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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 Three Months Ended September 26, 1999
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 Identification No.)
Incorporation or Organization)
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)
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 No X
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At April 24, 2000, the latest practicable date there were 15,499,004 shares of
Common Stock outstanding, $.01 par value.
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ARTHUR TREACHER'S, INC.
INDEX
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Unaudited Financial Statements:
Consolidated Balance Sheets as of September 26, 1999 and June 30, 1999 3
Consolidated Statements of Operations for the Three Month Periods
July 1, 1999 through September 26, 1999; and
July 1, 1998 through September 27, 1998 5
Consolidated Statement of Cash Flows for the Three Month Periods
July 1, 1999 through September 26, 1999; and
July 1, 1998 through September 27, 1998 6
Notes to Interim Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis Results of Operations and
Financial Condition 9
Part II. OTHER INFORMATION 13
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ARTHUR TREACHER'S, INC.
Consolidated Balance Sheets
September 26, 1999 and June 30, 1999
Assets September June
- ------ 1999 1999
(Unaudited) (Audited)
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CURRENT ASSETS:
Cash and cash equivalents $ 18,814 $ 165,459
Accounts receivable, net of allowance of $49,693
in September 1999 and $49,700 in June 1999 154,812 149,468
Inventories 129,981 174,930
Prepaid expenses and other 134,508 94,176
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TOTAL CURRENT ASSETS 438,115 584,033
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PROPERTY AND EQUIPMENT, AT COST
Leasehold improvements 2,339,494 4,072,762
Furniture, fixtures, and equipment 1,790,501 2,943,477
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4,129,995 7,016,239
Less accumulated depreciation 2,826,081 5,450,502
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PROPERTY AND EQUIPMENT, NET 1,303,914 1,565,737
OTHER ASSETS
Deposits 158,795 134,213
Goodwill 280,281 284,362
Other 73,169 73,174
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TOTAL ASSETS $2,254,274 $2,641,519
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ARTHUR TREACHER'S, INC.
Consolidated Balance Sheets, continued
September 26, 1999 and June 30, 1999
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September June
1999 1999
(Unaudited) (Audited)
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LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit)
CURRENT LIABILITIES:
Accounts payable $ 2,936,416 2,968,623
Accrued expenses and other liabilities 284,378 410,025
Current maturities of long-term debt 561,806 570,579
Deferred revenue 367,850 367,850
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TOTAL CURRENT LIABILITIES 4,150,450 4,317,077
Long-term debt, net of current maturities 1,062,757 1,119,300
Deferred revenue 304,991 248,000
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TOTAL LIABILITIES 5,518,198 5,684,377
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STOCKHOLDERS' EQUITY (Deficit)
Preferred stock 1,744,885 1,744,885
Common stock 151,651 151,651
Additional paid-in capital 10,516,950 10,516,950
Accumulated deficit (15,677,410) (15,456,344)
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TOTAL STOCKHOLDERS' EQUITY (Deficit) (3,263,924) (3,042,858)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,254,274 $ 2,641,519
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4
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ARTHUR TREACHER'S, INC.
Consolidated Statements of Operations
For the Three Months Ended
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September September
1999 1998
(Unaudited) (Unaudited)
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TOTAL REVENUE $ 3,899,702 5,450,043
OPERATING EXPENSES:
Cost of sales, including occupancy except depreciation 2,058,775 3,155,009
Operating expenses 1,503,866 2,214,847
Depreciation and amortization 215,050 290,885
General and administrative expenses 301,364 458,553
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TOTAL OPERATING EXPENSES 4,079,055 6,119,294
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LOSS FROM OPERATIONS (179,353) (669,251)
OTHER INCOME (EXPENSES):
Other, net (41,713) (34,092)
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NET LOSS (221,066) (703,343)
Undeclared preferred stock dividends (30,570) (20,250)
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NET LOSS FOR COMMON SHAREHOLDERS $ (251,636) (723,593)
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Basic loss per common share $ (.02) (.05)
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Diluted loss per common share $ (.02) (.05)
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Weighted average number of outstanding shares for basic and diluted 15,165,011 14,869,748
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ARTHUR TREACHER'S, INC.
Consolidated Statements of Cash Flows
For the Three Months Ended
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September September
1999 1998
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OPERATING ACTIVITIES
Net loss $(221,066) (703,343)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 215,050 290,885
Changes in assets and liabilities:
(Increase) in accounts receivable (5,344) (26,640)
(Increase) in deposits and other assets (24,577) (21,507)
(Increase) in prepaid expenses and other
current assets (40,332) (51,076)
Decrease in inventories 44,949 22,912
Decrease in goodwill 4,081 -
(Decrease) increase in accounts payable (32,207) 275,988
(Decrease) in accrued expenses, other
liabilities and dividends payable (68,656) (57,066)
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NET CASH USED IN OPERATING ACTIVITIES (128,102) (269,847)
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INVESTING ACTIVITIES
Capital expenditures (2,655) (254,981)
Proceeds from disposition of restaurants 49,428
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 46,773 (254,981)
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FINANCING ACTIVITIES
Proceeds from the issuance of preferred stock net of issuance costs -- 355,298
Proceeds from long-term debt -- 200,000
Payment of dividend -- (390,417)
Principal payments on long-term debt (65,316) (59,469)
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NET CASH (PROVIDED BY) USED IN FINANCING ACTIVITIES (65,316) 105,412
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NET (DECREASE) IN CASH AND CASH EQUIVALENTS (146,645) (419,416)
CASH AND CASH EQUIVALNETS, Beginning of period 165,459 909,636
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CASH AND CASH EQUIVALENTS, End of period $ 18,814 490,220
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 7,586 24,009
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6
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ARTHUR TREACEHR'S, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 26, 1999
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim unaudited financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission, and reflect all adjustments which, in the opinion of management, are
necessary to properly state the results of operations and financial position.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations although
management believes that the disclosures are adequate to make the information
presented not misleading. The results of operations are not necessarily
indicative of the results for the full year. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's audited financial statements included in the Form 10-KSB for
the fiscal year ended June 30, 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 31
Arthur Treacher's Fish and Chips restaurants in Pennsylvania, New York, New
Jersey and Delaware.
Arthur Treacher's Management Co., a wholly-owned subsidiary, 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 its franchisees.
Earnings per Share
Effective December 28, 1997, the Company implemented the provisions of Statement
of Financial Accounting Standards # 128 "Earnings Per Share". All earnings per
share information presented has been restated to reflect the provisions of this
statement.
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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
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. The Sixth Circuit should hand down the 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 opinion of management, the ultimate disposition of those matters will not
have a material adverse effect on the Company's consolidated results of
operations of financial position.
8
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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).
Results of Operations
The following discussion includes the following periods: (i) unaudited interim
financial statements for the three months ended September 26, 1999 and (ii) the
three months ended September 27, 1998.
1999 Three months and 1998 Three months
The Company's reported total revenues of $3,899,702 for the three month period
ended September 26, 1999 reflected a decrease of $1,550,341 or 28.5%, compared
to the same period in the previous fiscal year. The decrease is primarily
attributed to the franchising of 21 Company owned restaurants to existing
franchisees and lease termination of two restaurants compared to the same period
in the previous fiscal year.
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The Company recognized a decrease in net restaurant sales (defined as gross
restaurant sales less coupons, promotion cost and discounts) of $1,698,096 or
33.8% to $3,320,901 compared to $5,018,997 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 and lease termination of two
restaurants compared to the same period in the previous fiscal year. While total
net sales decreased 33.8%, same store net sales comparisons increased by 0.7% or
$21,111 to $2,862,577 for the three month period ended September 26, 1999
compared to $2,841,466 for the same period in the previous fiscal year.
Franchise and royalty income increased 141.0% from $151,377 to $364,829 for the
three months period ended September 26, 1999 compared to the same period in the
previous fiscal year. The increase was primarily due to the timeliness of the
receipt of marketing allowances from the Company's suppliers. Also, franchise
sales increased $24,500 for the three month period ended September 26, 1999
compared to $ .0 for the same period in the previous fiscal year. The increase
was primarily due to the sale of franchisees to Miami Subs, Inc.
The Company's total costs and expenses decreased 33.3% from $6,119,294 to
$4,079,055 for the three month period ended September 26, 1999, compared to the
same period in the previous fiscal year. The decrease was primarily attributed
to the franchising of 21 Company owned restaurants and lease termination of two
restaurants compared to the same period in the previous fiscal year.
General and Administrative expenses decreased 34.3% or $157,189 to $301,364 for
the three month period ended September 26, 1999, compared to $458,553 in the
same period in the previous fiscal year. The decrease is partially attributed
the reduction of staff in association with the franchising of the 21 Company
owned restaurants and lease termination of two restaurants compared to the same
period in the previous fiscal year.
Interest expense decreased 1.8% from $42,509 to $41,713 for the three month
period ended September 26, 1999, compared to the same period in the previous
fiscal year. The decrease in interest expense was due to a reduction in the debt
financing.
Depreciation and amortization decreased 26.8% or $78,059 to $215,050 for the
three month period ended September 26, 1999, compared to $293,109 for the same
period in the previous fiscal year. This decrease was primarily attributed to
the franchising of 21 Company owned restaurants and lease termination of two
restaurants compared to the same period in the previous fiscal year.
As a result of the foregoing, particularly the franchising of 21 Company owned
restaurants and lease termination of two restaurants compared to the same period
in the previous fiscal year. The Company's net loss (before preferred dividends)
decreased 68.6% or $482,277 to $221,066 for three month period ended September
26, 1999, compared to a net loss (before preferred dividends) of $703,343 for
the same period in the previous fiscal year.
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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 $3.3 million of equity and debt has been raised since
December 1997.
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Preferred Stock "Series C" December 1997 $ 990,000
Warrants exercised Dec 1997 - April 1998 $ 60,400
Common Stock June 1998 $ 438,315
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
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$ 3,335,715
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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, 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 $3,712,335 at
September 26, 1999 compared to $3,733,044 at June 30, 1999. The Company had cash
and short-term investments of $18,874 at September 26, 1999 compared to $165,459
at June 30, 1999. During the quarter ended September 26, 1999, the Company
experienced negative cash flow which has adversely affected its liquidity. The
lack of liquidity has adversely affected the Company's operations. Such negative
cash flow resulted primarily from operating losses related to the "Seafood
Grille" concept in the Detroit, Florida and New York metropolitan markets.
The Company became in arrears with respect to certain leases because of
poor performance by stores in those locations. The Company had also incurred
indebtedness in connection with (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.
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The Nasdaq Stock Market, Inc. delisted the Company's Common Stock from the
NASDAQ Small Cap Market on February 10, 1999 because the Company failed to
comply with Nasdaq's compliance criteria regarding minimum net tangible assets
and minimum bid price. The Company's common stock became listed on the OTC
Bulletin Board effective February 11, 1999. The delisting from NASDAQ could
adversely affect the Company's ability to raise additional capital.
The Company 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.
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
None
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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: April 24, 2000 By /s/ William F. Saculla
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William F. Saculla
President, Chief Financial Officer
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