<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT
Under Section 13 or 15(d) of the Securities Act of 1934
For the Three Months Ended September 27, 1998
------------------
ARTHUR TREACHER'S, INC.
----------------------------------------------
(Name of Small Business Issuer in Its Charter)
UTAH 34-1413104
- -------------------------------- -----------------
(State or Other Jurisdiction (I.R.S. Employer
of 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)
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 /X/ No / /
At November 11, 1998, the latest practicable date there were 14,913,534 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 September 27, 1998
and June 30, 1998 4
Consolidated Statements of Operations for the Three
Month Periods July 1, 1998 through September 27,
1998 and July 1, 1997 through September 28, 1997 6
Consolidation Statement of Cash Flows for Three
Month Periods July 1, 1998 through September 27,
1998 and July 1, 1997 through September 28, 1997 7
Notes to Interim Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis results of
Operations and Financial Condition 11
Part II. OTHER INFORMATION 16
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 1998 and JUNE 30, 1998
<TABLE>
<CAPTION>
September June
Assets 1998 1998
- ------ (Unaudited) (Audited)
----------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 490,220 909,636
Accounts receivable, net of allowance of $22,893
in September 1998 and $19,893 in June 1998 117,258 90,618
Inventories 251,826 274,738
Prepaid expenses and other 224,585 173,509
------------- -------------
Total current assets 1,083,889 1,448,501
------------- -------------
Property and equipment, at cost
Buildings 156,300 156,300
Leasehold improvements 4,778,045 4,640,605
Furniture, fixtures, and equipment 3,567,701 3,450,160
------------- -------------
8,502,046 8,247,065
Less accumulated depreciation 3,458,674 3,173,746
------------- -------------
Property and equipment, net 5,043,372 5,073,319
OTHER ASSETS
Security Deposits 198,222 198,574
Goodwill 444,732 450,689
Other 163,370 141,511
------------- -------------
Total assets $ 6,933,585 7,312,594
============= =============
</TABLE>
-4-
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 1998 and JUNE 30, 1998
<TABLE>
<CAPTION>
September June
1998 1998
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit)
CURRENT LIABILITIES:
Accounts payable $ 2,539,161 2,307,009
Accrued expenses and other liabilities 421,997 501,545
Current maturities of long-term debt 374,855 393,312
Dividend payable - 390,417
------------ -------------
TOTAL CURRENT LIABILITIES 3,336,013 3,592,283
Long-term debt, net of current maturities 1,557,793 1,398,805
Other liabilities 37,840 15,358
------------- -------------
TOTAL LIABILITIES 4,931,646 5,006,446
------------- -------------
STOCKHOLDER'S EQUITY (Deficit)
Preferred stock 1,755,486 1,355,505
Common stock 148,977 148,539
Additional paid-in capital 10,410,444 10,411,729
Accumulated deficit (10,312,968) (9,609,625)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (Deficit) 2,001,939 2,306,148
TOTAL LIABILITIES and STOCKHOLDRS EQUITY $ 6,933,585 7,312,594
============ =========
</TABLE>
-5-
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED
<TABLE>
<CAPTION>
September September
1998 1997
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
TOTAL REVENUE $ 5,450,043 5,885,766
OPERATING EXPENSES:
Cost of sales, including occupancy
except depreciation 3,155,009 3,062,703
Operating expenses 2,214,847 2,433,086
Depreciation and amortization 290,885 262,093
General and administrative expenses 458,553 438,734
------------- -------------
Total operating expenses 6,119,294 6,196,616
------------- -------------
LOSS FROM OPERATIONS (669,251) (310,850)
Other income (expenses):
Other, net (34,092) (70,742)
------------- --------------
NET LOSS (703,343) (381,592)
Undeclared preferred stock dividends (20,250) (2,158)
------------- -------------
Net loss for common shareholders $ (723,593) (383,750)
============= =============
Basic loss per common share $ (.05) (.03)
============= ============
Diluted loss per common share $ (.05) (.03)
============= ============
Weighted average number of outstanding shares
for basic and diluted 14,869,748 14,399,248
============= =============
</TABLE>
-6-
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED
<TABLE>
<CAPTION>
September September
1998 1997
--------- ---------
<S> <C> <C>
Operating activities:
Net loss $ (703,343) (381,592)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 290,885 262,093
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (26,640) (25,672)
(Decrease) in deposits and other assets (21,507) 2,356
(Increase) decrease in prepaid expenses and other
current assets (51,076) (67,989)
(Increase) decrease in inventories 22,912 10,817
(Decrease) increase in accounts payable 275,988 260,573
Decrease in accrued expenses, and other
liabilities (57,066) (94,565)
-------------- -------------
Net cash used in operating activities (269,847) (33,979)
------------- -------------
Investing activities:
Capital expenditures (254,981) (53,660)
--------- --------
Financing activities:
Proceeds from the issuance of preferred stock, net of issue costs 355,298 -
Cash received from common stock subscribed - -
Proceeds from long-term debt 200,000 -
Payment of dividend (390,417) -
Principal payments on long-term debt (59,469) (74,952)
------------- --------------
Net cash provided by financing activities 105,412 (74,952)
------------- --------------
Net increase (decrease) in cash and cash equivalents (419,416) (162,591)
Cash and cash equivalents beginning of period 909,636 867,847
------------- -------------
Cash and cash equivalents end of period $ 490,220 705,256
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 24,009 22,857
============= =============
</TABLE>
-7-
<PAGE>
ARTHUR TREACEHR'S, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 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, 1998, filed with the
Securities and Exchange Commission on October 13, 1998.
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.
23rd Street Holding Company., a wholly-owned subsidiary, owns and
operates 1 restaurant on East 23rd Street located in New York, New York.
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>
ARTHUR TREACEHR'S, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 1998
Note 3 - COMMITMENTS AND CONTINGENCIES
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; filed May 9, 1995. On November 16, 1994, Arthur
Treacher's terminated the agency agreement of a Regional Development
Representative, ATAC Corporation, on the grounds that ATAC breached the
agreement by assigning the agency agreement to a third party without the
consent of Arthur Treacher's. 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, tortuously 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 allegation 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,
tortuous 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. 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 Consumer Sales Practices and
Business Opportunity Acts. The Company also requested that the district court
dismiss the claim against the Company's former President. The Company in 1998
filed Motions for Summary Judgment 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 Court recently granted the Company's Motion to Stay
the lawsuit pending arbitration and the ruling is presently the subject of an
appeal to the Sixth Circuit Court of Appeals.
-9-
<PAGE>
ARTHUR TREACEHR'S, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 1998
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 pursue any counterclaims.
In 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.
Note 4 - STOCKHOLDER'S EQUIITY
In September 1998 the Company consummated a private placement to one
accredited investor under Regulation D of the Securities Act of 1933 with
respect to units consisting of shares of its Series D Preferred Stock for
Aggregate proceeds of $400,000. On September 27, 1998 , the Company sold an
aggregate of 4,000 shares of Series D Preferred Stock. The Preferred Stock is
entitled to a cumulative dividend of 15 percent per annum, payable
semi-annually, beginning January 1, 2000, if and when the Board declares a
dividend. The Preferred Stock is convertible to Common Stock at $1 per share
for an aggregate of 400,000 shares at the option of the shareholder at anytime
after January 1, 1999.
-10-
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS
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, 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) unaudited interim
financial statements for the three months ended September 27, 1998 and (ii)
the three months ended September 28, 1997.
-11-
<PAGE>
1999 Three months and 1998 Three months
Total revenues of $5,450,043 for the three month period ended September 27,
1998 decreased $435,723 or 7.4% compared to $5,885,766 for the same period
last year. The decrease is primarily attributed to the lesser amount of
$279,669 of discounts and coupon sales for the three month period ended
September 27, 1998 compared to $597,187 of discounts and coupon sales incurred
during the three month period ended September 28, 1997. Therefore, $317,518 or
72.9% of the sales decrease is attributable to the deep discounting incurred
during the three month period ended September 28, 1997. Other factors
attributing to the decrease in total revenues came from same store net
restaurant sales (defined as gross restaurant sales less coupons, promotion
cost and discounts) for the three month period ended September 27, 1998
decreased 5.8% compared to the same period last year. Franchise and other
income decreased 28.8% or $61,232 to $151,377 for the three months period
ended September 27, 1998 compared to $212,609 for the same period last year,
primarily due to the timeliness of the receipts of other income from the
Company's suppliers.
The Company's total costs and expenses decreased 1.3% or $77,322 to $6,119,294
for the three month period ended September 27, 1998, as compared to $6,196,616
for the same period last year.
Interest expense decreased 7.1% or $3,234 to $42,509 for the three month
period ended September 27, 1998, as compared to $45,743 for the same period
last year. The decrease in interest expense was a function of a reduction in
the debt financing for recent acquisitions, new store construction and
renovations.
Depreciation and amortization increased 11.0% or $28,802 to $290,885 for the
three month period ended September 27, 1998 compared to $262,093 for the same
period last year. This increase was primarily driven by new store construction
and renovations.
As a result of the foregoing, the Company's net loss (before preferred
dividends) increased 84.3% or $321,751 to $703,343 for three month period
ended September 27, 1998, as compared to a net loss (before preferred
dividends) of $381,592 for the same period last year. The most significant
factors contributing to the net loss are the decrease in same store restaurant
sales, which accounted for approximately $105,000 of the net loss,
approximately $112,000 from losses incurred from new store operations and
pre-opening expenses and approximately $67,000 from a decrease in other
income.
-12-
<PAGE>
Three months ended September 27, 1998 and June 30, 1998
The Company has demonstrated substantial improvement in profitability for the
three month period ended September 27, 1998 when compared to the prior three
month period ended June 30, 1998. When considering the seasonality effect on
each of the three month periods ended September 27, 1998 and June 30, 1998,
both are traditionally comparable quarters since they both lack the sales
peaks attributed to the Christmas and Easter seasons.
Net contribution from the restaurants improved by $116,347 or 62% to a loss of
$71,190 or 1.4% of net sales for the three month period ended September 27,
1998, compared to a loss of $187,537 or 3.90% of net sales for the three month
period ended June 30, 1998.
Although same store sales decreased by 0.5% (one half of one percent), the most
significant factors for improving the net contribution from restaurant
operations were reduced costs by improved controls of 2.3% on total net sales of
$5,018,997.
Franchise and marketing net contribution improved by $31,050 or 85.1% to
$67,541 for the three month period ended September 27, 1998 compared to
$36,491 for the three month period ended June 30, 1998.
General and administrative expenses decreased by $93,062 or 20% to $372,493
for the three month period ended September 27, 1998 compared to $465,555 for
the three month period ended June 30, 1998.
Earnings before interest, taxes, depreciation and amortization improved
$242,376 or 39.1% to a loss of $378,366 for the three month period ended
September 27, 1998 compared to a loss of $620,742 for the three month period
ended June 30, 1998.
7/1/98 3/30/98
Through Through
9/27/98 6/30/98
---------- -----------
LOSS FROM OPERATIONS $(669,251) (1,077,626)
LESS: Other 0 391,407
ADD: Depreciation and
Amortization 290,885 387,548
Non-Recurring items 0 422,529
Interest income 0 38,154
---------- -----------
EBITDA $(378,366) (620,742)
-13-
<PAGE>
Liquidity and Capital Resources
The Company has financed its operations principally from revenues derived from
Company owned restaurants, royalty income from franchisees, other income and
private placements of equity and debt. The Company has raised over $12 million
in equity since May 1996, of which approximately $2 million of equity and debt
has been raised since December 1997.
Preferred Stock "Series C" December 1997 $ 990,000
Common Stock June 1998 $ 438,315
Preferred Stock "Series D" September 1998 $ 400,000
Promissory Notes
and Warrants. September 1998 $ 200,000
-------------
$ 2,028,315
The Company has been and will continue to engage in contract negotiations with
certain suppliers to reduce the Company's cost of goods sold and improve the
Company's liquidity.
The Company's current liabilities exceeded its current assets by $2,252,124 at
September 27, 1998 compared to $2,143,782 at June 30, 1998. The Company had
cash and short-term investments of $490,220 at September 27, 1998 compared to
$909,636 at June 30, 1998. The Company is in arrears with respect to certain
leases because of poor performance by stores in those locations. The Company
is exploring means to limit the Company's financial obligations with respect
to under-performing stores, including but not limited to renegotiating certain
leases.
The Company believes that its current cash resources, revenues from
operations, anticipated franchise and other income, cost savings (including
equipment leasing opportunities and new supplier relationships) will be
sufficient to adequately fund its current working capital needs through the
fiscal year commencing July 1, 1998, although additional financing may be
required. 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.
Seasonality
The Company derives a significant portion of its sales during the
November/December (Christmas) and February/March (Easter) holiday seasons,
which are reflected in the Company's operating results for the second and
third quarter. These seasonal effects are dependent upon the general retailing
environment and customers' preference to shopping malls. Weather can have a
-14-
<PAGE>
significant affect on shopping in Northern climates. 86% of the Company's
sales come from Northern states. These areas can be significantly impacted by
weather during December, January and February. Approximately 70% of the
Company's restaurant revenue is derived from 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.
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 December 31, 1998. The Company is in the process of updating
all accounting and computer programs, which the Company does not expect the
costs of compliance to be material relative to its financial condition. The
Company has made inquiries with its' suppliers in regards to year 2000
compliance issues and has received assurance that these suppliers will be year
2000 compliant. However 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.
-15-
<PAGE>
PART I OTHER INFORMATION
Item 1 Legal Proceedings
None
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
None
-16-
<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: November 11, 1998 By /s/ William F. Saculla
-----------------------
William F. Saculla
President and Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-27-1998
<CASH> 490
<SECURITIES> 0
<RECEIVABLES> 117
<ALLOWANCES> 0
<INVENTORY> 252
<CURRENT-ASSETS> 1,084
<PP&E> 8,502
<DEPRECIATION> 3,459
<TOTAL-ASSETS> 6,934
<CURRENT-LIABILITIES> 3,336
<BONDS> 0
0
1,755
<COMMON> 149
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,934
<SALES> 0
<TOTAL-REVENUES> 5,450
<CGS> 3,155
<TOTAL-COSTS> 6,119
<OTHER-EXPENSES> 34
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (703)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (703)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
