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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT
Under Section 13 or 15(d) of the Securities Act of 1934
For the Nine Months Ended March 26, 2000
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 Incorporation or Organization) (I.R.S. Employer
Identification No.)
7400 Baymeadows Way, Suite 300, Jacksonville, Florida 32256
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(Address of Principal Executive Offices) (Zip Code)
(904) 739-1200
------------------------------------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes __X___ No _____
At May 30, 2000, the latest practicable date there were 15,599,004 shares of
Common Stock outstanding, $.01 par value.
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ARTHUR TREACHER'S, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Unaudited Financial Statements:
Consolidated Balance Sheets as of March 26, 2000 and
June 30, 1999 3
Consolidated Statements of Operations for the Three
Month Periods December 27, 1999 through March 26, 2000;
and December 28, 1998 through March 28, 1999 5
Consolidated Statements of Operations for the Nine
Month Periods July 1, 1999 through March 26, 2000; and
July 1, 1998 through March 28, 1999 6
Consolidated Statement of Cash Flows for the Six Month
Periods July 1, 1999 through March 26, 2000; and
July 1, 1998 through March 28, 1999 7
Notes to Interim Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis results of Operations
and Financial Condition 12
Part II. OTHER INFORMATION 20
2
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<TABLE>
<CAPTION>
ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 26, 2000 and JUNE 30, 1999
March June
2000 1999
(Unaudited) (Audited)
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,615,217 165,459
Accounts receivable, net of allowance of $10,470
in March 2000 and $49,700 in June 1999 109,510 149,468
Inventories 135,366 174,930
Prepaid expenses and other 142,973 94,176
------------- -------------
TOTAL CURRENT ASSETS 4,003,066 584,033
------------- -------------
PROPERTY AND EQUIPMENT, AT COST
Leasehold improvements 2,351,712 4,072,762
Furniture, fixtures, and equipment 1,799,343 2,943,477
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4,151,055 7,016,239
Less accumulated depreciation 3,195,134 5,450,502
------------- -------------
PROPERTY AND EQUIPMENT, net 955,921 1,565,737
OTHER ASSETS
Deposits 109,197 134,213
Investments 2,100,000 0
Goodwill 272,117 284,362
Other 75,169 73,174
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TOTAL ASSETS $ 7,515,470 2,641,519
============= =============
</TABLE>
3
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<TABLE>
<CAPTION>
ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 26, 2000 and JUNE 30, 1999
March June
2000 1999
(Unaudited) (Audited)
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit)
CURRENT LIABILITIES:
Accounts payable $ 2,296,829 2,968,623
Accrued expenses and other liabilities 338,425 410,025
Current maturities of long-term debt 1,503,356 570,579
Deferred revenue 367,850 367,850
------------- --------------
TOTAL CURRENT LIABILITIES 4,506,460 4,317,077
Long-term debt, net of current maturities 807,039 1,119,300
Minority Interest in Subsidiary 1,552,673 0
Deferred revenue 81,366 248,000
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TOTAL LIABILITIES 6,947,538 5,684,377
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STOCKHOLDERS' EQUITY (Deficit)
Preferred stock 1,744,885 1,744,885
Common stock 158,359 151,651
Additional paid-in capital 14,778,942 10,516,950
Accumulated deficit (16,114,254) (15,456,344)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (Deficit) 567,932 (3,042,858)
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 7,515,470 2,641,519
============= =============
</TABLE>
4
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<TABLE>
<CAPTION>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIODS
December 27, 1999 December 28, 1998
through through
March 26, 2000 March 28, 1999
(Unaudited) (Unaudited)
------------------ ------------------
<S> <C> <C>
TOTAL REVENUE $ 2,878,998 5,040,277
OPERATING EXPENSES:
Cost of sales, including occupancy except depreciation 1,641,143 2,862,811
Operating expenses 1,079,530 2,130,216
Depreciation and amortization 176,109 281,187
General and administrative expenses 293,161 407,886
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TOTAL OPERATING EXPENSES 3,189,943 5,682,100
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LOSS FROM OPERATIONS (310,945) (641,823)
OTHER INCOME (EXPENSES):
Other, net (73,743) (276,486)
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NET LOSS (384,688) (918,309)
Undeclared preferred stock dividends (30,570) (30,570)
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Net loss for common shareholders $ (415,258) (948,879)
============== =============
Basic loss per common share $ (.03) (.06)
============= ============
Diluted loss per common share $ (.03) (.06)
============= ============
Weighted average number of outstanding shares for basic and diluted 15,424,004 14,951,087
============= =============
</TABLE>
5
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<TABLE>
<CAPTION>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIODS
July 1, 1999 July 1, 1998
through through
March 26, 2000 March 28, 1999
(Unaudited) (Unaudited)
--------------- ---------------
<S> <C> <C>
TOTAL REVENUE $ 10,366,002 15,907,538
OPERATING EXPENSES:
Cost of sales, including occupancy except depreciation 5,476,350 8,892,228
Operating expenses 3,912,433 6,403,479
Depreciation and amortization 567,268 834,979
General and administrative expenses 911,347 1,273,948
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TOTAL OPERATING EXPENSES 10,867,398 17,404,634
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LOSS FROM OPERATIONS (501,396) (1,497,096)
OTHER INCOME (EXPENSES):
Other, net (156,514) (710,338)
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NET LOSS (657,910) (2,207,434)
Undeclared preferred stock dividends (91,710) (71,820)
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Net loss for common shareholders $ (749,620) (2,279,254)
============= =============
Basic loss per common share $ (.05) (.15)
============= ============
Diluted loss per common share $ (.05) (.15)
============= ============
Weighted average number of outstanding shares for basic and diluted 15,278,452 14,905,798
============= =============
</TABLE>
6
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<TABLE>
<CAPTION>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIODS
July 1, 1999 July 1, 1998
through through
March 26, 2000 March 28, 1999
---------------- ----------------
<S> <C> <C>
Operating activities:
Net loss $ (657,910) (2,207,434)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 567,268 900,282
Amortization of deferred revenue (241,634) ---
Deferred revenue proceeds 120,720 ---
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 39,958 (41,737)
Decrease (increase) in deposits and other assets 35,266 (46,727)
(Increase) in prepaid expenses and other
current assets (48,797) 8,695
Decrease in inventories 39,564 45,785
(Decrease) increase in accounts payable (671,794) 728,405
(Decrease) increase in accrued expenses, and
other liabilities (71,600) 526,900
-------------- -------------
Net cash (used in)operating activities (888,959) (85,831)
-------------- -------------
Investing activities:
Capital expenditures (20,161) (462,285)
Investments made by subsidiary (2,100,000) --
Proceeds from disposition of restaurants 49,428 --
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Net cash used in investing activities (2,070,733) (462,285)
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Financing activities:
Proceeds from the issuance of stock, from subsidiary 5,674,978 0
Proceeds from the issuance of preferred stock, net of issue costs - 355,298
Issuance of common stock - 58,577
Proceeds from long-term debt 1,010,133 200,000
Payment of dividend - (390,417)
Principal payments on long-term debt (275,661) (211,113)
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Net cash provided by financing activities 6,409,450 12,345
------------- -------------
Net increase (decrease) in cash and cash equivalents 3,449,758 (535,771)
</TABLE>
7
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<TABLE>
<CAPTION>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
FOR THE NINE MONTHS ENDED
July 1, 1999 July 1, 1998
through through
March 26, 2000 March 28, 1999
-------------- --------------
<S> <C> <C>
Cash and cash equivalents beginning of period 165,459 909,636
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Cash and cash equivalents end of period $ 3,615,217 373,865
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 62,508 108,028
============== =============
Supplemental disclosure of noncash transactions:
Common stock issued to settle accounts payable $ 0 43,836
============= =============
Supplemental disclosure of noncash transactions:
Common stock issued to settle debt and interest $ 146,396 0
============= =============
</TABLE>
8
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ARTHUR TREACEHR'S, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 26, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim unaudited financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission, and reflect all adjustments which, in the opinion of management, are
necessary to properly state the results of operations and financial position.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations although
management believes that the disclosures are adequate to make the information
presented not misleading. The results of operations are not necessarily
indicative of the results for the full year. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's audited financial statements included in the Form 10-KSB for
the fiscal year ended June 30, 1999, filed with the Securities and Exchange
Commission on April 20, 2000.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The interim consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
MIE Hospitality, Inc., a wholly-owned subsidiary: which operates 29
Arthur Treacher's Fish and Chips restaurants in Pennsylvania, New York, New
Jersey and Delaware.
Arthur Treacher's Management Co., a wholly-owned subsidiary, which
provides payroll services to the Company.
Arthur Treacher's Advertising Co., a wholly-owned subsidiary, which
provides certain advertising services to the Company and the franchisees.
Digital Creative Development Corporation (Digital). A subsidiary
which will seek to acquire, invest and form joint ventures with web design, web
consulting and companies that create and transmit digital broadband content.
Earnings per Share
Effective December 28, 1997, the Company implemented the provisions of Statement
of Financial Accounting Standards # 128 "Earnings Per Share". All earnings per
share information presented has been restated to reflect the provisions of this
statement.
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Note 3 - COMMITMENTS AND CONTINGENCIES
ATAC Corporation and Patrick Cullen v. Arthur Treacher's, Inc. and James
Cataland, Case No. 1:95CV 1032, In the U.S. District Court, Northern District,
Ohio Eastern Division; filed May 9, 1995. On November 16, 1994, Arthur
Treacher's terminated the agency agreement of a Regional Development
Representative, ATAC Corporation, on the grounds that ATAC breached the
agreement by assigning the agency agreement to a third party without the consent
of Arthur Treacher's. ATAC claims that the Company was aware of and consented to
the third-party assignment. The Company is unaware of any document signed by a
properly-authorized representative of the Company formally authorizing or
consenting to the assignment. On May 9, 1995, ATAC filed the action and alleged
that the Company terminated the contract without cause, tortuously interfered
with other business relationships, committed wrongful conversion of the
territory and committed restraint of trade and price-fixing, breach of contract,
fraud, and violations of RICO. ATAC originally demanded a minimum of $2,750,000
in compensatory damages and $6,000,000 in punitive damages. In response to the
original complaint, the Company filed a motion to dismiss all of the claims. In
addition, the Company filed a counterclaim against ATAC seeking a Declaratory
Judgment that ATAC does not have a service contract with the Company in certain
areas which the Company does business, that ATAC has committed breach of
contract and that the Company is entitled to indemnification for previous
lawsuits which have occurred because of the actions of ATAC on behalf of the
Company. ATAC has twice amended the claims and allegation of the original
complaint. In the Third Amended Complaint, ATAC asserts claims against the
Company and the Company's former President, James Cataland, for fraud, breach of
contract, tortuous interference with contract, violations of the Ohio Business
Opportunity Act, violations of the Ohio Consumer Sales Practices Act and breach
of fiduciary duty. ATAC seeks in excess of $10,000,000 in compensatory,
punitive, and statutory damages from the Company. In response to the Third
Amended Complaint, the Company in 1997 filed a Motion to Dismiss ATAC's claims
for breach of fiduciary duty and under the Consumer Sales Practices and Business
Opportunity Acts. The Company also requested that the district court dismiss the
claim against the Company's former President. The Company in 1998 filed Motions
for Summary Judgment on behalf of itself and the Company's former President with
respect to all of ATAC's claims (except breach of contract) and requested that
the court refer the remaining contract claim to binding arbitration. The Court
recently granted the Company's Motion to Stay the lawsuit pending arbitration
and the ruling is presently the subject of an appeal to the Sixth Circuit Court
of Appeals.
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.
10
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In opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's consolidated results of
operations of financial position.
11
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Management's Discussion and Analysis or Plan of Operation
This Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Registration Statement.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Information set forth herein contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. The Company cautions readers that important factors
may affect the Company's actual results and could cause such results to differ
materially from forward-looking statements made by or on behalf of the Company.
Such factors include, but are not limited to, changing market conditions, the
impact of competitive products, pricing and acceptance of the Company's
products.
Overview
The Company's principal sources of revenues are from the operation of it's
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. 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,
the costs of operating the headquarters offices (rent and utilities) and certain
related costs (travel and entertainment).
On February 17, 2000, the Company announced the formation of a wholly-owned
subsidiary, Digital Creative Development Corporation (Digital). Digital will
seek to acquire, invest and form joint ventures with web design, web consulting
and companies that create and transmit digital broadband content.
On March 16, 2000, the Board of Directors of the Company approved the
appointment of Ralph Sorrentino as the Chief Executive Officer of Digital. Mr.
Sorrentino became Chief Executive Officer of Digital effective May 1, 2000.
These steps are part of management's plan to change the Company's business
focus. Digital plans to invest in companies that are involved in the creation
and transmission of broadband content, Digital also plans to provide, services
and capital to early stage internet companies and Digital intends to acquire
controlling interest in its portfolio companies but may, from time to time,
take minority equity positions in consideration for such services and
12
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capital. The Company believes that it can develop such internet business
activities, including e*commerce and content portals either through acquisitions
of majority owned subsidiaries or through internal development.
As of March 26, 2000, Digital had received advances of $5,674,978 and had used
$2,100,000 of these advances to purchase equity positions in a number of
companies. In addition, management of Digital has been evaluating companies for
potential acquisitions as well as opportunities for obtaining controlling equity
positions of internet companies focused on the new media broadband entertainment
sector. In order to raise additional capital for acquisitions, Digital has
commenced a private placement of its common stock.
The Company does not intend to engage primarily in the business of investing,
reinvesting or trading in securities so as to be an investment company required
to register as such under the Investment Company Act of 1940. Nevertheless, the
Company may be required to register as an investment company as a consequence of
investments that it has made subsequent to its change of control to the extent
that it presently holds "investment securities" (as defined by the Investment
Company Act) which constitutes more than 40% of the value of the Company's
assets (exclusive of U.S. government securities and cash items) on an
unconsolidated basis, unless the Company restructures or reduces its holdings of
investment securities within a reasonable period of time. Although it is the
intention of the Company to take the actions necessary to avoid investment
company status, no assurance can be given that the Company will be able to take
such actions. The Investment Company Act of 1940 imposes a comprehensive scheme
of regulation which would require a substantial restructuring of the operations
of the Company to permit the Company to comply with the applicable regulations.
Applicable regulations may also operate to impose significant restrictions on
the permissible activities and transactions of the Company. If the Company
cannot restructure its operations or reduce its holdings of investment
securities to avoid the need for the investment company restriction, the Board
of Directors will consider taking such actions as may be necessary or
appropriate under the circumstances.
Results of Operations
The following discussion includes the following periods: (i) unaudited interim
financial statements for the three months ended March 26, 2000 and March
28,1999. (ii) unaudited interim financial statements for the nine months ended
March 26, 2000 and March 28, 1999.
2000 Three months and 1999 Three months
The Company's reported total revenues of $2,878,998 for the three month period
ended March 26, 2000 reflected a decrease of $2,161,279, or 42.9%, compared to
$5,040,277 in the same three
13
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month period ended March 28, 1999. The decrease is primarily attributed to the
franchising of 27 Company owned restaurants to existing franchisees and the
lease termination of two restaurants 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 $2,099,250 or
45.7% to $2,490,938 for the three month period ended March 26, 2000, compared to
$4,590,188 in the same three month period ended March 28, 1999. The decrease is
primarily attributed to the franchising of 27 Company owned restaurants to
existing franchisees and the lease termination of two restaurants compared to
the same period in the previous fiscal year. Same store net sales decreased by
3.6% or $92,043 to $2,493,657 for the three month period ended March 26, 2000
compared to $2,585,700 for the same period in the previous fiscal year.
Franchise and other income decreased 18.1% or $67,991 to $307,036 for the three
month period ended March 26, 2000, compared to $375,027 in the same three month
period ended March 28, 1999. The decrease was primarily due to the timeliness of
the receipt of marketing allowances from the Company's suppliers.
The Company's total costs and expenses decreased 43.9% or $2,492,157 to
$3,189,943 for the three month period ended March 26, 2000, compared to
$5,682,100 for the three month period ended March 28, 1999. The decrease was
primarily attributed to the franchising of 27 Company owned restaurants and the
lease termination of two restaurants compared to the same period in the previous
fiscal year.
General and Administrative expenses decreased 28.1% or $114,725 to $293,161 for
the three month period ended March 26, 2000, compared to $407,886 for the three
month period ended March 28, 1999. The decrease is partially attributed to the
reduction of staff in association with the franchising of the 27 owned Company
restaurants and the lease termination of two restaurants compared to the same
period in the previous fiscal year.
Interest expense increased 42.1% or $21,848 to $105,078 for the three month
period ended March 26, 2000, compared to $407,886 for the three month period
ended March 28, 1999. The increase was due to new debt taken on by the Company.
Depreciation and amortization decreased 36.6% or $105,078 to $176,109 for the
three month period ended March 26, 2000, compared to $281,187 for the same
period in the previous fiscal year. This decrease was primarily attributed to
the franchising of 27 Company owned restaurants and the lease termination of two
restaurants compared to the same period in the previous fiscal year.
The Company considers earnings before interest, taxes, depreciation and
amortization to be another important indicator of performance. For the three
month period ended March 26, 2000, earnings before interest, taxes, depreciation
and amortization increased by 62.6% or $225,800 to a loss of ($134,836) compared
to a loss of ($360,636) for the same period in the previous fiscal
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year. This improvement is partially attributed to the franchising of 27 Company
owned restaurants and lease termination of two restaurants compared to the same
period in the previous fiscal year.
12/27/99 12/28/98
Through Through
03/26/00 03/28/99
-------- --------
LOSS FROM OPERATIONS $(310,945) $(641,823)
LESS: Other 0 0
ADD: Depreciation and
Amortization 176,109 281,187
------- -------
EBITDA $(134,836) $(360,636)
As a result of the foregoing, the Company's net loss (before preferred
dividends) decreased 58.1% or $533,621 to a net loss (before preferred dividends
of $384,688 for three month period ended March 26, 2000, compared to a net loss
(before preferred dividends) of $918,309 for the same period in the previous
fiscal year.
2000 Nine months and 1999 Nine months
The Company's reported total revenues of $10,366,002 for the nine month period
ended March 26, 2000, reflected a decrease of 34.8% or $5,541,536, compared to
$15,907,538 for the same nine month period ended March 28, 1999. The decrease is
primarily attributed to the franchising of 21 Company owned restaurants to
existing franchisees in the three month period ended September 26, 1999 and the
additional franchising of 6 Company owned restaurants to existing franchisees in
the three month period ended December 26, 1999 and the lease termination of two
restaurants 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 38.6% or
$5,564,878, to $8,860,533 compared to $14,425,411 in the same period in the
previous fiscal year. The decrease is primarily attributed to the franchising of
21 Company owned restaurants to existing franchisees in the first three month
period ended September 26, 1999, the additional franchising of 6 Company owned
restaurants to existing franchisees in the three month period ended December 26,
1999 and the lease termination of two restaurants compared to the same period in
the previous fiscal year. While total net sales decreased 38.6%, same store net
sales comparisons for stores operated for the full nine months, decreased by
1.1% or $92,718 to $8,397,475 for the nine month period ended March 26, 2000
compared to $8,490,193 for the same period in the previous fiscal year.
Franchise and other income increased 37.1% or $270,226 to $999,605 for the nine
month period ended March 26, 2000 compared to $729,379 for the same period ended
March 28, 2000 in the
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previous fiscal year. 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 for
the nine month period ended March 26, 2000, compared to $80,751 in the same
period in the previous fiscal year.
The Company's total operating costs and expenses decreased 37.6% or $6,537,236
to $10,867,398 for the nine month period ended March 26, 2000 compared to
$17,404,634 for the same period ended March 28, 1999. The decrease is primarily
attributed to the franchising of 21 Company owned restaurants to existing
franchisees in the first three month period ended September 26, 1999, the
additional franchising of 6 Company owned restaurants to existing franchisees in
the three month period ended December 26, 1999 and the lease termination of two
restaurants compared to the same period in the previous fiscal year.
Interest expense increased $23,004 or 17.2% from $133,510 to $156,514 for the
nine month period ended March 26, 2000, compared to $133,510 for the same period
in the previous fiscal year. The increase in interest expense was due to new
debt taken on by the Company.
Depreciation and amortization decreased 32.1% or $267,711 to $567,268 for the
nine month period ended March 26, 2000, compared to $834,979 for the same period
in the previous fiscal year. The decrease is primarily attributed to the
franchising of 21 Company owned restaurants to existing franchisees in the first
three month period ended September 26, 1999 and the additional franchising of 6
Company owned restaurants to existing franchisees in the three month period
ended December 26, 1999 and the lease termination of two restaurants compared to
the same period in the previous fiscal year.
The Company considers earnings before interest, taxes, depreciation and
amortization to be another important indicator of performance. For the nine
month period ended March 26, 2000, earnings before interest, taxes, depreciation
and amortization increased by 106% or $1,139,916 to a gain of $65,872 compared
to a loss of ($1,074,044) for the same period in the previous fiscal year. This
improvement is partially attributed to the franchising of 27 Company owned
restaurants and the lease termination of two restaurants compared to the same
period in the previous fiscal year.
16
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7/1/99 7/1/98
Through Through
03/26/00 03/28/99
--------- ---------
LOSS FROM OPERATIONS $(501,396) $ (1,497,096)
LESS: Other 0 (411,927)
ADD: Depreciation and
Amortization 567,268 834,979
--------- -----------
EBITDA $ 65,872 $(1,074,044)
As a result of the foregoing, the Company's net loss (before preferred
dividends) decreased 70.2% or $1,549,524 to $657,910 for nine month period ended
March 26, 2000, compared to a net loss (before preferred dividends) of
$2,207,434 for the same period in the previous fiscal year.
Liquidity and Capital Resources
The Company has financed its 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 $1.25 million of equity and debt has been
raised since June 30, 1999.
Common Stock March 1999 $ 110,000
Promissory Notes and Warrants May 1999 - February 2000 $1,137,000
----------
$1,247,000
The management of the Company continues to seek opportunities to reduce the
Company's operating costs, in an effort to improve the Company's liquidity. The
Company's most significant supplier contract was completed in December 1998 with
the Company's soft drink product supplier. The Company received in excess of
$625,000 in cash from its new soft drink supplier during the three month period
ended December 27, 1998. Such proceeds were used to defray the cost of switching
vendors and promotional costs incurred to integrate the new product line into
the Company's menu. Any excess proceeds will be amortized into income over a two
year period. The new vendor is providing menu board design leadership, menu
board financing and marketing support in various phases of core product
promotions in addition to soft drink promotions.
The Company's current liabilities exceeded its current assets by $503,394 at
March 26, 2000, compared to $3,733,044 at June 30, 1999. The Company had cash
and short-term investments of $3,615,217 at March 26, 2000 compared to $165,459
at June 30, 1999. The primary reason for this increase in cash is the
consolidation of Digital Creative Development Corporation Finance Statement. The
capital that has been raised by Digital and not the Company and will be retained
by Digital and used solely for Digital's operations and the acquisition and
investment in companies that focus on the creation and delivery of broadband
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 nine month
period ended March 26, 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 resturant
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operations.
The Company implemented a restructuring strategy in January 1999 which is
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 of October 1999, the
restructuring of real estate obligations by franchising, selling and terminating
selected leases was completed. As a result of the spin-off of selected leases,
losses typically incurred by certain locations have been eliminated, thus
improving cashflow.
The Company believes that it will need additional financing and working capital
to finance its operations and capital expenditures. Although 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, and the
re-negotiation of the Company's accounts payable. There 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.
Seasonality
The Company derives a significant portion of its sales during the
November/December (Christmas) and March/April (Easter) holiday seasons, which
are reflected in the Company's operating results for the second and third
quarter. These seasonal effects are dependent upon the general retailing
environment and customers' preference to shopping malls. Weather can have a
significant affect on shopping in Northern climates. 86% of the Company's sales
come from Northern states. These areas can be significantly impacted by weather
during December, January and February. Approximately 70% of the Company's
restaurant revenue is derived from shopping malls. The Company derives
approximately 15% of its total annual revenues from the operations of the stores
located in shopping malls during the holiday season.
Year 2000 Compliance The Company has undertaken a comprehensive review of its
computer-based systems and applications to identify modifications necessitated
by the century change in the year 2000 and has implemented a plan to make such
modifications. The Company has completed critical systems compliant with the
century change prior to December 31, 1999. The Company has completed the process
of updating all accounting and computer programs. The Company's costs of
compliance was not material relative to its financial condition. The Company has
made inquiries with its' suppliers in regards to year 2000 compliance issues and
no issues were derived from the year 2000 compliance.
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PART II OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults on Senior Securities
None
Item 4 Submission of Matters to a Vote of Shareholders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
From 8-K Filed March 27, 2000
Regarding Item 4 Changes in registrant's
certifying accountants
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SIGNATURES
In accordance with the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ARTHUR TREACHER'S, INC.
(Registrant)
Date: May 30, 2000 /s/ William F. Saculla
-------------------------
William F. Saculla
President and Chief
Financial Officer
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