<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 28, 2000
REGISTRATION NO. ________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS UNDER
SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
ARTHUR TREACHER'S, INC.
-------------------------------------------------------------
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 11-3570846
-------------------------------- --------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYEE IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
5 Dakota Drive, Suite 303, Lake Success, New York 11042
------------------------------------------------- -----------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(516) 358-0600
-------------------------------------------------------------
(ISSUER'S TELEPHONE NUMBER)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
TO BE REGISTERED WHICH EACH CLASS IS TO BE REGISTERED
-------------------- ------------------------------------
NONE N/A
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
<PAGE>
ARTHUR TREACHER'S, INC.
CROSS-REFERENCE SHEET
SHOWING LOCATION IN REGISTRATION STATEMENT OF INFORMATION
REQUIRED BY ITEMS ON FORM 10-SB
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING LOCATION
----------------------- --------
<S> <C> <C>
PART I
------
1. Description of Business................................. SUMMARY; RISK FACTORS; REASONS FOR THE DISTRIBUTION; BUSINESS;
UNAUDITED PRO-FORMA FINANCIAL STATEMENTS; MANAGEMENT'S DISCUSSION
AND ANALYSIS; ARRANGEMENTS BETWEEN DIGITAL CREATIVE DEVELOPMENT
CORPORATION AND ARTHUR TREACHER'S, INC.; FINANCIAL STATEMENTS
2. Management's Discussion and Analysis or Plan of
Operation............................................... MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION; BUSINESS
3. Description of Property................................. RISK FACTORS; BUSINESS
4. Securities ownership of Certain
Beneficial Owners and Management........................ SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
5. Directors, Executive Officers, Promoters
and Control Persons..................................... MANAGEMENT
6. Executive Compensation.................................. EXECUTIVE COMPENSATION
7. Certain Relationships and Related
Transactions............................................ SUMMARY; RISK FACTORS; THE DISTRIBUTION; REASONS FOR THE
DISTRIBUTION; BUSINESS; MANAGEMENT; SECURITIES OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT; ARRANGEMENTS BETWEEN DIGITAL
CREATIVE DEVELOPMENT CORPORATION AND ARTHUR TREACHER'S, INC.;
DESCRIPTION OF CAPITAL STOCK
8. Description of Registrant's
Securities to be Registered............................. DESCRIPTION OF CAPITAL STOCK
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
PART II
-------
1. Market Price of and Dividends of the
Registrant's Common Equity and Related
Stockholder Matters..................................... SUMMARY; RISK FACTORS; SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT; DESCRIPTION OF CAPITAL STOCK; DIVIDEND
POLICY; ARRANGEMENTS BETWEEN DIGITAL CREATIVE DEVELOPMENT
CORPORATION AND ARTHUR TREACHER'S, INC.;
2. Legal Proceedings....................................... LEGAL PROCEEDINGS
3. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.................................... NOT APPLICABLE
4. Recent Sales of Unregistered
Securities.............................................. NOT APPLICABLE
5. Indemnification of Directors
and Officers............................................ INDEMNIFICATION OF OFFICERS AND DIRECTORS
PART F/S
--------
1. Financial Information .................................. SUMMARY; RISK FACTORS; REASONS FOR THE DISTRIBUTION; BUSINESS;
UNAUDITED PRO-FORMA FINANCIAL STATEMENTS; MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS;
ARRANGEMENTS BETWEEN DIGITAL CREATIVE DEVELOPMENT CORPORATION AND
ARTHUR TREACHER'S, INC.; FINANCIAL STATEMENTS
2. Financial Statements and
Supplementary Data...................................... SUMMARY; RISK FACTORS; UNAUDITED PRO-FORMA FINANCIAL STATEMENTS;
BUSINESS; MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS; FINANCIAL STATEMENTS;
ARRANGEMENTS BETWEEN DIGITAL CREATIVE DEVELOPMENT CORPORATION AND
ARTHUR TREACHER'S, INC.;
</TABLE>
PART III
--------
1. Exhibits................................................ EXHIBITS
3
<PAGE>
[ARTHUR TREACHER'S LOGO]
PRELIMINARY INFORMATION STATEMENT
(SUBJECT TO COMPLETION)
ARTHUR TREACHER'S, INC.
Distribution of Approximately 30,000,000 Shares of Common Stock
This Information Statement is being furnished in connection with the
distribution by Digital Creative Development Corporation ("Digital") to holders
of its common stock and its preferred stock of all the outstanding shares of
common stock of Arthur Treacher's, Inc. Digital has transferred or will transfer
to us its restaurant business described in this Information Statement.
Shares of our common stock will be distributed to holders of Digital
common stock and preferred stock of record as of the close of business on
February 1, 2001, which will be the record date. Each such holder will receive
one share of common stock for every share of Digital common stock held on the
record date and such number of shares of common stock into which any preferred
stock he holds on the record date is convertible. The distribution will be
effective at 11:59 p.m. on ____________, 2001. Shareholders will receive cash in
lieu of fractional shares.
No shareholder approval of the distribution is required or sought. We
are not asking for a proxy and you are requested not to send us a proxy. Digital
shareholders will not be required to pay for the shares of our common stock to
be received by them in the distribution, or to surrender or to exchange shares
of Digital common stock or preferred stock in order to receive our common stock,
or to take any other action in connection with the distribution. There is no
current trading market for our common stock. Our common stock will trade on the
NASDAQ Bulletin Board under the symbol "ATPF".
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER
THE MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE _____.
--------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
INFORMATION STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------
Shareholders of Digital with inquiries related to the distribution may
contact Digital's transfer agent, Atlas Stock Transfer, telephone (801)
266-7151.
The date of this Information Statement is __________________, 2001.
4
<PAGE>
A MESSAGE FROM THE CHAIRMAN
RELATING TO THE SPIN-OFF OF
ARTHUR TREACHER'S, INC.
FROM DIGITAL CREATIVE DEVELOPMENT CORPORATION
We are sending you this Information Statement to describe the
distribution of shares of common stock of Arthur Treacher's, Inc. (sometimes
referred to herein as "AT" or "Arthur Treacher's") held by Digital Creative
Development Corporation to the stockholders of Digital Creative Development
Corporation. In this distribution, you will receive one share of AT common stock
for each share of Digital Creative Development Corporation common stock owned by
you at the close of business on February 1, 2001 and such number of shares of AT
common stock into which any preferred stock you hold on February 1, 2001 is
convertible. Your shares of AT common stock will be mailed to you on or about
_______________, 2001. All references in this Information Statement to Arthur
Treacher's or AT refer to Digital Creative Development Corporation's restaurant
business before the distribution and to Arthur Treacher's, Inc., a Delaware
corporation, after the distribution.
No stockholder action is necessary to make the distribution. You do not
need to surrender shares of Digital Creative Development Corporation common
stock or preferred stock to receive AT common stock in the distribution. The
number of shares of Digital Creative Development Corporation common stock and
preferred stock you own will not change as a result of the distribution.
The purpose of the distribution is to separate the restaurant business
from Digital Creative Development Corporation's entertainment business: (i) to
allow the restaurant business to focus on its core strengths and (ii) to permit
customers, stockholders and other constituencies to better evaluate the
respective businesses. Digital and Arthur Treacher's, Inc. have entered into a
series of agreements relating to the distribution and the relationship of
Digital and Arthur Treacher's, Inc. thereafter.
These agreements are attached as exhibits to this Information Statement.
This document provides you with detailed information about Arthur
Treacher's, Inc. and the distribution. We are enthusiastic about this
opportunity for Arthur Treacher's, Inc. to concentrate on its core business and
dedicate its resources to the growth of its business. We encourage you to read
this document carefully to learn more about Arthur Treacher's, the distribution
and Arthur Treacher's future plans.
Very truly yours,
-----------------------------------------
Bruce Galloway
Chairman
_______ ___, 2001. Digital Creative Development Corporation
5
<PAGE>
INFORMATION STATEMENT
TABLE OF CONTENTS
PAGE
----
Summary ............................................................... 7
Why this Information was Sent to You .................................. 9
Summary Historical and Pro Forma Financial Information ................ 10
Relationship Between Digital Creative Development Corporation
and Arthur Treacher's, Inc. ........................................ 10
The Distribution ..................................................... 11
Investor Contact ...................................................... 12
Risk Factors .......................................................... 12
The Distribution ...................................................... 20
Pro Forma Capitalization .............................................. 21
Reasons for the Distribution .......................................... 21
Material United States Federal Income Tax
Consequences ..................................................... 22
Description of Business of Arthur Treacher's
Restaurant Business .............................................. 26
Legal Proceedings ..................................................... 39
Where You Can Find More Information ................................... 40
Management's Discussion and Analysis .................................. 41
Unaudited Pro Forma Financial Statements .............................. 46
Management ............................................................ 53
Executive Compensation and Other Matters .............................. 55
Stock Ownership of Certain Beneficial Owners and Management ........... 56
Arrangements between Digital and Arthur Treacher's .................... 60
Description of the Company's Capital Stock ............................ 62
Treatment of Certain Digital and Arthur Treacher's
Stock Options .................................................... 63
Treatment of Certain Digital Warrants ................................. 64
Listing and Trading of our Common Stock ............................... 65
Certain Charter and Delaware Law Provisions ........................... 65
Delaware Business Combination Statute ................................. 65
Dividend Policy ....................................................... 67
Indemnification of Directors and Officers ............................. 67
Distribution Agent, Transfer Agent and Registrar ...................... 68
Index of Consolidated Financial Statements ............................ 69
Exhibits .............................................................. 70
You should rely only on the information contained in this Information
Statement regarding the distribution. Arthur Treacher's has not authorized any
other person to provide you with different information. If anyone provides you
with different or inconsistent information, you should not rely on it. You
should assume that the information appearing in this Information Statement is
accurate as of the date on the front cover of this Information Statement only.
Arthur Treacher's business, financial condition, results of operations and
prospects may have changed since that date.
6
<PAGE>
SUMMARY
This summary highlights selected information contained elsewhere in
this Information Statement. It is not complete and may not contain all of the
information that is important to you. To understand better the distribution and
Arthur Treacher's, you should read the entire Information Statement carefully,
including the risk factors and financial statements (see Risk Factors beginning
on page ____ and Financial Statements beginning on page ___.) Following the
distribution, we will be an independent public company, and Digital Creative
Development Corporation will have no continuing stock ownership in us.
Accordingly, our historical financial results as part of Digital Creative
Development Corporation may not reflect our financial results in the future as
an independent company, or what our financial results would have been had we
been a stand-alone company during the periods presented.
THE SPIN-OFF
The following is a brief summary of the terms of the spin-off.
<TABLE>
<CAPTION>
<S> <C>
Distributing Company .................................. Digital Creative Development Corporation, a Utah corporation
("Digital") (formerly called Arthur Treacher's, Inc.).
Spun-Off Company ...................................... Arthur Treacher's, Inc., a Delaware corporation ("AT"), currently a
subsidiary of Digital. After the spin-off, AT will be an
independent public company and will continue to be named "Arthur
Treacher's, Inc."
Consideration to Be Received by Digital
Shareholders in the spin-off ........................ Digital shareholders will receive one share of AT common stock in
the spin-off for each share of Digital common stock they hold at
the close of business on the record date for the spin-off, which is
expected to be on or about ________, 2001, and such number of
shares of AT common stock into which any preferred stock they hold
at the close of business on such record date is convertible. No
action by Digital shareholders will be required to receive shares
of AT common stock in the spin-off.
AT Common Stock ....................................... ______________ shares of AT common stock, which is eighty percent
(80%) of the outstanding shares of AT common stock, will be
distributed in the spin-off. Twenty percent (20%) of the
outstanding shares of AT common stock will continue to be held by
Jeffrey Bernstein, the President and Chief Executive Officer of
Arthur Treacher's. Immediately after the spin-off, we estimate
that about ____________ shareholders of record will hold shares of
AT common stock,
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
although some of the shares may be registered in the name of a single
shareholder who represents a number of shareholders.
Distribution Ratio .................................... One share of AT common stock for each share of Digital common stock
that you hold at the close of business on or about _____________,
2001, the record date for the spin-off, and such number of shares
of AT common stock into which any preferred stock you hold on such
record date is convertible.
Record Date/spin-off Date ............................. On or about February 1, 2001 (close of business).
Distribution Agent .................................... Atlas Stock Transfer, which is the registrar and transfer agent for
Digital common stock and AT common stock.
NASDAQ OTC Symbol ..................................... ATPF
Trading Market ........................................ There has been no trading market for AT common stock.
Tax Consequences ...................................... A Digital shareholder generally will recognize ordinary dividend
income for federal income tax purposes to the extent of the lesser
of the fair market value of the shares of AT common stock received
and such shareholder's ratable share of Digital's current and
accumulated earnings and profits for the year of the distribution.
To the extent that the fair market value of the shares of AT common
stock received by the Digital shareholder exceeds such
shareholder's ratable share of Digital's current and accumulated
earnings and profits for the year of the distribution, such excess
first will reduce such shareholder's aggregate adjusted federal
income tax basis in such shareholder's shares of Digital, and any
remaining excess will be treated as gain or loss from the sale or
exchange of the shareholder's Digital Stock. Such gain or loss
will be capital gain or loss if the shares of Digital common stock
are held as a capital asset by the Digital shareholder. Digital
anticipates that, due to its deficit in accumulated earnings and
profits and its expected deficit in current earnings and profits, no
portion of the distribution of the AT common stock will be treated
as a dividend. See "Material United States Federal Income Tax
Consequences" for a more detailed description of the federal income
tax consequences of the spin-off.
Relationship Between Digital and AT ................... AT and Digital will enter into a distribution agreement and other
agreements described in the section entitled "Relationship Between
Digital and AT." Digital and AT may enter into additional or
modified agreements, arrangements and transactions, all of which
will be negotiated at arm's length.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Management and Management
Compensation ........................................ The compensation, awards and other benefits payable to selected
members of management are described in "Management."
</TABLE>
-------------------------
You should carefully read the "Risk Factors" beginning on page ______.
-------------------------
If you have any questions relating to the spin-off, you may contact
Gary Herman at 212-603-7557.
After the spin-off, if you are a shareholder of AT and have questions
relating to the spin-off, you may contact AT directly
Arthur Treacher's, Inc.
5 Dakota Drive
Suite 302
Lake Success, New York 11042
Tel: 516-358-0600
Fax: 516-358-5076
Attention: Corporate Secretary
WHY THIS INFORMATION STATEMENT WAS SENT TO YOU
This Information Statement is being delivered to you because you were
an owner of Digital common stock or preferred stock on February 1, 2001. This
entitles you to receive a distribution of one share of the common stock of our
new company, Arthur Treacher's, Inc., a Delaware corporation, for each share of
Digital common stock owned by you on February 1, 2001 and such number of shares
of AT common stock as any preferred stock you hold is convertible. Although no
action is required on your part to cause this to happen and you do not have to
pay cash or other consideration to receive these shares, the distribution of
these shares to you will have certain tax and other consequences, so please read
the information in this document carefully. It is not, and is not to be
construed as, an inducement or encouragement to hold, buy or sell any of our
securities. The information set forth in this Information Statement is believed
by us to be accurate as of the date set forth on its cover. Changes may occur
after that date, and we will not update the information except in the normal
course of our respective public disclosure obligations and practices.
Digital has historically operated in two businesses or segments: the
restaurant business and the entertainment business. This Information Statement
describes: the business of Arthur Treacher's; the relationship between Digital
and Arthur Treacher's; how this transaction benefits Digital and its
stockholders; and provides other information to assist you in evaluating the
benefits and risks of holding or disposing of your shares of Arthur Treacher's
common stock. Arthur Treacher's has applied to have the Arthur Treacher's common
stock included for quotation on the Nasdaq Bulletin Board under the symbol
"ATPF". All references in this Information Statement to Arthur Treacher's refer
to Digital's restaurant business before the spin-off and to Arthur Treacher's
after the spin-off.
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
Set forth below is a summary of certain historical and pro forma
financial information relating to the restaurant group of Digital:
RESTAURANT GROUP
----------------
<TABLE>
<CAPTION>
6/30/96 6/30/97 6/30/98 6/30/99 6/30/00
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET SALES $ 7,877,910 $ 17,775,659 $ 22,986,762 $ 21,531,829 $ 13,547,419
INCOME(LOSS) FROM
CONTINUING OPERATIONS $ (1,154,340) $ (2,079,022) $ (2,768,695) $ (5,846,719) $ (3,077,412)
RELATED EARNINGS PER
COMMON SHARE $ (0.14) $ (0.16) $ (0.19) $ (0.40) $ (0.19)
TOTAL ASSETS $ 2,670,304 $ 7,622,866 $ 7,312,594 $ 2,641,519 $ 1,343,558
LONG TERM OBLIGATIONS $ 458,923 $ 1,570,305 $ 1,398,805 $ 1,119,300 $ 470,994
CASH DIVIDENDS $ - $ - $ - $ - $ -
</TABLE>
THREE MONTHS ENDED
10/1/00 9/26/99
-------------------------
RESTAURANT GROUP
----------------
NET SALES $ 2,941,988 $ 3,899,702
INCOME(LOSS) FROM
CONTINUING OPERATIONS $ (106,851) $ (221,068)
RELATED EARNINGS PER
COMMON SHARE $ (0.03) $ (0.02)
TOTAL ASSETS $ 1,183,199 $ 2,254,274
LONG TERM OBLIGATIONS $ 433,159 $ 1,062,757
CASH DIVIDENDS $ - $ -
RELATIONSHIP BETWEEN DIGITAL CREATIVE DEVELOPMENT CORPORATION
AND
ARTHUR TREACHER'S, INC.
All Arthur Treacher's common stock held by Digital is being distributed
to the Digital stockholders as described in this Information Statement. Digital
will have no ownership interest in Arthur Treacher's after the distribution.
Arthur Treacher's board of directors will consist of four directors. At the
outset, all of the Arthur
10
<PAGE>
Treacher's directors, with the exception of Arthur Treacher's new Chief
Executive Officer and Gary Herman, will be former directors of Digital.
Please review the information set forth under the captions
"Arrangements Between Digital Creative Development Corporation and Arthur
Treacher's" and "Description of Capital Stock" for further details about Arthur
Treacher's relationship with Digital, its capital structure and matters related
to corporate governance.
THE DISTRIBUTION
After thorough consideration, the board of directors of Digital
determined that a distribution of shares of Arthur Treacher's was in the best
interest of the stockholders of Digital. The Digital board of directors
considered a number of factors in determining to recommend approval of the
spin-off of Arthur Treacher's including:
- the recent proposed valuations of Arthur Treacher's;
- the current financial market conditions and the historical
market information concerning Digital common stock, the
ability of Arthur Treacher's to become a viable public company
and create substantial stockholder value by, among other
things, allowing the financial community to focus separately
on the restaurant business and the entertainment business; and
- the ability to focus greater management attention and
resources on opportunities for our business and to focus on
better managing our cost structure. Digital will similarly
benefit by being able to focus on its retained entertainment
business and its growth opportunities.
Please review the information set forth under the caption "Reasons for
the Distribution" for further details about the reasons for the distribution.
Each Digital stockholder will receive one share of Arthur Treacher's
common stock for every share of Digital common held and such number of shares of
AT common stock into which any preferred stock held is convertible. As of
February 1, 2001, Digital had [ ] shares of common stock outstanding.
Distribution and Transfer Information. Atlas Stock Transfer will act as
the distribution and transfer agent for the distribution. The distribution agent
will mail stock certificates beginning on or about the distribution date.
Record Date, Distribution Date. The record date for the distribution
will be the close of business on February 1, 2001. On the record date, Digital
will transfer to a custodian all of the shares of Arthur Treacher's common stock
pursuant to an irrevocable custody arrangement. On or about [ , ], the custodian
will deliver the shares to Arthur Treacher's transfer agent, who will then mail
them to the Digital stockholders of record as of the record date.
11
<PAGE>
No Fractional Shares. No fractional shares of Arthur Treacher's common
stock will be distributed. Fractional shares of Arthur Treacher's common stock
will be aggregated and sold by Atlas Stock Transfer to provide cash to holders
in lieu of such fractional shares.
Trading Market. Arthur Treacher's has applied to have the Arthur
Treacher's common stock included for quotation on the Nasdaq Bulletin Board
under the symbol "ATPF".
INVESTOR CONTACT
Arthur Treacher's and Digital stockholders with questions about the
distribution should contact Jeffrey Bernstein at Arthur Treacher's principal
executive offices at 5 Dakota Drive, Suite 302, Lake Success, New York 11042;
telephone (516) 358-0600. This contact information will remain the same after
the distribution.
RISK FACTORS
You should carefully consider the risks described below when evaluating
your ownership of Arthur Treacher's common stock. The risks and uncertainties
described below are not the only ones Arthur Treacher's faces. Additional risks
and uncertainties Arthur Treacher's is presently not aware of or that it
currently considers immaterial may also impair Arthur Treacher's business
operations.
If any of the following risks actually occurs, Arthur Treacher's
business, financial condition or results of operations could be materially
adversely affected. In such case, the trading price of the Arthur Treacher's
common stock could decline significantly.
This Information Statement contains forward-looking statements. These
statements include words such as "may," "will," "expect," "believe," "intended,"
"anticipate," "estimate" or similar words. These statements are based on
Digital's current beliefs, expectations and assumptions. Arthur Treacher's
actual results could differ materially from those anticipated in these
forward-looking statements due to certain factors, including the risks described
below and elsewhere in this Information Statement. Arthur Treacher's undertakes
no obligations to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
DIGITAL OPERATED SOLELY AS A RESTAURANT BUSINESS UNTIL FEBRUARY 2000,
WHEN IT COMMENCED DEVELOPMENT OF ITS ENTERTAINMENT BUSINESS. ARTHUR TREACHER'S
MAY INCUR LOSSES AS A RESULT OF OPERATING SOLELY AS A RESTAURANT BUSINESS AGAIN.
Since starting the entertainment business in February 2000, Digital's
operations have consisted of the restaurant business and the entertainment
business. The commencement of the entertainment business has allowed Digital,
among other things, to:
12
<PAGE>
- concentrate on its broadband and digital content delivery
business; and
- enable Digital to explore significant business opportunities
not otherwise available to its restaurant business, including
developing an internet-related service and developmental
business engaging in strategic alliances to foster
entertainment-related operations.
Arthur Treacher's alone cannot be sure that its operating results will
not be adversely affected by the loss of one or more of the above attributes.
Any loss of the benefits provided by the combination with the entertainment
business could seriously harm Arthur Treacher's operating results which would
negatively affect the value of your investment.
ARTHUR TREACHER'S OPERATING RESULTS HAVE VARIED SIGNIFICANTLY IN THE
PAST AND ARE LIKELY TO VARY SIGNIFICANTLY IN THE FUTURE. ARTHUR TREACHER'S STOCK
PRICE MAY DECLINE IF IT FAILS TO MEET THE EXPECTATIONS OF ANALYSTS AND
INVESTORS.
Arthur Treacher's quarterly and annual operating results have been and
will likely continue to be affected by a wide variety of factors that could have
a negative effect on revenue and profitability. These factors include, but are
not limited to:
- seasonality considerations as to operations;
- lack of access to additional financing and working capital to
cover operating and capital expenditures;
- general conditions in the restaurant industries; and
- availability of products to supply ongoing operations.
THE SPIN-OFF OF ARTHUR TREACHER'S WILL RESULT IN TAXABLE GAIN TO DIGITAL, AND
ARTHUR TREACHER'S MAY BE HELD LIABLE FOR SUCH TAX AS A RESULT OF HAVING BEEN
INCLUDED IN DIGITAL'S CONSOLIDATED GROUP
The distribution of Arthur Treacher's will be a taxable event to
Digital. If any corporate tax is incurred by Digital as a result of the
distribution, Arthur Treacher's, as a member of the consolidated group of
corporations of which Digital is the common parent for federal income tax
purposes, may be held jointly and severally liable for such tax. In such event,
Arthur Treacher's may be forced to increase its debt or issue equity to pay such
tax, and there can be no assurance that these sources of funding will be
available. An increase in debt could negatively impact Arthur Treacher's
financial position and future results of operations, while an issuance of equity
could dilute your interest in Arthur Treacher's.
BECAUSE THE DISTRIBUTION OF ARTHUR TREACHER'S STOCK TO YOU IS TREATED AS A
TAXABLE DISTRIBUTION, YOU MAY BE TREATED AS RECEIVING TAXABLE CAPITAL GAINS OR
TAXABLE ORDINARY INCOME.
13
<PAGE>
You generally will recognize ordinary dividend income for federal
income tax purposes to the extent of the lesser of the fair market value of the
shares of Arthur Treacher's common stock received and your ratable share of
Digital's current and accumulated earnings and profits for the year of the
distribution. Any excess of the fair market value of the Arthur Treacher's
common stock over your ratable share of Digital's current and accumulated
earnings and profits first will reduce your aggregate adjusted federal income
tax basis in your shares of Digital, and any remaining excess will be treated as
(generally) capital gain or loss from the sale or exchange of your Digital
common stock.
THERE HAS NEVER BEEN A TRADING MARKET FOR THE NEW ARTHUR TREACHER'S COMMON STOCK
BEING DISTRIBUTED IN THIS TRANSACTION. ACCORDINGLY THE STOCK PRICE MAY BE
VOLATILE. THIS VOLATILITY MIGHT KEEP YOU FROM RESELLING YOUR SHARES AT OR ABOVE
THE PRICE ON THE DISTRIBUTION DATE.
Prior to the distribution, there has been no public market for Arthur
Treacher's common stock. Arthur Treacher's has applied to have its common stock
included for quotation on the Nasdaq Bulletin Board. Based on the trading
patterns of other companies which became publicly traded in similar
transactions, Arthur Treacher's believes the initial trading volume in Arthur
Treacher's common stock will be moderate as investors assess Arthur Treacher's
progress as a public, stand-alone company. However, an active, sustained trading
market may not develop.
A number of factors may affect the price and liquidity of the Arthur
Treacher's common stock, including:
- actual or anticipated fluctuations in Arthur Treacher's
operating results;
- changes in expectations as to Arthur Treacher's future
financial performance or changes in securities analysts'
financial estimates; and
- the operating and stock price performance of other comparable
companies.
In addition, Arthur Treacher's common stock may be followed by few, if
any, market analysts and there may be few institutions acting as market makers
for the common stock. Either of these factors could adversely affect the
liquidity and trading price of the Arthur Treacher's common stock. Also, the
stock market in general has experienced extreme price and volume volatility that
has especially affected the market prices of securities of many companies. At
times, this volatility has been unrelated to the operating performance of
particular companies. These broad market and industry fluctuations may adversely
affect the trading price of the common stock, regardless of Arthur Treacher's
actual operating performance.
ARTHUR TREACHER'S HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF
ITS RESULTS AS A SEPARATE COMPANY.
The historical financial information of Arthur Treacher's is shown in
the unaudited pro-forma financial statements at page ____ and does not
necessarily reflect what Arthur Treacher's financial position, results of
operations and cash flows would have been had it been a separate, stand-alone
entity during the periods presented. In addition, the historical information is
not necessarily indicative of what its results of operations, financial
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positions and cash flows will be in the future. Arthur Treacher's has not made
adjustments to reflect many significant changes that will occur in its cost
structure, funding and operations as a result of its separation from Digital,
including changes in its employee base, changes in its legal structure and
increased costs associated with being a public, stand-alone company.
For additional information, see "Unaudited Pro Forma Condensed
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and historical consolidated financial
statements and notes thereto.
ARTHUR TREACHER'S MUST OBTAIN ASSIGNMENT OF ALL MAJOR CONTRACTS IT WILL ASSUME
FROM DIGITAL. SOME OF THE PARTIES TO THESE MAJOR CONTRACTS MAY NOT CONSENT TO
THE ASSIGNMENT AT ALL OR WITHOUT ADVERSE CHANGES TO THE EXISTING COSTS, TERMS
AND CONDITIONS.
Because Arthur Treacher's is a newly-formed entity, all of the
contracts under which it will operate must be either assigned from Digital or
entered into again. We cannot be certain that parties to these existing
contracts will be willing to assign them to Arthur Treacher's at all or on terms
no less favorable than those currently in effect with Digital. If any of the
parties to these contracts are unwilling to assign them on favorable terms,
Arthur Treacher's results of operations could be adversely affected. Although
Digital has undertaken to provide the benefits of those contracts to Arthur
Treacher's, there is no guarantee that such arrangements will be effective.
ARTHUR TREACHER'S MAY ENGAGE IN FUTURE ACQUISITIONS THAT RESULT IN INCREASED
DEBT, ASSUMPTION OF LIABILITIES AND OTHER MANAGERIAL CHALLENGES THAT MAY RESULT
IN A NEGATIVE EFFECT ON OPERATIONS.
As part of its overall strategy to enhance or accelerate its
development efforts, Arthur Treacher's may acquire or invest in complementary
companies or enter into joint ventures or strategic alliances with other
companies. Risks commonly encountered in such transactions include the
difficulty of assimilating the operations and personnel of the combined
companies; the potential disruption of Arthur Treacher's ongoing business; the
inability to retain key technical and managerial personnel; the inability of
management to maximize the financial and strategic position of Arthur Treacher's
through the successful integration of the acquired business; decreases in
reported earnings as a result of charges for amortization of acquired intangible
assets; dilution of existing equity holders; difficulty in maintaining controls,
procedures and policies; and the impairment of relationships with employees and
customers as a result of any integration of new personnel. There can be no
assurances that Arthur Treacher's would be successful in overcoming these risks
or any other problems encountered in connection with such business combinations,
investments or joint ventures, or that such transactions will not have an
adverse effect on Arthur Treacher's business, financial condition and results of
operations.
OUR PLANNED EXPANSION INTO NEW GEOGRAPHIC AREAS INVOLVES A NUMBER OF RISKS, MANY
OF WHICH ARE BEYOND OUR CONTROL.
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Almost all of our current restaurants are located in the eastern and
mid-western regions of the United States. Our planned expansion within and
outside these regions involves a number of risks, including:
- uncertainties related to demographics, regional tastes and
preferences;
- legal requirements, local custom, wages, costs and other
economic conditions;
- the need to develop relationships with local distributors and
suppliers for fresh produce, fresh tortillas and other
ingredients;
- potential difficulties related to management of operations
located in a number of broadly dispersed locations; and
- lack of market awareness or acceptance of our restaurant
concept.
We may not be successful in addressing these risks. We also may not be
able to open our planned new operations on a timely basis, or at all. Once the
new restaurants are opened, they may not be operated profitably. Delays in
opening or failure to open planned new restaurants could have a material adverse
effect on our business and results of operations. We currently anticipate that
our new restaurants will take several months to reach planned operating levels
due to inefficiencies typically associated with new restaurants, such as lack of
market awareness, acceptance of our restaurant concept and inability to hire
sufficient staff.
THE SUCCESS OF OUR RAPID EXPANSION STRATEGY WILL DEPEND ON A VARIETY OF FACTORS,
MANY OF WHICH ARE BEYOND OUR CONTROL.
We intend to continue to pursue a rapid expansion strategy. There are
currently two Arthur Treacher's Fish & Chips/Pudgie's Famous Chicken co-brand
units and one Pudgie's Famous Chicken unit under construction. Following the
successful consolidation of the our operations into our Lake Success, New York
headquarters and significant reductions in corporate overhead, our focus will
now be on opening new units through franchising and co-branding. It is
anticipated that during calendar 2001, contracts will be signed for not less
than fifteen additional restaurants, to be operated either as Arthur Treacher's
Fish & Chips, Pudgie's Famous Chicken, or both. We also expect that a
significant number of Miami Subs, Nathan's and/or Kenny Rogers co-brand units
will be added during 2001. By the end of calendar 2001, we expect to be
operating or franchising/co-branding, in excess of 250 restaurants, primarily up
and down the East Coast of the United States, as far west as Ohio and Michigan.
We remain confident that our management/infra-structure is equipped to handle
growth of this magnitude. Our ability successfully to achieve our expansion
strategy will depend on a variety of factors, many of which are beyond our
control. These factors include:
- our ability to locate suitable restaurant sites or negotiate
acceptable lease terms;
- our ability to obtain required local, state and federal
governmental approvals and permits related to construction of
the sites, food and alcoholic beverages;
- our dependence on contractors to construct new restaurants in
a timely manner;
- our ability to attract, train and retain qualified and
experienced restaurant personnel and management;
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- our ability to operate our restaurants profitably;
- our ability to engage new franchisees;
- our need for additional capital and our ability to obtain such
capital on favorable terms or at all;
- fluctuations in food costs particularly the cost of fish,
seafood and chicken (to the extent not mitigated by the terms
of annual contracts with suppliers);
- our ability to respond effectively to the intense competition
in the quick-service restaurant industry; and
- general economic conditions.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD HAVE A NEGATIVE
EFFECT ON THE PRICE OF OUR COMMON STOCK.
- Our quarterly and annual operating results and comparable unit
sales may fluctuate significantly as a result of a variety of
factors, including:
- labor costs for our hourly and management personnel,
including increases in federal or state minimum wage
requirements;
- fluctuations in food costs, particularly the cost of
fish, seafood and chicken.
- the timing of new restaurant openings and related
expenses;
- the amount of sales contributed by new and existing
restaurants;
- our ability to achieve and sustain profitability on a
quarterly or annual basis;
- consumer confidence;
- changes in consumer preferences;
- the level of competition from existing or new
competitors in the quick-service restaurant industry;
- factors associated with closing a unit, including
payment of the base rent for the balance of the lease
term;
- impact of weather on revenues and costs of food; and
- general economic conditions.
Accordingly, results for any one quarter are not necessarily indicative
of results to be expected for any other quarter or for any year. We cannot
assure that comparable unit sales for any particular future period will not
decrease.
THE RESTAURANT INDUSTRY IS INTENSELY COMPETITIVE, AND WE MAY NOT HAVE THE
RESOURCES TO COMPETE ADEQUATELY.
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The restaurant industry is intensely competitive. There are many
different segments within the restaurant industry that are distinguished by
types of service, food types and price/value relationships. We position our
restaurants in the high-quality, quick-service food segment of the industry.
Competition in our industry segment is based primarily upon food quality, price,
restaurant ambiance, service and location. Although we believe we compete
favorably with respect to each of these factors, many of our direct and indirect
competitors are well-established national, regional or local chains and have
substantially greater financial, marketing, personnel and other resources than
we do. We also compete with many other retail establishments for site locations.
The performance of individual units may also be affected by factors
such as traffic patterns, demographic considerations and the type, number and
proximity of competing restaurants. In addition, factors such as inflation,
increased food, labor and employee benefit costs and the availability of
experienced management and hourly employees may also adversely affect the
restaurant industry in general and our units in particular.
THE ABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL TO OPERATE AND
MANAGE OUR RESTAURANTS IS EXTREMELY IMPORTANT, AND OUR FAILURE TO DO SO COULD
ADVERSELY AFFECT OUR BUSINESS.
Our success and the success of our individual restaurants depend upon
our ability to attract and retain highly motivated, well-qualified restaurant
operators and other management personnel, as well as a sufficient number of
qualified employees, including guest service and kitchen staff, to keep pace
with our expansion schedule. Qualified individuals needed to fill these
positions are in short supply in certain areas, and our inability to recruit and
retain such individuals may delay the planned openings of new restaurants or
result in higher employee turnover in existing restaurants, which could have a
material adverse effect on our business or results of operations. We also face
significant competition in the recruitment of qualified employees. In addition,
we are heavily dependent upon the services of our officers and key management
involved in restaurant operations, marketing, finance, purchasing, expansion,
human resources and administration. The loss of any of these individuals could
have a material adverse effect on our business and results of operations.
WE MAY NOT BE ABLE TO MANAGE THE GROWTH WE EXPECT IN OUR OPERATIONS.
Our growth strategy will place a strain on our management, financial
and other resources. To manage our growth effectively, we must maintain the
level of quality and service at our existing and future restaurants. We must
also continue to enhance our operational, financial and management systems and
locate, hire, train and retain experienced and dedicated operating personnel,
particularly managers. We may not be able to effectively manage any one or more
of these or other aspects of our expansion. Failure to do so could have a
material adverse effect on our business and results of operations.
OUR FAILURE TO OBTAIN ADDITIONAL FINANCING WHEN NEEDED WOULD ADVERSELY AFFECT
OUR BUSINESS.
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We believe that anticipated cash flow from operations and funds
anticipated to be available from a credit facility will be sufficient to satisfy
our working capital requirements for at least the next 12 months. We plan to
incur substantial costs over the near-term in connection with our expansion
plans. We may need to seek additional financing sooner than we anticipate as a
result of the following factors:
- changes in our operating plans;
- acceleration of our expansion plans;
- lower than anticipated sales of our menu offerings;
- increased food and/or labor costs;
- potential acquisitions; and
- additional financing may not be available on acceptable terms,
or at all. If we fail to get additional financing as needed,
our business and results of operations would likely suffer.
ARTHUR TREACHER'S DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF
INTEREST BECAUSE OF THEIR OWNERSHIP OF DIGITAL COMMON STOCK.
Certain of Arthur Treacher's directors and executive officers have a
substantial amount of their personal financial portfolio in Digital common
stock, preferred stock, warrants and options to purchase Digital common stock.
Ownership of Digital common stock by Arthur Treacher's directors and officers
after its separation from Digital could create, or appear to create, potential
conflicts of interest when directors and officers are faced with decisions that
could have different implications for Digital and Arthur Treacher's. For
information regarding directors' and officers' ownership of Digital common
stock, see "Management - Stock Ownership of Directors and Executive Officers."
ARTHUR TREACHER'S IS SUBJECT TO ANTI-TAKEOVER PROVISIONS
Certain provisions of Arthur Treacher's Certificate of Incorporation
and By-laws could make it more difficult for a third party to gain control of
Arthur Treacher's, even if a change in control might be beneficial to its
stockholders. This could adversely affect the market price of the common stock.
These provisions include the ability of the board of directors to designate and
issue preferred stock without stockholder consent.
THERE ARE POSSIBLE ADVERSE EFFECTS OF PENNY STOCK RULES ON LIQUIDITY FOR ARTHUR
TREACHER'S SECURITIES
Trading of the Arthur Treacher's common stock will be conducted on the
NASDAQ Bulletin Board. An investor may find it more difficult to dispose of or
to obtain accurate quotations as to the price of such securities because Arthur
Treacher's is not listed on the NASDAQ Small-Cap Market.
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If both the price per share is below $5.00 and Arthur Treacher's
revenues fall below $6,000,000 per year, Arthur Treacher's common stock would be
subject to certain penny stock rules promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Arthur Treacher's is hopeful that
with the acquisition of Pudgie's Famous Chicken, revenues will not fall below
that floor. Rule 15g-9 under the Exchange Act imposes additional sale practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors. For transactions covered by this
Rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. For any transaction by broker-dealers involving a penny stock,
unless exempt, the rules require delivery, prior to a transaction in a penny
stock, of a risk-disclosure document relating to the penny stock market.
Disclosure is also required to be made about compensation payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, statements are required to be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, such Rule may affect the ability
of broker-dealers to sell Arthur Treacher's common stock. If Arthur Treacher's
securities were subject to the rules on penny stocks, the market liquidity for
Arthur Treacher's securities could be severely adversely affected.
THE DISTRIBUTION
The board of directors of Digital has declared a distribution to its
stockholders of one share of Arthur Treacher's common stock for every share of
Digital common stock held on February 1, 2001, the record date for the
distribution, and such number of shares of common stock into which any preferred
stock held on February 1, 2001 in convertible. As a result of the distribution,
all of the then outstanding Arthur Treacher's common stock held by Digital will
be distributed to Digital's stockholders. See "Description of Capital Stock."
Effective ______________, Digital elected to convert all of the
outstanding stock held by private investors in Digital's subsidiary, DCDC
(Delaware), to shares of Digital on a one-for-one basis. Accordingly, former
holders of shares of DCDC (Delaware) will participate in the distribution of
Arthur Treacher's common stock on a one-for-one basis. DCDC (Delaware) is now a
wholly-owned subsidiary of Digital.
On ______________, Digital will effect the distribution by delivering
all of the Arthur Treacher's common stock to ________________, which will hold
such shares as custodian for the benefit of the Digital's stockholders of record
as of the record date pursuant to an irrevocable custody arrangement. On or
about ___________________, the distribution agent will deliver the shares to
Atlas Stock Transfer, Digital's transfer agent, which will then mail the shares
to the Arthur Treacher's stockholders of record as of the record date.
No fractional shares will be issued as part of the distribution. The
distribution agent will aggregate undistributed fractional shares and sell such
shares at the earliest practicable date at the then-prevailing market price.
Each person who would be otherwise entitled to receive a fractional share will
instead receive a cash payment equal to such person's proportionate share of the
net proceeds of the sale of such aggregate undistributed fractional shares.
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Digital's stockholders will not be required to pay any cash or other
consideration for the Arthur Treacher's common stock received in the
distribution. The distribution of the Arthur Treacher's common stock to Digital
stockholders will, however, have certain tax and other consequences, as
discussed in this document.
The general terms and conditions of the arrangements between Arthur
Treacher's and Digital as a result of the distribution are set forth in the
Separation and Distribution Agreement, the General Assignment and Assumption
Agreement and the Indemnification and Insurance Matters Agreement, as well as
other ancillary agreements. For more information regarding these agreements,
please see "Arrangements Between Digital and Arthur Treacher's." Digital will
pay the costs and expenses incurred in connection with the distribution.
For more information regarding tax consequences, see "Risk Factors" and
"Material United States Federal Income Tax Consequences."
PRO FORMA CAPITALIZATION
The following table sets forth the capitalization and certain other
balance sheet data of Arthur Treacher's as of October 1, 2000. This information
should be read in conjunction with the pro forma financial information included
elsewhere in this Information Statement.
<TABLE>
<CAPTION>
<S> <C>
Preferred stock, authorized 10,000,000 shares, $.001 par value; no shares
issued and outstanding $ -
Common stock, authorized 75,000,000 shares, $.001 par value; 29,629,576 shares
issued and outstanding 29,630
Additional paid-in-capital 14,880,256
Accumulated deficit (18,253,785)
--------------
Total $ (3,343,899)
==============
</TABLE>
REASONS FOR THE DISTRIBUTION
After thorough consideration, the board of directors of Digital
determined that a spin-off of the restaurant business was in the stockholder's
best interest. The Digital board of directors considered a number of factors in
determining to recommend approval of the spin-off of the restaurant business
including:
- The recent proposed valuation of Arthur Treacher's;
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- The current financial market conditions and the historical
market information concerning Digital common stock, the
ability of Arthur Treacher's to become a viable public company
and create substantial stockholder value by, among other
things, allowing the financial community to focus separately
on the restaurant business and the entertainment business; and
- The ability to focus greater management attention and
resources on opportunities for our business and to focus on
better managing our cost structure. Digital will similarly
benefit by being able to focus on its retained entertainment
business and its growth opportunities.
Our restaurant business has exhibited different growth characteristics,
customers and distribution channels from Digital's other segments. Those
differences are expected to continue in the future. Digital's management
believes that the different businesses require inherently different strategies
in order to maximize their long-term value. Consequently, Digital's current
structure, which involves the operation of each of these segments under a group
structure, while efficient in the past, is not now the most effective structure
to design and implement the distinct strategies necessary to operate each
segment successfully in a manner that maximizes its long-term value.
After reviewing Digital's goals and objectives and considering other
possible methods of enhancing the growth of Arthur Treacher's, Digital's
management and board of directors concluded that enhancing this business through
the formation of Arthur Treacher's and the distribution would be in the best
interest of Digital stockholders. Digital's board of directors approved the
formation of Arthur Treacher's and the distribution based on a thorough analysis
of information provided by management.
Digital will account for the spin-off of the restaurant business as
follows. The basis of all assets, liabilities and stockholder's equity will
carry over into the new entity, Arthur Treacher's. For tax and legal purposes,
Digital will record the distribution of Arthur Treacher's stock as a taxable
spin-off. At the time Digital transfers the common stock of Arthur Treacher's to
the custodian, Digital will account for the fair market value of the shares
distributed as a distribution and will record as a taxable gain, the difference,
if any, between the tax basis of the shares distributed and the fair market
value of such shares. The fair market value of the shares of Arthur Treacher's
common stock will be based on the trading price at the date of distribution.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain material United States federal
income tax consequences resulting from the distribution, acquisition, ownership
and disposition of Arthur Treacher's common stock. The summary is based upon
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury Regulations promulgated and proposed thereunder
("Regulations"), judicial authority and current administrative rulings and
practice, all of which are subject to change at any time by legislative,
judicial or administrative action. Any such changes may be applied retroactively
in a manner that could adversely affect a holder of the common stock. No rulings
have been requested (or will be requested) by Digital from the Internal Revenue
Service (the
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"IRS") as to any of the matters discussed below, and it is possible that the IRS
will take positions that differ from those stated herein.
The discussion below does not address all aspects of United States
federal income taxation that may be relevant to particular holders of Arthur
Treacher's common stock in the context of their specific investment
circumstances or to certain types of holders subject to special treatment under
United States federal income tax laws (for example, dealers in securities,
insurance companies, financial institutions, tax-exempt organizations, foreign
corporations, foreign partnerships, individuals who are not citizens or
residents of the United States, estates and trusts, the income of which is not
subject to United States federal income taxation without regard to source and
persons in special situations such as those who hold the Arthur Treacher's
common stock as part of a hedging or conversion transaction or straddle). The
discussion does not address any aspect of state, local or foreign taxation. In
addition, the discussion assumes that Digital shareholders will hold the Arthur
Treacher's common stock as a "capital asset" (generally, property held for
investment) within the meaning of Section 1221 of the Code.
DIGITAL SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS CONCERNING
THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF
THE ARTHUR TREACHER'S COMMON STOCK AS WELL AS THE APPLICATION OF STATE, LOCAL
AND FOREIGN INCOME AND OTHER TAX LAWS.
CONSEQUENCES TO ARTHUR TREACHER'S
The distribution of Arthur Treacher's common stock will not be a
taxable event to Arthur Treacher's. However, such distribution will be a taxable
event to Digital, which will incur taxable gain as a result of such distribution
measured by the difference between the fair market value of the distributed
Arthur Treacher's common stock and Digital's adjusted federal income tax basis
in such stock. If corporate tax is imposed upon such gain, Arthur Treacher's
would be jointly and severally liable with Digital and with each other member of
the consolidated group of which Digital is the common parent. If the IRS were to
attempt to collect from Arthur Treacher's any tax due with respect to the gain
arising from the distribution of its stock by Digital, Arthur Treacher's may be
forced to increase its debt or issue equity to pay such tax, and there is can be
no assurance that these sources of funding will be available. An increase in
debt could negatively impact Arthur Treacher's financial position and future
results of operations, while an issuance of equity could dilute a shareholder's
interest in Arthur Treacher's.
CONSEQUENCES TO DIGITAL SHAREHOLDERS
Taxation of Distribution
A Digital shareholder that receives shares of Arthur Treacher's in the
contemplated distribution will recognize ordinary dividend income for federal
income tax purposes to the extent of the lesser of the fair market value of the
shares of Arthur Treacher's common stock received and such shareholder's ratable
share of Digital's current and accumulated earnings and profits for the year of
the distribution. [The fair market value of the Arthur Treacher's shares will be
established by subsequent trading that develops with respect to such shares.
Digital expects that each shareholder's ratable share of Digital's current and
accumulated earnings and profits for the year in
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which the Arthur Treacher's shares will be distributed will be $____ per share
of Digital common stock owned]. Any excess of the fair market value of the
Arthur Treacher's common stock over the shareholder's ratable share of Digital's
current and accumulated earnings and profits first will reduce the shareholder's
aggregate adjusted federal income tax basis in the shares of Digital owned by
such shareholder, and any remaining excess will be treated as (generally)
capital gain or loss from the sale or exchange of such shareholder's Digital
common stock. In the case of non-corporate persons, the maximum federal income
tax rate that would apply to such capital gain is (i) 20% if such shareholder
had held the Digital shares deemed exchanged for more than one year and (ii) the
rate that applies to ordinary income (i.e., a graduated rate up to a maximum of
39.6%) if the shareholder's holding period for the Digital shares deemed
exchanged was up to twelve months. The deductibility of capital losses is
subject to certain limitations as described in the Code.
If a Digital corporate shareholder's receipt of Arthur Treacher's stock
is characterized as a dividend pursuant to the above rules, such shareholder
generally will be eligible to claim the 70% dividends received deduction
pursuant to Section 243 of the Code with respect to such dividend. There are,
however, many exceptions and restrictions relating to the availability of the
dividends received deduction, including restrictions relating to the holding
period of the stock under Section 246(c) of the Code and debt-financed portfolio
stock pursuant to Section 246A of the Code.
Pursuant to Section 1059 of the Code, the tax basis of any Digital
shares held by a corporate shareholder for two years or less (ending on the
earliest of the date on which Digital declares, announces, or agrees to payment
of the Arthur Treacher's shares) will be reduced (but not below zero) by the
non-taxed portion of an "extraordinary dividend" for which a dividends-received
deduction is allowed. To the extent a corporate shareholder's tax basis in its
Digital common stock would have been reduced below zero but for the foregoing
limitation, such shareholder will recognize such amount as capital gain from the
exchange of such shareholder's Digital common stock. Generally, an
"extraordinary dividend" is a dividend that (i) when aggregated with all
dividends having ex-dividend dates with an 85-day period equals or exceeds 5% of
the corporate shareholder's adjusted federal income tax basis in its shares of
Digital common stock or (ii) when aggregated with all dividends having an
ex-dividend date within a 365-day period exceeds 20% of such corporate
shareholder's adjusted federal income tax basis in its Digital common stock. If
an election is made by the corporate shareholder, in certain circumstances the
fair market value of the Digital common stock as of the day before the
ex-dividend date may be substituted for such shareholder's aggregate adjusted
basis in applying these tests.
Corporate shareholders of Digital are urged to consult their tax
advisors regarding the extent, if any, to which the exceptions and restrictions
and rules under Section 1059 apply to the receipt of Arthur Treacher's common
stock.
Digital anticipates that, due to its deficit in accumulated earnings
and profits and its expected deficit in current earnings and profits, no portion
of the distribution of the AT common stock will be treated as a dividend.
Ownership of Arthur Treacher's Common Stock
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Digital shareholders receiving Arthur Treacher's common stock will take
an initial federal income tax basis in such stock in an amount equal to the fair
market value of such stock, and their holding period in the Arthur Treacher's
common stock for federal income tax purposes will begin on the date of the
distribution. [The fair market value of the Arthur Treacher's common stock will
be determined once trading begins with respect to such stock.] Distributions on
the Arthur Treacher's common stock that are paid out of Arthur Treacher's
current and accumulated earnings and profits, as determined for federal income
tax purposes, will be taxable to an Arthur Treacher's shareholder as ordinary
dividend income in an amount equal to the amount of cash, or the fair market
value of any property, distributed. To the extent, if any, that the amount of
the distribution exceeds the amount of Arthur Treacher's current and accumulated
earnings and profits, such distribution first will reduce the shareholder's
adjusted federal income tax basis in the Arthur Treacher's common stock and, to
the extent such distribution exceeds such adjusted tax basis, will be treated as
capital gain. Such capital gain will be long-term capital gain if the shares of
Arthur Treacher's have been held for more than twelve months, and will be
taxable to non-corporate shareholders at the rates specified above in "Material
United States Federal Income Tax Consequences - Consequences to Digital
Shareholders - Taxation of Distribution." Corporate shareholders may be eligible
to claim the dividends received deduction with respect to any distributions made
on Arthur Treacher's common stock, subject to such limitations as are described
above in "Material United States Federal Income Tax Consequences - Consequences
to Digital Shareholders - Taxation of Distribution."
Disposition of Arthur Treacher's Common Stock
Gain or loss realized by an Arthur Treacher's shareholder upon the sale
of all or a portion of such shareholder's Arthur Treacher's common stock will be
subject to United States federal income tax as capital gain in an amount equal
to the difference between the sum of the amount of cash and fair market value of
other property received and such shareholder's adjusted basis in the Arthur
Treacher's common stock surrendered. Such gain will be long-term capital gain if
the shares of Arthur Treacher's common stock sold had been held for more than
one year, and will be taxable to non-corporate persons at the rates described
above in "Material United States Federal Income Tax Consequences - Consequences
to Digital Shareholders - Taxation of Distribution."
BACKUP WITHHOLDING
A shareholder of Digital that receives a distribution of Arthur
Treacher's common stock, and a subsequent shareholder of Arthur Treacher's that
receives a distribution with respect to such stock, may be subject to backup
withholding at the rate of 31% with respect to each such distribution, unless
the shareholder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (b) provides a correct
taxpayer identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A shareholder who does not provide its correct taxpayer
identification number may be subject to penalties imposed by the IRS. Any amount
paid as backup withholding will be creditable against the holder's tax
liability.
DESCRIPTION OF BUSINESS OF ARTHUR TREACHER'S
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Digital is principally involved in two lines of business. Digital is
engaged in the operation, franchising, ownership and development of "Arthur
Treacher's Fish and Chip's" and Pudgie's Famous Chicken fast food restaurants.
Commencing in February 2000, Digital established a subsidiary to become engaged
in acquiring and investing in entities that create and provide entertainment
content to both business and the consumer through digital broadband and
conventional distribution platforms.
BACKGROUND
Digital was originally founded in 1969 as Arthur Treacher's Fish &
Chips, Inc., a Delaware corporation. In 1979, Mrs. Paul's, Inc. ("Mrs. Paul's")
purchased Arthur Treacher's Fish & Chips, Inc. In 1982, Lumara Foods of America,
Inc. ("Lumara") acquired the assets of Arthur Treacher's Fish & Chips, Inc. from
Mrs. Paul's. Lumara sought bankruptcy protection in 1983. In December 1983,
Arthur Treacher's Inc., an Ohio corporation, entered into an agreement to
purchase the assets of Lumara, during Chapter XI bankruptcy proceedings. In
February 1984, Arthur Treacher's Inc., an Ohio corporation, merged into El
Charro, Inc., a Utah corporation, which consummated the acquisition of the
assets of Lumara and changed its name to Arthur Treacher's, Inc. On May 31,
1996, an investor group organized by Mr. Bruce Galloway, the current Chairman of
the Board, acquired control of Digital.
In February 2000, Digital formed a subsidiary, DCDC (Delaware), for the
purpose of acquiring and investing in entities engaged in the creation of
traditional entertainment content and broadband. In March 2000, Digital formed
the subsidiary, Arthur Treacher's, Inc., a Delaware corporation. In August 2000,
Digital, a Utah corporation, changed its name from Arthur Treacher's, Inc.
to Digital Creative Development Corporation.
RESTAURANT BUSINESS
(A) OVERVIEW
On December 29, 2000, the Arthur Treacher's system consists of
restaurants, comprised of Company-owned restaurants and independently owned and
operated franchised locations and franchise restaurants co-branded with Miami
Subs, Corp. ("Miami Subs"), Nathan's Famous Hot Dogs and Pudgie's Famous Chicken
as follows:
Company Owned Restaurants
-------------------------
Arthur Treacher's Fish & Chips: 16
Pudgie's Famous Chicken: 5
Treacher's/Pudgie's Co-Brand: 6
---
Total: 27
Franchised Restaurants
----------------------
Arthur Treacher's Fish & Chips: 57
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Pudgie's Famous Chicken: 21
Treacher's/Pudgie's Co-Brand: 1
Nathan's/Treacher's Co-Brand: 15
Kenny Rogers/Treacher's Co-Brand: 1
Miami Subs/Treacher's Co-Brand: 43
--
Total: 138
The restaurants are located in 13 states in the mid-western and
eastern United States as well as Washington D.C., Puerto Rico and the province
of Ontario, Canada. Arthur Treacher's main product is its "Original Fish &
Chips" product consisting of fish fillets coated with a special batter prepared
under a proprietary formula, deep-fried golden brown, and served with
English-style chips and two corn meal "hush puppies." Arthur Treacher's other
products include chicken, shrimp, clams and an assortment of other seafood
combination dishes. The restaurants offer British-style fish & chips and seafood
and/or fried skinless chicken cuisine.
In August 1998, the Company commenced pursuing co-branding
opportunities. On August 13, 1998, the Company entered into a co-branding
licensing agreement with Miami Subs. Miami Subs offers fresh fast food including
hot and cold submarine sandwiches, cheesesteak sandwiches and various ethnic
foods. In August 1999, Nathan's Famous Hot Dogs opened its first co-branded
restaurant with Arthur Treacher's in Yonkers, New York.
o FRANCHISE EXPANSION & CO-BRANDING
Arthur Treacher's intends to focus on franchising the Arthur Treacher's
Fish & Chips brand restaurants and accelerate its co-branding expansion with
Miami Subs, Nathan's Famous Hot Dogs, Kenny Rogers Roasters and Pudgie's Famous
Chicken. The targeted territories for franchise and co-brand expansion will
primarily include New York, New Jersey, Delaware, Pennsylvania, Ohio, Michigan,
Maryland, Washington D.C., Florida and Ontario. Arthur Treacher's will continue
to capitalize on the strength of its brand through franchising and co-branding.
The co-branding programs with Miami Subs, Nathan's Famous Hot Dogs, Kenny Rogers
Roasters, Pudgie's Famous Chicken and other approved quick serve and casual
dining restaurant chains will continue to provide an additional source of
franchise revenue.
Arthur Treacher's seeks co-branding between two restaurant concepts
when one concept provides a product or serves a demographic group that is
underserved by the other. In addition, the Company will seek complementary
concepts that offer different products to the same customers during different
parts of the day. Arthur Treacher's looks to co-branding as an opportunity to
add incremental revenue for each of its Fish & Chips restaurants systemwide.
As of November 1997, the Company entered into a management agreement
with Miami Subs as to one location, and in August 1998, the Company entered into
a co-brand license agreement with Miami Subs to put a limited Arthur Treacher's
menu in Miami Subs units. As of June 30, 2000, 63 Miami Subs, 14 Nathan's and 4
Pudgie's restaurants have co-branded with Arthur Treacher's.
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Arthur Treacher's receives royalties and initial franchise fees under
each co-brand franchise agreement. Arthur Treacher's anticipates opening
additional co-brand locations during the current fiscal year with each of its
co-brand partners.
o EXPANSION IN PREVIOUSLY EXCLUSIVE TERRITORY
Arthur Treacher's acquired the exclusive development rights from its
Canadian franchisee in December 1999 and has begun to seek franchises for the
Ontario territory. Arthur Treacher's intends initially to develop the Toronto
market before expanding into other regions of Ontario. The growth plan will
primarily be franchise expansion with additional emphasis on seeking co-brand
partners with an established multi unit Canadian concept.
o CORPORATE FRANCHISEES
Arthur Treacher's
The most crucial element of our market strategy is growth by expansion.
Each new location in the concept provides additional presence, additional
consumer awareness of the concept, additional revenues, either derived from the
profits of Company-owned stores or royalty revenues from franchise-owned stores,
additional contributions to the collective advertising fund and increased
purchasing leverage through increased economies of scale.
We have elected a modest and controlled growth strategy, projecting the
addition of six to twelve stores per year. This will allow us to expand and
increase its revenues at a steady pace, while still allowing for the effective
control of overhead and expansion costs.
Pudgie's Famous Chicken
Pudgie's uses several different methods to implement its strategy of
expansion. The first is growth through the addition of franchise-owned
locations. The addition of franchise-owned locations allows the company to
increase its unit-base without having to utilize its operating capital and
without the need to seek financing. We still can derive, from each new franchise
unit, the benefits of increased presence and consumer awareness, greater
leverage in advertising and purchasing through economies of scale, and even the
increased revenue stream from the 5% continuing royalties on net sales. Each new
franchise location also places a much lesser administrative burden on the
company, inasmuch as franchisees are responsible for the full management of
their own stores, thus helping keep overhead costs to a minimum.
In addition, Pudgie's has explored the possibility of increasing the
number of company-owned locations, the possibility of converting existing chains
in similar markets, and has explored the possibility of co-branding with other
complementary concepts.
In October 1999, Pudgie's Famous Chicken in West Babylon began offering
its customers various items from the menu of the concept Arthur Treacher's Fish
& Chips. This experiment to test the results of co-branding an
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existing unit proved to be a success. Store revenues have increased 30% from
prior year's sales since the introduction of this concept, and what is typically
a material lull in sales during the season of Lent was significantly mitigated
this past term.
Pudgie's Franchise Corp. is presently authorized to offer franchises
for sale in New York, New Jersey, Connecticut, Pennsylvania, Virginia, Ohio,
California, Massachusetts and Nevada. Pudgie's is also a member of the
International Franchise Association.
Arthur Treacher's intends to develop joint programs with new corporate
franchisees for regional expansion opportunities in certain selected markets.
This program will entail a corporate sponsor for a particular region based upon
metropolitan population densities. A region would typically be large enough to
cover an area that could accommodate ten or more store locations. Arthur
Treacher's anticipates that a regional representative franchise agreement would
be executed with the corporate franchisee providing it with rights to a
specified region and to support from the Company in order to develop the area
within certain guidelines established by the Company relating, among other
things, to a minimum number of restaurants to be opened within particular time
periods. Arthur Treacher's also intends to grant new franchises to operators of
single restaurants. There can be no assurance, however, that suitable
franchisees can be located or that regional representative franchise agreements
will be reached on terms acceptable to Arthur Treacher's.
Arthur Treacher's and Pudgie's Famous Chicken estimate the cost of
opening a new restaurant at between $115,000 and $220,000 per restaurant
(assuming the land and building are leased) depending upon factors such as the
size of the restaurant, the lease, remodeling cost and local construction costs.
Co-branding the Arthur Treacher's menu into another restaurant concept
entails a conversion cost of approximately $5,000 to $35,000 depending on the
existing restaurant equipment being used by the co-brand partner.
By standardizing the construction and equipment procurement process of
its restaurant network, Arthur Treacher's believes that it could develop the
economies of scale in the design and site selection process for franchises. A
supplementary benefit of such an expansion program could include proposals to
arrange for regional or national equipment leasing and financing programs and
the use of national or regional contractors to provide support for franchisees
wishing to expand. There can be no assurance that such programs will be reached
on terms acceptable to Arthur Treacher's.
Arthur Treacher's proposed expansion will be dependent on, among other
things, attracting quality franchise candidates, the availability of suitable
restaurant sites, negotiation of acceptable lease terms, timely development of
such sites, obtaining landlords' consents to renovations, constructing or
renovating restaurants, hiring of skilled management and other personnel, the
general ability to successfully manage growth (including monitoring restaurants,
controlling costs and maintaining effective quality controls) and the
availability of adequate financing. In the case of franchised restaurants,
Arthur Treacher's will be substantially dependent on the management skills of
its franchisees.
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With respect to Pudgie's Famous Chicken, since Pudgie's is a heavy
delivery concept with a simple menu, the typical Pudgie's can effectively
operate in a location as modest as 800 to 1500 square feet, and in a location
that does not need to be a premier traffic and visibility location, thus
allowing units to have the advantage of typically lower rents. Equipment
requirements are few, and the capital outlay required to open a new franchise is
significantly less than other comparative and competitive franchises in this
market. As a result of the mitigating cost factors, a Pudgie's Famous Chicken
location can typically operate profitably with lower than industry average unit
sales per location.
Additionally, there is the clear benefit in operating a unit which is
part of a growing chain. The opening of each new franchise location contributes
presence and revenue to Pudgie's Franchise Corp., and contributes revenue to the
Pudgie's advertising fund. Increased advertising revenue correlates directly to
more aggressive spending, thus increasing brand and consumer awareness.
Ultimately, such increases in sales lead to an ever-expanding revenue
stream for Pudgie's Franchise Corp., the corporate-owned Pudgie's Famous Chicken
locations and for each Pudgie's franchisee
(B) MARKETING, PROMOTION AND ADVERTISING
Core menu items
Batter-dipped fish, chicken, shrimp and signature-cut potatoes (chips)
continue to account for more than 75% of Arthur Treacher's annual sales during
the fiscal year ended June 30, 2000. Arthur Treacher's has built a strong brand
awareness over the past 31 years with its core menu and anticipates increasing
the marketing and promotion of the batter-dipped products. Arthur Treacher's
restaurants are designed to produce the batter-dipped products easily.
Increasing the sales of already high volume products will improve product
rotation and help ensure hot, fresh food for customers.
Arthur Treacher's believes that batter-dipped food is a strong focus for
the menu because, in part, batter-dipped food cannot be prepared easily at home.
Most households do not have a deep fryer and a recipe for batter.
Marketing strategies
Arthur Treacher's. Mall-based stores are critical to Arthur Treacher's
success. Seventy percent of the Arthur Treacher's system wide revenue for the
fiscal year ended June 30, 2000 was mall-based. Therefore, marketing strategies
are tailored to generate business in malls. If the tactics are feasible for
freestanding stores, the marketing approach is expanded to the freestanding
markets. Certain promotions developed for freestanding stores will not
necessarily be successful in the mall locations. Freestanding locations can
benefit substantially from external media (print, radio, television, direct mail
and out of home). Purchasing external media to drive customers to a mall food
court and to an Arthur Treacher's restaurant in that food court becomes cost
efficient when the concentration of stores can adequately support the marketing
cost of the external media. The geographic distribution of Arthur
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Treacher's mall-based and freestanding stores permits Arthur Treacher's to
design marketing programs for each region. Most of Arthur Treacher's
freestanding and mall locations are in separate markets. Northeast Ohio and
Central Pennsylvania have most of the freestanding stores, while the mall-based
Arthur Treacher's are located primarily in the New York to Philadelphia corridor
and Florida.
A local marketing-training program for managers of those Arthur
Treacher's restaurants located in food courts has been implemented. The program
is designed to enable and empower managers to market their stores within the
confines of the mall by capturing new customers, using fewer discounts and
improving frequency of visits. Promotional tools have been provided to the
managers. Managers are working with their supervisors and the marketing
department to create marketing plans tailored to the needs of each store.
Managers of freestanding locations are also being trained in local marketing
techniques which are designed to reflect the different needs of freestanding
stores.
Pudgie's Famous Chicken. With respect to Pudgie's Famous Chicken,
because of the value-conscious market to which Pudgie's caters, distribution of
coupons through a direct-mail campaign, typically as inserts in money-saver
publications, has had the most powerful positive impact on sales over any other
form of marketing. Since June 1998, Pudgie's Famous Chicken has undertaken an
aggressive advertising campaign which includes the distribution of free standing
inserts. Money-saver publications such as The Pennysaver, The Shoppers' Guide,
The Yankee Trader, The Staten Island Advance, The Marketeer, Town News, Home
News Tribune and Newsday's Clip-It, have all featured these types of coupon
flyers, typically with a different set of coupons and different values offered
every month.
Pudgie's Famous Chicken has aired numerous radio and television
commercials and participates in various local community-oriented programs, such
as street fairs, parades and school lunches, combining advertising with a
community presence
(C) FRANCHISES
As of December 20, 2000, Arthur Treacher's had 138 independently owned
and operated franchised locations consisting of 79 traditional Arthur Treacher's
Fish & Chips and/or Pudgie's Famous Chicken restaurants and 59 co-branded
restaurants. Arthur Treacher's has three options for franchises: individual
stores, co-branding and area development. Pursuant to its franchise agreement,
Arthur Treacher's Fish & Chips and Pudgie's Famous Chicken provide their
respective franchisees with a method of operation, including trade secrets,
technical knowledge, a supply distribution program and standards for customer
service, quality control, decor, layout, signs and accounting systems. Arthur
Treacher's Fish & Chips and Pudgie's Famous Chicken also provide centralized
advertising and cooperative advertising programs and an initial training
program, which is required for franchisees. Franchisees are typically required
to spend a minimum of three percent of monthly gross sales on advertising. In
addition, each franchisee must purchase certain private label proprietary food,
paper supplies, equipment and signage from Company-approved suppliers and
distributors.
Arthur Treacher's does not select restaurant sites for franchisees, but
all sites are subject to Arthur Treacher's approval. Arthur Treacher's also
requires that its franchisees name Arthur Treacher's as an additional insured
party
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on their property and casualty insurance policies and that vendors provide
subrogation to Arthur Treacher's with respect to their product liability
insurance.
Pursuant to their respective standard franchise agreements, which are
incorporated in their respective Uniform Franchise Offering Circulars, the
initial franchise fee for a one unit Arthur Treacher's Fish & Chips or a
Pudgie's Famous Chicken franchise is $30,000. The fee for an area development
franchise is dependent upon population density and competitive factors within a
given market. The fee for an area development franchise is $69,500. These
franchise fees do not include the costs associated with the operation of the
restaurant, including food, supplies, labor, equipment, occupancy costs and
taxes.
Co-branding fee arrangements may vary depending on the growth potential,
commitments and development schedules agreed upon with the co-brand partner.
Each franchisee is subject to a royalty fee of a maximum of six percent
of the franchisee's gross sales, net of sales taxes and certain other
adjustments, based upon sales reports at the end of each calendar month. In the
fiscal year ended June 30, 2000, Arthur Treacher's received a total of $466,690
in franchise fees and royalty income. Franchisees fees vary primarily because of
the age of the franchise contract, with an average royalty of about three
percent. Reduced royalty fees have been granted by Arthur Treacher's for certain
older franchise contracts and for franchisees who operate multiple units.
As of October 14, 2000, franchisees operating four restaurants have
either been notified of being in default for non-payment of royalties or are
more than 90 days in default on royalty payments. The inability of Arthur
Treacher's franchisees to make payments on a timely basis will adversely affect
Arthur Treacher's liquidity and its operations.
(D) SUPPLIERS AND PRICING
Seafood prices, particularly the price of fish, are subject to supply
problems due to environmental and economic factors. Arthur Treacher's is
developing measures to minimize the effect on its operations.
Arthur Treacher's principal product is fish, and currently Arthur
Treacher's uses primarily Deep Skinned Alaskan Pollack. Other species are being
tested as alternatives due to supply, price and availability. Arthur Treacher's
and franchisees utilize two suppliers for fish and one supplier for shrimp. For
the fiscal year ended June 30, 2000, purchases of fish and shrimp accounted for
approximately 20% and 7%, respectively of Arthur Treacher's operating expenses,
excluding occupancy costs. Such supplies and prices are subject to volatility.
Seafood of the quality sought by Arthur Treacher's tend to trade on a negotiated
basis depending upon supply and demand at the time of purchase. Supply and price
can be affected by multiple factors, such as weather, politics and economics in
the producing countries. An increase in the prices of seafood, particularly
fish, could have an adverse effect on Arthur Treacher's.
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Arthur Treacher's maintains relationships with certain seafood vendors
in an effort to obtain seafood of the quality and in the quantity demanded by
Arthur Treacher's customers. These relationships enable Arthur Treacher's to
maintain its supply of fish as well as affording Arthur Treacher's some price
stability. Arthur Treacher's has sought to mitigate the effects of price
volatility by entering into agreements with its principal fish suppliers to
provide fixed prices for seafood products during the six months to one year
duration of the contracts. Such fixed price agreements also help ensure Arthur
Treacher's supply of fish and enable Arthur Treacher's to reduce its supply
costs. Although Arthur Treacher's anticipates that the agreements will be
renewed on substantially the same terms as the current agreements, there can be
no assurance that the new terms will not be more costly. However, Arthur
Treacher's believes that alternative suppliers of pollack, cod and other
seafoods are available if the prices increase substantially. Management also
intends to take advantage of changing technologies with respect to the "farming"
and breeding of selected species of fish and seafood products, and currently
purchases some fish products that are "farmed."
Arthur Treacher's uses many individual suppliers for many of its
significant non-seafood items. For example: potatoes, chicken, cups, shortening
and proprietary fish batter and hushpuppy mix are each purchased from different
suppliers under oral and written agreements which set the price for one year.
All of Arthur Treacher's supplies are delivered by such suppliers to one
distributor who services Arthur Treacher's restaurants from three distribution
centers. Any disruption in supplies from such suppliers could temporarily have
an adverse effect on Arthur Treacher's operations, although Arthur Treacher's
believes that the supplier could readily be replaced. Except with respect to
Arthur Treacher's proprietary products, franchisees can purchase such products
from other suppliers or distributors, subject to Arthur Treacher's prior
approval.
(E) COMPETITION
The restaurant business is highly competitive with respect to price,
service, location and food quality and is generally considered to be a mature
industry. Competition in the industry can be expected to increase. The industry
is affected by changes in consumer eating habits and preferences, local,
regional and national economic conditions, demographic trends, automobile
traffic patterns, government regulation, employee availability and commodity and
operating cost fluctuations, many of which are beyond Arthur Treacher's control.
Any unplanned or unanticipated changes in these factors could adversely affect
Arthur Treacher's.
There are numerous well-established competitors in the operating areas
of Arthur Treacher's. Restaurants operated or franchised by Arthur Treacher's
compete directly not only with quick service restaurants ("QSRs"), but also with
moderately priced family and specialty restaurants. Significant competitors
include fast food seafood restaurants such as Long John Silvers and Captain D's,
casual dining restaurants with a seafood emphasis such as Red Lobster and
Landry's, and other chains that serve seafood or chicken, or both.
Arthur Treacher's primary competitors in the fast service seafood
restaurant business are Long John Silvers and Captain D's. Both competitors have
company-owned and franchised restaurant operations in certain regions of the
United States. Long John Silvers is the largest competitor and Captain D's, a
wholly-owned subsidiary of Shoney's, Inc., has a strong regional presence in the
southeastern United States. The amount of competition varies
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among Arthur Treacher's principal regional markets. Both Captain D's and Long
John Silvers compete directly with Arthur Treacher's in Ohio and Pennsylvania,
although the level of competition is highest in several Pennsylvania markets.
Long John Silvers competes directly with Arthur Treacher's in several of its
markets in Florida.
In Ontario, Arthur Treacher's has significant direct competition from
independent fish and chips restaurants, but less direct competition from other
major fast service seafood chains. Many of Arthur Treacher's competitors possess
substantially greater financial, marketing, personnel and other resources than
those of Arthur Treacher's. Such competitive pressures limit Arthur Treacher's
ability to increase food and beverage prices, and thus may limit the extent to
which Arthur Treacher's and its franchisees can offset certain costs of doing
business. There can be no assurance that well-established competitors will not
place additional restaurants in close proximity to those of Arthur Treacher's
and its franchisees.
Arthur Treacher's also faces vigorous competition from other QSR chains
in attracting and retaining suitable franchises. Arthur Treacher's plans to
increase its number of franchised restaurants, but there can be no assurance
that it will be able to attract and retain suitable franchisees.
Arthur Treacher's has developed a concentration of restaurant locations
in the food courts of regional shopping malls. The competition in the malls
typically consists of the eight to fourteen different restaurant concepts in
each food court. Each food concept generally serves a distinctive menu item
which may compete, directly or indirectly, with Arthur Treacher's. There can be
no assurance that Arthur Treacher's will continue to be able to compete
effectively with such food concepts. Top competitors in food courts include
Sbarros, Chik-fil-a, Philly Stations, a variety of small chains featuring
Japanese, Chinese, Cajun and other ethnic foods. Major QSR chains such as
McDonald's, KFC, Burger King, Wendy's, and Taco Bell are opening in food courts.
The major chains benefit from broad consumer awareness generated by broadcast
media. These concepts can dominate a food court.
(F) SEASONALITY
Arthur Treacher's derives a significant portion of its sales during the
November/December (Christmas) and March/April (Easter) seasons, which are
reflected in Arthur Treacher's operating results for the second and third
quarter. These seasonal effects are dependent upon the general retailing
environment and customers' preference to shopping malls. Weather can have a
significant affect on shopping in Northern climates. These areas can be
significantly impacted by weather during December, January and February.
Approximately 70% of Arthur Treacher's systemwide net sales is derived from
shopping malls. Arthur Treacher's derives approximately 15% of its total net
sales from operations of the stores located in shopping malls during the holiday
season.
(G) EMPLOYEES
At September 30, 2000, Arthur Treacher's had approximately 300
employees. A total of approximately 245 employees are paid on an hourly basis
and 55 employees receive a salary. Six of Arthur Treacher's employees perform
executive functions. Most of Arthur Treacher's employees are employed at Arthur
Treacher's restaurants.
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Arthur Treacher's believes that the number of persons employed is adequate to
conduct Arthur Treacher's current level of operations but is mindful of current
labor shortages adversely affecting the restaurant and similar businesses.
(H) GOVERNMENT REGULATION
Arthur Treacher's business is subject to extensive federal, state and
local government regulation, including regulations relating to franchising,
public health and safety, zoning and fire codes. The failure to obtain or retain
food or other licenses would adversely affect the operations of Arthur
Treacher's restaurants.
Arthur Treacher's is subject to federal and state laws, rules and
regulations that govern the offer and sale of franchises. Arthur Treacher's is
also subject to a number of state laws that regulate certain substantive aspects
of the franchisor-franchisee relationship. If Arthur Treacher's is unable to
comply with the franchise laws, rules and regulations of a particular state,
relating to offers and sales of franchises, Arthur Treacher's will be unable to
engage in offering or selling franchises in such state. Arthur Treacher's
believes it is in material compliance with such laws, rules and regulations and
has not been cited for non-compliance. Arthur Treacher's is not currently
subject to any investigation by any federal or state regulatory authority.
On a national level, the FTC requires Arthur Treacher's to furnish
prospective franchisees with a disclosure document which complies with the FTC's
Trade Regulation Rule (the "FTC Rule"). Pudgie's Famous Chicken is also required
to furnish prospective franchisees with such a disclosure document. Arthur
Treacher's current FTC disclosure document is effective for use in the 37
states, and the District of Columbia, that do not require registration of
disclosure documents. However, in the 13 remaining states, Arthur Treacher's is
required to register a state-specific document and receive an effective
registration notice prior to the commencement of sales of franchises in such
states.
Arthur Treacher's is qualified to sell franchises in selected states
that require a state-specific document, although Arthur Treacher's believes that
it could register in all registration states if it chose to offer franchises in
such states. Arthur Treacher's is required to update its FTC disclosure document
to reflect the occurrence of material events. The occurrence of any such events
may, from time to time, require Arthur Treacher's to modify its disclosure
documents within 90 days or stop offering and selling franchises until the
document is so updated. There can be no assurance that Arthur Treacher's will be
able to update its disclosure document or become registered to offer or sell
franchises in certain states consistent with its expansion plans, or that Arthur
Treacher's will be able to comply with existing or future franchise regulations
in any particular state, any of which could have an adverse effect on Arthur
Treacher's.
(I) TRADE AND SERVICE MARKS AND TRADE SECRETS
Arthur Treacher's believes that the "Arthur Treacher's" and the "Arthur
Treacher's Fish & Chips" trade and service marks, and other marks may have
significant value and are important to the marketing of its restaurants and
products. All are registered with the United States Patent Office. Arthur
Treacher's registered "Arthur Treacher's Seafood Grille" as a trade and service
mark in 1998. Arthur Treacher's principal trademarks and service marks,
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"Arthur Treacher's" and "Arthur Treacher's Fish and Chips," are subject to
renewal for 10 year periods upon application to the United States Patent Office
between 2007 - 2009. The other trade and service marks are subject to renewal
for 10 year periods on various dates between 2000 - 2010. Upon expiration of
each period, the marks may be renewed for successive 10 year periods. Arthur
Treacher's also registered the trademark "Arthur Treacher's Fish & Chips" in
Canada on July 23, 1999. This trademark is subject to renewal every 15 years.
There can be no assurance, however, that Arthur Treacher's trade and service
marks do not, or will not, violate the proprietary rights of others, that Arthur
Treacher's trade and service marks would be upheld if challenged or that Arthur
Treacher's would not be prevented from using its trade or service marks. Any of
the aforementioned instances could have a material adverse effect on Arthur
Treacher's and its franchisees. Arthur Treacher's trade and service marks have
not been and are not subject to any material challenges, and Arthur Treacher's
has acted to vigorously defend the marks in several isolated instances where
alleged infringement has occurred.
Arthur Treacher's utilizes a proprietary batter mix in connection with
the preparation of its seafood products. There can be no assurance that such
recipe will not be copied by a competitor, and that Arthur Treacher's business
will not be adversely affected.
(J) PUDGIE'S FAMOUS CHICKEN
In October, 2000, Arthur Treacher's purchased all of the outstanding
capital stock of the entities which own and act as franchisor of the Pudgie's
Famous Chicken chain of fast food chicken restaurants. Pudgie's consists of 32
restaurants in the New York tri-state metropolitan area, including 10
company-owned stores and 22 franchises. The purchase price was 20% of the issued
and outstanding stock of Arthur Treacher's. Mr. Jeffrey Bernstein, the Chief
Executive Officer of Pudgie's, has become Chief Executive Officer and President
of Arthur Treacher's.
COMPANY HISTORY
The first Pudgie's Famous Chicken location was opened in 1981 in
Bethpage, New York, and the company had grown to approximately 100 locations
during its peak period in the early 1990's. The company consummated a public
offering in 1992, at which time management changed hands. The change in
management, over-expansion and excessive corporate overhead caused Pudgie's
Famous Chicken to seek Chapter 11 Bankruptcy protection in September 1996.
During the two-year period that the company operated as a Chapter 11
Debtor-in-Possession, the company's debt grew to a level that was
disproportionate to the revenues it could generate. In addition, little market
support was offered to the existing franchise base. As a result of the company's
inability to reorganize under Chapter 11 insolvency laws, the assets comprising
Pudgie's Famous Chicken were offered for sale at a bankruptcy court auction,
free of liabilities and at a significantly discounted price.
In June 1998, following the bankruptcy court auction, Pudgie's
Restaurant Corp., Pudgie's Franchise Corp. and Pudgie's Famous Chicken, LLC,
acquired the assets of Pudgie's Famous Chicken. The distressed nature of the
assets at the time allowed for the acquisition on most favorable terms which has
translated into a successful turnaround of operations in a matter of months
following the bankruptcy auction sale.
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After much scrutiny, it was determined that Pudgie's Famous Chicken
still had market presence and loyalty in Long Island and the surrounding areas,
making the acquisition most attractive. Thus, upon conclusion of the bankruptcy
sale in June 1998, Pudgie's Famous Chicken, LLC assumed control of the company's
intellectual property, Pudgie's Restaurant Corp. assumed control of fourteen
corporate locations, and Pudgie's Franchise Corp. assumed the franchise rights
to the remaining twenty-three individually owned franchise locations. Jeffrey
Bernstein was named President and CEO of each of the Pudgie's companies.
Since 1991, Jeffrey Bernstein, a twenty-year veteran in the food
industry, has been the principal of Consolidated Services, Inc., a Long
Island-based financial consulting firm, which specializes in "turn-around
management."
Turn-around management is the process by which troubled companies are
reorganized so that lost value may be restored to a distressed asset. In many
cases, turnaround companies far exceed their pre-turnaround values, which forms
the foundation of a substantial debt free-asset base.
Since Pudgie's Famous Chicken, LLC, Pudgie's Restaurant Corp. and
Pudgie's Franchise Corp. have been operating Pudgie's Famous Chicken, the
ability to immediately improve the revenues available from corporate and
franchise locations has caused the resumption of advertising, improved
operations, including bringing equipment back to a state of operational repair,
increased branding and customer awareness, improved store appearance, and
steadily increased sales volume at the corporate owned locations.
Today, Pudgie's Famous Chicken has a strong regional presence, with
thirty-two locations concentrated primarily in Long Island, New York, New Jersey
and Connecticut, with satellite units located in Ohio, as well as in Jakarta,
Indonesia.
All intellectual property, inclusive of trademarks, copyrights, etc.,
is owned by Pudgie's Famous Chicken, LLC, a Delaware Limited Liability Company.
The ten corporate stores are each owned by a separate corporation, commonly
operated and managed by Pudgie's Restaurant Corp.
Pudgie's Franchise Corp. generates revenue based on the sale and
continuity of franchise stores. The fee to purchase a new franchise is $30,000
and franchisees pay a continuing fee equal to 5% of net sales revenue.
Each corporate location and each franchise location is obligated to
contribute an additional 3% of net sales revenue to an advertising fund, which
is maintained and controlled by Pudgie's Franchise Corp. All cooperative
advertising revenue that is received by Pudgie's Franchise Corp. is expended by
Pudgie's Franchise Corp. on advertising.
It is Pudgie's intention to continue this trend to increase sales in
both corporate-owned and franchise locations, and to expand by increasing the
number of corporate owned locations and adding presence through the addition of
more regional franchise stores.
37
<PAGE>
MARKET STRATEGY
Pudgie's signature product is "America's Favorite Skinless Chicken
Since 1981." Pudgie's chicken is prepared by removing the skin from the breast,
leg and thigh, followed by marinating the product in a proprietary breading and
frying in a low-fat soybean oil. The result is a product that is a lower fat
alternative to competitive fried chicken and other fast-food alternatives.
Pudgie's is primarily a take out and delivery-based dinner concept.
Approximately 40% of all location sales are deliveries, and 60% are pick-ups.
Store sales peak during the height of dinner hour, from 5:00 to 7:30 PM. A
handful of Pudgie's Famous Chicken locations offer in-house dining options.
These locations often cater to a larger lunch crowd.
Pudgie's primary consumer is the dual and middle income family with
children ranging in age from infants and toddlers to younger and older teens.
Pudgie's Famous Chicken, as a healthier fast food alternative appeals to
concerned mothers, consumers who are conscious of their own health and the
health of their families, and consumers who are not willing to sacrifice product
quality and product taste. The Pudgie's concept appeals to working parents whose
hectic schedules leave precious little time and energy to cook at home seven
days a week, and to those who want a product that's fast, convenient, healthier
than a "typical" fast-food pit-stop, as well as one that's reasonably priced.
Pudgie's branded character is the Pudgster, a plump chicken with a cute
face, a friendly smile and the Pudgie's Famous Chicken logo emblazoned on his
chest. Along with the Pudgster, as well as various dessert and kids menu
options, Pudgie's Famous Chicken is a fun concept that appeals to children of
all ages, as well as their parents.
All of these factors have contributed to Pudgie's having built a unique
niche in the home-meal replacement market.
(K) PROPERTIES
Arthur Treacher's principal executive offices are located at 5 Dakota
Drive, Suite 303, Lake Success, New York 11042. Arthur Treacher's rents its
3,500 square feet of headquarters space for an annual rent of approximately
$84,000 pursuant to a lease which expires on December 31, 2005.
Arthur Treacher's 17 restaurants are leased by MIE Hospitality, a
wholly-owned subsidiary of Arthur Treacher's. In addition, with respect to five
leases, Arthur Treacher's either guarantees the obligations of franchisees or
leases the properties and subleases them to franchisees. Arthur Treacher's
freestanding restaurants are each approximately 2,000 square feet and Arthur
Treacher's restaurants located in malls are each approximately 400 to 1,100
square feet.
38
<PAGE>
The leases have remaining terms ranging from one to 18 years. Many of
the leases contain renewal options for periods of five to 10 years. Arthur
Treacher's is reviewing whether to continue to operate any marginal restaurants
and to renegotiate the terms of each restaurant lease upon the expiration of
each lease. The following chart sets forth the expiration dates of the terms of
(i) the leases of Company owned restaurants, and (ii) Arthur Treacher's leases
which are subleased to franchisees and leases of franchisees which are
guaranteed by Arthur Treacher's.
Leases Subject
to Guarantees
Number of Leases or Subleases Expiration Date
---------------- --------------- ---------------
3 0 2000
3 8 2001
3 5 2002
7 5 2003
8 3 2004
3 4 Thereafter
LEGAL PROCEEDINGS
The following is a description of certain legal proceedings affecting
Arthur Treacher's, Inc.
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 Arthur Treacher's was aware of and
consented to the third-party assignment. Arthur Treacher's is unaware of any
document signed by a properly-authorized representative of Arthur Treacher's
formally authorizing or consenting to the assignment. On May 9, 1995, ATAC filed
the action and alleged that Arthur Treacher's terminated the contract without
cause, tortiously 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, Arthur Treacher's filed
a motion to dismiss all of the claims. In addition, Arthur Treacher's filed a
counterclaim against ATAC seeking a Declaratory Judgment that ATAC does not have
a service contract with Arthur Treacher's in certain areas which Arthur
Treacher's does business, that ATAC has committed breach of contract and that
Arthur Treacher's is entitled to indemnification for previous lawsuits which
have occurred because of the actions of ATAC on behalf of Arthur Treacher's.
ATAC has twice amended the claims and allegation of the original complaint. In
the Third Amended Complaint, ATAC asserts claims against Arthur Treacher's and
Arthur Treacher's former President, James Cataland, for fraud, breach of
contract, tortious 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 Arthur Treacher's. In response to the
39
<PAGE>
Third Amended Complaint, Arthur Treacher's in 1997 filed a Motion to Dismiss
ATAC's claims 13 for breach of fiduciary duty and under the Consumer Sales
Practices and Business Opportunity Acts. Arthur Treacher's also requested that
the district court dismiss the claim against Arthur Treacher's former President.
Arthur Treacher's in 1998 filed Motions for Summary Judgment on behalf of itself
and Arthur Treacher'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 Arthur Treacher's
Motion to Stay the lawsuit pending arbitration and the ruling is presently the
subject of an appeal to the Sixth Circuit Court of Appeals. The parties
submitted briefs to the Sixth Circuit between July and October of 1999 and a
hearing was held in June 2000. The Sixth Circuit should hand down its decision
within the next few months.
Arthur Treacher's originally believed that the lawsuit was an attempt
by plaintiffs to regain the territory by forcing Arthur Treacher's to defend
expensive litigation at significant expense, and that the plaintiffs' claims are
without merit. Arthur Treacher's now understands that ATAC solely seeks damages
from Arthur Treacher's. Arthur Treacher's still believes that ATAC's claims are
meritless. Arthur Treacher's attorneys have been instructed to vigorously defend
Arthur Treacher's from the claims made by ATAC and pursue any counterclaims.
In the opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on Arthur Treacher's consolidated
results of operations of financial position.
WHERE YOU CAN FIND MORE INFORMATION
As a result of the distribution, the Securities Exchange Act of 1934,
as amended (the "Exchange Act") requires Arthur Treacher's to file annual,
quarterly and other reports with the Securities and Exchange Commission. Arthur
Treacher's intends to provide annual reports containing audited financial
statements to its stockholders in connection with its annual meetings of
stockholders.
Arthur Treacher's filed with the Securities and Exchange Commission
(the "SEC") a registration statement, which includes certain exhibits, under the
Exchange Act, for the securities issued pursuant to this Information Statement.
This Information Statement contains general information about the contents of
contracts and other documents filed as exhibits filed with the registration
statement. You should read the registration statement and the exhibits for
further information about Arthur Treacher's and the distribution.
The SEC allows Arthur Treacher's to "incorporate by reference"
information into this Information Statement, which means that important
information may be disclosed to you by referring you to another document filed
separately with the SEC. The information about Arthur Treacher's incorporated by
reference is deemed to be part of this Information Statement, except for
information superseded by information in, or incorporated by reference in, this
Information Statement. This Information Statement incorporates by reference the
documents set forth below that have been previously filed with the SEC. The
following documents contain important information about Arthur Treacher's and
its financial condition and operating results and are hereby incorporated by
reference:
40
<PAGE>
- Digital's Annual Report on Form 10-KSB for the year ended June
30, 2000;
- Digital's Quarterly Report on Form 10-QSB for the Quarter
Ended September 30, 2000; and
- Digital's Quarterly Report on Form 10-QSB for the Quarter
Ended March 31, 2000.
You should rely only on the information in this document or to which we
have referred you. We have not authorized anyone to provide you with information
that is different. If you are in a jurisdiction where it is unlawful to direct
these types of activities, then the transaction presented in this document does
not extend to you. The information contained in this document speaks only as of
the date of this document, unless the information specifically indicates that
another date applies.
You may read and copy the registration statement and other materials
that Arthur Treacher's files with the Securities and Exchange Commission at the
Public Reference Room of the Securities and Exchange Commission, 450 Fifth
Street, Washington, D.C. 20549 and at the Securities and Exchange Commission's
regional offices at 7 World Trade Center, Suite 1300, New York, New York 10048
and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can
request copies of these documents, upon payment of a duplication fee, by writing
to the Securities and Exchange Commission's Public Reference Section. Please
call the Securities Exchange Commission at 1-800-SEC-0330 for further
information on he operation of the Public Reference Rooms. The Securities and
Exchange Commission filings of Arthur Treacher's are also available to the
public on the Securities and Exchange Commission Internet site
(http://www.sec.gov).
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW AND BASIS OF PRESENTATION
While the legal structure of the transaction pursuant to which this
Information Statement is being filed is an internal restructuring and spin-off
of the restaurant business, for accounting purposes Arthur Treacher's is being
treated as the continuing accounting entity.
Accordingly, the historical financial information required by Form 10
is incorporated by reference from the Digital Forms 10-QSB and the Management's
Discussion and Analysis as presented below is substantially identical to that in
Digital's Form 10-QSB filed for the quarter ended September 30, 2000 and 10-KSB
filed for the fiscal year ended June 30, 2000, which reflect the historical
consolidated operations of Arthur Treacher's and the entertainment business.
The market price of Digital's common stock has fluctuated significantly
over the years. The market price of the common stock could be subject to
significant fluctuations in the future based on factors such as quarterly
fluctuations in Arthur Treacher's financial results, quarterly fluctuations in
other restaurant companies' financial
41
<PAGE>
results, changes in analysts' estimates of financial performance, general
conditions in the restaurant industries, conditions in the financial markets and
general conditions in the global economy which might adversely affect consumer
purchasing. In addition, the stock market in general has experienced extreme
price and volume fluctuations, which have affected the market prices for many
companies and which have often been unrelated to the operating performance of
the specific companies.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations of Digital 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," "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. Digital cautions readers that
important factors may affect Digital's actual results and could cause such
results to differ materially from forward-looking statements made by or on
behalf of Digital. Such factors include, but are not limited to, changing market
conditions, the impact of competitive products, pricing and acceptance of
Digital's products.
OVERVIEW
Digital's principal sources of revenues are from the operation of it's
Company-owned restaurants and the receipt of royalties from franchisees.
Digital's cost of sales includes food, supplies and occupancy costs (rent and
utilities at Company-owned stores). Operating expenses include labor costs at
Digital-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 Arthur Treacher's headquarters in Lake Success, New
York, the costs of operating the headquarters offices (rent and utilities) and
certain related costs (travel and entertainment).
On October 19, 2000, Arthur Treacher's purchased all of the outstanding
capital stock of the entities which own and act as franchisor of the Pudgie's
Famous Chicken chain of fast food chicken restaurants. Pudgie's consists of 32
restaurants in the New York tri-state metropolitan area, including 12 company
owned stores and 20 franchises. The purchase price was 20% of the issued and
outstanding stock of Arthur Treacher's. Mr. Jeff Bernstein, the Chief Executive
Officer of Pudgie's, became Chief Executive Officer and President of Arthur
Treacher's.
ENTERTAINMENT BUSINESS
Digital intends to acquire and make investments primarily in
traditional entertainment content entities. To date, Digital's investments have
been made through its subsidiary, DCDC (Delaware). Digital's entertainment
42
<PAGE>
business is headquartered in New York, New York. Digital's strategy is to
acquire and invest in entities which provide comprehensive services to a wide
variety of entertainment and other related businesses and for general public
consumption. Digital seeks strategic alignments with these business entities to
focus on creative services (i.e., original content production) resulting in
revenue generation from motion pictures; television; animation; product
endorsement and sales; and licensing and syndication. Content is intended to be
delivered to both business and the consumer through conventional distribution
platforms as well as digital broadband.
On March 16, 2000, the Board of Directors of Digital approved the
appointment of Ralph Sorrentino as the Chief Executive Officer of Digital. Mr.
Sorrentino became Chief Executive Officer of DCDC (Delaware) effective May 1,
2000.
Digital plans to invest in companies that are involved in the creation
and transmission of content. Digital also plans to provide, services and capital
to early stage entertainment companies. 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 capital. Digital
believes that it can develop such business activities, including content and
related distribution, through acquisitions of majority-owned subsidiaries.
Digital 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, Digital 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 constitute more than 40% of the value of Digital's
assets (exclusive of U.S. government securities and cash items) on an
unconsolidated basis, unless Digital restructures or reduces its holdings of
investment securities within a reasonable period of time. Although it is the
intention of Digital to take the actions necessary to avoid investment company
status, no assurance can be given that Digital 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
Digital to permit Digital to comply with the applicable regulations.
Applicable regulations may also operate to impose significant
restrictions on the permissible activities and transactions of Digital. If
Digital cannot restructure its operations or reduce its holdings of investment
securities to avoid the need for the investment company restriction, the Digital
Board of Directors will consider taking such actions as may be necessary or
appropriate under the circumstances to avoid investment company registration.
Digital, through its entertainment subsidiary, has invested or advanced
approximately $427,000 in two entertainment concept companies in the period
ended October 1, 2000.
RESULTS OF OPERATIONS
The following discussion includes the following periods: unaudited
interim financial statements for the three months ended October 1, 2000 and
September 26, 1999.
43
<PAGE>
2000 THREE MONTHS AND 1999 THREE MONTHS
Digital's reported total revenues of $3,051,251 for the three month
period ended October 1, 2000 reflected a decrease of $848,451, or 21.8%,
compared to $3,899,702 in the same three month period ended September 26, 1999.
This decrease was primarily attributed to the franchising of 10 Company-owned
restaurants compared to the same period in the previous fiscal year.
Digital recognized a decrease in net restaurant sales (defined as gross
restaurant sales less coupons, promotion costs and discounts) of $761,006 or
22.9% to $2,559,895 for the three month period ended October 1, 2000, compared
to $3,320,901 in the same three month period ended September 26, 1999. The
decrease is primarily attributed to the franchising of 10 Company-owned
restaurants to existing franchisees. Same store net sales decreased by 8.9% or
$248,118 to $2,545,079 for the three month period ended October 1, 2000,
compared to $2,793,197 for the same three month period ended September 26, 1999.
Franchise and other income decreased 12.7% or $46,212 to $318,617 for the three
month period ended October 1, 2000, compared to $364,829 in the same three month
period ended September 26, 1999. The decrease was primarily due to the
timeliness of the receipt of marketing allowances from Digital's suppliers.
Digital's total costs and expenses decreased 15.0% or $612,359 to
$3,466,696 for the three month period ended October 1, 2000, compared to
$4,079,055 for the three month period ended September 26, 1999. This decrease
was primarily attributed to the franchising of 10 Company- owned restaurants
compared to the same period in the previous fiscal year.
General and administrative expense increased $310,333 or 103.0% to
$611,697 for the three month period ended October 1, 2000, compared to $301,364
for the three month period ended September 26, 1999. The increase is primarily
attributed to the expenses incurred by DCDC (Delaware) in the amount of $389,229
for the three month period ended October 1, 2000, compared to zero for the three
month period ended September 26, 1999. Without these charges from DCDC
(Delaware), general and administrative expenses would have decreased $78,896 or
26.2% to $231,437 for the three month period ended October 1, 2000, compared to
$301,364 for the three month period ended September 26, 1999.
Interest expense increased 14.2% or $5,941 to $47,654 for the three
month period ended October 1, 2000, compared to $41,713 for the three month
period ended September 26, 1999. The increase was due to new debt taken on by
Digital.
Depreciation and amortization decreased 26.9% or $57,737 to $157,313
for the three month period ended October 1, 2000, compared to $215,050 for the
three month period ended September 26, 1999. This decrease was primarily
attributed to the franchising of 10 Company-owned restaurants compared to the
same period in the previous fiscal year.
44
<PAGE>
As a result of the foregoing, particularly the franchising of 10
Company-owned restaurants compared to the same period in the previous fiscal
year Digital's net loss (before preferred dividends) increased $242,033 or
109.5% to $463,099 for the three month period ended October 1, 2000, compared to
a net loss (before preferred dividends) of $221,066 for the three month period
ended September 26, 1999. Without taking into account the net loss (before
preferred dividends) from DCDC (Delaware) of $356,248, Digital's net loss
(before preferred dividends) would have decreased $114,215 or 51.7% to $106,851
for the three month period ended October 1, 2000, as compared to a net loss
(before preferred dividends) of $221,066 for the three month period ended
September 26, 1999.
LIQUIDITY AND CAPITAL RESOURCES. Digital has financed its restaurant
operations principally from revenues derived from Company-owned restaurants,
franchise income and private placements of equity and debt. Digital has raised
approximately $12,000,000 in equity and debt since May 1996 (exclusive of
capital raised by DCDC (Delaware)), approximately $1.9 million of equity and
debt has been raised since September 1998.
<TABLE>
<CAPTION>
<S> <C> <C>
Private Placement of Promissory Notes and Warrants September 1998 $ 200,000
Preferred Stock "Series D" September 1998 $ 400,000
Common Stock March 1999 $ 110,000
Promissory Notes and Warrants May 1999 - February 2000 $ 1,137,000
Warrants July 2000 $ 48,250
------------
$ 1,895,250
</TABLE>
Digital's current assets exceeded its current liabilities by $2,665,735
at October 1, 2000, compared to current liabilities exceeding its current assets
by $4,238,252 at June 30, 2000. The primary reason for the improved ratio of
current assets to current liabilities is the capital raised by DCDC (Delaware)
in 2000. Digital had cash and short-term investments of $6,454,153 at October 1,
2000 compared to $8,239,351 at June 30, 2000. The primary reason for this
decrease in cash is the investments in marketable and non-marketable securities
by DCDC (Delaware). The capital that has been raised will be retained by DCDC
(Delaware) and is intended to be used solely for DCDC (Delaware) operations and
the acquisition and investment in companies and technologies that focus on the
creation and delivery of entertainment content. Digital had also incurred
indebtedness in connection with (i) the conversion of past due amounts under
certain leases to indebtedness and (ii) the repurchase of certain franchises,
but several of such restaurants were unable to generate sufficient revenues to
repay the indebtedness. During the Fiscal 2000, and the three month period ended
October 1, 2000 Digital experienced negative cash flow which has adversely
affected its liquidity. The lack of liquidity in Digital has adversely affected
Digital's restaurant operations.
Digital implemented a restructuring strategy in January 1999 which
focused on improving cash flow by franchising or selling certain company-owned
restaurants, franchise sales, co-branding 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 transfer of selected leases, losses typically
incurred by certain locations have been eliminated, thus improving cashflow.
Arthur Treacher's believes that it will need additional financing and
working capital to finance its restaurant operations and capital expenditures.
Although Arthur Treacher's has obtained additional financing in the past and
45
<PAGE>
believes it could meet its needs through either additional borrowings or the
sale of additional equity, and the re-negotiation of Arthur Treacher's accounts
payable. There can be no assurance that Arthur Treacher's would succeed in
obtaining any such financing, or that the terms of such transactions could be
effected, and that such strategy will be successful. If Arthur Treacher's
strategy is unsuccessful, there is substantial doubt about the restaurants
operations continuing as a going concern
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements are presented
for illustrative purposes only and are not necessarily indicative of the
financial position, or results of operations of future period or the results
that actually would have been realized had the Arthur Treacher's business been a
separate company during the specified periods. The pro forma financial
statements, including the notes thereto, are qualified in their entirety by
reference to, and should be read in conjunction with, the historical
consolidated financial statements of Digital, including the notes thereto,
included herein or incorporated herein by reference. See "Where You Can Find
More Information" on page _____.
The following unaudited pro forma financial statements give effect to
the proposed spin-off of the restaurant business. The pro forma adjustments are
preliminary and based on management's estimates. In addition, management is in
the process of assessing and formulating its business plans. Management does not
know the exact amount of the restructuring costs but does not believe that they
will be material. Based on the timing of the closing of the transaction, the
finalization of the integration plans and other factors, final pro forma
adjustments may differ materially from those presented in these pro forma
financial statements.
The pro forma balance sheet assumes that the spin-off took place on
October 1, 2000. The pro forma statement of operations assumes the spin-off took
place as of the beginning of October 1, 2000.
46
<PAGE>
DCDC
SPIN OFF BALANCE SHEET
OCTOBER 1, 2000
<TABLE>
<CAPTION>
Pro Forma
---------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 13,220
Accounts receivable 110,596
Inventories 37,513
Prepaid expenses and other 44,989
-
----------
TOTAL CURRENT ASSETS 206,318
----------
PROPERTY AND EQUIPMENT AT COST
Leasehold improvements 2,386,864
Furniture, fixtures, and equipment 1,790,366
----------
4,177,230
Less: accumulated depreciation 3,557,141
----------
PROPERTY AND EQUIPMENT, NET 620,089
----------
OTHER ASSETS
Deposits 19,291
Goodwill 263,954
Notes receivable 65,135
Investment and advances in entertainment companies -
Marketable securities available for sale -
Non-marketable securities -
Other 8,412
----------
TOTAL OTHER ASSETS 356,792
----------
TOTAL ASSETS $1,183,199
==========
<CAPTION>
Pro Forma
---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts payable $2,185,720
Accrued expenses and other liabilities 248,174
Current maturities of long term debt 1,379,285
Deferred revenue 280,760
----------
TOTAL CURRENT LIABILITIES 4,093,939
LONG TERM DEBT, net of current maturities 433,159
----------
TOTAL LIABILITIES 4,527,098
----------
STOCKHOLDERS' EQUITY
-
Common stock 29,630
Additional paid in capital 14,880,256
Accumulated deficit (18,253,785)
----------
TOTAL STOCKHOLDERS' EQUITY (3,343,899)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,183,199
==========
47
<PAGE>
<CAPTION>
PREFERRED COMMON
STOCK STOCK P-I-C
--------- ------ -----
<S> <C> <C> <C> <C> <C>
1 Assume issuance of 1 AT share for each Digital
share 16,590,701 16,591 (16,591)
2 Assume issuance of 1 AT share for each DCDC
(Del) share 11,869,950 11,870 (11,870)
3 Assume conversion of Digital preferred stock
Series A 3,300 3 (3)
Series B 765,625 766 (766)
Series C - -
Series D 400,000 400 (400)
4 Elimination of preferred and common (1,744,885) (165,907) 1,910,792
5 Assume issuance of stock options
----------- --------- ---------
(1,744,885) (136,277) 1,881,162
=========== ========= =========
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
DCDC
Spin Off--INCOME STATEMENT
For the Three Months Ended October 1, 2000
Pro Forma Actual
--------- ------
3 Months 3 Months
10/1/00 9/26/99
<S> <C> <C>
TOTAL REVENUE $ 2,941,988 $ 3,899,702
OPERATING EXPENSES
Cost of sales 1,618,255 2,058,775
Operating expenses 1,003,149 1,503,866
Depreciation and amortization 157,313 215,050
General and administrative expenses 222,468 301,364
----------- -----------
TOTAL OPERATING EXPENSES 3,001,185 4,079,055
----------- -----------
INCOME FROM OPERATIONS (59,197) (179,353)
OTHER INCOME (EXPENSE)
Interest expense (47,654) (41,713)
Undeclared preferred stock dividends -
----------- -----------
NET PROFIT (LOSS) FOR COMMON SHAREHOLDER $ (106,851) $ (221,066)
=========== ===========
INCOME PER SHARE
PRIMARY $(0.03) $(0.02)
DILUTED $(0.03) $(0.02)
</TABLE>
49
<PAGE>
DCDC
Spin Off--INCOME STATEMENT
For the Year Ended June 30, 2000
<TABLE>
<CAPTION>
Pro Forma Actual
--------- ------
Year Ended Year Ended
6/30/00 6/30/99
<S> <C> <C>
TOTAL REVENUE $ 13,547,419 $ 21,531,829
------------ ------------
OPERATING EXPENSES -
Cost of sales 7,234,384 12,855,353
Operating expenses 5,074,222 8,569,080
Depreciation and amortization 691,232 1,204,321
General and administrative expenses 1,200,622 1,905,439
Impairment of assets 5,504 2,036,955
Compensation from stock options 1,931,000 -
-
------------ ------------
TOTAL OPERATING EXPENSES 16,136,964 26,571,148
------------ ------------
INCOME FROM OPERATIONS (2,589,545) (5,039,319)
------------ ------------
OTHER INCOME (EXPENSE) -
Interest expense (228,821) (168,885)
Other Net (259,046) (638,515)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (487,867) (807,400)
------------ ------------
NET PROFIT (LOSS) FOR COMMON SHAREHOLDER $(3,077,412) $ (5,846,719)
============ ============
INCOME PER SHARE
PRIMARY $(0.19) $(0.40)
DILUTED $(0.19) $(0.40)
</TABLE>
50
<PAGE>
DIGITAL CREATIVE DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 1, 2000
<TABLE>
<CAPTION>
Pro Forma Actual
--------- ------
3 Months 3 Months
10/1/00 9/26/99
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $(106,851) $(221,066)
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 153,231 215,050
Amortization of deferred revenue (36,502) -
Changes in assets and liabilities: -
Increase in accounts receivable (3,936) (5,344)
Increase in deposits and other assets 230 (24,577)
Increase in prepaid expenses and other current assets 33,716 (40,332)
Decrease in inventories 14,467 44,949
Decrease in goodwill 4,081 4,081
Increase (decrease) in accounts payable 64,752 (32,207)
Decrease in accrued expenses and other
liabilities (207,087) (68,656)
--------- ---------
Net cash (used in) provided by operating activities (83,899) (128,102)
--------- ---------
INVESTING ACTIVITIES
Capital expenditures (4,339) (2,655)
Investments made by subsidiary -
Proceeds from disposition of restaurants - 49,248
--------- ---------
Net cash used in investing activities (4,339) 46,593
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of stock -
Issuance of common stock 48,250 -
Principal payments of long term debt (36,543) (65,316)
--------- ---------
Net cash (used in) provided by financing activities 11,707 (65,316)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 37,069 (146,825)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD (23,849) 165,459
--------- ---------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 13,220 $ 18,634
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid for interest $ - $ 7,586
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Common stock issued to settle accounts payable $ - $ -
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Common stock issued to settle debt and interest $ - $ -
========= =========
</TABLE>
51
<PAGE>
DIGITAL CREATIVE DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE YEAR ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Pro Forma Actual
12 Months 12 Months
6/30/00 6/30/99
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $(3,077,412) $(5,846,719)
Adjustments to reconcile net income to net cash
provided by operating activities -
Stock option compensation 1,931,000 -
Depreciation and amortization 906,736 3,241,276
Loss on disposal of assets 38,261 932,590
Changes in assets and liabilities:
Increase in accounts receivable 93,464 (58,851)
Increase in deposits and other assets 110,320 132,698
Increase in prepaid expenses and other current assets 40,373 79,332
Decrease in inventories 47,295 99,808
Increase (decrease) in accounts payable (775,639) 617,758
Decrease in accrued expenses and other - 133,913
liabilities (253,344)
----------- -----------
Net cash (used in) provided by operating activities (938,946) (668,195)
----------- -----------
INVESTING ACTIVITIES
Capital expenditures (52,739) (427,622)
Proceeds from notes receivable 4,001 -
----------- -----------
Net cash used in investing activities (48,738) (427,622)
----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of common stock - 98,577
Proceeds from issuance of preferred stock - 355,299
Proceeds from long term debt 1,025,133 435,725
Principal payments of long term debt (226,867) (537,961)
----------- -----------
Net cash (used in) provided by financing activities 798,266 351,640
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (189,418) (744,177)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 165,459 909,636
----------- -----------
CASH AND CASH EQUIVALENTS END OF PERIOD $ (23,959) $ 165,459
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid for interest $ 140,964 $ 175,727
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Common stock issued to settle accounts payable $ 176,900 $ 43,836
=========== ===========
Common stock issued to settle notes payable $ 639,158 $ -
=========== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Common stock issued to settle debt and interest $ 87,915 $ -
=========== ============
</TABLE>
52
<PAGE>
MANAGEMENT
The following table list the names, ages and positions of all directors
and executive officers of Arthur Treacher's as of the distribution date. There
are no family relationships between any director or executive officer and any
other director or executive officer of Arthur Treacher's. Executive officers
serve at the discretion of the board of directors
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Name Age Position
---- --- --------
Bruce R. Galloway 43 Chairman of the Board
Skuli Thorvaldsson 59 Vice Chairman of the Board
Jeffrey Bernstein 50 President, Chief Executive
Officer, Director
Gary Herman 36 Secretary; Director
William F. Saculla 49 Vice President
Ritu Dewan 36 Vice President
DIRECTORS AND OFFICERS
Bruce R. Galloway. Mr. Galloway has been Chairman of the Board of
Directors of Digital since May 1996 and was the Chief Executive Officer from May
1998 to May 2000. Mr. Galloway is currently a managing director of Burnham
Securities Inc., an NASD Broker/Dealer and investment bank based in New York.
Prior to joining Burnham in 1993, Mr. Galloway was a senior vice president at
Oppenheimer & Company, an investment bank and NASD Broker/Dealer based in New
York, from 1991 through 1993. Mr. Galloway holds a B.A. degree in Economics from
Hobart College and an M.B.A. in Finance from New York University's Stern
Graduate School of Business.
Skuli Thorvaldsson. Mr. Thorvaldsson has been Vice Chairman of the
Board of Directors of Digital since May 1996. Mr. Thorvaldsson has been the
Chief Executive Officer of the Hotel Holt in Iceland since 1980. Mr.
Thorvaldsson has various diversified interests in food court services, travel
agency and pork processing. He is also a master franchisee of Domino's Pizza in
Scandinavia. Mr. Thorvaldsson is a director of Allied Resources Corp. Mr.
Thorvaldsson graduated from the Commercial College of Iceland and the University
of Barcelona. Mr. Thorvaldsson received his Degree in Law from the University of
Iceland.
Jeffrey Bernstein. Jeffrey Bernstein assumed the role of President and
Chief Executive Officer of Arthur Treacher's, Inc. on October 20, 2000,
following his tenure as President and Chief Executive Officer of Pudgie's Famous
Chicken, a metro New York QSR chain, which he acquired out of bankruptcy in June
of 1998.
Mr. Bernstein has extensive turn-around experience having run his own
consulting business, Consolidated Services Inc. from 1990 through 1998.
Consolidated Services specializes in corporate turn-arounds and
insolvency/crisis management. During his tenure at Consolidated Services Inc.,
Mr. Bernstein was involved in over 100 chapter 11 and out-of-court corporate
restructurings, working with debtors and creditor committees.
Mr. Bernstein has deep roots in the food business, where he began his
career as a food service broker in 1970. Additionally, Mr. Bernstein was
instrumental in the introduction of "Juicy Juice" to the supermarket trade
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<PAGE>
and was in a key management position at Cooky's Steak Pubs, a publicly traded
metro New York based dinner house chain.
Gary Herman. Mr. Herman is an Associate Managing Director at Burnham
Securities Inc., a New York based investment banking firm which he joined in
April 1997. Prior to joining Burnham, from 1993 to 1997 Mr. Herman from was a
managing partner of The Kingshill Group, Inc., a merchant banking firm with
offices in New York and Tokyo. He is currently on the Boards of Directors of
Datametrics Corporation, Comstar Interactive, Inc. and the NYC Industrial
Development Agency. Mr. Herman holds a B.A. in Political Science from the State
University of New York at Albany.
William F. Saculla. Mr. Saculla has served as Secretary and Chief
Financial Officer of Digital since 1984. In May 1998, Mr. Saculla was named
President of Digital and was also nominated to the Board of Directors of
Digital. Mr. Saculla resigned as an officer and director of Digital in May,
2000. Mr. Saculla earned a B.S. degree in Accounting from Youngstown State
University in 1978.
Each Director is elected to serve until the Company's next annual
meeting of Shareholders and until his successor is duly elected and qualified.
There are no agreements with respect to the election of directors. Executive
officers are appointed annually by the Board of Directors, and each executive
officer serves at the discretion of the Board of Directors.
Ritu Dewan. Ritu Dewan is Vice President of Operations for Arthur
Treacher's, Inc., fully responsible for all aspects of the operations of our
more than thirty corporately owned stores. Ms. Dewan holds a Bachelor of Arts
Degree in economics from Delhi University, India and a certificate in
international marketing from Baruch College, City University of New York.
Ms. Dewan began her foodservice career at the renowned Kenny's Steak
House, located in the Hotel Beverly, New York, where she remained until 1994, at
which time she joined Pudgie's Famous Chicken as a corporate district manager.
In 1996, Ms. Dewan was promoted to Assistant Director of
Operations/Director of Human Resources at Pudgie's Famous Chicken, where she was
fully responsible for operational and financial accountability for sixteen
corporate units. During her tenure as Assistant Director of Operations, Ms.
Dewan developed, formulated and implemented management development programs
designed to enhance management and corporate efficiencies, as well as each
unit's contribution to the corporate bottom line. Furthermore, Ms. Dewan
restructured franchise acquisitions with a credible, disciplined commitment to
excellence, team building and standard of execution.
It should be noted that at the time current management acquired
Pudgie's Famous Chicken, i.e., June 1998, Ms. Dewan was the only management
employee who was invited to become a part of the new Pudgie's management team.
Moreover, Ms. Dewan was selected as Pudgie's Famous Chicken Employee of the Year
for 1999 and 2000.
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<PAGE>
OTHER IMPORTANT EMPLOYEES
Scott Y. Stuart, Esq. Scott Y. Stuart is general counsel to Arthur
Treacher's, Inc. Mr. Stuart graduated from the State University of New York at
Binghamton with honors in 1984 and received his J.D. from Brooklyn Law School is
1987. Mr. Stuart has practiced law in both the private sector as well as in the
public sector. After spending five years as an attorney with the United States
Department of Justice, Mr. Stuart headed up a practice group at the law firm of
Rivkin, Radler & Kremer. Following that, Mr. Stuart became of-counsel to the law
firm of Jaspan Schlesinger Hoffman LLP. Following the acquisition of Pudgie's
Famous Chicken in 1998, Mr. Stuart was appointed secretary and general counsel
of that company. Following the recent acquisition of Pudgie's Famous Chicken by
Arthur Treacher's, Inc., Mr. Stuart became general counsel to the newly
consolidated company.
Leonard A. Spier. Leonard Spier is Director of Purchasing for Arthur
Treacher's, Inc. Mr. Spier, a graduate of Bernard Baruch College, CUNY, has
spent virtually his entire working life in the food service business, beginning
as a food service broker in 1975 with ABD/Harrison Food Brokerage Co.
From 1975 until leaving ABD/Harrison in 1983, Mr. Spier was a food
service sales representative and account executive, roles which he continued
after joining the HC Boerner Company, the food subsidiary of Harvey Radio Corp.,
until June 1990, when the food service division was sold to Apple Food
Brokerage.
Mr. Spier remained with Apple Food Brokerage as a wholesale account
representative and account executive, until joining Pudgie's Famous Chicken in
June 1999.
COMMITTEES
The Company has the following committees: Executive, Compensation and
Audit. The Board of Directors elected Bruce Galloway, Skuli Thorvaldsson and
Jeffrey Bernstein to the Executive Committee. The Compensation Committee of the
Board of Directors was formed to review the Company's executive compensation
proposals, subject to the approval of the Board of Directors. The Compensation
Committee is composed of Skuli Thorvaldsson, Bruce Galloway and Jeffrey
Bernstein. The Audit Committee was formed to advise the Board in matters
relating to the audit of the Company's financial statements and the Company's
financial reporting systems. Messrs. Bruce Galloway, R. Skuli Thorvaldsson and
Jeffrey Bernstein serve as members of the Audit Committee.
EXECUTIVE COMPENSATION AND OTHER MATTERS
EXECUTIVE COMPENSATION
The compensation of our executive officers will be approved by our
Compensation Committee of our board of directors. Our Compensation Committee
will consist entirely of non-employee directors. We expect that the
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<PAGE>
compensation of the executive and other officers will consist principally of
base salary, annual cash bonus and long-term equity-based incentive
compensation.
Salaries of the executive officers will be based, among other factors,
on our Compensation Committee's assessment of the executive's responsibilities,
experience and performance, compensation data of other companies, and the
compensation environment for attracting and retaining executives.
We expect that cash bonuses for executives officers will be determined
each year at or following the end of our fiscal year, in accordance with targets
established at or near the beginning of the fiscal year. Factors which may be
considered in determining the amount of cash bonuses paid to officers will be,
among others, the executive officer's individual performance, including the
quality of strategic plans, organizational and management development, special
project leadership and similar indicators of individual performance, and our
financial performance, which may be measured by earnings per share, return on
equity and total return to the shareholders in the form of stock price
appreciation and dividends, if paid.
We describe below the current compensation arrangements for our chief
executive officer and our two other executive officers who receive compensation,
as measured by their base salaries, calculated on an annualized basis. Although
we expect that the compensation of our executive officers will consist
principally of base salary, annual cash bonus and long-term equity-based
incentive compensation may also be awarded by the compensation committee. In
connection with the current compensation arrangements for our executive officers
described below, base salary represents the executive officer's current base
salary on an annualized basis.
The current compensation for our chief executive officer and our two
other officers who receive compensation is as follows:
- Jeffrey Bernstein, who will serve as our President and Chief
Executive Officer following the distribution, currently
receives a base salary equal to $200,000 on an annualized
basis.
- William Saculla, who will serve as a Vice President, currently
receives a base salary of $95,000.
- Ritu Dewan, who will serve as a Vice President, currently
receives a base salary of $80,200.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding shares of our common stock are and will be prior
to the distribution held beneficially and of record by Digital and Jeffrey
Bernstein. The following table sets forth information concerning shares of our
common stock projected to be beneficially owned immediately after the
distribution date by:
- each person or entity known by us to own more than five
percent of the outstanding shares of our common stock;
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<PAGE>
- each person who we currently know will be our director at the
time of the distribution; and
- all persons who we currently know will be our directors and
executive officers at the time of the distribution.
The share amounts in the table below reflect the distribution ratio of
one share of our common stock for every one share of Digital common stock or
preferred stock currently held by the listed individuals. Unless otherwise
indicated in the footnotes below, each person or entity has sole voting and
investment power with respect to the shares of common stock set forth opposite
such person's or entity's name. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Shares of common stock
and options, warrants and convertible securities that are currently exercisable
or convertible within 60 days into shares of our common stock are deemed to be
outstanding and to be beneficially owned by the person holding the options or
warrants for the purpose of computing the percentage ownership of the person,
but are not treated as outstanding for the purpose of computing the percentage
of any other person.
Shareholder Shares Percentage
----------- ------ ----------
Ralph Sorrentino (1) 5,743,332 25.7
Bruce R. Galloway (2) 3,830,162 19.9
NTS Financial Services Ltd. (3) 2,722,873 14.6
Burnham International Inc. (4) 2,500,000 13.1
Fred Knoll (5) 2,438,818 13.5
Evan Binn and Ronna Binn (6) 1,908,624 10.7
Magee Industrial Enterprises, Inc. (7) 1,245,887 7.2
EFA Ventures, Inc. (8) 1,199,980 6.7
Martin Wade (9) 1,000,000 5.7
Skuli Thorvaldsson (10) 760,000 4.4
William Saculla (11) 84,282 .5
Donald Perlyn (12) 81,667 .5
Maurice Sonnenberg (13) 50,000 .3
Sigurdur Jon Bjornsson (14) 10,000 .1
Jeffrey Bernstein 3,318,140 20.0
Officers and Directors as a Group 7,232,584 43.6
Total Outstanding Shares 16,590,701
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<PAGE>
NOTES
Exercise prices referred to herein are subject to adjustment pursuant to the
Warrant Adjustment Plan and Option Adjustment Plan
(1) Mr. Ralph Sorrentino is the President and Chief Executive Officer of DCDC
(Delaware). Includes warrants to purchase 83,333 shares of Common Stock which
are exercisable at an exercise price of $.30 per share through October 21, 2004;
(ii) warrants to purchase 83,333 shares of Common Stock which are exercisable at
an exercise price of $.60 per share through February 5, 2005; (iii) warrants to
purchase 10,000 shares of Common Stock which are exercisable at an exercise
price of $.39 per share through March 16, 2005; (iv) warrants to purchase
5,000,000 shares of Common Stock which are exercisable at an exercise price of
$.37 per share through May 1, 2005. Includes 300,000 shares of common stock held
in DCDC (Delaware) that is convertible into 300,000 shares at Common Stock of
Digital at the option of the holder thereof or Digital.
(2) Mr. Bruce R. Galloway is the Chief Executive Officer and Chairman of the
Board of Arthur Treacher's. Includes warrants to purchase 380,000 shares of
Common Stock at an exercise price of $1.00, Per share which warrants are
exercisable through May 31, 2001; (ii) warrants to purchase 250,000 shares of
Common Stock which are exercisable at an exercise price of $1.00 per share
through December 31, 2001; (iii) warrants to purchase 20,000 shares of Common
Stock which are exercisable at an exercise price of $1.00 per share through
March 27, 2002; (iv) warrants to purchase 10,000 shares of Common Stock which
are exercisable at an exercise price of $1.00 per share through November 24,
2003; (v) warrants to purchase 20,000 shares of Common Stock which are
exercisable at an exercise price of $.68 per share through March 15, 2004; (vi)
warrants to purchase72,000 shares of Common Stock which are exercisable at an
exercise price of $.44 per share through May 10, 2004; (vii) warrants to
purchase 175,000 shares of Common Stock which are exercisable at an exercise
price of $.30 per share through September 30, 2004; (viii) warrants to purchase
3,333 shares of Common Stock which are exercisable at an exercise price of $.30
per share through October 21, 2004; (ix) warrants to purchase 65,789 shares of
Common Stock which are exercisable at an exercise price of $.38 per share
through December 1, 2004; (x) warrants to purchase 3,333 shares of Common Stock
which are exercisable at an exercise price of $.30 per share through February 5,
2005; (xi) warrants to purchase 10,000 shares of Common Stock which are
exercisable at an exercise price of $.39 per share through March 19, 2005; (xii)
warrants to purchase 22,166 shares of Common Stock which are exercisable at an
exercise price of $.68 per share through April 10, 2004; (xiii) warrants to
purchase 30,769 shares of Common Stock which are exercisable at an exercise
price of $.49 per share through May 10, 2004; (xiv) warrants to purchase 39,630
shares of Common Stock which are exercisable at an exercise price of $.38 per
share through June 10, 2004. (xv) warrants to purchase 36,928 shares of Common
Stock which are exercisable at an exercise price of $.41 per share through July
10, 2004; (xvi) warrants to purchase 39,862 shares of Common Stock which are
exercisable at an exercise price of $.375 per share August 10, 2004 warrants to
purchase 44,040 shares of Common Stock which are exercisable at an exercise
price of $.34 per share through September 10, 2004; (xviii) warrants to purchase
47,604 shares of Common Stock which are exercisable at an exercise price of $.32
per share through October 10, 2004; (xix) warrants to purchase 37,212 shares of
Common Stock which are exercisable at an exercise price of $.40 per share
through November 10, 2004; (xx) warrants to purchase 40,850 shares of Common
Stock which are exercisable at an exercise price of $.37 per share through
December 10, 2004; (xxi) warrants to purchase 42,265 shares of Common Stock
which are exercisable at an exercise price of $.37 per share through January 10,
2005; (xxii) warrants to purchase 8,621 shares of Common Stock which are
exercisable at an exercise price of $1.74 per share through February 10, 2005.
Includes 300,000 shares of common stock held by Mr. Galloway and 100,000 shares
of common stock held by Jacombs Trading (an entity controlled by Mr. Galloway)
in DCDC (Delaware) that is convertible into an equal amount of the Common Stock
of Digital at the option of the holder thereof or Digital.
(3) Includes warrants to purchase 140,000, shares of Common Stock at an exercise
price of $.30 per share through September 30, 2004; (ii) warrants to purchase
83,333 shares of Common Stock at an exercise price of $.30 per share through
October 21, 2004; (iii) warrants to purchase 65,789 shares of Common Stock at an
exercise price of $.38 per share through January 10, 2005; (iv) warrants to
purchase 83,333 shares of Common Stock at an exercise price of $.30 per share
through February 5, 2005. Includes 1,000,000 shares of common stock held in DCDC
(Delaware) that is convertible into 1,000,000 shares of Common Stock of the
Digital at the option of the holder thereof or Digital.
(4) Burnham International Inc. holds 2,500,000 shares of common stock in DCDC
(Delaware) that is convertible into 2,500,000 shares of Common Stock of the
Company at the option of the holder thereof or Digital. Bruce Galloway is
managing director of Burnham International Inc.
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<PAGE>
(5) Includes warrants to purchase 10,000 shares of Common Stock at an exercise
price of $1.00, which warrants are exercisable through March 27, 2002; (ii)
warrants to purchase 10,000 shares of Common Stock which are exercisable at an
exercise price of $1.00 through April 30, 2003; warrants to purchase 10,000
shares of Common Stock which are exercisable at an exercise price of $1.00
through November 24, 2003; (iv) warrants to purchase 20,000 shares of Common
Stock which are exercisable at an exercise price of $.68 per share through March
15, 2004; The following notes and warrants are owned by Europa International
Inc. Knoll Capital Management, Inc. is the investment manager for Europa. Mr.
Knoll is the sole shareholder of Knoll Capital Management Inc.(i) warrants to
purchase 83,333, shares of Common Stock at an exercise price of $.30 per share
through September 30, 2004; (iv) warrants to purchase 83,333 shares of Common
Stock at an exercise price of $.30 per share through October 21, 2004; (v)
warrants to purchase 83,333 shares of Common Stock at an exercise price of $.30
per share through February 5, 2005. Includes 600,000 shares of common stock held
by Europa International, Inc. held in DCDC (Delaware) that is convertible into
600,000 shares of Common Stock of Digital at the option of the holder thereof or
Digital.
(6) Includes warrants to purchase 50,000 shares of Common Stock owned by Mr. And
Mrs. Binn and are exercisable at a price of $1.00 per share through May 31,
2001, (ii)warrants to purchase 2,000 shares of Common Stock which are
exercisable at an exercise price of $1.00 through March 27, 2002; (iii) warrants
to purchase 10,000 shares of Common Stock which are exercisable at an exercise
price of $1.00 through November 24, 2003; (iv) warrants to purchase 20,000
shares of Common Stock which are exercisable at an exercise price of $.68 per
share through March 15, 2004; (v) warrants to purchase 83,333 shares of Common
Stock which are exercisable at an exercise price of $.30 per share through
September 30, 2004; (vi) warrants to purchase 83,333 shares of Common Stock
which are exercisable at an exercise price of $.30 per share through February 5,
2005; (vii) a promissory note convertible to 266,666 shares of Common Stock at a
conversion price of $.21 per share on September 30, 2000; (viii) warrants to
purchase 10,000 shares of Common Stock which are exercisable at an exercise
price of $.39 per share through March 16, 2005. Includes 750,000 shares of
common stock held by Evan Binn in DCDC (Delaware) that is convertible into
750,000 shares of Common Stock of the Digital at the option of the holder
thereof or of Digital Creative Development Corporation.
(7) Gives effect to the conversion of 490,000 shares of Series B Preferred Stock
into 765,625 shares of Common Stock for no additional consideration.
(8) EFA Ventures, Inc. owns 199,997 shares of common stock in DCDC (Delaware)
and EFA International Fund LP owns 999,983 shares of common stock in DCDC
(Delaware). The stock of DCDC (Delaware) is convertible into 1,199,980 shares of
Common Stock of Digital at the option of the holder or the Digital. EFA Ventures
Inc. is general partner in the EFA International Fund. Sigurdur Jon Bjornsson is
the Vice President and Financial Director for EFA Ventures Inc.
(9) Includes warrants to purchase 1,000,000 shares of Common Stock owned by Mr.
Martin Wade and are exercisable at a price of $1.00 per share through May 1,
2005.
(10) Gives effect to the conversion of 400,000 shares of Series D Preferred
Stock into 400,000 shares of Common Stock for no additional consideration.
Includes warrants to purchase 250,000 shares of Common Stock at a purchase price
of $1.00, which warrants are exercisable through May 31, 2001; (ii) warrants to
purchase 50,000 shares of Common Stock which are exercisable through January 9,
2002 at an exercise price of $1.00 per share (iii) warrants to purchase 20,000
shares of Common Stock which are exercisable at an exercise price of $1.00 per
share through March 27, 2002, (iv) warrants to purchase 10,000 shares of Common
Stock at an exercise price of $1.00 through November 24, 2003; (v) warrants to
purchase 20,000 shares of Common Stock at an exercise price of $.68 per share
through March 15, 2004; (vi) warrants to purchase 10,000 shares of Common Stock
at an exercise price of $.39 per share through March 16, 2005.
(11) 12,000 shares of Common Stock at a price of $1.00 per share through August
31, 2002. Does not include options which have been granted but have not vested
to purchase 3,000 shares of Common Stock at a price of $1.00 per share. 20% of
such options vest for a period of five years commencing September 1, 1999.
Includes warrants to purchase 10,000 shares of Common Stock at an exercise price
of $1.00 through November 24, 2003; (ii) warrants to purchase 16,667 shares of
Common Stock at an exercise price of $.30 per share through February 5, 2005;
(iii) warrants to purchase 20,000 shares of Common Stock at an exercise price of
$.68 per share through March 15, 2004; (iv) warrants to purchase 10,000 shares
of Common Stock which are exercisable at an exercise price of $.39 per share
through March 16, 2005.
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<PAGE>
(12) Includes warrants to purchase 10,000 shares of Common Stock at an exercise
price of $1.00 through November 24, 2003; (ii) warrants to purchase 20,000
shares of Common Stock at an exercise price of $.68 per share through March 15,
2004; (iii) warrants to purchase 41,667 shares of Common Stock at an exercise
price of $.38 per share through February 5, 2005; (iv) warrants to purchase
10,000 shares of Common Stock which are exercisable at an exercise price of $.39
per share through March 16, 2005.
(13) Includes warrants to purchase 10,000 shares of Common Stock at an exercise
price of $1.00 through November 24, 2003; (ii) warrants to purchase 30,000
shares of Common Stock at an exercise price of $.68 per share through March 15,
2004; warrants to purchase 10,000 shares of Common Stock which are exercisable
at an exercise price of $.39 per share through March 16, 2005.
(14) Includes warrants to purchase 10,000 shares of Common Stock which are
exercisable at an exercise price of $.39 per share through March 16, 2005.
ARRANGEMENTS BETWEEN DIGITAL AND ARTHUR TREACHER'S
We have provided below summary descriptions of the Master Separation
and Distribution agreement, effective as of ______________, or the Separation
Agreement, and the key related agreements. The description is not complete. You
should read the full text of these agreements, which have been filed with the
Securities and Exchange Commission as Exhibits to the registration statement of
which this Information Statement is a part.
MASTER SEPARATION AND DISTRIBUTION AGREEMENT
The Master Separation and Distribution Agreement contains the key
provisions relating to the separation and the distribution.
THE SEPARATION. The separation is scheduled to occur on or around
_______________. On or before the separation date, Arthur Treacher's will sign
the General Assignment and Assumption Agreement which provides for the transfer
to Arthur Treacher's of assets and liabilities from Digital, effective on the
separation date. Digital will deliver additional agreements governing various
interim and ongoing relationships between Digital and Arthur Treacher's
following the separation date. The ancillary agreements include:
- a General Assignment and Assumption Agreement;
- an Employee Matters Agreement; and
- an Indemnification and Insurance Matters Agreement.
To the extent that the terms of any of these ancillary agreements conflict with
the separation agreement, the terms of these agreements govern. These agreements
are described more fully below.
THE DISTRIBUTION. On or prior to the date the distribution is
effective, Digital intends to distribute the shares of common stock of Arthur
Treacher's that Digital holds to Digital stockholders on a pro rata basis.
Digital
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<PAGE>
may, in its sole discretion, change the distribution date. Digital intends to
consummate the distribution only if the following conditions are met (any of
which may be waived by Digital):
- all required government approvals must be in effect; and
- no legal restraints must exist preventing the distribution.
COVENANTS BETWEEN DIGITAL AND ARTHUR TREACHER'S. In addition to signing
documents that transfer control and ownership of various assets and liabilities
of Digital relating to the restaurant business, Arthur Treacher's agreed with
Digital to enter into ancillary agreements described below.
INFORMATION EXCHANGE. Both Digital and Arthur Treacher's have agreed to
share information with each other, at no cost to the requesting party, for the
following purposes, unless the sharing would be commercially detrimental:
- Each party has agreed to maintain adequate internal accounting
to allow the other party to satisfy its own reporting
obligations and prepare its own financial statements.
- Each party will retain records that may be beneficial to the
other party for a specified period of time. If the records are
going to be destroyed, the destroying party will give the
other party an opportunity to retrieve all relevant
information from the records.
- Each party will do its best to provide the other party with
personnel, directors, officers or agents who may be used as
witnesses in legal proceedings.
DISPUTE RESOLUTION. If problems arise between Arthur Treacher's and
Digital, we have agreed to an arbitration procedure.
GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT
The General Assignment and Assumption Agreement identifies the assets
Digital will transfer to Arthur Treacher's and the liabilities we will assume
from Digital in the separation. The Agreement also describes when and how these
transfers and assumptions will occur.
INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT
GENERAL RELEASE OF PRE-SEPARATION CLAIMS. Effective as of the
separation date, Arthur Treacher's will release Digital and its affiliates,
agents, successors and assigns, and Digital will release Arthur Treacher's, and
its affiliates, agents, successors and assigns among other things, from any
liabilities arising from events occurring on or before the separation date. This
provision will not impair a party from enforcing the separation agreement, any
ancillary agreement or any arrangement specified in any of these agreements.
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<PAGE>
INDEMNIFICATION. The indemnification and insurance matters agreement
also contains provisions governing indemnification. In general, Arthur
Treacher's has agreed to indemnify Digital and its affiliates, agents,
successors and assigns from all liabilities arising from:
- the restaurant business, any of Arthur Treacher's liabilities
or any of Arthur Treacher's contracts; and
- any breach by Arthur Treacher's of the Separation Agreement or
any ancillary agreement.
Digital has agreed to indemnify Arthur Treacher's and our affiliates,
agents, successors and assigns from all liabilities arising from:
- Digital's business other that the business transferred to
Arthur Treacher's pursuant to the separation; and
- any breach by Digital of the Separation Agreement or any
ancillary agreement.
The indemnifying party will have all indemnification payments net of
insurance proceeds that the indemnified party receives. The agreement also
contains provisions governing notice and indemnification procedures.
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
Following the distribution, Arthur Treacher's authorized capital stock
will consist of 75,000,000 shares of common stock, $.001 par value, and
10,000,000 shares of preferred stock, $.001 par value. The description set forth
below is incomplete and is qualified by reference to the certificate of
incorporation and bylaws, which are set forth in Exhibits 2.1 and 2.2.
COMMON STOCK
The holders of common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Except as
otherwise provided by law, the holders of common stock vote together with the
holders of preferred stock as one class. Subject to the rights of the holders of
any shares of preferred stock which may at the time be outstanding, holders of
common stock will be entitled to such dividends as the board of directors may
declare out of funds legally available therefor. Subject to the prior rights of
creditors and holders of any preferred stock which may be outstanding from time
to time, the holders of common stock are entitled, in the event of liquidation,
dissolution or winding up of Arthur Treacher's, to share pro rata in the
distribution of all remaining assets. The common stock is not liable for any
calls or assessments and is not convertible into any other securities. In
addition, there are no redemption or sinking fund provisions applicable to the
common stock.
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<PAGE>
PREFERRED STOCK
The certificate of incorporation provides that the board of directors
is authorized to provide for the issuance of shares of preferred stock, from
time to time, in one or more series. Prior to the issuance of shares in each
series, the board of directors is required by the certificate and the Delaware
General Corporation Law (the "DGCL") to adopt resolutions and file a Certificate
of Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Therefor or the Certificate of Designation with the Secretary of
State of Delaware, fixing for each such series the designations, preferences and
relative, participating, optional or other special rights applicable to the
shares to be included in any such series and any qualifications, limitations or
restrictions thereon, including, but not limited to, dividend rights, dividend
rate or rates, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices, and the
liquidation preferences as are permitted by Delaware law.
TREATMENT OF CERTAIN DIGITAL AND ARTHUR TREACHER'S STOCK OPTIONS
DESCRIPTION OF DIGITAL 2000 STOCK PURCHASE AND OPTION PLAN
During the most recent fiscal year, Digital had in effect an employee
stock purchase and option plan (the "Plan") pursuant to which Digital may grant
options to purchase an aggregate of 15,000,000 shares of Digital common stock to
certain employees, officers and directors of Digital. At December ____, 2000,
options to purchase _______________ shares of Digital common stock were
outstanding under the Plan (the "Digital Employee Options").
Digital has granted to Ralph Sorrentino, Martin Wade and Joanne
Marzella (the "Officer/Director") options to purchase an aggregate of 6,250,000
shares of Digital common stock (the "Officer/Director Options") pursuant to
Employment Agreements entered into between Digital and the Officer/Directors or
their affiliates (the "Digital Officer/Director Option Agreements").
PROPOSED AMENDMENT TO THE DIGITAL STOCK PURCHASE AND OPTION PLAN AND THE DIGITAL
OFFICER/DIRECTOR OPTION AGREEMENTS
Digital intends to adopt an amendment to the Plan and Digital intends
to enter into Amendment Agreements to the Digital Officer/Director Option
Agreements (the "Amendments") pursuant to which, effective immediately prior to
the distribution of the Arthur Treacher's common stock, each of the Digital
Employee Options and the Officer/Director Options outstanding will be bifurcated
into two separately exercisable options, one to purchase Digital Common Stock
(an "Adjusted Digital Option") and one to purchase Arthur Treacher's Common
Stock (an "Adjusted Arthur Treacher's Option") (collectively, the "Adjusted
Options"). Each Adjusted Option will be exercisable for a number of shares equal
to the number of shares covered by the corresponding pre-spin-off Digital
Employee Option or Digital Officer/Director's Option, as the case may be. Thus,
following the spin-off,
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<PAGE>
each Employee Stock Option holder will hold separately exercisable options to
purchase an equal number of shares of Digital Common Stock and Arthur Treacher's
Common Stock and each holder of Officer/Director Options will hold separately
exercisable options to purchase an equal number of shares of Digital Common
Stock and Arthur Treacher's Common Stock. The exercise price of each Adjusted
Option will be adjusted to recognize the effect of the spin-off by allocating
the exercise price of the corresponding Digital Option prior to the spin-off
between the Adjusted Digital Option and the Adjusted Arthur Treacher's Option
based on the relative total asset value of Digital and Arthur Treacher's after
the spin-off.
DESCRIPTION OF ARTHUR TREACHER'S STOCK OPTION PLAN
The Arthur Treacher's Board intends to adopt, and Digital, as the sole
stockholder of Arthur Treacher's will approve, the Arthur Treacher's 2001
Adjustment Plan (the "Arthur Treacher's 2001 Adjustment Plan") subject to
consummation of the distribution. The following summary is qualified in its
entirety by reference to the complete text of the Arthur Treacher's 2001
Adjustment Plan.
In connection with the spin-off, each Digital Employee Option existing
under Digital's Stock Purchase and Option Plan prior to the spin-off will be
adjusted so as to represent two separately exercisable options: one to purchase
Digital Common stock (the "Adjusted Digital Option") and one to purchase Arthur
Treacher's Common stock (the "Adjusted Arthur Treacher's Option"). Each Adjusted
Arthur Treacher's Option will be exercisable for the same number of shares as
was covered by the corresponding Digital Option immediately prior to the
spin-off. The exercise price of each Adjusted Arthur Treacher's Option will be
adjusted to recognize the effect of the spin-off by allocating the exercise
price of the corresponding Digital Option prior to the spin-off between the
Adjusted Digital Option and the Adjusted Arthur Treacher's Option based on the
relative total asset value of Digital and Arthur Treacher's after the spin-off.
The purpose of the Arthur Treacher's 2001 Adjustment Plan is to provide
for the grant and administration of the Adjusted Arthur Treacher's Options
pursuant to the spin-off. The Arthur Treacher's 2001 Adjustment Plan has no
other purpose and no further grants of options will be made under the Arthur
Treacher's 2001 Adjustment Plan. The Arthur Treacher's 2001 Adjustment Plan will
provide substantially the same rights and benefits to option holders with regard
to Arthur Treacher's Options as is currently provided under existing Digital
Employee Stock Option Plan.
TREATMENT OF CERTAIN DIGITAL WARRANTS
There are currently outstanding Warrants to purchase ______ shares of
Digital common stock. Digital intends to enter into amendment of the Warrants
(the "Warrant Amendments") pursuant to which, effective immediately prior to the
distribution of the Arthur Treacher's common stock, each of the Warrants
outstanding will be bifurcated into two separately exercisable Warrants, one to
purchase Digital common stock (an "Adjusted Digital Warrant") and one to
purchase Arthur Treacher's common stock (an "Adjusted Arthur Treacher's
Warrant") (collectively, the "Adjusted Warrants"). Each Adjusted Warrant will be
exercisable for a number of shares equal to the number of shares covered by the
pre-spin-off Digital Warrant. Thus, following the spin-off, each Warrant holder
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<PAGE>
will hold separately exercisable warrants to purchase an equal number of shares
of Digital common stock and Arthur Treacher's common stock. The exercise price
of each Adjusted Warrant will be adjusted to recognize the effect of the
spin-off by allocating the exercise price of the corresponding Digital Warrant
prior to the spin-off between the Adjusted Digital Warrant and the Adjusted
Arthur Treacher's Warrant based on the relative total asset value of Digital and
Arthur Treacher's after the spin-off. Arthur Treacher's will adopt a Warrant
Adjustment Plan to effect the foregoing.
LISTING AND TRADING OF OUR COMMON STOCK
There is not currently a public market for our common stock. We have
been approved to list our common stock on the NASDAQ Bulletin Board under the
symbol "ATPF"
We cannot assure you as to the price at which our common stock will
trade before, on or after the distribution date. Although the price at which
such stock trades may fluctuate significantly until our common stock is fully
distributed and an orderly market develops, we believe the presence of a
when-issued trading market may have a stabilizing effect on the price of our
common stock following the distribution. In addition, the combined trading
prices of our common stock and Digital common stock held by shareholders after
the distribution may be less than, equal to or greater than the trading price of
Digital common stock prior to the distribution.
The shares distributed to Digital shareholders will be freely
transferable, except for shares received by people who may have a special
relationship or affiliation with us. People who may be considered our affiliates
after the distribution generally include individuals or entities that control,
are controlled by, or are under common control with us. This may include some or
all of our officers and directors. Persons who are our affiliates will be
permitted to sell their shares only pursuant to an effective registration
statement under the Securities Act of 1933, as amended, or an exemption from the
registration requirements of the Securities Act, such as exemptions afforded by
Section 4(2) of the Securities Act or Rule 144 thereunder.
CERTAIN CHARTER AND DELAWARE LAW PROVISIONS
After the distribution, certain provisions of the certificate could
discourage potential acquisition proposals and could delay or prevent a change
in control. The issuance of preferred stock authorized in the certificate could
have the effect of delaying or preventing a change in control. Such preferred
stock could be utilized to implement, without stockholder approval, a
stockholders' rights plan that could be triggered by certain change in control
transactions, which could delay or prevent a change in control or could impede a
merger, consolidation, takeover or other business combination involving Arthur
Treacher's. The issuance of preferred stock with voting and conversion rights
may adversely affect the voting power of the holders of common stock, including
the loss of voting control to others. Arthur Treacher's has no current plans to
issue shares of preferred stock.
DELAWARE BUSINESS COMBINATION STATUTE
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<PAGE>
Section 203 of the DGCL provides that, subject to exceptions set forth
therein, an interested stockholder of a Delaware corporation shall not engage in
any business combination including mergers or consolidations or acquisitions of
additional shares of the corporation, with the corporation for a three-year
period following the date that such stockholder becomes an interested
stockholder unless:
- prior to such date, the board of directors of the corporation
approved either the business combination or the transaction
which resulted in the shareowner becoming an interested
stockholder;
- upon consummation of the transaction which resulted in the
shareowner becoming an "interested stockholder," the
interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction
commenced, other than statutorily excluded shares; or
- on or subsequent to such date, the business combination is
approved by the board of directors of the corporation and
authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66?% of the outstanding
voting stock which is not owned by the interested stockholder.
Except as otherwise set forth in Section 203, an interested
stockholder is defined to include:
o any person that is the owner of 15% or more of the
outstanding voting stock of the corporation, or is
an affiliate or associate of the corporation and
was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within
three years immediately prior to the date of
determination; and
o the affiliates and associates of any such person.
Section 203 may make it more difficult for a person who would be an
interested stockholder to effect various business combinations with a
corporation for a three-year period. We have not elected to be exempt from the
restrictions imposed under Section 203. However, for a period of three years
following the distribution date, Digital and its affiliates are excluded from
the definition of interested stockholder pursuant to the terms of Section 203.
The provisions of Section 203 may encourage persons interested in acquiring
Arthur Treacher's to negotiate in advance with our board, since the stockholder
approval requirement would be avoided if a majority of the directors then in
office approves either the business combination or the transaction which results
in any such person becoming an interested stockholder. Such provisions also may
have the effect of preventing changes in our management. It is possible that
such provisions could make it more difficult to accomplish transactions which
our shareowners may otherwise deem to be in their best interests.
THE PROVISIONS OF THE CERTIFICATE AND DELAWARE LAW ARE INTENDED TO
ENCOURAGE POTENTIAL ACQUIRORS TO NEGOTIATE WITH US AND ALLOW OUR BOARD OF
DIRECTORS THE OPPORTUNITY TO CONSIDER ALTERNATIVE PROPOSALS IN THE INTEREST OF
MAXIMIZING STOCKHOLDER VALUE. SUCH PROVISIONS, HOWEVER, MAY ALSO HAVE THE EFFECT
OF DISCOURAGING ACQUISITION PROPOSALS OR DELAYING OR PREVENTING A CHANGE IN
CONTROL, WHICH MAY HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF THE COMMON
STOCK.
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<PAGE>
DIVIDEND POLICY
Arthur Treacher's has never declared or paid any cash dividends on its
capital stock. Arthur Treacher's currently intends to retain all future
earnings, if any, for use in the operation and expansion of its business and
does not anticipate declaring or paying cash dividends.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Section 145 of the DGCL provides that a corporation may indemnify
directors and officers as well as other employees and individuals against
expenses including attorneys' fees, judgments, fines and amounts paid in
settlement in connection with various actions, suits or proceedings, whether
civil, criminal, administrative or investigative other than an action by or in
the right of the corporation, a derivative action, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to an criminal action or
proceedings, if they had no reasonable cause to believe their conduct was
unlawful. A similar standard is applicable in the case of derivative actions,
except that indemnification only extends to expenses including attorneys' fees
incurred in connection with the defense or settlement of such actions, and the
statues requires court approval before there can be any indemnification where
the person seeking indemnification has been found liable to the corporation. The
statute provides that it is not exclusive of other indemnification that may be
granted by a corporation's by-laws, disinterested director vote, stockholder
vote, agreement or otherwise.
Our certificate of incorporation allows us to provide that each person
who was or is made a party or is threatened to be made a party to or is involved
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person, or a person of whom such
person is the legal representative, is or was a director or officer of us or,
while a director or officer of us, is or was serving at our request as a
director, officer, employee or agent of another corporation or of a partnership,
join venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is the alleged
action of such person in an official capacity as a director, officer, employee
or agent or in any other capacity while serving as a director, officer, employee
or agent, will be indemnified and held harmless by us to the fullest extent
authorized by the DGCL, as the same exists or may hereafter be amended, against
all expense, liability and loss reasonably incurred or suffered by such person
in connection therewith. Our certificate of incorporation also provides that we
shall pay the expenses incurred in defending any such proceeding in advance of
its final disposition, subject to the provisions of the DGCL. Such rights are
not exclusive of any other right which any person may have or thereafter acquire
under any statue, provision of the certificate by-law, agreement, vote of
shareowners or disinterested directors or otherwise. No repeal or modification
of such provision will in any way diminish or adversely affect the rights of any
director, officer, employee or agent of us thereunder in respect of any
occurrence or matter arising prior to any such repeal or modification.
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Arthur Treacher's understands that the staff of the Securities and
Exchange Commission is of the opinion that statutory, charter and contractual
provisions as are described above have no effect on claims arising under the
federal securities laws.
DISTRIBUTION AGENT, TRANSFER AGENT AND REGISTRAR
The Distribution Agent, Transfer Agent and Registrar for the Arthur
Treacher's common stock is Atlas Stock Transfer, 5899 South State Street, Salt
Lake City, Utah 84107, Telephone: (801) 266-7151.
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<PAGE>
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Interim Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations - 3 Months Ended October 1, 2000
and September 26, 1999 F-1
Consolidated Balance Sheets - October 1, 2000 and June 30, 2000 F-2 - F-3
Consolidated Statements of Stockholder's Equity - 3 Months Ended October 1, 2000
and September 26, 1999 F-3
Consolidated Statements of Cash Flows - 3 Months Ended October 1, 2000
and September 26, 1999 F-4 - F-5
Condensed Notes to Interim Financial Statements F-6 - F-8
Independent Auditor's Report F-9
Year End Consolidated Financial Statements (Audited)
Consolidated Statements of Operations - Years Ended June 30, 2000 and 1999 F-10
Consolidated Balance Sheets - June 30, 2000 and 1999 F-11
Consolidated Statements of Stockholder's Equity - Years Ended June 30, 2000 and 1999 F-12 - F-13
Consolidated Statement of Cash Flows - Years Ended June 30, 2000, 1999 and 1998 F-14
Notes to Consolidated Financial Statements F-15 - F-36
</TABLE>
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<PAGE>
DIGITAL CREATIVE DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS
<TABLE>
<CAPTION>
July 1, 2000 July 1, 1999
through through
October 1, 2000 September 26, 1999
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
TOTAL REVENUE $ 3,051,251 3,899,702
------------ ------------
OPERATING EXPENSES:
Cost of sales, including occupancy except depreciation 1,642,299 2,058,775
Operating expenses 1,055,387 1,503,866
Depreciation and amortization 157,313 215,050
General and administrative expenses 611,697 301,364
------------ ------------
TOTAL OPERATING EXPENSES 3,466,696 4,079,055
------------ ------------
LOSS FROM OPERATIONS (415,445) (179,353)
OTHER INCOME (EXPENSES):
Interest Expense (47,654) (41,713)
------------ ------------
NET LOSS (463,099) (221,066)
Undeclared preferred stock dividends (39,805) (30,570)
------------ ------------
Net loss for common shareholders $ (502,904) (251,636)
============ ============
Basic loss per common share $ (.03) (.02)
============ ============
Diluted loss per common share $ (.03) (.02)
============ ============
Weighted average number of outstanding shares for basic and diluted 16,590,701 15,165,011
============ ============
</TABLE>
F-1
<PAGE>
DIGITAL CREATIVE DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
OCTOBER 1, 2000 and JUNE 30, 2000
<TABLE>
<CAPTION>
October 1, June 30
ASSETS 2000 2000
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,454,153 8,239,351
Accounts receivable, net of allowance of $10,065
and $10,065 respectively 194,586 92,750
Inventories 113,168 127,635
Prepaid expenses and other 88,942 84,358
----------- -----------
TOTAL CURRENT ASSETS 6,850,849 8,544,094
----------- -----------
PROPERTY AND EQUIPMENT, AT COST
Leasehold improvements 2,386,864 2,382,525
Furniture, fixtures, and equipment 1,824,037 1,824,037
----------- -----------
4,210,901 4,206,562
Less accumulated depreciation 3,557,141 3,403,910
----------- -----------
PROPERTY AND EQUIPMENT, net 653,760 802,652
----------- -----------
OTHER ASSETS
Deposits 19,291 18,513
Goodwill 263,954 268,035
Notes Receivable, Net of Allowance of $210,000
and $210,000 respectively 765,135 266,134
Investments and Advances in Entertainment Concept Companies 427,291 0
Marketable Securities Available for Sale 720,736 300,000
Non-Marketable Securities, Net of Allowance of $450,000 2,200,000 2,200,000
Other 8,412 8,412
----------- -----------
TOTAL OTHER ASSETS 4,404,819 3,061,094
----------- -----------
TOTAL ASSETS $11,909,428 12,407,840
=========== ===========
</TABLE>
F-2
<PAGE>
DIGITAL CREATIVE DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
OCTOBER 1, 2000 and JUNE 30, 2000
<TABLE>
<CAPTION>
October 1, June 30,
2000 2000
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,276,895 2,155,326
Accrued expenses and other liabilities 248,174 455,261
Current maturities of long-term debt 1,379,285 1,377,993
Deferred revenue 280,760 317,262
------------ ------------
TOTAL CURRENT LIABILITIES 4,185,114 4,305,842
Long-term debt, net of current maturities 433,159 470,994
------------ ------------
TOTAL LIABILITIES 4,618,273 4,776,836
------------ ------------
MINORITY INTEREST IN SUBSIDIARY 4,805,282 4,805,282
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock 1,744,885 1,744,885
Common stock 165,907 164,707
Additional paid-in capital 20,063,870 19,941,820
Accumulated deficit (19,488,789) (19,025,690)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,485,873 2,825,722
------------ ------------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 11,909,428 12,407,840
============ ============
</TABLE>
F-3
<PAGE>
DIGITAL CREATIVE DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS
<TABLE>
<CAPTION>
July 1, 2000 July 1, 1999
through through
October 1, 2000 September 26, 1999
--------------- ------------------
<S> <C> <C>
Operating activities:
Net loss $ (463,099) (221,066)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 153,231 215,050
Amortization of deferred revenue (36,502) --
Changes in assets and liabilities:
(Increase) in accounts receivable (101,836) (5,344)
(Increase) in deposits and other assets (927,070) (24,577)
(Increase) in prepaid expenses and other
current assets (4,584) (40,332)
Decrease in inventories 14,467 44,949
Decrease in goodwill 4,081 4,081
Increase (decrease) in accounts payable 121,569 (32,207)
(Decrease) in accrued expenses, and
other liabilities (207,087) (68,656)
----------- -----------
Net cash (used in) provided by operating activities (1,446,830) (269,847)
----------- -----------
Investing activities:
Capital expenditures (4,339) (2,655)
Investments made by subsidiary (420,736) --
Proceeds from disposition of restaurants -- 49,248
----------- -----------
Net cash used in investing activities (425,075) 46,773
----------- -----------
Financing activities:
Proceeds from the issuance of stock, from subsidiary 75,000 0
Proceeds from the issuance of preferred stock, net of issue costs -- --
Issuance of common stock 48,250 --
Proceeds from long-term debt -- --
Payment of dividend -- --
Principal payments on long-term debt (36,543) (65,316)
----------- -----------
Net cash (used in) provided by financing activities 86,707 (65,316)
----------- -----------
Net (decrease) in cash and cash equivalents (1,785,198) (146,645)
</TABLE>
F-4
<PAGE>
DIGITAL CREATIVE DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE THREE MONTHS ENDED
<TABLE>
<CAPTION>
July 1, 2000 July 1, 1999
through through
October 1, 2000 September 26, 1999
--------------- ------------------
<S> <C> <C>
Cash and cash equivalents beginning of period 8,239,351 165,459
------------ -------
Cash and cash equivalents end of period $ 6,454,153 18,814
============ =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 6,999 7,586
============ =======
Supplemental disclosure of noncash transactions:
Common stock issued to settle accounts payable $ 0 0
============ =======
Supplemental disclosure of noncash transactions:
Common stock issued to settle debt and interest $ 0
============ =======
</TABLE>
F-5
<PAGE>
DIGITAL CREATIVE DEVELOPMENT CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 1, 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, 2000, filed with the Securities and Exchange
Commission on October 16, 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.
F-6
<PAGE>
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 (DCDC (Delaware)), a
subsidiary which acquires invests and forms joint ventures with web design, web
consulting and companies that create and transmit digital broadband content.
Arthur Treacher's Inc., a wholly-owned subsidiary, which was formed to
conduct the Company's restaurant operations.
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.
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.
F-7
<PAGE>
The Company originally believed that the lawsuit was an attempt by plaintiffs to
regain the territory by forcing the Company to defend expensive litigation at
significant expense and that the plaintiffs' claims are without merit. The
Company now understands that ATAC solely seeks damages from the Company. The
Company still believes that ATAC's claims are meritless. The Company's attorneys
have indicated that they intend to vigorously defend the Company from the claims
made by ATAC and pursue any counterclaims.
In opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's consolidated results or
operations or financial position.
F-8
<PAGE>
Independent Auditors' Report To the Board of Directors Arthur Treacher's, Inc.
We have audited accompanying the consolidated balance sheets of Arthur
Treacher's, Inc. and subsidiaries as of June 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of Digital Creative Development Corp., a
newly formed majority-owned subsidiary, whose statements reflect total assets of
$11,065,242, and $0 as of June 30, 2000 and 1999, respectively, and total
revenues of $44,629 and $0, respectively, and loss on investments of $450,000
and $0 respectively. Those statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to the
amounts included for Digital Creative Development Corp., is based solely on the
report of the other auditors. We conducted our audits in accordance with
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Arthur Treacher's,
Inc. as of June 30, 2000 and 1999, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles. The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 11 to the consolidated financial statements, the Company has
continuing net losses. Additionally, Arthur Treacher's, Inc.'s restaurant
companies (Arthur Treacher's, Inc., Arthur Treacher's Management Company, M.I.E.
Hospitality, Inc. and Arthur Treacher's Advertising) when considered alone have
a stockholders deficit of approximately $8,000,000 and a working capital
deficiency of approximately $4,000,000. These conditions raise substantial
doubts about its ability to continue as a going concern. Management's plans
regarding those matters also are described in Note 10. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty. September 28, 2000 Gainesville, Florida
F-9
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
REVENUES
Restaurant Sales $12,116,681 $20,567,361
Franchise Fees and Royalties 466,690 355,776
Other Revenues 964,048 608,692
----------- -----------
TOTAL REVENUES 13,547,419 21,531,829
OPERATING EXPENSES
Cost of Sales, Including Occupancy Except Depreciation 7,234,384 12,855,353
Operating Expenses 5,074,222 8,569,080
Depreciation and Amortization 691,232 1,204,321
General and Administrative Expenses 1,464,007 1,905,439
Impairment of Assets 215,504 2,036,955
Compensation from Stock Options 1,931,000
----------- -----------
TOTAL OPERATING EXPENSES 16,610,349 26,571,148
----------- -----------
LOSS FROM OPERATIONS (3,062,930) (5,039,319)
OTHER INCOME (EXPENSES)
Interest Expense, Net of Interest Income of $44,688 in 2000 (184,192) (168,885)
and $6,842 in 1999
Loss on Securities (450,000) --
Minority Interest in Loss from Subsidiaries 386,822 --
Other, Net (259,046) (638,515)
----------- -----------
TOTAL OTHER INCOME (EXPENSES) (506,416) (807,400)
----------- -----------
NET LOSS (3,569,346) (5,846,719)
UNDECLARED PREFERRED STOCK DIVIDENDS (159,220) (102,390)
----------- -----------
NET LOSS FOR COMMON SHAREHOLDERS $(3,728,566) $(5,949,109)
=========== ===========
Basic Loss Per Common Share (.24) (.40)
=========== ===========
Diluted Loss Per Common Share (.24) (.40)
=========== ===========
Weighted Average Number of Outstanding Shares for Basic and Diluted 15,339,306 14,966,624
=========== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-10
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
ASSETS
<TABLE>
<CAPTION>
2000 1999
---- ----
CURRENT ASSETS
-------------
<S> <C> <C>
Cash and Cash Equivalents $ 8,239,351 $ 165,459
Accounts Receivable, Net of Allowance of $10,065 81,418 138,136
in 2000 and $49,700 in 1999
Inventories 127,635 174,930
Current Portion of Notes Receivable 11,332 11,332
Prepaid Expenses and Other Current Assets 84,358 94,176
---------- ---------
TOTAL CURRENT ASSETS 8,544,094 584,033
PROPERTY AND EQUIPMENT
----------------------
Leasehold Improvements 2,382,525 4,072,762
Furniture, Fixtures, and Equipment 1,824,037 2,943,477
---------- ---------
4,206,562 7,016,239
Less - Accumulated Depreciation 3,403,910 5,450,502
---------- ---------
PROPERTY AND EQUIPMENT, NET 802,652 1,565,737
OTHER ASSETS
------------
Deposits 18,513 134,213
Goodwill, Net of Accumulated Amortization of $58,505 in 2000 268,035 284,362
and $42,178 in 1999
Notes Receivable, Net of Allowance of $210,000 in 2000 and 266,134 70,135
$0 in 1999
Marketable Securities Available for Sale 300,000 --
Non-marketable Securities, Net of Allowance of $450,000 2,200,000 --
Other 8,412 3,039
---------- ----------
TOTAL OTHER ASSETS 3,061,094 491,749
---------- ----------
TOTAL ASSETS $12,407,840 $2,641,519
=========== ==========
</TABLE>
F-11
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $ 2,155,326 $2,968,623
Accrued Expenses and Other Liabilities 455,261 410,025
Current Maturities of Long-Term Debt 1,377,993 570,579
Deferred Revenue 317,262 367,850
----------- ----------
TOTAL CURRENT LIABILITIES 4,305,842 4,317,077
LONG-TERM DEBT, Net of Current Maturities 470,994 1,119,300
OTHER LIABILITIES
Deferred Revenue -- 248,000
----------- ----------
TOTAL LIABILITIES 4,776,836 5,684,377
MINORITY INTEREST IN SUBSIDIARY 4,805,282 --
STOCKHOLDERS' EQUITY
Preferred Stock 2,000,000 Shares Authorized:
Series A Convertible, Par Value $1; 2,200 Shares Issued and Outstanding; 2,200 2,200
Involuntary Liquidation Preference of $1 Per Share Plus Accrued and
Unpaid Dividends
Series B Convertible, Par Value $1; 490,000 Shares Issued and Outstanding; 490,000 490,000
Involuntary Liquidation Preference of $1 Per Share
Series C, Par Value $100; 9,900 Shares Issued and Outstanding; Involuntary 852,705 852,705
Liquidation Preference of $100 Per Share Plus Accrued and Unpaid Dividends
Series D, Par Value $100; 4,000 Shares Issued and Outstanding; Involuntary 399,980 399,980
Liquidation Preference of $100 Per Share Plus Accrued and Unpaid Dividends
Common Stock, Par Value $.01; Authorized 25,000,000 Shares; Issued and 164,707 151,651
Outstanding: 16,490,484 Shares at June 30, 2000; 15,149,181 Shares at June
30, 1999
Additional Paid-In Capital 19,941,820 10,516,950
Accumulated Deficit (19,025,690) (15,456,344)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,825,722 (3,042,858)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,407,840 $ 2,641,519
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-12
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Additional
Preferred Common Paid in Accumulated
Stock Stock Capital Deficit Total
----- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $1,355,505 $ 148,539 $10,411,729 $ (9,609,625) $ 2,306,148
Common Stock Issued -- 2,515 107,486 -- 110,001
Preferred Stock Issued 399,980 -- (44,681) -- 355,299
Stock Issued to Settle Accounts -- 438 43,398 -- 43,836
Payable
Preferred Stock Converted to Common (10,600) 159 10,441 -- --
Stock Issuance Costs -- -- (11,423) -- (11,423)
Net Loss -- -- -- (5,846,719) (5,846,719)
---------- --------- ----------- ------------ -----------
Balance at June 30, 1999 1,744,885 151,651 10,516,950 (15,456,344) (3,042,858)
Stock Issued in Payment of Notes -- 11,386 715,687 -- 727,073
Payable
Stock Issued to Settle Accounts -- 1,670 175,230 -- 176,900
Payable
Stock Option Compensation -- -- 1,931,000 -- 1,931,000
Majority Interest in Subsidiary -- -- 6,602,953 6,602,953
Net Loss -- -- -- (3,569,346)
---------- --------- ----------- ------------ -----------
Balance at June 30, 2000 $1,744,885 $ 164,707 $19,941,820 $(19,025,690) $ 2,825,722
========== ========= =========== ============ ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-13
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $(3,569,346) $(5,846,719)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Stock Option Compensation 1,931,000
Depreciation and Impairment 906,736 3,241,276
Loss on Disposal of Assets 38,261 932,590
Loss on Investments 450,000 --
Provision for Bad Debts 210,000 --
Allocation of Losses to Minority Shareholders (386,822) --
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable 56,718 (58,851)
Decrease in Deposits and Other Assets 110,320 132,698
Decrease in Prepaid Expenses and Other Current Assets 34,818 79,332
Decrease in Inventories 47,295 99,808
Increase (Decrease) in Accounts Payable (636,398) 617,758
Increase (Decrease) in Accrued Expenses, Other Liabilities and (253,344) 133,913
Dividends Payable
-------------- --------------
Net cash used in operating activities (1,060,762) (668,195)
-------------- --------------
INVESTING ACTIVITIES
Issuance of Notes and Loans Receivable (435,000) --
Capital Expenditures (77,670) (427,622)
Purchase of Investments (2,950,000) --
Proceeds from Notes Receivable 4,001 --
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (3,458,669) (427,622)
-------------- --------------
FINANCING ACTIVITIES
Proceeds from the Issuance of Common Stock 11,795,057 98,577
Proceeds from the Issuance of Preferred Stock -- 355,299
Proceeds from Long-Term Debt 1,025,133 435,725
Principal Payments on Long-Term Debt (226,867) (537,961)
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,593,323 351,640
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,073,892 (744,177)
CASH AND CASH EQUIVALENTS, Beginning of Year 165,459 909,636
-------------- --------------
CASH AND CASH EQUIVALENTS, End of Year $ 8,239,351 $ 165,459
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 140,964 $ 175,727
Noncash Investing and Financing Activities:
Common Stock Issued to Settle Accounts Payable $ 176,900 $ 43,836
Common Stock Issued in Payment of Notes Payable $ 639,158 --
Common Stock Issued in Payment of Accrued Interest $ 87,915 --
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-14
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Description of the Business
---------------------------
Arthur Treacher's, Inc. (the "Company") owns, operates and franchises
quick service seafood restaurants under the name "Arthur Treacher's
Fish & Chips". At June 30, 2000, the Company owned and operated 27
restaurants and franchised an additional 62 restaurants, and
participates in 81 franchised co-branded restaurants located in 13
states, Puerto Rico and Canada, with the greatest concentration in the
northeast region of the United States.
In February 2000, the company formed a subsidiary, Digital Creative
Development Corporation, a Delaware Corporation, (DCDC, Delaware), for
the purpose of investing in entities engaged in the creation of
traditional entertainment content. In March 2000, the Company formed a
subsidiary, Arthur Treacher's, Inc., a Delaware Corporation (which has
been inactive through June 30, 2000). In August 2000, the Company, a
Utah corporation, changed its name from Arthur Treacher's Inc. to
Digital Creative Development Corporation (Utah).
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Arthur Treacher's Management
Company, MIE Hospitality, Inc., Arthur Treacher's, Inc. (Delaware) and
Arthur Treacher's Advertising Company, and its majority-owned
subsidiary, Digital Creative Development Corporation. All material
intercompany transactions have been eliminated in consolidation.
F-15
<PAGE>
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an original
maturity of ninety days or less to be cash equivalents.
Inventories
-----------
The Company values its inventories at the lower of cost (first-in,
first-out method) or market.
Investments
-----------
Investments in marketable securities are carried at fair market value
and classified as available for sale. Investments in non-marketable
securities are carried at cost less any valuation allowances deemed
necessary by management.
Property and Equipment
----------------------
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided on a straight-line basis over
the estimated useful lives of the respective assets, which range from 3
to 10 years.
F-16
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------
Recoverability of Long-Lived Assets
-----------------------------------
The Company follows the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment is measured by the
amount by which the carrying amount of the assets exceed the fair value
of the assets. During 2000 and 1999, the Company recognized an
impairment loss of approximately $215,500 and $2,037,000, (which is
included in depreciation and amortization), related to the assets at
two store locations in 2000, and approximately 17 stores in two states
in 1999.
Income Taxes
------------
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In
addition, the method requires the recognition of future tax benefits,
such as net operating loss and business tax credit carryforwards, to
the extent that realization of such benefits is more likely than not.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
F-17
<PAGE>
Franchise Operations
--------------------
Franchise royalties, which are based upon a percentage of franchise
restaurants' sales, are recognized as income on the accrual basis.
Initial franchise fees are typically included in revenues when
substantially all services and conditions relating to the sale of the
franchise have been performed or satisfied, which occurs when the
franchised restaurant commences operations. Initial franchise fees for
area franchise agreements are recognized as income on a pro rata basis
as the restaurants are opened.
Per Share Data
--------------
The Company follows the provisions of SFAS No. 128, "Earnings per
share". This statement governs the computation, presentation, and
disclosure requirements of earnings per share (EPS) for entities with
publicly held common stock.
F-18
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
------------------------------------------
Net income per share of common stock is computed based upon the
weighted average number of common shares and share equivalents
outstanding during the year. When dilutive, stock options and warrants,
and preferred stock are included as share equivalents. None of these
equity instruments are included in the 2000 and 1999 calculations since
the Company experienced losses.
Estimates
---------
The preparation of financial statements in accordance with generally
accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and
liabilities, at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Stock Options and Warrants
--------------------------
The Company follows the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," in accounting for its options and warrants,
which permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 "Accounting for Stock Issued to
Employees," and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion
25 and provide the pro forma disclosure provisions of SFAS No. 123.
F-19
<PAGE>
Goodwill
--------
Goodwill, which has been recorded as a result of purchased
acquisitions, is amortized over the period estimated to benefit from
the acquired assets and rights, which is twenty years.
NOTE 2 - MARKETABLE SECURITIES
---------------------
As of June 30, 2000, the cost of marketable securities approximates
fair value and there are no unrealized gains or losses or other
comprehensive income.
NOTE 3 - RELATED PARTY RECEIVABLES
-------------------------
The subsidiary (Digital Creative Development Corp.) has a
non-interest-bearing loan due upon demand for advances made to a
related entity. The amount receivable at June 30, 2000 was $36,846.
The subsidiary (Digital Creative Development Corp.) has a
non-interest-bearing loan due on demand from a Director/Stockholder of
the Company in the amount of $25,000.
F-20
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 4 - LONG-TERM DEBT
--------------
<TABLE>
<CAPTION>
Long-term debt consisted of the following at June 30, 2000 and 1999:
2000 1999
---- ----
<S> <C> <C>
Note payable due in semi-annual principal installments of $113,956, $ 569,783 $ 907,228
plus interest at 8%, maturing December 2002, unsecured.
Notes payable to banks, due in monthly installments totaling $8,041, 122,992 172,022
including interest at rates ranging from 11% to 18%, maturing through
August 2002, collateralized by property and equipment.
Various notes payable related to the acquisition of franchised 131,111 218,629
restaurants, due in monthly installments of principal and interest at
rates ranging from 8.5% to 14%, maturing at dates through May 2003,
collateralized by property and equipment.
Various notes payable to related parties, bearing fixed interest at 1,544 392,000
16%, payable in full on May 30, 2000 - Not paid as of June 30, 2000.
Note payable to related party, due in monthly installments of $2,392 68,424 --
including interest at 14%, maturing in May, 2003, unsecured.
Various notes payable to related parties, bearing fixed interest at
12%, payable in full on:
September 30, 2000 289,000 --
October 30, 2000 271,133 --
November 30, 2000 50,000 --
January 31, 2001 50,000 --
February 1, 2001 295,000 --
--------- ----------
1,848,987 1,689,879
Less Current Maturities 1,377,993 570,579
--------- ----------
Total long-term debt $ 470,994 $1,119,300
========== ==========
Maturities of long-term debt at June 30, 2000 are as follows:
Year ending June 30, Amount
------------------- ------
2001 $1,551,243
2002 366,075
2003 163,498
----------
Subtotal 2,080,816
Less interest (231,829)
----------
Total principal maturities $1,848,987
==========
</TABLE>
F-21
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
The Company considers the carrying value of its long-term debt to be a
reasonable estimation of its fair value based on the current market
rates available to the Company for debt of the same remaining
maturities.
NOTE 5 - LEASES
The Company is the lessee under various long-term operating leases for
the land and buildings in which its owned and franchised restaurants
operate. The leases generally range between five and twenty years and
usually provide for renewal options.
The majority of the leases require the Company to be billed for taxes,
insurance, utilities, and maintenance costs of the leased property.
Certain of the leases require additional (contingent) rental payments
if sales volumes at the related restaurants exceed specified limits.
Base rent expense for Company-owned restaurants, net of sublease income
of $12,000 and $12,000 in 2000 and 1999, respectively, was
approximately $1,445,000 and $2,602,000 for the years ended June 30,
2000 and 1999, respectively.
The following summarizes future minimum lease payments, for the
Company-owned restaurants, required for leases that have initial or
remaining noncancelable terms in excess of one year as of June 30,
2000:
F-22
<PAGE>
Year ending June 30, Amount
------------------- ------
2001 $1,907,003
2002 1,579,476
2003 1,168,744
2004 678,860
2005 397,816
Thereafter 1,061,164
----------
TOTAL $6,793,063
==========
The Company also conditionally guarantees the payment of certain lease
obligations of its franchisees. The amount of this conditional
guarantee is approximately $156,000 in 2000, $132,000 in 2001, $105,000
in 2002 and 2003, and $15,000 in 2004.
The subsidiary (Digital Creative Development Corp.) is also party to a
new lease for its office space. The lease is effective December 1, 2000
and expires November 30, 2005. The base rent is $9,300 per month.
F-23
<PAGE>
The future minimum rental commitments under non-cancelable leases are
as follows:
June 30,
--------
2001 $ 134,780
2002 111,600
2003 111,600
2004 111,600
2005 111,600
Thereafter 46,500
---------
Total minimum lease payments $ 627,680
=========
F-24
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 6 - INCOME TAXES
------------
Income tax benefit attributable to income from continuing operations
for the years ended June 30, 2000 and 1999, differed from the amounts
computed by applying the U.S. Federal income tax rate of 34% to income
before taxes as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Computed "expected" tax benefit $(688,519) $(2,043,745)
Increase (decrease) in income taxes resulting from:
Non-deductible meals and entertainment 11,858 17,488
Goodwill amortization 5,551 5,551
Change in valuation allowance 777,974 1,850,202
Other, net (106,864) 170,504
--------- ----------
$ -- $ --
========= ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of derrerred tax assets and liabilities as of June 30, 2000
and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Deferred Tax Assets:
Net Operating Loss Carryforward $4,203,573 $3,649,684
Allowance for Doubtful Accounts 71,762 16,898
Deferred Royalty 107,869 209,389
Property and Equipment 456,207 185,466
---------- -----------
Total Gross Deferred Tax Assets 4,839,411 4,061,437
Less Valuation Allowance 4,839,411 4,061,437
---------- -----------
Net Deferred Tax Assets $ -- $ --
========== ===========
</TABLE>
At June 30, 2000, the Company had approximately $12.4 million of net
operating loss carryforwards available for use, which expire through
2020. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the schedule of
reversal of deferred tax assets, projected future taxable income, and
tax planning strategies in making the assessment.
F-25
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 7 - STOCK OPTIONS AND STOCK WARRANTS
During 2000 and 1999, the Company granted 6,164,572 and 90,000
nonqualified stock options, respectively, to certain key employees and
directors to purchase shares of the Company's common stock at a price
equal to or in excess of the market price of the stock, vesting over a
three to five year period. These options were granted as compensation
and the number of options granted was determined based on specific
individual circumstances. The shares issuable under these option grants
are nonregistered shares and the Company has no requirement to register
such shares. The Company does not have a formal stock option plan.
The per share weighted-average fair value of stock options granted was
calculated using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1999 - no expected dividend
yield, risk-free interest rate of 5.6% weighted average expected
volatility of 22% and an expected life of 5 years; 2000 - no expected
dividend yield, risk-free interest rate ranging from 6.0% to 6.7%
weighted average expected volatility of 88% and an expected life of 5
years. In addition, for 2000 and 1999 the Company has discounted the
market price of the stock, on the date of option grant, by 35% in
consideration of the restrictions on the sale of the underlying shares.
The fair value on the date of grant for options granted with exercise
prices in excess of the market price of the stock ranged from $.15 to
$1.64 in 2000 and was $.10 for 1999.
The Company applies APB Opinion No. 25 in accounting for option grants
and, accordingly, no compensation cost has been recognized for its
stock options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss would
not have been materially impacted for the effects of such calculation
in 2000 or 1999.
F-26
<PAGE>
Certain options granted to key employees were granted at option prices
below market price. In accordance with APB Opinion No. 25, compensation
expense has been recorded based on the difference between the option
price and the market price on the date of the option. The total amount
of such compensation for 2000 was $1,931,000 and $-0- in 1999.
The portion of the compensation related to such options not yet vested
has been deferred as shown in the table below:
Effect on
Paid in Capital
---------------
Total Stock Option Compensation from Year 2000 Awards.. $ 4,681,000
Portion Deferred ...................................... (2,750,000)
-----------
Net Addition to Contributed Capital/Compensation ...... $ 1,931,000
===========
F-27
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 7 - STOCK OPTIONS AND STOCK WARRANTS (concluded)
--------------------------------
In addition, during 2000 the Company granted 95,000 warrants (valued at
$139,983) to purchase shares of Company common stock to non-employees
in return for services provided in connection with the Company's equity
offerings. These warrants have been recorded at fair value using
substantially the same criteria as discussed above for the stock
options. During 1999, the Company granted 345,363 warrants (valued at
$46,000) to purchase shares of the Company's common stock to investors
and in return for services provided.
In connection with an equity offering, the Company also issued 148,500
warrants to purchase shares of Company common stock as described in
note 10 during the year ended June 30, 1999.
F-28
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 7 - STOCK OPTIONS AND STOCK WARRANTS (concluded)
--------------------------------
Stock option and warrant activity during the period indicated is as
follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Balance at June 30, 1998 3,163,891 $2.13
Granted - exercise price in excess of market price of stock 435,363 0.66
Canceled (280,000) 1.00
----------
Balance at June 30, 1999 3,319,254 1.30
Granted-exercise price at market price of stock 301,329 .45
Granted-exercise price in excess of market price of stock 613,244 .32
Granted-exercise price less than market price of stock 7,588,331 .46
----------
Balance at June 30, 2000 11,822,158 $.90
==========
</TABLE>
F-29
<PAGE>
The following table presents information regarding all options and
warrants outstanding at June 30, 2000.
<TABLE>
<CAPTION>
Weighted
Number of Average Weighted
Warrants and Remaining Range of Average
Options Contractual Exercise Exercise
Outstanding Life Prices Price
----------- ---- ------ -----
<S> <C> <C> <C>
8,502,904 4.7 years $0.30-$3.80 $0.45
435,363 3.6 years 0.49-1.00 0.66
1,435,000 2.0 years 1.00-1.51 1.05
998,500 2.1 years 1.00-3.13 1.28
450,391 1.7 years 1.00-3.37 2.72
----------
11,822,158 3.3 years $0.30-$3.80 1.45
==========
</TABLE>
The following table presents information regarding options and warrants
currently exercisable at June 30, 2000.
<TABLE>
<CAPTION>
Number of Weighted
Warrants and Range of Average
Options Exercise Exercise
Exercisable Prices Price
----------- ------ -----
<S> <C> <C>
2,932,990 $0.37-$1.00 $0.48
182,000 0.44-0.44 0.44
1,435,000 1.00-1.51 1.05
736,000 1.00-3.13 1.22
415,391 1.00-3.37 2.87
---------
5,701,381 $0.37-$3.37 0.89
=========
</TABLE>
F-30
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 8 - COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is a defendant in a lawsuit with a former development
franchisee alleging wrongful contract termination, among other things.
The plaintiff is seeking damages in excess of $10 million, however the
Company believes the claim is without merit, has counter sued and is
defending the claim vigorously. The case is presently in the U.S.
District Court. The Company is involved in various other claims and
legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will
not have a material adverse effect on the Company's consolidated
results of operations or financial position.
The Company is party to employment and consulting agreements with
certain key members of management which provide for salary and benefit
continuation for specified periods of time.
The Company has a variety of purchase contracts and commitments with
various food and beverage suppliers. These contracts expire within one
to five years, and specify purchase prices and rebates to be provided
by the supplier. It is not expected that these commitments will have an
adverse impact in future years.
NOTE 9 - DIGITAL CREATIVE DEVELOPMENT CORPORATION CONVERTIBLE STOCK
----------------------------------------------------------
As discussed in Note 1 to the financial statements, the Company formed
Digital Creative Development Corporation in February 2000.
Subsequently, approximately 12,000,000 shares were sold to other
parties representing approximately 45% of outstanding stock of DCDC
Delaware. The Digital stock may be converted into the Company's stock,
in whole or in part, at any time, at the option of the Holder. The
Digital stock may be converted into Treacher stock, at any time, at the
option of Treacher's provided that at the time of such conversion, the
common stock of Arthur Treacher's, Inc. is listed on the NASDAQ
Small-Cap Market or National Market or on a national securities
exchange on the OTC Bulletin Board and the Company has filed all
periodic reports that are required under the Securities Exchange Act of
1934
F-31
<PAGE>
NOTE 10 - STOCKHOLDERS' EQUITY
In November and December 1997, the Company consummated a private
placement to investors with respect to equity units consisting of
shares of its Series C Preferred Stock, with warrants to purchase
shares of common stock attached, for aggregate proceeds of $990,000. On
November 25, 1997 the Company sold 8,100 shares of Series C Preferred
Stock, with warrants to purchase 121,500 shares of common stock
attached. On December 23, 1997, the Company sold 1,800 shares of Series
C Preferred Stock, with warrants to purchase 27,000 shares of common
stock attached. The Company allocated $137,295 of the proceeds to the
value of the warrants and $852,705 to the value of the preferred stock.
The preferred stock is not convertible, but may be redeemed at the
option of the Company at a redemption price of $100 per share plus
accrued and unpaid dividends, at any time after October 31, 1999. The
holders of the preferred stock are entitled to a cumulative dividend of
10 percent per annum, payable semi-annually, if and when the Board
declares a dividend.
At June 30, 2000 and 1999, the Company had accumulated and unpaid
dividends of approximately $201,000 and $102,000 on this series of
preferred stock. The warrants entitle the holder to purchase one share
of common stock at an exercise price of $3.125 per share of common
stock. The Company is utilizing the proceeds for working capital needs.
F-32
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 10 - STOCKHOLDERS' EQUITY (concluded)
--------------------
The holders of the Series A Preferred Stock are entitled to a
cumulative dividend of $0.10 per share per annum. Such dividends accrue
annually but are payable if and when the Company declares a dividend.
The Company has not paid any dividends with respect to the Series A
Preferred Stock. The 2,200 outstanding shares of Series A Preferred
Stock are convertible into 3,300 shares of Common Stock for no
additional consideration at the option of the holder of the stock. The
Series A Preferred Stock is entitled to a liquidation preference of
$1.00 per share, plus any accrued and unpaid dividends. The Series A
Preferred Stock may be redeemed by the Company at a redemption price of
$1.00 per share plus all accrued and unpaid dividends. The amount of
accumulated and unpaid dividends was approximately $23,940 at June 30,
2000 and $23,720 at June 30, 1999.
In conjunction with the acquisition of MIE, the former owners of MIE
(Magee) and the Company amended the terms of the Series B Preferred
Stock and agreed that no dividends would accumulate on such preferred
stock after November 30, 1996. The Company also agreed to pay Magee an
amount equal to the accrued dividend on the Series B Preferred Stock
through November 30, 1996 (which was $390,417) in full on September 1,
1998. In addition, the 490,000 outstanding shares of Series B Preferred
Stock are now allowed to be convertible at the option of the holder or
the Company at any time, and the conversion rate was increased so that
Magee will receive 765,625 shares of common stock upon conversion (an
increase of 275,625 shares, valued at $843,413 and included as part of
the purchase price of MIE) for no additional consideration. The Company
has not determined when it will require conversion of the Series B
Preferred Stock into common stock.
F-33
<PAGE>
The holders of the Series D Preferred Stock are entitled to a
cumulative dividend of 15 percent per share per annum. Such dividends
accrue annually but are payable if and when the Company declares a
dividend. The Company has not paid any dividends with respect to the
Series D Preferred Stock. The 4,000 outstanding shares of Series D
Preferred Stock are convertible into 400,000 shares of Common Stock for
no additional consideration at the option of the holder of the stock.
The amount of accumulated and unpaid dividends was approximately
$105,000 at June 30, 2000 and $45,000 at June 30, 1999.
During 1999, 10,600 shares of preferred stock series A were converted
to common stock.
NOTE 11 - GOING CONCERN
-------------
As shown in the accompanying financial statements, the Company incurred
a net loss of approximately $1,600,000 for the year ended June 30, 2000
and $5,800,000 during the year ended June 30, 1999. These losses create
an uncertainty about the Company's ability to continue as a going
concern.
F-34
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 11 - GOING CONCERN (concluded)
-------------
Management of the Company implemented a corporate restructuring plan to
address the financial condition of the Company in January 1999. The
multi-faceted corporate strategy is focused on the restructuring of
real estate obligations, improving store profitability, franchising and
attracting capital or new debt. Each facet of the strategy is geared to
improving profitability by selling certain company-owned restaurants
that typically incur losses, franchise sales, cobranding and
introducing a retail product line for major supermarket chains. Upon
the completion of the restructuring plan, the Company-owned and
operated restaurants will be concentrated within New York, New Jersey
and Pennsylvania.
Existing Arthur Treacher markets in Ohio, Michigan, Maryland,
Washington D.C., Florida and Ontario, Canada will be targeted for
franchise expansion. The cobranding program with Miami Subs, Nathan's
Famous Hot Dogs, Kenny Rogers Roasters, Pudgies Famous Chicken and
other approved quick serve and casual dining feeders will continue to
provide an additional source of franchise revenue.
As of October 30, 1999, the restructuring of real estate obligations by
franchising, selling and terminating selected leases was complete. As a
result of the spin-off of selected leases, losses typically incurred by
certain locations have been eliminated, thus improving cashflow and
profitability. Also, the Company raised $952,000 in the form of capital
and bridge loans from January 1999 to February 4, 2000 within Arthur
Treacher's, Inc. (Utah) and raised in excess of $11 million capital
within its new subsidiary, Digital Creative Development Corporation
(Delaware).
F-35
<PAGE>
NOTE 12 - SUBSEQUENT EVENTS
Subsequent to June 30, 2000, the Company changed its name as further
described in Note 1. On October 2, 2000, Arthur Treacher's, Inc.
(Delaware), a subsidiary of the Company, executed an agreement to
purchase all the outstanding capital stock of the entities which own
and act as franchiser of the Pudgies Famous Chicken (Pudgies) chain of
fast food restaurants. Pudgies consists of 32 restaurants in the New
York tri-state metropolitan area, including 12 company owned stores and
20 franchises.
F-36
<PAGE>
Exhibit Number Description
-------------- -----------
2.1 Certificate of Incorporation of Arthur Treacher's, Inc.
2.2 By-laws of Arthur Treacher's, Inc.
6.1 Form of Separation and Distribution Agreement
6.2 Form of Assignment and Assumption Agreement
6.3 Indemnification and Insurance Matters Agreement
-----------------
70
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARTHUR TREACHER'S, INC.
Date: December 28, 2000 By:
--------------------------------------------
Name: Jeffrey Bernstein
Title: President and Chief Executive Officer
71
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
2.1 Certificate of Incorporation of Arthur Treacher's, Inc.
2.2 By-laws of Arthur Treacher's, Inc.
6.1 Form of Separation and Distribution Agreement
6.2 Form of Assignment and Assumption Agreement
6.3 Indemnification and Insurance Matters Agreement
72
