<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10 - QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 ( D )
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission File Number
March 29, 1998 0-22315
ARTHUR TREACHER'S, INC.
7400 Baymeadows Way, Suite 300
Jacksonville, Florida 32256
( 904 ) 739-1200
UTAH 34-1413104
( State of Incorporation ) ( I.R.S. Employer Identification No.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
At May 12, 1998, the latest practicable date, there were 14,607,259 shares of
Common Stock outstanding, $.01 par value.
<PAGE>
ARTHUR TREACHER'S INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Unaudited Financial Statements :
Consolidated Balance Sheets as of
March 29, 1998 and June 30, 1997 3-4
Consolidated Statements of Operations for the Three
Month Periods December 29, 1997 through March 29,
1998 and December 30, 1996 through March 30, 1997 5
Consolidated Statements of Operations for the Nine
Month Periods July 1, 1997 through March 29, 1998 and
July 1, 1996 through March 30, 1997 6
Consolidated Statement of Cash Flows for the Nine
Month Periods July 1, 1997 through March 29, 1998 and
July 1, 1996 through March 30, 1997 7
Notes to Interim Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10-16
PART II. OTHER INFORMATION 17-23
2
<PAGE>
ARTHUR TREACHER'S INC
CONSOLIDATED BALANCE SHEETS
MARCH 29, 1998 AND JUNE 30, 1997
<TABLE>
<CAPTION>
ASSETS March June
------ 1998 1997
( unaudited ) ( audited )
------------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and short-term investments $1,457,247 $ 867,847
Accounts receivable, net of allowance
for doubtful accounts of $28,653 in March
1998 and $25,900 in June 1997 184,870 137,598
Inventories 263,965 288,663
Prepaid Expenses 220,577 181,544
Other 6,208 0
------------- ----------
TOTAL CURRENT ASSETS 2,132,867 1,475,652
------------- ----------
OTHER ASSETS
Security deposits 204,213 151,451
Goodwill, net of accumulated amortization 304,771 317,016
Other 81,972 8,233
------------- ----------
TOTAL OTHER ASSETS 590,956 476,700
------------- ----------
PROPERTY AND EQUIPMENT, at cost
Land 0 150,000
Buildings 156,300 306,300
Leasehold improvements 4,238,227 4,160,812
Furniture, Fixtures and Equipment 3,260,995 3,166,180
------------- ----------
TOTAL PROPERTY AND EQUIPMENT 7,655,522 7,783,292
Less - accumulated depreciation 2,900,712 2,112,778
PROPERTY AND EQUIPMENT, NET 4,754,810 5,670,514
------------- ----------
TOTAL ASSETS $7,478,633 $7,622,866
============= ==========
</TABLE>
3
<PAGE>
ARTHUR TREACHER'S INC
CONSOLIDATED BALANCE SHEETS
MARCH 29, 1998 AND JUNE 30, 1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit) March June
------ 1998 1997
( unaudited ) ( audited )
------------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $1,442,900 $1,050,956
Accrued expenses and other liabilitie 542,829 654,527
Current maturities of long-term debt 405,930 369,863
------------ -----------
TOTAL CURRENT LIABILITIES 2,391,659 2,075,346
LONG-TERM DEBT, net of current portion 1,445,535 1,570,305
Other liabilities 408,018 392,705
------------ -----------
TOTAL LIABILITIES 4,245,212 4,038,356
------------ -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock 1,355,505 577,200
Common Stock 145,972 143,992
Additional Paid-in-capital 9,860,881 9,704,248
Accumulated Deficit (8,128,937) (6,840,930)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 3,233,421 3,584,510
------------ -----------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $7,478,633 $7,622,866
============ ===========
</TABLE>
4
<PAGE>
ARTHUR TREACHER 'S INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
<TABLE>
<CAPTION>
December 29, 1997 December 30, 1996
through through
March 29, 1998 March 30, 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
TOTAL REVENUE $ 4,961,334 $ 5,458,428
OPERATING EXPENSES
Cost of sales, including occupancy,
except depreciation 2,978,084 3,091,386
Operating expenses 1,833,383 1,873,652
Depreciation and Amortization 281,697 269,715
General and Administrative and Franchise services 478,048 623,559
------------------ ------------------
TOTAL COSTS AND EXPENSES 5,571,212 5,858,312
LOSS FROM OPERATIONS (609,878) (399,884)
OTHER EXPENSE, net
Interest expense 50,959 40,391
Other 24,999 271,431
------------------ ------------------
75,958 311,822
NET LOSS $ (685,836) $ (711,706)
------------------ ------------------
Undeclared preferred stock dividends (20,570) (2,180)
------------------ ------------------
NET LOSS Available for common shareholders $ (706,406) $ (713,886)
================== ==================
Basic (loss) per share $ (0.05) $ (0.05)
================== ==================
Diluted (loss) per share $ (0.05) $ (0.05)
================== ==================
AVERAGE SHARES OUTSTANDING 14,563,615 14,364,563
================== ==================
</TABLE>
5
<PAGE>
ARTHUR TREACHER 'S INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED
<TABLE>
<CAPTION>
July 1, 1997 July 1, 1996
through through
March 29, 1998 March 30, 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
TOTAL REVENUE $ 17,628,596 11,992,778
OPERATING EXPENSES
Cost of sales, including occupancy,
except depreciation 9,156,117 6,245,065
Operating expenses 7,306,045 4,541,816
Depreciation and Amortization 827,808 454,998
General and Administrative and Franchise services 1,372,116 1,478,767
--------------- ---------------
TOTAL COSTS AND EXPENSES 18,662,086 12,720,646
LOSS FROM OPERATIONS (1,033,490) (727,868)
OTHER EXPENSE, net
Interest expense 142,878 114,576
Loss on sale of property 36,641 24,994
Other 74,998 364,875
--------------- ---------------
254,517 504,445
NET LOSS $ (1,288,007) $ (1,232,313)
--------------- ---------------
Undeclared preferred stock dividends (30,758) (6,540)
--------------- ---------------
NET LOSS Available for common shareholders (1,318,765) (1,238,853)
=============== ===============
Basic (loss) per share $ (0.09) $ (0.10)
=============== ===============
Diluted (loss) per share $ (0.09) $ (0.10)
=============== ===============
AVERAGE SHARES OUTSTANDING 14,485,664 12,918,496
=============== ===============
</TABLE>
6
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIODS
<TABLE>
<CAPTION>
July 1, 1997 July 1, 1996
through through
March 29, 1998 March 30, 1997
<S> <C> <C>
Operating activities:
Net loss $ (1,288,007) $ (1,232,313)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 827,808 454,998
Common stock issued for services 20,758
Loss on disposition of restaurants 36,641 24,994
Changes in Operating assets and liabilities
Accounts receivable (47,272) (22,492)
Deposits and other assets (52,590) (124,941)
Prepaid expenses (39,033) (258,995)
Inventories 24,698 (221,884)
Accounts payable 391,944 214,726
Accrued expenses and other liabilities (96,385) 62,949
----------------- --------------
Net cash used in operating activities (221,438) (1,102,958)
----------------- --------------
Investing activities:
Purchase acquisitions of restaurants (1,842,681)
Capital expenditures (262,721) (929,343)
Proceeds from disposition of property 246,102 19,500
----------------- --------------
Net cash used in investing activities (16,619) (2,752,524)
----------------- --------------
Financing activities:
Issuance of common stock 124,050 5,045,595
Issuance of preferred stock 990,000
Cash received from common stock subscribed 381,687
Stock issuance costs (197,890)
Proceeds from long term debt 157,216 220,506
Principal payments on long-term debt (245,919) (1,043,717)
----------------- --------------
Net cash provided by financing activities 827,457 4,604,071
----------------- --------------
Increase in cash and cash equivalents 589,400 748,589
Cash and cash equivalents beginning of period 867,847 990,683
----------------- --------------
Cash and cash equivalents end of nine months $ 1,457,247 $ 1,739,272
================= ==============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 121,878 $ 86,576
================= ==============
Supplemental disclosure of noncash transactions:
Long term debt assumed in restaurants $ 222,576
================= ==============
Common stock conversion rights issued for
restaurant purchases $ 68,750
================= ==============
Series A Preferred Stock exchanged for common stock $ 74,400
================= ==============
Common stock issued for stock issuance cost $ 36,420
================= ==============
Other assets received on sale of property $ 80,119
================= ==============
Proceeds from issuance of Preferred Stock
Allocated to warrants $ 137,295
================= ==============
</TABLE>
7
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 29, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim unaudited financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission, and reflect all adjustments which, in the opinion of management, are
necessary to properly state the results of operations and financial position.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations although
management believes that the disclosures are adequate to make the information
presented not misleading. The results of operations are not necessarily
indicative of the results for the full year. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's audited financial statements included in the Form 10-KSB for
the fiscal year ended June 30, 1997, filed with the Securities and Exchange
Commission on September 29, 1997.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The interim consolidated financial statements
include the accounts of the company and its wholly-owned subsidiaries,
MIE Hospitality, Inc., a wholly owned subsidiary: which operates 31
Arthur Treacher's Fish and Chips restaurants in Pennsylvania, New York,
New Jersey and Delaware.
Arthur Treacher's Management Co., a wholly-owned subsidiary, provides
payroll services to the company.
Arthur Treacher's Advertising Co., a wholly-owned subsidiary, provides
certain advertising services to the company and the franchisees.
Earnings Per Share
Effective December 28, 1997, the Company implemented the provisions of Statement
of Financial Accounting Standards #128 "Earnings Per Share". All earnings per
share information presented has been restated to reflect the provisions of this
statement.
8
<PAGE>
NOTE 3 - COMMITMENTS AND CONTINGENCIES
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 entered into an agreement with the former president and Chief
Executive Officer to provide consulting services to the company at a rate of
$100,000 per year for two years, which commenced June 1, 1996, and terminates on
May 31, 1998.
NOTE 4 - STOCKHOLDER'S EQUITY
In November and December 1997, the Company consummated a private placement to
six accredited investors under Regulation D of the Securities Act of 1933 with
respect to units consisting of shares of its Series C Preferred Stock and
Warrants to purchase shares of Common Stock for aggregate proceeds of $990,000.
On November 25, 1997, the Company sold an aggregate of 8,100 shares of Series C
Preferred Stock and Warrants to purchase an aggregate of 121,500 shares of
Common Stock. On December 23, 1997, the Company sold an aggregate of 1,800
shares of Series C Preferred Stock and Warrants to purchase 27,000 shares of
Common Stock.
The Preferred Stock is entitled to a cumulative dividend of 10 percent per
annum, payable semi-annually, if and when the Board declares a dividend. The
Warrants entitle the holder to purchase one share of Common Stock at an exercise
price of $3.125 per share of Common Stock.
The Company is utilizing the proceeds for unit expansion and working capital
needs.
On November 14, 1997, the holders of the Series A Preferred Stock were issued
111,600 shares of common stock in exchange for 74,400 shares, plus accrued and
unpaid interest of the outstanding shares of the Series A Preferred Stock.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 competition, pricing and acceptance of the Company's products.
Overview
The Company's principal source 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, paper supplies and occupancy costs (rent,
utilities, etc.) of company owned restaurants. Operating expenses include labor
costs, advertising and general expenses at Company owned restaurants. Franchise
services include fees payable to regional representatives and other marketing
and franchise support cost. General and administrative expenses include cost
incurred for corporate support and administration, including the salaries and
related expenses of personnel at the Company headquarters in Jacksonville,
Florida, the cost of operating the headquarters' offices (rent and other
occupancy costs) and certain related cost ( professional fees, communications,
travel, etc.).
10
<PAGE>
General
On December 12, 1997, the Company announced the signing of a letter of intent to
purchase Seattle Crab Company, Inc. Seattle Crab Company's restaurants, which
are located in the northwestern United States, include 91 "Skipper's" quick
service seafood restaurants and one "Seattle Crab" full service casual dining
restaurants. Seattle Crab Company, Inc. owns and operates 87 restaurants and has
five franchises. Arthur Treacher's is the third largest quick service seafood
chain in the Unites States and Skipper's is the fourth largest.
The purchase price for the proposed acquisition is $11,950,000 consisting of
$7,500,000 in cash and a promissory note in the principal amount of $4,450,000,
which note will be convertible into shares of the Company's Common Stock at the
option of the Company. The closing of the acquisition of Seattle Crab Company,
Inc., of which there can be no assurance, is contingent upon the execution of a
definitive purchase agreement, completion by the Company of a debt or equity
financing for the $7,500,000 cash portion of the purchase price and certain
other contingencies.
On February 2, 1998, the Company announced that it would expand its co-branding
concept with Miami Subs Corp. to an additional six to nine Miami Subs or Arthur
Treacher's locations, which will offer both Miami Subs and the Company's
products. Miami Subs Corp. restaurant chain consist of Miami Subs quick service
restaurants, which feature fresh foods such as submarine sandwiches, hamburgers
and various ethnic foods, in the eastern United States. The first co-branded
concept store, located in Bergenfield, New Jersey, began being managed by the
Company and offering the Company's products in November 1997. The location has
generated significant sales levels over the six month test period. The Company
is optimistic about the opportunities to increase revenues with the co-brand
concept. The Company is negotiating with Miami Subs Corp. to acquire Miami Subs
Corp. through an exchange of shares of common stock of the Company for the
common stock of Miami Subs corp., although there is no assurance that such an
acquisition will be consumated.
Results of Operations
The following discussions are based on the financial results for the following
periods :
o Unaudited interim financial statements for the three months ended
March 29, 1998, and three months ended March 30, 1997.
o Unaudited interim financial statements for the nine months ended
March 29, 1998, and nine months ended March 30, 1997.
The results for the above mentioned nine month period ended March 30, 1997, do
not include the operations of M.I.E. Hospitality, Inc. (M.I.E.) prior to its
acquisition on November 27, 1996.
11
<PAGE>
1998 Three months and 1997 Three months
The Company's total revenues decreased 9.1% or $497,094 to $4,961,334 for the
three month period ended March 29, 1998, compared to the same period last year.
The decrease is partially contributed to the Easter holiday season beginning two
weeks earlier in the March 30, 1997, period compared to the March 29, 1998,
period. Traditionally, store volume is increased during this holiday season.
The Company's total costs and expenses decreased 4.9% or $287,100 to $5,571,212
for the three month period ended March 29, 1998, compared to the same period
last year. The decrease was a function of the sales decline and its impact on
cost of sales for the three month period ended March 29, 1998.
Cost of sales from restaurant operations improved to 34.3% on net restaurant
sales for the three month period ended March 29, 1998, compared to 34.8% for the
same period last year.
General and Administrative cost decreased 23.3% or $145,511 to $478,048 for the
three month period ended March 29, 1998, compared to $623,559 for the same
period last year. This was primarily a result of lower legal fees and the
reorganization of the marketing and franchise operations resulting in savings of
approximately $100,000 for the three month period ending March 29, 1998.
Interest expense increased 26.2% or $10,568 to $50,959 for the three month
period ended March 29, 1998, compared to $40,391 for the same period last year.
The increase in interest expense was a function of increased debt financing for
recent acquisitions, new store construction and renovations.
Depreciation and amortization increased 4.4% or $11,982 to $281,697 for the
period ended March 29, 1998, compared to $269,715 for the same period last year.
This increase was primarily driven by acquisitions, new store construction and
renovations.
The Company considers earnings before interest, taxes, depreciation and
amortization to be another important indicator of performance. For the three
month period ended March 29, 1998, earnings before interest, taxes, depreciation
and amortization increased by 12% or $48,420 to a loss of ($353,180) compared to
a loss of ($401,600) for the same period last year. This improvement is
primarily a result of less legal and professional fees incurred for the three
month period ended March 29, 1998.
12
<PAGE>
12/29/97 12/30/96
Through Through
3/29/98 3/30/97
LOSS FROM OPERATIONS $(609,878) (399,884)
LESS : Other 24,999 271,431
ADD : Depreciation and
Amortization 281,697 269,715
-------- --------
EBITDA $(353,180) $(401,600)
As a result of the foregoing, the Company's net loss decreased 3.6% or $25,870
to a net loss of ($685,836) for the three month period ended March 29, 1998,
compared to a net loss of ($711,706) for the same period last year.
1998 Nine months and 1997 Nine months
The Company's total revenues increased 47.0% or $5,635,818 to $17,628,596 for
the nine month period ended March 29, 1998, compared to the same period last
year. The increase is a result of operating the restaurants in the M.I.E.
division for the full 39 week period ended March 29, 1998, compared to the 18
weeks of operation for the period ended March 30, 1997.
The Company's total costs and expenses increased 46.7% or $5,941,440 to
$18,662,086 for the nine month period ended March 29, 1998, compared to the same
period last year. Of the increase, $4,945,806 or 26.5% was attributable to cost
and expenses incurred by the M.I.E. division from July 1, 1997, through November
26, 1997. Additional cost incurred in the nine month period ended March 29, 1998
was a function of the acquisition of three additional restaurants in 1997 and
two in September 1996.
The most significant increase from revenues came from net restaurant sales
(defined as gross restaurant sales less coupons, promotion cost and discounts)
which increased 43.7% or $4,682,956 to $15,392,787 compared to the same period
last year of $10,709,831. The increase was attributable to the net restaurant
sales generated by the M.I.E. division for a full 39 week period ended March 29,
1998, compared to the post acquisition 18 week period of operation for the
period ended March 30, 1997. Franchise and royalty income decreased 30.9% or
$242,992 to $542,684 for the nine months ended March 29, 1998, primarily due to
the acquisition of M.I.E. Hospitality, Inc, the Company's former 31 restaurant
franchisee and several other franchise locations. Regional representative fees
decreased in conjunction with the decline in royalty revenue compared to the
same period last year.
Cost of sales from restaurant operations improved by 1.5% to 34.4% on net
restaurant sales for the nine month period ended March 29, 1998, compared to
35.9% for the same nine month period last year.
13
<PAGE>
General and Administrative cost decreased 7.2% or $106,651 to $1,372,116 for the
nine month period ended March 29, 1998, compared to $1,478,767 for the same
period last year. This was primarily a result of less legal fees incurred for
litigation. This decrease of $106,651 for the nine month period ended March 29,
1998, caused the General and Administrative expense to decrease by 4.6% as a
percentage to total revenue.
Interest expense increased 24.7% or $28,302 to $142,878 for the nine month
period ended March 29, 1998, compared to $114,576 for the same period last year.
The increase in interest expense was a function of increased debt financing for
recent acquisitions, new store construction and renovations.
Depreciation and amortization increased 81.9% or $372,810 to $827,808 for the
nine month period ended March 29, 1998, compared to $454,998 for the same period
last year. This increase was primarily driven by acquisitions, new store
construction and renovations.
The Company considers earnings before interest, taxes, depreciation and
amortization to be a another important indicator of performance. For the nine
month period ended March 29, 1998, earnings before interest, taxes, depreciation
and amortization increased by $345,418 to a loss of ($317,321) compared to a
loss of ($662,739) for the same period last year. This improvement is primarily
a result of a $952,813 contribution from restaurant operations by the M.I.E.
subsidiary for the nine month period ended March 29, 1998.
7/1/97 7/1/96
Through Through
3/29/98 3/30/97
------- -------
LOSS FROM OPERATIONS (1,033,490) (727,868)
LESS : Loss on sale of property 36,641 24,994
Other 74,998 364,875
ADD : Depreciation and
Amortization 827,808 454,998
-------- --------
EBITDA $(317,321) $(662,739)
As a result of the foregoing, the Company's net loss increased 4.5% or ($55,694)
to ($1,288,007) for the nine month period ended March 29, 1998, compared to a
net loss of ($1,232,313) for the same period last year. A significant portion of
the increased loss was due to the increase in depreciation and amortization
expenses as discussed above.
14
<PAGE>
LIQUIDITY
The Company has financed its operations principally from revenues derived from
Company owned restaurants, franchise royalties, private placements of equity and
credit lines from various financial institutions. The Company's current assets
exceeded its current liabilities by $258,792 at March 29, 1998, compared to
current liabilities exceeding current assets by $ 599,694 at June 30, 1997. The
Company had cash and short term investments of $1,457,247 at March 29, 1998,
compared to $ 867,847 at June 30, 1997.
Since May 1996, the Company has raised over $ 8,495,313 from the sale of equity
to fund acquisitions, develop the Seafood Grille concept and provide working
capital. On December 23, 1997, the Company completed a Private Placement
Offering of Series C 10% Cumulative Redeemable Preferred Stock and Common Stock
Purchase Warrants with gross proceeds of an aggregate amount of $990,000.
The Company anticipates that the proceeds from the Series C offering in addition
to a $750,000 credit line with a financial institution will be used for capital
expenditures related to the Co-brand expansion with Miami Sub's Corp.,
restaurant renovations in northeast Ohio, New York and central Pennsylvania and
working capital.
On June 1, 1998 a promissory note of $1,139,563 related to the acquisition of
MIE, requires a semi-annual principal payment of $113,956 in addition to the 8%
interest payment which began on June 1, 1997. Also, on September 1, 1998, a
promissory note in the amount of $390,418 related to the acquisition of MIE is
payable in full to Magee Industrial Enterprises.
The Company's net loss decreased 3.6% or $25,870 to a net loss of ($685,836) for
the three month period ended March 29, 1998, compared to a net loss of
($711,706) the same period last year respectively. A significant portion of the
loss was due to the increase in depreciation and amortization expenses.
The Company increased earnings before interest, taxes, depreciation and
amortization by $48,420 and $345,418 to a loss of ($353,180) and a loss of
($317,321) for the three month and nine month periods ended March 29, 1998,
respectively, compared to a loss of ($401,600) and a loss of ($662,739) for the
same periods last year respectively.
The Company believes that with its current cash resources, cash flow from
operations and the proceeds from its Series C Preferred Stock, there will be
adequate working capital through March 29, 1999. 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 additional
borrowings or the sale of additional equity, although there can be no assurance
that the Company will be successful in obtaining such financing or equity.
15
<PAGE>
SEASONALITY
The Company derives a significant portion of its sales during the November and
December ("Christmas") and March/April ("Easter") holiday seasons, some of which
have been reflected in the Company's operating results for the three month
period ended March 29, 1998. These seasonal effects are dependent upon the
general retailing environment in the regions that the Company operates in.
Approximately 70% of the Company's restaurants are in shopping malls while the
remaining 30% are freestanding units or strip center locations. The Company
derives approximately 36.6% of its total annual revenues from operations during
the Christmas and Easter holiday seasons.
YEAR 2000 COMPLIANCE
The Company has undertaken a comprehensive review of its computer-based systems
and applications to identify modifications necessitated by the century change in
the year 2000 and has implemented a plan to make such modifications. The Company
intends to have all critical systems compliant with the century change prior to
the end of 1999. While the Company does not expect the costs of compliance to be
material relative to its financial condition, the business of the Company could
be adversely affected should the Company or other entities with whom the Company
does business with be unsuccessful in completing critical modifications in a
timely manner.
16
<PAGE>
PART II OTHER INFORMATION
Item 1 Legal Proceedings
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 Regional Representative Agreements
which it had with ATAC Corporation ("ATAC"), on the grounds that ATAC breached
the agreements by assigning them to a third party without the consent of the
Company. ATAC claims that the company was aware of and consented to the
third-party assignment. The Company is unaware of any document signed by a
properly authorized representative of the Company formally authorizing or
consenting to the assignment.
On May 9, 1995, ATAC filed the action and alleged that the Company terminated
the contract without cause, tortiously interfered with other business
relationships, committed wrongful conversion of the territory and committed
restraint of trade and price-fixing, breach of contract, fraud, and violations
of RICO. ATAC originally demanded a minimum of $2,750,000 in compensatory
damages and $6,000,000 in punitive damages.
In response to the original complaint, the Company filed a motion to dismiss all
of the claims. In addition, the Company 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.
ATAC has twice amended the claims and allegations of the original complaint. In
the Third Amended Complaint, ATAC asserts claims against the Company and the
Company's former President, James Cataland, for fraud, breach of contract,
tortious interference with contract, violations of the Ohio Business Opportunity
Act, violations of the Ohio Consumer Sales Practices Act, and breach of
fiduciary duty. ATAC seeks in excess of $10,000,000 in compensatory, punitive,
and statutory damages from the Company.
17
<PAGE>
In response to the Third Amended Complaint, the Company in 1997 filed a motion
to Dismiss ATAC's claims for breach of fiduciary duty and under the Consumers
Sales Practices and Business Opportunity Acts. The Company has also requested
that the district court dismiss the claims against the Company's former
President. The Company has in 1998 filed Motions for Summary Judgement on behalf
of itself and the Company's former President with respect to all of ATAC's
claims (except breach of contract) and requested that the Court refer the
remaining contract claim to binding arbitration. The Lawsuit is now scheduled
for trial on June 15, 1998, but plaintiffs have very recently asked that the
trial be postponed by 120 days.
The Company originally believed that the lawsuit was 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 now understands that ATAC solely seeks damages from the Company. The
Company still believes that ATAC's claims are meritless. The Company's attorneys
have indicated that they intend to vigorously defend the Company from the claims
made by ATAC and have reasserted counterclaims which are opposed by ATAC.
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults on Senior Securities
None
Item 4 Submission of Matters to a Vote of Shareholders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
a. Exhibits
4.4 Certificate of Designation of Series C
Preferred Stock
b. Reports on Form 8-K
None
18
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARTHUR TREACHER'S, INC.
(Registrant)
/s/ William F. Saculla
----------------------
William F. Saculla,
President and Chief Financial Officer
Date: May 12, 1998
19
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF
SERIES C 10% CUMULATIVE REDEEMABLE PREFERRED STOCK
SERIES C
OF
ARTHUR TREACHER'S, INC.
ARTHUR TREACHER'S, INC., a corporation organized and existing under the Utah
Business Corporation Act,
DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors by the
Articles of Incorporation (as amended) of said Corporation, and pursuant to the
provisions of Section 16-10-1 5 of the Utah Business Corporation Act, said Board
of Directors at a meeting duly held on June 6, 1 997, adopted a resolution
providing for the designation, number, voting powers, preferences and rights of
the Series C 10% Cumulative Redeemable Preferred Stock and the qualifications,
limitations, or restrictions thereof, which resolution is as follows:
RESOLUTION FIXING
EXPRESS TERMS
OF
SERIES C 10% CUMULATIVE REDEEMABLE PREFERRED STOCK
OF
ARTHUR TREACHER'S, INC.
RESOLVED, that there is hereby established a third series of Preferred Stock,
the designation, number, voting powers, preferences and rights and the
qualifications, limitations, or restrictions thereof are as follows:
Section 1. Designation of Series.
The series shall be designated "Series C 10% Cumulative Redeemable
Preferred Stock" ("Series C Preferred Stock").
Section 2. Number of Shares.
The number of shares of Series C Preferred Stock is 1 50,000, which number
the Board of Directors may increase or decrease (but not below the number of
shares of the series then outstanding).
20
<PAGE>
Section 3. Dividends.
(a) The holders of shares of Series C Preferred Stock shall be entitled to
receive, when and as declared by the Board of Directors out of any funds legally
available for the declaration of dividends, cumulative dividends at the annual
rate of $ 1 0.00 per share, and no more, payable annually in cash, on the
fifteenth day of October of each year, hereinafter referred to as the "dividend
date," to stockholders of record on such dates respectively preceding the
payment thereof as may be fixed by the Board of Directors in declaring any such
dividends. Such dividends shall be cumulative from the date of issuance, and the
first such dividend shall be prorated from the date of issuance. Accumulations
of dividends on shares of Series C Preferred Stock shall not bear interest.
(b) So long as any shares of Series C Preferred Stock shall remain
outstanding, no dividends or other distributions (other than dividends payable
in shares ranking junior to the Series C Preferred Stock, both as to dividends
and in liquidation) shall be paid upon or set apart for or distributed with
respect to any shares ranking junior to the Series C Preferred Stock (either as
to dividends or assets) at any time when there exists a default with respect to
the payment of dividends with respect to outstanding shares of Series C
Preferred Stock.
Section 4. Liquidation Preference.
(a) In the event of any liquidation, dissolution, or winding up of the
Corporation, or any distribution of its capital, the holders of shares of the
Series C Preferred Stock shall be entitled to receive, from the assets of the
Corporation, payment in cash of an amount equal to $100.00 per share, plus a
further amount equal to all accrued and unpaid cumulative dividends on the
Series C Preferred Stock to the date of payment of the amount due pursuant to
such liquidation, dissolution, or winding up of the Corporation, before any
distribution of assets shall be made to the holders of any class of shares
ranking junior to the Series C Preferred Stock, either as to dividends or
assets. If, upon such liquidation, dissolution, winding up, or distribution of
capital, the assets thus distributable to the holders of shares of Series C
Preferred Stock shall be insufficient to permit the payment to such holders of
the preferential amounts aforesaid, then such assets or the proceeds thereof
shall be distributed ratably among the holders of shares of Series C Preferred
Stock according to the number of such shares held by each. After such payment to
the holders of shares of Series C Preferred Stock, the remaining assets and
funds of the Corporation shall be divided and distributed among the holders of
shares ranking junior to the Series C Preferred Stock, then outstanding,
according to their respective interests.
(b) The liquidation, dissolution, winding up, or distribution of capital,
as such terms are used in the foregoing paragraph, shall not be deemed to
include any consolidation or merger of the Corporation with another corporation
or any transfer of substantially the entirety of the property and assets of the
Corporation to another corporation.
21
<PAGE>
Section 5. Redemption and Purchase.
(a) At the election of the Corporation, to be exercised by resolution
adopted by its Board of Directors, all or any part of the shares of Series C
Preferred Stock may be redeemed, commencing October 3 1, 1 999, on any quarterly
dividend payment date upon not less than 30 days' nor more than 60 days'
previous notice given by first-class mail, postage prepaid, to the holders of
record thereof at their addresses as the same appear on the records of the
Corporation and by (a) paying for each share thereof called for redemption $ 1
00.00, plus a further amount equal to all accrued and unpaid cumulative
dividends on the Series C Preferred Stock to the date fixed for redemption, or,
in lieu of such payment, by (b) depositing the redemption price in cash on or
prior to said redemption date with such bank or trust company in the City of
Jacksonville, Florida, as may be designated by the Board of Directors of the
Corporation in trust for payment on the redemption date to the holders of the
shares of Series C Preferred Stock so to be redeemed. In case of the redemption
of less than all of the outstanding shares of Series C Preferred Stock, the
shares to be redeemed may be selected by lot or pro rata, or by call of all or
any part of the shares owned by one or more holders of such shares, or by such
other method as the Board of Directors In its discretion may determine, and
notice, as above provided, shall be given to the holders of record whose shares
have been so selected for redemption. On and after the date fixed in any such
notice as the date of redemption of the shares of Series C Preferred Stock,
unless default shall be made by the Corporation in the payment and/or deposit-of
the redemption price pursuant to such notice and to the provisions hereof, all
dividends on the shares of Series C Preferred Stock so called for redemption
shall cease to accrue, and on such date or on deposit in trust as aforesaid of
funds sufficient for such redemption (notice of redemption having been given as
aforesaid), whether said deposit shall have been made on said redemption date or
prior thereto, all rights of the holders of said shares of Series C Preferred
Stock as stockholders of the Corporation shall cease except the right to receive
the redemption price and no more from the Corporation or from a depositary as
above described, upon surrender of their certificates properly endorsed. If the
holders of the shares of Series C Preferred Stock which shall have been called
for redemption shall not, within six years after such deposit, claim the amount
deposited for the redemption of their shares, any such bank or trust company
shall, upon demand, pay over to the Corporation such unclaimed amounts, and
thereupon such bank or trust company and the Corporation shall be relieved of
all responsibility in respect thereof and to such holders.
(b) The Corporation may also, from time to time, purchase or otherwise
acquire outstanding shares of Series C Preferred Stock.
(c) Any shares of Series C Preferred Stock which are redeemed or purchased
by the Corporation shall have the status of authorized but unissued shares of
Preferred Stock without designation of any series.
22
<PAGE>
Section 6. Voting Rights
The holders of shares of Series C Preferred Stock shall not be entitled to
vote, except as otherwise required by law.
IN WITNESS WHEREOF, ARTHUR TREACHER'S, INC. has caused this certificate to
be signed by R. FRANK BROWN, its PRESIDENT and by WILLIAM F. SACULLA, it's
SECRETARY, this 5th day of November, 1997
ARTHUR TREACHER'S, INC.
/s/R. Frank Brown, President
----------------------------
R. Frank Brown, President
/s/William F. Saculla, Secretary
--------------------------------
William F. Saculla, Secretary
STATE OF FLORIDA )
COUNTY OF DUVAL ) SS
BE IT REMEMBERED that on this 5th day of November, 1997, personally came before
me, a Notary Public in and for the Country and State aforesaid, R. Frank Brown,
President of Arthur Treacher's, Inc., a corporation of the State of Utah, and he
duly executed said certificate before me and acknowledged the said certificate
to be the free act and deed of said Corporation and the facts stated herein are
true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal of office the day
and year aforesaid.
Notary Public
/s/ Tina Sorkness
23
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