<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 Nine Months Ended March 28, 1999
ARTHUR TREACHER'S, INC.
(Name of Small Business Issuer in Its Charter)
UTAH 34-1413104
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 May 14, 1999, the latest practicable date there were 15,057,753 shares of
Common Stock outstanding, $.01 par value.
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ARTHUR TREACHER'S INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Unaudited Financial Statements:
Consolidated Balance Sheets as of March 28, 1999 and June 30, 1998 3
Consolidated Statements of Operations for the Three Month Periods
December 28, 1998 through March 28, 1999 and
December 29, 1997 through March 29, 1998 5
Consolidated Statements of Operations for the Nine Month Periods
July 1, 1998 through March 28, 1999 and
July 1, 1997 through March 29, 1998 6
Consolidation Statement of Cash Flows for the Nine Month Periods
July 1, 1998 through March 28, 1999 and
July 1, 1997 through March 29, 1998 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 21
</TABLE>
2
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ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 28, 1999 and JUNE 30, 1998
<TABLE>
<CAPTION>
March June
1999 1998
ASSETS (Unaudited) (Audited)
- ------ ----------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 373,865 909,636
Accounts receivable, net of allowance of $16,893
in March 1999 and $19,893 in June 1998 127,355 90,618
Inventories 228,953 274,738
Prepaid expenses and other 159,814 173,509
------------- -------------
TOTAL CURRENT ASSETS 889,987 1,448,501
------------- -------------
PROPERTY AND EQUIPMENT, AT COST
Buildings 156,300 156,300
Leasehold improvements 4,829,605 4,640,605
Furniture, fixtures, and equipment 3,723,445 3,450,160
------------- -------------
8,709,350 8,247,065
Less accumulated depreciation 4,048,381 3,173,746
------------- -------------
PROPERTY AND EQUIPMENT, net 4,660,969 5,073,319
OTHER ASSETS
Security Deposits 200,276 198,574
Goodwill 432,611 450,689
Other 186,536 141,511
------------- -------------
TOTAL ASSETS $ 6,370,379 7,312,594
============= =============
</TABLE>
3
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ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 28, 1999 and JUNE 30, 1998
<TABLE>
<CAPTION>
March June
1998 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit) (Unaudited) (Audited)
- ---------------------------------------------- ----------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 3,017,316 2,307,009
Accrued expenses and other liabilities 453,433 501,545
Current maturities of long-term debt 377,261 393,312
Dividend payable - 390,417
------------ -------------
TOTAL CURRENT LIABILITIES 3,848,010 3,592,283
Long-term debt, net of current maturities 1,359,521 1,398,805
Other liabilities 606,421 15,358
------------- -------------
TOTAL LIABILITIES 5,813,952 5,006,446
------------- -------------
STOCKHOLDER'S EQUITY (Deficit)
Preferred stock 1,755,486 1,355,505
Common stock 150,577 148,539
Additional paid-in capital 10,467,423 10,411,729
Accumulated deficit (11,817,059) (9,609,625)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (Deficit) 556,427 2,306,148
TOTAL LIABILITIES and STOCKHOLDRS' EQUITY $ 6,370,379 7,312,594
============ =========
</TABLE>
4
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ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIODS
<TABLE>
<CAPTION>
December 28, 1998 December 29, 1997
through through
March 28, 1999 March 29, 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
TOTAL REVENUE $ 5,040,277 4,961,334
OPERATING EXPENSES:
Cost of sales, including occupancy except depreciation 2,862,811 2,978,084
Operating expenses 2,130,216 1,833,383
Depreciation and amortization 281,187 281,697
General and administrative expenses 407,886 478,048
------------- -------------
TOTAL OPERATING EXPENSES 5,682,100 5,571,212
------------- -------------
NET LOSS FROM OPERATIONS (641,823) (609,878)
OTHER INCOME (EXPENSES):
Other, net (125,990) (75,958)
Sales by stores of discontinued operations 135,186 0
Expenses by stores of discontinued operations (285,682) 0
-------------- -------------
TOTAL OTHER INCOME (EXPENSES) (276,486) (75,958)
NET LOSS (918,309) (685,836)
Undeclared preferred stock dividends (30,570) (20,570)
------------- -------------
Net loss for common shareholders $ (948,879) (706,406)
============== =============
Basic loss per common share $ (.06) (.05)
============= ============
Diluted loss per common share $ (.06) (.05)
============= ============
Weighted average number of outstanding shares for basic and diluted 14,951,087 14,563,615
============= =============
</TABLE>
5
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ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIODS
<TABLE>
<CAPTION>
July 1, 1998 July 1, 1997
through through
March 28, 1999 March 29, 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
TOTAL REVENUE $ 15,907,538 17,628,596
OPERATING EXPENSES:
Cost of sales, including occupancy except depreciation 8,892,228 9,156,117
Operating expenses 6,403,479 7,306,045
Depreciation and amortization 834,979 827,808
General and administrative expenses 1,273,948 1,372,116
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TOTAL OPERATING EXPENSES 17,404,634 18,662,086
------------- -------------
LOSS FROM OPERATIONS (1,497,096) (1,033,490)
OTHER INCOME (EXPENSES):
Other, net (298,411) (254,517)
Sales by stores of discontinued operations 565,494 0
Expenses by stores of discontinued operations (977,421) 0
-------------- -------------
TOTAL OTHER INCOME (EXPENSES) (710,338) (254,517)
NET LOSS (2,207,434) (1,288,007)
Undeclared preferred stock dividends (71,820) (30,758)
------------- -------------
Net loss for common shareholders $ (2,279,254) (1,318,765)
============= =============
Basic loss per common share $ (.15) (.09)
============= ============
Diluted loss per common share $ (.15) (.09)
============= ============
Weighted average number of outstanding shares for basic and diluted 14,905,798 14,485,664
============= =============
</TABLE>
6
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ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIODS
<TABLE>
<CAPTION>
July 1, 1998 July 1, 1997
through through
March 28, 1999 March 29, 1998
-------------- --------------
<S> <C> <C>
Operating activities:
Net loss $ (2,207,434) (1,288,007)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 900,282 827,808
Common stock issued for services - 20,758
Loss on disposition of restaurants - 36,641
Changes in assets and liabilities:
(Increase) in accounts receivable (41,737) (47,272)
(Decrease) in deposits and other assets (46,727) (52,590)
Decrease (Increase) in prepaid expenses and other
current assets 8,695 (39,033)
Decrease in inventories 45,785 24,698
Increase in accounts payable 728,405 391,944
Increase (decrease) in accrued expenses, and
other liabilities 526,900 (96,385)
------------- --------------
Net cash used in operating activities (85,831) (221,438)
------------- --------------
Investing activities:
Capital expenditures (462,285) (262,721)
Proceeds from disposition of restaurants - 246,102
------------- --------------
Net cash used in investing activities (462,285) (16,619)
------------- --------------
Financing activities:
Proceeds from the issuance of preferred stock, net of issue costs 355,298 792,110
Issuance of common stock 58,577 124,050
Proceeds from long-term debt 200,000 157,216
Payment of dividend (390,417) -
Principal payments on long-term debt (211,113) (245,919)
------------- -------------
Net cash provided by financing activities 12,345 827,457
------------- -------------
Net (decrease) increase in cash and cash equivalents (535,771) 589,400
</TABLE>
7
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ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
FOR THE NINE MONTHS ENDED
<TABLE>
<CAPTION>
July 1, 1998 July 1, 1997
through through
March 28, 1999 March 29, 1998
-------------- --------------
<S> <C> <C>
Cash and cash equivalents beginning of period 909,636 867,847
------------- -------------
Cash and cash equivalents end of period $ 373,865 1,457,247
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 108,028 121,878
============== =============
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
MARCH 28, 1999
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
MARCH 28, 1999
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 March 28, 1999 and March 29,
1998.
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
MARCH 28, 1999
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
MARCH 28, 1999
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 EQUITY
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.
In February 1999, the Company is offering an aggregate of twenty (20) units
consisting of 685,710 shares of Common Stock and warrants to purchase an
aggregate of 685,710 shares of Common Stock. The Company is offering up to 20
units at a price of $10,000 per unit, each unit consisting of 22,857 shares of
Common Stock and Warrants to purchase 22,857 shares of Common Stock at an
exercise price of $0.4375 per share.
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 March 28, 1999 and (ii) the
three months ended March 29, 1998. (iii) unaudited interim financial statements
for the nine months ended March 28, 1999 and (iv) the nine months ended March
29, 1998.
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 $5,040,277
for the three month period ended March 28, 1999, an increase of $78,943 or
1.6%, compared to the same period last year of $4,961,334.
Net restaurant sales (defined as gross restaurant sales less coupons, promotion
cost and discounts) decreased 7.4% or $354,684 to $4,456,738 compared to the
same period last year of $4,811,422. While net restaurant sales decreased 7.4%,
same store net restaurant sales decreased by 7.3% or $328,403 compared to the
same period last year. The extreme weather had a negative affect upon net sales
at the store level. In the first 7 weeks of this period, net sales decreased
$230,800 or 10.4% when compared to the same 7 week period and same stores last
year. Also, the decrease in revenue is partially attributed to a reduction in
the coupons, promotions and discounts of $271,764 when compared to the same
three month period last year.
Franchise and other income increased 150.2% or $225,115 to $375,027 for the
three month period ended March 28, 1999, compared to the same period last year.
The co-brand expansion program with Miami Subs produced $7,824 in royalty
income and $ 25,000 of initial franchise fees for this period compared to zero
in the same period last year. Initial franchise fees are one-time fees paid by
the franchisees at the time the franchise is purchased. Initial franchise fees
are not recognized as income until the period in which all of the Company's
obligations relating to the sale have been performed, which generally occurs
when the franchise opens. Also, the Company has recorded income from three
major suppliers in excess of $178,000 this period compared to approximately
$16,000 for the same period last year.
The Company's total operating expenses increased 2.0% or $110,888 to $5,682,100
for the three month period ended March 28, 1999, as compared to $5,571,212 for
the same period last year. The increase was primarily attributed to an increase
of $296,833 in the operational expenses associated at the store level compared
to the same period last year.
General and administration decreased $70,162 or 14.7% to $407,886 for the
period ended March 28, 1999, compared to $478,048 for the same period last
year. The company continues to prudently managing its administrative cost.
Interest expense increased 1.8% or $936 to $51,895 for the three month period
ended March 28, 1999, as compared to $50,959 for the same period last year. The
increase in interest expense was insignificant when compared to the same period
last year.
14
<PAGE>
Depreciation and amortization decreased .2% or $510 to $281,187 for the three
month period ended March 28, 1999, as compared to $281,697 for the same period
last year. This decrease was insignificant in comparing to the same period last
year.
Discontinued operations include one co-brand restaurant, two seafood grilles
and expenses related to three closed restaurants incurred accumulated losses of
$150,496. These units are now closed and are being marketed as part of the
Company's restructuring plan.
As a result of the foregoing, particularly the decrease in net sales at the
store level and the losses incurred from the new concept development of the
seafood grilles and co-brand restaurant, the Company's net loss (before
preferred dividends) increased 33.9% or $232,473 to a net loss (before
preferred dividends) of $918,309 for the three month period ended March 28,
1999, as compared to a net loss (before preferred dividends) of $685,836 for
the same period last year. The net loss increase of $232,473 was primarily
attributed to the loss from discontinued operations of $150,496 or 72.8%
compared to zero in the same period last year and the operating loss for the
six remaining seafood grille restaurants totaling approximately $133,000 for
the three month period ended March 28, 1999, compared to a loss of $61,000 for
the same period ended last year, an increase of approximately $72,000. Of the
approximately $72,000 increase in seafood grille operations approximately
$70,000 was attributed to two stores not open in the prior period and one store
whose lease expires on May 31, 1999 and will not be renewed.
Fiscal 1999 Nine months and 1998 Nine months
The Company reported total revenues (defined as net restaurant sales plus
coupons, promotions, discounts and franchise and other income) of $15,907,538
for the nine month period ended March 28, 1999, a decrease of $1,721,058 or
9.8%, compared to the same nine month period last year of $17,628,596. The
decrease in revenue is primarily attributed to a reduction in coupons,
promotions and discounts of $ 934,148 when compared to the same nine month
period last year. Also, attributing to the decrease in total revenues are same
store net restaurant sales (defined as gross restaurant sales less coupons,
promotion cost and discounts) for the nine month period ended March 28, 1999
decreased 6.3% compared to the same period last year.
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.
15
<PAGE>
Franchise and other income increased 34.4% or $186,695 to $729,379 for the nine
month period ended March 28, 1999 compared to $542,684 for the same period last
year, partially due to the timeliness of the receipts of franchise and other
income from the Company's suppliers. The co-brand expansion program with Miami
Subs produced $ 16,517 in royalty income and $ 57,500 in initial franchise fees
for the nine month period ended March 28, 1999, compared to zero in the same
period last year. Also, the Company has recorded income from three major
suppliers of approximately $ 230,000 for the period March 28, 1999 compared to
approximately $ 84,000 for the same period last year. During the nine 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 and fund future marketing efforts. Any excess proceeds above the cost
of changing vendors will be amortized into income over a two year period.
The Company's total operating expenses decreased 6.7% or $1,257,452 to
$17,404,634 for the nine month period ended March 28, 1999, as compared to
$18,662,086 for the same period last year. The decreased was partially
attributed to the decrease in revenue at the store level and the reduction in
the general and administration of $98,168 or 7.15% to 1,273,948 for the nine
month period ending March 28, 1999, as compared 1,372,116 for the same period
last year.
Interest expense decrease d 6.6% or $9,368 to $133,510 for the nine month
period ended March 28, 1999, as compared to $142,878 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% or $7,171 to $834,979 for the nine
month period ended March 28, 1999, as compared to $827,808 for the same period
last year. This increase was not significant in comparison to the same period
last year.
Discontinued operations include one co-brand restaurant, two seafood grilles
and expenses related to three closed restaurants incurred accumulated losses of
$411,927. These units are now closed and are being marketed as part of the
Company's restructuring plan.
16
<PAGE>
As a result of the foregoing, particularly the decrease in net sales at the
store level and the losses incurred from the new concept development of the
seafood grilles and co-brand restaurant, the Company's net loss (before
preferred dividends) increased 71.4% or $919,427 to a net loss (before
preferred dividends) of $2,207,434 for the nine month period ended March 28,
1999, as compared to a net loss (before preferred dividends) of $1,288,007 for
the same period last year. The net loss increase of $919,427 was primarily
attributed to the loss from discontinued operations of $411,927 or 44.8%
compared to zero in the same period last year and the operating loss for the
six remaining seafood grille restaurants totaling approximately $325,000 for
the nine month period ended March 28, 1999, compared to a loss of $189,000 for
the same period ended last year an increase of $136,000. Of the approximately
$136,000 increase in seafood grille operations approximately $155,000 was
attributed to two stores not open in the prior period and one store whose lease
expires on May 31, 1999 and will not be renewed.
Liquidity and Capital Resources
The Company has financed its operations principally from revenues derived from
Company owned restaurants, franchise 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.
<TABLE>
<S> <C> <C>
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
</TABLE>
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. 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.
17
<PAGE>
The Company's current liabilities exceeded its current assets by $2,958,023 at
March 28, 1999 compared to $2,143,782 at June 30, 1998. The Company had cash
and short-term investments of $373,865 at March 28, 1999 compared to $909,636
at June 30, 1998. Operating losses have caused the Company to suffer liquidity
problems, which include 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 implementation of its restructuring plan, current
cash resources, cash flow from operations, cost savings, franchising of certain
restaurants, sale of underperforming restaurants and the renegotiation of
certain 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.
Restructuring Strategy
The restructuring strategy focuses on building cash flow primarily by the
disposition of the Florida and Detroit markets, co-branded restaurants and the
seafood grill restaurants. The cashflow will be generated by the proceeds of
the sale and the elimination of the losses incurred by these certain
restaurants. The company is currently negotiating with sixteen national and /
or regional quick serve chains, five real estate / business brokers and various
landlords and franchisee's. The implementation of the strategy will
improve the operating cash flow of the Company as illustrated in
the financial summary below. Although there will be no assurance this strategy
will be successful.
18
<PAGE>
The means of the disposition will vary by location based on the following
restructuring priorities:
<TABLE>
<S> <C>
o Sell leases : Accumulate cash by selling attractive
leases. Each location will be marketed based on
the value of the leasehold improvements, equipment
package and the commercial value of the mall.
o Franchise : Accumulate cash by franchising. Certain
restaurant locations are suitable as owner /
operator opportunities for existing franchisees,
employees and new franchise candidates.
o Limit liability : Certain troubled locations may be difficult
to market as a franchise or to another
concept. In this case, the objective is to
terminate the lease to prevent future losses.
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Company Profile Before To Date After
By restaurant type Restructuring Restructuring Restructuring
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Company owned and operated
Fish & Chips 53 52 39
AT & Miami Subs 1 0 0
Seafood Grilles 7 6 0
Closed 6 6 0
--- ----- ---
Total 67 64 39
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The restaurants remaining as company owned and operated after the restructuring
will be the traditional Arthur Treacher's Fish & Chip restaurants. As
demonstrated in the following table, the fish & chip restaurants continue to be
the driving force behind the company returning to profitability. The other
concepts have not been successful and would require additional resources such
as time, capital and manpower in order to reverse the negative trend. Each of
the new concept restaurants will fall-out during the restructuring process.
19
<PAGE>
- -------------------------------------------------------------------------------
Concept Summary
for Nine Months ended
March 28, 1999
- -------------------------------------------------------------------------------
Restaurant *EBITDA before regional expenses and administration
Fish & Chips $ 797,000
AT & Miami Subs (95,000)
Seafood Grilles (395,000)
Closed restaurants (57,000)
---------
Total $ 250,000
- -------------------------------------------------------------------------------
o EBITDA - Earnings before Interest, Taxes, Depreciation and Amortization
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.
20
<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
21
<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: May 14, 1999 By /s/ William F. Saculla
----------------------------
William F. Saculla
President and Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-28-1999
<CASH> 373,865
<SECURITIES> 0
<RECEIVABLES> 127,355
<ALLOWANCES> 0
<INVENTORY> 228,953
<CURRENT-ASSETS> 889,987
<PP&E> 8,709,350
<DEPRECIATION> 4,048,381
<TOTAL-ASSETS> 6,370,379
<CURRENT-LIABILITIES> 3,848,010
<BONDS> 0
0
1,755,486
<COMMON> 150,577
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,370,379
<SALES> 0
<TOTAL-REVENUES> 15,907,538
<CGS> 8,892,228
<TOTAL-COSTS> 17,404,634
<OTHER-EXPENSES> 298,411
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133,510
<INCOME-PRETAX> (2,207,434)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 411,927
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,207,434)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
