood Grille"
concept, reduced costs by changing to lower cost seafood suppliers, commenced
efforts to renegotiate certain property leases, hired a new Director of
Marketing, retained a new advertising agency, held regional meetings with
franchisees for the first time in several years, attended franchise conventions
to promote the Company and produced new promotional and advertising materials.
On November 27, 1996 the Company purchased 100% of the common stock of its
largest franchisee, MIE Hospitality, Inc. (MIE), whose operations include 32
restaurants in the midwest and northeast United States. The purchase price was
$4,232,976 (calculated as $2,250,000 in cash, $1,139,563 in long-term debt
assumed and $843,413, which represents the rights to acquire 275,625 shares of
Company common stock for no consideration at a future date.
Also during 1997, the Company acquired eight restaurants in six different
transactions all accounted for as purchases. The purchase price, which totaled
approximately $544,000, was satisfied by cash, common stock, or assumed
liabilities.
MIE, formerly the Company's largest franchisee and now a wholly-owned
subsidiary, had an exclusive territory in New York, Pennsylvania, New Jersey and
Delaware, where it operated 33 stores. The Company anticipates that the MIE
Acquisition will provide opportunities for additional expansion, since the
Company can open additional Company-owned stores and sell additional franchises
in states where MIE was the exclusive franchisee. Following the purchase of MIE,
the Company purchased six former franchised restaurants in the Detroit area. The
Company believes the six restaurants in the Detroit area are strategically
located in areas with a concentration of Arthur Treacher's restaurants.
Management believes that such restaurants can be better managed by the Company
than by the former franchisees with no additional administrative overhead being
incurred by the Company.
(B) Franchises
The Company has 117 restaurants in its system, consisting of 63 Company owned
restaurants and 54 independently owned and operated franchised locations. The
Company has two geographical options for franchises: individual stores and area
development. However, the Company does have a franchisee that has agreed to open
one franchise for each of the next three years in northeastern Ohio, although
such franchisee does not have any exclusive territory. The Company also has a
franchisee with an exclusive franchise for the province of Ontario, Canada,
where there are eight restaurants.
Pursuant to its franchise agreement, the Company provides its franchisees with a
method of operation, including trade secrets, technical knowledge, a supply
distribution program and standards for customer service, quality control, decor,
layout, signs and accounting systems. The Company also
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provides centralized advertising and cooperative advertising programs and an
initial training program, which is required for franchisees. Each franchisee is
currently required to spend a minimum of three percent of monthly gross sales on
advertising. In addition, each franchisee must purchase certain private label,
proprietary food, paper supplies, equipment and signage from Company approved
suppliers and distributors. The Company does not select restaurant sites for
franchisees, but all sites are subject to the Company's approval. The Company
also requires that its franchisees name the Company as an additional insured
party on their property and casualty insurance policies and that vendors provide
subrogation to the Company with respect to their product liability insurance.
Pursuant to the Company's standard franchise agreement, which is incorporated in
its Uniform Franchise Offering Circular, the initial franchise fee for a one
unit franchise is $19,500. The fee for each additional franchise declines
thereafter. The fee for an area development franchise is $49,500. These
franchise fees do not include the costs associated with the operation of the
restaurant, including food, supplies, labor, equipment, occupancy costs and
taxes.
Each franchisee is subject to a royalty fee of a maximum of six percent of the
franchisee's gross sales, net of sales taxes and certain other adjustments,
based upon sales reports at the end of each calendar month. In the fiscal year
ended June 30, 1997, the Company received a total of $484,885 in franchise fees
and royalty income. Franchisees owning seven of such restaurants were more than
90 days in arrears in their payment of royalties to the Company. Most
franchisees, including the Canadian franchisee, pay royalties at a rate
substantially lower than six percent of gross sales, with an average royalty of
about three percent. Reduced royalty fees have been granted by the Company for
certain older franchisees and for franchisees who operate multiple units. As of
September 15, 1997, franchisees operating seven restaurants have either been
notified of being in default for non-payment of royalties or are more than 90
days in default on royalty payments. One of such franchisees, operating two
restaurants, and the Company have executed an installment payment plan with
respect to its delinquent payments. The inability of the Company's franchisees
to make payments on a timely basis will adversely affect the Company's liquidity
and its operations.
(C) Corporate Strategy
The Company seeks to focus on three key areas of development:
o The "Seafood Grille" concept,
o Unit Expansion,
o Marketing, Advertising and Promotion.
1. The "Seafood Grille" Concept
The Company is renovating its existing restaurants to adopt the "Seafood Grille"
concept to focus on grilled foods while enhancing the Company's existing brand
name. The Company has begun to expand its menu to include, in addition to its
current fried fish dinner and fried chicken combinations,
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a selection of grilled seafood entrees and grilled chicken entrees, together
with an assortment of vegetables and other side dishes. Several species of fish,
including tuna, cod, mahi- mahi and salmon, are being developed in order to
complement the Company's existing line of seafood products.
Each fish fillet sold under the "Seafood Grille" concept is deep skinned and
flash-frozen under a strict recipe developed by the Company. At each store
location, the fillet is inserted into a special grilling unit for quick cooking.
Test marketing and implementation of this concept began in July 1996 at a
franchised location that the Company purchased in November 1996. As of September
15, 1997, the Company had implemented the "Seafood Grille" concept in 21
restaurants.
The Company is developing a nationwide implementation plan, which will include
operations, marketing and advertising expenditures. The Company estimates that a
complete restaurant renovation will cost approximately $85,000 per restaurant.
Because of the high cost of a complete renovation, the Company has also
implemented the "Seafood Grille" concept with a modified renovation, which
consists primarily of the installation of new grilling equipment and, for
certain restaurants, new signage and awnings. The Company has utilized the
modified renovation in 17 of the 21 restaurants which offered the "Seafood
Grille" as of September 15, 1997. The Company anticipates that most future
renovations will utilize the less expensive alternatives in order to limit the
Company's capital expenditures. The Company anticipates that all of the
restaurants currently owned by the Company will offer the "Seafood Grille"
concept, although the cost of renovation will depend on such factors as the size
of the restaurant, whether the restaurant is free standing or in a mall, and the
amount of equipment to be installed. Such renovations will be made on a region
by region basis so that all restaurants within a region can benefit from
regional advertising and marketing promotions. New store formats may be
developed to enable consumers to view a wider selection of the Company's menu
selections. New store displays may be exhibited at all restaurant locations to
provide consumers with information such as caloric, fat and cholesterol content
in each of the Company's menu items. The Company cannot require franchisees to
renovate their stores to implement the "Seafood Grille" concept and has not
determined whether to provide incentives for such renovations. Furthermore, the
conversion of any existing restaurants that may be purchased from franchisees
will incur additional costs, a portion of which will come from operations.
2. Unit Expansion
The Company intends to open more Company owned and operated stores and
franchised stores. The Company's system has 117 restaurants, of which 63 (54%)
are Company owned. The Company expects to achieve a ratio of approximately 40%
of the restaurants as Company owned by the year 2000 due to franchise
development. The Company will continue to build its network of Company owned and
franchised restaurants in the United States with additional locations in order
to increase the Company's penetration into local markets. The Company seeks to
expand both in its principal existing markets of Florida, Ohio, Michigan, Texas,
the New York metropolitan area and Ontario and in markets where the Company
previously had a significant presence, including Virginia,
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Maryland, Washington D.C., Illinois and New England. The Company has no current
plans to expand outside of the United States and Canada.
The Company believes that the purchase of MIE will provide additional
opportunities for expansion, since the Company may now open additional Company
owned stores and sell additional franchises in New York, New Jersey,
Pennsylvania and Delaware, where MIE was the exclusive franchisee and had
exclusive development rights. In addition, the Company believed that it could
operate the 32 stores owned by MIE with minimal increase in administrative
overhead and that the purchase of the 32 stores would provide the Company with
more flexibility and control over the implementation of the "Seafood Grille"
concept.
Execution of its growth strategy requires the Company's management to, among
other things: (i) identify acquisition candidates who are willing to be acquired
at prices acceptable to the Company; (ii) consummate identified acquisitions;
and (iii) obtain financing for future acquisitions. The Company believes that
the acquisition of franchise restaurants is preferable to opening new Company
owned restaurants where there is a concentration of other restaurants,
particularly Company owned restaurants. Such concentration of Company owned
restaurants enables the Company to achieve more effective control of marketing,
economies of scale regarding the purchase of supplies, the deployment of field
personnel and advertising and thereby improve the restaurants' operations
without any increase in central administrative overhead. The Company believes
that such economies of scale can be achieved if a minimum of six to ten
restaurants are in an area.
The Company does not anticipate further development of its franchise network
until the fiscal year commencing July 1997. The Company wants to implement the
"Seafood Grille" concept, purchase some restaurants from franchisees and improve
its image before again focusing on the sale of franchises. In order to develop
its franchise system, the Company intends to develop joint programs with new
corporate franchisees for regional expansion opportunities in certain selected
markets. This program will entail a corporate sponsor for a particular region
based upon metropolitan population densities. A region would typically be large
enough to cover an area that could accommodate ten or more store locations. The
Company anticipates that a master franchise agreement would be executed with the
corporate franchisee providing it with rights to a specified region and to
support from the Company in order to develop the area within certain guidelines
established by the Company relating, among other things, to a minimum number of
restaurants to be opened within particular time periods. Current agreements do
not require any minimum number of restaurants to be opened in a region and the
Company currently has only one master franchise agreement for Ontario, Canada.
The Company also intends to grant new franchises to operators of single
restaurants. There can be no assurance, however, that suitable franchisees can
be located or that master franchise agreements will be reached at terms
acceptable to the Company.
The Company estimates the cost of opening a new Company owned restaurant at
between $50,000 and $200,000 per restaurant (assuming the purchase, not lease,
of new equipment), depending upon factors such as the size of the restaurant,
the lease and local construction costs. This cost includes the capability for
the "Seafood Grille" concept. By standardizing the construction and equipment
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procurement process of its restaurant network, the Company believes that it
could develop the economies of scale in the design and site selection process. A
supplementary benefit of such an expansion program could include proposals to
arrange for regional or national equipment leasing and financing programs and
the use of national or regional contractors to provide support for franchisees
wishing to expand. There can be no assurance that such programs will be reached
at terms acceptable to the Company.
The Company's proposed expansion and store renovations will be dependent on,
among other things, market acceptance of the Company's "Seafood Grille" concept,
the availability of suitable restaurant sites, negotiation of acceptable lease
terms, timely development of such sites, obtaining landlords' consents to
renovations, constructing or renovating restaurants, hiring of skilled
management and other personnel, the general ability to successfully manage
growth (including monitoring restaurants, controlling costs and maintaining
effective quality controls) and the availability of adequate financing. In the
case of franchised restaurants, the Company will be substantially dependent on
the management skills of its franchisees.
3. Marketing, Promotion and Advertising
The Company believes that its brand name is still recognized among consumers in
the northeastern, mid-western and southern regions of the United States
primarily because the Company's primary product line had been a popular
restaurant concept during the early 1970's. The Company and its franchisees
typically spend approximately three to four percent of gross sales per year on
advertising. In addition, suppliers provide the Company with rebates to be spent
by the Company on marketing. In the fiscal year ended June 30, 1997, such
marketing rebates were approximately $356,000. The Company has broad discretion
in spending such marketing allowances.
Management is developing a marketing campaign to re-establish the Company's
brand name. Since June 1996, the Company has retained a new advertising agency
and produced new television commercials. System-wide promotion with coordinated
regional advertising represents an area of opportunity for the Company. Local
advertising by the Company and its franchisees has been, and continues to be,
the predominant form of promotion. The Company has hired a Director of Marketing
who has developed to produce advertising and promotion at the local level
consisting of in-store advertising, local circulars, promotions and newspaper
advertising. By utilizing system-wide promotion with regional advertising
campaigns, the Company expects to achieve greater control and market breadth and
to increase consumer awareness of its products and services while maintaining
creative control over the Company's brand image. Such a program would provide
the Company with system-wide coverage using print, network and cable television,
national radio media.
The franchisees will be expected to pay a portion of the three percent currently
required to be spent on advertising by each franchisee to the Company as a fee
for such coordinated advertising. A portion of the approximately three percent
of gross sales currently spent by the Company for advertising Company owned
stores would also be devoted to the coordinated campaign. The
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amounts collected would be utilized entirely on marketing and promotional
campaigns to benefit the entire franchise network.
(D) Suppliers and Pricing
The Company's senior management (most of whom joined the Company since June
1996) have experience with the supply and pricing issues associated with the
food industry. Seafood prices, particularly the price of pollack, are subject to
supply problems due to environmental and economic factors. The Company has
developed measures to minimize the effect on the Company.
The Company's principal product, "Fish and Chips," includes pollack. The Company
and franchisees utilize one supplier to the Company owned stores for pollack.
The Company and its franchisees use three suppliers for shrimp. For the fiscal
year ended June 30, 1997, purchases of pollack and shrimp accounted for
approximately 20% and 7% of the Company's operating expenses, excluding
occupancy costs, respectively. The Company has reduced its costs since June 30,
1996 by utilizing new suppliers of pollack and shrimp. The Company also offers
salmon and tuna. Such seafoods' supplies and prices are subject to volatility.
Seafoods of the quality sought by the Company tend to trade on a negotiated
basis depending upon supply and demand at the time of purchase. Supply and price
can be affected by multiple factors, such as weather, politics and economics in
the producing countries. An increase in the prices of seafood, particularly
pollack, could have an adverse effect on the Company's profitability.
The Company maintains relationships with certain seafood vendors in an effort to
obtain seafood of the quality and in the quantity demanded by the Company's
customers. These relationships enable the Company to maintain its supply of fish
as well as affording the Company some price stability. The Company has sought to
mitigate the effects of price volatility by entering into agreements with its
principal fish suppliers to provide fixed prices for seafood products during the
six months to one year duration of the contracts. Such fixed price agreements
also help ensure the Company's supply of fish. The Company's written agreements
regarding pollack and shrimp expire in March 1998 and its agreement regarding
chicken expires in December 1997. Although the Company anticipates that the
agreements will be renewed on substantially the same terms as the current
agreements, there can be no assurance that the new terms will not be more
costly. The Company's principal suppliers of seafood products are Odyssey
Enterprises, Inc. for fish products and Tampa Bay Fisheries for shrimp. However,
the Company believes that alternate suppliers of pollack and other seafoods are
available if the prices of pollack or other seafoods increase substantially.
Management also intends to take advantage of changing technologies with respect
to the "farming" and breeding of selected species of fish and seafood products,
and currently purchases some fish products that are "farmed."
The Company uses different individual suppliers for many of its significant
non-seafood items. For example, cups, french fries, chicken, shortening and
proprietary fish batter are each purchased from different individual suppliers
under oral and written agreements which set the price for one year. The
principal suppliers for non-seafood products are Coca-Cola (drink syrup),
Griffith laboratories (batter mix), Heinz U.S.A. (sauces), McCain Foods, Inc.
(potatoes), Phoenix Foods (chicken) and Wilsey
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Foods, Inc. (shortening). All of the Company's supplies are delivered by such
suppliers to one distributor, Fast Food Merchandisers Inc., who services the
Company's restaurants from three distribution centers. Any disruption in
supplies from such suppliers could temporarily have an adverse effect on the
Company's operations, although the Company believes that the supplier could
readily be replaced. Except with respect to the Company's proprietary batter
mix, franchisees can purchase such products from other suppliers or
distributors, subject to the Company's prior approval. The Company received
approximately $127,000 from royalties on its batter mix sales in the fiscal year
ended June 30, 1997.
(E) Competition
The restaurant business is highly competitive with respect to price, service,
location and food quality and is generally considered to be a mature industry.
Competition in the industry can be expected to increase. The industry is
affected by changes in consumer eating habits and preferences, local, regional
and national economic conditions, demographic trends, automobile traffic
patterns, government regulation, employee availability and commodity and
operating cost fluctuations, many of which are beyond the Company's control. Any
unplanned or unanticipated changes in these factors could adversely affect the
Company.
There are numerous well-established competitors in the operating areas of the
Company. Restaurants operated or franchised by the Company compete directly not
only with quick service restaurants ("QSRs"), but also with moderately priced
family and specialty restaurants. Significant competitors include fast food fish
restaurants such as Long John Silvers and Captain D's, casual dining restaurants
with a seafood emphasis such as Red Lobster and Landry's, and other chains that
serve grilled seafood or chicken, or both.
The Company's primary competitors in the fast service seafood restaurant
business are Long John Silvers and Captain D's. Both competitors have company
owned and franchised restaurant operations in certain regions of the United
States. Long John Silvers is the largest competitor with over 1,300 locations
nationwide. Captain D's, a wholly owned subsidiary of Shoney's, Inc. with
approximately 600 units, has a strong regional presence in the southeastern
United States. The amount of competition varies among the Company's principal
regional markets. Both Captain D's and Long John Silvers compete directly with
the Company in Ohio and Pennsylvania, although the level of competition is
highest in several Pennsylvania markets. Long John Silvers competes directly
with the Company in several of its markets in Florida. In Ontario, the Company
has significant direct competition from independent fish and chips restaurants,
but less direct competition from other major fast service seafood chains. Many
of the Company's competitors possess substantially greater financial, marketing,
personnel and other resources than those of the Company. Such competitive
pressures limit the Company's ability to increase food and beverage prices and
thus may limit the extent to which the Company and its franchisees can offset
certain costs of doing business. There can be no assurance that well-established
competitors will not place additional restaurants in close proximity to those of
the Company and its franchisees.
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The Company also faces vigorous competition from other QSR chains in attracting
and retaining suitable franchises. Beginning in the fiscal year commencing July
1, 1997, the Company plans to increase its number of franchised restaurants but
there can be no assurance that it will be able to attract and retain suitable
franchisees.
Competition with the Company can take other forms. The Company also competes
with fast food restaurants and "casual dining" restaurants that offer
specialties other than grilled fish and chicken. Consumer preferences tend to
shift and the variety of alternatives may affect consumer selection. A change by
consumers to other types of products such as pork or beef or to restaurants with
ethnic themes such as Mexican, Chinese or Italian can have a material adverse
affect on the Company's sales.
The Company has developed a concentration of restaurant locations in the food
courts of regional shopping malls. The competition in the malls typically
consists of the seven to thirteen different restaurant concepts in each food
court. Each food concept generally serves a distinctive menu item which may
compete, directly or indirectly, with the Company. There can be no assurance
that the Company will continue to be able to compete effectively with such food
concepts.
(F) Seasonality
The Company derives a significant portion of its sales during the November and
December holiday season, which is reflected in the Company's operating results
for the second quarter. This seasonal effect is dependent upon the general
retailing environment and customers' preference to shopping malls. Approximately
70% of the Company's restaurants are in shopping malls. The Company derives
approximately 15% of its total annual revenues from operations of the stores
located in shopping malls during the holiday season.
(G) Employees
At August 31, 1997, the Company had approximately 700 employees. A total of
approximately 575 employees are paid on an hourly basis and 125 employees
receive a salary. Eight of the Company's employees perform executive functions.
Most of the Company's employees are employed at the Company's restaurants. The
Company believes that the number of persons employed is adequate to conduct the
Company's current level of operations. The Company believes that it would need
an additional two to four administrative employees at its headquarters to manage
the anticipated expansion. The addition of new restaurants will also increase
the number of employees at the restaurants.
Since many of the Company's employees are paid hourly rates related to the
federal minimum wage, increases in the minimum wage will increase the Company's
operating expenses. The Federal government increased the minimum wage from $4.25
an hour to $4.75 per hour in October 1996 and to $5.15 in September 1997. As of
August 31, 1997, the Company employed 575 hourly workers, approximately 50% of
whom are paid below $5.15 per hour. The Company believes that increases in the
minimum wage will cause operating costs to increase by less than 0.4% and that
such increased
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cost will be offset by the Company's recent menu price increase of four percent
and increased sales and reduced costs derived from improved purchasing
procedures, of which there can be no assurance.
(H) Government Regulation
The Company's business is subject to extensive federal, state and local
government regulation, including regulations relating to franchising, public
health and safety, zoning and fire codes. The failure to obtain or retain food
or other licenses would adversely affect the operations of the Company's
restaurants.
The Company is subject to federal and state laws, rules and regulations that
govern the offer and sale of franchises. The Company is also subject to a number
of state laws that regulate certain substantive aspects of the
franchisor-franchisee relationship. If the Company is unable to comply with the
franchise laws, rules and regulations of a particular state, relating to offers
and sales of franchises, the Company will be unable to engage in offering or
selling franchises in such state. The Company believes it is in compliance with
such laws, rules and regulations and has not been cited for non-compliance. In
1995, the Federal Trade Commission ("FTC") conducted an investigation related
specifically to the Company following a complaint filed by certain franchisees
but the FTC took no action. The complaint alleged various misrepresentations by
the Company, including misrepresentations to the franchisees regarding (i) the
investment risk, earnings, food costs and construction costs that could be
expected by a franchisee, (ii) the rate of expansion of the number of Arthur
Treacher's restaurants and (iii) the availability of national advertising and
marketing support. The Company is not currently subject to any investigation by
any federal or state regulatory authority.
On a national level, the FTC requires the Company to furnish prospective
franchisees with a disclosure document which complies with the FTC's Trade
Regulation Rule (the "FTC Rule"). The Company's current FTC disclosure document
is effective for use in 37 states, and the District of Columbia, that do not
require registration of disclosure documents. However, in the 13 remaining
states, the Company is required to register a state-specific document and
receive an effective registration notice prior to the commencement of sales of
franchises in such states. The Company is not qualified to sell franchises in
any state that requires a state specific document although the Company believes
that it could register in such states if it chose to offer franchises in such
states. The Company has begun the registration process in Illinois, New York,
Virginia and Maryland.
The Company will be required to update its FTC disclosure document to reflect
the occurrence of material events. The occurrence of any such events may, from
time to time, require the Company to modify its disclosure documents within 90
days or stop offering and selling franchises until the document is so updated.
There can be no assurance that the Company will be able to update its disclosure
document or become registered to offer or sell franchises in certain states
consistent with its expansion plans or that the Company will be able to comply
with existing or future franchise regulations in any particular state, any of
which could have an adverse effect on the Company.
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(I) Trade and Service Marks and Trade Secrets
The Company believes that the "Arthur Treacher's" and the "Arthur Treacher's
Fish & Chips" service marks and other service marks may have significant value
and are important to the marketing of its restaurants and products. All are
registered with the United States Patent Office. The Company has applied to
register "Arthur Treacher's Seafood Grille" as a service mark. The Company's
principal "Arthur Treacher's" and "Arthur Treacher's Fish and Chips" service
marks are subject to renewal for 10 year periods upon application to the United
States Patent Office in 2007. The other service marks are subject to renewal for
10 year periods on various dates between 1999 and 2001. Upon expiration of each
period, the marks may be renewed for successive 10 year periods. There can be no
assurance, however, that the Company's trade and service marks do not, or will
not, violate the proprietary rights of others, that the Company's trade and
service marks would be upheld if challenged or that the Company would not be
prevented from using its trade or service marks. Any of the aforementioned
instances could have a material adverse effect on the Company and its
franchisees. The Company's trade and service marks have not been and are not
subject to any material challenges and the Company has acted to vigorously
defend the marks in several isolated instances where alleged infringement has
occurred. The Company is aware of two restaurants in the New York metropolitan
area which infringed on the Company's service mark in 1996, each of which ceased
such infringement upon demand by the Company.
The Company utilizes a proprietary batter mix in connection with the preparation
of its seafood products. There can be no assurance that such recipe will not be
copied by a competitor and that the Company's business will not be adversely
affected.
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Item 2. Description of Property.
The Company's principal executive offices are located at 7400 Baymeadows Way,
Jacksonville, Florida 32256 (904-739-1200). The Company rents its 7,600 square
feet of headquarters space for an annual rent of approximately $134,000 pursuant
to a lease which expires in 2001. The Company believes that its headquarters
space is adequate for its proposed expansion.
The Company's 63 restaurants include 32 restaurants located in premises leased
by the Company, 30 located in premises leased by MIE, a wholly-owned subsidiary
of the Company, and one in a property owned by MIE. In addition, with respect to
five leases, the Company either guarantees the obligations of franchisees or
leases the properties and subleases them to franchisees. The Company's free
standing restaurants are each approximately 2,000 square feet and the Company's
restaurants located in malls are each approximately 400 to 1,100 square feet.
The leases have remaining terms ranging from one to 16 years. Many of the leases
contain renewal options for periods of five to 10 years. The Company is
reviewing whether to continue to operate any marginal restaurants acquired in
the MIE Acquisition and to renegotiate the terms of each restaurant lease upon
the expiration of each lease. The following chart sets forth the expiration
dates of the terms of (i) the leases of Company owned restaurants, and (ii) the
Company's leases which are subleased to franchisees and leases of franchisees
which are guaranteed by the Company.
Leases Subject
to Guarantees
Number of Leases or Subleases Expiration Date
---------------- ------------ ---------------
6 0 1997
4 1 1998
7 0 1999
3 1 2000
14 0 2001
11 2 2002
13 0 2003
7 1 2004
3 0 After 2004
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Item 3. Legal Proceedings
In the normal course of the Company's business, certain actions may be filed
against the Company for which the Company and its legal counsel, do not believe
would warrant any merit. Such actions may prove to be meritorious and could
result in settlements which could materially and severely affect the financial
condition of the Company. The Company is involved in various other claims and
legal actions arising in the ordinary course of business. As of June 30, 1997,
the Company has not made any provisions for any actions, including the action
discussed below. There can be no assurance that any actions against the Company
would be resolved in favor of the Company nor that such actions would be
dismissed.
ATAC Corporation and Patrick Cullen v. Arthur Treacher's, Inc. and James
Cataland, Case No. 1:95CV 1032, in the U.S. District Court, Northern District,
Ohio Eastern Division
On November 16, 1994, the Company terminated the agency agreement of a Regional
Development Representative, ATAC Corporation, on the grounds that the agent
breached the agreement by assigning the agency agreement to a third party
without the consent of the Company. On May 9, 1995, ATAC filed the above
lawsuit; however, ATAC did not inform the Company of the lawsuit (via service of
process as prescribed by the Ohio Rules of Civil Procedure). ATAC seeks a
minimum of $2,750,000 in compensatory damages and $6,000,000 in punitive
damages.
On August 31, 1995, ATAC's counsel informed the Company that a lawsuit has been
filed. ATAC alleges that the Company terminated the contract without cause,
tortiously interfered with other business relationships, wrongful conversion of
the territory, restraint of trade and price-fixing, breach of contract, fraud,
RICO and conversion. The Company has filed a partial motion on the pleadings to
dismiss James Cataland, Sr. and William Saculla from the lawsuit. The Company
has also filed a Motion for Judgment on the Pleading which requests the court to
dismiss all claims. If successful, ATAC will only be allowed to proceed under a
breach of contract theory.
The Company believes that the lawsuit is an attempt by plaintiffs to regain the
territory by forcing the Company to defend expensive litigation at significant
expense and that the plaintiffs' claims are without merit. The Company has filed
a counterclaim against ATAC seeking a Declaratory Judgment that ATAC does not
have a service contract with the Company in certain areas which the Company does
business, that ATAC has committed breach of contract and that the Company is
entitled to indemnification for previous lawsuits which have occurred because of
the actions of ATAC on behalf of the Company.
In the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's consolidated results of
operations of financial position.
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Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
16
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The following table sets forth the high and low prices for the periods
indicated as reported by the National Daily Quotation Service, Inc. between
dealers and do not include retail mark-ups, mark-downs, or commissions and do
not necessarily represent actual transactions, as reported by the National
Association of Securities Dealers Composite Feed or other qualified inter-dealer
quotation medium. As of September 19, 1997, the closing bid price was $3.125 per
share.
Low High
--- ----
1996 Fiscal Year:
First Quarter 0.500 1.063
Second Quarter 0.375 0.906
Third Quarter 0.250 0.875
Fourth Quarter 0.500 3.125
1997 Fiscal Year:
First Quarter 2.000 3.375
Second Quarter 3.000 3.375
Third Quarter 3.000 3.875
Fourth Quarter 3.000 3.313
The Common Stock is recorded on the NASD Bulletin Board with the symbol
ATCH. As of June 30, 1997, the number of record holders of the Company's Common
Stock was 565.
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Dividends
To date, the Company has not paid any dividends on its Common Stock. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon the Company's earnings, its capital
requirements and financial condition, and other relevant factors. The Company
does not intend to declare any dividends in the foreseeable future, but instead
intends to retain all earnings, if any, for use in the Company's business
operations. No dividends may be distributed with respect to the Common Stock so
long as there are accrued and unpaid dividends on the Series A Preferred Stock.
The amount of accumulated and unpaid dividends on the Series A Preferred Stock
was approximately $96,000 as of June 30, 1997.
In conjunction with the acquisition of MIE, the former owners of MIE
(Magee) and the Company amended the terms of the Series B Preferred Stock and
agreed that no dividends would accumulate on such Preferred Stock after November
30, 1996. The Company also agreed to pay Magee an amount equal to the accrued
dividends on the Series B Preferred Stock through November 30, 1996 (which was
$390,417) in full on September 1, 1998. In addition, the 490,000 outstanding
shares of Series B Preferred Stock are now allowed to be convertible at the
auction of the holder or the Company at any time, and the conversion rate was
increased so that Magee will receive 765,625 shares of Common Stock upon
conversion for no additional consideration. The Company has not determined when
it will require conversion of the Series B Preferred Stock into Common Stock.
Item 6. Management's Discussion and Analysis or Plan of Operation.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Registration Statement.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995.
Information set forth herein contains "forward-looking statements" which
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. The Company cautions readers that important factors
may affect the Company's actual results and could cause such results to differ
materially from forward-looking statements made by or on behalf of the Company.
Such factors include, but are not limited to, changing market conditions, the
impact of competitive products, pricing and acceptance of the Company's
products.
Overview
The Company's principal sources of revenues are from the operations of the
Company owned restaurants and the receipt of royalties from franchisees. The
Company's cost of sales includes food,
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supplies and occupancy costs (rent and utilities at Company owned stores).
Operating expenses include labor costs at the Company owned stores and
advertising, marketing and maintenance costs. Franchise services and selling
expenses include fees payable to regional representatives and their expenses and
the salary of the Company's Director of Franchise Services. General and
administrative expenses include costs incurred for corporate support and
administration, including the salaries and related expenses of personnel at the
Company's headquarters in Jacksonville, Florida (except the Director of
Franchise Services), the costs of operating the headquarters offices (rent and
utilities) and certain related costs (travel and entertainment).
Results of Operations
The following discussion includes the following periods: (i) the fiscal year
ended June 30, 1997 ("Fiscal 1997") and (ii) the fiscal year ended June 30, 1996
("Fiscal 1996") and the fiscal year ended June 30, 1995 ("Fiscal 1995"). The
financial results of the Company have been audited as of the full fiscal years
ended June 30, 1997, June 30, 1996 and June 30, 1995. Fiscal 1997 reflects the
operation of MIE as of November 27, 1996 (the date of consummation of the
acquisition).
Fiscal 1997 and Fiscal 1996
The Company's revenues increased 126% to $17,775,659 for Fiscal 1997 compared to
Fiscal 1996. This increase was primarily driven by the Company's acquisition of
MIE, an operator of 32 Arthur Treacher's Fish & Chips restaurants, which
generated revenue of approximately $8,400,000 and the purchase or assumption of
nine additional franchise restaurants. Comparable store sales for restaurants
operated a minimum of 12 months increased 1.13% in Fiscal 1997 compared to the
Fiscal 1996. The increase in revenues was also stimulated by new marketing
campaigns, new menu promotion items such as scallops, oysters and popcorn shrimp
and an aggressive approach to retain quality restaurant management.
The most significant increase from revenues came from restaurant sales, which
increased 155% to $16,934,481 in Fiscal 1997 compared to $6,648,564 in Fiscal
1996. Franchise and royalty income decreased 44% to $484,885 in Fiscal 1997
primarily because of the acquisition of 41 franchised restaurants.
The Company's total cost and expenses excluding depreciation and amortization
and interest increased 122% to $19,033,592 for Fiscal 1997 compared to Fiscal
1996. Approximately $544,000 of the increase resulted from settlements of
lawsuits, lease cancellations and start-up cost associated with the Seafood
Grille concept in the Detroit market. With the addition of 41 Company-owned
restaurants, including 32 purchased from MIE, total costs and expenses increased
compared to Fiscal 1996, although total cost as a percentage to sales declined
1.75% from Fiscal 1996.
Regional representative fees, which are included in operating expenses are based
on the number of representatives and the amount of royalty income from
franchisees in a representative's region. Such
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<PAGE>
fees declined compared to Fiscal 1996 in conjunction with the purchase of 41
franchise restaurants. Each representative acted as the Company's exclusive
agent in a designated territory to market and supervise individual franchisees
and to sell franchise opportunities. Each representative received 50% of the
royalties received by the Company under each franchise agreement and $9,000 of
the $19,500 initial franchise fee paid by each franchisee in such territory. The
Company has two remaining regional representatives but the development of the
regional representative program has been discontinued by the Company.
Cost of sales from restaurant operations, which excludes occupancy and
depreciation, declined by 3.2% in Fiscal 1997 compared to Fiscal 1996 primarily
due to an aggressive effort to increase the Company's purchasing efficiencies by
reducing contract prices with several major suppliers of fish, shrimp, chicken,
potatoes and cooking oil.
General and administrative expenses increased to $2,050,734 for Fiscal 1997
compared to $1,097,350 for Fiscal 1996 as a result of the settlements of
lawsuits, disputes regarding leases and fees related to a consulting agreement
with the former Chief Executive Officer which became effective on June 1, 1996.
These expenses totaled approximately $681,000 in Fiscal 1997, which included
approximately $137,000 to the former Chief Executive Officer.
Interest expense for Fiscal 1997 was $163,130 compared to $168,513 in Fiscal
1996. Although total outstanding debt increased, the decrease in interest
expense was a function of improved interest rates on new debt with respect to
recent acquisitions of restaurants.
Depreciation and amortization increased to $724,968 in Fiscal 1997 from $290,120
in Fiscal 1996. This increase was primarily caused by the increase in fixed
assets from the acquisition of restaurants.
As a result of the foregoing, particularly the increase in general and
administrative expenses, the Company's net loss was $2,079,022 in Fiscal 1997
compared to a loss of $1,154,340 in Fiscal 1996.
On May 23, 1997 the Internal Revenue Service accepted the Company's proposal of
payment of $20,000 and the forfeiture of $1,180,064 of the Company's net
operating loss for the period prior to 1992 and removed all restrictions
relative to the use of the Company's remaining net operating losses for the tax
periods prior to 1992 and all subsequent net operating losses. As a result of
this agreement, the Company determined it has additional deferred tax assets of
$1,025,088 related to net operating loss carry forwards. This entire amount was
recorded during 1997 and has been offset by an increase in the valuation
allowance.
Fiscal 1996 and Fiscal 1995
The Company's revenues increased to $7,877,910 in Fiscal 1996 from $7,218,455 in
Fiscal 1995, an increase of 9%. The most significant increase was in sales at
Company owned restaurants, where revenues increased 18% to $6,648,564 in Fiscal
1996. Although the number of Company owned stores increased from 23 at the ended
of Fiscal 1995 to 24 at the end of Fiscal 1996, revenues at
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<PAGE>
Company owned stores increased principally through the purchase of six
restaurants from franchisees which, in the aggregate, had substantially higher
sales than the aggregate sales of the three Company owned stores that were
closed and the one Company owned store that was sold to a franchisee in Fiscal
1996. Franchise and royalty income declined 22% to $861,867 in Fiscal 1996
primarily because of the reduction in the number of franchised restaurants from
123 at the end of Fiscal 1995 to 103 at the end of Fiscal 1996.
The Company's total costs and expenses, excluding interest, increased 16% to
$8,863,737 in Fiscal 1996. The cost of sales, including occupancy, except
depreciation, at Company owned stores increased 16% to $3,856,776 in Fiscal
1996. As a percentage of Company owned restaurants' sales, the cost of sales,
including occupancy, except depreciation, decreased from 59% in Fiscal 1995 to
58% in Fiscal 1996. The Company's operating expenses increased 5% to $3,619,491
in Fiscal 1996. As a percentage of revenues, operating expenses decreased from
48% in Fiscal 1995 to 46% in Fiscal 1996. Fees payable to regional
representatives declined in conjunction with the decline in revenues from
franchisees. The Company's general and administrative expenses increased 56% to
$1,097,350 in Fiscal 1996 compared to Fiscal 1995. As a percentage of revenues,
general and administrative expenses increased to 14% in Fiscal 1995 from 10% in
Fiscal 1996 as a result of settlements of lawsuits and disputes regarding
leases.
Interest expenses for Fiscal 1996 also increased to $168,513 from $101,818 in
Fiscal 1995 as a result of increased payments to Bank One, the restructuring of
lease obligations and interest payable on promissory notes issued in connection
with the purchase of restaurants from franchisees and restructuring of lease
obligations.
Depreciation and amortization increased 69% to $290,120 in Fiscal 1996 as a
result of the acquisition of the five new Company owned stores and costs
associated with the closing of three Company owned stores. The Company also did
not benefit from any net operating loss carry forward in Fiscal 1996.
As a result of the foregoing, the Company's net loss increased to $1,154,340 in
Fiscal 1996 from $389,998 in Fiscal 1995.
Liquidity and Capital Resources
The Company has financed its operations principally from revenues derived from
Company owned stores and royalty income from franchisees, private placements of
equity and a line of credit from a bank. The Company's current liabilities
exceeded its current assets by $599,694 at June 30, 1997 compared to $1,252,796
at June 30, 1996. The Company had cash and short-term investments of $867,847 at
June 30, 1997 compared to $990,683 at June 30, 1996. Particularly before the
installation of new management and change in control in June 1996, operating
losses caused the Company to suffer liquidity problems, which included the
Company's inability to make certain lease and note payments when due. The
Company became in arrears with respect to certain leases because of poor
performance by stores in those locations. The Company had also incurred
indebtedness in
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connection with (i) the conversion of past due amounts under certain leases to
indebtedness and (ii) the repurchase of certain franchises, but several of such
restaurants were unable to generate sufficient revenues to repay the
indebtedness.
In order to increase its working capital and alleviate such liquidity problems,
the Company sold 3,042,463 shares of Common Stock in a private placement for
aggregate gross proceeds of $1,873,552 from June through September 1996 (the
"June Private Placement") and sold 3,163,911 shares of Common Stock in a private
placement for aggregate gross proceeds of $5,631,761 in November and December
1996 (the "November Private Placement"). The Company utilized approximately
$400,000 of the proceeds of the June Private Placement to provide collateral to
Bank One as security for the then outstanding indebtedness of $750,000,
approximately $350,000 to satisfy trade payables that were outstanding as of
June 1, 1996, approximately $250,000 to fund losses from operations,
approximately $166,000 for expenses incurred in connection with the offering and
the change of control of the Company through the hiring of Mr. R. Frank Brown,
approximately $125,000 for advertising and public relations and the costs
associated with the hiring of new management personnel, approximately $105,000
for (i) the repayment of notes due former franchisees who had sold restaurants
to the Company and (ii) lease obligations, approximately $142,000 for accounting
and legal expenses incurred in conjunction with and after the private placement
and with respect to the defense of ongoing litigation and approximately $78,000
for placement fees in connection with the private placement. See "Certain
Transactions."
The Company used $2,250,000 of the proceeds of the November Private Placement
for the cash portion of the purchase of MIE. The Company anticipates that (i) an
improvement in the operations of the stores purchased from MIE, which
contributed revenues of approximately $8,400,000 for Fiscal 1997, (ii) revenues
which may be generated from Company owned stores which the Company plans to open
in MIE's former territory and (iii) the additional franchise fees and royalty
income from additional franchises to be sold in such states will each have a
positive impact on liquidity.
The Company used $355,000 of the proceeds of the November Private Placement to
satisfy its remaining obligations to Bank One The Company has also utilized the
proceeds of the November Private Placement for restaurant renovations to expand
the Seafood Grille concept, acquisition of restaurants and settlements of past
due amounts to certain landlords and settlement of certain litigation. The
Company is now current regarding lease payments on all of its restaurant leases.
The Company anticipates that it will need additional capital to fund investments
in capital expenditures related to the Seafood Grille concept. The Company
expects to spend approximately $2,000,000 through June 30, 1998 to develop the
Seafood Grille concept in additional markets in the United States. The Company
also expects to spend approximately $1,000,000 in working capital to renovate
its existing Company owned restaurants to selectively introduce the Seafood
Grille concept.
For Fiscal 1997, the Company experienced negative cash flow resulting primarily
from start-up expenses related to the introduction of the Seafood Grille concept
into the Detroit marketplace, legal and lease obligation settlements,
integration expenses related to the acquisitions of M.I.E. and other
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restaurants. The Company believes the costs incurred in the development of the
Seafood Grille concept will enable the Company to re-position itself in the
marketplace for quick service restaurants, as the Company can emphasize its
broiled food products.
The management of the Company has reduced certain costs since the change of
control in June 1996 and continues to seek opportunities to reduce the Company's
operating costs. Since March 30, 1997, Management of the Company has reduced its
administrative staff and has reassigned various middle management positions to
yield a cost savings of approximately $275,000 annually. Since June 30, 1996,
the Company has changed suppliers and distributors to further reduce costs. In
addition to these measures, management has also initiated a menu price increase
of approximately four percent. The increase in prices was the Company's first in
three years.
The Company believes that its current cash resources, cash flow from operations,
cost savings (including equipment leasing opportunities and new supplier
relationships) and the anticipated proceeds from the proposed sale of real
estate at one location will be sufficient to adequately fund its current working
capital needs through the fiscal year commencing July 1, 1997, although
additional financing may be required for all planned capital expenditures. In
the event that the Company needs additional working capital to finance its
operations or capital expenditures, the Company believes it could meet its needs
through either additional borrowings or the sale of additional equity, although
there can be no assurance that the Company would be successful in obtaining any
such financing, or on what terms such transactions could be effected.
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Item 7. Financial Statements.
The financial statements are filed as part of this Annual Report on Form
10-KSB.
Item 8. Changes in and Disagreements with Accountants.
By unanimous vote of the Board of Directors on March 27, 1997, KPMG Peat
Marwick LLP was ratified as the Company's new principal independent accountants.
The Company has not had any disagreements regarding the presentation of its
financial statements or the application of any Generally Accepted Accounting
Principles with its former accountants.
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons.
Name Age Position
---- --- --------
Bruce R. Galloway 39 Chairman of the Board
R. Frank Brown 48 President, Chief Executive Officer,
Treasurer and Director
Skuli Thorvaldsson 55 Vice Chairman of the Board
Fred Knoll 41 Director (Designee)
Heinz Schimmelbusch 53 Director (Designee)
Dennis S. Bookshester 58 Director (Designee)
William F. Saculla 45 Secretary
Directors
Bruce R. Galloway. Mr. Galloway has been Chairman of the Board of Directors
since May 1996. Mr. Galloway is currently a managing director of Burnham, the
placement agent in the November Private Placement, an NASD Broker/Dealer and
investment bank based in New York. Prior to joining Burnham in 1993, Mr.
Galloway was a senior vice president at Oppenheimer & Company, an investment
bank and NASD Broker/Dealer based in New York, from 1991 through 1993. Mr.
Galloway holds a B.A. degree in Economics from Hobart College and an M.B.A. in
Finance from New York University's Stern Graduate School of Business.
R. Frank Brown. Mr. Brown has served as President, Chief Executive Officer,
Treasurer and Director since May 1996. From May 1995 to May 1996, Mr. Brown
worked as a consultant to an investment group associated with the Company. Prior
to working for the Company, Mr. Brown was associated with Shoney's and Captain
D's. From August 1992 to May 1995, he operated, as a franchisee, two Shoney's
restaurants in northern Utah. From November 1984 to August 1992, Mr. Brown was
President of Captain D's. From August 1978 through November 1984, Mr. Brown held
numerous positions within the Captain D's organization, including Group Vice
President, Vice President of Franchise Operations, Director of Franchise
Operations, Director of Personal and Training, Personal Recruiter and Unit
Manager. Mr. Brown is a 1972 Graduate of Purdue University, where he received a
B.A. degree in Psychology.
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Skuli Thorvaldsson. Mr. Thorvaldsson has been Vice Chairman of the Board of
Directors since May 1996. Mr. Thorvaldsson has been the Chief Executive Officer
of the Hotel Holt in Iceland since 1980. Since 1992, Mr. Thorvaldsson has been
the President of NTS Financial Services, Ltd. Mr. Thorvaldsson has various
diversified interests in food court services, travel agency and pork processing.
He is also a master franchisee of Domino's Pizza in Scandinavia. Mr.
Thorvaldsson is a director of Allied Resources Corp. Mr. Thorvaldsson graduated
from the Commercial College of Iceland and the University of Barcelona. Mr.
Thorvaldsson received his Degree in Law from the University of Iceland.
Fred Knoll. Mr. Knoll is a Director designee of the Company. Since 1987, he has
been the principal of Knoll Capital Management, L.P., a venture capital firm
specializing in the information technology industry. From 1989 until 1993, Mr.
Knoll was Chairman of the Board of Directors of Telos Corporation (formerly C3
Inc.), a computer systems integration company with approximately $200 million in
annual sales. From 1985 to 1987, Mr. Knoll was an investment manager for General
American Investors, responsible for the technology portfolio, and served as the
United States representative on investments in leveraged buyouts and venture
capital for Murray Johnstone, Ltd. of Glasgow, Scotland. Mr. Knoll is the
Chairman of the Board of Thinkings Tools Inc. and of Lamar Signal Processing
Ltd., and he is a director of numerous companies including Spradling Holdings
Ltd. and U.S. Energy Systems Inc. Mr. Knoll is on the Board of Advisors of SRI
International (the European division of Stanford Research Institute) and is a
co-manager of the Valor Capital Management and Valor International public stock
funds. Mr. Knoll holds a B.S. in Electrical Engineering and Computer Science and
a B.S. in Management from Massachusetts Institute of Technology and an M.B.A.
from Columbia University in Finance and International Business.
Heinz C. Schimmelbusch. Mr. Schimmelbusch is a Director designee of the Company.
He is Chairman, President and Chief Executive Officer of Allied Resource
Corporation ("Allied"), a company founded by Mr. Schimmelbusch in 1994 to
develop companies active in mining, advanced materials and recycling. Mr.
Schimmelbusch is also Chairman of Alanx Corporation, a producer of composite
ceramics for wear solutions; Chairman and Chief Executive Officer of Puralube,
Inc., which is commercializing an advanced process for re-refining used oil; and
a Director of Northfield Minerals Inc., a gold mining and exploration company
listed on the Toronto Stock Exchange. Mr. Schimmelbusch has been a Director of
Safeguard Scientific Corporation, a company whose shares are listed on the New
York Stock Exchange, since 1989. Prior to 1994, Mr. Schimmelbusch was Chairman
of the Management Board of Metallgesellschaft AG, Germany, a multinational
company in the process industries, and Chairman of the Supervisory Board of
LURGI AG, Germany's leading process engineering firm; of Buderus AG, a leading
manufacturer of commercial and residential health equipment; of Dynamit Nobel
AG, a leading manufacturer of explosives; and Norddeutsche Affinerie AG,
Europe's largest copper producer. Mr. Schimmelbusch also served on the Boards of
several leading German Corporations and institutions, including Allianz
Versicherungs AG, Munich; Philipp Holzmann AG, Frankfurt; Mobil Oil AG, Hamburg;
Teck Corporation, Vancouver; and others. Mr. Schimmelbusch has been the founder
and Chief Executive Officer of a number of public companies in process
industries, including: Inmet Corporation, Toronto, Canada (formerly Metall
Mining Corporation); Methanex Corporation, Vancouver, Canada; and B.U.S.
Umweltservice AG, Frankfurt,
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Germany. Mr. Schimmelbusch served as a Member of the Presidency and Chairman of
the Environmental Division of the German Industrial Association (BDI) and
represented Germany on the Executive Board of the International Chamber of
Commerce, Paris, where he held the office of Vice President. Mr. Schimmelbusch
received his graduate degree (with distinction) and his doctorate (magna cum
laude) in Economics from the University of Tubigen, Germany.
Dennis S. Bookshester Mr. Bookshester is a Director designee of the Company.
Since 1991, he has been a business consultant. In January 1997, he became
President and Chief Executive Officer of H20 Plus, LLP. From 1990 through 1991,
he served as President and Chief Executive Officer of Zale Corporation. From
1984 through 1989, he served as Vice Chairman of Carson Pirie Scott & Company
and as Chairman and Chief Executive Officer of its retail division. From 1983
through 1984, he served as the President and Chief Executive Officer of the
Department Stores Division of Carson Pirie Scott & Company. From 1977 through
1983, he held various executive positions with Associated Dry Goods Corporation,
where he served as President of its Caldor, Inc. subsidiary from 1982 through
1983, as Chairman and Chief Executive Officer of Sibley, Lindsay and Curr
Division from 1978 through 1982 and as President of such division from 1977
through 1978. From 1961 through 1977 he was with Federated Department Stores,
Inc. where he became Senior Vice President of Merchandising. Mr. Bookshester is
a Director of Evans, Playboy Enterprises Inc., AMRE, Fruit of the Loom, Sundance
Homes, American Gem Corporation and the University of Chicago Council for the
Graduate School of Business. Mr. Bookshester received his B.S. degree from the
University of Alabama in 1960.
William F. Saculla. Mr. Saculla has served as Secretary of the Company since
1984. Mr. Saculla is responsible for the Company's financial reporting
activities and internal controls. Mr. Saculla earned a B.S. degree in Accounting
from Youngstown State University in 1978.
Each Director is elected to serve until the Company's next annual meeting of
Shareholders and until his successor is duly elected and qualified. There are no
agreements with respect to the election of directors. Executive officers are
appointed annually by the Board of Directors and each executive officer serves
at the discretion of the Board of Directors. The Director designees have agreed
to become members of the Board of Directors upon the Company obtaining Director
and Officer liability insurance. The Company has requested bids for such
insurance to several insurance companies and will obtain such insurance upon
acceptance of a bid.
Other Key Employees
Michael D. Proulx, Director of Franchise Services. Mr. Proulx has served as
Director of Franchise Development since January 1994. He was the owner of a
Company franchise from December 1992 through August 1996, when it was purchased
by the Company. Prior to October 1992, Mr. Proulx was a Commissioned Officer
serving as a Pilot and Intelligence Officer in the United States Army with
assignments that included that of Company Commander, Airfield Commander and
Brigade Operations Officer. Mr. Proulx is a 1973 graduate of Cornell University
where he received a B.S.
27
<PAGE>
degree in Economics. Mr. Proulx also received an M.S. degree in International
Relations from Troy State University in 1988.
Jana Williams, Director of Marketing. Ms. Williams rejoined the Company as the
Director of Marketing in June 1996. Prior to this, Ms. Williams was the
Marketing and Media Coordinator for the Company from December 1993 to January
1996. From January 1996 to June 1996, she was an Account Coordinator at Harte
Hanks Direct Marketing. From January 1992 to June 1993, Ms. Williams served as a
Convention Coordinator for Technol Medical Products, Inc., in Fort Worth, Texas.
From May 1986 through January 1992, she served as Women's Services Specialist
for the Team Bank in Dallas, Texas. Ms. Williams is a 1990 graduate of the
University of Texas, Arlington where she earned a B.A. in Marketing.
Committees
In December 1996, the Board of Directors formed the following committees:
Executive, Compensation and Audit. The Board of Directors elected Frank Brown,
Bruce Galloway and Skuli Thorvaldsson to the Executive Committee. The
Compensation Committee of the Board of Directors was formed to review the
Company's executive compensation proposals, subject to the approval of the Board
of Directors. The Compensation Committee is composed of Dennis Bookshester,
Skuli Thorvaldsson and Bruce Galloway. The Audit Committee was formed to advise
the Board in matters relating to the audit of the Company's financial statements
and the Company's financial reporting systems. The Board elected Messrs. Bruce
Galloway, R. Frank Brown, Skuli Thorvaldsson, William Saculla, the Company's
Secretary, and George Koo, an independent advisor to the Company, as members of
the Audit Committee.
In addition, the International Advisory Committee was formed to advise the Board
of Directors regarding international operations and expansion opportunities,
although without the power to obligate the Company. The Board selected Gudmundur
Jonsson, David Baron, Valdimar Thomasson, Evan Binn, Gisly Martinsson, Lorie
Karnath and Hans Rutkowski to the International Advisory Committee.
28
<PAGE>
Item 10. Executive Compensation.
The following table provides certain summary information concerning the
compensation paid or accrued by the Company to or on behalf of its Chief
Executive Officer and the other named executive officers of the Company for
services rendered in all capacities to the Company and its subsidiaries for the
fiscal years ended June 30, 1997, 1996 and 1995.
(a) Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards Payouts Payouts
--------------------------------------------------- -------------- -------
Name and Other Annual Restricted Securities LTIP All Other
Principal Position Year Salary Bonus Compensation Stock Underlying Payouts Compensation
Award(s) Options/SARs
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R. Frank Brown 1997 $125,000.00 0.00 $0.00 0.00 20,000 $0.00 0
President, CEO, shares of
Treasurer Common Stock
1996 $10,025.00 0.00 $0.00 0.00 700,000 $0.00 0
shares of
Common Stock
1995 $0.00 0.00 $0.00 0.00 0 $0.00
</TABLE>
29
<PAGE>
(b) Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Securities Percent of total
Underlying Options/SARs options/SARs granted to
Name granted employees in fiscal year Exercise or base price Expiration Date
<S> <C> <C> <C> <C>
R. Frank Brown (1) 20,000 shares of Common 100% $3.37 2002-2005
Stock
</TABLE>
- ----------
(1) 25% of the options vest each year over a period of four years commencing
March 27, 1997 and are exercisable for five years after vesting.
(c) Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
<TABLE>
<CAPTION>
Shares acquired on Number of Unexercised Value of unexercised in-the-money
Name exercise Value Realized options/SARs at June 30, 1996 options/SARs at June 30, 1997
<S> <C> <C> <C> <C>
R. Frank Brown(1) 0 0 720,000 options $192,500 Exercisable,
$770,000 Unexercisable
145,000 Exercisable
575,000 Unexerciseable
</TABLE>
- ----------
(1) 25% of the options for 20,000 vest each year over a period of four years
commencing March 27, 1997 and are exercisable for five years after vesting.
20% of the options for 700,000 shares vest each year over a period of five
years commencing June 1, 1997 and are exercisable for five years after
vesting.
(d) Long-Term Incentive Plans -- Awards in Last Fiscal Year
<TABLE>
<CAPTION>
Estimated future payouts under
non-stock price based plans
Number of shares, Performance or other period -------------------------------------------------
Name units or other rights until maturation or payout Threshold Target Maximum
<S> <C> <C> <C> <C> <C>
R. Frank Brown(1) 20,000 March 1997-March 2001 N/A N/A N/A
</TABLE>
- ----------
(1) 25% of these options vest each year over a period of four years commencing
March 27, 1997 and are exercisable for five years after vesting.
Mr. R. Frank Brown has executed an employment agreement with the Company which
provides for a salary of $125,000 per year for a term of two years commencing
June 1, 1996. The agreement is renewable annually for additional one year terms.
Pursuant to the employment agreement, the Company granted Mr. Brown options to
purchase an aggregate of 700,000 shares of Common Stock, with an exercise price
of $1.375 per share with respect to 350,000 shares and an exercise price of
30
<PAGE>
$2.125 per share with respect to 350,000 shares. 20% of these options vest each
year over a period of five years commencing June 1, 1997 and are exercisable for
five years after vesting. In the event that Mr. Brown's employment contract is
not renewed, he will only be entitled to exercise those options which have
vested as of the date of termination. In March 1997, Mr. Brown received options
to purchase 20,000 shares of Common Stock at a purchase price of $3.37 per
share. 25% of these options vest each year over a period of four years
commencing March 27, 1997. The Company has also purchased $1,000,000 of key man
life insurance on Mr. Brown, of which the Company is the beneficiary. Ownership
of the policy will be assigned to Mr. Brown upon termination of Mr. Brown's
employment. Mr. Brown also receives a car allowance of $600 per month.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of September 15, 1997 with
respect to officers, directors and persons who are known by the Company to be
beneficial owners of more than 5% of the Company's Common Stock. Except as
otherwise indicated, the Company believes that the beneficial owners of the
Common Stock listed below, based on information furnished by such owners, have
sole investment and voting power with respect to such shares, subject to
community property laws where applicable.
Shareholder Shares Percentage
- --------------------------------------------------------------------------------
Bruce R. Galloway(1) 1,812,334 11.7
Lifeyrissjodur Austurlands 1,179,875 8.2
Skuli Thorvaldsson(2) 1,172,666 8.0
Evan Binn and Ronna Binn(3) 925,094 6.4
Fred Knoll (4) 843,916 5.9
Liferissjodur Vestmannaeyinga 823,125 5.7
Lifeyrissjodurinn Hlif 821,875 5.7
AFC Enterprises, Inc.(5) 776,666 5.4
Magee Industrial
Enterprises, Inc.(6) 765,625 5.1
R. Frank Brown(7) 195,000 1.3
Heinz Schimmelbusch(8) 76,668 0.5
William Saculla(9) 18,000 0.1
Dennis Bookshester(10) 10,000 ---
Officers and Directors as a Group(11) 4,128,584 26.5%
Total Outstanding Shares (12) 14,399,248
31
<PAGE>
Notes
(1) Mr. Bruce R. Galloway is the Chairman of the Board of the Company. Includes
(i) warrants to purchase 430,000 shares of Common Stock at a purchase price
of $1.51, which warrants are exercisable through May 31, 2001, (ii)
warrants to purchase 250,000 shares of Common Stock which are exercisable
at an exercise price of $3.00 per share through December 31, 2001 and (iii)
warrants to purchase 5,000 shares of Common Stock which are exercisable at
an exercise price of $3.37 per share through March 27, 2002. Does not
include warrants to purchase 15,000 shares of Common Stock at an exercise
price of $3.37 per share for five years, 5,000 of which vest each year
commencing March 27, 1998.
(2) Includes (i) warrants to purchase 250,000 shares of Common Stock at a
purchase price of $1.51, which warrants are exercisable through May 31,
2001, (ii) warrants to purchase 50,000 shares of Common Stock which are
exercisable through January 9, 1997 at an exercise price of $3.00 per share
and (iii) warrants to purchase 5,000 shares of Common Stock which are
exercisable at an exercise price of $3.37 per share through March 27, 2002.
Does not include warrants to purchase 15,000 shares of Common Stock at an
exercise price of $3.37 per share for five years, 5,000 of which vest each
year commencing March 27, 1998. Includes 867,666 shares of Common Stock
owned by NTS Financial Services, Inc., of which Mr. Thorvaldsson is
President.
(3) Includes warrants to purchase 50,000 shares of Common Stock owned by Mr.
and Mrs. Binn, which warrants are exercisable at a purchase price of $1.51
per share through May 31, 2001.
(4) Mr. Fred Knoll, a Director designee of the Company, owns warrants to
purchase 10,000 shares of Common Stock at an exercise price of $3.37, which
warrants are exercisable through March 27, 2002. Includes 833,916 shares of
Common Stock owned by Knoll Capital Management, Inc., of which Mr. Knoll is
the sole shareholder.
(5) Includes warrants to purchase 100,000 shares of Common Stock owned by Mr.
Andrew Catapano, President of AFC Enterprises. Such warrants are
exercisable at a purchase price of $1.51 per share through May 31, 2001.
(6) Gives effect to the conversion of 490,000 shares of Series B Preferred
Stock into 765,625 shares of Common Stock for no additional consideration.
(7) Mr. R. Frank Brown is the President, Chief Executive Officer, Treasurer and
a Director of the Company. Includes 140,000 options granted which have
vested but does not include 560,000 options granted which have not vested
pursuant to Mr. Brown's employment agreement to purchase an aggregate of
700,000 shares of Common Stock, with an exercise price of $1.375 per share
with respect to 350,000 shares and an exercise price of $2.125 per share
with respect to 350,000 shares. 20% of such options vest each year for a
period of five years commencing June 1, 1997. Includes warrants to purchase
5,000 shares of Common
32
<PAGE>
Stock which are exercisable at an exercise price of $3.37 per share through
March 27, 2002. Does not include warrants to purchase 15,000 shares of
Common Stock at an exercise price of $3.37 per share for five years, 5,000
of which vest each year commencing March 27, 1998
(8) Mr. Heinz Schimmelbusch, a Director designee, disclaims beneficial
ownership of 133,334 shares of Common Stock held in trust for his children.
Includes warrants to purchase 10,000 shares of Common Stock which are
exercisable through March 27, 2002 at an exercise price of $3.37 per share.
(9) Mr. William Saculla is the Secretary of the Company. Includes options to
purchase 3,000 shares of Common Stock at a price of $2.65 per share through
August 31, 2002. Does not include options which have been granted but have
not vested to purchase 12,000 shares of Common Stock at a price of $2.65
per share. 20% of such options vest for a period of five years commencing
September 1, 1998.
(10) Includes warrants to purchase 10,000 shares of Common Stock which are
exercisable through March 27, 2002 at an exercise price of $3.37 per share.
(11) Involves 66,668 shares of Common Stock and warrants to purchase 30,000
shares of Common Stock owned by Directors designees.
(12) Gives no effect to the issuance of any shares of Common Stock upon the
exercise of any outstanding options or warrants, including: (i) 1,335,000
shares of Common Stock upon the exercise of currently exercisable warrants
with an exercise price of $1.51 per share, (ii) 400,000 shares of Common
Stock upon the exercise of currently exercisable warrants with an exercise
price of $3.00 per share, (iii) 316,391 shares of Common Stock upon the
exercise of currently exercisable warrants issued to the placement agent of
the November Private Placement, with an exercise price of $3.30 per share,
(iv) 110,000 shares of Common Stock issuable to employees of the Company
other than Mr. Brown for an exercise price of $2.65, which vest over a
period of five years commencing September 1, 1997, (v) 5,000 other warrants
with an exercise price of $3.00 per share exercisable through January 31,
2002, and (vi) 700,000 shares of Common Stock issuable upon the exercise of
options which vest over a period of five years issued to Mr. Brown, and the
issuance of 862,514 shares of Common Stock upon conversion of all of the
outstanding shares of Series A and Series B Preferred Stock.
Magee Industrial Enterprises is the sole owner of the 490,000 shares of
Series B Preferred Stock which is convertible into 765,625 shares of Common
Stock. Twenty shareholders, none of whom are affiliated with the Company,
own all of the 89,200 outstanding shares of Series A Preferred Stock, which
are convertible into 96,889 shares of Common Stock.
33
<PAGE>
Item 12. Certain Relationships and Related Transactions.
On May 31, 1996, Mr. James R. Cataland sold 2,000,000 shares of Common Stock to
an investor group led by Mr. Bruce Galloway, the Company's Chairman of the
Board, for an aggregate sale price of $1,200,000. With respect to such 2,000,000
shares, Mr. Galloway purchased 416,667 shares, NTS Financial Services, LTD. (an
affiliate of Mr. Thorvaldsson, the Company's Vice Chairman of the Board)
purchased 416,666 shares, Lifeyrissjodurinnn Hilf (an Icelandic pension fund)
purchased 546,875 shares, Heinz Schimmelbusch and members of his family
purchased 200,000 shares and certain non-affiliates of the Company purchased the
remaining 419,792 shares. Contemporaneously with such sale, James A. Cataland
and William Saculla resigned from the Board of Directors of the Company, Mr.
Cataland resigned as President of the Company and Messrs. Galloway, Brown and
Thorvaldsson were elected to the Board of Directors. Mr. Galloway paid $0.60 per
share purchased from Mr. Cataland, but received no placement fee in connection
therewith. Certain other purchasers of the balance of 2,000,000 shares of Common
Stock from Mr. Cataland and 3,042,463 shares of Common Stock from the Company
paid $0.64 per share. Of the $0.64 purchase price per share, $0.04 per share was
paid as a placement fee to Mr. Galloway, and other broker/dealers, and Mr.
Cataland and the Company received $0.60 per share from such investors. With
respect to such private placement, approximately $40,000 in placement fees were
paid to Mr. Bruce Galloway in his capacity as a placement agent. Upon the sale
of his shares of Common Stock, Mr. Cataland was retained by the Company as a
consultant under a consulting agreement. Under this agreement, Mr. Cataland
receives a consulting fee of $100,000 per year, payable in bi-weekly
installments for two years which commenced June 1, 1996.
On May 31, 1996, Messrs. Bruce Galloway, Skuli Thorvaldsson and Gudmundur
Jonsson agreed to be jointly and severally liable for the Company's obligations
to Bank One under a term loan in the original principal amount of $750,000 and
Mr. Andrew Catapano, the President of AFC Enterprises (a principal shareholder
of the Company) agreed to guarantee $187,500 of the Company's obligations. Upon
repayment of the loan on December 2, 1996, the guarantees were terminated. In
consideration for such guarantors providing the guarantees and providing
approximately $170,000 to fund certain expenses in connection with the
acquisition of Mr. Cataland's shares and the placement of the Company's Common
Stock in May 1996, the Company issued 555,000 warrants to Mr. Galloway, 250,000
warrants to Mr. Thorvaldsson, 250,000 warrants to Mr. Jonsson and 100,000
warrants to Mr. Catapano. Such warrants are exercisable at a price of $1.51 for
a period of five years through May 31, 2001.
On August 26, 1996, the Company purchased substantially all of the assets and
selected liabilities of Proulx Properties, Inc., a corporation owned by Michael
Proulx, the Company's Director of Franchise Services. The assets of the
corporation consisted of a franchised restaurant located in Port Charlotte,
Florida. The purchase price was 22,000 shares of Common Stock of the Company
valued at $68,750. On the date of the transaction, the average of the Company's
closing bid and asked prices was $3.125 per share.
34
<PAGE>
On November 27, 1996 the Company purchased 100% of the common stock of its
largest franchisee, MIE Hospitality, Inc. (MIE), whose operations include 32
restaurants in the midwest and northeast United States. The purchase price was
$4,232,976 (calculated as $2,250,000 in cash, $1,139,563 in long-term debt
assumed and $843,413, which represents the rights to acquire 275,625 shares of
Company common stock for no consideration at a future date. As of the date of
the acquisition, Magee was owned by 11 individuals and 10 trusts, all of whom
are relatives or trusts for the benefit of relatives. None of such shareholders
own more than 10% of the issued and outstanding stock of Magee. Harry M.
Katerman, the owner of 8.8% of the stock of Magee is the President of Magee.
The $1,139,563 principal amount of remaining debt owed by MIE to Magee is
evidenced by a promissory note (the "Magee Note") payable in 10 equal semiannual
installments, with the first payment being due on June 1, 1998 and the final
payment being due on December 1, 2002. The principal amount of the Magee Note
bears interest at the rate of eight percent (8%) per annum, and interest is
payable every six months commencing June 1, 1997. In the event of a closing of
any financing by the Company in excess of $10,000,000, provided that the debt or
equity financing which results in equaling or exceeding the aggregate gross
proceeds of $10,000,000 is a debt or equity financing for gross proceeds of a
minimum of $5,000,000 (other than any purchase money financing in connection
with the acquisition of any assets) or the sale of all or substantially all of
the capital stock of the Company or MIE, the balance of all outstanding
principal and interest under the Magee Note shall be immediately due and
payable.
The 490,000 shares of Series B Preferred Stock of the Company owned by MIE were
transferred to Magee in connection with the Company's acquisition of MIE. The
Series B Preferred Stock is convertible into 765,625 shares of Common Stock of
the Company at the option of the Company commencing April 27, 1997. The Company
agreed to pay Magee an amount equal to the accrued dividend on the Series B
Preferred Stock of $390,417 through November 30, 1996 in full on September 1,
1998. Such obligation shall not bear interest and no dividends have accumulated
on such Preferred Stock since November 30, 1996.
In connection with the November Private Placement, Bruce Galloway received
$71,000 as selling commissions. Burnham, the placement agent of the November
Private Placement, had agreed to pay Mr. Galloway, the Chairman of the Board of
the Company and a Managing Director of Burnham, 20% of the cash compensation
payable to Burnham in consideration for his services rendered in connection with
the November Private Placement.
Effective January 10, 1997, the Company issued 250,000 warrants to Mr. Bruce
Galloway, 100,000 warrants to Mr. George Koo (an advisor to the Board) and
50,000 warrants to Mr. Skuli Thorvaldsson. The warrants are exercisable for a
term of five years at an exercise price of $3.00 per share. The warrants were
issued for services rendered in connection with the acquisition of MIE and
represented the reinstatement of 400,000 warrants previously issued to Mr.
Galloway (with an exercise price of $0.60 per share) which had expired in August
1995.
35
<PAGE>
Item 13. Exhibits and Reports
(a) Exhibits
3.1.1 *Registrant's Certificate of Incorporation
3.1.2 *Agreement and Plan of Reorganization and First Addendum
dated December 5, 1983
3.1.3 *Certificate of Merger dated January 23, 1984
3.1.4 *Articles of Merger dated January 27, 1984
3.1.5 *Articles of Amendment to Articles of Incorporation dated
January 27, 1984
3.1.6 *Amendment to Articles of Incorporation dated January 27,
1986
3.1.7 *Articles of Amendment to Articles of Incorporation dated
June 28, 1996
3.2 *Registrant's Bylaws
4.1 *Form of Common Stock Certificate
4.2 *Certificate of Designation on Series A Preferred Stock
4.3 *Certificate of Designation on Series B Preferred Stock
10.1 *Purchase Agreement dated May 31, 1996 between James
Cataland and Registrant
Exhibits
--------
*Exhibit A - Option Agreement (See Exhibit 10.16)
*Exhibit B - Consulting Agreement (See Exhibit 10.14)
Schedules
---------
**Schedule A - States of Incorporation and
Qualification
**Schedule B - Financial Statements
**Schedule C - Taxes
**Schedule D - Contracts
**Schedule E - Accounts Receivable
**Schedule F - Litigation
36
<PAGE>
**Schedule G - Conflicting Interests
**Schedule H - Leases **Schedule I - Franchises
**Schedule J - Trademarks
**Schedule K - Payroll Register
**Schedule L - Employment Contracts
**Schedule M - Insurance Policies
10.2 *Employment Agreement dated June 1, 1996 between R. Frank
Brown and Registrant
10.3 *Purchase Agreement dated November 27, 1996, between M.I.E.
Hospitality and Registrant
Schedules
---------
**Schedule 1 Notice of Target Inter-Company Debt
**Schedule 1(b) Seller's Distribution Schedule (See
Exhibit 10.17)
**Schedule B Qualifications as Foreign
Corporations in Delaware, New
Jersey, New York
**Schedule 2(a) Capital Stock Representations,
Exceptions, etc.
**Schedule 2(b) Exceptions to GAAP and Ordinary
Course of Business since September
30, 1996, etc.
**Schedule 2(c) Disclosure of Liabilities of M.I.E.
Hospitality Not Disclosed in
Financial Statements or Other
Schedules
**Schedule 2(d) Exceptions to Tax Returns,
Representations and Warranties
**Schedule 2(e) List of assets owned or leased, etc.
**Schedule 2(f) Exceptions to Usability and
Salability of Inventories
**Schedule 2(g) Contracts, Notices, Defaults, etc.
37
<PAGE>
**Schedule 2(g)(5) Insurance policies and bonds
**Schedule 2(g)(6) Banks
**Schedule 2(g)(7) Interests in entities having been
party to transaction with M.I.E. in
past 12 months
**Schedule 2(g)(8) Consents or approvals of third
parties
required
**Schedule 2(g)(9) Accounts receivable aging schedule
**Schedule 2(i) Salary increases, contracts with
employees, agents, etc., and M.I.E.
benefit plans; M.I.E. payroll
roster; Collective Bargaining
Agreements
**Schedule 2(k) Legal Actions
**Schedule 2(l) Patents and trademarks, licenses,
etc.
**Schedule 2(m) List of Indemnification Given for
M.I.E. Hospitality for Patent,
Trademark or Copyright Infringement
**Schedule 2(o) Insurance Policies, see Schedule
2(g)(5)
**Schedule 2(p) Outstanding Loans or Advances or
Obligations to Make Loans or
Advances
**Schedule 2(r) Environmental
**Schedule 3(b) Consents required for performance by
Buyer
**Schedule 3(d) Preferred Stock Rights and
Preferences
**Schedule 3(e) Buyer Financials
38
<PAGE>
**Schedule 5 Consents and Release of Guarantees
Received by M.I.E. Hospitality
(Identified Leases)
**Schedule 5(i) Consents to Lease, etc., not
received
**Schedule 7(e) Actual Knowledge (individuals)
**Schedule 12(i) Target Working Capital Statement
Exhibits
--------
*Exhibit A M.I.E. Note (See Exhibit 10.8)
*Exhibit B Buyer Guaranty (See Exhibit 10.4)
*Exhibit C Buyer Note (See Exhibit 10.7)
**Exhibit 2(b) Balance Sheets and statements of
Income as of 12/31/95 and 9/30/96
**Exhibit D Form of Questionnaire
**Exhibit D-1 Responses to Questionnaire
*Exhibit E Escrow Agreement (See Exhibit 10.5)
*Exhibit F General Mutual Releases (See Exhibit
10.6)
10.4 *Guaranty Surety Agreement dated November 27, 1996 by Arthur
Treacher's, Inc.
10.5 *Escrow Agreement dated November 27, 1996 among Arthur
Treacher's, Inc. Seller and Brown Brothers Harriman & Co.
10.6 *Mutual Release Agreement dated November 27, 1996, among
M.I.E. Hospitality, Inc. and Magee Industrial Enterprises,
Inc.
10.7 *Promissory Note dated November 27, 1996 for $390,417 from
M.I.E. Hospitality, Inc. in favor of Magee Industrial
Enterprises Inc.
10.8 *Promissory Note dated November 27, 1996 for $1,139,563 from
M.I.E. Hospitality, Inc in favor of Magee Industrial
Enterprises, Inc.
39
<PAGE>
10.9 *Uniform Franchise Offering Circular as of January 1, 1997
10.10 *Form of Franchise Agreement as of January 1, 1997
10.11 *Form of Warrant exercisable at $1.51 per share
10.12 *Form of Warrant to Burnham Securities, Inc.
10.13 *Form of Stock Option to Employees
10.14 *Consulting Agreement dated May 31, 1996 between James
Cataland and Registrant
10.15 *Termination Agreement dated May 31, 1996 between James
Cataland and Registrant
10.16 *Option Agreement dated March 29, 1996 between James
Cataland and Skuli Thorvaldsson
10.17 *Schedule 1(b) to the Purchase Agreement dated November 27,
1996 between M.I.E. Hospitality and Registrant .
10.18 *Form of agreement with holders of Series A Preferred Stock
11.1 *Statement of Computation of Per Share Earnings
21. *List of Subsidiaries
27. *Financial Data Schedules
* Previously Filed with Form 10-SB Declared Effective on August 12, 1997
** Not Included with previous filings.
40
<PAGE>
SIGNATURES
In accordance with the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ARTHUR TREACHER'S, INC.
(Registrant)
Date: September 28, 1997 By /s/ R.Frank Brown
--------------------------
R. Frank Brown,
President, Chief Executive Officer,
Treasurer
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ R. Frank Brown Director, President, Chief Executive September 28, 1997
- ----------------------------------- Officer, Treasurer
R. Frank Brown
/s/ Bruce Galloway Director, Chairman of September 28, 1997
- ------------------------------------ the Board
Bruce Galloway
Director September __, 1997
- -----------------------------------
Skuli Thorvaldsson
</TABLE>
41
<PAGE>
ARTHUR TREACHER'S, INC.
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report of KPMG Peat Marwick LLP F-2
Independent Auditors' Report of Lytkowski & Pease, Inc. F-3
Consolidated Balance Sheets as of June 30, 1997 and 1996 F-4
Consolidated Statements of Operations for the years ended
June 30, 1997 and 1996 F-6
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended June 30, 1997 and 1996 F-7
Consolidated Statements of Cash Flows for the years ended
June 30, 1997 and 1996 F-8
Notes to Consolidated Financial Statements F-9
F-1
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Arthur Treacher's, Inc.:
We have audited the accompanying consolidated balance sheet of Arthur
Treacher's, Inc. as of June 30, 1997, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Arthur Treacher's,
Inc. as of June 30, 1997, and the results of their operations and their cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Jacksonville, Florida
August 29, 1997
F-2
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Arthur Treacher's, Inc.:
We have audited the accompanying consolidated balance sheet of Arthur
Treacher's, Inc. as of June 30, 1996, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Arthur Treacher's,
Inc. as of June 30, 1996, and the results of their operations and their cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
Lytkowski & Pease, Inc.
Cleveland, Ohio
September 20, 1996
F-3
<PAGE>
ARTHUR TREACHER'S, INC.
Consolidated Balance Sheets
June 30, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
- ------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $867,847 990,683
Accounts receivable, net of allowance of $25,900
in 1997 and $39,000 in 1996 137,598 147,122
Inventories 288,663 68,668
Prepaid expenses 181,544 34,867
---------- ----------
Total current assets 1,475,652 1,241,340
---------- ----------
Property and equipment, at cost (notes 2 and 4):
Land 150,000 --
Buildings 306,300 156,300
Leasehold improvements 4,160,812 1,404,295
Furniture, fixtures, and equipment 3,166,180 1,254,176
---------- ----------
7,783,292 2,814,771
Less accumulated depreciation 2,112,778 1,424,317
---------- ----------
Property and equipment, net 5,670,514 1,390,454
Deposits 151,451 23,976
Goodwill, net of accumulated amortization of $9,524 in 1997 317,016 --
Other 8,233 14,534
---------- ----------
Total assets $7,622,866 2,670,304
========== ==========
</TABLE>
(Continued)
F-4
<PAGE>
ARTHUR TREACHER'S, INC.
Consolidated Balance Sheets, continued
June 30, 1997 and 1996
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity (Deficit) 1997 1996
- ---------------------------------------------- ---- ----
<S> <C> <C>
Current liabilities:
Accounts payable $1,050,956 923,379
Accrued expenses and other liabilities (note 3) 654,527 514,555
Current maturities of long-term debt (note 4) 369,863 1,056,202
----------- -----------
Total current liabilities 2,075,346 2,494,136
Long-term debt , net of current maturities (note 4) 1,570,305 458,923
Other liabilities 392,705 46,379
----------- -----------
Total liabilities 4,038,356 2,999,438
----------- -----------
Stockholders' equity (deficit) (note 9):
Preferred stock 2,000,000 shares authorized:
Series A convertible, par value $1; 87,800 shares
issued and outstanding 87,200 87,800
Series B convertible, par value $1; 490,000 shares
issued and outstanding 490,000 490,000
Common stock $.01 par value; authorized 25,000,000 shares,
issued and outstanding 14,399,248 shares at June 30, 1997
and 11,118,620 shares at June 30, 1996 143,992 111,186
Additional paid-in capital 9,704,248 3,731,347
Accumulated deficit (6,840,930) (4,371,491)
----------- -----------
3,584,510 48,842
Less subscriptions receivable -- (377,976)
----------- -----------
Total stockholders' equity (deficit) 3,584,510 (329,134)
----------- -----------
Commitments and contingencies (notes 5 and 8)
Total liabilities and stockholders' equity $7,622,866 2,670,304
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ARTHUR TREACHER'S, INC.
Consolidated Statements of Operations
June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues:
Restaurant sales $16,934,481 6,648,564
Franchise fees and royalties 484,885 861,867
Other revenues 356,293 367,479
------------ ------------
Total revenues 17,775,659 7,877,910
------------ ------------
Operating expenses:
Cost of sales, including occupancy except depreciation (note 5) 9,445,874 3,856,776
Operating expenses 7,536,984 3,619,491
Depreciation and amortization 724,968 290,120
General and administrative expenses (note 8) 2,050,734 1,097,350
------------ ------------
Total operating expenses 19,758,560 8,863,737
------------ ------------
Loss from operations (1,982,901) (985,827)
Other income (expenses):
Interest expense, net of interest income of $57,851 in 1997 (105,279) (168,513)
Other income, net 9,158 --
------------ ------------
Net loss $(2,079,022) (1,154,340)
============ ============
Net loss per common share $ (.16) (.14)
============ ============
Weighted average number of outstanding shares 13,115,395 8,273,032
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ARTHUR TREACHER'S, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Additional
Preferred Common Paid in Accumulated Subscriptions
Stock Stock Capital Deficit Receivable Total
----- ----- ------- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 $577,800 80,762 2,183,748 (3,217,151) -- (374,841)
Common stock issued -- 23,625 1,415,722 -- -- 1,439,347
Stock issuance costs -- -- (388,231) -- -- (388,231)
Warrants issued for services -- -- 148,931 -- -- 148,931
Common stock subscribed -- 6,799 427,406 -- (434,205) --
Stock issuance costs -- -- (56,229) -- 56,229 --
Net loss -- -- -- (1,154,340) -- (1,154,340)
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1996 577,800 111,186 3,731,347 (4,371,491) (377,976) (329,134)
Subscription received, net -- -- 3,711 -- 377,976 381,687
Preferred stock redeemed (600) -- -- -- -- (600)
Common stock issued -- 32,519 5,657,325 -- -- 5,689,844
Stock issued for restaurant
purchases -- 287 88,464 -- -- 88,751
Common stock conversion rights
issued for MIE acquisition
(note 2) -- -- 843,413 -- -- 843,413
Stock issuance costs -- -- (770,980) -- -- (770,980)
Warrants issued for services -- -- 150,968 -- -- 150,968
Preferred stock dividend declared -- -- -- (390,417) --
(390,417)
Net loss -- -- -- (2,079,022) -- (2,079,022)
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 $577,200 143,992 9,704,248 (6,840,930) -- 3,584,510
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ARTHUR TREACHER'S, INC.
Consolidated Statements of Cash Flows
June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net loss $(2,079,022) (1,154,340)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 724,968 290,120
Loss on disposition of restaurants 27,061 95,112
(Increase) decrease in accounts receivable (6,818) 24,742
(Increase) decrease in deposits and other assets (67,174) 4,363
(Increase) decrease in prepaid expenses (116,475) 127,294
(Increase) decrease in inventory (42,317) 21,380
(Decrease) increase in accounts payable (69,078) 268,006
(Decrease) increase in accrued expenses and
other liabilities (86,961) 237,438
----------- -----------
Net cash used in operating activities (1,715,816) (85,885)
----------- -----------
Investing activities:
Purchase acquisitions of restaurants (1,842,681) (410,230)
Capital expenditures (1,076,240) --
Proceeds from disposition of restaurants 19,500 18,000
----------- -----------
Net cash used in investing activities (2,899,421) (392,230)
----------- -----------
Financing activities:
Issuance of common stock 5,689,844 1,439,347
Cash received from common stock subscribed 381,687 --
Stock issuance costs (620,012) (239,300)
Proceeds from long-term debt 226,738 490,852
Principal payments on long-term debt (1,185,856) (248,286)
----------- -----------
Net cash provided by financing activities 4,492,401 1,442,613
----------- -----------
Net (decrease) increase in cash and cash equivalents (122,836) 964,498
Cash and cash equivalents beginning of year 990,683 26,185
----------- -----------
Cash and cash equivalents end of year $867,847 990,683
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $159,539 142,280
=========== ===========
Supplemental disclosure of noncash transactions:
Long-term debt assumed in restaurant purchases $1,401,661 --
=========== ===========
Common stock conversion rights issued for restaurant purchases $843,413 --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
ARTHUR TREACHER'S, INC.
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
(1) Summary of Significant Accounting Policies
(a) Description of the Business
Arthur Treacher's Inc. (the "Company") owns, operates and franchises
quick service seafood restaurants under the names "Arthur Treacher's
Fish & Chips" and "Arthur Treacher's Seafood Grille." At June 30,
1997, the Company owned and operated 63 restaurants and franchised an
additional 54 restaurants, located in 11 states and Canada, with the
greatest concentrations in the northeast and midwest regions of the
United States.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Arthur Treacher's
Management Company and Arthur Treacher's Advertising Company. All
material intercompany transactions have been eliminated in
consolidation. Certain 1996 amounts have been reclassified to conform
to presentation adopted during 1997.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of ninety days or less to be cash equivalents.
(d) Inventories
The Company values its inventories at the lower of cost (first-in,
first-out method) or market.
(e) Property and Equipment
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided on a straight-line basis over
the estimated useful lives of the respective assets, which ranges from
3 to 10 years.
F-9
<PAGE>
ARTHUR TREACHER'S, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
(f) Recoverability of Long-Lived Assets
The Company adopted the provisions of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," on July 1,1996. This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Adoption of this
Statement did not have a material impact on the Company's financial
position or results of operations.
(g) Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In
addition, the method requires the recognition of future tax benefits,
such as net operating loss and business tax credit carryforwards, to
the extent that realization of such benefits is more likely than not.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.
(h) Franchise Operations
Franchise royalties, which are based upon a percentage of franchise
restaurants' sales, are recognized as income on the accrual basis.
Initial franchise fees are typically included in revenues when
substantially all services and conditions relating to the sale of the
franchise have been performed or satisfied, which occurs when the
franchised restaurant commences operations. Initial franchise fees for
area franchise agreements are recognized as income on a pro rata basis
as the restaurants are opened.
F-10
<PAGE>
ARTHUR TREACHER'S, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
(i) Pre-Opening Costs
Costs associated with opening new restaurants are expensed during the
period incurred.
(j) Per share data
Net loss per common share outstanding is computed based upon the
weighted average number of common stock and common stock equivalents
outstanding during the period. Common stock equivalents include
convertible preferred stock and common stock options and warrants. The
dilutive impact of common stock options and warrants is included in
the calculation of net loss per share when the exercise price falls
below the market price. Net loss per share on a fully diluted basis is
not different from net loss per common share outstanding and thus is
not disclosed separately.
(k) Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and
liabilities, at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(l) Stock Options and Warrants
Prior to July 1, 1996, the Company accounted for its grants of stock
options and warrants in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As such, compensation expense
would be recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. On July 1,
1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock
option grants made in 1996 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
F-11
<PAGE>
ARTHUR TREACHER'S, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
(m) Goodwill
Goodwill, which has been recorded as a result of purchased
acquisitions, is amortized over the period estimated to benefit from
the acquired assets and rights, which is twenty years.
(n) Recent Accounting Pronouncements
During February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, (SFAS 128)
"Earnings per Share." SFAS 128 governs the computation, presentation,
and disclosure requirements for earnings per share (EPS) for entities
with publicly held common stock. SFAS 128 was issued to simplify the
computation of EPS and replaces the Primary and fully diluted EPS
calculations currently in use with calculations of Basic and Diluted
EPS. SFAS 128 is effective for financial statements for both interim
and annual periods ending after December 15, 1997, and earlier
application is not permitted. The Company will begin to calculate its
EPS in compliance with SFAS 128 for the period ended December 31,
1997.
(2) Acquisitions
On November 27, 1996 the Company purchased 100% of the common stock of its
largest franchisee, MIE Hospitality, Inc. (MIE), whose operations include
32 restaurants in the midwest and northeast United States. The transaction
has been accounted for as a purchase and the results of operations have
been included in the accompanying consolidated financial statements from
the date of acquisition forward. The purchase price of $4,232,976
(calculated as $2,250,000 in cash, $1,139,563 in long-term debt assumed and
$843,413, which represents the rights to acquire 275,625 shares of Company
common stock for no consideration at a future date (note 9)) has been
allocated to the tangible net assets of MIE and the remaining $326,540
recorded as goodwill. In addition, $736,877 of deferred tax liabilities of
MIE were offset by the Company's deferred tax assets, resulting in a
decrease in the deferred tax valuation allowance.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and MIE as if the acquisition
had occurred as of the July 1, 1996 and 1995. The pro forma financial
information does not necessarily reflect the results of operations that
would have occurred had the Company and MIE constituted a single entity
during such periods. Pro forma total revenues of $23.7 million and $22.7 in
1997 and 1996, respectively. Pro forma net loss of $1.72 million and $1.59
in 1997 and 1996, respectively, and pro forma net loss per share of $.13
and $.19 in 1997 and 1996, respectively.
F-12
<PAGE>
ARTHUR TREACHER'S, INC.
Notes to Consolidated Financial Statements
(2) Acquisitions, continued
Also during 1997, the Company acquired eight restaurants in six different
transactions all accounted for as purchases. The purchase price, which
totaled approximately $544,000, was satisfied by cash, common stock, or
assumed liabilities. The entire purchase price was allocated to the
tangible assets of the acquired entities. The results of operations of each
entity was included in the consolidated financial statements from the date
of acquisition. None of the acquisitions were significant to the operations
of the Company during 1997 or 1996.
(3) Accrued Expenses and Other Liabilities
Accrued liabilities consisted of the following at June 30, 1997 and 1996:
1996 1995
---- ----
Accrued professional fees $142,500 --
Accrued taxes 328,093 234,581
Other 183,934 279,974
-------- --------
Total accrued liabilities $654,527 514,555
======== ========
(4) Long-Term Debt
Long-term debt consisted of the following at June 30, 1997 and 1996:
1997 1996
---- ----
Notes payable:
Notepayable due in quarterly installments of
$140,969, including interest at 8%, beginning
June 1, 1998 maturing December 2002, unsecured $1,139,563 --
F-13
<PAGE>
ARTHUR TREACHER'S, INC.
Notes to Consolidated Financial Statements
(4) Long-Term Debt, continued
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Notes payable to banks, due in monthly installments totaling
$2,667, including interest at rates ranging from 10% to 12.5%,
maturing through
November 2001, secured by property and equipment $ 98,424 79,360
Various notes payable related to the acquisition of franchised
restaurants, due in monthly installments of principal and
interest at rates ranging from 8% to 16.1%, maturing at dates
through 2007, secured
by property and equipment 601,031 497,510
Line of credit, interest only payable at the prime rate,
amount paid in full December 1996 -- 750,000
Note payable due in monthly installments of $13,741,
including interest at 10%, maturing in April 1998,
secured by property and equipment 101,150 188,255
---------- ----------
1,940,168 1,515,125
Less current maturities 369,863 1,056,202
---------- ----------
Total long-term debt $1,570,305 458,923
========== ==========
</TABLE>
F-14
<PAGE>
ARTHUR TREACHER'S, INC.
Notes to Consolidated Financial Statements
(4) Long-Term Debt, continued
Principal maturities of long-term debt for the next five years and
thereafter at June 30, 1997 are as follows:
Year ending June 30, Amount
-------------------- ------
1998 $ 369,863
1999 323,141
2000 343,564
2001 315,126
2002 328,389
Thereafter 260,085
----------
Total $1,940,168
==========
The Company considers the carrying value of its long-term debt to be a
reasonable estimation of its fair value based on the current market rates
available to the Company for debt of the same remaining maturities.
(5) Leases
The Company is the lessee under various long-term operating leases for the
land and buildings in which its owned and franchised restaurants operate.
The leases generally range between five and twenty years and usually
provide for renewal options.
The majority of the leases require the Company to be billed for taxes,
insurance, utilities, and maintenance costs of the leased property. Certain
of the leases require additional (contingent) rental payments if sales
volumes at the related restaurants exceed specified limits.
Base rent expense for Company owned restaurants, net of sublease income of
$9,000 and $6,000 in 1997 and 1996, respectively, was approximately
$1,691,000 and 791,000, for the years ended June 30, 1997 and 1996,
respectively.
F-15
<PAGE>
ARTHUR TREACHER'S, INC.
Notes to Consolidated Financial Statements
(5) Leases, continued
The following summarizes future minimum lease payments, for Company owned
restaurants, required for leases that have initial or remaining
noncancelable terms in excess of one year as of June 30, 1997:
Year ending June 30, Amount
-------------------- ------
1998 $ 2,270,570
1999 2,209,456
2000 2,093,782
2001 1,933,935
2002 1,445,519
Thereafter 1,705,455
-----------
Total $11,658,717
===========
The Company also conditionally guarantees the payment of certain lease
obligations of its franchisees. The amount of this conditional guarantee is
approximately $163,000 for each of the next five years.
(6) Income Taxes
Income tax benefit attributable to income from continuing operations for
the years ended June 30, 1997 and 1996, differed from the amounts computed
by applying the U.S. Federal income tax rate of 34% to income before taxes
as follows:
1997 1996
---- ----
Computed "expected" tax benefit $(729,988) (392,476)
Increase (decrease) in income taxes resulting from:
Non-deductible meals and entertainment 11,973 11,563
Goodwill amortization 3,238 XX
Change in valuation allowance 742,596 375,276
Other, net (27,819) 5,637
--------- ---------
$ -- --
========= =========
F-16
<PAGE>
ARTHUR TREACHER'S, INC.
Notes to Consolidated Financial Statements
(6) Income Taxes, continued
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of June_30, 1997 and
1996 are as follows:
1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforward $2,022,284 318,263
Property and equipment -- 63,244
Allowance for doubtful accounts 8,806 10,892
Other -- 51,791
---------- ----------
Total gross deferred tax assets 2,031,090 444,190
Less valuation allowance 1,392,894 356,387
---------- ----------
Net deferred tax assets 638,196 87,803
---------- ----------
Deferred tax liabilities:
Property and equipment 638,196 --
Royalty fees -- 14,000
Other -- 68,103
---------- ----------
Total deferred tax liabilities 638,196 82,103
---------- ----------
Net deferred tax assets $ -- 5,700
========== ==========
During 1997, the Company reached an agreement with the Internal Revenue
Service regarding the amount of net operating loss carryforwards available
for future use. As a result of this agreement, the Company determined it
had additional deferred tax assets of $1,025,088 relating to net operating
loss carryforwards. This entire amount was recorded during 1997 and has
been offset by an increase in the valuation allowance.
At June 30, 1997, the Company had approximately $5.9 million of net
operating loss carryforwards available for use, which expire through 2012.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the schedule of reversal of deferred tax assets, projected future
taxable income, and tax planning strategies in making the assessment.
F-17
<PAGE>
ARTHUR TREACHER'S, INC.
Notes to Consolidated Financial Statements
(7) Stock Options and Stock Warrants
During 1997 and 1996, the Company has granted 316,500 and 700,000
nonqualified stock options, respectively, to certain key employees and
directors to purchase shares of the Company's common stock at a price equal
to or in excess of the market price of the stock, vesting over a five year
period. These options were granted as compensation and the number of
options granted was determined based on specific individual circumstances.
The shares issuable under these option grants are nonregistered shares and
the Company has no requirement to register such shares. The Company does
not have a formal stock option plan.
The per share weighted-average fair value of stock options granted was
calculated using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 - no expected dividend yield, risk-free
interest rate of 6.4% weighted average expected volatility of 8.6% and an
expected life of 5 years; 1996 - no expected dividend yield, risk-free
interest rate of 6.6%, weighted average expected volatility of 21% and an
expected life of 5 years. In addition, for 1997 and 1996 the Company has
discounted the market price of the stock, on the date of option grant, by
35% in consideration of the restrictions on the sale of the underlying
shares. The fair value on the date of grant for options granted with
exercise prices in excess of the market price of the stock was $.02 and
$.03 for 1997 and 1996, respectively. For options granted with exercise
prices equal to the market price of the stock, the fair value was $.13 for
1996. No options were granted with exercise prices equal to the market
price of the stock in 1997.
The Company applies APB Opinion No. 25 in accounting for option grants and,
accordingly, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would not have been
materially impacted for the effects of such calculation in either 1997 or
1996.
In addition, during 1997 and 1996 the Company granted 721,391 warrants and
1,930,000 warrants, respectively, (valued at $150,968 and $148,931,
respectively) to purchase shares of Company common stock to non-employees
in return for services provided in connection with the Company's equity
offerings. These warrants have been recorded at fair value using
substantially the same criteria as discussed above for the stock options.
F-18
<PAGE>
ARTHUR TREACHER'S, INC.
Notes to Consolidated Financial Statements
(7) Stock Option Plan and Stock Warrants, continued
Stock option and warrant activity during the period indicated is as
follows:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Balance at June 30, 1995 -- $--
Granted:
Exercise price equal to market price of stock 350,000 1.38
Exercise price in excess of market price of stock 2,280,000 1.60
Exercised -- --
Canceled -- --
---------- -----
Balance at June 30, 1996 2,630,000 1.57
Granted:
Exercise price equal to market price of stock 405,000 3.00
Exercise price in excess of market price of stock 632,891 3.14
Exercised -- --
Canceled (652,500) 1.61
---------- -----
Balance at June 30, 1997 3,015,391 $1.96
========== =====
</TABLE>
The following table presents information regarding all options and warrants
outstanding at June 30, 1997.
Weighted
Number of Average Weighted
Warrants and Remaining Range of Average
Options Contractual Exercise Exercise
Outstanding Life Prices Price
1,685,000 5.0 years $ 1.38 - 1.51 $ 1.48
460,000 9.0 years 2.13 - 2.65 2.25
870,391 5.4 years 3.00 - 3.37 3.17
------------- -------------- --------------- -------
3,015,391 5.7 years $ 1.38 - 3.37 $ 1.96
============= ============== =============== =======
F-19
<PAGE>
ARTHUR TREACHER'S, INC.
Notes to Consolidated Financial Statements
(7) Stock Option Plan and Stock Warrants, continued
The following table presents information regarding options and warrants
currently exercisable at June 30, 1997.
Number of Weighted
Warrants and Range of Average
Options Exercise Exercise
Exercisable Prices Price
1,405,000 $ 1.38 - 1.51 $ 1.50
92,000 2.13 - 2.65 2.19
756,391 3.00 - 3.37 3.02
------------- ------------------ ---------
2,253,391 $ 1.38 - 3.37 $ 2.03
============= ================== =========
(8) Commitments and Contingencies
Included in general and administrative expenses in the accompanying
consolidated statement of operations is approximately $544,000 and $403,000
for the years ending June 30, 1997 and 1996, respectively, related to the
settlement of lawsuits, lease cancellations and other items. The Company is
involved in various other claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition
of these matters will not have a material adverse effect on the Company's
consolidated results of operations or financial position.
The Company has entered into an agreement with its former President and
Chief Executive Officer to provide consulting services to the Company at a
rate of $100,000 per year, commencing June 1, 1996 and expiring in June
1998.
F-20
<PAGE>
ARTHUR TREACHER'S, INC.
Notes to Consolidated Financial Statements
(9) Stockholders' Equity
During 1996, the Company sold 3,042,463 shares of Common Stock in a private
placement for aggregate gross proceeds of $1,873,552 (the June Private
Placement) and sold 3,163,911 shares of Common Stock in a private placement
for aggregate gross proceeds of $5,631,761 during 1997 (the November
Private Placement). The Company utilized the proceeds of the June Private
Placement to repay outstanding indebtedness and as cash flow for
operations. The proceeds from the November Private Placement were used to
acquire MIE, as described in note 2, and to repay additional debt.
In addition, as described in note 2, the Company issued approximately
28,700 shares of its common stock as part of acquiring eight restaurants.
The holders of the Series A Preferred Stock are entitled to a cumulative
dividend of $0.10 per share per annum. Such dividends accrue annually but
are payable if and when the Company declares a dividend. The Company has
not paid any dividends with respect to the Series A Preferred Stock. The
87,200 outstanding shares of Series A Preferred Stock are convertible into
96,889 shares of Common Stock for no additional consideration at the option
of the holder of the stock. The Series A Preferred Stock is entitled to a
liquidation preference of $1.00 per share, plus any accrued and unpaid
dividends. The Series A Preferred Stock may be redeemed by the Company at a
redemption price of $1.00 per share plus all accrued and unpaid dividends.
The amount of accumulated and unpaid dividends was approximately $96,000 as
of June 30, 1997.
In conjunction with the acquisition of MIE (see note 2), the former owners
of MIE (Magee) and the Company amended the terms of the Series B Preferred
Stock and agreed that no dividends would accumulate on such Preferred Stock
after November 30, 1996. The Company also agreed to pay Magee an amount
equal to the accrued dividend on the Series B Preferred Stock through
November 30, 1996 (which was $390,417) in full on September 1, 1998. In
addition, the 490,000 outstanding shares of Series B Preferred Stock are
now allowed to be convertible at the option of the holder or the Company at
any time, and the conversion rate was increased so that Magee will receive
765,625 shares of Common Stock upon conversion (an increase of 275,625
shares, valued at $843,413 and included as part of the purchase price of
MIE) for no additional consideration. The Company has not determined when
it will require conversion of the Series B Preferred Stock into Common
Stock.
F-21
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<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Jun-30-1997
<PERIOD-START> Jul-01-1996
<PERIOD-END> Jun-30-1997
<CASH> 867,847
<SECURITIES> 0
<RECEIVABLES> 137,598
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<INVENTORY> 288,663
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<PP&E> 7,783,292
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0
577,200
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<INCOME-PRETAX> (2,079,022)
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