<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT
Under Section 13 or 15(d) of the Securities Act of 1934
For the Six Months Ended December 26, 1999
ARTHUR TREACHER'S, INC.
(Name of Small Business Issuer in Its Charter)
UTAH 34-1413104
- ---------------------------- ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
7400 Baymeadows Way, Suite 300, Jacksonville, Florida 32256
- ------------------------------------------------------ -----------------
(Address of Principal Executive Offices) (Zip Code)
(904) 739-1200
- -----------------------------------------------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
------ -----
At April 27, 2000, the latest practicable date there were 15,499,004 shares of
Common Stock outstanding, $.01 par value.
<PAGE>
ARTHUR TREACHER'S, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Unaudited Financial Statements:
Consolidated Balance Sheets as of December 26, 1999 and June 30, 1999 3
Consolidated Statements of Operations for the Three Month Periods
September 27, 1999 through December 26, 1999; and
September 28, 1998 through December 27, 1998 5
Consolidated Statements of Operations for the Six Month Periods
July 1, 1999 through December 26, 1999; and
July 1, 1998 through December 27, 1998 6
Consolidated Statement of Cash Flows for the Six Month Periods
July 1, 1999 through December 26, 1999; and
July 1, 1998 through December 27, 1998 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 19
</TABLE>
2
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 26, 1999 and JUNE 30, 1999
<TABLE>
<CAPTION>
December June
1999 1999
ASSETS (Unaudited) (Audited)
- ------ --------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 84,594 165,459
Accounts receivable, net of allowance of $10,470
in December 1999 and $49,700 in June 1999 168,067 149,468
Inventories 161,349 174,930
Prepaid expenses and other 96,601 94,176
------------- -------------
TOTAL CURRENT ASSETS 510,611 584,033
------------- -------------
PROPERTY AND EQUIPMENT, AT COST
Leasehold improvements 2,350,578 4,072,762
Furniture, fixtures, and equipment 1,792,181 2,943,477
------------- -------------
4,142,759 7,016,239
Less accumulated depreciation 2,998,107 5,450,502
------------- -------------
PROPERTY AND EQUIPMENT, net 1,144,652 1,565,737
OTHER ASSETS
Deposits 113,466 134,213
Goodwill 276,199 284,362
Other 70,169 73,174
------------- -------------
TOTAL ASSETS $ 2,115,097 2,641,519
============= =============
</TABLE>
3
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 26, 1999 and JUNE 30, 1999
<TABLE>
<CAPTION>
December June
1999 1999
(Unaudited) (Audited)
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable 2,522,646 2,968,623
Accrued expenses and other liabilities 349,092 410,025
Current maturities of long-term debt 1,088,197 570,579
Deferred revenue 367,850 367,850
------------- --------------
TOTAL CURRENT LIABILITIES 4,327,785 4,317,077
Long-term debt, net of current maturities 824,779 1,119,300
Deferred revenue 132,218 248,000
------------- -------------
TOTAL LIABILITIES 5,284,782 5,684,377
------------- -------------
STOCKHOLDERS' EQUITY (Deficit)
Preferred stock 1,744,885 1,744,885
Common stock 154,091 151,651
Additional paid-in capital 10,660,905 10,516,950
Accumulated deficit (15,729,566) (15,456,344)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (Deficit) (3,169,685) (3,042,858)
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 2,115,097 2,641,519
============= =============
</TABLE>
4
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIODS
<TABLE>
<CAPTION>
September 27, 1999 September 28, 1998
through through
December 26, 1999 December 27, 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
TOTAL REVENUE $ 3,586,672 5,847,525
OPERATING EXPENSES:
Cost of sales, including occupancy except depreciation 1,776,432 3,258,735
Operating expenses 1,328,406 2,323,389
Depreciation and amortization 176,109 303,118
General and administrative expenses 316,823 503,457
------------- -------------
TOTAL OPERATING EXPENSES 3,597,770 6,388,699
------------- -------------
LOSS FROM OPERATIONS (11,098) (541,174)
OTHER INCOME (EXPENSES):
Other, net (41,058) (44,608)
------------- --------------
NET LOSS (52,156) (585,782)
Undeclared preferred stock dividends (30,570) (30,570)
------------- -------------
Net loss for common shareholders $ (82,726) (616,352)
============== =============
Basic loss per common share $ (.01) (.04)
============= ============
Diluted loss per common share $ (.01) (.04)
============= ============
Weighted average number of outstanding shares for basic and diluted 15,246,342 14,897,754
============= =============
</TABLE>
5
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIODS
<TABLE>
<CAPTION>
July 1, 1999 July 1, 1998
through through
December 26, 1999 December 27, 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
TOTAL REVENUE $ 7,486,374 11,297,568
OPERATING EXPENSES:
Cost of sales, including occupancy except depreciation 3,835,207 6,413,744
Operating expenses 2,832,272 4,538,236
Depreciation and amortization 391,159 591,576
General and administrative expenses 618,187 964,438
------------- -------------
TOTAL OPERATING EXPENSES 7,676,825 12,507,994
------------- -------------
LOSS FROM OPERATIONS (190,451) (1,210,426)
OTHER INCOME (EXPENSES):
Other, net (82,771) (78,699)
------------- --------------
NET LOSS (273,222) (1,289,125)
Undeclared preferred stock dividends (61,140) (41,250)
------------- -------------
Net loss for common shareholders $ (334,362) (1,330,375)
============= =============
Basic loss per common share $ (.02) (.09)
============ ============
Diluted loss per common share $ (.02) (.09)
============ ============
Weighted average number of outstanding shares for basic and diluted 15,205,677 14,883,154
============= =============
</TABLE>
6
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIODS
<TABLE>
<CAPTION>
July 1, 1999 July 1, 1998
through through
December 26, 1999 December 27, 1998
----------------- -----------------
<S> <C> <C>
Operating activities:
Net loss $ (273,222) (1,289,125)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 391,159 591,576
Amortization of deferred revenue (161,502) --
Deferred revenue proceeds 45,720 --
Changes in assets and liabilities:
(Increase) in accounts receivable (18,598) (46,627)
Decrease (increase) in deposits and other assets 23,752 (53,727)
(Increase) in prepaid expenses and other
current assets (2,425) (43,093)
Decrease (increase) in inventories 13,581 (24,853)
(Decrease) increase in accounts payable (414,682) 376,183
(Decrease) increase in accrued expenses, and
other liabilities (60,933) 672,601
-------------- -------------
Net cash (used in) provided by operating activities (457,150) 182,935
-------------- -------------
Investing activities:
Capital expenditures (10,195) (417,404)
Proceeds from disposition of restaurants 49,428
-------------- --------------
Net cash used in investing activities (39,233) (417,404)
-------------- --------------
Financing activities:
Proceeds from the issuance of preferred stock, net of issue costs - 355,298
Proceeds from long-term debt 560,153 200,000
Payment of dividend - (390,417)
Principal payments on long-term debt (223,101) (211,113)
------------- -------------
Net cash (used in) provided by financing activities 337,052 (46,232)
------------- --------------
Net increase (decrease) in cash and cash equivalents (80,865) (280,701)
</TABLE>
7
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
FOR THE SIX MONTHS ENDED
<TABLE>
<CAPTION>
July 1, 1999 July 1, 1998
through through
December 26, 1999 December 27, 1998
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents beginning of period 165,459 909,636
------------- -------------
Cash and cash equivalents end of period $ 84,594 628,935
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 51,776 90,188
============= =============
Supplemental disclosure of noncash transactions:
Common stock issued to settle accounts payable $ -- 43,836
------------- -------------
Supplemental disclosure of noncash transactions:
Common stock issued to settle debt and interest $ 146,396 --
============= =============
</TABLE>
8
<PAGE>
ARTHUR TREACEHR'S, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 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
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.
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.
9
<PAGE>
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
<PAGE>
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
<PAGE>
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 December 26, 1999 and December
27,1998. (ii) unaudited interim financial statements for the six months ended
December 26, 1999 and December 27, 1998.
12
<PAGE>
1999 Three months and 1998 Three months
The Company's reported total revenues of $3,586,672 for the three month period
ended December 26, 1999, reflected a decrease of $2,260,853 or 38.7%, compared
to the same three month period ended December 27, 1998. 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 $2,326,797 or
43.3% to $3,048,694 compared to $5,375,491 in the same period in the previous
fiscal year. 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 0.7% or $21,827 to $3,041,200 for the three month
period ended December 26, 1999 compared to $3,063,027 for the same period in the
previous fiscal year.
Franchise and other income increased 61.5% or $124,765 to $327,740 for the three
month period ended December 26, 1999 compared to the same three month period
ended December 27, 1998. The increase 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 43.7% from $2,790,929 to
$3,597,770 for the three month period ended December 26, 1999, compared to the
same period in the previous fiscal year. 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 34.2% or $133,319 to $256,385 for
the three month period ended December 26, 1999, compared to $389,704 in the same
period in the previous fiscal year. 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 4.7% or $1,865 from $39,193 to $41,058 for the three
month period ended December 26, 1999, compared to the same period in the
previous fiscal year. The increase was due to new debt taken on by the Company.
Depreciation and amortization decreased 41.9% or $127,008 to $176,109 for the
three month period ended December 26, 1999, compared to $303,117 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.
13
<PAGE>
The Company considers earnings before interest, taxes, depreciation and
amortization to be another important indicator of performance. For the three
month period ended December 26, 1999, earnings before interest, taxes,
depreciation and amortization increased by 166% or $415,951 to a gain of
$165,011 compared to a loss of ($250,940) for the same period in the previous
fiscal 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.
9/27/99 9/28/98
Through Through
12/26/99 12/27/98
-------- --------
LOSS FROM OPERATIONS $ (11,098) $(541,174)
LESS: Other 0 5,415
ADD: Depreciation and
Amortization 176,109 303,118
--------- ---------
EBITDA $ 165,011 $(243,471)
As a result of the foregoing, the Company's net loss (before preferred
dividends) decreased 91.1% or $533,626 to $52,156 for three month period ended
December 26, 1999, compared to a net loss (before preferred dividends) of
$585,782 for the same period in the previous fiscal year.
1999 Six months and 1998 Six months
The Company's reported total revenues of $7,486,374 for the six month period
ended December 26, 1999, reflected a decrease of 33.7% or $3,811,194, compared
to the same six month period ended December 27, 1998. 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 38.7% or
$4,024,893, to $6,369,595 compared to $10,394,488 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 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 38.7%, same store net
sales comparisons for stores operated for the full six months, decreased by 0.1%
or $716 to $5,903,777 for the six month period ended December 26, 1999 compared
to $5,904,493 for the same period in the previous fiscal year.
14
<PAGE>
Franchise and other income increased 95.5% or $338,217 to $692,569 for the six
month period ended December 26, 1999 compared to the same period in the 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 $161,502 for the six month period
ended December 26, 1999, compared to $0.0 in the same period in the previous
fiscal year.
The Company's total costs and expenses decreased 38.6% from $4,831,169 to
$7,676,825 for the six month period ended December 26, 1999, 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 in the
first three month period ended September 26, 1999, the additional franchising of
6 Company owned restaurants to existing 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 $1,069 or 1.3% from $81,702 to $82,771 for the six
month period ended December 26, 1999, compared to 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 33.9% or $200,417 to $391,159 for the
six month period ended December 26, 1999, compared to $591,576 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 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 six month
period ended December 26, 1999, earnings before interest, taxes, depreciation
and amortization increased by 133% or $816,641 to a gain of $200,708 compared to
a loss of ($615,933) 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.
15
<PAGE>
7/1/99 7/1/98
Through Through
12/26/99 12/27/98
-------- --------
LOSS FROM OPERATIONS $ (190,451) $(1,210,426)
LESS: Other 0 (2,917)
ADD: Depreciation and
Amortization 391,159 591,576
----------- -----------
EBITDA $ 200,708 $ (615,933)
As a result of the foregoing, the Company's net loss (before preferred
dividends) decreased 78.9% or $1,015,903 to $273,222 for six month period ended
December 26, 1999, compared to a net loss (before preferred dividends) of
$1,289,125 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 $3.3 million of equity and debt has been raised since
December 1997.
<TABLE>
<S> <C> <C>
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
----------
$3,335,715
</TABLE>
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.
16
<PAGE>
The Company's current liabilities exceeded its current assets by $3,817,174 at
December 26, 1999 compared to $3,733,044 at June 30, 1999. The Company had cash
and short-term investments of $84,594 at December 26, 1999 compared to $165,459
at June 30, 1999. 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 six
month period ended December 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.
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 working capital to finance its
operations or capital expenditures. Although the Company has successfully
obtained additional financing in the past and the Company believes it could meet
its needs through either additional borrowings or the sale of additional equity,
and the continued negotiations of the Company's accounts payable, although there
can be no assurance that the Company would be successful in obtaining any such
financing, or on what terms such transactions could be effected, although there
can be no assurance 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
17
<PAGE>
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.
18
<PAGE>
PART II OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults on Senior Securities
None
Item 4 Submission of Matters to a Vote of Shareholders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
None
19
<PAGE>
SIGNATURES
In accordance with the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ARTHUR TREACHER'S, INC.
(Registrant)
Date: April 27, 2000 By /s/ William F. Saculla
----------------------------
William F. Saculla
President and Chief Financial Officer
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