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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 Six Months Ended December 27, 1998
ARTHUR TREACHER'S, INC.
----------------------------------------------
(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C>
UTAH 34-1413104
- -------------------------------------------------------------- ------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
7400 Baymeadows Way, Suite 300, Jacksonville, Florida 32256
- -------------------------------------------------------------- ------------------------------------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(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 February 16, 1999, the latest practicable date there were 14,935,452 shares
of Common Stock outstanding, $.01 par value.
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ARTHUR TREACHER'S INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Unaudited Financial Statements:
Consolidated Balance Sheets as of December 27, 1998 and
June 30, 1998 3
Consolidated Statements of Operations for the Three Month
Periods September 28, 1998 through December 27, 1998 and
September 29, 1997 through December 28, 1997 5
Consolidated Statements of Operations for the Six Month
Periods July 1, 1998 through December 27, 1998 and
July 1, 1997 through December 28, 1997 6
Consolidation Statement of Cash Flows for the Six Month
Periods July 1, 1998 through December 27, 1998 and
July 1, 1997 through December 28, 1997 7
Notes to Interim Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis results of Operations
and Financial Condition 13
Part II. OTHER INFORMATION 19
2
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ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 27, 1998 and JUNE 30, 1998
December June
ASSETS 1998 1998
- ------ (Unaudited) (Audited)
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 628,935 909,636
Accounts receivable, net of allowance of $10,893
in December 1998 and $19,893 in June 1998 137,245 90,618
Inventories 299,591 274,738
Prepaid expenses and other 216,602 173,509
---------- ----------
TOTAL CURRENT ASSETS 1,282,373 1,448,501
---------- ----------
PROPERTY AND EQUIPMENT, AT COST
Buildings 156,300 156,300
Leasehold improvements 4,785,965 4,640,605
Furniture, fixtures, and equipment 3,722,204 3,450,160
---------- ----------
8,664,469 8,247,065
Less accumulated depreciation 3,753,409 3,173,746
---------- ----------
PROPERTY AND EQUIPMENT, net 4,911,060 5,073,319
OTHER ASSETS
Security Deposits 199,567 198,574
Goodwill 438,776 450,689
Other 194,245 141,511
---------- ----------
TOTAL ASSETS $7,026,021 7,312,594
========== ==========
3
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ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 27, 1998 and JUNE 30, 1998
December June
1998 1998
(Unaudited) (Audited)
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit)
CURRENT LIABILITIES:
Accounts payable $ 2,639,356 2,307,009
Accrued expenses and other liabilities 508,690 501,545
Current maturities of long-term debt 379,318 393,312
Dividend payable -- 390,417
------------ ------------
TOTAL CURRENT LIABILITIES 3,527,364 3,592,283
Long-term debt, net of current maturities 1,401,686 1,398,805
Other liabilities 680,814 15,358
------------ ------------
TOTAL LIABILITIES 5,609,864 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 (10,898,750) (9,609,625)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (Deficit) 1,416,157 2,306,148
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 7,026,021 7,312,594
============ ============
4
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ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIODS
<TABLE>
<CAPTION>
September 28, 1998 September 29, 1997
through through
December 27, 1998 December 28, 1997
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
TOTAL REVENUE $ 5,847,525 6,299,485
OPERATING EXPENSES:
Cost of sales, including occupancy except depreciation 3,258,735 3,110,421
Operating expenses 2,323,389 2,562,548
Depreciation and amortization 303,118 284,112
General and administrative expenses 503,457 455,167
------------ ------------
TOTAL OPERATING EXPENSES 6,388,699 6,412,248
------------ ------------
NET LOSS FROM OPERATIONS (541,174) (112,763)
OTHER INCOME (EXPENSES):
Other, net (44,608) (107,816)
------------ ------------
NET LOSS (585,782) (220,579)
Undeclared preferred stock dividends (30,570) (8,930)
------------ ------------
Net loss for common shareholders $ (616,352) (229,509)
============ ============
Basic loss per common share $ (.04) (.02)
============ ============
Diluted loss per common share $ (.04) (.02)
============ ============
Weighted average number of outstanding shares for basic
and diluted 14,897,754 14,494,128
============ ============
</TABLE>
5
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ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIODS
<TABLE>
<CAPTION>
July 1, 1998 July 1, 1997
through through
December 27, 1998 December 28, 1997
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
TOTAL REVENUE $ 11,297,568 12,185,251
OPERATING EXPENSES:
Cost of sales, including occupancy except depreciation 6,413,744 6,173,124
Operating expenses 4,538,236 4,995,634
Depreciation and amortization 591,576 546,205
General and administrative expenses 964,438 893,901
------------ ------------
TOTAL OPERATING EXPENSES 12,507,994 12,608,864
------------ ------------
LOSS FROM OPERATIONS (1,210,426) (423,613)
OTHER INCOME (EXPENSES):
Other, net (78,699) (178,558)
------------ ------------
NET LOSS (1,289,125) (602,171)
Undeclared preferred stock dividends (41,250) (10,188)
------------ ------------
Net loss for common shareholders $ (1,330,375) (612,359)
============ ============
Basic loss per common share $ (.09) (.04)
============ ============
Diluted loss per common share $ (.09) (.04)
============ ============
Weighted average number of outstanding shares for basic and
diluted 14,883,154 14,446,788
============ ============
</TABLE>
6
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ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIODS
<TABLE>
<CAPTION>
July 1, 1998 July 1, 1997
through through
December 27, 1998 December 28, 1997
----------------- -----------------
<S> <C> <C>
Operating activities:
Net loss $(1,289,125) (602,171)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 591,576 546,205
Loss on disposition of restaurants -- 36,641
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (46,627) (15,688)
(Decrease) in deposits and other assets (53,727) (37,110)
(Increase) in prepaid expenses and other
current assets (43,093) (31,865)
(Increase) decrease in inventories (24,853) 2,656
Increase in accounts payable 376,183 347,886
Increase (decrease) in accrued expenses, and
other liabilities 672,601 (63,466)
----------- -----------
Net cash provided by operating activities 182,935 183,088
----------- -----------
Investing activities:
Capital expenditures (417,404) (192,093)
Proceeds from disposition of restaurants -- 246,102
----------- -----------
Net cash used in investing activities (417,404) 54,009
----------- -----------
Financing activities:
Proceeds from the issuance of preferred stock, net of issue costs 355,298 --
Issuance of common stock -- 22,650
Cash received from common stock subscribed -- 990,000
Stock issuance costs -- (197,890)
Proceeds from long-term debt 200,000 157,216
Payment of dividend (390,417) --
Principal payments on long-term debt (211,113) (167,892)
----------- -----------
Net cash (used in) provided by financing activities (46,232) 804,084
----------- -----------
Net increase (decrease) in cash and cash equivalents (280,701) 1,041,181
</TABLE>
7
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ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
FOR THE SIX MONTHS ENDED
<TABLE>
<CAPTION>
July 1, 1998 July 1, 1997
through through
December 27, 1998 December 28, 1997
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents beginning of period 909,636 867,847
---------- ----------
Cash and cash equivalents end of period $ 628,935 1,909,028
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 90,188 68,217
========== ==========
Supplemental disclosure of noncash transactions:
Common stock issued to settle accounts payable $ 43,836 --
========== ==========
Series A Preferred Stock exchanged for common stock $ -- 74,400
========== ==========
Common stock issued for stock issuance costs $ -- 36,420
========== ==========
Other assets received on sale of property $ -- 80,119
========== ==========
Proceeds from issuance of Preferred Stock allocated to warrants $ -- 137,295
========== ==========
</TABLE>
8
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ARTHUR TREACHER'S, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 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.
9
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ARTHUR TREACHER'S, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1998
Earnings per Share
- ------------------
Net income (loss) per share of common stock is computed based upon the weighted
average number of common shares and share equivalents outstanding during the
period. Stock options, when dilutive, are included as share equivalents.
Weighted average shares outstanding under the basic calculation are the same as
that under the diluted calculation since the inclusion of common stock
equivalents would be anti-dilutive.
Statement of Financial Accounting Standards No. 130
- ---------------------------------------------------
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"),
which is effective for fiscal years beginning after December 15, 1997. FAS 130
establishes standards for reporting total comprehensive income in financial
statements, and requires that Companies explain the differences between total
comprehensive income and net income. Management has adopted this statement in
1999. No difference between total comprehensive income and net income existed in
the interim financial statements reported at December 27, 1998 and December 28,
1997.
Statement of Financial Accounting Standards No. 131
- ---------------------------------------------------
The FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"), which is effective for fiscal years beginning December 15, 1997. FAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. Management does not believe that FAS 131 will effect
its current disclosures.
10
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ARTHUR TREACHER'S, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 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.
11
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ARTHUR TREACHER'S, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 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.
12
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Management's Discussion and Analysis or Plan of Operation.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Registration Statement.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995.
Information set forth herein contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. The Company cautions readers that important factors
may affect the Company's actual results and could cause such results to differ
materially from forward-looking statements made by or on behalf of the Company.
Such factors include, but are not limited to, changing market conditions, the
impact of competitive products, pricing and acceptance of the Company's
products.
Overview
The Company's principal sources of revenues are from the operations of the
Company owned restaurants and the receipt of royalties from franchisees. The
Company's cost of sales includes food, 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 December 27, 1998 and (ii) the
three months ended December 28, 1997. (iii) unaudited interim financial
statements for the six months ended December 27, 1998 and (iv) the six months
ended December 28, 1997.
13
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Fiscal 1999 Three months and 1998 Three months
The Company's reported total revenues (defined as net restaurant sales plus
coupons, promotions, discounts and franchise and other income) of $5,847,525 for
the three month period ended December 27, 1998, a decrease of $451,960 or 7.2%,
compared to the same period last year of $6,299,485.
Net restaurant sales (defined as gross restaurant sales less coupons, promotion
cost and discounts) decreased 2.4% or $129,904 to $5,375,491 compared to the
same period last year of $5,505,395. While net restaurant sales decreased 2.4%,
same store net restaurant sales decreased by 7.4% or $399,007 compared to the
same period last year. The Company's expansion efforts had an adverse effect on
the sales performance of certain existing restaurants that supplied personnel to
start-up the expansion restaurants. This human resource issue has since been
addressed with the addition of additional members to the senior management team
in September 1998 providing the resources to implement recruiting and training
programs. Also, an adequately funded marketing budget was not in place until
November 1998, when at such time, an advertising agency was retained and a
systemwide advertising campaign began. Prior to the funding,
advertising was very limited, compared to the advertising
expended for the same period last year.
Franchise and other income increased 12.7% or $22,812 to $202,975 for the three
month period ended December 27, 1998 compared to the same period last year
primarily due to the initial franchise fees generated this year for Miami Subs
co-brands that amounted to $32,500 for this period compared to zero in the same
period last year. During the period the Company changed a major product vendor.
Under the terms of the agreement the vendor will become the sole supplier of
soft drinks dispensed by the Company for the next five years. In accordance with
the agreement the Company received in excess of $625,000 in cash from this
vendor during November 1998. Such proceeds have, and will be used to defray the
cost of switching vendors. Any excess proceeds will be amortized into income
over a two year period.
The Company's total operating expenses decreased 0.4% or $23,549 to $6,388,699
for the three month period ended December 27, 1998, as compared to $6,412,248
for the same period last year. The Company anticipates additional cost savings
over the next term.
Interest expense decreased 15.3% or $7,067 to $39,108 for the three month period
ended December 27, 1998, as compared to $46,175 for the same period last year.
The decrease in interest expense was a function of the Company's efforts to
reduce debt.
Depreciation and amortization increased 6.7% or $19,006 to $303,118 for the
three month period ended December 27, 1998, as compared to $284,112 for the same
period last year. This increase was primarily driven by acquisitions, new store
construction and renovations.
14
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As a result of the foregoing, particularly the decrease in net sales at the
store level and the losses incurred from new store development, the Company's
net loss (before preferred dividends) increased 165.6% or $365,203 to a net loss
(before preferred dividends) of $585,782 for the three month period ended
December 27, 1998, as compared to a net loss (before preferred dividends) of
$220,579 for the same period last year. The net loss increase of $365,203 was
primarily incurred in the months of October 1998 and November 1998 which was
prior to the completion of the orientation and training of the new
upper-management team hired in early September 1998.
Subsequently, in December 1998 the new management team produced a pretax income
of $ 79,667 compared to $ 151,154 for December 1997. The December 1998 pretax
income could have been greater if not for the "new store expansion" losses
totaling $34,458 for December 1998 compared to -0- for December 1997.
Fiscal 1999 Six months and 1998 Six months
The Company reported total revenues (defined as net restaurant sales plus
coupons, promotions, discounts and franchise and other income) of $11,297,568
for the six month period ended December 27, 1998, a decrease of $887,683 or
7.3%, compared to the same six month period last year of $12,185,251. The
decrease in revenue is primarily attributed to a reduction in sales coupons,
promotions and discounts of $ 662,384 when compared to the same six month period
last year. Other factors contributing to the decrease in total revenues are
attributed to same store net restaurant sales (defined as gross restaurant sales
less coupons, promotion cost and discounts) for the six month period ended
December 27, 1998 decreased 6.7% compared to the same period last year. The
Company's expansion efforts had an adverse effect on the performance of certain
existing restaurants that supplied the personnel to start-up the expansion
restaurants.
Also, an adequately funded marketing budget was not in place until November
1998, when at such time, an advertising agency was retained and a systemwide
campaign began. Prior to the funding, advertising was very limited, compared to
advertising expended for the same period last year.
Franchise and other income decreased $38,420 to $354,352 for the six month
period ended December 27, 1998 compared to $392,772 for the same period last
year, primarily due to the timeliness of the receipts of franchise and other
income from the Company's suppliers. During the six month period, the Company
changed a major product vendor. Under the terms of the agreement the vendor will
become the sole supplier of soft drinks dispensed by the Company for the next
five years. In accordance with the agreement, the Company received in excess of
$625,000 in cash from this vendor during November 1998. Such proceeds have, and
will be used to defray the cost of switching vendors. Any excess proceeds will
be amortized into income over a two year period.
The Company's total operating expenses decreased 0.8% or $100,870 to $12,507,994
for the six month period ended December 27, 1998, as compared to $12,608,864 for
the same period last year.
15
<PAGE>
Interest expense decreased 11.2% or $10,304 to $81,615 for the six month period
ended December 27, 1998, as compared to $91,919 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 8.3% or $45,371 to $591,576 for the six
month period ended December 27, 1998, as compared to $546,205 for the same
period last year. This increase was primarily driven by acquisitions, new store
construction and renovations.
As a result of the foregoing, the Company's net loss (before preferred
dividends) increased 114.1% or $686,954 to $1,289,125 for the six month period
ended December 27, 1998, as compared to a net loss (before preferred dividends)
of $602,171 for the same period last year. The net loss increase of $686,954 was
primarily incurred in the months of July 1998 through November 1998 which was
prior to the completion of the orientation and training of the new
upper-management team hired in early September 1998.
Subsequently, in December 1998 the new management team produced a pretax income
of $ 79,667 compared to $ 151,154 for December 1997. The December 1998 pretax
income could have been greater if not for the "new store expansion" losses
totaling $34,458 for December 1998 compared to -0- for December 1997. The "new
store expansion" losses for the six month period ended December 27, 1998 totaled
$160,279 compared to -0- for same period last year.
Liquidity and Capital Resources
The Company has financed its operations principally from revenues derived from
Company owned restaurants, royalty income from franchisees, and private
placements of equity and debt. The Company has raised over $12 million in equity
since May 1996, of which $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
Private Placement of Promissory Notes and Warrants. September 1998 $ 200,000
-----------
$ 2,028,315
16
<PAGE>
The management of the Company has reduced certain costs by renegotiating various
vendor contracts and continues to seek opportunities to reduce the Company's
operating costs. 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 most significant contract negotiation
of the fiscal year thus far, was completed in December 1998, relative to the
Company's soft drink product offerings. The Company received in excess of
$625,000 in cash from its new soft drink supplier during the three months ended
December 27, 1998. None of the proceeds from this transaction have been recorded
to income for the three month period ended December 27, 1998. Such proceeds
have, and will be used to defray the cost of switching vendors and promotional
cost incurred to integrate the new product line into the Company's menu. Any
excess proceeds will be amortized into income over a two year period. In
addition to the economic benefit realized, the new vendor is providing menu
board design leadership, menu board financing and marketing support in various
phases of core product promotions in addition to soft drink promotions.
The Company's current liabilities exceeded its current assets by $2,244,990 at
December 27, 1998 compared to $2,143,782 at June 30, 1998. The Company had cash
and short-term investments of $628,935 at December 27, 1998 compared to $909,636
at June 30, 1998. Operating losses caused the Company to suffer liquidity
problems, which included the Company's inability to make certain lease and note
payments when due. The Company became in arrears with respect to certain leases
because of poor performance by stores in those locations. The Company had also
incurred indebtedness in connection with its new restaurant expansion program of
which several of such restaurants are unable to generate sufficient revenues to
repay the indebtedness.
The Nasdaq Stock Market, Inc. has delisted the Company's Common Stock from the
NASDAQ Small Cap Market effective as of the close of business on February 10,
1999 because the Company failed to comply with Nasdaq's compliance criteria
regarding minimum net tangible assets and minimum bid price. The Company's
common stock became listed on the OTC Bulletin Board effective February 11,
1999. The delisting from NASDAQ could adversely affect the Company's ability to
raise additional capital.
The Company believes that its current cash resources, cash flow from operations,
cost savings (including equipment leasing opportunities and new supplier
relationships), franchising of certain restaurants and the sale or renegotiation
of underperforming leases will be sufficient to adequately fund its current
working capital needs through the fiscal year commencing July 1, 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 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.
17
<PAGE>
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
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
July 31, 1999. 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 complaint. 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.
18
<PAGE>
PART II 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
19
<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: February 16, 1999 By /s/ William F. Saculla
----------------------------
William F. Saculla
President and Chief Financial Officer
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