<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 Three Months Ended Commission File Number
December 28, 1997 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 February 11, 1998, the latest practicable date, there were 14,552,259 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
December 28, 1997 and June 30, 1997 3-4
Consolidated Statements of Operations for the Three
Month Periods September 29, 1997 through December 28,
1997 and September 30, 1996 through December 29, 1996 5
Consolidated Statements of Operations for the Six
Month Periods July 1, 1997 through December 28, 1997
and July 1, 1996 through December 29, 1996 6
Consolidated Statement of Cash Flows for the Six
Month Periods July 1, 1997 through December 28, 1997
and July 1, 1996 through December 29, 1996 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 17-20
2
<PAGE>
ARTHUR TREACHER'S INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1997 AND JUNE 30, 1997
<TABLE>
<CAPTION>
ASSETS December June
1997 1997
(unaudited) (audited)
----------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and short-term investments $1,909,028 $867,847
Accounts receivable, net of allowance
for doubtful accounts of $26,653 in
December 1997 and $25,900 in June 1997 153,286 137,598
Inventories 286,007 288,663
Prepaid Expenses 213,409 181,544
Other 6,630 0
----------------- -----------------
TOTAL CURRENT ASSETS 2,568,360 1,475,652
----------------- -----------------
OTHER ASSETS
Security deposits 185,366 151,451
Goodwill, net of accumulated amortization 308,853 317,016
Other 84,917 8,233
----------------- -----------------
TOTAL OTHER ASSETS 579,136 476,700
----------------- -----------------
PROPERTY AND EQUIPMENT, at cost
Land 0 150,000
Buildings 156,300 306,300
Leasehold improvements 4,201,813 4,160,812
Furniture, Fixtures and Equipment 3,226,600 3,166,180
----------------- -----------------
TOTAL PROPERTY AND EQUIPMENT 7,584,713 7,783,292
Less - accumulated depreciation 2,623,010 2,112,778
----------------- -----------------
PROPERTY AND EQUIPMENT, NET 4,961,703 5,670,514
----------------- -----------------
TOTAL ASSETS $8,109,199 $7,622,866
================= =================
</TABLE>
3
<PAGE>
ARTHUR TREACHER'S INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1997 AND JUNE 30, 1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit) December June
1997 1997
(unaudited) (audited)
----------------- -----------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $1,398,842 $1,050,956
Accrued expenses and other liabilities 575,748 654,527
Current maturities of long-term debt 447,578 369,863
----------------- -----------------
TOTAL CURRENT LIABILITIES 2,422,168 2,075,346
LONG-TERM DEBT, net of current portion 1,481,914 1,570,305
Other liabilities 408,018 392,705
----------------- -----------------
TOTAL LIABILITIES 4,312,100 4,038,356
----------------- -----------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock 1,355,505 577,200
Common Stock 145,413 143,992
Additional Paid-in-capital 9,739,282 9,704,248
Accumulated Deficit (7,443,101) (6,840,930)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 3,797,099 3,584,510
----------------- -----------------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $8,109,199 $7,622,866
================= =================
</TABLE>
4
<PAGE>
ARTHUR TREACHER 'S INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS
<TABLE>
<CAPTION>
September 29, 1997 September 30, 1996
through through
December 28, 1997 December 29, 1996
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
TOTAL REVENUE $ 6,299,485 $ 4,094,975
OPERATING EXPENSES
Cost of sales, including occupancy,
except depreciation 3,110,421 1,988,899
Operating expenses 2,562,548 1,398,079
Depreciation and Amortization 284,112 116,170
General and Administrative and Franchise services 455,167 636,248
------------------------ ----------------------
TOTAL COSTS AND EXPENSES 6,412,248 4,139,396
LOSS FROM OPERATIONS (112,763) (44,421)
OTHER EXPENSE, net
Interest expense 46,175 36,186
Loss on sale of property 36,641 0
Other 25,000 37,999
------------------------ ----------------------
107,816 74,185
NET LOSS $ (220,579) $ (118,606)
------------------------ ----------------------
Undeclared preferred stock dividends (8,930) (2,180)
------------------------ ----------------------
NET LOSS Available for common shareholders $ (229,509) $ (120,786)
======================== ======================
Basic earnings (loss) per share $ (0.02) $ (0.01)
======================== ======================
Diluted earnings (loss) per share $ (0.02) $ (0.01)
======================== ======================
AVERAGE SHARES OUTSTANDING 14,494,128 13,244,930
======================== ======================
</TABLE>
5
<PAGE>
ARTHUR TREACHER 'S INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIODS
<TABLE>
<CAPTION>
July 1, 1997 July 1, 1996
through through
December 28, 1997 December 29, 1996
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
TOTAL REVENUE $ 12,185,251 $ 6,355,587
OPERATING EXPENSES
Cost of sales, including occupancy,
except depreciation 6,173,124 3,171,275
Operating expenses 4,995,634 2,262,789
Depreciation and Amortization 546,205 184,844
General and Administrative and Franchise services 893,901 1,064,663
------------------------ ----------------------
TOTAL COSTS AND EXPENSES 12,608,864 6,683,571
LOSS FROM OPERATIONS (423,613) (327,984)
OTHER EXPENSE
Interest expense 91,919 74,185
Loss on sale of property 36,641 24,994
Other 49,998 93,444
------------------------ ----------------------
178,558 192,623
NET LOSS $ (602,171) $ (520,607)
------------------------ ----------------------
Undeclared preferred stock dividends (10,188) (4,360)
------------------------ ----------------------
NET LOSS Available for common shareholders $ (612,359) $ (524,967)
======================== ======================
Basic earnings (loss) per share $ (0.04) $ (0.04)
======================== ======================
Diluted earnings (loss) per share $ (0.04) $ (0.04)
======================== ======================
AVERAGE SHARES OUTSTANDING 14,446,788 12,195,463
======================== ======================
</TABLE>
6
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS
<TABLE>
<CAPTION>
July 1, 1997 July 1, 1996
Through Through
December 28, 1997 December 29, 1996
------------------- --------------------
<S> <C> <C>
Operating activities:
Net loss (602,171) (520,607)
Adjustments to reconcile net loss to net cash
provided by ( used in ) operating activities:
Depreciation and amortization 546,205 184,844
Loss on disposition of property 36,641 24,994
Changes in Operating assets and liabilities
Accounts receivable (15,688) (35,791)
Deposits and other assets (37,110) (189,531)
Prepaid expenses (31,865) (77,905)
Inventory 2,656 (195,157)
Accounts payable 347,886 301,346
Accrued expenses and other liabilities (63,466) 339,641
------------------- -------------------
Net cash provided by (used in) operating activities 183,088 (168,166)
------------------- -------------------
Investing activities:
Purchase acquisitions of restaurants (1,842,681)
Capital expenditures (192,093) (215,446)
Proceeds from disposition of property 246,102 19,500
------------------- -------------------
Net cash provided by (used in) investing activities 54,009 (2,038,627)
------------------- -------------------
Financing activities:
Issuance of common stock 22,650 5,105,496
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 -
Principal payments on long-term debt (167,892) (790,110)
------------------- -------------------
Net cash provided by (used in) financing activities 804,084 4,697,073
------------------- -------------------
Increase in cash and cash equivalents 1,041,181 2,490,280
Cash and cash equivalents beginning of period 867,847 990,683
------------------- -------------------
Cash and cash equivalents end of six months $ 1,909,028 $ 3,480,963
=================== ===================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 68,217 $ 14,506
=================== ===================
Supplemental disclosure of noncash transactions:
Long-term debt assumed in restaurant purchases $ 74,562
=================== ===================
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
DECEMBER 28, 1997
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 terminate 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 Regulations 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 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 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. Seattle Crab Company's subsidiaries include: a
northwest-based chain named "Skipper's" which consist of 91 quick service
seafood restaurants and "Seattle Crab" with 2 full service casual dining
restaurants. Arthur Treacher's is currently the third largest quick service
seafood chain while Skipper's is the fourth largest.
On February 2, 1998 the Company announced they have agreed to expand their
co-branding concept with Miami Subs, to an additional six to nine restaurant
locations. The first co-branded concept store, located in Bergenfield, New
Jersey, was opened in November 1997. Results from the location have shown
significant sales levels over the three month test period and were extremely
encouraging. Both companies are very optimistic about the opportunities that
exist with this concept.
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
December 28, 1997 and three months ended December 29, 1996.
o Unaudited interim financial statements for the six months ended
December 28, 1997 and three months ended December 29, 1996.
The results for the above mentioned periods ended December 29, 1996 do not
include the operations of M.I.E. Hospitality, Inc. (M.I.E.) prior to its
acquisition on November 27, 1996.
1997 Three months and 1996 Three months
The company's total revenues increased 53.8% or $2,204,510 to $6,299,485 for the
three month period ended December 28, 1997 compared to the same period last
year. The increase is a result of operating the M.I.E. division for the full 13
week period ended December 28, 1997 compared to the 5 weeks of operation for the
period ended December 29, 1996.
11
<PAGE>
The company's total costs and expenses increased 54.9% or $2,272,852 to
$6,412,248 for the three month period ended December 28, 1997 compared to the
same period last year. Of the increase, $1,970,298 or 86.7% was attributable to
cost and expenses incurred by the M.I.E. division from September 30, 1997
through November 26, 1997. Additional cost incurred in the three month period
ended December 28, 1997 was a function of the acquisition of three additional
restaurants in 1997.
The most significant increase from revenues came from net restaurant sales
(defined as gross restaurant sales less coupons, promotion cost and discounts)
increased 49.7% or $1,828,519 to $5,505,395 compared to the same period last
year of $3,676,876. The increase was attributable to the net restaurant sales
generated by the M.I.E. division for a full 13 week period ended December 28,
1997 compared to the post acquisition 5 week period of operation for the period
ended December 29, 1996. Franchise and royalty income decreased 28.7% or $72,697
to $180,163 for the quarter ended December 28, 1997 primarily due to the
acquisition of M.I.E. Hospitality, Inc. its former 31 restaurant franchisee.
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 to 34.3% on net restaurant
sales for the three month period ended December 28, 1997 compared to 34.7% for
the same period last year.
General and Administrative cost increased 7.6% or $25,705 to $364,290 for the
three month period ended December 28, 1997 compared to $338,585 for the same
period last year. This was primarily a result of various legal fees incurred for
litigation and the legal and accounting charges incurred for the SEC and NASDAQ
registration and listing. Although there was an increase of $25,705 for the
three month period ended December 28, 1997, General and Administrative expense
decreased by 2.5% as a percentage to total revenue.
Interest expense increased 27.6% or $9,989 to $46,175 for the three month period
ended December 28, 1997 compared to $36,186 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 144.6% or $167,942 to $284,112 for the
period ended December 28, 1997 compared to $116,170 for the same period last
year. This increase was primarily driven by acquisitions, new store construction
and renovations.
12
<PAGE>
The Company considers earnings before interest, taxes, depreciation and
amortization to be another indicator of performance. For the three month period
ended December 28, 1997 earnings before interest, taxes, depreciation and
amortization increased by 225.1% or $75,958 to $109,708 compared to $33,750 for
the same period last year. This improvement is primarily a result of a $466,857
contribution from restaurant operations by the M.I.E. division for the three
month period ended December 28, 1997.
9/29/97 9/30/96
Through Through
12/28/97 12/29/96
LOSS FROM OPERATIONS $(112,763) (44,421)
LESS : Loss on sale of property 36,641 -0-
Other 25,000 37,999
ADD : Depreciation and
Amortization 284,112 116,170
------- -------
EBITDA $109,708 $33,750
As a result of the foregoing, the Company's net loss increased 86% or ($101,973)
to ($220,579) for the three month period ended December 28, 1997 compared to a
net loss of ($118,606) 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.
1997 Six months and 1996 Six months
The company's total revenues increased 91.7% or $5,829,664 to $12,185,251 for
the six month period ended December 28, 1997 compared to the same period last
year. The increase is a result of operating the M.I.E. division for the full 26
week period ended December 28, 1997 compared to the 5 weeks of operation for the
period ended December 29, 1996.
The company's total costs and expenses increased 88.7% or $5,925,293 to
$12,608,864 for the six month period ended December 28, 1997 compared to the
same period last year. Of the increase, $4,945,806 or 83.5% 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 six month period ended
December 28, 1997 was a function of the acquisition of three additional
restaurants in 1997 and two in September 1996.
13
<PAGE>
The most significant increase from revenues came from net restaurant sales
(defined as gross restaurant sales less coupons, promotion cost and discounts)
increased 93.2% or $5,104,969 to $10,581,365 compared to the same period last
year of $5,476,396. The increase was attributable to the net restaurant sales
generated by the M.I.E. division for a full 26 week period ended December 28,
1997 compared to the post acquisition 5 week period of operation for the period
ended December 29, 1996.. Franchise and royalty income decreased 30% or $167,911
to $392,772 for the six months ended December 28, 1997 primarily due to the
acquisition of M.I.E. Hospitality, Inc. its 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 2.4% to 34.5% on net
restaurant sales for the six month period ended December 28, 1997 compared to
36.9% for the same six month period last year.
General and Administrative cost increased 12.6% or $79,892 to $714,569 for the
six month period ended December 28, 1997 compared to $634,677 for the same
period last year. This was primarily a result of various legal fees incurred for
litigation and the legal and accounting charges incurred for the SEC and NASDAQ
registration and listing. Although there was an increase of $79,892 for the six
month period ended December 28, 1997, General and Administrative expense
decreased by 4.1% as a percentage to total revenue.
Interest expense increased 23.9% or $17,734 to $91,919 for the six month period
ended December 28, 1997 compared to $74,185 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 195.5% or $361,361 to $546,205 for the
six month period ended December 28, 1997 compared to $184,844 for the same
period last year. This increase was primarily driven by acquisitions, new store
construction and renovations.
14
<PAGE>
The Company considers earnings before interest, taxes, depreciation and
amortization to be another indicator of performance. For the six month period
ended December 28, 1997 earnings before interest, taxes, depreciation and
amortization increased by $297,531 to $35,953 compared to a loss of ($261,578)
for the same period last year. This improvement is primarily a result of a
$815,022 contribution from restaurant operations by the M.I.E.
division for the six month period ended December 28, 1997.
7/1/97 7/1/96
Through Through
12/28/97 12/29/96
LOSS FROM OPERATIONS (423,613) (327,984)
LESS : Loss on sale of property 36,641 24,994
Other 49,998 93,444
ADD : Depreciation and
Amortization 546,205 184,844
--------- ---------
EBITDA $35,953 $(261,578)
As a result of the foregoing, the Company's net loss increased 15.7% or
($81,564) to ($602,171) for the six month period ended December 28, 1997
compared to a net loss of ($520,607) 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.
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 $146,192 at December 28, 1997 compared to
current liabilities exceeding current assets by $ 599,694 at June 30, 1997. The
Company had cash and short term investments of $1,909,028 at December 28, 1997
compared to $ 867,847 at June 30, 1997.
Over the past 21 months the Company has been successful in the equities market
raising over $ 8,495,313 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 proceeds for an aggregate amount
of $990,000.
15
<PAGE>
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 Seafood Grille concept, restaurant renovations in
northeast Ohio 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 is payable in full to Magee Industrial
Enterprises.
The Company's net loss increased 86% and 15.7% or ($101,973) and ($81,564) to
($220,579) and ($602,171) for the three month and six month periods ended
December 28, 1997 respectively, compared to a net loss of ($118,606) and
($520,607) for the same periods last year respectively. A significant portion of
the increased loss was due to the increase in depreciation and amortization
expenses.
The Company increased earnings before interest, taxes, depreciation and
amortization by $75,958 and $297,531 to $109,708 and $35,953 for the three month
and six month periods ended December 28, 1997 respectively, compared to $33,750
and a loss of ($261,578) 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 December 28, 1998. 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.
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 December 28, 1997. 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.
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 15, 1994, the Company terminated the agency agreement of a Regional
Development Representative, ATAC Corporation ("ATAC"), on the grounds that ATAC
breached the agreement by assigning the agency agreement 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, tortuous interference with other business
relationships, wrongful conversion of the territory and committed restraint of
trade and price-fixing, breach of contract, fraud, RICO and conversion. 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,
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.
17
<PAGE>
In response to the Third Amended Complaint, the Company has filed a motion for
judgment on the pleadings with respect to 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. ATAC has expressed a desire to file a Fourth
Amended Complaint. The Company intends to file motions for summary judgment with
respect to all of ATAC's claims which remain after the district rules on the
Company's motion for judgment on the pleadings. The lawsuit is now scheduled for
trial in June 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.
Item 2 Changes in Securities and Use of Proceeds
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 (the
"Preferred Stock") and warrants to purchase shares of Common Stock (the
"Warrants") for aggregate gross proceeds $990,000. On November 25, 1997, the
Company sold an aggregate of 8,100 shares of 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 Preferred Stock and Warrants to
purchase 27,000 shares of Common Stock.
The Company offered the units through Burnham Securities, Inc., who received a
selling commission of an aggregate of $79,200 or eight percent of the gross
proceeds of the private placement.
18
<PAGE>
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.
Accordingly, no dividends may be distributed with respect to the Common Stock so
long as there are accrued and unpaid dividends on the Preferred Stock. The
holders of the Preferred Stock are not entitled to vote, except as required by
law. The Preferred Stock is entitled to a liquidation preference of $100 per
share, plus any accrued and unpaid dividends. The Preferred Stock may be
redeemed by the Company at a redemption price of $100 per share, plus all
accrued dividends, commencing October 31, 1999.
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 "Warrant Shares"). The
Warrants may be exercised for five years commencing October 1, 1998. Each holder
has the right to have the Company include the Warrant Shares in any registration
statement filed with the Securities and Exchange Commission within five years of
the closing of the private placement, subject to the approval of the managing
underwriter of such offering.
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
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.
19
<PAGE>
ARTHUR TREACHER'S, INC.
(Registrant)
/s/Frank Brown
---------------------
FRANK BROWN
President, Chief Executive
Officer and Treasurer
Date: February 11, 1998
20
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