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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT
Under Section 13 or 15(d) of the Securities Act of 1934
For the Fiscal Year Ended June 30, 2000
DIGITAL CREATIVE DEVELOPMENT CORPORATION
(formerly ARTHUR TREACHER'S, INC.)
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(Name of Small Business Issuer in Its Charter)
UTAH 34-1413104
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7400 Baymeadows Way, Suite 300, Jacksonville, Florida 32256
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(Address of Principal Executive Offices) (Zip Code)
(904) 739-1200
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(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
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
|_|
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB. |X|
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State issuer's revenues for its most recent fiscal year. $13,547,419
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Shares outstanding. 16,600,484
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State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange
Act.) $16,966,848
Note: if determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
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PART I
Item 1. Description of Business.
Digital Creative Development Corporation (the "Company") is principally
involved in two lines of business. The Company is engaged in the operation,
franchising, ownership and development of "Arthur Treacher's Fish and Chip's"
fast food restaurants. Commencing in February 2000, the Company established a
subsidiary to become engaged in acquiring and investing in entities that create
and provide entertainment content to both business and the consumer through
digital broadband and conventional distribution platforms.
BACKGROUND
The Company was originally founded in 1969 as Arthur Treacher's Fish &
Chips, Inc., a Delaware corporation. In 1979, Mrs. Paul's, Inc. ("Mrs. Paul's")
purchased Arthur Treacher's Fish & Chips, Inc. In 1982, Lumara Foods of America,
Inc. ("Lumara") acquired the assets of Arthur Treacher's Fish & Chips, Inc. from
Mrs. Paul's. Lumara sought bankruptcy protection in 1983. In December 1983,
Arthur Treacher's Inc., an Ohio corporation, entered into an agreement to
purchase the assets of Lumara, during Chapter XI bankruptcy proceedings. In
February 1984, Arthur Treacher's Inc., an Ohio corporation, merged into El
Charro, Inc., a Utah corporation, which consummated the acquisition of the
assets of Lumara and changed its name to Arthur Treacher's, Inc. On May 31,
1996, an investor group organized by Mr. Bruce Galloway, the current Chief
Executive Officer and Chairman of the Board, acquired control of the Company.
In February 2000, the Company formed a subsidiary, Digital Creative
Development Corporation, a Delaware corporation ("DCDC (Delaware)"), for the
purpose of acquiring and investing in entities engaged in the creation of
traditional entertainment content. In March 2000, the Company formed a
subsidiary, Arthur Treacher's, Inc., a Delaware corporation ("ATI Delaware"). In
August 2000, the Company, a Utah corporation, changed its name from Arthur
Treacher's Inc. to Digital Creative Development Corporation. The Company intends
to transfer all of its assets and liabilities related to its restaurant
operations to ATI Delaware and to distribute all of its shares of ATI Delaware
to its shareholders.
RESTAURANT BUSINESS
A. Overview
On June 30, 2000 the Arthur Treacher's system consists of 170
restaurants, comprised of 27 Company owned restaurants and 62 independently
owned and operated franchised locations and 81 franchise restaurants cobranded
with Miami Subs, Corp. ("Miami Subs"), Nathan's Famous Hot Dogs and Pudgie's
Famous Chicken. The restaurants are located in 13 states in the mid-western and
eastern United States as well as Washington D.C. Puerto Rico and the province of
Ontario, Canada. The Company's main product is its "Original Fish & Chips"
product consisting of fish fillets coated with a special batter prepared under a
proprietary formula, deep-fried golden brown and served with English-style chips
and two corn meal "hush puppies". The Company's other products include chicken,
shrimp, clams and an assortment of other seafood combination dishes.
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In August 1998 the Company commenced pursuing co-branding
opportunities. On August 13, 1998, the Company entered into a co-branding
licensing agreement with Miami Subs. Miami Subs offers fresh fast food including
hot and cold submarine sandwiches, cheesesteak sandwiches and various ethnic
foods. In August 1999 Nathans Famous Hot Dogs opened its first cobranded
restaurant with Arthur Treacher's in Yonkers, New York.
Franchise Expansion & Co-branding
The Company intends to focus on franchising the Arthur Treacher's Fish
& Chips brand restaurants and accelerate its cobranding expansion with Miami
Subs, Nathans Famous Hot Dogs, Kenny Rogers Roasters and Pudgie's Famous
Chicken. The targeted territories for franchise and cobrand expansion will
primarily include New York, New Jersey, Delaware, Pennsylvania, Ohio, Michigan,
Maryland, Washington D C, Florida and Ontario. The Company will continue to
capitalize on the strength of its brand through franchising and cobranding. The
cobranding programs with Miami Subs, Nathan's Famous Hot Dogs, Kenny Rogers
Roasters, Pudgies Famous Chicken, Phillips Seafood and other approved quick
serve and casual dining restaurant chains will continue to provide an additional
source of franchise revenue.
The Company seeks co-branding between two restaurant concepts when one
concept provides a product or serves a demographic group that is underserved by
the other. In addition, the Company will seek complementary concepts that offer
different products to the same customers during different parts of the day. The
Company looks to cobranding as an opportunity to add incremental revenue for
each of its Fish & Chips restaurants systemwide.
As of November 1997, the Company entered into a management agreement
with Miami Subs as to one location and in August 1998, the Company entered into
a co-brand license agreement with Miami Subs to put a limited Arthur Treacher's
menu in Miami Subs units. As of June 30, 2000, 63 Miami Subs, 14 Nathans and 4
Pudgie's restaurants have co-branded with Arthur Treacher's.
Arthur Treacher's receives royalties and initial franchise fees under
each cobrand franchise agreement. The Company anticipates opening additional
co-brand locations during the current fiscal year with each of its cobrand
partners.
o Expansion in Previously Exclusive Territory
The Company acquired the exclusive development rights from its Canadian
franchisee in December 1999 and has begun to seek franchises for the Ontario
territory. The company intends to develop the Toronto market initially before
expanding into other regions of Ontario. The growth plan will primarily be
franchise expansion with additional emphasis on seeking cobrand partners with an
established multi unit Canadian concept.
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o Corporate Franchisees
The Company intends to develop joint programs with new corporate
franchisees for regional expansion opportunities in certain selected markets.
This program will entail a corporate sponsor for a particular region based upon
metropolitan population densities. A region would typically be large enough to
cover an area that could accommodate ten or more store locations. The Company
anticipates that a regional representative franchise agreement would be executed
with the corporate franchisee providing it with rights to a specified region and
to support from the Company in order to develop the area within certain
guidelines established by the Company relating, among other things, to a minimum
number of restaurants to be opened within particular time periods. The Company
also intends to grant new franchises to operators of single restaurants. There
can be no assurance, however, that suitable franchisees can be located or that
regional representative franchise agreements will be reached at terms acceptable
to the Company.
The Company estimates the cost of opening a new restaurant at between
$115,000 and $220,000 per restaurant (assuming the land and building are leased)
depending upon factors such as the size of the restaurant, the lease, remodeling
cost and local construction costs.
Co-branding the Arthur Treacher's menu into another restaurant concept
entails a conversion cost of approximately $25,000 to $35,000 depending on the
existing restaurant equipment being used by the co-brand partner.
By standardizing the construction and equipment procurement process of
its restaurant network, the Company believes that it could develop the economies
of scale in the design and site selection process for franchises. A
supplementary benefit of such an expansion program could include proposals to
arrange for regional or national equipment leasing and financing programs and
the use of national or regional contractors to provide support for franchisees
wishing to expand. There can be no assurance that such programs will be reached
at terms acceptable to the Company.
The Company's proposed expansion will be dependent on, among other
things, attracting quality franchise candidates, the availability of suitable
restaurant sites, negotiation of acceptable lease terms, timely development of
such sites, obtaining landlords' consents to renovations, constructing or
renovating restaurants, hiring of skilled management and other personnel, the
general ability to successfully manage growth (including monitoring restaurants,
controlling costs and maintaining effective quality controls) and the
availability of adequate financing. In the case of franchised restaurants, the
Company will be substantially dependent on the management skills of its
franchisees. The Company does not anticipate opening any Company owned stores in
the current fiscal year.
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(B) Marketing, Promotion and Advertising
Core menu items
Batter-dipped fish, chicken, shrimp and signature-cut potatoes (chips)
continue to account for more than 75% of the Company's annual sales during the
fiscal year ended June 30, 2000. Arthur Treacher's has built a strong brand
awareness over the past 31 years with its core menu and anticipates increasing
the marketing and promotion of the batter-dipped products. The Company's
restaurants are designed to produce the batter-dipped products easily.
Increasing the sales of already high volume products will improve product
rotation and help ensure hot, fresh food for customers.
The Company believes that batter-dipped food is a strong focus for the
menu because, in part, batter-dipped food cannot be prepared easily at home.
Most households do not have a deep fryer and a recipe for batter.
Marketing strategies
Mall based stores are critical to the Company's success. Seventy
percent of the Arthur Treacher systemwide revenue for the fiscal year ended June
30, 2000 was mall based. Therefore, marketing strategies are tailored to
generate business in malls. If the tactics are feasible for freestanding stores,
the marketing approach is expanded to the freestanding markets. Certain
promotions developed for freestanding stores will not necessarily be successful
in the mall locations. Freestanding locations can benefit substantially from
external media (print, radio, television, direct mail and out of home).
Purchasing external media to drive customers to a mall food court and to an
Arthur Treacher's restaurant in that food court becomes cost efficient when the
concentration of stores can adequately support the marketing cost of the
external media. The geographic distribution of the Company's mall based and free
standing stores permits the Company to design marketing programs for each
region. Most of the Company's freestanding and mall locations are in separate
markets. Northeast Ohio and Central Pennsylvania have most of the freestanding
stores while the mall based Arthur Treacher's are located primarily in the New
York to Philadelphia corridor and Florida.
A local marketing training program for managers of Arthur Treacher's
restaurants located in food courts has been implemented. One-day training
classes have been held for the managers. The program is designed to enable and
empower managers to market their store within the confines of the mall by
capturing new customers, use fewer discounts and improve frequency of visits.
Promotional tools have been provided to the managers. Managers are working with
their supervisors and the marketing department to create marketing plans
tailored to the needs of each store. Managers of freestanding locations are also
being trained in local marketing techniques which are designed to reflect the
different needs of freestanding stores.
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(C) Franchises
As of June 30, 2000, the Company had 143 independently owned and
operated franchised locations consisting of 62 traditional Arthur Treacher
restaurants and 81 cobranded restaurants. The Company has three options for
franchises: individual stores, cobranding and area development. Pursuant to its
franchise agreement, the Company provides its franchisees with a method of
operation, including trade secrets, technical knowledge, a supply distribution
program and standards for customer service, quality control, decor, layout,
signs and accounting systems. The Company also provides centralized advertising
and cooperative advertising programs and an initial training program, which is
required for franchisees. Each franchisee is required to spend a minimum of
three percent of monthly gross sales on advertising. In addition, each
franchisee must purchase certain private label proprietary food, paper supplies,
equipment and signage from Company approved suppliers and distributors.
The Company does not select restaurant sites for franchisees, but all
sites are subject to the Company's approval. The Company also requires that its
franchisees name the Company as an additional insured party on their property
and casualty insurance policies and that vendors provide subrogation to the
Company with respect to their product liability insurance.
Pursuant to the Company's standard franchise agreement, which is
incorporated in its Uniform Franchise Offering Circular, the initial franchise
fee for a one unit franchise is $19,500. The fee for each additional franchise
declines thereafter. The fee for an area development franchise is $69,500. These
franchise fees do not include the costs associated with the operation of the
restaurant, including food, supplies, labor, equipment, occupancy costs and
taxes.
Cobranding fee arrangements may vary depending on the growth potential,
commitments and development schedules agreed upon with the cobrand partner.
Each franchisee is subject to a royalty fee of a maximum of six percent
of the franchisee's gross sales, net of sales taxes and certain other
adjustments, based upon sales reports at the end of each calendar month. In the
fiscal year ended June 30, 2000, the Company received a total of $466,690 in
franchise fees and royalty income. Franchisees fees vary primarily because of
the age of the franchise contract, with an average royalty of about three
percent. Reduced royalty fees have been granted by the Company for certain older
franchise contracts and for franchisees who operate multiple units.
As of October 14, 2000, franchisees operating four restaurants have
either been notified of being in default for non-payment of royalties or are
more than 90 days in default on royalty payments. The inability of the Company's
franchisees to make payments on a timely basis will adversely affect the
Company's liquidity and its operations.
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(D) Suppliers and Pricing
Seafood prices, particularly the price of fish, are subject to supply
problems due to environmental and economic factors. The Company is developing
measures to minimize the effect on the Company.
The Company's principal product is fish, currently the Company uses
both pollack and cod. Other species are being tested as alternatives due to
supply, price and availability. The Company and franchisees utilize one supplier
for fish and one supplier for shrimp. For the fiscal year ended June 30, 2000,
purchases of fish and shrimp accounted for approximately 20% and 7% of the
Company's operating expenses, excluding occupancy costs, respectively. Such
supplies and prices are subject to volatility. Seafoods of the quality sought by
the Company tend to trade on a negotiated basis depending upon supply and demand
at the time of purchase. Supply and price can be affected by multiple factors,
such as weather, politics and economics in the producing countries. An increase
in the prices of seafood, particularly fish, could have an adverse effect on the
Company.
The Company maintains relationships with certain seafood vendors in an
effort to obtain seafood of the quality and in the quantity demanded by the
Company's customers. These relationships enable the Company to maintain its
supply of fish as well as affording the Company some price stability. The
Company has sought to mitigate the effects of price volatility by entering into
agreements with its principal fish suppliers to provide fixed prices for seafood
products during the six months to one year duration of the contracts. Such fixed
price agreements also help ensure the Company's supply of fish and enable the
Company to reduce its supply costs. Although the Company anticipates that the
agreements will be renewed on substantially the same terms as the current
agreements, there can be no assurance that the new terms will not be more
costly. However the Company believes that alternative suppliers of pollack, cod
and other seafoods are available if the prices increase substantially.
Management also intends to take advantage of changing technologies with respect
to the "farming" and breeding of selected species of fish and seafood products,
and currently purchases some fish products that are "farmed."
The Company uses many individual suppliers for many of its significant
non-seafood items. For example: potatoes, chicken, cups, shortening and
proprietary fish batter and hushpuppy mix are each purchased from different
suppliers under oral and written agreements which set the price for one year.
All of the Company's supplies are delivered by such suppliers to one distributor
who services the Company's restaurants from three distribution centers. Any
disruption in supplies from such suppliers could temporarily have an adverse
effect on the Company's operations, although the Company believes that the
supplier could readily be replaced. Except with respect to the Company's
proprietary products, franchisees can purchase such products from other
suppliers or distributors, subject to the Company's prior approval.
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(E) Competition
The restaurant business is highly competitive with respect to price,
service, location and food quality and is generally considered to be a mature
industry. Competition in the industry can be expected to increase. The industry
is affected by changes in consumer eating habits and preferences, local,
regional and national economic conditions, demographic trends, automobile
traffic patterns, government regulation, employee availability and commodity and
operating cost fluctuations, many of which are beyond the Company's control. Any
unplanned or unanticipated changes in these factors could adversely affect the
Company.
There are numerous well-established competitors in the operating areas
of the Company. Restaurants operated or franchised by the Company compete
directly not only with quick service restaurants ("QSRs"), but also with
moderately priced family and specialty restaurants. Significant competitors
include fast food seafood restaurants such as Long John Silvers and Captain D's,
casual dining restaurants with a seafood emphasis such as Red Lobster and
Landry's, and other chains that serve seafood or chicken, or both.
The Company's primary competitors in the fast service seafood
restaurant business are Long John Silvers and Captain D's. Both competitors have
company owned and franchised restaurant operations in certain regions of the
United States. Long John Silvers is the largest competitor and Captain D's, a
wholly owned subsidiary of Shoney's, Inc. has a strong regional presence in the
southeastern United States. The amount of competition varies among the Company's
principal regional markets. Both Captain D's and Long John Silvers compete
directly with the Company in Ohio and Pennsylvania, although the level of
competition is highest in several Pennsylvania markets. Long John Silvers
competes directly with the Company in several of its markets in Florida.
In Ontario, the Company has significant direct competition from
independent fish and chips restaurants, but less direct competition from other
major fast service seafood chains. Many of the Company's competitors possess
substantially greater financial, marketing, personnel and other resources than
those of the Company. Such competitive pressures limit the Company's ability to
increase food and beverage prices and thus may limit the extent to which the
Company and its franchisees can offset certain costs of doing business. There
can be no assurance that well-established competitors will not place additional
restaurants in close proximity to those of the Company and its franchisees.
The Company also faces vigorous competition from other QSR chains in
attracting and retaining suitable franchises. The Company plans to increase its
number of franchised restaurants but there can be no assurance that it will be
able to attract and retain suitable franchisees.
The Company has developed a concentration of restaurant locations in
the food courts of regional shopping malls. The competition in the malls
typically consists of the eight to fourteen different restaurant concepts in
each food court. Each food concept generally serves a distinctive menu item
which may compete, directly or indirectly, with the Company. There can be no
assurance that the Company will continue to be able to compete effectively with
such food concepts. Top competitors in food courts include Sbarros, Chik-fil-a,
Philly Stations, a variety of small chains featuring Japanese, Chinese, Cajun
and other ethnic foods. Major QSR chains such as McDonald's, KFC, Burger King,
Wendy's, and Taco Bell are opening in food courts. The major chains benefit from
broad consumer awareness generated by broadcast media. These concepts can
dominate a food court.
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(F) Seasonality
The Company derives a significant portion of its sales during the
November/December (Christmas) and March/April (Easter) 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. These areas can be significantly impacted by
weather during December, January and February. Approximately 70% of the
Company's systemwide net sales is derived from shopping malls. The Company
derives approximately 15% of its total net sales from operations of the stores
located in shopping malls during the holiday season.
(G) Employees
At September 30, 2000, the Company had approximately 300 employees. A
total of approximately 245 employees are paid on an hourly basis and 55
employees receive a salary. Six of the Company's employees perform executive
functions. Most of the Company's employees are employed at the Company's
restaurants. The Company believes that the number of persons employed is
adequate to conduct the Company's current level of operations.
(H) Government Regulation
The Company's business is subject to extensive federal, state and local
government regulation, including regulations relating to franchising, public
health and safety, zoning and fire codes. The failure to obtain or retain food
or other licenses would adversely affect the operations of the Company's
restaurants.
The Company is subject to federal and state laws, rules and regulations
that govern the offer and sale of franchises. The Company is also subject to a
number of state laws that regulate certain substantive aspects of the
franchisor-franchisee relationship. If the Company is unable to comply with the
franchise laws, rules and regulations of a particular state, relating to offers
and sales of franchises, the Company will be unable to engage in offering or
selling franchises in such state. The Company believes it is in compliance with
such laws, rules and regulations and has not been cited for non-compliance. The
Company is not currently subject to any investigation by any federal or state
regulatory authority.
On a national level, the FTC requires the Company to furnish
prospective franchisees with a disclosure document which complies with the FTC's
Trade Regulation Rule (the "FTC Rule"). The Company's current FTC disclosure
document is effective for use in 37 states, and the District of Columbia, that
do not require registration of disclosure documents. However, in the 13
remaining states, the Company is required to register a state-specific document
and receive an effective registration notice prior to the commencement of sales
of franchises in such states. The Company is qualified to sell franchises in
selected states that requires a state specific document although the Company
believes that it could register in all registration states if it chose to offer
franchises in such states.
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The Company is required to update its FTC disclosure document to
reflect the occurrence of material events. The occurrence of any such events
may, from time to time, require the Company to modify its disclosure documents
within 90 days or stop offering and selling franchises until the document is so
updated. There can be no assurance that the Company will be able to update its
disclosure document or become registered to offer or sell franchises in certain
states consistent with its expansion plans or that the Company will be able to
comply with existing or future franchise regulations in any particular state,
any of which could have an adverse effect on the Company.
(I) Trade and Service Marks and Trade Secrets
The Company believes that the "Arthur Treacher's" and the "Arthur
Treacher's Fish & Chips" trade and service marks, and other marks may have
significant value and are important to the marketing of its restaurants and
products. All are registered with the United States Patent Office. The Company
registered "Arthur Treacher's Seafood Grille" as a trade and service mark in
1998. The Company's principal "Arthur Treacher's" and "Arthur Treacher's Fish
and Chips" trade and service marks are subject to renewal for 10 year periods
upon application to the United States Patent Office between 2007 - 2009. The
other trade and service marks are subject to renewal for 10 year periods on
various dates between 2000 - 2010. Upon expiration of each period, the marks may
be renewed for successive 10 year periods. The Company also registered the
trademark "Arthur Treacher's Fish & Chips" in Canada on July 23, 1999. This
trademark is subject to renewal every 15 years. There can be no assurance,
however, that the Company's trade and service marks do not, or will not, violate
the proprietary rights of others, that the Company's trade and service marks
would be upheld if challenged or that the Company would not be prevented from
using its trade or service marks. Any of the aforementioned instances could have
a material adverse effect on the Company and its franchisees. The Company's
trade and service marks have not been and are not subject to any material
challenges and the Company has acted to vigorously defend the marks in several
isolated instances where alleged infringement has occurred.
The Company utilizes a proprietary batter mix in connection with the
preparation of its seafood products. There can be no assurance that such recipe
will not be copied by a competitor and that the Company's business will not be
adversely affected.
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(J) Pudgies Famous Chicken
On October 2, 2000, ATI (Delaware) executed an agreement to purchase
all of the outstanding capital stock of the entities which own and act as
franchisor of the Pudgies Famous Chicken chain of fast food chicken restaurants.
Pudgies consists of 32 restaurants in the New York tri-state metropolitan area,
including 12 company owned stores and 20 franchises. The purchase price will be
20% of the issued and outstanding stock of ATI (Delaware). Mr. Jeff Bernstein,
the Chief Executive Officer of Pudgies, will become Chief Executive Officer and
President of ATI (Delaware). The acquisition is scheduled to close in October
2000.
ENTERTAINMENT BUSINESS
The Company intends to acquire and make investments primarily in
traditional entertainment content entities. To date, the Company's investments
have been made through its subsidiary, DCDC (Delaware). The Company's
entertainment business is headquartered in New York, New York. The Company's
strategy is to acquire and invest in entities which provide comprehensive
services to a wide variety of entertainment and other related businesses and for
general public consumption. DCDC seeks strategic alignments with these business
entities to focus on creative services (i.e., original content production; web
design; advertising; brand marketing; etc.) resulting in revenue generation from
motion pictures; television; animation; product endorsement and sales; and
licensing and syndication. Content is intended to be delivered to both business
and the consumer through digital broadband and conventional distribution
platforms.
Investments:
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DCDC (Delaware) has made the following investments through
September 30, 2000:
(a) Our Yearbook Corp. is a portal site for high school and
college yearbooks on the Internet. DCDC (Delaware) invested
$450,000 for 450,000 shares of preferred stock of Our Yearbook
Corp. DCDC (Delaware) has also extended three loans for an
aggregate principle amount of $160,000. Our Yearbook Corp.,
subsequently filed for protection under the federal bankruptcy
laws. DCDC (Delaware) has established allowances in the amount
of $610,000 in the financial statements.
(b) Interactive Pager Media, Inc. is a provider of wireless
interactive pager services in the United States. DCDC
(Delaware) invested $1,000,000 for 122,100 shares of preferred
stock of Interactive Pager Media, Inc.
(c) Thinking Tools, Inc. is a provider of Internet services. DCDC
(Delaware) invested $300,000 for 600,000 shares of common
stock of Thinking Tools, Inc.
(d) Liquor.com, Inc. is an internet site for information related
to the alcohol beverage industry. Consumers can also purchase
wine, champagne, spirits, accessories and industry-related
items. DCDC (Delaware) loaned Liquor.com $250,000 under a
promissory note which is convertible into 71,023 shares of
common stock and a warrant exercisable for 35,511 shares of
common stock.
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(e) Made MyWay.com, Inc. is a provider of Internet based digital
printing services. DCDC (Delaware) invested $1,200,000 for
1,200,000 shares of common stock of MadeMyWay.com.
(f) Heavy.com, Inc. is a digital entertainment company with a
focus on original content creation. DCDC (Delaware) has
extended a loan of $500,000 to the company. DCDC (Delaware)
also has warrants to purchase 63,450 shares of common stock of
Heavy.com Inc. at $7.47 per share.
The investments in both Yearbook and Made MyWay.com, Inc. grant DCDC
(Delaware) the right to elect a nominee to the Boards of Directors of these two
companies.
None of the investments to date exceed 15% of the voting stock of the
portfolio companies. Although the Company intends to purchase a minimum of 20%
of the outstanding voting stock and have a controlling interest in its portfolio
companies, the Company may purchase lower percentage interests from time to
time. The Company intends to structure its investments so that it will not be
engaged primarily in the business of investing, reinvesting or trading in
securities and will not be classified as an investment company withing the
meaning of the Investment Company Act of 1940.
Pending Acquisitions
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The Company entered into a definitive agreement in August 2000 to acquire the
television production company EYECANDY, Inc. in exchange for stock in the
Company. EYECANDY, Inc. is a programmer which is approved by Chinese television
authorities for broadcast to China. The transaction includes EYECANDY's Asian
prime time weekly television show, America In 60 Minutes. The Company and
EYECANDY intend to bring United States programming to China and Chinese
programming to the United States.
Item 2. Description of Property.
The Company's principal executive offices are located at 7400 Baymeadows Way,
Jacksonville, Florida 32256. The Company rents its 5,100 square feet of
headquarters space for an annual rent of approximately $96,000 pursuant to a
lease which expires on December 31, 2000.
The Company's 27 restaurants are leased by MIE Hospitality, a wholly-owned
subsidiary of the Company. In addition, with respect to five leases, the Company
either guarantees the obligations of franchisees or leases the properties and
subleases them to franchisees. The Company's free standing restaurants are each
approximately 2,000 square feet and the Company's restaurants located in malls
are each approximately 400 to 1,100 square feet.
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The leases have remaining terms ranging from one to 18 years. Many of the leases
contain renewal options for periods of five to 10 years. The Company is
reviewing whether to continue to operate any marginal restaurants acquired in
the MIE Acquisition and to renegotiate the terms of each restaurant lease upon
the expiration of each lease. The following chart sets forth the expiration
dates of the terms of (i) the leases of Company owned restaurants, and (ii) the
Company's leases which are subleased to franchisees and leases of franchisees
which are guaranteed by the Company.
Leases Subject
to Guarantees
Number of Leases or Subleases Expiration Date
---------------- ------------ ---------------
3 0 2000
3 8 2001
3 5 2002
7 5 2003
8 3 2004
3 4 Thereafter
Item 3. 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; 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
13
<PAGE>
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
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. The parties submitted briefs to the Sixth Circuit between July and
October of 1999 and a hearing was held in June 2000. The Sixth Circuit should
hand down its decision within the next few months.
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 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 of financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
In August 2000, the Company's Shareholders approved an amendment to the
Company's Articles of Incorporation which: (i) changed the Company's name to
Digital Creative Development Corporation and (ii) increased the number of
authorized shares of Common Stock to 75,000,000.
14
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The following table sets forth the high and low prices for the periods
indicated as reported by the National Daily Quotation Service, Inc. between
dealers and do not include retail mark-ups, mark-downs, or commissions and do
not necessarily represent actual transactions, as reported by the National
Association of Securities Dealers Composite Feed or other qualified inter-dealer
quotation medium. As of September 30, 2000, the closing bid price was $1.3438
per share.
Low High
--- ----
1999 Fiscal Year:
-----------------
First Quarter 0.563 2.625
Second Quarter 0.594 1.125
Third Quarter 0.375 0.969
Fourth Quarter 0.313 0.813
2000 Fiscal Year:
-----------------
First Quarter 0.313 0.438
Second Quarter 0.250 0.469
Third Quarter 0.344 4.467
Fourth Quarter 1.250 3.938
2001 Fiscal Year
----------------
First Quarter 1.313 2.500
The Common Stock is recorded on the NASD Bulletin Board with the symbol DCDC. As
of June 30, 2000, the number of record holders of the Company's Common Stock was
458.
Dividends
In November and December 1997, the Company consummated a private placement with
respect to equity units consisting of shares of its Series C Preferred Stock and
warrants to purchase shares of common stock for aggregate proceeds of $990,000.
The Company sold 9,900 shares of Series C Preferred Stock with warrants to
purchase 148,500 shares of common stock attached. The preferred stock is not
convertible, but may be redeemed at the option of the Company at a redemption
price of $100 per share plus accrued and unpaid dividends, at any time. The
holders of the preferred stock are entitled to a cumulative dividend of 10
percent per annum, payable semi annually, if and when the Board declares a
dividend. On September 28, 1998, the Company sold 4,000 shares of Series D
preferred stock and Common Stock Purchase Warrants with gross proceeds of an
aggregate amount of $400,000. The preferred stock is convertible into 400,000
shares of common stock. The holders of the preferred stock are entitled to a
cumulative dividend of 15 percent per annum, payable semi annually, if and when
the Board declares a dividend.
To date, the Company has not paid any dividends on its Common Stock or Preferred
Stock. The payment of dividends, if any, in the future is within the discretion
of the Board of Directors and will depend upon the Company's earnings, its
capital requirements and financial condition, and other relevant factors. The
Company does not intend to declare any dividends in the foreseeable future, but
instead intends to retain all earnings, if any, for use in the Company's
business operations. No dividends may be distributed with respect to the Common
Stock so long as there are accrued and unpaid dividends on the Series A and
Series C Preferred Stock. The amount of accumulated and unpaid dividends on the
Series A Preferred Stock, Series C Preferred stock and Series D Preferred Stock
was approximately $212,970 as of June 30, 1999.
15
<PAGE>
Item 6. 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.
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 Company implemented a restructuring strategy in January 1999 which
focused on improving cash flow and profitability by franchising or selling
certain company owned restaurants, franchise sales, cobranding and introducing a
retail product line for major supermarkets chains. As a result of the
restructuring, "Earnings before Interest, Depreciation and Amortization" for
Arthur Treacher's Inc., the restaurant division increased $2,433,000 or 100.1%
to $3,000 for Fiscal Year Ended June 30, 2000 as compared to ($2,430,000) for
Fiscal Year Ended 1999.
The implementation of the strategy has improved the operating cash flow and
profitability of the Company as illustrated in the financial summary below.
16
<PAGE>
-----------------------------------------------------------------------
Arthur Treacher's Inc.
(Restaurant Division)
Statement of Operations
For Fiscal Years Ended
June 30, 2000 June 30, 1999
(in thousands)
Total Revenue $ 13,547 $ 21,532
*Net Loss (1,132) (5,846)
Adjustments
-----------
Add: Depreciation & Amortization 691 1,204
Impairment of Assets 215 2,037
Interest 229 176
-------- --------
EBITDA $ 3 $ (2,430)
EBITDA - Earnings before Interest, Taxes, Depreciation and
Amortization
* Excluding stock option compensation for DCDC (Delaware) key
employees
-----------------------------------------------------------------------
The following discussion includes the following periods: (i) the fiscal
year ended June 30, 2000 ("Fiscal 2000") and (ii) the fiscal year ended June 30,
1999 ("Fiscal 1999") and (iii) the fiscal year ended June 30, 1998 ("Fiscal
1998"). The financial results of the Company have been audited as of the full
fiscal years ended June 30, 2000, June 30, 1999 and June 30, 1998.
Fiscal 2000 and Fiscal 1999
The Company's reported total revenues of $13,547,419 for Fiscal 2000, reflecting
a decrease of 37.1% or $7,984,410, compared to $21,531,829 for Fiscal 1999. The
decrease is primarily attributed to the franchising of 27 Company owned
restaurants and the lease termination of two restaurants in Fiscal 2000 compared
to the same period in the previous fiscal year.
The Company recognized a decrease in net restaurant sales (defined as gross
restaurant sales less coupons, promotion cost and discounts) of 41.1% or
$8,042,217, to $11,534,144 for the fiscal year ended June 30, 2000, compared to
$19,576,361 for the fiscal year ended June 30, 1999. The decrease is primarily
attributed to the franchising of 27 Company owned restaurants and the lease
termination of two restaurants in Fiscal 2000 compared to the same period in the
previous fiscal year. While total net sales decreased 41.1%, same store net
sales comparisons for stores operated for the full twelve months, decreased by
2.0% or $217,878 to $10,900,615 for the Fiscal 2000, compared to $11,118,493 for
the Fiscal 1999.
17
<PAGE>
Franchise and other income increased 48.3% or $466,270 to $1,447,733 for Fiscal
2000, compared to $964,468 for Fiscal 1999. The increase was partially due to
the timeliness of the receipt of marketing allowances from the Company's
suppliers, and the amortization of the excess conversion funds from the change
in the Company's major supplier. Other income form this conversion fund
increased $242,253 to $323,004 for the Fiscal 2000 compared to $80,751 for the
Fiscal 1999.
Also the Company's franchise fees and royalty fees increased $110,914 or 31.2%
to $466,690 for Fiscal 2000, compared to $355,776 for Fiscal 1999. The increase
was primarily due to the increase in the opening of Co-branded restaurants
throughout the year. Also the Company earned $44,629 from interest associated
its subsidiary, DCDC (Delaware) for Fiscal 2000, compared to zero for the Fiscal
1999.
Cost of sales from restaurant operations for Fiscal 2000 increased by .4% to
35.2% on net restaurant sales compared to 34.8% for Fiscal 1999. The increase in
cost of sales percentage is primarily a result of low sales volumes in many of
the restaurants subsequently sold during the restructuring. The Company's total
costs and expenses decreased 37.5% or $9,960,799 to $16,610,349 for Fiscal 2000
compared to $26,571,148 for Fiscal 1999. The decrease is primarily attributed to
the franchising of 27 Company owned restaurants and the lease termination of two
restaurants in Fiscal 2000 compared to the same period in the previous fiscal
year. Included in the Company's total costs was a decrease attributed to the
recognition of an asset impairment charge as required by SFAS No. 121"
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, in Fiscal 2000 SFAS NO 121 decreased by 89.4% or $1,821,451 to
$215,504 compared to $2,036,995 in Fiscal 1999.
General and administrative expense decreased $441,432 or 23.2% to $1,464,007
Fiscal 2000, compared to $1,905,439 Fiscal 1999. The decrease is primarily
attributed to the franchising of 27 Company owned restaurants and the lease
termination of two restaurants in Fiscal 2000 compared to the same period in the
previous fiscal year. General and administrative expenses would have been lower
if not for the expenses incurred by DCDC (Delaware) in the amount of $263,385
for the fiscal year ended June 30, 2000, compared to zero for the fiscal year
ended June 30, 1999. Without these charges from Digital Creative Development
Corporation, general and administrative expenses would have decreased $704,817
or 37.0% to $1,200,622 for Fiscal 2000, compared to $1,905,439 for Fiscal.
Interest expense increased $53,153 or 30.2% to $228,880 for Fiscal 2000,
compared to $175,727 for Fiscal 1999. The increase in interest expense was due
to new debt taken on by the Company.
Depreciation and amortization decreased 42.6% or $513,089 to $691,232 for Fiscal
2000, compared to $1,204,321 for Fiscal 1999. The decrease is primarily
attributed to the franchising of 27 Company owned restaurants and the lease
termination of two restaurants in Fiscal 2000 compared to the same period in the
previous fiscal year.
18
<PAGE>
The undeclared preferred stock dividends increased $56,830 or 55.5% to $159,220
in Fiscal 2000 compared to $102,390 in Fiscal 1999. The increase is primarily
attributable to the Series D Preferred Stock issued in September 1998.
Other expenses increased $36,845 or 5.7% to $675,000 in Fiscal 2000 compared to
$638,515 in Fiscal 1999. Of the increase the Company recognized an unrealized
loss of $450,000 from an investment and bad debt expense of $210,000 by DCDC
(Delaware) for the Fiscal 2000, compared to zero for the Fiscal 1999. If these
expenses were not incurred by DCDC (Delaware), other expenses would have
decreased by $623,515 or 97.7% to $15,000 in Fiscal 2000 compared to $638,515 in
Fiscal 1999.
As a result of the foregoing particularly the franchising of 27 Company owned
restaurants and the lease termination of two restaurants in Fiscal 2000 the
Company's net loss (before preferred dividends) decreased $2,277,373 or 39.0% to
$3,569,346 for Fiscal 2000, as compared to a net loss (before preferred
dividends) of $5,846,719 for the Fiscal 1999. Excluding the net loss (before
preferred dividends) from DCDC (Delaware) of $878,756 and the stock option
compensation expense of $1,931,000 issued by Arthur Treachers, Inc. for DCDC
(Delaware) key employees, the Company's net loss (before preferred dividends)
would have decreased $5,087,129 or 87.0% to $759,590 for Fiscal 2000, as
compared to a net loss (before preferred dividends) of $5,846,719 for the Fiscal
1999.
Fiscal 1999 and Fiscal 1998
The Company's reported total revenues of $21,531,829 for Fiscal 1999, a decrease
of $1,454,933 or 6.3%, compared to Fiscal 1998. The decrease in total revenues
was generally a result of the restructuring activity which reduced the company
owned restaurants from 62 operating restaurants to 42 by June 30, 1999. Also
contributing to the decrease in total revenues was a reduction in couponing and
discounting of $1,133,356 when compared to the same period last year and a same
store sales decline of 6.2% for restaurants operated a minimum of 12 months when
compared to the same period last year.
Net restaurant sales (defined as gross restaurant sales less coupons, promotion
cost and discounts) decreased 3.1% or $626,566 to $19,576,361 compared to the
same period last year of $20,202,927 generally a result of the restructuring
activity. Same store net restaurant sales for stores operated a minimum of 12
months decreased $1,166,425 or 6.2% for Fiscal 1999 compared to Fiscal 1998.
Franchise and royalty income increased $110,914 or 32.0% to $355,776 for Fiscal
1999 primarily due to the co-brand expansion program with Miami Subs. The
co-brand expansion program with Miami Subs produced $ 28,765 in royalty income
and $ 57,500 in initial franchise fees for Fiscal 1999, compared to zero in the
same period last year.
19
<PAGE>
Cost of sales from restaurant operations for Fiscal 1999 increased by .2% to
34.8% on net restaurant sales compared to 34.6% for Fiscal 1998. The increase in
cost of sales percentage is primarily a result of low sales volumes in many of
the restaurants subsequently sold during the restructuring. The Company's total
operating expenses increased $1,473,270 or 5.9% to $26,571,148 for Fiscal 1999,
as compared to $25,097,878 for Fiscal 1998. Of the increase $2,036,955 or 138.3%
of the increase is attributed to the recognition of an asset impairment charge
as required by SFAS No. 121" Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of".
Discontinued operations and other non-recurring cost increased by $576,217 or
117.3% to $1,067,446 of which $878,785 was a result of losses and write-downs
incurred from the new concept development of the seafood grilles and co-branded
restaurants operated by the Company. These stores have been sold or the leases
have been terminated during the restructuring.
Interest expense decreased $16,959 or 8.8% to $175,728 for Fiscal 1999, as
compared to $192,687 for Fiscal 1998. The decrease in interest expense was a
function of paying down debt financing for past acquisitions and the natural
expiration of various debt.
Depreciation and amortization decreased $11,035 or .9% to $1,204,321 for Fiscal
1999, as compared to $1,215,356 for Fiscal 1998. Included in Fiscal 1998
depreciation was an asset impairment write-down of $110,000 in accordance with
FASB 121. With the $110,000 omitted from Fiscal 1998, depreciation and
amortization actually increased $98,965 or 9.0% to $1,204,321 for Fiscal 1999,
as compared to $1,105,356 for Fiscal 1998. The increase was primarily driven by
new store construction.
The undeclared preferred stock dividends increased $42,283 or 70.3% to $102,390
in Fiscal 1999 compared to $60,107 in Fiscal 1998. The increase is primarily
attributable to the Series D Preferred Stock issued in September 1998.
As a result of the "asset impairment write-down", discontinued operations of the
"Seafood Grilles" and co-branded restaurants and other non recurring cost, all
combined for net losses of $3,104,401. The Company's net loss (before preferred
dividends) increased $3,078,024 or 111.2% to $5,846,719 for Fiscal 1999, as
compared to a net loss (before preferred dividends) of $2,768,695 for the Fiscal
1998.
Liquidity and Capital Resources
The Company has financed its restaurant operations principally from revenues
derived from Company owned restaurants, franchise income and private placements
of equity and debt. The Company has raised approximately $12,000,000 in equity
and debt since May 1996, of which approximately $1.9 million of equity and debt
has been raised since September 1998.
Private Placement of Promissory Notes and Warrants September 1998 $ 200,000
Preferred Stock "Series D" September 1998 $ 400,000
Common Stock March 1999 $ 110,000
Promissory Notes and Warrants May 1999-February 2000 $1,137,000
Warrants July 2000 $ 48,250
----------
$1,895,250
20
<PAGE>
The Company's current assets exceeded its current liabilities by $4,238,752 at
June 30, 2000, compared to current liabilities exceeding its current assets by
$3,733,044 at June 30, 1999. The Company had cash and short-term investments of
$8,239,351 at June 30, 2000 compared to $165,459 at June 30, 1999. The primary
reason for this increase in cash is the consolidation of DCDC
(Delaware)financial statement. The capital that has been raised by DCDC
(Delaware) and not the Company, and will be retained by DCDC (Delaware) and used
solely for DCDC (Delaware) operations and the acquisition and investment in
companies and technologies that focus on the creation and delivery of
entertainment content. The Company had also incurred indebtedness in connection
with (i) the conversion of past due amounts under certain leases to indebtedness
and (ii) the repurchase of certain franchises, but several of such restaurants
were unable to generate sufficient revenues to repay the indebtedness. During
the Fiscal 2000, the Company experienced negative cash flow which has adversely
affected its liquidity. The lack of liquidity in the Company has adversely
affected the Company's restaurant operations.
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 engages in contract negotiations with certain
suppliers to reduce the Company's cost of goods sold and improve the Company's
liquidity.
On September 30, 1999, the Company executed promissory notes for an aggregate
principal amount of $289,000 from certain shareholders and board members.
Interest accrues at a rate of 12% per annum. In addition, the debt and interest
is convertible into 1,541,333 shares of common stock at $.21 per share on
September 30, 2000. Also 481,667 warrants are attached to this debt at an
exercise price of $.30 per share, which warrants are exercisable through
September 30, 2004.
On October 21, 1999, the Company executed promissory notes for an aggregate
principal amount of $221,000 from certain shareholders and board members.
Interest accrues at a rate of 12% per annum. In addition, the debt and interest
is convertible into 1,178,667 shares of common stock at $.21 per share on
October 21, 2000. Also 368,333 warrants are attached to this debt at an exercise
price of $.30 per share, which warrants are exercisable through October 21,
2004.
On December 1, 1999, the Company executed promissory notes for an aggregate
principal amount of $50,000 from Bruce Galloway the Company's CEO and Chairman
of the Board. Interest accrues at a rate of 12% per annum. In addition, the debt
and interest is convertible into 200,000 shares of common stock at $.28 per
share on December 1, 2000. Also 65,789 warrants are attached to this debt at an
exercise price of $.38 per share, which warrants are exercisable through
December 1, 2004.
21
<PAGE>
On January 5, 2000, the Company executed promissory notes for an aggregate
principal amount of $50,000 from Skuli Thorvaldsson, a Director of the Company.
Interest accrues at a rate of 12% per annum. In addition, the debt and interest
is convertible into 200,000 shares of common stock at $.28 per share on January
5, 2001. In conjunction with the notes, the Company issued 65,789 warrants are
attached to this debt at an exercise price of $.38 per share, which warrants are
exercisable through January 5, 2005.
On February 5, 2000, the Company secured 12% promissory notes which generated
$345,000 from certain shareholders and board members. Interest accrues at a rate
of 12% per annum. In addition, the debt and interest is convertible into
1,610,000 shares of common stock at $.24 per share on February 5, 2001. In
conjunction with the notes, 575,000 warrants are attached to this debt at an
exercise price of $.30 per share, which warrants are exercisable through
February 5, 2005.
The Company believes that it will need additional financing and working capital
to finance its restaurant operations. The Company has obtained additional
financing in the past and believes it could meet its needs through either
additional borrowings or the sale of additional equity, franchising of
company-owned restaurants and the re-negotiation of the Company's accounts
payable. However,can be no assurance that the Company would be succeed in
obtaining any such financing, or the terms such transactions could be effected,
and that such strategy will be successful. If the Company's strategy is
unsuccessful there is substantial doubt about the restaurant operations
continuing as a going concern.
In the event that the Company's intended transfer of its assets and liabilities
related to its restaurant operations to ATI Delaware and distributes all of its
shares of ATI Delaware to its shareholders, the Company may still remain liable
for some of such liabilities.
Digital Creative Development Corporation (Delaware)
In Fiscal 2000, DCDC (Delaware) completed a private placement of approximately
$11,900,000 shares of common stock for aggregate gross proceeds of $11,900,000.
Each share is convertible into one share of Common Stock of the Company. The
funds were raised solely for the pupose of investing in and acquiring companies
that create and deliver entertainment content. As of June 30, 2000 DCDC
(Delaware) had cash on hand of $8,263,210. DCDC (Delaware) believes that the
proceeds of the offering will be sufficient to finance its operations through
Fiscal 2000.
Item 7. Financial Statements.
The financial statements are filed as part of this Annual Report on
Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants.
On February 20, 2000, Lytkowski & Company LLP (the "Former Accountant")
was notified by Arthur Treacher's Inc. (the Company") that the client-auditor
relationship had ceased. The Former Accountant had served as the Company's
independent public accountant prior to its resignation. The Former Accountant's
report on the financial statements for the past ten months did not contain an
adverse opinion or a disclaimer of opinion. There were no disagreements with the
Former Accountant on any matter of accounting principles or practices, financial
statement disclosures or auditing scope or procedure.
22
<PAGE>
The Company engaged Davis Monk & Company to replace the Former
Accountant as the Company's independent certifying public accountant.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons.
Name Age Position
---- --- --------
Bruce R. Galloway 43 Chairman of the Board and
Chief Executive Officer
Skuli Thorvaldsson 59 Vice Chairman of the Board
William F. Saculla 49 President, Chief Financial Officer,
Secretary, Director
Donald Perlyn 57 Director
Maurice Sonnenburg 64 Director
Evan Binn 61 Director
Ralph Sorrentino 48 Director
Sigurour Jon Bjornsson 34 Director
Directors
Bruce R. Galloway. Mr. Galloway has been Chief Executive Officer since May 1998
and Chairman of the Board of Directors since May 1996. Mr. Galloway is currently
a managing director of Burnham Securities Inc., an NASD Broker/Dealer and
investment bank based in New York. Prior to joining Burnham in 1993, Mr.
Galloway was a senior vice president at Oppenheimer & Company, an investment
bank and NASD Broker/Dealer based in New York, from 1991 through 1993. Mr.
Galloway holds a B.A. degree in Economics from Hobart College and an M.B.A. in
Finance from New York University's Stern Graduate School of Business.
Skuli Thorvaldsson. Mr. Thorvaldsson has been Vice Chairman of the Board of
Directors since May 1996. Mr. Thorvaldsson has been the Chief Executive Officer
of the Hotel Holt in Iceland since 1980. Mr. Thorvaldsson has various
diversified interests in food court services, travel agency and pork processing.
He is also a master franchisee of Domino's Pizza in Scandinavia. Mr.
Thorvaldsson is a director of Allied Resources Corp. Mr. Thorvaldsson graduated
from the Commercial College of Iceland and the University of Barcelona. Mr.
Thorvaldsson received his Degree in Law from the University of Iceland.
23
<PAGE>
William F. Saculla. Mr. Saculla has served as Secretary of the Company and Chief
Financial Officer since 1984. In May 1998, Mr. Saculla was named President and
was also nominated to the Board of Directors. Mr. Saculla earned a B.S. degree
in Accounting from Youngstown State University in 1978.
Donald Perlyn. Mr. Perlyn was elected to the Board of Directors in November
1998. Mr. Perlyn Joined Miami Subs Corporation in May of 1989. In addition to
being an attorney, he is a 32 year veteran of the of the restaurant industry
with extensive experience in restaurant development, operations and franchising.
Since 1989, Mr. Perlyn has been responsible for the development and growth of
the Miami Subs Grill concept. Mr. Perlyn was promoted to the position of
President of Miami Subs Corporation in July of 1998. In October of 1999, Miami
Subs Corp. was acquired by Nathan's Famous Inc. As a result of this acquisition,
Mr. Perlyn, in addition to his responsibilities at Miami Subs, assumed the
position of Executive Vice President of Nathan's Famous, Inc. He is also a
member of the Board of Directors of Nathan's Famous, Inc.
Maurice Sonnenberg. Mr. Sonnenberg was elected to the Board of Directors in
November 1998. Mr. Sonnenberg has served as an advisor to five United States
Presidential Administrations on matters of finance, international trade, foreign
policy and intelligence matters. Among his vocational activities he presently
serves as the Senior International Advisor to the investment banking firm of
Bear Stearns & Co. Inc. and as the Senior International Advisor to the law firm
of Manatt, Phelps and Philips, LLP (with offices in Washington DC and Los
Angeles).
Evan Binn. Mr. Binn was elected to the Board of Directors in November 1998. Mr.
Binn received his bachelors degree from University of California at Los Angeles
and is A Certified Public Accountant in California. He is a member of the
California Society of Certified Public Accountants and has maintained a practice
in Los Angeles, CA for thirty seven years.
Sigurour Jon Bjornsson. In March 2000, Mr. Bjornsson was elected to the Board of
Directors. Mr. Bjornsson currently serves as Vice President and Financial
director of EFA Venture Inc. a venture capital firm. Mr. Bjornsson also serves
on a number of corporate boards in Iceland, including: Icebird Airline;
Scandinavian Pizza Company; New Industries; and Betware.com Ltd Mr. Bjornsson
graduated from the University of Iceland with a BS major in Business Finance in
1993.
Ralph Sorrentino Mr. Sorrentino serves as President and Chief Executive Officer
of Digital Creative Development Corporation (Delaware). Mr. Sorrentino oversees
the implementation of the Company's business strategies. Prior to joining DCDC
(Delaware), Mr. Sorrentino served as Chief Financial Officer of Liberty Digital,
Inc. and its predecessor, TCI Music, where he oversaw corporate transactions and
managed operations and senior staff. His media career began in 1992 with Bohbot
Entertainment and Media, where he served as President and Chief Operating
Officer and supervised the company's television property development, strategic
planning and acquisition/investment activities.
24
<PAGE>
Each Director is elected to serve until the Company's next annual meeting of
Shareholders and until his successor is duly elected and qualified. There are no
agreements with respect to the election of directors. Executive officers are
appointed annually by the Board of Directors and each executive officer serves
at the discretion of the Board of Directors.
Other Key Employees
Thomas K. Hoffman, Executive Vice President, Corporate Development. Mr. Hoffman
joined the Company when MIE was purchased in November of 1996. In his current
capacity he is responsible for purchasing, new product development, store
development and franchise relations. Prior to this he served as Vice President
of Operations for MIE from 1986 until 1996. He continued supervising the MIE
stores after the Company purchased the franchise until May 1998 when he was
promoted to his current position. He received a BA degree in Business Management
from Bloomsburg University in 1975.
Robert J. Zelinski, Controller, Assistant Secretary. Mr. Zelinski has served as
Controller of the Company since 1987. Mr. Zelinski is responsible for the
Company's financial reporting activities and internal controls . Mr. Zelinski
earned a B.S. degree in Accounting from Youngstown State University's Williamson
School of Business in 1987 and was also a franchisee of the Company from 1990
through 1993.
Committees
The Company has the following committees: Executive, Compensation and Audit. The
Board of Directors elected William F. Saculla, Bruce Galloway and Skuli
Thorvaldsson to the Executive Committee. The Compensation Committee of the Board
of Directors was formed to review the Company's executive compensation
proposals, subject to the approval of the Board of Directors. The Compensation
Committee is composed of Skuli Thorvaldsson and Bruce Galloway. The Audit
Committee was formed to advise the Board in matters relating to the audit of the
Company's financial statements and the Company's financial reporting systems.
Messrs. Bruce Galloway, R. Skuli Thorvaldsson, William Saculla, and George Koo,
an independent advisor to the Company, serve as members of the Audit Committee.
25
<PAGE>
Item 10. Executive Compensation.
The following table provides certain summary information concerning the
compensation paid or accrued by the Company to or on behalf of its Chief
Executive Officer and the other named executive officers of the Company for
services rendered in all capacities to the Company and its subsidiaries for the
fiscal years ended June 30, 1999, 1998 and 1997.
(a) Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Awards Payouts Payouts Long-Term Compensation
------------------- -------------- ------- ----------------------
Name and Principal Other Annual Restricted Securities LTIP All Other
Position Year Salary Bonus Compensation Stock Award(s) Underlying Payouts Compensation
Options/SARs
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bruce Galloway 2000 $-0- 0.00 $0.00 0.00 311,329. $0.00 0
Chairman, CEO
1999 $110,000.00 0.00 $0.00 0.00 10,000. $0.00 0
1998 $ 20,000.00 0.00 $0.00 0.00 255,000. $0.00 0
Shares of Common
Stock
William F. Saculla 2000 $ 95,000.00 0.00 $0.00 0.00 10,000.00 $0.00 0
President,
Treasurer
1999 $ 95,000.00 0.00 $0.00 0.00 10,000.00 $0.00 0
1998 $ 78,000.00 0.00 $0.00 0.00 0.00 $0.00 0
shares of Common
Stock
</TABLE>
(b) Option/SAR Grants in Last Fiscal Year -
<TABLE>
<CAPTION>
Number of Securities Percent of total
Underlying Options/SARs options/SARs granted to Exercise or base price Expiration Date
Name granted employees in fiscal year
<S> <C> <C> <C> <C>
Bruce Galloway 10,000 3.1% $0.39 3/16/05
Bruce Galloway 36,928 11.5% $0.41 7/20/04
Bruce Galloway 39,862 12.4% $0.38 8/20/04
Bruce Galloway 44,040 13.7% $0.34 9/20/04
Bruce Galloway 47,604 14.8% $0.32 10/20/04
Bruce Galloway 37,212 11.6% $0.40 11/20/04
Bruce Galloway 40,850 12.7% $0.37 12/20/04
Bruce Galloway 42,265 13.2% $0.35 01/20/05
Bruce Galloway 8,621 2.7% $1.74 02/20/05
Bruce Galloway 3,947 1.2% $3.80 03/20/05
Bill Saculla 10,000 3.1% $0.39 3/16/05
</TABLE>
26
<PAGE>
(c) Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
<TABLE>
<CAPTION>
Shares acquired Value Realize Number of Unexercised Value of unexercised in-
Name on exercise Value Realize options/SARs the-money options/SARs
at June 30, 2000 at June 30, 2000
<S> <C> <C> <C> <C>
Bruce Galloway 0 0 1,310,784 options $1,704,787 Exercisable
1,310,784 Exercisable
</TABLE>
Consulting Agreement
The Company, DCDC (Delaware), Mr. Sorrentino, Digital and RJS Consulting Corp.,
an affiliate of Mr. Sorrentino, executed a consulting agreement dated as of May
1, 2000. The Consulting Agreement provides, in part, for Mr. Sorrentino, acting
through RJS Consulting Corp., to serve as Chief Executive Officer and President
of DCDC (Delaware) Mr. Sorrentino became Chief Executive Officer and President
of DCDC (Delaware) effective July 1, 2000. Mr. Sorrentino receives a base annual
fee of $250,000 for an initial term of 30 months. The term is renewable for
additional one year periods unless either party determines to terminate the
agreement on not less than 180 days notice prior to the end of the then current
term. The fee for any extended term shall not be less than 120% of the fee for
the 12 month period preceding the extension. Mr. Sorrentino will become Chief
Executive Officer and President of the Company .
Contemporaneously with execution of the Consulting Agreement, the Company
granted Mr. Sorrentino options (the "Options") to purchase 5,000,000 shares of
Common Stock pursuant to a Stock Option Agreement between the Company and
Sorrentino. Mr. Sorrentino received Options to purchase 5,000,000 shares of
Common Stock at an exercise price of $.37 per share pursuant to the Stock Option
Agreement between the Company and Sorrentino. The Options are exercisable
through September 30, 2007.
The amount of shares issuable upon exercise of the Options and the exercise
price are subject to adjustment under certain circumstances. In the event that
Mr. Sorrentino's retention under the Consulting Agreement is terminated by Mr.
Sorrentino other than for "Good Reason" (as defined in the Consulting Agreement)
or is terminated by Digital with "Cause" (as defined in the Consulting
Agreement) at any time prior to October 1, 2002, then Mr. Sorrentino shall
forfeit that number of Options (to the extent not previously exercised) equal to
the product of 100,000 times the number of months between the date of
termination and October 1, 2002. Grounds for termination for "Cause" by DCDC
(Delaware) and "Good Reason" by Mr. Sorrentino, include, but are not limited to,
a breach by the defaulting party of the material terms of the Consulting
Agreement which is not cured within 30 days notice by the non-defaulting party.
27
<PAGE>
In the event that Mr. Sorrentino's retention under the Consulting Agreement is
terminated by Mr. Sorrentino for Good reason or is terminated by DCDC (Delaware)
without "Cause" then Mr. Sorrentino may exercise all outstanding Options at an
exercise price of $.01 per share. At any time after DCDC (Delaware) terminates
Mr. Sorrentino's employment other than for Cause and at any time after Mr.
Sorrentino terminates his employment for Good Reason, Mr. Sorrentino may require
DCDC (Delaware) to repurchase any Options held by Mr. Sorrentino which are not
subject to forfeiture and any Shares previously issued to Mr. Sorrentino upon
exercise of any Options, upon written notice (the "Put Notice") to DCDC
(Delaware) of Mr. Sorrentino's election to require the Company to effect such
repurchase. The purchase price (the "Purchase Price") for each such Option and
each such share of Common Stock (a "Share") shall be the greater of (x) the
average of the closing prices of a board lot of Shares traded on the Company's
principal listed exchange for the thirty (30) trading days immediately preceding
the purchase date or (y) the closing price of Shares on such exchange on the
date of the Put Notice. The payment of the Purchase Price shall be effected as
follows:
(i) If 25% of the average cash balances held by DCDC (Delaware) over 90
days.
("Available Cash") is in excess of the amount of the Purchase Price,
the Company shall pay the entire Purchase Price in cash;
(ii) If DCDC (Delaware) has less Available Cash than the Purchase
Price, then, if Mr. Sorrentino is legally able to publicly to sell such Options
or Shares, DCDC (Delaware) shall cooperate with Mr. Sorrentino in effecting such
sale and pay to Mr. Sorrentino the difference between (a) the average of the
closing prices of a board lot of Shares traded on the Company's principal listed
exchange for the thirty (30) trading days immediately preceding the date of sale
and (b) the price at which Mr. Sorrentino was able to effect such sale. The
payment by DCDC (Delaware) of such difference shall be made in cash, to the
extent of Available Cash, plus the balance in the form of either, at Mr.
Sorrentino's election, (x) a promissory note with a term of 30 months bearing
interest at the prime rate plus 300 basis points and otherwise in form and
substance satisfactory to Mr. Sorrentino or (y) additional Shares or (c) any
combination of such a Promissory Note and additional Shares.
Under the terms of the Consulting Agreement, the Company agreed to assume and be
primarily liable for and shall indemnify Mr. Sorrentino against up to $2,500,000
of indebtedness incurred by Mr. Sorrentino for any legal purpose. Upon
consummation of an offering by the Company of a financing of debt and\or equity
of a minimum of $20,000,000, The Company agreed to loan to Mr. Sorrentino the
difference between $2,500,000 and the aggregate amount of the Assumed Debt (the
"Loan"). The Loan shall be evidenced by a promissory note bearing interest at 6%
per annum in form satisfactory to DCDC (Delaware) and Mr. Sorrentino with a
maturity date of October 1, 2002(the "Maturity Date"). The Loan shall be secured
by a first priority security interest in the Options and any Shares issued upon
exercise of the Options which, at a valuation of $.50 per share, secures
performance by Mr. Sorrentino of his obligations under the Consulting Agreement
through the Maturity Date. Upon the issuance of any shares of Common Stock upon
exercise of any Options, Mr. Sorrentino shall deliver the stock certificates
representing such shares to DCDC (Delaware) to be held as security. Upon the
issuance of any shares of Common Stock upon exercise of the Options, the shares
will be deposited as pledged securities in favor of DCDC (Delaware) in a
brokerage account subject to a customary account control agreement. Under
certain circumstances, the Loan and the Assumed Debt shall be forgiven by The
Company.
28
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of October 2, 2000, with respect
to officers, directors and persons who are known by the Company to be beneficial
owners of more than 5% of the Company's Common Stock. Except as otherwise
indicated, the Company believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
Shareholder Shares Percentage
-------------------------------------------------------------------------------
Ralph Sorrentino (1) 5,743,332 25.7
Bruce R. Galloway (2) 3,830,162 19.9
NTS Financial Services Ltd. (3) 2,722,873 14.6
Burnham Internationl Inc. (4) 2,500,000 13.1
Fred Knoll (5) 2,438,818 13.5
Evan Binn and Ronna Binn (6) 1,908,624 10.7
Magee Industrial
Enterprises, Inc. (7) 1,245,887 7.2
EFA Ventures, Inc. (8) 1,199,980 6.7
Martin Wade (9) 1,000,000 5.7
Skuli Thorvaldsson (10) 760,000 4.4
William Saculla (11) 84,242 .5
Donald Perlyn (12) 81,667 .5
Maurice Sonnenberg (13) 50,000 .3
Sigurdur Jon Bjornsson (14) 10,000 .1
Officers and Directors as a Group (15) 12,998,221 47.5
Total Outstanding Shares 16,600,484
29
<PAGE>
Notes
1. Mr. Ralph Sorrentino is the President and Chief Executive
Officer of DCDC (Delaware). Includes warrants to purchase 83,333
shares of Common Stock which are exercisable at an exercise price
of $.30 per share through October 21, 2004; (ii) warrants to
purchase 83,333 shares of Common Stock which are exercisable at an
exercise price of $.60 per share through February 5, 2005; (iii)
warrants to purchase 10,000 shares of Common Stock which are
exercisable at an exercise price of $.39 per share through March
16, 2005; (iv) warrants to purchase 5,000,000 shares of Common
Stock which are exercisable at an exercise price of $.37 per share
through May 1, 2005; (v) promissory note convertible into 266,666
shares of Common Stock at a conversion price of $.21 per share on
October 21, 2000. Excludes a promissory note convertible to
233,333 shares of Common Stock at a conversion price of $.24 per
share on February 5, 2001. Includes 300,000 shares of common stock
held in DCDC (Delaware) that is convertible into 300,000 shares at
Common Stock of the Company at the option of the holder thereof or
the Company.
(2) Mr. Bruce R. Galloway is the Chairman of the Board of the Company.
Includes warrants to purchase 380,000 shares of Common Stock at an
exercise price of $1.00, Per share which warrants are exercisable
through May 31, 2001; (ii) warrants to purchase 250,000 shares of
Common Stock which are exercisable at an exercise price of $1.00
per share through December 31, 2001; (iii) warrants to purchase
20,000 shares of Common Stock which are exercisable at an exercise
price of $1.00 per share through March 27, 2002; (iv) warrants to
purchase 10,000 shares of Common Stock which are exercisable at an
exercise price of $1.00 per share through November 24, 2003; (v)
warrants to purchase 20,000 shares of Common Stock which are
exercisable at an exercise price of $.68 per share through March
15, 2004; (vi) warrants to purchase72,000 shares of Common Stock
which are exercisable at an exercise price of $.44 per share
through May 10, 2004; (vii) warrants to purchase 175,000 shares of
Common Stock which are exercisable at an exercise price of $.30
per share through September 30, 2004; (viii) warrants to purchase
3,333 shares of Common Stock which are exercisable at an exercise
price of $.30 per share through October 21, 2004; (ix) warrants to
purchase 65,789 shares of Common Stock which are exercisable at an
exercise price of $.38 per share through December 1, 2004; (x)
warrants to purchase 3,333 shares of Common Stock which are
exercisable at an exercise price of $.30 per share through
February 5, 2005; (xi) warrants to purchase 10,000 shares of
Common Stock which are exercisable at an exercise price of $.39
per share through March 19, 2005; (xii) warrants to purchase
22,166 shares of Common Stock which are exercisable at an exercise
price of $.68 per share through April 10, 2004; (xiii) warrants to
purchase 30,769 shares of Common Stock which are exercisable at an
exercise price of $.49 per share through May 10, 2004; (xiv)
warrants to purchase 39,630 shares of Common Stock which are
exercisable at an exercise price of $.38 per share through June
10, 2004. (xv) warrants to purchase 36,928 shares of Common Stock
which are exercisable at an exercise price of $.41 per share
through July 10, 2004; (xvi) warrants to purchase 39,862 shares of
Common Stock which are exercisable at an exercise price of $.375
per share August 10, 2004 warrants to purchase 44,040 shares of
Common Stock which are exercisable at an exercise price of $.34
per share through September 10, 2004; (xviii) warrants to purchase
47,604 shares of Common Stock which are exercisable at an exercise
price of $.32 per share through October 10, 2004; (xix) warrants
to purchase 37,212 shares of Common Stock which are exercisable at
an exercise price of $.40 per share through November 10, 2004;
(xx) warrants to purchase 40,850 shares of Common Stock which are
exercisable at an exercise price of $.37 per share through
December 10, 2004; (xxi) warrants to purchase 42,265 shares of
Common Stock which are exercisable at an exercise price of $.37
per share through January 10, 2005; (xxii) warrants to purchase
8,621 shares of Common Stock which are exercisable at an exercise
price of $1.74 per share through February 10, 2005; (xxiii) a
promissory note convertible to 560,000 shares of Common Stock at a
conversion price of $.21 per share on September 30, 2000; (xxiv) a
promissory note convertible into 266,666 shares of Common Stock at
a conversion price of $.21 per share on October 21, 2000. Excludes
(i) a promissory note convertible to 200,000 shares of Common
Stock at a conversion price of $.28 per share on December 1, 2000;
(ii) a promissory note convertible to 233,333 shares of Common
Stock at a conversion price of $.24 per share on February 5, 2001;
(iii) warrants to purchase 3,947 shares of Common Stock which are
exercisable at an exercise price of $3.80 per share through March
10, 2005. Includes 300,000 shares of common stock held by Mr.
Galloway and 100,000 shares of common stock held by Jacombs
Trading (an entity controlled by Mr. Galloway) DCDC (Delaware)
that is convertible into an equal amount of the Common Stock of
the Company at the option of the holder thereof or the Company.
30
<PAGE>
(3) Includes warrants to purchase 140,000, shares of Common Stock at
an exercise price of $.30 per share through September 30, 2004;
(ii) warrants to purchase 83,333 shares of Common Stock at an
exercise price of $.30 per share through October 21, 2004; (iii)
warrants to purchase 65,789 shares of Common Stock at an exercise
price of $.38 per share through January 10, 2005; (iv) warrants to
purchase 83,333 shares of Common Stock at an exercise price of
$.30 per share through February 5, 2005; (v) a promissory note
convertible to 448,000 shares of Common Stock at a conversion
price of $.21 per share on September 30, 2000; (vi) a promissory
note convertible to 266,666 shares of Common Stock at a conversion
price of $.21 per share on October 21, 2000. Excludes a promissory
note convertible to 200,000 shares of Common Stock at a conversion
price of $.28 per share on January 5, 2001; (ii) a promissory note
convertible to 233,333 shares of Common Stock at a conversion
price of $.24 per share on February 5, 2001. Includes 1,000,000
shares of common stock held in DCDC (Delaware) that is convertible
into 1,000,000 shares of Common Stock of the Company at the option
of the holder thereof or the Company.
(4) Burnham International Inc. holds 2,500,000 shares of common
stock in DCDC (Delaware) that is convertible into 2,500,000 shares
of Common Stock of the Company at the option of the holder thereof
or the Company. Bruce Galloway is managing director of Burnham
International Inc. which owns 49% of Burnham International Inc.
(5) Includes warrants to purchase 10,000 shares of Common Stock at an
exercise price of $1.00, which warrants are exercisable through
March 27, 2002; (ii) warrants to purchase 10,000 shares of Common
Stock which are exercisable at an exercise price of $1.00 through
April 30, 2003; warrants to purchase 10,000 shares of Common Stock
which are exercisable at an exercise price of $1.00 through
November 24, 2003; (iv) warrants to purchase 20,000 shares of
Common Stock which are exercisable at an exercise price of $.68
per share through March 15, 2004; The following notes and warrants
are owned by Europa International Inc. Knoll Capital Management,
Inc., is the investment manager for Europa. Mr. Knoll is the sole
shareholder of Knoll Capital Management Inc.(i) warrants to
purchase 83,333, shares of Common Stock at an exercise price of
$.30 per share through September 30, 2004; (iv) warrants to
purchase 83,333 shares of Common Stock at an exercise price of
$.30 per share through October 21, 2004; (v) warrants to purchase
83,333 shares of Common Stock at an exercise price of $.30 per
share through February 5, 2005; (vi) a promissory note convertible
to 266,666 shares of Common Stock at a conversion price of $.21
per share on September 30, 2000; a promissory note convertible to
266,666 shares of Common Stock at a conversion price of $.21 per
share on October 21, 2000. Excludes a promissory note convertible
to 233,333 shares of Common Stock at a conversion price of $.24
per share on February 5, 2001. Includes 600,000 shares of common
stock held by Europa International, Inc. held in DCDC (Delaware)
that is convertible into 600,000 shares of Common Stock of the
Company at the option of the holder thereof or the Company.
(6) Includes warrants to purchase 50,000 shares of Common Stock owned
by Mr. And Mrs. Binn and are exercisable at a price of $1.00 per
share through May 31, 2001, (ii)warrants to purchase 2,000 shares
of Common Stock which are exercisable at an exercise price of
$1.00 through March 27, 2002; (iii) warrants to purchase 10,000
shares of Common Stock which are exercisable at an exercise price
of $1.00 through November 24, 2003; (iv) warrants to purchase
20,000 shares of Common Stock which are exercisable at an exercise
price of $.68 per share through March 15, 2004; (v) warrants to
purchase 83,333 shares of Common Stock which are exercisable at an
exercise price of $.30 per share through September 30, 2004; (vi)
warrants to purchase 83,333 shares of Common Stock which are
exercisable at an exercise price of $.30 per share through
February 5, 2005; (vii) a promissory note convertible to 266,666
shares of Common Stock at a conversion price of $.21 per share on
September 30, 2000; (viii) warrants to purchase 10,000 shares of
Common Stock which are exercisable at an exercise price of $.39
per share through March 16, 2005. Excludes a promissory note
convertible to 233,333 shares of Common Stock at a conversion
price of $.24 per share on February 5, 2001. Includes 750,000
shares of common stock held by Evan Binn in DCDC (Delaware) that
is convertible into 750,000 shares of Common Stock of the Company
at the option of the holder thereof or the Company.
31
<PAGE>
(7) Gives effect to the conversion of 490,000 shares of Series B
Preferred Stock into 765,625 shares of Common Stock for no
additional consideration.
(8) EFA Ventures, Inc. owns 199,997 shares of common stock in DCDC
(Delaware) and EFA International Fund LP owns 999,983 shares of
common stock in DCDC (Delaware). The stock of DCDC (Delaware) is
convertible into 1,199,980 shares of Common Stock of the Company
at the option of the holder or the Company. EFA Ventures Inc. is
general partner in the EFA International Fund. Sigurdur Jon
Bjornsson is the Vice President and Financial Director for EFA
Ventures Inc.
(9) Includes warrants to purchase 1,000,000 shares of Common Stock
owned by Mr. Martin Wade and are exercisable at a price of $1.00
per share through May 1, 2005.
(10) Gives effect to the conversion of 400,000 shares of Series D
Preferred Stock into 400,000 shares of Common Stock for no
additional consideration. Includes warrants to purchase 250,000
shares of Common Stock at a purchase price of $1.00, which
warrants are exercisable through May 31, 2001; (ii) warrants to
purchase 50,000 shares of Common Stock which are exercisable
through January 9, 2002 at an exercise price of $1.00 per share
(iii) warrants to purchase 20,000 shares of Common Stock which are
exercisable at an exercise price of $1.00 per share through March
27, 2002, (iv) warrants to purchase 10,000 shares of Common Stock
at an exercise price of $1.00 through November 24, 2003; (v)
warrants to purchase 20,000 shares of Common Stock at an exercise
price of $.68 per share through March 15, 2004; (vi) warrants to
purchase 10,000 shares of Common Stock at an exercise price of
$.39 per share through March 16, 2005.
(11) Mr. William Saculla is the President, Treasurer, and
Secretary of Arthur Treacher's Inc. Includes options to purchase
12,000 shares of Common Stock at a price of $1.00 per share
through August 31, 2002. Does not include options which have been
granted but have not vested to purchase 3,000 shares of Common
Stock at a price of $1.00 per share. 20% of such options vest for
a period of five years commencing September 1, 1999. Includes
warrants to purchase 10,000 shares of Common Stock at an exercise
price of $1.00 through November 24, 2003; (ii) warrants to
purchase 16,667 shares of Common Stock at an exercise price of
$.30 per share through February 5, 2005; (iii) warrants to
purchase 20,000 shares of Common Stock at an exercise price of
$.68 per share through March 15, 2004; (iv) warrants to purchase
10,000 shares of Common Stock which are exercisable at an exercise
price of $.39 per share through March 16, 2005. Excludes a
promissory note convertible to 46,667 shares of Common Stock at a
conversion price of $.24 per share on February 5, 2001.
(12) Includes warrants to purchase 10,000 shares of Common Stock
at an exercise price of $1.00 through November 24, 2003; (ii)
warrants to purchase 20,000 shares of Common Stock at an exercise
price of $.68 per share through March 15, 2004; (iii) warrants to
purchase 41,667 shares of Common Stock at an exercise price of
$.38 per share through February 5, 2005; (iv) warrants to purchase
10,000 shares of Common Stock which are exercisable at an exercise
price of $.39 per share through March 16, 2005. Excludes a
promissory note convertible to 116,667 shares of Common Stock at a
conversion price of $.24 per share on February 5, 2001,
(13) Includes warrants to purchase 10,000 shares of Common Stock
at an exercise price of $1.00 through November 24, 2003; (ii)
warrants to purchase 30,000 shares of Common Stock at an exercise
price of $.68 per share through March 15, 2004; warrants to
purchase 10,000 shares of Common Stock which are exercisable at an
exercise price of $.39 per share through March 16, 2005.
32
<PAGE>
(14) Includes warrants to purchase 10,000 shares of Common Stock
which are exercisable at an exercise price of $.39 per share
through March 16, 2005.
Item 12. Certain Relationships and Related Transactions.
On September 15, 1998, Skuli Thorvaldsson, a Director of the Company,
participated in a private placement of the Company's secured 15% promissory
notes and common stock purchase warrants, which private placement generated
gross proceeds of $600,000. Mr. Thorvaldsson loaned the Company $400,000
pursuant to the terms of a promissory note. Interest accrues at the rate of 15%
per annum. In addition, Mr. Thorvaldsson received warrants to purchase 100,000
shares of Common Stock at an exercise price of $1.78 per share, which warrants
are exercisable through September 15, 2003. On September 28, 1999, the debt was
converted to 4,000 shares of Series D Preferred Stock. The Preferred Stock is
convertible by the holder to shares of Common Stock at a conversion price of
$1.00 per share of Common Stock the 4,000 shares of Preferred Stock issuable
upon conversion of the Note in the principal amount of $400,000 is convertible
into 400,000 shares of Common Stock.
On May 10, 1999, the Company issued 16% promissory notes in the aggregate
principal amount of $182,000, included notes in the principal amount of $72,000,
$60,000 and $50,000 from Mr. Bruce Galloway, Mr. Skuli Thorvaldsson, and Europa
International Inc. Knoll Capital Management, Inc., is the investment manager for
Europa. Mr. Knoll is the sole shareholder of Knoll Capital Management Inc.
respectfully. Interest accrues at a rate of 16% per annum. In addition, the debt
and interest is convertible into 380,737 shares of common stock at $.44 per
share on May 10, 2000. In conjunction with the promissory notes The Company
issued 182,000 warrants at an exercise price of $.44 per share, which warrants
are exercisable through May 10, 2004.
On September 30, 1999, the Company issued 12% promissory notes in the aggregate
principal amount of $289,000 included notes in the principal amount of $105,000,
$84,000, $50,000 and $50,000 from Mr. Bruce Galloway, NTS Financial Services
Ltd., Mr. Evan Binn and Europa International Inc. Knoll Capital Management,
Inc., is the investment manager for Europa. Mr. Knoll is the sole shareholder of
Knoll Capital Management Inc. respectfully. Interest accrues at a rate of 12%
per annum. In addition, the debt and interest is convertible into an aggregate
1,541,333 shares of common stock at $.21 per share on September 30, 2000. In
conjunction with the promissory notes the Company issued 481,667 warrants at an
exercise price of $.30 per share, which warrants are exercisable through
September 30, 2004.
On October 21, 1999, the Company issued 12% promissory notes in the aggregate
principal amount of $221,000 included notes in the principal amount of $50,000
from each of Bruce Galloway, NTS Financial Services Ltd., Ralph Sorrentino and
Europa International Inc. Knoll Capital Management, Inc., is the investment
manager for Europa. Mr. Knoll is the sole shareholder of Knoll Capital
Management Inc. respectfully. Interest accrues at a rate of 12% per annum. In
addition, the debt and interest on each note is convertible into 266,666 shares
of common stock at $.21 per share on October 21, 2000. In conjunction with the
promissory notes, each of the four investors received 83,333 warrants at an
exercise price of $.30 per share, which warrants are exercisable through October
21, 2004.
33
<PAGE>
On December 1, 1999, the Company issued 12% promissory notes in the aggregate
principal amount of $50,000 from Mr. Bruce Galloway the Company's CEO and
Chairman of the Board. Interest accrues at a rate of 12% per annum. In addition,
the debt and interest is convertible into 200,000 shares of common stock at $.28
per share on December 1, 2000. In conjunction with the promissory notes The
Company issued 65,789 warrants at an exercise price of $.38 per share, which
warrants are exercisable through December 1, 2004.
On January 5, 2000, the Company issued 12% promissory notes in the aggregate
principal amount of $50,000 from NTS Financial Services Ltd., a Director of the
Company. Interest accrues at a rate of 12% per annum. In addition, the debt and
interest is convertible into 200,000 shares of common stock at $.28 per share on
January 5, 2001. In conjunction with the promissory notes the Company issued
65,789 warrants at an exercise price of $.38 per share, which warrants are
exercisable through January 5, 2005.
On February 5, 2000, the Company issued 12% promissory notes in the aggregate
principal amount of $395,000 included notes in the principal amount of $50,000
from each of Mr. Bruce Galloway, NTS Financial Services Ltd., Mr. Evan Binn, Mr.
Ralph Sorrentino and Europa International Inc. Knoll Capital Management, Inc.,
is the investment manager for Europa. Mr. Knoll is the sole shareholder of Knoll
Capital Management Inc. respectfully. Interest accrues at a rate of 12% per
annum. In addition, the debt and interest on each $50,000 note is convertible
into 233,333 shares of common stock at $.24 per share on February 5, 2001. In
conjunction with the promissory notes the Company issued 83,333 warrants to each
holder of a $50,000 note at an exercise price of $.30 per share, which warrants
are exercisable through February 5, 2005.
In May 2000, the Company, DCDC (Delaware), Ralph Sorrentino and RJS Consulting
Corp., an affiliate of Mr. Sorrentino, extended a consulting agreement and the
Company granted Mr. Sorrentino options to purchase 5,000,000shares of common
stock at an exercise price of $.37 per share. See "Item 10. Executive
Compensation"
Item 13. Exhibits and Report
(a) Exhibits
3.1.1 *Certificate of Incorporation
3.1.2 *Agreement and Plan of Reorganization and First Addendum
dated December 5, 1983
3.1.3 *Certificate of Merger dated January 23, 1984
34
<PAGE>
3.1.4 *Articles of Merger dated January 27, 1984
3.1.5 *Articles of Amendment to Articles of Incorporation dated
January 27, 1984
3.1.6 *Amendment to Articles of Incorporation dated January 27,
1986
3.1.7 *Articles of Amendment to Articles of Incorporation dated
June 28, 1996
3.1.8 ***Articles of Amendment to Articles of Incorporation dated
July 31, 2000
3.2 *Bylaws
4.2 *Certificate of Designation of Series A Preferred Stock
4.10 *Certificate of Designation of Series B Preferred Stock
4.4 *Certificate of Designation of Series C Preferred Stock
4.5 *Certificate of Designation of Series D Preferred Stock
10.1 *Purchase Agreement dated May 31, 1996 between James
Cataland and Registrant
10.3 *Purchase Agreement dated November 27, 1996, between M.I.E.
Hospitality and Registrant
10.4 *Guaranty Surety Agreement dated November 27, 1996 by Arthur
Treacher's, Inc.
10.6 *Mutual Release Agreement dated November 27, 1996, among
M.I.E. Hospitality, Inc. and Magee Industrial Enterprises,
Inc.
10.7 *Promissory Note dated November 27, 1996 for $390,417 from
M.I.E. Hospitality, Inc. in favor of Magee Industrial
Enterprises Inc.
10.8 *Promissory Note dated November 27, 1996 for $1,139,563
from M.I.E. Hospitality, Inc in favor of Magee Industrial
Enterprises, Inc.
10.9 *Uniform Franchise Offering Circular as of January 1, 1997
10.10 *Form of Franchise Agreement as of January 1, 1997
10.11 *Form of Warrant exercisable at $1.51 per share
35
<PAGE>
10.12 *Form of Warrant to Burnham Securities, Inc.
10.13 *Form of Stock Option to Employees
10.17 *Schedule 1(b) to the Purchase Agreement dated November 27,
1996 between M.I.E. Hospitality and Registrant .
10.18 *Form of agreement with holders of Series A Preferred Stock
10.19 **Forbearance Agreement between the Company and Magee
Industrial Enterprises, Inc. dated October 21, 1999
10.20 **Co-Branding Agreement between the Company and Miami Subs
dated August 13, 1998
10.21 ***Letter Agreement to co-branding agreement between the
Company and Miami Subs dated April 30, 1999
10.22 ***Stock Option Agreement between the Company and Ralph
Sorrentino dated as of May 1, 2000
10.23 ***Executive Consulting Agreement among the Company, Digital
Creative Development Corporation (Delaware), Ralph
Sorrentino and RJS Consulting Corp.
10.24 ***Purchase Agreement among the Company, Arthur Treacher's
Inc. (Delaware) and Jeffrey Bernstein, dated as of
October 2, 2000**
10.25 ***List of Subsidiaries
10.26 Financial Data Schedules
*Previously Filed with Form 10-SB Declared Effective on
August 12, 1997
**Previously filed with Form 10-KSB for the year ended
June 30, 1999.
***Filed herewith
36
<PAGE>
ARTHUR TREACHER'S, INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
CONTENTS
PAGE
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-19
37
<PAGE>
Independent Auditors' Report
To the Board of Directors
Arthur Treacher's, Inc.
We have audited accompanying the consolidated balance sheets of Arthur
Treacher's, Inc. and subsidiaries as of June 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of Digital Creative Development Corp., a
newly formed majority-owned subsidiary, whose statements reflect total assets of
$11,065,242, and $0 as of June 30, 2000 and 1999, respectively, and total
revenues of $44,629 and $0, respectively, and loss on investments of $450,000
and $0 respectively. Those statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to the
amounts included for Digital Creative Development Corp., is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Arthur
Treacher's, Inc. as of June 30, 2000 and 1999, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 11 to
the consolidated financial statements, the Company has continuing net losses.
Additionally, Arthur Treacher's, Inc.'s restaurant companies (Arthur Treacher's,
Inc., Arthur Treacher's Management Company, M.I.E. Hospitality, Inc. and Arthur
Treacher's Advertising) when considered alone have a stockholders deficit of
approximately $8,000,000 and a working capital deficiency of approximately
$4,000,000. These conditions raise substantial doubts about its ability to
continue as a going concern. Management's plans regarding those matters also are
described in Note 10. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
September 28, 2000
Gainesville, Florida
F-1
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
ASSETS
<TABLE>
<CAPTION>
2000 1999
---- ----
CURRENT ASSETS
-------------
<S> <C> <C>
Cash and Cash Equivalents $ 8,239,351 $ 165,459
Accounts Receivable, Net of Allowance of $10,065 81,418 138,136
in 2000 and $49,700 in 1999
Inventories 127,635 174,930
Current Portion of Notes Receivable 11,332 11,332
Prepaid Expenses and Other Current Assets 84,358 94,176
---------- ---------
TOTAL CURRENT ASSETS 8,544,094 584,033
PROPERTY AND EQUIPMENT
----------------------
Leasehold Improvements 2,382,525 4,072,762
Furniture, Fixtures, and Equipment 1,824,037 2,943,477
---------- ---------
4,206,562 7,016,239
Less - Accumulated Depreciation 3,403,910 5,450,502
---------- ---------
PROPERTY AND EQUIPMENT, NET 802,652 1,565,737
OTHER ASSETS
------------
Deposits 18,513 134,213
Goodwill, Net of Accumulated Amortization of $58,505 in 2000 268,035 284,362
and $42,178 in 1999
Notes Receivable, Net of Allowance of $210,000 in 2000 and 266,134 70,135
$0 in 1999
Marketable Securities Available for Sale 300,000 --
Non-marketable Securities, Net of Allowance of $450,000 2,200,000 --
Other 8,412 3,039
---------- ----------
TOTAL OTHER ASSETS 3,061,094 491,749
---------- ----------
TOTAL ASSETS $12,407,840 $2,641,519
=========== ==========
</TABLE>
F-2
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $ 2,155,326 $2,968,623
Accrued Expenses and Other Liabilities 455,261 410,025
Current Maturities of Long-Term Debt 1,377,993 570,579
Deferred Revenue 317,262 367,850
----------- ----------
TOTAL CURRENT LIABILITIES 4,305,842 4,317,077
LONG-TERM DEBT, Net of Current Maturities 470,994 1,119,300
OTHER LIABILITIES
Deferred Revenue -- 248,000
----------- ----------
TOTAL LIABILITIES 4,776,836 5,684,377
MINORITY INTEREST IN SUBSIDIARY 4,805,282 --
STOCKHOLDERS' EQUITY
Preferred Stock 2,000,000 Shares Authorized:
Series A Convertible, Par Value $1; 2,200 Shares Issued and Outstanding; 2,200 2,200
Involuntary Liquidation Preference of $1 Per Share Plus Accrued and
Unpaid Dividends
Series B Convertible, Par Value $1; 490,000 Shares Issued and Outstanding; 490,000 490,000
Involuntary Liquidation Preference of $1 Per Share
Series C, Par Value $100; 9,900 Shares Issued and Outstanding; Involuntary 852,705 852,705
Liquidation Preference of $100 Per Share Plus Accrued and Unpaid Dividends
Series D, Par Value $100; 4,000 Shares Issued and Outstanding; Involuntary 399,980 399,980
Liquidation Preference of $100 Per Share Plus Accrued and Unpaid Dividends
Common Stock, Par Value $.01; Authorized 25,000,000 Shares; Issued and 164,707 151,651
Outstanding: 16,490,484 Shares at June 30, 2000; 15,149,181 Shares at June
30, 1999
Additional Paid-In Capital 19,941,820 10,516,950
Accumulated Deficit (19,025,690) (15,456,344)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,825,722 (3,042,858)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,407,840 $ 2,641,519
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
REVENUES
Restaurant Sales $12,116,681 $20,567,361
Franchise Fees and Royalties 466,690 355,776
Other Revenues 964,048 608,692
----------- -----------
TOTAL REVENUES 13,547,419 21,531,829
OPERATING EXPENSES
Cost of Sales, Including Occupancy Except Depreciation 7,234,384 12,855,353
Operating Expenses 5,074,222 8,569,080
Depreciation and Amortization 691,232 1,204,321
General and Administrative Expenses 1,464,007 1,905,439
Impairment of Assets 215,504 2,036,955
Compensation from Stock Options 1,931,000
----------- -----------
TOTAL OPERATING EXPENSES 16,610,349 26,571,148
----------- -----------
LOSS FROM OPERATIONS (3,062,930) (5,039,319)
OTHER INCOME (EXPENSES)
Interest Expense, Net of Interest Income of $44,688 in 2000 (184,192) (168,885)
and $6,842 in 1999
Loss on Securities (450,000) --
Minority Interest in Loss from Subsidiaries 386,822 --
Other, Net (259,046) (638,515)
----------- -----------
TOTAL OTHER INCOME (EXPENSES) (506,416) (807,400)
----------- -----------
NET LOSS (3,569,346) (5,846,719)
UNDECLARED PREFERRED STOCK DIVIDENDS (159,220) (102,390)
----------- -----------
NET LOSS FOR COMMON SHAREHOLDERS $(3,728,566) $(5,949,109)
=========== ===========
Basic Loss Per Common Share (.24) (.40)
=========== ===========
Diluted Loss Per Common Share (.24) (.40)
=========== ===========
Weighted Average Number of Outstanding Shares for Basic and Diluted 15,339,306 14,966,624
=========== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Additional
Preferred Common Paid in Accumulated
Stock Stock Capital Deficit Total
----- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $1,355,505 $ 148,539 $10,411,729 $ (9,609,625) $ 2,306,148
Common Stock Issued -- 2,515 107,486 -- 110,001
Preferred Stock Issued 399,980 -- (44,681) -- 355,299
Stock Issued to Settle Accounts -- 438 43,398 -- 43,836
Payable
Preferred Stock Converted to Common (10,600) 159 10,441 -- --
Stock Issuance Costs -- -- (11,423) -- (11,423)
Net Loss -- -- -- (5,846,719) (5,846,719)
---------- --------- ----------- ------------ -----------
Balance at June 30, 1999 1,744,885 151,651 10,516,950 (15,456,344) (3,042,858)
Stock Issued in Payment of Notes -- 11,386 715,687 -- 727,073
Payable
Stock Issued to Settle Accounts -- 1,670 175,230 -- 176,900
Payable
Stock Option Compensation -- -- 1,931,000 -- 1,931,000
Majority Interest in Subsidiary -- -- 6,602,953 6,602,953
Net Loss -- -- -- (3,569,346)
---------- --------- ----------- ------------ -----------
Balance at June 30, 2000 $1,744,885 $ 164,707 $19,941,820 $(19,025,690) $ 2,825,722
========== ========= =========== ============ ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-5
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $(3,569,346) $(5,846,719)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Stock Option Compensation 1,931,000
Depreciation and Impairment 906,736 3,241,276
Loss on Disposal of Assets 38,261 932,590
Loss on Investments 450,000 --
Provision for Bad Debts 210,000 --
Allocation of Losses to Minority Shareholders (386,822) --
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable 56,718 (58,851)
Decrease in Deposits and Other Assets 110,320 132,698
Decrease in Prepaid Expenses and Other Current Assets 34,818 79,332
Decrease in Inventories 47,295 99,808
Increase (Decrease) in Accounts Payable (636,398) 617,758
Increase (Decrease) in Accrued Expenses, Other Liabilities and (253,344) 133,913
Dividends Payable
-------------- --------------
Net cash used in operating activities (1,060,762) (668,195)
-------------- --------------
INVESTING ACTIVITIES
Issuance of Notes and Loans Receivable (435,000) --
Capital Expenditures (77,670) (427,622)
Purchase of Investments (2,950,000) --
Proceeds from Notes Receivable 4,001 --
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (3,458,669) (427,622)
-------------- --------------
FINANCING ACTIVITIES
Proceeds from the Issuance of Common Stock 11,795,057 98,577
Proceeds from the Issuance of Preferred Stock -- 355,299
Proceeds from Long-Term Debt 1,025,133 435,725
Principal Payments on Long-Term Debt (226,867) (537,961)
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,593,323 351,640
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,073,892 (744,177)
CASH AND CASH EQUIVALENTS, Beginning of Year 165,459 909,636
-------------- --------------
CASH AND CASH EQUIVALENTS, End of Year $ 8,239,351 $ 165,459
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 140,964 $ 175,727
Noncash Investing and Financing Activities:
Common Stock Issued to Settle Accounts Payable $ 176,900 $ 43,836
Common Stock Issued in Payment of Notes Payable $ 639,158 --
Common Stock Issued in Payment of Accrued Interest $ 87,915 --
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-6
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Description of the Business
---------------------------
Arthur Treacher's, Inc. (the "Company") owns, operates and franchises
quick service seafood restaurants under the name "Arthur Treacher's
Fish & Chips". At June 30, 2000, the Company owned and operated 27
restaurants and franchised an additional 62 restaurants, and
participates in 81 franchised co-branded restaurants located in 13
states, Puerto Rico and Canada, with the greatest concentration in the
northeast region of the United States.
In February 2000, the company formed a subsidiary, Digital Creative
Development Corporation, a Delaware Corporation, (DCDC, Delaware), for
the purpose of investing in entities engaged in the creation of
traditional entertainment content. In March 2000, the Company formed a
subsidiary, Arthur Treacher's, Inc., a Delaware Corporation (which has
been inactive through June 30, 2000). In August 2000, the Company, a
Utah corporation, changed its name from Arthur Treacher's Inc. to
Digital Creative Development Corporation (Utah).
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Arthur Treacher's Management
Company, MIE Hospitality, Inc., Arthur Treacher's, Inc. (Delaware) and
Arthur Treacher's Advertising Company, and its majority-owned
subsidiary, Digital Creative Development Corporation. All material
intercompany transactions have been eliminated in consolidation.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an original
maturity of ninety days or less to be cash equivalents.
Inventories
-----------
The Company values its inventories at the lower of cost (first-in,
first-out method) or market.
Investments
-----------
Investments in marketable securities are carried at fair market value
and classified as available for sale. Investments in non-marketable
securities are carried at cost less any valuation allowances deemed
necessary by management.
Property and Equipment
----------------------
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided on a straight-line basis over
the estimated useful lives of the respective assets, which range from 3
to 10 years.
F-7
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------
Recoverability of Long-Lived Assets
-----------------------------------
The Company follows the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment is measured by the
amount by which the carrying amount of the assets exceed the fair value
of the assets. During 2000 and 1999, the Company recognized an
impairment loss of approximately $215,500 and $2,037,000, (which is
included in depreciation and amortization), related to the assets at
two store locations in 2000, and approximately 17 stores in two states
in 1999.
Income Taxes
------------
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In
addition, the method requires the recognition of future tax benefits,
such as net operating loss and business tax credit carryforwards, to
the extent that realization of such benefits is more likely than not.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Franchise Operations
--------------------
Franchise royalties, which are based upon a percentage of franchise
restaurants' sales, are recognized as income on the accrual basis.
Initial franchise fees are typically included in revenues when
substantially all services and conditions relating to the sale of the
franchise have been performed or satisfied, which occurs when the
franchised restaurant commences operations. Initial franchise fees for
area franchise agreements are recognized as income on a pro rata basis
as the restaurants are opened.
Per Share Data
--------------
The Company follows the provisions of SFAS No. 128, "Earnings per
share". This statement governs the computation, presentation, and
disclosure requirements of earnings per share (EPS) for entities with
publicly held common stock.
F-8
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
------------------------------------------
Net income per share of common stock is computed based upon the
weighted average number of common shares and share equivalents
outstanding during the year. When dilutive, stock options and warrants,
and preferred stock are included as share equivalents. None of these
equity instruments are included in the 2000 and 1999 calculations since
the Company experienced losses.
Estimates
---------
The preparation of financial statements in accordance with generally
accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and
liabilities, at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Stock Options and Warrants
--------------------------
The Company follows the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," in accounting for its options and warrants,
which permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 "Accounting for Stock Issued to
Employees," and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion
25 and provide the pro forma disclosure provisions of SFAS No. 123.
Goodwill
--------
Goodwill, which has been recorded as a result of purchased
acquisitions, is amortized over the period estimated to benefit from
the acquired assets and rights, which is twenty years.
NOTE 2 - MARKETABLE SECURITIES
---------------------
As of June 30, 2000, the cost of marketable securities approximates
fair value and there are no unrealized gains or losses or other
comprehensive income.
NOTE 3 - RELATED PARTY RECEIVABLES
-------------------------
The subsidiary (Digital Creative Development Corp.) has a
non-interest-bearing loan due upon demand for advances made to a
related entity. The amount receivable at June 30, 2000 was $36,846.
The subsidiary (Digital Creative Development Corp.) has a
non-interest-bearing loan due on demand from a Director/Stockholder of
the Company in the amount of $25,000.
F-9
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 4 - LONG-TERM DEBT
--------------
Long-term debt consisted of the following at June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Note payable due in semi-annual principal installments of $113,956, $ 569,783 $ 907,228
plus interest at 8%, maturing December 2002, unsecured.
Notes payable to banks, due in monthly installments totaling $8,041, 122,992 172,022
including interest at rates ranging from 11% to 18%, maturing through
August 2002, collateralized by property and equipment.
Various notes payable related to the acquisition of franchised 131,111 218,629
restaurants, due in monthly installments of principal and interest at
rates ranging from 8.5% to 14%, maturing at dates through May 2003,
collateralized by property and equipment.
Various notes payable to related parties, bearing fixed interest at 1,544 392,000
16%, payable in full on May 30, 2000 - Not paid as of June 30, 2000.
Note payable to related party, due in monthly installments of $2,392 68,424 --
including interest at 14%, maturing in May, 2003, unsecured.
Various notes payable to related parties, bearing fixed interest at
12%, payable in full on:
September 30, 2000 289,000 --
October 30, 2000 271,133 --
November 30, 2000 50,000 --
January 31, 2001 50,000 --
February 1, 2001 295,000 --
--------- ----------
1,848,987 1,689,879
Less Current Maturities 1,377,993 570,579
--------- ----------
Total long-term debt $ 470,994 $1,119,300
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Maturities of long-term debt at June 30, 2000 are as follows:
Year ending June 30, Amount
------------------- ------
<S> <C>
2001 $1,551,243
2002 366,075
2003 163,498
----------
Subtotal 2,080,816
Less interest (231,829)
----------
Total principal maturities $1,848,987
==========
</TABLE>
F-10
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
The Company considers the carrying value of its long-term debt to be a
reasonable estimation of its fair value based on the current market
rates available to the Company for debt of the same remaining
maturities.
NOTE 5 - LEASES
The Company is the lessee under various long-term operating leases for
the land and buildings in which its owned and franchised restaurants
operate. The leases generally range between five and twenty years and
usually provide for renewal options.
The majority of the leases require the Company to be billed for taxes,
insurance, utilities, and maintenance costs of the leased property.
Certain of the leases require additional (contingent) rental payments
if sales volumes at the related restaurants exceed specified limits.
Base rent expense for Company-owned restaurants, net of sublease income
of $12,000 and $12,000 in 2000 and 1999, respectively, was
approximately $1,445,000 and $2,602,000 for the years ended June 30,
2000 and 1999, respectively.
The following summarizes future minimum lease payments, for the
Company-owned restaurants, required for leases that have initial or
remaining noncancelable terms in excess of one year as of June 30,
2000:
Year ending June 30, Amount
------------------- ------
2001 $1,907,003
2002 1,579,476
2003 1,168,744
2004 678,860
2005 397,816
Thereafter 1,061,164
----------
TOTAL $6,793,063
==========
The Company also conditionally guarantees the payment of certain lease
obligations of its franchisees. The amount of this conditional
guarantee is approximately $156,000 in 2000, $132,000 in 2001, $105,000
in 2002 and 2003, and $15,000 in 2004.
The subsidiary (Digital Creative Development Corp.) is also party to a
new lease for its office space. The lease is effective December 1, 2000
and expires November 30, 2005. The base rent is $9,300 per month.
The future minimum rental commitments under non-cancelable leases are
as follows:
June 30,
--------
2001 $ 134,780
2002 111,600
2003 111,600
2004 111,600
2005 111,600
Thereafter 46,500
---------
Total minimum lease payments $ 627,680
=========
F-11
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 6 - INCOME TAXES
------------
Income tax benefit attributable to income from continuing operations
for the years ended June 30, 2000 and 1999, differed from the amounts
computed by applying the U.S. Federal income tax rate of 34% to income
before taxes as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Computed "expected" tax benefit $(688,519) $(2,043,745)
Increase (decrease) in income taxes resulting from:
Non-deductible meals and entertainment 11,858 17,488
Goodwill amortization 5,551 5,551
Change in valuation allowance 777,974 1,850,202
Other, net (106,864) 170,504
--------- ----------
$ -- $ --
========= ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of derrerred tax assets and liabilities as of June 30, 2000
and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Deferred Tax Assets:
Net Operating Loss Carryforward $4,203,573 $3,649,684
Allowance for Doubtful Accounts 71,762 16,898
Deferred Royalty 107,869 209,389
Property and Equipment 456,207 185,466
---------- -----------
Total Gross Deferred Tax Assets 4,839,411 4,061,437
Less Valuation Allowance 4,839,411 4,061,437
---------- -----------
Net Deferred Tax Assets $ -- $ --
========== ===========
</TABLE>
At June 30, 2000, the Company had approximately $12.4 million of net
operating loss carryforwards available for use, which expire through
2020. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the schedule of
reversal of deferred tax assets, projected future taxable income, and
tax planning strategies in making the assessment.
F-12
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 7 - STOCK OPTIONS AND STOCK WARRANTS
During 2000 and 1999, the Company granted 6,164,572 and 90,000
nonqualified stock options, respectively, to certain key employees and
directors to purchase shares of the Company's common stock at a price
equal to or in excess of the market price of the stock, vesting over a
three to five year period. These options were granted as compensation
and the number of options granted was determined based on specific
individual circumstances. The shares issuable under these option grants
are nonregistered shares and the Company has no requirement to register
such shares. The Company does not have a formal stock option plan.
The per share weighted-average fair value of stock options granted was
calculated using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1999 - no expected dividend
yield, risk-free interest rate of 5.6% weighted average expected
volatility of 22% and an expected life of 5 years; 2000 - no expected
dividend yield, risk-free interest rate ranging from 6.0% to 6.7%
weighted average expected volatility of 88% and an expected life of 5
years. In addition, for 2000 and 1999 the Company has discounted the
market price of the stock, on the date of option grant, by 35% in
consideration of the restrictions on the sale of the underlying shares.
The fair value on the date of grant for options granted with exercise
prices in excess of the market price of the stock ranged from $.15 to
$1.64 in 2000 and was $.10 for 1999.
The Company applies APB Opinion No. 25 in accounting for option grants
and, accordingly, no compensation cost has been recognized for its
stock options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss would
not have been materially impacted for the effects of such calculation
in 2000 or 1999.
Certain options granted to key employees were granted at option prices
below market price. In accordance with APB Opinion No. 25, compensation
expense has been recorded based on the difference between the option
price and the market price on the date of the option. The total amount
of such compensation for 2000 was $1,931,000 and $-0- in 1999.
The portion of the compensation related to such options not yet vested
has been deferred as shown in the table below:
Effect on
Paid in Capital
---------------
Total Stock Option Compensation from Year 2000 Awards.. $ 4,681,000
Portion Deferred ...................................... (2,750,000)
-----------
Net Addition to Contributed Capital/Compensation ...... $ 1,931,000
===========
F-13
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 7 - STOCK OPTIONS AND STOCK WARRANTS (concluded)
--------------------------------
In addition, during 2000 the Company granted 95,000 warrants (valued at
$139,983) to purchase shares of Company common stock to non-employees
in return for services provided in connection with the Company's equity
offerings. These warrants have been recorded at fair value using
substantially the same criteria as discussed above for the stock
options. During 1999, the Company granted 345,363 warrants (valued at
$46,000) to purchase shares of the Company's common stock to investors
and in return for services provided.
In connection with an equity offering, the Company also issued 148,500
warrants to purchase shares of Company common stock as described in
note 10 during the year ended June 30, 1999.
F-14
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 7 - STOCK OPTIONS AND STOCK WARRANTS (concluded)
--------------------------------
Stock option and warrant activity during the period indicated is as
follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Balance at June 30, 1998 3,163,891 $2.13
Granted - exercise price in excess of market price of stock 435,363 0.66
Canceled (280,000) 1.00
----------
Balance at June 30, 1999 3,319,254 1.30
Granted-exercise price at market price of stock 301,329 .45
Granted-exercise price in excess of market price of stock 613,244 .32
Granted-exercise price less than market price of stock 7,588,331 .46
----------
Balance at June 30, 2000 11,822,158 $.90
==========
</TABLE>
The following table presents information regarding all options and
warrants outstanding at June 30, 2000.
<TABLE>
<CAPTION>
Weighted
Number of Average Weighted
Warrants and Remaining Range of Average
Options Contractual Exercise Exercise
Outstanding Life Prices Price
<S> <C> <C> <C>
8,502,904 4.7 years $0.30-$3.80 $0.45
435,363 3.6 years 0.49-1.00 0.66
1,435,000 2.0 years 1.00-1.51 1.05
998,500 2.1 years 1.00-3.13 1.28
450,391 1.7 years 1.00-3.37 2.72
----------
11,822,158 3.3 years $0.30-$3.80 1.45
==========
</TABLE>
The following table presents information regarding options and warrants
currently exercisable at June 30, 2000.
<TABLE>
<CAPTION>
Number of Weighted
Warrants and Range of Average
Options Exercise Exercise
Exercisable Prices Price
<S> <C> <C>
2,932,990 $0.37-$1.00 $0.48
182,000 0.44-0.44 0.44
1,435,000 1.00-1.51 1.05
736,000 1.00-3.13 1.22
415,391 1.00-3.37 2.87
---------
5,701,381 $0.37-$3.37 0.89
=========
</TABLE>
F-15
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 8 - COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is a defendant in a lawsuit with a former development
franchisee alleging wrongful contract termination, among other things.
The plaintiff is seeking damages in excess of $10 million, however the
Company believes the claim is without merit, has counter sued and is
defending the claim vigorously. The case is presently in the U.S.
District Court. 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 is party to employment and consulting agreements with
certain key members of management which provide for salary and benefit
continuation for specified periods of time.
The Company has a variety of purchase contracts and commitments with
various food and beverage suppliers. These contracts expire within one
to five years, and specify purchase prices and rebates to be provided
by the supplier. It is not expected that these commitments will have an
adverse impact in future years.
NOTE 9 - DIGITAL CREATIVE DEVELOPMENT CORPORATION CONVERTIBLE STOCK
----------------------------------------------------------
As discussed in Note 1 to the financial statements, the Company formed
Digital Creative Development Corporation in February 2000.
Subsequently, approximately 12,000,000 shares were sold to other
parties representing approximately 45% of outstanding stock of DCDC
Delaware. The Digital stock may be converted into the Company's stock,
in whole or in part, at any time, at the option of the Holder. The
Digital stock may be converted into Treacher stock, at any time, at the
option of Treacher's provided that at the time of such conversion, the
common stock of Arthur Treacher's, Inc. is listed on the NASDAQ
Small-Cap Market or National Market or on a national securities
exchange on the OTC Bulletin Board and the Company has filed all
periodic reports that are required under the Securities Exchange Act of
1934.
NOTE 10 - STOCKHOLDERS' EQUITY
In November and December 1997, the Company consummated a private
placement to investors with respect to equity units consisting of
shares of its Series C Preferred Stock, with warrants to purchase
shares of common stock attached, for aggregate proceeds of $990,000. On
November 25, 1997 the Company sold 8,100 shares of Series C Preferred
Stock, with warrants to purchase 121,500 shares of common stock
attached. On December 23, 1997, the Company sold 1,800 shares of Series
C Preferred Stock, with warrants to purchase 27,000 shares of common
stock attached. The Company allocated $137,295 of the proceeds to the
value of the warrants and $852,705 to the value of the preferred stock.
The preferred stock is not convertible, but may be redeemed at the
option of the Company at a redemption price of $100 per share plus
accrued and unpaid dividends, at any time after October 31, 1999. The
holders of the preferred stock are entitled to a cumulative dividend of
10 percent per annum, payable semi-annually, if and when the Board
declares a dividend.
At June 30, 2000 and 1999, the Company had accumulated and unpaid
dividends of approximately $201,000 and $102,000 on this series of
preferred stock. 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 working capital needs.
F-16
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 10 - STOCKHOLDERS' EQUITY (concluded)
--------------------
The holders of the Series A Preferred Stock are entitled to a
cumulative dividend of $0.10 per share per annum. Such dividends accrue
annually but are payable if and when the Company declares a dividend.
The Company has not paid any dividends with respect to the Series A
Preferred Stock. The 2,200 outstanding shares of Series A Preferred
Stock are convertible into 3,300 shares of Common Stock for no
additional consideration at the option of the holder of the stock. The
Series A Preferred Stock is entitled to a liquidation preference of
$1.00 per share, plus any accrued and unpaid dividends. The Series A
Preferred Stock may be redeemed by the Company at a redemption price of
$1.00 per share plus all accrued and unpaid dividends. The amount of
accumulated and unpaid dividends was approximately $23,940 at June 30,
2000 and $23,720 at June 30, 1999.
In conjunction with the acquisition of MIE, the former owners of MIE
(Magee) and the Company amended the terms of the Series B Preferred
Stock and agreed that no dividends would accumulate on such preferred
stock after November 30, 1996. The Company also agreed to pay Magee an
amount equal to the accrued dividend on the Series B Preferred Stock
through November 30, 1996 (which was $390,417) in full on September 1,
1998. In addition, the 490,000 outstanding shares of Series B Preferred
Stock are now allowed to be convertible at the option of the holder or
the Company at any time, and the conversion rate was increased so that
Magee will receive 765,625 shares of common stock upon conversion (an
increase of 275,625 shares, valued at $843,413 and included as part of
the purchase price of MIE) for no additional consideration. The Company
has not determined when it will require conversion of the Series B
Preferred Stock into common stock.
The holders of the Series D Preferred Stock are entitled to a
cumulative dividend of 15 percent per share per annum. Such dividends
accrue annually but are payable if and when the Company declares a
dividend. The Company has not paid any dividends with respect to the
Series D Preferred Stock. The 4,000 outstanding shares of Series D
Preferred Stock are convertible into 400,000 shares of Common Stock for
no additional consideration at the option of the holder of the stock.
The amount of accumulated and unpaid dividends was approximately
$105,000 at June 30, 2000 and $45,000 at June 30, 1999.
During 1999, 10,600 shares of preferred stock series A were converted
to common stock.
NOTE 11 - GOING CONCERN
-------------
As shown in the accompanying financial statements, the Company incurred
a net loss of approximately $1,600,000 for the year ended June 30, 2000
and $5,800,000 during the year ended June 30, 1999. These losses create
an uncertainty about the Company's ability to continue as a going
concern.
F-17
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 11 - GOING CONCERN (concluded)
-------------
Management of the Company implemented a corporate restructuring plan to
address the financial condition of the Company in January 1999. The
multi-faceted corporate strategy is focused on the restructuring of
real estate obligations, improving store profitability, franchising and
attracting capital or new debt. Each facet of the strategy is geared to
improving profitability by selling certain company-owned restaurants
that typically incur losses, franchise sales, cobranding and
introducing a retail product line for major supermarket chains. Upon
the completion of the restructuring plan, the Company-owned and
operated restaurants will be concentrated within New York, New Jersey
and Pennsylvania.
Existing Arthur Treacher markets in Ohio, Michigan, Maryland,
Washington D.C., Florida and Ontario, Canada will be targeted for
franchise expansion. The cobranding program with Miami Subs, Nathan's
Famous Hot Dogs, Kenny Rogers Roasters, Pudgies Famous Chicken and
other approved quick serve and casual dining feeders will continue to
provide an additional source of franchise revenue.
As of October 30, 1999, the restructuring of real estate obligations by
franchising, selling and terminating selected leases was complete. As a
result of the spin-off of selected leases, losses typically incurred by
certain locations have been eliminated, thus improving cashflow and
profitability. Also, the Company raised $952,000 in the form of capital
and bridge loans from January 1999 to February 4, 2000 within Arthur
Treacher's, Inc. (Utah) and raised in excess of $11 million capital
within its new subsidiary, Digital Creative Development Corporation
(Delaware).
NOTE 12 - SUBSEQUENT EVENTS
Subsequent to June 30, 2000, the Company changed its name as further
described in Note 1. On October 2, 2000, Arthur Treacher's, Inc.
(Delaware), a subsidiary of the Company, executed an agreement to
purchase all the outstanding capital stock of the entities which own
and act as franchiser of the Pudgies Famous Chicken (Pudgies) chain of
fast food restaurants. Pudgies consists of 32 restaurants in the New
York tri-state metropolitan area, including 12 company owned stores and
20 franchises.
F-18
<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.
DIGITAL CREATIVE DEVELOPMENT
(Registrant)
Date: October 13, 2000 By /s/ Bruce Galloway
--------------------------------------
Bruce Galloway
Chief Executive Officer
By /s/ William F. Saculla
--------------------------------------
William F. Saculla
President, Chief Financial Officer
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Bruce Galloway Chief Executive Officer, Director, October 13, 2000
---------------------------------- Chairman of the Board
Bruce Galloway
/s/ William F. Saculla President, Treasurer, Chief October 13, 2000
---------------------------------- Financial Officer, Director
William F. Saculla
/s/ Skuli Thorvaldsson Director October 13, 2000
----------------------------------
Skuli Thorvaldsson
/s/ Donald Perlyn Director October 13, 2000
----------------------------------
Donald Perlyn
Director October 13, 2000
----------------------------------
Evan Binn
Director October 13, 2000
----------------------------------
Maurice Sonnenburg
/s/ Sigurdur Jon Bjornsson Director October 13, 2000
----------------------------------
Sigurdur Jon Bjornsson
Director October 13, 2000
----------------------------------
Ralph Sorrentino
</TABLE>
38
